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Thursday, November 26, 2015

Financial Review

The Gravy Boat

DOW + 1 = 17,813
SPX – 0.27 = 2088
NAS + 13 = 5116
10 YR YLD – .01 = 2.23%
OIL + .25 = 43.12
GOLD – 4.50 = 1071.90
SILV – .05 = 14.26

We have a boatload, or at least a gravy boat full of economic data before we get into the holiday. Initial claims for state unemployment benefits declined 12,000 to a seasonally adjusted 260,000 for the week ended Nov. 21. Claims have now held below the 300,000 threshold for 38 consecutive weeks, the longest stretch in years, and remain close to levels last seen 42 years ago.

Orders for business equipment climbed more than forecast in October. Bookings for non-military capital goods excluding aircraft rose 1.3 percent, the most in three months, after an upwardly revised 0.4 percent increase in September; non-defense capital goods are considered a proxy for business investment.

So, today’s report shows businesses are spending more on business. It may be too early to call it a trend reversal but cap ex spending had been weak, in large part due to cuts in the energy sector, and also the tendency for companies to indulge in share buybacks rather than plowing money back into the business.

Orders for all durable goods, items meant to last at least three years, climbed 3 percent. Commercial aircraft orders surged 81 percent in October after dropping 32.2 percent a month earlier. Excluding transportation equipment demand, which is volatile from month to month, bookings increased 0.5 percent in October. Stronger demand for computers, heavy machinery, military hardware and jumbo jets offset a dip in auto sales.

Consumer spending edged up 0.1% in October after a similar increase in September. Personal income increased 0.4% last month. Savings increased to $761 billion last month, the highest level since December 2012, from $722 billion in September. A little extra money in the bank may just mean consumers are saving up for the holiday shopping season. If so, it would bode well for cleaning out some of the excess inventory reported in yesterday’s GDP report. This points to a labor market that continues to show signs of recovery even though consumers remain wary.

Still, inflation remains tame. The personal consumption expenditures index, the PCE, was up 0.2%. Year on year core PCE is holding at 1.3%, which is far short of the Federal Reserve’s target of 2% inflation. Still, we expect the Fed to raise interest rates at the December FOMC meeting, but this means that rate hikes will likely take a long and shallow trajectory.

The University of Michigan consumer sentiment index rose to 91.3 in November, up from 90 in October; and while that is a gain, it falls short of the preliminary reading of 93.1. Consumers are feeling decent but not giddy. This follows yesterday’s report from the Conference Board that showed a big drop in consumer confidence. Both reports show consumers are sanguine about current conditions but a bit nervous about future economic prospects.

New single family home sales increased 10.7% in October to a seasonally adjusted annual rate of 495,000. The median price of a new home fell 6% from a year ago to $281,500. New home sales are a bigger driver of economic activity than existing home sales. Today’s numbers show solid, steady, though unspectacular growth, which seems to be a theme in recent economic reports. Still, you have to think there is a cumulative positive impact.

Investors across the world are also watching rising geopolitical tensions between Russia and NATO member Turkey after a Russian SU-24 warplane was shot down by a Turkish F-16 fighter jet on Tuesday. Russia’s Foreign Minister Sergei Lavrov said Turkey may have planned to shoot down the Russian warplane near its border, calling the act “planned provocation.” Lavrov also said Russia will reexamine the entire spectrum of its relations with Turkey because “we can’t leave what happened without a response.”

Russia supplies about half of Turkey’s natural gas, for which Turkey pay’s about $10 billion a year. No doubt the incident will cool business relations between Russia and Turkey but Russia needs the cash; and remember that Russia still supplies oil and gas to Ukraine despite their differences. Beyond that it is important to remember that Turkey is a member of NATO.

In its twice-yearly Financial Stability Review, the European Central Bank has warned that chances of an “abrupt risk reversal” are increasing due to slowing growth in China and the withdrawal of monetary stimulus in the U.S.

European authorities are proposing a system to share the cost of protecting bank deposits, as the FDIC does in the United States, but the European Deposit Insurance Scheme, which would protect savings accounts of up to €100,000-euro, could face opposition from Germany, which has long resisted sharing fiscal risks with other Eurozone countries.

The ECB has additionally announced it will temporarily pause its asset purchase program over the holiday season (December 22-January 1) “to reduce possible market distortions” during a period of “lower market liquidity,” which is to say, they will be closing shop for the holidays.

Minutes from the Bank of Japan’s latest meeting show that some policymakers believe an output gap was one reason the country was taking longer to meet its 2% inflation target, highlighting a lingering worry that quantitative easing may not be working. An output gap is the difference between what an economy is producing and what it could produce if operating at its most efficient. Separately, Japan announced it will raise the minimum wage by 3% to try to stimulate growth.

Andre Esteves, CEO of Grupo BTG Pactual, the largest investment bank in Latin America, has been arrested in Brazil as part of a corruption probe of the state-run oil company, Petrobras; which has lost 80% of its market cap. The government’s leader in the Senate, Delcidio Amaral, was also arrested this morning. Esteves and Amaral are accused of trying to suppress testimony in the investigation into a bribery scheme between Petrobras and the nation’s biggest builders.

More than 100 people have already been arrested, including former top executives at Petrobras and Brazil’s biggest construction conglomerate. And then they started to cut deals with prosecutors by turning evidence on higher ups. Esteves is widely considered the most high-profile figure in Brazilian finance; he is quoted as saying that his company, BTG, stood for “Better than Goldman.” Now the question is whether Esteves can cut a deal by implicating someone even higher up – the president of Brazil.

A federal judge in Manhattan has ruled that General Motors and its law firm, King & Spalding, need not turn over privileged documents to drivers hoping to show that the automaker intended to commit a crime or fraud by concealing defective ignition switches in their vehicles. Most of the documents related to the law firm’s advice from 2010 to 2013 on three crashes involving Chevrolet Cobalts.

Vehicle owners said the deception justified a waiver of attorney-client privilege. The judge found probable cause to believe that GM committed a crime or fraud by hiding the defect from regulators and the public, but did not go the next step to say that communications between GM and the legal firm were made to further such misconduct.

The World Meteorological Organization announced today that 2015 is the hottest year on record, surpassing last year’s record heat. And we still have more than a month left in the year. They made the proclamation without waiting for the end of the year because it has been so extraordinarily hot, forecast to stay that way and unlikely to cool down enough to not set a record.

The World Meteorological Organization is the weather agency of the UN, and they are not alone in their forecast, the US National Oceanic and Atmospheric Administration, NASA, and Japan’s weather agency all say 2014 is the current record hot year with a global temperature of 14.57 degrees Celsius, 58.23 degrees Fahrenheit.

The years between 2011 and 2015 have been the hottest five-year period on record. The record probably won’t last long. Due to the influence of El Nino, which is set to last into the middle of 2016, and continually rising levels of heat-trapping greenhouse gases, which come from the burning of coal, oil and gas, 2016 will be even hotter. The report comes the week before world leaders assemble in Paris to try to negotiate an agreement to fight climate change.

There is some optimism that the Paris summit can move beyond diplomatic posturing. Significantly, investors are beginning to realize that action on climate presents enormous business opportunities. A briefing paper released through the We Mean Business coalition points out that 277 companies with $6 trillion in revenue, and 144 investors with $20 trillion in assets under management, have collectively now made nearly 700 ambitious climate commitments.

The briefing paper  calls for a series of proposals to be included in the text of the Paris agreement to help unlock further flows of finance. These include a goal of net zero greenhouse gas emissions well before the end of the century, strengthening national emissions reduction commitments every five years from 2020, carbon pricing, and improving public policy to scale up private climate finance.

Here’s one way to look at climate change; the internet has been around since the 60’s, and in the 80’s the idea expanded into the World Wide Web. In the 90’s there was talk about building the information superhighway, even though we weren’t quite sure where that road would take us.

There were debates about the cost of building out digital infrastructure and who would bear this huge expense, not who would make fortunes with the business opportunities. It basically boiled down to figuring out how to make money with the technology. Once we wrapped our brains around that, the money started to flow. The same thing is about to happen with Green technology.

