Friday, December 06, 2013 - The Goldilocks Job Report

The Goldilocks Job Report

by Sinclair Noe

DOW + 198 = 16,020
SPX + 20 = 1805
NAS + 29 = 4062
10 YR YLD - .02 = 2.85%
OIL + .27 = 97.65
GOLD + 5.60 = 1231.70
SILV + .11 = 19.64

Big gains on Wall Street, the best in about a month. The monthly jobs report came out this morning. It was just a little better than expected; nothing earth shattering but decent. The economy generated 203,000 net new jobs. The unemployment rate dropped to 7.0% from 7.3%. The unemployment rate is now at the lowest level since November 2008. So, this was a Goldilocks report, just good enough to indicate some strength but not so strong as to push the Federal Reserve to taper, to cut back on its monthly bond purchase program. Really, the Wall Street traders got the best possible report today. There is still a slight risk of a Fed taper in December, and we'll talk about that more in a moment.

Let's dig into the numbers.

Hiring in November was strong in most industries, including transportation and warehousing, professional occupations, manufacturing, health care, construction and retail. And there was a shift toward more well-paying jobs compared with October.

The number of businesspeople and professionals who found work rose by 35,000 to lead the way. It has been the fastest-growing category over the past year. Companies that warehouse and deliver goods, meanwhile, hired 31,000 new workers; some of that gain may be seasonal. Manufacturers added 27,000 jobs, the biggest increase since March. Construction companies added 17,000 jobs, slightly above the industry’s 12-month average.

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November; however, retail employment slowed, adding 22,300 last month compared to 45,800 in October.

State and local governments added 14,000 jobs. The only area of the economy posting job cuts was the federal government, which was not surprising, because the federal government has been cutting jobs every month this year.

The bigger surprise in this release was a three-tick decline in the unemployment rate to 7.0%, as furloughed government workers coming back into the labor force contributed to a sharp rise in household employment and participation failed to recoup all of the decline seen in the previous month. Most of the employment impact from the government shutdown was reversed in the November report.
The Labor Force Participation Rate increased in November to 63.0% from 62.8% in October (October decline was partially related to shutdown). This is the percentage of the working age population in the labor force, looking for a job or actually working. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) fell by 331,000 to 7.7 million in November. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. These workers are included in the alternate measure of labor utilization known as the U-6, which decreased to 13.2% in November from 13.8% in October. 

There are 4.066 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 4.063 million in October. This is generally trending down, but is still very high. Long term unemployment remains one of the key labor problems in the US. After a while, these people are no longer considered to be actively seeking work, and they just sort of disappear from the data. 

Employment gains for October and September were little changed overall. The number of new jobs created in October was trimmed to 200,000 from 204,000, while September’s figure was raised to 175,000 from 163,000.

The higher concentration of good-paying jobs created last month helped to push up average hourly wages by 4 cents to $24.15. Over the past year hourly earnings have climbed a mild 2%. The average workweek edged up 0.1 hour to 34.5 hours, which remains near a post-recession high. Hours usually increase when the economy strengthens.

Since June 2009, real average weekly earnings have increased 0.3% per year, even as productivity has increase by 1.5% per year. Most of the gains in income have gone to the highest income earners, and real median weekly wages have declined by 0.8% per year since 2009. Stagnant or declining wages are nothing new; that trend has been in place for more than 30 years. The other day we reported that corporate profits remain near record highs as a share of national income, but workers' share has dropped to the lowest level in nearly 60 years. The problem of stagnant wages has created a new niche in what was once considered the vast middle class; that new group is called ALICE, asset limited income constrained employed; but they're not the only ones affected by stagnant wages. Slow wage growth is the rule for the bottom 75%. Almost everybody is falling behind the top 5% to 10%.

Surely, the weakness in wages will be a consideration for the Fed when they consider the prospects of taper. The unemployment rate at 7.0% might lead the Fed to taper. Employment was up 2.293 million year-over-year in November; that might be enough for the Fed to consider taper. One month of figures doesn’t necessarily mean much: there’s a lot statistical noise in the employment update. Still, we’ve now seen three months of solid employment growth, with payroll gains averaging more than a hundred and ninety thousand since September. Given that during this period the economy was subjected to a government shutdown and the uncertainty of a debt-ceiling crisis, the strength in hiring is doubly reassuring. The longer-term trend is also encouraging: since the recovery began, in 2009, the monthly payroll figure has averaged about a hundred and seventy-five thousand. So there does seem to have been a bit of a pickup recently.

But there is still extensive economic weakness and other concerns. Yesterday's 3Q GDP report showed the economy growing at a 3.6% pace, but that number was an upward revision largely due to inventory stacking, which could act as a drag on 4Q or 1Q GDP. That would indicate a wait and see position from the Fed.  

The Fed will also consider inflation, and the most recent consumer price index, prices at the retail level were steady in October (the last report). Over the past 12 months, prices rose 0.7%, the smallest gain since October 2009. Disinflation remains a concern, and the thought of breaking through to deflation probably gives Fed policymakers nightmares.

The Fed will also be wary of dialing back bond purchases before lawmakers strike a deal to fund the federal government. That could come as soon as next week. Congressional aides have said negotiators were down to the final details. Still, we have to look beyond the budget committee, and even if the committee comes up with a deal, the Congress might not be able to take that beyond a one year continuing resolution to fund the government, and that wouldn't happen until January. Again, reason for the Fed to delay a taper.

Beyond the possibility of a budget agreement is content of any such agreement. For years, Bernanke has been begging for fiscal help to stimulate the economy; and while a budget deal might staunch the fiscal bloodletting, that's not the same as fiscal stimulus. Fiscal stimulus would involve actual spending programs, infrastructure projects, an increase in minimum wages, and much, much more. Don't hold your breath. Again, that would be reason for the Fed to delay taper.

 In the course of the recovery, the decline in the jobless rate has accelerated. In October, 2009, it peaked, at ten per cent. Then it took nearly two years to fall below nine per cent. In the past couple of years, it has fallen by another two percentage points. This is partly because job growth has picked up, but it also reflects the fact that the labor force isn’t growing as fast as it has in the past. A few years ago, the rule of thumb was that the economy needed to generate a hundred and fifty thousand jobs every month to keep the unemployment rate flat. Now, according to Administration economists, the break-even rate is closer to a hundred thousand. When the job numbers come in above that figure, as they did this month, the unemployment rate tends to fall.

