Financial Review

What a Plan

Sinclair Noe — August 22, 2017

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DOW + 196 = 21,899
SPX + 24 = 2452
NAS + 84 = 6297
RUT + 14 = 1371
10 Y + .03 = 2.21%
OIL + .28 = 47.65
GOLD – 6.90 = 1285.40
BITCOIN + 0.17% = 4144.78 USD
ETHEREUM + 0.44% = 324.14

The stock market is overvalued. Price to earnings ratios are too high. Investors are too complacent; the volatility index is still below historic average. The Federal Reserve isn’t just planning to raise interest rates but plotting a reduction of its $4.5 trillion balance sheet, which can add to the effect of monetary-policy tightening, further increasing borrowing costs.

All good reasons why the stock market could collapse. Instead the Dow Industrial Average has the best single day of trading since April. Here is the key point, the thing that really does matter – the trend is up. The trend has been up for 8 years. A trend in place is more likely to continue than it is to reverse.

A trend can keep going for a long, long time. At some point, the trend will indeed reverse but that was not the case today. The market has slogged along the past 2 weeks with a minor pullback – yesterday we called that a pause and sure enough, today the market hit the play button – but we have not seen anything yet to confirm a trend reversal.

Individual stocks may have already reversed but the major bull market trend remains in place.

Markets do not go up in a straight line, they fluctuate. It may seem totally irrational that the market can keep rolling along like this but the market can remain irrational far longer than individual investors can remain solvent. That does not mean that we should disregard the recent pullback.

The recent declines should remind us that the relentless bull market will not last forever. When that fateful day finally comes and stocks begin their painful unwind, will you be ready? Probably not. Just as you develop a plan for what and when to buy, you should also have a plan for when to sell.

Maybe you are in it for the short-term or the long-term. Maybe you can handle 5% risk, or 10% or 20%. Whatever your plan, make sure you have a plan and that you stick to it.

The holy grail of successful investing is not buying momentum stocks in an uptrend; it is not investing in a bull market when stocks pull back. The holy grail is discipline. A good plan, executed with discipline will beat a brilliant plan with no discipline.

Last night, Trump laid out his strategy for Afghanistan. Confronted with a series of bad options, he chose one and explained it to the public in a national address short on details. We don’t know how many more troops will be on the ground. We don’t know what those soldiers will do. We don’t know when it will be over or if it will ever be over.

Best guess is that 4,000 troops will be added to the 8,000 troops in country. Trump singled out Pakistan for harboring Afghan Taliban insurgents and other militants. Trump’s call for India to play a greater role in Afghanistan may constrain Pakistan and lead to the opposite of what he wants.

After 16 years, it is hard to guess what difference that will make. He did not lay out a timeline – which might be a smart move. The one thing Afghan fighters do know is how to wait out occupying forces.

Trump says we will stay until there is peace and victory. Identifying peace is subjective. What will determine whether we are winning or losing? The plan seems to be that the war will continue until something good happens. In Afghanistan that might be a very long time indeed.

Shares of U.S. defense companies rose – Northrop Grumman, Boeing, Lockheed.

The next stop for Trump is Arizona, where he will address a rally (and perhaps protesters) about his border wall, and other issues. Large protests are expected near President Trump’s rally in downtown Phoenix. The rally, scheduled for 7 p.m. local time at the Phoenix Convention Center, is Mr. Trump’s first visit as president to Arizona.

According to the Arizona Republic, more than 3,900 people had indicated on Facebook that they would attend one event, Protest Trump Downtown Phoenix, across the street from the convention center. Another 2,700 said they planned to attend White Supremacy Will Not Be Pardoned, organized by the Puente Human Rights Movement.

Other protests are also scheduled. Gov. Doug Ducey was planning to greet Mr. Trump but not to attend the rally. Trump has discussed a pardon for former Sheriff Joe Arpaio. But some of his advisers are reportedly concerned that such a move would add fuel to the firestorm surrounding the president’s recent comments about race and further divide the country.

Arpaio had committed a crime by refusing to stop detaining suspected undocumented immigrants despite a court order. He faces up to six months in prison and is to be sentenced in the fall. Arpaio said on Monday night that he would not attend the rally.

House Speaker Paul Ryan said Monday night tax reform should be easier to pass than a health-care overhaul.  Politico reports, meanwhile, that Trump’s top aides and congressional leaders have made significant strides in shaping a tax overhaul.

Sources familiar with the talks told Politico that there’s broad consensus on some of the best ways to pay for cutting both the individual and corporate tax rates. Options include capping the mortgage interest deduction for homeowners, scrapping peoples’ ability to deduct state and local taxes, and eliminating businesses’ ability to deduct interest, while also phasing in what’s known as full expensing for small businesses. That allows them to immediately deduct investment like new equipment.

The Senate Health Committee will hold two hearings next month on stabilizing premiums in the individual insurance market, the panel’s chairman and top Democrat said Tuesday. The first, scheduled for Sept. 6, will feature state insurance commissioners, and the second, on Sept. 7, will have testimony from governors.

