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

Always Look on the Bright Side
by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

Always look on the bright side.

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

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

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

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

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

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

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

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

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

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

Tuesday, February 18, 2014 - Econ Roundup

Econ Roundup

by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, January 28, 2014 - If I Had a Hammer

If I Had a Hammer

by Sinclair Noe

DOW + 90 = 15,928
SPX + 10 = 1792
NAS + 14 = 4097
10 YR YLD - .02 = 2.75%
OIL + 1.50 = 97.22
GOLD - .80 = 1256.70
SILV - .13 = 19.66

The State of the Union is… tonight.

President Obama will describe how he will use his pen and phone to overcome the Do-Nothing Congress, and the Republicans have ironically lined up not one, but three responses to refute the idea they are nothing more than obstreperous obstructionists.

Everybody from the Pope to the big wigs in Davos have been talking about inequality and it will likely be a major theme in tonight’s speech. Job and wage growth has been broken since the 1990s. Median family incomes grew very slowly from 1979 to 1999, peaked that year, and have fallen 13% since. The economy has recovered since the near financial meltdown of 2008, but it has been the weakest recovery since the Great Depression, and one of the reasons it has been such a slow recovery is that the spoils of recovery have been unevenly distributed.

Even though we have seen job growth in the past 54 months, 6 of the 10 fastest growing job categories are in low paying service sector positions, such as retail clerk and home health care aids. Middle class income is sinking; the ranks of the poor are rising; and the economic gains only go to the top, or 95% of all economic gains in the “recovery” have gone to the top 1%. For the fourth year in a row, the real median weekly earnings for full-time workers fell slightly. Profits, on the other hand, have been putting on a show. As a share of national income, corporate profits were 14.6% in the third quarter of 2013, the most recent quarter for which we have data. In the history of these data going back to 1947, there was only one quarter higher than that, the last quarter of 2011.

These trends are moving in opposite directions but they are related. Profit is simply revenue minus expenses, and so there are two ways to grow profits: increase revenue or cuts expenses. Profits have been propelled by squeezing costs rather than growing demand. The strength of profits is directly related to the weakness in hourly wages. In a normal business cycle, you would expect profits to increase before wages. During the good times, we tend to get fat and lazy. During a downturn, businesses get lean and mean and they start running at high productivity again. But that hasn’t happened. Real compensation has grown more slowly than productivity.

One way to look at this is to compare labor costs against the unit profit costs, and even after accounting for increases in productivity, profits have outpaced workers earnings. Compensation net productivity growth is up about 10% since 2000, while profits net productivity growth has doubled in the same time.

In the US, there is no job security. The share of working age Americans holding jobs is now lower than at any time in the last 30 years, and three-quarters of those working people are living hand to mouth. Advances in technology are just going to make job prospects even more challenging. A recent McKinsey Global Institute survey found that 230 million service jobs representing some $9 trillion in salary globally could be transformed by computers by 2025. Forget about outsourcing manufacturing jobs overseas, the robots are coming.

So, there is really nothing to drive wages higher because demand for jobs outweighs supply of jobs. It is hard to demand higher wages when your replacement is filling out an application in the lobby, or when your replacement is a robot.

So, in addition to a pen and a phone, the President has a bully pulpit, and he will use it tonight. It remains to be seen if he will use it to put important ideas in people’s minds by shaping public discourse. We know he's going to talk about economic inequality, as he should. He will probably mention worker salaries, which haven't risen in 30 years.

One of the ideas we will hear tonight is the President will to use an executive order to raise the minimum wage in new federal contracts.  The order about the minimum wage and federal contracts will raise the pay from the national minimum of $7.25 an hour to $10.10 an hour. The change applies only to new federal contracts, and not to renewals of existing agreements. So, he’s using a pen and a phone to raise the minimum wage, but nobody will see an increase in their next paycheck.

