Playing on Iran’s Home Court: The Great Strait of Hormuz Test

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner  

Any good armchair general with a good search engine and time on his hands can figure out in a hurry that the song and dance about Iran being unable to close the Strait if Hormuz for long is just a plain crock. Worse than that. Yet, this big Orwellian lie persists, so I want to set the record straight. Iran has the capability of not only closing the Strait for some time, but creating a world of hurt for the U.S. Navy’s 5th Fleet.

Iran possesses a build-up of anti-ship weapons called Sunburn missiles, which it has procured from Russia and China over the last decade. These are top-notch weapons developed by the Russians as a low-cost challenge to the expensive, tech-heavy weaponry of the U.S., and specifically the aircraft carrier task force. A conflict, which I now assign a high probability to [see Scenario for an Israel Attack on Iran], is going to be a huge test of a global-naval doctrine that Russia and China will watch with tremendous interest. Iran's mix of anti-ship missiles (Sunburns, Onyxs, home produced, etc) is an unknown, but I think they are armed to the teeth. The big question: How many of these weapons does Iran have? I would suggest thousands, and that this is the real show.

Given that U.S. crony logic seems to be about squandering money on weapons in the military-industrial complex, I fear for sailors and marines on the 5th Fleet. Don’t get me wrong, the US Navy is professional, but the Strait doesn’t allow for the normal defense in depth available in open seas, in fact it offers the Iranians a cross fire setup or triangulation (see map of Strait below) . If you read discussions on various military sites, there is a lively debate on American ship defense system like the Aegis. However, almost nobody claims this to be fully protective against ship strikes. And an oil tanker, no way.  It is important that the US is working on new generation lasar defense to counter these missiles, however they are still in development. This puts added pressure for Iran to have this fight now, not later. The following is from ”Russian Military Equality Network. (I have cleaned up the English a bit.]

U.S. Navy Pacific Commander Admiral Timothy Keating said that due to lack of sufficient funds for the procurement of simulated target missile defense system, the U.S. Navy can not now afford to fight “the club” category of supersonic anti-ship missiles. It is reported that the U.S. military that is used to simulate the “club” missile target missile is still being developed, and is expected to be put into use in 2014.

The Sunburn is perhaps the most lethal anti-ship missile in the world, designed to fly as low as 9 feet above ground/water at more than 1,500 miles per hour (mach 2+).  The missile uses a violent pop-up maneuver for its terminal approach to throw off Phalanx and other U.S. anti-missile defense systems. Given their low cost, they’re perfectly suited for close quarter naval conflict in the bathtub-like Persian Gulf.

The Sunburn is versatile, and can be fired from practically any platform, including just a flat bed truck. It has a 90-mile range, which is all that is necessary in the small Persian Gulf and 40-mile-wide Strait of Hormuz. Fired from shore a missile could hit a ship in the Strait in less than a minute. It presents a real threat to the U.S. Navy. Tests using the Aegean and RAM ship defense technology stops the Sunburn 95% of the time, but such testing was done in open seas, not a bathtub. The payload hit with a 750-pound conventional warhead  can be witnessed at 1:53-1:57 in this video. Not enough to sink a carrier, but it could take down smaller capital ships and crew.

You don’t have to be Hannibal preparing for the Battle of Cannae to see that the Strait is a potential shooting gallery. Without a doubt, Iran has plotted and mapped every firing angle and location along the Gulf, their home-court coastline. This is going to put enormous interdiction pressure on U.S. warplanes to spot and destroy platforms, which may be as simple as a flat-bed truck. In reality, Iran has dug in from Jask in the east to Bandar in the west and can easily cover any ship, commercial or military, traversing the narrow Strait.

Equally disturbing is Iran’s missile range for the entire Persian Gulf. Bahrain itself could be hit by the longer-range version of the Sunburn, the Onyx. Is the U.S. (which has three aircraft carrier groups in play currently) going to stick around or clear out to the Oman Sea, leaving control of the oil lanes to Iran? Or will they stay and slug it out with the Iranians? If so, at what cost? Iran’s home court strategic advantage and weaponry may mean nasty losses for the 5th Fleet. If they leave, the Iranians would use naval mines to close the strait and missiles to hamper the mine clearing operations.

This is a classic fog of war situation, and has game changer potential.

 

 

For additional analysis on many topics, including trading ideas, subscribe to Russ Winter's Actionable – risk free for 30 days.  Click here for more information.  

6 am in Greece and Venizelos is about to board a plane to Brussels. According to The Guardian a deal was going to be done for sure before his take off. You know - any minute now... The Guardian was wrong. From Bloomberg:

• VENIZELOS SAYS TIME OF RESPONSIBILITY FOR ALL
• VENIZELOS SAYS STILL ISSUES THAT MUST BE DETERMINED
• VENIZELOS SAYS ALL ISSUES AGREED EXCEPT FOR ONE

And here it is:

• VENIZELOS SAYS HOPES EUROGROUP WILL TAKE POSITIVE DECISION

Because hope is just so much more efficient than prayer when it comes to strategic planning for one's insolvent population.

That's it.

• VENIZELOS ENDS STATEMENTS TO REPORTERS IN ATHENS

One of the few sane economists out there is Michael Pento of Pento Portfolio Strategies (formerly of Peter Schiff's Euro Pacific Capital).

