Wednesday, January 22, 2014 - A Mixed Bag

A Mixed Bag

by Sinclair Noe

DOW – 41 = 16,373
SPX + 1 = 1844
NAS + 17 = 4243
10 YR YLD + .04 = 2.86%
OIL + 1.69 = 96.66
GOLD – 3.80 = 1237.80
SILV - .07 = 19.90

Another mixed day on Wall Street. It’s earnings season. IBM reported quarterly revenue that missed estimates for the fourth straight quarter, due to a steep fall in demand for servers and storage products in emerging markets such as China. IBM thinks part of the reason for declining revenue was backlash from emerging economies against US government spying. IBM was down enough to drag the Dow Industrials into negative territory for the day.

Coach, the handbag maker, was the biggest loser in the S&P 500 after posting disappointing sales in North America. United Technologies, the air conditioner and elevator company, reported higher fourth-quarter profit that topped Wall Street estimates, though revenue fell shy of expectations. Norfolk Southern posted a 24 percent rise in quarterly income.

After the close, Netflix reported higher profit for the fourth quarter as the company added 2.3 million customers to its TV and movie streaming service in the United States.

A mixed bag of earnings today. Not much to cause the bulls or the bears to run.

Target Corp said it will stop offering health coverage to part-time workers, citing new public insurance exchanges floated by the US government. Less than 10 percent of the company's 361,000 employees currently participate in the insurance plan that is being discontinued. Target is not the first or the last company to take this position.

The winter storm blanketing most of the Midwest and East Coast pushed natural gas prices to their highest level in nine months on Wednesday. February natural gas jumped 26 cents, or 6 percent, to $4.689 per thousand cubic feet. The last time natural gas prices were this high was late April 2013. Americans who use propane to heat their homes are scrambling to deal with sharply higher prices and a limited access to the fuel. Domestic production has increased to an estimated 17.8 billion gallons in 2013, from 15.2 billion gallons in 2008, but offsetting the increased production is a robust export market. The country exported an estimated 4.3 billon gallons of propane last year, compared to 800 million gallons in 2008. The tighter supply has led to wholesale price increases, to $2.20 a gallon from $1.10 a gallon a year ago. Prices for retail customers have risen to nearly $3 a gallon from $1.90 a year ago.

According to data released by the IRS, conversion from tax-deferred individual retirement accounts to Roth IRAs increased ninefold in 2010, to $64.8 billion. That was the first year when a $100,000 income limit on eligibility to convert was eliminated - and it marked the first time the amount of assets converted to Roths exceeded contributions. The higher your income, the more likely you are to convert to a Roth. Paying taxes now rather than later isn't beneficial if you expect to be in a lower tax bracket when you begin drawing down funds in retirement.

Mohamed El-Erian is stepping down as head of the asset-management firm Pimco. Bill Gross, who founded Pimco and serves as its co-chief investment officer with El-Erian, said he was in disbelief when the chief executive told him of his intentions several weeks ago. El Erian will stay on as an adviser to Pimco’s parent company, Allianz. The past year was difficult for bond fund managers and Pimco, the largest of the bond funds, saw huge outflows.

Warren Buffett is offering a $1 billion prize to anybody who can fill out a perfect March Madness bracket. The prize would be paid out in 40 annual installments of $25 million, or a one-time lump sum of just $500 million. The first 10 million people to enter the contest will be eligible for the ludicrous grand prize. If there’s a tie, they’ll split. The odds of a perfect basketball bracket are staggering; 9.2 quintillion to one. Apparently there has never been a documented perfect bracket. Madness just got crazier.

The Center for Economic Policy and Research has run some numbers on how much the housing bubble and the collapse cost. Based on Congressional Budget Office data looking at GDP growth going back to 2008, the dollar losses through 2013 are at $7.6 trillion, in 2013 dollars; or about $25,000 for every person in the country. This is just economic losses, it does not include any effort to quantify the pain that workers or their families have suffered from being unemployed or losing their homes. The numbers are speculative but likely a good guess.

Years of banking crises, credit droughts and economic uncertainty have prevented businesses investing for the future. Instead, they have clipped costs, wages and jobs and built up huge stockpiles of cash rather than investing in new plants, staff, updated technology, equipment or acquisitions. According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years. At some point, the thinking goes, all that corporate cash will come flooding into the economy. Maybe.

Merrill Lynch surveyed fund managers, and a record number think companies are under-investing and most respondents want firms to deploy their cash on capital expenditures. Sounds good, but there is no obvious catalyst for such a move.

Treasury Secretary Jack Lew sent a letter to House Speaker John Boehner warning that the country would likely exhaust the extraordinary measures used to stay beneath the debt limit by late February. In a previous letter to Boehner, Lew had projected the deadline might not be hit until early March. In the deal reached in mid-October to end the government shutdown, lawmakers extended the nation's debt limit into the first week of February. It was always understood that Treasury could take extraordinary measures to extend the deadline even further. But in his note to Boehner, Lew made clear that those tools weren't as potent as they have been in previous debt limit crises, partly because of limits on borrowing capacity and partly because of financial constraints that are unique to the month of February.

But now Secretary Lew writes: "The length of time that the extraordinary measures can extend the nation's borrowing authority is significantly shorter than it was in 2011 and 2013. This is in large part because the government experiences large net cash outflows in the month of February, due to tax refunds. For example, in 2013, the government experienced net cash outflows of approximately $230 billion in the month of February, as compared to average net outflows of $45 billion in the other months of the year.”

House GOP leaders have stated that they won't simply vote to extend the debt limit without receiving something in return. The White House, meanwhile, has steadfastly refused to negotiate over raising the debt limit. So it appears we are headed for another showdown, and it is approaching much faster than you thought.

This is Day Two of the World Economic Forum in Davos, Switzerland. Over 2,500 Presidents, Prime Minsters, CEOs, Celebrities, Academics, and moneyed elites, will be holed up in a small and posh mountain resort in Switzerland to discuss, in the words of the WEF, "improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas."

This year's theme is "The Reshaping of the World: Consequences for Society, Politics and Business." A few words from the preamble are worth noting: "political, economic, social and, above all, technological forces... are shifting power from traditional hierarchies to networked hierarchies." That means the false idea of reducing democracy to the singular act of voting every few years is over. People are begging to assert participatory democracy and exercise people power, using many new technologies and methods of interconnection, as levels of confidence in political leadership are dangerously declining around the world.  The WEF warns its members that we are witnessing a shift of power. But those attending the WEF are largely focused on the symptoms of various crises not the causes or the cures.

