Thursday, June 26, 2014 - Buffers and Filibusters

Buffers and Filibusters

by Sinclair Noe

DOW – 21 = 16,846
SPX – 2 = 1957
NAS – 0.71 = 4379
10 YR YLD - .03 = 2.52%
OIL - .80 = 105.70
GOLD  - .70 = 1317.90
SILV + .10 = 21.22

Yesterday, the Commerce Department downgraded the first quarter gross domestic product to a negative 2.9%, meaning the economy shrank by 2.9%. Today, St. Louis Federal Reserve president James Bullard says it’s likely an aberration; the weak report for the first quarter was likely distorted by inventories, weather, and by the challenges of accounting for health-care spending under the new law. Bullard says he isn’t worried, “the market’s right to shake this off. Looking forward over the next four quarter, most forecasters have 3% growth.”

Well, that’s good. No worries. Nothing to see hear, move along, move along.

It’s just that the fall was so nasty, it’s hard not to look and linger over the carnage. It really was ugly. And while we can blame it on the weather, that doesn’t seem right. We always have weather. Minneapolis is underwater today. Bad weather is a fairly constant aberration. We should be past the point of excuses; we are 5 years into a recovery; granted it has been a stealth recovery.

I wonder if Mr. Bullard is confusing the stock market with the economy. A down day in the bull market would just be a blip on the tape, but the stock market is not the economy. And the economy is not bouncing back, which would be the expected move after a seasonal aberration. Most importantly, we haven’t seen a surge in hiring. It looks more like we’ve gone through a very long period where everybody who was going to be fired was fired, and companies are running as lean as they can. So, the jobless claims have leveled off, but there’s a big difference between no more fat to cut and an economy that produces lots of well-paying jobs.

If you want new jobs, and the consumer spending that flows from new jobs, you look for new businesses, and you can just keep looking. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. The decline affected nearly all business sectors. The fact that the economy has been weak since 2007 suggests that new business activity has also declined in existing companies.

New businesses are critical for economic growth because a small fraction of today's startups will become tomorrow's economic heavyweights. Most of today's workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy.

Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding. Also, most of today’s workers are working at smaller businesses, companies with less than 100 employees, and we just aren’t making enough of these smaller businesses.

The Federal Reserve’s monetary policy has been a boon for Wall Street, so we’ve seen record highs even as the economy contracts. The Fed policy was to elevate asset prices in the hope it would trickle down to the rest of the economy; the trickle down part has been a terrible failure but the higher prices have been nifty for a small group of financial companies and some of the largest corporations. The problem is that it is hard to maintain corporate profits in a recession. Also, it’s hard to have sustainable growth from big corporations; they’re like trees; once they reach a certain height, they stop growing. Look back to the Fortune 500 list from 1995; less than half the firms on that list are still on the list today.

And businesses aren’t investing for the future. A major factor in the first quarter contraction was lower gross private domestic investment; a smaller increase in inventories accounted for most of that, but we also saw a drop in investment in non-residential structures, investment in equipment, investment in information processing equipment; countered by a slight increase in investment in intellectual property; that’s tricky to measure because it could be money spent on research and development or it might be money spent on movies. Lower investment accounted for about 2% of the 2.9% drop.

For the last few decades, every boom has depended on housing; same strategy today. The problem is that boomers will not start upgrading now in their 60s. And the young ones expected to pick up the baton are full of debt. And the housing numbers seem to back it up. We did see a big jump in new home sales for May, but that was mainly confined to the South, meanwhile existing home sales barely inched forward, and it appears the big run in home sales has happened and now we’re leveling out. Any boost from housing has already hit.

And this is the recurring theme of the recovery, it’s just around the corner.

No, not that corner, the next corner.

The Supreme Court is still dishing out decisions; two more today, but not the big one on Hobby Lobby; that will probably come on Monday. Today we heard about buffer zones and recess appointments.

The Supreme Court ruled on McCullen v. Coakley, striking down a Massachusetts law requiring protesters to stay at least 35 feet from an abortion clinic's entrance and walkways. In a unanimous opinion, the court held that such buffer zones violate First Amendment free speech rights.

Only three other states, Colorado, Montana and New Hampshire, have buffer zone laws on the books, but the Massachusetts zone was the largest. The Massachusetts law was passed after 2 clinic workers were shot and killed by a gunman outside a clinic in 1994. In 2000, the Supreme Court upheld Colorado's 8-foot "floating" buffer zones around individuals as they walk into and exit an abortion clinic.

