We’ll Know It When We See It
DOW – 332 = 17,662
SPX – 35 = 2044
NAS – 82 = 4859
10 YR YLD – .07 = 2.13%
OIL – 1.71 = 48.29
GOLD – 5.40 = 1162.50
SILV – .11 = 15.72
Yesterday marked the 6 year anniversary of the bull market. Today is the 15th anniversary of the Nasdaq‘s all-time high. The Nasdaq has pulled in after briefly moving above the 5,000 level last week. The Nasdaq had been on a nice little run, so, for now support looks to be a long way away. Today the S&P 500 dropped below the 50 day moving average at 2061; that should have been an area of strong support.
Job openings in the United States rose 2.4% to 5 million in January and stood at a 14-year high. The Labor Department reports the number of people hired fell slightly to 5 million. So-called separations – layoffs, people fired, workers who quit – dipped to 4.82 million from 4.90 million.
The National Federation of Independent Business‘s small-business optimism index edged up to 98.0 in February, from 97.9 in January. Both readings are down from 100.4 in December. Although small-business owners remain upbeat, a growing percentage reports difficulty in finding workers with the right labor qualifications. By one measure, the skills shortage is the worst since 2006, but most business owners remain reluctant to raise compensation to attract and retain qualified employees.
The Commerce Department said wholesale inventories increased 0.3 percent in January as sales recorded their biggest decline since 2009, pushing the number of months it would take to clear warehouses to its highest level in more than 5-1/2 years. Sales at wholesalers fell 3.1 percent in January, the largest drop since March 2009, after slipping 0.9 percent in December.
Prescription drug spending rose by a record 13% in the U.S. last year, the biggest annual increase in over a decade. A new report from Express Scripts found that specialty prescriptions, which are generally high cost biologic drugs to treat everything from multiple sclerosis to cancer accounted for almost one-third of total drug spending. Excluding hepatitis C pills and compounded medications, Express Scripts said the year over year increase in per capita drug spending was just 6.4%. Hepatitis C pills can cost $1,000 each. In some states, Medicaid programs are severely restricting access to such Hepatitis C pills or not covering them at all.
Overnight, the euro fell toward $1.07 in dollar terms, (new 12 year low) stirring another round of forecasts that the currencies would reach parity at 1-to-1 before long. The European Central Bank started its quantitative easing bond-buying program yesterday. The ECB is creating euros to purchase bonds – many from non-Europeans – who will take those euros and, to some significant degree, will cash them in for dollars or something else to buy assets elsewhere. The ECB will buy €66 a month in bonds for the next year and a half, provided they can find enough bonds to buy at that pace. What we are seeing already from the Euro-QE is that the yield curve is flattening, and fast about it. Euro-system central banks were said to have purchased securities, including German five-year notes with a negative yield.
Rates on short-term securities are below zero in seven Eurozone nations, meaning a buyer now would get less back than they paid if they held them to maturity. That’s boosting demand for longer-dated bonds, particularly as the ECB’s rules preclude purchases of debt yielding below its deposit rate of minus 0.2 percent. German 30-year yields dropped the most in more than two months and touched an all-time low. The yield premium investors demand to hold Germany’s 30-year bunds instead of two-year notes shrank to 100 basis points, or 1 percentage point. The spread is down from 234 basis points a year ago. Germany’s 30-year yield fell as much as 15 basis points to 0.74 percent, while the rate on two-year notes touched a record-low minus 0.255 percent.
And it’s not just government debt and it’s not just Germany; we are seeing negative interest from Denmark and Switzerland and even in some corporate debt, such as Nestle. And not just negative in inflation-adjusted terms like US government debt. It’s just negative; as in you give the German government some euros, and over time the German government gives you back less money than you gave it. And not just small amounts, nearly $2 trillion dollars of Euro debt now carries negative nominal yields. And not just a little bit negative; the overnight interest rate in Swiss francs is about negative 1% annually.
Negative rates serve as a tax on holding money; a disincentive to parking money on the sidelines. What we are seeing is an experiment in monetary policy, and it has emerged in the vacuum of policy that might otherwise have money circulating through the economy.
