Financial Review

Falling Knives

Sinclair Noe — March 8, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 109 = 16,964
SPX – 22 = 1979
NAS -59 = 4648
10 Y – .07 = 1.83%
OIL – 1.67 = 36.23
GOLD – 6.50 = 1261.50

Small business confidence declined further in February as lingering concerns about sales growth and profits hurt capital spending and hiring plans. The National Federation of Independent Business (NFIB) said its small business optimism index dropped one point to a reading of 92.9 last month, with none of the index’s components showing an increase. The index decreased 1.3 percentage points in January.

Spending and hiring plans weakened a bit as expectations for growth in real sales volumes fell. Earnings trends worsened a bit as owners continued to report widespread gains in worker compensation while holding the line on price increases.

China’s February trade performance was far worse than economists had expected, days after top leaders at the National People’s Congress sought to reassure investors. Exports fell 25% from a year earlier, the biggest drop since May 2009, while imports slumped 13%, leaving a trade surplus of $32 billion. It’s easy to blame Chinese New Year distortions, but the numbers point to bigger economic problems.

Japan’s 10-year yield extended its push into negative territory, dropping to an all-time low of minus 0.12 percent, meaning almost three-quarters of Japanese government bonds currently offer yields at or below, zero percent. By far the biggest move in trading overnight was the Japanese 30-year, which saw its yield plunge 22 basis points to a record low 0.468 percent. Japan’s 40-year yield is now lower than the U.S. 12-month yield.

After a long wait for inflation to accelerate, Fed officials face a complex and possibly divisive debate over whether recent evidence of rising prices is strong enough to move ahead with planned rate hikes.

In separate statements on Monday, policymakers at the core of that debate staked out starkly different views, with Fed Vice Chairman Stanley Fischer saying economic data now points to the “first stirrings” of inflation, while Fed Governor Lael Brainard countered that the evidence was not yet clear, and it would be much safer to wait. The Fed is not expected to raise interest rates next week, but they might signal they are looking at a rate increase in April or June.

Mario Draghi, the President of the European Central Bank, who is widely expected to tinker with the Eurozone’s financial plumbing this week in the face of weaker-than-expected inflation and six weeks of volatility weighing on business sentiment. Once again, with the market already pricing aggressive action, there’s a risk of disappointment when the ECB meets Thursday. If the ECB takes action, it sets up a divergence in monetary policy between the Eurozone and the US.

Yesterday we told you that the big jump in iron ore prices was short covering and not based on fundamentals. We have also said that trading in the energy markets has been driven by speculation more than fundamentals. Goldman Sachs tells investors the current commodity rally will fade as higher prices prompt more supply to enter the market. Yesterday, iron ore prices jumped 19%; despite the move, Citigroup says it is still bearish as supply and demand fundamentals remain firmly in place; while Axiom Capital Management said the price jump was probably just a “blip.”

Now normally, when Goldman makes a recommendation, we need to consider the possibility that it is a contrarian indicator, but in this case, they might be right. The commodity markets, especially energy, is a supply driven market, and when prices go higher, supply floods back into the market. But the current oil market is still oversupplied and prices have to remain lower for supplies to meaningfully shrink and re-balancing to take place.

The oil market has been especially volatile. Oil’s 2016 roundtrip is nearly complete. WTI crude started the year at about $40 per barrel, and bottomed around $28.75 a barrel – a double bottom actually in late January and early February. That represents more than a 34% swing.  After a 5.5% gain on Monday, the price returned to just a few pennies shy of $38. Brent crude touched $40 per barrel yesterday for the first time in 2016, and moved up to a three month high today before sliding. Now that is nothing but speculative trading.

When prices move higher it is likely a short squeeze because the fundamentals have not changed; there is still an oil glut; OPEC can’t be trusted to freeze production; and it will take time to winnow the producers and eliminate the weak players.

 Meanwhile, China is looking at extra stimulus, Japan has gone to negative interest rates, and the ECB meets Thursday to consider adding even more monetary stimulus. The net effect should be that all these countries weaken their own currency, and the dollar should strengthen. And commodities are priced in dollars, which should lead to lower prices. Just a reminder, stocks have been trading close to commodities for at least the past few months.

Oil and natural gas producer Chevron will cut its budget by at least 17 percent for the next two years as it finishes construction on major expansion projects and works to save cash. The company said it plans to spend between $17 billion to $22 billion annually in 2017 and 2018. For 2016, the company has already announced it would spend $26 billion. Executives reiterated the company’s commitment to pay its $1.07 quarterly dividend.

Goodrich Petroleum, an oil & gas exploration company said it will not make interest payments due March 15 and April 1 on some of its bonds, and will instead opt to use the 30-day grace period it is allowed before being officially in default. Goodrich said it has already launched an offer to exchange all of its outstanding unsecured notes and preferred stock for its common stock. If the exchange offers are not taken up, the company said it would likely file for Chapter 11 bankruptcy protection.

It can be tempting to look for bargains in the oil patch but some folks think it is tempting to catch a falling knife. I wonder how long it will take before Houston turns into Detroit.

Rooftop solar panel installer Vivint Solar terminated an agreement under which it would have been taken over by solar energy company SunEdison after SunEdison failed to “consummate” the $2.2 billion deal. Vivint said it intended to “seek all legal remedies available” as a result of the “willful breach” of the merger agreement by SunEdison.

SolarCity’s shares popped today after announcing a deal to install solar panel systems in Whole Foods Market stores across the U.S. The plan aims to increase the production of solar power and offset the need for a traditional grid power while helping the organic food store save money. In total, the energy firm will retrofit up to 100 Whole Foods stores with rooftop solar panels.

The U.S. Air Force has selected Pratt & Whitney to build the engines for Northrop Grumman’s new $80 billion long-range strike bomber program. Analysts had expected Pratt to be chosen as the supplier since the company already builds engines for Lockheed Martin’s F-35 combat jet. Other key suppliers for “airframe or mission systems” include BAE Systems, GKN, Spirit AeroSystems, Orbital ATK, Rockwell Collins and Janicki Industries.

Cyprus has become the fourth Eurozone nation to exit an EU-IMF bailout, as finance ministers gave the green light to leave its program without a follow-up fund. Cyprus was forced into a €10-billion-euro bailout in March 2013, due to a toxic combination of broken banks, a soaring deficit and an inability to access market financing. By contrast with Cyprus, Greece (the only Eurozone country left in a rescue program) was caught yesterday in a new disagreement between the EU and IMF regarding the strength of its bailout reform commitments.

