Financial Review

Cake and Panic

Sinclair Noe — May 17, 2017

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

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DOW – 372 = 20,606
SPX – 43 = 2357
NAS – 158 = 6011
RUT – 38 = 1355
10 Y – .11 = 2.22%
OIL + .30 = 48.96
GOLD + 24.20 = 1261.90

Today marks the 225^th anniversary of the New York Stock Exchange. On the floor of the exchange, they celebrated with cake and panic. Stocks started the session with triple digit losses on the Dow, and then drifted lower throughout the day.

It was the worst loss on Wall Street since September, while the Nasdaq Composite Index plunged 2.6 percent for its steepest drop since June 24.

The dollar fell by nearly 2 percent against the yen to its lowest level since April and hit a six-month low against the Swiss franc. The dollar index, which tracks the U.S. currency against six peers, fell 0.6 percent to its lowest level since Nov. 9, surrendering all its “Trump bump” gains.

The VIX, the volatility index jumped nearly 5 points, or 46%. The 10-year Treasury yield sank to 2.22 percent in its steepest decline since July. The spread between 10-year and two-year yields narrowed to the flattest since before Trump’s election.

Today’s drop in markets comes after Tuesday evening saw the second damaging story for President Donald Trump in as many days. The New York Times reported  that Trump asked former FBI director James Comey to end an inquiry into ties former national security advisor Michael Flynn had to Russia.

And Comey documented the meeting in a memo. The Comey memo caused alarm on Capitol Hill and raised questions about whether Trump attempted to interfere with a federal investigation, something that might constitute obstruction of justice and could potentially be invoked to impeach Trump.

And this report came just a day after The Washington Post reported Trump revealed “highly classified” information to Russia’s foreign minister. Last week, Trump fired Comey, even as the FBI was investigating possible ties between Trump’s campaign and Russia.

The market reacting negatively to Trump-related headlines is a definite change from what we’ve become accustomed to in recent months. After the market’s violent election night reaction, stocks have moved up and to the right unabated, with the political chaos in Washington seeming to have little impact on financial markets.

The difference might be that several Republican leaders are now starting to say it may be time for an independent commission or special prosecutor. House Speaker Paul Ryan held a press conference this morning; he did not call for a special prosecutor, but he said, “we have an obligation to carry out our oversight regardless of which party is in the White House.”

And just as important as what Ryan said, was what he didn’t say. Ryan did not attack former FBI Director Comey, a marked change from last week. And Ryan did not attack the media.

In a letter to acting FBI Director Andrew McCabe on Tuesday, the Republican chairman of a House oversight committee, Jason Chaffetz, set a May 24 deadline for the FBI to produce all relevant material relating to any communications between Comey and Trump. Ryan backed Chaffetz’s request.

The Senate Intelligence Committee sent two letters to former FBI Director James Comey and Acting FBI Director Andrew McCabe requesting their cooperation in the committee’s ongoing investigation into Russia’s election interference. The senators have requested that Comey appear before the committee “in both open and closed sessions.”

Senator John McCain, who has called for the creation of a special bipartisan congressional panel to investigate the Russia matter, compared the controversies enveloping Trump to the Watergate scandal that forced Republican President Richard Nixon to resign in 1974. This is not to say that Republicans have deserted Trump – far from it, but there are some cracks in the wall.

Speaker Ryan insisted the Republican legislative agenda was not becoming paralyzed, but that might be wishful thinking. There is no way this controversy will help efforts to repeal and replace Obamacare, it will not aid tax reform or infrastructure efforts. That does not mean the agenda can’t move forward, just that it will be tougher.

Apple stock was down 3.3% today. Apple stock was up 34% this year on anticipation that the next iPhone could spur a “super cycle” of sales as well as hopes that federal tax reform could enable Apple to bring home some of its $240 billion in cash and marketable securities that are held outside the United States at lower tax rates.

Apple has suggested that if the company were able to repatriate some of its overseas holdings at a lower tax rate, it would return some of the money to its shareholders.

Trump leaves Friday on a 10-day trip to Saudi Arabi, Israel, and the Vatican. Today Trump told graduates of the Coast Guard Academy that he has been treated worse than any politician “in history”, although Mrs. Lincoln probably would have disagreed.

It took nearly a decade, but debt has made a comeback. Americans have now borrowed more money than they did at the height of the credit bubble in 2008, just as the global financial system began to fall apart. The Federal Reserve Bank of New York says total household debt had reached a new peak — $12.7 trillion, exceeding its peak in the third quarter of 2008.

Student loans account for 10.6 percent of that total, up from 3.3 percent in 2003, Student borrowers today owe $1.3 trillion, more than double the $611 billion nearly nine years ago. About one in 10 student borrowers is behind on the loans — the highest delinquency rate of any type of loan tracked by the report.

While mortgage balances still make up much of household debt, they are a smaller share of total obligations and have fallen back to 2003 levels. Auto loans totaled about $1.1 trillion, or 9 percent, of all household debt. Defaults have been creeping up in auto loans.

Credit card balances shrunk by $15 billion to $764 billion, but there has been a recent uptick in delinquencies on these payments. The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also speaks to growing optimism among banks and other lenders about economic growth.

Debt can fuel consumer spending, which accounts for about 70 percent of all economic activity in the United States. But debt can be risky. The good news is that the economy is stronger than it has been in some time. Consumers were delinquent on 4.8% of total debt, a marked improvement from the 11.9% of debt that was at least 30 days late at the end of 2009.

Cisco Systems, the world’s largest networking gear maker, reported its sixth straight drop in quarterly revenue, largely due to declines in its router business. The company’s net income rose to $2.5 billion, or 50 cents per share, from $2.3 billion, or 46 cents per share, a year earlier. Revenue fell 0.5 percent to $11.9 billion.

Target reported better-than-expected first-quarter earnings and revenue. Target reported adjusted earnings per share of $1.21, beating estimates of 91 cents. Sales, at $16.0 billion, were ahead of estimates for $15.6 billion, though they were down from $16.2 billion last year. E-commerce sales climbed 22%. Same-store sales were down 1.3%.

Shares of Ascena Retail Group fell more than 30 percent in after-hours trading as the owner of Ann Taylor, Loft, Lane Bryant and other brands said it adjusted its second-half outlook to reflect worse-than-expected business conditions. In what’s been a rough earnings season for retailers, Ascena expects third-quarter comparable store sales to decline 8 percent and for full-year comparable sales to decline between 6 percent and 7 percent.

I/O is Google’s annual developer conference. And they had some interesting announcements. There are now about 2 billion active devices based on the company’s Android software. The big headline: Google Assistant is coming to the iPhone. It’s no longer stuck on Android.

Google is also expanding its third-party support for Assistant. Before, third parties could build “actions” for the Assistant in the Google Home speaker. Now they’ll work wherever Assistant is, including Android phones and the iPhone. Google Home, the company’s connected speaker, will soon let you call any number in the US or Canada from the speaker for free.

