Financial Review

Cats and Dogs

Sinclair Noe — May 25, 2017

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

DOW + 70 = 21,082
SPX + 10 = 2415
NAS + 42 = 6205
RUT + 0.88 = 1383
10 Y – .01 = 2.25%
OIL – 2.50 = 48.82
GOLD – 3.20 = 1256.40
BITCOIN + .29% = 2483.51
ETHEREUM - 8.01% = 174.63

The S&P 500 and Nasdaq hit record closing highs. The surprising part is that retail led the charge.

Best Buy beat profit expectations, reported a surprise increase same-store sales and provided an upbeat outlook. The net profit for the quarter dropped to $188 million, or 60 cents a share, from $229 million, or 70 cents a share, in the same period a year ago. Still they blasted through analyst estimates.

Best Buy shares jumped 22% today.

Tommy Hilfiger owner PVH was the second-biggest S&P gainer with a 4.8-percent jump to a near 6-month high on strong results.

Dollar Tree reported earnings that matched estimates. Sales rose 4%, while same-store sales rose 0.5%.

Sears posted a quarterly loss on an adjusted basis. Revenue dropped. Same-store sales fell 11.2% in the quarter. But Sears recently announced cost cutting measures and they still have cash on hand for operations.

Today, shares popped 12%.

The trade gap in goods—services are excluded—widened to $67.6 billion in April from $65.1 billion in March, the government said in its advanced report. The full report will be released on June 2. Exports of goods fell in April, while imports expanded; that means the trade gap will likely cut into second quarter gross domestic product.

There had been hope for a big bounce back in the second quarter to make up for extremely sluggish first quarter growth of 0.7 percent, which had been blamed on temporary factors like weather.

Housing data this week was also disappointing when new home sales fell 11.4 percent and existing home sales fell by 2.3 percent in April.

Initial jobless claims rose by 1,000 to 234,000 in the seven days stretching from May 14 to May 20. That’s just a few notches above the post-recession low set in February, and near the lowest level since April 1973.

The U.S. economy has been churning out new jobs at a rapid pace since 2011, pulling the unemployment rate down to 4.4% and eliciting widespread complaints from businesses that they cannot find enough skilled workers to fill open positions, although not enough to push wages significantly higher.

OPEC agreed to extend oil production cuts for another 9 months, as expected. Oil traders were not impressed, maybe even disappointed cuts weren’t extended for 12 months. Production cuts have bolstered prices in the past, at least for a while, and then the euphoria fades – it just seemed to fade real fast today.

Of course, there is more at play. The biggest beneficiary of price cuts might be the US shale producers, who are expected to increase their output by about 900,000 barrels a day this year, soaking up much of OPEC’s production cuts.

Short-term projections call for a draw down in storage tanks in the coming weeks as the summer driving season gets underway, but the oil glut is likely to continue absent a big increase in demand – and the long-term outlook for demand faces headwinds from improved efficiency and conservation.

And a move to more electric engines.

There is a definite move away from diesel. The whole idea of clean diesel is being shot down in lawsuit after lawsuit. It started with Volkswagen cheating on diesel emissions; then Mercedes, Peugeot, Renault, and Fiat Chrysler. Add GM to the list.

GM is accused in a lawsuit of rigging hundreds of thousands of diesel trucks with devices like those used by Volkswagen AG, to ensure they pass emissions tests. The proposed class-action lawsuit covers people who own or lease more than 705,000 Chevrolet Silverado and GMC Sierra pickups fitted with “Duramax” engines from the 2011 to 2016 model years.

It said GM used at least three “defeat devices” to ensure that the trucks met federal and state emission standards, even if they generated more pollution in real-world driving. The complaint was filed in the federal court in Detroit.

In a 10-to-3 decision, a federal appeals court affirmed the freeze on the second iteration of President Trump’s executive order on immigration from six majority Muslim countries. The court said that national security “is not the true reason” for the order, despite Trump’s insistence to the contrary, saying it “drips with religious intolerance, animus and discrimination.”

Writing for the majority, Chief Judge Roger Gregory said Mr. Trump’s statements on the campaign trail concerning Muslims showed that the revised order was the product of religious hostility. Such discrimination, he wrote, violates the First Amendment’s ban on government establishment of religion.

Trump issued his initial order on Jan. 27, a week into his presidency. Less than two weeks later, the Court of Appeals for the Ninth Circuit affirmed an order halting it. Though Trump vowed to fight the ruling, he did not appeal to the Supreme Court. Instead, he issued a revised executive order. Now that it has been struck down, he is again faced with the choice of whether to appeal to the Supreme Court.

President Trump was in Brussels for a NATO meeting and he intensified his accusations that NATO allies were not spending enough on defense and warned of more attacks like this week’s Manchester bombing unless the alliance did more to stop militants.

In unexpectedly abrupt remarks as NATO leaders stood alongside him, Trump said certain member countries owed “massive amounts of money” to the United States and NATO — even though allied contributions are voluntary, with multiple budgets.

