HAPPY FOURTH

If you ever pretended to be a journalist--and mostly that's all we have today, pretenders--you may have gotten lucky and crossed paths with the works of HL Mencken.

                                                           

Warren Buffett might be known as the "Scold of Omaha," but that's really a badly repeated joke. Known as the "Sage of Baltimore," Mencken was, like all humans, flecked and flawed. An essayist, journalist, editor and, perhaps most of all, critic of American life and culture, Henry Louis Mencken for all his shortcomings got many things correct. And one of them on this Fourth of July most memorable is the statement quoted below.

From Plato to Mencken and way beyond, the tentacles of centralized government get ever longer in their assault on human dignity and liberty.

HL Mencken warned us about the spread of government and that slow slipping away of liberty when he said "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." For that matter Plato was probably the first to warned us about governments inevitable infringement of the rights of the people telling us so very long ago "When the tyrant has disposed of foreign enemies by conquest or treaty and there is nothing to fear from them then he is always stirring up some wary or other in order that the people may require a leader." I worry that the political parties have done such a fantastic job of spreading government s reach into our daily lives by sowing dogmatic discord throughout the populace. The straights hate the gays, the blacks don't trust the whites, the Northerner dislikes those in the south, the farmer hates the city dweller. We turn gay rights and family values into war cries and march off under our banner to demand our rights and more importantly privileges. The two parties rally the folks around their causes and drive a deep divide into the populace all the while strengthening their death grip on the seat of power and the public purse.

--dailyspeculations.com

WEAK OIL

Oil and safe-haven favorite gold were also under pressure as the unrest in Iraq and between Ukraine in Russia - supportive factors for both in recent weeks - remained in a lull.

The Iraqi army retook Saddam Hussein's home village overnight, while former Iraqi parliament speaker Osama al-Nujaifi said he would not run for another term, a move that should make it easier for the Shi'ite parties to replace Prime Minister Nuri al-Maliki with someone more widely accepted.

Russian President Vladimir Putin also called for better relations with the United States on Friday in a congratulatory message to President Barack Obama marking U.S. Independence Day.

Brent crude dipped back below $111 a barrel and was set to post its biggest weekly loss since early January. U.S. oil futures were down for a seventh straight and heading for their longest such run since 2009. [O/R]

"Supply fears are easing somewhat, but Iraq is setting a high floor on prices," said Victor Shum, vice-president of energy consultancy IHS Energy Insight.

--Reuters 7/4/14

Yielding 3.4%, the 15 Dow utilities disbursed a total of $4.96, up about 2% from $4.87 a year earlier. NiSource (NI), Southern Co. (SO), and Williams Cos. (WMB) raised their quarterlies. NiSource has an August pay date, while Williams announced a second boost for sometime in the third quarter.

Duke Energy (DUK) on Tuesday started the third-quarter dividend ball rolling for the Dow utilities with a boost in its quarterly to 79.5 cents a common share from 78 cents, for a 4.4% yield. Duke has paid dividends without interruption since 1926, and this is its seventh yearly increase in a row and heading for their longest such run since 2009. [O/R]
 --Barron's 7/3/14

Energy sectors currently under pressure from O's anticarbon policies could be in for relief, the report speculates. The Keystone Pipeline would be built, benefiting some refineries along the Gulf Coast, including those of Valero (VLO) and Phillips 66 (PSX) that can process lower-grade Canadian crude. Republicans also would remove restrictions on liquefied-natural-gas exports, which would lift prices. That, in turn, would boost coal demand, benefiting the Market Vectors Coal exchange-traded fund (KOL) and companies such as Arch Coal (ACI) and Peabody Energy (BTU).

Of course, it's still a long way until November. Never underestimate Republicans' ability to blow an election, as they did in both 2006 and 2010.
--Barron's  7/3/14

One last peek at the first half.

