Financial Review

Watching Paint Dry

Sinclair Noe — October 23, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 54 = 23,273
SPX – 10 = 2564
NAS – 42 = 6586
RUT – 11 = 1497
10 Y – .01 = 2.38%
OIL + .02 = 51.86
GOLD + 2.00 = 1283.00

Cryptocurrency

• Number of Currencies: 876
• Total Market Cap: $169,012,985,919
• 24H Volume: $5,690,782,655

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	5,710.1	$94.82B	$3.11B	54.62%	1	-3.33%	+0.46%
	Ethereum	ETH	308.99	$29.31B	$784.44M	13.78%	0.0541205	+8.51%	-6.30%
	Ripple	XRP	0.20325	$7.87B	$167.54M	2.94%	0.00003593	+4.97%	-20.68%
	Bitcoin Cash	BCH	327.67	$5.48B	$238.42M	4.19%	0.0576983	+4.86%	-0.49%
	Litecoin	LTC	57.790	$3.10B	$250.59M	4.40%	0.0101885	+5.49%	-7.66%
	Dash	DASH	294.84	$2.26B	$64.49M	1.13%	0.0520935	+5.42%	-1.91%
	NEM	XEM	0.21126	$1.87B	$5.85M	0.10%	0.00003664	+4.21%	-7.57%
	NEO	NEO	30.300	$1.51B	$57.43M	1.01%	0.0053008	+9.19%	+6.67%
	BitConnect	BCC	195.693	$1.42B	$13.41M	0.24%	0.034437	-4.56%	+0.06%
	Monero	XMR	89.18	$1.35B	$38.32M	0.67%	0.0155816	+4.30%	-6.85%

Wall Street had opened at record highs following Japanese Prime Minister Shinzo Abe’s emphatic win in weekend polls. The victory also sent the dollar to a three-month high against the yen, as investors bet the win would mean a continuation of “Abenomics,” the ultra-loose policies that have kept downward pressure on the yen. But the early morning gains faded.

General Electric posted its worst single day loss in more than 6 years, dropping more than 6%. Oilfield services company Halliburton warned of slower growth at its oil well drilling and evaluation business, reflecting a steady drop in rig counts in the United States. The outlook suggests Halliburton’s current-quarter might not be as strong as its latest quarter, even as they posted a 15% increase in third quarter revenue.

Halliburton’s shares fell about 1.5 percent. Schlumberger was down 1.5 percent, while Baker Hughes fell 4 percent. Meanwhile, T-Mobile’s quarterly profit topped Wall Street analyst estimates, and the No. 3 U.S. wireless carrier raised the lower end of its expected range of customer additions for the year but didn’t elaborate on a potential deal with rival Sprint.

Still, the S&P 500 index set a record today, completing its longest streak ever without a 3% intraday drawdown. At the close, it overtook the previous record of 241 days set in 1996. The S&P 500 has gone 34 straight days without a 0.5% drop, the longest streak since 1995.

The S&P 500 has fallen by 1% or more in a single day only four times this year, the fewest for a full year since 1964. Its average daily close on an absolute basis has been 0.3% this year, the lowest since 1965. So, that’s it; it’s official – this is the most boring stock market of all time.

As earnings season rolls on we see companies in the S&P 500 are posting earnings growth of just 2.4% through last week, below the already lame 3.7% that was forecast. The first two quarters of the year looked like earnings were great and headed for the moon, but part of that was just the comparison with the first half of 2016 when earnings were declining.

This week brings a heavy slate of reports, as 185 of the benchmark’s constituents post results. At 21.85 times earnings, the S&P 500 is on the pricier side of historical averages.

It’s not theory anymore. U.S. markets are clearly pricing in some version of a tax plan. The tenor of the markets changed in early September when tax reform made its way back into the news cycle. As we get closer and closer, the details become more and more important.

Today, Trump tweeted that there will be no changes to Americans’ tax-deferred retirement plans (such as 401Ks and IRAs), pushing back against reports that the Republicans are weighing a proposal that would significantly reduce the income workers can save in these popular programs. Now that’s good news if you are trying to save for retirement but it might be bad news for a tax plan.

Republicans’ ability to win passage of a tax package hinges on its ability to survive a complex set of legislative restrictions in the Senate. Republicans are attempting to cut business tax rates deeply, and to cut individual tax rates, using a legislative route that allows them to bypass a Democratic filibuster and pass a bill with a simple Senate majority.

To do that, they will need to make some tough political choices, eliminating some popular tax breaks, or employing some budgetary accounting tricks, to offset lost revenues from rate cuts. Trump’s tweet concerned one of those accounting maneuvers, which would have allowed Republicans to effectively borrow tax revenues from the future to offset some rate cuts today.

Reducing 401K contribution limits would force retirement savers to pay more in taxes today, as they sock away money, but less in the future, when they began withdrawing retirement funds tax-free. This move also opens the door for other possible concessions, or maybe we should say – inevitable concessions.

Clearly, nothing like the plan Republicans recently put forward will become law. The plan does not just fail to lift economic growth meaningfully, it adds significantly to the nation’s fiscal problems. It also is politically unpalatable.

The brouhaha over eliminating the state and local income tax deduction, the principal source of additional tax revenue in the plan, has even forced some of the authors of the legislation to step back from it. If a tax bill makes it into law, and odds appear no better than even that one will, then it will be significantly scaled back.

Whenever you open a bank account or apply for a credit card, there is a ton of fine print, which includes a clause that says that if there is a problem, it must be resolved through arbitration – not by going through the courts or joining in a class action lawsuit.

The Consumer Financial Protection Bureau, a watchdog agency, has approved a rule that would block mandatory arbitration clauses, allowing more people to file or join a lawsuit to press their complaints. So, if a bank were to open bogus accounts in your name, or start racking up unwarranted fees, you could still try to resolve the matter through arbitration, but you could also keep the option of taking it to the courts.

One of the big problems with arbitration is that it is difficult for most people to take time out of their schedule to attend arbitration over smaller disputes. Would you take a day off work to attend arbitration over a $100 dispute you may or may not win? Many people just give up.

Another problem is that if a consumer reaches a settlement through arbitration, it generally requires non-disclosure – meaning that other potential plaintiffs do not have the benefit of knowing that other consumers have been wronged, how they settled, or what evidence might have been uncovered in the process – meaning there is no precedent established through the process of arbitration.

And that means there is no record of repeat offenses. Every misdeed by the bank or financial institution is viewed as “one-off” rather than a pattern of improper or even illegal behavior.

Wall Street had hoped Congress would kill the rule before it went into effect later this year. Today, the Treasury Department issued an 18-page report that tries to argue against the protections. With tax reform now taking up much of lawmakers’ attention, opportunities to push through the measure in time are dwindling.

Also slowing their efforts has been backlash against two big financial firms, Wells Fargo and Equifax. Wells Fargo has been under pressure since admitting last year that employees had opened millions of sham accounts customers didn’t ask for, and Equifax is struggling to recover from a massive hack that affected more than 145 million people.

