Financial Review

The Streak Ends

Sinclair Noe — February 28, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW – 25 = 20,812
SPX – 6 = 2362
NAS – 36 = 5825
RUT – 21 = 1386
10 Y – .01 – 2.36%
OIL – .13 = 53.92
GOLD – 4.30 = 1248.80

After 12 straight record high closes, the Dow Industrials finally posted a losing session. No milk and cookies today. It was the best run of record highs since 1987.

After topping out at 103.82 on January 3, the US dollar has weakened against a basket of its peers, pulling back into the 100 area. Dollar weakness is good news for the multinationals that dominate the S&P 500. Stocks rallied right after the election, bonds sold off for roughly the same reasons.

Yields on the benchmark 10-year Treasury note rose to a high of 2.64% in the middle of December (yields move opposite to prices) – reflecting expectations for faster growth, but in the past month buyers returned to bonds, pushing yields down as low as 2.32% and today finishing at 2.36%.

The rally in bonds might be explained by recent headlines that Trump’s proposed stimulus plans will take longer to implement than previously expected and that the stimulus will be less expansionary than first thought. Today, the market paused ahead of President Trump’s address before Congress; and the markets will be looking for specifics with specific timelines.

President Trump speaks to a joint session of Congress tonight, where investors hope for more details on the administration’s plans for tax reform, deregulation and infrastructure spending. The future of the Affordable Care Act could also be a subject, as well as updates on the Border Tax Adjustment.

Trump said he believes the extra $54 billion dollars he has proposed spending on the US military will be offset by a stronger economy as well as cuts in discretionary spending. Still to be answered – what will be cut, and how will the military spend an extra $54 billion, and how will it be accounted for.

Today, Trump signed an executive order that asks new EPA Administrator Scott Pruitt to begin the long process of repealing the Clean Water Rule (also known as the “Waters of the US rule”) and replacing it with… something else. Here’s the catch: Rolling back this rule won’t be easy to do.

By law, Pruitt must go through the years-long federal rulemaking process and replace the Obama-era regulation with his own version – and then defend it in court as legally superior. And, as Pruitt’s about to find out, figuring out which bodies of water deserve protection is a maddeningly complex task that could take years and years.

Gross domestic product increased at a 1.9 percent annual rate, per the Commerce Department’s second estimate for the fourth quarter, confirming the estimate published last month. Output increased at a 3.5 percent rate in the third quarter. The economy grew 1.6 percent for all of 2016, its worst performance since 2011, after expanding 2.6 percent in 2015.

Consumer spending was revised from 2.5 percent to 3.0 percent. Economic data early in the first quarter has been mixed, with retail sales rising in January but home-building and business spending on capital goods easing.

The US trade deficit for goods widened in January, as Americans snapped up consumer goods made abroad. The advance look at the trade deficit widened 7.6% to $69 billion. Imports widened by $4.4 billion while exports fell by $400 million. Imports of consumer goods jumped 4.8% in January and climbed 7.8% over 12 months.

The S&P/Case-Shiller 20-city index rose 5.6% in the three-month period ending in December compared to a year ago, up from a 5.2% annual gain in November. The broader national index rose 5.8% for the year in the December period, the strongest gain in 30 months.

In December, the hottest markets were again in the West. Seattle prices rose 10.8% compared to a year ago. In Phoenix, home prices rose 0.2% in December, and 4.9% compared to a year ago.

The Conference Board’s survey of consumer confidence rose to 114.8 in February from 111.6 in January. That’s the highest level since July 2001. Only 20% of survey respondents said jobs are “hard to get,” that is an 8-year low. In February, the present situation index rose to 133.4 from 130.0. The index measures how Americans feel now. The expectations index that looks six months ahead increased to 102.4 from 99.3 last month.

The Senate has confirmed billionaire investor Wilbur Ross as Commerce secretary, clearing another one of Trump’s economic team members. Ross has agreed to divest from much of his business empire.

Dallas Fed President Rob Kaplan says the financial market is pricing in the probability of an interest-rate hike by the Federal Reserve in either March, May or June and that is “likely in the neighborhood of where we are heading.” Kaplan said, “I don’t think the exact timing is the most important thing. I think the path of rates is.”

Kaplan, who is a rate-policy voter this year, said the economy is making good progress toward the Fed’s goals of full employment and a stable 2% rate of inflation. Meanwhile, Philadelphia Fed President Patrick Harker, another rate-policy voter said today, “I see three hikes as appropriate for 2017, assuming things stay on track.”

Well, if the Fed does raise rates in 2 weeks, we have been warned. Those comments helped push the 2-year yield to its highest since December. Interest rate futures implied traders saw a nearly 57 percent chance the Fed will raise rates at its next meeting on March 14-15, up from roughly 31 percent late on Monday, per Reuters data.

Morgan Stanley gave some wealth management clients incorrect tax information that caused some to underpay and others to overpay. The bank is setting aside $70 million to cover the costs and is in discussions with the IRS over the errors that occurred in tax years 2011 through 2016.

South Korean authorities have formally charged the heir of Samsung – Jay Y. Lee – with bribery and embezzlement in the corruption scandal that has rocked the country’s political establishment. Samsung Electronics President Park Sang-Jin has also resigned, as well as Vice Chair Choi Gee-Sung.

YouTube viewers worldwide are now watching more than 1 billion hours of videos a day, threatening to eclipse US television viewership, which is estimated at 1.25 billion hours. YouTube surpassed the figure, which represents a 10-fold increase since 2012, late last year. By comparison, Facebook and Netflix, as of January 2016, counted 100 million and 116 million hours of daily video views, respectively.

It goes to show… Comcast has announced a deal that will allow customers with the latest gear to search for and watch YouTube videos through their cable boxes. The deal follows a similar tie-up with Netflix unveiled last July. YouTube apps are available through many smart TVs and internet-connected boxes like Roku, but those don’t allow for an integrated search across traditional TV networks and Netflix.

YouTube is getting ready to take on traditional cable companies, today unveiling Unplugged, a live TV service streamed over the internet. Unplugged will be similar to Dish’s Sling TV and AT&T’s DirecTV Now, allowing you to subscribe to a so-called “skinny bundle” of popular pay TV channels at a cost of around $30 to $40 per month.

A large swath of the internet went down today when Amazon’s cloud-based Simple Storage Service, or S3, went offline. Amazon’s service provides website and image hosting and storage capabilities for a variety of companies including Imgur, Dropbox, Slack, Snapchat’s Bitmoji, parts of Amazon itself and a slew of others.

UBS published a research report on Apple, writing: “the company may have over 1,000 engineers working on a project in Israel that could be related to AR [augmented reality]. Augmented reality is an area where Apple could leapfrog competition in providing a superior user experience. This could result in sustained iPhone retention rates and more switchers.”

However, if you really want the skinny on Apple, they were holding their annual shareholder meeting today, and Apple CEO Tim Cook predicts tons of revenue from “future stuff I can’t talk about.”

