Wednesday, August 13, 2014 - Oil, At Least in Theory

Oil, At Least in Theory
by Sinclair Noe

DOW + 91 = 16,651
SPX + 12 = 1946
NAS + 44 = 4434
10 YR YLD - .03 = 2.41%
OIL - .04 = 97.33
GOLD + 3.70 = 1313.20
SILV - .11 = 19.91

The economic news today did not point to a positive session for Wall Street. Retail sales for July were flat compared to June. Excluding autos and gas, retail sales were up just 0.1%. Clothing sales increased 0.4% but that was primarily due to extreme discounting. That report was confirmed by an earnings report from Macy’s, which missed expectations on earnings and revenue, and then lowered guidance. In after-hours trade, Cisco reported better than expected earnings and revenue.

The US has deployed 130 Marines and Special Operations forces to northern Iraq to help assess ways to rescue thousands of members of the Yazidi religious group taking refuge on Mount Sinjar. Those military advisers will not have a combat role, but the Defense Department left open the possibility that US troops could help create a safe passage for the Yazidi off Mount Sinjar. That might put US troops in direct combat with the ISIS militants trying to kill the Yazidi, a proposition President Obama has not signed off on, but one the military advisers are exploring.

The US and Iran don't agree on much, but it appears the two countries are backing Iraqi Prime Minister Nouri al-Maliki's replacement, Haider al-Abadi. Iran's endorsement on Tuesday means that Maliki, who has indicated he won't go quietly, will have an even harder time holding onto his position. The United States and its allies hope that replacing Maliki, who alienated the Sunnis of Iraq, will undermine support for the militant group the Islamic State in Iraq and Syria (ISIS). For now, Maliki is trying to cling to power, but his days appear numbered.

There are daily multiple sorties by US fighter bombers flying off a US Navy aircraft carrier in the Gulf, some resulting in airstrikes on advancing ISIS forces that have threatened civilian refugees and the Kurdish capital of Erbil. Unmanned US drones are in the air gathering a constant stream of intelligence which is being fed back to a US-manned operations center in Baghdad and then shared with America's allies.

There are close to 1,000 US military advisors in Iraq, including Special Operations forces, divided between Baghdad and Kurdistan and the CIA is believed to be running an operation to supply Kurdish forces, the Peshmerga, with arms and ammunition. Iraqi Kurds have overtaken 2 northern oilfields.  The two oilfields are said to have a combined daily output capacity of some 400,000 barrels per day. The operations are most certainly not entirely humanitarian. France and Germany both say they will send military equipment to help the Kurds defend themselves. Hercules transport planes have been dropping aid to civilians fleeing from the onslaught of ISIS.

While the case for intervention on humanitarian grounds to save the lives of thousands of fleeing refugees is overwhelming, there is now the risk of what is known as "mission creep"; of a small, narrowly defined operation ballooning out of control, sucking in Western countries into a lengthy conflict with no clear exit. Politicians are fond of saying "there will be no boots on the ground" but in practice there are already growing numbers of US military personnel deployed to Iraq behind the scenes. The ISIS fighters are now embedding in residential areas like Mosul, essentially using civilians as shields. Already Iraqi government airstrikes around Mosul have led to reports of civilian casualties. What if advice and air power alone are not enough to prevent the ISIS from taking more towns in Iraq and Kurdistan? What if Baghdad itself or the cities of Kirkuk or Irbil look threatened?

The militants from ISIS have been causing problems in Iraq and Syria for several months, but then they took control of the area around Kirkuk, a gigantic oilfield; then they captured the Mosul Dam, which controls electricity and might serve as a weapon; and then they encroached on the Kurdish capital of Erbil, an oil boomtown which happens to have a US consulate but also has hundreds of employees of companies like Chevron and ExxonMobil; that’s when the airstrikes against ISIS started. To be fair, it was also when ISIS became especially barbaric, and tens of thousands of Yazidi refugees became stranded. The current US intervention certainly has humanitarian purpose, but it would also be wrong to pretend that oil is totally irrelevant to the larger crisis in Iraq.

Meanwhile, the markets are discounting any disruption in distribution in Iraq; Iraq is currently the world's seventh-largest oil producer, churning out some 3.3 million barrels per day; Kurdistan in the north is only responsible for about 10% of the national production; most Iraqi oil exports come from the southern part of the country, and those oil fields are far away from the current fighting, so it’s highly unlikely that there will be a disruption, at least in theory.

In theory, all oil sales in Iraq are supposed to be handled by the central government in Baghdad, which then splits revenues among the various regions according to an existing agreement. Iraqi Kurdistan has been pushing to sell more of its own oil directly to other countries, bypassing the central government entirely, because Kurdish officials claim that the central government hasn't been sending Kurdistan its promised share of oil revenue.

The United States is officially opposed to Kurdistan's direct sales of oil abroad because it might undermine the unity of the Iraqi government. There's currently an oil tanker filled with about 1 million barrels of Kurdish oil parked about 50 miles offshore from Houston that can't unload its crude. State Department officials have been quietly warning any potential buyers of the Kurdish oil that they could face "serious legal risks." But now, the Kurds are stepping up the fight against ISIS.

