Tuesday, July 01, 2014 - The Good, the Bad, and the Depressing

The Good, the Bad, and the Depressing
by Sinclair Noe

DOW + 129 = 16,956
SPX + 13 = 1973
NAS + 50 = 4458
10 YR YLD + .05 = 2.56%
OIL - .13 = 105.24
GOLD - .80 = 1327.10
SILV + .02 = 21.08

Record high closes for the Dow and the S&P.

The record setting bull market run refuses to stumble. The S&P 500 has not seen a correction, a drop of 10%, for 1,002 days, and counting. This marks the fifth longest stretch without a correction since 1928. The average time between corrections is about 18 months; we’ve now gone 33 months without a 10% pullback.  

The Institute for Supply Management said its manufacturing index registered 55.3% in June, down slightly from May’s reading of 55.4%. Any number above 50% signals expansion. Separately, the research firm Markit said its final reading of US manufacturing conditions in June totaled 57.3, compared with a preliminary reading of 57.5; still the highest reading since May 2010. So the manufacturing sector has expanded for 13 consecutive months, but it wasn’t a month over month increase, and we have to remember that manufacturing was expanding in the first quarter as the broader economy was contracting by 2.9%. Today’s reports were decent news for manufacturing, but hardly great.

The Commerce Department reports construction spending increased 0.1% in May, following a 0.8% increase in April. Construction activity totaled $958 billion at a seasonally adjusted annual rate in May, up 6.6% from a year ago. Single-family home construction was down 1.4% while apartment construction dropped 0.6%. The hotspot for construction was a 4.3% rise in construction of power generating facilities.

The upshot is that the economy is continuing to improve from the deep freeze of old man winter, even if the recovery is tepid. Most economists and analysts had called for 3% growth in the first quarter, not a 2.9% contraction. Now that the weather and the economy have thawed, we’re hearing talk of 3% growth going forward.

The strongest S&P 500 sector this year has been Utilities, up 17%. The S&P 500 Energy sector is up 13%, with the following subsectors: Oil & Gas Equipment and Services rising 28%, Oil & Gas Storage and Transportation up 25% and Oil & Gas Exploration up 22%.The weakest S&P 500 sector so far this year has been Retailing.

June auto sales beat expectations with Chrysler, Nissan, Toyota and Hyundai all posting healthy gains compared with the same month a year earlier. General Motors had a small increase and Ford’s sales declined. June new car sales approached 1.4 million, about the same as a year earlier. Most analysts were forecasting a 2% to 3% decline for the month. GM recalled an additional 8.5 million cars yesterday, which means that GM has now recalled 29 million cars since the start of the year, more than the total number of vehicles it sold in 2011, 2012, and 2013 combined. It’s also more than the 22 million vehicles recalled by all automakers last year.

AAA predicts that nearly 35 million Americans will take a road trip of 50 miles or more on the Independence Day weekend. The current national average price for a gallon of regular gasoline is $3.68, compared with $3.48 a year ago. According to AAA, gasoline prices are 20 cents a gallon higher due to “market fear about Iraq”.

Sunnis and Kurds walked out of the first session of Iraq's new parliament after Shi'ites failed to name a prime minister to replace Nuri al-Maliki; so, the prospects are poor for a new unity government that might prevent Iraq from collapsing. Meanwhile, the ISIS rebels continue fighting; they control suburbs  just west of Baghdad; they have been waging fierce battles in Tikrit, north of Baghdad, and there have been clashes to the south of the capital, leaving the city surrounded on three sides. The United Nations says more than 2,400 Iraqis had been killed in June alone, making the month by far the deadliest since the US "surge" offensive in 2007.

Geopoltical hotspots continue to flare up. Ukrainian forces struck pro-Russian separatists bases in eastern Ukraine with air and artillery strikes. The ceasefire came and went, and won’t be renewed. Russian president Putin accused the Ukrainian prime minister of shunning the road to peace; while Russian foreign minister Lavrov warned of a “new round of bloodshed”.

 A follow-up on yesterday’s Supreme Court ruling in the Hobby Lobby case, which dealt with a closely held corporation’s objection to paying for contraceptives in employees’ health care under the Affordable Care Act mandate. The Supremes said corporations are people, my friend, and they have religious beliefs, and so they are exempt from the mandate. There had already been exemptions for churches and non-profit organizations; in those situations the government determined that contraceptives would be paid by the government. This was the solution put forth in 2012, and revised in 2013, whereby taxpayers could pick up the tab for contraceptive coverage, instead of religious employers, as a solution to the First Amendment issues in question.

Writing for the majority in the Hobby Lobby case, Justice Alito wrote: “[the White House] could extend the accommodation that HHS has already established for religious nonprofit organizations to non-profit employers with religious objections to the contraceptive mandate. That accommodation does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’s stated interests.”

In other words, while the government can’t compel Hobby Lobby to finance contraceptives, it can compel taxpayers to do so. Another name for taxpayer funded healthcare is “single payer”. I’m not sure if the Supremes intended this, but they just justified the government to establish a single payer health plan, at least for contraceptives.

