Surveillance Will Continue Until the Paranoia Stops

Financial Review with Sinclair Noe

DOW – 75 = 16,368
SPX – 10 = 1909
NAS – 20 = 4334
10 YR YLD - .05 = 2.42%
OIL + .71 = 97.63
GOLD + 7.10 = 1314.00
SILV - .06 = 20.05

Normally, at least for the past 5 years, any dip has been seen as a buying opportunity. Lately, investors see a dip as reason to sell and ask questions later.

The Bank of England holds UK interest rates at a record low of 0.5% for another month. And the European Central Bank holds interest rates at 0.15% and announced they would keep rates low for an extended period of time. ECB President Mario Draghi warned there would be a "continued moderate and uneven recovery" in the eurozone. The annual inflation rate in the 18 countries of the eurozone was 0.4 percent in July, down from 0.5 percent in June; not quite deflation, but not headed in the right direction. Italy just announced its second consecutive quarter of negative GDP; which is the basic definition of a recession. Meanwhile, the website of the ECB has been hacked, and the hacker reportedly contacted the ECB and demanded a ransom for the stolen data.

The New York Times reported yesterday that a Russian crime ring had hacked more than a billion internet passwords, maybe more than 4 billion. It’s being called the biggest hack in history; which may or may not be accurate. Russian hackers are just a small part of the hacking world, about 2%. The major global hackers are Indonesia, China, the US, Taiwan, Turkey, and India. And while Russia may not constitute the same volume as other hackers, they make up for it in audacity; for example, the breach of the Target retail stores. And the recent tensions and sanctions between Russia and the US probably mean there will be no coordinated effort to crack down on international hacking. Of course, it might be argued that for true audacity, nobody can touch the NSA.

How dangerous is this hack? Hard to say. We still don’t know which websites were breached. We still don’t know how the hacked data will be misused. And we are being advised that the best thing to do is to change your password on various sites you use; which isn’t that difficult. There are, of course, companies that you can pay to provide cyber protection; coincidentally, these same companies are the ones that alert us to cyber problems; and I have a nagging suspicion some of them might actually create the problems in the first place. What this really does is to raise awareness that data hackers can collect almost anything, and digital security has been a weak spot in technological progress.

Perhaps braced by Moore’s Law, technology marches on; the journal Science reports that IBM researchers have developed a new computer chip they call TrueNorth.  The new chip was “designed to approximate the structure and function of the brain in silicon”, plus it is power efficient. The chip contains 5.4 billion transistors, yet draws just 70 milliwatts of power. By contrast, modern Intel processors in today’s personal computers and data centers may have 1.4 billion transistors and consume far more power, about 35 to 140 watts. The new chip weaves together all those transistors into an on-chip network of 4,096 neurosynaptic cores, producing the equivalent of 256 synapses. IBM has also tethered 16 of  these chips together in four four-by-four arrays, which collectively offer the equivalent of 16 million neurons and 4 billion synapses, showing that the design can be easily scaled up for larger implementations.

Think of the synapses as memory, and the neurons are the processor; working together they provide fairly complex pattern recognition, and what might be described as sensing capabilities. Right now, the chip is not real fast, but it can be strung together, and on a per watt basis, it really starts to fly. The low power consumption opens up a world of possible uses. This might be the chip that powers the internet of things, embedded in all sorts of devices and possibly revolutionizing mobile devices.

The big question is whether the chips can learn? Not yet, however IBM has already tested the chip’s ability to drive common artificial intelligence tasks, including recognizing images; TrueNorth was able to recognize things like people, cyclists, cars, buses, and trucks with about 80% accuracy. Keep in mind that this is a new chip, still in its early stages of development.  IBM is still investigating how to commercialize this processor and has made no commitments to either manufacture the chip itself or license the design out to others.

