FINANCIAL REVIEW

Third World Stuff

Sinclair Noe — October 15, 2014

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Financial Review

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

DOW – 173 = 16,141
SPX – 15 = 1862
NAS – 11 = 4215
10 YR YLD – .11 = 2.09%
OIL – .13 = 81.71
GOLD + 8.90 = 1242.10
SILV + .05 = 17.55

Go back a mere 18 trading sessions and the market was at all-time highs. The Dow hit an intraday high of 17,350 and a closing high of 17,279, on September 19th; that was 18 trading sessions in the past. For the Nasdaq composite we have seen a 10% correction from recent highs. That means this drop happened fast, and it also means the bear may have more room to run; this move is not mature in terms of duration or magnitude.

The major indices have dropped under the 200 day moving average; we were waiting for confirmation; we got it. The S&P looked to bounce off a different trendline. If you draw a straight line across the S&P lows beginning with the lows from 2011, which is where we saw support and a bounce today, at the 1820 level; it is also very close to the support levels from April at about 1815, which we talked about on Monday. That is an intermediate level of support, but it held today, and you have to respect the line, unless or until it breaks down.

Once we hit certain levels, people start to feel the pain and they move to safety; it is risk off, or a margin call is triggered, or you just get tired of the pain. And it was looking painful today; earlier in the session the Dow was down 460 points. The Russell 2000 index of small cap stocks reversed declines and finished the session in positive territory. For most of the trading day investors rushed for safe havens, including US Treasury debt. The yield on the 10-year Treasury note tumbled as low as 1.87%, its lowest since May 2013. Low interest rates are great news for people who want to borrow money or refinance their mortgage, but they typically show up when the economy is in the dumps and there’s not a lot of demand for loans. The low rates are lousy for savers. And even more ominous, low rates come with a whiff of deflationary stink.

And oil prices continued to slide, at one point down to almost $80 a barrel; great news when you go to fill up at the pump, but another indicator that demand is slow around the world. The lower oil prices are weighing heavy on the shares of oil drilling companies and the big oil companies. The worst-performing S&P Composite 1500 subsector this year has been Oil & Gas Drilling, down 22% through Tuesday, according to FactSet. The Oil & Gas Equipment and Services sector hasn’t fared much better, with a drop of 17%. You might think it would be a positive for the airlines, because fuel is a big expense, but no; airline stocks were down 4.9% intraday, because it turns out that one of the worst places for an Ebola patient is inside a sealed tube at 25,000 feet.

The second health care worker to be diagnosed with Ebola flew on a commercial flight one night before reporting a fever; and she had a fever while flying on the Frontier flight on Monday. Frontier says because of the short time between the flight and her fever, health officials were contacting all 132 passengers from the flight. Public-health professionals will interview the passengers and monitor those deemed to be at risk for contracting the virus. But what we are learning is that the public health professionals are flying by the seat of their pants, making up protocols as they go, and making mistakes which have the potential to grow exponentially.

Nurses at the Dallas hospital now claim that they did not have the proper haz-mat suits, they did not have the proper training; people facing possible exposure are not quarantined. The original Ebola patient, the late Mr. Duncan, was brought to Texas Health Presbyterian by ambulance with Ebola-like symptoms, then he was “left for several hours, not in isolation, in an area” where up to seven other patients were. “Subsequently, a nurse supervisor arrived and demanded that he be moved to an isolation unit, yet faced stiff resistance from other hospital authorities.” Lab samples were not properly sealed and then they were sent through the usual hospital tube system, which means the entire hospital could potentially be contaminated. The nurses also alleged that hazardous waste was allowed to pile up to the ceiling. This is third world stuff, and it is happening in Dallas.

The market fallout started today in the European markets. The yield on German 10-year bunds fell to 0.75%; the German DAX fell 2.9%. Germany is finally falling victim to its own compulsion for austerity, and it is slipping into recession and dragging down its neighbors. In the UK, the FTSE lost 2.8%; the CAC in Paris lost 3.6%; stocks in Italy lost 4.4%. The Greek stock market dropped 9%.

The Greek market is admittedly small, but it makes people think about the potential unraveling of the Euro Union. The Greeks are fed up with austerity and not so keen on the restrictions imposed as part of a bailout plan; they would just as soon skip the bailout, with a middle finger salute to the EU, and try to sort things out on their own.

And then we had some soft economic reports. Retail sales came in worse than expected, with headline sales falling 0.3% against expectations for a more modest 0.1% decline. Autos and gas down, home furnishings, building materials, nonstore retailers, clothing and accessories, and sporting goods and hobbies all down. Electronics up thanks to the iPhones, but that’s like a blue moon, rare.

The latest report on producer prices paid showed that prices unexpectedly fell 0.1% in September against expectations for a 0.1% increase. Additionally, the New York Fed’s latest Empire manufacturing report showed that business conditions plunged more than 20 points to 6.17 from last month’s 27.54 reading, and way below expectations. Then the Fed released its Beige Book, a survey of economic conditions; the general flavor of the report was that the economy was continuing to grow at the same “modest to moderate pace” seen since 2011, with moderate consumer spending and modest wage growth.

