Wednesday, July 23, 2014 - Another Day Another Dollar

Another Day Another Dollar

by Sinclair Noe

DOW – 26 = 17,086
SPX + 3 = 1987
NAS + 17 = 4473
10 YR YLD un = 2.46%
OIL = 103.12
GOLD – 3.50 = 1305.00
SILV - .06 = 21.01

The Standard & Poor’s 500 index rose to an all-time high, as Apple boosted technology companies and health-care shares rallied through another busy day of earnings reports. The Dow was lower, mainly due to Boeing – we’ll get to that in a moment. Apple hit its highest level since 2012, based on earnings reported after the close yesterday.

Profits at S&P 500 members probably rose 6.2 percent in the second quarter, while sales gained 3.3 percent. Let’s knock out a few earnings reports:

Facebook posted $791 million in net income, or 30 cents a share, compared with $333 million or 13 cents a share in the second quarter of 2013; revenue totaled $2.9 billion compared to $1.8 billion in the year ago period. Mobile advertising represented 62% of its ad revenue; they have figured out Facebook on a smartphone. Facebook now claims 1.32 billion monthly users.

AT&T was once the telephone company, now it’s the second largest US mobile provider; they earned  $3.6 billion or 68 cents per share in the second quarter, down from $3.8 billion or 71 cents per share a year ago; even as revenue increase from $32.1 billion to $32.6 billion.

Biogen Idec rallied 11 percent after raising its full-year forecast, while Intuitive Surgical jumped 18 percent as results topped estimates.

At first blush, Boeing’s numbers looked good; the aerospace giant earned $2.40 per share, easily beating estimates of $2 per share; the company lifted its earnings outlook for the rest of the year. Shares dropped about 2%. Revenue growth disappointed. Commercial airline sales were up less than expected; there was a substantial charge for a military tanker. Boeing is one of the dogs of the Dow – down 7% year to date.

Delta Air Lines said its second-quarter earnings were up 17%, driven by higher passenger and operating revenue as traffic increased. Delta has said it plans to reinvest about 50% of its operating cash flow back into the business, resulting in $2 billion to $3 billion of capital expenditures annually through 2018, with $2.3 billion planned for 2014.

Another day, another General Motors recall; the only difference is that today’s recall does not involve ignition switches; it’s a problem with the seats. Today’s recalls total 717,950 vehicles covering six models; bring the total for the year to about 29 million. If you own a GM vehicle, call the dealer. The problem with ignition switches hasn’t gone away, just that today, it moved to Jeep-Chrysler, which announced nearly 800,000 vehicles will be recalled for ignition switch problems.

Another month, another downward revision from the IMF. In June, the International Monetary Fund forecast US economic growth would be about 3% to 3.5% for the rest of this year, and then they revised forecasts down to 2%. Today, the IMF said US economic growth would be about 1.7%. The IMF says lower growth expectations should contribute to continued slack in the labor market for the next three to four years, with the United States remaining below full employment until 2018.

The IMF says the Federal Reserve could keep its benchmark interest rates at zero beyond the middle of 2015, the date implied by policymaker forecasts, as long as inflation and financial stability concerns remain subdued. Future US growth could be disappointing if interest rates rise too quickly, or if there is a broader and concerted slowdown in emerging markets, or if increasing geopolitical tensions in Iraq and Ukraine prompt higher energy prices and severe financial and trade disruptions. The IMF also warned that an aging US population meant the economy would not be able to grow above 2% long term without significant reforms, including tax and immigration changes, more investment in infrastructure and job training, and the provision of childcare assistance, which could help lure more Americans into the workforce. Even without these measures, the IMF said there is "a strong case" for more government spending to support the economic recovery in the near-term, as long as there is a plan to deal with high entitlement spending later on.

Meanwhile, the IIF, the Institute of International Finance says investors have been willing to take on more risk, pushing borrowing costs down and stock prices higher, based in part on strengthening confidence in the US and global recoveries, but with perhaps too much exuberance. Investors don’t seem to be taking adequate account of the uncertainties around economic growth and monetary policy, and that points to a pull-back in markets. With uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation. The IIF’s concerns echo those of some Federal Reserve officials, who said at their June meeting that low volatility levels and increased risk-taking signaled “market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy.”

Another day and the fighting continues in the Middle East. The latest count has 687 Palestinians killed in the conflict. Ben Gurion Airport in Tel Aviv remains closed to US airlines, and many other global carriers. Secretary of State John Kerry is trying to negotiate a ceasefire but it looks unlikely.

In the Netherlands, a day of mourning as the bodies of the victims were returned for identification. Most of the passengers were Dutch. Two military planes, one Dutch and the other Australian, carrying the first 40 coffins landed at Eindhoven air base. They were met by members of the Dutch royal family, the Prime Minister and hundreds of victims' relatives. In Kiev, the Ukrainian government reports two Ukrainian military jets were shot down within 20 miles of the crash scene.

The downing of a civilian jetliner might turn out to be the Lusitania moment that could draw the US and Russia into a new world war, but for now, it doesn’t seem likely. The more likely reaction will be an increase in sanctions against Russia, which the US has already done; the EU is more reticent. The European Commission, the EU’s executive arm, will put forward its proposals to a committee of the 28 EU member governments in Brussels tomorrow. The bloc’s foreign ministers this week called for plans for measures that could hit “access to capital markets, defense, dual-use goods, and sensitive technologies, including in the energy sector.” Russia supplies 30% of the natural gas to Europe, and it is a major trade partner. Yesterday, France delivered a $1 billion dollar warship to Russia, saying the Russians had paid for it and it was scheduled for delivery. Business drives the truck, coffins are placed in the back.

Events in Gaza and Ukraine have, for the time being, taken global attention away from the Syrian civil war and the ISIS’s advance through Iraq. Last Thursday and Friday were the two bloodiest days yet in Syria’s civil war, with more than 700 people killed in fighting between the Syrian government and ISIS, the Sunni militant group. An ISIS suicide bombing killed 31 people, mainly civilians, in Baghdad yesterday. ISIS appears to be consolidating its newly acquired territories. The government in Baghdad appears to be struggling to cobble together something that would actually pass as a government. The civil wars in Syria and Iraq are growing increasingly chaotic and there doesn’t seem to be much hope for resolution.

The Gaza and Ukraine conflicts are not likely to draw greater powers into a major conflict. And one reason is because Gaza and Ukraine are not major oil producers. The conflict that represents the largest potential threat to markets is still the ISIS invasion of Iraq; there oil supply could be severed and the jockeying among regional middle powers could possibly lead to a wider scale conflagration between Sunni and Shia sponsor states.

So, one of the indicators that things are getting better or worse will be reflected in the price of energy. Think of it this way: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. Anything that disrupts that supply of energy disrupts the work you do.