Again, this has been a long, slow, slog of a recovery. You should think, and I think the Fed believes that the recovery is still vulnerable, and just looking at the headline number of the unemployment rate masks broader weakness in the labor market and the economy.

On Wall Street, the big question is whether this report will be enough to persuade the Federal Reserve Board, which meets later this month, to start withdrawing one of the extraordinary measures it has been taking to support the economy; namely, QE, the policy of creating $85 billion dollars each month to buy Treasury bonds and mortgage backed securities, and put downward pressure on long-term interest rates, especially mortgage rates. 

Both Bernanke and Yellen have stressed the need to look beyond the headline employment rate; a taper announcement at the December FOMC meeting certainly has not been communicated, and it is unlikely the Fed will play the role of Scrooge heading into the holidays. So this report today was about as good as Wall Street could hope for; not too hot, not too cold, as Goldilocks would say – just about right. 

Thursday, December 05, 2013 - 46664

46664

by Sinclair Noe

DOW – 68 = 15,821
SPX – 7 = 1785
NAS – 4 = 4033
10 YR YLD + .03 = 2.87%
OIL + .18 = 97.38
GOLD – 18.20 = 1226.10
SILV - .28 = 19.54

Nelson Mandela is dead. News reports say the former South African President died peacefully at his home. He was 95. Nelson Mandela will be remembered as the person who, more than any other, brought an end to apartheid, the heartless policy of “separate development” in which white, black and South Asian South Africans were obliged to live apart. It is part of his towering achievement that the very notion of racial segregation is anathema throughout the civilized world.

Yes, the stock market was down again today but the economy is doing better than you thought. Third quarter gross domestic product grew at a 3.6% pace, revised up from earlier estimates of 2.8%. Wow, sounds great, until you dig into the numbers. A large part of the revision, almost half, comes from an increase in inventories. Businesses were stocking the shelves. Were they predicting a gang-buster holiday shopping season or were they caught flat-footed by a lack of demand? We won't know with certainty until we get through the fourth quarter, but most indications are that the economy is still slogging forward, and there doesn't seem to be a need for such a large inventory buildup. We know businesses accumulated more than $116 billion in inventories in the quarter, the most since the first quarter of 1998.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, was revised down to a 1.4% rate, the lowest since the fourth quarter of 2009. That line about consumer spending is a bit misleading, and I always have to issue a caveat, because the economy is about much more than consumers, but still. Consumer spending had previously been estimated to have increased at a 1.5% pace. A sluggish start to the holiday shopping season offered another reason for caution on the economy's near-term prospects. Several big retailers reported disappointing November sales, with some relying on bargains to lure shoppers. And so, there is a strong possibility businesses will still have inventory on the shelves after the holidays, and there will be no need for new orders to replenish the stocks, and that will likely weigh down GDP growth in the fourth quarter and into the New Year.

Consumers are holding onto the purse strings. Some companies that reported sales gains had to offer more bargains to attract shoppers. The need to keep discounting, which stems from sagging consumer confidence and shoppers trained to wait for bargains, will persist through the remainder of the season. Retailers have created this expectation; just check your inbox; I'll bet you're getting more and more promotional e-mails from national chains. Why rush when there might be a better deal next week.

Meanwhile, the Commerce Department reported that after-tax corporate profits in the third quarter increased at a 2.6 percent pace in the third quarter, slowing from the prior quarter's 3.5 percent pace. So profits are still growing, quite nicely, but they are growing slower. Dividends decreased $179 billion in the third quarter, in contrast to an increase of $273 billion in the second; part of that decrease is from dividends paid by Fannie Mae to the federal government in the second quarter.

The knee jerk reaction on Wall Street was that the GDP number was stronger than estimates and Wall Street looks at good news as bad news, based upon the idea that the Fed will taper from Quantitative Easing; that speculation was enough to push treasury yields to 3-month highs, but a closer examination of the numbers shows the GDP numbers to be a little less than robust. Atlanta Federal Reserve Bank President Dennis Lockhart summed it up by saying: "I am not prepared to interpret the revised third quarter number as an indication that the economy is on a much stronger track."

Another number in the report was the price index for gross domestic purchases, which came in at 1.8%, up 0.2% from the second quarter. These measures of inflation are important because the Fed has repeatedly promised not to raise the so-called fed funds rate, now at nearly zero, until the jobless rate falls below 6.5% or inflation rises above 2.5%; those are the thresholds, rather than the targets. The Fed has targeted an inflation rate of 2%; that would be the sweet spot. And as long as inflation remains below target, that provides justification to keep the fed funds target rates in the zero range.

Why is that important? Markets are jittery about the Fed starting the process of ending some $85 billion in bond purchases each month. The purchases of Treasurys and mortgage-backed securities are meant to keep interest rates low and stimulate the economy. The tapering of bond purchases, however, is likely to trigger an increase in interest rates of all kinds and that could dampen economic growth. When the Federal Reserve first hinted during the summer that it would soon scale back, mortgage rates surged and interest rates also rose in many developing countries.

A new research report by the Cleveland Fed indicates that when the inflation rate remains low, it would be justification for the Fed to maintain its Zero Interest Rate Policy. In other words, the Fed will try a balancing act; keeping the fed funds rate lower for longer, to ease the worries of investors and let the economy more gradually acclimate to a future that at some point, might include higher interest rates.

An interesting point to ponder is that inflation remains tame, perhaps even disinflationary, even as the stock market has moved to record highs. Now you might suspect that a rising stock market, even a frothy stock market, even a bubblicious stock market might have an inflationary impact on the economy; then again, maybe not. Here we are in a stock market boom, and deflation is a greater concern, and apparently a guide for Fed policy. Go figure.

Today, the European Central Bank and the Bank of England left interest rates unchanged. Deflation is a big concern in the Eurozone. Producer price inflation (PPI) fell to -1.4% in the eurozone in October. This is how deflation becomes lodged in the price chain. Prices are sticky for a while as you approach zero inflation, but once you break through the ice into deflation things can move fast; an example would be Greece.

We seem to have a glut of things, and you know the old story about supply and demand. China's fixed capital investment over the past year has been $4 trillion; that represents an 8 fold increase in the past 10 years, and it compare with $3 trillion for the entire EU and $3 trillion for the US. China is a vast new source of supply for a saturated global economy. Meanwhile, today's data on GDP suggests US businesses are a bit saturated as well. Europe's slide towards deflation is replicating what happened in Japan in the 1990s at the onset of its lost decade.

