Tuesday, January 07, 2014 - No Place Else To Go

No Place Else To Go

by Sinclair Noe

DOW + 105 = 16,530
SPX + 11 = 1837
NAS + 39 = 4153
10 YR YLD - .02 = 2.93%
OIL + .46 = 93.89
GOLD – 6.00 = 1232.80
SILV - .32 = 19.95

Had to happen, eventually I suppose; an up day on Wall Street. Traders waded through the snow and decided to buy something. No place else to go. You can look for a better explanation, but I think that sums it up: no place else to go.

Maybe some folks think we're in bubble territory in stocks. I don't know. A couple of weeks ago, economist Robert Shiller wrote an article in the New York Times claiming we were near a bubble in housing. Being near a bubble and being in a bubble are very different. Shiller has a formula for stock valuations known as CAPE, which stands for cyclically adjusted price earnings ratio. For the past 60 years or so, the CAPE ratio has been around 18.3. If CAPE moves above this estimate of the mean, eventually it will "regress to the mean" and return to the long-term average. If CAPE rises excessively above the mean, then one can argue that a bubble exists in the stock market. Right now, CAPE is estimated to be 25.

Maybe there will be a reversion to the mean by way of prices dropping or maybe there will be a reversion to the mean by way of earnings rising. Either way, the prices of the underlying assets may be high relative to the cash flows that support them for an extended period of time. Which is another way of saying the markets can remain irrational longer than you can remain solvent. Maybe the markets will hit new highs and we'll have another record setting year on Wall Street. Who knows?

The Commerce Department reports the trade gap is getting smaller, a drop in oil imports pushed the trade deficit to the lowest level in 4 years, down 12.9% for November. Petroleum imports were the weakest in three years as advances in domestic extraction put the US on track to become the world’s largest oil producer by 2015. We're still buying stuff from overseas; things like cars, and parts, and other capital goods; the American consumer is still consuming. We're exporting more, especially airplanes. There has been a pickup in US manufacturing, and it's a little more than just a wave of exports; it appears more sustainable.

Energy independence, or at least developing a comprehensive plan to achieve US energy independence could be the single biggest way to boost the economy. Recently, FedEx CEO Fred Smith was quoted as saying “Oil is at the center of everything we do. If we produce more in the US and use less and develop alternatives … you allow the United States within our economy a half a trillion dollars more in GDP."

Six Republicans sided with Democrats on a 60-37 Senate vote to revive expired federal jobless benefits. The legislation would restore benefits averaging $256 weekly to an estimated 1.3 million long-term jobless Americans who were cut off when the program expired Dec. 28. Duration of federal coverage generally ranges from 14 to 47 weeks, depending on the level of unemployment within individual states. The three-month cost to the Treasury is estimated at $6.4 billion. Without action by Congress, hundreds of thousands more will feel the impact in the months ahead as their state-funded benefits expire, generally after 26 weeks.

At issue is a system that provides as much as 47 weeks of federally funded benefits, beginning after the exhaustion of state benefits, usually 26 weeks in duration. The first tier of additional benefits is 14 weeks and generally available to all who have used up their state benefits. An additional 14 weeks is available in states where unemployment is 6 percent or higher. Nine more weeks of benefits are available in states with joblessness of 7 percent or higher. In states where unemployment is 9 percent or higher, another 10 weeks of benefits are available.

Any legislation that clears the Senate would also have to make it through the House. Speaker John Boehner has insisted that any measure to renew unemployment benefits should be paid for, so today's vote was just a hurdle on the way to the battle. And any deals cut on unemployment benefits might spill over into other battles coming up in the next few weeks, including the omnibus spending bill and the farm bill. After that, Congress will face its toughest challenge of the year when Democrats and Republicans will have to find a way to prevent us from defaulting.

The deal to end the government shutdown in October raised the debt ceiling until February 7. The Treasury can employ extraordinary measures to extend the deadline even further. How long is still up in the air; it could come as soon as late February or as late as June depending on the amount Treasury collects in tax receipts.

Details about the JPMorgan-Madoff settlement are coming out today. JPMorgan Chase will pay $2.6 billion to resolve criminal and civil allegations it failed to stop or really even raise a warning flag about Bernie Madoff's Ponzi scheme. The bank will pay $1.7 billion to settle the government’s allegations, $350 million in a related case by the Office of the Comptroller of the Currency, plus $543 million to cover separate private claims. It's apparently the biggest ever bank forfeiture and also the largest ever Department of Justice penalty for violation of the Bank Secrecy Act. JPMorgan officials will not be penalized.

