Monday, August 25, 2014 - Tax Weasels

Tax Weasels
by Sinclair Noe

DOW + 75 = 17,076
SPX + 9 = 1997.92 (record)
NAS + 18 = 4557
10 YR YLD - .02 = 2.38%
OIL - .27 = 93.38
GOLD – 4.60 = 1277.20
SILV - .05 = 19.45

The S&P 500 crossed above 2000 intraday, closing off the high for the day, but still closing in record territory. We recognize it but we don’t have a big celebration. It’s just a number, a nice big round number. For reference, the S&P 500 topped 1,000 back in February 1998.

Economic data today includes:

Sales of new single family homes dropped for a second month in June. New home sales slipped 2.4%, but data from the past 3 months was revised to show 33,000 more new homes were sold than previously reported. The median sales price increased 2.9% from a year ago. At July’s sales pace it would take 6.0 months to clear the supply of houses on the market, the highest since October 2011. Tomorrow, we’ll see the latest data on existing home sales from S&P/Case-Shiller.

Separately, financial data firm Markit said its preliminary services Purchasing Managers Index dipped to 58.5 this month from 60.8 in July.A reading above 50 indicates expansion.

Last Friday ECB President Mario Draghi delivered the luncheon speech at the Jackson Hole Symposium; Draghi said the ECB had done all it could for now and the governments of the EU needed to step up. Today a survey was published from the National Association for Business Economics and the conclusions show most economists surveyed think the Federal Reserve’s monetary policy is on track but the US needs to enact structural policies in order to stimulate stronger economic growth.  The Fed’s expansionary monetary policy has been at odds with a sharply restrictive fiscal stance that saw budget deficits declining from 11% of GDP in 2009 to less than 3% this year.

Economists overwhelmingly expect the Federal Reserve to hold off raising short-term interest rates until at least 2015. But nearly a third say doing so would mean the central bank waited too long. While many economists appear at ease with the “steady-as-she-goes perspective” from the Fed, “almost 40% say the stimulus policies are no longer necessary and should be curtailed or sunset.” On other topics, business economists say immigration reform is one of their top priorities, and the US needs to let more immigrants in. Meanwhile, the economists surveyed support the idea of lifting the ban on exports of US-produced crude oil and nat gas. The industry is pushing for the right to export more fuel overseas to ease the threat of overproduction, a move that could also help reduce the US trade deficit. The White House moved this summer to loosen restrictions on crude exports, but an outright end to the ban faces higher hurdles, and would require Congressional approval.

A new academic paper from economists from the University of Chicago and the University of Maryland suggest the weakness in employment is not just a result of the Great Recession, but a longer-term structural change in the economy; the share of Americans with jobs has declined because the labor market has stagnated in recent decades; fewer startups creating new jobs; fewer people losing or leaving jobs, fewer people landing new ones. This suggests the US has been headed to higher unemployment even before the financial crisis, and even if we add jobs, we still have problems that can’t be overcome by Federal Reserve monetary policy alone. The paper says that a 1 percentage point decline in the churning of the labor market lowers the employment rate by 0.77 of a percentage point, a huge effect.

It’s Monday, and so we have some mergers to cover. The Swiss drug maker Roche agreed to buy InterMune for $8.3 billion. InterMune is based in California; it has one drug called pirfenidone to treat idiopathic pulmonary fibrosis, a fatal scarring of the lungs. It is licensed to sell the drug in Europe, and hopes to get approval in the US later this year. About $87 billion in pharmaceutical acquisitions were made in the first half of this year, eclipsing the total for all of 2013.

If you are Canadian or have ever been to Canada or know Canadians, then you probably know Tim Hortons; it’s a chain of coffee and donut shops; kind of like Starbucks but the coffee is actually good. And it may be the new home of the Whopper. Burger King wants to buy Tim Hortons. If completed, the deal would mean Burger King’s corporate headquarters would move to Canada, where it would qualify for a corporate inversion, with the idea of lowering Burger King’s corporate tax bill. The actual headquarters and the executives go nowhere, but the nominal address changes so the company can avoid US tax rates. Burger King says the deal is not about the taxes, but about the coffee, and the fast food breakfast business. Coffee may be an especially important attraction for Burger King and its majority owner, the Brazilian investment firm 3G Capital. In Tim Hortons, Burger King would be getting a restaurant chain that is essentially synonymous with coffee in Canada. Yea, that’s the reason; it’s the coffee, not the taxes; or maybe they’re trying to create a new donut-burger. Yea, that’s it. They’re just trying to compete with waffle tacos and sausage pancakes.

With the 15% nominal rate in Canada, this is absolutely a move about taxes; rooted in the lie that American corporations pay the highest tax rates in the world, which is not true when you consider the effective rates rather than nominal rates. When it comes to effective rates, what corporations actually pay, the US ranks 17^th out of 27 developed countries. Walgreens recently scrapped an inversion deal because of public blowback. Once one of these brands pulls off an inversion deal without blowback that actually hurts sales, it will be a run for the exits.

There are so many companies trying to weasel out of taxes that the inversion trend is the hot new thing on Wall Street, so hot that JPMorgan is backing a new online broker that has bundled up 25 companies seen as inversion targets. The basket of companies is called the Tax Inversion Targets, or TIT; I am not making this up. Count on JPMorgan to go for the most weasely product and then tack on a bit of tacky.

Late Friday, Goldman Sachs agreed to buy back $3.15 billion in mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the Federal Housing Finance Agency. The FHFA accused Goldman of dumping low-quality mortgage bonds during the run-up to the financial crisis. Goldman is not paying a penalty, but it is estimated the bonds are worth only about $2 billion today. Last month, lawyers for the FHFA presented evidence showing that Goldman was aware of weakness in the subprime mortgage market but did not pass that info to clients buying subprime bonds, even as Goldman was shorting the bonds. Just to be clear, Goldman was selling the bonds and simultaneously betting the bonds would fail.

AP is reporting that a column of Russian tanks and armored cars crossed into Ukraine’s far southeast, which is away from the fighting that has been taking place. The markets have been worried about a Russian invasion of Ukraine; now it looks like it is happening, and the markets seem to discount it.

ISIS, has been fighting in Iraq, and even though US airstrikes are inflicting damage, they are still entrenched. Meanwhile, they have taken over a key government airbase in Syria. BBC says government forces evacuated the airbase. Syrian state television confirmed that government troops had lost control of the base. The US has not been targeting airstrikes against ISIS in Syria.

Twice in the last seven days, Egypt and the United Arab Emirates have secretly teamed up to launch airstrikes against Islamist-allied militias battling for control of Tripoli, Libya. Responsibility for the airstrikes was initially a mystery. After the first set, several American officials initially said that signs pointed to the United Arab Emirates, but clearly American intelligence was surprised.