The hearings come in the wake of the Senate’s failure last month to repeal and replace the Affordable Care Act, or Obamacare. Obamacare plans are sold on the individual market.

Bloomberg gathers up what we know so far about what will be new in the iPhone 8. The new smartphone arrives with lofty expectations. After all, this is the 10th anniversary of the original iPhone. Apple plans to release three new phones: successors to the iPhone 7 and iPhone 7 Plus as well as a new, revamped model that sits at the high-end.

All will have the usual upgrades like faster processors. The display will use a technology called OLED, which makes for better color reproduction and deeper blacks and whites. The screen will also take up nearly the entire front of the phone, save for thinner bezels and a notch at the top of the front to fit in the camera and new sensors. But don’t expect lots of new stuff, rather look for improvements to existing stuff.

Wells Fargo CEO Timothy Sloan said that forthcoming results from the bank’s review of its consumer sales scandal could cause more negative attention. Sloan also said that “within a few weeks” the bank will announce the completion of an expanded review by a third party of the fake consumer accounts workers had opened. They were pressured by aggressive sales goals; a practice Wells Fargo has since ended.

In an Aug. 4 quarterly 10-Q filing required by the SEC for public firms, Wells Fargo said it expanded the review period to 2009 through 2016 and that could reveal a “significant increase” in unauthorized accounts. The bank will also send notices about the process for customers to make claims against the bank and is compiling a list of additional customers who complained an account was opened without their consent, Sloan said in the memo.

Yesterday, Berkshire Hathaway’s $9 billion all-cash deal for power transmission company Oncor was terminated after Sempra Energy emerged as the victor. Warren Buffett’s conglomerate had been battling for Oncor with the hedge fund Elliott Management.

Berkshire has a nearly $100 billion war chest of cash to make deals. S&P affirmed Berkshire’s AA rating and a stable outlook. Berkshire had been on review since July, after bidding $9 billion in cash for the Texas power transmission operation of Energy Future Holdings. Berkshire A shares hit $270,960, and B shares rose to $180.61, both all-time highs. Even when Buffet loses, he wins.

Here is a reminder about the National Park Service’s Lifetime Senior Pass. I mentioned this about a month ago, but the deadline is next Monday. The passes grant lifetime entry for citizens who are older than 62 to more than 2,000 sites and parks across the country. Due to legislation passed in Dec. 2016, these lifetime passes will jump from $10 to $80 on Aug. 28. If you go to just one park, the $10 pass pays for itself. Just a reminder.

The solar eclipse was bigger for Facebook than any of the last four Super Bowls. Facebook says that 66 million people worldwide created 240 million interactions about the eclipse. Last year’s Super Bowl pulled in 64 million to Facebook. Monday’s obsession with the eclipse shows that Facebook doesn’t need a massive TV event to draw Super Bowl-sized crowds.

The social network has long pitched advertisers that it can deliver a “Super Bowl-sized” audience every day, but now we know it can deliver a Super Bowl-sized audience for events that have nothing to do with sports or football or traditional TV.

Millions and millions of people took tens of millions of photos, and like 20 of them are good. (In that sense, it was just like every other day.)

Financial Review

Insert Clever Eclipse Headline

Sinclair Noe — August 21, 2017

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DOW + 29 = 21,703
SPX + 2 = 2428
NAS – 3 = 6213
RUT – 0.89 = 1356
10 Y – .01 = 2.18%
OIL – 1.11 = 47.40
GOLD + 7.10 = 1292.30
BITCOIN – 2.81% = 3940.88 USD
ETHEREUM – 2.52% = 315.65

Since August 7, the Dow Industrials have given back 397 points or 1.7%. The S&P 500 has slipped 0.08%, and the technology-weighted Nasdaq has led the way lower with a 2.6% move. Second-quarter results from S&P 500 reporting companies have been solid with 65% beating expectations. Guidance has largely also been quite positive.

The recent price action in equities has left the uptrend under pressure but at this point it doesn’t look like anything more than a pause – at least for the big Blue-Chip names. Small caps are having a tougher time. The Russell 2000 index of small and mid-cap companies moved into negative territory year-to-date.

Most recent economic data suggest the US economy is on better footing that it was in the first half of the year; which seems to be part of a trend for the past few years. This week, the markets are waiting to hear from Fed chair Janet Yellen; she delivers a speech at the Jackson Hole Economic Summit on Friday.

We know that the Fed has been raising rates and plans to trim holdings on its balance sheet, but last week’s minutes paint a picture of a cautious Fed. European Central Bank President Mario Draghi will also speak Friday. Don’t expect any big news on central bank policy.

The central bankers will be talking about economic growth and there will be plenty of discussions about low inflation. US inflation fell to 1.4 percent in June, based on the Fed’s preferred gauge, and consumer prices in the euro area – currently at 1.3 percent – have wavered since the start of the year.

Today, the Federal Reserve published a new survey providing extra detail on the labor market. The survey will be published 3 times a year. Survey says, workers see little hope for higher paychecks, and while they are increasingly searching for new jobs, they expect fewer offers to fall into their laps.