Asset Percent gain                                                               

Gold 9 percent

S&P 500 6 percent

MSCI World 4 percent

Commodity ETF 4 percent

Total bond ETF 2 percent
--MarketWatch 7/3-14

INTERESTING CHARTS

The charts below came from various sites: Business Insider, The Automatic Earth and Zero Hedge. You can as they say, read between the lines and draw your own conclusions. The first is a proxy for what unbridled money printing will do. The other two have to do with jobs, full and part-time, participation rates and the bogus numbers fed to the MSM by you know who. 

LIQUIDITY SPEAKS



Anyone who even remotely fiddles around with the labor market knows that part-time job creation far outstrips full time ones. They also know that employers are extremely selective, often requiring far more stringent qualifications for even entry jobs than in the past, putting an unannotated damper on job creations that never finds its way in the official numbers.




Participation Rate Hits 35 Year Low.

OUR VIEW

 

The news is out.

The winner of the bitcoin auction is a single person, a billionaire, the same Silicon Valley billionaire who mercifully wants to break California up into six states. A consummation for those who live there devoutly to be seen.

What ever tiny part up north is left the current governor and the legislature can reside, walled off to do their damage on a microscopic scale. A Western block replica of the Berlin Wall, this time keeping the ugly, bad and horrible not the good inside.

The billionaire is Tim Draper, founder of a Silicon Valley venture capital fund who apparently scooped up the $18 million in coins the government had confiscated. Supporters of the virtual currency feel it could become a viable option to fiat currencies, the kind governments world-wide continue devaluing to keep their leaky, bureaucratic-overloaded, debt-laden vessels afloat.

Draper was quoted as saying: "Bitcoin frees people from trying to operate in a modern market economy with weak currencies. Of course, no one is totally secure in holding their own country's currency. We want to enable people to hold and trade bitcoin to secure themselves against weakening currencies."

Draper is a much welcome advocate of free markets in an age of ever encroaching government regulations, spying and interference, a beacon of bright light against the darkness of the Washington-centered octopus. 

He is also the third generation in his family to make his mark in start-up investing, the real American dream, that the Big O is constantly trying to shackle.  

That's our view. We hope you know yours.

GET YOUR FACTS FIRST

GET YOUR FACTS HERE

Back in the day when we used to fool around with some serious medicine, a prominent colleague with an Ivy League pedigree would begin nearly every one of his responses with: "My bias is....."

Based on today's jobs report the market looks more and more bipolar with part of it egged on by growing confidence in the recovery and the other laden with fear about the likelihood of rising interest rates.

New highs in the indexes are becoming almost daily happenings but overall on the year these markers aren't up much.

Call it yin and yang, economic push-pull, financial schizophrenia or whatever you like. But don't it call boring. It's a decent bet something's on the brink. Honeymoons and Goldilocks markets don't last. If they did it would be a fundamental violation of human nature.

Like central banks, we humans usually find a way to screw things up. It kind of comes with the territory. Some might define this skill as bias. Most of the action before long three-day holidays is protective and tame.

The big July holiday is a doorstop between the first half and the last. A brief respite period to either cheer for more of the same or pray for change, depending on one's bias. Will this turn into a picker's market or one just over-inflated looking for a way station to deflate?

As always your guess is about as good as the next guru's. Just try to keep your bias reasonable, if such a thing exists. As Mark Twain once put it: "Get your facts first, and then you can distort them as much as you please."

COLLAPSED

Just for the mental exercise let's play the dot connecting game.

There are three of them in this round. The first is easy to understand because it has the term easy in it as in easy money. 

The other two can be described in a single word--collapse. Both risk premium and volatility, like a good magician, pulled their own Houdini, disappearing a while back without a trace.

And it's the without a trace that troubles all those who get mislabeled by the bulls and MSM as being bears.

Caution is obviously a word these folks have difficulty with since they try to use the old black and white parameter, if you're not with them you must be a bear. These are easy, loose terms to toss around, one of the hallmarks of modern day gurus and the shallow MSM.

Stock-trading volume in June hit its lowest level for the month in eight years, according to the Wall Street Journal, not a good sign that individual investors are rushing to call their brokers. That's a drop of 18% over last June when the tapering news bulled it's way into the headlines.

