Tuesday, July 23, 2013 - Woman Gives Birth to a Baby

Woman Gives Birth to a Baby

by Sinclair Noe

DOW + 22 = 15,567
SPX – 3 = 1692
NAS – 21 = 3579

10 YR YLD + .02 = 2.51%
OIL + .09 = 107.00
GOLD + 12.50 = 1348.70
SILV - .05 = 20.59

The Dow Industrial Average hit a new record high close. The S&P 500 was down slightly after four straight gains, including a record high yesterday. It's still earnings reporting season, and the big report today came after the close of trade. Apple reported better than expected sales and profits. Generally, we're seeing revenues are coming in pretty lackluster and profits seem to be doing a little better than gains in sales.

In the first quarter of 2013, we saw an interesting and unexpected development. While the corporate earnings of S&P 500 companies were better than expected, their revenues weren’t nearly as impressive.  Just 46% of S&P 500 companies reported revenues above estimates. And the second-quarter corporate earnings might be similar, if not worse. Keep in mind that before second-quarter earnings season began, we had 87 S&P 500 companies issue negative earnings guidance. The information technology and consumer discretionary sectors of the S&P 500 had the largest number of companies issuing negative guidance about their corporate earnings relative to their five-year average.

Many stock advisors are staying optimistic and not taking into consideration the reliability of corporate earnings. Consider the Investors Intelligence Advisor Sentiment index. It has been increasing for three consecutive periods and is closing in on highs made in mid-May of 2012.

Big-cap companies are still trying their best to boost their corporate earnings through other means—call it financial engineering. Take Yahoo!, for example. In the past few quarters, the company purchased $3.65 billion worth of its own shares back, and in its first-quarter corporate earnings announcement, the company was very clear that it plans to purchase another $1.9 billion worth of its own shares back.

These anemic revenues mean that companies are not really selling more, and deteriorating earnings combined with key stocks heading higher continues looks like an effort to lure retail investors into a topping market. I'm not saying the market has topped here, and I'm not trying to sound bearish; that would be foolish while we have record highs. Just reminding you that a trend can reverse.

The Senate Financial Institutions and Consumer Protection subcommittee convened a hearing to explore whether financial companies – the big banksters like Goldman Sachs, JPMorgan Chase and Morgan Stanley – should control power plants, warehouses and oil refineries. 

Although Congress removed post-Depression era barriers that separated commercial banking and traditional commerce in the late 1990s, a group of bipartisan senators has lately been advocating the reinstatement of those walls in part to impose tighter regulation on such actions.

The ability of those banks, or more accurately their subsidiaries to gather nonpublic information on commodities stores and shipping also could give the banks an unfair advantage in the markets and cost consumers billions of dollars. And there is particular concern because the giant banks receive the benefit of low-rate borrowing from the Federal Reserve. That could leave taxpayers on the hook for losses caused by a collapse in commodities prices or in the event of an environmental disaster like the Deepwater Horizon oil spill.

Meanwhile, the Federal Reserve is reviewing the decades old decision to allow banks to be involved in physical commodities transport and storage. Yes, the Federal Reserve, in addition to printing money out of thin air, they serve as a banking regulator.

The 1999 Gramm-Leach-Bliley Act added exemptions for certain commodities units that previously weren’t allowed under the 1956 Bank Holding company Act. One was for businesses that the Fed could determine were complementary or incidental to the bank’s financial activities. The first of those decisions came in 2003, when the Fed allowed Citigroup to continue dealing in physical commodities.

The other exception was for firms that became banks after 1999 and had physical commodities businesses that predated Sept. 30, 1997. That rule is relevant because Goldman Sachs and Morgan Stanley converted to bank holding companies during the 2008 financial crisis. The Fed gave them five years to divest businesses that didn’t comply with the Bank Holding Company Act.

Morgan Stanley said in its 2012 annual report that it was in talks with the Fed over whether the company’s physical commodities businesses would be given a grandfather exemption or if it would have to sell any units by the end of the five-year grace period. Goldman Sachs faces the same deadline if any of its investments are deemed noncompliant.

This issue came to the forefront with a New York Times article over the weekend detailing how Goldman Sachs has been operating an aluminum warehouse operation in Detroit; the main job of the warehouse seems to be delaying delivery of the metal, crimping supplies and running up prices. We've been hearing more and more about banks trying to manipulate prices, whether through warehousing practices or manipulation of interest rates in the Libor rate rigging scandal, or the ISDAfix scandal, or the oil price scandal in Europe, or electricity scandal involving JPMorgan and Barclays. And at this point, we are accumulating more and more evidence that the banks are rigging pretty much everything.

By the way, we just marked the third anniversary of the Dodd Frank Financial Reform Act. They're now saying the thing might actually make it into law by the end of the year; so far, ti's just been bits and pieces of the legislation that has been enacted. Sort of like the road killl that's left after the lobbyists have finished with it. Since the summer of 2010, bank and financial industry lobbyists and attorneys have met with regulators more than 3,100 times to argue their positions. Reform representatives have met with regulators about 150 times. Guess who's winning?