A new product, Google Lens has some of the most impressive new features. You can scan just about anything with your phone’s camera and have Assistant analyze its contents. For example, if you take a photo of a concert venue, you can listen to an artist’s music, buy tickets, and more. Or for the amateur botanists, take a picture of a flower, and Google will tell you what it is.

Google’s Daydream virtual-reality platform now supports standalone headsets, not just ones that need to be powered by smartphones. Perhaps the most ambitious program is Google.ai, or artificial intelligence. Put away your machine learning degrees — artificial intelligence is now at the stage where it’s ready to replicate and improve on itself.

Googlers have designed AIs that are capable of “learning to learn,” which they hope to use on every single product across the Google portfolio, including its cloud business. Google announced a new generation of its custom AI chips today, the second version of its Tensor Processing Units.

Google’s TPU represents a next generation of chip, one custom-built for the task of handling AI, and twice as fast. The new hardware will be available for developers on Google’s cloud service and for companies that want to add artificial intelligence to their operations when renting processing power.

Financial Review

No Coffee Today

Sinclair Noe — March 21, 2017

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

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DOW – 237 = 20,668
SPX – 29 = 2344
NAS – 107 = 5793
RUT – 37 = 1346
10 Y – .04 = 2.44%
OIL – .72 = 47.50
GOLD + 10.30 = 1245.20

The Treasury yield curve reached its narrowest level since the end of February, a possible indicator that investors are losing faith in the “reflation trade.” Yields started falling last week after the Federal Reserve raised interest rates for the second time in three months.

Typically, such a move would help push rates higher across the curve to better align with the higher baseline rates. However, the Fed’s reluctance to commit to a faster pace of interest-rate hikes, resulting in a short squeeze, which then lured bond bulls back into the debt market.

Long-term rates continued lower over the past two days as congressional Republicans have struggled to secure the support necessary for President Trump’s proposed health-care overhaul bill to make it out of the House of Representatives. A vote on the bill has been set for Thursday. Trump has said that passage of the bill is a prerequisite for tax reform.

These two events have brought into question the underlying assumptions that helped send Treasury yields rocketing higher in the aftermath of Trump’s Nov. 8 electoral victory. The Federal Reserve said they were sticking to guidance for 3 rate hikes, and not including speculation about potential pro-growth fiscal policies, including tax reform and infrastructure spending, throwing shade on Trump’s yet un-released details about his plans for the fiscal overhaul.

The American Health Care Act is not finding public support; per Five-Thirty-Eight the most recent six polls from firms such as Fox News, Morning Consult, and YouGov/CBS News showed that an average of 30% of Americans support the American Health Care Act, while 47% of people surveyed were against it. And health-care reform is undergoing last minute revisions prior to a vote.

Trump went to Capitol Hill this morning to muster support for the bill, but even if it passes the House, it might not clear the Senate. The bill might pass, or not – time will tell, but for today at least, the markets felt uncertainty. No coffee for the closer.

The stock market sold off sharply with many market leaders of the reflation trade lagging. And this is in context of a market that has priced in tax reform, infrastructure spending, and maybe a bit more.

And it follows on the heels of FBI Director Comey’s testimony before a rare open congressional committee hearing. The market ignored the slam at Trump’s credibility, and while the president himself may be Teflon, the market is not when it comes to his policy initiatives.

Earlier today, Bank of America Merrill Lynch released its monthly fund managers’ survey, with a record number saying the market is extremely overvalued, and just 10 percent expecting to see US tax reform passed by Congress before its August recess, as promised by the administration.

Again, a record number of institutional investors say the US equity market is overvalued. Yet at the same time, a net 48% of these managers say they are overweight stocks in their portfolios, meaning they hold more than their benchmarks would require.

If the health care bill passes the House and Senate, and if we see solid details on tax reform, we might still see a rally, but today was a day of uncertainty.

The Dow and the S&P snapped a months’ long streak without a drop of 1% for either index. As investors sold stocks, they snapped up bonds.

The yield on the 10-year Treasury note fell 4.6 basis points to 2.426% on Tuesday, while the yield on the two-year note shed 3.6 basis points to 1.260%, leaving the spread between the two at 1.166 percentage points, the narrowest level since Feb. 28.

The general direction of the yield curve in a given interest-rate environment is typically measured by comparing the yields on the two- and 10-year issues, although the difference between the federal funds rate and the 10-year note are often used as well.

The underlying concept is straightforward. When the difference between yields on short-term bonds and yields on long-term bonds decreases, the yield curve flattens, that is, it appears less steep. A flat yield curve is typically an indication investors and traders are worried about the macroeconomic outlook.

The big losers today were bank stocks, with the XLF ETF that tracks the sector dropping as much as 2.6%. Individual losers in the banking sector were Goldman Sachs, down almost 3%, Bank of America down over 5.5%, and Morgan Stanley, down 4%.

The US current-account deficit, a measure of the nation’s debt to other countries, fell 3.1% to $112.4 billion in the final quarter of 2016, the government said. The drop in the current-account deficit in the fourth quarter was tied to a large increase in primary income — returns on American-owned assets held abroad. That offset a larger trade deficit in goods.

There are a raft of Federal Reserve officials speaking this week. This morning, Fed Bank of New York President William Dudley gave a talk at a forum on banking standards in London, in which he was critical of Wells Fargo but made no mention of monetary policy. Dudley is calling for better incentives to drive performance on Wall Street, while stating banks have “a long way to go” in reforming internal culture.

Google has issued a public apology to major advertisers after their spots were featured alongside YouTube videos carrying homophobic and anti-Semitic messages. It led to Marks & Spencer, HSBC, the BBC, and McDonald’s pulling ad content from Google sites in the UK.

The tech giant is taking a “tougher stance on hateful content” in response, as well as hiring more staff and tightening safeguards in its YouTube Partner Program.

Wal-Mart will launch its first investment arm to expand its e-commerce business in partnership with retail start-ups, venture capitalists and entrepreneurs. Called Store No. 8, the Silicon Valley-based investment team will work with startups that specialize in areas like robotics, virtual and augmented reality, machine learning and artificial intelligence.

Augmented reality is coming to Apple, and the first fruits could be “Matrix-style” 3D photographs that users can move around – and eventually view through AR smartglasses. Meanwhile, Apple unveiled an updated version of its iPad tablet with a brighter screen and a $329 starting price that is the lowest ever for a full-sized tablet from Apple.

Just don’t take it on a plane. The US issued new rules that will prevent passengers from carrying most electronic devices into the cabin during flights from eight countries in the Middle East and Africa. Passengers will have to check in any devices bigger than a smartphone — including iPads, Kindles and laptops — before clearing security or boarding.