Wednesday, November 25, 2015

Turkey Shoots

DOW + 19 = 17,812
SPX + 2 = 2089
NAS + 0.33 = 5102
10 YR YLD – .01 = 2.24%
OIL + .89 = 42.64
GOLD + 6.70 = 1076.40
SILV + .05 = 14.30

The US economy expanded at a faster pace in the third quarter than previously reported. Gross domestic product rose at a 2.1% annualized rate, up from an initial estimate of 1.5%. Nearly all of the improvement was because of revised data on inventories, which showed businesses restocking shelves at a faster pace than the government first estimated.

Still, company stockpiles remained elevated compared with sales, indicating that new orders and production will cool further to clear shelves and warehouses heading into 2016. Inventories grew at a $90 billion annualized rate from July through September, almost twice as much as previously estimated, but down from the second quarter.

The improvement in inventory levels was offset by a slight downward revision in consumer spending last quarter. Cheap gasoline is giving households a little extra money, and consumers are spending, just not quite as fast; consumer spending was revised down to 3% from 3.2% in the initial estimate for the third quarter. Consumption during the current fourth quarter, including the holiday shopping season, is expected to increase at an annualized rate of about 3%.

For all of 2015, the rate of economic growth is expected to be about 2.5%, not much different from the 2.4% rate in 2014. Not great but good enough. The GDP report was the one of the last big economic reports before the Fed FOMC meeting December 16th; the other big report will be the November jobs report, which will be published on Friday, December 4th. In reality, not much has changed since June or even October, when the Fed did not raise rates.

Corporate profits after tax, without inventory valuation and capital consumption adjustments, fell at a 3.2% pace from the second quarter, the biggest drop since the fourth quarter of 2014. On a year-over-year basis, corporate profit growth was 1.4%, compared with 8.5% year over year growth in the second quarter. That measure of corporate profits tracks most closely with what companies report in earnings statements. Profit data aren’t inflation adjusted.

The Conference Board reports that its index for consumer confidence fell to 90.4 from 99.1 in October. Despite a strong advance in hiring last month, consumers expressed more caution about the job market and future economic conditions in the most recent survey. The fall is in the expectations, not the current conditions, component. The decline in job expectations is dramatic and raises the question whether global effects, which have been negative for the US, are beginning to weigh on the American consumer, which would not be a positive for the holiday spending outlook.

Existing home prices rose in September. The S&P/Case-Shiller 20-city composite index gained 0.2%. Prices rose 5.5% for the year, up from a 5.1% yearly gain in August. The index is still about 12% lower than its 2006 peak. Phoenix home prices were up 0.2% in September, and up 5.3% over the past 12 months.

At the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 54% above January 2000 (54% nominal gain in almost 16 years).

These are nominal prices, and real prices (adjusted for inflation) are up about 40% since January 2000 – so the increase in Phoenix from January 2000 until now is about 14% above the change in overall prices due to inflation.

Turkey has shot down a Russian military jet near the Syrian border. Turkish officials said the jet was downed after it knowingly violated Turkish airspace. The two Russian pilots ejected before the plane crashed but they were shot in their parachutes as they floated to earth. And then Turkish tribesmen reportedly destroyed a Russian helicopter with a TOW antitank missile as it tried to rescue the airmen. The Russian Ministry of Defense confirmed that one fighter pilot had been killed by ground fire and that a marine deployed on the search-and-rescue helicopter died but that the rest of the crew had managed to escape.

Russia’s retaliation so far has been largely symbolic. Russia’s foreign minister canceled a Wednesday visit to Turkey, and a large Russian tour operator announced it was suspending sales to Turkey. The two countries are also significant trade partners, or at least they were. A reminder that Turkey is a member of NATO. Today, French president Francois Hollande was in Washington and conducted a joint press conference with President Obama. They vowed to intensify their nations’ military attacks on ISIS in Syria and Iraq. They also announced that next week’s climate change summit in Paris would be a “powerful rebuke” to terrorists.

In the immediate aftermath markets reacted nervously, with the lira selling off, Russian stocks sliding and global government bonds climbing as investors move to safe havens. Meanwhile, a car bomb exploded outside a hotel housing judges supervising parliamentary elections in Egypt’s North Sinai, killing at least three people and injuring 14. The region is the main area of operations for the Egyptian affiliate of ISIS.

