Tuesday, May 06, 2014 - Quickly Aging Here

Quickly Aging Here
by Sinclair Noe

DOW – 129 = 16,401
SPX – 16 = 1867
NAS – 57 = 4080
10 YR YLD  - .02 = 2.59%
OIL + .38 = 99.86
GOLD – 1.80 = 1308.90
SILV - .04 = 19.65

There was a pretty broad selloff on Wall Street today. AIG posted lousy earnings late yesterday, and today they dragged down most of the financials. Twitter proved a drag on the tech stocks. Twitter reached the 6 month expiration of a lock-up period that had restricted sale of about 82% of its outstanding stock. Share prices dropped about 18% today, but home prices in Silicon Valley are likely to move a bit higher in the next month. After the close, Disney posted better than expected earnings.

Let’s start with economic data; the trade deficit narrowed in March, down 3.6% to $40.4 billion. March exports came in at about $193 billion and imports were around $234 billion, resulting in a $40 billion shortfall. Exports are 17% above the pre-recession peak, while imports are about 1% above the pre-recession peak. Exports of capital goods, industrial supplies and materials, and automobiles increased in March. Exports of services hit a record high, while those of non-petroleum goods were also the highest on record. Exports to Canada, South Korea and Germany all touched all-time highs in March. Imports of food and non-petroleum products hit record highs in March.

Last week we saw the estimate for first quarter gross domestic product showing 0.1% growth; that estimate worked with an assumption that the trade deficit for March would come in at $38.9 billion, not the $40.4 billion reported today. So, this implies that the GDP number could be re-estimated by two-tenths, which would mean a negative -0.1% GDP for the first quarter, or maybe just a bit worse. There will be other data considered in the final GDP number, but it now looks like a negative number. And most economists are calling for a bounce back in the second quarter.

Corelogic reports home prices nationwide, including distressed sales, increased 11.1% in March 2014 compared to March 2013. This change represents 25 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased 1.4% in March 2014 compared to February 2014.

Excluding distressed sales, home prices nationally increased 9.5% in March 2014 compared to March 2013 and 0.9% month over month compared to February 2014. So, home price increases are slowing, and this might also prove a drag on GDP, but it doesn’t necessarily mean the housing market is in the dumps. One of the bright points in the report is that there are fewer distressed sales, that means there is also less inventory, and there is less negative equity.

A separate report from Black Knight Financial, a mortgage research firm finds the number of mortgages on which lenders initiated foreclosure in March fell to the lowest level in more than 7 years. Banks initiated foreclosure on 88,000 properties in March, down more than 27% from a year ago, and well below the high of more than 316,000 in March 2009.

Foreclosures should continue to trend down because the share of mortgages that are behind on their payments is also declining. Around 2.1% of all loans were in some stage of foreclosure in March, the lowest level since late 2008, and another 5.5% of all borrowers were 30 days or more past due on their loans but not yet in foreclosure, the lowest since late 2007. Both of those are still well above pre-crisis levels but they are down sharply from a few years ago.

Growth in the services sector accelerated in April, rising at the fastest pace in eight months as new orders jumped and overall activity quickened by the most since early 2008. The ISM said its services sector index rose to 55.2 in April from 53.1 in March, topping expectations for a read of 54.1. The data provides further evidence that economic activity is regaining momentum after lagging through much of the winter.

Today is the anniversary of one of the scariest days in market history. On May 6, 2010, the Dow plunged nearly 1,000 points in a matter of minutes in what became known as the flash crash. The crash wiped out $1 trillion in wealth in the blink of an eye, only to recover, kinda, sorta. High-frequency computerized trading was believed to at least be part of the cause of the technical breakdown. And the regulators have not figured it out to this day, and yes it could happen again.  

Last week, SEC Chair Mary Jo White testified before Congress that the markets were not rigged. Today, the SEC announced they have sent out subpoenas demanding records from brokerage companies to try and figure out how customers’ orders are routed, and how firms are being paid for order flow. The good news is the SEC is investigating; the bad news is that dark pool and high frequency trading has been going on for years and the SEC appears totally clueless.

Institutional Investor released its Rich List, a list of the 25 top income generating hedge fund managers. David Tepper of Appaloosa Management topped the list with $3.5 billion in earnings. Second on the list was Steven Cohen of SAC Capital, who might have fared better if his firm hadn’t been guilty of insider trading. Just for reference, $3.5 billion works out to $400,000 an hour.