Japan is now fighting back with a strong monetary stimulus program called Abenomics, an easy money policy after the abject failure of a tight money policy. The result of tight money was that fiscal policy had to carry the entire burden instead. Budget deficits exploded as Japan battled the slump. Public debt ballooned to 245% of GDP. ECB President Mario Draghi says the central bankers are fully aware of downside risks of protracted low inflation. The ECB has been behind the curve for most of the past three years, needlessly causing a double-dip recession that caused havoc to public finances; so I guess its no surprise they took no action today.

In other economic news, the Department of Labor released its weekly jobless claims report this morning, and these results were also better-than-expected. Seasonally-adjusted claims fell by 23,000 to 298,000, significantly beating the 320,000 claims economists had predicted. Combined with yesterday's ADP payroll report, this would seem to bode well for tomorrow's monthly jobs report, but this weekly claims report was over the Thanksgiving holiday week, and the results might be slightly distorted. Still, it was the third straight weekly drop in initial claims. Not bad.

Look for 180,000 new jobs and the unemployment rate to go from 7.3% to 7.2%.

Regulators are reportedly ready to approve a tough version of what is known as the "Volcker Rule," part of the Dodd-Frank financial-reform act, which prohibits banks from proprietary trading, which is fancy talk for "gambling with their own money." Regulators were originally planning to leave a big loophole in the Volcker Rule by letting banks do what's known as "portfolio hedging”. This is basically proprietary trading by another name, because it lets banks claim that any kind of trading they do is hedging against losses somewhere in their massive, multi-trillion-dollar portfolios.

One reason why the Volker Rule might actually have teeth is the London Whale. Remember the $6 billion loss that was, according to Jamie Dimon, a portfolio hedge? Not exactly. Bankers warn that this version of the Volcker Rule means mega-banks will not be able to protect themselves from future economic calamities, which means they have no choice but to get smaller and take fewer risks.

Sounds about right.

Wednesday, December 04, 2013 - The Defining Challenge

The Defining Challenge

by Sinclair Noe

DOW – 24 = 15,889
SPX - 2 = 1792
NAS +0.80 = 4038
10 YR YLD + .05 = 2.83%
OIL + 1.25 = 97.29
GOLD + 19.00 = 1244.30
SILV + .54 = 19.82

December can be a cold, cold month. At least that's how the equity markets are starting the month; four losing sessions. Part of this might be the big institutional investors, the big hedge funds and money managers, looking around and realizing the market is up 30% or so, and that would be a good year, so why no lock in a few profits. No need to worry about the budget battle in Washington; no need to worry about the Federal Reserve surprising people with a premature taper; no need to worry about a strong jobs report on Friday. In this crazy market where good economic news gets traders worried about the Fed taking away the punch bowl, today we had some reasonably decent economic news and another drop in the markets.

Let's start with the economic reports. ADP, the payroll processing firm, has a monthly report on private jobs; they issue the report just before the monthly official government report on jobs, the BLS non-farm payroll report. The ADP report is not great at predicting the government report, but its one of the better guidelines we have. Today, ADP reported companies added to their payrolls by a net 215,000 in November, and they revised the October number higher to 184,000.

Manufacturers, builders and other goods-producing industries increased headcount by 40,000, the most this year. Employment in construction climbed by 18,000. Factories also added 18,000 jobs, the biggest gain since February 2012. Trade, transportation and utility companies created 45,000 jobs last month. Companies employing 500 or more workers added 65,000 jobs. Medium-sized businesses, with 50 to 499 employees, took on 48,000 workers and small companies expanded payrolls by 102,000.

ADP typically underestimates the number of jobs added to the economy. The government jobs report is Friday morning; the average estimate is for 180,000 net new jobs in November.

In a separate report, contracts signed to buy newly built homes jumped 25% in October month to month. Now let's dig into the numbers, because the numbers are a bit unusual. In September, contracts to buy new homes dropped 6% from August. So there was a big drop in September and an even bigger bounce up in October. A couple of theories behind the numbers. First, is the idea of pent-up demand; the government shutdown caused potential buyers to wait, and also interest rates have been climbing, pushing potential buyers to jump now rather than wait for higher rates later. The other theory is that there's a large margin of error in this report and we'll see the number revised next month.

Meanwhile, the Institute for Supply Management's non-manufacturing index dropped to 53.9 in November from 55.4 in October. A reading above 50 indicates expansion in the services sector of the economy, but clearly expanding a little slower. The ISM manufacturing index, released Monday, showed an increase to 57.3 from 56.4.

Meanwhile, the Federal Reserve released its Beige Book this afternoon. The Beige Book is a business survey, which contains anecdotal reports from the 12 Fed district banks, and it's published two weeks before the officials meet to set monetary policy at the FOMC meeting. It's called Beige Book because it has a beige cover, although I suspect it is also descriptive of the writing style.

Anyway, here's the synopsis: consumer spending increased in most of the country, with retailers expressing optimism about holiday sales; hiring showed a modest increase or was unchanged; manufacturing activity continued to expand in most districts, with gains noted in the motor-vehicle and high-technology industries; demand for professional business services experienced stable to moderate growth, especially in computer technologies.

And the Commerce Department reported this morning that the October trade deficit decreased to $40 billion. Total October exports came in at $192 billion compared to imports of $233 billion, resulting in a deficit of $40 billion, down from $43 billion in September. Oil prices were just under $100 in October, down from $102 in September, and prices will likely be down even further in November. The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

Meanwhile, remember the budget negotiations? That's where each political party draws a line in the sand, and a bipartisan committee dances around the line and no later than December 13^th, they are supposed to come up with a deal that nobody could love. There is broad agreement that a portion of the sequester should be replaced with targeted cuts to discretionary spending. But Democrats demand revenues in the mix and Republicans categorically reject new taxes. The dance of legislation is reportedly close to finding some syncopation, which would involve an agreement to set a spending level for the next fiscal year above the $967 billion in place under current law.

Also, it appears that both sides are getting closer to agreement on $80 billion in savings to replace the cuts from sequestration over the next 2 years; shared among defense and non-defense programs alike. Other items being considered to pay for it include selling off the broadband spectrum in auction (essentially a government yard sale), increasing TSA fees (in other words, it'll cost more for an airline flight), plus changes in postal service and some reform to federal pensions but no structural changes to entitlement programs.

