Monday, June 30, 2014 - Narrow Decisions Leave the Doors Wide Open

Narrow Decisions Leave the Doors Wide Open
by Sinclair Noe

DOW – 25 =  16,826
SPX – 0.73 = 1960
NAS + 10 = 4408
10 YR YLD - .02 = 2.51%
OIL - .23 = 105.51
GOLD + 11.80 = 1327.90
SILV + .09 = 21.06

Today’s session marked the end of trading for June as well as for the second quarter. After a run to record closes, the S&P 500 Index posted a quarterly gain of 4.7%, and the Dow Jones Industrial Average had an increase of 2.2%. The Nasdaq Composite Index had a quarterly gain of 4.9%. It marks the sixth straight quarterly gain for both the S&P and Nasdaq. With six straight quarterly gains, the Nasdaq has had its longest streak of advances since 2000, while the S&P 500 has had its best run since 1998. The Dow, meanwhile, posted its fifth positive quarter of the last six.

For the first half of 2014, the S&P 500 is up 6%, with the Dow industrials up 1.4%, and the Nasdaq up 5.4%. Airline, pharmaceutical, and utilities stocks led advancers during the period, which was marked by the impact of bad weather, and a 2.9% drop in first-quarter gross domestic product. Yields on Ten year Treasury notes started the year at 3.03%, dropped down to 2.71% at the end of the first quarter, then dropped to 2.45% at the start of June. The S&P 500 has scored 22 record closing highs so far this year, which has increased concerns among some investors that the market might be due for a technical pullback. Yet the CBOE volatility index, or VIX, Wall Street’s fear gauge, has held near multiyear lows.

This week will likely see light trading with a holiday shortened week. The markets will close Friday for Independence Day. The monthly jobs report will be issued on Thursday.

Meanwhile, oil prices have advanced steadily from 98.46 a barrel at the start of the year, to 101.58 at the start of April, to 102.87 at the start of June.

The precious metals have also shown some recent signs of life. Spot gold started the year at 1206 an ounce, while silver began the year at 19.54. Since June 1^st, there has been a modest rally from 1252 for gold and 18.91 for silver. This is not a huge rally, and it doesn’t mark a challenge to old highs, but it might signal a bounce off recent lows.

Let’s start with a couple of cases from the Supreme Court. You recall that last week we noted the Supremes had been, uncharacteristically unanimous on several cases; that came to a screeching halt today in the case of Burwell v. Hobby Lobby and Conestoga Wood. In a 5-4 opinion authored by Justice Alito, the court ruled that the Obama administration has failed to show that the contraception mandate contained in the Affordable Care Act is the "least restrictive means of advancing its interest" in providing birth control at no cost to women.

The Affordable Care Act contains a provision requiring most employers to cover the full range of contraception in their health care plans at no cost to their female employees. The Obama administration had granted an exemption for churches and accommodations for religious hospitals, schools and nonprofits, but for-profit companies were required to comply with the coverage rule or pay fines.

Hobby Lobby, a Christian-owned craft supply chain store, and Conestoga Wood Specialties Store, a Pennsylvania wood manufacturer owned by a family of Mennonites, challenged the contraception mandate on the grounds that it violates their religious freedom by requiring them to pay for methods of contraception they find morally objectionable. The Religious Freedom Restoration Act says that the federal government may not put substantial burdens on religious exercise.  The owners of those companies believe certain forms of contraceptives are forms of abortion, in violation of the religious beliefs of the company’s owners.

So, the court was dealing with a couple of issues. First is a company like Hobby Lobby considered a person? This is important because the Religious Freedom Restoration Act protects “persons” but doesn’t mention for-profit corporations. Justice Alito wrote: "Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law."

The other issue was whether the mandate for contraception coverage imposed a substantial burden on Hobby Lobby. Well, it’s a pretty easy argument that anything the government requires a person to do is a substantial burden, so…, strike two.

The case is being billed as a battle between women’s rights and religious rights.

The opinion was written narrowly so as only to apply to the contraception mandate, not to religious employers who object to other medical services, like blood transfusions or vaccines. But there is no certainty the ruling will be interpreted narrowly. What if a company objects to something the government does, outside the realm of health care? Time will tell. Another point came when Justice Ginsburg wrote: “One might ask why the separation [between business and owner] should hold only when it serves the interest of those who control the corporation.”

The opinion applies to small, closely held corporations, but what if a big, publicly traded corporation makes a similar claim? As the majority itself noted, no big, publicly-traded corporation has emerged to make such a claim. The Court doesn’t have to rule on a question it isn’t asked. And a closely held corporation can still be pretty big. Hobby Lobby has 572 stores. “Closely held” refers to a corporation that has more than 50% of the value of its outstanding stock owned by 5 or fewer individuals. These corporations are thought to make up 90% of corporations; these corporations account for about 52% of private employment, or a little more than 60 million people. Hobby Lobby is being described as a narrow ruling but it has the potential to affect tens of millions of workers.

Now that the court has recognized that corporations have religious exercise, the door has been opened. All it takes is for the right plaintiff to walk through it.

The Supremes also issued an opinion in the case of Harris v. Quinn, ruling 5-4 that some government workers are not required to pay union dues. In writing for the majority, Justice Alito concluded that there was a category of government employee, a partial public employee, who can opt out of joining a union and not be required to contribute dues to that labor group. What is a partial public employee? In this case it refers to home-care aides who typically work for an ill or disabled person, with Medicaid paying their wages.

The court declined to strike down a decades-old precedent that required many public-sector workers to pay union fees, so this does not apply to employees such as teachers or police officers who work directly for the government.

The case, Harris v. Quinn, was brought by eight Illinois workers who provided home health care to Medicaid recipients. Several of the original plaintiffs were mothers who, helped by Medicaid, were personal home-care assistants to their disabled children and opposed joining the union and paying any union fees. Justice Alito wrote in the majority opinion: “Agency-fee provisions unquestionably impose a heavy burden on the First Amendment interests of objecting employees.”

The case deals with the “fair share” fees that most unions charge all employees, including nonmembers, to support collective bargaining. These fees prevent free-riding. Unions are required by law to bargain on behalf of members and nonmembers alike, all of whom benefit from collective bargaining. If some employees could simply decline to pay to support collective bargaining, all would have the incentive to similarly opt out, thereby undermining the union and harming all employees. It’s a classic case of the free-rider problem.

Because the case only deals with partial public employees, it is being called a narrow decision, however, by giving a constitutional underpinning to the anti-union “right to work” stance, the court short-circuited that process, retreating from its decades-long practice of giving states broad latitude in making economic policy, including labor policy. In this way, the court became very much involved in economic policy.

So, today the court split on two different cases, and in those splits they have opened up Pandora’s Box. We are likely to see and hear much more on these issues over the next few years.