Target forecast a drop in full-year sales at established stores and reported a steeper-than-expected fall in holiday-quarter sales due to “unexpected softness” at its stores. Target’s net sales have now declined for six quarters in a row as shoppers increasingly gravitate to online retailers. Target said it expects sales at stores open for at least a year to decline in the low-single digit percentage range, and they cut earnings guidance 16% to 24%.  Target shares down about 13% at a 2-year low.

Valeant Pharmaceuticals  posted better-than-expected earnings and revenue for the fourth quarter as it cut costs and saw strength in its Bausch & Lomb eye care business. However, revenue fell 13% from a year ago. The company has been struggling to regain investor confidence after it came under investigation over its accounting and drug pricing practices last year.

Priceline Group hit a 52-week high after reporting a beat on both its top and bottom lines for the fourth quarter. Revenue was up 17% thanks to a jump in hotel reservations.

Saudi Aramco will buy a 50% equity stake in Malaysian firm Petronas’ major refining and petrochemical project for $7 billion. The deal will boost Aramco’s downstream business ahead of a planned initial public offering next year.

OneWeb Ltd, a US satellite startup backed by Japan’s SoftBank Group, and debt-laden satellite operator Intelsat SA agreed to merge in a share-for-share deal.  SoftBank will buy voting and non-voting shares in the combined company for $1.7 billion in cash.

Starbucks will locate one of its ultra-luxurious coffee “roasteries” in Milan, Italy, marking the chain’s first entry into the Italian coffee market where founder and CEO Howard Schultz originally drew inspiration for the company. Starbucks plans to open 20 to 30 Roastery locations worldwide, where customers are treated to personalized small-batch brews of Starbucks Reserve coffee.

Financial Review

Double Hat Trick

Sinclair Noe — February 10, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 96 = 20,269
SPX + 8 = 2316
NAS + 18 = 5734
RUT + 10 = 1388
10 Y + .01 = 2.41%
OIL + .81 = 53.81
GOLD + 5.70 = 1234.50

Reckitt Benckiser has agreed to buy Mead Johnson Nutrition for $90 a share, or $16.6 billion, taking the UK consumer-products group into the infant food market. Including debt, the deal is valued at $17.9 billion. The transaction will add to Reckitt’s per-share earnings in the first full year.

Blackstone has agreed to acquire insurance broker AON’s employee benefits outsourcing unit for $4.3 billion in cash, giving Blackstone ownership of a business that processes work benefits for 15% of the U.S. population. It will also allow Aon to exit the capital-intensive business, allowing it to invest in growth areas beyond its core insurance brokerage operations.

The University of Michigan preliminary February consumer sentiment index fell to 95.7 from January’s final reading of 98.5. The most marked decline was in a forward-looking part of the survey, down 5.1% from January.

Oil is rallying on OPEC. West Texas Intermediate crude oil is higher after data released by the International Energy Agency showed a record-high 90% compliance to the OPEC output deal in the first month.

The IEA, which advises industrial nations on energy policy, said that if current compliance levels are maintained, the global oil stocks overhang that has weighed on prices should fall by about 600,000 barrels per day in the next six months.

But this may be as good as it gets for OPEC; participation in production cuts has been uneven among OPEC members, with Saudi Arabia shouldering the cuts to compensate for other countries which continue to pump – a situation that won’t continue indefinitely.

The Labor Department says import prices increased 0.4 % last month after an upwardly revised 0.5 % rise in December. In the 12 months through January, import prices jumped 3.7 %, the largest gain since February 2012, after advancing 2.0 % in December.

Import prices are rising as firming global demand lifts prices for oil and other commodities, but the spillover to a broader increase in inflation is being limited by dollar strength. Prices for imported fuels increased 5.8 % last month. Import prices excluding fuels fell 0.2 %. The report also showed export prices edged up 0.1 % in January.

Iron ore futures surged past $100 a ton, while spot ore rose to $83.84 a dry ton, the highest since October 2014. The rise came after official data showed that China’s exports surged 7.9% from a year earlier in dollar terms, leaving the country with a trade surplus of $51.4 billion.

In a shift, President Trump agreed to honor the “one China” policy during a phone call with China’s leader Xi Jinping. Trump angered Beijing in December by talking to the president of Taiwan and saying that the United States did not have to stick to the policy.

Trump held a news conference today with Japanese Prime Minister Shinzo Abe at the White House. The US and Japan account for nearly a third of the global economy. Trade in goods and services between the world’s No.1 and No. 3 economies was worth nearly $268 billion in 2015.

Trump vowed that the currencies of the US, China and Japan would soon be on “a level playing field.” Trump did not explain how the three countries would reach a level playing field, or what he meant by the phrase. Trump also said he will make a fresh policy announcement next week in response to the court ruling blocking his travel ban. Again, no details.

$21.6 billion. That’s how much an internal Department of Homeland Security report says Trump’s “wall” along the U.S.-Mexico border would cost. The report’s estimated price tag is much higher than a $12 billion figure cited by Trump during his campaign and the $15 billion estimate from top Republican leaders in Congress.

Meanwhile, the European Union is struggling with a familiar problem – Greece. The country could soon run out of cash and would not be able to make crucial debt repayments. Greece is currently on a third bailout program worth €86 billion euros ($92 billion); that bailout program still has more than a year to go, but the IMF is worried that Greece’s debt is not sustainable.

If indeed European creditors recognize next week that Greece has completed all the agreed measures for the second bailout review, then this would pave the way for new disbursements. With fresh funds, Greece should be in condition to meet deadline payments next summer and avoid a financial collapse.

But the view among creditors is that such a deal next week is “unlikely”. Even as Greece has shown some economic growth, 0.4% last year with 2.7% forecast for 2017, and the Greeks have managed to build a small budget surplus; the Greeks debt load continues to increase, yields on government bonds has climbed into double digits and debt has increased to an expected 183% of the country’s total economy from 159%.

And the main reason is that the Greeks are not eligible to participate in the European Central Bank’s Quantitative Easing program. And right now, the ECB is the only buyer of Euro bonds.

The IMF weighed in this week, publishing its analysis of the challenges to the Greek economy. The IMF says that in addition to needed reforms, European governments need to provide debt relief to Greece. The IMF analysis is that Greece represents a real problem without debt relief; Euro creditors believe they can present a unified front to break the deadlock. Eurozone governments, and especially Germany, are opposed to debt relief.

Today, Greece’s creditors called for more reforms in the form of more austerity measures. The additional austerity dose would hardly be accepted by the government led by Alexis Tsipras. The leftwing Greek leader promised not to impose further cuts or tax raises after almost seven years of painful measures adopted in exchange for the lenders’ money.

The Greeks have also opposed further pension adjustments, as it has adopted 11 cuts since 2010. There is a possibility of snap elections, which would add a new layer of uncertainty. And if things go wrong with Greece, Italy is next in line, with the second highest debt burden among Eurozone nations, plus a dangerously weakened banking system.

The Greek debt crisis seems like the never-ending economic story but that doesn’t mean the problem has been resolved. It doesn’t mean there is an imminent collapse, but consider this – Germany has been repatriating its gold. Germany has been bringing gold home from New York and Paris since 2013.

