Financial Review

Friday, May 16, 2014 – Nervous About Recovering in the Recovery

Nervous About Recovering in the Recovery
by Sinclair Noe

DOW + 44 = 16491
SPX + 7 = 1877
NAS + 21 = 4090
10 YR YLD + .02 =  2.52%
OIL + .68 = 102.18
GOLD – 4.10 = 1293.70
SILV – .11 = 19.45


Stocks were all over the place this week; we had record highs for the Dow Industrial Average and the S&P 5oo Index, topping 1900 for the first time, even as small caps slipped and internet stocks tumbled. For the week, the Dow slipped 0.6 % and the S&P 500 dipped 0.03 %, while the Nasdaq gained 0.5 %. Bonds enjoyed a very nice week indeed, with the yield on the 10 year Treasury note moving from a high for the week of 2.66% to a low of 2.47%. Isn’t it awesome when the Dow hits a record high but everything else flatlines or shrinks? Maybe we are in a recovery, but maybe we need to recover from the recovery.

Recent economic data has been mixed, and reports released Friday added to concerns about the lackluster recovery. The preliminary Reuters / University of Michigan consumer sentiment index for May was at 81.8, down from 84.1 in April. Housing starts increased in April at a seasonally adjusted annual rate of 1,072,000. This is 13.2 % above the revised March estimate of 947,000 and is 26.4 % above the April 2013 rate of 848,000.

Earlier in the week we got the PPI and CPI inflation numbers. On the retail level the core inflation rate increased to 1.8% year over year. The Fed has begun to chirp about deflation fears at just exactly the time that core inflation is turning higher, not that inflation is high, but it isn’t exactly deflationary at the moment.

We also saw a report from the New York Fed on household debt; Americans are swimming in it. For the first quarter, debt stood at$11.6 trillion. To put it in perspective, if Americans’ household debt was an economy, it would be the third largest in the world.

The fastest growing debt category: student loans, which top $1 trillion. Pew Research reported this week that four in ten U.S. households (37%) headed by an adult younger than 40 have student debt. Households with student loan debt have a median net worth of $8,700 compared to $64,700 for households without student debt.

The report says high levels of debt are restraining household formations. Slower household formation means less demand for buying homes or apartments, which, in turn, translates into less construction and construction jobs. And even young households looking to buy residential real estate have a harder time getting a mortgage.

There wasn’t much economic news this week but we did have a few interesting surveys. Gallup’s annual Economy and Personal Finance poll finds 59% of Americans are nervous about retirement and afraid they will run out of money. And the idea of needing a million dollars to secure a comfortable retirement, well that plan is now considered obsolete, what with rising medical costs, disappearing pensions, insufficient 401(k)s, and low interest rates.

Meanwhile, the most surprising poll results came from CNBC’s Millionaire Survey which finds a majority of millionaires consider inequality a major problem and about two-thirds support higher taxes on the wealthy; in other words, they think they probably should pay more in taxes; just a bit more in taxes, nothing too big.

David Tepper manages the Appaloosa Fund. He is the highest paid hedge fund manager in the world. Last year he pulled down $3.5 billion, which is more than you and I combined. Tepper rarely talks publicly about the markets but he was at an investing conference in Las Vegas the other day and he decided to talk. Tepper says he’s nervous about the markets: “There are times to make money, this is a time to not lose money.”

Tepper’s biggest concerns hinge on economic growth prospects and its effect on stock prices. He said his opinion would be different if the economy was growing at 4%. Even adjusting for the weather, the economy looks to be growing much more slowly than he expected. Indeed, US GDP grew by 0.1% in the first quarter of 2014. That’s a problem, Tepper says, because stocks on average are trading at 16 times next year’s expected earnings. That means investors are expecting relatively strong bottom lines and if the economy is growing more slowly than expected, profits are likely to disappoint.  Tepper says he is also concerned about deflation, given the sluggish economic growth prospects; consequently, he has gone, at least in part, to cash.  Tepper says he’s “nervous”.