His scripted comments contrasted with NATO’s choreographed efforts to play up the West’s unity by inviting Trump to unveil a memorial to the Sept. 11, 2001, attacks on the United States at the new NATO headquarters building in Brussels.

Now, two of Germany’s leading newspapers are reporting that in a meeting with the EU’s top leadership he insulted Germany, calling the Germans “bad, very bad” for their running a trade surplus with the US and threatening to cut off car imports to the US.

The European Union said it doesn’t share a common position with Trump on Russia, while differences remain in key policy areas, including climate change and trade, adding to signs of strain in the world’s closest political and economic alliance.

Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that the nonpartisan Congressional Budget Office analysts said would undermine some insurance markets.

Republicans say they may first act to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in several states. A Senate plan is likely to continue subsidies that help low-income Americans with co-pays and deductibles.

The Congressional Budget Office said Wednesday that the House plan narrowly passed May 4 would result in 23 million more people without insurance and, in some states, plans that are too costly for older or sicker people. A Quinnipiac University national poll released today said Americans voters disapprove of the House measure by 57 to 20 percent.

Nvidia has enjoyed a particularly charmed existence since November 8. The graphics-chip maker’s stock price has exploded 95% higher since then, the biggest gain in the S&P 500 by almost 30 percentage points.

On one hand, the company has been targeted by large speculators as a stock likely to decline, as reflected by the roughly $3 billion in short positions held by hedge funds. But it’s also one of the favorite stocks for millennial investors. And while share prices across the technology industry have soared since the election, Nvidia has even more going for it than strength by association and the adoration of millennials

On Wednesday, SoftBank announced a $4 billion stake in the company, sending shares climbing even higher. In the grand scheme of things, this discrepancy between large institutions and individual investors is nothing new to the stock market. Some people get drawn in by the hype and the prospect of a quick profit, while others get worried that valuations are overextended.

The United States can expect an Atlantic hurricane season with more than the usual number of storms. The season, which begins June 1 and runs to Nov. 30, is likely to produce 11 to 17 named storms.

Experts at the National Oceanic and Atmospheric Administration say as many as nine of those could become hurricanes, with winds of 74 miles per hour or higher, and as many as four could be major hurricanes with winds of 111 m.p.h. or greater, also known as Category 3 or higher.

In an average season, 12 named storms develop, and three of them become major hurricanes. The agency said there was only a 20 percent chance of a below-normal season this year. In 2016, NOAA forecast 10 to 16 named storms; fifteen storms developed, including four hurricanes of Category 3 or higher.

Phoenix is the nation’s fifth largest city. Estimates released today by the U.S. Census Bureau show Phoenix last July surpassed Philadelphia, its closest population rival, for the first time after losing the title in 2010.  The 2016 data puts Phoenix’s total population at 1,615,017.

The average 88 people per day the city added between July 1, 2015 and July 1, 2016 gives Phoenix another national distinction: It’s the fastest-growing city in the country, based on numeric increase. Phoenix isn’t the only place growing in Arizona. Maricopa County has the nation’s highest annual population increase among counties, according to recent census statistics.

Financial Review

The Case Has Strengthened

Sinclair Noe — August 26, 2016

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

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DOW – 53 = 18,395
SPX – 3 = 2169
NAS + 6 = 5218
10Y + .06 = 1.62%
OIL – .04 = 47.29
GOLD – .90 = 1321.70

Federal Reserve chair Janet Yellen delivered a speech at the Jackson Hole Economic Symposium this morning. Here’s what she said, the key point: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Yellen said the Fed expects “moderate growth” in gross domestic product, additional strengthening in the labor market and inflation rising to 2% over the next few years.  She said that any decision on interest rates “always depends on the degree to which incoming data continues to confirm the Fed policy committee’s outlook.” Yellen spent the bulk of her speech discussing the potential need to add new tools to the Fed’s toolkit to combat the next recession given that interest rates remain so low. Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

In the past, Yellen has been dovish; in no hurry to raise rates; and she wasn’t exactly pounding the table, and she didn’t give a specific date when the Fed might make a move. And even though Yellen was making a case for action, the markets kind of shrugged it off initially. So, vice-chair Stanley Fischer came along later and removed any ambiguity, saying: “Yellen’s comments are consistent with a possible September hike.”

That is not a guarantee of a rate hike but if the Fed takes action in about 3 weeks, you can’t say you weren’t warned. Stocks, bonds and commodities were all sporting nice gains following Yellen’s speech, then Fischer provided clarification and selling ensued, while at the same time the dollar moved higher and the VIX spike 4.5%.

U.S. economic growth was a bit more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending. Gross domestic product expanded at a 1.1 percent annual rate, down from the 1.2 percent rate reported last month. The revision also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8 percent pace in the first quarter. It grew 1.0 percent in the first half of 2016.

The government also reported that after-tax corporate profits fell at a 2.4 percent rate last quarter after increasing at an 8.1 percent pace in the first quarter. Weak profits could limit an anticipated rebound in business spending. With profits declining, an alternative measure of growth, gross domestic income, or GDI, increased at only a 0.2 percent rate in the second quarter, the weakest since the first quarter of 2013.

