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Industrial Production Post Third Consecutive Annual Decline: 90% Chance Of Recession

In 17 of the 19 times in the last 100 years that Industrial Production has contracted for 3 consecutive months, the US economy has entered recession. Today 0.7% drop YoY is the 3rd month of declines.

The only times in the last 100 years that 3 months of US Industrial Production contraction has not coincided with a recession was in 1934 and 1952… (and the current decline is larger than 1952’s in aggregate)

While the MoM rise of 0.9% (against a revised 0.7% drop in December) was the “strong US economy” headline du jour, a simple scratch below the surface shows most of the surge was from Utilities:

*U.S. JANUARY UTILITY PRODUCTION RISES 5.4%; MINING UNCHANGED
*U.S. UTILITY OUTPUT SHOWS BIGGEST GAIN SINCE DECEMBER 2009

So we suggest not getting too excited about that being sustainable.

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Morgan Stanley Admits “Our Advice Has Been Horrendous”, Blames “Bizarro World”

While we have generally disagreed with Morgan Stanley’s Adam Parker flipflopping on stocks some two years ago, or just as the market was topping out, we can’t find fault with his latest note released today in which he openly admits that “our portfolio advice has been pretty horrendous lately. As my 90-year old Latin teacher used to tell the class in 1985, “son, you are in left field, without a glove, with the sun in your eyes.”

For those who follow our portfolio, we did quite well over the five years from 2011-2015. But, our portfolio just had its worst month in 61 months in January, and things have not improved in February. The market is down more than we thought it would be. Our biggest sector bet has been financials (particularly credit cards). As an investor recently said to us at a conference, “I am doing a lot of things, just nothing with confidence”. Doing the opposite of what we recommended would have been better. Bizarro World. Or at least hopefully not the real world.

Why has said advice been horrendous? In three words, blame “bizarro world.” Here’s why:

Martin Marietta reported last week, and they and a couple of other materials companies have blamed their poor quarters on the rain. Even Milli Vanilli’s success with this line turned out to be fake. The rain? Oh, the stock went up a lot that day. Bizarro World. The credit card companies are discounting a consumer recession. The banks are discounting an industrials recession. But, Visa said volumes were good in January, and jobs, housing, delinquencies, confidence, and other metrics appear to belie the market price action. Bizarro World. Companies with good results are being hammered. Companies with bad results have stopped going down, with freight, WMT, and other prior losers outperforming. Bizarro World.“

We truly find it amusing how increasingly more “serious people” allign with our cynical view of the “market”, one in which nothing makes sense and merely reporting on day-to-day centrally-planned events, which have zero logical continuity or cause and effect, is grounds for constant entertainment.

What is Adam Parker’s recommendation?

Are we on a cube-shaped planet? Should “Us do opposite of all Earthly things?” Everything seems backwards. Sell winners, buy losers, own staples in both up and down markets. Just do the opposite of what makes sense. Bizzaro World.

In other words, this:

No Adam, not Bizarro world world, a world taken over by central planners. And yes, even the most rigged markets can go down as well as up. Enjoy.

And we hope our readers enjoy some of the excerpts from Parker’s full note because it is truly an amusing admission of just how broken everything is.

Bizarro World

What are the other major client concerns?

China economy and currency devaluation: We are definitely concerned about the China economic slowdown and the tighter financial conditions that ensue from the currency depreciation. Morgan Stanley’s house view is that the depreciation will continue (6% more this year and 11% more through year-end 2017), and it is hard to argue this won’t continue to impact emerging markets and therefore demand for US exporters as these countries’ currencies weaken. From the US equity perspective, we are generally avoiding stocks with exposure to the Old Economy – no metals and mining, no materials, less than the benchweight in industrials, underweight energy. In our judgment clarity on the trajectory of the Chinese economy and stabilization in major economic factors seem like prerequisites to get backlog growth and higher book-to-bill ratios for the exposed US companies in industrials and technology. Among the items we are concerned about, after a slowdown in the US consumer, next on the list is further Chinese economic deceleration or currency depreciation.