And for college age students, who you might expect would raise a ruckus about all the inequality, well they don’t have jobs; they do have mountains of student debt and so they don’t dare take to the streets. Besides, nobody really thinks you can change government anymore. Pete Seeger is dead and nobody can find a hammer, much less figure out how to use a hammer. Cynicism is stifling, not motivating. It’s hard to get people worked up to change something that seems irreparably dysfunctional. Maybe we’ll just have to wait until the whole mess to topple under its own weight. And things right now are pretty lopsided. Even the high rollers at Davos acknowledged that just 85 people now hold as much wealth as 3.5 billion people.

Whatever the economic costs of inequality, the social costs are even greater. Research shows that unequal economies are more fragile and prone to financial crisis and that they have higher levels of social unrest, poor health, anxiety and a host of other problems. Inequality also reduces social mobility—the very foundations of the American Dream—and it’s a voting issue. A new Gallup Poll shows that two-thirds of adults are dissatisfied with wealth distribution in the US. It’s also a global problem and it is certainly at the core of the volatility we’ve seen in emerging market economies in the past couple of weeks.

The problems in emerging markets are not just related to the monetary policy of central bankers, although that is a big part of the equation; the problems are related to economic inequality and subsequent political problems which tend to crop up when there is economic inequality. After 5 down days on Wall Street, you might think the markets were waking up to the problems; then we have a modest gain and we are lulled into a sense of complacency. The financial markets in 2012 and a much of 2013 were moving in lockstep, in a “risk on-risk off” pattern, with high yielding emerging markets as the preferred “risk on” trade. Investors were chasing yield and finding it in emerging markets, where the yield was much higher than here, where the Fed has engineered negative real yields.

And in our complacency, we might have overlooked the similarity in emerging markets today with the similarities of 1997.  In the 1990s Asian crisis, the rapid withdrawal of hot money triggered combined liquidity and exchange rate-regime crises. Then and now, capital flight merely served to exacerbate homegrown problems. The initial flight of capital needn’t be prompted by a crisis anywhere at all. It might simply be a ‘rotation’ of short-term capital from one set of opportunities to others elsewhere: game over, move on. That means that as emerging countries tried to enter into the global economy, they set up to allow capital to flow in with ease, which also meant capital could flow out with ease. Emerging market economies that had nurtured reasonably liquid domestic capital markets were among the worst hit.

Even though the Fed’s taper talk sent a shudder through emerging markets last year, at least as big a culprit has been slowing growth in China, since lower demand for commodities hits many smaller economies hard. China is trying to engineer a transition from an export/investment driven economy to a consumer oriented one, and no country has managed that transition smoothly. Even worse, China’s consumption share of GDP has generally been declining in recent years.

Remember that Lehman, which had a large emerging markets desk, nearly went bust in the 1997 Asian markets crisis. Our big banks now look better diversified, but if a large bank bet wrong on enough trades, it could take a meaningful hit to its balance sheet. And more weakly capitalized Eurobanks are less able to sustain this sort of blow well. So while the emerging markets wobbles may not evolve into a full-blown crisis, it’s likely we’ll have a sustained period of roller coaster volatility before conditions stabilize.

There have been 14 Federal Reserve Chairmen; Janet Yellen is about to become the fifteenth. The transition of the Chair is cause for some trepidation. Market makers rightly wonder about the direction of monetary policy and the markets may act in a skittish manner. The first year of a new Fed Chair is not necessarily bad for the markets. By a 9 to 4 ratio, the first year of a new Fed chair leads to positive gains in the Dow Jones Industrial Average. The most recent and notable exception being the first year under Alan Greenspan (1987), where the Dow tanked more than 30% and finished the year down about 20%. Under Paul Volker, the Dow was volatile, with significant moves from negative to positive territory, but after one year of trading under the guidance of Volker saw the Dow in positive territory. Bernanke took the reins in 2006, which you may recall was a very good year for the Dow. Yellen? Well, time will tell.  Tune in tomorrow. 

