Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Wednesday, March 11, 2015

King Dollar

Financial Review

King Dollar

DOW – 27 = 17,635
SPX – 3 = 2040
NAS – 9 = 4849
10 YR YLD – .01 = 2.11%
OIL + .11 = 48.40
GOLD – 7.60 = 1154.90
SILV – .15 = 15.57

The euro plunged to a fresh 12-year low this morning, extending a broad decline just days after the ECB launched its €1 trillion bond-buying program, while the dollar index soared to its highest in more than 11 years at 99.41, on expectations that the Fed could soon lift US interest rates. Nearly all now believe the FOMC will remove the word “patient” from its policy statement after its March 17-18 meeting, opening the door for a rate increase in June. The euro dropped down to $1.05. If you’ve been thinking about a European vacation, this is the year.

According to an earnings model created by Goldman Sachs, a 10% strengthening in the trade-weighted dollar lowers the estimated 2015 profit for the S&P 500 by about $3 a share. The S&P 500 should have earnings per share of $123.52 this year. Should S&P 500 earnings fall for the first three months of 2015, it would mark the first period of negative earnings since 2009.

The quarterly Duke University/CFO Magazine Global Business Outlook Survey reports 70% of US companies plan to raise pay by at least 3%, on average, this year. Three percent raises, to be sure, don’t sound like all that much. Yet it’s been a long time since wages grew more than about 2%, basically just keeping pace with inflation. Wages aren’t expected to rise across all industries. While pay is going up in consulting, tech, manufacturing and health care, wage growth is still expected to be less than 2 percent in retail, media and energy.

The survey also shows two out of three big US exporters, those with at least one-fourth of their total sales overseas, said the appreciation of the dollar has had a negative impact on their businesses. And nearly one-fourth of big exporters said they have reduced their capital spending plans as a result.

So, a strong dollar is good for travel abroad, good for cheap oil; bad for exports. The dollar is up 24% since June; that is a massive move for a currency, and it is a move that will only slowly ripple through the economy. In addition to paying less at the gas pump, the cost of imported goods and services has dropped for seven straight months. Import prices excluding fuel fell 0.7 percent in January, the biggest decline outside of a recession in records going back to 2002. Clothing, electronics and automobiles are among the items that will probably carry smaller price tags in the second and third quarters.

And the Fed meets next week, another FOMC meeting to determine monetary policy, and it looks like they are getting closer to raising rates. There are several arguments against raising rates, including the strong dollar, disinflation, and continued slack in the labor force. Still, St. Louis Federal Reserve President James Bullard is saying current economic conditions no longer justify leaving rates at zero, and the Fed is late in raising rates.

Societe Generale is now saying they expect the first rate hike in June; that based on their “newsflow” indicators; basically tracking news articles highlighting themes of strength; in other words strength in the economy is trending. Société Générale said it now expects the Fed to remove the word “patient” from its forward guidance at its policy meeting next week.

One irony is that the more investors believe the Fed will soon raise rates the more the dollar appreciates, and in turn, the more inflation will fall short of the Fed’s goal. Higher US borrowing costs make investing in dollar-denominated securities more attractive relative to its counterparts that are still loosening monetary policy.

Greece has received a 500 million euro lifeline  from the European Stability Mechanism. The cash-strapped country must still negotiate with its creditors to receive 8 billion euros to meet its obligations through March. The simple truth is that Greece can no longer afford the bailouts and they are unwilling to accept the terms, which basically lock Greece into a Euro Union debtors’ prison. And so the fight between Germany and Greece has been raised a few notches, with the Greek justice minister threatening to seize German assets to compensate Greek victims of Nazi war crimes.

During the same debate, Prime Minister Alexis Tsipras expressed his government’s firm intention to seek war reparations from Germany, noting that Athens would show sensitivity that it hoped to see reciprocated from Berlin.

Tsipras told MPs that the matter of war reparations was “very technical and sensitive” but one he has a duty to pursue. He also seemed to indirectly connect the matter to talks between Greece and its international creditors on the country’s loan program.

Tsipras said: “The Greek government will strive to honor its commitments to the full, but it will also strive to ensure all unfulfilled obligations toward Greece and the Greek people are fulfilled. You cannot pick and choose on ethical issues.”

