Tuesday, February 18, 2014 - Econ Roundup

Econ Roundup

by Sinclair Noe

DOW – 23 = 16,130
SPX + 2 = 1840
NAS + 28 = 4272
10 YR YLD - .03 = 2.71%
OIL + 2.14 = 102.27
GOLD – 6.90 = 1323.30
SILV + .12 = 22.06

Homebuilders' confidence in the housing market declined sharply this month as the severe weather battering much of the nation keeps many would-be buyers at home. The National Association of Home Builders/Wells Fargo builder sentiment index dropped to 46. That's down from January's reading of 56 and is the lowest level since May. A reading of 50 is the tipping point between good and bad sales conditions.

Certainly one sector singing the blues over the cold weather has been the airlines. More than 500 flights were cancelled today; almost 1,400 flights cancelled yesterday for the Presidents’ Day holiday and more than 4,000 delayed. The big day for cancellations was last Thursday, when more than 7,500 flights were scrapped. That’s bound to have some effect on revenue and earnings.

Last week’s economic news was generally disappointing with weak payroll growth, mortgage applications slipping, retail sales dropping to the lowest growth rate of the recovery, and a sharp drop in manufacturing activity; that can’t all be blamed on bad weather. Several retailers didn’t even mention severe weather as they missed estimates for the holiday shopping season.

US auto dealers have about $100 billion worth of unsold cars and trucks sitting on their lots. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run up to the financial crisis and the auto-sales collapse of 2008-2009.

Inventories soared last year to the highest level of the recovery and were mostly responsible for the uptick in GDP in the second half of 2013. Inventory builds in the face of decelerating demand is a potentially troubling economic development. It's been a long time since we experienced an inventory recession, but prior to the past two financial market-induced recessions, inventory recessions were the more common cause of economic contraction.

If there was material upward pressure on aggregate demand because of an increase in economic velocity, it should be exerting upward pressure on long-term interest rates. However, throughout the second half of 2013, both the 10-year and the 30-year Treasury yields have been trading sideways, and this week are in the exact same spot reached on the July 5 peak. There may be some pent-up demand for housing and consumer durables and such, and maybe things will pick up when the weather finally thaws out. Whether the economy does or does not warm up with the weather; either way, it will likely be reflected at the long end of the bond curve.

The Kauffman Foundation and Legal Zoom released a fourth quarter survey of new business founders; 91% of business owners are confident their companies will be more profitable in the next 12 months, up from 86% saying that in the third quarter. Readings on the outlook for the overall economy and consumer demand also improved. With more customers expected, start-up founders plan to add staff. According to the survey 43% of respondents plan to hire more employees, up from 36% saying that in the third quarter.

Generic drugmaker Actavis says it will buy Forest Laboratories for about $25 billion in cash and stock, expanding its portfolio of specialty pharmaceuticals for neurological and other disorders. The deal means a major payday for activist investor Carl Icahn, the second-largest shareholder at Forest Labs.

Commodities revenue at the top 10 investment banks dropped 18% in 2013 in a third year of declines. Revenue from commodities for top banks fell to $4.5 billion last year from $5.5 billion the previous year. The banks' 2013 commodities revenue is less than a third of the $14.1 billion they racked up in 2008 at the height of the commodities boom.

The Federal Reserve Bank of New York reports that consumer debt in the US rose last quarter by the most in more than 6 years. Household debt increased 2.1%, or $241 billion, to $11.5 trillion, the biggest gain since the third quarter of 2007. The level of debt last quarter was $180 billion higher than a year earlier. Total indebtedness remains 9.1% below the peak of $12.6 trillion in the third quarter of 2008. Americans borrowed to buy homes and cars and to pay for education. Mortgages top the list at more than $8 trillion; student loan debt has now topped $1 trillion.

Of the 12% overall rise in student debt, a third came from borrowers with the worst credit history, or those with credit scores of 620 or lower. About five percentage points came from those with scores between 621 and 680, and roughly two points was from those in the middle quintile; scores between 681 and 720. The data suggest more people with poor credit scores are going to school to gain new skills, which eventually could lead to better jobs and higher earnings. Other data show that those with college degrees are much less likely to be unemployed and earn far more than those with only high school diplomas. Delinquency rates are going up from about 8.5% two years ago to 11.5% delinquency in the fourth quarter.

The loan to deposit ratio in the US banking system recently hit a 35-year low, meaning banks now have more cash on their balance sheets and they aren’t loaning the money out. QE is the most likely reason for the shift from loans to cash. Both loans and cash are considered assets on a bank’s balance sheet, and most banks don’t want to hold excess cash reserves, but they clearly don’t want to lend when the interest rate charged does not compensate for the risk of the loan. Meanwhile, the Federal Reserve pays interest on excess reserves. That’s a no-brainer model for the banks. And we likely won’t see more lending until interest rates rise or the Fed cuts payments on excess reserves, or some combination of the two.

