Financial Review

Again and Again

Sinclair Noe — February 21, 2017

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DOW + 118 = 20,743
SPX + 14 = 2365
NAS + 27 = 5865
RUT + 10 = 1410
10 Y + .01 = 2.43%
OIL + .61 = 54.39
GOLD + 2.20 = 1236.60

Stock prices across the world climbed to record highs. Dow, S&P, Nasdaq, and Russell hit record highs again.

Walmart reports same-store sales in the US rose 1.8% for the quarter, the 10th straight quarterly increase. Meanwhile, e-commerce sales were up 29%, boosted by the purchase of online retailer Jet.com in September as well as online grocery. But profit fell 18% in the fourth quarter as the company invests in its online platforms; still, Walmart beat top and bottom-line estimates.

Amazon just lowered its free-shipping minimum to $35 from $49 for customers who aren’t members of its Prime membership program. The change appears to be a response to Walmart’s recent rollout of free two-day shipping for all customers on orders over $35.

Macy’s reports net income was $475 million, or $1.54 per share, down from $544 million, or $1.73 per share last year, but they beat estimates. Revenue also dropped, missing estimates.  Same-store sales fell 2.1%. The company also released preliminary guidance for 2017, expecting sales to decline by 2% to 3% for the full year at all owned and licensed stores. Macy’s plan is to sell its real estate; $637 million sold last year, more to come this year.

Home Depot reported higher-than-expected profit and sales helped by a strong housing market in the United States and set a $15 billion share buyback plan. The company reported a 5.8 percent rise in quarterly sales to $22.2 billion – beating estimates. Profit rose to $1.7 billion in the fourth quarter from year ago $1.4 billion – also beating estimates.

Verizon Communications and Yahoo! say they will go forward with their proposed acquisition but Verizon cut the price by $350 million from the original cost of 4.8 billion. The revised deal comes after months of speculation as whether talks would break down because of two massive data breaches at Yahoo.

Restaurant Brands International has agreed to acquire Popeyes Louisiana Kitchen for $1.8 billion in cash. Under the terms of the agreement, Restaurant Brands, operator of Burger King and Tim Hortons, will pay $79 per Popeyes’ share.

Kraft Heinz dropped its $143 billion bid to buy Unilever – a deal that would have created the largest food company in the world. Already this year, more than $205 billion in proposed deals have been withdrawn.

Reuters reports SoftBank is prepared to cede control of Sprint to T-Mobile to clinch a merger of the two U.S. wireless carriers. SoftBank is expected to approach T-Mobile parent Deutsche Telekom for negotiations when an ongoing auction of airwaves ends in April and a ban on talks between rivals is lifted.

TransferWise, a London-based startup, has launched a service that allows users to make international transfers with Facebook’s chat application. Facebook already allows its users to send money domestically in the United States via its Messenger app, but has not yet launched similar services internationally.

Growth in eurozone business activity surged in February to its highest level in almost six years, per the latest survey by IHS Markit. The overall flash composite index of services and manufacturing spiked to 56.0, up from 54.4 in January. Growth in Germany’s private sector reached its highest level in nearly three years, while French business activity surged to near a six-year high.

Overall, the PMIs showed that private sector manufacturing and service sector activity in the euro zone this month was its strongest since April 2011.Eurozone stocks pushed to a 14-month high this morning.

HSBC’s pretax profit tanks. Europe’s biggest bank by assets saw pretax profit for 2016 fall to $7.1 billion from $18.8 billion the previous year. The UK-based bank reported a net loss of $4.2 billion in the fourth quarter of 2016. The biggest single hit to its battered bottom line came from a $2.4 billion write-down of the value of its private banking business in Europe. HSBC announced a new $1 billion share-buyback program.

BHP Billiton reports a surge in profits. The world’s largest miner said profits surged seven-fold to $3.1 billion during the six months that ended in December. The extra cash helped BHP boost its dividend and pay down debt.

China has halted all coal imports from North Korea for the rest of 2017, effectively slicing the country’s exports by about half, as it steps up efforts to implement U.N. sanctions against the country. Per BMI Research, China imported 22 million tons of coal from North Korea in 2016, representing 12.3% of its total imports.

Philadelphia Federal Reserve Bank President Patrick Harker said over the weekend that he would likely support raising interest rates at the central bank’s upcoming March meeting if he sees more evidence that economic growth and inflation are accelerating. Federal Reserve Bank of Cleveland President Loretta Mester who said she would be “comfortable” with the central bank raising rates.

Minneapolis Fed President Neel Kashkari said the U.S. labor market has “more room to run,” suggesting he does not believe the central bank should raise rates quickly to head off inflation. Kashkari said it has been a “big surprise” that so many workers have returned to the workforce over the past year and a half, and he is “cautiously optimistic” that the pattern will continue.

