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.

Tuesday, October 2, 2012 - The Church of England and the Case Against Usury

The Church of England and the Case Against Usury

- by Sinclair Noe

DOW – 32 = 13,482
SPX + 1 = 1445
NAS + 6 = 3120
10 YR YLD - .01 = 1.62%
OIL – 22 = 91.67
GOLD - .80 = 1775.40
SILV - .03 = 34.72

Late yesterday I noticed a report citing the Church of England taking on British Banks. I'd like to thank an astute and alert listener for another version of the story to my attention. As many of you know, I wrote a book about the bankers' role in the financial crisis, and I paid particular attention to the role of usury. The book is “Eat the Bankers: The Case Against Usury, the Root Cause of the Economic Crisis and the Fix”. (Click here for more info on the book.)

There is a direct relationship between usury and the current economic problems. The rise in usury led directly to predatory loans, foreclosures, personal and business bankruptcy, debts that spiral out of control and never seem to get paid despite good intentions. Many families have suffered quietly, blaming themselves for what was happening. Bankers have no moral compass. They reject compassion and try to shift culpability.

Usury traps the most desperate; it is a form of regressive taxation that chops away at the middle class and working poor. Usury enslaves the borrower and oppresses the poor. Usury wasted a great economy by shifting investment capital away from productive purposes. Usury stunts economic development and perpetuates poverty.

Usury was condemned by virtually all the world's religions. There is only one known instance where Jesus turned to violence; one instance where he destroyed property; one instance where he took a whip to another man – when he chased the money changers from the Temple.

Despite nearly universal condemnation, usury slowly and surely crept into common acceptance. Today it is rare to hear criticism of usury in a church, synagogue, mosque, or temple. This is sad because the family and finance are interconnected. Man as an economic being cannot be abstracted from other aspects of life. Every house of worship includes the faithful whose faith is tested by economic stress. The Golden Rule applies to all religions and it is not just an educational tool for children, it is a core principle for commerce and life. To ignore usury is to become the people Jesus warned us about.

And so, there was some satisfaction yesterday to see the Church of England has submitted comments to the British parliamentary commission investigating the Libor rate-fixing scandal and other banking misdeeds, saying that the bankers should repent.

Here is the link to the full text of the Submissionfrom the Church of England’s Mission and Public Affairs Council(S035)

Here are portions of the Church of England's submission:

A flourishing economy requires sound banks. Simply waiting until memories of recent scandals fade would not be an adequate strategy for rebuilding public trust. Regulatory and cultural changes are necessary.

The Biblical claim that ‘the love of money is the root of all evil’ holds true because, ultimately, treating money as an end rather than a means is dehumanising for creatures made in the image of God: ‘You cannot serve God and mammon (wealth)’.

The roots of the crisis in banking are, therefore, ethical. … "What would it mean to be a good banker?" A strong and virtuous professional culture in banking is the best way to guard against abuse without constraining innovation.

Inadequate levels of competition have distorted the proper operation of markets and increased the problems of ‘too big to fail’. The banking sector has violated some of the fundamental principles of the free market economy: free entry and exit, the avoidance of monopoly and oligopoly, and independence from external subsidy.

The nature of risk – and the basis of remunerating people for managing risk – has been badly misunderstood within the banking sector. Those who have been handsomely rewarded for risk taking have not been those who have borne the consequences of those risks.

Christianity has always recognised that money, interest and debt are not merely technical problems for economists but are moral questions for everybody. In a modern market economy, interest and debt may be unavoidable, but they are not amoral matters.

There is evidence that in many professions, but notably in finance and banking, ... the culture of their working environment does little or nothing to encourage virtues such as truth-telling, loyalty and prioritizing what is right over what may be expedient.

There is also evidence that the culture of banking has changed in the last 25 years or so. In 1991, a study of professionals in different sectors suggested that many in retail banking, who had entered the profession believing it to be about serving the customers’ financial interests, were dismayed that the job had come to value the sale of financial products as the objective, with little thought for customers’ needs. The shift from a culture of personal service to one of maximizing sales appears to be more marked in banking than other sectors.