Another court ruling today, didn’t quite make it to the Supremes, but potentially still important; the New York state Court of Appeals ruled that towns can use zoning ordinances to ban hydraulic fracturing, or fracking. Numerous municipalities across the state have either banned fracking or are considering doing so, and the trend may accelerate because of the court’s ruling. Of course, a state law in New York does not apply in other states, but it may be the start of a trend if not necessarily a precedent.

General Motors recalled more than 8.4 million vehicles worldwide today, bringing its total figures for the year above 28 million cars, more than the 22 million recalled last year by all automakers combined. GM said it was aware of seven crashes, eight injuries and three fatalities in the recalled vehicles, but said that there was no conclusive evidence that a defect had caused them. The death toll is  just from the latest round of recalls; 13 other deaths associated with other GM recalls involving ignition switches will result in payments of at least $1 million per family; at least that is the starting point unveiled today by a compensation expert hired by GM.

In economic data today; the National Association of Realtors (NAR) said its Pending Home Sales Index, based on contracts signed last month, increased 6.1% to 103.9, the highest level since September of last year. Contracts increased in all regions of the country, with the Northeast and West experiencing the largest gains. The Pending Sales Index looks at contracts for existing homes, with the anticipation there will be an actual sale in about 2 months; so it looks like there might be a little boost for home sales. However, signed contracts were down 5.2% from May of last year. Existing home sales are expected to decrease by 2.8 percent this year to 4.95 million, compared to 5.1 million sales in 2013.

There is a magazine called “The Banker” and each year they publish rankings of the profits and capital strength of the 1,000 biggest banks in the world. They estimate that last year the top 1,000 banks posted a record $920 billion in profit. This was the industry’s largest-ever annual haul, comfortably beating the pre-crisis peak of $786 billion in 2007. Last year's global profits were up 23% from the previous year to their highest ever level.

China's banks made $292 billion in aggregate pretax profit last year, or 32% of the industry's global earnings. Last year China Construction Bank shoved aside America's JPMorgan Chase to become second largest in terms of tier-one capital. And the total Tier 1 capital of Chinese banks has also overtaken that of the US for the first time ever, at $1.19 trillion, to make it the largest single banking sector in the world. ICBC (formerly known as Industrial and Commercial Bank of China) kept the top spot; with more than $200 billion, and it is also the world's most profitable bank, with $55 billion last years. Four Chinese banks made the top ten list for profits, including: ICBC, China Construction Bank, Agriculture Bank of China, and Bank of China.

Chinese officials have ramped up investment in real estate through the state controlled banking system to counter weaker than desired growth. They will likely continue this stimulus, even if it means construction of buildings that will sit vacant. Then there is the $5 trillion dollar question of the health of China’s lightly regulated shadow banking system.

The top US banks in terms of Tier-one capital are JPMorgan, Bank of America, Citigroup, and Wells Fargo. Banks in the United States made aggregate profits of $183 billion, or 20% of the global tally, led by Wells Fargo's earnings of $32 billion. The top 10 US banks in the 2014 ranking have an aggregate capital-to-assets ratio of 7.84%. This compares with a ratio of just 4.47% for the top 10 banks in the EU. To some extent, the difference is explained by US Generally Agreed Accounting Principles (GAAP), which allow netting of derivative positions.

Until 2007, Mitsubishi UFJ Financial Group was a banking giant in terms of tier-one capital, now it ranks tenth, and it is the only Japanese bank in the top ten. In the Top 1000 ranking 20 years ago, all the top six positions were held by Japanese banks. With 20/20 hindsight we can see that the Japanese banking boom was unsustainable. And now China’s banking boom seems to be getting ahead of itself. Chinese banks capital-to-asset ratio is 2 percentage points lower than that in the US, which basically means that if loans start to default, they have a smaller cushion.

Over the past 15 years, Chinese banks average profit growth has been more than 50% per year; while assets have risen more than 20% per year and China’s economic growth has been just under 14% per year. And in the past 4 years, the Chinese economy has slowed from those double digit growth levels, even as Chinese bank profits have accelerated. It seems unlikely that this path is sustainable, and more likely that there is some combination of lower growth rates in the banking sector or stronger growth rates in the Chinese economy.

Ten years ago, Europe counted five banks among the world's top ten. Today there is only one, HSBC, in fifth place. Struggling Eurozone banks contributed just 3% overall to global profits, down from 25% before the 2008 crisis, as recovery remains slow or non-existent in many countries. There are no French or Spanish or German banks in the top ten. Italian banks lost $35 billion last year, and occupy four of the top five spots in terms of the biggest annual losses. And European banks accounted for 24 of the top 25 losses.

Meanwhile, BNP Paribas is in hot water. Today, BNP pleaded guilty in New York state court, admitting to transferring billions of dollars to blacklisted countries under US sanctions. The plea to one count of falsifying business records and one count of conspiracy is part of a broader settlement deal with state and federal authorities. As part of that deal, BNP agreed to plead guilty to criminal charges and pay about $8.9 billion.

BNP is the seventh bank to settle a criminal sanctions violation case but the first to plead guilty; prosecutors consider BNP to be the worst offender. Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions coursing through its New York operations and the broader American financial system, but the wrongdoing was more pervasive at BNP, stretching from at least 2002 into 2012, after the investigation was already in full swing.

The BNP investigation centered on its commodity-trade finance business in Paris and Geneva. About 30 executives who worked there have resigned, gone on leave, been fired or relocated since 2012. Unauthorized dollar payments were made on behalf of oil companies to Sudanese or Iranian entities. Prosecutors also reviewed metals and agriculture commodity deals, as well as non-commodity transactions. In total, the bank is suspected of hiding about $30 billion in transactions.

BNP will prevent certain units within BNP’s headquarters in Paris, as well as offices in Geneva, from processing payments in dollar denominations, also known as dollar clearing, for one year beginning in 2015. The deal also requires BNP dismiss 13 employees. The deal comes six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes. Both banks could have faced the loss of their bank charter in the US, which is considered to be the Wall Street equivalent of a death penalty for a bank. That did not happen. Prosecutors have managed to extract a criminal guilty plea but only a civil penalty, a slap on the wrist, even if it is a nearly $9 billion slap.

In the months ahead, prosecutors will shift their focus to several big banks suspected of manipulating foreign currencies; they are expected to use the Credit Suisse, BNP cases as a template for pulling down criminal guilty pleas without harsh punishment, proving what we’ve known for a very long time – the big banks are too big to jail.

Friday, June 27, 2014 - Biscuits on the Table

Biscuits on the Table
by Sinclair Noe

DOW + 5 = 16,851
SPX + 3 = 1960
NAS + 18 = 4397
10 YR YLD  + .01 = 2.53%
OIL - .10 = 105.74
GOLD – 1.80 = 1316.10
SILV - .25 = 20.97

The major stock indices traded lower for most of the day, and only in the final minutes turned to positive territory. For the week, the Dow slipped 0.6 percent and the S&P 500 declined 0.1 percent, while the Nasdaq gained 0.7 percent. Volume spike today as the Russell Indices were reconstituted.

