Tuesday, August 12, 2014 - Hype is Hurting

Hype is Hurting

by Sinclair Noe

DOW – 9 = 16,560
SPX – 3 = 1933
NAS – 12 = 4389
10 YR YLD + .02 = 2.44%
OIL - .15 = 97.22
GOLD + .60 = 1309.50
SILV - .10 = 20.02

The Dow Industrial Average has now gone negative year-to-date. Seven of the 10 main groups in the S&P 500 declined, with energy companies dropping 0.7 percent to lead the slide as Brent crude settled at the lowest level since July 2013. The International Energy Agency said a supply glut was shielding the market against threats in the Middle East.

As we wrap up earnings season, 73% of companies have beaten earnings estimates, slightly above the 1-year average of 72%, but “beating estimates” this time doesn’t mean what it did in recent quarters. For the past few years, analysts have ratcheted down their estimates in the run-up to earnings season, setting the bar lower and lower—and setting up an easy beat. Companies are beating by an average of 4.2%, above the 1-year average of 3.2%. Q2 earnings growth is 8.4%, up from an expected 4.9% on June 30. This is the second-highest earnings growth rate since Q4 2011. Revenues are now up for 5 consecutive quarters and at all-time highs, and it now looks like revenues might be driving earnings. The strongest sectors for upside earnings surprises have been telecom services, health care (especially biotech), and information technology; while consumer staples is the weakest. US banks and thrifts had their second best quarter in 2 decades, with more than $40 billion in net income.

Profit margins have soared. Net profit margins more than doubled from 4.6% in March 2009 to 9.8% at the end of the first quarter. Margins could come in just shy of 10% when all the second-quarter results are in. The problem is that high margins tend to mark a peak rather than a normal level of profitability. In other words, it’s tough to keep the margins high, and there are several reasons: most of the fat has been cut and it is difficult to further improve labor efficiencies and that’s confirmed by last week’s productivity report showing that the real output of nonfarm business has been hovering around 3% year to year since Q2-2010, consistently higher than real GDP growth; capital spending has been low, but is likely to rebound; and with interest rates near all-time lows, companies will find it difficult to find better financing to boost margins. As margins stagnate or slip, the best defense is to look for companies that are growing revenues.

Actually, the best defense might be to discount analysts’ expectations; something that Wall Street is doing with greater frequency. The problem is that analysts issue glowing earnings growth expectations for the next few quarters, based on pro forma estimates, minus the bad stuff, and heavily adjusted; which in turn drives up share prices. Traders buy in. As the distant quarters get closer and closer, the analysts ratchet down expectations, making for a bar that is easy to hurdle, and again the traders buy in.

In its latest report on earnings expectations and reported earnings, FactSet found a startling change in how the market reacts to these fabricated earnings beats. Over the past five years, companies with upside earnings surprises saw their stock prices rise on average 1% from two days before the announcement to two days afterwards; and downside earnings surprises were punished with a 2.3% decline in stock price over the four-day window. So far in the second quarter earnings season, companies have been crushing earnings, and the market is languishing. FactSet found that this time around the market didn’t reward these juicy earnings surprises at all. Stocks of these companies actually dropped 0.1% over the four-day window. And downside earnings surprises got hit with a 3% decline. The hype is hurting.

The share of unemployed Americans competing for each open job hit a six-year low in June. The Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS report, showed the number of unemployed job seekers per open job fell to 2.02 in June, the lowest level since April 2008. Job openings, a measure of labor demand, increased to a seasonally adjusted 4.67 million in June, the highest level since February 2001. At the same time, hiring reached its highest point since February 2008. Much of the increase in employment growth since the 2007-2009 recession ended had been driven by a sharp decline in the pace of layoffs, as opposed to a higher rate of hiring.

Job growth has topped 200,000 in each of the past six months, a stretch last seen in 1997. The unemployment rate has declined to 6.2 percent from 6.7 percent at the end of 2013. The JOLTS report shows some of the slack is coming out of the labor market, and the next sign of a tightening labor market is if we start to see wage growth. Meanwhile, a gauge of small businesses’ intentions to hire has also surged to a fresh post-crisis high, with 13% of respondents to a survey by the National Federation of Independent Business indicating their intentions to hire. That’s the largest percentage since September 2007. The problem is they aren’t actually hiring. The JOLTs hiring rate is nowhere near as buoyant as the job opening rates. The US hiring rate, hires as a share of total employment, hit 3.5% in June. You might expect businesses to intend to hire before they actually hire, but there is also a disconnect; and it might be in a skills mismatch or it might be in a wages mismatch.