If the budget committee can't reach a deal by the December 13 deadline, House Speaker John Boehner has said that he will push for a continuing resolution to fund the government past Jan. 15 at the $967 billion level. Apparently both sides realize that shutting down the government is not a popular idea, but short-term stopgap continuing resolutions are getting a bit stale as well.

Somewhere, in the vague and distant past, I remember hearing something about closing loopholes and reforming the tax code but that would require roll up your shirt sleeves, honest work, and we know that Congress has nasty aversion to that four letter word.

Some things never change.

Banks cheat. They get caught sometimes. They pay a fine. It's the cost of doing business.

EU antitrust regulators have fined six financial institutions including Deutsche Bank, Royal Bank of Scotland, Citigroup, Societe Generale, JPMorgan and brokerage RP Martin a record total of $2.3 billion for rigging financial benchmarks. The penalty is the biggest yet to be handed down to banks for rigging the benchmarks used to determine the cost of lending; the benchmarks involved are the London interbank offered rate, or Libor, the Tokyo interbank offered rate and the euro area equivalents. They are used to price hundreds of trillions of dollars in assets ranging from mortgages to derivatives.

EU Competition Commissioner Joaquin Almunia said in a statement: "What is shocking about the Libor and Euribor scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other."

Yes, I'm shocked, shocked to find that gambling is going on in here!

Authorities around the world have so far handed down a total of $3.7 billion in fines to UBS, RBS, Barclays, Rabobank and ICAP for manipulating rates, while seven individuals face criminal charges.

UBS paid a record fine of $1.5 billion late last year to the US Department of Justice and the UK's Financial Services Authority for rate-rigging. EU fines can reach up to 10 percent of a company's global turnover. UBS blew the whistle on the Libor and Tibor cases and will not be fined as a result. Barclays will escape a fine in the Euribor case because it alerted the Commission to the offence.

The European Commission said it would continue to investigate Credit Agricole, HSBC, JPMorgan and brokerage ICAP for similar offenses.

And by the way, I don't know how the regulators come up with the amount they decide to fine the banksters. I guess they pull a number out of the hat. I'll check on that.

Moving on. Now that the government has fixed the healthcare.gov website and Obamacare is experiencing smooth sailing. Huh? What? Squirrel...

Anyway, President Obama turned his focus today to the pocketbook issues that Americans consistently rank as a top concern, arguing that the dream of upward economic mobility is breaking down and the growing income gap is a "defining challenge of our time."

"The basic bargain at the heart of our economy has frayed," the president said in remarks at a nonprofit community center a short drive from the White House in one of Washington's most impoverished neighborhoods.

The president vowed to focus the last three years of his presidency on addressing the discrepancy and a rapidly growing deficit of opportunity that he said is a bigger threat than the fiscal deficit. Obama said increasing income inequality is more pronounced in the United States than other countries. He said Americans should be offended that a child born into poverty has such a hard time escaping it, saying: "It should compel us to action. We're a better country than this." Obama did not propose any new policy initiatives in the speech.

The speech comes amid growing national and international attention to economic disparities — from the writings of Pope Francis to the protests of fast-food workers across the country. The president cited the pope's question of how it isn't news when an elderly homeless person dies from exposure, but news when stock market loses two points.

Tuesday, December 03, 2013 - But Be Afraid

But Be Afraid

By Sinclair Noe

DOW – 94 = 15,914
SPX – 5 = 1795
NAS – 8 = 4037
10 YR YLD - .01 = 2.78%
OIL + 2.22 = 96.04
GOLD + 5.00 = 1225.30
SILV - .03 = 19.28

Stocks down again today for the third straight session, the first three-session losing streak since late September. It isn't a trend, yet; as we said yesterday, it's only a reason to stay cautious. I'm reading the rationale for today's decline:

“Traders blamed the slide on worries about the Federal Reserve winding down its economic stimulus program earlier than expected due to strong readings on November manufacturing and construction spending released Monday. Weaker-than-expected consumer spending for the kickoff to the holiday shopping season also has investors on edge.” (USA Today)

And now I'm more confused than ever. Traders claim the economy is too strong, then we hear that consumer spending is too weak, and the worry is the Fed will taper. Flip a coin – you'll be more accurate.

The bulls’ case appears increasingly strained. One argument is that there is enough talk of bubbles that there can’t possibly be one. But in fact, in the dot-com era, there was plenty of discussion of frothiness of the tech stocks. Remember irrational exuberance?

Similarly, contrary to popular perceptions, mortgage industry insiders were concerned about the subprime market starting in 2005, with every conference featuring a panel on whether that market was getting out of hand.

And at least those overdone bull markets were built on the back of solid fundamental growth. By contrast, the U.S. recovery is more technical than real, with headline unemployment failing fully to capture the dire state of labor conditions. Estimates that include underemployment at near Depression eara levels. College grads face an unprecedentedly hostile job market and many are also mired in student debt. Not surprisingly, consumer confidence has dropped over the past seven months. And the recovery in the housing market? We'll get to that in a moment.

The Fed’s policies of super-low interest rates and quantitative easing, which have lowered yields on Treasury and mortgage bonds, have sent investors scrambling for returns. And the Fed’s efforts have been compounded by similarly aggressive policies in Japan and China, and even a willingness to be more accommodative by the once austerity smitten European Central Bank. Market trading has been driven by anticipation of Fed action rather than economic fundamentals.

In a May 2013 testimony to the Joint Economic Council, Federal Reserve Chairman Bernanke stated that the FOMC has made it clear, "it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes." Alongside additional answers he offered concerning the rationale and timing of such tapering, the financial markets immediately swooned.  A number of Federal Reserve officials had immediately and ever since come out to distort and negate some of the Chairman's communications, in an attempt to reduce the apparent runaway rise in borrowing costs, particularly on shorter-tenured bonds. we also do know that growth, revenue, and earnings, have all just been ok throughout the year. So,it makes sense that the Federal Reserve has had an outsized role in changing the trajectory of market performance, at least since June and probably into the New Year

Bill Gross, the head of bond giant Pimco, in his most recent investment outlook wrote: “Don't fight central banks, but be afraid.” Markets that have "excess liquidity" compliments of central banks become skewed toward the speculative end of the spectrum. Speculative markets can continue to rise much longer than rational people believe, or maybe the speculative market ended last Friday. Markets cannot rise forever based on printed money. At some point, the economy needs to carry more weight, but fear is not a valid investment strategy; discipline is.