Over the past few weeks, Federal Reserve Chairwoman Janet Yellen and a host of other Fed officials have suggested that an interest-rate increase at the policy-setting Federal Open Market Committee’s meeting on March 14-15 remains on the table.

It’s that time of year again – when refinery maintenance season kicks in and the market makes a shift to cleaner-burning gasoline, disrupting production and lifting prices for the fuel at the pump. If prices see the average five-year increase they usually do during the spring, retail gasoline could cost an average $2.85 a gallon around Memorial Day.

Crude oil prices have been moving higher and OPEC said it was sticking to its agreement to cut production by about 1.8 million barrels per day to drain a glut that has depressed prices for over two years. OPEC compliance is helping keep prices afloat, but rising US oil production is acting as a counterweight; the result is a glut of crude supplies.

Here’s the hitch: the glut of gasoline is now the worst in 27 years. At 259 million barrels, US gasoline storage levels are now at their highest level since the Energy Information Administration began tracking the data back in 1990.  If both crude and refined product inventories are going up at the same time, then there should be some reasons for worry.

Part of the reason for the glut, of course, are high levels of production, around 9 to 10 million bpd. But that increase came to satisfy rising demand (which, of course, was stoked by lower prices). More demand should have soaked up that excess supply.

However, US demand has faltered. US gasoline demand plunged to just 8.2 million barrels per day in January, and sales were down 4 percent from a year earlier. It was also the lowest level in four years. Weak demand is raising some red flags for the market.

Demand is seasonal, with softer demand in winter months, but this winter’s ‘valley’ is lower than any other since 2012. The glut of gasoline has led to tankers being turned away at New York Harbor in recent weeks, diverted to ports in the Caribbean.

If demand does not rebound, inventories will rise, pushing prices lower. So, while OPEC production cuts are important, keep an eye on US demand, not just for oil prices but also as a barometer of overall economic activity.

The Department of Homeland Security issued a sweeping set of orders today that implement President Trump’s plan to increase immigration enforcement, placing the clear majority of the nation’s 11 million undocumented immigrants at risk of deportation. The memos instruct all agents — including Customs and Border Protection and Immigration and Customs Enforcement — to identify, capture and quickly deport every undocumented immigrant they encounter.

The memos require undocumented immigrants caught entering the country to be placed in detention until their cases are resolved, increase the ability of local police to help in immigration enforcement, call for the hiring of 10,000 more immigration agents and allow planning to begin on an expansion of the border wall between the United States and Mexico.

The memos make undocumented immigrants who have been convicted of a crime the highest priority for enforcement operations. But they make clear that ICE agents should also arrest and initiate deportation proceedings against any other undocumented immigrant they encounter.

These new guidelines, however, leave untouched the executive order signed by former President Barack Obama in 2012 on deferred action for childhood arrivals, which shields from deportation immigrants who were brought to the US as children.

Financial Review

Decision Day

Sinclair Noe — October 28, 2015

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DOW + 198 = 17,779
SPX + 24 = 2090
NAS + 65 = 5095
10 YR YLD + .06 = 2.09%
OIL + 2.93 = 46.13
GOLD – 11.30 = 1156.70
SILV + .07 = 16.04

It’s Decision Day for the Federal Reserve, and it was an easy decision. The FOMC wrapped up a two-day policy session with a statement that interest rates will remain unchanged near zero; where they have been stuck for 7 full years. The Fed’s statement left open the possibility that the Fed will raise rates at its final meeting of the year, in December. While noting that job growth has slowed, it said that other economic indicators remained relatively strong and the domestic economy “has been expanding at a moderate pace”.

The Fed also signaled that its concerns about the global economy have diminished. In the statement from the meeting in September the Fed said global economic and financial developments might restrain domestic growth. In today’s statement they just say the Fed “is monitoring global economic and financial developments.”

The next FOMC meeting is scheduled for December 15 and 16. Fed chairwoman Janet L. Yellen said in a late September speech that she still expected to raise rates this year, as long as economic growth continued. Stanley Fischer, the Fed’s vice chairman, said much the same a few weeks later. Many Fed policymakers have been saying they will raise interest rates since March, but there are also doves among the Fed, arguing against rate hikes.

Today’s decision to keep rates near zero was supported by nine of the ten members of the Federal Open Market Committee. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, once again dissented, as he did at the September meeting, arguing the Fed should start to raise rates now. Of course any decision would need to be supported by better economic data, and for now at least, the economy can’t seem to build any real momentum.