The problem with the idea of having even more devices than your smartphone and tablet gathering information for your convenience, of course, is the many ways all that data can be used against you. Traditionally, we think of the government as the invader of privacy, but as capabilities change, we see private corporations getting into the act. Last year the Wall Street Journal reported on new facial recognition technology; police could use an iPhone to take a photo, and then cross check the face in a criminal database; sounds good in the battle against terrorism, but the company that makes the technology wasn’t just considering sales to law enforcement, but also to the health care and financial industries. Yea, I don’t know exactly what those applications might be but I don’t think I like it.

Are health care companies going to start sensing every drop of sweat, every minute we work out, every time we puff a cigarette or sip a cocktail? Maybe we won’t even have to bother going to the doctor anymore. And what about the health insurance companies? Financial engineers believe they can pretty much put a price on anything. So what is your freedom worth? You need air, water, food, and relationships to survive. You want to go shopping, to the movies, to see friends. You have kids, romantic attachments, familial obligations. You like being able to travel, to explore, to watch TV. You need medical care. What are each of these worth? It’s a question that analysts are thinking about.

Or how about the school districts in Houston that require students to wear electronic tagging badges to improve security and increase attendance rates; the same electronic tagging badges formerly used to keep track of cattle.

The “Internet of Things” is probably the next Big Thing. How big? ABI Research estimates that over 30 billion devices will be connected to the Internet of Things by 2020; Gartner puts the number at 26 billion – not including 7.3 billion PCs, tablets, and smartphones. That’s a lot of internet-connected things, considering that there are “only” a little over 7 billion people on this planet, and many of those people are not connected to the internet, much less to electricity. And as technology increases and prices drop, in accordance with Moore’s Law, it opens up the possibility of connecting almost everything from the simple to the complex, and not only connecting, but sensing, monitoring, and controlling almost every facet of your work, home, and private life.

And then that brings us back to the hackers. How secure would all those embedded devices be in a world full of such things. You don’t need to break a code, it would be easier than ever to hack into everything you do, or think about doing. Don’t worry, I’m sure it will all work out fine, but the surveillance will continue until you stop being paranoid.

Some things never change. Bank of America is the latest big bank to work a deal with the Department of Justice. We’re still waiting for an official announcement but it looks like BofA has agreed to a $16 billion settlement for its role in the sale of toxic mortgage securities. The deal is reportedly for about $9 billion in cash and more than $7 billion in soft-dollar relief to consumers; things like loan mods or refi’s which they are supposed to be doing anyway; and this could still be a sticking point in the deal. The two sides continue to hammer out details and are still negotiating a statement of facts. For example, will BofA be forced to admit wrongdoing, and if so, will they actually describe what they did and who did it when they broke the law. Will they be able to deduct the fine from their taxes, thus sloughing off the burden onto taxpayers?

If or when the record deal goes through, Bank of America will have paid more than $50 billion in penalties and consumer relief in deals with government agencies, not including private investors, after acquiring subprime giant Countrywide and investment firm Merrill Lynch at the height of the crisis. And that raises the biggest question of all: how is it possible to cheat so many people out of so many billions without anybody actually breaking a law?

There is an interesting side case that is important to understand the BofA settlement. The bank had been low-balling the DOJ, offering to settle for maybe $3 billion, until last week, when Judge Jed Rakoff a federal judge in Manhattan ordered the bank to pay nearly $1.3 billion for selling 17,600 loans, many of which were defective. Bank of America had previously lost that case, which involved its Countrywide Financial unit, at a jury trial. Turns out, that going to trial was a very, very bad idea for BofA, and when Rakoff issued his ruling, the bank had no negotiating leverage in this case. The Department of Justice started preparing a suit to take to trial, and Bank of America returned to the negotiating table. The case before Judge Rakoff dealt with a Countrywide loan program known as the Hustle, which represented only a small fraction of the firm’s mortgage portfolio, meaning that penalties in cases dealing with larger programs could skyrocket.

