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, May 19, 2014 - Still Too Big to Jail

Still Too Big to Jail
by Sinclair Noe

DOW + 20 = 16511
SPX + 7 = 1885
NAS + 35 = 4125
10 YR YLD + .02 = 2.54%
OIL + .58 = 102.16
GOLD - .10 = 1293.60
SILV - .01 = 19.44

Merger Mania Monday. Late yesterday, AT&T announced an offer to buy DirecTV for $48 billion, or $95 per share. The combined AT&T-DirecTV would serve 26 million customers; that would make it the second-largest pay TV operator behind a combined Comcast-Time Warner Cable, which would serve 30 million under a $45 billion merger proposed in February. The Comcast deal still faces regulatory hurdles.

AT&T and DirecTV promised consumer benefits like more economical bundles that tie mobile phone, pay TV and Internet service together on a single bill. The deal could face regulatory scrutiny from the Federal Communications Commission and Department of Justice. Unlike the cable company tie-up, the AT&T-DirecTV merger would effectively cut the number of video providers from four to three for about 25% of US households. That's a situation that could result in higher prices for consumers and usually gives regulators cause for concern.

The value that DirecTV offers that no other national TV provider offers is a special deal for football fans; for $240 to $330 you can buy a special package that gets you all the NFL football games, including your hometown favorite no matter where you live. That’s why DirecTV paid an estimated $4 billion to the NFL for the latest Sunday Ticket contract; that deal expires at the end of the upcoming NFL season. If the Sunday Ticket arrangement were not to be extended, AT&T would reportedly have a legal out, according to terms of the takeover.

Part of the value of DirecTV is what it isn’t. DirecTV does not offer fixed-line or mobile Internet service, and its rights to airwave frequencies for satellite TV are not the kind that AT&T can use to improve its mobile phone network. If AT&T can convert DirecTV’s customers into high-speed Internet subscribers, they could have 25% of all pay TV subscribers and then two companies would control 55% to 60% of all Internet subscriptions in the US.

The board of AstraZeneca has rejected the improved, and apparently final $119 billion takeover offer from US drugmaker Pfizer. Pfizer, which is the world's second-biggest drugmaker by revenue, has been courting No. 8 AstraZeneca since January. Yesterday, Pfizer raised the offer 15% to $119 billion; that would be the richest acquisition ever among drugmakers and the third-biggest in any industry. AstraZeneca didn't take long to reject the new offer, its board arguing Pfizer is making "an opportunistic attempt to acquire a transformed AstraZeneca, without reflecting the value of its exciting pipeline" of experimental drugs.

Pfizer's offer comes amid a surge of other deals among drugmakers. Those deals include Switzerland's Novartis agreeing to buy GlaxoSmithKline's cancer-drug business for up to $16 billion, to sell most of its vaccines business to GSK for $7.1 billion, plus royalties, and to sell its animal health division to Eli Lilly for about $5.4 billion. Canada's Valeant Pharmaceuticals has also made an unsolicited offer of nearly $46 billion for Botox maker Allergan, which has turned it down, so far.

Law enforcement agents have arrested more than 90 hackers accused of infecting more than half-a-million computers worldwide with malicious snooping software. The suspects were charged with developing, selling and marketing a remote access tool, or “RAT,” that allowed users to infiltrate computers, view files and steal personal data from unwitting victims. Talk about creepy; the malware could even take over your webcam and take pictures and videos of you. The original creator of the software, who founded an organization called “Blackshades,” was arrested in June 2012, but investigators said an international ring of hackers continued to sell and disseminate the software after his arrest, reaching thousands of people in more than 100 countries; 19 countries participated in the arrests, and more than 300 searches had been conducted in what law enforcers described as one of the largest cybersecurity operations in history.

The United States charged five Chinese government officials with allegedly orchestrating cyber-attacks against six major American companies. It marks the first time the US has formally charged foreign government officials for explicitly acting at the behest of a foreign government in cyber-crimes. The companies targeted by hackers were Alcoa, Westinghouse, Allegheny Technologies, US Steel, United Steelworkers Union, and Solar World.