Saudi Arabia may extend production cuts if oil supplies stay above the five-year average. New data shows the US rig count growing for a ninth week. US crude output has climbed to 9.1 million barrels a day, the most since February last year. And a Libya official said two major ports are preparing to restart oil exports.

British inflation last month shot past the Bank of England’s 2% target for the first time since the end of 2013, leaping by 2.3% in annual terms. The British government announced yesterday that Prime Minister Theresa May would trigger Article 50 of the Lisbon Treaty on March 29 and initiate the two-year negotiation process for leaving the European Union.

Goldman Sachs will begin moving hundreds of people out of London before any Brexit deal is struck as part of its contingency plans for Britain leaving the European Union. Leading financial firms warned before last year’s June referendum that they would have to move some jobs if there was a leave vote, and have been working on plans for how they would do so for the past several months.

Many banks now believe they will lose “passporting” rights, that let them sell services across the EU from their London hubs. The bulk of Goldman’s European operations are in Britain, where it has around 6,000 employees.

Britain’s high street banks processed nearly $740 million from a money-laundering operation run by Russian criminals with links to the Kremlin and the FSB, per The Guardian. HSBC, RBS, Lloyds and Barclays are among 17 banks based in the UK that are facing questions over what they knew about the international scheme and why they didn’t turn away suspicious money transfers.

Marriott International plans to add up to 300,000 rooms worldwide by 2019, as part of a three-year growth plan, ahead of the No. 1 hotel chain’s investor day. The owner of Ritz-Carlton and St. Regis luxury hotel brands said it would earn $675 million in stabilized fees from hotel rooms added to its system. Earlier this month, Marriott said it would speed up expansion of its Starwood brand in Europe by 2020.

Target’s first fully redesigned shop in Houston will include two separate entrances: one for time-crunched grocery shoppers, and another for those who want to browse fashion or beauty. The company will use the design, which also includes order pickup parking spots, as a starting point for the 500 stores it plans to make over in 2018 and 2019. It’s part of the $7 billion investment Target disclosed last month.

Sears revealed “substantial doubt” about its ability to stay in business in an annual report filed late Tuesday. The company said in the report, “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern.”

Sears said its efforts to generate cash by selling or licensing brands like Kenmore and Diehard, as well as selling valuable real estate, should mitigate that doubt and satisfy its estimated cash needs for the next 12 months. But the company said it can’t make any guarantees.

Financial Review

Pandora’s Box

Sinclair Noe — August 17, 2016

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

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DOW + 21 = 18,573
SPX + 4 = 2182
NAS + 1 = 5228
10 Y – .02 = 1.55%
OIL + .29 = 46.87
GOLD + 2.60 = 1349.40

The Federal Reserve released minutes from their July FOMC meeting. In July, with the Brexit vote over and market turmoil subsiding, the Fed seemed somewhat more open to the possibility of resuming rate hikes. Economic data has been mixed; we had a very weak report on second quarter gross domestic product and we had a very strong July jobs report. A key official, New York Fed President William Dudley,  said yesterday that a rate hike in September was possible – even if markets aren’t convinced that it’s probable.

Apparently the news of a possible rate hike in September was enough to spook the equity markets a little bit. Is a Rate Hike in September two months before an election, with this economic backdrop, possible? Doubtful. The bond market isn’t buying it. Ten-year yields have hardly budged. The currency market didn’t even shrug.

Here’s what the Fed said, quoted from the minutes: “Some other participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the Committee’s inflation objective would continue, even with further steps to gradually remove monetary policy accommodation. Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting.”

Sorry, but that is just a bit too vague to be taken seriously. If the Fed wants to raise rates in September, they need to pound the table and state very clearly that they intend to hike rates. Taken as a whole, then, Chair Janet Yellen is keeping the hawks at bay and the Fed on a course of loose monetary policy, including the current 0.25-0.5 percent range. That’s even despite some clamoring from those wanting to hike. And despite some initial chatter about “some” wanting a rate hike, following the release of the minutes the market quickly adjusted its sights.

Stocks closed higher; treasuries pared losses. Two-year Treasuries, the most sensitive to policy expectations, halted a back-to-back decline. The dollar was basically flat. The greenback has slumped more than 5 percent this year as Fed policy makers have yet to see signs that inflation is moving toward their 2 percent goal. That means the Fed is less likely to diverge from the paths of the Bank of Japan and European Central Bank, which are boosting monetary stimulus as they seek to spur flagging growth.

The minutes once again portray a Fed that can’t seem to find direction or purpose; not confident in holding steady but not ready to embrace new approaches. Fed chairwoman Janet Yellen is scheduled to speak at next week’s annual economic symposium in Jackson Hole, Wyoming. Let’s hope she actually says something.

Time now for a quick lesson in basic economics. Adverse selection is a phenomenon wherein the insurer is confronted with the probability of loss due to risk not factored in at the time of sale. This occurs in the event of an asymmetrical flow of information between the insurer and the insured. Asymmetrical information refers to a situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality. Or another way of saying it; in any given deal, somebody has the upper hand.

In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance. Or in the case of health insurance, it is a situation where “uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people.

And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates. …. But higher rates make insurance even less attractive for healthy people, causing even more of them to drop out. Before long, coverage would become too expensive for almost everyone.”

Yesterday, Aetna announced that it will withdraw from 11 of the 15 state Affordable Care Act exchanges where it sells marketplace plans; leaving some counties with only one option for healthcare, and in Pinal County – no options. Aetna cited mushrooming financial losses and structural problems with the exchange markets as causes for its retreat.

There might be more to the story. A few months ago, Aetna was looking to expand its presence in the ACA exchanges and Aetna also wanted to acquire Humana. In a letter to the US Department of Justice, Aetna CEO Mark Bertolini outlined the company’s plans to roll back much of its Obamacare business if the DOJ blocked a proposed merger with rival Humana. A company spokesman denied that participation in the exchanges was a bargaining chip in its negotiations with the DOJ, saying the decision was driven by losses.

So is this about losses or a merger battle? Is this a confessional, or extortion? It may in fact be true that Aetna can’t envision a way to make a profit in the exchanges without merging with Humana, even if it is true that its losses didn’t prevent it from seeing its earnings increase 20% in 2015.

Aetna executives and attorneys surely knew that government anti-trust lawyers would see the letter as thinly veiled extortion, even if their concerns were entirely sincere. At any rate, Aetna may have opened Pandora’s Box.

A recent report from the Kaiser Family Foundation shows that as many as two states and 650 counties are on track to have just one insurer on the Affordable Care Act exchanges next year. The entire states of Alaska and Alabama will be faced with just one choice in 2017, as well as large swaths of Kentucky, Tennessee, Mississippi, Arizona and Oklahoma. The effects of health insurance company pullouts will be to leave people uninsured.

