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

It’s Just a Matter of Time
by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, July 07, 2014 - Small Steps

Small Steps

by Sinclair Noe

DOW – 44 = 17,024
SPX – 7 = 1977
NAS – 34 = 4451
10 YR YLD - .03 = 2.62%
OIL - .67 = 103.39
GOLD - .50 = 1321.00
SILV - .10 = 21.15

It was a long holiday weekend that was over way too fast. And the problems of the world haven’t gone away. Let’s get caught up on some of the big stories.

In Iraq, the situation is deteriorating. There had been muted hope for some sort of an inclusive government to hold the country together. Don’t count on it. Iraq’s new parliament has called a recess and they won’t meet again for 5 weeks. So Iraq is now politically paralyzed. Meanwhile, a Sunni Islamist insurgency killed an army general near Baghdad.  It looks like Prime Minister Maliki is digging in his heels, raising the risk that Iraq will fragment along ethnic and sectarian lines.

ISIS, the Sunni insurgents are holding territory in western Iraq and just north of the capitol. The Iraqi military, backed by Shi'ite militias and volunteers, has yet to take back any major cities but is trying to advance on Tikrit. Kurds in northern Iraq have taken advantage of the chaos to expand their autonomous territory in northern Iraq. Most Sunnis and Kurds walked out of the last parliament, saying they believed the prime minister and president should be chosen along with the speaker as a package, not one at a time. They could not resolve the impasse, so the acting speaker postponed the meeting.

In eastern Ukraine, pro-Russian rebels built barricades in the streets of Donetsk and it looks like they will try to make a stand. Although most shops and businesses in Donetsk were still open, some were shut, and residents are concerned that government forces could soon attack. Rebels have been barricaded into government buildings in Donetsk, which they declared capital of an independent "people's republic", but until now the city mostly functioned normally.

You may recall there was an election in Afghanistan last month. They announced preliminary results today. The losing presidential candidate is now saying the results of the election were improperly counted and he is describing it as a “coup” against the people. His rejection of the election results sets the stage for a possible bloody standoff between ethnic groups or even secession of parts of the fragile country, which is already deeply divided along tribal lines. The vote to pick a successor to Hamid Karzai was intended to mark the first democratic transfer of power in Afghan history, a crucial step towards stability as the US prepares to withdraw the bulk of its troops by the end of the year. Not so great.

Hamas stepped up rocket fire at southern Israeli towns and Israel called up reserve troops today in anticipation of a possible escalation of hostilities. Hamas has vowed revenge for what it saw as Israel's deadliest attacks in which six Palestinian militants died, though Israel denied any involvement. The surge in violence has raged since the kidnapping and killing of three Israeli youths last month and a Palestinian teen last week. Israel said more than 40 rockets were launched as militants' funerals were held in Gaza. Thirty struck inside Israel and the rest were shot down by rocket interceptors. Air raid sirens wailed as far north as the outskirts of Tel Aviv and Jerusalem.

And then there’s Chicago, where the Fourth of July holiday resulted in widespread violence that left 80 people wounded and 14 dead.

On the economic calendar, Alcoa will kick off the earnings reporting season after the close of trade tomorrow. Alcoa has long held the ceremonial role for starting earnings season because it was in the Dow Industrials and it had the ticker symbol AA. Alcoa is no longer one of the Dow 30 stocks, but the tradition holds. Actually, we’ve already seen about 25 companies from the S&P 500 report earnings.

Second-quarter profit growth is expected to come in at 6.6% for the Standard & Poor’s 500-stock index, which would be an improvement over the 5.6% growth in the first three months of 2014. Revenues are expected to grow 3%. While negative second-quarter profit warnings have outpaced positive ones by a 4.2 to 1 margin — well above the 2.6 to 1 negative-to-positive ratio since 1995 — the future outlooks from CEOs are far more bullish than the first quarter, when there were nearly 7 negative profit pre-announcements for every positive one.

