Correcting Some Misconceptions About A New Secular Bull Market

Submitted by Lance Roberts of STA Wealth Management,

As I was preparing to write my annual "Outlook and Forecast" for 2014, I read many different views from major Wall Street firms to get a general feel of the consensus.  However, during the course of my research I read one piece of work in particular that tried to build the case that we have entered into a new "secular" bull market as last seen in the early 1980's.   However, while the thesis is interesting, it was based on some flawed assumptions interest rates, valuations and time frames.

Interest Rates

The first assumption was that interest rates have now begun a secular shift higher based on the premise that the current pickup in rates was akin to what was last seen in 1946 as shown in the chart below.

Saut-Interest-Rates-123013

While the chart clearly shows that interest rates have hit the same levels as last seen in 1946, the view that rates will rise strongly from current levels assumes that the same economic drivers exist today.  In 1946, the United States had just exited WWII which left Europe and Japan in ruins.  The United States became the manufacturing center of the industrialized world as we assisted in the rebuilding of Germany, Britain, France and Japan.  That is no longer the case today as much of our industrial manufacturing has been outsourced to other countries for lower costs.  The chart below shows interest rates overlaid against the annual changes in economic growth.

Interest-Rates-Economy-123013

While there are many "hopes" that economic growth will pick up in 2014 the ongoing demand for lower prices on goods and services requires continued wage suppression through "job exportation" and lower financing costs to maintain profitability.  This will likely keep a lid on interest rates for quite some time to come.  Furthermore, the currently low savings rate, which reduces productive investments, combined with an aging population provides additional headwinds to the ability of interest rates to rise.   This has been the ongoing problem for Japan which has seen interest rates stuck at low levels for over a decade.

Japan-Liquidity-Trap-123013

While there are many arguments that we are not Japan, with which I agree, there are many similarities from an economic perspective. 

Valuations

The second argument for entry into a secular bull market was based on valuations.

"The S&P 500 currently trades at 16.45x this year's bottom up operating earnings estimate.

 

In their seminal book 'Security Analysis,' Graham & Dodd publish an equation about how to calculate a proper Price to Earnings Ratio (P/E).  The formula was:

P/E = 8 + (2 x Expected Earnings Growth)

 

So, even if I haircut earnings growth to 4.5%, the P/E would be 17x.  If next year's earnings estimate of $122.42 is anywhere close to the mark, that would suggest a price of 2081."

That statement should get just about everyone excited as that would imply a rise of 13% in 2014 from the current price levels.

However, there is a huge problem with this analysis.  Graham & Dodd never used forward operating earnings in the analysis as such metrics were not used when they published their seminal work.  Graham focused on reported trailing earnings and always suggested in using an average of earnings (using a 5,7 or 10 year time frame) to smooth out anomalies.  This smoothing of earnings was the basis for Professor Robert Shiller's work on smoothing inflation adjusted earnings using a 10-year average.

Using reported earnings for Q3-2013, which is the last fully completed quarter, and using the current price of 1841, the current P/E ratio is 19.5x earnings.  (For a variety of charts on market valuations from Tobin's Q-ratio to Shillers P/E refer to "The Market In Pictures")  From just about any historical perspective, the markets are now becoming expensive.  However, if we correctly use Graham's formula using reported earnings and the historical growth rate of earnings of 6% we get the following valuation:

P/E = 8 + (2*6) = 20x

This would imply a target of 1887 for 2014 or a return of 2.4%.   Importantly, a 2.4% rate of return from such levels of high valuation would be consistent with historical norms.

However, if we use the current forward estimates for reported earnings in 2014, which currently stands at $106.00 per share, and use estimated year end reported earnings for 2013 of $96.72, then the earnings growth rate rises to 10%.  Graham's formula then changes to:

P/E = 8 + (2*10) = 28x

Such a valuation would exceed every other secular bull market valuation peak in history with the exception of the "tech bubble" in 2000 and the spike in valuations caused by the "financial crisis" as earnings collapsed in 2008.  The chart below shows the historical P/E ratio using trailing reported earnings from 1900-present.

PE-LongTerm-Reported-123013

However, a P/E ratio of 28x would imply a target for the S&P 500 of 2708 which would be a 47% rise from current levels over the next 12 months.  While such a price rise could conceivable occur, the likelihood of such
a monstrous increase in the current environment is unlikely.  The most likely outcome will either be a disappointment in earnings, prices or both.

Time Frames

Lastly, his discussion focused on time frames stating that:

"I think the odds favor that we are in a new secular bull market like the 1982-2000 affair."

Using the following chart as evidence.

Saut-structural-markets-123013

First, the chart notes that the average of each cycle has been 14 years.  However, that average was skewed by the very short secular bull market of 5+ years leading up to the 1929 peak.  More importantly, as noted, we are currently 13 years into a secular bear market which the average historical secular bear market has averaged 17 years.  In a complete vacuum of other data, it would suggest that the current secular cycle still has roughly four more years, and one more nasty decline, to come.

