Tuesday, August 19, 2014 - It’s Just a Matter of Time

It’s Just a Matter of Time
by Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again. 

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

What Could Go Wrong?
by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, April 16, 2014 - What is Really Plausible

What is Really Plausible

by Sinclair Noe

DOW + 162 = 16,424
SPX + 19 = 1862
NAS + 52 = 4086
10 YR YLD + .01 = 2.63%
OIL + .05 = 103.81
GOLD - .20 = 1303.20
SILV + .07 = 19.73

Let’s start with some earnings news and then we’ll move over to economic data.

Google posted $3.4 billion in net income, or $5.04 per share, in the three months ended March 31, compared to $3.3 billion, or $4.97 per share, in the year-ago period. Revenue rose 19% to $15.4 billion, but analysts had estimated $15.5 billion, and the shares were getting clobbered in late trades.

IBM reported its lowest quarterly revenue in five years; IBM reported revenue of $21.7 billion for the quarter, but that marks the eighth consecutive decline in quarterly revenue. The company has been restructuring its business by cutting jobs and selling its low-end server business. This is not what you would call a growth model.

Also, from the faulty business model file: Bank of America posted a $276 million loss for the most recent quarter. The financial results included a pre-tax expense of $6 billion, or approximately 40 cents a share after tax, to cover litigation costs as the bank moved to resolve mortgage-related litigation fallout from the financial crisis that began in 2007 and other issues; far worse than the $3.7 billion investors had braced for. The bank today agreed to a $584 million settlement of litigation over nine residential mortgage-backed securitizations insured by the Financial Guaranty Insurance Company. The FGIC said the securitizations were sponsored by Countrywide, which Bank of America bought in 2008.

Since the 2008-2009 financial crisis, Bank of America has logged some $50 billion of expenses for settlements of lawsuits and related legal costs, before taxes. Without those charges, its income before taxes would have been about three times higher. When does it end? How do you factor this when you try to value shares of a company? The simple answers: it ain’t over yet, and don’t even try.

In economic news: China reported that its economy grew at its slowest pace in 18 months at the start of 2014, but the increase was better than expected and showed some improvement in March.

From the Census Bureau: privately owned housing starts in March increased 2.8% from February to a seasonally adjusted annual rate of 946,000; single family housing starts increased 6% from the month before at an annual rate of 635,000. Building permits authorized were down 2.4% from February at a seasonally adjusted annual rate of 990,000, but it’s still 11.2% higher than March of last year.

The Federal Reserve reports industrial production increased 0.7% in March, following a 1.2% advance in February; for the first quarter industrial production moved up at a 4.4% pace. The increase in industrial production, which beat economists' expectations for a 0.5% gain, reflected in part a 0.5% rise in manufacturing output. There were also hefty increases in production at mines and utilities.

The Federal Reserve has just released its April Beige Book, a collection of anecdotes on economic conditions from business contacts across each of the 12 Fed districts. Economic growth increased and consumer spending rose, at least for people who weren’t completely snowed in. The Fed seemed quite fascinated with the weather, mentioning it more than 100 times; it’s like they had never seen snow before, and they seemed amazed that it makes actual work difficult for some people.  

Transportation, manufacturing, financial services, and auto sales all improved, though the reports on residential housing markets were “varied.” The Beige Book also talks of delays to crop plantings and shipments of commodities, as well as a pig virus that hurt hog farming. Labor market conditions continued to slowly improve with minimal wage pressure, and prices were generally stable or slightly higher.

Fed Chair Janet Yellen delivered a speech to the Economic Club in New York. She said the economy is improving, it will continue to improve, and by 2016 it will be normal, and then it will all be good. Yellen said: “I find this baseline outlook quite plausible.”

Yellen laid out 3 questions that will guide the Fed policymakers: Is there still significant “slack” in the labor market? Is inflation moving back toward 2 percent? What factors may push the recovery off track?