Right now there is probably a $5 to $10 fear premium built into the price of oil, and that seems to be acceptable. The signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained more or less, Russia and Ukraine will find a solution or just fade away. The non-acceptance of Black Swans is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters. Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant. Maybe, after 13 years of war, the US is just weary of any threat.

At some point the fear premium could pop and oil prices could jump to $150 or $200 a barrel, and if that happens the IMF forecast is way too high; if that happens the economy comes to a grinding halt; if that happens, everybody in the US and Europe will wake up and scream bloody murder, but for now, it’s just another day, another dollar.

Tuesday, July 22, 2014 - Curb Your Enthusiasm

Curb Your Enthusiasm

by Sinclair Noe

DOW + 61 = 17,113
SPX + 9 = 1983
NAS + 31 = 4456
10 YR YLD - .01 = 2.46%
OIL - .17 = 104.42
GOLD – 4.70 = 1308.50
SILV + .04 = 21.07

We start with a couple of economic reports. The National Association of Realtors reports existing home sales were up 2.6% in June to a seasonally adjusted rate of 5.04 million, compared to 4.91 million in May. Sales in June were 2.6% higher than last month, but were 2.3% below the June 2013 rate. Total inventory rose 2.2% in June to 2.3 million existing homes for sale; unsold inventory is up 6.5% from a year ago.

At June’s pace of sales, there was a 5.5 month supply of homes for sale. The Realtors’ group considers a 6-month supply to be a balanced market. Higher supplies favor buyers and lower supplies favor sellers. The Federal Housing Finance Agency says home prices in May rose 0.4% from the prior month and were 5.5% above their level of May 2013. Distressed sales accounted for just 11% of sales in June, down from 15% last year, 25% in 2012, and 30% in 2011. Fewer distressed sales probably explains why there were fewer sales than June of last year.

The Consumer Price Index, or CPI, measures inflation at the retail level; the CPI increased 0.3% in June. The core CPI looks at prices excluding food and energy, which is important for people who don’t eat food or drive cars or use electricity; core CPI was up 0.1% in June. On a year over year basis, CPI is up 2.1%, and the core CPI is up 1.9%. The big driver for the increase in June was higher prices for gasoline.

In earnings reports:

Quarterly profit at McDonald's fell more than expected. Second quarter net income fell almost 1% to $1.3 billion, or $1.40 per share. Sales at McDonald’s restaurants in the US dropped for a third straight quarter.

Coca Cola’s 2Q net income dropped to $2.6 billion from $2.68 billion a year earlier.

Verizon reported second quarter earnings nearly doubled, but it was a confusing report because Verizon paid for Vodaphone shareholders in the quarter, plus they sold some of their wireless spectrum to T-Mobile; cutting through the clutter, Verizon added 1.4 million devices; Verizon added three tablets for every new smartphone. Earnings were just a smidge above expectations.

Comcast reported net income of almost $2 billion for the second quarter, with total revenue of $16.8 billion, up 3.5% from the same period last year. The revenue increase came from high speed internet service. Comcast lost cable video customers, as more people bypass cable and satellite subscriptions in favor of cheaper streaming alternatives.

Credit Suisse reported a second quarter loss of $779 million, the largest loss since 2008; reflecting the charge of $2.6 billion related to the settlement with US law enforcement for a guilty plea to conspiring to aid tax evasion in helping American customers hide money in Swiss accounts. Or another way to look at it, they were one criminal conviction away from a $1 billion quarterly profit. Credit Suisse also announced it would exit the commodities trading business.

Meanwhile, it looks like bond traders are exiting the bond trading business. Trading in US government bonds has dropped 25% in the past few weeks compared to the same time period a year ago. Since the end of the second quarter, trading in investment grade bonds has dropped 17% and trading in junk bonds has dropped 8%.

Last week, Fed Chair Janet Yellen talked about overvaluation in the biotech and social media sectors. One of the most common measures of value is the P/E, or price to earnings ratio; there are certainly other measures of value, but PE is common. Generally, a low PE can point toward value, while a high PE might indicate overvaluation, or even an unprofitable company. Currently the S&P 500 trades at 16.1 times forward 12-month consensus earnings per share. So, you might think a PE of 165 would mean a stock was extremely overvalued, ready to crash; or not. In September 2003, Apple had a PE of 165; since then it has gained about 6,000%.

After the close of trade today, Apple posted fiscal third quarter results. Revenue came in at $37.4 billion versus $38 billion expected; EPS was $1.28 versus $1.23 expected; iPhone sales were on track; iPad sales were a little weak; Mac sales were a little better than expected. Apple posted profit of $7.75 billion, up from $6.9 billion in the year-ago period. Apple announced a new iPhone 6, not yet available, but ready to swamp stores before the end of the year; it will have a bigger screen. Curb your enthusiasm.

Also after the close, Microsoft posted profit of $4.6 billion, or 55 cents a share, on revenue of $23.4 billion. During the year-ago period, the world's largest software company earned $4.97 billion, or 59 cents a share, on $19.9 billion in sales. So, sales were up, profit was a slight miss, due to the Nokia acquisition. Bing search ad revenue is up 40%, and Bing now has about 20% of the market share for search engines. Microsoft is big in the cloud, where revenue is up almost 150%, topping 4 billion.

Hedge fund manager Bill Ackman went on CNBC yesterday and promised he would deliver the death blow against Herbalife. Ackman has been shorting the stock for about a year, a $1 billion bet the company will crash. Then he delivered a 3 hour diatribe with 250 slides in his PowerPoint presentation, alleging that Herbalife is not just a multi-level marketing nutritional club, it is a pyramid scheme preying on minorities, and the biggest fraud since Enron. Ackman didn’t present a great deal of evidence. Today the stock was up 15%, for no apparent reason, other than surviving an Ackman death blow.

There were two rulings from two federal appeals court panels on Obamacare today. The question was whether the government could subsidize health insurance premiums for people in states that use the federal insurance exchange; 36 states use the federal exchange, while the other states set up their own state exchanges. This goes back to wording in the original law that says subsidies can be applied to state exchanges.

 The United States Court of Appeals for the District of Columbia Circuit said that the government could not subsidize insurance for people in states that use the federal exchange. That decision could potentially cut off financial assistance for more than 4.5 million people who were found eligible for subsidized insurance in the federal exchange, or marketplace.

A couple of hours later, the United States Court of Appeals for the Fourth Circuit, in Richmond, upheld the subsidies, saying that a rule issued by the Internal Revenue Service was “a permissible exercise of the agency’s discretion.”

For now, nothing changes, with the exception that there will be many more billable hours for the attorneys.