Yesterday, we talked a bit about the problem in Detroit. I said the underfunded pensions weren't really a problem. That is true, but I should qualify. The underfunded pensions are problematic, but we could fix the problems. It would cost money. It would require hard work. That's not the path that Detroit is on. Rather, Detroit is turning into a test case for destroying pension funds and if it catches on, it will spread to other cities, and that might be a problem.

Bankruptcy or not, Detroit's emergency manager, Kevyn Orr, says the city simply can't afford the pensions it has promised tens of thousands of retired and current city workers, many of whom are counting on the checks to make ends meet.

So how much money do Detroit's retirees actually get? On average Detroit's firefighters, police officers and other city employees receive pension checks that are similar or slightly smaller in size than the national average of $30,000 a year. In Dallas Texas, the average annual police pension is around $47k, in Los Angeles it's about $58k. For different jobs the pensions vary, but a general city employee who retired in 2011 with an average ending salary of $60,000 and 40 years of service could receive around $45,000 a year.

Regardless of whether Orr's proposed cuts go through, pension checks for younger employees will be less generous. Current workers have already agreed to pension cuts. For example, in 2011, Detroit police and firefighters agreed to a roughly 15% cut for pension benefits accrued from future years of service.

While retired Detroit firefighters and police officers receive more generous pension checks than auto workers -- checks averaged almost $30,000 a year in 2011 compared to about $18,000 for UAW retirees they often don't receive the added bonus of Social Security payments. So apparently the plan is to slash the pensions, and since they aren't eligible for Social Security because they were on the city plan, ...they get nothing?

The birth of the as yet un-named prince-child of Kate and William in London has been making enormous headlines. The best headline I've seen is: “Woman Gives Birth to Baby”. The accompanying story provided details: A married woman of childbearing age has given birth to a baby boy. The event followed nine months of pregnancy. "Both mother and baby are doing well," a spokesman for the woman said. It is now expected that the baby will grow up.

Finally, a good use of austerity, at least as it applies to words.

It's been a while since we've followed up on austerity, so let's see how it's holding up. In the UK, austerity has shaved 6 percent from that country's gross domestic product over the past three years, according to estimates from Oxford economist Simon Wren-Lewis. This amounts to $143.5 billion in lost income during that time, or nearly $5,400 per British household.

Debt hawks  might argue that a little bit of economic pain now is worth it if you can avoid a government-debt blowup in the future. That was the gist of Harvard economists Carmen Reinhart and Kenneth Rogoff's oft-cited paper, "Growth In A Time Of Debt," which argued that government debt above 90 percent of GDP led to sharply lower economic growth. Reinhart and Rogoff followed up their paper with op-ed articles and even testifying before Congress to help convince governments here and in Europe to hurry up and cut government debt sooner rather than later. The only problem is that their research paper was riddled with errors and omissions, and problems with the Excel spreadhseet calculations.

The trouble is, austerity has not worked to lower government debt burdens. It has only made them worse.

Surprise, surprise: it turns out that slashing government spending and raising taxes in the midst of a recession/depression actually lowers tax revenue and raises the cost of government services for the poor and unemployed, which makes government finances even worse.

The struggling European countries that undertook their own austerity programs, as a condition of receiving bailout funds from the austerity fanatics holding the purse strings, are still seeing their debt loads rise.  In 2011 German Finance Minister Wolfgang Schäuble wrote that “austerity is the only cure for the Eurozone”; In Ireland, Greece, Spain, Italy, and Portugal, government debt as a percentage of GDP has increased since the beginning of 2011. The debt problem is worse than before the belt tightening. Public debt levels are rocketing in almost every country of the eurozone periphery. Debt ratios are already crossing the point of no return in Portugal and Italy and are nearing the danger zone in Ireland.

The latest figures from Eurostat are shocking even to those who never believed that combined fiscal and monetary contraction – made worse by bank curbs – could have any other result than a faster rise in debt trajectories.

Portugal’s debt has just blown through the upper limits set by the EU-IMF troika, reaching 127% of GDP in the first quarter of 2013. This is 15 percentage points higher than a year ago – the bitter fruit of austerity overkill. The Portuguese people have suffered year after year of cuts only to find themselves sinking deeper into a debt swamp. The finance minister resigned. Yields on 10-year bonds jumped briefly above 8%.The IMF warned last month that the debt outlook remains “very fragile” and that any external shock could push the country over the edge.

Italy’s debt has hit 130% – compared with 123% a year ago – rapidly spiralling beyond the safe threshold for a country without its own sovereign currency and central bank.

In Ireland, public debt has jumped by 18 points to 125% in a single year. This is partly “pre-funding” to cover borrowing needs for 2014 but a slide back into recession accounts for a big chunk.

The former head of the IMF’s team in Ireland, Prof Ashoka Mody, has called for “a complete rethinking” of the austerity strategy. He confirmed what the Irish trade unions and others have said all along, that fiscal overkill is self-defeating, especially if compounded by tight money.

Rogoff and Reinhart made errors when they guessed that 90% debt to GDP was the level that resulted in catastrophic meltdown, but you've got to think that anything over 125% debt to GDP can be problematic; certainly, it presents the bond market vigilantes with the hint of blood in the air. The current course is untenable. Markets may tolerate EMU debts of 130% for a while but they are unlikely to tolerate levels nearing 140%, or even any prospect of it.

