Tuesday, July 01, 2014 - The Good, the Bad, and the Depressing

The Good, the Bad, and the Depressing
by Sinclair Noe

DOW + 129 = 16,956
SPX + 13 = 1973
NAS + 50 = 4458
10 YR YLD + .05 = 2.56%
OIL - .13 = 105.24
GOLD - .80 = 1327.10
SILV + .02 = 21.08

Record high closes for the Dow and the S&P.

The record setting bull market run refuses to stumble. The S&P 500 has not seen a correction, a drop of 10%, for 1,002 days, and counting. This marks the fifth longest stretch without a correction since 1928. The average time between corrections is about 18 months; we’ve now gone 33 months without a 10% pullback.  

The Institute for Supply Management said its manufacturing index registered 55.3% in June, down slightly from May’s reading of 55.4%. Any number above 50% signals expansion. Separately, the research firm Markit said its final reading of US manufacturing conditions in June totaled 57.3, compared with a preliminary reading of 57.5; still the highest reading since May 2010. So the manufacturing sector has expanded for 13 consecutive months, but it wasn’t a month over month increase, and we have to remember that manufacturing was expanding in the first quarter as the broader economy was contracting by 2.9%. Today’s reports were decent news for manufacturing, but hardly great.

The Commerce Department reports construction spending increased 0.1% in May, following a 0.8% increase in April. Construction activity totaled $958 billion at a seasonally adjusted annual rate in May, up 6.6% from a year ago. Single-family home construction was down 1.4% while apartment construction dropped 0.6%. The hotspot for construction was a 4.3% rise in construction of power generating facilities.

The upshot is that the economy is continuing to improve from the deep freeze of old man winter, even if the recovery is tepid. Most economists and analysts had called for 3% growth in the first quarter, not a 2.9% contraction. Now that the weather and the economy have thawed, we’re hearing talk of 3% growth going forward.

The strongest S&P 500 sector this year has been Utilities, up 17%. The S&P 500 Energy sector is up 13%, with the following subsectors: Oil & Gas Equipment and Services rising 28%, Oil & Gas Storage and Transportation up 25% and Oil & Gas Exploration up 22%.The weakest S&P 500 sector so far this year has been Retailing.

June auto sales beat expectations with Chrysler, Nissan, Toyota and Hyundai all posting healthy gains compared with the same month a year earlier. General Motors had a small increase and Ford’s sales declined. June new car sales approached 1.4 million, about the same as a year earlier. Most analysts were forecasting a 2% to 3% decline for the month. GM recalled an additional 8.5 million cars yesterday, which means that GM has now recalled 29 million cars since the start of the year, more than the total number of vehicles it sold in 2011, 2012, and 2013 combined. It’s also more than the 22 million vehicles recalled by all automakers last year.

AAA predicts that nearly 35 million Americans will take a road trip of 50 miles or more on the Independence Day weekend. The current national average price for a gallon of regular gasoline is $3.68, compared with $3.48 a year ago. According to AAA, gasoline prices are 20 cents a gallon higher due to “market fear about Iraq”.

Sunnis and Kurds walked out of the first session of Iraq's new parliament after Shi'ites failed to name a prime minister to replace Nuri al-Maliki; so, the prospects are poor for a new unity government that might prevent Iraq from collapsing. Meanwhile, the ISIS rebels continue fighting; they control suburbs  just west of Baghdad; they have been waging fierce battles in Tikrit, north of Baghdad, and there have been clashes to the south of the capital, leaving the city surrounded on three sides. The United Nations says more than 2,400 Iraqis had been killed in June alone, making the month by far the deadliest since the US "surge" offensive in 2007.

Geopoltical hotspots continue to flare up. Ukrainian forces struck pro-Russian separatists bases in eastern Ukraine with air and artillery strikes. The ceasefire came and went, and won’t be renewed. Russian president Putin accused the Ukrainian prime minister of shunning the road to peace; while Russian foreign minister Lavrov warned of a “new round of bloodshed”.

 A follow-up on yesterday’s Supreme Court ruling in the Hobby Lobby case, which dealt with a closely held corporation’s objection to paying for contraceptives in employees’ health care under the Affordable Care Act mandate. The Supremes said corporations are people, my friend, and they have religious beliefs, and so they are exempt from the mandate. There had already been exemptions for churches and non-profit organizations; in those situations the government determined that contraceptives would be paid by the government. This was the solution put forth in 2012, and revised in 2013, whereby taxpayers could pick up the tab for contraceptive coverage, instead of religious employers, as a solution to the First Amendment issues in question.

