Wednesday, October 31, 2012

Paying for Climate Change
by Sinclair Noe

DOW – 10 = 13,096
SPX +0.22 = 1412
NAS – 10 = 2977
10 YR YLD -.06 = 1.69%
OIL - .16 = 88.56
GOLD + 11.20 = 1721.20
SILV + .51 = 32.36

Hurricane Sandy remains the compelling story; the latest count is that the storm killed 64 people in the US. The latest estimates are for up to $15 billion in insured losses, double that for uninsured losses, toss in at least $20 billion in lost business; we're looking at $50 billion and counting. Lumber futures soared on expectations for increased demand, while gasoline surged on concerns that a Phillips 66 refinery in Linden, New Jersey, could shut for an extended period after Sandy cut power to the plant that produces 238,000 barrels a day of fuel. The aftermath of Hurricane Sandy looks to be a soggy, protracted, costly affair. Over 8 million people are still without electricity. Blackouts could last beyond the election. Transportation is still clogged. The pictures and video out of New York and New Jersey look like war scenes. It will be a challenge but if you think it was a knockout punch, Fougeddaboudit.
A 13 foot surge of water hit the southern tip of Manhattan. That's a big wall of water. New Yorkers may be tough but what if the flooding happens again, and what if the water doesn't go away? A 13 foot rise in sea level might over time render uninhabitable many of the parts of New York City we've seen flooded during Sandy. Scary, right?

If you’ve followed the news and weather in the past 24 hours you have no doubt run across a journalist or blogger explaining why it’s difficult to say that climate change could be causing big storms like Sandy. Well: it is.
Scientific American had this great explanation:

The hedge expressed by journalists is that many variables go into creating a big storm, so the size of Hurricane Sandy, or any specific storm, cannot be attributed to climate change. That’s true, and it’s based on good science. However, that statement does not mean that we cannot say that climate change is making storms bigger. It is doing just that—a statement also based on good science, and one that the insurance industry is embracing, by the way. (Huh? More on that in a moment.)

Scientists have long taken a similarly cautious stance, but more are starting to drop the caveat and link climate change directly to intense storms and other extreme weather events, such as the warm 2012 winter in the eastern U.S. and the frigid one in Europe at the same time. They are emboldened because researchers have gotten very good in the past decade at determining what affects the variables that create big storms. Hurricane Sandy got large because it wandered north along the U.S. coast, where ocean water is still warm this time of year, pumping energy into the swirling system. But it got even larger when a cold Jet Stream made a sharp dip southward from Canada down into the eastern U.S. The cold air, positioned against warm Atlantic air, added energy to the atmosphere and therefore to Sandy, just as it moved into that region, expanding the storm even further.

Here’s where climate change comes in. The atmospheric pattern that sent the Jet Stream south is colloquially known as a “blocking high”—a big pressure center stuck over the very northern Atlantic Ocean and southern Arctic Ocean. And what led to that? A climate phenomenon called the North Atlantic Oscillation (NAO)—essentially, the state of atmospheric pressure in that region. This state can be positive or negative, and it had changed from positive to negative two weeks before Sandy arrived. The climate kicker? Recent research by Charles Greene at Cornell University and other climate scientists has shown that as more Arctic sea ice melts in the summer—because of global warming—the NAO is more likely  to be negative during the autumn and winter. A negative NAO makes the Jet Stream more likely to move in a big, wavy pattern across the U.S., Canada and the Atlantic, causing the kind of big southward dip that occurred during Sandy.

Climate change amps up other basic factors that contribute to big storms. For example, the oceans have warmed, providing more energy for storms. And the Earth’s atmosphere has warmed, so it retains more moisture, which is drawn into storms and is then dumped on us.
These changes contribute to all sorts of extreme weather. In a recent op-ed in the Washington Post, James Hansen at NASA’s Goddard Institute for Space Studies in New York blamed climate change for excessive drought, based on six decades of measurements, not computer models: “Our analysis shows that it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be directly linked to climate change. To the contrary, our analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change.”

He went on to write that the Russian heat wave of 2010 and catastrophic droughts in Texas and Oklahoma in 2011 could each be attributed to climate change, concluding that “The odds that natural variability created these extremes are minuscule, vanishingly small. To count on those odds would be like quitting your job and playing the lottery every morning to pay the bills.”
Hansen also argued a year ago that Earth is entering a period of rapid climate change, so radical weather will be upon us sooner than we’d like. Scientific American just published a big feature article detailing the same point. might recall that another well-regarded scientist predicted behemoths such as Sandy in 2007. The article in Scientific American, by Kevin Trenberth, a senior scientist at the National Center for Atmospheric Research, was presciently titled, “Warmer Oceans, Stronger Hurricanes.” Trenberth’s extensive analysis concluded that although the number of Atlantic hurricanes each year might not rise, the strength of them would.

Hurricane Sandy has emboldened more scientists to directly link climate change and storms, without the hedge. On Monday, as Sandy came ashore in New Jersey, Jonathan Foley, director of the Institute on the Environment at the University of Minnesota, tweeted: “Would this kind of storm happen without climate change? Yes. Fueled by many factors. Is [the] storm stronger because of climate change? Yes.”
Raymond Bradley, director of the Climate Systems Research Center at the University of Massachusetts, was quoted in the Vancouver Sun saying: “When storms develop, when they do hit the coast, they are going to be bigger and I think that’s a fair statement that most people could sign onto.”