Bloomberg reports that regulators are ready to label Metlife a potential threat to the financial system, subjecting the insurer to oversight by the Federal Reserve. MetLife, the biggest US life insurer, could be subjected to stricter capital, leverage and liquidity requirements as a result of Fed supervision. A decision by the Financial Stability Oversight Council may come as early as July 31, and MetLife would have 30 days to request a hearing before the FSOC to contest the decision.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is now 4 years old, even though it isn’t really in effect; just 52% of the rules mandated under Dodd-Frank have been finalized by regulators; Another 23% have been proposed but they’re still working out details, and regulators haven’t even gotten around to 24% of the rules. A recent report by consumer watchdog Public Citizen called out the Securities and Exchange Commission as a particularly egregious delayer, noting that it had pushed back the deadlines for 13 of the 23 rules it was supposed to finalize this year.

City workers and retired city workers in Detroit have agreed to pension cuts to help bailout the city from bankruptcy. General retirees would get a 4.5% pension cut and lose annual inflation adjustments. They accepted the changes with 73% of ballots in favor. Support for the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts.

Most people travel to or from Israel by air, and the major airport, really the only airport is Ben Gurion in Tel Aviv; last year, 14 million people went through Ben Gurion Airport, in a country with a population of 8 million.  Yesterday a rocket from Gaza landed about one mile from the airport; we don’t have further details on that rocket; it didn’t hit the airport; it was a mile away. When news spread, Delta diverted a flight to Paris. United airlines cancelled flights. The Federal Aviation Administration banned all US passenger and cargo flights to and from Tel Aviv for at least the next 24 hours. European airlines cancelled flight to Israel. The possibility of a passenger jet being shot down over a war zone is a very realistic and fresh memory.

US and United Nations diplomats are in Israel, trying to broker a ceasefire of some sort. Israel continues to pound targets across the Gaza Strip. It does not appear a ceasefire is near. If there is any light at the end of the tunnel, the tunnel will be destroyed.

The European Union today threatened Russia with harsher sanctions if Russia doesn’t cooperate in the investigation of the downing of the Malaysian flight 17 and if Russia doesn’t stop sending weapons to Russian backed separatists in Ukraine. But it was just a threat, and they’ll get together later in the week to draft proposals for sanctions.

Monday, July 21, 2014 - A Three Legged Stool

A Three Legged Stool

by Sinclair Noe

DOW – 48 = 17,051
SPX – 4 = 1973
NAS – 7 = 4424
10 YR YLD - .01 = 2.47%
OIL + 1.46 = 104.59
GOLD + 1.30 = 1313.20
SILV + .04 = 21.03

First leg:

Let’s start with earnings reporting season, which kicks into full gear this week with 140 of the S&P 500 companies posting results.

Netflix reported a profit of $71 million, or $1.15 a share, on revenue of $1.34 billion. This was in line with expectations, but for Netflix, an important component is how fast they are adding subscribers; turns out – pretty fast; 1.69 million new net streamers in the second quarter; 570,000 in the US and 1.12 million international subscribers; now topping 50 million worldwide.

Allergan, the Botox company, posted better than expected 2Q profits and sales but also announced it is cutting 1,500 jobs in a restructuring.  BB&T, the southeastern financial company, posted weak 2Q results as mortgage activity lagged; this has been a theme among banks for the second quarter, but the bigger banks have been compensating with profits in investment banking and trading; smaller, regional banks find it harder to compete in that arena. Chipotle Mexican Grill, theme park operator Six Flags, oilfield services company Halliburton, Manpower Group, and chip-maker Texas Instruments all reported better than expected results.

Tomorrow we’ll get the earnings report from McDonalds; after the close we’ll get earnings from Microsoft and Apple. Wednesday’s results include Facebook. Thursday we’ll hear from General Motors and Amazon.com.

So far, earnings season has been strong, of the S&P 500 companies that reported through the end of last week, earnings are up 7.6% from the same period last year on 4.2% higher revenues, with 65.9% beating EPS estimates and 68.2% coming out with better than expected revenue. This is better performance than we have seen at this stage in other recent reporting cycles. The +7.6% earnings growth at this stage in Q2 compares to an earnings decline of -3% for the same group of companies in Q1 On the revenue side, the +4.2% growth thus far compares to growth rates of +1.7% and +3% in Q1. The earnings and revenue beat ratios for these companies are similarly tracking better relative to Q1.

Second leg:

Israel and Hamas continue to battle in the Gaza Strip and Russian separatists continue to impede Malaysia Airlines Flight 17 investigation efforts. President Obama delivered a statement this morning on the geopolitical hotspots. Secretary of State John Kerry was dispatched to Cairo to discuss cease-fire negotiations with international officials. Though Obama cited Israel’s “right to defend itself” against Hamas missile strikes that now number in the thousands, he said he has instructed Kerry to prioritize de-escalation.

Obama said investigation efforts into what caused the crash of Malaysia Airlines Flight 17 have been impeded by pro-Russian separatists, who have assumed control of the crash site and have begun removing evidence. “Unfortunately, the Russian-backed separatists continue to block the investigation,” Obama said of the militants. “All of which begs the question, what exactly are they trying to hide?” Obama said responsibility lies with the Russian government, and Russian President Vladimir Putin, to convince the separatists to cooperate with an international investigation.

A train carrying the remains of most of the almost 300 victims of the Malaysia Airlines plane downed over Ukraine left the site on Monday, after the Malaysian Prime Minister reached a deal with the leader of pro-Russian separatists controlling the area. The aircraft's black boxes, which could hold information about the crash in rebel-held eastern Ukraine, will be given to the Malaysian authorities.

At the United Nations, the Security Council unanimously adopted a resolution demanding those responsible "be held to account and that all states cooperate fully with efforts to establish accountability". It also demanded that armed groups allow "safe, secure, full and unrestricted access" to the crash site. It will be difficult to use the forensic evidence at the site to determine exactly what happened, but it is becoming increasingly obvious the plane was shot down with Russian weaponry.

Clearly Putin did not want nearly 300 civilians to die, but it happened and it probably happened because of things he set in motion. If Russia is even loosely tied to the destruction of the passenger plane, even if it was an accident, the incident could represent another escalation of Russian aggression and mark a major turning point in how Russia is perceived around the world.

British Prime Minister David Cameron will urge other European leaders to consider imposing tougher sanctions Russian oil, gas, defense, and banking sectors at an EU meeting tomorrow. However, EU diplomats made clear today that sectoral sanctions would still be extremely difficult for some of Europe's poorer nations. They are especially nervous about the energy sector, central to the Russian economy, but also to the European Union.

EU nations rely on Russia for about 30% of their gas demand and have intertwined interests based on decades of energy reliance. Russia exports around $60 billion a year in gas and the Netherlands was Russia's biggest export destination last year, mostly oil and metals. Energy sanctions would most likely derail the fragile European recovery in general and might even lead to a complete economic collapse in certain member states. Many Eurozone countries see sanctions as collective economic suicide that helps no one. What they should see is that dependence on imported fossil fuels has made them economically weak and subservient. As long as the Eurozone relies on Russian gas to heat their homes in the winter, Putin can get away with murder.