Writing for the majority in the Hobby Lobby case, Justice Alito wrote: “[the White House] could extend the accommodation that HHS has already established for religious nonprofit organizations to non-profit employers with religious objections to the contraceptive mandate. That accommodation does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’s stated interests.”

In other words, while the government can’t compel Hobby Lobby to finance contraceptives, it can compel taxpayers to do so. Another name for taxpayer funded healthcare is “single payer”. I’m not sure if the Supremes intended this, but they just justified the government to establish a single payer health plan, at least for contraceptives.

There was a time when a majority of Americans were confident in the Supreme Court, but according to a new Gallup poll just 30% say they are confident in the highest court. That’s the good news; people have more confidence in the Supremes than in any other arm of government, but that may not be saying that much when confidence in the presidency stands at 29% and in the Congress at 7%. Which means Congress is even less popular than head lice, or T-Mobile, or Facebook.

The Federal Trade Commission says T-Mobile made money the old fashioned way, by charging customers hundreds of millions of dollars in bogus charges. The practice is often referred to as "cramming"; businesses stuff a customer's bill with bogus charges associated with a third party. In its complaint filed in federal court, the Federal Trade Commission claimed that T-Mobile billed consumers for subscriptions to premium text services such as $10-per-month horoscopes that were never authorized by the account holder. The FTC alleges that T-Mobile collected as much as 40% of the charges, even after being alerted by other customers that the subscriptions were scams.

Facebook has its own little scam. It modified hundreds of thousands of users' accounts by prioritizing 'positive emotional content' to see if it could make them happier or sadder, without telling them what it was doing.

Researchers from Cornell University and the University of California filtered information going into the news feeds of 689,000 users; that includes the constant flow of links, videos, pictures, and comments by friends. When positive emotional content from friends was reduced, users would post more negative content themselves, essentially becoming unhappier. The opposite happened when negative emotional content was reduced. The process has been dubbed “emotional contagion”.

The study, published in the journal “Proceedings of the National Academy of Sciences of the USA”, concluded: “Emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks.”

A spokesman for Facebook said the research was conducted over a single week and none of the data was associated with a specific person's account. Instead, they said the site wanted to make its content more “relevant and engaging”.

Just to be clear, another name for emotional contagion is empathy, something that is in short supply at Facebook. What we really learned from this experiment is that the people at Facebook have spent so much time staring at a computer screen that they have become disconnected from emotional reality, and have to rely on scientists to run secret experiments on hundreds of thousands of lab rats, I mean customers, to discover that people get upset when their friends are unhappy. Even worse, the experiment confirms that social networks now have the power to change the emotional well-being of millions of lab rats, I mean customers, on a whim; just to see what happens; devoid of empathy.

Now that’s depressing.

Thursday, January 02, 2014 - Back in the Groove

Back in the Groove

by Sinclair Noe

DOW – 135 = 16,441
SPX – 16 = 1831
NAS – 33 = 4143
10 YR YLD - .04 = 2.99%
OIL – 2.93 = 95.49
GOLD + 17.50 = 1224.00
SILV + .57 = 20.11

I'm back. We'll try to settle into the groove here, starting with a look at the daily economic news.

Financial data firm Markit said its final US Manufacturing Purchasing Managers Index rose to 55.0 last month, beating November's 54.7 reading. So, manufacturing ended the year on a high note, growing in December at the fastest pace in 11 months.

Signs of strength in both the manufacturing and services sector as well as stronger job growth across the economy contributed to the Federal Reserve's decision in December to begin tapering, slowing its monthly bond purchases. I had expected the Fed would wait to begin the taper. I was wrong. It wasn't really a shocking development because we knew they would eventually taper, it was just a matter of timing. The taper hasn't actually started yet, it's only been announced.

One area where we're starting to see some impact is in mortgage rates, now at the highest levels since September. The average rate for a 30-year fixed mortgage was 4.53% this week, up from 4.48%. And Freddie Mac also reports the average 15-year fixed rate climbed to 3.55% from 3.52%.

While a jump in mortgage rates has slowed demand, buyers continued to push prices higher. According to the most recent S&P/Case-Shiller home price index, prices in 20 US cities rose 13.6% in October from a year earlier. Some of the price increase is because there are fewer foreclosures, which typically are sold with discounts. And earlier this week, the National Association of Realtors reported contracts to buy previously owned homes rose 0.2% in November, the first increase in six months, after a 1.2% drop in October that was larger than initially reported.

Meanwhile, Eurozone manufacturing also posted its strongest growth since May 2011, but there were some significant divergences with Germany posting solid growth and France showing a decline.

