Wednesday, July 02, 2014 - Milk and Cookie Binge

Milk and Cookie Binge
by Sinclair Noe 

DOW + 20 = 16,976
SPX + 1 = 1974
NAS – 0.92 = 4457
10 YR YLD + .07 = 2.63%
OIL – 1.18 = 104.16
GOLD + 1.10 = 1328.20
SILV + .18 = 21.25

Record highs for the Dow and the S&P 500. We celebrate with milk and cookies. It’s good, it’s wholesome.

Unlike Goldman Sachs, which apparently likes to celebrate with binge drinking at strip clubs; at least that’s the accusation by 2 former Goldman employees suing Goldman for discrimination against women. Support for their claims includes statements of former Goldman Sachs employees, expert statistical analyses and evidence on earnings and promotions from the firm’s own records. According to filings with the court, female vice presidents earned 21 percent less than men and female associates made 8 percent less, the former employees claimed; about 23 percent fewer female vice presidents were promoted to managing director of the bank relative to their male counterparts.

We’ll stick with milk and cookies.

Tomorrow we’ll get the monthly jobs report, one day early due to the holiday shortened weekend. Today we got the ADP Employment Report showing private nonfarm payrolls increase 281,000 in June. That’s the best ADP report since the fall of 2012. That would be a very good number indeed if it translates to the government report tomorrow. The ADP report should not be used as a predictor of the government jobs report. Both reports tend to move in the same direction in the long term, but month to month fluctuations can be quite pronounced. It is expected tomorrow’s report will show 215,000 net new jobs in June.

Here’s another indicator; the ISM manufacturing employment index was unchanged in June at 52.8%; the historical correlation between the ISM employment index and the BLS employment report suggest the economy lost about 5,000 manufacturing jobs in June; the ADP report showed the economy added 12,000 manufacturing jobs last month.

The best way to boost the economy is to have more people working, which then equates to more people spending. Even though the unemployment rate has dropped to 6.3%, that’s still high; and long term unemployment is still a problem, and indicates there is still slack in the labor market. Just as important as the number of jobs created is the quality of the jobs created. For several years, the trend has been for lower paying jobs, where wages are below the average of $24.38 an hour. There has been some improvement this year, with 61% of the 1.07 million new jobs in 2014 paying above the average hourly wage. So, keep an eye on wage growth in tomorrow’s report; it will be a critical component in overall GDP growth.

So, as we wait for the jobs report, we are left to question whether the economic recovery is really gaining traction. Dr. Copper says yes. Copper closed at its highest price in more than 4 months. Copper for September delivery gained 6 cents, or 1.9 percent, to settle at $3.27 a pound. Since copper is an industrial metal used in everything from buildings to cars, it’s considered a good economic indicator, however it might be a better indicator of growth in China, the world’s largest buyer  of copper.

Federal Reserve chairwoman Janet Yellen delivered a speech to the International Monetary Fund and she says the Fed has the right focus on jobs and inflation, and should leave stability concerns to regulation. Many economists and investors are concerned the Fed’s policies have fostered potential financial asset bubbles. Yellen said today: “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

Yellen said she saw pockets of increased risk-taking across the financial system that could warrant a more "robust macroprudential approach" if those concerns grew.

BNP agreed on Monday to pay almost $9 billion while admitting criminal violations of United States sanctions. BNP admitted to funneling and hiding some $30 billion in transactions to Iran, Sudan, and Cuba. The bank will also be barred from clearing any financial transactions in dollars for a year starting in January. Credit Suisse and a subsidiary of UBS also pleaded guilty recently to tax avoidance and interest-rate rigging, respectively. JPMorgan Chase, Bank of America and other United States banks have paid billions of dollars in penalties but have, so far, avoided criminal liability. The French government says that’s not fair.

And while it might be easy to dismiss the French for whining, they are correct. New research suggests that overseas firms like BNP Paribas do in fact pay bigger fines and plead guilty more often than United States companies. United States criminal fines from 2001 to 2010 were about five times greater on average for foreign firms than for their American counterparts. The average penalty was 22 times bigger for foreign companies after adjusting for the type of crime and whether the company was listed. One reason may be that prosecutors single out only the most serious cases abroad. Another reason might be because prosecutors are afraid of hurting a domestic business. Another reason might be that prosecutors are spineless wimps in the face of the political clout of US banks.

What we have learned is that businesses and investors don’t seem to care about the criminal convictions of Credit Suisse and BNP and that might signal that if a conviction will not shut down the company, then there’s no reason not to convict, international or domestic.

Yesterday we told you about that creepy experiment by Facebook, designed to make you feel good or bad by filtering out good or bad content. Facebook faces a government investigation in Europe over its study of whether manipulating people's news feeds could change their emotions. Facebook won't be helped by the fact that the company didn't alter its terms of service to disclose to users that their posts would be used for research until four months after the experiment took place.

The implementation of the European Union's so-called "right to be forgotten" policy is already having a worrying impact on the media, with at least two outlets revealing on Wednesday that links to articles of theirs have been scrubbed from Google. A European court ruled in May that Google must remove links to articles from its search engine if the subjects of the post asked it to. The court specified that links could be scrubbed if they were "inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed."

When the ruling came down, some worried that it would place too much power in the hands of public figures who wished to have unflattering information about themselves hidden. On Wednesday, the Guardian and the BBC both disclosed that just such an occurrence seemed to have taken place with stories of theirs. The Guardian case involved 6 articles that were taken down from Google’s European platforms. The BBC case involved Stan O’Neal, the former head of Merrill Lynch, implicated in the subprime mortgage scandal. Is the data in the BBC report "inadequate, irrelevant or no longer relevant"? Hmm.

Solar installers SolarCity and SunRun have filed a lawsuit against Arizona’s revenue department over the state’s decision to apply property taxes to third-party solar-power systems. SolarCity and SunRun have popularized leasing, rather than owning, residential rooftop systems. The companies install and maintain the systems in return for monthly payments that are generally less than a homeowner’s monthly power bill. 

Arizona’s revenue department last year decided to tax leased solar panels, resulting in $152 extra in property taxes for the first year of a homeowner’s leased $34,000 solar panel array, a charge that would decrease as the value of the array goes down; still it’s a large enough increase to wipe out most or all of the savings from going solar. Until last year, both owners and leasers of solar panels didn’t have to pay property taxes. There are concerns that applying taxes on systems would wipe out the savings from solar leasing and stunt solar-power growth in Arizona.