In the latest volley in its high-profile fight with Apple, the Justice Department has appealed a decision that protects the company from unlocking an iPhone in a New York drug case. Prosecutors, who say Apple has unlocked at least 70 iPhones in the past, are relying on the same “All Writs Act” in a California court, where a judge ordered the company to unlock a device belonging to one of the San Bernardino shooters. The clash has intensified a long-running debate over how much law enforcement and intelligence officials should be able to monitor digital communications.

The Arizona Regional Multiple Listing Service reports overall sales in February were down 2.6% year-over-year. Cash Sales (frequently investors) were down to 29.0% of total sales. Active inventory is now down 0.7% year-over-year, and inventory is down for the fifteenth consecutive month.

Sportswear giant Nike, Swiss watch brand Tag Heuer and German luxury car company Porsche will end their endorsement deals with tennis star Maria Sharapova after she tested positive for an illegal heart drug at the Australian Open. Sharapova brings in, or brought in, a reported $30 million per year in endorsements.

Sharapova said she’s taken the drug, meldonium for over a decade, long before a 2016 ban by the World Anti-Doping Agency, which outlawed the substance as a performance-enhancer. So you might be wondering why there is a problem with a heart drug. Meldonium delivers oxygen through the blood. This can save lives when poor circulation reduces blood supply and oxygen to tissues. For the same reason, reducing the need for oxygen can enhance athletic performance.

Over the course of a workout, as our bodies use oxygen, our blood becomes oxygen deficient—because we’re using up oxygen at a faster rate than our lungs can replace it. Not so if you’re Maria Sharapova on meldonium. Her blood stays oxygen-rich longer, allowing her to perform longer in practice and in matches. And because the drug changes the actual substance that is metabolized in the body, it changes the way Sharapova feels after a workout, too.

This winter was the warmest on record for the contiguous U.S., according to the National Oceanic and Atmospheric Administration. The average temperature across the lower 48 states was 36.8 degrees Fahrenheit, breaking the mark set in 1999-2000. It was 4 degrees higher than the 20th-century average.

Financial Review

2015 Financial Review

Sinclair Noe — December 31, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 178 = 17,425
SPX – 19 = 2043
NAS – 58 = 5007
10 Y – .03 = 2.27%
OIL + .45 = 37.05
GOLD + .40 = 1060.20
SILV – .03 = 13.81

This is the final day of the year, and so it is appropriate to review where the markets stand; generally, it was ugly. We’ll take a look at stocks, bonds, the dollar and commodities. It was not an easy year for investors. Nearly 70% of investors lost money this year, according to Openfolio, an app that allows people to track their investment performance and compare their portfolio with other users.

Warren Buffett is seeing his worst year since 2008, with Berkshire Hathaway shares down more than 11% year to date. Bill Ackman of Pershing Square Capital sent a letter to investors in December that said 2015 may be the fund’s worst year since it was founded in 2004. 2008 was a terrible year in the stock market, but bonds were up 22%. But this year, not one major asset class had a good year.

If you went to sleep on December 31, 2014 and you just woke up today, you might think nothing happened in 2015. The S&P 500 index started the year at 2058, and closed at 2043, for a loss of 15 points or about 0.7%; with dividends reinvested the S&P 500 is up just about 2%. This follows three straight years of double digit gains for the S&P.

The best performing sector in the S&P was Consumer Discretionary with a gain of 9.5%. The worst performing S&P sector was Energy (no surprise there) down 23.8%, and materials down almost 10%. Netflix was the top performing stock in the S&P 500 with a gain of 139%; Amazon + 122%. Add in Google (now called Alphabet) + 49%, and Facebook + 36%. The big losers in the S&P were Chesapeake Energy, CONSOL Energy, and Southwestern Energy; all three down right at 77%.

So, if you avoided energy and went with the simple idea of the FANG stocks: Facebook, Amazon, Netflix, and Google; that simple formula makes you a stock picking genius. That doesn’t mean the FANG stocks will deliver in 2016. After all a trade can get crowded; case in point, Apple, the most widely held stock, lost 4% on the year.

The Dow Industrial Average started the year at 17,823 and closed at 17,425, for a loss of 398 points, or about 2.2%. Just a reminder, the Dow hit a record high of 18351 back in May and we did enjoy some milk and cookies this year; but it’s a long way from May to December.

The top performers in the Dow include Nike + 31% YTD, McDonald’s + 26%, Home Depot + 26%, and GE + 22%. The big losers on the Dow were Walmart – 28%, Caterpillar – 25%, American Express – 25%, and Chevron – 20%.

The Nasdaq Composite started the year at 4736 and closed the year at 5007 for a gain of 271 points or about 5.7%.

The Russell 2000 index started the year at 1204 and finished the year at 1135, down 69 points, or just under 6% negative for the year.

There are approximately 3,700 publicly traded companies on the US exchanges, and filtering out the S&P 500 stocks and the OTC stocks, the top performers included Eagle Pharmaceutical + 462%, Exelixis + 300%, Galapagos + 239%, and Prothena + 242%; all four are basically biotech companies. Great returns but long odds.

European markets ended the year mixed. Germany’s DAX gained 10%, while Italy’s MIB was the top performer, up 13%. On the downside, Britain’s FTSE lost 5% and Spain’s IBEX fell 7%. The major Asian indexes were mostly higher. Hong Kong’s Hang Seng lagged, losing 7%. Japan’s Nikkei gained 9%. And I’m sure you remember when China devalued the yuan in August and their stock market suffered massive losses; when all was said and done China’s Shanghai Composite finished the year with a 9% gain.

Jamaican stocks were a pretty good place to invest this year; the island nation’s index rose more than 80%. As for losers, political woes and lower oil prices have hurt the Ukrainian equities index, which has tumbled 56% year-to-date.

Morgan Stanley Institutional Growth is the top performing mutual fund of 2015, returning 11% so far this year; pretty good, but it is still below the fund’s own five-year average return of 14.6%.

The year’s best performing ETF position was VelocityShares 3x Inv Natural Gas ETN, a triple-leveraged ETF meant to track the inverse price movement of natural gas. Because natural gas prices fell 33% in the past year, this ETF climbed more than 200%.

Excluding leveraged ETFs, and those that track the inverse of a commodity or index, the best-performing ETF of 2015 is the Market Vectors ChinaAMC SME-ChiNext ETF, which emulates bonds issued by China.

As 2015 comes to an end, so does Q4. And that means corporate America will announce the financial results of their fourth quarter in a few weeks. According to FactSet, earnings for the S&P 500 are expected to have fallen 4.7% during the final three months of the year. If so, it would mark three consecutive quarters of year-over-year declines in earnings; something that hasn’t happened since 2009.

US Treasuries lost ground in 2015. Treasury yields put in their lows for the year in January.