I also ran across an article that puts the Fed’s QE into perspective. The Federal Reserve has spent approximately $3.2 trillion in the post-Crisis era, with most of the money being dropped from helicopters hovering over Wall Street banks. The Fed mainly bought Treasuries and mortgage backed securities, but they could have mailed a check for $10,223 to every person in the US; they could have bought back all the US debt owned by China, Japan, and Belgium; they could have created 12.8 million jobs in 2009, each paying $50k a year, and still be making payroll for them today – which actually would have met their mandate. And that’s just based upon large scale asset purchases under QE; by some estimates the Fed has dished out my than $17 trillion to prop up the financial order. A trillion here, a trillion there, pretty soon it adds up to real money.

The Census Bureau released a report on the demographic makeup of the US; the population is aging rapidly; about 1 in 5 Americans (21%) will be 65 years old and up by 2050, compared with just 13% in 2010 and less than 10% in 1970. It sounds like a lot of old people, but it seems less so when compared with other countries. In 2050, around 40% of Japan’s population will be 65-plus, up from 24% in 2012. In Germany, Italy, Spain, and Poland over 30% will be 65 plus. China will have about 26% of its population over the age of 65, which amounts to more old people in China than the entire population of the US.

The concern with an aging population is that there will be a much slower economy: less spending, less saving, lower economic output, and slower growth; fewer working age people paying taxes, less money going into social programs like Social  Security and Medicare, and more money coming out of those programs. But the Census report also finds that the working age population will increase, mainly due to immigration.

The White House today released the 2014 National Climate Assessment, written by 300 climate experts and reviewed by the National Academy of Sciences. The full report, at more than 800 pages, is the most comprehensive look at the effects of climate change in the US to date. Don’t worry, they also provided a Cliff Notes version that weighs in at a mere 137 pages, thereby killing fewer trees. The short and sweet is that we’re all going to fry; it’s too late, climate change is here and now, and it will just get worse and worse.

Average temperatures in the US have increased 1.3 degrees to 1.9 degrees Fahrenheit (depending on the part of the country) since people began keeping records in 1895, and about 80% of that warming has come in the past 20 years. The period from 2001 to 2012 was warmer than any previous decade on record, across all regions of the country. And it will keep getting hotter. If we really get very serious about cutting emissions, temperatures will rise by 3 to 5 degrees, depending on location, over the next 80 years; if we keep going the way we’re going, temperatures will rise 5 to 10 degrees, and maybe by 15 degrees in some places. That means 115 degree days in the desert southwest could be 125 to 130 degrees.

In addition to extreme heat, you can add wildfires, and drought, and hurricanes, and extreme downpours – real gulley washers, plus rising sea levels. The report says that in much of the US, especially the Midwest and Northeast, more rain is falling in short-duration, heavy bursts, leading to more flooding. The Northeast and Midwest may continue to get wetter, while the Southwest becomes even more parched, raising water supply and energy concerns there.

The report warns the Southwest to prepare for major disruptions ahead due to climate change: "Increased heat and changes to rain and snowpack will send ripple effects throughout the region’s critical agriculture sector, affecting the lives and economies of 56 million people –- a population that is expected to increase 68% by 2050, to 94 million. Severe and sustained drought will stress water sources, already over-utilized in many areas, forcing increasing competition among farmers, energy producers, urban dwellers, and plant and animal life for the region’s most precious resource."

The report says the Southwest will be plagued by drought, which is not really uncommon, but the droughts will be hotter and drier and longer and will lead to a big increase in wildfire activity, which has already started to take place.

The report notes that American society and its infrastructure were built for the past climate, not the future. It highlights examples of the kinds of changes that state and local governments can make to become more resilient. One of the main takeaways is that you don't want to look at the weather records of yesteryear to determine how to set up your infrastructure.

