Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Thursday, December 03, 2015

Financial Review

A Far, Far Better Thing

DOW – 252 = 17,477
SPX – 29 = 2049
NAS – 85 = 5037
10 YR YLD + .15 = 2.33%
OIL + 1.33 = 41.27
GOLD + 8.40 = 1062.60

The S&P 500 suffered its biggest drop since late September.

The European Central Bank cut its deposit rate commercial banks must pay to store money overnight to minus 0.3% from minus 0.2%. The ECB left its key lending rate unchanged at 0.05% and the rate on its marginal lending facility at 0.3%. They also announced they will extend their bond buying program until March 2017. But the central bank did not increase the monthly spending on bonds beyond the current monthly level of 60 billion euros, or $63 billion.

With inflation at just 0.1%, unemployment still over 10% and bank lending disappointing, many analysts were expecting more aggressive moves. Now, here’s where it got interesting; the dollar index dropped over 2%, at one point the euro was up about 3% but finished trade with modest gains. Early this morning the Financial Times tweeted and reported the ECB was leaving rates unchanged. Oops. But even after the correction, the euro held on to some of the gains.

Even as the ECB announced fresh stimulus, the Federal Reserve is considering tightening monetary policy. Actually, it is more than just a consideration – the Fed has now done everything they can to communicate that a rate hike is coming on December 16th. Fed Chair Janet Yellen said yesterday she was “looking forward” to a US interest rate increase.

This morning Yellen spoke to the Joint Economic Council in Washington and repeated the idea that it is a far, far better thing to raise rates. Yellen said that a Fed move to start raising rates will be a sign of “how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.”

More Americans applied for unemployment benefits in the last week of November. Initial jobless claims rose 9,000 to a seasonally adjusted 269,000 in the period from Nov. 22 to Nov. 28. Weekly claims dipped below the 300,000 mark in February and are now at the lowest levels in years. The government will issue the monthly employment report for November. Economists expect a gain of about 200,000 new jobs.

Global outplacement firm Challenger, Gray & Christmas reports layoffs fell to a 14-month low in November, but total job cuts for 2015 were on track to hit a six-year high. November payroll reductions fell 39 percent from the previous month to 30,953, the lowest level since September 2014. Still, the report brings year-to-date layoffs to 574,888, setting up 2015 to be the worst year for job cuts since 2009.  Reductions in the energy sector, the hardest hit industry in terms of layoffs this year, fell to a 5-month low of 1,355, so maybe the worst of the bloodletting has passed.

The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 55.9 from 59.1 the month before. Any reading above 50 indicates expansion in the service side of the economy. Last month’s reading was extraordinarily strong, but this month’s drop was disappointing. New export orders, new orders, business activity, and employment all showed a big slowdown.

The Commerce Department said new orders for manufactured goods increased 1.5 percent on rising demand for transportation equipment and a range of other goods. Orders in September were revised to show them falling 0.8 percent instead of the previously reported 1.0 percent drop. Despite the increase in orders last month, manufacturing looks weak.

The Obama administration expects to start lifting sanctions on Iran as early as January, after the United Nations’ nuclear watchdog found no credible evidence that Tehran recently engaged in atomic-weapons activity. However, the International Atomic Energy Agency did find that the country had pursued a program in secret until 2009, longer than previously believed. The first batch of sanctions relief would end most U.S., European and U.N. financial and energy curbs and free up around $100 billion in Iranian oil revenue that’s being held overseas.

OPEC meets tomorrow in Vienna. Saudi Arabia has reportedly challenged the oil cartel to cut production by 1 million barrels per day, saying it would back output cuts as long as they were supported by countries both inside and outside the cartel. That will be tricky. Iran has already said it plans to hike its production next year, apparently they like the idea of getting paid for the oil they pump.  Iraq’s oil minister said nothing is decided. And remember that OPEC already has a production target of 30 million barrels a day but they have been pumping 32.2 million barrels a day. Oil prices dipped below $40 a barrel yesterday, but moved higher this morning.

