Monday, April 14, 2014 - Blood Moon and More

Blood Moon and More

by Sinclair Noe

DOW + 146 = 16,173
SPX + 14 = 1830
NAS + 22 = 4022
10 YR YLD + .02 = 2.64%
OIL - .11 = 103.63
GOLD + 8.20 = 1327.60
SILV un = 20.07

Here’s what you can expect; the Earth will eclipse the moon tonight about 10:58PM pacific time, adjust according to your time zone. The eclipse will take some time, a few hours. The moon will shift color from orange to blood red to brown, again depending on you locale and the weather. It should be interesting.

The stock markets started the day in positive territory and as trading dragged on, the major indices moved lower on the very cusp of turning red, almost as if they were being eclipsed, and then positive again, right at 3:15 PM eastern time, everything just picked up. Now, you might think the markets are rigged. You might.

A group of traders has sued CME Group Inc, accusing the operator of the world's largest derivatives exchange of selling market data to high frequency traders, cheating other investors who lacked such access. The suit says the CME and its Chicago Board of Trade unit have been giving high-frequency traders early access to buy and sell orders.  They said this deprived other investors of the transparent, real-time data on futures and interest rate contracts that they thought they were getting, and were paying for.

Volume was down from Friday; that’s a nasty trend, lighter volume on up days, heavier volume on down days.

The economic calendar includes the March Consumer Price Index tomorrow; Wednesday brings an update on housing starts and building permits, plus the Federal Reserve will release its Beige Book; Friday, the markets are closed for Good Friday.

This morning the Commerce Department reported retail sales increased 1.1% last month; February’s sales numbers were revised higher to 0.7% from a previously reported 0.3%. An important subset of the report showed retail inventories, excluding automobiles, rose 0.2% in February. You will recall that businesses accumulated too much inventory in the fourth quarter of last year, and we have seen fewer orders as the businesses work through unsold goods and try to clear their shelves. That has left the inventory to sales ratio at its highest level since September 2009. Now, it looks like the buyers are back.

A separate report from the New York Fed showed people grew more confident in the labor market last month, with younger workers in particular seeing a greater chance of finding work should they lose their current job.

Earnings reporting season continues with Citigroup posting better than expected net income under of $3.9 billion, or $1.23 per share, from $3.8 billion, or $1.23 per share. Citi Holdings, which holds the bank's portfolio of troubled assets left over from the financial crisis, posted a loss of $292 million, down from $798 million a year earlier. For all of Citigroup, adjusted revenue dropped 2% to $20.1 billion. Citi still has problems with its Mexican unit, which is accused of making fraudulent loans. Also, Citi flunked the recent Fed stress tests for capital reserves. So, here we are nearly 6 years after the financial meltdown and Citi is still cleaning up its books, still exhibiting signs of structural damage, and unable to put money to productive purpose.

The Congressional Budget office says the deficit isn’t as bad as they thought. For the fiscal year 2014 ending September 30, CBO said, the deficit would fall to $492 billion from a $514 billion February estimate - and nearly a third lower than last year's $680 billion deficit. And CBO lowered its cumulative deficit forecast for fiscal years 2015 through 2024 by $286 billion, to a mere $7.6 trillion; the reason for the lower deficits, is that subsidies for health care costs will be less than previously guesstimated.

Deficits will reach a low point of $469 billion, or 2.6% of US gross domestic product, in fiscal 2015, then gradually start to rise, topping $1 trillion again in 2023 and 2024, a level that would be near 4% of GDP.

Last week the IMF and the World Bank held their Spring Meeting in Washington DC. Here’s a snippet from a panel discussion featuring Federal Reserve Bank of Chicago President Charles Evans and Citigroup chief economist Willem Buiter.

Charles Evans said: “In the U.S. monetary policy is using the standard transmission mechanism. We’re trying to reduce financing costs. Auto rates are down and the auto sector is way back compared to where it was. Housing is better. Mortgage rates are down. And if you have the ability to refinance, or get a mortgage – it’s tougher these days because of the standards - then you can do that. So it’s the standard transmission mechanism. And we are indeed trying to get inflation up because we’re below target. What comes with that is wage increases, also up to where they ought to be. Wages are a symptom of inflation – using a lagging indicator – and they’re down around 2 to 2.25% right now. When they’re at a steady growth part of the cycle they ought to be about 3.5% - 1.5% productivity and 2% inflation target. So getting everything up – and getting inflation up to where it is supposed to be is an important part of all of this. So that benefits everybody.”

Citigroup chief economist Willem Buiter responded: “Monetary policy works with asset prices. By boosting equities, raising bond prices, weakening the currency and that’s exactly how it has happened. Not very effectively, because we have poor man’s monetary policy. Which is what unconventional monetary policy is. But it’s all we have. I would have preferred to see some additional measures on the fiscal side, which could have mitigated some of the income distributional consequences…”

Over the weekend we saw the investment game plan detailed on Sunday morning talk shows. Did you catch it? The climate is changing; we can still fix it; it will require massive investment. According to the most recent Intergovernmental Panel on Climate Change report, keeping global warming down to a level people can live with means cutting carbon emissions to "near zero" by the end of the century, even in an increasingly industrialized world. That may be doable, but it will take "substantial investments" in everything from planting more trees to replacing fossil fuels with low-carbon power sources like solar, wind and nuclear energy. The report clearly shows that the challenges to resolve the global common problem are huge, but also this report shows that there are some steps to resolve this issue.

And the longer we wait, the more expensive it becomes, and if we wait too long, the Earth and all of us who are too miserly to invest now, will cook.

