Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Thursday, February 25, 2016

If You Build It

Financial Review

If You Build It

DOW + 212 = 16,697
SPX + 21 = 1951
NAS + 39 = 4582
10 Y – .05 = 1.70%
OIL + .93 = 33.08
GOLD + 4.30 = 1233.70

The Shanghai Composite in China dropped 6.4% today, extending its fall this year to 22%, as surging money-market rates signaled tighter liquidity and the offshore yuan weakened for a fifth day, while the country’s vice finance minister warned of pressure on exports. The plunge comes as world leaders gather for a G20 meeting in Shanghai, where current market turmoil and a global economic slowdown are expected to be key topics of discussion.

European shares bounced after two days of falls, and sterling steadied after having been pounded all week by ‘Brexit’ fears.  The S&P 500 Index closed at a seven-week high, right at a major level of resistance, and just barely breaking above the 50 day moving average.

Meanwhile, the IMF is calling for urgent and bold action to combat the slowing world economy ahead of the gathering of G20 finance ministers and central bank chiefs. The IMF report says: “The G20 must plan now for coordinated demand support using available fiscal space to boost public investment.” The calls for an organized stimulus program followed warnings that China’s slowdown, financial market turbulence and the collapse in commodity prices were major headwinds that could derail a global recovery.

Citigroup says the chances of a global recession are already high and only going up. The team of economists from Citi say that when they adjust for what they call “true Chinese growth,” the Citi team finds that global growth might have been as low as 2 percent year-over-year in the final quarter of 2015.

That is the lowest since the Eurozone recession of 2012-2013, and if growth remains at such depressed levels, it would qualify as a global recession according to their measures. They forecast global growth will this year once again unperformed (against long-term trends and previous year forecasts).

Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese erroneous measurements). But the risk of a global growth recession (growth below 2%) is high and rising.

While a global recession may be increasingly probable according to Citi, it’s not necessarily unavoidable. They say the world needs a global version of what they call “Abenomics plus”, which in Citi’s terms would be easy monetary policy coupled with fiscal stimulus and structural reform that would include “material deleveraging.” But, given their recession call, the team doesn’t believe these policy measures will actually occur as fiscal stimulus faces high political hurdles.

A new report this week by the Center on Budget and Policy Priorities warns that state and local spending on infrastructure – including schools and wastewater treatment plants as well as highways and bridges – is at a 30-year low. Total capital spending as a share of state GDP fell in all but five states and the District of Columbia between 2002 and 2013, with the largest drops in Nevada, Florida and Michigan.

According to the 2013 report card by the American Society of Civil Engineers, the U.S. has serious infrastructure needs of more than $3.4 trillion through 2020, including $1.7 trillion for roads, bridges and transit; $736 billion for electricity and power grids; $391 billion for schools; $134 billion for airports; and $131 billion for waterways and related projects.

A big part of the problem is that federal investment in infrastructure has dropped by half during the past three decades, from 1 percent to 0.5 percent of GDP, leaving more of the responsibility and finances to state and local governments. At the same time, states have varied greatly on how much of their annual budgets they have been willing to invest in infrastructure – from as little as 3 percent to 4 percent of total state spending in California, Michigan and Vermont to as much as 9 percent in Alabama, Montana and Nebraska.

The new report says that reversing the decline in state investment in transportation, public buildings and other forms of vital infrastructure “is the key to creating good jobs and promoting full economic recovery,” especially at a time of improved economic conditions and historically low interest rates. But instead of making the infrastructure investments essential to building a stronger economic recovery, the report says, many states have opted instead for cutting taxes and offering corporations tax subsidies in a “misguided approach to boosting economic growth.”

So, in an environment of slowing global growth the threat of a deflationary spiral, how can central banks create demand through monetary policy? And the answer is that they probably can’t. You need fiscal stimulus, and the best way to do that is infrastructure investment. This is not ideology but rather a pragmatic and fairly simple approach.

By investing in infrastructure you’re hiring a lot of people now who then build a number of public goods (roads, bridges, electrical infrastructure and the like) that increase efficiency and productivity over decades of time. It should rightly fall under the category of government investment and not government spending.

