More generally, there are several reasons to think that inflation will remain moderate and close to our objective. First, and most obviously, the economy continues to operate with significant slack. Second, measures of underlying inflation show little upward pressure. In fact, one—the Federal Reserve Bank of New York’s Underlying Inflation Gauge—is turning down. This measure uses a very wide set of variables to forecast the underlying inflation trend. Third, it is hard to be very concerned about inflation risks when the growth rate of nominal labor compensation is so low and stable. It is noteworthy to me that the employment cost index has risen only 2.1 percent over the past four quarters and has shown no acceleration. Fourth, inflation expectations remain well-anchored. This is critically important because inflation expectations are an important driver of actual inflation outcomes. Taking into account the current stance of monetary policy, I anticipate that inflation will decline to slightly below our 2 percent long-run objective over the next few years.

Dudley said this means that this means that the Fed Funds rate will stay “exceptionally low” at least through late 2014. Dudley’s assumption is that job recovery won’t happen fast enough to meet the Fed’s dual mandate of keeping inflation in check while supporting full employment:

Given our forecast of stable prices and a still slow path back to full employment, there is an argument for easing further. But, unfortunately, our tools have costs associated with them as well as benefits. Thus, we must weigh these costs against the benefits of further action.

As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs. But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing.

The full text of Dudley’s remarks are available here.

Paul Ausick

The deal was struck with the US Environmental Protection Agency and the state of Indiana is expected to cut 90% of the refinery’s flaring-related emissions. A similar deal was struck between the EPA and Marathon Petroleum Corp. (NYSE: MPC) for six of the company’s refineries.

The capability to process the nastier oil sands crude should lower the cost of crude to BP and improving the company’s margins. Oil sands crude has been selling at a discount of as much as $20/barrel to WTI crude and even more to Brent crude.

The Whiting refinery is expected to start refining oil sands crude next year.

Paul Ausick

The SEC site noted that the SEC alleges that George Levin and Frank Preve from Fort Lauderdale area raised more than $157 million from 173 investors in less than two years.  Today’s allegations are that they issued promissory notes from Levin’s company and interests in a private investment fund they operated.

The SEC noted that they used the investor funds to purchase discounted legal settlements from former Florida attorney Scott Rothstein through his law firm Rothstein Rosenfeldt and Adler PA. Another charge is that the settlements Rothstein sold were not real and the supposed plaintiffs and defendants did not exist.

Rothstein reportedly used the funds in classic Ponzi scheme fashion to make payments due other investors and support his lavish lifestyle.

Apparently some bad guys do get caught.  The SEC report says that Rothstein’s Ponzi scheme collapsed in October 2009 and that he is currently serving a 50-year prison sentence.

FULL COMPLAINT

JON C. OGG

First Solar Inc. (NASDAQ: FSLR) has been a total disaster, but short covering and bottom-fishing traders are snapping up shares.  After an all-time low of $13.75 this week, shares recovered to $14.92 on Thursday on the most active volume in two weeks (over 10 million shares).  Shares are indicated above $15.00 for Friday but we will see if this can hold. SunPower Corporation (NASDAQ: SPWR) recovered more than 10% on Thursday after a recent low of $4.94 with a close of $5.59 on over 4 million shares (most since Feb 17 at 7.3 million shares).

One potential problem to consider is that the tariffs could inadvertently impact some of the U.S. producers of solar panels as well.  The issue is that many components involved in making these PV panels also come from China.

Suntech Power Holdings Co. Ltd. (NYSE: STP) is a loser in this tariff effort.  Shares were at $2.60 just last Friday and the ADRs closed down at $2.13 on Thursday.  Shares are indicated higher on Friday but we will have to see how it pans out.  Trina Solar Limited (NYSE: TSL) is another loser with its ADR closing at $6.08 Thursday after having been at $7.50 just last Friday.

LDK Solar Co., Ltd. (NYSE: LDK) closed lower on Thursday at $2.91, but this is actually in-line with prices just last Friday and its 52-week range is $2.54 to $7.90.

GT Advanced Technologies Inc. (NASDAQ: GTAT) is often lost in the shuffle as it is on the technology side of the solar PV process.  It is also in LED technology.  Shares closed down at $4.49 on Thursday against a 52-week low of $4.24.  The 12 million shares traded on Thursday was the highest trading volume seen since last August.

If you really want to know what the trend is on a global-solar basis, just follow the Guggenheim Solar (AMEX: TAN).  This ETF closed down yet again at $18.35 on Thursday after closing at $19.21 the prior day and against a $20.61 close last Friday.

Unfortunately, the solar sector has its share of woes and pain.  Austerity, expiration of tax credits, a lack of cost-effectiveness, and other issues are going to be present for the time being whether tariffs exist or not.

JON C. OGG

[T]he main risk lies in potentially overcommitting to the ultra-easy monetary policy, reigniting the global inflation debacle of the 1970s.

Bullard includes a chart in his presentation that shows personal consumption expenditures running slightly above an annual inflation rate of 2%, the Fed’s sort-of target.

Harking back to the bad, old days of the 1970s, Bullard notes that the era suffered 4 recessions in 13 years, double-digit inflation, and double-digit unemployment. Calling monetary policy a “blunt instrument,” Bullard argues that labor policy should replace monetary policy in grappling with unemployment.

That’s probably a wise suggestion, except that labor policy depends on getting legislation through the Congress, and if that had been easy, it would already have been done. Even though Fed monetary policy may be a club and not a scalpel, it may be all that’s left in the policy arsenal.

Bullard’s slide presentation is available here.

Paul Ausick

The plan won’t do much to curb expected USPS deficits of around $18 billion annually by 2015, but keeping the small post offices open and maintaining the local identity of small towns with unique ZIP codes will help reduce the political pressure on the agency.