Any hope will require more than tripling the share of electricity produced by renewable sources or nuclear power, along with refining the still-evolving technology of capturing carbon emissions and storing them underground. And it will take a coordinated global effort, likely including taxes on emissions. No direct price tag was attached to that scenario, but the IPCC authors indicate it would require "substantial investments," and more delays just drive up the expected cost. The impact could amount to shaving the projected average growth of the global economy by six-hundredths of a percentage point, from about 2% per year to 1.94%, over the coming century. The total global economy was about $72 trillion in 2012, according to World Bank figures.

Secretary of State John Kerry, who in February called the issue "the greatest challenge of our generation," said Sunday's report is an economic opportunity.

Kerry said in a written statement: "So many of the technologies that will help us fight climate change are far cheaper, more readily available, and better performing than they were when the last IPCC assessment was released less than a decade ago. These technologies can cut carbon pollution while growing economic opportunity at the same time. The global energy market represents a $6 trillion opportunity, with 6 billion users around the world."

Despite more than two decades of efforts to restrain carbon emissions, not only are emissions still going up, they're going up faster than ever. Though there's been an increased emphasis on generating power from renewable sources, the use of coal has gone up in the past 10 years.

The Washington Post and the Guardian captured coveted Pulitzer Prizes for public service for their revelations about the US government's massive surveillance programs. The newspapers' stories were based on thousands of secret documents obtained from Edward Snowden, the former National Security Agency contractor who is living in Russia after fleeing the United States. The Post also won a Pulitzer this year for explanatory reporting. The New York Times won two Pulitzers, both for photography. No award was handed out for feature writing. The Boston Globe won for breaking news for its coverage of the Boston Marathon bombing. Reuters won an award for its coverage on the persecution of a Muslim minority in Myanmar who in efforts to flee often fall into the hands of brutal human-trafficking networks. The prize for investigative reporting went to The Center for Public Integrity for reports on how some lawyers and doctors rigged a system to deny benefits to coal miners stricken with black lung disease. The prize for explanatory reporting went to the Washington Post for work on the prevalence of food stamps in post-recession America. The prize for local reporting went to the Tampa Bay Times for an investigation into squalid housing conditions for the city's homeless population. The prize for national reporting went to The Gazette in Colorado Springs, Colorado, for his examination of how wounded combat veterans are mistreated.

I know what you’re thinking; this is a shocking development. Who knew there were still newspapers?

Monday, March 31, 2014 - Hope for the Best, Prepare for the Worst

Hope for the Best, Prepare for the Worst
by Sinclair Noe

DOW + 134 = 16,457
SPX + 14 = 1872
NAS + 43 = 4198
10 YR YLD + .01 = 2.72%
OIL - .18 = 101.49
GOLD – 10.10 = 1285.80
SILV - .06 = 19.86

Wrapping up the first quarter let’s go to the scorecard. The Dow Industrials lost 121 points in the quarter but gained 136 points in the month of March; the S&P 500 finished the quarter up 24 points and up 13 points in March; the Nasdaq Comp gained 22 points in the quarter and lost 110 points in March; oil prices are up $3.50 a barrel since the start of the year and down .42 in March; gold gained $74.80 for the quarter but lost $41.90 the last month; silver added .33 for the quarter but down $1.44 for the month of March.

The first quarter marked the fifth straight quarter of gains for the S&P 500 and the Nasdaq Composite indices. Last week’s drop of 2.8% in the Nasdaq Comp was the first such drop since October 2012, or the first time the Nasdaq dropped by 2.8% in 77 weeks.

Did you see 60 Minutes last night? They interviewed Michael Lewis, who is an excellent financial writer; he has a new book called “Flash Boys” and it deals with high frequency traders on Wall Street. They tried to present the idea that they had just discovered the market is rigged. It is rigged, and it has been rigged for quite some time; this is not a new discovery. The high frequency traders scalp as many trades as possible; they add no value; they do not make markets; they do not provide liquidity; they steal from everyone who buys and sells stocks. Good for Michael Lewis for writing a book about this, but it is not new.

And it is not the only market that’s rigged. Switzerland’s Competition Commission announced today that it had begun a formal investigation into eight financial institutions, over potential collusion to manipulate the currency markets. The regulator opened a preliminary investigation into the foreign exchange market last year. Regulators in Britain, the United States and other countries have begun investigations into whether traders tried to manipulate benchmark currency rates. The financial institutions being investigated include: UBS, Credit Suisse, Zurcher Kantonalbank, Julius Baer, Royal Bank of Scotland, JPMorgan Chase, Citigroup and Barclays.

And of course, this follows investigations into the Libor rate rigging, ISDAfix derivatives rigging, gold rigging, mortgages backed securities rate rigging, robo-signing, and the shorter path is to find markets that haven’t been rigged and manipulated. Earlier today, a district judge said shareholders could pursue a securities fraud lawsuit against JPMorgan for the London Whale trading scam. The financial sector dips its beak into everything, everywhere. The Bank of England recently admitted in its Quarterly Bulletin that banks don’t actually lend the money to the depositors; they lend bank credit created on their books. In the United States the finance charges on this credit amounts to approximately 30% to 40% of the economy. So, in effect, everything is rigged.

Janet Yellen, made her first public speech as the new Federal Reserve chairwoman, today in Chicago. Perhaps the takeaway line from Yellen’s speech was when she said: “There remains no doubt that the economy and the job market are not back to normal health. The recovery still feels like a recession to many Americans and it also looks that way in some economic statistics.”

And this is the very reason why the economy is not experiencing normal health; the Fed has been pushing money to Wall Street, so the Wall Street bankers and traders can dip  their beak into everything, but QE1, 2, 3, and the Twist, and ZIRP haven’t produced jobs, because the money never made it to Main Street; and because the money never made it to Main Street, there is only weak demand, not enough demand to spur the economy into a virtuous cycle of growth and prosperity. 