The WEF's 2014 Global Report helps set the agenda and prioritization for the great and the good to discuss. Financial risk, unsurprisingly, still ranks at number one, followed by high unemployment or underemployment. Water crises come in third place with climate at fifth, behind severe income disparity. There is therefore a growing recognition that economy, ecology and equity are all in crisis; that they are all fundamentally interconnected. None can be solved without solving the others. For example, the water scarcity crisis is driven, in part, by the expansion in coal. Go to West Virginia if you need proof.

The big question for 2014 will be how the plutocrats respond. Some are still in denial. Today's economy is going so well for those at the very top that it can be hard to see how badly it is working for those in the middle and at the bottom.

Tuesday, January 21, 2014 - Real Risks

Real Risks

by Sinclair Noe

DOW – 44= 16,414
SPX + 5 = 1843
NAS + 28 = 4225
10 YR YLD unch = 2.82%
OIL + .67 = 95.26
GOLD – 13.00 = 1242.70
SILV - .41 = 20.01

Wall Street’s attention this week will mainly focus on earnings reports given the dearth of economic data. There are only a few important economic reports this week, all of which will be released on Thursday. Thursday’s reports include the November FHFA housing price index (expected +0.3% m/m), December existing home sales (expected +1.0%), and December leading indicators (expected +0.2%). The Treasury on Thursday will sell $15 billion of 10-year TIPS. The markets will be looking to next week’s FOMC meeting where the consensus is that the FOMC will taper QE3 by another $10 billion to $65 billion per month.

Global stocks found support as Chinese money-market rates dropped after the People’s Bank of China added funds and expanded access to a lending facility after the 7-day repurchase rate had surged 153 basis points to a 1-month high of 6.32% on Monday. In an attempt to alleviate a liquidity squeeze, the PBOC added more than 255 billion yuan ($42 billion) into the financial system and will allow small and medium-sized Chinese banks to access its Standing Lending Facility for loans of up to 2-weeks on a trial basis before China's Lunar New Year holiday begins on Jan 31; this was in addition to a liquidity injection made just yesterday for an unspecified amount.

The yield on Portugal's 10-year government bond fell below 5.00% for the first time since Aug 2010, reducing concerns about sovereign debt. Gains in European stocks were muted. The German January investor confidence unexpectedly dropped for the first time in 6 months. Japanese Economy Minister Amari warned that his country still faced the risk of falling back into deflation, which undercut the yen on speculation the BOJ may press ahead with additional stimulus.

The International Monetary Fund is slightly more optimistic about the world’s economies this year than it was three months ago.  The IMF updated its forecasts that the world economy will grow 3.7% in 2014 and that the US economy will grow 2.8%. The global forecast is 0.1 percentage point higher and the US forecast 0.2 point higher than the IMF's October forecast.

After a sluggish start, global economic growth picked up in the second half of 2013. As a result, growth amounted to 3% last year. The IMF expects it will be even stronger growth this year.

The IMF forecasts that the US economy grew 1.9% last year, and they are forecasting 2.8% growth for this year, which would match US growth in 2012. Part of the anticipated improvement is based on expectations for less drag from higher US taxes and across-the-board spending cuts. By 2015, the IMF forecast the US economy will grow 3%, or 0.4 percentage point lower than its October forecast. So, 2014 revised higher and 2015 revised lower. The IMF reduced its outlook because a recent budget agreement left in place most of the spending cuts. The IMF had expected most of those cuts to have been eliminated by next year.

The IMF forecasts stronger growth for the Eurozone as it tries to emerge from recession after a lingering debt crisis.  Economic activity shrank 0.7% in 2012 and 0.4% in 2013. But this year the IMF projects 1% growth and 1.4% in 2015. Germany, the biggest economy in Europe, will grow 1.6% this year it projects, up from 0.5% growth in 2013.

China is expected to grow 7.5% in 2014 and 7.3% in 2015. Both 2014 and 2015 projections were slightly higher than the IMF's October forecast, but lower than the 7.7% growth reported for 2013.  The IMF said that growth in China, the world's second-largest economy, had rebounded strongly in the second half of 2013 due to acceleration in investment. But the IMF said the growth will moderate because of actions by the government to slow growth in credit.

For Japan, the IMF forecast growth of 1.7% this year, the same as 2013, but a slowdown to 1% growth in 2015.

Citing high unemployment and low inflation, the IMF said that the United States and other major economies should be careful not to pull back prematurely on the economic support being provided by the Fed and other central banks.

A survey finds that CEOs around the world are more confident in the global economy. Accounting and consulting firm PricewaterhouseCoopers, which conducted the survey, said the world's corporate leaders are "gradually switching from survival mode to growth mode." That improved optimism could lead to more investment, growth and jobs.

Activists, however, warn that wealth inequality is a growing and pressing concern that needs to be addressed. PwC's findings came as political and business leaders gathered in the Swiss ski resort of Davos. Each year they got together on a mountaintop to congratulate themselves, network with each other and confer about how best to bring order and prosperity to humankind; and of course, how they can profit.

Nobody at Davos will come right out and say that they are trying to rule the world; that would be far too crass; especially in light of the World Economic Forum’s most recent publication, Global Risks 2014. The study, issued by the charitable organization Oxfam concludes that the “the chronic gap between the incomes of the richest and poorest citizens” is the greatest threat to stability that looms in the next decade.

The study revealed some remarkable statistics. The 85 richest people on Earth have the same amount of wealth as the bottom half of the population. Those wealthy individuals are a small part of the richest 1% of the population, which combined owns about 46% of global wealth. The study found the richest 1% had $110 trillion in wealth -- 65 times the total wealth of the bottom half of the population. Seven out of 10 people live in countries where economic inequality has increased in the last 30 years.

That bottom half of the population owned about $1.7 trillion, or about 0.7% of the world's wealth. That's the same amount as owned by the 85 richest people. It is a little crazy that more than 3.5 billion people own less than 85 people, roughly the number of people who could comfortably sit on a bus – not that they would actually sit on a bus. Nowhere is inequality more pronounced than the United States, where the very greatest amount of resources are owned by the very fewest people. In the US, the wealthiest one per cent captured 95% of post-financial crisis growth since 2009, while the bottom 90% became poorer.

The Oxfam report says that the global economy has become so skewed in favor of the rich that economic growth in many countries today “amounts to little more than a ‘winner takes all’ windfall for the richest.” The report warns that democratic institutions are being undermined as an increasing amount of wealth is concentrated in the hands of the richest, making it ever easier for them to influence policy to enrich themselves further. The report calls this process “political capture.”

