Tuesday, July 08, 2014 - Everything Except Productive Purpose

Everything Except Productive Purpose
by Sinclair Noe

DOW – 117 = 16,906
SPX – 13 = 1963
NAS – 60 = 4391
10 YR YLD - .05 = 2.56%
OIL - .13 = 103.40
GOLD - .40 = 1320.60
SILV - .03 = 21.12

Down 2 days and already I’m seeing the financial talking heads asking if this is the start of a correction. Just a reminder that markets go up and down and sometimes sideways. The markets don’t need a big reason to move. Right now, we’re heading into earnings reporting season, and a few things happen; first, some investors might look at a position and determine that prospects for earnings are not so great, or some investors are taking the opportunity to put some cash in their pockets, just in case they see a bargain basement opportunity.

A trend in place is more likely to continue than it is to reverse, and it reverses when we can see clear evidence of a reversal. Yes, the market looks overvalued by many metrics, yes there seems to be irrational exuberance; but the markets can remain irrational longer than you can remain solvent; yes, we’ve seen a couple of down days but we’ve gone 33 months without a correction, but we’ve had a bunch of down days during that same time. Right now, we’re seeing a minor pullback into a trading range as we await earnings season.

Should you stay or should you go? The markets have hit recent highs, and so you have to wonder if you get out when the getting is good. After hitting record highs, the past 2 days have seen declines; let me be very clear, 2 down days do not constitute a trend; not unless you trade the minute bars. Still, it can be sickening to see profits melt away. Conversely, cutting exposure with the aim of putting cash back to work when valuations drop can be soothing at first, but maddening if stocks continue climbing. There is a fine line between adjusting exposure based on valuations and timing the market; and either way it’s a real trick heading into earnings reporting season.

With interest rates at historic lows and stocks climbing, holding cash in a portfolio has been costly, but on the flip side, cash can serve as a buffer against market pullbacks and corrections, and it provides flexibility to buy again if prices drop; in other words, you keep your powder dry. The real return on cash has to consider the idea that you can use it to make even more money down the road. Of course, for that strategy to work, you have to reinvest the cash; you have to look for bargains or look for other opportunities. If you aren’t willing or able to do that analysis then the risk is that you build up cash and don’t know when to get more invested.

This is where the idea of rebalancing comes in; it doesn’t require sophisticated analysis; you just sell high and buy low. If your risk tolerance points you toward a 60% allocation in stocks, and the stocks go up in price and now you hold 70% in stocks, cash out, to bring the equity allocation back to 60%; turn around and put that cash into a part of the portfolio that has dropped. The idea is that you are buying low; the unfortunate side effect is that you might be dumping your winnings into a losing position. A variation on the theme is sell high and buy something you don’t already hold.

But then the question is where do you go to find value? An article in the New York Times suggests that everything is in bubble territory. The chief investment strategist at BlackRock, one of the world’s biggest asset managers, spends his days searching for potential opportunities for investors to get a better return relative to the risks they are taking on, and he says there are very few cheap assets these days. At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago, and lower than just before the global financial crisis in 2007-2008.

Bonds offer next to nothing in the way of returns, and if you want to chase yield in the debt markets, you’ll find some of the riskiest issues can’t even breach 5%. Real estate has spiked in many locations, even farmland has rocketed. It’s not that any one area is outrageously overvalued. Most people would agree that stock valuations are lower than 2000, and real estate peaked in 2006, and we haven’t really recovered to those levels. It’s just that everything that could be considered a financial asset has gone up. And of course, as prices go up, the potential future returns drop.

Maybe that’s a reflection of a slowing global economy. Maybe it’s a result of the central bankers printing lots of money, but not directing where the money would go; and so the money was parked on the sidelines, and not put to productive use, not being invested in things like factories or infrastructure. And then the risk is that folks chasing yield take on more and more risk until something pops.