Citing “increased terrorist threats” from militant groups in various regions of the world, the US State Department has issued a global travel alert ahead of a busy Thanksgiving week. The department did not advise people against travel but said US citizens should be vigilant, especially in crowded places. The announcement comes as Brussels remains on lockdown and follows the discovery of an explosive belt near Paris and the mobile phone of a fugitive believed to have taken part in the November 13 attacks.

Ford is the latest automaker to say it will not equip future cars with Takata air bag inflators that use ammonium nitrate, the chemical propellant that has been linked to eight deaths and more than 100 injuries worldwide. Ford’s auto recalls with Takata airbags have so far affected about 1.5 million vehicles, including certain older model-year Ford Mustangs, Ford GTs and North American-built Ford Rangers.

Costco has an E. Coli problem. Nineteen people have been infected with E. coli in California, Colorado, Missouri, Montana, Utah, Virginia, and Washington. They have tracked the source to Costco’s rotisserie chicken salad. You might want to stick with turkey for the next few days.

Skyworks Solutions has withdrawn its agreed takeover bid for PMC-Sierra after an increased offer of $2.3 billion from Microsemi gained the backing of the target’s board. Skyworks said it won’t modify its bid and that the company is entitled to an $88 million termination fee from PMC. Semiconductor makers have pursued mergers at a record pace this year.

China’s securities regulator has canceled a requirement that brokerages must hold a net positive purchase position on daily proprietary trading as the nation’s stock market stabilizes following a summer slump. With the Shanghai Composite now having gained more than 20% from its August low, regulators are withdrawing from a government campaign to prop up shares.

New York Attorney General Eric Schneiderman is clamping down on “spoofing,” issuing subpoenas to interdealer brokers BGC Partners, TFS-ICAP, GFI Group, and Tullett Prebon Financial Services. The investigation is focused on placing offers with the intent to cancel them before they trade in order to trick other investors by creating the illusion of demand. Earlier this month, high-frequency trader Michael Coscia became the first person to be found guilty of spoofing in a criminal case.

National Football League player Dwight Freeney can proceed with his lawsuit alleging that Bank of America was complicit in a fraud scheme that caused him to lose more than $20 million and forced his Rolling Stone restaurant to close. The Arizona Cardinals linebacker last Thursday defeated a bid by the parent company and its Merrill Lynch unit to dismiss, among others, fraud and negligent misrepresentation claims stemming from the bank’s recruitment of him in 2010 to manage his assets. US District Judge Margaret Morrow in Los Angeles didn’t rule on the merits of Mr. Freeney’s claims but agreed that he alleged enough facts to move forward with the case.

Just in time for the busiest shopping week of the year – iSight Partners, a privately held cyber intelligence firm is warning retailers about what they call “the most sophisticated point-of-sale malware seen to date.” The firm had shared information about the malware, dubbed ModPOS, with clients in October, and briefed dozens of companies about its dangers. Some retailers have found digital evidence that linked threat indicators they had previously seen to ModPOS, though that does not necessarily mean they were victims of breaches. Just a reminder that if you are concerned about cyber security while holiday shopping, cash still works.

CalPERS, the California Public Employees’ Retirement System said it paid $3.4 billion in performance fees to its private equity managers since 1990 while the controversial sector generated $24.2 billion in profits for retirees. CalPERS has been hard-pressed to keep up with looming obligations to its 1.7 million current and future retirees.

The CalPERS fund, the largest pension fund in the country now at about $295 billion, is considered about 74% funded, down from 77% as of June 30, 2014, mostly because of weak performance from its global stock portfolio. The global stock portfolio posted returns of 1% for the last fiscal year, ended June 30. Private equity, by contrast, returned 8.9% for the year but not without risk and hefty fees.

Jeff Bezos’s space exploration company Blue Origin achieved a key milestone: sending a rocket into space and then landing it safely back on Earth. Making reusable rockets is a central goal for a generation of companies that are trying to cut the cost of space travel and exploration. A Blue Origin vehicle called New Shepard flew to space on Monday, reaching an altitude of 100 kilometers, and then landed back at its launch site.