So far, 642 tons has been transferred. They just expedited a transfer of 330 tons stored with the New York Federal Reserve. They still have about 100 tons in a vault in Paris. Why the rush? The German central bank says it is bringing the gold home to help build public “trust and confidence.”

Sears Holdings reported a 10.3% drop in comparable store sales for the holiday quarter, and said it would cut debt and pension obligations by at least $1.5 billion this year. Sears also announced a new plan to cut costs by at least $1 billion in 2017 by reducing overhead, improving merchandise at its stores and through better inventory management.

Renault peddled SUVs to Europeans and it worked. The French car company’s 2016 profit surged 38% to $3.4 billion from the year before thanks to the popularity of its new SUVs among Europeans. CEO Carlos Ghosn said the automaker would be open to a merger with Nissan if the French government would sell its stake in Renault.

Sweden’s SAAB  has offered to build the world’s most modern fighter aircraft factory in India, it said on Friday, as it goes head-to-head with US rival Lockheed Martin to supply hundreds of locally produced planes to India’s military.

Danish wind turbine maker Vestas Wind Systems has jumped to the top of the U.S. wind market, overtaking General Electric in new capacity installed last year. Vestas, the world’s biggest wind turbine maker, supplied 43% of the 8.2 gigawatts of wind power capacity connected to the US power grid last year; GE supplied 42%.

The Galaxy S8 will be unveiled in New York next month, per the Wall Street Journal, and Samsung is ready to display a whole host of new features. While the physical home button will be stripped away and the fingerprint scanner moved to the back of the device, and only curved-screen versions will be released. The company will also showcase its new virtual assistant called Bixby, and possibly its recently trademarked “Samsung Hello.” And yes, it will have a headphone jack.

For many liquors, aging is the key to their distinct flavors. Brandy is no exception, with top-shelf labels spending years in casks. But chemists think they have discovered a shortcut—ultrasound. Spanish researchers blasted ultrasound through a barrel of brandy for 3 days and the results were close to 2 years of aging.

Now, if they can just figure out a way to reverse the aging process. Still, something to keep in mind as we head into the weekend –  if you are clever, you can get a lot done in just a couple of days.

Financial Review

Hat Trick

Sinclair Noe — February 9, 2017

Podcast: Play in new window | Download (Duration: 12:08 — 6.9MB)

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DOW + 118 = 20,172
SPX + 13 = 2307
NAS + 32 = 5715
RUT + 19 = 1378
10 Y + .05 = 2.40%
OIL + .71 = 53.05
GOLD – 12.40 = 1229.60

We have new record high closes for the Dow, S&P, and Nasdaq. It’s a hat trick.

The chief executives of several airlines, as well as executives from air cargo companies, were invited to a breakfast meeting at the White House this morning. Trump called the air-traffic control system “outdated” and he told the execs: “We have an obsolete plane system, we have obsolete trains, we have obsolete airports, we have bad roads. And we’re going to change all that.”

Trump also said: “We’re going to be announcing something I would say over the two or three weeks that will be phenomenal in terms of tax and developing our aviation infrastructure.” He gave no indication of what the announcement might entail. Presumably the “phenomenal” tax and infrastructure plan does not apply solely to the airline industry, and Wall Street lapped it up. He went on to say: “Lowering the overall tax burden on American business is big league.”

The rally had stagnated in recent days as investors sought details about Trump’s policy agenda. Financials, which have soared since the election, were the best-performing group, up 1.4 percent after three sessions of declines, while energy shares gained 0.9 percent. Those sectors stand to benefit should lower taxes spur economic activity as interest rates and the demand for energy would presumably rise.

After 18 months of courtship and court cases, two massive deals that would have reshaped the U.S. health insurance industry have both been declared dead. Anthem’s $48 billion deal to buy Cigna was blocked by a federal judge late Wednesday, weeks after another judge halted Aetna’s bid for Humana. Reasons given: The mergers would have led to less competition and higher prices for Americans.

Applications for unemployment benefits in the U.S. unexpectedly declined last week to an almost three-month low. Jobless claims fell by 12,000 to 234,000 in the week ended Feb. 4. The latest results extend a trend of historically low claims, with applications staying below 300,000 in the longest streak since 1970. A shortage of skilled workers is prompting companies to hold on to existing employees while continuing to add more workers to help fulfill demand.

The Senate has confirmed Jeff Sessions as attorney general largely along party lines. The 52-47 vote capped weeks of divisive battles over Sessions, an early supporter of President Trump. Next up is Representative Tom Price, Trump’s pick for health secretary and a staunch advocate of repealing Obamacare. A vote come could come later tonight.

Secretary of State Rex Tillerson met his Canadian counterpart for the first time on Wednesday for talks that touched on NAFTA, the trade agreement President Trump has pledged to renegotiate. The top US diplomat also met with Mexico’s foreign minister to discuss collaboration on law enforcement, migration and security, and agreed to visit the country in the coming weeks.

A US court of appeals is reviewing arguments on whether to reinstate the Trump administration’s temporary ban on immigration, with the outcome likely to be appealed to the Supreme Court.

Meanwhile, Trump’s first executive order, signed January 25, entitled: “Border Security and Immigration Enforcement Improvements” resurrects some of the most controversial immigration enforcement programs of recent years, seeks to deputize state and local law enforcement as immigration officials across the country, and threatens major cuts to federal funding for cities that fail to fall in line with the administration’s vision.

Trump has called for the construction of new immigrant detention facilities along the U.S. border with Mexico – including through private contracts – as quickly as possible, and there have been requests for additional asylum officers at 2 for-profit Detention Centers in Arizona.

A Dallas federal judge has upheld the Labor Department’s fiduciary rule, dealing a setback to the financial industry’s attempts to kill the measure. But the legal move may not mean much for the regulation’s fate. Last Friday, President Trump issued a memorandum to study the rule’s impact and rescind or revise it if it isn’t consistent with his administration’s regulatory principles. A status report will be published on March 10.

Boeing won orders for 39 wide-body aircraft from Singapore Airlines; a deal worth about $14 billion, as Southeast Asia’s biggest long-distance carrier upgrades its fleet over the next decade with more fuel-efficient models to cut costs.  The airline agreed to buy 20 777-9s, which are set to debut at the decade’s end, and 19 787-10s, the longest Dreamliner model.

There’s a good chance you can’t get there from here. More than 2,700 flights were canceled and all public schools in New York City, Boston and Philadelphia will be closed today as the region braced for a winter storm that could dump a foot of snow or more.

President Trump has written a letter to China’s President Xi Jinping in his first direct communication with the leader of the world’s second-biggest economy since he took office. With currency wars threatening to raise their head again, China has managed to get the yuan exactly where it wants it.

The nation’s authorities have let the currency rise against the dollar, making it harder for the U.S. administration to accuse it of undervaluing the exchange rate, while at the same letting the yuan weaken against a trade-weighted basket of currencies.

Greece’s two-year bond yield climbed above 10 percent as negotiations to release further IMF funds remained deadlocked. The International Monetary Fund weighed in this week, publishing a long-awaited analysis of the challenges the Greek economy still faces. The report has been the focal point of heated disagreement between the fund and Europe in terms of what Greece needs to do to get back on track.