Survey respondents on average said in July that the lowest annual salary they would accept in a new job would be $57,960, down from $59,660 only four months earlier. This measure has declined since November, with most of the changes coming from older and higher-income Americans.

Asked what salary they expected in job offers over the next four months, the average response declined to $50,790 from $54,590 when the last survey was taken in March. The survey, conducted since early 2014 but published for the first time on today, also showed 22.7 percent of respondents searched for a job in the last four weeks, up from 19.4 percent in the previous report. Young people accounted for most of the increase.

The respondents saw a 22 percent likelihood of receiving at least one job offer in the next four months, down from an average response of 25 percent eight months ago.

Trump will speak this evening at 6 p.m. about “the path forward” for US strategy in Afghanistan and South Asia. He is expected to authorize about 4,000 more U.S. troops for counter-terrorism missions as part of a new military strategy in Afghanistan. After 16 years of stuttering war in Afghanistan, the Taliban has returned to its strongest level since 2001.

His plan comes just days after he fired his chief strategist, Steve Bannon, a vehement voice against sending more troops to Afghanistan, and the architect of Trump’s “America First” policy of limiting foreign engagement to situations where the US can benefit directly.

Tomorrow, Trump travels to Phoenix for a campaign rally at the Civic Center. Trump has said he is seriously considering a pardon for former Maricopa County Sheriff Joe Arpaio, who was found guilty of criminal contempt for defying a judge’s order in a racial profiling case.

Even without an announcement of a pardon, the visit could roil grievances and rallying cries after a week of protests in major cities across the country. Both Trump supporters and opponents are planning to demonstrate outside the rally, fueling police concerns about potential clashes.

The Washington Post reports the Trump administration has decided to disband the federal advisory panel for the National Climate Assessment, a group aimed at helping policy makers and private-sector officials incorporate the government’s climate analysis into long-term planning.

The Post said the charter for the 15-person Advisory Committee for the Sustained National Climate Assessment was due to expire Sunday. On Friday, National Oceanic and Atmospheric Administration acting administrator informed the committee’s leader that the agency wouldn’t renew the panel. The next National Climate Assessment is due for release next year.

A bit of hopeful news out of Washington today. Senate Majority Leader Mitch McConnell insisted the government will raise the debt ceiling and avoid defaulting on its debt. Treasury Secretary Steven Mnuchin has called for Congress to pass a bill to increase the borrowing limit by the end of September.

By then, the Treasury will have exhausted its so-called extraordinary measures to continue its borrowing authority and risks defaulting on its debt. The Treasury secretary has called for a “clean” debt-ceiling increase, meaning lawmakers would not attach spending cuts or other provisions to it.

Some conservatives, particularly in the House, have previously tried to pair measures to raise the debt ceiling with spending cuts. Mnuchin said the debt ceiling was his top priority when lawmakers return from recess next month.

Sempra Energy has placed a bid to buy Oncor for $9.45 billion in cash after majority owner Energy Future Holdings abandoned a deal to sell the Texas-based power transmission company to Warren Buffett’s Berkshire Hathaway. This represents a rare blow to Buffett, who avoids bidding wars for companies and had swooped in two months ago to buy Oncor after Texas regulators blocked two previous attempts by Energy Future to sell it.

Energy Future, which has been in bankruptcy since 2014, had initially planned to seek court approval today for the sale of Oncor to Berkshire for $9 billion over opposition from its biggest creditor, hedge fund Elliott Management. Instead, Energy Future will go with Sempra because of the value of the bid, a lower break-up fee and, most importantly, support from Elliott.

San Diego-based Sempra said it expected to own about 60 percent of a reorganized Oncor after it completes the transaction, which is valued at $18.8 billion, including debt. Energy Future owns 80 percent, but Sempra plans to sell some of that equity to other outside investors. A hearing on the revised reorganization plan and creditor support agreement was set for Sept. 6.

Total is buying Maersk’s oil and gas business in a $7.45 billion deal which the French energy major said would strengthen its operations in the North Sea and boost earnings and cash flow. For Danish company A.P. Moller Maersk, the sale of Maersk Oil, with reserves equivalent to around 1 billion barrels of oil, fits with a strategy of focusing on its shipping business.

Fiat Chrysler shares jumped almost 7% today after Great Wall Motors confirmed that it is interested in acquiring at least part of the company. The interest focuses on Fiat’s Jeep and Ram brands of off-road vehicles and trucks. Reports surfaced recently that a Chinese automaker was interested in placing a bid for the brands. Fiat Chrysler said in a statement it has not yet been approached by the Chinese automaker.

Johnson & Johnson was ordered by a California jury to pay $417 million to a woman who claimed she developed ovarian cancer after using the company’s talc-based Baby Powder. The Los Angeles Superior Court jury’s verdict is the largest to date in lawsuits alleging J&J failed to adequately warn consumers about the cancer risks of talc-based products.

The verdict included $70 million in compensatory damages and $347 million in punitive damages. It followed 5 trials in Missouri state court; Johnson and Johnson lost 4 of those trials, resulting in more than $300 million in verdicts against J&J. The company says it will appeal today’s verdict.

