Friday, December 7, 2012 - A Date Which Will Live in Infamy, Plus the Jobs Report

A Date Which Will Live in Infamy, Plus the Jobs Report

by Sinclair Noe

DOW + 81 = 13,155
SPX + 4 = 1418
NAS – 11 = 2978
10 YR YLD +.05 = 1.63%
OIL - .27 = 85.99

GOLD + 4.50 = 1704.50
SILV + .08 = 33.11

Today marks the 71^st anniversary of the attack on Pearl Harbor. There were of course, memorials in Hawaii and around the country. I've seen a few of the pictures. Each year the number of Pearl Harbor survivors that attend these memorials, their number grows smaller and their ranks thin. If you know a veteran of World War II, be sure to take time to recognize their stories, be sure to say thanks.

Today's major economic data was the monthly jobs report; widely expected to be weak due to the effects of Hurricane Sandy. Instead, it came in relatively strong. The headline numbers: the economy added 146,000 jobs in November, and the unemployment rate dropped to 7.7%, a four year low. The Labor Department claimed that the effect of Sandy on the report was minimal, saying in a statement, “Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.”

In other words, we should not look at this report as surprisingly good given the effect of the hurricane. Rather, the Labor Department claims that the jobs numbers should be analyzed without taking the storm into account at all. And by that standard, not only were the job numbers weak, there were some underlying problems. To be counted, a person would needed to have been out of work for three weeks or so on Nov. 12. The storm hit Oct. 29. Only a few workers met the length criteria. So, some of the storm's negative effects will likely show up next month.

This month's number beat expectations of 75-80,000 jobs, but that was considering the hurricane. Taking out the effects of the hurricane the number was below the average job growth per month of about 150,000 over the past two years. It is growth but it is sluggish and not enough.

First, this is the initial report; there will be revisions. Each month, the Labor Department issues its estimate for the previous month’s job growth, but it also issues revisions for the two months prior to that as well. And this report showed a net downward revision of 49,000 jobs. So really this report gave us a net job gain of 97,000 — a much less impressive figure than the headline 146,000; and there will be revisions.

The report also showed a decrease in construction employment of 20,000 jobs. If Sandy did in fact have a minimal effect on the report then this is strange, because recent housing start data has been positive; just this week the Commerce Department announced that construction spending increased in October, showing the continuance of a positive trend. So, if construction spending is increasing it should show up as jobs, unless construction spending isn't really increasing or perhaps because Hurricane Sandy had a bigger impact on these numbers than the Labor Department’s statement suggests.

After showing a solid 0.3% gain last month, the participation rate — or the percentage of adult workers in the workforce — declined once again by 0.2%. That drop in the participation rate appears to be the primary reason the unemployment rate dropped to 7.7%, as the household survey actually showed a net decline in jobs. While some of the overall decline in the participation rate has been driven by demographic reasons — an older country is going to have fewer people able to work — that only tells part of the story. Some of the decline in participation is undoubtedly a product of a depressed economy, and a true jobs recovery would have this number moving upwards, rather than the other way around.

Roughly 350,000 Americans left the labor force in November, lowering the rate, partly due to bad weather keeping Americans from working. The ranks of the long-term unemployed—those without a job for 27 weeks or more—fell only slightly to 4.8 million from 5 million.

One thing not indicated in the report is a negative effect of the fiscal cliff. But November's figures also show that jobs are growing too slowly to significantly lower unemployment or boost the economy's overall growth, which faces headwinds. To keep up with population growth, the economy needs to add about 120,000 new jobs every month just to keep the unemployment rate from rising. While any slowdown could prove temporary, even a brief stall will hurt job creation—one of the main things keeping consumers confident.


A survey by the University of Michigan, also released Friday, suggests consumers this month are already feeling markedly less optimistic about the economic outlook, after being more confident than they have been in five years. The Thomson-Reuters/University of Michigan consumer sentiment index's preliminary reading for December slumped to 74.5 compared with 82.7 at the end of last month.

The jobs report revealed a bifurcated economy. Service-related businesses, a broad category including retail, health care and other areas, are fueling much of the nation's job growth. Retail employment alone added more than 50,000 jobs last month. However, the goods-making part of the economy, manufacturing and the housing market, didn't contribute to job growth in November. Construction employment fell by 20,000 and manufacturing lost 7,000 jobs. Government hiring was roughly flat, but declined by about 50,000 in October.

An unusually high number of workers—more than 1 million—worked part-time instead of full-time because of bad weather, the government said. That suggests that some of the 350,000 decline in the labor force, and the drop in the unemployment rate, could be linked to Sandy.

In February, 2011, President Obama went to Silicon Valley and participated in a breakfast meeting of high tech bigwigs. Obama interrupted Steve Jobs to ask what it would take to make iPhones in the USA. Jobs answered: “Those jobs are gone and they're not coming back.”

Well, time change, and a few of those jobs are coming back. Apple will resume manufacturing in the US next year, not much but a few Mac computers will be made here, about $100 million in manufacturing.

Meanwhile, GE is spending some $800 million to re-establish manufacturing in its giant, and almost abandoned facility at Appliance Park, in Kentucky. In February 2012, GE opened an all-new assembly line to make water heaters. In March 2012, GE started a second assembly line to make refrigerators. Another assembly line is under construction make a new stainless-steel dishwasher starting in early 2013. Whirlpool is bringing mixer-making back from China to Ohio. Otis is bringing elevator production back from Mexico to South Carolina. And Wham-O is bringing Frisbee-molding back from China to California.

