No Expectations

Financial Review with Sinclair Noe — September 16, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB) 

 

DOW + 100 = 17,131
SPX + 14 = 1998
NAS + 33 = 4552
10 YR YLD un = 2.59%
OIL + 1.79 = 94.71
GOLD + 2.20 = 1235.90
SILV + .03 = 18.79

Tomorrow the Federal Reserve FOMC wraps up its meeting to determine monetary policy. Even before the Fed issues a statement, the financial press is dissecting every phrase and utterance of every Fed policymaker, and trying to impart conflated significance to every twitch of an eyebrow or overstuffed briefcase. It’s pretty simple really; not much has changed over the past couple of months; the Fed is on track to end the large scale asset purchases under QE; the Fed will raise rates at some point, unless something drastic changes; the nuances of language are inconsequential. There, I’ve just condensed about 100 articles into about 100 words, and you didn’t miss anything. You’re welcome.

Today, China jumped on the QE bandwagon. The People’s Bank of China will print about 500 billion yuan, which works out to about $81 billion. They will hand out the money to the five largest banks in China. That money will eventually make its way into the financial markets. Considering the cost of printing 500 billion yuan…,

US producer prices were flat in August. The Labor Department said falling gasoline and food prices restrained its producer price index for final demand last month. The PPI moved up just 0.1% in July. For the past 12 months the producer prices increased 1.7%. The PPI last month was dampened by a 1.4 percent decline in gasoline prices, which followed a 2.1 percent fall in July. Food prices slipped 0.5 percent after rising 0.4 percent a month earlier. Prices received for services at the final demand level increased 0.3 percent after rising 0.1 percent in July. A 1.7 percent increase in prices for loan services accounted for more than 20 percent of last month’s increase.

A report from the Census Bureau showed median household income edged up just $180 last year to $51,939, a gain deemed statistically insignificant. This is the second consecutive year that the annual change was not statistically significant, following two consecutive annual declines. Income at the median, meaning half the country earned more and half earned less, has declined nearly $5,000 since 2007. The share of Americans living in poverty fell for the first time since 2006, dropping a half percentage point to 14.5 percent. The Hispanic population registered the biggest decline.

Nevertheless, the poverty rate was still 2 percentage points higher than it was seven years earlier. The small drop in the poverty rate can be attributed to the increase in full-time employment. There were about 60.8 million men and 45.1 million women working full time in 2013. That meant 1.8 million men and 1 million women found full-time jobs. Currently, there are 118.6 million full-time workers in the US, that’s a 2 million increase since August of 2013. There are still big gaps between the races, and also gender inequality; women earn 78 cents per every dollar that men did; that works out to a difference of about $10,800 per year. The nation’s level of income inequality continues to be the highest of any Western industrialized nation and worse than even El Salvador, the Dominican Republic, and India.

About one in five children live in poverty. The US is already ranked 34 out of 35 developed countries for child poverty, according to the UN Children’s Fund. There is some good news, however. The overall poverty rate for US children did fall, to 19.9% in 2013 from 21.8% in 2012.

According to a new survey by Gobankingrates.com, one in three Americans worry about money all the time. The survey found that more people were worried about finances than death or losing a family member. Paying bills and asking other people for money back were the top two most dreaded tasks. Survey respondents age 45 and up, most of them baby boomers and are either retired or planning for retirement, said their biggest financial fear was never being able to get out of debt. Millennials were far more worried about unemployment, according to the survey. About 17.1% of 18-to-19-year-olds are unemployed and 10.6% of 20-to-24-years old are unemployed.

More Americans have health insurance. The latest numbers come from the federal Centers for Disease Control and Prevention, which polled more than 27,000 people during the first three months of the year. Forty-one million U.S. residents, or 13.1 percent, were uninsured during the quarter when benefits started to kick in for people who signed up for coverage into private insurance or Medicaid via the Obamacare exchanges or elsewhere. That’s the lowest number and percentage of uninsured people since the CDC started using this version of its survey in 1997. It’s also down 3.8 million people and 1.3 percentage points from the end of 2013. The Congressional Budget Office projects 12 million people will gain health insurance by year’s end.