Wednesday, June 04, 2014 - An Airtight Defense

An Airtight Defense
by Sinclair Noe

DOW + 15 = 16,737
SPX + 3 = 1927 (record close)
NAS + 17 = 4251
10 YR YLD + .01 = 2.60%
OIL - .27 = 102.39
GOLD – 1.30 = 1244.60
SILV - .01 = 18.90

Eight times a year the Federal Reserve gathers economic updates from the 12 districts and publishes the information about two weeks before its FOMC meetings. The data is published in a beige folder, and that is why it is called the Beige Book, although it might actually refer to the writing style. Anyway, economic activity expanded all across the country, with most districts reporting moderate or modest growth. Consumer spending expanded across almost all districts. Tourism was another bright spot and manufacturing activity expanded across the country. Home sales were described as “mixed across the country” even as home prices continue to rise. Labor markets were described as steady. Inflation was tame, with a slight exception for higher food prices in some areas.

In other words, when the Fed meets in a couple of weeks, there won’t be any big changes in monetary policy.

The Institute for Supply Management said its services index rose to 56.3%, its highest level since August, from 55.2% in April. That’s the number and they’re sticking with it.

The US trade deficit grew to $47 billion in April, up from $44 billion in March. Exports slowed in April, down slightly to $193 billion. Imports, meanwhile, surged by nearly $3 billion to $237 billion, mainly driven by increased spending in consumer goods and cars.

A new survey from the MacArthur Foundation finds 70% of Americans still feel a housing crisis remains today and the worst is yet to come; that’s down from 77% a year ago, but still it doesn’t look like there’s much confidence in a housing recovery. Half the respondents think housing represents a good long term investment, while 43% says that’s not the case; two-thirds say it’s harder to build wealth through home ownership than 20 or 30 years ago. Over half of Americans, 52%, have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years.

In line with the survey on housing, a new poll from CNN and ORC International finds 59% of adults think the American Dream has become impossible for most to achieve, up from 54% in a poll conducted in 2006. What’s more, 63% of those surveyed believe most children in the US will grow up to be worse off than their parents. While most Americans say they’re better off than the prior generation, they also feel gains in living standards are grinding to a halt. One problem is that the survey didn’t define exactly what the American Dream is supposed to be.

ADP, the payroll processing firm, issues a monthly payroll report ahead of the Labor Department each month. The ADP report is not always an accurate predictor of the government report but it is still closely watched for any hints. ADP says the economy added 179,000 private sector jobs in May; that’s significantly below the consensus estimate of 200,000 to 215,000 jobs for the Friday jobs report.

According to the latest revisions from the Labor Department, productivity in the first quarter declined at a 3.2% annual rate, the worst in six years, as workers spent more time on the job producing fewer goods during an unusually stormy weather.

A new research study published today from the Economic Policy Institute shows a sharp disconnect in the late 1970s between the overall productivity of the US economy and wage gains for the average worker. Normally, when workers make more things during a work day, they get paid more for that day’s work. From 1948 to 1979, both hourly wages and productivity roughly doubled. But from 1979 to 2013, productivity rose 65% while average hourly compensation rose just 8%; those at the bottom and middle of the income ladder saw little of those gains.

Wages for everyone at or below the 30th percentile of the income distribution have essentially been flat, while wages for the poorest 10% of workers have fallen during that time period. At all income levels, women earn less on average than men do.  Most wage growth has flowed to the top 1% of earners, posting a 153% increase in wages. Since wages for the lowest income group have fallen while wages at the highest income group have grown, income inequality has also increased.  Piketty was right.

The S&P 500 index hit another record high close today, and even at that it’s just up about 5% year to date. The best performing market year to date is in Dubai; posting a 56% return since the start of the year and posting a 117% return for the past 12 months. The strongest S&P 500 subsectors this year include oil & gas equipment and services, which is up 17%; oil & gas exploration and production, up 15%; real estate investment trusts, up 15%; natural gas utilities, up 21%; and electric utilities, which have risen 14%, largely on the back of some big mergers.

The top performing stocks in the S&P year to date include: Forest Labs, up 60%, a takeover target; Nabors Industries, a contract oil driller based in Bermuda is up 54% year to date; Electronic Arts, the video game developer is up 51%; Keurig Green Mountain has returned 50% this year, this is the coffee company that makes those little single serve containers of coffee; Newfield Exploration, an oil and gas exploration and development company out of Texas is up 49% since the start of the year; Delta Airlines is up 47% after rejoining the S&P 500 index; and Pepco, the Washington DC based utility is up 47% YTD, after agreeing to be acquired by Exelon. Probably nobody picked those stocks as the top performers at the start of the year.

After the close of trade today, comes word that Sprint is nearing an agreement price to acquire T-Mobile for about $40 a share, or around $32 billion, a 17% premium to the closing price today. There will be regulators to deal with. An announcement and an actual deal are still down the road. If you are unhappy with the service and price you pay for your mobile phone, this won’t help.

A federal appeals court has overturned a decision by Judge Jed Rakoff to reject a federal settlement deal with Citigroup. Judge Rakoff had considered the Citigroup-SEC settlement to be little more than a slap on the wrist. The original case accused Citigroup of duping investors into buying tainted CDO’s, Collateralized Debt Obligations. The bank agreed to pay $285 million to settle the civil fraud case, without admitting wrongdoing.

Judge Rakoff called the fine “pocket change” for the bank and said the settlement deprived the public “of ever knowing the truth in a matter of obvious public importance.” And now the court of appeals decision is going to rein in judicial discretion even more. The ruling essentially says that a judges job is not to search for the truth.  One small victory for Judge Rakoff: the SEC last year reversed its longstanding yet unofficial policy of allowing companies to neither “admit nor deny wrongdoing,” signaling that it would force admissions in particularly egregious cases.

If only the SEC had the backbone to pursue a particularly egregious case.

The G-7 or Group of 7 is meeting today and tomorrow; it used to be the G8 until Putin invaded Crimea, and so Russia was kicked out of the clubhouse. A draft of the G7 communique calls on Russia to "accelerate withdrawal of military forces from the eastern border with Ukraine" and "exercise its influence among armed separatists to lay down their weapons".

