Monday, June 23, 2014 - Calm Before the Storm

Calm Before the Storm
by Sinclair Noe

DOW – 9 = 16,937
SPX – 0.26 = 1962
NAS + 0.64 = 4368
10 YR YLD un = 2.62%
OIL  - .13 = 106.04
GOLD + 3.60 = 1319.30
SILV + .02 = 21.00

The economic data today from the National Association of Realtors shows existing home sales picked up in May. Total sales rose 4.9% to 4.89 million units from an upwardly revised 4.66 million in April. While that marks a month to month increase, sales are down from the 5.15 million level of May one year ago.  Total housing inventory increased 2.2% in May. Unsold inventory is 6% higher than a year ago.

Meanwhile, Markit's US Flash manufacturing PMI report for June, increased to 57.5 from 56.4 in May.

The stock market has drifted slightly higher over the past couple of months. Yes we hit record highs last week, but the movement has been very slow, volume has been light, and volatility is almost non-existent. Volume is down about 50% since 2008. The VIX, or volatility index, sometimes known as the fear index, is down below 12, which means that the only people in the options market are all maxxed out on Ambien, or Valium. The S&P 500 hasn’t had a daily move of 1% in more than 2 months. Russia invades Ukraine – wake me when it’s over. Radical militants threaten to tear apart Iraq – we’ve seen this story before. The US economy is weak right now but growth is right around the corner – rinse, lather, repeat. The US plays Portugal in the World Cup and it’s a tie, of course.

The Federal Reserve looked at monetary policy and cranked up the old Xerox to publish their statement. Maybe this is the result of all that Federal Reserve fiddling; maybe they have created the boring stock market, which lulls everyone into a false sense of complacency. Of course, that’s not how markets work, no matter how much central bank finesse is applied. Markets are risky, always have been, always will be. I think it’s safe to say this is the calm before the storm, because there is always a storm in the markets.

There was some merger activity today. General Electric struck a deal to acquire France-based Alstom's power business for $16.9 billion after a lengthy pursuit. There was another utility deal, Wisconsin Energy announced a deal to acquire Integrys Energy for $9.1 billion. Oracle also announced a deal to acquire MICROS Systems for $4.6 billion.

The price of oil has been one of the few markets to show movement, which is not good news for drivers. Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given the recent jump in oil prices, gasoline prices are poised to increase in coming weeks. Higher prices at the pump serve as a tax on consumers, whose purchasing power is still questionable. It’s estimated that an increase of $10 a barrel subtracts 0.4% from real GDP growth. Of course, for that to apply, the price increase has to stick.

The Supreme Court is in session and today they ruled on limiting the Environmental Protection Agency’s power to regulate facilities that emit carbon dioxide. The decision would reduce the number of carbon-emitting facilities the EPA can regulate, but it is a limited ruling, and even Justice Scalia said: "It bears mention that EPA is getting almost everything it wanted in this case."

Meanwhile a statement from the EPA claims victory, "The Supreme Court’s decision is a win for our efforts to reduce carbon pollution because it allows EPA, states and other permitting authorities to continue to require carbon pollution limits in permits for the largest pollution sources." Industry groups, such as the American Petroleum Institute, also claimed victory. The group said in a statement that the decision was a "stark reminder that the EPA's power is not unlimited."

The decision won't have a huge impact on US climate policy, as the decision only modestly changed the number of large facilities subject to certain permitting requirements. It also won't affect the Obama administration’s proposal to reduce emissions from power plants, which is a separate program.

When the EPA classifies something (like carbon dioxide) as a harmful pollutant, it triggers a number of legal requirements under the Clean Air Act. One of them, known as a "prevention of significant deterioration" (PSD) rule, requires factories, power plants, and other large facilities to get the EPA's approval before they make changes that would lead to higher pollution. These facilities also must use the "best available control technology" to reduce the effects of pollution they emit. Another provision requires any facility that is a "major source" of pollution to get a permit from the EPA.

Under the Clean Air Act, facilities become subject to these regulations if they emit more than 250 tons (or in some cases as little as 100 tons) of pollution per year. Traditional pollutants such as sulfur dioxide or lead can be harmful even if they are only emitted in trace amounts, so a relatively low threshold makes sense. Only large factories and power plants emit that much of these conventional pollutants.

But carbon dioxide is different. Factories produce vastly more carbon dioxide than other pollutants regulated by the EPA. Under existing rules, about 15,000 facilities are required to get permits under the Clean Air Act based on their emissions of non-carbon pollutants. If the EPA had used the same 250-ton threshold for carbon dioxide emissions, 6.1 million facilities would suddenly have needed permits. The agency estimated it would cost $21 billion per year just to process all that paperwork.