With stocks at all-time highs and no longer cheap after a five-year bull run, Wall Street wants to see companies deliver profit and revenue growth in the coming second-quarter earnings season sizable enough to warrant the market’s big move. Indeed, the bull market’s continued health will hinge on vibrant corporate profitability. Whether or not stocks continue trending higher will likely depend on second-quarter earnings reports, as well as management’s guidance of full-year earnings.

Currently, the S&P 500 is trading at nearly 16 times its estimated earnings over the next four quarters, which is a tad above the long-term average. Heading into the season, analysts are upbeat, with more analysts’ raising profit forecasts than lowering them for the first time since the first quarter of 2012, but more upbeat analysts could result in a more downbeat market reaction.

On Wednesday, the Federal Reserve will release the minutes of its last meeting, held June 17-18. Wall Street will again be looking for any clues related to the timing of the first interest rate hike by the Fed. After the strong jobs report Thursday, some Wall Street firms revised their rate-hike timetables, warning that rates could start rising earlier-than-expected next year. However, the Fed might not be so positive about jobs. There’s been concern about the degree to which a falling unemployment rate is overstating labor-market strength.  You’ll likely see general agreement that the labor market has been improving, but there will be difference in opinion about the drop in the unemployment rate. Officials have also been eyeing tepid wage growth.

That’s one of the strange things about the jobs report; it does a poor job of measuring the strength of the jobs created. When we try to measure performance in the stock market, we don’t look at the number of new stocks available to investors, instead we measure the price of the stocks, the value of the stocks. But when we look at jobs, we don’t look at the value those jobs bring. One of the things we’ve seen is that many of the jobs being created are part-time.

So, it's interesting that the recent news of job market "improvement" doesn't mention that of the 10 occupation categories projecting the greatest growth in the next eight years, only one pays a middle-class wage. Four pay barely above poverty level, and five pay beneath it, including fast food workers, retail sales staff, health aids, and janitors. The job expected to have the highest number of openings is "Personal Care Aide" – taking care of aging baby boomers in their houses or in nursing homes. The median salary of an aid is under $20,000.

We’re starting to see some improvement as the job market gains traction; more than half the jobs the economy has added so far this year are in positions that pay higher than the hourly wage. Some 58% of the new jobs created in 2014 pay above the average hourly wage of $24.45. By contrast, about 48% of the new jobs created in 2013 paid above the national average. Businesses in 2014 are hiring more white-collar employees, construction is on the mend (at least compared to the first quarter), health care is going strong and even the long-downtrodden financial industry is finally getting into the act. About 42% of the new jobs, meanwhile, fall into categories that pay less than the average wage.

Still there is a general lack of upward wage pressure; workers demanding more money as the labor market improves and the pool of potential employees shrinks. Wages have risen just 2% over the past year and weekly wages have actually fallen in the past two months. Part of the problem is part-time work; part of the problem is that the good paying jobs are limited to certain sectors. The bigger problem is that the increase in the number of jobs is not translating to higher wages and that, in turn does not translate to faster economic growth.

This week’s economic calendar also includes reports on small businesses, job turnover, and consumer credit. There was a 10.2% surge in consumer credit in April. The growing dependence on debt could prolong consumer spending a few more months, but in the absence higher real wages, this type of consumption cannot last much longer, certainly not if we see both gas prices and inflation-driven interest rates edge higher later this year.

It’s unlikely we’ll get any big pronouncements from the Fed. They probably talked about how the economy has rebounded from the terrible slump of the 1^st quarter, but if you read the minutes for any major move on interest rates, don’t hold your breath. Neither short-term nor long-term rates will go significantly higher in the next few years. More likely, modest increases that might even be quickly reversed. The implications of another extended period of depressed rates would be bad news for savers and pension funds, but it should help the stock market.

After the Fed’s June meeting, they made clear that they expected to finally begin lifting their benchmark rate in 2015, if the economy continues to expand and unemployment continues to decline. Even so, 12 of the 16 members of the policy committee expected the Fed's rate to be no higher than 1.5% by the end of 2015 — a full 18 months from now. Asked for their rate prediction for the end of 2016, the majority of the Fed panel expected 2.5% or less. And because the Fed's rate influences all other interest costs, that would suggest still-low rates across the board.