There was a time when a majority of Americans were confident in the Supreme Court, but according to a new Gallup poll just 30% say they are confident in the highest court. That’s the good news; people have more confidence in the Supremes than in any other arm of government, but that may not be saying that much when confidence in the presidency stands at 29% and in the Congress at 7%. Which means Congress is even less popular than head lice, or T-Mobile, or Facebook.

The Federal Trade Commission says T-Mobile made money the old fashioned way, by charging customers hundreds of millions of dollars in bogus charges. The practice is often referred to as "cramming"; businesses stuff a customer's bill with bogus charges associated with a third party. In its complaint filed in federal court, the Federal Trade Commission claimed that T-Mobile billed consumers for subscriptions to premium text services such as $10-per-month horoscopes that were never authorized by the account holder. The FTC alleges that T-Mobile collected as much as 40% of the charges, even after being alerted by other customers that the subscriptions were scams.

Facebook has its own little scam. It modified hundreds of thousands of users' accounts by prioritizing 'positive emotional content' to see if it could make them happier or sadder, without telling them what it was doing.

Researchers from Cornell University and the University of California filtered information going into the news feeds of 689,000 users; that includes the constant flow of links, videos, pictures, and comments by friends. When positive emotional content from friends was reduced, users would post more negative content themselves, essentially becoming unhappier. The opposite happened when negative emotional content was reduced. The process has been dubbed “emotional contagion”.

The study, published in the journal “Proceedings of the National Academy of Sciences of the USA”, concluded: “Emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks.”

A spokesman for Facebook said the research was conducted over a single week and none of the data was associated with a specific person's account. Instead, they said the site wanted to make its content more “relevant and engaging”.

Just to be clear, another name for emotional contagion is empathy, something that is in short supply at Facebook. What we really learned from this experiment is that the people at Facebook have spent so much time staring at a computer screen that they have become disconnected from emotional reality, and have to rely on scientists to run secret experiments on hundreds of thousands of lab rats, I mean customers, to discover that people get upset when their friends are unhappy. Even worse, the experiment confirms that social networks now have the power to change the emotional well-being of millions of lab rats, I mean customers, on a whim; just to see what happens; devoid of empathy.

Now that’s depressing.

Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Monday, February 03, 2014 - Another Piece of Cake, Marie?

Another Piece of Cake, Marie?
by Sinclair Noe

DOW – 326 = 15,372
SPX – 40 = 1741
NAS – 106 = 3996
10 YR YLD - .09 = 2.58%
OIL - .78 = 96.71
GOLD + 11.20 = 1258.10
SILV + .17 = 19.44

In economic news, manufacturing activity slowed sharply in January on the back of the biggest drop in new orders in 33 years while construction spending barely rose in December. Maybe it had something to do with the cold weather, maybe it’s just a pause after slightly stronger economic growth in the third and fourth quarters.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.3 last month, its lowest level since May 2013, from 56.5 in December. It was the second straight month of slowing growth from November's recent peak reading of 57, which had been the highest since April 2011, and indicated manufacturing was slowing after output grew at its fastest pace in nearly two years in the fourth quarter.

Underscoring the weather impact, delivery delays increased a bit last month, but the biggest red flag was the huge drop in the forward-looking new orders index, which fell to 51.2 from 64.4 in December. That 13.2-point drop was the largest monthly decline in the key component since December 1980.

In a separate report, the Commerce Department said construction spending rose 0.1% in December, slowing from the prior month's 0.8% increase. While private construction spending hit a five year high, outlays on public construction projects recorded their biggest drop in a year, reflecting the drag from weak state and local government spending.

Bad weather also appeared to hurt US auto sales in January, with Ford, GM and Toyota USA reported a slide in sales for the month.

The big economic report this week will be Friday’s jobs report. Last month the jobs report showed an anemic 74,000 jobs added in December. The January report is expected to show a rebound of 185,000 jobs in January.

January was the worst month for the stock market in more than a year. February is off to a bad start.  Even before today’s economic data, there wasn’t much to cheer: pending home sales disappointed, home prices have been softening, durable goods orders were weak, fourth quarter GDP growth was decent – down from the third quarter – and not enough to think the economy is able to run on its own, and the December jobs report was just ugly – it was just one report and not a trend but it was ugly. All this suggests the economy might not be able to handle higher interest rates, and yet the Fed has now cut back on Quantitative Easing bond purchases in its last two meetings; this would theoretically result in higher bond yields, but that hasn’t happened; rates have moved lower and that suggests the bond market is seeing something moving in the shrubs, and it’s not a bull.

Meanwhile, the consumer, and that’s what the vast majority of Americans are now considered, just consuming units, the consumer story is under attack; the middle class is slipping away. Corporate America is now facing the reality of income inequality, and that means the customer base for businesses that appeal to the middle class is shrinking. Spending has shifted upward with some of the retail winners being businesses that cater to the top tier with high-end goods and services, or businesses that try to capture the expanding ranks of cost conscious consumers with discounted goods.

According to a report by the Federal Reserve of St. Louis and Washington University in St. Louis, in 2012 the top 5% of earners were responsible for  38% of domestic consumption, up from 28% in 1995. The current economic recovery has been driven mostly by the top tier; since 2009 inflation adjusted spending by the top 20% has risen 17%, compared with just 1% among the bottom 95%. More broadly, about 90% of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20% of households in terms of income.

