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Friday, March 13, 2015

Patience For Now

Financial Review

Patience For Now

DOW – 145 = 17,749
SPX – 12 = 2053
NAS –  21 =  4871
10 YR YLD + .01 = 2.11%
OIL – 2.05 = 45.00
GOLD + 6.50 = 1158.40
SILV + .12 = 15.64

At one point today, the Dow was down 250, so it could have been worse. For the week, the Dow was down 0.6% and the S&P 500 fell 0.9%. The Nasdaq was down 1.1% for the week. Today is Friday the 13th. All I can say is pure coincidence. We looked at the market for 148 Friday the 13ths, going back to 1928, there is no particular trend.

 In the last week of January we saw oil prices drop to right around the $45 a barrel level, with intraday lows of $44.37, but the daily closing price hovering just a little above $45. And in February, prices popped up to touch $55.05; prices challenging $55 on 3 days, and could not break out. So, now we are back to challenging support at $45. And waiting to see if the trading range will break down.

The International Energy Agency says oil prices remain fragile due to unrelenting production by US shale-oil producers. There has been an expectation that oil producers would cut back production in response to lower oil prices, but the IEA  report shows oil production in the US has increased by 115,000 barrels, and now we’re running out of places to store the oil. The IEA says it doesn’t see cutbacks in production until the second half of the year; and for now at least, ballooning inventories combined with shrinking oil storage likely will drag prices lower.

Baker Hughes reported today that the oil rig count dropped by 67 last week to 1125, and that has been a trend in the oil patch, but it also means that existing wells continue to produce. At some point, the IEA says those discontinued wells could make a difference in the supply, and when it does it will make for some serious price disruption; but as of now, the cutbacks haven’t kicked in.

Meanwhile, Reuters reports a tentative deal has been reached between the United Steelworkers and oil companies to end the largest US refinery strike in 35 years. The reported deal would last four years and “wage increases would be 2.5% the first year, 3% each in years two and three, and 3.5% in the fourth year.” The strike affected 12 refineries representing a fifth of US refining capacity. The deal still needs approval from the rank and file, but it will likely lead to more refined products making the way to your local gas station, which should open up some of the storage facilities for crude oil.

Next week, European leaders meet to consider whether to prolong economic sanctions on Russia. The thinking is that they will allow most, or all of the sanctions to expire in July, and they will not be looking to add new sanctions.  And while Russia has continued to supply oil to the world markets, an easing of sanctions is likely to result in a fresh wave of Russian oil supply hitting the market; you know, to make up for lost revenue. Also, today Russia’s central bank cut its key interest rate one percent to try to stimulate its economy. That’s the trend these days; cut rates to give a jolt to the economy; it’s also a battle to devalue currencies.

Now, toss in a strong dollar. Over the past 14 sessions, the S&P has had a correlation of -0.96 to the dollar index, meaning that stocks consistently fall on days when the dollar gains. Perfect inverse correlation is -1.0.

Tokyo stocks surged through the 19,000 level today to record their highest close since April 2000. The Nikkei currently leads all major Asian markets with a 10.5% year-to-date gain. The Japanese stock market has been sparked by Bank of Japan stimulus, (known as Abenomics), which has pushed the yen down to the lowest levels against the dollar in 8 years.

And of course, the European Central Bank started its version of QE this week, and they will be buying about $66 billion dollars of bonds per month. In addition, concerns about Greece’s status in the euro bloc have weighed on the common currency. The dollar pushed to a new 12 year high today against the euro.

Also, investors are wagering that recent solid jobs data from February will persuade the Fed to send signals for a coming rate increase, perhaps as early as midyear, at its two-day Federal Open Market Committee meeting next week. The pace of the dollar’s rise against worldwide currencies suggests a number of undesirable outcomes for the US economy. First, there’s the loss in export competitiveness. In fact, the U.S. trade deficit just hit a record high (excluding oil). Secondly, corporations have to endure the disintegration of profits made in foreign currencies. Indeed, forward earnings estimates for the initial two quarters of 2015 have turned negative. But the Fed is looking at something different, and they are likely to hint at raising rates, even as it becomes harder to justify a rate hike. Still, no one wants to be short dollars going into FOMC. The Fed meets Tuesday and Wednesday, and until then we’ll just have to be patient.

