Tuesday, August 26, 2014 - A Few Old Sayings

A Few Old Sayings
by Sinclair Noe

DOW + 29 = 17,106
SPX + 2 = 2000.02 (record)
NAS + 13 = 4570
10 YR YLD + .01 = 2.40%
OIL + .55 = 93.90
GOLD - .70 = 1280.90
SILV - .08 = 19.38

The S&P 500 notched its 30th record of the year and closed above 2000 for the first time ever. The Dow also rose but fell short of its record closing high after setting an all-time intraday high earlier in the session.

There are a few old sayings about the market that seem to fit. The first is, “the trend is you friend”; we have seen a few minor pullbacks since the bottom in 2009, but since the start of 2013 there has been a strong and steady uptrend. “A trend in place is more likely to continue than it is to reverse, until it reverses” and today marked a continuation of the trend, not a reversal.

Why is the market going up? Who knows? There are plenty of problems around the world. The US economy looks sluggish, but “stocks climb a wall of worry to march into bullish territory”; that’s a phrase that’s been thrown around for more than 60 years, but was made popular by Joe Granville in the 1980s.  Another financial proverb claims “Worry is interest paid on trouble before it falls due.” And the opposite of the “wall of worry” is “Bear markets slide down a slope of hope.”

And then there is the very, very old saying “buy low, sell high.” Any idiot off the street could repeat this phrase to you as if they had the secret recipe for investing success. Honestly, it’s good advice, because the overwhelming top indicator for investors and traders is price. You can’t spend volume or moving averages or stochastics or relative strength, and eventually, inevitably the trend will change.

If you want to look at a chart of an uptrend, just look at the S&P 500. If you want to see a chart of a downtrend look at the past four months’ worth of charts for wheat and corn and soybeans. As we near the end of summer, farmers are preparing for record crops in the Midwest. Wheat crops are forecast at a record 273 million bushels, up from 235 million last year; this year’s  soybean harvest is also expected to be a record, and corn will be a near record. But there is a problem. In many areas, such as the Dakotas, where agriculture has been a mainstay, the energy boom has taken over, and most of that oil travels by rail, and that means grain shipments have been held up, right as we head to harvest.

Reports the railroads filed with the federal government show that for the week that ended Aug. 22, the Burlington Northern Santa Fe Railway, North Dakota’s largest railroad, had a backlog of 1,336 rail cars waiting to ship grain and other products. Another railroad, Canadian Pacific, had a backlog of nearly 1,000 cars. Agriculture Department officials estimate that Canadian Pacific would not be able to fulfill nearly 30,000 requests from farmers and others for rail cars before October.

We have a couple of reports on home prices. The Federal Housing Finance Agency’s home price index shows house prices rose just 0.8% in the second quarter of 2014. This is the twelfth consecutive quarterly price increase for the FHFA index, but it also shows a slowdown. The FHFA index is based on home sales prices from conforming mortgages through Fannie Mae and Freddie Mac. Home prices are up 5.2% from the second quarter a year ago. Arizona ranked 5^th in annual appreciation.

In another indicator of a housing slowdown, the S&P/Case-Shiller National Home Price Index gained just 6.2% in the 12 months ending June 2014, while the 10-City and 20-City Composites gained 8.1%. That’s a dramatic shift from the double-digit, year-over-year price increases that had become the norm in the second half of 2013 and the first part of this year. All three indices saw their rates slow significantly from last month. To be clear, home prices are not dropping, simply rising at a slower rate.

The 20-city composite rose 1% in June. Phoenix posted a 0.6% gain for June, and a 6.9% gain from June of last year. Nationally, prices are still 17% below their peak. In Phoenix, the peak was measured to June 2006; from that point prices dropped 56%, and although prices have recovered, we are still 35% below peak prices.  

The takeaway from the housing reports is that price gains are slowing, and home supply has increased with higher prices and more people renting; consumers are slowly losing their ability to finance large purchases as home price appreciation continues to outpace wages. Absent a big increase in wages, you might expect home prices to remain flat or even decrease a bit in coming months.

Orders for durable goods jumped 22.6% in July; that is a record move, but much of the increase is because Boeing saw a jump in signed contracts for the 777X; it will take years before those planes are flying. Along with Boeing, automakers also turned in a strong performance. Demand for cars and small trucks climbed by 10.2%. Orders excluding the transportation sector, however, fell 0.8% with widespread weakness. Orders for primary metals, machinery, computers and defense goods all declined. Another key measurement of business investment, a category known core capital goods, dropped 0.5% in July. Orders for durable goods are volatile, and can jump around from month to month. While business investment has fallen in three of the past four months, it’s increased by an annual pace of 9% so far this year.

The Conference Board’s consumer confidence index jumped to 92.4 in August, the highest level since October 2007, from a revised 90.3 in July. Confidence has now increased for four straight months, and consumers remain quite positive about the short-term outlooks for the economy and labor market, even as the future expectations index declined from 91.9 to 90.9.

It’s official, minus the approval of regulators; Burger King will buy Tim Hortons for $11.4 billion and move the corporate headquarters to Canada, except they will keep corporate offices in Miami; and even though the deal would make sense without the tax dodging; it is a tax inversion deal. Warren Buffett’s Berkshire Hathaway is providing $3 billion in financing for the acquisition. Berkshire will earn 9% annual interest by taking a preferred equity stake.

The Department of Veterans Affairs says investigators have found no conclusive proof that delays in care caused any deaths at a VA hospital in Phoenix. That may be technically accurate, or not, but a troubled health care system in which veterans waited months for appointments while employees falsified records to cover up the delays, certainly did not serve those veterans with the care they deserved. The inspector general's final report has not yet been issued.

The VA is preparing a whole host of fixes for its healthcare system. Congress approved $17 billion to expand health care resources at the VA. Across the entire VA system, $400 million must be spent on staff overtime or private doctors to ensure veterans are treated quickly. As of Aug. 6, the VA had allocated $128 million in private care costs for 83,000 veterans; 8,248 VA schedulers across the country have been trained in appropriate ways of scheduling patients, including 764 Phoenix workers; an internal investigation board will be created to identify managers at the Phoenix hospital responsible for wrongdoing and what disciplinary actions should be taken; nearly $17 million has been spent in Phoenix to send veterans to private doctors for speedier care.