During the Great Recession and its aftermath, the federal government acted to help victims of the severe downturn by funding programs that extended unemployment benefits—to up to 99 weeks in some cases, up from the standard 26 weeks. As the economic recovery continued, weak as it was for many in the working class, many lawmakers on the right began to believe that these extended benefits were a drag on employment—the theory being that government checks reduced the incentive for recipients to find a job, and that cutting off this lifeline would compel unemployed workers to look harder for work and perhaps take jobs they may not have accepted if the benefits had continued. Relying on this premise, Congress allowed the federally-funded Emergency Unemployment Compensation program to lapse last December.

Now, more than seven months later, data are available to test this idea. Coming from perspectives that diverge greatly along the ideological spectrum, scholars at both AEI and EPI, the Economic Policy Institute and the American Enterprise Institute, a couple of think tanks at opposite ends of the spectrum, have come to the conclusion that this “bootstraps” theory is incorrect—curtailing jobless benefits did not boost employment. Because unemployment benefits are contingent upon the people who receive them proving that they are looking for a job, receiving jobless benefits appears to make recipients at least just as likely, and certainly not less likely, to rejoin the ranks of the employed.

The US budget deficit was $95 billion at the end of July, down 3 percent from the same period last year. The fiscal year-to-date deficit at the end of July was $460 billion, the lowest level since the same period in fiscal year 2008, compared with a deficit of $607 billion for the same period in fiscal year 2013.

The National Association of Realtors released metro area home-price data for the second quarter, and it looks like growth in home prices is slowing, especially in the East. Nationwide, the median existing single-family home price in the second quarter was $212,400, up 4.4% from the second quarter of 2013. The median existing home price for the Phoenix area is $198,600, up 8.6% from one year ago.

The inventory of all existing homes for sale rose 6.5 percent in June from a year earlier to 2.3 million, an increase from a 13-year low of 1.8 million in January 2013. That’s a 5.5-month supply at the current sales pace, less than the six months that is considered equilibrium between buyers and sellers. Breaking it down further, inventory tightened at the market’s low end and grew at the top. The number of U.S. homes for sale in the bottom third of the market -- below $198,000 -- fell 17 percent in June compared with a year earlier, according to a Redfin analysis of 31 large U.S. metropolitan areas. The supply was up 3 percent in the middle market and jumped 15 percent at the top. The rising inventory of more expensive properties is giving a boost to sales. At the bottom of the market, first-time buyers, even those with the credit, savings and income to overcome tougher underwriting requirements, must face off against other bidders. First-time purchasers accounted for 28 percent of all sales of previously owned homes in June, down from about 40 percent historically.

A funny thing happened in New York yesterday; Manhattan prosecutors filed criminal charges against a dozen payday lending companies and their owner, accusing them of making payday loans that defied New York's limits on interest rates, or usury laws. The defendants in the case tried to cover their tracks with a maze of offshore corporations, to make it look like they weren’t doing business in New York. Under New York state law, the maximum interest rate that can be charged is 9 percent annually and the general usury limit is 16%, with a bunch of exemptions. The defendants in this case are accused of charging between 300% and 700% interest. Remarkably, most states still have usury laws on their books, but not all. In Arizona the legal rate of interest is 10%.

You may very well have a credit card that charges more than 10%, and the reason that is not considered usury is federal court decisions and statutes have virtually exempted credit card companies by allowing them to charge customers, regardless of their state of residence, the interest rates allowed by the state in which they are incorporated. This means that there are no limits on credit card interest rates in practice, even if certain limits remain on the books, the only exception being the 18 percent interest limit for federally chartered credit unions. And so it is a very rare event when anyone faces a criminal charge of usury.

Wednesday, August 21, 2013 - Ticking Away the Minutes

Ticking Away the Minutes

by Sinclair Noe

DOW – 105 = 14, 897
SPX – 9 = 1642
NAS – 13 = 3599
10 YR YLD + .04 = 2.85%
OIL + .04 = 105.00
GOLD – 4.20 = 1367,80
SILV - .14 – 22.89

Stocks slid, clawed back to breakeven, then sold aggressively into the close. News of the day in the form of FOMC minutes showing policymakers are talking about pulling away the Quantitative Easing punchbowl. The Dow closed below 15,000 for the first time since July 3; the Dow is now down for six sessions; the S&P ended negative, dragged by utilities and financials; techs held up relatively well. Yields on the benchmark 10-year Treasury hit a fresh session high of 2.88%. The dollar held up against most currencies, and most emerging market currencies continued to take a beating.

So, what did the Fed say in the FOMC minutes? Nothing unexpected. Policy makers were “broadly comfortable” with Bernanke's plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon. But they weren't saying they had to taper right this moment.

The central bankers did not signal as to whether such a taper of the $85 billion-per-month bond purchase plan would come in September, October or December, the three remaining meeting dates for 2013, but they indicated they would like to have it tapered down by the middle of next year.