Consumers groups have used both cases as a rallying cry against arbitration clauses, which Wells Fargo and Equifax both use. But the Treasury Department’s report could provide a boost to efforts to derail the rule.

Prime Minister Shinzo Abe made a huge gamble when he called for a snap election to demonstrate confidence in his government. Lucky for him, he won in a landslide. Also lucky are stock investors, and not just those in Japan. The victory likely means the continuation of the Bank of Japan’s huge economic stimulus.

Abe’s policies have allowed gross domestic product to expand for six straight quarters, a rarity for an economy that has been in and out of recession regularly since the 1990s. At less than 3 percent, the unemployment rate is the lowest in 23 years. Japanese shares rose, with the Nikkei 225 Stock Average gaining for a 15th straight day, its longest winning streak on record.

Globally, the BOJ’s continued policy accommodation should help cushion the blow from the Fed’s balance sheet normalization and the ECB’s expected tapering next year. The ECB meets on Thursday and they are widely expected to cut their monthly bond purchase program in half.

The tally is in: Amazon received 238 proposals from cities, states, districts and territories interested in becoming home to the company’s second headquarters. Last month, Amazon announced that it wanted to open a second North American headquarters, setting off a scramble among economic development officials from the United States, Canada and Mexico eager for as many as 50,000 jobs and $5 billion in investment.

The next step is for Amazon’s real estate team to sort through the bids and decide which proposals to consider more closely. It plans to decide early next year. Affordable-housing advocates point to spikes in rents in Seattle as evidence that bidding cities ought to prepare for rising housing costs if Amazon decides to locate thousands of highly paid employees there.

The number of apartments deemed affordable for very low-income families across the United States fell by more than 60 percent between 2010 and 2016. According to a new report by Freddie Mac, rent growth is outstripping income growth in most major metro areas. The apartment vacancy rate was 8 percent in 2009, compared to 4 percent in 2017.

More renters flooded the market after people lost their homes in the housing crisis. That trend, coupled with a stagnant supply of apartments, resulted in increased rents. The report found a significant drop in the percentage of affordable units in seven of the nine states where Freddie Mac financed the most rental units, including Arizona.

Celebration: New Highs for the DJIA and the S&P 500

Financial Review

Milk and Cookies: New Highs for the DJIA and the S&P 500

Sinclair Noe — July 12, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 120 = 18,347
SPX + 14 = 2152
NAS + 34 = 5022
10 Y + .09 = 1.52%
OIL + 2.04 = 46.80
GOLD – 21.90 = 1333.70

It was a record high close for Dow industrials and S&P 500 today. Dow Jones Industrial was up 120 points to 18,347, taking out the old record from May of 2015. S&P 500 up 14 to 2152, second consecutive record high close for the S&P 500. Nasdaq up 34 to 5022.

Japan’s Nikkei extended gains overnight,  rising 2.5% to almost recapture its pre-Brexit level, after Prime Minister Shinzo Abe ordered a new round of fiscal stimulus. The yen had its biggest two-day slide since 2014. Former Federal Reserve Chairman Ben Bernanke met with Prime Minister Shinzo Abe Tuesday. Bernanke noted during the face-to-face meeting that Japan’s central bank still has a range of monetary easing measures at its disposal. Brushing aside a view among Japanese economists that BOJ policy has reached its limit, Bernanke’s assessment added to speculation that Tokyo will unleash new rounds of fiscal and monetary stimulus to reboot Abenomics, Abe’s growth plan. It sounds like Bernanke is giving instructions on how to use the helicopter to make it rain yen.

The European Commission has slashed its U.K. and Eurozone growth forecasts following the Brexit vote, stating the cumulative negative impact for British GDP would be about 1%-2.5%, and the euro area between 0.2%-0.5%, by 2017. For the first time in more than seven years, analysts are finally expecting some action on UK interest rates from the Bank of England when it meets for its first post-Brexit policy decision on Thursday. The central bank is widely seen as reducing its key interest rate to 0.25% from a current record low of 0.5%, where it has stood since March 2009.

So, a fresh round of stimulus from Japan, plus lower interest rates in the UK, plus decent economic news from the EU and a high probability of stimulus from the ECB. Also, China performed a stealth devaluation of the yuan to support its economy. Around the world, there is a push for more stimulus or QE, and in the US, the Fed seems to have abandoned the idea of rate hikes, even as last Friday’s jobs report showed a strong rebound. Central bank policy, essentially throwing money at the markets, works – at least it works to lift the financial markets. Just in case you missed what was happening the last 8 years.

Global stocks erased losses sparked by the UK’s Brexit vote. The MSCI All-Country World Index capped a 7.6 percent rally from its post-Brexit low to reach the highest level in a month. The pound rose the most since the vote. US crude oil surged the most in three months. Treasuries fell in the biggest 2-day sell-off this year.

The IMF said in its formal annual review of the U.S. economy and policies that the June 23 “Brexit” vote has prompted a rise in the dollar that has been less than feared, up about 1% in nominal effective terms, while stock markets have recovered losses incurred right after the vote. Meanwhile, a safe-haven rush into U.S. Treasuries has lowered yields, and home and business financing costs, considerably. The IMF’s conclusion: “The net effect on growth is pretty negligible.” The IMF kept unchanged its previous U.S. economic growth forecasts of 2.2 percent for 2016 and 2.5 percent in 2017.

However, the IMF said a “more complex and harmful” downside risk is that the potential growth rate may be lower than previously estimated, with a smaller output gap. The United States faces a confluence of forces that will weigh on future gains, including a rising share of the U.S. labor force shifting into retirement, aging basic infrastructure, low productivity gains and labor markets and businesses that appear less adept at reallocating human and physical capital. It said growth in future years under this scenario could settle at well below 2 percent.

U.S. wholesale inventories barely rose in May as automobile stocks recorded their biggest drop in more than 2-1/2 years, suggesting inventory investment likely remained a drag on economic growth in the second quarter.  The Atlanta Federal Reserve’s GDPNow forecast model shows the US economy likely expanded at a 2.3 percent annualized rate in the second quarter following the latest data on wholesale trade. The latest GDP estimate was slightly lower than the 2.4 percent figure calculated on July 6

Job openings in the U.S. fell in May to the lowest of the year. The Labor Department’s JOLT survey shows job openings fell to a seasonally adjusted 5.5 million in May from a record 5.85 million in April. That’s the biggest decline in openings since last August. The fewer number of jobs available could be a blip that gets reversed in June. The economy added a whopping 287,000 jobs last month after just a meager 11,000 gain in May.

What is clear is that hiring has slowed in 2016. The hiring rate among private sector companies slipped to 3.8% in May to mark the lowest level in more than two years. The quit rate was unchanged at 2%, which is actually a negative; people quit their jobs in order to take new jobs, so more quits are seen as more mobility in the labor force.

