Friday, January 18, 2013 - Happy Inauguration Weekend

Happy Inauguration Weekend

by Sinclair Noe

DOW + 53 = 13,649
SPX + 5 = 1485
NAS – 1 = 3134
10 YR YLD -.03 = 1.84%
OIL - .15 = 95.79
GOLD – 2.40 = 1685.70
SILV + .16 = 31.99

The Dow Industrials and the S&P 500 closed at 5 year highs today. We have now seen gains over the first three weeks of the new year. While many Main Street investors remain wary of the the market that bit them in the financial crisis of 2008, they are missing out on historic gains. Since the turnaround that began March 9, 2009, the market has chalked up gains of 118%, putting it in the top nine bull markets in which the S&P 500 gained more than 100%. The current bull, which followed the worst bear market, or market plunge, since the Great Depression, is also 1,407 days old, which ranks eighth and also puts it in the "1,000 Day Club." In cash terms, the stock market has generated $10.5 trillion in paper wealth since the bear market ended.

For much of the last 44 months, most investors, many of them psychologically and financially scarred by the 2008-09 financial crisis, have sworn off the stock market. In the five years ended in 2012, individual investors have yanked an estimated $557 billion out of U.S. stock mutual funds, while $1 trillion has been funneled into bond funds. Once bitten, twice shy. Investors don't really trust the market itself, so they don't trust the rally. Of course, there are other factors. The aging baby boomers are growing increasingly averse to risk. And then there's the concern the gains have been artificially inflated by the stimulus injected into markets by bankers. These drastic and unprecedented measures used by central bankers to reignite the economy, revive risk taking and boost investor confidence are bound to end some time, and when the Fed exits QE, there could easily be another day of reckoning.

 Last week offered a hint, when minutes from the Federal Reserve showed decision makers discussing when to wean the planet from their accommodative bond buying. The sell-off in long-term Treasuries in one week wiped out their entire yield from last year, and demonstrated the peril of crowding into allegedly safe havens.

Real interest rates tick higher when economies improve, but an unruly spike is another thing altogether. The Fed has vowed to keep rates down, as will our looming debt ceiling. But if the 30-year Treasury yield, now just below 3.1%, were to nudge above 3.32%, the return over the next 12 months would be negative

Of course, there is still no shortage of things for jittery investors to worry about. The World Bank warned that the US budget battle is already restraining economic growth around the world and warned the U.S. could fall back into recession if massive budget cuts aren't avoided in coming months.

Moody's, the ratings agency that evaluates the financial health of sovereign nations, including the US, warned this week that it will downgrade the nation's triple-A credit rating if Congress doesn't raise the debt ceiling and defaults on its debts. A similar move by S&P in the summer of 2011 after a similar battle resulted in the Dow tumbling 635 points in a single day.

But, perhaps the scariest thing in the past week was a report from Lippers that stock funds, including mutual funds and exchange traded funds that invest in both U.S. and foreign shares, took in a whopping $18.3 billion in the week ended Jan. 9, the fourth-largest weekly inflow since it began tracking them in January 1992. Investors are finally coming to the realization that the conservative investments they have been in have returned little to nothing over the past several months and years. That has left them in a deep hole. Yeah, that's the ticket, jump back in at the top of a four year cyclical bull market run. Nothing scary about that.

A stock market perched at fresh five-year highs is vulnerable to many excuses for a pullback, but the fourth-quarter results companies are now reporting won't be one of them.

It isn't that corporate profits last quarter were good; they weren't. Profit projections have also been dramatically cut. Analysts now see fourth-quarter earnings for Standard & Poor's 500 companies expanding just 1.9% year-over-year—down from 9.9% hoped for three months ago and 13.7% last summer. Companies likewise desperately need revenue to keep growing, since many have squeezed all they can from profit margins. So it helps that Wall Street is now bracing for stagnant revenue growth last quarter among nonfinancial companies.

The bar isn't uniformly low, however. The two sectors analysts are counting on to deliver the biggest fourth-quarter growth—10.9% for consumer discretionary and 8.9% for financials—have already run up the most in 2012

In contrast, expectations for cyclical companies seem glummer. Three out of the four sectors where analysts expect shrinking profits are all sensitive to capital spending, with the consensus seeing profits decline 5.6% for industrial companies, 2% for energy, and 1% for technology.

Happy Inauguration Weekend. Obama has a chance to make a pointed, ideological speech Monday. Obama can define the November results as a decisive referendum on the proper role for the state. He could cement his speech in history. There have been some good inauguration speeches over the years, and plenty of not so great speeches.

Thomas Jefferson in 1801 – after the nation’s first contested election – declaring, “We are all Federalists, we are all Republicans.” Abraham Lincoln in 1861, pleading for the South to remain in the Union, and vowing to repress rebellion by force until “the better angels of our nature” returned. FDR declaring “the only thing we have to fear is fear itself,” referring to the bank panics that imperiled the nation.