“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes show. “Almost all participants confirmed that they were broadly comfortable” with the committee moderating “the pace of its securities purchases later this year.”

Some participants indicated that “overall financial-market conditions had tightened significantly,” the minutes said. “They expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.”

Several others said the rise in rates “was likely to exert relatively little restraint.” In addition, these participants thought that rising stock prices and easier bank lending standards would offset the impact of higher borrowing costs. Some of the officials welcomed the rise in rates “insofar as those developments were associated with an unwinding of unsustainable speculative positions.”

In other words, there was concern about the stock markets and housing markets, or pick a market... overinflating; possible asset bubbles. One area of concern for the Fed is probably its own balance sheet. The Federal Reserve has set a new record, but it’s not one exactly worth celebrating. For the first time ever, the Fed owns more than $2 trillion in US debt, which is to say, in US Treasuries. On Dec. 31, 2008 that statistic consisted of less than a half-trillion in Treasury securities, but efforts undertaken by the Fed to revive the economy — so called “quantitative easing” — have instead left the bank to bear record amounts of national debt. China, the second place holder with regards to US debt, was owed $1.27 trillion by the US as of late June.

There is another problem for the Fed; if, when, or as the Fed winds down QE and they reduce purchases of mortgage backed securities then interest rates will rise and bond prices will fall. That could raise the federal deficit (because the government would have higher borrowing costs) and slow the housing market (because mortgage rates could rise further). The basic math is that prices fall when interest rates rise, and the longer the maturity the more severe the price drop. This is a big deal with the Fed. As of August 15th, it owned mortgage-backed securities worth $1.264 trillion as well as notes and bonds worth $1.9 trillion. In effect, by tapering the Fed will force down the current value of its own securities portfolio.

The FOMC minutes also revealed the Fed is considering other tools, such as a new overnight reverse repo facility. They also discussed lowering the 6.5% unemployment rate threshold. That's the target they set for an exit from QE. So, they think the economy is headed for lower unemployment. Maybe, but will that mean better jobs? Maybe not.

Businesses are hiring at a robust rate. The only problem is that three out of four of the nearly 1 million hires this year are part-time and many of the jobs are low-paid. Employers say part-timers offer them flexibility. If the economy picks up, they can quickly offer full-time work. If orders dry up, they know costs are under control. It also helps them to curb costs they might face under the Affordable Care Act, or at least that has become an easy scapegoat. Obamacare is only one factor. The surge in part-time employment also reflects an economy that has struggled to maintain decent growth.

In a paper published last month, the San Francisco Federal Reserve Bank said uncertainty over fiscal and regulatory policy had left the U.S. unemployment rate 1.3 percentage points higher at the end of last year than it otherwise would have been. The jobless rate stood at 7.8 percent in December; it has since fallen to 7.4 percent.

Maybe part-time hiring and the low wages environment will fade away as the economy regains momentum, starting in the second half of this year and through 2014. Maybe not. Businesses have learned how to function with fewer workers. One study found that profit per employee at privately held companies jumped to more than $18,000 in 2012 from about $14,000 in 2009. Private employers are either able to make more money with fewer employees or have been able to make more money without hiring additional employees. The lesson learned for businesses during the downturn was to have lean operations. There are limits to running a lean operation, and the big question is whether we are now at those limits.

Many of these part time, low paying jobs, aren't really part time, low paying jobs. In the small “d” depression of the past few years, good jobs were transformed into bad jobs, full-time workers with benefits were transformed into freelancers with nothing. From the end of an “average” American recession, it ordinarily takes slightly less than a year to reach or surpass the previous employment peak. As of June 2013, four full years after the official end of the Great Recession, we had recovered only 6.6 million jobs, or just three-quarters of the 8.7 million jobs we lost.

One of the tricks to running “lean operations” was to dump entire departments and reorganize them so that the same work, the same jobs, requiring the same skills, would henceforth, in good times and bad, be done by contingent workers. One sign of that: during the course of the downturn, corporate profits went up by 25%-30%, while wages as a share of national income fell to their lowest point since that number began to be recorded after World War II. This is more than a matter of factories firing and burger joints and Wal-Mart hiring; this was a switcheroo; the good jobs were transformed into bad jobs, and if that wasn't good enough, the other option was no job.

Eventually the hours will start to creep back up, and at some point labor will gain strength, or maybe even flex muscle, but not today. Until then, be careful you don't become a part-timer, without even trying.