Small-business sentiment rose for the third straight month in June, but remained muted compared to its long-term average. The optimism index from the National Federation of Independent Business rose 0.7 to 94.5. Only three of ten components declined in June, and the biggest jump was in the number of people who expect the economy to improve. Still, the index has spent most of the economic expansion well below its long-term average of 98.

A new commercial data pact between the European Union and the United States has been approved and companies such as Google and Facebook can sign up by the end of the month. The new agreement that will allow the transfer of online data across the Atlantic; this includes everything from social media posts and search queries to information about workers’ pensions and payroll. The pact, known as the EU-U.S. Privacy Shield will underpin over $250 billion dollars of transatlantic trade in digital services annually. The previous such framework, Safe Harbor, was struck down by the EU’s top court in October on the grounds that it allowed U.S. agents too much access to Europeans’ data.

An arbitration court ruled that China has no historic title over the waters of the South China Sea and has breached the Philippines’ sovereign rights with its actions. China boycotted the hearings at the Permanent Court of Arbitration in The Hague and vowed to ignore the ruling and said its armed forces would defend its sovereignty and maritime interests. China claims most of the energy-rich waters through which about $5 trillion in ship-borne trade passes every year. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

Amazon.com said this morning that some customers were reporting difficulty with checkout after making purchases in its highly publicized “Prime Day” shopping event. The glitches seem to have been worked out. The one-day sale, for members of Amazon’s $99 per year Prime subscription service, is expected to generate up to $1 billion in sales, more than double the amount last year.

Amazon devices such as Echo, Fire TV, Fire TV Stick and Fire tablet are available at big discounts as are a host of other products from high-end televisions to shoes and toys. Big U.S. retailers such as Wal-Mart and Gap are also offering midsummer promotions online to cash in on the hype around Amazon’s Prime Day sale. For Amazon, it is a chance to grow its base of prime customers; who then end up spending more than twice as much each year compared to non-subscribed customers. Users who subscribe to Amazon Prime membership are promised 100,000 special bargains by the e-commerce platform, launching the kind of purchasing frenzy that saw more than 34.4 million items sold last year.

To move all that stuff, Amazon has a sprawling logistics network, designed to deliver most Prime products in just 48 hours. In some warehouses, known as “Fulfillment Centers,” robots have even been introduced to shorten the “click-to-ship” gap to just 15 minutes.

Financial Review

Earnings Reporting Season

Sinclair Noe — July 11, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 80 = 18,226
SPX + 7 = 2137
NAS + 31 = 4988
10 Y + .07 = 1.43%
OIL – .65 = 44.76
GOLD – 10.80 = 1355.60

The S&P 500 Index traded at a new intra-day high this morning, topping 2143, and closing at a record high 2137, taking out the old high of 2130 from May of last year.

And just because we hit a new high, doesn’t mean we’ve reached the top.  Typically, a breakout results in a bullish rally. The market has broken its multiyear record 17 times, and each of those instances has been followed by prolonged growth. After these 17 multiyear highs, the average return for the S&P 500 has been 8.5% over the next six months and a whopping 15.5% over the next year. Not a guarantee, just an indication of past performance. If you are a bit cautious, wait for confirmation, such as a weekly close above the old high.

So it may come as a surprise that the S&P 500 is also poised to match its longest earnings recession since 1936. At 25 times reported profit, the S&P 500 is trading at a higher multiple than it has for 90 percent of the time in the past eight decades. Earnings have been declining for four consecutive quarters, and if the second quarter numbers do not improve we will have a fifth consecutive quarter of declining earnings. Earnings are not expected to improve; they will probably be down about 5.6% from a year earlier, according to FactSet. And yet, a majority of stocks will probably report better than expected earnings. The average “beat rate” – the percent of the time a company beats the consensus earnings estimate – is 61% for the broad market.

Wall Street analysts lower the bar for earnings and then cheer when a company steps or stumbles over the bar. The “typical” quarter sees companies in aggregate report better-than-expected numbers, with the average margin of upside running around four percentage points. If the pattern persists, companies have an outside shot of ending about even with the 2015 period. The current forecasts for the third quarter are for a slight dip of less than 1 percent in profits, followed by a more notable bounce-back in the fourth quarter.

As far as deciphering the actual earnings reports, well I’ve been reading and analyzing reports for a couple of decades and it just keeps getting tougher and tougher to make sense of the numbers. An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the “adjusted” profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years. At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.

Lynn Turner, chief accountant at the Securities and Exchange Commission, said companies are still touting “made-up, phony numbers” as much as they did 15 years ago, perhaps more, and few experts are calling them out on it. Turner said, “The analysts aren’t doing enough to get behind the numbers that management gives them to find out what’s really going on.” And this of course, begs the question, what is the job of Securities and Exchange Commission?

Alcoa used to be one of the Dow 30 stocks, and with the ticker symbol AA, it kicks off the earnings reporting season. Not only is Alcoa first in line, it is the poster child for what we might expect. Alcoa reported quarterly earnings and revenue that beat analysts’ expectations. The company posted adjusted second-quarter earnings per share of 15 cents on revenue of $5.3 billion. Analysts expected the company to report earnings of about 9 cents per share on $5.2 billion in revenue.

Despite beating expectations, Alcoa’s second-quarter adjusted earnings per share declined from 19 cents in the comparable year-ago period. Revenue also fell — from $5.9 billion — compared to the same quarter last year. After the announcement, Alcoa shares jumped more than 4 percent in after-hours trading.

Earlier in the year, oil and stocks were trading in concert. Oil prices fell more than 1 percent today, hitting two-month lows on extended selling after the market’s break below a key technical support level last week due to oversupply fears. Last week, oil slumped nearly 8 percent in its biggest weekly losses in six months and already hit a two-month low on Thursday after disappointing drawdowns in U.S. crude and gasoline inventories pointed toward weak demand.

Interior minister Theresa May will become Britain’s next prime minister on Wednesday, after her only rival abruptly quit the race today, removing the need for a drawn-out leadership contest. May was left as the only candidate to succeed David Cameron, who announced he was stepping down after Britons voted last month to leave the European Union. May favored a vote to Remain in last month’s referendum.

The Bank of England is weighing a raft of emergency measures to stem the flood of money out of Britain’s biggest property funds that caused fresh market panic last week. These could include “enforced notice periods before redemptions, slashing the price for investors who rush to the door, or additional liquidity requirements for funds.”

Australia’s Malcolm Turnbull declared victory on Sunday in a marathon national election, with his coalition government retaining power and the opposition Labor Party conceding defeat. It’s still unclear whether the prime minister will lead a majority government or one that needs the support of smaller parties and independents. The coalition has so far won 74 of 150 House of Representative seats and is projected to take 76, or the slimmest majority possible.