The US military conducted its first airstrike in Iraq yesterday as part of an expanded mission announced last week by President Barack Obama. The new phase of the campaign began with US planes striking a single fighting position set up by ISIS militants that was firing on Iraqi security forces southwest of Baghdad. Now, you’re probably thinking this is not the first airstrike, and it is not; the US has already carried out at least 162 air strikes in recent weeks, unleashing more than 250 bombs and missiles on ISIS targets. Previously, the military was limited to strikes designed to assist with humanitarian missions, such as driving militants from Sinjar, or to defend Iraqi infrastructure, or to protect US personnel and facilities. So, this is the first military airstrike. It won’t be the last.

Pentagon leadership suggested to a Senate panel today that US ground troops may directly join Iraqi forces in combat against ISIS, despite president Obama’s repeated public assurances against boots on the ground. Wow, that was fast. General Martin Dempsey, the chairman of the Joint Chiefs of Staff, told the Senate armed services committee that he could see himself recommending the use of some US military forces now in Iraq to embed within Iraqi and Kurdish units to take territory away from ISIS.

The Russian ruble fell again today; fallout from the sanctions announced last week combined with lower oil prices. Since then there’s a self-perpetuating dynamic, there’s nothing supporting the currency. Ukraine’s president has offered parts of the country’s separatist east limited self-rule for three years under the terms of a peace plan reached with Russia. Looks like Russia won. They wanted a buffer. They have no interest in owning Ukraine as long as they can control it. The Ukrainian government admits that it does not have enough fuel to heat homes and keep factories running through the winter. Peace sounds better than freezing.

One of the strange sidebar stories on the Russia-Ukraine-sanctions story, is what might happen to the International Space Station. Currently, US astronauts hitch a ride on Russian rockets. NASA has chosen SpaceX and the Boeing Corporation to build spacecraft to ferry astronauts to the International Space Station. The agency will award a combined $6.8 billion to the firms for the first phase of the program.

Governments of all sizes are demanding that Google hand over more and more data about its users; we know this because Google publishes a report on the data it turns over. The report is a tally of all the times a government has used its legal authority to demand that Google hand over internal data about the people who use Google products like Gmail, YouTube or its namesake search engine.

This is the 10th time Google has released numbers on government data requests. Each time, the number of requests has risen sharply, reflecting Google’s growth as a company as well as governments’ increasing use of the company’s data in criminal investigations. The roughly 32,000 requests Google fielded in the first six months of 2014 were up 15 percent from the previous six months, and up 150 percent since the company started publishing its transparency report in 2009. The growth was faster in the United States, with 19 percent growth in the first half of 2014 versus the previous six months, and up 250 percent since 2009.

The world is pumping carbon dioxide into the air at the fastest rate since 1984. Last month was the hottest August on record. The superlatives say it all: We’re running out of time to avoid climate change’s most disastrous consequences. So, why don’t we see more action on the issue? The main problem we are looking at among the leaders of countries and business communities is a general perception that taking action on climate change will reduce economic growth, reduce creation of jobs, and generally speaking it will be expensive.

But a new report from the Global Commission on the Economy and Climate casts doubt on that idea, declaring that the necessary fixes could wind up being effectively free. The commission found that some $90 trillion is likely to be spent over the coming 15 years on new infrastructure around the world. If the $90 trillion that will be spent globally on cities, agriculture, and energy systems in the next 15 years is invested in low-carbon infrastructure and technology, economies actually will save money. The investment would generate $5 trillion in savings from factors like lower operating costs for renewable energy sources (versus fossil fuels) and increased energy efficiency, making this the cheaper option in the long run. And that’s before you calculate the benefits of avoiding disastrously high levels of CO2.

Perhaps the most important overall point of the report is that economic policies around the world are still aligned to favor fossil fuels. The commission cited the more than $600 billion a year spent to subsidize fossil fuels, more than six times the level of subsidies going to renewable energy.

