Morning in Arizona

Morning in Arizona

The Headline Animator

Monday, June 06, 2016

Saying Nothing

Financial Review

Saying Nothing


DOW + 113 = 17,920
SPX + 10 = 2109
NAS + 26 = 4968
10 Y + .02 = 1.72%
OIL – .01 = 49.68
GOLD + 1.20 = 1245.70

The S&P 500 closed at a 7 month high and is now just 21 points from the record high back in May of last year.

Federal Reserve chair Janet Yellen delivered a speech today in Philadelphia. The event was the last insight into Fed thinking before a media blackout takes effect ahead of the June 14-15 monetary policy meeting. One week ago, the market betting was on a June or July interest rate hike from the Fed; then Friday, we saw the very, very weak non-farm payrolls report from the Labor Department. The economy added just 38,000 jobs in May, the smallest gain since September 2010. So, what did Yellen say about the Fed’s stance on rate hikes now?

Well, it depends on what you wanted to hear. Yellen said the jobs report was disappointing but she warned against attaching too much significance to it on its own. Yellen said. “Other timely indicators from the labor market have been more positive.” Amid the “countervailing forces,” she said, “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately.”

Yellen listing four main risks to the U.S. economy – slower demand and productivity, and inflation and overseas risks – before downplaying them all. Yellen told the World Affairs Council of Philadelphia: “If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate.”

So, if you think Yellen should be dovish, what you heard is that the Fed might hike rates in September or December. If you are more hawkishly inclined, then you are probably looking at July or September, plus December. Right now, market pricing doesn’t give the Fed more than a 50% chance of raising rates until the December 14, 2016, meeting. A rate hike in June is priced at just a 2% chance; July is at just 27.5%.

And if you think Yellen was intentionally vague and is growing weary of all this guessing, and she might just flex some muscle and hike rates next week, just to end all the speculation, then this quote probably caught your attention:Because monetary policy affects the economy with a lag, steps to withdraw this monetary accommodation ought to be initiated before the FOMC’s goals are fully reached.”

Stocks, the dollar and bond yields all moved lower in the immediate aftermath of the speech, then recovered as if nothing happened. Lurking in the bond market is a $1 trillion reason for the Federal Reserve to go slow on interest-rate increases. That’s how much bondholders stand to lose if Treasury yields rise unexpectedly by 1 percentage point, according to a Goldman Sachs Group estimate.

With only a few weeks to go until Britain holds its referendum, fresh polls have shown an increase in support among voters for the U.K. to leave the European Union, swinging toward a Brexit. Results from an online poll by ICM showed those wishing to leave the EU at 48%, and those wanting to remain in at 43%, with 9% undecided.

The International Monetary Fund says Brexit would either be pretty bad or very bad. The Organization for Economic Cooperation and Development warns that there would be dire consequences not just for Britain, but for the rest of the world. The Bank of England says output would go down and inflation would go up. Of course, the IMF, the OECD, and the BOE have the prognostication skills of a brick.

Treasury Secretary Jacob Lew and Secretary of State John Kerry are in Beijing for the eighth round of the U.S.-China Strategic and Economic Dialogue as tensions simmer over Beijing’s land-reclamation in the South China Sea. Chinese authorities are likely to complain about recent anti-dumping steel tariffs and ask that the U.S. recognize its country as a market economy, while American officials want China to adopt further financial liberalization, address industrial overcapacity and refrain from more yuan devaluations. Dinner will be served, nothing will change, and everybody will go home.

Saudi Arabia plans to more than triple the government’s non-oil revenues and clamp down on public sector salaries over the next five years; ministers announced reforms designed to reduce the economy’s dependence on oil. The plan is part of a wider, long-term reform drive known as Vision 2030, which was announced by Deputy Crown Prince Mohammed bin Salman in April. He aims to overhaul many aspects of Saudi Arabia’s economy and society as the kingdom prepares for a future of shrunken oil revenues and a rising population.