A recent, peer-reviewed study published by several authors in the Proceedings of the National Academy of Science concludes: “The largest cyclones are most affected by warmer conditions and we detect a statistically significant trend in the frequency of large surge events (roughly corresponding to tropical storm size) since 1923.”

Greg Laden, an anthropologist who blogs about culture and science, wrote this week in an online piece: “There is always going to be variation in temperature or some other weather related factor, but global warming raises the baseline. That’s true. But the corollary to that is NOT that you can’t link climate change to a given storm. All storms are weather, all weather is the immediate manifestation of climate, climate change is about climate.”

Now, as promised: If you still don’t believe scientists, then believe insurance giant Munich Re:
Munich Re, one of the world’s largest reinsurance firms, issued a study titled “Severe Weather in North America.” According to the press release that accompanied the report, “Nowhere in the world is the rising number of natural catastrophes more evident than in North America.” … While many factors have contributed to this trend, including an increase in the number of people living in flood-prone areas, the report identified global warming as one of the major culprits: “Climate change particularly affects formation of heat-waves, droughts, intense precipitation events, and in the long run most probably also tropical cyclone intensity.”
Insurers, scientists and journalist are beginning to drop the caveats and simply say that climate change is causing big storms. As scientists collect more and more data over time, more of them will be willing to make the same data-based statements.
The bottom line is, it doesn't matter whether you believe in climate change, you will pay for climate change.

The New York Stock Exchange and the Nasdaq were open again, running on back-up generators. For the month, the Dow fell 2.5 percent, the S&P 500 slipped 2 percent and the Nasdaq was off 4.5 percent. For the past six months, going back to the old idea of “Sell in May”; if you had sold on May 1st, you would have avoided a 182 point decline in the Dow Industrials, you would have missed a 7 point gain in the S&P 500, you would have avoided a 73 point loss. I told you back in March and April. You're welcome.

I feel less certain about the best six months from October through May, but you place your bets and you take your chances.

Tuesday, October 30, 2012

Tuesday, October 30, 2012 - Sandy, FEMA, Elections, Star Wars, Gold

Sandy, FEMA, Elections, Star Wars, Gold
by Sinclair Noe

Of course the over-riding story of the day is Hurricane Sandy. The latest is that the death toll has climbed to 40. Search and rescue missions are constant and ongoing. The death toll included 17 victims in New York State; 10 of them in New York City, along with five each in Pennsylvania and New Jersey. Sandy also killed 69 people in the Caribbean before making its way up the Eastern Seaboard. Haiti was hardest hit by the storm; 54 Haitians died, with 20 still missing. Tens of thousands have been left homeless. Crops were devastated. Many Haitians were still living in tents following the 2010 earthquake. Hurricane Sandy has worsened the threats of cholera and food shortages. We should be proud of how we have responded to this natural disaster, but there is still a lot of damage and it will take time to clean up.

About 8 million people are without electricity. More than 16,000 airline flights have been canceled. The economic damage will be massive. But it's too early to say exactly how much it will be.

The Jersey Shore was hit especially hard. Lower Manhattan was flooded by an 14 foot surge of seawater, a record. Commuter tunnels and subway tunnels are underwater.

Wall Street was closed today, feeling a little under the weather. There was electronic trading in the commodities markets. Gold - .80 = 1710.00, Silver - ,01 = 31.85, crude oil - .02 = 86.57. The New York Stock Exchange and Nasdaq both plan to resume normal trading tomorrow. Wall Street, as represented by the extensive network of exchanges, banks and regulators — has spent the past two days testing systems and assessing the markets in an effort to ensure the trading day goes smoothly. Some trading firms with damaged data centers or facilities have had issues reconnecting electronically with the exchanges. One nearby building that houses several firms sustained significant damage and could hamper their ability to operate. Such firms are now scrambling to move operations and do repairs to be ready for the open on Wednesday.

In advance of Sandy’s march through Manhattan, thousands of sandbags have been stacked in front of the downtown headquarters of Goldman Sachs. It is a picture whose metaphorical value should not be lost on regulators, policymakers, shareholders and the bankers themselves.

And then, of course, there's an election in one week. When asked about disaster relief and FEMA's role in a debate in June of 2011, Romney said, “Every time you have an occasion to take something from the federal government and send it back to the states, that’s the right direction. And if you can go even further, and send it back to the private sector, that's even better.”

Then, according to a transcript of the debate, he added: “Instead of thinking, in the federal budget, ‘What we should cut,’ we should ask the opposite question, ‘What should we keep?' We should take all of what we're doing at the federal level and say, what are the things we're doing that we don't have to do? And those things we've got to stop doing, because we're borrowing $1.6 trillion more this year than we're taking in.”

When questioned by moderator John King of CNN about disaster relief specifically, Romney responded, “We cannot afford to do those things without jeopardizing the future for our kids. It is simply immoral, in my view, for us to continue to rack up larger and larger debts and pass them on to our kids, knowing full well that we'll all be dead and gone before it's paid off. It makes no sense at all."