Taking a look at economic data today, the Federal Reserve report on consumer debt for May showed debt increased $19.6 billion, not including mortgage or real estate related lending; that’s down from a $26.1 billion increase in April. Revolving debt, including credit-card balances, rose $1.79 billion in May following an $8.85 billion April advance that was the biggest since November 2007. Non-revolving debt, which includes car and education loans, gained $17.8 billion in May, the biggest increase since February 2013, after climbing $17.3 billion in the previous month. Car sales continue be show strength, reaching a 16.9 million annual rate last month, the fastest pace since July 2006.

The JOLT survey, or Job Openings and Labor Turnover survey shows that as of the end of May, companies increased the number of job openings almost back to pre-recession levels. Despite greater demand for workers, pay scales have not budged much.  Wages for all private-sector employees increased 2% in the year ended in June, according to the Labor Department, exactly where wage growth has trended through all of this recovery.

News from the small-business sector, however, suggests pay growth is ready to break out of the 2% range. According to the June survey of small firm owners by the National Federation of Independent Business, a net 21% of small businesses report lifting compensation in the last few months. That is the highest reading since the end of 2007. So, it looks like we are getting closer to seeing wage growth in the near future, but we’re not quite there yet. And since we aren’t seeing actual proof of wage inflation, it could be argued that the Fed should wait a bit longer before tapping the brakes. And for that matter, even if we start to see signs of wage inflation, that might be a good thing.

Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech today that “subdued productivity gains” along with “moderate” increases in consumer spending and “more tempered” growth in housing construction, will lead to economic growth in the range of 2% to 2.5%, well below the Fed consensus of 3% growth. Lacker says “broad-based advances in technology are far less likely than in the past, and that we should prepare for relatively stagnant productivity growth trends going forward.”

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said today that inflation will likely stay quite low for about 4 or 5 years. Kocherlakota says the Fed is “undershooting its price stability goal” of 2% inflation and will likely continue to do so for some time to come; he sees the probability of inflation averaging more than 2% over the next four years as being “considerably lower” than the probability of inflation coming in less than 2% over the same time period. Kocherlakota is skeptical of improvements in the jobs market, saying “much of the decline in the unemployment rate since October 2009 has occurred because the fraction of people who are looking for work has fallen.” That means the Fed is also failing to meet its job creation goal, which is damaging for the economy.

When you look at last week’s jobs numbers something doesn’t seem to add up, at least it gives pause to consider the numbers. GDP growth equals productivity growth plus job growth, or at least growth in hours worked. We’ve been adding jobs at a good pace, but the economy contracted 2.9% in the first quarter. That leaves productivity, and it turns out that there is a long term trend in decelerating productivity growth. And the problem with productivity is not that workers aren’t working hard; the problem is that we haven’t been investing in the right tools for the job.

Earnings season kicked off with a report from Alcoa. It was better than expected. Including all charges, the company earned $138 million or 12 cents a share during the quarter. That reverses the company’s $148 million loss in the same period a year ago. Revenue also came in ahead of expectations. Alcoa reported revenue of $5.8 billion, which is 2.6% higher than expected. Revenue is flat from the year-ago period.

Earlier Samsung issued an earnings warnings, claiming profits could fall as much as 26% from a year earlier. Smartphone and tablet sales took a pretty big beating. Samsung put out a statement that says tablet sales are slow because consumers are slower to upgrade tablets compared to upgrading smart phones. They also blamed the rising Korean won, which is up 9% against the dollar in the past 3 months; they blamed excess inventory in Europe, and competition in the mid and low-end of the market, and a few other excuses as well.