Fed impotence: Many investors have been suggesting that the Fed and frankly all monetary policy makers globally have run out of power. There are roughly 15 countries with negative yields out seven years on the curve. So, investors are asking about monetary policy efficacy, cuts not hikes, the zero bound, and QE4. Is 4 bigger than infinity? It is definitely true that the bubble is in the belief in the policy makers. Investors are worried that US economic conditions need to really deteriorate for the Fed to admit the hike was wrong, so markets will likely continue to go lower if economic news is bad, and another group of investors worry that if the Fed acts, it won’t be effective. We don’t think lowering the front end to zero will be good for stocks. We do think a QE4 would be, or at least we won’t fight it. Last week we received an article about negative CORPORATE bond yields from an investor. That being forwarded to us just about summarizes where people’s heads are right now. In the end, Morgan Stanley’s economic base case is still slow economic growth and slow retrenchment from the Fed, but our judgment is that bad economic news won’t be rewarded. We are not as concerned that the Fed will make a mistake in terms of raising the front end, but it is Bizarro World.

Earnings season and outlook: We had thought the EPS season would assuage fears that formed and grew in early January. The disturbing development is the price action this year, where the rewards for beating estimates has been small, and the penalty for missing has been harsh. This is new from last quarter, where there were high rewards for beating and big penalties for missing – but of similar magnitude. (Remember the Thursday night in October of last year when Amazon, Google, and Microsoft all beat expectations and collectively added roughly $100 billion of market capitalization before the open the next morning?) The big reward for beating expectations hasn’t continued this quarter. So, if beating isn’t rewarded and missing is punished – isn’t that also called a down market? EPS season in aggregate has been fine – 85% of the market cap has reported and there’s been 4.1% upside to the embedded consensus numbers, about average for the last 27 quarters, all of which have shown upside for the US market. Forward guidance has come down sharply, possibly a negative harbinger but also making 2016 expectations really low relative to history and potentially too low in absolute terms. The long-term average for the bottom-up estimates is for 14% growth at this time of year, and it is currently around 3% for this year. That seems pretty low to us. Earnings will end up about $118 in 2015, with $5 in energy. They were $119 with $13 in energy in 2014. The current consensus is $122 for 2016 with $2.30 in energy. So, there is a diminishing impact of the lower oil price. Moreover, earnings in 2015 grew around 6% ex-energy. Expectations don’t seem that high to us right now for the full year 2016. We are at $125.9 – above the bottom-up number, a place we have never been before at this time of the year.

The oil price…: We interpreted the energy sector news during this earnings season as worse for the oil price recovery in the short term. Why? Most of the big companies reporting aren’t really guiding for that much of a US production cut. Hess, Noble, Anadarko, and others are guiding to big capital spending cuts but to production being barely down. Anadarko would rather cut their dividend than more dramatically reduce production. Imagine if we told you 18 months ago that oil would be down 75%, the rig count would be down 75%, capital spending would be down 20%, and production would be relatively unchanged. Wow! The technology improvement has been massive. Exxon announced they will do a 25% capital spending reduction and will now only do $23.2 billion this year! That still seems like a huge number in absolute dollars.

Fixed income guys are smarter than equity guys: Personally, we are not quite as worried about this issue as others. Fixed income guys are always negative and many of them were advising SPX puts early in 2013. Nonetheless, they are now in all their glory, even if they will get paid less. There are frequent periods in the past where high yield and equity didn’t move in tandem (tights in 1997 and equity market peak in March of 2000). The energy patch obviously explains part of it (SMID-cap E&P are different from XOM). The consumer patch explains part of it (the companies that are growing OK have no debt or have investment grade debt). The financials are in far better condition than prior cycles. The fraction of corporate debt that is long-term relative to short-term is at an all-time high – companies took advantage of the market and termed out. Interest coverage (particularly ex-energy) is in WAY better shape (several turns higher) than prior cycles. So, maybe both equities and high yield will be correlated for now, but ultimately we resist the notion that we hear all the time (internally and externally) that the bond guys are much smarter than the equity guys and high yield leads. We are both equally wrong at times. Why did financial stocks in Europe seem to lead the financial credit in Europe?

Europe: for vacation but not for stocks? One thing we worry about is that US investors are not mentioning Europe very much as a risk . It seems odd to see the Euro Stoxx down 16% in local currency year to date (about 7% worse than the S&P500) and to also think people are pretty complacent about Europe. Investors have said to us lately, “I am worried that the US banks stocks are telling you the US is in big trouble economically,” but they seem less worried that DB being down 54% (from its 52-week high) is a bad sign for Europe. In our meetings in the US the last few weeks, no investor asked about Europe as a risk factor. This reminds us of a year ago when no one was asking about China as a potential risk. When we articulated in our year-ahead outlook we preferred US to European equities, we had thought the US would be up 4% and Europe maybe just 1-2% this year. We did not envision a down 9% vs. a down 16% scenario.

