Thursday, September 12, 2013 - Going Interstellar

Going Interstellar

by Sinclair Noe

DOW – 25 = 15,300
SPX – 5 = 1683
NAS – 9 = 3715
10 YR YLD - .01 = 2.91%
OIL + .02 = 108.62
GOLD – 44.80 = 1322.00
SILV– 1.48 = 21.84

The war hasn't started..., yet.

The peace talks are underway in Geneva between Secretary of State Kerry and his Russian counterpart Lavrov. In a news conference ahead of the Geneva talks, Foreign Minister Lavrov said the resolution of the chemical weapons issue in Syria would make any military strike by the United States unnecessary. The UN has confirmed it has received documents from Syria on joining the Chemical Weapons Convention, a key step in the Russian plan. Syria's president said it would submit arms data one month after signing, but Mr Kerry has rejected that time-frame.

Even before the talks, Russian President Vlad Putin weighed in with an op-ed in the New York Times arguing that a military strike risked “spreading the conflict far beyond Syria’s borders” and would violate international law, undermining postwar stability. Putin says poison gas was used in Syria but not by Assad; he also didn't say who sold the poison gas to Syria; he talks about peace and democracy; and he finishes the editorial by saying “We are all different, but when we ask for the Lord’s blessings, we must not forget that God created us equal.” It's all quite bizarre, to have Putin lecturing the US on democracy and morality and God.

The good news is that the war hasn't started..., yet.

And that means we can focus on domestic problems, like shutting down the government. Lawmakers are tied up in knots over increasing the debt ceiling this fall, but they eventually will; eventually. The only question is how messy the process will be. They really don't have much choice. Even if they shut down government for a while, they can't make the stunt last long.  A default would hurt the economy and markets, and most lawmakers know this. That's why they regularly raise the debt ceiling before it comes to that. In fact, since 1940, Congress has effectively approved 79 increases to the debt ceiling. That's an average of more than one a year.

Despite some politicians' incorrect assertions, raising the debt ceiling does not give the government a "license to spend more." It simply lets Treasury borrow the money it needs to pay the bills in full and on time. Those bills are for services already performed and entitlement benefits already approved by Congress. In other words, it's a license to pay the bills the country incurs as a result of past decisions made by lawmakers from both parties over the years. It sounds like it should be a straight forward deal. It's not. It's a chance to position for whatever idea a politician can position for. Things will likely get ugly before they get uglier. That's about the only thing we can count on from Congress.

Believe it or not, Greece's job situation is getting worse. Greece's jobless rate hit a record high of 27.9 percent in June, and was more than twice the average rate in the euro zone of 12.1 percent in July.  The unemployment rate has more than tripled since 2008, the start of a six-year recession which has wiped out about a quarter of Greece's economy. Joblessness is a major headache for the government as it scrambles to hit fiscal targets and carry out structural reforms demanded by its international creditors.

Meanwhile, an independence rally in Catalonia drew more than one million. That's a lot of people. Greece's unemployment rate is now higher than Spain's

If you plan on buying one of Apple's new iPhones, you may want to head to Wal-Mart. Wal-Mart announced it will carry the new devices and sell them at prices lower than Apple and other retailers. Wal-Mart said it will carry 16-gigabyte versions of the iPhone 5c and the iPhone 5s. The iPhone 5c will be available for $79 ($20 cheaper than its regular price) with a two-year contract from AT&T, Verizon or Sprint. The iPhone 5s will be available for $189 ($10 cheaper than its regular price) from the same carriers.

It's strange when Wal-Mart can get a better deal from Apple than the Apple stores.

A Dutch designer thinks the way people currently buy electronics is inherently wasteful. As soon as a new device comes out, the old one is tossed in the garbage or put on the shelf to collect dust. He's introduced a new phone called PhoneBloks, a smartphone that has detachable components on its front and back so that everything from the processor to the camera can be easily upgraded without discarding the rest of the phone. The entire contraption is held together by a pegboard-style base, with a screen -- also replaceable -- mounted on the front. It's kind of like lego-blocks for a phone.

If you're looking for a good deal on airline tickets; you might want to keep an eye on United Airlines. For about 15 minutes today, they offered $0 fares plus $5 in tax for many domestic flights. That worked out to $10 flights between Washington DC and Hawaii, while others scooped up over a dozen tickets to destinations all over the country.

And then, just as quickly as the airfares showed up, United’s reservation system slammed to a halt, reporting “United.com is currently undergoing maintenance  Flight search and booking are unavailable for all flights.” They say it was a computer glitch.

California lawmakers are poised to raise the state's minimum wage by 25% -- a move that would make the state's hourly workers among the most highly paid in the country. Millions of workers would see their hourly pay jump from $8 to $9 on July 1, 2014 and to $10 on Jan. 1, 2016, under legislation which received strong support this week from the state's Governor Jerry Brown and other legislative leaders. "The minimum wage has not kept pace with rising costs," Brown said in a statement. "This legislation is overdue and will help families that are struggling in this harsh economy."