Monday, November 18, 2013 - Activism from Billionaires and Tweeters

Activism from Billionaires and Tweeters
by Sinclair Noe

DOW + 14 = 15.976
SPX – 6 = 1791
NAS – 36 = 3949
10 YR YLD - .04 = 2.66%
OIL - .83 = 93.01
GOLD – 14.40 = 1277.00
SILV - .38 = 20.50

This one didn't feel like a record high celebration, in part because the major indices closed well off the intraday high. The Dow had been trading above 16,000 for much of the afternoon, but a late sell-off saw the Dow finish below that nice round number; still, it was good enough for another record high close. The S&P 500 hit an intraday high of 1802, but closed in negative territory. Still we mark today's gains in the Dow in the “win” column and that means we have now had 39 record high closes on the Dow in 2013.

The trend is in place, firmly. The rise in the Dow Jones industrials continues to be confirmed by an associated rise in the Dow Jones Transportation Average. A look at the S&P 500 also shows a clear breakout at the top multiyear resistance level. The breakout may be false, due to the lack of active participation, as evidenced by light volume. So far, it has held up pretty well, contrary to its overbought condition. Everything is pointing higher as long as the Fed continues to pump money into the economy; and it looks like they will continue until March, although they could start to taper in January or December. Or maybe Bernanke will go out with a gift of extra stimulus.

More than half the gauges Janet Yellen uses to track the labor market are below pre-recession levels, reinforcing the likelihood she will support never ending easy money policy. While payrolls have increased and firings slowed, four measures: unemployment, labor force participation and rates on hiring and voluntary quits are still worse than at the start of the recession in December 2007. Hard to say when we'll see taper, but the party will slow down when the Fed removes the punchbowl. Until then stay alert, don't doze off, stay agile. A trend in place remains in place, until it reverses.

Economist Paul Krugman, in his column in the New York Times, asks us to imagine a world in which depression like economics are the new normal. Krugman writes: “What if depression-like conditions are on track to persist, not for another year or two, but for decades?”

If that’s the case, then those with their hands on the economy’s wheel are going to have to readjust their worldview. Krugman writes: “Central bankers need to stop talking about ‘exit strategies.’ Easy money should, and probably will, be with us for a very long time.”

As a result, deficit hawks will have to wait a long, long while before their warnings about federal debt hold any real value. “We can forget all those scare stories about government debt, which run along the lines of ‘It may not be a problem now, but just wait until interest rates rise.’”

Carl Icahn was speaking today at the Reuters Global Investment Outlook Summit and he said he could see a big drop in the stock market because earnings at many companies are fueled more by low borrowing costs than management's efforts to boost results. Of course this is not news. For several years, we've seen and talked about the tactics of corporate management to boost earnings by cutting expenses without commensurate attention to innovation and growing revenue; we've discussed the advantage of a low interest rate environment; and we've gone into detail about the little trick of stock buybacks to gloss over a lack of creativity.

It makes sense to invest in research and development to create value and grow a business and capture market share; or you could buy back shares and give the false impression of growing earnings per remaining shares. Icahn favors the latter.

Apple, minus the paranoid attention to fine tune design and function under the leadership of Steve Jobs, has reverted to the innovation of adding colors to the iPhone cases. Maybe someone really needs a 41-megapixel camera on a Nokia smartphone. Samsung's new innovation is a bended display; the screen is curved a little and displays information on different parts of the screen; so if you look at it from the side, you can see whether there is a notification. Or you could actually pick up the phone and look at the screen. The way some high tech companies pursue an innovative edge is through the patent courts, although I didn't hear if Icahn had anything to say about that tactic.

The average selling price of smartphones around the globe has been plunging this year and Qualcomm just warned a few weeks ago about a decline in high-end phone demand. The hot new idea is a watch. Dick Tracy had one of those 50 years ago, so it's about time someone got around to actually building one.

The hot new technology seems to be coming in the form of a Sony PlayStation; they sold one million in the first 24 hours of the rollout of a new model. Games, bread and circuses; all controlled by the flick of the opposable thumb. Forget about hunger, clean water, renewable energy. This is how we train the next generation of drone warriors.