Parker’s conclusion: buy because, well, there is no reason to buy.

What’s the bull case? The positives are this: no one is articulating a bull case for US equities with conviction. Earnings expectations are potentially low. There is some fiscal stimulus this year (vs. drag previous years). The Presidential candidates don’t appear to be multiple expanders now, but they will get more centrist and the riffraff will be removed in a few more weeks. Sentiment is low (two weeks ago an investor on a panel we moderated said “It is a multi-variable world and every variable is negative”.) The US probably looks relatively better than other parts of the world. So maybe, the bull case is just that no one can articulate a bull case.

Or perhaps, just perphaps, if no bull case can be made, sell?

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#BernieBrosSoWhite? Real Gap in Sanders Support Not from Gender but Race, Ethnicity

The youth appeal of septuagenarian Sen. Bernie Sanders has been the big story of the Democratic primary so far. But is this another instance of pollsters and pundits overlooking minority millennials? Several recent polls show that among young non-white Democrats, Hillary Clinton is still the top candidate.

Put another way, it’s simply not true that “Sanders dominates among younger voters in nearly every racial and gender category,” as NBC reported a few weeks ago.

In a January USA Today/Rock the Vote poll, for instance, Sanders was the preferred liberal candidate among millennial Democrats and independents overall, leading with 46 percent to Clinton’s 35 percent. Among millennials of color, however, Sanders beat Clinton by a mere one point (42 percent to 41 percent).

In a national poll conducted January 19-24 by the Beck Research for the American Federation for Children, Democratic millennials as a whole were again drawn strongly to Sanders (64 percent to 29 percent). But among young Hispanic Democrats, Clinton led 52 percent to Sanders’ 38 percent.

And in the latest NBC News|SurveyMonkey poll—conducted online from Feb 8-14—Sanders was the top candidate for 47 percent of white Democrats, but just 20 percent of black Democrats chose Sanders, with 75 percent supporting Clinton. This racial divide held true for millennials, with 64 percent of young black Democrats in Clinton’s camp, while just 25 percent favored Sanders. Among young white Democrats nearly the exact opposite was true, with Sanders the top choice of 75 percent and Clinton just 22 percent.

While America may have “millennial fatigue,” the generation is just starting to reach its peak political power. Now that nearly all millennials have reached voting age (by the widest parameters, the last of this cohort were born in the year 2000), they stand to rival boomers for political impact in the upcoming election. The current crop of 18- to 35-year-olds will make up 31 percent of all eligible U.S. voters in 2016, the same percentage of the electorate populated by boomers. (Gen X represents a quarter of eligible voters this year and pre-boomers 13 percent.)

Because young voters tend to turn out in lower numbers than the olds, boomers are still likely to outpace millennials at the 2016 ballot box. But any candidate who can harness the millennial vote still stands to gain significantly. And among millennial voters, Latinos are the biggest force to reckon with. They make up 44 percent of the eligible millennial voting population, more than any other racial or ethnic group. Whites account for just 27 percent of eligible millennial voters, blacks for 35 percent, and Asians for 30 percent.

Yet the electoral influence of Latino millennials may be minimized by their concentration in a few geographic locales. While Latinos do make up a sizable portion of voters in some key areas—including Florida (18 percent), Nevada (17 percent), Colorado (14.5 percent), and Illinois (10.5 percent)—more than half of all eligible Latino voters can currently be found in just three states: California, Texas, and New York.

Low voter turnout may also dampen Latino political impact. In the 2012 elections, Latinos had significantly lower turnout than whites or blacks, at 48 percent versus 64 and 66.6 percent, respectively.

While young Latino turnout may be low, however—and white youth turnout has been flat—young black voters have been hitting the polls in increasing numbers (though there is some skepticism among black millennials that this will continue). Black voters as a whole, including black millennials, tend to lean overwhelmingly Democrat. And among these black Democrats, Clinton has a significant edge.

A national survey conducted by Public Policy Polling (PPP) at the beginning of February found Clinton besting Sanders among Democrat-leaning voters as a whole, with 53 percent support to his 32 percent. But this difference was especially stark among black voters, with whom Clinton’s support sprung to 82 percent. She was also rated favorably by 79 percent of black voters, with just 9 percent rating her unfavorably, while only 27 percent of black voters rated Sanders favorably and 23 viewed him in a negative light.

“Bernie Sanders continues to make in roads with most segments of the Democratic electorate,” said Dean Debnam, president of PPP. “But his continued struggles with African Americans could give him a lot of trouble when the contest moves beyond New Hampshire to states where there’s racial diversity.”

