Friday, June 28, 2013

Friday, June 28, 2013 - Halftime

by Sinclair Noe

DOW – 114 = 14,909
SPX – 6 = 1606
NAS + 1 = 3403
10 YR YLD - .05 = 2.48%
OIL - .49 = 96.49
GOLD + 34.50 = 1236.30
SILV + 1.15 = 19.76

What a long strange trip it's been, and we've only just reached the halfway mark of 2013.

It started with the fiscal cliff, and after the lemmings jumped, we still had payroll tax hikes, debt ceiling battles, sequestration, mixed with assorted dysfunction; and through it all the stock market climbed. The S&P 500 hit a record high of 1687 in May; the Dow hit a high of 15,542. Those were the days of milk and cookies.

And then Bernanke did a little tap dance around the punchbowl, sparking the animal spirits of the marketplace, and transforming bond market vigilantes into feral hogs, raising their snouts in the air and sniffing a whiff of blood. Volatility spiked, with more than 15 consecutive days of 100-point swings for the Dow. The bond market swooned, and June turned gloomy.

Still, the first half was generally positive. The best first half for stocks since 1998. The S&P 500 closed the first half of 2013 up 12.6 percent. For the second quarter, the Dow rose 2.3%, the S&P 500 gained 2.4% and the Nasdaq Composite climbed 4.2%

We are at a policy inflection point, or at least we are at a point where we can think about an inflection point, which may or may not be a bad thing if it is accompanied by good economic news. So, let's see where the markets stand in relation to the beginning of QE2 back in the autumn of 2010. Not much change really. Bond yields are just a little lower than in November of 2010. The dollar has been on a roller coaster ride, but it recovered all the lost ground. Gold, which was beaten bloody in the last quarter, was just a smidge higher in late 2010. Three rounds of QE failed to produce hyper inflation, or even any kind of inflation; the price of milk and bread is the same as it was five years ago; maybe all that QE avoided deflation. Even though the Fed expanded its balance sheet, the money never made it into the broader economy, with the possible exception of stocks. Stocks looked bubbly, at least until a month ago. The jobs picture has improved, but not enough.

Gold plunged to a 34-month low, set for a record quarterly drop. Gold has dropped 23 percent this quarter, heading for its biggest loss since at least 1920 in London.  Silver futures fell to the lowest since August 2010. About $60 billion was wiped from the value of precious metals exchange-traded product holdings this year.  Silver futures are down 34 percent this quarter, set for the biggest drop since the start of 1980. It’s the worst performer this year on the Standard & Poor GSCI Spot Index of 24 commodities. The index is down 5.5 percent this year. The current gold to silver ratio is about 64 to 1; which might indicate that silver is over-sold, or might indicate that gold still has more to drop. China announced today that they would buy gold to support their currency. Even as the paper metals have dropped, the premium for physical metal has been growing. So, it should go up, but remember that market can remain irrational long than you can remain solvent.

The dollar index has been on a bit of a rally the past couple of weeks, and for the year the dollar has climbed from around 80 to 83; cementing it's status as the prettiest horse in the glue factory. By the way, a New Mexico company has received permits from the USDA to open a horse meat plant. It would be the only one in the country, at least for now, to slaughter horses for human consumption. Just a side note there.

Bonds have been hammered as of late. The benchmark 10 year note rose 64 basis points over the last three months in the largest quarterly yield rise since the fourth quarter of 2010. The 10-year yield is up 33 basis points on the month.  Bond mutual funds and bond ETFs saw $62 billion in outflows through the first 3 weeks of June. The withdrawals wiped out over half of the $115 billion deposited into bond funds through the first five months of the year. Emerging market debt and high yield were among the casualties, with losses of 8.8% and 4.2% respectively. NYSE margin debt declined to $377 million in May from April’s record reading of $384 million. This was the first decline on a monthly basis since last June. Historically, margin debt has a strong correlation with the S&P 500 as investors tend to lever up as the market advances and the mood shifts from risk off to risk on. Mortgage rates jumped to the highest level in 2 years. The average rate on the 30-year fixed is 4.46%.

It seems like we've been on a wild ride this week. There were Supreme Court rulings: voting rights, affirmative action, Doma, Prop 8. You heard all about those. You probably didn't hear about a few others. Vance v. ball State and University of Texas v. Nassar involved employment discrimination and both make it significantly more difficult for employees to sue employers for workplace discrimination. In Koontz v. St. Johns River Water Management, the Court ruled that a man trying to develop property in a wetlands region did not have to pay money to improve wetlands in other areas to counteract the effects of his development. This decision makes it more difficult for localities to demand financial compensation to enforce environmental regulations. And in Mutual Pharmaceutical v. Bartlett, the Court ruled a woman could not sue a pharmaceutical company for the side effects of a generic drug she took which caused her to go blind, put her in a coma, and made most of her skin fall off. By the way, the drug is called Clinoril, a generic form of sulindac, and it's still on the market.

Jon Corzine has finally been charged, in a civil suit, for losing $1 billion dollars of MF Global's clients' money. A civil suit. And before you say there is no justice in this country. I present the case of Robert Bracone and Rene Torres. This is a New York City story of corruption; filthy, dirty corruption. The two men are accused and pleaded guilty to accepting cash payments to remove the filth from New York. Specifically, they each accepted a $5 dollar tip for cleaning up trash in an alley. The guys were sanitation workers, trash men; more than 25 years on the job. They have lost their jobs, and they have each paid a $2,000 fine. Finally, there is justice in New York City.

And then there was a little bit of data that slipped by almost un-noticed. It comes from the Wealth Data Book. It confirms some of what we know. America has more millionaires than any other country; more billionaires, too. We have tall buildings and fast cars and shiny airplanes, and that must mean we are the richest country in the world, why, we must be the richest country in the history of the world. Not exactly.

