Tuesday, July 15, 2014 - The Path We're On

The Path We’re On
by Sinclair Noe

DOW + 5 = 17,060
SPX – 3 = 1973
NAS – 24 = 4416
10 YR YLD + .01 = 2.54%
OIL - .74 = 100.17
GOLD – 13.20 = 1294.60
SILV - .19 = 20.82

We’ll start with a couple of quick economic reports.

The Commerce Department reports retail sales increased 0.2% in June. The sales figures from May were revised from a 0.3% increase to a 0.5% increase. The increase in June was below consensus expectations of a 0.6% increase; however sales in April and May were revised higher, so it all levels out and was fairly strong report. Sales were up 4.3% year to year.

The Empire State Manufacturing Survey for July was up 6 points to 25.6, a four year high.

The state of California released its monthly cash report for June; the state’s General Fund ended the fiscal year with a positive cash balance for the first time since 2007, so the state won’t have to borrow to meet all of its payment obligations.

Federal Reserve chairwoman Janet Yellen delivered her semiannual Humphrey Hawkins testimony before the Senate Banking Committee today. Tomorrow, Yellen will repeat the process with the House. Yellen said progress has been made to restore the economy to health and strengthen the financial system, yet too many Americans remain unemployed and inflation remains below targets and there hasn’t been enough financial reform.

After prepared remarks, Yellen fielded questions from the senators, and this is where it gets a little interesting. Yellen said, “equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.” Some folks felt this was an “irrational exuberance” moment for Yellen. Social media and biotech stocks declined immediately after her comments. Yellen has a good reputation on forecasting. Back in 2006, when she was president of the San Francisco Fed, she gave a speech pushing back against former Fed Chair Alan Greenspan’s claim, with respect to the housing crisis, that the “worst of this may well be over.” Greenspan was wrong, Yellen was right, or at least not as bad as Greenspan.

Yellen said the Fed is still concerned about the housing market: “While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”

The housing market slowed last year when mortgage rates spiked on the possibility of taper. Yellen said that while the rise in rates is “the most obvious explanation for the weakness in the housing market over the past year,” it “seems unlikely that interest rates are the whole story.”

Yellen says the Fed is keeping a close watch on what it sees as potentially excessive risk-taking in the market for leveraged loans, but downplayed the possibility that its policies of ultra-low interest rates could be fueling asset bubbles. Still, there are some areas of financial markets, such as lower rated corporate debt, that are showing looser underwriting standards. Yellen and her Fed colleagues seem generally unfazed by concerns of bubbles and she said in testimony that the prices of real estate, stocks and corporate bonds “remain generally in line with historical norms.”

Yellen said most officials expect rates to start rising in 2015 and to finish the year around 1%. “That gives you a feeling for what participants thought would be appropriate given their projections in June,” she said. “What will actually happen clearly is going to depend on the progress the economy makes.”

Yellen seems pleased with the trajectory of the economy; investors seem complacent. She reiterated the Fed’s view that the economy will continue to grow at a moderate pace, and that the Fed is in no hurry to start increasing short-term interest rates.

All in all, Yellen’s testimony didn’t reveal much new. The Fed has been telegraphing this information for some time. The idea is that they can float information, and if the trial balloon gets shot down, they aren’t stuck in actual policy; if the trial balloon is accepted they can slowly implement the policy. It’s called forward guidance, and it seems to be working. The problem with forward guidance is that the Fed doesn’t know the future, and so they keep the guidance a little on the vague side, and then everybody fills in the blanks based upon their own particular bias.

It is earnings season and a couple of the big banks posted today.

JPMorgan reported a profit of $6 billion, or $1.46 a share, down from $6.5 billion, or $1.60 a share, a year earlier. Goldman Sachs posted net income of $2.04 billion, compared with year-earlier net income of $1.93 billion. Both banks saw share prices move higher after the reports.

These earnings came during a quarter in which fixed-income trading and mortgage refinancing were weak; so in that regard, the banks performed well. More likely the banks managed earnings expectations.

Johnson & Johnson reported higher-than-expected quarterly results on strong sales of its new hepatitis C drug. J&J said it had earned $4.33 billion, or $1.51 per share, in the second quarter. That compared with $3.83 billion, or $1.33 per share, a year earlier. They also raised guidance for the full year.

Intel posted better than expected Q2 revenue and profit; then they raised their Q3 revenue forecast well ahead of expectations; then they announced they would increase their share repurchase program. Intel posted a profit of $2.8 billion, or 55 cents a share, from a year-earlier profit of $2 billion, or 39 cents a share. Gross margin widened to 64.5%, compared with 59.6% in the first quarter. Intel still makes most of its profits from chips for computers; they’re still trying to get into the mobile market, but this past quarter they made more than a half billion in profits making chips for the internet of things, which is basically the idea that all of our mundane possessions will eventually be connected devices.

A study by the International Data Corporation calculates the internet of things market will grow to $7.1 trillion in the next 5 years. More than 1.9 billion once-inert devices are already connected to the internet, from parking meters to home thermostats, and by 2018 that number will top 9 billion.