But wait, there's more. JPMorgan has come to the settlement because they turned a blind eye to what was, at a basic level, money laundering. Back in 2007 and 2008 it became increasingly clear that JPMorgan's top executives knew there were problems, and there are emails to support that.

The bank itself was invested with Madoff through a number of feeder funds. In the fall of 2008, a JP Morgan memo laid out what was wrong with Madoff. It questioned his "odd choice of a one man accounting firm, " and said that there were "various elements of this story that" made the bank "nervous." Two weeks later, the bank sent a memo to UK regulators saying that Madoff's returns were suspicious.

That was around October/November 2008, and as that was going on, JP Morgan also took $275 million of its money out of Madoff feeder funds. Madoff was arrested on December 11, 2008. JPMorgan connected the dots when it mattered to its own profit, but wasn’t so diligent when it came to its obligations to report illegal activity.

The financial services industry has grown like an cancer with the help of taxpayer bailouts and ongoing subsidies, all of which increase our debt.  In 2011, the Commerce Department reported the financial sector accounted for 8.4 percent of GDP, and represented 30 percent of corporate profits. If proceeds of US debt had been invested for roads, high speed railroads, new industries, cheap energy, airports, and to fund scientific research, the debt would self-liquidate. But the bailouts came with a huge component of dead-end financing designed to let bankers suck rents from the financial system. The Fed monetizes debt through asset purchases and has been filling gaping holes in bank balance sheets.

Meanwhile, median incomes have continued their seemingly relentless decline; for male workers, income has fallen to levels below those attained more than 40 years ago. In the US, where a growing economic divide – with more inequality than in any other advanced country – has been accompanied by severe political polarization. Maybe we can avoid another round of political bickering that resulted in last year's shutdown. But even if they do, the likely contraction from the next round of austerity – which already cost 1-2 percentage points of GDP growth in 2013 – means that growth will remain anemic, barely strong enough to generate jobs for new entrants into the labor force. A dynamic tax-avoiding Silicon Valley and a thriving hydrocarbon sector are not enough to offset austerity’s weight.

The fundamental problem of the global economy in 2013 remained a lack of global aggregate demand. This does not mean that there is an absence of real needs – for infrastructure, to take one example, or, more broadly, for retrofitting economies everywhere in response to the challenges of climate change. But the global private financial system seems incapable of recycling the world’s surpluses to meet these needs. And prevailing ideology prevents us from thinking about alternative arrangements.

Maybe the global economy will perform a little better in 2014 than it did in 2013, or maybe not. Maybe the stock market will perform better this year or maybe it will crash. I don't know. The problem seems to be that money pours into the market by default or maybe just because the salespeople on Wall Street are effective. There are other places for the money to go, it just isn't going there right now, and that seems to be a wasted opportunity. 

Monday, January 06, 2014 - A Cold Forecast

A Cold Forecast

by Sinclair Noe

DOW – 44 = 16,425
SPX – 4 = 1826
NAS – 18 = 4113
10 YR YLD - .03 = 2.96%
OIL - .31 = 93.65
GOLD - .20 = 1238.80
SILV + .02 = 20.27

A few big things this week. Friday we'll see the monthly jobs report. Today we had the confirmation of Janet Yellen, no surprise there; on Wednesday we'll see the minutes of the most recent FOMC meeting which will give us the justification for the taper. The minutes will likely include strong differentiation between taper and tightening, and the Fed is likely to stress the importance of accommodative monetary policy and ultra-low interest rates for the next 18 months or so.

Any bond gains have been curbed as we start the new year; a combination of the Fed slowing its bond purchases, plus corporate supply, plus there is still the safe haven aspect of bonds in the face of a few days of weakness in the equity markets. This Friday's jobs report will prove important as a barometer for yields. More than 2.2 million jobs were probably created in 2013, the most since about 2.5 million eight years earlier. The estimates call for 195,000 net new jobs in December and the unemployment rate to hold at 7.0%. If the economy added more than 200,000 jobs we might expect a more aggressive taper; fewer than 200,000 jobs and the taper might be more sanguine.

Healthcare spending in the US rose 3.7% in 2012 to $2.8 trillion, the fourth year in a row in this range as the slow economic recovery tempered private insurance use, drug prices fell and the government held back payment increases for doctors. For the first time in more than a decade, health care spending grew more slowly than the US economy from 2010 to 2012. It marks the slowest rate of increase in healthcare spending since 1960, even though that $2.8 trillion figure represents 17.2% of the national economy. Expenditures on health care, including everything from hospital procedures to prescription medicines, rose less than 4 percent a year from 2009 through 2012, after growing by an average of more than 7 percent from 2000 through 2008 and by double digits in the previous decade.