Chief Justice Roberts delivered the opinion of the court. "It is no accident that public streets and sidewalks have developed as venues for the exchange of ideas." Roberts said: “Even today, they remain one of the few places where a speaker can be confident that he is not simply preaching to the choir. With respect to other means of communication, an individual confronted with an uncomfortable message can always turn the page, change the channel, or leave the Web site."

The court was silent on the free speech rights of protesters confined to “free speech pens” around political conventions, and buffer zones around churches, and funeral services, and for that matter, the buffer around the Supreme Court building in Washington DC.

Also today, the Supremes ruled unanimously in NLRB v Noel Canning that President Obama had violated the Constitution in 2012 by appointing officials to the National Labor Relations Board during a short break in the Senate’s work when the chamber was convening every three days in short pro forma sessions when no business was conducted. Those breaks were too short, Justice Stephen G. Breyer wrote in a majority opinion joined by the court’s four more liberal members.

A ruling could cast a cloud over the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. Justice Breyer added that recess appointments remain permissible so long as they are made during a break of 10 or more days. But many experts say that if either house of Congress is controlled by the party opposed to the president, lawmakers can effectively block such appointments by requiring pro forma sessions every three days. Each house must get the approval of the other chamber for recesses of more than three days. Somebody shows up, claims the Senate is in session, and they hold a fake session and that’s that.

The decision affirmed a broad ruling last year from a federal appeals court in Washington that had called into question the constitutionality of many recess appointments by presidents of both parties. The appeals court last year said that presidents may bypass the Senate only during the recesses between formal sessions of Congress. Two of the three appellate judges went further, saying that presidents may fill only vacancies that arose during that same recess. The Constitution’s recess-appointments clause says, “The president shall have power to fill up all vacancies that may happen during the recess of the Senate.”

And while today’s ruling is being hailed as a major blow to executive power, in practical terms, today’s ruling no longer really matters. That’s because the Senate majority has since eliminated the filibuster on executive and judicial appointments that was the cause of this whole mess to begin with.

After the DC Circuit Court of Appeals ruled last year that the NLRB appointments were illegal, President Obama renominated appointees to fill those slots and submitted them to the Senate. What happened? Senate Republicans filibustered them forever, of course. Eventually, Senate majority leader Harry Reid got fed up and triggered the “nuclear option”: a Senate rules change that would require only 50 votes, instead of 60, to invoke cloture on executive and judicial nominations. The NLRB nominees, and several others that had been held up, made their way through.

Yesterday, the Supremes ruled that law enforcement can’t search your smartphone without a warrant or a really, really good reason why they don’t need a warrant.  Of course, police can search all sorts of things without a warrant, and the solicitor general had argued that cell phones were not that different than briefcases or purses that are regularly searched when you enter a federal building or an airport.

Chief Justice Roberts said: “Cellphones differ in both a quantitative and a qualitative sense from other objects that might be kept on an arrestee’s person.” He went on at length to describe the differences, noting that a cellphone can reveal more private information than the search of an entire house. The phone contains “the sum of an individual’s private life” he said; searching it without a warrant is constitutionally unreasonable. The chief justice’s response to the government’s warning that a warrant requirement would impede law enforcement was basically a shrug: “Privacy comes at a cost.”

What we learned is that Supreme Court justices now have and use smart phones.

The best line yesterday came on the NBC Nightly News when Brian Williams, followed the report by asking the reporter if this will have any effect on the NSA’s ability to electronically dig into our cell phone records without warrants.

That Brian Williams is a real comedian.

Thursday, November 21, 2012 - Size and Composition

Size and Composition

by Sinclair Noe

DOW + 109 = 16,009
SPX + 14 = 1795
NAS + 47 = 3969
10 YR YLD - .01 = 2.78%
OIL + 1.59 = 95.44
GOLD - .40 = 1243.40
SILV + .14 = 20.09

Intraday, the Dow industrials were higher last Friday and last Monday, but this was a record high close, and that is what we look at – the close. The reason we look at the close is largely arbitrary, and the reason we celebrate the Dow record high close as opposed to the S&P 500 record high close, is again arbitrary. The significance of a close above 16,000 is not a big deal; it's just a number. Earlier in the week the market looked at the round number and could not close above; there was a pause; then today, a move above. Test, retracement, breakout; that's bullish.

We have discussed that there is a disconnect between the markets and the broader economy. We have discussed that the trickle down effect or the wealth effect has been less than satisfying for. Still, some of that money will filter into the broader economy; and the bottom line is that it's better than a poke in the eye with a sharp stick.

At some point the Fed will taper; the easy money party will end; until then, well, enjoy the milk and cookies.

