Tuesday, August 27, 2013 - The Drums of War

The Drums of War

by Sinclair Noe

DOW – 170 = 14,776
SPX – 26 = 1630
NAS – 79 = 3578
10 YR YLD - .07 = 2.71%
OIL + 3.34 = 109.55
GOLD + 11.00 = 1417.00
SILV + .19 = 24.62

Yesterday Secretary of State Kerry laid out the case against Syria. Today we learned the US could be ready to take military action as soon as Thursday. Defense Secretary Hagel today said: "We have moved assets in place to be able to fulfil and comply with whatever option the president wishes to take."

This follows last Wednesday's suspected chemical attack near the Syrian capital, Damascus, which reportedly killed more than 300 people; more than 3,600 people were treated for nerve agents, and by some estimates the death toll is now approaching 500. You've surely seen the grisly videos. They are compelling, but in light of the faulty intelligence that preceded the war in Iraq, there is a call for stronger proof. White House spokesman Jay Carney says a report on chemical weapons use being compiled by the US intelligence community and will be published this week.

There is not a requirement for Congressional approval for the president to initiate military action including strikes; rather the War Powers Act requires congressional notification, and that has been happening; of course questions of legality will be debated. The UK Parliament is to be recalled on Thursday to discuss possible responses. Prime Minister David Cameron said the world could not stand idly by after seeing appalling scenes of death and suffering caused by suspected chemical weapons attacks. French President Francois Hollande said France was "ready to punish" whoever was behind the attack. The Arab League said it held Syrian President Bashar al-Assad responsible for the attacks and called for UN action.

Russia, China, and Iran - allies of the Syrian government - have stepped up their warnings against military intervention, with Moscow saying any such action would have "catastrophic consequences" for the region.

After almost 12 years of war, the public is not keen on new battles; the latest polls show only 9% support for military intervention. And an almost irresistible feeling that something needs to be done is running head-on with the reality that there is no course of action that is attractive and that does not carry significant risks. A diplomatic response seems unlikely at this point. A minimalist response of stepping up support for Syrian opposition forces has so far proven ineffective. A more likely response is strategic missile and air strikes, perhaps similar to the Bosnian campaign of 1999 or the more recent campaign against Libyan dictator Kaddafi. Regime change is explicitly not the goal of military action, and administration officials have suggested any airstrikes will be limited.

Or the whole damn thing could explode into World War III. At the very least, Syria will be a mess for quite some time; we don't know who or what will replace the Assad regime, and even a fairly smooth transition of power can prove challenging as we've learned in Egypt; the situation in Syria will be an even bigger challenge. The outlook for military action is stark.

Warships are on the move. The impending conflict is rippling across financial markets. Europe and Asia moved lower. Equity markets in the Middle East were down significantly. Syria is not considered a major player in oil, but the region is vital, and so oil prices spiked this morning, up 2.95 at 108.87 a barrel. We've seen oil prices top out at 108.00 a couple of times this summer, so a breakout above 108 is important. We're at six month highs. Post-financial crisis highs for crude sit just below $114. We're not that far off.

Gold loves fear. Yesterday, gold closed above $1400, and today it kept running, hitting an intraday high of 1425; there is a major level of resistance at 1420, and it is being challenged. We're not that far off. After that the big levels of resistance are around 1520; that is still pretty far off.

Emerging markets could absorb the brunt of the selling as this crisis continues to unfold. Money has been flowing out. Although this is more likely a result of other factors not associated with military moves in the Middle East. Many are now dubbing the BRIC countries (the grouping of Brazil, Russia, India and China) down and out, but the lower prices also make valuations more enticing. Maybe periods of pessimism are good times to buy, but only if you have a constitution suited to catching falling knives. For investors bracing for an end of cheap dollars from the Federal Reserve, emerging market currencies are getting hit hard.

Meanwhile, I went to the New York Times website today, and it was down; hacked by the Syrian Electronic Army, a group which supports Syrian president Bashar al-Assad. So I guess the war has already started.

With all the talk about war, it would be easy to overlook the banks behaving badly, but don't worry, I've got it covered. Let's start with JPMorgan; the Federal Housing Finance Agency wants JPMorgan to pay more than $6 billion to settle claims that it knowingly sold bad mortgages to Fannie Mae and Freddie Mac ahead of the financial crisis. Such a settlement would be the biggest single penalty paid by any bank for actions ahead of the crisis. It would also roughly match the $6.2 billion JPMorgan lost in the "London Whale" trading debacle in early 2012.

The FHFA regulates Fannie Mae and Freddie Mac, and they claim JPMorgan misled the mortgage agencies about the value of $33 billion in mortgage backed securities. JPMorgan expects to settle the case, but they're balking at the price.