Today, Governor Romney and President Obama put aside their fierce battle for the White House, avoiding politics to focus on relief efforts after mammoth storm Sandy left millions of Americans struggling to recover. With a week left in a deadlocked race, Obama canceled campaign trips to stay in Washington and supervise storm recovery, while Romney held a storm relief event in the swing state of Ohio but ducked most political talk, including past comments about FEMA. Meanwhile, Vice President Biden told reporters FEMA was doing "one hell of a job," an echo of the comments famously made by former President George W. Bush during the government's botched response to Hurricane Katrina in 2005.

Romney will hit the trail again for rallies in Florida on Wednesday, and Romney's running mate, Paul Ryan, and Vice President Joe Biden also added new campaign stops as the race heads to a finish. Obama on Wednesday will visit New Jersey, which along with New York City bore the brunt of the storm, although he was expected to return to campaigning on Thursday for the final sprint to Election Day.

Before Election Day, we'll have one more jobs report this Friday. Job growth likely picked up in October, but not enough to prevent the unemployment rate from rising off a near four-year low, although that might not matter for next week's presidential election. Coming four days ahead of the election, the employment report on Friday is not expected to shift much from its recent pattern, limiting its impact on voters. Employers are expected to have added 125,000 jobs to their payrolls in October, up from 114,000 in September. The unemployment rate is forecast to tick up a tenth of a percentage point to 7.9 percent after a dramatic 0.3 percentage point fall in September. Most people have an impression of the economy and their minds won't be changed at this late stage. Only a dramatic headline on either number in either direction might move the dial a bit more.

One bit of good news on the jobs front today, Chrysler reaffirmed that the company is not moving Jeep vehicle production out of the United States to China. This had been a bit of a campaign issue. Chrysler in an October 25 blog post had already rejected a statement made that day to a crowd in Ohio by Republican presidential candidate Mitt Romney, that Chrysler was thinking of moving all Jeep production from Ohio to China. Romney, speaking last week to a crowd in Defiance, Ohio, said that he had read a news article that said Chrysler's Jeep brand is considering moving "all production to China." Later, the Romney campaign aired an advertisement that did not repeat the move of production from Ohio but said that Chrysler is considering making Jeeps in China.

Meanwhile in Europe, Reuters reports an overwhelming majority of Greek Socialist lawmakers have agreed to vote in favor of contested austerity reforms, sharply increasing the odds of securing parliamentary approval for the measures.

Near-bankrupt Greece needs to push through spending cuts and tax measures worth 13.5 billion euros as well as a raft of reforms to appease EU and IMF lenders and secure bailout money needed to avoid running out of cash next month. After months of negotiations on the austerity plan, the Greek Prime Minister announced that talks had been completed and implored his allies to back the package. The prime minister's New Democracy party and the Socialist PASOK have between them 160 deputies, nine more than they need for an absolute majority in parliament.

Not much in the way of corporate news today, but there was an announcement that George Lucas is selling LucasFilm to Disney for $4 billion, and Henry Blodget did a nice article on the company that Lucas built, without the aid of venture capitalists. How did George Lucas build a company worth $4 billion without any outside investors?
Here are the key points:
  • He quit an early career when he realized it wasn't right for him (he wanted to be a race-car driver...until he almost got killed in a crash)
  • He made a type of product he loved and cared deeply about (movies)
  • He made--and learned from--lots and lots of different products (There were many Lucas movies before Star Wars)
  • He evolved (Lucas's early movies were artsy non-commercial films)
  • He studied and learned from the best mentors (Francis Ford Coppola, among others)
  • He became friends with other extremely talented people in the industry (Steven Spielberg, among others)
  • He was shrewd (He sold his directing services to Fox Studios for Star Wars for cheap--but kept all the merchandise, licensing, and sequel rights, which Fox didn't want)
  • He was very, very patient (Unlike many of today's entrepreneurs and investors, Lucas wasn't looking for a "quick flip." Lucasfilm was founded in 1971, 41 years ago).
  • And of course, it helps when the force is with you.

Not exactly an overnight sensation, but a good recipe for success.

Let's talk about gold, and maybe silver too. There are a few trends developing in the metals markets that deserve our attention.

One of the last big trends in gold was back in 2004, when the GLD exchange traded fund was formed. Suddenly people could invest in gold, without the hassles of holding the physical metal; also, it was an easy trading platform. The Exchange Traded Product, or ETP, trades like a stock; you can enter or exit a trade is seconds. The only problem is that you don't actually own gold, you own paper. Theoretically, that paper is backed by physical gold, but you can't actually exchange it for coins or bullion.

The market meltdown of 2008 changed people's comfort levels with regard to holding paper gold compared to physical gold. Total coin and bar purchases are up 96% since 2009, while net additions to ETs are down 73% over the same period.

While ETPs include the ownership of physical bars, it's clear that increasing numbers of investors are buying more bullion than proxies. This is a remarkable shift, especially given the claimed popularity of GLD.

The shift is even more dramatic with silver. Investors have tripled their silver bullion purchases since 2007, while the exchange-traded vehicles sold 26 million ounces more than what they bought to back their funds last year.
Why is this happening? And what does it mean?

