Stocks Manage Mild Moves and Mixed Finish

Charles Schwab: On the Market

Posted: 7/13/2016 4:15 PM ET

Stocks Manage Mild Moves and Mixed Finish

U.S. stocks paused a bit from their recent rally with the major indexes closing mixed and near the flatline as a drop in crude oil prices weighed on energy issues. Investors may have been exercising some additional caution ahead of some key earnings reports out of the financial sector later this week. In economic news, the Fed released its Beige Book, mortgage applications jumped for a second-straight week and import prices rose. Treasuries and gold were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 18,372, the S&P 500 Index was flat at 2,152, and the Nasdaq Composite shed 17 points (0.3%) to 5,006. In moderate volume, 823 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $2.05 lower at $44.75 per barrel, wholesale gasoline declined $0.05 to $1.38 per gallon and the Bloomberg gold spot price increased $8.70 to $1,343.62 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% lower at 96.29.

CSX Corp. (CSX $28) released 2Q earnings about an hour before the closing bell, correcting information that was released via Twitter earlier in the day. CSX announced earnings-per-share (EPS) of $0.47 versus the FactSet estimate of $0.44, while revenues declined 11.9% year-over-year to $2.68 billion, just shy of forecasts. The company noted that looking forward it continues to expect 2016 full-year earnings per share to decline, reflecting the ongoing transition in the energy markets, along with the impact of the strong U.S. dollar and low commodity prices. Shares of CSX traded higher.

Juno Therapeutics Inc. (JUNO $30) rallied after the company announced that the U.S. Food and Drug Administration (FDA) has removed the clinical hold on the Phase 2 clinical trial of its blood cancer treatment. As a result, JUNO said the trial, known as ROCKET, will resume.
Teva Pharmaceutical Industries Ltd. (TEVA $54) gained ground after the company raised its 2Q EPS and revenue guidance. Both figures were above FactSet estimates.

Fed releases Beige Book, mortgage applications jump back-to-back

The Federal Reserve's Beige Book, a tool summarizing economic activity across the nation used by the Federal Open Market Committee (FOMC) to prepare for its next two-day meeting set to conclude on July 27, was released in afternoon action. The report showed that U.S. economic activity continued to expand at a modest pace across most regions and while employment continued to increase during the period, the rate of growth ranged from little change to moderate. Consumer spending, though positive, was reported as showing some signs of softening and manufacturing was mixed and reporting districts noted that the outlook remained positive but deteriorated. As noted in the recent Schwab Market Perspective: Looking Beyond Britain, while we agree that the July FOMC meeting is likely off the table for a move on rates, we aren’t dismissing the possibility of a hike later in the year. A lot can happen in a few months and if financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

The MBA Mortgage Application Index rose 7.2% last week, after jumping 14.2% in the previous week. The second-straight solid weekly gain was led by a 11.2% rise for the Refinance Index, while the Purchase Index came in flat. The average 30-year mortgage rate fell 6 basis points (bps) to 3.60%.

The Import Price Index (chart) rose 0.2% month-over-month (m/m) for June, compared to the Bloomberg projection of a 0.5% increase, and May's unrevised 1.4% gain. Compared to last year, prices were lower by 4.8%, versus the 4.6% forecasted drop, and following May's unrevised 5.0% fall.

Treasuries were higher, with the yield on the 2-year note declining 2 bps to 0.67%, the yield on the 10-year note decreasing 4 bps to 1.47% and the 30-year bond rate falling 5 bps to 2.17%. Bond yields gave back some of their two-day recovery from recent pressure that has come from the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will yield the release of the Producer Price Index, expected to have increased 0.3% for May after rising 0.2% the month prior, and weekly initial jobless claims, forecasted to show an increase to a level of 265,000.

Europe modestly retreats from steep rally, Asia extends winning streak

European equities finished slightly lower on the heels of a four-session rally that came as the global markets recovered from the fallout from the late-June vote in the U.K. to leave the European Union, known as a Brexit. Financials lagged as Italian banking worries festered, while energy issues were bogged down by a drop in crude oil prices in the wake of a mixed U.S. oil inventory report. However, the appointment of Home Secretary Theresa May as the new U.K. Prime Minister cleared up some political uncertainty, while hopes of further stimulus measures in Japan and expectations of a rate cut from the Bank of England tomorrow added some support. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, eurozone industrial production in May dropped more than expected. The euro traded higher and the British pound fell versus the U.S. dollar, while bond yields in the region lost ground.

Stocks in Asia extended their recent winning streak to three days as the global markets continued to recover from the post Brexit fallout pressure, remaining buoyed by expectations of further Japanese stimulus measures, and some political clarity in the U.K. Japanese equities rose, adding to the rally as of late as expectations continued to be elevated that Prime Minister Abe, coming off his ruling party's convincing weekend upper house election victory, is close to announcing more aggressive stimulus measures. Gains in Japan came even as the yen rebounded somewhat from its recent drop and as a Japanese government spokesperson denied an earlier media report that suggested government officials are considering "helicopter money" as a policy option. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational.

Stocks trading in mainland China and Hong Kong extended their recent gains on speculation that the government is taking steps to support investor sentiment, per Bloomberg. After the closing bell, China reported a slightly smaller-than-expected drop in June exports, which came ahead of Thursday night's release of the nation's 2Q GDP report, expected to show year-over-year growth slowed to 6.6% from 6.7% in 1Q. Finally, equities in Australia and South Korea advanced, while Indian securities were mostly flat, despite late-yesterday's mostly upbeat data on the nation's industrial production and consumer price inflation.

The international economic docket for tomorrow will be limited, with expected economic reports consisting of inflation expectations, employment data and new vehicle sales from Australia. Meanwhile, in central bank action, tomorrow the Bank of England is expected to announce a 25 basis point reduction to its official bank rate, which would lower the rate to 0.25%, while the Bank of Korea will also meet and is expected to leave its benchmark interest rate unchanged at 1.25%.

Financial Review

The Courage to Act, or Not

Sinclair Noe — October 5, 2015

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DOW + 304 = 16,776
SPX + 35 = 1987
NAS + 73 = 4781
10 YR YLD + .07 = 2.06%
OIL + .72 = 46.26
GOLD – 2.50 = 1136.90
SILV + .40 = 15.77

The Dow Industrial Average has gone from a low of 16,013 Friday morning after the jobs report to an intraday high today of 16,798, or a swing of 785 points. The S&P 500 rose for a fifth session in a row, its longest winning streak this year

The US, Japan and 10 other Pacific Rim economies have reached agreement to strike the largest trade pact seen anywhere in two decades. The Trans-Pacific Partnership covers some 40% of the global economy and will create a new Pacific economic bloc with reduced trade barriers relating to the flow of everything from beef and dairy products to textiles and data as well as new standards and rules for investment, the environment and labor.

Former Fed Chairman Ben Bernanke has published a new book, entitled “The Courage to Act” and so he’s making the rounds. In a CNBC interview, Bernanke said that slow productivity growth is weighing on the economy, and there’s too much reliance on the central bank. He said other policymakers in the government need to step up. He refused to second guess current Fed Chair Janet Yellen on her decision not to increase rates at the Fed’s September meeting.

In an interview with USA Today, Bernanke said that more corporate executives should have gone to jail for their misdeeds. Bernanke explained that the Fed did not have the authority to jail anyone. Rather, it was the Department of Justice’s responsibility to do that. And while a few folks here and there went to prison for various violations, it’s largely been the financial entities that have paid the penalties.

“A financial firm, of course, is a legal fiction,” Bernanke explained. “It’s not a person. You can’t put a financial firm in jail.”

“It would’ve been my preference to have more investigation of individual actions because obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm,” he continued. “In that respect, there should’ve been more accountability at the individual level.”