Initial claims for state unemployment benefits fell 21,000 to a seasonally adjusted 323,000. Meanwhile, prices at the wholesale level dropped 0.2%. The PPI core rate, excluding gas and food rose 0.2%; so the lesson is that we can all get lower prices if we just stop driving and eating; and, we are seeing disinflation at the wholesale and retail levels. Also this morning, the Philadelphia Federal Reserve Bank reported its business activity index fell to its lowest level since May. Wall Street's pretzel logic saw this bad economic news as a positive, indicating the Fed will continue to be accommodative. Just how long the Fed can keep pumping easy money into the stock market is the big question. Japan may serve as a playbook. Today the Bank of Japan left its massive stimulus policy, known as Abenomics, in place. So, with Japan as a guide, the Fed could do much, much more. The dollar rose to its highest against the yen in more than four months.

Today, European Central Bank President Mario Draghi said the ECB would not cut the deposit rate into negative territory. Draghi tried to dispel talk the ECB was considering charging banks to deposit cash overnight in a bid to boost economic activity. The Federal Reserve pays banks to deposit funds, and there has also been talk that they might consider not paying to get that money out of the vaults and into circulation. Draghi said the central bank did not see deflation materializing, but clearly deflation is a greater concern than inflation, and deflation may force the ECB to reach deeper into their tool belt.

It's generally accepted that central banks monetary policies implemented in response to the global financial crisis prevented a deeper recession and higher unemployment than there otherwise would have been. These measures, along with a lack of demand for credit as a result of the recession, contributed to a decline in real and nominal interest rates to ultra-low levels that have been sustained over the past five years.

A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. Over the past 5 years, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks.

Nonfinancial corporations benefited by $710 billion as the interest rates on debt fell, however this did not result in higher levels of investment. The impact that ultra-low interest rates have had on banks has been mixed. They have eroded the profitability of eurozone banks, resulting in a cumulative loss of net interest income of $230 billion between 2007 and 2012. But banks in the United States experienced an increase in effective net interest margins and a cumulative increase in net interest income of $150 billion. The experience of UK banks falls between these two extremes.

Meanwhile, households in these countries have lost a combined $630 billion in net interest income; that's not total losses from the economic downturn, that's just net interest income.

There are limits to central bank monetary stimulus schemes. The Federal Reserve has been buying mortgage backed securities at a rate of $40 billion per month and they now hold an estimated 26% of the total of mortgage backed securities outstanding. Each month the Fed continues buying, they increase their stake by 0.8%. Even if the Fed were to taper in March and stop all MBS purchases by the end of 2014, Fed holdings of MBS would rise to about 34% of the total MBS market.

The Fed has already distorted the housing market, and if QE continues much longer, they could corner the market. What would that look like? I'm not sure, I'm just asking. Another question is whether the asset purchases have really done the job. The Fed might want to look at buying something else. Quantitative easing can be targeted at all kinds of assets and with the Fed swallowing up the entire MBS market, maybe it's time to look elsewhere. There is probably nothing to prevent the Fed from jumping into the corporate bond market, or maybe they could start buying up municipal bonds; they could start with Detroit, Riverside, and Stockton.

Regardless of whether you agree with the idea or not, or whether you appreciate the irony or not, the point is that the Fed can not only make adjustments to the size but also the composition of its asset purchases.

Today marked a big change in the Senate. I'm still trying to figure how it will affect business and the economy but a friend asked me to speak on it today, so I'll say a few words.

Senate Majority Leader Harry Reid pulled the trigger today, deploying a parliamentary procedure dubbed the "nuclear option" to change Senate rules to pass most executive and judicial nominees by a simple majority vote. The Senate voted 52 to 48 for the move, with just three Democrats declining to go along with the rarely used maneuver.

From now until the Senate passes a new rule, executive branch nominees and judges nominated for all courts except the Supreme Court will be able to pass off the floor and take their seats on the bench with the approval of a simple majority of senators. They will no longer have to jump the hurdle of 60 votes, which has increasingly proven a barrier to confirmation during the Obama administration.

Reid opened debate in the morning by saying that it has become "so, so very obvious" that the Senate is broken and in need of rules reform. He rolled through a series of statistics intended to demonstrate that the level of obstruction under President Barack Obama outpaced any historical precedent.

Half the nominees filibustered in the history of the United States were blocked by Republicans during the Obama administration; of 23 district court nominees filibustered in U.S. history, 20 were Obama's nominees; and even judges that have broad bipartisan support have had to wait nearly 100 days longer, on average, than President George W. Bush's nominees. There has been gridlock; that's true. Changing the rules can come back to bite you at a later date; that's true, too.