Secondly, the ability to have a "1982-2000 affair" is highly improbable.  The 1982-2000 secular bull market cycle was driven primarily by a multiple expansion process with a beginning valuation level of 5-7x earnings and a dividend yield of 6%.  Interest rates and inflation were at extremely high levels and were at the beginning of a 30-year decline which would increase profitability as production and interest rate costs fell.  Lastly, the consumer was at the beginning of a period of a leverage ramp up which spurred consumption levels to almost 70% of GDP.

S&P-500-InterestRates-Inflation

With inflation and interest rates currently at low levels, and consumers already heavily levered relative to historical norms, the drivers that led to the secular bull market in of the 80-90's simply do not exist today. 

Conclusion

While being a "stark raving bull" going into 2014 is certainly fashionable currently; as investors, we should place our faith, and hard earned savings, into the reality of the underlying fundamentals.  It is entirely conceivable that the current momentum driven markets, fueled by ongoing Federal Reserve interventions, could certainly drift higher in the months to come.  However, the reality is that the current underlying demographic trends, economic realities and market fundamentals do not provide the base to support current price levels much less the entrance into a secular bull market akin to that of the 80's and 90's.

Of course, with virtual entirety of Wall Street being extremely bullish on the markets and economy going into 2014, along with bullish sentiment at extremely high levels, it certainly brings to mind Bob Farrell's Rule #9 which states:  "When all experts agree – something else is bound to happen."

Hold on to your hats friends – 2014 could well turn out to be an interesting year for all the wrong reasons.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9owSCSEBxXA/story01.htm Tyler Durden

Denver Airport Attempts to Fight Back Tide by Banning Marijuana Possession

It's also an ingenious way to guarantee return business!Marijuana tourism in
Colorado will see another complication before it kicks off
Wednesday:
Denver International Airport
doesn’t want to see any of your
bud or weed or whatever you kids are calling it these days. From
the Denver Post:

Denver International Airport will be the first city facility to
prohibit marijuana possession on all of its property as it attempts
to combat illegal interstate trafficking in the face of federal
law.

Airport officials plan to begin enforcing the new policy, which
is the furthest-reaching among the city’s marijuana limitations, in
early January.

Recently adopted city ordinances ban the display and transfer —
but not mere possession — of marijuana on city-owned property
including parks, the 16th Street Mall, streets and sidewalks near
schools.

“We talked to all of (the federal agencies involved), and
they’ve expressed concern for good reason, but it was our decision
based on the way the airport operates,” said Stacey Stegman, DIA
spokeswoman. “We didn’t want to impact other airports and other
agencies, and we didn’t want to facilitate transporting marijuana
across state lines.”

But apparently tokers shouldn’t worry too much:

And while the airport has decided to implement a zero-tolerance
marijuana policy, it doesn’t plan to actively enforce the
policy.

“It’s not like we are going to do checkpoints. We just want
people to comply,” Stegman said, noting that a violator would have
to be discovered by other means, such as committing a different
crime and having pot found in the perpetrator’s possession.

Well, then! But an important reminder: The airport’s rules have
absolutely no bearing on what the Transportation Security Agency
does if their agents discovery you with marijuana.

Read the full story
here
. Jacob Sullum explains what to expect in Colorado come
Wednesday here.

Follow this story and more at Reason
24/7
.

Spice up your blog or Website with Reason 24/7 news and
Reason articles. You can get the
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here
. If you have a story that would be of
interest to Reason’s readers please let us know by emailing the
24/7 crew at 24_7@reason.com, or tweet us stories
at 
@reason247.

from Hit & Run http://reason.com/blog/2013/12/30/denver-airport-attempts-to-fight-back-ti
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Slate Wonders Why Libertarian Party Insists on Being Libertarian on Gay Rights Issues, Reveals Utter Ignorance of Party’s History

Weird little piece up at Slate today, about an issue
certainly none of their readers or pretty much anyone else cares
about, but feeds a generic endless desire to scratch at the
persistently annoying itch of libertarianism in these here
times.

It is called “How
Libertarians Failed Gay Rights
” and its URL contains the phrase
“the party failed to take a stand” on gay rights. Its evidence for
this is that on the LP’s current website, author Tyler Lopez
couldn’t find a dedicated page about gay rights.

The Party’s platform
does,
though Lopez doesn’t mention this, contain this:

Sexual orientation, preference, gender, or gender identity
should have no impact on the government’s treatment of individuals,
such as in current marriage, child custody, adoption, immigration
or military service laws. Government does not have the authority to
define, license or restrict personal relationships. Consenting
adults should be free to choose their own sexual practices and
personal relationships.

Lopez’ very non-deep knowledge of his subject misses some other
things, like the long history of LP candidates speaking out about
gay rights as a pretty big deal, from Ed Clark’s 1978 California
governor’s race in which he ran hard against
the anti-gay Briggs Initiative
to Gary
Johnson in 2012
to
Andre Marrou in 1992
, and the interesting identity politics
fact that the Party’s first presidential candidate, John Hospers,
was gay, though not openly so in a modern sense. 

At the very convention where he got the Party’s
nomination, former Republican congressman and Defense of Marriage
Act author Bob Barr

had to denounce his own law
and insist he’d repeal it as
president.