Employers don’t hire people to save the American economy; they don’t hire people because the Fed is buying Treasury bonds. Employers hire people because if they didn’t, they wouldn’t be able to meet the demand for goods and services they produce, and they’d be leaving profit on the table, and some competitor would step in and take that profit. Employers hire because of demand, not QE.

Consumers create demand and demand creates jobs and the steady income from a job creates consumer demand; if that sounds like a death spiral, well it can be, unless there is some way to spur demand. What we have learned over the past 6 years, is that QE is not the answer; allowing the financial sector to dip their beaks and suck out finance charges to the tune 40% of the economy is not the answer.

Simply growing corporate profits is not the answer. US companies outside of the finance industry are holding more cash on their balance sheets than ever, with $1.64 trillion at the end of 2013. The profits have been growing for the past 5 years but income has dropped and employment growth, while steady has been anemic. Typically, profits recover before jobs, but the money doesn’t seem to be trickling down. One way corporations have been maximizing profit is by cutting labor expenses. And compensation has dropped to just over 60%, the lowest level since 1951.

So today Chairwoman Yellen talked about how the economy and job market are not back to normal health; she said the Fed had an “extraordinary” commitment to boosting the economy and adding jobs and that commitment will be needed for some time to come. The problem is that the Fed has been prescribing the wrong medicine.

The United Nations Intergovernmental Panel on Climate Change, the IPCC, issued its report on climate change today, and as we talked about on Friday, the report concludes that climate change is already having effects including: melting sea ice and thawing permafrost in the Arctic, killing off coral reefs in the oceans, and leading to heat waves, heavy rains and mega-disasters. And the worst is yet to come. Climate change poses a threat to global food stocks, and to human security.

The report is a three year project. The volume of scientific literature on the effects of climate change has doubled since the last report in 2007, and the findings make an increasingly detailed picture of how climate change poses a much more direct threat to life and livelihood. The warning signs about climate change and extreme weather events have been accumulating over time, but this report struck out on relatively new ground by drawing a clear line connecting climate change to food scarcity, and conflict.

"We're now in an era where climate change isn't some kind of future hypothetical," said the overall lead author of the report, Chris Field of the Carnegie Institution for Science in California. "We live in an area where impacts from climate change are already widespread and consequential."

The report was pretty straightforward and to the point; if the world doesn't cut pollution of heat-trapping gases, the already noticeable harms of global warming could spiral "out of control". Here are some of the key points of the report:

Climate change is already taking a sizeable chunk out of global food supply and it is going to get worse. Increases in crop yields – which are needed to sustain a growing population – have slowed over the last 40 years. Some studies now point to dramatic declines in some crops over the next 50 years – especially wheat, and to a lesser extent corn. Rice so far is unaffected. The shortages, and the threat of food price spikes, could lead to unrest.

Climate change poses a threat to human security, and could lead to increased migration. Potential shortages of food and water, because of climate change, could be drivers of future conflicts. These won't necessarily be wars between states, but conflicts between farmers and ranchers, or between cities and agriculture industry which wants water for food.

Some are more vulnerable than others. Poor people in poor countries, and even the poor in rich countries, are going to bear an unfair burden of climate change. Climate change is going to exacerbate existing inequalities, and it is going to make it harder for people to claw their way out of poverty. Still, no one is immune, or according to another contributing author Princeton University professor Michael Oppenheimer, “We’re all sitting ducks.”

As temperatures rise beyond 2 degrees to 4 degrees – our current trajectory – there are limits to how far society can adapt to climate change. The only way out is to cut emissions now – and buy some time by slowing warming – and at the same time make plans for sea walls, relocations, and other measures that can keep people out of harms' way.

The scientific data is now completely overwhelming. It is not easy or comforting to imagine the negative consequences, and this does not mean we can’t make some very important and meaningful changes. Indeed, this will probably be the most important issue for all of us for the next 30 or 40 years. It will dominate business activity as well as most other aspects of our lives. Hope for the best, prepare for the worst.

Friday, march 28, 2014 - Ukraine, Climate Change, and More

Ukraine, Oil, Climate Change, and More

by Sinclair Noe

DOW + 58 = 16323

SPX + 8 = 1857

NAS + 4 = 4155

10 YR YLD + .04 = 2.71%

OIL  + .30 = 101.58

GOLD + 3.20 = 1295.90

SILV + .13 = 19.92

Consumer spending increased 0.3% in February, but the January reading on spending was revised lower to 0.2%. Disposable income, or the money left over after taxes, rose 0.3% after adjusting for inflation, the most since September. It climbed 2.1% from February 2013. Wages and salaries increased 0.2% after a 0.3% gain. This tells us a few things; consumers are spending what they earn, basically hand to mouth; also incomes and spending are not enough to lift the economy and we will be seeing first quarter GDP estimates revised lower.

Today’s spending report showed purchases of durable goods, including automobiles, increased 0.1% after adjusting for inflation following a 0.4% drop in January. Purchases of non-durable goods, which include gasoline, gained 0.3%. Household outlays on services climbed 0.2% after adjusting for inflation. Today’s data also showed the core price measure, which excludes fuel and food, rose 1.1% from a year ago, the same as in January.

Total prices, which are the ones tracked by Federal Reserve policy makers, were up 0.9% from February 2013, the smallest year-to-year gain since October. That remains well below the central bank’s 2% target.

The Thomson Reuters/University of Michigan consumer sentiment index final reading for March came in at a four-month low of 80, down from 81.6 in February.

Next week’s big economic report will be the Friday jobs report. Unlike the last three monthly employment reports, the March data should be fairly clean of weather effects. And so the forecasts are calling for 200,000 net new jobs, compared to the 175,000 jobs added in February. A reading of 200k or better would confirm the idea that economic activity in the first quarter was slowed by the weather, and stable fundamentals will support strong growth.

