Financial Review

Ultra Violet

Sinclair Noe — December 7, 2017

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DOW + 70 = 24,211
SPX + 7 = 2636
NAS + 36 = 6812
RUT + 11 = 1520
10 Y + .05 = 2.38%
OIL+ .66 = 56.62
GOLD – 16.00 = 1247.80

Cryptocurrency

• Number of Currencies: 1,364
• Total Market Cap: $443,799,771,860
• Volume (24h): $29,879,496,699

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Volume (24h)	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	16,012.0	$290.56B	$17.67B	59.15%	1	-3.56%	+74.30%
	Ethereum	ETH	413.58	$41.34B	$2.10B	7.02%	0.0250542	-0.34%	-1.99%
	Bitcoin Cash	BCH	1,378.80	$26.18B	$1.55B	5.20%	0.0906213	+11.89%	+15.99%
	IOTA	MIOTA	3.71990	$10.57B	$1.14B	3.80%	0.00022174	-9.27%	+196.54%
	Ripple	XRP	0.23500	$10.09B	$553.84M	1.85%	0.00001519	+15.71%	+6.01%
	Dash	DASH	660.52	$5.36B	$242.77M	0.81%	0.0403684	-0.34%	-11.54%
	Litecoin	LTC	97.110	$5.31B	$644.07M	2.16%	0.00571542	-0.85%	+13.95%
	Bitcoin Gold	BTG	238.73	$4.52B	$146.44M	0.49%	0.0157946	+11.30%	-7.79%
	Monero	XMR	251.29	$4.32B	$281.56M	0.94%	0.0163026	-3.27%	+59.69%
	Cardano	ADA	0.112903	$2.98B	$64.74M	0.22%	0.0000067	+1.62%	-1.36%

Stocks closed higher. The S&P 500 snapped a 4-day losing streak. Tech stocks made something of a comeback after taking a battering earlier this week. From Friday through Tuesday, the Nasdaq fell 1.6%, with analysts largely blaming the drop on profit-taking after a big rally and on concerns about how the U.S. tax overhaul will impact the tech sector. Whatever rotation away from tech happened in the past few days, it was minor.

Hamas urged Palestinians to abandon peace efforts and launch a new uprising against Israel in response to Trump’s recognition of Jerusalem as the Israeli capital. Palestinian factions called for a “Day of Rage” on Friday, and today a wave of protest in the West Bank and Gaza brought clashes between Palestinians and Israeli troops.

Sen. Al Franken said he will resign in the coming weeks, in a speech on the Senate floor that put him face to face with dozens of Democratic colleagues who called for him to step down over mounting allegations of sexual misconduct.

General Electric plans to cut 12,000 jobs in its power division as the new CEO institutes sweeping changes and the company grapples with a decline in business for coal and natural gas products. The company will cut nearly one in five positions in its GE Power unit. Overall, the layoffs equal about 4% of the company’s workforce of about 295,000 employees at the end of 2016.

New CEO John Flannery is aiming to make GE more efficient. He has already earned a reputation for taking a microscope to GE’s global business to identify opportunities for savings and changes. GE said the cuts would contribute to its plans to slash $3.5 billion in “structural costs” in 2017 and 2018. That includes a $1 billion cost-cutting plan in 2018 by the GE Power division, which makes gas and steam turbines, electrical transmission products, nuclear plant infrastructure and other items.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 236,000 for the week ended Dec. 2. Last week marked the 144th straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was smaller.

This only tells part of the story about the strength of the economy. Yes, the unemployment rate is at 4.1%, a level considered near full employment. But many workers who leave or lose a job are not eligible for unemployment benefits. That is why the claims number has been so low for so long.

The bitcoin boom continued today, zipping past $17,000. Since its low of $11,450 on Tuesday to its peak Thursday, Bitcoin has rallied 45% in a roughly 48-hour span. Bitcoin soared above $19,500 a coin on Coinbase’s GDAX exchange at about 11:30 a.m. ET, three hours after it blew past $16,000.

The massive tear upward seems to have put pressure on Coinbase’s infrastructure — the exchange said on Twitter that users were experiencing issues logging into their accounts because of record traffic. Other exchanges had other prices. Pick one and wish.

If you placed a wager on bitcoin, congratulations. Don’t forget to cash in. If you didn’t put money in bitcoin and you are starting to feel tempted, just remember that you probably didn’t win the lottery this week either. So, what?

The only thing hotter than bitcoin is inflation in Venezuela, now running at 1,369 percent between January and November. The Venezuelan central bank reported inflation of 180 percent and 240 percent in 2015 and 2016, which had been the highest on record. It has since then stopped providing figures.

S&P Global analysts said a partial government shutdown would cost the economy about $6.5 billion per week, or about 0.2 percent of gross domestic product growth in the fourth quarter of 2017, as the impact of furloughing federal employees ripples across the country.

Lawmakers have until the end of Friday to reach an agreement to avert the shutdown. The House is slated to vote Thursday on a short-term extension to keep the government going a couple of more weeks while lawmakers try to work out the problems.