Today was the big solar eclipse. And it was probably a grand experience for people in the path of totality. Not such a big deal in Arizona, where we just had a partial eclipse. Hopefully, you did not try to look directly at the sun, unless you had special eyewear.

The pictures of the eclipse were great. My favorite is a picture taken in Wyoming, showing the moon covering about half the sun, and if you look closely, perfectly timed images show a tiny International Space Station passing in front of the sun. That must be one of the all-time great photobombs.

Many people did try to take pictures. And you may have noticed something strange. Your photos probably show the sun blown out in a blaze of light — not the crescent shape of a partial eclipse. But in some photos, a crescent did appear; it was just far from the actual sun and maybe looked blue. The effect is called a “lens flare,” which happens when a camera is exposed to a bright light.

In response, the lens captures some of the light as a reflection. Lens flares generally show up as little dots or circles, but during an eclipse they appear as small crescents. If you were hoping to capture what the eclipse looked like from your location, the crescent reflections that come out as lens flares are actually a pretty good representation. They are similar to the projections you might have seen through leaves or pinhole cameras.

And if you missed this eclipse or can’t wait to do it again, don’t worry. The next one is only 2,422 days away, April 8, 2024.

Financial Review

Thirst for Innovation

Sinclair Noe — March 24, 2015

 

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DOW – 104 = 18,011
SPX – 12 = 2091
NAS – 16 = 4994
10 YR YLD – .03 = 1.88%
OIL + .06 = 47.51
GOLD + 3.90 = 1194.20
SILV – .04 = 17.04

The Labor Department reports the consumer price index climbed by a seasonally adjusted 0.2% last month. Gasoline prices rebounded in February. Higher costs for food, housing and new cars also contributed to the increase. Still, there’s been zero overall inflation in the last 12 months, mainly because of the big drop in gas prices. If food and energy are excluded, so-called core consumer inflation has risen at a 1.7% rate over the past 12 months.

In February energy prices rose 1%. Gasoline price are still down almost 33% in the past year. Food prices moved up 0.2% last month, bringing the increase over the past 12 months to 3%. Shelter costs also rose 3% in the past year. The cost of medical care fell in February for the first time since 1975, although overall health-care costs were unchanged.

Now, the reason the CPI number is important is because the Federal Reserve last week shifted from being patient about raising interest rates to being data dependent about hiking rates, and the data they are focusing on is inflation and jobs. Although the Fed uses a different index as its preferred price gauge, the central bank views 2% inflation as healthier for the economy. The key to the inflation data is that much of the disinflation is the result of lower oil prices, and the Fed thinks this is temporary; prices will move higher, probably later in the year.

San Francisco Fed president John Williams says the Fed should hike rates mid-year. Speaking in Sydney, Williams suggested economic conditions in the US were “downright good.” He added he believed, “We will be starting to raise interest rates this year and we will be moving them gradually over the next couple of years to more normal levels.” Meanwhile, St. Louis Federal Reserve President James Bullard speaking in London today said he is concerned about the mismatch between the markets and the central bank’s expectations for the first interest-rate increase, warning it could end with a “violent” reaction in the financial market. And by violent reaction he means something like the taper tantrum of 2013.

Sales of new single family homes rose 7.8% in February to a seasonally adjusted annual rate of 539,000 units, the highest level since February 2008. The regional results were unusual, to say the least; and likely influenced by bad winter weather. Sales last month soared 152.9 percent in the Northeast, but fell 12.9 percent in the Midwest. Sales in the South jumped 10.1 Sales fell 6.0 percent in the West.

Meanwhile, the S&P/Case-Shiller report on existing home sales finds prices were up 4.5% in December compared to a year ago. The report said average home prices in the 10 and 20 cities covered are back to levels last seen in autumn 2004, but are still down between 16% and 17% from their peaks set in mid-2006. All 20 cities on the index saw prices rise in December, with the fastest pace of increase reported in Denver and the slowest in Las Vegas. All cities also saw prices accelerate year-over-year, led by a 9.3 percent price jump in San Francisco and an 8.4 percent increase in Miami.

US troops will remain in Afghanistan. Today president Obama granted Afghanistan’s request to slow the drawdown of troops; that means 9,800 troops will stay through the end of the year; then troop size will be re-assessed for 2016; then the plan is to be out by 2017. Under a previous plan U.S. forces were to have been cut to about half of the current level of just under 10,000 by the end of 2015. But U.S. officials said improved relations with Afghan leaders contributed to a revision of the plan. The thinking is that the new government in Kabul needs to get a little stronger. And there is also the prospect of peace, which sounds farfetched, but Pakistan is putting pressure on the Taliban to negotiate with the government in Kabul or else lose the havens they enjoy on the Pakistan side of the border. Of course policy can reverse quickly in that corner of the world, but after 13 years, it isn’t just America that is war weary.

Broadband internet service providers hate net neutrality; they fought it tooth and nail, but more than 4 million people wrote to the FCC in favor of neutrality and the FCC ruled to regulate ISPs like a utility. No surprise then that the broadband providers are now challenging net neutrality in the courts. The first challenge was just filed by USTelecom, a trade group; more legal challenges will follow, but the FCC hasn’t even published the new rules in the Federal Register.