More important is how Europe will deal with energy security as the continent relies on Russia for about a third of its oil and gas, a fact that gives Putin considerable leverage over the EU. The G7 draft communique says: "The use of energy supplies as a means of political coercion or as a threat to security is unacceptable." Euro leaders say they are committed to diversifying energy sources away from Russia, but it won’t happen overnight. Complacency on the energy front seems like a really big mistake.

As the G7 meeting wraps up, the various leaders will head to France on Friday to mark the 70^th anniversary of the D-Day invasion at Normandy. Putin will be there. No negotiations or diplomatic level talks are planned but it should make for some interesting photo ops.

And before the D-Day anniversary there will be an uncomfortable dinner between President Obama and French President Hollande, who will make the case that the French bank, BNP Paribas should not be fined $10 billion for money laundering. Naturally, this has BNP clients nervous about what all this means for business, and the upper echelons of BNP management nervous about how their employees might respond to questions about money laundering.

Once upon a time BNP thought they could beat the rap. BNP showed prosecutors a memo that the bank thought would explain and possibly mitigate the conduct. The memo, drafted around 2004 by an outside law firm, essentially authorized the bank to process certain transactions for Sudan, as long as BNP’s employees in New York were not involved in the arrangement. BNP argued that it lacked the intent to commit a crime, saying that it followed the law firm’s directive. That legal argument, known as the “advice of counsel” defense, prompted prosecutors to pore over the single-page memo and weigh the bank’s argument. Ultimately the prosecutors concluded that the memo alleviated only a small fraction of the wrongdoing. Apparently hiring lawyers to tell you that you can do whatever you want turns out to be a little bit less than an airtight legal strategy.

Wednesday, April 30, 2014 - Record Highs in First Gear

Record Highs in First Gear

by Sinclair Noe

DOW + 45 = 16580.84 (record close)
SPX + 5 = 1883
NAS + 11 = 4114
10 YR YLD - .04 = 2.65%
OIL – 1.59 = 99.69
GOLD – 4.60 = 1292.30
SILV - .29 = 19.25

Back on December 31^st, we finished the old year with a record high close on the Dow Industrial Average at 16,576; since then the index has bobbed up  and down, briefly hitting an intraday high of  16,631 on April 4^th, but on that day we finished in negative territory. Today, a record high close. The S&P 500 is closing in on the record high close of 1890, but not today.

Now, when you hear the Dow is breaking records, you might think the economy is roaring, cruising along the highway in fifth gear. You would be wrong; the economy is stuck in first gear and the clutch is slipping. The Commerce Department reports the economy expanded at a mere 0.1% annual pace in the first three months of the year, one of the weakest rates of growth in the nearly 5-year-old recovery.

A slowdown had been expected due to the harsh winter weather that froze business activity across a large swath of the country, but this report was worse than expected. The gross domestic product had been expanding at a 3.4% pace in the second half of last year. No worries, the weather has warmed and everything is returning to normal. Yeah, not exactly.

There has been a rebound in the monthly data for March but there have been some disappointments as well. On the positive side, households have pared down some of their debt, credit is a little more available, and consumer spending should bounce back. Even the 2% growth in consumption spending is not all that encouraging; 1.1% of that consumption growth, more than half, was attributed to higher household expenditures on health care.

Home construction is likely to pick up speed as the weather improves, but the housing market seems to be slowing down, with reports this week on new home sales turning soft and existing home sales turning negative in many areas. Residential investment has been negative for 2 quarters. The housing market probably won’t deliver much horsepower as the engine of economic growth but it should be a little better than the winter months, when many parts of the nation were frozen.

An area of concern is business investment, as company spending on equipment fell in the first quarter, and the 3 quarter average is barely positive. The change in inventories subtracted 0.57 percentage points from growth in Q1, exports subtracted 0.83 percentage points. The outlook for trade is soft; the US is not immune to weakness overseas; China’s economy has slowed; there are problems in the Eurozone; and emerging markets are still struggling. Meanwhile, incomes have flat lined and unemployment remains unpleasantly high.

On Friday we’ll get the monthly jobs report. Today, we got a preview from ADP, the human resources firm, and their data shows the economy added 210,000 jobs in April. The ADP report showed hiring picking up in nearly all industries and company sizes; it just isn’t picking up at a real fast pace.

The Federal Reserve FOMC wrapping up their policy meeting and they issued a statement that they will keep policy on the same track; interest rate targets are unchanged and the taper continues with another $10 billion in large scale asset purchases cut this month, to a mere $45 billion a month. The central bankers said that economic activity “slowed sharply” earlier in the year but noted it has “picked up recently.” And “The committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.”

The disappointing reading on economic growth earlier in the day underscored how bumpy the road back to normal can be. The FOMC statement repeated language from its last meeting in March stating that it will consider the country’s realized and expected progress toward full employment and 2% inflation in determining when to increase rates. The Fed also reiterated that it will take into account “a wide range of information,” including the health of the labor market, inflation pressures and financial developments. In some ways, you could look at the continuation of the taper as a vote of confidence from the Fed. Fed policymakers have said that the phaseout of bond purchases is not on autopilot; the Fed can speed it up or slow it down, depending on how the economy progresses, but apparently the weak GDP number today was not convincing enough to alter expectations; or maybe GDP falls outside the Fed mandate of price stability and maximum employment, and maybe it isn’t something they should specifically pinpoint. Of course, if the economy turns south, they will have to deal with it.

Many Americans are still wondering when the recovery is going to start, but by economic measures, the economy stopped shrinking and started growing in June 2009, the official start of the recovery. That was 58 months ago. Since 1945, the average length of a business-cycle expansion has been 58 months. So if the current recovery continues, it will end up being longer than average, not to mention much weaker. And today’s GDP number was right on the edge of recessionary. The cold weather excuse only goes so far. Already in the second quarter we’ve had deadly and damaging tornadoes, and as the weather continues to warm, we’ll deal with the effects of drought. You have to wonder if the economy was plagued by more than just weather last quarter.

That doesn’t mean we are now entering a recession; we may be close but we aren’t there yet, and we may still rebound, but this affords a good opportunity to think about how you might handle the next downturn in the business cycle. The stock market was up today, and in light of the GDP report, you have to wonder about stock valuations; the earnings reports haven’t afforded much to cheer. Are you still buying or are you looking to sell into strength.

