Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Friday, January 29, 2016

Sub Zero

Financial Review

Sub Zero

DOW + 396 = 16,466
SPX + 46 = 1940
NAS + 107 = 4613
10 Y – .05 = 1.93%
OIL + .46 = 33.68
GOLD + 2.80 = 1118.80
SILV + .02 = 14.34

It’s Friday and also the last trading day of the month.

For the week, the Dow gained 2.3%, the S&P added 1.7% and the Nasdaq increased 0.5%.
That left the Dow down 5.5% for the month, or a loss of 959 points. The Nasdaq lost 7.9%, or 394 points in January, its largest monthly loss since May 2010.

The S&P was down 103 points, or 5%, although at one point last week the S&P was down 11% since the start of the year.

An index of US Treasury bonds returned 1.8% for January, which has been the best month of the year for bonds, at least over the past few years. The yield on the 10-year note dropped 24 basis points for the month.

Gold and silver shared the safe haven spotlight with Treasuries. Gold gain $58.60, or 6% for the month. Silver added 53-cents or 3.8%, year-to-date.

The dollar has gained just over 1% year-to-date, but is still below November highs.
Even with today’s gain, oil closed out the month of January with a loss of $3.37 or 9%.

The U.S. economy expanded at a slower pace in the fourth quarter. Gross domestic product rose at a 0.7% annualized rate in the three months ended in December after a 2% gain in the third quarter. GDP expanded 2.4% for a second straight year, led by the biggest gain in consumer spending in a decade.

Household purchases rose at a 2.2% annualized pace in the fourth quarter, down from 3% in the third quarter; so consumer spending slowed in the quarter, but businesses saw big cuts in spending.

Business investment decreased at a 1.8% annualized rate, the first drop since the third quarter of 2012 and compared with a 2.6% pace in the third quarter. Businesses cut spending on stockpiles to try to pare unwanted inventories. That effort trimmed growth by 0.5 percentage point in the fourth quarter. Home construction grew at a solid 8.1% annual rate.

Separately, the Labor Department reports wages and salaries rose 0.6% in the fourth quarter – the same pace as in the previous three months, indicating gradual tightening in the labor market has yet to put pressure on employers to boost pay. Wages of all employees, including government workers, advanced 2.1% from the same period in 2014.

The Bank of Japan said that it would adopt a negative interest rate policy for the first time, in an attempt to kick start the world’s number three economy. The central bank said it cut the deposit rate it pays on cash parked at the BOJ by commercial banks in excess of legally required reserves, to minus 0.1% from the previous plus 0.1%. The goal was to push down borrowing costs across a broad time spectrum to stimulate inflation.

Just one week ago, Bank of Japan Governor Haruhiko Kuroda said he was not thinking of adopting a negative interest rate policy now, signaling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying program. So, this really was shocking news for global markets.

The yen tumbled after the announcement. The benchmark Topix index closed 2.9% higher. Money is pouring into bonds all over the world, pushing yields lower. Germany’s 10-year yield is off 6 bps at 0.33%, making for the lowest reading in nine months, and yielding about the same as a US 3-month note.

Now, these negative rates in Japan are not being applied at the retail level; this is directed at the banks, and the reserves held by banks with the central bank. But if the negative rates last long enough, it could work to the consumer level. For now, the idea is to nudge banks to make loans and circulate money through the economy, with a little punishment for banks that hoard the cash.

In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there’s a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead. We have seen negative rates over the past year or so in the Eurozone, and Sweden, Denmark and Switzerland.

We don’t really know yet how it will play out, and we don’t have historic data to guide us. This time it really is different. We’ve heard that before, but it is true this time. For the Eurozone and now for Japan, rates are at the lowest levels in at least 500 years – and, yes, Deutsche Bank did look that far back in sovereign debt records.

So what do negative interest rates tell us about the global economy? We appear to be in a long-term low growth and low inflation environment. Perhaps the central bankers, including the Fed, need to re-think their ideas about acceptable levels of inflation; perhaps a 2% rate of inflation is too low. Today’s action by the Bank of Japan will almost certainly influence the Fed’s thinking on future interest rate hikes.  At the very least it should lead to discussion of how monetary and fiscal policy is conducted and coordinated on a global scale.

And for investors, we need to consider whether the US economy really is so much stronger than our global business partners; and we should also consider the spread between global and international rates and the spread between US long-term and short-term Treasuries (it is flattening, and you know that’s not good); also the impact of negative interest rates on a variety of asset classes, including equities, currencies, and commodities.

Oil prices started the session with big gains but pared losses throughout the day as the dollar index gained more than 1%.  It proved near impossible to prop up oil on the notion of a Russia-OPEC deal to cut production. The Wall Street Journal reported that an Iranian oil official said the country would not join an immediate OPEC production cut. The paper said Iran wants to boost crude exports by 1.5 million barrels a day. Baker Hughes reports energy firms in the US cut oil rigs for the sixth straight week and were expected to shed more.

Puerto Rico plans to propose a debt exchange to investors, offering to swap existing bonds for two new types of securities to help the U.S. commonwealth alleviate its debt burden. Both classes of debt would delay payments, giving the island time to make fiscal adjustments and spur economic growth. One would eventually pay interest at 5%, while the other would carry a value determined by Puerto Rico’s fiscal health.

The World Health Organization is warning that the Zika virus is “spreading explosively” in the Americas, and will convene a special meeting on Monday about whether to declare a public health emergency. While there is no approved vaccine, U.S. health officials and drug makers could start working on an experimental one soon. Both GlaxoSmithKline and Sanofi are considering developing a treatment.

Xerox said it would split into two companies, one holding its legacy hardware operations and the other its business process outsourcing unit, in which activist investor Carl Icahn will get three board seats. The company, whose shares had fallen more than 30% in the past 12 months, has been trying to turn itself around by focusing on software and services as businesses cut costs and a switch to mobile devices hits demand for printers.

Fourth-quarter earnings reporting season is well under way, with S&P 500 companies on average expected to post a 4.1% drop in earnings, according to Thomson Reuters. Excluding energy companies, earnings are seen rising 2.1%.

Chevron reported its first quarterly loss in more than 13 years on Friday as the oil producer struggled to cope with plunging crude prices that are eroding profitability across all its divisions. The company posted a fourth-quarter net loss of $588 million, or 31 cents per share, compared with a net profit of $3.47 billion, or $1.85 per share, in the year-ago period. The last time Chevron posted a quarterly loss was the third quarter of 2002. Chevron last month announced it would cut its 2016 budget by 24% to $26 billion.

It’s time now for another edition of Banks Behaving Badly: In today’s edition we take you back to last summer, when we told you tens of thousands of Malaysians gathered in Kuala Lumpur and demanded to know how almost $700 million linked to the debt-laden government investment fund 1Malaysia Development Berhad (1MDB) ended up in prime minister Najib Razak’s personal bank accounts. 1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond deals underwritten by Goldman Sachs, which charged nearly $600 million in fees, and resulted in little or no development in Malaysia.

We now have an answer from the attorney general appointed by Najib to investigate Najib. The AG says the $700 million that just appeared in the Prime Minister’s personal bank account was a personal gift from the royal family of Saudi Arabia, and there was no bribery or corruption. So, the Prime Minister has been cleared of all wrongdoing because hey, sometimes wealthy Saudis just hand out really lavish gifts. Meanwhile, Tim Leissner, chairman of the Goldman Sach’s Southeast Asia ops, is taking leave of absence from Goldman and moving from Singapore to LA.  And that’s the way they do it.

No comments: