Morning in Arizona

Morning in Arizona

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Tuesday, June 21, 2016

Ms. Yellen Goes to Washington

Financial Review

Ms. Yellen Goes to Washington


DOW + 24 = 17,829
SPX + 5 = 2088
NAS + 6 = 4843
10 Y + .03 = 1.70%
OIL – .52 = 48.85
GOLD – 22.30 = 1268.70

Federal Reserve chair, Janet Yellen, presented her semiannual testimony on monetary policy today before the Senate Banking Committee. In prepared remarks, Yellen said weak economic growth in the United States could force the Federal Reserve to hold off on any imminent interest rate increases.

While the American economy’s long-term prospects remain favorable, Yellen signaled that headwinds in the form of slower employment gains in recent months, weak productivity growth and a sluggish pace of inflation have prompted the Fed to adopt a more cautious stance. Yellen said: “Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective.”

Yellen stressed that monetary policy “remains accommodative” and that “if the economy were to disappoint, a lower path of federal funds rate would be appropriate”. Yellen tried to sound an optimistic outlook for the second half of the year, however, she warned that the British vote on Thursday on whether to stay in the European Union, alongside a US hiring slowdown, posed risks to the economic outlook.

Meanwhile the Federal Reserve submitted its monetary policy report to Congress ahead of Yellen’s testimony. One of the things that stands out is the Fed seems to think the stock market is getting a bit pricey. The report says: “Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades.” Of course, the Fed is not known for its stock picking acumen. Still, stocks probably are over-valued, in large part because the Fed’s low interest rate policy has driven investors to take more risk.

The message seems to be no rate increase in July; a September rate hike is still possible but not as likely, unless we see a big improvement in economic data. That whole idea of 4 rate hikes this year? Forget about it. Two hikes? That’s what Yellen says but then she was calling for 4 hikes at the start of the year. It is hard to imagine 2 more increases when the Fed can’t even seem to do one.

And yet, the Fed seems bent on trying to raise rates, although they haven’t made a real strong case for why they want a rate hike, other than they want tools to fight a potential downturn. What they have not done is to identify which part or parts of the economy are so strong that they require monetary tightening to avoid overheating the economy.

Remain is surging in the polls. The latest Brexit referendum poll from The Telegraph shows that Remain has jumped out to a 7-point lead. The poll, conducted by ORB International, shows Remain ahead of Leave by 53% to 46%. You could look at other polls and find different results, and considering the margin of error, you could still call it a toss-up. Most likely, the fear of Brexit is likely worse than Brexit itself. Of course, we won’t know for sure until we get there.

The most likely market response to an exit is that the British pound and euro drop while the US dollar goes higher in a flight to quality; likewise, US Treasury prices move higher, pushing yields down; stocks probably take a hit. If the Remain campaign wins, then look for a bounce in the pound sterling, higher bond rates due to less uncertainty and a more hawkish stance from the Fed, and a rally in stocks. Again, we won’t know for sure until we get there. One thing that seems likely is that Friday will be a volatile session.

And even though George Soros warns that a Brexit would result in a meltdown worse than Black Wednesday, the only thing happening this week is a vote. If the Leave Campaign wins, it would still take a couple of years before the Brits actually leave the EU, during which time they will negotiate various trade deals and treaties. Leaving the EU requires an act of Parliament, which means they will craft the details of an exit. The Leave Campaign admits that markets might be volatile but they dismiss the economic consequences as fear mongering.

Germany’s Constitutional Court
 has rejected a legal challenge to the ECB’s Outright Monetary Transaction program, a never-used crisis tool that allowed the central bank to buy debt of financially strained countries. The case was brought by 35,000 German politicians and academics who argued that the so-called OMT scheme violates European law, ever since the ECB announced the program in 2012 and pledged to do “whatever it takes” to prevent the Eurozone from imploding. Basically the Germans confirm they don’t want to provide relief to Greece.

The European Union’s Brussels envoys agreed to extend until the end of January the energy, financial and defense sanctions on Russia over the conflict in Ukraine, but formal approval is still pending.

