Financial Review

Settling a Score

Sinclair Noe — May 24, 2017

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DOW + 74 = 21,012
SPX + 5 = 2404 (record)
NAS + 24 = 6163
RUT + 1 = 1382
10 Y – .02 = 2.26%
OIL – .15 = 51.32
GOLD + 7.90 = 1259.60
BITCOIN + 4% = 2537.16
ETHEREUM + 1.83% =  185.00

After 5 straight winning sessions, the S&P 500 closed at a new record high. The Nasdaq Comp is near a record.

The Federal Reserve released minutes of their May 3^rd FOMC policy meeting. The statement points toward a rate hike as soon as the Fed’s meeting in mid-June. According to minutes: “Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation.”

Officials opted at the May meeting to leave the target range for their benchmark lending rate unchanged at 0.75 percent to 1 percent. They have projected three rate increases in 2017. They made the first rate hike in March. If they follow with 2 more hikes this year, we would be looking at rates around 1.25% to 1.5% by the end of the year, with a strong possibility for 4 more hikes next year.

Fed officials discussed a brightening global economic picture and viewed recent soft inflation and output data as likely caused by transitory factors. Growth slowed in the first quarter to an annualized pace of 0.7 percent, although the Fed expects the economy to bounce back in the second quarter.

Unemployment continued to decline. Labor Department data released two days after the meeting showed the jobless rate in April fell to 4.4 percent, the lowest reading since 2007 and beneath most economists’ estimates of the lowest sustainable level, or what might be considered full employment.

Policy makers have also said they would like to start shrinking their $4.5 trillion balance sheet by year-end, a move that may lift longer-term borrowing costs and dampen growth. It sounds scary to think that the Fed will soon reduce its war chest of bonds. Still, today after the minutes were released, Treasury values rose and longer-term yields fell.

One interpretation is that traders aren’t taking the Fed seriously. But another is that investors just received an unexpectedly concrete sense of the Fed’s methodology for unwinding its balance sheet, and it clearly indicates moving at a slow, gradual, incremental pace.

Fed members said they favored a method that included allowing a certain amount of their holdings to pay down without reinvesting the proceeds. The Fed would cap the amount of debt they’d allow to roll off at a certain level, and then would adjust that level every three months. Officials agreed they should provide additional details of the plan “soon.”

The dollar weakened slightly. Oil prices posted their first decline in six sessions. US crude supplies fell a seventh week in a row. Following the supply data, the price action became a function of positioning ahead of the OPEC meeting tomorrow. OPEC is expected to extend production cuts for 9 months, until March of 2018.  Data from the U.S. Energy Information Administration Wednesday showed that domestic crude supplies fell by 4.4 million barrels for the week ended May 19.

The last time the Congressional Budget Office scored the Republican health care bill back in March, it forced lawmakers to make major changes in order to prevent millions of Americans from losing their health coverage and lower premiums for the elderly. Amendments were added and another vote was held, this time without waiting for a CBO analysis – and the bill passed in the House.

The Congressional Budget Office today released their updated score for the American Health Care Act (AHCA), and the results are just as ugly as the first time. The report from the CBO on the amendments added just before the AHCA was passed by the House shows that 23 million more Americans could be uninsured by 2026 compared to the current healthcare system, slightly lower than the 24 million estimated under the previous iteration of the bill.

The CBO estimates that 14 million people who are currently covered would be uninsured as soon as the House plan were to be signed into law. And another nine million people would lose coverage over the course of the next decade. The AHCA, would also spike coverage costs in many states for people with pre-exiting conditions, especially for older Americans.

Importantly, the score projects that the AHCA will cut the federal deficit by $119 billion, $32 billion less than the $151 billion cut in the previous report. This was key because Republicans plan to consider the bill under the reconciliation process in the Senate. By these rules, the bill must shave off at least $2 billion from the federal deficit to be considered.

The Senate is expected to craft their own version of a healthcare bill instead of using the current form of the AHCA. The practical ramifications of the CBO’s latest report were more limited than its immediate political implications.

The House bill, as written, will not become law. Whatever proposal the Senate comes up with will have significant differences and will need a separate assessment by the CBO before a vote.

President Trump today continued his overseas tour with a visit to the Vatican. Pope Francis gave Trump a medallion engraved with the image of an olive tree – a symbol of peace, he explained.

Francis also presented Trump a signed copy of “Laudato Si’: On Care for Our Common Home”, the first papal encyclical focused solely on the environment. The two men spoke privately for about an hour-and-a-half. Next stop, Brussels.

Testifying to the House Budget Committee, Office of Management and Budget Director Mick Mulvaney suggested the government’s borrowing limit may need to be raised earlier than originally anticipated, citing “slower-than-expected” tax receipts.

The latest monthly budget report from the Treasury shows receipts are up almost 1% for the fiscal year to date. The year before, receipts were up about 1.2% through April, and the year before that, nearly 9%.

Sales of previously-owned homes sputtered in April after a strong first quarter. Lean inventory continued to constrain demand. The National Association of Realtors said existing-home sales ran at a seasonally adjusted annual rate of 5.57 million.

That was a 2.3% decline from March’s selling pace, which was revised down a tick but still stood at a 10-year high, though 1.6% higher compared to a year ago in April.

The median national sales price was $244,800 in April, a gain of 6% compared to a year ago. It was the 62nd-straight month of annual price gains. Despite that, first-time buyers managed to stage a small comeback.

They represented 34% of all buyers in April, up from 32% in March, though still below their long-time average of about 40%. NAR’s report also showed that 52% of homes sold in April were on the market for less than a month, which is a new high.

Sentier Research reports that median annual household income, adjusted for inflation, was $59,361 in April, a big 1% gain from March and a statistically significant move. For the first time since the U.S. entered the worst recession of the post-war era, the typical U.S. household has more income than it did when the century started.

Moody’s Investors Service downgraded China’s sovereign rating one notch to A1, which is two grades above junk status. The previous ratings cut was in November 1989 in the wake of Tiananmen Square.

In a statement, Moody’s said, “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.” China’s total debt is estimated at around 220% of gross domestic product as of 2015, with a large chunk of it owed by corporations.

Global financial markets shrugged off the news because it is more confirmation than revelation.

Ministerial buildings were set ablaze in the Brazilian capital today as tens of thousands of protesters took to the streets to demonstrate against government corruption, renewing calls for Brazilian President Michel Temer to step down.