Tuesday, July 15, 2014 - The Path We're On

Financial Review with Sinclair Noe

DOW + 5 = 17,060
SPX – 3 = 1973
NAS – 24 = 4416
10 YR YLD + .01 = 2.54%
OIL - .74 = 100.17
GOLD – 13.20 = 1294.60
SILV - .19 = 20.82

 

We’ll start with a couple of quick economic reports.

The Commerce Department reports retail sales increased 0.2% in June. The sales figures from May were revised from a 0.3% increase to a 0.5% increase. The increase in June was below consensus expectations of a 0.6% increase; however sales in April and May were revised higher, so it all levels out and was fairly strong report. Sales were up 4.3% year to year.

The Empire State Manufacturing Survey for July was up 6 points to 25.6, a four year high.

The state of California released its monthly cash report for June; the state’s General Fund ended the fiscal year with a positive cash balance for the first time since 2007, so the state won’t have to borrow to meet all of its payment obligations.

Federal Reserve chairwoman Janet Yellen delivered her semiannual Humphrey Hawkins testimony before the Senate Banking Committee today. Tomorrow, Yellen will repeat the process with the House. Yellen said progress has been made to restore the economy to health and strengthen the financial system, yet too many Americans remain unemployed and inflation remains below targets and there hasn’t been enough financial reform.

After prepared remarks, Yellen fielded questions from the senators, and this is where it gets a little interesting. Yellen said, “equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.” Some folks felt this was an “irrational exuberance” moment for Yellen. Social media and biotech stocks declined immediately after her comments. Yellen has a good reputation on forecasting. Back in 2006, when she was president of the San Francisco Fed, she gave a speech pushing back against former Fed Chair Alan Greenspan’s claim, with respect to the housing crisis, that the “worst of this may well be over.” Greenspan was wrong, Yellen was right, or at least not as bad as Greenspan.

Yellen said the Fed is still concerned about the housing market: “While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”

The housing market slowed last year when mortgage rates spiked on the possibility of taper. Yellen said that while the rise in rates is “the most obvious explanation for the weakness in the housing market over the past year,” it “seems unlikely that interest rates are the whole story.”

Yellen says the Fed is keeping a close watch on what it sees as potentially excessive risk-taking in the market for leveraged loans, but downplayed the possibility that its policies of ultra-low interest rates could be fueling asset bubbles. Still, there are some areas of financial markets, such as lower rated corporate debt, that are showing looser underwriting standards. Yellen and her Fed colleagues seem generally unfazed by concerns of bubbles and she said in testimony that the prices of real estate, stocks and corporate bonds “remain generally in line with historical norms.”

Yellen said most officials expect rates to start rising in 2015 and to finish the year around 1%. “That gives you a feeling for what participants thought would be appropriate given their projections in June,” she said. “What will actually happen clearly is going to depend on the progress the economy makes.”

Yellen seems pleased with the trajectory of the economy; investors seem complacent. She reiterated the Fed’s view that the economy will continue to grow at a moderate pace, and that the Fed is in no hurry to start increasing short-term interest rates.

All in all, Yellen’s testimony didn’t reveal much new. The Fed has been telegraphing this information for some time. The idea is that they can float information, and if the trial balloon gets shot down, they aren’t stuck in actual policy; if the trial balloon is accepted they can slowly implement the policy. It’s called forward guidance, and it seems to be working. The problem with forward guidance is that the Fed doesn’t know the future, and so they keep the guidance a little on the vague side, and then everybody fills in the blanks based upon their own particular bias.

It is earnings season and a couple of the big banks posted today.

JPMorgan reported a profit of $6 billion, or $1.46 a share, down from $6.5 billion, or $1.60 a share, a year earlier. Goldman Sachs posted net income of $2.04 billion, compared with year-earlier net income of $1.93 billion. Both banks saw share prices move higher after the reports.

These earnings came during a quarter in which fixed-income trading and mortgage refinancing were weak; so in that regard, the banks performed well. More likely the banks managed earnings expectations.