So, on the one hand you have the former Federal Reserve chairman saying, after the fact, that people should have gone to jail but the financial firms are abstractions. Then on the other hand you have the former attorney general Eric Holder’s infamous quote that some financial institutions became so big, “that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” And on the other hand we have the Supreme Court, which has determined that corporations are people, even if Ben Bernanke says they’re fictitious and he can’t figure out how to lock them up.

The U.S. Supreme Court this morning rejected a U.S. Justice Department bid to restore the insider trading convictions of two hedge fund managers and reverse a lower court’s ruling that prosecutors contend will make it harder to bring such cases. The justices left in place a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that threw out the 2012 convictions of hedge fund managers Todd Newman and Anthony Chiasson for engaging in a scheme involving tips about Dell and Nvidia.

In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit, something more than the nurturing of a friendship. The appeals court also said the person being prosecuted had to know about the benefit. That issue wasn’t before the Supreme Court.

Yes, the Supremes are back in session, and they have some important cases on the docket, including: Evenwel v. Abbott, which will dig into the concept of one-person, one vote; also, Friedrichs v. California Teachers Association, which pits the practical needs of collective bargaining against the First Amendment and could have huge political consequences by crippling public employee unions and possibly all unions; and waiting in the wings at the high court are two politically incendiary cases: one involving abortion, the other birth control under Obamacare.

Saudi Arabia cut prices on oil sales over the weekend as it plays catch-up with OPEC and other producers in the region. State-run Saudi Aramco reduced prices significantly on oil sent to Asia and the U.S. The Saudi strategy is to keep producing oil at high levels in anticipation of improved demand at lower price points. Meanwhile, Russia is ready to meet with members of the Organization of Petroleum-Exporting Countries (OPEC) — as well as non-member oil producers — to discuss the situation facing global oil markets.

The Institute for Supply Management said its services index fell to 56.9% from 59% in August. New orders and prices paid were down, but any reading above 50 indicates growth, and this report marks the 68 consecutive month of growth in the services sector of the economy.

General Electric has drawn a big investment from activist shareholder Nelson Peltz. Peltz’s Trian Fund Management has accumulated $2.5 billion in GE shares since the middle of May —a roughly 1% stake —making it one of the company’s top 10 shareholders. While Trian has some criticism of the company, both sides say they are in agreement on most aspects of GE’s current direction, which includes the sale of the majority of its giant financing arm. Trian hasn’t requested a GE board seat.

Twitter has announced that co-founder and interim CEO Jack Dorsey will stay on as permanent chief executive. As Dorsey formally takes on the Twitter CEO job — after more than three months of drama and speculation — investors are bound to wonder which of Dorsey’s two companies will get short shrift. As Dorsey is reprising his role as Twitter CEO, he is also going to be taking his second company, mobile payments startup Square, public.

American Apparel filed for Chapter 11 bankruptcy in Delaware. The company plans to keep stores open while it seeks approval for its restructuring plan with lenders through the bankruptcy court.

Shares in Google have stopped trading, and have in fact ceased to exist. Instead, you can now trade Alphabet, the parent company for Google. Alphabet is a group of companies, many of which were acquired or developed internally by what used to be Google Labs. The biggest part of Alphabet stock that investors need to watch is the now-focused subsidiary of Google internet businesses.

All those advertising dollars that drove GOOG stock before will still do so, and they will come from this unit. Both GOOG stock and GOOGL stock will continue to trade separately, and at the same previous prices. They are ownership stakes in the parent company, Alphabet. GOOG stock will represent Class C shares of Alphabet, but with no voting rights, while GOOGL stock represents Class A shares with one vote each.

If you trade stocks on Scottrade you might want to be a bit more vigilant. Hackers had access to Scottrade’s network for “a period of several months” in late 2013 and early 2014. The retail brokerage posted a notice on its website. The company said it believes that contact information, names and addresses were the focus of the breach, although “sensitive data” such as Social Security numbers and email addresses were also in the system that was breached. The information of 4.6 million clients was contained in the targeted database, and Scottrade is providing a year of identity protection services to those clients. Scottrade said it is directly notifying clients who had an account before February 2014 that their data may have been accessed.

The FTSE 100 was up about 2.5% and almost the entire move can be attributed to Glencore. The commodities giant Glencore was briefly up 21% in London, and it had jumped by as much as 70% in Hong Kong trade after rumors circulated that management would listen to takeover offers. The company’s board disputed those claims in a press release, however, saying, “It is not aware of any reasons for these price and volume movements or of any information which must be announced to avoid a false market.”

Canadian fertilizer company Potash has backed out of its $8.8 billion takeover attempt of its German rival K+S. According to Potash, it’s dropping the bid because of market conditions and a lack of commitment from K+S management. Back in August, K+S said Potash’s bid undervalued the company and would eliminate jobs

Ford reached a key agreement with a union representing workers at an F-150 plant in Missouri. The UAW workers still need to vote on the deal which covers employment conditions, not the wage levels being negotiated on a national level. The development is crucial for Ford as the Kansas City-area plant is a major producer of the new F-150. Any slowdown in production would create a ripple of worry with F-150 sales continuing to gain momentum in the U.S.

Volkswagen will hold a special board meeting to review n internal investigation on the emissions cheating crisis. One of the biggest challenges for the VW board is how deeply to cut into Volkswagen’s investment budget in order to try to stave off credit agency downgrades.

Air France said last week it was planning cuts to jobs, jets, and routes in the absence of a deal with pilots, who had been asked to work more hours for the same pay to help end annual losses that began in 2011. Air France workers “stormed” the company’s headquarters at Charles de Gaulle Airport near Paris after it threatened to cut 2,900 jobs, interrupting a meeting with union representatives and ripping executives’ clothes off.

Financial Review

Inmates Run the Asylum

Sinclair Noe — May 15, 2015

 

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DOW + 20 = 18,272
SPX + 1 = 2122
NAS – 2 = 5048
10 YR YLD – .10 = 2.14%
OIL – .01 = 59.87
GOLD – 2.20 = 1223.00
SILV + .06 = 17.53

The S&P 500 index hit a record high close for the second day in a row. The S&P added 0.3 percent this week for its first back-to-back weekly gain in more than a month. The Nasdaq posted a small gain for the week.  The Dow Jones Industrial Average gained about 0.4 percent for the week. The Dow is close to another record. The old record is 18,288 from March 2.

So, to see if this little rally has legs, we can look at the Dow Jones Transportation Index, because according to Dow Theory, if the industrials are performing, they have to ship their products to market, so the Dow Transports should confirm any move by the Industrials. We are not getting confirmation. Transports topped out in November, and then there were 4 failed attempts to break through the high of 9310. And since March, the Transports have been consolidating lower. Now this doesn’t mean that the Industrials can’t hit a new record on Monday; after all the index is within spitting distance of the old record; but if the rally has legs, we would need to see Transports exhibit some signs of life. When we see a divergence, the we can expect the transports to drag down the broader market.

Industrial production fell a seasonally adjusted 0.3% in April.  Excluding autos, manufacturing was down 0.1%. As expected, mining and utilities output declined last month; that category includes oil exploration – which was down 14.5%. Capacity utilization dipped to 78.2% from 78.6% in March, indicating little cost pressure on goods prices. Meanwhile, the University of Michigan Consumer Sentiment Index fell to a preliminary May reading of 88.6, a seven-month low, compared with a final April level of 95.9.

A new study of labor market data by the Kansas City Fed concludes that since 2009, job growth has been strong for middle-skill and high-skill workers, but has remained weak for low-skill jobs. Middle-skill jobs rebounded in the first two years of the recovery and high-skilled jobs started to return in 2012. Growth in the upper two sectors has improved in each of the past three years. Low-skill jobs remain the one segment of the labor market that has yet to return to prerecession growth levels.

