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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now that’s depressing.

Friday, March 07, 2014 - Jobs Report Friday and Aiming Higher

Jobs Report Friday and Aiming Higher

by Sinclair Noe

DOW + 30 = 16,452
SPX + 1 = 1878
NAS - 15 = 4336
10 YR YLD + .05 = 2.79%
OIL + 1.00 = 102.56
GOLD – 9.50 = 1341.90
SILV - .51 = 21.03

This is a jobs report Friday. Here’s what you need to know. The economy added 175,000 net new jobs in February; this topped estimates of 150,000. The unemployment rate moved higher to 6.7%, up from 6.6% in January. After two months of very bad jobs reports, we returned to just below average levels of 189,000 per month; not a great showing but not ugly. The December and January reports were revised higher by 25,000 jobs. So why did the unemployment rate go up?

The labor pool got bigger; more people were looking for work. The ranks of the short-term unemployed declined by 61,000 to 2.3 million, while the ranks of the  long-term unemployed jumped by 200,000 to 3.85 million, and the labor participation rate held steady at 63%, just above the generational low of 62.8% in December. That seems to be a discrepancy, but the unemployment rate is based on a separate survey of households from the one that tracks hiring by employers, and the household survey showed an increase of 264,000 in the labor force. The participation rate is still well below the range of 66% to 67% where it had been for the past 20 years or so.

The unemployment rate went up slightly because that 264,000 gain swamped an increase of 42,000 in the number of people who were employed in the survey, but was positive over all because it showed more people are looking for work. And in the age group of people we expect to be working, the 25 to 54 year olds, participation rate increased in February to 81.2% from 81.1%, and the 25 to 54 employment population ratio was unchanged at 76.5%. 

Last month 10.5 million people were unemployed; including 3.8 million who have been out of work for six months or more; while 5.5 million have moved to retirement, intentional or not; and 3 million are disabled and the number of people applying for Social Security disability benefits has spiked in recent years. Even though February saw more people returning to the labor force, the percent of the population working or looking for work remains near a 30-year low due to millions of dropouts during the recession. One of the consequences of long-term unemployment is the loss of job skills, or for younger workers, they never really develop job skills and may face a lifetime of lower wages.

Most of the jobs, 162,000 were in the private sector. State and local governments have been doing a bit of hiring, adding 19,000 jobs last month, while the federal government continues layoffs, cutting 6,000 jobs. Private sector payroll employment has now posted gains for 48 consecutive months and with businesses adding about 8.7 million jobs over that time, private sector payroll is almost back to the previous peak back in January 2008; just another 130,000 more to go; although that does not account for population growth. So, there’s a good chance private employment will be at a new high next month. And total employment will probably be at a new high before the end of summer.

State, local, and federal government had 32,000 fewer jobs than one year ago. This marks the 56th consecutive month, going back to July 2009, that government employment was down on a year-over-year basis, excluding the temporary jobs added for the 2010 census. If you count them, the string is 43 months, going back to August 2010. Still, by a wide margin, this is the longest string of government job cuts since the end of World War II. Governments now employ 15.9 percent of all Americans who have jobs. That is the lowest proportion since 2001.

The one area of improvement in government jobs seems to be coming from state governments because their finances are improving. While local government payrolls are holding steady, state-level payrolls have increased for seven consecutive months, pulling the number of jobs back up to 2011 levels. The main sources of new jobs have been education and healthcare.

An alternate measure of employment, the U-6, includes underutilized workers; the U-6 came in at 12.6%, down from 12.7%, and the lowest level since November 2008. There are still 7.2 million people working part-time for economic reasons; because they can’t find full-time employment or their hours have been cut back.

Once again the report highlighted the deeply uneven nature of the recovery in the jobs market. The unemployment rate for white people was 5.8%, for African Americans it was 12%, and Hispanics 8.1%, and unemployment for teenagers was 21.4%. Of the 175,000 new jobs last month, 99,000 went to women. Over the 12 months through February, women’s nonfarm employment rose by 1.07 million jobs, half of the total US gain of 2.16 million. A couple of years ago, women accounted for just 37% of annual job gains.

Here is the full breakdown of "young vs old" jobs since December 2007: those 55 and older have gained 4.9 million jobs. Those under 55 are still some 3.1 million jobs below their December 2007 level.

The quality of jobs has been a big concern for some time, however in February, white-collar professions including accounting, bookkeeping and consulting led the gains, as the professional and business service sector gained 79,000 jobs. Here’s the catch; one-third of the professional jobs were temporary jobs.  Blue-collar hiring was more muted with the manufacturing sector adding 6,000 positions and construction gaining 15,000. Retailers cut 4,100 jobs as a 12,000 gain in food and beverage stores was offset by a 12,000 decline in electronics and appliance stores. The leisure and hospitality sector added 25,000 jobs.

