FINANCIAL REVIEW

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Sinclair Noe — December 3, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 33 = 17912
SPX + 7 =2074
NAS + 18 = 4774
10 YR YLD + .01 = 2.29%
OIL + .49 = 67.37
GOLD + 11.60 = 1211.10
SILV – .04 = 16.52

Record high for the Dow Industrials and the S&P 500.

About 2 weeks before the Federal Reserve FOMC meets to determine monetary policy they gather together reports from across the nation on how the economy is doing; the Fed then binds those reports in a Beige folder, or what we call the Beige Book. As the name would imply, the Beige Book is not always a page turner, but it can provide some useful information as well as an indicator of what the Fed policymakers are thinking, and then there is the occasional surprise nugget of information.

The Beige Book was released today and it shows the US economy holding up well despite global slowing; economic activity continued to expand in October and November, with lower gasoline prices boosting consumer spending. Despite a sharp drop in crude oil prices, drilling activity in shale production districts remained steady; oil and gas exploration activity decreased in North Dakota and increased in Montana relative to a month earlier; production remained at record levels. Lower oil prices have some oil companies concerned and closely monitoring prices, which are close to many firms’ breakeven price.

Employment gains were widespread. Better conditions in the labor market meant more employers were struggling to retain key workers as well as fill job openings in sectors such as information technology, engineering, legal and health services, manufacturing and transportation. Inflation remains tame, thanks to lower gas prices, and also because a stronger job market has not yet pushed inflation higher.

Oil was a dominant theme is this edition of the Beige Book; it got more mentions than any other word. Contrary to the Fed’s outlook for domestic oil producers, Reuters reports a drop of almost 40% in new well permits issued across the US in November. Just a reminder that about 20% of the high yield or junk bond market involves the energy sector, and fully a third of the capital expenditure among S&P 500 companies can be traced to the energy sector. The Beige Book takeaway is that the economy isn’t seeing much response to the falling price of oil right now, but everyone is on the lookout for a big impact.

The Institute for Supply Management said its services index rose to 59.3 last month from 57.1 in October, and just below the post-recession high of 59.6 hit in August. A reading above 50 indicates expansion in economic activity. Two out of the ten components of the survey, employment and imports, fell from October, but all were above the 50 level.

The payroll processing firm ADP provides their own survey of the labor market each month just before the government’s monthly jobs report. Today, ADP estimates the economy added 208,000 private sector jobs in November. The number was just a little below expectations. Services dominated the picture, with 176,000 new jobs, compared to 32,000 in goods-producing. And small business continue to be the biggest job creators, adding 101,000 jobs last month, compared to medium sized businesses which added 65,000 jobs. Both the ADP and the government report on payrolls have risen more than 200,000 in at least 7 of the past 8 months. These are not blockbuster numbers but they are solid growth numbers.

Friday’s job report is expected to come in around 230,000 net new jobs; the ADP report today does not change that estimate. However, it is important to realize that the estimates for November are all over the board, and one reason is because of seasonal adjustments to the number; and the guesstimate is that the seasonal adjustment in October was a bit harsh; also, there is a tendency over the past few years for the Labor Department to make pretty big upward revisions in November. Also, we’ve seen some strong economic data recently. The Institute for Supply Management’s surveys of manufacturing and services firms in November were consistent with GDP growth north of 5%. TrimTabs Investment Research, after analyzing income tax deposits from workers subject to withholding, estimates 306,000 jobs were created. Jobless claims, a proxy for layoffs, were low in the week companies were surveyed. I’m just saying, you want to tune in Friday for the results.

Meanwhile, the Labor Department reported today revisions to third quarter productivity. Productivity grew at a revised 2.3% annual pace instead of 2% from the beginning of July through the end of September. The increase in output of goods and services was raised to 4.9% from 4.4%. Hours worked were revised up by a smaller amount, to 2.5% from 2.3%.Unit-labor costs, meanwhile, fell 1% instead of rising 0.3%. And labor costs for the second quarter were revised to show a 3.7% plunge — a much larger decline than the previously reported 0.5% drop. The amount of compensation employees receive per hour of work rose in the third quarter after declining in the spring, but the increase was small: 1.3% before inflation is taken in to account. That’s down from an initial estimate of 2.3%, though. Adjusted for inflation, compensation rose just 0.2%. Let’s break that down. The report means workers are more productive, but they aren’t being rewarded for producing more. This slow growth in wages is holding back the recovery. If you want to know why most people don’t feel like the economy is strong, it’s because their own paychecks are anemic, despite their hard work.

It seems to me the best way to push wages higher is to have more jobs; that would help push wages for everyone a bit higher. The best welfare program is a job at a living wage. There is no better anti-poverty program than jobs for those who want to work. Offering a job is a hand-up not a hand-out. Working promotes community. It allows for shared prosperity. We all benefit when everyone works. It is consistent with American values. We have a half-century of experience with hand-outs instead of hand-ups. Hand-outs do little to reduce poverty. Inequality is worse.

In other news today:
Honda has announced a nationwide airbag recall in the US. Honda has already recalled 3.5 million cars with Takata airbags and now they’re expanding the recall to all 50 states, despite a parts shortage. In other words, call first.

News out of Ukraine that does not involve Russia. The country’s energy minister said there was a short circuit at a 1,000 megawatt nuclear power plant, the largest in Europe; they reported rolling blackouts throughout the country. The problem is not with the nuclear reactors, still….

The Russian ruble continues its meltdown. About a month ago, the Russian central bank said it would stop intervening to prop up the ruble except in emergency situations. Yesterday and today they intervened.

The dollar hit a 5 year high. The euro dropped to a 27 month low against the dollar. This would be consistent with the European Central Bank taking stimulative measures to boost growth and fend off deflation when they meet tomorrow.

Hackers who knocked Sony Pictures Entertainment’s computer systems offline last week used tools very similar to those used last year to attack South Korean television stations and ATMs. South Korea publicly blamed the 2013 attacks on North Korea. The FBI issued a private warning to companies to be on the lookout for a certain type of destructive malware that can basically wipe out hard drives.

A United Nations global warming conference has convened in Peru, trying to pave the way for an international treaty they hope to forge next year. In the more than 2 decades since leaders first got together on climate change, life on Earth has changed. And this conference provides some of the actual numbers. Carbon dioxide emissions: up 60%. Global temperature: up six-tenths of a degree. Population: up 1.7 billion people. Sea level: up 3 inches. US extreme weather: up 30%. Ice sheets in Greenland and Antarctica: down 4.9 trillion tons of ice. In other words, it is hotter, more polluted, more crowded, and more extreme.

Tomorrow morning at 7:05AM Eastern Time, the Orion spacecraft is scheduled to be launched by NASA from Cape Canaveral. This Orion test vehicle won’t be carrying a crew. The flight is meant only to check out the spacecraft’s systems for the first time in space. But a full-featured version of the spaceship is scheduled to send astronauts beyond Earth orbit in 2021, for the first time since the Apollo 17 moonshot in 1972. NASA plans to use Orion spaceships to send astronauts to an asteroid by the mid-2020s, and to Mars and its moons starting in the 2030s.