Financial Review

Applesauce

Sinclair Noe — June 25, 2015

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DOW – 75 = 17,890
SPX – 6 = 2102
NAS – 10 = 5112
10 YR YLD + .02 = 2.39%
OIL – .57 = 59.70
GOLD – 2.10 = 1173.90
SILV – .04 = 15.94

The Supreme Court ruled to save subsidies for as many as 8 million people under the Affordable Care Act. In the case of King v. Burwell, justices determined that the subsidies should be available in states that don’t have their own exchanges. The court determined that the broader context of the ACA allows subsidies to all those under the Obamacare program. Justices voted 6-3 in favor of upholding the subsidies with Chief Justice John Roberts and swing vote Justice Anthony Kennedy joining the majority.

Obamacare, technically titled The Affordable Care Act, gave states the option to build their own healthcare marketplaces or simply use one operated by the federal government. In all, 34 states decided to rely on the federal “exchange.” And about 8 million low- to moderate-income Americans are now receiving subsidies of on average $260 a month through the federal exchange. But in a lawsuit challenging the law, critics insisted the federal government is not allowed to subsidize insurance in states that rejected their own exchange for the federal system. Those critics based their argument on a single phrase in Obamacare that refers only to participants enrolled through an exchange “established by the State.” The court finds that the act’s tax credits are available in states that have the federal exchange rather than merely in states that created state exchanges.

Yes, the term “established by the State” is ambiguous, but in the end—after taking a whack at the ACA for “more than a few examples of inartful drafting”, chief justice Roberts wrote: “The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral.” Quoting the 2012 Obamacare challenge: “Without the federal subsidies … the exchanges would not operate as Congress intended and may not operate at all …” And Roberts notes, “It is implausible that Congress meant the Act to operate in this manner.”

And then Roberts concluded: “In a democracy, the power to make the law rests with those chosen by the people. Our role is more confined—“to say what the law is.”’ Which is kind of an admission that the Supremes could not figure out a way to turn the applesauce back into apples. The simple reality is that almost 11 million people have signed up for Obamacare and about 8 million are getting subsidies, which means they would likely not get healthcare without Obamacare; that’s nearly 11 million people with contracts; and those contracts represent something of definite value. Talk about a potential legal hot mess. Talk about killing off Obamacare is now moot.

President Obama held a press conference after the decision was announced, and he said: “This law is working, and it’s going to keep doing it.” Like it or not, the comment was pretty much a straightforward factual statement.

The Supreme Court also issued a ruling on “Texas Department of Housing and Community Affairs v. The Inclusive Communities Project”; in a 5-4 decision they determined plaintiffs can file suit under the Fair Housing Act for practices that have a discriminatory effect, even if the accused wasn’t purposely discriminating. The case dealt with low income housing which was built primarily in low-income, predominantly black neighborhoods. Texas may not have enacted this policy explicitly to keep blacks segregated from whites, but under the disparate impact claim which the court just affirmed, the effect of this decision perpetuated segregation.

The ruling affirms that the law forbids “disparate impact” discrimination—that is, discrimination that is race-neutral on the surface but racist in practice. Justice Anthony Kennedy wrote the majority opinion; he explains that the Fair Housing Act, as originally written made it unlawful to “refuse to sell or rent … or otherwise make unavailable or deny, a dwelling to a person because of race.” So, in that regard, the law bars both racist intent and racist consequences.

But wait, there’s more. The Supreme Court still has five big cases to announce in the next couple of days. Here’s a rundown of what’s left to settle:

In a landmark decision, the court will confront two questions. The first is whether states can ban same-sex marriage. The second is whether states must recognize same-sex marriages performed legally in other states.

The justices must also decide a challenge to the drug protocol several states use by to execute inmates. The case is from Oklahoma, and it looks at the mix of drugs used and whether the drugs inflict cruel and unusual pain.

The court could give thousands of federal prisoners new hope and potentially hamstring prosecutors in ruling on a federal law that sets mandatory minimum sentences for federal firearms offenders who already have three convictions for “violent felonies.” At the heart of this case is the vagueness of the term “violent felonies”.

