Monday, August 19, 2013 - Not Attending Jackson Hole

Not Attending Jackson Hole

by Sinclair Noe

DOW – 70 = 15,010
SPX – 9 = 1646
NAS – 13 = 3589
10 YR YLD + .05 = 2.88%
OIL - .51 = 1365.20
GOLD – 11.60 = 1366.60
SILV - .07 = 23.29

It don't know where Ben Bernanke is. I know he is not scheduled to be in Jackson Hole, Wyoming this week. Most of the Federal Reserve policy makers will be at Jackson Hole for the annual economic get-together to debate whether the Fed should pull back from its $85 billion dollar per month asset purchase plan known as Quantitative Easing, also known as QE, also known as Stock Market Rocket Fuel. QE has lifted the markets to record highs this year, and talk of exiting QE has dropped the markets from highs the past couple of weeks.

Egypt continues to slip into a dark place as the military continues its bloody crackdown on civilian protesters. Just don't call it a coup; that specific designation would require an end to foreign aid. Egypt has been one of the biggest recipients of US foreign aid over the years. Egypt gets about $1.3 billion a year in aid. The money is not sent directly to Egypt; it goes to defense contractors who then send military equipment and expertise to the Egyptian military.

The biggest recipients of foreign aid to Egypt are Lockheed Martin, pulling in more than a quarter billion a year, followed by several others pulling in tens of millions, including DRS Technologies, L-3, Deloitte & Touche (apparently to keep track of everything), Boeing, Raytheon, and many more. The products include F-16s, surveillance equipment, Apache helicopters, Stinger missiles, motors, spare parts, and even teargas grenades.

The latest news out of Egypt is that a court has ordered the former dictator, Hosni Mubarak be released from custody. Mubarak has been detained on a variety of charges since his ouster in 2011. The courts say let him go. Not today, but maybe in a couple of weeks. Don't hold your breath. Actually, the court order means more volatility for Egypt; probably more protests; more protests means more teargas, so if you were in Cairo – hold your breath.

You may recall that when the Arab Spring began, Mubarak used some of the military equipment against protesters, including teargas grenades that proclaimed “Made in the USA”. This turned out to be a very bad marketing strategy. The Muslim Brotherhood then won the election and you have to wonder if the anti-US propaganda was a part of that. The Muslim Brotherhood turned out to be very bad at governing Egypt; the military, equipped with US made equipment, has now taken over the government. Just don't call it a coup.

You may also recall that one of the many factors in the Arab Spring was the release of Wikileaks diplomatic cables showing widespread political corruption. Wikileaks has just created its own “insurance” policy; sort of. Wikileaks is the website founded by Julian Assange; the site has released huge amounts of classified documents, also known as data dumps, detailing all sorts of governmental and diplomatic shenanigans. Assange has sought asylum at the Ecuadorian Embassy in London. WikiLeaks has released about 400 gigabytes' worth of mysterious data in a series of encrypted torrent files called "insurance." And no one can open it. File encryption means that the data is hidden and no one can see what's in the shared files without a key to unlock them, which hasn't been publicly released.

What is the meaning of calling it “insurance”? Is it meant to protect Bradley Manning (who has just been sentenced to 60 years), Edward Snowden, Julian Assange, or someone else? We don't know. The bigger question is what is in the “insurance” data dump? We don't know. It might be the identities of every secret agent working for the US around the world; it might be incriminating video; or everything that Edward Snowden had collected from his job with the NSA; it might be nothing more than a mumbo jumbo of code. It might even be the long anticipated data dump on the wrongdoing by the big banks.

For JPMorgan it appears bad habits, potentially illegal habits can't be broken. Last week, two junior level traders were criminally charged in connection with the London Whale losses. The bank is under investigation by eight agencies; add one more. The US Securities and Exchange Commission (SEC) is investigating whether JPMorgan's Hong Kong office hired the children of China's state-owned company executives with the express purpose of winning underwriting business and other contracts.

US law does not stop companies from hiring politically connected executives, but hiring people in order to win business from relatives can be bribery, and the SEC is investigating JPMorgan's actions under the US Foreign Corrupt Practices Act. If it's not one thing it's another.

The big banks seem to get away with..., everything. That's not always the case with the hedge fund managers; they tend to be viewed in a slightly different light; they are not considered systemically important; Bernie Madoff was sent to the big gray house. Steven Cohen saw his hedge fund charged, although Cohen wasn't personally charged. Today, the SEC announced a deal against Phil Falcone which includes an $18 million penalty, and Falcone must admit wrongdoing, and he will be banned from the securities industry for at least 5 years.

In June 2012, federal regulators had accused Falcone of manipulating the market by improperly using $113 million in fund assets to pay his own taxes and to favor some customer redemption requests secretly over others, among other things. His actions, “read like the final exam in a graduate school course in how to operate a hedge fund unlawfully.”