The federal government filed a lawsuit against Fiat Chrysler, accusing it of using illegal engine-control software to enable its diesel-powered vehicles to pass emissions tests. The filing occurred days after Fiat Chrysler proposed a modification to the software to ensure correct test results in hopes of resolving the issue.

The Environmental Protection Agency accused Fiat Chrysler in January of installing the software on about 104,000 Ram pickup trucks and Jeep Grand Cherokee sport utility vehicles sold from 2014 through 2016.

The Fiat Chrysler problem is very like the legal woes of Volkswagen, which admitted to using “defeat device” software to enable its cars to pass emissions tests while spewing far more pollutants than allowed in normal driving. Volkswagen ended up paying billions of dollars in fines, several of its executives have been investigated or charged with crimes.

Facebook has signed deals with news and entertainment creators Vox Media, BuzzFeed, ATTN, Group Nine Media and others to make shows for its upcoming video service, which will feature long and short-form content. It is an attempt to deliver on Facebook Chief Executive Mark Zuckerberg’s remarks to investors earlier this month that the company was looking for so-called “anchor content” that would draw people to the video tab on Facebook’s app.

Financial Review

No Fear

Sinclair Noe — October 31, 2016

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DOW – 18 = 18,142
SPX – 0.26 = 2126
NAS – 0.97 = 5189
10 Y – .01 = 1.83%
OIL – 1.94 = 46.76
GOLD + 2.30 = 1278.00

Another Merger Monday. For the second consecutive week, we have a batch of big mergers announced. US mergers and acquisitions activity in October was already at a record high before these deals were announced, led by AT&T’s giant deal for Time Warner.

GE is merging its oil and gas business with Baker Hughes. GE will own 62.5% of the new publicly traded company, which will have combined revenue of $32 billion, while Baker Hughes shareholders will own 37.5% and will receive a one-time special dividend of $17.50 a share when the deal closes. The combination of GE Oil & Gas and Baker Hughes will create the second-largest player in the oil-field services industry in terms of revenue after Schlumberger.

Telecommunications company CenturyLink said it would buy Level 3 Communications in a cash-and-stock deal with an equity value of about $24 billion, or about $34 billion, including debt. The deal implies a purchase price of $66.50 per share – a premium of approximately 42% above where Level 3 shares were trading last week, before reports surfaced of a potential acquisition. The combination will increase CenturyLink’s fiber network in the US to 450,000 miles from about 250,000.

Blackstone Group will buy TeamHealth Holdings in a deal valued at about $6.1 billion. TeamHealth is a hospital staffing provider. Blackstone will pay TeamHealth shareholders $43.50 per share held, a premium of about 18 percent to the stock’s Friday close.

 Multiple sources say a long-rumored merger between DraftKings and FanDuel is imminent; the pair’s recent settlement with NY Attorney General Eric Schneiderman cleared a key obstacle to the pair-up. Some of the major details discussed last week included executive leadership, the name of the company, whether one site or two will be used, and where the company headquarters will be located. Combined, the two firms cover 90-95% of the daily fantasy market.

Brocade Communications spiked as much as 24% today after a report that the company is finalizing talks to sell itself. Bloomberg reported that a sale of the data-storage and networking provider could be announced as soon as this week, and Broadcom is one of the interested potential buyers. Broadcom makes semiconductors, part of the components that go into Brocade’s networking equipment – so it might make a good fit.

Consumers boosted their spending in September at the fastest pace in three months, while their incomes grew by a modest amount. Consumer spending increased 0.5 percent, a significant rebound from August when spending fell 0.1 percent. The increase was led by a 1.3 percent surge in spending on autos and other durable goods. Incomes increased 0.3 percent in September, slightly faster than the 0.2 percent gain in August. With spending rising faster than incomes, the personal saving rate slipped slightly to 5.7 percent in September, down from 5.8 percent in August.

A key inflation gauge followed by the Federal Reserve was up a slight 0.2 percent in September, while core prices, excluding food and energy, rose only 0.1 percent. Over the past year, core prices are up just 1.7 percent, still below the Fed’s 2 percent inflation target. The Atlanta Federal Reserve’s GDP Now forecast model showed the economy is on track to grow at a 2.7% annualized pace in the fourth quarter.

Fed officials meet this week, but they are expected to its key policy rate unchanged at 0.25 percent to 0.5 percent, where it has been since December of last year. The FOMC will wrap up their 2-day meeting on Wednesday. Still, it looks like a rate hike will come in December, and so this week’s FOMC statement will likely include some sort of vaguely blunt Fedspeak sending a clear message to markets that, barring any unforeseen hiccups, the Fed is a go for a December hike.

On Friday, we have the October jobs report. The economy has been averaging 178,000 new jobs per month for 2016, and that is the estimate for the past month; however, the September numbers were off a bit – only 156,000. This will be the biggest economic report before next week’s election.

Bond markets around the globe are acting rattled by inflationary pressures and October was a bad month for bonds, down 3%; and even US Treasuries lost 1.2%. People are responding to this idea that central banks will be suddenly shifting away from their excess accommodation.

Commercial banks in the US have amassed $90 billion of Treasuries and non-mortgage debt from federal agencies this year alone, bringing the total to $754 billion, according to data compiled by the Fed. The 5 biggest US banks held a combined $206 billion of government debt at the end of the second quarter, according to the latest available filings. That’s a 74 percent increase over the past three years.

Including federally guaranteed mortgage-backed securities, banks now own $2.4 trillion of government bonds, which would be the most since the central bank began compiling data in 1973. Why are banks hoarding all that debt? One reason is tighter regulations; the other is banks aren’t lending more because the economy isn’t growing as fast as we’d like it to grow. A big reason banks are funneling so much money into safe assets is that deposit growth is outstripping loan demand.

Eurozone economic growth remained steady at 0.3% in third quarter, indicating 1.6% over the year and suggesting the bloc’s steady recovery has not so far been knocked off course by Britain’s vote to leave the EU. Inflation figures, released at the same time, saw a modest rise in October. The service sector helped boost the Flash Inflation figure to 0.5%, up from 0.4% in September, but the number narrowly missed expectations for a 0.6% rise.

Officials and experts from OPEC countries and non-OPEC nations including Azerbaijan, Brazil, Kazakhstan, Mexico, Oman and Russia met for consultations in Vienna on Saturday and they could not agree to a specific commitment to join OPEC in limiting oil output levels to prop up prices, suggesting they want the oil producing group to solve its differences first. On Friday, OPEC members failed to agree how to put in place a global deal to limit production, following objections from Iran which has been reluctant to freeze its output. The non-OPEC did agree to meet again in November before a scheduled regular OPEC meeting on Nov. 30.