Though June's volume did exceed that in May, discount brokers, a favorite of mom and poppers, according to reports, are expecting a decline in trading of 20% or more leading to a decline "in daily average revenue trades for the second three months of the year."

We're not suggesting it, but some might view this as another dot that's collapsed.

THE BOOKIE BET

With the upcoming July 4th holiday approaching and the stock market being closed, next Monday will really be the start of the second half of 2014.

We all pretty much know what happened during this year's first half, so an appropriate question now might be: What's up for the second half?

The realistic short answer is nobody knows for sure. But many are expecting more bumpiness, a pretty safe call it seems to us, given what's gone before it. Among this group you'll hear such hedged terms as "stretched," "not cheap" or "fair valued" to describe valuations.

Much of the concern centers on the end of QE and when investor attention shifts to the possibility of rising interest rates. Some would suggest the reality of rising rates. But these two suspects just might be the most anticipated events since the turn of the century and the predicted Y2K melt down that never melted down.

Granted there are many more factors involved now, more dreariness seemingly afloat around the globe, not to forget fears about rising inflation that many seem inclined to taking a head-buried-somewhere-the-sun-don't shine approach to.

We'll leave out the deflation worry mongers for now because they've been the darlings of MSM for some time. Perhaps a more accurate term would be uncertainty. But if past is any kind of prologue to the future, stretched valuations can remain stretched for a while as in longer than most think.

In our view, however, many of the assumptions about those valuations have a built-in fallacy. That valuations must always reach previous bubble or, to quote a term making the rounds today, outrageous proportions for something ugly to occur.

That's brings up another interesting question: Just what is ugliness? The kinder, gentler response is the absence of beauty. Most asset classes from bonds to gold to stocks have been up during the first half, not a normal thing in markets. It happens about every once in the twelfth of never.

As any bookie worth his bets will suggest the odds against that continuing are ones he just might want to discuss with you.

NOT SO CHEAP TRANSFER

 

 If you've ever rode on any public transit system you're most likely familiar with transfers.

Transfers usually have a slight extra charge for allowing you to connect with another part of the transit system to get to your destination. It's simple concept.

A good part of risk management is about transfers. For a fee you can buy an instrument that allows you to transfer that risk to someone else. Most people know them as insurance policies but there are many other forms.

If you buy a home and have a mortgage, the lender usually mandates what's called a homeowner's policy to protect you and the lender from something both presumably don't what to happen, unexpected damage to the property.

It's really just a put option. It has a beginning date and an ending date, cost a certain amount and the closer it gets to expiration the less it's worth if you want to redeem it. In the world of option trading it's known as a decaying asset, much like you and me.

The point is the only way that option can go up in value is if something neither you nor the lender wants to happen. Then it becomes worth a lot more than the funds you most likely begrudgingly coughed up to own it.

In the world of high finance there are all kinds of options, many with fancy names like swaps, Cocos, CLOs, etc., not just the ones that get traded daily on the option exchanges. And the denizens of Wall Street and investment banking are never short on ideas about how to create new ones.

What all these fancy items share is the principle of transfer. Hypothetically, they symbolize something physical behind each transaction like a piece of paper or so many shares of a stock. In the commodities world you could be forced to take physical possession.

Imagine the third Friday of some distant month they deliver two tons of fresh elephant manure to your door. It's a huge, smelly risk 

And that's just about where we are now with the Federal Reserve. Having taken most of the risk off their long-time friends, the big banks, the Fed with their crazy QE game and low interest rates have transferred that risk to the global markets.

In plain English, you and me and all those yield starved folks including institutions like asset managers and pension funds who have been forced out onto the same limb seeking some income oxygen. If you think about junk bonds here, you'll recall that the Fed prohibited the big boys from supplying their usual liquidity for corporate bonds.

