Friday, January 31, 2014 - January Out

January Out

by Sinclair Noe

DOW – 149 = 15,698
SPX – 11 = 1782
NAS- 19 = 4103
10 YR YLD  - .03 = 2.67%
OIL - .76 = 97.47
GOLD + 2.80 = 1246.90
SILV + .03 = 19.27

The Dow started the year and the month at 16,572 (-926). The S&P 500 started the month at 1845 (-63). The Nasdaq Comp, for the month, went from 4160 (– 57).

For the week, the Dow fell 1.1 percent, the S&P 500 slipped 0.4 percent and the Nasdaq dropped 0.6 percent. In January, the Dow slumped 5.3 percent, the S&P 500 lost 3.6 percent and the Nasdaq fell 1.7 percent. January marked the worst month for the Dow and the S&P 500 since May 2012, and the worst for the Nasdaq since October of that year.

Yield on the 10 year Treasury note dropped from 2.99% to (- 32bp). And this is a little telling, the Vix, the volatility index went from 14.32 to 18.22    (-3.9)

The Vix might be indicating that the market is not sufficiently scared of the emerging market contagion; certainly the Vix is higher than the start of the month, but remember that December saw record highs for the major indices, and a really scary Vix reading would be around $49, for those of you who remember the beginning of 2009. In other words, there are a whole bunch of people who haven’t figured out that we’re in a downturn in the markets. So far the US markets are just experiencing a small move, but the rest of the world is taking a bigger hit. About $17 billion has poured out of emerging market funds this month.

Right now, there is growing angst regarding the emerging markets. The Dow was down more than 200 points to start the session today. And really, none of this should be a surprise. We know that emerging markets have been struggling with the Fed’s taper and other stimulus plans of developed economies. Things tend to unravel slowly and then all at once. It’s hard to figure out where we are in the unravelling. When will this little downturn end? I don’t know but I’m guessing the Vix will be higher than today.

A new State Department report on the proposed Keystone XL oil pipeline finds that the project would have a minimal impact on the environment, an assessment likely to increase pressure on the White House to approve it. But the report sets no deadline for doing so. The proposed pipeline would carry crude derived from oil sands in Canada to refineries in the United States. The evaluation fell to the State Department because the proposed $7 billion project by TransCanada Corp would cross the US-Canada border.

A New York State judge has approved an $8.5 billion agreement by Bank of America to settle most of the claims by nearly two dozen mortgage securities investors.  In a 53-page decision, Justice Barbara R. Kapnick of State Supreme Court in Manhattan ruled that the 2011 settlement was reached in good faith.

The settlement had been challenged by the American International Group, an investor in the mortgage securities, which contended that the trustee overseeing the bonds did not push aggressively enough for more money from Bank of America. AIG argued that the settlement shortchanged investors and accused the trustee, Bank of New York Mellon, of conflict of interest and of shirking its duties. The judge determined that the trustee did not abuse its discretion in entering into a settlement.

There’s something rotten in Denmark, and it’s Goldman Sachs. Denmark gave the global financial giant Goldman Sachs the go-ahead on Thursday to buy a stake in its state utility. Some members of the Socialist People’s Party were so upset, they withdrew their ministers from the country’s governing coalition. Some party members said the deal ceded too much power to Goldman. Thousands of people have taken to the streets in recent weeks to protest the deal; a prominent banner featured the vampire squid that has become a symbol for Goldman Sachs. Nearly 200,000 Danes signed an online petition against the deal, a record.

Under the terms of the deal, Goldman would invest about $1.45 billion for an 18% stake in Dong Energy, the state utility. Dong Energy has a number of businesses, including offshore wind farms, drilling for oil and gas in the North Sea. The utility has about one million gas and electric customers and operates coal and biomass power plants. The deal does not buy Goldman a controlling share, but the minority stake would come with special privileges. Goldman would get a seat on the utility’s board. And the bank, along with two Danish pension funds, would have veto power over changes in the utility’s strategy or its executive suite; specifically the utility’s chief executive or chief financial officer. The Danish pension funds are investing about $550 million.

Among the questions about the deal is whether it is being structured to avoid taxes. Goldman’s investment will be made through a company based in Luxembourg. And that Luxembourg company is then owned in part by companies in Delaware and the Cayman Islands. So, the deal boils down to either a big tax evasion scheme by Goldman or a significant investment in renewable, green energy. Time will tell but I’m guessing it’s a bit of both.

