Tuesday, July 08, 2014 - Everything Except Productive Purpose

Everything Except Productive Purpose
by Sinclair Noe

DOW – 117 = 16,906
SPX – 13 = 1963
NAS – 60 = 4391
10 YR YLD - .05 = 2.56%
OIL - .13 = 103.40
GOLD - .40 = 1320.60
SILV - .03 = 21.12

Down 2 days and already I’m seeing the financial talking heads asking if this is the start of a correction. Just a reminder that markets go up and down and sometimes sideways. The markets don’t need a big reason to move. Right now, we’re heading into earnings reporting season, and a few things happen; first, some investors might look at a position and determine that prospects for earnings are not so great, or some investors are taking the opportunity to put some cash in their pockets, just in case they see a bargain basement opportunity.

A trend in place is more likely to continue than it is to reverse, and it reverses when we can see clear evidence of a reversal. Yes, the market looks overvalued by many metrics, yes there seems to be irrational exuberance; but the markets can remain irrational longer than you can remain solvent; yes, we’ve seen a couple of down days but we’ve gone 33 months without a correction, but we’ve had a bunch of down days during that same time. Right now, we’re seeing a minor pullback into a trading range as we await earnings season.

Should you stay or should you go? The markets have hit recent highs, and so you have to wonder if you get out when the getting is good. After hitting record highs, the past 2 days have seen declines; let me be very clear, 2 down days do not constitute a trend; not unless you trade the minute bars. Still, it can be sickening to see profits melt away. Conversely, cutting exposure with the aim of putting cash back to work when valuations drop can be soothing at first, but maddening if stocks continue climbing. There is a fine line between adjusting exposure based on valuations and timing the market; and either way it’s a real trick heading into earnings reporting season.

With interest rates at historic lows and stocks climbing, holding cash in a portfolio has been costly, but on the flip side, cash can serve as a buffer against market pullbacks and corrections, and it provides flexibility to buy again if prices drop; in other words, you keep your powder dry. The real return on cash has to consider the idea that you can use it to make even more money down the road. Of course, for that strategy to work, you have to reinvest the cash; you have to look for bargains or look for other opportunities. If you aren’t willing or able to do that analysis then the risk is that you build up cash and don’t know when to get more invested.

This is where the idea of rebalancing comes in; it doesn’t require sophisticated analysis; you just sell high and buy low. If your risk tolerance points you toward a 60% allocation in stocks, and the stocks go up in price and now you hold 70% in stocks, cash out, to bring the equity allocation back to 60%; turn around and put that cash into a part of the portfolio that has dropped. The idea is that you are buying low; the unfortunate side effect is that you might be dumping your winnings into a losing position. A variation on the theme is sell high and buy something you don’t already hold.

But then the question is where do you go to find value? An article in the New York Times suggests that everything is in bubble territory. The chief investment strategist at BlackRock, one of the world’s biggest asset managers, spends his days searching for potential opportunities for investors to get a better return relative to the risks they are taking on, and he says there are very few cheap assets these days. At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago, and lower than just before the global financial crisis in 2007-2008.

Bonds offer next to nothing in the way of returns, and if you want to chase yield in the debt markets, you’ll find some of the riskiest issues can’t even breach 5%. Real estate has spiked in many locations, even farmland has rocketed. It’s not that any one area is outrageously overvalued. Most people would agree that stock valuations are lower than 2000, and real estate peaked in 2006, and we haven’t really recovered to those levels. It’s just that everything that could be considered a financial asset has gone up. And of course, as prices go up, the potential future returns drop.

Maybe that’s a reflection of a slowing global economy. Maybe it’s a result of the central bankers printing lots of money, but not directing where the money would go; and so the money was parked on the sidelines, and not put to productive use, not being invested in things like factories or infrastructure. And then the risk is that folks chasing yield take on more and more risk until something pops.

Taking a look at economic data today, the Federal Reserve report on consumer debt for May showed debt increased $19.6 billion, not including mortgage or real estate related lending; that’s down from a $26.1 billion increase in April. Revolving debt, including credit-card balances, rose $1.79 billion in May following an $8.85 billion April advance that was the biggest since November 2007. Non-revolving debt, which includes car and education loans, gained $17.8 billion in May, the biggest increase since February 2013, after climbing $17.3 billion in the previous month. Car sales continue be show strength, reaching a 16.9 million annual rate last month, the fastest pace since July 2006.

The JOLT survey, or Job Openings and Labor Turnover survey shows that as of the end of May, companies increased the number of job openings almost back to pre-recession levels. Despite greater demand for workers, pay scales have not budged much.  Wages for all private-sector employees increased 2% in the year ended in June, according to the Labor Department, exactly where wage growth has trended through all of this recovery.

News from the small-business sector, however, suggests pay growth is ready to break out of the 2% range. According to the June survey of small firm owners by the National Federation of Independent Business, a net 21% of small businesses report lifting compensation in the last few months. That is the highest reading since the end of 2007. So, it looks like we are getting closer to seeing wage growth in the near future, but we’re not quite there yet. And since we aren’t seeing actual proof of wage inflation, it could be argued that the Fed should wait a bit longer before tapping the brakes. And for that matter, even if we start to see signs of wage inflation, that might be a good thing.

Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech today that “subdued productivity gains” along with “moderate” increases in consumer spending and “more tempered” growth in housing construction, will lead to economic growth in the range of 2% to 2.5%, well below the Fed consensus of 3% growth. Lacker says “broad-based advances in technology are far less likely than in the past, and that we should prepare for relatively stagnant productivity growth trends going forward.”

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said today that inflation will likely stay quite low for about 4 or 5 years. Kocherlakota says the Fed is “undershooting its price stability goal” of 2% inflation and will likely continue to do so for some time to come; he sees the probability of inflation averaging more than 2% over the next four years as being “considerably lower” than the probability of inflation coming in less than 2% over the same time period. Kocherlakota is skeptical of improvements in the jobs market, saying “much of the decline in the unemployment rate since October 2009 has occurred because the fraction of people who are looking for work has fallen.” That means the Fed is also failing to meet its job creation goal, which is damaging for the economy.

When you look at last week’s jobs numbers something doesn’t seem to add up, at least it gives pause to consider the numbers. GDP growth equals productivity growth plus job growth, or at least growth in hours worked. We’ve been adding jobs at a good pace, but the economy contracted 2.9% in the first quarter. That leaves productivity, and it turns out that there is a long term trend in decelerating productivity growth. And the problem with productivity is not that workers aren’t working hard; the problem is that we haven’t been investing in the right tools for the job.

Earnings season kicked off with a report from Alcoa. It was better than expected. Including all charges, the company earned $138 million or 12 cents a share during the quarter. That reverses the company’s $148 million loss in the same period a year ago. Revenue also came in ahead of expectations. Alcoa reported revenue of $5.8 billion, which is 2.6% higher than expected. Revenue is flat from the year-ago period.

Earlier Samsung issued an earnings warnings, claiming profits could fall as much as 26% from a year earlier. Smartphone and tablet sales took a pretty big beating. Samsung put out a statement that says tablet sales are slow because consumers are slower to upgrade tablets compared to upgrading smart phones. They also blamed the rising Korean won, which is up 9% against the dollar in the past 3 months; they blamed excess inventory in Europe, and competition in the mid and low-end of the market, and a few other excuses as well.

Wednesday, October 23, 2013 - Rally Fizzles

Rally Fizzles

by Sinclair Noe

DOW – 54 = 15,413
SPX - 8 = 1746
NAS – 22 = 3907
10 YR YLD - .03 = 2.48%
OIL – 1.05 = 97.25
GOLD – 7.50 = 1334.70
SILV - .15 = 22.66

So, after a five day rally we finally got the fizzle. The markets don't go straight up and the market had run quite a bit. The S&P 500 advanced 23 percent this year through yesterday, pulling within a half percentage point of the 23.5 percent gain in 2009. The S&P 500 was valued at 15.9 times estimated earnings as of yesterday, the highest since December 2009. While that’s up 16 percent this year and starting to feel a bit frothy, it’s still below the multiples at the market’s two previous peaks, when the ratio reached 16.5 in October 2007 and 25.7 in March 2000. Of the 169 S&P 500 companies that have reported results this season, 76 percent exceeded analysts’ predictions for profit, while 54 percent beat sales estimates.

And 87% of stocks in the S&P 500 traded above their average prices from the past 50 days. Today, though 7 out of 10 main industries in the S&P 500 declined, with commodity, consumer-discretionary and financial companies dropping at least 0.6 percent to lead the retreat.

Treasury yields fell to their lowest in three months on more bets that the Federal Reserve will maintain its stimulus efforts until next year. The Fed is kind of handcuffed from doing any tapering; the consensus is pushing it out to March. The weak jobs number supports it.

If you're looking for health insurance at healthcare.gov, don't despair. Help might be on the way. Republicans on the House Committee on Energy and Commerce have asked John McAfee to review the HealthCare.gov website. McAfee created the McAfee Anti-virus software company that bears his name. He sold that a few years back. House Committee on Energy and Commerce counsel Sean Hayes wrote to McAfee’s lawyer on Oct. 14. “For three years we have been monitoring the implementation of the law and have been trying to dig into what has happened with the Exchange rollout. Given the failures of Healthcare.gov, and Mr. McAfee’s expertise, I was hoping he might be able to discuss his views with staff on the hill.” McAfee declined to provide assistance. The back story on McAfee involves fugitive flight from a home in Belize following the death of a neighbor, deportation from Guatemala to the US, and some very bizarre behavior. He hasn't been indicted in the US. Meanwhile, or next best hope is that Edward Snowden decides to come home from Russia; don't hold your breath.

There was a strange phone call today; I'm sure it was somewhat awkward. The German government has obtained information that the United States may have monitored the mobile phone of Chancellor Angela Merkel and today Merkel called President Barack Obama to demand an immediate clarification. A spokesman for Merkel said she told Obama that if such surveillance had taken place it would represent a "grave breach of trust" between close allies. "She made clear that she views such practices, if proven true, as completely unacceptable and condemns them unequivocally," the statement read.

