Financial Review

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Sinclair Noe — November 16, 2016

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DOW – 54 = 18,868
SPX – 3 = 2176
NAS + 18 = 5294
10 Y – .40 = 45.41
OIL – .02 = 2.22%
GOLD – 3.40 = 1225.00

The Dow Jones Industrial Average had posted record closes for four straight sessions, before hitting the pause button today. Still, the Dow is up about 8.25 percent year to date, outperforming the S&P 500 and the Nasdaq composite, which were up 6.6 percent and 5.8 percent for the year, respectively.

The last two times the Dow outperformed the S&P and Nasdaq in a year when all three were higher year to date were in 2006 and 1996. If the Dow can break 19,000 it would likely just keep running higher. Based on market data from the past 30 years, when the Dow has crossed levels like 2,000, 3,000, 4,000 – all the way to 18,000, we can expect traders to push it up even higher.

The trend is true not just for a quick one-week return, but also one-month and one-quarter returns. If nothing else, a move through a thousand-point level attracts attention, encouraging more people to jump on board. Of course, we’re not there yet, and it is a probability, not a guarantee.

The producer price index was unchanged in October. The PPI measures inflation at the wholesale level. Higher costs of natural gas and gasoline were offset last month by declines in prices of food as well as services such as financial advice and hospital outpatient care. Still, some modest inflationary pressure is building.

Wholesale costs have risen 0.8% in the past 12 months. That’s the strongest one-year change since the end of 2014. A separate measure that strips out the volatile food, energy and trade margin categories is rising at an even faster rate. So-called core producer prices have climbed 1.6% in the past 12 months, the fastest pace in two years.

Industrial production was unchanged in October after a big drop in output as warmer-than-normal temperatures reduced the demand for heating; utility output dropped 2.6%. Manufacturing output edged up 0.2%, while mining output jumped 2.1% higher, its best performance since March 2014.

The National Association of Home Builders’ index was steady was unchanged at 63 in November. Any reading over 50 indicates improvement.

A measure of mortgage application activity fell to a 10-month low as 30-year mortgage rates jumped to their highest levels since January. Borrowing costs to buy a home and to refinance posted their steepest weekly increase since June 2013. Interest rates on 30-year fixed-rate mortgages with conforming loan balances of $417,000 or less averaged 3.95 percent, which was up from 3.77 percent the previous week and the highest since January

Federal Reserve Bank of St. Louis President James Bullard said there’s a chance the US economy could get a medium-term boost if President-elect Donald Trump increases infrastructure spending and reforms taxes. Bullard said a “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting.” Prices of federal funds futures contracts indicate investors see a more-than 90 percent probability the U.S. central bank will hike when officials meet Dec. 13-14.

Not everybody expects a Trump boost for the economy; Bill Gross, manager of the Janus Global Unconstrained Bond Fund, writes: “There is no new Trump bull market in the offing. Investors must drive with caution, understanding that higher deficits resulting from lower taxes raise interest rates and inflation, which in turn have the potential to produce lower earnings.” Gross writes many of the policies Trump favors represent the status quo – and a Clinton administration would have been no better. “Neither party as they now stand has bold policies beyond the reach of K Street lobbyists.”

So far, the Trump transition team does not seem particularly concerned about a transition team staffed heavily with lobbyists from energy, agriculture, transportation, and banking. Meanwhile, Senate Republicans voted to keep Mitch McConnell of Kentucky as the majority leader. Democratic senators elected Chuck Schumer of New York as minority leader.

Now, it is important to remember that Bill Gross is a bond guy; and while stocks have enjoyed record highs since the election, bond prices have tanked. The bond market largely believes Trump’s policies can lead to economic growth at the expense of deficit spending and inflation. And with bond prices dropping, volatility in the bond market has surged. Fixed income markets and equity markets are following completely different narratives after the election.

So, the question is which one is right. And the answer might be that they are both wrong. Stocks are probably overbought and bonds are probably oversold, and that can continue to play out in the near term. The most like course is a reversion to the mean. But absent equilibrium, Gross makes a good point about inflation and higher rates eventually dragging stocks lower.