Is there still significant “slack” in the labor market? Why yes, yes there is. The unemployment rate is at 6.7% and Yellen would prefer to see it closer to 5.2% or 5.6% and she thinks it will take about 2 more years to get there. Further slack exists in the share of the workforce working part time and the long term unemployed and the low level of participation in the workforce. Toss in almost no wage pressure.

Is inflation moving back toward 2 percent? Yellen said inflation significantly persisting below 2% was more likely than inflation moving substantially above 2%. At the moment, the Fed’s favorite measure of inflation is less than 1%, well below the Fed’s annual inflation target of 2%.Inflation is likely to gradually move back toward the central bank’s target. Yellen said that to some extent, the low rate of inflation seems to be due to factors that are likely to be temporary, including lower consumer energy prices and a drop in import prices.

What factors may push the recovery off track?  Yellen says there can be a lot of ‘twists and turns’ in the economy” and the central bank has no “fixed idea” about what will come to pass. The Fed will try to set the course and Yellen said the central bank’s new forward guidance can serve as an “automatic stabilizer” that helps investors from overreacting to “twists and turns” the economy may take.

She cited the ongoing fiscal drag on the economy. This is a recurring theme; we heard Bernanke talking about this for a long time. Allow me to translate from Fedspeak to plain language. The Federal Reserve is responsible for monetary policy; Congress handles fiscal policy. So fiscal drag means that the policies laid out by Congress have hurt the economy. The Fed has tried to stimulate the economy, much like stepping on the accelerator while the Congress has been applying the brakes. That’s a bit simplistic because there are other factors at work. The Fed is stepping on the gas, the Congress is stepping on the brakes, and we’ve got rotten, ill-behaved bratty children in the back seat, reaching over and grabbing the steering wheel and threatening to drive into a brick wall; in this example, the bratty kids in the back seat are the banksters.

Just a little reminder of a story from the Summer of 2013; when we learned that Goldman Sachs was in the aluminum business. Goldman had 27 industrial warehouses in the Detroit area, where they stored aluminum. Goldman also had an interest in the financial markets for aluminum; they bet on price movement in the commodity; and they exploited pricing regulations set up by an overseas commodities exchange, which essentially allowed them to keep aluminum in storage longer than allowed, which keeps it off the market and out of production, which jacks up prices, based upon simple supply-demand, and then they bet on those higher prices. They literally had trucks moving aluminum from one warehouse to another, all around Detroit, but they wouldn’t ship it out for production. The move cost consumers more than $5 billion over the last 3 years.

The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets. The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. Federal regulators were also looking at JPMorgan and 3 other banks for rigging electricity prices.

Using special exemptions granted by the Federal Reserve and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers. After hearing of all the abuses by the banks, some people thought it might be good to rethink these policies. And about 9 months have passed, and finally 2 senators, Sherrod Brown and Elizabeth Warren, have sent a letter to the Fed, suggesting that "As a general matter, [big banks] should be prohibited from owning physical assets like warehouses, pipelines, and tankers."

Aluminum prices have continued to rise not necessarily because the commodity has become more valuable or scarce, but simply because the wait times for physical delivery have steadily grown longer. In some cases, the wait has lasted more than a year. Meanwhile, commodity traders have come up with a unique solution to banks hold physical commodities in warehouses to manipulate prices. The London Metals Exchange will give traders the ability to hedge aluminum prices, as the commodity continues to rise due to lengthy delivery times that have thrown a wrench in a number of supply chains.

Here are a few facts for your consideration: roughly one-third of everything we buy goes to interest; the interest goes to private banks; at the height of the financial crisis over 40% of US corporate profits went to the financial industry, up from 7% in 1980. The simple reality is that I we could just get those crazy banksters under control, we would have at minimum a couple of trillion extra dollars floating through the economy, and we wouldn’t have to worry (as much)  about the Fed and Congress and monetary policy versus fiscal drag, and we would all be talking about the phenomenal economic recovery. And that is not only plausible, but that’s a fact.