Three cases being considered together ask the court to force the Environmental Protection Agency to consider the economic cost of complying with regulations limiting emissions from power plants before it issues any rules. The government argued that the Clean Air Act made no reference to costs when it required the EPA should to adopt “appropriate and necessary” emissions rules. Above and beyond that argument, there is another question of the true economic cost of emissions from power plants.

The court will also decide an issue that goes to the very founding of the U.S.: Who controls the creation of congressional districts? Arizona voters passed a constitutional amendment in 2000 stripping the Legislature of the power to draw districts and giving it to an independent redistricting commission. It’s meant to avoid “gerrymandering” — the habit of legislators to draw bizarrely shaped districts that give their parties’ candidates the best shot at winning. The Legislature went to court, pointing out that Article I of the Constitution specifies that “the times, places and manner of holding elections for Senators and Representatives shall be prescribed in each state by the legislature thereof” — and that only Congress, not state bodies, can change that.

In economic news: Consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items. Consumer spending rose a seasonally adjusted 0.9% in May. The amount consumers spent in April and March was also a bit stronger than initially reported. Personal income increased by 0.5% for the second straight month. The sharp uptick in spending in May, however, required Americans to draw down their savings. The personal savings rate fell to 5.1% from 5.4%.Despite a stronger labor market, households still aren’t spending as much as they normally do. Consumer spending has risen at modest 3.6% in the past 12 months, though lower gasoline prices has had something to do with that.

The number of people who applied for unemployment benefits in the period running from June 14 to June 20 rose by 3,000 to 271,000. Initial jobless claims have been under the key 300,000 level for 16 straight weeks, the longest stretch since 2000-2001.

The Census Bureau has issued a report on changes within the American populace between April 2010 and July 2014. America is becoming more diverse, and youthful. Ninety-five percent of population growth over the past year came from minorities, and millennials now outnumber baby boomers. Millennials, Americans born between 1982 and 2000, are 44.2 percent minority, a larger amount than previous generations. They also now outnumber Boomers by 7.7 million (83.1 million Millennials compared to 75.4 million Boomers). That actually isn’t anything new; Millennials have outnumbered Boomers for a long time; and part of it depends on what years you count to define Millennials. If you count 1980 to 2004, there are more than 104 million Millennials.

The majority of US children under age 5 are minorities; 50.2 percent are part of any ethnic or race group besides non-Hispanic white. By 2060, more than half of the American population will be a racial or ethnic minority. Migration seems to be a normal part of American life. The tendency to migrate is highest for young adults. However, in the ages following retirement (commonly around 65), we see another spike in migration.

The standoff between Greece and its international creditors was extended into the weekend, just days before Athens has to meet a crucial debt deadline which could decide whether it goes bankrupt and gets kicked out of the euro currency club. A key meeting of Eurozone finance ministers broke up without agreement on Greece’s rescue package.

Executive compensation is supposedly  geared toward results, but some CEOs still got massive pay packages in 2014 even though their investors didn’t do so well. Notables: Viacom’s Philippe Dauman +19.2% to $44.3M (shareholder return -6.6%); GE’s Jeff Immelt +88.4% to $37.3M (shareholder return -6.7%); Boeing’s James McNerney +24.1% to $28.9M (shareholder return -2.5%); IBM’s Virginia Rometty +38.5% to $19.3M (shareholder return -12.4%).

Monday, June 23, 2014 - Calm Before the Storm

Financial Review with Sinclair Noe

DOW – 9 = 16,937
SPX – 0.26 = 1962
NAS + 0.64 = 4368
10 YR YLD un = 2.62%
OIL  - .13 = 106.04
GOLD + 3.60 = 1319.30
SILV + .02 = 21.00

The economic data today from the National Association of Realtors shows existing home sales picked up in May. Total sales rose 4.9% to 4.89 million units from an upwardly revised 4.66 million in April. While that marks a month to month increase, sales are down from the 5.15 million level of May one year ago.  Total housing inventory increased 2.2% in May. Unsold inventory is 6% higher than a year ago.