Also, mental health resources have been expanded in Phoenix by filling all but three of 13 psychiatric vacancies and six of seven psychologist positions and adding four social workers. The hospital's primary care staff has been expanded by 53 doctors, nurses and other caregivers. Twenty-seven temporary examination rooms have been opened, and two new outpatient clinics are planned with an additional 30,000 square feet of space.

President Obama went to Charlotte North Carolina today to address the national convention of the American Legion; and he announced steps to expand veterans’ access to mental health care and an initiative with financial companies to lower home loan costs for military families.

The US has begun surveillance flights over Syria to gather intelligence that might lead to airstrikes against ISIS militants in Syria. Military action inside Syria has not been approved yet. Pentagon officials have been drafting potential options for the president, including airstrikes.

Here’s a thought, before we send any more troops back into Iraq, or approve any airstrikes in Syria, we should make sure the VA has figured out a way to provide the best medical care to veterans. No excuses.

Ukraine has captured 10 Russian soldiers, though it did not state how they were caught. Weapons and fighters are able to cross the porous border freely, but until now there has never been confirmation that serving Russian soldiers were active inside Ukraine, despite repeated claims from Kiev. Russian President Vladimir Putin and Ukrainian President Petro Poroshenko held one-one-one talks today in Minsk, aimed at defusing the situation, which is positive, but the Russian POWs undoubtedly makes talks a bit awkward.

After 50 days of fighting, Egypt has brokered a ceasefire between Gaza and Israel. Palestinian and Egyptian officials said the deal called for an indefinite halt to hostilities, the immediate opening of Gaza's blockaded crossings with Israel and Egypt and a widening of the territory's fishing zone in the Mediterranean.

The United Nations has produced a new study on climate change; it includes a summarization of hundreds of scientific papers and is considered to present the best scientific and economic analysis on global warming, and is designed to provide policymakers with a scientific foundation for dealing with global warming. Bloomberg says it has received a leaked copy of the report which highlights the dangers from rising temperatures including damage to crop production, rising sea levels, melting glaciers and more pervasive heatwaves. The report mentions the word “risk” more than 350 times; “vulnerable” or “vulnerability” are written 61 times; and “irreversible” comes up 48 times.

The study, called the “Synthesis Report”, says global warming already is impacting “all continents and across the oceans,” and further pollution from heat-trapping gases will raise the likelihood of “severe, pervasive and irreversible impacts for people and ecosystems”. And the longer we wait to address the problems the more it will cost.

Tuesday, July 29, 2014 - How Do you Feel?

How Do You Feel?
by Sinclair Noe

DOW – 70 = 16,912
SPX – 8 = 1969
NAS – 2 = 4442
10 YR YLD  - .03 = 2.46%
OIL - .63 = 101.04
GOLD – 4.70 = 1299.80
SILV un = 20.66

How are you feeling? Are you confident? Apparently more people are. The Conference Board’s consumer confidence index increase to 90.9 in July, up from 86.4 in June; it’s the highest level in almost 7 years; it marks a significant rebound from the February 2009 low of 25.3. The people who compile the index say: “Strong job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations,” and the improved confidence “suggests the recent strengthening in growth is likely to continue into the second half of this year.”

Home prices dropped in May compared to April. The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.3% in May on a seasonally adjusted basis, its first decline since January 2012. Prices in the 20 cities rose 9.3% year over year, the slowest year-over-year gain since February 2013. The Phoenix area posted a 0.4% increase from April to May, non-seasonally adjusted.

In a separate report form the Commerce Department, home ownership rates dropped to 64.8% in the second quarter from 65% in the first quarter.

A fairly startling report was published today by the Urban Institute and TransUnion, the credit reporting firm, showing more than one-third (35%) of Americans with credit files had debt in collections in 2013. Non-mortgage delinquent debt totals $11.23 trillion. Which sounds like a lot, and it is, but it’s down from $12.68 trillion in delinquent debt in 2009; this includes debts such as credit cards, auto loans, student loans, utility bills, or even a phone bill or gym membership.  The study looked at debts that had been reported to a credit bureau as delinquent, and turned over to collection; that means the debt is at least 180 days old, but it also means the debt can stay on the credit report for up to 7 years, maybe longer. The share of people with debt 30 days past due is about 5.3%. What this means is that when a debt becomes past due, it lingers on a credit report.

The report on delinquent debt may tell us more about debt collection methods than about deadbeat American consumers. It is very easy for a company to turn over a debt to a credit rating bureau or a debt collection company; it is very hard for a consumer to get a debt removed from a credit report, even if the debt is disputed, or in many instances, even when the debt is paid. Consumers filed 204,000 complaints with the Federal Trade Commission last year, up nearly 3% from 2012, even though the amount of delinquent debt dropped. The most common complaint concerned debt collectors that lied about the amounts a consumer owed and the nature of the delinquency.

The European Union has imposed new sanctions on Russia for its involvement in supporting separatists in Ukraine. The US also toughened its sanctions further. The latest American actions took aim at more Russian banks and a large defense firm, but they also went further than past moves by blocking future technology sales to Russia’s oil industry in an effort to inhibit its ability to develop future resources. The Euro Union agreed to restrictions on trade of equipment for the oil and defense sectors, and "dual use" technology with both defense and civilian purposes. Russia's state run banks would be barred from raising funds in European capital markets. The measures would be reviewed in three months. Previously Europe had imposed sanctions only on individuals and organizations accused of direct involvement in threatening Ukraine, and had shied away from wider "sectoral sanctions."

The orchestrated actions on both sides of the Atlantic were designed to demonstrate solidarity in the face of what American and European officials say has been a stark escalation by Russia in the insurgency in eastern Ukraine. Until now, European leaders have resisted the broader sorts of actions they agreed to today.