Elon Musk has unveiled a new kind of solar roof that will be offered starting next year through SolarCity, the home solar installation company that he is seeking to merge into Tesla. Whether meant to emulate clay tiles on a Spanish-style house or shingles on a colonial, Musk said they have 98% of the ray-collecting power of a conventional solar panel, are durable and will last longer than the house itself. Tesla gave little detail on cost, except to say that the cost of the roof would be less than a conventional roof plus solar. The plan is to combine the solar roof tiles with a bank of batteries called Powerwall, and provide power to an electric car.

Moody’s Investors Services just issued a bond rating report explaining how and why it considers climate change risk in rating energy companies. Among the G20 economies, electricity production and central heating account for 45 percent of the country’s carbon emissions. This is, of course, the economic sector that can utilize renewables right now. The firms in the electric business are capital intensive and issue bonds often. If the rating agencies become negative on the sector and lower the bond ratings, companies will pay more to raise money and a few will not be able to raise money.

Moody’s argument could be boiled down to this. The cost of renewable energy is falling, and lower renewable prices will put pressure on wholesale energy prices just as carbon pricing adds to the costs of the carbon-fueled generators. Thus, margins will fall the most for the least efficient carbon-fueled facilities. Moody’s entitled its report, “Carbon Transition Brings Risks and Opportunities”. In sum, it appears that big money is beginning to speak, and it says, “Carbon emissions count and if you don’t believe that, you’ll pay dearly if you need money and you might not get our money at all.”

Volkswagen plans to cut more than 10,000 jobs in coming years as the German auto giant switches its focus to making electric cars in the wake of its Dieselgate scandal.

Prime Minister Justin Trudeau has finally signed Canada’s free trade agreement with Europe at a ceremony in Brussels. CETA will remove 98% of tariffs – and officials hope it will generate an increase in trade worth $12 billion a year. For a while it looked like the trade deal might not happen because Wallonia, a province in Belgium objected to certain provisions, which were ultimately changed.

But the Walloon intransigence has underlined the extent to which trade has become politically radioactive as citizens increasingly blame globalization for growing disparities in wealth and living standards. What about implications for the much-debated US –EU trade deal? EU Trade Commissioner Cecilia Malmstrom declared, “TTIP is not dead,” adding that negotiations will continue after the November election.

Putting the fizz back into its line-up, Coca-Cola Ginger was launched in Australia today, as the South Hemisphere country ushers in summer. Coca-Cola South Pacific noted that sales of ginger-flavored drinks were up 6% in Australia over the past year, and Bundaberg Ginger Beer has been a favorite since it was launched in 1960.

Sony Corp cut its annual profit outlook due to losses related to the sale of its battery business – disappointing a market that had been hoping for an upward revision on sales momentum for PlayStation 4 and the launch of its virtual reality headset. Sony will announce its first-half results tomorrow.

Happy Halloween to everyone. I hope you enjoyed my costume today –if you haven’t noticed, I’m dressed as a weary broadcaster, sick to death of this seemingly never-ending political campaign where issues have fallen into a bottomless abyss, never to see the light of day. Eight more days until the 2016 campaign is over. Unless … No we won’t even go there. It’s gonna be over. Anyone who mentions the 269-269 electoral vote scenario gets banned.

Downside Volatility Continues to Start Week

Charles Schwab: On the Market

Posted: 6/27/2016 4:15 PM ET

Downside Volatility Continues to Start Week

U.S. stocks continued Friday's sell-off in the aftermath of the U.K.'s vote to leave the European Union, with financials and technology issues responsible for the brunt of the decline. Treasury yields continued lose ground, while a preliminary read on services sector activity was unchanged from the previous month and some regional manufacturing data remained in contraction territory. The U.S. dollar surged to the upside and gold was also higher, while crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) fell 261 points (1.5%) to 17,140, the S&P 500 Index lost 37 points (1.8%) to 2,001, and the Nasdaq Composite tumbled 114 points (2.4%) to 4,594. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil dropped $1.31 to $46.33 per barrel and wholesale gasoline was $0.04 lower at $1.53 per gallon, while the Bloomberg gold spot price rose $10.89 to $1,326.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 1.1% to 96.48.

Medtronic PLC (MDT $82) inked a deal to acquire circulatory support technology firm Heartware International Inc. (HTWR $58) in a transaction valued at $1.1 billion. As part of the agreement, MDT will pay $58 per share in cash for each share of HTWR, a 93% premium to Friday's closing price, with the purchase expected to close by the end of October. Shares of MDT closed lower, while HTWR rallied over 90%.

Preliminary services sector read unchanged, regional manufacturing remains in contraction

The preliminary Markit U.S. Services PMI Index in June was unchanged from May's final reading of 51.3, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest rise to 52.0. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently.

The Dallas Fed Manufacturing Index ticked slightly higher to -18.3 for June from May's unrevised -20.8 level with economists forecasting an improvement to -15.0. A reading below zero denotes contraction.

Treasuries were decidedly higher, with uncertainty remaining after Friday's Brexit vote as the yield on the 2-year note fell 3 basis points (bps) to 0.60%, the yield on the 10-year note declined 10 bps to 1.46%, and the 30-year bond rate decreased 13 bps to 2.28%. For the latest analysis on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' recent article titled Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. You can also follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will commence with the release of the third and final reading of 1Q GDP, with economic output expected to have ticked higher to a 1.0% quarter/quarter (q/q) annualized rate of expansion, from the 0.8% pace announced in the second release, while personal consumption is expected to be adjusted higher from a 1.9% to a 2.0% q/q increase. Investors will also get a look at the S&P/CaseShiller Home Price Index, forecasted to show home prices in the 20-city composite rose 5.41% y/y during April, and were 0.58% higher m/m on a seasonally-adjusted basis. Finally, after the opening bell, the Consumer Confidence Index and Richmond Fed Manufacturing Index are scheduled for release.

Brexit fallout continued to weigh on Europe, Asia mostly higher despite yen strength

European equities finished lower, extending the severe losses seen last Friday in the wake of the U.K.'s stunning vote to leave the European Union (EU)—known as a Brexit—that sent shockwaves through the global markets with U.K. banks taking the brunt of the burden. Adding to the uncertainty, Scottish First Minister Sturgeon said that a second independence referendum for Scotland was "very much on the table." For the latest on the markets, Schwab's outlook, and other considerations surrounding Brexit, Schwab offers a number of articles for investors to consider, including the latest Schwab Market Perspective: British Shock—What's Next, at www.schwab.com/marketinsight. You can also follow Schwab and on Twitter: @schwabresearch.