Sales over the Thanksgiving weekend may have been a disappointment for the nation’s retailers, but they were a boon for the automakers, lifting their sales in the United States for November to the best rate since before the recession. Industrywide sales rose 8.9 percent in November to 1.25 million vehicles. At that pace, automakers predicted a seasonally adjusted annual rate of 16.3 million vehicles sold, the highest since May 2007. For the year, the industry is expected to sell 15.6 million new vehicles.

Corelogic released its report on home prices for October. The Corelogic Home Price Index is a 3 month weighted average, and it shows prices increased just 0.2% compared to September. Year over year, home prices, including distressed properties, nationwide increased 12.5%; this marked the 20^th consecutive monthly increase in home prices.

The housing market recovery is uneven, and home prices in 12 states remain at least 20% below local peak levels. Nevada’s home prices in October, including distressed sales, were 41% below a 2006 peak, the largest drop from bubble levels, despite explosive growth of 26% over the past year. Prices in Florida and Arizona in October were more than 30% below local peak levels. In California, home prices are still about 22% below the peak. In October, national home prices were down 17% from a bubble peak. Only 1.88 million homes were for sale at the end of October, down 2.1 percent from the previous month and the fewest since March. The shortage of inventory has slowed sales. Home re-sales fell in October for a second straight month to a seasonally adjusted annual pace of 5.12 million.

Michigan home sales were up 14% over the past year. That seems surprising in light of the news out of Detroit today, but Michigan is a big state. Detroit is in bad shape. Detroit is in far worse fiscal shape than other major American cities and cannot mount a sustainable recovery without a drastic overhaul that will certainly impose harsh sacrifices. The city of Detroit today officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after US Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors. The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities.

Whether Rhodes would deem the city insolvent wasn’t much of a question. If Detroit isn’t insolvent, what place is? Less clear was the status of pensions. The bankruptcy judge said he will allow pension cuts in Detroit's bankruptcy, even though pensions were protected under Michigan's constitution; but he also said he won't necessarily agree to pension cuts unless the entire reorganization plan is fair and equitable. The average Detroit General Retirement System pensioner nets less than $20,000 a year; for police and fire retirees, it’s about $34,000 annually.

Judge Rhodes said he will not issue a stay on the bankruptcy, meaning the case will proceed. And even though an appeal has already been filed, and more will come in the days ahead, the bankruptcy code provides for Chapter 9 to continue while appeals are pending that challenge. Rhodes also scolded the city for rushing through negotiations with its creditors, noting they only had 30 days to offer a counter-proposal. Saying that amount of time is “simply far too short,” Rhodes ruled the city did not satisfy good-faith requirements to try to negotiate with creditors outside of bankruptcy court. Bankruptcy protection limits the legal actions the city's 100,000 creditors can take to collect money owed to them. So, it looks like the Judge is pointing all parties back to the negotiating table.

America is doing a lousy job of educating our kids. According to the latest results of a comprehensive set of international tests, America's teens have remained mid-pack among their peers worldwide and utterly stagnant in reading, math and science over the last 10 years.

America's 15-year-olds failed to improve on the Program for International Student Assessment; meanwhile, East Asian countries maintained their top slots, and other countries not generally known for their academic prowess have become breakout stars of a sort. Poland, Germany and Ireland showed tremendous growth, and Vietnam, which administered the exam for the first time in 2012, wound up among the top-performing countries, eclipsing the US in math and science. Yes, the US now trails Vietnam in our ability to educate our teenagers.

In fall 2012, the Organisation for Economic Co-Operation and Development tested 28 million students between ages 15 and 16 in 65 economies, including 34 OECD countries. Among those 34 countries, the US performed slightly below average in math, scoring 481, and ranked 26 (though the report notes that due to measurement error, the ranking could range from 23 to 29.) Shanghai, Singapore, Hong Kong, Chinese Taipei, Korea and Japan came out on top, followed by such European countries as Liechtenstein, Switzerland, Netherlands, Estonia, Finland and Poland. Peru, Indonesia, Qatar, Colombia and Jordan came in last.

In reading, the US performed around the OECD average of 496, ranking 17 (or between 14 and 20) with an average score of 498. Again, Shanghai, Hong Kong, Singapore, Japan, Korea, Finland, Ireland, Taipei, Poland and Estonia came out on top, with Argentina, Albania, Kazakhstan, Qatar and Peru filling out the bottom.

The US also came in around the OECD science average of 501, ranking 21 (between 17 and 25) with an average score of 497. Top scorers included Shanghai, Hong Kong, Singapore, Japan, Finland, Estonia, Korea, Vietnam, Poland and Canada. The lowest performers include Peru, Indonesia, Qatar, Albania and Tunisia.

We've tried to chronicle the misdeeds of Wall Street banksters leading up to and following the financial crisis, so it might surprise you to learn that, according to a survey from the Economist Intelligence Unit, 60% of those surveyed said they had a positive view of Wall Street's reputation for ethical conduct; of course those surveyed were Wall Street financial industry executives. A separate survey by Edleman interviewed 31,000 regular people, and they concluded that the financial services industry was the least trusted of 18 industries to do the right thing by the general public.

The quote of the day goes to Goldman Sachs CEO Lloyd Blankfein, speaking at an industry conference today, saying “This country does a great job of creating wealth, but not a great job of distributing it.”

Monday, December 02, 2012 - The Home Stretch

The Home Stretch

By Sinclair Noe

DOW – 77 = 16,008
SPX – 4 = 1800
NAS – 14 = 4045
10 YR YLD + .05 = 2.79%
OIL + 1.19 = 93.91
GOLD – 32.80 = 1220.30
SILV - .73 = 19.31

Stocks were down today. There are many possible explanations, but the one that makes sense to me is that we just couldn't have a record high celebration with milk and cookies; not after all the pie I ate over the holiday. There are other explanations as well.