On the USTelecom website they claim that broadband is critical for the US economy; they compare the investment in broadband to the great government investments in the interstate highway system and the Apollo moon shot; and they don’t seem to deny that 75% of the nation consumers have only one choice for high speed internet service – essentially a monopoly. So, they think of their industry as a utility; they just want to be the utility that gets to self-police, decide their own rules, and decide their own punishment if they break their own rules. The big argument is that they have spent a lot of money on broadband; and they think the service is pretty good. But it isn’t.

Downloading a high-definition movie takes about 7 seconds in Seoul, Hong Kong, Tokyo, Zurich, Bucharest and Paris, and people pay as little as $30 a month for that connection. In Los Angeles, New York and Washington, downloading the same movie takes 1.4 minutes for people with the fastest Internet available, and they pay $300 a month for the privilege. The divide is not just with the fastest plans. At nearly every speed, Internet access costs more in the United States than in Europe. American Internet users are also much more likely than those in other countries to pay an additional fee, about $100 a year in many cities, to rent a modem that costs less than $100 in a store. And if you would like to download that movie in 7 seconds at one-tenth the cost, forget about it. The cable companies have the technology, but they have no reason to upgrade their systems because they have no competition. It’s not like most people have an option of a different carrier. Let the lawsuits begin.

The UN has issued a report claiming that the world could suffer a 40 percent shortfall in water in just 15 years unless countries dramatically change their use of the resource.

Many underground water reserves are already running low, while rainfall patterns are predicted to become more erratic with climate change. As the world’s population grows to an expected 9 billion by 2050, more groundwater will be needed for farming, industry and personal consumption. The report predicts global water demand will increase 55 percent by 2050, while reserves dwindle. If current usage trends don’t change, the world will have only 60 percent of the water it needs in 2030.

Water shortages could lead to problems in so many ways: crops could fail, ecosystems could break down, industries could collapse, disease and poverty could worsen, and violent conflicts over access to water could become more frequent. The report calls on policymakers and communities to rethink water policies, urging more conservation, recycling of wastewater, and finding ways to make water-intensive sectors more efficient and less polluting. One of the more controversial ideas is to raise the price for water. Factors driving up demand for water include increased meat consumption, larger homes, transportation, and basically most of the perks we associate with a middle-class life.

Population growth and increased urbanization also contribute to the problem. Water demand tends to grow at double the rate of population growth. The global population is expected to grow to 9.1 billion people by 2050, up from the current 7.2 billion. More people living in cities also put strain on water supplies. The report estimates that 6.3 billion people, or about 69% of the world’s population, will be living in urban areas by 2050, up from the current 50%. Currently, about 748 million people worldwide have poor access to clean drinking water.

And the problem is right in our own backyard, or more specifically next door. California is in its fourth drought. Despite occasional rainfall this winter, water-supply conditions in California have grown more dire. Reservoirs are woefully low, and the snowpack in the Sierra and groundwater levels are at or near historic lows. The senior water scientist at NASA’s Jet Propulsion Laboratory in Pasadena wrote in the Los Angeles Times this month that the state has only about one year of water left in its reservoirs. One year. And groundwater is being pumped so rapidly for agriculture in the Central Valley that the land in some areas is literally sinking at the rate of a foot or more per year. This summer many fields will be left fallow.

Last week, California Governor Jerry Brown approved a $1 billion emergency drought package, but more than $700 million of that money will actually go toward flood control, food assistance and the protection of wildlife habitat. The State Water Resources Control Board will tighten water restrictions, which will limit lawn watering to twice a week, and restaurants should not serve water unless a customer asks for it and hotels should give guests the option to decline fresh towels and sheets every day. Even the water board’s chairwoman described the restrictions as “quite modest.” But modest policy could give way to desperate policy if the drought continues. And even if the drought were to end tomorrow, there will be extended droughts in California’s and the entire Southwest’s future. As it stands now, water policy won’t help much.

It is often said that necessity is the mother of innovation. For the past 20 years, some of the brightest minds in the world have converged on California, many have tried to answer the question of how to get more clicks for an online advertisement. I think their focus is going to change quickly.

Monday, July 07, 2014 - Small Steps

Financial Review with Sinclair Noe

DOW – 44 = 17,024
SPX – 7 = 1977
NAS – 34 = 4451
10 YR YLD - .03 = 2.62%
OIL - .67 = 103.39
GOLD - .50 = 1321.00
SILV - .10 = 21.15

 

It was a long holiday weekend that was over way too fast. And the problems of the world haven’t gone away. Let’s get caught up on some of the big stories.

In Iraq, the situation is deteriorating. There had been muted hope for some sort of an inclusive government to hold the country together. Don’t count on it. Iraq’s new parliament has called a recess and they won’t meet again for 5 weeks. So Iraq is now politically paralyzed. Meanwhile, a Sunni Islamist insurgency killed an army general near Baghdad.  It looks like Prime Minister Maliki is digging in his heels, raising the risk that Iraq will fragment along ethnic and sectarian lines.