The Russell Indices are compiled by Russell Investments. The Russell 3000 is an index of the 3000 largest stocks in the US. The Russell 2000 is the 2000 smallest stocks in the Russell 3000. Once a year, the Russell indices are reconstituted, to reflect changes such as acquisitions, bankruptcies, or just changes in the size of the companies listed in the index. The reconstitution probably explains the increase in volume and the last minute increase in prices today.

Some things we need to know heading into the weekend; including Ukraine, Iraq, and Argentina. We’ll start with the situation in Ukraine. The European Union signed a free-trade pact with Ukraine today and warned it could impose more sanctions on Moscow unless pro-Russian rebels act to wind down the crisis in the east of the country by Monday. Georgia and Moldova signed similar deals, holding out the prospect of deep economic integration and unfettered access to the EU's 500 million citizens, but alarming Moscow which is concerned about losing influence over former Soviet republics.

EU leaders meeting in Brussels demanded that, by Monday, Ukrainian rebels agree to ceasefire verification arrangements, return border checkpoints to Kiev authorities, free hostages and launch serious talks on implementing Ukrainian president Poroshenko's peace plan.

EU leaders said they were ready to meet again at any time to adopt significant sanctions on Russia. Diplomats said they could target new people and companies with asset freezes as early as next week. More than 60 names are already on the list. Although it has drawn up a list of hard-hitting economic sanctions against Russia, the EU is still hesitating over deploying them because of fears among some member states of antagonizing their major energy supplier.

Meanwhile, leaders of the European Union's 28 member states voted on the next president of the European Commission, which serves as the EU's executive branch. The president sets the policy agenda, enforces rules and represents Europe abroad. They elected Jean Claude Junker on a 26-2 vote. The losing votes belonged to the United Kingdom and Hungary, and they really have a strong dislike for Junker; so much so that they may try to exit the EU. That probably won’t happen, but there is talk of an “in or out” referendum for the Brits.

A funny thing is happening in Iraq. The US is lining up support for Iraq from Iran and Syria. And the bombing has apparently started, but we’re still trying to figure out who is throwing the bombs. The first aerial bombing took place Monday or Tuesday, apparently carried out by the Syrian Air Force, acting at the behest of the Iranian government in support of the Iraqi government, which the US government supports, but only if the Iraqi’s purge the government of all the goofs who messed up over the past 10 years or so.

Which is to say, the war in Iraq is escalating. Already, the war involves Iraq, Syria, Iran, Turkey, Saudi Arabia, Qatar, ISIS or ISIL if you prefer, Israel, Lebanon, and of course the US. The Pentagon denied reports of US drone strikes along the Iraq-Syria border after reports by BBC of drone bombings. The Murdoch Street Journal reports Syrian airstrikes. Unidentified bombers have reportedly launched an air strike on ISIS positions in northern Iraq. Iraqi television has claimed they are US planes, but the Pentagon has denied responsibility.

US planes were identified by Iraqi television, but the Saudi Al-Arabiya network claims that the raid was carried out by Syria. Meanwhile, Iranian Special Forces sent in to help protect Baghdad and a few select holy sites, along with surveillance drones. And Israel has bombed Syria in retaliation for an attack from Syria that killed Israeli civilians in the Golan Heights.

And so with all this going on, the Pentagon admitted yesterday that armed US drones are now flying over Iraq, equipped with Hellfire missiles, deployed from a base in Kuwait, in addition to unarmed surveillance flights by drones and manned aircraft, and supplemented by US military advisers on the ground.

Meanwhile, the Pentagon says the United States has opened a "joint operations center" in Baghdad, boosting the total number of US service members to 500. And the New York Times reports that Iraqi government officials are saying that the US is planning to send more than 1,000 private security guards to Iraq to protect US troops, which amounts to far more than the US government has previous acknowledged.

For years Iraq has been a major oil producer; it kept Saddam in business all those years; back then Iraq produced about 2.5 million barrels a day; recently output has increased to more than 3 million barrels, and it’s estimated that production could easily top 6 million barrels. In a country of about 30 million, there should be enough natural resources for profound prosperity, but that is not the case. In recent years, none of this oil wealth trickled down to the grassroots, especially in Sunni areas of the country where signs of reconstruction, economic development, restored services, or jobs were hard to find. Instead, the vast new revenues disappeared into the recesses of a corrupt government, and from there – who knows?

So here’s where Iraqi oil, or the lack of its revenues at least, comes into play. Communities across Iraq, especially in embittered Sunni areas, began demanding funding for reconstruction, often backed by local and provincial governments. In response, the Maliki government relentlessly refused to allocate any oil revenues for such projects, choosing instead to denounce such demands as efforts to divert funds from more urgent budgetary imperatives. That included tens of billions of dollars needed to purchase military supplies including, in 2011, 18 F-16 jets from the United States for $4 billion. In a rare moment of ironic insight, Time magazine concluded its coverage of the F-16 purchase with this comment: “The good news is the deal will likely keep Lockheed’s F-16 plant in Fort Worth running perhaps a year longer. The bad news is that only 70% of Iraqis have access to clean water, and only 25% have clean sanitation.”

My grandmother used say, as long as we’ve got biscuits on the table, nobody should go hungry. I guess they never heard that saying in Iraq.

Nothing in today's complex world has a single cause, but you have to think that a major reason for all this is the oil.

Argentina is in trouble. They have until Monday to pay a group of hedge fund managers over $1.3 billion on defaulted bonds. If they don’t pay, they risk default. If it goes into default, investors lose faith in Argentina’s capacity to pay, interest rates on its bonds surge, and the country is forced to print money to pay creditors, the economy could collapse.

Then again, if Argentina does pay this group of hedge fund managers over $1.3 billion worth of bonds by July 30, it opens itself up to lawsuits from other investors who also own those bonds, lawsuits that could cost the country up to $15 billion. That's over half the money it has in its central bank.

The story goes back to 2001, when Argentina was going through a financial crisis. Argentina issued bonds, and they defaulted on those bonds. After the default, hedge fund manager Paul Singer and some other hedge funds swooped in to buy the defaulted bonds for pennies on the peso. They knew they were buying defaulted bonds, but the idea was that things might improve or there might be a deal negotiated; that’s what usually happens, debt issuers restructure debt, and negotiate with creditors to pay less. Creditors usually take the deal because it is better to get something rather than nothing. Most of Argentina’s creditors have decided to accept 70 cents on the dollar.