Attorney General Eric Holder said: “In some cases, they stole trade secrets that would have been particularly beneficial to Chinese companies at the time they were stolen. In others, they stole sensitive, internal communications that would provide a competitor, or adversary in litigation, with insight into the strategy and vulnerabilities of the American entity. In sum, the alleged hacking appears to have been conducted for no reason other than to advantage state-owned companies and other interests in China, at the expense of businesses here in the United States.”

The Justice Department has criminally charged Credit Suisse AG and two of its units with conspiring to willfully help Americans evade taxes. A Virginia federal court filing accuses Credit Suisse of conspiring to in part "advise the preparation and presentation of false income tax returns and other documents to the Internal Revenue Service.'' The four-page criminal information charges the bank with "assisting clients in using sham entities'' as the purported owners of secret offshore accounts and "soliciting IRS forms that falsely stated under penalties of perjury that the sham entities … owned the assets in the accounts.''

The criminal case follows a Senate subcommittee investigation that found the bank provided accounts in Switzerland for more than 22,000 US clients totaling $10 billion to $12 billion. The report said Credit Suisse sent Swiss bankers to recruit American clients at golf tournaments and other events, encouraged US customers to travel to Switzerland and actively helped them hide their assets.

Credit Suisse has apparently agreed as part of a settlement to plead to one count of conspiring to aid tax evasion. It would mark the first time in more than 20 years that a major bank has plead guilty to criminal wrongdoing. But make no mistake, this was a negotiated guilty plea that does not bear the consequences of criminal guilt. Credit Suisse will pay about $2.6 billion in penalties and hire an independent monitor for up to two years, which sounds exactly like a civil penalty. Recognizing that criminal charges could prompt regulators to revoke a bank’s license to operate, the corporate equivalent of the death penalty, prosecutors met with regulators to discuss punishing Credit Suisse without putting it out of business and imperiling the economy. The biggest challenge facing Credit Suisse could be that some of its own clients, such as pension funds, have internal requirements that prohibit them from doing business with an entity that has pleaded guilty to a crime.

Otherwise, this amounts to another slap on the wrist. The CEO and Chairman keep their positions. Credit Suisse will admit to a statement of facts that shows the U.S. tax evasion was widely fostered by the bank, the people said. The firm won’t have to disclose the names of US account holders under terms of the agreement.

The Credit Suisse plea won’t be the last. BNP Paribas is expected to plead guilty in coming weeks to doing business with countries like Sudan and Iran that the United States has blacklisted; BNP is also expected to pay more than $5 billion in fines. And eventually, we could see criminal charges brought against American banks such as JPMorgan and Citigroup, which are the subjects of criminal investigations, but those inquiries are at an earlier stage and it is unclear whether they would result in criminal charges. The Justice Department's highest-profile settlement over sales of risky mortgage securities in the run-up to the financial crisis — the $13 billion deal among the department, state regulators and JPMorgan Chase — was a civil case, and no bank executives were charged. Federal prosecutors in California have been conducting a related criminal investigation.

So for now we have a new strategy for controlling the illegality of the big banks: charge them with criminal activity and punish them with civil penalties. So what we have, in the end, seems to be a version of the anemic civil settlements and deferred-prosecution agreements that banks always get when they commit crimes. As usual, it is little more than the cost of doing business. Eric Holder can say that no bank is too big to jail, but then he folds like a tortilla when it comes to pursuing criminal charges that actually carry criminal penalties. For now, the government's message to banks remains the same: Go ahead and break the law. If worse comes to worst, your low-level bankers will take the fall, and your shareholders will pick up the tab.

Friday, April 25, 2014 - Don't Hold Your Breath

Don’t Hold your Breath
by Sinclair Noe

DOW – 140 = 16,361
SPX – 15 = 1863
NAS – 72 = 4075
10 YR YLD - .02 = 2.66%
OIL – 1.25 = 100.69
GOLD + 9.90 = 1304.80
SILV + .07 = 19.83

Consumer sentiment rose in April to a nine-month high as views on current and near-term conditions surged. The Thomson Reuters/University of Michigan's final April reading on the overall index of consumer sentiment came in at 84.1, up from 80 the month before.