Note, the study talks about skill jobs, not about wages, although it may rightly be assumed that a highly skilled adjunct professor would make more than burger flipper – that is not always the case. Last week’s jobs report showed average hourly wages increased by only 0.1% in April and 2.2% for the past twelve months, which really means wages were flat after factoring inflation, and even in a recovering job market. What we have seen is wages fall in a recession, but remain flat in an economic recovery. Because wages remain sluggish, monetary policy doves are urging the Fed to hold off on raising rates. Yellen acknowledged that wages are not where they should be at her Congressional testimony last month.

So, where is the slack in the labor market? Much of it comes from workers who lost jobs in the downturn, and just left the labor pool; many of those workers were discouraged at prospects, and many others took a somewhat forced version of retirement. It is estimated that somewhere between 6 million to 17 million workers are under-employed, while another 6 or 7 million left the labor pool and are no longer counted. And don’t forget that new workers are added to the labor pool at the rate of about 80,000 per month. All those students in their graduation caps and gowns will be looking for jobs next week. So, there is plenty of slack (without even touching on globalization), and that is all reflected in wages.

The median weekly real income of men (including both wage and salary workers) working full time is an amazing $80 per week less today than it was 36 years ago in 1979, when converting to current dollars. That adds up to some $4,000 per year. And the median household income is down $5,000 per year over the past 15 years. And this is happening even as the jobs that are available demand a higher and higher skill set.

Dealmaking in the U.S. in 2015 has climbed 48 percent year-on-year to $565 billion, the highest level since 2007, following a string of multi-billion dollar acquisitions this week, including: Danaher acquiring Pall for $13.8 billion, Williams Companies acquiring Williams Partners for $13.8 billion, and Verizon acquiring AOL in a $4.4 billion deal. JPMorgan tops the list of U.S. M&A advisers with $153 billion from 52 deal. The New York Times is reporting that Visa, the credit card company is said to be in talks to buy its former subsidiary, Visa Europe, for as much as $20 billion. And the Wall Street Journal is reporting. Shutterfly, which is in a proxy fight with Marathon Partners Equity Management, said it would continue to consider “strategic transactions that provide compelling value”

Next week, four banks are expected to plead guilty to criminal antitrust charges in relation to manipulating the foreign exchange, or Forex, markets. The four banks are Barclays, JPMorgan Chase, Citigroup, and Royal Bank of Scotland. UBS will escape a guilty plea to fraud and antitrust charges related to foreign-currency rigging.

As required by the terms of a 2012 settlement, UBS self-reported the currency rigging and provided early cooperation which helped prosecutors in their investigation, so they felt they should have immunity for the fraud and anti-trust charges. But UBS is not off the hook; they will likely skate on anti-trust but still face fraud charges; and the reason is simple – they are a repeat offender. In 2012, UBS was under investigation for rigging the Libor, interest rates; the bank reached a settlement with prosecutors in which they agreed to “commit no United States crimes whatsoever” for the two-year term of the agreement. The 2012 settlement on rigging Libor followed on the heels of a 2011 settlement related to antitrust violations in the municipal-bond market. And that followed on the heels of a deferred-prosecution agreement in 2009 to resolve charges it helped American taxpayers hide money overseas.

So, now UBS is whining about not getting total immunity; apparently unable to distinguish between leniency and absolution. As a result, the bank is scrambling to continue to hold its charter in the US by obtaining waivers from regulators to allow it to continue operating certain businesses and access some benefits. UBS lawyers have been in marathon talks this week with prosecutors hammering out what court-filed documents will say about the bank’s alleged violations.

So, it sounds like the Justice Department is finally getting tough. According to the Murdoch Street Journal, the prosecutors were blowing up the 2012 deal. It sounds tough, right? Not so much. It is very likely that UBS will be allowed to continue doing business in the US, after they pay a multi-million dollar, slap on the wrist, fine. But what about the other banks that are expected to plead guilty to criminal anti-trust charges? Well, again, it’s a slap on the wrist fine and they will be able to continue doing business despite criminal charges.

But wait, there’s more. For example, what will happen to the foreign exchange market? Don’t worry, it’s in good hands. The New York Federal Reserve Bank is responsible for something called the Foreign Exchange Committee meets six to eight times per year and is responsible for establishing best practices in the Forex market. The committee members are commercial banks and investment banks. The Chair of the committee is a man named Troy Rohrbaugh, who is also the head of Foreign Exchange Trading at JPMorgan Chase, now and when the criminal activity was alleged. Before him, the chair was a man named Jeff Feig, who was from Citigroup. So, at the NY Fed, the committee charged with cleaning up the Forex market was chaired by a couple of guys from a couple of banks that are about to plead guilty to criminal charges in the Forex markets. And with guilty pleas expected next week, what has the NY Fed done about this arrangement? Nothing. Because the NY Fed is a captured regulator. Truly a case of the inmates running the asylum.

And that brings us to former Federal Reserve Chairman Ben Bernanke’s latest blog. The Bailout Prevention Act-a bipartisan bill introduced Wednesday-would seek to curb risk-taking from large banks by removing some of the Fed’s ability to bail them out. Bernanke thinks limiting bailouts is a bad idea. Bernanke says that in the 2008 crisis, the Fed served as a lender of last resort and he takes his bows for saving the global financial system from meltdown. And there is some truth to that. Then he says the Fed should still be able to bailout the banks if another problem crops up. And there he is wrong.

Bernanke says limiting the Fed’s ability to protect the economy in a financial panic would be a mistake. But we know the Fed has many other tools beside bailouts. What the Fed should do is fulfill its duty as a regulator. The Fed should set strong standards for banking activity; they should work with prosecutors to enforce the rules; if the laws are broken, the offending banks should have their charters revoked and the bank officers jailed. And if that happened, I suspect the banks would become the very picture of financial probity and we would never have to worry about a bailout ever again. And if they did slip up and try to destroy the financial system, we could chop them into small digestible pieces that could no longer pose a threat.

Financial Review

Month End Review

Sinclair Noe — April 30, 2015

 

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DOW – 195 = 17,840
SPX – 21 = 2085
NAS – 82 = 4941
10 YR YLD + .01 = 2.05%
OIL + 1.19 = 59.77
GOLD – 20.60 = 1185.00
SILV – .44 = 16.20

For the month, the Dow was up 0.4 percent, the S&P 500 gained 0.9 percent and the Nasdaq rose 0.8 percent. For the month of April, the dollar index fell about 3.7 percent. Some month end portfolio buying pushed yields on ten year notes to 2.05% after hitting a 7 week high of 2.11% earlier in the session. The big mover in April was in the energy market, where crude oil jumped more than 21%. S&P 500 earnings for the first quarter now are forecast to have increased 1.1 percent from a year ago, Thomson Reuters data showed, while revenue is forecast to be down 3.2 percent.

The Commerce Department reports consumer spending rose 0.4% in March as households stepped up purchases of big-ticket items like automobiles; that follows a 0.2% gain in February. The savings rate fell for the first time in four months to 5.3% from 5.7%. A year earlier, Americans were saving at a 4.8% rate. Consumer spending rose 1.9% in the first quarter, down from 4.4% and 3.2% in the prior two quarters. That might indicate there is pent-up demand, but a rebound in economic activity could be crimped by an inventory overhang.

The Employment Cost Index, which measures the cost of employing the average US worker climbed 0.7% in the first quarter, compared to a 0.5% increase in the fourth quarter. And while there has been a lot of attention to low paying jobs in retail and restaurants, and talk about raising the minimum wage, the job gains last month came in higher paying professions. Professional, scientific and technical services workers saw a 2.1% gain, and the real estate, rental and leasing business saw a 1.5% advance. While retail employee pay rose 0.5% in the first quarter. In the 12 months through March, labor costs jumped 2.6 percent, the largest rise since the fourth quarter of 2008. They are approaching the 3 percent threshold that economists say is needed to bring inflation closer to the Fed’s 2 percent target.

