Financial Review

Still Too Hot

Sinclair Noe — June 21, 2017

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DOW – 57 = 21,410
SPX – 1 = 2435
NAS + 45 = 6233
RUT – 3 = 1399
10 Y + .01 = 2.16%
OIL – 1.06 = 42.45
GOLD + 3.70 = 1247.30
BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

The Energy Information Administration reports American crude stockpiles fell by 2.45 million barrels last week and gasoline supplies slid by 577,999 barrels. Meanwhile, oil production rose to 9.35 million barrels a day, the highest level in almost two years.

The report did nothing to sway oil traders from their bearish positions. Brent crude dropped below $45 for the first time in 2017.  West Texas Intermediate dropped 1.06 to 42.45 a barrel. Potentially bullish factors failed to lift prices, including Tropical Storm Cindy halting service at a major oil terminal in the Gulf of Mexico, a shake-up in the Saudi royal family, and Iran’s Oil Minister saying that OPEC may decide to make deeper cuts.

That sent energy shares in the S&P 500 Index to the lowest level in two months. Chipmakers helped lift tech stocks. Healthcare and Biotech shares helped lift the Nasdaq to positive territory. The Nasdaq Biotechnology Index is up 8% this week.

A draft of an executive order on drug prices appears to give the pharmaceutical industry much of what it has asked for — and no guarantee that costs to consumers will drop. The four-page document, obtained by the New York Times, contains several proposals that have long been championed by the industry, including strengthening drug makers’ monopoly power overseas and scaling back a federal program that requires pharmaceutical companies to give discounts to hospitals and clinics that serve low-income patients.

The proposed order does little to specifically call out the drug industry and instead focuses on rolling back regulations.

Senate Republicans have been working for weeks behind closed doors on legislation aimed at repealing and replacing major portions of the Affordable Care Act. Tomorrow, they are expected to unveil their plan. The Republican-controlled House of Representatives narrowly approved its version of repeal last month. An estimated 23 million people could lose their healthcare under the House plan, according to the non-partisan Congressional Budget Office.

The Senate proposal cuts off Medicaid expansion more gradually than the House bill, but would enact deeper long-term cuts to the health-care program for low-income Americans. Senate Majority Leader Mitch McConnell said on Tuesday the Senate healthcare bill would be different from the House version, but he did not elaborate.

Given the opposition of all Senate Democrats to repealing Obamacare, Republican leaders will need the support of at least 50 of the chamber’s 52 Republicans to ensure passage. The bill will be brought to the Senate floor once the CBO has assessed its cost and impact, likely next week. Even if the Senate measure does pass the upper chamber, it will still have to pass muster with the more conservative House before any legislation could be enacted.

A Roper Center analysis shows the proposal with just 29 percent support, making it the most unpopular piece of legislation Congress has considered in decades. There is no state in the union where a majority of voters support the bill.

Meanwhile, a new report, released by the Agency for Healthcare Research and Quality (AHRQ), says the coast-to-coast opioid epidemic is swamping hospitals, showing 1.27 million emergency room visits or inpatient stays for opioid-related issues in a single year.

The report puts Maryland at the very top of the national list for inpatient care. The state, already struggling with overdoses from heroin and prescription opioids, has seen the spread of the synthetic opioid fentanyl, which can be mixed with heroin or cocaine and is extraordinarily powerful. Opioid-related deaths in Maryland had nearly quadrupled since 2010, and deaths from fentanyl had increased 38-fold in the past decade.

Baltimore City saw 694 deaths from drug and alcohol-related overdoses in 2016 — nearly two a day, and a big spike from 2015, when 393 people died from overdoses. Drug overdoses, which range from prescription painkillers to heroin and fentanyl, cause most of the fatal overdoses. In 2015, opioid overdoses killed 33,039 Americans, according to data that the Centers for Disease Control and Prevention.

The sharpest increase in hospitalization and emergency room treatment for opioids was among people ages 25 to 44. The new report shows that women are now as likely as men to be admitted to a hospital for inpatient treatment for opioid-related problems. The report identifies big increases in hospitalizations among people older than 65, but those cases predominantly result from reactions to prescription medication, rather than from overdoses or the use of heroin or other illegal drugs.

