Friday, July 18, 2014 - The Fault Is Not In Our Stars

The Fault Is Not In Our Stars

by Sinclair Noe

DOW + 123 = 17,100
SPX + 20 = 1978
NAS + 68 = 4432
10 YR YLD + .01 = 2.48%
OIL - .31 – 102.88
GOLD – 7.30 = 1311.90
SILV - .27 = 20.99

President Obama today demanded Russia stop supporting separatists in eastern Ukraine, calling it “an outrage of unspeakable proportions.” Obama stopped short of directly blaming Russia for the incident but warned that he was prepared to tighten economic sanctions. He echoed international calls for a rapid and credible investigation. While the West has imposed sanctions on Russia over Ukraine, the United States has been more aggressive than the European Union. German Chancellor Angela Merkel said it was too early to decide on further sanctions before it was known exactly what had happened to the plane. Emotions are undoubtedly running high across Europe, but whether that translates into action remains to be seen.

Meanwhile, Israel says it could significantly widen a Gaza land offensive. The Israeli land advance followed 10 days of barrages against Gaza from air and sea, hundreds of rockets fired by Hamas into Israel and failed attempts to arrange a ceasefire or a truce.

How does all this play out? We don’t know. Yesterday was a terrible day, with Israel sending in ground troops to Gaza and somebody shooting down a Malaysian jetliner; it felt like an inflection point, like a moment when the narrative shifts, but for now we don’t know if that is true, or which way the winds blow.

Markets are funny; the financial markets were jittery; today, not so much. What changed? Not much. For the week, the Dow climbed 0.9 percent, the S&P 500 rose 0.5 percent and the Nasdaq gained 0.4 percent. So, volatility spiked yesterday; the VIX moved higher by 32%, but gave back 17% today. One day does not change a trend. War can change a trend, but we’re not at that point today, or maybe the markets are just ignoring reality. The market’s attention to geopolitical hotspots shifted to earnings. S&P 500 companies' profits are expected to grow 5 percent in the second quarter, according to Thomson Reuters data, down from the 8.4 percent growth forecast at the start of April. Revenue is seen up 3.2 percent.

Strong earnings from several companies kept the market in positive territory after it opened. Investors drove up shares in Google, Honeywell International, furniture company Knoll and Huntington Banchsares, among others. The Conference Board's latest index of leading indicators, designed to predict the economy's trajectory, climbed in June for the fifth consecutive month.

General Electric reported earnings today. Total revenue rose 3% to $36.2 billion, up from $35.1 billion in the year-earlier quarter. GE reported net income of $3.5 billion, a 13% increase from the year-earlier quarter. The company’s three largest industrial businesses: power and water, aviation, and oil and gas; all reported strong growth, ranging from 10% to 20%.The company also announced plans to have an initial public offer of its North American retail finance business by the end of this month; slowly but surely exiting the finance business and getting back to its industrial roots.

Beyond earnings season, Wall Street continues to be supported by Federal Reserve policy, and this week Fed Chair Janet Yellen went to Capitol Hill, and largely said it will be a while before the punchbowl is taken away. But eventually it will happen.  Since Fed chief Janet Yellen targets jobs above all else, this was bound to force capitulation by the Fed before long. It happened this week in her testimony to Congress when she said: "If the labor market continues to improve more quickly than anticipated, then increases in the federal funds rate likely would occur sooner and be more rapid than currently envisioned."

This is a policy shift. Yellen has admitted that the Fed misjudged the pace of jobs recovery. The staff did not expect unemployment to fall this low until late next year. The inflexion point has come 15 months early. Yellen added the usual caveats about "false dawns". Wages are barely rising. The jobs market is not yet drawing back the millions who dropped out of the system. The labor participation rate is still stuck at a 36-year low of 62.8%, and at the lowest ever recorded for men. Yellen said, "The recovery is not yet complete. We need to be careful to make sure the economy is on a solid trajectory before we consider raising interest rates."

