Thursday, August 15, 2013 - Who's in Control?

Who's in Control?

by Sinclair Noe

DOW – 225 = 15,112
SPX – 24 = 1661
NAS – 63 = 3606
10 YR YLD +.04 = 2.75%
OIL + .41 = 107.26
GOLD + 29.60
SILV + 1.14 = 23.11

Let's start with the economic data:

The Labor Department said its producer price index (PPI) remained flat in July, surprising economists who were expecting a rise of 0.3%. Meanwhile, core prices, which exclude food and energy costs, edged 0.1% higher -- less than the 0.2% climb projected by economists. By comparison, June saw gains of 0.8% and 0.2%, respectively.

Meanwhile, the consumer price index (CPI) showed retail prices rose a seasonally adjusted 0.2% on gains for gasoline, housing, clothing and food, among other goods. Excluding energy and food, the core consumer-price index also rose 0.2%.

The core CPI increased 1.7% in July from the same period in the prior year, slightly up from June’s annual growth. Overall consumer prices have increased 2% over the past 12 months. That year-over-year growth in the overall CPI has trended higher in recent months.

Just the other day, James Bullard,  the St. Louis Fed president said he is concerned about low inflation levels, which he said will be a factor in whether the Fed will scale back its bond-buying program. Bullard said: "There has not been much indication, so far, that it has been ticking back up toward target."

Also, the number of people who applied for new regular state unemployment-insurance benefits fell 15,000 to 320,000 in the week that ended Aug. 10, hitting the lowest level of initial claims since October 2007.

Who's in control? 

The headlines at the Wall Street Journal this morning said:  "Stock and bond prices tumbled after stronger-than-expected economic data ..." The share of our national income which goes to corporate profit is the highest it's been since they started tracking it in 1929, while the share going to people -- as salary and wages -- is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.  We're becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.

Why would good news about the economy cause the stock market to fall? The sentences continues: "... raised investor anxiety about a pullback next month in central-bank support for financial markets... "

Investors had been relying on the Federal Reserve to keep pumping up the stock market's record run, but some mildly favorable economic reports raised fears that the Fed's market-friendly interventions might come to an end.

Who's in control?

Stocks had the biggest one-day percentage drop since late June; trading volume was higher than the recent averages; there were poor results and outlooks from Dow components Wal-Mart and Cisco.

Wal-Mart Stores' shares fell on a surprise decline in quarterly same-store sales and Cisco Systems shares dropped one day after the network equipment maker announced it was cutting 4,000 jobs. The Wal-Mart earnings report could be considered a macro indicator, almost a proxy for gross domestic product data. It shows that consumer spending isn't that strong yet; inflation is rising, wages are not, and unemployment is still pretty high as witnessed by the news from Cisco.

There's a conundrum in the labor market. Over the past 3 years the number of job openings has risen by almost 50% but actual hiring has gone up by less than 5%. Companies advertise job openings but they don't fill the openings. There may be several possible reasons. Some look at the possible skills gap, the mismatch between the work companies need done and the skills the workers have. Maybe that explains a few of the unfilled job openings but not all. Openings in the retail sector have doubled over the past 3 years but hiring has been flat. They can't find someone with the skills to work at JCPenney?

A second explanation is that employers are offering jobs at wages that are too low to attract good applicants. The long term high unemployment rates have put no upward pressure on wages and companies haven't adjusted their wage offers.

And yet another explanation is that the nature of the financial crisis, rooted in the housing market crash, made it very difficult for many people to move for a job, suggesting that companies respond by filling openings from within. The jobs are advertised, but they go to people already with the company. The final explanation is that companies advertise jobs without much intent to fill the jobs; they don't have to recruit; they don't have to look for talent; it comes to them, cheap and easy.

Everybody's worried about what the Fed might do, unless you followed the “Best Six Months, Worst Six Months” plan, which called for you to get out in May and stay away through October. Actually, the refined version said to get out on May 24^th. In July, that looked like a bad move, now it looks smart. Sell In May doesn't always work, and it might not work this year, but it works with enough regularity to warrant consideration. Why does it work? Go figure.

Who's in control?

More and more the answer is not who you think.

Websites belonging to the Washington Post, CNN, and Time have been attacked, apparently by supporters of Syrian President Bashar Assad. Some links on the sites were redirecting readers to the website of the Syrian Electronic Army (SEA).

The breaches have been blamed on a third-party link recommendation service that all three sites used. The SEA has hit several media companies in recent months, mostly via social media. In this attack, the group was able to manipulate links served by content recommendation service Outbrain, which has now been taken offline.