Chinese internet giant Tencent Holdings and its partners will pay $8.6 billion to buy an 84% stake in the maker of the popular “Clash of Clans” mobile game, in a deal that values the Finnish game maker at $10.2 billion. Tencent and its partners will purchase the stake in Supercell Oy from Japanese telecommunications giant SoftBank and the Finnish company’s current and former employees.

Brazilian telecom Oi has filed for bankruptcy protection; it is the largest ever bankruptcy in Brazil, about $19 billion. The Brazilian economy is slogging through the second year of recession. The filing is likely to have major repercussions in Brazil, since several major state-owned banks are among Oi’s top creditors.

Bids for Sports Authority store leases are due Thursday, and outlets with leases that go unsold are in danger of going dark (the company sold its inventory to a trio of liquidators in May). The New York City-based Modell’s Sporting Goods and the Britain-based Sports Direct are considering a joint bid for as many as 200 stores of the bankruptcy retailer Sports Authority.

Boston Retirement System has filed the first bondholders proposed class action against Volkswagen claiming that “false and misleading statements” led to the securities’ decline after its “emissions scandal went public.” German prosecutors have also launched a probe against former CEO Martin Winterkorn and another senior executive for allegedly not informing investors quickly enough about potential losses.

Boeing signed a tentative agreement, valued at potentially $25 billion, to sell jetliners to Iran, in what would be one of the Islamic republic’s biggest deals with a U.S. manufacturer since trade sanctions on Tehran were eased.

The Federal Aviation Administration has approved new rules for commercial drone operations. Drone flights will be approved for agriculture, research and development, educational and academic use, and powerline, pipeline and antenna inspections. They will also be approved for aiding rescue operations, bridge inspections, aerial photography and wildlife nesting area evaluations.

The rules, which will take effect in late August, will allow drones that weigh less than 55 pounds and fly up to 400 feet high and 100 miles per hour, but only within sight of an operator and not over people. Drones will not be allowed to fly at night unless they have special lighting and must stay at least 5 miles from airports. Operators must be at least 16 and have a remote pilot certificate. The new rules do not cover drones to deliver your online purchases; that would require separate action.

Samsung, the world’s top smartphone maker, plans to invest about $1.2 billion in the United States over the next four years on internet of things technologies. Samsung said it will make the investments through its Silicon Valley arms such as the Samsung Global Innovation Center in order to develop relevant technologies and strengthen cooperation with startup companies.

Evidence is mounting that doctors who receive as little as one meal from a drug company tend to prescribe more expensive, brand-name medications for common ailments than those who don’t. A study published online Monday by JAMA Internal Medicine found significant evidence that doctors who received meals tied to specific drugs prescribed a higher proportion of those products than their peers. And the more meals they received, the greater share of those drugs they tended to prescribe relative to other medications in the same category.

The 2015 Jeep Grand Cherokee that rolled backward down a driveway and killed the actor Anton Yelchin had been recalled for a gearshift issue. Fiat Chrysler in April recalled more than 1.1 million cars and SUVs worldwide because vehicles may roll away after drivers exit, an issue linked to 41 injuries, 212 crashes and 308 reports of property damage.

If you bought a ticket through Ticketmaster between late 1999 and early 2013, you could be eligible for free tickets to a number of events. An email sent to eligible Ticketmaster customers includes instructions on how to get vouchers for free tickets to selected events as well as discounts on Ticketmaster purchases. The vouchers are the result of a class-action lawsuit over ticket fees and other charges, and about 50 million people are in line to receive the vouchers.

Pacific Gas and Electric is preparing to close the Diablo Canyon Power Plant, California’s last operating nuclear facility. The plant’s two reactors would be shut down in 2024 and 2025, when their operating licenses expire. The proposal is part of an agreement with environmental and labor groups, intended to help meet California’s aggressive clean energy goals. It comes after years of public pressure to close the plant, near San Luis Obispo, because of safety concerns over its location, near several fault lines, and its use of ocean water for cooling.

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