Tuesday, January 14, 2014 - The Day the Net Died (Maybe)

The Day the Net Died (Maybe)

by Sinclair Noe

DOW + 115 = 16,373
SPX + 19 = 1838
NAS + 69 = 4183
10 YR YLD + .04 = 2.87%
OIL + .83 = 92.63
GOLD – 7.40 = 1246.00
SILV - .15 = 20.36

A US appeals court has rejected federal rules that required Internet providers to treat all web traffic equally. The Federal Communications Commission's open Internet rules, also known as net neutrality rules, required Internet service providers to give consumers equal access to all lawful content without restrictions or varying charges. The US Court of Appeals for the District of Columbia Circuit struck down the regulation, which was passed in late 2010 and challenged in court by Verizon Communications. The decision that could allow mobile carriers and other broadband providers to charge content providers for faster access to websites and products, or block content, or slow down access.

One argument is that a video and Internet provider would have an incentive to bog down a video streaming service such as Netflix in favor of its own sites. Or it could charge a toll to those who want their content delivered at a higher speed, which media watchdogs say would stifle innovation and favor big and powerful companies.

The issue of companies playing favorites with their own content came to the forefront when Comcast announced plans to acquire NBCUniversal in 2009.  Comcast, the nation's largest cable and Internet distributor, said in a statement that the court ruling would not change the company's policies. At the time of the acquisition, the Comcast agreed to abide by the FCC's open Internet rules for 7 years, even if the courts changed them. After 7 years, the gloves would likely come off.

There is big money at stake, as we were reminded today. Charter Communications wants to buy Time Warner Cable in a deal valued at more than $37 billion. Time Warner Cable's board has rejected the offer.

The FCC had classified broadband providers as information service providers as opposed to telecommunications service providers, like telephone companies, and that distinction created a legal hurdle for the FCC's authority over them. This was the second time the court struck down the FCC's net neutrality rules. The FCC now could appeal the ruling to the full appeals court or to the US Supreme Court, something FCC Chairman Tom Wheeler said he is considering as he looked at "all available options" to ensure Internet networks remained free and open.

The regulators could also try to reclassify broadband providers so they fall in the same category as traditional phone companies, a step that would give the FCC more oversight power. With the agency taking its regulatory authority from the Telecommunications Act of 1996, it could go back to Congress and ask for new authority to regulate broadband. But the Republican majority in the House of Representatives has tried multiple times to repeal the FCC’s net-neutrality rules, and any legislation giving the FCC new authority over broadband providers would have little chance with lawmakers there.

One simple way, at least on its face, to get around the prohibition on applying common carrier rules to broadband would be for the FCC to reclassify broadband, subject to the common carrier rules that traditional voice service is subject to.

There will be serious push back from the phone and cable companies and their lobbyists. They will make threats, recycle all of their debunked myths about the Internet, they will claim that the internet belongs to them, and promise we can trust them not to do any of the bad things they've fought so hard to do.

Economic data today; the commerce department reported better-than-expected retail sales for December, up 0.2% versus estimates of 0.0%. Core sales, excluding the more volatile food and auto sectors, were up 0.7% for the biggest gain in almost a year. November sales numbers were revised slightly lower. These core sales correspond most closely with the consumer spending component of gross domestic product, and the increase suggested consumption accelerated in the fourth quarter from the third quarter's 2 percent annual pace.

A second report from the Commerce Department showing retail inventories, excluding autos, increased 0.6 percent in November after increasing 0.3 percent in October. The economy grew at a 4.1 percent rate in the third quarter, which was the fastest pace in almost two years. Fourth-quarter GDP growth estimates range as high as a 3.9 percent rate.

It's earnings reporting season and this week features the big banks; today featured JPMorgan and Wells Fargo. Wells reported an 11% jump in profits, thanks in large part to cost cutting, which is to say they fired people. Wells Fargo says their mortgage business is doing just about what it would be expected to do at this point in the economic cycle. The nation's biggest mortgage lender, Wells Fargo, said its mortgage volume tumbled to $50 billion in the quarter, down 60 percent from $125 billion a year ago. The second-biggest lender, JPMorgan Chase, said its mortgage originations, that includes new home purchases and refinancings, fell 54 percent to $23.3 billion from $51.2 billion a year ago.

