Market Hits Record Highs and Supreme Court Hands Down
More Decisions
By Sinclair Noe
DOW + 14 = 16,921
SPX + 2 = 1959
NAS – 3 = 4359
10 YR YLD + .01 = 2.62%
OIL + .48 = 106.07
GOLD + 42.80 = 1321.30
SILV + .86 = 20.86
SPX + 2 = 1959
NAS – 3 = 4359
10 YR YLD + .01 = 2.62%
OIL + .48 = 106.07
GOLD + 42.80 = 1321.30
SILV + .86 = 20.86
Taking a look at economic data, weekly claims for jobless
benefits fell 6,000 to 312,000; the labor market still has plenty of slack but
still shows signs of modest improvement. The Philly Fed manufacturing index was
up to its highest reading since last September. And the Conference Board's
index of leading economic indicators rose 0.5% to 101.7 in May.
President Obama said today that the United States would
deploy up to 300 military advisers to Iraq to help its Iraqi government forces
fend off Sunni militants. Obama emphasized again that he would not send combat
troops to Iraq, although there seems to be a fine line between combat troops
and advisers; he said the United States would help the Iraqis “take the fight”
to the militants, who he said pose a threat to Iraq’s stability and to American
interests, because Iraq could become a sanctuary for terrorists who could
strike the United States or its allies.
Secretary of State John Kerry will go to Europe and the
Middle East this weekend to build support among Iraq’s Arab neighbors for a
multisectarian government in Baghdad.
Markets were in negative territory most of the day,
nothing big, then we recovered near the end of the session, nothing big; the
S&P 500 hit its 21st record high close of the year. This market
is just slowly scratching and clawing its way higher, and that’s a good thing.
When the markets go on a sharp move higher, sometimes called a parabolic run,
it usually ends with a nasty fall. For now, the markets are moving higher but
staying within the channels of standard deviation.
There are plenty of geopolitical hotspots, and a boatload
of economic uncertainty, but the US equity markets are as constant as you could
want. The past 44 consecutive sessions of the Standard & Poor's 500 index
have fluctuated upward or downward by less than 1 percent. To put that streak
in context, the S&P 500 hasn't seen this little movement since 1995, when
the index didn't change by a full percentage point for 95 days. All the while,
stocks have been steadily ticking up. The S&P 500 is up 6% year-to-date.
There always seems to be a crisis somewhere and maybe
investors and Wall Street traders are just crisis weary, even if it is a little
dangerous to wait for the next hotspot to implode. Ukraine hasn’t resulted in
disaster, at least not for the US. We’ve been dealing with a mess in Iraq for
more than 10 years, so there’s no reason to freak out now. The full impact of
recent world events is still unclear, so just keep trading. Compared with past
conflicts in the Middle East, America has reduced its dependence on oil in the
region and thus may not be feeling the effects of the current crisis as
strongly.
The Federal Reserve’s QE policy has been a tremendous
success for Wall Street, even if it hasn’t trickled down to Main Street. Impressive
corporate earnings growth may be outweighing any effects that world events are
having on the markets. Earnings of companies in the S&P 500 are expected to
growth by a rate of 5.4% in Q2 2014, with nine of the ten sectors in the index
projecting higher growth than last year.
Yesterday, Fed Chairwoman Janet Yellen dismissed
inflation as nothing more than noisy. Wall Street traders loved the dismissal of
rising prices as an indication that the Fed would not be swayed from their
ongoing accommodative policy. Still, you have to wonder where the Fed is going
as they try to oversee an uneven recovery and a benign exit from QE.
Like the Fed, the Bank of England has kept interest rates
in the near zero range for the past 5 years. Last week, BOE Governor Mark
Carney indicated that economic liftoff might come sooner than the markets
think. Unemployment in Britain has been falling faster than expected, even
though there is still considerable slack in the labor market. British GDP has
steadily risen over the past year and is now just 0.6% below its pre-crisis
peak. The improving picture could nudge the BOE toward a rate increase sooner
rather than later. And so the BOE has its own form of forward guidance,
stressing that the timing of the first rate increase is less important than the
idea that once rates increase, the degree and pace of increases will be gradual
and limited; in other words, a soft and gentle slope.
The Supreme Court is handing down decisions this week.
Today they issued a unanimous ruling on Alice Corp v. CLS Bank International, a
case that deals with patents. Alice Corporation, an Australian company developed
a method for mitigating settlement risks among multiple parties. In its Supreme
Court brief, the company said the method was eligible to be patented largely
because it involved shadow records updated in real time that “require a
substantial and meaningful role for the computer.”