But the market has not yet determined a clear direction. On Monday, something very rare happened: more than 300 issues on the New York Stock Exchange advanced to new 52-week highs, and more than the same number of issues fell to new lows. It happened for the first time ever.

The number of stocks setting new 52-week highs should normally outnumber those setting new lows (and vice versa,) reflecting some uniformity and clarity of direction. However, a wide dispersion between new highs and lows is not seen as a good market indicator. The high number of stocks making new highs and lows at the same time show that this is a confused market.

Snapchat, the messaging service, has filed to go public in one of the most eagerly anticipated market debuts of 2017. Snapchat is aiming for a valuation of more than $30 billion, which would make it the third-most-valuable technology company at the time of listing, after Alibaba and Facebook.

Snap, the parent company, aims to have shares trading as soon as March. Its last round of financing came in May to the tune of $1.8 billion, which valued the company at around $17.8 billion. Snapchat accounts for 32 percent of social network users in the United States, it’s only getting 2.3 percent of social network ad dollars.

No one questions Snapchat’s ability to engage its users. But turning that engagement into money is another story.

Amazon for the first time has filed lawsuits against counterfeit sellers, after several businesses voiced concern that knockoffs were killing their sales and endangering consumers. Amazon has increasingly relied on third-party sellers to fuel its growth, but opening its website brought with it a greater chance for fake goods to enter its warehouses.

Twitter has launched a counteroffensive against trolls who have been on the attack for too long. The company is expanding its “mute” function, allowing users to block specific content – like words, phrases or conversations – from appearing in their notifications section. The damage to Twitter’s reputation caused by abuse and harassment was reportedly one of the factors that swayed Salesforce against buying the platform earlier this year.

Seeking to ease concerns over its largest ever deal, Microsoft has offered concessions to EU antitrust regulators over its $26 billion bid for LinkedIn. The European Commission, which will rule on the deal by Dec. 6, did not provide details. It’s expected to seek feedback from rivals and customers before deciding whether to accept the concessions, demand more, or open a full investigation.

EU antitrust regulators are set to fine HSBC, JPMorgan and Credit Agricole by the end of the year for rigging financial benchmarks linked to the euro. Charges were levied in May 2014 against the three banks, which denied wrongdoing. Deutsche Bank, RBS and Societe Generale admitted guilt in December 2013, while Barclays avoided a fine because it alerted the European Commission.

Despite years of delays, the SEC has finally approved a plan to introduce a vast surveillance system to oversee trading on the US stock market, in response to the 2010 “Flash Crash.” The creation of a Consolidated Audit Trail will establish a regulatory central database and monitor every trade order, execution, modification and cancellation in real-time.

Boeing will cut 500 jobs over four years and shut two plants as it revamps its defense and space unit. The company also said it would create a new global operations group that would include its defense units in Australia, Saudi Arabia, and UK. Boeing’s defense, space and security business accounted for 31.4% of the plane maker’s total revenue of $23.9 billion in the latest quarter.

During his campaign Donald Trump singled out Ford by name, calling on the American car manufacturer to stop sending jobs to Mexico and threatening to slap tariffs on any cars imported from south of the border. Ford CEO Mark Fields says Ford still intends to move small car production to Mexico, but he hopes to work openly with the new president and Congress.

The Fiesta Bowl has a new sponsor for this year’s game, and not a moment too soon. Six weeks before the Fiesta serves as one of 2016’s two College Football Playoff semifinals, the game is now the PlayStation Fiesta Bowl.

Financial Review

Do Computers Dream of Algorithmic Capitulation?

Sinclair Noe — August 28, 2015

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DOW – 11 = 16,643
SPX + 1 = 1988
NAS + 15 = 4828
10 YR YLD + .02 = 2.19%
OIL + 2.71 = 45.27
GOLD + 8.30 = 1134.80
SILV + .08 = 14.70

The week roared in like a lion and left like a lamb. For the week, the Dow gained 1.1 percent, the S&P rose 0.9 percent and the Nasdaq added 2.6 percent. Go figure. Panicked selling on Monday and Tuesday gave way to a rush to buy on Wednesday and Thursday.  And for many investors, it was just too much. Equity funds saw $29.5 billion head for the exits, the largest weekly outflow on record. On Tuesday, investors pulled out $19 billion, the biggest single day for outflows in the past 8 years.  Some traders would call that “capitulation”, a sign of a bottom in the markets.