Tuesday, December 03, 2013 - But Be Afraid

But Be Afraid

By Sinclair Noe

DOW – 94 = 15,914
SPX – 5 = 1795
NAS – 8 = 4037
10 YR YLD - .01 = 2.78%
OIL + 2.22 = 96.04
GOLD + 5.00 = 1225.30
SILV - .03 = 19.28

Stocks down again today for the third straight session, the first three-session losing streak since late September. It isn't a trend, yet; as we said yesterday, it's only a reason to stay cautious. I'm reading the rationale for today's decline:

“Traders blamed the slide on worries about the Federal Reserve winding down its economic stimulus program earlier than expected due to strong readings on November manufacturing and construction spending released Monday. Weaker-than-expected consumer spending for the kickoff to the holiday shopping season also has investors on edge.” (USA Today)

And now I'm more confused than ever. Traders claim the economy is too strong, then we hear that consumer spending is too weak, and the worry is the Fed will taper. Flip a coin – you'll be more accurate.

The bulls’ case appears increasingly strained. One argument is that there is enough talk of bubbles that there can’t possibly be one. But in fact, in the dot-com era, there was plenty of discussion of frothiness of the tech stocks. Remember irrational exuberance?

Similarly, contrary to popular perceptions, mortgage industry insiders were concerned about the subprime market starting in 2005, with every conference featuring a panel on whether that market was getting out of hand.

And at least those overdone bull markets were built on the back of solid fundamental growth. By contrast, the U.S. recovery is more technical than real, with headline unemployment failing fully to capture the dire state of labor conditions. Estimates that include underemployment at near Depression eara levels. College grads face an unprecedentedly hostile job market and many are also mired in student debt. Not surprisingly, consumer confidence has dropped over the past seven months. And the recovery in the housing market? We'll get to that in a moment.

The Fed’s policies of super-low interest rates and quantitative easing, which have lowered yields on Treasury and mortgage bonds, have sent investors scrambling for returns. And the Fed’s efforts have been compounded by similarly aggressive policies in Japan and China, and even a willingness to be more accommodative by the once austerity smitten European Central Bank. Market trading has been driven by anticipation of Fed action rather than economic fundamentals.

In a May 2013 testimony to the Joint Economic Council, Federal Reserve Chairman Bernanke stated that the FOMC has made it clear, "it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes." Alongside additional answers he offered concerning the rationale and timing of such tapering, the financial markets immediately swooned.  A number of Federal Reserve officials had immediately and ever since come out to distort and negate some of the Chairman's communications, in an attempt to reduce the apparent runaway rise in borrowing costs, particularly on shorter-tenured bonds. we also do know that growth, revenue, and earnings, have all just been ok throughout the year. So,it makes sense that the Federal Reserve has had an outsized role in changing the trajectory of market performance, at least since June and probably into the New Year

Bill Gross, the head of bond giant Pimco, in his most recent investment outlook wrote: “Don't fight central banks, but be afraid.” Markets that have "excess liquidity" compliments of central banks become skewed toward the speculative end of the spectrum. Speculative markets can continue to rise much longer than rational people believe, or maybe the speculative market ended last Friday. Markets cannot rise forever based on printed money. At some point, the economy needs to carry more weight, but fear is not a valid investment strategy; discipline is.

Sales over the Thanksgiving weekend may have been a disappointment for the nation’s retailers, but they were a boon for the automakers, lifting their sales in the United States for November to the best rate since before the recession. Industrywide sales rose 8.9 percent in November to 1.25 million vehicles. At that pace, automakers predicted a seasonally adjusted annual rate of 16.3 million vehicles sold, the highest since May 2007. For the year, the industry is expected to sell 15.6 million new vehicles.

Corelogic released its report on home prices for October. The Corelogic Home Price Index is a 3 month weighted average, and it shows prices increased just 0.2% compared to September. Year over year, home prices, including distressed properties, nationwide increased 12.5%; this marked the 20^th consecutive monthly increase in home prices.

The housing market recovery is uneven, and home prices in 12 states remain at least 20% below local peak levels. Nevada’s home prices in October, including distressed sales, were 41% below a 2006 peak, the largest drop from bubble levels, despite explosive growth of 26% over the past year. Prices in Florida and Arizona in October were more than 30% below local peak levels. In California, home prices are still about 22% below the peak. In October, national home prices were down 17% from a bubble peak. Only 1.88 million homes were for sale at the end of October, down 2.1 percent from the previous month and the fewest since March. The shortage of inventory has slowed sales. Home re-sales fell in October for a second straight month to a seasonally adjusted annual pace of 5.12 million.