Meanwhile, a new Gallup poll shows more Americans are optimistic about the job market this month than at any time since the 2008 financial crisis, with 30% saying now is a good time to find a quality job.

That marks a significant improvement from the 8% who said they were optimistic about the job market in 2010, but it’s still a drop from the pre-2008 highs of almost 50%. And even though almost a third of Americans are optimistic, two-thirds still say the job market is lackluster; 66% of Americans say it’s not a good time to hunt for employment.

Next week’s economic calendar includes a two day Federal Reserve FOMC meeting. Next Friday, we’ll have a monthly jobs report; the current estimates call for 215,000 net new jobs in April and the unemployment rate dipping to 6.6% from 6.7%. Also, the Commerce Department will release its first guess of first quarter GDP; the consensus estimate on the initial estimate is that the economy grew about 1%.

The situation in Ukraine is going to hell in a hand basket. Russian militants have now become entrenched in towns across eastern Ukraine; Russian troops are massed on the border. Ukrainian leaders said operations to expel pro-Russian militants in eastern cities would continue, even though military action so far has done little more than prompt Russia to stage military exercises on Ukraine’s border and raise concerns about Moscow’s next move. The government in Kiev says that if the Russians cross the border they would view that as an invasion. Ukraine's Prime Minister said Russia wanted to start World War Three by occupying the country and creating a conflict that would spread to the rest of Europe.

A group of foreign military observers, possibly including some Germans, traveling under the auspices of the Organization of Security and Cooperation in Europe, along with their Ukrainian military hosts, were detained by pro-Russia separatists in Slovyansk. It was unclear precisely how many were in the group, about a dozen, but the detention appeared to be the first time that members of the Ukraine armed forces had been taken into custody by the separatists.

The US, Britain, and Germany are now calling for more sanctions against Russia, but none of the three countries gave any details of what the sanctions might be, or when they might be enacted. The standoff has already led to heavy capital flight from Russia, prompting credit rating agency Standard & Poor's to cut the country's ratings. That forced the Russian central bank to raise its key interest rate to reverse a drop in the ruble.

The Federal Communications Commission announced new rules governing Internet service. The rules effectively put an end to net neutrality, or the idea that all web traffic should be treated equally. A court decision in January struck down FCC rules meant to ensure that Internet providers do not discriminate by blocking or slowing certain content.

That new rule gives broadband providers what they’ve wanted for a long time, the right to speed up some traffic and degrade others. When broadband accelerates some traffic the result is that other traffic slows down. We take it for granted that bloggers, start-ups, or nonprofits on an open Internet reach their audiences roughly the same way as everyone else. Now they won’t. They’ll be moved over to a slow lane and forced to line up for their chance to reach an audience as they watch as companies that can pay tolls to the cable companies speed ahead. The motivation is not complicated. The broadband carriers want to make more money for doing what they already do. Never mind that American carriers already charge some of the world’s highest prices, around sixty dollars or more per month for broadband, a service that costs less than five dollars to provide.

After the ruling, internet providers like Comcast and Verizon cut deals with content providers, such as Netflix, which would pay to stream their content in an Internet “fast lane.” The new rules effectively create a fast lane and a slow lane on the internet. The fast lane includes big tech companies that can afford to pay; the slow lane includes startups, small businesses and everybody else. The internet providers are also becoming more and more involved in providing content, and it just makes sense to think their content will get preferential treatment. Companies like Verizon and Comcast will have staggering power to decide what bits of information reach your devices and mine, in what order and at what speed. That is, assuming we're permitted to get that information at all.

Bottom line is that the internet is going to get more expensive; if content providers have to pay extra for the fast lane, they’ll pass those costs on to the end user. The finer details will be hashed out in the coming months, starting on May 15, when the proposed rules become public.

