Financial Review

Very Close

Sinclair Noe — December 27, 2016

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DOW + 11 = 19,945
SPX + 5 = 2268
NAS + 24 = 5487
RUT + 6 = 1377
10 Y + .02 = 2.56%
OIL + .63 = 53.65
GOLD + 10.00 = 1139.30

The Dow Jones industrial average marked its seventh straight week of gains on Friday. Today, the Dow Jones Industrial Average once again flirted with the widely-watched 20,000 level… and once again failed to make it through. The index hit an opening peak of 19,980, just a few points shy of last week’s record highs, but went sideways thereafter, with volume about 50 percent below the 30-day average (typical of the final trading week of the year.)

Treasury yields rose the most in almost two weeks. U.S. crude prices were up over 1% and briefly moved above the $54 a barrel level.

Gasoline prices are at $2.28 a gallon, national average. That’s four cents a gallon more than a week ago, today. Oil markets adopting a wait-and-see approach before the first “OPEC and non-OPEC” output cut deal in 15 years goes into effect. The accord, which kicks in on Jan. 1, is designed to bolster oil prices by lowering production of all the parties involved by almost 1.8M barrels per day.

The focus of today’s trading was the retail sector, as investors tried to figure the strength of the holiday shopping season. Amazon.com said this was the best holiday season ever as they shipped more than 1 billion items. More than 72 percent of Amazon’s customers worldwide shopped through mobile devices and Dec. 19 was the busiest shopping day this holiday season.

Prime customers spent twice as much as other consumers using Amazon. Sales of voice-controlled Echo devices were nine times more than they were during last year’s holiday season. Other best sellers on Amazon included 72-pack Keurig K-Cups, the movie “Finding Dory,” Samsung’s Gear VR virtual reality headset and Nintendo’s Pokémon Sun and Pokémon Moon role-playing video games.

The day after Christmas is always a little hectic at shopping malls but yesterday was wild. Fights, disturbances and false reports of gunfire caused chaotic scenes and shut down several malls across the country. Eight to 10 people suffered minor injuries during a melee in the food court at The Mills at Jersey Gardens in Elizabeth, New Jersey. And then similar disturbances unfolded in other cities.

Consumer confidence surged in December to the highest level since 2001. The Conference Board’s consumer confidence index jumped to 113.7 from a revised 109.4 in November. A measure of how confident Americans feel right now, known as the present situation index, dipped to 126.1 from 132. That’s still near the highest level in nine years, however. An index that tracks expectations over the next six months rose to 105.5 from 94.4, marking the highest level since 2003.

Donald Trump took credit for the surge in consumer confidence, tweeting: “The world was gloomy before I won – there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!”

Actual holiday spending is instead on track to reach a combined $656 billion in November and December, according to National Retail Federation. Meanwhile, research firm Customer Growth Partners raised its holiday sales estimate to a 4.9 percent gain over last year to $637 billion. That would be the biggest increase since 2005. Customer Growth had previously predicted a 4.1 percent advance.

Online sales grew an estimated 15 percent, up more than a percentage point from the firm’s previous forecast. The Trump campaign didn’t provide a source for the $1 trillion figure, but it appears to come from a Deloitte study that was released in September, more than six weeks before Trump won the election. The study forecast that holiday spending would exceed $1 trillion in the three months from November to the end of January, representing a 3.6% to 4% increase over last year’s. There’s no evidence that spending has already hit that level.

The consumer confidence index also showed that the share of households anticipating higher equity prices a year from now surged to 44.7 percent in December from 30.9 percent a month earlier. The last time Americans’ optimism about the stock market registered such a dramatic one-month surge was during the dot-com boom; so, consider the idea that the confidence index might be a contrarian play.

Also, consumer confidence does not necessarily carry over to business. John Williams, president of the Federal Reserve Bank of San Francisco said his meetings with business leaders in recent weeks have been dominated by uncertainty about the economic plans of President-elect Trump. Excitement about tax cuts and regulatory relief has been tempered by worries about the impact of less trade and less immigration.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index rose by 5.1 percent in October from the same time last year. Home prices in many markets have reached the highest levels since the financial crisis. Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities over each of the last nine months. Seattle and Portland home prices were up over 10% in the past 12 months. The Phoenix market was up 0.4% in October and up 5.2% over the last 12 months through October. Home prices have been rising as a healthy jobs market and historically low mortgage rates have increased demand for homeownership since the financial crisis.

Also, constrained supply helped to bid up the prices of existing homes, especially in desirable East Coast and West Coast cities. David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices noted that “mortgage interest rates rose in November and are expected to rise further as home prices continue to out-pace gains in wages and personal income.” Adding, “With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends. Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely.”

The world’s oldest operating bank — Monte dei Paschi — continues to work on securing a bailout from the Italian government. But it will need more cash than previously thought. The bank disclosed late Monday that the European Central Bank has said €8.8 billion-euro ($9.2 billion) will be required to fill the hole in its finances; that’s about twice as much as previously anticipated. At the same time, subordinated bonds held by the bank’s institutional investors are expected to be converted to shares to raise an additional €2 billion-euro to €2.3 billion-euro.

The central bank also warned that Monte dei Paschi’s financial position has deteriorated rapidly in recent weeks. Trading in Monte dei Paschi shares has been suspended since Friday. Meanwhile, the Italian government has approved a €20 billion-euro rescue fund to help prop up Monte dei Paschi and the country’s other struggling banks.

Toshiba said it may have to book several billion dollars in charges related to a U.S. nuclear power acquisition, a shock warning that sent its stock tumbling 12 percent and rekindled concerns about its accounting acumen. Toshiba said cost overruns at U.S. power projects handled by a nuclear construction business newly acquired from Chicago Bridge & Iron would be much greater than initially expected, potentially requiring a huge write-down.

Panasonic will invest more than 30 billion-yen (or about $256 million) in the Buffalo, New York production facility of Elon Musk’s Tesla Motors to make photovoltaic (PV) solar cells and modules. The plan is part of the solar partnership that the two companies first announced in October, but which did not disclose investment details. The two companies said they plan to start production of PV modules in the summer of 2017 and increase to one gigawatt of module production by 2019.

The announcement underscores deepening ties between Tesla and Panasonic. The two are building a $5 billion lithium-ion gigafactory east of Reno, Nevada, to produce batteries for both electric cars and energy storage products. In October, Tesla revealed plans to work with Panasonic to make solar cells and modules. Tesla acquired solar installer SolarCity for $2 billion. Musk revealed plans for a new solar-roof made of glass tiles in late October.

The U.S. Food and Drug Administration on Friday approved a new drug developed by Biogen to treat spinal muscular atrophy, the leading genetic cause of death in infants.

Seattle Genetics reports four people died in test trials for its experimental cancer drug, prompting the FDA to impose a clinical hold on the company’s early-stage trials.

Healthcare company Abbott Laboratories has won U.S. antitrust approval for its proposed purchase of medical device maker St. Jude Medical. Abbott has agreed to divest two medical device businesses to settle FTC charges that the $25 billion acquisition of St. Jude would likely be anti-competitive.

Abbott has said the deal would help it compete against larger rivals Medtronic and Boston Scientific as hospitals look to cut the number of their suppliers.

Financial Review

Defeat Devices

Sinclair Noe — September 29, 2015

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DOW + 47 = 16,049
SPX + 2 = 1884
NAS – 26 = 4517
10 YR YLD – .04 = 2.09%
OIL + .80 = 45.23
GOLD – 4.40 = 1128.70
SILV + .04 = 14.74

Single-family home prices rose in July, matching the pace of price gains in June but falling just short of expectations. The S&P/Case Shiller composite index of 20 metropolitan areas in July gained 5 percent year over year. San Francisco, Denver and Dallas experienced the highest year-over-year home appreciation among the 20 cities with price increases of 10.4 percent, 10.3 percent and 8.7 percent, respectively.

