Friday, July 25, 2014 - Hot and Dry

Hot and Dry
by Sinclair Noe

DOW – 123 = 16,960
SPX – 9 = 1978
NAS – 22 = 4449
10 YR YLD - .04 = 2.47
OIL - .13 = 101.94
GOLD + 13.30 = 1308.20
SILV + .35 = 20.82

For the week, the Dow is down 0.8%, the S&P is flat and the Nasdaq is up 0.4% in its second straight weekly rise.

In economic news, durable goods orders were up 1.4% in June, but May’s numbers were revised lower to show a 1.2% decline. Shipments of core capital goods fell 1%. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. The government will release its first snapshot of second-quarter GDP next Wednesday. The economy contracted at a 2.9% rate in the first three months of the year, with business spending on equipment falling at a 2.8% rate.

Investors have been selling junk bonds. In the past week investors pulled $2.3 billion from junk bond funds. That marked the biggest outflow since June 2013, when the Fed was hinting about tapering. The high-yield market has pulled back in recent weeks, sending prices lower and yields higher. The bond market is not as liquid as it once was; trading volume is down across the board, and trading desks have been cut back, meaning a big sell-off could look more like a run on bonds.

Yesterday we told you about Amazon.com’s earnings report, or more specifically, a lack of earnings. Amazon has a unique business model where they manage to consistently increase sales without actually turning a profit. If it seems like this kind of model has limitations, you are correct, and today Amazon hit the wall. Yesterday’s non-earnings report went from bad to worse as Amazon announced the current quarter will result in bigger losses than the last quarter. The $126 million dollar loss will swell to a $400 million dollar loss, maybe as much as $800 million.

Breaking down the forward guidance, about $410 million of the current quarter loss will be in the form of stock compensation. What makes this even more interesting is that the company lost about $14 billion in market cap today. Jeff Bezos lost $3.5 billion from his personal fortune; Bezos may be an internet visionary, but lacks some basic math skills.

Also yesterday, Visa reported net income for the quarter ended June 30 rose 11 percent to $1.36 billion, or $2.17 a share, from $1.23 billion, or $1.88, a year earlier. Analysts had expected $2.10 a share. Visa’s losses accounted for about one-third of the decline in the Dow today. So, the earnings side was good but the company reduced its revenue forecast for the rest of the fiscal year. One reason for the reduction – Russia. After the US imposed sanctions on Russia, Putin recommended Russia create its own payment system. Visa said that tensions with Russia may affect earnings by “several pennies,” and that headwinds, in the form of lower cross-border volumes, are likely to continue in the short term in international corridors such as Ukraine, Venezuela and Argentina.

The European Union has been holding meetings in Brussels to find agreement over imposing sanctions on Russia over its behavior in Ukraine. They’ve decided to put together an outline on sanctions and get together again next week; the outline would exclude the crucial gas sector.

Following the downing of Malaysia Airlines Flight 17, many Europeans are eager for their governments to do something to punish Putin for fomenting instability in the Ukraine. But the debate over economic sanctions is shining an awkward spotlight on the large and important trade relations between Russia and Europe. Russia is Europe’s gas station, and if Europe decides to stop doing business with Russia, they will have to figure out a new, and likely more expensive way to put gas in the car and to heat their homes.

According to the Energy Information Administration, oil and natural gas accounted for 70% of Russia’s export revenues in 2012; and most of those exports go to Europe; and most of Europe hasn’t figured out how to provide their own energy. Oil reserves in the North Sea are expensive to tap; fracking technology hasn’t happened for a number of reasons; and so Europe depends on Russia for about 30% of its natural gas. Many of Europe’s biggest corporations are directly involved in importing fuel from Russia, and many of Europe’s biggest industries, such as utilities, power-hungry manufacturers, car manufacturers, transportation systems, and anyone else who uses electricity – all rely on fuels imported from Russia.

If the EU were to suddenly grow a spine and just say no to Russian oil and natural gas, it would certainly inflict some short- term pain on Russia, but oil and gas are fungible and the market is global. One of Putin’s first moves was to sign a deal with China to make Russia a major supplier of natural gas. Europe does not have a quick replacement for Russia’s natural gas and winters in Europe can get very cold.