Meanwhile, inflation as gauged by the PCE price index rose 0.2% in March. The core rate that excludes food and energy edged up a smaller 0.1%. The PCE inflation index has climbed just 0.3% over the past 12 months, though the core rate is up 1.3% in the same span.

The number of Americans filing first-time claims for unemployment benefits fell 34,000 to a seasonally adjusted 262,000 from a revised 296,000 in the prior week; that’s a 15 year low. This report from the Labor Department covered the period from April 19 to April 25, which included the Easter holiday, so the numbers should be taken with a grain of salt.

Another report showed that factory activity in the Midwest accelerated in April, after hitting a 5-1/2-year low hit in February. The Institute for Supply Management-Chicago’s business barometer rose to 52.3 from a March reading of 46.3. A reading above 50 indicates an expansion in the region’s factory sector.

The Dollar Index was lower, for its eighth consecutive day of declines, the longest losing streak since April 2011. The losses cap the dollar’s first monthly decline since June. When you get to where sentiment is all one way in one trade, the trade gets very crowded. According to Commodity Futures Trading Commission speculative traders cut net bullish bets on the greenback to a six-month low of 324,940 contracts last week. While the FOMC called anemic first-quarter growth, in part, “transitory” in its statement, the absence of a stronger signal for higher rates prompted dollar bulls to begin to doubt their conviction.

Yesterday, the FOMC brushed off a first quarter slowdown as weather-related and transitory; more consumer spending and fewer claims for unemployment would support the Fed’s outlook, and of course, the financial markets have been hooked on cheap money and accommodative policy from the Fed. Just a reminder that the first quarter of 2014 showed negative GDP, and then the economy came roaring back in the second and third quarters. The Fed seems to think we might see a repeat this year. Yesterday, the Commerce Department reported first quarter GDP growth of 0.2%, and if the economy comes roaring back, it’s a good bet the Fed will hike rates later this year. But there are no guarantees the economy will bounce back this year.

The Atlanta Federal Reserve Bank’s “GDP Now” forecast predicted first quarter GDP growth of 0.1% – pretty close to the reported number – and they predict second quarter GDP growth of 0.9%. And while that represents economic growth, consider that the strong dollar cut one percentage point from first quarter GDP; now the strength of the dollar is moderating, which should help exports and boost second quarter GDP. Also, bad winter weather lopped off one percentage point from the first quarter GDP number; nobody is predicting crippling snow storms hurting second quarter growth.

So, the big question is whether the Fed will raise interest rates, and the answer seems to be that they will be data dependent, as they continually repeat in their FOMC statements. Weighing in on the matter today is former Fed Chairman Ben Bernanke, who has become much more provocative since he left the Fed. Bernanke now writes a blog for the Brookings Institute. In his first blog he took on Larry Summers’ ideas about secular stagnation. In today’s blog he takes on the Wall Street Journal editors, specifically an editorial entitled “The Slow Growth Fed”, which argued that the Fed’s economic growth  projections have been too high since the financial crisis (which Bernanke concedes is true). The WSJ then argues that monetary policy is not working and should be discontinued.

Bernanke responds: “It’s generous of the WSJ writers to note, as they do, that “economic forecasting isn’t easy.” They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the FOMC decided not to raise the federal funds rate above 5-1/4 percent.”

Bernanke has a very good point. Plenty of people have been forecasting hyper-inflation and a dollar collapse. It hasn’t happened. They were wrong. Economic forecasting isn’t easy. But instead of looking at the data, some people, including the WSJ editors, insist that their version of reality must be correct and the data must be wrong.

Indeed, there is good reason to credit monetary policy with providing a boost to the labor market. Just look at the unemployment rate of 5.5% in the US compared to 11.3% unemployment in the Eurozone, where the ECB was slow to implement accommodative policy. Bernanke admits that monetary policy is not a panacea, and he said that several times when he was Fed chairman. Bernanke then writes:  “I am waiting for the WSJ to argue for a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive. We shouldn’t be giving up on monetary policy, which for the past few years has been pretty much the only game in town as far as economic policy goes. Instead, we should be looking for a better balance between monetary and other growth-promoting policies, including fiscal policy.”

Again, Bernanke has a great point; fiscal policy has been missing in action in the recovery. It is estimated that rebuilding the crumbling US infrastructure would create 13 million jobs. That is something that the Federal Reserve doesn’t control. The American Society of Engineers gives the US a “D+” for the state of its infrastructure, and estimated in 2013 that it will cost $3.6 trillion to bring America’s public infrastructure to an acceptable level by 2020. Chronic underinvestment in the nation’s essential infrastructure will ultimately require a national investment plan unseen since Europe’s post-war reconstruction.

According to the World Economic Forum’s Global Competitiveness Report for 2013, the US ranks 25th in the world in terms of overall infrastructure, behind such nations as Barbados and Oman, and only one spot ahead of Qatar. The quality of America’s air transport infrastructure is ranked 30th in the world, while quality of the electricity supply ranks 33rd. So, the business case for investment in infrastructure is strong, and even though the Federal Reserve is far from perfect, Dr. Bernanke is correct.

Later this evening, Elon Musk, the CEO of Tesla Motors will make a big announcement. He is expected to introduce a home battery product, which people can use to store energy from their solar panels or to backstop their homes against blackouts, and also a “very large utility-scale” battery product, which may do the same for large companies or even parts of the grid. Tesla’s $5 billion Nevada “Gigafactory” will likely provide most of the muscle behind this bid for a non-automotive product line. The factory will be the largest producer of lithium-ion cells in the world, and Tesla hopes economy of scale will drive prices down.

Tesla is already supplying batteries to homes and businesses like Wal-Mart through a pilot program and a supply agreement with another Elon Musk property, SolarCity. The storage batteries can absorb energy during peak production times, and discharge it later. This eliminates concerns about lack of wind or sun, and ensures that these resources don’t go to waste when they’re available.

Tesla isn’t the only company in the battery game, and whatever happens with Tesla, this market is expected to grow. A study by GTM Research and the Energy Storage Association earlier this year found that while storage remains relatively niche, the market was sized at just $128 million in 2014, it also grew 40 percent last year, and three times as many installations are expected this year.

There are still plenty of questions, including how much it will cost to drop off the grid. Stay tuned for the answers tomorrow.

Financial Review

To Be Fair

Sinclair Noe — April 16, 2015

 

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

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DOW – 6 = 18,105
SPX – 1 = 2104
NAS – 3 = 5007
10 YR YLD – .02 = 1.88%
OIL + 12 = 56.51
GOLD – 3.70 = 1198.90
SILV – .04 – 16.37

Yesterday the ECB pledged to fulfill its €1 trillion-euro bond-buying program; today Eurozone government borrowing costs slid to new lows. Germany’s 10-year yield fell almost a basis point to 0.087% in early trade, while yields on all German government debt out to January 2024 were negative. Other notable levels include France’s 30-year yield, which fell below 1%, and the yield on two-year Portuguese bonds, which is on its way below zero.

The price of Greece’s three-year notes dropped the most since February and Greek corporate bonds also slumped. Credit-default swaps suggested there was a 79 percent chance of the country being unable to repay its debt in five years. Greece’s three-year yield is at a multiyear high, up 359 basis points at 27.7%. Expectations are low that Greece can reach a deal with its creditors at next week’s Eurogroup meeting. Standard & Poor’s has downgraded Greece’s credit rating to CCC+ with a negative outlook, citing a substantial risk of a default due to the country’s drawn out negotiations with its creditors.

Greece has been pushed a step closer to default and potential exit from the euro after one of its main lenders, the International Monetary Fund, all but ruled out allowing the cash-strapped country to delay repaying the €1 billion-euro due next month. Today, the head of the IMF, Christine Lagarde, said delaying the payments would be an unprecedented action that would only make the situation worse. Her comments followed a report that the Greek finance minister, Yanis Varoufakis, had sounded out the IMF over whether Athens could ask for a delay on the payments it is struggling to afford. Varoufakis denied asking for leniency. So Greece might default, that’s nothing new, but there are still plenty of options; some more realistic than others; we might not expect an enlightened solution to the Greek problem, but with any luck there will be something creative.