Prime Minister Shinzo Abe’s Liberal Democratic Party and its allies won a stronger majority in Japan’s Upper House election on Sunday, in a development that will make it far easier to push through his economic agenda. Abe later confirmed a new round of stimulus, nearly $100 billion worth of measures, including loans. To fund a supplementary budget, they said the cabinet will consider the first additional issuance of new government bonds in four years. The announcement on new stimulus measures helped send the yen down 2% against the dollar and pushed the Nikkei up 4%. Other Asian markets also moved higher this morning.

Japanese messaging service Line Corp., set for a dual New York and Tokyo listing this week, has priced its initial public offering at the top of its marketed range, and is expected to raise as much as $1.3 billion and value the company at $6.9 billion. Line’s offering will be the biggest tech IPO of the year and it will mark the first Japanese company to list new shares in the U.S. since 2000.

The hacking outfit OurMine has already been responsible for a few high-profile Twitter account takeovers, but the latest may be particularly embarrassing for the company. Twitter CEO Jack Dorsey had his account briefly hacked Saturday morning, as OurMine tweeted out a link to its website and a message that it was “testing your security,” along with a Vine clip that has since been deleted.

UFC was sold. The mixed martial arts promoter was sold for $4 billion to a consortium of investors, led by the talent agency WME-IMG. Backing the transaction are private equity firms Silver Lake, Kohlberg Kravis Roberts and Michael Dell. Ultimate Fighting Championship fights are now shown in more than 156 countries and claim millennials as some 45% of its audience.

Thomson Reuters agreed to sell its intellectual property and science business to private equity firms Onex Corp and Baring Private Equity Asia for $3.55 billion in cash. The business, which has 3,200 employees, provides intellectual property and scientific information and associated tools and services to governments, universities and companies.

All Starbucks store employees and managers in the U.S. are in for at least a 5% raise starting in October. Employees with at least two years of service will also now be eligible for double the amount of stock award in the company, which is doled out each November as an equity reward that turns into shares of Starbucks stock after a specific time period. The wage increase combined with the new stock award policy means compensation will increase between 5% and 15%.

Black Friday is coming four months early for some retailers. Stores including Target, Sears, Banana Republic, Express, the Gap and Old Navy are offering deals around the same time as Amazon’s big Prime Day sale, which starts tomorrow. Wal-Mart has even eliminated the $50 minimum spending requirement for shoppers to receive free shipping on their online orders. Amazon shares hit a record on Friday, and gained another 1% today.

That all comes ahead of Tuesday’s second annual Prime Day, when subscribers will get access to over 100,000 deals. It will be Amazon’s biggest day ever. Countdown deals rolled out last week, and on Friday Amazon started offering specials. Starting at midnight Pacific time, members of the $99 a year Prime service will see deals as frequently as every five minutes throughout the day.

Today is July 11, or 7-11. Free Slurpees for everyone! At least at participating 7-Eleven convenience stores. Between 11 a.m. and 7 p.m. at participating stores, visitors can receive a free small Slurpee drink available in various flavors.  This is the 14th year the retailer has offered free Slurpee drinks on its birthday.

Maybe Slurpees aren’t your thing. I understand. Just wait until tomorrow July 12, Cow Appreciation Day at Chik-fil-A. The chicken chain will offer a free entrée to anyone dressed in cow attire, whether “head-to-hoof” or sporting a cow-spotted accessory, like a purse or hat.

Financial Review

Nobody Knows Normalization

Sinclair Noe — February 12, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 313 = 15,973
SPX + 35 = 1864
NAS + 70 = 4337
10 Y + .10 = 1.75%
OIL + 2.77 = 28.98
GOLD – 9.40 = 1238.00

The Nikkei Stock Average finished down 11% for the week, its biggest weekly percentage drop since October 2008. For the day, the index ended off 4.8% at 14,952, the lowest since October 2014. The Nikkei is down 21% year-to-date.

Japanese Prime Minister Shinzo Abe held a meeting with his top financial diplomat today, as well as the BOJ’s governor, following a report that the “architect of Abenomics” called for a Group of 20-wide response to the recent market rout. Friday’s high-level gathering came as the country’s stock markets plunged again and the yen hit highs not seen since October 2014. Speculation is also rampant that Tokyo could conduct yen-selling intervention.

The Hang Seng China Enterprises Index of mainland Chinese companies trading in Hong Kong fell 2% Friday and was off 6.8% for the week. Trading was halted on the Kosdaq, the smaller cap, tech focused exchange in South Korea as the index dropped by more than 8%.

Here in the US, we’re not quite in bear territory for the major indices: The Nasdaq dropped 18% from last summer’s high; the S&P 500 dropped 15% from last year’s high.

And then we bounced today, not enough for weekly gains, but a bounce off the lows, as expected. For the week the Dow lost 1.4%, the S&P lost just under 1% after hitting a two-year low yesterday, and the Nasdaq lost just over a half a percent for the week. I’m just glad the markets will be closed Monday.

So, the very, very bad start to the New Year in the markets has carried over into February, and everybody is looking for a market bottom. And maybe yesterday marked a low; we can never really know until after the fact, but one day does not confirm a trend reversal. Add Bank of America to the list. The firm’s research team is the latest on Wall Street to lower expectations for the U.S. stock market in 2016, after one of the worst starts to a year on record wiped out more than $2 trillion in value.

The bank now expects the Standard & Poor’s 500 Index to end the year at 2,000. While the bank’s new target implies a 7.7 percent advance from the current level, it’s 9 percent lower than the prior target of 2,200. It would also mean a small annual loss. Of course, nobody knows where stocks will finish the year. You don’t know, Bank of America doesn’t know, I certainly don’t know, and the central bankers of the world have no clue.

So far, all attempts by central bankers to respond to the situation have not been working out. The People’s Bank of China has been selling dollars and substituting derivatives to prop up its balance sheet; a strategy that seems likely to result in devaluation of the Chinese currency.  Japan is fumbling around for answers and the yen has been getting stronger.

Europe has joined Japan with negative interest rates and it isn’t stimulating the economy, it is just leading banks, businesses and individuals to hoard cash. And Eurobanks are looking especially vulnerable right now. Deutsche Bank’s problems came into focus this week. The yield on Deutsche Bank’s 6% Contingent Convertible bonds, or CoCos, rose to more than 13% from 7.5% at the start of the year. The bank’s shares were down 40% in the same period.

When the debt of Germany’s biggest bank is trading like junk, it should catch your attention. As a side note, it would be high irony if Germany had to go begging to the EU to save its banking system. But Deutsche Bank is not the only Eurobank with problems.

Janet Yellen tried to normalize interest rates and instead the yield curve flattened. Fed Chair Janet Yellen wrapped up her testimony before Congress yesterday, stressing that the central bank was not on a “preset” path to return policy to “normal” and “wouldn’t take negative rates off the table.”

Yellen told lawmakers this week she was studying ways to “be prepared” in the event the current slide in world stock markets, concern about financial sector stress, and slowing economic growth all translate into a recession or another financial crisis. The growing consensus is that the Fed can’t raise rates again and a majority of money managers are calling for cuts.

