Wednesday, July 16, 2014 - The Color of the Day is Beige

The Color of the Day is Beige

by Sinclair Noe

DOW + 77 = 17,138
SPX + 8 = 1981
NAS + 9 = 4425
10 YR YLD - .01 = 2.53%
OIL + 1.38 = 101.34
GOLD + 6.20 = 1300.80
SILV + .07 = 20.89

A record high close for the Dow; the 15^th record high close of the year for the Dow. The S&P 500 did not take out the old high from July 3^rd. We have a few economic reports to cover, plus Fed Chair Yellen continued testimony on Capitol Hill, and lots more.

Industrial production increased 0.2% in June to 103.9. This is 24.1% above the recession low, and 3.1% above the pre-recession peak. For the second quarter, industrial production advanced at an annual rate of 5.5%; so the quarter was good but the month of June was less than expected.

The Commerce Department reports producer prices increased by a seasonally adjusted 0.4% last month, above forecasts for a 0.2% gain, after falling 0.2% in May. Year-over-year, the producer price index rose at an annualized rate of 1.9% in June. The core rate, stripping out food and energy prices, was up 0.2%.

This afternoon, the Federal Reserve released its Beige Book, a collection of reports from the 12 Fed districts. The general consensus is that economic growth was moderate to modest. Most Districts were optimistic about the outlook for growth. Consumer spending increased in every district. Retail sales grew modestly in most districts. Auto sales, which have been on the upswing for more than a year, continued to stand out as particularly brisk support for the economy, but broader retail sales were more subdued. Labor market conditions continue to improve with all districts reporting slight to moderate employment growth. Several districts reported "some difficulty" finding staff for skilled positions, however there doesn’t seem to be any pressure on wages. Here’s a hint, if you can’t find skilled workers, try offering higher wages. The report gave a mixed appraisal of the US housing market. Conditions "varied" across the country, with some regions suffering from weak demand.

Fed Chair Janet Yellen returned to Capitol Hill to deliver her second day of Humphrey Hawkins testimony. The prepared remarks were the same as yesterday, then they open up for a Q&A. Some of the key points from today’s hearing:

Yellen said she is optimistic about the economy, “We had a very surprising negative growth in the first quarter, which is a number that in a way doesn't seem consistent with the underlining momentum in the economy and many indicators of spending and production. And I do think the economy is recovering and that growth is picking up and that we have sufficient growth to support continued improvement in the labor market."

Yellen said threats to financial stability are moderate “and not a very high level.” She again weighed in on valuations, saying: "Some things may be on the high side and there may be some pockets where we see valuations becoming very stretched but not generally. The use of leverage is not broad-based, it hasn't increased, and credit growth is not at alarming levels by any means."

Yellen did not single out specific sectors today. Yesterday she said biotech and social media looked a bit over-valued. That had some talking heads complaining; the funniest rant came from Jim Cramer, who said: “Next time, Fed Chief Yellen, it might pay to point out that there are plenty of cheap stocks out there, too. At least that way you can help us make money, not just lose it.” Maybe someone can tell Cramer the Fed is not in business to help him make stock picks, no matter how much help he needs. The Fed has been incredibly accommodative to Wall Street, and Cramer still complains. The Fed doesn’t issue a price target on Twitter. But if you read between the lines, Yellen was likely saying that there are no plans to raise the margin requirements on brokers.

There were some questions about a bill in the House that would require the Fed to follow a mathematical rule for when to raise or lower interest rates. Yellen didn’t like that idea; she said there is no magic formula for raising rates. Yellen again expressed confidence the Fed can exit when the time comes. The Fed has a variety of tools it can use to raise interest rates. In the distant future, the Fed’s balance sheet will shrink in size.

The best line from the Fed did not come from Yellen; Dallas Fed President Richard Fisher was speaking today at the University of Southern California. Fisher said ending asset purchases this fall isn’t enough; the Fed should start to taper the reinvestment of maturing securities in October. Fisher said: "Monetary policy is a bit like duck hunting. If you want to bag a mallard, you don't aim where the bird is at present, you aim ahead of its flight pattern. To me, the flight pattern of the economy is clearly toward increasing employment and inflation that will sooner than expected pierce through the tolerance level of 2%."

Meanwhile, it’s earnings reporting season. Bank of America said profit declined 43% as it spent $4 billion to cover litigation costs, including a mortgage settlement with AIG. There seems to be a trend developing in banks’ earnings reports; they are making money on investment banking and some other areas, but results are weak for mortgage originations, and they are setting aside big chunks of earnings to pay for legal settlements.

Bank of America and the Department of Justice are reportedly negotiating a mortgage securities settlement, which could cost the bank around $13 billion.

Intel was up more than 9% after a very strong earnings report after the close yesterday. Yahoo fell today following weaker than expected earnings. EBay posted lower than expected 2Q results and even though sales were up this month, EBay cut its outlook for the third quarter.

Merger and acquisition activity has been wild lately. Today’s M&A stories revolved around Rupert Murdoch’s plan to buy Time Warner for $85 a share, or about $75 billion. Time Warner says it isn’t interested in exploring a sale, but if they sell, there are other potential suitors. General Electric is in talks to sell its household appliances business; that’s a part of the company that’s been around since 1905, when they invented the electric toaster. Yesterday, the number 2 tobacco company, Reynolds American agreed to buy the number 3 tobacco company, Lorillard for $25 billion.

One of the motivating factors behind mergers lately has been something called inversion, basically merging with an overseas company to avoid corporate taxes in the US. Members of the House and Senate have made proposals to curb the inversion trend in recent months, and the president included a provision in the budget he presented to Congress this year that would have effectively banned the move. But none of these efforts have yet gained traction. Today, Treasury Secretary Jack Lew called on Congress to enact legislation to halt inversion, effective immediately and retroactive to May.  Making any new legislation retroactive through May could disrupt several megadeals that have already been struck, such as the Medtronics deal.

Global M&A volume in the first half was the highest since 2007. One of the side effects of the M&A frenzy back in 2007-2008 was the frenzy of pink slips that followed. Deals are sold to investors on the basis of “creating value” with terms like “efficiencies” and “synergies”; code words for cost cutting and mass-layoffs. Acquisitions, layoffs, and cost-cutting are the simplest things to do for a CEO, as opposed to inventing things and boosting sales organically, which is hard. Analysts love M&A, investors too, and of course the investment bankers promote it as the best thing since sliced bread, or maybe electric toasters.

Last year, Microsoft acquired Nokia’s mobile phone business and promised $600 million in cost saving and efficiencies and synergies. Now, Microsoft employees are bracing for up to 12,000 layoffs, the biggest ever for Microsoft. The layoff news will come before the company holds its post-earnings conference call after the market closes July 22.

Leaders of the five BRICS nations agreed on the structure of a $50 billion development bank by granting China its headquarters and India its first rotating presidency. The leaders also formalized the creation of a $100 billion currency exchange reserve, which member states can tap in case of balance of payment crises. Both initiatives, which require legislative approval, are designed to provide an alternative to financing from the International Monetary Fund and the World Bank, where BRICS countries have been seeking more say.

Wednesday, May 14, 2013 - Crumbs and Curds

Crumbs and Curds

by Sinclair Noe

DOW – 101 = 16,613
SPX – 8 = 1888
NAS – 29 = 4100
10 YR YLD - .07 = 2.54%
OIL + .37 = 102.07
GOLD + 11.00 = 1306.70
SILV + .22 = 19.85

The days of milk and cookies can be fleeting; one day the world seems sweet and creamy, and the next day you’re left with nothing but crumbs and curds. The Russell 2000 index of small and mid-caps, dropped 1.6% falling below the 200 day moving average; since hitting a high in March the Russell is down 8.7%. The Dow Jones Internet Index has plunged 17% from a 13-year high in March.

