Financial Review

Beverly, Hills That Is

Sinclair Noe — September 1, 2015

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DOW – 469 = 16,058
SPX – 58 = 1913
NAS – 140 = 4636
10 YR YLD – .03 = 2.17%
OIL – 4.99 = 44.21
GOLD + 5.40 = 1140.80
SILV – .01 = 14.72

Another rough day for stocks across the world after twin surveys showed China’s manufacturing sector in the grip of its worst slump in several years. Asian stocks slumped on the first trading day of September, with Japan’s Nikkei 225 index chalking up a near 4 percent loss into correction territory. The Stoxx Europe 600 Index dropped as much as 3.2 percent. The major US averages lost more than 6 percent each in August. The New York Stock Exchange invoked Rule 48 for the fourth time in two weeks.

If you want, you could blame it on the Fed, as good a culprit as any; they want to raise rates despite data. Or you could look to a global slowdown, as emerging markets struggle with lower and lower commodity prices. The High Frequency Traders certainly can be considered culpable, not for starting the fire but for splashing kerosene on the flames. But really, this is just what markets do. It’s not one thing that causes a market to tumble, it is the added weight of many things. And a market looking to sell is going to sell. The major averages ended in correction territory, down nearly 3 percent in their third-largest daily decline for 2015.

All the turbulence has created a fertile playing field for those who trade the market on a short-term basis, but otherwise has sent many to the sidelines. The recent market rout caught some star Wall Street traders by surprise, others not so much; not a hedge fund affiliated with “The Black Swan” author Nassim Nicholas Taleb that seeks to profit from extreme events in the financial markets. Universa Investments LP gained roughly 20% last Monday.

The gains, some realized, some just paper gains for now, amounted to more than $1 billion in the past week; largely on Monday, as its returns for the year climbed to roughly 20% through earlier this week. Meanwhile, David Einhorn’s Greenlight Capital told investors it lost 5.3% in August; widening Greenlight Capital’s loss for the year to 13.8%, or about $1.4 billion

U.S. construction spending in July rose 0.7%, to an annual rate of $1.08 trillion – its highest level in more than seven years, boosted by an increase in the building of houses, factories and power plants. Construction of single-family houses advanced 2.1 percent in July. Factories rose 4.7 percent, and power facilities increased 2.1 percent. Spending on government building projects slipped 1 percent. Total construction spending has risen 13.7 percent over the past 12 months.

Manufacturing grew at the slowest pace in August in more than two years. The Institute for Supply Management said its manufacturing index dropped to 51.1% last month from 52.7% in July. Readings over 50% indicate more companies are expanding instead of shrinking. The ISM’s new-orders index dropped 4.8 points to 51.7%, the lowest since May 2013. The employment gauge slipped 1.5 points to 51.2%. And the exports index fell 0.5 points to 46.5%.

Roller-coaster stock markets appeared to have no major impact on auto purchases. The six largest automakers in the U.S. market all beat the sales forecasts of industry analysts. The gains contributed to a total seasonally adjusted annual rate of 17.81 million, the highest rate since July 2005. GM, the No. 1 automaker in the U.S. market, reported that sales dropped 0.7 percent. Ford, the No. 2 U.S. automaker by vehicle sales, showed a gain of 5 percent, easily outdistancing expectations. Toyota, No. 3 in U.S. sales, reported an 8.8 percent decline in August. Fiat Chrysler showed a rise of 2 percent, boosted by Jeep SUVs, extending the auto maker’s streak of sales gains to 65 months. For the first time since 2012, Labor Day sales will be included in September results.

If you think the stock market is crazy, just look at the oil market. From Thursday through Monday, West Texas Intermediate crude oil posted its best 3-day gain in a quarter century. What was behind the move? Apparently not much. The fundamentals in the oil market didn’t really change; there is still an oil glut. The Energy Information Agency reported that US shale production was a little lower than previously thought, but it wasn’t a huge drop and there are still massive inventories, especially for refined petroleum, which then causes an inventory backup for crude.

There were rumors of slowing production from Saudi Arabia; rumors, not actual cutbacks. So, it looks like the big parabolic rally in oil was largely spurred by speculation that prices had hit a bottom, and then as prices started rising, it squeezed short sellers. Another way of saying it is – speculation; not exactly the stuff of bottoms. Sure enough, today oil prices dropped 10.1%.