What are the central banks going to do when another wave of bad news breaks over the markets? And will whatever they do work? The idea of the central bank “put” seems to be losing its punch, or even worse, backfiring. While the recent market volatility might just be an overblown response to the December rate hike by the Fed, you also have to question how one tiny little rate increase could cause this much damage, and if the real problem goes much deeper?

Retail sales rose 0.2% in January, as consumers boosted purchases of new cars as well as groceries and shopped more online. Sales in December were sharply revised higher to show a 0.2% gain instead of a 0.1% decline. Sales at gas stations dropped 3.1% in January.

Core sales – excluding autos, gas, building materials and food – rose an even stronger 0.6%. In an early sign of lackluster spending, Retail Metrics, a private research firm, said sales at stores open at least a year fell 0.9 percent in January from a year earlier. Meanwhile, business inventories climbed a seasonally adjusted 0.1% in December. To put it simply, sales are not strong enough to clear the shelves.

The University of Michigan’s preliminary February reading on consumer sentiment dropped to 90.7 from 92.0 in January. The expectations component fell from 82.7 to 81.0 during the month. The gauge of current conditions was down less, falling from 106.4 to 105.8. Consumer views of their financial situations improved, but largely because they expect lower inflation. In fact, respondents anticipated the lowest inflation rate on record in the January survey.

Sure enough. The Labor Department said import prices dropped 1.1% last month after decreasing 1.1% in December. Import prices have decreased in 17 of the last 19 months, reflecting the strong dollar and plunging oil prices.

A new report from the New York Federal Reserve shows older Americans have been ramping up their debt while younger Americans have not. In real terms, debt in the hands of Americans between 50 and 80 years of age has increased by 59% since 2003. At the same time, the aggregate debt of those age 39 and younger has dropped by 12%.

This is mainly a result of the housing market. Home-secured debt, per capita, has surged 47% for those age 65, for an increase of $11,191, while it’s dropped 28% to $8,195 for those aged 30. The same trend played out for auto loans as well; on a per-capita basis, auto debt is up 29% for those 65 years old, but it’s down 6% for those 30 years old. Overall, balances owed by households grew $288 billion in 2015, slightly less than the $306 billion increase seen in 2014.

Major world powers have agreed to a cessation of hostilities in Syria set to begin in a week and to provide humanitarian assistance to besieged areas, but failed to secure a complete ceasefire or an end to Russian bombing. The U.S., Russia and more than a dozen other nations also reaffirmed their commitment to a political transition when conditions on the ground improved, following a marathon meeting in Munich aimed at resurrecting peace talks.

Meanwhile, Saudi Arabia says it is willing to commit ground troops to fight ISIS in Syria; exactly how or when they might deploy, and what they intend to do if they deploy, and the extent of US involvement in any Saudi deployment – those are still open questions.

Oil prices were on a 6-day slide from February 4 until this morning; prices went from a high of 33.60 to a low of 26.05; or a 22% bear market in 6 days. Needless to say, there were some big bets on the short side, and when news of a hint of OPEC production cuts hit the wires, the shorts cashed in, which caused prices to pop, which squeezed the remaining short positions.

A big move up in oil prices today (10.5% and 12.3% intraday) but for the week, oil was down 4.7%. Most of the volatility in oil right now is due to speculators. At the same time, stocks have been moving in lockstep with oil; that correlation is not based on fundamentals; stocks and oil will disconnect eventually, just not today.

Christine Lagarde is set to win a second term as managing director of the International Monetary Fund, after a nominee deadline passed with no new candidates to challenge her. In a statement released Thursday, Treasury Secretary Jacob Lew said the U.S. supports her for a second term.

A full 76% of S&P 500 companies have reported fourth quarter earnings through early Friday. And the picture is not pretty. FactSet data show expectations for first-quarter per-share earnings have fallen to a decline of 6.3%, far wider than the decline of 5.5% they were showing as recently as Monday.  Back in September, that forecast was for growth of 4.8%.

By the end of December, it had fallen to growth of just 0.8%. The energy sector is looking worst, but all 10 S&P 500 sectors are facing lower expected earnings-growth rates for the first quarter than at the end of September

In case you missed it, Burger King announced this week that it will add hot dogs to its fast food menu. Proof positive that there is still some common sense in this world.

Financial Review

Don’t Bet the Farm

Sinclair Noe — September 16, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 140 = 16,739
SPX + 17 = 1995
NAS + 28 = 4889
10 YR YLD + .02 = 2.30%
OIL + 2.56 = 47.15
GOLD + 14.10 = 1120.20
SILV + .53 = 15.03

The cost of consumer goods fell in August for the first time since the beginning of the year, owing mostly to another sharp drop in gasoline prices as the summer driving season came to an end. The consumer price index, or the cost of living, fell by a seasonally adjusted 0.1% last month. That’s the first decline since January. Retail prices are up just 0.2% in the past year. Excluding food and energy, so-called core consumer prices rose 0.1% in August. Core prices have risen just 1.8% in the past 12 months, unchanged from in July.

Energy prices declined 2% in August. Most of the relief came in the form of lower prices at the pump. The cost of a regular gallon of gas fell about 8% last month. The price of fuel had risen three straight months before the decline in August. Still, energy prices are down 15% over the past year. Food prices rose again, however. They increased 0.2% in August, spurred by higher costs of eggs, fruits and vegetables. The cost of airline tickets dropped for the second straight month. The price of new cars and medical care were unchanged. Lower inflation is also giving American workers more relief. Real hourly wages jumped 0.5% in August, a combination of lower inflation and a bump in pay. Real wages have climbed a modest 2% in the past 12 months.

By the way, the CPI-W is used to determine the COLA, or Cost of Living Adjustment; and it is based on the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers, which came in at negative 0.3% in August. We will still have to wait for September to determine the COLA, but we know it can’t go negative, so it looks like there will be no cost of living adjustment for Social Security benefits, or anything else.

The Federal Reserve will certainly consider inflation, or the lack of inflation, in their FOMC meeting today and tomorrow. An improving labor market and a growing economy are seen giving the Fed enough fodder to justify a hike. But many analysts see enough concern over low inflation and the impact of a rate move on fragile emerging markets as likely to stay the Fed’s hand. The World Bank and the International Monetary Fund have both argued against a Fed rate increase out of concern a move could add to turmoil in emerging-market economies, which has been fueled by a collapse in commodity prices and related concerns about China’s economy and Beijing’s decision last month to devalue its currency.

If you want to understand what the World Bank and IMF are worried about, you can look to 1997 and the Asian financial crisis. In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was swiftly followed by the Philippines, Malaysia, Singapore, and Indonesia. Then came a massive decline in Hong Kong’s stock market that led to losses in markets around the globe. Eventually the Russian ruble collapsed. Long Term Capital Management, a hedge fund run by John Meriwether and a few Nobel laureates, made some highly leveraged bad bets, and for a while it looked like the whole thing might result in a global financial meltdown.