Chinese wages are five times what they were in 2000 and are expected to keep rising rapidly. And labor is a steadily decreasing percentage of the cost of manufacturing.  Oil prices are three times what they were in 2000. Natural gas in the US is a quarter of what it is in Asia. By moving manufacturing back to the US, time to market also improves dramatically. As a result, that water heater that GE makes, they can now sell it for 20% less.

We have seen a very short-term and I think very poor decision by companies to outsource labor in pursuit of maximizing shareholder gain; and in the short-term it worked, but there was a cost. These executives also outsourced innovation and design and quality, and they decimated the core of their domestic customer base, and they debased their good name and reputation in exchange for a quick pop to the spreadsheet and a boon for bonuses. Most of these firms that outsourced didn't consider the externalities, the hidden costs.

They missed the fact that management needs to have a close working relationship with workers to insure quality and innovation. They also missed the costs and risks of an international supply chain, which is increasingly out of step with the shorter, faster product cycles; and as labor becomes an ever smaller part of the overall process, labor savings become less and less relevant. As products become more high-tech, production is more complicated, and the quality, rather than the cost of labor, becomes a priority.

As it turns out, maximizing shareholder value in the short-term leads businesses to do things that detract from maximizing long-term shareholder value, such as outsourcing, favoring cost-cutting over innovation, the destruction of brand equity, and excessive executive compensation. Outsourcing isn't an isolated event. It's the result of the underlying philosophy of shareholder value.

Fiscal cliff negotiations have devolved into direct talks between President Obama and John Boehner, cutting other congressional players out in effort to streamline the talks. House Speaker John Boehner and House Minority Leader Nancy Pelosi sparred in dueling press conferences today.

Boehner declared there was no progress in the talks. He accused the White House of enacting a deliberate strategy of”slow-walking” the economy toward the fiscal cliff. Pelosi took umbrage at that term. She said Republicans are the ones who have not acted on a bill that’s cleared the Senate, which would extend the Bush-era tax cuts for 98% of the population. Mitch McConnell was apparently too befuddled and so he just filibustered himself.

Today’s jobs report shows an economy that’s still moving in the right direction but way too slowly, which is why Washington’s continuing obsession with the federal budget deficit is insane. Jobs and growth must come first. The fact is some 350,000 more people stopped looking for jobs in November, and the percent of the working-age population currently employed continues to drop — now at 63.6%, almost the lowest in 30 years. Meanwhile, the average workweek is stuck at 34.4 hours.

The slowness of the jobs recovery isn’t because of Hurricane Sandy, and it’s not because of any uncertainty over the looming “fiscal cliff.” Businesses won’t create more jobs without enough customers. But consumers can’t and won’t spend because they don’t have the money. Until the private sector is able to boost the economy we need to invest in the economy. Now is the time to invest. The cost of borrowing is low; the yield on the ten-year Treasury is near historic lows, and the need for more jobs and better wages so high, and our infrastructure needs repair. We need to invest in infrastructure to improve productivity, and that means an investment in jobs.

Thursday, December 6, 2012 - Dude, Watch Out for That Cliff

Dude, Watch Out for That Cliff

by Sinclair Noe

DOW + 39 = 13,074
SPX + 4 = 1413
NAS + 15 = 2989
10 YR YLD -.01 = 1.58%
OIL – 1.44 = 86.44
GOLD + 5.70 = 1701.00
SILV + .12 = 33.13

So, Barack Obama and John Boehner have figured out a way to deal with this whole fiscal cliff, man. There going to go to Seattle, Washington and they're gonna smoker reefers and drink coffee until they come up with, like a really great idea, dude.

Why not? It wouldn't be any worse than what they're doing now.

In economic news:

New applications for unemployment benefits dropped for the third straight week, but we're still not back to the levels before Hurricane Sandy. Initial jobless claims declined by 25,000 to a seasonally adjusted 370,000 in the week ended Dec. 1. Tomorrow is the monthly jobs report; don't expect it to reveal any long term trend; it will be distorted by the Hurricane and also by the holiday shopping season. The guess is for about 75,000 new jobs in November, well below the average for the past few months.

The Federal Reserve issues a quarterly flow of funds report; the most recent volume shows households trying to cut back on debt in the third quarter; or at least cutting mortgage debt, while student loan debt and car loan debt piled up. When factoring in inflation, American households have deleveraged by about 13% since the meltdown of 2008.

In the third quarter, a 3% drop in mortgages more than offset the 4.3% increase in consumer credit, namely student and car loans. Household net worth, the difference between assets and liabilities, rose $1.7 trillion to $64.8 trillion.

Companies again built up debt, with non-financial debt leaping 4.4% as firms hit the corporate bond market with interest rates so low. Corporate stockpiles of cash hit a record $1.74 trillion, up 2.6% from the second quarter. After rising for the first time in a year and a half in the second quarter, state and local government debt slipped 0.1%. Federal government debt climbed 6.2%, which marked the smallest rise since the second quarter of 2008. All told, households, businesses and governments saw debt expand by 2.4% in the third quarter, which is the smallest increase since the fourth quarter of 2009.At $39.28 trillion, that’s just less than 2.5 times the nation’s annualized output in the third quarter.

Debt may well be one of the biggest drags on economic growth: 35-40% of everything we buy goes to interest; 29% of business profits go to the financial industry; 21-32 trillion are hidden in offshore tax havens.

