Wednesday, July 02, 2014 - Milk and Cookie Binge

Milk and Cookie Binge
by Sinclair Noe 

DOW + 20 = 16,976
SPX + 1 = 1974
NAS – 0.92 = 4457
10 YR YLD + .07 = 2.63%
OIL – 1.18 = 104.16
GOLD + 1.10 = 1328.20
SILV + .18 = 21.25

Record highs for the Dow and the S&P 500. We celebrate with milk and cookies. It’s good, it’s wholesome.

Unlike Goldman Sachs, which apparently likes to celebrate with binge drinking at strip clubs; at least that’s the accusation by 2 former Goldman employees suing Goldman for discrimination against women. Support for their claims includes statements of former Goldman Sachs employees, expert statistical analyses and evidence on earnings and promotions from the firm’s own records. According to filings with the court, female vice presidents earned 21 percent less than men and female associates made 8 percent less, the former employees claimed; about 23 percent fewer female vice presidents were promoted to managing director of the bank relative to their male counterparts.

We’ll stick with milk and cookies.

Tomorrow we’ll get the monthly jobs report, one day early due to the holiday shortened weekend. Today we got the ADP Employment Report showing private nonfarm payrolls increase 281,000 in June. That’s the best ADP report since the fall of 2012. That would be a very good number indeed if it translates to the government report tomorrow. The ADP report should not be used as a predictor of the government jobs report. Both reports tend to move in the same direction in the long term, but month to month fluctuations can be quite pronounced. It is expected tomorrow’s report will show 215,000 net new jobs in June.

Here’s another indicator; the ISM manufacturing employment index was unchanged in June at 52.8%; the historical correlation between the ISM employment index and the BLS employment report suggest the economy lost about 5,000 manufacturing jobs in June; the ADP report showed the economy added 12,000 manufacturing jobs last month.

The best way to boost the economy is to have more people working, which then equates to more people spending. Even though the unemployment rate has dropped to 6.3%, that’s still high; and long term unemployment is still a problem, and indicates there is still slack in the labor market. Just as important as the number of jobs created is the quality of the jobs created. For several years, the trend has been for lower paying jobs, where wages are below the average of $24.38 an hour. There has been some improvement this year, with 61% of the 1.07 million new jobs in 2014 paying above the average hourly wage. So, keep an eye on wage growth in tomorrow’s report; it will be a critical component in overall GDP growth.

So, as we wait for the jobs report, we are left to question whether the economic recovery is really gaining traction. Dr. Copper says yes. Copper closed at its highest price in more than 4 months. Copper for September delivery gained 6 cents, or 1.9 percent, to settle at $3.27 a pound. Since copper is an industrial metal used in everything from buildings to cars, it’s considered a good economic indicator, however it might be a better indicator of growth in China, the world’s largest buyer  of copper.

Federal Reserve chairwoman Janet Yellen delivered a speech to the International Monetary Fund and she says the Fed has the right focus on jobs and inflation, and should leave stability concerns to regulation. Many economists and investors are concerned the Fed’s policies have fostered potential financial asset bubbles. Yellen said today: “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

Yellen said she saw pockets of increased risk-taking across the financial system that could warrant a more "robust macroprudential approach" if those concerns grew.

BNP agreed on Monday to pay almost $9 billion while admitting criminal violations of United States sanctions. BNP admitted to funneling and hiding some $30 billion in transactions to Iran, Sudan, and Cuba. The bank will also be barred from clearing any financial transactions in dollars for a year starting in January. Credit Suisse and a subsidiary of UBS also pleaded guilty recently to tax avoidance and interest-rate rigging, respectively. JPMorgan Chase, Bank of America and other United States banks have paid billions of dollars in penalties but have, so far, avoided criminal liability. The French government says that’s not fair.

And while it might be easy to dismiss the French for whining, they are correct. New research suggests that overseas firms like BNP Paribas do in fact pay bigger fines and plead guilty more often than United States companies. United States criminal fines from 2001 to 2010 were about five times greater on average for foreign firms than for their American counterparts. The average penalty was 22 times bigger for foreign companies after adjusting for the type of crime and whether the company was listed. One reason may be that prosecutors single out only the most serious cases abroad. Another reason might be because prosecutors are afraid of hurting a domestic business. Another reason might be that prosecutors are spineless wimps in the face of the political clout of US banks.

What we have learned is that businesses and investors don’t seem to care about the criminal convictions of Credit Suisse and BNP and that might signal that if a conviction will not shut down the company, then there’s no reason not to convict, international or domestic.

Yesterday we told you about that creepy experiment by Facebook, designed to make you feel good or bad by filtering out good or bad content. Facebook faces a government investigation in Europe over its study of whether manipulating people's news feeds could change their emotions. Facebook won't be helped by the fact that the company didn't alter its terms of service to disclose to users that their posts would be used for research until four months after the experiment took place.

