Tuesday, August 26, 2014 - A Few Old Sayings

A Few Old Sayings
by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, April 18, 2014 - Yes, We Have No Avocados

Yes, We Have No Avocados

by Sinclair Noe

The markets are closed today in observance of Good Friday.

No economic reports today.

Let’s take a look at next week’s economic calendar. On Wednesday, we’ll get reports on new and existing home sales. New home sales are expected to be up slightly, while existing home sales are expected to post a decline for the third consecutive month. Higher mortgage rates and rising prices have pushed some potential buyers out of the market. The average rate on a 30-year fixed mortgage is up almost a full percentage point from its recent low one year ago.

The softness in home prices in the first quarter has also hurt homeowners struggling with negative equity. The pool of underwater borrowers peaked at 12.8 million, or 29% of all properties with a mortgage, in the second quarter of 2012. Rising prices have lifted millions back above water. As of the first quarter of this year, some 9.1 million homes (or 17% of homes with mortgages) were "seriously" underwater, owing at least 25% more than property's estimated market value.

Next Friday, we’ll see the Consumer sentiment index, which has been showing a lack of enthusiasm reflecting the weak pace of hiring and meager pay raises for most households, which in turn results in sluggish consumer spending.

Thursday, we’ll get a report on durable goods orders. If economic growth is finding traction, you would expect to see businesses spending more on equipment, which should show up in the nondefense goods excluding aircraft, subcategory of the durable goods report. If businesses are seeing an increase in demand for their products, they would be expected to ramp up production. You can’t boost profits forever by just cutting costs.

Earnings season kicks into high gear next week. Apple, Microsoft, AT&T, McDonald’s, Netflix, and Facebook all report next week. S&P 500 companies' first-quarter earnings are projected to have increased 1.7% from a year ago. The forecast is down sharply from the start of the year, when profit growth was estimated at 6.5%, but has climbed from a low of 0.6% reached on Wednesday.

Yesterday, an international deal was announced in Geneva to defuse the East-West crisis in Ukraine; the pro-Russian separatists occupying buildings in Eastern Ukraine apparently didn’t get the memo. Leaders of gunmen who have taken over city halls and other sites in and around Donetsk this month in pursuit of demands for a Crimea-style referendum on union with Russia, rejected the agreement struck in Geneva.

Moscow renewed its insistence that it has no control over the "little green men" who, as before Russia annexed Crimea last month, appeared in combat gear and with automatic weapons to seize public buildings - a denial that Western allies of those who overthrew the pro-Russian president in Kiev do not accept. The White House renewed President Barack Obama's demands that the Kremlin use what Washington believes is its influence over the separatists to get them to vacate the premises. It warned of heavier economic sanctions than those already imposed over Crimea if Moscow failed to uphold the Geneva deal.

There’s no question the US can inflict great financial damage on the Russian economy, and there are indications that the Russian economy is already experiencing the early stages of a recession, but all is fair in love and war. And Russia can fight back with more than just restricting nat gas exports.  Russia's cyber-warfare experts are among the best, and they have already attacked – trial runs if you will – even though that information wasn’t really mainstream news. And the US is vulnerable, mainly because we are so dependent on technology.

So, let’s take a look at what’s on the menu for the holiday weekend. Higher prices, at least for food.

Almost everything you eat is costing more, or will. The US Department of Agriculture had been projecting about a 3% rise in the price of fresh fruits and vegetables this year; they will have to revise higher. The CRB Food Index takes a look at commodity prices for a range of foods; that index is up 20% since the start of the year. And it will likely get worse.

California has suffered a double hit: very little rain in the lowlands and a lack of snow in the mountains in the north and east. Snowmelt provides water for many of the state's farmers during the growing season and for the huge population centers in the south. Snow this year was only about 30% of the historical average. Now, the snow is melting, and in some streams and rivers there is so little water that wildlife crews have had to truck stranded salmon downstream so they could make it out to sea. This likely means some waterways will dry out this summer.