Today the Institute for Supply Management said its index on services fell in December, while the Commerce Department said new orders for factory goods rebounded in November following a drop in October. The pace of growth in the services sector slowed for a second straight month in December with business activity expanding at a lower rate and new orders contracting, according to the Institute for Supply Management. ISM’s index fell to 53 points last month from 53.9 in November, dropping to its lowest reading since June 2013 and under expectations for a read of 54.5. A separate report from the Commerce Department showed new orders for factory goods rebounded in November, rising 1.8%, as had been forecast. The department also said orders for durable goods, manufactured products expected to last three years or more, rose 3.4% instead of the 3.5% increase reported last month. Durable goods orders excluding transportation rose 1.2%.

And then, just to keep things interesting, Alcoa kicks off the earnings reporting season. And after the Fed minutes on Wednesday, the Bank of England and the European Central Bank will meet to determine monetary policy on Thursday. It should be a fun week.

Last Friday, Fed Chairman Ben Bernanke gave an upbeat outlook on the economy but he cautioned that the recovery "clearly remains incomplete." That was part of an economic conference in Philadelphia. Bernanke got most of the attention, but one of the more interesting comments came from New York Fed President William Dudley, who said  a lot is still unknown about how the bond buying works. His observation is important because he has long been a supporter of aggressive Fed actions to help the economy. The New York Fed leader has for some time expressed support for continuing the purchases, even as he also voted in favor of the Fed’s decision last month to cut back.

Referring to the Fed’s stimulus program, Mr. Dudley said, “we don’t understand fully how large-scale asset-purchase programs work to ease financial market conditions—is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?” Mr. Dudley also said that when it comes time to unwind the Fed’s easy-money stance, uncertainty is again a major issue facing central bankers. “There could be unintended consequences” about moving to a more normalized state of monetary policy, he said.

I tend to think that such uncertainty runs deeper than it appears at the Fed, which is why policymakers are eager to end asset purchases. The more they buy, the more they risk "unintended consequences" at exit time.

It's a cold week for most of the country. Spot wholesale electricity in Texas  topped $5,000 a megawatt-hour for the first time as cold weather boosted demand and prompted the grid operator to import generation from Mexico and ask users to conserve power until at least tomorrow. Power consumption on the Electric Reliability Council of Texas network, which covers most of the state, averaged 53,369 megawatts for the hour ended at noon, a 6.7 percent increase from the day-ahead forecast of 50,034 megawatts. One megawatt is enough to serve about 500 homes during mild weather and about 200 homes during periods of peak demand.

The forecast is extreme: 32 below zero in Fargo, N.D.; minus 21 in Madison, Wis.; and 15 below zero in Minneapolis, Indianapolis and Chicago. Wind chills, what it feels like outside when high winds are factored into the temperature, could drop into the minus 50s and 60s. That's dangerous cold weather. Frostbite and hypothermia can set in quickly at 15 to 30 below zero. A flu epidemic has now spread across half the country. It hasn't been this cold for almost two decades in many parts of the country.

There have been plenty of problems associated with the weather, not the least of which is air travel. Airlines canceled 4,400 flights on Monday, bringing the total to more than 17,000 over the last week. Today, there is a scheduled flight worth noting, Delta Flight # 2014 from Minneapolis to Atlanta; it marks the last commercial flight for the DC-9. For the past nearly 50 year, the Douglas DC-9 was an aviation workhorse, credited with bringing jet service to most small and medium sized US cities. Delta was the launch customer for the DC-9 back in 1965.

Business bankruptcy filings in the US dropped 24% last year to the lowest level since 2006. The American Bankruptcy Institute reports the total filings by businesses and individuals fell to 1.03 million, the report said, from 1.19 million in 2012.

A trial over how Detroit should end costly financial contracts with two big banks was suspended today after more than a foot of snow fell, paralyzing much of the city and closing the federal courthouse there. Creditors of the city had been scheduled to make their closing arguments against a plan for Detroit to pay $165 million to exit the contracts, known as interest-rate swaps. The creditors say that termination fee improperly favors the two swap counterparties, Bank of America and UBS.

The storm also stopped the trial just as a group of creditors accused the mediator who negotiated the swap-termination deal of misconduct. The creditors filed an objection last week, contending that the mediator had exceeded the limits of his authority when he publicly praised the $165 million deal and said he would recommend that the bankruptcy court approve it.