The fund has argued that, in addition to needed reforms, European governments must provide debt relief to Greece for the country’s economy to recover fully. Meanwhile, Astellon Capital, a hedge fund based in London, published analysis saying that some form of restructuring is essential for Italy, given the inability of the country’s economy to grow.

The Astellon report also notes that the E.C.B. and sickly Italian banks have been the main buyers of Italian government bonds over the past three years. Also, Mediobanca, the Italian investment bank published a report which highlights just how little Italy has benefited from being in the euro: Growth has been literally zero, and the economy’s competitiveness as an exporter has deteriorated.

Twitter reported fourth-quarter revenue was $717 million, missing the $740 million average analyst estimate. Sales growth of 1 percent slowed dramatically in the period from the 48 percent gain a year earlier. Twitter added 2 million new users, bringing the total number of people who log in monthly to 319 million. Twitter has had trouble persuading advertisers to spend more money on its social-media platform as fewer people join.

Coca-Cola offered up a flat earnings report. Excluding items, the company earned 37 cents per share, in line with estimates. Net operating revenue fell about 6 percent to $9.41 billion, the seventh straight drop, but slightly ahead of estimates. The company forecast 2017 adjusted earnings to fall 1-4 percent from 2016. Coca-Cola has been offloading much of its bottling business to cope with falling demand for carbonated beverages in North America. Coke said it was on track to complete re-franchising of its US bottling operations by the end of this year.

Whole Foods is shrinking its store count for the first time since the recession. After reporting disappointing earnings, the upscale grocer says it will close 9 stores; including one in Prescott.

With about 70 percent of the S&P 500 having reported results, fourth-quarter earnings are on track to have climbed 8.5 percent, which would be the best performance since the third quarter of 2014, according to Thomson Reuters.

Financial Review

Draghi Put

Sinclair Noe — December 5, 2016

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

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DOW + 45 = 19,216
SPX + 12 = 2204
NAS + 53 = 5308
RUT + 23 = 1337
10 Y – 01 = 2.38%
OIL – .64 = 51.04
GOLD – 7.30 = 1170.80

The Dow Industrial Average moved higher in early trading to set a new intraday high of 19,274, and a new record high close.

Italy voters rejected a referendum that would cut the power of the senate, so Matteo Renzi resigned. Italy’s prime minister suffered a major defeat over the weekend in a constitutional-reform referendum he proposed. The measure began as a streamlining of government decision-making processes, and evolved into a vote of confidence in Renzi himself.

Italy’s main bank index dropped around 3.5% in early European trading. Italian banks hold about one-third of the Eurozone’s more than $1 trillion in non-performing loans. Trading in Unicredit shares has been suspended after the bank’s stock fell by more than 5%.  Italy has more than $2.1 trillion in outstanding government debt, worth more than 130% of GDP.

The euro shook off earlier losses and equities climbed as the results of the election were widely expected. Say hello to the Draghi put.

The far right lost in Austria. The Freedom Party’s Norbert Hofer conceded defeat to left-leaning rival Alexander Van der Bellen in the presidential election. Austria is one of several EU countries facing growing far-right parties—France, the Netherlands, and Germany all have elections with similar stakes next year. Still, Hofer did get 47% of the vote.

Britain’s Supreme Court will hear arguments over the next four days to decide whether Theresa May has the right to trigger Article 50 of the Brexit process without a parliamentary vote. All 11 Supreme Court justices will hear the case, so that there can be no accusations the court would have delivered a different decision if the panel had been constituted differently. A verdict is expected in January.

President-elect Donald Trump criticized China in a series of tweets yesterday and he rejected concerns over his decision to take a phone call from Taiwan’s president. Also on Twitter, the President-elect had a warning for companies that offshore their manufacturing, saying they will face heavy new taxes if they wish to sell into the U.S.

Trump taps former rival Ben Carson to be housing secretary. President-elect Trump nominated Ben Carson to lead the Department of Housing and Urban Development. Carson ran against Trump in the Republican presidential primaries, and is a retired neurosurgeon. Carson had previously indicated reluctance to take a position in the incoming administration because of his lack of experience in federal government.

President-elect Donald Trump is widening the circle of candidates for secretary of state and will interview more prospects this week, transition officials said, a sign that after multiple meetings with high-profile hopefuls he still isn’t sold on who he wants as the nation’s top diplomat. Though Trump’s transition team said last week that the search had narrowed to four finalists, new candidates have emerged, including Rex Tillerson, chairman and chief executive officer of Exxon Mobil.

Meanwhile, Trump met with former Vice President Al Gore, an environmental activist who has devoted years to fighting climate change, Gore told reporters: “It was a sincere search for areas of common ground.” Trump has called global warming a hoax and threatened to quit climate accords, though he recently said he is keeping an “open mind.”

Today, General Electric’s power services chief said even if Trump took the United States out of the 2015 Paris climate deal, it would not necessarily cut demand for plant improvements because utilities still want the economic benefits that come with modernization.

Dakota Pipeline project denied federal permits as tribal protestors win the day. The U.S. Army Corps of Engineers said Sunday it would not allow the controversial Dakota pipeline project to proceed, denying permits for the project while it conducts an environmental review to assess route of the 1,170-mile pipeline.

OPEC expects oil demand in 2017 to be as robust as this year, even though recently agreed production cuts could raise prices for buyers. OPEC, along with Russia, last week agreed its first oil output cuts since 2008, looking to reduce production by around 1.8 million barrels per day beginning in January to try to reduce global oversupply and prop up prices. Oil prices have risen since the production agreement, with benchmark Brent crude oil futures topping $55 a barrel, and WTI topping $53 a barrel this morning before settling down.

It’s important to remember that 1.8 million barrels is about one-fifth of US oil output, which has not cut back much at all, despite several bankruptcies in the oil patch; and is expected to ramp up production by year-end to bring overall output up year-over-year — and that was before this massive spike in prices driven by OPEC cuts.

The Institute for Supply Management, or ISM, said its non-manufacturing activity index jumped 2.4 percentage points to 57.2, the highest reading since October 2015. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

Services industries reported a 4-percentage point surge in production last month. A measure of services sector employment jumped 5.1 percentage points to a 13-month high. The services sector survey added to last week’s upbeat manufacturing survey and data on consumer spending in suggesting the economy maintained its momentum early in the fourth quarter after growing at a brisk 3.2 percent annualized rate in the July-September quarter. An ISM reading of 57.2 would be consistent with about a 3.5 percent annual rate in real GDP growth.

James Bullard, President of the Federal Reserve Bank of St. Louis was a featured speaker at the ASU Economic Forecast Luncheon in Phoenix today. Bullard said properly designed and executed policies to boost infrastructure, modify regulations for some industries, and overhaul the tax code “may have some impact … if they are directed towards improving medium-term U.S. productivity growth.” Bullard said it is too early to tell if the policies expected from the Trump administration could move the economy to a different “regime.”