Masked in the latest quarter is a very strong 4.4 percent annualized growth rate for consumer spending which is 0.2 percent higher than the first estimate. Inventory draw is the quarter’s culprit, pulling down GDP by a very steep 1.3 percentage points. But, in a counter-intuitive twist, lighter inventory in times of slow economic growth is a major positive for future production and employment and is a major plus for the ongoing quarter. The line of thinking is that there’s no pony in here now, but at some future point, there will be a pony, because ponies have always appeared in the past.

The Commerce Department reports the trade gap narrowed to a seasonally adjusted $59.3 billion in July from $64.5 billion in June. Exports rose by $2.9 billion during the month while imports shrank $2.4 billion. A surge in food exports helped cut the nation’s goods gap. Exports of foods, feeds & beverages rose 31 percent in the month though export prices of agricultural goods actually dipped slightly in the month. Other export readings are less favorable including a decline for capital goods, reflecting weak global investment in new equipment, and a small dip for consumer goods.

The University of Michigan’s consumer sentiment index for August slipped to 89.8 from 90.0 in July. The index is 2.3% lower than a year ago.

A very good article by Rex Nutting in Marketwatch asks a key question: Who’s preparing the United States for the 21st century? Nobody, really. Not the 22 million private businesses, not the 118 million households, and not the 90,000 state, local or federal government agencies.

Since the recession, investments have fallen sharply, and they haven’t gotten back up again. It seems that everyone is still scarred by the Great Recession, and by the collapse of asset bubbles in 2000 and 2006. Gross domestic investment totaled about $3.6 trillion in the second quarter of 2016, about 20% of gross domestic product.

That may seem a large sum, but it’s the lowest share of GDP, except during recessions, since 1947. But when you consider depreciation, the actual number is probably closer to $750 billion in the second quarter, or 4% of GDP, about half of the average over the post-war period. In fact, net investment has been running at the lowest rates since the Great Depression of the 1930s.

Business fixed investment has fallen for three quarters in a row, the first time that’s happened outside of a recession or its immediate aftermath since the mid-1980s. Net investment by state and local governments dropped to 0.6% of GDP in the second quarter, about half the average over the post-war period.

We have an economy that’s underperforming, but no one is willing or able to invest the sums needed to build the offices, factories, mines, computers, machinery, roads and airports we’ll need in the future. Business leaders don’t see a quick payoff in long-term investments, and public officials can’t fill the gap because the public thinks austerity now is better than growth tomorrow.

A U.K. sentiment index from YouGov and the Centre for Economics and Business jumped to 109.8 from 106.6 in July. The July print was a three-year low, and the rise in August was the largest in three years. It looks like the panic that gripped the public in the immediate aftermath of the Brexit vote has subsided, but the Centre warns it could all change though as details of the Brexit start to become reality.

If you have an Apple iPhone, you need to fix it. Apple issued a patch to repair a dangerous security flaw in iPhones and iPads after researchers discovered that a prominent United Arab Emirates dissident’s phone had been targeted with a previously unknown method of hacking. The hack is the first known case of software that can remotely take over a fully up-to-date iPhone 6. The researchers said they had alerted Apple a week and a half ago, and the company developed a fix and distributed it as an automatic update to iPhone 6 owners.

Adding another twist to the drama over Herbalife, investment bank Jefferies has been looking for the past month to find buyers for Carl Icahn’s 18% (roughly $1 billion) stake in the company. As if the idea of Herbalife’s largest shareholder exiting wasn’t enough of a story, the report also says Bill Ackman was among a possible group of buyers. Ackman has been shorting the stock for years. 

Icahn’s sale would come just weeks after he expressed renewed confidence in the company following the FTC settlement. Ackman kicked off the fight in 2012 with a widely watched presentation and a $1 billion bet that the stock would collapse. Icahn joined the battle a few months later and soon after got several Herbalife board seats.

Since then, the men have screamed at each other on live television and they and the company have traded legal accusations amid multiple investigations and a feature-length documentary. If Ackman really wanted to crush Herbalife, one way would be to get rid of the largest holder and then sell.

Apollo Global Management said it would buy cloud services provider Rackspace Hosting in a deal valued at $4.3 billion. The $32 per-share-offer represents a premium of 6 percent to Rackspace’s Thursday closing price. It’s also a 38% premium to Rackspace’s closing price on August 3. There was a very large short interest in Rackspace, more than $400 million. Ouch.

This exit from the public market can be laid squarely at the feet of Amazon Web Services. Amazon and Rackspace used to be such fierce competitors in cloud computing that Rackspace spearheaded a project called OpenStack to give itself and other IT vendors a chance to compete with Amazon. And OpenStack was successful, just not as successful as Amazon. It says something that the company went private instead of being bought by its partners, Amazon, Microsoft or any IT firms looking to jump start their cloud revenues; and what it probably says is that Amazon is crushing it in the cloud.