The creditors, including both financial institutions and labor groups, complain that the swaps were invalid from the time Detroit signed them, in 2005. They say that if Detroit took legal action against the two banks, instead of paying them to end the contracts, the city could obtain a much better deal. If Detroit cannot obtain the new loan, proposed by Barclays Capital, the city has warned that it soon will soon be out of cash and unable to pay its workers.

It was not clear when the trial might resume.

JPMorgan Chase is expected to announce this week that it has reached civil and criminal settlements to the tune of $2 billion for ignoring the signs of the Bernie Madoff Ponzi scheme. Madoff used JPMorgan as his bank, and this is basically a money laundering charge against JPMorgan. All told, after reaching the Madoff settlements with federal prosecutors in Manhattan and regulators in Washington, the bank will have paid some $20 billion to resolve government investigations over the last 12 months, and there might be more settlements in the months ahead. Authorities have opened a bribery investigation into JPMorgan’s hiring practices in China, prompting the bank to turn over internal emails and documents about its “Sons and Daughters” hiring program, which employed the children of the nation’s ruling elite.

The Madoff case, perhaps the largest threat to JPMorgan as it hung over the bank these last five years, produced its own damaging emails. The emails, some of which came to light in a private lawsuit against the bank, suggest that even as questions swirled about the legitimacy of Mr. Madoff’s operation, JPMorgan continued to do business with him. In one internal email sent before Mr. Madoff’s arrest in December 2008, a senior risk manager at JPMorgan reported that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” No individual executives have been accused of wrongdoing.

JPMorgan’s Madoff settlements will also likely involve a so-called deferred prosecution agreement, a criminal action that would essentially suspend an indictment as long as JPMorgan acknowledged the facts of the government’s case and changed its behavior.  JPMorgan has publicly maintained that “all personnel acted in good faith” in the Madoff matter; they may have to modify that position in light of the deferred prosecution agreement.

Wednesday, March 27, 2013 - What Does That Mean?

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

What Does That Mean?

By Sinclair Noe

DOW – 33 = 14,526
SPX – 0.92 = 1562
NAS + 4 = 3256
10 YR YLD - .05 = 1.85%
OIL + .35 = 96.69
GOLD + 5.90 = 1606.40
SILV - .07 = 28.79

With just a couple of trading days left in the first quarter, it looks like the S&P 500 will finish the quarter with its highest valuation in three years. At its current price, the S&P 500 has an LTM P/E of 16.1x; allow me to translate. The Price to earnings ratio, or P/E, over the last twelve months, (LTM) is 16.1. We get this number by taking the stock's current price divided by the company's 12 month earning per share. As an example, if a stock is priced at $10 and had earnings of $1, the P/E is 10. If they had earnings of $5 the P/E is 2; if they had earnings of 50 cents, the P/E would be 20. After gaining 9.2% year-to-date and growing its multiple, the S&P 500 will enter earnings season with high expectations. However, the current multiple is still low by long-term standards, so good earnings could sustain the rally. Maybe.

The Fed continues to throw money at Wall Street through its accommodative easing; Europe hasn't imploded yet; things could change and there could be a big event, but absent that, the stock markets will be paying attention to earnings. Forward looking P/E for the upcoming 12 months are expected to come in around 15.2. Now, in the past quarter the laggards have been technology companies, energy companies, and financials; while the leaders have been consumer companies and healthcare. One of the things to consider is whether the laggards can pick up the slack.

So, when we enter the first quarter earnings season, it will be interesting to see if there is a rotation to the energy or maybe the tech sectors. Tech should really be important when it comes to sustainability of the rally. Another area to watch is Emerging Markets, down more than 7% from the start of the year. If the markets are destined to move higher, the overseas equities would need to show strength, and might even represent an upside opportunity. Let me caution that I'm not making predictions here, just offering some thoughts on what might be important to watch.

Another thing to consider is that the US economy went flat-line in the fourth quarter; GDP was initially reported as negative and then revised to just barely positive, and in this environment, the stock market hits record highs. It won't be easy to turn in earnings numbers that support those new higher prices.

Lots of attention on Cyprus, especially tomorrow, when the banks are scheduled to reopen, with sharp restrictions; withdrawals will be limited to 300-euros per day. Big mess; lots of photo ops tomorrow. The Cypriot economy is struggling; they've gone almost two weeks with nothing but limited ATM withdrawals. Fitch just got around to downgrading the three biggest Cypriot banks.The banks are facing big losses and that is radiating out through the island economy. The private sector has already started cutting back.

When the banks reopen, they will confiscate deposits; nobody knows how much, but they will be taking from the accounts over 100,000-euro. The reversal of the decision to ‘tax’ insured depositors constitutes a last minute restoration of common sense. By forcing losses on uninsured depositors and the banks’ bondholders, taxpayers have to bear a smaller burden of the bailout loans; and this is a good thing.

