Wednesday, January 22, 2014 - A Mixed Bag

A Mixed Bag

by Sinclair Noe

DOW – 41 = 16,373
SPX + 1 = 1844
NAS + 17 = 4243
10 YR YLD + .04 = 2.86%
OIL + 1.69 = 96.66
GOLD – 3.80 = 1237.80
SILV - .07 = 19.90

Another mixed day on Wall Street. It’s earnings season. IBM reported quarterly revenue that missed estimates for the fourth straight quarter, due to a steep fall in demand for servers and storage products in emerging markets such as China. IBM thinks part of the reason for declining revenue was backlash from emerging economies against US government spying. IBM was down enough to drag the Dow Industrials into negative territory for the day.

Coach, the handbag maker, was the biggest loser in the S&P 500 after posting disappointing sales in North America. United Technologies, the air conditioner and elevator company, reported higher fourth-quarter profit that topped Wall Street estimates, though revenue fell shy of expectations. Norfolk Southern posted a 24 percent rise in quarterly income.

After the close, Netflix reported higher profit for the fourth quarter as the company added 2.3 million customers to its TV and movie streaming service in the United States.

A mixed bag of earnings today. Not much to cause the bulls or the bears to run.

Target Corp said it will stop offering health coverage to part-time workers, citing new public insurance exchanges floated by the US government. Less than 10 percent of the company's 361,000 employees currently participate in the insurance plan that is being discontinued. Target is not the first or the last company to take this position.

The winter storm blanketing most of the Midwest and East Coast pushed natural gas prices to their highest level in nine months on Wednesday. February natural gas jumped 26 cents, or 6 percent, to $4.689 per thousand cubic feet. The last time natural gas prices were this high was late April 2013. Americans who use propane to heat their homes are scrambling to deal with sharply higher prices and a limited access to the fuel. Domestic production has increased to an estimated 17.8 billion gallons in 2013, from 15.2 billion gallons in 2008, but offsetting the increased production is a robust export market. The country exported an estimated 4.3 billon gallons of propane last year, compared to 800 million gallons in 2008. The tighter supply has led to wholesale price increases, to $2.20 a gallon from $1.10 a gallon a year ago. Prices for retail customers have risen to nearly $3 a gallon from $1.90 a year ago.

According to data released by the IRS, conversion from tax-deferred individual retirement accounts to Roth IRAs increased ninefold in 2010, to $64.8 billion. That was the first year when a $100,000 income limit on eligibility to convert was eliminated - and it marked the first time the amount of assets converted to Roths exceeded contributions. The higher your income, the more likely you are to convert to a Roth. Paying taxes now rather than later isn't beneficial if you expect to be in a lower tax bracket when you begin drawing down funds in retirement.

Mohamed El-Erian is stepping down as head of the asset-management firm Pimco. Bill Gross, who founded Pimco and serves as its co-chief investment officer with El-Erian, said he was in disbelief when the chief executive told him of his intentions several weeks ago. El Erian will stay on as an adviser to Pimco’s parent company, Allianz. The past year was difficult for bond fund managers and Pimco, the largest of the bond funds, saw huge outflows.

Warren Buffett is offering a $1 billion prize to anybody who can fill out a perfect March Madness bracket. The prize would be paid out in 40 annual installments of $25 million, or a one-time lump sum of just $500 million. The first 10 million people to enter the contest will be eligible for the ludicrous grand prize. If there’s a tie, they’ll split. The odds of a perfect basketball bracket are staggering; 9.2 quintillion to one. Apparently there has never been a documented perfect bracket. Madness just got crazier.

The Center for Economic Policy and Research has run some numbers on how much the housing bubble and the collapse cost. Based on Congressional Budget Office data looking at GDP growth going back to 2008, the dollar losses through 2013 are at $7.6 trillion, in 2013 dollars; or about $25,000 for every person in the country. This is just economic losses, it does not include any effort to quantify the pain that workers or their families have suffered from being unemployed or losing their homes. The numbers are speculative but likely a good guess.

Years of banking crises, credit droughts and economic uncertainty have prevented businesses investing for the future. Instead, they have clipped costs, wages and jobs and built up huge stockpiles of cash rather than investing in new plants, staff, updated technology, equipment or acquisitions. According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years. At some point, the thinking goes, all that corporate cash will come flooding into the economy. Maybe.

Merrill Lynch surveyed fund managers, and a record number think companies are under-investing and most respondents want firms to deploy their cash on capital expenditures. Sounds good, but there is no obvious catalyst for such a move.

Treasury Secretary Jack Lew sent a letter to House Speaker John Boehner warning that the country would likely exhaust the extraordinary measures used to stay beneath the debt limit by late February. In a previous letter to Boehner, Lew had projected the deadline might not be hit until early March. In the deal reached in mid-October to end the government shutdown, lawmakers extended the nation's debt limit into the first week of February. It was always understood that Treasury could take extraordinary measures to extend the deadline even further. But in his note to Boehner, Lew made clear that those tools weren't as potent as they have been in previous debt limit crises, partly because of limits on borrowing capacity and partly because of financial constraints that are unique to the month of February.

But now Secretary Lew writes: "The length of time that the extraordinary measures can extend the nation's borrowing authority is significantly shorter than it was in 2011 and 2013. This is in large part because the government experiences large net cash outflows in the month of February, due to tax refunds. For example, in 2013, the government experienced net cash outflows of approximately $230 billion in the month of February, as compared to average net outflows of $45 billion in the other months of the year.”

House GOP leaders have stated that they won't simply vote to extend the debt limit without receiving something in return. The White House, meanwhile, has steadfastly refused to negotiate over raising the debt limit. So it appears we are headed for another showdown, and it is approaching much faster than you thought.

This is Day Two of the World Economic Forum in Davos, Switzerland. Over 2,500 Presidents, Prime Minsters, CEOs, Celebrities, Academics, and moneyed elites, will be holed up in a small and posh mountain resort in Switzerland to discuss, in the words of the WEF, "improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas."

This year's theme is "The Reshaping of the World: Consequences for Society, Politics and Business." A few words from the preamble are worth noting: "political, economic, social and, above all, technological forces... are shifting power from traditional hierarchies to networked hierarchies." That means the false idea of reducing democracy to the singular act of voting every few years is over. People are begging to assert participatory democracy and exercise people power, using many new technologies and methods of interconnection, as levels of confidence in political leadership are dangerously declining around the world.  The WEF warns its members that we are witnessing a shift of power. But those attending the WEF are largely focused on the symptoms of various crises not the causes or the cures.

The WEF's 2014 Global Report helps set the agenda and prioritization for the great and the good to discuss. Financial risk, unsurprisingly, still ranks at number one, followed by high unemployment or underemployment. Water crises come in third place with climate at fifth, behind severe income disparity. There is therefore a growing recognition that economy, ecology and equity are all in crisis; that they are all fundamentally interconnected. None can be solved without solving the others. For example, the water scarcity crisis is driven, in part, by the expansion in coal. Go to West Virginia if you need proof.

The big question for 2014 will be how the plutocrats respond. Some are still in denial. Today's economy is going so well for those at the very top that it can be hard to see how badly it is working for those in the middle and at the bottom.