Today the government announced they will cut public wages and borrow billions of dollars. Last week Saudi Arabia’s sovereign wealth fund announced a $3.5 billion investment in Uber.  It’s one of the biggest venture capital investments in history and brings Uber’s overall fundraising haul to $11 billion. Those investments might allow Uber to expand its share of the global ride-hailing market and make big profits for its investors.

But money spent on money-losing price competition isn’t investment. Price wars do nothing to increase the world’s productive capacity. So the fact that so much money is being invested in Uber, and in other companies deliberately losing millions in an effort to gain market share, could be an ominous sign. It suggests that it’s getting harder and harder to spend money in ways that boost long-term economic growth.

More than 25 European and Asian-owned supertankers are now shipping Iranian crude, allowing the Islamic Republic to ramp up exports much faster than expected following the lifting of sanctions in January. Tehran was struggling as recently as April to find partners to ship its oil, but after an agreement on a temporary insurance fix, more than a third of Iran’s crude shipments are now being handled by foreign vessels. Iran shipped 2.3 million b/d in April 2016, the highest level since 2012. These figures are 15 percent higher than the International Energy Agency forecast.

The Supreme Court today declined to hear GlaxoSmithKline’s bid to throw out lawsuits by union health and welfare funds that said the company’s misrepresentation of heart-related risks of its diabetes medication Avandia caused them to pay too much for the drug for insured patients.

The court left in place a 2015 ruling by the 3rd Circuit Court of Appeals against GlaxoSmithKline that allowed the class action lawsuits to proceed. The suits were filed by three labor union funds that provide medical coverage, including the cost of prescription medications, to union members and their families.

The lawsuits filed between 2007 and 2010 allege that GSK violated the Racketeer Influenced and Corrupt Organizations Act, or RICO, by fraudulently concealing the risk of cardiovascular injury. GSK has since settled claims by 46 U.S. states and thousands of users, without admitting any wrongdoing.

The Supreme Court also rejected Google’s bid to throw out a class action lawsuit involving claims that the company deceived California advertisers about the placement of Internet ads through its Adwords service. The court’s decision not to hear the case leaves in place a September 2015 ruling by the San Francisco-based 9th Circuit Court of Appeals that the litigation could move forward as a class action representing advertisers who used the service between 2004 and 2008.

A federal district court judge in 2012 ruled that the case could not move forward as a class action in part because each advertiser would receive different damages. Each advertiser would have paid a different sum for the ads in question, the judge said. The appeals court reversed the district court, prompting Google to ask the Supreme Court to intervene, which they did not.

The Supremes also rejected Ecuador’s challenge to a $96 million international arbitration award in favor of energy company Chevron. The dispute stems from a 1973 deal that called for Texaco Petroleum, later acquired by Chevron, to develop oil fields in exchange for selling oil to Ecuador’s government at below-market rates.

Texaco filed several lawsuits in the 1990s accusing Ecuador of violating the contract. The case is not part of a separate legal battle brought by a group of Ecuadorean villagers who claim Texaco caused billions of dollars in pollution damage when it began exploring oil deposits in the 1960s.

Impossible Foods aims to disrupt the food industry by developing meat products from plant-based ingredients. Launched by a top biochemist from Stanford, the startup says it’s on the verge of offering an alternative that looks, smells, and even sizzles like regular ground beef.

We’ve been told over and over again by online security experts not to use the same passwords for multiple sites. And apparently Facebook’s Mark Zuckerberg is just as lax as the rest of us in actually following that advice. Zuckerberg’s accounts at Twitter, Pinterest and Instagram were hacked this weekend, apparently because he had re-used his LinkedIn password — which was one of more than 100 million passwords stolen in 2012 and dumped online last month.

Just in case you were wondering Zuckerberg’s password was “dadada”. A 2013 study found 55% of all Internet users use the same passwords for most, if not all, sites they visit. So if one account gets breached, all are potentially exposed.

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