Financial Review

The Sun Might Come Out in 2Q

Sinclair Noe — April 29, 2015

 

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

Subscribe: iTunes | RSS

DOW – 74 = 18,035
SPX – 7 = 2106
NAS – 31 = 5023
10 YR YLD + .06 = 2.04%
OIL + 1.47 = 58.53
GOLD – 7.20 = 1205.60
SILV – .07 = 16.64

Economic growth slowed in the first quarter.  Gross domestic product expanded by 0.2%, down from 2.2% growth in the fourth quarter. The Commerce Department reports consumer spending rose by 1.9%, but economic activity was constrained by bad weather in many areas, the West Coast port closures, a drop in exports (in part due to a stronger dollar), and a big decline in business spending. It is widely expected that the economy will rebound in the second quarter, much like what happened in 2014, when first quarter GDP contracted by 2.1% only to bounce back with a second quarter gain of 4.6%. Exports sank 7.2% in the first quarter, while imports edged up 1.8%. The plunge in oil prices, meanwhile, forced a resurgent U.S. energy industry to retrench. Overall, business investment on “structures” sank 23.1% in the first quarter, the biggest drop in four years. Companies did boost investment on equipment, but just barely so. Equipment spending rose a scant 0.1%.

For all of last year the economy grew at a 3% pace and that dropped down to just 0.2% in the first quarter. We can break it down to three major areas. Weather accounted for about a 1% drop; those winter storms closed roads, and stores, and offices. Some of that lost economic activity will be made up in the second and third quarters, but not all. The strong dollar also accounted for about a 1% drop in GDP. Although the dollar has weakened in the past couple of weeks, it is still fairly strong against major currencies and central banks from Europe to Japan to China are continuing to pump money into the markets and push the value of their currencies lower.  This means we probably won’t see an increase in US exports anytime soon. Oil prices moved to a four month high today, but they were lower in the first quarter and lower oil prices meant less money spent in the oil patch, but it didn’t translate into drivers spending the money they saved at the pump; that knocked about 0.6% from GDP.

But don’t worry, be happy. That’s the Federal Reserve’s new mantra. The Fed’s FOMC policy-setting committee wrapped up its third meeting of the year, and the impression from their statement is that the weak economic data from the first quarter is transitory, the sun will come out tomorrow, don’t worry. The Fed has said they would rely on economic data to determine when they might raise rates, and the first part of today’s statement listed a smorgasbord of weak data. There was no indication that the economy was about to “lift-off”, no sense of urgency to act. So, we do not expect a rate hike at the June FOMC meeting, and futures contracts only seem to give about a 60% chance of a rate hike by the end of the year. The Fed seems to think the economy will come roaring back after a long winter’s sleep. It could happen but it hasn’t happened yet.

Delivering the first-ever speech by a Japanese prime minister to a joint session of Congress, Shinzo Abe laid out his vision for deeper Japanese involvement in Asian security and global diplomacy. He made a pitch for the Trans-Pacific Partnership, a massive free trade deal that the United States, Japan and 10 other countries are now negotiating.

First-quarter earnings are on track to post a slight gain following many stronger-than-expected results. With reports in from 47% of S&P 500 companies as of Tuesday, Q1 earnings are now expected to have risen 0.02% from a year ago, beating a Thomson Reuters forecast for a 2.9% decline. Still, the raised outlook has been mainly attributed to one company – Apple. Without the tech giant, the S&P 500 forecast would show a profit decline of 1.6%.

Lumber Liquidators  said it’s been advised the Justice Department is seeking criminal charges against the company relating to the importation of certain products that possibly contain harmful chemicals, and the DOJ probe will likely cost the company about $10 million; the company also faces more than 100 pending class action lawsuits. Lumber Liquidators also reported a loss for the quarter and sales dropped more than 8% so far in April. This morning, the company announced its CFO will resign in June.