But Paul Singer is demanding 100% face value of the bonds. And if he is not paid, there is a clause that says no other creditors can be paid. And if Argentina pays the full amount to Singer, the other creditors will likely not be satisfied with a 70% haircut. And the reason Argentina is in this jam is because Singer sued, and it went all the way to the US Supreme Court, and the Supremes sided with the hedge funds, and let stand a district court ruling.

The Supreme Court has been busy handing down decisions this week; and we will likely get a couple more decisions on Monday; I guess they don’t hand down decisions on Friday, and opt instead for an early happy hour. Anyway, the decisions of the past week were downright strange for one reason; several were unanimous. Wednesday, the court decided Riley v. California, which unanimously held that police cannot search the cellphones of people they arrest without a warrant. On Thursday, the court handed down two of its major opinions of this year: National Labor Relations Board v. Noel Canning, about the president's recess appointment power and McCullen v. Coakley, about abortion clinic buffer zones.

You will recall that the court is split ideologically, with 5 justices leaning right and 4 justices leaning left, so it’s a little surprising to see the twain meet. Unanimity is rare; a fractured court is the norm, and yet, we had three unanimous decisions among people who are inclined to disagree; and at a time when the House of Representatives is suing the president and people from one side can’t have a civil conversation with someone from the other side. Maybe this is an example of the rule of law being more important than politics. Before we declare a victory for compromise, maybe there’s a little more to how the court arrived at unanimity.

Even when the court agrees on a ruling, it can divide over the reasoning and even how the rule should be applied. In other words they take very different paths to arrive at the same place. It is possible that a 5-4 decision is not an indication of a polarized court. You have to read the decisions behind the vote. And conversely, a unanimous decision can mask deep divisions that appear down the road.

Thursday, June 26, 2014 - Buffers and Filibusters

Buffers and Filibusters

by Sinclair Noe

DOW – 21 = 16,846
SPX – 2 = 1957
NAS – 0.71 = 4379
10 YR YLD - .03 = 2.52%
OIL - .80 = 105.70
GOLD  - .70 = 1317.90
SILV + .10 = 21.22

Yesterday, the Commerce Department downgraded the first quarter gross domestic product to a negative 2.9%, meaning the economy shrank by 2.9%. Today, St. Louis Federal Reserve president James Bullard says it’s likely an aberration; the weak report for the first quarter was likely distorted by inventories, weather, and by the challenges of accounting for health-care spending under the new law. Bullard says he isn’t worried, “the market’s right to shake this off. Looking forward over the next four quarter, most forecasters have 3% growth.”

Well, that’s good. No worries. Nothing to see hear, move along, move along.

It’s just that the fall was so nasty, it’s hard not to look and linger over the carnage. It really was ugly. And while we can blame it on the weather, that doesn’t seem right. We always have weather. Minneapolis is underwater today. Bad weather is a fairly constant aberration. We should be past the point of excuses; we are 5 years into a recovery; granted it has been a stealth recovery.

I wonder if Mr. Bullard is confusing the stock market with the economy. A down day in the bull market would just be a blip on the tape, but the stock market is not the economy. And the economy is not bouncing back, which would be the expected move after a seasonal aberration. Most importantly, we haven’t seen a surge in hiring. It looks more like we’ve gone through a very long period where everybody who was going to be fired was fired, and companies are running as lean as they can. So, the jobless claims have leveled off, but there’s a big difference between no more fat to cut and an economy that produces lots of well-paying jobs.

If you want new jobs, and the consumer spending that flows from new jobs, you look for new businesses, and you can just keep looking. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. The decline affected nearly all business sectors. The fact that the economy has been weak since 2007 suggests that new business activity has also declined in existing companies.

New businesses are critical for economic growth because a small fraction of today's startups will become tomorrow's economic heavyweights. Most of today's workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy.

Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding. Also, most of today’s workers are working at smaller businesses, companies with less than 100 employees, and we just aren’t making enough of these smaller businesses.

The Federal Reserve’s monetary policy has been a boon for Wall Street, so we’ve seen record highs even as the economy contracts. The Fed policy was to elevate asset prices in the hope it would trickle down to the rest of the economy; the trickle down part has been a terrible failure but the higher prices have been nifty for a small group of financial companies and some of the largest corporations. The problem is that it is hard to maintain corporate profits in a recession. Also, it’s hard to have sustainable growth from big corporations; they’re like trees; once they reach a certain height, they stop growing. Look back to the Fortune 500 list from 1995; less than half the firms on that list are still on the list today.

And businesses aren’t investing for the future. A major factor in the first quarter contraction was lower gross private domestic investment; a smaller increase in inventories accounted for most of that, but we also saw a drop in investment in non-residential structures, investment in equipment, investment in information processing equipment; countered by a slight increase in investment in intellectual property; that’s tricky to measure because it could be money spent on research and development or it might be money spent on movies. Lower investment accounted for about 2% of the 2.9% drop.

For the last few decades, every boom has depended on housing; same strategy today. The problem is that boomers will not start upgrading now in their 60s. And the young ones expected to pick up the baton are full of debt. And the housing numbers seem to back it up. We did see a big jump in new home sales for May, but that was mainly confined to the South, meanwhile existing home sales barely inched forward, and it appears the big run in home sales has happened and now we’re leveling out. Any boost from housing has already hit.

And this is the recurring theme of the recovery, it’s just around the corner.

No, not that corner, the next corner.

The Supreme Court is still dishing out decisions; two more today, but not the big one on Hobby Lobby; that will probably come on Monday. Today we heard about buffer zones and recess appointments.

The Supreme Court ruled on McCullen v. Coakley, striking down a Massachusetts law requiring protesters to stay at least 35 feet from an abortion clinic's entrance and walkways. In a unanimous opinion, the court held that such buffer zones violate First Amendment free speech rights.

Only three other states, Colorado, Montana and New Hampshire, have buffer zone laws on the books, but the Massachusetts zone was the largest. The Massachusetts law was passed after 2 clinic workers were shot and killed by a gunman outside a clinic in 1994. In 2000, the Supreme Court upheld Colorado's 8-foot "floating" buffer zones around individuals as they walk into and exit an abortion clinic.

Chief Justice Roberts delivered the opinion of the court. "It is no accident that public streets and sidewalks have developed as venues for the exchange of ideas." Roberts said: “Even today, they remain one of the few places where a speaker can be confident that he is not simply preaching to the choir. With respect to other means of communication, an individual confronted with an uncomfortable message can always turn the page, change the channel, or leave the Web site."

The court was silent on the free speech rights of protesters confined to “free speech pens” around political conventions, and buffer zones around churches, and funeral services, and for that matter, the buffer around the Supreme Court building in Washington DC.

Also today, the Supremes ruled unanimously in NLRB v Noel Canning that President Obama had violated the Constitution in 2012 by appointing officials to the National Labor Relations Board during a short break in the Senate’s work when the chamber was convening every three days in short pro forma sessions when no business was conducted. Those breaks were too short, Justice Stephen G. Breyer wrote in a majority opinion joined by the court’s four more liberal members.

