Friday, January 31, 2014 - January Out

January Out

by Sinclair Noe

DOW – 149 = 15,698
SPX – 11 = 1782
NAS- 19 = 4103
10 YR YLD  - .03 = 2.67%
OIL - .76 = 97.47
GOLD + 2.80 = 1246.90
SILV + .03 = 19.27

The Dow started the year and the month at 16,572 (-926). The S&P 500 started the month at 1845 (-63). The Nasdaq Comp, for the month, went from 4160 (– 57).

For the week, the Dow fell 1.1 percent, the S&P 500 slipped 0.4 percent and the Nasdaq dropped 0.6 percent. In January, the Dow slumped 5.3 percent, the S&P 500 lost 3.6 percent and the Nasdaq fell 1.7 percent. January marked the worst month for the Dow and the S&P 500 since May 2012, and the worst for the Nasdaq since October of that year.

Yield on the 10 year Treasury note dropped from 2.99% to (- 32bp). And this is a little telling, the Vix, the volatility index went from 14.32 to 18.22    (-3.9)

The Vix might be indicating that the market is not sufficiently scared of the emerging market contagion; certainly the Vix is higher than the start of the month, but remember that December saw record highs for the major indices, and a really scary Vix reading would be around $49, for those of you who remember the beginning of 2009. In other words, there are a whole bunch of people who haven’t figured out that we’re in a downturn in the markets. So far the US markets are just experiencing a small move, but the rest of the world is taking a bigger hit. About $17 billion has poured out of emerging market funds this month.

Right now, there is growing angst regarding the emerging markets. The Dow was down more than 200 points to start the session today. And really, none of this should be a surprise. We know that emerging markets have been struggling with the Fed’s taper and other stimulus plans of developed economies. Things tend to unravel slowly and then all at once. It’s hard to figure out where we are in the unravelling. When will this little downturn end? I don’t know but I’m guessing the Vix will be higher than today.

A new State Department report on the proposed Keystone XL oil pipeline finds that the project would have a minimal impact on the environment, an assessment likely to increase pressure on the White House to approve it. But the report sets no deadline for doing so. The proposed pipeline would carry crude derived from oil sands in Canada to refineries in the United States. The evaluation fell to the State Department because the proposed $7 billion project by TransCanada Corp would cross the US-Canada border.

A New York State judge has approved an $8.5 billion agreement by Bank of America to settle most of the claims by nearly two dozen mortgage securities investors.  In a 53-page decision, Justice Barbara R. Kapnick of State Supreme Court in Manhattan ruled that the 2011 settlement was reached in good faith.

The settlement had been challenged by the American International Group, an investor in the mortgage securities, which contended that the trustee overseeing the bonds did not push aggressively enough for more money from Bank of America. AIG argued that the settlement shortchanged investors and accused the trustee, Bank of New York Mellon, of conflict of interest and of shirking its duties. The judge determined that the trustee did not abuse its discretion in entering into a settlement.

There’s something rotten in Denmark, and it’s Goldman Sachs. Denmark gave the global financial giant Goldman Sachs the go-ahead on Thursday to buy a stake in its state utility. Some members of the Socialist People’s Party were so upset, they withdrew their ministers from the country’s governing coalition. Some party members said the deal ceded too much power to Goldman. Thousands of people have taken to the streets in recent weeks to protest the deal; a prominent banner featured the vampire squid that has become a symbol for Goldman Sachs. Nearly 200,000 Danes signed an online petition against the deal, a record.

Under the terms of the deal, Goldman would invest about $1.45 billion for an 18% stake in Dong Energy, the state utility. Dong Energy has a number of businesses, including offshore wind farms, drilling for oil and gas in the North Sea. The utility has about one million gas and electric customers and operates coal and biomass power plants. The deal does not buy Goldman a controlling share, but the minority stake would come with special privileges. Goldman would get a seat on the utility’s board. And the bank, along with two Danish pension funds, would have veto power over changes in the utility’s strategy or its executive suite; specifically the utility’s chief executive or chief financial officer. The Danish pension funds are investing about $550 million.

Among the questions about the deal is whether it is being structured to avoid taxes. Goldman’s investment will be made through a company based in Luxembourg. And that Luxembourg company is then owned in part by companies in Delaware and the Cayman Islands. So, the deal boils down to either a big tax evasion scheme by Goldman or a significant investment in renewable, green energy. Time will tell but I’m guessing it’s a bit of both.

Officials in California said that for the first time in the state’s history, they won’t be able to provide any water to contractors that supply two-thirds of the population and a million acres of farmland. The California Department of Water Resources, which had predicted it would be able to supply about 5 percent of the amount requested, said it now projects that it won’t be able to provide any of the 4 million acre-feet of water sought by local agencies.

The reduction means that agencies will have to rely on existing water supplies such as ground water or what is in storage behind dams. The Los Angeles-based Metropolitan Water District, serving 19 million people in Southern California, and the San Francisco Public Utilities Commission, which supplies much of the Bay Area, have built up water reserves and won’t be as hard hit as places such as Sacramento and the Central Valley farming region. About two-thirds of Californians get at least part of their water from northern mountain rains and snow through a network of reservoirs and aqueducts known as the State Water Project. State Department of Water Resources Director Mark Cowin said: "Simply put, there's not enough water in the system right now for customers to expect any water this season from the project."

Farmers and ranchers throughout the state already have felt the drought's impact, tearing out orchards, fallowing fields and trucking in alfalfa to feed cattle on withered range land.  Agricultural production accounts for most of the state's water use and is expected to be hit the hardest by the reduction. At the same time, many cities have ordered severe cutbacks in water use.

If you watched the State of the Union address this week, you might rightly assume that Congress can’t do anything, which would only be partially correct. The House this week passed a Farm Bill. Big whoop. The Farm Bill is normally the most uncontroversial bit of legislation Congress deals with. Not anymore. The bill is 959 pages long and would cost $956 billion.

That cut is twice what the Senate originally proposed, but a fraction of the nearly $40 billion the GOP House voted to cut last year. Those cuts didn't go into effect, but a cut of $5 billion in the current fiscal year was implemented via Congressional inaction last November. The bill budgets $16 billion less than what would have been spent under current law, with the Food Stamp program absorbing almost half those cuts, or right at $8 billion. In a great big federal budget, that might not sound like much but it worls out to 21 fewer meals per month for a family of 4.

The bill also makes some policy changes for famers. It’s a neat little bait and switch. What the bill takes from the ag lobby with one hand, it largely gives back with the other. Of $41 billion in projected savings (over 10 years) from eliminating direct payments to farmers, the bill restores $27 billion via enhanced crop insurance subsidies and a new program that “insures” against adverse price movements. Supposedly necessary to secure the nation’s food supply at a time of record farm, this federal largess flows almost regardless of how much money its recipients already have. People making up to $900,000 per year in adjusted gross income can qualify for payments. The total commodity-program take for any individual “actively engaged” in farming is capped at $125,000, or 2½ times the national median household income. But your definition of actively engaged is probably different than the definition in the farm bill.

Farm prices and farm revenues and net profits had been at record highs, so old-style farm prices that put the floor under prices were no longer effective. So they racheted up the guarantees, converted into a kind of revenue insurance, allowing the money to continue to flow. The insurance scheme also preserves the current incentive structure of large-scale US agriculture, which is to grow as much corn and soybeans as possible. That's great for the corporations that supply inputs to industrial-scale farmers—seed and pesticide companies like Monsanto, DuPont, and Dow. And in the event of floods or drought, the results could get shaky. Depending on the payouts, any savings from cuts in the Farm Bill could be wiped out.