Financial Review

The Terror Threat Level is Flashing Magenta

08292014
FINANCIAL REVIEW
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DOW + 18 = 17,089
SPX + 6 = 2003 (record)
NAS + 22 = 4580
10 YR YLD + .01 = 2.34%
OIL + 1.30 = 95.85
GOLD – 2.00 = 1288.20
SILV – .02 = 19.56

The S&P 500 set another record high close, the 32nd of the year. The S&P 500 gained 3.8% for the month, representing the benchmark’s best August performance since 2000. The S&P 500 also achieved its largest monthly percentage jump since February, when it rose 4.3%. The Dow and S&P have posted gains for four weeks in a row. For the week, the S&P 500 tacked on nearly 0.8%. The Dow scored advances of 0.6% for the week and 3.2% for the month, while the Nasdaq climbed 0.9% for the week and 4.8% for August. Don’t forget that August saw rates on the 100 year Treasury note drop from 2.55% to 2.34%. And oil prices had dropped from 98.15 a barrel to 95.85.

It’s always tricky to say “this time it’s different”, but it is. Remember, back in 2000? The Nasdaq was trading right about where it is now, but back then, people were quitting their day jobs to become day traders; the market was irrationally exuberant. Not so much anymore. People are skeptical; they don’t’ trust the market and they don’t trust the rally. And distrust is healthy, at least for investors.

The Commerce Department reported this morning that consumer spending fell 0.1% in July; down .02% inflation adjusted, compared to a gain of 0.4% in June. Spending was weighed down in part by a decline in automobile purchases and a weather-related drop in demand for utilities.

Consumer prices rose modestly in July, a sign inflation remains in check as the Federal Reserve winds down its bond-buying program. The price index for personal consumption expenditures, the Fed’s preferred inflation measure, increased 1.6% in July from a year earlier. Excluding food and energy, prices climbed 1.5% year over year, for all those people who don’t eat or drive.

The Thomson Reuters/University of Michigan’s consumer sentiment index increased to 82.5 in August, the highest level since July 2007, from 81.8 in July. So, consumers are confident but not so confident that we will increase spending.

This morning the UK raised its terror threat level from “substantial” to “severe”. The next level is “critical”, followed by “duck and cover”. Thankfully, the British are wise enough to avoid a color coded terror threat level. The new alert level rates the risk of an attack on the UK “highly likely”, although there was no evidence to suggest one was “imminent”. Prime Minister David Cameron held a press conference to talk about the threat posed by ISIS, or IS, or ISIL, or whatever you want to call them. He did not give extensive details on what the changed threat level would mean, stressing people “should continue to go about our lives in the normal way”.

Kurdish Peshmerga forces say they have retaken oilfields near Mosul in north Iraq from ISIS militants. The area is part of a large swathe of territory in northern Iraq overrun by ISIS in recent weeks. Iraqi and Kurdish forces backed by US air strikes have regained some ground, including the vital Mosul dam.

Germany’s Foreign Minister Frank Steinmeier says the crisis in eastern Ukraine is “slipping out of control.” His statements were echoed by various other European Foreign Ministers. Russia could face new restrictions after a summit of the European Union’s 28 heads of state in Brussels on Saturday. The EU and the US have already imposed sanctions against dozens of senior Russian officials, separatist commanders and Russian firms accused of undermining Ukrainian sovereignty. In late July, the EU also blacklisted some key economic sectors, prompting Russia to retaliate by banning food imports. Clearly this is not having the desired deterrent effect, despite the fact that the Russian economy is suffering. The Russian ruble dropped to its lowest level in 16 years.

Meanwhile, the US has imposed new sanctions on 25 companies and individuals suspected of helping Iran’s nuclear program, or suspected of evading previous sanctions, or supporting terrorism.

India’s economy grew 5.7 percent in the three months that ended in June from the same period a year ago; its fastest pace in two-and-a-half years. The economy was helped by strong growth in electricity, gas and water supply, and financial services.

Brazil has fallen into recession. Economic output, GDP, fell by 0.6% in the three months to June, and revised figures for the first quarter of the year also showed a fall of 0.2%. The data showed that civil construction, manufacturing and investment especially suffered during the second quarter. Brazil holds general elections in about a month and the economic news is not good for the incumbents.