Indeed, Sanders seems to be in for a rough patch ahead in the Southern and Mid-Atlantic primaries.

In South Carolina, which will hold its primary on February 27, PPP this week found Clinton leading 55 percent to 34 percent over Sanders among all likely Democra#mce_temp_url#tic-primary voters, propelled largely by support from the black electorate. In fact, Clinton and Sanders were tied among white Democrats in South Carolina. But blacks make up more than half of likely Democratic voters, and they prefer Clinton by 40 percentage points (63 percent to 23 percent).

Another poll of South Carolina voters, this one conducted from February 10-12, also put Clinton ahead overall, with 59 percent of the likely Democratic vote compared to Sanders’ 40 percent. White Democrats in this poll preferred Sanders by nearly 30 percentage points, but blacks broke for Hillary 73 percent to 26 percent.

In North Carolina, a PPP poll from mid-January found that Clinton also enjoys hefty support from black Democrats, who make up about a third of the primary electorate, in the Tar Heel state. Just 12 percent of black Democrats preferred Sanders, while 77 percent said they would vote for Clinton. Meanwhile, 81 percent of black Democrats said they have a favorable opinion of Clinton, while only 43 percent felt favorably about Sanders.

The former secretary of state also outshines Sanders in Georgia, which will hold its primary on Super Tuesday (March 1), and Maryland, which votes in April. In Maryland, black Democrats prefered Clinton 10-to-1 over Sanders when polled in January, while white Democrats preferred Sanders by a little less than 2-to-1. Overall, 40 percent of Maryland Democrats said they would vote for Clinton, 27 percent for Sanders, and 5 percent for Martin O’Malley, while 28 percent were undecided.

In Georgia—where blacks make up more than half of the electorate—a poll from Atlanta’s Channel 2 Action News found Clinton favored by 63 percent of likely Democratic voters, with just 21.5 supporting Sanders and 15 percent undecided. “Clinton far and away locks up the African-American vote,” the station noted, with nearly 77 percent favoring Clinton and just 11 percent choosing Sanders. Among white Georgia Democrats, Clinton only led by about 15 percentage points.

Little presidential-polling data exists on Asian-Americans specifically. This is a group that has tended to lean Democrat for the past several decades, although nearly half of Asian-Americans now describe themselves as politically independent and, in 2014, Republicans won the overall Asian vote by one percentage point nationwide.

Both the Republican and Democratic National Committees have been making plays to court Asian-American voters recently. Asians are the fastest-growing racial group in the United States, but also the least likely to vote. They accounted for just 3 percent of the electorate in 2012, and are expected to make up 4 percent of the electorate this year. Asian-American political organizers say they’re currently focusing efforts on Nevada, where 8.3 percent of the total population and 7.3 percent of eligible voters identify as Asian or Pacific Islander. The most recent polls show Sanders and Clinton tied among likely Democratic voters there.

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Apple Refuses to Build iPhone ‘Backdoor,’ South Dakota Passes Bathroom Bill, No Celiac Disease in Ted Cruz’s Army: A.M. Links

Apple will refuse a federal court order saying it must unlock an iPhone used by one of the San Bernardino shooters. “We have great respect for the professionals at the FBI, and we believe their intentions are good,” Apple CEO Tim Cook said in a letter. But in requesting the company build a backdoor to the iPhone, the agency has “asked us for something we simply do not have, and something we consider too dangerous to create.”
Ted Cruz scoffs at the idea of providing members of the military with gluten-free meals.
Celinda Lake, Democratic strategist, says young liberals aren’t that fazed by the possibility of a female president but would really like to back a gay or transgender candidate.
Celebrities take selfies in refugee blankets. You know, for art.
“The Constitution is pretty clear about what’s supposed to happen now,” said President Obama, chiding Republican senators for suggesting they would refuse to confirm any Supreme Court nominee he offers.
The South Dakota legislature has passed a bill that would prohibit public-school students from using bathrooms that do not correspond to their biological sex.
A former student at the University of Montana has been awarded $245,000 over the university’s “unfair and biased” rape investigation.
Carnegie Mellon researchers have attempted to quantify the amount of sex-trafficking that takes place around major events such as the Super Bowl. To do so, they classified every online escort ad stating “new to town” or “first appearance” as an obvious sex slave.

Follow us on Facebook and Twitter, and don’t forget to sign up for Reason’s daily updates for more content.

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The ban on cash is coming. Soon.

This is starting to become very concerning.