There may be some concerns about the ETPs; do they really have the physical metals in the appropriate quantities to back up their paper? Another reason for the shift is certainly due to global economic, fiscal, and monetary concerns. Remember, the recovery in the US has been mediocre in our eyes, but compared to the rest of the world, the US economy looks great. In times of global economic concerns, people gravitate to precious metals as a safe haven play. Then, you might remember the MF Global fiasco. There is concern that holding a paper receipt for metals is not enough, that the brokerage might hypothecate the assets in an account, and you are back to hold nothing more than a worthless piece of paper. Having metal in your control and at your disposal lets you avoid dependence on counterparties.

Last year, Hedge fund manager John Paulson started taking delivery of physical gold, moving away from paper gold. Now, the trend seems to be spreading to countries taking delivery of physical gold from central banks.

The demand story for silver is quite different; silver is the poor guys' precious metal; demand takes the form of jewelry and coins. Overall silver jewelry sales in China were up 19.3% in the first 9 months of this year, compared to last year. And don't forget that silver is an industrial metal; one of the big applications is in the solar industry, and output is expected to increase ten-fold in the next 4 years; that means lots of silver will be used.

Another important consideration is the increase in the monetary base. The price of gold tends to move in pretty close relation to the expansion of the monetary base. Since the Fed declared QE to Infinity,  it's logical to conclude that this expansion of the monetary base will continue. If it grows at the same pace through January 2014, there is a high likelihood the gold price will reach $2,300 at that point. That's roughly a 30% rise within 15 months. Some may argue that there's no law saying this correlation must continue. That's true. And maybe the Fed doesn't print till 2014. That's possible. But it's not just the US central bank that's printing money; the European Central Bank (ECB) President Mario Draghi has declared that it will buy unlimited quantities of European sovereign debt; Japan's central bank is expanding its current purchase program by around 10 trillion yen ($126 billion) to 80 trillion yen; the Chinese, British, and Swiss are all adding to their balance sheets.

One more point, the precious metals market is actually quite small. The investment market for silver is actually less than the market capitalization of Wal-Mart, so when these metals prices start to move, they can move fast.

Monday, October 29, 2012

Monday, October 29, 2012 - Hurricanes and Clean Energy

Hurricanes and Clean Energy
by Sinclair Noe

The stock and bond markets in New York were closed today; that's the first time that's happened since Hurricane Gloria hit New York in the 80's. The markets will be closed tomorrow; that's the first time the market has been closed for 2 days due to weather since 1888, when a blizzard hit New York; of course it was closed following 9/11. Areas around New York's Financial District were part of a mandatory evacuation zone. The storm surge is already pushing water over seawalls in the southern tip of Manhattan. And the hurricane is just now hitting New York head on. It already flooded Atlantic City. Much of the East Coast was at a standstill as the storm approached. The storm, 900 miles across, shut the federal government in Washington and state offices from Virginia to Massachusetts. Schools were closed, planes and trains tried to get out of the way; delays are affecting transportation around the nation. You can't get there from here.

Economic losses could ultimately reach $20 billion, only half of it insured. Some estimates put the property damage as high as $90 billion; we'll see. Ten states have declared a state of emergency; 60 million people are in the path of the hurricane; there will undoubtedly be some tragedies. Keep those people in your prayers.

It is estimated millions of people will lose electricity for an extended period. Federal inspectors have been dispatched to 11 nuclear power plants from Maryland to Connecticut; trying to avoid a repeat of the Fukushima Reactor meltdown in Japan. Hope the backup generators work.

Last Friday, we opened the phones and for some reason, the conversation centered around global warming. So, I think I'll talk about green energy today.

Clean energy has become a dirty word in presidential politics. In their second debate, Mitt Romney and Barack Obama each tried to outdo the other’s love of fossil fuels: Obama extolling his record on oil and natural gas production, Romney vowing to take “advantage of the oil and coal we have here.” The Republican candidate has ridiculed the administration’s $535 million loan guarantee to Solyndra, the bankrupt California-based solar panel maker, and accused Obama of living “in an imaginary world where government-subsidized windmills and solar panels could power the economy.”

The candidates’ coolness to renewable energy comes at a time when the domestic supply of traditional energy sources, such as oil and natural gas, is at an all-time high. And yet this failure to make the promise of renewables a keynote in the debate is a huge missed opportunity. In particular, it ignores the dramatic reduction in the cost of photovoltaic solar power worldwide and the considerable benefits to consumers and the environment.

The untold story of this campaign is that what killed Solyndra may turn out to be a boon for the nation. Over the past five years the price of photovoltaic panels has plummeted 75 percent, due largely to a glut of Chinese-made panels. The fall in prices rendered technically advanced photovoltaic panels, like those produced by Solyndra and other US companies, too expensive to compete. But cheap panels have been a godsend for consumers.

Nationally, the average cost of residential installations—including hardware, permits, and labor—has plummeted from $9 a watt in 2006 to $5.46. Averaging in commercial industrial installations, the national installed price drops to $3.45 a watt, (says the Solar Energy Industries Association, a Washington-based trade group.) For consumers, the economics are compelling; it's a hedging strategy for energy consumption, something like locking in $1-dollar-per gallon gas for the next 20 years.