The harsh reality is that the EU failed to clean up its problems. You can blame the mess on the periphery if you wish, or you can blame it on the belt tightening failed policies of the northern states, but the simple reality of the day is that austerity has not worked. Contractionary policy has needlessly pushed southern Europe into a double dip recession, or in some cases, just out and out depression.

Meanwhile, the big headline from across the pond: Woman Gives Birth to a Baby.

Wednesday, April 24, 2013 - God Bless the Child

God Bless the Child

by Sinclair Noe

DOW – 43 – 14,676
SPX +.01 = 1578
NAS +0.32 = 3269
10 YR YLD un = 1.70%
OIL + 2.43 = 91.61
GOLD + 17.90 = 1432.50
SILV + .22 = 23.26

Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news. The Pew Research Center has analyzed the most recent date from the Census Bureau, and it turns out the rich got richer and the poor got poorer. During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the US with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.

Because of these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009. On an individual household basis, the mean wealth of households in this more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.

God Bless the child that's got his own.

But it's getting tougher. A new Frontline documentary aired last night and if you didn't see it, it's available online; it's called “The Retirement Gamble”. The basic premise is that even if you try to save for the future, Wall Street is stripping your retirement funds clean with fees and bad performance. The documentary spends a lot of time on a 2012 research paper by Robert Hiltonsmith of the think tank Demos, which found that a median-income, two-earner family will pay a staggering $155,000, all told, in 401(k) fees. That cash represents about 30 percent of the total retirement savings this hypothetical family would have had, if it had paid no fees.

Once upon a time, American workers were far more likely to work for a company that offered a defined-benefit pension plan, the cost of which was covered by the employer. Today, we are instead encouraged to invest in a 401(k) or similar retirement plan, which offer limited investment choices. Most of those choices are "actively managed" funds that try to beat the stock market, but charge higher fees for the privilege. It is often difficult to see what sort of investments these funds have made and the kinds of fees they are charging.

The first draft of first-quarter 2013 GDP is due on Friday, but it should be clearly noted that Friday's number is only an estimate; an initial guess; there will be revisions; the revisions might be substantial. Over the past week or so, there has been a big brouhaha over the revelation that economists Ken Rogoff and Carment Reinhart's research was wrong. They had determined that when a country's debt to GDP level reaches 90%, the result is that economic growth slows – it goes negative. Their research had a Microsoft Excel coding error, and a few problems with assumptions. And so the argument for austerity now has more holes than Swiss cheese. Unfortunately, the austerity theory was enforced and it has backfired, and there are consequences.

But if the idea of debt causing slow or no growth has been discredited, where does that leave us? Is it possible that slow economic growth causes more debt? And is economic growth really a good measure of economic performance? Can an economy be growing and still be lousy? Maybe.

Economic growth measures the increase in the gross domestic product. Economic growth only shows how much more wealth the country has as a whole. We've seen growth in GDP for about 4 years but we've also seen the gap between rich and poor growing wider and wider. Growth is not creating an equitable society; it is creating inequality. If you've ever played the board game Monopoly, you know that when one player gets all the properties and all the hotels and all the money, the game is over.

We've had growth but we haven't seen jobs; well, we've seen some jobs, just not enough. And the jobs that have been created are often in low paying fields. We're not seeing good solid job growth.

So, on Friday, we'll watch the report on GDP, but we'll watch with a skeptical eye.

Remember the sequester? When seven weeks ago the deadline to find a federal budget compromise came and went, there was much handwringing in Washington. In the event that no agreement was found there were to be cuts to public spending so severe and painful that no one would dare fail to agree. To deter Republicans from holding out, half the immediate spending savings of $85.4 billion was to be found from the defense budget, and, to ensure Democrats would work to find a deal, half from annually funded federal programs. Despite these encouragements to fiscal discipline, the March 1 deadline came and went.

We all grew sick of hearing about the sequester. This week the sequester broke surface when it began affecting air travel, causing long delays at airports, which is to be expected when you send 1,500 air traffic controllers home without pay. One in 10 controllers will stay at home on unpaid leave every day until October. With the vacation season looming, crowded airports full of frustrated passengers will become commonplace.

You may not see it but there are other problems with the sequester. Air traffic controllers are not the only federal employees being told to take the week off.

So far, the sequester appears to have pleased no one, except perhaps those fiscal hawks who agree to anything so long as the federal government is shrunk. The cuts are blind, irrational, hastily arranged, uncaring, arbitrary and dangerous. Few doubt that federal expenditure is too high, but even if one is persuaded that cuts need to be made right now – which, as we remain stuck in a stagnant economy, flies in the face of macroeconomic reason – the sequester is the wrong way to make cuts and is already cutting the wrong things. The Congressional Budget Office estimates that the sequester alone will cost 0.6 percent in GDP this year. The cuts are not merely the enemy of good economic management but an automatic depressant upon the nation’s economic health.

A government watchdog warned that regulators need to be more aggressive in reducing exposure among major Wall Street firms if they want to eliminate concerns about "too-big-to-fail" banks. Christy Romero, special inspector general for the $700 billion Troubled Asset Relief Program, said in a report that not enough has been done by government overseers to address the interconnected nature of the largest and most complex financial companies. The ties among major Wall Street firms that posed a challenge at the height of the 2008 financial crisis remain a problem.