The largest banks got their test scores today. The first round consisted of simulating how banks would weather a worst case scenario of a deteriorating economy, spiking oil prices and weakening corporate credit. Last week all 31 banks passed that test. Today’s Comprehensive Capital Analysis and Review is the second part of the Fed’s stress tests, basically a measure of high quality capital compared to risk-weighted assets; 28 of the 31 banks passed today’s test; three banks were allowed to re-take the test and they passed; one bank received an incomplete grade, meaning they will have to revise their plans; and 2 banks flunked the test.

The failing grades went to the US units Deutsche Bank and Santander; they are now barred from issuing dividends or stock buybacks until the Fed approves a new plan.  Goldman Sachs, JPMorgan Chase and Morgan Stanley cleared only after revising proposals. The Fed didn’t specify how Goldman Sachs, JPMorgan and Morgan Stanley altered their proposals. Bank of America‘s approval is contingent on it submitting a revised capital strategy by the end of September. Many banks are expected to tweak their buybacks and dividends;  Morgan Stanley was first to announce plans to repurchase up to $3.1 billion in common stock. Citigroup’s plans to return capital to shareholders got the cleanest approval from the Fed.

The National Association of Realtors said millennials, or people between 18 and 34 years old, accounted for the largest share of home buyers last year at 32%. Millennials make up 23% of the U.S. population. The median age of millennial homebuyers was 29, their median income was $76,900 and they typically bought a 1,720-square foot home costing $189,900.

The Arizona Regional Multiple Listing Service (ARMLS) reports that for the third consecutive month, inventory in Phoenix was down year-over-year. Active inventory is now down 8.4% year-over-year. House prices bottomed in Phoenix in 2011 at about the current level of inventory. Overall sales in January were up 9.0% year-over-year. Cash sales were down to about 29.9% of total sales. Non-cash sales were up 18.3%.

Get Ready for More Oil Deals. Whiting Petroleum, the largest producer in North Dakota’s Bakken shale basin, has put itself up for sale. Whiting has reached out to potential buyers including Statoil ASA about a sale. The company took on $2.2 billion in additional debt for its $6 billion acquisition last year of fellow shale producer Kodiak Oil & Gas, just as crude prices had begun a decline from more than $100 a barrel to less than $50 at the start of the year. Buyers are ultimately after reserves, the amount of oil a company has in the ground based on its drilling acreage.

Canada and the US are “very close” to announcing stronger new oil tanker rail car standards, intended to limit fires and pollution when oil trains derail. Canadian Transport Minister Lisa Raitt said a recent spate of fiery oil tanker accidents, including three derailments in just the past month from Canadian National Railway, has ratcheted up the pressure on both governments to take action.

US airlines are expecting a strong spring. Airlines for America projects the busiest spring in seven years for the airline industry. The group’s chief economist, attributes the forecast to “rising US employment and personal incomes, an improving economy, the highest consumer sentiment in a decade and the continued affordability of air travel.” Of course, that’s assuming you can get through the TSA checkpoint.

High-density packages of lithium batteries like those used in cell phones and laptops pose fire risks and should not be carried on passenger planes until safer methods for carrying them are developed. Boeing now says the risk is “continually increasing (and) requires action to be taken.” A report that labels the batteries as “dangerous goods” is due to be considered in April by the U.N. International Civil Aviation Organization. The recommendations would then need to be approved by the group in October, and by a broader air safety council next year.

Google is in talks to buy Bangalore-based start-up InMobi, a mobile advertising network that claims to have over 1 billion users across 200 countries. Meanwhile,  Google has opened its first-ever branded store, to be called The Google shop, which will be based on London’s Tottenham Court Road – a street packed with tech and gadget retailers. The store will sell the company’s range of Android phones and wearables, tablets, Chromebook laptops, and Chromecast TV services. Two more Google Shops are also set to open later this year.

There has been a boatload of news the past few days about Apple, and Apple watches and Apple pay, etc., etc. And today, nothing; silence. Which is a bad thing indeed. The iTunes store went offline, no updates, no downloads for tunes, books, or apps. It’s one of the longest outages for the iTunes store.

NASA test-fired its most powerful rocket today in Utah. The QM-1 is the largest solid rocket motor ever built. The 801 ton motor produced the same amount of thrust as 14 Boeing 747 jumbo jets. The 2 minute test resulted in temperatures of 4,500°F, enough to melt sand on the site into glass, as 3.6 million pounds of thrust poured out of the engine. NASA plans to use 2 of the rockets to fly humans to Mars.

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