That’s unfortunate, because it turns out that making health care available to people actually makes them healthier. A new study, published Monday in JAMA Internal Medicine, offers another way of looking at the issue. Low-income people in Arkansas and Kentucky, which expanded Medicaid insurance to everyone below a certain income threshold, appear to be healthier than their peers in Texas, which did not expand. One “solution” to health insurance behemoths threatening to pull out of the ACA exchanges would be to allow them to merge. A second “solution” is to let them hike premiums to ridiculous levels. The third solution is the Pandora’s Box, also known as the public option.

Britain’s job market is shrugging off Brexit, for now. Data from the Office for National Statistics showed that the number of people claiming jobless benefits in the UK unexpectedly fell in July. Additionally, the UK’s unemployment rate held at a record-low 4.9%. Analysts in the coming months will continue to watch the unemployment level as one of the key indicators of how the Brexit vote is affecting the U.K. economy.

Subprime credit-card lending is making a comeback. TransUnion’s Second Quarter 2016 Industry Insights Report shows that 11% of the 10 million new customers entering the credit-card marketplace in the past year were subprime borrowers. Additionally, the data suggests subprime borrowers are seeing the biggest increase in balances, up 14% versus a year ago. Still, TransUnion’s financial services business unit, says delinquency levels are not “alarming.”

Cisco Systems is readying for job cuts. The company is expected to eliminate 14,000 jobs, or about 20% of its labor force, beginning in the next few weeks. Microsoft, HP, and Intel have all announced big jobs cuts within the past year or so.

Target reported disappointing Q2 earnings and management placed part of the blame squarely on Apple. Comparable store sales at Target overall fell by 1.1%, but Target executives noted that electronic sales decreased by double digits and “accounted for 70 basis points [0.7%] of overall comp decline.”

Even more notably, Target specifically pointed out that Apple product sales were down by “more than 20%” year-over-year and were to blame for a third of the overall plunge of electronic sales at Target. Apple’s growth has been running into a bit of trouble recently, as the astounding success of the iPhone 6 has made for tough comparisons; and many customers are probably sitting on the sidelines before the launch of the iPhone 7.

The iPhone 7 might be coming soon. That’s according to a leaked photo spotted by 9to5Mac of “reset hours” at AT&T stores for September. The website speculates that the photo shows September 9 as the date AT&T will begin advertising the iPhone 7 and September 23 as the day when the phone will go on sale.

The Treasury Department issued rules this year that thwarted several tax inversions, but one large deal that managed to get through was the $16 billion acquisition of Tyco by Johnson Controls. The last hurdle for the transaction is a vote today by both sets of shareholders. Johnson Controls shareholders are set to vote in Dallas, while Tyco’s shareholders will do so in Dublin.

Financial Review

Slow to Patch

Sinclair Noe — April 15, 2015

 

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

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DOW + 75 = 18,112
SPX + 10 = 2106
NAS + 33 = 5011
10 YR YLD un = 1.90%
OIL + 2.67 = 55.96
GOLD + 9.60 = 1202.50
SILV + .18 = 16.41

The Federal Reserve reports industrial production dropped 0.6% in March. The biggest drop since August 2012. For the first quarter, industrial production was down at 1% annual rate, the first quarterly decline since the end of the recession.

The National Association of Home Builders/Wells Fargo index of home builder confidence increased to 56 in April from 52 in March. Readings over 50 indicate that more builders see sales conditions as good rather than poor. All three components of the index improved in the month: sales expectations, buyer traffic, and the component gauging current sales conditions all moved higher.

China grew at its slowest pace last quarter since the global financial crisis in 2009; GDP expanded 7% in the three months to March from the year ago period, down from 7.3% the prior quarter. Retail sales and industrial output data broadly missed expectations, however, with the latter expanding at the slowest pace since 2008.

Japan overtook China as the top foreign holder of US government debt for the first time since the global financial crisis. Each country holds a little more than $1.22 trillion in US Treasuries, but Japan has about $7 billion more than China.

Saudi Arabia pumped close to a record amount of crude oil last month, leading the biggest surge in OPEC output in almost four years just as the US shale boom shows signs of slowing. The International Energy Agency said average US oil production of 12.6 million barrels a day in the first six months of 2015 will slide to 12.5 million by the fourth quarter as companies curb drilling.

Meanwhile, Saudi Arabia and other OPEC producers raised output by 890,000 barrels a day to 31 million a day in March. Demand for oil will be higher this year than previously thought, according to the International Energy Agency report. The IEA’s expectation for a “notable acceleration” in demand for oil in 2015 comes as Iran called on fellow OPEC members to cut production. If you think you know where oil prices are going just consider the International Energy Agency’s conclusion to their Oil Market Report; they say, “The outlook is only getting murkier.”

There has been a lot of talk about oil prices and supply and demand; most of the talk is short-term and it can be confusing. We know that many drillers have shut down rigs but then we hear that North Dakota’s Bakken production is expected to surge in the second and third quarters of this year, as that state puts the screws on companies to complete wells and rolls out some new tax incentives.

According to the new annual energy outlook by the Energy Information Administration, the government appears to be even more bullish about U.S. oil production this year than it was last year. Despite a nearly 50% drop in the price of crude-oil since then, the government’s expectation for oil production growth is even more robust than in last year’s energy forecast.

Where it gets more interesting is in the long-term outlook; there we are seeing a fundamental shift. The EIA report says longer-term, US crude oil production will peak at 10.6 million barrels per day in 2020, a million barrels more than the high forecast a year earlier. Crude production will then moderate to 9.4 million barrels per day in 2040, 26% more than expected a year ago. Despite lower prices, higher production will result mainly from increased onshore oil output, predominantly from shale formations.

Perhaps the most interesting long-term idea is that the US could become a net energy exporter over the next 2 to 15 years. And it’s not just a result of more drilling, but rather advanced technologies that are reshaping the energy economy, including the greater use of renewable energy sources, along with conservation efforts, including more efficient cars and trucks. The report found that solar is the fastest growing source of renewable energy with an annual growth rate of 6.8%. The report predicts that 77GW of renewable generation capacity will be added up until 2040 with 44% of that (33.9GW) from solar. Of this 31GW will be solar PV. Only 9GW of nuclear and 1GW of coal capacity is expected to be added in the same period.

This afternoon the Federal Reserve published its Beige Book, a collection of anecdotal reports from the 12 Fed districts; the report is published 8 times a year, just a couple of weeks before the FOMC meetings to determine monetary policy. Once again, the districts reported that the economy continues to grow moderately or modestly.

Nonfinancial firms saw rising activity across all districts with demand picking up for high-tech services such as cybersecurity and web development. The Boston and Richmond Fed districts saw an increase in healthcare services, and Service providers in Boston, Philadelphia, Kansas City, and Dallas were optimistic about near-term growth trends for their firms. Many districts said that savings from lower gas prices was fueling consumer sales. Auto sales rose in most districts, and all districts expected corporate and leisure travel to be up in 2015. Most Fed districts reported a tight supply of residential real estate, and only New York reported softening conditions in the residential real estate market. In Chicago, inventories of homes were near historic lows, especially for lower-priced homes. And the Fed says banking conditions are generally favorable.