Google is nearly doubling the amount of renewable energy used to power its massive data centers. The long-term commitments cover up to 842 megawatts of power that will flow from six different wind and solar power projects scheduled to be finished within the next two years in the U.S., Chile and Sweden. Google has now signed contracts covering 2 gigawatts of renewable energy, enough to power about 2 million homes; putting the company closer to its goal of having 3.6 gigawatts lined up by 2025. Google timed its announcement to coincide with the U.N. conference in Paris that is exploring ways to reduce the volume of carbon emissions.

Yea, that Paris conference is still going on. COP21, the 21st conference of parties to the UN’s climate treaty-making body, the Framework Convention on Climate Change (FCCC) is still meeting in Paris, trying to save the world from global warming. One of the more interesting things revealed at the conference involves the role of energy in the inequality equation. The report, released yesterday, found that “the richest 1 per cent of the world’s population produces 175 times as much CO2 per person as the bottom 10 per cent” and the richest 10 per cent produce fully half of all carbon emissions.

The conference will produce some progress, but not enough. Nations are making pledges to reduce emissions but even the most ambitious emission pledges on the table would still result in catastrophic climate change, even assuming that all these pledges are fully implemented. Even best-case scenarios seem to point to an agreement that falls short of an action plan to keep the world under 2 C of warming, the threshold scientists overwhelmingly agree can’t be breached in order to avert catastrophic climate change. What’s more, individual countries’ emissions targets won’t be legally binding.

Eight of the biggest U.S. banks have been downgraded by Standard & Poor’s, following a rule approved by the Fed that will require large institutions to hold a stockpile of debt that can be converted into equity if they falter. The credit rating agency said they “now consider the likelihood that the U.S. government would provide extraordinary support to its banking system to be uncertain.” Firms affected include JPMorgan, BofA, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street.

Target has agreed to reimburse MasterCard and other U.S. financial institutions a total of about $39 million to settle claims in connection with its massive data breach – which exposed 40 million payment cards to fraud – during the 2013 holiday season. The settlement follows a $67 million agreement Target struck with Visa in August on behalf of banks and other firms that issue credit and debit cards.

Chipotle is tightening its supplier standards in the wake of an E. coli outbreak last month, putting its longstanding promise to buy food locally in jeopardy. The company has now updated its website by taking down that description and replacing it with a message on long-term supplier relationships. Chipotle began the prior program in 2008 in a bid to support local farms and sustainable agriculture.

European Union regulators confirmed they have opened a full-blown probe into McDonald’s tax affairs in Luxembourg. At the center of the dispute is McDonald’s Luxembourg franchise company, which the EU says has not paid tax since 2009. Yet the company receives hundreds of millions in royalty payments from across Europe and Russia for the right to use the brand and associated service. And it’s not just McDonald’s, other corporate giants figured out the tax dodge as well, including Starbucks, Fiat Chrysler, Amazon, Apple, Valeant, and of course Pfizer. And it’s not just Luxembourg, it is also Ireland and a few islands between France and Great Britain. At the core it is nothing but a tax dodge, a big scam.

Brazil, the largest economy in South America, and the seventh largest economy in the world is in complete disarray. A bid to impeach Brazilian President Dilma Rousseff has been launched by the Speaker of the country’s lower house of Congress, Eduardo Cunha. Despite her re-election last year, Rousseff’s second term has been marred by a corruption scandal involving her own Workers’ Party that has sent her approval rating plummeting and provoked mass protests.

A sweeping corruption investigation into a multimillion-dollar kickback scheme at the state-run oil company Petrobras has embroiled dozens of the country’s leading businessmen and politicians. The President was the chairwoman of Petrobras during many of the years that the alleged corruption took place. And the economy is falling apart: 3 quarters of negative GDP, a collapse of the currency, huge loses in stocks – with some of the biggest loses coming from the economic powerhouse of Brazil – Petrobras.

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