U.K. Chancellor Osborne delivered a speech ahead of the market's open in an attempt to calm nerves, saying that despite the uncertainty, "you should not underestimate our resolve" in navigating the unchartered waters ahead. Meanwhile, later in the day in speaking to Parliament, Prime Minister Cameron rejected pleas for a "do-over" Brexit vote, instead appointing a group of officials to prepare for the withdrawal from the EU. The Conservative Party also accelerated the timeframe for a new leader, pulling the timetable back by nearly a month to September 2. For in depth analysis of the issue, as well as what is next, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, timely article After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The British pound was lower, adding to its record loss on Friday, and the euro saw pressure versus the U.S. dollar, while bond yields in the region were lower.

Stocks in Asia finished mostly higher, being the first to "dip its toe" in the uncertainty of the aftermath of Friday's severe rout in the wake of the decision by the U.K. to quit the European Union. Japanese equities rallied, despite the yen showing strength, and after an emergency meeting between Japanese policymakers. Prime Minister Abe, Finance Minister Aso and Bank of Japan (BoJ) deputy governor Nakasone concluded their meeting without any substantive moves, but with a pledge to act if necessary, fueling speculation of some sort of intervention by the BoJ with either more stimulus, a BoJ easing, or a combination of the sort. Mainland Chinese stocks advanced and those trading in Hong Kong were flat, with Premier Li saying despite the risks of the Brexit fallout, he still expects to achieve their growth targets. Finally, strength in materials helped Australian securities tick higher, while listings in South Korea and India were both nearly unchanged.

Tomorrow, the international economic docket will be light, offering the Import Price Index from Germany and consumer confidence from France, Italy and South Korea.

Financial Review

Until After the Fact

Sinclair Noe — January 25, 2016

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

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DOW -208 = 15,885
SPX – 29 = 1877
NAS –  72 = 4518
10 Y – .03 = 2.02%
OIL -2.36 = 19.83
GOLD + 11.90 = 1108.90

Stocks in Asia rallied overnight, with the Topix index in Tokyo increasing 1.3 percent, China’s Shanghai Composite Index rising 0.8 percent and the MSCI Asia Pacific Index adding 1.2 percent. Despite gaining in early trading, shares in Europe turned lower. US stocks were down all day, but the selling got worse into the close.

Oil gave up some of its recent gains after Saudi Arabia said it is keeping up investments in energy products and data from China showed that diesel consumption dropped for a fourth consecutive month. Also, Iraq’s oil ministry told Reuters that the country had record output in December, producing as much as 4.13 million barrels a day. A senior Iraqi oil official said separately the country may raise output even further this year. After posting a 21% gain in just 3 days last week, West Texas Intermediate closed down 7.3%.

Following the lifting of economic sanctions and the release of billions of dollars’ worth of frozen Iranian assets, Tehran is ready for business: The country just struck a provisional deal to buy eight A380 superjumbos, while an agreement for 100 more planes from Airbus and Boeing could be completed this week. Over the weekend, China and Iran also mapped out a plan to broaden relations and expand bilateral trade up to $600 billion over the next decade.

Market-based expectations point to a 96 percent chance of the Federal Reserve maintaining rates unchanged at its meeting on Wednesday. In other words, there is also most zero chance of a rate hike, because the Fed knows they can’t surprise the markets right now.

The April FOMC meeting still has about a 30% chance of a rate hike. Investors will be scouring the statement released afterward for hints that the Fed is backing away from its base case of four quarter percentage-point rate increases in 2016.  Roughly $2.5 trillion of stock market value wiped out in the past three weeks could throw the Fed off its course of gradual interest rate hikes.

The dollar has appreciated by some 2 percent since the central bank last met on Dec. 16. Coming on top of a 11 percent increase in the year prior, the latest advance will curb already slowing economic growth and put downward pressure on an inflation rate that the Fed judges is too low as it is. The Fed doesn’t want to appear to kowtow to the markets, so look for the statement to mention something about how the Fed remains “data dependent”.

One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the drop in oil prices. Fast-forward to today and the analysts provide an update to their previous thesis. Here’s what they say:

“The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market. The ABX history suggests that oil will see more declines in the next couple of months and find a floor somewhere in the low 20s in the March-April time frame.

Both the duration of the decline (1.5+ years) and the scale of the decline are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective “bubble” bursting patterns are so similar.

“Consider how things tend to work. Denial on what constitutes fair value is a big component of bubbles, on the part of both market participants and policymakers. When perceived “bubbles” burst, markets take their time in steadily shredding views of the perception of fundamental value, as prices move lower and lower. Along the way, many will cite “technical factors” as the cause of the decline, which in some way suggests the price decline may not be real when in fact it is all too real.

In the end, the technicals drive the fundamentals, as credit flees and borrowers go bust, and a feedback loop lower kicks in. Lower prices beget accelerated selling, as asset owners need to raise cash. It could be margin calls or it could be producer selling needs, it doesn’t really matter: the selling becomes inevitable and turns into forced selling.”

The point here is not that oil is necessarily the new subprime per se but that the recent action in the price of crude resembles nothing if not the bursting of a bubble and the sudden realization that the asset has been overvalued for too long.

Meanwhile, the economists at Moody’s Capital Markets Research weigh in; they say, if you want to know where equities are going, look at junk bonds. Specifically, look at the spread in yield between junk bonds and Treasuries. That spread has been widening sharply. And look at the Expected Default Frequency (EDF), a measure of the probability that a company will default over the next 12 months. It has been soaring.

Moody’s Expected Default Frequency began spiking last summer and has nearly doubled since then to 8%, the highest since 2009. The average spread between high-yield bonds and Treasuries has widened to 813 basis points (8.13 percentage points). But at the lower end of the junk-bond spectrum (rated CCC and below), the yield spread is a red-hot 18.4 percentage points.

Here’s why the spread matters: A wider-than 800 basis-point high-yield spread reflects elevated risk aversion that will reduce capital formation and spending by non-investment-grade businesses. In addition, ultra-wide bond yield spreads favor a continuation of equity market volatility that should sap the confidence of businesses and consumers. How bad is it? That’s the scary part, they say we won’t know until after the fact.