The Federal Communications Commission website has crashed. Today is the last day to submit comments on the FCC’s proposal to regulate the internet. The proposal at issue would allow internet providers to charge content companies for more direct connections to their customers. These so-called “fast lanes” have sparked a vehement reaction from internet activists, who claim that the new policy could turn the web into a plutocracy where companies that are willing to shell out cash receive premium treatment. As of last week, the FCC had received almost 650,000 comments, mostly in favor of net neutrality; which is another way of saying no toll booths on the information superhighway.

Real highways are another matter. This afternoon the US House approved an $11 billion plan to replenish the federal fund for highway and mass transportation projects, but just through next May. Passage of the bill only puts off a larger debate over raising taxes to pay for long-term infrastructure financing. This was a stop-gap measure, as federal funds were 2 weeks from drying up which would have resulted in work stoppages during the peak of the summer roadwork season.

The Department of Transportation has said that without an agreement in Congress, federal payments to states will begin to slow by the end of the month. Also, the existing two-year law authorizing about $50 billion in highway and transit funding annually expires on Sept. 30; and with it the ability of the government to levy the 18.4-cent-per-gallon gas tax that finances the work.

Longer term plans have been dragged down by disagreements on how to fund projects. The short-term proposal signed today, raises money through an accounting gimmick called pension smoothing, which allows for a delay in the payments that corporations make to their pension funds resulting in a higher corporate tax bill. It’s a temporary, inadequate response to a long-term problem, better than nothing, even if it doesn’t do what it needs to do; which seems to describe everything in Congress these days.

The road ahead may be full of potholes, but on the road of life, most people think the ride will be smooth. A new survey conducted by the National Council on Aging, Untied Healthcare and USA Today finds that older adults are pretty optimistic; 89% say they’re confident they can maintain a higher quality of life through their senior years. On the financial front, 45% of the older group surveyed said they wished they had saved more money; almost one-third (31%) said they wished they had made better investments. The new survey finds more financial optimism than last year, but still almost half (49%) of the 60-and-older respondents say they're concerned that their savings and income will be sufficient to last the rest of their lives. In 2013, 53% expressed that concern.

So what is behind the optimism? The reasons vary, but support of family and friends is at the top, followed by being happy about their living situation, and being in good health.

There seems to be something to the good health part of the optimism equation. The medical journal JAMA released a study today showing people are having fewer strokes and dying less often in the wake of strokes. It’s still a big problem, striking 800,000 people a year and killing 130,000, but the numbers are down.

Another study released this week says better heart health and more education means the onset of Alzheimer’s begins later in life now than 30 years ago in developed nations. One trial in Finland suggested the body can be conditioned to hold off mental decline with gym exercising, good food choices and cognitive training.

It is good to have an end to journey towards, but it is the journey that matters in the end.

Friday, June 13th, 2014 - Infallible Source Predicts Economic Collapse!

Infallible Source Predicts Economic Collapse!
by Sinclair Noe

DOW + 41 = 16,775
SPX + 6 = 1936
NAS + 13 = 4310
10 YRYLD + .02 = 2.60%
OIL + .38 = 106.91
GOLD + 2.80 = 1276.90
SILV + .15 = 19.77

For the week, the Dow was down 0.9%, the S&P fell 0.7 percent and the Nasdaq was down 0.25%. The week's decline was the first after three weeks of consecutive gains on the S&P 500. For the year, the broad market index is up about 4.8%. So, it was a rough week, but a good Friday the 13^th.

The Producer Price Index measures prices at the wholesale level; the PPI was down 0.2% in May. The decline was driven lower by cheaper food and gas, and follows two months of strong gains. In the past 12 months, producer prices have risen 2%, matching the Federal Reserve's inflation target. That's down from an annual gain of 2.1% in April. Excluding the volatile food, energy and profit margin categories, (for all you people who don’t eat food or drive in cars) core producer prices were unchanged in May. Inflation, as measured by the consumer price index, has been mostly below 2% for the past two years.

Of course, that might change, at least for people who eat and drive cars. The price of oil has jumped the past few days, now standing at $106.91 a barrel, mainly on fears of a civil war in Iraq. The International Energy Agency played down fears over the possible loss of oil exports from Iraq in its monthly Oil Market Report, writing: "Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk." Oil futures in New York rose 4.1% this week.

A very nasty group of rebels known as ISIS is closing in on Baghdad. ISIS stands for the Islamic State of Iraq and Syria, or the Islamic State of Iraq and Levant, and they are made of Sunnis. The government of Iraq is controlled by Shi’ites. ISIS has taken over the second largest city of Mosul; they have surrounded the largest oil refinery in the country, and they are moving to the capitol of Baghdad. So far, the Iraqi soldiers have been running away, but today a message from the Grand Ayatollah Ali al-Sistani, who is the highest religious authority for Shi'ites in Iraq, said people should unite to fight back.

In an interesting twist, before ISIS started ramping up the fight in Iraq, they were fighting in Syria, against the government of Bashar al Assad.

President Obama told reporters at the White House he would not send US troops back into combat in Iraq but had asked his national security team to prepare "a range of other options" to help Iraqi security forces. He specifically did not rule out the use of military action, which might include the possibility of air attacks to slow the rebel advance.