The chaos of this week’s markets appeared to hit smaller investors especially hard, leaving yet another dent in their stock market confidence. The Monday flash crash resulted in smaller investors being locked out of their online accounts. Strange glitches appeared. Exchanges spit out the wrong prices for widely held funds. For example, the SPDR S&P Dividend ETF dropped 33% in 15 minutes, then shot right back up 30 minutes later, while the stocks tracked by the ETF never fell that far.

The QQQ, which tracks 100 of the biggest Nasdaq stocks, dropped 17% in a matter of minutes. The shares of the 100 companies that make up the PowerShares QQQ did not drop 17 percent. There is about $2 trillion held in 1,411 exchange traded funds in the US. Monday’s flash crash raised an interesting question: how difficult would it be to liquidate those ETFs in a period of stress?

The crash also raised questions about whether the exchanges offer a fair playing field. You probably already know the answer. So far we have heard next to nothing from the Securities and Exchange Commission. What we really saw was a market failure. A playing field heavily tilted toward High Frequency Traders and tilted away from the average investor. Some traders see the outflows as capitulation, but most Mom and Pop investors likely just rode it out; if you own Starbucks, you probably did not sell when it dropped 26%; first you probably didn’t realize it; second, you probably couldn’t log on to trade it.

And so most of the outflow can likely be attributed to the institutional investors and algorithmic traders; those folks, or maybe we should say “those machines”. Gillian Tett of the Financial Times wrote: “these machines are being programmed to link numerous market segments together into trading strategies. So when computer programs cannot buy or sell assets in one segment of the market, they will rush into another, hunting for liquidity.”

In Asia: Chinese shares rallied for a second day and the yuan gained the most since April on speculation authorities took several more steps to prop up equities. During this week’s wild ride, China became the epicenter of a global selloff, with a five-session crash starting last Thursday triggering steep losses in U.S. and European stocks – only to be followed by surges. The Shanghai Composite index closed the session up 4.9%, paring its loss for the week to just over 10%.

So far the situation in China has not lead to credit contagion, just volatility that spread globally. Of course the really big risk of extreme volatility in the markets comes from the possibility that the High Frequency Traders and the market makers and their algorithms just freeze up; and we saw some of that on Monday. Then the circuit breakers kicked in, and things normalized. But here’s where it gets tricky. When all those ETFs couldn’t figure out pricing, it was really a pretty simple problem; check the prices of the stocks in the basket, recalculate, and then reset the prices. Remember that ETFs are a very basic form of derivatives; a fund derived from the valuations of a basket of stocks.

For every market and every index, there are derivatives, and most of them are much more complex than a simple basket of stocks, and they are still largely unregulated. Remember back in 2008, when the derivatives trading unit of AIG collapse? AIG executive Joe Cassano had the famous quote that is was difficult to imagine “a scenario within any kind of realm of reason that would see us losing a dollar in any of those transactions.” And then of course, AIG collapsed when its credit default swaps defaulted and the financial world learned that they couldn’t cover their bets, and the government came to the rescue with a $180 billion bailout for AIG.

Now you may think that this problem was cleaned up following the near global financial meltdown of 2008; Dodd-Frank reform was supposed to make derivatives trading more transparent, but that didn’t happen. Wall Street firms successfully lobbied to have a huge loophole inserted into the Dodd-Frank Act that enables them to evade regulations on swap agreements. Now traders and firms can shift the location of the swaps to places like London and avoid the oversight that was supposed to be provided by Dodd-Frank. The trading affiliates of the largest banks remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

The U.S. derivatives market has shrunk but remains large, with outstanding contracts worth $220 trillion at face value. And the top five top banks account for 92 percent of that. US banks are still trading derivatives as vigorously as ever. But their trades, booked through London affiliates, do not carry any credit guarantees, meaning that when the next credit contagion hits, they won’t be forced to pay off; meaning that all the financial institutions that purchased derivatives as a hedge against extreme volatility, kind of like what we saw on Monday; they don’t actually have insurance.