There wasn’t anything in the economic reports to suggest a 450 point slide in the Dow, but the data didn’t show any strength, and that is part of the problem. The US economy has been trying to dig out of the slow grind of modest growth. The thinking was that the economy might achieve escape velocity, might pick up enough momentum to increase demand, which would increase GDP, which would create jobs, and there would be a virtuous cycle. Yea, not so much.

And as the markets were slipping into darkness today, came word that Federal Reserve Chairwoman Janet Yellen was optimistic about the economy; a news leak that Yellen met with a group of economic big wigs on the edge of the IMF and World Bank meetings over the past weekend, and Yellen was quite upbeat, calling for 3% GDP growth in the US and seemingly confident the US would hit the inflation target off 2%. Yellen’s reported remarks were roughly in line with the forecasts presented by Fed policy makers at their last meeting in September. They saw the economy growing by 2.6 to 3 percent next year and inflation rising to 1.7 to 2 percent in 2016, according to their central tendency forecasts. So, nothing really new, but somebody felt it was important to have the Fed chief sounding confident on a day when the market was looking very ugly.

Not that the Fed can do much else. Back in 2007, when the market swooned, Bernanke was looking at the Fed Funds rate at 5.25%, and the Fed’s balance sheet was still under $1 trillion. Now rates are near zero and the Fed has added about $4 trillion to its balance sheet, and they don’t have many tools left in their tool belt. The Fed can’t cut interest rates from here. QE3 is scheduled to finish this month, and QE4 doesn’t seem likely any time soon. And so now, when the market dips, there is little to motivate an investor to buy the dips. The Fed might want to prop up the markets, but they don’t look like they have the tools for the job.

The robust parts of the economy have been getting a free ride on the back of QE in various forms: energy development, financial services, venture capital pushing the tech sector in Silicon Valley, but if you get out of those bubbles, the rest of the country is still slogging along, far from escape velocity, just trying to dig out of the ditch.

Oh yeah, it’s earnings reporting season. This morning Bank of America reported something to do with the third quarter. Net income was $168 million, down from $2.5 billion a year earlier. Adjusted earnings per share, which exclude an accounting gain, were 40 cents, beating the 32-cent average estimate. And that’s before $238 million of dividends to its preferred stockholders, so after those dividends it lost $70 million, a negative number. And that’s just the beginning of the mish mash of numbers that passes for an earnings report. I could spend the next week looking at the report and still not tell you with certainty that Bank of America turned a profit or a loss.

Netflix reported its third-quarter earnings results after the close of trading and the immediate reaction was swift and negative. It really had nothing to do with the earnings. The company reported weaker-than-expected growth in new video-streaming subscribers. The company said it added 3.02 million such subscribers during the quarter, but had forecast additions of 3.69 million video-streaming subscribers. HBO announced it will launch its own streaming service next year, a direct attack on Netflix. Netflix shares fell almost 26% in after-hours trading.

Ebay said it had net income of $673 million, or 54 cents a share, in the quarter, compared to $837 million, or 53 cents a share, in the year-earlier period.

American Express’ third-quarter earnings rose 8%, on net income of $1.4 billion, or $1.40 a share, in the quarter, up from $1.3 million, or $1.25 cents a share; revenue growth was below its target but trends in operating expenses were favorable. American Express was down 2.2% in regular trading and down a bit more after hours.

FINANCIAL REVIEW

Paulson, Bernanke, and Geithner Walk Into a Courtroom

Sinclair Noe — October 6, 2014

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Financial Review

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DOW – 17 = 16991
SPX – 3 = 1964
NAS – 20 = 4454
10 YR YLD – .02 = 2.42%
OIL + .05 = 90.39
GOLD + 16.10 = 1207.80
SILV + .49 = 17.45

Stocks erased early gains. The Russell 2000 Index of small cap stocks took a hit of nearly 1%. Earnings season is right around the corner. Alcoa kicks off the unofficial start of earning season on Wednesday, and we’ll get 8 companies from the S&P500 reporting this week. The average estimate for the S&P500 calls for right at 5% earnings growth; however there are concerns about the impact of a strong dollar on overseas revenue.

Not much in the way of economic data today. The economy added at least 200,000 new jobs in seven of the past eight months and all signs point to similarly strong hiring through the end of the year. The latest evidence? A ninth straight increase in the employment trends index produced by the Conference Board, a nonprofit economic-research firm. The index is now 6.1% higher than a year ago.

Slightly less optimistic is the new, broader, all-purpose employment index from the Federal Reserve, it’s called labor market conditions index; it was up 2.5 points last month after an increase of 2.0 in August. This is a new index the Fed has built that draws on 19 separate jobs-related measures to give a broad sense of the labor market; it includes data on labor force participation, average weekly hours and hourly earnings, and hiring and quit rates. As we have seen in many of the monthly jobs reports, the unemployment rate is more of a headline number that doesn’t always tell us if the labor market is tight or slack. This new index is designed to be more comprehensive. That’s about all I can tell you for now.

The Federal Open Market Committee releases minutes from its Sept. 16-17 meeting on Oct. 8.

The protests in Hong Kong have faded away. Protestors briefly blocked entrances to two government buildings, but faced with the prospect of government violence, combined with an agreement between government and protestors to hold formal talks in the future, the mass crowds have largely gone home. Tens of thousands of protestors are now just a few hundred stragglers. It’s difficult to keep up a mass protest for more than about one week.

