Friday, June 28, 2013 - Halftime

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?