Kind of depends on how you measure things. The most telling comparative measurement is median wealth (per adult). It describes the amount of wealth accumulated by the person precisely in the middle of the wealth distribution -- fifty percent of the adult population has more wealth, while fifty percent has less. You can't get more middle than that. And when it comes to median wealth, we're not Number One. We're not even in the Top Ten. We're Number 27!

And according to the Global Wage Report, the number one reason why we're number 27 isn't globalization, or new technologies, or poor social safety nets; the reason is fiancialization.

"Financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies."
This includes such trends as:
The corporate change during the 1980s to make shareholder value the ultimate goal.
The deregulation of Wall Street that allowed for the creation of a vast array of new financial instruments for gambling.
Allowing private equity firm to buy companies, load them up with debt, extract enormous returns, and then kiss them good-by.
The growth of hedge funds that suck productive wealth out of the economy.
The myriad of barely regulated world financial markets that finance the globalization of production, combined with so-call "free trade" agreements.
The increased share of all corporate profits that go to the financial sector.
The ever-increasing size of too-big-to-fail banks.
The fact that many of our best students rush to Wall Street instead of careers in science, medicine or education.
In short, financialization is when making money from money becomes more important that providing real goods and services.

With all that going on, you may have missed the speech by President Obama on Tuesday. It was the first time a President has acknowledged global warming and set out to change policy to address the problem. The main thing I got from it was bad for coal, good for fracking.

A few weeks back, someone called in and asked about problems with the Vatican Bank. I hadn't been following it but I did a little research and yes, there was an investigation into money laundering. When Pope Francis took office, he pledged to clean up the Holy See's scandal plagued government. For the past two years, Italian prosecutors have been investigating money laundering at the Vatican Bank, formally known as the institute of Religious Works. That investigation revealed an alleged plot to smuggle $26 million from secret Swiss bank accounts into Italy. Today, Italian financial police detained a Vatican accountant, a financial broker, and a former member of the country's secret services. 

There seems to be something about banking that is repellant to the notion of good deeds; perhaps it is the idea that usury is considered a sin; perhaps it goes back to the idea of casting out the money changers from the Temple. Whatever the root, the problems with the Vatican Bank underscores the challenges the Pope faces in trying to recast the Catholic Church as more humble and serving the poor. 

So, where are we going in the second half? What do you think about the Supremes? Now that we have a policy dealing with global climate change, do you believe in climate change? Have you been outside today?

Thursday, June 27, 2013

Thursday, June 27, 2013 - To Not Trade in Principles

To Not Trade in Principles
by Sinclair Noe

DOW + 114 = 15,024
SPX + 9 = 1613
NAS + 25 = 3401
10 YR YLD - .05 = 2.48%
OIL + 1.35 = 96.85
GOLD – 24.40 = 1201.80
SILV - .01 = 18.61

First some economic news, then we'll head to Ecuador.

Consumer spending rose a seasonally adjusted 0.3% in May, reversing a 0.3% decline in April. So, for the past 2 months, it's a wash. Adjusted for inflation, the numbers are slightly lower. Consumers bought more cars and trucks in May and spent a bit more on gasoline, reflecting higher prices at the pump. They also ate outside the home more often and shelled out extra cash for housing, financial advice, insurance and recreational activities. Since incomes rose faster than spending in May, the savings rate of Americans climbed to 3.2% from 3%. That’s the highest level since December and well above the 2013 low of 2.2%.

In a separate report, the Labor Department reported a 9,000 drop in first-time jobless claims for the last week.

The National Association of Realtors reports pending home sales jumped in May to reach a six-year high, The NAR's pending home sales index climbed 6.7% to 112.3 in May, from a downwardly revised 105.2 in April. The index was up 12.1% from May 2012 levels. 

Freddy Mac reports the average rate for the 30-year fixed-rate mortgage rose to 4.46% in the week ending June 27, the highest rate in a couple of years, and up from 3.93% in the prior week. That gain of 53 basis points is the largest weekly change since 1987. A year ago, the 30-year rate averaged 3.66%.

Earlier this week, Dallas Fed President Richard Fisher likened market participants to “feral hogs” for pushing bond yields higher. Today, three more top Federal Reserve officials took issue with the increase in interest rates. William Dudley, the president of the New York Fed, Fed Gov. Jerome Powell and Atlanta Fed President Dennis Lockhart were less colorful but more pointed.
Dudley said expectations of an earlier rate hike were “quite out of sync” with both FOMC statements and the expectations of most FOMC participants,” and he said any rise in short-term rates “is very likely to be a long way off.”
Powell, in a separate appearance, said the spike in bond yields over the past month is “larger” than would be justified by any “reasonable reassessment” of the path of Fed policy. Powell said that if the market is now pricing in an increase in rates in 2014, “that implies a stronger economic performance than forecast either by most FOMC participants or by private forecasters.”
And Lockhart said that some in the markets appeared to mishear what Bernanke said. The three Fed officials were generally upbeat about the economic outlook despite what Lockhart admitted were “weak inflation readings, mixed vital signs, and choppy quarter-to-quarter growth statistics.”

As expected, the Commodity Futures Trading Commission said it is suing Jon Corzine, who was MF Global’s chief executive, and the firm’s former assistant treasurer Edith O’Brien for the unlawful use of about $1 billion in customer funds that “harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.”

The CFTC, cites internal MF Global phone recordings as evidence in alleging that Corzine knew the company was running out of cash and directed it to keep paying out obligations without asking where the money came from. The CFTC cites one MF Global official’s comment that “we have to tell Jon that enough is enough. We need to take the keys away from him.”

CFTC said Corzine is charged with being more than a passive actor in the downfall of MF Global. The CFTC is seeking financial penalties against Corzine and O’Brien and also to ban them from trading and registering to work in the derivatives markets overseen by the agency. MF Global has agreed to settle with regulators and payback any customers who are still owed money as well as pay a $100 million fine. I still have a hard time understanding how this is not a criminal matter.