The National Association of Realtors reports  existing home sales were up 1.1% in May, at a seasonally adjusted annual 5.62 million rate.  April’s sales stood 2.7% higher than a year ago, and marked the third-highest selling pace of the past year. The median number of days a property spent on the market dropped to a fresh low of 27 days.

There were 1.96 million homes for sale at the end of the month, 8.4% lower than in the same period a year ago. Lower supply amid sturdy demand nudged prices higher again. The median sales price in May was $252,800, a new all-time high and 5.8% higher than a year ago. May marked the 63rd straight month of yearly price gains.

The Realtors called the pace of price appreciation “unsustainable” and noted that “some would-be buyers are having to delay or postpone their home search” because of low supply.

Confidence and business activity have climbed since the election. The economy seems to be muddling along. This would typically be good for banks, as demand for loans should be higher. However, bank lending has fallen significantly since last year. Total bank loans have grown just 4.6% since February 2016, the weakest showing since 2014. Business loans rose 3.9%—the slowest growth rate in nearly six years—and were the worst-performing segment.

The main reason for the tepid economic growth over the last eight years has been a lack of business investment. Many thought improved consumer confidence and business activity were signs that this trend had reversed. So far, it appears the opposite has happened.

America leads the world when it comes to access to higher education. But when it comes to health, environmental protection, and fighting discrimination, it trails many other developed countries. The Social Progress Index released this week is compiled from social and environmental data that come as close as possible to revealing how people live. America came in at number 18.

The Trump administration made its final plea to the U.S. Supreme Court to allow its proposed ban on travelers from six Muslim-majority countries to go into effect as the justices weigh how to handle the hotly contested dispute. The court papers filed today complete the briefing on the government’s emergency application asking the justices to block lower court injunctions in favor of challengers to the ban.

Lawyers for the state of Hawaii and individual plaintiffs in Maryland urged the high court not to allow the ban go into effect. The Supreme Court could now act at any time.

Travis Kalanick has resigned from his job leading Uber, giving up on his effort to hold onto power as self-inflicted scandals enveloped him and the company he co-founded. Pressure from investors, who have poured more than $15 billion into the company, ultimately did what the board could, or would, not: It convinced the 40-year-old chief executive to step aside. Uber is now in need of a new CEO.

The world’s largest sportswear maker and the world’s largest online retailer might finally work together. According to analysts at Goldman Sachs, Nike will start selling directly on Amazon.com. Nike’s shoes, apparel, and accessories are already sold on Amazon, but from third-party sellers and unlicensed dealers that purchased the product wholesale from Nike.

Selling directly on the site eliminates a layer between Nike and the consumer, allowing the company to better control pricing and presentation. It’s not quite direct to consumer, but it’s a lot closer. Goldman sees it as a deal worth potentially up to $500 million of revenue yearly — an additional 1% of global sales for the Nike.

Nike’s biggest competitors — Adidas and Under Armour — already sell directly on Amazon, and they both have fancy splash pages that highlight the newest and best product the companies offer. Dick’s Sporting Goods and Foot Locker, some of Nike’s biggest retailers, were both down on the news of the increasing competition. Dick’s neared an 18-month low, while Foot Locker fell below a three-year-low.

Sears Canada is preparing to seek court protection against creditors in a move that will likely lead to a liquidation, according to reports by Bloomberg and Reuters. The company was spun off in 2012 from Sears Holdings, which owns Sears’ US business. Sears Holdings still holds 12% of the Canadian business’s stock.

Eddie Lampert, the CEO of Sears Holdings, owns 45% of Sears Canada’s shares. Sears Canada said earlier this month that it had “significant doubt” about its ability to stay in business, and was looking at a possible restructuring or sale.

UPS said today that, for the first time, it will assess a surcharge on peak holiday season deliveries in the US to recoup the higher costs that come with managing the peak surge.

Wal-Mart is telling some technology companies that if they want its business, they can’t run applications for the retailer on Amazon’s cloud-computing service, Amazon Web Services.