As a result, a Four Seasons hotel is experiencing nearly double the growth rate of a Best Western; a restaurant that sells a $75 dinner is experiencing twice the growth in sales of a restaurant that sells a $15 dinner. High end retailers such as Nordstrom and bargain basement retailers such as Dollar Tree have seen their share price double over the past 10  years, while JC Penney and Sears (a couple of stores built on the middle class) have been shuttering stores and scaring investors.

We knew this was coming; about 10 years ago, Citigroup wrote a report in which they supplied a name for an economy that is run by and for the ultra-wealthy; it’s called a plutonomy. There is no average consumer in a plutonomies. There is only the rich and what Citigroup describes as “everyone else”.

There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the non-rich, the multitudinous many, but only accounting for surprisingly small bites of the national pie. The Citi report endorse the inequality and determines that Plutonomists should be targeted as Citi customers. The report states: “The Managerial Aristocracy, like in the Gilded Age, the Roaring Twenties, and the thriving nineties, needs to commandeer a vast chunk of that rising profit share, either through capital income or simply paying itself a lot.

“At the heart of plutonomy is income inequality. Societies that are willing to tolerate/endorse inequality are willing to tolerate/endorse plutonomy.” The Citigroup report warns their wealthy clients that there is a risk that inequality will not be tolerated, but they go on to say they are not concerned: “Perhaps one reason societies allow plutonomy is because enough of the electorate believe they have a chance of becoming a Plutoparticipant. Why kill it off, if you can join it? In a sense this is the embodiment of the ‘American Dream’.”

The reality is that every child that ever played organized sports has a greater chance of becoming Lebron James or Tiger Woods than becoming a Plutoparticipant; a greater chance of being struck by lightning; and your odds are better at hitting the Lotto – which come to think of it is the new American Dream.

Bank of America issued a similar report that concluded the well-heeled might be able to save the economy from a long period of dismally weak consumer spending and that the consumer debt problem is only a problem for the middle class, or what’s left of it.

The Bank of America report was entitled: “The Myth of the Overlevered Consumer” and the Citigroup report was entitled: “Plutonomy: Buying Luxury, Explaining Global Imbalances”. Apparently they decided against the title: “Let Them Eat Cake”.

There are, of course, limits to the amount of cake a plutocrat can eat, and how many bars of soap they will buy, and how many blankets they buy, and how many  shirts they buy (even if they buy the expensive ones), and how much gas they buy for their cars. And this is the reason the economic recover has been tepid and not enough to run without the aid of the Federal Reserve.

And despite this, the Fed decided to taper again. The Central Bank wants out of Quantitative Easing because it hasn’t worked to re-inflate the system, with the exception of Wall Street and to a lesser degree the housing market (although what they actually re-inflated in the housing market was the banks’ balance sheets by siphoning off the toxic mortgage backed securities, but we won’t get into that right now). The Fed must also be concerned that QE has left the stock and bond markets, and the emerging markets, more than a little frothy; not to mention their own balance sheet.

The current market pullback actually takes some of the froth out of risk assets, particularly high yielding credit which is showing very low spreads relative to inflation expectations. The second is to allow the marketplace to replace their bond buying. The Fed still wants low rates, but wants them without as much intervention on their end. The best way for this to happen would be through a risk-off period whereby money flees risk assets to push Treasury yields lower at the same time the Fed is stepping away.

If this pullback turns into a correction the markets are in for even bigger declines, and one thing to watch is this Friday’s January jobs report. Complacency still remains high, even though the VIX, the volatility index, spiked to 21 today. The economy needs to re-inflate. The plutocrats can’t do it; the middle class could do it but the Fed’s QE did nothing to get money onto Main Street. If the deflation trend doesn’t end soon, we could see a wake-up call for the complacent.

And so today, we’ve started to hear hints and calls for the Fed to taper the taper; complaints that the Fed is turning off the free money spigot while Wall Street still wants to dip its beak in the reservoir. And there is a very serious concern that the as yet untested Janet Yellen led Fed might not provide the same backstop as the Bernanke Fed or the Greenspan Fed, both of which maintained an implicit put, which when put to the test proved explicit. And there is a growing realization that the rest of the world can’t or won’t compensate for a little tightening by the Fed. And the market is learning that the economy does matter, the whole economy, not just the top tier. And the market is learning that cause and effect has not been repealed. 

Tuesday, July 02, 2013 - Summer Swoon

Summer Swoon

by Sinclair Noe

DOW – 43 = 14,932
SPX – 1 = 1614
NAS – 1 = 3433
10 YR YLD - .02 = 2.47%
OIL + 1.65 = 99.54
GOLD – 10.20 = 1243.40
SILV - .27 = 19.48

Stocks started the second half of the year with a lukewarm rally yesterday; then the rally fizzled as the day wore on; still, yesterday was an up day. Today, stocks started in slightly positive territory, and as the day wore on, stocks sputtered. On a technical basis, the Dow and the S&P tried to break above the 50 day moving averages and failed. So, the 50 day MA is serving as a level of resistance, and stocks are not demonstrating the ability to break out.