California Insurance Commissioner Dave Jones is urging insurers to voluntarily divest from thermal coal, citing the risks of climate change and the danger of losses on assets backing policyholder obligations. California is the sixth-largest insurance marketplace in the world, and this is the first time a state insurance regulator has called for the divestment of such assets. The commissioner is also requiring insurers to annually disclose their carbon-based investments, including holdings in oil, gas and coal.

McDonald’s reported fourth-quarter profit and sales that beat expectations.  US same store sales were up 5.7% in the fourth quarter. Same-store sales across all regions rose 5% from a year earlier. The big reason for the turnaround is that customers are eating up the all-day breakfast menu.

Halliburton reported a fourth-quarter net loss of $28 million, or 3 cents a share, compared with $901 million, or $1.06 share a year earlier. Halliburton also said it expanded its list of assets to sell as it tries to convince antitrust authorities around the world that its purchase of rival Baker Hughes won’t impede competition. The cash and stock deal was valued at $34.6 billion when it was announced near the end of 2014, just as oil prices had begun their downward spiral. Shares of both companies have dropped more than 30 percent since then.

This week’s quarterly earnings announcements will include results from three of the tech sector’s most important companies: Apple reports on Tuesday, Microsoft and Amazon report on Thursday.

Alphabet has agreed to pay $185 million in a back-tax settlement with U.K. authorities, setting off a hostile response from opposition politicians questioning the government’s handling of the case. According to a panel in 2013, Google paid just $16 million in U.K. corporate tax from 2006 to 2011 on $18 billion of revenue. Separately, Apple is facing a European tax investigation that could force the iPhone maker to pay more than $8 billion in back taxes.

Johnson Controls and Tyco International have announced plans to merge, in a deal that values the combined company at $40 billion. Both firms have recently fallen on hard times – Johnson has dropped more than 20% over the past year, while Tyco is down more than 25%. The new company will change its headquarters to Ireland for tax purposes.  Tyco was one of the first big U.S. industrial companies in seeking tax relief by moving its legal residence offshore. The company moved its headquarters to Bermuda from New Hampshire in 2007, then to Switzerland in 2009, and to Ireland in 2014.

Siemens has agreed to buy CD-adapco, a privately held U.S. engineering software firm, for close to $1B in cash. The acquisition comes ahead of Siemens’ annual shareholders meeting on Tuesday.

Twitter CEO Jack Dorsey tweeted late Sunday night that 4 senior Twitter executives are leaving the media company, the biggest leadership changes since Dorsey returned as chief executive as he struggles to revive the company’s growth. Twitter’s stock has fallen nearly 50 percent since Dorsey’s return last year and is now trading below its IPO price.

U.S. health inspectors have found serious deficiencies at Theranos’ northern California laboratory that, if not fixed, could see the lab suspended from the Medicare program. Regulators did not detail the problems, but results of the inspection are expected to be made public soon. The findings could also lead Walgreens to take an even harder look at what remains of its partnership with Theranos.

Takata shares tumbled 10% in Tokyo overnight, hitting their lowest level since 2009, after U.S. regulators said recalls involving the company’s air bags would expand by around 5 million vehicles. Takata executives are also meeting automakers this week to discuss the company’s financial condition, including how to split recall-related costs that could climb into the billions of dollars.

Financial Review

Bad Things in the Midwest

Sinclair Noe — May 14, 2015

 

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DOW + 191 = 18,252
SPX + 22 = 2121.10
NAS + 69 = 5050
10 YR YLD – .04 = 2.24%
OIL – .77 = 59.73
GOLD + 6.30 = 1222.40
SILV + .35 = 17.55

The Standard & Poor’s 500 Index closed at an all-time high, taking out the previous closing high of 2117.69. The Dow is still about 36 points shy of its record closing high. The dollar is on track for its longest weekly losing streak since October 2013. The bond market rallied, just a little, which is at least a change from the past couple of weeks. The earnings season is winding down, and it was ugly, but it looks like there will be positive earnings growth coming from the first quarter numbers. The economic data has been tepid.

The number of Americans who applied for unemployment benefits in the first full week of May fell by 1,000 to 264,000. New claims have registered less than 270,000 for three straight weeks, only the second instance in which that’s happened since 1975. Continuing jobless claims, people already collecting benefits, were unchanged at 2.23 million in the week ended May 2.

Producer prices, or prices at the wholesale level, fell a seasonally adjusted 0.4% in April to mark the seventh decline in the last nine months, mainly because of lower gasoline and food costs. Core producer prices that exclude the volatile categories of food, energy and trade rose 0.1% last month; the increase was mainly due to higher prices for drugs. Over the past year overall producer prices have fallen a record 1.3% on an unadjusted basis. Yet the core rate has risen 0.7% in the same span.

U.S. corporate spending on capital projects could fall this year to the lowest level since 2011, with steep reductions by the energy industry and companies in other sectors cutting spending amidst broad concerns about global growth. Among the S&P sectors, only the materials and financials sectors expect to spend more in 2015 than they did last year. They’re not spending at a pace that would suggest a global recovery. According to data from Thomson Reuters, estimates from analysts show that total S&P 500 capex spending could dip to $641 billion in 2015 from actual spending of $718 billion for 2014, marking the lowest level since 2011.

And it’s not just businesses that are holding on to the purse strings; yesterday we had a report showing retail sales were flat last month. It was widely believed that lower oil prices would put extra money in shoppers’ wallets and they would rush out to spend. Oil prices remain more than 40% below the highs reached in mid-2014, which equates to a roughly $150 billion ‘tax cut’ to consumers.

One reason for the lack of spending might be middle class debt. According to the Federal Reserve, as of 2013, the average debt of middle-class families, those that fall within the middle three-fifths of the population by earnings, amounted to an estimated 122 percent of annual income. That’s down from 2010, but still higher than 2001. Consumers have been trying to save more because they realized that gas prices could go higher, and it is happening; consumers also realize that interest rates could go higher, and for a typical household, higher rates could spell disaster.

Futures contracts imply that traders see the fed funds rate at about 0.3 percent rate by December. That’s the lowest estimate of the year, and about half the forecast for the overnight lending benchmark that the Fed gave in March. Fed policymakers have been saying that a rate hike will probably happen this year, with the caveat that any move will be data dependent. The economic data looks soft right now but the Fed has another motivation for a rate hike: financial stability. With interest rates near zero, the Fed is limited in their ability to deal with financial instability. They don’t have many tools in their tool belt.

So the Fed says rate hike, the futures traders say no; and this is setting up for another market-wide tantrum. Former Fed Chairman Alan Greenspan, speaking yesterday, said: “Just remember we had the ‘taper tantrum.’ And we’re going to get another one.”