I have no problem with the filibuster, at least the old fashioned filibuster. I hate the modern filibuster, where a senator just says: “I filibuster” and everything grinds to a halt. If you want a filibuster, then stand up on the Senate floor, (like when Mr. Smith Goes to Washington) talk until your voice or your bladder gives out. Read from Dr. Seuss of actually try to display intelligence. We know this is possible because every time a Senate committee calls an expert witness to testify at a hearing, we never hear the witness, just the various Senators, bloviating on without end.

And if they ever did bring back the old fashioned filibuster, the could set up a wind farm on the steps of the Capitol to capture the never-ending torrent of hot air.

Tuesday, July 16, 2013 - No Inflation Except if You Drive

No Inflation Except if You Drive

by Sinclair Noe

DOW - 32 = 15,451
SPX - 6 = 1676
NAS – 8 = 3598
10 YR YLD - .02 = 2.53%
OIL - .55 = 105.77
GOLD + 8.30 = 1292.50
SILV + .08 = 21.11

Start with the big economic report of the day; the Consumer Price Index, or CPI, which measures inflation at the retail level, increased 0.5% in June. A 6.3 percent surge in gasoline prices accounted for about two thirds of the increase. In the 12 months through June, the CPI advanced 1.8 percent. Stripping out energy and food, consumer prices increased 0.2 percent for a second straight month. That took the increase over the past 12 months to 1.6 percent, the smallest rise since June 2011. No real inflation except for energy prices.

A separate report from the Fed showed output at the nation's factories, mines and utilities rose 0.3 percent in June after a flat reading in May.

Another report showed confidence among single-family home builders at a 7-1/2 year high in July, with expectations of stronger sales and buyer traffic.

In earnings news, Coca Cola reported earnings of $2.6 billion, down from $2.7 billion a year ago. They tried to blame the shortfall on bad weather but I think people are cutting back on drinking soda.

Goldman Sachs posted second quarter net income of $1.9 billion compared with $962 million, in the period a year earlier. So, profits are up 100 percent. How is that possible, especially considering the new capital requirements and all those terrible regulations being forced on the big banks? And it's not just Goldman. Just the other day, JPMorgan reported a 33% increase in profits and Wells Fargo reported a 19% jump, and Citigroup's profits are up 42%. Banks are smashing their old profit records in a sluggish economy, with moderate M&A activity, and all sorts of regulations that were supposed to keep the banks from becoming unmanageable behemoths.

Actually, most of the regulations aren't really in place, only about 40% of the rules are affecting the banks, and they are still fighting the rest of the regulations; so maybe they don't really want to talk too loudly about record profits in a harsher regulatory environment. It's like the kid who's forced to take medicine, and his health improves, but he still cries about having to take the medicine.

Tomorrow morning, Fed Chairman Bernanke will appear before the House Financial Services Committee as part of his 2 day testimony before Congress on the economy and monetary policy. He'll deliver prepared remarks and then there will be a question and answer session, which generally provides the Congressmen a chance to demonstrate their economic incompetence and for Bernanke to speak without saying anything. Sometimes Bernanke slips and there is a nugget of information. He might just give a hint about when the Fed will exit QE, or what might serve as a trigger for taper; but mainly he'll repeat the mantra that monetary policy will remain accommodative from here to eternity. Expect a boring recitation of what Bernanke has been trying to repeat and repeat again and again; that essentially QE continues. Of course, you never know. Bernanke is going to leave his role at the Fed, so maybe he could just break out and speak truth.

That might be fun. Can you imagine if Bernanke, or even Greenspan before him, had decided to cut through the Fedspeak and tell the blunt, plain truth to the politicians? Maybe Bernanke could talk about how the Fed really made the crisis of 2008 much worse than it should have been; maybe he could talk about how the Fed has failed in its role as a regulator of the big banks, and now they represent an even bigger risk than in 2008; maybe he could tell the politicians how the sequester and austerity moves are hurting the economy, and the fiscal policy is akin to bleeding a patient to restore health.

Maybe Bernanke could tell Washington that the last four years have offered the federal government a borrowing and investment opportunity that's unprecedented in modern history; and that window of opportunity won't last forever. Interest rates have been at World War II-era levels, thanks to ZIRP, while investor confidence in Uncle Sam (and fears about other investments) created a situation where they were effectively paying the government to borrow money.

We could borrow the money, invest it in job creation, and be rewarded with an expanding economy that pays us back for our investment in both human and financial terms. And it's not like we'd be creating make-work. America's falling down. Our highways and bridges are crumbling; our electric grid is vulnerable; our water systems are antiquated; our public transportation is a joke, only surpassed by the cellular network; and that's just for starters. Maybe Bernanke could tell the politicians that we are on the verge of missing a once in a lifetime opportunity to really make a difference.