Many see recent events in oil production as a straight battle between Saudi Arabia and the USA. The Saudis seemed intent on crashing American shale producers and for political reasons too intricate to detail in this moment, but it hasn’t really worked out that way. The US frackers have figured out how to keep the rigs pumping. The high priced oil phase of the shale revolution can be seen as the gold rush days of the industry’s history. Frackers paid millions for mineral rights and a whole new generation of Beverly Hillbillies came into being. And while the boom times in the oil patch didn’t last, oil industry insiders who predicted the death of shale oil in the United States got it wrong.

U.S. oil production has begun to drop in response to low oil prices, but not as dramatically as many had anticipated. Oil companies have cut back spending significantly in response to the fall in the price of oil. The number of rigs that are active in the main U.S. tight oil producing regions– the Permian and Eagle Ford in Texas, Bakken in North Dakota and Montana, and Niobrara in Wyoming and Colorado– is down 58% over the last 12 months.

Nevertheless, U.S. tight oil production continued to climb through April. It has fallen since, but the EIA estimates that September production will only be down 7%, or about 360,000 barrels/day, from the peak in April. Shale oil producers are getting more oil out of fewer wells and that factor is keeping the industry alive. Adjustments were made. Analysts now estimate that the breakeven point of new shale oil wells is $27.50 per barrel, not counting financing costs.  Recent oil price falls did not lead to the extinction of fracking, it promoted efficiency in the sector, which heralds further price falls.

Meanwhile, the Saudis probably never suspected that Green Energy could flourish amidst low oil prices. The U.S. Navy has invested an undisclosed amount in the Mesquite solar farm about 40 miles west of Phoenix Arizona, allowing for an expansion of the facility that is anticipated to make it the world’s largest solar farm. The farm will provide 210 megawatts of direct power, a third of the energy needed to power 14 Navy and Marine Corps sites. The solar farm, slated to go online next year, is expected to save the Navy “at least” $90 million in energy costs over the course of the 25-year contract with Sempra U.S. Gas and Power, which operates it.

The Mesquite facility, which completed its first phase of buildout in late 2012, has a potential capacity of 700 megawatts, which would power up to 260,000 homes. It requires no water to operate and reduces greenhouse gas emissions.  The investment marks a big step toward the Department of Defense’s Congress-mandated goal to either produce or procure 25 percent of its total energy needs from renewable sources by 2025.

General Electric announced it has won more than $1 billion in orders from customers in the Asia Pacific region, as energy generators look for ways to improve efficiency and reduce costs and environmental damage. GE is providing six new gas turbines in Thailand, two steam turbines and generators for Vietnam, and starting a large-scale replacement project in Japan. The company made the announcement at the start of the Power-Gen Asia conference.

The White House is considering sanctions against both Russian and Chinese companies and individuals as it tries to stop its alleged cyber theft of commercial and economic information. The move comes as the U.S. grows increasingly frustrated at efforts to steal commercial secrets. President Obama signed an executive order in April declaring a national emergency over cyber-attacks, which “constitute an unusual and extraordinary threat.”

You might want to send Google a Thank You note. Starting today, Google Chrome, the browser of choice for a majority of desktop users, will be effectively cutting off Flash advertising at the knees, ignoring those intrusive, battery-sucking, fan-spinning, auto-play videos and banners. Now people will have to click on the ads to see them in Flash, but if you just want to read something on the internet without being distracted by an advertisement masquerading as a slot machine on meth, well, you have that option. Google’s move follows a similar anti-Flash play by Mozilla, the third-most-used browser, and Amazon’s recent decision to ban Flash-based ads from its ad network. Facebook also recently called on browser makers to stop supporting Flash altogether.

After years of sticking with Flash for desktop browsers, the big software firms and advertisers are suddenly getting scared straight by the prospect of ad blocking. People have been increasingly turning to browser add-ons that block advertising (and the creepy tracking and security vulnerabilities that come along with many of the ads). By preventing people from seeing ads, blocking software will cut off $22 billion in advertising revenue this year, up 41% from last year.