Back in the Spring of 2010 the Office of the Comptroller of the Currency (OCC) and the Federal Reserve issued consent orders to 11 mortgage servicers, mandating that borrowers who had pending foreclosures, or had completed foreclosure sales in 2009 or 2010 could request an investigation by independent reviewers. The independent reviews would be paid for by the servicers, and in a shocking twist, the independent reviewers were anything but independent.

Eventually 16 servicers were included in the reviews, accused of using forged and shoddy paperwork to rapidly foreclose on homeowners, a practice known as “robo-signing.” The servicers, including Bank of America and Wells Fargo, agreed to have independent consultants review their foreclosure files for errors. In the 12 months that the review was up and running, not a single homeowner received any compensation. But the eight consultants managing the process were paid a total of $1.9 billion.

And so the independent review was cancelled and the regulators and the banksters worked out a quick and dirty settlement, with $3.3 billion going to wronged homeowners; a bunch of insultingly small checks distributed to a wide swath of people, and the regulators and banksters got to say: look how many people we helped. Meanwhile, nobody went to jail for the thousands of forged documents, the perjury, the obstruction of justice, etc., etc. in what was surely one of the largest fraud cases in American history.

Another problem is that nobody really knew who had been wronged and in what amounts, and so when the restitution was paid, nobody really knew if there was any rationale for the payments. The OCC said the consultant’s review had found an overall error rate of about 4.5% after assessing about 100,000 files, but that always seemed to be a lowball estimate.

Meanwhile, Representative Elijah Cummings continued to get data, and now that data is coming to light. In one example, a reviewer, Promontory Financial, found errors with 60% of the loan modifications conducted by Bank of America; a partially completed review found similar problems of the cases reviewed for PNC Bank. Based upon those numbers, the banksters got off with a puny little fine, and the wronged homeowners got shortchanged.

Now, you’re probably thinking to yourself, that this is old news about the robo-signing, but what is still relevant is  how the politicians have suppressed this information for so long; further proof of how deeply pretty much all of Washington DC is in bed with the banks. Only now when foreclosure abuses are considered old news does the public begin to get an inkling of how much the official story was close to a complete fabrication.

Of course, the people who went through the Independent Foreclosure Review process knew full well what a charade it was, but they were never taken seriously. The review process cost nearly $2 billion and it turned out to be a cost efficient whitewashing by the banksters. If you’ve lost your home, you are sure to be under financial duress, and people with no money don’t have any clout with our government. Foreclosure is considered a stigma, which discourages victims from telling their stories and sets those brave enough to do so up for abuse; the banks have done a great job of playing up the “deadbeat borrower” meme, whether it fits or not.

And we finish today with the story of how a top bank executive finally has to pay for his fraudulent actions. Bank of America's former finance chief, Joe Price, has agreed to pay $7.5 million to settle a New York lawsuit that accused the bank and its former executives of misleading investors during the lender's acquisition of Merrill Lynch. The top execs at BofA lied about the toxic assets on the books at Merrill Lynch and mounting losses leading to the merger; and misrepresenting the impact the merger would have on the bank's future earnings; this violated so many securities laws that it is crazy.

New York Attorney General Eric Schneiderman said: "This settlement is one more step in our effort to hold top financial executives accountable for their actions." What a crock.

The bank paid the fine for Joe Price, which means the shareholders are actually paying. Joe Price did not have to admit wrongdoing. Former BofA CEO Ken Lewis settled last month; the bank paid his fine too; Lewis did not admit wrongdoing.

Meanwhile, there is still a $2.3 billion class action lawsuit pending, and the Department of Justice is now offering a $13 billion settlement to Bank of America to resolve federal and state investigations of the lender’s sale of bonds backed by home loans in the run-up to the 2008 financial crisis. Don’t hold your breath for justice.

