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.

Tuesday, July 15, 2014 - The Path We're On

The Path We’re On
by Sinclair Noe

DOW + 5 = 17,060
SPX – 3 = 1973
NAS – 24 = 4416
10 YR YLD + .01 = 2.54%
OIL - .74 = 100.17
GOLD – 13.20 = 1294.60
SILV - .19 = 20.82

We’ll start with a couple of quick economic reports.

The Commerce Department reports retail sales increased 0.2% in June. The sales figures from May were revised from a 0.3% increase to a 0.5% increase. The increase in June was below consensus expectations of a 0.6% increase; however sales in April and May were revised higher, so it all levels out and was fairly strong report. Sales were up 4.3% year to year.

The Empire State Manufacturing Survey for July was up 6 points to 25.6, a four year high.

The state of California released its monthly cash report for June; the state’s General Fund ended the fiscal year with a positive cash balance for the first time since 2007, so the state won’t have to borrow to meet all of its payment obligations.

Federal Reserve chairwoman Janet Yellen delivered her semiannual Humphrey Hawkins testimony before the Senate Banking Committee today. Tomorrow, Yellen will repeat the process with the House. Yellen said progress has been made to restore the economy to health and strengthen the financial system, yet too many Americans remain unemployed and inflation remains below targets and there hasn’t been enough financial reform.

After prepared remarks, Yellen fielded questions from the senators, and this is where it gets a little interesting. Yellen said, “equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.” Some folks felt this was an “irrational exuberance” moment for Yellen. Social media and biotech stocks declined immediately after her comments. Yellen has a good reputation on forecasting. Back in 2006, when she was president of the San Francisco Fed, she gave a speech pushing back against former Fed Chair Alan Greenspan’s claim, with respect to the housing crisis, that the “worst of this may well be over.” Greenspan was wrong, Yellen was right, or at least not as bad as Greenspan.

Yellen said the Fed is still concerned about the housing market: “While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”

The housing market slowed last year when mortgage rates spiked on the possibility of taper. Yellen said that while the rise in rates is “the most obvious explanation for the weakness in the housing market over the past year,” it “seems unlikely that interest rates are the whole story.”

Yellen says the Fed is keeping a close watch on what it sees as potentially excessive risk-taking in the market for leveraged loans, but downplayed the possibility that its policies of ultra-low interest rates could be fueling asset bubbles. Still, there are some areas of financial markets, such as lower rated corporate debt, that are showing looser underwriting standards. Yellen and her Fed colleagues seem generally unfazed by concerns of bubbles and she said in testimony that the prices of real estate, stocks and corporate bonds “remain generally in line with historical norms.”

Yellen said most officials expect rates to start rising in 2015 and to finish the year around 1%. “That gives you a feeling for what participants thought would be appropriate given their projections in June,” she said. “What will actually happen clearly is going to depend on the progress the economy makes.”

Yellen seems pleased with the trajectory of the economy; investors seem complacent. She reiterated the Fed’s view that the economy will continue to grow at a moderate pace, and that the Fed is in no hurry to start increasing short-term interest rates.

All in all, Yellen’s testimony didn’t reveal much new. The Fed has been telegraphing this information for some time. The idea is that they can float information, and if the trial balloon gets shot down, they aren’t stuck in actual policy; if the trial balloon is accepted they can slowly implement the policy. It’s called forward guidance, and it seems to be working. The problem with forward guidance is that the Fed doesn’t know the future, and so they keep the guidance a little on the vague side, and then everybody fills in the blanks based upon their own particular bias.

It is earnings season and a couple of the big banks posted today.

JPMorgan reported a profit of $6 billion, or $1.46 a share, down from $6.5 billion, or $1.60 a share, a year earlier. Goldman Sachs posted net income of $2.04 billion, compared with year-earlier net income of $1.93 billion. Both banks saw share prices move higher after the reports.

These earnings came during a quarter in which fixed-income trading and mortgage refinancing were weak; so in that regard, the banks performed well. More likely the banks managed earnings expectations.

Johnson & Johnson reported higher-than-expected quarterly results on strong sales of its new hepatitis C drug. J&J said it had earned $4.33 billion, or $1.51 per share, in the second quarter. That compared with $3.83 billion, or $1.33 per share, a year earlier. They also raised guidance for the full year.

Intel posted better than expected Q2 revenue and profit; then they raised their Q3 revenue forecast well ahead of expectations; then they announced they would increase their share repurchase program. Intel posted a profit of $2.8 billion, or 55 cents a share, from a year-earlier profit of $2 billion, or 39 cents a share. Gross margin widened to 64.5%, compared with 59.6% in the first quarter. Intel still makes most of its profits from chips for computers; they’re still trying to get into the mobile market, but this past quarter they made more than a half billion in profits making chips for the internet of things, which is basically the idea that all of our mundane possessions will eventually be connected devices.

A study by the International Data Corporation calculates the internet of things market will grow to $7.1 trillion in the next 5 years. More than 1.9 billion once-inert devices are already connected to the internet, from parking meters to home thermostats, and by 2018 that number will top 9 billion.