Yea, that's not going to happen.

But then who would have thought the politicians would agree on anything; turns out they can, and did. The Senate has voted to confirm Richard Cordray as director of the Consumer Financial Protection Bureau, as senators approved the first of a batch of President Barack Obama's nominations freed for votes by a bipartisan agreement.

The vote came hours after Senate leaders worked out a deal freeing up seven stalled appointments for the consumer bureau and other agencies for simple majority votes by the chamber. In exchange, Democrats agreed to abandon for now an effort to change Senate rules to weaken the minority party's ability to block nominations with filibusters, and Obama agreed to submit two different nominees for two labor posts.

Obama had used a recess appointment to put Cordray in charge of the agency, an appointment that expires in January. Republicans had solidly opposed Cordray's nomination, demanding that Obama first agree to change the agency's financing and structure.

So, this proves that politicians can come together, and all it took was the threat of the “nuclear option” on filibusters. Simple.

You Will Be Paying Higher Gasoline Prices. It Is Essential You Begin to Understand Why!

In the face of escalating gas prices, the oil patch, their allies and Wall Street are counting on your ignorance permitting them to pick your pockets, spoon-feeding you nonsense while they cash in massively. Oil prices recently touched $107, a level during the current run-up not reached since May of last year. This while inventories in the U.S. are near all-time record levels, U.S. production is accelerating, the world is awash in oil, and natural gas in the U.S. is selling at an equivalent BTU content to that of oil costing $24 a barrel or less.

It just doesn't make sense, and it is not explained away by the usual industry placebos: "The driving season is upon us", "production difficulties in Libya, Nigeria or you name it," "Iran is becoming recalcitrant," "Egypt is falling apart," "the dollar is weakening," "Chinese consumption is impacting markets," and so forth. Lots of hot air without real substance nor actual impact on the price of oil at Cushing, Texas, the delivery point for WTI crude. Misinformation propagated often enough both by the industry and a somnolent press to make an otherwise bilked public (paying extortionate levels for gas and petroleum products) blindly accept the oil industry's palaver. This combined with massive industry lobbying resulting in a total lack of effectual oversight of oil industry pricing and Commodity Exchange excess and the gross distortions resulting from the financialization of energy markets.

My saying so doesn't necessarily make it so. But consider the following- only yesterday Mr. Joe Petrowski, the CEO of Gulf Oil, posited on CNBC that the price of oil should be half of yesterday's $105/bbl exchange-quoted price or closer to $50 a barrel. He cited that record amounts of oil are being produced in the United States and Canada, and that OPEC supplies are higher.

Add to this the comments of Rex Tillerson, Chairman and CEO of ExxonMobil. In case you missed it, only last week, Exxon's 2012 earnings were cited as the second most profitable corporate earnings in the world, ever.

Yet some two years ago, before a Senate Committee, the same Rex Tillerson testified that the price of crude oil was $30 to $40 higher (at that time quoted at $100/bbl on the exchanges) than it should have been were it not for the "financialization" of energy futures and options on the Commodity Exchanges. With this coming from a man of Tillerson's stature and expertise on the issue, one would have expected that someone in government would have acted to protect the public's interest, but clearly the 'oiligopoly' and the commodity exchanges have a higher priority in Washington and the Beltway.

As an example of the excesses of the financialization of oil and energy derivatives trading and how they have lost all bearing to 'supply and demand' of physical product, let me cite but one example. On Feb 8, 2012 the Chicago Mercantile Exchange Group (CME), the world's leading derivatives marketplace, announced it set a new record for trading volumes of its energy products on February 7, 2012. Their trading volume for energy futures and options contracts totaled 3,489,302 contracts higher than the previous record of 3,098,129 contracts on 02.22.10 The CME group controls more than 90 percent of listed U.S Futures Trading including the New York Mercantile Exchange (NYMERC) and according to theWall Street Journal has outspent rivals on lobbying in Washington to ensure its views are heard.

Consider trading 3,489,302 energy or crude oil equivalent contracts in one day represents 3.48 billion barrels of oil (each oil futures or option contract is for 1,000 barrels). With world consumption some 85 million barrels a day, this would mean that in one day's trading on the New York Merc, the equivalent of 41 days of the total WORLD'S consumption will have been traded. And then we are told, of course, that it's all about supply and demand.

Remember, your silence is letting the oil boys and the oil desks of the bank-holding companies and the myriad speculators take you to the cleaners.