California governor Jerry Brown issued an executive order aimed at curbing greenhouse gas emissions, saying it was critical to address “an ever-growing threat” posed by global warming to the state’s economy and well-being. Under Brown’s order, by 2030, emission levels will have to be reduced by 40 percent compared with 1990. Under existing state law, emissions are supposed to be cut 80 percent from what they were in 1990 by 2050. In his State of the State address in January, the governor called for reducing gas consumption by cars and trucks by up to 50 percent over the next 15 years. California’s target reflects those set by other governments, including the European Union, ahead of the United Nations conference on climate change in Paris this year.

The Supreme Court has been hearing arguments and issuing rulings; there have been some high profile cases before the court; the issue of same sex marriage for example. And today, the justices heard a challenge of lethal injection as a violation of the ban on cruel and unusual punishment.

There is another case that hasn’t received much publicity but you might find it interesting. The Supreme Court agreed on Monday to spell out Congress’s authority to give someone a right to sue in federal court, even if that individual cannot show that a specific harm was done.  That is an issue under Article III of the Constitution and arose in the case of Spokeo v. Robins, which will be heard and decided in the Court’s next Term.

Under Article III, federal courts only have authority to decide a case or controversy that has something real at stake – a “live” issue, rather than a theoretical claim.  Normally, a case cannot satisfy that requirement unless the suing individual can show some actual or imminent personal injury, or harm.

At issue in the newly granted Spokeo case is whether an individual can sue based on a simple claim that a right created by federal law has been violated, without proof of an additional injury growing out of that violation.  This particular case tests a lawsuit by a Californian, Thomas Robins, who sued under the federal Fair Credit Reporting Act of 1970, claiming that an online search engine put out inaccurate personal information about him. The search engine, operated by Spokeo, gathers information about individuals from public sources, such as telephone books, social networks, marketing surveys, real estate listings, business websites, and other databases.  It makes the information available to those who search for it online, but cautions them that it does not verify the accuracy of the data.

Robins, who filed a class-action lawsuit, claimed that Spokeo had provided flawed information about him, including that he had more education than he actually did, that he is married although he remains single, and that he was financially better off than he actually was.   He said he was unemployed and looking for work, and contended that the inaccurate information would make it more difficult for him to get a job and to get credit and insurance.

A federal judge dismissed his lawsuit, concluding that Robins had not offered sufficient evidence that he was harmed by the information available through Spokeo.  The U.S. Court of Appeals for the Ninth Circuit overturned that result, clearing the way for the lawsuit to go forward.  It concluded that Congress had created a right to sue under the Act, and that was sufficient to show an injury if a violation of the Act was claimed. The Supreme Court asked the U.S. Solicitor General for the federal government’s views on the case, and the government urged the Court not to grant review.  While not embracing the Ninth Circuit’s view of the Article III “standing” issue, the Solicitor General argued that the Ninth Circuit’s ruling could actually be understood as going beyond that to find a genuine claim of injury. The Justices granted review, despite the government’s suggestion.

Litigation makes strange bedfellows. Google, eBay, Yahoo, and Facebook all filed briefs in the Spokeo case, because of course, they all post information about individuals through their sites, and some of that information might not always be accurate; such is the nature of the internet, or at least that was what the tech companies tried to argue. The companies complain that they process so much data about so many people that the decision opens them up to liability from too many people if they violate the law – as if their control of so much personal data in the first place is not part of the problem.

The brief is fascinating since it details the large number of lawsuits the companies are already facing that they hope a favorable Supreme Court decision could just make go away. Google, Facebook, Hulu, and several other tech companies are facing various and assorted suits, and their defense seems to be that it would be difficult for them not to break the law. The arguments also lay bare the fact that even though there have been laws written to respect our privacy or to protect consumers, the laws are almost never enforced, and they only are considered after grievous harm has taken place; which may serve as a form of compensation but doesn’t seem to qualify as protection.

So, this case is a pretty big deal. If the Supremes overturn the Ninth Circuit, laws meant to protect user privacy, as well as consumer and financial protection laws will become unenforceable. If the Supremes rule with the Ninth Circuit it could change the business model and content of the entire internet.

Financial Review

Thirst for Innovation

Sinclair Noe — March 24, 2015

 

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

Subscribe: iTunes | RSS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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