Third leg:

Financial markets have been largely whistling past geopolitical hotspots, with just the occasional jittery pullback. The simple fact is that the Federal Reserve and all other global central banks have been providing the markets with unusually accommodative monetary policy; which is to say, the central banks have been throwing easy money at the markets. And there is growing concern that the continuation of this “unconventional” and “extraordinary” state of affairs involves an entirely new set of risks.

Clearly the Fed would like to do what it can to prevent bubbles from forming while they hold off on raising rates; it’s a delicate balancing act. If the Fed raises rates too soon, it risks a downturn in the economy, just as the Fed expects the economy is ready for liftoff. If the Fed continues with its easy money policies it risks the chance of bubbles; already Fed Chair Janet Yellen has acknowledged pockets of overvaluation. Last week, during Humphrey Hawkins testimony of Capitol Hill, Yellen singled out social media stocks and biotechs.

What does Yellen know about social media and biotech valuations? Probably not a great amount, but that doesn’t devalue her perspective; there may be some kind of asset bubble taking shape in at least some corners of the financial market. And don’t think Yellen just tossed out the overvaluation comment in a flippant or offhand manner. She is well aware of Alan Greenspan’s notorious remarks about “irrational exuberance”. This was a chance for Yellen to jawbone the markets. The very fact that she’s doing so means that she probably sees good reason for speaking out.

Yellen knows she is walking a very narrow line as she tries to guide monetary policy back toward some kind of “new normal” for the first time since the 2008 financial crisis. Yellen seemed to be saying that if small corners of the market over-inflate and pop, well tough luck; it won’t change the Fed’s path toward escape velocity. You might want to buckle your seat belts and get ready for a bumpy ride.

One reason for the overvaluation has been that the Fed has pumped up markets to such a point where it has been a bad trade to try to fight the Fed, and this has removed normal checks on overvaluation. Under normal market conditions, short sellers provide the right amount of pessimism to temper the optimism that leads to a wildly overvalued stock market. Short positions help keep companies with weak earnings potential and bad management from riding the bull market herd mentality to unjustifiably high share prices. But this market is far from normal. The stock market has climbed to fresh new highs, not today, but the Dow has hit record highs 15 times this year, even with geopolitical hotspots and negative first quarter GDP.

Short sellers are in retreat. It’s hard to fight the Fed and a bull market. The proportion of shares in short positions is at its lowest level since before the collapse of Lehman Brothers, with short interest on the S&P 500 index hovering around 2%.

Shorting a stock involves borrowing it from a broker at one price with the promise to return those shares after a certain period of time. The short seller will then sell the borrowed shares, and if the stock price goes down, they can buy them back, return them to the broker, and pocket the difference. When shorting, the risk is that the price goes up and you have to buy back the shares at a higher price. Shorting can be a good way to make big money fast. If a stock drops 50%, the short seller stands to make 100% on the trade; and when a stock starts to fall, it can fall fast.

Some traders like to look at the charts for short targets, and that is important; you never want to short a stock that is in a strong uptrend; you want to wait for it to turn over. You can also look at the fundamentals, and earnings season is a great time to look for really high price to earnings ratios, heavy debt burdens, downward guidance, or anything else that might raise a red flag. It’s good to remember shorting, especially if one of the three legs starts to wobble.

Friday, July 11, 2014 - TGI Friday

TGI Friday

by Sinclair Noe

DOW + 28 = 16,943
SPX + 2 = 1967
NAS + 19 = 4415
10 YR YLD - .01 = 2.52%
OIL – 2.44 = 100.49
GOLD + 3.70 = 1340.00
SILV + .03 = 21.55

We start with a quick review of the global hot-spots.

Israel and Gaza are throwing missiles at each other. Israel has better offense and defense. Approximately 100 Palestinians have died in the bombing; one Israeli has died in the missile attacks. President Obama has offered to negotiate a ceasefire but there isn’t much interest. Palestinian militants say they will fire missiles at Tel Aviv’s main airport. Israelis won’t rule out a ground war and vow the aerial assault will continue until quiet is restored.

Ukrainian President Poroshenko vowed to "find and destroy" pro-Russian rebels who killed 23 servicemen and wounded nearly 100 in a missile attack today. Kiev blames Moscow for fanning the violence and allowing fighters and high-powered weaponry to cross the frontier from Russia to Ukraine.

Kurdish forces seized two oilfields in northern Iraq and took over operations from a state-run oil company. Kurdish politicians formally suspended their participation in Iraqi government in Baghdad. An oil ministry spokesman in Baghdad described the takeover as dangerous and irresponsible. The Shi’ite run government of Prime Minister Maliki has been trying to cobble together a coalition government with very little success and it now appears the country has literally been divided into three states. Meanwhile, when the extremist Sunni faction known as ISIS took over the city of Mosul, they reportedly captured some radioactive materials, 40 kilos of uranium. The International Atomic Energy Agency says it is low grade and doesn’t pose a risk. I’m just guessing that story isn’t the last we’ll hear about the radioactive materials.

Portugal’s government and central bank tried to reassure investors that the country’s banking system is safe and sound. Banco Espirito Santo said any losses at the holding company Espirito Santo International would not pose a danger to the bank. European markets moved a little higher today.

Recent financial history in the Eurozone paints a less than compelling picture of bank soundness. You will remember when the Greek banks floundered. About four years ago, there was that little problem with Bankia in Spain. Bankia bought up smaller bankrupt regional banks and then went bankrupt itself. Bankia shareholders and Spanish taxpayers took the brunt of that failure. You will also remember the Bank of Cyprus, where the depositors took a big haircut.

The common theme in Eurozone bank failures is that things go wrong, governments claim everything is under control, banks fail, banks get bailed out or bailed in, depositors and taxpayers get the shaft. Rinse, lather, repeat. And then you think, these are just the banks in the peripheral countries. Don’t forget the money laundering by HSBC and BNP Paribas, and the tax evasion schemes from Credit Suisse.

Back in the USA, the speaker of the House of Representatives is suing the President. Politics makes strange bedfellows. Casino magnate and conservative donor Sheldon Adelson joined Berkshire Hathaway CEO Warren Buffett and former Microsoft CEO Bill Gates to write a New York Times op-ed criticizing House Republicans for failing to address an overhaul of the nation’s immigration system, which they said “borders on insanity.”

And the top story in America today…, Lebron James will take his basketball talents to Cleveland.

The World Cup championship will be played Sunday; Germany versus Argentina. More than one billion people are expected to watch at least a bit of the final game; more than 3.2 billion will have watched at least some of the games of the tournament, which would make World Cup 2014 the most watched televised event ever.

The markets moved higher today, which is more than we can say for CYNK Technology, the obscure OTC stock that surged 36,000% from a couple of pennies to more than $25 dollars in a few weeks, with nothing in the way of an actual business. The SEC closed down trading. I told you it was a bad idea.