Tuesday, April 16, 2013 - Love That Dirty Water

Love That Dirty Water

by Sinclair Noe

DOW + 157 = 14,756
SPX + 22 = 1574
NAS + 48 = 3264
10 YR YLD + .02 = 1.72%
OIL + .20 = 89.90
GOLD + 16.70 = 1370.30
SILV + .65 = 23.44

If home is where the heart is, then Boston is everybody's hometown today. No significant developments to report. The death toll stands at 3, with 176 people reported as injured, some in very critical condition. Officials now say it was just two bombs; yesterday, there was speculation there were more. There is no indication that the bombing was part of a broader plot. We still don't know if it was one evil lunatic or a group of evil lunatics. We don't know if it was done by someone from this country or elsewhere. There have been no arrests, and it is a very intensive ongoing investigation. We should not speculate on some things. What we do know is that people responded by running toward the blast to help the victims. We do know that the medical personnel and others responded heroically. And we do know that the good, decent, and heroic people outnumber the evil lunatics; always have, always will.

Total housing starts in March were up 46.7% from the March 2012 pace, although some of that increase was due to a surge in multi-family starts in March. Single family starts were up 28.7%. Even with this significant increase, housing starts are still very low.

The consumer price index decreased 0.2% in March, led by lower energy and apparel costs. Energy prices decreased 2.6% in March, retracing half of the 5.4% rise in February. Gasoline prices fell 4.4% in the month. Electricity prices also declined. The only big gain came in prices for used cars and trucks.

In the past year, the CPI has risen 1.5%. So,today's report may actually add to concerns about deflationary pressure; at the very least, it leaves plenty of room for the Federal Reserve to continue QE.

Industrial production rose a seasonally adjusted 0.4% in March, and February’s growth was revised higher to 1.1% from the initially reported 0.8% advance. The March gain wasn’t necessarily a great sign for the economy; utilities output rose due to unusually cold weather, and manufacturing and mining output actually decreased. Still, the annualized 5% gain in output during the first quarter was the best since the first quarter of 2012, and came as consumer goods output shot up 6.2%, the best quarterly gain since the end of 1999. The auto industry was a major factor in the first quarter numbers. Strong demand for new cars pushed automotive product output up 2.6% higher in March and 13.2% for the quarter.

Coca-Cola reported first-quarter results above Wall Street's forecasts. Coke also said it struck a deal to start refranchising its business in the US, which will lower costs.

WW Grainger, which sells power tools and other industrial equipment, said its first-quarter net income climbed 13 percent.

Intel reported a widely expected drop in first-quarter earnings on Tuesday, though the final results were in line with diminished expectations. Intel reported net income of $2 billion, or 40 cents per share, compared with net income of $2.7 billion a year ago.

US Bancorp reported first-quarter earnings that fell short of analysts' expectations. The Minneapolis bank's net income rose 7 percent to $1.43 billion as it set aside less cash to cover soured loans. Goldman Sachs reported first-quarter profit of $2.2 billion, or $4.29 a share, driven by strength in its investment banking business as well as its investing and lending unit.

European lawmakers have voted to cap banker bonuses at the region’s largest institutions, as part of a major set of reforms designed to curb the financial industry’s risky behavior.

The legislation had faced major opposition from Britain, home to Europe’s largest financial center, but it was eventually outvoted by other European Union countries that wanted to rein in the excesses. It's not like the bankers will starve. Compensation limits will restrict bonus payments to one year’s base salary, though that figure can be doubled if a majority of shareholders approve. The legislation will apply to all banks active in Europe, as well as the international divisions of European firms like Barclays and UBS.

Meanwhile, Italian officials broadened their investigation into whether the Japanese investment bank Nomura helped hide losses at the troubled lender Monte dei Paschi di Siena, ordering the police to seize assets worth $2.35 billion and naming a former top Nomura executive as a suspect.

The unusual move to seize such a large sum, and go after prominent bankers, underlined the importance of the case in Italy and the euro zone, where people are still a little nervous about banks, following that little episode in Cyprus. Monte dei Pashci is the oldest bank in the world and the third largest in Italy, and it apparently has to do with some transaction that left the bank in need of a bailout for more than $5 billion by the Italian government.