The yield on the two-year surged to fresh six-year highs after the Federal Reserve announced an interest-rate increase in December. For the year, the two-year rallied 60 basis points to 1.07%. The 10-year yield put in its 2015 high of 2.48% in June before ending the year up 41 basis points at 2.27%. Selling at the long end caused the 30-year yield to rise 28 basis points to 3.03%. The yield on the long bond put in its 2015 peak of 3.24% in June. For the year the long bond lost 2%.  The 3-month Treasury bill returned 0.11%.

As for corporate bonds, high-yield debt sold by companies with more fragile balance sheets had a tough 2015. In particular, it was not a good year to hold bonds from Arch Coal, which took three of the bottom spots ahead of a potential bankruptcy filing.  Investment-grade corporate bonds sold by companies with relatively strong balance sheets fared better, but not by much. People are still avoiding high-yield debt from the energy sector, but elsewhere you’re seeing some stability. In a world where the 10-year Treasury is yielding 2.25%, 8% or 9% will still attract attention for someone willing to chase yield.

The US dollar rallied in 2015. The US Dollar Index climbed 9% in 2015. The Canadian dollar was the worst-performing major currency versus the greenback, plunging 16.4% to 1.38 per dollar as a result of the weakness in oil prices. The euro was also hit hard, falling 10% to 1.09 as the European Central Bank announced a policy of negative interest rates. The Swiss franc could be the lone major currency to gain versus the dollar.

In January, the Swiss National Bank removed its euro-franc floor, causing the Swiss franc to skyrocket. The currency hit a high of .83 per dollar, up 16%. By the middle of March, however, virtually the entire move had been erased. The franc is up 0.2% at .99 per dollar. The Brazilian real lost almost half its value and is looking like it has hit bottom, or at least it should within the next 6 months.

Commodities had a really ugly 2015. Precious metals saw some early strength in 2015 but sold off throughout the year after their January gains. Gold sank 10% to $1,060 an ounce and silver lost 12% to $13.80 an ounce. On the industrial side, copper plunged 25% to $2.13 a pound.

2015 has been the year of the double dip for crude oil. Prices were recovering until Greece voted to leave the Eurozone for a few minutes. Then after their banks were drained, they decided to stay just a little bit longer.

You also had the China stock market crash and OPEC started an old fashioned price war against US shale players, plus the supposed return of Iranian oil as sanctions are supposed to be lifted. But hold on, is it a done deal? The Wall Street Journal is reporting that the US is going to put more sanctions on Iran which may cause some problems for the return of Iranian oil back to the market.

For the year crude oil tumbled 31% to $37.05 a barrel as oil inventories swelled. An unseasonably warm fourth quarter pushed natural gas down to $1.75 per million British thermal units, but a late rally saw the energy component end 2015 down 19% at $2.37.

The Thomson Reuters CRB commodities index fell 24% to six-year lows. While coffee slumped 25 percent, cotton and sugar are in positive territory for 2015. Cocoa prices were up more than 18% on the year.

Next week’s economic calendar includes a couple of reports from the ISM and then next Friday we get the monthly jobs report for December. Also, we’ll start seeing some fourth quarter earnings reports trickle in.

Just because we can look back on 2015 doesn’t mean we can see the future. The only thing we know with any degree of certainty is that 2016 will be different. So good luck to you in the New Year.

Financial Review

Commodity Crush

Sinclair Noe — December 29, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 192 = 17,720
SPX + 21 = 2078
NAS + 66 = 5107
10 Y + .08 = 2.31%
OIL + 1.06 = 37.87
GOLD + .50 = 1070.00

The Commerce Department reports the trade deficit grew to $60.5 billion in November – a three-month high – as exports declined more than imports. Exports of goods shrank 1.9% to $121 billion, the second straight monthly decline. Imports dropped a slim 0.2% to $181.5 billion in November. Trade has been a drag on growth in five of the last seven quarters, as the strong dollar and weak global economies have limited exports.

Home values in 20 U.S. cities rose at a faster pace in the year ended October as lean inventories of available properties combined with steadily improving demand. The S&P/Case-Shiller index of property values climbed 5.5 percent from October 2014 after rising 5.4 percent in the year ended September. A limited supply of properties for sale has helped prop up home values.

Prices in Phoenix were up 0.5% from September to October and up 5.7% over the past 12 months ending in October. At the peak in 2006, prices in Phoenix were up 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 55% above January 2000 (55% nominal gain in almost 16 years).

The Conference Board’s consumer confidence index rose to 96.5 in December. In addition, confidence in November was revised higher to 92.6 from 90.4, which was the lowest level in more than a year. Consumers remain positive about the current state of the economy, particularly the job market. The number of people who anticipated more jobs in the months ahead increased slightly while the percentage who expected jobs to be scarce declined.

A new report from Sentier Research takes a look at Census data showing the median annual household income was $56,746 in November. That’s barely above October’s median of $56,688, but it was enough to top the $56,688 reached in December 2007, when the recession began. The bad news is that the median income is 1.1% lower than in January 2000, when record-keeping began. The numbers are inflation adjusted.

Still, the labor market has been showing improvement, even if it barely registers as a blip in wages. The unemployment rate is down 4 percentage points from the summer of 2011, to 5.0%; the median duration of unemployment has been cut in half to 10.8 weeks, and a broader measure of underemployment (the U-6) is 9.9%, down from 16.1%.

Saudi Arabia announced plans to shrink its record $98 billion state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatization. The Saudis are not expected to cut production in 2016. But there are increasing signs that demand might slow much sharper than expected after a spike in 2015. Oil prices higher today after dropping yesterday to near 11 year lows.

Still, it looks like oil is settling in to a range of $30 to $50 a barrel. Energy users everywhere are enjoying an annual income boost worth more than $2 trillion. The net result will almost certainly accelerate global growth, because the beneficiaries of this enormous income redistribution are mostly lower- and middle-income households that spend all they earn.

On the flip side, governments of oil producing countries, such as Saudi Arabia, are cutting public spending even as they run down reserves and borrow from financial markets; and major oil companies are forced to cut back, to the tune of $200 billion this year. And Iran is about to come back online.

A ship loaded with more than 25,000 pounds of low-enriched uranium has left Iran for Russia as part of a deal aimed to limit Tehran’s nuclear program. In a statement, Secretary of State John Kerry said the move was “one of the most significant steps” in fulfilling last summer’s nuclear accord, and it may be only weeks before the agreement takes effect. On “Implementation Day,” roughly $100 billion in Iranian assets will be unfrozen, and the country will be free to sell oil on world markets and operate in the global financial system.

What this means is that the big oil companies like ExxonMobil, Chevron, BP, Shell, and Total are on the ropes. Iran claims it can pump oil for $1 a barrel, and they will, soon. Saudi Arabia claims they can still make a profit under $20 a barrel. The big Western oil companies can’t compete, at least not when it comes to exploration and development of new fields. Shell learned that lesson when it came to developing Artic oil fields, it just didn’t pencil out and they had to abandon that plan at a cost of about $7 billion.