Bruno Iksil, the former JPMorgan Chase trader at the center of the “London Whale” trading scandal, has accused the bank’s Chief Executive Jamie Dimon of laying the ground for the $6.2 billion loss. In an account on his website, Iksil, who traded credit derivatives for JPMorgan in London, also blamed senior executives at the bank.

Financial Review

Before the Deluge

Sinclair Noe — October 1, 2015

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

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DOW – 12 = 16,272
SPX + 3 = 1923
NAS + 6 = 4627
10 YR YLD – .02 = 2.04%
OIL – .11 = 44.98
GOLD – 1.80 = 1114.50
SILV un = 14.63

Manufacturing grew in September at the slowest pace in more than two years. The Institute for Supply Management said its manufacturing index dropped to 50.2% last month from 51.1% in August, reflecting a stronger dollar and weaker global economy that is hurting U.S. exports of many major American-made goods. That’s the weakest reading since May 2013, although any reading above 50 indicates growth.

The number of people who applied for unemployment benefits rose by 10,000 to 277,000 in the week ended Sept. 26, but initial claims remain extremely low in a sign of steady improvement of the labor market. The average of new claims over the past month, meanwhile, fell by 1,000 to seasonally adjusted 270,500. The level of new claims sank below 300,000 in early March and has remained there for 30 straight weeks, a feat last accomplished in 1973, when the nation’s working population was 40% smaller. Tomorrow morning is the monthly jobs report from the Labor Department.

Construction spending increased 0.7% in August, and gained 13.7% over 12 months. Residential construction rose 1.3%, while nonresidential construction grew 0.3%. Construction of lodging climbed 2.8% and has climbed 41.4% over 12 months.

Not all American homes are rising in value and not all markets are experiencing the recovery evenly. According to a report from Zillow, almost 30% of all homes lost value in August from a year earlier; that’s down from a high of 65% in 2009, although a normal housing market would be closer to 20%. Overall, the median value of homes rose 3.3% year-over-year to $180,800, but appreciated at half the pace of August 2014.

President Obama has signed into law a bill that extends federal funding until December 11 after the Senate and the House yesterday passed the proposal, as expected. Had Congress not approved the measures, the government would have shut down today, the first day of the new fiscal year. Republicans and Democrats now have around ten weeks to formulate a long-term budget, with the parties looking to strike a two-year deal.

Hurricane Joaquin is headed for the East coast, maybe. Where it lands is still uncertain. Joaquin is a Category 3 hurricane with winds of 125 miles per hour and gusts to 155 miles per hour; an increase of the sustained winds to 130 mph would make it a Category 4 storm. Right now it is hitting the Bahamas and within the next 24 hours, it is expected to head north, possibly hitting the Carolinas, or Virginia, or even making land near New England.

The best guesstimates have it headed for New York City. If the hurricane heads for the coast, it will lose some of its punch and slow down to a Category 1 or possibly a tropical depression before landfall. Even if it veers to the northeast and heads out into open waters, it is expected to produce serious flooding. Beyond the wind and the rains, there is a strong possibility of waves approaching 30 feet and storm surge of 8 feet.

Even as the track of the storm is uncertain, the governors of Virginia and New Jersey have already declared a state of emergency.  We all remember Hurricane Sandy but if current projections hold, Joaquin won’t be another Sandy, but nature is unpredictable. Parts of the eastern U.S. from Florida to New Jersey are under flood watches and warnings today, with more than 10 inches of rain already having fallen in some areas this week.

The weather is a staple for the commodity markets. The rain and flooding is expected to be a big problem for cotton farmers in Georgia and the Carolinas. Atlantic hurricanes can be mildly bullish for energy markets as oil and gas platforms could be shut down as a precaution. They could also damage infrastructure, such as refineries and transportation. Traders now expect minimal disruptions to energy markets.

The big three U.S. automakers – GM, Ford, and Fiat Chrysler – reported a jump in September sales as cheap gasoline and ultra-low interest rates drove demand for sport utility vehicles and pickup trucks. Total U.S. auto sales, an early glimpse of consumer spending each month, are expected to have risen about 14% last month.