Last week we talked about Judge Jed Rakoff's speech dealing with the reasons why bankers haven't gone to jail:

US attorneys and the Federal Bureau of Investigation have other priorities, whether it's antiterror cases, accounting frauds after Enron's bankruptcy, or Ponzi rip-offs after Bernard Madoff's huge scam. Financial frauds are particularly tough to crack, and many of the prosecutors with the requisite knowledge have been moved to other areas.

Law enforcement agencies have had to compete for a shrinking pot of money from Congress, and the best way to do that is by beefing up their statistics with smaller, easier cases and avoiding the years-long financial fraud probes that may turn up nothing.

The federal government's involvement in the mid-2000s bubble, deregulating the financial industry, keeping interest rates low and such, may also have given prosecutors pause.

The US has shifted over the last 30 years from prosecuting high-level individuals to using delayed-prosecution agreements to settle cases against entire companies. That shift “has led to some lax and dubious behavior on the part of prosecutors," Rakoff said, including allowing managers to sweep crimes under the rug.

But the public at large is not happy with the banksters; witness last week's planned Twitter Q&A session planned by none other than JPMorgan. JPM execs thought it would be way cool to have a Twitter session on the topic of “What carreer advice would you ask a leading exec at a global firm? Tweet a Q using #AskJPM.

So people sent their questions and comments. Here's a sampling:

I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending AM I DIVERSIFIED?

Can I have my house back?

Did you always want to be part of a vast, corrupt criminal enterprise or did you "break bad"?

Is the fact that you've paid over half a billion in fines since August a source or pride, or are you embarrassed it's not higher?

What's it like working with Mexican drug cartels? Do they tip?

When Jamie Dimon eats babies are they served rare? I understand anything above medium-rare is considered gauche.

Is it the ability to throw anyone out of their home that drives you, or just the satisfaction that you know you COULD do it?

Is it easier to purchase a congressional representative or a senator?

How much does JPM spend every year buying off members of the SEC, and what is the average rate?

Did you have a specific number of people's lives you needed to ruin before you considered your business model a success?

After about 7 hours, JPM realized they had lost control and the bank pulled the plug on the social media event. 

Tuesday, August 28, 2012 - I Won't Be Going to Jackson Hole

I Won't Be Going to Jackson Hole
Sinclair Noe

DOW – 21 = 13,102
SPX – 1 = 1409
NAS + 3 = 3077
10 YR YLD -.02 = 1.63%
OIL + .57 = 97.48
GOLD + 3.00 = 1667.60
SILV +.18 = 31.00
PLAT – 23.00 = 1524.00

The ECB announced that Mario Draghi had canceled plans to attend the Kansas City Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming citing “a heavy workload”. So, I would just like to announce that I'm not going to be able to attend either. Further, I can tell you that none of that makes much difference; the markets are waiting on a Federal Reserve announcement and an ECB announcement. Relax, it'll happen. Draghi faces a tougher row to hoe. ECB staff are still weighing a variety of approaches. Draghi, meanwhile, remains in conflict with Germany’s Bundesbank, which has reiterated its opposition to bond purchases of any kind.

Meanwhile Fitch has downgraded ratings on 7 mid-sized Italian banks, based on the "current challenges in the operating enviroment" and the difficult of accessing wholesale funding. At the same time, the ECB is in a standoff with Spain, which remains reluctant to seek help from the euro-zone’s rescue fund, an action that Draghi and other ECB officials have made clear is an absolute prerequisite for any new bond-buying efforts. Apparently the Spanish have figured out that the medicine is worse than the ailment and they don't want to be economically indentured for the foreseeable future. I can understand that Draghi is busy these days.

Stock markets were flat. Volume was among the lightest of the year after Monday's lightest trading in 2012. August is a slow season, and investors mostly stayed on the sidelines. Light volume can exacerbate moves in the markets but what we're seeing now is a snooze fest.