Still, the FOMC minutes reveal Fed policymakers optimistic about the job market. The June Job Openings and Labor Turnover Survey (JOLTS) data released by the Bureau of Labor Statistics paint a grim picture of job opportunities in the labor market. The “hires rate”—the share of total employment accounted for by new hires—is an important comprehensive measure of the strength of job opportunities because it incorporates two components: 1) net new hires, and 2) new hires that are due to “churn”, i.e., hires that are replacing vacated or lost positions. In June, 3.1 percent of all jobs were hires. This was a substantial drop from May, when the hires rate was 3.3 percent.

The JOLTS data are a regular reminder that there is always a great deal of “churn” in the labor market. In July, the economy added 162,000 jobs, net. Over the last year, an average of 4.3 million workers were hired every month and an average of 4.2 million workers either left their jobs voluntarily or were laid off every month. These hires and separations numbers, however, are currently very low; when the labor market is stronger, there is much more churn. Nowadays, employed workers are less likely to quit the job they have. Back in 2006, about 3 million workers quit their job each month. Last June, 2.2 million workers voluntarily quit their jobs. Because leaving a job for a better opportunity can be an important way for workers to advance, this persistent depressed rate of voluntary quits represents millions of lost opportunities.

Unemployed workers far outnumber job openings in every major sector. This means the main problem in the labor market is a broad-based lack of demand for workers—not, as is often claimed, available workers lacking the skills needed for the sectors with job openings.

The Federal Reserve might be ready to taper, but the reasons for taper are more about the Fed's balance sheet and asset bubbles than about the strength of the economy, and certainly the labor market. And maybe QE hasn't and can't do anything to improve the labor market, but it would have been nice if the FOMC minutes had actually covered the mandate regarding full employment.

Tuesday, July 09, 2013 - What's It All About?

What's It All About?

by Sinclair Noe

DOW + 75 = 15,300
SPX + 11 = 1652
NAS + 19 = 3504

10 YR YLD -.01 = 2.63%
OIL + 1.38 = 104.52
GOLD + 13.40 = 1251.70
SILV + .18 = 19.36

It's earnings reporting season. The stock market is feeling happy for the moment. Second quarter earnings are expected to be soft, but expectations have been ratcheted down, so there is potential for upside surprises. That's the game that's played on Wall Street to siphon a little bit of trading profit. Anywhere else, they'd call it price fixing.

But this game of diminished expectations may have some basis in reality. The top line numbers more than likely suck. Analysts expect the 30 companies in the Dow Industrial Average to see revenue growth of just 0.7%; that number could be ratcheted down into negative territory; that follows a 0.6% drop in revenue in the first quarter.

What do you call it when there are two consecutive quarters of economic contraction? Recession. That's a bit of a non sequitur, but the logical conclusion is not too far removed from the premise. After all, we're talking about 30 of the biggest, most powerful companies in the world and they are struggling to grow sales. They're still reporting profits, but that comes from cost cutting, which tends to fall on the labor force. There are limits to cost cutting as a business strategy for growing profits.

No worries. The S&P 500 closed above 1650 and looks poised to make a run at those record highs of May; remember the days of milk and cookies, before Bernanke started talking about taper. Well tomorrow the minutes of last month's FOMC meeting will be released, and we'll see if they're still talking taper, and we'll see if the markets can remain exuberant if the Fed is still talking taper.

Of course the Fed looks at more than just the headline unemployment rate, even if they have set a target of 6.5% based upon that rate. They also look at broader views of the labor markets. After all, the Fed will make its decision based on the outlook for labor markets, not what happened a month ago. One such report, know as “Jolts” looks at job openings and labor turnover. In May, businesses posted more job openings and gross hiring also picked up. But the rates remain well below those seen before the most recent recession.

May also saw a small increase in job separations. A sizeable part of the gain in separations came from people quitting their jobs. That’s a positive for the labor market outlook since workers tend to give notice only when they are confident they will quickly land another job.

Before you think that is overly optimistic, the Conference Board employment trend index, a compilation of job indicators designed to foreshadow changes in nonfarm payrolls, edged up a mere 0.05% in June. Its growth rate for the second quarter moderated. The report said that suggests “acceleration in the employment growth is unlikely in the near future.”

Part of the problem is that for every job opening, there are 3 people looking for a job, and since people aren't really leaving their current jobs, because of the tight labor market, that means people aren't moving up; they aren't leaving a job for a better job. The ratio of unemployed workers to job openings is the highest in the 13 years the BLS has been collecting the data. Not coincidentally, most of the industries with the highest numbers of job openings in May, according to the JOLTS data, were lower-paying sectors, including health-care services, retail sales and restaurants.

Another consideration in the jobs market is that one of the most consequential effects of the sequester began just this week: weekly unpaid furlough days for more than 650,000 civilian workers at the Defense Department, who will effectively see their pay cut by 20 percent for the  final 11 weeks of this budget year. A little back-of-napkin math shows 20% of 650,000 jobs is kind of like losing 130,000 jobs.