The non-partisan Congressional Budget Office has issued a report on the effects of raising the minimum wage. Over all, the budget office estimated that lifting the minimum wage to $10.10 and indexing it to inflation would reduce total employment by about 0.3 percent, or 500,000 workers. The CBO cautioned that its estimate was imprecise, maybe almost no impact, maybe more. On the positive side, increasing the minimum wage would bolster the earnings of about 16.5 million workers: $5 billion a year more for families living in poverty, $12 billion a year more for families earning from one to three times the poverty threshold.

According to figures released today by the Bloomberg New Energy Finance show, global spending on energy efficiency rose almost 5% in the past year to $14.9 billion. China spent about $4.3 billion; North American investment dropped 33% to $3.6 billion.

President Obama announced today that he is directing the Transportation Department and the EPA to draft new fuel economy standards for trucks by March 2015. Pollution from transportation is the nation’s second-largest source of greenhouse gas pollution. In 2011, the EPA issued its first round of fuel economy regulations for United States trucks and heavy-duty vehicles built in the model years 2014 to 2018, which the agency projects will reduce carbon pollution by 270 million metric tons, or the equivalent of taking 56 million passenger vehicles off the road for a year. Heavy-duty trucks represent just 4% of all vehicles on the highways but generate 20% of the carbon pollution produced by the transportation sector.

Three countries are experiencing civil unrest today: the Ukraine, Thailand, and Venezuela.

In Kiev, 5 people were killed in street protests and at least 150 more injured. The opposition is seeking to overturn constitutional changes that strengthened Russia-backed President Yanukovych’s powers and to put Ukraine on a path toward EU membership. The standoff began Nov. 21, when Yanukovych pulled out of a free-trade deal with the EU, opting instead for President Vladimir Putin’s offer of $15 billion of aid and cheaper gas.

Gun battles erupted in Bangkok and 4 people are reported killed with nearly 100 more wounded as authorities try to clear demonstrators from the streets. The government’s anti-corruption body announced it was filing charges against Prime Minister Yingluck Shinawatra for a rice subsidy scheme.

Last week, protests in Venezuela led to 3 deaths. Today, opposition leader Leopoldo Lopez surrendered to police and was arrested. Protesters planned more marches, while President Nicolas Maduro told oil workers to march in support of the government. The demonstrators are demanding Maduro's resignation and expressing a litany of complaints from inflation and crime to corruption and product shortages.

Twenty-three nations encompassing 40% of the world's population will go to the polls this year. When you exclude China, which never goes to the polls, that means well over half of eligible human voters can cast ballots this year; that includes some of the big emerging market players such as India and Brazil. Emerging market have been beaten down broadly speaking, but recovery will likely be unique and in part, a consequence of what happens in the ballot box.

BofA Merrill Lynch conducted a survey of 222 fund managers with nearly $600 billion collective in assets under management. The survey says investors now believe emerging markets are the biggest risk to global financial security. Five years ago emerging markets were considered relatively safe, and default risk and counterparty credit risk was considered toxic; now it’s considered no problem. In line with this thinking, fund managers have increased their portfolio allocations to global bank stocks to the highest level on record. Meanwhile, allocations to emerging markets have fallen to the lowest level on record. At least according to the survey.

Monday, November 18, 2013 - Activism from Billionaires and Tweeters

Activism from Billionaires and Tweeters
by Sinclair Noe

DOW + 14 = 15.976
SPX – 6 = 1791
NAS – 36 = 3949
10 YR YLD - .04 = 2.66%
OIL - .83 = 93.01
GOLD – 14.40 = 1277.00
SILV - .38 = 20.50

This one didn't feel like a record high celebration, in part because the major indices closed well off the intraday high. The Dow had been trading above 16,000 for much of the afternoon, but a late sell-off saw the Dow finish below that nice round number; still, it was good enough for another record high close. The S&P 500 hit an intraday high of 1802, but closed in negative territory. Still we mark today's gains in the Dow in the “win” column and that means we have now had 39 record high closes on the Dow in 2013.

The trend is in place, firmly. The rise in the Dow Jones industrials continues to be confirmed by an associated rise in the Dow Jones Transportation Average. A look at the S&P 500 also shows a clear breakout at the top multiyear resistance level. The breakout may be false, due to the lack of active participation, as evidenced by light volume. So far, it has held up pretty well, contrary to its overbought condition. Everything is pointing higher as long as the Fed continues to pump money into the economy; and it looks like they will continue until March, although they could start to taper in January or December. Or maybe Bernanke will go out with a gift of extra stimulus.