The SEC is now investigating the relationship between Thomson Reuters and the Institute for Supply Management. ISM manufacturing data was sent out early on June 3rd to Thomson Reuters high-speed clients, or high frequency traders, and there were trades based on the early release of data; by some estimates more than $28 million in trades in a matter of 15 milliseconds prior to the official release.

Earlier this week President Obama announced his plans to fight global warming. The GOP response was that it would kill jobs. Today, Christine Lagarde, the managing director of the International Monetary Fund, said that climate change will drive job creation. “Climate change will create jobs. It will create disasters before it creates jobs, but it will create jobs.” Clean up on Aisle 3.

Where in the world is Edward Snowden? Right now, it looks like Snowden is doing his best imitation of Tom Hanks in the movie “The Terminal”; remember that Hanks played a guy who's country was lost while he was on an airplane, and when he landed, his passport was no longer valid; he ended up stuck in a no-man's land in the terminal of an airport. The best guess is that Snowden is in the terminal of the airport in Moscow, not quite admitted into Russia. At some point he will leave the terminal. Where will he go?

Well, he's already been in Hong Kong and Moscow; and in each location the governments of China and Russia have refused extradition; certainly a bit of a slap on the diplomatic wrist, but that's China and Russia. And if Snowden were to stay in China or Russia, at some point the State Department would step up pressure, and he might be extradited. So, where will he go?

The possible candidates for an ultimate landing spot include Iceland and Ecuador. Why would either country accept Snowden? Well, for Iceland the thinking is that they've already kicked out the bankers; they have no real reliance on the US or for that matter, on our European allies. Iceland is reverting back to fishing, and they really just don't care. For Ecuador, it's a little bit different.

The US is Ecuador's largest trade partner. Ecuador now sends about 40 percent of its exports to the United States, including crude oil, seafood, fruit and nuts, cocoa and flowers. The nation’s total exports to the United States tallied up to $9.6 billion in 2011. Right now, Ecuador has two major trade deals with the US; the Andean Trade Practices and Drug Eradication Act, which is scheduled to expire this summer; and the General System of Preferences, which gives Ecuador and about 100 other countries duty free entry for certain products.

Today, Ecuador's Communications Minister announced that Ecuador was renouncing trade benefits with the US because of American pressure not to offer asylum to Snowden. He claims the trade pact has become a “new instrument of blackmail” and says Ecuador “does not accept threats from anybody, and does not trade in principles, or submit to mercantile interests, as important as they may be.”

Meanwhile, the Washington Post has jumped into the fray with an editorial accusing Ecuadorian President Correa of suppressing media while aiding the self-proclaimed whistleblower of another country.

President Correa responded with a tweet saying “The nerve! Do you realize the power of the international press? They have managed to focus on Snowden and the 'evil' in countries that 'support' him, making us forget the terrible things done against the American people and the entire world.”

You may recall that Julian Assange, the founder of Wikileaks has spent the past year in an Ecuadorian embassy in London to avoid extradition. What's the deal with Ecuador?

One thing you probably won't hear in the Washington Post is the back story, which involves a 20-year battle against Chevron, the oil company. Texaco, now owned by Chevron, dumped 16 billion gallons of toxic water into streams from the early 1970s until 1992, harming the environment and the people who used them for drinking water, cooking and cleaning. Texaco never tried to prevent this from happening, never cleaned up the contamination or compensated victims. That is a fact even Chevron does not deny.

An Ecuadorian court has held Chevron liable, to the tune of $19 billion. Chevron refuses to pay because it says the Ecuadorian judiciary and American plaintiffs’ lawyers conspired in a vast racketeering plot to extort from the multinational. And rather than pay the Ecuadorian judgment, Chevron sued the Ecuadorian plaintiffs (the indigenous indians) and the lawyers. Chevron itself stripped almost all of its assets from Ecuador in recent years in anticipation of losing the case. And since Chevron has removed all assets from Ecuador, the Ecuadorians are now forced to seek judgment through third countries. That's not so easy.

Chevron has roughly $15 billion in assets in Canada. In Toronto, in an unusual decision without any precedent in Canadian law, a court found that because Chevron operates only through subsidiaries, the case must be stayed. The vast majority of Chevron's assets lie with its subsidiaries, not in its corporate shell. Chevron also operates via its subsidiaries in dozens of countries around the world that could be targeted. The company does not even own its own building housing its headquarters near San Francisco.

Knowing it cannot win the Ecuador battle on the merits, Chevron also exercised improper political influence over governments and courts. In Argentina, after an order to freeze Chevron's assets in that country, Chevron suddenly decided to "invest" $1.5 billion in a large gas field with the local state-owned oil company, YPF; followed by an advertising and a lobbying campaign – freeze lifted.

The battle between Chevron and Ecuador has more twists and turns than a bag full of pretzels; the same could be said of the strange story of Edward Snowden, Booz Allen Hamilton, and the Carlyle Group. What is becoming more apparent is the growing corporate influence on issues which were once considered the purview of governments. 

Wednesday, June 26, 2013

Wednesday, June 26, 2013 - Still Some Work to be Done

Still Some Work to be Done
by Sinclair Noe

DOW + 149 = 14,910
SPX + 15 = 1603
NAS + 28 = 3376
10 YR YLD - .05 = 2.54%
OIL + .17 = 95.49
GOLD – 52.40 = 1226.20
SILV – 1.12 = 18.62

Today we'll cover the Supreme Court decisions, but first the economic news.

As you know, the Commerce Department reports the Gross Domestic Product, or GDP of the nation on a quarterly basis. They issue an initial guesstimate, then they settle on a revised number; for example, they said the first quarter GDP was 2.4%; and then today, they revised the revision of the guesstimate. The economy did not grow at 2.4% in the first quarter, instead it was just anemic 1.8% growth.