Pope Francis says the global economic system is near collapse. In an interview with la Vanguardia, the Pope said he was especially concerned about youth unemployment, and he denounced the influence of war and the military on the global economy, saying: “We discard a whole generation to maintain an economic system that no longer endures, a system that to survive has to make war, as the big empires have always done. Since we cannot wage the Third World War, we make regional wars. And what does that mean? That we make and sell arms. And with that the balance sheets of the idolatrous economies -- the big world economies that sacrifice man at the feet of the idol of money -- are obviously cleaned up."

The pope said there was enough food to feed all the world's hungry, and people’s needs should be at the heart of the economic system.

Following the elections in the European Union, France issued a report on debt, which contained several key findings, including the idea that the rise in the state’s debt in the past decades cannot be explained by an increase in public spending. The report also says that no one actually knows who holds the French debt. And the big conclusion of the report is that some 60% of the French public debt is illegitimate. An illegitimate debt is one that grew in the service of private interests, and not the wellbeing of the people. Therefore the French people have a right to demand a moratorium on the payment of the debt, and the cancellation of at least part of it.

Goldman Sachs and Bain Capital have agreed to pay a combined $121 million to settle a lawsuit that accused them and other firms of colluding to drive down the prices of takeovers before the financial crisis, according to a court filing on Wednesday. The deal, if approved by the court, would bring closure for Goldman and Bain of a seven-year-old lawsuit filed by former shareholders of the acquired companies, who claimed that private equity firms teaming up to do deals were partners in an illegal conspiracy to reduce competition.

The settlement deal also raises the stakes for the remaining defendants, which include some of private equity’s biggest firms. The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital, Silver Lake and the Carlyle Group are scheduled to head to trial in November. Now the $121 million dollar settlement is fairly small, but now that Goldman and Bains have broken ranks with the other defendants, the lawyers for the plaintiffs may gain additional bargaining power. The plaintiffs are seeking billions of dollars in damages, but because of the mechanics of antitrust law, the defendants could be liable for a multiple of that amount if they lose at trial.

The Justice Department has asked Citigroup for more than $10 billion to settle a probe into the bank’s sale of mortgage-backed bonds before the 2008 financial crisis. Prosecutors broke off talks with Citigroup earlier this week and are preparing to sue the bank after it offered less than $4 billion ($1 billion cash and the rest in consumer relief) to resolve the matter. The Justice Department could file a lawsuit as early as next week.

The department is taking a similar approach with Bank of America. Prosecutors also halted talks with the bank June 9 after it offered to pay more than $12 billion, short of the department’s $17 billion request. And then there is the outstanding case against BNP Paribas, where prosecutors are believed to be calling for more than $10 billion in fines for money laundering and sanctions violations. And this all follows on the heels of the Credit Suisse $2.6 billion fine and criminal guilty plea in a tax evasion case. No word whether prosecutors are looking at criminal charges against BofA or Citigroup. What we are seeing is that the fines are getting larger, but somehow with billions of dollars of penalties and multiple billions of dollars of wrongdoing, nobody ever goes to jail.

If you wonder why the prisons aren't filled with banksters, just follow the money from Wall Street to Capitol Hill. Earlier this week we saw one of Wall Street's favorite politicians of the decade, Eric Cantor, destroyed by a random teabagger who railed against him endlessly for pushing through Bush's TARP bailout of the big banks. Just this cycle, the financial sector had contributed $1,396,450 to Cantor's campaign coffers. And Cantor was just one of the politicians getting their wallets fluffed by Wall Street, a quick list of Wall Street favorites includes John Boehner, Spencer Bachus, Jeb Hensarling, and Democrats including Charlie Rangel, and Heny Stoyer. We have finally found one thing in Washington that is bipartisan – bribery, or should I say campaign finance…no, it’s bribery.

Elon Musk has announced that Tesla will let other companies use its inventions under an open-source-inspired agenda at the company. Here’s how Musk put it in a blog post:”Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”

Tesla has hundreds of approved patents, and many pending applications, for all manner of inventions tied to electric-vehicle technology. Tesla pioneered innovations that lowered the cost and increased the safety of battery packs. Its cars recharge much faster than others on the market, thanks to connector, software, and power-management advances. Now this public company will offer these smarts up to its rivals and ask nothing but goodwill in return.

And while it sounds like a radical idea, it might be a very smart business move. One thing that is required for electric cars is charging stations, as ubiquitous as gas stations. And even though Tesla has patents on battery technology, and they have some of the best batteries around with longer range and faster recharging, they still need to improve the technology. And Musk apparently isn’t concerned with the competition, saying: “You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters.”

Here’s an amazing statistic, compliments of a Tweet from Bill Gates. From 1901 to 2000, the United States built millions of miles of roads and interstate highways, plus Hoover Dam, plus many other damns, plus an incredible number of building; and during that 100 year period, we used 4.5 gigatons of concrete. In the past 3 ½ years, China has been on a building boom that has consumed 6.6 gigatons of concrete.