The Surgeon General of the United States, Vivek Murthy, has sent an electronic letter to 2.3 million doctors asking for their help to curb what’s being called an “unprecedented” epidemic of opioid painkiller overdose deaths. It’s the first time in history that a surgeon general has sent a letter directly to American physicians. Despite being home to 5% of the world’s population, America consumes 80% of its opioids. Between 2013 and 2014, deaths from synthetic opioids skyrocketed by 79%, according to a new Centers for Disease Control and Prevention report released Thursday.

A 2014 report from the American Academy of Neurology estimates that more than 100,000 Americans have died from prescribed opioids since the late 1990s. Those at highest risk include people between 35 and 54, the report found, and deaths from opioids in this age group have exceeded those from firearms and car crashes.

Financial Review

I Would Like to Thank the Academy

Sinclair Noe — February 26, 2016

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

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DOW – 57 = 16,639
SPX – 3 = 1948
NAS + 8 = 4590
10 Y + .07 = 1.76
OIL – .29 = 32.79
GOLD – 10.90 = 1222.80

For the week, the Dow Industrials added 1.5%, the S&P 500 gained 2%, the Nasdaq was up 1.9%. The S&P 500 has rallied about 6.5 percent since reaching a 22-month low on Feb. 11, it remains lower by more than 4.5 percent for the year.

The dollar strengthened for a third day versus the yen, while yields on 10-year Treasury notes topped 1.75 percent. Oil capped the biggest weekly gain since August, with a 10% move. China’s central bank said it sees room for monetary easing. Chinese markets were up over 1% after a big 6% drop Thursday.

The MSCI All-Country World Index rose 0.1 percent, while the Stoxx Europe 600 Index rose 1.5 percent. Gold posted a consecutive weekly drop for the first time this year.

Finance ministers and central bank governors from the world’s leading economies have gathered in Shanghai to discuss a response to the global economic landscape. Among the many issues facing them is the plunge in commodity prices, market volatility, exchange rates and the slowdown of China’s economy. G20 participants will try to agree on a coordinated stimulus program that could stop a global slowdown from turning into something worse.

But meetings of the world’s 20 leading economies have a long history of disappointing and analysts see little reason why this one should end differently. German Finance Minister Wolfgang Schaeuble was quick to pour some cold water on hopes for extra stimulus saying that the global economy needs reform, not stimulus.

Zero interest rates are not doing enough to stimulate flagging economies, while negative rates may well do more harm than good because potential depositors might prefer stuffing the money under the mattress rather than paying to park it at a bank. But don’t assume that will stop central banks trying to stimulate demand and raise inflation. The most likely option? Helicopter money. But what form will that take?

The most likely option is probably a direct monetization of government debt. The state could create infrastructure bonds to finance public works programs and those could be bought directly by its central bank and then cancelled. Instead of adding to the national debt, the bonds would simply be written off.

U.S. economic growth slowed in the fourth quarter, but not as sharply as initially thought. Gross domestic product increased at a 1.0 percent annual rate instead of the previously reported 0.7 percent pace. The economy grew at a rate of 2.0 percent in the third quarter. There will be another revision in about a month but as it stands now, GDP expanded 2.4 percent in 2015.

The value of inventories increased. The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities and construction. Investments in new housing jumped. Exports fell. Consumers and businesses both cut back on spending toward the end of the year, and that is not a good sign for an increase in growth.

We also learned consumer purchases climbed 0.5% in January – the biggest increase in 8 months. Disposable income, or the money left over after taxes, rose 0.4 percent for a second month, after adjusting for inflation. The saving rate held at 5.2 percent. Turns out there’s still some life left in the consumer. And we are seeing some signs of inflation.

The PCE, the Fed’s preferred gauge of inflation, increased 0.4 percent in January, compared with an increase of 0.2 percent in December. The January PCE price index increased 1.3 percent from January a year ago. The January PCE price index, excluding food and energy, increased 1.7 percent from January a year ago.

That’s still short of the Fed’s 2% target for inflation, but the jump in prices makes it more likely that members of the policy-making Federal Open Market Committee, who next meet in March, will continue to raise interest rates.

Federal Reserve Governor Lael Brainard said today that the market has been doing the Fed’s job for it, as tightening financial conditions in the U.S. over the past year and a half have reached the equivalent of three quarter-percentage-point interest-rate hikes.

Federal Reserve Governor Jerome Powell, speaking in New York today said: “A data-driven committee, making decisions meeting by meeting, is likely to surprise markets from time to time.”

In a separate report, the Commerce Department says the trade gap widened in January to the largest level since June. The seasonally adjusted trade deficit widened to $62.2 billion from $61.5 billion in December.

The University of Michigan consumer sentiment index for February was at 91.7, up from the preliminary reading of 90.7, and down from 92.0 in January.

Warren Buffett will release his annual letter to Berkshire Hathaway shareholders this weekend following another lackluster year that saw the conglomerate’s stock price lag the broader market. “His under-performance is getting conspicuous. He must address it,” said Doug Kass, head of Seabreeze Investment Partners.