US military officials estimate Russia's reinforcement of troops near Ukraine has brought the total forces there to as many as 40,000. The new US estimates of as many as 35,000 to around 40,000 troops are higher than the more than 30,000 total deployments reported earlier this week by US and European sources familiar with official reporting. Ukraine's estimates of Russian forces near the border are far higher than Western figures; the Ukrainians estimate there are 100,000 Russian troops amassed on the border. The military buildup is adding to concerns that Russia may again be readying an incursion into Ukraine following its annexation of Crimea.

The Russian deployments included the establishment of supply lines and a wide range of military forces. These include militia or Special Forces units made up of Russian fighters wearing uniforms lacking insignia or other identifying markings, similar to the first Russian forces to move into Crimea during Russia's recent military takeover there. The Pentagon has said there was no indication that the forces were carrying out the kind of springtime military exercises Moscow has officially cited as the reason for their deployment. Ukraine's government has put its heavily outnumbered and outgunned forces on alert for an invasion from Russia in the east.

President Obama wrapped up a foreign trip today with a visit to Saudi Arabia. The trip started with a visit to The Hague, then an economic summit in Brussels, then a visit to Italy and a meeting with Pope Francis; his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security. It is a safe bet that the conversation with the Saudi King included Ukraine.

So here are a few thoughts: it is possible that the US could sustain a sale of 500,000 to 750,000 barrels of oil per day from the Strategic Petroleum Reserves, the SPR. If the US coordinated with the Saudis to ensure that they did not cut back production; indeed, they could even step up production from 9.7 million bpd; the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. It is estimated that a $12 drop in the price of a barrel of oil could potentially cost Russia $40 billion in revenue.

This might have been part of the discussion but don’t count on it. Saudi incentives aren’t exactly in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to break-even. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from around $100 a barrel, where they have been for the last few months.

Back in the US, Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to US drillers. The SPR remains a potential weapon in the arsenal against Russia but it is a double edged sword.

A report in The Guardian provides a preview of a UN climate science report due to be published Monday. Government officials and scientists are gathered in Yokohama this week to wrangle over every line of a summary of the report before the final wording is released on Monday; the first update in seven years.

Nearly 500 people must sign off on the exact wording of the summary, including the 66 expert authors, 271 officials from 115 countries, and 57 observers; but governments have already signed off on the critical finding that climate change is already having an effect, and that even a small amount of warming in the future could lead to "abrupt and irreversible changes".

The final report from the Intergovernmental Panel on Climate Change, IPCC, will reportedly say that "In recent decades, changes in climate have caused impacts on natural and human systems on all continents and across the oceans."

"Both warm water coral reef and Arctic ecosystems are already experiencing irreversible regime shifts,” in other words we are already at the tipping point in some areas of the world. The biggest risks are for people living in low lying coastal areas, but there are also risks for inland flooding, as well as extreme heat waves. Drought could put safe drinking water in short supply. Storms could wipe out infrastructure. Climate change will slow down economic growth, and create new "poverty traps". Some areas of the world will also be more vulnerable – such as south Asia and south-east Asia.

The report argues that the likelihood and potential consequences of many of these risks could be lowered if ambitious action is taken to reduce the greenhouse gas emissions that cause climate change, but the report also acknowledged that a certain amount of warming is already locked in, and that in some instances there is no way to escape the effects of climate change.

The administrator of MF Global Holdings' bankruptcy plan has sued the auditor PricewaterhouseCoopers for at least $1 billion over its advice on a $6.3 billion European sovereign debt investment that helped fuel the brokerage's rapid demise.

According to a complaint filed in US District Court in Manhattan, PwC committed professional malpractice by offering "flatly erroneous" advice concerning, and approval of, the off-balance-sheet accounting treatment for the debt by MF Global and its then-chief executive, Jon Corzine. The complaint said PwC knew that the investment would add significant risk to MF Global's already weak finances. It said MF Global would not have taken on the exposure, which allowed it to book immediate revenue, had it received sound advice.

Corzine invested $6.3 billion in debt of countries such as Belgium, Ireland, Italy, Portugal and Spain to advance his strategy of transforming his futures and commodities brokerage into a global investment bank. As Europe's economy weakened, MF Global struggled with worries about the debt, margin calls, credit rating downgrades, and news that money from customer accounts was used to cover liquidity shortfalls, ending in its October 31, 2011 bankruptcy. The complaint said it is the first seeking to hold PwC liable for malpractice over its accounting advice for the sovereign debt. It does not address how customer money was used. Creditors would share in recoveries if the lawsuit succeeds.

General Motors is adding 971,000 cars to its global ignition switch recall, which began in February with 1.6 million vehicles and has been linked to a dozen deaths. GM said the recall is being expanded to include versions of the Chevrolet Cobalt, Chevrolet HHR, Pontiac G5, Pontiac Solstice and Pontiac Sky made during model years 2008-2011. Older versions of those cars, dating back to 2003, were recalled in February, along with the Saturn Ion.

A GM spokesman said "we're not taking any chances" that some of the newer cars could have ignitions that could be switched from "run" to "accessory," shutting down the engine and disabling the cars' power steering, power brakes and airbags. So it looks like GM is finally trying to do the right thing, but only after years of doing the wrong things.