A separate report showed the ISM  factory index fell to 57 in December from the prior month’s 57.3, which was the highest since April 2011. Readings above 50 indicate expansion.

Russia retained the title of the world's top oil producer for 2013. For a while, the US overtook the top spot from Russia. The Russian oil output rose to a post-Soviet high of 10.51 million barrels per day in 2013, up almost 1.4 percent from 2012. We've seen a huge increase in domestic oil production, but Russia's economy relies on oil revenue and as oil prices declined, the Russians responded by boosting output.

In the US, small businesses increased their borrowing in November. The Thompson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1% in November from a year earlier. That would seem to be a leading indicator of continued economic expansion, and maybe an early signal of increased hiring ahead.

Applications for unemployment benefits declined last week to the lowest level in a month. Jobless claims fell 2,000 to 339,000. The number of people continuing to receive jobless benefits dropped by 98,000 to 2.83 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Those job-seekers rose by about 58,000 to 1.39 million in the week ended Dec. 14. Those extended benefits lapsed Dec. 28 as Congressional Democrats failed in a last-ditch effort to prolong the assistance before the House adjourned earlier in the month. Senate Democrats have pledged to consider a measure to reinstate the aid next week as lawmakers return to Washington.

The expiration of the extended benefits will leave about 25 percent of jobless Americans collecting unemployment insurance payments, down from 38 percent. Since 1946, when data was first collected, the share of unemployed receiving state or federal aid has never dropped below 30 percent.

Thirteen states raised their minimum wage yesterday. Those boosts will provide the country's low-wage workforce with some relief. But in many areas they won't be enough to bridge the gap between what people are paid and what they need to cover basic expenses. None of the states raised their minimum wages as high as $10.10, which is the wage proposed last year by Senate Democrats and later supported by President Obama.

Also yesterday, the Affordable Care Act went into law. Health insurance companies can't turn away anyone because of their medical histories or pre-existing conditions. Prices can't be higher for people with chronic ailments, or for women, and older individuals can't be charged more than three times what younger customers pay. Basic benefits like hospitalizations, prescription drugs and mental health care must be covered. Annual and lifetime limits to essential coverage are gone. And nearly everyone must obtain health coverage or face a tax penalty under the individual mandate.

More than 2.1 million people have signed up for Obamacare. Also, states report 3.9 million people signed up for Medicaid, which is expanding coverage in 25 states and the District of Columbia. Enrollment surged in December as the deadline for January coverage approached.

There are still problems with the website; it's working better than before, but that's not saying much. Some consumers still can't navigate their way, others will find the insurance they chose isn't in place, and others, whose polices were canceled because they didn't meet standards, will suffer lapses in coverage if they couldn't complete applications in time. But it's official now. You can't really undo 2.1 million insurance policies.

The S&P 500 finished 2013 with 30% gains, after posting all time highs for the first time since 1999.  The Dow average climbed 27 percent in 2013 for its best performance since 1995.

The first trading session of January has proven profitable for investors over the previous five years, with the index gaining an average of almost 2 percent that day since 2009. Three rounds of Federal Reserve stimulus and better-than-forecast corporate earnings have helped the S&P rally as much as 173% from a 12-year low in 2009.

Last January, the Dow posted a 5.7% gain for the month, and the S&P was up 5% for January 2013. And we were off to the races. There is a theory that the movement of the S&P 500 during the month of January sets the stock market's direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year. The theory comes from the Stock Traders Almanac.

Officially, the Almanac says every down January since 1950 has been correctly called by its Barometer and has a long-term batting average of almost 80%. In some instances a month seems like too long to wait. In those cases it’s possible to make a call after only five days, thanks to a predictive power that’s been almost 90% accurate over the years. You also look to history which says great years tend to be followed by good years. We end up seeing an average increase of 10% in the year following gains of 20% or more 80% of the time.  2013 was only the 6th time since 1929 that stocks finished the year at their annual high, a rarity that has historically preceded price gains in subsequent years by an average of 8.5%. Of course, if you want absolute certainty, you'll have to wait 12 months.

And even if the January Barometer does work, which it probably does, well, you've still got to be in the market, or get out of the market, depending on the signal. There's some old investing wisdom that says that “being right and making money are not the same thing.”

Those of us lucky enough to own stocks are a bit wealthier than a year ago, at least in theory, and depending on exactly what we own, and of course, on paper.  At least part of the rally in stocks has been driven by signs of a resilient, if not exactly booming, economy. It is a far better thing for stocks to be rising than for them to be falling. Despite the steady stream of good news out of the stock market, the majority of Americans still think the economy is getting worse, not better. Of course, only about half of Americans own stock, and that includes those in retirement accounts; they rely on wages, which haven't really budged.