What they could do is provide equipment and technology to oil producing countries, forget about exploration, and maybe go a step beyond and sell their reserves.  That is precisely the strategy of self-liquidation that tobacco companies used, to the benefit of their shareholders. If oil managements refuse to put themselves out of business in the same way, activist shareholders or corporate raiders could do it for them.

As clean energy technology improves and environmental restrictions tighten, it is inevitable that much of the world’s oil reserves will be left in the ground, which means that oil companies are sitting on stranded assets that are, or soon will be, worthless. Redirecting just half the $50 billion that oil companies are likely to spend this year on exploring for new reserves would more than double the $10 billion for clean-energy research announced this month by 20 governments at the Paris climate-change conference. The financial returns from such investment would almost certainly be far higher than from oil exploration.

One of the big themes for 2016 will likely be lower commodity prices. I really don’t like to make predictions and your guess is as good as mine, but here is my thinking: first, commodity prices are in a downtrend and a trend in place is more likely to continue than it is to reverse; commodities, raw materials, the very building blocks of our economies, from oil all the way to copper, are being discounted in price.

Next, demand ain’t what it used to be. For the past 8 years at least demand for raw materials and especially oil has been driven by low interest rate policy which led to over-leveraging and over-borrowing, which led to over-production and over-capacity.

The Federal Reserve threw about $4 or $5 trillion at the economy but they were not alone; the central banks of the Euro Union, Japan, and especially China added in tens of trillions more. In China they built entire cities that sit empty. This over-production is unsustainable and the balloon is now drifting down to earth. And while all the over-production was happening, technology improved efficiency and conservation, further lowering demand.  Eventually, commodities prices will more or less stabilize, but at much lower levels.

And the reality for big oil companies is that they are in a dying business, just like the tobacco companies and the coal companies. Imagine for a moment, the coal company CEO who, ten years ago had the foresight to realize that coal was about to be crushed, and instead had sold off reserves, made big payouts to shareholders and re-invested in almost anything other than coal. It didn’t happen and I don’t expect big oil to do it either, even if it is the smart move.

‘Tis the season to return unwanted holiday gifts — and for retailers to lament the impact of all those boomeranging sales on their bottom lines. Approximately $70 billion worth of products may be returned this holiday season. While retailers can resell some of those items or foist them off on liquidators and discount chains, much of the value of returns is lost as they move through the supply chain. Just how much do businesses lose? Last year, Americans returned about $284 billion in merchandise, according to the National Retail Federation, and anywhere from a quarter to half of that value cannot be recouped, leading to tens of billions of dollars of losses. And fraudulent returns are expected to cost retailers $2.2 billion.

Carl Icahn has sweetened his buyout bid for Pep Boys …, again. And this time the Pep Boys board determined activist investor Carl Icahn’s latest buyout offer was superior to the deal it accepted from Bridgestone. Icahn Enterprises’ latest bid of $18.50 per share values Pep Boys at about $1 billion, while Bridgestone’s previous offer of $17 per share valued the company at about $947 million. The U.S. auto parts retailer has now moved to terminate the Bridgestone agreement.

Two of the world’s largest technology firms, IBM and Microsoft, are vying to tap the fast-growing market for forecasting air quality in China. Bouts of smog enveloping Beijing already prompted authorities to declare two unprecedented “red alerts” this month, and while prediction technology won’t be able to make the air better, it could be a step toward helping the city’s 22 million people live with it. IBM and Microsoft’s advances in “cognitive computing” can provide predictions for the air quality index up to 10 days in advance using data on weather, traffic and factory use.

Financial Review

Times Change

Sinclair Noe — September 30, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 235 = 16,284
SPX + 35 = 1920
NAS + 102 = 4620
10 YR YLD + .01 = 2.06%
OIL – .14 = 45.09
GOLD – 12.40 = 1116.30
SILV – .13 = 14.62

This is the last trading day of the third quarter. China’s main stock market posted its worst quarter since 2008 and its smaller Shenzhen index, posted its worst quarter in at least two decades. Markets in Singapore and Indonesia are set to post their worst quarters since the financial crisis. The MSCI Asia ex-Japan Index fell 19.1% from the beginning of the quarter. The Nikkei closed out its worst quarter since 2010 and the ASX its worst since 2011.

European stocks moved higher today, but not enough to recover from the worst quarter in 4 years. The Stoxx Europe 600 index is down about 9.5% for the quarter. Germany’s DAX index down 12% for the quarter. France’s CAC index posted a quarterly loss of 7.3%, and the UK’s FTSE 100 down 7.7%. The Eurozone is back in deflation. Consumer prices slipped 0.1% year-over-year in September.

The major U.S. averages had a rough third quarter. Concerns about spillover from slowdown in China and the timing of a Federal Reserve rate hike sent markets into correction territory, or more than 10 percent below their 52-week highs, in late August. The major U.S. averages recently fell back into correction mode and were close to retesting the August lows Tuesday.

The Russell 2000 held below its Aug. 24 low Tuesday. For the quarter, the Dow fell 7.6 percent, the S&P lost 6.9 percent and Nasdaq fell 7.4 percent. For September, the Dow fell 1.5 percent while the S&P dropped 2.6 percent and Nasdaq fell 3.3 percent. The Nasdaq biotech index lost 19.8% for the quarter.

West Texas Intermediate and Brent crude oil were down 24% for the quarter, for their sharpest decline since the end of 2014. The LMEX Metals Index is set for its longest streak of monthly declines since January 2009, down 11% for the quarter. Based on the most-active contracts, gold prices lost 1.5% for the month and 4.8% for the quarter. Year to date, gold is down 5.8%.Rice, cocoa, and cotton are the only commodities to post gains year-to-date.

Everything else is down. The worst performers are coffee down 28.8%, and lumber down 34.6%. Brazil and Columbia have flooded the coffee markets to boost exports to customers buying with U.S. dollars, in an effort to help offset losses from weakness in their local currencies. The selloff in lumber tells us something about the construction market, not just domestically but more so in China.

The MSCI Emerging Markets Index is down 19% for the quarter; investors pulled $40 billion out of developing economies in the third quarter, the biggest outflows since the fourth quarter of 2008. About $11 trillion has been erased from global shares in the third quarter.

The head of the International Monetary Fund says there is reason to be concerned about the global economy. In a speech today, IMF Director Christine Lagarde said that her organization sees troubling signs in the world’s finances, and that it is unclear if the current situation is cyclical or if it represents a fundamental downturn. “The simple answer is that there is no simple answer. Certainly, we are at a difficult and complex juncture,” Lagarde said, explaining she is worried about recent global affairs and international economics are similarly distressing.