Here is an interesting interview he did with Bloomberg back in December where he discusses his typical range of topics: Gold, Inflation, and Interest rates

 

Notable comments:

• Half of the DXY is against the EURO, so that's the headwind for gold, but the tailwind for gold still is the fact that we have negative real interest rates & they probably won't rise for a very long time
• M2 is up 10% YOY
• QE3 will come in Q2 FY'12, which will be another tailwind for gold
• Nominal GDP is rising, you take out a legitimate rate of inflation, and we are in a recession
• U.S. and Europe = Stagflation
• How long can an investor accept a negative real return after interest and taxes? A buyer strike of an Auction and you'll see yields rise just as they did in Greece and Italy. It's going to happen in this country
• People are always talking about the tremendous amount of cash on the corporate balance sheets. What about the tremendous amount of debt on corporate balance sheets? They have $7.6 Trillion dollars of debt on their balance sheets. What happens to that debt when interest rates rise & they have to roll over that debt

 

Remember robosigning and the whole fraudclosure scandal? In a few days you can forget it. Because in America, the cost of contractual rights was just announced, and it is $25 billion: this is the amount of money that banks will pay to settle the fact that for years mortgages were issued and re-issued without proper title and liens on the underlying paper, courtesy of Linda Green et al. Why is this happening? Because staunch hold outs for equitable justice (at least until this point), the AGs of NY and California folded like cheap lawn chairs (we can't wait to find what corner office of Bank of America they end up in), but not before the one and only intervened. From the WSJ: "The Obama administration made a full-court press over the past four days to secure the support of key state attorneys general, including those from Florida, California and New York." Nothing like a little presidential persuasion to help one with overcoming one's conscience. Because in America the push to abrogate the very foundation of contractual agreements comes from the very top. But wait, there's more - just to wash its hands of the guilt associated with this settlement which shows once and for all that the Democratic administration panders as much if not more to the banking syndicate as any republican administration, as it announces one settlement with one hand, with the other the US will sue banks over the mortgage reps and warranties issue covered extensively here, in the most glaringly obtuse way to distract that it is gifting trillions worth of contingent liabilities right back to the banks, not to mention discarding the whole concept of justice. From the WSJ: "Federal securities regulators plan to warn several major banks that they intend to sue them over mortgage-related actions linked to the financial crisis, according to people familiar with the matter. The move would mark a stepped-up regulatory effort to hold Wall Street accountable for its sale of bonds linked to subprime mortgages in 2007 and 2008. At issue is whether the banks misrepresented the poor quality of loan pools they bundled and sold to investors, the people said." Wait, let us guess -that particular lawsuit will end up in a... settlement? Ding ding ding. We have a winner. All today's news succeed in doing is finally wrapping up any and all legal loose ends, so that banks can finally wrap all outstanding litigation overhangs at pennies on the dollar. And if at the end of the day, they find themselves cash strapped, why the US will simply loan them more cash of course.

First, here is the WSJ, on the banks that will benefit from the fraudclosure settlement:

Government officials are on the verge of an agreement worth as much as $25 billion with five major banks, capping a yearlong push to settle federal and state probes of alleged foreclosure abuses by lenders.

 

The deal would represent the largest government-industry settlement since a multistate deal with the tobacco industry in 1998.

 

The agreement covers five banks: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. Together, the five handle payments on 55% of all outstanding home loans, or around 27 million mortgages, according to Inside Mortgage Finance.

These are the banks benefitting from Uncle Sam's decision to finally unclog the foreclosure pathway, as banks will no longer have to prove in court they are in fact the title owners.

But just in case popular outrage at this act is a little much, at the same time banks sued over fabricating Reps and Warranties will be: "Ally Financial Inc., Bank of America Corp., Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc." What an odd coincidence: gift with one hand, and take away with the other from virtually all the same banks.

Only it is not really taking away: it is merely putting the wheels in motion that will ultimately result in the same type of settlement that will make a mockery of the legal process in the US, and expose all the state Attorneys General as banker puppets, doing the bidding of the highest bidder... and of Obama of course.

Some more, on the "gifting"

The planned pact would involve around $5 billion in cash penalties, payable to borrowers, states and the federal government. That includes $1.5 billion in cash payments to borrowers who went through foreclosure between September 2008 and December 2011. Borrowers could receive $1,500 to $2,000 each, with the actual amount paid depending on the number of borrowers filing a claim.

 

The agreement is expected to call on the banks to provide $20 billion in other aid—by cutting loan balances for tens of thousands of homeowners and by refinancing thousands of borrowers who are current on their loans but owe more than their homes are worth.

 

Officials say the deal will help provide immediate benefits to around one million homeowners, while raising accountability for banks that work with borrowers facing foreclosure. The foreclosure process has been snarled since late 2010, after allegations that banks had serially submitted bogus mortgage documents when attempting to repossess homes from delinquent borrowers.

Why the push now?

The bank payments would unlock a large new source of housing funding at a time when Congress doesn't appear likely to approve new spending measures to tackle lingering problems facing housing markets, such as a refinance program that President Obama unveiled last week.

30 pieces of silver? Or a corner office.

The three key states overcame misgivings about the plan in recent days, people familiar with the situation said. The inclusion of California is especially important: People familiar with the discussions say the banks would have been willing to pay just $19 billion without the participation of the nation's most-populous state.

 

The office of California Attorney General Kamala Harris declined to comment. A spokeswoman for Florida Attorney General Pam Bondi said that "while Attorney General Bondi has not yet joined the settlement, she is hopeful that a resolution will be reached soon."

The beneficiaries:

"It is frankly a headline victory for both banks and attorneys general with a modest impact on the housing market," said Joshua Rosner, managing director of investment firm Graham Fisher & Co.

 

"It's not new money. It's all soft dollars to the banks," said Paul Miller, a bank analyst at FBR Capital Markets.

And of course, the president, who ends up buying a few cheap votes for $2000 a pop:

Borrowers
could receive $1,500 to $2,000 each, with the actual amount paid
depending on the number of borrowers filing a claim.

This is also the cost per individual to rescind in perpetuity any actual claims about one's mortgage paperwork. Will Americans go for it? You betcha.

As for the so-called punishment:

In a meeting with reporters last month, Robert Khuzami, the SEC's enforcement chief, said the agency's mortgage-bond investigation was looking for evidence that firms "failed to disclose important information when selling these securities."

 

Mr. Khuzami declined further comment on the investigation.