One of the side effects of a strong dollar is disinflation, or maybe we could even call it deflation. Producer Prices dropped 0.5% in February. Despite the first rise in gasoline costs since last summer, US producer prices, or prices at the wholesale level, fell in February for the fourth straight month. Wholesale gas prices climbed 1.5% in February, the biggest increase since last June. Yet food prices retreated 1.6% to mark the biggest pullback in almost two years. Trade prices sank a record 1.5%. Excluding the volatile categories of trade, food and energy, core prices were flat on the month. Over the past year overall producer prices have fallen by 0.6%, the first 12-month decline on record.

The University of Michigan’s consumer sentiment index dropped to 91.2 in March from 95.4 in February. That’s the worst reading since November. We get cranky when we have to pay more for gas.

The Feds are looking into hedge fund manager Bill Ackman’s assault on Herbalife. Neither Ackman nor his fund, Pershing Square, has been served a subpoena. But The Wall Street Journal reports: “Prosecutors in the Manhattan US attorney’s office and New York field office of the FBI have conducted interviews and sent document requests in recent months in connection with the investigation, which is looking into whether people, including some hired by Mr. Ackman, made false statements about Herbalife’s business model to regulators and others in order to spur investigations into the company and lower its stock price.”

This week we learned that Wall Street bankers are struggling, and the bonus pool paid to security industry employees in New York City – that’s just in New York City – was $28.5 billion. It works out to an average bonus of $172,860. So somebody at the Institute for Policy Studies pulled out their calculator and figured that if you take 1.03 million full-time workers paid an hourly wage of $7.25 or less, the minimum wage, and multiplied by 50 hours of work per week; the total compensation would be about $15 billion dollars, more or less. A 40 hour work week would put the compensation at about $14 billion. So, the sum of Wall Street bonuses just for New York City is roughly twice the total amount paid to all the full-time workers paid minimum wage in the entire country.

It has been a busy week, which included news that most of the big banks had passed a stress test, and you might think that means the banks haven’t been getting into trouble. Not exactly. It’s time for today’s edition of “Banks Behaving Badly”. We start with Commerzbank, one of Germany’s largest lenders, which agreed to pay nearly $1.5 billion and dismiss some of its employees to resolve an array of charges in the United States. Commerzbank was accused of sending tainted money through the American financial system; siphoning funds to sanctioned Iranian corporations, facilitating accounting fraud at Olympus, the Japanese camera company; charged with Bank Secrecy Act criminal offense and institutional anti-money laundering. Eight regulatory agencies investigated the bank.

Leslie Caldwell, head of the Justice Department’s criminal division, which prosecuted the criminal part of the case said, “Financial institutions must heed this message: Banks that operate in the United States must comply with our laws, and banks that ignore the warnings of those charged with compliance will pay a very steep price.” And of course, we all know that means there were no indictments, just a fine; but in a rare breach of prosecutorial etiquette, the bank was not allowed to deny wrongdoing.

Meanwhile Bloomberg reports the Justice Department is about to get tough on banks that rigged the foreign exchange markets. Prosecutors are reportedly pressing Barclays, Citigroup, JPMorgan and the Royal Bank of Scotland to plead guilty, which would mean a fine, and the starting point for rigging the global currency markets is $1 billion, more or less. In keeping with prosecutorial etiquette, prosecutors are seeking a simultaneous settlement with the banks, which would enable the lenders to avoid being singled out for industrywide conduct.

Two weeks ago the FCC voted to approve rules on net neutrality and today they released the text on the actual rules. A couple of key points, the new rules will ban paid prioritization – so the internet cannot be divide into “haves” and “have nots”, or fast lanes and toll lanes; also the rules would ban blocking, meaning consumers must get what they pay for, unfettered access to any lawful content on the Internet.

The 400 pages of the FCC rule aren’t exactly beach reading, but if you are still trying to understand the importance of the ruling and the need for it, the first two sentences offer a nice summation: “The open Internet drives the American economy and serves, every day, as a critical tool for America’s citizens to conduct commerce, communicate, educate, entertain, and engage in the world around them. The benefits of an open Internet are undisputed.”

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