For the past few years I've talked with you about the foreclosure frauds perpetrated by the banksters. Lots of things went wrong, including: fake documents, forged documents, robo-signing, illegal foreclosures, foreclosures on military families while they served overseas, foreclosures on homes with no mortgages, foreclosures on people who paid on time, foreclosures on people who were truly trying to work out some sort of reasonable deal, kickbacks, and in general a complete lack of accountability for these crimes and abuses.

But instead of giving voice to thousands upon thousands of victims of illegal foreclosures, instead of documenting the banks’ criminal practices, maybe what we all should have done is simply let the Office of Comptroller of the Currency – part of the Treasury Department — and the Federal Reserve construct their own settlement with the banks. Then, when it utterly unraveled — as it has over the past couple of months — the unimaginable fraud heaped upon homeowners would get more attention than ever before.

Indeed, despite OCC and the Fed’s best efforts to protect banks from harm, they’ve actually exposed them like never before. Two years ago,  the OCC, the primary regulator for the banks doing the lion’s share of the foreclosing, had to answer for their complete lack of oversight and enforcement. So they came up with a solution.

Instead of joining with other regulators and leveraging their authority to generate the biggest penalties possible, OCC would break off (the Federal Reserve would join them), and pursue its own settlement. Announcing that 14 mortgage servicers committed “violations of applicable state and federal law,” OCC would allow 4.2 million homeowners in foreclosure in 2009 and 2010 to petition for an “independent” review, and would mandate specific restitution for any foreclosure found to be improper. The real goal was to find as few irregularities as possible, to “prove” that the problem was contained to a few isolated cases of sloppy paperwork, and to undermine the other state and federal regulators’ investigations. It was the perfect plan, if your idea of a good plan is to downplay bank malfeasance and subvert justice.

This plan began to take water from the moment it began. The Independent Foreclosure Reviews weren’t independent: OCC and the Fed, in their infinite wisdom, decided to let the banks hire and pay for their own third-party reviewers. The predictable consequences included a windfall for the bank consultants hired for the job – they made a combined $2 billion off the reviews – and numerous cases of reviewers deliberately trying to make the banks look better, or even hiding evidence of bank malfeasance. The OCC faced a moment of truth: Power through with expensive and obviously flawed reviews, or pull the plug. They did the latter. Instead of completing the 500,000 reviews requested by individual borrowers, they would merely slot all 4.2 million, whether victims of foreclosure fraud or not, into several broad categories, and pay out a total of $3.6 billion. The regulators refused to release the methodology underlying that process, or any of the completed reviews from the third-party consultants.

This all spilled out in an ugly manner over the past week. The vast majority of aggrieved homeowners will get less than $300. The main stream media has picked up on the story. Politicians have picked up the story. The regulators are now stonewalling Congress. Where does this go from here? Hard to say, but the whole story has revealed a nasty mess that will be difficult to sweep under the rug.

Economic leaders gathering in Washington for the World Bank and International Monetary Fund  spring meetings this week. So, the IMF updated its economic forecast. The IMF now predicts global growth of about 3.3 percent this year and 4 percent in 2014. That is a reduction of 0.2 percentage point since its January estimate for 2013; it did not change its estimate for next year’s growth.

Still, the report underscored that financial conditions had improved markedly since last year, in no small part because of aggressive monetary easing undertaken by the Federal Reserve, the Bank of Japan and the European Central Bank. Recession continues to afflict Europe, and the world still struggles with high unemployment, but risks to the downside; in particular from the threat of a country’s leaving the euro zone and from fiscal policy uncertainty in the United States, have faded.

Kind of strange that they think things are getting better and they lower their growth estimates.

The fund lowered its estimate of United States growth this year to 1.9 percent, down 0.2 percentage point from its January forecast. But it said the United States was “in the lead” in seeing an acceleration of growth, in part because Washington policy makers were able to avoid the so-called fiscal cliff of tax increases and spending cuts at the turn of the year.