The worst performing cities on the list include Detroit, and the only surprise is that Chicago was even worse than Detroit. The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs. Phoenix home prices were up 0.7% in July, and up 4.6% year over year.

The Conference Board said its index of consumer attitudes rose to 103.0, the highest since January, from a downwardly revised 101.3 the month before. The present situation index, a measure of current conditions, also climbed to an eight-year high of 121.1 from 115.8. Yet the expectations index declined to 91.0 from 91.6, suggesting Americans are a bit more cautious about the next six months.

After 2 weeks of solid drawdowns, API reports a huge 4.6 million barrel crude oil inventory build last week – the 2nd biggest weekly build in over 5 months.

The Senate yesterday passed a procedural vote to extend federal agency funding levels until December 11 as Congress moved to avoid a government shutdown on Thursday, when the new fiscal year starts. The Senate overwhelmingly advanced the government funding bill; it still has to go to the House for a vote.

The International Monetary Fund is warning of large positions that mutual funds in the United States have built in high-yielding bonds issued by risky companies here and in emerging markets around the world. The warning comes at a time of increased nervousness about China and other emerging markets like Brazil. And it highlights a growing concern on the part of regulators and economists that mutual funds, in their hunger to load up on high-risk, high-yield securities in a low interest rate environment, will be hard pressed to sell them during a market reversal.

Carl Icahn says the Fed is blowing it. Activist investor Carl Icahn released a new video titled “Danger Ahead,” which warns that trouble is coming to the financial markets. Icahn believes the Fed got the US economy into this mess and that its zero-interest-rate policy has created an “earnings mirage.” In the film, Icahn criticized both political parties for not reaching a tax compromise that would encourage American widget makers to bring more than $2 trillion in foreign profits back to the U.S. He criticized Wall Street sales folk for having a code of ethics he jokingly characterized as less virtuous than the mafia.

He criticized earnings reports wholesale as “suspect” due to financial engineering via share buybacks and M&A. Icahn says companies are simply buying other companies to create the perception of growing earnings and that a lot of companies are buying back stock that shouldn’t be. Icahn says: “A buyback is a short-term fix, but it weakens the balance sheet.” So, activist investor Carl Icahn is now opposed to financial engineering? The only surprise here is that…, actually there is no surprise.

Goldman Sachs lowered its S&P target. Goldman Sachs US equity strategist David Kostin lowered his S&P 500 price target to 2,000, down from his previous target of 2,100. Kostin wrote, “The impetus for these reductions is that our models now incorporate a slower pace of economic activity in the US and China and a lower oil price than we had been previously assuming.” For 2016, Kostin sees S&P 500 earnings per share of $120 and a year-end target of 2,100. At best they are late to the analysis, at worst it’s a contrarian indicator.

The new iPhones had a strong debut, with estimates that Apple sold a record 13 million over the weekend. Apple charges $749 for an iPhone 6S with 64GB of storage. But how much does it actually cost Apple to build the phone? Teardown.com ripped apart a new iPhone to figure out exactly what’s inside, and found that the total cost of components is $245. The most expensive bits are the processors, followed by the touch screen. This does not mean Apple is making $499 in profit on each phone, though, as it doesn’t include costs like manufacturing and shipping.

Yahoo’s board has authorized the company’s plan to spin off of its 384 million-share stake in Alibaba even though the IRS has declined to rule on whether the move will be tax free. Yahoo cautioned that the spinoff is still “subject to certain other conditions, including final approval by Yahoo’s Board of Directors (and) receipt of a legal opinion with respect to the tax-free treatment of the transaction.” The stake is worth $22.75 billion.

Sprint has confirmed  that it won’t take part in the FCC’s broadcast incentive auction for wireless spectrum next March. The auction, for prized low-band airwaves that will help with indoor penetration and in rural areas, won’t be cheap, so skipping it should make a major difference to cash burn, a vital issue for Sprint.

Reynolds American has agreed to sell the international rights to its Natural American Spirit division to Japan Tobacco for about $5 billion. The deal doesn’t include the brand’s U.S. operations, Winston-Salem.

After nearly two years’ worth of delays, Tesla kicks off Model X deliveries today. Prices top out at $132,000. Initial demand looks strong. Tesla has booked roughly 30,000 reservations for the vehicle. The launch isn’t the only big project for Tesla, which aims to open a $5 billion battery factory in Nevada next year.

By now, you’ve heard about the Volkswagen diesel scandal. The company installed software that would cheat emissions tests, and then when the cars went back out on the road, in regular driving situations, the cars would emit 40 times the legal limit for nitrogen oxide, or NOx. The CEO of Volkswagen, Martin Winterkorn was fired. To make matters worse, it appears that Volkswagen was warned about the illegality of the software as far back as 2007 by Robert Bosch. Bosch is the engineering and electronics firm which supplied VW with certain components that are at the center of the scandal, but it did so for testing purposes only.

According to Automotive News Bosch told VW that using the technology in a production vehicle was unlawful. VW’s supervisory board, said the board had received an internal report at its meeting on Friday showing VW technicians had warned about illegal emissions practices in 2011. No explanation was given as to why the matter was not addressed then.

Now, you may wonder how serious this whole mess really is; sure it’s a hit to VW’s reputation; there will likely be recalls of millions of cars; there will be class action lawsuits, and more. But then you recall General Motors had a problem with faulty ignition switches that resulted in 124 deaths and even more injuries. GM was charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case was put on hold as part of a deal where GM pays a $900 million fine and signed a deferred prosecution agreement – basically saying they won’t do it again.

Volkswagen pollution is harder to link to individual deaths, but it is still a deadly bit of deception. The New York Times reports that the chemicals that spewed illegally from the Volkswagen diesel cars — known as nitrogen oxides or NOx — have been linked to a host of respiratory and cardiovascular illnesses, as well as premature deaths.

Of course all that death an illness can’t be linked back to VW directly, but scientists now calculate that the excess pollution from VW, about 46,000 tons since late 2008, likely resulted in 106 deaths, plus an as-yet uncalculated number of illnesses. Of course, that’s just for the illegal emissions. Most of the air pollution from cars is perfectly legal.

In fact, the average gap between real-world emissions and official test results has been growing. A new report by the International Council on Clean Transportation, the research group that first flagged suspicious emissions patterns at Volkswagen, found that under normal conditions the average carbon-dioxide emissions for passenger cars are some 40% higher than the official amounts certified by European lab tests.

In 2001, the gap was less than 10%. Daimler showed a gap of nearly 50% between what researchers measured on the road and what technicians recorded in official lab tests. The artificial, and predictable, conditions under which cars are tested makes it easy for carmakers to engineer favorable emissions-test results without breaking any rules. Tuning engines to perform most efficiently at the power and load levels commonly used in tests is one way to do it.

And it’s not that VW was the only car company trying to skirt emissions standards. For years, emissions from cars built by almost every major manufacturer have been higher out on the road than when tested in labs. Over the years, several major auto manufacturers — including GM, Ford, Honda and, yes, Volkswagen — have been forced to pay hefty fines and recall vehicles after getting caught using defeat devices. In what was then the largest environmental enforcement case in U.S. history, companies including industry leaders Caterpillar, Cummins Engine, Mack Trucks and Volvo Truck agreed to pay $83 million in fines and reprogram the computers.