Workers are assessing quake damage and starting to clean up after a 6.0 magnitude quake in Napa California; it was the strongest quake in the San Francisco area in 25 years. Approximately 172 people were treated for mainly minor injuries; two people had serious injuries; no deaths have been reported. Several building were badly damaged and a mobile home park caught fire. The biggest economic damage may come to wineries.

Meanwhile, a large 6.9-magnitude earthquake has struck a sparsely populated area of central Peru. There were no immediate reports of damage or injuries, and authorities were still surveying the region.

Hackers again showed how powerful electronic attacks can be when they forced Sony's PlayStation Network and Blizzard's Battle.net offline over the weekend. The same group responsible for shutting down the gaming platforms, which calls itself the Lizard Squad, also claimed credit for sending a bomb threat via Twitter that grounded a plane carrying Sony Online Entertainment president John Smedley. The plane was traveling from Dallas to San Diego but was diverted to Phoenix. No bomb was found.

Earlier this month, the computer systems at 51 UPS stores were found to have been infected with malware that could potentially allow criminals to gain access to consumer data. The FBI says that up to 1,000 retailers could have malicious software on their sales systems, potentially exposing sensitive information to identity theft and financial fraud.

And that raises the question of why companies continue to get hacked? The most probable answer is that corporate executives just don’t want to spend the money on security because they consider it a cost without a financial benefit; at least until after the fact.

And finally, John Sperling has died at the age of 93. Back in 1978, Sperling founded the University of Phoenix. The University of Phoenix has a presence in 38 states and in Puerto Rico, and at one point touted 242,000 students, although that number has significantly dropped. Sperling became a billionaire, and he used his wealth on several philanthropic projects, including research into seawater agriculture and anti-aging medicine. He was also an outspoken critic of the government's war on drugs, advocating for treatment instead of criminalization.

Friday, August 15, 2014 - Don't Worry

Don’t Worry

by Sinclair Noe

DOW – 50 = 16, 662
SPX – 0.12 = 1955
NAS + 11 = 4464
10 YR YLD - .06 = 2.35%
OIL + 1.49 = 97.07
GOLD – 8.40 = 1305.50
SILV - .31 = 19.65

For the week, the Dow rose 0.7%, the S&P 500 gained 1.2% and the Nasdaq climbed 2.2%.

The Federal Reserve said factory production jumped 1.0% last month after rising 0.3% in June. That was the largest gain since February and reflected increases across all major categories. Auto production surged 10.1%, the biggest rise since July 2009. There were also solid gains in the production of machinery and computers and electronic goods; yesterday we talked about the importance of capex and business spending; maybe we’re seeing signs of that.

Or not. In a separate report, the New York Fed said its "Empire State" general business conditions index fell to 14.69 this month from 25.60 in July.

A preliminary August reading on the University of Michigan/Thomson Reuters consumer-sentiment index fell to the lowest level in 9 months, 79.2 down from a final July level of 81.8.

Producer prices, or prices at the wholesale level increased 0.1% in July, with 0.5% growth for transportation and warehousing prices; goods prices were unchanged; food prices rose 0.4%; energy prices dropped 0.6%. Overall producer prices rose 1.7% over the 12 months that ended in July, down from June’s annual-growth rate of 1.9%.

But the economic news carried little weight today, as attention once again focused on geopolitics. That might not be totally accurate; Wall Street looks at geopolitical hotspots but it can’t hold their focus. A new survey of institutional money managers around the world by Bank of America Merrill Lynch has found a sudden surge in worry and fear, and a rise in the number buying “protection” against a crash; which means derivatives such as put options or credit default swaps.

Money managers are worried about the markets and the Fed raising interest rates and geopolitical events and the baggage retrieval system at Heathrow, and so, over the past month they have raised their cash positions from 4.5% to 5.1%. Which doesn’t sound very defensive; in fact, it sounds like money managers are still excessively bullish on stocks.

Yesterday Russian President Putin talked about how he wanted to avoid confrontation in Ukraine. Last night a Russian armored column crossed the border into Ukraine; they started firing artillery at Ukrainian forces, which exchanged shellfire. Ukrainian President Petro said a "significant" part of the Russian column had been destroyed. Russia's government denied its forces had crossed into Ukraine. NATO said there had been a Russian incursion into Ukraine but would not go so far as to call it an invasion.

After Ukraine reported the invasion, Russia's ruble weakened against both the dollar and the euro. Russian shares were also dragged lower. International markets moved lower. European Union governments warned they are ready to expand sanctions against Russia if the conflict in Ukraine intensifies.  US markets initially moved lower. The yield on the ten year treasury dropped 6 basis points to 2.35%; Treasuries are usually considered a safe haven. The yield on German bunds, or 10 year bonds, dropped under 1%. The escalating clash is now haunting the European economy, already on the brink of fresh recession, with a string of southern states in debt-deflation.

All of a sudden, the euro crisis is back, though in truth it never really went away. The latest economic figures from the eurozone make bleak reading. Across the eurozone, which is struggling to get banks lending to businesses, economic growth is expected to be 1.1% this year. All three of the euro area’s biggest economies — Germany, France and Italy — are failing. Germany’s output actually fell in the second quarter. Italy is suffering through a triple dip recession. The French economy has stagnated. Analysts expect it to grow by less than one per cent this year. Italy has dropped back into recession, or maybe it never got out of recession. The closest thing approximating good news was that Spain's dead-cat bounce recovery continued with 0.6% growth. But it still has 24.5% unemployment. The eurozone economy is still far smaller than six years ago, by about 1.9%; unemployment is in double figures and debt burdens in some areas are high.

In June, the ECB cut its key interest rates and introduced a new program of cheap loans to banks that are intended to be passed on to businesses. Some economists say the European Central Bank should go further and engage in large-scale purchases of public and private debt to reduce borrowing costs and add to the money supply. ECB President Mario Draghi is under fire to do more to resuscitate growth. He, in turn, argues that “monetary policy can only achieve so much, with government reform required to do the heavy lifting,” and he is probably right, but there doesn’t seem to be much appetite for reform. Monetary stimulus is simply not remotely an adequate substitute for government spending. Even the austerian IMF has been forced to acknowledge that fact.

The Ukraine crisis has drawn the EU into an economic confrontation with Russia, which is not only the principal supplier of energy to many eurozone countries but is also a significant trading partner and export market for European goods. This is hardly designed to improve the economic outlook, and the eurozone remains too weak to withstand external shocks. And Eurozone weakness was already in place before the most recent economic sanctions against Russia; the unfortunate reality is that nobody really knows how Russian sanctions will play out. There will be costs associated with sanctions; many of them unexpected.

