What Happens When We Run Dry
Financial Review by Sinclair Noe
DOW + 228 = 17,977
SPX + 27 = 2081
NAS + 57 = 4929
10 YR YLD – .01 = 2.10%
OIL – 1.12 = 43.88
GOLD – 4.30 = 1155.30
SILV – .01 = 15.73
Halfway through March, the S&P 500 is almost exactly flat year to date after a January tumble and February recovery, as we head into a Federal Reserve FOMC policy meeting later this week. Halfway through March a year ago, that was exactly the same situation: US stocks flat for the year directly ahead of the March Fed meeting, when the Fed’s intent to slowly tighten up policy was affirmed. It is widely expected that Fed policy setters will remove the word “patient” from their statement, opening the door for a rate increase in June.
The Fed has kept its benchmark lending rate near zero for more than six years, underpinning a strong rally in stocks. Wall Street loves to feed at the zero interest rate trough. Wall Street has a history of whining about tighter monetary policy; remember the “taper tantrum”, and so today’s gains feel like a sucker’s rally. Or the Fed could surprise us and they could very well remain patient.
Crude fell for a fifth day, dropping to its lowest intraday price since March 2009. Crude oil closed $43.88 a barrel, closely following the IEA’s prediction on Friday that storage tanks in the US may become full this year as drilling-rig cuts fail to slow production. Oil has now broken-down from the $45 to $50 range, to fresh lows; and that means we won’t know where the bottom is until we hit it.
The dollar index closed just above 100. Goldman Sachs says the euro will fall to $0.80. In a note released on Friday, the investment bank predicted the euro would fall to parity in six months and $0.80 by the end of 2017. The call comes a couple of days after Deutsche Bank announced it saw the euro hitting $0.85 before 2017. The Federal Reserve says it really doesn’t pay much attention to the strength of the dollar, but I’m not sure they can avoid the 800 pound canary. The strength of the dollar and the weakness of the euro has a profound effect on US exports; and that has a big impact on profitability for many companies; and in the case of commodities, and especially oil, it is a major difference between deflationary and inflationary forces, or what the Fed calls price stability.
Factory production in the US declined in February for a third consecutive month, signaling cutbacks in manufacturing will hold back economic growth this quarter. The 0.2 percent decrease at manufacturers followed a 0.3 percent drop in January that was initially estimated as a gain. Total industrial production, which also includes mines and power plants, climbed 0.1 percent, propelled by a record surge in utility use. Delays at West Coast ports have probably disrupted supplies, while sluggish growth in foreign markets and a rising dollar that makes American products more expensive may be crimping demand. Another report this morning showed manufacturing in the New York region grew this month at a slower pace than projected.
Confidence among US homebuilders unexpectedly fell in March to an eight-month low. The National Association of Home Builders/Wells Fargo sentiment gauge dropped to 53 from 55 in February. Sales of single-family homes declined to a five-month low and builder optimism about the outlook failed to improve. Even with this slight slip, the index remains in positive territory. Low mortgage rates and job creation may help spur homebuyer interest in coming months.
It’s back. Once again the US government has hit the debt limit. February 2014 Congress passed legislation, which President Obama signed into law, suspending the cap on government borrowing until March 15, 2015. As of today, the public debt is $18.1 trillion. For now, the Treasury is still paying the nation’s bills, sort of; they are robbing from Peter to pay for Paul, or what the Treasury calls “extraordinary measures.” Those measures include stopping investments in a pension fund for federal employees and suspending the issuance of special Treasury securities used by state and local governments; essentially accounting tricks, but there is a limit to the trickery. The Congressional Budget Office recently estimated that such measures would provide sufficient operating cash for the government until October or November.
We’ve all seen this mess before. Congress will try to tie some pet legislation to a spending bill; that will get shot down, until Congress finally wakes up to the fact that they have to pay for what they already bought. Will the US default? Probably not. Will Congress make a mess of it? Good chance.
Some have suggested that the debt ceiling should just be done away with, that it should be a given that the US will pay its bills. Bad idea. The debt ceiling gives us a regular reminder of the economic incompetence of Congress, and that is just priceless.