Financial Review

Dead Cats and Shade Balls

Sinclair Noe — August 11, 2015

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DOW – 212 = 17,402
SPX – 20 = 2084
NAS – 65 = 5036
10 YR YLD – .10 = 2.14%
OIL – 1.71 = 43.25
GOLD + 4.60 = 1109.70
SILV + .13 = 15.46

Since mid-July the Dow Industrial Average has dropped from a high of 18,137, including a 5 session losing streak; in late July the Dow dropped below its 200 day moving average, indicating a downtrend; it bounced up to touch the 200-day moving average but could not break through; after that we started August with a 6 session losing streak. Yesterday, the Dow bounced 241 points; and that is looking like a dead cat bounce today.

China’s central bank devalued the yuan in an effort to help jump-start its stalling economy. The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended a dual-currency system. For background, the yuan’s peg to the dollar had been in place since 2006. The People’s Bank of China, their central bank, would buy or sell yuan to keep the currency near a certain value against the dollar. The dollar’s been strong since 2011. And so, the peg made the yuan strong too.

The People’s Bank of China called the change a one-time adjustment and said its fixing will become more aligned with supply and demand. Outside China it smells of a currency war.  The PBOC said a strong yuan puts pressure on exports and cited a high effective exchange rate as a factor behind the devaluation. July’s export slump was deeper than economists predicted. This devaluation is a form of economic stimulus that promotes Chinese exports and makes imports from abroad more expensive. However, the risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system.

In trade-weighted terms, the yuan has been strengthening lately. The rising dollar has pulled it higher against the yen, euro and other currencies. Tempting as it may be for politicians to deplore the opening of fresh economic hostilities, this is a long way short of currency war. The decision is expected to add further momentum to the strong dollar, which has already been boosted this year on prospects for higher US interest rates. This could have a deflationary effect in the US. The dollar’s strength against major global currencies has taken a toll on US exports in recent quarters, and the Fed is closely watching the effects on the economy as it debates whether to raise interest rates, a move that could make the dollar even stronger.

Any macro benefits must be weighed against costs. These mainly fall on China’s domestic companies; the devaluation hits Chinese airlines, which carry a large debt load, which will now be harder to service; this will also likely hit European luxury goods. China is the EU’s largest trading partner. and banks in China and the rest of Asia, that have dollar-denominated debt and face the prospect of paying them back with a weakening yuan or rand, kiwi, Aussie dollar or won.

And don’t forget the $9 trillion in emerging-market dollar-denominated debt. It’s a ticking time bomb. Today the selloff took the MSCI Emerging Markets Index’s decline from a peak last September to 20 percent, the threshold for a bear market. And Moody’s Investors Service lowered Brazil’s rating to the cusp of junk in the second downgrade since President Dilma Rousseff came to office. Brazil’s grade was cut by one notch to Baa3, with a stable outlook. Brazil is rated BBB- by S&P. And as this strong dollar dynamic continues, you can expect more debt defaults from foreign corporations. Dollar denominated commodities are down amid speculation the weaker currency will make imports to China more expensive and slow demand.

OPEC pumped the most crude last month in more than three years as Iran returned output to the highest level since international sanctions were strengthened in 2012. The 12-member group, responsible for 40% of world oil supplies, raised output in July by 100,700 barrels a day to 31.5M. The increase came even as Saudi Arabia, which often curbs output toward the end of the summer, told OPEC it cut production by the most in almost a year.

Google has announced a major corporate restructuring. Google will become a subsidiary of a new holding company called Alphabet. Google co-founder Larry Page will serve as Alphabet’s CEO, with fellow Google co-founder Sergey Brin as president; Google’s current vice president of products Sundar Pichai is taking over as CEO of Google. Google said it would split into two reporting companies under the new holding company. Page said he’s restructuring Google so that all units outside its main Web businesses like search, advertising, YouTube and mobile software will be broken off and run independently. All those ventures will now come under the new Alphabet.

The restructuring should allow for greater transparency, but beyond that – why change? And the reason might be that Google wants to be like Warren, or at least like Warren Buffett’s holding company, Berkshire Hathaway. Page and Brin are big Buffett fans. A hallmark of Buffett’s approach has been to let management teams run their units independently. Under Page’s structure for the newly created Alphabet, Pichai takes over as CEO of Google; former Apple executive Tony Fadell leads Nest; and former Genentech CEO Art Levinson is leading Calico. The new structure allows Page to offload some of the day-to-day operational responsibilities of running the company, while remaining in charge of overseeing the allocation of resources to the different businesses; just like Buffett runs Berkshire.

Under the new structure, Alphabet will still get almost all its revenue and profit from Google. The company has been using the cash from the business to fund its other investments. Unlike Berkshire, which typically buys well-established companies with steady cash flow, Page must manage a conglomerate tasked with creating new technology products.

Greece and its international lenders have clinched a bailout agreement after night-long talks in Athens, although a couple of minor issues still have to be resolved. The pact is expected to be worth up to €86 billion-euro. Greek officials anticipate the accord to be ratified by parliament on Wednesday or Thursday and vetted by Eurozone finance ministers on Friday, clearing the way to aid disbursements by Aug. 20 – the day a €3.2 billion-euro debt payment falls due to the ECB.

Productivity in the second quarter of 2015 rose 1.3% after two straight negative quarters. But it is only up an anemic 0.3% from a year earlier. The Labor Department also said the average annual rate of productivity growth from 2007 to 2014 was revised down to 1.3% per year from the prior estimate of 1.4%. This is well below the long-term rate of 2.2% per year from 1947 to 2014. Productivity measures how much an employee produces in an hour of work. Higher productivity is regarded as the key to a rising standard of living over time because it tends to lead to higher pay for workers and larger profits for companies.

The National Association of Realtors reports the median existing single-family home price rose 8.2% in the second quarter, compared to the second-quarter of 2014 to $229,400.

Wholesale inventories jumped a seasonally adjusted 0.9% in June, though May levels were revised lower by 0.2% to show a 0.6% gain. The gain in inventories during June was led by motor vehicle and motor vehicle parts and supplies, and offset by a fall in computer and computer peripheral equipment and software.

Small business sentiment rose in July after two months of declines. The National Federation of Independent Business said its small-business optimism index rose 1.3 points to 95.4. Expectations for business conditions and real sales gains accounted for half the net gain in the components.

Investors reacted in an unusual way to Freeport McMoRan’s plan to potentially sell $1 billion worth of stock, just weeks after declaring their preference to not issue new shares: They pushed the stock 10.8% higher yesterday in the best performance in more than six years. While new shares will dilute value for existing holders, investors seem to see it as a better option than selling more assets or taking its oil business public.

Global mergers and acquisitions are on pace this year to hit the highest level on record, thanks to record buying sprees from companies on the hunt for growth. According to data provider Dealogic, takeover-deals would reach $4.58 trillion this year if the current pace of activity continues, comfortably above the $4.29 trillion notched in 2007.

You’ve heard the phrase: “Necessity is the mother of invention.” We know that California and the Southwest is suffering through a drought. We know that much of the water in the Southwest is stored in reservoirs and we lose an enormous amount of water to evaporation. Enter Sydney Chase, president of a startup company called XavierC. The company thinks they have a solution and it is called a shade ball. A shade ball is a 4-inch hollow orb made of polyethylene; it has just a little water inside to serve as ballast, so it won’t blow away in a strong wind, but it is sealed airtight and it is designed to float on the surface of a reservoir.

Los Angeles has just released 96 million shade balls into local reservoirs, where they will effectively serve as a cover to reduce evaporation, also blocking sunlight to reduce algae growth and hazardous reactions with the chlorine and bromide in the water. The shade balls can also be used on tailing ponds where miners store contaminated water, to keep birds away from toxic agents, and in waste-water treatment facilities, to keep odors at bay.