There is a strong tendency among the Wall Street hype-sters to “buy the dip”, with the pitch being that if stocks plunge, it’s really just a buying opportunity if you are patient. What they don’t say is that it is almost impossible to be patient if you run out of capital, but putting that aside, the stocks will all come roaring back someday. Yea, I’m not going to tell you that. Some stocks will recover. Some stocks don’t come back.

Here’s a quote from a Citigroup analyst’s note to clients: “We believe the recent pullback represents a particular opportunity among large cap Internet stocks, with multiples having retraced to levels not seen for more than two years, with no/little change in fundamentals, and with investment profiles that sync well with what portfolio managers are seeking in today’s market.”

Among the favorite downtrodden internet stocks: Facebook, down 18% from its high; LinkedIn, down 43%; and AOL, down 31%, seriously I was surprised to learn that AOL still trades. I would have thought that anybody who lived through 1999 would have shunned AOL permanently. Did we learn nothing from the dot.com days? Certainly the Wall Street analysts learned nothing; they rode the market all the way down back in the day, all the time screaming “buy, buy, buy.” I’ll say the same thing I said back then, you can’t go broke taking a profit.

Treasury bonds rallied. The yield on the 10-year Treasury note touched 2.523% at one point, its lowest level since Oct. 31. While today’s move had all the markings of a short squeeze, the storyline is that the European Central Bank will pump more liquidity into the economy next month. Bank of England Governor Mark Carney signaled there is no rush to raise interest rates after the bank left its growth and inflation forecasts broadly steady in its latest inflation report. And Federal Reserve Chairwoman Janet Yellen said last week that the Fed would continue to keep interest rates near zero for a considerable period to support the economy and inflation remains low. Yellen is scheduled to speak tomorrow.

Today we had a report on inflation at the wholesale level. The Labor Department’s Producer Price Index, or PPI, increased 0.5% in March. The PPI was overhauled in January for the first time since 1978, largely to include services such as retail, health care and financial advice. Previously the index only looked at the price of goods: food, energy, housing and the like. That makes sense, but it has also lead to some wicked wild spikes and dips in the PPI. More likely the CPI, prices at the retail level, are more accurate, running in the range of 1.5% annualized rate.

There’s just something about the bond market that doesn’t feel right. Rates should not be dropping if the economic recovery is really underway. If the first quarter was a weather related aberration, and the second quarter is bouncing back, rates should not be dropping.

After ending 2013 at 3.03%, 10-year Treasury yields have declined 50 basis points year to date. Sovereign yields have collapsed throughout Europe and have generally fallen around the globe. What's behind the decline? Are there potential ramifications for stocks and the global economy? These are critical questions, especially considering the bullish consensus view of accelerating US and global growth.

The Ukraine crisis likely marks an unfortunate end to an era of global cooperation (of a sort) and a return to Cold War tensions and risks. Geopolitical risks exacerbate the vulnerabilities of financial market excesses. And the global central bankers’ response to the collapse of 2008 has resulted in trillions upon trillions of dollars of mispriced financial assets and ever greater leveraged speculation. When the Fed was pumping $85 billion a month into the markets - that was not de-leveraging. With QE winding down, there is impetus for the leveraged speculators to take more risk averse positions; toss in a geopolitical flare-up and greed transforms to fear.

Former Fed Chairman Alan Greenspan was speaking at a financial summit in Washington today and he said that current calculations of the federal government's budget deficit and fiscal outlook understate the risk of long-term trouble, because they do not take into account such "contingent liabilities" as the risk of a major Wall Street bank collapsing. Typically, deficit hawks invoke the phrase "contingent liabilities" to call for cuts to Social Security and Medicare, arguing that official government accounting understates the long-term taxpayer costs of such programs. But Greenspan didn't make a hard pitch on entitlement cuts, focusing instead on the risk of bank bailouts.  

Bond prices are going up nonetheless because the big money is seeking a safe haven in a gathering storm.

Europe’s highest court Tuesday gave people the means to scrub their reputations online, issuing a ruling that could force Google and other search engines to delete references to old debts, long-ago arrests and other unflattering episodes. Embracing what has come to be called “the right to be forgotten,” the Court of Justice of the European Union said people should have some say over what information comes up when someone Googles them.

The decision was celebrated by some as a victory for privacy rights in an age when just about everything, good or bad, leaves a permanent electronic trace. Others warned it could interfere with the celebrated free flow of information online and lead to censorship. The ruling stemmed from a case out of Spain involving Google, but it applies to the entire 28-nation bloc of over 500 million people and all search engines in Europe, including Yahoo and Microsoft’s Bing.

Google is already getting requests to remove objectionable personal information from its search engine. Europeans can submit take-down requests directly to Internet companies rather than to local authorities or publishers under the ruling. If a search engine elects not to remove the link, a person can seek redress from the courts.

The criteria for determining which take-down requests are legitimate is not completely clear from the decision. The ruling seems to give search engines more leeway to dismiss take-down requests for links to webpages about public figures, in which the information is deemed to be of public interest. But search engines may err on the side of caution and remove more links than necessary to avoid liability. Google has said it is disappointed with the ruling, which it noted differed dramatically from a non-binding opinion by the ECJ's court adviser last year. That opinion said deleting information from search results would interfere with freedom of expression.

Some limited forms of a “right to be forgotten” exist in the US and elsewhere, for example, in regard to crimes committed by minors or bankruptcy regulations, both of which usually require that records be expunged in some way.  And some things probably are better off forgotten.

In 1897 silver and gold dealers-slash-bankers in London began gathering each day to post their metals prices. They would meet in a basement and compare prices and then average prices and come up with something called the “fix”. There was a morning fix and an afternoon fix for both gold and silver. This became the price for precious metals. There has long been speculation that the bankers who set the fix might occasionally alter the prices to suit their own trades, in other words the fix was rigged and manipulated.

The basic price setting formula worked well for the bankers and it was adopted by the Libor and the Forex and the ISDA and others who liked the idea of controlling prices for a major market. Turns out the Libor and the Forex and other markets were indeed manipulated, and investigations are ongoing. And then the regulators got the bright idea that if all those markets were rigged, maybe the original, the gold and silver fix, maybe they were rigged. Investigations are underway. 

And so Deutsche Bank has decided they don’t want to be part of the London silver fix. They have announced they are resigning their post effective as of August 14, 2014. That leaves just two primary dealers to set prices for silver, HSBC and Bank of Nova Scotia; not enough to matter; and so the London Silver Fix will close down. The London Gold Fix will continue for now, but by the middle of August there will be no more London Silver Fix. And all of the banks that continue to trade in silver will have to find new ways to rig the market.

People used to think price manipulation in major markets never occurred. More evidence today, Bloomberg reports on a research paper that uncovered evidence that some traders got early news of Federal Reserve rate announcements and then traded on it during the Fed’s media lockup. The paper, covering September 1997 through June 2013, detected abnormally large price movements and imbalances in buy and sell orders that were “statistically significant and in the direction of the subsequent policy surprise.” The moves occurred during the window between when Fed announcements were supplied to the news media and when they were permitted to be released to the public.