Agricultural conditions worsened slightly across the nation, thanks to wet fields, persistent drought, and a cold winter. Weather was an important consideration in the Beige Book, mentioned 71 times, and it was mostly bad weather.  Energy market conditions declined in the oil patch. Falling oil prices hurt new orders to energy supplier companies. Manufacturing activity was mixed, hurt by the soaring value of the dollar, which makes US goods more expensive overseas.

Another big day for earnings reports. Bank of America reported a better-than-expected first-quarter profit, reversing from a year-earlier loss, as legal costs fell to $370 million for the quarter. BofA has paid at least $70 billion so far to settle legal issues related to the financial crisis. It turns out that throwing away tens of billions of dollars on legal problems is a flawed business model. Who knew?

CSX beat estimates with earnings, while revenue was essentially in line. The rail operator also announced a $2 billion stock buyback, and raised its dividend by 13 percent to 18 cents per share.

Delta Air Lines posted better-than-expected earnings. The carrier said it plans to cut seating capacity later this year on international routes as the strong dollar and declining oil prices damps overseas travel demand.

Charles Schwab said its first-quarter profit fell 7.4%, as the company was hurt by higher one-time costs and a slowdown in trading.

Netflix, the online video-streaming service, reported revenue of $1.57 billion in its first quarter, on earnings of 38 cents per share. Analysts expected earnings of 69 cents per share, but share price moved higher in after-hours trading because they added 4.9 million new subscribers, topping estimates of 4 million.

Keep in mind that this week we’ve seen several of the big financial institutions reporting earnings, and they were expected to turn in good results. Starting next week, we’ll start to see other sectors reporting, and as we get into the energy sector or the manufacturing sector, we are more likely to see ugly numbers.

The European Union has accused Google of anti-trust violations; cheating competitors by distorting Internet search results to favor its shopping service; and regulators also launched another antitrust investigation into its Android mobile operating system. Google now has an opportunity to explain itself and the case might be settled by the company making commitments to change its products.  The EU regulator can demand sweeping changes to Google’s business practices and might impose fines up to $6.6 billion. Google plans to defend the charges.

Nokia has agreed to acquire telecom equipment company Alcatel-Lucent for $16.6 billion, in a deal that would solidify its ambitions to become a major provider of networking equipment. The deal is expected to close in the first half of 2016. The combined company will have about 114,000 employees and combined sales of around 26 billion euros. The new Nokia will have stronger exposure to the North American market, with key contracts with AT&T and Verizon.

With the FCC’s new net neutrality rules published in the Federal Register – let the lawsuits begin. AT&T and three industry trade groups representing cable companies and wireless carriers have filed separate lawsuits challenging the rules. AT&T is the first large individual challenger, joined by the National Cable and Telecommunications Association, wireless group CTIA and the smaller American Cable Association.

After months of negotiations, Target is close to a settlement with MasterCard that would reimburse banks with roughly $20 million for costs they incurred from its massive data breach two years ago. In 2013, Target said at least 40 million credit cards were compromised by a hack during the holiday shopping season, and the attack might have resulted in the theft of personal information. Target also faces a big payout in its negotiations with Visa.

Verizon has published its annual report on cyber security. The report was based on the details of 79,790 “security incidents” given to Verizon’s researchers by 70 organizations, and that’s just for the past year. Phishing may be the oldest trick in the hacker’s book, but it’s still the method behind many of the breaches we’ve seen in recent months. Nearly a quarter of people who receive phishing e-mails open them, according to the report, and 11 percent proceed to download file attachments.

The Verizon report also suggests that companies adopt “improved detection and response capabilities.” Put simply, companies rarely figure out on their own that they’ve been breached. Security professionals often fail to update their systems with patches for known vulnerabilities, and hackers take full advantage of those weaknesses. According to the report, “71 percent of vulnerabilities had a patch available for more than a year prior to the breach.” In other words, many paths hackers took to break into networks last year could have been rendered dead-ends if someone had installed these updates. Worse yet, the issuance of a patch may be a green light for hackers to attack, because it highlights a vulnerability and the hackers know most organizations are slow to patch.

Financial Review

Times Change

Sinclair Noe — March 19, 2015

 

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

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DOW – 117 = 17,959
SPX – 10 = 2089
NAS + 9 = 4992
10 YR YLD + .02 = 1.97%
OIL – .81 = 43.85
GOLD + 4.10 = 1172.00
SILV+ .22 = 16.21

The Federal Reserve wrapped up a two-day FOMC meeting yesterday; and the stock market responded with a rally; the dollar dropped initially. After a day of consideration, stocks slipped and the dollar clawed back gains.  Oil prices rose yesterday and dropped again today. You could make the case that the Fed has maintained an overly accommodative monetary policy for too long, or you could argue that the economy will take a hit if the Fed hikes interest rates too soon. The Fed removed its pledge to be patient in tightening policy, while also cutting its forecast for the economy. Go figure.

Initial jobless claims edged up by 1,000 to a seasonally adjusted 291,000 in the period stretching from March 8 to March 14.  New claims have tracked below 300,000 for the second straight week after spiking to a 10-month high of 325,000 at the end of February in what now appears to have been weather-related quirk.

The Commerce Department said the current account gap, which measures the flow of goods, services and investments into and out of the country, increased to $113 billion from a $98 billion deficit in the third quarter. That was the largest shortfall since the second quarter of 2012.

The Conference Board’s  leading economic index rose 0.2% in February in a sign the U.S. economy should expand at a moderate rate in the months ahead.

If the Dollar Index finishes higher in March, it will be up 9 consecutive months, extending what is already the longest streak in history; so far racking up just over 25% in gains. So, it’s not a surprise that commodities prices are trading at 12-year lows. Yesterday the dollar dropped 3% following the Fed announcement; that was the biggest daily move since March 2009. I read today that the strong dollar might be the next Black Swan event. I grant that the move has been surprisingly strong but I’m not sure it really qualifies for outlier status; or does my doubt qualify it.

Another EU Economic Summit is underway. The two-day meeting in Brussels is attended by leaders from across the eurozone.  The Greek debt crisis and the possibility of extending sanctions against Russia and energy are the key issues up for discussion. The Greek parliament adopted a “humanitarian crisis” bill yesterday, the first package of social measures put forward by the radical left-wing Syriza government. The bill is basically an anti-poverty law, designed to allow people opportunity to stay in housing and providing emergency food aid for the poorest Greeks.  The European Commission warned that Greece should not act unilaterally. This on the same day the European Central Bank opened its plush new €1.4 billion office headquarters in Brussels. The price tag for the Greek humanitarian crisis law to help its poorest: €200 million. At the opening ceremony, the ECB announced that the new HQ was “an example of what Europe is capable of.” Well, apparently so.