According to auto industry consultancy Edmunds.com sales got a boost from the calendar, with the entire Labor Day weekend falling in September for the first time since 2012. GM said its total sales in September rose 12%; Ford posted sales gains of 23%; and Fiat Chrysler says September sales were up 14%.

Deere and the United Auto Workers union have reached a tentative agreement to replace the six-year master labor contract that ended at midnight last night. The deal is for another six years and will now go to a vote of the 10,000 Deere manufacturing staff that the UAW represents.

Ratification of a contract between the UAW and Fiat Chrysler appears to be impossible after workers at assembly plants in Ohio and Michigan on Tuesday overwhelming voted against a proposed four-year deal.

Samsung is now accused of Volkswagening its TVs. Yep, that’s the new word for cheating on environmental tests. Independent lab tests show Samsung televisions use less power when they are tested for energy efficiency ratings than during real world use. Sweden’s government has also been looking into TVs from unspecified manufacturers that “clearly recognize” the video used in testing, and which “immediately lower their energy use by adjusting the brightness of the display” in response.

Google and Microsoft have ended a long-running patent spat involving about 20 suits in the U.S. and Germany. Microsoft had alleged that Google’s former Motorola Mobility unit infringed its IP. Google, which held onto most of Motorola’s patents following its sale to Lenovo, alleged that Xbox consoles infringed its patents. Now they’ve made nice with each other, Google and Microsoft plan to cooperate on various patent issues.

The Centre for Economic Policy Research says the Eurozone recession is over. Like the National Bureau of Economic Research in the U.S., the CEPR labels recessions based on a variety of economic indicators and not the informal definition of two consecutive quarters of negative GDP growth. The CEPR said the period from the third quarter of 2011 to the first quarter of 2013 represented the second post-financial crisis recession in the Eurozone. The reason the CEPR feels confident in saying the Eurozone is out of the recession is that the duration of the recovery has made up for its slow speed. However, the Eurozone recovery has been “unusually lackluster” by historical standards.

The third quarter was ugly for stocks, but there were a few winners. More than 3 dozen companies in the S&P 500 posted double digit gains for the quarter. Chipotle, Amazon, and Google posted 20% gains for the quarter. Merger news also pushed some stocks higher, such as Teco, AGL Resource, Cablevision, Chubb, and Molson Coors. Also making the list: Activision Blizzard, Nike, Under Armor, Best Buy, Royal Caribbean, Southwest Airlines, Reynolds American, and Altria.

Merger activity has been strong in 2015. According to data from Thomson Reuters, $3.19 trillion in deals were announced year-to-date, just 2% below 2007 levels. Many of the transactions were worth more than $10 billion, making up 36.5% of the total. In the third quarter there were fewer deals than in any other three-month period this year, yet the dollar volume surpassed $1 trillion. Energy has been the top industry by value, as companies sought strength in consolidation as the price of commodities plummeted. There was also a slew of health care transactions, especially in insurance and pharmaceuticals. Goldman Sachs and Morgan Stanley were the top-ranked financial advisers on these deals.

Bankers like to make big dollar deals; they don’t like to get their hands dirty with smaller loans, but that doesn’t mean they won’t take a cut. For many years the big banks have bankrolled smaller consumer lenders, also known as payday lenders. In the past they were known as loan sharks, and even as the names changed, the terms didn’t; these lenders are still charging outrageous rates, sometimes more than 200%.

But now the Consumer Financial Protection Bureau (CFPB) is starting to tighten regulations on the consumer lenders. The lenders have come under scrutiny for a range of practices that can lead borrowers to believe they are paying far less in interest and fees than they actually are. Now that regulation is getting tighter, the big banks are trying to protect their loans to the subprime lenders; the big change is an amendment that says that if one of the loan sharking companies faces regulatory action that has a material impact on its business, it would constitute a default. And a default would give the big banks the right to seize the lender’s assets, at least in theory; or a pound of flesh if it suits them.

