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Friday, March 28, 2014

Friday, March 28, 2014 - Ukraine, Climate Change, and More

Financial Review with Sinclair Noe

DOW + 58 = 16323
SPX + 8 = 1857
NAS + 4 = 4155
10 YR YLD + .04 = 2.71%
OIL  + .30 = 101.58
GOLD + 3.20 = 1295.90
SILV + .13 = 19.92

Consumer spending increased 0.3% in February, but the January reading on spending was revised lower to 0.2%. Disposable income, or the money left over after taxes, rose 0.3% after adjusting for inflation, the most since September. It climbed 2.1% from February 2013. Wages and salaries increased 0.2% after a 0.3% gain. This tells us a few things; consumers are spending what they earn, basically hand to mouth; also incomes and spending are not enough to lift the economy and we will be seeing first quarter GDP estimates revised lower.

Today’s spending report showed purchases of durable goods, including automobiles, increased 0.1% after adjusting for inflation following a 0.4% drop in January. Purchases of non-durable goods, which include gasoline, gained 0.3%. Household outlays on services climbed 0.2% after adjusting for inflation. Today’s data also showed the core price measure, which excludes fuel and food, rose 1.1% from a year ago, the same as in January.

Total prices, which are the ones tracked by Federal Reserve policy makers, were up 0.9% from February 2013, the smallest year-to-year gain since October. That remains well below the central bank’s 2% target.

The Thomson Reuters/University of Michigan consumer sentiment index final reading for March came in at a four-month low of 80, down from 81.6 in February.

Next week’s big economic report will be the Friday jobs report. Unlike the last three monthly employment reports, the March data should be fairly clean of weather effects. And so the forecasts are calling for 200,000 net new jobs, compared to the 175,000 jobs added in February. A reading of 200k or better would confirm the idea that economic activity in the first quarter was slowed by the weather, and stable fundamentals will support strong growth.

US military officials estimate Russia's reinforcement of troops near Ukraine has brought the total forces there to as many as 40,000. The new US estimates of as many as 35,000 to around 40,000 troops are higher than the more than 30,000 total deployments reported earlier this week by US and European sources familiar with official reporting. Ukraine's estimates of Russian forces near the border are far higher than Western figures; the Ukrainians estimate there are 100,000 Russian troops amassed on the border. The military buildup is adding to concerns that Russia may again be readying an incursion into Ukraine following its annexation of Crimea.

The Russian deployments included the establishment of supply lines and a wide range of military forces. These include militia or Special Forces units made up of Russian fighters wearing uniforms lacking insignia or other identifying markings, similar to the first Russian forces to move into Crimea during Russia's recent military takeover there. The Pentagon has said there was no indication that the forces were carrying out the kind of springtime military exercises Moscow has officially cited as the reason for their deployment. Ukraine's government has put its heavily outnumbered and outgunned forces on alert for an invasion from Russia in the east.

President Obama wrapped up a foreign trip today with a visit to Saudi Arabia. The trip started with a visit to The Hague, then an economic summit in Brussels, then a visit to Italy and a meeting with Pope Francis; his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security. It is a safe bet that the conversation with the Saudi King included Ukraine.

So here are a few thoughts: it is possible that the US could sustain a sale of 500,000 to 750,000 barrels of oil per day from the Strategic Petroleum Reserves, the SPR. If the US coordinated with the Saudis to ensure that they did not cut back production; indeed, they could even step up production from 9.7 million bpd; the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. It is estimated that a $12 drop in the price of a barrel of oil could potentially cost Russia $40 billion in revenue.

This might have been part of the discussion but don’t count on it. Saudi incentives aren’t exactly in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to break-even. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from around $100 a barrel, where they have been for the last few months.

Back in the US, Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to US drillers. The SPR remains a potential weapon in the arsenal against Russia but it is a double edged sword.

A report in The Guardian provides a preview of a UN climate science report due to be published Monday. Government officials and scientists are gathered in Yokohama this week to wrangle over every line of a summary of the report before the final wording is released on Monday; the first update in seven years.

Nearly 500 people must sign off on the exact wording of the summary, including the 66 expert authors, 271 officials from 115 countries, and 57 observers; but governments have already signed off on the critical finding that climate change is already having an effect, and that even a small amount of warming in the future could lead to "abrupt and irreversible changes".

The final report from the Intergovernmental Panel on Climate Change, IPCC, will reportedly say that "In recent decades, changes in climate have caused impacts on natural and human systems on all continents and across the oceans."

"Both warm water coral reef and Arctic ecosystems are already experiencing irreversible regime shifts,” in other words we are already at the tipping point in some areas of the world. The biggest risks are for people living in low lying coastal areas, but there are also risks for inland flooding, as well as extreme heat waves. Drought could put safe drinking water in short supply. Storms could wipe out infrastructure. Climate change will slow down economic growth, and create new "poverty traps". Some areas of the world will also be more vulnerable – such as south Asia and south-east Asia.

The report argues that the likelihood and potential consequences of many of these risks could be lowered if ambitious action is taken to reduce the greenhouse gas emissions that cause climate change, but the report also acknowledged that a certain amount of warming is already locked in, and that in some instances there is no way to escape the effects of climate change.

The administrator of MF Global Holdings' bankruptcy plan has sued the auditor PricewaterhouseCoopers for at least $1 billion over its advice on a $6.3 billion European sovereign debt investment that helped fuel the brokerage's rapid demise.

According to a complaint filed in US District Court in Manhattan, PwC committed professional malpractice by offering "flatly erroneous" advice concerning, and approval of, the off-balance-sheet accounting treatment for the debt by MF Global and its then-chief executive, Jon Corzine. The complaint said PwC knew that the investment would add significant risk to MF Global's already weak finances. It said MF Global would not have taken on the exposure, which allowed it to book immediate revenue, had it received sound advice.

Corzine invested $6.3 billion in debt of countries such as Belgium, Ireland, Italy, Portugal and Spain to advance his strategy of transforming his futures and commodities brokerage into a global investment bank. As Europe's economy weakened, MF Global struggled with worries about the debt, margin calls, credit rating downgrades, and news that money from customer accounts was used to cover liquidity shortfalls, ending in its October 31, 2011 bankruptcy. The complaint said it is the first seeking to hold PwC liable for malpractice over its accounting advice for the sovereign debt. It does not address how customer money was used. Creditors would share in recoveries if the lawsuit succeeds.

General Motors is adding 971,000 cars to its global ignition switch recall, which began in February with 1.6 million vehicles and has been linked to a dozen deaths. GM said the recall is being expanded to include versions of the Chevrolet Cobalt, Chevrolet HHR, Pontiac G5, Pontiac Solstice and Pontiac Sky made during model years 2008-2011. Older versions of those cars, dating back to 2003, were recalled in February, along with the Saturn Ion.

A GM spokesman said "we're not taking any chances" that some of the newer cars could have ignitions that could be switched from "run" to "accessory," shutting down the engine and disabling the cars' power steering, power brakes and airbags. So it looks like GM is finally trying to do the right thing, but only after years of doing the wrong things.

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