The Labor Department reports jobless claims increased by 12,000 to 294,000 in the week ended April 11. Fewer than 300,000 American workers filed applications for unemployment benefits for the sixth consecutive week. The total number of people currently receiving benefits was the lowest since 2000.

The pace of home construction rebounded slightly last month after being snowed out in February. Construction starts on new homes increased 2% in March at an annualized rate of 926,000.

Congressional leaders unveiled a bipartisan bill today that gives president Obama fast track authority to negotiate a trade deal with 11 other Pacific nations. The bill gives Congress the power to vote on the Trans-Pacific Partnership once it’s completed, but they could not amend the deal. It would essentially be an up or down vote. The legislation would also make any final trade agreement public for 60 days before the president signs it, and up to four months before Congress votes. If the agreement fails to meet the objectives laid out by Congress – on labor, environmental and human rights standards – a 60-vote majority in the Senate could shut off fast track trade rules and open the deal to amendments.

Former Fed Chairman Ben Bernanke has accepted an adviser role at a hedge fund. Bernanke will join Citadel Investment Group as a senior adviser.  Bernanke reportedly chose Citadel because it is not regulated by the Federal Reserve and he won’t be doing lobbying. So, in a way he’s gone from one hedge fund to another. And this is just another example of the revolving door between government and business, but in fairness, when Bernanke was Chairman of the Fed he couldn’t even refinance his mortgage.

Netflix  announced first quarter earnings late yesterday; net income fell to $24 million, or 38 cents a share, from $53.1 million, or 86 cents, as the strong dollar contributed to losses outside the U.S. But Wall Street isn’t paying attention to that, rather the focus is on subscriber growth; and Netflix added 4.8 million new subscribers worldwide.

Goldman Sachs posted the highest earnings per share in more than five years as all of its major businesses topped analysts’ estimates and the firm paid out a smaller portion of revenue to compensate employees. Net income surged 40 percent to $2.8 billion, and trading accounted for much of the increase. That means the improved returns come at a higher risk.

Citigroup reported its highest quarterly profit in nearly eight years. Citi has been slowly getting its house in order by cutting costs and shedding assets that are not critical to its main businesses. It has sold retail operations in many countries and shrunk its US branch network. Adjusted net income rose 16% to $4.8 billion, or $1.52 per share, beating average analyst estimates of $1.39 per share. Adjusted revenue fell 2% to $19.81 billion.

American Express reported a 6.3% rise in quarterly profit, helped by higher spending by card holders and an increase in net interest income.

UnitedHealth reported earnings and revenue that beat expectations. The company also raised its 2015 earnings forecast.

McDonald’s Japan forecast sharp losses. The 49%-owned subsidiary expects an operating loss of $210 million this year after a damaging series of food safety scandals, a costly french fry shortage, and fierce competition in the coffee sector. The operator of McDonald’s in Japan announced it would close 131 restaurants and renovate 2,000 more as part of its restructuring plan.

Yesterday more than 60,000 workers in 200 cities joined in what organizers claimed was the largest protest by low-wage workers in US history. The demonstrations, calling for a $15 per hour minimum wage, were the latest in a series of strikes that began with fast-food workers in New York in November 2012. The movement has since attracted groups outside the restaurant industry: Wednesday’s protesters included home-care assistants, Walmart workers, child-care aides, airport workers, adjunct professors and other low-wage workers. It also sparked international support, with people protesting low wages in Brazil, New Zealand and the UK.

Despite a slow start to IPO debuts so far this year, three big companies went public today. Etsy, the Brooklyn-based online marketplace for artisanal goods, opened for trading at $31 a share on the Nasdaq stock market. That is nearly double its initial offering price of $16 a share. Not bad for an e-commerce platform that so far hasn’t posted a profit and sells handmade items. Etsy is all about potential; it boasts more than 1 million active sellers, with access to 19.8 million active buyers on the site. And the company says it has achieved just shy of $2 billion in gross sales last year, with buyers or sellers in nearly every country.

Meanwhile, Virtu Financial, the big high-frequency trading firm, opened at $23 a share, about 21 percent higher than its $19 offering price. This is the second effort at going public in two years for Virtu. It postponed the stock sale last spring because of controversy about high-frequency trading prompted by the publication of Michael Lewis’s book “Flash Boys.” Virtu doesn’t help its case when they publish a chart showing one single day of losses in six years of trading activity; which is impossible unless you are gaming the trade.

The retailer Party City opened for trading at $20.40, above its offering price of $17 a share. Party City is going public three years after the private equity firm Thomas H. Lee Partners bought control of the nearly 70-year-old seller of party goods. So far this year, 38 companies have gone public in the US, about 60% fewer than at the same time last year.

Bombardier has hired UBS and Citigroup to advise on a potential IPO or sale of its rail unit, which could be valued at about $5 billion. Splitting off the rail unit would allow management to focus on turning around Bombardier’s aerospace division, which posted a 2014 loss of $995 million.

A New York federal bankruptcy judge has blocked most lawsuits against General Motors related to defective ignition switches. The judge ruled that plaintiffs could not sue the company for at least 84 deaths caused by an ignition fault because they predate GM’s 2009 bankruptcy.  The liability shield included in the 2009 agreement that lifted GM from bankruptcy should be allowed to remain in place, even though the company has acknowledged that many employees knew about the defective switch at the time but failed to alert owners of the cars that they might have a potential claim against the company.

The ruling shuts down not only lawsuits stemming from accidents that took place before July 10, 2009, but also most of the suits seeking economic damages for the loss in value of the defective cars. Lawyers had estimated that the economic loss claims potentially totaled $7 billion to $10 billion. Economic loss cases will be allowed to go forward, the judge ruled, only if they can be tied solely to actions by the post-bankruptcy company, known as New GM.

Last year the auto industry issued more recalls involving old models than ever before; more than 60 million vehicles have been recalled in the United States, double the previous annual record in 2004. In all, there were about 700 recall announcements last year, an average of two a day, affecting the equivalent of one in five vehicles on the road.

WikiLeaks has published 30,287 documents and 173,132 emails stemming from last winter’s cyber-attack on Sony Pictures Entertainment. The hack was reportedly initiated by North Korea in response to the studio’s decision to release “The Interview,” a comedy that centered on an assassination attempt on North Korean leader Kim Jong-un. That resulted in a series of embarrassing revelations, exposing correspondence between top executives and producers that ultimately led to the ouster of studio chief Amy Pascal. The correspondence released today exposes Sony’s political fundraising and its lobbying activities on behalf of anti-piracy. In particular, WikiLeaks cites emails detailing how members of the studio set up a “collective” in order to get around campaign donation limits and send money to New York Governor Andrew Cuomo, because of his support for state film and television tax incentives and work cracking down on piracy.

Financial Review

Stagnation versus Innovation

Sinclair Noe — April 7, 2015

 

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

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DOW – 5 = 17,875
SPX – 4 = 2076
NAS – 7 = 4910
10 YR YLD – .01 = 1.89%
OIL + .94 = 53.08
GOLD – 6.30 = 1208.70
SILV – .14 = 16.93

The stock market was in positive territory almost all day, right until the very end of the session; it just slipped away. And that coincided with an American Petroleum Institute report showing crude oil inventories increased by 12.2 million barrels in the last week, about triple estimates.

Not much economic news today. The Labor Department JOLT survey reports job openings rose to a 14-year high of 5.13 million in February from 4.97 million in January. There were 1.69 unemployed people for every opening in February. The quits rate slipped to 1.9% from 2%. This is good news; there are more jobs available, and people are quitting their current jobs because they have a level of confidence that they can find a new, better job.