The I.M.F. also said that the United States had proved too aggressive in carrying out budget cuts, given its still-sluggish rates of growth and high unemployment levels. It said it anticipated that the across-the-board $85 billion in budget cuts known as sequestration would push down growth levels this year and beyond.

The report says: “The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate. But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of G.D.P. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s ‘forward guidance’ and by pent-up demand for housing and durables.”

There are some positive developments for the Inland Empire but there are still some big challenges. San Bernardino is still facing a scarcity of good news as the city's financial consultant presented a proposed budget to the City Council last night. One significant improvement is that - as long as a large chunk of the city's debts continue to be deferred - the city won't be in danger of not making payroll as it was in the weeks leading up to several pay days in 2012. The budget proposes to resume payments to the California Public Employees' Retirement System, but defers more than $16 million in other funds. The most positive developments might not have anything to do with repairing broken municipalities, but with a new wave of businesses washing into the Inland Empire.

An article in the LA Times this past weekend identified the Inland Empire as the fastest growing industrial region in the country and the most desirable industrial real estate market. Among the many merchants running large-scale operations now are such household names as Amazon.com, Kohl's, Skechers., Mattel, and Stater Bros. Markets.

They come for warehouses; really big warehouses; some are bigger than 30 football fields under one roof; really, really big warehouses where they can store, process and ship merchandise such as clothes, books and toys to ever more online shoppers and handle the rising flood of goods passing through the ports of Los Angeles and Long Beach.

The demand for these big buildings is so intense in San Bernardino and Riverside counties that developers are erecting more than 16 million square feet of warehouses on speculation, meaning they are gambling that buyers or renters will rush forward to claim the buildings by the time they are complete.

Although the Inland Empire was hard hit by the recession and earned a reputation for mortgage foreclosures, evictions and high unemployment rates during the downturn, the industrial property business has remained a bright spot. And it is now picking up speed.

Southern California has long been a vital hub for major retailers and manufacturers; the region features major seaports, and an enormous population base, but with Los Angeles and Orange counties essentially full, the Inland Empire with its wide-open spaces is now where the big new buildings are flying up.

Los Angeles County's industrial vacancy is 2.5%, the lowest in the country, and some of the priciest industrial property in the country is around LAX. Orange County is the second-tightest market in the U.S., with 3.5% vacancy. The two counties and the Inland Empire have a combined total of more than 1.65 billion square feet of industrial property, which is twice as big as the next largest market, Chicago.

Key to all this is logistics; the organization and movement of goods to accommodate business. The Inland Empire is close to the ports, which in turn means that the Inland Empire is close to the Pacific Rim. Once upon a time, a warehouse was where you stored things for weeks or months, such as toys and canned food that retailers would grab to restock their shelves. Sorting, organizing and moving the inventory was a constant challenge.

Tracking goods in the modern age of bar codes, scanners and computers is a comparative breeze. The location of every widget can be identified with pinpoint accuracy and fetched by robots that can lift and carry 3,000-pound loads with ease. Technology has allowed larger facilities with more sophisticated equipment to be able to deliver products very efficiently, enabling businesses to consolidate their logistical operations into bigger warehouses.

And it's not just the Inland Empire; the general wave of industrial revival has hit many core markets, including Chicago, Atlanta, the Inland Empire, New Jersey and others. The expansion of e-commerce has sparked the need for big-box distribution centers in major distribution hubs. More than one-third of 2012 build-to-suit requirements were e-commerce related. According to the US Census Bureau, e-commerce sales totaled $225 billion in 2012, more than double the amount in 2005. Strong demand for big-box quality space in major logistics markets has triggered an increase in both BTS and spec development. Last year, 58 million square feet of supply was added to the nation’s inventory and 57.7% of that was built to suit,

In total, developers currently have 57 million square feet of industrial space under construction. The Inland Empire leads all markets with 6.8 million, and Dallas comes in second with 5.8 million. New starts remain well below historical norms, which means new demand can quickly tighten the market. In fact, supported by strong new demand, the vacancy rate declined 30 basis points in the fourth quarter of 2012, the largest quarterly decline since 2006. So, with any luck, this is something that won't turn into a bubble. Knock on wood.