If a shutdown were to take place so far into the quarter, fourth-quarter GDP would not have time to bounce back, which could shake investors and consumers and, as a result, possibly snuff out any economic momentum. The bad news, is that even in a partial shutdown, Congress would continue to get paid for taking a holiday recess.

A faction of conservative Republicans is raising warnings about federal spending, two weeks after backing tax-cut legislation that would raise federal deficits by $1 trillion over the next decade. They say that compromises struck with moderate Senate Republicans, as well as negotiations to keep Democrats from filibustering spending bills, will contain measures that increase government spending.

As Congress turns attention to funding the government after months devoted to passing the tax cut package, some of the lawmakers who dismissed Congress’s own analysis that the tax cuts would add deficits are raising alarms about spending.

That may threaten some of the deals Senate Republican leaders cut to secure votes for the tax plan, including heading off cuts to Medicaid and legislation to stabilize Obamacare insurance markets. Killing your parents and then complaining about being an orphan.

Wildfires in Los Angeles have burned more than 120,000 acres, and it will get worse. Schools are closed, roadways are shut and nearly 200,000 people have been told to evacuate their homes. Winds were strengthening on Thursday, with warnings that gusts of 80 miles per hour. The high winds will continue at least through tomorrow.

Brush fires broke out this morning in Malibu, Oxnard and Huntington Beach; that in addition to the fires burning, basically out of control in Sylmar, Santa Clarita, Bel-Air and Ventura.

The Federal Reserve reports net worth of households and nonprofits hit a record of $96.9 trillion after a $1.74 trillion increase, or 1.8%, gain in the third quarter. Total debt grew at the fastest rate in nearly two years, 6.2% annualized, after the federal government was allowed to borrow again following the end of a debt-limit impasse. The stock market rally continued in the third quarter, and that $1.1 trillion gain was the big driver of the gain in net worth. Rising house prices added another $400 billion.

On the borrowing front, the story continued to be the rise in corporate debt, rising 6.4% annualized, as well as the continued auto- and student-loan driven rise in consumer credit, which rose 4.9% annualized. Cash on corporate balance sheets rose to $2.36 trillion from $2.29 trillion. So, tax cuts.

Goggle and Amazon are fighting. Google on Tuesday said it would pull its YouTube apps from Amazon’s Fire TV and Alexa-powered Echo Show starting next month. Why? Google pointed a finger at Amazon, which hasn’t been selling some products from Google and Nest, which is also owned by Google’s parent company.

Amazon also doesn’t allow Google products to have access to its Prime Video streaming service. These kinds of conflicts can be confusing for consumers who probably just want to watch the things they like on the devices they’ve bought. It’s childish that companies as big as Amazon and Google can’t work out a deal that makes sense for both, thereby helping the industry to grow and, instead, let consumers and content owners suffer.

Meanwhile, another long-standing streaming media tiff is getting (somewhat) resolved. As of Wednesday, Apple TV owners are finally able to add Amazon’s Prime Video to their devices — about six months after Apple chief executive Tim Cook promised the service was on its way. The two companies reportedly had trouble negotiating while wearing the hats of both partners and competitors.

With the holiday shopping season approaching and bankruptcy proceedings underway in federal court, Toys R Us just received court approval to pay 17 executives about $14 million in incentive bonuses, as long as the company hits its target of $550 million in earnings. It must hit a minimum of $484 million in adjusted earnings before any bonuses are awarded.

Attorneys for the company argued in court papers that the bonuses would help encourage executives to focus on driving up sales as the holidays approach. Because if they don’t get bonuses, they might not do a good job?

The national student loan debt is currently $1.4 trillion, an amount owed by more than 44 million borrowers. The average student loan borrower owes $27,857 in educational debt upon graduation.

The Student Loan Report polled 1,000 student loan borrowers currently in repayment to find out if they would rather receive a gift or an equally-valued student loan payment this holiday season, and 69% said they would like the money to go toward paying down the student loan debt.  Just trying to help you work through your shopping list.

Wildfires torching California, sexual-harassment scandals toppling powerful men and a splintered political landscape — and that’s only a trickle of the headlines. It’s the sludge of earthbound news that has Pantone, the design world’s arbiter of color, looking to the night sky and the future for its 2018 color of the year.

Ultra Violet 18-3383, it is — a dramatically provocative and thoughtful shade. Pantone says the hue, a blue-based purple, expresses “originality, ingenuity and visionary thinking that points us toward the future.” Apparently this is an annual event.

Financial Review

Trump Budget

Sinclair Noe — May 23, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 43 = 20,937
SPX + 4 = 2398
NAS + 5 = 6138
RUT + 3 = 1380
10 Y + .03 = 2.28%
OIL + .36 = 51.49
GOLD – 9.70 = 1251.70

In the morning, U.S. economic data showed new single-family home sales in April tumbled from near a nine-and-a-half-year high, while manufacturing activity for May fell to the lowest level since September.