Monday, April 21, 2014 - Why Stocks Continue Going Higher

Why Stocks Continue Going Higher
by Sinclair Noe

DOW + 40 = 16,449
SPX + 7 = 1871
NAS + 26 = 4121
10 YR YLD un 2.72%
OIL - .01 = 103.64
GOLD – 4.30 = 1291.30
SILV - .21 = 19.54

The S&P 500 has gained for five straight sessions, marking the longest winning streak since October. This has not been a pretty rally. Volume was light today; that has been part of the trend; light volume on up days and heavy volume on down days.

We are smack dab in earnings reporting season, and 87 companies have posted results through this morning with 62% beating earnings expectations; that’s down from 66% beating earnings over the past 4 quarters, and those earnings expectations have been ratcheted lower and lower, so it should be an easy bar to cross. And still the markets have been moving higher.

Dozens of S&P 500 components will report earnings this week, including Apple, Biogen, Facebook, McDonald’s, AT&T and Caterpillar. More than 30 companies in the Nasdaq 100 (NDX) are slated to report earnings. After the close of trade Netflix posted a first-quarter profit of $53 million, or 86 cents a share, up from $3 million, or five cents a share, a year ago. The company in January had projected a profit of 78 cents a share. The stock shot up about 7% to $372 in extended-hours trading. After a jump of 300% in 2013, Netflix had slumped recently.

As part of the earnings announcement, Netflix announced a price hike, but it will only be for new customers, and the hike won’t happen for about 2 or 3 months, and existing customers will be grandfathered in with a non-specific grace period.

Also, Netflix sent a letter to shareholders in opposition to the proposed Comcast-Time Warner Cable merger. The letter says that if the merger is approved, “the combined company’s footprint will pass over 60 percent of U.S. broadband households...with most of those homes having Comcast as the only option for truly high-speed broadband. The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger."

Two months ago, Netflix agreed to pay Comcast for access to its high-speed network to improve the video quality and loading speed for Netflix streaming customers.

On a related note, major television broadcasters and Aereo will argue before the US Supreme Court tomorrow in a case that is about much more than the future of a controversial startup. The outcome could have far-reaching effects on the future of television and cloud computing, the quality of wireless service, and entrepreneurs trying to create the next big thing in technology.

You’ve never heard of Aereo? Don’t feel bad, I’m not even sure I’m pronouncing it correctly. It is a 2 year old startup that captures broadcast airwaves and then streams those signals to users, for about $8 a month. The broadcast channels such as NBC, CBS, ABC, and Fox are transmitted free of charge to anyone who has a television and an antenna. But cable companies like Comcast and Time Warner pay the broadcasters billions of dollars in fees for the right to re-broadcast the network TV channels as part of paid cable packages. Aereo argues it doesn't need to pay those fees because the broadcast signals which it's capturing and then retransmitting to its subscribers over the Internet, are free.

Broadcasters sued, claiming Aereo is violating copyright law by retransmitting the shows and threatening their industry's business model. If Aereo is legal, they fear there’s nothing stopping cable companies from copying Aereo to avoid paying the broadcasters billions of dollars in fees. If Aereo wins, broadcasters have threatened to yank their broadcast signals off the free airwaves and instead offer them only to paid subscribers.

Aereo streams network TV to subscribers via servers in “the cloud.” A Supreme Court decision against Aereo threatens to outlaw the entire cloud-computing industry. If Aereo is violating copyright law, that means other cloud providers could also be held responsible for helping users access illegal content. For example, Google or Dropbox could be responsible for policing the content stored in a Google Drive or Dropbox account to avoid copyright violations.

If Aereo wins and broadcasters follow through on their threat to stop beaming over-the-air programming, it could have an unintended benefit for smartphone users. As people consume more data on their mobile devices, it has created a shortage of wireless spectrum that could lead to dropped calls and slower wireless speeds if more airwaves aren't freed up.

The government is preparing to auction off some of those unused broadcast airwaves to wireless companies so they can improve service and avoid network congestion. An Aereo victory could prompt broadcasters to sell more of those airwaves to wireless companies, which could ultimately lead to improved smartphone service.

Now, think back a few years, no a few more years, maybe you are old enough to remember when the entertainment industry sued Sony, claiming that allowing customers to use its Betamax VCRs to record TV programming for later viewing amounted to copyright theft. The Supreme Court dismissed their arguments.