And, of course, the Fed is the one central bank in the world poised to lift rates at some point, further boosting the dollar. And the strong dollar compared to euro deterioration isn’t a one day event but rather a longer term trend; and that strong dollar trend tends to weigh on stocks. The dollar has rallied this year versus 14 of 16 major currencies. The dollar’s going up so much, so fast you wonder what it does to US economic growth down the road. If you are wondering how the Fed can justify higher rates in this kind of global, zero-lower-bound world, well, that is the question. There seems to be no positive outcome to higher interest rates in the current environment, and no reason for higher rates.
Inflation is at or below any inflation levels for the past 50 years at least. And there is no wage inflation pressure; even though the unemployment rate has dropped to 5.5%, long term unemployment and underutilization means there is no wage pressure. So, the only justification for raising interest rates now is that the idea of Zero Interest Rate Policy has been a failure. The entire concept of using easy monetary policy to stoke the economy is not borne out by the evidence. If government wants to goose the economy it needs to spend money, not just make it cheap to borrow. Cheap money harms savers while benefitting speculators, pushing them into risky assets such as stocks, bonds and commodities. The reason there’s been no consumer inflation is that none of the Fed’s money is ending up in consumers’ hands. Why keep making it ultra-cheap for Wall Street when none of it is landing in our pockets anyway? For now it is a big race to devalue currencies and the US isn’t even on the track. We’ll see how that plays out.
Of course one of the positive side effects of a strong dollar is that we have cheaper oil; and oil is also cheap because we have a surplus of oil right now and we are running out of places to store it. The U.S. produced 9.32 million barrels of crude a day the week of Feb. 27, the highest level in weekly Energy Information Administration data going back to 1983. Output will average 9.3 million barrels a day this year, up 7.8 percent from 2014, the agency predicted Feb. 10. Oil inventories at 444.4 million barrels are at the highest level since 1930. Oil drillers expecting prices to rebound after the biggest drop in six years have come up with an alternative to storing their crude in tanks: They’re keeping it in the ground.
It’s a new twist on an old oil-trading technique, known as a contango storage play, in which a trader buys cheap crude in an oversupplied market and saves it to lock in profits at higher future prices. Drillers who have spent millions boring holes through petroleum-rich shale rock are just waiting for prices to go up before turning on the spigot. Based on estimates from Wood Mackenzie and RBC Capital Markets there are more than 3,000 wells that have been drilled but not tapped. Waiting gives producers a better chance of receiving a higher price. It could also delay a recovery by attracting more supply every time prices rise.
Mountaintop coal mining is dead. Its financial lifeblood was choked off this week. PNC Financial, the nation’s seventh-biggest bank, said it will no longer finance coal-mining companies that pursue mountaintop removal of coal in Appalachia. This is a mining process that involves exploding mountaintops and then scraping off the coal. The practice has left areas the combined size of Delaware barren and destroyed, while polluting thousands of rivers and streams beyond the point of viability. PNC’s decision comes after environmental advocacy groups put intense pressure on Wall Street banks to stop financing such practices. PNC now joins other banks that have cut off financing; Bank of America, Citigroup, Morgan Stanley, JPMorgan Chase, Wells Fargo, Credit Suisse and others had already distanced themselves from coal companies involved in mountaintop removal. GE Capital and UBS appear to be the only large financial institutions in the country still willing to lend money to companies involved in mountaintop mining.
Mountaintop mining is capital intensive. Without financing the coal reserves will not be extracted; that means that those reserves should not be counted toward share value. Other financing alternatives will probably be found, in time, and at a cost. Till then, this goes down as a victory for environmental activists, and represents a change in tactics.
Tomorrow, the Federal Reserve releases results from the second of two phases of this year’s stress tests. In addition to assessments of the banks’ capital plans, this week’s exams include so-called qualitative judgments the Fed makes on how the banks identify and manage risk, and whether they have good corporate governance and internal controls. It’s akin to a character test, and the outcome can be hard for banks to predict. Capital can be quantified; the quality of a firm’s board of directors can’t be.
But character isn’t so hard to identify; we know it when we see it; and we know it when we don’t see it.
Britain’s Public Accounts Committee is investigating HSBC for helping clients evade taxes. Margaret Hodge is chairwoman of the parliamentary committee questioning top management from HSBC. Those in the line of fire yesterday included CEO Stuart Gulliver, head of global private banking, Chris Meares, and BBC Trust chairwoman and former chairwoman of HSBC’s audit committee, Rona Fairchild, whom Hodge told to resign. Hodge stated the obvious: “Either you’re completely incompetent in your oversight duties or you knew about it.”