Iraq has scheduled to export about 2.4 million barrels per day of Basra Light crude in September, up from 2.2 million in the previous month. Libya has resumed shipments of crude. According to the IEA: "The Atlantic market is currently so well supplied that incremental Libyan barrels are reportedly having a hard time finding buyers." If Iraqi oil goes offline, even for a short time, the rest of the world does not have enough spare capacity to replace that production; that would likely push oil prices over $125 a barrel, and that might then increase the leverage for Putin.

And it had been thought that sanctions imposed on Russia over its support for Ukrainian rebels might cause disruptions in oil distribution. Russia is the largest oil producer in the world, at over 10 billion barrels equivalent per day or 13% of world supply. However, the markets are looking at Russia and saying that Putin needs to sell oil even more than the EU needs to buy it. Russia turning the taps off would cause an oil shock in the West as it would cause a steep rise in prices and significant disruption, however it would also bankrupt Russia. At least in theory.

Ukraine vows to stop Russian-supply convoy unless conditions are met. Wary that the Russians may be trying to move military supplies into their country to aid pro-Moscow separatists, Ukrainian officials said they would not allow a convoy of 280 Russian trucks to cross the border unless the Red Cross took over the delivery. Ukraine says the cargo, which Russia insists is humanitarian aid, must be loaded onto other vehicles by the Red Cross. It will take the trucks about two days to make the 620 mile trip from Moscow to eastern Ukraine.

Ukrainian state-run energy firm Naftogaz said yesterday that the ongoing dispute over natural gas prices between Kiev and Moscow may lead to disruption in Russian gas transit to the European Union (EU) countries. Kiev and Moscow have been locked in a dispute for three years over a 2009 contract under which they agreed to tie the price of gas to the international spot price of oil. In June, Russia's energy giant Gazprom has cut all gas supplies to Ukraine after the two sides have failed to reach an agreement on payments. The dispute between the two former Soviet countries triggered fears that Russian gas transit to Europe may be halted. Currently, around 15 percent of EU gas supplies flow through Ukraine.

Yesterday, the International Energy Agency (IEA) said: "Oil prices seem almost eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world." Global oil prices have fallen to their lowest levels in 13 months. Brent crude is trading around $103 a barrel, and WTI is around $97, then 10^th straight session with prices under $100. Retail gas prices have dropped about 23 cents a gallon since April.

And you probably remember back in 2008, when tensions with Iran helped push oil prices up to a record $148 a barrel. So, with all the problems around the world now, why are oil prices dropping? The US is pumping the most oil in 27 years, adding more than 3 million barrels of daily supply since 2008. Supplies from the Organization of Petroleum Exporting Countries, which pumps about 40% of the world’s oil, rose to a five-month high of 30 million barrels a day in July as Libyan output recovered and Saudi Arabia increased production. At the same time, global demand is weak, although it is expected to pick up towards the end of the year. Meanwhile Mexico has privatized its oilfields, at least partially. The state-owned energy group Pemex will lose the monopoly it has held since nationalization in 1938. Mexico’s oilfields had been underperforming and production dropped by more than a million barrels per day in the past few years. So, if we can just hold it together for a couple more years, North America could become energy independent. Until then, it could go either way, at any moment, and send the economy into a tailspin in a heartbeat, at least in theory.

Friday, August 08, 2014 - Rocky Relations

DOW + 185 = 16,553
SPX + 22 = 1931
NAS+ 35 = 4370
10 YR YLD - .01 = 2.41%
OIL + .01 = 97.35
GOLD – 3.90 = 1310.10
SILV - .03 = 20.02

The S&P and Dow both posted their best day since March. For the week, the Dow rose 0.4%, the S&P 500 gained 0.3%, and the Nasdaq rose 0.4%.

The Pentagon says US warplanes have dropped bombs on an ISIS artillery positon in northern Iraq, near Erbil, the Kurdish regional capital. US military planes have also carried out air drops of food and water to displaced refugees. Last night, President Obama announced the plan for assisting Iraqi religious refugees stranded on a hilltop in northern Iraq, and also authorizing limited airstrikes to protect US personnel in Erbil. The air strike is the first time the US has been directly involved in a military operation in Iraq since American troops withdrew in late 2011. No time limit has been set for air strikes.

In very short order, the Islamic State of Iraq and Syria, ISIS, captured one-third of Syria and about one-quarter of Iraq, and they continue to expand their frontiers. Just to put it in perspective, they now control a land mass larger than Great Britain, with a population bigger than Denmark. In northern Syria some 5,000 ISIS fighters are using tanks and artillery captured from the Iraqi army in Mosul to besiege half a million Kurds on the Turkish border. ISIS has also built a huge war chest by looting Iraqi banks of perhaps half a billion dollars, making ISIS the world's richest terrorist organization, by some estimates. And they have been gathering weapons, US weapons left behind by the Iraq army.