The US Senate has approved a bill that would return $11 billion to the USPS that the agency overpaid to its pension accounts. The US House of Representatives is still working on a bill, including one that would consolidate post offices in more heavily populated areas rather than shutting down offices in small towns.

In its announcement the USPS said that details of its plan would be available here after 4:00 p.m. today.

Chesapeake did go on to note that this SEC inquiry “should not be construed as an indication that any violation of the federal securities laws has occurred. The company and Mr. McClendon intend to cooperate with the SEC in responding to its inquiry.”

This morning we saw three analyst calls on Chesapeake if you count a Canaccord Genuity drop of the price target down to $26 per share for its target.  The stock closed up 2.7% at $17.19 today and the shares are fluctuating between being up and down in the after-hours.

Today’s news should have been expected, and it is safe to assume that more headline risk remains here.  Chesapeake did hit a new 52-week low of $16.70 today and the 52-week range was previously $16.72 to $35.75.

JON C. OGG

The trick is that Visa divulged in a filing that the Department of Justice has a civil investigative demand as an official request for information over its pricing structure and over recent pricing adjustments.  It needs to be known that Visa has received inquiries of this nature before and the CEO noted that it could take up to a year to resolve.

Perhaps what is of a larger concern to investors is that this inquiry came in March, and it is now May.  Even if it came at the very end of the month that means that Visa sat on the news for a whole month allowing its shares to rise from $118 to $125 before it divulged the news.

Visa shares hit $125.25 on May 1 as a new high and pulled back on Wednesday to $122.19 before the drop of 1.5% to $120.40 this Thursday.  Mastercard hit a high of $466.98 on May 1 and pulled back to $451.45 on Wednesday before its 0.6% drop this morning to $448.20.

Department of Justice inquires do not mean that anything wrong has been done, but right now investors treat any form of investigation with caution.  It is caution that should be expected, and frankly the stocks have held up better than many might have expected.  This won’t be going away any time soon and we would expect that analysts will be chiming on this matter for the rest of the week.

JON C. OGG

There was one takeaway that we are shocked did not get more play and more attention, and it is something that both Congress and the White House need to greatly consider in a time of austerity and when taxes are set to rise for many key earners at the start of 2013.  About 18 minutes into the Bernanke post-FOMC press conference on Wednesday is where we think the focus needs to come down because it contains an outlook and a warning about the looming fiscal cliff in 2013.  It is this key issue that may ultimately decide the election outcomes for the White House and for Congress.

The warning is over if no action is taken at all.  Mr. Bernanke said that it is imperative for Congress to give us a fiscal policy that has to be based upon sound fiscal policy and in a way that will not endanger the short-term recovery of the economy…. At about the 17:50 to 18:00 minute mark of the press conference is where the real jewel and the real warning comes into play.

Bernanke said, “And I am concerned that if all the tax increases and all the spending cuts that are associated with the current law which would take place, absent any Congressional action, that would occur on January 1st that that would be a significant risk to the recovery.  So I am looking and hoping that Congress will take actions that will address both sides of that ‘uh’ both requirements of good fiscal policy.”

The looming fiscal cliff…  Not enough time was spent on this as the conference was more around projections, economic outlook downgrades, deflation versus inflation, what low rates really mean, and other important issues.  What Bernanke did not address is that Congress has not done its job in taking any actions that are good for the population as a whole.  The infighting is too deep and getting to any middle ground seems impossible today.  How long has it been since the U.S. government operated with a real budget now?

The United States has already lost its prized Triple-A rating from the ratings agencies and the risk is of further downgrades.  New and fresh actions from France and The Netherlands indicate that there are risks that austerity measures will not be taken by the stronger nations in the European Union and any domino-effect might allow U.S. politicians to be less hawkish about living with budgetary means.

As we have seen over the last two years or so, politics is a very dirty game and finding the real winners or beneficiaries is often a challenge.  Selling austerity and budget cuts to the public is a hard task.  At the end of the day it is just easier to sell the notion that it is better to have good times at any cost rather than contraction or doldrums just to live within budgetary means.

How this all ultimately plays out really depends upon the elections in November.  After that we will know for sure how the looming fiscal cliff will play out, but polls and predictions are already trying to get a jump to determine who will win the White House and which party will be in clear control of Congress.

This looming fiscal cliff was not given anywhere near the attention it deserved.  Our future depends upon it.

JON C. OGG

A review of the stockcharts.com chart at the end of this article shows that Wal-Mart again has sharply violated its 50-day moving average after a recovery to new recent highs.  This is the second such violation in well under ninety days.  The stock continues to act as a trap.

Now take a look at the options trading.  Of course there are many call option buyers and sellers hoping that today’s news is just an over-reaction since the stock is down by 4.7% to $59.50 on three-times normal trading volume with more than two hours until the market closes.

Go out to the JUNE $57.50 PUTS with some 4,514 contracts traded against an open interest of 14,187 contracts.  The last trade was at $0.97 per contract, indicating that investors are effectively betting that the stock may go to around $56.50 or so.

Now go out to the SEPTEMBER $57.50 PUTS trading 2,259 contracts against a prior open interest of 5,187 contracts.  With a last trade of $2.07, that is a gamble that Wal-Mart will effectively fall to $55.50 or so by the time September 21, 2012 rolls around.

Of course this is using simple intrinsic value.  It is very possible that some investors are selling those puts for a theoretical long trade and some investors may just be hedging shares.  Still, some are making the bet that more downside is on the way.

It is hard to imagine that a few million dollars worth of a scandal can eat up more than $9 billion in market capitalization, but investors shoot first and will ask questions later.  If you find one roach somewhere in your house, common sense would dictate that there are other roaches elsewhere.

JON C. OGG

You can click on the chart twice to enlarge it.