Do shade balls work? It’s probably too soon to say for sure, but there are now 96 million of them floating in LA reservoirs; and if they do work, there might be shade balls coming to a waterway near you.

Financial Review

Casino Mentality

Sinclair Noe — July 22, 2015

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 68 = 17,851
SPX – 5 = 2114
NAS – 36 = 5171
10 YR YLD – .02 = 2.32%
OIL – 1.62 = 49.24
GOLD – 7.00 = 1095.00
SILV – .05 = 14.90

As of today, Wall Street will have to comply with the “Volcker rule,” which bans taxpayer-insured banks from making bets with their own money. Although major financial institutions have fought for years to change the rule, they have for the most part fallen in line – shedding their proprietary-trading desks, pulling money from certain investment funds and ceasing other speculative activities. The new rule has also changed much of the industry. The five largest U.S. investment banks cut staff on bond sales and trading desks by 18% from 2011 to 2014, while 1,428 new hedge funds were launched during the same period.

Greek MPs are debating a second set of reforms they need to approve to secure a €86 billion-euro bailout, as thousands protest against further austerity measures. The protest outside parliament briefly turned violent. Earlier, Greece’s PM urged rebels within his own Syriza party to support the reforms demanded by creditors. Meanwhile, the European Central Bank has increased its cash lifeline to Greek banks with an emergency injection of an extra €900 million-euro, the ECB’s second in a week, coming just hours before the vote.

The National Association of Realtors reports sales of previously owned homes climbed to an eight-year high in June. Closings on existing homes, which usually occur a month or two after a contract is signed, climbed 3.2 percent to a 5.49 million annualized rate, the most since February 2007. Compared with a year earlier, purchases increased 9.6 percent in June. The median price of an existing home rose 6.5 percent from June 2014 to $236,400, the highest on record before adjusting for inflation. First-time buyers accounted for 32 percent of existing-home purchases in May.

In a separate report, the Federal Housing Finance Agency reports home prices rose 0.4 percent on a seasonally adjusted basis from April to May. The FHFA’s report showed home prices rose 5.7 percent in May from a year earlier. The measure is 1.8 percent below its March 2007 peak and about the same as the April 2006 level.

And it looks like people are catching the real estate bug, again. A new survey from Bankrate.com shows 27% of respondents believe real estate is the best investment, beating out cash for the top spot, as 2006 fades away in the rear view mirror.

Bad news ladies, you have taken a step backwards on the pay scale. New data from the Labor Department shows women earned 81.9 cents for every dollar a man earned in the second quarter of the year. That’s down from almost 84 cents for every dollar a man earned in the second quarter of 2014. Overall, median weekly earnings of all full-time workers climbed 2.7% from a year earlier to $801. Men got bigger paychecks, with wages and salaries climbing 3.4% from a year earlier to $886. For women, the increase was a more moderate 1.4% to $726. Men tend to work more hours than women. Women ages 20-24 come closest to earning the same as their male peers. That gap widens noticeably for women 35-44 and continues to grow.

The report also shows big disparities in pay related to race and educational attainment. For example, median weekly earnings for black men working at full-time jobs were $696 per week, or 76.1 percent of the median for white men. And full-time workers age 25 and over without a high school diploma had median weekly earnings of $499, compared with $1,210 for those holding at least a bachelor’s degree.

New York moved to raise the minimum wage for fast-food workers to $15 an hour by the end of 2018 in New York City and by mid-2021 in the rest of the state. The New York Wage Board voted unanimously for the increase, which would cover some 180,000 workers statewide.

A new report from the Annie E. Casey Foundation finds 22 percent of American children are living in poverty (as of 2013, the latest data available) compared with 18 percent in 2008. Poverty rates are nearly double among African-Americans and American Indians. Problems are most severe in South and Southwest. Particularly troubling is a large increase in the share of children living in poor communities marked by poor schools and a lack of a safe place to play.

Late Tuesday, the American Petroleum Institute said its data showed a 2.3-million-barrel increase in crude stocks in the past week. The more closely-watched data from the U.S. Energy Information Administration was released today, and that report showed stockpiles increased by 2.5 million barrels for the week ending July 17. Since the start of the year, oil prices are down about 5%. The decline in oil prices is part of a larger drop in commodity prices that has seen precious metals dropping 7 of the past 8 sessions; in turn dragging down prices on copper, zinc, and lead. And good news for coffee drinkers, the beans are down 23% since the start of the year.

Earnings reporting season, and the past couple of days have been rough. Dim outlooks and guidance were seen at Apple, IBM, Microsoft, and Yahoo, while commodity producers deepened declines. Shares of Freeport-McMoRan slipped 4.5%, Vale dipped 3%, and BHP Billiton fell nearly 5%.

The biggest hit was from Apple, even though the company topped analysts’ estimates for revenue and earnings, sales of iPhones came in slightly below estimates. Yesterday, Apple stock lost $62 billion in market capitalization. It was the biggest one day loss for Apple, but the record for the biggest one-day market cap loss goes to Microsoft; back on April 3, 2000, Microsoft lost $82 billion in one day, after news that a federal judge ruled it violated antitrust laws. Don’t worry about Apple; their market cap is still around $714 billion and they’re sitting on $202 billion in cash.

While markets remain near record highs, June-quarter S&P 500 earnings are expected to dip 1.5 percent. Of the 102 companies to report through Wednesday morning, 70 percent beat earnings expectations, matching the rate over the past four quarters and above the 63-percent average beat rate since 1994. However, only 55 percent have topped revenue forecasts, below the 61-percent average beat rate since 2002. U.S. companies are expected to post their worst sales decline in nearly six years in the second quarter, in part due to the strong dollar that reduces the value of U.S. companies’ overseas income.

Boosted by a recent stock surge, Facebook’s market capitalization has overtaken that of General Electric. The social network’s 26% climb this year has brought its market value to $275 billion, compared to GE’s $273 billion. Some are expressing concerns: GE racked up $149 billion in sales last year and employed more than 300,000 people. Facebook reported $12.5 billion in sales and employed roughly 9,200.

U.S. authorities have charged five people in the first cases bearing some link to last year’s massive cyber-attack on JPMorgan, which exposed the contact information of 83 million accounts. The men were accused of crimes ranging from securities fraud to money laundering – not with anything directly related to the attack on the bank – but officials confirmed there was a link. Rather, the court filings detailed charges involving a multiyear campaign to drive up the price of worthless penny stocks by pitching them to unsuspecting investors through millions of spam emails. One of the people briefed on the matter said he believed that the defendants had intended to use some of the email addresses obtained in the JPMorgan hacking to find other people who could be persuaded to invest in otherwise worthless stocks. It seems like a particularly reckless way to get a mailing list but that’s the story. Four of the men were arrested in Florida and Israel, while a fifth remains at large.

The bankruptcy drama at Caesars Entertainment came to a head today. Caesars put its largest unit in chapter 11 protection in January, rather than the whole company, preserving many investments of shareholders. In January, subsidiary Caesars Entertainment Operating Co. and nearly 175 affiliates filed for bankruptcy protection in Chicago after the second-lien holders filed an involuntary bankruptcy petition against the entity in Delaware. A Delaware judge later moved the entire case back to Chicago, Caesars’ preferred venue.

The case, as well as the months preceding the chapter 11 filing, has been contentious. In four lawsuits against the parent company, creditors have said Caesars’ entities improperly shifted good assets away from them to benefit its owners, including private-equity firms Apollo Global Management LLC and TPG. At least seven transactions between 2009 and 2014 have been questioned.