The final read of consumer sentiment was revised lower for August, to 91.9 from a preliminary tally of 92.9 and a July reading of 93.1. That was the first reading since the market turmoil.

Total incomes rose 0.4 percent in July for a fourth month.  Consumer spending increased 0.3 percent in July, matching the prior month’s gain. Because spending increased less than incomes, the saving rate rose to 4.9 percent from 4.7 percent. Today’s Commerce Department report also showed inflation remained tame. The personal expenditure index, or PCE, increased 0.1% from the prior month and was up 0.3 percent from a year earlier. The core price measure, which excludes food and fuel, also rose 0.1 percent from the prior month and was up 1.2 percent from July 2014, the smallest year-to-year gain in four years. Inflation hasn’t reached the Fed’s 2 percent goal since April 2012.

So what’s on the menu at Jackson Hole? The Federal Reserve’s annual economic policy conference kicked off late last night, and will run through Saturday. Fed policymakers have, in the past, used the conference to telegraph changes in monetary policy. In the past couple of days, we have heard from NY Fed President William Dudley, who seems split between hiking or waiting; KC Fed President Esther George is predictably hawkish; Minneapolis Fed President Narayana Kocherlakota is predictably dovish.

With Fed Chair Janet Yellen skipping the conference we probably won’t hear anything definitive, traders will be watching for signals about the likely timing of an interest rate increase from Vice Chairman Stanley Fischer. Today Fischer was playing it close to the vest, saying the Fed is watching the situation in China, but also acknowledging that the US economy has shown signs of strength.

There is little doubt that the Federal Reserve’s efforts to prop up the stock market since the 2008 financial crisis through monetary stimulus measures, like buying up government bonds and other assets, better known as quantitative easing, or QE, helped fueled one of the longest bull runs in history. But those who predict a cratering of the market with the cessation of QE have, so far, been proven wrong. At most, the market rally slowed, but it did not crater. The market anticipation of the end of QE, a taper tantrum, was far worse than the actual end of QE. We may be seeing something similar now.

And while QE and Zero Interest Rate Policy were certainly important parts in the market recovery from 2008, they were not the only parts, and it is probably misleading to make a direct connection when trying to gauge where the S&P 500 is headed or why it might go in a particular direction. In short, an interest rate hike in the not-too-distant future is not off the table.

Crude prices were up again today after bouncing back from six-and-a-half-year lows on positive U.S. growth numbers, recovering equities markets and reports of an emergency OPEC meeting. On Thursday, oil saw its biggest one-day bounce since 2009 with North Sea Brent and U.S. light crude rising more than 10%, tacking on 6.3% today. WTI crude posted its first weekly gain in nine weeks, ending its longest losing streak since 1986.

Carl Icahn has set his sights on mining company, Freeport-McMoRan. The stock surged almost 30% after announcing plans to cut spending and production, and lowering its 2016 capex budget by 29% from its $5.6B estimate issued in July. After the closing bell, Carl Icahn disclosed an 8.46% active stake in the company, sending shares up another 10% in after-hours trading. In a new 13D filing, Icahn said he plans to engage with Freeport McMoRan management and may seek board seats.

“For the first time ever, one billion people used Facebook in a single day – one in seven people on earth,” – that according to a blog post from CEO Mark Zuckerberg. With 1 billion users this past Monday, the 12-year-old company has become an online community that is bigger than the population of every country on the globe except China and India. Facebook has 1.49 billion average monthly users, and said it had an average of 968 million daily users in June.

I guess we really are all in this together.