The special inspector general's report comes amid a continuing debate over whether Washington has truly eliminated the chance a large financial firm on the verge of collapse would need to be rescued by the government. It's pretty clear that the market is saying too-big-to-fail is still a problem, that these huge Wall Street banks are too complex, too interconnected, too large. Romero suggested regulators use the detailed structural plans they are receiving from the largest banks, known as living wills, to identify and eliminate potential problem areas among major firms. Obama administration officials have stressed that the 2010 Dodd-Frank financial overhaul means no financial firm would again enjoy a government bailout. But not everyone is convinced. While current law prevents bailouts to specific institutions, there could still be a demand to use taxpayer dollars in the face of a future financial crisis.

Last week the International Monetary Fund hosted a conference of some of the world’s top macroeconomists to assess how the most intense crisis to have shaken the industrialized economies since the Great Depression has changed the profession’s collective understanding of how the world economy works. After five years of coping with the consequences of the disaster, there is still so much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into the abyss again a few years down the road.

In determining what is a sustainable level of government debt, or whether central banks should focus on anything other than inflation, or what should be done to prevent further bubbles from destabilizing economies, we still don't have the answers, even if we have learned that some of the answers we thought might work have been disproved.

If you are one of the nearly five million American workers who have been unemployed for over six months, or one of the six million Spaniards, three million Italians or 1.3 million Greeks without a job or a clear prospect of finding one, this amounts to a tragedy.

Considering that the large and complicated financial institutions that set off the crisis five years ago have only gotten bigger, too big to fail has grown even bigger than ever and if it's too big to jail, it probably its too big to be allowed to fail; and that means that the gap in knowledge is downright scary.

Some things never change. Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news.

Monday, April 22, 2013 - Airplanes, Austerity, and Flying Bulls

Airplanes, Austerity, and Flying Bulls

by Sinclair Noe

DOW + 19 = 14,567
SPX + 7= 1562
NAS + 27 = 3233
10 YR YLD - .01 = 1.70%
OIL + .80 = 88.81
GOLD + 19.80 = 1427.30
SILV + .12 = 23.51

It's Monday but it's a better Monday than last Monday. No bombings to report today, at least not in our country.

Over the weekend, the cover story on Barron's magazine featured a cartoon drawing of a bull on a pogo stick, leaping through the air. You may recall that 6 months ago, Barron's poll of big money, institutional investors were bearish on the market; that was about 1,000 points ago. Now they're bullish. This would be a contrary indicator. But not today. Today, the bulls were buying the dips. The market started negative but finished positive. It’s all about momentum. Many fundamentally-oriented investors have been licking their wounds. And the nature of momentum-driven investing is that it can work longer than more sober-minded souls would think possible.

An open question is the odd continued rise of stock prices even as corporate earnings weaken. Why are investors paying more for companies whose earnings are declining in aggregate? In normal bull markets, you see a new leadership group emerge, and late in cycle, investors increasingly favor conservative stocks. This time the leaders are defensive plays, high quality companies that pay healthy dividends. While bulls say that this is predictable given ZIPR, we’ve had ZIPR for years now.
When this disconnect ends is anyone’s guess. But markets like this suggest that even more caution than usual is warranted.

The National Association of Realtors reported existing home sales slipped 0.6 percent last month to a seasonally adjusted annual rate of 4.92 million units. The supply of existing homes on the market for sale rose 1.6 percent during the month to 1.93 million, which represented 4.7 months' supply at March's sales pace, up from 4.6 in February.

That's is way below the 6 months' worth normally considered as an ideal balance between demand and supply. A year earlier, the inventory of unsold homes was 2.32 million, a 6.2 months' supply. More homes are expected to go on the market next month ahead of the summer buying season, so it might just be seasonal or it might signal that tight inventory is crimping demand, or it might signal that there is a real drag on housing.

It's earnings reporting season. Caterpillar reported this morning, with earnings of $1.31 per share; they missed estimates. In a statement the company expressed optimism on domestic housing, but said a 50% reduction in mining related businesses and little to no inventory build going into summer planting season will hurt results. For 2013, Caterpillar lowered its forecasts for both earnings and revenue to the low-end of the previous range.

Netflix posted better than expected earnings, and jumped about 20% in price.

Tomorrow, we'll get the Apple earnings. Over the past six months, Wall Street has gone from thinking that Apple can do no wrong to thinking that there's no way Apple will ever again do anything right. The stock has collapsed from a high of $702 to a recent low of $390 last week. Apple's results in the December quarter disappointed many analysts, and the company's outlook for the first quarter was muted. After a steady flow of news reports suggesting that first-quarter sales have not gone well, as well as Apple's failure to release any new products so far this year, many on Wall Street think that Apple will miss even its low guidance for the quarter.

The government is expected to report Friday that the economy expanded at a relatively healthy 3% clip in the first three months of 2013 after an anemic 0.4% gain in the fourth quarter. But don’t put too much stock into the mostly backward-looking report on gross domestic product. The signs of another midyear slowdown are already evident in softer consumer spending, a barely growing manufacturing industry and a slower pace of private-sector hiring. The same seesaw pattern also occurred in 2012 and 2011; and this year we can add in the effects of the fiscal cliff and the sequester. Consumers are finally feeling the bite from an increase in taxes earlier in the year and a round of federal budget cuts should pinch harder. The cuts only started to take effect in mid-March, and the biggest impact is likely to be felt in the next few months. Best case is for a continuation of an uneven recovery.