There are 12 stocks in Berkshire Hathaway’s largest 15 holdings, including American Express, Wells Fargo and International Business Machines, that are all together down and by a sum of nearly $13 billion over the past 12 months. Another lingering question: Who will take over in coming years, given Buffett is 85, and second-in-command Charlie Munger is 92.

Short sellers are piling into energy stocks. As oil prices struggle to recover and expected debt default rates climb, the level of energy shorts on the S&P 1500 as a percentage of float, or those available for selling, is at 12.5 percent, approaching the 13.45 percent level financials saw heading into the crisis in July 2008. Short interest for energy is at the third-highest level of any sector dating back to 2007.

Among the hardest-hit individual companies are Transocean (36.3 percent short interest of shares outstanding), Chesapeake Energy (35.3 percent) and Consol Energy (28.8 percent), which saw a 20 percent gain in short interest during the most recent two-week filing period, according to FactSet. The companies represent the second, third and fourth most-shorted on the S&P 500; the non-energy company, GameStop is first with 37.7 percent. Energy as a sector is down 4 percent year to date and nearly 26 percent over the past 12 months.

Halliburton is cutting about 8% of its global workforce, or 5,000 jobs, pressured by the prolonged slump in crude prices. Halliburton has already reduced its global headcount by 25 percent, or almost 22,000 employees, since 2014. Halliburton is awaiting regulatory approval for its acquisition of Baker Hughes, and the company said last month it still has not reached an agreement with U.S. and European regulators about the “adequacy” of proposed divestitures.

The UK’s Royal Bank of Scotland reported its eighth annual loss. The $3.8-billion loss was due partly to litigation over mortgage-backed securities. That said, the fourth quarter of the majority-state-owned British bank—bailed out during the 2008 financial crisis—wasn’t nearly as bad as the previous year. The results follow a major restructuring that started last year, which involved shrinking RBS’s investment bank and exiting 25 of the 38 countries in which it operates, to focus on U.K. retail and commercial banking.

Republic Airways has filed for Chapter 11 bankruptcy protection, blaming several quarters of falling revenue after having to ground aircraft amid a pilot shortage. The carrier, which feeds flights to American Airlines, Delta and United Continental, listed assets of $3.6 billion and $3 billion of liabilities. Republic said the bankruptcy process would allow it to continue normal business while restructuring its finances and contracts.

Hilton Worldwide Holdings confirmed plans to spin off most of its hotels into a real-estate investment trust. The REIT will include about 70 properties, mostly upscale assets in the U.S. and internationally. Hilton owns or leases 147 hotels around the world. The properties, which include hotels under the Hilton and DoubleTree banners, could be worth more than $10 billion.

Dow Chemical said it agreed to pay $835 million to settle an antitrust case that was on appeal to the U.S. Supreme Court in the wake of Justice Antonin Scalia’s death earlier this month. Dow said the accord will resolve its challenges to a $1.06 billion jury award to purchasers of compounds for urethanes, a chemical used to make foam upholstery for furniture and plastic walls in refrigerators.

Dow Chemical had disputed a jury’s finding it had conspired with four other chemical makers to fix urethane prices and asked the Supreme Court to take the class-action case on appeal. Scalia, one of the court’s most conservative members, had voted to scale back the reach of such group suits.

A week after the ruptured natural gas well in Aliso Canyon, California was finally declared sealed, we have a full account of the environmental damage — and it doesn’t look good. A new paper published in the journal Science declared it to be one of the largest environmental disasters in US history. In total, 97,100 metric tons of methane were released into the atmosphere over the course of 112 days, equal to the greenhouse gas emissions of over half a million cars.

The Oscars are this weekend, and everyone is a winner. Just for being nominated attendees will receive a gift bag with a retail value of $232,800 worth of free swag – if they want it. Don’t thank the Academy; the swag bags aren’t about rewarding nominees. They’re an advertising opportunity for interested companies, handed out by a marketing firm called Distinctive Advantage. The items are all donated by the companies, which pay for the privilege; and this year’s bag is the biggest ever, at more than a quarter-million dollars in retail value.

Financial Review

Jobs Report Friday

Sinclair Noe — March 6, 2015

 

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

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DOW – 278 = 17,856
SPX – 29 = 2071
NAS – 55 = 4927
10 YR YLD + .13 = 2.24%
OIL – 1.02 = 49.74
GOLD – 31.90 = 1164.30
SILV – .35 = 15.81

The first Friday of the month is all about jobs.

The Bureau of Labor Statistics reports the economy added 295,000 new jobs in February. The unemployment rate dropped from 5.7% to 5.5%. The results topped estimates of 235,000 jobs, and also beats the revised 239,000 reported for January (revised down from 257,000); and also up from 188,000 a year ago.

The estimates were lower, mainly because most of the country has been experiencing harsh winter weather, and on the West Coast there was a shutdown and a slowdown at the ports. None of that seemed to matter, and if you are thinking ahead, you might imagine that the economy will just keep getting stronger as the weather gets better.