World Bank experts say China’s economic growth is likely to slow slightly to 7.4% this year, and to lag even a bit more next year. A separate World Bank report says growth will accelerate in India, expanding at a 6 percent rate next year, and a bit faster in 2016.

Yesterday was election day in Brazil, at least the first round. Incumbent Dilma Rousseff and pro-business rival Aecio Neves, will face off in an Oct. 26 runoff to decide what has been Brazil’s most unpredictable election in decades. The incumbent of the Workers’ Party, or PT, had 42 percent of the votes yesterday, followed by Neves of the Brazilian Social Democracy Party, known as PSDB, with 34 percent. While Brazil’s inflation hovers around the 6.5 percent upper limit of the target range and the economy slid into recession in the second quarter, unemployment at 5 percent remains near record lows.

Last week, JPMorgan Chase disclosed that hackers had broken into their computer systems in a massive security breach affecting 76 million households. That’s a huge number, just shy of two-thirds of American households, making the breach the largest cyber-attack against a bank in history.

Yet the company has not disclosed a separate, presumably even larger figure: the number of individual customers whose personal information was compromised. JPMorgan has said that no account information was stolen by the hackers, but that they were able to access contact details like names, phone numbers and email and home addresses. Internal bank information, such as what types of accounts individuals held, was also stolen. The bank has argued that because contact information was stolen, as opposed to account details, the best way to measure the size of the hack is by households, not individuals.

Hank Paulson, Ben Bernanke, and Tim Geithner walk into a courtroom; it sounds like the making of a joke, but it is serious business about why some firms were bailed out and others were hung out to dry. Specifically, it is part of a lawsuit alleging the 2008 federal rescue of American International Group cheated shareholders of $40 billion. Former Treasury Secretary Hank Paulson testified for 2 hours today. Paulson said he valued stability above all else in regulating markets, followed by the need for market participants to be responsible for the consequences of their actions.

“It was important that terms be harsh because I take moral hazard seriously,” Paulson said, referring to the economic term for consequence-free risks. Paulson drew a distinction between AIG’s treatment and that of Citigroup, which he acknowledged received better terms than the insurer. Paulson said AIG had to be rescued because if it failed “the country faced a real disaster.” The government avoided punitive terms for Citigroup because it feared doing so would encourage shortsellers to attack other banks, further destabilizing the economy. There was no similar risk of a domino effect in the insurance market.

In a bit of a bombshell, Paulson said he talked with the Chinese government about investing in US firms as part of the rescue scheme; in AIG’s case, Paulson said he didn’t think the Chinese would be interested in a deal without a government guarantee. “The government couldn’t provide that assurance,” Paulson said. “The Chinese were very, very nervous” about investing in U.S. firms at the time.

Geithner is scheduled to testify tomorrow. Bernanke is scheduled to take the stand on Wednesday.

The FCC has extended its public comment timeframe for the proposed Comcast Time Warner Cable mega-merger. The $45 billion marriage was meant to be open for public comment and debate until Oct. 8, but that portion of the review has now been pushed back to Oct. 29; the agency expects its review of the deal to be done by Jan. 2016.

Hewlett-Packard said today that it plans to split into two separate companies, a personal-computer and printer business, and corporate hardware and services operations. Meg Whitman will lead Hewlett-Packard Enterprise, a business focused on corporate hardware and services, while Dion Weisler, the vice president in charge of Hewlett-Packard’s personal-computer and printer operations, will become CEO of that business. The HP split comes a week after eBay announced it would spin off PayPal to shareholders. This looks like another example of financial engineering. If HP hasn’t been able to right the ship after dozens of industry-spanning acquisitions and an inconclusive multiyear restructuring, the next logical step is to bust it up and hope the pieces are worth more than the whole.

Glencore Plc is laying the groundwork for a potential merger with Rio Tinto Group in the next year that would create the world’s largest mining company, worth about $160 billion. As a preliminary step, Glencore has reached out to Aluminum Corp. of China, the Chinese state-backed company that is Rio’s largest shareholder, to gauge its interest in a potential deal. A merger would catapult the combined company past BHP Billiton to become the largest mining group, combining Glencore’s commodity-trading operations with Rio’s portfolio of iron-ore projects.

The Spanish health minister reports a Spanish nurse who treated a missionary for Ebola at a hospital in Madrid, has tested positive for the disease. The female nurse was part of the medical team that treated a 69-year-old Spanish priest who died in a hospital last month after being flown back from Sierra Leone, where he was posted. The nurse is believed to have contracted the virus from that priest. The World Health Organization confirmed there has not been a previous transmission outside West Africa in the current outbreak. Spanish authorities said they were investigating how the nurse became infected at a hospital with modern health care facilities and special equipment for handling cases of deadly viruses.

Today, the White House announced the government would develop expanded screening of airline passengers for Ebola, both in the West African countries hit by the disease and the United States.