The Fed will raise interest rates …, someday. But it won’t be easy. We’ve been locked into near zero since December 2008, but that was during rough times; the economy lost 576,000 jobs that month. Things have improved quite a bit since those dark days. But there are still risks and no guarantees that recovery can continue without monetary stimulus. The recovery has received almost no fiscal stimulus – to the contrary. The lack of fiscal stimulus has been one of the main reasons why the recovery has been so sluggish, even as the economy has shown consistent growth.

Even as the federal debt grew substantially in recent years, the government’s annual interest payments barely increased thanks to the Fed’s efforts to minimize borrowing costs. Higher rates mean higher debt servicing costs which would choke off any possibility of fiscal policy shouldering the burden of recovery.

The labor market has recovered most of the ground lost during the downturn but there is still slack. Full employment is a loose target and the Fed doesn’t really know when we will hit it. We’re close but not there yet. Workers remain underutilized and discouraged. Wages have not shown strength, certainly not enough to push inflation, which remains well below the Fed’s 2% target. And while the price of oil has an outsized influence on broader prices, the Fed has little control over the commodity markets one way or the other.

The Fed also has little control over long term interest rates, they just set the target for very short-term rates; still, if they raise the target, you could expect the rates on everything from cars to credit cards to mortgages to jump, along with a stronger dollar. And this is where it gets tricky. A stronger dollar would hurt US exports while also making imports cheaper; in other words the possibility of a slowing economy combined with disinflation. Further, it could hurt emerging market economies, as their currencies buy less and their resources sell for less.  Higher rates would be good news for savers, who now earn near zero, but for now they have to take on more risk, which is why Wall Street enjoyed a nice rally on today’s news.

The House has approved the reauthorization of the U.S. Export-Import Bank, marking a big victory for business groups that had fought to secure its revival. The bank’s future, however, may not be fully resolved until December. The House bill now goes to the Senate, which recently approved a similar measure as part of an unrelated transportation bill.

Following years of intense debate, the Senate has passed a controversial bill that will see the Department of Homeland Security become a hub for sharing information about cyber-attacks within the government and the private sector. The Cybersecurity Information Sharing Act, known as CISA, would give legal protection to companies that share information about cyber-threats with the government and with each other.

This should help them detect intrusions faster, improve their defenses, and take advantage of government advice and intelligence. It should give law enforcement a clearer picture of the threats facing U.S. networks and help in pursuing cybercriminals. The bill, which has faced privacy concerns from high-tech firms and advocacy groups, must now be reconciled with a separate piece of legislation that was passed by the House of Representatives earlier this year. In the end, Senator Harry Reid summed it up best: “The bill, which is okay, is better than nothing.”

The Energy Information Administration said U.S. commercial crude inventories rose by 3.4 million barrels to a total of 480 million barrels in the previous week, but gasoline and distillate inventories fell. Also, Mexico’s state oil company Pemex said it had received a license from the United States to import U.S. light crude to be refined at Mexican refineries in exchange for its own heavier crude oil. Now, oil was up today, which seems a little counter-intuitive because the EIA had reported weekly jumps of eight million and 7.6 million barrels in its past two reports and today’s data marked a fifth weekly rise in a row.

Volkswagen reported a net loss of $1.84 billion in the third quarter, its first quarterly decline in more than a decade. Volkswagen subtracted €6.7 billion-euro from profit to cover the cost of recalling and repairing about nine million cars equipped with illegal software intended to cheat on emissions tests. The effect of the deceptive software on sales and revenue is likely to worsen in coming quarters.

Fiat Chrysler Automobiles reported a better-than-expected 35 percent jump in quarterly earnings helped by strong performance in North America, and confirmed its full-year guidance.

A successful contract pitch, that included a Super Bowl ad, has landed Northrop Grumman as much as $80 billion to build the U.S. Air Force’s Long-Range Bomber. Northrop beat out Boeing and Lockheed Martin for the contract.

As reported yesterday, Walgreens Boots Alliance is acquiring Rite Aid for $ 9.4 billion, or $17.2 billion after factoring in debt. Walgreens expects the transaction to close in the second half of 2016.

Separately, Walgreens Boots Alliance reported a better-than-expected quarterly profit, helped by lower costs achieved through its cost-cutting plan. Walgreens in April launched a plan to cut $1.5 billion in costs by the end of fiscal 2017, which would include store closures and freezing salary hikes for senior U.S. executives.

Confirming earlier rumors, Toshiba has announced the sale of its image sensor business to Sony as it tries to recover from a $1.3 billion accounting scandal. Sony recently said it would spin off its image sensor business into a new wholly-owned subsidiary called Sony Semiconductor Corporation, and Toshiba’s operations are set to come under that umbrella. No financial details of the deal have been disclosed.