ISIS now controls most of Syria’s oil and gas production. In northern Iraq, ISIS now controls a 750 megawatt dam near the city of Mosul. The Mosul Dam is considered one of the most dangerous dams in the world; it was poorly constructed, leaks constantly, and requires near constant maintenance to avoid collapse. In addition to controlling the electric output of the dam, the militant group now has a real weapon of mass destruction, capable of extreme destruction along the Tigris River, including possibly flooding Baghdad under 15 feet of water.

The Iraq army shows no signs of recovering from its earlier defeats and has failed to launch a single successful counter-attack. The only large-scale counter-attack launched by the regular army and the newly raised Shia militia was a disastrous foray into Tikrit on 15 July that was ambushed and defeated with heavy losses. There is no sign that the dysfunctional nature of the Iraqi army has changed. Iraqi politicians have gone on playing political games as they move, ever-so-slowly, towards replacing the discredited prime minister, Nouri al-Maliki.

Iraq’s Shia majority seems to believe the present situation is not as dangerous as it looks. They argue that Iraq’s Sunnis have risen in revolt and ISIS fighters are only the shock troops of an uprising provoked by the anti-Sunni policies and actions of Maliki. Once he is replaced, as is almost certain, Baghdad will offer the Sunnis a new power-sharing agreement with regional autonomy similar to that enjoyed by the Kurds. Despite all signs to the contrary, Shia at all levels are putting faith in this myth.

The foster parents of ISIS and the other Sunni jihadi movements in Iraq and Syria are Saudi Arabia, the Gulf monarchies and Turkey. The rise of ISIS was crucially supported by outside Sunni powers. It’s unlikely the Sunni community as a whole in Iraq would have lined up behind Isis without the support Saudi Arabia gave directly or indirectly to many Sunni movements. The same is true of Syria. The Saudis now seem fearful of the monster they helped create, and they have pulled support from the jihadi opposition, but it may be too late. For the US, Britain and the Western powers, it makes for rocky relations with major oil suppliers. And then, to complicate matters further, Israel and Gaza resumed throwing bombs at each other after a nearly 3-day ceasefire.

You may remember that oil prices had spiked to $108 a barrel in June, but then ISIS failed to attack Baghdad, and ISIS did little that threatened oil infrastructure affecting deliveries outside Iraq, and oil prices slipped. The price at the pump is down 15 cents a gallon since July 4^th; down 35 cents per gallon since mid-June. And now that the US has re-entered the battle, it is widely anticipated that the craziness in Iraq will be defeated and oil prices will stabilize, but it would be foolish not to expect ISIS to retaliate against US aerial attacks.

In economic news today:
Wholesale inventories grew by 0.3% in June, while sales increased 0.2%.

Productivity in the second quarter increased 2.5%, compared with a revised 4.5% drop in the first quarter. Cold weather in the first quarter hurt output, but workers produced more in the spring, proving that 90% of the difference is just showing up. Unit-labor costs increased 0.6% in the second quarter, and inflation adjusted hourly wages were up just 0.1%.

White House economic officials say the labor market is about 80% back to the level before the financial crisis, an indication the economy is steadily healing. It just doesn’t feel that way for many Americans. As the US economy recovers, hirings increase and people are encouraged to look for jobs again; at least that’s how things are supposed to work.  Instead, the ratio of the adult population with jobs, or looking for one; what’s called the labor force participation rate, has been falling, standing at 62.9% in July 2014. This represents a 3 percentage point decline since the financial crisis and the lowest rate since 1978. Gains in participation rates between 1960 and 2000 were largely driven by sweeping social changes such as the post-war baby boom and the entry of women into the work force, but in the past 7 years half of those gains have been reversed; the equivalent of 7.5 million workers have been lost from the US labor force.

The shrinking pool of workers in the job market is due in part to demographic shifts as the boomer generation moves into retirement, but today the International Monetary Fund, the IMF said more needs to be done to strengthen the labor market, raise wages, and bring people back into the labor force. The IMF says up to one third of the post-2007 decline in participation rates is reversible and we need to look at economic policies to turn things around. Suggestions include better job training, employment search assistance programs, affordable child care, and immigration reform.

The Federal Reserve has released a nationwide survey, the first of its kind, designed to get a better understanding of how households view their own financial situation and economic well-being. The short answer is “not so good”. Just 30% of survey respondents described themselves as better off than they were in 2008, with 34% saying they were doing about the same and 34% saying they were worse off. Some 77% of respondents said they either didn't expect a raise in the next 12 months or expected their income to decline. About 30% of Americans said their household income for 2012 was lower than what they'd expect in a normal year.

About 40 million Americans have student loan debt totaling more than $1.3 trillion, and only 40% of them think the education was worth the cost. Some 35% of survey respondents who are paying back student loans said they had to cut spending by "a little" over the past year to keep up with their student debt payments, and another 11% said they had to cut back their spending by "a lot." One finding of the survey is that debt can affect your health. Some 44% of Americans with student debt said they avoided medical treatment because they couldn't afford it, while only 30% of Americans without student loans said the same thing.