Now, you might look at how Wall Street responded to this very good news about jobs and you might be scratching your head, you might even think Wall Street is opposed to honest, hardworking Americans. Well, maybe a little, but the reason for the sell-off is that a stronger economy means higher interest rates. Investors are looking and focusing entirely on what the Federal Reserve will do in the coming months. Effectively good news in this data point supports the notion that they will raise rates in the not-too-distant future. Wall Street and corporate America have been enjoying a long run of free or at least very cheap money.

The Fed says any interest rate increase decision will be data dependent, but it should not be just that the unemployment rate drops to a given level. Disinflation leaves some wiggle room. And the Fed should also consider the long-term damage suffered by workers who have dropped out of the labor force or are long-term unemployed. Better to grow a little faster than desired rather than stamp out a recovery that is just approaching escape velocity.

Wages rose 0.1%, or .03 cents to $24.78. Average hourly wages for private-sector workers have been rising slowly, at around a 2% annual pace, for the last few years. There was a 0.5% increase in wages in January, but that now looks like a “one off” month. The Consumer Price Index, or inflation at the retail level, fell 0.1% in January compared to a year earlier; so that means “real” wages actually grew.

The US economy added over one million jobs between November and January, and it looks like the labor market is getting stronger and stronger. February was the 53rd straight month of employment gains, and the 12th straight month payrolls have increased by at least 200,000, the best run since a 19-month stretch that ended in March 1995. Payrolls rose 3.1 million in 2014, the most in 15 years. And payrolls are up 3.3 million year-over-year in February.

Most industries added workers to their payrolls. Bars and restaurants led the way by adding 59,000 jobs. It looks like people who are saving a few dollars at the gas pump are spending a few dollars for dining out. Unfortunately, bars and restaurants are not typically high paying jobs. Education and health services added 54,000 jobs. White-collar business and professional firms hired 51,000 employees, while cutting back on their use of temporary workers. The number of temp workers fell for the second month in a row for the first time since 2011. A cut back in temp jobs may indicate that temp workers are getting permanent positions.

Retailers added 32,000 workers. Construction companies created 29,000 jobs in February despite poor weather in much of the eastern half of the country. Transportation and warehousing added 18,000 jobs; financial activities added 10,000 jobs; and Information added 7,000.

Manufacturers created 9,000 new jobs, the smallest amount in 18 months. A few factors hit manufacturing, including a stronger dollar and weak global growth that has curtailed demand for American-made goods. In a separate report this morning the Commerce Department said exports fell 2.9% in January to a seasonally adjusted $189.4 billion, marking the third decline in a row. Imports decreased 3.9% to $231.2 billion, resulting in a lower trade gap of $41.8 billion for December.

Government added 7,000 jobs last month; those were state and local jobs, not federal. State and local government jobs are slowly posting gains – now up 138,000 from the bottom but still 620,000 below the peak.

There are still 6.6 million workers who are underutilized, working part-time even though they would prefer full-time work; that’s down slightly from 6.8 million in January. If you add underutilized workers with unemployed workers, you come up with a different measure called U-6, which figures the unemployment rate at 11%, down from 11.3% in January, and the lowest U-6 since September 2008.

And let’s be clear when we look at U-6 compared to the U-3 unemployment rate, which is the headline number at 5.5%. Sometimes, some people say the U-6 is the real unemployment number, and it usually goes in line with some theory that the government is trying to hide the real numbers. No, these are two separate numbers. And you should not try to compare apples to oranges. The U-6 number can help us get a better understanding of slack in the labor market, which goes a long way to understanding why wages remain stagnant.

Another reason for stagnant wage growth is that many people have been sitting on the sidelines, sometimes discouraged from looking for work, sometimes they have gone to school for training, and in the case of the boomer population, many have retired, even if it was involuntary. According to the BLS, there are 2.7 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.8 in January. And this was reflected in the participation rate, which dropped from 62.9% to 62.8%. The participation rate is the percentage of the working age population in the labor force. What we see here is that some long-term unemployed have moved back into the labor pool, while the massive demographic shift persists, and others have walked away from the pool. The drop in the jobless rate reflected both an increase in hiring and a decline in the number of people in the labor force.

When people get back in the labor pool after a long bout with unemployment, they typically return for lower wages. Also, part-time workers have very little power in negotiating higher wages; usually their best hope is for more hours. This puts a downward bias on wages.  There is growing evidence that an improvement is underway. One indication is the growing number of younger workers changing jobs as they gain more confidence in their prospects. There were 2.7 million quits in December; you have to quit a job before you get a new job. And you don’t quit unless you are fairly confident about a new job. On average, workers who switch jobs get a 14% pay increase in their new salaries.

Job openings now top 5 million, the highest level since January 2001. The number of job openings is seen a measure of labor market slack, with more job openings indicating the balance of power in the labor market shifting towards workers looking for jobs and away from employers looking to hire.