The researchers calculate that the traders made off with somewhere between $14 million and $250 million in aggregate profits. A spokesperson says the Fed “enhanced its media release security procedures” last October “to better protect the information against premature release.”

Friday, March 14, 2014 - The Circle of Life

The Circle of Life

by Sinclair Noe

DOW – 43 = 16,065
SPX – 5 = 1841
NAS – 15 = 4245
10 YR YLD - .01 = 2.64%
OIL + .81 = 99.01
GOLD + 10.90 = 1383.00
SILV + .29 = 21.56

In economic news, the early-March consumer sentiment index fell to 79.9. That’s down from a final February reading of 81.6 but the latest number is within the range of numbers posted since November.

A separate report from the Labor Department shows the producer price index dropped o.1% last month. The PPI measures inflation at the wholesale level. Final demand for goods rose 0.4% in February. Final demand for services dropped 0.3%. Producer prices excluding volatile food and energy costs fell 0.2%. In the 12 months through February, producer prices increased 0.9%, the smallest one-year gain since May 2013. Inflation is not a concern. The economy is still too sluggish to generate inflation.

There are two big news stories of the day: Flight 370 and Ukraine. We don’t know anything about either. A total absence of actual information about the missing Malaysian flight is not in any way hindering 24 hour news coverage of the story. Facts have given way to fantastic fantasizing about everything from terrorism to hidden island airstrips to alien abductions. The news networks have been gathering tons of erroneous and conflicting reports which they immediately pass to their viewers. They must think we’re all morons.

Secretary of State John Kerry and his Russian counterpart Sergei Lavrov wrapped up meetings in London by announcing they have no common vision on the crisis in Ukraine. Russia will go forward with a referendum vote on Crimean sovereignty on Sunday. Monday will be a strange day as we watch the markets try to weave a narrative.

The Swiss bank UBS said it will conduct an internal review of its precious metals business amid expanding regulatory investigations into potential manipulation of interest rates and the price of commodities and currencies. European regulators began looking at other benchmark rates, including for gold and silver, as part of an outgrowth of its investigation of rigging of the London interbank offered rate, or Libor, and other global interest rate benchmarks. The process of setting the benchmark price for gold in London dates to 1919. It is set twice a day by five firms that serve as market makers; those market makers are: Barclays, Societe Generale, Deusche Bank, Scotiabank, and HSBC.

The Hong Kong Monetary Authority said that after an investigation of nine banks that were part of the local consortium making daily submissions to determine the Hong Kong Interbank Offered Rate, which is used as a benchmark to price corporate loans, household mortgages and other types of debt; only UBS was found to have tried to manipulate the rate, but the regulators conclude that they were not good at rigging the rate, so no fines have been levied.

Today the Federal Deposit Insurance Corp sued 16 of the world's largest banks, accusing them of cheating dozens of other now defunct banks by manipulating the Libor interest rate. The big global banks broke certain swaps contracts they had entered into with the now-closed banks by separately colluding to rig the Libor rate to which the contracts were tied. Some of the big banks have already paid fines to resolve the charges; but the big banks are also being sued by investors and other who claim they lost money due to the manipulation.

A federal judge last March dismissed many of those claims that were based on antitrust law, but has yet to rule on cases that rely on the "breach of contract" theory used by the FDIC.

The Inspector General for the Department of Justice has released a report that basically says the crackdown on mortgage fraud is a joke. In 2010, Attorney General Eric Holder said, “mortgage fraud crimes have reached crisis proportions, but we are fighting back.” The only problem is it didn’t happen. More money was given to the FBI, but the inspector general’s report shows that the FBI considered mortgage fraud to be its lowest-ranked national criminal priority.

Holder announced in 2012 that prosecutors had charged more than 530 people over the previous year in mortgage fraud related cases, but the new report says the actual number of cases was 107. Yep, the regulators are now cooking the books.

Yesterday we reported that Wall Street bonuses grew 15% last year to more than $26.7 billion, or an average of $164,000 per employee, according to the New York Comptroller; it marked the third highest bonus payout on record. The average salary including bonuses in 2012 was $360,700, or more than five times greater than the rest of the private sector. The average Wall Street bonus is now 7 times larger than it was 30 years ago. Meanwhile the median household income has been stagnant for the past 30 years.

People who park their savings in these big banks accept a lower interest rate on deposits or loans than they require from America’s smaller banks. That’s because smaller banks are riskier places to park money. Smaller banks won’t be bailed out if they get into trouble; big banks are too big to fail. That implied government protection is like a hidden subsidy for the big banks, and it affords them a competitive advantage, and allows them to rake in more profits than smaller rivals.

How large is this hidden subsidy? Two IMF researchers have calculated it’s about eight tenths of a percentage point; and based on the total amount of money parked at the 10 biggest Wall Street banks that works out to a subsidy of about $83 billion a year. The top 5 banks account for $64 billion of the $83 billion subsidy; and that pretty much equals the top 5 banks average annual profits. Bottom line, no subsidy, no bonus pool.

Meanwhile, I almost missed this story from Tuesday. In Vermont, 15 towns have voted to support the creation of a public bank in Vermont, calling for the state legislature to establish such a bank and urging passage of legislation designed to begin its implementation. The specific proposal under consideration, Senate Bill 204, would turn an existing agency, the Vermont Economic Development Authority, into a public bank that would accept deposits and issue loans for in-state projects.

Currently, the only state in the US to maintain a public state bank is North Dakota. However, since the financial downturn of 2008, other states have looked into replicating the North Dakota model as a way to buck Wall Street while taking more control of state and local finances.

Here’s how the public bank in North Dakota works: All state revenues must be deposited with the state public bank by law.  The bank pays no bonuses, fees or commissions; does no advertising; and maintains no branches beyond the main office in Bismarck. The bank offers cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. The Bank of North Dakota underwrites municipal bonds, funds disaster relief and supports student loans. It partners with local commercial banks to increase lending across the state and pays competitive interest rates on state deposits. For the past ten years, it has been paying a dividend to the state.

An economic study on a public bank in Vermont suggests the plan would create 2,500 new jobs and increase the gross state product by more than $340 million, with no new appropriations or bonding to establish the bank.

And we wrap up with this; today is Pi Day. March 14, or expressed another way 3-14, which happen to be the first 3 digits of pi, that Greek letter that has come to be defined as the ratio of a circle’s circumference to its diameter; in other words the ratio of the linear distance around the edge of a circular object to its measure of a straight line going through the center of a circle connecting two points on the circumference. So, if you want to know the circumference of a circle you could just multiply the diameter times 3.14 (pi). This also happens to be the birthday of Albert Einstein, which just makes both all the more intriguing.  A year from today, the date will be 3-14-15, which happens to be the first 5 digits of pi; it’s a once in a lifetime event.

Pi is, of course, an irrational number, which means it cannot be expressed as a ratio. It’s a decimal that’s neither finite (like 2.0 or 2.2) nor repeating (like 3.3333) nor periodic (like 9.1818). It just keeps going past 3.14159 for as long as you’d like to take it. Some people have done the calculation out to more than 2 trillion decimal places, with the help of computers. And so we consider pi to be infinite.

Another way to consider this is that there is no perfect circle. Or we might say that since pi is an infinite, non-repeating decimal every possible number combination exists somewhere in pi’s infinite sequence of numbers, and if you were to convert it to ASCII text, somewhere in that infinite string of digits is the name of every person you will ever love, or even meet, plus the date, time and manner of your death, and every question and every possible answer, and all the mysteries of the universe are contained in this infinite sequence of digits, and the only way we can wrap our minds around it is to think of it as a circle.