JPMorgan Chase shareholders have won court permission to pursue their securities fraud lawsuit as class action against the bank over the “London Whale” trading scandal, which caused a $6.2 billion loss. Shareholders led by pension funds in Arkansas, Ohio and Oregon alleged that JPMorgan, CEO Jamie Dimon and CFO Douglas Braunstein knowingly hid increased risks at the Chief Investment Office operating in London, including on an April 13, 2012 conference call when Dimon called reports about the synthetic portfolio a “tempest in a teapot.”

It turned out to be a $6.2 billion loss by the London Whale and fallout contributed to even bigger losses for shareholders as market capitalization dropped by $40 billion from April 13 to May 21, 2012. And don’t forget the $1 billion in fines reached in a settlement with regulators that included a rare admission of wrongdoing.

Financial Review

Chips and Salsa

Sinclair Noe — July 16, 2015

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DOW + 70 = 18,120
SPX + 16 = 2124
NAS + 64 = 5163
10 YR YLD un = 2.35%
OIL + .13 = 51.04
GOLD – 4.30 = 1145.60
SILV – .12 = 15.08

The Nasdaq Composite closed at a record high, taking out the old record from last month.

After hours of debate, Greek lawmakers passed a bailout agreement late last night. Eurozone finance ministers agreed in principle to extend a €7 billion-euro bridge loan to Greece. The loan would allow Greece to pay some of its outstanding bills, meet a scheduled repayment to the ECB next week and open the door to securing a third bailout package. Up next: the German Bundestag will vote on Friday whether or not to approve the new rescue, however, talks over securing a new €86B bailout are likely to last for another four weeks.  European Central Bank President Mario Draghi said he views the country’s place in the euro as secure. Greek banks are still closed for the time being.

Yesterday, Fed Chair Janet Yellen said once again that the Fed is likely to raise interest rates at some point in 2015. Yellen told the House Financial Services Committee that the first hike since 2006 “will signal how much progress the economy has made in healing from the trauma of the financial crisis.” Today, Yellen repeated her semi-annual testimony to the Senate Banking Committee. Yellen told lawmakers that waiting too long to raise interest rates holds risks for the U.S. economy, along with tightening too quickly; her preference would be to proceed in a “prudent and gradual manner.”

Filings for U.S. unemployment benefits declined last week for the first time in a month, heading back toward the lowest levels in more than a decade. Jobless claims fell 15,000 to 281,000 in the week ended July 11.

The national monthly jobs report is published on the first Friday of each month, and a couple of weeks later we get a report on individual states. The June jobs numbers are out for Arizona, and they are not good. The unemployment rate slipped from 5.8% to 5.9%, and the state lost 55,200 jobs; the majority of the losses were from government and local education as schools let out for the summer (about 39,100 jobs); but the state also lost 5,500 private sector jobs.

The National Association of Home Builders/Wells Fargo Homebuilders’ confidence index held steady at 60 in July. Sales in both the new and existing home markets however builders still face a number of challenges, including shortages of lots and labor.

The average rate for a 30-year fixed-rate mortgage climbed to 4.09% in the week that ended July 16, reaching the highest rate since October, from the prior week’s reading of 4.04%

U.S. senators have introduced a bill to allow Puerto Rico’s public entities to file for bankruptcy, basically Chapter 9 reorganization, under federal laws as the commonwealth starts negotiations with creditors to restructure its $72 billion in debt. Puerto Rico said one of its agencies failed to transfer funds to a trustee to cover a $36 million, Aug. 1 debt payment because the legislature didn’t appropriate the funds when it passed the budget last month.

Although China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels have increased at an even faster pace. Outstanding loans for companies and households stood at a record 207% of GDP at the end of June, up from 125% in 2008. Pershing Square’s Bill Ackman said China is a far bigger global threat than Greece. Hedge fund managers Paul Singer and Jeffrey Gundlach have also weighed in on the crash, calling it “way bigger than subprime” and “far too volatile to invest in.”