Michigan home sales were up 14% over the past year. That seems surprising in light of the news out of Detroit today, but Michigan is a big state. Detroit is in bad shape. Detroit is in far worse fiscal shape than other major American cities and cannot mount a sustainable recovery without a drastic overhaul that will certainly impose harsh sacrifices. The city of Detroit today officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after US Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors. The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities.

Whether Rhodes would deem the city insolvent wasn’t much of a question. If Detroit isn’t insolvent, what place is? Less clear was the status of pensions. The bankruptcy judge said he will allow pension cuts in Detroit's bankruptcy, even though pensions were protected under Michigan's constitution; but he also said he won't necessarily agree to pension cuts unless the entire reorganization plan is fair and equitable. The average Detroit General Retirement System pensioner nets less than $20,000 a year; for police and fire retirees, it’s about $34,000 annually.

Judge Rhodes said he will not issue a stay on the bankruptcy, meaning the case will proceed. And even though an appeal has already been filed, and more will come in the days ahead, the bankruptcy code provides for Chapter 9 to continue while appeals are pending that challenge. Rhodes also scolded the city for rushing through negotiations with its creditors, noting they only had 30 days to offer a counter-proposal. Saying that amount of time is “simply far too short,” Rhodes ruled the city did not satisfy good-faith requirements to try to negotiate with creditors outside of bankruptcy court. Bankruptcy protection limits the legal actions the city's 100,000 creditors can take to collect money owed to them. So, it looks like the Judge is pointing all parties back to the negotiating table.

America is doing a lousy job of educating our kids. According to the latest results of a comprehensive set of international tests, America's teens have remained mid-pack among their peers worldwide and utterly stagnant in reading, math and science over the last 10 years.

America's 15-year-olds failed to improve on the Program for International Student Assessment; meanwhile, East Asian countries maintained their top slots, and other countries not generally known for their academic prowess have become breakout stars of a sort. Poland, Germany and Ireland showed tremendous growth, and Vietnam, which administered the exam for the first time in 2012, wound up among the top-performing countries, eclipsing the US in math and science. Yes, the US now trails Vietnam in our ability to educate our teenagers.

In fall 2012, the Organisation for Economic Co-Operation and Development tested 28 million students between ages 15 and 16 in 65 economies, including 34 OECD countries. Among those 34 countries, the US performed slightly below average in math, scoring 481, and ranked 26 (though the report notes that due to measurement error, the ranking could range from 23 to 29.) Shanghai, Singapore, Hong Kong, Chinese Taipei, Korea and Japan came out on top, followed by such European countries as Liechtenstein, Switzerland, Netherlands, Estonia, Finland and Poland. Peru, Indonesia, Qatar, Colombia and Jordan came in last.

In reading, the US performed around the OECD average of 496, ranking 17 (or between 14 and 20) with an average score of 498. Again, Shanghai, Hong Kong, Singapore, Japan, Korea, Finland, Ireland, Taipei, Poland and Estonia came out on top, with Argentina, Albania, Kazakhstan, Qatar and Peru filling out the bottom.

The US also came in around the OECD science average of 501, ranking 21 (between 17 and 25) with an average score of 497. Top scorers included Shanghai, Hong Kong, Singapore, Japan, Finland, Estonia, Korea, Vietnam, Poland and Canada. The lowest performers include Peru, Indonesia, Qatar, Albania and Tunisia.

We've tried to chronicle the misdeeds of Wall Street banksters leading up to and following the financial crisis, so it might surprise you to learn that, according to a survey from the Economist Intelligence Unit, 60% of those surveyed said they had a positive view of Wall Street's reputation for ethical conduct; of course those surveyed were Wall Street financial industry executives. A separate survey by Edleman interviewed 31,000 regular people, and they concluded that the financial services industry was the least trusted of 18 industries to do the right thing by the general public.

The quote of the day goes to Goldman Sachs CEO Lloyd Blankfein, speaking at an industry conference today, saying “This country does a great job of creating wealth, but not a great job of distributing it.”