Oxfam sees a risk to both democratic institutions and to social stability in these trends. The report does recognize that “some economic inequality is essential to drive growth and progress, rewarding those with talent, hard earned skills, and the ambition to innovate and take entrepreneurial risks.”; but “the extreme levels of wealth concentration occurring today threaten to exclude hundreds of millions of people from realizing the benefits of their talents and hard work.”

Pope Francis challenged business leaders assembled in Davos to put their wealth at the service of humanity instead of leaving most of the world's population in poverty and insecurity. The Pope’s message said, in part: "I ask you to ensure that humanity is served by wealth and not ruled by it," and it went on: "The growth of equality demands something more than economic growth, even though it presupposes it. It demands first of all 'a transcendent vision of the person'."

The World Economic Forum is looking at other threats, not just inequality. The recent hack of Target merely reinforced the possibility of “Cybergeddon” in the online world, and that possibility, taken to just a little extreme could result in a frozen neural network which controls, among other things, the global financial system. Once again, the Masters of the Universe gathered at Davos will talk about the challenge of climate changes and the related hurricanes, floods, polar vortexes, droughts, and other extreme weather. Once again, the Masters of the Universe will face the reality that they can’t control the weather. And there will be a bunch of people guessing who among the 85 is in attendance.

Maybe that guy, maybe that guy, maybe some other guy. There are lots of guys in Davos this week; not many women; only about 15% of the 2,500 attendees. Organizers say it’s simply the reality of today’s world.

So back to the real concern for the Davos attendees – how to make more money. For the answers we turn to the global central bankers. After an unprecedented bout of experimental monetary policy and money printing, the Federal Reserve wants to reset policy to the pre-crisis mode to avoid another credit bubble. Meanwhile, China is trying to implement financial sector reforms to bring a credit bubble to an end. So, the real risks look  like slower than forecast US growth, possible Eurozone deflation, not enough structural reforms in Japan, and bad loans in China; there will doubtless be other risks that crop up.

Friday, January 17, 2104 - This Page is Being Monitored for Your Safety

This Page is Being Monitored for Your Safety

by Sinclair Noe

DOW + 41 = 16,458
SPX – 7 = 1838
NAS – 21 = 4197
10 YR YLD  - .02 = 2.82%
OIL + .20 = 94.30
GOLD + 11.40 = 1255.10
SILV + .22 = 20.42

It was a fairly volatile session on Wall Street today, in part because today was an options expiration Friday. For the week, the Dow rose 0.13 percent, the S&P 500 slipped 0.20 percent and the Nasdaq gained 0.55 percent. Earnings season is still in the early phase, but S&P 500 companies so far are beating analysts' expectations at a rate that's below what's typical. With earnings from 10 percent of the S&P 500 companies so far, 50 percent have exceeded expectations, below the historical average of 63 percent for a full season.  Intel and General Electric were the latest to dampen the view on fourth quarter earnings. Morgan Stanley wrapped up a week of earnings reports from the big banks by posting a sharp drop in profit, which they blamed on legal bills, but on an adjusted basis they beat estimates. Woo-hoo.

The NSA gathers nearly 200 million text messages a day from around the world and has put software in almost 100,000 computers allowing it to spy on those devices. If you think that seems a bit excessive, you are not alone. And so today, President Obama delivered a major speech to reassure the world that the US is concerned about privacy issues. Thank you Edward Snowden.

Obama said: "The reforms I'm proposing today should give the American people greater confidence that their rights are being protected, even as our intelligence and law enforcement agencies maintain the tools they need to keep us safe." Which is another way of saying that the spy agencies won’t be dismantled; they will continue to spy, and we should all just chill out and accept it.

Obama promised that the United States will not eavesdrop on the heads of state or government of close US friends and allies. One of the biggest changes will be an overhaul of the government's handling of bulk telephone "metadata"; lists of millions of phone calls made by Americans that show which numbers were called and when. Obama said the program will be ended as it currently exists. The government will not hold the bulk telephone metadata. While a presidential advisory panel had recommended that the data be controlled by a third party such as the telephone companies, Obama did offer a specific proposal for who should store the phone information in the future.

Obama instructed the Attorney General Eric Holder and the intelligence community to report before the metadata program comes up for reauthorization on March 28 about how to actually continue the program without having the government actually holding the metadata. And until then, the government will have to get approval from the FISA court, the Foreign Intelligence Surveillance Act Court every time intelligence agencies want to check the database of all those phone calls, unless they consider it an emergency; in which case, big brother can do whatever they think they need to do.

So, apparently the big speech on privacy was that we can expect more of the same, more or less. The one thing it was not was an ability to strike a "balance" between the current surveillance state and civil liberties "concerns"; or what many of us fondly remember as the Bill of Rights.

Here is the punch line from the president’s speech: “When mistakes are made, which is inevitable in any large and complicated human enterprise, they correct those mistakes, laboring in obscurity, often unable to discuss their work even with family and friends -- the men and women at the NSA know that if another 9/11 or massive cyber-attack occurs, they will be asked by Congress and the media why they failed to connect the dots. What sustains those who work at NSA and our other intelligence agencies through all these pressures is the knowledge that their professionalism and dedication play a central role in the defense of our nation.”

I used to keep a quote from Benjamin Franklin on my computer; something about giving up liberty for security. I was looking for that quote, but somehow, it looks like it’s been deleted.

So to recap: the phone metadata still exists; the government will keep the metadata, and records of financial transactions and texts and so forth until the government can figure out what to do with all the data; the government will search the data when they get approval from a secret court with a history of being friendly to the government and a secret court which has no privacy advocates; the government will search the data without court approval when they think they can get away with it; all of this will remain secret, or as nearly secret as possible because Edward Snowden is stuck in Russia; so just chill out because the spies are trying to do a good job.

National-security leaders behave as if preventing even a single terrorist attack is so important that, to marginally decrease its likelihood, it was incumbent upon us to torture prisoners, to invade Iraq, and to establish a system of mass surveillance on hundreds of millions of innocents to identify a tiny minority of terrorists. So long as the NSA is charged with stopping every potential attack, and given more power until it can do so, it will verge toward totalitarianism, because no society can stay free and eliminate the risk of terrorism.

The Senate yesterday passed the budget bill, as expected. It goes to the president for a signature. The government will remain open at least until September. However Congress could take the rest of the year off, and probably will. Congress is unlikely to pass any other major piece of legislation this year—with the possible exception of a long overdue farm bill.

They just don’t have much on the “To Do List”; actually there is plenty to do, but little that has a realistic chance of getting done. There is a long list of issues, including immigration reform, NSA and privacy concerns, health care, unemployment compensation, or even more important – jobs.