The result: almost 52,000 residential rooftop systems were installed in the US last year, up 30 percent from a year earlier. Total rooftop installations, including on commercial buildings, grew 109 percent from 2010 to 2011. Total photovoltaic installations are projected to grow an additional 71 percent this year from 2011 levels. In less than four years we have tripled solar energy to 5,700 megawatts installed.

Worldwide, the picture is even more positive. Australia projects that 10 percent of its 8 million houses will have rooftop systems within the next 12 months; most of that growth coming in the past three years. European rooftop installations continue to outpace those in the U.S., even as some countries begin to pare subsidies that have helped spur a continental rooftop boom. Including residential, commercial, and industrial-scale projects, the world had installed about 67 gigawatts of photovoltaic power at the end of last year—up from just 1.5 gigawatts in 2000.

Despite such breakthroughs, the U.S. economy is harnessing only a fraction of solar’s potential benefits. Based on U.S. Census Bureau data, about 100 million U.S. residential units could physically hold rooftop systems one day, generating by one estimate 3.75 trillion kilowatt hours of electricity a year. In 2011, total U.S. electrical generation from all sources was about 4 trillion kilowatt hours—42 percent of that from coal, according to the U.S. Energy Information Administration. The trouble is, many of the big,investor-owned utilities that provide about 85 percent of America’s electricity see solar as both a technical challenge and a long-term threat to their 100-year-old profit models. And the lack of a national energy policy means regulation of solar is up to states, public service commissions, and a wealth of local governments and bureaucracies—many of whom have a vested interest in maintaining the status quo.

We are starting to see a shift in pricing power and in political clout. Today solar is cost effective without local subsidies for 300 utilities in 30 states representing 21% of electricity solar in the USA.  That is a market opportunity of over $1 Trillion. We now have more than 100,000 solar energy jobs at more than 5,600 companies in the US, double the number from 4 years ago.

In fact, the Department of Defense, the largest single energy consumer in America, is bullish on solar. Whether it is the 1.45-megawatt solar project at the Burlington, Vt., Air National Guard Base or the 14-megawatt project at Nellis Air Force Base, Nev., the military recognizes the value of solar. America is now home to the largest operating solar photovoltaic plant in the world, the 250 megawatt thin-film plant in Yuma. That plant can provide electricity to 100,000 homes.
Photovoltaic technology is not the only significant solar development. In California, construction is underway for the largest concentrated solar thermal plant of its kind in the world, the 392-megawatt Ivanpah project in California that created 2,100 construction jobs. When completed in 2013, this concentrated solar plant will power 140,000 homes. And a 280 megawatt concentrated solar plant in Gila Bend, will be the first in the US with energy storage, providing power even when the sun goes down. That project created 1,600 jobs.
The story is much the same with wind energy. At the end of 2008 we had about 25,000 megawatts of wind energy, but today we have doubled wind energy capacity to over 50,000 megawatts. We have added more new wind energy capacity over the last five years than nuclear and coal combined. We now have 75,000 Americans working in wind and over 470 plants in America manufacturing wind products. The upshot: the cost of wind energy dropped from 8.4 cents per kilowatt hour in 2008 to about 5 to 7 cents per kilowatt hour today. States like Iowa and South Dakota have achieved the milestone of getting 20 percent of their electricity from wind. And the Shepherds Flat wind farm in Oregon, one of the largest in the world at 845 megawatts, created 400 construction jobs and is powering 235,000 homes.
Energy efficiency is the low-hanging fruit. Every day we are paying more for energy than we should due to poor insulation, inefficient lights, appliances, and heating and cooling equipment -- money we could save by investing in energy efficiency. In the past 4 years, more than 1 million homes have been weatherized. Given the fact that over 90 percent of the products used in weatherization are manufactured in the United States, we are creating jobs not only in construction but also in manufacturing. This is a win-win-win situation.
I wish I'd heard more about green energy during this election cycle. I think it is probably the biggest growth story in the economy. I think it's a national security issue.
A hurricane or a earthquake could do serious damage to a nuclear plant. Even if you don't believe the ever-growing mountains of evidence supporting global warming being human caused, there is no doubt that there are dangers from nuclear; there are dangers from oil, nat gas, and coal. There is no question that coal is a pollutant, and can cause serious health issues, same with the pollution from oil products.
If you choose to disregard the scientific evidence that these pollutants are a part of global warming, that is your choice. There is clear evidence that we are seeing warming. The arctic ice caps are melting, glaciers are melting, Iceland isn't all Ice any more, and there are hurricanes in New York at the end of October. What is causing the warming? The vast majority of scientists say we are the cause. You are not compelled to believe in science. However, I'll tell you one reason I believe. If we can clean up the air and water, we'll have a cleaner, healthier planet; that's a good thing; and if the scientists are right, we'll avoid the destruction of the planet and ourselves. It's kind of like believing in God. You live a better healthier life for believing, while if you don't believe and you are wrong – you're just damned.