Next week, the Federal Reserve will hold its annual Jackson Hole retreat. Janet Yellen will speak on labor markets. The labor market has improved but still looks weak. Various Fed officials have various theories on the labor markets, but not much in the way of solutions, and so, not surprisingly, they have different views on Fed policy.

Jeremy Stein left the Fed Board of Governors earlier in the year to return to a teaching gig at Harvard. Last week Stein said whatever the Fed does, we can expect less financial stability. Stein says that the process of exiting QE and raising interest rates has “no real precedent”. Yellen devoted an entire speech to the subject of financial stability last month at the IMF, where she said the Fed had devoted “substantially increased resources” to monitoring stability and acknowledged that the Fed’s low-interest rate policy had spurred “households and businesses to take on the risk of potentially productive investments.” But, she went on, “Such risk-taking can go too far, thereby contributing to fragility in the financial system.”

Yesterday, St. Louis Federal Reserve President James Bullard said he believes financial markets are probably mistaken if they’re counting on Fed interest rate increases to occur more slowly than policy makers forecast. Bullard says the Fed will raise the interest rate target in the first quarter of 2015. Bullard said: “We’re way ahead of where we expected to be” in terms of the Fed’s employment mandate, and “If that strength continues in the second half of the year here, then the conversation on a little more hawkish direction of monetary policy will heat up.”

Today, Minneapolis Fed President Narayana Kocherlakota offered a contrasting view, saying: “The FOMC is still a long way from meeting its targeted goal of price stability” because of excess slack in the job market, and “progress in the decline of the unemployment rate masks continued weakness in labor markets,” which would keep the inflation rate below the Fed’s 2% target until 2018. Kocherlakota pointed to the participation rate among people between the ages of 25 to 54, the prime working years; another especially significant” measure of slack is the “historically high” percentage of workers who would like full-time jobs but can only find part-time work. The U-6 unemployment rate, a broad measure of unemployment that includes people working part time because they can’t find full-time jobs rose to 12.2% in July after declining one percentage point over the first six months of the year.

One of the biggest changes in the US labor market over the past two decades has been the increasing number of people working over the age of 55. From the end of World War II until the early 1990s, a smaller and smaller share remained in the labor force but since the 1990s that trend reversed. In 1993, only 29% of people that age were in the labor force. The vast majority were retired. But participation has been rising and by 2012 more than 41% of people in that age group were still in the labor force, the highest since the early 1960s. Clearly, something has changed about people’s attitudes toward retirement. A survey from the Federal Reserve last week provided some clues. Around 21% of people said their plan for retirement is simply “to work as long as possible” and the number of people giving this response increases by age.

In addition to the Fed’s get-together in Jackson Hole, next week’s economic calendar includes minutes from the Fed’s July 30^th FOMC meeting; on Thursday we’ll get a report on July existing home sales from the National Association of Realtors; Tuesday brings an update on July housing starts. Housing starts tumbled 9.3% in June. The Labor Department will release the consumer price index report on Tuesday; the CPI measures inflation at the retail level; it’s been running near 2%, more or less.

Thursday, August 07, 2014 - Surveillance Will Continue Until the Paranoia Stops

Surveillance Will Continue Until the Paranoia Stops
by Sinclair Noe

DOW – 75 = 16,368
SPX – 10 = 1909
NAS – 20 = 4334
10 YR YLD - .05 = 2.42%
OIL + .71 = 97.63
GOLD + 7.10 = 1314.00
SILV - .06 = 20.05

Normally, at least for the past 5 years, any dip has been seen as a buying opportunity. Lately, investors see a dip as reason to sell and ask questions later.

The Bank of England holds UK interest rates at a record low of 0.5% for another month. And the European Central Bank holds interest rates at 0.15% and announced they would keep rates low for an extended period of time. ECB President Mario Draghi warned there would be a "continued moderate and uneven recovery" in the eurozone. The annual inflation rate in the 18 countries of the eurozone was 0.4 percent in July, down from 0.5 percent in June; not quite deflation, but not headed in the right direction. Italy just announced its second consecutive quarter of negative GDP; which is the basic definition of a recession. Meanwhile, the website of the ECB has been hacked, and the hacker reportedly contacted the ECB and demanded a ransom for the stolen data.

The New York Times reported yesterday that a Russian crime ring had hacked more than a billion internet passwords, maybe more than 4 billion. It’s being called the biggest hack in history; which may or may not be accurate. Russian hackers are just a small part of the hacking world, about 2%. The major global hackers are Indonesia, China, the US, Taiwan, Turkey, and India. And while Russia may not constitute the same volume as other hackers, they make up for it in audacity; for example, the breach of the Target retail stores. And the recent tensions and sanctions between Russia and the US probably mean there will be no coordinated effort to crack down on international hacking. Of course, it might be argued that for true audacity, nobody can touch the NSA.

How dangerous is this hack? Hard to say. We still don’t know which websites were breached. We still don’t know how the hacked data will be misused. And we are being advised that the best thing to do is to change your password on various sites you use; which isn’t that difficult. There are, of course, companies that you can pay to provide cyber protection; coincidentally, these same companies are the ones that alert us to cyber problems; and I have a nagging suspicion some of them might actually create the problems in the first place. What this really does is to raise awareness that data hackers can collect almost anything, and digital security has been a weak spot in technological progress.

Perhaps braced by Moore’s Law, technology marches on; the journal Science reports that IBM researchers have developed a new computer chip they call TrueNorth.  The new chip was “designed to approximate the structure and function of the brain in silicon”, plus it is power efficient. The chip contains 5.4 billion transistors, yet draws just 70 milliwatts of power. By contrast, modern Intel processors in today’s personal computers and data centers may have 1.4 billion transistors and consume far more power, about 35 to 140 watts. The new chip weaves together all those transistors into an on-chip network of 4,096 neurosynaptic cores, producing the equivalent of 256 synapses. IBM has also tethered 16 of  these chips together in four four-by-four arrays, which collectively offer the equivalent of 16 million neurons and 4 billion synapses, showing that the design can be easily scaled up for larger implementations.

Think of the synapses as memory, and the neurons are the processor; working together they provide fairly complex pattern recognition, and what might be described as sensing capabilities. Right now, the chip is not real fast, but it can be strung together, and on a per watt basis, it really starts to fly. The low power consumption opens up a world of possible uses. This might be the chip that powers the internet of things, embedded in all sorts of devices and possibly revolutionizing mobile devices.