The latest numbers show that both consumer spending and trade were weaker than the earlier estimates showed. Consumers did not increase spending on health care, foods, hotel, travel, legal or personal care; big ticket purchases such as autos and electronics were flat. Investment in business structures including office buildings and plants dropped 8.3%; worse than the earlier estimates of 3.5%. Exports dropped 1.1% in the Q1; imports were down 0.4%.

Now, the GDP numbers will be revised yet again. Every five years the Commerce Department overhauls GDP data to try and provide a more accurate picture of the economy; they'll conduct that overhaul next month.

And you may be wondering why this is important; after all, we're talking about 1Q GDP and we're almost finished with the second quarter. The GDP data means that it is less likely the Fed will see a drop in the unemployment rate any time soon; and that means the talk of taper might be premature. In Wall Street's perverse thinking, the bad news on GDP was actually a positive because it might mean the Fed will back away from taper. Funny, huh?

Overall growth has hit a soft patch that economists expect to be temporary — but might end up lasting a lot longer than anybody would like. GDP growth during the past 12 months was just 1.6%, including the latest revision. That’s about the expected pace of growth in the current quarter, and it’s actually a slowdown from the pace in 2010 and 2011. The good news is that growth immediately after the recession ended in 2009 was driven by government spending and other fiscal stimulus measures. Those programs have now faded and government spending is now acting as a drag on the economy.

The Fed expects growth to pick up in the second half of 2013, as the effects of “fiscal drag” fade. But the lower numbers for the start of the year, especially the signs that consumers are still struggling, could prompt downgrades in growth estimates for the rest of the year. The row just got a little harder to hoe.

If you have heard any news today, you are surely aware the Supreme Court has issued two landmark decisions. In the US v. Windsor, the court ruled 5-4 that  a provision of the Defense of Marriage Act (DOMA) is unconstitutional, making it illegal to deny federal benefits to married same-sex couples.

Also in a 5-4 decision, in Hollingsworth v. Perry the Supreme Court opted against a constitutional ruling on California's same-sex marriage ban, Proposition 8, in favor of a deferring to a district court that previously outlawed the measure.
The rulings leave in place laws banning same-sex marriage around the nation, and the court declined to say whether there was a constitutional right to such unions.  So, the debate about same sex marriage is not finished; maybe it's just begun. But in clearing the way for same-sex marriage in California, the nation’s most populous state, the court effectively increased to 13 the number of states that allow it.

The ruling striking down the federal Defense of Marriage Act will immediately extend many benefits to couples in the states where same-sex marriage is legal, and it will give the Obama administration the ability to broaden other benefits through executive actions.

The decision on the federal law was decided by 5 to 4, with Justice Anthony Kennedy writing the majority opinion. He was joined by the four members of the court’s liberal wing. He said the law was motivated by a desire to harm gay and lesbian couples and their families, demeaning the “moral and sexual choices” of such couples and humiliating “tens of thousands of children now being raised by same-sex couples.”

The California case was also decided by 5 to 4, but with a different and very unusual alignment of justices. Chief Justice Roberts wrote the majority opinion declining to rule on the constitutionality of Proposition 8. He was joined by Justice Scalia and Justices Ruth Bader Ginsburg, Stephen G. Breyer and Elena Kagan.

Chief Justice Roberts said the failure of officials in California to appeal the trial court decision against them was the end of the matter. Proponents of Proposition 8 had suffered only a "generalized grievance" when the ballot initiative they had sponsored was struck down, the chief justice wrote, and they were not entitled to represent the state's interests on appeal. The ruling in the case,Hollingsworth v. Perry, erased the appeals court’s decision striking down Proposition 8.

As a formal matter, the decision sent the case back to the appeals court, the United States Court of Appeals for the Ninth Circuit, in San Francisco, “with instructions to dismiss the appeal for lack of jurisdiction.” 

Lawyers for the two sides had different interpretations of the legal consequences of the Supreme Court’s ruling. Supporters of Proposition 8 said it remained the law in California, while their adversaries said the trial court's decision struck it down. As a practical matter, Gov. Jerry Brown instructed officials there to start issuing marriage licenses to same-sex couples as soon as the Ninth Circuit acts.

If, or rather when, California becomes the 13th state to allow same-sex marriage, about 30 percent of Americans will live in jurisdictions where it is legal.

The case on the federal Defense of Marriage Act of 1996,United States v. Windsor, concerned two New York City women, Edith Windsor and Thea Clara Spyer, who married in 2007 in Canada. Ms. Spyer died in 2009, and Ms. Windsor inherited her property. The 1996 law did not allow the Internal Revenue Service to treat Ms. Windsor as a surviving spouse, and she faced a tax bill of about $360,000 that a spouse in an opposite-sex marriage would not have had to pay. Ms. Windsor sued, and last year the United States Court of Appeals for the Second Circuit, in New York, struck down the 1996 law.

After celebrating the Supreme Court’s decision, same-sex couples may want to phone their accountants. In addition to having implications for Social Security benefits, child care rights and retirement planning, the high court’s ruling that the Defense of Marriage Act is unconstitutional might mean a check from Uncle Sam. Couples may be able to amend prior years’ tax returns to receive bigger refunds now that their marriages are recognized by the federal government

Income tax filing has been frustrating for many couples, some of whom had to file as many as four separate returns because of the conflicting state and federal rules. And since they were unable to file joint returns, same-sex couples lost out on some of the deductions and credits allowed for heterosexual couples, such as breaks offered to those selling a home and child-related tax credits.