Monday, November 04, 2013 - SAC Chairs Avoid Hard Time

SAC Chairs Avoid Hard Time

by Sinclair Noe

DOW + 23 = 15,639
SPX + 6 = 1767
NAS + 14 = 3936
10 YR YLD - .02 = 2.62%
OIL - .12 = 94.49
GOLD – 1.20 = 1315.60
SILV - .21 = 21.76

Stock markets finished October in fine fashion. Remember there was a brief rally in September when the Fed did not taper QE; then there was a rough patch as the government shutdown and tiptoed to the edge of not paying its bills, but that's all behind us now, at least for a month or so. December is now the next foreseeable turning point in the Washington budget battles. That's when a report is due from a joint congressional budget conference. Corporate earnings have been generally positive, even as guidance has been less than exuberant, but that's the game of earnings expectations: under-promise and out-perform. The S&P 500, the Dow industrials, and the small cap Russell 2000 saw new all-time highs last month; absent a big collapse, the Russell is on track for one of its best years of performance ever. The Nasdaq Comp, is still a long way from records but the petal is to the metal.

Since the start of the year through the end of October, the Russell and the Nasdaq are up more than 29%; the S&P 500 is up over 23%, and the Dow has added 18%. Looking forward to this week, a slew of economic data will be released, including: factory orders, the ISM non-manufacturing index, jobless claims, GDP data and personal income and outlays. Earnings season continues. Meanwhile, the soon-to-be former chairman of the Federal Reserve Ben Bernanke will speak on a panel in DC about “Policy Responses” to Crises. The correct answer according to Bernanke is to crank up the digital printing press and shower Wall Street with money.

Today, St. Louis Fed President James Bullard said inflation is too low and he'd like to see tangible evidence that inflation is moving closer to the Fed's target of 2%; that's an argument against tapering in the near term. Bullard thinks the Fed should ignore the “bickering in Washington” largely because it won't go away any time soon. Bullard thinks there will be too many distortions in the Friday jobs report to use the data in a definitive manner. So, all in all, it is a very low probability the Fed will taper in December. We would likely need to see inflation make a very big jump and see the next two jobs reports with net new jobs over 200,000. Doubtful. But we could see taper; it is still in the realm of possibilities. Or maybe we'll see the Fed double down and start buying $170 billion a month in treasuries and MBS. Also doubtful. The only certainty right now is that the Fed is providing fuel to the markets and for now the markets are moving higher.

If history is any indication, the market should see a fourth quarter rally. Shares have climbed in the final two months 82 percent of the time since 1928 when the benchmark gauge advanced at least 10 percent through October. So, the pump is primed. And if the averages hold, the S&P 500 could see a 6% increase in the final two months of the year, which would put the S&P at about 1850 by year's end. But that doesn't guarantee an end of year rally; a weak holiday shopping season could slow down the train, and Fed taper could slam on the brakes and send sparks flying. But for the moment, Wall Street is happy and traders are counting their bonus.

The bear market case is supported by rapidly rising price to earnings ratios, bullish sentiment on Wall Street, margin debt at 5 year highs, and the market has gone almost a year and a half without a real correction, so you have to figure we'll get one at some time. But if you're really counting on a correction, a serious, bring you to your knees correction, then you would look at the Fed hiking rates or tapering from QE combined with higher energy prices. Right now, the price of oil is back under $95 a barrel. No worries.

There will be no bonuses at SAC Capital; might not be a SAC Capital. SAC Capital Advisors has agreed to plead guilty to insider trading violations and pay a record $1.2 billion penalty, becoming the first large Wall Street firm to confess to criminal conduct since the days of Drexel and Michael Milken. The guilty plea and fine paid by SAC, which is owned by the billionaire investor Steven A. Cohen, are part of a broader plea deal. It also will impose a five-year probation on the fund and require SAC to terminate its business of managing money for outside investors, though the firm will probably continue to manage Cohen’s multi-billion dollar fortune. Cohen has not been charged criminally.

SAC’s admission that several of its employees traded stocks based on secret information also sours Cohen’s investment track record. Since 1992, the fund posted average annual returns of nearly 30 percent. The $1.2 billion penalty adds to the $616 million in insider trading fines that SAC agreed to pay to federal regulators earlier this year. Cohen, who owns 100 percent of the firm, will pay those penalties.

The plea deal does not incorporate a separate civil action by the SEC against Cohen. Also, authorities continue to view Cohen and other SAC employees as targets of a continuing criminal insider trading investigation. The plea agreement expressly states that it “provides no immunity from prosecution for any individual.” The firm will not trade about $6 billion in outside investors accounts but Cohen still has a personal fortune around $9 billion, and the firm will likely stay open to accommodate his personal wealth.

This was probably not a difficult deal for Cohen to make. He still keeps a big chunk of money, no matter how much was ill gotten. It’s far easier for SAC Capital as a corporate entity to plead guilty and settle with the government because it doesn’t have to worry about being incarcerated. The government is not going to incarcerate the chairs and desks. For now, SAC appears to be intact; prosecutors did not freeze assets. The corporate entity does not go to jail; just one more reason why corporations are not people.

Even before the deal could be done, it's coming under fire. The lawyer for a class-action suit over SAC’s trading in drug company Elan has asked a federal judge to reject the potential settlement. Federal judges have started to balk at rubber-stamping settlements in which defendants neither admit nor deny wrongdoing; a step in the right direction, but this deal with Steven Cohen seems to confirm that for Cohen at least, crime pays.

Another big settlement today involving big pharma. The Justice Department says Johnson & Johnson will pay more than $2.2 billion in criminal and civil fines for marketing drugs Risperdal, Invega and Natrecor for uses they weren't approved. The settlement also covers charges that the company paid kickbacks to doctors and pharmacies promoting the drugs.

The criminal filings said Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, marketed Risperdal for unapproved uses. The drug, approved to treat only schizophrenia, was marketed to also treat anxiety, agitation, depression and apparently anything that might feel better by taking a pill, preferably a blue pill.