So the agency effectively re-wrote the law, exempting facilities that emitted less than 100,000 tons of carbon dioxide from getting a permit. Several states and business groups challenged this decision, arguing that the EPA had no authority to unilaterally re-write the law.

Almost everyone agrees that a literal reading of the Clean Air Act would lead to madness. The EPA has warned that "decade-long delays in issuing permits would become common, causing construction projects to grind to a halt nationwide." The Supreme Court didn't want that to happen.

But a majority of the court, led by Justice Scalia, also didn't like the EPA's approach. The court said that if Congress set a threshold of 250 tons, the EPA can't just unilaterally change it to 100,000 tons. Instead, the court's majority held that the term "air pollutant" can have different meanings in different parts of the Clean Air Act. While the "Act-wide definition" of air pollutant includes carbon dioxide, Scalia wrote, "EPA has routinely given it a narrower, context-appropriate meaning" in certain parts of the Clean Air Act. Scalia used the same trick to avoid subjecting millions of facilities to burdensome permitting requirements. He held that the definition of "air pollutant" didn't include carbon dioxide in sections of the Clean Air Act where including it would lead to a vast expansion in regulation.

The court's four liberals, led by Justice Stephen Breyer, preferred a different approach. Rather than selectively interpreting "any air pollutant" to exclude carbon dioxide, Breyer would instead have interpreted another phrase in the same section of the law, "any source" to exclude power plants that produce only modest amounts of carbon dioxide.

Two of the court's conservatives, Samuel Alito and Clarence Thomas, wrote a separate opinion arguing that the Supreme Court had been wrong to push the EPA into regulating carbon dioxide in the first place in 2007.

While the EPA can't impose regulations on new power plants based on their carbon dioxide emissions, the court ruled that the courts can regulate the carbon dioxide emissions of facilities that are already subject to regulations based on their emissions of conventional pollutants. So the EPA will still do what the EPA does; it’s estimated that 83% of greenhouse gas emissions that could potentially be regulated under the Environmental Protection Agency's interpretation of the law would still be covered as a result of the ruling, compared with the 86% of emissions that the EPA says it wants to regulate.

What today’s ruling really shows is that Congress has been out of touch and dysfunctional in dealing with pollution and climate change; rather than deal with issues, they stick their heads in the sand and hope the problem goes away, but it doesn’t; it simply shifts to another part of government that may or may not manage to resolve the problem, but in either case, is not held accountable to the voters; and then finally, if the problem persists, it goes to the courts. It’s a bad way to make and enforce laws.

A couple of other cases today: in Loughrin v. US; the court declined to reduce the scope of a federal criminal law against bank fraud, ruling that prosecutors do not need to prove that defendants intended to defraud a bank. The decision came in an appeal brought by Kevin Loughrin, who was convicted of six counts of bank fraud for stealing checks that he then altered so he could buy merchandise at Target stores.

Loughrin told police he meant to buy the items using the checks, then return the items for cash refunds. He was charged with using altered checks totaling $1,184.  Loughrin appealed his conviction. He argued that the bank fraud statute required prosecutors to prove that he intended to defraud the banks on which the checks were drawn. He said his intent was only to deceive Target. In other words, this was run of the mill fraud, and the use of a check was incidental. Loughrin did not appeal his related convictions for identity theft and possession of stolen mail. Between 2006 and 2010, the government sought to prosecute nearly 3,000 cases using the statute. Meanwhile, no major bankers have gone to jail for the crimes associated with the financial crisis; I’m just saying.

One more decision today: New Jersey wanted to institute legalized gambling on football, passing a law that the NFL and other sports leagues quickly fought in court.  The NFL won (as it often seems to do in court) at the federal appellate level, forcing New Jersey to take the case to the Supreme Court. The Supremes declined to review the case, so if you are in New Jersey, or any other state except Nevada, you’ll have to continue to call your bookie, or you can play fantasy football in a league set up through the NFL’s website.

Monday, January 13, 2014, Hacks and Leaks

Hacks and Leaks

by Sinclair Noe

DOW – 179 = 16,257
SPX – 23 = 1819
NAS – 61 = 4113
10 YR YLD - .03 = 2.83%
OIL – 1.14 = 91.58
GOLD + 3.80 = 1253.40
SILV + .23 = 20.51

This week's economic calendar includes retail sales report and business inventories tomorrow; reports on wholesale inflation and the Fed Beige Book on Wednesday; Thursday we'll see the inflation numbers on the retail level; Friday brings an update on housing starts, industrial production, and an options expiration Friday.