The big question is whether the chips can learn? Not yet, however IBM has already tested the chip’s ability to drive common artificial intelligence tasks, including recognizing images; TrueNorth was able to recognize things like people, cyclists, cars, buses, and trucks with about 80% accuracy. Keep in mind that this is a new chip, still in its early stages of development.  IBM is still investigating how to commercialize this processor and has made no commitments to either manufacture the chip itself or license the design out to others.

The problem with the idea of having even more devices than your smartphone and tablet gathering information for your convenience, of course, is the many ways all that data can be used against you. Traditionally, we think of the government as the invader of privacy, but as capabilities change, we see private corporations getting into the act. Last year the Wall Street Journal reported on new facial recognition technology; police could use an iPhone to take a photo, and then cross check the face in a criminal database; sounds good in the battle against terrorism, but the company that makes the technology wasn’t just considering sales to law enforcement, but also to the health care and financial industries. Yea, I don’t know exactly what those applications might be but I don’t think I like it.

Are health care companies going to start sensing every drop of sweat, every minute we work out, every time we puff a cigarette or sip a cocktail? Maybe we won’t even have to bother going to the doctor anymore. And what about the health insurance companies? Financial engineers believe they can pretty much put a price on anything. So what is your freedom worth? You need air, water, food, and relationships to survive. You want to go shopping, to the movies, to see friends. You have kids, romantic attachments, familial obligations. You like being able to travel, to explore, to watch TV. You need medical care. What are each of these worth? It’s a question that analysts are thinking about.

Or how about the school districts in Houston that require students to wear electronic tagging badges to improve security and increase attendance rates; the same electronic tagging badges formerly used to keep track of cattle.

The “Internet of Things” is probably the next Big Thing. How big? ABI Research estimates that over 30 billion devices will be connected to the Internet of Things by 2020; Gartner puts the number at 26 billion – not including 7.3 billion PCs, tablets, and smartphones. That’s a lot of internet-connected things, considering that there are “only” a little over 7 billion people on this planet, and many of those people are not connected to the internet, much less to electricity. And as technology increases and prices drop, in accordance with Moore’s Law, it opens up the possibility of connecting almost everything from the simple to the complex, and not only connecting, but sensing, monitoring, and controlling almost every facet of your work, home, and private life.

And then that brings us back to the hackers. How secure would all those embedded devices be in a world full of such things. You don’t need to break a code, it would be easier than ever to hack into everything you do, or think about doing. Don’t worry, I’m sure it will all work out fine, but the surveillance will continue until you stop being paranoid.

Some things never change. Bank of America is the latest big bank to work a deal with the Department of Justice. We’re still waiting for an official announcement but it looks like BofA has agreed to a $16 billion settlement for its role in the sale of toxic mortgage securities. The deal is reportedly for about $9 billion in cash and more than $7 billion in soft-dollar relief to consumers; things like loan mods or refi’s which they are supposed to be doing anyway; and this could still be a sticking point in the deal. The two sides continue to hammer out details and are still negotiating a statement of facts. For example, will BofA be forced to admit wrongdoing, and if so, will they actually describe what they did and who did it when they broke the law. Will they be able to deduct the fine from their taxes, thus sloughing off the burden onto taxpayers?

If or when the record deal goes through, Bank of America will have paid more than $50 billion in penalties and consumer relief in deals with government agencies, not including private investors, after acquiring subprime giant Countrywide and investment firm Merrill Lynch at the height of the crisis. And that raises the biggest question of all: how is it possible to cheat so many people out of so many billions without anybody actually breaking a law?

There is an interesting side case that is important to understand the BofA settlement. The bank had been low-balling the DOJ, offering to settle for maybe $3 billion, until last week, when Judge Jed Rakoff a federal judge in Manhattan ordered the bank to pay nearly $1.3 billion for selling 17,600 loans, many of which were defective. Bank of America had previously lost that case, which involved its Countrywide Financial unit, at a jury trial. Turns out, that going to trial was a very, very bad idea for BofA, and when Rakoff issued his ruling, the bank had no negotiating leverage in this case. The Department of Justice started preparing a suit to take to trial, and Bank of America returned to the negotiating table. The case before Judge Rakoff dealt with a Countrywide loan program known as the Hustle, which represented only a small fraction of the firm’s mortgage portfolio, meaning that penalties in cases dealing with larger programs could skyrocket.

Thursday, July 10, 2014 - If It’s Not One Thing…

If It’s Not One Thing…
by Sinclair Noe

DOW – 70 – 16,915
SPX – 8 = 1964
NAS – 22 = 4396
10 YR YLD - .01 = 2.53%
OIL + .59 = 102.88
GOLD + 8.70 = 1336.30
SILV + .32 = 21.52

We start today with the hottest stock in the world: CYNK Technology, ticker CYNK.  It is a one person company, which has something to do with a website, with headquarters in Belize, maybe. There is no indication of revenue, possibly about a million in losses. It had been trading for a couple of pennies, and then for no apparent reason it started trading higher. After closing at 6 cents on May 15 it began its surge with a 3,650% jump to $2.25 on June 17. The stock climbed as much as 49% to $21.95 earlier today in over-the-counter trading on volume of more than 380,000 shares before erasing its gain to close down 5.5% to $13.90, and a market cap of a little more than $4 billion. How and why did this happen? Nobody seems to have an answer, but I think it would be a very, very bad idea to do anything with this stock, just to be clear.

Se nao e uma coisa e outra coisa.

Which is Portuguese for “if it’s not one thing, it’s another thing.”

I’m sure somebody in Lisbon was fully aware of what was going on, and they were waving their arms and screaming about the bank that was ready to implode; and nobody paid any attention because there was so much else happening around the world. Iraq is fractured, bombs are flying in Israel, Germany is expelling a US spy, the Italian economy looks wobbly, Libya, Ukraine, Nigeria, Thailand, China. Pick a global hot spot, pick ten global hotspots, and I bet Portugal is not on the list.

Here’s the story: Espirito Santo International is a big conglomerate in Portugal; they missed a payment on some short-term debt this week. So, a couple of subsidiaries got clobbered, Espirito Santo Financial Group shares down 9%, and Banco Espirito Santo shares down 17%. Trading was halted.  The credit rating agency, Moody’s, cut the corporate credit rating to junk status, which is basically closing the barn gate after the cow gets out.

While I make no claim to any particular knowledge of the Portuguese banking system, the consensus is that this problem should not create a meltdown scenario; however, there has been a singe factor. Borrowing costs for Greece, Spain, and Italy bounced a bit higher. Again, this is not earth shaking, but it did cause a brief flash of realization that the banking problems of the past few years have not been corrected.