A ruling could cast a cloud over the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. Justice Breyer added that recess appointments remain permissible so long as they are made during a break of 10 or more days. But many experts say that if either house of Congress is controlled by the party opposed to the president, lawmakers can effectively block such appointments by requiring pro forma sessions every three days. Each house must get the approval of the other chamber for recesses of more than three days. Somebody shows up, claims the Senate is in session, and they hold a fake session and that’s that.

The decision affirmed a broad ruling last year from a federal appeals court in Washington that had called into question the constitutionality of many recess appointments by presidents of both parties. The appeals court last year said that presidents may bypass the Senate only during the recesses between formal sessions of Congress. Two of the three appellate judges went further, saying that presidents may fill only vacancies that arose during that same recess. The Constitution’s recess-appointments clause says, “The president shall have power to fill up all vacancies that may happen during the recess of the Senate.”

And while today’s ruling is being hailed as a major blow to executive power, in practical terms, today’s ruling no longer really matters. That’s because the Senate majority has since eliminated the filibuster on executive and judicial appointments that was the cause of this whole mess to begin with.

After the DC Circuit Court of Appeals ruled last year that the NLRB appointments were illegal, President Obama renominated appointees to fill those slots and submitted them to the Senate. What happened? Senate Republicans filibustered them forever, of course. Eventually, Senate majority leader Harry Reid got fed up and triggered the “nuclear option”: a Senate rules change that would require only 50 votes, instead of 60, to invoke cloture on executive and judicial nominations. The NLRB nominees, and several others that had been held up, made their way through.

Yesterday, the Supremes ruled that law enforcement can’t search your smartphone without a warrant or a really, really good reason why they don’t need a warrant.  Of course, police can search all sorts of things without a warrant, and the solicitor general had argued that cell phones were not that different than briefcases or purses that are regularly searched when you enter a federal building or an airport.

Chief Justice Roberts said: “Cellphones differ in both a quantitative and a qualitative sense from other objects that might be kept on an arrestee’s person.” He went on at length to describe the differences, noting that a cellphone can reveal more private information than the search of an entire house. The phone contains “the sum of an individual’s private life” he said; searching it without a warrant is constitutionally unreasonable. The chief justice’s response to the government’s warning that a warrant requirement would impede law enforcement was basically a shrug: “Privacy comes at a cost.”

What we learned is that Supreme Court justices now have and use smart phones.

The best line yesterday came on the NBC Nightly News when Brian Williams, followed the report by asking the reporter if this will have any effect on the NSA’s ability to electronically dig into our cell phone records without warrants.

That Brian Williams is a real comedian.

Wednesday, June 25, 2014 - Use Your Library Card at a Copy Shop for a Horseback Ride to the Moon

Use Your Library Card at a Copy Shop for a Horseback Ride to the Moon
by Sinclair Noe

DOW + 49 = 16,867
SPX + 9 = 1959
NAS + 29 = 4379
10 YR YLD - .02 = 2.56%
OIL + .74 = 106.77
GOLD - .60 = 1319.40
SILV + .09 = 21.12

One of the jobs of the Commerce Department is to calculate the gross domestic product of the country; clearly it is a difficult task to figure out the value of all the goods and services produced, and so they tend to revise the numbers as they gather information. In April the Commerce Department figured the economy grew, just barely, 0.1% in the first quarter; last month they revised their GDP numbers to negative1.0%; today they revised GDP even lower. The economy shrank by 2.9%.

To understand the big move, you first have to realize that the GDP number is supposed to measure everything; construction and demolition, marriages and divorces, broccoli sales and cigarette sales, yoga classes and cancer treatments. One of the big reasons for the negative number is that the cost of healthcare dropped significantly.

The US spent $6.4 billion less on health care in the first quarter than in the last quarter of 2013. Government statisticians initially forecast a 9.9% increase in health-care spending, and what we got was a 1.4% decline. Considering all the millions of previously uninsured people who are gaining access to health insurance under the Affordable Care Act, how can they be shrinking so dramatically?

Health-care costs overall have been increasing more slowly in recent years compared with the pace before the 2007-09 recession. Slow growth in the price of health-care services combined with a decline in the amount of health care people consumed in the first quarter. Still, health-care spending is expected to accelerate again in coming quarters as the millions of people who gained health insurance coverage during the Affordable Care Act’s first open enrollment period begin to use their new coverage. Most people who got coverage at the start of the year, are just now figuring out how to use the coverage. So, the idea that people are spending less on health care may hurt the GDP number but that doesn’t mean it’s a bad thing. This also means that the economists don’t really understand how Obamacare is affecting the economic data; and that means they don’t really know how long it will distort data. This is new territory.  

A couple of other areas were also involved in shrinking the economy. Companies continue to hoard cash and shun investing in new equipment or new employees; and that will continue until demand picks up; we’ve been told demand will pick up, any day now…, it’ll pick up…., that’s what we’ve heard for a few years.

Another rough spot for GDP was in trade. The trade deficit widened in the first quarter, which would typically indicate growth, but in the first quarter both imports and exports dragged down growth. And then trade was disrupted by the weather, the excuse that keeps giving and giving.  And now that the winter has turned to spring and spring to summer, the economy will bounce back like a kangaroo on a trampoline. Maybe. Consider that when the economy shrank in the first quarter of 2009, the country lost 2.3 million jobs and the markets were in a free fall. Fast forward to first quarter 2014 and the markets are around record highs while the country added about 600,000 new jobs; hardly the stuff of gloom and doom.

Today’s GDP revision might give the Federal Reserve cause for pause, or more likely it will reinforce their dovish inclinations for monetary policy. On the fiscal side, if policymakers in Washington are concerned enough to give the economy a boost, they can consider straightforward measures that would promote growth and create jobs: invest in infrastructure, restore extended unemployment benefits, hire public-sector workers like teachers and first responders, and basically abandon austerity measures in general.

You may remember the gloom and doom days of 1973, when OPEC imposed an oil embargo; prices jumped, lines formed at gas stations to buy rationed gas. Lawmakers responded by limiting the export of oil from the US; we could still export gasoline and diesel but not oil. It didn’t make much common sense but that was the response to the embargo. Things have changed.

Now, oil drillers are tapping shale formations and so much oil is flooding out of the ground that prices for ultralight oil have dropped as much as $10 below the price of traditional crude oil. Which sounds good if you are a consumer, because you might think it would result in lower prices at the pump. But as you know, the price at the pump has been going up because of the crazies in Iraq, and Libya, and Ukraine. Rather than let the oil build up and let prices drop, the plan is to export that oil under a process known as a private ruling which would relax the export restrictions.