You have to wonder if Yellen’s critics are making inroads. St. Louis Fed President James Bullard is concerned the Fed will overshoot on inflation. The Bank of International Settlements has warned about the Fed stoking asset bubbles.

You could make the case that Quantitative Easing has done its job, keeping growth alive as Congress and the White House pushed through draconian fiscal policy; the economy did not fall back into recession, not yet anyway. It just hasn’t been able to achieve escape velocity, or liftoff; but then that wasn’t really what QE was designed to do. It was designed to bail out the banks and avoid meltdown. The banksters are doing just fine. Time to try something new.

At some point the economy will have to stand on its own, and if it isn’t strong enough, you can bet the Fed will come up with a new idea to bail out the financial sector. When the Fed eventually takes away the punchbowl, it’s still unclear what effect it will have on the rest of the world. 

Tens of thousands of prisoners serving time for federal drug offenses will be eligible to seek early release beginning next year. The United States Sentencing Commission, which voted in April to reduce the penalties for most drug crimes, voted unanimously today to make that change retroactive. It will apply to nearly 50,000 federal inmates who are serving time under the old rules. The Sentencing Commission said the move would help ease prison overcrowding and reduce prison spending, which makes up about a third of the Justice Department’s budget. The change comes amid a bipartisan effort to roll back the harshest penalties set during the height of the drug war.

President Obama plans to sign an executive order on Monday barring discrimination against gay, lesbian, bisexual and transgender employees of companies that do federal government work. The order would also for the first time explicitly protect federal employees from discrimination on the basis of gender identity. The order will not include a religious exemption many faith organizations had requested.

Next week’s economic calendar includes a report on inflation, the CPI, on Tuesday. Also, a report from the Labor Department on real earnings. Nominal hourly wage growth has hovered around 2% for all of this recovery, a sign that labor markets are still weak. The National Association of Realtors will report existing-home sales Tuesday, and the Commerce Department will tally up new-home sales Thursday.  Next Friday’s durable goods orders will offer details on June capital-spending activity.

This weekend, Sunday July 20^th at 1:18 PM (Pacific) to be precise, we’ll mark the 45th anniversary of the first man on the moon. Maybe you remember where you were back in 1969; maybe you weren’t even here in ’69, but it was a remarkable event to watch Neil Armstrong and Buzz Aldrin, and of course Michael Collins; something that humankind had dreamed about for thousands of years, and it actually happened. It seemed that anything was possible. Apollo 11 not only achieved its mission to perform a manned lunar landing and return safely to Earth, it raised the bar of human potential.

I wonder if we could do it today. Or anything equivalent? It seems unlikely. There is so much divisiveness in the country today, and for all the advances of the past 45 years, we are rife with problems. But then, I’m old enough to remember that 1969 was full of problems: the country was at war in Asia, and there was a Cold War as well, and there were deep problems at home including race riots and campus protests, the assassinations of Martin Luther King and Robert Kennedy were fresh in peoples’ hearts.

Maybe we don’t achieve our full potential when everything is set up for success, it is not when all the stars are in perfect alignment; maybe we outperform when our backs are to the wall. In 1962, JFK issued the challenge, saying, “We choose to go the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too."

For the past 45 years, we’ve heard the phrase, “Well, if we can put a man on the moon…” ” How many times have you heard that expression? If we can put a man on the moon, why can’t we cure cancer; or get our economy going? It’s a cliché now right? But it didn’t start out as a cliché. It started as a challenge. And 45 years ago, when I was much younger, I remember watching Neil Armstrong and Buzz Aldrin walk on the moon. I’m sure many people around the world share this same memory. President Nixon spoke to Neil Armstrong and his crew while they were on the moon and he said, "for one shining moment the people of the Earth are united as one." He was right. And I remember looking up at the moon that night, realizing humans were on the surface, and thinking anything is possible. This weekend I’ll look up at the moon again, and I still believe anything is possible – both success and failure. And if we don’t do those things that should be done, the fault is not in our stars, but in our selves.