Amazon, which has rapidly built a network of on-demand workers for its Prime Now service, now faces a lawsuit over how those workers are treated. The action potentially thrusts Amazon into the center of a debate roiling Silicon Valley over whether on-demand workers should be treated as employees or independent contractors. Companies such as Uber and Postmates, which consider their workers contractors and thereby avoid some expenses, have faced similar suits.

IBM announced it will acquire the digital and data assets of The Weather Company in a deal valued at about $2 billion. The Weather Company is currently owned by the Blackstone Group, Bain Capital and NBC Universal, which paid $3.5 billion for the firm in 2008. IBM will use the Weather Company’s digital assets to boost its Watson cloud and Internet of Things platforms.

It’s an interesting idea. The Weather Company gathers data from 147,000 weather collection stations, and that process could be improved through the Internet of Things and then analyzed by Watson. The result: Airlines use it to manage turbulence. Insurance companies use it to judge risk. Agricultural companies use it to manage crops. A side benefit to the deal is that much of the Weather Company’s data is managed on the computing systems of IBM competitors, including Amazon and Google, and now it will move to IBM’s cloud, called Softlayer. That is not enough to right the ship at IBM, but it might give us a hint of how some companies will commoditize the cloud.

Now, just a reminder that the third Republican debate starts in less than one hour, so this is a good time to remind you of the rules for the drinking game. Whenever you hear the phrase that starts with: “I’m the only candidate on this stage….” You take a drink. Also, you should take a shot of something, your choice, whenever a candidate mentions Ronald Reagan. If Reagan is mentioned along with Tip O’Neil, it’s a double shot. Remember to watch responsibly and hydrate.

Financial Review

The Bar is Set Low

Sinclair Noe — February 17, 2015       

 

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DOW + 28 = 18,047
SPX + 3 = 2100
NAS + 5 = 4899
10 YR YLD + .12 = 2.14%
OIL + .27 = 53.05

 Another record high close for the S&P 500 index and the Russell 2000 index. As of February 11, 356 S&P 500 companies have reported and 71.3% beat earnings expectations. Total revenues are up +1.5% with 55.6% beating top-line estimates. Earnings growth with little or no revenue growth means companies are cutting costs or repurchasing shares to boost earnings. The Health Care and Telecom Services sectors were the best performers on the quarter. The energy sector was badly beaten down. The 12-month forward P/E currently sits around 16, putting it well above the 10-year average of 14; a little pricey but not excessive. Guidance has been disappointing but the game is to set the bar very low and then stop over it.

Eurozone officials and the new government in Greece have been playing hardball. Greece is running out of money. A report from JPMorgan shows Greek banks were losing deposits at the rate of €2 billion a week. The Greek government has so far insisted that budget cuts and economic overhauls mandated by the current €240 billion bailout are hurting its economy and society and that the currency union’s finance ministers haven’t offered sufficient leeway on implementing those measures.

Yesterday, Eurozone ministers gave the Greek government an ultimatum to request an extension of the bailout with the strings attached. Today, Greek Prime Minister Alexis Tsipras gave a defiant speech in Parliament in Athens, saying his government would move to immediately dismantle overhauls mandated by its bailout program and calling for European leaders to hold a summit on his country’s funding needs. And then this afternoon came word that Greece would consider a 4 to 6 month extension of the bailout; but the announcement was seriously devoid of details; so, don’t expect much.

Eurozone finance ministers set several preconditions for considering an extension, including a promise from Greece to not roll back any measures implemented under the existing bailout deal and coordinate any new moves with its creditors. They also want the government to pledge that its debts to the Eurozone would be repaid in full. PM Tsipras, in his speech, reiterated plans by his government to immediately unwind already-implemented austerity measures, such as changes to labor laws.

You can argue that Greece brought its problems on itself, although it had a lot of help from irresponsible lenders. At this point, however, the simple fact is that Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany — real Greek GDP per capita fell 26% from 2007 to 2013, compared with a German decline of 29% from 1913 to 1919.

Despite this catastrophe, Greece is making payments to its creditors, running a primary surplus — an excess of revenue over spending other than interest — of around 1.5% of GDP And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus, and keep running huge surpluses for many years to come.

What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another. For now, it looks more and more that the Eurozone finance ministers want to kick Greece out of the union.
 
You will recall that a Ukraine-Russia ceasefire was scheduled to take effect Sunday. Somebody did not get the memo. Ukraine said it would wait until the rebel groups stopped shelling a town in Eastern Ukraine; and the rebels said they would discuss the possible withdrawal of the weaponry later.