Almost half the participants said they were not saving any portion of their income, and roughly one-fifth said they're spending more money than they are currently taking in. Only 39% of people reported having a rainy-day savings fund that would cover at least three months of expenses. A combined 25% of households who told the Fed they'd had savings prior to 2008 reported having used up "all" or "nearly all" of their savings as a result of the recession. And just 48% of people said they would be able to completely cover a $400 hypothetical emergency expense without selling something or borrowing money. Just under a third of non-retired households reported having no retirement savings or pension, including just under 20% of households aged 55 to 64. A quarter of the respondents said they had done no retirement planning at all.  Of those who have given some thought to retirement planning and plan to retire at some point, 25% didn’t know how they will pay their expenses in retirement.

Next week’s economic calendar includes a look at July retail sales on Wednesday. The recent drop in gas prices may actually dampen the real outlook for retail sales. On Tuesday we’ll get a look at the strength of the labor market in the JOLT report, the Job Openings and Labor Turnover survey measures workers who are quitting their jobs; the thinking is that when workers are confident about their job prospects they’re more willing to jump ship. The quit rate has edged up in the past couple of years but is still well below the rates posted in the last expansion. Another measure of strength in the labor market is hiring activity among small businesses. On Tuesday, we’ll get the Small Business Optimism survey. In June, 26% of small businesses surveyed said they had at least one job opening they could not fill.  On Thursday, the New York Fed will release its second-quarter Household Debt and Credit Report. The New York Fed reported that in the first quarter, households increased their total borrowings (including mortgages, credit cards, student loans and auto loans) for the third quarter in a row, led by gains in mortgages and student loan debt.

Wednesday, July 23, 2014 - Another Day Another Dollar

Another Day Another Dollar

by Sinclair Noe

DOW – 26 = 17,086
SPX + 3 = 1987
NAS + 17 = 4473
10 YR YLD un = 2.46%
OIL = 103.12
GOLD – 3.50 = 1305.00
SILV - .06 = 21.01

The Standard & Poor’s 500 index rose to an all-time high, as Apple boosted technology companies and health-care shares rallied through another busy day of earnings reports. The Dow was lower, mainly due to Boeing – we’ll get to that in a moment. Apple hit its highest level since 2012, based on earnings reported after the close yesterday.

Profits at S&P 500 members probably rose 6.2 percent in the second quarter, while sales gained 3.3 percent. Let’s knock out a few earnings reports:

Facebook posted $791 million in net income, or 30 cents a share, compared with $333 million or 13 cents a share in the second quarter of 2013; revenue totaled $2.9 billion compared to $1.8 billion in the year ago period. Mobile advertising represented 62% of its ad revenue; they have figured out Facebook on a smartphone. Facebook now claims 1.32 billion monthly users.

AT&T was once the telephone company, now it’s the second largest US mobile provider; they earned  $3.6 billion or 68 cents per share in the second quarter, down from $3.8 billion or 71 cents per share a year ago; even as revenue increase from $32.1 billion to $32.6 billion.

Biogen Idec rallied 11 percent after raising its full-year forecast, while Intuitive Surgical jumped 18 percent as results topped estimates.

At first blush, Boeing’s numbers looked good; the aerospace giant earned $2.40 per share, easily beating estimates of $2 per share; the company lifted its earnings outlook for the rest of the year. Shares dropped about 2%. Revenue growth disappointed. Commercial airline sales were up less than expected; there was a substantial charge for a military tanker. Boeing is one of the dogs of the Dow – down 7% year to date.

Delta Air Lines said its second-quarter earnings were up 17%, driven by higher passenger and operating revenue as traffic increased. Delta has said it plans to reinvest about 50% of its operating cash flow back into the business, resulting in $2 billion to $3 billion of capital expenditures annually through 2018, with $2.3 billion planned for 2014.

Another day, another General Motors recall; the only difference is that today’s recall does not involve ignition switches; it’s a problem with the seats. Today’s recalls total 717,950 vehicles covering six models; bring the total for the year to about 29 million. If you own a GM vehicle, call the dealer. The problem with ignition switches hasn’t gone away, just that today, it moved to Jeep-Chrysler, which announced nearly 800,000 vehicles will be recalled for ignition switch problems.

Another month, another downward revision from the IMF. In June, the International Monetary Fund forecast US economic growth would be about 3% to 3.5% for the rest of this year, and then they revised forecasts down to 2%. Today, the IMF said US economic growth would be about 1.7%. The IMF says lower growth expectations should contribute to continued slack in the labor market for the next three to four years, with the United States remaining below full employment until 2018.

The IMF says the Federal Reserve could keep its benchmark interest rates at zero beyond the middle of 2015, the date implied by policymaker forecasts, as long as inflation and financial stability concerns remain subdued. Future US growth could be disappointing if interest rates rise too quickly, or if there is a broader and concerted slowdown in emerging markets, or if increasing geopolitical tensions in Iraq and Ukraine prompt higher energy prices and severe financial and trade disruptions. The IMF also warned that an aging US population meant the economy would not be able to grow above 2% long term without significant reforms, including tax and immigration changes, more investment in infrastructure and job training, and the provision of childcare assistance, which could help lure more Americans into the workforce. Even without these measures, the IMF said there is "a strong case" for more government spending to support the economic recovery in the near-term, as long as there is a plan to deal with high entitlement spending later on.