A survey by Duke University and CFO Magazine  of more than 500 Chief Financial Officers, shows they expect to boost full-time hiring by nearly 1.8% next year, which represents a slight increase from this year. The results indicate that despite worries over President Obama's health care reform law, a recent tendency on the part of companies to hire more part-time workers may be turning around; so far in 2013, companies have hired more than four times the amount of part-time workers than full-time workers, while in 2012 the opposite was true.

New figures on wealth inequality from economists Thomas Piketty and Emmanuel Saez show that the top 10 percent earned more than half of our nation's income. That hasn't happened since they started tracking these figures a century ago.

What about the bottom 99 percent? After being left out of the post-crisis boom, they finally saw an increase in their earnings last year, but it was less than one percent. By contrast, income for the top one percent rose twenty percent. The really rich, the top 0.01 percent, saw their income soar by more than 32 percent.

As the Economic Policy Institute recently observed, "The median worker saw an increase of just 5.0 percent between 1979 and 2012, despite productivity growth of 74.5 percent--while the 20th percentile worker saw wage erosion of 0.4 percent .

Shareholders of Dell approved a proposal led by company founder Michael Dell to take the computer company private. The proposal, worth about $25 billion, won an unspecified majority of votes from the holders of Dell stock. The buyers consortium sweetened the deal in recent weeks in response to criticism from activist Carl Icahn and others, who had complained their offer undervalued the company.

As Dell goes private, a couple of companies are going public. Hilton Worldwide, which is owned by Blackstone Group, could be valued at $30 billion. Blackstone does not intend to issue so many shares that it loses control of Hilton.

Twitter is going public. It's could be the biggest IPO since Facebook, and hopefully they learned a lesson from that. The IPO announcement came in the form of a tweet. The details of Twitter’s filing are confidential, thanks to the JOBS Act.

Designed to foster more IPOs for “emerging growth” companies, the IPO provisions of the law have become a way for most companies that want to go public do so with less investor scrutiny. The new rules have cut the time that all that information is available to the public to three weeks before the roadshow.

And finally, scientists now have strong evidence that NASA's Voyager 1 probe has crossed the heliosphere, the magnetic boundary separating the solar system's sun, planets and solar wind from the rest of the galaxy. The first man-made object to leave the solar system.

"In leaving the heliosphere and setting sail on the cosmic seas between the stars, Voyager has joined other historic journeys of exploration: The first circumnavigation of the Earth, the first steps on the Moon," Ed Stone, chief scientist on the Voyager mission said "That's the kind of event this is, as we leave behind our solar bubble."

The twin spacecraft Voyager 1 and 2 were launched in 1977, 16 days apart. Voyager 2 will exit the solar system in about 2 billion more miles. Voyager 1 has a long way to go before the next stop. The probe will fly near a star in about 40,000 years. But as of today, human-kind has gone interstellar. 

Tuesday, February 05, 2013 - Cutting to Spite Ourselves

Cutting to Spite Ourselves

by Sinclair Noe

DOW + 99 = 13,979
SPX + 15 = 1511
NAS + 40 = 3171
10 YR YLD +.04 = 2.02%
OIL + .47 = 96.64
GOLD – 1.40 = 1674.00
SILV +.06 = 31.92

The Congressional Budget Office released revised budget projections that show the federal deficit will drop to $845 billion this year, the first time during Obama's presidency that the red ink would fall below $1 trillion. The budget office also said the economy will grow slowly in 2013. The reason for the slowdown is a tax increase in January and spending cuts coming in the next couple of months.

A few minutes after the CBO report, President Obama spoke to the press and said those spending cuts would damage the economy and must be avoided. He asked Congress for a short-term deficit reduction package that will delay deeper cuts past the automatic start date of March 1, also known as the sequester.

The automatic cuts are part of a 10-year, $1 trillion deficit reduction plan that was supposed to spur Congress and the administration to act on long-term fiscal policies that would stabilize the nation's debt. Though Congress and the White House have agreed on about $2.6 trillion in cuts and higher taxes since the beginning of 2011, they have been unable to close the deal on their ultimate goal of reducing deficits by about $4 trillion over a decade.

If the automatic cuts are allowed to kick in, they would reduce Pentagon spending by 7.9 percent and domestic programs by 5.3 percent. Food stamps and Medicaid would be exempt, but Medicare could take up to a 2 percent reduction, under the plan.

White House aides say the president's plan for long-term deficit reduction would increase tax revenue by about $600 billion to $700 billion over 10 years as well as reduce mandatory health care spending, primarily in Medicare, by about $400 billion over the next decade. It would also change an inflation formula that would reduce cost-of-living adjustments for beneficiaries of government programs, including Social Security. Republicans have called for a more comprehensive overhaul of government entitlement programs.

For now, the President is asking for a short-term deficit reduction package of spending cuts and tax revenue that will delay the sequester, and give Congress time to chip away at the problem.