The Johnson & Johnson subsidiary, Janssen, will pay $400 million for the illegal marketing, while Johnson & Johnson will pay $1.7 billion to settle civil cases with the federal government and 45 states.

You've heard of Blackberry's plans to sell itself. The mobile phone manufacturer never quite caught up with other smart phone makers. Today saw the collapse tentative takeover offer from Blackberry's largest shareholder. Blackberry's CEO resigned. The shareholder, Fairfax Financial Holdings, and an unnamed group of institutional investors will invest $1 billion through debentures that can be converted into common shares at a price of $10 a share.

A scientific panel set up by the United Nations has found that climate change will pose a serious threat to the world's food supply in the coming decades. The findings aren't set to be announced until March and are still undergoing editing, but a copy of the report has leaked online, and ended up on the New York Times. The findings come from the Intergovernmental Panel on Climate Change (IPCC), which has been releasing reports on the matter around every six years. The report paints a decidedly grim picture. Climate change will pose sharp risks to the world’s food supply in coming decades, potentially undermining crop production and driving up prices at a time when the demand for food is expected to soar. And they say they are already seeing the harmful effects in some regions.

On the food supply, the new report finds that benefits from global warming may be seen in some areas, like northern lands that are now marginal for food production. But it adds that over all, global warming could reduce agricultural production by as much as 2 percent each decade for the rest of this century. During that period, demand is expected to rise as much as 14 percent each decade, the report found, as the world population is projected to grow to 9.6 billion in 2050, from 7.2 billion today. The report finds agricultural risks “are greatest for tropical countries, given projected impacts that exceed adaptive capacity and higher poverty rates compared with temperate regions.” And yes, hundreds of billions of dollars are already being spent in an effort to reduce emissions in response to previous findings by the IPCC.

Thursday, October 10, 2013 - Goodbye Jamaica

Goodbye Jamaica

by Sinclair Noe

DOW + 323 = 15,126
SPX + 36 = 1692
NAS + 82 = 3760
10 YR YLD + .03 = 2.68%
OIL + 1.35 = 102.96
GOLD – 20.60 = 1287.40
SILV - .21 = 21.78

Over the past few days we've been hearing that a government default wouldn't be a big deal; that a default wouldn't actually mean default. But it turns out that avoiding a default is a very good thing indeed. Hope over a deal in Washington put the bid back in stocks; and for right now it is just hope for a deal on the debt ceiling, not an actual deal yet; and quite possibly no deal on the government shutdown. We may not get the government running again but the politicians finally realized that they can't strap a suicide bomb vest on US Treasuries.

We may have a bunch of idiot politicians in Washington...,

Yeah, we do have a bunch of idiot politicians in Washington. And they still have a lot of work to do. Republicans in the House of Representatives offered a plan to postpone the default for 6 weeks; President Obama has indicated that if a clean debt limit bill is passed, he would sign it, even if the government remains shut down. That might be a stumbling point. In another potential wrinkle, the GOP plan might permanently ban the Treasury Department from using extraordinary measures to avoid default; so in some ways it isn't a truly clean bill; plus it is very short-term, meaning we get to go through this again around Thanksgiving.

The possible extension means there is the possibility of broader budget talks, including possible deficit reduction. The prospect of broad budget talks is reviving worries among some liberals that Mr. Obama would agree to steps to trim Social Security or Medicare benefits to win Republican concessions, and one area in particular seems ripe – the chained CPI. That remains to be seen.

Bloomberg is reporting on a conversation between Obama and John Podesta, an informal adviser and former chief of staff to President Clinton; just before Obama was re-elected, he vowed to Podesta that he would never again bargain with Republicans to extend the debt limit. The precedent, set in the agreement that ended a 2011 budget standoff, “sent a signal that this was fair game to blackmail over whether the country would default.” According to Podesta, “He feels like he has to end it and end it forever.”

The stand Obama has taken on the latest fight over the government shutdown and borrowing limit -- refusing to tie policy conditions to raising the debt ceiling -- is an attempt to repair some of the damage that he and his aides believe he sustained by making concessions to Republicans to avert a default two years ago.

The Republicans will renew their attack on Obamacare. Heritage Action, the Koch brothers funded, conservative group leading the charge against the health care law has agreed to raising the debt limit but maintains that any measure re-opening the government would be met by demands for killing Obamacare. Just in case you were wondering why something is happening now, it's because the big money players from Wall Street and Big Oil were getting worried, and they started pulling the strings. We may have a bunch of idiot politicians in Washington, but they're the best idiot politicians money can buy. And this is why it is too early to say the deal is in the bag. Conservative Republicans might not throw their support behind Boehner's plan. Boehner made no mention of Obamacare this morning during his remarks.

So, we get a possible, temporary impasse on the debt ceiling, and no movement on the government shutdown, and the Dow industrials jump 300 points. Just imagine the temper tantrum Wall Street would have thrown if we had defaulted.

And then the cherry on top is that all of the fiscal dysfunction means the Federal Reserve FOMC is less likely to take action when they meet October 29-30, especially in light of the damage done by the shutdown. Then you also can consider the nomination of Janet Yellen, a dove, likely to prefer monetary stimulus to backsliding. Yesterday, the Fed released minutes of the September FOMC meeting and one of the concerns dealt with the “considerable risks surrounding fiscal policy.”

There are risks to fiscal policy. Today, a report that initial claims for unemployment benefits jumped 66,000 last week to 374,000. Exactly how much economic damage results from the shutdown will be hard to determine. Pollster Nate Silver, the guy who actually got the numbers right on the election, says the media is probably overstating the magnitude of the shutdown's political impact. Remember Syria? The fiscal cliff? Benghazi? The IRS scandal? The collapse of immigration reform? All of these were hyped as game-changing political moments by the news media. Yeah, not so much. Of course, if the not-yet-done deal doesn't get done and we go into default or if the shutdown lasts a long time, then the magnitude of the impact is being understated.