Caesars has called the transfers proper. The bankruptcy reorganization plan on file, which calls for the $1.5 billion investment by the parent as part of a deal to restructure the subsidiary, calls for Caesars to be reshaped as a real-estate investment trust. Senior lenders support the deal, while more junior creditors, including a group of second-lien holders that is suing, have opposed it. The bankruptcy judge in Chicago ruled that creditor lawsuits against Caesars Entertainment can continue and the bankruptcy of the casino’s top subsidiary shouldn’t delay the cases against the parent. Caesars’ stock dropped 41 percent to $4.76 a share.

Financial Review

Goodnight and Good Luck

Sinclair Noe — February 11, 2015  

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 6 = 17,862
SPX – .06 = 2068
NAS + 13 = 4801
10 YR YLD un = 1.98%
OIL – .75 = 49.27

President Obama has asked Congress for formal authorization to fight the Islamic State that would prohibit the use of “enduring offensive ground forces” and limit engagement to three years. The proposed resolution says Islamic State “has committed despicable acts of violence and mass execution.” Its militants have killed thousands of civilians while seizing territory in Iraq and Syria in an attempt to establish a hub of jihadism in the heart of the Arab world. Don’t expect a quick vote by Congress, maybe something in March, maybe just more talk.

We keep hearing that ISIS is growing, and one way they recruit jihadists to their cause is through slick websites and social media. So, you might be wondering why the government doesn’t just close down those sites. I don’t know, but today, the hacktivist group Anonymous has launched a massive cyber-attack against ISIS. A list of more than hundred Twitter and Facebook accounts suspected to belong to Islamic militants has been released by Anonymous. Twitter has already suspended more than 1500 ISIS accounts since the group released the first list in June, 2014 and dozens of militant recruiting websites were knocked offline using collective DDoS Attack. Thousands of Twitter accounts associated with ISIS are still active and spreading jihadist propaganda, but Anonymous says this is just the beginning.

The federal government ran a bigger deficit in January, pushing the imbalance so far this budget year up 6.2% from the same period a year ago.  The Treasury Department said the deficit for January stood at $17 billion compared to $10 billion a year ago.

Home prices moved higher across most of the country. According to the National Association of Realtors, the median price of an existing single-family home rose in the 4^th quarter from a year earlier in 86% of the 175 metropolitan areas measured. Twenty-four areas had price gains of 10% or more, up from 16 regions in the third quarter. Prices declined in 24 areas. The median was $208,700, up 6% from the fourth quarter of 2013. NAR reports Phoenix home prices increased 3.9% over the past year to a median price just over $200,000.

Finance ministers from across the Eurozone have gathered in Brussels today to try to figure out what to do about Greece. The newly elected Greek government is looking for relief from austerity measures. Those restrictions were a condition of Greece’s being granted a total of 240 billion euros, or about $272 billion, in loans from its European neighbors and the International Monetary Fund since 2010. Greece still needs to receive its next loan installment, €7.2 billion, or otherwise bridge the financial gap, to keep from defaulting on its international debt payments in coming months.

Reckless lending and reckless borrowing went hand in hand in the years leading up to the euro crisis. Greek officials did indeed use financial tricks developed by Wall Street to mask the size of budget deficits. Still, even before Greece joined the eurozone, it was clearly living far beyond its means. International lenders knew or should have known this; they were not defrauded so much as willfully blind.  The bailout of Greece was not a rescue of the country, but rather a rescue of the creditors; it was a bank bailout. The Greek government only received 11% of the bailout money to date; the rest went to creditors, or who knows where.

Greece now has more debt than it can ever repay, and lenders share some of the blame for this.  Spending cuts have only resulted in destroying the economy. The Greeks understand; that’s why they voted for Syriza; that’s why there are tens of thousands of Greeks protesting in the streets of Athens today. Unlike many countries, the protestors are not protesting against their government, they are protesting for their government to fight against the creditors. At some point the Euro Union will have to let Greece out of debtors’ prison. At a certain point you have to stop squeezing countries that are in the depths of a depression. And ultimately, some form of forgiveness benefits creditors as much as it helps debtors. Greece is well past the point where debt forgiveness could be considered reward for bad behavior.

By the way, the finance minister for Greece, Yannis Varoufakis, considered by some to be a bit radical, but also well known for research in game theory. So, how about a little game of chicken? Good luck.

Ten U.S. states have sent a letter to Anthem complaining that the company has been too slow in alerting clients that they were victims of a massive data breach disclosed last week and claiming the health insurer should commit to reimbursing customers for losses during the lag time.

The FBI is examining how fraudulent tax returns were filed in 19 states through Intuit’s tax-preparation software TurboTax and whether a computer data breach allowed access to personal information. Intuit halted e-filings of state returns last Friday after spotting criminal attempts to get refunds through its systems, but resumed filing after steps were taken to combat the activity.

A federal judge has approved the IRS issuing summonses requiring certain companies to hand over information about US taxpayers who used Sovereign Management and Legal for offshore accounts. The companies include FedEx, DHL, UPS, Western Union, The Federal Reserve Bank of New York, and HSBC. This could get interesting.

Apple has plenty of cash on the books, but they want more; so, they’re issuing Swiss bonds. For Apple, the lure of issuing in Swiss francs is clear: Swiss government yields are negative as far out as 2027, with its 10-year government bond yielding negative 0.09%. Apple’s strong brand and high credit ratings—Aa1 from Moody’s Investors Service and AA+ from Standard & Poor’s—should make it an attractive proposition for yield-starved investors who have Swiss currency to put to work. That will make any funding ultracheap.

What will Apple do with the extra cash? Activist investor Carl Icahn has a suggestion: more dividend dollars and a few less Apple shares. This is a common theme on Wall Street; according to the Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54% of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4% of GDP, to prop up their share prices by repurchasing their own stock. Last year’s buybacks were about 3.3% of market capitalization. Since 2004, stock buybacks totaled $6.9 trillion, and that must surely skew our understanding of earnings.

Apple, which began playing with a record valuation of $700B during midday trading in November, ended the day yesterday at $710 billion. The landmark comes just two weeks after Apple posted the largest quarterly net income of any public company in history. Apple will also be launching a new energy project, partnering with First Solar on an $850M solar farm in California.
The deal will supply enough electricity to power all of Apple’s California stores, offices, headquarters and a data center. Apple will get 130 megawatts, enough to power 60,000 California homes. It’s the biggest-ever solar procurement deal for a company that isn’t a utility, and it nearly triples Apple’s stake in solar.

But it’s not the biggest solar project in California, not by a long shot.

Nearly 4,000 acres of desert near Desert Center California have been converted into a massive solar farm. The Desert Sunlight Solar Farm has been running since December and it was officially dedicated on Monday. The 550-megawatt farm is the largest on public lands managed by the federal Bureau of Land Management. It will provide enough energy to power more than 160,000 average California homes annually. Desert Sunlight was developed by First Solar of Tempe.

First Solar received $1.46 billion from the U.S. Department of Energy, a partial loan guarantee funded by a group of private investors, to finance the project. Pacific Gas & Electric Company and Southern California Edison already have agreed to purchase power from Desert Sunlight for the next two decades.
Before 2009 no solar projects had been permitted on public land. Today, there are 29 permitted commercial-scale solar projects throughout the Southwest. Desert Sunlight is the sixth solar project to come online, and eight more are under construction.