Though Europe’s commerce with Russia will probably slump because of the sanctions, the measures are expected to hit Russia more severely, especially the restrictions on Russian banks’ ability to raise money in Europe and the United States. European companies have been warning for some time that their earnings could suffer because of sanctions against Russia. Today, the oil company BP warned that sanctions could hurt earnings. BP owns a 19.75% stake in the Russian oil company Rosneft.

We are about halfway through second quarter earnings season. Here are a few of today’s reports:

The pharmaceutical company, Pfizer posted earnings that beat estimates, while revenue dropped; they also said they expect earnings to drop in the third quarter. Merck had a similar story, beating earnings estimates while revenue slipped. United Parcel Service missed profit forecasts, even as profits and revenue were higher than a year ago. Herbalife, the multi-level marketed nutritional supplement company posted weak earnings after the close yesterday; shares were clobbered today. Corning, the glass making company reported a sharp drop in earnings due to acquisition costs; also clobbered.

Twitter reported a net loss of $145 million, or 24 cents a share, compared to a loss of $42 million a year ago. More people used the Twitterverse during the World Cup; revenue was up 124%, but then the users fade away; globally, usage was down 7% from a year ago. Twitter shares have jumped about 30% in after-hours trading. Go figure.

The Federal Reserve FOMC started its two-day meeting today. They will issue a statement tomorrow. The Fed is in the midst of reducing the amount of money it is pumping into the financial system by way of large purchases of mortgage backed securities and Treasuries, a process of tapering the Quantitative Easing. So far, the Fed has reduced purchases from $85 billion a month to $35 billion a month, and tomorrow they are expected to drop that down to $25 billion a month. QE is scheduled to end in October.

Then the Fed will shift their focus to raising its target for short-term interest rates, which have been near zero for more than 5 years. The Fed has already said they will take their time in raising rates. That exit from an accommodative policy is considered dangerous, and today the International Monetary Fund, the IMF, said it could reduce output in the United States by as much as 2% through 2016.

Volatility in the US could ripple through to emerging markets and likewise depress growth, but even worse; cutting growth by as much as 9% in more vulnerable developing countries due to higher interest rates and tighter financial conditions; and then it gets worse, with larger declines coming in time due to lower productivity, weaker trade, and falling commodity prices.

In addition to when the Fed will raise rates, it is also important to consider how high they will raise rates, and if they will wait long enough for liftoff to occur first. Liftoff is when the US economy has regained its strength and momentum and is able to cope with higher rates because of its economic strength. Fear of inflation could prompt the Fed to raise rates before liftoff; there is an even greater chance the Fed will raise rates before emerging markets could bear the burden of higher rates. If the Fed gets it wrong, we could end up stuck in sluggish or permanently lower growth.

Swiss bank UBS and German bank Deutsche Bank have disclosed that they are facing inquiries from the New York attorney general’s office. The UBS inquiry deals with dark pools, or alternative trading platforms, generally used by larger institutional clients such as pension funds and hedge funds, trying to hide orders from public observation. At its core, the dark pools are a form of price manipulation. Deutsche Bank is facing inquiry into high frequency trading and dark pools.

The Financial Times reports: “The Federal Reserve Bank of New York is stepping up pressure on the biggest banks to improve their ethics and culture, after investigations into the alleged rigging of benchmark rates led officials to conclude bankers had not learnt lessons from the financial crisis…

“Fed officials were surprised that some of that reported behavior occurred after the 2008 crisis, leading them to believe bankers had not curbed their poor conduct. To make sure the biggest banks are paying enough attention to ethics and culture, NY Fed bank evaluations have begun incorporating new questions emphasizing such issues. Topics include whether the right performance structure is in place to punish bad behavior, especially when it comes to compensation.”

Well, that is just great, the NY Fed suggests banks pay smaller bonuses when they encounter unethical behavior by the banksters. We’ll file that one under “Cruel and Unusual Draconian Punishment”.

But if you’re really looking for a funny story about banksters, check out the New York Times Dealbook. It seems the banksters are cashing in on advising companies how to do inversion deals to evade taxes. Inversions are behind the recent rash of merger deals in which major US corporations have renounced their citizenship in search of a lower tax bill offshore. It is important to understand that inversion does not in any meaningful sense involve American business moving overseas; all they’re doing is dodging taxes on those profits.

Investment banks are estimated to have collected, or will soon collect, nearly $1 billion in fees over the last three years advising and persuading American companies to move the address of their headquarters abroad (without actually moving).

The leaders in this growing field include Goldman Sachs, JPMorgan, Morgan Stanley, and Citigroup; they’ve made hundreds of millions aggressively promoting these transactions to major corporations, arguing that such deals need to be completed quickly before Washington tries to block them. These same banks received hundreds of billions from US taxpayers in the form of bailouts. The Joint Committee on Taxation estimates these inversion deals are expected to cost taxpayers nearly $20 billion over the next decade.

Tuesday, June 24, 2014 - A Funny Thing Happened

A Funny Thing Happened
by Sinclair Noe

DOW – 119 – 16,818
SPX – 12 = 1949
NAS – 18 = 4350
10 YR YLD - .04 = 2.58%
OIL + .81 = 106. 84
GOLD + .70 = 1320.00
SILV + .03 = 21.03

Let’s start with a couple of reports on housing; the Commerce Department says new home sales increased 18.6% to a seasonally adjusted annual rate of 504,000 units, the highest level since May 2008. The increase in sales was the biggest since January 1992. Compared to May of last year, sales were up 16.9%.

Meanwhile, the S&P/Case-Shiller index of existing home prices rose 0.2% in April; the smallest gain since March of last year, with the year-on-year increase slowing to 10.8%.

Today’s reports seem to indicate a strong new home market and a weak existing home market, but that’s probably not quite accurate. Homebuilders are working through inventory, while existing home inventories are low and starting to rise; for existing homes that means we’ve mainly worked through most of the distressed sales that were out there. The housing market is moving forward modestly, but also in fits and starts.