Celebrate safely.

Wednesday, February 19, 2014 - Stake your Claim

Stake your Claim

by Sinclair Noe

DOW – 89 = 16,040
SPX – 12 = 1828
NAS – 34 = 4237
10 YR YLD + .02 = 2.73%
OIL + .81 = 102.91
GOLD – 11.40 = 1311.90
SILV - .43 = 21.64

This winter has been brutally cold for much of the country, the worst in 20 years. The harsh weather makes an easy scapegoat for slow economic growth and sickly earnings. Every bad bit of economic data and all ugly earnings reports can be buried under the snow and ice. Many companies and sectors aren’t really affected by the weather; while others were definitely slammed.

This is true of new construction. The Commerce Department reports housing starts dropped 16% to 880,000 in January from 1.05 million in December. For all of 2013, builders began work on 926,700 homes, up the most since 2007’s 1.36 million. The good news is that the weather related downturns will eventually melt away like so much ice on a warm sidewalk.

Another report today showed producer prices increased 0.2% in January, led by gains in goods such as food and pharmaceuticals. This follows a 0.1% increase in the PPI in December. Today’s data mark the debut of the PPI after its first major overhaul since 1978, which more than doubles its reach of the economy by including prices received for goods, services, government purchases, exports, and construction. The revamped PPI encompasses 75% of the economy, up from a third of all production for the old index, which reflected the costs of goods alone.

Since services represent the biggest part of the economy, the gauge will offer a broader look at inflation at the producer level. Goods will account for about 24% of the new PPI gauge; while service, including financial services, food wholesalers and transportation providers, make up 63%; prices of government purchases and exported goods represent 11%; construction is 2%. What this new methodology might do is to smooth out inflation at the wholesale level because goods are inherently more volatile than services. What the report reveals is that we are experiencing disinflation.

So, those were the two economic reports of the morning, and the Dow Industrial average was rolling along with about 50 points in gains, then we saw the minutes of the January Federal Reserve FOMC meeting. Fed officials agreed unanimously to continue to slowly reduce the pace of its asset-purchase program by another $10 billion to $65 billion per month and to pledge to keep rates low until “well past” the point where the unemployment rate fell below a 6.5% threshold. This was the first unanimous statement since 2011. And that’s about where the unanimity ended.

A few Fed hawks thought it might be good to increase short term rates within the next few months; a few Fed doves thought it might be good to slow down the pace of the taper; that brought a response that there should be a “Clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each policy-making meeting, especially if there is no evidence of a change in the outlook.” The debate on changing the forward guidance, the pledge to the market about keeping rates low, was all over the map. Some want to lower the unemployment rate threshold, while others want a more descriptive or “qualitative” guidance.

And the Fed policy makers described the weak December jobs report as an “anomaly”. Now, remember that the FOMC meeting took place just a few days before the weak January jobs report; so I suppose we could describe that as a double anomaly. If there is a third consecutive weak jobs report for February, then I think we might call it egg on the face. The bottom line is that for now, the taper is on track, rates will remain low for at least a year, we’ll have plenty of forward guidance, and Janet Yellen’s job is something like herding cats.

There are a couple of interesting court cases; one involving Argentina and the other, Detroit.

The country of Argentina has asked the US Supreme Court to review a case that has unsettled the Argentinian markets and currency and might force the country to make payments on billions of dollars of defaulted bonds.

The dispute stems from Argentina’s 2001 default on $95 billion in debt. The country offered to substitute bonds worth 25 cents to 29 cents on the dollar in 2005 and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt. NML Capital, a fund run by billionaire Paul Singer, swooped in and bought about $1.5 billion in bonds for pennies on the dollar, and then they did not accept the swap, opting instead to go through the courts. NML sued to collect the full amount, citing a clause in the bond agreement bars Argentina from treating the restructured securities more favorably than the defaulted bonds.

Argentina challenged a lower court ruling that said the country must pay owners of the repudiated bonds in full before it can make payments on a separate $24 billion in restructured debt. The legal fight has put US courts in the unusual position of shaping another country’s financial future. Argentina says the dispute threatens to force a new default, and lower court rulings have led to credit ratings downgrades. The Argentines further argued that the lower court rulings “effectively reach into Argentina’s borders, coercing it into violating its sovereign debt policies and commandeering billions of dollars of core sovereign assets.”

The appeals court rulings in the case are on hold while the Supreme Court decides whether to get involved. Some decision is expected from the Supremes by around April. Argentina previously said it would never pay the funds, which the country’s leaders have called “vultures.” Its legislature passed a law in 2005 barring payment on the defaulted bonds. Another option under consideration is that the country will offer a new restructuring plan to defaulted bondholders and let investors who own the restructured notes swap them into debt subject to local law.

Meanwhile, Detroit is as broke as Argentina. Lawyers are arguing over how to split the money that’s left. A lawyer for the city says Detroit’s general obligation tax pledge doesn’t give bondholders priority over other creditors in its record $18 billion municipal bankruptcy. Bond insurers have sued Detroit, claiming a proposal by the city’s emergency manager to cut payments to general obligation bondholders is illegal. The insurers say that pledges the city made when the bonds were issued give bondholders certain rights over the taxes.

The dispute may require the judge to weigh in on a long-running debate among legal scholars about whether certain municipal bonds get priority over more traditional unsecured creditors, such as public employees or suppliers. The city’s lawyer argued the city’s pledges to bondholders are no different from those made to all unsecured creditors. Such general promises mean the municipal bonds in dispute are unsecured. Detroit didn’t set aside any property that could be used as collateral for the bonds, or create a special lien on the taxes. The current offer would pay public employee pensions 25 cents on the dollar and GO bond holders 22 cents. The bond insurers present their case in a couple of days.

The city may also try again to resolve a dispute over interest-rate swaps that cost taxpayers about $4 million a month. Detroit may present a new proposal for canceling the swaps in the next three or four days.

While historic winter storms have battered much of the US, California is suffering its worst drought on record. The reservoirs of California are just a fraction of capacity. In the dried-up fields of California's Central Valley, farmers are selling their cattle. Others have to choose which crops get the scarce irrigation water and which will wither.

California is the biggest agricultural state in the US - half the nation's fruit and vegetables are grown here. Farmers are calling for urgent help, people in cities are being told to conserve water and the governor is warning of record drought.

Meanwhile, the southern Imperial Valley, which borders Mexico, draws its water from the Colorado River along the blue liquid lifeline of the All American Canal. Farmers are making hay while the water flows, alfalfa actually; which is used as cattle feed and is being exported to China.  In effect, a hundred billion gallons of water per year is being exported in the form of alfalfa from California. It's a huge amount. It's enough for a year's supply for a million families.

Cheap water rights and America's trade imbalance with China make this not just viable, but profitable. We have more imports than exports so a lot of the steamship lines are looking to take something back. And hay is one of the products which they take back. It's now cheaper to send alfalfa from LA to Beijing than it is to send it from the Imperial Valley to the Central Valley.

Japan, Korea and the United Arab Emirates all buy Californian hay. The price is now so high that many local dairy farmers and cattle ranchers can't afford the cost when the rains fail and their usual supplies are insufficient. Hay trucks are a common sight heading north up the road from the Imperial Valley and despite the high prices, the cattle farmers have to buy what they can. Even with recent rains in northern California there's still a critical shortage of water. There will be many questions about who has claim to what, and this is just the early stages of the drought. Stay tuned. 