While the President is on an overseas trip, stocks were helped by a lack of major news updates related to the government probe on possible ties between his election campaign and Russia. While today’s economic data was weak, investors were relieved Trump’s first full budget plan was largely as expected, even if it is not expected to be approved in Congress.

The Trump Budget was published today. Its official title is “A New Foundation for American Greatness” and it includes big changes to the role of the federal government. It would cut or eliminate numerous programs that the White House says are a waste of money or create too much dependency.

Some of these programs — including Medicaid and food stamps — provide benefits to up to a fifth of all Americans. The $4.09 trillion budget proposal for the fiscal year that begins in October, is the first detailed blueprint for how Trump wants the government to change.

White House Office of Management and Budget Director Mick Mulvaney called the plan a “Taxpayer First Budget,” and he said they worked to jettison any spending that they felt they could not defend. In total, this meant roughly $3.6 trillion in cuts over the next 10 years.

The Trump budget team made rosy assumptions about economic growth that many economists — both conservative and liberal — said went too far. Trump has proposed cutting the corporate tax rate from 35 percent to 15 percent, but his budget assumes that corporate tax receipts will increase almost every year.

The budget says the U.S. government will collect $328 billion in estate and gift taxes over the next decade, but it also says Trump will eliminate the estate tax. The budget assumes its policies will kickstart an era of 3% GDP growth by 2021.

The Congressional Budget Office assumes the U.S. can grow at 1.9%, and professional forecasters see, as measured by the Blue-Chip survey, see just 2.1% GDP growth. Per analysis from a Committee for a Responsible Federal Budget, there is no plausible path to 4% growth, and 3% growth is “unlikely.”

It would require exceeding the record levels of productivity set between 1959 and 1968 or restoring capital growth, productivity growth, and labor-force participation to the levels achieved in the booming 1990s. The independent Tax Policy Center estimated that Trump’s campaign tax plan would add $7.2 trillion to the deficit.

Whether realistic or not, higher growth estimates allow the Trump administration to project that the government will collect more revenues from taxpayers and spend less on safety-net programs, offsetting the costs of the president’s wish list to hold deficits down.

The budget would provide $574 billion for the Pentagon, a 10 percent increase from the last full-year budget in fiscal 2016 and about 9.5 percent more than the budget Congress approved for the current fiscal year. Trump’s proposal would exceed the military spending caps under the 2011 Budget Control Act by $52 billion.

The president would reduce nearly a third of funding for diplomacy and foreign aid including global health and food aid, peacekeeping and other forms of non-military foreign involvement. Also, spending more than $2.6 billion for border security, including $1.6 billion to begin work on a wall on the border between Mexico and the US, or at least between Naco and Agua Prieta.

While the Pentagon’s budget would see a $6 billion increase, the push for more high-priced weapons — including fulfilling Trump’s pledge to increase the Navy fleet to 350 ships from 275 that can be deployed today — will wait another year.

He’s also proposing cutting funding for the State Department by more than 28 percent. The budget also makes use of several other classic accounting gimmicks. It assumes that the wars in Afghanistan and the Middle East will cause future Congresses to allocate $593 billion in extra war funding that won’t be needed and then claims to save that amount by not spending it.

On the campaign trail, Trump said, “I’m not going to cut Social Security like every other Republican, and I’m not going to cut Medicare or Medicaid.”  In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in Medicaid health insurance payments, Social Security disability benefits, food stamps, low-income housing assistance and block grants that fund meals-on-wheels for the elderly.

Funding for Medicaid, the health-care program for low-income Americans and many people in nursing homes, and CHIP, the Children’s Health Insurance Program, would be cut by $880 billion over 10 years.

Funding for SNAP, the Supplemental Nutrition Assistance Program, a modern version of food stamps that provided benefits to 44 million people in 2016, would be cut 29 percent. In many cases, a higher burden of paying for anti-poverty programs would be shifted away from the federal government and onto the states.

The budget would cut payments to disabled workers by $72 billion over the next 10 years, or about $7.2 billion a year. That represents 5% of the disability benefits the government doled out in 2016. The disability insurance fund was created in 1956 in a series of amendments to beef up Social Security.

Social Security retirement benefits and Social Security Disability are all part of a single Social Security safety net designed to ensure that American workers can live with dignity when they retire or if they become too disabled to get gainful employment.

Far from a separate program, Social Security Disability Insurance is a protection available to all Americans, and is paid for through the same Social Security payroll taxes that pay for retirement benefits.

The budget also calls for cuts to the National Institute for Health, the Centers for Disease Control and Prevention, the Food and Drug Administration, and Planned Parenthood.

The Environmental Protection Agency, as expected based on prior budget proposal drafts, is set to lose 31% of its current budget, which amounts to a $2.7 billion cut. That will likely hinder the agency’s ability to enforce environmental laws, impede its tap water safety programs, and eliminate its Climate Protection Program, among other changes.