Meanwhile, the IIF, the Institute of International Finance says investors have been willing to take on more risk, pushing borrowing costs down and stock prices higher, based in part on strengthening confidence in the US and global recoveries, but with perhaps too much exuberance. Investors don’t seem to be taking adequate account of the uncertainties around economic growth and monetary policy, and that points to a pull-back in markets. With uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation. The IIF’s concerns echo those of some Federal Reserve officials, who said at their June meeting that low volatility levels and increased risk-taking signaled “market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy.”

Another day and the fighting continues in the Middle East. The latest count has 687 Palestinians killed in the conflict. Ben Gurion Airport in Tel Aviv remains closed to US airlines, and many other global carriers. Secretary of State John Kerry is trying to negotiate a ceasefire but it looks unlikely.

In the Netherlands, a day of mourning as the bodies of the victims were returned for identification. Most of the passengers were Dutch. Two military planes, one Dutch and the other Australian, carrying the first 40 coffins landed at Eindhoven air base. They were met by members of the Dutch royal family, the Prime Minister and hundreds of victims' relatives. In Kiev, the Ukrainian government reports two Ukrainian military jets were shot down within 20 miles of the crash scene.

The downing of a civilian jetliner might turn out to be the Lusitania moment that could draw the US and Russia into a new world war, but for now, it doesn’t seem likely. The more likely reaction will be an increase in sanctions against Russia, which the US has already done; the EU is more reticent. The European Commission, the EU’s executive arm, will put forward its proposals to a committee of the 28 EU member governments in Brussels tomorrow. The bloc’s foreign ministers this week called for plans for measures that could hit “access to capital markets, defense, dual-use goods, and sensitive technologies, including in the energy sector.” Russia supplies 30% of the natural gas to Europe, and it is a major trade partner. Yesterday, France delivered a $1 billion dollar warship to Russia, saying the Russians had paid for it and it was scheduled for delivery. Business drives the truck, coffins are placed in the back.

Events in Gaza and Ukraine have, for the time being, taken global attention away from the Syrian civil war and the ISIS’s advance through Iraq. Last Thursday and Friday were the two bloodiest days yet in Syria’s civil war, with more than 700 people killed in fighting between the Syrian government and ISIS, the Sunni militant group. An ISIS suicide bombing killed 31 people, mainly civilians, in Baghdad yesterday. ISIS appears to be consolidating its newly acquired territories. The government in Baghdad appears to be struggling to cobble together something that would actually pass as a government. The civil wars in Syria and Iraq are growing increasingly chaotic and there doesn’t seem to be much hope for resolution.

The Gaza and Ukraine conflicts are not likely to draw greater powers into a major conflict. And one reason is because Gaza and Ukraine are not major oil producers. The conflict that represents the largest potential threat to markets is still the ISIS invasion of Iraq; there oil supply could be severed and the jockeying among regional middle powers could possibly lead to a wider scale conflagration between Sunni and Shia sponsor states.

So, one of the indicators that things are getting better or worse will be reflected in the price of energy. Think of it this way: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. Anything that disrupts that supply of energy disrupts the work you do.

Right now there is probably a $5 to $10 fear premium built into the price of oil, and that seems to be acceptable. The signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained more or less, Russia and Ukraine will find a solution or just fade away. The non-acceptance of Black Swans is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters. Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant. Maybe, after 13 years of war, the US is just weary of any threat.

At some point the fear premium could pop and oil prices could jump to $150 or $200 a barrel, and if that happens the IMF forecast is way too high; if that happens the economy comes to a grinding halt; if that happens, everybody in the US and Europe will wake up and scream bloody murder, but for now, it’s just another day, another dollar.

Thursday, January 02, 2014 - Back in the Groove

Back in the Groove

by Sinclair Noe

DOW – 135 = 16,441
SPX – 16 = 1831
NAS – 33 = 4143
10 YR YLD - .04 = 2.99%
OIL – 2.93 = 95.49
GOLD + 17.50 = 1224.00
SILV + .57 = 20.11

I'm back. We'll try to settle into the groove here, starting with a look at the daily economic news.

Financial data firm Markit said its final US Manufacturing Purchasing Managers Index rose to 55.0 last month, beating November's 54.7 reading. So, manufacturing ended the year on a high note, growing in December at the fastest pace in 11 months.

Signs of strength in both the manufacturing and services sector as well as stronger job growth across the economy contributed to the Federal Reserve's decision in December to begin tapering, slowing its monthly bond purchases. I had expected the Fed would wait to begin the taper. I was wrong. It wasn't really a shocking development because we knew they would eventually taper, it was just a matter of timing. The taper hasn't actually started yet, it's only been announced.

One area where we're starting to see some impact is in mortgage rates, now at the highest levels since September. The average rate for a 30-year fixed mortgage was 4.53% this week, up from 4.48%. And Freddie Mac also reports the average 15-year fixed rate climbed to 3.55% from 3.52%.