Meanwhile, a former JPMorgan trader wanted by the United States for allegedly falsifying bank records to cover up $6 billion in trading losses was arrested in Madrid. Javier Martin-Artajo was arrested after he presented himself to police in Madrid and was later released on bail. Now there will be extradition hearings.

For years I've been saying the biggest banks should be broken up, chopped into smaller pieces, more easily digestible. It would be the best thing for the economy, and according to a new research report from the investment bank Keefe, Bruyette and Woods, it would be good for the banks' shareholders. The report says  JPMorgan's value might be 30 percent higher if it were broken into pieces. If JPMorgan were broken into four units -- traditional banking, investment banking, asset management and private equity -- the market value of those segments could total $255.7 billion -- a 29.9 percent premium over Thursday’s market valuation of $196.9 billion. The move also would unlock some $19.5 billion that the bank is setting aside to satisfy capital reserve requirements for so-called too big to fail banks. That's money the bank might make available for lending.

The report also looked at JPMorgan's legal problems, which include 13 investigations by federal regulators, not to mention some overseas legal problems on charges ranging from manipulation of energy markets to hiding large losses during the “London Whale” debacle in early 2012. The bank also faces a barrage of lawsuits from individuals and its trading counterparties. The legal uncertainties have taken their toll on JPMorgan's stock, with shares trading at 8.65 times the bank's earnings over the past 12 months. Similar institutions trade at multiples that are 25 percent to 40 percent higher. The report says the legal problems aren't enough to bring the bank down.

Ah, we can't let this one pass without notice. The New York Attorney General has sued Donald Trump for his Trump University. Attorney General Eric Schneiderman says many of the 5,000 students who paid up to $35,000 thought they would at least meet Trump but instead all they got was their picture taken in front of a life-size picture of “The Apprentice” TV star.

“Trump University engaged in deception at every stage of consumers’ advancement through costly programs and caused real financial harm,” Schneiderman said. “Trump University, with Donald Trump’s knowledge and participation, relied on Trump’s name recognition and celebrity status to take advantage of consumers who believed in the Trump brand.”

Schneiderman is suing the program, Trump as the university chairman, and the former president of the university in a case to be handled in state Supreme Court in Manhattan. He accuses them of engaging in persistent fraud, illegal and deceptive conduct and violating federal consumer protection law. The $40 million he seeks is mostly to pay restitution to consumers.

And honestly,… I’m not saying there shouldn’t be consumer protections, and fraudulent activity should certainly be punished, but if you’re paying $35,000 to go to something called Trump University the words caveat and emptor do leap to mind.

In economic data today, the Case-Shiller Home price index showed price gains of about 1% for the month and 12% year over year, roughly inline with previous gains as well as expectations. However, this is a June report for home sale closings from late spring and early summer (meaning the sales contract was signed even earlier). It contains virtually no information about how home prices are reacting to the sharp jump in interest rates this summer. That said, some details: All 20 cities posted monthly and annual gains, but prices rose faster this month than last in just 6 cities as opposed to 10 in May. Dallas and Denver hit new all-time highs. San Francisco is up 47% from its March 2009 low. Phoenix is up 37% from its September 2011 low. Las Vegas prices are up 24.9% Y/Y, San Francisco +24.5%, Phoenix up 19.8%, Los Angeles +19.9%. On the lower end, Cleveland +3.5%, D.C. +5.7%, Chicago +7.3%, New York +3.3%.

The story of the West is a story of water; droughts, floods, the development of water infrastructure. But the story of water in the West is also being told, every day, in the growing crisis facing communities, watersheds, ecosystems, and economies. This isn’t a crisis of for tomorrow. It is a crisis today. What is, perhaps, a surprise, is that it has taken this long for the entire crazy quilt of western water management and use to finally unravel. But it is now unraveling.

The old adage of the blind men describing an elephant based on their experience touching different parts of it applies to western water. In the past few years, we’ve seen bits and pieces of the puzzle: a well, and then two wells, and then a town goes dry. A farmer has to shift from water-intensive crops to something else, or let land go fallow. Vast man-made reservoirs start to go dry. Groundwater levels plummet, yet the response is to try to drill new and deeper wells and pump harder, or build another dam, or move water from an ever-more-distant river basin. Competition between industry and farming increases. And politicians run back to old, tired, half-solutions rather than face up to the fact that we live in a changed and changing world.

Here are a few pieces of the puzzle that we had better start to put together into a coherent picture if we hope to change our direction.