If for no other reason than a blind pig can find an occasional acorn, Greenspan is probably right about this; traders are almost certain to complain about higher rates, even if rates have been abnormally low for a very long time; which will then give them an excuse to trade with higher volatility. Higher volatility equates to bigger profits, or losses if they get it wrong. The start of a tightening cycle typically causes some rise in volatility, but rarely a bear market, provided the Fed doesn’t surprise the markets. The extent of the impact is likely to be influenced by two other conditions: changes in equity valuations and the direction of inflation.

For now, inflation remains moderate but that can change; and one big factor will be energy prices. The fact that equity multiples have been rising suggests that markets are at greater risk for at least a modest correction; not a crash but enough to get your attention. And when we talk about rising multiples, we generally think of momentum stocks, and the usual suspects in this area would be biotech and social media stocks. The flip side to this line of thinking is that stocks climb a wall of worry. Momentum stocks typically represent areas of growth in an otherwise stagnant economy.

For now, volatility remains at low levels, the VIX, or volatility index is trading just under 13, almost half the level from back in December. It kind of feels like the calm before the storm.

Bad things are happening in the Midwest.

Deadly avian flu viruses have affected more than 33 million turkeys, chickens and ducks in more than a dozen states since December. On Tuesday, agriculture officials confirmed that the bird flu outbreak that has spread throughout the Midwest for months had reached Nebraska, making it the 16th state affected. Today, South Dakota reported its first possible infection on a chicken farm with 1.3 million birds in the eastern part of the state. The Iowa Poultry Association says there is no food safety risk for consumers. Chickens, turkeys and other poultry infected with bird flu will be destroyed and will not enter the food supply. Still, Iowa Governor Terry Branstad declared a state of emergency on May 1 due to the avian influenza outbreak. The virus may pose no risk to humans, but it is already having an impact on prices at the grocery store.

Iowa, where one in every five eggs consumed in the country is laid, has been the hardest hit: More than 40 percent of its egg-laying hens are dead or dying. For now at least, the biggest impact of the virus is on egg prices. It is estimated that prices will rise 1.6% for every million chickens destroyed. About 90 percent of the more than 25 million chickens that are being destroyed in Iowa produced liquid eggs, and already the wholesale price for those eggs nationwide has nearly doubled from late April. Liquid eggs are used in everything from mayonnaise to cake mix and are a major product of Iowa’s poultry industry.

According to the Associated Press, the price of a carton of eggs at supermarkets has increased 17% over the last month, hitting an average of $1.39. Bulk prices paid for eggs by cake mix and mayonnaise manufacturers, meanwhile, have spiked 63% over the past two-and-a-half weeks. Turkey prices are up as well, with breast meat at delis rising 10% since mid-April. So far, chicken prices appear to be unaffected.

Certainly the avian flu affects chicken farmers but from there it ripples through the Midwestern economy to the support businesses, ranging from bank lenders and insurers to trucking operations, feed mills and farmers. It hasn’t hit corn and soybean farmers yet, but it means a smaller market for part of their crops.

Next stop:
Chicago,
“Hog butcher for the world,
Tool maker, stacker of wheat,
Player with railroads and the nation’s freight handler;
Stormy, husky, brawling,
City of the big shoulders.
They tell me you are wicked and I believe them.”
City of Junk.

Moody’s Investors Service dropped two other hammers on Chicago taxpayers today, downgrading debt on both Chicago Public Schools and the Chicago Park District to junk levels. For the schools this will apply to $6.2 billion in general obligation debt.

The action won’t necessarily prevent CPS from borrowing more. But it will make that more costly, and comes at a particularly sensitive time, as the district seeks to renegotiate hundreds of millions of dollars in currently-losing swaps contracts. Beyond that, the district faces a deficit of well over $1 billion in its budget for the school year that begins on July 1, and is in negotiations with the Chicago Teachers Union, which says the current financial woes are “manufactured.”

At the parks, $616 million in outstanding general obligation debt is affected. Yesterday, Moody’s downgraded the city’s credit rating to junk status. Moody’s said Chicago’s options for curbing its $20 billion unfunded pension liability “have narrowed considerably” after last week’s Illinois Supreme Court ruling invalidated a state pension reform law. Moody’s said spending cuts and tax increases may be needed, regardless of how the court rules. The state could force the city to pay retirees directly, possibly leading to another rating cut. Moody’s on Tuesday also cut ratings on Chicago’s sales tax, motor fuel tax, and water and sewer revenue bonds.

Cities don’t get to play by regular bankruptcy rules. Cities don’t really have the choice of liquidating and going out of business. So when they can’t keep up with pensions, payrolls, services, and other obligations, they get temporary bankruptcy protection under Chapter 9. But they know that sooner or later they need to come up with a plausible matching-ends-with-means plan for coming out of bankruptcy. How will this all play out? I don’t know. But I’m guessing there might be a new nickname for Chi-town. City of big haircuts.

FINANCIAL REVIEW

Oil and Implications

Sinclair Noe — December 2, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW + 102 = 17,879
SPX + 13 = 2066
NAS + 28 = 4755
10 YR YLD + .07 = 2.29%
OIL – 1.48 = 67.52
GOLD – 14.30 = 1199.50
SILV un = 16.57

Record highs on Wall Street. The day’s gains were broad, with nine of the 10 S&P 500 industry sectors higher. The only group to fall was telecoms. I think this is the 32nd record high for the Dow this year; pretty soon we’ll be counting them in dozens.

Records for the bond market as well. US corporate bond sales for 2014 have topped $1.5 trillion, setting a new annual record, as borrowers lock in low rates. According to Lipper, investors have poured money into corporate investment-grade funds for 24 straight weeks, with inflows of $880 million for the week ending Nov. 26. Borrowers have offered $1.168 trillion of investment-grade notes in 2014 and $344 billion of junk bonds. Yields on corporate bonds in the U.S. fell to 3.57 percent in June and have since risen to 3.86 percent yesterday.

So, record highs for equities, record issuance for corporate bonds; the story line is that this is a good place to be, and when you look abroad, it makes sense. Yesterday, Moody’s Investors Service cut Japan’s credit rating to A1. Japan is in a recession after a sales tax increase in April destroyed consumer demand, and Prime Minister Shinzo Abe is facing a vote of confidence, and he is likely to retain a majority. As for Europe, well, don’t hold your breath waiting for the ECB to ride to the rescue.