A jump in interest rates has had a big impact on the housing market. That should be a warning sign for a Federal Reserve seemingly bound and determined to withdraw stimulus from a still-shaky economy. Higher rates have hurt demand. The average interest rate for a 30-year fixed-rate mortgage has jumped to 4.5 percent from a record low of 3.3 percent in early 2013. Fed Chairman Ben Bernanke and others argued they weren't kicking the props out from under the bond market, but that's sort of what happened: Bond prices fell, and interest rates jumped. Of course, rates are still relatively low, and the housing market is not exactly in a panic, though sales are slowing.

The specifics of bank earnings are increasingly unimportant because nobody believes the numbers anymore; the numbers are massaged and manipulated to such a degree that they are of no value. Wells Fargo closed near an all time high. Still, the reports are fun reading, even if much is fictional.

JPMorgan met earnings expectations if you overlook the legal costs, and Wall Street seemed willing too overlook the legal costs today. Investment banking fee revenue dropped 3 percent. The bank had $1.1 billion of legal expenses in the fourth quarter, about $850 million of which was linked to a recent settlement for failing to report its suspicions of fraud at its client Bernard Madoff's fund.

The bank agreed to some $20 billion of legal settlements in 2013; almost equal to a typical year's profit. CEO Jamie Dimon indicated some investigations into JPMorgan are just beginning, so the idea is that they just treat the legal problems as the cost of doing business.

One bit of info from JPMorgan today, a key lending metric, the ratio of the bank's loans-to-deposits, hit a new low. In 2013, JPMorgan on average lent out just 57% of its deposits. That's down from 61% a year ago and the lowest that ratio has been in at least a decade. Back in 2004, JPMorgan's loan-to-deposit percentage was as high as 88%. It's also down at rivals. But not as much. The industry average is just under 70%.Traditionally, banks have lent out 80 to 90% of their deposits.

So, why isn't JPMorgan making loans? One reason is that they can make as much money, about $300 million by just buying short term, low interest rate Treasury bonds. Dimon should send a thank you note to Bernanke. The other possible explanation is that there isn't much demand for loans. Either way, this would seem to be an indicator of sluggish growth.

The bank earnings season actually kicked off on Friday when the Federal Reserve released a statement saying it made an estimated $79 billion in net interest income, driven by its $90 billion in interest income on its portfolio of Treasuries, mortgage bonds, and other securities. The Fed sent $77 billion to the US Treasury. The Federal Reserve, after operational costs, is earning double the profits of Exxon Mobil ($44 billion) and Apple ($41 billion), and those two companies are doing a combined $600 billion in global revenues. The Fed doesn't have to drill oil wells or hire Chinese kids to glue together phones, they basically print money, buy mostly risk-free bond investments and do a little research to determine what the interest payments are going to be. The Fed has built up a $4 trillion dollar portfolio, and they have sent more than $350 billion to the Treasury since 2009. By the way, the Fed sent $88 billion to the Treasury in 2012, so they were down last year. No, I don't know what that indicates.

Standard & Poor's Ratings Services revised its outlook on California's credit ratings to positive from stable, citing the governor's budget plan. S&P foresees raising the state's rating one notch within two years, if California follows the $107 billion budget Brown proposed last week. S&P said it is also encouraged by the proposal's emphasis on repaying debt and building reserves. While Brown did not suggest specific action for making the teachers' underfunded retirement system whole, he did highlight that the pension "is in need of a long-term funding strategy.”

In a letter issued through the Economic Policy Institute, including seven Nobel Laureates, argue that the government should hike the federal minimum wage from $7.25 to $10.10 an hour by 2016 and then peg future increases to inflation.

The effect of a minimum wage hike is one of the most hotly debated issues in economic research. Some argue that a boost in the wage floor would hurt low wage earners because employers would be hesitant to hire if they had to pay their workers more. In the letter, the economists, argue that the "weight" of the evidence indicates past minimum wage hikes haven’t hurt the job market.