Thursday, August 21, 2014 - Rarefied Air

Financial Review with Sinclair Noe

DOW + 60 = 17,039
SPX + 5 = 1992
NAS + 5 = 4532
10 YR YLD - .02 = 2.40%
OIL + .45 = 93.90
GOLD – 15.10 = 1277.30
SILV - .04 = 19.52
 

The S&P 500 broke two records during today's session, climbing past its previous intraday all-time high of 1,991.39 and ending above its previous record close of 1,987.98. Both had been set on July 24.

Family Dollar has rejected a $9 billion dollar buyout offer from Dollar General, opting instead for a smaller $8.5 billion dollar offer from Dollar Tree. The thinking is that a combination of the largest dollar store – Dollar General with the #2 Family Dollar, would be unlikely to win antitrust approval.

Once upon a time, Sears was the largest retailer in the nation. Today, Sears Holdings announce it lost $975 million in the first half of the year; $573 million in the second quarter. This was the 9^th consecutive quarter of losses, and the past quarter also marked the heaviest losses. Quarterly revenue dropped about 10%. The plan now is to close underperforming stores, or, in a classic example of corporate-speak “rationalizing our physical footprint.” The company successfully spun off Lands End earlier this year, to the benefit of shareholders. But its Sears Canada and Sears Automotive stores have been on the block for some time, indicating either a lack of interest on the part of buyers or an unwillingness by Sears to bend on its asking price.

Gap shares moved higher in after-hours trade after earnings topped expectations. With a few exceptions, retail earnings this quarter have been disappointing. Last week, Walmart cut its full-year earnings guidance, and a few days later, Target reported a disappointing quarter. It’s hard to get consumers to loosen their grip on the purse strings.

The National Association of Realtors said sales of existing homes rose 2.4% in July to a seasonally adjusted annual rate of 5.15 million, the fourth consecutive month of gains and the fastest rate of gain in 10 months. More people are buying homes compared to earlier in the year, but the sales pace is still down 4.3% from one year ago. The median existing-home price for all housing types in July was $222,900, which is 4.9% above July 2013. This marks the 29th consecutive month of year-over-year price gains.

In a separate report, the Labor Department said initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 298,000 for the week ended Aug. 16.

The Conference Board’s Leading Economic Index increased 0.9% last month after an upwardly revised 0.6% rise in June.

The Bureau of Economic Analysis, the BEA, has released its state by state analysis of quarterly gross domestic product. California has the biggest economy among the states, with about $2.1 trillion in GDP, followed by Texas at $1.4 trillion, and New York at $1.2 trillion. Vermont has state GDP of about $28 billion. Arizona comes in at almost $265 billion.

The latest numbers from the Census Bureau show the gap between Americans at the top of the economic ladder and those at the bottom is as wide as ever. Between 2000 and 2011, the gap expanded considerably. The net worth of the poorest 20% of US households fell by $5,124. At the same time, the wealthiest 20% posted a $61,379 increase in net worth. Looked at another way, the net worth of the richest 20% of families totaled $630,754 in 2011. The poorest had a negative net worth of $6,029. Altogether, the top 40% of households increased their net worth from 2000 to 2011. The bottom 60% lost ground.

Sentier Research has analyzed Census data on incomes. In June 2014, the median household income was $53,891, down from $55,589 in inflation-adjusted dollars when the economic expansion began in June 2009; that is a 3.1% drop in median income. Now, let’s clarify this report because you may have seen that the average inflation adjusted per-person disposable personal income is up 4.2% over the past 5 years. There is a difference between median and average; Bill Gates walks into a room with 80 other people and the average net worth of everyone in the room is about one billion dollars; while the median net worth is barely changed. The averages can be distorted by the strong income gains among the wealthiest; the median income numbers give a better sense of the majority of Americans.

And it’s not just the past 5 years; median income remains lower than back in January 2000; the middle income family is worse off than they were 14 years ago. The good news is that there has been some improvement in the past 3 years; since 2011, inflation adjusted household incomes are up 3.8%. We are starting to dig out of a hole, but we’re still digging.