While parallels exist between 1997 and the current emerging market selloff, notably in the form of a stronger dollar, which makes it more expensive for emerging-market countries to finance their debts, plus lower commodity prices and slowing trade, it could be more dangerous today; there are more highly leveraged hedge funds, and sovereign funds, and derivative trades. At the least, emerging market debt will become more expensive, commodities (denominated in dollars) will become less expensive, trade will likely slow, and defaults could become more common.

The Fed’s decision tomorrow will be felt around the world because the dollar is still the reserve currency and the Fed’s monetary policy determines what happens to currencies, stock markets and economies right around the world. The markets are pricing in roughly a one-third likelihood of a rate rise this week, but, in truth, no one has any real idea whether the trigger will finally be pulled or not. I think there is a much higher probability the Fed will hike rates. We’ve been warned, it has been telegraphed and signaled and communicated in almost every way other than an official proclamation. And if they don’t do it tomorrow – when will they?

ZIRP, or Zero Interest Rate Policy was instituted in response to emergency financial conditions nearly 7 years ago. Where is the emergency today to justify ZIRP? The economy is less than stellar but it’s not like Lehman Brothers just shut their doors. And so my best guess is the Fed will raise rates tomorrow, but I’m not betting the farm because I don’t know what will happen. Neither do you. Plan accordingly.

Home-builder confidence in the market for newly constructed single-family homes rose a point to 62, the highest level since Nov. 2005, according to the National Association of Home Builders/Wells Fargo housing market index. Any reading above 50 indicates good conditions.

The Energy Information Administration reports oil stockpiles slipped 2.1 million barrels last week. Refineries increased operating rates for the first time since July, and supplies of gasoline and distillate fuels surged. Stocks of oil exploration and production companies rallied, while those of refiners fell. WTI crude rose 5.7%; it was the highest close and biggest one-day gain since Aug. 31.

So, how is the economy on Main Street? The Census Bureau has some answers. The median household income was $53,657 last year, down from $54,462 in 2013 but not statistically different. The poverty rate was 14.8%, which means 46.7 million people were impoverished — the fourth straight year in which the number of people in poverty was not statistically different. The percentage of people without health insurance coverage for the entire 2014 calendar year was 10.4%, down from 13.3% in 2013.

The Obama administration has begun preparations for a possible federal shutdown next month as a series of obstacles threaten a repeat of 2013. Lawmakers have just 15 days to reach a budget agreement before September 30, when current funding expires.

Snapping a major two-day slump, China’s Shanghai Composite Index jumped 4.9%, with all of the gains coming one hour before markets shut in a pattern that’s generally interpreted as government intervention.

Japan debt ratings were cut today by Standard & Poor’s over doubts the government will revive economic growth and end deflation in the next two to three years. The country currently has some $450 billion of debt outstanding; and the credit rating was cut to AA- rating instead of an A+ report card. The S&P downgrade is the most recent of the major credit-rating companies to do so; Moody’s was the first, in December 2014, followed by Fitch in April. S&P justified its downgrade by saying that the outlook for Prime Minister Shinzo Abe’s “Abenomics” program is grim.

Eurozone officials are racing against the clock to restructure Greece’s banking system before new rules kick in that could wipe out corporate deposits and result in disastrous effects for the country’s economy. The rush has been complicated by Sunday’s snap parliamentary elections, which could produce no clear winner and prolong negotiations over a governing coalition.

Anheuser-Busch InBev has informed rival SABMiller that it intends to make an offer to acquire the British firm in a deal that would bring together the world’s two largest beer makers. SAB Miller issued a statement saying, “No proposal has yet been received and the board of SABMiller has no further details about the terms of any such proposal.” So, the deal is far from certain, but if it happens, it would probably value SAB Miller around $75 to $92 billion, and create a brewing giant that would dominate much of the global beer market; which raises some questions about whether such a deal could pass anti-trust muster.

Also, since Anheuser Busch InBev is now a Belgian company trying to acquire SABMilller, a British company, there are some unique rules that come into play. Stringent rules on disclosure require a company to confirm or deny any hint of a deal, whether that comes from an anonymously sourced news article or unusual stock movement. The disclosure triggers a 28-day timeline for a formal, fully financed bid. Known as the put-up-or-shut-up rule, if AB InBev decides to walk away from the transaction it can’t come back for six months.

General Motors has agreed to sign a deferred-prosecution agreement to end a US government investigation into its handling of an ignition-switch defect linked to 124 deaths. The company will pay less than the $1.2 billion that Toyota paid to resolve a similar case, but the exact amount was not immediately known. The deal means GM will be charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case will be put on hold while GM fulfills terms of the deal.

The United Auto Workers union has reached a tentative labor deal with Fiat Chrysler after a long drawn-out night of negotiations. The union hopes the terms can be used as a template for Ford and GM, which also extended their deals past a midnight deadline on Monday to allow more time to wrap up negotiations. Under the agreement, Fiat Chrysler will eventually phase out the two class wage system between new factory workers and more senior employees.

Financial Review

Patience For Now

Sinclair Noe — March 13, 2015

 

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DOW – 145 = 17,749
SPX – 12 = 2053
NAS –  21 =  4871
10 YR YLD + .01 = 2.11%
OIL – 2.05 = 45.00
GOLD + 6.50 = 1158.40
SILV + .12 = 15.64

At one point today, the Dow was down 250, so it could have been worse. For the week, the Dow was down 0.6% and the S&P 500 fell 0.9%. The Nasdaq was down 1.1% for the week. Today is Friday the 13^th. All I can say is pure coincidence. We looked at the market for 148 Friday the 13ths, going back to 1928, there is no particular trend.

 In the last week of January we saw oil prices drop to right around the $45 a barrel level, with intraday lows of $44.37, but the daily closing price hovering just a little above $45. And in February, prices popped up to touch $55.05; prices challenging $55 on 3 days, and could not break out. So, now we are back to challenging support at $45. And waiting to see if the trading range will break down.

The International Energy Agency says oil prices remain fragile due to unrelenting production by US shale-oil producers. There has been an expectation that oil producers would cut back production in response to lower oil prices, but the IEA  report shows oil production in the US has increased by 115,000 barrels, and now we’re running out of places to store the oil. The IEA says it doesn’t see cutbacks in production until the second half of the year; and for now at least, ballooning inventories combined with shrinking oil storage likely will drag prices lower.

Baker Hughes reported today that the oil rig count dropped by 67 last week to 1125, and that has been a trend in the oil patch, but it also means that existing wells continue to produce. At some point, the IEA says those discontinued wells could make a difference in the supply, and when it does it will make for some serious price disruption; but as of now, the cutbacks haven’t kicked in.