Since Q4 2011, the average peak-to-trough pull-back on the Dow has been roughly -6%, with no correction exceeding -10%. One may ascertain that a "buy-on-the-dip" mentality remains pervasive among equity investors. So why not add to long, risk-on positions once again? Could this pull-back be different? Aren't stocks "the only game in town" with the excessively accommodative Fed monetary policy?

And while you consider market risk, don’t forget the old idea of the best and worst six months in the stock market; we’re entering the worst six months by the way. The old adage "Sell in May and Go Away", warning investors of a seasonal decline in equities, is often attributed to summer vacations and decreased investment flows relative to winter months. According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. 

When we look at the 13 cases since 2001, the strategy of selling out just before May would have given rise to successful trades in 9 cases, or about 70 % of the time. Moreover, we observe that the "Sell in May" strategy has not failed in two consecutive years since 1992-1993. Given that "Sell in May" failed in 2013, we estimate the odds for a seasonal decline are even higher for 2014. This is not a perfect indicator, but there are not perfect indicators. You have to think that anybody who doesn’t recognize the odds is just trying to sell you something.

And on the question of valuations, at 18 times forward earnings for the S&P 500 and 36 times forward earnings for the Nasdaq, US stocks are generally closer to the high end of their range; that seems a bit pricey compared to emerging markets with 12 times forward earnings. Still, somebody was buying today, at least enough to push the Dow to a record high close. Investor optimism for US stocks has been trending up since the end of 2011, reaching an extreme level in January. Of course that would be a contrary indicator. There are plenty of voices telling you to stay the course, or even buy, and then buy some more. I’m just saying it is important to consider the possibility of selling into strength. 

Wednesday, March 05, 2014 - Not Much Change

Not Much Change

by Sinclair Noe

DOW – 35 = 16,360
SPX – 0.1 = 1873
NAS + 6 = 4357
10 YR YLD + .01 = 2.70%
OIL – 2.40 = 100.93
GOLD + 2.40 = 1337.80
SILV + .02 = 21.26

ADP, a payroll processing company, reports its own monthly jobs estimate each month, just before the government comes out with its monthly jobs report. Today, ADP said the economy added 139,000 new jobs in February; they revised the January number down to 127,000 from the previously reported 175,000. When the Labor Department reports on jobs Friday morning the best guess is about 150,000 jobs and the unemployment rate holding at 6.6%. So, the ADP report is reasonably close.

Separately, initial jobless claims for the past week did not point to any improvement in the labor market with initial claims up 14,000 in the February 22 week to a 348,000 level.

In other news, the Institute for Supply Management’s non-manufacturing index slipped to 53.5 in February from 54 the previous month.

This afternoon the Federal Reserve published its Beige Book, which is a compilation of reports and observations from the 12 Fed districts. Growth slowed in Chicago and activity was stable in Kansas City. While the other eight districts reported growth, the Fed said it was characterized as "modest to moderate" in most cases, an overall downgrade from its last report on January 15, which showed "moderate" growth in nine regions. Business contacts were still upbeat, and real estate activity picked up in some areas, and travel and tourism remained strong. Retail sales growth softened in most districts, partly due to weather. Factory output and sales were affected in regions including Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, and Dallas, where the weather was blamed for utility outages, disrupted supply chains and a slowdown in hiring.

So, the latest Beige Book still reflects weather disruptions. If you were waiting for clean data, this wasn’t it. We might not get clean data from the Friday jobs report. We may need to rethink our idea of data clean from weather disruptions because it seems we are experiencing bad weather with regularity, whether it be the polar vortex or ice storms or drought or hurricanes or tornadoes. If it’s not one thing it’s another.

The big brouhaha in Ukraine seems to be a bit calmer today. The European Union is ready to provide $15 billion of financial support to Ukraine over the next couple of years by way of a series of loans and grants. The assistance would be delivered in coordination with the European Bank for Reconstruction and Development and the European Investment Bank, and is in part contingent on Ukraine signing a deal with the International Monetary Fund. Yesterday, Secretary of State John Kerry visited Kiev to offer moral support and a $1 billion aid package to a Ukraine fighting to fend off bankruptcy. Money soothes the savage beast. And so, there is no fighting today; that’s good.

In time we will probably find out more and more details about who and how this Ukrainian revolution came to be and why; and the best guess is that it was not quite an organic uprising of the masses; and it was probably not a coincidence that a nostalgic stroll along old Cold War paths coincided with Defense Secretary Chuck Hagel’s proposal to cut back Pentagon spending. This is not to say there are no problems in the Ukraine, there are. Internal divisions in Ukraine are real and enduring. Russian aggression in Ukraine is bad, and there really is no justification for this kind of military intervention. US credibility and security is not at stake and there really isn’t anything we can do anyway, short of a full-fledged return to the Cold War. Some people may want that but I don’t much care for the notion.

It’s a good story to imagine the downtrodden Ukrainian everyman fighting for freedom from the Russian overlords, but there’s a better chance that the real story will be told by following the money trail.

In 1998, Washington state voters raised the state’s minimum wage and linked it to the cost of living. Over the past 15 years, the minimum wage in Washington has climbed to $9.32 an hour, the highest in the country. Payrolls at Washington's restaurants and bars, portrayed as particularly vulnerable to higher wage costs, expanded by 21%. Poverty has trailed the US level for at least 7 years.

According to a Congressional Budget Office report published February 18, increasing the minimum wage would lift 900,000 people out of poverty and add $31 billion to the earnings of low-wage Americans, but it might reduce employment by up to a million jobs; actually that last point is an area where the CBO report was fuzzy, saying it might cost up to a million jobs or it might not reduce  employment; as a result, most people split the difference and say it will reduce employment by 500,000, but that’s not what the report says, and it’s  not what the data from Washington state says.

One possible explanation is that businesses have plenty of ways besides job cuts to absorb the costs of a minimum-wage increase: price increases, reductions in profits and savings from lower turnover can help soak up the shock.

As of January, 21 states and the District of Columbia had a higher minimum wage than the federal floor. Cities including San Francisco and Santa Fe, New Mexico, require even higher hourly earnings than the proposed federal level, at $10.74 and $10.66 respectively.

New Jersey voters in November approved increasing the minimum wage by $1 an hour to $8.25, tying future increases to the consumer price index. In January, after the raise took effect, private employers added 8,320 jobs in New Jersey, according to ADP Research Institute. That was the fastest pace of job growth since December 2012.