Generally, the IRS allows taxpayers to amend returns for up to three years after the filing deadline or up to two years after the taxes are paid. The timeline may be different at the state level, and some couples may have more time if they filed protective claims for previous tax years that would give them an extension for amending returns.
To be sure, the decision leaves some question marks. The court cases did not address how the government should treat civil unions between same-sex couples. Also, the ruling does not mean states that currently prohibit same-sex marriage now have to permit it.
After talking to an accountant, same-sex couples might want to talk with an estate planning attorney, as the estate tax was at the heart of the case of US v. Windsor. Estate planning should be a little easier for same-sex couples. Without federal recognition, many couples were not able to pass assets to their spouses after death, as straight couples could. Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may want to update their trusts to give their spouses tax-free access to the trust’s income or principal. The ruling could also make it possible for married same-sex couples to share assets without being subject to gift taxes.
After talking to an accountant and an estate planning attorney, some same-sex couples might want to talk to their health insurance agent. While more employers are allowing same-sex spouses to be added to their employees’ health plans, it was provided as a taxable benefit—costing those couples an additional $1,069 a year in taxes. Now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable.
Today's rulings still require individual planning, so there's still some work to be done.

But I remember that I grew up in a time of anti-miscegenation laws, which were overturned in 1967 with the Supreme Court decision of Loving v. Virginia. In my own family I remember when a Mormon married a Jew, and the rabbi that refused to perform the marriage ceremony because he claimed he wouldn't marry a “mixed couple”. My view is that if two people love each other, that's not mixed up, that's good. The one thing this world definitely needs is more love, and there is still some work to be done.

Tuesday, June 25, 2013

Tuesday, June 25, 2013 - On Energy

On Energy
by Sinclair Noe

DOW + 100 = 14.760
SPX + 14 = 1588
NAS + 27 = 3347
10 YR YLD + .04 = 2.59%
OIL + .07 = 95.25
GOLD – 5.00 = 1278.60
SILV - .05 = 19.74

A few economic reports to start.

The S&P/Case-Shiller Home Price Index for April showed average home prices increased 12.1% compared to April one year ago. All 20 cities in the index showed positive year over year returns and this marked the highest monthly gains in the history of the Indices. San Francisco showed the largest year-over-year growth at 23.9%, followed by Las Vegas at 22.3%, Phoenix at 21.5%, and Atlanta at 20.8%. New York saw the lowest levels of growth at 3.2%.

Meanwhile, the Commerce Department reports sales of new homes rose in May to the highest rate since mid-2008. Sales increased 2.1% last month to an annual rate of 476,000. The median price of new homes, meanwhile, dropped 3.2% to $263,900 last month from a record high of $272,600 in April. 

Business orders for durable goods, the big ticket items, rose 3.6% to a seasonally adjusted $231 billion. Business investment excluding defense and aircraft was up 1.1%, marking a third straight gain. A big factor was a 51% increase in orders for new passenger planes. In the first five months of 2013, business orders have risen 2.1% in compared to the same period last year.

The Conference Board’s consumer confidence index jumped to 81.4 in June, the best reading since January 2008 and up from 74.3 in May. Consumers had better views both of current conditions and the future.

The Commodity Futures Trading Commission is expected to approve a civil lawsuit this week against Jon Corzine, the former CEO of MF Global. You'll recall that MF Global went bankrupt after losing $1 billion in customer money; and by losing, I don't mean they made bad trades and lost money on the trades; they lost the money; it just disappeared. Nobody has figured out where it went. Poof! Vanished. In a rare move against a Wall Street executive, the agency has informed Mr. Corzine’s lawyers that it aims to file the civil case without offering him the opportunity to settle. The lawsuit is not expected to link Corzine directly to the disappearance of the customers' money, but the regulator will probably blame Corzine for failing to prevent the breach at a lower rung of the firm. Also, by going after a civil lawsuit, this probably means that regulators are not going after criminal charges. In a way, this is very helpful; it sets a bit of a precedent or at least establishes a quantifiable bar; if you steal more than $1 billion dollars, it's just a civil matter; if you steal less than $1 billion, it's a criminal case.

Meanwhile, the Supreme Court has issued an opinion that effectively strikes down the Voting Rights Act of 1965. On a 5-4 vote, the Supremes ruled  that Congress had not provided adequate justification for subjecting nine states, mostly in the South, to federal oversight. In 1965, the states could be divided into two groups: those with a recent history of voting tests and low voter registration and turnout, and those without those characteristics," Chief Justice John G. Roberts Jr. wrote for the majority. "Congress based its coverage formula on that distinction. Today the nation is no longer divided along those lines, yet the Voting Rights Act continues to treat it as if it were."
Chief Justice Roberts said that Congress remained free to try to impose federal oversight on states where voting rights were at risk, but must do so based on contemporary data. When the law was last renewed, in 2006, Congress relied on data from decades before. The chances that the current Congress could reach agreement on where federal oversight is required are small, especially when you consider that Congress can't seem to agree on anything.
Case in point.
President Obama deliver his plans to tackle pollution and global warming. Obama declared the debate over climate change and its causes was obsolete and he announced he was directing his administration to launch the first-ever federal regulations on heat-trapping gases emitted by new and existing power plants — “to put an end to the limitless dumping of carbon pollution.” Other aspects of the plan will boost renewable energy production on federal lands, increase efficiency standards and prepare communities to deal with higher temperatures.

This is really the first time we've seen policy action aimed at global warming. "The question is not whether we need to act," Obama said. "The question is whether we will have the courage to act before it's too late." Obama also made a point to dismiss those who don't acknowledge the science behind man-made global warming, saying: “We don't have time for a meeting of the Flat Earth Society."

In the speech Obama asked the State Department not to approve the construction of the Keystone XL pipeline unless it can first determine that the pipeline will not lead to a net increase in greenhouse gas emissions.

"Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation's interest," the president said. "And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects of the pipeline's impact on our climate will be absolutely critical to determining whether this project is allowed to go forward."
The speech covered more than the pipeline. Obama's strategy in the second-term rests on three pillars: cutting carbon pollution in America, preparing the U.S. for the impacts of climate change, and leading international efforts to cut global emissions. Among the top-billed items are imposing the first carbon limits on existing power plants and requiring all federal projects to be able to withstand the heightened storms and sea level rise associated with climate change.