Meanwhile, Reuters reports a tentative deal has been reached between the United Steelworkers and oil companies to end the largest US refinery strike in 35 years. The reported deal would last four years and “wage increases would be 2.5% the first year, 3% each in years two and three, and 3.5% in the fourth year.” The strike affected 12 refineries representing a fifth of US refining capacity. The deal still needs approval from the rank and file, but it will likely lead to more refined products making the way to your local gas station, which should open up some of the storage facilities for crude oil.

Next week, European leaders meet to consider whether to prolong economic sanctions on Russia. The thinking is that they will allow most, or all of the sanctions to expire in July, and they will not be looking to add new sanctions.  And while Russia has continued to supply oil to the world markets, an easing of sanctions is likely to result in a fresh wave of Russian oil supply hitting the market; you know, to make up for lost revenue. Also, today Russia’s central bank cut its key interest rate one percent to try to stimulate its economy. That’s the trend these days; cut rates to give a jolt to the economy; it’s also a battle to devalue currencies.

Now, toss in a strong dollar. Over the past 14 sessions, the S&P has had a correlation of -0.96 to the dollar index, meaning that stocks consistently fall on days when the dollar gains. Perfect inverse correlation is -1.0.

Tokyo stocks surged through the 19,000 level today to record their highest close since April 2000. The Nikkei currently leads all major Asian markets with a 10.5% year-to-date gain. The Japanese stock market has been sparked by Bank of Japan stimulus, (known as Abenomics), which has pushed the yen down to the lowest levels against the dollar in 8 years.

And of course, the European Central Bank started its version of QE this week, and they will be buying about $66 billion dollars of bonds per month. In addition, concerns about Greece’s status in the euro bloc have weighed on the common currency. The dollar pushed to a new 12 year high today against the euro.

Also, investors are wagering that recent solid jobs data from February will persuade the Fed to send signals for a coming rate increase, perhaps as early as midyear, at its two-day Federal Open Market Committee meeting next week. The pace of the dollar’s rise against worldwide currencies suggests a number of undesirable outcomes for the US economy. First, there’s the loss in export competitiveness. In fact, the U.S. trade deficit just hit a record high (excluding oil). Secondly, corporations have to endure the disintegration of profits made in foreign currencies. Indeed, forward earnings estimates for the initial two quarters of 2015 have turned negative. But the Fed is looking at something different, and they are likely to hint at raising rates, even as it becomes harder to justify a rate hike. Still, no one wants to be short dollars going into FOMC. The Fed meets Tuesday and Wednesday, and until then we’ll just have to be patient.

One of the side effects of a strong dollar is disinflation, or maybe we could even call it deflation. Producer Prices dropped 0.5% in February. Despite the first rise in gasoline costs since last summer, US producer prices, or prices at the wholesale level, fell in February for the fourth straight month. Wholesale gas prices climbed 1.5% in February, the biggest increase since last June. Yet food prices retreated 1.6% to mark the biggest pullback in almost two years. Trade prices sank a record 1.5%. Excluding the volatile categories of trade, food and energy, core prices were flat on the month. Over the past year overall producer prices have fallen by 0.6%, the first 12-month decline on record.

The University of Michigan’s consumer sentiment index dropped to 91.2 in March from 95.4 in February. That’s the worst reading since November. We get cranky when we have to pay more for gas.

The Feds are looking into hedge fund manager Bill Ackman’s assault on Herbalife. Neither Ackman nor his fund, Pershing Square, has been served a subpoena. But The Wall Street Journal reports: “Prosecutors in the Manhattan US attorney’s office and New York field office of the FBI have conducted interviews and sent document requests in recent months in connection with the investigation, which is looking into whether people, including some hired by Mr. Ackman, made false statements about Herbalife’s business model to regulators and others in order to spur investigations into the company and lower its stock price.”

This week we learned that Wall Street bankers are struggling, and the bonus pool paid to security industry employees in New York City – that’s just in New York City – was $28.5 billion. It works out to an average bonus of $172,860. So somebody at the Institute for Policy Studies pulled out their calculator and figured that if you take 1.03 million full-time workers paid an hourly wage of $7.25 or less, the minimum wage, and multiplied by 50 hours of work per week; the total compensation would be about $15 billion dollars, more or less. A 40 hour work week would put the compensation at about $14 billion. So, the sum of Wall Street bonuses just for New York City is roughly twice the total amount paid to all the full-time workers paid minimum wage in the entire country.

It has been a busy week, which included news that most of the big banks had passed a stress test, and you might think that means the banks haven’t been getting into trouble. Not exactly. It’s time for today’s edition of “Banks Behaving Badly”. We start with Commerzbank, one of Germany’s largest lenders, which agreed to pay nearly $1.5 billion and dismiss some of its employees to resolve an array of charges in the United States. Commerzbank was accused of sending tainted money through the American financial system; siphoning funds to sanctioned Iranian corporations, facilitating accounting fraud at Olympus, the Japanese camera company; charged with Bank Secrecy Act criminal offense and institutional anti-money laundering. Eight regulatory agencies investigated the bank.

Leslie Caldwell, head of the Justice Department’s criminal division, which prosecuted the criminal part of the case said, “Financial institutions must heed this message: Banks that operate in the United States must comply with our laws, and banks that ignore the warnings of those charged with compliance will pay a very steep price.” And of course, we all know that means there were no indictments, just a fine; but in a rare breach of prosecutorial etiquette, the bank was not allowed to deny wrongdoing.

Meanwhile Bloomberg reports the Justice Department is about to get tough on banks that rigged the foreign exchange markets. Prosecutors are reportedly pressing Barclays, Citigroup, JPMorgan and the Royal Bank of Scotland to plead guilty, which would mean a fine, and the starting point for rigging the global currency markets is $1 billion, more or less. In keeping with prosecutorial etiquette, prosecutors are seeking a simultaneous settlement with the banks, which would enable the lenders to avoid being singled out for industrywide conduct.

Two weeks ago the FCC voted to approve rules on net neutrality and today they released the text on the actual rules. A couple of key points, the new rules will ban paid prioritization – so the internet cannot be divide into “haves” and “have nots”, or fast lanes and toll lanes; also the rules would ban blocking, meaning consumers must get what they pay for, unfettered access to any lawful content on the Internet.

The 400 pages of the FCC rule aren’t exactly beach reading, but if you are still trying to understand the importance of the ruling and the need for it, the first two sentences offer a nice summation: “The open Internet drives the American economy and serves, every day, as a critical tool for America’s citizens to conduct commerce, communicate, educate, entertain, and engage in the world around them. The benefits of an open Internet are undisputed.”

FINANCIAL REVIEW

Halloween Treats

Sinclair Noe — October 31, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Financial Review
DOW + 195 = 17,390
SPX + 23 = 2018
NAS + 64 = 4630
10 YR YLD + .03 = 2.33%
OIL – .44 = 80.68
GOLD – 25.90 = 1173.90
SILV – .28 = 16.28

Record highs, again.