It's easy to think stocks are still in an uptrend. The first half of the year posted solid gains, but those gains were slammed in June. Over the past week, prices started moving higher, but there's no conviction. Trading volume has been down. Tomorrow, the markets close early, and then stay closed for July 4^th, and Friday will be a low volume day. So, it's hard to be enthusiastic about stocks right here. Another failed rally could send prices lower, quick. It's easy to slip into summer slowdown mode, but this is not a time to be complacent if you are still in equities.

Since the FOMC’s June 22nd meeting, markets have been in turmoil. Commentators and Fed watchers have been speculating about exactly what Chairman Bernanke was trying to say on behalf of the Committee. Bernanke had indicated the asset purchase program might begin to be phased out when unemployment reached 7%. Actually, he indicated that by the time the program had ceased, unemployment would be at 7% sometime in the middle of next year. The import of this remark is critical, especially given that the publicly available FOMC central tendency forecast for unemployment by the end 2013 is 7.2-7.3% and by the end of 2014 the central tendency is an optimistic 6.5-6.8%. 

The Fed actually has a handy online calculator, the jobs calculator tool to estimate how many jobs per month will be needed to reach a certain unemployment level.
As an example, for the unemployment rate to decline to 7.3% in December (the high end of the Fed's forecast), with the participation rate staying steady at 63.4%, would require about 150,000 jobs per month for the next seven months.  This seems very possible. If the participation rate increases to 63.6%, than the economy would need to add 210,000 jobs per month for the unemployment rate to fall to 7.3% in December.
You can put in your own assumptions to the calculator. 

In economic news, CoreLogic reports home prices, including distressed sales, rose 2.6% in May and were up 12.2% for the past 12 months; the fastest annual increase in 2006. In addition to boosting household net worth, which supports consumer spending, the housing recovery has spilled over to manufacturing by fueling demand for construction materials and consumer items like stoves and refrigerators.

In a separate report, the Commerce Department said new orders for manufactured goods increased 2.1 percent after advancing 1.3 percent in April. Factory orders rose in most categories in May. Manufacturing slowed in recent months, weighed down by deep government spending cuts and slowing global demand

The Commerce Department also revised up the increase in new orders for durable goods - manufactured products expected to last three years or more - by a tenth of a percentage point to 3.7 percent. Even more encouraging, orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 1.5 percent instead of the 1.1 percent rise the department had reported last week. That might lead to a slightly higher revision for 2Q GDP

Car makers posted stronger sales in June. General Motors posted 6.5% growth, Chrysler rose 8.2%, and Ford sales were up 4.4% from May. The automakers are back to pre-crisis levels in the annual sales rate. Auto sales account for about 16 percent of the country's overall retail sales. Part of that can be attributed to pent-up demand for cars. Part of it might be consumers looking for better fuel efficiency.

Oil prices broke above $98 a barrel a couple of week's ago; an area that had been resistance; at the time I said it seemed to be a breakout. Oil prices dropped with almost everything else on concerns about the Fed taking away the punchbowl of monetary stimulus, but now, we're back above $99 and poised to break into triple digits. And some of that is a risk premium, associated with unrest in Egypt; not a big producer, but a strategically located Middle East country.

Egypt's president has rejected an army ultimatum that the country's crisis be resolved by tomorrow;there are widespread and deadly protests across the capital. In a late-night televised appeal for calm, Mohammed Morsi admitted he had made mistakes, pledging his loyalty to the people, but he insisted on his constitutional legitimacy as president and said he would not be dictated to.

The army earlier leaked details of its draft "roadmap" for Egypt's future. Morsi was put under pressure by the resignation of six ministers from his government on Monday Military sources told the BBC the president's position was becoming "weaker" with every passing minute and suggested that under the draft plan, he could be replaced by a council of cross-party civilians and technocrats ahead of new elections.

On Sunday, millions of flag-waving supporters of the opposition movement behind the protests had rallied nationwide, urging the president to step down. Demonstrations that had been jubilant when the army's ultimatum was interpreted as a coup-in-the-making turned increasingly confrontational later in the day.

With a 20% shift in our annual infrastructure spending from 20th century technology to 21st century technology we can drive a new global $10 trillion economy by 2020. That was an undercurrent in a powerful speech President Obama delivered last week, demanding EPA set new standards for climate change to reverse its effect on our health and the environment. That action will help set goals to meet the desire of many to clean the environment. The president also noted: “A low carbon clean energy economy could be an engine for growth for years to come,” asserting that deploying American innovation by using our natural resources more effectively help boost the economy.

As impressive as the speech was, the president passed on the opportunity to focus on how the United States will compete with Germany and Japan as the largest climate-based wealth creators.  It's estimated that the technology needed to meet carbon emission reduction targets by 202 would require investment of about $10 trillion globally; that represents a shift of 20% in our global infrastructure spending.

The challenge is that while the technology exists we still don’t have the business model and financial innovation necessary to attract the $10 trillion by 2020. The president  made clear that he believes in our entrepreneurs, investors, and corporations who bringing climate change solutions to market. What he did not do is inspire thousands more to join them to unleash a climate wealth economy. These folks are all motivated to do well by doing good.