The Conference Board said its index of consumer confidence rose to 85.2 from 82.2 in May, with optimism about the labor market. June's reading was the highest since January 2008. Consumers think jobs are more widely available. The survey found 14.7% of consumers think jobs are “plentiful,” the best reading since May 2008, while the share characterizing jobs as “hard to get” fell to a three-month low of 31.8%.

While government data showed confidence at January 08 highs, Gallup's latest survey shows, only one in five Americans (22%) say the economy is excellent or good, while 34% say it is poor; and worse still, Americans continue to be less optimistic about the economy's future:  38% say the economy is getting better, while 58% say it is getting worse; the worst differential since 2013. Gallup's US Economic Confidence Index lost another point last week, the third week in a row, dropping to its lowest in over 2 months.

Not much confidence in the equity markets today. I haven’t seen anything earth shattering that would explain why stocks moved from positive to negative territory, and even with the rollover, the major indices still didn’t drop a full percentage point; 119 points ain’t what it used to be. The S&P 500 closed down more than half a percent for its sharpest loss since June 12, after setting a fourth record high in five sessions. Maybe its concern about Iraq, maybe the high frequency traders ran out of shorts to squeeze.

A funny thing happened in Russia today; President Putin appeared to back away from the fight with Ukraine; Putin asked Russia’s upper house to revoke the right it had granted him to order military intervention in Ukraine. At the same time, pro-Russian insurgents in eastern Ukraine shot down a Ukrainian helicopter killing 9 servicemen.

There is no backing off the fighting in Iraq, where a dire situation has gone from bad dream to nightmare in two weeks of fighting that have seen Sunni Muslim gunmen assert control over a growing area, including at least two towns that lie on a crucial supply route linking Baghdad, the capital, with the mostly Shiite Muslim south.

Secretary of State John Kerry urged Kurdish leaders to remain part of Iraq, as fighters from local Sunni tribes wrested control of at least part of Iraq’s largest oil refinery after battling for days with government troops over the key facility. Armed tribal factions from the Baiji area breached the refinery complex 140 miles northwest of Baghdad.  Kerry flew to the Kurdish region on a trip through the Middle East to rescue Iraq following a lightning advance by the Sunni fighters led by jihadis of the Islamic State in Iraq and the Levant. U.S. officials believe that persuading the Kurds to stick with the political process in Baghdad is vital to keep Iraq from splitting apart. Washington has placed its hopes in forming a new, more inclusive government in Baghdad that would undermine the insurgency. Kerry aims to convince Kurdish leaders to join it. Something will likely tip one way or the other in the next week or two.

The spike in instability in several oil producing regions around the world is threatening to knock some production offline, but it is also boosting profits for drillers operating in trouble-free zones. Oil prices have hit their highest levels in almost 9 months as places like Iraq, Syria, Ukraine and Libya continue to experience violence and political upheaval. For companies with heavy investments in these regions, the situation is perilous, but for oil companies elsewhere, the higher price is good news.

Oil markets could be looking at an extended period of elevated prices, which is bad news for companies with billions invested in Iraq. ExxonMobil and BP already started evacuating some of their workers from southern Iraq, despite the fact that militants remain north of Baghdad. But for companies drilling far from the violence – in Texas for example – a $5 per barrel increase in prices can be the difference between whether or not an oil project is economically viable. Oil companies are using the opportunity to step up drilling. The Eagle Ford shale in southern Texas, for example, saw four more oil rigs and one gas rig come into operation over the past week. Across the U.S., the number of oil rigs in use reached 1,545 -- the highest level since record keeping began in 1987.

The Supreme Court has ruled on the case of Halliburton v. Erica P. John Fund. Halliburton is trying to block a class-action lawsuit claiming the company inflated its stock price. A group of investors claims they lost money when Halliburton's stock price dropped after revelations the company misrepresented revenues, understated its liability in asbestos litigation and overstated the benefits of a merger.

Writing for the court, Chief Justice John Roberts said companies should have a chance in the early stages of a lawsuit to show that any alleged fraud was not responsible for a drop in the company's stock price. The Supremes did not overturn a precedent setting case that might have ended class action suits completely. The old case is Basic v.  Levinson, and it established the theory of “fraud on the market”, or the idea that shareholders who claim fraud don’t need to show they relied on specific false statements. The theory presumes a company’s false statements inflated its stock price. This seems to make sense; if a company lies about its revenue, lies about its liabilities, lies about the benefits of a merger that will inflate the stock price; but I suppose you could also argue the stock price might be inflated because the economy improves or because algorithmic traders inflated the price or maybe the moon and stars were aligned in a particular way.

The truth is that it is nearly impossible to pinpoint exactly why stock prices go up; but it is possible to identify when a corporation lies about revenues, liabilities, and benefits. The Supreme Court seems to be saying that it’s O.K. for corporations to lie, so long as nobody can prove a direct link between the lies and the share price.

The case now goes back to the lower courts, where Halliburton will have another chance to block the investors from joining together as a class.

Just a reminder, the Sabanes Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, was supposed set a new standard for all public companies, and top management to certify the accuracy of financial information or face possible punishment of up to 20 years in prison. When President Bush signed it into law he said: “The era of low standards and false profits is over; no boardroom in America above or beyond the law.”

A funny thing happened over the past 14 years: nobody has been convicted of criminal wrongdoing under Sarbanes Oxley, at least as best we can tell. There may have been some civil charges, but the “Justice Department doesn’t directly track Sarbanes-Oxley prosecutions, so there may be another case here or there. Even four or five SOX criminal cases in 10 years, though, makes them as rare as a blue moon.” (see Reuters)

There’s a new report on climate change predicting serious consequences, especially for American businesses. The funny thing about this report is that it comes from a panel chaired by former New York City Mayor Michael Bloomberg, former Treasury Secretary Hank Paulson and hedge fund manager turned climate activist Tom Steyer. It includes devastating forecasts for American companies, including dramatic declines in agricultural yields, loss of productivity due to intense heat and up to $35 billion spent dealing with coastal storms.