Officials in California said that for the first time in the state’s history, they won’t be able to provide any water to contractors that supply two-thirds of the population and a million acres of farmland. The California Department of Water Resources, which had predicted it would be able to supply about 5 percent of the amount requested, said it now projects that it won’t be able to provide any of the 4 million acre-feet of water sought by local agencies.

The reduction means that agencies will have to rely on existing water supplies such as ground water or what is in storage behind dams. The Los Angeles-based Metropolitan Water District, serving 19 million people in Southern California, and the San Francisco Public Utilities Commission, which supplies much of the Bay Area, have built up water reserves and won’t be as hard hit as places such as Sacramento and the Central Valley farming region. About two-thirds of Californians get at least part of their water from northern mountain rains and snow through a network of reservoirs and aqueducts known as the State Water Project. State Department of Water Resources Director Mark Cowin said: "Simply put, there's not enough water in the system right now for customers to expect any water this season from the project."

Farmers and ranchers throughout the state already have felt the drought's impact, tearing out orchards, fallowing fields and trucking in alfalfa to feed cattle on withered range land.  Agricultural production accounts for most of the state's water use and is expected to be hit the hardest by the reduction. At the same time, many cities have ordered severe cutbacks in water use.

If you watched the State of the Union address this week, you might rightly assume that Congress can’t do anything, which would only be partially correct. The House this week passed a Farm Bill. Big whoop. The Farm Bill is normally the most uncontroversial bit of legislation Congress deals with. Not anymore. The bill is 959 pages long and would cost $956 billion.

That cut is twice what the Senate originally proposed, but a fraction of the nearly $40 billion the GOP House voted to cut last year. Those cuts didn't go into effect, but a cut of $5 billion in the current fiscal year was implemented via Congressional inaction last November. The bill budgets $16 billion less than what would have been spent under current law, with the Food Stamp program absorbing almost half those cuts, or right at $8 billion. In a great big federal budget, that might not sound like much but it worls out to 21 fewer meals per month for a family of 4.

The bill also makes some policy changes for famers. It’s a neat little bait and switch. What the bill takes from the ag lobby with one hand, it largely gives back with the other. Of $41 billion in projected savings (over 10 years) from eliminating direct payments to farmers, the bill restores $27 billion via enhanced crop insurance subsidies and a new program that “insures” against adverse price movements. Supposedly necessary to secure the nation’s food supply at a time of record farm, this federal largess flows almost regardless of how much money its recipients already have. People making up to $900,000 per year in adjusted gross income can qualify for payments. The total commodity-program take for any individual “actively engaged” in farming is capped at $125,000, or 2½ times the national median household income. But your definition of actively engaged is probably different than the definition in the farm bill.

Farm prices and farm revenues and net profits had been at record highs, so old-style farm prices that put the floor under prices were no longer effective. So they racheted up the guarantees, converted into a kind of revenue insurance, allowing the money to continue to flow. The insurance scheme also preserves the current incentive structure of large-scale US agriculture, which is to grow as much corn and soybeans as possible. That's great for the corporations that supply inputs to industrial-scale farmers—seed and pesticide companies like Monsanto, DuPont, and Dow. And in the event of floods or drought, the results could get shaky. Depending on the payouts, any savings from cuts in the Farm Bill could be wiped out.

Friday, January 17, 2104 - This Page is Being Monitored for Your Safety

This Page is Being Monitored for Your Safety

by Sinclair Noe

DOW + 41 = 16,458
SPX – 7 = 1838
NAS – 21 = 4197
10 YR YLD  - .02 = 2.82%
OIL + .20 = 94.30
GOLD + 11.40 = 1255.10
SILV + .22 = 20.42

It was a fairly volatile session on Wall Street today, in part because today was an options expiration Friday. For the week, the Dow rose 0.13 percent, the S&P 500 slipped 0.20 percent and the Nasdaq gained 0.55 percent. Earnings season is still in the early phase, but S&P 500 companies so far are beating analysts' expectations at a rate that's below what's typical. With earnings from 10 percent of the S&P 500 companies so far, 50 percent have exceeded expectations, below the historical average of 63 percent for a full season.  Intel and General Electric were the latest to dampen the view on fourth quarter earnings. Morgan Stanley wrapped up a week of earnings reports from the big banks by posting a sharp drop in profit, which they blamed on legal bills, but on an adjusted basis they beat estimates. Woo-hoo.

The NSA gathers nearly 200 million text messages a day from around the world and has put software in almost 100,000 computers allowing it to spy on those devices. If you think that seems a bit excessive, you are not alone. And so today, President Obama delivered a major speech to reassure the world that the US is concerned about privacy issues. Thank you Edward Snowden.