 

The planned regulatory actions come at a critical juncture. The SEC, Justice Department and state prosecutors are pushing to complete a number of financial-crisis cases by the end of this year, partly to avoid having enforcement action curbed by statutes of limitations, the people said.

In reality all this action will do is provide a benefit for private plaintiffs against banks like Bank of America, such as MBIA, whose case that banks have misrepresented terms of sold securities, will be strengthened. The ultimate cost, however to banks, will be miniscule compared to the fact that the foreclosure pathway will again be unclogged, and the banks are allowed to deficiency mark houses sold from REO, and use fungible excess reserves to plug the difference.

All in all, just a day's work for the administration as it does everything in its power to push the housing market higher at all costs, and further and further away from equilibrium pricing, which is what should be for a true and normal price appreciation to occur... something which will never happen of course as it would take far longer than the 4 years allotted to the president. If the process entails bending the law beyond recognition, so be it.

Government is only too much disposed to follow this diabolical advice, for it is composed of ministers and officials - of men, in short, who, like all other men, desire in their hearts, and always seize every opportunity with eagerness, to increase their wealth and influence. Government is not slow to perceive the advantages it may derive from the part which is entrusted to it by the public. It is glad to be the judge and the master of the destinies of all; it will take much, for then a large share will remain for itself; it will multiply the number of its agents; it will enlarge the circle of its privileges; it will end by appropriating a ruinous proportion. - Frederic Bastiat

The kids need to be dressed & dropped off at school, you have your big presentation today, you've been working your ass off  putting in long hours in hopes that someone will notice you and give you that promotion, and you told your wife you'd host family dinner this evening, knowing that your mother-in-law would be all over you for one reason or another. You don't have time for political nonsense - I get it.

Unfortunately, the elected officials we trust to keep our best interest in mind aren't always doing that. While we struggle just to get through the day, they put legislation together that starts to infringe on our personal liberties. While we hit the pillow exhausted after a long day, the President is giving speeches asking for more power, saying things like he's going against free market principles in order to save the free market, or flat out telling us that he'll act as an administrator if he has to in order to get things done that he knows are best for us. Are we missing our warning signs that our Constitutional Republic is in trouble? I believe so.

Here are a few clips I'd like to share with you - watch them & decide for yourself.

 

Sometimes You Need to Abandon Free Market Principles to Save the Free Market?

And Sometimes You Need to Pass the Bill Before We Can See What Is In It?

Just Bypass Congress - You Know, the Checks & Balances the Founders Put In Place

Maybe You Just Have too Much Information at Your Disposal - Need to Limit That

Sometimes You Just Need More Power to Act Administratively - He Won't Abuse It

And it's all Because That Pesky Constitution - It Only Says What Gov't CAN'T Do To You, not what Governmnt should do FOR you

Where Have Our Leaders Gone? Wouldn't This Be Refreshing to Hear Again?

Yesterday when we discussed the surprising non-cut in the Australia cash rate, we asked "is China re-exporting the lagging US inflation it imported over 2011? " and said that "It means that Chinese inflation continues to be far higher than what is represented... and wonder: did the RBA just catch the PBOC lying about its subdued inflation?" Lastly, we concluded: "Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withdrawing liquidity when the market expects RRR cuts?" Sure enough, as usually happens when assuming sentiment manipulation by a centrally planned powerhouse such as the US, and in far lesser degree these days, China, we were right. The news just out of China is that January inflation soared far beyond expectations, with CPI printing at 4.5% Y/Y, compared to estimates of a decline to 4% from December's 4.1%. This was the highest inflation since October. We will simply repeat our conclusion from yesterday, which while speculation then is now confirmed: "Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good." Practically, this means that the PBOC just told the world that no easing will come from China in a long time, and that the Fed and the ECB are alone in reliquifying the market. It also means that one can kiss the Chinese growth dynamo story goodbye, and once the US finally recouples with the rest of the world, the only hope will be a new announcement of QE in March so it hits its maximum efficiency in time for Obama's reelection campaign.

Submitted by Simon Black of Sovereign Man

Introducing The Government’s Newest Unpaid Spy: YOU

One of the most terrifying aspects of George Orwell’s seminal work 1984 was his description of how society had turned into one giant police agency. People were encouraged to rat each other out, groomed since childhood to be unpaid government spies:

“[Children] adored the Party and everything connected with it… All their ferocity was turned outwards, against the enemies of the State, against foreigners, traitors, saboteurs, thought-criminals. It was almost normal for people over thirty to be frightened of their own children.”

The Department of Homeland Security’s “If you see something, say something…” is not too far off from this paradigm– encouraging citizens to rat each other out to the police for the mere suspicion of potential wrong-doing.

DHS Secretary Janet Napolitano even made a special appearance at last Sunday’s Super Bowl to get the message out about ‘public vigilance,’ and ensure that the entire city of Indianapolis was blanketed with advertisements from her Big Brother campaign.

The IRS has been encouraging this type of behavior for years, rewarding citizens with a share of collections for anyone who snitches on potential tax cheats. Last year the agency upped its reward payout for tax informants, topping out at a full 30%.

A few months ago, the Mayor of Newark, NJ announced a similar program designed to reward citizens for snitching on gun owners. According to the mayor, “We don’t even have to have a conviction,” for an informant to get paid a cool $1,000 cash. Rat out your neighbor, get paid. Simple.

(As an aside, police in neighboring East Orange, NJ have rolled out a new pre-crime surveillance system. In the words of Police Chief William Robinson, “The police are observing you. The police are recording you. And the police are responding.” Big Brother is clearly watching.)

In the financial system, there are droves of civilian agencies that have been coerced into becoming government spies. As we discussed a few weeks ago, everyone from bankers to brokers to gold dealers are obliged to submit ‘suspicious activity reports’ to the federal government. They even have minimum quotas.

What’s more, these so-called “SARs” must remain top-secret. It’s a crime for your banker to inform you that you were the subject of a suspicious activity report.