The 2014 Nobel Prize in Physiology or Medicine was awarded on Monday to American-British neuroscientist John O’Keefe, and Norwegian scientists May-Britt Moser and Edvard Moser. The Mosers are the fifth married couple to be awarded a Nobel Prize. The trio received the award for their discoveries of cells that constitute a positioning system in the brain, which was described as an “inner GPS.” In 2005, they discovered a type of nerve cell that generates a coordinate system and allows for precise positioning. Together, these discoveries explain how the brain creates a map of space and how we navigate our way through a complex environment. Now, here’s where it gets interesting; Alzheimer and dementia patients often have a hard time with location – they tend to get lost easily. Since these spatial cells are among the first to be hit in Alzheimer’s and other forms of dementia, understanding how they are degraded should shed important light on the disease process.

The Supreme Court today said it would not hear appeals from five states whose same-sex marriage bans had been invalidated by lower federal courts. The decision, issued without explanation, will lead to recognition of gay marriages in 11 more states. It also allows an avalanche of legal challenges to the remaining bans to keep going forward in state and federal courts, where gay and lesbian couples have overwhelmingly prevailed.

The court’s decision leaves unchanged 20 state laws blocking same-sex unions. Each is already under legal attack, facing challenges in state or federal court, and sometimes both. Challenges to marriage bans already have reached a handful of state appeals courts and in the federal Fifth, Sixth, Ninth and Eleventh circuit appeals courts. By letting gay and lesbian marriages go forward in 11 other states, the justices almost certainly made it harder to reverse course in the future. If they do, the court would have to do more than simply prohibit some couples from marrying; it would have to invalidate marriages that have already taken place. It will become very hard for the Supreme Court to take that back.

FINANCIAL REVIEW

Strange Days Indeed

Sinclair Noe — October 2, 2014

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Financial Review

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DOW – 3 = 16,801
SPX + 0.01 = 1946
NAS + 8 = 4430
10 YR YLD + .03 = 2.43%
OIL + .59 = 91.32
GOLD + 1.30 = 1215.30
SILV – .08 = 17.20

The Dow Industrial dropped about 130 points in early trading, but then recovered, mainly

In economic news:
The number of Americans filing new claims for unemployment benefits fell last week by 8,000 to a seasonally adjusted 287,000. Separate data showed small businesses hiring workers at the fastest pace in 8 months. The National Federation of Independent Business said its monthly survey of its members found they added an average of 0.24 workers per firm last month, on a seasonally adjusted basis. Tomorrow the government will report on non-farm payrolls for September; we’re looking for about 220,000 net new jobs and the unemployment rate to hold near 6.1%.

A report from the Commerce Department showed new orders for factory goods posted their biggest decline on record in August. Factory orders dropped 10.1%, following a 10.5% increase in July; the wild swings are attributed to orders for airplanes. Stripping out transportation orders, new orders were down a more modest 0.1%.

Since June, the European Central Bank has lowered the interest rate on bank deposits parked at the ECB to negative territory, a first for this central bank, and added new lending and private-asset purchase programs. Today, the ECB wrapped up a policy session and announced nothing new. They will wait and see if some of the stuff they’ve done in the past few months, will actually start to impact the Eurozone economy. They really can’t cut rates much lower, and there is only tepid demand for any kind of a lending program. They’ve already announced a plan to purchase collateralized bank bonds and bundles of loans known as asset backed securities, but that won’t start for about 2 weeks. So, for now, they sit back and wait and watch. Today’s ECB meeting was held in Naples; about 1,000 protesters were arrested.

You’ve already heard about the Liberian man who took a flight to the US and then came down with Ebola. He is in a Dallas Texas hospital fighting for his life. At first CDC officials thought there were just a handful of people possibly exposed, then they upped the number to 18, then about 40 people who would need to be monitored for possible Ebola infection. Now they say up to 100 people may have had direct or indirect contact with the patient. Dallas County officials said 12 to 18 people had direct contact with the Texas patient, and they in turn had contact with scores of others. If it sounds like a contagion, well it is. But the good news is that the health care system in the US should be more effective than the health care system in Western Africa. With the right care, people can survive an infection. Keep calm and carry on.

The New York Times reports a cyber-attack this summer on JPMorgan Chase compromised more than 76 million household accounts and seven million small-business accounts, making it among the largest corporate hacks ever discovered. In a regulatory filing, the bank said that the information leaked included names, email addresses, phone numbers and addresses. The bank said that there’s no evidence account information was taken. By the time JPMorgan first suspected the breach in late July, hackers had already gained the highest level of administrative privilege to more than 90 of the bank’s computer servers. And it appears the hackers made off with a list of the applications and programs that run on every standard JPMorgan computer, a hacker’s roadmap of sorts, which hackers could cross check with known vulnerabilities in each program and web application, in search of an entry point back into the bank’s systems.

Hong Kong has the sixth largest stock market in the world, which is second in Asia after Tokyo, and is the sixth largest hub for foreign exchange trading. It maintains open borders to investors and does not impose any capital controls.

Beijing’s man in Hong Kong, CY Leung has told pro-democracy protesters to step down, and repeated warnings that the consequences would be serious if they sought to surround or occupy government buildings, but he says he will not resign. Tens of thousands of people have taken to the streets in the last week to demand full democracy, including a free voting system when they come to choose a new leader in 2017. Now the protestors have surrounded at least 2 government buildings, including the building housing the Chief Executive CY Leung. It looks like the standoff is coming to a head. It will be an interesting weekend.