Financial Review

Sheepish Algorithms

Sinclair Noe — July 14, 2015

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DOW + 75 = 18,053
SPX + 9 = 2108
NAS + 33 = 5104
10 YR YLD – .03 = 2.40%
OIL + .84 = 53.04
GOLD – 2.70 = 1155.80
SILV – .13 = 15.48

The stock market posted its first 4-day winning streak since January. The S&P 500 last week fell as much as 4 percent from its all-time high, and has since recovered to trade within 1 percent of its record set in May. The S&P 500 and the Dow are up 3 percent over four sessions, while the Nasdaq Composite has added 4 percent.

The United States and other world powers reached an agreement with Iran that calls for limits on Tehran’s nuclear program in return for lifting economic sanctions that have crippled Iran’s economy, enabling the oil-rich nation to ramp up its energy exports, access international finance and open the doors to global investors. Full implementation of the agreement will likely take months and is contingent on the pace at which Iran meets its obligations. The deal will keep Iran from producing enough material for an atomic weapon for at least 10 years and impose provisions for inspections of Iranian facilities, including military sites.

Oil prices initially dropped when the Iran deal was announced, but then prices climbed higher. The oil markets were not surprised by the news announcement, and a deal was clearly already priced in; and it will take some time before Iran has a big impact on supplies. Iran doesn’t have great reserves of crude oil supplies to throw on the market. Tehran has stored around 25 million barrels of oil mainly consisting of condensate.  Iran will have to invest heavily in infrastructure; they will need to attract investment, sign commercial contracts and figure out the other logistics needed with producing and exporting oil. If the deal holds, look for Iran to deliver more supplies by 2016, possibly pushing prices lower. Even so, this represents opportunities for the Big Oil firms like ExxonMobil, Total, Royal Dutch Shell; also, oilfield service companies like Schlumberger, Halliburton, and Weatherford; also tanker companies; also big banks should do well with financing deals, but only the biggest banks such as JPMorgan, Goldman Sachs, and Morgan Stanley.

The director of international affairs at National Iranian Oil Company, said, “We will try to maximize our crude export capacity to Europe and restore 42 to 43 percent share in the European market before the sanctions were imposed.” This is an interesting sidebar. Since the Russian invasion into eastern Ukraine, Europe has been dealing with the threat of Russia cutting oil and nat gas. Iran now steps up as an alternate energy source. Iran holds the world’s fourth-largest proved crude reserves and the second-largest natural gas reserves. So, Europe might be a winner in today’s announcement. The bottom line is that today’s announcement means the oil market will be over-supplied for a long time.

Prime Minister Alexis Tsipras appears to be facing open rebellion in his coalition as he attempts to push creditor reforms through Greece’s parliament ahead of Wednesday’s deadline. With dozens of MPs in Syriza threatening to defect, Tsipras will need the support of the opposition to pass the €86 billion-euro package, putting the future of his government in doubt. Meanwhile, Athens missed another payment due to the IMF late Monday. The Greek deal does not include debt relief, and this might be its fatal flaw. The other flaw is continued insistence on austerity, which has not worked. Austerity measures are primarily aimed at shrinking debt as a proportion of a country’s economic output, a measure known as the debt-to-GDP ratio. Even if total debt is reduced, the debt-to-GDP ratio can rise because gross domestic product shrinks in tandem. So, Greece still faces the same problems they faced a month ago – their debt burden is unsustainable.

In the first meeting with investors since calling its $72 billion debt pile “not payable”, Puerto Rico said it was still premature to discuss how creditors would be affected, but made the case for a restructuring. Puerto Rico bonds are held by many U.S. investors, who bought the securities because they’re tax-exempt nationwide and offered higher yields than comparable debt.

After a month-long rollercoaster ride, China’s stock market is showing some signs of stabilizing, suggesting Beijing’s bundle of support efforts are having the intended impact. Last week, Chinese officials allowed more than half of all listed companies to suspend their shares from trading and prohibited major stakeholders from selling at all, pushing the Shanghai market up 13% Thursday and Monday.  Chinese stocks are down 24% from their mid-June peak.

China accounted for 38 percent of the global growth last year, up from 23 percent in 2010. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa. If China slows down, the demand for industrial commodities goes down. That can have a huge impact on the global economy.