Brazilian President Dilma Rousseff has launched an anti-corruption offensive to counter rising discontent over the kickback scandal that took place at Petrobras during the years she was chairwoman of the state-run oil company. Her proposals include the criminalization of campaign slush funds, seizure of assets from government officials convicted of corruption and implementing an anti-bribery law passed more than a year ago. On Sunday, over 1 million people took to Brazil’s streets in anti-government protests. A small minority of the protesters called for a military takeover of the government.
 
Apple is moving to the Dow Industrial Average, replacing AT&T. The Dow is a price-weighted index, which means the price is determined by the price changes of its components, rather than percentage changes. A 1% move in Apple’s stock–about $1.28 at Wednesday’s closing price–would move the Dow by about 8.54 points. In contrast, the S&P 500 is a market-capitalization weighted index. Since Apple has a $748 billion market cap, its stock has more than twice the influence on the S&P as that of Exxon Mobil which is the second-most heavily-weighted component with a $361 billion market cap.

Starbucks declared a 2-for-1 stock split set for April 9 at its Annual Meeting yesterday, saying it sees enough growth on the horizon to help push the company to a $100 billion market capitalization. Starbucks also announced a new delivery service, for people who don’t want to walk to the corner.

Sony has launched its PlayStation Vue streaming video service in three cities, with a starting price of $50/month, after testing the service since November. The lineup features content from three of the big four (CBS, Fox, NBC), but popular content from Disney – ABC, ESPN and Disney cable – is still a glaring omission. Sony’s price is raising eyebrows, as it’s competing with Sling TV’s $20/month price point. This whole idea of paying for cable TV service is about to change, we just don’t know yet who the big winner will be.

Times change. The Recording Industry Association of America reports that streaming services accounted for $1.87 billion in revenue last year, while sales of CDs represented $1.85 billion in sales. Apparently the sales on 8-track tapes has not been doing well either.

Another sign of the times. There are now more Uber cars in New York City than there are taxis. According to the city’s Taxi and Limousine Commission: 14,088 registered Uber cars compared with 13,587 yellow cabs.

Target has agreed to pay a $10 million settlement related to its 2013 data breach, which compromised the personal information of as many as 110 million people. Under the proposal, Target would pay individual victims up to $10,000 in damages and implement additional data security measures, such as appointing a chief information security officer and maintaining a written information security program. Target also raised the minimum wage for all of its workers to $9 an hour yesterday, matching moves made by rivals Wal-Mart, GAP and T.J. Maxx.

Bank of New York Mellon is reportedly nearing an agreement to pay just over $700 million to settle allegations that the bank overcharged pension funds and other clients for foreign exchange services. The bank told clients it would provide them with the best possible execution, but instead gave them the worst rates of the day. Meantime, BNY Mellon obtained better spot prices for itself and profited on the spread. The New York AG’s office claims the bank earned $2 billion over ten years through the alleged deception. So, that worked out quite well for the bank. And now you know why pension funds are in trouble.

Teslas can once again be legally sold in New Jersey after Governor Chris Christie signed a bill to allow the company to sell directly to consumers. The step comes after fighting efforts in nearly every state to halt its direct sales method, which doesn’t use independent dealers. Tesla also presented a software update to its Model S vehicle at a news conference this morning. It was widely expected the update would improve the range of the electric car between charges. Instead, Elon Musk announced a safety feature. The car will also warn drivers if battery power is low before they drive beyond an area where they can charge. Musk said drivers were concerned about “range anxiety,” and he says it will now be impossible to run out of charge unless you do so intentionally, or you are driving on the George Washington bridge in New Jersey.

Transocean expects to book an after-tax charge of between $300 million -$325 million as it moves to dispose of four rigs. According to Baker Hughes, U.S. oil-rig count fell to 866 last week, the 14th straight week of declines, as plunging oil prices wreak havoc on the industry. Transocean also logged a $992 million charge to correct the value of its contract drilling business in February, and saw the departure of CEO Steven Newman.

The Bank of International Settlements Quarterly Review shows debt in the global oil and gas industry reached $2.5 trillion in 2014, or 2 ½ times what it was eight years earlier. Cheap financing made it easier for exploration and production companies to finance operations and expand rapidly as the fracking kicked into high gear.  The debt boom is now magnifying the slump in prices; the most immediate effect is a sharp cutback in capital spending plans, and we’ve already seen many rigs shutdown. At the same time, production continues to climb higher because deteriorating balance sheets encourage companies to keep pumping from existing wells to service the debt even as oil prices drop.

The BIS authors warn: “A sell-off of oil company debt could spill over to corporate bond markets more broadly if investors try to reduce the riskiness of their portfolios. The fact that debt of oil and gas firms represents a substantial portion of future redemptions underlines the potential system-wide relevance of developments in the sector.”

And it is not just domestic oil producers. Today, Kuwait’s oil minister said OPEC had no choice but to keep producing in an oversupplied market or risk losing market share.

The National Snow and Ice Data Center at the University of Colorado has been measuring Arctic ice for the past 35 years, and this winter was the smallest winter size on record, by about 130,000 square kilometers, an area about the size of Mississippi.

This winter has been hot. Global temperatures from December to February were the highest on record. If that comes as a surprise to many Americans after an agonizingly cold winter, it’s because the eastern United States and Canada was one of the only regions on earth with lower-than-average temperatures. Globally, the average temperature from December to February was 1.42 degrees Fahrenheit higher than the 20th-century average, according to the National Oceanic and Atmospheric Administration. The average temperature was the highest since tracking began in 1880, surpassing the previous high in 2007 by .05 degrees.

Financial Review

Milk and Cookies. Enjoy While You Can.

Sinclair Noe — February 25, 2015       

 

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

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DOW + 15 = 18,224
SPX – 1 = 2113
NAS – 0.98 = 4967
10 YR YLD – .02 = 1.97%
OIL + 1.75 = 51.03
GOLD + 2.90 = 1205.20
SILV + .22 = 16.64

Another record high for the Dow Industrial Average. These are the days of milk and cookies.

Federal Reserve Chairwoman Janet Yellen continued her semi-annual Humphrey-Hawkins testimony today in front of the House Financial Services Committee. The prepared opening remarks were identical to the testimony yesterday in the Senate. The Q&A session became a bit testy today as Yellen was accused of political bias. Republicans questioned Yellen about an October speech on inequality, just before the midterm elections, as evidence she was leaning toward the Obama administration and Democrats. Methinks they doth protest too much. There were also calls for an audit of the Fed, historically a nonstarter with Federal Reserve Chairs. It made for generally poor political theater.

The important part of the testimony was fairly easy to find. Keep in mind the Fed has a dual mandate of maximum employment and price stability. So the key statement from Yellen was when she said: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

So, higher rates will come with higher inflation, indicating that disinflation and deflation are still a concern for now. The Fed believes that inflation is going to move lower before it moves higher because of oil prices and import prices. As for the timing of when we will see inflation and possible interest rate hikes, Yellen said: “We expect inflation over the medium term — the next two or three years — to move up to our 2% target.”