And all those polls you're seeing suggesting that the GOP is cratering with regards to public approval, and pulling the Democrats down with them, well all those polls probably won't translate in changes in the re-election efforts of incumbents, or the makeup of the House or Senate. And according to Silver's analysis the degree of polarization in Congress is higher than at any point since the Great Depression by a variety of measures, and is possibly at its highest point ever. It is very partisan, and that means there is a great amount of uncertainty. And so the Fed FOMC minutes were correct, there are risks to fiscal policy.

So, the markets bounced today, but it's not a done deal.

Something else I wanted to cover today. With all the political insanity, you might have missed an important story in the journal Nature. Try to think back to the hot days of summer. Now try to remember the hottest summer of the past 20 years. It's tough to put the exact date on it but we can all remember some brutal heat in the desert southwest; a hot spell where temperatures topped 110 or 115 for several days in a row. Well, there will come a time when we'll look back on those days as the good old days. Within a generation, whatever climate we were used to will be a thing of the past. The hottest, most extreme weather will be the average.

According to the new study, the mean annual climate of the average location on Earth will slip past the most extreme conditions experienced during the past 150 years and into new territory by between 2047 and 2069, depending on the amount of climate-warming greenhouse gases that are emitted during the next few decades. Once a location reaches the transition point, the average temperature of its coolest year will be greater than the average temperature of its hottest year for the past 150 years. Even more strikingly, the study found that the oceans, which have absorbed about half of the man-made carbon dioxide (CO2) emissions since the dawn of the industrial revolution 250 years ago, exceeded their historical bounds of pH measurements back in 2008. In other words, the oceans are becoming highly acidic.

Even with aggressive cuts in greenhouse gas emissions, the study found, the projected near-surface air temperature of the average location on Earth will move beyond historical variability in about 56 years from now. A business-as-usual scenario in which emissions continue on their current upward trajectory would see an unprecedented climate occurring 20 years sooner than that, in 2047. And they even break it down by city. New York will reach a tipping point by 2048; Los Angeles will get to the point of no return in 2048; Mexico City in 2031; Phoenix is 2043; and Kingston Jamaica will be there in 10 short years.

The boundary of passing from the climate of the past to the climate of the future really happens surprisingly soon. The study shows that tropical areas, which contain the richest diversity of species on the planet as well as some of the poorest countries, will be among the first to see the climate exceed historical limits — in as little as a decade from now — which spells trouble for rainforest ecosystems and nations that have a limited capacity to adapt to rapid climate change.

According to the study, conducted by a team from the University of Hawaii, about 1 billion people currently live in areas where the climate will exceed historical bounds of variability by 2050. This number would rise to 5 billion people under a business-as-usual emissions scenario, which is the emissions path the world is currently on. We could slow down, by cutting emissions we might buy more time until we hit the tipping point, but according to the new study, we will hit it.

The study is hardly the first to document the steady march toward hotter temperatures around the globe. Less than two weeks ago,the Intergovernmental Panel on Climate Change (IPCC) released its fifth report, describing a planet that is warming at an accelerated pace because of human activity. The past three decades have been the hottest since 1850, according to the panel established by the United Nations, which added that warming and sea-level rise will continue through the 21st century.

But by predicting the tipping point when traditional climates will be replaced by hotter futures, the new study provides a fresh way to look at the problem. There are several things we can start to look for, including changes in food production, especially from the tropics; water scarcity due to drought; and the prices will be affected as big agriculture responds, and much more, right down to specific locations.

Sorry Jamaica.

Friday, September 27, 2013 - Swords to Plowshares

Swords to Plowshares

by Sinclair Noe

DOW – 70 = 15,258
SPX – 6 = 1691

NAS – 5 = 3781

10 YR YLD - .02 = 2.62%
OIL - .16 = 102.87
GOLD + 12.40 = 1337.20
SILV + .05 = 21.88

The war hasn't started,... yet.

And it looks like it won't start any time soon; I refer, of course to US military intervention in Syria; the Syrian Civil War is ongoing, but the US didn't jump into that quagmire. A funny thing happened in New York last night, the five permanent members of the United Nations Security Council have agreed on a resolution that will require Syria to give up its chemical weapons; yes, that means Russia and China signed off on the deal, but there will be no automatic penalties if the Syrians fail to comply. If Syria fails to comply, there would need to be further UN agreement on what measures to impose for noncompliance. Still, it is a remarkable turn of events considering that a few short weeks ago we had destroyers in the Mediterranean and it looked like bombs would fly at the drop of a hat.

The diplomatic breakthrough on Syria came as Iran’s foreign minister, Mohammad Zarif, said progress had been made toward a resolution of the nuclear dispute between his country and the West, suggesting it could happen in a year. Zarif met face to face with Secretary of State John Kerry in one of the highest-level discussions between the two countries in more than 30 years. Then, this morning President Obama revealed he had talked by phone with President Hassan Rouhani of Iran, the first direct contact between the leaders of Iran and the United States since 1979. Obama said they discussed Iran’s nuclear program and said he was persuaded there was a basis for an agreement.

Mr. Obama added: “A path to a meaningful agreement will be difficult. And at this point both sides have significant concerns that will have to be overcome. But I believe we’ve got a responsibility to pursue diplomacy and that we have a unique opportunity to make progress with the new leadership in Tehran.”