Today was the first day of the sequester hitting airports, as the nation's largest airports dealt with the onset of furloughs for FAA air-traffic controllers. Reports of late takeoffs at O’Hare, Atlanta’s Hartsfield-Jackson Atlanta International, New York’s LaGuardia, Los Angeles International and Charlotte-Douglas International in Charlotte, N.C., were widespread. In many cases, planes left the gate, only to sit on the tarmac for extended periods of time, while many flights were cancelled. Flights into cities such as Washington and New York were delayed by more than two hours as a result of the furloughs. Flight delays and cancellations at one airport can have a ricochet effect throughout the rest of the country, messing up arrivals and connections.

Pimco’s Bill Gross, the manager of the world’s largest bond fund, is the latest to trash a focus on austerity by British and euro-zone officials, telling the Financial Times that moving to cut debt too fast instead risks wrecking an economic recovery rather than righting the fiscal ship.

“The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross said. “You’ve got to spend money.”

 Gross says it was a mistake to think bond markets were calling on governments to embark on a round of severe fiscal belt-tightening. “In the long term it is important to be fiscal and austere,” Gross said. “It is important to have a relatively average or low rate of debt to GDP. The question in terms of the long term and the short term is how quickly to do it.”

Of course, last week, there was a major brouhaha about the academic research of Rogoff and Reinhart, who in 2010 put forth the idea that when a country reaches 90% debt to GDP it willl inevitably result in economic contraction. Last week, three economists presented a follow-up which showed Rogoff and Reinhart had flawed assumptions and basic math errors in their research. The idea that there’s a debt-to-GDP threshold that is true for every country, falls apart.

The “moral of this story is that it is an illusion to expect that the complicated relationship between public debt and GDP growth will always and everywhere be the same.” The idea that there is a stable relationship between debt and growth across time and places, independent of weak economies, is now behind us.

The timing of these developments is interesting. Right now there’s a serious effort to rethink the move to austerity. Between the developments in Japan and the IMF’s efforts in Europe and England, the common wisdom will soon be that austerity as a solution was oversold, with all the toxic side effects hidden. The question next will be how to turn that into political power.

France and Spain fell short of their budget deficit goals last year and rather than imposing even more draconian measures, the European Commission signals an end to sharp spending cuts.

The EU's statistics office Eurostat said France posted a deficit of 4.8 percent of economic output, higher than its 4.5 percent target. Spain's shortfall was the largest in the EU. Despite cuts and tax increases, Spain's budget shortfall was 7.1 percent, excluding bank recapitalization, higher than the government's 6.98 percent official year-end reading and well above Madrid's original target of 6.3 percent.

With budget cuts blamed for a second straight year of recession, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. European Commission President Jose Manuel Barroso, said today that austerity had reached its natural limits of popular support, saying: "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."

Budget cuts have been at the center of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job. Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing a rethink, with the focus shifting to economic growth strategies.

It is not yet clear just how big a policy shift EU policymakers are planning.

From the Wall Street Journal:

Troubles overseas are threatening the US recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

US exports of goods to the European Union are declining outright. Growth in overall US exports has been sputtering for months, after a three-year postrecession surge. And major US companies are reporting increasingly disappointing overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.

Thursday, April 18, 2013 - Elvis and Other Ongoing Investigations

Elvis and Other Ongoing Investigations

by Sinclair Noe

DOW – 81 = 14,537
SPX – 10 = 1541
NAS – 38 = 3166

10 YR YLD - .02 = 1.69%

OIL + 1.68 = 88.36
GOLD + 14.60 = 1393.10
SILV - .03 = 23.38

Emergency teams went house to house through mounds of debris in a devastated four-block area of West, Texas; that's the name of the town – West; it's near Waco. An explosion at a fertilizer plant leveled a big part of the town and there are 15 dead and perhaps 160 injured. Officials said there was no initial indication that the blast was anything but an industrial accident, but it is an ongoing investigation. Maybe someone will look into the wisdom behind building a fertilizer plant right next to a residential area and even a nursing home.

Meanwhile, an interfaith service was held in Boston today to mourn the victims of the bombing. It was actually a very good service. Several dignitaries spoke, including President Obama, who promised that the perpetrators will face justice. But it is an ongoing investigation. The FBI has released pictures of a couple of guys carrying large backpacks; they think they might be suspects in the bombings.

Meanwhile, the FBI has arrested a man in Mississippi for mailing letters laced with the poison ricin. The suspect is an Elvis impersonator. I can't make this stuff up.

We’re seeing economic growth cool off a little bit after a strong start to the year. The index of leading economic indicators declined 0.1% in March. The LEI looks forward about 3 to 6 months; the biggest challenges seem to be weak consumer demand and slow income growth.

Meanwhile, the Philadelphia Fed’s factory index declined, reflecting a drop in orders that prompted managers to cut back on hiring and inventories.. Manufacturing activity in the region is still growing, it's just sluggish growth.