It was a regulatory form of a slap on the big boys' wrists, a conciliatory signal to the masses that "We got this covered!" According to reports, the bond inventory that these big boys now hold is at a record low, hovering somewhere around $50 billion or a miniscule 0.5% of the entire market.

Transfers have their place and their function. Unlike those transfers one gets on the transit system, however, this is one that in the end won't be cheap.

COPPER OVER SOCCER

 Copper prices are still down 6% so far this year.

But that may be changing as concerns about the China slowdown appear to be waning. Investors will find out more tomorrow when China's PMI  gets released. Other possible reports set for this week--also on Tuesday--is the U.S. ISM followed by Thursday's Bureau of Labor Statistics release of its Employment Situation where some economists are expecting a fifth straight month of good news on the job growth side.

As for copper it's partially been in a funk owing to concerns about Chinese copper financial shenanigans usually described in a kinder, gentler term, irregularities, a sort of a business or MSM invented variation of suspect of interest.  

In short, using copper as collateral for loans could skew the real demand picture and create major problems if true and anything goes awry, not that they ever do in the economic world of international finance. Phony loans of the stuff disturb the supply and demand curve. A weaker dollar may also be contributing to the new found better feeling about copper.

At any rate, copper jumped up 1% in two hours this morning pushing the metal to its highest price in over 90 days. If a couple of those reports bring good cheer, it will back the Fed further into a decision corner it's been trying to avoid for months.

At the risk of creating some enemies, it may be fun to be a fan, unless, of course, your team doesn't win, so forget soccer balls for the nonce and keep your eye on copper spools.

BETTER PART OF DISCRETION

TrimTabs, a well-know independent research group that focuses on supply and demand of stock shares and money flows, recently reported that much of the hoopla about companies buying back their shares--a move that many believe has buoyed share prices--is waning.

Founded in 1990, one of TrimTabs premises is that stock prices are more a function of available money than just value. It's another way of saying it's about supply and demand not any different from any tradeable goods in the market.

Buybacks usually occur for one of two reasons: there's a lot of easy money around, as is the case now, or there's actual hidden value out there that's gone unrecognized in general. Some might refer to it as the Buffett play. 

The moral of the story is this. As James Authers of  the Financial Times points out today in his column, "Tide turning against buybacks ahead of the market top," one of the so-called pillars supporting and even helping push them higher is apparently ending. It's a mouthful of an headline, but worth a look if caution is still a registered word in your lexicon

Citing research from TrimTabs, Authers notes that money flowing into corporate buybacks the last two months declined to its lowest level since the first of 2013.  Moreover, announced buybacks, according to TrimTabs, peaked in February 2013 and have drifted lower ever since.

So far this June around $22 billion went to buying back shares compared to about $63 billion last June. And there's more. Announced buybacks among U.S.companies, 38 so far this year, has trended to its lowest level since 2011, according to Authers.

Some have called buybacks the classic example of corporations' lack of imagination, a tactic resorted to when you can't come up with any good ideas to spend your cash. Recall a couple of years back one of MSM's raves was how much cash U.S. corporations were sitting on. It's sort of a business version of shoppers who buy just to be buying because they got the money.

But buybacks, like insider buying, can also represent a value play when corporations view their own shares as being cheap.With the huge run-up in the market most of that has all but changed for arguing this point in our view. Carried to an extreme, what this falls under is the category of  the magician's art, financial engineering versus real growth.

The other side of that marker is insider selling, a figure that, according to TrimTabs, is up dramatically in recent weeks. A quick note on this. Given the recent take off in energy, much of it caused by the Iraqi situation, here's just one example. Twelve different insiders at Pioneer Natural Resources Company (PXD) between the end of May and now unloaded 90,400 shares.

Now one company does not a trend make. But there were no purchases during that time and four of the 12 cut their holdings by more than 10%. 

No doubt bulls will come up with counter arguments like M & A activity, arguing that a number of them have been cash deals. But there's no unwritten rule that says cash deals create value. Call it a show of confidence or whatever you want. We call it caution.