All the commissaries at domestic military installations will be closed every Monday through the end of September. (Most agencies within the department have decided to salve the economic sting a tiny bit by setting the furloughs on Mondays and Fridays, so that workers might at least enjoy a series of long weekends.)

But the visuals of closed cafeterias, equipment maintenance sheds, supply warehouses, payroll offices and the like will have absolutely no effect on the pace of congressional effort toward untangling the budget morass. Whatever work is taking place on that score is totally out of view. And none of the congressional leadership is suggesting this will change before Congress returns from its August recess a full week after Labor Day, when there will be 23 days left before this fiscal year gives way to the next.

Some agreement on spending will need to get done by then to forestall a partial government shutdown, which is in neither party’s political interest to permit. Odds are that the first month or so, at a minimum, will be covered by a temporary patch in the form of a continuing resolution that keeps agencies spending at their across-the-board budget cut levels.

But any longer-term agreement already seems destined to be delayed until the end of the year, by which time the debt ceiling will also be nearing. And if they can't find agreement, then the budget would require layoffs – probably a mix of civilian, active-duty military, National Guard and Reserves.

As expected, the IMF cut its forecast for world economic growth for the third time this year. The IMF now expects global output to expand by 3.1%, down from 3.3% forecast in April, and down from 3.5% forecast growth back in January. The revision means the global economy will have failed to pick up pace over the past two years, although the IMF expects a slight acceleration in growth in 2014 to 3.8%, subject to revisions, of course.

The IMF said: "While old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies." They pointed to the slowdown in China which is also affecting emerging markets such as Brazil and South Africa; also, the ongoing slowdown in the Euro-zone. One country that is expected to show growth – Japan, which should see growth of 2%, up from earlier forecasts of 1.6%, due to the success of Abenomics.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency are proposing raising the leverage ratios on the largest US banks to 5% from the 3% agreed upon by international regulators as part of Basel III. The insured bank subsidiaries of those firms would be subject to a 6% leverage ratio to be considered well-capitalized. That basically means the banks would have to hold a little more in the way of reserves.

While the proposed changes would not take effect until 2018 if finalized, the rules as proposed represent the latest attempt by regulators to address lingering concerns that certain large, complex banks remain too big to fail. Of course, that still leaves a 5 year window, and considering the extreme leverage, it is doubtful that a 5% cushion could save us from a bank crash, but it's a start I suppose.

FDIC staff said market perceptions that certain banks would be protected by the government poses a threat to the financial system, allowing these firms to obtain cheaper funding and eliminating checks on excessive risk taking by the banks. The banks don't want to be forced to hold more reserves, even if it would mean they are a bit safer. And the reality is that it would not make them much safer. If we really have concerns about too big to fail, we could start by regulating derivatives trading and reinstating Glass-Steagall.

Yesterday, Fortune released its list of the world's 500 largest corporations, ranking them by revenue for the fiscal year ended on or before March 31. In total, the 500 largest global corporations reported $30.3 trillion in 2012 revenue, nearly a 3 percent increase from the year before, with profits of $1.5 trillion. There are 132 US companies on the Global 500 list; China had the second most with 89 companies. Seven of the top ten companies by revenue were in the energy business. Royal Dutch Shell topped the revenue list with $481 billion, followed by Walmart with $469 billion and Exxon Mobil with revenue of $449 billion. Exxon Mobil was the most profitable at $44.9 billion, followed by Apple at $41.7 billion.

Oil closed at $104.52. Fill up the gas tank now.

Thousands of people gathered in Prescott Arizona today to honor the 19 members of the Granite Mountain Hotshot squad who died fighting the Yarnell fire. Vice president Biden lead a list of dignitaries on hand. Biden referred to an old saying: “All men are created equal - then a few became firefighters.”

Over the years I've raised a question from time to time on this program: “What's the economy for?” Why do we get up each day and do the work we do? What is the purpose of our labors? Well, for the Yarnell 19 their mission was to save lives and protect property, and their jobs weren't jobs, but a duty to their fellow citizens. Sometimes I wonder about the purpose of our labors, but I'm quite certain the Yarnell 19 had figured out the right answer. 