An International Red Cross building in eastern Ukraine was bombed and one worker was killed. Seven Ukrainian soldiers were killed in a single strike by tank fire on their armored personnel transporter on Monday. On Wednesday at least 10 people were killed when shelling hit a school playground in Donetsk. The Russian and Ukrainian governments say the ceasefire is holding; if so, it is just by a thread.

Turkey will join in the fight against ISIS; they also want to see Syrian President Assad removed from power. Turkey is already struggling with 1.5 million refugees from the Syrian war alone. It has now deployed tanks and armored vehicles on the border with Syria as fighting intensified and the parliament approved the measure to go to war. It is not clear whether Turkey will take immediate action, however the approval of the MPs could enable the US to use its large airbase in southern Turkey for air strikes against ISIS.

Of course ISIS has grown quickly, in part because they have taken over oil wells, but that raises the question of who has been buying oil from ISIS. The answer is smugglers, and they buy on the cheap. A barrel of oil that would ordinarily sell for over $90 can be discounted as much as 75 percent. But it’s still a profitable sale for ISIS, as the money it loses from such a discount is more than made up for by the readiness of customers to buy its oil and the plethora of routes through which it can export it.

Global oil prices have fallen to their lowest level in more than two years after Saudi Arabia cut its official selling price. Concerns of oversupply after higher output in the US, together with forecasts of lower global demand by the International Energy Agency, are driving prices down. But that just seems to highlight a most peculiar marketplace, especially in light of the geopolitical risks. Oil prices drop and stock markets are floating merrily along near record highs in the face of the Russia-Ukraine conflict, the emergence of ISIS and a new round of fighting in Iraq and Syria, mass protests in Hong Kong and China’s ongoing territorial disputes. And the cherry on top: credit markets show low spreads, while long-term bond yields have fallen in most advanced economies.

Strange days indeed. What gives?

Markets have taken the view that the Russia-Ukraine conflict will remain contained, rather than escalating into a full-scale war. The sanctions and counter-sanctions between the West and Russia have increased, but so far they are not causing significant economic and financial damage to the European Union or the US. Russia is feeling the pain of the sanctions, but that means they are likely to continue to supply natural-gas supplies to Western Europe.

The turmoil in the Middle East has not triggered a massive shock to oil supplies and prices like those that occurred in 70s. On the contrary, there is excess capacity in global oil markets. Iraq may be in trouble, but about 90% of its oil is produced in the south, near Basra, which is fully under Shia control, or in the north, under the control of the Kurds. Only about 10% is produced near Mosul, now under the control of ISIS. Yesterday, Saudi Arabia signaled to the markets that it was more interested in maintaining market share than in defending prices. Saudi Aramco, the national oil company, stunned markets by announcing that it was cutting prices by about $1 a barrel to Asia, the crucial growth market for the Persian Gulf producers, as well as by 40 cents a barrel to the United States.

The main source of supply growth continues to be the United States, which, as a result of the shale oil boom, now rivals Russia and Saudi Arabia in oil output. While the United States remains a modest oil exporter, its surging output pushes other oil, particularly from West Africa, out of the American market, helping to lower prices. Net oil imports to the United States have fallen since 2007 by 8.7 million barrels a day, roughly equivalent to total Saudi and Nigerian exports.

What could go wrong?

Well, the situation in Hong Kong could turn violent. Russia may break the ceasefire in Ukraine, or they might turn off the natural gas supplies with the first winter storm. The Eurozone could relapse. An ISIS jihadist could decide to leave the desert and try to wreak havoc on a major city. Toss in a sidebar story of turbulence in Thailand, or Argentina, or Turkey, or Egypt, or hackers doing great damage in the cyber-world, and you’ve got the makings of a brouhaha. You can’t rule out financial contagion, or any other kind of contagion.

One hundred years ago, the financial markets were complacent, just like today; they ignored the risks that led to World War I until late in the summer of 1914. Of course, back then the markets were poor at correctly pricing low probability, high impact tail risks. Today, with the interconnected, high technology the markets are still poor at correctly pricing risk, they can just misprice it much faster.

FINANCIAL REVIEW

Third Quarter Wrap

Sinclair Noe — September 30, 2014

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Financial Review

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DOW – 28 = 17,042
SPX – 5 = 1972
NAS – 12 = 4493
10 YR YLD + .02 = 2.51%
OIL – 3.14 = 91.43
GOLD – 6.30 = 1209.70
SILV – .49 = 17.07

We wrap up the third quarter of 2014.

The Dow Jones Industrial Average is up 3.4% year to date; and it is up about 11% from the lows of February. Ten of the 30 Dow stocks are up more than 10% year to date. Eight of the Dow stocks are in negative territory for the year, even after adding in divdends. The best performing Dow stocks are Intel (up 37% ytd) and Microsoft (up 28% ytd). The worst performing Dow stocks are Boeing (down 5% ytd) and United Technologies (down 6% ytd).

The Dow lost 55 points, or 0.3%, for the month, and for the third quarter the Dow added 217 points or 1.3%. The S&P 500 dropped 31 points, or 1.5% in September, and added 12 points for the quarter; and that was good enough for the seventh consecutive quarterly gain, the best run for the S&P 500 since 1998. The Nasdaq Composite lost 87 points, or 1.8%, for the month, but added 85 points for the third quarter. The Russell 2000 index of small cap stocks lost 69 points, or 5.8% in September; and posted a loss of 98 points, or 8.1% for the third quarter.