Anyway, we survived Black Friday, mainly by sitting it out. Black Friday comes with its own unofficial economic data point as the most important shopping day of the year. And we always hear the erroneous, or at least mildly misleading caveat that consumer spending accounts for nearly 70% of gross domestic product, making this large shopping day extra important. Thanksgiving and Black Friday combined brought in an estimated $12.3 billion in sales, according to shopping analytics firm ShopperTrak. Thanksgiving Day traffic grew 27% as nearly one-third of shoppers headed to stores on the holiday. About 97 million people planned to shop online or in stores on Friday, with about 140 million intending to do so Thanksgiving through Sunday. That’s down from 147 million last year. Overall spending was expected to reach $57.4 billion for the weekend, that's down from $59.1 billion last year.

Thanksgiving and Black Friday fell a week later in the season this year, leading stores to push pre-Black Friday deals and shifting consumer spending earlier. On average, shoppers would spend about $407 Thursday through Sunday, compared with about $423 in 2012. So, if you avoided shopping, don't worry, because there will be big discounts as we move into the season.

Today is Cyber Monday. These are not real holidays, but rather marketing schemes, designed to encourage sales. Cyber Monday just started in 2005. There’s no denying that the scheme has been a huge shopping success. It set records for one-day online shopping for the past three years in a row. Last year, Cyber Monday sales approached $1.5 billion; this year will likely be higher. The actual Cyber Monday deals from e-commerce sites have been posted for quite some time; it's not like the deals are restricted to today only. Retailers that offer attractive deals and make it as easy as possible for people to buy no matter where they are — whether on mobile, tablet, desktop, speaking to a call center or in-store — are going to be the winners, regardless of the date on the calendar. With all these opportunities, who needs Cyber Monday?

Today, the US Supreme Court declined to hear a legal challenge to a New York state law requiring internet retailers to collect sales tax, even if they have no physical presence in the state where the buyer is buying. So, for now at least, the New York law remains intact and the high court will not rule on whether states have the power to pass such laws. Recently, 11 other states passed laws seeking to expand their tax authority over out-of-state retailers.

New York Attorney General Eric Schneiderman argued in defense of the law that recent developments favored delaying consideration of the issue. He cited the possibility of congressional action and pending challenges to other state laws as reasons why it would be better to wait. Proposed legislation in Congress would give all states the power to enforce their sales tax laws on Internet retailers. In May, the Senate approved a bill, but it has stalled in the House of Representatives. Schneiderman also noted that developments in the retail industry that would make it easier for companies to collect state taxes could also render the dispute moot in the near future because the burden on businesses would not be so great.

Let's run through a few economic reports. Construction spending rose 0.8% in October, which was a bit higher than the 0.4% expected. All of the improvement in October was in public spending, which rose 3.9%. Private construction outlays fell 0.5%. While the trend shows the housing recovery remains intact, private nonresidential outlays have shown weakness over the past two months.

The ISM manufacturing index increased to 57.3 in November from 56.4 in October. This is the highest level since 2011. The employment sub-component of the ISM index also jumped: 3.3 points to 56.5 in November, almost enough to make us think the monthly jobs report will come in better than expected. 

This Friday, we'll see if the economy added more new jobs. That will be the biggest economic news in a while, due to its implications for Fed policy. The Federal Reserve is considering scaling back, or tapering, its $85 billion in monthly asset purchases, but will only do so if the economy is improving at a moderate pace. More than any other statistic, the jobs report is the best indicator of the health of the labor market.

In September, the Fed surprised the market by not tapering and led Fed watchers to revise their expectations for when the taper could come. Right now, most analysts believe that it will happen in March, but better than expected job growth could push up that forecast. The October job report beat expectations, adding 204,000 jobs and revised up the August and September numbers by 60,000 as well. This was despite the government shutdown and debt ceiling brinksmanship.

Analysts expect 180,000 new jobs in November and the unemployment rate to drop back to 7.2%, after it rose last month due to the shutdown. If the data beats expectations, it will increase the odds that the Fed will taper in December. If the number is weak, it will almost surely rule out a December taper and could push it even further into the spring or summer of next year.

Meanwhile, the Bank of Japan might be looking to increase it's monetary base. BOJ Governor Haruhiko Kuroda said today that he would not be opposed to adjusting policy, fanning speculation the bank could take more easing steps next year. Japan's central bank is looking to go beyond its $70-billion-a-month bond-buying operation; which based upon the relative size of the Japanese economy means that Abenomics is about 3 times bigger than the Fed's Quantitative Easing. Options include major purchases of stock-market-linked funds or other assets riskier than Japanese government bonds. The yen continued to struggle after falling about 4 percent in November against the dollar and euro. Investors have been selling the low-yielding yen to buy riskier assets in carry trades made attractive by the Bank of Japan's ultra-loose monetary policy. Today, the dollar climbed to a more than six-month high against the yen.

As we head into the last month of the year, let's take a look at where the markets are, and may be headed. Of course, I don't know where the markets are headed, and neither does anybody else but we can look at some data and make wild guesses or prescient predictions, depending on how this plays out over the next month.

The S&P 500 is up about 26% year to date, and that outpaces earnings growth. A quick refresher; when stock prices outpace earnings growth, the price to earnings multiple, also known as the P/E ratio, is expanding. So, in the S&P 500 the PE has expanded to 16.5 from 13.7 trailing Earnings Per Share, or EPS, at the end of last year. Forecasting PE is important because it can be a huge driver for future returns; it represents the premium investors are willing to pay for profits. Many investors feel that there is less multiple expansion in front of us than behind us. The PE tends to revert to its mean, but it fluctuates, and it can trend away form the mean for extended periods; which is to say, the PE could trend even higher, giving stocks a nice boost.

While stock indexes like the S&P 500 have hit all-time highs, the stocks are not currently valued at the levels that have marked the end of bull markets in the past. The PE for S&P 500 companies using trailing 12 month EPS, is right around 16, but historic ratios at the end of secular and cyclical bull markets are usually closer to 17 or 18 range. So, valuations are high but not necessarily topping. In other words, a bull market can run longer than you might expect.

There are other indicators to consider.

The percent of stocks trading over their 200-day moving average is currently at 82%. Again, a trend in place is more likely to continue than it is to reverse, at least until it reverses. At a certain point, the market gets frothy, and unlike the children of Lake Wobegone, not everyone can be above average. While this indicator has been overbought all year, it does not diminish the risk associated with such a high percentage.

Sentiment has turned extremely bullish. The bulls have reached 52.6, which is in in the overly optimistic range. The bears fell to a 30-month low of 16.5, which is extremely bearish from a contrarian’s point-of-view. Since the majority of traders are excessively bullish, who is left buying?

