Wall Street Corporations

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vhf

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Wall Street Corporations

posted on Jul 01, 2010 12:22AM

A couple of noteworthy reads from Graham Summers tonight...

Regards - VHF

Every Time the TBTFs Are Threatened, the Market Craters… Coincidence?

Graham Summers

June 30, 2010

On Monday I put out an article positing that the market would bounce because institutional investors would game the month of June (also the end of 2Q10) in order to post better results.

Instead, the market rolled over and collapsed posting one of the worst days in history (from an internals perspective).

Indeed, not only was it the 10th 90% down day we've seen since the April top (a day in which 90% of stocks fell), but some of the internals were the most powerful we've seen in all of history (only four other days have seen more extreme readings: the Bear Stearns Crash, the Lehman Crash, the absolute lows of March 2009 and the Flash Crash in May 2010).

Why is this? Why would institutions forego the typical performance gaming and manipulation to post terrible 2Q10 results?

Well, I’ve got a theory…

If you’ll recall, back in late May I published an article revealing that the market craters every single time Congress introduces a bill that might rein in the investment banks or Too Big To Fail (TBTF) firms.

The logic here is quite simple. Most if not ALL of the recovery talk for politicians stems from the fact that the stock market has risen dramatically since we introduced al the Stimulus and bailouts.

In plain terms, almost every politicians/ government economist uses the S&P 500’s price level to determine how good or bad things are in the US (this alone is a disturbing fact that bears further examination at a later time).

Thus, the stock market has become a political weapon of sorts. And it’s a weapon that is largely controlled by… the very same investment banks/ TBTF firms the Government keeps trying to rein in or break up.

So how coincidental can it be that EVERY time Congress introduces a bill to limit prop trading, or break up the TBTFs, or some other anti-Wall Street legislation, that the market craters?

Have a look at the below chart and tell me with a straight face that this is coincidence:

Seriously, at this point things are getting a little too coincidental. Every time Wall Street is threatened, the market collapses. Every time the threat is removed, it explodes higher.

Of course, the backdrop to all of this is that the fundamentals are garbage, that stocks are overvalued, that institutional investors are being hit with redemptions and so have to liquidate at the same time that the Fed’s various market props are being removed (QE is over)… all of which are market negative.

Similarly, one could argue that the market is simply discounting that reform would hurt the market because it would rein in trading. After all, if Wall Street essentially runs the market, so any reform that would hurt Wall Street would be perceived as market negative.

But still… with 70% of market volume coming from High Frequency Trading Programs (HFTPs), and the HFTP sector being dominated by the TBTF firms… how coincidental can it be that any time the TBTF guys are threatened, the market collapses?

_______________________

The Real Story In America: a Tale of Two People

Graham Summers

June 30, 2010

I propose that the real division amongst the American people is based not on social issues (race, religion, political views) or biological issues (gender). I believe the real divide is based on LAW.

Remember, the US as a political system is entirely based on a complicated legal framework. And while the boundaries erected by race, religion, even gender, have begun to blur, the legal boundaries are as rigid today as they were the day the Constitution was framed.

With that in mind, by law, the American public is broken into two groups of people.

Individuals
Legal entities or businesses[1]

Under American law, a business entity receives the same rights as an individual. It can own property, it has freedom of speech… in fact, a recent Supreme Court ruling permits corporations to directly spend on political campaigns just like individuals. This means that Goldman Sachs and Exxon Mobil are now freely permitted to use their billions in direct donations to political candidates.

However, while having the same rights, individuals and business entities have very different responsibilities. Let’s say I go dump a gallon of oil into a local river. If I’m caught doing this, I can face a fine of up to $2,000, potentially serve six months in jail, and perform up to 200 hours of community service (depending on where I do it).

In contrast, Exxon Mobil dumped 15,000 gallons of oil into Boston’s Mystic River last year and was fined $6 million. That sounds like a lot of money, except it’s basically what Exxon makes in three hours of business. No one went to jail. No one spent an afternoon cleaning up a highway or some other civic project. The fine (a joke) was it.

The distinctions between individual and corporate responsibility extend to taxes as well. You or I have to pay taxes on our income according to basic tax law. However, large-scale corporations are regularly permitted to prepare two sets of tax books (one for the public/ SEC, the other for the IRS).

I realize this point sounds a bit “conspiracy theorist” but it is commonly known in the financial community. Consider the Goldman Sachs or GE stories located below.

Goldman Sachs’s Tax Rate Drops to 1%, or $14 Million

Goldman Sachs Group Inc., which got $10 billion and debt guarantees from the U.S. government in October, expects to pay $14 million in taxes worldwide for 2008 compared with $6 billion in 2007… The company’s effective income tax rate dropped to 1 percent from 34.1 percent… The firm reported a $2.3 billion profit for the year after paying $10.9 billion in employee compensation and benefits.

()http://www.bloomberg.com/apps/news?pid=20601110&sid=a6bQVsZS2_18

GE: 7,000 Tax Returns, $0 U.S. Tax Bill

General Electric filed more than 7,000 income tax returns in hundreds of global jurisdictions last year, but when push came to shove, the company owed the U.S. government a whopping bill of $0…

() http://money.cnn.com/2010/04/16/news/companies/ge_7000_tax_returns/index.htm

Many politicians and media outlets like to lament the US’s high corporate tax rate. However, according to SmartMoney magazine, between 2000 and 2005, US corporate taxes amounted to only 2.2% of US GDP. In contrast the average for the 30 countries that comprise the Organization for Economic Cooperation and Development (OECD) was 3.4% (54% higher).

Regarding tax responsibility, the following article helps explain how Big Business is permitted to get away with such low taxes:

Tax Audits of Big Business Are Declining, Study Says

An analysis of data from the U.S. Internal Revenue Service by a nonpartisan research group shows that the agency is reducing its auditing of the biggest businesses. The Transactional Records Access Clearinghouse found that the IRS audited one of four of the largest companies in 2009, the lowest rate in more than 20 years…

() http://www.nytimes.com/2010/04/12/business/12audit.html?ref=business

Some of these tax differences are due to the inherent differences between individuals and large-scale business. I, as an individual, am required to remain a citizen of a particular tax jurisdiction. If I choose to remain a US citizen, I have to pay the US income taxes on any earned amount over $87K even if I reside in a foreign country year-round and make all of my income abroad.

Large-scale corporations, on the other hand, can move their business segments to whichever tax jurisdiction they please. A few years ago Halliburton and other large multinationals moved their headquarters to Dubai drawn by the 0% corporate tax rate there.

Never mind that Halliburton’s “headquarters” were only two floors of one building located on Sheikh Zayad road (suspiciously unmarked on the building’s directory when I was there) or that it retained its offices in the US. Halliburton, for legal and tax purposes, was officially “headquartered” in Dubai.

I propose that this is the real divide in the US: that between individuals and large corporations. The former group comprises the majority of the US population. However, the latter group is granted the greatest freedom. It also holds the greatest political clout due to its massive cash coffers and extensive lobbying efforts.

In this sense, I believe we are truly in something of an Oligarchy in which the political process, proposed legislation, and various regulations are largely controlled by an extremely tiny portion of the population.

So while we’re taught in school that the US is a Democracy founded on The Declaration of Independence’s proclamation that “all men are equal,” I believe that the reality is that the same economic imbalances that governed the US’s political system at the signing of the Declaration (namely that only wealthy, white landowners could vote) still exist today… though the system is no longer controlled by votes but by money.