In other markets: Oil prices dropped from $105.51 to $91.43 per barrel, a decline of more than $14 for the quarter. Gold is down $122 for the quarter. Silver is down almost $4.

The yield on the ten year Treasury note finished the quarter essentially unchanged, but it was a wild ride; one month ago the 10-year yield had dropped to 2.34%. Sovereign bonds around the world beat corporate debt this quarter by the most in three years as consumer-price gains slowed in the U.S. and disinflation threatened Europe. Government securities returned 1.4 percent from the end of June through yesterday, while company debt earned 0.3 percent. But don’t forget the dollar rally; even if you made money in foreign stocks or sovereign debt, you likely have a loss when you try to bring the gains home and have to re-price into dollars.

The dollar index of major currencies rose 0.4% to 85.95. The index has gained 7.7% over the last three months, the biggest quarterly gain since 2008 and a record-breaking 11 successive weeks of gains. Of course a stronger dollar is not always a good thing; it could lead to weaker trade performance, less exports, and more imports. Supposedly a strong dollar is indicative of a strong economy as spending switches from US goods toward foreign goods it will likely result in less output and lower employment than it otherwise would be in the absence of dollar appreciation. In other words, a strong dollar might reduce GDP by almost 0.5%.

Of course a weak currency can be problematic as well, just look at Russia. The ruble is down almost 17 percent against the dollar this year and weakened to a record low this week. The dollar-denominated RTS stock index is in a bear market and yields on government ruble bonds due in 2023 have jumped 1 percentage point since June to 9.42 percent, more than the yield on similar-maturing debt securities sold by Greece.

Net outflows from Russian assets totaled $75 billion in the first half of 2014, compared with $61 billion in all of last year. The Russian central bank is reportedly considering capital controls to limit the outflows. Yuan-ruble trading is growing faster than any other pair of currencies on the Moscow Exchange, and the Russians would like to increase the Chinese currency’s role in local money markets. Some doom and gloomers think that spells the end of the US dollar, but what it actually means is that sanctions are working. The dollar is strong and it dominates world markets.

The S&P/Case-Shiller US National Home Price Index, which covers all nine U.S. census divisions, recorded a 5.6% annual gain in July 2014. The 10- and 20-City Composites posted year-over-year increases of 6.7%. Although all cities but one gained on a monthly basis, 17 saw smaller increases in July as compared to last month.

For those worried that home prices have gotten too high, consider this: In many major cities, prices are still below bubble peaks. In 18 of 20 major US cities, home prices in July were between 3% and 42% below the bubble peaks that were hit in the local markets. Las Vegas is still down 42%, and Phoenix has the second worst recovery, with prices still 35% below the peak. In the most recent Case-Shiller report, Phoenix posted a gain of 5.7% for the past 12 months, and a gain of just 0.3% from June to July.

Consumer confidence fell in September for the first time in five months. The Conference Board, an industry group, said its index of consumer attitudes fell to 86.0 in September from a upwardly revised 93.4 the month before. Consumer confidence was hurt by concerns over the job market and expectations that economic growth will slow in coming months. A variety of factors are impacting consumers. Employers appear to be picking up hiring and laying off fewer employees, but workers are still concerned about their career prospects. Home prices are on the rise, but many households are wary of taking on too much debt, with Americans’ credit-card balances recently hitting the lowest tally in more than a decade. According to the sentiment report: “Tiny wage gains meant that nearly half of all households anticipated declines in inflation-adjusted incomes during the year ahead.”

Even as the U.S. economy reached a milestone in May with employment exceeding the prerecession peak, 29 of 50 states have yet to match that accomplishment. Bloomberg recently compiled Labor Department data shows the weakest jobs rebound has been in the states central to the 2002-2006 housing bubble and the subsequent price collapse. Nevada, Arizona and Florida are among those furthest from their peak employment during the December 2007-June 2009 downturn. The energy industry is driving the economic expansion in 12 of the 13 states leading growth since the recession ended. Leaders include Texas, North Dakota, Oklahoma and Louisiana, with Oregon the only non-energy state among the standouts. Oregon has been boosted by technology manufacturing and fast growth in exports.

Median household income is now 8 percent below what it was in 2007, adjusted for inflation. It’s 11 percent below its level in 2000. It used to be that economic expansions improved the incomes of the bottom 90 percent more than the top 10 percent. Since the current recovery began in 2009, all economic gains have gone to the top 10 percent. The bottom 90 percent has lost ground. We’re in the first economic upturn on record in which 90 percent of Americans have become worse off. And this month, that was reflected in the confidence figures.

Next week the International Monetary Fund hosts a gathering of the top finance officials from around the world. The IMF plans to again revise down its outlook for the global economy next week. Central banks have tried to rev up growth with cheap cash, but printing money can only go so far. The IMF has been arguing for a while that governments must restructure their economies to make them more competitive and capable of consistence growth. Next week they are expected to say that the best idea for many governments is to spend more on infrastructure and invest in roads, bridges, power plants, ports, and other big, expensive projects.