A report from the European Renewable Energy Council finds the European Union could generate trillions of dollars in fuel savings by looking beyond goals mandated for 2020. Greater investments for things like wind and solar power, coupled with a slow move away from things like coal, could make the region nearly carbon-free by 2050. On the other side of the Atlantic, however, officials have expressed reservations about being forced into a low-carbon economy, highlighting the green divide among western powers.
The European campaign groups, in a report highlighting an "Energy (R)evolution," call on European leaders to move in favor of renewables and energy efficiency instead of fossil fuels or nuclear power. The group states that every time oil prices increase by $1, Europeans wind up paying more than $500 per month. That, they say, could drop by half by 2030 if leaders embrace a comprehensive green energy future. EU member states have agreed to cut their carbon footprint by 20 percent, improve energy efficiency by 20 percent and get 20 percent of their energy from renewable energy resources by 2020. In the U.S., meanwhile, a study on the energy future finds state and federal governments could generate as much as $124 billion by exploiting unconventional oil and gas plays as part of an all-out push for energy independence. 

Opponents of low-carbon measures like Michigan's argue about high consumer bills, while supporters point to the long-term consequences of a carbon-intensive economy. The European argument, at least from the other side of the ocean, seems to be that, while coal, oil and natural gas are bountiful now, in the long run, you get what you pay for. 

Sandy is now coming onshore across New Jersey right about at Cape May. As the hurricane makes landfall our winds will begin to slowly subside. As I write this we are probably at the peak of the storm. Shortly, you may notice that the worst of the worst seems to be over and you will be correct. This is not to say the storm is finished, it's just that we are close to the apex in terms of winds increasing any more. Trees can still come down and power outages will be an issue throughout the night. Power outages will be a big problem. We'll see in the next couple of hours how bad the flooding problem is.
The storm forced the New York Stock Exchange to extend today's closing to Tuesday -- the first unplanned shutdown since the Sept. 11 terrorist attacks. Commodity markets traded electornically, with gold down 1.30 = 1710.80, silver down .33 = 31.86, crude oil down .74 = 85.54. The Port of New York and New Jersey, whose terminals make up the third-busiest container port in the country, also was temporarily shuttered and evacuated. And a Phillips 66 refinery in Linden, N.J. and a Hess refinery in Port Reading, N.J., shut operations, while several others curtailed production. Although oil prices are expected to drop due to less demand.
The potential damage to homes from Hurricane Sandy-driven storm surges is likely to be greater than it was last year for Hurricane Irene. CoreLogic estimates nearly 284,000 residential properties valued at almost $ billion are at risk for potential storm surge damage among the coastal Mid-Atlantic states.

Now is as good a time as any to remind people of who provides all those detailed projections of where Hurricane Sandy is going to hit and how strong it’s going to be: the federal government. No matter how you get your weather news—local TV or radio, The Weather Channel, AccuWeather, whatever—hurricane forecast information originally comes from the National Hurricane Center, which is part of the National Weather Service. The raw data come in part from the Hurricane Hunters, the pilots who fly planes into hurricanes, who are part of the Air Force Reserve and the National Oceanic and Atmospheric Administration. The computer models that predict where hurricanes are going to strike are developed by the NHC. There’s a strong case to be made that hurricane research is one area where a small amount of taxpayer spending has had huge public benefits.

The Labor Department said it hopes to release October's unemployment report on Friday as scheduled, despite the closure of the federal government on Monday, and possibly additional days this week, because of Hurricane Sandy.
The report on October's unemployment rate and the number of new jobs added that month is the last major economic report before next week's presidential election. And a delay in the report until after the election would fuel conspiracy theories. The September jobs report, released Oct. 5, showed the unemployment rate surprisingly dropped to 7.8% from 8.1% the previous month, the lowest level since Obama took office. 

Friday, October 26, 2012

Friday, October 26, 2012 - Thank God It's Friday

DOW + 3 = 13,107
SPX – 1 = 1411
NAS – 1 = 2987
10 YR YLD - .08 = 1.75%
OIL -.43 = 88.30
GOLD + .80 = 1712.10
SILV - .02 = 32.19
PLAT – 16.00 = 1551.00

The U.S. economy grew in the third quarter, the GDP grew at a 2% rate, a bit stronger than the 1.7% expected by economists, and up from the 1.3% rate in the second quarter. Consumer spending and federal government spending increased and the housing market and home construction were areas of strength. Business spending continued to be a drag. GDP is the broadest measure of an economy’s health, and represents the value of all goods and services produced in the US. GDP has been positive since the third quarter of 2009, but today's report, although better than expected, really can't be considered more than moderate growth.

Consumer spending increased at a 2% pace. Business investment fell by 1.3% in the third quarter, subtracting 0.1 percentage points from growth. Farm inventories dropped due to the drought and that subtracted 0.4 percentage points from GDP growth. Government spending increased 3.7%, with the lions' share coming from the federal government and a fairly flat spending pattern from local governments. Investment in the housing sector jumped 14.4%. Inflation as measured by the Consumer PCE or Personal Consumption Expenditures Index increased to 1.8% from 0.7% in the second quarter; most of that increase was due to high gasoline prices, which have started moving lower in the current quarter.

Imports dipped 0.2%, reducing the drag on economic growth. Imports subtract from GDP. Conversely, more exports would help GDP, but exports fell an even sharper 1.6%, reflecting the difficulty faced by American companies in selling goods overseas in a global economic slowdown.