Average hourly earnings rose 0.4%, or 9 cents to $24.31 per hour; bringing the year-over-year gain to 2.2%; not much but a gain. The average workweek fell to the lowest level since January 2011, which might be due to the bad winter weather, but the weather-sensitive construction sector added 15,000 jobs last month. We know that the household survey took place during a week of storms in the northeast. The Labor Department also reported that 601,000 people in the household survey said they could not get to work because of the weather last month, nearly double the number who typically said that in February on a historical basis. So, weather had an effect, but at some point we just move beyond the weather excuse.

One interesting point about hours worked and hourly wages is that we can try to normalize this data by looking at average weekly earnings. In February, this number dropped slightly to $682.65 from $683.74. So, hourly wages were up  very slightly and hours worked were down a little, and it might be easy to explain this as weather related, but then we look  at average weekly earnings over  the past year, which would not be weather related, and earnings grew just 1.3%, which is the weakest earnings growth in 5 years.

The 175,000 net jobs added in February extrapolates to a pace of 2.1 million jobs a year, squarely within the long-term range. So we have a tepid jobs recovery; just enough to call it a recovery, not enough to call it a good recovery, not enough to instigate action to make it better, and not enough to see the virtuous cycle of job growth that feeds on its own strength.

It will likely be good enough for the Federal Reserve to put taper on auto-pilot. They will continue to trim back monthly bond purchases by $10 billion at their next FOMC meeting later this month. Yesterday, William Dudley, president of the Federal Reserve Bank of New York, suggested that it would take either a recession or an economic miracle to shift the Fed from its course.

Back in December, then-Fed head Ben Bernanke justified the taper as a program that was intended to foster job growth and that job growth was on track, so the work of QE bond buying was accomplished. Many Fed policymakers are still concerned about inflation, even though we’ve had more disinflation of late; and their thinking is they need to be properly positioned to raise rates if they need to battle inflation; before they could raise rates, they want to be out of the bond buying business.

Since the last quarter of 2012, nominal hourly wage growth has increased from 1.5% to the current 2.2%, while inflation has decreased from just under 3% to about half that pace now. That means that most regular workers were losing ground as price growth exceeded hourly wage growth; that seems to be changing now; wage growth is just a little more than inflation. That’s good but then we consider weekly earnings growth, which is around 1.3% annualized, workers are still losing ground to inflation, or at best – flat. So, this is not a reason to fear inflation, nor is it a reason for the Fed to raise interest rates.

The Fed’s target for unemployment is 6.5%, which doesn’t really sound like full employment. It wouldn’t be bad to do better; to get the unemployment rate below 6.5%; we really shouldn’t worry about the inflationary pressures of a tighter job market, in part because we haven’t seen any inflationary pressures, even though we are getting close to the target. Of course, the Fed may have limited ability to help on the jobs front. It would be nice to see more fiscal policy aimed at creating jobs. Inflation has not been an issue at all. The public debt has also not been an issue at all, and attempts to cut spending have been completely counterproductive and damaging to the short and long-term health of the economy.

Real wage gains for low and middle income workers would be a good thing. If people can start to get ahead, just a little, from their hard work, they are likely to take a more active role in the economy and that might mean we could eventually see some momentum in the economy. In other words, we still need to aim higher. 

Wednesday, March 06, 2013 - Hollowed Out

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877.

Hollowed Out

by Sinclair Noe

DOW + 42 = 14,296
SPX + 1 = 1541
NAS – 1 = 3222
10 YR YLD +.04 = 1.94%
OIL - .39 = 90.43
GOLD + 8.70 = 1585.10
SILV + .34 = 29.04

I have to admit to a hollow feeling in these celebrations. The High Frequency Traders are probably having fun. The Wall Street banksters are swimming in waves of liquidity, freakishly similar to 2007, when they leveraged everything and then leveraged the leverage, and then leveraged the risk on the leverage. And after they burned the place to the ground, they took a bailout to rebuild, and they left the grounds slathered in debt.

So, the Fed has cut interest rates to near zero, which is the optimal level when you are getting buried in debt. The low interest rate has the combined effect of lowering debt issuance and servicing costs, as well as increasing bank margins. The side effect is that currency debasement boosts competitiveness, investment and inflation. A few jobs result from increased competitiveness, but not enough to create a virtuous cycle. ADP said the private sector added 198,000 jobs last month; tomorrow we get the government's monthly jobs report; and the word we now associate with the jobs report is “modest”.

Here we are again; the Fed is juicing asset values and telling us they're doing it to prop up the economy, while all it really does is juicing the banksters and the corporate cronies. Not so much for the rest of America; still struggling to stand straight after taking a sack of bricks to the belly. And while the economy is showing signs of improvement, it is hollow, absent the middle class; workers pay has been shrinking as a part of the total GDP ever since the meltdown.