The IMF argues that taking advantage of low borrowing costs to finance infrastructure can boost near-term growth with cash injections and long-term output by increasing the efficient flow of commercial goods. If projects are carefully chosen, that public investment can add two percentage points to growth in industrialized economies, cut debt levels by up to 8% of gross domestic product and increase private investment by a half-percentage point of GDP. The extra debt from financing the projects would be more than offset by the growth returns.

A follow-up on the story about the New York Fed, which is supposed to serve as a banking regulator. ProPublica ran a story about a former New York Fed bank examiner, who noted that her ex-bosses weren’t willing to stand by her claims that Goldman Sachs didn’t have any conflict-of-interest policies, or at least a version that could pass muster. They fired her, but she made secret recordings before she was fired, and now she’s suing. The day this all broke, last Friday, Goldman issued a new conflict-of-interest policy that prohibits investment bankers from trading individual stocks and bonds. That wouldn’t have anything to do with the fact that, like Goldman Sachs itself, one of its investment bankers was on both sides of Kinder Morgan’s acquisition of El Paso, would it? Steve Daniel, a Goldman banker, had an undisclosed $340,000 personal investment, and Goldman Sachs had a $4 billion stake, in Kinder Morgan while both were selling El Paso advice on the deal. And of course there are multiple examples of when Goldman made bets against their clients.

The first case of deadly Ebola diagnosed in the U.S. has been confirmed in Dallas, in a man who was traveling in Liberia and arrived in the U.S. on Sept. 20. The man is being kept in isolation. He had no symptoms when he left Liberia, then began to show signs of the disease on Sept. 24; he was admitted to the hospital on September 26; he is now critically ill. At the same time, another suspected case is being evaluated at a National Institutes of Health facility, the 13th such possible infection in the U.S. All others have tested negative.

There is no approved treatment for Ebola, though drugmakers are attempting to develop vaccines or medicines that could be used in this or a future outbreaks. Current care involves isolating the patient so they can’t infect others, and providing supportive treatment such as intravenous fluids and antibiotics to fight opportunistic infections. There are some drug companies that are working on Ebola vaccines and treatments, and yes, they saw their stock prices jump today. Here’s a quick rundown: NewLink Genetics, an Ames, Iowa, company working on an Ebola vaccine, up 14% today; Tekmira Pharmaceuticals, up about 20 percent; BioCryst Pharmaceuticals, up 12 percent; and Sarepta Therapeutics, up 7 percent.

Tuesday, August 05, 2014 - Go Firgure

Financial Review with Sinclair Noe

DOW – 139 = 16,429
SPX – 18 = 1920
NAS – 31 = 4352
10 YR YLD - .01 = 2.48%
OIL - .86 = 97.43
GOLD + .40 = 1289.60
SILV - .39 = 19.84

We start with a couple of economic reports: The Institute for Supply Management’s services index rose to 58.7 last month, the highest level since December 2005, from 56.0 in June. A reading above 50 indicates expansion. Orders jumped to a 9 year high. A sub-index gauging services industry employment also rose as did order backlogs, but export order growth moderated.

In a separate report, the Commerce Department said orders for manufactured goods increased 1.1% in June, more than reversing May's 0.6% decline. Orders for non-defense capital goods excluding aircraft hit a record high; this might indicate a renewal in business confidence and equipment spending plans. Factory orders rose across all categories, with bookings for electrical equipment, appliances and components recording their largest gain since November 2010. In another sign of strength, unfilled orders saw their largest rise in seven months.

So, a couple of good reports on the economy, and the stock market tumbles. Go figure.

The situation in Ukraine appears headed to a tipping point. Ukrainian forces have been pushing back against Russian backed separatists in eastern Ukraine. Meanwhile, Russia is massing troops on the border. Some 20,000 troops are now stationed about 50 kilometers from the border, closer than they had been stationed previously. In April, Russian President Vladimir Putin had briefly deployed about 40,000 troops at the border. The latest troops include Russian Elite forces, armored brigades, artillery and anti-aircraft units. Poland’s foreign minister thinks Russia is preparing to invade Ukraine; he didn’t flat out say an invasion was imminent, just that the Russians are getting ready.

Putin has ordered his government to prepare retaliatory measures against US and European economic sanctions imposed on Russia. We don’t know what Putin means by retaliatory measures. Russia may limit or ban flights over Siberia by European carriers bound for Asia as a response to sanctions levied against the country. Russia has also called for the UN Security Council to hold an emergency meeting on the humanitarian situation in Ukraine. It isn’t a humanitarian situation when the pro-Russian rebels shoot a plane full of civilians out of the sky, but it is a humanitarian situation when the rebels start getting their butts kicked.

One thing that hasn’t happened yet is a disruption in oil and gas supplies from Russia to Europe. Russia derives half its tax revenue from the oil sector; Europe relies on Russian supplies. As the weather changes and winter sets in, Europe’s resolve, which has already been soft, will weaken further. For now, energy prices are moving lower, despite violence in Eastern Europe, Libya, and Iraq. Global oil demand has been running below supply over the last few months, building up a glut of high quality crude oil in the West African, European and Asian markets. The US Energy Information Administration reported last week that gasoline supplies rose by 400,000 barrels at a time when market bulls hoped to see a reduction. Oil prices are at their lowest levels since February.