The Senate last year passed comprehensive immigration reform with the support of 14 Republicans, establishing a 13-year pathway to citizenship for millions for immigrants in the country illegally, but the measure remains dead in the House. Immigration reform has turned political and there is little urgency to pass anything before the 2014 midterm elections.

There will be some tweaking to the Affordable Care Act, and this remains a focus for many lawmakers; last week 70 Democrats supported a bill that would alert users of breaches involving their personal data. Beyond minor adjustments, the administration continues to grant some occasional exemptions and deadline extensions in an inconsistent pattern. Maybe by the end of the year, the website will be running smoothly, maybe.

The Farm Bill will likely pass. Historically, the bill has been easily renewed, but the last five-year measure was passed in 2008. This year the hurdles include dairy price supports, catfish inspection jurisdiction, and a controversial amendment that forbids states from imposing agricultural standards, such as California’s barring of eggs from states that allow their farmers to pen hens in tiny cages. But even as the two sides appear to be coming together, there are no guarantees the bill will pass.

Even the first high-profile legislative fight of the year, extending emergency unemployment insurance, has faltered. Democrats claim to have a winning issue on their hands, with more than one million Americans losing their benefits, but most Republicans so far aren’t feeling the political pain. Of course, the best solution for unemployment is a job, but Congress is probably incapable of coming together on anything resembling a bipartisan effort to stimulate employment.

So, the budget bill was passed, and we don’t have to worry about that or worry about Congress doing much of anything until September.

A new paper published in the journal called “Health Affairs” makes an interesting connection between income inequality and health. The finding is that poor people get sick more than rich people, and they get sick at very specific times. The research looked at when people go to the hospital for hypoglycemia (low blood sugar).

The basic idea is that people struggling to make it paycheck-to-paycheck (or benefits-to-benefits) might run out of money at the end of the month—and have to cut back on food. If they have diabetes, this hunger could turn into an even more severe health problem: low blood sugar. So we should expect a surge of hypoglycemia cases at the end of each month for low-income people, but not for anybody else.

That's what researchers found when they looked at the numbers for California between 2000 and 2008. The researchers also looked at when people go the hospital for other health problems such as appendicitis, which doesn't depend on diet. So there shouldn't be any end-of-the-month increase in appendicitis cases for low-income people if tight budgets are the problem. There wasn't. Poor people don't need more care at the end of the month for every kind of condition; just the ones that get worse when you don't have enough to eat. So, the solution is apparently to try to make sure that people have enough food to eat all through the month; which sounds expensive, but is actually not as costly as the nearly $1200 that an average hypoglycemia episode costs.

Thrusday, January 16, 2014 - The “It Could Be Worse” Victory Lap

The “It Could Be Worse” Victory Lap

by Sinclair Noe

DOW – 64 = 16,417
SPX – 2 = 1845
NAS + 3 = 4218
10 YR YLD - .04 = 2.84%
OIL - .07 = 94.10
GOLD + .70 = 1243.70
SILV - .11 = 20.20

The number of Americans filing new claims for unemployment benefits fell for the second consecutive week last week; down 2,000 to 326,000. This might suggest that the December jobs report, which was a weak 74,000 jobs added, maybe that report was just a temporary slowdown.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rose to 9.4 points this month from 6.4 in December. Any reading above zero indicates manufacturing expansion in the region.

In another report, the Labor Department said its Consumer Price Index increased 0.3% after being flat in November. In the 12 months to December, consumer prices accelerated 1.5%. A 3.1% increase in gasoline prices was mostly behind the spike in inflation last month. The increase in gasoline was the largest since June and followed a 1.6% fall in November. Food prices rose 0.1% for a third month. There is no wage inflation. Average hourly earnings adjusted for inflation fell 0.3% in December; and with the weakness in the labor market, there is very little chance of wage growth for quite some time.

The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below CPI. And outgoing Fed Chairman Ben Bernanke says inflation is not a problem, and he cited this morning’s CPI report. As for overinflated assets, Bernanke said the Fed is "extraordinarily sensitive" to that risk after the financial crisis, which began with the bursting of a massive property price bubble, but rather than to try to pop bubbles with the blunt tool of higher interest rates, Bernanke said in the Fed is using supervision, regulation and other microeconomic-type tools to be sure the threat is minimal.

Bernanke claims there is no fear of hyperinflation, and he believes the Fed has the tools to manage inflation and avoid bubbles and keep everything under control. And to hear Bernanke talk, you might not think that the past 5 years have been a big monetary experiment. And maybe they have and will continue to avoid bubbles, but if you believe that, then you also believe the markets are fairly valued right now. So, what would happen if the Fed just stopped QE tomorrow? Imagine a market where the Fed just stopped buying Treasuries and mortgage backed securities. You are likely imagining a market dropping about 20%; maybe more.

Anyway, Bernanke is taking a victory lap as part of his farewell tour, and to some extent he’s probably entitled; the extent being that this whole grand experiment could still end quite badly. But for now things are improving, even if it has been painfully slow improvement; still it could be worse; it could be Europe.

If we compare the economic recovery of the United States since the Great Recession with that of the Eurozone, the differences are striking, and instructive. The US recession officially ran form December 2007 to June 2009, while the Eurozone recession ran from January 2008 to April 2009, and then they dipped back into recession in the third quarter of 2011 and lingered for another couple of years. Now you can argue that the US is still in some form of economic malaise, what with 20 million unemployed, but the technical definition of a recession doesn’t always count things like people out of work. In the Eurozone, unemployment is at near record levels of 12.1%, while in the U.S. it is currently 6.7%. In Greece and Spain, unemployment is over 25%, and youth unemployment is approaching 60%.

How are we to explain these differences? The Federal Reserve lowered short-term interest rates to about zero in 2008 and has kept them there since. The Fed also signaled its intention to keep these interest rates at these levels for a long time. And venturing into uncharted territory, the Fed engaged in three rounds of "quantitative easing," or more than $2 trillion of money creation. Just how much the Fed policy served to stimulate the economy is questionable, but there has been some impact. The stock market and the housing market saw an injection of liquidity, and some people got very, very wealthy, and maybe a little  of that spilled over into the broader economy; maybe. At the least, it helped to avoid the double dip that befell the Eurozone.