We are smack dab in earnings reporting season. This week, the big banks report. Tomorrow we'll hear from JPMorgan and Wells Fargo; Bank of America on Wednesday; Goldman Sachs and Citigroup on Thursday; Morgan Stanley on Friday. The banks' reports will provide insight into how much activity there has been in both consumer and commercial lending and portfolios. Another area of interest is changes in the banks' trading portfolios, which are expected to decline. Financial companies announced more job cuts last year than any other corporate sector; those cuts can't continue indefinitely. Litigation costs will be the wild card in earnings reports as some of the big banks have been trying to clean out the skeletons from the closets.

Fourth-quarter earnings expectations are highest for health-care stocks, financials and consumer-discretionary names, as well as Industrial companies. Much like in the third-quarter, the financial sector is expected to have the best earnings growth in the fourth quarter, with an estimated growth rate of 22.6%. S&P 500 earnings as a whole are expected to grow 6.1%. Without the contribution of the financial sector, expected growth is 3%.

While some businesses have shown fundamental improvement, many corporate earnings have benefited from cost cutting, low interest rates to refinance debt, stock buybacks and other moves that might fall under the heading of financial engineering, and it's not just the banks. Many companies have not been investing in boosting their productivity. In order for the economy to grow, companies are going to have to start investing more in capital expenditures and job growth, the very things they have squeezed to achieve high margins.

One thing the banks could do is to tighten up their security on digital transaction. Last Friday, retailer Target announced that personal information on as many as 70 million additional customers was stolen as part of the company's payment card data breach. The information stolen includes names, mailing addresses, phone numbers, and e-mail addresses. Hackers infected Target's point-of-sale terminals with malware to steal the payment card information Over the weekend, the number of people impacted by the breach may have grown to as many as 110 million. This is the latest blow to Target, which in December revealed that hackers had stolen approximately 40 million credit and debit card numbers. Some of that 40 million may be overlap in the 110 million figure. Target said at the time that it believed the data stolen came from transactions made between November 27 and December 15.

The breach, in turn resulted in a 10 to 20 fold increase in stolen cards available on underground markets. Target says affected customers will suffer no liability for fraudulent charges, and they will offer one year of credit monitoring and identity theft protection. You can go to a Target website and enter an email address, and an activation code will be emailed to you.

Target partnered with credit card monitoring firm Experian to handle the monitoring for its customers. Once users get their activation codes they’ll be asked to enter a variety personal information into the Experian Web site to verify their identities for the credit monitoring. This includes information such as address, social security number and mother’s maiden name — all to ensure that consumers get the right credit reports. Target will not have access to the data.

Once users are signed up for the service, they will receive a complimentary copy of their credit report and the option to receive daily credit monitoring, access to fraud resolution services and identity theft insurance where available.

Target was not alone; Neiman Marcus has also been hacked. I haven't heard numbers on Neiman Marcus, but it apparently happened about the same time as the Target hack. Three other, as yet unnamed, retailers were also hacked.

Banks and card issuers are reportedly prohibited from naming any organization that's suffered a breach, unless that organization releases a public breach notification. Then it's up to the card issuers to notify affected customers.

Issuing new cards, however, reportedly costs at least $10 per card, which has led some card issuers to avoid reissuing cards after a breach. Notably, while JPMorgan Chase reportedly replaced up to 2 million cards for cardholders whose data was compromised during the Target breach, Wells Fargo has declined to do so, saying that it will instead monitor accounts for signs of fraud and add additional protections to any apparently compromised accounts.

Card issuers have long complained about their inability to hold retailers accountable for the cost of replacing cards following a breach. But retailers have long countered that card issuers should be doing more to protect cardholder data, for example by implementing the chip-and-PIN system known as EMV, which requires a cardholder to enter a personal identification number before the card can be used to authorize an in-person transaction. EMV is already in widespread use in many other parts of the world, including Europe.

We don’t know all of the details about what happened at Target and Neiman Marcus, but there’s a really obvious weak spot in the US payments infrastructure that should be corrected, irrespective of whether it would have prevented the Target and Neiman Marcus breaches: the use of two-factor authentication, namely chip-and-PIN cards, which are standard outside the US and have been effective in reducing fraud. The bottom line is that the retailers don't want to pay for secured transactions and the banks don't want to pay for secured transactions.