The Federal Communications Commission website has crashed. Today is the last day to submit comments on the FCC’s proposal to regulate the internet. The proposal at issue would allow internet providers to charge content companies for more direct connections to their customers. These so-called “fast lanes” have sparked a vehement reaction from internet activists, who claim that the new policy could turn the web into a plutocracy where companies that are willing to shell out cash receive premium treatment. As of last week, the FCC had received almost 650,000 comments, mostly in favor of net neutrality; which is another way of saying no toll booths on the information superhighway.

Real highways are another matter. This afternoon the US House approved an $11 billion plan to replenish the federal fund for highway and mass transportation projects, but just through next May. Passage of the bill only puts off a larger debate over raising taxes to pay for long-term infrastructure financing. This was a stop-gap measure, as federal funds were 2 weeks from drying up which would have resulted in work stoppages during the peak of the summer roadwork season.

The Department of Transportation has said that without an agreement in Congress, federal payments to states will begin to slow by the end of the month. Also, the existing two-year law authorizing about $50 billion in highway and transit funding annually expires on Sept. 30; and with it the ability of the government to levy the 18.4-cent-per-gallon gas tax that finances the work.

Longer term plans have been dragged down by disagreements on how to fund projects. The short-term proposal signed today, raises money through an accounting gimmick called pension smoothing, which allows for a delay in the payments that corporations make to their pension funds resulting in a higher corporate tax bill. It’s a temporary, inadequate response to a long-term problem, better than nothing, even if it doesn’t do what it needs to do; which seems to describe everything in Congress these days.

The road ahead may be full of potholes, but on the road of life, most people think the ride will be smooth. A new survey conducted by the National Council on Aging, Untied Healthcare and USA Today finds that older adults are pretty optimistic; 89% say they’re confident they can maintain a higher quality of life through their senior years. On the financial front, 45% of the older group surveyed said they wished they had saved more money; almost one-third (31%) said they wished they had made better investments. The new survey finds more financial optimism than last year, but still almost half (49%) of the 60-and-older respondents say they're concerned that their savings and income will be sufficient to last the rest of their lives. In 2013, 53% expressed that concern.

So what is behind the optimism? The reasons vary, but support of family and friends is at the top, followed by being happy about their living situation, and being in good health.

There seems to be something to the good health part of the optimism equation. The medical journal JAMA released a study today showing people are having fewer strokes and dying less often in the wake of strokes. It’s still a big problem, striking 800,000 people a year and killing 130,000, but the numbers are down.

Another study released this week says better heart health and more education means the onset of Alzheimer’s begins later in life now than 30 years ago in developed nations. One trial in Finland suggested the body can be conditioned to hold off mental decline with gym exercising, good food choices and cognitive training.

It is good to have an end to journey towards, but it is the journey that matters in the end.

Wednesday, July 17, 2013 - Good Markets, Bad Economy

Good Markets, Bad Economy

by Sinclair Noe

DOW + 18 = 15,470
SPX + 4 = 1680
NAS + 11 = 3610
10 YR YLD - .04 = 2.49%
OIL + .59 = 106.59
GOLD – 16.90 = 1275.60
SILV - .72 = 19.29

Let's start today with a quick rundown of a few earnings reports.

Intel reported second quarter net income of $2 billion, down from $2.8 billion a year ago. Revenue was $12.8 billion, and they expect third quarter revenue around $13.5 billion, both revenue numbers and guidance were below current estimates.

IBM posted earnings of $4.3 billion on revenue of $24.9 billion. Earnings were up slightly from a year ago, while revenue was down slightly.

Bank of America reports net income rose 63 percent, to $4 billion from $2.5 billion in the period a year earlier, while revenue increased to $22.7 billion from $22 billion. The bank benefited from higher revenue from equities sales and trading and a reduction in expenses, but its mortgage unit continued to struggle.

This seems to be a recurring trend for the big banks; more profits from the Wall Street business side, less revenue from the old fashioned loan business, less money set aside for reserves. The concerns are that trading performance tends to be uneven over time, and cutting costs can only go so far, it doesn't increase revenue.

June housing starts fell 9.9% to an annualized rate of 836,000—the lowest level since August 2012. The drop in housing starts was led by a decline in multifamily construction, which fell 26.2% versus 0.8% for single-family houses.

The Federal Reserve released its Beige Book survey today, and it indicates “modest to moderate” growth. Housing construction and home prices improved, while consumer spending increased in most districts, fueled by rising car and truck sales. The housing recovery is also driving more production of lumber, materials and construction equipment.

The report says hiring held steady or increased in most districts. But employers in some districts were reluctant to hire permanent or full-time workers. Employers have added an average of 202,000 jobs a month this year, up from about 180,000 a month in the previous six months. Still, growth has been weak.

Fed Chairman Ben Bernanke went before the House of Representatives today to deliver his semi-annual testimony, which was also pretty beige. Bernanke said: “We’re going to be responding to the data. If the data are stronger than we expect, we’ll move more quickly” to reduce bond purchases. If data “don’t meet the kinds of expectations we have about where the economy’s going, then we would delay that process or potentially increase purchases for a time.”

The Fed chairman described labor markets as “far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high.”