However, the letter reads: "Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front."

Thursday, September 12, 2013 - Going Interstellar

Going Interstellar

by Sinclair Noe

DOW – 25 = 15,300
SPX – 5 = 1683
NAS – 9 = 3715
10 YR YLD - .01 = 2.91%
OIL + .02 = 108.62
GOLD – 44.80 = 1322.00
SILV– 1.48 = 21.84

The war hasn't started..., yet.

The peace talks are underway in Geneva between Secretary of State Kerry and his Russian counterpart Lavrov. In a news conference ahead of the Geneva talks, Foreign Minister Lavrov said the resolution of the chemical weapons issue in Syria would make any military strike by the United States unnecessary. The UN has confirmed it has received documents from Syria on joining the Chemical Weapons Convention, a key step in the Russian plan. Syria's president said it would submit arms data one month after signing, but Mr Kerry has rejected that time-frame.

Even before the talks, Russian President Vlad Putin weighed in with an op-ed in the New York Times arguing that a military strike risked “spreading the conflict far beyond Syria’s borders” and would violate international law, undermining postwar stability. Putin says poison gas was used in Syria but not by Assad; he also didn't say who sold the poison gas to Syria; he talks about peace and democracy; and he finishes the editorial by saying “We are all different, but when we ask for the Lord’s blessings, we must not forget that God created us equal.” It's all quite bizarre, to have Putin lecturing the US on democracy and morality and God.

The good news is that the war hasn't started..., yet.

And that means we can focus on domestic problems, like shutting down the government. Lawmakers are tied up in knots over increasing the debt ceiling this fall, but they eventually will; eventually. The only question is how messy the process will be. They really don't have much choice. Even if they shut down government for a while, they can't make the stunt last long.  A default would hurt the economy and markets, and most lawmakers know this. That's why they regularly raise the debt ceiling before it comes to that. In fact, since 1940, Congress has effectively approved 79 increases to the debt ceiling. That's an average of more than one a year.

Despite some politicians' incorrect assertions, raising the debt ceiling does not give the government a "license to spend more." It simply lets Treasury borrow the money it needs to pay the bills in full and on time. Those bills are for services already performed and entitlement benefits already approved by Congress. In other words, it's a license to pay the bills the country incurs as a result of past decisions made by lawmakers from both parties over the years. It sounds like it should be a straight forward deal. It's not. It's a chance to position for whatever idea a politician can position for. Things will likely get ugly before they get uglier. That's about the only thing we can count on from Congress.

Believe it or not, Greece's job situation is getting worse. Greece's jobless rate hit a record high of 27.9 percent in June, and was more than twice the average rate in the euro zone of 12.1 percent in July.  The unemployment rate has more than tripled since 2008, the start of a six-year recession which has wiped out about a quarter of Greece's economy. Joblessness is a major headache for the government as it scrambles to hit fiscal targets and carry out structural reforms demanded by its international creditors.

Meanwhile, an independence rally in Catalonia drew more than one million. That's a lot of people. Greece's unemployment rate is now higher than Spain's

If you plan on buying one of Apple's new iPhones, you may want to head to Wal-Mart. Wal-Mart announced it will carry the new devices and sell them at prices lower than Apple and other retailers. Wal-Mart said it will carry 16-gigabyte versions of the iPhone 5c and the iPhone 5s. The iPhone 5c will be available for $79 ($20 cheaper than its regular price) with a two-year contract from AT&T, Verizon or Sprint. The iPhone 5s will be available for $189 ($10 cheaper than its regular price) from the same carriers.

It's strange when Wal-Mart can get a better deal from Apple than the Apple stores.

A Dutch designer thinks the way people currently buy electronics is inherently wasteful. As soon as a new device comes out, the old one is tossed in the garbage or put on the shelf to collect dust. He's introduced a new phone called PhoneBloks, a smartphone that has detachable components on its front and back so that everything from the processor to the camera can be easily upgraded without discarding the rest of the phone. The entire contraption is held together by a pegboard-style base, with a screen -- also replaceable -- mounted on the front. It's kind of like lego-blocks for a phone.