Last spring insiders were heavy sellers before the June correction. Upon this recent advance, the ratio of sellers to buyers has again become extremely bearish, exceeding the summer selling.

Margin debt has hit new all-time highs, surpassing levels reached in 2007-08. Such a high extent of leveraging is a sign of an overly enthusiastic marketplace.

Stock market capitalization relative to GDP has moved back up to multi-decade highs. This suggests that investment in the market is at an extremely high level. Because the market value is so high relative to GDP, any correction will have a detrimental impact on the entire system.
The S&P 500 profit margin is at a 60-year high. This is a direct result of low interest rates; a key input for capitalism. Any changes in rates, or expectations in changes could upset this “good as it gets” scenario.

It's hard to be bearish when the markets are on the edge of record highs, but that is actually a good time to be cautious, and remind yourself of the importance of risk management. 

Wednesday, November 27, 2013 - Evangelii Gaudium and Happy Thanksgiving

Evangelii Gaudium and Happy Thanksgiving

by Sinclair Noe

DOW + 24 = 16,097
SPX + 4 = 1807
NAS + 27 = 4044
10 YR YLD + .03 = 2.74%
OIL – 1.40 = 92.28
GOLD – 4.40 = 1238.60
SILV - .11 = 19.80

This has been a quiet week on Wall Street; the two major features have been record highs for the DOW and the S&P and 13 year highs for the Nasdaq, combined with light volume. Now normally, light volume on record highs would be an indication the market has run out of steam and is ready to roll over. But this is a holiday shortened week; the markets are closed tomorrow for Thanksgiving, and then just very, very quiet day on Friday. So, it's difficult to read much into the price and volume other than to say, there is a pause for the holiday.

Happy Thanksgiving.

Plenty to be thankful for; the S&P 500 has climbed 2.8 percent in November, poised for the third straight monthly gain. The S&P 500 is up 27% this year; the Nasdaq is up 33% year to date.

Economic data today shows fewer workers filed applications for unemployment benefits last week; that's a good report for the labor market. The Thomson Reuters/University of Michigan final index of consumer sentiment in November unexpectedly rose to 75.1 from 73.2 a month earlier, and came in higher than expected.

The Conference Board’s index of leading indicators, a gauge of the economic outlook for the next three to six months, rose for a fourth straight month in October.

A separate report showed the government shutdown hurt business confidence, with orders for durable goods dropping 2 percent in October. The MNI Chicago Report business barometer fell less than expected in November.

So, most of the economic data today is positive, but here's a scary little detail still lingering from the financial meltdown days; borrowers are increasingly missing payments on home equity lines of credit, HELOCs, they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks. The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along. More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

Data from the credit agency Equifax shows that the number of borrowers missing payments around the 10-year point can double in their eleventh year. When the loans go bad, banks can lose 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.

What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks. Even more so, it's a reminder of how everyday people are still digging out from negative equity, paying loans on properties that still are underwater and may be underwater for a long, long time. And of course, there's a ripple effect that keeps the entire economy from reaching escape velocity.

Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611 billion from $346 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising. Fitch Ratings calculates that after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping from $81.25 to $293.16. Yea, that's going to leave a mark.

Maybe the scariest news this week comes from former Federal Reserve chairman Alan Greenspan in an interview with Bloomberg TV claiming the stock market isn't in a bubble. Greenspan said: “This does not have the characteristics, as far as I’m concerned, of a stock market bubble.” Greenspan said that even with the rise in equities, the US economy is restrained by a “degree of uncertainty” that is reducing investment. Based upon past performance, which is not an indication of future results, Greenspan may be the ultimate contrarian indicator.

As a side note, Greenspan was asked about the major policy announcement from Pope Francis this week denouncing unfettered capitalism. Greenspan declined to comment.

The Pope's “apostolic exhortation” may be the most important news, not just of the week, but in a very long time. You don't have to be Catholic to understand the importance of this policy statement from the Pope, just look at the numbers. There are about 7.2 billion people in the world; about 2.4 billion are considered Christians, about 1.3 are Roman Catholics, and there are about 250 million more Eastern Orthodox. That makes Roman Catholics, by an overwhelming margin, the largest denomination of any religion on the planet. And Pope Francis is the leader of this massive flock.

And the Pope is now talking about the “new idolatry of money”, writing:

The worship of the ancient golden calf has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings.

His thoughts on income inequality are searing:

How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality.

The pope's writing on "the economy of exclusion and inequality" might disappoint those who considers themselves free-market capitalists, but they would do well to listen to the message. And many of those free-market capitalists are Catholics. How can they reconcile their business with their faith?

Income inequality has been growing in the US since the 1970s. Nearly all of us are likely to experience it in some form or another. Income inequality is not someone else's problem. In the discussions of why the US is not recovering, economists often mention metrics like economic growth and housing. They rarely mention the metrics that directly tell us we are failing our economic goals, like poverty and starvation. Those metrics of income inequality tell an accurate story of the depth of our economic malaise that new-home sales can't. One-fifth of Americans, or 47 million people, are on food stamps; 50% of children born to single mothers live in poverty; and over 13 million people are out of work. And for the first time in our nation's history, children are now less likely to do as well as their parents.

The bottom line, which Pope Francis correctly identifies, is that inequality is the biggest economic issue of our time - for everyone, not just the poor. Nearly any major economic metric - unemployment, growth, consumer confidence - comes down to the fact that the vast majority of Americans are struggling in some way. You don't have to begrudge the rich their fortunes or ask for redistribution. It's just hard to justify ignoring the financial problems of 47 million people who don't have enough to eat. Until they have enough money to fill their pantries, we won't have a widespread economic recovery. You can't have a recovery if one-sixth of the world's economically leading country is eating on $1.50 a day.

It's only surprising that it took so long for anyone - in this case, Pope Francis - to become the first globally prominent figure to figure this out and bring attention to income inequality. And it is an issue that is not going away.

Happy Thanksgiving, and don't forget all the things you are thankful for. 

If you would like to read the apostolic exhortation, Evangelii Gaudium, here is the link.