You don't have to be paying interest on anything directly to be paying interest. Interest is built into the product; 40% of public projects, on average, goes to interest;12% interest for garbage collection; 38% interest on water processing; 70+% interest as part of public housing costs. US debt has not been paid off since 1835. In past 24 years US has paid $8.2 trillion in interest on $15 trillion in debt.

And Now – Banks Behaving Badly:

The British bank, Standard Chartered say it expects to pay $330 million to settle claims by United States government agencies that it had moved hundreds of billions of dollars on behalf of Iran, in violation of American sanctions against Iran. The estimated settlement payment would come in addition to a $340 million settlement the bank reached in August with the New York State Department of Financial Services, which charged Standard Chartered with scheming with Iranian companies and banks for nearly a decade to hide 60,000 transactions worth $250 billion from regulators.

Last Month, HSBC Holdings, another major British bank, set aside an additional $800 million to cover potential fines stemming from a money laundering investigation, bringing its total provisions for the case to $1.5 billion. HSBC is still negotiating a settlement. Last summer, ING Bank, reached a $619 million dollar settlement with the Treasury Department over claims the bank violated American sanctions against Iran, Libya, and other countries.

Now, we have another example of why corporations are not people. While several big banks set aside hundreds of millions of dollars, while neither admitting nor denying guilt, we present the strange tale of Gustl Mollath, a German man, who seven years ago, may the accusation that staff at the Hypo Vereinsbank (HVB) – including his wife, then an assets consultant at HVB – had been illegally smuggling large sums of money into Switzerland. Mr. Mollath was committed to a high-security psychiatric hospital after being accused of fabricating a story of money-laundering activities. He remains in that hospital to this day, against his will. But recent evidence brought to the attention of state prosecutors shows that money-laundering activities were indeed practiced over several years by members of staff at the Munich-based bank, the sixth-largest private financial institute in Germany, as detailed in an internal audit report carried out by the bank in 2003. The report, which has now been posted online, detailed illegal activities including money-laundering and aiding tax evasion. A number of employees, including Mollath's wife, were subsequently fired following the bank's investigation.

Asked why the bank kept the report to itself and did not approach the authorities, a bank spokeswoman said: "In 2003 HVB initiated extensive investigations via internal audits in response to information provided by Mr Mollath on transactions that had taken place a long time before … It was determined that employees had acted contrary to their instructions regarding Swiss banking transactions". While the findings did result in some firings, the audit "did not produce sufficient evidence indicating criminal conduct … that would have made a criminal charge seem appropriate". There are now calls for the judiciary to reassess Mr. Mollath's case, but nothing yet.

And that brings us to Argentina. You may recall that Argentina suffered a major financial crisis in 2001; the country successfully managed an external debt restructuring; they said no to the standard austerity package, and the result was a fairly remarkable economic recovery. But they're not out of the woods just yet. Elliott Capital Management, a vulture fund based in the tax haven Cayman Islands refused to accept the terms of the debt restructuring that was accepted by more than 92% of bondholders in 2005 and 2010. It has demanded payment in full, and has actively pursued its case in different courts across the world. A few months ago, Elliott Capital got a judge in Ghana to seize an Argentine navy ship. Then a judge in a district court in New York ruled that the Argentinian government must pay $1.3 billion to the same vulture fund, the full face value of their holdings plus accumulated interest starting in late 2001.

Elliott and other vulture funds are not conventional investors. They buy bonds at discount rates during a crisis with the explicit intention of taking the distressed countries to court in foreign jurisdictions, while also holding out for payment in full with no renegotiation of the debt. Obviously vulture funds are not concerned with niceties such as how the debt was accumulated, the principle that debts should be served according to the debtor's capacity to pay or how the enforced payments will affect the well-being of the most vulnerable. They represent global finance in its most nakedly aggressive and exploitative form.

The New York ruling also contained an injunction that prohibited third parties from "aiding and abetting" any violation of his order, thereby preventing Argentina from being able to continue payments to the creditors that had accepted the restructuring. This has far-reaching implications beyond this case, because it calls into question all debt restructuring deals that are not just likely, but also necessary to preserve international finance. For example; why would those holding Greek bonds accept a debt restructuring plan that might be necessary for a solution and beneficial to all, if they know that vulture funds can hold out and receive judicial support in international courts?

The ruling also contradicts US internal bankruptcy laws, which force minority creditors to confirm to deals accepted by 70% of creditors. If this ruling is supported in the higher courts (both Argentina and other creditors have already appealed) it will create an unviable situation for global bond markets. Creditors will only be making one-way bets if no possibility of restructuring is accepted, making the only options all (full payment) or nothing (complete default).

And then the credit rating agencies stepped in this week and cut Argentina's rating to slightly above junk status. Is Argentina at risk of default? Well, the current account is in balance, international reserves are above $46bn and the ratio of debt service payments to exports is less than 20%. Unemployment has gone from a high of around 22% to about 7%. Argentina has been one of the fastest growing economies in the world.

After 2002, Argentina reversed the austerity measures promoted by the IMF, renationalized key productive sectors like aviation, pensions and most recently oil, increased social protection and income transfers to the poor, and reduced poverty substantially. Real wages have increased, and wage inequalities have been reduced. In other words, Argentina is a dangerously successful story. It shows that there is life after a default, and that austerity is not the best way out of a crisis. These are two lessons that clearly frighten financial markets and their allies within the judicial system, and obviously there is concern that other countries in financial distress could seek to emulate this example. Remember Iceland? It's a safe bet that the Greeks, and Spaniards, and Italians remember.