The implementation of the European Union's so-called "right to be forgotten" policy is already having a worrying impact on the media, with at least two outlets revealing on Wednesday that links to articles of theirs have been scrubbed from Google. A European court ruled in May that Google must remove links to articles from its search engine if the subjects of the post asked it to. The court specified that links could be scrubbed if they were "inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed."

When the ruling came down, some worried that it would place too much power in the hands of public figures who wished to have unflattering information about themselves hidden. On Wednesday, the Guardian and the BBC both disclosed that just such an occurrence seemed to have taken place with stories of theirs. The Guardian case involved 6 articles that were taken down from Google’s European platforms. The BBC case involved Stan O’Neal, the former head of Merrill Lynch, implicated in the subprime mortgage scandal. Is the data in the BBC report "inadequate, irrelevant or no longer relevant"? Hmm.

Solar installers SolarCity and SunRun have filed a lawsuit against Arizona’s revenue department over the state’s decision to apply property taxes to third-party solar-power systems. SolarCity and SunRun have popularized leasing, rather than owning, residential rooftop systems. The companies install and maintain the systems in return for monthly payments that are generally less than a homeowner’s monthly power bill. 

Arizona’s revenue department last year decided to tax leased solar panels, resulting in $152 extra in property taxes for the first year of a homeowner’s leased $34,000 solar panel array, a charge that would decrease as the value of the array goes down; still it’s a large enough increase to wipe out most or all of the savings from going solar. Until last year, both owners and leasers of solar panels didn’t have to pay property taxes. There are concerns that applying taxes on systems would wipe out the savings from solar leasing and stunt solar-power growth in Arizona.

Tuesday, June 17, 2014 - What Could Go Wrong?

What Could Go Wrong?
by Sinclair Noe

DOW + 27 = 16,808
SPX + 4 = 1941
NAS + 16 = 4337
10 YR YLD + .06 = 2.65%
OIL - .30 = 106.60
GOLD un = 1272.70
SILV + .09 = 19.86

The FOMC, the Federal Open Market Committee started two days of meetings today; tomorrow they are expected to announce more of the same. The FOMC is largely expected to taper its asset purchase program by $10 billion to $35 billion. Effective July 1, the Fed is expected to lower its asset purchases to $15 billion in agency mortgage backed securities (MBS) and $20 billion in Treasuries. The Fed is also expected to maintain its current forward guidance language on federal funds rate support; in other words, they will keep telling us that rates might increase sometime next year.

The committee is likely to make some upgrades to its description of the economic outlook in its economic projections. The committee will probably need to reduce its 2014 real GDP growth forecast to take into account the Q1 disappointment, and we can probably expect the committee to reduce its unemployment rate forecast and lift its inflation forecast slightly.

The consumer-price index climbed a seasonally adjusted 0.4% in May from a month earlier. It marked the fastest increase since February 2013 and doubled the pace of economists' forecasts. Excluding food and energy components, so-called core prices increased 0.3%, the fastest pace since August 2011. From a year earlier, core prices were up 2%, the most since February 2013, and now match the Fed's target.

Another inflation measure closely watched by the Fed, the core personal-consumption expenditure, has stayed far below 2%. Inflation at wholesale level unexpectedly dropped by 0.1% in May, but remember the PPI rose 0.6% in April, so this is just a leveling out process. Wage pressure remains stubbornly low and consequently, the pace of the economic growth remains uneven. In May, the real average hourly wage fell 0.2%. Real wages have fallen three straight months even as inflation has picked up slightly.

The average hourly wage for a typical American worker registered just $10.28 in May, adjusted for inflation and measured in constant dollars. The real hourly wage totaled $10.31 in June 2009, the last month of the 2007-2009 recession. This is part of a trend that stretches back about 30 years.

Still, with core prices up 2% on an annual basis, the Fed will need to address the topic of inflation tomorrow. Let’s hope they also mention the lack of wage gains.

Another report today shows housing starts posted a bigger-than-forecast 6.5% decline. Housing starts declined to an annual rate of 1 million units last month from 1.07 million in April. What’s more, permits for new construction fell by 6.4% in May to a 991,000 annual pace, the slowest in fourth months.

The situation in Iraq is still bad. The ISIS rebels are about 40 miles north of Baghdad and seem intent on the idea of attacking the capitol city. Or they might attack the major source of revenue for the ruling government, and that means oil. One of three major oil refineries has now fallen under control of ISIS; the other two are in Baghdad and the south and not considered to be threatened at this time. About 2.5 million barrels of oil a day are exported from Basra, Iraq’s main port, located in the south.