Yesterday, the Financial Crimes Enforcement Network (FinCEN), the federal agency which oversees the legions of unpaid government spies, added a few more businesses to the list. Now non-bank mortgage lenders and originators must ‘assist law enforcement’ by submitting suspicious activity reports.

The rule will take effect in the spring. What’s ambiguous is whether or not it will apply to -individuals- who hold and issue private mortgages.

Despite 50 pages of new regulations, the definition of ‘residential mortgage lender’ remains unclear. This is common with laws and regulations… they take up a lot of space, but they’re incredibly vague. Based on the published text:

• Individuals who finance the sale of their residence are exempt.
• Individuals who finance an investment property/properties that they own may be subject to the rule.
• Businesses who own and finance investment properties are more than likely subject to the rule.
• Individuals and businesses who finance properties that they do not own are subject to the rule.
• Individuals and businesses who accept a residential mortgage application are subject to the rule.

In other words, if you loan money to someone to buy a house, you might just become the next unpaid government spy. Congratulations.

What’s incredible is that FinCEN came up with this rule all on its own. There was no Constitutional legislative progress. Nothing was submitted for debate on the House floor, or for the President’s signature.

This is not a law. It’s simply a new policy that a federal agency decided to impose, in its sole discretion. And it happens every single day across the hundreds of federal agencies in Washington– a sort of ‘self-legislation’ which creates thousands of pages of new regulations that each and every American is obliged to obey.

Not exactly what the Founding Fathers had in mind…

In the case of FinCEN, the agency has conjured a rule creating (by their estimate) 31,000 new unpaid government spies. You might be one of them. And in the coming months, you can expect more rulings that will apply to other professions– real estate agents, pawn brokers, and just about anyone who deals in cash.

Have you reached your breaking point yet?

We’ve repeatedly noted that the U.S. government planned regime change in Syria at least 20 years ago.

Indeed, carrying out acts of violence and blaming it on the Syrian government as an excuse for regime change was discussed over 50 years ago by British and American leaders.

We noted in December that foreign troops were amassing on the Syrian border.

We noted yesterday that an independent report by the Arab League found that “rebels” were attacking government buildings and innocent civilians with armor-piercing projectiles and other heavy weaponry.

Today, Israeli news site Debkafile reports:

British and Qatari special operations units are operating with rebel forces under cover in the Syrian city of Homs just 162 kilometers from Damascus, according to debkafile’s exclusive military and intelligence sources. The foreign troops are not engaged in direct combat with the Syrian forces bombarding different parts of Syria’s third largest city of 1.2 million. They are tactical advisers, manage rebel communications lines and relay their requests for arms, ammo, fighters and logistical aid to outside suppliers, mostly in Turkey.

 

This site is the first to report the presence of foreign military forces in any of the Syrian uprising’s embattled areas.

Something very similar happened in Libya … and that has not turned out very well.  (Indeed, some of the Al Qaeda fighters who overthrew Gadaffi are now helping the Syrian rebels).

Of course, this situation cannot be viewed in a vacuum.  Russia has sent a large naval force to Syria in a show of support for the Syrian government, and a high-level Russian general and former member of the Russian joint chiefs of staff has said that Russia will defend Iran.  Iran and Syria have had a mutual defense pact for years, and Iran is purportedly directly assisting the Syrian military in its fight with the rebels … sending 15,000 troops of its own. And China has warned against an attack on Syria.

Another day, another delay, and still nothing is done.

• GREEK PREMIER SAYS OUTSTANDING ISSUE NEEDS FURTHER WORK
• GREEK PREMIER SAYS DISCUSSION TO CONTINUE ON OUTSTANDING ISSUE
• PAPDEMOS SAYS AIMS TO CONCLUDE LOAN TALKS AHEAD OF THURSDAY'S EUROGROUP MEETING

And on the off chance that Greece, gasp, does not actually get something done by the deadline, it means that at tomorrow's meeting the only topic of discussion will be the calorie content in the taxpayer funded pastries. In the meantime, some semblance of reality is creeping back into the EURUSD.

Bloomberg reports that at almost 1 am local time, the Greek government meeting has broken up, and the head of LAOS is speaking, and by the looks of things, is not going along with the program:

• KARATZAFERIS SAYS HE DID NOT HAVE ENOUGH TIME TO STUDY MEASURES
• KARATZAFERIS SAYS HE NEEDS LEGAL ASSURANCES ON MEASURES
• KARATZAFERIS SAYS HE MIGHT CONTINUE TO SUPPORT THE GOVERNMENT DESPITE NOT AGREEING TO DEAL
• KARATZAFERIS SAYS HE MADE HIS POSITIONS CLEAR EARLY IN MEETING
• KARATZAFERIS SAYS HE APPRECIATES THE PREMIER'S EFFORTS
• KARATZAFERIS SUPPORTED ND LEADER ON ISSUE OF PENSIONS

Translation: no deal. And, dum dum dum, another headlines says that the Troika is now back in Papademos' office. The suspense builds.

In other rheotrical statements, got ink?

And so the legend of the once invincible "hedge fund titan" Phil Falcone, often the target of mockery and ridicule on the pages of Zero Hedge, ends, after his now irrelevant hedge fund which peaked in the tens of billions back in 2006/2007 is forced to borrow a secured loan from Jefferies at a 15% rate. The reason - the firm's all in gamble in satellite communication company LightSquared, which is also pretty much finished following today's announcement by airline carriers who said that LightSquared would "ruin US aviation." That, and pretty much everything else that Falcone invested in in the past 5 years. Check and mate. This also answers our question from August 2010 "Is Phil Falcone's Mega Bet On [LightSquared] Going To Be His Last?" It is.