Sometimes it is difficult to make sense of the cyber world. For example, do you like Cheerios? The little circular breakfast cereal? Well, if you like Cheerios on Facebook, General Mills thinks that is reason enough to prevent you from suing them, or at least that’s what they thought. Last week, General Mills revealed a new rule to prevent people from joining class action lawsuits if they had joined the General Mills online communities, or entered a contest, or subscribed to newsletters or liked Cheerios on Facebook.

Under the new terms, those who violated the rule would be limited to arbitration or informal negotiations as a means of conflict resolution. And when you think about it for a moment it seems a bit heavy handed that a cereal company could take away your right to sue, even if you found a rat in your Progresso soup, or something yucky in your Yoplait, or actual leprechaun parts in your Lucky Charms. General Mills has now reversed the policy, and they even claim there was no policy in the first place, it was just a misunderstanding of how far they could throw around their corporate weight.

Financial markets have been fairly calm lately — no big banking crises, no imminent threats of euro breakup. But it would be wrong and dangerous to assume that recovery is assured; our still-sluggish economic progress could still be undermined by bad policies, or the argument of the past few months is that the economy could be derailed by inclement weather.

The Conference Board’s leading index is designed to forecast economic activity, not the weather. So, the split between the leading and coincident indexes so far this year offers further evidence of how the weather slowed growth in the first quarter. It also supports expectations that economic activity is picking up this quarter.

The board compiles 10 forward-looking data series, including jobless claims and new orders, to calculate its leading index, and the coincident index contains four series, including nonfarm payrolls and business sales. While growth in the coincident index usually follows the rate of the leading index with a lag, the gap between the two has widened in recent months.

Today, the board said its leading index increased a larger-than-expected 0.8% in March, and the coincident index increased 0.2%. In the past four months, which included the harsh winter period, the leading index has increased 1.5% while the coincident is up just 0.4%. The gains in the leading index mean economic fundamentals should allow the recovery to pick up steam in coming months. If so, the coincident index should post better gains. Today’s Leading Economic Index says, “The economy is rebounding from widespread inclement weather and the strengthening in the labor market is beginning to have a positive impact on growth.”

The Fed is trying to exit QE, but it won’t be easy, and they say one of the determinants is the employment picture and inflationary pressures. A new research paper by Fed economists says those two categories should not be considered separately.

Fed Chairwoman Janet Yellen has argued that a significant portion of the long-term unemployment problem is due to a depressed economy rather than structural issues such as aging or the gap between workers’ skills and employers’ needs. According to her line of thinking, Fed policies could help spur hiring by boosting demand. If the problem is primarily structural, as some other economists have argued, Fed policies are less likely to make any difference in employment. In a speech earlier this month, Yellen said, “I believe that long-term unemployment might fall appreciably if economic conditions were stronger.”

The new research paper corroborates Yellen’s findings. The new research says that by using regional data sets rather than simply national figures, and economists were able to “discriminate the independent influences of short- and long-term unemployment” on inflation.

“The results suggest that long-term unemployment has exerted similar downward pressure on inflation to that exerted by short-term unemployment in recent decades.”

Or economic recovery could be undermined by green men.

For the past two weeks, pro-Russian gunmen in green uniforms with no insignias, have been taking over government buildings in eastern Ukraine. Russia did not claim them; they were unidentified “green men”. To no one’s surprise, US intelligence is now saying the “green men” are indeed Russian military, and this is a pretty clear breach of the non-escalation agreement reached last week in Geneva. So, now the US State Department is saying that Russia and their “green men” need to vacate occupied buildings and checkpoints, accept an amnesty and address their grievances politically, or the financial sanctions against Russia will be escalated.