Friday, August 22, 2014 - Be Careful Out There

Financial Review with Sinclair Noe

DOW – 38 = 17,001
SPX – 3 = 1988
NAS + 6 = 4538
10 YR YLD un = 2.40%
OIL - .46 = 93.50
GOLD + 4.30 = 1281.60
SILV un = 19.51

All three major indices posted gains for the week, with the Dow up 2%, the S&P up 1.7% and the Nasdaq up 1.6%. It was the strongest week of gains for both the Dow and the S&P since April, and the third straight week of gains for all three indices.

There is a lot to cover before we can wrap up the week. First we go to Jackson Hole Wyoming, where the Fed has been having a friendly get together of economists. Janet Yellen kicked off the event with a speech this morning. She said what you might expect: "There is no simple recipe for appropriate policy," and she called for a "pragmatic" approach that gives officials room to evaluate data as it arrives without committing to a preset policy path. And she backed up her comments with a new tool, the Labor Market Conditions Index, which measures 19 labor market indicators, and it isn’t new data, just combining it all together, but it showed she is monitoring the data.

Yellen referenced the possibility that labor markets may be a bit tighter than they seem and that the Fed may consider having to raise interest rates sooner than expected. At the last FOMC meeting in July, the Fed was still saying there was “significant” slack in the labor market, and today she confirmed that slack remains, saying: “Five years after the end of the recession, the labor market has yet to fully recover.” Another area of slack is wage deflation. Employers cut some wages during the downturn, or eliminated raises, and they aren’t offering raises now. Yellen said: “wages could begin to rise at a noticeably more rapid pace once pent-up wage deflation has been absorbed.”

So, today Yellen didn’t say anything radically different, just a hint less dovish, or at least not as dovish as Wall Street might have hoped for.  

Just in case you were wondering, there have been some protestors at Jackson Hole; one group could be spotted wearing T-shirts printed with graphs showing wage inequality; apparently, an attorney representing the protestors got to talk with Yellen for a minute or two. Meanwhile, investment bankers were noticeably absent from this year’s symposium; the invitation list is mostly devoid of representatives from big private-sector banks. The Fed finally figured out that rubbing elbows and special access wreaks of cronyism.

The Jackson Hole Symposium featured more than Yellen. There was a variety of papers on multiple subjects. A professor from MIT presented a paper detailing how robots and computers don’t steal as many jobs as you might think. Seems the robots are not good at jobs requiring judgment and common sense. So we aren’t obsolete just yet.

Another bit of research says we are less likely to switch jobs, or there is less labor market fluidity, and the reasons are that the workforce is getting older, and there is a shift to older businesses, which means fewer startups, and more startups tend to fail, and more jobs require occupational licensing or certification.

Yet another research paper concluded that the problem of long term unemployment is not necessarily terminal. The thinking has been that if someone loses a job and is out of work for a long time they have a harder time finding work, and eventually they lose their skills and fall out of the labor pool; the idea is called hysteresis, or the idea that cyclical unemployment becomes structural. The new research says it is only a moderate problem. So, the good news is that we are not obsolete and we are adaptable.  

And then European Central Bank President Mario Draghi delivered a speech following lunch. Draghi said European central bankers and politicians each have a role to play in boosting demand and reducing joblessness. For its part the ECB is willing to take more stimulus measures if needed to keep low rates of inflation from becoming embedded in expectations of future price growth but the ECB can't do it alone and governments must join in efforts to reduce unemployment.

For Draghi, this was a bigger shift in policy; for years the ECB has been preaching that governments needed to shrink deficits and undertake economic reforms even during times of economic weakness. The austerity measures did not work; the result has been stubbornly high unemployment, stagnation, and disinflation or low-flation bordering on deflation, with a dollop of double dip recession.

Draghi admitted as much, saying the GDP data "confirm that the recovery in the euro area remains uniformly weak, with subdued wage growth even in non-stressed countries suggesting lackluster demand." And so Draghi called on combining monetary and fiscal policies to stimulate demand with efforts to make labor markets more flexible. He also proposed a significant boost in public investment.

In June, the ECB approved a stimulus package that includes record low interest rates, new 4-year loans to banks, and a step toward large scale purchases of asset backed securities, although no new QE announcement was forthcoming in today’s speech. Draghi said today: "The risks of 'doing too little'" and allowing temporary unemployment to become more entrenched "outweigh those of 'doing too much’, that is, excessive upward wage and price pressures."