From Bloomberg:

Billionaire Phil Falcone’s hedge fund, which tumbled by almost half last year because of a troubled wireless venture, is paying a 15 percent interest rate for a $190 million loan, almost triple what the riskiest corporate borrowers pay, said two people with knowledge of the loan. The loan is backed by all of the fund’s assets, according to the people. In addition to LightSquared, they include a 27 percent stake in Ferrous Resources Ltd., an iron-ore producer in Brazil, and a 54 percent stake in Spectrum Brands Holdings Inc., a Madison, Wisconsin-based manufacturer of batteries and pet food. If any assets are sold, Jefferies gets paid first, according to the people, and the lender has the right to help sell some of the assets at an agreed upon minimum price.

 

Falcone borrowed the money from Jefferies Group Inc. after paying off a $400 million loan from UBS AG on Jan. 30. Falcone received $160 million from New York-based Jefferies after fees, and will pay an annualized rate of 15 percent on the loan, which matures on Oct. 31, according to the people, who asked not to be identified because the fund is private. Interest on the loan will be paid monthly.

 

The premium Falcone’s hedge fund must pay to borrow money illustrates just how risky lenders view his biggest wager. His main Harbinger Capital Partners Master Fund I has more than 60 percent of its assets invested in LightSquared Inc., a Reston, Virginia-based firm that plans to build out a network offering high-speed data service to as many as 260 million people.

 

LightSquared is awaiting final clearance from the Federal Communications Commission as regulators weigh test results that show the service’s signals disrupt global-positioning system equipment used by cars, tractors, boats and planes.

 

LightSquared argues that technical solutions exist to resolve the interference and GPS manufacturers should have planned to accommodate the firm’s use of the spectrum.

Things could always be worse though: Phil could be paying 500%, the same as Greece. For that however, he would have to pledge, most sternly, that LightSquared would be profitable as soon as 2013 though... And of course, Phil still has the missus.

First, small momo-favorite companies. Next: entire nations. Finally: the all-seeing, all-dancing central banks. Today, Diamond Foods just fired its CEO and CFO after the audit committee found its books have been cooked, only phrased more politically correct: "the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers. The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting." Cue the class action lawsuits. When everything is said and done, the US investor will find that the Madoff M.O. of "doing business" has simply shifted to corporate America, where courtesy of non-GAAP BS one can report whatever the investing public wants to believe, until it all blows up. In other news, the now fired executives were stunned to discover they are not getting an extra bonus for cooking the books, last heard mumbling "double standard" under their breath. And if anyone wonders why despite the confirmed "bull market" in stocks (driven entirely by the nearly $1 trillion liquidity injection from the ECB in the past 6 months), investors just pulled $1.8 billion out of US mutual funds yet again, this is your answer.

From the press release:

SAN FRANCISCO, Feb. 8, 2012 (GLOBE NEWSWIRE) -- Diamond Foods, Inc. (Nasdaq:DMND - News) today announced that the Audit Committee of its Board of Directors has substantially completed its investigation of the Company's accounting for certain crop payments to walnut growers. The Audit Committee has concluded that the Company's financial statements for the fiscal years 2010 and 2011 will need to be restated. Over the course of the last three months, the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers. The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting.

The Board of Directors is taking a number of corrective actions including the appointment of a new Chief Executive Officer and Chief Financial Officer. Effective immediately, the Board has appointed Director Rick Wolford to serve as Acting President and Chief Executive Officer and Michael Murphy, of Alix Partners, LLP, to serve as Acting Chief Financial Officer. The Company is commencing searches for permanent replacements for the CEO and CFO positions. The Board has also appointed Robert J. Zollars, who previously served as Lead Independent Director, to the position of Chairman of the Board. Michael J. Mendes and Steven M. Neil have been placed on administrative leave from the Company.

"After an extensive and thorough investigation, the Audit Committee concluded that the Company's internal controls were inadequate and that certain grower payments for the 2011 and 2010 crops were not accounted for in the correct periods. As a result, the Company will restate its fiscal years 2010 and 2011 financial statements," said Robert Zollars, Diamond Foods' Chairman. "The Board takes the Company's control and the integrity of its financial statements very seriously, and we are moving aggressively to implement corrective measures, including changes to the Company's leadership."

"I look forward to working with the management team and the terrific employees at Diamond and will be focused on moving the business forward, further driving Diamond's strong brands and helping to find a permanent chief executive," said Rick Wolford, Acting President and Chief Executive Officer.

Diamond is working diligently to complete financial restatements for the affected periods and will file all required reports with the U.S. Securities and Exchange Commission as soon as possible. While the timing of the restatement is difficult to predict at this time, the Company will endeavor to provide updates on timing and other material developments.

Rick Wolford previously served as Chief Executive Officer, President and Chairman of Del Monte Foods. Mr. Wolford began his career in 1967 in the food industry at Dole Foods, where he held a variety of positions, including President of Dole Packaged Foods. He has served as a Director of Diamond Foods since April 2011.

Michael Murphy is currently a Managing Director at Alix Partners, a leading financial consulting firm. He has more than 20 years of broad and varied financial advisory services experience.

This week, Arizona legislators are voting on a package of bills that would be “Wisconsin on steroids” – banning collective bargaining, release time and automatic deduction of union dues from paychecks. The unions plan state capitol protests this week, so things are heating up and the story has already appeared in various national publications. Since union protests are planned for the capitol tomorrow it will likely involve a lot of drama and TV coverage. Yet like every issue there are pros and cons, and government unions are a very sensitive topic to be sure. While the TV coverage will certainly focus on the favorable side of unionization (after all, what is better for the economy than more people collecting paycheks.... even if these are ever diminishing paychecks) here is an infographic from the Goldwater Institute looking at the cost side of the equation.

Submitted by Lance Roberts of StreetTalk Advisors

Consumer Credit And The American Conundrum

What to do?  This is not as an innocuous question as one might think.  For most American families, who have to balance their living standards to their income, face this conundrum each and every month.  Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark crevices of the mailbox.  What to do?