Earnings, Kitchen Sinks, Whining

By Sinclair Noe

DOW + 84 = 13,596
SPX + 8 = 1480
NAS + 18 = 3136
10 YR YLD +.05 = 1.88%
OIL + .94 = 95.18
GOLD + 7.10 = 1688.10
SILV +.24 = 31.83

The Dow Jones Transportation Average logged a record high today, ending the day up 37.44, or 0.66%, at 5,681.28. The transports average logged its best opening 15 days in January in more than a quarter century. The Dow Jones Industrial Average is still well off its October, 2007 all-time high of 14,164.53. So Dow Theory purists will have to be patient for a while yet. The Nasdaq still has a way to go. But Silicon Valley is back on top. Is it 2000 all over again?

The Best Performing Cities Index from the Milken Institute may have a familiar ring to it. The country's top metro area in 2012, based on jobs, pay and technology—is San Jose, Calif. It has been over a decade since the region ranked first on the index. Coming in second place on the index is Austin, Texas, another hub for tech innovation. The Milken Institute reported that for every job added to the tech sector, five outside jobs were created.

The number of Americans filing new claims for unemployment aid hit a five-year low last week and residential construction increased in December. Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000, the lowest level since January 2008. It was the largest weekly drop since February 2010 and ended four straight weeks of increases. The jobless-claims report suggests that we’re likely to see nonfarm payrolls expand at perhaps a better rate than we’ve seen in recent months.

A separate report from the Commerce Department showed housing starts jumped 12.1 percent last month to their highest level since June 2008. Permits for future home construction were also the highest in about 4-1/2 years. Digging into the housing report, 30 percent of all housing starts in 2012 were of multi-family apartments. That is the highest share in over 20 years. In December alone, multi-family starts jumped 23 percent month to month, seasonally adjusted, and are up nearly 166 percent from December of 2011. Compare that to single family gains of 8 percent month-to-month and 18.5 percent from a year ago. The housing starts number would indicate a shift in strategy. Developers are rushing to increase supply of multi-family apartments; this even as single-family rentals continue to gain market share. Continued uncertainty in the housing market, tighter mortgage underwriting and weaker consumer wealth has pushed ever more Americans to rent; the foreclosure crisis forced others. Still, the report indicates improving health in the housing sector. The labor and housing figures were really quite compelling and exceeded expectations rather handily in both cases.

Today, the American Bankers Association's held a economic conference to complain about tax increases and continued uncertainly among government policy makers; they say it will slow economic growth and job creation significantly early this year and threaten to tip the economy back into a recession. The tax hikes already put into place following this month's fiscal cliff deal in Congress will subtract 1.25 percentage points from gross domestic product growth this year, and additional government spending cuts--or continued uncertainty--would cause the economy to grow even slower than the tepid 2.0% pace. Those lackluster projections assume a relatively orderly resolution to the debt-ceiling debate in Congress.

It's earnings reporting season; still too early to declare the fourth quarter a success or a failure. And we've been sifting through some numbers. Extending the climb in corporate profits this year is expected to grow more challenging as labor costs rise with increased hiring. CEOs say they also face uncertainty over new health-care rules and taxes. Washington’s repetitive political confrontations threaten to further lengthen their odds. The debt-limit fight comes as the economy likely is growing at an annual rate of just 1.5 percent in the first quarter, although it will probably expand 2 percent during the year.

Despite the whining from the bankers, corporate profits are outstanding. Bloomberg reports US corporations’ after-tax profits have grown by 171 percent under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947. Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50 percent greater than during the late-1990s Internet boom, measured by the size of the economy. The S&P 500 index is up 80% over the past 4 years and is now at a 5 year high.