So, while Draghi firmly planted an anti-austerity flag, he also felt the ECB’s June stimulus will be all that they can do, and he recognizes the real risk that monetary policy loses effectiveness, and somebody needs to wake up the government.

There is a long tradition of the Jackson Hole symposium giving a little bump to the markets; not today, and the reason had less to do with the doves and hawks on the Fed and more to do with geopolitics.

Ukraine says Russian artillery is being used against Ukraine's forces, both from across the border and from inside Ukraine. In addition, NATO said it has seen "transfers of large quantities of advanced weapons, including tanks, armored personnel carriers and artillery, to separatists." Moscow sent more than 130 trucks rolling across the border in what it said was a mission to deliver humanitarian aid. Ukraine called it a "direct invasion," and the US and NATO condemned it as well.

The trucks, part of a convoy of 260 vehicles, entered Ukraine without government permission after being held up at the border for a week amid fears the mission was a Kremlin ploy to help the pro-Russian separatists in eastern Ukraine. Russia claims the trucks are carrying food, water, and other humanitarian supplies. The city of Luhansk has been largely cut off for weeks and is without water and electricity as Ukraine forces fight rebels. Ukraine wanted the international Red Cross to inspect all trucks, fearful of a Trojan horse; but Russia lost patience and accused Ukraine of stalling. The Red Cross, which had planned to escort the convoy to assuage fears that it was a cover for a Russian invasion, said it had not received enough security guarantees to do so, as shelling had continued overnight.

Ukraine said they would not shell the convoy but rebel forces took advantage of that promise to drive on the roads being used by the convoy.

Meanwhile, Hamas-led gunmen in Gaza executed 18 Palestinians accused of collaborating with Israel. The executions were held in a public square. I suppose that has a certain deterrent effect. The ceasefire, like others before it, did not last long. Israeli Prime Minister Benjamin Netanyahu threatened to escalate the fight against Hamas after a four-year-old Israeli boy was killed by a mortar attack from Gaza. Shortly after his remarks, Palestinian officials said Israel had flattened a house in a Gaza City air strike, wounding at least 40 people. More than 80 rockets and mortars shot from Gaza hit Israel. Israeli forces carried out more than 25 air strikes in Gaza. Since the conflict began last month, 2,071 Palestinians, many of them civilians, have now been killed and around 400,000 of the enclave's 1.8 million people displaced. Sixty-four Israeli soldiers and four civilians in Israel have been killed.

Meanwhile, the quagmire in Iraq is sucking us in ever deeper. You will recall that just 2 weeks ago, President Obama announced “targeted airstrikes to protect our American personnel and a humanitarian effort to help save thousands of Iraqi civilians who are trapped on a mountain without food and water and facing almost certain death.” And it seemed to work, sort of. The Yazidis trapped on the mountain got off the mountain, most of them anyway.

And then there was the problem of ISIS controlling the Mosul Dam, and the threat of using the dam to flood the Tigris River valley, and that includes Baghdad; so there was some extra work to do there. And then there was the horrific beheading of American journalist James Foley, and yesterday Secretary of Defense Chuck Hagel called ISIS an “imminent threat to every interest we have,” while Chairman of the Joint Chiefs of Staff General Martin Dempsey conceded that attacks on ISIS could not be limited to Iraq but would also spread into Syria; and Secretary of State John Kerry said ISIS “must be destroyed and will be crushed”.

And now Iraq has a new prime minister, Haider al-Abadi. The hope was that he could forge a new coalition government. Not exactly. Sunni lawmakers quit talks on forming a new Iraqi government after gunmen killed scores of worshipers at a Sunni mosque in a province neighboring Baghdad. Today’s strike took place after three roadside bombs targeted a Shiite political gathering.

Federal authorities today urged law enforcement across the country to be alert for possible attacks inside the United States in retaliation for US airstrikes against ISIS. In a joint bulletin issued to local, state and federal law enforcement, the Department of Homeland Security and FBI said that while they are “unaware of any specific, credible threats against the Homeland” and find most threats to the U.S. homeland by supporters of ISIS “not credible,” they cannot rule out attacks in the United States from sympathizers radicalized by the group’s online propaganda.