In the Eurozone, the response was tightening and austerity, and the IMF has now admitted that austerity has led to even higher levels of debt than before, and reduced GDP growth. Now the question is why the Europeans have been so unfortunate to be subjected to much more brutal economic policy than what we have experienced in the United States. While there are many nuances, there are also some simple but deadly important reasons. Most vital is the accountability, or lack thereof, of the institutions making the decisions. In Europe you have the so-called "troika" -- the European Central Bank (ECB), the European Commission, and (more recently recruited) the IMF. These are much less accountable to Eurozone residents -- especially but not limited to those of the most victimized countries (Spain, Greece, Portugal, Ireland, and Italy) -- than even the relatively unaccountable Federal Reserve and US Congress and executive branch are to Americans.

Some examples: In all 27 countries, the IMF recommended budget tightening, with spending cuts generally favored over tax increases. In 15 countries there were recommendations on health care: 14 were to cut spending. In 22 of the 27 countries there were recommendations to cut pensions. In half the countries, the Fund also gave advice on employment protection; in all of them, the recommendation was to reduce employment protections. Reducing eligibility for disability payments or cutting unemployment compensation, raising the retirement age, and decentralizing collective bargaining were also recommended.

But perhaps even more remarkably, this evidence tells us why the ECB allowed repeated and severe financial crises in the eurozone to take their toll on the eurozone and world economy for nearly three years. Not until July of 2012 did ECB President Mario Draghi utter those famous three words -- "whatever it takes" -- which, backed up a few weeks later by the new "Outright Monetary Transactions" program, put an end to the threat of financial meltdown.

After more than 20 European governments have fallen during the prolonged crisis, the pace of the destructive budget tightening there is finally winding down: from about 1.5 percent of GDP in 2012, to 1.1 percent in 2013, to 0.35 percent in 2014. But who knows how many more years it will take to reach normal levels of employment.

This is not to say that the US recovery has been a shining example, and Bernanke should not take too many bows, but it could have been worse.

It is earnings reporting season. Goldman Sachs’ profit fell 21 percent, as revenue from fixed income trading dropped 11% after adjusting for an accounting charge. Fixed income trading revenue accounted for 48% of Goldman's total revenue back in 2009. In the fourth quarter of 2013, it was 25%.

Profit at Citigroup rose 21%, after adjusting for items, as it cut costs and released dipped into funds set aside for bad loans. Now worries. What could go wrong?

Right before Christmas the Emergency Financial Manager for Detroit negotiated a settlement to end a costly interest rate swap with two investment banks. Ending the swaps with UBS and Bank of America Corp's Merrill Lynch Capital Services for $165 million was a key component of Detroit emergency manager Kevyn Orr's plan to adjust the cash-strapped city's finances through the municipal bankruptcy process.

Detroit currently pays about $50 million a year to the banks in exchange for the swaps, which provided a steady interest rate of about 6% on a $1.4-billion pension funding deal. That equals nearly 5% of the city’s sparse general fund budget.

The $165 million deal represented a 43% discount from a previously negotiated deal for a payment of $285 million to the banks, which the bankruptcy judge said was far too generous to the banks. Today, that same bankruptcy judge said the $165 million is still too high a price to pay.

Bankruptcy Judge Steven Rhodes said the city must stop making poor financial decisions, and it’s his judicial responsibility to ensure it emerges from Chapter 9 bankruptcy as a financially sustainable municipality. 

It represented a major win for Detroit retirees, city residents, the pension funds, several European banks and a bond insurer called Ambac Assurance, which aggressively fought the settlement. Because Rhodes denied the deal, they stand to get more money from the city’s eventual bankruptcy restructuring. It represents a major loss for the investment banks. Before you celebrate, this just sets the stage for a possible legal battle.

Wednesday, January 15, 2014 - A Few Pages of Pork

A Few Pages of Pork

by Sinclair Noe

DOW + 108 = 16,481
SPX + 9 = 1848.38
NAS + 31 = 4214

10 YR YLD + .01 = 2.88%
OIL + 1.75 = 94.34
GOLD – 3.00 = 1243.00
SILV - .05 = 20.30

The S&P 500 hit a record high close, just a few pennies better than December 31^st. The market has had a weak start to January but we're still at elevated levels. The Dow Industrials are about another day like today away from records; that close was 16,576 on New Year's Eve.

A $1.1 trillion compromise spending bill that funds the government through September won approval today from the House of Representatives and now goes to the Senate for consideration. The Senate is expected to also pass the so-called "omnibus" bill and send it to President Barack Obama to be signed into law. The 1,582-page bill eases most of the automatic spending cuts that were part of the sequester and keeps the federal government funded through Sept. 30.

The budget bill calls for 1% increases in the paychecks of federal workers and military personnel, the first raises in three years for most agency workers. The spending measure also would protect disabled veterans and some military spouses from a pension cut set to go into effect in 2015.The bill would provide nearly $92 billion for US military operations abroad, mostly in Afghanistan, plus about $7 billion for disasters and other emergencies. That was just slightly less than last year’s war spending but about $44 billion less than was provided in 2013 for disasters, after Hurricane Sandy ravaged the Northeast in October 2012.

Democrats like a $1 billion increase in Head Start funding for early childhood education from its recent low point after forced budget cuts last year. Half of the money will go to help children 3 years old and younger, touching on an Obama administration priority. For Republicans, the compromise reduces funding to two of their least-favorite agencies: the Internal Revenue Service and the Environmental Protection Agency. Democrats also blocked GOP-sought curbs on the Environmental Protection Agency’s power to regulate utilities’ greenhouse gas emissions. The bill includes  an extra $155 million worth of financing for the Department of Energy to promote its nuclear projects. There is also money for the coal industry. The measure provided money for Obama’s 2010 health care overhaul and his revamping of federal oversight of the nation’s financial markets, though not as much as he requested. There are also cuts for financing the Securities Exchange Commission. Overall, federal spending would be lower than the final budget of President George W. Bush's administration.

Out of 1,582 pages I'm guessing we'll find a few pages dedicated to pork.

In the latest economic data, a measure of inflation at the wholesale level, the seasonally adjusted Producer Price Index rose 0.4 percent last month, the biggest increase since June, although inflation pressures remained benign. 

In its latest Beige Book report on business activity, the Fed said the economy grew at a moderate pace from late November through the end of 2013, with some regions of the country expecting a pickup in growth. Specifically, 9 of the 12 regions reported moderate growth, and 2 regions reported modest to moderate growth. Moderate is a little better than modest, both are better than mediocre, and that's just a smidge better than maudlin. In other words, the Fed's Beige Book is not very precise. They say that tourism has picked up in Florida, and that ripples out to help lift other parts of the Floridian economy. Around the Gulf of Mexico there has been significant energy investments, and that also ripples. In the Midwest, the auto industry has perked up, and that ripples out to other industries. Retail sales were pretty good across the country. Wages are still a problem across the country, and not likely to get better. Everything else was up just a little everywhere except the St. Louis region. Go figure.