It’s earnings reporting season. Here is a quick (very quick) recap of earnings reports: Bank of America beat estimates, Blackrock says money is flowing into higher fee products, Delta Airlines reported a boost in domestic business, Intel offered strong guidance even as PC sales slumped, Kinder Morgan posted a second quarter miss, US Bancorp posted results in-line with expectations, Garmin shares plunge following a disappointing outlook, Goldman Sachs posted a 49% decline in profit as trading revenue slipped and they also had extra litigation expenses (I’m shocked, shocked I tell you), Citigroup topped estimates – in part by cutting costs, Blackstone profits slumped as the hedge fund posted gains but the private equity and real estate businesses declined, eBay raised full year revenue guidance, United Healthcare reported better-than-expected earnings and revenue – and raised full year guidance, Netflix beat second quarter estimates and announced they added a gazillion subscribers in the quarter.

After the close, Google reported profit of $3.9 billion on revenue of $17.7 billion, solid increases from last year. Google has been spending billions of dollars on data centers, real estate, acquisitions, and research and development to support its existing businesses and find new growth opportunities in industries as disparate as energy, health care, transportation, and generally ruling the world and controlling our minds.

If you want more detailed analysis of individual company earnings reports, feel free to dig into the devilish details, and good luck. Earnings reporting season is generally a headache. It is difficult to decipher. Bad news gets buried in reports, and the numbers can be inscrutable. I’ve been reading earnings reports for a long time and I’ve pretty much given up. If the numbers look bad one way they can be massaged to look much better. In other words, the perfect picture of obfuscation. And then there is the ritual of companies guiding expectations lower, only to beat expectations; it’s sadder than watching Charlie Brown try to kick a football.

The largest center of manufacturing in the U.S. is about as far from the rust belt as you can get. The Los Angeles metro area has the most manufacturing workers in the country. More people work in factories there than traditional blue-collar towns such as Chicago, Detroit or Philadelphia. Even though LA has lost some manufacturing jobs, there are still about 524,000 manufacturing workers in the region, well above 409,000 in Chicago and 368,000 in New York.

European Union regulators have launched twin investigations against Qualcomm. The first investigation will examine whether the company offered discounts to customers on condition they bought chipsets exclusively from Qualcomm. The second will look at whether the firm engaged in predatory pricing tactics by setting prices below their costs to squeeze out competitors.

Carl Icahn thinks Blackrock is a “dangerous company”. Icahn’s beef: That many ETFs (which make up a major segment of BlackRock revenue) are dangerous to the market, particularly high-yielding bond ETFs which he thinks stifle liquidity.

In a first for the airline industry, United Continental has awarded millions of frequent flier miles to hackers who have uncovered gaps in the carrier’s web security. United unveiled the approach in May just weeks before technological glitches grounded its entire fleet twice. Through the “bug bounty” program, researchers flag problems before hackers can exploit them. The cost can be less than hiring outside consultancy.

Last week, Britain’s Financial Conduct Authority took the unusual step of announcing that it was dropping its investigation into the London Whale trading case and would take no further action against Bruno Iksil, whose risky bets on complex derivative contracts ended up costing JPMorgan Chase $6.2 billion in losses.

Iksil, who got his catchy nickname from trading counterparties who marveled at the immense size of his positions; he emerged as the latest face of international financial scandal in 2012, when The Wall Street Journal identified him as the mysterious figure at the center of huge derivative bets that were roiling the market. Since then, JPMorgan Chase has agreed to pay a total of $920 million to resolve accusations by several agencies in the United States and Britain that the bank had misstated financial results and lacked sufficient internal controls to prevent its traders from “fraudulently overvaluing investments,” as the Securities and Exchange Commission put it. As in all such cases, companies do not commit crimes or frauds. Iksil faces no charges. He does not even face civil claims, which have a much lower standard of proof.

Of course, it is not illegal to engage in risky trading and lose money, even billions. Iksil did not conceal his positions within the bank, and his strategy was discussed repeatedly with higher-ranking executives. The government alleged that Iksil’s colleagues (but not Iksil) fraudulently hid the amount of the losses by assigning false values to the positions in their internal reports. And that would be illegal, or at least it would be if it were ever prosecuted.

On May 20 of this year, JPMorgan Chase and Citigroup both entered a guilty plea on one felony count of conspiring to rig foreign currency exchange trades, the largest market on the globe. Five days earlier, on May 15, HUD slipped a notice into the Federal Register, seeking to alter its standard loan-level certification form, known as HUD-92900-A. This form must be filled out for lenders to receive FHA insurance, which reimburses them if the homeowner falls into foreclosure.