Thursday, November 15, 2012 - Pick One or Pick All Four

Pick One or Pick All Four

by Sinclair Noe

DOW – 28 = 12,542
SPX – 2 = 1353
NAS – 9 = 2836
10 YR YLD =1.59%
OIL – 1.01 = 85.31
GOLD – 11.50 = 1717.10
SILV - .14 = 32.70

We had a few economic reports; they deserve mention; we also had a few flashpoints; we'll get to those soon.

Consumers paid somewhat higher prices for food, rent and housing in October, offsetting a decline in the price of gasoline at the pump. The consumer-price index edged up a seasonally adjusted 0.1% last month. Inflation-adjusted hourly wages, meanwhile, fell by 0.2% in October. Wages fell slightly, even as consumer prices rose, to account for the decline. Real wages have fallen 0.7% over the past 12 months, meaning consumers have less buying power compared with one year ago. Consumers got some relief in October, however, from the falling price of gasoline. The government’s price index of gas, which spiked 16.6% from July to September, tapered off 0.6% last month. The more important number to consumers — the actual cost of a gallon of gas — fell by almost 7% in October and retail prices continued to decline in the first two weeks of November. The average national cost is about $3.50 a gallon, down from nearly $4 a few months ago.

Hurricane Sandy contributed to negative readings for both Philadelphia- and New York-area manufacturing gauges in November; not a surprise.

First-time jobless claims soared by 78,000 to a seasonally adjusted 439,000 in the week ended Nov. 10; its the highest level for initial claims in 18 months; largely a side-effect of Hurricane Sandy.The bottom line is that in coming weeks the data will be extremely volatile and will likely not reflect the true picture of the labor market developments.

Tens of thousands of European workers take to the streets in a historic, concerted action to protest soaring unemployment and unprecedented austerity. The Bank of England's Mervyn King warns that the slump will be longer and more painful than imagined. It is slowly dawning on policy-makers in each region just what a mess they are in. Mervyn King warns that, five years after the collapse of Northern Rock,the British economy is still only halfway through the crisis. Meanwhile German Chancellor Angela Merkel talks of another half a decade of misery in the euro-zone.

The European Union statistics agency, Eurostat reports third-quarter euro-zone gross domestic product shrank 0.1% compared to the second quarter. That’s equal to an annualized contraction of around 0.4%. That follows a 0.2% quarterly contraction in the previous three months. A recession is widely defined as two consecutive quarters of shrinking GDP. The figures didn’t tell us anything we didn’t already know. However, they did confirm that things are at least as bad as we thought.

Greece's finance minister has written to the UK's finance minister asking for further information on Greek citizens who were recently revealed to hold offshore accounts with HSBC in the channel isle of Jersey.

"We had no idea about their existence and were surprised when their names were included on the list recently made public by HSBC," said a senior finance ministry official. "The minister sent the letter because he wants to get to the bottom of it. Tax evasion is one of our biggest problems."

An estimated 57,000 Greeks are believed to have transferred banks deposits abroad since the crisis' outbreak in Athens in late 2009.

In a separate development, the finance minister announced that the country was also poised to dispatch letters to some 15,000 Greeks who moved about €5bn abroad without declaring it to tax authorities. "More than €2bn of that amount could be recouped in taxes," said the finance ministry official. "Ordinary Greeks who are suffering from so much austerity want to see some action."

The International Monetary Fund drew a line in the sand on Greek debt negotiations today, saying the fund’s European bailout partners must do more to cut the ailing country’s debt for the sake of the global economy and the fund itself can’t offer any better loan terms. German chancellor Angela Merkel has once again rejected the idea that governments should take a loss on their loans to Greece.

There is still a lot of talk about the fiscal cliff. Nothing much changed today. We'll keep you posted. Federal Reserve Bank of Dallas President Richard Fisher said: “Only the Congress of the United States can now save us from fiscal perdition. The Federal Reserve cannot,” and he added the Federal Reserve won’t be there to bail out legislators if they fail. Fisher said: “Our Congress–past and present–has behaved disgracefully in discharging its fiscal duty.” Apparently Fisher missed the irony of his remark. Also, no notice of how similar Fisher's remarks sound to the IMF's warnings on Greek debt negotiations.

 Federal Reserve Chairman Ben Bernanke said today that banks' overly tight lending standards may be holding back the U.S. economy by preventing creditworthy borrowers from buying homes. 

Bernanke said: Some tightening of credit standards was needed after the 2008 financial crisis, but "the pendulum has swung too far the other way." Qualified borrowers are being prevented from getting home loans. Well, we know he's aware of the problem, the question is what will he do about it. In his speech, Bernanke gave no hint of what future moves the Fed might take. But he said officials at the central bank understood the problems still facing the US economy. Bernanke said the housing has shown signs of recovery this year. But he said construction activity, sales and prices remain much lower than they were before the crisis. About 20 percent of mortgage borrowers remain underwater.

Oh yeah, the Israelis and Palestinians are throwing bombs at each other across the Gaza border.

Fiscal Cliff, European recession, War in the Middle East, weak economic numbers in the US – Four flashpoints; pick one or pick all 4, and the world did not explode. It's a good day. 

BP has agreed to pay the largest criminal fine in US history – $4.5bn – to resolve all criminal charges arising from the fatal explosion and oil spill in the Gulf of Mexico.