Falcone and his Harbinger hedge fund entities engaged in serious misconduct that harmed investors, and the SEC says their admissions leave no doubt that they violated the federal securities laws. For Falcone, who is currently engaged in two battles over LightSquared, a broadband company in bankruptcy he is fighting to maintain control over, the settlement appeared to be a positive turn of events. He struck a more upbeat note than the regulator saying he was, “pleased that we were able to reach a settlement to resolve these matters with the S.E.C.”

Following the financial crisis, the Federal Reserve, which is actually a regulator of banks; we forget that some times; the Fed, in addition to its other mandates of price stability and maximum employment, the Fed regulates banks, even though they don't really have their heart in it. The Fed in the role of regulator is kind of like a Pope who doesn't believe in religion. Anyway, following the financial crisis, the Fed started conducting stress tests on the big banks. They graded on a curve.

These annual financial health checkups continue and today the Fed described some significant shortcomings in the banks’ responses to the so-called stress tests. Despite the severity of the recent housing bust, the Fed said some banks weren’t taking into account the possibility of falling house prices when valuing certain mortgage-related assets for the tests. In other cases, banks assumed they would be strong enough to take business away from competitors in stressed times.

The Fed appeared most concerned that banks were applying the tests too generally. In other words, such banks didn’t pay enough attention to the risks that were particular to their assets and operations. Banks excluded material that was relevant to the bank’s “idiosyncratic vulnerabilities.” Under the tests, the banks have to assume weakness in the economy and turmoil in the markets, and then calculate the losses they would suffer under such conditions. The banks then subtract those losses from capital, the financial buffer they maintain to absorb losses. If the assumed losses cause capital to fall below a regulatory threshold, the banks effectively fail the test.

As part of the stress tests, banks have to carefully lay out capital plans to show regulators that they would have the strength to operate through tough times. The Fed says the banks are, in essence just trying to pass the test without really addressing the problems.

The stress tests have created tension between the Fed and the banks. One reason is that the tests can determine how much a bank is allowed to pay out in dividends or spend on stock buybacks.

President Obama is meeting with regulators today to get a status report on the progress of the Dodd-Frank reform act, the financial reform legislation that appears to have stalled after three years. This fall, the president will face a host of renewed efforts for financial reform, including housing finance reform. Just a reminder that September will mark the 5 year anniversary of the bankruptcy of Lehman Brothers, and so maybe it's time to get around to some reforms to prevent another Lehman Brothers collapse.

The Dodd-Frank law, which Congress passed in response to the meltdown, called for hundreds of new rules, including new oversight of the massive swaps market, mortgages and consumer financial products, and large nonbank financial firms. Regulators have missed deadlines on many of the most controversial requirements. The rules are about 40 percent complete. For example, the so-called Volcker rule to forbid banks from making risky trades with their own money is more than a year behind schedule, as five different agencies struggle to agree on a single rule. Despite that, the Dodd Frank act has grown while shrinking; grown from 848 pages of statutory text to 13,789 pages – more than 15 million words of regulation.

The White House meeting features the heads of major financial regulatory agencies, including the Treasury, Comptroller of the Currency, Securities and Exchange Commission, Commodity Futures Trading Commission, and the Consumer Financial Protection Bureau, among others.

Thursday, August 15, 2013 - Who's in Control?

Who's in Control?

by Sinclair Noe

DOW – 225 = 15,112
SPX – 24 = 1661
NAS – 63 = 3606
10 YR YLD +.04 = 2.75%
OIL + .41 = 107.26
GOLD + 29.60
SILV + 1.14 = 23.11

Let's start with the economic data:

The Labor Department said its producer price index (PPI) remained flat in July, surprising economists who were expecting a rise of 0.3%. Meanwhile, core prices, which exclude food and energy costs, edged 0.1% higher -- less than the 0.2% climb projected by economists. By comparison, June saw gains of 0.8% and 0.2%, respectively.

Meanwhile, the consumer price index (CPI) showed retail prices rose a seasonally adjusted 0.2% on gains for gasoline, housing, clothing and food, among other goods. Excluding energy and food, the core consumer-price index also rose 0.2%.

The core CPI increased 1.7% in July from the same period in the prior year, slightly up from June’s annual growth. Overall consumer prices have increased 2% over the past 12 months. That year-over-year growth in the overall CPI has trended higher in recent months.

Just the other day, James Bullard,  the St. Louis Fed president said he is concerned about low inflation levels, which he said will be a factor in whether the Fed will scale back its bond-buying program. Bullard said: "There has not been much indication, so far, that it has been ticking back up toward target."

Also, the number of people who applied for new regular state unemployment-insurance benefits fell 15,000 to 320,000 in the week that ended Aug. 10, hitting the lowest level of initial claims since October 2007.