Potato salad, however, is apparently a good idea. A guy from Ohio posted a simple request on the crowd-funding website, Kickstarter: Help him raise $10 to buy the ingredients to make potato salad. Within about a week’s time, 5,300 people donated between $1 and $10 to the potato salad endeavor for a grand total of $44,000.

Meanwhile, Wells Fargo was the first of the big banks to report second quarter earnings. The bank’s earnings per share of $1.01 in the second quarter matched analyst’s estimates; profit rose 4% from the same period a year ago, to $5.7 billion. The bank’s second-quarter revenue fell to $21.1 billion from $21.4 billion a year ago.

The FTC has sued Amazon for billing parents millions of dollars for unauthorized app purchases made by children. The FTC suit seeks an order that Amazon pay back parents for such purchases and also force the company to require parental consent for such purchases in the future.

Meanwhile, Amazon is seeking permission from the FAA to test its delivery drones near Seattle. Amazon wants to use drones to deliver packages in 30 minutes or less as part of a program called “Prime Air”. In 2012, Congress required the FAA to establish a road map for the broader use of drones. The FAA has allowed limited use of drones in the US for surveillance, law enforcement, atmospheric research and other applications. The Federal Aviation Administration estimates about 7,500 drones will be flying across the sky for commercial use by 2018. The agency plans to issue rules by the end of this year governing the flight of drones weighing less than 55 pounds. Last year, the US government created six sites for companies, universities and others to test drones for broader commercial use.

About a month ago, I told you that Apple was working on a new type of glass made of synthetic sapphires. This week, Apple won a patent for “fused glass device housings”, a new method of fusing glass to make casings for devices like the iPhone.  There is speculation that the next version of the iPhone will use the nearly indestructible glass for a cover or for an entire casing. According to the new patent, Apple has figured out a way to build an all-glass device that would still be durable and lightweight, essentially by fusing multiple pieces of glass together rather than designing casings out of a single slab. The new casing could be a sales killer; if the case doesn’t break, why would you be forced to buy a new one.

America’s largest reservoir and Las Vegas’ main water source and an important indicator for water supplies in the Southwest, will fall this week to its lowest level since 1937 when the manmade lake was first being filled. Lake Mead is expected to drop to 1,081 feet above sea level; by 2016 the lake is projected to drop below 1,075 feet above sea level and trigger water rationing.

The California State Water Resources Control Board will hold a public hearing next week to impose rules that would ban wasteful outdoor watering; things like hosing down sidewalks and driveways, or washing a car without a shut-off nozzle. The rules would give local agencies the authority to impose fines of up to $500 a day on scofflaws, although enforcement would probably start with warnings and escalating fines.

At the beginning of the year, Governor Brown declared a drought emergency and asked residents to voluntarily cut use by 20%, but water use has only declined by 5%, and in Southern California’s 3 largest cities, water use has increased in the last year.

Over a three-week span starting next Monday, 72% of the S&P 500's members will report earnings, and we’re off to an uneven start. Alcoa kicked off the season with strong results. Wells Fargo posted decent numbers but mortgage originations were down; that had been a cash cow for Wells Fargo. Container Store reported earnings that were a big disappointment. Why would you buy boxes, if you weren’t moving? The results seem to indicate that the housing market is weak, or possibly consumer spending is weak.

Yesterday, the discount chain, Family Dollar reported same store sales fell 1.8% during the quarter, and the CEO offered a downbeat assessment: "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment."

And then Gap topped off the week of discouraging retail commentary by reporting June same-store sales that fell 2% year-over-year. Sales were expected increase 0.8%. Gap's management, however, was light on additional commentary. This rash of discouraging retail data, however, makes the broader US economic picture seem murky, and consumer demand seems to have been weak in a number of sectors of the economy, but earnings season is just starting.

Many of the biggest banks on Wall Street will turn in quarterly results that will provide some insight into how the slowly improving economy is translating to companies’ bottom lines. Among the big names on the earnings calendar this week: Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America.

Next week’s economic calendar includes a report from the Commerce Department on retail sales in June. Wednesday brings the PPI, or producer price index, or prices at the wholesale level. Another, though indirect, part of the inflation outlook is the level of slack in industrial capacity. When goods producers have little capacity to spare, chances increase for bottlenecks and shortages that could introduce price increases at the wholesale level. The Fed will report on industrial production and capacity utilization on Wednesday. On Wednesday, the National Association of Home Builders and Wells Fargo will release its July housing market index, a gauge of builder confidence. The Commerce Department will report on June housing starts and building permits Thursday. And Tuesday and Wednesday, Federal Reserve Chairwoman Janet Yellen takes the Hill to deliver semi-annual testimony before the House and the Senate, where she will regale lawmakers with tales of noisy inflation and an economy that is inches from liftoff.

Wednesday, April 23, 2014 - A Brilliant Future From Cool Ideas

A Brilliant Future From Cool Ideas

by Sinclair Noe

DOW – 12 = 16,501
SPX – 4 = 1875
NAS – 34 = 4126
10 YR YLD - .05 = 2.68%
OIL - .2- = 101.55
GOLD un 1284.70
SILV + .06 = 19.55

It’s earnings season, and this is a chance to compare and contrast. This morning, Facebook posted earnings of $642 million in net income, or 25 cents a share, in the first quarter, versus $219 million, or 9 cents a share in the year ago period. Overall revenue grew 72% year-on-year to $2.5 billion in the first quarter, topping estimates. Facebook now has 1.28 billion active users, and more than 1 billion do their Facebook stuff on a mobile device. Then Facebook announced their Financial Director was resigning. Shares were up about 3%.

Nobody puts on a better presentation than Apple, that’s how they grew to be the most valuable company in the world. Steve Jobs would walk out and announce Apple had created a new mp3 player, and also a new way to connect to the internet, and also a new camera. Wow, three new products, nope…, he would hold up the iPhone – just one very cool thing from Apple; tech geeks heads would explode.

Today, Apple posted earnings of $10.2 billion or $11.62 a share, on revenue of $45.6 billion. Analysts expected the company to report earnings excluding items of $10.18 a share; Apple reported a 4.6% rise in March-quarter revenue to $45.6 billion; Apple sold 43.7 million iPhones in the quarter. Then they announced they were adding to their stock buyback with an additional $30 billion over the next year. Then they announced a 7 for one stock split, to make their $500-plus shares a little more affordable. Wow, the share price exploded in after-hours trade by about 8%.

You see the difference.

The really cool thing that Apple is now working on is something you’ve probably never heard of and wasn’t part of the earnings report today. Apple is making sapphires. Natural sapphire is a gemstone variety of the mineral corundum, a crystalline form of aluminum oxide. Corundum is colorless, but in natural sapphires, various impurities create a range of colors: chromium makes the gem red, becoming a ruby; iron and titanium create the prized cornflower blue of a true sapphire. Synthetic sapphire is colorless, unless deliberately colored.