The US does not depend on Russian fuels, however there are a couple of strange side stories coming out of the sanctions. First, is the as-yet-unaddressed need to restart NASA, so we don’t have to depend on Russia for ride sharing to the space station. The other, is that Americans don’t really care much about Russia anyway; last week the US imposed a fresh round of sanctions on Russian companies, including weapons manufacturers. How did patriotic Americans respond? Well, you can no longer buy Kalashnikov AK-47s. Technically you can, you just can’t find any. The move sent American gun buyers into a frenzy, seeking to buy any and all AK-47s on any store shelf.

So, it should come as no surprise that Russia has stepped up its direct involvement in fighting between the Ukrainian military and separatist insurgents, unleashing artillery attacks from Russian territory and massing heavy weapons along the border. So, while the EU considers drafting a new outline of possible sanctions for further possible consideration; Russia may send in the troops.

About 34% of the contiguous United States was in at least a moderate drought as of this week.

Things have been particularly bad in California, where more than 80% of the state is in “extreme” drought, state officials have approved drastic measures to reduce water consumption. California farmers, without water from reservoirs in the Central Valley, are left to choose which of their crops to water. Parts of Texas, Oklahoma and surrounding states are also suffering from drought conditions. East of the Mississippi, rainfall has been rising. But global warming also appears to be causing moisture to evaporate faster in places that were already dry. Researchers believe drought conditions in these places are likely to intensify in coming years.

A new study released yesterday by NASA and the University of California Irvine shows we are losing water at a shocking rate in the West. Using a satellite designed to track changes in groundwater, the research team found that the Colorado River basin—which supplies water to 40 million people in seven states—lost 15.6 cubic miles of freshwater in the last 10 years. From December 2004 to November 2013 the Colorado basin lost nearly 53 million acre feet, or almost double the volume of the nation’s largest manmade reservoir, Lake Mead. (Actually, Lake Mead is no longer the biggest reservoir in the country; a lake in North Dakota takes that honor, as Lake Mead has shrunk.) More than 75% of that loss was due to excessive groundwater pumping. It’s the first study to quantify just how big a role the overuse of groundwater plays in dwindling water resources out West.

How did this happen without anyone noticing it? The answer, basically, is that up until this study, nobody had a good way of measuring how much water is stored underground. And the researchers aren’t certain how much groundwater is left. Water above ground in the basin's rivers and lakes is managed by the U.S. Bureau of Reclamation, and its losses are documented. Pumping from underground aquifers is regulated by individual states and is often not well documented.

In the last seven years, Lake Mead’s dwindling has accelerated. The lake is now just barely more than 1,080 feet above sea level, slightly below its previous record low set in November 2010. Lake Mead is expected to drop another 20 feet into record territory by summer 2016. The low water level is already affecting hydroelectric power production. If the water level drops below 1050, the Hoover Dam might not be able to produce electricity.

Well before then, perhaps as soon as next April, downstream water rationing will kick in—which has never happened before. A 2007 shortage-sharing agreement sets three elevations for which water restrictions will be imposed on the Lower Basin states of Arizona, California, Nevada, and New Mexico. The first shortage level, 1,075 feet, will likely come into effect in the next several months. It would require a total water use cut of 4.4%, with Arizona taking an 11% cut, Nevada a 4% cut, New Mexico 3.3% and California remaining the same.

Right now, Phoenix has officially recorded just over one inch of precipitation since the start of the year; the normal amount is just under 4 inches. The problem is that when above-ground water supplies run low - which is happening now, and it is common in California, even when there isn’t a drought - water managers use groundwater to meet public and farming needs. The study finds that so much groundwater has been used that it will be impossible to recover it naturally; overall supply of available freshwater will continue to decrease as a result.

Monday, May 12, 2014 - More Milk and Cookies

More Milk and Cookies

by Sinclair Noe

DOW + 112 = 16,695
SPX + 18 = 1896
NAS + 71 = 4143
10 YR YLD + .03 = 2.65%
OIL + .63 – 100.62
GOLD + 5.60 = 1296.70
SILV + .35 = 19.60

Record highs for both the Dow and the S&P 500. We celebrate when the Dow hits a record high; there is no specific celebration for the S&P, which doesn’t really make sense. We have a party with milk and cookies. Today we have some lemon zest cookies and I think they have poppy seed sprinkles, which means we would all fail a drug test for the next few days.