The Senate Banking Committee will hold hearings to try and determine if retailers or banks should foot the costs in the wake of a breach. Or maybe we should have something a little better than a third world payment system. It's normal for the US to be backward in retail banking. It’s in investment banking that she is a great innovator.

In the meantime, think cash.

From hacks to leaks. West Virginians are being told “DO NOT USE WATER”. Not just don't drink the water, do not use the water, no baths, no washing of clothes or dishes, almost nothing. A chemical used in coal processing has leaked from an old tank along the Elk River and leaked into the water supply, a crisis that has affected nearly 300,000 people in nine counties and effectively closed the largest city in the state. The shorthand name for the chemical is “crude MCHM.” The technical name is 4-methylcyclohexane methanol.  People line up for free water at the fire stations or buy it at the Dollar General — $1.60 for a 20-ounce Dasani, $39 for a flat of 24 bottles.

The leak happened on Thursday, so West Virginians are getting a little ripe by today. Two state employees tracked the leak to Freedom Industries, which owns a row of vintage storage tanks along the south bank of the Elk. The chemical had leaked from an inch-wide hole in the bottom of one tank, pooled in a containment area and then seeped through a porous cinder-block retaining wall, down the bank and into the river.

The infrastructure was primed for a water crisis. The intake for the water distribution system is downstream by a little more than a mile, and on the same side of the river, as the tanks containing the chemicals. The West Virginia American Water Co. sent out the do-not-use order late Thursday afternoon, but by then people had been drinking the water, cooking with it and bathing children with it.

Phrases such as "light at the end of the tunnel" are being used by officials in West Virginia as they give about 300,000 people there hope that they'll soon be able to use the water that's supplied to their homes and businesses. What this tells us is that out water infrastructure has some problems. It's easy to slough this off by thinking it's just West Virginia, but it could happen almost anywhere, and we are not prepared.

Hacks and leaks, just 2 areas where we could see major improvements and upgrades. And I'm thinking back to last Friday's jobs report and wondering why we aren't seeing many, many more jobs being created in this country. 

Friday, August 16, 2013 - Who Knows?

Who Knows?

by Sinclair Noe

DOW – 30 = 15,081
SPX – 5 = 1655
NAS – 3 = 3602
10 YR YLD + .07 = 2.83%
OIL + .62 = 107.95
GOLD + 11.10 = 1378.20
SILV + .25 = 23.36

The Dow fell 2.2 percent for the week, its biggest decline since June 2012, while the S&P 500 dropped 2.1% for the week and the Nasdaq dropped 1.6%; their biggest weekly losses since June, 2013. It was a second week of losses for the major indexes. The yield on the 10 year note climbed to the highest level in 2 years. Gold settled at its highest price in almost two months.

The productivity of US workers rose more than projected in the second quarter. The measure of employee output per hour increased at a 0.9% annualized rate, after a 1.7% decline in the prior three months. Even with the second-quarter pickup, productivity was unchanged in the 12 months ended in June, below the average 2.4% annual gain in the 2000-2011 period. Businesses are reaching the limit of how much efficiency they can squeeze from their existing staff. So, we're at a point where any increase in demand could prompt more hiring, but we're not seeing an increase in demand.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 80.0 from 85.1 in July. We're all consumers aren't we; that's how we are measured; that is our value to corporate America. Earlier this week I repeated the old idea that consumer spending is 70% of overall economic activity. One listener took me to task, writing: “Why do you keep perpetuating the lie that consumer spending makes up 70% of GDP when the federal government alone accounts for more than 20% State and local government accounts for more than 10%. Then there is business spending.  You are supposed to be the one busting these lies.”

By the way, if you would like to take me to task, the email is sinclair@moneyradio.com

The consumer spending thing is like a whole bunch of other statistics, which is to say, it's not very accurate. What government statistics call consumer spending is not what most people consider consumer spending. Most of it isn’t, anyway. Lots of that so-called consumer spending is in fact government spending; Medicare and Medicaid, for instance, are lumped in there, as is most health-care spending, which amounts to about $2 trillion a year,which might tend to throw the consumer-spending numbers off a bit. Health-care spending isn’t really driven by consumers but by insurance companies, government, and other non-consumer enterprises. Something on the order of 15 percent of health-care spending actually comes out of consumers’ pockets.

Other examples of not really consumer spending include money spent by nonprofits, for instance, along with political parties and campaigns. I think that bank fees and such are included in consumer spending numbers, and who knows what else, and it's a certainty that interest compounded into the economy accounts for about 30% of what we pay for everything; and I really don't know how the consumer spending numbers try to reconcile that data.