Lopez also
misses the Party’s record
from the mid-’70s on of being way
ahead of the national curve in talking sense and laissez-faire when
it came to homosexuality.

This is summed up well in
Ralph Raico’s document
used by the LP during the 1976 Roger
MacBride campaign, “Gay
Rights: A Libertarian Approach
.” Some excerpts. Again, this was
used in the mid-’70s. Worth a longish look:

Since they partially share the heritage of Classical Liberalism,
democratic socialists and left-liberals have been much more helpful
to the cause of gay liberation. Much of the progress in recent
years in repealing laws in this area has been due to them. But too
often, even when they are more or less rational on the subject,
they are, either for reasons of temperament or politics, much too
timid….so many of them are generally in favor
of gay rights, but nearly all shy away from the right of homosexual
couples to adopt children, or even to have their unions legally
recognized. Moreover, their attitudes are often tainted by an
offensive, psychiatrically-rooted condescension: basically, a
these-people-are-sick-and-need-help-not-punishment approach….

And as for the run-of-the-mill liberal politicians, we have a
right to suspect the extent of their genuine tolerance. Consider,
for example, one of the more “liberal” of these men, Sergeant
Shriver (who was McGovern’s Vice Presidential candidate in 1972).
In a speech in Chicago to Mayor Daley’s precinct workers, on
October 24, 1972, Shriver whiningly complained of the unfair
attacks on McGovern in these terms: “And then they say that George
McGovern wants to give blanket amnesty to everybody—draft dodgers,
deserters, queers, kooks …” (New Your Times, November 12,
1972. Sec. 4—notice that, in his frenzy, Shriver does not even take
the trouble to make sense: “blanket amnesty to queers?”) I think
you and I have a good idea of the real feelings on homosexuals of
anyone likely to become the candidate for President of the
Democratic Party…..

With the Libertarian Party, unlike other political groups, there
was never any need laboriously to raise its consciousness on the
issue of gay liberation, nor to compel it, after long, drawn-out
battles, finally to concede the humanity and first class
citizenship of gay men and women. Instead, the Libertarian Party
was born believing in gay rights. The need to promote full freedom
of individual development for all persons is what led to the
formation of our Party; and the very first mention of us
in The New York Times (“New Party Makes a Debut
in Denver,” February 6, 1972) lists as
our first objective (even ahead of abolition of
the draft, amnesty for draft-evaders and deserters, private
ownership of gold, etc.): “Repeal of all criminal laws in which
there is no victim.”

Gay rights have been an issue in practically every major
Libertarian campaign since then, including John Hospers’ try for
the Presidency in 1972 (he did get one electoral vote, thus coming
in a close third to McGovern); Fran Youngstein’s campaign for Mayor
of New York; Jerry Tuccille’s try for Governor of New York in 1974;
and the 1975 bids of Ray Cunningham for Mayor of San Francisco, and
Dave Long for Mayor of Boston. It is also an integral part of the
campaign of Roger MacBride and David Bergland, our candidates for
President and Vice-President in 1976. At the Libertarian National
Convention in New York City, in August, 1975, at which MacBride and
Bergland were nominated, the following Platform planks were adopted
unanimously.

“We hold that only actions which infringe the rights of others
can properly be termed crimes. We favor the repeal of all federal,
state and local laws creating “crimes” without victims. In
particular, we advocate: … . (b) the repeal of all laws regarding
consensual sexual relations, including prostitution and
solicitation, and the immediate cessation of state oppression of
homosexual men and women, that at last they be accorded their full
rights as individuals … (e) the use of executive pardon to free all
those presently incarcerated for the commission of these
“crimes.”

We call for the end of Defense Department policy of discharging
armed forces personnel for homosexual conduct when such conduct
does not interfere with their assigned duties. We further call for
the retraction of all less-than-honorable discharges previously
assigned for such reasons and the deletion of such information from
military personnel files.”

Better than “don’t ask, don’t tell,” and in 1975. Dare
I suggest Lopez has no idea what he’s talking about?

More on how radical and how early the LP was on gay rights, a
long long time ago, from Raico:

During the Tuccille campaign in 1974, a position paper was
issued on the subject, composed by Mike James, Western New York
Libertarian and gay liberationist. It provide s the basis for the
position of the MacBride-Bergland ticket on the issue. Here is what
our national candidates in 1976 specifically favor and will promote
to the extent they can:

  • Repeal of all laws regarding consensual sexual acts between
    adults (with the age of consent reasonably defined). This would
    include abolition of laws prohibiting prostitution and
    solicitation, whether gay or straight.
  • Repeal of legislation prohibiting unions between members of the
    same sex, and the extension to such unions of all legal rights and
    privileges presently enjoyed by partners in heterosexual
    marriages.
  • An end to the use of loitering statutes and entrapment
    procedures as a means of harassing gays and prostitutes.
  • An end to the collection by government agencies of data on the
    sexual preferences of individuals.
  • Elimination of regulations specifying homosexuality as a
    justification for denying or revoking state licenses (for doctors,
    lawyers, teachers, hairdressers, etc.).
  • Repeal of laws prohibiting cross-dressing.
  • Recognition of the right of a homosexual parent to be
    considered for custody of his or her natural child, and of the
    child to choose the homosexual parent as guardian.
  • Elimination of laws specifying homosexuality as grounds for
    denying the right of adoption.
  • Equality of treatment of gay people in regard to government
    service, including particularly membership in the armed
    forces.
  • Release of all individuals presently detained or imprisoned for
    any victimless crime.