Back on September 19th, the Dow hit a record high close of 17,279. And then we watched the market tumbled for nearly a month. On October 17th we told you about a bullish reversal pattern, and it has been a strong move to new highs; up 1,100 from when I called the reversal, and up 1,545 from the lows of October 15.

Also, a new closing high for the S&P 500, however, we did not take out the intraday high of 2019 from September 19. Let’s break down the moves for the month of October. The Dow is up 248. The S&P added 46 points. The Nasdaq is up 137 points for October to a 14-1/2 year high. In October we saw the yield on the 10 year note drop 18 basis points from 2.51%. Gold took a hard fall on Friday, at one point trading at levels not seen since 2010. And of course, a big move in oil down 10.75 a barrel. If you are looking for a really dramatic move, the Russell 2000 index of small cap stocks has bounced from a low of 1046 on October 13, to close today at 1173, a 127 point gain; and once again above the 50 day and 200 day moving averages.

For the week the Dow rose 3.5 percent, its best percentage weekly gain since January 2013. For the week, the S&P 500 was up 2.7 percent and the Nasdaq was up 3.3 percent.

And if you think the rally of the past two weeks is impressive you should see the 2-day rally on the Nikkei, up almost 5% today. The Bank of Japan announced it expand its QE purchases and will now buy about $720 billion worth of Japanese bonds each year. So, the Federal Reserve ended QE3 large asset purchases on Wednesday, but really they just passed the baton to Japan.

Here is what has happened in Japan. December 2012, Shinzo Abe was elected as Prime Minister in Japan. Abe appointed Haruhiko Kuroda as governor of the Bank of Japan, and they set out on a very aggressive stimulus campaign to lift the Japanese economy out of decades of funk. They called it Abenomics. It started with promise. In early 2013, the yen fell, and the Japanese stock market rallied. And then the politicians got involved and started making a mess of things; they raised a consumption tax to try and rein in budget deficits. The economy contracted and disinflation returned. This has now become a familiar pattern. We’ve seen it here in the US; the central bank tries to stimulate the economy; the politicians tighten the belt. We’ve seen it in the Eurozone; Draghi promises to do whatever it takes; the austerians slam on the brakes.

In Japan, Abe is going all out. International commodity prices have been falling, and so the idea is to weaken the yen. Japan’s public pension system will also step in with direct purchases of exchange traded funds to prop up the equity markets. The idea is to mitigate deflation risks while also creating price inflation in other asset markets. The target is 2% inflation, and Prime Minister Abe seems hell-bent to make sure it happens.

So, the Fed ends QE, The Bank of Japan doubles down on QE (literally, they don’t even call it QE, it’s called QQE2); next up is the European Central Bank; next week the ECB will likely announce something, exactly what is still a guess. The main refinancing rate is already at 0.05%, a level ECB boss Mario Draghi several times has described as the “lower bound”. And with deposit rates at -0.2%, consensus is also for no changes there. As for full-scale QE? Well, Draghi has said he’ll do whatever it takes, but Draghi doesn’t have the same clout in Europe as Abe does in Japan. Draghi will surely face opposition from the Germans. Earlier in the year, the central bank laid out plans to buy asset-backed securities and covered bonds, dubbed private or mini QE. It started purchasing covered bonds in October, but has yet to push the buy-button for ABS.

Today, the Commerce Department reported that inflation in the US remains subdued. The price index for personal consumption expenditures, which is the Fed’s preferred way to measure inflation, held steady at 1.4% in September. Excluding the often-volatile categories of food and energy, prices rose 1.5% on the year. Annual core inflation has been steady at that level since May. The PCE inflation index has been under 2% for the past 29 months. The Fed warned in its policy statement on Wednesday that “inflation in the near term will likely be held down by lower energy prices and other factors.” Still, the Fed said that the chances of inflation “running persistently below” the 2% target had “diminished somewhat since early this year.”

The final October reading on the University of Michigan/Thomson Reuters consumer-sentiment index rose to 86.9, the highest reading since July 2007, from a final September level of 84.6. Consumers have kept their focus on improved job and wage prospects, and lower prices at the pump don’t hurt.

In a separate report, consumer spending fell in September for the first time in eight months, as Americans spent less on energy; and because we were spending less of gas, fewer people felt the need to replace the old gas guzzler with a new, more fuel efficient model, and auto sales dropped. They spent more on services, however. Personal spending dropped a seasonally adjusted 0.2% last month to mark the first decline since January.

By the way, it is estimated that sometime tomorrow, the nationwide average price for a gallon of gas will drop under $3 a gallon. The decline in gas prices is estimated to help consumers save roughly $250 million a day.

Meanwhile, the Bureau of Labor Stats reports labor costs are up 0.7% in the third quarter, matching the gain in the second quarter. Wages increased 0.8%, while the cost of benefits rose 0.6%. Over the past year, employment costs are up 2.3%, the fastest growth since 2008. Real, steady growth in wages is the missing ingredient in the economy right now. For months, economists have been saying the steady decline in the unemployment rate would inevitably lead to higher wages, as employers would have to bid up the wages they offer to recruit and retain productive workers. That prediction was fine in theory, but it didn’t seem to be showing up in anyone’s paycheck, until now, and it is still too early to say that to say it is entrenched, but we are seeing signs. Wages for private-sector workers are up at a 3% annual pace over the past six months. Average hourly earnings for nonsupervisory and production workers (about 80% of workers) are up 2.6% in the past year. And with inflation running at 1.4%, this means workers are actually getting ahead, just a little.

And don’t forget we are in earnings reporting season. And earnings are looking good; data sources vary, but according to FactSet, of the 362 companies that have reported earnings so far, 78% have reported earnings that have beaten the mean estimate of analysts. The blended earnings growth rate for the quarter is 7.3%, well above the estimated growth rate of 4.5% that was expected by analysts as of Sept. 30.

Exxon Mobil said its third-quarter earnings edged up 2.5% as higher refining margins and improvements at its refining and marketing segment helped offset lower production. Shares rose about 2%.

Chevron reported a third-quarter profit that rose well above expectations, offsetting a bigger-than-expected decline in sales. Earnings for the quarter ended Sept. 30 came in at $5.6 billion, or $2.95 a share, up from $5 billion, or $2.57 a share, in the year-earlier period.

AbbVie posted net profit of $506 million, or 31 cents a share, in the quarter, down from $964 million, or 60 cents a share, in the year-earlier period. They beat estimates and raised guidance.

It was a very, very bad week for privatized space travel. On Tuesday, an Orbital Science Antares unmanned rocket blew up on the launch pad in Virginia. Today, one of Virgin Galactica’s spacecraft crashed during a test flight in Southern California, killing one pilot and injuring another. The company was testing a new rocket engine on the craft, which is eventually supposed to carry paying tourists on suborbital flights high above the Earth. The accident is a major setback to Virgin, which had aimed to start regular commercial flights in 2015.

Next week, we have two really big events: the mid-term elections on Tuesday, and the jobs report next Friday.