ISIS, the Sunni insurgents are holding territory in western Iraq and just north of the capitol. The Iraqi military, backed by Shi'ite militias and volunteers, has yet to take back any major cities but is trying to advance on Tikrit. Kurds in northern Iraq have taken advantage of the chaos to expand their autonomous territory in northern Iraq. Most Sunnis and Kurds walked out of the last parliament, saying they believed the prime minister and president should be chosen along with the speaker as a package, not one at a time. They could not resolve the impasse, so the acting speaker postponed the meeting.

In eastern Ukraine, pro-Russian rebels built barricades in the streets of Donetsk and it looks like they will try to make a stand. Although most shops and businesses in Donetsk were still open, some were shut, and residents are concerned that government forces could soon attack. Rebels have been barricaded into government buildings in Donetsk, which they declared capital of an independent "people's republic", but until now the city mostly functioned normally.

You may recall there was an election in Afghanistan last month. They announced preliminary results today. The losing presidential candidate is now saying the results of the election were improperly counted and he is describing it as a “coup” against the people. His rejection of the election results sets the stage for a possible bloody standoff between ethnic groups or even secession of parts of the fragile country, which is already deeply divided along tribal lines. The vote to pick a successor to Hamid Karzai was intended to mark the first democratic transfer of power in Afghan history, a crucial step towards stability as the US prepares to withdraw the bulk of its troops by the end of the year. Not so great.

Hamas stepped up rocket fire at southern Israeli towns and Israel called up reserve troops today in anticipation of a possible escalation of hostilities. Hamas has vowed revenge for what it saw as Israel's deadliest attacks in which six Palestinian militants died, though Israel denied any involvement. The surge in violence has raged since the kidnapping and killing of three Israeli youths last month and a Palestinian teen last week. Israel said more than 40 rockets were launched as militants' funerals were held in Gaza. Thirty struck inside Israel and the rest were shot down by rocket interceptors. Air raid sirens wailed as far north as the outskirts of Tel Aviv and Jerusalem.

And then there’s Chicago, where the Fourth of July holiday resulted in widespread violence that left 80 people wounded and 14 dead.

On the economic calendar, Alcoa will kick off the earnings reporting season after the close of trade tomorrow. Alcoa has long held the ceremonial role for starting earnings season because it was in the Dow Industrials and it had the ticker symbol AA. Alcoa is no longer one of the Dow 30 stocks, but the tradition holds. Actually, we’ve already seen about 25 companies from the S&P 500 report earnings.

Second-quarter profit growth is expected to come in at 6.6% for the Standard & Poor’s 500-stock index, which would be an improvement over the 5.6% growth in the first three months of 2014. Revenues are expected to grow 3%. While negative second-quarter profit warnings have outpaced positive ones by a 4.2 to 1 margin — well above the 2.6 to 1 negative-to-positive ratio since 1995 — the future outlooks from CEOs are far more bullish than the first quarter, when there were nearly 7 negative profit pre-announcements for every positive one.

With stocks at all-time highs and no longer cheap after a five-year bull run, Wall Street wants to see companies deliver profit and revenue growth in the coming second-quarter earnings season sizable enough to warrant the market’s big move. Indeed, the bull market’s continued health will hinge on vibrant corporate profitability. Whether or not stocks continue trending higher will likely depend on second-quarter earnings reports, as well as management’s guidance of full-year earnings.

Currently, the S&P 500 is trading at nearly 16 times its estimated earnings over the next four quarters, which is a tad above the long-term average. Heading into the season, analysts are upbeat, with more analysts’ raising profit forecasts than lowering them for the first time since the first quarter of 2012, but more upbeat analysts could result in a more downbeat market reaction.

On Wednesday, the Federal Reserve will release the minutes of its last meeting, held June 17-18. Wall Street will again be looking for any clues related to the timing of the first interest rate hike by the Fed. After the strong jobs report Thursday, some Wall Street firms revised their rate-hike timetables, warning that rates could start rising earlier-than-expected next year. However, the Fed might not be so positive about jobs. There’s been concern about the degree to which a falling unemployment rate is overstating labor-market strength.  You’ll likely see general agreement that the labor market has been improving, but there will be difference in opinion about the drop in the unemployment rate. Officials have also been eyeing tepid wage growth.

That’s one of the strange things about the jobs report; it does a poor job of measuring the strength of the jobs created. When we try to measure performance in the stock market, we don’t look at the number of new stocks available to investors, instead we measure the price of the stocks, the value of the stocks. But when we look at jobs, we don’t look at the value those jobs bring. One of the things we’ve seen is that many of the jobs being created are part-time.

So, it's interesting that the recent news of job market "improvement" doesn't mention that of the 10 occupation categories projecting the greatest growth in the next eight years, only one pays a middle-class wage. Four pay barely above poverty level, and five pay beneath it, including fast food workers, retail sales staff, health aids, and janitors. The job expected to have the highest number of openings is "Personal Care Aide" – taking care of aging baby boomers in their houses or in nursing homes. The median salary of an aid is under $20,000.

