In Midland, Texas, last week. Visiting an incredibly productive business that, a month prior, I did not know existed. Midland is not the prettiest of towns. Though, where God may have deprived her of beauty, he overcompensated with ingenuity, productivity and wealth. Well beyond her modest size. Midland's economy may as well be occurring on the moon, as much as it differs from most of the nation. Which alludes to the subject of this week's essay, below.
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Q1 earnings season has begun. Wall Street anticipates bad news. Which may be the best news we've yet heard.
For the first time since the Great Recession, many believe that earnings will contract for two consecutive quarters. So catalyzing an "earnings recession." Energy stocks will hurt returns. As will the dollar's continuing growth. Which will lead to an earnings recession, so adversely impacting investors. Of course, those lower energy costs have been a boon for consumer spending. Which serves to help earnings. And expectations have been lowered to a point that upside surprises may be likely.
In other words, there remain two sides to every story. Alas, we'll have to wait and see.
After yet again bouncing off its 125-day moving average, the S&P 500 knocks again on the upper ranges of resistance. We'll soon see whether the index has the temerity to break through resistance at the high-water mark of 2,117.
Aside from low interest rates and stable inflation rates, we believe the increasing belief that the Fed will delay interest rate hikes has also leavened equities. FOMC member and economics wunderkind Narayana Kocherlakota believes that moribund economic growth might delay rate hikes might until 2016. Manna to Wall Street's prying ears.
Further, there exists another reason for the Fed to hold off: Interest rates affect debt pricing. Including the trillions of dollars in debt which ties the U.S. economy together. Higher payments could eviscerate budgets at the federal and state levels. Likely no small coincidence that the Fed changed policy emphasis to "data dependence," as it provides an excuse to avoid raising rates during a weakening economy. Not to mention that it grants governments more time to raise tax revenue before having to deal with higher interest payments.
Finally, falling Q1 U.S. industrial production provides even further evidence that the economy may be cooling. Once can't exactly drop the booster rockets before the craft has achieved the velocity required to escape the stratosphere.
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The Iran nuclear deal has come under much scrutiny. Especially as the only supportive faction appears to be the White House. Israel? Against it. As is much of Europe and the Middle East. Former Secretaries of State Henry Kissinger and George Schultz penned an op-ed in The Wall Street Journal last week. Essentially saying that the prospective deal gives too much away to achieve too little. Of course, don't tell that to Iranian Supreme Leader Khomeini, who claims that the deal doesn't grant enough. Khomeini wants sanctions lifted immediately. And refuses to allow foreign inspectors onto Iranian nuclear facilities. All of which has Israel nervous. More so now that Russia has announced its intention to begin selling missiles to Iran.
Bottom line? This deal smells odd to most arbiters. Are we really going to force a questionable deal through? A the cost of unwinding sanctions? Talk about precarious territory.
In Asia, Japan has dethroned China as the top foreign holder of U.S. Treasurys. China had held that spot since the financial crisis. The result of Japanese policies pushing down interest rates as Japanese investors search for yield.
Meanwhile, Hillary Clinton (HRC) removed any doubt about her intentions to run for the White House, announcing her second campaign for the presidency on Sunday. "Everyday Americans need a champion, and I want to be that champion," stated the former secretary of state.
Seriously, who doubted she was going to run for president? HRC wants the presidency like Bill wanted Monica Lewinsky. Nobody doubts HRC's bona fides. Nor does anyone doubt her polarizing nature. But whomever wins the DNC's nomination will have to convince the public that the White House should remain in Democratic hands for a third consecutive term. A feat that hasn't been accomplished for more than 60 years.
Marco Rubio also announced. The Florida Senator will seek the nomination in what will soon become a very crowded GOP field. I'd call Rubio green. But, he brings more experience to the table than did our current president when he won his first presidential election. So that line of reasoning has, unfortunately, been vacated.