The latest thing to worry about is the market divergence. The Dow hit record highs but the Russell 2000 index of small and midcap stocks closed below its 200 day moving average last week. The idea is that small caps will drag down the blue chips, or maybe the blue chips will lift up the small caps, but one way or another, something has got to give. Another consideration is the number of NYSE stocks making new highs minus the number of NYSE stocks making new lows continues to look mediocre at best even as the Dow and S&P make all-time highs. You don't typically want to see large caps struggling at recent highs with less underlying participation by individual stocks because narrowing of participation at highs is how tops are formed. You also don't typically want to see new all-time highs for the S&P while the more economically sensitive small caps are in a correction. These things can resolve in either direction, but the historical bias is toward a resolution to the downside.

The basic truth is that not all stocks are hitting record highs. That’s not how it works; there are winners and losers, even in a bull market, even in a bear market. The other reality is that we don’t make record highs forever, 2013 being the exception to the rule. At some point this market will roll-over, we don’t know exactly when, but rather than sticking our head in the sand, we remain vigilant.

Yesterday was Election Day in Ukraine. A preliminary count from eastern Ukraine showed 89% of voters in the Donetsk region and 97% in neighboring Luhansk voted for greater autonomy; which is to say they are voting to split from Ukraine and be more closely associated with Russia. The Russian government did not even say that it recognized the results of the voting, which the authorities in Kiev and their Western supporters all declared illegal from the start. The Kremlin issued a statement saying only that it “respects the will of the population of the Donetsk and Luhansk regions,” and that the crisis should be resolved through dialogue.

As part of that dialogue, Gazprom, the gas company controlled by the Russian government, announced it would send Ukraine an advance bill for natural gas deliveries in June. So the dialogue is “pay up or no gas.” The Euro Union is slowly tightening economic sanctions on Russia, but slowly, hoping they don’t have to face Gazprom turning off the spigot on supplies to the continent. This entire conflict could turn ugly fast, but each day that goes on without a meltdown is a good day for the markets.

Meanwhile, the Department of Justice is reportedly getting closer to actually enforcing the law, at least with respect towards a big bank. There are signs and last minute meetings that point toward possible criminal charges against two large European banks. No giant bank has been found guilty of criminal charges in the US for at least 20 years. Lawyers for BNP Paribas and Credit Suisse have been meeting with prosecutors to try and wrangle a deal for leniency. BNP is suspected of doing business with countries like Sudan and Iran that were on a US sanctions blacklist; Credit Suisse is suspected of offering tax shelters to wealthy Americans.

There have been criminal charges against subsidiaries of big banks, but the parent companies have been spared. Credit Suisse recently set up a subsidiary to house their US offshore business; the idea being that they could create a subsidiary to serve as a sacrificial lamb. Word is that US prosecutors are unwilling to criminally charge the newly formed unit.

Criminal charges could prompt regulators to revoke a bank’s license to operate, the corporate equivalent of the death penalty. When HSBC faced criminal charges a couple of years ago, the bank set up a subsidiary in Asia to take the fall. That deal was apparently accepted because the Justice Department is afraid of a criminal charge of the parent company could wreak havoc on the broader economy, far beyond the boundaries of France or Switzerland. The BNP and Credit Suisse investigations could lay the groundwork for actions against American banks as well. We may see how this strategy develops within the week.

There were no significant economic reports today, there was a fairly important weather report from NASA and some scientists at the University of California – Irvine. They say that glaciers and ices shelves along the western part of Antarctica are melting, and as they melt they’re releasing roughly the equivalent of the entire Greenland ice sheet into the ocean every year; enough ice to raise the world’s sea level by about 4 feet, which means my dream of owning oceanfront property in Arizona is alive and well. Eventually, they say the oceans will rise by about 14 feet, but that’s a long way down the road. The scientists say the melting process has passed the point of no return.

Now, why do we talk about it here on the Financial Review? Because it is changing the financial landscape. John Nelson, the chairman of Lloyd’s of London has posted an article in the Guardian explaining how climate change is changing the insurance industry’s catastrophe modeling. “According to the World Bank, weather-related losses and damage have risen from an annual average of about $50bn in the 1980s to close to $200bn. Lloyd's knows this all too well, the damage wrought on the US by the hurricanes Katrina, Rita and Wilma in 2005 and Superstorm Sandy in 2012 to name but a few all brought significant claims to the insurance market.”

And so, Lloyd’s is changing models to account for climate change, by building in forward projections, not just historical data. This will likely lead to changes in insurance pricing, and in this way, we will all be affected, but it doesn’t stop there. This means changes in environmental policy of course, and also housing and land use policy. And this is not just about insurance companies trying to jack your rates. “Ultimately, insurance exists to pick up the pieces and pay the claims” when extreme weather hits, but there may also come a time when insurance companies stop paying claims, and deem certain areas uninsurable, which is the equivalent of a financial death sentence. And that’s just the start; wait until the Environmental Protection Agency announces rules intended to slow the pace of climate change.