Retail sales fell an unexpected 0.3% in June as consumers pulled back on car, home and clothing purchases. It was the first drop in monthly retail sales since February and comes after an uptick in May initially pointed to a stronger spring. May retail sales were revised lower, however, to an increase of 1% from an initial 1.2% estimate.

Households cut spending on a variety of goods and services, including cars, clothes, home furnishings, and dining out. Americans also spent less online and shelled out less cash at do-it-yourself and building-materials suppliers. The decline in auto sales was expected because dealers had already posted lower sales after a huge month in May, but the rest of the report was disappointing. Only department stores, consumer-electronics outlets and gasoline stations posted sold sales gains; and the improvement at gas dealers owed mostly to higher fuel prices last month. If gas stations are stripped out, retail sales fell an even sharper 0.4%.

The prices the U.S. paid for imported goods fell a seasonally adjusted 0.1% in June, marking the 11th decline in the past 12 months. Excluding fuel, import prices declined by 0.2%.  In the past 12 months import prices have dropped 10%, mostly because of a lower oil costs. Import prices are down a smaller 2.3% excluding fuel in the same span.

U.S. homes are today less likely to be in the foreclosure process than at any time since the Great Recession started. According to Corelogic, about 1.3% of all mortgaged homes were in the foreclosure process in May — the smallest share since the end of 2007, when the downturn started.

Small-business owners weren’t cheerful about economic conditions in June. The National Federation of Independent Business’s monthly small-business optimism index dropped 4.2 points to 94.1, the lowest point of the year so far. Small-business owners said they planned to spend less and had weak expectations for sales and business conditions. Small-business owners were less optimistic about the prospect of making new hires, investing in their business or expecting growth in June. The report concludes that, “While this is not a recession signal, it is a clear sign that economic growth on Main Street is not set for a strong second half.”

Earnings reporting season kicks into high gear this week. This morning JPMorgan Chase reported earnings that beat estimates. Wells Fargo reported profits that matched estimates, but revenues that missed. Johnson & Johnson posted better-than-expected second quarter profit and adjusted its full year outlook higher. CSX reported profit rose 4.5% during its latest quarter, though falling coal volume weighed on revenue, which retreated 5.5%. Yum Brands posted better than expected results, mainly on the strength of international sales.

Also this week, look for reports from Intel, Google, Netflix, GE, Bank of America, Goldman Sachs, and Citigroup – just to name a few.

China’s Tsinghua Unigroup has submitted a $23 billion bid to buy out U.S. memory-chip maker Micron Technology; it works out to a 19% premium over Micron’s closing price on Monday. Tsinghua Unigroup, China’s largest state-owned chip-design company, already has several links to major U.S. companies. It acquired a controlling stake in Hewlett-Packard’s China networking-equipment unit in May. Intel bought a 20% stake in Tsinghua Unigroup last year for $1.5 billion. Micron, based in Boise, Idaho, is the last remaining U.S. maker of the widely used chips known as dynamic random access memory, or DRAMs. It is No. 2 behind Samsung Electronics in that market, and makes flash memory used to store data in mobile devices such as smartphones. Look for the Department of Justice to intervene in this deal.

Remember the flash crash in the Treasury market back on October 15^th? Actually, it was a melt-up in prices that sent the yield on the 10-year Treasury from 2.19% down to 1.86% in a matter of minutes. The US government released its report on the day’s dramatic swings. The main culprit – algorithms. Primary trading firms accounted for more than 50 percent of the total trading volume in both cash and futures markets for US Treasuries on Oct. 15. That proportion is not unusual, according to the report, but what is remarkable is their level of activity on the day. Most of their trading is done almost automatically by computers running algorithms. As trading began to heat up, these algorithms essentially fed on each other, causing the amount of “self-trading” undertaken between different arms of the same PTF firms to increase. The computers performed like so many sheep, just following the herd. The problem might have been worse, if humans hadn’t stepped in, some simply pulled the plugs on their trading machines and order was restored.