Our inspiration is not to just fix climate change, it is to ignite the next economy by meeting our energy needs using climate change solutions. Climate change is a trillion dollar opportunity masquerading a crisis. The next step for the president is to jump-start this next economy with the federal government taking the lead.

Congress failed in a last-ditch effort to reach a deal on student loans, and so yesterday, the rates doubled from 3.4% to 6.8%. Not all student loans are affected. Only rates on new, subsidized federal Stafford loans doubled from 3.4 percent to 6.8 percent on July 1. Rates on existing subsidized Stafford loans will remain at 3.4 percent. Rates on new and existing unsubsidized Stafford loans will remain at 6.8 percent. 

The doubling of interest rates means most monthly payments will increase by about 16%. About two-thirds of students take on debt to finance education; the typical debt load works out to about $30,000. Even if Congress can work out a deal, a retroactive change in rates, back to lower levels, seems unlikely. This is one more mistake by Congress; increasing the cost of education, rather than investing in education. Stupid, really.

According to new statements from Bank of America employees, the lender offered employees incentives for sending homeowners into foreclosure rather than modifying their loans. The BofA employees stated under oath that they were “told to lie to homeowners about loan modifications and were rewarded for sending homeowners to foreclosure rather than modifying their loans”. The allegations and incriminating statements are part of the evidence being presented in a federal class-action lawsuit brought by homeowners against BofA. The homeowners say that the lender deliberately “thwarted their attempts to take advantage of the federal Home Affordable Modification Program (HAMP).”

Former employees of BofA involved in the suit testified that they were “instructed to deny modifications for no reason, to pretend they had not received documents they received, to hold documents and then claim they were too old, and to cancel trial modifications for ‘nonpayment’ even when all payments had been received.” The employees also reported that the bank “drilled” into them that the longer loan modifications were delayed, the more fees the bank could collect, even if this meant “lying to customers.”

The mortgage workers reportedly received cash bonuses and gift cards for meeting quotas for sending distressed homeowners into foreclosure. Not surprisingly, BofA has denied all of these allegations.

I was thinking about saying at the beginning of this story that “According to shocking new statements from Bank of America employees”.., but you're not shocked by this are you?

Friday, February 01, 2013 - Jobs Report Friday

Jobs Report Friday

by Sinclair Noe

DOW + 149 = 14,009
SPX + 15 = 1513
NAS + 36 = 3179
10 YR YLD + .02 = 2.01%
OIL + .12 = 97.61
GOLD + 3.80 = 1668.60
SILV + .37 = 31.94

Today is a Jobs Report Friday. Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate inched higher to 7.9%. The headline number was below expectations, which had been running from 170,000 to 185,000 new jobs. However, employment figures for November and December were revised up sharply. November was revised from 161,000 to 247,000, a gain of 86,000; so it turns out that job growth immediately before the election was actually under-estimated; December was revised from 155,000 to 196,000, a gain of 41,000.

In January, job gains occurred in retail trade, construction, health care, and wholesale trade, while employment edged down in transportation and warehousing. Exactly what this pace of job growth means for the unemployment rate depends on whether many of the workers sitting on the sidelines decide to join, or rejoin, or can find a place in the labor force. Right now, labor force participation rates, the share of people of working age who are either working or looking for jobs, is hovering around 30-year lows. Only those who are actively looking for work are counted as unemployed, so if the labor force participation stays low, even modest job growth can cause the unemployment rate to fall quite a bit.

The decline in the labor force participation rate brought the unemployment rate down much faster than anyone would have thought. The aging of America accounts for a little bit of it, but you’d still expect that job searches would go up and participation would rise as opportunities are opening up. For the long-term unemployed, who now represent 40 percent of all jobless workers, the opportunities still seem few and far between. Millions have exhausted their unemployment benefits and many more will fall off the government’s system in the coming months , and once the fall off, they seem to disappear.

The BLS report shows the number of unemployed persons, at 12.3 million, was little changed in January. In January, the number of long-term unemployed (those jobless for 27 weeks or more) was about unchanged at 4.7 million and accounted for 38.1 percent of the unemployed. Both the employment-population ratio (58.6 percent) and the civilian labor force

participation rate (63.6 percent) were unchanged in January. The number of persons employed part time for economic reasons, at 8.0 million, changed little in January. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The alternate measure of unemployment, or U6, which includes under-utilized workers was unchanged at 14.4%. That means the number of people working part-time who want to work full-time and the people who want work but are no longer counted as looking for work; that number is now 21.4 million. 

In January, the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. Average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $23.78. Over the year, average hourly earnings have risen by 2.1 percent. 

State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 239,000 in 2011. In 2012, state and local government employment declined by 32,000 jobs. In January 2013, state and local governments lost another 4,000 jobs. It appears most of the state and local government layoffs are over, however state and local government employment is still trending down slightly. Of course. the Federal government layoffs are ongoing with another 5,000 jobs lost in January.