The World Bank reported that advanced economies appeared to have turned the corner after five years of financial crises and recession. It forecast global growth will firm to 3.2% this year from 2.4% in 2013. The bank lowered its 2014 China GDP forecast to 7.7% from 8.0% forecast in June, but raised its Eurozone GDP estimate to 1.1% from 0.9%, and kept its US GDP estimate at 2.8% and its projection for Japan GDP at 1.4%.

The International Monetary Fund expects global growth to pick up this year, though it should still remain below its potential of about 4 percent. IMF Managing Director Christine Lagarde said: "Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven," and she says one of the biggest risks is deflation.

Earnings reporting season, and the big banks dominate the earnings news this week. Bank of America reported 4^th quarter net income of almost $3.2 billion. Revenue increased 14% to $22.3 billion. Consumer banking had its best quarter since 2011, the wealth management and global banking divisions posted record revenues. The bank made $11.6 billion in home loans, down 49% from the third quarter. BofA isn't alone in this. 

Both JP Morgan and Wells Fargo reported declines in their mortgage businesses yesterday. BofA' mortgage unit lost $1.1 billion, which was actually an improvement from a loss of $3.7 billion same time last year, but much of the earlier losses were due to legal expenses, which, at $2.3 billion for 4Q are still a bit of an embarrassment. BofA says the problem now is that demand for mortgages has dropped. This might explain the Fed taper; the banks just aren't producing mortgages. And the banks are setting aside fewer reserves for mortgage related losses. What could go wrong?

The housing market may be slowly improving, but weak spots remain. In 15 states, the share of “deeply underwater” foreclosures is larger than those with equity, according to housing data analyst RealtyTrac. But, overall, the December data show those deeply underwater foreclosures declining and homes rich in equity increasing. During the housing downturn we saw a downward spiral of falling home prices resulting in rising negative equity, which in turn put millions of homeowners at higher risk for foreclosure when they encountered a trigger event such as job loss. Now we are seeing the reverse trend: rising home prices resulting in falling negative equity, which in turn is giving millions of homeowners a lifeline to avoid foreclosure.

The data measure underwater status by comparing the value of a home loan to the value of the home itself. A foreclosure was defined as “deeply underwater” when the homeowner owed at least 25 percent more than the value of the property. (The loan-to-value was 125 percent or greater.) A foreclosure with equity was defined as one where the value of the loan was equal to or smaller than the value of the home. (A loan-to-value ratio of 100 percent or less.)

The states with the highest percentage of deeply underwater foreclosures were: Nevada (65 percent of foreclosures were deeply underwater), Florida (61 percent), Illinois (61 percent), Michigan (55 percent), and Ohio (48 percent).

But that data is just for those homes in foreclosure. In two states especially hard-hit by the housing crisis, Nevada and Florida, “deeply underwater” properties accounted for more than one in every three homes.

States with the most equity-rich homes — where the loan value was well below the value of the home — included Hawaii (36 percent), New York (33 percent), California (26 percent), Montana (24 percent), and Maine (24 percent). D.C. also had a rate of 24 percent.

Five bank regulatory agencies approved a tweak to the Volcker rule that would allow banks to keep interests in certain funds backed by trust-preferred securities. The change was aimed at easing the concerns of small banks that they needed to dump certain investments they thought would be allowed under the rule, losing money in the process.

The American Bankers Association, or ABA, a bank trade group, sued regulators, and lawmakers from both parties have backed the banks. After regulators announced the revision, the bankers group said it was considering the change and would decide whether to continue with its lawsuit.

The Volcker rule, which was required by the 2010 Dodd-Frank law, prohibits banks from making speculative bets with their own money and restricts their investments in certain funds. Five agencies, including the Federal Reserve and the Federal Deposit Insurance Corp, were involved in writing the rule. Smaller banks claimed that, as an unintended consequence of the final version, they would need to dump funds backed by trust-preferred securities, or TruPS, which are collateralized debt obligations, or CDO's that have characteristics of debt and equity. These CDOs were issued mainly by small banks and were attractive because they counted towards capital for regulatory purposes but they were regarded as debt instruments for tax purposes, so payments on them were deductible as interest. 

Regulators said banks could keep certain collateralized debt obligations backed by TruPS established before May 2010 and obtained before the Volcker rule was finalized last month. The agencies also said banks can continue to act as market makers in the TruPS-backed funds. Banks have 30 days to comment on the changes after which regulators have the power to make additional tweaks if necessary. Even the dumbest banker can get around the Volcker rule. The regulators started with a weak statute, and managed to make it weaker. 

Tuesday, January 14, 2014 - The Day the Net Died (Maybe)

The Day the Net Died (Maybe)

by Sinclair Noe

DOW + 115 = 16,373
SPX + 19 = 1838
NAS + 69 = 4183
10 YR YLD + .04 = 2.87%
OIL + .83 = 92.63
GOLD – 7.40 = 1246.00
SILV - .15 = 20.36

A US appeals court has rejected federal rules that required Internet providers to treat all web traffic equally. The Federal Communications Commission's open Internet rules, also known as net neutrality rules, required Internet service providers to give consumers equal access to all lawful content without restrictions or varying charges. The US Court of Appeals for the District of Columbia Circuit struck down the regulation, which was passed in late 2010 and challenged in court by Verizon Communications. The decision that could allow mobile carriers and other broadband providers to charge content providers for faster access to websites and products, or block content, or slow down access.

One argument is that a video and Internet provider would have an incentive to bog down a video streaming service such as Netflix in favor of its own sites. Or it could charge a toll to those who want their content delivered at a higher speed, which media watchdogs say would stifle innovation and favor big and powerful companies.

The issue of companies playing favorites with their own content came to the forefront when Comcast announced plans to acquire NBCUniversal in 2009.  Comcast, the nation's largest cable and Internet distributor, said in a statement that the court ruling would not change the company's policies. At the time of the acquisition, the Comcast agreed to abide by the FCC's open Internet rules for 7 years, even if the courts changed them. After 7 years, the gloves would likely come off.

There is big money at stake, as we were reminded today. Charter Communications wants to buy Time Warner Cable in a deal valued at more than $37 billion. Time Warner Cable's board has rejected the offer.

The FCC had classified broadband providers as information service providers as opposed to telecommunications service providers, like telephone companies, and that distinction created a legal hurdle for the FCC's authority over them. This was the second time the court struck down the FCC's net neutrality rules. The FCC now could appeal the ruling to the full appeals court or to the US Supreme Court, something FCC Chairman Tom Wheeler said he is considering as he looked at "all available options" to ensure Internet networks remained free and open.