BP agreed to pay $4bn to the US government over five years, and $525m to the Securities and Exchange Commission. That money will be paid over three years. The criminal settlement does not settle all of the claims against BP for the April 2010 blowout of the Deepwater Horizon, and the subsequent oil spill.

BP is not yet off the hook for environmental damage to the Gulf of Mexico, and could face billions in restoration costs to waters, coastline and marine life. The deal does limit BP's exposure to further criminal charges and penalties, and frees the company to focus on resolving those other civil claims.

The fine is the largest criminal penalty in US history, easily outstripping the previous record of $1.2 billion levied by the Justice Department against Pfizer over fraudulent marketing practices. In addition to the fines, the oil company agreed to plead guilty to 11 felony counts of misconduct or neglect of ships' officers, arising from the deaths aboard the Deepwater Horizon when the rig exploded and sank. It also agreed to single misdemeanour counts under the Clean Water Act and the Migratory Bird Act and one felony count of obstruction of Congress.

The settlement remains subject to US federal court approval.

Two BP employees will also face manslaughter charges over the 11 deaths in the oil-rig explosion that triggered the spill.

Notice that BP will not face charges of manslaughter, two employees will. Another reason why corporations are not people.

The US Census Bureau has released its report on “Income, Poverty, and Health Coverage in the United States:2011” Median household income declined, the poverty rate was not statistically different from the previous year and the percentage of people without health insurance coverage decreased. 

Real median household income in the United States in 2011 was $50,054, a 1.5 percent decline from the 2010 median and the second consecutive annual drop.

The nation's official poverty rate in 2011 was 15.0 percent, with 46.2 million people in poverty. After three consecutive years of increases, neither the poverty rate nor the number of people in poverty were statistically different from the 2010 estimates.

The number of people without health insurance coverage declined from 50.0 million in 2010 to 48.6 million in 2011, as did the percentage without coverage - from 16.3 percent in 2010 to 15.7 percent in 2011.

In 2011, the median earnings of women who worked full time, year-round ($37,118) was 77 percent of that for men working full time, year-round ($48,202) ─ not statistically different from the 2010 ratio. Real median earnings of both men and women who worked full time, year-round declined by 2.5 percent between 2010 and 2011. The rates of decline for men and women were not statistically different from one another.

Based on the Gini index, income inequality increased by 1.6 percent between 2010 and 2011; this represents the first time the Gini index has shown an annual increase since 1993, the earliest year available for comparable measures of income inequality. The Gini index was 0.477 in 2011. (The Gini index is a measure of household income inequality; zero represents perfect income equality and 1 perfect inequality.)

Income inequality also increased between 2010 and 2011 when measured by shares of aggregate household income received by quintiles. The aggregate share of income declined for the middle and fourth quintiles. The share of aggregate income increased 1.6 percent for the highest quintile and within the highest quintile, the share of aggregate income for the top 5 percent increased 4.9 percent. The changes in the shares of aggregate income for the lowest two quintiles were not statistically significant.

In 2011, 13.7 percent of people 18 to 64 (26.5 million) were in poverty compared with 8.7 percent of people 65 and older (3.6 million) and 21.9 percent of children under 18.

A Raft of Reports

by Sinclair Noe

DOW + 136 = 13,232
SPX + 15 = 1427
NAS + 42 = 3020
10 YR YLD +.03 = 1.71%
OIL +.65 = 88.48
GOLD – 5.20 = 1716.00
SILV un = 32.26

We have a drove of economic data to cover today; a mass of intelligence; a flock of facts; a legion of lowdowns; a swarm of information; and we'll sort through the stories and try to make sense of it all. Of course, tomorrow we'll get the big report on the monthly jobs picture for October. Friday's jobs report is expected to show non-farm employers added just 125,000 jobs last month - not enough to prevent the jobless rate from rising a tenth of a point to 7.9 percent. The unemployment rate fell to a near four-year low in September at 7.8%.

Today, we heard some hints about tomorrow's non-farm labor report. Automatic Data Processing, the payroll processor, always releases their report prior to the government's report. The ADP report is not a particularly good indicator of the BLS report. ADP shows private employers added 158,000 workers last month. There is some evidence of labor market improvement. It is not totally convincing yet but overall the message is positive.

Weekly initial unemployment claims declined to 363,000 for the week ending October 27, down 9,000 from the previous week. Unemployment claims topped out over 650,000 back in the first quarter of 2009 and have been moving mostly sideways this year, but are near the cycle bottom. Don't be surprised to see an increase in claims over the next couple of weeks, due to Hurricane Sandy.

The Institute for Supply Management, or ISM, issued its manufacturing index for October. The Purchasing Mangers' Index was 51.7% in October, up from 51.5% in September. The new orders index was 54.2%, up from 52.3%; the employment index was 52.1%, down from 54.7%. Any reading above 50 indicates expansion in the manufacturing sector, however this was not robust expansion. In a separate report, Eurostat says unemployment in the Euro-zone hit a new high of 11.6%; that bodes poorly for exports from the US.

These reports are not considered solid indicators for tomorrow's jobs report, which is expected to show of 125,000 payroll jobs for October, on a seasonally adjusted basis; the unemployment rate is expected to inch up to 7.9%. ADP has altered their methodology slightly, and we'll see if that makes them a bit more accurate. The bottom line here is that the economy continues to add jobs, although probably at a sluggish pace.