What we are learning about this version of the Fed is they move slow and in small steps.

Thursday, July 03, 2014 - Jobs Report Thursday

Jobs Report Thursday

DOW + 92 = 17,068
SPX + 10 = 1985
NAS + 28 = 4485
10 YR YLD + .02 = 2.65%
OIL - .42 = 104.06
GOLD – 7.60 = 1320.60
SILV - .02 = 21.23

Record high closes for the Dow and the S&P 500.

The first Friday of each month is typically a big day for economic data because the Labor Department releases the nonfarm employment report. I have always considered this to be one of the most important economic reports because jobs make everything happen; it’s the stuff of work and production and a driver of capital, and sweat and blood. So, we spend extra time to really dig into the jobs report, which was released today because tomorrow is a holiday.

This was a very good jobs report. The economy added 288,000 net new jobs in June and the unemployment rate dropped from 6.3% to 6.1%; that’s the lowest unemployment rate since September 2008. The report topped estimates of 215,000 jobs. The jobs reports for April and May were revised higher; April was revised from 282,000 to 304,000 net new jobs; May was revised from 217,000 to 224,000 new jobs; meaning there were 29,000 more jobs than previously reported.

June marked the best five-month stretch of job creation since early 2006; for the past five months the economy has added at least 200,000 jobs per month. The three-month average rate of hiring in the second quarter now stands at 272,000, compared with 190,000 a month in the first quarter.

The economy has added private sector jobs for 52 straight months. During this span, 9.7 million private sector jobs have been created. Over the past 12 months, the economy has added 2.495 million jobs; and year-to-date the economy has added 1.385 million job; and 2014 is on track to be the best year for job growth since 1999.

Total employment is now 415,000 above the pre-recession peak; and private employment is now 895,000 above the previous peak; the difference between private and total is the loss of government jobs, which has been like an anchor dragging down total employment. State and local governments added 24,000 jobs last month; state and local government employment is up 138,000 from the bottom but still more than 600,000 below the peak. The federal government added 2,000 jobs in June but federal employment is still down 23,000 for the year.

Breaking down the government jobs a bit further, the improvement likely reflects a stabilizing financial outlook for municipalities. When home prices crashed, it cut into the tax base of cities and counties, and the response was to lay off workers. A return to government hiring, even a modest increase could have long term benefits from investment in education and infrastructure.

More than 7.5 million people are employed part-time for economic reasons; this number is up 275,000 in June, although the trend has been and remains down for the year. People who are working part-time because their hours have been cut back or they can’t find full-time employment are included in an alternate measure known as labor underutilization or U-6. The U-6 rate decreased to 12.1% in June from 12.2% in May; and this is the lowest U-6 reading since October 2008.

Full-time employment suffered its third-largest single month-over-month decline since the recession ended; 523,000 full-time jobs were lost while a stunning 799,000 new part-time jobs were added in June. Part-time workers again account for more than 18% of the total workforce, a level that has remained relatively stable since the recession, despite efforts to deny the truth that this is a "part-time" recovery. Part-time jobs had been in rapid decline over the past year, but June's spike cancels out that shift. There are now almost exactly as many part-time workers (28 million) as there were a year ago.

The Labor Force Participation Rate was unchanged in June at 62.8%. This is the percentage of the working age population in the labor force.  We would like to see the participation rate increase, meaning more people are looking for jobs, but a large portion of the recent decline in the participation rate is due to demographics; people are retiring and won’t be re-entering the labor force. The Employment-Population ratio increased in June to 59.0%.

The unemployment rate is calculated by dividing the number of people who are unemployed by the total number of people working or looking for work. The best way for the rate to fall is for the number of unemployed to drop because more people found a job, but it can also decline when people give up looking for work altogether. Still, the jobless rate dropped to 6.1% and that’s because more people found work, not because more people were dropping out of the labor pool; so the jobless rate fell for the right reasons.