Be careful out there.

Retailers have taken a recent hit, with weak earnings reports from the likes of Wal-Mart and Sears. Today Ross Stores posted better than expected second quarter results. The S&P Retail Index gained 0.6%, which doesn’t sound like much but it was the best week since February. The heavy promotional environment has been forcing retailers to offer discounts to stay relevant even as they deal with the growing shift to online sales. The big brick-and-mortar retailers have been trying to adjust to this shifting landscape. The labor market is no doubt improving, but wage growth has been essentially stagnant, restricting households’ buying power. In a nutshell, it has been a tough backdrop for retailers. No doubt the stock-price performance of the retail sector in the S&P 500 has been one of the weakest in the index – up +0.9% vs. a gain of +8.6% for the index as a whole.

Total earnings for the 490 S&P 500 members that have reported already are up +8.1% from the same period last year, with a ‘beat ratio’ of 65.5% and a median surprise of +2.6%. Total revenues are up +4.4%, with a very impressive revenue ‘beat ratio’ of 62.2% and a median surprise of 0.8%. So, this has been a strong earnings season, with the minor exception that guidance has been a little less than satisfying.

Stock prices of small-cap stocks have been underwater this year, with the S&P 600 down -1.2% vs. a gain of +8.6% for the S&P 500 in the year-to-date period. This underwhelming stock price performance is getting confirmed by the group’s mixed results thus far in the Q2 reporting cycle. As of Friday, August 22, we have seen Q2 results from 555 S&P 600 members or 92.5% of the index’s total members. Total earnings for these 555 companies are up +12.1% from the same period last year on +9.5% higher revenues, with 48.6% beating EPS estimates and 38.2% coming ahead of top-line expectations. 

Total earnings in Q2 are on track to reach a new all-time quarterly record, surpassing the last record set in 2013 Q4. That brings a good news/bad news conundrum. Is it just a one-time bounce of the low levels of the first quarter? It’s always difficult to top a record.

The S&P 500 is trading at 18.5x forward earnings, above the historical average of about 16.5x. The Shiller cyclically adjusted P/E ratio is currently about 26x the historical average of 16x. No matter how you manipulate the numbers, stock valuations are closer to the high end than the low end, and then the question is whether those valuations are justified in view of the risks facing stocks.

The biggest risk to stocks is the Fed ending its unprecedented experiment in easy money. Stock market investors have benefitted from ZIRP, zero interest rate policy, far longer than anyone might have imagined, and maybe Draghi was right when he talked today about the risk that monetary policy can lose its effectiveness. Now, maybe the Fed can exit QE and ZIRP and the markets will achieve liftoff; I just don’t know where we’ll find the fuel for liftoff.

The second most significant risk is the geopolitical havoc occurring around the world. And most of that havoc seems to be in or near areas with oil. From the heady days of mid-2008 when it traded at nearly $150 a barrel, crude oil has had quite a rocky ride. After sliding down to the $30s and rallying back around $120, crude has settled in around the $90 to $110 range for the past two years.  Commodity traders have wondered why oil hasn’t gone higher. Geopolitical tensions abound across the world; the Middle East seemingly hasn’t been this unstable in years. There may be reasons why oil prices have moved lower, including the renaissance in oil and gas exploration and development in the US; lower demand brought about by great efficiencies and conservation; also, the big investment banks have exited the oil  trading business and the oil  marketing business, and they have not been replaced by new players. A dip in oil prices could send some smaller exploration companies to the mat. A spike in oil prices could send stock investors to the exits. Geopolitical stability is decidedly bad for stocks, particularly stocks that are trading at very high valuations.

A third risk to stocks is that earnings will not keep pace. Corporations may have squeezed about all of the cost savings they can out of their businesses. While companies continue to "beat" expectations, the truth is that they are more leveraged than they were in 2007 on the cusp of the financial crisis, and they live in fear that interest rates are going to rise and they will not be able to service their debt. Meanwhile, consumers tend to hold onto a dollar until the eagle grins.

