Thursday, August 15, 2013 - Who's in Control?

Who's in Control?

by Sinclair Noe

DOW – 225 = 15,112
SPX – 24 = 1661
NAS – 63 = 3606
10 YR YLD +.04 = 2.75%
OIL + .41 = 107.26
GOLD + 29.60
SILV + 1.14 = 23.11

Let's start with the economic data:

The Labor Department said its producer price index (PPI) remained flat in July, surprising economists who were expecting a rise of 0.3%. Meanwhile, core prices, which exclude food and energy costs, edged 0.1% higher -- less than the 0.2% climb projected by economists. By comparison, June saw gains of 0.8% and 0.2%, respectively.

Meanwhile, the consumer price index (CPI) showed retail prices rose a seasonally adjusted 0.2% on gains for gasoline, housing, clothing and food, among other goods. Excluding energy and food, the core consumer-price index also rose 0.2%.

The core CPI increased 1.7% in July from the same period in the prior year, slightly up from June’s annual growth. Overall consumer prices have increased 2% over the past 12 months. That year-over-year growth in the overall CPI has trended higher in recent months.

Just the other day, James Bullard,  the St. Louis Fed president said he is concerned about low inflation levels, which he said will be a factor in whether the Fed will scale back its bond-buying program. Bullard said: "There has not been much indication, so far, that it has been ticking back up toward target."

Also, the number of people who applied for new regular state unemployment-insurance benefits fell 15,000 to 320,000 in the week that ended Aug. 10, hitting the lowest level of initial claims since October 2007.

Who's in control? 

The headlines at the Wall Street Journal this morning said:  "Stock and bond prices tumbled after stronger-than-expected economic data ..." The share of our national income which goes to corporate profit is the highest it's been since they started tracking it in 1929, while the share going to people -- as salary and wages -- is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.  We're becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.

Why would good news about the economy cause the stock market to fall? The sentences continues: "... raised investor anxiety about a pullback next month in central-bank support for financial markets... "

Investors had been relying on the Federal Reserve to keep pumping up the stock market's record run, but some mildly favorable economic reports raised fears that the Fed's market-friendly interventions might come to an end.

Who's in control?

Stocks had the biggest one-day percentage drop since late June; trading volume was higher than the recent averages; there were poor results and outlooks from Dow components Wal-Mart and Cisco.

Wal-Mart Stores' shares fell on a surprise decline in quarterly same-store sales and Cisco Systems shares dropped one day after the network equipment maker announced it was cutting 4,000 jobs. The Wal-Mart earnings report could be considered a macro indicator, almost a proxy for gross domestic product data. It shows that consumer spending isn't that strong yet; inflation is rising, wages are not, and unemployment is still pretty high as witnessed by the news from Cisco.

There's a conundrum in the labor market. Over the past 3 years the number of job openings has risen by almost 50% but actual hiring has gone up by less than 5%. Companies advertise job openings but they don't fill the openings. There may be several possible reasons. Some look at the possible skills gap, the mismatch between the work companies need done and the skills the workers have. Maybe that explains a few of the unfilled job openings but not all. Openings in the retail sector have doubled over the past 3 years but hiring has been flat. They can't find someone with the skills to work at JCPenney?

A second explanation is that employers are offering jobs at wages that are too low to attract good applicants. The long term high unemployment rates have put no upward pressure on wages and companies haven't adjusted their wage offers.

And yet another explanation is that the nature of the financial crisis, rooted in the housing market crash, made it very difficult for many people to move for a job, suggesting that companies respond by filling openings from within. The jobs are advertised, but they go to people already with the company. The final explanation is that companies advertise jobs without much intent to fill the jobs; they don't have to recruit; they don't have to look for talent; it comes to them, cheap and easy.

Everybody's worried about what the Fed might do, unless you followed the “Best Six Months, Worst Six Months” plan, which called for you to get out in May and stay away through October. Actually, the refined version said to get out on May 24^th. In July, that looked like a bad move, now it looks smart. Sell In May doesn't always work, and it might not work this year, but it works with enough regularity to warrant consideration. Why does it work? Go figure.

Who's in control?

More and more the answer is not who you think.

Websites belonging to the Washington Post, CNN, and Time have been attacked, apparently by supporters of Syrian President Bashar Assad. Some links on the sites were redirecting readers to the website of the Syrian Electronic Army (SEA).

The breaches have been blamed on a third-party link recommendation service that all three sites used. The SEA has hit several media companies in recent months, mostly via social media. In this attack, the group was able to manipulate links served by content recommendation service Outbrain, which has now been taken offline.

Yesterday, the New York Times website was knocked out of service, maybe it was just a celebration of the great Northeastern Blackout of 2003, which you may recall was caused by a software bug that failed to detect and respond to a power surge when a tree limb hit a power line. Yep, 55 million people cast into darkness because a tree limb was too close to a power line.

I don't know why the Times had a problem yesterday, they say it was a problem with scheduled maintenance. Maybe. They started out by tweeting the blackout. Then they started posting stories on their Facebook page.

Facebook may have been convenient, but that meant that the Times was no longer in control of its content. Facebook is not hosting this material for the sake of the Times or for people who want quality journalism. Facebook itself is an increasingly threatening competitor to the journalism industry, and it serves its own needs first.

The situation also highlighted a reality all news organizations, and all of us who rely on the web for much of what we read and say, need to understand better. Technology can be fragile. It can be hacked. And even if you don't get your news content from the web, remember that all it takes is an unpruned tree limb, and the power could be out. In other words, we all need a Plan B.

Who's in control?

In Egypt, the control appears to be tenuously hanging with the military, at a great cost. The death toll surpassed 600 today during Egypt’s bloodiest crackdown on supporters of its deposed Islamist president, as violent new protests erupted in the country and world condemnation widened, including an angry response by President Obama and calls for a suspension of European economic aid.

Egypt’s Interior Ministry warned protesters that police officers were authorized to use lethal force to protect themselves. The ministry also promised to punish any “terrorist actions and sabotage” after at least two government buildings were burned. It was easily the most violent of the three deadly suppressions since Morsi was forcibly removed from power by the armed forces six weeks ago, plunging the country into its worst crisis since the ouster of Mr. Morsi’s authoritarian predecessor, Hosni Mubarak, in the 2011 revolution.

 Mr. Obama strongly condemned the Egyptian government’s use of brute force to crush the protests and said the United States had canceled military exercises with the Egypt’s armed forces scheduled for next month. Mr. Obama also warned of further unspecified steps if Egypt’s interim leaders continued down what he called a “more dangerous path.”

But he said nothing about cutting the $1.3 billion in annual military aid that the United States provides to Egypt and acknowledged that the United States had historically regarded the country as a friend and a “cornerstone for peace in the Middle East.”

In Europe, some officials called for a suspension of aid by the European Union, and at least one member state, Denmark, cut off funds.

So, to recap. The military staged a coup. The civilian regime was a façade. The military's attempt to destroy the Muslim Brotherhood guarantees a violent future, likely including terrorism and perhaps ending in civil war. Despite having dumped $75 billion worth of "aid" into Cairo's coffers over the years, Washington has no "leverage."

Yet the Obama administration continues to mouth meaningless platitudes. President Barack Obama said that the violence "must stop." To make that happen he said the US was pulling out of planned joint military maneuvers with Egypt. Yea, that's not going to get it done.

Who's in control?