Greek stocks and bonds surged yesterday, with Athens’ main stock exchange closing almost 10% higher on the day after Eurozone financial ministers approved a four-month extension to the country’s bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released.

The German government is now selling five-year bonds with a negative yield. That means investors will pay to lend money to the country for five years. Germany auctioned 3.28 billion euros ($3.72 billion) of bonds due in April 2020 at an average yield of negative 0.08%.

Today the Senate moved to avert a shutdown of the Department of Homeland Security. The upper chamber voted 98-2 on a procedural hurdle that would pave the way for a “clean” funding bill to be brought to the floor. It remains unclear when the Senate will vote on final passage on the funding bill. If the Senate passes a clean bill, it would then move over to the House, and it is uncertain if House Speaker John Boehner would allow a vote on such a bill. DHS funding runs out in 2 days.

The White House says President Obama would veto a House Republican effort to rewrite the federal “No Child Left Behind” law. The House bill is expected to pass the chamber later this week. Senate Republicans are working on their own version of No Child Left Behind, which expired in 2007.

New homes sold at annual rate of 481,000 last month, essentially unchanged from December. The Commerce Department reports sales were 5.3% higher in January compared to a year earlier; this despite a drop of 51% in the Northeast, where bad weather kept buyers away. The median price for a new home was up 9% from a year ago.

For all the talk about how lower oil prices would reduce supplies, it hasn’t happened yet. Just the opposite. According to EIA weekly data released today, crude oil in storage in the US jumped 2%, or 8.4 million barrels, to 434 million barrels. Oil storage is bursting at the seams and inventories remain at their highest levels in at least 80 years. The rate of growth of production is slowing slightly but production continues at the highest rate since 1972, for now.

Southwest Airlines took 128 of its jets out of service late Tuesday, or roughly one-fifth of its fleet, after informing federal regulators that it “inadvertently omitted” required maintenance checks on the planes’ backup hydraulic systems. Dozens of flights were immediately canceled as a result, while officials from Southwest and the FAA discussed plans to complete the maintenance checks and return the planes to service.

American Express will raise interest rates on about one million customers. Annual rates will climb by an average of 2.5 percentage points to at least 12.99%. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles.” Typically banks make large scale changes in response to broader shifts in interest rates or risk.

Anthem, which earlier this month reported that it was hit by a massive cyberbreach, has concluded that the personal information of 78.8M customers was exposed in the attack, including 8.8M-18.8M people who were members of independently run Blue Cross Blue Shield plans. Anthem still believes the hacked data was restricted to birthdays and Social Security numbers, among other data, but doesn’t appear to have involved medical information or financial details.

Another company that had problems with cybersecurity is Target, but it doesn’t seem to have hurt their most recent results.  Target saw a higher-than-expected jump in its fourth-quarter earnings and is forecasting modest growth for the first quarter of 2015. Exiting Canada, as the company recently announced it will do, will cost it $5.1 billion.

Earlier this month Wal-mart announced they would be paying workers at least $9 an hour, increasing to $10 an hour next year. Wal-Mart is of course the largest retailer, and we thought this might ripple out through other retailers. Sure enough. T.J. Maxx, Marshalls and other chains owned by TJX Cos. will be increasing the pay of US workers to at least $9 an hour beginning in June, increasing to $10 an hour next year.

Now for today’s edition of “Banks Behaving Badly”; yet another foreign currency scandal, Reuters reports that BNY Mellon is in settlement talks with the DOJ and New York AG over claims that it defrauded clients in foreign exchange transactions. The bank faces several lawsuits, including class actions, stemming from allegations that it misled clients about how it determined currency exchange rates for certain transactions.

HSBC has a “terrible list of problems,” so says the chairman of HSBC, Douglas Flint. And he admits that he couldn’t rule out further scandals emerging at the bank along the same lines as the tax evasion schemes at HSBC’s Swiss private bank, but he said: “I sincerely hope there are no more skeletons.”

A British parliamentary committee questioned Flint and CEO Stuart Gulliver after the tax evasion schemes were revealed by several news organizations. The news story only came to light 4 years after a former HSBC employee turned over bank files. Some of the clients whose details HSBC’s Swiss operations were sheltering included arms dealers and politicians who were part of discredited regimes, like that of Bashir-al-Assad in Syria. Earlier, when asked why some HSBC clients reportedly came to Switzerland with wads of cash, Flint was lost for words. Still to be determined is why the bank should not be broken up.

Move over Alibaba, you could have company next year. Postal Savings Bank of China, the country’s sixth largest lender by assets, is seeking an initial public offering in 2016 that could make history by bringing in some $25 billion .

In a new S-1, GoDaddy declared plans to list on the NYSE under the symbol “GDDY” and announced IPO underwriters including Morgan Stanley, JPMorgan, Citi and others. GoDaddy is a fast-growing company which posted revenue of $1.4 billion in 2014, up 23% from 2013 levels, according to the filing. But it’s also a big money loser. The company posted a loss of $143.3 million in 2014, which is the fourth annual loss in a row.

Monday, June 23, 2014 - Calm Before the Storm

Financial Review with Sinclair Noe

DOW – 9 = 16,937
SPX – 0.26 = 1962
NAS + 0.64 = 4368
10 YR YLD un = 2.62%
OIL  - .13 = 106.04
GOLD + 3.60 = 1319.30
SILV + .02 = 21.00

The economic data today from the National Association of Realtors shows existing home sales picked up in May. Total sales rose 4.9% to 4.89 million units from an upwardly revised 4.66 million in April. While that marks a month to month increase, sales are down from the 5.15 million level of May one year ago.  Total housing inventory increased 2.2% in May. Unsold inventory is 6% higher than a year ago.

Meanwhile, Markit's US Flash manufacturing PMI report for June, increased to 57.5 from 56.4 in May.

The stock market has drifted slightly higher over the past couple of months. Yes we hit record highs last week, but the movement has been very slow, volume has been light, and volatility is almost non-existent. Volume is down about 50% since 2008. The VIX, or volatility index, sometimes known as the fear index, is down below 12, which means that the only people in the options market are all maxxed out on Ambien, or Valium. The S&P 500 hasn’t had a daily move of 1% in more than 2 months. Russia invades Ukraine – wake me when it’s over. Radical militants threaten to tear apart Iraq – we’ve seen this story before. The US economy is weak right now but growth is right around the corner – rinse, lather, repeat. The US plays Portugal in the World Cup and it’s a tie, of course.

The Federal Reserve looked at monetary policy and cranked up the old Xerox to publish their statement. Maybe this is the result of all that Federal Reserve fiddling; maybe they have created the boring stock market, which lulls everyone into a false sense of complacency. Of course, that’s not how markets work, no matter how much central bank finesse is applied. Markets are risky, always have been, always will be. I think it’s safe to say this is the calm before the storm, because there is always a storm in the markets.