A couple of years ago the European Central Bank developed a plan for dealing with sovereign debt crises, the OMT or Outright Monetary Transactions program, but it has never been used and it probably wouldn’t apply even if the situation in Portugal started to create a meltdown scenario. So the fear out of Portugal is something called the “doom loop”; that’s the cycle in which weak banks lean on governments for support, draining public finances, which in turn drags down the banks with them.

A couple of years ago,ECB President Mario Draghi bought some time when he declared the central bank would do “whatever it takes”, and then they did nothing. So it was like a whiff of smoke that reminds you that never bought fire extinguishers, even after that little explosion in 2008, and the Greece fire in 2011.

And so, European stocks took a hit today, and that spread over to Wall Street, where the Dow Industrials started the day with a 180 point dip, until traders remembered – it’s Portugal. And then they decided that a little pullback following a 6 week rally was to be expected and Banco Espirito Santo is nothing to fear, even if you don’t have a fire extinguisher.

So, with the long-term memory of a dog chasing a squirrel, we move on to our next topic. After all, we live in a mobile-first and cloud-first world. So says Satya Nadella, the CEO of Microsoft; no he’s not the guy trying to buy the LA Clippers, he’s the guy who replaced Steve Ballmer. Nadella has sent out a really long email to all Microsoft employees outlining his vision for Microsoft. Over the years, Microsoft made a very large amount of money serving the PC world. Its Windows operating system and Office software generated the vast majority of its sales and profits, but now the personal computer is going the way of the typewriter. Microsoft used to talk about “a computer on every desk and in every home,” a vision it clearly succeeded in delivering. But what do you do when you’ve delivered that vision?

So Nadella writes: “Computing is ubiquitous and experiences span devices and exhibit ambient intelligence. Billions of sensors, screens and devices – in conference rooms, living rooms, cities, cars, phones, PCs – are forming a vast network and streams of data that simply disappear into the background of our lives. This computing power will digitize nearly everything around us and will derive insights from all of the data being generated by interactions among people and between people and machines. We are moving from a world where computing power was scarce to a place where it now is almost limitless, and where the true scarce commodity is increasingly human attention.”

There are a couple of interesting phrases in the mission statement from Nadella; he writes, “computing is ubiquitous” and also “ambient intelligence”. The idea that computers are ubiquitous is fairly easy to understand; just look around you; you probably have a smart phone close at hand; if you are in an office, you still have PCs, and don’t forget the computers in the printers and telephones, and thermostat, and electric meter. If you are driving right now, your car is a computing marvel. And if you are at home, check out the computer in your refrigerator, and dishwasher, and a dozen other gadgets and appliances. Another name for ubiquitous computing is the “internet of things”.

And the idea here is to connect machine to machine, and machine to human, and then human to human. We’ve been talking about that for a long time. The computers would be embedded in almost everything and everything would communicate seamlessly with everything else. We’re not there yet, but if you have questions about the internet of things, just ask Siri or Cortana.

All that computing power means we are surrounded by an ocean of data. The exploration of that data constitutes what Microsoft researchers call the “fourth paradigm”, exploration of data to discover new and interesting results to power a new generation of artificial intelligences. Microsoft Research head Peter Lee recently talked about some of the AI breakthroughs that were powering the new tools. Discussing the concept of “transfer learning,” he revealed that by training a speech recognition neural net on multiple languages, its performance improved with each new language, even on previously trained languages.

There are already apps that can infer context from our emails and documents and then deliver information we need, or might need, when we need it. We’ve already seen this in marketing and advertising; based upon your searches, the data programs can figure out whether you are getting married, pregnant, planning a vacation, or looking for a job; and then they deliver advertising that should grab your fancy and even calculate the probability of a purchase, putting the supply chain in motion, ready to send out drones to deliver your package with same day delivery, or even within the hour. It’s a little like the waiter anticipating when you want a coffee refill; that sounds like a simple task but it is incredibly complex and requires understanding the differences between correlation and causation. Computers are not good at that, but they’re getting better, or maybe they’re getting smarter.

As computing becomes more and more ubiquitous all those little computers, embedded in almost everything, are gathering data; and the neural networks are analyzing the data – watching and learning, and the data eventually becomes information, and the information becomes knowledge. And we end up with collective wisdom. At least that’s the idea.

We’re closer than you think. We already know that computing power grows exponentially. Moore’s Law basically says that technology performance indicators double every 18 months, which leads to incredible innovative applications only slightly bogged down by social acceptance. Not every innovation makes it into common usage because of concerns about privacy, lack of trust, reliability, or just information overload. Somewhere there is a huge scrapyard of abandoned apps.

There is an even larger ocean of smaller and more powerful embedded computers monitoring our actions and data and trying to figure out where we want to go, and then trying to figure out how to help us get stuff done. That’s the benign version. The version will a little less sugar coating involves a complete loss of privacy and subjugation before the robot overlords. Then again, in a world of CYNK Technology and Portuguese doom loops, maybe we deserve robot overlords.

Microsoft will have an earnings call next week, and we’ll likely learn more then. Today’s six page memo was big on building productivity, but that might also mean pink slips for many Microsoft employees; after all there are bound to be some redundancies following the Nokia acquisition. Nadella writes that "We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more." But for all the talk of a brave new mobile first, cloud first world, don’t expect Microsoft to abandon the Xbox game console; it’s a money maker. Still, it is a fairly bold new direction for Microsoft, maybe the biggest vision change since Bill Gates ran the place.

Thursday, June 05, 2014 - The European Central Bank Has Done Something

The European Central Bank Has Done Something

by Sinclair Noe

DOW + 98 = 16,836
SPX + 12 = 1940
NAS + 44 = 4296
10 YR YLD - .02 = 2.58%
OIL - .18 = 102.46
GOLD + 9.60 = 1254.20
SILV + .24 = 19.04

The Dow and the S&P finished with record high closes.

We start in Europe. The European Central Bank has done something. No, I’m serious, they did something; not just talked about doing “whatever it takes”, they actually took some action; nothing terribly bold; probably not enough, but something. Specifically, the ECB cut its benchmark interest rate to 0.15% from 0.25%, and the deposit rate to minus 0.10% from zero. The rate cuts will take effect next week, on June 11. They are trying the  negative interest rate, which has never been tried on a large scale, in a bid to push down the value of the euro and encourage banks to invest excess cash rather than hoard it in central bank vaults.

The ECB will also begin offering four-year loans to banks at the benchmark interest rates, under conditions meant to ensure that lenders use the money to issue loans to businesses. The loans are designed so that they can’t just borrow the money from the ECB at 0.15% and toss it into government bonds.