Meanwhile, Markit's US Flash manufacturing PMI report for June, increased to 57.5 from 56.4 in May.

The stock market has drifted slightly higher over the past couple of months. Yes we hit record highs last week, but the movement has been very slow, volume has been light, and volatility is almost non-existent. Volume is down about 50% since 2008. The VIX, or volatility index, sometimes known as the fear index, is down below 12, which means that the only people in the options market are all maxxed out on Ambien, or Valium. The S&P 500 hasn’t had a daily move of 1% in more than 2 months. Russia invades Ukraine – wake me when it’s over. Radical militants threaten to tear apart Iraq – we’ve seen this story before. The US economy is weak right now but growth is right around the corner – rinse, lather, repeat. The US plays Portugal in the World Cup and it’s a tie, of course.

The Federal Reserve looked at monetary policy and cranked up the old Xerox to publish their statement. Maybe this is the result of all that Federal Reserve fiddling; maybe they have created the boring stock market, which lulls everyone into a false sense of complacency. Of course, that’s not how markets work, no matter how much central bank finesse is applied. Markets are risky, always have been, always will be. I think it’s safe to say this is the calm before the storm, because there is always a storm in the markets.

There was some merger activity today. General Electric struck a deal to acquire France-based Alstom's power business for $16.9 billion after a lengthy pursuit. There was another utility deal, Wisconsin Energy announced a deal to acquire Integrys Energy for $9.1 billion. Oracle also announced a deal to acquire MICROS Systems for $4.6 billion.

The price of oil has been one of the few markets to show movement, which is not good news for drivers. Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given the recent jump in oil prices, gasoline prices are poised to increase in coming weeks. Higher prices at the pump serve as a tax on consumers, whose purchasing power is still questionable. It’s estimated that an increase of $10 a barrel subtracts 0.4% from real GDP growth. Of course, for that to apply, the price increase has to stick.

The Supreme Court is in session and today they ruled on limiting the Environmental Protection Agency’s power to regulate facilities that emit carbon dioxide. The decision would reduce the number of carbon-emitting facilities the EPA can regulate, but it is a limited ruling, and even Justice Scalia said: "It bears mention that EPA is getting almost everything it wanted in this case."

Meanwhile a statement from the EPA claims victory, "The Supreme Court’s decision is a win for our efforts to reduce carbon pollution because it allows EPA, states and other permitting authorities to continue to require carbon pollution limits in permits for the largest pollution sources." Industry groups, such as the American Petroleum Institute, also claimed victory. The group said in a statement that the decision was a "stark reminder that the EPA's power is not unlimited."

The decision won't have a huge impact on US climate policy, as the decision only modestly changed the number of large facilities subject to certain permitting requirements. It also won't affect the Obama administration’s proposal to reduce emissions from power plants, which is a separate program.

When the EPA classifies something (like carbon dioxide) as a harmful pollutant, it triggers a number of legal requirements under the Clean Air Act. One of them, known as a "prevention of significant deterioration" (PSD) rule, requires factories, power plants, and other large facilities to get the EPA's approval before they make changes that would lead to higher pollution. These facilities also must use the "best available control technology" to reduce the effects of pollution they emit. Another provision requires any facility that is a "major source" of pollution to get a permit from the EPA.

Under the Clean Air Act, facilities become subject to these regulations if they emit more than 250 tons (or in some cases as little as 100 tons) of pollution per year. Traditional pollutants such as sulfur dioxide or lead can be harmful even if they are only emitted in trace amounts, so a relatively low threshold makes sense. Only large factories and power plants emit that much of these conventional pollutants.

But carbon dioxide is different. Factories produce vastly more carbon dioxide than other pollutants regulated by the EPA. Under existing rules, about 15,000 facilities are required to get permits under the Clean Air Act based on their emissions of non-carbon pollutants. If the EPA had used the same 250-ton threshold for carbon dioxide emissions, 6.1 million facilities would suddenly have needed permits. The agency estimated it would cost $21 billion per year just to process all that paperwork.