Today, the Center for American Progress issued a report showing that raising the minimum wage from $7.25 to $10.10 an hour would reduce federal food stamp spending by $4.6 billion a year. Last year, a report done by researchers at Berkeley and the University of Illinois asserted that taxpayers are spending nearly $7 billion a year to supplement the wages of fast-food workers, many of whom earn the minimum wage or close to it.

Now, let’s get caught up on banks behaving badly. The latest news on this front regards Citigroup which disclosed on Friday that it had been defrauded of $400 million in a scheme involving a financially shaky oil services company in Mexico. And while that was going on, a Citigroup affiliate based in Los Angeles received a grand jury subpoena from federal prosecutors in Massachusetts related to anti-money-laundering compliance. The focus of the subpoenas is unclear.

The affiliate has also received a subpoena from the Federal Deposit Insurance Corporation related to its anti-money-laundering program and the Bank Secrecy Act. The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members.

Apparently the two issues, one involving fraud and the other involving money-laundering compliance, are unrelated.

In 2006, the bank’s computer systems got fouled up and certain business units failed to process Citi’s foreign transactions to ensure compliance with anti-money laundering regulations for about 4 years until the computer error was fixed. In 2012, Banamex USA entered into a consent order with the FDIC and California Department of Financial Institutions to improve its oversight and tracking systems. In 2013, Citigroup entered into another consent order with the Federal Reserve and agreed to take companywide actions also intended to bolster its compliance efforts. Now we have subpoenas in the case.

Meanwhile, the New York Times is reporting that the Treasury Inspector General believed that JP Morgan had used attorneys to “investigate” its conduct in dealing with Bernie Madoff with the intent of impeding regulatory scrutiny and allowing staff to get away with perjury. In this case it goes back to the idea of what JP Morgan knew about Madoff’s Ponzi scheme and when did they know it.

We know that JPMorgan was Madoff’s banker. JPMorgan hired lawyers to investigate, or maybe they hired outside law firms as a way to put a shield around the questionable activity, to impede regulators from getting to the bottom of criminal or merely potentially costly conduct. This raises the question of attorney client privilege.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.”

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers. But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege. The inspector general argued that the lawyers’ interviews were essentially “made for the purpose of getting advice for the commission of a fraud or crime.” The reporters also stress that the use of attorneys as an information shield for banks is already troublingly widespread.

But the Department of Justice will not pursue subpoenas of the potential perjury or potential obstruction of justice, because, according to a DOJ letter the action would “risk developing negative precedent that could result in harm to the long-term institutional interests of the United States.”

Just in case you were wondering, too big to fail and too big to jail is still the law of the land. 

Monday, February 10, 2014 - Set the Tone

Set the Tone

by Sinclair Noe

DOW + 7 = 15,801
SPX + 2 = 1799
NAS + 22 = 4148
10 YR YLD + .03 = 2.69%
OIL + .12 = 100.00
GOLD + 7.90 = 1276.00
SILV + .07 = 20.18

A little bit of follow up to last Friday’s jobs report, which you recall came in at 113,000 jobs added in January and the unemployment rate dropping to 6.6%. There was a huge discrepancy between the household survey and the business establishment survey; the household survey showed 616,000 new jobs. The household survey can be a bit volatile and is considered less reliable. There is also a discrepancy between the establishment survey and a couple of earlier reports from ISM and ADP. The Institute for Supply Management services index came in at 56.4% in January, indicating a strong month for service jobs. The ADP, or Automatic Data Processing, employment report indicated 160,000 private sector service jobs were created in January, or about 100,000 more jobs than the government reported. It will be very interesting to watch revisions to the jobs report next month.

The major stock indices just loved the lousy jobs report, and this is a head scratcher for many people. Why would bad news on jobs be good news for stocks? Well, a weak job market gives employers the upper hand because most workers will accept lower wages, which translates into higher profits for corporate America. I know that is short sighted because the workers are also customers, but in the short term world of Wall Street, it makes sense.

The other reason is the Fed; and the Fed will likely continue its Zero Interest Rate Policy (ZIRP) as long as the labor market is lethargic. Continued low interest rates encourage corporations to borrow money to buy back their own shares, pushing up values and prices. Buy backs are the last refuge of innovation challenged companies unwilling to invest in research and development in favor of short-term stock performance.

The low interest rate environment also leads to a fairly straightforward comparison between stocks and bonds, with the nagging idea that low rates don’t pay anything now, and when rates go up, prices will go down. And finally, in a bad job market the Fed will be slower to back away from quantitative easing, and Wall Street just loves to see the free flow of easy money.

And so, we’ll all be watching the new Fed Chair, Janet Yellen this week as she goes before Congress for her first Humphrey Hawkins testimony tomorrow before the House and Wednesday before the Senate, and we’ll try to determine if the need for extraordinary measures has abated or not. Likely, we’ll hear something along the lines of, steady as she goes. Don’t expect any big changes, but as a new Fed Chair, she may set the tone a bit.

Before Yellen’s testimony tomorrow, House Republicans will hold a meeting tonight to address raising the debt ceiling. House Republican leaders will try to use the meeting to sell their members on voting for a bill that raises the debt limit but also reverses changes to military retirement benefits. Reversing these changes would add to the deficit, so Republicans would have to find ways to pay for it. One way Republicans are considering paying for the change is to extend the sequester for mandatory spending for one more year. Senate and House Democrats have been firm in demanding a clean debt limit bill — one without additional policy concessions.

There isn’t much time. On Friday, Treasury Secretary Jacob Lew said extraordinary borrowing measures aren’t likely to last past Feb. 27. And the House adjourns Wednesday so Democrats can go to their annual issues retreat. Lawmakers don’t return for a full workday until Feb. 26.

Earnings season has moved into its latter stages, with 54 S&P 500 companies expected to report results this week. Of 343 companies in the S&P index that have reported earnings through Friday, 67.9% beat Wall Street expectations against 67% over the last four quarters, and ahead of the 63% rate since 1994.

Of course, when you hear anything about earnings, you must take it with a grain of salt, or maybe you should just buy a great big salt lick. Public companies are notorious for lowering earnings guidance so they can claim to beat the easier targets. Toss in little tricks like stock buy backs and the earnings season looks less and less like a buying signal and more and more like a management ruse to increase already lofty pay levels.