Give me a break. The guy just made $3.5 billion last year and he’s nervous. Lee Trevino, the famous golfer was once asked if he got nervous standing over a putt that could win a tournament and possibly pay several hundred thousand dollars. Trevino said no, he didn’t get nervous anymore, but when he was younger he used to get nervous, before he went on the pro circuit he made money betting on golf games in west Texas. Trevino said he used to get nervous standing over a putt that could win or lose $20 dollars, when he only had $5 in his pocket. A new poll by Bloomberg indicates that financial professionals are quite concerned about deflation in the Eurozone. About three-quarters of them say it’s a greater threat to the region than inflation. Some individual countries such as Portugal have already experienced deflation this year, and the inflation rate in the 18-nation bloc as a whole was 0.7% in April.

This isn’t the only problem plaguing the Eurozone. A report from the Global Sustainability Institute says Britain is running out of energy. Britain has just 5.2 years of oil, 4.5 years of coal and three years of its own gas remaining. France fares even worse, with less than one year to go before it runs out of all three fossil fuels. Germany, it was claimed, has 250 years of coal remaining but less than a year of oil. Italy has less than a year of gas and coal, and only one year of oil. The report concludes that some countries are becoming increasingly vulnerable to rising energy prices and reliant on resource-rich neighbors, while alternative energy sources need to be developed. One thing the crisis in Ukraine has clearly demonstrated is that energy is a new weapon.

In a new report, Standard & Poor’s Rating Services argues that climate change will hit country’s economic growth rates, their external performance, public finances, and sovereign credit ratings; and not in a good way. Despite a surge in extreme weather events, S&P has not, to date, revised the rating of a sovereign as a result. The report says that, “assuming that extreme weather events are on the rise in terms of frequency and destruction, how this trend could feed through to our ratings on sovereign states bears consideration.”

According to S&P, poorer and lower-rated countries will be the hardest hit by climate change. All of the 20 nations ranked most-vulnerable by S&P are emerging markets, with the vast majority in Africa or Asia.

Telecommunications regulators formally proposed new “net neutrality” rules that may let Internet service providers charge content companies for faster and more reliable delivery of their traffic to users. Federal Communications Commission Chairman Tom Wheeler has come under fire from consumer advocates and technology companies for proposing to allow some “commercially reasonable” deals in which content companies could pay broadband providers to prioritize traffic on their networks.

Critics worry the rules would create “fast lanes” for companies that pay up and slower traffic for others, although Wheeler has pledged to prevent “acts to divide the Internet between ‘haves’ and ‘have nots.'” The FCC’s proposal tentatively concludes that some pay-for-priority deals may be allowed, but asks whether “some or all” such deals should be banned and how to ensure paid prioritization does not relegate any traffic to “slow lanes.”

The Federal Communications Commission has just granted itself the ability to either protect or condemn the free Internet, depending on how you read the net neutrality rules the agency will consider making law in the coming months. FCC Chairman Tom Wheeler’s response to criticism has thus far consisted mostly of pleas for people to trust that the agency knows what it’s doing, but he may be the only one.

The problem is that no one can agree on what the agency is promising. Some believe that the FCC is working to increase its power and stifle innovation in the broadband market, poking its nose into every deal Internet service providers try to make. Others think that the proposed rules don’t go far enough, and that unless it is willing to reclassify broadband companies to be subject to the same laws as telephone companies, it can’t protect the free Internet. The rules as they are currently written are wide open to interpretation and abuse.

The FCC is still ignoring the peering and interconnection agreements that allow companies like Comcast to charge both companies and consumers for access to its network. It’s still manned by people who fought the principles it’s now trying to defend. And it’s still the same agency whose own incompetence threatened the Internet in the first place. There is a good chance the FCC could kill the internet, and if so, the first blows were delivered this week.

This week’s economic calendar was light, next week will be lighter. The Fed will release the minutes from the April 29-30 meeting on Wednesday. The Fed heads take their dog and pony show on the road, with Janet Yellen delivering a commencement address at New York University on Wednesday. Among the district presidents giving speeches, the list includes: Richard Fisher (Dallas) and John Williams (San Francisco) on Monday; Charles Plosser (Philadelphia) and William Dudley (New York), Tuesday; Esther George (Kansas City) and Narayana Kocherlakota (Minneapolis) and Dudley again, Wednesday; and Williams again, Thursday.

Two major reports on April housing demand are on tap next week. Sales of existing homes will be reported Thursday, followed by Friday’s new home sales report.

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