The conundrum exists because there is not enough money to cover the costs of the current living standard.  The average family of four have few choices available to them.  The burden of debt that was accumulated during the credit boom can't simply be disposed of.  Many can't sell their house because 1 in 4 homes are worth less than what they owe.  There is no ability to substantially increase disposable incomes because of a weak employment environment and deflationary wage pressures.  Despite the mainstream spin on recent statistical economic improvements the burdens on the average American family are increasing.  Nothing brought this to light more than yesterday's release of consumer credit data which rose $19 billion following a $20 billion increase in November. 

However, after the release yesterday the headlines were replete with commentators talking about the "end of the consumer deleveraging cycle".   Joe Weisenthal wrote yesterday at Business Insider "It's hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit.  Consumer credit expanded by $19 billion in December. That's far more than the $7 billion that was expected by economists.  Revolving consumer credit (credit cards) grew by $4.1 billion sequentially, and is basically flat from last year again (up barely).

One more point on this: A lot of people think that US consumer has too much debt, and that a big number here is 'bad' and we could imagine that being true. But if we're talking about cycles, and whether the economy is in rebound or recession mode, re-expanding credit is OBVIOUSLY what you want to see."

Under more normal circumstances Joe would absolutely be correct.  Rising consumer credit means more consumption which leads to stronger economic growth.  Let me explain.  Individuals go to work to produce a good or service for which they are paid a finite amount of money for.  With that income they pay taxes which leaves them with discretionary income from which to live on.  Pay the rent, utilities, insurance and healthcare, food, clothes and put gas in the car and that pretty much consumes the majority of the paycheck. 

Therefore, in the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American.  (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit)  This is why during the 80's and 90's, as the ease of credit permeated its way through the system, the standard of living rose in America even while economic growth rate slowed in America along with incomes.

Therefore, as the gap between the "desired" living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage.  It is a simple function of math. 

Today, the situation is quite different and a harbinger of potentially bigger problems ahead.  The consumer is no longer turning to credit to leverage UP consumption - they are turning to credit to maintain their current living needs. 

Take a look at the chart of personal consumption expenditures (PCE) versus total consumer credit.  Notice in the past year as consumer credit rose you saw an increase in PCE.  In the last two months consumer credit has exploded higher but there has been virtually NO increase in PCE levels on a month over month basis.  Retail sales during the Christmas shopping season we disappointing and this was even with a large decrease in gasoline prices.

This situation becomes even more apparent when we begin to look at the longer term trends of real disposable incomes, consumer credit and personal saving rates. 

Most of the deleveraging process that has been occurring up to this point has NOT been voluntary.  Banks have been cutting off excess credit lines, consumers have been defaulting on debt, mortgage foreclosures, and personal bankruptcies.  Consumers, on the other hand, are struggling just to make ends meet and are in reality doing very little in terms of voluntary debt reduction.  As incomes have decreased over the past two years - the inflationary pressures in food, energy, medical and utilities have consumed more of that declining wage base.  This is why today we have 1 out of every 2 Americans on some form of governmental assistance, more than 47 million people on food stamps and transfer receipts making up more than 35% of personal incomes.  It is hard to make the claim that the economy is on a fast track to recovery with statistics like that.  That is why the recent increases in consumer debt are disturbing.  The rise in NOT about increasing consumption by buying more "stuff" it is about just about being able to purchase the same amount of "stuff" to maintain the current standard of living.

Yes, the economic data has certainly shown some signs of picking up as of late.  However, if you go ask your neighbor, co-worker or small business on the corner the answer you get back will probably surprise you.  The struggle to survive from one paycheck to the next  is a reality for most American's today.  It is very reminiscent of 1980 when Dolly Parton penned the lyrics for the movie "9 to 5" to wit:

Workin' nine to five
What a way to make a livin'
Barely gettin' by
It's all takin' and no givin'
They just use your mind
And you never get the credit
It's enough to drive you
Crazy if you let it

Nine to five, yeah
They got you where they want you
There's a better life
And you think about it, don't you?
It's a rich man's game
No matter what they call it
And you spend your life
Puttin' money in his wallet

Those words will certainly resonate for those of the age 16-24, who weren't even alive when the movie was made, that are part of Occupy Wall Street and are protesting the "rich man" because they feel oppressed by the system.  For that age group 1 in 4 are unemployed and they are living back home with parents.   In turn, parents are now part of the "sandwich generation" that are caught between taking care of kids and elderly parents.  The rise in medical costs and healthcare goes unabated consuming more of their incomes.  The deleveraging cycle has only likely been put temporarily on hold.  The recent increases in consumer debt without corresponding increases in personal consumption are concerning to say the least. 

Hopefully, the recent upticks in the economic data are more than just temporary bounces post the economic crisis of last summer.  Hopefully, the recent improvements in employment, while mostly temporary hires, will translate into higher incomes in the future.  Hopefully, the recession in the Eurozone, which accounts for about 1/5th of exports and incomes to U.S. corporations, will not negatively impact the U.S..  Hopefully, the U.S. can begin to reduce to long term deficits and get the country back onto a sustainable growth trend.

That is an awful lot of hoping.

At this point everyone is so habituated to worthless updates from Greece that we are shocked Bloomberg even noticed. Either way, here is latest Greek headline tape bomb, via BBG, which looks at a leaked Troika draft report obtained by Bloomberg.