Because this is a slow week for economic data, we will be hearing some opinions from the folks at the Federal Reserve. Minneapolis Fed President Narayana Kocherlakota laid out a case for waiting until the second half of 2016 to start raising rates, and to then raise them gradually so as to reach just 2 percent by the end of 2017. Some of the Fed’s more hawkish policymakers have even pressed for a rate rise as early as June, warning that waiting too long could force the Fed to hike borrowing costs sharply to head off a potential surge in unwanted inflation. Kocherlakota says it would be a mistake to raise rates this year, and the Fed “can be both late and slow in reducing the level of monetary accommodation.” Kocherlakota is one of the doves at the Fed, and as the Fed rotates voting among policymakers, it turns out he won’t be voting at FOMC meetings this year.

The Bank of England has asked British banks to put emergency plans in place to be able to absorb the potential shock from an escalation of the Greek debt crisis. Minutes from the Financial Policy Committee’s latest meeting show the central bank believes the current turmoil in Greece is one of the biggest external risks to the U.K’s financial stability. Because of this, it is already working closely with the Treasury and bank regulator the Financial Conduct Authority to make sure contingency plans are ready.

The Greeks are supposed to make a $500 million IMF loan repayment on Thursday. Prime Minister Alex Tsipras has gone to Moscow to beg for rubles. Putin is reportedly open to the idea of providing a line of credit, plus discounts on natural gas in exchange for… well, that’s the rub isn’t it. What will Putin demand? Greece has assets, including possible offshore oil. EU officials fear any Russian rescue loans or other sweeteners could persuade Athens to veto sanctions on the Kremlin over Ukraine; such sanctions require unanimity among EU members, so Greece could end sanctions on its own.

A deal with Russia might cause some irritation, and the Greeks seem ready to provoke; they keep demanding reparations from Germany for Nazi occupation and crimes. Meanwhile, the Greeks demand an investigation into the 2010 Greek bailout, which they are still paying for and which they believe might have been somewhat corrupted. And so we know Greece is ready to ruffle feathers.

We’ve been waiting for a list of reforms from Greece. We never really got that. The Troika has glossed over that omission. It would be more difficult to gloss over a loan payment. What would happen if Greece doesn’t make its loan payment on Thursday? That would shake things up; even if they are a day or two late in making the payment; it would change the entire dynamics of negotiations moving forward. One thing is becoming obvious, the Greeks are not timid and they don’t have much to lose.

Even if Greece makes the loan repayment on Thursday, it will have to make payroll the following week; about $1.7 billion in wages and pension payments. Then there are more IMF payments due in May and June. And the problem is that the Greek economy is not getting better, so at some point there must be a deal or there will be a default.

The IMF and the World Bank hold their annual spring meeting next week; ahead of the meeting the IMF has issued a report on the world economy, entitled “Lower Potential Growth: A New Reality”, and the outlook is grim. The IMF says living standards may only rise slowly due to an aging population and lower capital and productivity growth. The IMF says the rapid pace of productivity growth in the late 1990s and early 2000s is unlikely to be restored in advanced countries. In emerging economies, the returns from education and innovation are unlikely to be as large as they were initially. The IMF expects potential growth in advanced economies to rise slightly, from an average of 1.3% during the period of 2008 to 2014, to 1.6% between 2015 and 2020. That’s well below pre-crisis rates of around 2.25%.

Now, move beyond the numbers and the IMF is saying the global economy is slowing down and it will stay down; this is a fundamental break from historic patterns.  For financial markets, this likely means that interest rates could settle in for an extended stay around the zero lower bounds; this also means that equity markets have likely moved higher despite a big decline in business investment since 2008. While we have seen more and more stock buybacks and M&A activity, there has been a chronic lack of spending on equipment and technology that drives gains in competitiveness and increases productivity. The IMF report says: “weak business investment has contrasted with the ebullience of stock markets, suggesting a possible disconnect between financial and economic risk taking.”

The great hope is that booming asset prices will trigger a surge of investment, allowing economic fundamentals to catch up with markets; that thinking is a variation on the theme of trickle-down economics; that hordes of corporate cash will rain down on the economy in a deluge of spending on research and infrastructure. The IMF report says it isn’t happening and it won’t happen. The productivity gains of the internet revolution have run their course; the world’s demographics are also changing and we are getting older and grayer and slower; the decline has begun. Economic growth as we have known it is a thing of the past. Get over it, get used to it.

It’s not all doom and gloom. The IMF suggests that there is still room for optimism—the future trajectory of potential output is not set in stone. And then they trot out some stale ideas for improving innovation; their big idea is to strengthen patent laws. And worker productivity could get a boost by improving education quality. True enough I suppose, but it lacks a sense of urgency. And the IMF analysis strikes me as superficial and shallow.

Economists sometimes forget what drives an economy, and so they can’t imagine what would drive change. Much of the world struggles to scrape out a day to day living, and that will become an even bigger challenge in the coming years. Innovation is not born of patent laws, just the opposite; innovation is born of necessity. Innovation comes from scientists and science fiction writers and tired workers looking for a break and daydreamers and shade tree mechanics and kitchen table tinkerers. And innovation answers questions. Right now the biggest questions for the coming years seems to be how we can provide food, water, housing, transportation, and health care to a global population that will soon top 9 billion; all without destroying the planet in the process.

The answer is likely to come from new sources of energy; at least that is my best guess. With enough energy we can clean fouled water, we can grow enough food, we can build enough housing, and we can move whatever needs to be moved. And it is my estimation that the next great advances in innovation must need be in energy.

Think about the innovations in technology that we’ve seen for computing and communication. One hundred years ago you could not have imagined the computing power you now have in your laptop or even your smartphone. Fiber optics and satellite communications were beyond the imaginations of the science fiction writers. Yet the car motor of 100 years ago is essentially unchanged; an internal combustion engine burning gasoline; carburation is improved and now it pounds out more horsepower but the principle hasn’t changed. Mr. Edison’s electric motor is essentially the same, slightly more efficient and bigger, but the same at its core. Nuclear power offered the prospect of tapping previously unseen sources of power, but we have never figured out how to do it without making an even bigger mess. Harnessing the power of the sun is an ancient idea but in 100 years it is likely that solar power will seem as quaint as the telegraph seems to someone using the internet. Morse code works to relay a message but Skyping someone halfway around the world is much better.

Whether the world really is nearing the end of its growth potential has been an ongoing economic theme for a long time. Ben Bernanke, the former chairman of the US Federal Reserve turned blogger for the Brookings Institution reminds us in his debut blog of another economist, Alvin Hansen, who coined the term “secular stagnation” back in 1938, arguing even then that population growth was slowing and the big advances in technology were mostly finished. Hansen might be forgiven his pessimistic outlook; in 1938 the economy was still a mess, the Dust Bowl was an ecological disaster, and World War was right around the corner. And it was out of crisis that innovation occurred. Of course, in the decades that followed Hansen’s argument, the postwar population boomed, there was rapid technological advancement, and the economy did not stagnate.

Bernanke believes that the US economy will right itself naturally, as so often before, if we only pay attention to the three most important objectives for economic policy: achieving full employment, keeping inflation low and stable, and maintaining financial stability. But I doubt secular stagnation can be beaten by low inflation. Innovation is born of necessity and forged in crisis. Only then do we open our minds to the unimaginable and determine that something is only impossible until it is done.

Financial Review

Groping Along

Sinclair Noe — March 30, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW + 263 = 17,976
SPX + 25 = 2086
NAS + 56 = 4947
10 YR YLD + .01 = 1.96%
OIL – .19 = 48.68
GOLD – 13.40 = 1186.00
SILV – .28 = 16.79

The Commerce Department reports consumer spending rose just 0.1% in February; that follows a decline in January. The small increase in spending in February and outright decline in January suggest the economy failed in early 2015 to match the pace of growth at the end of last year. Gross domestic product is forecast to expand just 1.4% in the first quarter, down from 2.2% in the fourth quarter and 5% in the third quarter. Part of the problem might be harsh winter weather; if that is the case, we might expect a rebound in consumer spending in the spring.