Also, the ECB will start buying packages of loans, or asset-backed securities; another measure designed to push lending to small businesses; right now there aren’t enough loans in the private sector to make this a big deal; but the idea is that the banks can get cheap money, lend it out, and then sell off the loans to the ECB. It’s called the targeted longer-term refinancing operations, or T.L.T.R.O., as if the world needs another financial acronym. Also, the ECB will no longer offset the impact of its holdings of bonds bought to combat the euro zone crisis in 2010 and 2011 by simultaneously withdrawing comparable amounts of money from the financial system.

This is a scaled down version of Quantitative Easing, and a very scaled down version of Abenomics. So Draghi and the ECB stopped short of using the metaphorical bazooka of full scale QE large scale asset purchases of sovereign bonds, probably because they would have a tough time working out which country’s bonds to buy; instead the ECB will purchase private sector asset-backed securities.

The idea of negative interest rates has been tried before, but not on a continental scale; still the negative part, is just a minus 0.10%, so it probably won’t be a huge game changer. If it isn’t sinking in just yet, here’s the simplified concept. Normally, if you put $100 on deposit with the bank they might pay you a small interest rate, say 1% a year. At the end of one year, you would have $101. Negative interest rates are just the opposite; if you put $100 on deposit with the bank, you would have to pay them, and so at the end of the year, you would have $99.

The theory is that when it becomes more costly for European banks to keep money in the ECB, they will have incentive to do something else with it; lend it out to consumers or businesses, for example. Or if negative rates make it less attractive for global investors to park money in Europe, it could cause the euro to fall on currency markets, helping reverse a rise in its value that has made European exporters less competitive.

Will negative interest rates work? Not necessarily. If the banks don’t start lending, they will have to start paying the negative interest rate, and then they will likely pass the cost on to the customer. They might not call it a negative interest rate, but banks are notorious for charging fees to their clients. If, or when the banks start charging fees for deposits, or however they pass along the costs, people might start pulling their money out of the banks. People might buy something when they take their money out of the bank, or they might just put it under their mattress at home.

On a smaller scale, Denmark tried negative interest rates a couple of years ago, and nothing really changed one way or the other; the Danish krona depreciated a little but it did not lead to a noticeable increase in real interest rates or an increase in bank lending.

Still, the ECB had to try something. ECB President Mario Draghi has been talking for 2 years about doing something. Now the question is whether it will work. The Eurozone faces low inflation and even deflation in certain countries. Deflation is a much bigger problem than inflation, and much less responsive to most monetary policy. Japan has been trying to escape the effects of deflation for the better part of two decades. Central banks can pump liquidity into the markets but they have a harder time creating demand in an economy.

One of the bank’s aims is to weaken the euro, which allows exporters in the euro zone to sell their products more cheaply abroad. A weaker euro also tends to push up inflation by raising the prices of fuel and other imported goods. Markets got the message. The euro fell 0.37 percent against the dollar, to $1.355, its lowest level in four months. Of course, if the Euro currency depreciates significantly, you have to wonder if Europe’s major trading partners would just sit back and fail to respond.

Will it work? I’m guessing it won’t. “Are we finished?” Mr. Draghi asked rhetorically at one point in his news conference. “The answer is no. If need be, we aren’t finished here.” Earlier, Draghi said, “If required, we will act swiftly with further monetary policy easing.” Which sounds a lot like what he said 2 years ago: “whatever it takes.”

If it sounds like the ECB’s moves are fraught with uncertainty, you are correct. This whole monetary system, whether in Europe or Japan or China or the US, is just a big experiment.

Today, Securities and Exchange Commission Chair Mary Jo White gave a speech on the stock markets and High frequency trading and dark pools. Depending on perspective it was either a major crackdown or same old same old. Mainly she said the SEC will start the process of looking into these things, which is disappointing because the SEC is supposed to be the regulator of these things. Instead we find out the SEC is looking into developing rules targeting high-speed traders, less transparent trading venues and order-routing practices, a move designed to promote fairness for investors, shine more light on the markets and bolster stability. I knew the SEC was behind the curve on these issues, but this is just sad.

Still, I guess it’s important because it does mark the first time Chairwoman White has articulated her plan for revamping equity market structure rules since she took over at the SEC in the spring of 2013. White said she has numerous regulatory proposals in the works, including an "anti-disruptive trading" rule to rein in aggressive short-term trading by high-frequency traders during vulnerable market conditions, and a plan to force more proprietary trading shops to register with regulators and open their books for inspection.

Dark pools allow investors to execute trades anonymously and do not make trading data available until after the trade is complete, if at all. White says she wants more transparency for the dark pools, and the SEC is seriously thinking about finding out who and where these dark pools are and maybe asking them to disclose more to the public and to regulators about how they operate. Any regulations that are ultimately proposed will have to be vetted through a public comment process and approved by a majority of the SEC's five commissioners. But ultimately, Chairwoman Mary Jo White wants the SEC to actually understand how the stock markets work. And to this end the SEC seems to be all in favor of disclosure. To be fair, disclosure is the SEC's answer to most questions, but it's especially the answer to questions that the SEC doesn't especially want to talk about.

Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Monday, June 02, 2014 - Clean Power Plan

Clean Power Plan

by Sinclair Noe

DOW + 26 = 16,743
SPX + 1 = 1924
NAS – 5 = 4237
10 YR YLD + .07 = 2.53%
OIL - .31 = 102.40
GOLD – 7.80 = 1244.50
SILV - .05 = 18.86

The ISM got it wrong this morning. The Institute for Supply Management reported its May manufacturing index came in at a weaker than expected 53.2, but there was a software problem that didn’t properly reflect season adjustments; the ISM issued a revision; the May index was 56.0; but for some reason, that wasn’t correct, so they issued another revision. The May manufacturing index was 55.4; that’s the number and they’re sticking with it. Embarrassing? Yes.

Meanwhile, stocks and bonds were all over the board. Stocks fell into negative territory early on, but bounced back as revisions were issued. Bonds are hyper sensitive to economic growth, and the yield on the 10 year note moved higher and stayed higher, despite the initial numbers and the revisions. And if you look past the revisions, and you should, because it appears to be nothing more than an honest mistake, caught quick and corrected; the bottom line is a pretty strong number for manufacturing, more or less in line with the idea of a second quarter bounce in the economy.  

The bigger story this week will be the jobs report on Friday. It is widely expected the economy added about 200,000 to 215,000 jobs in May, which would be down from a very strong report of 288,000 net new jobs in April. The unemployment rate is expected to tick up from 6.3% to 6.4% as more people enter the labor force.

