Financial Review with Sinclair Noe
DOW + 22 = 16,982
SPX + 0.57 = 1978
NAS – 4 = 4444
10 YR YLD + .02 = 2.47%
OIL - .52 = 101.57
GOLD – 4.80 = 1304.50
SILV - .18 = 20.67
SPX + 0.57 = 1978
NAS – 4 = 4444
10 YR YLD + .02 = 2.47%
OIL - .52 = 101.57
GOLD – 4.80 = 1304.50
SILV - .18 = 20.67
This will be a busy
week for economic reports. Today’s reports included the National Association of
Realtors’ index of pending home sales for June; it dropped 1.1%. This index
looks at contracts signed, and usually about 80% of signed contracts result in
a sale within 2 months. The pending home sales index is up 9% from February,
but it is down 7.3% compared to June a year ago. The blame can be placed at the
usual suspects: tough credit requirements, rising home prices, and weak wage
growth.
In a separate report,
the market preliminary services Purchasing Managers Index for July was 61,
unchanged for June; a reading above 50 indicates expansion. The services sector
continued to add employees, though at a slower pace. The employment index fell
from 56.1, the fastest rate on record, to 52.8 in July.
Wednesday morning
brings the first estimate of second quarter gross domestic product. It is
widely anticipated the economy grew at about a 3% pace in the second quarter,
following a 2.9% contraction in the first quarter, largely blamed on bad winter
weather combined with the expiration of long-term unemployment benefits and
working through excess inventory accumulation. So, the first quarter and second
quarter will kind of cancel each other out and result in a flat first half. If
the economy can maintain 3% growth for the next couple of quarters, it will
result in annualized growth a little below 2%. Wednesday’s GDP report will
include revisions to output for the past 3 years.
A few hours after the
GDP report, the Federal Reserve FOMC will wrap up a 2-day meeting on monetary
policy, and issue a statement. However, the Fed will not update its economic
forecast, nor will they hold a press conference until the September 17 FOMC
meeting; so don’t expect any major changes to Fed policy this week. Still, Fed
watchers will look for nuances to the Fed statement for any hint of policy
changes, specifically when the Fed will start to raise interest rates.
Friday brings the
non-farm payroll report for July. It is expected the economy added about
235,000 net new jobs in July; anything close is in the ballpark; anything under
200,000 or over 300,000 would shock the markets. The unemployment rate is
expected to drop to 6%, but the unemployment rate has quite a few variables to
consider, including the participation rate – the percentage of the population
still looking for work or working. The participation rate has dropped from
65.8% in 2007 to 62.8% last month. This means that a lot of people have dropped
out of the labor market. If some of those people re-enter the labor market and
start looking for jobs, the unemployment rate could move higher, even if the
economy adds a bunch of new jobs.
We kick off the week
with a Merger Monday. Zillow will buy Trulia for $3.5 billion. Zillow and
Trulia are No. 1 and 2 in the online real estate market, followed by No. 3 Move
Inc. Zillow reported nearly 83 million monthly unique visitors in June. Trulia
reported 54 million. The combination would create something like a monopoly in
the online home hunting market.
Dollar Tree has agreed
to buy Family Dollar Stores for $8.5 billion. The deal was pushed forward by
investor Carl Icahn, who had built up a 9.5% stake in Family Dollar, and with
the bump up in price from the merger, Icahn pockets a cool $150 million
increase this weekend. The new Dollar Tree, or maybe Dollar Family Tree, would
keep operating separate chains, but would have about 13,000 locations across
the US and Canada, with 145,000 employees and about $18 billion in revenue.
Tesla and Panasonic
have reached a deal for Panasonic to invest in Tesla’s gigafactory. The initial
Panasonic investment will be about $200 to $300 million, but could grow to $5
billion. The gigafactory would make battery packs for cars. Panasonic is the
main supplier of battery cells for Tesla. Tesla has said it is evaluating sites
in Arizona, California, Nevada, New Mexico, and Texas to place its massive
battery factory. The electric car maker would break ground on the gigafactory
later this year. Tesla is scheduled to report earnings on Thursday.
Lloyds Banking Group
has agreed to pay $370 million to US and British regulators to resolve
investigations into manipulating interest rates or Libor rate rigging. There
were two main issues with Lloyds: rigging Libor, for which seven other
institutions have already been punished; and for the first time, manipulating
another rate, known as the repo rate. This repo rate was used to calculate the
scale of the fees paid to the Bank of England for its special liquidity scheme
(SLS), which was created in April 2008 to cheapen the prices at which money
could be obtained by banks as the credit crisis unfolded; in other words,
Lloyds manipulated their own bailout. The British lender is the latest big bank
to admit criminal wrongdoing, and they entered into a deferred prosecution
agreement. Under that agreement, Lloyds will avoid criminal charges if it stays
out of trouble for the next two years.