So the agency effectively re-wrote the law, exempting facilities that emitted less than 100,000 tons of carbon dioxide from getting a permit. Several states and business groups challenged this decision, arguing that the EPA had no authority to unilaterally re-write the law.

Almost everyone agrees that a literal reading of the Clean Air Act would lead to madness. The EPA has warned that "decade-long delays in issuing permits would become common, causing construction projects to grind to a halt nationwide." The Supreme Court didn't want that to happen.

But a majority of the court, led by Justice Scalia, also didn't like the EPA's approach. The court said that if Congress set a threshold of 250 tons, the EPA can't just unilaterally change it to 100,000 tons. Instead, the court's majority held that the term "air pollutant" can have different meanings in different parts of the Clean Air Act. While the "Act-wide definition" of air pollutant includes carbon dioxide, Scalia wrote, "EPA has routinely given it a narrower, context-appropriate meaning" in certain parts of the Clean Air Act. Scalia used the same trick to avoid subjecting millions of facilities to burdensome permitting requirements. He held that the definition of "air pollutant" didn't include carbon dioxide in sections of the Clean Air Act where including it would lead to a vast expansion in regulation.

The court's four liberals, led by Justice Stephen Breyer, preferred a different approach. Rather than selectively interpreting "any air pollutant" to exclude carbon dioxide, Breyer would instead have interpreted another phrase in the same section of the law, "any source" to exclude power plants that produce only modest amounts of carbon dioxide.

Two of the court's conservatives, Samuel Alito and Clarence Thomas, wrote a separate opinion arguing that the Supreme Court had been wrong to push the EPA into regulating carbon dioxide in the first place in 2007.

While the EPA can't impose regulations on new power plants based on their carbon dioxide emissions, the court ruled that the courts can regulate the carbon dioxide emissions of facilities that are already subject to regulations based on their emissions of conventional pollutants. So the EPA will still do what the EPA does; it’s estimated that 83% of greenhouse gas emissions that could potentially be regulated under the Environmental Protection Agency's interpretation of the law would still be covered as a result of the ruling, compared with the 86% of emissions that the EPA says it wants to regulate.

What today’s ruling really shows is that Congress has been out of touch and dysfunctional in dealing with pollution and climate change; rather than deal with issues, they stick their heads in the sand and hope the problem goes away, but it doesn’t; it simply shifts to another part of government that may or may not manage to resolve the problem, but in either case, is not held accountable to the voters; and then finally, if the problem persists, it goes to the courts. It’s a bad way to make and enforce laws.

A couple of other cases today: in Loughrin v. US; the court declined to reduce the scope of a federal criminal law against bank fraud, ruling that prosecutors do not need to prove that defendants intended to defraud a bank. The decision came in an appeal brought by Kevin Loughrin, who was convicted of six counts of bank fraud for stealing checks that he then altered so he could buy merchandise at Target stores.

Loughrin told police he meant to buy the items using the checks, then return the items for cash refunds. He was charged with using altered checks totaling $1,184.  Loughrin appealed his conviction. He argued that the bank fraud statute required prosecutors to prove that he intended to defraud the banks on which the checks were drawn. He said his intent was only to deceive Target. In other words, this was run of the mill fraud, and the use of a check was incidental. Loughrin did not appeal his related convictions for identity theft and possession of stolen mail. Between 2006 and 2010, the government sought to prosecute nearly 3,000 cases using the statute. Meanwhile, no major bankers have gone to jail for the crimes associated with the financial crisis; I’m just saying.

One more decision today: New Jersey wanted to institute legalized gambling on football, passing a law that the NFL and other sports leagues quickly fought in court.  The NFL won (as it often seems to do in court) at the federal appellate level, forcing New Jersey to take the case to the Supreme Court. The Supremes declined to review the case, so if you are in New Jersey, or any other state except Nevada, you’ll have to continue to call your bookie, or you can play fantasy football in a league set up through the NFL’s website.