Obama said: "The reforms I'm proposing today should give the American people greater confidence that their rights are being protected, even as our intelligence and law enforcement agencies maintain the tools they need to keep us safe." Which is another way of saying that the spy agencies won’t be dismantled; they will continue to spy, and we should all just chill out and accept it.

Obama promised that the United States will not eavesdrop on the heads of state or government of close US friends and allies. One of the biggest changes will be an overhaul of the government's handling of bulk telephone "metadata"; lists of millions of phone calls made by Americans that show which numbers were called and when. Obama said the program will be ended as it currently exists. The government will not hold the bulk telephone metadata. While a presidential advisory panel had recommended that the data be controlled by a third party such as the telephone companies, Obama did offer a specific proposal for who should store the phone information in the future.

Obama instructed the Attorney General Eric Holder and the intelligence community to report before the metadata program comes up for reauthorization on March 28 about how to actually continue the program without having the government actually holding the metadata. And until then, the government will have to get approval from the FISA court, the Foreign Intelligence Surveillance Act Court every time intelligence agencies want to check the database of all those phone calls, unless they consider it an emergency; in which case, big brother can do whatever they think they need to do.

So, apparently the big speech on privacy was that we can expect more of the same, more or less. The one thing it was not was an ability to strike a "balance" between the current surveillance state and civil liberties "concerns"; or what many of us fondly remember as the Bill of Rights.

Here is the punch line from the president’s speech: “When mistakes are made, which is inevitable in any large and complicated human enterprise, they correct those mistakes, laboring in obscurity, often unable to discuss their work even with family and friends -- the men and women at the NSA know that if another 9/11 or massive cyber-attack occurs, they will be asked by Congress and the media why they failed to connect the dots. What sustains those who work at NSA and our other intelligence agencies through all these pressures is the knowledge that their professionalism and dedication play a central role in the defense of our nation.”

I used to keep a quote from Benjamin Franklin on my computer; something about giving up liberty for security. I was looking for that quote, but somehow, it looks like it’s been deleted.

So to recap: the phone metadata still exists; the government will keep the metadata, and records of financial transactions and texts and so forth until the government can figure out what to do with all the data; the government will search the data when they get approval from a secret court with a history of being friendly to the government and a secret court which has no privacy advocates; the government will search the data without court approval when they think they can get away with it; all of this will remain secret, or as nearly secret as possible because Edward Snowden is stuck in Russia; so just chill out because the spies are trying to do a good job.

National-security leaders behave as if preventing even a single terrorist attack is so important that, to marginally decrease its likelihood, it was incumbent upon us to torture prisoners, to invade Iraq, and to establish a system of mass surveillance on hundreds of millions of innocents to identify a tiny minority of terrorists. So long as the NSA is charged with stopping every potential attack, and given more power until it can do so, it will verge toward totalitarianism, because no society can stay free and eliminate the risk of terrorism.

The Senate yesterday passed the budget bill, as expected. It goes to the president for a signature. The government will remain open at least until September. However Congress could take the rest of the year off, and probably will. Congress is unlikely to pass any other major piece of legislation this year—with the possible exception of a long overdue farm bill.

They just don’t have much on the “To Do List”; actually there is plenty to do, but little that has a realistic chance of getting done. There is a long list of issues, including immigration reform, NSA and privacy concerns, health care, unemployment compensation, or even more important – jobs.

The Senate last year passed comprehensive immigration reform with the support of 14 Republicans, establishing a 13-year pathway to citizenship for millions for immigrants in the country illegally, but the measure remains dead in the House. Immigration reform has turned political and there is little urgency to pass anything before the 2014 midterm elections.

There will be some tweaking to the Affordable Care Act, and this remains a focus for many lawmakers; last week 70 Democrats supported a bill that would alert users of breaches involving their personal data. Beyond minor adjustments, the administration continues to grant some occasional exemptions and deadline extensions in an inconsistent pattern. Maybe by the end of the year, the website will be running smoothly, maybe.

The Farm Bill will likely pass. Historically, the bill has been easily renewed, but the last five-year measure was passed in 2008. This year the hurdles include dairy price supports, catfish inspection jurisdiction, and a controversial amendment that forbids states from imposing agricultural standards, such as California’s barring of eggs from states that allow their farmers to pen hens in tiny cages. But even as the two sides appear to be coming together, there are no guarantees the bill will pass.

Even the first high-profile legislative fight of the year, extending emergency unemployment insurance, has faltered. Democrats claim to have a winning issue on their hands, with more than one million Americans losing their benefits, but most Republicans so far aren’t feeling the political pain. Of course, the best solution for unemployment is a job, but Congress is probably incapable of coming together on anything resembling a bipartisan effort to stimulate employment.

