FINANCIAL REVIEW

Brilliance in Euphemistic Ambiguity

Sinclair Noe — September 18, 2014

Financial Review

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DOW + 109 = 17,265
SPX + 9 = 2011
NAS + 31 = 4593
10 YR YLD + .03 = 2.63%
OIL – 1.40 = 93.02
GOLD + 1.60 = 1225.80
SILV un = 18.62

Stock moved higher for a third day. Record high closes for the Dow and the S&P 500. The Dow notched its 17th record close of the year; the S&P posted its 34th record high close for the year. The stock market is in Fed mode. The Fed wrapped up their policy meeting yesterday, and they didn’t scare anybody; they even gave added assurance that they will be overly communicative. Interest rates are probably going to go up in the future but not at any specific time that can be identified. The Fed stuck with the phrase “considerable time” which is a great way to speak words that contain absolutely no meaning. Brilliant, brilliant performance in euphemistic ambiguity.

And even if the Fed tightens, the rest of the world’s central banks are getting looser, and it just figures that some of that will spill over to Wall Street. The ECB lowered rates so much that they’ve gone negative. Just the other day, the People’s Bank of China pumped about $80 billion into five banks.

The number of investment advisors that are bearish is at the lowest level since 1987. When bears start to dwindle to extremely low levels it’s often viewed as a contrarian signal on Wall Street; the Investors intelligence sentiment index now stands at 14.1%, the lowest level of bears since January 1987, when the index stood at 13.3%. The more extreme the reading, either to the bearish side or bullish side, the greater the likelihood the market moves in the opposite direction. History warns that the lack of bears warrants attention.

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits dropped 36,000 to a seasonally adjusted 280,000 for the week ended September 13th. This hints at the idea that the weak August jobs report might be an aberration.

The Commerce Department said housing starts fell 14.4 percent to a seasonally adjusted 956,000-unit annual pace last month. But July’s starts were revised to show a 1.12-million unit rate, the highest level since November 2007.

In another report, the Philadelphia Federal Reserve Bank said its index of mid-Atlantic business activity slipped in September. Despite the drop, factory employment in the region hit its highest level since May 2011 and new orders accelerated.

So, three decent economic reports showing reasonable strength in jobs, housing, and manufacturing.

Also today, the Federal Reserve released its Flow of Funds report. Consumer credit grew by 3.6% in the second quarter, but that’s slower than the 4.2% growth in the overall economy. Overall household debt as a percent of gross domestic product has declined to about 70% from just over 90%. Other types of debt; such as credit cards, student loans and auto loans have expanded, but still not enough to offset the declines in mortgages; household home mortgage debt stood just under 55% of GDP, the smallest since 2002. Credit growth has been slower than overall growth in the economy. The same cannot be said for wealth. The net worth of Americans hit a record high in the second quarter; up 1.7 percent to $81.5 trillion, of course that does not mean the wealth was spread around evenly. So today’s climbing net worth is different from the housing bubble in one key way: from 2003 to 2007, the run-up in net worth was fueled by a binge of household borrowing. Today’s climbing net worth has happened alongside a falling debt burden. Put another way: assets are climbing even though debts are falling.

Wall Street is all a twitter about the next big IPO, Alibaba, which has priced its initial public offering at $68 a share, the top end of the expected range. At that price, the IPO, one of the largest-ever, would give Alibaba a market valuation of $167.6 billion.

The New York Stock Exchange will hold an industry conference call tomorrow morning before the open to provide operational updates on the public offering. The idea is to avoid a Facebook or Twitter type of flop, if possible.

The Justice Department is trying to get banks to rat out their employees. According to Marshall Miller, the number 2 official with the Justice Department’s criminal division, if the banks cooperate with the DOJ, they might avoid prosecution by exposing nefarious individuals. The law enforcement types want the banks to stop stonewalling investigations. For example the recent criminal case against BNP Paribas, the French bank guilty of doing business with blacklisted countries such as Iran and Cuba; BNP stalled the investigation to the point that prosecutors missed the deadline to charge individuals. In turn, rather than receive a so-called deferred-prosecution agreement, BNP was forced to plead guilty in a rare criminal action against a giant global bank. This might give us some insight into the Justice Department’s plans for prosecuting the currency-rigging investigation, an inquiry that has swept up several of the world’s biggest banks, including Barclays and JPMorgan Chase.

But there are risks to the corporate executives for ratting out the rank and file. And the problem is that the rank and file would have very little reason not to turn on their masters before their masters turn on them. For the first time, it almost looks like the DOJ almost wants to put some bankers behind bars.

The polls in Scotland have closed. We may know later tonight or maybe tomorrow whether the Scots voted for independence from the UK. The ballot asks a simple question: “Should Scotland be an independent country?”

I’ve been reading about Scottish independence, and it seems the view from London that is that independence would doom the Scots to a horrible economic collapse. Steve Forbes writes: “Both Scotland and the remnants of the UK will be poorer. Capital will flee Scotland. London will get hit as well,” and “The break-up of Great Britain would encourage all the forces of chaos, terrorism and aggression and set a terrible precedent.” So, apparently, if Scotland forms its own country through the democratic process, the terrorists win. I don’t know, but we’ll find out soon.

Yesterday the US House of Representatives voted to authorize the arming of moderate, non-jihadist Syrian rebels. The vote was tacked onto a spending bill to fund the federal government and it passed 273 to 156. As you know, this was legislation of the utmost importance because we have heard repeatedly that if the US doesn’t stop ISIS, they will come over here and chop our heads off and kill us all. The Senate will likely take it up in December, maybe.

Why the delay? Well, after spending pretty much all of August and the beginning of September on vacation, the House of Representatives is taking a Congressional recess, adjourning until after the midterm election. That means the House won’t return to session until November 12, the week after Election Day, or almost two months from now. And now they’re leaving DC after just 8 days since their last vacation, so they can campaign to keep their jobs, which apparently consists of campaigning to keep their jobs.

Maybe all these threats of terrorism are a bit overblown, after all it would be pretty tough to defeat the US, and the reason is because we are now armed to the teeth. The Associated Press reports that school police departments across the US have taken advantage of free military surplus gear, stocking up on mine-resistant armored vehicles, grenade launchers and scores of M16 rifles. The surplus program has come under scrutiny following the police response to protesters in Ferguson Missouri. It has become common practice to hand out surplus weapons to law enforcement agencies; kind of a menacing peace dividend.

And now we learn that at least 26 school districts are loading up on weaponry. Federal records show schools in Florida, Georgia, Kansas, Michigan, Nevada, Texas and Utah obtained surplus military gear. At least six California districts have received equipment. But now, cooler heads prevail, and the Los Angeles unified school district has been thinking about the appropriateness of the weaponry, and so they have decided to return to the Pentagon three grenade launchers. They’ll keep the mine resistant armored vehicles and the M-16s.

No word yet on what they plan to do with the tactical nukes.