Interfax reports Russian warplanes have started air strikes against ISIS targets in Syria; this marks Russia’s first use of force in the Middle East since the 1980s. In a speech at the United Nations on Monday, Putin called for a mandate for a broad coalition to fight ISIS that would include Syrian government forces and Iran. The U.S. and a coalition of countries is also carrying out limited airstrikes in Syria against ISIS, but they also say a future Syria must not have Assad at its helm because of his brutal actions against his own people.

Russian strikes will be in support of operations by the Syrian army and won’t target opposition forces other than those of ISIS. At least that’s one story; the other story is that the Russians bombed the Free Syrian Army, the anti-Assad rebel group that is backed by the West. Speaking at the U.N. on Wednesday, Secretary of State John Kerry said the U.S. would have “grave concerns” if Russia targeted other groups. If Putin really wants to jump into Syria with both feet, I suppose the best thing is that nobody tells him he’s jumping into quicksand.

The government will be open tomorrow. The Senate and the House just passed a short-term spending bill that will extend federal funding until December 11 and avoid a government shutdown by tonight’s midnight deadline. Following the votes, Republican leaders plan to start talks with President Obama about a two-year budget, although it’s unclear whether any successor to outgoing House Speaker John Boehner would be interested in such a deal.

Payroll processor ADP says the private sector added 200,000 new jobs in September. The Labor Department will issue its report on Friday; estimates are calling for 190,000 to 200,000 new jobs in the government report. ADP reports about half of the new jobs were created by large companies with 1,000 employees or more. Small and midsize firms were less aggressive in hiring. Only the energy and manufacturing sector reported job losses.

The Securities and Exchange Commission charged twenty-two municipal underwriting firms with selling municipal bonds using materially false statements or omitting required disclosures to investors. They will pay penalties based on the number and size of the fraudulent offerings identified, with a maximum penalty imposed on PNC Capital Markets of $500,000. Mesirow Financial, and Edward Jones also failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers. The firms did not admit or deny the findings, but agreed to cease and desist from such violations in the future.

Tesla last night launched its long-awaited Model X sports-utility vehicle, which features two electric motors, a range of around 250 miles and seating for seven people, as well as “falcon wing” rear doors that can open differently depending on conditions. Tesla CEO, Elon Musk, said around 25,000 people had ordered the SUV, but they’ll have to wait 8-12 months to receive their cars. The basic theme here is: they can sell them as fast as they make them.

Considering that the founder of Tesla Motors is also into rocket ships, and solar arrays, and cargo carrying pneumatic tubes, and planetary colonization, the car offers some unusual features, including Bioweapon Defense Mode. Elon Musk says it should be useful “if there’s ever and apocalyptic scenario of some kind.” We don’t know how well this might work in the event of thermonuclear war; it is, after all just a slightly more aggressive version of an air filtration system, but it might come in handy if there’s a dead skunk in the middle of the road.

There are some other Easter eggs built into the Model X computer programs. There is “Ludicrous Mode”, a button you can push if you want to go from 0-60 in 3.5 seconds, and then if you keep pushing the button you can see a clip from the movie Space Balls. Or, if you want to know more about the people that built your car, on the computer screen press the Tesla logo and then press the lower right corner of the screen and up pops a photo of the development team. And for audiophiles, a premium sound system where you can turn the volume to eleven.

Meanwhile, the only software Volkswagen can come up with is to cheat on emissions, and General Motors is still trying to make the ignition switch work.

The times are changing, and it’s not just computerized electric cars. The biggest coal companies in the U.S. are in trouble. Twenty-six percent of U.S. coal companies have gone out of business in the last three years, and the value of the companies that have managed to survive has dropped 76% in five years, according to a report from the energy finance research group Carbon Tracker.

As of 2001, just 17.1% of U.S. electricity came from natural gas generation. By 2014, gas’ share had increased to 27.4%. The entire U.S. coal industry made a big, expensive, debt-laden bet that China’s thirst for coal, particularly the kind used to make steel, would never slow down, and they were wrong. And now, New York City’s five pension funds, worth a collective $160 billion, announce they will divest their investments in coal.

In America’s long, dangerous history of mining, not once has a coal mine owner been charged criminally for a worker’s death. Coal miner fatalities, in some ways, have been considered a business expense. All of that changed with the indictment of Donald Blankenship. The former CEO of Massey Energy will stand trial starting tomorrow at a federal court in Charleston, W.Va. He faces up to 31 years in prison for allegedly conspiring to violate safety laws and lying to regulators about safety practices at the Upper Big Branch mine in Montcoal, W.Va., where a 2010 explosion killed 29 workers, the nation’s deadliest mining accident in 40 years.

Blankenship is facing criminal charges when other mining executives have not, in large part, because federal prosecutors say he was intimately involved in Upper Big Branch’s output to an extraordinary degree. He demanded reports every half hour on its production—they were sent to his home by fax on nights and weekends. Blankenship’s trial won’t do anything to resolve the disasters the coal industry has left. His conviction might bring closure to the families of the dead miners (if that’s possible). But in the long term, it might end up being a mere footnote in the tortured history of the Appalachian coalfields.

Financial Review

Remain Buckled Up

Sinclair Noe — August 24, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 588 = 15,871
SPX – 77 = 1893
NAS – 179 = 4526
10 YR YLD – .06 = 2.00%
OIL – 2.30 = 38.06
GOLD – 5.50 = 1155.90
SILV – .56 = 14.89

The “Fasten Your Seat-belt” sign stayed on for the entire trip.

The Dow Jones Industrial Average dropped 1089 points, or 6%, to 15,441 to start the session; that was the largest intraday drop in Dow history. The S&P 500 opened 100 points, or 4.9%, lower at 1,874. The Nasdaq Composite began the day down 360 points, or 7.6%, to 4,349. All three major US market indexes are now in correction territory, a 10% drop from a recent high. The latest round of selling comes on the heels of the worst week for the broad S&P 500 since 2011 that stripped more than $1 trillion in market value from US equities.

Before the market opened, Dow futures, S&P 500 futures and Nasdaq 100 futures triggered circuit breakers after falling at least 5%. The New York Stock Exchange operator NYSE Group invoked the rarely used “Rule 48,” which relaxes some trading rules in a bid to ensure a smooth opening to trading. The rule is instituted when trading before the start of the regular session is especially volatile. At the market open, a slew of single stocks and exchange-traded products triggered single-stock circuit breakers, which are initiated when there is a price drop of 10% or more in a five-minute period.