Meanwhile, Russia is headed for a recession. The economic development ministry revised its GDP forecast for 2015 from growth of 1.2 percent to a drop of 0.8 percent. Russian households are expected to take a hit, with disposable income seen declining by 2.8 percent against the previously expected 0.4 percent growth. Sanctions over Moscow’s role in eastern Ukraine are making things worse, hurting Russian banks and investment sentiment in particular. Russia’s economic outlook is at the mercy of the global market for oil, their national budget depends on it.

Another consideration is that Russia and Iran want to escape Western sanctions, meanwhile China continues to demand more oil, and the counterpunch is to trade oil without dollars. We hear warnings that we are seeing the early signs of a transformation in the global monetary system, away from the petrodollar, away from the dollar as the reserve currency. But that hasn’t happened yet, and today the Russian ruble continued its descent to fresh record lows. The result is a very disorderly capital flight from Russia, requiring the Russian Central Bank to step in and buy rubles, and raising the risk of emergency exchange controls. Some Russian banks have already started limiting withdrawals of dollars and euros to $10,000, an implicit lockdown for big depositors. Danske Bank says Russian “funding problems are increasing dramatically,” and “Russia is now flirting with systemic problems.”

Oil prices continued to fall today as a Saudi prince declared that the kingdom would only consider cutting oil production if Iran, Russia and the US agreed to match those cuts because it wants to protect its market share. There is more to the Saudis’ position; they know that low oil prices hurt Russia and Iran, both supporters of Assad in Syria. But today, the Saudi royal line was that falling prices are a result of “over-production everywhere” and not a pre-meditated strategy by Saudi Arabia.

Whatever the cause, the result could be one of the biggest transfers of wealth in history, potentially reshaping everything from talks over Iran’s nuclear program to the Federal Reserve’s policies to further rejuvenate the U.S. economy. Every day, American motorists are saving $630 million on gasoline compared with what they paid at June prices, and they would get a $230 billion windfall if prices were to stay this low for a year. The vast majority of that will flow into the economy, with lower-income households living on tight budgets likely to use money not otherwise spent on gas to buy groceries, clothing and other staples. At current prices, the annual revenue of OPEC members would shrink by about $600 billion, money that will instead stay within the borders of the world’s biggest oil importers, led by the United States, China and Japan.

Although falling oil prices lower inflation, the Federal Reserve claims the low inflation is probably temporary, and they are not altering their underlying judgments about policy. Nonetheless, the slump in oil prices may also help to persuade the European and Japanese central banks to implement further monetary easing as prices remain subdued. It was just about 3 years ago that oil prices, and other commodity prices were on the rise and headline inflation was running a bit higher; back then the argument was to strip out energy from the inflation consideration, and that’s what the Fed did. Meanwhile the ECB did not and they raised rates in Europe, which turned out to be incredibly stupid.

So now that oil is plunging, the same people who saw rising oil as a reason to raise rates should see falling oil as a reason for expansionary policy, right? Not exactly. Now we’re being told to pay no attention to low headline inflation, which they say is just oil, and anyway falling oil prices are a stimulus. So when oil is going up, it’s a reason to tighten policy, and when it’s going down, it’s a reason not to loosen policy.

Meanwhile, the stock market has been hitting record high after record high, corporate bonds are all the rage, and Treasury yields have dropped. Not small moves by the way. From mid-October, equities have surged almost 11% while commodities have fallen 7%. Equity rallies that include a series of record highs after an impressive multiyear advance, which has been the case this year, are usually underpinned by robust economic growth. And last week we saw third quarter economic growth revised higher to 3.9%, which is good; and unemployment continues its steady decline to 5.8%; but it is hardly the sort of economic growth that could be called robust. It doesn’t seem to merit unrelenting records in stocks and it isn’t enough to lift the economy to escape velocity. And if economic performance is really stronger than it looks and feels, and if the stock market is correct in its valuations, then we are setting up a big divergence in bonds and commodities, which are pointing to weaker overall growth.

More and more it looks like equity prices are propped up by share buybacks and dividend hikes and creative accounting, along with the otherwise untouched piles of cash on corporate balance sheets. Meanwhile fixed income investors chase yield and double up on everything with little regard for risk. At some point, the divergences will be brought into balance by economic and policy fundamentals, and that means that we need to see global economic growth if the stock records of today are to be believed, or we will see the bond and commodity markets were right and the stock markets will be dragged down to that level.

In economic news today:
The Commerce Department says construction spending rose 1.1% in October, after having slipped 0.1% in September. Fueling the gains in October was a 1.8% increase in spending on single-family houses. A similar boost in building schools increased government construction spending 2.3%. Total construction spending has climbed 3.3% from a year ago to $971 billion. Still, the solid growth in homebuilding underlines that sector’s weakness during much of the past year. Over the past 12 months, private residential construction spending has risen just 1.9% to an annualized rate of $353 billion.

Ford Motor sales declined 1.8% last month compared to November 2013, the company reported Tuesday. While a slip was anticipated the 187,000 vehicles sold was a weaker showing than anticipated. Ford still sells more trucks than cars or utility vehicles but that figure declined 9.9% to 70,903. The bright spot for Ford – Mustang sales were up 62%.

Chrysler, which is now a part of Italy’s Fiat Chrysler Automobiles, showed a 20% year-over-year increase in U.S. vehicle sales last month for a total of 170,839 units sold. This marks the group’s strongest November sales in 13-years with all five of its existing brands (Chrysler, Jeep, Dodge, Ram Truck and Fiat) posting gains.

General Motors reported a 6% increase in sales delivering 225,818 vehicles in November. Retail sales were up 5% which fleet deliveries grew 11%. Meanwhile the recall troubles continue at GM, as they are recalling 273,182 midsize SUV’s and Buick LaCrosse sedans in the U.S. because the low-beam headlights can cut out, temporarily or permanently. When vehicle in other countries are included, the total climbs to 316,357. The headlight recall brings the total number of GM recalls this year to 79. The total number of vehicles involved is 24.5 million.

SPY Gains of the XXX Olympiad

The stock market has given us over the past six weeks all the thrills of a summertime Six Flag amusement park ride. This serrated performance of risk on/risk off greed and fear rests upon the painful to watch unraveling of the European Monetary Union (EMU).

Now headlining the limited engagement of sovereign surrender of the old country to Germany is Spain. From CNBC, Wednesday night, Moody's Investors Service cut its rating on Spanish government debt by three notches on Wednesday from A-3 to Baa-3. Moody's rating puts it one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook.