Using his executive powers, Obama articulated a broad array of regulations his administration would enact that affect both government and the business sector, with many of the details still to come. Of particular note is the president's directive to the Environmental Protection Agency to move forward with climate change regulations to limit carbon emissions from existing coal and gas-fired utilities by no later than June 2014. Less settled is exactly how the agency will accomplish that and at what cost to industry.

Some of the president's policies are new, but many build upon existing initiatives, such as a program to improve fuel-economy standards for heavy-duty trucks beyond model year 2018. And new energy efficiency standards for federal buildings and appliances have already been established in an effort to reduce carbon pollution by at least 3 billion metric tons cumulatively by 2030, in combination with existing measures. The president has also called for the expansion of his so-called Better Building Challenge, which focuses on helping commercial, industrial and multi-family buildings cut waste and become at least 20 percent more energy efficient by 2020.

New clean energy initiatives include the president's goal for the Interior Department to issue permits for 10 gigawatts of renewables on public lands by the end of the year, and for the U.S. to work with trading partners to launch negotiations at the World Trade Organization aimed at creating global free trade in clean energy technologies such as solar, wind and geothermal.
There will be opposition to the plans. The other side of the aisle is already calling this a jobs killer. The week after he won the 2008 presidential election, Barack Obama addressed a group of governors and officials in Los Angeles, assuring them that global warming would be a top priority for his presidency. “Now is the time to confront this challenge once and for all,” he said. “Delay is not an option.”

Now he wants to upend the existing energy system and put the world on a path toward avoiding severe climate change, with an 80% cut in emissions by 2050 and investment of about $150 billion, and most of it on the president's own authority. Since 2008, a cap and trade bill died in the Senate; global climate talks have gone nowhere; and emphasis has come back to domestic oil and gas exploration and the mantra of drill, baby drill. There’s no longer a grand strategy to solve climate change once and for all. And it’s unlikely that Obama will attain any of the sweeping goals he laid out in 2008 — that would require cooperation from Congress. Instead, the White House will try to use whatever executive power it has to chip away at the problem.
Thanks to a 2007 Supreme Court decision, the EPA is required under the Clean Air Act to regulate carbon dioxide if it poses a threat to public health and welfare. (Which, most scientists agree, it does.)
So far, the EPA has used that authority to propose carbon standards for future coal- and gas-fired plants that have yet to be built. Yet green groups have long urged the agency to turn its attention to existing power plants, which are responsible for 40 percent of the nation’s carbon-dioxide output. The White House is asking the EPA to propose rules for those existing plants by the summer of 2014 and finish them by 2015. Pretty much everything the EPA could do on carbon would be under parts of the Clean Air Act that haven’t really been tested, and the devil will be in the details.

Part of the future will be in technology. I talked recently with a friend who is a scientist and is working on new sustainable energy. He told me that if you hold your arms open there is more energy in the air between your hands than is consumed in the entire world. There is a path of energy from the sun to every part of the universe, and we are just starting to understand. I am quite certain that the push for green energy is not a job killer but a job creator. The combination of technology and innovation and the need for clean energy solutions will be a vital part of the economy over the next few years. Get ready to be amazed.

Monday, June 24, 2013

Monday, June 24, 2013 - Hog Wild

Hog Wild
by Sinclair Noe

DOW – 139 = 14,659
SPX – 19 = 1573
NAS – 36 = 3320
10 YR YLD + .03 = 2.55%
OIL + 1.26 = 94.95
GOLD – 16.00 = 1283.60
SILV - .43 = 19.79

On Friday's show we had a call near the end of the hour and the caller posed a good question: “has the Fed started tapering?” The answer is technically “no”. But I had a chance to reflect over the weekend and I think what the Fed has done is started the process of gauging market reaction to an eventual exit from QE. It's like dipping a toe in the water.

Or as Richard Fisher, president of the Dallas Fed, told the Financial Times today, Markets tend to test things. We haven’t forgotten what happened to the Bank of England [on Black Wednesday]. I don’t think anyone can break the Fed . . . But I do believe that big money does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they’ll go after it.”

Fisher said the exit has not started but last week's hints by Fed Chairman Bernanke were part of a process to prepare the markets for the end of central bank support; or as Mr. Fisher put it: “I don't want to go from Wild Turkey to Cold Turkey overnight.”

The People's Bank of China seems to be taking the Cold Turkey approach; they are telling the country's largest banks to rein in risky loans and improve their balance sheets, a warning that sent a jolt through already unsettled equity markets. Last week, China experienced a bit of a credit crunch as short-term borrowing rates jumped; the overnight lending rate hit a record high of more than 13% and another measure of cash in the banking system , the 7-day repo rate peaked at 25%.

The official state media reported that the central bank was targeting the shadow banking system, saying: “It's not that there's no money. It's that the money is not in the right places.” And so the People's Bank of China said the banks must prudently manage liquidity risks that have resulted from rapid credit expansion. This seems to be a clear indication that the Chinese government has no plans to loosen policies or inject liquidity to bring down interest rates. The likely result is Chinese economic growth will slow this year, with most estimates ranging about 7.5% growth – only 7.5%.

The Federal Reserve expects the US economy to grow at a 2.6% pace this year; right now, the economy is growing at about a 2% clip. It will take some more time to see if the Fed's rosy outlook is justified; the Fed is typically bad at forecasts. If you don't get more job creation and higher incomes, there won't be a meaningful increase in consumer spending or economic growth.

It's hard to get blood out of a turnip.

The turnip is the American consumer. A new report from Bankrate says 76% of Americans are living paycheck to paycheck, with next to nothing in savings; 50% of those surveyed have less than a 3-month cushion of savings and 27% had no savings at all. And the savings rate has barely changed over the past 3 years. And a new poll from the Murdoch Street Journal finds 58% of Americans think the US is in a recession even though the recession officially ended 4 years ago.