I've seen a couple of news flashes today. One talking about Hurricane Isaac, the other flashing on the Republican Convention. Mitt Romney has been nominated by the GOP; not exactly a news flash. Hurricane Isaac is heading for New Orleans. But the best optic of the day may be the Tampa Bay Times Forum arena, the location the Republican Party chose to host a convention, the arena was built with taxpayer funds, which accounted for $86 million or 62%, of the total money needed to finance the construction of the stadium.

Oil rose as Isaac gathered strength on its way into the heart of the Gulf of Mexico's oil and refinery operations. The price got a boost after midday when Isaac strengthened into a Category 1 hurricane with 75 mph winds. Nearly 94 percent of oil production in the Gulf, or 1.3 million barrels per day, has been halted. At least 1 million barrels per day of refining capacity is expected to be shut down, which is about half the refining capacity in the storm's predicted path. The US consumes about 19 million barrels of oil products per day.

As Gulf Coast towns shudder and scramble, fearing the deluge of rain and wind that Hurricane Isaac is expected to dump, the drought-stricken Midwest couldn’t be more thrilled to welcome the storm system. The heartland of the United States has been hoping for rain since May; across the central plains, crops are withering and rivers are running completely dry, strangling local economies, but for those hoping for a respite from what’s been one of the most ruinous droughts in decades, Isaac may not be bringing salvation. The 1 to 3 inches of rain expected to fall on parched farmland later this week will provide a nice shot in the arm but most of the crops are already lost and the rain really won’t do much for lakes and streams. In fact, it might not even be enough to provide any relief at all. In Missouri, for example, this season’s rainfall is 15 to 20 inches below normal amounts, meaning even 3 inches of rain isn't going to be enough to end to the drought or save summer corn and soybean crops.

The storm system may even do more harm than good in America’s agricultural breadbasket. Abnormally high winds could push over already brittle unharvested corn stalks, flatten rice plants and knock over the newly-seeded sugarcane crop. Also at risk are cotton harvests in Louisiana, where many plants are currently in the “open-boll stage” and vulnerable to rain and wind. The soil is so parched across the central part of the U.S. that a sudden downpour — Isaac’s predicted 1 to 3 inches is on par with a weak hurricane or intense tropical storm — could send the rain sliding off the hard soil, leading to flash flooding.

The news flash of the day is Isaac, and it turns out there's an app for that, six apps at last count. Take your pick: Hurricane tracker, Hurricane HD, Hurricane Express. I haven't seen an app for the earthquake swarms coming out of Imperial County but I'm thinking it's just a matter of time.

Apple won its patent case over Samsung last Friday. Samsung was hit with a $1.05 billion verdict after a federal jury found that it had infringed Apple’s smartphone patents. In other words, Samsung ripped off the iPhone. Apple is now asking the judge to bar Samsung from selling 8 of its popular mobile devices in the United States. That’s a big deal.

Apple’s share price hit another record high this week. Samsung, dropped to a four-year low, wiping out some $12 billion in market valuation; which is about what Google paid to purchase Motorola Mobility, Samsung’s smaller rival. Despite Apple’s victory, this dispute is far from over. Samsung has said it will appeal, and then the case goes global and they square off in several other jurisdictions around the world.

Any billion-dollar jury award is significant, but this case is about much more than just money. The judgment represents 2% of Sansung’s global revenue; they can survive that. So, what’s this story about? It’s about market dominance in the global smartphone race. Apple’s victory is the most high-profile outcome thus far from Silicon Valley’s escalating intellectual property war. The biggest winners? Lawyers. Can you imagine the litigation fees on a $1 billion jury judgment?

Generally speaking, there are two schools of thought coming out of this verdict. This first is that Apple’s decisive victory means that its competitors — ie. Samsung, HTC, and Google-owned Motorola — will have to redouble their efforts at innovation now that a jury has told them to stop ripping off Apple’s designs. In other words, the decision will benefit consumers by fostering a diversity of designs and products in the smartphone market.