Yesterday we told you about the collapse of Portugal’s Banco Espirito Santo; today we report on the fallout. The French bank Credit Agricole held a 14% stake in Banco Espirito Santo and two seats on its board. Crédit Agricole's ties to the Portuguese group go back to 1986 when it helped the Espírito Santo Group set up Banco Internacional de Crédito. Over the years, the French bank raised its stake in the Portuguese group, as part of a larger international expansion plan in southern Europe.The French bankers say they never detected any “slip or difficulties” at Banco Espirito Santo. The collapse of the Portuguese bank nearly wiped out all the second quarter profits at the French bank.

Standard& Poors today announced that it was dropping its 10-year estimate of annual GDP growth in the US from 2.8% to 2.5%, which over a decade amounts to a pretty significant reduction. Why are they cutting the growth forecast? Here’s what S&P says: "Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population... At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold...."

S&P analysts say it basically boils down to the idea that high levels of income inequality cause more affluent households to save more of their increasing income rather than spend it, and as that cash is withdrawn the economy slows. At the other end of the economic scale, as income declines, households go into debt to try to maintain their standard of living, a strategy that is simply unsustainable over time. And when the unsustainable ceases to be sustained, you get a breakdown, much like that of 2008. In fact, S&P notes, as income inequality increases, an economic system becomes more and more vulnerable to a boom-and-bust cycle. It cites research demonstrating that income distribution plays a much more important role in sustaining long-term economic growth than any other factor.

Although the issue of income inequality is often addressed in moral terms, S&P concludes, at its foundation it is really an economic issue, saying: "A rising tide lifts all boats … but a lifeboat carrying a few, surrounded by many treading water, risks capsizing."

Earnings reporting season:

Retailer Target cut its second quarter earnings estimates due to higher promotions and more discounting; they also lost about $148 million related to that data breach, where hackers gained access to customer credit card info; that’s a small number compared to total sales at Target, but it apparently proved a costly distraction. Morgan Stanley reduced its second quarter earnings by 2 cents per share due to increased legal settlements. Disney posted better than expected earnings; shares moved just a smidge higher in after-hours trading. Cablevision cut back on its promotions and subscriber losses doubled in the second quarter. First Solar posted profits that missed estimates by a wide margin; they blamed project delays. Groupon fell in after-hours trading after posting a second quarter loss nearly triple the loss from a year ago. Zillow announced a second quarter loss, even as revenue increased; and they raised their full year revenue outlook. This was Zillow’s first quarterly report since they announced a $3.5 billion deal to acquire rival Trulia.

Time Warner and Fox both report earnings tomorrow, but the big news came today. Fox withdrew its offer for Time Warner. Game over. When Fox made the hostile bid, its stock dropped and Time’s stock soared; meanwhile Time’s board and management opposed the takeover and refused to discuss the offer. Now that Murdoch has dangled a huge windfall in front of Time Warner shareholders, only to take it away, one imagines that some of those shareholders may soon be venting their frustration to Time Warner's board and management.

Several America corporations have found a loophole in the tax code, which allows for a company to acquire a partial interest in a foreign company, and then change the address of its headquarters in order to evade US taxes; it’s called an inversion. There have been 22 such deals since 2011, most have been in the pharmaceutical industry, where overseas sales generate significant income that cannot be brought back to the US without suffering a major tax hit; but there have also been inversion deals in the media, consumer and manufacturing sectors. Some of those deals have collapsed, amid disputes over price and political scrutiny.

Walgreens was next on the list; closing in on a deal to buy the 55% of British pharmacy retailer, Alliance Boots; Walgreens already owns 45% of Alliance Boots. Walgreens will buy out Alliance Boots, but it won’t move its corporate headquarters abroad and it will not change its corporate citizenship to a lower tax country. They say they won’t do the inversion move because they would have had to renegotiate an existing agreement, and Alliance Boots wasn’t willing. There may also have been some political pressure.  President Obama has denounced tax inversions as unpatriotic and has urged Congress to stop them; which is like asking a Kleenex to stop a freight train. So, now the Treasury Department says there may be an executive order to provide a partial administrative fix, you know, until Congress gets back from its 5 week vacation.

As Ebola spreads, pharmaceutical giants are sitting this one out. That's mainly because treating a disease that affects a relatively small number of people who typically don’t have a lot of money doesn’t offer a great return on investment. It's unclear how much profit it would take to get Big Pharma interested in finding an Ebola cure, but right now such a project could well be a money-loser. Instead, small biotech firms, academics and government agencies are leading the search for an Ebola cure. And in a twist of fate, they may have found a way to treat the virus: tobacco.

A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with tobacco plants, appears to be working. Mapp Biopharmaceutical produced an experimental drug called ZMapp, an antibody that had been tested only on infected animals; now it’s been given to human patients, and it seems to make a big difference. The antibody work came out of research projects funded more than a decade ago by the U.S. Army to develop treatments and vaccines against potential bio-warfare agents, such as the Ebola virus.

The tobacco plant production system was developed because it was a method that could produce antibodies rapidly in the event of an emergency. To produce therapeutic proteins inside a tobacco plant, genes for the desired antibodies are fused to genes for a natural tobacco virus. The tobacco plants are then infected with this new artificial virus. The infection results in the production of antibodies inside the plant. The plant is eventually ground up and the antibody is extracted. The whole process takes a matter of weeks.