And then there is always the possibility of a black swan event, which could pop up almost anywhere, including the financial markets where big banks are bigger than ever, and money markets are now poised to close their vaults rather than risk a run, which is  just the sort of thing that creates a run; or maybe it will be a geopolitical mis-step – a bomb that lands in the wrong place, or a crazy Russian who turns off the nat gas spigot for the Eurozone.

An expensive market is always vulnerable to bad news and sell-offs. And so it is now more important than ever to be diligent, and don’t be afraid to lock in the hard won gains of the past 5 years.

Thursday, April 24, 2014 - The Bridge From Bubbles to Prosperity

Financial Review with Sinclair Noe

DOW unchanged 16,501
SPX + 3 = 1878
NAS + 21 = 4148
10 YR YLD unchanged 2.69%
OIL + .46 = 101.90
GOLD + 10.20 = 1294.90
SILV + .20 = 19.75

The Dow closed unchanged. That is just one of those freaky things that happens every few years. I remember it happened in 2008, and 1998 and 1996. I’m fairly sure there were other days where the Dow closed unchanged. I don’t know if there is any particular significance.

Orders to factories for durable goods rose 2.6%, adding to the 2.1% rise in February. The back-to-back gains followed two big declines in December and January, which had raised concerns about possible weakness in manufacturing. The earlier declines, however, were likely tied to bad winter weather.

On the jobs front, the number of people seeking unemployment benefits jumped 24,000 to a seasonally adjusted 329,000 last week. The four-week average of weekly unemployment claims decreased to 316,750, which puts us back to 2007 levels.

The big earnings report today was Microsoft, which posted income of $5.6 billion, or 68 cents per share, compared with $6 billion, or 72 cents, in the year-ago quarter. They beat estimates of 63 cents per share, but take it with a grain of salt; the estimates started the quarter around 80 cents per share.

Yesterday we talked about a tech bubble, and whether we were in one or not, and we looked at comments from Greenlight Capital manager David Einhorn; he says there is a bubble but it doesn’t necessarily mean the bubble will pop any time soon.

Today, Warren Buffet weighed in on whether stocks are too frothy. Buffett says, “we’re in a range, and it's a big zone always of reasonableness." He went on that "Stocks will become worth more decade after decade, not in any precise manner, not in an even manner or anything of the sort, but 10 years, 20 years, 30 years from now, stocks will be worth more than they are today."

A friend stopped by this morning and asked about bubbles; apparently this is a hot topic these days. How do you know you’re in a bubble? The most obvious answer is when it pops, but there are more helpful ways to address the issue.

The first indicator is that prices spike; a parabolic increase in prices. From March 1999 to March 2000, the Nasdaq rose 110%. Think of an airplane that climbs too fast; it stalls out, rolls over and plummets to the ground; same thing in most markets.

The next thing to watch is valuation. Prices can go up very fast, and if valuations also go up fast, we call that “growth”. When prices go up but valuations lag, we call that a divergence, and a bubble in the making. For stocks, this means that earnings need to keep pace with price.

Back in 2000, the P/E passed 44 based upon inflation adjusted 10 year average earnings, or what’s known as the Shiller P/E; now the Shiller P/E stands at 16. However, for some sectors, we are seeing a divergence; the P/E for internet stocks is up around 47. The P/E for utility stocks is 19, but that is significantly above the historical median of 16. One reason for that divergence might be the recent spike in natural gas prices combined with investors chasing dividend yield. A parabolic spike is relative to the underlying asset, which makes it a bit more difficult to identify, but some examples are not tough to spot.

Look at the spike in Bitcoin about 6 months ago; it went from around $150 to almost $1200 in about one month, and its underlying value was impossible to quantify; that was a bubble. It popped. Remember when gold prices jumped up in spring of 2011? Pop. How about bond prices right now in Spain and Italy? Up 1.1 percentage points in 12 months and just slightly above comparable US Treasuries. It might be a parabolic price increase in combination with a divergence from the underlying asset; or maybe it says something about US Treasuries. You decide.

Of course, the valuation of the underlying asset can change very quickly due to an exogenous event. For example, if Russia shuts off nat gas supplies to Europe, it would quickly change the underlying value of Italian or Polish bonds. When the tsunami hit Fukushima, it changed the value of nuclear sector stocks. When the Hindenburg exploded, it was a black swan event for manufacturers of dirigibles.