Over the next few weeks and months, we'll likely hear a rash of good news about the economy; or is it a flurry of good news; maybe a passel of good news? No, I think it's more like a rash. The pessimism of 2013 was overdue, so we might expect undue optimism in 2014. And once we find a particular narrative, we'll fit the facts around it. You need to look beyond the headline growth figures. Once the monetary stimulus is exhausted, we'll probably need a new narrative for monetary policy. We still need to see improvement in the labor force. We still have enormous problems in Washington, and the budget issue will be front and center in the coming weeks. We'll need some new technology to lift us to whatever place we need to go. Maybe we'll find it. I hope so.

Monday, December 3, 2012 - Still in the Woods and Other Economic News

Still in the Woods and Other Economic News

by Sinclair Noe

DOW – 59 = 12,965
SPX – 6 = 1409
NAS – 8 = 3002
10 YR YLD + .02 = 1.63%
OIL +.01 = 88.92
GOLD + .80 = 1717.00
SILV + .22 = 33.76

Let's start with the economic news. Business among manufacturers contracted in November and fell to the lowest level in more than three years. The Institute for Supply Management's index of purchasing managers dropped to 49.5% from 51.7% in October. Any reading below 50 indicates contraction in the manufacturing sector. The decline in the overall ISM index largely reflected a steep drop in new orders but companies remained active fulfilling prior orders. Only six of the 18 U.S. manufacturing industries surveyed by ISM said they expanded somewhat faster in November. Nearly twice as many said their industries contracted.

In the euro zone, manufacturers contracted for the 16th straight month, according to Markit. China’s manufacturing sector expanded slightly.

In a separate report, the Commerce Department said spending on construction projects advanced 1.4% in October to the highest level since September 2009.

The big economic news will come on Friday with the monthly jobs report. The best guess is that the economy added about 75,000 jobs in November, but that is just a guess; Hurricane Sandy has distorted some of the economic numbers. The fourth quarter of 2012 has clearly gotten off to a slow start. Consumer spending, by far the biggest source of economic growth, fell in October for the first time in five months. And orders for expensive, long-lasting goods, or durable goods, were flat in October. Sandy disrupted economic life in the Northeast in late October and contributed to the decline in spending, but consumers were reluctant shoppers last month even when the effects of the storm are discounted; the reason is simple – lack of money. And that brings us back round to jobs; more jobs means more income and more spending.

Last week we saw the revision to the estimate that U.S. real GDP grew at a 2.7% annual rate in the third quarter, up from the initial estimate of 2%. Sounds good, but deeper analysis shows it's far from good.

The revised figures do show an improvement of 0.4 percentage points in the contribution of exports, which are now claimed to have added about 0.2 percentage points to the 2.7% growth figure instead of subtracting 0.2% as originally reported. But this was erased by a 0.4 percentage point reduction in the contribution of consumption spending. More than all of the reported improvement from 2% to 2.7% GDP growth could be attributed to a higher rate of inventory accumulation than previously estimated. To put it another way, real final sales for the third quarter were originally reported to have grown at a 2.1% annual rate, whereas the new numbers have the figure at only 1.9%. The bottom line is that growth in demand for U.S. goods and services overall remains weak, even weaker than originally reported.

The new report also gives us the first look at an alternative estimate of third-quarter GDP that is built up from separate data on the income people are earning rather than goods and services being produced. Conceptually, an estimate of GDP constructed using either method should produce the identical number. But in practice, one arrives at different numbers using different data sources. The bad news is that if you strip out the GDI, or Gross Domestic Income, the economy only grew at a 1.7% rate in the third quarter and actually fell 0.7% in the second quarter. Not so great but probably not enough to say we are headed for a significant downturn, unless.

Last week, Treasury Secretary Tim Geithner presented the White House plan to avert the fiscal bluff, or fiscal cliff, or whatever. In the ongoing battle of the budget, President Obama has done something very cruel. Declaring that this time he won’t negotiate with himself, he has refused to lay out a proposal reflecting what he thinks Republicans want. Instead, he has demanded that Republicans themselves say, explicitly, what they want. Republican leadership didn't like it, but they didn't offer an alternative, until today; when they kind of mumbled through a reply.. The alternative remains a little light on specifics, but it calls for $800 billion in new revenue achieved through closing loopholes and capping deductions; $900 billion in health care and other mandatory spending cuts; $300 billion in spending cuts for discretionary spending, which includes social programs such as food stamps; and $200 billion gained by changing the way the government calculates cost-of-living adjustments for Social Security and Medicare; and raising the eligibility age for Medicare benefits.