Even Lopez’s substantive critique amounts to a complaint
that the LP treats gay issues in a distinctly libertarian
way–worrying about how government power effects gays, not worrying
about private attitudes or treatment, which remain the business of
those who hold the attitudes or give the treatment.

To complain about that is not to complain that the LP isn’t
sufficiently pro-gay (and compared to who? The Democratic Party who

just last year got around
to getting gay marriage rights in its
platform, and which some research by colleague Ronald Bailey
indicates didn’t even mention eliminating sexual orientation
discrimination in the platform until 1984?) but that it is overly
libertarian.

Slate‘s piece combines confused thinking with near
utter ignorance on its topic. However, it will, if read quickly and
carelessly by equally ignorant readers, help make certain people
think less of libertarianism, and that’s all that matters.

from Hit & Run http://reason.com/blog/2013/12/30/slate-wonders-why-libertarian-party-insi
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Slate Wonders Why Libertarian Party Insists on Being Libertarian on Gay Rights Issues, Reveals Utter Ignorance of Party's History

Weird little piece up at Slate today, about an issue
certainly none of their readers or pretty much anyone else cares
about, but feeds a generic endless desire to scratch at the
persistently annoying itch of libertarianism in these here
times.

It is called “How
Libertarians Failed Gay Rights
” and its URL contains the phrase
“the party failed to take a stand” on gay rights. Its evidence for
this is that on the LP’s current website, author Tyler Lopez
couldn’t find a dedicated page about gay rights.

The Party’s platform
does,
though Lopez doesn’t mention this, contain this:

Sexual orientation, preference, gender, or gender identity
should have no impact on the government’s treatment of individuals,
such as in current marriage, child custody, adoption, immigration
or military service laws. Government does not have the authority to
define, license or restrict personal relationships. Consenting
adults should be free to choose their own sexual practices and
personal relationships.

Lopez’ very non-deep knowledge of his subject misses some other
things, like the long history of LP candidates speaking out about
gay rights as a pretty big deal, from Ed Clark’s 1978 California
governor’s race in which he ran hard against
the anti-gay Briggs Initiative
to Gary
Johnson in 2012
to
Andre Marrou in 1992
, and the interesting identity politics
fact that the Party’s first presidential candidate, John Hospers,
was gay, though not openly so in a modern sense. 

At the very convention where he got the Party’s
nomination, former Republican congressman and Defense of Marriage
Act author Bob Barr

had to denounce his own law
and insist he’d repeal it as
president.

Lopez also
misses the Party’s record
from the mid-’70s on of being way
ahead of the national curve in talking sense and laissez-faire when
it came to homosexuality.

This is summed up well in
Ralph Raico’s document
used by the LP during the 1976 Roger
MacBride campaign, “Gay
Rights: A Libertarian Approach
.” Some excerpts. Again, this was
used in the mid-’70s. Worth a longish look:

Since they partially share the heritage of Classical Liberalism,
democratic socialists and left-liberals have been much more helpful
to the cause of gay liberation. Much of the progress in recent
years in repealing laws in this area has been due to them. But too
often, even when they are more or less rational on the subject,
they are, either for reasons of temperament or politics, much too
timid….so many of them are generally in favor
of gay rights, but nearly all shy away from the right of homosexual
couples to adopt children, or even to have their unions legally
recognized. Moreover, their attitudes are often tainted by an
offensive, psychiatrically-rooted condescension: basically, a
these-people-are-sick-and-need-help-not-punishment approach….

And as for the run-of-the-mill liberal politicians, we have a
right to suspect the extent of their genuine tolerance. Consider,
for example, one of the more “liberal” of these men, Sergeant
Shriver (who was McGovern’s Vice Presidential candidate in 1972).
In a speech in Chicago to Mayor Daley’s precinct workers, on
October 24, 1972, Shriver whiningly complained of the unfair
attacks on McGovern in these terms: “And then they say that George
McGovern wants to give blanket amnesty to everybody—draft dodgers,
deserters, queers, kooks …” (New Your Times, November 12,
1972. Sec. 4—notice that, in his frenzy, Shriver does not even take
the trouble to make sense: “blanket amnesty to queers?”) I think
you and I have a good idea of the real feelings on homosexuals of
anyone likely to become the candidate for President of the
Democratic Party…..

With the Libertarian Party, unlike other political groups, there
was never any need laboriously to raise its consciousness on the
issue of gay liberation, nor to compel it, after long, drawn-out
battles, finally to concede the humanity and first class
citizenship of gay men and women. Instead, the Libertarian Party
was born believing in gay rights. The need to promote full freedom
of individual development for all persons is what led to the
formation of our Party; and the very first mention of us
in The New York Times (“New Party Makes a Debut
in Denver,” February 6, 1972) lists as
our first objective (even ahead of abolition of
the draft, amnesty for draft-evaders and deserters, private
ownership of gold, etc.): “Repeal of all criminal laws in which
there is no victim.”