Friday, February 14, 2014 - Cold, Cold, Cold

Cold, Cold, Cold

by Sinclair Noe

DOW + 126 = 16,154
SPX + 8 = 1838
NAS + 3 = 4244
10 YR YLD + .01 = 2.74%
OIL - .05 = 100.30
GOLD + 16.30 = 1320.10
SILV + 1.02 = 21.61

The cold weather back East has left its frozen footprints all over a variety of economic reports from payrolls to new home sales to retail sales. Estimating the extent of the weather effect is a guess at best, and it is possible that consumer spending might have slowed even with more pleasant weather.

The best guesses from economists are that the snow, ice and bitter cold this winter will shave about 0.3 percentage point from economic growth; that works out to about $47 billion in lost productivity and about 76,000 jobs. Other estimates suggest fourth quarter GDP could be revised from 3.2% to as low as 2.2%(so maybe - $15 bln). Fortunately, a revision in GDP does not mean you have to write a refund check; whatever you made or lost in the fourth quarter is unchanged.

Schools closed, traffic non-existent, or massive traffic pile-ups, businesses closed, thousands of flights cancelled, electricity outages, the Great Lakes are 75% frozen over; it’s all a big frozen, expensive mess. The most recent storms, the ones going on right now in the East, could cost $20 to 40 billion.

The Federal Reserve reported this morning that manufacturing output fell 0.8% in January; they blamed the severe weather. At the same time, utility use jumped 4.1% last month, the biggest increase since March 2013. The Fed said the gain reflected “strong heating demand because of the extremely cold weather.” High heating bills mean less money in the purse for other possible purchases.  

The bad weather was blamed for a 0.4% drop in retail sales in January compared with December. The good news is that most people will still buy things, they’re just waiting for the weather to clear, and so sales could pick up in the second quarter. Pent-up demand should lead to a boost in second quarter growth of about 0.23 percentage point, reducing the total economic impact to about 0.3 percentage point.

Industrial production usually bounces back after a period of bad weather, as postponed orders are completed. With the weather having been lousy in December, January, and now February, we might not see a bounce back until March, or even April. But it will happen, eventually. The more lasting weather impact will be from the California drought. Snow and ice melt. Dust doesn’t melt.

Next week’s economic calendar will be slightly compressed; the markets are closed Monday for President’s Day. We’ll get a report on housing starts next Wednesday; expect a drop in the January numbers; some of that is weather related, some is related to higher mortgage rates. Two other economic series will offer guidance on the outlook for housing. Building permits are taken out before actual construction can begin. Economists think permits fell slightly last month after falling 2.6% in December. Builder confidence will be captured in the housing market index, out Tuesday. A reading about 50 means more builders think conditions are good than the number who see conditions as bad. The index has been above 50 for 8 consecutive months.

We’ll also see reports on inflation; the PPI, or Producer Price Index will report on wholesale level prices on Wednesday; the Consumer Price Index, or CPI, will report on retail level prices on Thursday. The Labor Department is changing how they calculate the PPI. The new index will include measures of services and construction. Instead of the old top-line label of “Finished Goods,” the headline PPI will now capture “Final Demand.” I’m not sure what that really means just yet. I’ll have to look into it, but economic indicators are always changing. You wouldn’t use a 1950s road map to plan a cross country drive.

Also next week, the Fed will release minutes of the January 28-29 FOMC meeting. Maybe we’ll learn more about the possible changes in the unemployment threshold of 6.5%.

Also, next week, I predict we will see; and this is not something that’s on any official calendar, but I predict we will see more wealthy people putting their feet in their mouths. It seems to be all the rage lately. This past week we had a couple of fine examples. John Mack, the former CEO of Morgan Stanley gave an interview to Bloomberg TV. In a discussion about executive pay, Mack said we're all being too rough on his fellow too-big-to-fail bank CEOs.

He would love, he said, "to see people stop beating up on Lloyd and Jamie," endearingly referring to Goldman chief Lloyd Blankfein and Chase chief Jamie Dimon by their first names (Mack must be in a bowling league with both men). He added: "I think that would make a lot of sense, and I'm in favor of that."

Mack went on to say that the debate over compensation was healthy, just not always warranted. "As long as shareholders reward performance," he said, "we can argue." But, he added, "The last time I checked, this business is still a business that pays people extremely well."

It's already funny that of all the injustices in the world, this was the one Mack decided to worry about on TV: the criticism of poor Jamie Dimon's 74 percent raise. But more to the point: If we really did live in a world where shareholders rewarded performance, would a CEO who just oversaw a record $20 billion in regulatory penalties even have a job, much less be getting a raise?

Mack had stones enough to be whining about people "beating up" on Jamie Dimon, given the year Chase just had. But to do so and simultaneously scold us that high compensation on Wall Street is just "shareholders rewarding performance," that’s just a bit more than bravado. It’s more like lunacy.

John Mack was the CEO of Morgan Stanley from 2005 to 2009. He was paid well. Morgan Stanley received bailouts. So, it just seems strange when he talks about “shareholders rewarding performance”.

Meanwhile, Tom Perkins is desperately trying to extend his 15 minutes of infamy. Perkins told an audience in San Francisco Thursday that people who pay more money in taxes should get more votes. Perkins said: "The Tom Perkins system is: You don't get to vote unless you pay a dollar of taxes, but what I really think is, it should be like a corporation. You pay a million dollars in taxes, you get a million votes. How's that?"

The audience laughed. But it isn’t so funny. After all, that’s not really how democracy works. Unfortunately, Perkins wasn’t joking around. Perkins is no stranger to outrage, and it seems like he’s starting to kind of like it that way. The Internet freaked out last month after he argued in a letter to the Wall Street Journal that there are parallels between progressive activists’ “war on the American one percent” and Nazi Germany’s persecution of Jews. Even the venture capital firm he co-founded, Kleiner Perkins Caufield & Byers, was quick to distance itself from his controversial comments.

“This is a very dangerous drift in our American thinking,” Perkins wrote in the letter. “Kristallnacht was unthinkable in 1930; is its descendant ‘progressive’ radicalism unthinkable now?” Perkins later apologized for that remark, or at least the specific reference to Kristallnacht. Even with the controversy, Perkins picked up some followers. Rich guys from real estate mogul Sam Zell to billionaire Wilbur Ross piled on, claiming the one percent is getting picked on unfairly.

Not all rich guys have jumped on the Perkins bandwagon; former AT&T Broadband CEO Leo Hindrey says executive pay has gotten so out of hand that it has caused a "structural breakdown of the meritocracy of our nation." You can blame the stagnant economy on a "handful of women and men" who run the country's largest companies. And that's according to a man who used to be one of those people. Hindery pointed out that, even as CEO pay has skyrocketed in recent decades, it has not "trickled down" to workers, who must increasingly borrow money to finance their spending. That dynamic helped set the stage for the most recent recession and helps explain today's sluggish recovery.

Fortune 500 CEOs now make more than 200 times what their average workers make, according to Bloomberg data. That ratio has increased by 1,000 percent since 1950. Hindery says that as CEO pay has exploded, worker pay has stagnated: Workers have not had a real cost-of-living increase since the 1960s. And these CEOs are not exactly earning their exorbitant pay.

Hindery describes says: "It's a fraud. It's born out of cronyism."  That cronyism is demonstrated in a new analysis of executive-pay data showing the compliance of corporate boards in approving CEO pay, regardless of corporate performance. Those directors are themselves well-paid for their vigorous rubber-stamping.