While a jump in mortgage rates has slowed demand, buyers continued to push prices higher. According to the most recent S&P/Case-Shiller home price index, prices in 20 US cities rose 13.6% in October from a year earlier. Some of the price increase is because there are fewer foreclosures, which typically are sold with discounts. And earlier this week, the National Association of Realtors reported contracts to buy previously owned homes rose 0.2% in November, the first increase in six months, after a 1.2% drop in October that was larger than initially reported.

Meanwhile, Eurozone manufacturing also posted its strongest growth since May 2011, but there were some significant divergences with Germany posting solid growth and France showing a decline.

A separate report showed the ISM  factory index fell to 57 in December from the prior month’s 57.3, which was the highest since April 2011. Readings above 50 indicate expansion.

Russia retained the title of the world's top oil producer for 2013. For a while, the US overtook the top spot from Russia. The Russian oil output rose to a post-Soviet high of 10.51 million barrels per day in 2013, up almost 1.4 percent from 2012. We've seen a huge increase in domestic oil production, but Russia's economy relies on oil revenue and as oil prices declined, the Russians responded by boosting output.

In the US, small businesses increased their borrowing in November. The Thompson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1% in November from a year earlier. That would seem to be a leading indicator of continued economic expansion, and maybe an early signal of increased hiring ahead.

Applications for unemployment benefits declined last week to the lowest level in a month. Jobless claims fell 2,000 to 339,000. The number of people continuing to receive jobless benefits dropped by 98,000 to 2.83 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Those job-seekers rose by about 58,000 to 1.39 million in the week ended Dec. 14. Those extended benefits lapsed Dec. 28 as Congressional Democrats failed in a last-ditch effort to prolong the assistance before the House adjourned earlier in the month. Senate Democrats have pledged to consider a measure to reinstate the aid next week as lawmakers return to Washington.

The expiration of the extended benefits will leave about 25 percent of jobless Americans collecting unemployment insurance payments, down from 38 percent. Since 1946, when data was first collected, the share of unemployed receiving state or federal aid has never dropped below 30 percent.

Thirteen states raised their minimum wage yesterday. Those boosts will provide the country's low-wage workforce with some relief. But in many areas they won't be enough to bridge the gap between what people are paid and what they need to cover basic expenses. None of the states raised their minimum wages as high as $10.10, which is the wage proposed last year by Senate Democrats and later supported by President Obama.

Also yesterday, the Affordable Care Act went into law. Health insurance companies can't turn away anyone because of their medical histories or pre-existing conditions. Prices can't be higher for people with chronic ailments, or for women, and older individuals can't be charged more than three times what younger customers pay. Basic benefits like hospitalizations, prescription drugs and mental health care must be covered. Annual and lifetime limits to essential coverage are gone. And nearly everyone must obtain health coverage or face a tax penalty under the individual mandate.

More than 2.1 million people have signed up for Obamacare. Also, states report 3.9 million people signed up for Medicaid, which is expanding coverage in 25 states and the District of Columbia. Enrollment surged in December as the deadline for January coverage approached.

There are still problems with the website; it's working better than before, but that's not saying much. Some consumers still can't navigate their way, others will find the insurance they chose isn't in place, and others, whose polices were canceled because they didn't meet standards, will suffer lapses in coverage if they couldn't complete applications in time. But it's official now. You can't really undo 2.1 million insurance policies.

The S&P 500 finished 2013 with 30% gains, after posting all time highs for the first time since 1999.  The Dow average climbed 27 percent in 2013 for its best performance since 1995.

The first trading session of January has proven profitable for investors over the previous five years, with the index gaining an average of almost 2 percent that day since 2009. Three rounds of Federal Reserve stimulus and better-than-forecast corporate earnings have helped the S&P rally as much as 173% from a 12-year low in 2009.

Last January, the Dow posted a 5.7% gain for the month, and the S&P was up 5% for January 2013. And we were off to the races. There is a theory that the movement of the S&P 500 during the month of January sets the stock market's direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year. The theory comes from the Stock Traders Almanac.

Officially, the Almanac says every down January since 1950 has been correctly called by its Barometer and has a long-term batting average of almost 80%. In some instances a month seems like too long to wait. In those cases it’s possible to make a call after only five days, thanks to a predictive power that’s been almost 90% accurate over the years. You also look to history which says great years tend to be followed by good years. We end up seeing an average increase of 10% in the year following gains of 20% or more 80% of the time.  2013 was only the 6th time since 1929 that stocks finished the year at their annual high, a rarity that has historically preceded price gains in subsequent years by an average of 8.5%. Of course, if you want absolute certainty, you'll have to wait 12 months.

And even if the January Barometer does work, which it probably does, well, you've still got to be in the market, or get out of the market, depending on the signal. There's some old investing wisdom that says that “being right and making money are not the same thing.”