White House spokesman Jay Carney, responding to the news in Washington, said Obama had assured Merkel that the United States "is not monitoring and will not monitor" the communications of the chancellor.

The news broke as Secretary of State John Kerry, on a visit to Rome, faced fresh questions about mass spying on European allies, based on revelations from Edward Snowden, the fugitive former US intelligence operative granted asylum in Russia.

French President Francois Hollande is pressing for the US spying issue to be put on the agenda of a summit of European leaders starting on Thursday. He also called Obama earlier this week after French newspaper Le Monde reported that the National Security Agency (NSA) had collected tens of thousands of French phone records in a single month between December 2012 and January 2013. The paper said NSA appeared to be targeting people tied to French business and politics as well as individuals suspected of links to terrorism.

Merkel is not the only foreign leader whose personal communications may have been monitored by the United States. Last month Brazilian President Dilma Rousseff called off plans for an October state visit to Washington because of similar revelations.

We can tap phone calls around the world but we can't figure out how to sell health insurance on a website; go figure.

The Securities and Exchange Commission voted unanimously to propose rules that, for the first time, would allow investors to buy stock in companies over the Internet using a crowdfunding exchange. These rules could reinvent the way that companies raise money by allowing them to bypass the traditional costs of going public, which usually involved hiring costly investment bankers and accountants.

The SEC's vote on so-called equity crowdfunding is in direct response to Title III of the JOBS Act, passed last year, in which Congress is looking for a loophole to allow smaller companies to get an exemption from the strict rules controlling the sale of securities to individuals. Congress is hoping that by using Internet crowdfunding, small and promising companies could gather capital needed to grow and expand from a wide pool of investors. These companies could, in theory, raise money they need to grow well before they could afford the relatively high costs of a traditional initial public offering.

The rules would create a new financial entity, called a funding portal, which would be a Web site that would electronically connect investors with young companies looking to raise money. The SEC's approval is needed since such sites are banned today in order to protect investors. Currently, such Web sites would need to be registered with the SEC as a broker, giving the SEC power to oversee the entity. Furthermore, such private sales could only be offered to "accredited investors," or wealthy investors savvy enough to know the risks. The companies selling stock through portals would also face restrictions. Companies would have to disclose details on any investors or officers owning 20% or more of the company. Financial statements of the company's operating history plus a tax return, not to mention details about certain financial dealings between officers and outside companies would need to be disclosed.

Crowdfunding has drawn wide interest because it will be open to any investor regardless of their income or net worth. Under the proposal, crowdfunding must be done online through an entity that provides investors with forums to ask questions and communicate about a deal. All investors, not just the so-called accredited investors, will have the opportunity to invest in entrepreneurs and their ideas at an earlier stage than ever before. 

Businesses using crowdfunding could raise no more than $5,000 a year from someone whose income or net worth is less than $100,000. Investors with income or net worth greater than $100,000 could contribute as much as 10 percent of their annual income or net worth, to a maximum of $100,000 in one year. The proposal doesn’t require businesses or funding portals engaged in crowdfunding to verify compliance with those restrictions. Instead, a crowdfunding portal must ask investors to disclose their income or net worth as a means of determining compliance.

Even after the SEC vote, equity crowdfunding doesn't become a reality. There will be a 90-day period for the public to issue comments. The SEC will then review those comments and make a final determination.  The process of approving crowdfunding has taken much longer than most expected as the regulator balances the need to help companies raise capital, but protect investors from scams.

Meanwhile, a federal jury in New York today found Bank of America's Countrywide unit liable for defrauding Fannie Me and Freddie Mac by selling them thousands of defective loans. The jury also found Countrywide executive Rebecca Mairone liable for fraud. District Judge Jed Rakoff, who presided over the trial, told lawyers he will determine the amount of any civil penalty later. The government is seeking a penalty more than $848 million, considered the gross loss to Fannie Mae and Freddie Mac. Alternatively, the government argues the penalty should be more than $131 million, the estimated net loss.

After the jury left, Rakoff listened to arguments on whether he should consider the net loss or gross loss when deciding the penalty. He also ordered both sides to submit written arguments on whether there is a cap on the penalties he can impose.

This goes back to a 2007 Countrywide program called the High Speed Swim Lane, or HSSL, which later became known as the “Hustle”; a fast track program for subprime loans. What makes this unique is that this is the first case by the government against a bank over bad mortgages to go to trial. Before the Hustle Case, everything else was swept under the rug or settled without trial. This is the first trial – and Bank of America lost.

We've talked and will continue to talk about the tentative $13 billion settlement between JPMorgan and the Department of Justice. Now comes word JPMorgan is in settlement talks with the bonds’ buyers who are seeking at least $5.75 billion. A group of investors including asset managers Blackrock and Neuberger Berman Group has been negotiating with the bank during the past year to recoup losses incurred when underlying loans soured. This is still in the talking stage and an agreement isn’t imminent and the amount may change.