And then we have to realize that the Fed's economic forecasting is usually a bit more rosy than realistic. Each year for the past 3 years they've been forced to revise lower. Already this year, economic growth has dropped below expectations. The Fed's prediction of stronger growth in the second half will almost certainly be cut from the current level of 2.5%. The recent spike in inflationary pressures, which is almost entirely due to the surge in energy costs, also negatively impacts the economy. The spike in inflationary pressures in 2011 coincided with the peak in economic activity. And increases in energy prices are highly correlated to recessions, as we discussed yesterday.

So, Bernanke's testimony today confirmed the Fed isn't going to exit QE or taper off from purchases any time soon. They can't reduce liquidity without risking the markets tanking, taking down consumer confidence and negatively impacting the economy. Or, the other way to look at it is that the Fed is the only thing holding up the markets as the economy continues to slowly grind along, or more likely, erode.

The Fed is constantly communicating its intentions regarding rates and it just tends to artificially prop up the markets, resulting in an imbalance, or some think a possible bubble. The Fed has controlled the markets in part starting with the Greenspan Put, then the historically low interest rates, and then the nearly constant infusions of fresh cash for primary dealers by way of massive government bond purchases. By pegging money market rates, the Fed has created fertile ground for carry trades; and the carry trades create an artificially bigger and bigger bid for risk assets. In this kind of environment, it seems prices can only go up.

After all, the Fed is providing what amounts to insurance against downside risk. The super cheap money and the idea that Too Big to Fail won't be allowed to fail, then attracts even more money flowing into even more speculative long positions. The Fed sets near zero interest rate policy well out into the future, and that eliminates any surprises in the yield curve. That, in turn, allows the traders in the money markets to hypothecate and rehypothecate securities without worries.

The monetary policy of the Fed serves to prop up risk assets but it doesn't do much to drive economic growth. There may be some trickle down effect but not enough to lift economic growth. The old fashioned ideas of credit creation aren't working. We've seen this failure as the big banks have been reporting earnings. The big banks have been reporting remarkable profits, but it comes from their trading desks; gambling in high risk assets; and it comes from setting aside fewer reserves. They just aren't making traditional loans.

Traditional loans used to get money circulating through the economy. A bank made a loan to a consumer or a business. The consumer or the business then spends the money and that adds to GDP which then increases corporate sales and profits. The money circulates and economic activity increases. But money velocity has dropped, even as the Fed has been shoveling trillions of dollars into the banks; that money hasn't found its way into the broader economy, it's been swallowed up by offshore trading in the highly profitable and incredibly dangerous and unregulated international derivatives markets; or what is sometimes called shadow banking, which has now grown to about $70 trillion.

The shadow banking system has grown to such incredible size without providing any real benefit to the broader economy, and represents a far bigger risk than benefit for GDP growth. The Fed's QE policy, and the reason Wall Street gets it's panties in a wad at the thought that QE might end, is nothing more than a way for the Fed to raise the reserve levels of banks; which means the banks don't have to set aside reserves from their own profits. The money remains on the Fed's books as a credit to the bank, unless the bank chooses to re-invest in some sort of asset purchase; which they typically do; which drives up asset prices, but does nothing for the economy.

So, the economy is not improving, or at the best it is slowly improving, but not enough to reach escape velocity. We've seen some job growth but not enough and the quality of jobs is weak; many of the jobs are part-time or temporary, and wages are shrinking; which means disposable income is shrinking; which mean demand is weak and top line sales are slipping; which means that the way corporations keep profits up is by cost cutting, but we're coming to the end of the rope when it comes to cost cutting. The major market indices are at record highs but the economy is still grinding along in a trough.

So, we've got a multi-trillion dollar shadow banking system propped up by credit creation in the form of QE and leveraged for optimal results; and indeed, the banks have been returning optimal results. But remember that leverage is a two-way street. It works great when the trade goes your way, but it can double your losses when the trade turns against you. What happens when the asset you have leveraged into suddenly begins to move in the wrong direction exposing you to substantial loss - not increased profits? More importantly what happens if the sheer size of your positions are so significant relative to market volume that liquidity disappears and you can't exit the trade without significantly moving the market in the wrong direction? The answer of course is that you are stuck. We've seen this before with Lehman Brothers, with LTCM, and more recently with the London Whale. We will see it again.

Bernanke talked today about the necessary economic conditions that would warrant a change in QE policy. Maybe the Fed could exit QE if there was some fiscal policy that actually had the potential to increase GDP and provide jobs and spur demand. We don't have that. We have a weak economy and highly speculative asset bubbles and all it takes is a blip in liquidity and the whole show could freeze over in a heartbeat.

So for now the market makers will back stop sell offs. Investors will continue to play along because they have no place else to go. And the Federal Reserve will continue with its accommodative policy; they don't really have a choice in the matter.