We also expect some big economic news out of Europe this week, and we’re likely to see a small announcement instead. You will recall that European Central Bank President Mario Draghi announced back in the summer of 2012 that he would do “whatever it takes” to save the euro. And then he spent the following two years doing nothing. This week he’s expected to actually do something, specifically he’s expected to unveil a package of measures to fight deflation. Analysts expect the ECB to cut both its main interest rate and reduce its deposit rate to below zero, meaning the central bank would charge lenders to hold money with it overnight. Although any reduction will be modest, a negative deposit rate has never been introduced by a major central bank; and the thinking goes, this will force the banks to start lending.

It doesn’t take much to see the flawed logic. Many countries in the Euro periphery are still struggling with Great Depression level unemployment. As long as unemployment remains as high as this, it’s nearly impossible for countries to generate the internal demand necessary for durable growth. The biggest obstacle to a bold move would seem to be Germany, which is enjoying a pretty strong economy, but even there, the inflation rate has dipped down to 0.6%. The ECB seems to think a little fine tuning will right the ship and then a rising tide will lift all boats. Doubtful. 

As expected, the EPA today issued the "Clean Power Plan" proposal, calling it "a commonsense plan to cut carbon pollution… Climate and weather disasters in 2012 cost the American economy more than $100 billion," the agency says in a document accompanying the proposal.

EPA Administrator Gina McCarthy said: "We don't have to choose between a healthy economy and a healthy environment. Our action will sharpen America's competitive edge, spur innovation and create jobs."

The regulations would force power plants to cut carbon dioxide emissions by 30% by 2030. The rules would set guidelines that states could choose how to follow. Under the plan, each state would have its own goal within the overall national pollution reduction effort. That’s an attempt to be politically and practically flexible in implementation. The EPA would set targets for each state for carbon emissions reductions. Then state governments would come up with their own plans for hitting these targets. The proposed regulation in essence gives them four different approaches they could try. They could renovate existing coal-fired plants with newer, more clean-burning technology; they could switch coal plants to natural gas, which produces much less carbon; they could try to persuade residents to be more efficient in their use of electricity; or they could band together with other states in a cap-and-trade network for emission reductions.

In a cap-and-trade network, companies would buy and sell permits allowing them to produce a certain amount of carbon emissions. Clean producers would be the sellers, while dirtier producers would be the buyers.

Almost a third of America's carbon emissions comes from electricity generation. EPA officials concede some of the dirtiest power plants now operating, such as older coal-fired plants, will end up shuttered as the nation shifts its reliance from traditional fossil fuel sources to cleaner alternatives. Coal supplied 37% of US electricity in 2012, compared to 30% from natural gas, 19% from nuclear power plants, 7% from hydropower sources such as dams and 5% from renewable sources such as wind and solar. By 2030, just over 30% of US electricity will come from coal and about the same amount from natural gas, with wind, solar and other alternative sources providing about 9%.

According to the EPA, the proposed new rules would reduce carbon pollution by the same amount as removing two-thirds of all cars and trucks form American roads. It put the cost as high as $8.8 billion a year, but noted health gains such as fewer premature deaths and respiratory diseases along with other benefits would be worth tens of billions of dollars to the US economy. Recent analysis quantifies the benefits in health, air quality and clean water at $63 billion a year. Since 1970, every dollar invested in compliance with Clean Air Act standards has yielded $4 to $8 in economic benefits.

Will this move actually clean up global pollution? Not really. No matter what the US does, global emissions will keep skyrocketing in the near future. This is because most of the rise in emissions is being driven by China. China’s carbon pollution has soared in the last 15 years, and is now about double the US level. The rest of the increase has come from oil-producing countries and from other, more slowly developing Asian nations; but China overshadows all of the other sources.

American per capita emissions, of course, are still more than twice as large as China’s. And the simple fact is that we won’t get far trying to tell China they have to cut emissions if we aren’t willing to cut our own emissions. Of course, if we unilaterally cut our emissions, that doesn’t mean China will be willing to follow our lead. Self-restraint might do nothing more than push down the price of high carbon energy sources, allowing China to burn more for less. What this move really does is position the US as a leader in cleaner energy technology, and even if we can’t export natural gas to China or many other parts of the globe, we could export cleaner energy technology and expertise.

One way to do this is to tax carbon intensive imports; something not included in today’s proposal. The US is still China’s most important export market, so a US carbon-import tax will provide a huge incentive for Chinese companies to reduce emissions.

Another specific not included in today’s proposal would be to implement a carbon tax or equivalent here in the US. This won't cut worldwide emissions enough to make a dent in global warming, but the funds could be used to spur research and development into things like gas, solar, wind and energy efficiency. We should think of carbon taxes mainly as incentives for the private sector to discover all the carbon-cutting technologies, and fund the research that will make green energy cheaper than coal.

Fortunately, renewable energy is up to the challenge of replacing those dirty fuels. In just the last three years, solar panels have gotten 60% cheaper and the price of wind energy has fallen more than 40%. Far from being expensive, clean energy is already beating both coal and natural gas on price in many parts of the country.

Coal and oil are low tech fuels whose time has passed, just as surely as the days of using whale oil to light our lamps, but the transition won’t be easy. The apprehension in coal country to leave this current path is understandable. We would all feel it if we were in their shoes. Outsiders can't ignore the plight of the families and the affected communities. And there will be massive political opposition, especially from the politicians backed by coal and big oil, which is most of the politicians. And most of these new regulations won’t go into effect until 2015, and there will be legal challenges, but the future is changing.

ISM, manufacturing index, jobs report, ECB, Mario Draghi, Gina McCarthy, EPA, Clean power Plan, record high close, Sinclair Noe, 

Tuesday, May 27, 2014 - Currently Trending Here

Currently Trending Here
by Sinclair Noe

DOW + 69 = 16,675
SPX + 11 = 1911
NAS + 51 = 4237
10 YR YLD - .02 = 2.52%
OIL - .24 – 104.11
GOLD – 29.20 = 1264.30
SILV - .40 = 19.14

The S&P 500 Index closed at another record high. The Dow Industrial Average is just a little below the May 13 record of 16,715. The Russell 2000 index of small and mid-caps confirmed the uptrend. The Russell had been lagging and there was a concern that small caps might drag the blue chips lower. While the Russell is still down about 2% year to date, on Friday it moved above its 200 day moving average.

Any time the market is trending, it makes sense to look for divergences, or any indicator that might signal a change in trend, but the most important thing to watch is still the trend itself; in other words the market scorecard is measured in price. And right now the trend is up.

Let’s start with some economic news. The S&P/Case-Shiller Home Price Indices continued to show gains in prices for existing home sales; the 10-city composite was up 0.8% and the 20-city composite was up 0.9% month over month; and respective year over year gains of 12.6% and 12.4%. Nineteen of the 20 cities showed positive returns in March; New York was the only city to decline. As of March 2014, average home prices across the United States are back to their mid-2004 levels. Measured from the 2006 peaks, home prices are down 19%.