More than half the gauges Janet Yellen uses to track the labor market are below pre-recession levels, reinforcing the likelihood she will support never ending easy money policy. While payrolls have increased and firings slowed, four measures: unemployment, labor force participation and rates on hiring and voluntary quits are still worse than at the start of the recession in December 2007. Hard to say when we'll see taper, but the party will slow down when the Fed removes the punchbowl. Until then stay alert, don't doze off, stay agile. A trend in place remains in place, until it reverses.

Economist Paul Krugman, in his column in the New York Times, asks us to imagine a world in which depression like economics are the new normal. Krugman writes: “What if depression-like conditions are on track to persist, not for another year or two, but for decades?”

If that’s the case, then those with their hands on the economy’s wheel are going to have to readjust their worldview. Krugman writes: “Central bankers need to stop talking about ‘exit strategies.’ Easy money should, and probably will, be with us for a very long time.”

As a result, deficit hawks will have to wait a long, long while before their warnings about federal debt hold any real value. “We can forget all those scare stories about government debt, which run along the lines of ‘It may not be a problem now, but just wait until interest rates rise.’”

Carl Icahn was speaking today at the Reuters Global Investment Outlook Summit and he said he could see a big drop in the stock market because earnings at many companies are fueled more by low borrowing costs than management's efforts to boost results. Of course this is not news. For several years, we've seen and talked about the tactics of corporate management to boost earnings by cutting expenses without commensurate attention to innovation and growing revenue; we've discussed the advantage of a low interest rate environment; and we've gone into detail about the little trick of stock buybacks to gloss over a lack of creativity.

It makes sense to invest in research and development to create value and grow a business and capture market share; or you could buy back shares and give the false impression of growing earnings per remaining shares. Icahn favors the latter.

Apple, minus the paranoid attention to fine tune design and function under the leadership of Steve Jobs, has reverted to the innovation of adding colors to the iPhone cases. Maybe someone really needs a 41-megapixel camera on a Nokia smartphone. Samsung's new innovation is a bended display; the screen is curved a little and displays information on different parts of the screen; so if you look at it from the side, you can see whether there is a notification. Or you could actually pick up the phone and look at the screen. The way some high tech companies pursue an innovative edge is through the patent courts, although I didn't hear if Icahn had anything to say about that tactic.

The average selling price of smartphones around the globe has been plunging this year and Qualcomm just warned a few weeks ago about a decline in high-end phone demand. The hot new idea is a watch. Dick Tracy had one of those 50 years ago, so it's about time someone got around to actually building one.

The hot new technology seems to be coming in the form of a Sony PlayStation; they sold one million in the first 24 hours of the rollout of a new model. Games, bread and circuses; all controlled by the flick of the opposable thumb. Forget about hunger, clean water, renewable energy. This is how we train the next generation of drone warriors.

Last week we talked about Judge Jed Rakoff's speech dealing with the reasons why bankers haven't gone to jail:

US attorneys and the Federal Bureau of Investigation have other priorities, whether it's antiterror cases, accounting frauds after Enron's bankruptcy, or Ponzi rip-offs after Bernard Madoff's huge scam. Financial frauds are particularly tough to crack, and many of the prosecutors with the requisite knowledge have been moved to other areas.

Law enforcement agencies have had to compete for a shrinking pot of money from Congress, and the best way to do that is by beefing up their statistics with smaller, easier cases and avoiding the years-long financial fraud probes that may turn up nothing.

The federal government's involvement in the mid-2000s bubble, deregulating the financial industry, keeping interest rates low and such, may also have given prosecutors pause.

The US has shifted over the last 30 years from prosecuting high-level individuals to using delayed-prosecution agreements to settle cases against entire companies. That shift “has led to some lax and dubious behavior on the part of prosecutors," Rakoff said, including allowing managers to sweep crimes under the rug.

But the public at large is not happy with the banksters; witness last week's planned Twitter Q&A session planned by none other than JPMorgan. JPM execs thought it would be way cool to have a Twitter session on the topic of “What carreer advice would you ask a leading exec at a global firm? Tweet a Q using #AskJPM.

So people sent their questions and comments. Here's a sampling:

I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending AM I DIVERSIFIED?

Can I have my house back?

Did you always want to be part of a vast, corrupt criminal enterprise or did you "break bad"?

Is the fact that you've paid over half a billion in fines since August a source or pride, or are you embarrassed it's not higher?

What's it like working with Mexican drug cartels? Do they tip?

When Jamie Dimon eats babies are they served rare? I understand anything above medium-rare is considered gauche.

Is it the ability to throw anyone out of their home that drives you, or just the satisfaction that you know you COULD do it?

Is it easier to purchase a congressional representative or a senator?

How much does JPM spend every year buying off members of the SEC, and what is the average rate?

Did you have a specific number of people's lives you needed to ruin before you considered your business model a success?

After about 7 hours, JPM realized they had lost control and the bank pulled the plug on the social media event.