Bloomberg said “Climate change is costing governments and businesses billions of dollars,” and he hopes it "will mobilize the business community and forge a consensus for leadership across the aisle." Paulson says he now believes that “climate change is the existential issue of our age." Paulson also penned an op-ed in the New York Times last weekend warning of a "climate bubble" that poses risks to the economy just like the credit bubble did in 2008.

Steyer, a billionaire who has pledged to spend millions electing pro-climate-action politicians, said he hopes that the report will help "change the spreadsheet for American business" as companies calculate risks and opportunities. The business community, he said, should "get to a point where calculation of the value of a company includes how they are responding to this problem."

Tuesday, May 27, 2014 - Currently Trending Here

Currently Trending Here
by Sinclair Noe

DOW + 69 = 16,675
SPX + 11 = 1911
NAS + 51 = 4237
10 YR YLD - .02 = 2.52%
OIL - .24 – 104.11
GOLD – 29.20 = 1264.30
SILV - .40 = 19.14

The S&P 500 Index closed at another record high. The Dow Industrial Average is just a little below the May 13 record of 16,715. The Russell 2000 index of small and mid-caps confirmed the uptrend. The Russell had been lagging and there was a concern that small caps might drag the blue chips lower. While the Russell is still down about 2% year to date, on Friday it moved above its 200 day moving average.

Any time the market is trending, it makes sense to look for divergences, or any indicator that might signal a change in trend, but the most important thing to watch is still the trend itself; in other words the market scorecard is measured in price. And right now the trend is up.

Let’s start with some economic news. The S&P/Case-Shiller Home Price Indices continued to show gains in prices for existing home sales; the 10-city composite was up 0.8% and the 20-city composite was up 0.9% month over month; and respective year over year gains of 12.6% and 12.4%. Nineteen of the 20 cities showed positive returns in March; New York was the only city to decline. As of March 2014, average home prices across the United States are back to their mid-2004 levels. Measured from the 2006 peaks, home prices are down 19%.

Mortgage rates started rising in May 2013 as the market speculated about when the Federal Reserve would start pulling back on its large scale asset purchase program, at the same time inventories of new and existing homes dropped, pushing prices higher and affordability was pushed down. One positive for home sales is that mortgage rates have recently dropped with the average 30 year fixed at 4.14% and the average 15 year fixed mortgage at 3.25% the lowest levels since last October.

The Conference Board said its consumer-confidence index rose to 83 in May from a downwardly revised 81.7 in April. The survey shows 20% of respondents expect their incomes will improve in the next 6 months; that doesn’t sound like much but it’s the highest reading since 2007. Other key elements of the survey: A net 18.2% said jobs were hard to get vs. being plentiful, compared with 19.8% in April and 26.5% in May 2013. Those who plan to buy a home within six months fell to 4.9% in May, the lowest since July 2012; that compares with a percentage of 5.6% in April. Those who plan to buy major appliances within six months fell to 45.1%, the lowest since September 2011.

Durable goods orders increased 0.8% in April. Durable goods are products designed to last 3 years or longer; so this is a broad category that includes everything from toasters to cars to nuclear submarines. In April, the Navy inked a $17.6 billion contract for 10 nuclear-powered attack submarines; and while that will be money that will circulate through the economy over several years, it skewed the report. Non-defense capital goods orders fell 1.2%. Business are placing fewer orders while working through a stockpile of goods amassed in the second half of 2013. Last month, durable goods inventories rose 0.1% after increasing 0.2% in March.

The Memorial Day holiday signals the unofficial start of summer and the summer driving season, and that usually equates to higher gasoline prices at the pump. Usually, but not always. According to the Energy Information Administration, prices at the pump are going to fall from today’s levels. This forecast is based on increased crude-oil production and declining global demand.  Rising oil production has boosted US crude-oil inventories to some 398 million barrels. That’s the highest level since way back in 1931. Demand is down, in large part because of better fuel efficiency forced by government MPG mandates. Demand has been declining since 2007. In many areas, gas prices are the lowest since 2011. Each penny decline in gasoline puts $1 billion back into people’s pockets.

Speaking in Portugal today, European Central Bank President Mario Draghi warned that prices in the countries in the euro zone's stressed periphery were falling too sharply, due to the combination of belt-tightening and a high exchange rate. He also cited evidence of a debt trap in stressed countries: the cost of finance for many companies has risen since the crisis, while falling prices mean they can't generate the profits to service their debts. Draghi said that the share of viable small businesses that can't get a loan is only around 1% in Germany or Austria, but around 25% in Spain and 33% in Portugal; Draghi called this imbalance a “credit gap” and blames it for up to a third of the economic slack in the crisis economies and acting as a brake on economic recovery. And so Draghi says the ECB will take action June 5th to ward off deflation and support economic recovery; what precisely will be done is still a matter of speculation.

It is widely anticipated the ECB will cut interest rates combined with an attempt to boost credit to small and medium sized businesses by providing long-term funding to banks provided they deploy that capital to expand business credit. The main lending rate will likely be cut from 0.25% to 0.1% or so. Meanwhile, the deposit rate paid to banks on overnight deposits will likely be cut from zero to a negative 0.1% or so, in effect charging the banks for funds they leave with the central bank.

The Federal Trade Commission has issued a report on the data brokerage industry. The nine data brokers examined in the FTC report were Acxiom, CoreLogic, Datalogix, eBureau, ID Analytics, Intelius, PeekYou, Rapleaf and Recorded Future. Data brokers analyze data collected about consumers to make automated assumptions about them. Consumers are placed in data-driven social and demographic groups for marketing purposes. The commission says that the same data that identifies a motorcycle enthusiast could both get him a discount on a biking magazine and make it easier to charge him more for car insurance. Another way to look at this is that the consumer is not the customer, rather the consumer is the product.

And yes, the data brokers know whether you drive a motorcycle, or smoke cigarettes, or if you are overweight, and how many bathrooms you have in your home, and if you travel or just like to read magazines about travel; that’s all in addition to the basics like name, address, social security number, age, and the bluntly termed “ability to afford products”.