Those of us lucky enough to own stocks are a bit wealthier than a year ago, at least in theory, and depending on exactly what we own, and of course, on paper.  At least part of the rally in stocks has been driven by signs of a resilient, if not exactly booming, economy. It is a far better thing for stocks to be rising than for them to be falling. Despite the steady stream of good news out of the stock market, the majority of Americans still think the economy is getting worse, not better. Of course, only about half of Americans own stock, and that includes those in retirement accounts; they rely on wages, which haven't really budged.

Over the next few weeks and months, we'll likely hear a rash of good news about the economy; or is it a flurry of good news; maybe a passel of good news? No, I think it's more like a rash. The pessimism of 2013 was overdue, so we might expect undue optimism in 2014. And once we find a particular narrative, we'll fit the facts around it. You need to look beyond the headline growth figures. Once the monetary stimulus is exhausted, we'll probably need a new narrative for monetary policy. We still need to see improvement in the labor force. We still have enormous problems in Washington, and the budget issue will be front and center in the coming weeks. We'll need some new technology to lift us to whatever place we need to go. Maybe we'll find it. I hope so.

Monday, September 24, 2012 - Counting Fingers

Counting Fingers

by Sinclair Noe

DOW – 20 = 13,558
SPX – 3 = 1456
NAS – 19 = 3160
10 YR YLD -.04 = 1.72%
OIL +.14 = 92.07
GOLD – 8.50 = 1765.50
SILV - .55 = 34.07
PLAT – 16.00 = 1626.00

Goldman Sachs is out with some research. I always feel more than a little skepticism when reading Goldman research. It's tough to believe a research report from a company you know would bet against you. You want to count your fingers after shaking hands. Goldman Sachs strategists expect the "fiscal cliff" to push the market lower in the fourth quarter, and they recommend investors sell the stocks that have lagged so far this year.

Goldman chief U.S. equity strategist David Kostin writes that the S&P 500 should fall sharply after the election when investors finally realize that there is a possibility that the fiscal cliff will not be resolved smoothly. He says the majority of investors expect to see the fiscal cliff avoided in the lame duck session of Congress, but Goldman sees a one-in-three chance that Congress will fail to address the issue.

Goldman says a catch-up strategy could be to sell stocks that have had the worst performance year-to-date. In the 23 years that the S&P was positive in the first nine months, a sector-neutral basket of underperforming stocks continued underperforming by an average 291 basis points during the fourth quarter, giving the strategy a 65 percent outperformance rate.

In a separate report, Goldman forecasts an 18.2 percent return on commodities in the next 12 months, with energy and industrial metals leading the way. Not 18.3%, but 18.2%.

The Standard & Poor's GSCI Enhanced Commodity Index gain of 18.2 percent will compare with 26.5 percent in energy ( or around $125 a barrel), 10 percent in industrial metals and 6 percent in precious metals. Agriculture will be down 5 percent over the same period and livestock up 4.5 percent. The Federal Reserve's third round of quantitative easing will help boost copper in the 2013 first half.

(Econombrowser had this analysis of ...Oil prices slipped below $92 a barrel, and finished just above. New efforts to revive growth from central banks in Europe, Japan and the U.S. have not been enough to overcome pessimism about the global economy's prospects. When economic growth slows, so does demand for fuel which typically results in lower oil prices. A stronger dollar makes crude more expensive and a less attractive investment for traders using other currencies. Can the wild swings in the price of oil over the last few weeks have anything to do with supply and demand? You remember last week, when the price of oil dropped $3 in a minute?The move sparked talk of an erroneous trade—called a "fat-finger" error in industry parlance—or a computer algorithm gone awry.

Fat finger or no, there was an even bigger drop on Wednesday, leaving the price of West Texas Intermediate well below where it had been prior to Fed Chair Bernnake's announcement of QE3, or even the price before the Jackson Hole Speech. Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?

In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less. Not a lot less-- the price of gasoline could change quite a lot and it would take some time before you could be sure you see a response in the data. That small (and often sluggish) response is why the price of oil can and does move quite a bit on a minute-by-minute basis, seemingly driven by forces having nothing to do with the final users of the product.

But if the price of oil that emerges from that process turns out to be one at which the quantity of the physical product that is consumed is a different amount from the physical quantity produced, something has to give. Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected.

There are several channels by which QE3 may end up influencing the quantity of oil physically produced and consumed. A lower value for the U.S. dollar would mean a greater quantity demanded worldwide at a given dollar price of oil. A higher level of economic activity (the ultimate goal of QE3) would also boost demand for the physical product. And lower real interest rates may make it profitable to store more oil physically, leaving less available for the ultimate users of the product. So I would have expected QE3 overall to be one factor that could contribute to a higher dollar price for oil.

But any investors who have been assuming that QE3 will boost the price of oil for no reason other than the fact that other traders expect it to raise the price of oil may find themselves tripping painfully over the fat finger of reality.

We're just about to wrap up the third quarter; top performers so far include precious metals funds, which is another way of saying precious metals. A bounce back at bargain levels, weakness in the dollar and a play on QE3. Stocks erased Q2 losses in the third quarter. Commodity and European funds outperforms, with Euro-region funds up about 10% on the quarter. Maybe it's just bargain hunting. Large caps and value outperformed small cap and growth.