The momentum to “ban cash”, and in particular high denomination notes like the 500 euro and $100 bills, is seriously picking up steam.

On Monday the European Central Bank President emphatically disclosed that he is strongly considering phasing out the 500 euro note.

Yesterday, former US Treasury Secretary Larry Summers published an op-ed in the Washington Post about getting rid of the $100 bill.

Prominent economists and banks have joined the refrain and called for an end to cash in recent months.

The reasoning is almost always the same: cash is something that only criminals, terrorists, and tax cheats use.

In his op-ed, Summers refers to a new Harvard research paper entitled: “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes”.

That title pretty much sums up the conventional thinking. And the paper goes on to propose abolishing, among others, 500 euro and $100 bills.

The authors claim that “without being able to use high denomination notes, those engaged in illicit activities – the ‘bad guys’ of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their ‘business models’.”

Personally I find this comical.

I can just imagine a bunch of bureaucrats and policy wonks sitting in a room pretending to know anything about criminal activity.

It’s total nonsense. As long as there has been human civilization there has been crime. Crime pre-dates cash. And it will exist long after they attempt to ban it.

Perhaps even more hilarious is that many of these bankrupt governments have become so desperate for economic growth that they now count illegal drug activity and prostitution in their GDP calculations, both of which are typically transacted in cash.

So, ironically, by banning cash these governments will end up reducing their own GDP figures.

What’s really behind this? Why is there such a big movement to ban something that is used for felonious purposes by just a fraction of a percent of the population?

Cash, it turns out, is the Achilles’ Heel of the financial system.

Central banks around the world have kept interest rates at near-zero levels for nearly eight years now.

And despite having created massive bubbles and enabled extraordinary amounts of debt, their policies aren’t working.

Especially in Europe, the hope of stoking economic growth (and even the sickening goal of inflation) has failed.

So naturally, since what they’ve been trying hasn’t worked, their response is to continue trying the same thing… and more of it.

Interest rates across the European continent are now negative.

Japanese interest rates are now negative.

And even in the United States, the Federal Reserve has acknowledged that negative interest rates are being considered.

They have no other choice; raising rates will bankrupt the governments they support and derail any fledgling economic growth.

Look at how low interest rates are in the US– and yet 4th quarter GDP practically ground to a halt. They simply cannot afford to raise rates.

As global economic weakness continues to play out, central banks will have no other option but to take interest rates even further into negative territory.

That said, negative interest rates will be the destruction of the financial system.

Because sooner or later, if banks have to pay negative wholesale interest rates to each other and to the central bank, then eventually they’ll have to pass those negative rates on to their customers.

Many banks have already started doing this, especially on larger depositors.

We’ve seen this in Europe where some banks charge their customers negative interest to save money, and in some extraordinary circumstances, pay other customers to borrow money.

It’s total madness.

There’s a certain point, however, when interest rates become so negative that no rational person would hold money in the banking system.

Eventually people will realize that they’re better off withdrawing their money and holding physical cash.

Sure, cash doesn’t pay any interest. But it doesn’t cost any either.

If you have a $200,000 in your savings account at negative 1%, you’d have to pay the bank $2,000 each year.

Clearly it would make more sense to buy a safe and hold most of that money in cash.

Problem is, the banks don’t have the money.

For starters, there’s literally not enough cash in the entire financial system to pay out more than a fraction of all bank deposits.

More importantly, banks (especially in the US and Europe) are extremely illiquid.

They invest the vast majority of your deposit in illiquid loans or securities of dubious long-term value, whatever the latest stupid investment fad happens to be.

And many banks have been engaging in a substantial balance sheet shift, rotating bonds from what’s called “Available for Sale” to “Hold to Maturity”.

This is an accounting trick used to hide losses in their bond portfolios. But it also means they have less liquidity available to support bank customer withdrawal requests.

The natural side effect of negative interest rates is pushing people to hold money outside of the banking system.

Yet it’s clear that a surge of withdrawal requests would bring down that system.

Banks don’t want that to happen. Governments don’t want that to happen.

But since central banks have no other choice than to continue imposing negative interest rates, the only logical option is to ban cash and force consumers to hold their money within the banking system.

Make no mistake, this is absolutely a form of capital controls. And it’s coming soon to a banking system near you.

PS. Clearly a trend with this much momentum requires some deliberate and measured action if you don’t want your savings trapped.

We’ll discuss this in our upcoming webinar.

I hate to belabor the point, but it should be obvious that these things are happening, quickly, and I can promise that you’ll get a ton of great information and solutions with the small investment of your time.