Yesterday, the New York Times website was knocked out of service, maybe it was just a celebration of the great Northeastern Blackout of 2003, which you may recall was caused by a software bug that failed to detect and respond to a power surge when a tree limb hit a power line. Yep, 55 million people cast into darkness because a tree limb was too close to a power line.

I don't know why the Times had a problem yesterday, they say it was a problem with scheduled maintenance. Maybe. They started out by tweeting the blackout. Then they started posting stories on their Facebook page.

Facebook may have been convenient, but that meant that the Times was no longer in control of its content. Facebook is not hosting this material for the sake of the Times or for people who want quality journalism. Facebook itself is an increasingly threatening competitor to the journalism industry, and it serves its own needs first.

The situation also highlighted a reality all news organizations, and all of us who rely on the web for much of what we read and say, need to understand better. Technology can be fragile. It can be hacked. And even if you don't get your news content from the web, remember that all it takes is an unpruned tree limb, and the power could be out. In other words, we all need a Plan B.

Who's in control?

In Egypt, the control appears to be tenuously hanging with the military, at a great cost. The death toll surpassed 600 today during Egypt’s bloodiest crackdown on supporters of its deposed Islamist president, as violent new protests erupted in the country and world condemnation widened, including an angry response by President Obama and calls for a suspension of European economic aid.

Egypt’s Interior Ministry warned protesters that police officers were authorized to use lethal force to protect themselves. The ministry also promised to punish any “terrorist actions and sabotage” after at least two government buildings were burned. It was easily the most violent of the three deadly suppressions since Morsi was forcibly removed from power by the armed forces six weeks ago, plunging the country into its worst crisis since the ouster of Mr. Morsi’s authoritarian predecessor, Hosni Mubarak, in the 2011 revolution.

 Mr. Obama strongly condemned the Egyptian government’s use of brute force to crush the protests and said the United States had canceled military exercises with the Egypt’s armed forces scheduled for next month. Mr. Obama also warned of further unspecified steps if Egypt’s interim leaders continued down what he called a “more dangerous path.”

But he said nothing about cutting the $1.3 billion in annual military aid that the United States provides to Egypt and acknowledged that the United States had historically regarded the country as a friend and a “cornerstone for peace in the Middle East.”

In Europe, some officials called for a suspension of aid by the European Union, and at least one member state, Denmark, cut off funds.

So, to recap. The military staged a coup. The civilian regime was a façade. The military's attempt to destroy the Muslim Brotherhood guarantees a violent future, likely including terrorism and perhaps ending in civil war. Despite having dumped $75 billion worth of "aid" into Cairo's coffers over the years, Washington has no "leverage."

Yet the Obama administration continues to mouth meaningless platitudes. President Barack Obama said that the violence "must stop." To make that happen he said the US was pulling out of planned joint military maneuvers with Egypt. Yea, that's not going to get it done.

Who's in control?

Tuesday, July 31, 2012 - Waiting on Godot, Draghi, Bernanke, DeMarco, the Flood, and For The Lights to Come Back On

Waiting on Godot, Draghi, Bernanke, DeMarco, the Flood, and For The Lights to Come Back On
-by Sinclair Noe


DOW – 64 = 13,008
SPX – 5 = 1379
NAS – 6 = 2939
10 YR YLD -.01 = 1.49 
OIL – 1.78 – 89.89
GOLD – 7.00 = 1615.90
SILV - .18 = 28.10
PLAT + 1.00 = 1421.00




We wrap up the month of July. Let's look at the scorecard; for the month, the Dow Industrial gained 128 points; the S&P 500 index gained 17 points; the yield on the 10 year treasury note dropped 9 basis points. 


S&P Case Shiller index of home prices rose  2.2% in May. All 20 cities in the index saw monthly gains. On a year-over-year basis, prices are down 0.7% nationally, the smallest fall in 18 months. Phoenix prices have climbed 11.5% - the strongest in the nation, while Atlanta’s have dropped 14.5%. Meanwhile, Corelogic reports there were about 60,000 completed foreclosures in June, down from about 80,000 in the same month last year. According to the report there were roughly 3.7 million homes lost to foreclosures since  2008. 


Ed DeMarco, the acting chief of the regulator for Fannie and Freddie, the Federal Housing Finance Agency, said in a letter to the top Republican and Democrat on the Senate Banking Committee that “after much study,” he has concluded that Fannie and Freddie’s participation in the Obama administration’s program to cut the amount owed by underwater borrowers would “not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers.”