Moody’s Investors Service has become the third major rating agency to downgrade Brazil’s debt to junk, slashing its rating by two notches to Ba2 as the former emerging market star sinks deeper into its worst recession in decades. “Every day it’s something, and you don’t know what the next thing will be,” said Samar Maziad, Moody’s lead analyst for Brazil. “There’s very little visibility on what the future will be.”

Orders for US capital goods rebounded in January by the most since June 2014. Bookings for non-military equipment excluding commercial aircraft jumped 3.9 percent, more than forecast, after a 3.7 percent decrease in December that was smaller than previously reported. Orders for all durable goods – items meant to last at least three years – rose 4.9 percent, the most since March.

The number of Americans filing applications for unemployment benefits rose last week from a three-month low. Jobless claims increased by 10,000 to 272,000 in the week ended Feb. 20. The number of people continuing to receive jobless benefits fell by 19,000 to 2.25 million in the week ended Feb. 13. Since early March, claims have been below the 300,000 level which is consistent with an improving job market.

Mortgage rates slipped to a 13 month low…, so if you were waiting. The 30-year fixed-rate mortgage averaged 3.62% in the February 25 week, down from 3.65% a week ago. The 15-year fixed-rate mortgage averaged 2.93%, down 2 basis points.

Federal Reserve Bank of St. Louis President James Bullard reiterated Wednesday that the pressure has come off the central bank to raise rates. Given that Fed policy is driven by incoming data, a drop in inflation expectations and financial market declines, Bullard says it would be “unwise to continue a normalization strategy.” Bullard, long a hawkish member of the Fed who has pushed for higher rates, reversed course in a separate speech last week.

In the ongoing saga of Apple versus the G-Men, Apple has filed its formal opposition to the federal court order requiring it to help law enforcement officials break into an iPhone, setting the stage for more legal wrangling. In its brief, Apple said that the court should vacate the order.

Apple wrote that it supports law enforcement in pursuing justice against terrorists and other criminals, “But the unprecedented order requested by the government finds no support in the law and would violate the Constitution.” Apple added that the order had broad implications that would “inflict significant harm to civil liberties, society and national security.

Attention Pershing Square investors, you need to put the corks back in the champagne bottles. Bill Ackman, the billionaire investor has managed to erase his entire 40% return of 2014, a performance that put him at the pinnacle of the hedge fund world. Ackman’s portfolio dropped 17.3% so far this year, adding to 2015’s 20.5% nosedive. Pershing Square Capital Management, which now oversees $12B, did not detail exactly what caused its most recent losses and a spokesman declined to comment.

With the earnings season wrapping up, about three-quarters of S&P 500 firms have exceeded profit projections, while less than half topped sales forecasts. Analysts estimate earnings at S&P 500 companies fell 4.2 percent in the fourth quarter. For 2015, under GAAP, S&P earnings per share fell by 12.7%, highlighting the sharpest decline since the financial crisis. The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem.

Today’s earnings reports include a tale of two retailers. The worst of times and the best of times; Sears and TJ Maxx. Sears said today that its same-store sales fell 7.1% in the fourth quarter and revenue dropped 9.8% to $7.3 billion. The company reported a quarterly loss of $580 million, or $5.44 per share, compared with a loss of $159 million, or $1.50 a share, the previous year. Sears said earlier this month that it would accelerate planned closures of 50 stores to cut costs. Sears Chairman Eddie Lampert says the retailer had a rough quarter because of warmer than expected winter weather. Yeah, that’s not it.

TJ Maxx parent company TJX Cos. has managed to escape the curse. The company’s fourth-quarter performance topped Wall Street’s expectations with a sales increase of 6%. The typical TJ Maxx is located in a strip mall, ideally placed so that customers can do their grocery shopping and then meander next door to peruse the clothing and housewares on TJ Maxx’s racks.

Compare that to a trip to a department store such as Macy’s, which usually involves committing to a mall experience. And when shoppers do wander into TJ Maxx, there’s a good chance they will see styles and brands that weren’t there during a previous visit. TJ Maxx had 2015 net sales of $31 billion; Macy’s brought in $27 billion, despite carrying about 50% more inventory. There is an urgency to buy at TJ Maxx or it might not be on the rack tomorrow.

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