As the labor market recovers, it creates a challenge of more people re-entering the labor pool. If more people re-enter the labor pool, the unemployment rate could go up, even as the economy adds jobs. But that hasn’t happened; rather, the number of unemployed who were re-entering the labor pool actually fell in June.

The number of long term unemployed workers has dropped by 1.2 million over the past year but there are still just over 3 million workers who have been unemployed for more than 26 weeks and they are still trying to find work; this is down from over 3.3 million people in May. There are many long term unemployed who may never get jobs again, and the longer they go without jobs, the tougher it will be. And more jobseekers gave up looking for work than found a job, for the 49^th time in the past 50 months. This is surely a demographic shift, but it also means we’re losing the skills and productivity of some of the most experienced workers.  For people who are finding jobs, the median duration of unemployment continues to drop rapidly, from 25 weeks coming out of the recession to just 13.1 weeks today.

Long term unemployment and underutilization indicate that there is still significant slack in the labor market, even though some companies are now beginning to report that they are having to compete to find workers.

So far, the trend has not resulted in higher incomes. Average pay has grown just 2% during the recovery, barely matching inflation and below the long term trend of 3.5%. Last month, the average hourly wage for private-sector workers rose six cents to $24.45. If workers earn more money, they’ll spend more money and that is a boost to the overall economy. The silver lining to the weak wages is that there is no wage inflation, so even though the jobs picture is improving, wage inflation should not influence the Federal Reserve.  Even if hourly wages aren’t moving much, there was a small pickup in the average work week and aggregate hours worked grew by a fairly strong 3.8% annual rate in the last quarter.

Job gains in June were widespread. Retailers added 40,200 workers last month. Financial and insurance firms increased their payrolls by 17,000. Restaurants and bars employed nearly 33,000 more people. Higher-paying sectors continued to lag behind in the jobs recovery. Factories added 16,000 workers, and construction added 6,000 workers, which would not be considered particularly strong. Factory payrolls have increased for 11 consecutive months, adding a total of 139,000 new jobs, well below the target of one million manufacturing jobs for the year. Factory payrolls remain a shadow of their former selves, but the revival in manufacturing is finally creating more job opportunities on the factory floor.

Shrinking unemployment and growing payrolls are always good signs for a stronger economy. However, the nature of these changes matters. If unemployment is low primarily due to labor force dropouts, and if employment growth is being driven by hundreds of thousands of low-earning part-time workers rather than growth in valuable and decent paying full-time positions, it means that the economic recovery still faces a hard slog.

The jobs report was far from perfect but it was very good and it should lead to growth in the economy for the second quarter. So today, stocks had another good day. The Dow closed above 17,000 for the first time ever. The S&P 500 is closing in on 2000. The Nasdaq is back to its highest level since 2000. Bonds dropped. And that is an ongoing trend, the markets race along while workers trudge.

Thursday, February 20, 2014 - Searching for Inflation

Searching for Inflation
by Sinclair Noe

DOW + 92 = 16,133
SPX + 11 = 1839
NAS + 29 = 4267
10 YR YLD + .02 = 2.75%
OIL + .02 = 102.86
GOLD + 12.10 = 1324.00
SILV + .29 = 21.92

The Conference Board’s Leading Economic Indicators rose 0.3% in January following no change in December. Over the six months through January, the LEI rose 3.1%. The LEI tracks 10 indicators designed to signal business cycle peaks and troughs. In the most recent report, 5 of the 10 indicators were positive, including a drop in jobless claims and a pickup in factory orders; on the negative side, declines in building permits and hours worked. Meanwhile, the Conference Board’s index of coincident indicators, a gauge of current economic activity, rose 0.1 percent for a second month. Overall, the leading indicators point to moderate expansion once the nation gets past inclement weather, with the caveat that consumer demand needs to pick up. No surprises in that report.

The Consumer Price Index rose 0.1% in January after a 0.2% gain in December. The CPI measures prices at the retail level. The core rate, excluding food and energy prices, also rose 0.1%. Over the past 12 months, consumer prices were up 1.5%, and the core CPI was up 1.6%. Energy costs increased 0.6% from a month earlier and were up 2.1% over the past 12 months. Food costs rose 0.1%. Gains in the cost of hotel rooms, medical care and rents were mostly offset by declining costs for new and used cars, clothing and airline fares.