Or maybe the American consumer is tired of spending, and is actually starting to save. The saving rate jumped in February to 5.8 percent, the highest since December 2012 and up from 4.4 percent just three months earlier. The savings rate slumped to as low as 1.9 percent in the run-up to the recession, a sign too many Americans were spending beyond their means. Since then, consumers have been trying to clean up their finances.

The National Association of Realtors said its pending-home-sales index rose 3.1% to 106.9 after a downward revision to January’s numbers. Total existing-homes sales in 2015 are forecast to be around 5.25 million, an increase of 6.4%, and the national median existing-home price is expected to increase around 5.6%.

The Commerce Department released the personal consumption expenditures price index, or PCE index, for February. It was up 0.3% for the past 12 months. The PCE is the Federal Reserve’s preferred measure of inflation. The oil price crash, a strong dollar and weak overseas economies have all kept inflation at bay. Some slack in the economy may also be keeping prices muted, but even after taking out food and energy, inflation came in at 1.4%, up very slightly from 1.3% in January. So, inflation is still well short of the 2% target established by the Federal Reserve. And we know the Fed has lowered its target for the unemployment rate to around 5%. We also know that the targets are not firm.

Full employment is that point where most people can find jobs and where the unemployment rate has dropped low enough where it just starts to spark inflation. Former Federal Reserve chairman Ben Bernanke gave a speech and answered questions today at Johns Hopkins. Bernanke said he doesn’t know where the so-called full-employment level is now, saying the Fed “is in some sense groping” to determine it.

One reason why it is difficult to determine full employment is because wages have been stuck in the mud; so, even as people have found jobs, their wages haven’t been enough to kick start inflation. Many of the jobs lost during the downturn were good paying jobs that were replaced in the recovery with lower paying jobs or part-time work. So, when it comes to pinpointing the full employment number, Bernanke says: “Nobody really knows that number with any precision,” adding, “and the Fed will continue to grope to find out what the right number is.”

In addition to a speech, today also marks the first day of Ben Bernanke’s blog. His first post dealt with why the Fed has kept rates artificially low for a long time and hurt savers. Of course, the simple answer is that rising rates would slow the economy at a time when the economy was not yet recovered from a massive downturn; and in that regard, the economy determines rates more than the Fed. What Bernanke didn’t really address is how lower rates pushed investors to chase yield, pushing them into the stock market, and what the effect of higher rates might be on the equity market.

Still, what was also important about the Bernanke blog was why he chose this topic for his first blog post. It almost seems he is trying to get us ready for a Fed rate hike. Dam the torpedoes, higher rates ahead. But it doesn’t look like the bond market is paying attention. Rates remain low despite the Fed warnings that they want to hike rates at some point this year. It looks like the setup for a letdown.

The big economic report this week is the jobs report.  U.S. exchanges will be closed on April 3 in observance of Good Friday, the day when the government releases its official employment report for March. Good Friday isn’t a federal holiday. It’s expected that the economy added about 255,000 net new jobs in March.

The pace of first-quarter profit warnings from S&P 500 companies is running slightly ahead of the same time a year ago, and well ahead of the five-year average. Ahead of the start of earnings reporting season, which unofficially kicks off when Alcoa reports results on April 8, about 84% of the companies that have provided first-quarter outlooks gave negative outlooks. That’s above the 81% that warned for the first quarter of 2014, and higher than the five-year average of 68%. Many of the companies blamed the negative effects of currency movements, lower commodity prices or both, for the negative pre-announcements.

Meanwhile, revenues of S&P 500 companies are expected to decline 2.8% in the first quarter from a year ago, which would mark the worst year-to-year drop since the third quarter of 2009. One sector is holding up well, healthcare is expected to see revenue growth of 9.1%. The energy sector, however, more than makes up for it. The average price of oil in Q1, at $48.65 a barrel, had been cut in half from a year ago ($98.56). So revenues are expected to plunge 38%. And earnings for the energy sector are expected to drop 64%.

But it’s not just the energy sector. Expect declining earnings for utilities, materials, telecom services, consumer staples, and IT. Look for possible earnings growth in consumer discretionary, financials, and healthcare. Oil & gas companies are blaming the oil bust for the collapse of their revenues and earnings. The rest of the companies are blaming the strong dollar in near unison. But ironically, they’re not pointing at the strong dollar and at oil as a force in lowering costs. Cost reductions are the result of superior management; sales and earnings declines are the fault of the strong dollar.

And of course, there will be a spillover effect into the second quarter; in fact revenues are expected to drop even more; down 3.1%, compared to first quarter declines of 2.8%. And earnings, after the decline of 4.6% in Q1, are expected to fall 1.8% in Q2, down from of an estimated growth of 4.2% and 5.3% respectively at the beginning of the year. Of course, part of this is ongoing game of ratcheting down expectations, only to beat expectations when earnings are reported, but more and more it looks like the economy might not be as strong it is sometimes portrayed.

Chinese stocks took off today after policy makers signaled the country had capacity to ease monetary policy and boost sluggish growth. Policymakers with the People’s Bank of China said that China’s policy makers had to be “vigilant” against the risk of disinflation and suggested that the nation had “room to act.” China’s central bank has already taken a series of easing steps since November, cutting interest rates twice and slashing banks’ reserve requirements.

Greece’s biggest creditor, Germany said this morning that the euro zone would give Athens no further financial aid until it has a more detailed list of reforms and some are enacted into law. Greece submitted a list of reforms on Friday. Greek Prime Minister Alex Tsipras spoke to the Greek parliament today; he said that Greece’s list of “short-term measures” to creditors included curbing fuel and tobacco smuggling, checks on bank transfers and fighting sales tax fraud. He said, “It’s time for the ‘haves’ to start paying and for the looting of the middle class and salaried workers to stop.” In the negotiations with the creditors, he said, “We are seeking an honorable compromise with our partners, but do not expect an unconditional surrender.”

A renewed Eurozone crisis poses the biggest risk to the global economy, according to a Fitch Ratings poll at its March sovereign credit briefing in Hong Kong and Singapore. The report showed that 41% of the respondents in Hong Kong and 45% in Singapore pointed to fresh Eurozone instability as the most likely thing to derail the global economic recovery. Whether by design or due to the combination of Greece submitting a lot of not-fully-fleshed out reforms right before the Easter holiday, it looks like Greece stays in the sweatbox for the next two weeks.

Monday is for mergers. Typically, the final details of a merger get worked out over a weekend and the announcement comes on a Monday. We had a boatload of deals announced this morning.

UnitedHealth Group announced plans to buy Catamaran Corp., the fourth-largest pharmacy-benefit manager in a$12.8 billion deal.

Teva Pharmaceutical Industries is acquiring Auspex Pharmaceuticals in a deal valued at $3.2 billion

Horizon Pharma said it planned on purchasing the pharma company Hyperion Therapeutics for $955 million, in cash and debt commitments.

Switzerland’s Dufry has agreed to buy airport tax and duty free seller World Duty Free in a deal that values the latter at about $3.9B, including debt. Dufry will pay about $1.5 billion for the Italian Benetton family’s 50.1% stake in the airport retailer. The deal is the second high-profile foreign takeover of an Italian company in less than a week after ChemChina bought a majority stake in tire maker Pirelli last Sunday.

In Asia’s biggest block deal this year, Chevron has sold its entire stake in Caltex Australia, the country’s biggest refiner, for$3.7 billion.

FINANCIAL REVIEW

The Only Winner is Gravity

Sinclair Noe — October 9, 2014

0 0 

   

Financial Review

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

DOW – 334 = 16,659
SPX– 40 = 1928
NAS – 90 =4378
10 YR YLD un 2.33%
OIL – 2.96 = 84.35
GOLD + 2.10 = 1224.60
SILV – .03 = 17.45

Triple-digit swings in the stock market have become common in recent days. Just this week, the Dow jumped 274 points Wednesday, reversing a 272-point decline on Tuesday. We’ll talk about volatility in just a moment.