So, the war hasn't started, and that's good. War is hell, and it's expensive. War, the military industrial complex, and the national security state that accompanies it can cost and arm and a leg, literally. And for many years, that is where American taxpayers' dollars have gone. Trillions of dollars. The Iraq war has cost somewhere north of $3 trillion, depending on the source for the numbers. And just to have the Tomahawk missile program sitting idle on the sidelines, waiting for potential deployment – that costs about $36,000 per hour. About $600 billion a year gets pumped into the Department of Defense, and that doesn't include the civilian intelligence community or the Department of Homeland Security. And we've recently learned there is more money being pumped to the civilian contractors than we previously imagined.

Budget cuts at the Pentagon were long considered an impossibility and a formula in Congress for political suicide. Now, the austerity movement’s first major initiative in Washington, known as sequestration, those mandated, take-no-prisoners, across-the-board cuts in federal spending instituted by Congress, have in fact accomplished what nothing else could: the first downsizing of our defense spending in this century. Sequestration cut about $40 billion from the Pentagon's funding this year. It's a start.

If we were smart, we should be able to get some credits for not starting wars, because that would have pushed military expenditures into the stratosphere. For example, no military intervention in Syria should result in at least $80 billion extra that could be spent to hire teachers or build bridges or public transit or to help veterans or green energy; whatever.

There should be a process for converting from a war economy to a civilian peace-time economy. Consider the Norfolk Naval Shipyard in Portsmouth, Virginia, a vast facility that repairs and rebuilds submarines. It spans 800 acres, contains 30 miles of paved roads and four miles of waterfront, employs 6,750 civilian workers, and has its own police and fire departments. Examining the current job categories at the shipyard reveals a skills base ready to be tapped to develop and produce green-energy technology. From electrical engineers and chemists to machinists, metal workers, and crane operators, there’s plenty of overlap between existing man- and womanpower in military industry and what’s needed for the robust growth of this country’s green energy sector.

For now, though, the shipyard is still doing submarines. And it will keep doing them until Congress makes new and different plans for this country. That's just one example; there are plenty more all around the country. Taxpayers have invested billions of dollars over decades in developing inventive technology, building infrastructure, and training skilled workers to fulfill military contracts for the war economy. It’s time for the American public to start seeing all this harnessed to new purposes.

Right now lawmakers are loath to cut funding if it means erasing military jobs in their districts, and the military-industrial complex has been particularly clever in the way it has spread its projects across every state and so many localities. Converting military contracts into green energy contracts would make redirecting wasteful military spending more politically feasible, and the federal government already operates an array of programs, including the Pentagon's own Office of Economic Adjustment, that could be expanded to help businesses and communities make the transition.

Moving public dollars into this country’s renewable energy sector could begin to lay the groundwork for a vibrant economy in the second and third decades of this century, while creating good jobs in a growth sector, working toward energy security, and helping this country reduce its reliance on fossil fuels. Like the construction of our interstate highway system in the 1950s, it’s an investment that would pay dividends for decades to come.

Maybe there is a better use of our time, energy, and money than to launch the next war.

The Intergovernmental Panel on Climate Change (IPCC), released the first chapter of its fifth assessment on global warming this morning, and the unequivocal message is that human beings are the “dominant cause of observed warming” that’s been seen since the mid-20th century and we must take action to cut greenhouse gas emissions. This is not news; while the certainty around the scientific case for man-made climate change has tightened somewhat, much of the new report reiterates the conclusions reached in the last IPCC assessment,which was released in 2007. 
The new report says that even if the world begins to moderate greenhouse gas emissions, warming is likely to cross the critical threshold of 2C by the end of this century. That would have serious consequences, including sea level rises, heatwaves and changes to rainfall meaning dry regions get less and already wet areas receive more. The IPCC warned that the world cannot afford to keep emitting carbon dioxide as it has been doing in recent years. To avoid dangerous levels of climate change, beyond 2C, the world can only emit a total of between 800 and 880 gigatonnes of carbon. Of this, about 530 gigatonnes had already been emitted by 2011. We're two-thirds of the way there. That has a clear implication for our fossil fuel consumption, meaning that humans cannot burn all of the coal, oil and gas reserves that countries and companies possess. In other words, we are fast approaching a tipping point, a point of no return.

Each of the IPCC’s last five big reports found that climate science has gotten increasingly certain that the planet is warming, and humans are the main cause. Scientists have a 95-100 percent certainty (“extremely likely”) that humans are causing temperatures to rise. Directly from the report: “It is extremely likely that more than half of the observed increase in global average surface temperature from 1951 to 2010 was caused by the anthropogenic increase in greenhouse gas concentrations and other anthropogenic forcings together.” The report in 2001 was 66 percent certain, and the 2007 report was 90 percent certain. Scientific conclusions that cigarettes are deadly and that the universe is about 13.8 billion years old have similar levels of certainty.

The science finds that the atmosphere and ocean have warmed, the amount of snow and ice has diminished, the global mean sea level has risen and that concentrations of greenhouse gases have increased. The central estimate is that warming is likely to exceed 2C, the threshold beyond which scientists think global warming will start to wreak serious changes to the planet. That threshold is likely to be reached even if we begin to cut global greenhouse gas emissions, which so far has not happened.

The IPCC assessments are important because they form the scientific basis of UN negotiations on a new climate deal. Governments are supposed to finish that agreement in 2015, but it's unclear whether they will commit to the emissions cuts that scientists say will be necessary to keep the temperature below a limit at which the worst effects of climate change can be avoided. And the worst effects of climate change are scary; livelihoods across the planet will be affected, the sea levels will rise, major changes in the sources and availability of drinking water, massive displacements of hundreds of billions of people, the acidification of the oceans, raging forest fires, famine, starvation, and more.

The science grows clearer, the case grows more compelling, and the costs of inaction grow beyond anything that anyone with conscience or commonsense should be willing to even contemplate.