Desert Sunlight is the world’s largest solar power plant, but just slightly. The Topaz solar project in San Luis Obispo County, Calif. — which, like Desert Sunlight, was built by Arizona-based First Solar — also has a capacity of 550 megawatts. But the desert has more abundant sunlight than San Luis Obispo County, so Desert Sunlight will actually generate more electricity than Topaz.

It’s an open question, though, whether future solar projects will be anywhere near as big as Desert Sunlight. Developers have been gravitating toward smaller solar farms, which are easier to build and usually have a smaller environmental impact.

One major obstacle for solar development has been the looming expiration of a 30% federal investment tax credit, which is scheduled to fall to 10% at the end of 2016. Another challenge for solar energy developers is that California and other states are already on track to meet increased requirements for renewable energy generation. But the outlook may be more positive after Gov. Jerry Brown in his inaugural speech last month called for half of the state’s power to come from renewable sources by 2030, up from the previous goal of 33% by 2020.

And finally, the Powerball lottery is up to almost $500 million, making it one of the top payouts ever. Actually, the cash payout would be about $370 million, and then you would have to cut taxes out of that. Still, you would be left with a healthy sum. Playing the lottery is a long shot, and it really doesn’t make much sense. But if you are going to play, might as well play when the payout is big. And for a couple of bucks, you can enjoy your own personal fantasy of how you might spend those millions; that’s got to be worth something. Your odds are 175-million to one. If you buy 2 tickets, each ticket will still be 175-million to one odds. It’s a bad bet. Good Luck.

FINANCIAL REVIEW

Strange Days in Energy

Sinclair Noe — February 3, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 305 = 17,666
SPX + 29 = 2050
NAS + 51 = 4727
10 YR YLD + .10 = 1.78%
OIL + 2.52 = 52.09
GOLD – 13.70 = 1261.10
SILV + .09 = 17.37

One year ago, the Dow Industrials dropped down to 15,356, which proved to be the low for 2014. Since then, up 16%, mas o menos.

Corelogic reports home prices slipped 0.1% in December, to take the year-on-year rate to 5%. Twenty-seven states and the District of Columbia are at or within 10% of their peak; current prices in Arizona are still 29.5% below the peak. Colorado (8.4%), Texas (7.8%) and New York (7.6%) saw the fastest growth, while only three states — Maryland (-0.7%), Vermont (-0.9%) and Connecticut (-2.2%) — saw a decline on a year-on-year basis.

New orders for factory-made goods in the U.S. sank 3.4% in December to mark the fifth straight decline. The latest drop suggests that manufacturers may have scaled back production owing to a stronger dollar and weak economic growth overseas that’s made it harder to sell American-made goods. Inventories also declined for the first time in 19 months, down 0.3%. Excluding transportation, new factory orders fell a smaller 2.3%.

Earnings reporting season:
Chipotle Mexican Grill said its fourth-quarter earnings rose 52% as sales benefited from stronger customer traffic, higher menu prices and new stores. It’s tough to keep growing that fast. Chipotle also reiterated its October warning that sales growth may slow during 2015 from the robust gains reported in recent periods. Shares were down in after-hours trade.

United Parcel Service will start applying surcharges for residential packages this year after its costs soared during the recent disappointing holiday season. UPS also reported that fourth-quarter profit fell from a year ago but forecast earnings within the range of estimates.

Walt Disney reported stronger-than-expected earnings and revenue for its December quarter as growth at its media networks and parks and resorts divisions offset a slight drop in revenue from studio entertainment. The bright spot was the animated film “Frozen” which has been a huge hit in merchandise sales. Disney’s record results in recent periods have been spurred by price increases at its domestic theme parks; measles tossed in at no extra charge.

St. Louis Fed Bank President James Bullard, speaking at a conference in Delaware, called for the breakup of big banks. Bullard said the time for restoring the Glass-Steagall Act, which had separated investment banks and commercial banks, had probably passed and was not the best route going forward. But he did advocate for smaller financial institutions, saying the argument that large corporations need large banks was weak.

Minneapolis Fed Bank President Narayana Kocherlakota says the Fed should not hike rates this year because it would slow the return of inflation to the central bank’s target and also risk a loss of credibility for the US central bank. Kocherlakota said he thinks it will already take inflation a few years to return to the Fed’s 2% annual target rate from current low level.

The Reserve Bank of Australia has jumped on the easing bandwagon, becoming the latest global central bank to cut interest rates in response to slowing inflation and concerns over economic growth. The RBA lowered its benchmark rate by 25 bps – its first change since August 2013 – to a new record low of 2.25%.

European stocks moved higher today. Greece’s new finance minister Yanis Varoufakis has suggested that instead of requesting a write-off of its €315 billion ($357 billion) foreign debt, the government would ask to swap Greek debt for two new types of bonds linked to growth while also targeting oligarchs, cartels, and wealthy tax evaders; proving there’s more than one way to make a financial transfer. The Athens Stock Exchange Index jumped up 11% today. Yes, this is the same Greek finance minister that was quoted over the weekend saying “Greece won’t negotiate with the Troika.” Which is an excellent opening position for negotiation when you think about it.

Greece’s debts are held by other democratically-elected countries. The majority view in those countries is against debt forgiveness. On the other end of the spectrum is Greece actually not negotiating and defaulting on debt, and then dropping out of the European Union; actually they say they don’t want to exit the EU, so they would have to be kicked out; something the EU does not have to political authority or unanimous support to do; but even if everybody acted in a most stupid and malignant manner, the bond vigilantes would start circling like sharks smelling blood, and the losses would mount quickly. Against that backdrop, rescue loans for debt indexed to nominal economic growth sounds quite pleasant indeed.

Auto makers say their U.S. sales grew in January, typically a slower month for the industry. Chrysler, General Motors and Nissan all posted double-digit increases in January. GM reports auto sales were up 15% compared with January a year ago. Ford up 15%, Fiat Chrysler up 14%. Nissan up 15%. Toyota up 16%.

Automotive information provider Kelley Blue Book said transaction prices of new light vehicles are up 5% compared with a year ago to $33,993. TrueCar estimates average incentive spending, including rebates and discounts, was $2,642 during the month. That is a decline of 10% compared with December’s numbers, but up 3.6% over January 2014. Gas prices, sitting at about $2 gallon, are helping juice demand for trucks and SUVs that consume more fuel but also deliver higher margins. Some buyers are using savings from lower fuel costs to purchase pricier options or come into the market sooner than otherwise planned. The thinking is that low fuel prices provide a significant boost to consumer disposable income.

Oil is in a bull market. It took all of three days trading. It started Friday, when oil jumped 8%, and yesterday and another 5% today; from an intraday low of $43.58 last Thursday to an intraday high of $54.24 today; boom 20%-plus move; technically we are in a bull market. Of course oil prices are still down 50% from the highs of last June. If you think this has anything to do with fundamentals such as supply and demand, I would love to hear that justification. Over the past several weeks, more than 20K oil workers have lost their jobs as companies pare their workforces to deal with the drop in oil prices. More than 700 oil industry jobs are now being terminated in Texas, following recent layoff announcements. It should take months before that actually affects supply. The supply/demand equation did not change that much in 3 days. What did change? Traders decided they could pop the price and squeeze the shorts.

Meanwhile, you have probably noticed that prices for electricity never went down at all. According to the US Energy Information Administration, since 2004, average residential electricity prices have jumped 39%, to 12.5 cents a kilowatt-hour and prices for all users have jumped 36% to 10.42 cents. Meanwhile, Americans are using less electricity; we’re using efficient light bulbs and Energy Star appliances, and even a little solar on the roof. The result is that sales are down. All at a time when the electric grid is in need of upgrades. The Edison Electric Institute calls this a “death spiral” for utilities. As a result, many utilities are now considering charging fixed monthly fees for electricity services to cover the fixed cost, rather than the cost of the electricity itself.