And Chicago Federal Reserve bank president Charles Evans said in Chicago, “An infrastructure plan would be terrific,” adding “I think corporate tax rationalization would be a huge improvement.” Yet he agreed: “you don’t need explicit stimulus” with the jobless rate already so low.

New York Fed President William Dudley also delivered a speech this morning, painting a benign picture of the current U.S. economy. Dudley said the U.S. election of Trump has created “considerable” uncertainty over the policies he will pursue so it is too soon for the Federal Reserve to judge whether its plan for gradual interest rate hikes needs adjusting.

Consolidated Communications Holdings said it would buy broadband service provider FairPoint Communications Inc in an all-stock deal valued at $1.5 billion, including debt. Consolidated’s acquisition of FairPoint marks the fifth such deal in the last two months as growing demand for data and video services drives companies to expand their fiber optic networks in newer regions. The deal will help Consolidated expand into northern New England.

The second of two proposed health insurance mega-mergers goes to trial today in Washington, D.C. The $37 billion combination of Aetna and Humana, two of the nation’s largest insurers, is being challenged by the Justice Department as being bad for consumers and could leave 17 million seniors in the Medicare Advantage market with little choice and higher prices.

Burberry has rejected multiple takeover offers from Coach. Informal talks for a cash-and-stock takeover of Burberry that would have created a luxury fashion brand worth more than $20 billion have gone nowhere, per the Financial Times.

Liberty Mutual is buying the excess and surplus insurance company Ironshore from Fosun International for about $3 billion.

Amazon unveiled Amazon Go, a grocery-store concept that will automatically add shoppers’ products to a digital cart so they can walk out without waiting in a checkout line. The first store is set to open in downtown Seattle in 2017.

Elon Musk may have his share of doubters, but when it comes to the most admired leaders in tech, he completely dominates his peers, according to a recent survey of more than 700 startup founders. Tallying 23% of the write-in votes in First Round Capital’s annual State of Startups poll, Tesla’s Musk beat out Amazon’s Jeff Bezos, who earned 10%, and Facebook’s Mark Zuckerberg, at 6%. The most cited female was Sheryl Sandberg, Facebook’s COO, but she garnered only 1% of the vote. Musk took the top spot in last year’s survey, as well.

 Mission Innovation 

Accelerating the Clean Energy Revolution.

 

Joint Launch Statement

 

November 30, 2015, in Paris, France, issued on behalf of the Governments of Australia, Brazil, Canada, Chile, China, Denmark, France, Germany, India, Indonesia, Italy, Japan, Mexico, Norway, Republic of Korea, Saudi Arabia, Sweden, the United Kingdom of Great Britain and Northern Ireland, the United Arab Emirates, and the United States of America:

Accelerating widespread clean energy innovation is an indispensable part of an effective, long-term global response to our shared climate challenge; necessary to provide affordable and reliable energy for everyone and to promote economic growth; and critical for energy security. While important progress has been made in cost reduction and deployment of clean energy technologies, the pace of innovation and the scale of transformation and dissemination remains significantly short of what is needed.

For these reasons, participating countries have come together to launch Mission Innovation to reinvigorate and accelerate public and private global clean energy innovation with the objective to make clean energy widely affordable.  Additional countries will be encouraged to join in the future.

Double Governmental Investment in Clean Energy Innovation. Each participating country will seek to double its governmental and/or state-directed clean energy research and development investment over five years. New investments would be focused on transformational clean energy technology innovations that can be scalable to varying economic and energy market conditions that exist in participating countries and in the broader world. Research and development projects would be designed and managed to attract private investors willing to advance commercialization. While each participating country’s clean energy innovation portfolio is unique and reflects national priorities, all participating countries share the common goal to accelerate the pace of the clean energy revolution now underway in an appropriate way.  This endeavor should help facilitate affordable access to critical technologies.

Private Sector and Business Leadership. Business needs to play a vital role in the commercialization and cost-effectiveness of clean energy breakthroughs, and participating countries commit to work closely with the private sector as it increases its investment in the earlier-stage clean energy companies that emerge from government research and development programs. Participating countries especially commend the contribution being made by a group of investors through the Breakthrough Energy Coalition. These investors from 10 countries and representing leadership from many key economic sectors are prepared to drive innovation from the laboratory to the market through the investment of patient capital at unprecedented levels into early-stage technology development into participating countries. This commitment, as stated in the Coalition’s principles, will be focused on investment opportunities sourced from the countries participating in Mission Innovation.  Participating countries also look forward to working with additional private sector partners who are willing to share our common goal of increasing investment for clean energy innovation.

Implementation.  Participating countries will implement Mission Innovation in a transparent, effective, and efficient manner.  Strong linkages with our investor partners and other key stakeholders are essential.  Working with existing international institutions, participating countries will cooperate and collaborate to help governments, private investors, and technology innovators to make available data, technology expertise, and analysis in order to promote commercialization and dissemination of clean energy technologies so they reach global market penetration.  Participating countries will build and improve technology innovation roadmaps and other tools to help in our innovation efforts, to understand where research and development is already happening, and to identify gaps and opportunities for new kinds of innovation.  Participating countries may also pursue joint research efforts through public-private partnerships as well as joint research among participating countries.  We will also seek to enhance global clean energy innovation capacity, including through ongoing bilateral engagement with participating countries.  The first implementation meeting for Mission Innovation will be held in early 2016.

Information Sharing.  Each participating country commits to provide, on an annual basis, transparent, easily-accessible information on its respective clean energy research and development efforts to promote transparency, engage stakeholders broadly, spur identification of collaborative opportunities, and provide the private sector more actionable information to improve its ability to make investment decisions.

Friday, August 15, 2014 - Don't Worry

Financial Review with Sinclair Noe

DOW – 50 = 16, 662
SPX – 0.12 = 1955
NAS + 11 = 4464
10 YR YLD - .06 = 2.35%
OIL + 1.49 = 97.07
GOLD – 8.40 = 1305.50
SILV - .31 = 19.65

For the week, the Dow rose 0.7%, the S&P 500 gained 1.2% and the Nasdaq climbed 2.2%.

The Federal Reserve said factory production jumped 1.0% last month after rising 0.3% in June. That was the largest gain since February and reflected increases across all major categories. Auto production surged 10.1%, the biggest rise since July 2009. There were also solid gains in the production of machinery and computers and electronic goods; yesterday we talked about the importance of capex and business spending; maybe we’re seeing signs of that.

Or not. In a separate report, the New York Fed said its "Empire State" general business conditions index fell to 14.69 this month from 25.60 in July.

A preliminary August reading on the University of Michigan/Thomson Reuters consumer-sentiment index fell to the lowest level in 9 months, 79.2 down from a final July level of 81.8.

Producer prices, or prices at the wholesale level increased 0.1% in July, with 0.5% growth for transportation and warehousing prices; goods prices were unchanged; food prices rose 0.4%; energy prices dropped 0.6%. Overall producer prices rose 1.7% over the 12 months that ended in July, down from June’s annual-growth rate of 1.9%.