Sapphire has been used in a variety of specialized applications for years, where its purity, clarity, high stable dielectric conductive properties, and high optical quality, along with its hardness, have made it worthwhile despite its relatively high price. Think lasers and high end, luxury watch faces.  Apple is making a billion dollar bet on sapphire as a strategic material for mobile devices such as the iPhone, iPad and perhaps an iWatch. Though exactly what the company plans to do with the scratch-resistant crystal, and when, is still the subject of debate.

Apple is creating its own supply chain devoted to producing and finishing synthetic sapphire crystal in unprecedented quantities. The new Mesa, Ariz., plant, in a partnership with sapphire furnace maker GT Advanced Technologies, will make Apple one of the world’s largest sapphire producers when it reaches full capacity, probably in late 2014. By doing so, Apple is assured of a very large amount of sapphire and insulates itself from the ups and downs of sapphire material pricing in the global market.

The Arizona project was revealed in November, with Apple paying $578 million for GTAT to install and run its advanced sapphire growth furnaces in a plant built and owned by Apple. The news triggered a frenzy of speculation that Apple planned to use sapphire crystal sheets to replace the glass currently used in touch displays for its 2014 iPhones, iPads or a new line of “wearables” such as the long-rumored iWatch, or all of the above.

That’s only the tip of Apple’s investment. Once the synthetic sapphires emerge from the furnaces, they’ll be shipped to Apple’s supply chain partners in Asia for slicing, polishing, laser cutting, coating and eventual assembly. No one has used sapphire in large-scale consumer electronics or consumer goods products. Apple created a sapphire cover for the iPhone 5 camera lens, and for the iPhone 5s Touch ID fingerprint sensor. It’s mainly the sheer foundry capacity that Apple is creating in sapphire that fuels the speculation that it has big plans for sapphire in bigger uses, such  as a replacement for the cover glass, presumed to be Corning Gorilla Glass, in at least the high-end iPhone model.

A sapphire cover would presumably be less likely to break or scratch, but the big payoff could be the ability to change the underlying LCD technology of the screen, rendering more colors and using less power than today’s LCDs, while improving the speed and accuracy of the touch interface. 

It will cost more, by some estimates about $20 more per screen, but what it shows is that when Apple believes in a new technology or material, they’re willing to take a hit on the bill of materials costs. Of course, to commit for the long term, there needs to be a convincing cost reduction roadmap somewhere.

Some think technology stocks are poised for a 2000-style crash. And if they aren't ready to fall now, they may be soon. What is it about financial bubbles that make them so hard to detect? One reason is that memories are short. Some 20 years ago Wall Street merrily poured into technology stocks, and was horribly burned. Not many years later, the rest of America piled into residential real estate with similar abandon, and similar results. Meanwhile, big tech companies are using their stock to fund eye-popping mergers and acquisitions, most famously Facebook's $19 billion takeover of WhatsApp in February (of which $12 billion is in Facebook shares). Apple seems to be able to continue to do cool stuff, and maybe a billion dollars is a good price for a better iPhone screen. Maybe it’s a sign of over valuation in tech. David Einhorn of Greenlight Capital thinks tech may be ready to resume its slide, but it is a cautionary tale:

We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it’s still just silly. This understanding limited our enthusiasm for shorting the handful of momentum stocks that dominated the headlines last year.

Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.

In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm. Some indications that we are pretty far along include:

The rejection of conventional valuation methods;

Short-sellers forced to cover due to intolerable mark-to-market losses; and

Huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.

And once again, certain “cool kid” companies and the cheerleading analysts are pretending that compensation paid in equity isn’t an expense because it is “non-cash.” Would these companies be able to retain their highly talented workforces if they stopped doling out large amounts of equity? If you are trying to determine the creditworthiness of these ventures, it might make sense to back out non-cash expenses. But if you are an equity holder trying to value the businesses as a multiple of profits, how can you ignore the real cost of future dilution that comes from paying the employees in stock?

Given the enormous stock price volatility, we decided to short a basket of bubble stocks. A basket approach makes sense because it allows each position to be very small, thereby reducing the risk of any particular high-flier becoming too costly. The corollary to “twice a silly price is not twice as silly” is that when the prices reconnect to traditional valuation methods, the derating can be substantial. There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers. When the last internet bubble popped, Cisco (the best of the best bubble stocks) fell 89%, Amazon fell 93%, and the lower quality stocks fell even more.

In the post-bubble period, people stopped talking about valuing companies based on eyeballs (average monthly users), total addressable market (TAM), or price-to-sales. When the re-rating occurred, the profitable former high-fliers again traded based on P/E ratios, and the unprofitable ones traded as a multiple of cash on the balance sheet.

Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and when the market reapplies traditional valuations to these stocks. While we aren’t predicting a complete repeat of the collapse, history illustrates that there is enough potential downside in these names to justify the risk of shorting them.

So is there a tech bubble, or isn't there? Maybe tech stocks aren’t overvalued; the market is more balanced now than it was in 2000. Back then, tech stocks accounted for 14% of all earnings in the S&P 500, but a third of the index's capitalization. Nowadays the two figures are about the same at 19%.  Nor is the IPO market overly frothy like it was 15 years ago. In the first quarter of 2000, 115 companies went public, raising $18 billion; in the first quarter of this year, 63 IPOs raised $11 billion. Moreover, the IPO market isn't as crazed as it was 15 years ago: The first day run-up in share prices after their IPO is a third of what is was in 2000, evidence that investors haven't lost all sense of proportion.

The problem is that bubbles, tech and otherwise, can easily be analyzed away. No one expects the tech bubble to explode using exactly the same formula it did 14 years ago. Tech is more bubble-prone than other industries. Investing by nature is betting on the future, but in the case of tech, the future is a growth story based on extracting a brilliant future from a cool idea. 

Tuesday, April 01, 2014 - Murderers and Cheats

Murderers and Cheats
by Sinclair Noe

DOW + 74 = 16,532
SPX + 13 = 1885
NAS + 69 = 4268
10 YR YLD + .04 = 2.76%
OIL – 1.99 = 99.59
GOLD – 5. 00 = 1280.80
SILV un = 19,86

Congratulations Mary Barra, you’ve been named CEO of General Motors, one of the biggest companies in America; now head on over to Capitol Hill to take the blame for the people who used to run the company.

Barra’s appearance before a subcommittee of the House Energy and Commerce Committee represented a significant new phase in the company’s crisis since it issued recalls that began in February for 2.6 million Cobalts and other vehicles. The problems with the cars involve faulty ignition switches; GM repeatedly failed to fix faulty ignition switches, despite conducting multiple internal studies of the problem since 2001, and 13 people died in the defective vehicles.