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Housing Starts, Permits Drop For Second Month As Homebuilding Activity Remains Far Below Prior Peak

Today’s batch of housing data, namely the January update of housing starts and permits, which as a reminder has a quite substantial “confidence interval” of between 10.5% and 28.3%, was largely uneventful.

Total housing starts of 1099K was the second consecutive drop from last month’s downward revised 1,143K, and a miss to the 1,173K expected. This was due to a drop in both 1-unit structures, which declined from 761K to 731K in all regions led by the Midwest, as well as a decline in multi-family, or rental, units which dropped from 363K to 354K. Can’t blame the weather this time.

The silver lining to the Starts miss was the small Permits print, which at 1,202K beat expectations of 1,200K, but like with starts was the second consecutive drop from the substantially downward revised January number of 1.204MM (down from 1.232MM) and November’s 1.282MM. And while rental unit permits rose by a modest 1.1% to 442K, the single-family permits declined by 1.6% to 720K, below the

What goes without saying is that both starts and permits remain well below their 2007 highs, and what is more troubling is that as the Y/Y change chart shown below demonstrates, the growth rate is rapidly approaching the X-axis if not sliding below it.

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Core Inflation Spikes Most In 15 Months

Producer Prices (ex food and energy) jumped 0.4% MoM – the biggest rise since Oct 2014 (and dramatically hotter than the 0.1% rise expected). Rubbing salt into Fed mandate wounds still further is last month’s print was also revised higher and YoY (+0.6%) is the highest since Sep 2015. Across the range of PPI data, all items came hotter than expected in January (despite a 5% drop in Energy) with Food rising most.

Inflation hotting up…

So, inflation is starting to hot up and the jobs data is ‘awesome’ – what is The “data dependent” Fed to do next?

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Tim Cook Refuses To Comply With “Chilling” Government Demand To “Build A Backdoor” Into iPhone

Following the December 2 horrific mass shooting in San Benardino, Judge Sheri Pym of U.S. District Court in Los Angeles said on Tuesday that Apple must provide “reasonable technical assistance” to investigators seeking to unlock data on – in other words hack – an iPhone 5C that had been owned by Syed Rizwan Farook, one of the San Bernardino shooters.

Tim Cook has refused to comply.

The Apple CEO said his company opposed the demand from the judge to help the FBI break into the iPhone. Cook said that the demand threatened the security of Apple’s customers and had “implications far beyond the legal case at hand.”

It gets worse: in a letter to Apple’s customers, Cook said the FBI had asked the company to build “a backdoor to the iPhone”, and while this may not have been an issue in the pre-Snowden days, has become a very sensitive topic for a nation that realizes its government is intent on tracking its every move.

“The government is asking Apple to hack our own users and undermine decades of security advancements that protect our customers — including tens of millions of American citizens — from sophisticated hackers and cybercriminals,” he said.

“We can find no precedent for an American company being forced to expose its customers to a greater risk of attack.”

Cook’s summary:

“The implications of the government’s demands are chilling. If the government can use the All Writs Act to make it easier to unlock your iPhone, it would have the power to reach into anyone’s device to capture their data. The government could extend this breach of privacy and demand that Apple build surveillance software to intercept your messages, access your health records or financial data, track your location, or even access your phone’s microphone or camera without your knowledge.”

While we applaud Cook’s rebelliousness, we wonder just how much of it is merely theater. After all as Snowden previously revealed, the NSA already has full access to all the iPhone data it needs. Recall from “NSA Mocks Apple’s “Zombie” Customers; Asks “Your Target Is Using A BlackBerry? Now What?” where we noted something quite amusing:

the NSA itself mocks Orwell, using a reference from the iconic Apple “1984” advertisement…

… As it says the man who has become “Big Brother” is none other than AAPL’s deceased visionary leader Steve Jobs…

… And is so very grateful for Apple’s paying client “Zombies” who make its job so much easier

Lucky for Tim Cook, the American collective may have “secure” phones, but its memory lasts 15 minutes tops.

Here is the full Tim Cook note:

A Message to Our Customers

The United States government has demanded that Apple take an unprecedented step which threatens the security of our customers. We oppose this order, which has implications far beyond the legal case at hand.

This moment calls for public discussion, and we want our customers and people around the country to understand what is at stake.
The Need for Encryption

Smartphones, led by iPhone, have become an essential part of our lives. People use them to store an incredible amount of personal information, from our private conversations to our photos, our music, our notes, our calendars and contacts, our financial information and health data, even where we have been and where we are going.