State and tribal assistance grants would be slashed from $1.08 billion to $597 million, or 45%. Those grants pay for states to carry out several federal directives such as toxic substance compliance, pesticides enforcement and brownfield inspections. Some of those categories have been zeroed out entirely, including beach protection, radon monitoring and lead testing.

The White House plan to trim the national debt includes selling off half of the nation’s emergency oil stockpile and the entire backup gasoline supply; a move that would raise $500 million in fiscal year 2018 — and as much $16.6 billion over the next decade — by drawing down the Strategic Petroleum Reserve.

The budget projects raising $1.8 billion over the next decade by opening the 19-million-acre Arctic National Wildlife Refuge to oil and gas development. The idea of allowing drilling in the refuge for its estimated 12 billion barrels of crude has long been championed by Alaska Republicans. But it’s anathema to environmentalists, who have successfully blocked ANWR drilling plans from advancing.

The plan includes changes to a few popular student loan programs – cutting back on the number of loan repayment options; eliminating the program that allows some workers in public service jobs to have their debts waived; and changes to Pell Grants, federal grant issued based on financial need.

These proposals would apply to loans that were issued on or after July 1, 2018. They would not apply to loans issued after July 1, 2018, if those loans are used to finish the borrowers’ current course of study. In other words, a college junior in seeking a loan on July 1, 2018, to finish her bachelor’s would not be subject to these proposals.

The proposed budget estimates that the federal government could save $35 billion over the next decade by rolling back regulations governing Wall Street. The White House does not detail how those savings would be realized. But the administration said an ongoing review of existing financial rules “will likely result in proposals that will provide significant savings to the federal government.”

Treasury Secretary Steven Mnuchin is currently conducting a comprehensive review of the impact of the 2010 Dodd-Frank financial reform legislation. An initial report recommending policy changes is expected to come at the beginning of June.

Fiscally and socially, the Trump proposal is a reverse Robin Hood.

Cuts in domestic programs to fund big military-spending hikes would disproportionately hit the poor. Tax cuts would primarily benefit the affluent. The Library of Congress is filled with budget proposals that presidents sent to Capitol Hill and never saw again in the form of legislation.

Even with a House and Senate controlled by fellow Republicans, Trump’s plans could face the same fate. Congress usually starts its drafting process each year with the existing budget and makes additions or subtractions from that.

If it keeps to that practice, it will be starting with a plan that passed with bipartisan support earlier this month, one Democrats believe many Republicans would not mind sticking to for another year. Remember that Congress has a difficult time passing any budget. Today’s White House proposal likely deepens the divide.

Financial Review

Go Placidly

Sinclair Noe — May 19, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 141 = 20,804
SPX + 16 = 2381
NAS + 28 = 6083
RUT + 6 = 1367
10 Y + .01 = 2.23%
OIL + 1.18 = 50.53
GOLD + 8.80 = 1256.60

Stocks finished with triple digit gains but well off session highs as news headlines once again rattled traders. The Dow gave back more than 50 points and the S&P 500 saw gains cut in half following an afternoon news dump. The Washington Post is reporting that a current White House official is a significant person of interest in the law enforcement investigation.

Separately the New York Times reported that Trump told Russian officials at the White House that firing FBI Director James Comey relieved “great pressure” from an ongoing probe into Russia and the election. The Times report cited a document summarizing the meeting.

Trump is on the first leg of a ten-day overseas trip that starts in Saudi Arabia, then moves to Israel, the Vatican, Brussels (for a NATO summit), and then Sicily for a G7 summit. The Trump administration planned to announce $110 billion in sales of advanced military equipment and training to Saudi Arabia this weekend.

Despite the firing of James Comey, and a general sense from the mainstream media that the Trump White House is in disarray, and the lowest public approval ratings since the inauguration, Wall Street continues to trade near record highs.  For the week, the Dow and S&P dropped 0.4 percent and Nasdaq was down 0.6 percent.

The dollar index lost 1.6 percent in the five days, the worst week since July 2016. Gold capped its best week in a month. The yield on 10-year Treasuries climbed less than one basis point to 2.23 percent, after rising as much as three basis points earlier in the session. It fell nine basis points this week.

Oil prices rose. West Texas crude rose 2.2 percent to settle at $50.53 a barrel in New York, for a weekly increase of 5.4 percent, the most since March and the second week of gains, on growing expectations that OPEC and other producing countries will agree next week to extend output cuts.

OPEC and other producers including Russia are scheduled to meet on May 25. They are expected to extend output cuts of 1.8 million barrels a day until the end of March 2018. U.S. crude production has climbed 10 percent since mid-2016 to 9.3 million barrels per day as shale producers have taken advantage of higher prices to boost activity.

Iran holds its first round of presidential elections this weekend. If President Hassan Rouhani remains in office, it should encourage Western investment and boost Iranian oil production. If the winner is Ebrahim Raisi, a critic of Iran’s nuclear deal with the West, then it is possible that new sanctions could be imposed, which could reduce the oil supply from Iran.