Federal Reserve Bank of San Francisco President John Williams says QE3 is essential and the Fed might do even more. Williams said the Fed “will continue buying mortgage-backed securities until the job market looks substantially healthier,” and they “might even expand our purchases to include other assets.” I don't know how you expand on unlimited Quantitative Easing, but we might find out.

The German edition of Der Spiegel is running a series of articles on the European situation, which make clear, as if that were still necessary, that Europe is still an absolute mess. You know, just in case you thought it was not; that Mario Draghi's latest unlimited whatever it takes has somehow chased away the demons.

First, Der Spiegel writes that the Greek deficit is twice as high as thought , at 20 billion-euro, according to a preliminary version of the long awaited troika report. The gap has to be closed for the next tranche of bailout money to be paid.

Second,euro-zone countries plan to let the bailout fund balloon up to $2.6 trillion. Remember that the German Constitutional Court limited Berlin's part to about $25 billion (billions compared to trillions). Creative accounting to infinity and beyond. 

Third, the latest German plan would split up investment and retail activities for Germany's banks (including Deutsche), think Glass Steagall. He wants to ban commodities speculation. And he wants a bank-ESM, a fund paid for by banks that can be used to bail them out, rather than taxpayer money.

There's lot more going on, and going wrong, in Europe, no matter what Draghi does, and no matter what plans José Manuel Barroso unveils. I'm really not expecting the Euro-situation to collapse real soon but here is the really scary part. The fate of the continent and its people is presently in the hands of a group of bankers, technocrats and delusional politicians.

More young adults are leaving their parents' homes to take a chance with college or a job. Across the nation, people are on the move again after putting their lives on hold and staying put. Once-sharp declines in births are leveling off, and poverty is slowing.

A new snapshot of census data provides sociological backup for what economic indicators were already suggesting: that the nation is in a tentative, fragile recovery; maybe, kinda, sorta.

The new 2011 census figures show progress in an economic recovery that technically began in mid-2009. The annual survey, supplemented with unpublished government figures as of March 2012, covers a year in which unemployment fell modestly from 9.6 percent to 8.9 percent. So, this data really is lagging.

The census figures show slowing growth in the foreign-born population, which increased to 40.4 million, or 13 percent of the US population. Last year's immigration increase of 400,000 people was the lowest in a decade.

The bulk of new immigrants are now higher-skilled workers from Asian countries such as China and India, contributing to increases in the foreign-born population in California, New York, Illinois and New Jersey.

Income inequality varied widely by region. The gap between rich and poor was most evident in the District of Columbia, New York, Connecticut, Louisiana and New Mexico, where immigrant or minority groups were more numerous. By county, Berkeley in West Virginia had the biggest jump in household income inequality over the past year, a result of fast suburban growth just outside the Washington-Baltimore region, where pockets of poor residents and newly arrived, affluent commuters live side by side.

As a whole, Americans were slowly finding ways to get back on the move. About 12 percent of the nation's population, or 36.5 million, moved to a new home, up from a record low of 11.6 percent in 2011.

Among young adults 25 to 29, the most mobile age group, moves also increased to 24.6 percent from a low of 24.1 percent in the previous year. Longer-distance moves, typically for those seeking new careers in other regions of the country, rose modestly from 3.4 percent to 3.8 percent.

Less willing to rely on parents, roughly 5.6 million Americans ages 25-34, or 13.6 percent, lived with Mom and Dad, a decrease from 14.2 percent in the previous year. Young men were less likely than before to live with parents, down from 18.6 percent to 16.9 percent; young women living with parents edged higher to 10.4 percent, up from 9.7 percent.

The increases in mobility coincide with modest improvements in the job market as well as increased school enrollment, especially in college and at advanced-degree levels.

Marriages dipped to a low of just 50.8 percent among adults 18 and over, compared with 57 percent in 2000. Among young adults 25-34, marriage was at 43.1 percent, also a new low, part of a longer-term cultural trend in which people are opting to marry at later ages and often cohabitate with a partner first.

Births, on the other hand, appeared to be coming back after years of steep declines. In 2011, the number of births dipped by 55,000, or 1 percent, to 4.1 million, the smallest drop since 2008.

Some 17 states showed statistically significant increases in the poverty rate, led by Louisiana, Oregon, Arizona, Georgia and Hawaii. Among large metropolitan areas, McAllen, Texas, led the nation in poverty, at 38 percent, followed by Fresno, Calif., El Paso, Texas, and Bakersfield, Calif. In contrast, the Washington, D.C., metro area had the lowest level of poverty, about 8 percent, followed by Bridgeport, Conn., and Ogden, Utah.

Government programs did much to stave off higher rates of poverty. While the official poverty rate for 2011 remained stuck at 15 percent, or a record 46.2 million people, the government formula did not take into account noncash aid such as food stamps, which the Census Bureau estimates would have lifted 3.9 million people above the poverty line. If counted, that safety net would have lowered the poverty rate to 13.7 percent. And without expanded unemployment benefits, which began expiring in 2011, roughly 2.3 million people would have fallen into poverty.