The private rulings by the Commerce Department define some ultralight oil as fuel after it has been minimally processed, making the oil eligible for sale outside the US. Export could start in August, and could increase to more than 700,000 barrels a day by next year. The Commerce Department has given permission to two companies to ship ultralight oil: Pioneer Natural Resources and Enterprise Products Partners.

So if you were hoping that all that domestic oil drilling would lead to lower prices for America, yea, that’s not going to happen.

Have you ever been on the floor of one of the commodity exchanges, or maybe seen pictures of the commodities traders? Thirty years ago, the scene was a violent confrontation of traders battling it out in the pits. Nowadays, the trading is much more subdued. Traders walk around with a portable computer that calculates the price in real time. That formula that is on every commodity trader’s computer is a continuous time option pricing model known as the Black-Scholes-Merton formula. Robert Merton and Myron Scholes won the 1997 Nobel Prize in Economics for their formula; Fisher Black passed away in 1995.

Robert Merton went on to create computerized arbitrage trading formulas and he advised hedge funds for a while, including the Arbitrage Management Company and Long Term Capital Management. He then settled down to work as a professor at MIT, where his current academic include financial innovation, controlling macro financial risk, and managing sovereign risk.

Bob Merton says your 401K is dangerous. In an article published in the Harvard Business Review, Merton writes: "The only way to avoid a catastrophe is for plan participants, professionals, and regulators to shift the mind-set and metrics from asset value to income."

Instead of telling you how much you’ve accumulated in your 401K, the plan administrators should be telling you the amount of sustainable income an employee can expect to receive in retirement. The “risk is retirement income uncertainty, not portfolio value.” That's not to say that 401k money shouldn't be invested in stocks. In fact, Merton says, 401k investment managers should invest participants' savings in a mixture of "risky assets," including equities, and "risk-free assets," such as long-term US Treasurys and deferred annuities. Merton says the solution  for employees who want to lock in retirement income, “the obvious decision is to buy the annuity.”

By disclosing annual income, Merton says, employers would help employees quickly and easily calculate how much of their annual salary they can expect to replace in retirement, together with Social Security. As a result, employees would be better able to take action to ensure they are on track to retire as planned.

The Supremes are in session and handing down decisions on a daily basis. Let’s start with American Broadcasting Company v Aereo; the Supremes delivered a major victory to the nation’s television networks, ruling that an upstart Internet company was violating copyright laws by transmitting their programs without paying for them. It was a 6-3 vote; in the majority, Justice Breyer said Aereo’s use of modern technology to stream broadcast television was not much different than cable systems that must pay the networks for its content. Meanwhile, in the minority, Justice Scalia said that Aereo is a copy shop that gives its customers a library card. I’m not sure how you might use a library card at a copy shop, but anyway, Kinko’s is out of business and so is Aero.

Today the Supremes also ruled on a couple of fourth amendment cases. The Fourth reads, in part: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause…” and apparently your smartphone falls under the category of “papers and effects”.

 Riley v. California and United States v. Wurie featured similar facts. Defendants were detained validly, one for driving with expired tags and the other for a hand-to-hand drug sale. Police searched them, as they had every right to do, and seized their phones. Without getting a warrant, they looked at the contents of each phone and found evidence that led, eventually, to much more serious charges: gang-related attempted murder in the first case and drug distribution and weapons violations in the other.

California state courts refused to overturn Riley’s conviction when he appealed the attempted murder charge, but the 1st Circuit Court of Appeals reversed Wurie’s conviction and ordered a new trial on the grounds that the warrantless search violated the Fourth Amendment’s prohibition against “unreasonable searches and seizures.”

Police can search a suspect’s pockets, or briefcase, or car when making a valid arrest because there may be weapons nearby or evidence of crime that could be lost. In addition, officers can search when there are “exigent circumstances,” meaning when there is no time to lose, in order, say, to stop a crime in progress, prevent suspects from destroying evidence, or rescue a kidnap victim. Prosecutors in both cases argued that searching a cell phone is really just the same thing as the valid search of personal items. Chief Justice Roberts didn’t buy it, replying, “That is like saying a ride on horseback is materially indistinguishable from a flight to the moon.”

Roberts wrote the opinion for the unanimous decision and concluded: “We cannot deny that our decision today will have an impact on the ability of law enforcement to combat crime… Privacy comes at a cost.”

Tuesday, June 24, 2014 - A Funny Thing Happened

A Funny Thing Happened
by Sinclair Noe

DOW – 119 – 16,818
SPX – 12 = 1949
NAS – 18 = 4350
10 YR YLD - .04 = 2.58%
OIL + .81 = 106. 84
GOLD + .70 = 1320.00
SILV + .03 = 21.03

Let’s start with a couple of reports on housing; the Commerce Department says new home sales increased 18.6% to a seasonally adjusted annual rate of 504,000 units, the highest level since May 2008. The increase in sales was the biggest since January 1992. Compared to May of last year, sales were up 16.9%.

Meanwhile, the S&P/Case-Shiller index of existing home prices rose 0.2% in April; the smallest gain since March of last year, with the year-on-year increase slowing to 10.8%.

Today’s reports seem to indicate a strong new home market and a weak existing home market, but that’s probably not quite accurate. Homebuilders are working through inventory, while existing home inventories are low and starting to rise; for existing homes that means we’ve mainly worked through most of the distressed sales that were out there. The housing market is moving forward modestly, but also in fits and starts.

The Conference Board said its index of consumer confidence rose to 85.2 from 82.2 in May, with optimism about the labor market. June's reading was the highest since January 2008. Consumers think jobs are more widely available. The survey found 14.7% of consumers think jobs are “plentiful,” the best reading since May 2008, while the share characterizing jobs as “hard to get” fell to a three-month low of 31.8%.

While government data showed confidence at January 08 highs, Gallup's latest survey shows, only one in five Americans (22%) say the economy is excellent or good, while 34% say it is poor; and worse still, Americans continue to be less optimistic about the economy's future:  38% say the economy is getting better, while 58% say it is getting worse; the worst differential since 2013. Gallup's US Economic Confidence Index lost another point last week, the third week in a row, dropping to its lowest in over 2 months.

Not much confidence in the equity markets today. I haven’t seen anything earth shattering that would explain why stocks moved from positive to negative territory, and even with the rollover, the major indices still didn’t drop a full percentage point; 119 points ain’t what it used to be. The S&P 500 closed down more than half a percent for its sharpest loss since June 12, after setting a fourth record high in five sessions. Maybe its concern about Iraq, maybe the high frequency traders ran out of shorts to squeeze.

A funny thing happened in Russia today; President Putin appeared to back away from the fight with Ukraine; Putin asked Russia’s upper house to revoke the right it had granted him to order military intervention in Ukraine. At the same time, pro-Russian insurgents in eastern Ukraine shot down a Ukrainian helicopter killing 9 servicemen.