Meanwhile, Egypt entered the broadening conflict with the Islamic State as its warplanes bombed extremist targets in Libya on Monday in retaliation for the beheading of 21 Egyptian Christians.

Cleveland Fed President Loretta Mester says it’s time to drop the “patient” language from the FOMC statement, joining at least six other top Fed officials in suggesting that short-term interest rates could be raised mid-year. Mester says she would like to see the language changed, and she thinks June should be a viable option for the Fed to consider a rate hike.

We’ll find out more about what the Fed policymakers are thinking tomorrow, when they release the minutes from the last FOMC meeting.

Data from the New York Fed released today shows 11.3% of student loans were delinquent in the final three months of 2014, up from 11.1% in the prior quarter. The share of auto loans at least 90 days overdue also rose, climbing to 3.5% from 3.1% the prior period, even as fewer credit card and mortgage loan payments were late. Delinquency rates for student loans probably understate the actual situation. About half of the student loans are in deferment, in grace periods or in forbearance, temporarily removing them from the repayment cycle.

The nation’s student-loan balance climbed by $31 billion last quarter to $1.16 trillion. Just by way of comparison, 10 years ago, student loan debt stood at $363 billion. That makes student loans the largest source of debt after mortgages, which gained $39 billion to $8.2 trillion in the fourth quarter. Auto-loan debt increased by $21 billion to $955 billion. Americans had $700 billion in credit card debt at the end of last year, up just $17 billion, or 2.5 percent, from 12 months earlier. That’s down from $824 billion when the recession ended in mid-2009.

The NAHB/Wells Fargo Housing Market index fell to 55 from 57 the month before; homebuilder confidence levels have held in the mid- to upper 50s range for the past 8 months, which is consistent with a modest, ongoing recovery.

Manufacturing activity growth in New York State slipped in February as the pace of incoming orders effectively stalled and a gauge of future activity dropped by the most in six years. The New York Fed’s Empire State general business conditions index fell in February to 7.78 from January’s reading of 9.95.

A federal judge in Texas, siding with 25 other states, ordered a temporary halt to President Obama’s initiatives to shield millions of people who are in the United States illegally from deportation. The White House said the Justice Department would appeal Monday’s action by U.S. District Judge Andrew Hanen in Brownsville, Texas. Homeland Security Secretary Jeh Johnson said the administration will comply with the injunction and delay accepting applications for deportation relief that had been set to begin on Wednesday. The backdrop for this is a fight in the Republican-led Congress over legislation passed by the House of Representatives to allow funding for the Department of Homeland Security only if Obama’s immigration actions were nullified.

A hacking ring has stolen up to $1 billion from banks around the world in what would be one of the biggest bank heists ever. The hackers have been active since at least the end of 2013 and have infiltrated more than 100 banks in 30 countries. These hacks are a bit different because they target the banks themselves rather than bank customers. The hackers mostly attacked banks in Russia, but they also went after financial institutions in the United States, Germany, China and Ukraine. The information was included in a report from cybersecurity firm, Kaspersky. The banks don’t know the exact amount they have lost. And the crimes went largely undetected until sometime last year.

US Attorney General Eric Holder has given US Attorneys a 90 day deadline to evaluate whether they can bring cases against any individuals for their role in the 2008 financial crisis. Federal prosecutors who previously brought charges against institutions for inappropriately marketing residential mortgage-backed securities will investigate individual employees for potential criminal or civil charges. Of course, Holder has already announced his resignation, so if anyone is actually prosecuted, it wouldn’t happen on his watch.

Another revelation from Kaspersky Labs, the Moscow-based security software firm that revealed the bank hack; Kaspersky says the NSA has figured out how to hide spying software deep within hard drives made by Western Digital, Seagate, Toshiba, and other top manufacturers, giving the agency the means to eavesdrop on the majority of the world’s computers. Kaspersky said it found personal computers in 30 countries infected with one or more of the spying programs, with the most infections seen in Iran, followed by Russia, Pakistan, Afghanistan, China, Mali, Syria, Yemen, and Algeria. The targets included government and military institutions, telecommunication companies, banks, energy companies, nuclear researchers, media, and Islamic activists. A former NSA employee told Reuters that Kaspersky’s findings were correct.

Top lawmakers in the House and Senate have begun their own probes into a recent wave of fraudulent tax filings made through Intuit’s TurboTax, highlighting a growing problem in the “e-filing” industry. IRS data shows that the issue has grown rapidly, to a record of almost 2M suspected incidents by 2013 from about 440K in 2010. The federal government estimates it blocked about $24B in attempts, but still lost about $5.2B in 2013, due to fraudulent e-filings.