Egan-Jones also cut Spain's sovereign rating to "CCC+" from "B," pushing the country's debt deep into speculative territory.  The rating cut, Egan-Jones's fifth for Spain this year, carries a "negative" outlook.

Fitch Ratings cut Spain's rating by three notches on June 7 to BBB, one notch above Moody's, and put a negative outlook on the credit

The current bearish market metronome to Europe’s impotence and incompetence, Spain’s insolvency and other countries soon to follow, is neither surprising, or, heretofore, improbable. Yet, angst-filled investors remain invested.

Still, a summertime rally will climb this particular wall-of-worry, albeit in a saw tooth pattern, if only because so few people believe that it can or should. Only a fortnight ago, we stared into the abyss having received freshly humbling economic reports on real estate and non-farm payroll. This doom and gloom was sandwiched in-between periods of misplaced optimism about the outcome of Europe’s banking crisis and future global growth.

Treasury rates made their final approach and landed into the history books, June 1,  reaching 1.45% on the 10-year and 2.51% on the 30-year, exceeding all-time lows reached in the fourth quarter of 2008.

Gold and silver has finally awaken from their $1,500 range-bound sleep with explosive upside moves, also June 1, coinciding with revisions of two previous months’ worth of punk GDP growth and a terrible realization that a new Fed punchbowl is nearby while the Presidential hopeful, former Massachusetts governor Mitt Romney chances for capturing the White house in November are brighter than ever.

Only in these perverted times will bad news make the stock market happy. Although in testimony before congress, Fed Chairman Ben Bernanke downplayed any urgency in enacting Quantitative Easing III (QE III), and was instructed by a member of congress to take the punchbowl away; you can be sure that it will remain. Since, without QE III, many politicians and many portfolio managers alike fear for their careers; and the economy, too.

The remaining June milestones to watch include the Greece’s Parliamentary (Snap) election to elect parties that the (EMU) will approve of and vice versa; keeping the dream of higher asset prices and no bank loses alive. It’s being reported that $1 billion dollars daily is being withdrawn from Greek banks prior to Sunday, June 17^th election.

France’s Legislative Second Round election will to determine if the Socialists will take control of their government. Both countries’ elections occur on the same day.

On June 19th, the Federal Open Market Committee (FOMC) two-day meeting begins. Opinion is split as to whether or not an announcement regarding QE III will be made. The usual monthly data sets throughout the rest of June should experience an elevated sensitivity because the current atmosphere of presidential politics supercharges all things economic.

So, why will there be a summer stock market rally? Be patience, we’re getting there.

Over the past two years, knowledgeable talking heads informed us that Greek and Portugal fiscal catastrophes are manageable, however, if the banking crisis infects Spain, then, its economy is just too large to save and the ballgame for developed nations and emerging markets is over. Well, that time has come. Spain officially asked for a €100 billion bailout.

I’m sure you have heard that the rescue structure is the Ireland model. The double quote below, the first from Gluskin Sheff of David Rosenberg, and the second from the blog site Zerohedge commenting on Rosenberg’s comment succinctly summarizes the folly of rescue:

Rosenberg - When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% - it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.

Zerohedge - As we have pointed out vociferously over the past few days, even though the assistance is being earmarked for the banks, the Spanish government assumes the responsibility and so this once 'low national debt' sovereign is following in Ireland's footsteps as its debt/GDP takes a 10pt jump to 89% (based on the government's data) and much higher in reality (when guarantees and contingencies are accounted for).

If the too big to contain (TBTC) outstanding bad debt equation about the EMU was true two years ago, it’s no lees true, today.

Taken all together, this is a continuation of the crisis and fallout from 2008. Greece is in a depression. Europe will soon enter a depression. Eventually, the entire world will sink into an economic depression; another economic depression in a long line of collapses throughout history. But, somehow, we will survive. We always do. There will be new winners and new losers in the 21st century.

Back to this summers’ rally. The S&P 500 Index 52 week range is 1,074.77 - 1,422.38. The close on June 13^th was 1,314.88. Its 6-month high was 1419.04 and low was 1205.535, a ten handle move on the index before Labor Day is not unreasonable. The stock market is as much a psychological and emotional occurrence as any endeavor imaginable.

On a technical basis, the market is near the middle of its 180-day trading range. The market is nearer to an oversold condition than an overbought one. The market can ignore reality (bad news) for weeks, sometimes months, at a time. This summer’s rally may take out the year’s highs but will be the last opportunity for money managers to enhance long returns in 2012.

When the stars and stripes are waived this summer in London at the Games of the XXX Olympiad, beginning July, 27^th, lasting thru August 12^th, and gold, silver, and bronze medals for individual effort and achievement are collected by young men and women on behalf of our republic, we will lay down our various political blood sports, for a brief moment, and swell with national pride.

Is a summer rally guaranteed because the nations of the world are watching their fellow countrymen represent and excel in their sport of passion, as a payoff for years of dedication through their blood, sweat, and tears, while also inspiring the next generation to compete and succeed? No.

But, show me anything that makes sense in a de-levering world of microscopic interest rates, austerity programs that allegedly spurs economic growth, notional derivative contract values several times over of total global wealth today, an insolvent global banking system that extends and pretends the day of reckoning, or a financial world that believes somehow, someway, helicopter Ben will save the day.

We all need to believe in something.

A Brief Weekly Review and Outlook

Last week was a continuation of an exuberant market during earnings season and a flailing economy complete with bad housing data and seven additional FDIC bank closings. The bulls argue corporate balance sheets while bears focus on the economic data. So, which is safer; driving looking into the rear view mirror or the windshield?

There is near unanimous agreement in the market that deflation has defeated inflation. Unanimous consensus always makes me nervous. Looking around the US, deflation is prominent, with all things real estate. However, US real estate is losing its impact, month by month, on the global economy.

What cannot be timed is when global growth, and the inflation that comes with it, overrides the drag of American real estate.

The amazing Treasury bond market is like sleeping with a very large snake; hopefully, you wake up first. The bond market is pricing in a near depression, perhaps, while the stock market is celebrating business as usual. Or, the rest of the world is madly purchasing US debt, thereby, driving down yields, as there is no safe alternative to treasuries, at the moment. The wild card is government intervention – or the lack of it – from an economic perspective.

On the other hand, the municipal bond market continues to offer a much better yield, although, 41 out of 50 states are insolvent, and all five Gulf States are exposed to loss of revenue and clean up expenses from the BP oil spill.

Gold was up $1 buck last week. Gold is still outperforming stocks for the year.

The week ahead offers more corporate earnings reports and several important economic reports.