Members of Congress and the families of people killed in GM cars are urging Barra to declare the cars unsafe to drive until new ignition switches are installed. So far, GM has said the vehicles are safe to operate as long as there are no objects attached to the ignition key.  GM conducted several internal investigations of the switch problems, dating back as far as 2001. Company engineers learned that the key in the ignition could be inadvertently bumped into the off or accessory position, causing the engine to lose power and disabling air bags.

Documents show that GM approved the switch for installation in its compact cars in 2002, despite data from its supplier, Delphi that the key turned too easily in the ignition. Meanwhile, the National Highway Traffic Safety Administration knew of problems but did not order earlier recalls. The automaker rejected changes to the switch in 2004 and 2005 despite becoming aware of consumer complaints. In July 2005, the company and the National Highway Traffic Safety Administration learned of a fatal accident in Maryland that killed a young woman. It was the first of what would become a series of incidents in which vehicles suddenly lost power and air bags failed to deploy in a crash.

GM and Delphi changed the switches in 2007, but the new switches were also defective. Federal safety regulators made an internal recommendation to open a formal defect investigation in 2007 after receiving information about four fatal crashes involving air bags that failed to deploy, but the agency declined to pursue a formal investigation because, it said, it “did not identify any discernible trend.”

Last night, Barra met privately with 22 family members of accident victims at GM's offices in Washington. There is nothing that would indicate that Barra was involved in the past problems; she will be very much involved in resolving those problems. There needs to be compensation for families of the victims. And they will have to find out what went wrong, and how it could continue to go wrong for so long. There are still cars on the road with faulty switches. They will have to deal with that and fast. At this point, any more deaths would be tantamount to murder. Maybe we’ve already hit that point.

The executives at GM knew for 13 years that their cars had a defective ignition switch that could and did kill people. They did a "cost-benefit analysis" and concluded that paying off the deceased's relatives was going to be cheaper than having to install a $10 part per car. They then covered up their findings and continued to let millions drive around with the defective part in their cars. There would be no recalls. People died; parents had to bury their children.

Also today in Washington, the Senate Permanent Subcommittee on Investigations released a report on Caterpillar, the company that makes heavy construction and mining equipment. According to the report, Caterpillar paid its tax consultant and auditor, PricewaterhouseCoopers to help set up the transfer of $8 billion in profits to a Swiss subsidiary between 1999 and 2012. The transfers had no economic substance and were made solely to take advantage of the lower tax rate Caterpillar negotiated with Switzerland, which ultimately resulted in about $2.4 billion in tax savings. And even though the tax scheme was just a way of shuffling paper to avoid taxes, the report did not draw any conclusions about whether this was illegal. It will likely result in the introduction of new legislation to make it tougher to skirt tax laws, but then that legislation would have to pass, and there will be armies of lobbyists on the case.

Over the past two years, GE has deployed more lobbyists than any other company to argue for a tax loophole that lets businesses deduct interest earned from overseas lending, according to a new report by Americans for Tax Fairness. This particular tax break will likely cost the US government $62 billion in revenue over the next decade.

GE lobbyists made contact with lawmakers or their staffs at least 863 times over a two-year period between 2011 and 2013 to argue for the loophole, known as the "active financing exemption." Congress is expected to extend the exemption again soon, with bipartisan support. The company paid its lobbyists $63 million to advocate for the exemption and other tax-related interests over that time. Citigroup, the next-busiest company, sent lobbyists half as often to push for the deduction and spent less than $15 million.

All told, the top 30 companies and trade organizations that lobbied for the exemption; major Wall Street banks and other big multinational companies with financing arms, such as GE and Ford; made more than 4,000 contacts with Congress to press for an extension of the exemption. They paid lobbyists $586 million over that time. The tax break essentially lets businesses indefinitely shield from US tax authorities interest they earn from lending money overseas.

It's not clear how much the loophole benefits each individual company, in terms of tax savings. It also can't be determined from lobbying records how much money GE or other companies spent specifically to push for the active financing exemption because companies often lump together spending totals for several issues together. But GE wrote in its 2012 annual report that if the provision were not renewed, "we expect our effective tax rate to increase significantly."

Congress technically did away with the active financing exemption as part of a tax-code overhaul in the 1980s. At the time, lawmakers said it was too easy for companies to cut their tax bill artificially by making it seem as if profits earned in the US were instead earned overseas. Yet Congress reintroduces the exemption every year, as part of a giant package of more than 50 tax breaks known as tax extenders, which the Congressional Budget Office calculates could cost the government $700 billion over the next decade.

Support for the extenders is typically bipartisan. The last round expired at the end of 2013, and Congress is now considering a package that would apply the tax breaks retroactively to the beginning of 2014.

The companies who have pushed hardest for the extension of the tax loophole are among those that are the most criticized for exploiting US tax laws in order to shelter huge amounts of revenue overseas. Though the US corporate tax rate is technically 35%, the companies that employ the active financing deduction and other tax-sheltering mechanisms pay a far lower effective rate.

General Electric, according to some calculations, pays an effective rate of less than zero in many years. GE claimed a tax benefit of $3.1 billion, meaning it claims it overpaid by that much, between 2008 and 2012 on $27.5 billion in profits

According to a new report from ISI Research, US S&P 500 companies now have $1.9 trillion parked outside the country. Some of that is just multinational corporations profits overseas; welcome to globalization; a big part of it is tax avoidance. Apple figured out a way to legally avoid paying corporate income tax on $30 billion of overseas profits. Apple set up a shell company, an Irish subsidiary that didn’t owe Irish taxes because it was managed and controlled from the US, but it didn’t owe US taxes because it was incorporated abroad. Brilliant.

Except, sometimes a big multinational like Apple might want to bring that money back to America, at which point the government taxes the difference between what companies pay in corporate income tax abroad and what they would have paid here. So, if they ever want to get the money out of international limbo, there shouldn’t be any advantage to this kind of tax avoidance scheme. Unless, the government does something stupid, like rewarding this bad behavior, with a tax repatriation holiday; a brief window of amnesty to bring capital back onshore at a fraction of the tax rate, pennies on the dollar. So, all Apple has to do is be patient and wait for the tax repatriation holiday.

And why would the government offer such a gift to tax dodgers? The thinking is that it brings in fresh money, which will be put to productive purpose, spurring economic growth. We tried it in 2004, and it doesn’t work. Growth and investment didn't increase. Even though corporations weren't supposed to use these funds for share buybacks or dividends, they did. That was good news for stock owners; bad the economy and even worse news for workers. Some of the companies that brought the most money back actually laid people off.

Monday, January 27, 2014 - Sniffing Out Weakness

Sniffing Out Weakness

by Sinclair Noe

DOW – 41 = 15,837
SPX – 8 = 1781
NAS – 44 = 4083
10 YR YLD + .04 = 2.76%
OIL - .94 = 95.70
GOLD – 12.50 = 1257.50
SILV - .22 = 19.79

Last week was rough for the Dow Industrial, and today started with the blue chips in the red but not by much; it even looked like we might finish in positive territory. Nahh. The markets have been trending downward over the last week due to a mix of concerns. Emerging market strains, anxiety over tapering by the Federal Reserve, and weak manufacturing data from China likely contributed to a pullback. Also, new home sales were weak in December.