We have seen strikes at oil refineries and a slowdown at the West Coast ports; that indicates that workers feel they have enough bargaining power and confidence to demand higher wages. At the same time, we heard that Walmart is raising wages for workers to $9 an hour, and up to $10 an hour next year; a move that is slowly and surely being repeated at other retailers. This indicates that it is cheaper to retain workers at higher wages than it is to find new workers.

Labor advocates say retailers should be focusing on adding hours as well as lifting pay for some workers. Retail workers make up 11% of working adults but that 18% of those who are working part time would rather be employed full time. Many who want more hours are women from minority groups.

Whenever we hear about stagnant wage growth we hear the argument of the “skills gap”; this is the idea that businesses can’t find the workers they need because American workers do not have the skills or education to perform. And it is always a little difficult to counter that argument without sounding anti-education. So don’t take this wrong. Education is still a great way to get a good paying job. Highly educated workers generally have a higher rate of employment and generally higher wages. But that doesn’t tell the whole story.

If businesses were desperate for workers with certain skills, they would presumably be offering premium wages to attract such workers. So where are these fortunate professions? You can find some examples here and there. Interestingly, some of the biggest recent wage gains are for skilled manual labor — sewing machine operators,boilermakers — as some manufacturing production moves back to America. But the notion that highly skilled workers are generally in demand is just false.

Meanwhile, the inflation-adjusted earnings of highly educated Americans have gone nowhere since the late 1990s; their wages are just as stagnant as everybody else. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career trajectories and are moving into less skill occupations if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.  Wage inflation in the United States is 2%. It has not gone up in five years. There are not 3% of the economy where there’s any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs that will magically appear, all these places where there are shortages and we just need to train people is fundamentally an evasion.

The simple reality is that demand creates jobs. If someone has a job, they spend their paychecks and that creates demand, and businesses then hire someone to meet the demand rather than lose the business. Unless you’re doing things that have things that are effecting the demand for jobs, more training and more education just means you’re helping people win a race to get a finite number of jobs. The core problem is that there aren’t enough jobs.

Wednesday, August 06, 2014 - Where Water Flows

Financial Review with Sinclair Noe

DOW + 13 = 16,443
SPX +.03 = 1920
NAS + 2 = 4355
10 YR YLD - .01 = 2.47%
OIL - .54 = 96.84
GOLD + 17.30 = 1306.30
SILV + .27 = 20.11

Let’s start with the economic news of the day:

The Commerce Department says the trade gap for June shrank 7% to $41.5 billion, the lowest reading since January. That was smaller than the roughly $44.8 billion shortfall the government had assumed in its first snapshot of second-quarter gross domestic product published last week; so that would indicate the 2Q GDP number could be revised higher by 0.3%.

Exports edged up 0.1% to a record high of $195.9 billion in June, supported by a surge in automobiles, parts and engines, which rose to an all-time high. Consumer goods exports also hit a record high. There was also a jump in crude oil exports. Imports fell 1.2% in June, the largest drop in a year; petroleum imports declined to $27.4 billion, the lowest level since November 2010, from $28.3 billion in May.

Elsewhere, the Gaza-Israel ceasefire is holding for a second day. The Iraqi government carried out an airstrike on ISIS, killing 60 in the city of Mosul. Russia is massing troops near the Ukrainian border. Renewed fighting in eastern Ukraine has forced the suspension of a search for the remains of the victims of crashed flight MH17. Russian President Putin has banned agricultural imports from countries imposing sanctions on Russia. So, it might be difficult to buy California avocados in Moscow, although the Kremlin hasn’t yet created a list of food and ag products that will be banned.

Of course it might be difficult to buy California avocados anywhere, unless California gets some rain. The entire state is experiencing drought, and 82% of California is in “extreme” drought; of that, 58% of the state is in an “exceptional drought”, the driest conditions possible, an increase of more than 20% in a single week. Record-low rainfall has sent rivers, lakes and water reservoirs to their lowest levels in decades; threatening the water supply of many cities. The unusually dry conditions have increased the risk of wildfires, which have already ravaged parts of the state; most recently an area near Yosemite National Park.

The long-term drought cutting off California's water supply continues to parch the state, and even NASA can see it now. With the entire state now in severe drought, NASA's Aqua satellite took a picture of California to compare the terrain with a similar image taken from 2011. California is turning brown and parched. In 119 years of record keeping, 2013 was the driest calendar year for California, and it’s even worse this year. Even with a possible El Niño lurking in the tropical Pacific, there is no quick fix to this drought. It will take years of above-average rainfall to recover.

In the major cities like Los Angeles, residents are getting mixed messages: don’t water your lawns or hose off the sidewalk or you could face a fine of $500; at the same time they could be fined if they don’t keep their lawns and neighborhoods looking nice. That has spawned a new side business for landscapers: lawn painting. Prices vary but typically range from 25 cents to 35 cents per square foot of grass. On average, a 500-square-foot lawn is likely to cost $175 for a fresh coat of green paint. The dye is marketed as safe and nontoxic.