Over the past 5 days the Dow Industrials dropped 2,198 from peak to trough; the Dow lost 1,697 from peak to today’s close; and the Dow was down 1,666 from the open 5 days ago to today’s close. All major trend lines have been violated.

You know things are bad when we start talking about circuit breakers; just to refresh your memory, the New York Stock Exchange said it will halt trading for 15 minutes if the Standard & Poor’s 500 Index drops 7 percent. And just when it looked like the circuit breakers might trip, the market recovered; almost. The Dow bounced back to a loss of only about 100 points; maybe short sellers covered; maybe the Plunge Protection team stepped in; maybe bargain hunters nibbled. Who knows? And then the major indices resumed their slide in the final hour of trade.

A downturn in the stock markets is fairly common; a weekly drop of more than 5 percent has happened 28 other times since 1980. On average, the market is relatively flat the next week, up 1.65 percent over the next four weeks, and up close to 5 percent over the next 12 weeks. Also important to note is that 60 percent of the time, the index moves higher the following week.

Some of the standout years include huge drawdowns of more than 20 percent over the next 12 weeks in 1987 and 2008. On the opposite side of the spectrum, there were massive turnarounds in 1998 and 2009. So, just because the markets drop 10%, it doesn’t mean the markets will go into a 20% bear market. Of course, if you are going to a 20% loss, you have to pass by 10% first.

U.S. markets average one 10 percent correction every 20 months. On average, we should expect these declines to take 71 trading days to play out (about three months). These 10% corrections are more common in a secular bear market. We are not in a secular bear market.

World stock markets fell sharply again as panic selling in China picked right back up to start the week. China’s stock markets have now wiped out the gains built up during the year. The Shanghai Composite Index closed down 8.5%. Fresh signs of a slowdown in China, the world’s second largest economy, have jolted stocks, bonds, currencies and commodities in recent days. Investors were further rattled today by the lack of fresh steps to stem the selloff over the weekend from Chinese authorities. Taking the cues from Asia, the European markets closed lower across the board.

The Chinese central bank is reportedly ready to flood the banking system with liquidity to increase lending, the latest in a series of measures designed to give the flagging economy a boost. China gave approval for pension funds run by local governments to invest in the stock market. The measure was approved over the weekend by the State Council. State media in China estimate close to $97 billion will be eligible to be invested under the new rule. Analysts also expect the People’s Bank of China to lower the reserve requirement ratio by 50 basis points to 100 basis points in reaction to massive capital outflows.

Of course, the People’s Bank of China has already intervened in markets; by devaluing its currency, freezing the markets, banning short-selling, arresting short-sellers, and pumping tens of billions of Dollars into the market; one day it appears to provide relief, the next day (like today) it hits the sidewalk with a thump. This has reportedly set up a power struggle in China. The whole world is waiting for massive action from the Chinese government, an economic bazooka that can blast through all this market madness. The problem is that China doesn’t have one. That’s because China’s growth model is broken, and it can’t be fixed by cash injections or other emergency policy measures. The old fixes won’t work anymore.

The Federal Reserve has been intervening in the US markets for the past 7 years (OK, the past 100 years, but the past 7 for today’s example). And after years of Zero Interest Rate Policy and $4.2 trillion in QE securities added to their balance sheet, we are left to wonder what other tools they have in their toolbox. The Fed has been talking about raising interest rates, and that now appears dead for the September FOMC meeting. Or to put it another way, they wouldn’t raise rates if the meeting were held tomorrow. Who knows where we’ll be in 3 weeks. What the Fed and the PBOC are learning is that the global economies are now inextricably linked. The strong dollar and a slowdown in China hits emerging markets. The US is not an island in the global economy. And maybe monetary policy intervention in the markets just can’t get the job done anymore.

Ten-year Treasury yields dropped below 2 percent for the first time since April. Futures traders cut the probability to 24 percent that the Fed will raise interest rates at its September meeting, from 48 percent on Aug. 14. The chance of a December increase fell to 47 percent from 74 percent.

Oil prices plunged to 6.5-year lows as concerns over demand from China rippled across energy markets. Brent crude is below the $45 per barrel level for the first time since 2009, while WTI crude is back into the $30s. Commodities sank to the lowest in 16 years.

Gas prices in the US remained level over the last two weeks, according to the bi-weekly Lundberg survey. Prices were 22% lower than they were for the two-week period a year ago. Significant cuts in retail prices are expected across the US due to the latest developments in the oil markets.

The euro strengthened to $1.15 and the Japanese yen is also higher with traders discounting a move by the Federal Reserve to raise interest rates next month. The euro is now at its lowest level since last February.

Now, that is all backdrop for today’s market movement. Why did stocks fall? More sellers than buyers; actually the numbers matched but selling was the more compelling storyline for the day. Why did markets fall? Who knows? Still, I have seen the steady parade of economists who predicted 9 of the last 5 recessions, and market pundits who predicted 20 of the past 2 corrections, explaining why we are all going to hell in a handbasket.

We’ve also had the Alfred E. Neuman pundits, saying they’re not worried and the markets will rebound tomorrow and everything is beautiful. Whenever you get involved in stocks, you should know your exit plan, even before you buy. If your exit plan called for you to be out, then you should be out. If your plan called for you to remain at these levels, then you sit and wait it out. If you get emotional about market moves, you should not be in the market.

As global markets convulsed this morning, Apple chief executive Tim Cook dashed off an email to Jim Cramer at CNBC. Cramer read the email live on air. Cook wrote: “I can tell you that we have continued to experience strong growth for our business in China through July and August… Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last two weeks.”

Well, as you might imagine, that calmed the frayed nerves of Apple investors, at least a little. Apple shares started the session down more than 15 then managed to rally into positive territory, finishing down 2.5% for the day. The difference was about $75 billion in market cap. Which raises the questions:  Where is the public filing that accompanies this letter which constitutes nothing short of a private business update with an outside, and unregulated by Apple, market cheerleader? And, just how is this not a Regulation Fair Disclosure violation?

Thursday, May 29, 2014 - First Quarter GDP and Extreme Weather

Financial Review with Sinclair Noe

DOW + 65 = 16,698
SPX + 10 = 1920
NAS + 22 = 4247
10 YR YLD + .01 = 2.44%
OIL + .79 = 103.51
GOLD – 2.70 = 1256.90
SILV + .02 = 19.14

The economy was worse than expected in the first quarter. The first estimate of first quarter gross domestic product showed 0.1% growth. Today, we got the second estimate and it showed 1.0% contraction. We figured the second estimate would show contraction but most estimates were calling for just 0.1% to 0.6% contraction. The newly revised estimate incorporates additional economic data released in recent weeks. Higher-than-expected imports and slower-than-expected inventory growth dragged the economy into negative territory.