Tuesday, January 14, 2014 - The Day the Net Died (Maybe)

The Day the Net Died (Maybe)

by Sinclair Noe

DOW + 115 = 16,373
SPX + 19 = 1838
NAS + 69 = 4183
10 YR YLD + .04 = 2.87%
OIL + .83 = 92.63
GOLD – 7.40 = 1246.00
SILV - .15 = 20.36

A US appeals court has rejected federal rules that required Internet providers to treat all web traffic equally. The Federal Communications Commission's open Internet rules, also known as net neutrality rules, required Internet service providers to give consumers equal access to all lawful content without restrictions or varying charges. The US Court of Appeals for the District of Columbia Circuit struck down the regulation, which was passed in late 2010 and challenged in court by Verizon Communications. The decision that could allow mobile carriers and other broadband providers to charge content providers for faster access to websites and products, or block content, or slow down access.

One argument is that a video and Internet provider would have an incentive to bog down a video streaming service such as Netflix in favor of its own sites. Or it could charge a toll to those who want their content delivered at a higher speed, which media watchdogs say would stifle innovation and favor big and powerful companies.

The issue of companies playing favorites with their own content came to the forefront when Comcast announced plans to acquire NBCUniversal in 2009.  Comcast, the nation's largest cable and Internet distributor, said in a statement that the court ruling would not change the company's policies. At the time of the acquisition, the Comcast agreed to abide by the FCC's open Internet rules for 7 years, even if the courts changed them. After 7 years, the gloves would likely come off.

There is big money at stake, as we were reminded today. Charter Communications wants to buy Time Warner Cable in a deal valued at more than $37 billion. Time Warner Cable's board has rejected the offer.

The FCC had classified broadband providers as information service providers as opposed to telecommunications service providers, like telephone companies, and that distinction created a legal hurdle for the FCC's authority over them. This was the second time the court struck down the FCC's net neutrality rules. The FCC now could appeal the ruling to the full appeals court or to the US Supreme Court, something FCC Chairman Tom Wheeler said he is considering as he looked at "all available options" to ensure Internet networks remained free and open.

The regulators could also try to reclassify broadband providers so they fall in the same category as traditional phone companies, a step that would give the FCC more oversight power. With the agency taking its regulatory authority from the Telecommunications Act of 1996, it could go back to Congress and ask for new authority to regulate broadband. But the Republican majority in the House of Representatives has tried multiple times to repeal the FCC’s net-neutrality rules, and any legislation giving the FCC new authority over broadband providers would have little chance with lawmakers there.

One simple way, at least on its face, to get around the prohibition on applying common carrier rules to broadband would be for the FCC to reclassify broadband, subject to the common carrier rules that traditional voice service is subject to.

There will be serious push back from the phone and cable companies and their lobbyists. They will make threats, recycle all of their debunked myths about the Internet, they will claim that the internet belongs to them, and promise we can trust them not to do any of the bad things they've fought so hard to do.

Economic data today; the commerce department reported better-than-expected retail sales for December, up 0.2% versus estimates of 0.0%. Core sales, excluding the more volatile food and auto sectors, were up 0.7% for the biggest gain in almost a year. November sales numbers were revised slightly lower. These core sales correspond most closely with the consumer spending component of gross domestic product, and the increase suggested consumption accelerated in the fourth quarter from the third quarter's 2 percent annual pace.

A second report from the Commerce Department showing retail inventories, excluding autos, increased 0.6 percent in November after increasing 0.3 percent in October. The economy grew at a 4.1 percent rate in the third quarter, which was the fastest pace in almost two years. Fourth-quarter GDP growth estimates range as high as a 3.9 percent rate.

It's earnings reporting season and this week features the big banks; today featured JPMorgan and Wells Fargo. Wells reported an 11% jump in profits, thanks in large part to cost cutting, which is to say they fired people. Wells Fargo says their mortgage business is doing just about what it would be expected to do at this point in the economic cycle. The nation's biggest mortgage lender, Wells Fargo, said its mortgage volume tumbled to $50 billion in the quarter, down 60 percent from $125 billion a year ago. The second-biggest lender, JPMorgan Chase, said its mortgage originations, that includes new home purchases and refinancings, fell 54 percent to $23.3 billion from $51.2 billion a year ago.