This week, the IMF released new economic forecasts lowering its estimates for global growth, while also citing diminished risks of a severe financial disruption in Europe or sharp fiscal policy adjustment in the United States. Today, at the spring meeting of the World Bank and the IMF in Washington, Christine Lagarde, the director of the IMF gave her blessing to recent actions taken by the Bank of Japan to help bolster growth. She also said the European Central Bank had more room to aid a recovery in Europe.

But it was cautious support for more easing. The IMF still believes unconventional monetary policies meant to prop up economic growth around the world are still needed now, but they also raise the risk of creating new bubbles that would jeopardize financial stability. Policy reforms are needed before any problems created by central bank stimulus start to arise.

At a separate news conference, Jim Yong Kim, the head of the World Bank, called for eradicating extreme poverty by 2030 and for fostering income growth for the bottom 40 percent in every country.

Meanwhile, the argument for austerity has suffered a devastating blow. Carmen Reinhart and Kenneth Rogoff, two economists, of the University of Maryland and Harvard respectively, wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify austerity policies. The authors purported to show that once a country's gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad. Cut budgets now or crash your economy. Problem is that their math didn't add up, and some other economists went back and checked the math, and Rogoff and Reinhart now say there was a problem with the Microsoft Excel spreadsheet; maybe some other problems they haven't taken credit for yet.

When properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2%, not -0.1% as published in Reinhart and Rogoff. It kind of changes the whole debate.

The House of Representatives has passed legislation designed to help companies and the government share information on cyber threats, though concerns linger about the amount of protection the bill offers for private information. US authorities have recently elevated the exposure to Internet hacks and theft of digital data to the list of top threats to national security and the economy. This is the second go-around for the Cyber Intelligence Sharing and Protection Act after it passed the House last year but stalled in the Senate after President Obama threatened to veto it over privacy concerns. The White House repeated its veto threat if further civil liberties protections are not added. Some lawmakers and privacy activists worry that the legislation would allow the government to monitor citizens' private information and companies to misuse it.

Too late.

Every time you mindlessly give a sales clerk your zip code at checkout, you're giving data companies and retailers the ability to track everything from your body type to your bad habits.

That five-digit zip code is one of the key items data brokers use to link a wealth of public records to what you buy. They can figure out whether you're getting married (or divorced), selling your home, smoke cigarettes, sending a kid off to college or about to have one.

Such information is the cornerstone of a multi-billion dollar industry that enables retailers to target consumers with advertising and coupons. Yet, data privacy experts are concerned about the level at which consumers are being tracked without their knowledge -- and what would happen if that data got into the wrong hands.

Acxiom, one of the biggest data brokers in the business, claims to have a database that holds information -- including one's age, marital status, education level, political leanings, hobbies and income level -- on 190 million individuals.Major competitors, like Datalogix and CoreLogic, tout similarly vast databases.

In most cases, all that is needed to match the information these data brokers compile with what you buy is your full name — obtained when you swipe a credit card — and a zip code.

Once a retailer identifies you, it can track and analyze your spending behaviors and background in order to predict what you might buy next. In the data world, this is often called predictive analysis or predictive modeling. Some retailers sell this information back to the data brokers which then sell it to other companies -- including retailers, banks, credit card issuers, airlines, hotels, auto manufacturers and many, many more -- in a seemingly never-ending cycle.

Currently, data brokers are required by federal law to maintain the privacy of a consumer's data only if it is used for credit, employment, insurance or housing. But there are some gray areas. Medical records and prescription purchases are off limits, but data brokers are allowed to track purchases of over-the-counter drugs and other related medical items, as well as web searches and medical surveys that consumers fill out online

I hope you've heard some of the talk about the foreclosure settlement fiasco. The quick rundown is that the Office of the Comptroller of the Currency and the Federal Reserve tried to take over an investigation into foreclosure abuses by the big banks and mortgage servicing companies. They looked into abuses such as foreclosing on active duty military, forged foreclosure documents, robo-signing, foreclosing on the wrong houses, foreclosing on people who were paying their mortgages on time, and other little problems. But it was too much work for the regulators, so they told the banks to hire outside consultants to review the mortgage files one by one. But it was too much work for the outside consultants, even though they were paid $2 billion to do the review. So, after two years, the regulators just decided to guess; they said there were probably 4.4 million homeowners who had been abused and they should be paid $3.6 billion. Some would be paid up to $125,000 for the big messes, but most homeowners would get a check for $300 or less.

The first round of the settlement checks was mailed last week; 1.4 million checks for abused homeowners, or maybe not abused; nobody is really certain because they never finished reviewing the files; but they sent the checks anyway. And now the checks are bouncing. Not all of them; just a few. The company hired to distribute the checks says it has corrected the problem.

Meanwhile, the journal, Science reports that NASA scientists have discovered two planets which they think could support life. The planets are very, very far away; 1,000 light years; part of a five planet solar system. The host star -- the equivalent of Earth's sun -- takes the name Kepler-62, where the individual planets are designated by letters thereafter. The planets are the right size and the right distance from the host star, and the scientists think they might have polar caps and water and all the other stuff of life; although probably no Elvis impersonators.