Tuesday, May 07, 2013 - Good Times Roll

Good Times Roll

by Sinclair Noe

DOW + 87 = 15,056
SPX + 8 = 1625
NAS + 3 = 3396
10 YR YLD + .01 = 1.78%
OIL - .64 = 95.52
GOLD – 17.70 = 1453.60
SILV - .08 = 24.06

The fun started in Asia as a weak yen sent Tokyo stocks to their highest level in almost five years while Australian shares closed lower after briefly erasing declines following the Reserve Bank of Australia's to cut key interest rates. The yen has now lost one percent since Thursday; the result is a rally in the Nikkei, supported by upward revisions in earnings expectations for Japanese companies. Japan's Nikkei 225 is up more than 50% in the past six months and overnight breached 14,000 for the first time since 2008. This is known as Abenomics, named after Shinzo Abe, the Japanese prime minister who has instituted a very aggressive form of monetary easing, much more aggressive than what the Federal Reserve is doing in the US; the plan will double Japan's monetary base by the end of 2014.

Later in the week, we'll see if Abenomics is gaining traction as Japanese automakers report earnings; of course, it may still be too early to see Abenomics result in stronger earnings, but over time, a weaker yen should result in more car sales for the likes of Toyota and Honda. The world has done OK while Japan has stagnated. If Japan were to go back to something like a 3% growth rate, that would make a big difference to the global economy. This might be a potentially serious opportunity to improve the pace of global growth.

Then the fun spread to Europe. ECB President Mario Draghi has said he'll do whatever it takes to push the euro zone economy forwards. Last week the ECB cut rates, keeping downward pressure on the euro although the stronger German data pushed it back above $1.31 against an easing dollar. Germany, the region's largest economy, reported a rise in industrial orders in March, confounding expectations for a drop. The German DAX Index finally topped the highs of 2007. For the first time in a couple of years, Portugal completed a sale of 10-year bonds. The bond sale puts Portugal on course to exit its bailout on time, and qualifies it for a ECB debt support program. The 10-year note yields 5.6%, safely below the 6% level that is considered a danger zone. The MSCI Global Index edged past its June 2008 high.

The good times then spread to the US, where Wall Street saw new record highs. There isn't much economic news to move the markets this week. The economic news last week wasn't great but it was better than expected, and so everything is moving higher. Small caps moved to new highs; Dow Transports are confirming with new highs; even emerging markets are pulling out of a skid; the S&P 500 has been up 11 out of the past 13 sessions; we've seen 10 record highs this year. It has been an impressive run. Will it last forever? Of course not. Will it continue longer than you think? Probably, or it could end tomorrow.

More than 400 earnings reports from S&P 500 companies are now in the books, with 47% beating estimates on sales, 72% beat on earnings per share; the aggregate earnings per share beat is 5.4%, and year to year earnings per share grew by 2.5%. Annual sales growth is negative 1.4%; that indicates companies are still cutting costs; there are limits to this strategy.

Of course, it's difficult to make sense of earnings reports these days. A new report from Ernst and Young surveyed 3,500 staff in 36 countries; 20% said they had seen financial manipulation in their companies in the last 12 months. In addition 42 percent of board directors and top managers surveyed said they were aware of "some type of irregular financial reporting".

And despite scandals and regulatory failures in the wake of the credit crunch, almost a quarter of top financial services staff surveyed said they were aware of manipulation and almost 10 percent of all staff said their companies had understated costs, overstated revenues or used unprincipled sales tactics.

At some point demand has to increase or the fun stops. Consumer credit expanded at a slower pace in March. Non-revolving debt led the way; things like auto loans and student loans. Credit card debt fell by 2.4%.

In a follow-up to last Friday's jobs report, today the Bureau of Labor Statistics released its Job Openings and Labor Turnover Summary, also known as the JOLTS report. There are about 3.8 million job openings in the country; there are about 12 million unemployed people looking to fill those jobs. Employers aren't firing people any more, but they're not hiring people, either. Employers still see demand as too weak to justify ramping up hiring. Consumers have been too busy picking through the wreckage of their finances to spend a lot of money.

So the stock market is flying high even as customers are pulling in their wings. What's keeping the markets at these highs? Central banks keep pumping up the bubble. This year is a year where all market behavior is basically nonsense. In an environment where you have the central banks pushing down all yield levels on whatever is supposed to be a fixed-income investment. With key economies like the United States seeing a patchy recovery but others struggling to maintain growth, major central banks around the world have shown over the last few weeks they intend to keep stimulus flowing freely for the time being. Let the good times roll.

A follow-up to reports that New York Attorney General Eric Schneiderman will sue Bank of America and Wells Fargo for violating terms of the National Mortgage Settlement; this was the $25 billion dollar settlement for allowing banks to overcharge people, use fake documents and otherwise abuse customers; and it wasn't really $25 billion because the banks could write off full amounts of short sales and loan mods; and this will shock you – most of the write-offs are short sales. Part of the deal would require the banks to actually respond to loan modification requests and to stop losing paperwork and stop abusing customers. This has proved to be too much for Bank of America and Wells Fargo, so the New York AG has said he'll sue; not for money; apparently he'll sue for equitable relief.