But the economic news carried little weight today, as attention once again focused on geopolitics. That might not be totally accurate; Wall Street looks at geopolitical hotspots but it can’t hold their focus. A new survey of institutional money managers around the world by Bank of America Merrill Lynch has found a sudden surge in worry and fear, and a rise in the number buying “protection” against a crash; which means derivatives such as put options or credit default swaps.

Money managers are worried about the markets and the Fed raising interest rates and geopolitical events and the baggage retrieval system at Heathrow, and so, over the past month they have raised their cash positions from 4.5% to 5.1%. Which doesn’t sound very defensive; in fact, it sounds like money managers are still excessively bullish on stocks.

Yesterday Russian President Putin talked about how he wanted to avoid confrontation in Ukraine. Last night a Russian armored column crossed the border into Ukraine; they started firing artillery at Ukrainian forces, which exchanged shellfire. Ukrainian President Petro said a "significant" part of the Russian column had been destroyed. Russia's government denied its forces had crossed into Ukraine. NATO said there had been a Russian incursion into Ukraine but would not go so far as to call it an invasion.

After Ukraine reported the invasion, Russia's ruble weakened against both the dollar and the euro. Russian shares were also dragged lower. International markets moved lower. European Union governments warned they are ready to expand sanctions against Russia if the conflict in Ukraine intensifies.  US markets initially moved lower. The yield on the ten year treasury dropped 6 basis points to 2.35%; Treasuries are usually considered a safe haven. The yield on German bunds, or 10 year bonds, dropped under 1%. The escalating clash is now haunting the European economy, already on the brink of fresh recession, with a string of southern states in debt-deflation.

All of a sudden, the euro crisis is back, though in truth it never really went away. The latest economic figures from the eurozone make bleak reading. Across the eurozone, which is struggling to get banks lending to businesses, economic growth is expected to be 1.1% this year. All three of the euro area’s biggest economies — Germany, France and Italy — are failing. Germany’s output actually fell in the second quarter. Italy is suffering through a triple dip recession. The French economy has stagnated. Analysts expect it to grow by less than one per cent this year. Italy has dropped back into recession, or maybe it never got out of recession. The closest thing approximating good news was that Spain's dead-cat bounce recovery continued with 0.6% growth. But it still has 24.5% unemployment. The eurozone economy is still far smaller than six years ago, by about 1.9%; unemployment is in double figures and debt burdens in some areas are high.

In June, the ECB cut its key interest rates and introduced a new program of cheap loans to banks that are intended to be passed on to businesses. Some economists say the European Central Bank should go further and engage in large-scale purchases of public and private debt to reduce borrowing costs and add to the money supply. ECB President Mario Draghi is under fire to do more to resuscitate growth. He, in turn, argues that “monetary policy can only achieve so much, with government reform required to do the heavy lifting,” and he is probably right, but there doesn’t seem to be much appetite for reform. Monetary stimulus is simply not remotely an adequate substitute for government spending. Even the austerian IMF has been forced to acknowledge that fact.

The Ukraine crisis has drawn the EU into an economic confrontation with Russia, which is not only the principal supplier of energy to many eurozone countries but is also a significant trading partner and export market for European goods. This is hardly designed to improve the economic outlook, and the eurozone remains too weak to withstand external shocks. And Eurozone weakness was already in place before the most recent economic sanctions against Russia; the unfortunate reality is that nobody really knows how Russian sanctions will play out. There will be costs associated with sanctions; many of them unexpected.

Next week, the Federal Reserve will hold its annual Jackson Hole retreat. Janet Yellen will speak on labor markets. The labor market has improved but still looks weak. Various Fed officials have various theories on the labor markets, but not much in the way of solutions, and so, not surprisingly, they have different views on Fed policy.

Jeremy Stein left the Fed Board of Governors earlier in the year to return to a teaching gig at Harvard. Last week Stein said whatever the Fed does, we can expect less financial stability. Stein says that the process of exiting QE and raising interest rates has “no real precedent”. Yellen devoted an entire speech to the subject of financial stability last month at the IMF, where she said the Fed had devoted “substantially increased resources” to monitoring stability and acknowledged that the Fed’s low-interest rate policy had spurred “households and businesses to take on the risk of potentially productive investments.” But, she went on, “Such risk-taking can go too far, thereby contributing to fragility in the financial system.”

Yesterday, St. Louis Federal Reserve President James Bullard said he believes financial markets are probably mistaken if they’re counting on Fed interest rate increases to occur more slowly than policy makers forecast. Bullard says the Fed will raise the interest rate target in the first quarter of 2015. Bullard said: “We’re way ahead of where we expected to be” in terms of the Fed’s employment mandate, and “If that strength continues in the second half of the year here, then the conversation on a little more hawkish direction of monetary policy will heat up.”

Today, Minneapolis Fed President Narayana Kocherlakota offered a contrasting view, saying: “The FOMC is still a long way from meeting its targeted goal of price stability” because of excess slack in the job market, and “progress in the decline of the unemployment rate masks continued weakness in labor markets,” which would keep the inflation rate below the Fed’s 2% target until 2018. Kocherlakota pointed to the participation rate among people between the ages of 25 to 54, the prime working years; another especially significant” measure of slack is the “historically high” percentage of workers who would like full-time jobs but can only find part-time work. The U-6 unemployment rate, a broad measure of unemployment that includes people working part time because they can’t find full-time jobs rose to 12.2% in July after declining one percentage point over the first six months of the year.

One of the biggest changes in the US labor market over the past two decades has been the increasing number of people working over the age of 55. From the end of World War II until the early 1990s, a smaller and smaller share remained in the labor force but since the 1990s that trend reversed. In 1993, only 29% of people that age were in the labor force. The vast majority were retired. But participation has been rising and by 2012 more than 41% of people in that age group were still in the labor force, the highest since the early 1960s. Clearly, something has changed about people’s attitudes toward retirement. A survey from the Federal Reserve last week provided some clues. Around 21% of people said their plan for retirement is simply “to work as long as possible” and the number of people giving this response increases by age.

In addition to the Fed’s get-together in Jackson Hole, next week’s economic calendar includes minutes from the Fed’s July 30^th FOMC meeting; on Thursday we’ll get a report on July existing home sales from the National Association of Realtors; Tuesday brings an update on July housing starts. Housing starts tumbled 9.3% in June. The Labor Department will release the consumer price index report on Tuesday; the CPI measures inflation at the retail level; it’s been running near 2%, more or less.

Thursday, June 12, 2014 - The Beautiful Game

Financial Review with Sinclair Noe

DOW – 109 = 16,734
SPX – 13 = 1930
NAS – 34 = 4297
10 YR YLD - .05 = 2.59%
OIL + 2.51 = 106.91
GOLD + 12.70 = 1274.30
SILV + .34 = 19.63

This is a big day for sports fans. In the US, many fans are thinking about the NBA playoffs or the start of the US Open golf championship, but those games are small potatoes compared to the World Cup. Over the next month, the World Cup will attract about 4 billion television viewers, maybe more when we consider all the digital devices that can replay the games; that’s more than the 3.6 billion viewers who watched the Beijing Olympic games; more than the 3.2 billion that watched the 2010 World Cup. By comparison, the Seahawks-Broncos Super Bowl managed a record 111 million viewers. The cumulative viewership for all the matches over the next month might top 35 billion. It’s a corporate marketing bonanza.