In the fourth quarter of its fiscal year 2014, the city of Detroit projected it would bring in $55 million in property taxes. Instead, it collected just $6.7 million, about $48.3 million short of what it expected. The city revealed the shortfall in its most recent filing with the Michigan Department of Treasury by Emergency Manager Kevyn Orr.

The hack attack on JPMorgan Chase went on for 3 months before they figured out something was wrong. The cyber-attack started in June and continued until just mid-August. In April, JPMorgan said it would spend a about $250 million a year on cybersecurity. JPMorgan becomes the latest victim in a rash of digital assaults, including the theft of 40 million payment-card numbers from Target and denial-of-service attacks against Bank of America, PNC Financial Services Group and other lenders. Though the JPMorgan breach didn’t disrupt the broader financial system, doesn’t instill much confidence.

Even if customers don’t lose money from a hacking assault on JPMorgan, the episode is a reminder that banks with the most sophisticated defenses are vulnerable. Treasury Department officials have reportedly told bank insurers that in the event of a cataclysmic attack, they would activate a government backstop that doesn’t explicitly cover electronic intrusions. A worst-case event that destroyed records, drained accounts and froze networks could hurt the economy on the scale of the 9-11 terrorist attacks. Federal deposit insurance would apply only if a bank failed, not if hackers drained accounts. The banks would have to tap their reserves and then their private insurance, which wouldn’t be enough to cover all claims from a catastrophic event.

Discussions about the government’s role in cleaning up after a catastrophic cyber assault have centered on the Terrorism Risk Insurance Act, or TRIA. The insurance law, enacted after the 2001 attacks, authorizes the government to provide financial support for insurance companies in the wake of terrorism. It is up for renewal this year. Bottom line is that if a cyber-attack destroys the financial system, you are on the hook.

The United States is crazy about guns. Coming off a year of record sales, the gun market is cooling off. In the recent quarter, Smith & Wesson sales dropped 23 percent, to $131.9 million, and profit plunged 45 percent, to $14.6 million. Sturm Ruger had similarly weak numbers at the end of July. Sales for Sturm dropped 13.4 percent, to $153 million, in the latest quarter, while profit slid by almost one-third, to $22.3 million. Seems we’ve reached “peak gun”. Which raises the question of why Americans purchased so many guns. The simple answer is fear. Fear of crime associated with the economic meltdown, fear of a Greek-style debt collapse, fear that the government would take away guns. Somehow, we have avoided the apocalypse, and so now, gun sales are down.

Still, a terrifying jihadist group is conquering and butchering its way across big swaths of Iraq and Syria. Planes are falling out of the sky on what seems like a weekly basis. Civilians were killed in massive numbers in the Israel-Gaza conflict, or was that Chicago. Others are falling prey to Ebola in West Africa. The world, in short, is falling apart. That’s how it feels, at least, to those of us who sit at a blessed remove from the death and destruction, but who are watching every bloody moment of it via cable news and social media. It can be hard, sometimes, not to see media coverage as an “unrelenting flow” of negativity. It raises an important question: In an age when we can mainline bad news 24/7 if we so choose, what’s the psychological impact of all this exposure to tragedy at a distance?

Turns out some people have studied that. It won’t give you PTSD, anxiety, or depression if you weren’t predisposed toward those conditions. However, cognitive shortcuts triggered by the news can also lead us to gradually see the world as a darker and darker place, chipping away at certain optimistic tendencies. All things being equal, if you ask people, regardless of their circumstances, to evaluate what’s going around them — Do they think their neighbors are good people? Do they think the local schools are solid? — “People always say yes in their immediate setting.”

Zoom out a little, though, and people have less to go on. As soon as you get out of your zone, most of your information’s from the news, and the news by definition covers the extreme things. And while, as has eternally been the case, there are certainly pockets of the planet that really are getting worse on a daily basis (Syria), on a broader level there’s solid evidence that the world is in the midst of a decades-long trend of actually becoming better: safer and healthier and more humane. We just have the bad stuff shouted into our ears louder than ever before. How can we fight back against the unnecessary coarsening of our outlook that may be occurring every time we glance at one of our gadgets? The simplest technique is to just turn it off. And try to consciously focus on the good things around you.

I hope you have a happy and safe Labor Day weekend.

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