If you're looking for a good deal on airline tickets; you might want to keep an eye on United Airlines. For about 15 minutes today, they offered $0 fares plus $5 in tax for many domestic flights. That worked out to $10 flights between Washington DC and Hawaii, while others scooped up over a dozen tickets to destinations all over the country.

And then, just as quickly as the airfares showed up, United’s reservation system slammed to a halt, reporting “United.com is currently undergoing maintenance  Flight search and booking are unavailable for all flights.” They say it was a computer glitch.

California lawmakers are poised to raise the state's minimum wage by 25% -- a move that would make the state's hourly workers among the most highly paid in the country. Millions of workers would see their hourly pay jump from $8 to $9 on July 1, 2014 and to $10 on Jan. 1, 2016, under legislation which received strong support this week from the state's Governor Jerry Brown and other legislative leaders. "The minimum wage has not kept pace with rising costs," Brown said in a statement. "This legislation is overdue and will help families that are struggling in this harsh economy."

A survey by Duke University and CFO Magazine  of more than 500 Chief Financial Officers, shows they expect to boost full-time hiring by nearly 1.8% next year, which represents a slight increase from this year. The results indicate that despite worries over President Obama's health care reform law, a recent tendency on the part of companies to hire more part-time workers may be turning around; so far in 2013, companies have hired more than four times the amount of part-time workers than full-time workers, while in 2012 the opposite was true.

New figures on wealth inequality from economists Thomas Piketty and Emmanuel Saez show that the top 10 percent earned more than half of our nation's income. That hasn't happened since they started tracking these figures a century ago.

What about the bottom 99 percent? After being left out of the post-crisis boom, they finally saw an increase in their earnings last year, but it was less than one percent. By contrast, income for the top one percent rose twenty percent. The really rich, the top 0.01 percent, saw their income soar by more than 32 percent.

As the Economic Policy Institute recently observed, "The median worker saw an increase of just 5.0 percent between 1979 and 2012, despite productivity growth of 74.5 percent--while the 20th percentile worker saw wage erosion of 0.4 percent .

Shareholders of Dell approved a proposal led by company founder Michael Dell to take the computer company private. The proposal, worth about $25 billion, won an unspecified majority of votes from the holders of Dell stock. The buyers consortium sweetened the deal in recent weeks in response to criticism from activist Carl Icahn and others, who had complained their offer undervalued the company.

As Dell goes private, a couple of companies are going public. Hilton Worldwide, which is owned by Blackstone Group, could be valued at $30 billion. Blackstone does not intend to issue so many shares that it loses control of Hilton.

Twitter is going public. It's could be the biggest IPO since Facebook, and hopefully they learned a lesson from that. The IPO announcement came in the form of a tweet. The details of Twitter’s filing are confidential, thanks to the JOBS Act.

Designed to foster more IPOs for “emerging growth” companies, the IPO provisions of the law have become a way for most companies that want to go public do so with less investor scrutiny. The new rules have cut the time that all that information is available to the public to three weeks before the roadshow.

And finally, scientists now have strong evidence that NASA's Voyager 1 probe has crossed the heliosphere, the magnetic boundary separating the solar system's sun, planets and solar wind from the rest of the galaxy. The first man-made object to leave the solar system.

"In leaving the heliosphere and setting sail on the cosmic seas between the stars, Voyager has joined other historic journeys of exploration: The first circumnavigation of the Earth, the first steps on the Moon," Ed Stone, chief scientist on the Voyager mission said "That's the kind of event this is, as we leave behind our solar bubble."

The twin spacecraft Voyager 1 and 2 were launched in 1977, 16 days apart. Voyager 2 will exit the solar system in about 2 billion more miles. Voyager 1 has a long way to go before the next stop. The probe will fly near a star in about 40,000 years. But as of today, human-kind has gone interstellar.