In a sign that businesses may not be poised to ramp up hiring significantly, the Labor Department said growth in non-farm productivity held steady at a 1.9 percent annual rate in the third quarter. The report also showed unit labor costs, a measure of the labor costs for producing any given measure of output, fell 0.1 percent as growth in hourly pay braked sharply. It was the first decline since the fourth quarter of 2011.

And even while the jobs picture shows only slow growth, consumers are confident and they are apparently buying houses and cars. The Conference Board's consumer confidence index increased to 72.2 last month from a downwardly revised 68.4 in September; it is now at the highest level since February 2008. Generally when the economy is growing at a good clip, confidence readings are at least 90. The Conference Board’s gauge of consumers’ views on the present situation rose to 56.2 in October from 48.7 in September. The portion of survey respondents saying jobs are “plentiful” rose to 10.3% in October from 8.1% in September, while those saying jobs are “not so plentiful” declined to 50.3% from 51.2%, and those saying jobs are “hard to get” ticked down to 39.4% from 40.7%. Now, this confidence is in the face of next week's election and the end of the year fiscal cliff and a weak jobs market. What do we make of it? Are consumers delusional or are they just not buying the fear about the fiscal cliff that Wall Street is selling?

The Census Bureau reports overall construction spending increased 0.6% in September to $851 billion from $846 in August. The September figure is 7.8% above September a year ago. Private residential spending is 58% below the peak in early 2006, and up 29% from the post-bubble low. Non-residential spending is 29% below the peak in January 2008, and up about 29% from the recent low. Public construction spending is now 17% below the peak in March 2009 and at the post-bubble low.

The Federal Reserve released its quarterly survey of senior loan officers, and the report found that American banks and branches of foreign lenders have made it easier to get business loans, commercial-real-estate projects, car loans and credit cards, but not mortgages. Despite not making it easier to obtain home loans, banks have reported increasing demand for mortgages, in line with data showing improving sales of homes as well as a big spike in refinance activity. Why were the banks were reluctant to lend? Putback Risk, which is the risk that the FHA would force them to buy back bad loans. In other words, the banks still haven't learned how to underwrite a mortgage, or more specifically, they are more concerned with generating paper which can be sold into a mortgage-backed security, than they are with underwriting a good mortgage.

Automakers reported strong sales for the month of October. GM sales rose 4.7 percent to 195,764 vehicles, while those at Chrysler, an affiliate of Italy's Fiat, increased 10 percent to 126,185 vehicles. Both totals were the best either automaker had seen since 2007. Ford Motor's sales last month edged up 0.4 percent, while Toyota Motor's sales rose about 16 percent. Still, annualized sales figures are running slightly below expectations of 14.9 million sales, and Hurricane Sandy will likely mean a poor November. Still, car sales are getting some spillover benefits from an increase in housing prices, and the massive refinancing boom; plus light vehicle sales have been an area of strength as people replace older cars with smaller, more fuel efficient cars.

I told you there was a gaggle of economic reports today. What does it mean? Well, the economy is improving; it isn't powerful but it is progress. The jobs picture isn't strong but it has been growing for 31 months and will likely grow for a 32^nd month, and there seems little fear of a job market meltdown. Manufacturing is still a sore spot. American workers remain extremely productive, which shouldn't be a surprise to anyone. Consumers are feeling better, without being unrealistic. There is pent-up demand for houses and cars, but that demand is not yet strong enough to unleash a virtuous circle of powerful growth – that would require an added spark, which we haven't seen yet. And Hurricane Sandy will likely dampen any spark for the next couple of months.Of course, tomorrow, we'll hear about the impact of the monthly jobs report on the presidential election. I really don't think the impact will be profound.

At least that is my interpretation.

And another thing: Hurricane Sandy will influence the economy for at least the next few months. Gauging the disaster’s effect requires assessing economic activity that might be lost entirely against activity that is substituted with other products or services (like when entertainment spending falls but hardware-store sales rise).

This is the idea that Gross Domestic Product or GDP is a measure of all economic activity, both good and bad; the sale of cigarettes counts in GDP just as the sale of broccoli; therefore, you might think that all those people on the eastern seaboard who will now have to rebuild their damaged communities, you might think that would add to economic activity – but it doesn't. Conversely, whatever the direct losses from Sandy, they won't show up in GDP, which focuses on the flow of new production, sales and employment, rather than the condition of existing wealth.

In the very short term, like the next few weeks,the impact is likely to be negative, as workers are forced to stay home, capital equipment is either unusable or idled temporarily, and shops are closed. In the slightly longer term–that is, the remainder of 2012 and the first few months of 2013; the impact is likely to be slightly positive because workers make up for lost output, capital equipment is brought back online, consumers make purchases that did not take place during the disruptions, and the rebuilding of damaged property begins.

Natural disasters result in the destruction of an economy's capital stock and generally lead to the disruption of business activity. You need look no further than the long lines waiting for gasoline in New Jersey and New York, or the long lines of people trying to get a bus to get to work in New York. Somebody waiting in line for 2 hours to fill the gas tank does not add to productivity. Most guesstimates peg the economic losses around $30 to $50 billion, which would represent .2% to .3% of nominal GDP. Gains from reconstruction activity will be mostly offset by losses in overall output. The net effect will likely be slightly negative; not a huge hit to the economy, but enough to slow down growth momentum.