Who's in control? 

The headlines at the Wall Street Journal this morning said:  "Stock and bond prices tumbled after stronger-than-expected economic data ..." The share of our national income which goes to corporate profit is the highest it's been since they started tracking it in 1929, while the share going to people -- as salary and wages -- is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.  We're becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.

Why would good news about the economy cause the stock market to fall? The sentences continues: "... raised investor anxiety about a pullback next month in central-bank support for financial markets... "

Investors had been relying on the Federal Reserve to keep pumping up the stock market's record run, but some mildly favorable economic reports raised fears that the Fed's market-friendly interventions might come to an end.

Who's in control?

Stocks had the biggest one-day percentage drop since late June; trading volume was higher than the recent averages; there were poor results and outlooks from Dow components Wal-Mart and Cisco.

Wal-Mart Stores' shares fell on a surprise decline in quarterly same-store sales and Cisco Systems shares dropped one day after the network equipment maker announced it was cutting 4,000 jobs. The Wal-Mart earnings report could be considered a macro indicator, almost a proxy for gross domestic product data. It shows that consumer spending isn't that strong yet; inflation is rising, wages are not, and unemployment is still pretty high as witnessed by the news from Cisco.

There's a conundrum in the labor market. Over the past 3 years the number of job openings has risen by almost 50% but actual hiring has gone up by less than 5%. Companies advertise job openings but they don't fill the openings. There may be several possible reasons. Some look at the possible skills gap, the mismatch between the work companies need done and the skills the workers have. Maybe that explains a few of the unfilled job openings but not all. Openings in the retail sector have doubled over the past 3 years but hiring has been flat. They can't find someone with the skills to work at JCPenney?

A second explanation is that employers are offering jobs at wages that are too low to attract good applicants. The long term high unemployment rates have put no upward pressure on wages and companies haven't adjusted their wage offers.

And yet another explanation is that the nature of the financial crisis, rooted in the housing market crash, made it very difficult for many people to move for a job, suggesting that companies respond by filling openings from within. The jobs are advertised, but they go to people already with the company. The final explanation is that companies advertise jobs without much intent to fill the jobs; they don't have to recruit; they don't have to look for talent; it comes to them, cheap and easy.

Everybody's worried about what the Fed might do, unless you followed the “Best Six Months, Worst Six Months” plan, which called for you to get out in May and stay away through October. Actually, the refined version said to get out on May 24^th. In July, that looked like a bad move, now it looks smart. Sell In May doesn't always work, and it might not work this year, but it works with enough regularity to warrant consideration. Why does it work? Go figure.

Who's in control?

More and more the answer is not who you think.

Websites belonging to the Washington Post, CNN, and Time have been attacked, apparently by supporters of Syrian President Bashar Assad. Some links on the sites were redirecting readers to the website of the Syrian Electronic Army (SEA).

The breaches have been blamed on a third-party link recommendation service that all three sites used. The SEA has hit several media companies in recent months, mostly via social media. In this attack, the group was able to manipulate links served by content recommendation service Outbrain, which has now been taken offline.

Yesterday, the New York Times website was knocked out of service, maybe it was just a celebration of the great Northeastern Blackout of 2003, which you may recall was caused by a software bug that failed to detect and respond to a power surge when a tree limb hit a power line. Yep, 55 million people cast into darkness because a tree limb was too close to a power line.

I don't know why the Times had a problem yesterday, they say it was a problem with scheduled maintenance. Maybe. They started out by tweeting the blackout. Then they started posting stories on their Facebook page.

Facebook may have been convenient, but that meant that the Times was no longer in control of its content. Facebook is not hosting this material for the sake of the Times or for people who want quality journalism. Facebook itself is an increasingly threatening competitor to the journalism industry, and it serves its own needs first.

The situation also highlighted a reality all news organizations, and all of us who rely on the web for much of what we read and say, need to understand better. Technology can be fragile. It can be hacked. And even if you don't get your news content from the web, remember that all it takes is an unpruned tree limb, and the power could be out. In other words, we all need a Plan B.

Who's in control?

In Egypt, the control appears to be tenuously hanging with the military, at a great cost. The death toll surpassed 600 today during Egypt’s bloodiest crackdown on supporters of its deposed Islamist president, as violent new protests erupted in the country and world condemnation widened, including an angry response by President Obama and calls for a suspension of European economic aid.

Egypt’s Interior Ministry warned protesters that police officers were authorized to use lethal force to protect themselves. The ministry also promised to punish any “terrorist actions and sabotage” after at least two government buildings were burned. It was easily the most violent of the three deadly suppressions since Morsi was forcibly removed from power by the armed forces six weeks ago, plunging the country into its worst crisis since the ouster of Mr. Morsi’s authoritarian predecessor, Hosni Mubarak, in the 2011 revolution.