What is equitable relief? Apparently it would be an injunction to force BofA and Wells to comply with the servicing standards in the Settlement. Now, they didn't comply with the original settlement, so why would they comply with an injunction? Who knows.

“I'm going to put if very bluntly. I regard the moral environment as pathological...these people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients... to counter-parties in transactions. They are tough greedy aggressive and feel absolutely out of control...and they have gamed the system to a remarkable extent.”

That's a quote from a recent speech by economist Jeffrey Sachs. It's only remarkable because Sachs is considered part of the establishment; a former economic advisor for the IMF and the United Nations. But the abuses by the banksters have become so blatant that they can't be overlooked. The Too Big To Fail Banks have admitted to money laundering to the worst drug cartels and terrorist organizations. No indictments. The banksters admit to millions of separate counts of perjury in the robo-signing scandal. No indictments, instead they reach a settlement and then violate the settlement. Again, no indictments. 

And if the Big Banks don't comply with the injunction to make them comply with the settlement..., well, I'm not sure but I'm guessing there won't be any indictments, just another limp wet noodle lashing.

Tuesday, June 19, 2012 - There is No Escape for the Fed - by Sinclair Noe

06192012 Script


DOW + 95 = 12,837
SPX + 13 = 1357
NAS + 34 = 2929
10 YR YLD +.04 = 1.62%
OIL - .12 = 84.23
GOLD – 10.80 = 1618.90
SILV - .32 = 28.52
PLAT – 2.00 = 1487.00


The Federal Reserve FOMC is meeting today and tomorrow to determine monetary policy for the next few weeks. Here is what they will probably say tomorrow. They won't lower interest rates; interest rates are at zero; interest rates are actually already negative when you consider the effects of inflation. Operation Twist is scheduled to expire in about two weeks. The idea behind Operation Twist is that the Fed sells shorter-term securities and buys longer-term securities with the goal of reducing long-term interest rates to encourage borrowing and spending. The yield on the 10-year note is 1.62%, so rates are pretty low even though the Twist hasn't been able to encourage a big round of borrowing and spending. Low interest rates alone have not been enough to create demand. Operation Twist is the Fed pushing on a string – which is to say, supply side economics is a crock.


Here's the conundrum for the Fed – how do they exit Operation Twist without creating a problem, possibly unwinding those nice, ultra-low interest rates? The Fed might announce a limited extension of the Twist, maybe to September or they might just offer a soft extension – saying something like: “we will monitor long-term rates and stand ready to maintain stability”. 


As far as QE3 – not likely. Europe hasn't collapsed, not today; but due to the possibility the Euro economy might implode in the not too distant future, the Fed will keep its powder dry. That's not totally accurate. Just like Operation Twist, QE 1&2 never really included an exit plan. The truth is that the Fed has continued to be the biggest buyer of Treasuries, they are propping up the market, they are pushing on a string and again confirming the fallacy of supply side economics. QE never went away, it just hasn't been effective and the Fed let it expire (in name only) while continuing to maintain an accommodative policy and this way they didn't have to answer questions about why QE was so ineffective. 


Another option for the Fed tomorrow is to announce they will maintain the ZIRP even longer than previously announced. It is already scheduled to last until 2014, they might say it should remain in place until 2015 or until such time as an asteroid destroys life on earth as we know it. Here is the bottom line – the Fed can't exit their easy money policy; if they try to exit, it would get ugly; so, tomorrow they will say something which will indicate they are not trying to exit, and the markets will be somewhere between mild disappointment and moderate pleasure. 


The payrolls report shows job growth has averaged 96,000 in the past three months, well below the 252,000 rate in the three months before that.


The payrolls number is the net change between job additions and separations; the difference between hirings and firings. The Job Openings and Labor Turnover Survey (Jolts) provides some details on the labor markets. The April report  shows the spring payroll weakness reflects a very steep drop in hiring, not a rise in job losses.  According to the Jolts report, new hires fell to 4.18 million in April, down from 4.34 million in March and from 4.44 million in February which had been the highest hire number since October 2008.


Companies also cut back on looking for workers. April job openings fell to 3.42 million, the lowest number in five months.  Job separations actually fell in April, to 4.09 million from 4.17 million in March. Separations including layoffs, firings, quits and retirements have stabilized around 4.1 million over the past year.


Any way you look at it, the Federal Reserve has failed miserably in its mandate to achieve maximum employment.