Gay rights have been an issue in practically every major
Libertarian campaign since then, including John Hospers’ try for
the Presidency in 1972 (he did get one electoral vote, thus coming
in a close third to McGovern); Fran Youngstein’s campaign for Mayor
of New York; Jerry Tuccille’s try for Governor of New York in 1974;
and the 1975 bids of Ray Cunningham for Mayor of San Francisco, and
Dave Long for Mayor of Boston. It is also an integral part of the
campaign of Roger MacBride and David Bergland, our candidates for
President and Vice-President in 1976. At the Libertarian National
Convention in New York City, in August, 1975, at which MacBride and
Bergland were nominated, the following Platform planks were adopted
unanimously.

“We hold that only actions which infringe the rights of others
can properly be termed crimes. We favor the repeal of all federal,
state and local laws creating “crimes” without victims. In
particular, we advocate: … . (b) the repeal of all laws regarding
consensual sexual relations, including prostitution and
solicitation, and the immediate cessation of state oppression of
homosexual men and women, that at last they be accorded their full
rights as individuals … (e) the use of executive pardon to free all
those presently incarcerated for the commission of these
“crimes.”

We call for the end of Defense Department policy of discharging
armed forces personnel for homosexual conduct when such conduct
does not interfere with their assigned duties. We further call for
the retraction of all less-than-honorable discharges previously
assigned for such reasons and the deletion of such information from
military personnel files.”

Better than “don’t ask, don’t tell,” and in 1975. Dare
I suggest Lopez has no idea what he’s talking about?

More on how radical and how early the LP was on gay rights, a
long long time ago, from Raico:

During the Tuccille campaign in 1974, a position paper was
issued on the subject, composed by Mike James, Western New York
Libertarian and gay liberationist. It provide s the basis for the
position of the MacBride-Bergland ticket on the issue. Here is what
our national candidates in 1976 specifically favor and will promote
to the extent they can:

  • Repeal of all laws regarding consensual sexual acts between
    adults (with the age of consent reasonably defined). This would
    include abolition of laws prohibiting prostitution and
    solicitation, whether gay or straight.
  • Repeal of legislation prohibiting unions between members of the
    same sex, and the extension to such unions of all legal rights and
    privileges presently enjoyed by partners in heterosexual
    marriages.
  • An end to the use of loitering statutes and entrapment
    procedures as a means of harassing gays and prostitutes.
  • An end to the collection by government agencies of data on the
    sexual preferences of individuals.
  • Elimination of regulations specifying homosexuality as a
    justification for denying or revoking state licenses (for doctors,
    lawyers, teachers, hairdressers, etc.).
  • Repeal of laws prohibiting cross-dressing.
  • Recognition of the right of a homosexual parent to be
    considered for custody of his or her natural child, and of the
    child to choose the homosexual parent as guardian.
  • Elimination of laws specifying homosexuality as grounds for
    denying the right of adoption.
  • Equality of treatment of gay people in regard to government
    service, including particularly membership in the armed
    forces.
  • Release of all individuals presently detained or imprisoned for
    any victimless crime.

Even Lopez’s substantive critique amounts to a complaint
that the LP treats gay issues in a distinctly libertarian
way–worrying about how government power effects gays, not worrying
about private attitudes or treatment, which remain the business of
those who hold the attitudes or give the treatment.

To complain about that is not to complain that the LP isn’t
sufficiently pro-gay (and compared to who? The Democratic Party who

just last year got around
to getting gay marriage rights in its
platform, and which some research by colleague Ronald Bailey
indicates didn’t even mention eliminating sexual orientation
discrimination in the platform until 1984?) but that it is overly
libertarian.

Slate‘s piece combines confused thinking with near
utter ignorance on its topic. However, it will, if read quickly and
carelessly by equally ignorant readers, help make certain people
think less of libertarianism, and that’s all that matters.

from Hit & Run http://reason.com/blog/2013/12/30/slate-wonders-why-libertarian-party-insi
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Oakland, CA Police Will Build City-Wide “Spy Center” With Surveillance Cameras, Maybe Drones

By the middle of next year, Oakland, California will likely have
a city-wide central surveillance center to monitor citizens at all
times. 

In a
6-1 vote
last month, the Oakland City Council agreed to
move forward with the creation of the Domain
Awareness Center
: a central surveillance hub for law
enforcement in one of the country’s
most dangerous cities
. The “spy center” will pull data from a
web of interconnected monitoring devices strewn throughout the city
and will operate 24 hours a day, seven days a week. 

According to the Center
for Investigative Reporting
, the Domain Awareness Center
started as a federal anti-terrorism project for the Port of
Oakland, but is now expanding into a city-wide program.

The Domain Awareness Center, a joint project between the Port of
Oakland and city, started as a nationwide initiative to secure
ports by networking sensors and cameras in and around the
facilities. The busy port is one of seven U.S. maritime facilities
that the Department of Homeland Security considers at highest
risk of a terrorist attack
.