According to the FTC, the firms have done a great job of finding data to crunch. One firm has information on 1.4 billion consumer transactions; another one adds 3 billion new records to its databases each month. While the report doesn’t address credit scores, the framework of the debate is much the same. What really worries the FTC is the impossibly opaque way the data is collected and managed. The data brokers gather their data from other data brokers rather than directly from an original source.

This is where the commission thinks the government should get involved. It suggests a law that would mandate the creation of a centralized portal where data brokers explain themselves, disclose their sources, and give people the opportunity to opt out; or for more sensitive data, require consumers to opt in before data could be sold. The commission hints it might call for some version of the idea that people have a right to have some things be forgotten, but they don’t actually recommend that data brokers cull their data, even when that data may be very old and inaccurate. And there is talk, but nothing concrete, about giving consumers access to their own data, and the ability to call for some of that data to be corrected or deleted.

President Obama today outlined a plan to withdraw all but 9,800 American troops from Afghanistan by the end of the year and withdraw the rest by the end of 2016. Under his plan, 9,800 US troops would remain behind into next year. By the end of 2015, that number would be reduced by roughly half. By the end of 2016, the U.S. presence would be cut to a normal embassy presence. The United States now has about 32,000 troops in Afghanistan.

At some point in the next week, President Obama is expected to announce Environmental Protection Agency mandated cuts intended to reduce carbon pollution by regulating carbon dioxide emissions from about 600 existing coal fired power plants. Obama could not get Congress to take action to address climate change during his first term, so he changed his tack and is using his executive authority under the 1970 Clean Air Act to issue the EPA regulation.

As currently drafted, the rule would cut greenhouse-gas emissions from the utility sector by 25%, the individuals said, but the baseline for that reduction has not been finalized. The EPA plan resembles proposals made by the Natural Resources Defense Council, which would allow states and companies to employ a variety of measures, including new renewable-energy and energy efficiency projects “outside the fence,” or away from the power plant site, to meet their carbon- reduction target.

Usually when the EPA regulates pollutants under the Clean Air Act, the agency sets an emission limit for each facility. By contrast, under a “mass-based system,” which the EPA is poised to adopt, states would have to meet an overall target for greenhouse-gas emissions and ensure that power plants either make those reductions at their facilities or finance efforts to achieve them in other ways, such as conservation or “green” generation or possibly through some variation of the cap and trade system.

Tuesday, March 25, 2014 - Want to Buy a Cookie?

Want to Buy a Cookie?

by Sinclair Noe

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.

Tuesday, February 25, 2014 - Dumb Luck

Dumb Luck

By Sinclair Noe

DOW – 27 = 16,179
SPX – 2 = 1845
NAS – 5 = 4287
10 YR YLD  - .05 = 2.70%
OIL - .76 = 102.06
GOLD + 5.00 = 1342.60
SILV - .07 = 21.99

Just a couple of economic reports to start. The S&P/Case-Shilller home Price Indices for December were posted today. Nationally home prices closed the year of 2013 up 11.3%, while posting a fourth quarter decline of 0.3%. After 26 months of consecutive gains, Phoenix posted -0.3% for the month of December, its largest decline since March 2011. Phoenix once led the recovery from the bottom in 2012, but Las Vegas, Los Angeles and San Francisco were the top three performing cities of 2013 with gains of over 20%.

Another sign that the housing market slowed down during the fourth quarter: Fannie Mae, the nation’s largest mortgage guarantor, saw demand for foreclosed properties dip at the end of the year. Fannie reported last week an $84 billion annual profit for 2013 on the backs of large home-price gains and a series of one-time legal and accounting benefits. The report also showed that its inventory of foreclosed homes increased for the second straight quarter as it begins to take back more properties in Florida and other states where foreclosures have been tied up in courts. The report showed that the prices Fannie received on those properties, as a share of the underlying mortgage balances, declined slightly from the prior quarter for the first time in 2½ years.

The Conference Board’s Consumer Confidence Index decreased to 78.1 in February from a revised 79.4 in January.  Fewer Americans projected business conditions would improve over the next 6 months, dropping from 80.8 to 75.7 fueling anxiety over the outlook for jobs and income that risks restraining consumer spending. The most important thing that would get consumers feeling better about the outlook is if the labor market improves more substantially. Apparently people who work feel better about the economy and are more likely to spend money than people who don’t have jobs. Who knew?

Even if you have income from work, you might still be holding tight to your coin purse. The Labor Department reports that payrolls in December and January showed the smallest back to back gains in 3 years.

White House economist Jason Furman said today the economy could be in a period of slower potential growth, a development that puts greater urgency on longer-run investments. Gains in worker productivity have eased since the recession began compared with the technology-driven improvement of the prior two decades. Without new policies, the country could face slow productivity growth similar to that recorded in the 1970s and 80s.

Weaker productivity gains during that period was offset partially by a rapidly expanding workforce due to the baby boom and more women taking jobs. Over the next two decades, demographic shifts instead will present an impediment to growth. The workforce is projected to expand at less than a third of the pace it did between 1974 and 1992 because the average American is getting older.

Furman laid out six longer-run initiatives the White House will be pushing on the economic front in the forthcoming 2015 budget:

1. The so-called “Opportunity, Growth and Security” proposal would make investments in research, job training and education beyond what’s possible under the budget framework Congress agreed to late last year. Closing tax loopholes and trimming other spending would pay for the new investments.

2. Expand infrastructure investments, ranging from roads to wireless broadband networks. The spending would create jobs in the short run, with the longer-run effect of improving business productivity.

3. Overhaul the business tax system with the long-stated goal of lowering the top rate to 28% while removing loopholes. Furman says, “By developing a system that is more neutral, corporate decision makers can act for business reasons, not tax reasons, which would create an environment in which capital will flow to the most efficient purposes.”

4. Provide universal preschool education. The investment will improve students’ performance as they advance through the education system and ultimately provide employers with higher skill workers.

5. Change the immigration system to make it easier for workers to obtain green cards and clear the way for foreign students to stay in the U.S. once they earn degrees. Immigrants will not simply expand the labor force, but engage in innovative or entrepreneurial activity that further elevates the economy’s potential.