Tuesday, May 06, 2014 - Quickly Aging Here

Financial Review with Sinclair Noe

DOW – 129 = 16,401
SPX – 16 = 1867
NAS – 57 = 4080
10 YR YLD  - .02 = 2.59%
OIL + .38 = 99.86
GOLD – 1.80 = 1308.90
SILV - .04 = 19.65

There was a pretty broad selloff on Wall Street today. AIG posted lousy earnings late yesterday, and today they dragged down most of the financials. Twitter proved a drag on the tech stocks. Twitter reached the 6 month expiration of a lock-up period that had restricted sale of about 82% of its outstanding stock. Share prices dropped about 18% today, but home prices in Silicon Valley are likely to move a bit higher in the next month. After the close, Disney posted better than expected earnings.

Let’s start with economic data; the trade deficit narrowed in March, down 3.6% to $40.4 billion. March exports came in at about $193 billion and imports were around $234 billion, resulting in a $40 billion shortfall. Exports are 17% above the pre-recession peak, while imports are about 1% above the pre-recession peak. Exports of capital goods, industrial supplies and materials, and automobiles increased in March. Exports of services hit a record high, while those of non-petroleum goods were also the highest on record. Exports to Canada, South Korea and Germany all touched all-time highs in March. Imports of food and non-petroleum products hit record highs in March.

Last week we saw the estimate for first quarter gross domestic product showing 0.1% growth; that estimate worked with an assumption that the trade deficit for March would come in at $38.9 billion, not the $40.4 billion reported today. So, this implies that the GDP number could be re-estimated by two-tenths, which would mean a negative -0.1% GDP for the first quarter, or maybe just a bit worse. There will be other data considered in the final GDP number, but it now looks like a negative number. And most economists are calling for a bounce back in the second quarter.

Corelogic reports home prices nationwide, including distressed sales, increased 11.1% in March 2014 compared to March 2013. This change represents 25 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased 1.4% in March 2014 compared to February 2014.

Excluding distressed sales, home prices nationally increased 9.5% in March 2014 compared to March 2013 and 0.9% month over month compared to February 2014. So, home price increases are slowing, and this might also prove a drag on GDP, but it doesn’t necessarily mean the housing market is in the dumps. One of the bright points in the report is that there are fewer distressed sales, that means there is also less inventory, and there is less negative equity.

A separate report from Black Knight Financial, a mortgage research firm finds the number of mortgages on which lenders initiated foreclosure in March fell to the lowest level in more than 7 years. Banks initiated foreclosure on 88,000 properties in March, down more than 27% from a year ago, and well below the high of more than 316,000 in March 2009.

Foreclosures should continue to trend down because the share of mortgages that are behind on their payments is also declining. Around 2.1% of all loans were in some stage of foreclosure in March, the lowest level since late 2008, and another 5.5% of all borrowers were 30 days or more past due on their loans but not yet in foreclosure, the lowest since late 2007. Both of those are still well above pre-crisis levels but they are down sharply from a few years ago.

Growth in the services sector accelerated in April, rising at the fastest pace in eight months as new orders jumped and overall activity quickened by the most since early 2008. The ISM said its services sector index rose to 55.2 in April from 53.1 in March, topping expectations for a read of 54.1. The data provides further evidence that economic activity is regaining momentum after lagging through much of the winter.

Today is the anniversary of one of the scariest days in market history. On May 6, 2010, the Dow plunged nearly 1,000 points in a matter of minutes in what became known as the flash crash. The crash wiped out $1 trillion in wealth in the blink of an eye, only to recover, kinda, sorta. High-frequency computerized trading was believed to at least be part of the cause of the technical breakdown. And the regulators have not figured it out to this day, and yes it could happen again.  

Last week, SEC Chair Mary Jo White testified before Congress that the markets were not rigged. Today, the SEC announced they have sent out subpoenas demanding records from brokerage companies to try and figure out how customers’ orders are routed, and how firms are being paid for order flow. The good news is the SEC is investigating; the bad news is that dark pool and high frequency trading has been going on for years and the SEC appears totally clueless.