Meanwhile, Greece is trying to form a coalition government and it looks like the 3 major parties are getting closer. The conservative New Democracy party won the election, narrowly, but the reality is that all the political parties want to renegotiate the bailout because a monkey with a calculator could figure out that the Greeks are getting screwed on the deal. And there seems to be some wiggle room. An IMF spokesperson said: “These economic programs are not static. They do get adjusted.” Germany has been inflexible on allowing any compromise. Then, late this afternoon we heard reports from the G-20 meeting in Mexico that Germany was going to end its opposition to the euro zone’s bailout funds buying the sovereign debt of troubled European nations. The stories have not been confirmed, but who knows? Maybe Merkel discovered the great Mexican invention, the margarita, and maybe she's getting a little loose in Los Cabos.


While this was going on, British Prime Minister David Cameron sparked a war of words with French officials by saying he would roll out the red carpet for French firms if new French President Francois Hollande raised taxes as planned on the wealthy. So it isn't total unanimity.


The G-20 is expected to issue a communique stating that the euro-zone will issue a jobs and growth plan and they will take concrete steps toward a more integrated approach to bank supervision, resolution, recapitalization and deposit insurance. The communique appears aimed, in part, at easing market worries about Spain.


If yesterday was all about Greece, today belongs to Spain. The euro strengthened 0.6 percent to $1.2647 while the yield on Spain's ten-year note dropped 11 basis points to 7.05 percent, after topping 7 percent yesterday for the first time in the history of the euro. The 7% threshold is the level that knocked other smaller countries like Greece and Ireland over the edge. Spain will need a lot more than 100 billion-euro to recapitalize its banks. And even though the bailout is too small to be effective it is still a big number, big enough to add to Spain's sovereign debt, pushing real debt to GDP to more than 146%. This means Spain now has a banking problem and a sovereign debt problem. They are not going to grow their way out of this problem. There doesn't appear to be a bailout plan that could pull Spain out of its downward spiral. It is probably just a matter of time. Of course we could be looking at another year of Spanish misery, and a lot can happen in 12 months, if they can last that long, but the situation doesn't look good. Spain is big enough to wipe out the EU.


There is a great photo of the doors of the Bank of Spain; someone has put up multiple stickers and post-it notes that read: “this is not a crisis, it is a scam.”


Let's look at some quotes that tell the Euro story:
"Spain is not Greece." Elena Salgado, Spanish Finance minister, February, 2010.


"Portugal is not Greece." The Economist, April 2010.


"Greece is not Ireland." George Papaconstantinou, Greek Finance minister, November, 2010.


"Spain is neither Ireland nor Portugal." Elena Salgado, Spanish Finance minister, November 2010.


"Ireland is not in ‘Greek Territory.’" Irish Finance Minister Brian Lenihan. November 2010.


"Neither Spain nor Portugal is Ireland." Angel Gurria, Secretary-general OECD, November, 2010.


"Italy is not Spain” – Ed Parker, Fitch MD, 12 June 2012


"Spain is not Uganda" Spanish PM Rajoy. June, 2012


"Uganda does not want to be Spain" (Ugandan foreign minister) June 13th 2012






Google has put out its latest "transparency report." It includes details of all the "takedown requests" the company received from governments around the world; these are basically government requests to pull something off the internet.  Leading the pack: The government of India, but that's a little misleading because China simply blocked Google. Sometimes Google complies with the takedown request, sometimes they don't.


Wikileaks founder Julian Assange is seeking political asylum at Ecuador's London embassy. Last week the UK's Supreme Court dismissed Mr Assange's bid to reopen an appeal against extradition to Sweden over alleged sex crimes he denies. The Supreme Court gave him until 28 June before extradition proceedings can start.


He says the allegations are politically-motivated. Swedish prosecutors want to question him over allegations of rape and sexual assault made by two female former Wikileaks volunteers in mid-2010 but have not filed any charges. Mr Assange, whose Wikileaks website has published a mass of leaked diplomatic cables that embarrassed several governments and international businesses, claims the sex was consensual.


According to a State Department report, more than 42,000 adults and children were found in forced prostitution, labor, slavery or armed conflict in 2011, a US government report has found. Some 9,000 more victims were identified around the world than in 2010.  But the number is just a fraction of the estimated 800,000 people trafficked across borders every year.


Describing the report as a "clear and honest assessment", US Secretary of State Hillary Clinton said: "The end of legal slavery in the United States and around the world has not meant the end of slavery."


Where the trade in persons was once labelled as human trafficking, Mrs Clinton said: "I think labelling this for what it is - slavery - has brought it to another dimension."


The stories of those enslaved "remind us of what kind of inhumane treatment we are still capable of as human beings. They are living, breathing reminders that the war against slavery remains unfinished."


Now, let's put that in perspective; JC Penney shares fell 8.5% to close at $22.25 one day after Michael Francis, the company's CEO announced a very abrupt resignation. The stock is down nearly 37% year to date. Store traffic fell as Penney shifted toward everyday low pricing and away from marked sales days. Francis walks with about $10 million for nine months work.