You've probably heard that household income is down 8% from 2007, but that's just part of the story. The gap between the richest one percent and the bottom 80 percent has grown exponentially over the past 30 years. With 53% of the population earning $30K or less per year, there is no question there is an asset bubble. The inequality is far worse than you think. The top 1% has 40% of the nation's wealth. While 80% of us have just 7%. And the top one percent own 50% of the stocks , bonds and mutual funds. So, this celebration of the market high is like throwing gasoline on the fire. There will be more and more attempts at redistribution until the whole thing pops. Enjoy the ride 

So, the record high for the Dow is more a reflection of how the corporations have squeezed workers, and how this is supposed to be the new normal. A new report by MIT on innovation and production seems to capture the desperation and how this has left the country at a competitive disadvantage. It says, in part:

One of the key danger points identified in these reports is the declining weight of the U.S. in the global economy. Even though the U.S. share of world manufactured output has held fairly steady over the past decade, economists have pointed out that this reflects good results in only a few industrial sectors. And even in those sectors, what appear to be productivity gains may be the result of underestimating the value of imported components. A close look at the composition of a worsening trade deficit shows that even in high-tech sectors the U.S. has a deteriorating picture. While the output of U.S. high tech manufacturing is still the largest in the world and accounted for $390 billion of global value added in high-tech manufacturing in 2010, U.S. share of this world market has been declining, from 34 percent in 1998 to 28 percent in 2010, as other countries made big strides ahead into this market segment.

Jobs are another huge concern. The great spike in unemployment over the past five years was disproportionately due to loss of manufacturing jobs. And as the economy revived, such jobs were very slow to return. In fact it is clear that many of them never will.

And the loss of jobs in manufacturing does not mean that the sector is now lean and mean. Nope, it has been gutted and it might not recover. What manufacturers we still have left in this country are having a hard time with innovation because they have lost the rest of the manufacturing community. Turns out that innovators need other innovators. They were not finding any complementary capabilities they could draw on in the industrial ecosystem as they tried to develop new components: no outside funding, no connections with community colleges, no trade associations, no research consortia.

It's called internal integration. A designer could go down the street in their hometown and talk to a manufacturer about the ease or difficulty of producing a new product. But now, the shop down the street is boarded up or torn down. To actually produce something requires a social ecosystem in which ideas can flourish and be tested with fairly low risk, at fairly frequent intervals, before they develop into actual products. Some might claim that the innovative process has gone high tech, and to some extent that is true, but it has also become fragmented across firms and geographies.

What we do not know, though, across different industries—and particularly for emerging new high-tech domains—is whether the separation of innovation from manufacturing will allow innovation to continue full-bore at its original home, or whether separation comes at the price of learning and creation of capabilities that might produce future innovation at the original home base. Separating innovation and manufacturing—in different companies, or in different locations—might make it unlikely that a firm would gain full advantage from implementing technological advances within manufacturing.

And of course, when jobs are lost, the experience of the worker is also lost. This at a time when many workers have finally mastered their trade and might have the ability to think beyond mere competency and look at innovations. And the longer the worker is unemployed the greater the probability the worker will become unemployable. Skills unused diminish over time.

Outsourcing and offshoring are not about improving flexibility and innovation, but about what managers usually say it is about: lowering labor costs. It’s actually a form of looting, just not the financial kind. The reduction in manufacturing floor costs is partially offset by an increase in managerial coordination, so it’s actually a transfer from blue to white collar workers, particularly the very top executives. And it increases risks of the enterprise. One glitch in the supply chain can wipe out profits claimed from lowering labor costs. And the longer-term effect is to hollow out the middle class which once formed the core of the customer base.

Not to worry, the Fed will continue to juice Wall Street and perpetuate the asset-based economic growth model, which in turn gives the Washington politicians a fig leaf to hide their dysfunction. Bernanke has stated he will use proper monetary policy until there is a recovery per employment; therefore, we will get a recovery. Perfectly logical. And I’ll keep flapping my arms until I begin to fly; therefore, I will make myself fly at some point.

The stock market is not a proxy for economic activity. Rather, it is a proxy for leveraged speculation using cheap borrowed money. The low volume and extreme volatility suggest a very dangerous top. Those now getting up the courage to plunge in will most likely be buying from those now hoping to get out before the next crash.

None of this means the crash will not be delayed for a year or two, or even longer. Nobody has any idea what will happen next. The real things we know about the economy is that taxpayers got stuck with Wall Street's gambling debt, and the employment shortfall, and the rents being extracted by the financial sector. And so far, we have done next to nothing to change the system.