Over the next month, there will be countries across the globe that will quite literally shut down for 90 minutes intervals. Courts will delay hearing cases, hospitals will not schedule surgeries, offices and retail outlets and factories will shut down, the crime rate will drop, the streets will empty with almost zero traffic, planes stop flying, and trains stop running. I’ve seen it happen; and because I am blessed to be married to a lovely Brazilian woman, I have been caught up in the madness.

If you are still unclear, and most Americans are unclear on this subject, I’m talking about the beautiful game, futebol, or what we call soccer and the rest of the world calls futebol. The World Cup is the global championship in soccer and this year it is being played in Brazil, which is the greatest soccer team in the history of the World Cup. The first game was just a little earlier today, Brazil beat Croatia 3-1.

The whole thing was once strange to me as well, but I have a friend, Charles Oelfke, the Honorary Brazilian Consulate in Arizona; he is also an American married to a Brazilian, and when I talked with him about this World Cup thing, he pulled out an article he wrote back in 1994; that was the year the US hosted the World Cup; that was also the year Brazil won its fourth championship.

Here’s what I learned from Charles’ Gringo’s-eye view of the World Cup Extravaganza. Because of my marital affiliation, I will be required to watch all games involving my adopted country every four years. It’s a cultural thing. I will be required to record every game. I will be required to call Brazil immediately after each game to discuss why, for example, a 0-0 tie was such an exciting, logical, tactical display, clearly proving Brazil’s world dominance in the sport. I will be required to replay each game at least 3 times that same night, then twice weekly for the next four years. And apparently it also involves turning the TV room into a green and yellow shrine to Brazilian futebol.

I still don’t really understand the game and the rules, but Charlie explained that there is a certain methodology of the 22 men in plastic shorts and long hair who run around like decapitated chickens for 90 minutes making life miserable for the goleiros (the goalkeepers) who wear oversized sticky gloves while flying horizontally through the air. The goleiros can’t win games, but they’re so often blamed for losing them that volunteers for this position on the team are scarce and they are often hired from other countries.

Next question: just how large is a soccer field? I’ve learned from experts (of which Brazil now has more than 200 million) that it’s… oh…maybe… uh 70 or 80 meters wide by about maybe…, 100 meters… uh.. maybe 110 meters long; something like that. The regulation probably reads “the dimensions of which depend upon space available.” You have to respect the degree of precision in the world’s most popular sport.

My own travels in Brazil reveal that futebol, at least on the amateur level, can be played on almost any stretch of open field, or a street without too much traffic, or the beach, or even on a volleyball court. The only requirement is a ball, or something that looks like a ball.

I asked about the 1994 World Cup, which was in the US but for some reason I have almost no personal recollection of it. It was supposed to be the games that introduced soccer to the US, and the US to World soccer; but mainly it proved that we weren’t quite ready, with the possible exception of our ability to grow and mow grass.

And then I asked about the actual final, the championship game from ’94. Charlie explained that back then he and his wife Josefa had been inviting friends to watch the TV broadcasts at their home, and this usually involved a lot of yelling and screaming and copious overeating (and I’m guessing quite a few cervezas and caipairinhas), but the numbers grew too fast, and they ran out of chairs for everybody, and they had to set up in a restaurant (a steak house, of course) for the final game. About 300 Brazilians showed up, and about 3 very foolhardy Italians; and there was a lot of cheering and dancing and singing. It’s a cultural thing, he explained.

And about that final game in 1994, he said: “It was Brazil’s destiny. Everyone agrees, Brazil was the best team and I believe that, but…” the final of 52 games, of an every four year event, the showcase, the championship of the world’s most popular sport, between two tri-champion teams, the most important athletic competition in the universe with billions of spectators around the world ended in a 0-0 tie. And after 30 minutes of overtime, still a 0-0 tie.

So then it was decided by penalties, a shoot-out, a lottery. Why not just give the goleiros a last cigarette, put a blindfold on them? And … 4 years of preparation and 52 games and it all came down to individual luck. The experts called it a great game, a real cliff hanger, and justified the Brazil win because Brazil had 22 shots on goal compared to Italy’s 8.  That’s like saying Michael Jordan had a great game because he shot 22 air balls. Still, it will go down in history as Brazil Campeao 3-2 over Italy. It was also the first championship to be decided by penalty kicks. Something that still upsets Charlie 20 years later.

Brazil is the undisputed greatest national team in the history of futebol. They have 5 championships; their closest rivals have 3. And this year, Brazil, the most futebol crazy country in the world, is the host country for the World Cup; and most of the experts are picking Brazil as the favorite to win a sixth championship. This would seem to be a perfect, futebol dream come true. Not so fast.

Many Brazilians are angry about how much was spent preparing for the Cup and how the country still struggled to be ready. Anger about broken promises and the ballooning cost of soccer venues contributed to widespread protests that drew over a million Brazilians into the streets last year. Detractors say the World Cup has done more harm than good by taking funds away from social programs and investment projects. The Brazilian government has spent an estimated $11 billion on the World Cup, while protesters say the money should have gone to low income housing, hospitals, better roads, and better schools.

And as the games start today, Brazil is ill-prepared, with many projects over budget and behind schedule. The government spent nearly $300 million for a stadium in Manaus, a city that doesn’t have a major league soccer team, and is deep in the jungle along the Amazon River. It’s expected that after the World Cup, the stadium will sit empty for the most part. Building materials were shipped in by boat because you can’t drive to Manaus.

And to add insult to injury, the ticket prices for most games will price average Brazilians out of the stadiums, and the profits from the games don’t go to Brazil, they go to FIFA. And part of FIFA’s deal is complete tax exemption on all profits. Toss in some charges of bribery and FIFA is being compared to the mafia.

Part of the preparations for the World Cup involved what is known as pacification plans for the favelas, the massive shantytowns that are home to tens of millions of the urban poor. The police move in and after they enforce order, they are supposed to upgrade hospitals and schools. So far, it has been a police invasion without the benefits.

Last year, Brazil hosted the Confederation Cup, a trial run for the World Cup; that led to riots, and protests that drew hundreds of thousands to the streets. The protests continued today, with subway workers on strike in Sao Paolo, and protest camps set up just out of sight from the stadiums.  Two days ago, Joseph Blatter, the President of FIFA, the international football association that arranges the World Cup, kicked things off in Sao Paulo. Brazilian celebrities including President Dilma Rousseff as well as the governor of the state of Sao Paulo and the mayor of the megacity stayed away from the event. They didn’t want a repeat of last year, when Blatter and Rousseff were booed off the stage. Blatter’s solo performance in Sao Paulo speaks volumes about the mood in the country. The World Cup may be a fiasco, but if Brazil loses the World Cup Championship it could be a disaster for the government.

Brazil is the 5^th largest country in the world; it has the 6^th largest economy; Sao Paulo and Rio de Janeiro are major cosmopolitan cities with massive favelas; it is the 17^th worst country when it comes to inequality. When millions live in poverty, and corruption is rampant, and basic public services are denied, a sports extravaganza seems inappropriate, even if it is futebol on Brazilian soil. And so they play. Maybe this is Brazil’s destiny.