Institutional Investor released its Rich List, a list of the 25 top income generating hedge fund managers. David Tepper of Appaloosa Management topped the list with $3.5 billion in earnings. Second on the list was Steven Cohen of SAC Capital, who might have fared better if his firm hadn’t been guilty of insider trading. Just for reference, $3.5 billion works out to $400,000 an hour.

I also ran across an article that puts the Fed’s QE into perspective. The Federal Reserve has spent approximately $3.2 trillion in the post-Crisis era, with most of the money being dropped from helicopters hovering over Wall Street banks. The Fed mainly bought Treasuries and mortgage backed securities, but they could have mailed a check for $10,223 to every person in the US; they could have bought back all the US debt owned by China, Japan, and Belgium; they could have created 12.8 million jobs in 2009, each paying $50k a year, and still be making payroll for them today – which actually would have met their mandate. And that’s just based upon large scale asset purchases under QE; by some estimates the Fed has dished out my than $17 trillion to prop up the financial order. A trillion here, a trillion there, pretty soon it adds up to real money.

The Census Bureau released a report on the demographic makeup of the US; the population is aging rapidly; about 1 in 5 Americans (21%) will be 65 years old and up by 2050, compared with just 13% in 2010 and less than 10% in 1970. It sounds like a lot of old people, but it seems less so when compared with other countries. In 2050, around 40% of Japan’s population will be 65-plus, up from 24% in 2012. In Germany, Italy, Spain, and Poland over 30% will be 65 plus. China will have about 26% of its population over the age of 65, which amounts to more old people in China than the entire population of the US.

The concern with an aging population is that there will be a much slower economy: less spending, less saving, lower economic output, and slower growth; fewer working age people paying taxes, less money going into social programs like Social  Security and Medicare, and more money coming out of those programs. But the Census report also finds that the working age population will increase, mainly due to immigration.

The White House today released the 2014 National Climate Assessment, written by 300 climate experts and reviewed by the National Academy of Sciences. The full report, at more than 800 pages, is the most comprehensive look at the effects of climate change in the US to date. Don’t worry, they also provided a Cliff Notes version that weighs in at a mere 137 pages, thereby killing fewer trees. The short and sweet is that we’re all going to fry; it’s too late, climate change is here and now, and it will just get worse and worse.

Average temperatures in the US have increased 1.3 degrees to 1.9 degrees Fahrenheit (depending on the part of the country) since people began keeping records in 1895, and about 80% of that warming has come in the past 20 years. The period from 2001 to 2012 was warmer than any previous decade on record, across all regions of the country. And it will keep getting hotter. If we really get very serious about cutting emissions, temperatures will rise by 3 to 5 degrees, depending on location, over the next 80 years; if we keep going the way we’re going, temperatures will rise 5 to 10 degrees, and maybe by 15 degrees in some places. That means 115 degree days in the desert southwest could be 125 to 130 degrees.

In addition to extreme heat, you can add wildfires, and drought, and hurricanes, and extreme downpours – real gulley washers, plus rising sea levels. The report says that in much of the US, especially the Midwest and Northeast, more rain is falling in short-duration, heavy bursts, leading to more flooding. The Northeast and Midwest may continue to get wetter, while the Southwest becomes even more parched, raising water supply and energy concerns there.

The report warns the Southwest to prepare for major disruptions ahead due to climate change: "Increased heat and changes to rain and snowpack will send ripple effects throughout the region’s critical agriculture sector, affecting the lives and economies of 56 million people –- a population that is expected to increase 68% by 2050, to 94 million. Severe and sustained drought will stress water sources, already over-utilized in many areas, forcing increasing competition among farmers, energy producers, urban dwellers, and plant and animal life for the region’s most precious resource."

The report says the Southwest will be plagued by drought, which is not really uncommon, but the droughts will be hotter and drier and longer and will lead to a big increase in wildfire activity, which has already started to take place.

The report notes that American society and its infrastructure were built for the past climate, not the future. It highlights examples of the kinds of changes that state and local governments can make to become more resilient. One of the main takeaways is that you don't want to look at the weather records of yesteryear to determine how to set up your infrastructure.