Yesterday, Fed policymakers released the minutes of the January FOMC meeting and we learned they had expressed concern about inflation being too low. Some participants wanted an “explicit indication” in their annual statement on policy goals that prices persistently above or below their 2 percent inflation target would be “equally undesirable.”

Prices are about to move higher, at least for food. It’s pretty simple; the state that produces the most vegetables is going through the worst drought it has ever experienced. Just consider the statistics regarding what percentage of the produce you eat is grown in California: 99% of artichokes, 44% of asparagus, 66% of carrots, 50% of bell peppers, 89% of cauliflower, 94% of broccoli, 95% of celery, 90% of lettuce, 83% of spinach, 33% of tomatoes, 86% of lemons, 90% of avocados, 84% of peaches, 88% of strawberries, and 97% of plums.

If fruits and veggies don’t fill your plate, you’ll want to take note that the US cattle herd is now the smallest it has been in 63 years. The drought in California and also Texas means that there are fewer cows, as ranchers in the West sell off their livestock because grazing land has dried out and buying feed is prohibitively expensive. And you can’t just snap your fingers and have a cow ready for market; it takes a couple of years. The lower supply means higher prices; offsetting the supply is lower demand; nearly 40% of Americans say they eat less beef today than 3 years ago.  Ground beef prices were up 5% for the past year. Chicken prices up more than 18% in the past 3 years, and bacon up 23% in the past 3 years.

If there is any good news on the food front, the US Department of Agriculture today reported that corn, soybeans, and wheat prices should be lower over the next 12 months.

Anyway, no inflation on the horizon in today’s CPI report. And the reason is not just what is happening in the USA. Goods inflation is exposed to global trade. When China was flooding the world with low cost goods in the 1990s and 2000s, it put immense downward pressure on consumer goods prices and held down the overall U.S. inflation rate. Unlike the 1990s and early 2000s, the latest downdraft in goods inflation is likely being driven not so much by an influx of cheap goods produced by low-cost emerging market labor, but by a slowdown overseas driven by over investment in emerging markets during their boom. An acceleration of global growth is probably a necessary condition for headline inflation to accelerate.

That’s just a small part of the inflation picture. The service sector makes up a larger part of the US economy these days. Services inflation is highly exposed to domestic housing and the cost of domestic labor. In other words, rent and wages. The owners’ equivalent rent index had been rising at a steady pace through most of 2012 and 2013, with 12-month percent changes hovering around 2%, but toward the end of 2013, the pace picked up. By January OER was up 2.5% compared to year-ago levels. That’s not a hot pace for housing costs but it bears attention. Meanwhile, wages have been flat for what seems like forever, and that means there is no demand to push prices higher, at least for services. For that matter, we may be setting up a divergence between wages and rents. You can’t push rents higher unless people earn enough wages to pay the rent.

The Federal Reserve Bank of New York has issued a paper on why people are having a hard time finding a job. The old excuse was “structural unemployment.” The new excuse is a decline in “job matching efficiency.”

The White House budget to be released early next month will propose $56 billion in new spending on domestic and defense priorities and drop a proposal that was included in last year's budget as a way to attract Republican support; a plan that would have cut Social Security benefits based on a “chained CPI”. The budget would aim to reduce the emphasis on austerity that has been the preoccupation of American politics for the past four years.

A White House official said President Obama decided to release a budget that fully represents his "vision," rather than to continue to pursue a fiscal agreement, because Republicans have refused to engage in good-faith negotiations over the nation's top priorities.

The new budget is due March 4.

The protests in the Ukraine have escalated into gun battles between police and anti-government forces. The death toll has climbed to 75. Three hours of fierce fighting in Kiev's Independence Square, which was recaptured by the protesters, left the bodies of over 20 civilians strewn on the ground. Nearby, President Viktor Yanukovich was meeting with a EU delegation trying to broker a political settlement. For now, there is no agreement.