 Mr. Obama strongly condemned the Egyptian government’s use of brute force to crush the protests and said the United States had canceled military exercises with the Egypt’s armed forces scheduled for next month. Mr. Obama also warned of further unspecified steps if Egypt’s interim leaders continued down what he called a “more dangerous path.”

But he said nothing about cutting the $1.3 billion in annual military aid that the United States provides to Egypt and acknowledged that the United States had historically regarded the country as a friend and a “cornerstone for peace in the Middle East.”

In Europe, some officials called for a suspension of aid by the European Union, and at least one member state, Denmark, cut off funds.

So, to recap. The military staged a coup. The civilian regime was a façade. The military's attempt to destroy the Muslim Brotherhood guarantees a violent future, likely including terrorism and perhaps ending in civil war. Despite having dumped $75 billion worth of "aid" into Cairo's coffers over the years, Washington has no "leverage."

Yet the Obama administration continues to mouth meaningless platitudes. President Barack Obama said that the violence "must stop." To make that happen he said the US was pulling out of planned joint military maneuvers with Egypt. Yea, that's not going to get it done.

Who's in control?

Wednesday, August 14, 2013 - Gripped by Euphoria

Gripped by Euphoria

by Sinclair Noe

DOW – 113 = 15,337
SPX – 8 = 1685
NAS – 15 = 3669
10 YR YLD - .03 = 2.71%
OIL + .11 = 106.94
GOLD + 15.10 = 1337.50
SILV + .41 = 21.88

Egypt's military was accused of pushing the country towards civil war after hundreds of protesters were believed to have been killed in a “massacre” at two Muslim Brotherhood protest camps.Security forces used machine guns, snipers, tear gas and armoured bulldozers during a full scale assault to clear the camps in Cairo. The operation left a scene of carnage on the capital’s streets and Egypt embroiled in its worst turmoil since the start of the Arab Spring.

With clashes breaking out across the country, the military declared a month-long state of national emergency and imposed a sweeping curfew in major cities.

Wednesday’s operation was the culmination of a six-week stand-off between Egypt’s security forces and the Muslim Brotherhood which followed the military’s decision to remove Mohammed Morsi as president. He had been the country’s first Islamist leader and its first to be democratically elected.

Mr Morsi’s supporters had vowed to occupy two protest camps,in Cairo until he was reinstated. That ended when the military moved into both camps with decisive force.

The Muslim Brotherhood put the number of dead at more than 500, and said that those killed in the “massacre” included unarmed civilians, women and children. Egypt’s health ministry gave an official death toll of 149, with more than 1,400 injured, although those figures were expected to rise.

The eurozone grew by 0.3% in the quarter to June, according to Eurostat, ending a recession – defined as two or more consecutive quarters of negative growth – that had dragged on for 18 months. Economists had forecast more modest growth of 0.2%, following a downwardly revised contraction of 0.3% in the first quarter. The data also showed growth in the wider European Union rose by 0.3%, after shrinking by 0.1% in the first three months of the year.

The revival was led by Germany, which grew by 0.7% in the second quarter. And for many Europeans there's not much cause for celebration just yet. More than 19.2 million people are currently unemployed in the euro area, according to Eurostat, with more than one in four Spaniards and Greeks out of work. It takes two quarters of economic contraction to call a recession, and only one quarter of growth to call the end of the recession. One quarter is not a trend.

It's an oft-used rule of thumb, but it's not really the official definition. That's why the National Bureau of Economic Research, the official arbiter of U.S. recessions, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Most everybody agrees that the U.S. was officially in a recession in 2001, even though we never had two straight quarters of negative GDP in that recession.

Second-quarter Eurozone GDP was pulled higher by strong growth in some countries, including Germany, France and Portugal. But France and Portugal are still touch-and-go, and several other countries, including Spain, Italy and the Netherlands, are still in recession. All it would take is a credit crisis in one of those countries to spark another debt panic and slam economic growth once again. Greece and Cyprus are still in a Depression.

One more reason to be less than exuberant about the end of the Euro-Recession is that they haven't really solved the problems. They are still trying to enforce austerity on the periphery, and it still isn't working; there's been a little relief when they take the boots off the necks, but otherwise, not much has changed. The financial sector is still a big problem; they still have banks to break up, and they might, starting with RBS, but that will be slow, and painful

Fund managers around the world are exuberant, convinced that America is in full recovery and Europe has overcome its debt crisis. Maybe not so much today, but that's the general feel. Bank of America’s monthly survey of investors showed a dramatic rise in confidence in August, with a net 72% expecting growth to accelerate over the next year. It is the highest in reading since 2009. This would be considered a contrary indicator. When everybody is happy, they've already put their money in the markets, and there is nothing left to do but sell.