Utilities like fixed fees, consumers not so much; fees punish energy-conservers and lengthen pay-back periods for solar power and energy-efficiency upgrades.

Meanwhile, a funny thing happened in India last week. President Obama visited and there was much pageantry and talk of expanded bilateral cooperation, and there was a $4 billion nuclear deal announced; the details of the deal are what make it interesting. It contrives a model to shift to Indian taxpayers the liability risks for nuclear accidents, thus undermining India’s domestic law, the Civil Liability for Nuclear Damage Act, which pins the liability on suppliers of nuclear-power plants and equipment. It will circumvent the central principle enshrined in that law — the right of recourse against nuclear suppliers, including manufacturers and designers.

The paradox is that America’s domestic law allows suppliers to be held liable, yet Washington has sought to shield its exporting firms by insisting that India accept operator’s strict liability and restrict potential claims. Great news for the nuclear suppliers; they face no downside risks and can concentrate on profits. For them, supplier liability ends with delivery of the plant or equipment.

In order to jumpstart its civilian nuclear power industry, India is agreeing to an insurance pool of $245 million to cover any liabilities. If a serious accident were to occur, India would be saddled with staggering, lasting costs. Japan’s Fukushima-disaster bill has been conservatively estimated at $105 billion, or 429 times higher than the Indian insurance pool’s capital.

So, what we have is an energy policy that is subject to 20% price swings in less than a week; clearly a market being manhandled by speculators; infrastructure that is crumbling and unable to pay for itself, and a source of electricity that can’t be used unless we are willing to dump liability on taxpayers. I’m just saying this might be cause for concern, at some point.

We’re giving more. The U.S. economic rebound last year pushed the stock market up and the jobless rate lower, helping to boost charitable giving in the country to a record $456 billion—a jump of more than 9 percent from the year before. The number of nonprofits has grown 50 percent since 2002, and many of them have turned to more sophisticated fundraising technologies like online giving and crowdfunding. The bulk of the contributions were small gifts from individuals; mega-gifts of $100 million or more accounted for just 1% of the total.

FINANCIAL REVIEW

Faster and Faster but No Liftoff

Sinclair Noe — November 25, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 2 = 17,814
SPX – 2 = 2067
NAS+ 3 = 4758
10 YR YLD – .05 = 2.26%
OIL – 1.95 = 74.22
GOLD + 2.90 = 1202.20
SILV + .20 = 16.77

The major stock indices couldn’t close at records, but Apple reached a milestone today. Apple’s market capitalization hit a record $700 billion; that’s double from 3 years ago when Tim Cook became CEO. Apple is the first S&P 500 company to ever reach a $700 billion market cap. Yet, on an inflation-adjusted basis, it still has way to go to be the most valuable company of all time. Microsoft’s market cap peak of $613 billion in 1999 translates to nearly $874 billion in 2014 dollars. When Microsoft was at the top, it was trading at 72 times earnings. Apple’s price-to-earnings ratio is currently 18, in line with the overall S&P. It’s a little tough to imagine what Apple will do in the future to match the growth they’ve experienced in the past.

The economy is better than you thought. The Commerce Department revised its estimate of third quarter gross domestic product from 3.5% up to 3.9%. There will be another revision before settling on a final number. Second quarter GDP came in at a 4.6% growth rate; combined second and third quarter GDP was the strongest back to back growth since 2003. Let’s break down the data.

A couple of key factors behind the increase include more consumer spending along with a little more business investment. Falling gas prices meant that people could go to the gas station and still have cash for other purchases. A separate report from the New York Fed show household debt balances also increased $78 billion in the third quarter at $11.7 trillion. Overall household debt still remains 7.6% below the 2008 peak of $12.7 trillion, but the increase was enough for the NY Fed to conclude that household deleveraging is over. Not so fast. The Conference Board reported that consumer confidence declined in November. The Consumer Confidence Index dropped to 88.7 from 94.1 in October. Consumers lowered their opinions on business conditions and the labor market. Maybe consumers are finished with deleveraging, or maybe they took on debt because wages haven’t kept pace with a growing economy.

Growth in domestic demand was revised up to a 3.2% pace in the third quarter instead of the previously reported 2.7% pace. Consumer spending grew at a 2.2% pace instead of the previously reported 1.8% rate.

Business investment was also up. Nonresidential investments grew by 7.1%, revised up from 5.5%, while investment in equipment reached 10.7%, with a stronger pace of spending on equipment than previously thought accounting for the bulk of the revision. Corporate, after tax profits grew at a 3.2% rate in the third quarter; that was down from a very strong 8.6% increase in corporate profits in the second quarter; still, after 6 months of extremely strong profit growth, companies were well positioned to spend a little on equipment. The strength in business investment spending would point to more hiring as well. In a separate report, the Federal Reserve Bank of Atlanta says the quality of new jobs is improving; 95% of the new jobs in October were full-time, which is a move in the right direction.

Export growth was lowered to a 4.9% rate from the previously reported 7.8% rate, while imports were revised up. That left a trade deficit that contributed 0.78 percentage point to GDP growth instead of the previously reported 1.32 percentage points. Government spending, which grew 4.2%, turned out to be a little lower than the Commerce Department initially estimated.

The Department of Agriculture reports net farm income in the US is forecast to be $97 billion, down 21% from a year ago and the lowest since 2010. Farmers are selling livestock for more, but that’s because many farmers culled their herds during the droughts of the past couple years; crop receipts are down, along with prices for many commodities, while expenses have increased.

Also today, the S&P/Case-Shiller home price index increased 4.8% for the 12 months ended in September, down from 5.1% reported for the 12 months ended in August. So home prices are going up, but at a slower pace; and that has been the trend; home price gains have now slowed for 9 straight months. In Phoenix, home prices dropped 0.1% from August to September, and for the past 12 months, prices increased a modest 3%.

A couple of extra bits on the housing market; Corelogic reports that distressed sales, both REO and short sales, accounted for 11.8% of total home sales nationally in September; that’s down from 15.2% distressed sales from September of 2013, but it is still a pretty high number. And another consideration is that back in the mid-2000s we saw a surge in mortgage debt fueled by an increase in home equity lines of credit, or HELOC, loans; it was a way for homeowners to tap into equity. The majority of HELOCs were originated at the peak of the home equity boom between 2004 and 2006, so there is concern of an oncoming wave of defaults when the estimated $190 billion in HELOC loans reset between Q4 2014 and 2017. The fear is that payment shock will not only cause a wave of defaults, but that it also may impact bank balance sheets and the mortgage markets where HELOCs are concentrated. Unlike the first-lien market when banks sold off most of the credit risk, more than 85% or $580 billion worth of HELOC loans are on bank balance sheets.

So, when you combine the stronger GDP numbers with the weaker consumer confidence index and a lackluster housing market, what you get is more of the same; an economy that looks like it should fly but can’t quite achieve escape velocity. Even when you add in corporate capital expenditures improving, that is just a step in the right direction without creating a discernible trend. Part of the problem is that the rest of the global economies are stuck in quicksand.

The Organization for Economic Co-operation and Development says the global economy will slowly improve over the next 2 years but Japan will grow less than previously expected while the euro zone struggles with stagnation and an increased deflation risk. The OECD calculates that a gradual 10% depreciation of the euro and the yen against the dollar over the next two years could potentially raise growth in the euro area and Japan by around 0.2 percentage point next year and twice as much the following year. Overall, the global economy is set to grow by 3.3% this year, 3.7% in 2015 and 3.9% in 2016. In the United States growth is projected to gain more momentum and remain above trend, reaching 3.1% next year.