There was some merger activity today. General Electric struck a deal to acquire France-based Alstom's power business for $16.9 billion after a lengthy pursuit. There was another utility deal, Wisconsin Energy announced a deal to acquire Integrys Energy for $9.1 billion. Oracle also announced a deal to acquire MICROS Systems for $4.6 billion.

The price of oil has been one of the few markets to show movement, which is not good news for drivers. Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given the recent jump in oil prices, gasoline prices are poised to increase in coming weeks. Higher prices at the pump serve as a tax on consumers, whose purchasing power is still questionable. It’s estimated that an increase of $10 a barrel subtracts 0.4% from real GDP growth. Of course, for that to apply, the price increase has to stick.

The Supreme Court is in session and today they ruled on limiting the Environmental Protection Agency’s power to regulate facilities that emit carbon dioxide. The decision would reduce the number of carbon-emitting facilities the EPA can regulate, but it is a limited ruling, and even Justice Scalia said: "It bears mention that EPA is getting almost everything it wanted in this case."

Meanwhile a statement from the EPA claims victory, "The Supreme Court’s decision is a win for our efforts to reduce carbon pollution because it allows EPA, states and other permitting authorities to continue to require carbon pollution limits in permits for the largest pollution sources." Industry groups, such as the American Petroleum Institute, also claimed victory. The group said in a statement that the decision was a "stark reminder that the EPA's power is not unlimited."

The decision won't have a huge impact on US climate policy, as the decision only modestly changed the number of large facilities subject to certain permitting requirements. It also won't affect the Obama administration’s proposal to reduce emissions from power plants, which is a separate program.

When the EPA classifies something (like carbon dioxide) as a harmful pollutant, it triggers a number of legal requirements under the Clean Air Act. One of them, known as a "prevention of significant deterioration" (PSD) rule, requires factories, power plants, and other large facilities to get the EPA's approval before they make changes that would lead to higher pollution. These facilities also must use the "best available control technology" to reduce the effects of pollution they emit. Another provision requires any facility that is a "major source" of pollution to get a permit from the EPA.

Under the Clean Air Act, facilities become subject to these regulations if they emit more than 250 tons (or in some cases as little as 100 tons) of pollution per year. Traditional pollutants such as sulfur dioxide or lead can be harmful even if they are only emitted in trace amounts, so a relatively low threshold makes sense. Only large factories and power plants emit that much of these conventional pollutants.

But carbon dioxide is different. Factories produce vastly more carbon dioxide than other pollutants regulated by the EPA. Under existing rules, about 15,000 facilities are required to get permits under the Clean Air Act based on their emissions of non-carbon pollutants. If the EPA had used the same 250-ton threshold for carbon dioxide emissions, 6.1 million facilities would suddenly have needed permits. The agency estimated it would cost $21 billion per year just to process all that paperwork.

So the agency effectively re-wrote the law, exempting facilities that emitted less than 100,000 tons of carbon dioxide from getting a permit. Several states and business groups challenged this decision, arguing that the EPA had no authority to unilaterally re-write the law.

Almost everyone agrees that a literal reading of the Clean Air Act would lead to madness. The EPA has warned that "decade-long delays in issuing permits would become common, causing construction projects to grind to a halt nationwide." The Supreme Court didn't want that to happen.

But a majority of the court, led by Justice Scalia, also didn't like the EPA's approach. The court said that if Congress set a threshold of 250 tons, the EPA can't just unilaterally change it to 100,000 tons. Instead, the court's majority held that the term "air pollutant" can have different meanings in different parts of the Clean Air Act. While the "Act-wide definition" of air pollutant includes carbon dioxide, Scalia wrote, "EPA has routinely given it a narrower, context-appropriate meaning" in certain parts of the Clean Air Act. Scalia used the same trick to avoid subjecting millions of facilities to burdensome permitting requirements. He held that the definition of "air pollutant" didn't include carbon dioxide in sections of the Clean Air Act where including it would lead to a vast expansion in regulation.

The court's four liberals, led by Justice Stephen Breyer, preferred a different approach. Rather than selectively interpreting "any air pollutant" to exclude carbon dioxide, Breyer would instead have interpreted another phrase in the same section of the law, "any source" to exclude power plants that produce only modest amounts of carbon dioxide.

Two of the court's conservatives, Samuel Alito and Clarence Thomas, wrote a separate opinion arguing that the Supreme Court had been wrong to push the EPA into regulating carbon dioxide in the first place in 2007.

While the EPA can't impose regulations on new power plants based on their carbon dioxide emissions, the court ruled that the courts can regulate the carbon dioxide emissions of facilities that are already subject to regulations based on their emissions of conventional pollutants. So the EPA will still do what the EPA does; it’s estimated that 83% of greenhouse gas emissions that could potentially be regulated under the Environmental Protection Agency's interpretation of the law would still be covered as a result of the ruling, compared with the 86% of emissions that the EPA says it wants to regulate.

What today’s ruling really shows is that Congress has been out of touch and dysfunctional in dealing with pollution and climate change; rather than deal with issues, they stick their heads in the sand and hope the problem goes away, but it doesn’t; it simply shifts to another part of government that may or may not manage to resolve the problem, but in either case, is not held accountable to the voters; and then finally, if the problem persists, it goes to the courts. It’s a bad way to make and enforce laws.

A couple of other cases today: in Loughrin v. US; the court declined to reduce the scope of a federal criminal law against bank fraud, ruling that prosecutors do not need to prove that defendants intended to defraud a bank. The decision came in an appeal brought by Kevin Loughrin, who was convicted of six counts of bank fraud for stealing checks that he then altered so he could buy merchandise at Target stores.

Loughrin told police he meant to buy the items using the checks, then return the items for cash refunds. He was charged with using altered checks totaling $1,184.  Loughrin appealed his conviction. He argued that the bank fraud statute required prosecutors to prove that he intended to defraud the banks on which the checks were drawn. He said his intent was only to deceive Target. In other words, this was run of the mill fraud, and the use of a check was incidental. Loughrin did not appeal his related convictions for identity theft and possession of stolen mail. Between 2006 and 2010, the government sought to prosecute nearly 3,000 cases using the statute. Meanwhile, no major bankers have gone to jail for the crimes associated with the financial crisis; I’m just saying.

One more decision today: New Jersey wanted to institute legalized gambling on football, passing a law that the NFL and other sports leagues quickly fought in court.  The NFL won (as it often seems to do in court) at the federal appellate level, forcing New Jersey to take the case to the Supreme Court. The Supremes declined to review the case, so if you are in New Jersey, or any other state except Nevada, you’ll have to continue to call your bookie, or you can play fantasy football in a league set up through the NFL’s website.