Tuesday, July 02, 2013 - Summer Swoon

Summer Swoon

by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thursday, April 18, 2013 - Elvis and Other Ongoing Investigations

Elvis and Other Ongoing Investigations

by Sinclair Noe

DOW – 81 = 14,537
SPX – 10 = 1541
NAS – 38 = 3166

10 YR YLD - .02 = 1.69%

OIL + 1.68 = 88.36
GOLD + 14.60 = 1393.10
SILV - .03 = 23.38

Emergency teams went house to house through mounds of debris in a devastated four-block area of West, Texas; that's the name of the town – West; it's near Waco. An explosion at a fertilizer plant leveled a big part of the town and there are 15 dead and perhaps 160 injured. Officials said there was no initial indication that the blast was anything but an industrial accident, but it is an ongoing investigation. Maybe someone will look into the wisdom behind building a fertilizer plant right next to a residential area and even a nursing home.

Meanwhile, an interfaith service was held in Boston today to mourn the victims of the bombing. It was actually a very good service. Several dignitaries spoke, including President Obama, who promised that the perpetrators will face justice. But it is an ongoing investigation. The FBI has released pictures of a couple of guys carrying large backpacks; they think they might be suspects in the bombings.

Meanwhile, the FBI has arrested a man in Mississippi for mailing letters laced with the poison ricin. The suspect is an Elvis impersonator. I can't make this stuff up.

We’re seeing economic growth cool off a little bit after a strong start to the year. The index of leading economic indicators declined 0.1% in March. The LEI looks forward about 3 to 6 months; the biggest challenges seem to be weak consumer demand and slow income growth.

Meanwhile, the Philadelphia Fed’s factory index declined, reflecting a drop in orders that prompted managers to cut back on hiring and inventories.. Manufacturing activity in the region is still growing, it's just sluggish growth.

This week, the IMF released new economic forecasts lowering its estimates for global growth, while also citing diminished risks of a severe financial disruption in Europe or sharp fiscal policy adjustment in the United States. Today, at the spring meeting of the World Bank and the IMF in Washington, Christine Lagarde, the director of the IMF gave her blessing to recent actions taken by the Bank of Japan to help bolster growth. She also said the European Central Bank had more room to aid a recovery in Europe.

But it was cautious support for more easing. The IMF still believes unconventional monetary policies meant to prop up economic growth around the world are still needed now, but they also raise the risk of creating new bubbles that would jeopardize financial stability. Policy reforms are needed before any problems created by central bank stimulus start to arise.

At a separate news conference, Jim Yong Kim, the head of the World Bank, called for eradicating extreme poverty by 2030 and for fostering income growth for the bottom 40 percent in every country.

Meanwhile, the argument for austerity has suffered a devastating blow. Carmen Reinhart and Kenneth Rogoff, two economists, of the University of Maryland and Harvard respectively, wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify austerity policies. The authors purported to show that once a country's gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad. Cut budgets now or crash your economy. Problem is that their math didn't add up, and some other economists went back and checked the math, and Rogoff and Reinhart now say there was a problem with the Microsoft Excel spreadsheet; maybe some other problems they haven't taken credit for yet.

When properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2%, not -0.1% as published in Reinhart and Rogoff. It kind of changes the whole debate.

The House of Representatives has passed legislation designed to help companies and the government share information on cyber threats, though concerns linger about the amount of protection the bill offers for private information. US authorities have recently elevated the exposure to Internet hacks and theft of digital data to the list of top threats to national security and the economy. This is the second go-around for the Cyber Intelligence Sharing and Protection Act after it passed the House last year but stalled in the Senate after President Obama threatened to veto it over privacy concerns. The White House repeated its veto threat if further civil liberties protections are not added. Some lawmakers and privacy activists worry that the legislation would allow the government to monitor citizens' private information and companies to misuse it.

Too late.

Every time you mindlessly give a sales clerk your zip code at checkout, you're giving data companies and retailers the ability to track everything from your body type to your bad habits.

That five-digit zip code is one of the key items data brokers use to link a wealth of public records to what you buy. They can figure out whether you're getting married (or divorced), selling your home, smoke cigarettes, sending a kid off to college or about to have one.

Such information is the cornerstone of a multi-billion dollar industry that enables retailers to target consumers with advertising and coupons. Yet, data privacy experts are concerned about the level at which consumers are being tracked without their knowledge -- and what would happen if that data got into the wrong hands.

