Republican Leaders Battle With President Obama

Daily Market Commentary for December 8, 2011

House Republican leaders put the brakes on extending a payroll tax cut and unemployment benefits, pending approval of a controversial oil pipeline striking a battle with President Barack Obama with only three weeks remaining for Congress to renew the expiring aid.
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In testimony prepared for a House hearing after being subpoenaed to testify before the committee, former chief of failed MF Global, Jon Corzine apologized to customers of the firm and said he did not know where missing money was located. “I simply do not know where the money is, or why the accounts have not been reconciled,” said Corzine in testimony prepared for a House Agriculture Committee hearing to examine the MF Global collapse. A trustee overseeing distribution of customer funds for MF Global in November estimated that as much as $1.2 billion in funds may be missing after the eighth-largest bankruptcy in U.S. history. Corzine said he was “stunned” when told that MF Global could not account for the money. On October 31, New York-based MF Global filed for bankruptcy protection after disclosing sizable exposure to derivatives and other investments related to billions of dollars in European sovereign debt. The Commodity Futures Trading Commission [CFTC], Securities and Exchange Commission [SEC] and the Federal Bureau of Investigation [FBI] are conducting investigations into the failure. The group of regulators are investigating whether the firm tapped into futures customer accounts for its own proprietary trading. Corzine, a former senator and governor of New Jersey, said he was deeply saddened by the failure to locate the missing funds, noting that there were “an extraordinary number of transactions” during the last few days of Global’s operation and that he did not know if there were “operational errors". Due to the MF Global failure, both Republicans and Democrats raised concerns they have been hearing from ranchers and farmers in their states who have accounts frozen and appear to have lost money. Because it has jurisdiction over regulation of commodity futures broker firms, and farmers and ranchers who use futures trading as a hedging technique, the agriculture committee is responsible for investigating the failure of MF Global. Thousands of former investors at MF Global have had their accounts frozen or have received only partial distributions, four weeks after the bankruptcy. Lawmakers have heard ongoing concerns from farmers who trade in futures as a hedging device, that the missing funds have had a chilling effect on investment in the markets. Corzine said he remains “deeply concerned” about what impact the “frozen funds” have had on MF Global’s former customers; “Their plight weighs on my mind every day – every hour.” Corzine disputed assertions that the failure was due to losses related to investments in European sovereign debt and that most of that loss had been accumulated before he arrived at MF Global. Corzine said the “lion’s share” of the loss was related to an asset that had been created by “years of tax losses cumulated in the firm’s U.S. and Japanese subsidiaries.”

The Labor Department reported that the number of people filing for state unemployment benefits for the first time, fell 23,000 to the lowest level seen since late February. New claims fell to a seasonally adjusted 381,000 last week. For week ended November 26, level of initial claims was revised up by 2,000 to 404,000. A Labor Department official reported that seasonal adjustment factors played a part in the large decline. The four-week average of new claims fell as well, down 3,000 to 393,250 - lowest level seen since early April 2011. Continuing claims for week ended November 26 fell by 174,000 to a seasonally adjusted 3.58 million, the lowest number seen since September 2008. The insured unemployment rate fell two-tenths of a percentage point, to 2.8% striking the lowest rate seen since October 2008. The four-week average of continuing claims dropped 20,500 to 3.67 million.

Following the central bank’s decision to cut its key lending rate by a quarter of a percentage point to 1% - the second cut in as many months - ECB President Mario Draghi dashed investors’ hopes that the European Central Bank would serve as a lender of last resort to troubled euro-zone governments, saying the institution is handcuffed by its treaty. “The method by which money is being channeled to European countries should not obscure the fact that the treaty says no monetary financing to governments. The spirit of the treaty is always on our minds,” he said. Speculation is gloomy that the bank is prepared to ramp up its bond-buying Securities Markets Program once European leaders put in place a new agreement enshrining limits on deficits and public debt. Under the SMP, the ECB sterilizes or offsets, the impact of its bond purchases by draining a corresponding amount of liquidity from the financial system in a weekly operation. “If the IMF were to use the money exclusively to buy bonds in the euro area, we think that is not compatible with the treaty,” Draghi said. Draghi announced a range of extraordinary measures aimed at alleviating stresses in Europe’s banking system while delivering a downbeat outlook for the euro-zone economy. Draghi said the rate cut wasn’t unanimous but, was decided by a majority on the 23-member Governing Council, implying some members had advocated leaving rates on hold. European leaders are scheduled to meet in Brussels for a crucial summit Thursday night and Friday. Measures on the table include the introduction of two three-year long-term refinancing operations, which will effectively meet all demand for collateralized loans at a fixed interest rate. Additionally, the ECB lowered collateral standards while also halving reserve requirements, which in turn will increase the amount of capital available to banks.

Commerce Department reported that during October, U.S. wholesale inventories jumped 1.6% to a seasonally adjusted level of $470.2 billion. In September, inventories were revised higher to a flat reading from an initially reported 0.1% dip. Inventories are up 10.9% at the wholesale level. compared to October 2010. Usually, rising inventories are taken as a good sign for the economy as it shows wholesalers want to stockpile goods on anticipated demand growth. Gains were driven by nondurable goods, namely farm products and petroleum, with a 2.8% advance however, durable goods inventories additionally rose 0.8%.


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