After two weeks chock full of retailers’ earnings — largely disappointing Wall Street and missing analysts’ expectations — the S&P 500’s Retail ETF (XRT) finished the week down about 3.5%. Leading the declines were names like Ascena Retail Group, Foot Locker, American Eagle and Sears.

Ascena — the parent of clothing companies such as Ann Taylor and dressbarn — saw its shares plunge more than 30 percent earlier in the week, after it adjusted its second-half outlook to reflect worse-than-expected business conditions. Meanwhile, Foot Locker’s same-store sales fell short of expectations.

Off-price retailer TJX, which operates T.J. Maxx, Marshalls and HomeGoods stores, was expected to be an upbeat outlier for the week, but even its first-quarter comparable sales couldn’t match Street estimates. Gap reported a surprise rise in quarterly same-store sales, bucking the trend of dismal results in the U.S. retail industry, as the company benefited from the robust performance at its Old Navy brand.

Campbell Soup’s quarterly sales and profit missed analysts’ estimates, hurt by higher promotions and weak demand for its condensed soups, broths and V8 vegetable juices, and the company warned that its full-year sales could decline.

Deere & Co raised its full-year sales and profit forecast for the second time, as demand improves for its farm and construction equipment, particularly in South America, sending its shares to a record high of $122. The company said it expected fiscal 2017 industry sales of tractors and combined harvesters in South America to be at the high-end of its earlier forecast of about 15-20 percent rise.

While farmers in South America have been complaining about low prices, they have enjoyed big gains in corn and soybean output.

Brazil’s Supreme Court released explosive plea-bargain testimony today accusing President Michel Temer, along with former presidents Lula da Silva and Dilma Rousseff, of receiving millions in bribes. The testimony raises serious doubts about whether Temer, who replaced the impeached Rousseff last year, can maintain his grip on the presidency.

The testimony implicates both ruling and opposition parties and indicates that Temer, a conservative, accepted $4.6 million in bribes from JBS, which ranks as the world’s largest meat processor. It also alleges that Lula, who is already facing five corruption trials, received $50 million in bribes in offshore accounts from JBS, while Rousseff took $30 million in bribes.

Temer said he would not resign from the presidency. The Supreme Court released an audio tape of Temer, approving the payment of hush money to former lower house speaker Eduardo Cunha, who last year orchestrated Rousseff’s impeachment and was later convicted for corruption.

Many politicians fear that if Cunha should turn state’s witness, his testimony could implicate scores of congressmen and members of the executive branch.

About 37,000 AT&T workers, or less than 14 percent of the company’s total workforce, began a three-day strike after failing to reach an agreement with the No. 2 U.S. wireless carrier over new contracts. This is the first time that AT&T wireless workers are on strike, which could result in closed retail stores during the weekend.

The workers on strike are members of the CWA Communications Workers of America union. The workers are demanding wage increases that cover rising healthcare costs, job security against outsourcing, affordable healthcare and a fair scheduling policy.

Slightly over half of the workers on strike are part of the wireless segment and the rest wireline workers, including a small number of DirecTV technicians.

Fiat Chrysler plans to update software that it expects will resolve the concerns of U.S. regulators about excess emissions in 104,000 older diesels. The software update would begin rolling out once the Environmental Protection Agency and California Air Resources Board approved.

In January, the EPA and California accused Fiat Chrysler of illegally using undisclosed software to allow excess diesel emissions in 104,000 U.S. 2014-2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks in a notice of violation.

The Environmental Protection Agency and California Air Resources Board announced approval of a fix for about 84,000 older Volkswagen diesel vehicles that can emit excess emissions. Volkswagen agreed last year to offer to buy back up to 475,000 2.0-liter diesel vehicles that had been sold in the United States or offer fixes if regulators approved.

Friday’s announcement covers a fix for 84,000 2012-2014 Passat diesel vehicles with automatic transmissions. A fix for vehicles with manual transmissions has not yet been approved. In January, regulators approved a fix for 67,000 2015 model diesels, leaving around 325,000 older vehicles still awaiting approval for a fix.

The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted.

Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau. For their work, debt collectors receive up to $1,710 in payment from the Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation.

They keep those funds even if borrowers subsequently default again. What constitutes rehabilitation? Nine months of on-time payments, even if the borrower only pays $5 a month. That means that in many cases, the government pays $38 to collect one dollar. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year.

Seven years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. That’s according to the latest findings from the Federal Reserve’s annual economic well-being of U.S. households, which found 44% in 2016 said such an expense would have to be covered by borrowing or selling something.

That’s a similar percentage to what was found in past Fed surveys. Of the group that can’t pay in cash, 45% would use a credit card to pay off the expense over time, about a quarter would borrow from friends of family, another 27% just couldn’t pay the expense and smaller fractions would turn to selling items or using a payday loan.