All that information needs to be protected from hackers and criminals who want to access it, steal it, and use it without our knowledge or permission. Customers expect Apple and other technology companies to do everything in our power to protect their personal information, and at Apple we are deeply committed to safeguarding their data.

Compromising the security of our personal information can ultimately put our personal safety at risk. That is why encryption has become so important to all of us.

For many years, we have used encryption to protect our customers’ personal data because we believe it’s the only way to keep their information safe. We have even put that data out of our own reach, because we believe the contents of your iPhone are none of our business.

The San Bernardino Case

We were shocked and outraged by the deadly act of terrorism in San Bernardino last December. We mourn the loss of life and want justice for all those whose lives were affected. The FBI asked us for help in the days following the attack, and we have worked hard to support the government’s efforts to solve this horrible crime. We have no sympathy for terrorists.

When the FBI has requested data that’s in our possession, we have provided it. Apple complies with valid subpoenas and search warrants, as we have in the San Bernardino case. We have also made Apple engineers available to advise the FBI, and we’ve offered our best ideas on a number of investigative options at their disposal.

We have great respect for the professionals at the FBI, and we believe their intentions are good. Up to this point, we have done everything that is both within our power and within the law to help them. But now the U.S. government has asked us for something we simply do not have, and something we consider too dangerous to create. They have asked us to build a backdoor to the iPhone.

Specifically, the FBI wants us to make a new version of the iPhone operating system, circumventing several important security features, and install it on an iPhone recovered during the investigation. In the wrong hands, this software — which does not exist today — would have the potential to unlock any iPhone in someone’s physical possession.

The FBI may use different words to describe this tool, but make no mistake: Building a version of iOS that bypasses security in this way would undeniably create a backdoor. And while the government may argue that its use would be limited to this case, there is no way to guarantee such control.

The Threat to Data Security

Some would argue that building a backdoor for just one iPhone is a simple, clean-cut solution. But it ignores both the basics of digital security and the significance of what the government is demanding in this case.

In today’s digital world, the “key” to an encrypted system is a piece of information that unlocks the data, and it is only as secure as the protections around it. Once the information is known, or a way to bypass the code is revealed, the encryption can be defeated by anyone with that knowledge.

The government suggests this tool could only be used once, on one phone. But that’s simply not true. Once created, the technique could be used over and over again, on any number of devices. In the physical world, it would be the equivalent of a master key, capable of opening hundreds of millions of locks — from restaurants and banks to stores and homes. No reasonable person would find that acceptable.

The government is asking Apple to hack our own users and undermine decades of security advancements that protect our customers — including tens of millions of American citizens — from sophisticated hackers and cybercriminals. The same engineers who built strong encryption into the iPhone to protect our users would, ironically, be ordered to weaken those protections and make our users less safe.

We can find no precedent for an American company being forced to expose its customers to a greater risk of attack. For years, cryptologists and national security experts have been warning against weakening encryption. Doing so would hurt only the well-meaning and law-abiding citizens who rely on companies like Apple to protect their data. Criminals and bad actors will still encrypt, using tools that are readily available to them.
A Dangerous Precedent

Rather than asking for legislative action through Congress, the FBI is proposing an unprecedented use of the All Writs Act of 1789 to justify an expansion of its authority.

The government would have us remove security features and add new capabilities to the operating system, allowing a passcode to be input electronically. This would make it easier to unlock an iPhone by “brute force,” trying thousands or millions of combinations with the speed of a modern computer.

The implications of the government’s demands are chilling. If the government can use the All Writs Act to make it easier to unlock your iPhone, it would have the power to reach into anyone’s device to capture their data. The government could extend this breach of privacy and demand that Apple build surveillance software to intercept your messages, access your health records or financial data, track your location, or even access your phone’s microphone or camera without your knowledge.

Opposing this order is not something we take lightly. We feel we must speak up in the face of what we see as an overreach by the U.S. government.

We are challenging the FBI’s demands with the deepest respect for American democracy and a love of our country. We believe it would be in the best interest of everyone to step back and consider the implications.

While we believe the FBI’s intentions are good, it would be wrong for the government to force us to build a backdoor into our products. And ultimately, we fear that this demand would undermine the very freedoms and liberty our government is meant to protect.

Tim Cook

via Zero Hedge http://ift.tt/1ooJolJ Tyler Durden

Stocks Have Taken Out Critical Support… Prepare Now!