The regulators could also try to reclassify broadband providers so they fall in the same category as traditional phone companies, a step that would give the FCC more oversight power. With the agency taking its regulatory authority from the Telecommunications Act of 1996, it could go back to Congress and ask for new authority to regulate broadband. But the Republican majority in the House of Representatives has tried multiple times to repeal the FCC’s net-neutrality rules, and any legislation giving the FCC new authority over broadband providers would have little chance with lawmakers there.

One simple way, at least on its face, to get around the prohibition on applying common carrier rules to broadband would be for the FCC to reclassify broadband, subject to the common carrier rules that traditional voice service is subject to.

There will be serious push back from the phone and cable companies and their lobbyists. They will make threats, recycle all of their debunked myths about the Internet, they will claim that the internet belongs to them, and promise we can trust them not to do any of the bad things they've fought so hard to do.

Economic data today; the commerce department reported better-than-expected retail sales for December, up 0.2% versus estimates of 0.0%. Core sales, excluding the more volatile food and auto sectors, were up 0.7% for the biggest gain in almost a year. November sales numbers were revised slightly lower. These core sales correspond most closely with the consumer spending component of gross domestic product, and the increase suggested consumption accelerated in the fourth quarter from the third quarter's 2 percent annual pace.

A second report from the Commerce Department showing retail inventories, excluding autos, increased 0.6 percent in November after increasing 0.3 percent in October. The economy grew at a 4.1 percent rate in the third quarter, which was the fastest pace in almost two years. Fourth-quarter GDP growth estimates range as high as a 3.9 percent rate.

It's earnings reporting season and this week features the big banks; today featured JPMorgan and Wells Fargo. Wells reported an 11% jump in profits, thanks in large part to cost cutting, which is to say they fired people. Wells Fargo says their mortgage business is doing just about what it would be expected to do at this point in the economic cycle. The nation's biggest mortgage lender, Wells Fargo, said its mortgage volume tumbled to $50 billion in the quarter, down 60 percent from $125 billion a year ago. The second-biggest lender, JPMorgan Chase, said its mortgage originations, that includes new home purchases and refinancings, fell 54 percent to $23.3 billion from $51.2 billion a year ago.

A jump in interest rates has had a big impact on the housing market. That should be a warning sign for a Federal Reserve seemingly bound and determined to withdraw stimulus from a still-shaky economy. Higher rates have hurt demand. The average interest rate for a 30-year fixed-rate mortgage has jumped to 4.5 percent from a record low of 3.3 percent in early 2013. Fed Chairman Ben Bernanke and others argued they weren't kicking the props out from under the bond market, but that's sort of what happened: Bond prices fell, and interest rates jumped. Of course, rates are still relatively low, and the housing market is not exactly in a panic, though sales are slowing.

The specifics of bank earnings are increasingly unimportant because nobody believes the numbers anymore; the numbers are massaged and manipulated to such a degree that they are of no value. Wells Fargo closed near an all time high. Still, the reports are fun reading, even if much is fictional.

JPMorgan met earnings expectations if you overlook the legal costs, and Wall Street seemed willing too overlook the legal costs today. Investment banking fee revenue dropped 3 percent. The bank had $1.1 billion of legal expenses in the fourth quarter, about $850 million of which was linked to a recent settlement for failing to report its suspicions of fraud at its client Bernard Madoff's fund.

The bank agreed to some $20 billion of legal settlements in 2013; almost equal to a typical year's profit. CEO Jamie Dimon indicated some investigations into JPMorgan are just beginning, so the idea is that they just treat the legal problems as the cost of doing business.

One bit of info from JPMorgan today, a key lending metric, the ratio of the bank's loans-to-deposits, hit a new low. In 2013, JPMorgan on average lent out just 57% of its deposits. That's down from 61% a year ago and the lowest that ratio has been in at least a decade. Back in 2004, JPMorgan's loan-to-deposit percentage was as high as 88%. It's also down at rivals. But not as much. The industry average is just under 70%.Traditionally, banks have lent out 80 to 90% of their deposits.

So, why isn't JPMorgan making loans? One reason is that they can make as much money, about $300 million by just buying short term, low interest rate Treasury bonds. Dimon should send a thank you note to Bernanke. The other possible explanation is that there isn't much demand for loans. Either way, this would seem to be an indicator of sluggish growth.

The bank earnings season actually kicked off on Friday when the Federal Reserve released a statement saying it made an estimated $79 billion in net interest income, driven by its $90 billion in interest income on its portfolio of Treasuries, mortgage bonds, and other securities. The Fed sent $77 billion to the US Treasury. The Federal Reserve, after operational costs, is earning double the profits of Exxon Mobil ($44 billion) and Apple ($41 billion), and those two companies are doing a combined $600 billion in global revenues. The Fed doesn't have to drill oil wells or hire Chinese kids to glue together phones, they basically print money, buy mostly risk-free bond investments and do a little research to determine what the interest payments are going to be. The Fed has built up a $4 trillion dollar portfolio, and they have sent more than $350 billion to the Treasury since 2009. By the way, the Fed sent $88 billion to the Treasury in 2012, so they were down last year. No, I don't know what that indicates.

Standard & Poor's Ratings Services revised its outlook on California's credit ratings to positive from stable, citing the governor's budget plan. S&P foresees raising the state's rating one notch within two years, if California follows the $107 billion budget Brown proposed last week. S&P said it is also encouraged by the proposal's emphasis on repaying debt and building reserves. While Brown did not suggest specific action for making the teachers' underfunded retirement system whole, he did highlight that the pension "is in need of a long-term funding strategy.”

In a letter issued through the Economic Policy Institute, including seven Nobel Laureates, argue that the government should hike the federal minimum wage from $7.25 to $10.10 an hour by 2016 and then peg future increases to inflation.

The effect of a minimum wage hike is one of the most hotly debated issues in economic research. Some argue that a boost in the wage floor would hurt low wage earners because employers would be hesitant to hire if they had to pay their workers more. In the letter, the economists, argue that the "weight" of the evidence indicates past minimum wage hikes haven’t hurt the job market.

However, the letter reads: "Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front."

Monday, January 13, 2014, Hacks and Leaks

Hacks and Leaks

by Sinclair Noe

DOW – 179 = 16,257
SPX – 23 = 1819
NAS – 61 = 4113
10 YR YLD - .03 = 2.83%
OIL – 1.14 = 91.58
GOLD + 3.80 = 1253.40
SILV + .23 = 20.51

This week's economic calendar includes retail sales report and business inventories tomorrow; reports on wholesale inflation and the Fed Beige Book on Wednesday; Thursday we'll see the inflation numbers on the retail level; Friday brings an update on housing starts, industrial production, and an options expiration Friday.