The second school of thought is that Apple is throwing its weight around and obsessively patenting hundreds, if not thousands, of not so technical features like a square with rounded edges, or the flick-of-a-finger on a touch-screen. If you can afford enough attorneys you can control the patents. In this view, high-priced intellectual property lawyers and tech firms with deep pockets actually stifle innovation; it allows one powerful company, Apple, to essentially have a monopoly on smartphone features. Like a square with rounded edges.

Intellectual property laws are in desperate need of reform. Inventors should be protected; that is understood, otherwise what’s the incentive to create anything? On the other hand, the current method of adjudicating patent disputes is badly broken.

When the big winners are the lawyers, the outlook for innovation is not good.

Michael Wolff at the Guardian had this worthwhile look at Apple:

During the closing arguments at the trial last week, Apple's attorney showed the jury two smartphones, Nokia's Lumia and a phone from Sony, and he said not every smartphone needs to look like an iphone. Just in case you were wondering what to buy instead of Apple, and ironically Nokia runs on a Windows platform.

Apple came close to destroying its business in the late 1980s by pursuing a suit against Microsoft claiming that Windows infringed the look and feel of the Mac desktop metaphor. Apple focused its hopes and business future on this lawsuit, while its market share dwindled. Rather than competing, it litigated. And lost.

Last week, it litigated against Samsung over its iPhone design and won.

The first justifiable conclusion might be that big companies get their way. The second might reasonably be that Apple doesn't change much: its business model remains aggressive self-righteousness. The third is what everybody knows: patent rules and philosophy are all screwed up.

As for the first point, Apple is not just a big company, but the biggest. And it is not just the biggest American company, but the most American company. It has entered a rarefied brand status in which it is now almost synonymous with American virtue: American as Apple. Its good design sense has become a major point of American pride, if not nationalism. The brand is a national asset. Apple is AT&T in its pre-break-up from; it's GM, in its what's-good-for-General-Motors-is-good-for-the-country stage; it's United Fruit when it made US foreign policy; it's Microsoft when desktop computing was transforming the world.

This is about as close to commercial omnipotence as it gets. Its unassailability, its right to be aggressive, is built into its share price. There are special privileges for the really big and pwerful. So let us briefly consider the chance for a Korean company defending itself against (or, perish the thought, challenging) the greatest American company of the age in the eyes of an American jury.

And then, there's the self-righteousness. Apple is one of the most aggressive intellectual property litigators of all time. Its major moves have not been about protecting precise technical innovations, but about claiming the much softer zone of look and feel. It sues for brand rather than engineering. It has pioneered a new modern sensibility: taste is what's most valuable; identity is king. It's sued about the lower case "i"; it's sued about the word "pod"; it's sued New York City over the "big Apple"; it's sued over using the words "app store".

This fierce defensiveness might be rightly understood in a psychological sense: Apple itself is based on stolen iconography. There was first the Beatle's Apple and there was Xerox's Palo Alto Research Center desktop design. Apple's self-righteousness masks its guilt. What's more, it knows better than anybody that if you relax your vigilance, somebody can easily walk off with what you've done – and improve it.

This is the story between the lines of its great victory and its further share price surge. On the one hand, there is this seemingly golden company. On the other hand, there is anybody with any sense of history knowing this is going to end badly.

Companies that acquire the nation's imprimatur often, if not invariably, over-reach. It is a characteristic of American capitalism: the price of getting really big and overbearing is that you incur an inverse reaction. In the early 1990s, an ambitious department of justice (a Republican administration DOJ at that) commenced its assault on Microsoft. For better or worse, by the time the feds were finished, the company, with its rotten operating system, besieged and beleaguered, had become just one of many not-very-adept players in the space – an unimaginable outcome if you remember the once God-like power and scorched-earth wrath of Microsoft.

Apple, and its rotten phone, have a ways to go. But karma should not be underestimated as a factor in this game.