And while the West has been dry, the Midwest and Northeast had one of the harshest winters in more than 3 decades. So far this year, corn and soybean futures prices have increased 15%, and wheat prices are up 20%. Last year, high prices for corn saw farmers respond by planting the most acreage in 70 years, which in turn pushed prices down by about 40%. The USDA says farmers will plant just a little less corn this year and just a little more soybeans. Market conditions favor less corn, so other crops picked up acres from corn.

As always, the growing season is subject to weather, and the past 4 years have not been normal; either too dry or too wet to be ideal. Some farmers are expecting a return to normal, or at least hoping. And even if crop harvests are abundant, prices will be underpinned by exports. Of course, the weather might not be normal.

We seem to be undergoing a change in climate that resulted in Vermont posting its coldest month of March ever; while nearly two-thirds of the Great Lakes remained frozen by early April, impacting commercial shipping; the Northwest and Northern Rockies were wet – too wet, resulting in a fatal landslide in Washington state; and California and Arizona had a record warm start to the year, with temperatures in the first 3 months of the year more than 5 degrees above average. If you are looking for normal weather, that doesn’t seem to be the direction.

After a drought in 2012, farmers slaughtered huge numbers of cattle and hogs as feed costs soared. All that extra meat on the market helped keep a lid on prices in 2013, and now, the US cattle herd is at a 63-year low. If you are considering ham for your Easter dinner, hog prices are at a 7 year low, but it won’t last long. The smaller supply of animals ready for slaughter plus the expectation of higher feed costs have sent prices soaring.

Meanwhile, the California drought will likely result in higher prices for many fruits and vegetables. Professor Timothy Richards at Arizona State University recently published research on which crops will likely be most affected and what the price boosts might be. He estimates the following possible price increases due to the drought:

• Avocados likely to go up 17 to 35 cents to as much as $1.60 each.

• Berries likely to rise 21 to 43 cents to as much as $3.46 per clamshell container.

• Broccoli likely to go up 20 to 40 cents to a possible $2.18 per pound.

• Grapes likely to rise 26 to 50 cents to a possible $2.93 per pound.

• Lettuce likely to rise 31 to 62 cents to as much as $2.44 per head.

• Packaged salad likely to go up 17 to 34 cents to a possible $3.03 per bag.

• Peppers likely to go up 18 to 35 cents to a possible $2.48 per pound.

• Tomatoes likely to rise 22 to 45 cents to a possible $2.84 per pound.

Industry estimates range from a half-million to 1 million acres of agricultural land likely to be affected by the current California drought, and between 10 and 20% of the supply of certain crops could be lost.

Just as farmers in the Midwest can shift acreage from corn to soybeans, we will shift our sources for food. When prices increase, farmers outside of California, including foreign suppliers, will be incentivized to ship more crops to the US. That will in turn put downward pressure on costs. But with water-supply problems expected to persist for years, California farmers will have some difficult choices to make. They’ll need to determine which crops should receive the limited amount of available water, and which should be allowed to fall away. The long term consequences for California agriculture could be profound.

The cost of growing food accounts for only about 15 cents of every $1 we spend on it. The rest goes to processing, packaging, marketing and transportation. Most US consumers are in a position to cope by spending less on other goods or switching to other types of food. In other words, going to fewer movies or purchasing less beef and more chicken, the price of which has risen much less than beef this year. However, nearly 47 million Americans rely on food stamps, or SNAP – the Supplemental Nutrition Assistance Program, and as food prices go higher the number of enrollees is likely to climb. And even with food stamps, many families will find it difficult to provide sufficient nutrition.

Keep in mind the US enjoys the world’s cheapest food prices. There are even more significant implications for poorer countries, where consumers devote a far larger share of personal income to food. Remember the Arab Spring uprisings started a few years ago with food shortages and rising prices. Food shortages also figure in the unrest in Venezuela. The US is the world's biggest food exporter by a wide margin; whatever happens to domestic prices won't be confined to our shores.