And what happens when the EPA moves on to regulation of greenhouse gas emissions? And it won’t be long before you start hearing more about cap and trade; and I predict that in the not so distant future we’ll all be familiar with the R.E.C. market, which is almost non-existent today. You don’t know about REC now, but you will.

Flood insurance will disappear for some areas, drought and crop insurance will vanish in other areas. And even if you live on a hill, it doesn’t mean you escape consequences, because this will also require massive investment in infrastructure; above and beyond updating outdated bridges. And this will eventually result in a complete revamp of our power structure. The days of coal fired power plants and flaring off natural gas in the oil fields are coming to an end just as surely as the days of whale oil lanterns passed into the darkness of history. And because necessity is the mother of invention, these are when we need, and I believe we will find imaginative and innovative solutions.

Thursday, September 12, 2013 - Going Interstellar

Going Interstellar

by Sinclair Noe

DOW – 25 = 15,300
SPX – 5 = 1683
NAS – 9 = 3715
10 YR YLD - .01 = 2.91%
OIL + .02 = 108.62
GOLD – 44.80 = 1322.00
SILV– 1.48 = 21.84

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

The peace talks are underway in Geneva between Secretary of State Kerry and his Russian counterpart Lavrov. In a news conference ahead of the Geneva talks, Foreign Minister Lavrov said the resolution of the chemical weapons issue in Syria would make any military strike by the United States unnecessary. The UN has confirmed it has received documents from Syria on joining the Chemical Weapons Convention, a key step in the Russian plan. Syria's president said it would submit arms data one month after signing, but Mr Kerry has rejected that time-frame.

Even before the talks, Russian President Vlad Putin weighed in with an op-ed in the New York Times arguing that a military strike risked “spreading the conflict far beyond Syria’s borders” and would violate international law, undermining postwar stability. Putin says poison gas was used in Syria but not by Assad; he also didn't say who sold the poison gas to Syria; he talks about peace and democracy; and he finishes the editorial by saying “We are all different, but when we ask for the Lord’s blessings, we must not forget that God created us equal.” It's all quite bizarre, to have Putin lecturing the US on democracy and morality and God.

The good news is that the war hasn't started..., yet.

And that means we can focus on domestic problems, like shutting down the government. Lawmakers are tied up in knots over increasing the debt ceiling this fall, but they eventually will; eventually. The only question is how messy the process will be. They really don't have much choice. Even if they shut down government for a while, they can't make the stunt last long.  A default would hurt the economy and markets, and most lawmakers know this. That's why they regularly raise the debt ceiling before it comes to that. In fact, since 1940, Congress has effectively approved 79 increases to the debt ceiling. That's an average of more than one a year.

Despite some politicians' incorrect assertions, raising the debt ceiling does not give the government a "license to spend more." It simply lets Treasury borrow the money it needs to pay the bills in full and on time. Those bills are for services already performed and entitlement benefits already approved by Congress. In other words, it's a license to pay the bills the country incurs as a result of past decisions made by lawmakers from both parties over the years. It sounds like it should be a straight forward deal. It's not. It's a chance to position for whatever idea a politician can position for. Things will likely get ugly before they get uglier. That's about the only thing we can count on from Congress.

Believe it or not, Greece's job situation is getting worse. Greece's jobless rate hit a record high of 27.9 percent in June, and was more than twice the average rate in the euro zone of 12.1 percent in July.  The unemployment rate has more than tripled since 2008, the start of a six-year recession which has wiped out about a quarter of Greece's economy. Joblessness is a major headache for the government as it scrambles to hit fiscal targets and carry out structural reforms demanded by its international creditors.

Meanwhile, an independence rally in Catalonia drew more than one million. That's a lot of people. Greece's unemployment rate is now higher than Spain's

If you plan on buying one of Apple's new iPhones, you may want to head to Wal-Mart. Wal-Mart announced it will carry the new devices and sell them at prices lower than Apple and other retailers. Wal-Mart said it will carry 16-gigabyte versions of the iPhone 5c and the iPhone 5s. The iPhone 5c will be available for $79 ($20 cheaper than its regular price) with a two-year contract from AT&T, Verizon or Sprint. The iPhone 5s will be available for $189 ($10 cheaper than its regular price) from the same carriers.