The reality is that most of America is still living through a small “d” depression and the Fed's testing the waters or measuring the aggressive nature of the bond market feral hogs does nothing to get us out of the depression. Talk of taper does nothing to improve the employment picture, but then QE hasn't done much to help the employment picture. Unemployment is down, but employment is not up; in other words, we've seen a drop in the number of people looking for a job, not an increase in job availability. The US has 2.4 million fewer jobs today than when the recession began. Adjusting for population growth, it will take more than nine years at the current rate of hiring to return to pre-recession employment levels.

There is a durable belief that much of today’s unemployment is rooted in a skills gap, in which good jobs go unfilled for lack of qualified applicants. This is mostly a corporate fiction. A Labor Department report last week showed 3.8 million job openings in the United States in April — proof, to some, that there would be fewer unemployed if more people had a better education and better skills. But both academic research and a closer look at the numbers in the department’s Job Openings and Labor Turnover Survey show that unemployment has little to do with the quality of the applicant pool.

In a healthy economy, job openings are plentiful and unemployment is low. April’s tally of 3.8 million openings might sound like a lot, but it is still well below the prerecession average, in 2007, of 4.5 million openings a month. It is also far lower than the record high of 5.2 million openings in December 2000, when the survey was started near the peak of a long economic expansion.

Unemployment is also stubbornly high — 7.5 percent in April, or 11.7 million people, a ratio of 3.1 job seekers for every opening. No category has been spared: unemployed workers outnumber openings in all of the 17 major sectors covered by the survey. The biggest problem in the labor market is not a skills shortage; rather, it is a persistently weak economy where businesses do not have sufficient demand to justify adding employees.

 In addition, when there are many more applicants than jobs, employers tend to impose overexacting criteria and then wait for the perfect match. They also offer tightfisted pay packages. What employers describe as talent shortages are often failures to agree on salary.

If a business really needed workers, it would pay up. That is not happening, which calls into question the existence of a skills gap as well as the urgency on the part of employers to fill their openings. Research from the National Bureau of Economic Research found that “recruiting intensity” — that is, business efforts to fill job openings — has been low in this recovery. Employers may be posting openings, but they are not trying all that hard to fill them, say, by increasing job ads or offering better pay packages.

Corporate executives have valuable perspectives on the economy, but they also have an interest in promoting the notion of a skills gap. They want schools and, by extension, the government to take on more of the costs of training workers that used to be covered by companies as part of on-the-job employee development. They also want more immigration, both low and high skilled, because immigrants may be willing to work for less than their American counterparts.

So, we have a problem with the Fed not accomplishing its mandate of full employment; what about the mandate for price stability? Well, there is very little inflation. There is a near zero chance of domestically generated inflation while wages are falling, and contractionary fiscal policy is depressing real incomes, and banks are not lending, and corporations are failing to invest. Externally driven inflation is possible and we are seeing some inflation in asset prices as a consequence of QE, but the core trend is disinflation in developed countries.

What the taper talk has accomplished is to push rates higher. Two months ago, the benchmark interest rate on the 10-year Treasury Note was about 1.62%; today it hit 2.62%. Higher rates will surely mean a slower recovery than we would have had if the Fed had avoided taper talk.

Right now, the feral bond hogs are winning. This bloodbath represents a 62% increase in borrowing costs for the federal government. Meanwhile, the average going rate for a 30-year fixed-rate mortgage has also risen by a full percentage point, to about 4.4 percent.

Today, the Bank of International Settlements, which is basically the central bank of the global central banks published its annual report on the state of the global economy. And they included a chapter on “Fiscal sustainability”, concluding: "While progress has been made towards reducing fiscal deficits, many economies still need to increase their primary balances significantly to put their debt on safer, downward trajectories." The BIS does not explain how rising interest rates might lower debt; and that is a major problem; rising rates means higher debt, just as slow growth leads to higher debt.

Instead, the BIS explains in its annual report, just how bad the losses might be if rates rise: “losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of other countries. The loss could range from 15% to 35% in France, Italy, Japan, and the UK. Such an upward move can happen relatively fast.” So says the BIS with a reference to the 1994 bond crash.

Monetary stimulus comes and goes; the idea is to try and time it so that it leaves when the economy is strong and can better handle the loss of stimulus. That's not what we saw this past week. Instead, we saw the Fed testing the waters, looking to withdraw stimulus based upon the markets' reaction. And that is entirely the wrong reasoning. 

Friday, June 21, 2013

Friday, June 21, 2013 - Summertime


by Sinclair Noe

DOW + 41 = 14,799
SPX + 4 = 1592
NAS – 7 = 3357
10 YR YLD + .09 = 2.51%
OIL – 1.39 = 92.92
GOLD + 20.80 = 1299.60
SILV + .52 = 20.22

There are certain phrases that seem to paint a picture. Today stocks ended slightly higher after two days of sharp declines. The phrase that comes to mind is “dead cat bounce”.

Stocks, and pretty much everything, slumped since Wednesday when Federal Reserve Chairman Ben Bernanke laid out the Fed's plans to scale back on its $85 billion in monthly asset purchases. The S&P broke under its 50-day moving average, contributing to 4.6 percent pullback from its all-time closing high reached on May 21. This retreat represents the largest since an 8.9 percent decline between September and November.

For the week, the Dow fell 1.8 percent, the S&P was down percent 2.1 percent, and the Nasdaq lost 1.9 percent. It was the biggest weekly decline for all three since April and also the fourth week of losses out of the past five.

In the four weeks since Ben Bernanke first mentioned that the Federal Reserve Board might start to taper its program of quantitative easing (QE) later this year, more than $2 trillion was wiped off the value of global stock markets — and probably far more from the value of global bonds. On Wednesday, Bernanke held a press conference where he repeatedly said the Fed would not exiting its bond buying program until the economy improved quite a bit from current levels. The markets heard what the markets heard.