On the current HUD-92900-A form, lenders must certify that their firm and its principals “have not, within a three-year period … been convicted of or had a civil judgment rendered against them” for a variety of crimes, including “commission of fraud … violation of Federal or State antitrust statutes or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements or receiving stolen property.”

So, they can just continue to write mortgages. No consequences. The day before HUD released the notice in the Federal Register, the New York Times reported that the Justice Department sought to lessen the consequences of the guilty pleas in the foreign exchange rigging case, ensuring that federal regulators would not use the pleas to bar banks from certain business lines.

Monday, March 31, 2014 - Hope for the Best, Prepare for the Worst

Financial Review with Sinclair Noe

DOW + 134 = 16,457
SPX + 14 = 1872
NAS + 43 = 4198
10 YR YLD + .01 = 2.72%
OIL - .18 = 101.49
GOLD – 10.10 = 1285.80
SILV - .06 = 19.86

Wrapping up the first quarter let’s go to the scorecard. The Dow Industrials lost 121 points in the quarter but gained 136 points in the month of March; the S&P 500 finished the quarter up 24 points and up 13 points in March; the Nasdaq Comp gained 22 points in the quarter and lost 110 points in March; oil prices are up $3.50 a barrel since the start of the year and down .42 in March; gold gained $74.80 for the quarter but lost $41.90 the last month; silver added .33 for the quarter but down $1.44 for the month of March.

The first quarter marked the fifth straight quarter of gains for the S&P 500 and the Nasdaq Composite indices. Last week’s drop of 2.8% in the Nasdaq Comp was the first such drop since October 2012, or the first time the Nasdaq dropped by 2.8% in 77 weeks.

Did you see 60 Minutes last night? They interviewed Michael Lewis, who is an excellent financial writer; he has a new book called “Flash Boys” and it deals with high frequency traders on Wall Street. They tried to present the idea that they had just discovered the market is rigged. It is rigged, and it has been rigged for quite some time; this is not a new discovery. The high frequency traders scalp as many trades as possible; they add no value; they do not make markets; they do not provide liquidity; they steal from everyone who buys and sells stocks. Good for Michael Lewis for writing a book about this, but it is not new.

And it is not the only market that’s rigged. Switzerland’s Competition Commission announced today that it had begun a formal investigation into eight financial institutions, over potential collusion to manipulate the currency markets. The regulator opened a preliminary investigation into the foreign exchange market last year. Regulators in Britain, the United States and other countries have begun investigations into whether traders tried to manipulate benchmark currency rates. The financial institutions being investigated include: UBS, Credit Suisse, Zurcher Kantonalbank, Julius Baer, Royal Bank of Scotland, JPMorgan Chase, Citigroup and Barclays.

And of course, this follows investigations into the Libor rate rigging, ISDAfix derivatives rigging, gold rigging, mortgages backed securities rate rigging, robo-signing, and the shorter path is to find markets that haven’t been rigged and manipulated. Earlier today, a district judge said shareholders could pursue a securities fraud lawsuit against JPMorgan for the London Whale trading scam. The financial sector dips its beak into everything, everywhere. The Bank of England recently admitted in its Quarterly Bulletin that banks don’t actually lend the money to the depositors; they lend bank credit created on their books. In the United States the finance charges on this credit amounts to approximately 30% to 40% of the economy. So, in effect, everything is rigged.

Janet Yellen, made her first public speech as the new Federal Reserve chairwoman, today in Chicago. Perhaps the takeaway line from Yellen’s speech was when she said: “There remains no doubt that the economy and the job market are not back to normal health. The recovery still feels like a recession to many Americans and it also looks that way in some economic statistics.”

And this is the very reason why the economy is not experiencing normal health; the Fed has been pushing money to Wall Street, so the Wall Street bankers and traders can dip  their beak into everything, but QE1, 2, 3, and the Twist, and ZIRP haven’t produced jobs, because the money never made it to Main Street; and because the money never made it to Main Street, there is only weak demand, not enough demand to spur the economy into a virtuous cycle of growth and prosperity. 