There is no backing off the fighting in Iraq, where a dire situation has gone from bad dream to nightmare in two weeks of fighting that have seen Sunni Muslim gunmen assert control over a growing area, including at least two towns that lie on a crucial supply route linking Baghdad, the capital, with the mostly Shiite Muslim south.

Secretary of State John Kerry urged Kurdish leaders to remain part of Iraq, as fighters from local Sunni tribes wrested control of at least part of Iraq’s largest oil refinery after battling for days with government troops over the key facility. Armed tribal factions from the Baiji area breached the refinery complex 140 miles northwest of Baghdad.  Kerry flew to the Kurdish region on a trip through the Middle East to rescue Iraq following a lightning advance by the Sunni fighters led by jihadis of the Islamic State in Iraq and the Levant. U.S. officials believe that persuading the Kurds to stick with the political process in Baghdad is vital to keep Iraq from splitting apart. Washington has placed its hopes in forming a new, more inclusive government in Baghdad that would undermine the insurgency. Kerry aims to convince Kurdish leaders to join it. Something will likely tip one way or the other in the next week or two.

The spike in instability in several oil producing regions around the world is threatening to knock some production offline, but it is also boosting profits for drillers operating in trouble-free zones. Oil prices have hit their highest levels in almost 9 months as places like Iraq, Syria, Ukraine and Libya continue to experience violence and political upheaval. For companies with heavy investments in these regions, the situation is perilous, but for oil companies elsewhere, the higher price is good news.

Oil markets could be looking at an extended period of elevated prices, which is bad news for companies with billions invested in Iraq. ExxonMobil and BP already started evacuating some of their workers from southern Iraq, despite the fact that militants remain north of Baghdad. But for companies drilling far from the violence – in Texas for example – a $5 per barrel increase in prices can be the difference between whether or not an oil project is economically viable. Oil companies are using the opportunity to step up drilling. The Eagle Ford shale in southern Texas, for example, saw four more oil rigs and one gas rig come into operation over the past week. Across the U.S., the number of oil rigs in use reached 1,545 -- the highest level since record keeping began in 1987.

The Supreme Court has ruled on the case of Halliburton v. Erica P. John Fund. Halliburton is trying to block a class-action lawsuit claiming the company inflated its stock price. A group of investors claims they lost money when Halliburton's stock price dropped after revelations the company misrepresented revenues, understated its liability in asbestos litigation and overstated the benefits of a merger.

Writing for the court, Chief Justice John Roberts said companies should have a chance in the early stages of a lawsuit to show that any alleged fraud was not responsible for a drop in the company's stock price. The Supremes did not overturn a precedent setting case that might have ended class action suits completely. The old case is Basic v.  Levinson, and it established the theory of “fraud on the market”, or the idea that shareholders who claim fraud don’t need to show they relied on specific false statements. The theory presumes a company’s false statements inflated its stock price. This seems to make sense; if a company lies about its revenue, lies about its liabilities, lies about the benefits of a merger that will inflate the stock price; but I suppose you could also argue the stock price might be inflated because the economy improves or because algorithmic traders inflated the price or maybe the moon and stars were aligned in a particular way.

The truth is that it is nearly impossible to pinpoint exactly why stock prices go up; but it is possible to identify when a corporation lies about revenues, liabilities, and benefits. The Supreme Court seems to be saying that it’s O.K. for corporations to lie, so long as nobody can prove a direct link between the lies and the share price.

The case now goes back to the lower courts, where Halliburton will have another chance to block the investors from joining together as a class.

Just a reminder, the Sabanes Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, was supposed set a new standard for all public companies, and top management to certify the accuracy of financial information or face possible punishment of up to 20 years in prison. When President Bush signed it into law he said: “The era of low standards and false profits is over; no boardroom in America above or beyond the law.”

A funny thing happened over the past 14 years: nobody has been convicted of criminal wrongdoing under Sarbanes Oxley, at least as best we can tell. There may have been some civil charges, but the “Justice Department doesn’t directly track Sarbanes-Oxley prosecutions, so there may be another case here or there. Even four or five SOX criminal cases in 10 years, though, makes them as rare as a blue moon.” (see Reuters)

There’s a new report on climate change predicting serious consequences, especially for American businesses. The funny thing about this report is that it comes from a panel chaired by former New York City Mayor Michael Bloomberg, former Treasury Secretary Hank Paulson and hedge fund manager turned climate activist Tom Steyer. It includes devastating forecasts for American companies, including dramatic declines in agricultural yields, loss of productivity due to intense heat and up to $35 billion spent dealing with coastal storms.

Bloomberg said “Climate change is costing governments and businesses billions of dollars,” and he hopes it "will mobilize the business community and forge a consensus for leadership across the aisle." Paulson says he now believes that “climate change is the existential issue of our age." Paulson also penned an op-ed in the New York Times last weekend warning of a "climate bubble" that poses risks to the economy just like the credit bubble did in 2008.

Steyer, a billionaire who has pledged to spend millions electing pro-climate-action politicians, said he hopes that the report will help "change the spreadsheet for American business" as companies calculate risks and opportunities. The business community, he said, should "get to a point where calculation of the value of a company includes how they are responding to this problem."

Monday, June 23, 2014 - Calm Before the Storm

Calm Before the Storm
by Sinclair Noe

DOW – 9 = 16,937
SPX – 0.26 = 1962
NAS + 0.64 = 4368
10 YR YLD un = 2.62%
OIL  - .13 = 106.04
GOLD + 3.60 = 1319.30
SILV + .02 = 21.00

The economic data today from the National Association of Realtors shows existing home sales picked up in May. Total sales rose 4.9% to 4.89 million units from an upwardly revised 4.66 million in April. While that marks a month to month increase, sales are down from the 5.15 million level of May one year ago.  Total housing inventory increased 2.2% in May. Unsold inventory is 6% higher than a year ago.

Meanwhile, Markit's US Flash manufacturing PMI report for June, increased to 57.5 from 56.4 in May.

The stock market has drifted slightly higher over the past couple of months. Yes we hit record highs last week, but the movement has been very slow, volume has been light, and volatility is almost non-existent. Volume is down about 50% since 2008. The VIX, or volatility index, sometimes known as the fear index, is down below 12, which means that the only people in the options market are all maxxed out on Ambien, or Valium. The S&P 500 hasn’t had a daily move of 1% in more than 2 months. Russia invades Ukraine – wake me when it’s over. Radical militants threaten to tear apart Iraq – we’ve seen this story before. The US economy is weak right now but growth is right around the corner – rinse, lather, repeat. The US plays Portugal in the World Cup and it’s a tie, of course.

The Federal Reserve looked at monetary policy and cranked up the old Xerox to publish their statement. Maybe this is the result of all that Federal Reserve fiddling; maybe they have created the boring stock market, which lulls everyone into a false sense of complacency. Of course, that’s not how markets work, no matter how much central bank finesse is applied. Markets are risky, always have been, always will be. I think it’s safe to say this is the calm before the storm, because there is always a storm in the markets.