In January 2012, the Texas town of Spicewood Beach ran out of water. Then Magdalena, New Mexico ran out. More recently, Barnhart, Texas. Now Texas publishes a list of towns either out or running out of freshwater. In some parts of Texas, demands for water for fracking are now competing directly with municipal demands.


Because of a severe, multi-year drought (described as “the worst 14-year drought period in the last hundred years”) and excessive water demands, the US Bureau of Reclamation, this week,announced it will cut water released from Lake Powell on the Colorado River to the lowest level since the massive reservoir was filled in the 1960s. Water levels in Lake Mead have already dropped more than 100 feet since the current drought began in 2000, but even in an average year, there is simply more demand than supply.


Las Vegas is so desperate for new supplies they have proposed a series of massive and controversial ideas, including: a $15+ billion pipeline to tap into groundwater aquifers in other parts of the state, diverting the Missouri River to the west, and building desalination plants in Southern California or Mexico so they can take a bigger share of the Colorado.


Governor Jerry Brown is pushing a $25+ billion water tunnel project to try to improve water quality and reliability for southern California farmers and cities and improve the deteriorating ecosystems of the Sacramento-San Joaquin Delta, with no guarantees that it will do any of those things at a price users are willing and able to pay.


San Luis Reservoir in California, which serves the Silicon Valley and other urban users, has fallen to 17 percent because of severe drought, making business, communities, and water managers nervous. Other major California reservoirs are also far below average, though massive deliveries of water continue on the assumption that next year will be wet.


Praying for rain has become an official water strategy for some politicians in Texas, Georgia,Florida, Oklahoma, and elsewhere.


Another popular water strategy seems to be to sue your neighboring state. Here are some examples: Texas v. Oklahoma and Kansas v. Nebraska and Colorado, and outside of the west,Florida v. Georgia (and Alabama too)


Groundwater is disappearing in California, the Great Plains, Texas and elsewhere in the West, because our laws and policies ignore the fact that surface and groundwater are connected. Contributing the problem, water managers and legislators typically put no restrictions on groundwater pumping, leading to inevitable, and inexorable, groundwater declines.

There is more and more and more evidence of declining snowpack in the western US as the climate warms.

These are just a few recent examples of the growing water-related dislocations in the western US. Writ large, the entire region is at risk. Oh, one more, the Colroado River, at Lake Mead, backed up by the Hoover Dam, the lake is receding; it's estimated that in four years there won't be enough water to cover the turbines to produce the elctricity for Las Vegas. You can replace a power plant. I'm not sure how you replace a river

Monday, April 29, 2013 - A Busy Week Heading in the Same Direction

A Busy Week Heading in the Same Direction

by Sinclair Noe

DOW + 106 = 14,818
SPX + 11 = 1593
NAS + 27 = 3307
10 YR YLD + .01 = 1.67%
OIL + .58 = 93.58
GOLD + 13.60 = 1477.50
SILV + .55 = 24.69

 The S&P 500 index ended at an all-time high. We have a celebration when the Dow Industrial Average closes at an all time high; no party for the S&P 500. I wish I could give you a valid reason for this but it defies logic. There is no law that says you can't enjoy milk and cookies anyway.

This week offers a packed economic calendar,with ISM manufacturing data Wednesday, and PMI manufacturing reports for the euro zone and China on Thursday. The week ends with Friday's U.S. employment report, expected to show 150,000 new nonfarm payrolls in April; and the backdrop to all the information is last Friday's initial report on first quarter GDP, which came in at 2.5%, short of the consensus forecast of 3%. 

Also, we'll compare and contrast this week's news with last week's reports out of Europe showing economic weakness in Germany as well really bad weakness in the peripheral countires where unemployment is rising from one awful record to another. In Spain, for example, the rate increased to 27.2%, with an even more stunning 57.2% rate among the young. In Greece, the unemployment rate tops 27% and the government is cutting thousands more jobs to qualify for more ECB bailout money.

The European Central Bank will face increasing pressure to cut its interest rate, currently at 0.75%, and to loosen monetary conditions, and to cut back on draconian austerity requirements. Italian Prime Minister Enrico Letta urged a focus on growth policies and away from austerity measures in his inaugural speech. Money market traders are evenly split on whether the ECB will cut rates at its meeting.

The ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Even if the ECB does act, a quarter-point cut will do nothing for growth. And most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. 

The Bank of Japan has already pulled out the big bazookas to loosen monetary policy and to jump into the bond markets. The result has been a roaring bull market in Japan.

In the US, corporate earnings show companies are still able to counter a worrisome revenue situation by cutting costs. Just 38 percent of the 271 S&P 500 companies that had reported through Friday topped revenue estimates, with the aggregate figure actually showing a sales decline of 1.45 percent. Weak corporate top-line growth is likely to spell an equally troubled bottom line for the 11.7 million unemployed. 