A jump in interest rates has had a big impact on the housing market. That should be a warning sign for a Federal Reserve seemingly bound and determined to withdraw stimulus from a still-shaky economy. Higher rates have hurt demand. The average interest rate for a 30-year fixed-rate mortgage has jumped to 4.5 percent from a record low of 3.3 percent in early 2013. Fed Chairman Ben Bernanke and others argued they weren't kicking the props out from under the bond market, but that's sort of what happened: Bond prices fell, and interest rates jumped. Of course, rates are still relatively low, and the housing market is not exactly in a panic, though sales are slowing.

The specifics of bank earnings are increasingly unimportant because nobody believes the numbers anymore; the numbers are massaged and manipulated to such a degree that they are of no value. Wells Fargo closed near an all time high. Still, the reports are fun reading, even if much is fictional.

JPMorgan met earnings expectations if you overlook the legal costs, and Wall Street seemed willing too overlook the legal costs today. Investment banking fee revenue dropped 3 percent. The bank had $1.1 billion of legal expenses in the fourth quarter, about $850 million of which was linked to a recent settlement for failing to report its suspicions of fraud at its client Bernard Madoff's fund.

The bank agreed to some $20 billion of legal settlements in 2013; almost equal to a typical year's profit. CEO Jamie Dimon indicated some investigations into JPMorgan are just beginning, so the idea is that they just treat the legal problems as the cost of doing business.

One bit of info from JPMorgan today, a key lending metric, the ratio of the bank's loans-to-deposits, hit a new low. In 2013, JPMorgan on average lent out just 57% of its deposits. That's down from 61% a year ago and the lowest that ratio has been in at least a decade. Back in 2004, JPMorgan's loan-to-deposit percentage was as high as 88%. It's also down at rivals. But not as much. The industry average is just under 70%.Traditionally, banks have lent out 80 to 90% of their deposits.

So, why isn't JPMorgan making loans? One reason is that they can make as much money, about $300 million by just buying short term, low interest rate Treasury bonds. Dimon should send a thank you note to Bernanke. The other possible explanation is that there isn't much demand for loans. Either way, this would seem to be an indicator of sluggish growth.

The bank earnings season actually kicked off on Friday when the Federal Reserve released a statement saying it made an estimated $79 billion in net interest income, driven by its $90 billion in interest income on its portfolio of Treasuries, mortgage bonds, and other securities. The Fed sent $77 billion to the US Treasury. The Federal Reserve, after operational costs, is earning double the profits of Exxon Mobil ($44 billion) and Apple ($41 billion), and those two companies are doing a combined $600 billion in global revenues. The Fed doesn't have to drill oil wells or hire Chinese kids to glue together phones, they basically print money, buy mostly risk-free bond investments and do a little research to determine what the interest payments are going to be. The Fed has built up a $4 trillion dollar portfolio, and they have sent more than $350 billion to the Treasury since 2009. By the way, the Fed sent $88 billion to the Treasury in 2012, so they were down last year. No, I don't know what that indicates.

Standard & Poor's Ratings Services revised its outlook on California's credit ratings to positive from stable, citing the governor's budget plan. S&P foresees raising the state's rating one notch within two years, if California follows the $107 billion budget Brown proposed last week. S&P said it is also encouraged by the proposal's emphasis on repaying debt and building reserves. While Brown did not suggest specific action for making the teachers' underfunded retirement system whole, he did highlight that the pension "is in need of a long-term funding strategy.”

In a letter issued through the Economic Policy Institute, including seven Nobel Laureates, argue that the government should hike the federal minimum wage from $7.25 to $10.10 an hour by 2016 and then peg future increases to inflation.

The effect of a minimum wage hike is one of the most hotly debated issues in economic research. Some argue that a boost in the wage floor would hurt low wage earners because employers would be hesitant to hire if they had to pay their workers more. In the letter, the economists, argue that the "weight" of the evidence indicates past minimum wage hikes haven’t hurt the job market.

However, the letter reads: "Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front."