So, the budget bill was passed, and we don’t have to worry about that or worry about Congress doing much of anything until September.

A new paper published in the journal called “Health Affairs” makes an interesting connection between income inequality and health. The finding is that poor people get sick more than rich people, and they get sick at very specific times. The research looked at when people go to the hospital for hypoglycemia (low blood sugar).

The basic idea is that people struggling to make it paycheck-to-paycheck (or benefits-to-benefits) might run out of money at the end of the month—and have to cut back on food. If they have diabetes, this hunger could turn into an even more severe health problem: low blood sugar. So we should expect a surge of hypoglycemia cases at the end of each month for low-income people, but not for anybody else.

That's what researchers found when they looked at the numbers for California between 2000 and 2008. The researchers also looked at when people go the hospital for other health problems such as appendicitis, which doesn't depend on diet. So there shouldn't be any end-of-the-month increase in appendicitis cases for low-income people if tight budgets are the problem. There wasn't. Poor people don't need more care at the end of the month for every kind of condition; just the ones that get worse when you don't have enough to eat. So, the solution is apparently to try to make sure that people have enough food to eat all through the month; which sounds expensive, but is actually not as costly as the nearly $1200 that an average hypoglycemia episode costs.

Friday, June 21, 2013 - Summertime

Summertime

by Sinclair Noe

DOW + 41 = 14,799
SPX + 4 = 1592
NAS – 7 = 3357
10 YR YLD + .09 = 2.51%
OIL – 1.39 = 92.92
GOLD + 20.80 = 1299.60
SILV + .52 = 20.22

There are certain phrases that seem to paint a picture. Today stocks ended slightly higher after two days of sharp declines. The phrase that comes to mind is “dead cat bounce”.

Stocks, and pretty much everything, slumped since Wednesday when Federal Reserve Chairman Ben Bernanke laid out the Fed's plans to scale back on its $85 billion in monthly asset purchases. The S&P broke under its 50-day moving average, contributing to 4.6 percent pullback from its all-time closing high reached on May 21. This retreat represents the largest since an 8.9 percent decline between September and November.

For the week, the Dow fell 1.8 percent, the S&P was down percent 2.1 percent, and the Nasdaq lost 1.9 percent. It was the biggest weekly decline for all three since April and also the fourth week of losses out of the past five.

In the four weeks since Ben Bernanke first mentioned that the Federal Reserve Board might start to taper its program of quantitative easing (QE) later this year, more than $2 trillion was wiped off the value of global stock markets — and probably far more from the value of global bonds. On Wednesday, Bernanke held a press conference where he repeatedly said the Fed would not exiting its bond buying program until the economy improved quite a bit from current levels. The markets heard what the markets heard.

If tapering does start well before the end of the year, this will surely be bad news for financial markets and the world economy. After all, the Fed's easy money policy has been the driving force behind the markets for several years; if the Fed stops handing out free money to the banks, then they would have to reconsider their valuation estimates for a whole host of financial products.

Did the markets over-react, or is it possible the Fed will taper, and manage to do so in a way which does not cause trauma to the markets? I don't know, but we will see in the fullness of time.

Part of the market reaction might be the double whammy hitting the global markets; the second part of that coming from China, which is cracking down on credit. I won't claim to be fully aware of what is going on in China, but the basic story is that China’s credit market has been in a bubble for years, with too much lending and borrowing, similar to what happened in the United States during the financial crisis. All that lending helps grow the economy until, one day, the bubble bursts, and it all comes crashing down, as happened the United States. China’s economic growth has been slowing, making a similar a crisis more likely. Chinese leaders seem to be trying to prevent a disaster by basically popping the bubble, a kind of controlled mini-collapse meant to avoid The Big One.

In a real, uncontrolled credit crisis like the U.S. financial meltdown, credit suddenly freezes up, particularly between banks, meaning that the daily loans banks were relying on to do business are suddenly no longer affordable. Banks with too many unsafe loans suddenly owe more money than they can get their hands on, sometimes leading them to default or even collapse. And that means that it suddenly becomes much tougher for everyone else – companies that want to build new factories, families that went to buy a home – to borrow money. That’s an uncontrolled credit crisis, and a number of China-watchers have been worried that China, in its pursuit of constant breakneck growth, could be headed for one.

China’s central bank, which is likely to tamp down all that unsafe lending and over-borrowing before it leads to a crash, appears to have forced an artificial credit crisis.