Where does that leave us?

The woods are lovely, dark, and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.

The stock market was essentially flat in November but the S&P 500 has chalked up some decent gains - over 12%, year to date. That's only partially accurate. A new report from Morgan Stanley chief equity strategist says that 90% of the profit growth has come from just 10 stocks in the S&P500. Those 10 stocks are: Apple, Bank of America, AIG, Goldman Sachs, Wells Fargo, JPMorgan, Citigroup, IBM, General Electric, and Western Digital. Striking that the profit growth is concentrated among banks and insurers. It helps to have friends in the Fed. Also, make note that this report referred to profit growth, not stock price.

The banks should be making money, the yields on agency mortgage-backed securities are really low, which leaves some wiggle room for the banks to build in some profits. And the banks have been wiggling. Which is not a really good thing for a couple of reasons. First, if the primary desire of Fed policy is to get people to buy houses, be rich, etc., and if its primary mechanism for doing so is buying MBS, then the inefficiency in transforming that mechanism into that desire is rather macroeconomically important and bad. Second, if money is coming out of the Fed and not ending up in homeowners’ pockets, that leaves only so many pockets it could be ending up in, and it is easy enough to observe that big banks (1) sit between the Fed and the homeowners and (2) have lots of pockets.

So the Fed held a conference on the matter today, and they produced a research report that basically said the banks make profit from charging more for a mortgage, than they are charged with Mortgage-backed securities; the banks pocket the difference, or the spread. The spread was 30-50bps in the ’90s and early 2000s, but rose to 150bps in September and is around 120bps now. So where banks used to make $10,000 on a $500,000 mortgage, now they make $25,000. Of course most of the loans are a better quality than years back, and most are refi's, with federal guarantees, but it seems the banks are making up for lost..? Maybe making up for the lost ability to rig rates elsewhere.

Swiss Bank UBS is reportedly near a settlement with American and British regulators for its role in the Libor rate rigging scandal. UBS is expected to pay $450 million and admit that some employees reported false rates to increase profit; if so, it would match the settlement and fine Barclays agreed to pay earlier this year. When the scandal broke at Barclays, it led to the CEO’s resignation and a shakeup in the company’s highest offices. So far, there have been no shakeups at UBS. The fine amounts to a blip on the $32 billion in annual revenue at UBS. Even though there were actual individuals scamming the Libor, there have been zero prosecutions. Nine figures sounds like a big amount but it is a pittance for the bank, especially because it will be passed on to shareholders, who can't be very happy. Shares of UBS are off nearly 70% since the financial crisis, the result of several scandals that included accusations that UBS helped wealthy clients dodge taxes and a $2.3 billion loss from the actions of a rogue trader.

Meanwhile, British lawmakers have announced plans to crackdown on tax dodgers; part of a campaign against “offshore evasion and avoidance by wealthy individuals and multinationals.” The push, the Treasury said in a statement, was expected to yield £2 billion in additional annual revenue. The drive comes amid growing criticism in Britain and elsewhere in Europe of the fiscal policies of several American companies that pay little tax on the billions of pounds and euros in sales that they generate in the region. The report focused on the tax practices of Starbucks, Amazon and Google, criticizing their policy of using lower-tax jurisdictions within Europe, like Ireland, Luxembourg and Switzerland, to record much of the revenue they generate in higher-tax countries like Britain, France and Germany. Companies like Google then transfer money they earn in Europe to Bermuda or other locations, thereby deferring or avoiding U.S. taxes as well. The companies say it's all perfectly legal

Ships are backing up, a kind of traffic jam off the coast from the ports of Los Angeles and Long Beach; freighters with no place to unload their cargo are line up at anchorages. The 800-member clerical workers unit of the International Longshore and Warehouse Union walked off the job last Tuesday, with some 10,000 longshoremen and other union members refusing to cross picket lines, forcing a shutdown at 10 of the twin ports' 14 container terminals. Four other container terminals remained open, along with facilities for handling shipments of automobiles, liquid fuels and cargo such as raw steel. The overall economic impact of the strike has been estimated to run at more than $1 billion a day, including lost wages of dock workers, truckers and others idled by the walkout, and the value of cargo rerouted by shippers.

The ports of Los Angeles and Long Beach together handled more than $400 billion in goods arriving or leaving the West Coast by ship last year. The strike  marks the largest disruption of cargo traffic through the two southern California facilities since a 10-day lockout at West Coast ports in 2002.