In corporate news, GE seeks to sell financial assets and focus on its industrial strengths. Private equity firm Blackstone (BX), which we own, will oblige by buying GE's real estate portfolio. This greatly benefits the Blackstone Mortgage Trust (BXMT), which we also own. Sending the stock up 10 percent over the last three months. In addition to its 6.60 percent dividend. Blackstone Group's head of real estate Jonathon Gray? Still the best in the business. When you can invest in scale, with the best talent, and have a complimentary macroeconomic backdrop? Everyone wins.
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The Good
Initial jobless claims beat expectations and lowered the four-week moving average to the lowest levels since 2000... Job openings have increased. As has the quit rate-a sign of employee confidence... Mortgage applications have risen, suggesting more home buyers... Global PMI has strengthened... Business lending has boomed...
The Bad
ISM services posted a slight miss, though the 56.5 reading is still solid... Rail traffic remains weak, and is unchanged year over year... High frequency economic indicators point to weakness...
The Ugly
Teenagers and smartphones. Twenty-five percent spend nearly all their waking hours online. Mostly on social media. Raising fundamental questions about productivity and access to information. And the unexpected consequences of such access. PBS story here.
President Compares Nuke Deal Critics to Iranian Hardliners
The White House has attempted to eradicate all dissent by comparing those not in favor of the currently proposed Iranian Nuke deal with the clerics running Iran. Even as no less authorities than former Secretaries of State Henry Kissinger and George Schultz have said that the Iranians have somehow gotten the upper hand during negotiations from which the U.S. team claimed it would be ready to walk away. Well, they didn't walk. And today Iran supreme leader is calling for further concessions from western nations. Article.
Ron Paul on Rampant Military Spending
One would think that the post-Cold War dividend would have been less military spending. Yet, that's not been the case. In this piece, former Congressman Ron Paul explains that military spending has not diminished because member of the public and private sector have fought to preserve budgets, projects and so the corresponding profits that flow from the military industrial complex.
Unequal, But Happy
Despite soaring inequality, worsened by the Great Recession and continued rumblings about the one percent, Americans remain a fairly happy bunch. Regardless of what politicians say. This is why.
Learn from Dr. Hannibal Lecter
Remember Tom Harris's character Dr. Hannibal Lecter? Guy was brilliant, right? The aesthete psychiatrist cum serial killer could remember everything. Need a recipe for baked camembert? All the notes to Mozart's Piano Sonata No. 10? An escape route from the local psychiatric hospital? Lecter could help. Because the not-so-good doctor had utilized a long-proven memory tactic known as the "mind palace." Now you can too. Article.
The Economics of the Rolling Stones
Forbes writer John Tamny has written a book entitled "Popular Economics: What the Rolling Stones, Downton Abbey and LeBron James Can Teach You About Economics." Tamny takes popular culture, teases out the economics lesson, and delivers it in such a way that illuminates, educates and, most importantly, entertains. More here.
Even High Earners Not Saving Enough
Thought that the savings glut was limited to the lower middle class? Think again. Even Americans earning over $75k per year are woefully shy of any semblance of financial autonomy. So affirming the idea that immaturity and lack of vision bridge all geographies and demographics. Story.
Krzyzewski the Greatest Coach Ever?
Coach K's Duke team just won his fifth championship. And while we're partial to Coach John Wooden, Coach K has achieved his modicum of success in a period of hyper-competition and lots of parity. Here, Sheldon Hirsch explains why Duke's coach of 35 years may just be the best college basketball coach ever.
Weekly Results
Market indices finished higher last week. The Dow Jones Industrial Average rose 1.66 percent. The S&P 500 Stock Index also gained 1.70 percent, while the Nasdaq Composite advanced 2.23 percent. The Russell 2000 small cap index rose 0.73 percent. And the 10-year Treasury bond yield rose 4 basis points to 1.95%. Gold added $5.75 per ounce, or 0.48%.
Check out JP Morgan's weekly recap here.