Tuesday, April 16, 2013 - Love That Dirty Water

Love That Dirty Water

by Sinclair Noe

DOW + 157 = 14,756
SPX + 22 = 1574
NAS + 48 = 3264
10 YR YLD + .02 = 1.72%
OIL + .20 = 89.90
GOLD + 16.70 = 1370.30
SILV + .65 = 23.44

If home is where the heart is, then Boston is everybody's hometown today. No significant developments to report. The death toll stands at 3, with 176 people reported as injured, some in very critical condition. Officials now say it was just two bombs; yesterday, there was speculation there were more. There is no indication that the bombing was part of a broader plot. We still don't know if it was one evil lunatic or a group of evil lunatics. We don't know if it was done by someone from this country or elsewhere. There have been no arrests, and it is a very intensive ongoing investigation. We should not speculate on some things. What we do know is that people responded by running toward the blast to help the victims. We do know that the medical personnel and others responded heroically. And we do know that the good, decent, and heroic people outnumber the evil lunatics; always have, always will.

Total housing starts in March were up 46.7% from the March 2012 pace, although some of that increase was due to a surge in multi-family starts in March. Single family starts were up 28.7%. Even with this significant increase, housing starts are still very low.

The consumer price index decreased 0.2% in March, led by lower energy and apparel costs. Energy prices decreased 2.6% in March, retracing half of the 5.4% rise in February. Gasoline prices fell 4.4% in the month. Electricity prices also declined. The only big gain came in prices for used cars and trucks.

In the past year, the CPI has risen 1.5%. So,today's report may actually add to concerns about deflationary pressure; at the very least, it leaves plenty of room for the Federal Reserve to continue QE.

Industrial production rose a seasonally adjusted 0.4% in March, and February’s growth was revised higher to 1.1% from the initially reported 0.8% advance. The March gain wasn’t necessarily a great sign for the economy; utilities output rose due to unusually cold weather, and manufacturing and mining output actually decreased. Still, the annualized 5% gain in output during the first quarter was the best since the first quarter of 2012, and came as consumer goods output shot up 6.2%, the best quarterly gain since the end of 1999. The auto industry was a major factor in the first quarter numbers. Strong demand for new cars pushed automotive product output up 2.6% higher in March and 13.2% for the quarter.

Coca-Cola reported first-quarter results above Wall Street's forecasts. Coke also said it struck a deal to start refranchising its business in the US, which will lower costs.

WW Grainger, which sells power tools and other industrial equipment, said its first-quarter net income climbed 13 percent.

Intel reported a widely expected drop in first-quarter earnings on Tuesday, though the final results were in line with diminished expectations. Intel reported net income of $2 billion, or 40 cents per share, compared with net income of $2.7 billion a year ago.

US Bancorp reported first-quarter earnings that fell short of analysts' expectations. The Minneapolis bank's net income rose 7 percent to $1.43 billion as it set aside less cash to cover soured loans. Goldman Sachs reported first-quarter profit of $2.2 billion, or $4.29 a share, driven by strength in its investment banking business as well as its investing and lending unit.

European lawmakers have voted to cap banker bonuses at the region’s largest institutions, as part of a major set of reforms designed to curb the financial industry’s risky behavior.

The legislation had faced major opposition from Britain, home to Europe’s largest financial center, but it was eventually outvoted by other European Union countries that wanted to rein in the excesses. It's not like the bankers will starve. Compensation limits will restrict bonus payments to one year’s base salary, though that figure can be doubled if a majority of shareholders approve. The legislation will apply to all banks active in Europe, as well as the international divisions of European firms like Barclays and UBS.

Meanwhile, Italian officials broadened their investigation into whether the Japanese investment bank Nomura helped hide losses at the troubled lender Monte dei Paschi di Siena, ordering the police to seize assets worth $2.35 billion and naming a former top Nomura executive as a suspect.

The unusual move to seize such a large sum, and go after prominent bankers, underlined the importance of the case in Italy and the euro zone, where people are still a little nervous about banks, following that little episode in Cyprus. Monte dei Pashci is the oldest bank in the world and the third largest in Italy, and it apparently has to do with some transaction that left the bank in need of a bailout for more than $5 billion by the Italian government.

For the past few years I've talked with you about the foreclosure frauds perpetrated by the banksters. Lots of things went wrong, including: fake documents, forged documents, robo-signing, illegal foreclosures, foreclosures on military families while they served overseas, foreclosures on homes with no mortgages, foreclosures on people who paid on time, foreclosures on people who were truly trying to work out some sort of reasonable deal, kickbacks, and in general a complete lack of accountability for these crimes and abuses.

But instead of giving voice to thousands upon thousands of victims of illegal foreclosures, instead of documenting the banks’ criminal practices, maybe what we all should have done is simply let the Office of Comptroller of the Currency – part of the Treasury Department — and the Federal Reserve construct their own settlement with the banks. Then, when it utterly unraveled — as it has over the past couple of months — the unimaginable fraud heaped upon homeowners would get more attention than ever before.

Indeed, despite OCC and the Fed’s best efforts to protect banks from harm, they’ve actually exposed them like never before. Two years ago,  the OCC, the primary regulator for the banks doing the lion’s share of the foreclosing, had to answer for their complete lack of oversight and enforcement. So they came up with a solution.

Instead of joining with other regulators and leveraging their authority to generate the biggest penalties possible, OCC would break off (the Federal Reserve would join them), and pursue its own settlement. Announcing that 14 mortgage servicers committed “violations of applicable state and federal law,” OCC would allow 4.2 million homeowners in foreclosure in 2009 and 2010 to petition for an “independent” review, and would mandate specific restitution for any foreclosure found to be improper. The real goal was to find as few irregularities as possible, to “prove” that the problem was contained to a few isolated cases of sloppy paperwork, and to undermine the other state and federal regulators’ investigations. It was the perfect plan, if your idea of a good plan is to downplay bank malfeasance and subvert justice.