Increasingly, we’ve seen big banks involved in commodity markets, and an interesting idea was recently tossed out by Theodore Butler regarding the origins of the 2008 crash. I don’t know if it is true but it’s an interesting story.

You’ll remember that Bear Stearns imploded six years ago; JPMorgan took it over as the doors were closed. It was an unprecedented fall. As Butler said: “The cause was said to be a run on the bank as nervous investors pulled assets from the firm. Bear Stearns was said to be levered by 35 times, meaning it had equity of $11 billion and total assets of $395 billion. This is a very small cushion if something negative suddenly appears… Since Bear had a significant presence in sub-prime mortgages and that market was in distress, it is assumed the fall of the firm was mortgage related. That may be true, but there was no general stress in the stock market through mid-March 2008 reflecting a credit crisis. Was there instead some specific trigger behind the company’s sudden collapse?”

One idea is that Bear Stearns was short the silver market. The exact holdings haven’t been established but the 4 largest short traders in silver was at an extreme level of more than 300 million ounces; triple the long positions, and Bear Stearns was the largest short in COMEX gold and silver contracts.

The day of Bear Stearns demise coincides with historic high points in gold and silver. “Gold prices rose from under $800 in mid-December 2007 to $1,000 in mid-March 2008, a gain of more than $200. Silver prices rose from under $14 in mid-December to $21 when Bear Stearns failed on March 17, 2008. That was a gain of $7. This was the highest price for silver and close to the highest price of gold since 1980. Obviously, a $200 rise in the price of gold and a $7 rise in the price of silver is not good if you are the biggest gold and silver short…. Bear Stearns had to come up with $2.7 billion because gold and silver prices rose sharply in the first quarter of 2008 and the company bet the wrong way. That it couldn’t come up with all the margin money for the losses in gold and silver, is the most visible reason it went under.”

We can’t say with certainty that this is what happened to Bear Stearns, but it is probably more than mere coincidence that JPMorgan ended up acquiring Bear, and really, it makes  sense, and at the very least it’s a great story.

Tuesday, March 05, 2013 - Milk and Cookies

Milk and Cookies

by Sinclair Noe

DOW + 125 = 14,253.77
SPX + 14 = 1539
NAS + 42 = 3224

10 YR YLD + .02 = 1.89%
OIL + . 50 = 90.62
GOLD + .80 = 1576.40
SILV + .16 = 28.80

The Dow has recovered all of its losses from the financial crisis and the small”d”depression, gaining 119 percent from its low in March 2009, making this the third-strongest bull market for the Dow since World War II.

Though the Dow has erased its memories of the crisis, many households aren't so lucky: Neither jobs nor wages have regained their pre-crisis highs. Home prices are still nearly 26 percent below their level when the Dow last peaked, and about 14 million homeowners are still underwater on their mortgages.

The job market has recovered only 5.5 million of the 8.7 million jobs lost during the downturn.

With the job market weak, worker wages have stagnated. Inflation-adjusted average income is 8 percent lower than in 2007, when the Dow was at its previous high. A chart of the stock market points to the upper right hand corner, while a chart of hourly earnings is just a flat line.

Higher stock prices do tend to benefit the more affluent. This might eventually provide a lift for the broader economy, or it might just be enough to sucker Mom and Pop investors into the market again; you remember those folks who were clobbered, twice in the past 13 years; those folks who were steamrolled by the flash crash; some of them will follow their lizard brain and jump in at record highs. Maybe it will work. I hope so.

These are boom times for Wall Street traders and Corporate America but Main Street America hasn't fully recovered from the Great Recession or the small “d” depression or whatever you want to call it; and just a reminder – it was kind of caused by Wall Street.