US based corporations posted slightly lower, after tax, seasonally adjusted, first quarter profits of $1.88 trillion for the quarter, down from $1.905 trillion in the fourth quarter; but those numbers were not adjusted for inventory valuation and capital consumption adjustments; we know corporations are still holding bloated inventories. A big buildup in private inventories boosted economic growth in the third quarter of 2013, but left a hangover that weighed on growth in the first quarter of 2014. Inventories subtracted 1.62 percentage points from GDP growth, compared with an initial estimate of 0.57 percentage point subtracted from growth.

Business investment declined at a 1.6% pace, revised from an initially estimated decline at a 2.1% pace. Spending on structures fell at a 7.5% pace and spending on equipment fell at a 3.1% rate. Investments in intellectual property, like research and development, rose at a 5.1% pace.

Consumer spending grew at a 3.1% pace in the first quarter, revised up from an initial estimate of growth at a 3% pace. Spending on services, like health care and household heating, grew at a 4.3% pace while spending on physical goods rose at a more modest 0.7% pace.

The housing market was a drag in the first quarter and the revisions didn’t create much change; residential fixed investment contracted at a 5% pace, a little better than the original estimate of a 5.7% decline, and that subtracted 0.16% from GDP.

Exports fell at a 6% pace in the first three months of the year, not as bad as the initial estimate of 7.6%, but imports, which are subtracted from the GDP calculation, rose at a 0.7% pace, compared with the initial estimate that they declined at a 1.4% pace. Net exports subtracted 0.95 percentage point from GDP growth.

Total government spending subtracted 0.15 percentage point from GDP for the quarter, compared with an initial estimate of 0.09 percentage point subtracted from growth. Federal spending added to GDP, state and local government spending subtracted slightly from GDP.

So, it was a nasty GDP revision but don’t worry, be happy because it was weather related and the winter storms and polar vortexes have passed; gray skies have cleared up, put on a happy face. One headline today tries to tell us: “Why the GDP Drop Is Good for the US Economic Outlook”; the thinking is that there is pent-up demand; consumers and businesses will brush off their cabin fever and rush out to buy and sell. Another headline tries to maintain perspective by reminding us that: “The US Economy Had a Hiccup, Not a Heart Attack”; which is almost a valid point; this wasn’t a heart attack, but it wasn’t a hiccup either. That article says, “This isn’t a recession or even the beginning of a recession though.” True, but this is how recessions start, with economic contraction, but this isn’t a recession.

The economy changes slowly, even though economic numbers jump up and down, and the numbers can be tricky. For example, in October 2008, the numbers on the economy showed GDP had dropped 0.3%, not nearly as bad as today’s number. Back in 2008, Lehman Brothers collapsed and the politicians said we faced a global financial meltdown.

Back in May 2007, the markets looked a lot like they do today, very low volatility, troubling signs for housing stocks, and a stock sector rotation that suggested the bull market was long in the tooth. That bull market ran for 5 more months. Whether investors knew it or not, they were incurring a large risk for only a few percent reward.

The numbers don’t always reflect the scene on the street. Maybe they do, but more than likely, this is not the start of a new recession. This is how recessions start and the strange part is how most economists are just glossing over this as if it were nothing but a hiccup, when it actually represents billions of dollars; one percent of a $17 trillion dollar economy; some hiccup.

The blame is squarely placed on the weather without acknowledging that the weather is undergoing massive change, not just the polar vortex of winter, but let’s look at the wildfires of spring, and the drought of summer. The “weather effect” is not likely a one and done. The United States is currently engulfed in one of the worst droughts in recent memory. More than 30% of the country experienced at least moderate drought as of last week's data. In seven states drought conditions were so severe that each had more than half of its land area in severe drought. Severe drought is characterized by crop loss, frequent water shortages, and mandatory water use restrictions.

While large portions of the seven states suffer from severe drought, in some parts of these states drought conditions are even worse. In six of the seven states with the highest levels of drought, more than 30% of each state was in extreme drought as of last week, a more severe level of drought characterized by major crop and pasture losses, as well as widespread water shortages. Additionally, in California and Oklahoma, 25% and 30% of the states, respectively, suffered from exceptional drought, the highest severity classification. Under exceptional drought, crop and pasture loss is widespread, and shortages of well and reservoir water can lead to water emergencies.

Drought has had a major impact on important crops such as winter wheat. Just 29% of the entire US wheat crop is rated good to excellent; very poor to poor ratings are 78% in Oklahoma, 67% in Texas and 59% in Kansas. And even though much of Texas received rain in the past week, it may be a case of too little, too late. With the crop now heading out, there's not much hope for any recovery as we move deeper into the season. That likely means higher prices for your daily bread. Pasture land across the West is in generally poor shape; that likely means higher beef prices, which you’ve probably already noticed.

In the Southwest, concerns are less-focused on agriculture and more on reservoir levels. In Arizona, reservoir levels were just two-thirds of their usual average. In New Mexico, reservoir stores were only slightly more than half of their normal levels. And Nevada is the worst of all, with reservoir levels about one-third of normal.

The situation in California may well be the most problematic of any state. The entire state is suffering from severe drought, and 75% of all land area was under extreme drought. Restrictions on agricultural water use has forced many California farmers to leave fields fallow. At the current usage rate, California has less than two years of water remaining. And we know California is responsible for about half the nation’s fruit and vegetable supply.

This past February, US food prices jumped 0.4% — the largest one-month increase since September 2011. Then they jumped another 0.4% in March. Then another 0.4% in April. Fruit and vegetable prices rose even faster, at a 0.7% clip in April. The US Department of Agriculture says the California drought doesn’t seem to have affected vegetable prices so far this year and the agency isn’t predicting a catastrophic spike in food prices just yet. The USDA projects that food price inflation will be between 2.5% and 3.5% in 2014. That's higher than the rise last year, but it's in line with the long-term average of 2.8%.

There are a couple of reasons why we might not get hit in the wallet this year: farmers are shifting water use from some crops to others, cutting back on some crops, like corn and alfalfa that might be available from other places. This strategy is tricky; for example, California dairy farms depend on alfalfa for feed; if they have to import feed, it could increase dairy prices in the short term. Also, farmers are pumping groundwater. The problem is the aquifers are being depleted, even sinking in some cases, and losing their original capacity. In the short term, we adapt; but if the drought continues, next year could be a bear.

Commodity markets already have weathered record cold in the US that sent natural-gas futures to five-year highs and severe drought in Brazil that has nearly doubled coffee prices. Now meteorologists are predicting even more abnormal weather, thanks to the return of El Nino, a rapid and prolonged warming of the tropical Pacific Ocean, which disrupts normal weather patterns and would exacerbate the extreme climatic events already affecting many markets this year. Meteorological agencies say there is a 60% to 70% chance of El Nino occurring by the end of 2014, and a more than 50% chance it will arrive earlier, by this summer.