Acxiom, one of the biggest data brokers in the business, claims to have a database that holds information -- including one's age, marital status, education level, political leanings, hobbies and income level -- on 190 million individuals.Major competitors, like Datalogix and CoreLogic, tout similarly vast databases.

In most cases, all that is needed to match the information these data brokers compile with what you buy is your full name — obtained when you swipe a credit card — and a zip code.

Once a retailer identifies you, it can track and analyze your spending behaviors and background in order to predict what you might buy next. In the data world, this is often called predictive analysis or predictive modeling. Some retailers sell this information back to the data brokers which then sell it to other companies -- including retailers, banks, credit card issuers, airlines, hotels, auto manufacturers and many, many more -- in a seemingly never-ending cycle.

Currently, data brokers are required by federal law to maintain the privacy of a consumer's data only if it is used for credit, employment, insurance or housing. But there are some gray areas. Medical records and prescription purchases are off limits, but data brokers are allowed to track purchases of over-the-counter drugs and other related medical items, as well as web searches and medical surveys that consumers fill out online

I hope you've heard some of the talk about the foreclosure settlement fiasco. The quick rundown is that the Office of the Comptroller of the Currency and the Federal Reserve tried to take over an investigation into foreclosure abuses by the big banks and mortgage servicing companies. They looked into abuses such as foreclosing on active duty military, forged foreclosure documents, robo-signing, foreclosing on the wrong houses, foreclosing on people who were paying their mortgages on time, and other little problems. But it was too much work for the regulators, so they told the banks to hire outside consultants to review the mortgage files one by one. But it was too much work for the outside consultants, even though they were paid $2 billion to do the review. So, after two years, the regulators just decided to guess; they said there were probably 4.4 million homeowners who had been abused and they should be paid $3.6 billion. Some would be paid up to $125,000 for the big messes, but most homeowners would get a check for $300 or less.

The first round of the settlement checks was mailed last week; 1.4 million checks for abused homeowners, or maybe not abused; nobody is really certain because they never finished reviewing the files; but they sent the checks anyway. And now the checks are bouncing. Not all of them; just a few. The company hired to distribute the checks says it has corrected the problem.

Meanwhile, the journal, Science reports that NASA scientists have discovered two planets which they think could support life. The planets are very, very far away; 1,000 light years; part of a five planet solar system. The host star -- the equivalent of Earth's sun -- takes the name Kepler-62, where the individual planets are designated by letters thereafter. The planets are the right size and the right distance from the host star, and the scientists think they might have polar caps and water and all the other stuff of life; although probably no Elvis impersonators.

When former Governor Arnold Schwarzenneger signed an executive order in 2007 creating the first-in-the-nation rule ordering reduced carbon emissions for cars and trucks, the oil industry seemed to be on board. Chevron helped write the rules. Chevron's biofuels chief spoke at the signing ceremony and pledged to develop biofuel replacements to gasoline. Two years ago, California started phasing in the mandate aimed at global warming. Now Chevron is leading a lobbying campaign to undercut the mandate they helped to write.

Chevron, the second largest US oil company quietly shelved most of its biofuels work in 2010; they just didn't see enough profit potential. The oil companies can make a profit making advanced biofuels, they just can't make as much profit as they would like.

ExxonMobil, the largest US oil company, has also retreated from a biofuels effort. It cut funding for research into making fuel from algae. Now ExxonMobil and Chevron are pressing California to postpone the low-carbon standard, and they are lobbying to stop other states from following California. The Big 2 oil giants acknowledge that carbon emissions contribute to global warming but they claim the mandate would push up prices at the pump, and the technology isn't currently available and would be expensive to produce.

Back in 2007, Chevron committed to a plant to extract biofuels from forest-based biomass; pretty much using the parts of the tree that don't get cut into lumber. The researchers developed a process, known as solvent liquefaction, that could produce fuel on a commercial scale at a cost of about $2.18 per gallon, back when crude oil was around $70 a barrel. The plants were expected to generate profits around 5 to 10%, but that's not quite the profit margins for oil and gas exploration, so they shut down the venture three years ago.

So, the big oil companies have shifted from research to lobbying against low-carbon fuels, including a lobbying group called Fueling California, which has received hundreds of thousands of dollars from Chevron.