Plenty of banks have
entered into deferred prosecution agreements but I have never heard of one that
violated a deferred prosecution agreement; and it isn’t because the banksters
keep their nose clean; it’s because the regulators never apply the DPA.
Taking a look at
geopolitical hotspots. Israel had agreed to a 12-hour ceasefire, but Hamas
continued to fire rockets into Israel, so the ceasefire is off. Palestinian
fighters launched a cross-border raid. Israeli Prime Minister Netanyahu is now
warning of a protracted war in Gaza.
The Ukrainian
government said today its troops had taken more territory from the rebels and
were moving towards the site of the Malaysian airlines crash, which
international investigators said they could not reach because of the fighting.
Meanwhile, European leaders and the US agreed to impose wider sanctions on
Russia's financial, defense and energy sectors.
Separately, an
international arbitration court at The Hague ruled that Russia must pay $50
billion for expropriating the assets of Yukos, the former oil giant. Finding
that Russian authorities had subjected Yukos to politically motivated attacks,
the panel made an award to a group of former Yukos shareholders that equates to
more than half the entire fund Moscow has set aside to cover budget holes. The
ruling hit back at decisions made under President Vladimir Putin's rule during
his first term as president to nationalize Yukos and jail Mikhail Khodorkovsky,
who had criticized him. The hardline approach was seen by Kremlin critics at
the time as a stark message to oligarchs to stay out of politics. Khodorkovsky,
who used to be Russia's richest man, was arrested at gunpoint in 2003 and
convicted of theft and tax evasion in 2005. Yukos, once worth $40 billion, was
broken up and nationalized, with most assets handed to Rosneft, an energy
company run by an ally of Putin.
And don’t forget
Libya. Two rival brigades of former rebels fighting for control of Tripoli
International Airport have been throwing bombs at each other’s positions; then
somebody bombed a huge nearby fuel depot, and that is now burning out of
control. The conflict has forced Tripoli International Airport to shut down.
Airliners were reduced to smoldering hulks on the tarmac and the aviation
control center was knocked out. Libya's government has asked for international
help to try to contain the disaster at the fuel depot on the airport road,
close to other tanks holding gas and diesel. With Libyan security
deteriorating, the United States evacuated its embassy in Tripoli on Saturday;
British, Italian, Philippine, and Australian embassies have followed suit.
The typical American
household has been losing ground. According to a new study by the
Russell Sage Foundation the inflation-adjusted net worth for the
typical household was $87,992 in 2003. Ten years later, it was only $56,335, or
a 36% decline. Even as the average American household’s wealth declined, the
net worth of wealthy households increased substantially. The average wealth of
the American household in the 95th percentile was $1,192,639 in 2003, and
$1,364,834 ten years later, an increase of 14%.
The authors of the
study said the reason for the disparity was that affluent households were able
to ride the success of the surging stock market after the 2008 crash, while
middle class families were severely impacted by the decreasing value of their
homes. Wealth declined for everyone in the aftermath of the Great Recession,
but better-off families were able to rebound. Households at the bottom of the
wealth distribution, on the other hand, lost the largest share of their wealth.
So, as we look at the
economic news this week, the GDP estimate and the jobs report, it’s a little
hard to imagine sustainable economic growth without a strong middle class. The
lesson of the past 10 years, and we might even say the past 30 years, is that
pumping up the upper echelons of the economy and hoping it trickles down to the
rest, doesn’t work. The middle class gets clobbered, small businesses are being
knocked out of the competition; in the early 1980s small business startups
accounted for 50% of all business growth, but that dropped to 35% by 2010, and
more small businesses are closing than are being created; and yes, that equates
to fewer jobs being created by small businesses.
Back in 1929, the top 10% earned nearly 50% of
the income. Today, income inequality is even wider. In 2012, the top 10%
surpassed 50% of the total US income for the first time, and the problem has
only grown in the past 2 years. Wealth disparity alarms often coincide with
major financial peaks, such as 1929, 1999, 2007, and today; that’s because
wealth disparity and income inequality are not sustainable. And there are only
2 solutions: the first is to grow the middle class, encourage small business,
lift people out of long term unemployment; the second solution, is that the
wealth distribution problem tends to be solved by falling markets.
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