We now know where all the money is hiding. Retirees who are usually expected to spend that hard-earned nest egg are instead cutting their spending and living frugally, according to a University of Michigan survey analyzed by software company United Income. The median retiree spends 8 percent less than they comfortably could afford; the result, retirees now hold assets totaling more than $25 trillion.

Spending money, besides being a boost for the economy, could help retirees be more active, if they physically get out of the house to do it. Meanwhile, younger Americans, whose incomes are falling behind those of previous generations, aren’t saving enough.

So, the moral of the story is get out and spend some money this weekend, you might feel younger.

Monday, June 09, 2014 - Record Highs and a Few Crumbs

Financial Review with Sinclair Noe

DOW + 18 = 16,943
SPX + 1 = 1951
NAS + 14 = 4336
10 YR YLD + .02 = 2.61%
OIL + 1.73 = 104.39
GOLD - .30 = 1253.00
SILV + .05 = 19.16

The major indices are now up for 4 consecutive sessions. The Dow Industrials hit a record high close for the 10^th time this year. The S&P is now up 14 of the last 17 trading sessions. The last time the Dow experienced a 10% correction was back in October 2011; since then, the Dow has gained almost 60% over 32 months without a 10% correction. Typically, you can expect a correction about every 12 months on average. The longest period without at least a 10% pullback was an 82 month run from 1990-1997. The S&P 500 hit a record high close for the 19th time this year. The S&P bull market is now at 62 months and counting, the best run since 1994 to 2000.

The CBOE Volatility Index moved a little higher today to 11.34. On Friday, the VIX hit a low of 10.73, the lowest level since January 2007. The VIX can go low and stay low for an extended period of time. In 2007, after hitting a low, the VIX steadily rose for the remainder of the year but stock prices didn’t peak until the end of 2007. The VIX measures options trades, but does it really mean investors are dangerously complacent? The Murdoch Street Journal reports: “Last week, 39% of respondents to a long-running weekly survey from the American Association of Individual Investors said they were bullish about stocks. That is well above readings of just over 27% in both February and April, when violence in Ukraine weighed on sentiment. But it is far from giddy. In fact, it is in line with the average since the poll's inception in 1987.”

Today had all the signs of a bull market, in addition to record highs, we had a good old fashioned Merger Monday. Tyson foods agreed to buy Hillshire for $8.5 billion, or $63 a share cash. That follows a bidding war between Tyson and Pilgrim’s Pride that pushed Hillshire from $37 a share on May 23 to the current bid.

Drugmaker Merck paid $3.9 billion, or $24.50 a share in cash for Idenix Pharmaceuticals, a 240% premium to Friday’s close of $7.23. Idenix has three drugs to treat Hepatitis C in clinical trials, but none on the market. Chipmaker Analog Devices agreed to buy Hittite Microwave Corp for $2.5 billion, or $78 a share, a mere 29% premium to Friday’s close.

Depending on the source, deal volume is up about 65% to 70% this year. Worldwide, companies are sitting on about $7.5 trillion of cash. With organic top line growth hard to come by in sluggish economies, many are turning to acquisitions.

You can buy a share of Apple for about $93; that following a 7 for 1 split; the first split for Apple in 9 years. A split is generally a non-event. If you owned 100 shares of Apple on Friday, you now own 700 shares, but the price was divided by 7. The financial structure and value of the company doesn’t change.

The yield on a 10-year US Treasury note was up a couple of basis points today to 2.61%. Meanwhile, the yield on the 10-year Spanish government bonds dropped 5 basis points to yield 2.59%. Normally, you would expect a government bond yield to correspond to demand and overall safety of the bond and the country backing the bond. Things are a little upside down. The good news is that investors aren’t expecting the Eurozone to disintegrate; the bad news is that investors aren’t expecting any growth in the Eurozone.

James Bullard, president of the St. Louis Federal Reserve Bank, speaking at a conference in Florida today, said the US macroeconomy is much closer to a normal state than it has been in 5 years and only weak labor markets and low inflation is keeping the Fed’s accommodative monetary policy in place. Last month, Bullard said that while the housing and labor markets remain weak, he expects recovery through the rest of the year, and said inflation would likely move towards the Fed's desired 2% rate.

Bullard told reporters after his speech: “If you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200,000, if you continue to see inflation moving back up toward target, I think if we get to the fall of the year and all of those things are transpiring as I’m suggesting they will, that will change the conversation about monetary policy, and there will be more sentiment toward an earlier rate hike.”

The housing market may not be as strong as some Fed policymakers believe. On Friday, the jobs report showed the economy had regained all the jobs lost in the recession, but that isn’t the case for the home building sector. The number of construction jobs has been climbing, rising about 7% in May from a year earlier, to 2.6 million, including electricians and other specialty trade contractors; but that's way down from the high of 3.45 million in April 2006. While jobs overall are back to their pre-recession peak, residential construction jobs are 34% below their peak.

Even five years after the housing meltdown, a sizeable chunk of homeowners remain underwater. About 6.3 million homes, or 12.7% of all properties with a mortgage, were underwater as of the first quarter.  About 1 in 10 homeowners are almost underwater, with less than 10% equity in their homes, meaning it would probably cost them to sell, when including selling related expenses.