There was some merger activity today. General Electric struck a deal to acquire France-based Alstom's power business for $16.9 billion after a lengthy pursuit. There was another utility deal, Wisconsin Energy announced a deal to acquire Integrys Energy for $9.1 billion. Oracle also announced a deal to acquire MICROS Systems for $4.6 billion.

The price of oil has been one of the few markets to show movement, which is not good news for drivers. Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given the recent jump in oil prices, gasoline prices are poised to increase in coming weeks. Higher prices at the pump serve as a tax on consumers, whose purchasing power is still questionable. It’s estimated that an increase of $10 a barrel subtracts 0.4% from real GDP growth. Of course, for that to apply, the price increase has to stick.

The Supreme Court is in session and today they ruled on limiting the Environmental Protection Agency’s power to regulate facilities that emit carbon dioxide. The decision would reduce the number of carbon-emitting facilities the EPA can regulate, but it is a limited ruling, and even Justice Scalia said: "It bears mention that EPA is getting almost everything it wanted in this case."

Meanwhile a statement from the EPA claims victory, "The Supreme Court’s decision is a win for our efforts to reduce carbon pollution because it allows EPA, states and other permitting authorities to continue to require carbon pollution limits in permits for the largest pollution sources." Industry groups, such as the American Petroleum Institute, also claimed victory. The group said in a statement that the decision was a "stark reminder that the EPA's power is not unlimited."

The decision won't have a huge impact on US climate policy, as the decision only modestly changed the number of large facilities subject to certain permitting requirements. It also won't affect the Obama administration’s proposal to reduce emissions from power plants, which is a separate program.

When the EPA classifies something (like carbon dioxide) as a harmful pollutant, it triggers a number of legal requirements under the Clean Air Act. One of them, known as a "prevention of significant deterioration" (PSD) rule, requires factories, power plants, and other large facilities to get the EPA's approval before they make changes that would lead to higher pollution. These facilities also must use the "best available control technology" to reduce the effects of pollution they emit. Another provision requires any facility that is a "major source" of pollution to get a permit from the EPA.

Under the Clean Air Act, facilities become subject to these regulations if they emit more than 250 tons (or in some cases as little as 100 tons) of pollution per year. Traditional pollutants such as sulfur dioxide or lead can be harmful even if they are only emitted in trace amounts, so a relatively low threshold makes sense. Only large factories and power plants emit that much of these conventional pollutants.

But carbon dioxide is different. Factories produce vastly more carbon dioxide than other pollutants regulated by the EPA. Under existing rules, about 15,000 facilities are required to get permits under the Clean Air Act based on their emissions of non-carbon pollutants. If the EPA had used the same 250-ton threshold for carbon dioxide emissions, 6.1 million facilities would suddenly have needed permits. The agency estimated it would cost $21 billion per year just to process all that paperwork.

So the agency effectively re-wrote the law, exempting facilities that emitted less than 100,000 tons of carbon dioxide from getting a permit. Several states and business groups challenged this decision, arguing that the EPA had no authority to unilaterally re-write the law.

Almost everyone agrees that a literal reading of the Clean Air Act would lead to madness. The EPA has warned that "decade-long delays in issuing permits would become common, causing construction projects to grind to a halt nationwide." The Supreme Court didn't want that to happen.

But a majority of the court, led by Justice Scalia, also didn't like the EPA's approach. The court said that if Congress set a threshold of 250 tons, the EPA can't just unilaterally change it to 100,000 tons. Instead, the court's majority held that the term "air pollutant" can have different meanings in different parts of the Clean Air Act. While the "Act-wide definition" of air pollutant includes carbon dioxide, Scalia wrote, "EPA has routinely given it a narrower, context-appropriate meaning" in certain parts of the Clean Air Act. Scalia used the same trick to avoid subjecting millions of facilities to burdensome permitting requirements. He held that the definition of "air pollutant" didn't include carbon dioxide in sections of the Clean Air Act where including it would lead to a vast expansion in regulation.

The court's four liberals, led by Justice Stephen Breyer, preferred a different approach. Rather than selectively interpreting "any air pollutant" to exclude carbon dioxide, Breyer would instead have interpreted another phrase in the same section of the law, "any source" to exclude power plants that produce only modest amounts of carbon dioxide.

Two of the court's conservatives, Samuel Alito and Clarence Thomas, wrote a separate opinion arguing that the Supreme Court had been wrong to push the EPA into regulating carbon dioxide in the first place in 2007.

While the EPA can't impose regulations on new power plants based on their carbon dioxide emissions, the court ruled that the courts can regulate the carbon dioxide emissions of facilities that are already subject to regulations based on their emissions of conventional pollutants. So the EPA will still do what the EPA does; it’s estimated that 83% of greenhouse gas emissions that could potentially be regulated under the Environmental Protection Agency's interpretation of the law would still be covered as a result of the ruling, compared with the 86% of emissions that the EPA says it wants to regulate.

What today’s ruling really shows is that Congress has been out of touch and dysfunctional in dealing with pollution and climate change; rather than deal with issues, they stick their heads in the sand and hope the problem goes away, but it doesn’t; it simply shifts to another part of government that may or may not manage to resolve the problem, but in either case, is not held accountable to the voters; and then finally, if the problem persists, it goes to the courts. It’s a bad way to make and enforce laws.

A couple of other cases today: in Loughrin v. US; the court declined to reduce the scope of a federal criminal law against bank fraud, ruling that prosecutors do not need to prove that defendants intended to defraud a bank. The decision came in an appeal brought by Kevin Loughrin, who was convicted of six counts of bank fraud for stealing checks that he then altered so he could buy merchandise at Target stores.

Loughrin told police he meant to buy the items using the checks, then return the items for cash refunds. He was charged with using altered checks totaling $1,184.  Loughrin appealed his conviction. He argued that the bank fraud statute required prosecutors to prove that he intended to defraud the banks on which the checks were drawn. He said his intent was only to deceive Target. In other words, this was run of the mill fraud, and the use of a check was incidental. Loughrin did not appeal his related convictions for identity theft and possession of stolen mail. Between 2006 and 2010, the government sought to prosecute nearly 3,000 cases using the statute. Meanwhile, no major bankers have gone to jail for the crimes associated with the financial crisis; I’m just saying.

One more decision today: New Jersey wanted to institute legalized gambling on football, passing a law that the NFL and other sports leagues quickly fought in court.  The NFL won (as it often seems to do in court) at the federal appellate level, forcing New Jersey to take the case to the Supreme Court. The Supremes declined to review the case, so if you are in New Jersey, or any other state except Nevada, you’ll have to continue to call your bookie, or you can play fantasy football in a league set up through the NFL’s website.