Tuesday, July 02, 2013 - Summer Swoon

Summer Swoon

by Sinclair Noe

DOW – 43 = 14,932
SPX – 1 = 1614
NAS – 1 = 3433
10 YR YLD - .02 = 2.47%
OIL + 1.65 = 99.54
GOLD – 10.20 = 1243.40
SILV - .27 = 19.48

Stocks started the second half of the year with a lukewarm rally yesterday; then the rally fizzled as the day wore on; still, yesterday was an up day. Today, stocks started in slightly positive territory, and as the day wore on, stocks sputtered. On a technical basis, the Dow and the S&P tried to break above the 50 day moving averages and failed. So, the 50 day MA is serving as a level of resistance, and stocks are not demonstrating the ability to break out.

It's easy to think stocks are still in an uptrend. The first half of the year posted solid gains, but those gains were slammed in June. Over the past week, prices started moving higher, but there's no conviction. Trading volume has been down. Tomorrow, the markets close early, and then stay closed for July 4^th, and Friday will be a low volume day. So, it's hard to be enthusiastic about stocks right here. Another failed rally could send prices lower, quick. It's easy to slip into summer slowdown mode, but this is not a time to be complacent if you are still in equities.

Since the FOMC’s June 22nd meeting, markets have been in turmoil. Commentators and Fed watchers have been speculating about exactly what Chairman Bernanke was trying to say on behalf of the Committee. Bernanke had indicated the asset purchase program might begin to be phased out when unemployment reached 7%. Actually, he indicated that by the time the program had ceased, unemployment would be at 7% sometime in the middle of next year. The import of this remark is critical, especially given that the publicly available FOMC central tendency forecast for unemployment by the end 2013 is 7.2-7.3% and by the end of 2014 the central tendency is an optimistic 6.5-6.8%. 

The Fed actually has a handy online calculator, the jobs calculator tool to estimate how many jobs per month will be needed to reach a certain unemployment level.
As an example, for the unemployment rate to decline to 7.3% in December (the high end of the Fed's forecast), with the participation rate staying steady at 63.4%, would require about 150,000 jobs per month for the next seven months.  This seems very possible. If the participation rate increases to 63.6%, than the economy would need to add 210,000 jobs per month for the unemployment rate to fall to 7.3% in December.
You can put in your own assumptions to the calculator. 

In economic news, CoreLogic reports home prices, including distressed sales, rose 2.6% in May and were up 12.2% for the past 12 months; the fastest annual increase in 2006. In addition to boosting household net worth, which supports consumer spending, the housing recovery has spilled over to manufacturing by fueling demand for construction materials and consumer items like stoves and refrigerators.

In a separate report, the Commerce Department said new orders for manufactured goods increased 2.1 percent after advancing 1.3 percent in April. Factory orders rose in most categories in May. Manufacturing slowed in recent months, weighed down by deep government spending cuts and slowing global demand

The Commerce Department also revised up the increase in new orders for durable goods - manufactured products expected to last three years or more - by a tenth of a percentage point to 3.7 percent. Even more encouraging, orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 1.5 percent instead of the 1.1 percent rise the department had reported last week. That might lead to a slightly higher revision for 2Q GDP

Car makers posted stronger sales in June. General Motors posted 6.5% growth, Chrysler rose 8.2%, and Ford sales were up 4.4% from May. The automakers are back to pre-crisis levels in the annual sales rate. Auto sales account for about 16 percent of the country's overall retail sales. Part of that can be attributed to pent-up demand for cars. Part of it might be consumers looking for better fuel efficiency.

Oil prices broke above $98 a barrel a couple of week's ago; an area that had been resistance; at the time I said it seemed to be a breakout. Oil prices dropped with almost everything else on concerns about the Fed taking away the punchbowl of monetary stimulus, but now, we're back above $99 and poised to break into triple digits. And some of that is a risk premium, associated with unrest in Egypt; not a big producer, but a strategically located Middle East country.