One final note: in the past few days, we've talked about climate change; we weren;t the only ones thinking about this issue. After previously indicating that he wasn’t going to back either candidate this election cycle, New York Mayor Michael Bloomberg endorsed President Obama in a column for Bloomberg News emphasizing that — in the wake of Hurricane Sandy — he wanted a candidate who would take climate change science seriously.

As Californians debate the "rich tax" contained in Gov. Jerry Brown's Prop 30, a new report challenges one argument for lowering tax rates on the wealthy: that millionaires simply move to avoid higher taxes, leaving the middle class with a higher burden.

The study, by sociologists at Stanford and Princeton, looked at two tax changes in California, a 1996 tax cut on high-income filers and a 2005 levy called the Mental Health Services Tax that took one percent of income over $1 million. Using tax-return data, the researchers examined how the changes affected "millionaire migration" in or out of the state before and after the tax laws were passed.

The research showed that millionaires not only were unmoved, so to speak, by their taxes being raised, "the highest-income Californians were less likely to leave the state after the millionaire tax was passed," wrote Charles Varner and Cristobal Young in their report.

In fact, the richer the Californian, the more likely he or she was to stay, the study found. Nor did the data suggest that lowering taxes lured millionaires to the state.

The pair previously studied millionaire migration in New Jersey, with largely the same results. But California's dynamic, tech-based economy may be, if anything, a better testing ground for the notion that job creators are forced out by taxation. "The presumption that exceptionally skilled, monied, and entrepreneurial individuals are also exceptionally mobile is debatable," Varner and Young concluded.

Aware, no doubt, of the politics swirling around their topic, Varner and Young appear to have considered every likely objection to their findings. They looked at the periods before each tax change in order to scoop up any high earners who moved in anticipation of being taxed. They scrutinized part-year returns to capture those who might take a second home to remove their out-of-state earnings from California's purview.

What they found is that California's millionaires, no matter the circumstances, move very little. "At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population," the report said.

Most of the fluctuation in numbers of millionaires, as my colleague Robert Frank pointed out in his book The High-Beta Rich, relates to the rise and fall of personal fortunes. "The remaining 98.8 percent of changes in the millionaire population is due to income dynamics at the top," Varner and Young wrote, "California residents growing into the millionaire bracket, or falling out of it again." 

This constant turnover in the top income brackets, the researchers say, may explain why millionaires aren't more sensitive to tax changes. A top earner who breaks into the millionaire's club only a few times in his career would be less likely to consider the tax when deciding to stay or go.

Indeed, the typical Californian millionaire only repeated his or her feat 54 percent of the time in the years from 1996 to 2003, the researchers found. Instead of paying one percent of their million-plus income to the government, this typical taxpayer would pay an effective tax rate of one-tenth of one percent over the 13 years. "This is a key question for someone considering whether to migrate for tax purposes," the study said.

The up-and-down fortunes of rich Californians is another reason they don't leave. "Most people who earn $1 million or more are having an unusually good year," Varner and Young wrote. "It is difficult to migrate away from an unusually good year of income."

So what does control millionaires' residential status? Loss of that golden opportunity for one: the greatest exodus of wealthy Californians in the years studied came after the collapse of the tech bubble. (The trend wasn't reversed until just after the Mental Health Services Tax was passed in '05.)

The other clear impetus for millionaires to get out of California was divorce. Knowing that the end of a marriage both occasions a move and shows up in tax data, the researchers used marital splits a "reverse placebo" to test tax data's ability to detect migration. In the first year after a divorce, 1.2 percent of divorcees start a new life elsewhere, according to the study.

"Divorce is something that has a very clear effect on migration, modest changes in the tax rate for high-income earners do not," the researchers concluded.

Paying for Climate Change

by Sinclair Noe

DOW – 10 = 13,096
SPX +0.22 = 1412
NAS – 10 = 2977
10 YR YLD -.06 = 1.69%
OIL - .16 = 88.56
GOLD + 11.20 = 1721.20
SILV + .51 = 32.36

Hurricane Sandy remains the compelling story; the latest count is that the storm killed 64 people in the US. The latest estimates are for up to $15 billion in insured losses, double that for uninsured losses, toss in at least $20 billion in lost business; we're looking at $50 billion and counting. Lumber futures soared on expectations for increased demand, while gasoline surged on concerns that a Phillips 66 refinery in Linden, New Jersey, could shut for an extended period after Sandy cut power to the plant that produces 238,000 barrels a day of fuel. The aftermath of Hurricane Sandy looks to be a soggy, protracted, costly affair. Over 8 million people are still without electricity. Blackouts could last beyond the election. Transportation is still clogged. The pictures and video out of New York and New Jersey look like war scenes. It will be a challenge but if you think it was a knockout punch, Fougeddaboudit.

A 13 foot surge of water hit the southern tip of Manhattan. That's a big wall of water. New Yorkers may be tough but what if the flooding happens again, and what if the water doesn't go away? A 13 foot rise in sea level might over time render uninhabitable many of the parts of New York City we've seen flooded during Sandy. Scary, right?

If you’ve followed the news and weather in the past 24 hours you have no doubt run across a journalist or blogger explaining why it’s difficult to say that climate change could be causing big storms like Sandy. Well: it is.

Scientific American had this great explanation:

The hedge expressed by journalists is that many variables go into creating a big storm, so the size of Hurricane Sandy, or any specific storm, cannot be attributed to climate change. That’s true, and it’s based on good science. However, that statement does not mean that we cannot say that climate change is making storms bigger. It is doing just that—a statement also based on good science, and one that the insurance industry is embracing, by the way. (Huh? More on that in a moment.)