The dark side of earnings season can be found in the revenue growth numbers. For 2013 it looks like the healthcare sector led the way for revenue growth, up 7.6%; consumer discretionary grew revenue by 3.8%; consumer staples grew revenue by 1.9%.  Industrials up 2.3% and utilities up 4.2%. Technology, the high-growth sector where American ingenuity is still leading the world, revenues rose just 5.4%. And telecom services eked out a barely visible 2.2% revenue gain. Not exactly breath-taking growth figures. Then there were the third and fourth largest sectors: revenues in the energy sector dropped 3.4%; and in the financial sector, they plunged 11.4%.

So, while inflation was 1.5%, the S&P 500 companies that have reported so far, all put together, triumphed with year-over-year revenue growth of 1%. Revenue growth was negative when considering inflation. And don’t forget that last year the S&P 500 was up nearly 30%; it was a great year, as long as you don’t look at top line growth, or lack thereof. Ingenious accounting is one element, financial engineering another. Corporations can borrow nearly unlimited amounts of money in the short-term markets and through bond sales, at little cost, thanks to the Fed’s policies, and load up their balance sheets with borrowed cash, that they then plow into share buybacks.

The doctored EPS growth, and particularly the analysts’ estimates for doctored EPS growth for distant future quarters is bandied about as illusory justification for the gravity-defying ascent of stocks. Eventually the double digit estimates for future quarters is ratcheted down right before earnings are reported, and then the companies can beat the diminished expectations.

Business success, as defined by growth in revenues and net profits and not by financial engineering and fabricated EPS, is crucial to the economy. But for a quarter of a century, corporate profits have been rising at a faster rate than GDP and are now “dangerously elevated by all reasonable measures.

Remember that $13 billion settlement JPMorgan Chase worked out with the Justice Department last November? At the time, we raised some questions about how the deal was worked out between JPMorgan CEO Jamie Dimon and Attorney General Eric Holder. The $13 billion was a record fine for a bank, but just a fairly small fine compared to JPMorgan’s profits, and even though the settlement does not release JPMorgan from potential criminal liability over the mortgages it packaged into bonds, Jamie Dimon seemed eager to act like the matter was a thing of the past; the board of directors at JPMorgan even voted him a big fat bonus, apparently for navigating the legal challenges.

Well, now the non-profit group Better Markets has filed a lawsuit against the Justice to block what it called an "unlawful" $13 billion settlement with JPMorgan Chase over bad mortgage loans sold to investors before the financial crisis. They say they are appalled that the settlement gave the bank "blanket civil immunity" for its conduct without sufficient independent judicial review. In effect, the DOJ acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any check on its authority or actions. And because the DOJ has declared its intention to use the Agreement as a “template” in future similar cases, it is imperative that the DOJ’s unlawful and secretive approach in the settlement process be subjected to judicial review.  

In its complaint, Better Markets alleges the settlement with the bank lacks critical facts that can help justify the deal, such as failing to name any individuals responsible for the wrongdoing, how much damage investors suffered or even "which specific laws were violated."

Of course, this is not the only bad behavior by JPMorgan Chase. A confidential email has emerged that shows a top Chinese regulator directly asked Jamie Dimon, the bank’s chief executive, for a “favor” to hire a young job applicant. The applicant, a family friend of the regulator, now works at JPMorgan. The email was one of several documents that JPMorgan recently turned over to federal authorities as part of an investigation into hiring at the bank. Federal authorities are now investigating whether the hiring at JPMorgan and at least six other big banks, was done explicitly to win business from Chinese companies. The authorities could decide to bring charges against individuals or a bank if they find such activity to be in violation of anti-bribery laws, in connection with the Foreign Corrupt Practices Act.

In recent months five top insurance companies with headquarters in mainland China or Hong Kong have become JPMorgan clients, although there is no direct link between the hiring and the new deals. Until now, it was unclear whether any well-connected job applicants ever met JPMorgan executives in New York.

Meanwhile, the really big investigations are still underway. Remember the Libor rate rigging scandal?  Well maybe something will eventually happen there, but already the investigations have moved over to the Forex, foreign currency exchange markets. The British FCA, or Financial Conduct Authority, are heading up that investigation, as the Forex is centered in London; the FCA says 10 banks are now cooperating in the investigation into how Forex traders colluded in setting certain key exchange rates in the $5.4 trillion a day forex market. The FCA says the allegations are every bit as bad as they have been with Libor.  

Wednesday, December 04, 2013 - The Defining Challenge

The Defining Challenge

by Sinclair Noe

DOW – 24 = 15,889
SPX - 2 = 1792
NAS +0.80 = 4038
10 YR YLD + .05 = 2.83%
OIL + 1.25 = 97.29
GOLD + 19.00 = 1244.30
SILV + .54 = 19.82

December can be a cold, cold month. At least that's how the equity markets are starting the month; four losing sessions. Part of this might be the big institutional investors, the big hedge funds and money managers, looking around and realizing the market is up 30% or so, and that would be a good year, so why no lock in a few profits. No need to worry about the budget battle in Washington; no need to worry about the Federal Reserve surprising people with a premature taper; no need to worry about a strong jobs report on Friday. In this crazy market where good economic news gets traders worried about the Fed taking away the punch bowl, today we had some reasonably decent economic news and another drop in the markets.

Let's start with the economic reports. ADP, the payroll processing firm, has a monthly report on private jobs; they issue the report just before the monthly official government report on jobs, the BLS non-farm payroll report. The ADP report is not great at predicting the government report, but its one of the better guidelines we have. Today, ADP reported companies added to their payrolls by a net 215,000 in November, and they revised the October number higher to 184,000.

Manufacturers, builders and other goods-producing industries increased headcount by 40,000, the most this year. Employment in construction climbed by 18,000. Factories also added 18,000 jobs, the biggest gain since February 2012. Trade, transportation and utility companies created 45,000 jobs last month. Companies employing 500 or more workers added 65,000 jobs. Medium-sized businesses, with 50 to 499 employees, took on 48,000 workers and small companies expanded payrolls by 102,000.

ADP typically underestimates the number of jobs added to the economy. The government jobs report is Friday morning; the average estimate is for 180,000 net new jobs in November.