And then the other indicator to consider is the madness of the masses. As investors identify a price move, they jump in; when everybody has jumped in, there is no one left. Or as Joe Kennedy said in the winter of 1928: “You know it's time to sell when shoeshine boys give you stock tips. This bull market is over.” By the way, the shoeshine boy reportedly told Kennedy to buy stock in the Hindenburg.

So, markets can get frothy and remain frothy, prices fluctuate, and the market can remain irrational longer than you can remain solvent. Spotting bubbles is possible, but tricky; so it’s important to remember you won’t go broke taking a profit.

Some things seem pretty straightforward. You accept that some things will work in very specific ways. You drive over a bridge and you expect that bridge to not fall into the river below. Yea, good luck with that. A report, released today by the American Road and Transportation Builders Association, warned that there are more than 63,000 bridges in this country in need of urgent repair; the dangerous bridges are used some 250 million times a day by trucks, school buses, passenger cars and other vehicles.

 Pennsylvania led the list of structurally deficient bridges, with 5,218, followed by Iowa, Oklahoma, Missouri and California. Nevada, Delaware, Utah, Alaska and Hawaii had the least. Overall, there are more than 607,000 bridges in the United States, according to the DOT's Federal Highway Administration, and most are more than 40 years old, and more than 10% are considered structurally deficient.

States rely heavily on federal funds to pay for road and bridge projects. The Fed collects 18.4 cents-a-gallon tax on gasoline and 24.4 cents-a-gallon tax on diesel to fund the Highway Trust Fund, which then pays out to the states. The Highway Trust Fund may be insolvent by this time next year unless Congress extends a temporary funding measure which is scheduled to expire in September.

The American Society of Civil Engineers estimates it will take $20.5 billion annually to clear the bridge repair backlog, up from the current $12.8 billion spent annually. That’s just the backlog; to really make a difference, it will take an investment of $3.6 trillion by 2020 to keep the transportation infrastructure in a good state of repair.

Meanwhile, we’ve been watching the Fed’s quantitative easing plan for some time and wondering why it hasn’t really helped the broader economy; it has helped banks, but not much beyond Wall Street. This is not to say the large scale asset purchase program hasn’t had an impact; it has. There is fairly concrete evidence that it has led to lower long-term interest rates; which in turn helped lift some real estate markets that were battered after the housing bubble burst. Some real estate markets are downright hot. Home values in San Francisco and Honolulu are at least 20 times as high as estimated rents. In other words, prices have jumped up and there is a divergence with the underlying asset, which has the makings for a bubble, but that just a couple of markets.

The broader real estate market has experienced a slowdown in the recovery and one cannot help but wonder about the extent to which Fed actions to pull back on their large scale asset purchases is implicated in the said slowdown. When former Fed chair Bernanke set off the "taper tantrum" in a press conference in June of last year by pointing out that at some point, the Fed would start scaling back the LSAP, bond and mortgage rates spiked. The 30-year fixed-rate mortgage went up about a point around then from the mid-threes to the mid-fours and has stayed there.

The Fed has tried to explain away the housing slowdown on the bad winter weather, but that’s just part of the problem. The other part of the problem is that the housing recovery only helped recover lost equity, it didn’t help create equity. In other words, it was a recovery effort not a wealth creation effort.

Kind of like the situation right now with bridges. From the day President Eisenhower signed the Federal-Aid Highway Act of 1956, the Interstate System has been a part of our culture; as construction projects, as transportation in our daily lives, and as an integral part of the American way of life.  Every citizen has been touched by it, if not directly as motorists, then indirectly because every item we buy has been on the Interstate System at some point.  President Eisenhower considered it one of the most important achievements of his two terms in office, and historians agree.  Economists recognize that this enormous public works project helped propel the economy, and still does.

Right now, interest rates are low; they won’t stay low forever. Right now, people need jobs; a massive infrastructure project would provide jobs, especially for long-term unemployed workers. Putting more people to work would mean more money moving through the economy, increasing demand, improving productivity. It seems like a no-brainer, until you remember that the problem rests squarely with our elected officials. Maybe the Federal Reserve could stop its insane and ineffective large scale asset purchases; stop the helicopter drops over Wall Street and instead make helicopter drops of cash strategically, directly over about 63,000 bridges.