Since its inception in 2009, the project has ballooned into a
surveillance program for the entire city. Some officials already
have proposed linking the center to a regional Department of
Homeland Security intelligence-gathering operation or adding feeds
from surveillance cameras around the Oakland stadium and arena
complex.

The center will aggregate information from an array of existing
surveillance methods, including thousands
of security cameras
owned by the city and private businesses,
license plate readers, gun shot detectors, crime-mapping software,
and Twitter feeds. 

Oakland residents vigorously protested the Domain Awareness
Center, citing privacy concerns and a lack of trust in
police. 

Joshua Daniels, one of the speakers during a July city council
meeting,
said
the surveillance center would give significantly more
power to the police department, which he believes “doesn’t respect
the rights” of Oakland residents. 

“This city has a huge trust issue,” Daniels said, “and it’s not
going to be solved by spying on your citizens.”

West Oakland resident Magdalena Kazmierczak
agreed
, “I don’t want to live in a city that is testing
this giant surveillance system, because I believe it is going to be
used to criminalize normal existence.” 

The American Civil Liberties Union of Northern California and
the Electronic Frontier Foundation have also stated their
opposition to the center, on the grounds that there are no privacy
guidelines in place or limits on how much collected data the city
will retain. 

This is all happening in the same city where, earlier this year,
the county sheriff
proposed purchasing a drone
 that can virtually
see through walls
with infrared technology. The drone plan was

tabled
 following a series of complaints over privacy
concerns by groups like the ACLU and Alameda County Against Drones,
but it may be brought up again.

The Domain Awareness Center however, will almost certainly still
be constructed. Oakland will allocate
$10.9 million
in federal grant money to create the new center.
The city also plans to apply for an additional $2.6 million to
create several new law enforcement positions.  

from Hit & Run http://reason.com/blog/2013/12/30/oakland-ca-police-will-build-city-wide-s
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Oakland, CA Police Will Build City-Wide "Spy Center" With Surveillance Cameras, Maybe Drones

By the middle of next year, Oakland, California will likely have
a city-wide central surveillance center to monitor citizens at all
times. 

In a
6-1 vote
last month, the Oakland City Council agreed to
move forward with the creation of the Domain
Awareness Center
: a central surveillance hub for law
enforcement in one of the country’s
most dangerous cities
. The “spy center” will pull data from a
web of interconnected monitoring devices strewn throughout the city
and will operate 24 hours a day, seven days a week. 

According to the Center
for Investigative Reporting
, the Domain Awareness Center
started as a federal anti-terrorism project for the Port of
Oakland, but is now expanding into a city-wide program.

The Domain Awareness Center, a joint project between the Port of
Oakland and city, started as a nationwide initiative to secure
ports by networking sensors and cameras in and around the
facilities. The busy port is one of seven U.S. maritime facilities
that the Department of Homeland Security considers at highest
risk of a terrorist attack
.

Since its inception in 2009, the project has ballooned into a
surveillance program for the entire city. Some officials already
have proposed linking the center to a regional Department of
Homeland Security intelligence-gathering operation or adding feeds
from surveillance cameras around the Oakland stadium and arena
complex.

The center will aggregate information from an array of existing
surveillance methods, including thousands
of security cameras
owned by the city and private businesses,
license plate readers, gun shot detectors, crime-mapping software,
and Twitter feeds. 

Oakland residents vigorously protested the Domain Awareness
Center, citing privacy concerns and a lack of trust in
police. 

Joshua Daniels, one of the speakers during a July city council
meeting,
said
the surveillance center would give significantly more
power to the police department, which he believes “doesn’t respect
the rights” of Oakland residents. 

“This city has a huge trust issue,” Daniels said, “and it’s not
going to be solved by spying on your citizens.”

West Oakland resident Magdalena Kazmierczak
agreed
, “I don’t want to live in a city that is testing
this giant surveillance system, because I believe it is going to be
used to criminalize normal existence.” 

The American Civil Liberties Union of Northern California and
the Electronic Frontier Foundation have also stated their
opposition to the center, on the grounds that there are no privacy
guidelines in place or limits on how much collected data the city
will retain. 

This is all happening in the same city where, earlier this year,
the county sheriff
proposed purchasing a drone
 that can virtually
see through walls
with infrared technology. The drone plan was

tabled
 following a series of complaints over privacy
concerns by groups like the ACLU and Alameda County Against Drones,
but it may be brought up again.

The Domain Awareness Center however, will almost certainly still
be constructed. Oakland will allocate
$10.9 million
in federal grant money to create the new center.
The city also plans to apply for an additional $2.6 million to
create several new law enforcement positions.  

from Hit & Run http://reason.com/blog/2013/12/30/oakland-ca-police-will-build-city-wide-s
via IFTTT

TruPS CDOs Explained – With Charts

Over the past two weeks, Trust Preferred (or TruPS) CDOs have gained prominent attention as a result of being the first, and so far only, security that the recently implemented and largely watered-down, Volcker Rule has frowned upon, and leading various regional banks, such as Zions, to liquidate the offending asset while booking substantial losses. But… what are TruPS CDOs, and just how big (or small) of an issue is a potential wholesale liquidation in the market? Courtesy of the Philly Fed we now have the extended answer.