Treasury Secretary Tim Geithner criticized the decision in a response letter, writing: “I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs.” Roughly 56% of all US mortgages are owned or guaranteed by Fannie and Freddie and about 11 million homeowners owe more than their properties are worth. Geithner said in his letter that allowing Fannie and Freddie participation in the White House principal-reduction program could help up to half a million homeowners and result in savings to the two mortgage giants of $3.6 billion when compared to other loan-modification programs. Geithner added that the Treasury’s estimate is based on FHFA’s own analysis which was provided to the Treasury. There is even a Treasury program that provides subsidies to investors of 18% to 36% of the amount forgiven depending upon the loan value. 


One might wonder why DeMarco is being so intransigent. You might further wonder why the administration doesn't just fire him. Turns out he's the head of an independent agency and he can't be fired. And then, even if he resigned, the administration would have to make an appointment which would have to be confirmed by the Senate.  In any case, deciding whether debt relief is a good policy for the nation as a whole is not DeMarco’s job. If households can't get help repairing their balance sheets, then the recovery, such as it is, will be even slower. Banks got the help they needed with their balance sheet problems, but households have not received as much attention. There is simply no way that it makes sense for an agency director to use his position to block implementation of the president’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy. This guy needs to go. 




The Commerce Department reports personal spending fell less than 0.1% in June. Spending for May was revised down slightly to a 0.1% decline. It’s the first time consumer spending has fallen two straight months since early 2009, near the end of the last official recession.


Personal income rose 0.5% last month , mainly the result of employees working longer hours. Incomes increased by at least that amount in four of the first six months of 2012 after doing so only once last year.


What’s more, consumers had significantly more buying power in June than they did at the start of the year when inflation is factored out. Real disposable income, or money left over after taxes, has increased 1.7% over the past 12 months, largely because of lower gasoline prices.


So, that means people were spending less and saving more. The savings rate increased to 4.4% in June, up from 4% in May, and up from a two year low of 3.2% last November. 


Meanwhile, the Conference Board's consumer confidence index rose to 65.9 in July, the highest level since April, and up from a revised 62.7 in June. This is not a sign of strong confidence, because that would be readings closer to 90. Still, the report indicates there was greater confidence about short-term business and employment prospects. 


In Washington DC, House and Senate leaders managed to do the unthinkable; they agreed on something, and they struck a deal to fund the government for six months. The deal sets a funding level of $1.047 trillion; in other words, they raised the debt ceiling and the government is expected to hit its $16.4 trillion debt limit, or debt ceiling, sometime after the November elections. The deal will have to be approved before the end of September. And then there is still the issue of the fiscal cliff, which refers to expiring tax cuts, automatic spending cuts, debt limit increases and other year-end deadlines. 


Unless Congress and Obama can reach a deal by January 2 on a new formula for deficit reduction, $109 billion in spending cuts, also known as sequestration, will fall into place as a first down payment on more than $1 trillion in spending cuts over a decade. Those are to be divided equally between defense and domestic programs. The automatic spending cuts are the result of a deficit-reduction deal struck last August by Obama and Congress that also raised Treasury Department borrowing authority to avoid a credit default. Congress would like to replace the automatic spending cuts with a series of more targeted, well-thought-out reductions and/or revenue increases. Lawmakers are hopeful they can revisit the matter.


This is the backdrop for this Friday's monthly jobs report. Most estimates are calling for a gain of 110,000 jobs in July, compared with 80,000 net new jobs in June. 


And Federal Reserve Federal Open Market Committee, or FOMC is meeting today and tomorrow to try  to figure out what they can do to fulfill their dual mandate of price stability and maximum employment. The price stability part has been under control lately. Inflation is right in line with Fed expectations, a little below targets actually. The economy grew at a feeble 1.5% clip in the second quarter and unemployment remains stuck at 8.2%. Job growth has only averaged 75,000 per month in the second quarter. Fed officials have indicated that this pace is unacceptable. But the unemployment rate doesn't tell the whole story. For example, the national unemployment rate doesn't take into account people who want to work but haven't looked for a job in the previous four weeks because they figured none were available. The national unemployment rate also doesn't account for people in part-time jobs who would prefer full-time work. The U-6 unemployment rate includes under-employed, marginally employed, and long-term unemployed; that rate stands at 15.3%, but in California, the U-6 is 20.3% and in Nevada the rate is 22.1%. Clearly the Federal Reserve is a failure when it comes to maximum employment. 


So what will the Fed do? The widely anticipated move is “not much”. Look for the Fed to announce they are willing to extend the ZIRP, the Zero Interest Rate Policy. There might be a move to reduce payments to banks for holding excessive reserves with the Federal Reserve. Yes, the Fed pays the banks to NOT lend money.  That might change but the Fed might just sit back and wait. 