With the November/December revisions, there were 200,000 new jobs, on average over the past three months.The new numbers are based on far more reliable — but slower to arrive — counts of the the number of workers for whom unemployment insurance premiums were paid. In 2012, employment growth averaged 181,000 per month. A month ago, we were told the average for the year was only 153,000, basically the same as in 2011. With the revisions, we are told that the 2011 average was really 175,000. At the end of last year, the official figures showed employment had risen 3.7 percent from the bottom in February 2010 to the end of 2012. Now that figure is 4.1 percent. A year from now we will get benchmark revisions for the last nine months of 2012. It is quite possible the 2012 annual average will then rise further, to more than 200,000.

The economy has added jobs for 28 straight months; just not fast enough. Since the downturn began in December 2007, the economy has had a net decline of about 2.3 percent in its nonfarm payroll jobs. And that does not account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the downturn.

Getting the economy to 5 percent unemployment within two years, a return to the rate that prevailed when the downturn, would require job growth of closer to 285,000.

So, we slog along. The Federal Reserves QE to Infinity and Beyond just isn't enough to get the jobs numbers improving. Maybe monetary policy could do something, but the current efforts are misdirected. Fiscal policy isn't helping. The Social Security Payroll Tax hike only shrinks paychecks. States are looking to raise sales taxes. Military spending fell 22.2% in the fourth quarter; eventually we should see a Peace Dividend but right now it's just spending cuts. Spending cuts won't add jobs.

The only reason for employers too hire more workers is if they have more customers. Where do customers come from? Well, you know the answer. For exporting companies, the customers come from Europe, Asia and South America. Not much growth from those areas. The government can be a customer, but the battle in Washington these days is about spending cuts and tax hikes. That leaves consumers; 70% of all economic activity. And consumers have seen their purchasing power decline. Median wages, adjusted for inflation, have been on the decline. Many consumers are still trying to pay down debts, and continue to keep a tight grip on dollars that do make it into their purse. Consumer confidence hit a 12 month low. The focus should be on moving money through the economy, in turn creating demand, and in turn creating jobs.

Once we get more jobs, if we get more jobs. Then everything gets easier.

The jobs news was good enough to push the major market indices higher. The Dow tops 14,000. The S&P 500 climbs above 1500. It was the best January of the new century. All this market news is great, especially if you already have a big chunk of change in the markets. The fear is that the average investor, who isn't in the market, who hasn't participated in the rally, will finally jump in when the rubber band has stretched fully. Yes, stocks have become more widely held over the past two decades. And roughly half of Americans own some stocks through mutual funds and pension funds. But only about a third of all Americans hold more than $10,000 in stock. So while more Americans hold stock, they don't hold much. Wealth for most families comes from their homes and jobs , which have not not recovered as quickly or as strongly as stocks.

And if you think the S&P climbed too quickly, check out Italy and Spain. After posting modest gains during the first week of the new year, both these markets exploded to the upside, quickly outpacing the S&P. But both Italian and Spanish shares are rolling over a bit. Nationalization of a Dutch bank today provided a stark reminder that Europe is still struggling to shake off the legacy of the financial crisis and find a way to let banks fail without loading up governments with debt. The Dutch government was forced to rescue SNS REALL to protect savers' deposits after the banking and insurance group racked up huge losses on real estate lending. Attempts to find a private buyer or investor failed.

A couple of economic reports: the automakers posted strong sales for January. GM sales were up 16% compared to a year ago. Ford up 22%, Toyota up 27%, and Chrysler with a 16% gain.

The Institute for Supply Managements manufacturing index climbed to 53.1 last month from December’s 50.2. Readings above 50 signal expansion.

Exxon Mobil and Chevron, the largest U.S. energy producers, are boosting profits with oil refineries that some analysts and investors urged them to divest as recently as last year. Earnings from processing crude into fuels such as gasoline and diesel more than made up for lagging returns from oil and natural gas exploration during the final three months of 2012, Exxon and Chevron reported today. Fuel refining helped propel fourth-quarter net income to a five-year high of almost $9.95 billion for Exxon and a record $7.25 billion for Chevron.

Those stories have a common thread. The price of oil has been climbing; good news for Exxon and Chevron; drivers have been buying new cars, which are generally more fuel efficient. For some folks the math is simple. Say you spend $300 a month on gas, and you're driving a vehicle that get 15 to 20 MPG. Switch that for a new car that gets 35 to 40 miles per gallon, and in many cases you pay the cost of a new car with the gas savings. As sales of new cars increase, it ripples through the economy.

A Raft of Reports

by Sinclair Noe

DOW + 136 = 13,232
SPX + 15 = 1427
NAS + 42 = 3020
10 YR YLD +.03 = 1.71%
OIL +.65 = 88.48
GOLD – 5.20 = 1716.00
SILV un = 32.26

We have a drove of economic data to cover today; a mass of intelligence; a flock of facts; a legion of lowdowns; a swarm of information; and we'll sort through the stories and try to make sense of it all. Of course, tomorrow we'll get the big report on the monthly jobs picture for October. Friday's jobs report is expected to show non-farm employers added just 125,000 jobs last month - not enough to prevent the jobless rate from rising a tenth of a point to 7.9 percent. The unemployment rate fell to a near four-year low in September at 7.8%.

Today, we heard some hints about tomorrow's non-farm labor report. Automatic Data Processing, the payroll processor, always releases their report prior to the government's report. The ADP report is not a particularly good indicator of the BLS report. ADP shows private employers added 158,000 workers last month. There is some evidence of labor market improvement. It is not totally convincing yet but overall the message is positive.