This year, 30 bills to kill or weaken renewable rules have been considered in 16 states. None have passed so far. California is the front line, and the state is outgunned. Chevron had its second most profitable year in 2012, posting net income of $26 billion on $222 billion in sales, the vast majority from petroleum. California’s revenue in fiscal year 2012 was $87 billion.

Emission controls enacted in California since 1966 have been models for federal car-pollution and miles-per-gallon rules. The state’s 32 million vehicles consume 15 billion gallons of gasoline each year, and emit 160 million metric tons of greenhouse gases annually, 36 percent of all such emissions in California. The state began to phase in the low-carbon standard in 2011. When it’s fully in effect in 2020, greenhouse gas emissions associated with transportation fuels are supposed to be 10 percent less than they were in 2010. Right now, the state is on track to achieve the goal, but the Air Resources Board, Chevron, and ExxonMobil won't disclose how the companies are complying with the rule. It could just be that Californians are driving less, or driving more fuel efficient and cleaner burning autos.

Some of the main arguments against the California low-carbon standard have been that it could raise the state's already high gasoline prices, force refiners out of business and even harm the economy by requiring the importation of more foreign oil. But it turns out that California's railroad infrastructure, including planned West Coast terminals, will increase the logistical capacity to transport oil to California from the Bakken oil field in North Dakota. That creates a sidebar play for energy by looking at the railroad companies, but it also means that the 2020 standards aren't a death knell for California refineries. The oil from the Bakken field is cheaper than the average barrel price in the US, and Bakken crude has been given a relatively low carbon intensity rating. The use of Bakken crude in California should exert downward pressure on gasoline prices in California, and Bakken crude is considered clean enough to help the state reach its 2020 low carbon emissions standard.

The USC Schwarzenegger Institute recently hosted a forum on Climate Change. California is uniquely vulnerable to rising sea levels. It's estimated that the past decade was 2 degrees warmer than it had been historically, and it was the hottest the Southwestern US has ever experienced. It's estimated the temperatures could rise 6 to 9 degrees over the next 50 years, if we do nothing.

And that looks like the current path, or at least the current path is next to nothing. This probably isn't the way things were expected to turn out in 2007; the idea of slightly less dirty fossil fuels is not nearly as good as truly clean alternatives, but until the economics change, that's what we'll be stuck with. And that leaves the question of what we've learned. We've learned that the big oil companies will break their promises in the pursuit of higher profit margins, and this should be remembered as new standards are considered or as new oil fields, such as the Monterrey Shale fields are explored.

Tuesday, September 4, 2012 - Review of the Economic News

Review of the Economic News

DOW – 54 = 13,035
SPX – 1 = 1404
NAS + 8 = 3075
10 YR YLD +.02 = 1.58%
OIL +.26 = 95.56
GOLD + 3.60 = 1697.20
SILV + .26 = 32.46
PLAT  + 21.00 = 1576.00

The Institute for Supply Management manufacturing index fell to 49.6% in August, lower than the 49.8% in July and the worst reading since July 2009. Readings below 50% indicate contraction in manufacturing companies surveyed. It appears to be part of a global trend; there has been a slowdown in manufacturing activity in Asia and Europe. Only eight of 18 industries as tracked by ISM were growing in August, led by printing, primary metals and food. August’s new-orders index fell to 47.1% from 48.0% in July; this points to manufacturers ratcheting down production activity, and that might also lead to a slowdown in hiring. The employment index fell to 51.6% from 52%; still positive but heading in the wrong direction.

Another ISM survey of the services sector — things like banking, health care and entertainment — is also expected to show an economy plodding ahead. The services index is forecast to edge down to 52.5 from 52.6.

The monthly jobs report is always an important chunk of economic data, and this Friday's report takes on a little added significance because the Federal Reserve FOMC will be meeting next week to determine policy, and most likely announce something like QE3. It's expected the economy added about 120,000 new jobs in August. While that’s enough to keep pace with the natural expansion of the labor force, it’s far too weak to reduce the 8.3% unemployment rate. And the chances that hiring will accelerate in the final months of the year appear to be fading. There doesn't appear to be any great catalyst to ignite job growth – with the exception of possible action from the Fed; so in a twisted way, a bad jobs report on Friday could serve as justification for Federal Reserve action to spark the economy.