We’re starting to see some improvement as the job market gains traction; more than half the jobs the economy has added so far this year are in positions that pay higher than the hourly wage. Some 58% of the new jobs created in 2014 pay above the average hourly wage of $24.45. By contrast, about 48% of the new jobs created in 2013 paid above the national average. Businesses in 2014 are hiring more white-collar employees, construction is on the mend (at least compared to the first quarter), health care is going strong and even the long-downtrodden financial industry is finally getting into the act. About 42% of the new jobs, meanwhile, fall into categories that pay less than the average wage.

Still there is a general lack of upward wage pressure; workers demanding more money as the labor market improves and the pool of potential employees shrinks. Wages have risen just 2% over the past year and weekly wages have actually fallen in the past two months. Part of the problem is part-time work; part of the problem is that the good paying jobs are limited to certain sectors. The bigger problem is that the increase in the number of jobs is not translating to higher wages and that, in turn does not translate to faster economic growth.

This week’s economic calendar also includes reports on small businesses, job turnover, and consumer credit. There was a 10.2% surge in consumer credit in April. The growing dependence on debt could prolong consumer spending a few more months, but in the absence higher real wages, this type of consumption cannot last much longer, certainly not if we see both gas prices and inflation-driven interest rates edge higher later this year.

It’s unlikely we’ll get any big pronouncements from the Fed. They probably talked about how the economy has rebounded from the terrible slump of the 1^st quarter, but if you read the minutes for any major move on interest rates, don’t hold your breath. Neither short-term nor long-term rates will go significantly higher in the next few years. More likely, modest increases that might even be quickly reversed. The implications of another extended period of depressed rates would be bad news for savers and pension funds, but it should help the stock market.

After the Fed’s June meeting, they made clear that they expected to finally begin lifting their benchmark rate in 2015, if the economy continues to expand and unemployment continues to decline. Even so, 12 of the 16 members of the policy committee expected the Fed's rate to be no higher than 1.5% by the end of 2015 — a full 18 months from now. Asked for their rate prediction for the end of 2016, the majority of the Fed panel expected 2.5% or less. And because the Fed's rate influences all other interest costs, that would suggest still-low rates across the board.

What we are learning about this version of the Fed is they move slow and in small steps.

Tuesday, May 27, 2014 - Currently Trending Here

Financial Review with Sinclair Noe

DOW + 69 = 16,675
SPX + 11 = 1911
NAS + 51 = 4237
10 YR YLD - .02 = 2.52%
OIL - .24 – 104.11
GOLD – 29.20 = 1264.30
SILV - .40 = 19.14

The S&P 500 Index closed at another record high. The Dow Industrial Average is just a little below the May 13 record of 16,715. The Russell 2000 index of small and mid-caps confirmed the uptrend. The Russell had been lagging and there was a concern that small caps might drag the blue chips lower. While the Russell is still down about 2% year to date, on Friday it moved above its 200 day moving average.

Any time the market is trending, it makes sense to look for divergences, or any indicator that might signal a change in trend, but the most important thing to watch is still the trend itself; in other words the market scorecard is measured in price. And right now the trend is up.

Let’s start with some economic news. The S&P/Case-Shiller Home Price Indices continued to show gains in prices for existing home sales; the 10-city composite was up 0.8% and the 20-city composite was up 0.9% month over month; and respective year over year gains of 12.6% and 12.4%. Nineteen of the 20 cities showed positive returns in March; New York was the only city to decline. As of March 2014, average home prices across the United States are back to their mid-2004 levels. Measured from the 2006 peaks, home prices are down 19%.

Mortgage rates started rising in May 2013 as the market speculated about when the Federal Reserve would start pulling back on its large scale asset purchase program, at the same time inventories of new and existing homes dropped, pushing prices higher and affordability was pushed down. One positive for home sales is that mortgage rates have recently dropped with the average 30 year fixed at 4.14% and the average 15 year fixed mortgage at 3.25% the lowest levels since last October.

The Conference Board said its consumer-confidence index rose to 83 in May from a downwardly revised 81.7 in April. The survey shows 20% of respondents expect their incomes will improve in the next 6 months; that doesn’t sound like much but it’s the highest reading since 2007. Other key elements of the survey: A net 18.2% said jobs were hard to get vs. being plentiful, compared with 19.8% in April and 26.5% in May 2013. Those who plan to buy a home within six months fell to 4.9% in May, the lowest since July 2012; that compares with a percentage of 5.6% in April. Those who plan to buy major appliances within six months fell to 45.1%, the lowest since September 2011.

Durable goods orders increased 0.8% in April. Durable goods are products designed to last 3 years or longer; so this is a broad category that includes everything from toasters to cars to nuclear submarines. In April, the Navy inked a $17.6 billion contract for 10 nuclear-powered attack submarines; and while that will be money that will circulate through the economy over several years, it skewed the report. Non-defense capital goods orders fell 1.2%. Business are placing fewer orders while working through a stockpile of goods amassed in the second half of 2013. Last month, durable goods inventories rose 0.1% after increasing 0.2% in March.