Unemployment is still around 7.9%. Median income dropped more than 8%. Wages as a percent of the economy are at an all-time low (at least for the time we've been keeping records). The number of people on food stamps is also at a record – 46 million. If we didn't have food stamps, there would be long lines outs outside of soup kitchens. More Americans are now a doctor's bill away from the poor house; more than 48 million have no health insurance. Student loan debt has gone from just over 23K in 2007 to $26,500 for the Class of 2011; someday they'll get a job and start paying down the debt. Home-ownership is down to 65.4%, the lowest level in 15 years; and if you still own your home there's a good chance you're underwater. Surprisingly, homelessness is on the decline. And foreclosures are on the decline, though still high, the numbers peaked out.

So, nothing to worry about. Jump into the market. What could go wrong? The excesses have been washed out. The banksters that crashed the market have all begged forgiveness and changed their evil ways. Washington has punished the wrong doers so severely that they'll never consider shenanigans again. Plus, the regulators are on top of everything. If it seems like Denzel Washington is flying the plane and everything is upside down – well, it is.

In this crazy mixed up world, why is the stock market doing so well? Corporations are enjoying sky high profits; they are doing more with fewer workers. Payrolls were cut, and the remaining workers were required to pick up the slack. American workers are incredibly productive, and right now they have no bargaining power to push for higher wages. Also, the tax code favors investments in technology and capital goods expenditures, but not for human labor. Tax and trade policies also encourage US corporations to expand and hire overseas. And then the Federal Reserve has been throwing money at Wall Street and that translates to lower borrowing rates for corporations. Corporate profits are claiming a larger share of national income than at any time in 60 years. It was the best of times, it was the worst of times.

After taking inflation into account, both the Dow and the S&P are down from their earlier highs in 2000. And, on an inflation-adjusted basis, the S&P 500 is down even after factoring in returns from dividend payments.

Still, American stocks are far ahead of their foreign counterparts. The Euro Stoxx 50, a barometer of euro zone blue chips, trades at 2,683 points, off its record high of 5,464 reached in March 2000, while the FTSE 100 in London was at 6,431, compared to a record of 6,930 in December 1999.

In Asia, the Nikkei 225-share index in Tokyo closed Tuesday at 11,683.45; it reached its high of 38,916 points in December 1989. And the Hang Seng index in Hong Kong finished at 22,560, versus a high of 31,638 points in October 2007.

The Dow is a price weighted index, so they almost couldn't include Apple or Google at current prices. They swapped a few companies over the past five years. Still, it's been an impressive rebound. After the crash of 1929, it took 25 years for the Dow to get back to the nominal level it plunged from.

The biggest factor in the recent rebound: the Federal Reserve has added more than $3 trillion of monetary stimulus to the economy and more than $1 trillion of bailout loans to financial firms since the 2008 financial crisis. This was done to prevent a widespread banking crash and help the wider economy. The banks have enjoyed a windfall, the broader economy, not so much. Federal Reserve Vice Chairman Janet Yellen said Monday that the Fed should press on with $85 billion in monthly bond- buying while tracking possible costs and risks from the unprecedented program.

"Turning to the potential costs of the Federal Reserve's asset purchases, there are some that definitely need to be monitored over time," Yellen said in a speech in Washington. "At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program."

Yellen, the central bank's No. 2 official, echoed Chairman Ben Bernanke's comment last week that the benefits of the Fed's historically low interest rates and near-record $3.09 trillion balance sheet outweigh any risk of financial instability.

The big question is whether the stock market can keep going up from here. 

 One determinant is whether stocks are seen by traders as relatively expensive, and therefore vulnerable to a sell-off. Robert Shiller, a professor of economics at Yale University, has built a model for gauging whether stocks are cheap or pricey. Right now, stock valuations are above historical averages, but well below the stratospheric highs they’ve reached in bubbles. According to his model, stocks are signaling that they can return about 3 to 4 percent a year. Of course, that's not guaranteed.

I repeat – not guaranteed.

But for today at least, Wall Street looked like the past 5 1/2 years never happened. What happens next depends on the Federal Reserve continuing to prop up Wall Street even as Main Street struggles; it is a dichotomy that can't go on forever. This bifurcation and the growing inequality is the dark lining behind this silvery cloud. Bernanke is a student of the Great Depression. One lesson he could still learn from the small “d” depression is that there is a difference between markets and the economy.