Scientists have long taken a similarly cautious stance, but more are starting to drop the caveat and link climate change directly to intense storms and other extreme weather events, such as the warm 2012 winter in the eastern U.S. and the frigid one in Europe at the same time. They are emboldened because researchers have gotten very good in the past decade at determining what affects the variables that create big storms. Hurricane Sandy got large because it wandered north along the U.S. coast, where ocean water is still warm this time of year, pumping energy into the swirling system. But it got even larger when a cold Jet Stream made a sharp dip southward from Canada down into the eastern U.S. The cold air, positioned against warm Atlantic air, added energy to the atmosphere and therefore to Sandy, just as it moved into that region, expanding the storm even further.

Here’s where climate change comes in. The atmospheric pattern that sent the Jet Stream south is colloquially known as a “blocking high”—a big pressure center stuck over the very northern Atlantic Ocean and southern Arctic Ocean. And what led to that? A climate phenomenon called the North Atlantic Oscillation (NAO)—essentially, the state of atmospheric pressure in that region. This state can be positive or negative, and it had changed from positive to negative two weeks before Sandy arrived. The climate kicker? Recent research by Charles Greene at Cornell University and other climate scientists has shown that as more Arctic sea ice melts in the summer—because of global warming—the NAO is more likely  to be negative during the autumn and winter. A negative NAO makes the Jet Stream more likely to move in a big, wavy pattern across the U.S., Canada and the Atlantic, causing the kind of big southward dip that occurred during Sandy.

Climate change amps up other basic factors that contribute to big storms. For example, the oceans have warmed, providing more energy for storms. And the Earth’s atmosphere has warmed, so it retains more moisture, which is drawn into storms and is then dumped on us.

These changes contribute to all sorts of extreme weather. In a recent op-ed in the Washington Post, James Hansen at NASA’s Goddard Institute for Space Studies in New York blamed climate change for excessive drought, based on six decades of measurements, not computer models: “Our analysis shows that it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be directly linked to climate change. To the contrary, our analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change.”

He went on to write that the Russian heat wave of 2010 and catastrophic droughts in Texas and Oklahoma in 2011 could each be attributed to climate change, concluding that “The odds that natural variability created these extremes are minuscule, vanishingly small. To count on those odds would be like quitting your job and playing the lottery every morning to pay the bills.”

Hansen also argued a year ago that Earth is entering a period of rapid climate change, so radical weather will be upon us sooner than we’d like. Scientific American just published a big feature article detailing the same point.

...you might recall that another well-regarded scientist predicted behemoths such as Sandy in 2007. The article in Scientific American, by Kevin Trenberth, a senior scientist at the National Center for Atmospheric Research, was presciently titled, “Warmer Oceans, Stronger Hurricanes.” Trenberth’s extensive analysis concluded that although the number of Atlantic hurricanes each year might not rise, the strength of them would.

Hurricane Sandy has emboldened more scientists to directly link climate change and storms, without the hedge. On Monday, as Sandy came ashore in New Jersey, Jonathan Foley, director of the Institute on the Environment at the University of Minnesota, tweeted: “Would this kind of storm happen without climate change? Yes. Fueled by many factors. Is [the] storm stronger because of climate change? Yes.”

Raymond Bradley, director of the Climate Systems Research Center at the University of Massachusetts, was quoted in the Vancouver Sun saying: “When storms develop, when they do hit the coast, they are going to be bigger and I think that’s a fair statement that most people could sign onto.”

A recent, peer-reviewed study published by several authors in the Proceedings of the National Academy of Science concludes: “The largest cyclones are most affected by warmer conditions and we detect a statistically significant trend in the frequency of large surge events (roughly corresponding to tropical storm size) since 1923.”

Greg Laden, an anthropologist who blogs about culture and science, wrote this week in an online piece: “There is always going to be variation in temperature or some other weather related factor, but global warming raises the baseline. That’s true. But the corollary to that is NOT that you can’t link climate change to a given storm. All storms are weather, all weather is the immediate manifestation of climate, climate change is about climate.”

Now, as promised: If you still don’t believe scientists, then believe insurance giant Munich Re:

Munich Re, one of the world’s largest reinsurance firms, issued a study titled “Severe Weather in North America.” According to the press release that accompanied the report, “Nowhere in the world is the rising number of natural catastrophes more evident than in North America.” … While many factors have contributed to this trend, including an increase in the number of people living in flood-prone areas, the report identified global warming as one of the major culprits: “Climate change particularly affects formation of heat-waves, droughts, intense precipitation events, and in the long run most probably also tropical cyclone intensity.”

Insurers, scientists and journalist are beginning to drop the caveats and simply say that climate change is causing big storms. As scientists collect more and more data over time, more of them will be willing to make the same data-based statements.

The bottom line is, it doesn't matter whether you believe in climate change, you will pay for climate change.

The New York Stock Exchange and the Nasdaq were open again, running on back-up generators. For the month, the Dow fell 2.5 percent, the S&P 500 slipped 2 percent and the Nasdaq was off 4.5 percent. For the past six months, going back to the old idea of “Sell in May”; if you had sold on May 1^st, you would have avoided a 182 point decline in the Dow Industrials, you would have missed a 7 point gain in the S&P 500, you would have avoided a 73 point loss. I told you back in March and April. You're welcome.

I feel less certain about the best six months from October through May, but you place your bets and you take your chances.