Oil prices have plunged more than 30% since midyear on growing global supplies of oil and weak demand growth. OPEC is meeting Thursday in Vienna to discuss oil prices, but before the official meeting an official from Venezuela says that informal talks before the meeting point toward no output cuts. That’s bad news for Venezuela, and even worse news for Russia, which is watching its oil-dominated economy stumble under lower prices. Crude futures extended losses on that news. Rumors on production cuts were flying today. The low prices for oil may be considered another indicator of global economic growth. As oil producers such as Venezuela and Russia fret about the drop in oil prices, more affordable energy would benefit the worldwide economy. Many people feel the global recession was really triggered by the rise in oil prices from 2000 through 2008 and some of the slow growth or stagnant growth in the global economy is because prices stayed so high for so long.

Jeff Gundlach, the CEO of Doubleline Capital, says oil markets are in their “second part of the cycle” wherein prices will drop because producers are getting squeezed after oil settled below $80. Production will see an increase “maybe on the sly” by countries that depend on oil revenue, creating a “vicious cycle” for the commodity’s price. He predicted that $70 is the “line in the sand” for West Texas Intermediate: Any drop below that level will lead to a significant fall in price. He also said an oil price around $75 (which is where we are today) would suggest that the consumer price index should probably be near zero, meaning that there is no inflation in the economy.

And just to keep things interesting, much of the oil boom in the US was done with financial engineering. There is an astonishing amount of debt that continues to build up on the smaller exploration and production companies’ balance sheets. Even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

And it is not just OPEC countries holding on for dear life waiting for production cuts. Particularly in the gas and natural gas liquids drilling directed sector, every operator (and their financier) is waiting for every other operator to stop or slow their drilling programs, so there can be some recovery in the supply-demand balance. And at some point, you have to wonder if the banks will put an end to the boom.

FINANCIAL REVIEW

Lather, Rinse, Repeat

Sinclair Noe — November 4, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Financial Review

DOW + 17 = 17,383
SPX – 5 = 2012
NAS – 15 = 4623
10 YR YLD – .01 = 2.34%
OIL – 1.31 = 77.47
GOLD + 2.90 = 1169.20
SILV – .11 = 16.13

Election Day 2014! We should all be very, very happy. Forget about red and blue, we can all count our blessings because the campaign ads on radio and TV are going away. There is one redeeming thing about this whole election. It will be over in a few hours. Say hallelujah!

Or you could say that it’s amazing that anyone bothers to vote given that our choices are between tweedle dumb and tweedle dumber. Still, I went to the polls today, early, and I cast my ballot. I was the only voter voting. In a few hours we’ll get the results. And the most likely result is that not much will change, despite the drama and despite hundreds of millions to persuade you. It takes a fortune for a politician to get beat these days, but most of the money isn’t real, it’s magic money that doesn’t belong to anybody, or at least nobody is willing to admit they spend money on politics. We’ve got the best politicians money can buy.

The present split Congress is the least-productive in US history. Regardless of the election’s outcome, the 114th Congress is unlikely to be any more productive than the 113th. Maybe that’s good news; when they do something is when they become dangerous. There are plenty of issues worthy of intelligent discussion and debate, however that never seemed important in this midterm election. That we have been burden with such an abundance of bull and still survived just shows we are a super nation.

Lather, rinse, repeat.

Let’s look at the economic news.

Home prices were down slightly in September, according to Corelogic prices were down 0.1% for the month and that resulted in year to year growth of 5.6%, the slowest pace in 2 years. So, the rate of growth in home prices has clearly slowed. For Arizona, home prices are still down 30% from the peak.

New orders for US factory goods fell for the second straight month, down 0.6% in September. August’s orders were slightly revised to show a 10.0 percent fall instead of the previously reported 10.1 percent decline. The decline in orders was led by aircraft, machinery, capital goods and computers and electronic products.

Yesterday we reported that auto sales were up in the third quarter, but the car companies are calling them back faster than they can sell them. Toyota is recalling 5,850 vehicles because of a possible loss of steering control. Ford is looking at 5 recalls totaling 202,000 vehicles for a variety of issues, including an incorrect repair of a steering problem in a previous recall.

Oil futures dipped under $76 a barrel for a while today. If there was any doubt on which country Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now. While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is directed to the US shale producers. The Kingdom made no secret of their displeasure yesterday when they cut oil prices to US buyers while raising them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the US.

The plan is to maintain market share in the US and bury the US energy producers. The Saudis fear predictions that US oil imports could fall to zero by 2037 as a reason they need to nip US oil producers in the bud. They are threatened by US oil production and they are acting to try to break the US producers back. That is one of the reasons todays balance of trade numbers weren’t much higher, even in the face of a strong dollar. The US not only has reduced oil imports but has become a major exporter of oil products.

The nation’s trade deficit increased 7.6% in September to the highest level since the late spring as exports to Europe, China and Japan all fell. In turn, this will likely lead to a lower revision of third quarter GDP; probably a drop from the 3.5% initial estimate, down to about 3%. In September, the trade gap climbed to a seasonally adjusted $43 billion from a slightly revised $40 billion in August. Yet if petroleum is excluded, the nation’s trade gap climbed to $47.2 billion in September to mark the highest level in seven years. Here’s the downside of a strong dollar: US exports of goods fell 3.2% with China, 6.5% with the European Union and 14.7% with Japan.

It’s not just a strong dollar but a combination of weak global economies. Today the European Commission said the Eurozone will need another year to reach even a modest level of economic growth. The new forecast calls for 0.8% growth across the Eurozone economy this year, and just 1.1% growth next year.

The Independent Evaluation Office of the International Monetary Fund issued a report that basically says the IMF did a poor job responding to the financial crisis; the IMF ignored its own research and pushed too early for richer countries to trim budgets. They admit the IMF was overly concerned about high debt levels and large fiscal deficits, and urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

The European Central Bank meets Thursday to try and figure out their next course of action.

Lather, rinse, repeat.

While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance.

When faced with private sector deleveraging, there are limits to the persuasive powers of low interest rates to revive private economic activity; low rates may help in an inflationary environment, but in a deflationary environment, spending is needed to stimulate demand. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes more and more deflationary. The flip side is that fiscal expansion could truly provide economic stimulus without the worry of interest rate increases. That doesn’t mean that we will see fiscal expansion to correct the problem, just because there is indisputable mathematics to support it.

Lather, rinse, repeat.

JPMorgan Chase has added $2.4 billion to its estimate of the amount of legal costs it may face. That figure was disclosed yesterday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market. In the past few days, Citigroup, Royal Bank of Scotland, HSBC, and Barclays all announced new reserves totaling more than $2.3 billion to deal with investigations into foreign exchange rate manipulation. Deutsche Bank added more than $1 billion to legal reserves for the expected cost of settlements. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates.

If it sounds familiar, well that is because we have seen settlements like this before. In 2012 Barclays and UBS entered deals to pay fines totaling almost $2 billion; a UBS subsidiary pleaded guilty to rigging Libor. The prosecutors and regulators probably thought the agreements would deter further bad behavior. The deals involved non-prosecution or deferred prosecution agreements. The agreements allow the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.

But it turns out that simply slapping the banks with more and bigger fines, does not deter future bad behavior. The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So federal prosecutors go for punishment that does not threaten the continued existence of one of the banks. In other words, punishment that doesn’t actually punish.

The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail”, while steadfastly refusing to actually jail a bank or major bank executives for criminal violations.

Lather, rinse, repeat.