Survey says almost everybody expects bond yields to rise as deflation fears evaporate, with just 3% still worried about the risk of an economic relapse. Managers have slashed their bond allocation to a 28-month low. The exuberant mood comes as margin debt on Wall Street hovers near $377 billion, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis. Margin debt is a form of debt as “a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. If the stock rises, they end up making far more money. If the stock crashes, you could lose your shirt and more. Brokers can force the sales of certain positions to cover losses.

Forced sales of stocks can set off panic and a rush for exits, snowballing into a crash, as happened in 1929. The current market may have further legs but there are some “astonishing similarities” between the latest patterns and events preceding prior market crises. Profits have been ticking along at stall speed just as in 2006 and 2007, and just like then people are resorting to leverage to squeeze out the last dime.

The rise in margin debt is matched by leveraged excess across the system, with debt-driven buy-backs of corporate shares running at a $400 billion annual rate. Leveraged buy-outs are back in vogue. IPOs are all the rage again. Junk bond yields are near record lows.

Investors are betting the US Federal Reserve is about to taper bond purchases for healthy reasons, because the US economy is strong enough to stand on its own feet. The counter-view is that the Fed is tightening for “unhealthy” reasons, because it has taken to heart warnings from the Bank of International Settlements about the dangers of excess leverage and a fresh asset bubble.

The Bank of America survey said there has been a dramatic divergence between “Main Street” and “Wall Street”. While the US economy has grown by $1.3 trillion since 2009, the US stock market has added $12 trillion.

The bank said nominal GDP growth over the past four quarters has been the slowest ever recorded outside a recession. This would not normally be circumstances when the Fed took away the punchbowl and tightened credit.

Two former JPMorgan Chase employees are facing criminal charges related to the trading scandal that cost the bank $6.2 billion last year. The two lower level employees are charged with wire fraud, and conspiracy to falsify books and records related to the trading losses. The trader who traded the losses, Bruno Iksil, also known as the London Whale, is cooperating with investigators. The two guys who have been charged have not been arrested.

Preet Bharara is the prosecutor and he tried to sound tough today. "This was not a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls," he said, directing his remarks squarely at Jamie Dimon.

He also said, "The difficulty inherent in precisely valuing certain kinds of financial positions does not give people a license to mislead or cover up losses. That goes double for handsomely paid executives at public companies whose actions can roil markets and upend an economy." So, it sounds tough, but it's not like we've seen them going after senior management.

You probably think you are entitled to some modicum of privacy in your emails. You would be wrong. Google, said so, publicly today. The internet giant argued in a US lawsuit that people who send messages via email should not “be surprised” if those messages are intercepted by the recipient’s email provider, in the same way that someone sending a letter to a business associate might expect it to be opened by a secretary.

"People who use web-based email today cannot be surprised if their emails are processed,” Google said. “Indeed, 'a person has no legitimate expectation of privacy in information he voluntarily turns over to third parties,” it added, citing a Supreme Court judgment handed down over electronic communications in 1979 – long before Google existed.

If you have a question or a subject you would like to bring to my attention, you can send me an email. …... sinclair@moneyradio.com

That should work.

Monday, July 08, 2013 - Nothing Recedes Like Progress

Nothing Recedes Like Progress

by Sinclair Noe

DOW + 88 = 15,224
SPX + 8 = 1640
NAS + 5 = 3484
10 YR YLD - .07 = 2.65%

OIL - .17 = 103.05
GOLD + 13.50 = 1238.30
SILV + .18 = 19.18

Took a little break for the Fourth of July, so we have some catching up to do. Friday morning the jobs report showed the unemployment rate holding steady at 7.6%, even as the economy added 195,000 jobs. Better than expected but not good enough; possibly proving the adage that nothing recedes like progress, or at the very least we know that the path of progress is neither swift nor easy. More than 8 million people are working part-time for economic reasons; nearly 3 million are working in temp jobs; more than 4 million are in the ranks of the long-term unemployed; more than one million are considered discouraged, they've just given up I suppose.

If the labor market holds steady and job creation continues at the current rate, the unemployment rate will dip below 7 percent sometime in mid- 2014; by which point the majority of American workers will be part-time. We really should be adding more than 300,000 jobs a month, not fewer than 200,000. As the Economic Policy Institute points out, we would need more than five years of job growth at this rate to get back to the level of unemployment that prevailed before the Great Recession.

Still, the 195,000 new jobs should boost expectations for growth and inflation, which tends to push up bond yields. That happened on Friday; yields on the 10year Treasury note bounced up above 2.6%. The concern is that the Fed will ease up on Quantitative Easing as the unemployment picture improves, and the Fed seems to think the economy is strong enough to handle it. But the feral hogs in the bond market smelled blood and they priced in the Fed stepping back, not caring whether the economy can handle it or not.