The problem, Hindery said, isn't just that the rich are getting richer. The tragedy, he said, is the rise of the low-wage workforce. Half of the jobs created in the past three years have been low-paying while the wealthiest Americans continue to capture record earnings.  The federal minimum wage, which stands at $7.25, is worth much less today than was in 1968. And all recent efforts to raise it have been stalled by Congress.

It's no wonder most of us are feeling entirely fed up. Two-third of Americans think CEO pay is out of hand.  Hindery would agree. After all, rising income inequality is putting a damper on the economy as a whole. "The only time the U.S. economy and any of the developed economies prosper is when there's a vibrant middle class that grows from the bottom up," he said. "We've trashed that whole principle."

Tuesday, February 11, 2014 - Yellen: Far From Complete

Yellen: Far From Complete

by Sinclair Noe

DOW + 192 = 15,994
SPX + 19 = 1819
NAS + 42 = 4191
10 YR YLD + .04 = 2.71%
OIL + .36 = 100.42
GOLD + 15.90 = 1291.90
SILV + .16 = 20.34

Janet Yellen went to Capitol Hill this morning to deliver her first semi-annual Monetary Policy Report to Congress as Fed Chair; this is what we used to call the Humphrey-Hawkins testimony and it involves prepared remarks followed by a question and answer before the House Committee of Financial Services; tomorrow, she’ll repeat the process with senators.

With regard to monetary policy, Yellen said she expects a great deal of continuity in the FOMC's approach to monetary policy. No surprise; Yellen was the vice-chair, she served on the FOMC, she helped formulate the current monetary policy strategy, and she supports the strategy.

Yellen pointed to real gross domestic product growth which rose at an average annual rate of more than 3.5% in the third and fourth quarters, versus 1.75% in the first and second. She also said there has been “progress” in the labor market which has added 3.25 million jobs since the Fed began a new round of asset purchases in August 2012.

However the economy added just 113,000 jobs last month, and 75,000 jobs the month prior. While Yellen did not specifically reference these weaker than expected reports in her prepared remarks, she called the labor recovery “far from complete.”

And the Fed’s target of 6.5% unemployment as the line where they might pull back from their zero interest rate policy; turns out that 6.5% is more of a threshold than a trigger, and Yellen made clear that the FOMC is “considering more than the unemployment rate when evaluating the condition of the US labor market.” Yellen also said she was surprised by the most recent jobs reports from December and January although she thought weather might be a factor, and she admitted the recovery is far from complete.

In addition to the headline unemployment rate, the Fed is trying to figure out what to do with long-term unemployed workers and part-time-but-wannabe-full-time workers. The numbers may not reflect what people’s preferences are, but that the economy can’t absorb them yet.  In the Q&A, she said: "A significant part of the decline in labor force participation is structural and not cyclical. Baby boomers are moving into older ages where there is a dramatic drop off in labor force participation…” In other words, get used to the new normal.

And then she tossed the jobs issue back into Congress’ court: "For our part we are trying to do what we can, with monetary policy, to simulate a faster economic recovery to bring unemployment down nationally.... Monetary policy is not a panacea. I think it's absolutely appropriate for Congress to consider other measures that you might take in order to foster the same goals.... Certainly all the economists that I know of think that improving the skills of the workforce is one important step that we should be taking to address those issues."

The key moment in the Q&A session was probably when Yellen said a notable change in the outlook will be cause for a change or a pause in the tapering stance. Wall Street traders loved that line. And then she talked about what it would take for the Fed to jump back into more bond buying: “I think a significant deterioration in the outlook, either for the job market, or concerns, very serious concerns, that inflation would not be moving back up over time. But the committee has emphasized that purchases are not on a preset course, and we will continue to evaluate the evidence."

When Yellen was asked about the consequences of QE, specifically bubbles, she answered: “I think it's fair to say our monetary policy has had an effect of boosting asset prices. We have tried to look carefully at whether or not broad classes of asset prices suggest bubble-like activity. I have not seen that in stocks, generally speaking. Land prices (she was referring to farm land), I would say, suggest a greater degree of overvaluation."

And Yellen added: "We recognize that in an environment of low interest rates like we've had in the Unites States now for quite some time, there may be an incentive to reach for yield. We do have the potential to develop asset bubbles or a buildup in leverage or rapid credit growth or other threats to financial stability. Especially given that our monetary policy is so accommodative, we are highly focused on trying to identify those threats."

Of course, the Fed’s dual mandate is price stability and maximum employment, but they also work as bank regulators, and her answer about her role as a regulator was informative; you have to listen carefully to the nuanced role of the Fed as regulator: "To my mind, the regulatory agenda of trying to strengthen the financial system will bring important long-term benefits to the economy."

We talk about the big banks behaving badly, and so when we see what looks like recognition of the problems by an actual banker, well that’s noteworthy. Today in the Guardian, Ross McEwen, the CEO of RBS admitted the British megabank abused its customers during the financial crisis: "In the rush for growth and profit, RBS forgot what banking is about. The bank valued least the people it should have valued most: its customers. We sold them products like PPI which many didn't need, and in some cases didn't know they had. Our customers often felt confused by language they found difficult to understand. We wasted their time with needless bureaucracy. We literally and metaphorically put them at the back of the queue."

And if you’re wondering what the reference to PPI is about, PPI stands for Payment Protection Insurance. PPI was sold, often using misleading sales practices, alongside personal loans and other borrowing, including credit cards. The policies were meant to cover payments if customers were sick or unemployed, but often they did not pay out or the buyer did not qualify in the first place. The four biggest British banks, Lloyd’s, Barclays, Royal Bank of Scotland, and HSBC have set aside close to $35 billion in legal reserves to pay for abuses related to PPI.

McEwen took over as CEO of RBS in October. The letter is one that could serve as a template for bankers here in the US; Janet Yellen and her colleagues at the Fed should read it as well. Some of the other key points from McEwen include: “Openness breeds trust.” And, “RBS cannot start to claim to be a bank that always treats people fairly unless we stop doing those things that erode trust. We cannot start to claim we are renewing the bank unless we stop shirking our responsibilities to our shareholders – principally the British taxpayer.”

McEwen has announced a detailed plan within the next month. This will be fun to watch this story unfold. McEwen is not representative of all big bankers; just today, Barclays announced it would fire 12,000 employees over the next year and at the same time they are raising the bonuses for their investment bankers; and they also announced profits had dropped 13%.

Yesterday we told you House Republicans were going to meet to work out their strategy for raising the debt ceiling. They met last night. House Speaker John Boehner laid out a plan to link the debt ceiling increase to legislation that would have reversed a cut to veteran retirement benefits, but conservative Republicans opposed the plan because it did not include provisions to pay for the erasing the cuts in veterans retirement benefits and Republican leaders worried that Democrats would not go along, holding firm to President Obama’s demand that no policy attachments come with a debt ceiling increase.

The debt ceiling is the maximum amount the Treasury Department may borrow to pay for spending programs that Congress has already authorized. Up until the last several years, the majority party in each chamber had taken the responsibility of raising it. And then Speaker Boehner changed the protocol with something he called the “Boehner Rule”, which holds that any debt ceiling increase should be attached to spending cuts of equal size; that set off a series of standoffs resulting in a sequestration deal in 2011 and last year's government shutdown. Nobody wants that again, and so now Boehner has told the Democrats to bring the debt ceiling to a vote; a clean bill with no attachments; and he’ll muster a couple dozen Republican votes to assure passage.