It's strange when Wal-Mart can get a better deal from Apple than the Apple stores.

A Dutch designer thinks the way people currently buy electronics is inherently wasteful. As soon as a new device comes out, the old one is tossed in the garbage or put on the shelf to collect dust. He's introduced a new phone called PhoneBloks, a smartphone that has detachable components on its front and back so that everything from the processor to the camera can be easily upgraded without discarding the rest of the phone. The entire contraption is held together by a pegboard-style base, with a screen -- also replaceable -- mounted on the front. It's kind of like lego-blocks for a phone.

If you're looking for a good deal on airline tickets; you might want to keep an eye on United Airlines. For about 15 minutes today, they offered $0 fares plus $5 in tax for many domestic flights. That worked out to $10 flights between Washington DC and Hawaii, while others scooped up over a dozen tickets to destinations all over the country.

And then, just as quickly as the airfares showed up, United’s reservation system slammed to a halt, reporting “United.com is currently undergoing maintenance  Flight search and booking are unavailable for all flights.” They say it was a computer glitch.

California lawmakers are poised to raise the state's minimum wage by 25% -- a move that would make the state's hourly workers among the most highly paid in the country. Millions of workers would see their hourly pay jump from $8 to $9 on July 1, 2014 and to $10 on Jan. 1, 2016, under legislation which received strong support this week from the state's Governor Jerry Brown and other legislative leaders. "The minimum wage has not kept pace with rising costs," Brown said in a statement. "This legislation is overdue and will help families that are struggling in this harsh economy."

A survey by Duke University and CFO Magazine  of more than 500 Chief Financial Officers, shows they expect to boost full-time hiring by nearly 1.8% next year, which represents a slight increase from this year. The results indicate that despite worries over President Obama's health care reform law, a recent tendency on the part of companies to hire more part-time workers may be turning around; so far in 2013, companies have hired more than four times the amount of part-time workers than full-time workers, while in 2012 the opposite was true.

New figures on wealth inequality from economists Thomas Piketty and Emmanuel Saez show that the top 10 percent earned more than half of our nation's income. That hasn't happened since they started tracking these figures a century ago.

What about the bottom 99 percent? After being left out of the post-crisis boom, they finally saw an increase in their earnings last year, but it was less than one percent. By contrast, income for the top one percent rose twenty percent. The really rich, the top 0.01 percent, saw their income soar by more than 32 percent.

As the Economic Policy Institute recently observed, "The median worker saw an increase of just 5.0 percent between 1979 and 2012, despite productivity growth of 74.5 percent--while the 20th percentile worker saw wage erosion of 0.4 percent .

Shareholders of Dell approved a proposal led by company founder Michael Dell to take the computer company private. The proposal, worth about $25 billion, won an unspecified majority of votes from the holders of Dell stock. The buyers consortium sweetened the deal in recent weeks in response to criticism from activist Carl Icahn and others, who had complained their offer undervalued the company.

As Dell goes private, a couple of companies are going public. Hilton Worldwide, which is owned by Blackstone Group, could be valued at $30 billion. Blackstone does not intend to issue so many shares that it loses control of Hilton.

Twitter is going public. It's could be the biggest IPO since Facebook, and hopefully they learned a lesson from that. The IPO announcement came in the form of a tweet. The details of Twitter’s filing are confidential, thanks to the JOBS Act.

Designed to foster more IPOs for “emerging growth” companies, the IPO provisions of the law have become a way for most companies that want to go public do so with less investor scrutiny. The new rules have cut the time that all that information is available to the public to three weeks before the roadshow.

And finally, scientists now have strong evidence that NASA's Voyager 1 probe has crossed the heliosphere, the magnetic boundary separating the solar system's sun, planets and solar wind from the rest of the galaxy. The first man-made object to leave the solar system.

"In leaving the heliosphere and setting sail on the cosmic seas between the stars, Voyager has joined other historic journeys of exploration: The first circumnavigation of the Earth, the first steps on the Moon," Ed Stone, chief scientist on the Voyager mission said "That's the kind of event this is, as we leave behind our solar bubble."

The twin spacecraft Voyager 1 and 2 were launched in 1977, 16 days apart. Voyager 2 will exit the solar system in about 2 billion more miles. Voyager 1 has a long way to go before the next stop. The probe will fly near a star in about 40,000 years. But as of today, human-kind has gone interstellar.