The world consumes about 92 million barrels a day, so that would be a major disruption, and it would not be surprising to see prices jump; with price levels increasing along with the severity of the given scenario, running anywhere from a few dollars per barrel to a worst case of $200 a barrel.

Not too long ago, Iraq was claiming that it would be producing 12 million barrels a day by 2017. That now seems a little too optimistic.  At best, the ISIS rebellion guarantees that any potential additional Iraqi oil output gains are not going to materialize in the near future. No oil companies are going to invest in Iraq until and unless the situation stabilizes.

Although the consequences for Iraqi oil production of what has happened so far appear to be minimal, all this comes at a time when the earlier and still ongoing conflicts in Libya and Syria have already disrupted nearly 2 million barrels a day in world oil production. If Iraq’s recent 3 million barrels a day was also taken out, we would be talking about a significant disruption in world oil supplies, and likely an oil price in excess of $150 a barrel.

The worst case scenario sees a regional conflict break out that pits the Middle East’s Shiites (Iran) against the Sunnis (Saudi Arabia), leading to a compromise of the Strait of Hormuz. Forty percent of the world’s exported oil is transported through this waterway.

And if that isn’t enough, focus you attention on Ukraine. Yesterday, Russia announced it was cutting off natural gas shipments to Ukraine; today an explosion destroyed one of Ukraine’s main pipelines for gas headed to Western Europe.

EU-brokered talks failed to reach a compromise between the countries, which remain far apart on a “fair” price for gas. Ukraine’s state-run gas operator filed a suit in an international arbitration court, claiming $6 billion in overpayment for gas since 2010. Its Russian counterpart filed a suit of its own, alleging unpaid debts worth $4.5 billion on gas delivered since 2009. Until these cases are resolved, Ukraine will receive only gas it pays for upfront, and must not impede the flow of gas destined for the EU, which gets around 15% of its gas via pipelines that pass through Ukraine. There is another pipeline running from Russia directly to Germany, but still, the global energy picture looks less and less stable.

On Friday we reported that Tesla, the electric car company started by Elon Musk, was freeing up its patents, making its technology available to competitors. Now Nissan and BMW are considering negotiations for cooperation on charging networks; basically using and enlarging Tesla’s existing network of 97 charging stations in the US. Nissan already produces the electric Leaf and BMW last week unveiled the electric i8 in Germany.

So, why design new chargers and invest in building a whole new infrastructure for BMW and Nissan drivers? The Tesla network already stretches from coast to coast and is expected to expand rapidly over the next year. And Tesla leads in battery technology, with a gigafactory planned to start production in 5 years, which will be the biggest battery making facility in the world, producing 500,000 lithium-ion battery packs per year; more than enough for Tesla and its competition.

SolarCity, the largest US installer of residential solar panels whose largest shareholder is entrepreneur Elon Musk, announced that it plans to acquire solar panel maker Silevo and expand into manufacturing with new panel factories, likely including the world’s largest high efficiency solar panel plants in New York. At a conference call announcing the move, Musk said: "We expect to have to install 10 gigawatts [of high-efficiency panels] a year. If you look at the current capacity in the world, we're not able to do that right now."

It's not just a supply question. Solar panel prices have been falling in recent years thanks to a production boom in China; and the panels getting produced, though cheap, aren't terribly efficient and prices have begun bottoming out anyway. Prices might start climbing soon. Government subsidies for renewables start getting phased out in 2016, and the political environment for rebooting subsidies remains unstable at best. Plus, recent moves by the US to slap tariffs on Chinese panels likely served as a catalyst for looking into building the Silevo plant.

According to a study by two professors at the Stern School of Business at New York University and one professor from McGill University, a quarter of all public company deals may involve some kind of insider trading. The professors examined stock option movements, when an investor buys an option to acquire a stock in the future at a set price, as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement. They determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” [...] But, the professors conclude, the Securities and Exchange Commission litigated only “about 4.7 percent of the 1,859 M&A deals included in the sample.”

The study also says: “While the SEC has taken action in several cases where the evidence was overwhelming, one can assume that there are many more cases that go undetected, or where the evidence is not as clear-cut, in a legal/regulatory sense.” Plus another finding from the abstract: “Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US.”

A new survey by Greenberg Quinlan Rosner, on behalf of Better Markets, finds voters regard Wall Street and big banks as “bad actors. A 64% majority believes the “stock market is rigged for insiders and people who know how to manipulate the system. Another 55% believes “Wall Street and big banks hurt everyday Americans by pouring money into ’get rich quick schemes’ rather than real businesses and investments. A 60% majority favors “stricter regulation on the way banks and other financial institutions conduct their business” and just 28% oppose. Support for stricter regulations inspires bipartisan support; most notably voters who own stocks are more likely to support stricter regulation than voters overall. And there is urgency in the issue because 83% of voters believe another crash is likely in the next 10 years.