Moody's Investors Service has changed its outlook on the Aaa rating of the European Union to “negative,” warning it might downgrade the bloc if it decides to cut the ratings on the EU's four biggest budget backers: Germany, France, the UK, and the Netherlands.  So, Mario Draghi, the president of the European Central Bank, has been claiming he will do whatever it takes, and this Thursday the ECB Governing Council will be meeting and they are widely expected to provide details of a new debt-buying plan, something that might put a cap on sovereign bond yields.

And then Germany will be determining whether they are constitutionally willing to go along with any deal, and today Moody's simplified the case. Still a new survey shows only a quarter of Germans think Greece should stay in the euro zone or get more help from other countries.  Of course, there is a strong chance the ECB will announce a rate cut and hold back on announcing a bond buying program. Both the ECB meeting and the Federal Reserve meeting hold great potential for major disappointment.

Moody's is only getting around to an obvious situation. The Euro-economies are crumbling. Spain is starting to go the way of Greece. There is a run on the Spanish banks. In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks, an amount equal to 7 percent of the country’s overall economic output; doubts grew about the durability of Spain’s financial system. 

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight. More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent. According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted.

Apple became the world’s most valuable-ever company two weeks ago. It is worth $624 billion, more than all the listed companies in Portugal, Ireland, Greece and Spain together.

General Motors reported auto sales rose 10% in August as all four major brands posted growth, led by Buick. Chrysler reported its US auto sales were up 14% as the company reported broad growth across its brands. Meanwhile, Ford's US new-vehicle sales improved 13% from a year ago on strong growth in utility-vehicle sales.

CoreLogic reports home prices nationwide, including distressed sales, increased on a year-over-year basis by 3.8 percent in July 2012 compared to July 2011. This was the biggest year-over-year increase since August 2006. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in July 2012 compared to June 2012. The July 2012 figures mark the fifth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.3 percent in July 2012 compared to July 2011.

Construction spending fell in July from June by the largest amount in a year, weighed down by a big drop in home improvement projects. There are two ways to read this; one – we have run out of money for the improvements, two – we have done everything on the honey-do list. I'm going with the second reason, based upon personal experience.

The Commerce Department said  overall construction spending declined 0.9 percent in July, but spending on construction of single-family homes and apartments increased again, a hopeful sign for the modest housing recovery. It followed three months of gains, which were driven by increases in home and apartment construction.  The June decline left spending at a seasonally adjusted annual rate of $834.4 billion. That's nearly 12 percent above a 12-year low hit in February 2011. Construction activity is roughly half of what might be considered to be healthy.

There is more fallout from the Libor rate-rigging scandal. Reuters reports Barclays has notified FINRA that a top executive and trader have been fired for their roles in the scandal. The regulatory filings disclosing the reasons for the two departures are not normally made public and Barclays did not specifically comment on the terminations, but they issued a statement that said:  "the firm undertook a thorough and robust internal disciplinary process promptly following the regulatory review which was completed in late July."

The dismissals reveal that even after settling with authorities, the full extent of Barclays' role in the rate-rigging scheme is still playing out. Lawyers familiar with the investigation say federal prosecutors continue to reach out to individuals to gauge interest in cooperating or taking pleas. They said US prosecutors are expected to begin making decisions in early September about whether to charge individual traders.

Also, at least a dozen US private equity firms have been subpoenaed by the New York state attorney general as part of a probe into whether a widely used tax strategy that saved these firms hundreds of millions of dollars is proper.  Among the firms that were subpoenaed are Bain Capital, KKR & Co, TPG Capital, Apollo Global Management, and Silver Lake Partners. Bain was once headed by Mitt Romney.  The subpoenas, which were sent out in July, seek documents related to the conversion of fees these private equity firms charge for managing investors' assets into fund investments. This means the investigation predates the release last month of confidential Bain fund documents by Gawker that revealed such a practice.

The practice is known as a "management fee waiver." As fund investments, the income would be taxed as capital gains, which attract rates around 15 percent. Without the conversion, the fees would be ordinary income, taxed at rates around 35 percent. The tax probe is being conducted out of the New York Attorney General's Taxpayer Protection Bureau, which was set up in early 2011. According to the AG's website, the agency was established "to root out fraud and return money illegally stolen from New York taxpayers at no additional cost to the state".