This plan began to take water from the moment it began. The Independent Foreclosure Reviews weren’t independent: OCC and the Fed, in their infinite wisdom, decided to let the banks hire and pay for their own third-party reviewers. The predictable consequences included a windfall for the bank consultants hired for the job – they made a combined $2 billion off the reviews – and numerous cases of reviewers deliberately trying to make the banks look better, or even hiding evidence of bank malfeasance. The OCC faced a moment of truth: Power through with expensive and obviously flawed reviews, or pull the plug. They did the latter. Instead of completing the 500,000 reviews requested by individual borrowers, they would merely slot all 4.2 million, whether victims of foreclosure fraud or not, into several broad categories, and pay out a total of $3.6 billion. The regulators refused to release the methodology underlying that process, or any of the completed reviews from the third-party consultants.

This all spilled out in an ugly manner over the past week. The vast majority of aggrieved homeowners will get less than $300. The main stream media has picked up on the story. Politicians have picked up the story. The regulators are now stonewalling Congress. Where does this go from here? Hard to say, but the whole story has revealed a nasty mess that will be difficult to sweep under the rug.

Economic leaders gathering in Washington for the World Bank and International Monetary Fund  spring meetings this week. So, the IMF updated its economic forecast. The IMF now predicts global growth of about 3.3 percent this year and 4 percent in 2014. That is a reduction of 0.2 percentage point since its January estimate for 2013; it did not change its estimate for next year’s growth.

Still, the report underscored that financial conditions had improved markedly since last year, in no small part because of aggressive monetary easing undertaken by the Federal Reserve, the Bank of Japan and the European Central Bank. Recession continues to afflict Europe, and the world still struggles with high unemployment, but risks to the downside; in particular from the threat of a country’s leaving the euro zone and from fiscal policy uncertainty in the United States, have faded.

Kind of strange that they think things are getting better and they lower their growth estimates.

The fund lowered its estimate of United States growth this year to 1.9 percent, down 0.2 percentage point from its January forecast. But it said the United States was “in the lead” in seeing an acceleration of growth, in part because Washington policy makers were able to avoid the so-called fiscal cliff of tax increases and spending cuts at the turn of the year.

The I.M.F. also said that the United States had proved too aggressive in carrying out budget cuts, given its still-sluggish rates of growth and high unemployment levels. It said it anticipated that the across-the-board $85 billion in budget cuts known as sequestration would push down growth levels this year and beyond.

The report says: “The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate. But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of G.D.P. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s ‘forward guidance’ and by pent-up demand for housing and durables.”

There are some positive developments for the Inland Empire but there are still some big challenges. San Bernardino is still facing a scarcity of good news as the city's financial consultant presented a proposed budget to the City Council last night. One significant improvement is that - as long as a large chunk of the city's debts continue to be deferred - the city won't be in danger of not making payroll as it was in the weeks leading up to several pay days in 2012. The budget proposes to resume payments to the California Public Employees' Retirement System, but defers more than $16 million in other funds. The most positive developments might not have anything to do with repairing broken municipalities, but with a new wave of businesses washing into the Inland Empire.

An article in the LA Times this past weekend identified the Inland Empire as the fastest growing industrial region in the country and the most desirable industrial real estate market. Among the many merchants running large-scale operations now are such household names as Amazon.com, Kohl's, Skechers., Mattel, and Stater Bros. Markets.

They come for warehouses; really big warehouses; some are bigger than 30 football fields under one roof; really, really big warehouses where they can store, process and ship merchandise such as clothes, books and toys to ever more online shoppers and handle the rising flood of goods passing through the ports of Los Angeles and Long Beach.

The demand for these big buildings is so intense in San Bernardino and Riverside counties that developers are erecting more than 16 million square feet of warehouses on speculation, meaning they are gambling that buyers or renters will rush forward to claim the buildings by the time they are complete.

Although the Inland Empire was hard hit by the recession and earned a reputation for mortgage foreclosures, evictions and high unemployment rates during the downturn, the industrial property business has remained a bright spot. And it is now picking up speed.

Southern California has long been a vital hub for major retailers and manufacturers; the region features major seaports, and an enormous population base, but with Los Angeles and Orange counties essentially full, the Inland Empire with its wide-open spaces is now where the big new buildings are flying up.

Los Angeles County's industrial vacancy is 2.5%, the lowest in the country, and some of the priciest industrial property in the country is around LAX. Orange County is the second-tightest market in the U.S., with 3.5% vacancy. The two counties and the Inland Empire have a combined total of more than 1.65 billion square feet of industrial property, which is twice as big as the next largest market, Chicago.

Key to all this is logistics; the organization and movement of goods to accommodate business. The Inland Empire is close to the ports, which in turn means that the Inland Empire is close to the Pacific Rim. Once upon a time, a warehouse was where you stored things for weeks or months, such as toys and canned food that retailers would grab to restock their shelves. Sorting, organizing and moving the inventory was a constant challenge.