Here's a quick rundown of the Euro economic slowdown. Spain's unemployment rate rose to 25 percent in the third quarter, a new record high; one reason for the new record is labor reform making it easier to dismiss workers. One alarming element of today's rise in Spanish unemployment is that most of the country's latest austerity package hasn't kicked in yet; it's just getting started. There are daily street protests throughout Spain. It's hitting the public and private sectors. Today, Bankia, the largest Spanish bank announced 72 senior bankers will have to return their bonus pay from 2011. The bonuses were awarded just weeks before Bankia admitted it needed $30 billion in bailout money.

Fans of Greek deadlines will be keen to know that Athens has been given until Sunday night to achieve full agreement on a $15 billion austerity package. Germany's finance minister has waded into the debate on Greece again, saying there were doubts the country had met its commitments from previous bailouts. Greece has been dealing with 25% unemployment for a while, and 54% among the young; a third of businesses in central Athens are closed, the two old mainstream political parties can't seem to get anything done. The Golden Dawn gained 18 seats in parliament in the last election; that represents less than 10% of the vote, but they continue to gain ground as more and more people lose hope. Violence has broken out even in parliament. Golden Dawn is the Neo-Nazi party and they are moving into the gaps left open by the crippled Greek state.

In the UK and throughout much of Europe there is a move to crack down on tax cheats. Revenues are drying up because unemployed workers don't pay tax, so now governments are going after businesses, and they're starting with foreign firms. The British Prime Minister Cameron is asking for investigations into international companies that have legally paid little or very small amounts of corporate tax on billion s in revenue; Starbucks, Apple, Google, Facebook, and Amazon are among those targeted for investigations.

Remember Silvio Berlusconi, the former Italian prime Minister? He wasn't just a politician, he was also a media tycoon, and he ran a company called MediaSet; he's one of Italy's richest men; and he's been on trial for tax evasion. The court found that Mr Berlusconi and 10 co-defendants were behind a scheme by Mediaset to purchase the rights to broadcast American films on his private television networks through a series of offshore companies, and had falsely declared the payments to avoid taxes.

Prosecutors said that they inflated the price for the TV rights of some 3,000 films as they re-licensed them internally to Berlusconi's networks, pocketing the difference that amounted to 250 million euros. The trial began in July 2006, but was put on hold by a now-defunct immunity law that shielded him from prosecution while he was premier.

Today, Berlusconi was convicted and sentenced to 4 years in prison. The sentence was immediately reduced to one year because of an amnesty law designed to reduce prison overcrowding. His lawyers promise to appeal.

Meanwhile, the director of the Bank of England has called for breaking up the “too Big to Fail” banks. Andrew Haldane said regulators should consider doubling banks’ loss-absorbing capital buffers to around 20%, “placing limits on bank size”, or imposing a “full separation of investment and commercial banking” rather than a ring-fence. Although banks claim to be more efficient the larger they are, the analysis ignores the cost of the implicit taxpayer guarantee that are calculated at $300 billion a year; that's just in implicit guarantees, and that's just in reference to the British banks. Can you imagine what would happen if Ben Bernanke made an announcement like that regarding US banks?

Meanwhile, the Swiss banking giant UBS is getting smaller. They announced they will fire 10,000 workers. Switzerland’s largest bank by assets will significantly shrink the trading side and complexity of its investment bank. UBS reports third quarter earnings next week.

Citigroup has fired two workers; they were internet stock analysts who made unauthorized disclsure related to the Facebook IPO. Citigroup was fined $2 million by the Massachusetts Securities Division for having “failed to prevent or detect the written disclosure of material, nonpublic research information in a restricted period before the Facebook IPO.

Nine more of the world’s major banks are currently under the microscope of US state prosecutors on suspected attempts to manipulate the Libor interest rate.
Bank of America, Bank of Tokyo Mitsubishi UFJ, Credit Suisse, Lloyds Banking Group, Rabobank, Royal Bank of Canada, Société Générale, Norinchukin Bank and West LB have received subpoenas to appear in court from Eric Schneiderman, New York Attorney-General, and George Jepsen, Connecticut Attorney-General.

They are jointly investigating the possible rigging of the Libor – a key bank lending rate which affects different financial instruments and transactions worth more than $300 trillion worldwide.
In August the investigators sent requests for information on the Libor case to Barclays, which has already been fined $450mln for Libor fixing, state-backed lender Royal Bank of Scotland, HSBC, JP Morgan Chase, UBS, Deutsche Bank and Citigroup. The investigators demanded the banks provide documents and records of communications to prove the alleged collusion to fix rates.

I find it absolutely amazing that the big banks continue to act in such reckless manner. If it's not one thing it's another.

I don't like uncertainty and I'm certain you don't like uncertainty and it is absolutely certain, at least according to the financial media and CEO of the biggest corporations in America are convinced that uncertainty is Satan's spawn. Yes, it is uncertainty over the fiscal cliff, not a lack of business that has the CEOs wetting their beds at night. There may be something to it. It's a little hard to imagine Congress being anything but dysfunctional, but we've seen it all before. Remember 1995, when Congress shut down the government – twice? Remember last year, when they avoided the fiscal cliff, even though they couldn't avoid a credit downgrade? I understand that the fiscal cliff is important and it should absolutely be dealt with, but it is not the most important issue in the economy.