In a separate report, contracts signed to buy newly built homes jumped 25% in October month to month. Now let's dig into the numbers, because the numbers are a bit unusual. In September, contracts to buy new homes dropped 6% from August. So there was a big drop in September and an even bigger bounce up in October. A couple of theories behind the numbers. First, is the idea of pent-up demand; the government shutdown caused potential buyers to wait, and also interest rates have been climbing, pushing potential buyers to jump now rather than wait for higher rates later. The other theory is that there's a large margin of error in this report and we'll see the number revised next month.

Meanwhile, the Institute for Supply Management's non-manufacturing index dropped to 53.9 in November from 55.4 in October. A reading above 50 indicates expansion in the services sector of the economy, but clearly expanding a little slower. The ISM manufacturing index, released Monday, showed an increase to 57.3 from 56.4.

Meanwhile, the Federal Reserve released its Beige Book this afternoon. The Beige Book is a business survey, which contains anecdotal reports from the 12 Fed district banks, and it's published two weeks before the officials meet to set monetary policy at the FOMC meeting. It's called Beige Book because it has a beige cover, although I suspect it is also descriptive of the writing style.

Anyway, here's the synopsis: consumer spending increased in most of the country, with retailers expressing optimism about holiday sales; hiring showed a modest increase or was unchanged; manufacturing activity continued to expand in most districts, with gains noted in the motor-vehicle and high-technology industries; demand for professional business services experienced stable to moderate growth, especially in computer technologies.

And the Commerce Department reported this morning that the October trade deficit decreased to $40 billion. Total October exports came in at $192 billion compared to imports of $233 billion, resulting in a deficit of $40 billion, down from $43 billion in September. Oil prices were just under $100 in October, down from $102 in September, and prices will likely be down even further in November. The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

Meanwhile, remember the budget negotiations? That's where each political party draws a line in the sand, and a bipartisan committee dances around the line and no later than December 13^th, they are supposed to come up with a deal that nobody could love. There is broad agreement that a portion of the sequester should be replaced with targeted cuts to discretionary spending. But Democrats demand revenues in the mix and Republicans categorically reject new taxes. The dance of legislation is reportedly close to finding some syncopation, which would involve an agreement to set a spending level for the next fiscal year above the $967 billion in place under current law.

Also, it appears that both sides are getting closer to agreement on $80 billion in savings to replace the cuts from sequestration over the next 2 years; shared among defense and non-defense programs alike. Other items being considered to pay for it include selling off the broadband spectrum in auction (essentially a government yard sale), increasing TSA fees (in other words, it'll cost more for an airline flight), plus changes in postal service and some reform to federal pensions but no structural changes to entitlement programs.

If the budget committee can't reach a deal by the December 13 deadline, House Speaker John Boehner has said that he will push for a continuing resolution to fund the government past Jan. 15 at the $967 billion level. Apparently both sides realize that shutting down the government is not a popular idea, but short-term stopgap continuing resolutions are getting a bit stale as well.

Somewhere, in the vague and distant past, I remember hearing something about closing loopholes and reforming the tax code but that would require roll up your shirt sleeves, honest work, and we know that Congress has nasty aversion to that four letter word.

Some things never change.

Banks cheat. They get caught sometimes. They pay a fine. It's the cost of doing business.

EU antitrust regulators have fined six financial institutions including Deutsche Bank, Royal Bank of Scotland, Citigroup, Societe Generale, JPMorgan and brokerage RP Martin a record total of $2.3 billion for rigging financial benchmarks. The penalty is the biggest yet to be handed down to banks for rigging the benchmarks used to determine the cost of lending; the benchmarks involved are the London interbank offered rate, or Libor, the Tokyo interbank offered rate and the euro area equivalents. They are used to price hundreds of trillions of dollars in assets ranging from mortgages to derivatives.

EU Competition Commissioner Joaquin Almunia said in a statement: "What is shocking about the Libor and Euribor scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other."

Yes, I'm shocked, shocked to find that gambling is going on in here!

Authorities around the world have so far handed down a total of $3.7 billion in fines to UBS, RBS, Barclays, Rabobank and ICAP for manipulating rates, while seven individuals face criminal charges.

UBS paid a record fine of $1.5 billion late last year to the US Department of Justice and the UK's Financial Services Authority for rate-rigging. EU fines can reach up to 10 percent of a company's global turnover. UBS blew the whistle on the Libor and Tibor cases and will not be fined as a result. Barclays will escape a fine in the Euribor case because it alerted the Commission to the offence.

The European Commission said it would continue to investigate Credit Agricole, HSBC, JPMorgan and brokerage ICAP for similar offenses.

And by the way, I don't know how the regulators come up with the amount they decide to fine the banksters. I guess they pull a number out of the hat. I'll check on that.

Moving on. Now that the government has fixed the healthcare.gov website and Obamacare is experiencing smooth sailing. Huh? What? Squirrel...

Anyway, President Obama turned his focus today to the pocketbook issues that Americans consistently rank as a top concern, arguing that the dream of upward economic mobility is breaking down and the growing income gap is a "defining challenge of our time."

"The basic bargain at the heart of our economy has frayed," the president said in remarks at a nonprofit community center a short drive from the White House in one of Washington's most impoverished neighborhoods.

The president vowed to focus the last three years of his presidency on addressing the discrepancy and a rapidly growing deficit of opportunity that he said is a bigger threat than the fiscal deficit. Obama said increasing income inequality is more pronounced in the United States than other countries. He said Americans should be offended that a child born into poverty has such a hard time escaping it, saying: "It should compel us to action. We're a better country than this." Obama did not propose any new policy initiatives in the speech.

The speech comes amid growing national and international attention to economic disparities — from the writings of Pope Francis to the protests of fast-food workers across the country. The president cited the pope's question of how it isn't news when an elderly homeless person dies from exposure, but news when stock market loses two points.

Wednesday, October 30, 2013 - Fed Holds Steady and Floats a Balloon

Fed Holds Steady and Floats a Balloon

by Sinclair Noe

DOW – 61 = 15,618
SPX – 8 = 1763
NAS – 21 = 3930
10 YR YLD + .02 = 2.52%
OIL - .85 = 97.35
GOLD – 1.40 = 1343.90
SILV + .22 = 22.84

Nobody expected the Fed to make any major policy changes at the conclusion of today's 2-day FOMC meeting. And the Fed surprised no one as they kept their cheap money policy in place. So why are the markets down today, with the Fed continuing its easy money giveaway? I'll explain in a moment.