The Memorial Day holiday signals the unofficial start of summer and the summer driving season, and that usually equates to higher gasoline prices at the pump. Usually, but not always. According to the Energy Information Administration, prices at the pump are going to fall from today’s levels. This forecast is based on increased crude-oil production and declining global demand.  Rising oil production has boosted US crude-oil inventories to some 398 million barrels. That’s the highest level since way back in 1931. Demand is down, in large part because of better fuel efficiency forced by government MPG mandates. Demand has been declining since 2007. In many areas, gas prices are the lowest since 2011. Each penny decline in gasoline puts $1 billion back into people’s pockets.

Speaking in Portugal today, European Central Bank President Mario Draghi warned that prices in the countries in the euro zone's stressed periphery were falling too sharply, due to the combination of belt-tightening and a high exchange rate. He also cited evidence of a debt trap in stressed countries: the cost of finance for many companies has risen since the crisis, while falling prices mean they can't generate the profits to service their debts. Draghi said that the share of viable small businesses that can't get a loan is only around 1% in Germany or Austria, but around 25% in Spain and 33% in Portugal; Draghi called this imbalance a “credit gap” and blames it for up to a third of the economic slack in the crisis economies and acting as a brake on economic recovery. And so Draghi says the ECB will take action June 5th to ward off deflation and support economic recovery; what precisely will be done is still a matter of speculation.

It is widely anticipated the ECB will cut interest rates combined with an attempt to boost credit to small and medium sized businesses by providing long-term funding to banks provided they deploy that capital to expand business credit. The main lending rate will likely be cut from 0.25% to 0.1% or so. Meanwhile, the deposit rate paid to banks on overnight deposits will likely be cut from zero to a negative 0.1% or so, in effect charging the banks for funds they leave with the central bank.

The Federal Trade Commission has issued a report on the data brokerage industry. The nine data brokers examined in the FTC report were Acxiom, CoreLogic, Datalogix, eBureau, ID Analytics, Intelius, PeekYou, Rapleaf and Recorded Future. Data brokers analyze data collected about consumers to make automated assumptions about them. Consumers are placed in data-driven social and demographic groups for marketing purposes. The commission says that the same data that identifies a motorcycle enthusiast could both get him a discount on a biking magazine and make it easier to charge him more for car insurance. Another way to look at this is that the consumer is not the customer, rather the consumer is the product.

And yes, the data brokers know whether you drive a motorcycle, or smoke cigarettes, or if you are overweight, and how many bathrooms you have in your home, and if you travel or just like to read magazines about travel; that’s all in addition to the basics like name, address, social security number, age, and the bluntly termed “ability to afford products”.

According to the FTC, the firms have done a great job of finding data to crunch. One firm has information on 1.4 billion consumer transactions; another one adds 3 billion new records to its databases each month. While the report doesn’t address credit scores, the framework of the debate is much the same. What really worries the FTC is the impossibly opaque way the data is collected and managed. The data brokers gather their data from other data brokers rather than directly from an original source.

This is where the commission thinks the government should get involved. It suggests a law that would mandate the creation of a centralized portal where data brokers explain themselves, disclose their sources, and give people the opportunity to opt out; or for more sensitive data, require consumers to opt in before data could be sold. The commission hints it might call for some version of the idea that people have a right to have some things be forgotten, but they don’t actually recommend that data brokers cull their data, even when that data may be very old and inaccurate. And there is talk, but nothing concrete, about giving consumers access to their own data, and the ability to call for some of that data to be corrected or deleted.

President Obama today outlined a plan to withdraw all but 9,800 American troops from Afghanistan by the end of the year and withdraw the rest by the end of 2016. Under his plan, 9,800 US troops would remain behind into next year. By the end of 2015, that number would be reduced by roughly half. By the end of 2016, the U.S. presence would be cut to a normal embassy presence. The United States now has about 32,000 troops in Afghanistan.

At some point in the next week, President Obama is expected to announce Environmental Protection Agency mandated cuts intended to reduce carbon pollution by regulating carbon dioxide emissions from about 600 existing coal fired power plants. Obama could not get Congress to take action to address climate change during his first term, so he changed his tack and is using his executive authority under the 1970 Clean Air Act to issue the EPA regulation.

As currently drafted, the rule would cut greenhouse-gas emissions from the utility sector by 25%, the individuals said, but the baseline for that reduction has not been finalized. The EPA plan resembles proposals made by the Natural Resources Defense Council, which would allow states and companies to employ a variety of measures, including new renewable-energy and energy efficiency projects “outside the fence,” or away from the power plant site, to meet their carbon- reduction target.

Usually when the EPA regulates pollutants under the Clean Air Act, the agency sets an emission limit for each facility. By contrast, under a “mass-based system,” which the EPA is poised to adopt, states would have to meet an overall target for greenhouse-gas emissions and ensure that power plants either make those reductions at their facilities or finance efforts to achieve them in other ways, such as conservation or “green” generation or possibly through some variation of the cap and trade system.