First, some verbal perspectives – highlights ours:

Developed as a way to provide capital markets access to smaller banks, thrifts, insurance companies, and real estate investment trusts (REITs) by pooling the issuance of TruPS into marketable CDOs, the market grew to $60 billion of issuance from its inception in 2000 through its abrupt halt in 2007. As evidenced by rating agency downgrades, current performance, and estimates from our own model, TruPS CDOs are likely to perform poorly. Using data and valuation software from the leading provider of such information, we estimate that large numbers of the subordinated bonds and some senior bonds will be either fully or partially written down, even if no further defaults occur going forward. The primary reason for these losses is that the underlying collateral of TruPS CDOs is small, unrated banks whose primary asset is commercial real estate (CRE). During their years of greatest issuance from 2003 to 2007, the booming real estate market and record low number of bank failures masked the underlying risks that are now manifest. Another reason for the poor performance of bank TruPS CDOs is that smaller banks became a primary investor in the mezzanine tranches of bank TruPS CDOs, something that is also complicating regulators’ resolutions of failed banks.

Then cutting straight to the conclusion:

… the TruPS CDO market provides important insights into how markets respond to regulations; the symbiotic relationship between investment banks and rating agencies in developing models and ratings; how ratings are adjusted over time; and, most recently, how accounting rules have changed with the crisis and have been applied to valuing untraded securities.

 

 

The poor performance of TruPS CDOs is first and foremost a direct, and largely unanticipated, result of the financial crisis and the broad-based nature of the real estate downturn. Record low numbers of bank failures over the 2003-2007 period as well as the booming real estate market also help explain the concentrations of issuance volume in these years. The very favorable market conditions combined with good returns relative to other structured finance products also may explain why banks became primary investors in securities in their own market.

 

Having said this, the very favorable market conditions masked underlying risks. Since bank TruPS CDOs were made up mainly of debt of banks too small to be rated, and since these banks largely invested in commercial real estate (CRE), these deals were, in effect, indirect investments in unrated and deeply subordinated CRE bonds. By comparison, even the riskiest of the synthetic mezzanine subprime CDOs were composed of bonds at least initially rated investment grade.

 

But having banks both issue TruPS and hold each other’s debt greatly increased those risks, as did the tendency to include the same TruPS issuers in many different CDOs. Banks turned out to be the primary customer for the lower-rated tranches of TruPS CDOs, many of which all models estimate are likely to be fully written down. The rationale for such holdings appeared to be that banks were investing in their own industry, which they ostensibly knew the risks of better than others. While this may not be uncommon for such a niche class of securities, it undoubtedly increased these risks once the downturn commenced. We show that banks’ being the primary investors of the TruPS CDOs in their own industry was publicly reported in the investment banking literature as early as 2004, but none of the major players, dealers or  rating agencies, expressed any concerns or made significant model adjustments until after the TruPS CDO market came undone. Since ratings do not take into account the investor base of a deal, nor do rating agencies keep track of who investors are, this would have to fall to the dealers to police. These agents are conflicted when a primary motive is to generate business.

 

 

There was a regulatory arbitrage point to these investments as well. Banks that hold each other’s equity are not allowed to count these as capital, but no such restrictions were placed on TruPS CDO investments at banks, which are hybrid debt/equity TruPS. Here the opaqueness of the structure itself and the limited disclosure made it difficult for regulators to actually determine how to account for TruPS CDOs for regulatory accounting purposes. Had banks been required to deduct portions of their TruPS CDO investments from capital, this may have limited bank investments in TruPS CDOs, which, in retrospect, would not have been a bad thing.

 

Future TruPS CDO issuance was dead long before Dodd-Frank placed restrictions on TruPS as regulatory capital. More important is the highly uncertain future of existing deals. Defaulting BHCs have yet to resolve their TruPS, but this will have to be done at least by their fifth year of deferral, which is the limit to which they can defer without defaulting. Rating agencies are making a conservative assumption that all existing deferrals are leading to defaults with little or no recovery. This has created disagreements among analysts responsible for conducting valuations. More work needs to be done to determine how these deferrals will play out and what assumptions are most reasonable to make regarding recoveries. In the meantime, efforts to resolve defaulted bank TruPS claims could add greater clarity to assumptions on  recoveries so critical to loss forecasts.

 

… what is needed in ABS/MBS markets is objective, critical analysis from analysts and researchers who are not profiting in any way from new issuance. An important aspect of the development of the TruPS CDO market, and of structured finance markets in general, is the dominance of analysis by companies directly profiting from new issuance. This is not unusual, and, in fact, is necessary. Innovation is greatest with economic incentives, and this process should not be hampered by regulation. Having said this, a more critical analysis of these deals may well have uncovered the high-risk nature of these investments that appeared to be captured in the large spreads and exceptional amounts of subordination in the AAA-rated senior classes of TruPS CDOs. More important, as the above-mentioned market concentrations became clearer, rating agency and issuer pricing models should have taken more account of this.