And that takes us back round to Janet Yellen’s earlier comments about the economy; you will recall she said: “Monetary policy is not a panacea. I think it's absolutely appropriate for Congress to consider other measures that you might take in order to foster the same goals.” There is plenty Congress could do, but I think we all know that isn’t going to happen.

So where does that leave us when it comes to investing?  The economy is still weak, the recovery is fragile at best, payroll data missed expectations in December and January, you can only blame the weather for a part of the market reaction (an ice storm in Atlanta has nothing to do with Treasury notes that mature in 10 years), corporate profits continue to outpace corporate revenue, top line and bottom line don’t jibe, at some point the divergence will lead to a tipping point, at some point stocks need to pay attention to the reality on the ground. The recent four day rally just feels like a trap being set. QE failed to juice the economy because it  was stimulus misdirected to the banks and not to Main Street; Yellen will back away from QE because it isn’t working; it may have stabilized the  financial sector but it failed to stimulate inflation expectations or economic activity, and the whole experiment is getting too risky.

Yellen is right to say we need fiscal policy to guide the way but she is wrong to imply that monetary policy can’t do more and better; monetary policy could make a big positive change; unfortunately that’s not going to happen.   

Thursday, November 21, 2012 - Size and Composition

Size and Composition

by Sinclair Noe

DOW + 109 = 16,009
SPX + 14 = 1795
NAS + 47 = 3969
10 YR YLD - .01 = 2.78%
OIL + 1.59 = 95.44
GOLD - .40 = 1243.40
SILV + .14 = 20.09

Intraday, the Dow industrials were higher last Friday and last Monday, but this was a record high close, and that is what we look at – the close. The reason we look at the close is largely arbitrary, and the reason we celebrate the Dow record high close as opposed to the S&P 500 record high close, is again arbitrary. The significance of a close above 16,000 is not a big deal; it's just a number. Earlier in the week the market looked at the round number and could not close above; there was a pause; then today, a move above. Test, retracement, breakout; that's bullish.

We have discussed that there is a disconnect between the markets and the broader economy. We have discussed that the trickle down effect or the wealth effect has been less than satisfying for. Still, some of that money will filter into the broader economy; and the bottom line is that it's better than a poke in the eye with a sharp stick.

At some point the Fed will taper; the easy money party will end; until then, well, enjoy the milk and cookies.

Initial claims for state unemployment benefits fell 21,000 to a seasonally adjusted 323,000. Meanwhile, prices at the wholesale level dropped 0.2%. The PPI core rate, excluding gas and food rose 0.2%; so the lesson is that we can all get lower prices if we just stop driving and eating; and, we are seeing disinflation at the wholesale and retail levels. Also this morning, the Philadelphia Federal Reserve Bank reported its business activity index fell to its lowest level since May. Wall Street's pretzel logic saw this bad economic news as a positive, indicating the Fed will continue to be accommodative. Just how long the Fed can keep pumping easy money into the stock market is the big question. Japan may serve as a playbook. Today the Bank of Japan left its massive stimulus policy, known as Abenomics, in place. So, with Japan as a guide, the Fed could do much, much more. The dollar rose to its highest against the yen in more than four months.

Today, European Central Bank President Mario Draghi said the ECB would not cut the deposit rate into negative territory. Draghi tried to dispel talk the ECB was considering charging banks to deposit cash overnight in a bid to boost economic activity. The Federal Reserve pays banks to deposit funds, and there has also been talk that they might consider not paying to get that money out of the vaults and into circulation. Draghi said the central bank did not see deflation materializing, but clearly deflation is a greater concern than inflation, and deflation may force the ECB to reach deeper into their tool belt.

It's generally accepted that central banks monetary policies implemented in response to the global financial crisis prevented a deeper recession and higher unemployment than there otherwise would have been. These measures, along with a lack of demand for credit as a result of the recession, contributed to a decline in real and nominal interest rates to ultra-low levels that have been sustained over the past five years.

A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. Over the past 5 years, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks.

Nonfinancial corporations benefited by $710 billion as the interest rates on debt fell, however this did not result in higher levels of investment. The impact that ultra-low interest rates have had on banks has been mixed. They have eroded the profitability of eurozone banks, resulting in a cumulative loss of net interest income of $230 billion between 2007 and 2012. But banks in the United States experienced an increase in effective net interest margins and a cumulative increase in net interest income of $150 billion. The experience of UK banks falls between these two extremes.

Meanwhile, households in these countries have lost a combined $630 billion in net interest income; that's not total losses from the economic downturn, that's just net interest income.

There are limits to central bank monetary stimulus schemes. The Federal Reserve has been buying mortgage backed securities at a rate of $40 billion per month and they now hold an estimated 26% of the total of mortgage backed securities outstanding. Each month the Fed continues buying, they increase their stake by 0.8%. Even if the Fed were to taper in March and stop all MBS purchases by the end of 2014, Fed holdings of MBS would rise to about 34% of the total MBS market.

The Fed has already distorted the housing market, and if QE continues much longer, they could corner the market. What would that look like? I'm not sure, I'm just asking. Another question is whether the asset purchases have really done the job. The Fed might want to look at buying something else. Quantitative easing can be targeted at all kinds of assets and with the Fed swallowing up the entire MBS market, maybe it's time to look elsewhere. There is probably nothing to prevent the Fed from jumping into the corporate bond market, or maybe they could start buying up municipal bonds; they could start with Detroit, Riverside, and Stockton.

Regardless of whether you agree with the idea or not, or whether you appreciate the irony or not, the point is that the Fed can not only make adjustments to the size but also the composition of its asset purchases.

Today marked a big change in the Senate. I'm still trying to figure how it will affect business and the economy but a friend asked me to speak on it today, so I'll say a few words.

Senate Majority Leader Harry Reid pulled the trigger today, deploying a parliamentary procedure dubbed the "nuclear option" to change Senate rules to pass most executive and judicial nominees by a simple majority vote. The Senate voted 52 to 48 for the move, with just three Democrats declining to go along with the rarely used maneuver.

From now until the Senate passes a new rule, executive branch nominees and judges nominated for all courts except the Supreme Court will be able to pass off the floor and take their seats on the bench with the approval of a simple majority of senators. They will no longer have to jump the hurdle of 60 votes, which has increasingly proven a barrier to confirmation during the Obama administration.

Reid opened debate in the morning by saying that it has become "so, so very obvious" that the Senate is broken and in need of rules reform. He rolled through a series of statistics intended to demonstrate that the level of obstruction under President Barack Obama outpaced any historical precedent.

Half the nominees filibustered in the history of the United States were blocked by Republicans during the Obama administration; of 23 district court nominees filibustered in U.S. history, 20 were Obama's nominees; and even judges that have broad bipartisan support have had to wait nearly 100 days longer, on average, than President George W. Bush's nominees. There has been gridlock; that's true. Changing the rules can come back to bite you at a later date; that's true, too.

I have no problem with the filibuster, at least the old fashioned filibuster. I hate the modern filibuster, where a senator just says: “I filibuster” and everything grinds to a halt. If you want a filibuster, then stand up on the Senate floor, (like when Mr. Smith Goes to Washington) talk until your voice or your bladder gives out. Read from Dr. Seuss of actually try to display intelligence. We know this is possible because every time a Senate committee calls an expert witness to testify at a hearing, we never hear the witness, just the various Senators, bloviating on without end.