Part of what we should have learned is that austerity is not the answer. Europe has shown that. When economists talk about the role of government in economic recovery, they often focus on the question of whether or not we need more economic stimulus. Government participation in the economy does not just stimulate private sector activity.  Government is itself a large, diverse and important sphere of economic enterprise.  Our federal, state and local governments produce and deliver important goods and service, things that people want and need, and that they have asked their representatives to create and maintain.   And governments employ millions of people in income-earning positions to carry out all of this production.  Ordinarily, we would expect that as a society grows, government will grow commensurately along with everything else.  As our population grows and private enterprises proliferate, we need more schools and teachers, more courthouses and police stations, more public parks, more inspectors and regulators, more paved roads and street lights, and more government clerical workers.  So while it is true that government spending also stimulates additional economic activity in the private sector – just as any economic enterprise stimulates economic activity in the other enterprises it touches and affects – it is also true that the public enterprises governments oversee and the tasks governments perform are all by themselves an important component of overall economic activity.

The part of government spending that is devoted to purchases made in the production of goods and services is called “consumption and gross investment” , or CGI, and it amounts to about 15% to 20% of GDP.  Government consumption and gross investment (CGI) can be contrasted with other forms of government spending that do not contribute to GDP, such as transfer payments to the public under social insurance programs like Social Security and unemployment insurance programs.

CGI started to dry up after the stimulus package started to wear off in 2011, and public enterprise also started to decline. Paul Krugman asked: “How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower. So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent.”

For the past couple of years we've heard bipartisan talk about grand bargains, fiscal cliffs, sequestration, and debt ceilings, with different strategies granted, but with a common theme to shrink government.

 Obama actually told us government must shrink because we are “out of money”.  But notice how absurd it would be if the leaders of private sector industry were to say that the private sector economy has to shrink because it is out of money.  Everybody recognizes that if our economy is to grow and progress, private enterprise needs to spend and invest, and that the means of financing are created along with the initiatives that are financed.   In the case of government, the financial constraint is even less relevant, I mean they print the currency, so there are no real constraints due to a lack of money.

Yesterday I told you to look for a lawsuit against S&P. As expected, the government is seeking more than $5 billion in a civil lawsuit against Standard & Poor's and parent company McGraw-Hill over mortgage-bond ratings, marking the first federal enforcement action against a credit rating agency over alleged illegal behavior tied to the recent financial crisis. S&P reportedly had a chance to settle for about $1 billion, but they felt the price was too high. Attorney General Eric Holder said at a news conference that S&P misled investors, causing them to lose billions, and that its ratings were affected by "significant conflicts of interests." He said that while analysts raised red flags as early as 2003, S&P executives ignored questions about ratings.

In the filing Monday, the government said: "Considerations regarding fees, market share, profits, and relationships with issuers improperly influenced S&P's rating criteria and models." In other words, they sold their ratings to the highest bidder and didn't give a damn about honesty. So, the question is why did it take so long to bring civil charges against the ratings agency?

Well, the lawyer defending S&P says the government intensified its investigation after S&P downgraded the government's credit rating in 2011, following the debt ceiling dysfunction. I'll give the lawyer credit for misdirection, if nothing else. S&P will likely use the same defense the industry has been using for years to explain the seemingly misguided ratings -- their right to free speech. S&P and other credit rating agencies have claimed that their ratings were merely free speech and are therefore protected under the First Amendment. 

There is a paper trail of damaging emails. You've heard about this before. And when those emails are read aloud in court, the best hope will be to make jurors think that maybe it's just a government vendetta. But listen to some of the emails:

In an April 2007 email, an analyst quoted in the lawsuit told an investment banking client that the priorities inside S&P were not centered on providing accurate ratings, but rather were focused on not “p*ssing off too many clients and jumping the gun ahead of [competitors] Fitch and Moody’s.”

The banker emailed back: “I mean come on we pay you to rate our deals, and the better the rating the more money we make?!?! What’s up with that? How are you possibly supposed to be impartial????”

Another S&P analyst wrote: "We rate every deal … it could be structured by cows and we would rate it.”

The email complaints about the integrity of the ratings were so numerous that S&P management directed analysts to stop sending complaints via email. But the emails continued. They wrote about allowing bankers to have greater input into the ratings process; let the bankers help make the grades for the products they were selling; and all designed to increase revenue for S&P. One email that seems particularly damaging came from a director in charge of rating CDOs in late 2006. He wrote: “this market is a wildly spinning top which is going to end badly.”

The paper trail is long and extremely damaging. So, what does it take to come up with criminal charges against a large financial institution? Seriously, what does it take to get a criminal charge started?

Today, Barclays, the British bank, announced it is provisioning another $1.3 billion in its Q4 results to settle claims it mis-sold financial products, bringing total provisions to about $3.5 billion. And UBS, the Swiss banking giant, announced a a $2.1 billion dollar fourth quarter loss, with $1.5 billion of that coming from fines for manipulating Libor interest rates. The Libor rate affects the prices of hundreds of trillions of dollars of financial products; everything from credit cards to mortgages to municipal bonds. Basically, the price of everything in the world the price is somehow connected to Libor. And these guys were monkeying around with this for individual profit. But nothing illegal happened.

And finally, Dell Computer will be taken private by founder Michael Dell and Silver Lake Partners in a $24.4 billion dollar deal. It works out to about $13.60 per share, roughly one-quarter Dell's all-time high 12 years ago. Still, it's the biggest buy out in years.