Tuesday, November 26, 2013 - The Best Question

The Best Question

by Sinclair Noe

DOW + 0.26 = 16,072
SPX + 0.27 = 1802
NAS + 23 = 4017
10 YR YLD - .02 = 2.71%
OIL - .60 = 93.49
GOLD – 9.60 = 1243.00
SILV - .39 = 19.92

Today we celebrate the Nasdaq. Yes, the Dow is at record highs, again, but the milk and cookies thing is getting old, kind of sickly sweet. Some might argue that you can never have too many cookies; that any day with milk and cookies is a good day. It's hard to dispute this argument. Still, it bears notice that the Nasdaq has closed above 4,000 for the first time in 13 years. The Nasdaq is up about 33% year to date, and counting. So, today we celebrate with chips and salsa.

If you're thinking the Nasdaq has had quite a run and it's starting to feel like 1999, you could be forgiven, but when you put it in perspective it's not quite the same. P/E ratios are around 19, compared with 29 just before the millennium. Price to book is now 2.6 compared to 5.1 back then. Basically, back in 1999, the Nasdaq was extremely overvalued. You can argue that it's overvalued today, but it isn't nearly to the old extremes.

Two economic reports on the housing market today. Permits for future home construction hit a near 5-½ year-high in October and prices for single-family homes showed big gains in September, suggesting a run-up in mortgage interest rates has not derailed the housing recovery.

The first report comes from the Commerce Department; building permits jumped 6.2 percent last month to an annual rate of 1.03 million units, the highest since June 2008. It was only the second time since mid-2008 that permits topped the 1 million-unit mark. Permits were up 13.9 percent from a year ago in October. Building permits are not counted toward GDP but they are a leading indicator, suggesting more construction activity in the coming quarters. Yesterday, we reported that pending home sales declined in October, likely some recalcitrance from buyers in light of the government shutdown; so maybe the permits indicate pent-up demand; or perhaps a shift away from single family residential.

Permits for the multifamily home sector jumped 15.3 percent in October and approvals for buildings with five units or more reached their highest level since June 2008. Single-family home permits, the largest segment of the market, rose 0.8 percent.

A separate report showed the S&P Case Shiller composite index of home prices in 20 metropolitan areas jumped 13.3 percent in September from a year ago, the strongest gain since February 2006. The Southwest continues to lead the housing recovery. Las Vegas home prices are up 27.5% year-over-year; in California, San Francisco, Los Angeles and San Diego are up 24.8%, 20.8% and 20.4% respectively. Phoenix posted 22 consecutive months of positive returns, up 18.9% in the past year. However, all remain far below their peak levels. As an example, since January 2000, home prices in Los Angeles were up 170% during the bubble days, dropped from those levels but are still up108% from 2000. Phoenix prices are up 41%, basically matching inflation.

Since April 2013, all 20 cities in the index are up month to month; however, the monthly rates of price gains have declined. More cities are experiencing slow gains each month than the previous month, suggesting that the rate of increase may have peaked.

As prices have rebounded, that has drawn REO properties out of the shadows and onto the auction block. Investors, including hedge funds and private equity firms, which acquire the lion’s share of homes at auctions, have raised about $20 billion to purchase as many as 200,000 homes to rent. Their purchases are spurring a rebound in property prices. As that speculative demand drives prices, that gives banks the chance to get foreclosures off their books.

Banks have reduced their collection of repossessed homes by 26 percent to $7 billion from a year earlier, according to the Federal Deposit Insurance Corp. That’s 50 percent of the level they held at the height of the foreclosure crisis at the end of 2010. Firms are motivated to sell these dwellings because they have to pay monthly outlays for maintenance and insurance. Banks have been eager to dispose of properties but they've been waiting for the right price. They may still take a hit on the sale, but it's a smaller hit and they are better able to absorb it; and waiting out the market, many properties will return a profit. Thanks in part to a Zero Interest Rate Policy, and the Fed buying up $85 billion a month in securities, and the stock market at record highs, the 6,940 FDIC-insured firms reported $42.2 billion in profit in the second quarter, up 23 percent from a year earlier.

Admittedly, third quarter bank profits dipped slightly, marking the first year-over-year decline since 2009. The Federal Deposit Insurance Corp. says the banking industry earned $36 billion in the third quarter, down $1.5 billion or 3.9 percent from the third quarter of 2012. The FDIC says the year-over-year earnings decline came primarily from a $4 billion increase in litigation expenses at a single institution. The FDIC did not name the institution.

Hmmm, I wonder which bank....

JPMorgan Chase of course, everybody knows that. We reported on their $13 billion penalty to settle charges of selling toxic mortgage bonds back in the day. Now that they have cleared that legal hurdle, the share price has jumped about 3%, raising the value of JPM shares by about $7 billion. Toss in a potential $4 billion in tax deductions, because profits are privatized but losses (and fines) are socialized, and the fine is almost paid.

The Conference Board's Consumer Confidence Index dropped in November to 70.4, down from 72.4 in October. The proportion of Americans who said jobs would become more plentiful in the next six months declined to 12.7 percent, the lowest since November 2011, from 16 % last month. The share of respondents who said they expected a pickup in their incomes declined to an eight-month low of 14.9 percent in November from 15.7 percent a month earlier. It should be noted that retail sales in October beat expectations, despite the drop-off in consumer sentiment. And the latest weekly chain-store sales snapshot for last week showed a solid increase, although it was driven by gains at discount and dollar stores. Consumers haven't gone into lock-down mode but we remain concerned about future finances because of weak gains in jobs and incomes.

Pope Francis today published a major document, known as an apostolic exhortation, which establishes what might be considered an official platform for his papacy. Pope Francis called for renewal of the Roman Catholic Church and attacked unfettered capitalism as "a new tyranny", urging global leaders to fight poverty and growing inequality. In it, Francis went further than previous comments criticizing the global economic system, attacking the "idolatry of money" and beseeching politicians to guarantee all citizens "dignified work, education and healthcare".

He also called on rich people to share their wealth, writing: "Just as the commandment 'Thou shalt not kill' sets a clear limit in order to safeguard the value of human life, today we also have to say 'thou shalt not' to an economy of exclusion and inequality. Such an economy kills."

Economic inequality features as one of the issues Francis is most concerned about, and the pontiff calls for an overhaul of the financial system and warns that unequal distribution of wealth inevitably leads to violence, writing: "As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world's problems or, for that matter, to any problems."

Denying this was simple populism, he called for action "beyond a simple welfare mentality" and added: "I beg the Lord to grant us more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor."

"How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?"

That's the best question I've heard in a long time.