And idea number 6:  Complete free-trade agreements with countries in Asia and Europe. Those deals would make the U.S. more attractive for foreign investment and open markets for domestically produced goods abroad.

Mt. Gox has disappeared. I know, we’re all shocked, shocked I tell you. There is nothing but a blank page on the Mt. Gox website. There was a brief notation on the website saying there might be something happening, maybe an acquisition, or something, then that disappeared and the website was blank again.

Mt. Gox, once the world's biggest bitcoin exchange, abruptly stopped trading today. Several other digital currency exchanges, including Bitstamp and BTC-E, issued statements attempting to reassure investors of both bitcoin's viability and their own security protocols.

Bitcoin investors deposit their holdings in digital wallets at specific exchanges, so the Mt. Gox shutdown is similar to a bank closing its doors - people cannot retrieve their funds. Released in 2009 by an anonymous creator known as Satoshi Nakamoto, the Bitcoin program runs on the computers of anyone who joins in, and it is set to release only 21 million coins in regular increments. The coins can be moved between digital wallets using secret passwords.

While Bitcoin fans have said the technology could provide a revolutionary new way of moving money around the world, skeptics have viewed it either a Ponzi Scheme or an investment subject to potential fraud or just a bad idea. Bitcoin was supposed to be a new, subversive alternative to a financial system that had been exposed as fragile, dangerous and too big to fail in the financial crisis of 2008. If you’re confused by what that is supposed to be, don’t worry, you are still sane; the bitcoin world is the crazy one in this story.

Tokyo-based Mt. Gox began as a venue for trading cards; the name stands for Magic the Gathering Online Exchange. No, I did  not make that up. Mt. Gox had surged to the top of the bitcoin world, but critics, from rival exchanges to burned investors, said the digital marketplace operator had long been lax over its security. Mt. Gox halted withdrawals earlier this month after it said it detected "unusual activity on its bitcoin wallets and performed investigations during the past weeks." The move pushed bitcoin prices down to their lowest level in nearly two months.

This morning, Mt. Gox CEO Mark Karpeles told Reuters in an email: "We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can't tell much more for now as this also involves other parties." He did not give any other details.

A document circulating on the Internet purporting to be a crisis plan for Mt. Gox, said more than 744,000 bitcoins were "missing due to malleability-related theft", and noted Mt. Gox had $174 million in liabilities against $32.75 million in assets. It was not possible to verify the document or the exchange's financial situation. If accurate, that would mean approximately 6 percent of the 12.4 million bitcoins minted would be considered missing.

But at the same time that the news about Mt. Gox was emerging, a New York firm announced plans to create an exchange that could draw the world’s largest banks into the virtual currency market for the first time. It could still happen, or not. This might be the death knell for bitcoin, or not. Imagine the lunacy of a private entity, printing money out of thin air, thinking that people would accept it as real currency, despite having no inherent value, based on nothing more than the beneficence of the issuer; subject to meltdown and freeze up, where massive amounts of value just disappear in the blink of an eye. The whole idea is the height of lunacy; unless, you’re the Federal Reserve of course.

There is more to it of course. A sovereign government that issues its own “nonconvertible” currency cannot become insolvent in terms of its own currency. It cannot be forced into involuntary default on its obligations denominated in its own currency. It can “afford” to buy anything for sale that is priced in its own currency. It might be able to buy things for sale in foreign currency by offering up its own currency in exchange, but that is not certain. If, instead, it promises to convert its currency at a fixed price to something else (gold, foreign currency) then it might not be able to keep that promise. Insolvency and involuntary default become possible. This seems to be where bitcoin failed; the convertibility part, or at least the part where you could actually buy something with bitcoin.

Speaking of the Fed and failure. Last week we finally saw the transcripts from the Fed from back in the crisis year of 2008. Now, Tim Geithner has a book coming out, titled “Stress Test”.  Geithner has a number of attention-grabbing takeaways. Among them: “We saved the economy from a failing financial system, though we lost the country doing it,” he writes in the book, due out May 13. Geithner led the Federal Reserve Bank of New York at the onset of the meltdown. He served as the Obama administration’s top economic official from January 2009 until January 2013.

On the book’s website, Geithner says: “We made mistakes, it was messy, and the damage was devastating and long-lasting. And yet, at the moments of most extreme peril, the United States was able to design and execute a remarkably effective strategy.” Actually, what we’ve been learning from the transcripts of the Fed in 2008, is that the remarkably effective strategy was more like a drunkard managing to survive a stroll through a landmine; i.e., persistence and dumb luck.

Wednesday, May 29, 2013 - Behind the Curtain

Behind the Curtain

by Sinclair Noe

DOW – 106 = 15,302
SPX – 11 = 1648
NAS – 21 = 3467
10 YR YLD - .01 = 2.12%
OIL – 2.12 = 92.89
GOLD + 11.30 = 1393.70
SILV + .19 = 22.56

Earlier today, I listened to one of the talking heads on CNBC trying to explain why the markets were up yesterday and down today. It was very entertaining.

When mortgage interest rates fall, the probability that an individual will re-finance a mortgage increases. When mortgage interest rates increase, the likelihood of a re-financing of the mortgage goes down. Therefore, in a rising rate environment, the average life of a pool of mortgages increases. For example, if a bond fund held Mortgage Backed Securities (MBS) with an assumed 10-year average life, and interest rates rose, the average life of the MBS portfolio would be extended for a few years. The last thing that a bond manager wants in a rising rate environment is to have the average maturity of the portfolio extended, as this adds to the losses. As a result, MBS players hedge their portfolios against “duration risk” by shorting Treasuries. The higher rates go, and the speed that rates are increasing, forces more and more selling.

Is there a level of support that we can watch? There is, and it's probably 2.2% to 2.5% on the 10-year bond that will bring out an avalanche of selling. The 2.2% tipping point is very close to where the T-bond sits today. Others say we have a huge concentration of bonds that would go out of the money around 2.5% - again, very close to where we are.