A survey released last week by the MacArthur Foundation found that 43% of those polled said it is no longer the case that owning a home is an excellent long-term investment and one of the best ways for people to build wealth. More than half said that buying a home has become less appealing than it once was. And 70% believe the nation is still in the middle of a crisis and that the worst is yet to come.

One major demographic group that isn’t buying homes is the Millennials; they are just trying to pay off student loans. President Obama announced Monday that he will expand a federal program designed to reduce student loan payments. The program, called “Pay As You Earn”, will give as many as five million more Americans with federal student loan debt the ability to cap their monthly student loan payments at 10% of their income and to have their remaining debt forgiven after either 10 years (for government and some non-profit workers) or 20 years (for other workers).

The current program is only available to Americans who began borrowing after October 2007 and kept borrowing after October 2011; the new order will allow students who borrowed money before October 2007 and those who have not borrowed since October 2011 to participate. The new program will begin in December 2015.

Of course, like so much consumer debt, if you pay the smallest monthly minimum, you just string out the loan and end up paying more over time; so, the new plan might not work for everybody. The best idea is to work some numbers, comparing monthly payments and lifetime costs; there are calculators for this at the Department of Education website.

The housing market is just one factor in an economy that doesn’t seem quite as strong as Fed President Bullard suggests. This was supposed to be a breakout year for economic growth but it started with negative GDP in the first quarter. And even though we have regained the jobs lost in the recession we still have nearly 10 million unemployed, and that’s more than 2 million more than in January 2008; and the quality of the jobs, and the pay has gone downhill for most workers. Income growth is at its lowest point since 2007. When people are shopping, they’re using borrowed money.

Corporations and Wall Street raked in profits unseen in their history. At the end of 2013, corporate profits hit an all-time high of $1.9 trillion. Those profits were largely achieved not by growing, but by cutting jobs and investments; and relying instead on mergers, buybacks, stock splits, QE, and other financial legerdemain.

The economy hasn’t really turned positive. It could change. Maybe the Fed will quit QE and try something that actually helps the economy. Until then, enjoy your milk and cookies, or whatever crumbs might come your way.

Wednesday, May 21, 2014 - Congratulations Graduates, Yada, Yada, Yada

Financial Review with Sinclair Noe

DOW + 158 = 16,533
SPX + 15 = 1888
NAS + 34 = 4131
10 YR + .02 = 2.53%
OIL – .33 = 103.74
GOLD – 2.40 = 1292.90
SIL  un = 19.49

Earnings season is winding down; about 96% of S&P 500 companies have reported results, with profit growth this quarter of 5.5% and revenue up 2.8%. While more companies have topped earnings expectations than usual, fewer have beat on the revenue side. This has been an ongoing theme for corporate profits; bottom line growth without corresponding sales. If this formula sounds unsustainable, it is, unless there is some other factor pumping up the markets.

Follow-up from yesterday: China has signed a 30-year deal to buy Russian natural gas worth about $400 billion. The gas deal gives Moscow an economic boost at a time when Washington and the European Union have imposed visa bans and asset freezes on dozens of Russian officials and several companies over Ukraine. It allows Russia to diversify its markets for gas, which now goes mostly to Europe; essentially opening the door to Asia’s gas market and potentially closing the door on the petro-dollar.

The Federal Reserve today released the minutes of the most recent FOMC meeting. Fed policymakers considered several approaches to tightening monetary policy, but decided to remain flexible; which is another way of saying QE is a big experiment and they are just hoping nothing explodes in their face. By making no decisions, the Fed is making it difficult for Wall Street to be spooked by tightening talk, at least for now.

In the minutes, the Fed made no decisions on which tools to use. One great advantage of extending the debate about how to tighten is that it keeps the question of when stuck in background. If the Fed laid out a detailed exit strategy the markets would start to trade the strategy and essentially kill it in its tracks.

The minutes show the Fed still thinks the first quarter slowdown was weather related, and things will pick up, any day now. Fed officials still see slack in the labor force, but there wasn’t consensus on how much slack or what to do about it. Inflation is picking up just a little, but is regarded as stable and not a problem.

After the minutes were published, we heard from several Fed officials, starting with Janet Yellen delivering a commencement address to NYU grads. Yellen delivered what you might expect, and nothing to do with monetary policy: graduates, she said, should “tend the fires of curiosity,” listen to others, show grit in the face of failure, and the courage of her hero Ben Bernanke (yada, yada, yada).

Federal Reserve Bank of San Francisco President John Williams said he’s inclined to delay any action that would allow the central bank’s balance sheet to get smaller until after the Fed has lifted interest rates for the first time. Williams  believes the Fed needs to take into account the troubles it had last year when it first floated plans to wind down its bond-buying policy, and make sure markets understand what the central bank does with its bond holdings is entirely different than what it does with short-term rates.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed is still failing to deliver on its employment and inflation goals. Kocherlakota says the current unemployment rate of 6.3% overstates the nature of the improvement. He said the labor market is not healthy but he didn’t call for additional levels of stimulus, but he did say it was possible for the Fed to switch to a system where instead of targeting a specific level of inflation, it could shift to a regime where it allowed inflation to rise above target to make up for past shortfalls.