Ironically, the market's moves could slow down the economy enough to make the market's prediction wrong, by hurting the economy so much that the Fed realizes it can't taper its bond purchases yet. And if the markets don't squash a recovery, then the politicians might. The austerity gang remains staunchly opposed to any deliberate job creation program. The Federal Reserve seems more interested in testing the idea of tapering than any aggressive monetary action.

And as the summer swoons on, it looks less and less likely that there is anything that will finally get us back to full employment. For now, rates are still near historic lows, and the equity markets, after using the Bernanke talking points as an opportunity to take profits, now seems to be focusing attention elsewhere.

Stocks have also been higher again. Maybe it is hope for a stronger earnings reporting season, which kicked off this afternoon with Alcoa reporting a $119 million loss, compared to a loss of $2 million a year ago. Alcoa posted big expenses for restructuring and legal costs. Woo hoo, happy days.

The analysts who analyze earnings seem to live in a mystical land of make believe. Six months ago, they predicted 2Q earnings growth of 8.7%; they've cut that to 1.8%: but they still think S&P 500 index share prices will rise by 8.8%. Getting to their price target would raise the index’s earnings multiple to 16.4; that's not a historically high multiple, but it might not reflect the anticipated slog. After three years of growth, earnings increases are slowing. Income in the S&P 500 advanced an average of 4.3 percent in each of the last five quarters, compared to the 28 percent average for 2010 and 2011.

Also, as we work our way through earnings season and look at the broader economy, GDP has been revised lower; down from 2.2% in 2012 to an estimated 1.9% this year. Data will likely be overhauled at the end of the month, and the expectation is that it will be revised lower. So, earnings growth alone is apparently not enough to reach escape velocity. The International Monetary Fund will probably lower its global growth forecast for the remainder of the year; they already lowered their forecast from the start of the year, down to 3.3% from an earlier estimate of 3.5%. They say they are seeing weakness in emerging countries in particular.

So the bar keeps getting lowered and nothing recedes like progress.

Oil prices moved slightly lower today, but remain entrenched in triple digit territory. Part of that is a risk premium associated with Egypt. At least 51 people were killed when the Egyptian army opened fire on supporters of ousted president Mohamed Mursi, in the deadliest incident since the elected Islamist leader was toppled by the military five days ago. Hundreds more were wounded today.

The Egyptian military has insisted that the overthrow was not a coup, and that it was enforcing the "will of the people" after millions took to the streets on June 30 to call for Mursi's resignation. The US government isn't calling it a coup because that would mean an end to $1.3 billion a year from Washington. That is called aid, but it also serves to pay Egypt to keep the peace with Israel. Apparently, a military coup by any other name is better than a democratically elected Muslim Brotherhood. So, the whole democracy thing is very messy, but the oil is still being transported through the Suez Canal.

The same cannot be said for oil being transported by rail in Canada.

Canadian police are still looking for the remains of people killed when a driverless crude oil train derailed and blew up in a small Quebec town over the weekend. The five locomotives and 72 oil cars had been parked near the town of Lac-Megantic in Quebec; that's not far from Maine. The brakes then somehow released and the train gathered pace as it rolled down a hill into the center of the town early on Saturday morning. It derailed and exploded into a gigantic fireball, flattening dozens of buildings and killing five people. Another 40 are missing and few residents hold out hope that they will be found alive.

Canada's railways have made a determined push to cash in on the country's crude-oil bonanza, painting themselves as a cost-effective alternative to politically unpopular pipelines like the proposed Keystone XL. The Canadian Railway Association recently estimated that as many as 140,000 carloads of crude oil are expected to rattle over the nation's tracks this year, up from only 500 carloads in 2009. That represents a 28,000 per cent increase in the amount of oil shipped by rail in the past 5 years. The Quebec disaster is the fourth freight-train accident under investigation involving crude-oil shipments since the beginning of the year.

So, there are some concerns about the ability to ship oil, whether on rail in Canada or by way of the Suez Canal; still, the recent run-up in oil prices is disconcerting. We've seen a big sell-off in commodities ranging from gold, to industrial metals, iron ore, extending to grains, natural gas and on. We've seen strength in the dollar, which was always a good excuse from the energy experts to explain falling oil prices.. We've seen demand for oil falling. Demand is dropping in China as that economy slows; the IMF is projecting slower and slower global economic growth, and that should mean less and less global demand for oil. Americans are driving less and less, not more and more; and we're driving more efficient cars. There has been a record jump in US domestic oil production, which has grown by more than one million barrels per day over the last year; that's the fastest growth in production in decades.

Some 5 percent of seaborne crude oil passes through the Suez Canal. Not inconsiderable, but its potential cost can be clearly calculated. The closure of Suez would not stop the lifting and shipping of oil cargoes. It would however add approximately 16 days steaming time around Cape Horn to an oil cargo's sea voyage otherwise precluded from using the canal, and the added expense works out to less than 50 cents a barrel.