The point is that the economic recovery has been pretty miserable for most Americans. Meanwhile, the Federal Reserve is holding its annual confab for the world’s most powerful financial players at Jackson Hole, Wyoming. The invitation only soiree includes central bankers, investment bankers, economists, and a various assortment of other bigwigs. Tomorrow morning, Fed Chair Janet Yellen will deliver the customary opening speech. ECB President Mario Draghi will speak at lunch. This year’s theme is “Re-Evaluating Labor Market Dynamics”.

In the mountains of Wyoming, the air is thin, and around Jackson Hole, it is rarefied: One banker was quoted as saying: "It seems that conditions reflect the best of all worlds - US economic growth that is neither too slow, which would put pressure on earnings - nor too fast, implying inflationary pressures which could lead to (price-to-earnings ratio) contraction and possibly accelerate the Fed's move towards higher interest rates."

Kansas City Federal Reserve Bank President Esther George says the time has come for the Fed to raise rates, citing improvement in the labor markets. George said: "I don't want us to be behind the curve in beginning to normalize interest rates… When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that… I think a very natural response when you get to this point is worrying that you might derail the recovery, but then again we've seen data come in stronger than we expected."

Fed officials are convinced that the economy is gaining strength after the years of false starts, but a majority of policy makers, led by Janet Yellen, favors a slow retreat from the Fed’s efforts to encourage job creation. They note that millions of people still cannot find jobs, while inflation remains relatively weak.

The theme is the labor market, and the Fed tracks wage trends closely because they're an important inflation indicator, and they're also a reflection of how close the economy is to full capacity. Also, in a well-functioning economy, wages should be rising particularly when productivity is going up. The Fed can't really do anything to get wages up; what it can do is wait to raise interest rates until the job market is healthier and that's what they're debating now - should they wait a while longer?

The latest government data show average hourly earnings adjusted for inflation have not increased at all in the last year, even though we're told the economy is getting better and other wage measures show similar trends. The problem with Jackson Hole is somebody like Bill Gates walks into a restaurant, and all the economist believe they are billionaires.

It is shaping up to be another good year in the equity markets, not as good as last year, but not a letdown; investors have ignored the calls for a correction, and this is still a risk-on market. Typically, when risk is not given much weight, this would be a good time to hedge one’s portfolio. And the reason for “risk-on” is a Federal Reserve that keeps interest rates at historic low levels; add in the demographics of most investors who have no choice but to stick what they have into higher risk assets such as stocks; plus the corporate world that is sitting on cash and the closest idea to innovation is to buy back their own stock, thus pushing prices even higher.

In this environment, weakness in the economy and even geopolitical events are being disregarded, with both being seen as buying opportunities. Investors might not have much choice but to hang onto the bandwagon, but you also should be keenly aware of when you need to get off because the markets could switch to risk-off in the blink of an eye.

The Bank of America settlement deal was announced today. BofA agreed to pay $16.65 billion to end federal and state investigations into the sale of toxic mortgage securities during the subprime housing boom; actually, it works out to $9.65 billion that will actually be paid, plus $7 billion in soft-consumer relief; minus about $600 million in tax deductions. About $5 billion of the cash portion of the settlement is paid as a penalty to the US Treasury. Other portions will go toward compensating investors, including state pension funds. Just under $1 billion will be split among six states.

Under the out-of-court settlement, Bank of America acknowledged that Merrill Lynch told investors in subprime mortgage bonds in 2006 and 2007 that the loans generally complied with underwriting guidelines, though reviews suggested as many as 50% did not. Bank of America also acknowledged that Countrywide did not generally tell investors the extent to which it made exceptions to its own internal guidelines. The settlement also covered some post-crisis conduct, including Bank of America's admission that from 2009 to 2012 it submitted loans for government insurance under the Federal Housing Administration that did not qualify.

The statement of facts failed to identify the amount of profit the bank gained, or show how the penalty will restore losses to investor victims. No individuals were charged. Maybe we can blame robots.

Bank of America shares jumped 4.1% to $16.16; the thinking is that the worst is behind them. The bank had already set aside reserves to handle the legal problems and the thinking is that this settlement is the settlement to end all settlements. Ultimately it works out to about a half year’s profit, give or take; you know, the cost of doing business.