When former Governor Arnold Schwarzenneger signed an executive order in 2007 creating the first-in-the-nation rule ordering reduced carbon emissions for cars and trucks, the oil industry seemed to be on board. Chevron helped write the rules. Chevron's biofuels chief spoke at the signing ceremony and pledged to develop biofuel replacements to gasoline. Two years ago, California started phasing in the mandate aimed at global warming. Now Chevron is leading a lobbying campaign to undercut the mandate they helped to write.

Chevron, the second largest US oil company quietly shelved most of its biofuels work in 2010; they just didn't see enough profit potential. The oil companies can make a profit making advanced biofuels, they just can't make as much profit as they would like.

ExxonMobil, the largest US oil company, has also retreated from a biofuels effort. It cut funding for research into making fuel from algae. Now ExxonMobil and Chevron are pressing California to postpone the low-carbon standard, and they are lobbying to stop other states from following California. The Big 2 oil giants acknowledge that carbon emissions contribute to global warming but they claim the mandate would push up prices at the pump, and the technology isn't currently available and would be expensive to produce.

Back in 2007, Chevron committed to a plant to extract biofuels from forest-based biomass; pretty much using the parts of the tree that don't get cut into lumber. The researchers developed a process, known as solvent liquefaction, that could produce fuel on a commercial scale at a cost of about $2.18 per gallon, back when crude oil was around $70 a barrel. The plants were expected to generate profits around 5 to 10%, but that's not quite the profit margins for oil and gas exploration, so they shut down the venture three years ago.

So, the big oil companies have shifted from research to lobbying against low-carbon fuels, including a lobbying group called Fueling California, which has received hundreds of thousands of dollars from Chevron.

This year, 30 bills to kill or weaken renewable rules have been considered in 16 states. None have passed so far. California is the front line, and the state is outgunned. Chevron had its second most profitable year in 2012, posting net income of $26 billion on $222 billion in sales, the vast majority from petroleum. California’s revenue in fiscal year 2012 was $87 billion.

Emission controls enacted in California since 1966 have been models for federal car-pollution and miles-per-gallon rules. The state’s 32 million vehicles consume 15 billion gallons of gasoline each year, and emit 160 million metric tons of greenhouse gases annually, 36 percent of all such emissions in California. The state began to phase in the low-carbon standard in 2011. When it’s fully in effect in 2020, greenhouse gas emissions associated with transportation fuels are supposed to be 10 percent less than they were in 2010. Right now, the state is on track to achieve the goal, but the Air Resources Board, Chevron, and ExxonMobil won't disclose how the companies are complying with the rule. It could just be that Californians are driving less, or driving more fuel efficient and cleaner burning autos.

Some of the main arguments against the California low-carbon standard have been that it could raise the state's already high gasoline prices, force refiners out of business and even harm the economy by requiring the importation of more foreign oil. But it turns out that California's railroad infrastructure, including planned West Coast terminals, will increase the logistical capacity to transport oil to California from the Bakken oil field in North Dakota. That creates a sidebar play for energy by looking at the railroad companies, but it also means that the 2020 standards aren't a death knell for California refineries. The oil from the Bakken field is cheaper than the average barrel price in the US, and Bakken crude has been given a relatively low carbon intensity rating. The use of Bakken crude in California should exert downward pressure on gasoline prices in California, and Bakken crude is considered clean enough to help the state reach its 2020 low carbon emissions standard.

The USC Schwarzenegger Institute recently hosted a forum on Climate Change. California is uniquely vulnerable to rising sea levels. It's estimated that the past decade was 2 degrees warmer than it had been historically, and it was the hottest the Southwestern US has ever experienced. It's estimated the temperatures could rise 6 to 9 degrees over the next 50 years, if we do nothing.

And that looks like the current path, or at least the current path is next to nothing. This probably isn't the way things were expected to turn out in 2007; the idea of slightly less dirty fossil fuels is not nearly as good as truly clean alternatives, but until the economics change, that's what we'll be stuck with. And that leaves the question of what we've learned. We've learned that the big oil companies will break their promises in the pursuit of higher profit margins, and this should be remembered as new standards are considered or as new oil fields, such as the Monterrey Shale fields are explored.

Wednesday, April 17, 2013 - Austerity Oops

Austerity Oops

by Sinclair Noe

DOW – 138 = 14, 618
SPX – 22 = 1552
NAS – 59 = 3204
10 YR YLD - .01 = 1.70%
OIL – 2.35 = 86.37
GOLD + 8.20 = 1378.50
SILV - .03 = 23.41

The Federal Reserve released its Beige Book this morning. The Beige Book is just a survey of the 12 Fed Districts and the name is due to the fact that it has a beige cover. The survey covers the time from late February to early April. The info is more anecdotal than precise measurements. Of the Fed’s 12 districts, five reported “moderate” growth, five reported “modest” growth, and New York and Dallas reported slight accelerations.

“Particular strength” was seen in residential construction and automobiles, which confirms the report on Monday dealing with industrial output. Consumer spending grew modestly, with higher gasoline prices, the expiration of the payroll tax cut and winter weather restraining growth. Lat week, the Commerce Department reported that retail sales were at a 9 month low. The sequester has rattled the defense industry with the automatic budget cuts; no surprise there. Overall, the Fed remains optimistic, but still concerned about fiscal policy.