And the fix is relatively simple; the politicians can reach a compromise; they can come up with a new plan; they can pass an extension and kick the can down the road for six months or a year; or they can just go over the cliff – which is entirely legal and would result in the best case scenario for reducing the debt. The fiscal cliff would actually raise taxes and cut spending. The reality is that this option is horrid economic policy. The mix of automatic spending cuts and the expiration of Bush-era tax cuts at the end of the year could cut growth next year. We can say with certainty that this is a failing mix because we've seen it applied in Europe and it has been a verifiable failure.

We've been told over and over that stimulus didn't work, even though it actually did, and it has resulted in growth albeit slow growth. But isn't slow, moderate growth better than the 8.5% contraction in GDP we saw in the fourth quarter of 2008? The CEOs know this and they know that if the stimulus spigot gets turned off, they are in trouble. They can talk about the need to fix the debt, but what they are really asking for is more stimulus. It's Orwellian doublespeak of the highest order. Debt to GDP is falling and the economy would tank if we were to reduce the Federal deficit while the economy is deleveraging.
Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.

Instead, the CEOs come out and start criticizing the Federal government for stepping in and filling the gap. If it wasn’t for the Federal deficit, the debt-to-GDP chart would be declining even more precipitously, and the economy would be a disaster. Deleveraging is a painful process, and the Federal government is easing that pain right now, and the reality is that the CEOs are hooked on the stimulus.

These big companies, on the whole, are losers relative to the rest of the corporate sectors; small and midsized businesses have outperformed and grown, while the big players have deleveraged, yet they have the temerity to preach to the rest of us as if they speak from genuine accomplishment, as opposed to having been lucky or politically savvy enough to assume the leadership of companies with well established franchises. How many of those CEOs were actual founders of those companies? None that I saw. How many were CEOs of financial institutions that received bailouts? About a dozen. And then there was GE, the tax dodger; and Merck, which gets all kinds of funding from various governmental health institutions.  And of course, the other factor working to their advantage is that political influence can be bought for remarkably little.

In any case, both the global economy and the US economy are very fragile right now, and every central banker in the world is begging for help from fiscal policymakers. Which is to say, higher deficits, not lower ones.

Of course, in addition to the uncertainty surrounding the fiscal cliff, we have the uncertainty surrounding the election. The latest Gallup polls show Romney leading by 3%. The latest CBS polls show Obama leading by 2%. The polls are fairly good predictors but not a sure thing. In 2004, Gallup failed to forecast the winner of the popular vote for president, for the second straight election. Halfway through Election Day 2004, various exit polls showed Kerry with the lead. So who will win the election? The polls are split, but the gamblers have placed their bets. And the gamblers are better at this than the pollsters.

In 2004, when the pollsters picked Kerry, 91 percent of bettors on had their money on Bush. The betting markets also were correct on the winner in each of the 50 states. In 2008, 90 percent of gamblers correctly forecast an Obama victory. They were also on the money with 48 of 50 states. In presidential races beginning in 1896, the New York TimesSun, and World provided daily betting quotes. The papers' sources were bookies who had agents at every stump and whistle-stop to gather intel and quantify popular sentiment. Between 1884 and 1940, the bettors erred on just one of sixteen elections, Wilson's 1916 upset of Hughes.

Now, the betting odds are posted on the internet. The three biggest internet oddsmakers are giving the following odds: Betfair has Obama with a 64 percent chance to win to Romney's 36 percent; Intrade has the president at 58 percent; and the Iowa Electronic Markets have the president at 59 percent.Oddschecker shows bookmakers to be even more bullish on Obama. Still, the consensus among gamblers isn't as strong as in the last two elections. At approximately 3-2 odds, the outcome indicates a tight race, likely hinging on Ohio. And it's not exactly a horse race, which can change in a second; it's more like a marathon, and one-third of all voters have already cast early ballots. We're closer to the finish line than you realize.

There have been plenty of issues that got short shrift in the public discourse during this election cycle. There were 3 presidential debates and I think that all three were lousy. The questions were bad, the answers worse.
Here's my list of questions I would have liked to have heard:
What should we do about the 10+ million undocumented people in this country, more than half of whom came here from Mexico?
Speaking of Mexico, the drug war in Mexico was the most deadly armed conflict in the world last year, killing more people than the war in Afghanistan and the civil war in Syria combined. What should we do about it?
We have run the largest trade deficit in the world every year for roughly the past 20 years. This year, it's half a trillion dollars, again. Other developed countries like Japan and Germany run consistent trade surpluses. What should we do about this?
The United States is the only industrialized country without universal healthcare, paid vacations and paid sick leave. Why is this? What should we do about it?
Climate change obviously is a worldwide issue. Should the United States participate in efforts to mitigate it? If so, how?
There is tremendous suffering now in both Greece and Spain, with unemployment of 25 percent+. Should we do anything to help people in those countries?
In poor countries, three million people die each year of respiratory infections, 2.5 million die each year of diarrhea, and two million die of AIDS. Virtually all of these deaths are avoidable. Should we avoid them?
If you could change one ruling by the Supreme Court, what would you change and how?
Feel free to add to the list.
Have a great weekend.