Tracking goods in the modern age of bar codes, scanners and computers is a comparative breeze. The location of every widget can be identified with pinpoint accuracy and fetched by robots that can lift and carry 3,000-pound loads with ease. Technology has allowed larger facilities with more sophisticated equipment to be able to deliver products very efficiently, enabling businesses to consolidate their logistical operations into bigger warehouses.

And it's not just the Inland Empire; the general wave of industrial revival has hit many core markets, including Chicago, Atlanta, the Inland Empire, New Jersey and others. The expansion of e-commerce has sparked the need for big-box distribution centers in major distribution hubs. More than one-third of 2012 build-to-suit requirements were e-commerce related. According to the US Census Bureau, e-commerce sales totaled $225 billion in 2012, more than double the amount in 2005. Strong demand for big-box quality space in major logistics markets has triggered an increase in both BTS and spec development. Last year, 58 million square feet of supply was added to the nation’s inventory and 57.7% of that was built to suit,

In total, developers currently have 57 million square feet of industrial space under construction. The Inland Empire leads all markets with 6.8 million, and Dallas comes in second with 5.8 million. New starts remain well below historical norms, which means new demand can quickly tighten the market. In fact, supported by strong new demand, the vacancy rate declined 30 basis points in the fourth quarter of 2012, the largest quarterly decline since 2006. So, with any luck, this is something that won't turn into a bubble. Knock on wood.

Wednesday, October 17, 2012 - It Could All Come Down to Pahrump

It Could All Come Down to Pahrump

-by Sinclair Noe

DOW + 5 = 13,557
SPX + 5 = 1460
NAS + 2 = 3104

10 YR YLD +.09 = 1.81%

OIL - .19 = 91.93

GOLD +1 .60 = 1750.90
SILV + .24 = 33.30
PLAT + 22.00 = 1672.00

Listen live or archived audio at MoneyRadio.com

The best site I've found for election polling data is http://fivethirtyeight.blogs.nytimes.com/

A CBS News/Knowledge networks poll of undecided voters who watched the debate found 37 percent giving an advantage to President Obama, 30 percent favoring Governor Romney and 33 percent calling the debate a tie. That represents a narrower lead for Mr. Obama than Mr. Romney had after the first debate in Denver, when a similar poll gave Mr. Romney a 46-22 edge.

A CNN poll of registered voters who watched the debate — not just undecided voters, as in the CBS News survey — also gave the debate to Mr. Obama by a seven-point margin, 46 percent to 39 percent. Mr. Romney had won by a much larger margin, 67 percent to 25 percent, in CNN’s poll after the first debate.

Meanwhile, 73 percent of voters in the CNN poll said Mr. Obama performed better than they expected, against just 10 percent who said he did worse; chalk that up to diminished expectations.

Two other polls gave Mr. Obama a somewhat clearer advantage. A Battleground poll of likely voters in swing states who watched the debate had him winning 53-38.

A poll by Google Consumer Surveys gave Mr. Obama a 48 percent to 31 percent edge among registered voters.

A Public Policy Polling survey of Colorado voters who watched the debate found 48 percent declaring Mr. Obama the winner, and 44 percent for Mr. Romney. Mr. Obama’s advantage was clearer in the poll among independent voters, who gave him a 58-36 edge. However, the candidates were roughly tied when Public Policy Polling asked them how the debate swayed their vote, with 37 percent saying the debate made them more likely to vote for Mr. Obama, with 36 percent for Mr. Romney.

The most recent odds put Mr. Obama winning a second term at 65%, down slightly in the past few days from 67%; but those odds do not include the results from last nights debate. Those are the odds, not the percentage of votes; that calculation is much closer, right about a 2-percentage point advantage for Mr. Obama in popular vote. The actual vote might be closer still. And of course, the winner is not determined by the popular vote but by the electoral college; so, swing states become key battlegrounds. And that means that an individual John or Jane Public in Pahrump Nevada might actually cast THE decisive vote.

NBC News reports that so far, $807 million has been spent on political ads for radio and television: local and national, cable and broadcast. Team Romney is outspending Team Obama by $455 million to $355 million. I say Team, because you have to factor in outside money that is now part of the campaigns due to the Citizens United Ruling. The actual Romney campaign has spent around $164 million. The actual Obama campaign has spent almost $300 million. The rest of the money has come from outside sources, the SuperPacs.

I find the debates and the election hoopla to be lots of fun and very entertaining. The debates are less expensive than going to a movie, so they seem cheap; but sometimes what's cheap is dear.

Few events have reshaped the nation over the last half-decade as much as the housing crisis—particularly in key battleground states such as Florida, Ohio, and Nevada. But neither the Obama nor the Romney campaign has had very much to say about it.

Housing’s absence from the campaign debate has led to lots of head-scratching among pundits, though there is an obvious explanation for why it has taken a back seat: housing is a political loser.

Mr. Romney faces a delicate balancing act. He has criticized Mr. Obama’s housing-rescue efforts as simply kicking the can down the road and says that he would focus on growing the economy instead. But that leaves an impression that he might recommend doing even less for at-risk homeowners looking to the government for more help. If your opponent is unpopular for promising to fix the problem and then falling short, it could be risky to advertise that you would offer even less.Mr. Obama has learned how difficult the housing problem is to fix, while Mr. Romney has discovered how hard it is to talk about in a sound-byte-driven campaign cycle.