Weekly initial unemployment claims declined to 363,000 for the week ending October 27, down 9,000 from the previous week. Unemployment claims topped out over 650,000 back in the first quarter of 2009 and have been moving mostly sideways this year, but are near the cycle bottom. Don't be surprised to see an increase in claims over the next couple of weeks, due to Hurricane Sandy.

The Institute for Supply Management, or ISM, issued its manufacturing index for October. The Purchasing Mangers' Index was 51.7% in October, up from 51.5% in September. The new orders index was 54.2%, up from 52.3%; the employment index was 52.1%, down from 54.7%. Any reading above 50 indicates expansion in the manufacturing sector, however this was not robust expansion. In a separate report, Eurostat says unemployment in the Euro-zone hit a new high of 11.6%; that bodes poorly for exports from the US.

These reports are not considered solid indicators for tomorrow's jobs report, which is expected to show of 125,000 payroll jobs for October, on a seasonally adjusted basis; the unemployment rate is expected to inch up to 7.9%. ADP has altered their methodology slightly, and we'll see if that makes them a bit more accurate. The bottom line here is that the economy continues to add jobs, although probably at a sluggish pace.

In a sign that businesses may not be poised to ramp up hiring significantly, the Labor Department said growth in non-farm productivity held steady at a 1.9 percent annual rate in the third quarter. The report also showed unit labor costs, a measure of the labor costs for producing any given measure of output, fell 0.1 percent as growth in hourly pay braked sharply. It was the first decline since the fourth quarter of 2011.

And even while the jobs picture shows only slow growth, consumers are confident and they are apparently buying houses and cars. The Conference Board's consumer confidence index increased to 72.2 last month from a downwardly revised 68.4 in September; it is now at the highest level since February 2008. Generally when the economy is growing at a good clip, confidence readings are at least 90. The Conference Board’s gauge of consumers’ views on the present situation rose to 56.2 in October from 48.7 in September. The portion of survey respondents saying jobs are “plentiful” rose to 10.3% in October from 8.1% in September, while those saying jobs are “not so plentiful” declined to 50.3% from 51.2%, and those saying jobs are “hard to get” ticked down to 39.4% from 40.7%. Now, this confidence is in the face of next week's election and the end of the year fiscal cliff and a weak jobs market. What do we make of it? Are consumers delusional or are they just not buying the fear about the fiscal cliff that Wall Street is selling?

The Census Bureau reports overall construction spending increased 0.6% in September to $851 billion from $846 in August. The September figure is 7.8% above September a year ago. Private residential spending is 58% below the peak in early 2006, and up 29% from the post-bubble low. Non-residential spending is 29% below the peak in January 2008, and up about 29% from the recent low. Public construction spending is now 17% below the peak in March 2009 and at the post-bubble low.

The Federal Reserve released its quarterly survey of senior loan officers, and the report found that American banks and branches of foreign lenders have made it easier to get business loans, commercial-real-estate projects, car loans and credit cards, but not mortgages. Despite not making it easier to obtain home loans, banks have reported increasing demand for mortgages, in line with data showing improving sales of homes as well as a big spike in refinance activity. Why were the banks were reluctant to lend? Putback Risk, which is the risk that the FHA would force them to buy back bad loans. In other words, the banks still haven't learned how to underwrite a mortgage, or more specifically, they are more concerned with generating paper which can be sold into a mortgage-backed security, than they are with underwriting a good mortgage.

Automakers reported strong sales for the month of October. GM sales rose 4.7 percent to 195,764 vehicles, while those at Chrysler, an affiliate of Italy's Fiat, increased 10 percent to 126,185 vehicles. Both totals were the best either automaker had seen since 2007. Ford Motor's sales last month edged up 0.4 percent, while Toyota Motor's sales rose about 16 percent. Still, annualized sales figures are running slightly below expectations of 14.9 million sales, and Hurricane Sandy will likely mean a poor November. Still, car sales are getting some spillover benefits from an increase in housing prices, and the massive refinancing boom; plus light vehicle sales have been an area of strength as people replace older cars with smaller, more fuel efficient cars.

I told you there was a gaggle of economic reports today. What does it mean? Well, the economy is improving; it isn't powerful but it is progress. The jobs picture isn't strong but it has been growing for 31 months and will likely grow for a 32^nd month, and there seems little fear of a job market meltdown. Manufacturing is still a sore spot. American workers remain extremely productive, which shouldn't be a surprise to anyone. Consumers are feeling better, without being unrealistic. There is pent-up demand for houses and cars, but that demand is not yet strong enough to unleash a virtuous circle of powerful growth – that would require an added spark, which we haven't seen yet. And Hurricane Sandy will likely dampen any spark for the next couple of months.Of course, tomorrow, we'll hear about the impact of the monthly jobs report on the presidential election. I really don't think the impact will be profound.

At least that is my interpretation.

And another thing: Hurricane Sandy will influence the economy for at least the next few months. Gauging the disaster’s effect requires assessing economic activity that might be lost entirely against activity that is substituted with other products or services (like when entertainment spending falls but hardware-store sales rise).