Public disquiet about the scale of bonuses ... has shed some light on a culture where large bonuses are valued, less for their monetary worth than for their significance as status indicators within the industry. This in itself suggests that the culture of banking has lost touch with matters of virtue – in short, there seems to be no reflection upon the question, "What would it mean to be a ‘good’ banker?" beyond the crude measure of monetary profit.

The financial crises and emerging scandals of recent years have ... raised profound concern not simply about the ability of the system to prevent extreme and criminal behaviour by individuals but about the system itself and a whole cadre of professionals within it. The question is not whether systems have been adequate to identify and deal with the bad apples but whether the whole orchard needs replanting.

Smarter regulation is, therefore, part of the answer, but only part. The sharp question is how banking can restore its internal professional standards in ways which communicate trust both within the industry and with stakeholders throughout the community.

The impact of recession on the most vulnerable is both well documented and deeply injurious to a cohesive society. And, in so far as all gain from greater social cohesion, all lose when social bonds are damaged through widening material inequality and the exclusion of significant numbers of people from meaningful employment.

Economic growth is a good thing but only to the extent that it is sustainable, realistic and achieved morally.

The damage done to the reputation of banks by the current crisis could prevent the banks playing their most effective role in promoting recovery. Restoring trust frequently requires symbolic, as well as merely effective, change to take place.

One insight from the Christian tradition of penitence and forgiveness is that it is often not enough to put matters back to where they were before things went wrong; some demonstration of a change of heart by means of restitution and a visibly robust refusal to let the same failings occur again, is necessary before a bad situation can be made good. Exactly what kind of action by the banks, or by the government, would be necessary to restore trust in this way would probably emerge if the debate about banking ethics were to take place openly in the public realm.

The question of the incentivizing of risk is a good example of how a failure to consider ethics in terms of the Common Good can distort judgments. The rhetoric of the risks taken within the banking sector tends to exclude the demonstrable fact that the consequences of banking failures have been borne by the people of the nation, and indeed of the world, and not just by the so-called risk takers.

"My word is my bond" only works if it is possible to identify with whom the bond is supposed to be forged. The impersonal nature of trading is one factor in the miscalculation of risk and one factor in the diminution of the reputation of the industry. 

We do not regard it as an accident that a sector of the economy which most robustly championed the free, unregulated, market economy should have found itself a victim of that innate tendency toward monopoly. Adam Smith recognised that markets need to operate within an external moral structure if they are to flourish, but that markets of themselves do not sustain such moral structures.

(end of excerpts from Church of England)

Capitalism won't achieve its ends without the things a moral sense can offer, and if you discount your brother's plight you've forgotten what capitalism is about. The structures of business and the mechanisms of capitalism need to recognize that, in the end, people need to be human to one another. Self interest prompts what justice demands. Repentance implies a complete turning around and making good. As things stand, the banks refuse to admit or deny wrongdoing, and they have completely failed to demonstrate any sort of repentance.

I do not belong to the Church of England but I applaud their courage.

The church of England is not alone. In 2005, Pope Benedict XVI condemned the “deplorable social plague of usury”. In the 2009 encyclical, Truth in Charity, Benedict wrote, “The weakest members of society should be helped to defend themselves against usury.”

This should be the issue of the day. And in reality it is. Over the next few days and weeks you will hear this debate phrased differently, but be aware that when you hear debate about the economy and finance, you are really hearing a moral debate.

Political leaders avoid usury like the plague. They think their job security depends on campaign contributions and the bankers know how to play that game. Politicians delude themselves that they can accept bribes and still represent the people. They lie when they say they are serving one master while collecting money from another.

What if there was an economic system that did not experience booms and busts, inflation and deflation, recessions and depressions? What if there was an economic system that promised universal prosperity? There is.

The laws of this marvelous economic system have been laid out by virtually every society. The guidelines for this beneficent and harmonious economic system were given to us more than 4,000 years ago; the rules are more relevant and necessary than ever. What is this miraculous economic system? It is simply to eliminate usury. When we see the violent results of modern economic experiments wouldn't it make sense to consider the ancient God given wisdom which promises social and economic justice and abundance?

I leave you with these final thoughts.

Rom. 13:8: “Owe no man anything, but to love one another.”

Luke 6:35: “Lend, hoping for nothing in return.”