Corporations are holding more than $1.7 trillion in liquid assets; essentially, they are parked in cash reflecting uncertainty over future policies. They’re investing in capital projects only 80 percent of their available internal funds. Though that figure is up about one-third from late-2009, that ratio has been below 80 percent only once since the end of 1958. Companies have squeezed profits out of this horrible economy by making it even more horrible, laying off workers and slashing costs. 

No sector has complained more than the banks, which have been reporting profits this week, and no sector has been making more money than the biggest, most oppressed banksters. JPMorgan Chase made $21 billion last year; it would have been more except for the $6 billion in losses by the London Whale. Today, Citigroup reported it was hit by charges for layoffs and fines to the tune of $2.3 billion in the last quarter; they still managed to posted net income of $1.2 billion. More alarming, Michael Corbat, Citi’s new CEO, had the audacity to blame regulatory costs for the bank’s performance — as if it were operating under some especially onerous rules that others weren’t.

Even with these “special” and “one-time” circumstances stripped out, these banks continue to be black boxes. Investors’ only choice is whether to trust the junk they spew forth.

Bank of America really has something to whine about; the bank reported a widely expected 63 percent drop in fourth-quarter profit after making huge payments to settle legal claims over its mortgage business. The bank’s earnings, a slim $732 million, amounted to 3 cents a share. For the entire year, profit jumped to $4.2 billion. The bank’s recent legal settlements also weighed on its results. Bank of America had warned investors that it deducted $2.5 billion to settle with regulators over claims of foreclosure abuses. The bank last week also struck an $11 billion agreement to resolve claims that it sold troubled mortgages to the government-controlled housing finance giant, Fannie, which experienced deep losses from the loans. The bottom line is that, quarter after quarter, these banks turn in financial reports that are impenetrable and full of what analysts politely call “moving parts.” It’s nearly five years since the dark days of the financial crisis, yet it’s still not clear if these banks are digging out or deeper. Methinks they doth protest too much. Why, it's almost as if the banks are trying to hide something.

Consumer advocates have complained that mortgage lenders are getting off easy in a deal to settle charges that they wrongfully foreclosed on many homeowners. Now it turns out the deal is even sweeter for the banks than it appears: Taxpayers will subsidize them for the money they're ponying up. The Internal Revenue Service regards the lenders' compensation to homeowners as a cost incurred in the course of doing business. Result: It's fully tax-deductible.

Regulators reached agreement this week with Goldman Sachs and Morgan Stanley. Last week, the regulators settled with 10 other lenders: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, U.S. Bank and Aurora. The settlements will help eliminate huge potential liabilities for the banks. Under the deal, 12 mortgage lenders will pay more than $9 billion to compensate hundreds of thousands of people whose homes were seized improperly, a result of abuses such as "robo-signing." Companies can deduct those costs against federal taxes as long as they are compensating private individuals to remedy a wrong. By contrast, a fine or other financial penalty is not tax-deductible.

Elsewhere in the world;  International Monetary Fund chief Christine Lagarde says the threat of financial collapse in the global economy appears to have eased, but she warned that developed economies still need to follow through on financial reforms and debt reduction. LaGarde said:

"We stopped the collapse. We should avoid the relapse. And it's not time to relax." Lagarde said that big economic powers, including the United States and European countries, had taken important steps to shore up their financial systems but have a lot of work left to do. She warned that there are signs of a waning commitment to regulate the financial sector. She said that reforms have been delayed and diluted, and she worries that banks are pushing back against necessary reforms. Wonder where she got that idea?

On the United States, Lagarde said any cuts should be aimed at allowing time for an economic recovery to play out. In Europe, Lagarde said she sees a lot of progress on reform. She said the European Union has a lot of new tools to deal with financial crisis. "And yet, firewalls have not yet proven operational," she said. She added that the EU still has work to do on its banking union in order to prevent future problems. On Greece, which has seen the most acute collapse of all the EU countries and which many believed would have to leave the currency union, Lagarde said recent reforms appeared to have restored confidence.

"This time it's different," she said. I think I've heard that line before.