It's a significant event in commodities markets because El Nino affects weather patterns virtually everywhere. Past occurrences brought dry weather to West Africa, damaging the region's cocoa crop, and wet weather to Brazil, delaying the coffee and sugar harvests. India typically sees less rain in its monsoon during an El Nino year, which can mean smaller grain and cotton crops. In the US, El Niño could bring much needed rain to the southwest and California. If it comes.

But El Nino is not necessarily good news for commodity prices on a global scale; it tends to help soybean crops but harm corn, wheat and rice crops. And also remember that El Nino refers to an extreme weather event. When El Nino hit in 1997 it claimed an estimated 2,100 lives and caused $33 billion damage to properties.

No matter which way you look, the forecast calls for extreme weather, and that means the first quarter GDP wasn’t just a hiccup.

Here Comes 2011

Welcome to 2011, the year of the Long-Term Evolution (LTE), A.K.A., G4 wireless connectivity. Only Verizon Wireless is offering it as I write this, but only through USB Modems.  Smartphones will be out later this year; so it’s here but just not available now to change your life.

The promised upgrade in broadband, whether we want it or can afford it, is a perfect metaphor for the upcoming collision between economic reality and political machinations.  One of three things will happen as the 112^th Congress is sworn in; a) it will continue business as usual, b) it will change spending in Washington DC, or c) our creditors will take away our charge card. America is unprepared for all three. Choice b would be not to raise the federal debt – much easier said than done. Choice a will debase the Dollar and cause inflation before the second leg of the 2008 Depression starts (Oh, and you thought we were pass that crisis?).

In 2010, the big winner was gold and silver amongst other commodity products. Below are finviz.com charts showing 1 year, 6 months, 3 month returns of the major futures markets. Silver was up 83.5% and Gold was up 29.5%. Stock averages trailed; The Russell 2000 was up 26.3%; NASDAQ 100 was up 19%; the S&P 500 was up 12.9%, followed by the DJIA, which was up 11.2%.

The 30-year Treasury Bond was up 5.6% for the year and the 10-year Note was up 4.2%. The US Dollar was up 1.2%. However, December was unkind to the 10-Year Note, as it lost 3% and the 30-Year Bond lost 4.2%.

On Monday, the stock market blasted off into triple digit territory, closing up 93 points. Optimism was everywhere in the air, not to mentioned an extra 850 billion in tax cuts to goose prices. I believe the DJIA will cross 14,000 this year and the S&P 500 will also cross 1450. The market will be wildly overvalued at that point, as the market is currently only recklessly overvalued, with more potential headwinds in the second half of the year from a slowing Chinese economy, a double-dip recession in Europe, and housing bubble collapses in Australia and Canada.

Gold and silver was savaged this Tuesday morning; February Comex gold last traded down $44.60 at $1,378.30 an ounce. Spot gold last traded down $36.40 at $1,378.50. The London P.M. gold fix was $1,388.50 versus the previous P.M. fixing of $1,405.50.  Silver futures for March delivery fell $1.617, or 5.2 percent, to $29.508 an ounce, I expect a consolidation period could last until the spring. This will range-bound gold’s price to $1,300 to $1,500.

Cost-Push inflation is being reflected in oil and food prices. Gasoline is now over $3.00 a gallon, on its way to $4-$5 a gallon this year. This inflationary pressure will weigh on a fragile consumer’s pocketbooks, therefore, GDP growth. Higher prices, combined with city and state firings of employees (layoffs is when you have a chance of getting your old job back) suggests higher unemployment and increase the chances a double-dip recession by the end of the year.

Fed Chairman, Ben S. Bernanke, has openly expressed a desire to inflate asset prices while holding down inflation on the theory that not doing so will reopen the door to deflation.

The minutes to the December 14^th FOMC policy meeting was released today which said in part, “While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment,”.

Only a neurosurgeon’s scalpel could be so precise. In my view, we can only wait to see which of the Fed’s missions will fail.

Conventional Wisdom is propagating that the private sector will ride to the rescue of the economy and President Obama’s reelection. Why would they? Demand is absent in the marketplace for goods in all but the luxury segment. Even the low-end retail segment is fading. Bottom-up stimulation is being withdrawn from the economy as state budgets, which spend locally, are being slashed, unmercifully.

If American business was serious in creating jobs here in America, they would be demanding trade protectionists’ measures to protect American workers. Once upon a time, business and the Chamber of Commerce did such things. Sadly, if we update the year by a decade, as the Eagle’s sang in their song Hotel California, “We haven’t had that spirit here since 1969”.

Below are my 2010 predictions with comments. Four of my predictions were right, three were too early, and four missed the mark. Without government intervention, my record would be eight out of eleven.  The take away is I was too conservative in my thinking which err on the on the side of caution for investors. Since the economy and the financial markets are disconnected like never before, and the government’s heavy hand has all but destroyed real price discovery, analyzing what is happening and predicting the consequences of those findings are becoming more and more a fool’s errand.

2010 Predictions	Result	Comments
I. The bond market will suffer its worst lost since 1994.	Wrong	Too early. The bond market began selling off in the 4th quarter. QE II artificially suppressed interest rates.
II. Gold will surpass $1,800.00 per oz.	Wrong	Too early. The direction was right, the magnitude was off. It went from $1,100 to $1,421 or 29.5%.
III. The Democratic Party will lose the House and barely retain the Senate.	Right	Bingo.
IV. The FDIC will temporarily run out of funds to shut down bad banks.	Wrong	The FDIC left open 900 bad banks otherwise they would run out of funds.
V. At least two states will default on their general obligation bond interest payments, roiling the municipal bond markets.	Wrong	Too early. The municipal train wreck will occur this year.
VI. Either, Tim Geithner, Lawrence Summers, of Ben Bernanke, will leave the administration before 2011.	Right	Lawrence Summers, bye bye.
VII. State and Federal taxes will rise in 2010.	Wrong	Silly me. I thought politicians would do the right thing instead of extending the Bush tax cuts.
VIII. Inflation will rise above 5% at least one quarter in 2010.	Wrong	Prices are rising but it is not being reflected in the CPI. Stay tuned.
IX. The yearly high for stocks will occur in the first half of the year.	Wrong	Quantitative Easing II (QE II) saved the stock market.
X. At least one western democratic government will fail and be replaced with another democratically elected government.	Right	The UK and Australia
XI. Residential real estate prices will drift lower YOY on the S&P Case-Shiller HPI	Right	Year-on-year, sales are up 0.2% for the 10-city adjusted index but are down 0.8% for the 20-city index