Never mind, for the moment, that a big chunk of that actual consumer spending goes to things like clothes and electronics and shoes made abroad, and the consumption of stuff made in China has little direct impact on domestic economic activity, the truth is that consumer spending, in reality, represents less than half of US economic activity, probably around 40 percent.

There is a formula for consumer spending, and almost anything can get tossed into the mix, and the formula has changed over time. It's estimated consumer spending was around 75% of the economy in 1929; it grew to 83% in 1932, largely because business spending dropped. Consumer spending dropped to 50% in World War II because of large expenditures by government and very low expenditures by individuals.

I think this gets back to the idea of whether demand or production drives consumption, and as a consequence, economic growth. I tend to think it is demand. Otherwise, the Fed's spending a couple of trillion dollars on Quantitative Easing would have resulted in real economic growth, rather than just inflating asset bubbles. A few trillion in Fed monetary stimulus never really found its way from Wall Street to Main Street. But back to original complaint; you have a point, the consumer spending numbers are skewed. But then GDP is also skewed; if someone buys cigarettes and gets cancer; the cost to treat the cancer is considered as part of GDP, as if it is adding to the growth of the economy rather than watching a part of the economy die. Meanwhile, they are just starting to factor in movies as having some economic value; and we're still a long way from having a poem contribute to GDP. So, yea, the consumer spending numbers are a myth and every economic number is skewed. You and me, we're kind of stuck with the numbers we get.

Anyway, today on Wall Street, retailers took a beating. From Wal-Mart and Gap to Macy’s and McDonald’s, chains that cater to middle- and lower-income Americans. Nordstrom, the luxury department store chain, reported lower-than-expected revenue in its second quarter Thursday, prompting the company to trim its full-year sales and profit forecasts. Nordstrom's has products in their stores, they just aren't finding demand for those products.

Everyone wants to talk about recovery, but it's more like the unrecovery. Look no further than Macy's for a snapshot of the consumer. For its namesake mid-tier department stores, Macy's reported the first decline in same-store sales in nearly four years this week, and said shoppers had been gravitating to its less expensive items. That's a contrast with Macy's upscale Bloomingdale's, which came in with strong results.

The trend also turns up in results posted on Thursday by Wal-Mart, which emphasizes low pricing. Its sales at stores open at least a year unexpectedly fell 0.3 percent last quarter, a second decline in a row, prompting the world's largest retailer to lower its sales forecast for the year.

Last week, a group of retailers including Costco and Gap reported modest gains in July same-store sales, thanks largely to bargains. Adding to the pressure, Macy's said many shoppers are redirecting their spending to their cars, housing and home improvement.

Automakers reported a 14 percent sales increase in July from a year earlier. Home improvement chain Home Depot is expected to report same-store sales rose 7 percent. Outside of home improvement and cars, many retailers say economic conditions were less than ideal.

In July, U.S. employers slowed their pace of hiring, with the number of jobs outside of farming increasing less than economists expected. The average price for a gallon of gasoline in the United States was still high: at the end of July, it was $3.67 compared to $3.51 a year earlier, according to the Lundberg survey. And the problems in Egypt could push the price at the pump into an upward spiral at any moment.

As of May, 47.6 million Americans, or one in seven, received food aid - highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010. Real wages are also stagnating: they fell 0.1 percent between June 2012 and June 2013, according to the Bureau of Labor Statistics, excluding inflation and civil servants and military personnel.

Wal-Mart Chief Financial Officer Charles Holley told reporters on a call: "The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have."

A recent government report showed 5.7 percent of Americans who had jobs in July could not get enough hours to qualify as full-time workers, the same percentage as in June. While the unemployment rate has fallen steadily over the last year, the share of part-time workers who want more hours has barely dropped, according to BLS statistics. Workers are not doing well. They're losing ground because wages are not growing in real terms.

And so, consumers are holding onto their purses. Macy's said shoppers at its namesake chain were holding back on anything nonessential, adding it didn't expect to make up the sales shortfall this year and cut its forecasts. Kohl's said comparable sales had slid for purchases paid for with a credit card, transactions typically made by people on a budget. And both Wal-Mart and Costco said sales of higher-ticket items such as electronics and games have been soft. Several companies have said shoppers are waiting longer to buy back-to-school items, suggesting they are waiting for deals and that they see no urgency to hit stores. This week's results may presage more of the same next week, when big chains like Target, J.C. Penney and Sears report earnings.

Consumer spending may not account for 70% of the economy but the consumer is weary these days. If there really is a recovery, it hasn't made it to Main Street, and without demand, there won't be growth. And for now, the beatings will continue until morale improves.