If tapering does start well before the end of the year, this will surely be bad news for financial markets and the world economy. After all, the Fed's easy money policy has been the driving force behind the markets for several years; if the Fed stops handing out free money to the banks, then they would have to reconsider their valuation estimates for a whole host of financial products.

Did the markets over-react, or is it possible the Fed will taper, and manage to do so in a way which does not cause trauma to the markets? I don't know, but we will see in the fullness of time.

Part of the market reaction might be the double whammy hitting the global markets; the second part of that coming from China, which is cracking down on credit. I won't claim to be fully aware of what is going on in China, but the basic story is that China’s credit market has been in a bubble for years, with too much lending and borrowing, similar to what happened in the United States during the financial crisis. All that lending helps grow the economy until, one day, the bubble bursts, and it all comes crashing down, as happened the United States. China’s economic growth has been slowing, making a similar a crisis more likely. Chinese leaders seem to be trying to prevent a disaster by basically popping the bubble, a kind of controlled mini-collapse meant to avoid The Big One.

In a real, uncontrolled credit crisis like the U.S. financial meltdown, credit suddenly freezes up, particularly between banks, meaning that the daily loans banks were relying on to do business are suddenly no longer affordable. Banks with too many unsafe loans suddenly owe more money than they can get their hands on, sometimes leading them to default or even collapse. And that means that it suddenly becomes much tougher for everyone else – companies that want to build new factories, families that went to buy a home – to borrow money. That’s an uncontrolled credit crisis, and a number of China-watchers have been worried that China, in its pursuit of constant breakneck growth, could be headed for one.
China’s central bank, which is likely to tamp down all that unsafe lending and over-borrowing before it leads to a crash, appears to have forced an artificial credit crisis.

The People's Bank of China, (like the China version of the Fed) has already tightened credit, making it difficult for banks to borrow money. Something called the seven-day bond repurchase rate, which indicates “liquidity” or the ease of borrowing money, shot way up to triple what it was two weeks ago. Basically, it started looking like a credit freeze; very similar to when Lehman Brothers imploded.

Then last night, Bloomberg reported the Chinese Central Bank had stepped in and offer more than $8 billion in relief. Then other news sources said there was no relief effort. Who knows?

What's next? Well, the Chinese leaders will either back away from the credit crunch or they'll push forward and try to clean out the financial system. Or maybe the whole thing will just spiral out of control. If they can clean out the excesses from the financial system without to much damage, without uncontrolled financial collapse it would be a good thing; and the reality is that the Chinese government has some experience in controlling market shocks. Still, the process is likely to be a bit painful.

Today marks the start of Summer, or the summer solstice, officially as of 1AM Eastern. The sun is straight above the Tropic of Cancer. It's the longest day of the year, at least in the Northern Hemisphere. It look's like it will be a long summer of partisan gridlock in Washington. They couldn't even pass a Farm Bill. The Farm Bill always gets passed. Liberal or Conservative, we all share something in common; we like to eat. The Farm Bill is supposed to insure the food we eat. But most Democrats voted against it, because it cut the food stamps program, and a quarter of the Republicans voted against it, because they hate government spending. There was all sorts of political intrigue about the ability to get a simple bill through the House; imagine game 7 of the NBA finals, the defenders sit down, the refs lower the basket to 6 feet and Lebron James misses a slam dunk. The politics of this is pathetic, but the reality is that this could mean all kinds of problems in the agricultural sector. (By the way, courtside seats for Game 7 in Miami were going for $30,000 each, and admission to the luxury suites topped $50,000.

The good news for the agricultural sector is that the weather should be better this summer than last summer, but that might be bad news as well.

The near record-breaking Midwestern drought of 2012 shriveled corn crops and toasted pasture land. But it did have one positive side effect. The drought significantly reduced the size of the seasonal Gulf of Mexico dead zone. Less rain led to less fertilizer runoff—the dead zone is fed by a buildup of nitrogen-based fertilizer in the Gulf—which meant that the 2012 summer dead zone measured just 2,889 sq. miles. That’s still a zone the size of the state of Delaware, but it was the fourth-smallest dead zone on record, and less than half the size of the average between 1995 and 2012.

This year will be different. Heavy rainfall in the Midwest this spring has led to flood conditions, with states like Minnesota and Illinois experiencing some of the wettest spring seasons on record. And all that flooding means a lot more nitrogen-based fertilizer running off into the Gulf. According to an annual estimate from National Oceanic and Atmospheric Administration, this year’s dead zone could be as large as 8,561 sq. miles—roughly the size of New Jersey. That would make it the biggest dead zone on record. And even the low end of the estimate would place this year among the top 10 biggest dead zones on record. Barring an unlikely change in the weather, much of the Gulf of Mexico could become an aquatic desert.

The nitrogen nutrients that flow into the Gulf, especially during the rainy spring season, encourages the growth of explosive algal blooms, which feed on the nitrogen. Eventually those algae die and sink to the bottom, and bacteria there get to work decomposing the organic matter. The bacteria consume oxygen in the water as they do, resulting in low-oxygen or oxygen-free regions in the bottom and near-bottom waters.

That’s what a dead zone—water, essentially, without air. Sealife—including the valuable shellfish popular in Gulf fisheries—either flee the area, much as you or I would if someone were to suck all the oxygen out of the room, or die. That’s why the dead zone matters—the larger it is, the greater the populations of fish that might be affected. With commercial fisheries in the Gulf worth $629 million as of 2009—and still recovering from the impact of the 2010 oil spill—the dead zone means business.

The major factor driving the size of the dead zone—beyond changing flooding patterns—is the use and overuse of fertilizers in the corn belt. It takes about 195 pounds of fertilizer to grow an acre of corn; 40% of the corn crop is used to make ethanol, which is blended with gasoline. The idea is that it is a cleaner way to run our cars.

Here's the weekend reading list:

Washington has missed the real inequality story

The Last Mystery of the Financial Crisis

Profits Without Production

Senator Criticizes Lack of Supervision for Banks’ Consultants