In economic news:
Germany’s exports sank 5.8 percent in August, the biggest monthly drop in five years. The figure raised concerns that Europe’s largest economy may fall into recession. European Central Bank President Mario Draghi says Europe’s problems are structural, not cyclical and there can be no recovery without reforms. Draghi was speaking in New York; he said the Euro banking sector is still going through deleveraging; they are not lending; and there are limits to what the ECB can do to produce growth. And deflation is highly contagious.

The number of people who applied for U.S. unemployment benefits in the first week of October edged down by 1,000 to a seasonally adjusted 287,000, holding below 300,000 for the fourth straight week. Jobless claims are now 21% lower compared to one year ago. What we are starting to see is that so many businesses fired workers during the downturn and they have been very slow to rehire or hire new workers, which means not many people are losing jobs right now.

Wholesale inventories rose by 0.7% in August. Inventories of durable goods, such as autos and machinery, rose 0.8%, while inventories of nondurable goods rose 0.5%. Wholesale sales fell 0.7%, following a 0.4% gain in July.

The Bloomberg Consumer Comfort Index climbed to 36.8 in the period ended October 5 from a four-month low of 34.8. A gauge of attitudes about the world’s largest economy registered the biggest increase since 2007. According to Bloomberg, a pickup in hiring, more job openings and lower gasoline prices are combining to brighten Americans’ spirits even as the stock market languishes. While today’s figures showed confidence improved among the college educated, homeowners and almost all income groups, the weekly gain left sentiment close to its third-quarter average. Gas prices make US consumers happy, or at least semi-happy. And prices are falling.

Now, let’s take a look at volatility because this week the markets have been on a really wild roller coaster ride, and it looks like the only winner is gravity. All 30 stocks in the Dow Jones Industrial Average were down. The VIX, the volatility index jumped 24% to just over 18, which is its highest reading in 18 months but still below the 20-year average of about 20. Maybe the markets were just too complacent.

For now, volatility is back and it tells us the markets are uncertain. Traders and market makers and specialists are not sure about the next move, and when there is uncertainty there is a lack of bids. Typically, there are investors lined up to buy stocks, however when there is uncertainty, there are fewer traders in line. The spread between the bid and offer widens, and when prices drop fast, the bidders have two choices: widen the spread even further, or step away completely. The result can be a downward spiral. It works in both directions; spreads widen quickly both on down days when investors are anxious to get out at any price and on big up days when investors will pay up to get into a stock. For now, investors are getting out.

Maybe people forgot the Federal Reserve is in the process of exiting QE, the massive asset purchase plan that has poured trillions of dollars into the market over the past few years. Remember the taper tantrum? When the markets tanked at the mere thought of the Fed exiting QE; now it really is almost finished. The purchases are widely credited for fueling price increases of all kinds of investments.

Investors have had a lot of advance notice that the end is coming, and the hope is that the announcement won’t cause big markets swings given all the time they’ve had to prepare. Many mutual fund managers say their bigger concern is when the Fed will start raising short-term interest rates, which the central bank has said won’t be for a “considerable time.” Every time that the Fed has ended QE, rates have gone down, and stock prices have gone down; it happened in 2010 and 2011, and it looks like it’s happening again.

The Fed’s bond-buying program helped the stock market not only to surge but to do so in nearly uninterrupted fashion, even when the economy was improving only modestly. The last time investors saw a 10 percent drop for the Standard & Poor’s 500 index was three years ago. This week’s volatility may be a preview of things to come after QE ends.

Add in earnings season and you’ve got a lunch date with Pepto-Bismol. Now, here’s how CFO’s and CEO’s get ready for earnings season; they pull out the pots and pans and assorted crockpots and they turn the heat to medium high and they start cooking the books. A couple of years ago, Duke and Emory Universities conducted a survey of chief financial officers and they found that about one in 5 companies admitted to cooking the books, or “managing” earnings reports to mischaracterize economic performance. And about 60% try to pump up income.

The report found, “Earnings misrepresentation occurs most often in an attempt to influence stock price, because of outside and inside pressure to hit earnings benchmarks, and to avoid adverse compensation and career consequences for senior executives.” And the CFO’s admit that it is difficult to unravel the book cooking from the outside looking in.

Here are the expectations as we enter 3Q earnings season. Earnings growth is estimated from 4.5% to 5%, generally speaking. The telecom sector should come in with the highest earnings growth and consumer discretionary is expected to post year over year declines. (Think Sears and JC Penney). The healthcare sector is the only S&P 500 sector that saw earnings expectations increase during the quarter, rising to 10.6% from 9.4%.

Back in June growth expectations called for 8% to 9% growth, but that’s just part of the game; aim high and then ratchet down expectations. So far 82 S&P 500 companies have issued negative earnings per share guidance, while 27 have reported positive guidance. The current 12 month forward price to earnings ratio of the S&P 500 is 15.

The security breach and hack of JPMorgan Chase has raised more questions than it has provided answers. We still don’t know who was behind the hack. It looks like it came from Russia, but that’s not very specific. We still don’t know what the motive was. Was it plain old theft, or was it official government retaliation? Authorities believe that the hackers may have tried to infiltrate about a dozen financial institutions, but we don’t know how far they got, or the motives for the other hacks.

The FBI and the Secret Service have begun a criminal inquiry into the attacks, but the only thing we know for now is that the biggest, most fortified financial institutions in the world, entrusted to safeguard trillions of dollars of the nation’s wealth are in fact, clueless and extremely vulnerable.

A most entertaining trial has been taking place this week; this is the story of former AIG CEO Hank Greenberg, who mismanaged AIG, cooked the books, got involved in selling credit default swap insurance on almost every mortgage related security, which led to a near systemic catastrophe, and when AIG was about to go belly up, the government stepped in with a bailout. And now Greenberg says the terms of the bailout were a little too harsh for his liking.

The trial features all-star lawyers, two former Treasury Secretaries, and today, former Fed Chairman Ben Bernanke took the stand. Bernanke said allowing American International Group Inc. to go into bankruptcy would have been catastrophic; echoing comments earlier this week from Hank Paulson and Tim Geithner. Bernanke said he couldn’t recall whether federal officials discussed the interest rates and fees it charged the insurance giant in exchange for an $85 billion loan during the 2008 financial crisis.

Emails from Bernanke were introduced into court evidence, highlighting the government’s belief at the time that the restrictions on AIG should serve as a warning to other insurance firms that were allegedly acting irresponsibly. The emails also show that the Fed tried to keep the terms of the bailout secret from the public, because accountability and transparency were not the preferred currency of the crisis.

And we learned something very strange about Bernanke; he used to send emails under the alias of Edward Quince. An imaginary figure Bernanke created to send emails. Maybe he thought a pen name would give him a level of privacy. Maybe he thought this was some kind of cloak and dagger spy game. Maybe he was just a smidge schizophrenic. Maybe he thought a pseudonym would shield him from whatever he was doing. Maybe that’s how he plans to refinance his house. Nobody knows for sure.

Bernanke was scheduled to introduce ECB president Mario Draghi for the speech in New York, but the AIG trial made for a scheduling conflict. In the process, we learn that Bernanke now charges $200,000 for a speech, so his testimony today was expensive. It also raises the question of why he’s trying to refinance his house, when he could just make a couple of speeches and be done with it.

The Nobel Prize for literature has been awarded to Patrick Modiano; he is a French novelist who has written books, screenplays, and children’s’ books. And even though his work has been translated into several languages, I have never heard of him. If we lived in France, I’m sure I could tell you more.

http://www.ecb.europa.eu/press/key/date/2014/html/sp141009.en.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2103384