Employers don’t hire people to save the American economy; they don’t hire people because the Fed is buying Treasury bonds. Employers hire people because if they didn’t, they wouldn’t be able to meet the demand for goods and services they produce, and they’d be leaving profit on the table, and some competitor would step in and take that profit. Employers hire because of demand, not QE.

Consumers create demand and demand creates jobs and the steady income from a job creates consumer demand; if that sounds like a death spiral, well it can be, unless there is some way to spur demand. What we have learned over the past 6 years, is that QE is not the answer; allowing the financial sector to dip their beaks and suck out finance charges to the tune 40% of the economy is not the answer.

Simply growing corporate profits is not the answer. US companies outside of the finance industry are holding more cash on their balance sheets than ever, with $1.64 trillion at the end of 2013. The profits have been growing for the past 5 years but income has dropped and employment growth, while steady has been anemic. Typically, profits recover before jobs, but the money doesn’t seem to be trickling down. One way corporations have been maximizing profit is by cutting labor expenses. And compensation has dropped to just over 60%, the lowest level since 1951.

So today Chairwoman Yellen talked about how the economy and job market are not back to normal health; she said the Fed had an “extraordinary” commitment to boosting the economy and adding jobs and that commitment will be needed for some time to come. The problem is that the Fed has been prescribing the wrong medicine.

The United Nations Intergovernmental Panel on Climate Change, the IPCC, issued its report on climate change today, and as we talked about on Friday, the report concludes that climate change is already having effects including: melting sea ice and thawing permafrost in the Arctic, killing off coral reefs in the oceans, and leading to heat waves, heavy rains and mega-disasters. And the worst is yet to come. Climate change poses a threat to global food stocks, and to human security.

The report is a three year project. The volume of scientific literature on the effects of climate change has doubled since the last report in 2007, and the findings make an increasingly detailed picture of how climate change poses a much more direct threat to life and livelihood. The warning signs about climate change and extreme weather events have been accumulating over time, but this report struck out on relatively new ground by drawing a clear line connecting climate change to food scarcity, and conflict.

"We're now in an era where climate change isn't some kind of future hypothetical," said the overall lead author of the report, Chris Field of the Carnegie Institution for Science in California. "We live in an area where impacts from climate change are already widespread and consequential."

The report was pretty straightforward and to the point; if the world doesn't cut pollution of heat-trapping gases, the already noticeable harms of global warming could spiral "out of control". Here are some of the key points of the report:

Climate change is already taking a sizeable chunk out of global food supply and it is going to get worse. Increases in crop yields – which are needed to sustain a growing population – have slowed over the last 40 years. Some studies now point to dramatic declines in some crops over the next 50 years – especially wheat, and to a lesser extent corn. Rice so far is unaffected. The shortages, and the threat of food price spikes, could lead to unrest.

Climate change poses a threat to human security, and could lead to increased migration. Potential shortages of food and water, because of climate change, could be drivers of future conflicts. These won't necessarily be wars between states, but conflicts between farmers and ranchers, or between cities and agriculture industry which wants water for food.

Some are more vulnerable than others. Poor people in poor countries, and even the poor in rich countries, are going to bear an unfair burden of climate change. Climate change is going to exacerbate existing inequalities, and it is going to make it harder for people to claw their way out of poverty. Still, no one is immune, or according to another contributing author Princeton University professor Michael Oppenheimer, “We’re all sitting ducks.”

As temperatures rise beyond 2 degrees to 4 degrees – our current trajectory – there are limits to how far society can adapt to climate change. The only way out is to cut emissions now – and buy some time by slowing warming – and at the same time make plans for sea walls, relocations, and other measures that can keep people out of harms' way.

The scientific data is now completely overwhelming. It is not easy or comforting to imagine the negative consequences, and this does not mean we can’t make some very important and meaningful changes. Indeed, this will probably be the most important issue for all of us for the next 30 or 40 years. It will dominate business activity as well as most other aspects of our lives. Hope for the best, prepare for the worst.