On the fiscal policy front, one of the main arguments for budget cuts and austerity comes from a 2010 study by two Harvard economists, Ken Rogoff and Carmen Reinhart. The study concluded that when a nation's debt grows too big, it can slow growth. The idea is that when the debt to GDP ratio hits 90%, the result is that growth will drop to 0.1%. So, the conventional wisdom, based upon the study, was that too much debt would make a country's economy grind to a halt. And the response was budget cutting and austerity programs from the European Union to the fiscal cliff and sequestration that came out of Washington.

Well now another set of academics at University of Massachusetts at Amherst have replicated the study. They discovered that the Harvard professors made a couple of errors in their research. The new review of the study shows the original study used a debatable method to weight the countries in their research and selectively excluded years of high debt and average growth, and they uncovered a code problem with the Excel spreadsheet.

Ooops.

I seem to recall that an Excel spreadsheet coding error was blamed in the collapse of the London Whale. Somebody really needs to come up with a foolproof spreadsheet.

Anyway, when the data is corrected, that 90% debt to GDP ratio isn't really the threshold that results in slower economic growth. It doesn't mean that high levels of debt should be considered as a positive, just that there is some wiggle room, and the appropriate levels of debt are a little different depending upon the situation, and it isn't set in stone, and maybe all this austerity isn't really the solution for everything right here, right now. And the new data shows that countries can have very high levels of debt and can have good strong growth.

Now in fact there is a reason to be concerned about the artificially low interest rates the Fed has and is certain to continue to engineer. They are a massive transfer from savers to the financial system and to speculators on asset prices. But the solution is more demand and more investment, and if the private sector won’t provide it, government needs to step in. The evidence, as even the IMF has been forced to acknowledge, is that government spending is stimulative, and with a fiscal multiplier over 1 (which is also what the IMF found is operative in low growth economies), spending makes the denominator of the debt/GDP grow faster than the numerator, reducing rather than increasing debt ratios.

Of course, it will be much harder to defend budget cuts and austerity, now that the data has been debunked, but the damage is already done. Science advances one funeral at a time.

The Senate failed to muster sufficient support Wednesday for a gun-buyer background check bill, voting the measure down in a procedural vote that likely dooms any major legislation to curb gun violence. The amendment failed 54 to 46, falling short of the 60-vote threshold needed to break a filibuster of the measure, even as victims of the Sandy Hook shootings and other shooting watched from the Senate gallery and activists at a vigil outside the Capitol read the names of people slain since then, hoping to prompt action.

"Shame on you!" shouted two women in the gallery after the vote. One was Patricia Maisch, who grabbed the third clip from the gunman who opened fired at then-Rep. Gabby Giffords in the Tuscon., Ariz., shooting in 2011. The other was Lori Hass, whose daughter was injured in the Virginia Tech shootings six years ago.

Passage of the background check amendment had been seen as key because it represented a bipartisan agreement in a highly polarized debate. It also would have preserved a major part of the overall bill that many advocates against gun violence saw as a minimum step toward stemming gun massacres.

Who says nothing ever gets done in Washington? Swiftly and without fanfare, Congress and President Obama have made it easier for top federal employees to trade on inside information.

On Monday, Obama signed into a law a change in the Stop Trading On Congressional Knowledge, or STOCK Act, which was passed in 2012. The change, which was approved unanimously by Congress last week, means that top federal employees, including staffers on Capital Hill and in the White House, will not have to publicly disclose their financial holdings online. That requirement was part of the original STOCK Act, but its implementation had been delayed again and again by Congress. And now it's dead.

A Pennsylvania judge has issued what might be considered a precedent-setting decision holding that there is no corporate right to privacy under that state's constitution. The ruling comes in an ongoing case where several newspapers sued to unseal a confidential settlement where major fracking corporations paid $750,000 to a family that claimed the gas drilling had contaminated their water and harmed their health. The Court ordered that settlement unsealed, enabling the papers, environmentalists and community rights advocates to examine the health issues and causes. The Court's ruling is significant because the fracking companies have relied on secrecy agreements with landowners to hide the environmental and health impacts of gas drilling.

Where the ruling is likely to make the biggest waves is in the corporate personhood debate. The Judge spent more than a third of her 32-page decision saying why corporations and business entities were not the same as people under Pennsylvania's constitution, and why, for the purposes of doing business in the state, that federal court rulings that blur the rights of people and businesses do not apply.

The Court wrote, "Nothing in that jurisprudence indicates that that right [of privacy] is available to business entities... There are no men or woman defendants in the instant case; they are various business entities," it wrote, saying business entities are created by the state and subject to laws, unlike people with natural rights. "In the absence of state law, business entities are nothing." If businesses had natural rights like people, "the chattel would become the co-equal to its owners, the servant on par with its masters, the agent the peer of its principles, and the legal fabrication superior to the law that created and sustains it."

The judge said the U.S. Constitution's 14th Amendment "use of the word 'person' that makes its protections applicable to business entities" does not apply to Pennsylvania's constitution. "The exact opposite is derived from plan language of Article X of the Constitution of the Commonwealth of Pennsylvania." And the Judge added, "Not only did our framers know how to employ the names of business entities when and where they wanted them… they used those words to subjugate business entities to the constitution."