The patents were challenged by CLS Bank International, which
says it clears $5 trillion in foreign exchange transactions a day using methods
to ensure that both sides performed. The bank said that Alice Corporation’s
patents merely recited “the fundamental economic concept of intermediated
settlement of escrow.”
A trial court invalidated Alice’s patents and then a
court of Appeals affirmed the lower court ruling. Writing for the Supremes,
Justice Clarence Thomas said that was “a patent-ineligible abstract idea,” and “Merely
requiring generic computer implementation fails to transform that abstract idea
into a patent-eligible invention.”
The case had been closely watched by the software
industry. Patent claims over the way ideas are incorporated into computers,
cellphones and other devices have become a challenge for many high-tech
companies. Justice Thomas indicated that the decision posed no threat to the
concept of software patents, writing: “There is no dispute that many
computer-implemented claims are formally addressed to patent-eligible subject
matter.”
The Supremes were also unanimous in ruling on United
States v. Clarke; in this case the Court held that a taxpayer may conduct an
examination of IRS officials in response to a summons for information and
records if the taxpayer can point to facts or circumstances that could raise an
inference of bad faith on the part of the IRS.
Another unanimous ruling says the First Amendment
protected an Alabama whistleblower. In Lane v. Franks, the high court ruled
that Edward Lane's First Amendment rights protected him from job retaliation
when he testified in the public corruption trial of then state Rep. Sue Schmitz
in 2010, who was accused of being on the payroll at the college but failed to
actually show up for work. Schmitz’ bogus job was uncovered and detailed, along
with many other cases of corruption in the state's two-year college system as
part of a two-year investigation of the system by The Birmingham News in
2006-07.
Lane was fired by
the two-year college he worked after his testimony. Lower courts had ruled
against Lane, finding that he was testifying as a college employee, not as a
citizen. Writing for the court, Justice Sonia Sotomayor said Lane's testimony
was constitutionally protected because he was speaking as a citizen on a matter
of public concern, even if it covered facts he learned at work. The decision is
a win for whistleblower advocates, who said it could encourage more government
workers to cooperate with prosecutors in public fraud cases without fear of
losing their livelihoods.
Meanwhile, there is still some fallout, and uncertainty
surrounding a Supreme Court decision earlier this week involving sovereign debt
of Argentina. Argentina defaulted on nearly $100 billion of debt in 2002.
Because some of the debt was sold under New York law, it faced a court
challenge after it settled with only some creditors in 2005 and 2010. A few
“hold out” creditors sought better repayment terms, specifically, some hedge
funds bought the debt after the 2002 default for pennies on the dollar and then
demanded full payment. The president of Argentina has called the hedge funds, “vultures”
The Supreme Court has given the vultures a victory.
In the next 10 days, we’ll see if Argentina will succeed
in defying the United States courts. On June 30, there is a scheduled interest
payment on a set of Argentine bonds that its government wants to pay. But the
courts say that interest may not be paid unless the country pays all it owes on
bonds it defaulted on years ago, something Argentina says it cannot and will
not do.
Argentina’s plan is to convert the bonds on which it
wants to make payment into new bonds that would not be subject to New York law.
Several banks and other financial institutions were willing to accept a partial
payment but now that might risk the ire of American courts.
There is no equivalent to bankruptcy law for sovereign
debtors. There is no legal procedure to resolve debts of destitute countries.
There is no court to approve a restructuring plan that will wipe out some debts
and convert others to equity, as there is for companies. Instead, troubled countries
negotiate with lenders to restructure the debts. That restructuring could
involve reducing the amount owed, lowering the interest rate, extending the
maturity of the debt or some combination of the three.
The IMF would typically work with poor countries by
offering emergency money contingent on financial reforms for the country; the
IMF money was understood to rank above the old debts. Bondholders could, and
did, hold out for full payment, but they faced the risk that the restructuring
would go through and those who agreed would get partial payouts, while the
holdouts got none. Now it has changed, at least for countries that issue bonds
under New York law. The hand of holdouts has been strengthened immensely. Financial
market service providers are now sovereign debt enforcement agents.
What would happen then? In a brief submitted to the
Supreme Court, Joseph Stiglitz, the Columbia University professor who was
formerly chief economist of the World Bank, offered a warning: “Unable to
restructure, governments that default would be permanently shut out from the
debt market, with consequential adverse effects on development and economic
growth prospects.” In other words, a modern day debtors’ prison for countries
with oppressive debt.
We’ll see how this one unfolds.