 And even as we continue to hit record highs in the stock markets; unfortunately, the broader economy hasn't joined in the party. The vast majority of US households face declining incomes and lower savings rates. This morning, the Commerce Department reported household purchases rose just 0.2%. Ultimately, it is households that provide demand for what companies make and sell. Cost cutting benefits are finite.

Last week, a Pew Research study showed that the top 7% of the population got richer during the past 5 years, while the remaining 93% lost. An Allstate/National Journal Heartland Monitor poll released Thursday found that while most Americans (56 percent) hold out hope that they‘ll be in a higher class at some point, even more Americans (59 percent) are worried about falling out of their current class over the next few years. In fact, more than eight in 10 Americans believe that more people have fallen out of the middle class than moved into it in the past few years.

Even more arresting was the extent to which things that used to be the unquestioned trappings of middle-class life have come to be seen as upper-class luxuries. Nearly half – 46 percent – of the respondents who described themselves as middle class said that being able to pay for children’s college education was possible only for the upper class. Forty-three percent thought that only the upper class had enough savings to deal with a job loss, and 40 percent believed only the upper class could save enough to retire comfortably.

For the land of opportunity, this is a seismic shift. America was created as a country where the middle class could prosper - Thomas Jefferson crowed that America had no paupers and few who were rich enough to live without labor.

This was supposed to be the place where, as Bill Clinton liked to put it, if you worked hard and played by the rules, you could get ahead. And Americans gloried in the fact that the world’s huddled masses regularly demonstrated their belief in the American dream by voting with their feet.

The respondents to the Heartland poll know the world has changed. Nearly two-thirds of those who described themselves as middle class said their generation had less job and financial security than their parents. More than half said they had less opportunity to advance.

The middle class is dying. Chart after chart, story after story, poll after poll, all show that the claim that we are a middle class nation are hollow fiction. People know things are bad, they know they are screwed, and they are coming to the realization that the problem is the giant corporations and their rapacious executives. A majority of people polled, 54%, believe that the actions of corporate CEOs have made things worse for the middle class. 

And so, that is the backdrop as the Federal Reserve FOMC starts two days of meetings tomorrow. Expect the FOMC to signal that the central bank is ready to step up to the plate – no backing down from accommodative monetary policy. In recent meetings the FOMC has indicated that it would like to taper off its $85 billion in monthly purchases of market securities, or at least they would like to know where the exit is located. Of course, the more the Fed looks for exits, the more the market players start eying exits. 

So, the Fed needs to come out and say QE will stick around for a while. This week, look for the Fed to offer reassurances of ongoing support, in large part because Congress is so dysfunctional that the Fed is the only way to support economic activity. And also because inflation is not a problem; the recent measures of inflation were running about 1.2% in the first quarter, well below target and even further from the limits. And last month's jobs report was sluggish at best.

Unfortunately, aggressive monetary policy is probably not enough to lift the economy; not enough for sustainable strong growth; and it can't last forever. At some point, high market valuations will either be validated by improving fundamentals or, if the fundamentals don't improve, they will eventually drag down the high valuations. Right now, valuations are high because the Fed is artificially pumping up the markets; it can't last forever but there is no reason for the Fed to stop the party right now. We hit a record high close on the S&P 500 today. A trend in place is more likely to remain in place than it is to reverse, until it reverses. Downside potential remains real; it could just be a tweet away.

It took only about five minutes for the market to tank and rebound after a group hacked the Associated Press’ Twitter feed to put out bogus information — and now the feds are taking a longer look to find out who got rich during the chaos.

The Securities and Exchange Commission and the Commodity Futures Trading Commission have each opened investigations into the hack that falsely reported “explosions in the White House and Barack Obama is injured” and briefly wiped away $136 billion in market value. Sources in and out of government say investigators will sort through the big financial winners and not just conduct a standard review of a market swing.

In addition to the SEC and the CFTC, the FBI is investigating the attack. Security and financial experts predicted the National Security Agency and the State Department, along with the Department of Homeland Security, would open their own inquiries.

The secretive NSA didn’t confirm any role, saying that Homeland Security “has the lead to secure civilian information and communications systems for the executive branch.”

A group called the Syrian Electronic Army immediately took credit for the attack last week, although terror experts note the Syrians don’t have the most sophisticated cyber-warriors.

One line of particular interest for investigators is that of lightning-fast “cheetah” traders who conduct deals with high-speed computers and who were trading in the market when the attack occurred.

Just a tweet away.