John Kennedy's thrilling Cold War call to arms is remembered for sheer eloquence, rather than the crisis it addressed. Second inaugurals stand out with greater infrequency. FDR memorably proclaimed “I see one-third of a nation ill-housed, ill-clad, ill-nourished.” Lincoln called for a lenient Reconstruction policy “with charity for all.” Most inauguration speeches don't strive for cheap quotability, and this may be the one area where they find success. .

Following this weekend's speech, the President will have another opportunity to make his positions known to the world. He will take to the bully pulpit for the State of the Union Address. He will need to hit a home-run in each speech; one detailing his vision and the other detailing the specifics of how we get there from where we are now. The viability and vigor of his next four years might depend on these two speeches. If he fails to deliver? Well, as JFK said: “Ask not.”

House Republican have come up with a plan to pass a three-month extension of federal borrowing authority next week to buy time - on pain of losing their own paychecks - for the Democratic-controlled Senate to pass a budget plan that shrinks budget deficits. The plan, hatched at a House Republican retreat, marks a new strategy from the party to break a budget deadlock by forcing the Senate to act first. This is strategic can kicking.

The Treasury needs congressional authorization to raise the current $16.4 trillion limit on U.S. debt sometime between mid-February and early March. The Senate has not passed a formal budget resolution in nearly four years, while the House has passed budgets that have died in the Senate. Under the planned legislation, House Majority Leader Eric Cantor said if the Senate or the House fail to pass a budget by April 15, lawmakers' pay would be withheld.

House Speaker John Boehner said there should be no long-term increase in the federal debt limit until the Senate passes a budget, and House Republicans will try to force the Senate into action to cut spending, saying: "We are going to pursue strategies that will obligate the Senate to finally join the House in confronting the government's spending problem. The principle is simple: no budget, no pay."

So, the Republicans came up with a nice soundbite there, and they will try to place blame of a default on the Dems. A spokesman for Senate Majority Leader Harry Reid, said the Senate would consider the increase if it was "clean."

A House Republican leadership aide said it was not currently anticipated that the three-month debt limit increase legislation would include spending cuts. Although Boehner has previously sought at least $1 in long-term spending cuts for every dollar of debt limit increase, the aide said that the reforms associated with requiring budgets from both chambers would meet the speaker's requirements.

Spending cuts would be demanded of any longer term debt limit increase, the aide said, and Congress would still have to continue dealing with two other fiscal deadlines, the March 1 launch of automatic spending cuts, and government funding legislation that is needed by March 27.

For now, it appears the White House strategy of refusing to negotiate on the debt ceiling has worked, sort of. Yes, the GOP could come back on the debt ceiling, and they will almost certainly float a few trial balloons. It could try to make a big deal of the sequester, but that’s a lot more like the fiscal cliff than it is like the debt ceiling: not good, but not potentially catastrophic, and therefore poor terrain for the “we’re crazier than you are” strategy. And while Republicans could shut down the government, my guess is that Democrats would actually be gleeful at that prospect: the PR would be overwhelmingly favorable for Obama, and again, not much risk of blowing up the world.

The Federal Reserve has released transcripts from 2007; the thinking being that a five year lag would lessen the appearance of stupidity. Not so much really. The major figures were pretty much clueless. Timothy Geithner, then president of the New York Federal Reserve Bank, said during an emergency telephone call on August 10 of that year that most of Wall Street was still doing fine.

"We have no indication that the major, more diversified institutions are facing any funding pressure," Geithner said according to the transcripts, which total 1,370 pages. "In fact, some of them report what we classically see in a context like this, which is that money  is flowing to them."

Similarly, Fed Chairman Ben Bernanke underestimated the risks of a looming financial blow-up.

"I do not expect insolvency or near insolvency among major financial institutions," he said in December 2007.

By then, the Fed had already launched emergency liquidity measures and begun cutting interest rates, which by December of 2008 would be brought all the way down to effectively zero.

Eventually, the financial meltdown would come to threaten all of Wall Street's powerhouses, and you know that story.

A soldier's basic pay is figured not only according to rank, but also by how long the soldier has served. The basic yearly pay in 2010 for the rank of an E5 sergeant with less than two years of experience is $24,735. That amount increases to $28,972 with four years of experience and $31,006 upon reaching six years of service.

Goldman Sachs awarded 22 senior executives and board members more than 736,000 restricted shares worth nearly $104 million as part of their 2012 bonuses. Goldman Chief Executive Lloyd Blankfein received 94,320 restricted shares. The shares were worth $13.3 million. I'm sure Blankfein performed heroically.