We are smack dab in earnings reporting season. This week, the big banks report. Tomorrow we'll hear from JPMorgan and Wells Fargo; Bank of America on Wednesday; Goldman Sachs and Citigroup on Thursday; Morgan Stanley on Friday. The banks' reports will provide insight into how much activity there has been in both consumer and commercial lending and portfolios. Another area of interest is changes in the banks' trading portfolios, which are expected to decline. Financial companies announced more job cuts last year than any other corporate sector; those cuts can't continue indefinitely. Litigation costs will be the wild card in earnings reports as some of the big banks have been trying to clean out the skeletons from the closets.

Fourth-quarter earnings expectations are highest for health-care stocks, financials and consumer-discretionary names, as well as Industrial companies. Much like in the third-quarter, the financial sector is expected to have the best earnings growth in the fourth quarter, with an estimated growth rate of 22.6%. S&P 500 earnings as a whole are expected to grow 6.1%. Without the contribution of the financial sector, expected growth is 3%.

While some businesses have shown fundamental improvement, many corporate earnings have benefited from cost cutting, low interest rates to refinance debt, stock buybacks and other moves that might fall under the heading of financial engineering, and it's not just the banks. Many companies have not been investing in boosting their productivity. In order for the economy to grow, companies are going to have to start investing more in capital expenditures and job growth, the very things they have squeezed to achieve high margins.

One thing the banks could do is to tighten up their security on digital transaction. Last Friday, retailer Target announced that personal information on as many as 70 million additional customers was stolen as part of the company's payment card data breach. The information stolen includes names, mailing addresses, phone numbers, and e-mail addresses. Hackers infected Target's point-of-sale terminals with malware to steal the payment card information Over the weekend, the number of people impacted by the breach may have grown to as many as 110 million. This is the latest blow to Target, which in December revealed that hackers had stolen approximately 40 million credit and debit card numbers. Some of that 40 million may be overlap in the 110 million figure. Target said at the time that it believed the data stolen came from transactions made between November 27 and December 15.

The breach, in turn resulted in a 10 to 20 fold increase in stolen cards available on underground markets. Target says affected customers will suffer no liability for fraudulent charges, and they will offer one year of credit monitoring and identity theft protection. You can go to a Target website and enter an email address, and an activation code will be emailed to you.

Target partnered with credit card monitoring firm Experian to handle the monitoring for its customers. Once users get their activation codes they’ll be asked to enter a variety personal information into the Experian Web site to verify their identities for the credit monitoring. This includes information such as address, social security number and mother’s maiden name — all to ensure that consumers get the right credit reports. Target will not have access to the data.

Once users are signed up for the service, they will receive a complimentary copy of their credit report and the option to receive daily credit monitoring, access to fraud resolution services and identity theft insurance where available.

Target was not alone; Neiman Marcus has also been hacked. I haven't heard numbers on Neiman Marcus, but it apparently happened about the same time as the Target hack. Three other, as yet unnamed, retailers were also hacked.

Banks and card issuers are reportedly prohibited from naming any organization that's suffered a breach, unless that organization releases a public breach notification. Then it's up to the card issuers to notify affected customers.

Issuing new cards, however, reportedly costs at least $10 per card, which has led some card issuers to avoid reissuing cards after a breach. Notably, while JPMorgan Chase reportedly replaced up to 2 million cards for cardholders whose data was compromised during the Target breach, Wells Fargo has declined to do so, saying that it will instead monitor accounts for signs of fraud and add additional protections to any apparently compromised accounts.

Card issuers have long complained about their inability to hold retailers accountable for the cost of replacing cards following a breach. But retailers have long countered that card issuers should be doing more to protect cardholder data, for example by implementing the chip-and-PIN system known as EMV, which requires a cardholder to enter a personal identification number before the card can be used to authorize an in-person transaction. EMV is already in widespread use in many other parts of the world, including Europe.

We don’t know all of the details about what happened at Target and Neiman Marcus, but there’s a really obvious weak spot in the US payments infrastructure that should be corrected, irrespective of whether it would have prevented the Target and Neiman Marcus breaches: the use of two-factor authentication, namely chip-and-PIN cards, which are standard outside the US and have been effective in reducing fraud. The bottom line is that the retailers don't want to pay for secured transactions and the banks don't want to pay for secured transactions.

The Senate Banking Committee will hold hearings to try and determine if retailers or banks should foot the costs in the wake of a breach. Or maybe we should have something a little better than a third world payment system. It's normal for the US to be backward in retail banking. It’s in investment banking that she is a great innovator.

In the meantime, think cash.

From hacks to leaks. West Virginians are being told “DO NOT USE WATER”. Not just don't drink the water, do not use the water, no baths, no washing of clothes or dishes, almost nothing. A chemical used in coal processing has leaked from an old tank along the Elk River and leaked into the water supply, a crisis that has affected nearly 300,000 people in nine counties and effectively closed the largest city in the state. The shorthand name for the chemical is “crude MCHM.” The technical name is 4-methylcyclohexane methanol.  People line up for free water at the fire stations or buy it at the Dollar General — $1.60 for a 20-ounce Dasani, $39 for a flat of 24 bottles.

The leak happened on Thursday, so West Virginians are getting a little ripe by today. Two state employees tracked the leak to Freedom Industries, which owns a row of vintage storage tanks along the south bank of the Elk. The chemical had leaked from an inch-wide hole in the bottom of one tank, pooled in a containment area and then seeped through a porous cinder-block retaining wall, down the bank and into the river.

The infrastructure was primed for a water crisis. The intake for the water distribution system is downstream by a little more than a mile, and on the same side of the river, as the tanks containing the chemicals. The West Virginia American Water Co. sent out the do-not-use order late Thursday afternoon, but by then people had been drinking the water, cooking with it and bathing children with it.

Phrases such as "light at the end of the tunnel" are being used by officials in West Virginia as they give about 300,000 people there hope that they'll soon be able to use the water that's supplied to their homes and businesses. What this tells us is that out water infrastructure has some problems. It's easy to slough this off by thinking it's just West Virginia, but it could happen almost anywhere, and we are not prepared.

Hacks and leaks, just 2 areas where we could see major improvements and upgrades. And I'm thinking back to last Friday's jobs report and wondering why we aren't seeing many, many more jobs being created in this country.