Language in the October statement mirrored the "moderate pace" of economic improvement that the Fed saw at its last meeting in September. The statement, though, did omit a reference from last month that fiscal tightening could slow growth in jobs and the broader economy. Let's dig into the Fed statement:

...economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

...economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall.

...Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

And so, the Fed will continue buying $45 billion a month in Treasuries and $40 billion a month in mortgage backed securities, and they will maintain their zero interest rate policy, but they seemed to be making the case that when they can get a little more data, the data will be good and they can taper. Maybe even in December. How do we know?

Because John Hilsenrath said so. Hilsenrath is a reporter with the Murdoch Street Journal and he's something of a mouthpiece for the Fed. He gets the Fed data before other reporters and he then reports what the Fed tells him to report. Within 15 minutes of the Fed statement, Hilsenrath had published two articles analyzing the statement. He is either the fastest typist in the world or he gets the information spoon fed ahead of the embargo. The key takeaways according to Hilsenrath:

The Fed dropped its reference to financial conditions having tightened in recent months, as it noted in September. That’s a nod of approval to rising stock prices and the recent drop in long-term interest rates. The Fed also removed a reference to its concern about higher mortgage rates, which have dropped since the last meeting.

The Fed retained language it used in September which suggested officials had an eye on pulling back from their bond buying program if the economy improved. It noted “underlying strength” in the broader economy and said it chose to “await more evidence” on the economy’s performance before adjusting the bond-buying program.

And then the kicker:

Taken together, the Fed isn’t taking a December adjustment to the bond-buying program off the table. But that comes with the strong caveat that it depends on whether the economy is living up to its expectations.

Citigroup then piled on by raising it's odds for a December/January taper. It's pretty simple really; the further down the path we go, the closer we get to the end. The Fed hopes there will be enough economic data to support a taper, even though we've gone through 5 years of this mess with anemic growth and little to indicate the economy will kick into high gear. And the Fed's nearly $4 billion in bond buying seems to have only produced an artificial and temporary boost for stock and bond prices. It's impossible to predict where prices will go when the Fed stops buying because we're dealing with an artificial construct, but the bet is that prices might move lower.

Of course, we've seen this before. The Fed floated the trial balloon on tapering, and the markets responded with a taper tantrum; and it is a good bet that is what we are seeing today; just enough taper worry to back off record highs and slow the parabolic rise on the charts; the Fed tapping on the brakes without changing gears.

The January FOMC meeting will be the last for Chairman Ben Bernanke, who is stepping down after eight years. President Barack Obama has chosen Vice Chair Janet Yellen to succeed Bernanke. Assuming that Yellen is confirmed by the Senate, her first meeting as chairman will be in March. Many economists think no major policy changes will occur before a new chairman takes over.

Congress' budget fight has clouded the Fed's timetable. Though the government reopened Oct. 17 and a threatened default on its debt was averted, Congress adopted only temporary fixes. More deadlines and possible economic disruptions lie ahead in December and January and February. So, there is a strong probability that any data the Fed considers will be distorted by fiscal policy or the lack of fiscal policy.

At some point, the Fed will taper, but they are also caught in a liquidity trap. You could make the case that the early rounds of QE contributed to a bounce in economic activity, but you could also argue that there is almost always a surge in economic growth following post recession weakness due to pent-up demand. Plus, in the early rounds of QE there were actually several more direct bailouts, including cash for clunkers, cash for casas, and even cash for refrigerators and toasters and other appliances. Maybe the Feds massive injections of cash have helped to keep the economy from slipping backward, but current indicators are showing signs of weakness.

Consumer and business confidence has been hammered by the political fight that triggered the government shutdown and pushed the nation to the brink of a nasty debt default, and a slew of recent data has pointed to economic weakness.

Economic reports today showed private sector employers hired the fewest number of workers in six months in October, although we'll wait until November 8^th for the monthly jobs report. ADP revised September’s job gain down from 166,000 to 145,000. The government shutdown and debt limit brinksmanship hurt the already softening job market in October. Average monthly growth has fallen below 150,000. Any further weakening would signal rising unemployment. Meanwhile, inflation stayed under wraps last month. Other data on hiring, factory output and home sales in September had already suggested the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households right as we head into the holiday shopping season.

In trading following the market's close, Facebook gained almost 10% after reporting revenue that was stronger than expected. Expedia gained almost 20% after reporting its results. On the downside, Starbucks shares fell 2.8 percent to $78.60 after the bell because the world's biggest coffee chain gave a 2014 profit outlook that was below expectations.

In the latest batch of earnings, General Motors reported stronger-than-expected quarterly profit because of strength in its core North American market and a smaller-than-anticipated loss in Europe. GM shares moved higher.

On the downside, Yelp dropped after it reported a wider third-quarter loss, while Western Union shares slid 12.4 percent to $16.85 after the company posted a steep drop in third-quarter earnings.

Earnings haven't been amazing, but they've been steady and sustainable, which the market likes enough to help us reach all-time highs. When the season ends and we focus on the macro again, that probably won't be good for the market.

Of the 313 companies in the S&P 500 that had reported earnings through Wednesday morning, 68 percent have topped Wall Street's expectations, above both the 63 percent beat rate since 1994 and the 66 percent rate for the past four quarters. Revenue performance has been mixed, however, with 53 percent of S&P 500 companies beating expectations, well below the 61 percent average since 2002, but slightly above the 49 percent rate for the last four quarters.

Tomorrow morning the Labor Department will release jobless claims for the past week. Due to recent computer upgrades in California, claims data has been distorted higher and should continue to trend back to an average of 335,000. Also due out are the regional Chicago and Milwaukee manufacturing surveys.

There will be a lot of economic data released tomorrow around the world. The Bank of Japan will make its monthly monetary policy statement, which is expected to turn a bit more dovish due to a slower rate of growth in inflation and employment. Fifty-three major US companies will report earnings tomorrow.

The rest of the world is still upset with the US for listening in on their phone calls. Responding to the firestorm of controversy over its spying on European allies, the head of the National Security Agency said today it would do everything in its power to avoid being caught doing it in the future. And I hope you've had a great day; if however it was a little less than you had hoped for, take consolation in the fact that you are not Kathleen Sebelius.

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