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Friday, May 09, 2014

Friday, May 09, 2014 - Happy Mothers' Day

Financial Review with Sinclair Noe

DOW + 32 = 16,583
SPX + 2 = 1878
NAS + 20 = 4071
10 YR YLD + .02 = 2.62%
OIL - .23 – 100.03
GOLD + .30 = 1291.10
SILV un = 19.26

Another up and down session on Wall Street but at the close it was a record high for the Dow Industrial Average. Whenever the Dow hits a record high close, we have a celebration with milk and cookies.

For the week, the Dow rose 0.4%, while the S&P 500 fell 0.1% and the Nasdaq lost 1.3%, for its worst weekly loss in a month. Small cap stocks moved higher today, but were still down on the week. The Russell 200 Index managed to close the week just a smidge above the 200-day moving average, and still well below the 50-day. According to SentimenTrader, Tuesday was only the third time in 35 years of market history that the NYSE Composite was sitting at a 52-week high one day before the Russell 2000 dropped below both its 50- and 200-day moving averages the next day. The last two occurrences were March 1999 and November 2007.

Fed Chairwoman Janet Yellen delivered testimony on Capitol Hill this week followed by questions from the lawmakers; she was even asked about the possible overvaluation in small caps. We covered Yellen’s testimony pretty extensively, but there were a few tidbits that didn’t make most newscasts, so we’ll put a wrap on this story with a couple of questions from lawmakers.

First, Joint Economic Committee Chairman Representative Kevin Brady(R-Texas) pushed Yellen for more clarity on when the FOMC would raise interest rates but Yellen would not pinpoint a date. Brady also displayed a slide showing the change in the S&P 500 total return since the end of the recession compared to the change in real disposable income per capita. Since the official end of the recession Main Street families have seen income increase 4.2% compared to Wall Street gains of 108.2%.

The other really interesting question came from Senator Bernie Sanders (I-Vermont). The senator began with the facts: “In the US today, the top 1 percent own about 38 percent of the financial wealth of America. The bottom 60 percent own 2.3 percent. One family, the Walton family, is worth over $140 billion; that’s more wealth than the bottom 40 percent of the American people. In recent years, we have seen a huge increase in the number of millionaires and billionaires, while we continue to have the highest rate of childhood poverty in the industrialized world. Despite, as many of my Republican friends talk about ‘the oppressive Obama economic policies,’ in the last year Charles and David Koch struggled under these policies and their wealth increased by $12 billion in one year. In terms of income, 95 percent of new income generated in this country in the last year went to the top 1 percent. “

Sanders then introduced an academic study that concludes, “The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on US government policy, while mass-based interest groups and average citizens have little or no independent influence.”

That sounds like an oligarchy. So Sanders asked Yellen: “In your judgment, given the enormous power held by the billionaire class and their political representatives, are we still a capitalist democracy or have we gone over to an oligarchic form of society in which incredible enormous economic and political power now rests with the billionaire class?”

Yellen did not answer “yes.” But she did say, “There’s no question that we’ve had a trend toward growing inequality and I personally find it a very worrisome trend that deserves the attention of policy makers.” She also expressed concern that trends toward growing inequality “can shape [and] determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.”

Also this week we had the White House released a report on climate change, the National Climate Assessment. The report basically says we need to make big changes. Today, speaking in California, President Obama said that he had ordered $2 billion in upgrades to federal buildings to increase their energy efficiency, adding that the Department of Energy would also be adopting new standards that would be the equivalent of taking 80 million cars off the road. Obama was speaking at a Wal-Mart, and it may be the first time a sitting president has visited a Wal-Mart; this after a multi-stop fundraising lalapalooza through the Golden State, and with a deaf ear to his own efforts to get a minimum wage deal past Congress. Meanwhile, the White House installed solar panels today.

There will undoubtedly be massive investments to combat climate change, but it isn’t always easy to spot the opportunities. According to a Bloomberg article, Wall Street’s idea of investing in climate change is to load up on natural gas, because it’s less dirty than other forms of fossil fuels. On the day the National Climate Assessment report was issued, the 44-company Standard & Poor’s Energy Index reached a record, and $322 million of cash flowed into exchange-traded funds that specialize in energy.

Here’s how Wall Street deals with climate change. The potential for hotter summers and colder winters will raise energy demand, and that suggests higher gas prices. Weather extremes are good for the energy business. More energy use, better for the earnings.

I can’t make this stuff up.

Next week’s economic calendar includes a Tuesday report on retail sales. Tuesday also brings a Commerce Department report on inventories, which was a major drag on first quarter GDP estimates. Also the CPI, or Consumer Price Index, which is expected to show tame inflation at the retail level with the possible exception of food prices. Next Friday we’ll get the April housing report and a chance to see if homebuilders are coming out of winter hibernation; an interesting subset will be whether starts on apartments are outpacing starts on single family residential; that reflects the shift toward renting rather than owning one’s home.

Over the weekend, we’ll follow the vote in Ukraine. There will be a referendum, I’m not sure what it will mean but it seems like a tipping point – maybe. The economic fallout from Ukraine moves at a slower pace but it apparently is having an effect as the slump in Russia's economy is taking its toll on sales and profits at businesses in the rest of Europe. The International Monetary Fund says Russia has already been dragged into a recession as investors flee the emerging market for fear of being caught up in the escalating conflict in eastern Ukraine. Trade and investment between Russia and Europe is worth about $500 billion a year. French bank Societe Generale cut first quarter net profit as they wrote down the value of their Russian banking activities. German factory orders in March fell by 2.8% compared to February, although it’s tough to say how much of that was related to tensions with Russia.

Meanwhile, Gazprom is threatening to cut off gas supplies to Ukraine. High quality global journalism requires investment. Russia’s energy minister said the state-controlled enterprise would move to a system of pre-payment for supplies to Ukraine from next month, bringing the simmering gas dispute between the countries a step closer to crisis.

One more thing this weekend. It’s Mothers’ Day. Don’t forget, and maybe take a little time to show your respect; respect for the work moms do, which is extremely undervalued, whether in the workplace or in the home. Acknowledge that the work moms do is what really makes everything else in the economy function. Admit it, society would collapse without the hard work of moms. I’m not saying you should forget the chocolates and flowers this weekend, which would be a mistake; just be sure they’re delivered with a heartfelt “thank you” and love.

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