And as Congress masters the ridiculous, there is trouble brewing on the Western front. California is going dry, and it is happening much faster than you might imagine. In an op-ed published Thursday by the Los Angeles Times, Jay Famiglietti, a senior water scientist at the NASA Jet Propulsion Laboratory in California, writes that California has lost around 12 million acre-feet of stored water every year since 2011. In the Sacramento and San Joaquin river basins, the combined water sources of snow, rivers, reservoirs, soil water and groundwater amounted to a volume that was 34 million acre-feet below normal levels in 2014. And there is no relief in sight. California now has only enough water to get it through the next year, according to NASA.
This is the “wet season” for California, but January was the driest in California since record-keeping began in 1895. Groundwater and snowpack levels are at all-time lows. The US Department of Agriculture announced that one-third of the monitoring stations in California’s Cascades and Sierra Nevada Mountains have recorded the lowest snowpack ever measured. About half of the state’s land area is experiencing “exceptional drought” conditions. The Bureau of Reclamation told central-valley farmers in February that the federal government wouldn’t delivery any water to them in 2015. Groundwater supplies have been shrinking since the 20th century, and as a result the ground has been sinking in the central valley.
Tomorrow, the State Water Resources Control Board is scheduled to vote on a conservation measure that would limit landscape watering, the strictest mandate directed at such water use the state has considered. Before California runs out of water, the state’s agriculture will run out of water. Many farmers will not be planting this year; that will be bad. Even worse, think about what happens if 35 million people run out of water.
Brazil’s government will present a package of anti-corruption measures after more than 1 million people, some of them calling for President Rousseff’s impeachment, took to the nation’s streets yesterday. Higher taxes and increased prices for government-regulated items are rankling Brazilians as the biggest corruption scandal in the country’s history ensnares powerful figures in her governing coalition. Brazil’s currency tumbled to the weakest level in 12 years on Friday, while the benchmark Ibovespa stock index has declined 15% since Rousseff was re-elected last October.
Vladimir Putin reappeared today. The Russian President had not made a public appearance in 11 days. Putin is in St. Petersburg to meet with the president of Kyrgyzstan. He did not say where he has been or what he was doing. So, I’m guessing he was just hiking on the Appalachian Trail. Meanwhile, Putin ordered nearly 40,000 troops in northern and western Russia to be put on full alert as part of snap-readiness military exercises.
December 2013, Target stores were hacked; payment card data for 40 million customers was stolen, along with the personal information of 70 million customers. Followed by hacks at eBay and Home Depot and other major retailers involving hundreds of millions more customers last year. The constant in these attacks? No criminal convictions. Federal authorities investigating last summer’s data breach at JPMorgan, which exposed the contact information of 83 million customers, are increasingly confident that a criminal case will be filed against the hackers in the coming months. The New York Times reports that officials believe several of the suspects are “gettable,” meaning that they live in a country with which the US has an extradition treaty. That would exclude countries like Russia.
The private banking arm of HSBC faces new criminal charges. A French judge has requested the investment bank be put on trial for allegedly helping wealthy clients avoid paying taxes. France is one of 10 countries looking into the claims.
The former Sears Tower is changing hands. Private-equity firm Blackstone has agreed to buy the Willis Tower for $1.3 billion, a record price for US office space outside of New York City. A group of investors paid $841 million for the Chicago landmark in 2004.
On Thursday, Tesla Motors will unveil an update to its Model S that will address its all-electric range in some form. On Sunday morning, CEO Elon Musk tweeted: “About to end range anxiety…via (over-the-air) software update. Affects entire Model S fleet.” Tesla’s electric cars already have the longest range of any electric vehicles on the road. The base model, with a 60 kwh battery, is EPA rated to go 208 miles. The 85 kwh version can travel 265 miles on a charge. Tesla similarly upgraded its Roadster electric cars last year, expanding their range to almost 400 miles between charges via an over-the-air update. Before the upgrade, Roadsters could travel about 245 miles on a single charge. By upgrading cars wirelessly, Tesla is ushering in a new world for the car business. One day, people might no longer have to buy a new car to get one with better or new features, just get an update.