Wait for what?  They might be waiting for Godot, or possibly Draghi. The European Central Bank is also holding meetings this week and ECB President Mairo Draghi has promised to do whatever it takes to protect the Euro-union. There is a chance we could see a bond purchase plan announced by the ECB; there is a chance we could have a big coordinated convergence of central banks all cooperating and working together as an irresistible force. But don't count on it; more likely, small, incremental steps. The more news comes out, the more it looks like Mario Draghi’s pledge that the ECB would do all it would take to save the Euro was a bluff. The best guess is that he hopes to appease the market gods until September 12, when the German Constitutional Court will render its decision on whether the “permanent” rescue mechanism, the ESM, is permissible. 


While Draghi will likely dither as long as he can, Spain is heading for insolvency as big chunks of debt come due later this year. Events are moving fast. The relevant issue is no longer whether this will happen, but whether it is better for Spain to restructure its debt inside or outside the Euro-union.


Inside the euro and without financial resources, a debt reduction is pointless. The Spanish economy would have to go into deepening internal deflation, with cuts in prices and salaries, to restore competitiveness. This is impossible, or at least improbable. What we know is that the Spanish economy is contracting and unemployment is crazy high and it is foolish to expect the Spanish people to put up with this much longer. Outside the Euro-union, the Bank of Spain would be able to act as a lender of last resort again and eliminate the risk of future debt restructurings. The country would at least have a sporting chance of avoiding protracted depression. Or maybe there will be a Euro-zone rescue, with attendant austerity. Nothing is preordained at this point, except if Spain leaves the Euro, then the union isn't worth a hill of beans. 




Hundreds of millions of people have been left without electricity in northern and eastern India after a massive power breakdown. More than half the country was hit by the power cuts after three grids collapsed - one for a second day. Hundreds of trains have come to a standstill and hospitals are running on backup generators. In Delhi, Metro services were halted and staff evacuated trains. Many traffic lights in the city failed, leading to massive traffic jams. In eastern India, around 200 miners were trapped underground as lifts failed, but officials later said they had all been rescued. The internet, banks, hospitals, and businesses of all sorts were closed. Electric service is being restored and fairly quick, but the outage has been a huge embarrassment for the Indian government and has revealed the infrastructure is a mess.


The same could be said for the  infrastructure in the US. By some estimates the US electric grid will need more than $2 trillion in investments over the next 20 years. 


Just last week, the Alliance for American Manufacturing issued a report that recommends a two-part solution. First is restoring America's infrastructure lifelines: its electrical grid, its public water and sewer systems, its railroads and dams. And second is doing it with American-manufactured steel and concrete, glass and aluminum; all American components and all American labor.


The result would be a nation more capable of fending off and recovering from natural and man-made disasters. And it would be a nation with a stronger economy based on a solid manufacturing base.


The Preparedness report was written by two security experts. One is Tom Ridge, the former Republican governor of Pennsylvania and former head of Homeland Security. The other is Robert B. Stephan, a former Assistant Secretary of Homeland Security for Infrastructure Protection.


Conclusions:
"The American way of life is dependent upon a vibrant economy, the existence of which is based upon a skilled work force, innovation and a world-class critical infrastructure. Much of this critical infrastructure is vulnerable to attack, catastrophic weather events and obsolescence and deterioration. Immediate national security, preparedness and economic needs require an equally strong domestic manufacturing base which, for many reasons, has eroded over the years."


The Preparedness report warns of depending on foreign sources for recovery:


". . .we can no longer rely on global suppliers - many of whom may not have our best interests at heart at a time of crisis. . .or come to our rescue in the midst of an emergency."


Critical to both psychological and physical recovery, it says:


"is a robust, diverse and resilient domestic manufacturing sector. In fact, there is a direct nexus between a strong domestic manufacturing sector and America's ability to prevent, mitigate, recover from and rebuild quickly in the wake of catastrophic events."


Ridge and Stephan devoted a whole section of the Preparedness report to the threats to dams and the nation's water supply. These are vulnerable to both natural and terrorist-caused disasters. And they're already in poor shape, receiving a D grade in a review by the American Society of Civil Engineers (ASCE). Dams, the ASCE said, need more than $50 billion in repairs.

The ASCE recommended in 2009 that the nation invest $2.2 trillion to repair critical infrastructure. Americans want that work, with unemployment stuck at 8.2 percent. And America needs that economic development. And it's never been cheaper to raise the money. 




Over 60% of the nation is in some form of drought. Areas affected include West Texas, North Dakota, Kansas, Colorado and Pennsylvania, all of which are part of the recent boom in North American energy production. That boom is possible partly by hydraulic fracturing or fracking. Fracking uses lots of water. Energy production uses more water than agriculture. The drought is now pitting oilmen against farmers. The farmers used to sell water to the oilmen; now they can't afford to sell, and the oilmen can't drill without the water.