The international problems started with a report that Chinese manufacturing may contract for the first time in 6 months. Then Argentina’s central bank limited dollar sales to preserve international reserves that had fallen to a seven-year low. Then there were concerns about a default in the shadow banking system in China. Then there concerns about a corruption scandal for Prime Minister Erdogan’s cabinet in Turkey. Protesters occupied municipal buildings in the Ukraine. Then the South African rand dropped big. Then the whole thing spread. I don’t know what happened in Mexico but the peso took a hit. Bank of America analysts recommended buying the Mexican peso on Nov. 24 as one of their top two Japan-related trades for this year, predicting a rally that would have boosted the currency’s value to 8.4 yen. Instead, the peso slumped 3.5% last week. More than a third of the most-traded emerging-market currencies have already fallen below forecasts.

Neither China, Turkey, Argentina, nor any other country has anything to do with consumer stocks, or most other equities, badly underperforming following an excellent year for the US stock market which was supposed to help consumers through the wealth effect. If you haven’t received your trickle down just yet, don’t hold your breath.

Tech stocks, which by extension are a type of consumer stock, have started to look weak, after being so strong last year. After the close today, Apple whiffed on earnings because they really whiffed on iPhone sales. The company reported that it sold 51 million units, a 6.7% jump in sales, year-over-year, which is lower than sell-side expectations of 54.7 million. The good news is that Apple beat expectations on the top and bottom line, despite weak iPhone sales. Revenue was $57 billion, up 5.6% on a year-over-year basis. EPS was $14.08, up 2% year-over-year. If the market is going to catch a second wind, don’t look for tech, at least not tomorrow.

Has the correction begun? Check back in a few months and we’ll know for sure. If you don’t want to wait that long I understand; waiting for clarity is risky, and we all know you can’t go broke taking a profit. So, some folks are looking at this as a chance to get out while the getting is good. At the very least, make sure you have a prevent defense in your portfolio playbook. And then there’s the whole January Barometer, which posits that as January goes, so goes the rest of the year. We know that January has been ugly, and if you need further confirmation, the financial press has been clinging to thin straws in their never-flinching belief that any decline is a buying opportunity.

A core principle of both fundamental and technical analysis is "a rising tide lifts all boats." If the economy is strong and growing, the vast majority of companies should benefit. We should expect to see this show up in both quarterly earnings reports and higher stock prices. And when prices don’t move higher, that might be an indicator that the financial markets are sniffing out economic weakness in advance. When it comes to the possible end of a bull market though, we need to remember the real driver behind the move in the first place – the Fed. And the Fed is meeting this week to determine policy.

There’s growing evidence that things aren’t as good as the Fed anticipated, but I don’t think we’re at the point where the Fed is going to pull back and stop their tapering, and they certainly won’t reverse the taper. The Fed will probably cut its purchases in $10 billion increments over the next six gatherings before announcing an end to the program no later than December. Treasuries fell today, pushing the 10-year yield up from almost a two-month low.

The state of emerging markets has very little impact on the Fed’s decision to continue taper. Charles Plosser, president of the Philadelphia Fed, said in a January 14 speech: "When we started QE ... there were many economies and emerging markets and other places that were very critical of our policy. Now that we're trying to stop it, they've been very critical of our policy."

Minneapolis Fed President Narayana Kocherlakota, a voting Federal Open Market Committee told the New York Times there are other ways to offer accommodative monetary policy, other than buying bonds. He talked about the Fed providing forward guidance, which is a far cry from cranking up the printing press. And just for the record, Kocherlakota is one of the Fed guys who thinks the Fed needs to do more to expand its efforts to reduce unemployment.

Now that the tapering has begun, the idea of less Federal Reserve stimulus combined with slower Chinese growth and specific concerns in some countries led last week to a full-scale flight from emerging-market assets that could continue this week. Emerging markets have been inflated in recent years by huge amounts of cheap cash created by the Federal Reserve, much of which found its way into developing economies in the hunt for better returns. If it all seems vaguely familiar, it’s because it looks a lot like the wildfire that spread through the developing world and resulted in currency runs that hit the Asian Tiger economies, or Russia,  or Latin America.

There are a few reasons for concern about this latest conflagration. The scale of money that has moved to developing markets over the past decade and now dwarfs the sums which fled in panic 15 years ago. Lending into emerging markets has increasingly been through bond markets, rather than in the direct bank loans that dominated previously and which involved longer-term relationships between banks and the firms and countries. And the growth of index tracking exchange traded funds over the past decade has increased the liquidity and also the volatility, meaning money that flowed in can flow out very, very, fast. Emerging markets have attracted about $7 trillion since 2005 through a mix of direct investment in manufacturing and services, mergers and acquisitions, and investment in stocks and bonds. That was considered hot money, stoked by the Fed’s QE.

The State of the Union is…tomorrow. The State of the Union speech will likely be light on legislative agenda and long on optimism. We have a budget, there probably won’t be another government shutdown, at least until October; there is a chance for immigration reform, maybe. And that’s about it. Don’t look for big legislative vision because it won’t happen. There is an election later in the year and so lawmakers will be yelling at each other for most of the year and trying to highlight their differences rather than creating consensus. That means tomorrow’s speech will likely be long on optimism and framing the national conversation.

These annual updates have become more and more predictable, and less and less inspiring. There will be a new piece of technology; the President’s communications team is urging us to watch what they call the “Enhanced State of the Union” online with a live stream of the address and a split screen format with graphics and charts to highlight key points and statistics. Well, that should be fun. The site is whitehouse.gov/sotu

One chart you won’t see comes today from the Green Party in the European Parliament; it estimates the cost of the implicit guarantee that governments will back large financial institutions, known as “too big to fail”; the price tag in 2012 was 234 billion euros. That is the corporate welfare dished out to big banks in the form of free benefits. The estimates were based on eight academic and institutional studies focused on implicit subsidies. Most of the studies arrive at a figure by quantifying the lower lending costs that large financial institutions enjoy from the market because of governments’ willingness to prop up failing national financial institutions, called the funding advantage approach. Others use a more complex option-pricing theory model.

There may actually be more costs than the studies have calculated. Government backing also creates moral hazard, or the willingness of banks to take outsize risk, knowing there is a lender of last resort. At the World Economic Forum meeting in Davos, Switzerland, last week, Mario Draghi, president of the European Central Bank, said he did not know whether any banks would need to be closed as a result of the central bank’s examination but that the system was prepared to deal with the consequences if any significant problems materialized. Draghi said, “The banks that should go, should go.”

Yea, you won’t hear that in the State of the Union speech, or in the response.