Mortgage rates started rising in May 2013 as the market speculated about when the Federal Reserve would start pulling back on its large scale asset purchase program, at the same time inventories of new and existing homes dropped, pushing prices higher and affordability was pushed down. One positive for home sales is that mortgage rates have recently dropped with the average 30 year fixed at 4.14% and the average 15 year fixed mortgage at 3.25% the lowest levels since last October.

The Conference Board said its consumer-confidence index rose to 83 in May from a downwardly revised 81.7 in April. The survey shows 20% of respondents expect their incomes will improve in the next 6 months; that doesn’t sound like much but it’s the highest reading since 2007. Other key elements of the survey: A net 18.2% said jobs were hard to get vs. being plentiful, compared with 19.8% in April and 26.5% in May 2013. Those who plan to buy a home within six months fell to 4.9% in May, the lowest since July 2012; that compares with a percentage of 5.6% in April. Those who plan to buy major appliances within six months fell to 45.1%, the lowest since September 2011.

Durable goods orders increased 0.8% in April. Durable goods are products designed to last 3 years or longer; so this is a broad category that includes everything from toasters to cars to nuclear submarines. In April, the Navy inked a $17.6 billion contract for 10 nuclear-powered attack submarines; and while that will be money that will circulate through the economy over several years, it skewed the report. Non-defense capital goods orders fell 1.2%. Business are placing fewer orders while working through a stockpile of goods amassed in the second half of 2013. Last month, durable goods inventories rose 0.1% after increasing 0.2% in March.

The Memorial Day holiday signals the unofficial start of summer and the summer driving season, and that usually equates to higher gasoline prices at the pump. Usually, but not always. According to the Energy Information Administration, prices at the pump are going to fall from today’s levels. This forecast is based on increased crude-oil production and declining global demand.  Rising oil production has boosted US crude-oil inventories to some 398 million barrels. That’s the highest level since way back in 1931. Demand is down, in large part because of better fuel efficiency forced by government MPG mandates. Demand has been declining since 2007. In many areas, gas prices are the lowest since 2011. Each penny decline in gasoline puts $1 billion back into people’s pockets.

Speaking in Portugal today, European Central Bank President Mario Draghi warned that prices in the countries in the euro zone's stressed periphery were falling too sharply, due to the combination of belt-tightening and a high exchange rate. He also cited evidence of a debt trap in stressed countries: the cost of finance for many companies has risen since the crisis, while falling prices mean they can't generate the profits to service their debts. Draghi said that the share of viable small businesses that can't get a loan is only around 1% in Germany or Austria, but around 25% in Spain and 33% in Portugal; Draghi called this imbalance a “credit gap” and blames it for up to a third of the economic slack in the crisis economies and acting as a brake on economic recovery. And so Draghi says the ECB will take action June 5th to ward off deflation and support economic recovery; what precisely will be done is still a matter of speculation.

It is widely anticipated the ECB will cut interest rates combined with an attempt to boost credit to small and medium sized businesses by providing long-term funding to banks provided they deploy that capital to expand business credit. The main lending rate will likely be cut from 0.25% to 0.1% or so. Meanwhile, the deposit rate paid to banks on overnight deposits will likely be cut from zero to a negative 0.1% or so, in effect charging the banks for funds they leave with the central bank.

The Federal Trade Commission has issued a report on the data brokerage industry. The nine data brokers examined in the FTC report were Acxiom, CoreLogic, Datalogix, eBureau, ID Analytics, Intelius, PeekYou, Rapleaf and Recorded Future. Data brokers analyze data collected about consumers to make automated assumptions about them. Consumers are placed in data-driven social and demographic groups for marketing purposes. The commission says that the same data that identifies a motorcycle enthusiast could both get him a discount on a biking magazine and make it easier to charge him more for car insurance. Another way to look at this is that the consumer is not the customer, rather the consumer is the product.

And yes, the data brokers know whether you drive a motorcycle, or smoke cigarettes, or if you are overweight, and how many bathrooms you have in your home, and if you travel or just like to read magazines about travel; that’s all in addition to the basics like name, address, social security number, age, and the bluntly termed “ability to afford products”.

According to the FTC, the firms have done a great job of finding data to crunch. One firm has information on 1.4 billion consumer transactions; another one adds 3 billion new records to its databases each month. While the report doesn’t address credit scores, the framework of the debate is much the same. What really worries the FTC is the impossibly opaque way the data is collected and managed. The data brokers gather their data from other data brokers rather than directly from an original source.

This is where the commission thinks the government should get involved. It suggests a law that would mandate the creation of a centralized portal where data brokers explain themselves, disclose their sources, and give people the opportunity to opt out; or for more sensitive data, require consumers to opt in before data could be sold. The commission hints it might call for some version of the idea that people have a right to have some things be forgotten, but they don’t actually recommend that data brokers cull their data, even when that data may be very old and inaccurate. And there is talk, but nothing concrete, about giving consumers access to their own data, and the ability to call for some of that data to be corrected or deleted.

President Obama today outlined a plan to withdraw all but 9,800 American troops from Afghanistan by the end of the year and withdraw the rest by the end of 2016. Under his plan, 9,800 US troops would remain behind into next year. By the end of 2015, that number would be reduced by roughly half. By the end of 2016, the U.S. presence would be cut to a normal embassy presence. The United States now has about 32,000 troops in Afghanistan.

At some point in the next week, President Obama is expected to announce Environmental Protection Agency mandated cuts intended to reduce carbon pollution by regulating carbon dioxide emissions from about 600 existing coal fired power plants. Obama could not get Congress to take action to address climate change during his first term, so he changed his tack and is using his executive authority under the 1970 Clean Air Act to issue the EPA regulation.

As currently drafted, the rule would cut greenhouse-gas emissions from the utility sector by 25%, the individuals said, but the baseline for that reduction has not been finalized. The EPA plan resembles proposals made by the Natural Resources Defense Council, which would allow states and companies to employ a variety of measures, including new renewable-energy and energy efficiency projects “outside the fence,” or away from the power plant site, to meet their carbon- reduction target.

Usually when the EPA regulates pollutants under the Clean Air Act, the agency sets an emission limit for each facility. By contrast, under a “mass-based system,” which the EPA is poised to adopt, states would have to meet an overall target for greenhouse-gas emissions and ensure that power plants either make those reductions at their facilities or finance efforts to achieve them in other ways, such as conservation or “green” generation or possibly through some variation of the cap and trade system.