Egypt's president has rejected an army ultimatum that the country's crisis be resolved by tomorrow;there are widespread and deadly protests across the capital. In a late-night televised appeal for calm, Mohammed Morsi admitted he had made mistakes, pledging his loyalty to the people, but he insisted on his constitutional legitimacy as president and said he would not be dictated to.

The army earlier leaked details of its draft "roadmap" for Egypt's future. Morsi was put under pressure by the resignation of six ministers from his government on Monday Military sources told the BBC the president's position was becoming "weaker" with every passing minute and suggested that under the draft plan, he could be replaced by a council of cross-party civilians and technocrats ahead of new elections.

On Sunday, millions of flag-waving supporters of the opposition movement behind the protests had rallied nationwide, urging the president to step down. Demonstrations that had been jubilant when the army's ultimatum was interpreted as a coup-in-the-making turned increasingly confrontational later in the day.

With a 20% shift in our annual infrastructure spending from 20th century technology to 21st century technology we can drive a new global $10 trillion economy by 2020. That was an undercurrent in a powerful speech President Obama delivered last week, demanding EPA set new standards for climate change to reverse its effect on our health and the environment. That action will help set goals to meet the desire of many to clean the environment. The president also noted: “A low carbon clean energy economy could be an engine for growth for years to come,” asserting that deploying American innovation by using our natural resources more effectively help boost the economy.

As impressive as the speech was, the president passed on the opportunity to focus on how the United States will compete with Germany and Japan as the largest climate-based wealth creators.  It's estimated that the technology needed to meet carbon emission reduction targets by 202 would require investment of about $10 trillion globally; that represents a shift of 20% in our global infrastructure spending.

The challenge is that while the technology exists we still don’t have the business model and financial innovation necessary to attract the $10 trillion by 2020. The president  made clear that he believes in our entrepreneurs, investors, and corporations who bringing climate change solutions to market. What he did not do is inspire thousands more to join them to unleash a climate wealth economy. These folks are all motivated to do well by doing good.

Our inspiration is not to just fix climate change, it is to ignite the next economy by meeting our energy needs using climate change solutions. Climate change is a trillion dollar opportunity masquerading a crisis. The next step for the president is to jump-start this next economy with the federal government taking the lead.

Congress failed in a last-ditch effort to reach a deal on student loans, and so yesterday, the rates doubled from 3.4% to 6.8%. Not all student loans are affected. Only rates on new, subsidized federal Stafford loans doubled from 3.4 percent to 6.8 percent on July 1. Rates on existing subsidized Stafford loans will remain at 3.4 percent. Rates on new and existing unsubsidized Stafford loans will remain at 6.8 percent. 

The doubling of interest rates means most monthly payments will increase by about 16%. About two-thirds of students take on debt to finance education; the typical debt load works out to about $30,000. Even if Congress can work out a deal, a retroactive change in rates, back to lower levels, seems unlikely. This is one more mistake by Congress; increasing the cost of education, rather than investing in education. Stupid, really.

According to new statements from Bank of America employees, the lender offered employees incentives for sending homeowners into foreclosure rather than modifying their loans. The BofA employees stated under oath that they were “told to lie to homeowners about loan modifications and were rewarded for sending homeowners to foreclosure rather than modifying their loans”. The allegations and incriminating statements are part of the evidence being presented in a federal class-action lawsuit brought by homeowners against BofA. The homeowners say that the lender deliberately “thwarted their attempts to take advantage of the federal Home Affordable Modification Program (HAMP).”

Former employees of BofA involved in the suit testified that they were “instructed to deny modifications for no reason, to pretend they had not received documents they received, to hold documents and then claim they were too old, and to cancel trial modifications for ‘nonpayment’ even when all payments had been received.” The employees also reported that the bank “drilled” into them that the longer loan modifications were delayed, the more fees the bank could collect, even if this meant “lying to customers.”

The mortgage workers reportedly received cash bonuses and gift cards for meeting quotas for sending distressed homeowners into foreclosure. Not surprisingly, BofA has denied all of these allegations.

I was thinking about saying at the beginning of this story that “According to shocking new statements from Bank of America employees”.., but you're not shocked by this are you?