To fully appreciate the excesses of the oil market one needs to understand that some 80 percent of all contracts bought and sold on the commodity exchanges are not executed by actual producers or crude oil consumers engaged in 'legitimate' hedging strategies, but rather by speculators and gamblers trying to drive oil prices in the direction in which they have placed their bets.

The Commodity Futures Trading Commission (CFTC) was given the authority by virtue of a January 2010 rider to the Commodity Exchange Act, to implement speculative position limits for futures and option contracts of certain energy commodities such as crude oil. To date, no action has been taken by the CFTC other than interminable hearings which one can well imagine have become a cover for the total lack of meaningful process.

In April 2011 the president amidst great fanfare, focused on 'speculation' in the oil market, giving Attorney General Eric Holder a mandate to investigate and announcing the formation of 'The Oil and Gas Price Fraud Working Group.' To date, more than two years later, not a word has been heard from this august commission.

A couple of weeks ago the Federal Trade Commission opened a formal investigation into how prices of crude oil and petroleum-derived products are set, mirroring a European Union inquiry. The investigation, now in a preliminary stage, will probably broaden into a multi-jurisdictional affair like the inquiry into manipulation of the London interbank offered rate, or Libor.

The price of oil is actually set, much like the Libor rates, by a data and news service called Platts. Platts publishes the Dated Brent benchmark that contributes to setting the price of more than half the world’s oil. The EU oil probe, which extends to undisclosed crude-derived products and biofuels, underscores how pricing in some energy markets lacks the transparency of financial products such as stocks and US corporate bonds. It also marks the third time global pricing benchmarks have drawn the regulators’ scrutiny in the past year following investigations into bank manipulation of the Libor, and ISDAFix, the benchmark for the $379 trillion swaps market.

In other words, everything is rigged. 

Wednesday, July 03, 2013 - Independence Day

Independence Day

by Sinclair Noe

DOW + 56 = 14,988
SPX + 1 = 1615
NAS + 10 = 3443

10 YR YLD + .03 = 2.50%
OIL + 1.64 = 101.24
GOLD + 10.10 = 1253.50
SILV + .34 = 19.82

Today is Independence Day. I know; the Fourth of July is tomorrow, but it is Independence Day in Egypt, or Coup Day, or something. They had huge crowds in Tahrir Square and they celebrated with fireworks, so let's called it Independence Day. We're not really sure what it is, but we know a few things. There has been a revolution. The Egyptian army has overthrown President Mohamed Morsi, announcing a roadmap for the country’s political future that will be implemented by a national reconciliation committee.

The head of Egypt's armed forces issued a declaration today suspending the constitution and appointing the head of the constitutional court as interim head of state. Morsi's presidential Facebook page quoted the disposed president as saying he rejected the army statement as a military coup. Morsi was the head of the Muslim Brotherhood and he had served for one year as president, after being democratically elected, following the revolution that overthrew the sort-of democratically elected dictator Hosni Mubarak. Democracy can be messy. And these are messy, noisy, uncertain and unpredictable days for Egypt.

The country is in unchartered territory. The economy is under severe pressure. Most institutions are weak. A credible leader is yet to emerge with widespread support. And, to make things worse, there is no play book. The mood on the street may look joyful but the situation could easily turn violent.

Nobody really knows what will happen next, but the Egyptian people took to the streets to say that what had been happening was not acceptable. They are no longer fearful or ambivalent about their government. With a little luck, maybe something good will come from all this.

Yesterday we talked about the doubling of interest rates on student debt. It shot up to 6.8% from 3.4% for new loans. So, the next time you go to a college graduation, look past the caps and gowns and make sure you notice the ball and chain most graduates are wearing as they march onstage to receive their diplomas. That's student loan debt, which at over $1 trillion tops credit card debt in the U.S. today. The average burden is $28,000, but add in their credit cards and they're graduating with an average of $35,000 in debt. It's no wonder that people who've paid off their student loan debt are 36 percent more likely to own homes than those who haven't.

A growing number of voices, including the Fed, are pointing to the way this debt burden is a drag not just on the borrowers but the wider economy. One survey found that student debt reduces average aggregate car purchasing by $6.4 billion a year. Young people are leaving school with the kind of debt that was once only incurred by the purchase of a first home; not surprisingly, it's depressing home buying too.

According to the Federal Reserve Bank, two-thirds of college graduates leave with some debt, and 37 million Americans are repaying a student loan right now. And the grads who graduate with no debt are the really lucky ones. The grads who graduate with debt are semi-lucky – they get a degree and a chance at emplyment. Lots of students don't graduate but still have debt. And then, about one-third of high school graduates aren't luck enough to go to college.