One of the most critical lines to watch is the 12-month moving average for stocks.

Historically this line has served well as a proxy for determining if stocks were in a bull or bear market. When stocks rallied above this line, they were in a bull market. When they fell below this line, they were in a bear market.

As you can see, this line was a great metric for targeting when to enter or exit the markets.

The significance of this line was somewhat obscured by Fed policy post-2009. Put simply, anytime stocks broke below the critical 12-month moving average, the Fed unveiled a new monetary program to reignite the bull market.

However, starting in 2011, the Fed got its wish (a long-term bull market) by convincing enough investors that whenever stocks collapsed into dangerous territory, the Fed would stop in. From that point onward, stocks stayed above the 12-month moving average.

Until today.

The China Yuan devaluation in August 2015 triggered a sharp sell-off for stocks that took us below the 12-month moving average. The bulls tried desperately to reclaim this line in October-December but have failed.

On top of this, the Fed is now tightening rates. And with a US Presidential election only nine months away, the Fed’s hands are tied regarding another QE program (the fact the Fed’s policies have increased wealth inequality has become a campaign issue).

Which means… stocks have very likely just entered a bear market. Few investors have caught on to this yet, but when they do, there will be a selling panic, possibly even a CRASH.

Smart investors are preparing now.

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

We are giving away just 1,000 copies for FREE to the public.

To pick up yours, swing by:

http://ift.tt/1HW1LSz

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

via Zero Hedge http://ift.tt/1ooJlq9 Phoenix Capital Research

Downturn Now Hitting The Refining Sector

Submitted by Michael McDonald of OilPrice

Downturn Now Hitting The Refining Sector

As all energy investors know, it has been a terrible year for oil and natural gas companies. Many stocks are down half or more from their 52-week highs. Yet amidst the carnage, one energy group has held up very well – refiners.

Companies like Valero (VLO) and Phillips 66 (PSX) have traded flat or even moved higher over the last year. This reality has largely been driven by the glut of crude bringing down input prices for these firms while continued stable demand for gasoline and diesel has led to better crack spreads. The crack spread refers to the profit per barrel of oil that refiners earn from turning oil into finished products like gasoline, diesel, and jet fuel.

While 2015 was a strong year for downstream operators, refiners could soon follow oil companies’ downward trajectory. Crack spreads are increasingly coming under pressure as the laws of supply and demand come into balance. Highly profitable crack spreads are drawing more refining capacity online and leading to more supply for many derivative oil products. Established refiners are struggling to combat already high inventories of gasoline and other products by cutting production at key plants, but that effort is unlikely to help sustain cracking margins over the short term. Energy analysts are forecasting that cracking spreads will fall substantially and margins in certain areas of the country such as the Midwest are already under severe pressure or are even negative thanks to limited storage capacity for final delivery products.

The situation is little better overseas. Asian fuel producers are facing increasing competition from China, which is exporting a surging level of refined crude products. Chinese net product exports are forecast to rise by 31 percent this year over and above robust export increases last year. Diesel exports rose 75 percent from China last year much to the chagrin of Indian and South Korean refiners.

Just like in the U.S., margins for cracking have fallen hard as new supply has rushed to take advantage of lucrative opportunities in the field. Singapore Dubai cracking margins are running around $1.90 per barrel so far for 2016 versus $3.96 a barrel in the fourth quarter of 2015.

China is hurting refiners and the global petroleum market in two ways then. First, the sudden shift in Chinese economic models has curtailed domestic oil demand, leading to falling oil prices and falling domestic demand for industrial oil derivatives. Second, to help Chinese refineries cope with the new harsh market conditions, China has started allowing many independent Chinese refineries to ship their output abroad. Diesel margins are particularly at risk as the product has seen a significant slowing of domestic Chinese demand and thus a very rapid build in export volumes.

With diesel exports authorized up to 1.8 million barrels per day for China, versus 900,000 barrels per day last year, there is little doubt that Asian diesel prices will fall dramatically. This may cause a chain reaction that slowly spreads west perhaps ultimately hampering margins in Europe as well.

Investors cannot do anything to stop this negative chain of events and there is little sign of the situation improving in the near term. While crude has managed to rebound off of its recent lows, that reality is cold comfort for most investors and only serves to hide the fact that oil prices are likely at least $20 per barrel below where most producers need them to be. If cracking margins ultimately plumb the same relative depths of profitability (or lack thereof), then 2016 could prove to be a harsh year indeed for refiners.

via Zero Hedge http://ift.tt/1VmVWVz Tyler Durden