They didn’t, and the financial system collapsed. As for “objective, critical anslysis”, why who needs that when one has paid-for professors like Craig Pirrong who have made a living of collecting “expert academic” fees simply to sign off on industry memoranda?

Anyway, enough words: here are the promised TruPS CDS charts and figures:

full Philly Fed working paper can be found here.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wMW06uEd1jE/story01.htm Tyler Durden

It’s Official: Investors Like Stocks MORE Today Than They Did in 2000!

 

Last year, 2013, will likely go down as the beginning of the end for the bull market in stocks.

 

Since the market bottom in 2009, stocks have rallied over 170%. It’s been an incredible run, but I fear that we’re nearing the end.

 

From 2009-late 2012, most of the rally was driven by mutual funds and other large institutional investors. During this period, individual or “Mom and Pop” investors were largely investing in bonds.

 

 

 

This changed in late 2012. At that point, individual investors joined in and stocks entered a mania. You can see it clearly in the chart above.

 

You can also see this in fund flows movements: from 2009-early 2013, individual investors shunned stock-based mutual funds and poured their money into bonds instead.

 

This changed in early 2013, as investors suddenly found an appetite for stocks again, pouring a RECORD $324 BILLION into US stock mutual funds.

 

To put this into perspective, this means investors put more money into stocks this year than they did in 2000: at the very peak of the TECH BUBBLE!

 

Which brings us to today.

 

Today investors are more bullish than at any point in 20 years. In fact, they are so bullish they are borrowing money (called margin debt) to BUY stocks at fastest pace in history.

 

Companies like Twitter, which have never made a penny in profit, are valued at tens of billions of Dollars.

 

In short, the market, taken as a whole, is overbought, overvalued, and overextended.

 

Now, this doesn’t mean that stocks cannot go higher from here. After all, market manias always tend to last long than you expect.

 

However, it does mean that “the good times” are ending. And the likelihood of stocks posting another massive up year is very slim indeed.

 

In this environment, it’s wise to lighten up on ownership to the longside. It’s even wisier to look for beaten down undervalued companies that offer you good down side protection.

 

For a FREE Special Report outlining how to profit from bear market crashes and bull market runs, swing by: http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

Phoenix Capital Research 

 

 

 

 

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YfKSS7IBlec/story01.htm Phoenix Capital Research

It's Official: Investors Like Stocks MORE Today Than They Did in 2000!

 

Last year, 2013, will likely go down as the beginning of the end for the bull market in stocks.

 

Since the market bottom in 2009, stocks have rallied over 170%. It’s been an incredible run, but I fear that we’re nearing the end.

 

From 2009-late 2012, most of the rally was driven by mutual funds and other large institutional investors. During this period, individual or “Mom and Pop” investors were largely investing in bonds.

 

 

 

This changed in late 2012. At that point, individual investors joined in and stocks entered a mania. You can see it clearly in the chart above.

 

You can also see this in fund flows movements: from 2009-early 2013, individual investors shunned stock-based mutual funds and poured their money into bonds instead.

 

This changed in early 2013, as investors suddenly found an appetite for stocks again, pouring a RECORD $324 BILLION into US stock mutual funds.

 

To put this into perspective, this means investors put more money into stocks this year than they did in 2000: at the very peak of the TECH BUBBLE!

 

Which brings us to today.

 

Today investors are more bullish than at any point in 20 years. In fact, they are so bullish they are borrowing money (called margin debt) to BUY stocks at fastest pace in history.

 

Companies like Twitter, which have never made a penny in profit, are valued at tens of billions of Dollars.

 

In short, the market, taken as a whole, is overbought, overvalued, and overextended.

 

Now, this doesn’t mean that stocks cannot go higher from here. After all, market manias always tend to last long than you expect.

 

However, it does mean that “the good times” are ending. And the likelihood of stocks posting another massive up year is very slim indeed.

 

In this environment, it’s wise to lighten up on ownership to the longside. It’s even wisier to look for beaten down undervalued companies that offer you good down side protection.

 

For a FREE Special Report outlining how to profit from bear market crashes and bull market runs, swing by: http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

Phoenix Capital Research 

 

 

 

 

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YfKSS7IBlec/story01.htm Phoenix Capital Research

Massive Fireball From North Dakota Oil Train Derailment Caught On Tape

*NO INJURIES REPORTED FROM BNSF TRAIN FIRE IN NORTH DAKOTA

A train has derailed west of Casselton, North Dakota just before 2:20 p.m. Monday. As Valley News Live reports, several area emergency teams are on scene and are setting up an incident command center. Emergency crews are urging people to stay inside and a code red alert has been sent out to residents in a two mile radius of the accident. The Casselton Fire Department says a Burlington Northern Santa Fe train is involved. An unknown number of cars derailed, but Valley News Live reports is told one bulk oil car is on fire and toxic black smoke is being released.

 

 

The explosion:

Valley News Live – KVLY/KXJB – Fargo/Grand Forks

 

More images…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YOcVfr5gfPo/story01.htm Tyler Durden