We shouldn't even call them student "loans," because you can't refinance them, and you can't get out from under them by declaring bankruptcy. It's more like indenture. Thanks to the Bankruptcy Reform act of 2005, there's no statute of limitation on collecting student loans, and lenders can garnish wages, tax refunds and even Social Security checks. Back in 2007, now-Sen. Elizabeth Warren asked: "Why should students who are trying to finance an education be treated more harshly than someone … who racked up tens of thousands of dollars gambling?" Nothing's changed, although Warren is part of a limited number of people in Congress who are trying. Now, Warren has proposed that student loans should get the same interest rates as banksters. You know, the Fed should offer money for education at the same ¼% that they give money to the big banks.

Following World War II, GI's returned home and went to school, and it was financed through the GI Bill. That one thing created more wealth than any other single thing in our nation's history. In theory and to a significant extent in practice, any GI could, if they worked hard enough, get a bachelor's degree from one of the best universities in the country (and, therefore, in the world), almost free of charge. The pronounced social and economic mobility of the postwar period would have been unthinkable without institutions of mass higher education, provided at public expense. The result was a highly educated population, relative to the pre-war years, that went on to productive work. And that in turn led to the greatest expansion of the middle class that we've ever seen.

Once upon a time, states competed to expand their public university systems - and many were free, or close to it. The stellar University of California system was tuition free (though there were fees) until the late 60's; so was the City University of New York system for a long time, and Arizona universities, and plenty of other states. Now, California is one of at least 10 states that now spends more on prison than higher education. I haven't seen any studies that make a direct link, but I'm pretty sure the two are connected.

A federal judge has approved HSBC's $1.9 billion settlement for money laundering. While noting "heavy public criticism" of the settlement, which enabled HSBC to escape criminal prosecution, US District Judge John Gleeson, New York, called the decision to approve the accord "easy, for it accomplishes a great deal."

The settlement was announced last December, but it required approval. The settlement includes $1.25 billion in forfeitures and $665 million in civil fines. The settlement is part of a deferred prosecution agreement, or DPA, that runs for 5 years. That means that the bank has to avoid doing the bad things they did, or they could be indicted. I've never heard of a major bank operating under a DPA that actually has been indicted for violating the DPA, but that's the theory.

And what are the bad things HSBC is accused of doing? Well for years they laundered money on behalf of Colombian and Mexican drug cartels. They laundered money for customers in Burma, Cuba, Sudan, Libya, and Iran, which were all subject to US sanctions. They dealt with drug dealers, murderers, terrorists, and other unsavory types and they made sure the bad guys had money to do bad things. But don't worry, it's not criminal; it's just a civil case.

Judge Gleeson said he had received requests from the public to reject the agreement because it did not hold HSBC criminally liable. He also read numerous editorials and columns suggesting, as one put it, that HSBC was "too big to indict." Gleeson, nonetheless, said "significant deference" was owed to the Obama administration in deciding not to press an indictment. Gleeson said "much of what might have been accomplished by a criminal conviction has been agreed to in the DPA," whose administration he will supervise.

This is not true. The settlement does not accomplish much. What the judge has done is to shred the justice system once again; it seems to be common practice these days. Judgments such as this just create a two-tiered justice system. And we accept it out of ambivalence and fear. One set of laws for the rich and powerful, another set of laws for everyone else. Maybe we should require that judge to recite the Pledge of Allegiance every morning to start the court day. Maybe he could read that segment about “justice for all”; not just punishment for the poor folk; not just an agreement to tie executive bonuses to meeting compliance standards; not just coddling the bag men for murderers and drug dealers and terrorists; not just a slap on the wrist if you hold a wad of money in your hand. Justice for all. What a joke.

Which brings us to our next segment: “Where in the world is Edward Snowden?” We now know he was not on Evo Morales' presidential jet. The president of Bolivia had flown to Russia to meet with Russian President Vlad Putin. President Morales then tried to fly back to Bolivia. Someone, somewhere suspected that he was trying to sneak out with Snowden on board. Portugal, Spain, France, and Italy refused to allow the presidential jet to fly over their airspace. The plane circled around for a few hours and eventually landed in Austria. The plane was searched and they did not find Snowden.

Now, normally a presidential jet, like Air Force One, is considered to be something like an embassy; there is an issue of national sovereignty. So, there is more than a little outrage over a pretty serious diplomatic transgression. Bolivia's ambassador to the United Nations said "the orders came from the United States." From a diplomacy standpoint, one does not normally interfere with diplomats and high-ranking public officials in transit. It is extraordinary to prohibit passage through one's state air space en route to another state. Almost all the nations in South America have condemned the intervention.

So, we spend billions of dollars on high tech intelligence and spy stuff and we still can't figure out whether Snowden is in the Moscow airport or on the Bolivian presidential jet or who-knows-where.

What we have learned about Snowden is that he doesn't have $1.9 billion to pay a civil fine.

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?