And if they ever did bring back the old fashioned filibuster, the could set up a wind farm on the steps of the Capitol to capture the never-ending torrent of hot air.

Thursday, August 15, 2013 - Who's in Control?

Who's in Control?

by Sinclair Noe

DOW – 225 = 15,112
SPX – 24 = 1661
NAS – 63 = 3606
10 YR YLD +.04 = 2.75%
OIL + .41 = 107.26
GOLD + 29.60
SILV + 1.14 = 23.11

Let's start with the economic data:

The Labor Department said its producer price index (PPI) remained flat in July, surprising economists who were expecting a rise of 0.3%. Meanwhile, core prices, which exclude food and energy costs, edged 0.1% higher -- less than the 0.2% climb projected by economists. By comparison, June saw gains of 0.8% and 0.2%, respectively.

Meanwhile, the consumer price index (CPI) showed retail prices rose a seasonally adjusted 0.2% on gains for gasoline, housing, clothing and food, among other goods. Excluding energy and food, the core consumer-price index also rose 0.2%.

The core CPI increased 1.7% in July from the same period in the prior year, slightly up from June’s annual growth. Overall consumer prices have increased 2% over the past 12 months. That year-over-year growth in the overall CPI has trended higher in recent months.

Just the other day, James Bullard,  the St. Louis Fed president said he is concerned about low inflation levels, which he said will be a factor in whether the Fed will scale back its bond-buying program. Bullard said: "There has not been much indication, so far, that it has been ticking back up toward target."

Also, the number of people who applied for new regular state unemployment-insurance benefits fell 15,000 to 320,000 in the week that ended Aug. 10, hitting the lowest level of initial claims since October 2007.

Who's in control? 

The headlines at the Wall Street Journal this morning said:  "Stock and bond prices tumbled after stronger-than-expected economic data ..." The share of our national income which goes to corporate profit is the highest it's been since they started tracking it in 1929, while the share going to people -- as salary and wages -- is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.  We're becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.

Why would good news about the economy cause the stock market to fall? The sentences continues: "... raised investor anxiety about a pullback next month in central-bank support for financial markets... "

Investors had been relying on the Federal Reserve to keep pumping up the stock market's record run, but some mildly favorable economic reports raised fears that the Fed's market-friendly interventions might come to an end.

Who's in control?

Stocks had the biggest one-day percentage drop since late June; trading volume was higher than the recent averages; there were poor results and outlooks from Dow components Wal-Mart and Cisco.

Wal-Mart Stores' shares fell on a surprise decline in quarterly same-store sales and Cisco Systems shares dropped one day after the network equipment maker announced it was cutting 4,000 jobs. The Wal-Mart earnings report could be considered a macro indicator, almost a proxy for gross domestic product data. It shows that consumer spending isn't that strong yet; inflation is rising, wages are not, and unemployment is still pretty high as witnessed by the news from Cisco.

There's a conundrum in the labor market. Over the past 3 years the number of job openings has risen by almost 50% but actual hiring has gone up by less than 5%. Companies advertise job openings but they don't fill the openings. There may be several possible reasons. Some look at the possible skills gap, the mismatch between the work companies need done and the skills the workers have. Maybe that explains a few of the unfilled job openings but not all. Openings in the retail sector have doubled over the past 3 years but hiring has been flat. They can't find someone with the skills to work at JCPenney?

A second explanation is that employers are offering jobs at wages that are too low to attract good applicants. The long term high unemployment rates have put no upward pressure on wages and companies haven't adjusted their wage offers.

And yet another explanation is that the nature of the financial crisis, rooted in the housing market crash, made it very difficult for many people to move for a job, suggesting that companies respond by filling openings from within. The jobs are advertised, but they go to people already with the company. The final explanation is that companies advertise jobs without much intent to fill the jobs; they don't have to recruit; they don't have to look for talent; it comes to them, cheap and easy.

Everybody's worried about what the Fed might do, unless you followed the “Best Six Months, Worst Six Months” plan, which called for you to get out in May and stay away through October. Actually, the refined version said to get out on May 24^th. In July, that looked like a bad move, now it looks smart. Sell In May doesn't always work, and it might not work this year, but it works with enough regularity to warrant consideration. Why does it work? Go figure.

Who's in control?

More and more the answer is not who you think.

Websites belonging to the Washington Post, CNN, and Time have been attacked, apparently by supporters of Syrian President Bashar Assad. Some links on the sites were redirecting readers to the website of the Syrian Electronic Army (SEA).

The breaches have been blamed on a third-party link recommendation service that all three sites used. The SEA has hit several media companies in recent months, mostly via social media. In this attack, the group was able to manipulate links served by content recommendation service Outbrain, which has now been taken offline.

Yesterday, the New York Times website was knocked out of service, maybe it was just a celebration of the great Northeastern Blackout of 2003, which you may recall was caused by a software bug that failed to detect and respond to a power surge when a tree limb hit a power line. Yep, 55 million people cast into darkness because a tree limb was too close to a power line.

I don't know why the Times had a problem yesterday, they say it was a problem with scheduled maintenance. Maybe. They started out by tweeting the blackout. Then they started posting stories on their Facebook page.

Facebook may have been convenient, but that meant that the Times was no longer in control of its content. Facebook is not hosting this material for the sake of the Times or for people who want quality journalism. Facebook itself is an increasingly threatening competitor to the journalism industry, and it serves its own needs first.

The situation also highlighted a reality all news organizations, and all of us who rely on the web for much of what we read and say, need to understand better. Technology can be fragile. It can be hacked. And even if you don't get your news content from the web, remember that all it takes is an unpruned tree limb, and the power could be out. In other words, we all need a Plan B.

Who's in control?

In Egypt, the control appears to be tenuously hanging with the military, at a great cost. The death toll surpassed 600 today during Egypt’s bloodiest crackdown on supporters of its deposed Islamist president, as violent new protests erupted in the country and world condemnation widened, including an angry response by President Obama and calls for a suspension of European economic aid.

Egypt’s Interior Ministry warned protesters that police officers were authorized to use lethal force to protect themselves. The ministry also promised to punish any “terrorist actions and sabotage” after at least two government buildings were burned. It was easily the most violent of the three deadly suppressions since Morsi was forcibly removed from power by the armed forces six weeks ago, plunging the country into its worst crisis since the ouster of Mr. Morsi’s authoritarian predecessor, Hosni Mubarak, in the 2011 revolution.

 Mr. Obama strongly condemned the Egyptian government’s use of brute force to crush the protests and said the United States had canceled military exercises with the Egypt’s armed forces scheduled for next month. Mr. Obama also warned of further unspecified steps if Egypt’s interim leaders continued down what he called a “more dangerous path.”

But he said nothing about cutting the $1.3 billion in annual military aid that the United States provides to Egypt and acknowledged that the United States had historically regarded the country as a friend and a “cornerstone for peace in the Middle East.”

In Europe, some officials called for a suspension of aid by the European Union, and at least one member state, Denmark, cut off funds.

So, to recap. The military staged a coup. The civilian regime was a façade. The military's attempt to destroy the Muslim Brotherhood guarantees a violent future, likely including terrorism and perhaps ending in civil war. Despite having dumped $75 billion worth of "aid" into Cairo's coffers over the years, Washington has no "leverage."

Yet the Obama administration continues to mouth meaningless platitudes. President Barack Obama said that the violence "must stop." To make that happen he said the US was pulling out of planned joint military maneuvers with Egypt. Yea, that's not going to get it done.

Who's in control?