Just a little over a month before Apple releases its smartwatch, LG has unveiled a new smart “luxury timepiece” called the LG Watch Urbane, which features a 1.3 inch touchscreen display and runs on Google’s Android Wear. Companies are vying for leadership in the smartwatch space, a market which is expected to be worth $33 billion by 2020. Apple has reportedly ordered 5 to 6 million watches from its Asia suppliers; and that’s just for the first quarter.

Apple has revolutionized music and phones. Now it is aiming at a much bigger target: automobiles. Apple has several hundred employees working secretly toward creating an Apple-branded electric vehicle. The project, code-named “Titan,” has an initial design of a vehicle that resembles a minivan. At best, it will be several years before an Apple car could hit the road, even if development goes smoothly and if Apple decides to proceed with the project. Yeah, look for an Apple car right after you get your Apple TV. In other words don’t hold your breath. The safe money, of course, is that Apple is using this rumored experiment as a way to delve deeper into becoming the core software provider for cars. Google already has a head start.

Friday, August 22, 2014 - Be Careful Out There

Financial Review with Sinclair Noe

DOW – 38 = 17,001
SPX – 3 = 1988
NAS + 6 = 4538
10 YR YLD un = 2.40%
OIL - .46 = 93.50
GOLD + 4.30 = 1281.60
SILV un = 19.51

All three major indices posted gains for the week, with the Dow up 2%, the S&P up 1.7% and the Nasdaq up 1.6%. It was the strongest week of gains for both the Dow and the S&P since April, and the third straight week of gains for all three indices.

There is a lot to cover before we can wrap up the week. First we go to Jackson Hole Wyoming, where the Fed has been having a friendly get together of economists. Janet Yellen kicked off the event with a speech this morning. She said what you might expect: "There is no simple recipe for appropriate policy," and she called for a "pragmatic" approach that gives officials room to evaluate data as it arrives without committing to a preset policy path. And she backed up her comments with a new tool, the Labor Market Conditions Index, which measures 19 labor market indicators, and it isn’t new data, just combining it all together, but it showed she is monitoring the data.

Yellen referenced the possibility that labor markets may be a bit tighter than they seem and that the Fed may consider having to raise interest rates sooner than expected. At the last FOMC meeting in July, the Fed was still saying there was “significant” slack in the labor market, and today she confirmed that slack remains, saying: “Five years after the end of the recession, the labor market has yet to fully recover.” Another area of slack is wage deflation. Employers cut some wages during the downturn, or eliminated raises, and they aren’t offering raises now. Yellen said: “wages could begin to rise at a noticeably more rapid pace once pent-up wage deflation has been absorbed.”

So, today Yellen didn’t say anything radically different, just a hint less dovish, or at least not as dovish as Wall Street might have hoped for.  

Just in case you were wondering, there have been some protestors at Jackson Hole; one group could be spotted wearing T-shirts printed with graphs showing wage inequality; apparently, an attorney representing the protestors got to talk with Yellen for a minute or two. Meanwhile, investment bankers were noticeably absent from this year’s symposium; the invitation list is mostly devoid of representatives from big private-sector banks. The Fed finally figured out that rubbing elbows and special access wreaks of cronyism.

The Jackson Hole Symposium featured more than Yellen. There was a variety of papers on multiple subjects. A professor from MIT presented a paper detailing how robots and computers don’t steal as many jobs as you might think. Seems the robots are not good at jobs requiring judgment and common sense. So we aren’t obsolete just yet.

Another bit of research says we are less likely to switch jobs, or there is less labor market fluidity, and the reasons are that the workforce is getting older, and there is a shift to older businesses, which means fewer startups, and more startups tend to fail, and more jobs require occupational licensing or certification.

Yet another research paper concluded that the problem of long term unemployment is not necessarily terminal. The thinking has been that if someone loses a job and is out of work for a long time they have a harder time finding work, and eventually they lose their skills and fall out of the labor pool; the idea is called hysteresis, or the idea that cyclical unemployment becomes structural. The new research says it is only a moderate problem. So, the good news is that we are not obsolete and we are adaptable.  

And then European Central Bank President Mario Draghi delivered a speech following lunch. Draghi said European central bankers and politicians each have a role to play in boosting demand and reducing joblessness. For its part the ECB is willing to take more stimulus measures if needed to keep low rates of inflation from becoming embedded in expectations of future price growth but the ECB can't do it alone and governments must join in efforts to reduce unemployment.

For Draghi, this was a bigger shift in policy; for years the ECB has been preaching that governments needed to shrink deficits and undertake economic reforms even during times of economic weakness. The austerity measures did not work; the result has been stubbornly high unemployment, stagnation, and disinflation or low-flation bordering on deflation, with a dollop of double dip recession.