This is the idea that Gross Domestic Product or GDP is a measure of all economic activity, both good and bad; the sale of cigarettes counts in GDP just as the sale of broccoli; therefore, you might think that all those people on the eastern seaboard who will now have to rebuild their damaged communities, you might think that would add to economic activity – but it doesn't. Conversely, whatever the direct losses from Sandy, they won't show up in GDP, which focuses on the flow of new production, sales and employment, rather than the condition of existing wealth.

In the very short term, like the next few weeks,the impact is likely to be negative, as workers are forced to stay home, capital equipment is either unusable or idled temporarily, and shops are closed. In the slightly longer term–that is, the remainder of 2012 and the first few months of 2013; the impact is likely to be slightly positive because workers make up for lost output, capital equipment is brought back online, consumers make purchases that did not take place during the disruptions, and the rebuilding of damaged property begins.

Natural disasters result in the destruction of an economy's capital stock and generally lead to the disruption of business activity. You need look no further than the long lines waiting for gasoline in New Jersey and New York, or the long lines of people trying to get a bus to get to work in New York. Somebody waiting in line for 2 hours to fill the gas tank does not add to productivity. Most guesstimates peg the economic losses around $30 to $50 billion, which would represent .2% to .3% of nominal GDP. Gains from reconstruction activity will be mostly offset by losses in overall output. The net effect will likely be slightly negative; not a huge hit to the economy, but enough to slow down growth momentum.

One final note: in the past few days, we've talked about climate change; we weren;t the only ones thinking about this issue. After previously indicating that he wasn’t going to back either candidate this election cycle, New York Mayor Michael Bloomberg endorsed President Obama in a column for Bloomberg News emphasizing that — in the wake of Hurricane Sandy — he wanted a candidate who would take climate change science seriously.

As Californians debate the "rich tax" contained in Gov. Jerry Brown's Prop 30, a new report challenges one argument for lowering tax rates on the wealthy: that millionaires simply move to avoid higher taxes, leaving the middle class with a higher burden.

The study, by sociologists at Stanford and Princeton, looked at two tax changes in California, a 1996 tax cut on high-income filers and a 2005 levy called the Mental Health Services Tax that took one percent of income over $1 million. Using tax-return data, the researchers examined how the changes affected "millionaire migration" in or out of the state before and after the tax laws were passed.

The research showed that millionaires not only were unmoved, so to speak, by their taxes being raised, "the highest-income Californians were less likely to leave the state after the millionaire tax was passed," wrote Charles Varner and Cristobal Young in their report.

In fact, the richer the Californian, the more likely he or she was to stay, the study found. Nor did the data suggest that lowering taxes lured millionaires to the state.

The pair previously studied millionaire migration in New Jersey, with largely the same results. But California's dynamic, tech-based economy may be, if anything, a better testing ground for the notion that job creators are forced out by taxation. "The presumption that exceptionally skilled, monied, and entrepreneurial individuals are also exceptionally mobile is debatable," Varner and Young concluded.

Aware, no doubt, of the politics swirling around their topic, Varner and Young appear to have considered every likely objection to their findings. They looked at the periods before each tax change in order to scoop up any high earners who moved in anticipation of being taxed. They scrutinized part-year returns to capture those who might take a second home to remove their out-of-state earnings from California's purview.

What they found is that California's millionaires, no matter the circumstances, move very little. "At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population," the report said.

Most of the fluctuation in numbers of millionaires, as my colleague Robert Frank pointed out in his book The High-Beta Rich, relates to the rise and fall of personal fortunes. "The remaining 98.8 percent of changes in the millionaire population is due to income dynamics at the top," Varner and Young wrote, "California residents growing into the millionaire bracket, or falling out of it again." 

This constant turnover in the top income brackets, the researchers say, may explain why millionaires aren't more sensitive to tax changes. A top earner who breaks into the millionaire's club only a few times in his career would be less likely to consider the tax when deciding to stay or go.

Indeed, the typical Californian millionaire only repeated his or her feat 54 percent of the time in the years from 1996 to 2003, the researchers found. Instead of paying one percent of their million-plus income to the government, this typical taxpayer would pay an effective tax rate of one-tenth of one percent over the 13 years. "This is a key question for someone considering whether to migrate for tax purposes," the study said.

The up-and-down fortunes of rich Californians is another reason they don't leave. "Most people who earn $1 million or more are having an unusually good year," Varner and Young wrote. "It is difficult to migrate away from an unusually good year of income."

So what does control millionaires' residential status? Loss of that golden opportunity for one: the greatest exodus of wealthy Californians in the years studied came after the collapse of the tech bubble. (The trend wasn't reversed until just after the Mental Health Services Tax was passed in '05.)

The other clear impetus for millionaires to get out of California was divorce. Knowing that the end of a marriage both occasions a move and shows up in tax data, the researchers used marital splits a "reverse placebo" to test tax data's ability to detect migration. In the first year after a divorce, 1.2 percent of divorcees start a new life elsewhere, according to the study.

"Divorce is something that has a very clear effect on migration, modest changes in the tax rate for high-income earners do not," the researchers concluded.