The more the price on the 10-year drops, and the higher the yield climbs, the more selling is required. Is the Big Sell-off going to happen? That depends on the performance of the bond market, and on how the dealer community is positioning themselves against event risk.

There are risks: generally speaking, and in regards to ‘taper’ of QE, soon as the Fed pulls back, we will see a spike/knee-jerk higher in rates (which we are seeing in ‘anticipation’ of this happening). Remember, all the movement we've seen in bonds in the past two weeks is just from jawboning about the possibility of taper.

Bernanke has recently said that the Fed is in the process of  changing the monthly QE purchases. Here's a big question to be considered – does taper of QE indicate the economy is better? That would be the reason to raise rates; the economy is improving – raise rates; everything else is artificial, or just an attempt to tamp down an impending asset bubble.

Yesterday, we heard that consumer confidence was up, a big jump in May to 76.2. It sounds like everybody believes the economy is improving. And while the confidence numbers are up, they're not out of the gutter. The average consumer confidence number during a recession is about 79, and even with our recent boost, we're still lagging below that low bar. The May data shows the highest measure of consumer confidence since February 2008. That was a time in which a housing crash was already well underway, and only a month before before Bear Stearns collapsed and confirmed that the country was in a financial crisis.

Yesterday, we also had the S&P/Case-Shiller House Price Index posting a 10.9% increase year over year in March. Well, that certainly sounds like things are improving. Except, in nominal terms, the Case-Shiller National index (SA) is back to the third quarter of 2003 levels. Inflation adjusted, prices are back to the second quarter of 2000. The biggest price gains were noted in Phoenix, Las Vegas, and San Francisco; all areas that were smashed by the housing crash. So, in some ways, the great rebound in housing is just another stage in the foreclosure crisis. And that is a crisis that is not yet finished.

Last year $192 billion-dollars was lost as a result of foreclosures.  On average per household, this number equates to about $1,700 of loss in 2012. The foreclosure crisis is still ongoing despite the fact that foreclosure volumes are on the decline. Why are the number of foreclosures on the decline? Last month, three major banks, including Citigroup, JPMorgan Chase, and Wells Fargo, halted all their sales of homes in foreclosure; this also reduced the supply of homes on the market. The apparent problem is that the banks still weren't following the rules for foreclosures, in violation of the national mortgage settlement. The reduction in housing supply, then, is largely artificial.

There is one thing that housing prices do accomplish, however: the so-called "wealth effect." Along with a booming stock prices, higher property values make people feel rich. This then encourages them to go out and spend money. Here's the problem with the wealth effect, you have to realize your gains. In other words, you would have to sell your stocks and your real estate and put the profit in your wallet, otherwise the wealth effect is so much smoke and mirrors, and you're spending money you don't really have. Which is one thing that Americans have apparently mastered.

Half of working Americans now earn less than they did 10 years ago, adjusted for inflation. Middle class incomes have barely budged in 44 years. Around 12 million people are unemployed, about 40% of whom have been out of work for six months or more. Remember the Summer of 2012? All the politicians were talking about jobs, jobs, jobs. Now, they can't even spell it. Poverty is on the rise, and it would be in your face and on the sidewalks except that now we have food stamps, so we don't have to look at the lines of people waiting outside soup kitchens like in the Great Depression. Still, 15% of the country depends on foods stamps.

For people who do have jobs, the quality of the jobs continues to decline, and if you were thinking about retiring, well, you probably are having to re-think your personal exit strategy. According to a recent Gallup survey, 37% of nonretired Americans claim that they will quit working after age 65. A decade ago, that percentage was 22, and in 1995, only 14% guessed they'd be retiring after 65. Is it possible that work is now more fulfilling for so many more people? Were so many employers discriminating against willing 65-year-olds a couple decades ago? Not likely. People are working longer to keep food on the table and a roof over their head.

Besides not having saved enough, today's would-be retiring baby boomers have more debt. The Census Bureau reports that from 2000-2011, the largest percentage increases in median household debt were in the 55-64 age bracket (up 64%, to $70,000) and the 65-and-over bracket (more than doubling, to $26,000). And while many were taking on more debt, median net worth (assets minus liabilities) for all age groups fell. In 2000, median net worth was $81,821. In 2005, median net worth had jumped to $106,585, before dropping to $68,828 in 2011 (in 2011 constant dollars).

In 1985 taxable money market funds were yielding 7.71%. A one-year CD was yielding 8.53%. Nowadays, CD's and money market funds offer rates that start with a decimal point. The Fed has been forcing people into the equity market and if you just don't have the stomach for stocks, you've been forced into the bond market.

The Fed's bond holdings alone have almost tripled since March 2008. And since last fall, the Fed has purchased mortgaged-backed securities and bonds by $85 billion each month. As a result, Fed's holdings in securities will amount to $4 trillion by the year-end of 2013. At the same time, the balance sheets of the big four central banks (the Fed, European Central Bank, Bank of Japan, and People's Bank of China) have more than quadrupled from $3 trillion to more than $13 trillion during the past half a decade.

As rounds of QE have pushed nominal interest rates below the rate of inflation in the United States, it was hoped that negative "real" interest rates would encourage lending and borrowing, and thus to stimulate economic activity. But this is growth by addiction, not growth by fundamentals.

Ben Bernanke knows this economy is not strong. This is no time to back away from trying to prop up the economy. Or as Bernanke said: “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”

Is the economy in better shape than a couple of years ago? Yes, but it's a little early to break into a chorus of “Happy Days are Here Again”. While economic growth has picked up, it remains anemic at 2.2 percent real GDP growth on average since the end of the recession in mid-2009. As long as the US is growing well below potential; about 2.2 percent since the Great Recession/depression, inflation risks remain low and disinflation is the new normal, which serves as a still another reason to keep interest rates low. A lot of people would like to press the idea that the economy is improving; Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems.

“The loss of output and earnings associated with high unemployment reduces revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.” At least that's what Bernanke claimed in his recent testimony to Congress. Maybe Winston Churchill said It better: “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.”

A mythical recovery gives cover to a lot of irresponsible people hoping that Americans won't look behind the curtain.