Investing through the summer fog of 2012

The economy continued to throw off mixed signals for the month of July, whipsawing traders and making investors even more squeamish and paranoid about where to tuck their wealth.

Added to this seesaw of economic data from everything from July's consumer confidence of 65.9, up from a revised 62.7; the July Chicago PMI of 53.7 up from 52.9.

The May S&P Case-Shiller HPI 20-city M/M rose 0.9%, however, the Yr/Yr fell 0.7%. The June New Home Sales figure fell to 350k from a revised up 382,000. The M/M Pending Home Sales Index for June dropped -1.4% from a revised downward 5.4% increase.

The Richmond Fed Manufacturing Index for July fell from -3 to -17. Conversely, the Empire State Manufacturing Survey, Kansas City Fed Manufacturing Index, Philadelphia Fed Survey all improved from the previous month.

The Dallas Fed Manufacturing Survey, consisting of a Business Activity Index and Production Index, found both indexes falling.

The knowledge that short-term markets are driven first by news headlines and central bank policies rather than primarily macro and macroeconomic data forces a perverse reaction onto the market in this unfamiliar climate we find our capital in.

Deteriorating economic statistics brings hope, by some, of additional stimulus measures from the Feds. Today, August 1, the Feds may shed some light onto their contingency plans, if there are any plans, for supporting a decaying economy between now and the November elections.

If Quantitative Easing III (QE III) or some variation of yield repression doesn't materialize from the Feds, markets will have an excuse to move lower, decaying as well.

Secondly, European Central Bank President, Mario Draghi, kicked off last Thursday's stock market rally by stating that he will do whatever it takes to save the Euro. A quick recap; in theory, generally, saving the Euro and the EU requires capping rising Spanish and Italian debt yields by the ECB agreeing to purchase their sovereign debt.

Because of inflationary fears, many German politicians, including Chancellor Angela Merkel's coalition government, vigorously oppose this action and similar bailout schemes. Two days ago, Monday, Treasury Secretary Timothy Geithner met with German Finance Minister Wolfgang Schaeuble and Mario Draghi, reaffirming their commitment in solving this crisis.

On Thursday, the European Central Bank will hold another policy meeting to find common ground. If the meeting fails to produce the proper response in the eyes of the market, this too will reverse last week's rally and send the market lower.

A third item that will send stocks lower in August, extending the S&P 500 incarceration in the current trading range between 1,099 and 1,419, if the realization sinks in of the draconian effects of federal budget automatic sequestration.

When austerity begins appearing in budgeting decisions in government, and workers begin preparing for possible layoffs and downsizing by reducing personal spending, and when businesses relying on government contracts to purchase their goods and services recalculate their cash flow and revenue, GDP will decline.

The May 2012, G.19 Federal Reserve Statistical Release, dated July 9th, shows "consumer credit increased at an annual rate of 8 percent in May. Revolving credit increased at an annual rate of 11-1/4 percent, while non-revolving credit increased at an annual rate of 6-1/2 percent." It's hard to imagine this type of credit activity continuing in the third and fourth quarters of 2012.

Our anemic economy grew 1.5% in the second quarter, down from 2.0% in the first quarter, with major help from consumer credit. Subtracting significant credit in the third and fourth quarters will exacerbate any weakness.

Individual savings rates were reported up 4.3%, annualized, in the first three months of this year, starving an already malnourished economy of vital disposable income. The minuscule interest currently being paid on savings is also problematic for an economy in need of greater money supply velocity.

An economically weakened Europe and a weakening China will inadvertently push the US economy over the edge unless smaller emerging markets can somehow re-accelerate the global economy while avoiding the developed nations' debt contagion.

The final culprit with the motive and opportunity to assassinate the economy is stagflation. As 2012 futures' prices on corn, oats, soy beans, and wheat reached multiyear highs, 1,300 counties spread over 29 Midwest states have been declared natural disaster areas by the USDA.

In the 1970's, President Richard M. Nixon imposed wage and price controls in an attempt to snuff out stagflation and inflation. President Gerald Ford attempted to talk down inflation with a Whip Inflation Now (WIN) campaign, complete with WIN buttons. Inflation ran rampant throughout the 1970's until a new Sheriff rode into town in 1979.

The newly appointed Federal Reserve Board Chairman, "Tall" Paul Volcker, ended inflation by jacking up short-term interest rates to 22%. Although, lifting interest rates to nosebleed levels induced at the time the deepest recession since the Great Depression, inflation did not return.

Another smart decision made by the government at the time was issuing callable long-dated treasury bonds and zero coupon bonds to minimize interest expense. This morning, Treasury announced it is investigating issuing floating rate notes; while interest rates are lower than they have been in the past 100 years. I'm puzzled by such a decision.

This earnings' season, restaurants such as McDonalds (MCD), Chipotle (CMG), Buffalo Wild Wings (BWLD), have admitted to struggles with cost inputs, missing earnings estimates, and are now lowering guidance for upcoming quarters. Food suppliers like Hormel Foods Corporation (HRL), Tyson Foods, Inc. (TSN), and Smithfield Foods, Inc. (SFD) are experiencing these headwinds, as well.

Brent Crude oil is priced north of $100 dollars a barrel. Members of OPEC require the price of oil to stay north on $80 dollars a barrel to maintain political stability at home. That price level is in conflict with jump-starting the global economy that is continuing to deleverage from the previous decade.

Regardless, if the price of oil should rise or fall short-term, the global economy will be petroleum-based for decades to come. Therefore, an essential building block for any inflation defensive portfolio requires an integrated oil company such as Exxon Mobile (XOM) or Chevron (CVX).

One final thought; although, we have experienced deflation in many things since 2008, technology, of course, real estate and virtually any asset requiring financing, and the cost of capital itself, this economic period will end, too. And once more, we will again face and fight inflation.

Unappreciated is the two-stage intermediate step between deflation and inflation – stagflation. Ben Bernanke has spent years and trillions of dollars attempting to re-inflate asset prices. One day he will succeed. At that point, Stage One, the rising cost of living, or cost-push inflation kicks in, whereby, too few dollars are available for rising prices.

Stage two of the stagflation equation is flat wages and personal income. Whether one draws a paycheck from a job or clip coupons from investments, purchasing power begins contracting, not growing.

This reality of less disposable income relative to prices, combined with an aging population and extended life expectancy is a recipe for structural economic arrested development until we surrender to full-blown inflation in future years.

Politicians will feel obligated to rectify the former condition and then, the more radical and dangerous phase of inflation occurs, demand-pull, leading to too many cheapened dollars chasing too few goods.

Confidence or the lack thereof, in a nation's currency, is the thin line straddling inflation and hyperinflation.

And, it is here, that your portfolio of hard assets such as gold and silver, agricultural commodities providing food security, natural resources such as land, timber, water, energy, selective adjustable rate debt, and very selective stocks, will pay off for the patient, long-term, investor during inflationary times.