The drought’s biggest victim could be California’s Central Valley, the source of fully half the nation’s fruits and vegetables, where panicked farmers are taking extraordinary steps to survive a drought that could drive them out of business. Some farmers are drilling water wells thousands of feet, others are paying more than $2,500 for an acre foot of water; that’s at least 6 times the price of what water was going for last year. Desperate farmers have scrambled to save valuable citrus orchards; others have already lost the battle and been forced to bulldoze dead trees. It’s estimated that 10% of California’s farmland went unplanted this season. And the environmental damage might not be repaired in our lifetimes.

A recent University of California, Davis, study found the state’s agriculture industry stands to lose at least $1.5 billion this year alone due to the drought; losses that threaten to devastate a region where virtually everything is tied to farming. Already, small towns where the population is made up primarily of farm laborers, are warning unemployment rates could hit 50% in coming months because there will be no crops to harvest. That’s terrible news for an area already stricken by some of the highest poverty rates in the nation and where many cities still haven’t fully recovered from the Great Recession. And that’s just the start of a vicious cycle. No crops means people can’t work. Prices for produce go up, and people can’t afford to eat.

And as the state dries up, we are seeing the commoditization of water. Actually, that’s nothing new. For at least the last 10 years, the big banks and wealthy investors have been buying up water, or water rights. In 2008, during its annual “Top Five Risks” conference, Goldman Sachs called water “the petroleum for the next century” and those investors who know how to play the infrastructure boom will reap huge rewards. A 2008 New York Times article mentioned Goldman Sachs, Morgan Stanley, Credit Suisse, Kohlberg Kravis Roberts, and the Carlyle Group, had “amassed an estimated an estimated $250 billion war chest to finance a tidal wave of infrastructure projects in the United States and overseas.” In a 2012 JP Morgan equity research document, it states clearly that “Wall Street appears well aware of the investment opportunities in water supply infrastructure, wastewater treatment, and demand management technologies.” Billionaire T. Boone Pickens owned more water rights than any other individuals in America, with rights over enough of the Ogallala Aquifer to drain approximately 200,000 acre-feet (or 65 billion gallons of water) a year.

This summer, various business forces are combining to remind us that fresh water isn’t necessarily or automatically a free resource. It could all too easily end up becoming just another economic commodity. At the forefront of this debate is Peter Brabeck, chairman and former CEO of Nestle. In his view, citizens don’t have an automatic right to more than the water they require for mere “survival”, unless they can afford to pay for it. For context, the World Health Organization sets such “survival” consumption levels at a minimum of 20 liters a day for basic hygiene and food hygiene – higher, if you add laundry and bathing. In the United States, the odds are that flushing your toilet consumes 50 liters of water a day, and your average daily consumption of water probably tops 125 gallons.

If you’re curious to know what a society existing on “survival” water supplies might look like, just take a glance at Detroit. When the city became the largest US municipality ever to file for bankruptcy protection, they began to look at the payments residents owed to city hall, including delinquent water bills. Instead of letting it slide, the city cut off water; leaving more than 100,000 of the city’s 700,000 citizens without running water in their homes.

Just this past week, we saw the city of Toledo, Ohio tell a half million residents the water wasn’t safe to drink. Flooded by tides of phosphorus washed from fertilized farms, cattle feedlots and leaky septic systems, the most intensely developed of the Great Lakes is increasingly being choked each summer by thick mats of algae, much of it poisonous. Toledo was unlucky: A small bloom of toxic algae happened to form directly over the city’s water-intake pipe in Lake Erie, miles offshore. Beyond the dangers to people and animals, the algae wreaks tens of billions of dollars of damage on commercial fishing and on the recreational and vacation trades. Ohio has stopped well short of actually ordering the sources of phosphorus runoff to cap their production.

Nestle Waters North America division is the largest bottled water company in the country; they have to pay for water, at least some of it. Nestle pumps some of its bottled water from an aquifer near Palm Springs, thanks to a partnership with the Morongo Indian nation. Their joint venture, bottling water from a spring on land owned by the Morongo in Millard Canyon, has another advantage: since the Morongo are considered a sovereign nation, no one needs to report exactly how much water is being drawn from the aquifer.

And there is some validity to the argument that we risk depleting the supply of fresh water through careless and irresponsible consumption of what many think of as a free or nearly free resource. But what, exactly is that role? Is it to allow large corporations to buy up water rights, and possible corner the market for water? One role for the markets might well be in developing water related technologies to treat waste water or desalinate water, or even to extract water from the air; or to develop ways to use less water than we use now to grow crops and make products such as paper, or electronics, or the billions of gallons used to dye clothes.

So far, private equity hasn’t been able to figure out the technology or the potential for startups in this relatively nascent field. There is hard science, and a fair amount of infrastructure investment required. Venture capital favors the get rich quick schemes, even if the latest phone app might fade in 18 months, they can make a quick strike. Venture capital tends to gravitate to areas it knows, and areas it knows will not require heavy upfront costs, even if it could provide a steady flow of income and water for decades to come.