The market seems set to go higher and there's no shortage of folks who want that. But pulling a few coins off  the table in the next  upward burst, if there is one, and going long some options if you need to be long might just be the better part of discretion.

ALONG THE WAY

 

Story has it back in my younger days as a cub reporter when if you have to write one more obit page or another story about a church bazaar you think you'll vomit, I was assigned  to cover one of those political gatherings where the top politician's smarmy  PR guy tries to wiggle his candidate's way into your byline via the libation route.

 In the medical profession it's called liver rounds.

The top dog was a Congressman whose name shall remain as anonymous now as it was then. It wasn't as if he didn't have some clout 'cause he did. He was just a glad handing phony with a knack for delivering the Washington bacon to the home crowd. He loved it and so did they. Re-election every two years sealed.

My mother raised us to always be kind to old dogs, children and, whenever possible, drink watermelon wine. Besides being an an aphrodisiac, it soothes the urinary tract. So knocking back a few, no problem.

Hang around politicians and bureaucrats long enough and you soon can read them out loud like one of those classic children's books. Pretty much that's what they are. Self-centered, ego-driven, immature kids running around in adult bodies. Oh, and I almost forgot about temper tantrums when things don't go as planned or someone asks the right question at the wrong time.

On this particular occasion there were some rumors floating around about some land in the sticks that a big federal government project was set to plow its way through the middle of and two of its largest owners were guess who? If you say the Congressman and his PR guy you're gonna ruin the story.

Ikea the big Swedish retailer steps up to the minimum wage plate, announcing what amounts to a 17 % hike in wages set to kick in next year. The huge retailers has 36 stores in the U.S. and says its raise is based on a living-wage calculator that includes such items as housing, food, transportation and medical costs. There's even a provision for taxes.

Many analysts believe that wages are the critical shoe in all this inflation talk. If wages rise and firms can make the expected price hikes that usually follow stick, it'll be off to the races time again. So Fed Chair Janet Yellen with her noise comment may prove more prophetic than anyone thinks.

With any surprises it might someday rival another Fed Chairman's now infamous comment about irrational exuberance. For Yellen's sake one only hopes that unlike the former this one wasn't plagiarized.

And, too, Ikea is not alone in raising minimum wages. The lists is growing..

One of the things we enjoy reading is statements like this one that appears in this week's Barron's: "With no recession on the horizon, there's little need to fret about the bull market's imminent demise Strong economic gains, however, don't always lead to big stock gains."

Correct on both accounts. Inflation is what we're talking about. And inflation can be somewhat good for stocks, but it can also send pocket-book-rattling shivers up the spine of shaky investors that are needed to drive stock prices higher. If the Fed turns out to be wrong--and we believe they already are--it won't say much for their so-called vote of confidence.

There's another term here you see little mention of, though we've espied a few--stagflation. Now you can burn the midnight petrol checking out all the data of the pros and cons apologists will cite to prove their points of view if you want. And that could bring up a really big question bureaucrats and politicians never want to hear:                      

 "Who in the hell is in charge anyway?"

Get caught up in the exercise at your own peril. Just be aware it hasn't made the rounds in a while and like the man said:  "What goes about comes about."   

Earlier today Federal Reserve of St. Louis President James Bullard, though a non-votng member, added some fuel to the debate by saying he thought the market was correct in looking past the dismal 1Q report "amid other signs that the economy is improving."

Speaking on the Fox News program "Sunday Morning Futures," Bullard added "... he expected that the economy would grow at around 3% for the rest of the year, and that unemployment would fall below 6% in the second half. He also said that the Fed’s preferred measure of inflation could approach its 2% target by year-end" 

The economy is in better shape than most realize, Bullard contended:  “Both financial markets and the public at large doesn’t realize how close we are to normal, compared with postwar history.” 

Should he turn out to be correct, the water filled balloon known as global markets will definitely bulge somewhere. Figure that out ahead of time and you'll save yourself a lot of unnecessary pain. And if you're lucky enough you might make some serious money along the way.

Until next time, that's the way the story has it.