The Commerce Department reported housing starts hit a four-year high. Groundbreaking on new homes jumped 15 percent in September, the quickest pace since July 2008. The surge in housing starts was viewed as evidence that the housing sector's fledgling recovery is bolstering the recovery of the broader economy.

And it makes the Federal Reserve look good. In September, when the Fed FOMC decide to announce an open ended mortgage backed securities bond buying binge, QE to infinity and beyond, they ended up propping up an economic sector that was already trending higher.

What came first, the Fed stimulus or the housing recovery? Many Fed officials reckon that as the housing market’s problems have been a big reason why the recovery has been so tepid, targeting the sector with direct aid can make a big difference for the broader economy. On the flip side, the Fed has the good fortune the housing market is showing signs of life when they are trying to stimulate the housing market. Policymakers hope positive housing momentum will help overall activity rise, which in turn should help boost job growth and lower unemployment. It still remains to be seen if the housing recovery has legs, and then if it has enough legs to lift the broader economy; but there is little doubt the housing market once again has momentum.

So does the housing rebound, joined with improving job market data, change economists’ estimates of how far the Fed eventually takes QE Infinity? There is already a lot of Fed monetary policy easing priced into the market and with the data improving there’s a risk the central bank could stop short of what’s expected, which could unsettle markets. Of course, it might be just a bump in a long term nasty market; even with improvements, the housing market remains far from normal. One of the tells would be an improvement in new home construction, that would demonstrate real demand; this month's report is a step in the right direction but not yet a trend.

So, for now, and with today's data, the old axiom, “Don't fight the Fed,” would certainly apply.

The S&P 500 rose for the third consecutive day. 3Q Earnings Season: IBM said revenue fell short of expectations. The stock dropped almost 5 percent, exerting an 81-point drag on the Dow industrials. IBM has an outsized influence on the Dow, which is a price-weighted index. IBM's stock closed at $200.63. Intel lost 2.5 percent to end at $21.79 a day after giving a weak revenue outlook.

Early in the 3Q reporting season 14% of S&P 500 companies have already reported earnings, and of those companies, 65 percent have beaten analysts' expectations, ahead of the long-term average of 62 percent. However, a majority - 54.3 percent - of the companies in the S&P 500 Index that have reported results so far have missed analysts' revenue forecasts, The top line is shrinking even as the companies are delivering bottom line results.

What gives? Earnings expectations have been lowered so far that it hasn't been hard to beat them. Once revenue starts missing and you can't cut costs anymore, I think this is the crack in the armor. If you then see earnings start to miss already lowered expectations, that's when you have a problem. Part of the answer is that the economy is in better shape today than it has been for some years. It is in a turnaround even if it is not as strong as we'd like it to be.

But that's already old news; we're already well into the fourth quarter. How does next year look? Well, companies are cautious about 2013 earnings targets. You can see how a CEO would want to reign in expectations for next year; it would be difficult to push profit margins higher when revenue growth is slowing. Margins are already considered pretty rich. If you have slowing revenues and you've already cut costs as much as possible; and I think it's safe to say that US businesses are running lean; then there's not a whole lot that can be done to grow earnings. 

Tuesday, April 17, 2012

DOW + 194 = 13,115

SPX +21 = 1390
NAS + 54 = 3042

10 YR YLD +.04 = 2.01%

OIL +.07 = 104.27
GOLD – 2.90 = 1651.00
SILV +.18 = 31.81
PLAT + 8.00 = 1589.00

Tax Day, and you still have a few hours to get the forms filed. We talk a lot about taxes on MoneyRadio; how to legally minimize the tax bill, how to defer the tax bill. We talk about annuities, life insurance, harvesting losses, IRA's, 401K's, corporate entities and more. And that's all good, but if you really want to cut your tax bill, there is a sure fire way to do it. If you are looking to stick it to the IRS, I'll tell you the secret. You don't need accountants, you don't need financial planners, you don't need tax software, you don't even need a mailbox in the Grand Caymans.

You need a lobbyist. The top eight companies that spent the most on federal lobbying from 2007 to 2009 all saw their reported tax rates decrease from 2007 to 2010; these top eight firms spent $540 million on lobbying from 2007 to 2009. They filed 332 lobbying reports that mentioned taxes and named 491 different tax bills in those reports.

The top eight companies that spent the most on lobbying were Exxon Mobil, Verizon Communications, General Electric, AT&T, Altria, Amgen, Northrop Grumman and Boeing. Exxon Mobil spent the most, some $81.92 million from 2007 to 2009.

AT&T recorded the largest tax reduction, with its tax rate falling from 34.0 percent to negative 6.4 percent from 2007 to 2010, or an estimated reduction of more than $7.3 billion. Altria, the parent company of Philip Morris, had the smallest decline from 2007 to 2010, with its rate declining from 28.9 percent to 27.4 percent. Six of the top eight companies saw declines of at least 7 percentage points. The likelihood of six of the top eight companies lowering their rates "by at least seven percentage points purely by random chance is less than 1 in 100,000." The lobbyists earn their money.