• TROIKA DRAFT GREEK ACCORD SAYS 2012 GDP TO SHRINK AS MUCH AS 5% - so make that 15%-25% realistically
• GREECE TO CUT MEDICINE SPENDING TO 1.5% OF GDP FROM 1.9% OF GDP - why not just "cull" 15-20% of the population?
• GREECE PLEDGES TO MERGE ALL AUXILIARY PENSION FUNDS -  one problem - following the default, there will be no pension funds left.
• GREECE TO PLEDGE 20% CUT IN MINIMUM WAGE IN TROIKA DRAFT - and Greek citizens pledge to never work again.
• TROIKA DRAFT GREEK ACCORD RENEWS PLEDGE TO CUT 150,000 EMPLOYEE - or the US equivalent of nearly 5 million workers...
• TROIKA DRAFT GREEK ACCORD PLEDGES 15,000 STATE JOB CUTS IN 2012
• GREECE TO PLEDGE ACCELERATED LABOR, PRODUCT MARKETS REFORMS
• GREECE PLEDGES PERMANENT SPENDING CUTS IN TROIKA DRAFT REPORT
• GREECE PLEDGES NOT TO INCREASE SALES-TAX IN DRAFT REPORT
• GREECE RENEWS PLEDGE FOR 1 NEW HIRE FOR EACH 5 DEPARTURES
• GREECE AIMS TO SELL DEPA, DESFA, OPAP, EYDAP, EYATH IN 1H 2012
• GREECE ALSO TARGETS HELLENIC PETROLEUM SALE IN FIRST HALF 2012

But the winner is:

• TROIKA DRAFT GREEK ACCORD SEES RETURN TO GROWTH IN 2013 - OMFG.... no, did they just... HILARIOUS

This from the country that was "just short" of a 9% forecast revenue growth in January with a 7% miss??? Sheer lunacy, and Germany will throw up all over the "pledges" as they have had enough. What is needed are guarantees. And even these are pending since the government meeting is still going on, meaning that Greek "leaders" can't come to an agreement over a set of hollow promises?

Bernanke Talks His Book

By Bruce Krasting 

Bernanke’s testimony to the House last week and to the Senate yesterday held no surprises. Ben has promised to maintain monetary policy at DEFCON 4 levels for as far into the future as we can see.

The prepared remarks were identical for both presentations. I reviewed Bernanke's 10/4/2011 testimony before the Congressional Joint Economic Committee (Link). There is something missing in the 2012 reports to Congress that was included in Ben's statement just a few months ago. Here’s what he said in October 2011 about inflation:

Longer-term inflation expectations have remained stable according to the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently.

So last October, Ben was touting up the TIPS/Bond spread as a confirmation that the broad expectation for inflation was very tame. In fact, when Ben made those comments in October he was right.

The five-year TIPs/Bond spread was at 1.60%, a very low rate of expected inflation. That's no longer true.

In his testimony to the Senate this week, Ben did not bother to mention that the TIPS spread has blown out since October. He eliminated any reference to the TIPS spread altogether. The reason? Simple, the TIPS spread is no longer telling Bernanke what he wants to hear, so he ignores it. 

The following are some charts on the TIPS spreads. First the five-year:

Now the Ten-year:

At this juncture, I’m absolutely convinced that Bernanke is making a biblical mistake. Yes. it will cost Ben his job (and the Fed’s credibility) at some point. But the real consequence will be to Americans in general, and also a few billion people outside the borders. 

There is zero evidence today that the US economy is in a crisis and that emergency monetary policies are justified. But Ben tells us differently. He omits critical information that would argue against his policies. I think his omission of the inflation information contained in the TIPs data is equivalent to lying, and he knows it. His disinformation makes all of his words to legislators (and the public) very suspect. 

My conclusion is that Bernanke is prepared to manipulate data (and any other damn thing he can lie about) in an effort to make people believe he is doing the “right thing.” He’s not doing what is right for the country any longer. He's in the process of ruining it. 

Ultimately, Bernanke will be proven wrong. The longer Bernanke’s emergency measures are sustained, the harder it will be to unwind the mess he has created. Another two years of ZIRP, Twist and QE will bring long-term economic problems to America. The history books will not look kindly on Bernanke and his speeches the past week. I expect they will say:

“The first weeks of February 2012 were the last chance the Federal Reserve Bank had to alter its stance. As of this date, the die was cast; the Fed committed to irreversible steps. The only variable left was time. Twenty-four months later the US economy lost its footings. And when it fell, it took a decade to find a bottom.”

Some say Bernanke is a hero, that he saved the global economy from collapse in 2009. I say that he is a goat, one that will bring us a generation’s worth of trouble. That he ignored ample evidence in 2012 that the economy had long since passed the Emergency Stage will be Ben’s undoing. He's so pregnant with his monetary policy that he can’t see (or just chooses to ignore) that the fire is out, the emergency is over, and his monetary policy should be in the process of normalization. That failure, will cost everyone, big time.

Not like it is news, but... Out of one pocket, into another, and in the mean time "things get better" as Gross explains below. That said, we hope Bill knows where Allianz of A&G fame (which just happens to be the closest comp to our own AIG) falls in the pecking order of the European house of cards.

From Peter Tchir of TF Market Advisors

Monkey See, Monkey Do

Irish Finance Minister saying that whatever the ECB does with Greece would be of interest to Ireland.  So if ECB forgives Greek debt (directly or through EFSF), Ireland is going to want the same deal.  Portugal won't be far behind.  And why stop at ECB and not go for PSI as well?

They continue to negotiate in Athens, but the reality is they should step back from the table.  They are locked into positions and slowly coming to the middle for some agreement,  yet they should be stopping and asking themselves if what they are doing is right.

On top of that, they are negotiating long term plans when Greece just missed January numbers by an astronomical 1 billion euro!  That is a massive miss on data that should have been relatively easy to predict.  What is the probability of future calculations being accurate when things that were estimated only a couple of months ago fail so miserably?