One of the disturbing revelations is that the Euro-zone technocrats says this is the template for the future. It is now up to depositors to know the bad investments the banks hold, even if the banks themselves are withholding information or are clueless.

The Memorandum of Understanding, which is the deal that is supposed to explain how much the Troika will steal from bank depositors, has not been written up yet and, thus, the deal is utterly incomplete. In particular, we have no idea what degree and type of austerity will be imposed upon a collapsing social economy. And when a deal is reached, Cyprus is going to continue to be subject to the austerian predilections of the Eurozone, and we can see how well that is working out in Greece. A break, though more painful initially, might have been better in the long run. Cyprus should be “no big deal”, and it may still slip from memory, but it may also signal a turning point.

And with all that mess it's easy to forget about the mess in Italy. They had an election, with no clear winner, and today we learn they can't form a coalition government. The euro dropped below $1.28.

Remember the rest of Europe? Yesterday, S&P downgraded Bankia in Spain. They also cut their euro-zone gross domestic product forecast to negative 0.5% from the earlier estimate of a 0.1% decline.

The Bank of England’s Financial Policy Committee says British banks must come up with 25 billion-pounds in fresh capital by the end of the year to start plugging an estimated 50 billion-pounds ($75 billion) capital shortfall across the sector.

The largest US banks: Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo, together have paid $61 billion to settle credit-crisis and mortgage claims over the past three years, according to SNL Financial. But wait, there's more! Research firm Compass Point Research estimates that U.S. banks will wind up owing a further $24 billion related to the repurchase of faulty mortgage loans.

At least eight federal agencies are investigating JPMorgan; federal prosecutors and the FBI in New York are also examining potential wrongdoing. A recent misstep points to the growing friction between JPMorgan and regulators as well as to the concerns within the bank. JPMorgan misstated how the bank may have harmed more than 5,000 homeowners in foreclosure. The bank’s primary regulator, the Office of the Comptroller of the Currency, is expected to collect a cash payment from the bank to remedy the flawed review of loans. The problems stem from January, when JPMorgan and other big banks agreed to a multi-billion dollar settlement over foreclosure abuses. As part of the pact, the bank agreed to comb through each loan file to spot potential errors, a process that the regulators will use to help determine the size of the payouts to homeowners. While assessing 880,000 mortgages, JPMorgan overstated the potential harm for more than 5,000 loans.

In April senior executives are expected to meet with investigators who are examining the London Whale trading loss. A handful of executives have already met with authorities, but the second round will include Mr. Dimon. While he is not suspected of any wrongdoing, the officials hope Mr. Dimon will help build a case against traders in London suspected of lowballing their losses.

Federal prosecutors in Manhattan are examining JPMorgan’s actions in the Madoff case, suspecting the bank may have violated a federal law that requires banks to alert authorities to suspicious transactions. The comptroller’s office is investigating similar issues.

Marketwatch reports that Bernie Madoff is speaking out from prison, claiming  the banks knew of his Ponzi scheme all along. Madoff says that ‘the banks must have known,’ and were complicit and contributing to my crime.” He specifically points out JPMorgan Chase, Bank of New York Mello, HSBC, and Citicorp.

Madoff wrote that “the trustee seems unwilling to act on my offer” to help and he is therefore “offering this information to the appropriate governmental committees in the hope that this information will prove helpful in future regulation of the appropriate institutions.” The House financial services committee and the Senate banking committee had no immediate comment on whether they had received any information from Madoff.

Madoff’s comments come as prosecutors are looking at whether J.P. Morgan failed to fully alert authorities to suspicions about Madoff’s finances. Madoff’s comments also come as JPMorgan Chase is reportedly embroiled in a squabble with regulators over a government probe into the institution’s relationship with Madoff. According to a January Reuters report, the OCC, JP Morgan’s chief regulator, has been unable to obtain documents it has requested from the big bank in connection with an investigation into its relationship with Madoff.

The report cites a letter from Treasury Department inspector general Eric Thorson to JPMorgan’s general counsel, Stephen Cutler, saying the OCC has been unable to obtain what it is seeking. Madoff had an account at JPMorgan Chase that he used to transfer funds between offices.

The headline of the day comes from the Economist, under a section titled Catholicism and economics, the story is headlined “The Poor Pope” and the subtitle is: “Francis wants to emphasise the church's teaching on poverty. What does that mean?”

I'm not surprised that the folks at The Economist don't know what religion teaches us about poverty; the surprising part is that they turned their ignorance, or at least their indifference, into a headline.