The People's Bank of China, (like the China version of the Fed) has already tightened credit, making it difficult for banks to borrow money. Something called the seven-day bond repurchase rate, which indicates “liquidity” or the ease of borrowing money, shot way up to triple what it was two weeks ago. Basically, it started looking like a credit freeze; very similar to when Lehman Brothers imploded.

Then last night, Bloomberg reported the Chinese Central Bank had stepped in and offer more than $8 billion in relief. Then other news sources said there was no relief effort. Who knows?

What's next? Well, the Chinese leaders will either back away from the credit crunch or they'll push forward and try to clean out the financial system. Or maybe the whole thing will just spiral out of control. If they can clean out the excesses from the financial system without to much damage, without uncontrolled financial collapse it would be a good thing; and the reality is that the Chinese government has some experience in controlling market shocks. Still, the process is likely to be a bit painful.

Today marks the start of Summer, or the summer solstice, officially as of 1AM Eastern. The sun is straight above the Tropic of Cancer. It's the longest day of the year, at least in the Northern Hemisphere. It look's like it will be a long summer of partisan gridlock in Washington. They couldn't even pass a Farm Bill. The Farm Bill always gets passed. Liberal or Conservative, we all share something in common; we like to eat. The Farm Bill is supposed to insure the food we eat. But most Democrats voted against it, because it cut the food stamps program, and a quarter of the Republicans voted against it, because they hate government spending. There was all sorts of political intrigue about the ability to get a simple bill through the House; imagine game 7 of the NBA finals, the defenders sit down, the refs lower the basket to 6 feet and Lebron James misses a slam dunk. The politics of this is pathetic, but the reality is that this could mean all kinds of problems in the agricultural sector. (By the way, courtside seats for Game 7 in Miami were going for $30,000 each, and admission to the luxury suites topped $50,000.

The good news for the agricultural sector is that the weather should be better this summer than last summer, but that might be bad news as well.

(Gulf of Mexico Dead Zone)

The near record-breaking Midwestern drought of 2012 shriveled corn crops and toasted pasture land. But it did have one positive side effect. The drought significantly reduced the size of the seasonal Gulf of Mexico dead zone. Less rain led to less fertilizer runoff—the dead zone is fed by a buildup of nitrogen-based fertilizer in the Gulf—which meant that the 2012 summer dead zone measured just 2,889 sq. miles. That’s still a zone the size of the state of Delaware, but it was the fourth-smallest dead zone on record, and less than half the size of the average between 1995 and 2012.

This year will be different. Heavy rainfall in the Midwest this spring has led to flood conditions, with states like Minnesota and Illinois experiencing some of the wettest spring seasons on record. And all that flooding means a lot more nitrogen-based fertilizer running off into the Gulf. According to an annual estimate from National Oceanic and Atmospheric Administration, this year’s dead zone could be as large as 8,561 sq. miles—roughly the size of New Jersey. That would make it the biggest dead zone on record. And even the low end of the estimate would place this year among the top 10 biggest dead zones on record. Barring an unlikely change in the weather, much of the Gulf of Mexico could become an aquatic desert.

The nitrogen nutrients that flow into the Gulf, especially during the rainy spring season, encourages the growth of explosive algal blooms, which feed on the nitrogen. Eventually those algae die and sink to the bottom, and bacteria there get to work decomposing the organic matter. The bacteria consume oxygen in the water as they do, resulting in low-oxygen or oxygen-free regions in the bottom and near-bottom waters.

That’s what a dead zone—water, essentially, without air. Sealife—including the valuable shellfish popular in Gulf fisheries—either flee the area, much as you or I would if someone were to suck all the oxygen out of the room, or die. That’s why the dead zone matters—the larger it is, the greater the populations of fish that might be affected. With commercial fisheries in the Gulf worth $629 million as of 2009—and still recovering from the impact of the 2010 oil spill—the dead zone means business.

The major factor driving the size of the dead zone—beyond changing flooding patterns—is the use and overuse of fertilizers in the corn belt. It takes about 195 pounds of fertilizer to grow an acre of corn; 40% of the corn crop is used to make ethanol, which is blended with gasoline. The idea is that it is a cleaner way to run our cars.

Here's the weekend reading list:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/21/washington-has-missed-the-real-inequality-story/

Washington has missed the real inequality story

http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619

The Last Mystery of the Financial Crisis

http://www.nytimes.com/2013/06/21/opinion/krugman-profits-without-production.html?hp&pagewanted=print

Profits Without Production

http://dealbook.nytimes.com/2013/06/20/senator-criticizes-lack-of-supervision-for-banks-consultants/?ref=business

Senator Criticizes Lack of Supervision for Banks’ Consultants