In the meantime, stocks continue to rally back from every setback.  Maybe Mr. Fink will shut down all the blackrock fixed income funds in an effort to help push all investors into 100% equity?  (you have to give him credit for not talking his own book)

The Treasury just sold $24 billion 10 Years in a completely unremarkable bond auction, which was virtually a carbon copy of the January sale of 10 Year, except with a slight drop in the Bid To Cover, which declined from 3.29 to 3.05, and an increase in the yield from 1.90% to 2.02%. All the other metrics were essentially the same as a month earlier: Directs at 17.9% vs 17.4% prior, Indirects 38.9% vs 38.4% before, and Dealers at 43.3% vs 44.4% before. And now, heartened by this successful sale, the Fed itself is in the market selling $8.00-$8.75 billion in 1.5 year bonds. In other words, bonds for everyone - it is a repo market ponzified debt issuance bonanza!

Treasury Market About Face - Just a Blip or Sign of Things To Come?

Courtesy of Lee Adler of the Wall Street Examiner

In my last email to you I mentioned that the bulge in withholding tax collections which may have been a tipoff to the better than expected payrolls data, had subsided. I took another look at the data today, and there's been no rebound since I posted that report.     On top of that, yesterday the Treasury announced that today's 4 week bill auction would total $37 billion, which was not only the first time in 7 weeks that it was more than $30 billion, it was a billion more than the new TBAC (Treasury Borrowing Advisory Committee) estimated for this quarter, on which the ink is barely dry.   The TBAC is a body comprised of a handful of the biggest of the Fed's Primary Dealers, which is officially tasked with estimating the Treasury's quarterly borrowing needs and forecasting a weekly auction schedule, including types of securities and amounts expected for each. The TBAC issues a report every 3 months which I scrutinize closely and use as a benchmark for evaluating how things are unfolding week to week in terms of the reality versus the Federal Government's "spin."   Spin, by the way, is what the media pundits like to call it, but let's be real. "Spin," when applied to government pronouncements, is just a euphemism for wishful thinking and outright lying, in other words, propaganda.    Over the past 3 weeks, total Treasury issuance was actually $37 billion below the TBAC forecast, thanks to the windfall withholding taxes that came along between the last week in December through the latter part of January. It's a very rare event indeed when the government actually does better than expected. It's usually a result of some kind of ham handed manipulation. The fact that this week the 4 week bill size jumped by $7 billion and was more than the TBAC estimate is clear evidence that the benefits of the tax windfall, whatever its cause, have ended. In the end, the government's borrowing this week will be $4 billion more than the TBAC estimate, with a billion above forecast tacked on to each of the 4 bill auctions this week from the 4 week bill up to the 52 week bill. 

Now we can get back to the normal state in recent years where the government has been borrowing more than was expected every week, due to overly optimistic economic assumptions used by the government and the TBAC in making their forecasts. 

I wrote about this in last Thursday's Wall Street Examiner Professional Edition Treasury update for subscribers. The summary excerpt below is from last week's first part of a two part series each week in which I examine the major forces impacting overall market liquidity as they affect both stocks and bonds.

The Treasury market panic continued this week, with yields heading for new lows, thanks partly to a return of central banks to the table at a modest level, but mostly due to a ratcheting up of public buying. Bond fund inflows hit a record last week. It's sheer panic. Bedlam.

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The panic atmosphere has been helped along by reduced supply. Once last Tuesday's big settlement (but less than originally forecast) was out of the way, the market just idled as the paper was digested. Supply settling next week will be extremely low, in fact, there should be a minor paydown. Then the mid month settlement will be well below the norm for note and bond settlements. Considering that the Fed usually settles a big wad of its forward MBS purchases at mid month, the skids will be greased and supply will be reduced. There will be more than enough cash to go around.

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That will be a recipe for more buying of those "fortress balance sheet equities" (cough, cough), so the slow motion meltup will be spurred on, probably for most of February.

But something went wrong this week with that big surge of withholding tax collections we have been witnessing with awe. It disappeared. In fact, the year to year comparisons went negative again last week. The mystery money is gone, for now at least.

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The Treasury Borrowing Advisory Committee, as is its wont, looked at the strong economic numbers of the past month or so and extrapolated them indefinitely into the future, forecasting big reductions in Treasury supply going forward. They even went so far as to suggest the Treasury allow negative interest rates on the bill auctions. Let the dealers and the big banks (of whom the TBAC guys are the kingpins) pay a kind of tax to the government for holding their money and keeping it "safe." I mean, these clowns are the biggest buyers of this paper. It's as if they want to kick themselves, or each other, in the ass. Of course, it will be grandma and grandpa saver who are hurt the most. But they don't count.

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Plus, the Gummit and TBAC guys are apparently so confident that rates will stay down for the long run, they're talking about doing floating rate notes. They're now looking at a better than best case scenario. I suspect that things won't play out quite that way, especially if this sudden collapse in withholding taxes persists. Another week of disappearing taxes, and I'd take it seriously. So we'll watch out for that.

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Remember, these are the same financial rocket scientist geniuses who built the credit bubble and collapsed the financial system. Since they paid no penalty for that, they will do it again, probably soon, is my guess. The only issue is timing.

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While we're waiting for the verdict on that though, there's enough momentum in the trends now at work to keep the bulls in clover for a few more weeks. 

The forces that had spurred last week's Treasury rally receded this week, with not only an increase in supply due to weaker than expected government revenues, but evidence in this week's auctions so far that investor demand, which had been running red hot, may be waning. The indirect bid, which is a measure of that demand both from investors and foreign central banks, has been down at each of this week's 5 auctions so far. Three of the data series that we will want to look at closely this week are the Fed's weekly update on foreign central bank buying, the data from the ICI on bond fund inflows, and the Fed's weekly data on commercial bank buying of Treasuries and Agencies. Those have all been positive in recent weeks. Any sign that any of them are on the wane could be the canary in the coal mine for a turn not only in the Treasury market, but also the stock market.  

I'll post a complete update on these items, the tax collection data, technical chart updates of the Treasury market and the US dollar, and a complete review of the Fed's balance sheet in the Professional Edition on Thursday evening and Saturday.  

Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Get the research and analysis you need to understand these critical forces. Click this link to try WSE’s Professional Edition risk free for 30 days!