President Obama has proposed lowering the corporate tax rate from 35% to 28% and eliminating loopholes and deductions. Romney has proposed lowering the corporate tax rate to 25% and repealing the alternative minimum tax. And if you believe that – you are a dolt. Those proposals wouldn't lower taxes they would raise taxes. Nobody pays the full tax rate.

While you've probably heard that the United States has the highest corporate tax rate in the developed world, you know that only schmucks pay the full amount; U.S. corporate taxes that were actually paid (the effective rate) fell to a 40 year low of 12.1% in fiscal year 2011. The U.S. both taxes its corporations less and raises less in revenue from corporate taxes than its foreign competitors: the U.S. Is about 25% below the OECD average.

We hear about the effective tax rate for wealthy individuals; Warren Buffet pays a lower effective tax rate than his secretary; President Obama pays a lower effective tax rate than his secretary. The Buffet Rule died this week.

This year, federal taxation will take up less than 15 percent of total national economic activity. That’s the lowest level in 60 years. In fact, total revenue as a share of gross domestic product has now been under 15 percent for three straight years—the first time that has happened since before World War II.

What is this really telling us? We're missing a great opportunity, folks. Clearly, there is an one area of the economy where Americans excel, where we generate enormous Return on Investment; I'm talking about the Lobbyist Industry. Embrace it; export it to other countries; share the prosperity. This is obviously the path to big time profits. Are they teaching this in business schools? Forget about innovation, forget about best practices, forget about technology, forget about production, forget about making something that people need. The best ROI anywhere is to lobby. If we really focus out attention on this industry, we can push the effective tax rate even lower. Refunds for everybody. We'll change Tax Day into Refund Day. Yea, that's it.

Speaking of not doing anything productive; Goldman Sachs reported 1^st quarter profit fell 23% as sluggish demand for deal-making put a damper on results.Goldman posted a profit of $2.11 billion, compared with a year-earlier profit of $2.74 billion. Lighter client demand for trading and investment banking has been a sore spot for Goldman in recent quarters, putting pressure on two of the firm's prized sources of revenue. Maybe demand fell because nobody wants to be a Muppet.

After the close, Yahoo said first-quarter earnings rose 28%, beating expectations despite relatively flat revenue for the period. Yahoo reported net income of $286 million, or 23 cents a share, compared with net income of $223 million or 17 cents a share same quarter last year.

Intel reported a profit of $2.74 billion, or 53 cents a share, compared with $3.16 billion, or 56 cents a share, in the year-earlier period. Revenue was $12.91 billion, up from $12.85 billion. Adjusted profit was 56 cents a share. I don't know what adjusted profit means. Intel has been really good at beating estimates, so good that the game is catching up with them. It's not good enough that Intel beats estimates, they have to beat big.

IBM said it earned $3.07 billion, or $2.61 a share, on revenue of $24.7 billion, compared with earnings of $2.86 billion, or $2.31 a share, on $24.6 billion in sales in the same period a year ago. Excluding one-time items, IBM would have earned $3.3 billion, or $2.78 a share. One-time items are also known as the cost of doing business.

The International Monetary Fund warned today that the European debt crisis could flare up again at any time and send the global economy back into deep recession. The Fund's chief economist said there was currently "an uneasy calm" following the tensions in financial markets at the end of 2011, with hopes of a gradual recovery dependent on keeping the single currency in one piece. The Fund said that there was a risk of a 1930's style slump. "In the current environment of limited policy room, there is also the possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s." In the absence of a euro meltdown, the IMF predicted that weak recovery was likely to resume in developed countries. The best we can hope for is lousy and the worst is truly dreadful. So thanks and have a nice day. Spain managed to sell a few billion dollars worth of bonds, which is a remarkable accomplishment considering nobody expects Spain to survive. Remarkable until you consider the ECB and the IMF are buying the bonds.

John Paulson, is a billionaire hedge-fund manager; he made a fortune betting US mortgages would turn sour; they did. Last year he almost lost his shirt, now he's seeking to reverse record losses in 2011, by shorting European sovereign bonds. Paulson said he is buying credit-default swaps on European debt, or protection against the chance of default. Spanish banks are of particular concern as their holdings of the country’s debt and client withdrawals make them overly dependent on European Central Bank financing.

Sometimes economics just seems bizzaro; case in point from the Murdoch Street Journal:

Thirty-six of the 51 economists surveyed, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. The number who expect no action is up from 30 in the January survey. “An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot,” said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.

OK, we are in the sweet spot of an “anemic recovery”; I never knew you could have an anemic sweet spot. But we don’t need monetary stimulus. And why not? Because we have an “adequate recovery.” That seems to pretty much sum up macroeconomics circa 2012.

Wells Fargo has been busy expanding its stake in the GEO Group; Wells Fargo is the company's second-largest investor, holding 4.4 million shares valued at about $86 million. Unfortunately it's a safe investment. GEO is the second larges private jailer in America. The private prison industry grew by more than 350 percent over the last decade and a half. Overall, more than 2.3 million people are currently behind bars, up 50 percent in the last 15 years, the land of the free now accounting for a full quarter of the world’s prisoners.