One area of agreement in the FOMC minutes is that officials are concerned about weakness in the housing market; citing factors like higher home prices, construction bottlenecks from a shortage of labor and harsh winter weather, as well as tight credit.

Former White House advisor Larry Summers thinks student debt is slowing the housing market, which in turn is slowing the broader economy. Since 2003, student loan balances have nearly quadrupled to $1.2 trillion, during a period when mortgage debt rose “only” 65% to $8.2 trillion and credit card debt actually declined by 4.2% to $660 billion. The burden of servicing that ever growing student loan debt is eating into other forms of borrowing and spending, such as the purchase of a home. And so the proportion of first-time buyers has been shrinking for years.

Over 70% of the students who are sitting through a commencement speech this spring have student loans. They will start their career, if any, with about $33,000 in debt. Even when adjusted for inflation, it’s about twice as much as 20 years ago. Back then, only 43% of students graduated with student loans. And as education costs have jumped, the idea of working your way through school just doesn’t work anymore.

One of the reasons why education costs have jumped is because of austerity. States cut back on funding for state universities; the schools raised tuition and they discovered they could charge whatever they want, or get away with, because the students just borrow the money. Once upon a time state governments held the reins of university budgets and they would tighten their grip occasionally; no more; and through the student loan programs, designed with whatever intentions, the government is simply aiding and abetting colleges in extracting ever more money from the future lives of their students.

And so for the Class of 2014, you now face the prospect of rising interest rates, a mountain of student loan debt, almost no chance of buying a home in the foreseeable future, and the prospects for a good job in your chosen field are not looking good. Congratulations, don’t despair, just have the grit and courage of Ben Bernanke (yada, yada, yada) and you’ll work your way out of your parents’ basement in 10 or 15 years.

Earlier this week, the Oregon Legislature approved a plan that could pave the way for college students to finance their education by selling equity stakes in their future income. It’s an interesting idea. With both unsubsidized and subsidized Federal loan rates now at 6.8%, and Grad PLUS rates even higher, the student loan burden that comes with an undergraduate degree, let alone further education can be daunting. Unfortunately, Federal loans are often the only option that a student has to pay for school nowadays.

Equity financing would allow these students to avoid debt in exchange for a portion of their future income for a set number of years. Proponents of the Oregon plan claim that 3% per year for 20 years would be enough to keep the program afloat. One concern is that students who expect to be high earners will not participate if it could mean they end up paying more in tuition when all is said and done. Equity financing would be costly for a medical student. A cap on repayment could help solve such a problem. The cap would still have to be higher than the average tuition rate charged by the school. Meanwhile, a equity financing might be a sweet deal for a student taking classes that don’t lead to a big paycheck; it might even encourage them to pursue higher education without regard to finance.

The best that can be said for the plan is that it is a tax on future earnings, the worst is that it is a newfangled name for indentured servitude.

So, back to the housing market for a moment; you have a massive number of young adults living at home with very little financial means for purchasing a home. The recent argument was that as economies grew, this wealth would eventually lift the standard of living for all. There is new economic research showing that this isn’t always the case especially when a rentier class emerges. In fact, this wealth gap is being fully visualized through real estate. Some analysts have been scratching their heads wondering how housing prices could go up while homeownership is actually falling.

How do you have soaring home prices with household incomes dropping? The fact that investors are dominating in the housing market shows how large and powerful these big pools of money have become. The financial sector rarely had an interest in being actual property owners until the housing market imploded. But in the first quarter of this year, cash sales from investors reached an all-time high; that isn’t Mom and Pop buying a crib with cash and it certainly isn’t the first time buyer a few years removed from college.

Since 2005, we have increased the number of rental households by roughly 7 million (a 21 percent increase). Interestingly enough, we have a foreclosure graveyard of 7 million over this same period. Owner occupied housing has actually fallen over this period. We are looking at close to one decade of data and we have fewer individual homeowners today than we did in 2004.

In previous recoveries, you would also see home building picking steam up but that hasn’t happened. In better days, we would see more than 2 million housing starts per year. In this recovery, we’ve been doing our best to close in on 1 million.

And when the Fed last year floated the idea of taper, the markets responded with a taper tantrum, and rates increased, modestly, but an increase; and that was enough to slam the brakes on regular home buyers last year. Mortgage apps are now near an all-time generational low. Regular buyers are becoming a minority. Many of the “pent up demand” argument assumes first, that younger buyers have the means to buy. Second, it also assumes homes are affordable based on their income (which they are not). And so we have cash investors, spurred on by strong stock returns, but what happens if or when the inevitable stock market correction comes along?