Financial Review

The Good, the Bad, and the Depressing

DOW + 129 = 16,956

SPX + 13 = 1973

NAS + 50 = 4458

10 YR YLD + .05 = 2.56%

OIL – .13 = 105.24

GOLD – .80 = 1327.10

SILV + .02 = 21.08

 

Record high closes for the Dow and the S&P.

 

The record setting bull market run refuses to stumble. The S&P 500 has not seen a correction, a drop of 10%, for 1,002 days, and counting. This marks the fifth longest stretch without a correction since 1928. The average time between corrections is about 18 months; we’ve now gone 33 months without a 10% pullback.

 

The Institute for Supply Management said its manufacturing index registered 55.3% in June, down slightly from May’s reading of 55.4%. Any number above 50% signals expansion. Separately, the research firm Markit said its final reading of US manufacturing conditions in June totaled 57.3, compared with a preliminary reading of 57.5; still the highest reading since May 2010. So the manufacturing sector has expanded for 13 consecutive months, but it wasn’t a month over month increase, and we have to remember that manufacturing was expanding in the first quarter as the broader economy was contracting by 2.9%. Today’s reports were decent news for manufacturing, but hardly great.

 

The Commerce Department reports construction spending increased 0.1% in May, following a 0.8% increase in April. Construction activity totaled $958 billion at a seasonally adjusted annual rate in May, up 6.6% from a year ago. Single-family home construction was down 1.4% while apartment construction dropped 0.6%. The hotspot for construction was a 4.3% rise in construction of power generating facilities.

 

The upshot is that the economy is continuing to improve from the deep freeze of old man winter, even if the recovery is tepid. Most economists and analysts had called for 3% growth in the first quarter, not a 2.9% contraction. Now that the weather and the economy have thawed, we’re hearing talk of 3% growth going forward.

 

The strongest S&P 500 sector this year has been Utilities, up 17%. The S&P 500 Energy sector is up 13%, with the following subsectors: Oil & Gas Equipment and Services rising 28%, Oil & Gas Storage and Transportation up 25% and Oil & Gas Exploration up 22%.The weakest S&P 500 sector so far this year has been Retailing.

 

June auto sales beat expectations with Chrysler, Nissan, Toyota and Hyundai all posting healthy gains compared with the same month a year earlier. General Motors had a small increase and Ford’s sales declined. June new car sales approached 1.4 million, about the same as a year earlier. Most analysts were forecasting a 2% to 3% decline for the month. GM recalled an additional 8.5 million cars yesterday, which means that GM has now recalled 29 million cars since the start of the year, more than the total number of vehicles it sold in 2011, 2012, and 2013 combined. It’s also more than the 22 million vehicles recalled by all automakers last year.

 

AAA predicts that nearly 35 million Americans will take a road trip of 50 miles or more on the Independence Day weekend. The current national average price for a gallon of regular gasoline is $3.68, compared with $3.48 a year ago. According to AAA, gasoline prices are 20 cents a gallon higher due to “market fear about Iraq”.

 

Sunnis and Kurds walked out of the first session of Iraq’s new parliament after Shi’ites failed to name a prime minister to replace Nuri al-Maliki; so, the prospects are poor for a new unity government that might prevent Iraq from collapsing. Meanwhile, the ISIS rebels continue fighting; they control suburbs  just west of Baghdad; they have been waging fierce battles in Tikrit, north of Baghdad, and there have been clashes to the south of the capital, leaving the city surrounded on three sides. The United Nations says more than 2,400 Iraqis had been killed in June alone, making the month by far the deadliest since the US “surge” offensive in 2007.

 

Geopoltical hotspots continue to flare up. Ukrainian forces struck pro-Russian separatists bases in eastern Ukraine with air and artillery strikes. The ceasefire came and went, and won’t be renewed. Russian president Putin accused the Ukrainian prime minister of shunning the road to peace; while Russian foreign minister Lavrov warned of a “new round of bloodshed”.

 

A follow-up on yesterday’s Supreme Court ruling in the Hobby Lobby case, which dealt with a closely held corporation’s objection to paying for contraceptives in employees’ health care under the Affordable Care Act mandate. The Supremes said corporations are people, my friend, and they have religious beliefs, and so they are exempt from the mandate. There had already been exemptions for churches and non-profit organizations; in those situations the government determined that contraceptives would be paid by the government. This was the solution put forth in 2012, and revised in 2013, whereby taxpayers could pick up the tab for contraceptive coverage, instead of religious employers, as a solution to the First Amendment issues in question.

 

Writing for the majority in the Hobby Lobby case, Justice Alito wrote: “[the White House] could extend the accommodation that HHS has already established for religious nonprofit organizations to non-profit employers with religious objections to the contraceptive mandate. That accommodation does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’s stated interests.”

 

In other words, while the government can’t compel Hobby Lobby to finance contraceptives, it can compel taxpayers to do so. Another name for taxpayer funded healthcare is “single payer”. I’m not sure if the Supremes intended this, but they just justified the government to establish a single payer health plan, at least for contraceptives.

 

There was a time when a majority of Americans were confident in the Supreme Court, but according to a new Gallup poll just 30% say they are confident in the highest court. That’s the good news; people have more confidence in the Supremes than in any other arm of government, but that may not be saying that much when confidence in the presidency stands at 29% and in the Congress at 7%. Which means Congress is even less popular than head lice, or T-Mobile, or Facebook.

 

The Federal Trade Commission says T-Mobile made money the old fashioned way, by charging customers hundreds of millions of dollars in bogus charges. The practice is often referred to as “cramming”; businesses stuff a customer’s bill with bogus charges associated with a third party. In its complaint filed in federal court, the Federal Trade Commission claimed that T-Mobile billed consumers for subscriptions to premium text services such as $10-per-month horoscopes that were never authorized by the account holder. The FTC alleges that T-Mobile collected as much as 40% of the charges, even after being alerted by other customers that the subscriptions were scams.

 

Facebook has its own little scam. It modified hundreds of thousands of users’ accounts by prioritizing ‘positive emotional content’ to see if it could make them happier or sadder, without telling them what it was doing.

 

Researchers from Cornell University and the University of California filtered information going into the news feeds of 689,000 users; that includes the constant flow of links, videos, pictures, and comments by friends. When positive emotional content from friends was reduced, users would post more negative content themselves, essentially becoming unhappier. The opposite happened when negative emotional content was reduced. The process has been dubbed “emotional contagion”.

 

The study, published in the journal “Proceedings of the National Academy of Sciences of the USA”, concluded: “Emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks.”

 

A spokesman for Facebook said the research was conducted over a single week and none of the data was associated with a specific person’s account. Instead, they said the site wanted to make its content more “relevant and engaging”.

 

Just to be clear, another name for emotional contagion is empathy, something that is in short supply at Facebook. What we really learned from this experiment is that the people at Facebook have spent so much time staring at a computer screen that they have become disconnected from emotional reality, and have to rely on scientists to run secret experiments on hundreds of thousands of lab rats, I mean customers, to discover that people get upset when their friends are unhappy. Even worse, the experiment confirms that social networks now have the power to change the emotional well-being of millions of lab rats, I mean customers, on a whim; just to see what happens; devoid of empathy.

 

Now that’s depressing.

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