Draghi admitted as much, saying the GDP data "confirm that the recovery in the euro area remains uniformly weak, with subdued wage growth even in non-stressed countries suggesting lackluster demand." And so Draghi called on combining monetary and fiscal policies to stimulate demand with efforts to make labor markets more flexible. He also proposed a significant boost in public investment.

In June, the ECB approved a stimulus package that includes record low interest rates, new 4-year loans to banks, and a step toward large scale purchases of asset backed securities, although no new QE announcement was forthcoming in today’s speech. Draghi said today: "The risks of 'doing too little'" and allowing temporary unemployment to become more entrenched "outweigh those of 'doing too much’, that is, excessive upward wage and price pressures."

So, while Draghi firmly planted an anti-austerity flag, he also felt the ECB’s June stimulus will be all that they can do, and he recognizes the real risk that monetary policy loses effectiveness, and somebody needs to wake up the government.

There is a long tradition of the Jackson Hole symposium giving a little bump to the markets; not today, and the reason had less to do with the doves and hawks on the Fed and more to do with geopolitics.

Ukraine says Russian artillery is being used against Ukraine's forces, both from across the border and from inside Ukraine. In addition, NATO said it has seen "transfers of large quantities of advanced weapons, including tanks, armored personnel carriers and artillery, to separatists." Moscow sent more than 130 trucks rolling across the border in what it said was a mission to deliver humanitarian aid. Ukraine called it a "direct invasion," and the US and NATO condemned it as well.

The trucks, part of a convoy of 260 vehicles, entered Ukraine without government permission after being held up at the border for a week amid fears the mission was a Kremlin ploy to help the pro-Russian separatists in eastern Ukraine. Russia claims the trucks are carrying food, water, and other humanitarian supplies. The city of Luhansk has been largely cut off for weeks and is without water and electricity as Ukraine forces fight rebels. Ukraine wanted the international Red Cross to inspect all trucks, fearful of a Trojan horse; but Russia lost patience and accused Ukraine of stalling. The Red Cross, which had planned to escort the convoy to assuage fears that it was a cover for a Russian invasion, said it had not received enough security guarantees to do so, as shelling had continued overnight.

Ukraine said they would not shell the convoy but rebel forces took advantage of that promise to drive on the roads being used by the convoy.

Meanwhile, Hamas-led gunmen in Gaza executed 18 Palestinians accused of collaborating with Israel. The executions were held in a public square. I suppose that has a certain deterrent effect. The ceasefire, like others before it, did not last long. Israeli Prime Minister Benjamin Netanyahu threatened to escalate the fight against Hamas after a four-year-old Israeli boy was killed by a mortar attack from Gaza. Shortly after his remarks, Palestinian officials said Israel had flattened a house in a Gaza City air strike, wounding at least 40 people. More than 80 rockets and mortars shot from Gaza hit Israel. Israeli forces carried out more than 25 air strikes in Gaza. Since the conflict began last month, 2,071 Palestinians, many of them civilians, have now been killed and around 400,000 of the enclave's 1.8 million people displaced. Sixty-four Israeli soldiers and four civilians in Israel have been killed.

Meanwhile, the quagmire in Iraq is sucking us in ever deeper. You will recall that just 2 weeks ago, President Obama announced “targeted airstrikes to protect our American personnel and a humanitarian effort to help save thousands of Iraqi civilians who are trapped on a mountain without food and water and facing almost certain death.” And it seemed to work, sort of. The Yazidis trapped on the mountain got off the mountain, most of them anyway.

And then there was the problem of ISIS controlling the Mosul Dam, and the threat of using the dam to flood the Tigris River valley, and that includes Baghdad; so there was some extra work to do there. And then there was the horrific beheading of American journalist James Foley, and yesterday Secretary of Defense Chuck Hagel called ISIS an “imminent threat to every interest we have,” while Chairman of the Joint Chiefs of Staff General Martin Dempsey conceded that attacks on ISIS could not be limited to Iraq but would also spread into Syria; and Secretary of State John Kerry said ISIS “must be destroyed and will be crushed”.

And now Iraq has a new prime minister, Haider al-Abadi. The hope was that he could forge a new coalition government. Not exactly. Sunni lawmakers quit talks on forming a new Iraqi government after gunmen killed scores of worshipers at a Sunni mosque in a province neighboring Baghdad. Today’s strike took place after three roadside bombs targeted a Shiite political gathering.

Federal authorities today urged law enforcement across the country to be alert for possible attacks inside the United States in retaliation for US airstrikes against ISIS. In a joint bulletin issued to local, state and federal law enforcement, the Department of Homeland Security and FBI said that while they are “unaware of any specific, credible threats against the Homeland” and find most threats to the U.S. homeland by supporters of ISIS “not credible,” they cannot rule out attacks in the United States from sympathizers radicalized by the group’s online propaganda.

