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.

Wednesday, April 03, 2013 - Traps Set

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

Traps Set

by Sinclair Noe

DOW – 111 = 14,550
SPX – 16 = 1553
NAS – 36 = 3218
10 YR YLD - .05 = 1.81%
OIL – 2.72 = 94.47
GOLD – 18.30 = 1558.90
SILV - .28 = 27.08

We have a day like today and we are reminded of the fleeting nature of a bull run. The Russell 2000 cracked this week. It tried to get up yesterday, but small-caps couldn’t hold their ground. Transports followed with a thud. Both the transports and the Russell registered slightly lower highs to kick off the second quarter. Commodities have moved lower as of late; gold, silver, platinum, copper all sneaking back to support. Physical demand for the metals remains very strong and there appears to be a disconnect between the paper market and the physical market. It feels like someone is trying to set a trap for a greater fool.

I don't know whether this is a technical move, or if there is a fundamental reason. The news doesn't always help. The big news story of the day is that the Rutgers basketball coach yelled at the players and the school fired the coach. Yeah that's it. North Korea is purportedly ready to nuke the world, Syria continues to crumble under the brutality of a sick dictator, Egypt is arresting comedians, Italy elected comedian and he doesn't want a government, Europe is borderline in a Depression, depending on which line of which border, Eurozone unemployment reached a record 12pc in February and looks certain to ratchet higher as fiscal cuts deepen and manufacturing continues to struggle, raising the spectre of social explosion across southern Europe, the US is supposed to have a great recovery except we all know it isn't great, and the stock market seems wildly disconnected from reality.

So, I'm not really sure what the fundamentals are telling us, and the technicals aren't quite conclusive, and it really doesn't matter. Selling is selling. In the market, the final word, the ultimate arbiter of any dispute, is always price. There is no guarantee we will see a major sell-off this month, or even in May, or even a summer swoon. We've weathered the fiscal cliff, the sequester, and the Cyprus Bank Heist; which simply means that anything bigger than a nice orderly pullback would be unexpected; not out of the question, just unexpected.

The stock market is propped up to the tune of $85 billion a month in Federal Reserve Treasury and mortgage backed securities purchases. Today, John Williams, the president of the Federal Reserve Bank of San Francisco, floated a trial balloon, and it didn't float very well. When the Fed might begin tapering off quantitative easing has been a key question for markets since the Fed’s policy meeting in March. The Fed has said it would continue the purchase program until it sees “substantial” improvement in the labor market.

In a speech today, Williams said: “Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”

Williams compared Fed policy to driving a car up a long, steep hill. The Fed is pushing down hard on the gas pedal but once the road gets flatter- the Fed “will have to lighten up on the accelerator a bit.” It sounds like a good analogy, but it's not accurate. A better analogy is that the Fed has been throwing money out of a helicopter hovering directly over Wall Street, and this has made Wall Street a ton of money while having a very minimal impact on the rest of the country. And if the Fed lightens up on the money dump, Wall Street will throw a tantrum.

Williams said that ending the bond purchases is not a tightening of policy and the Fed’s $3 trillion balance sheet will add stimulus and put downward pressure on rates. Wall Street responded like a baby that just had his candy stolen.

Today, the ADP jobs report for March was the fifth economic indicator in the past week to disappoint investors with a lower-than-expected reading.  ADP said the private sector generated 158,000 jobs in March.  The pace of hiring was revised up sharply in February, but that tells us little about where the economy is headed in the second quarter of the year. The ADP report is not great at forecasting the government's monthly jobs numbers due Friday morning; estimates are calling for about 190,000 new jobs, so although not a predictor, today's report was disappointing.

Last month, the Department of Labor released new job market numbers, which suggests that the economic recovery is perpetuating the trend of college graduates turning to minimum wage jobs. Though there has been significant employment gains, many recent college graduates have been forced to resort to low-wage, low-skilled jobs. There are now 13.4 million college graduates working for hourly pay, up 19 percent since the start of the recession.

According to the Department of Labor, there are about 284,000 graduates with at least a bachelor’s degree that were working minimum wage jobs in 2012.

In a recent study released by NELP, the National Employment Law Project, the low-wage occupational sector is the fastest growing sector in the economy, even though this sector only lost about one-fifth of its jobs. Meanwhile, the middle-wage job sector—which usually serves as the pathway into the workforce for many recent graduates—was hardest hit, and has been the slowest to recover.

According to the NELP study: Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth; Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.

I'm guessing student loan debt is part of the problem here.

There are jobs, they're just lousy jobs. The Bureau of Labor Stats reports Workers in seven of the 10 largest occupations typically earn less than $30,000 a year, a far cry from the nation's average annual pay of $45,790. Food prep workers are the third most-common job in the U.S., but have the lowest pay, at a mere $18,720 a year for 2012. Cashiers and waiters are also popular professions, but the average pay at these jobs tallies up to less than $21,000 annually. There are 4.3 million retail sales workers out there, making them the most common job, but the position pays only $25,310 for the year.

Among the 10 most popular professions, only the nation's 2.6 million registered nurses earn a good living, bringing home nearly $68,000 a year on average; and they work hard for every dime.

Wages have been in the spotlight this year as the debate over income inequality intensified. Middle-class Americans have been losing ground, as median household income dropped by more than $4,000 since 2000. Part of this decline stems from a disappearance of middle-class jobs and an explosion of lower-paying ones. Some 58% of the jobs created during the recovery have been low-wage positions, according to a 2012 report by the National Employment Law Project. These low-wage jobs had a median hourly wage of $13.83 or less.

The problem with inequality is the same problem a kid faces when he's playing the board game Monopoly with his parents. The kid knows that if he beats his parents, if he gets all the money and all the properties, he wins the game, but the game ends and he gets sent to bed. Somewhere we forgot that when one player, or a very small group of elite players end up with all the money, the game is over. That's a great analogy I read in a book called “Down the Up Escalator”.

After the shot across the bow in 2008, you might have expected that regulators and market participants would use the experience to change for the better, to become more prudent, and to reduce the sorts of risky behaviors that almost crashed the entire system. Instead of having been reduced, financial risks loom larger than ever. It's why the next downturn will be just as bad – if not worse – than the last one. Nothing has been learned, and nothing has been changed. The most basic of human behaviors, the tendency towards moral hazard (so well understood by the insurance industry) has been completely overlooked by the Fed. The very same Fed that could not and did not see that a housing bubble was forming is now equally complacent about corporate bond yields touching all-time record lows across the entire spectrum, right down to CCC junk that sits one skinny notch above default.  Stocks are for show, but bonds are for dough, so the saying goes;and with bonds now priced for perfection if not for something even better, there's no room for error.

I'm not ready to raise the crash flag, but I keep getting this uneasy feeling that we're walking into a trap.