Johnson & Johnson reported higher-than-expected quarterly results on strong sales of its new hepatitis C drug. J&J said it had earned $4.33 billion, or $1.51 per share, in the second quarter. That compared with $3.83 billion, or $1.33 per share, a year earlier. They also raised guidance for the full year.

Intel posted better than expected Q2 revenue and profit; then they raised their Q3 revenue forecast well ahead of expectations; then they announced they would increase their share repurchase program. Intel posted a profit of $2.8 billion, or 55 cents a share, from a year-earlier profit of $2 billion, or 39 cents a share. Gross margin widened to 64.5%, compared with 59.6% in the first quarter. Intel still makes most of its profits from chips for computers; they’re still trying to get into the mobile market, but this past quarter they made more than a half billion in profits making chips for the internet of things, which is basically the idea that all of our mundane possessions will eventually be connected devices.

A study by the International Data Corporation calculates the internet of things market will grow to $7.1 trillion in the next 5 years. More than 1.9 billion once-inert devices are already connected to the internet, from parking meters to home thermostats, and by 2018 that number will top 9 billion.

The Federal Communications Commission website has crashed. Today is the last day to submit comments on the FCC’s proposal to regulate the internet. The proposal at issue would allow internet providers to charge content companies for more direct connections to their customers. These so-called “fast lanes” have sparked a vehement reaction from internet activists, who claim that the new policy could turn the web into a plutocracy where companies that are willing to shell out cash receive premium treatment. As of last week, the FCC had received almost 650,000 comments, mostly in favor of net neutrality; which is another way of saying no toll booths on the information superhighway.

Real highways are another matter. This afternoon the US House approved an $11 billion plan to replenish the federal fund for highway and mass transportation projects, but just through next May. Passage of the bill only puts off a larger debate over raising taxes to pay for long-term infrastructure financing. This was a stop-gap measure, as federal funds were 2 weeks from drying up which would have resulted in work stoppages during the peak of the summer roadwork season.

The Department of Transportation has said that without an agreement in Congress, federal payments to states will begin to slow by the end of the month. Also, the existing two-year law authorizing about $50 billion in highway and transit funding annually expires on Sept. 30; and with it the ability of the government to levy the 18.4-cent-per-gallon gas tax that finances the work.

Longer term plans have been dragged down by disagreements on how to fund projects. The short-term proposal signed today, raises money through an accounting gimmick called pension smoothing, which allows for a delay in the payments that corporations make to their pension funds resulting in a higher corporate tax bill. It’s a temporary, inadequate response to a long-term problem, better than nothing, even if it doesn’t do what it needs to do; which seems to describe everything in Congress these days.

The road ahead may be full of potholes, but on the road of life, most people think the ride will be smooth. A new survey conducted by the National Council on Aging, Untied Healthcare and USA Today finds that older adults are pretty optimistic; 89% say they’re confident they can maintain a higher quality of life through their senior years. On the financial front, 45% of the older group surveyed said they wished they had saved more money; almost one-third (31%) said they wished they had made better investments. The new survey finds more financial optimism than last year, but still almost half (49%) of the 60-and-older respondents say they're concerned that their savings and income will be sufficient to last the rest of their lives. In 2013, 53% expressed that concern.

So what is behind the optimism? The reasons vary, but support of family and friends is at the top, followed by being happy about their living situation, and being in good health.

There seems to be something to the good health part of the optimism equation. The medical journal JAMA released a study today showing people are having fewer strokes and dying less often in the wake of strokes. It’s still a big problem, striking 800,000 people a year and killing 130,000, but the numbers are down.

Another study released this week says better heart health and more education means the onset of Alzheimer’s begins later in life now than 30 years ago in developed nations. One trial in Finland suggested the body can be conditioned to hold off mental decline with gym exercising, good food choices and cognitive training.

It is good to have an end to journey towards, but it is the journey that matters in the end.