Be careful out there.

Retailers have taken a recent hit, with weak earnings reports from the likes of Wal-Mart and Sears. Today Ross Stores posted better than expected second quarter results. The S&P Retail Index gained 0.6%, which doesn’t sound like much but it was the best week since February. The heavy promotional environment has been forcing retailers to offer discounts to stay relevant even as they deal with the growing shift to online sales. The big brick-and-mortar retailers have been trying to adjust to this shifting landscape. The labor market is no doubt improving, but wage growth has been essentially stagnant, restricting households’ buying power. In a nutshell, it has been a tough backdrop for retailers. No doubt the stock-price performance of the retail sector in the S&P 500 has been one of the weakest in the index – up +0.9% vs. a gain of +8.6% for the index as a whole.

Total earnings for the 490 S&P 500 members that have reported already are up +8.1% from the same period last year, with a ‘beat ratio’ of 65.5% and a median surprise of +2.6%. Total revenues are up +4.4%, with a very impressive revenue ‘beat ratio’ of 62.2% and a median surprise of 0.8%. So, this has been a strong earnings season, with the minor exception that guidance has been a little less than satisfying.

Stock prices of small-cap stocks have been underwater this year, with the S&P 600 down -1.2% vs. a gain of +8.6% for the S&P 500 in the year-to-date period. This underwhelming stock price performance is getting confirmed by the group’s mixed results thus far in the Q2 reporting cycle. As of Friday, August 22, we have seen Q2 results from 555 S&P 600 members or 92.5% of the index’s total members. Total earnings for these 555 companies are up +12.1% from the same period last year on +9.5% higher revenues, with 48.6% beating EPS estimates and 38.2% coming ahead of top-line expectations. 

Total earnings in Q2 are on track to reach a new all-time quarterly record, surpassing the last record set in 2013 Q4. That brings a good news/bad news conundrum. Is it just a one-time bounce of the low levels of the first quarter? It’s always difficult to top a record.

The S&P 500 is trading at 18.5x forward earnings, above the historical average of about 16.5x. The Shiller cyclically adjusted P/E ratio is currently about 26x the historical average of 16x. No matter how you manipulate the numbers, stock valuations are closer to the high end than the low end, and then the question is whether those valuations are justified in view of the risks facing stocks.

The biggest risk to stocks is the Fed ending its unprecedented experiment in easy money. Stock market investors have benefitted from ZIRP, zero interest rate policy, far longer than anyone might have imagined, and maybe Draghi was right when he talked today about the risk that monetary policy can lose its effectiveness. Now, maybe the Fed can exit QE and ZIRP and the markets will achieve liftoff; I just don’t know where we’ll find the fuel for liftoff.

The second most significant risk is the geopolitical havoc occurring around the world. And most of that havoc seems to be in or near areas with oil. From the heady days of mid-2008 when it traded at nearly $150 a barrel, crude oil has had quite a rocky ride. After sliding down to the $30s and rallying back around $120, crude has settled in around the $90 to $110 range for the past two years.  Commodity traders have wondered why oil hasn’t gone higher. Geopolitical tensions abound across the world; the Middle East seemingly hasn’t been this unstable in years. There may be reasons why oil prices have moved lower, including the renaissance in oil and gas exploration and development in the US; lower demand brought about by great efficiencies and conservation; also, the big investment banks have exited the oil  trading business and the oil  marketing business, and they have not been replaced by new players. A dip in oil prices could send some smaller exploration companies to the mat. A spike in oil prices could send stock investors to the exits. Geopolitical stability is decidedly bad for stocks, particularly stocks that are trading at very high valuations.

A third risk to stocks is that earnings will not keep pace. Corporations may have squeezed about all of the cost savings they can out of their businesses. While companies continue to "beat" expectations, the truth is that they are more leveraged than they were in 2007 on the cusp of the financial crisis, and they live in fear that interest rates are going to rise and they will not be able to service their debt. Meanwhile, consumers tend to hold onto a dollar until the eagle grins.

And then there is always the possibility of a black swan event, which could pop up almost anywhere, including the financial markets where big banks are bigger than ever, and money markets are now poised to close their vaults rather than risk a run, which is  just the sort of thing that creates a run; or maybe it will be a geopolitical mis-step – a bomb that lands in the wrong place, or a crazy Russian who turns off the nat gas spigot for the Eurozone.

An expensive market is always vulnerable to bad news and sell-offs. And so it is now more important than ever to be diligent, and don’t be afraid to lock in the hard won gains of the past 5 years.