FINANCIAL REVIEW

Lather, Rinse, Repeat

Sinclair Noe — November 4, 2014

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

Financial Review

DOW + 17 = 17,383
SPX – 5 = 2012
NAS – 15 = 4623
10 YR YLD – .01 = 2.34%
OIL – 1.31 = 77.47
GOLD + 2.90 = 1169.20
SILV – .11 = 16.13

Election Day 2014! We should all be very, very happy. Forget about red and blue, we can all count our blessings because the campaign ads on radio and TV are going away. There is one redeeming thing about this whole election. It will be over in a few hours. Say hallelujah!

Or you could say that it’s amazing that anyone bothers to vote given that our choices are between tweedle dumb and tweedle dumber. Still, I went to the polls today, early, and I cast my ballot. I was the only voter voting. In a few hours we’ll get the results. And the most likely result is that not much will change, despite the drama and despite hundreds of millions to persuade you. It takes a fortune for a politician to get beat these days, but most of the money isn’t real, it’s magic money that doesn’t belong to anybody, or at least nobody is willing to admit they spend money on politics. We’ve got the best politicians money can buy.

The present split Congress is the least-productive in US history. Regardless of the election’s outcome, the 114th Congress is unlikely to be any more productive than the 113th. Maybe that’s good news; when they do something is when they become dangerous. There are plenty of issues worthy of intelligent discussion and debate, however that never seemed important in this midterm election. That we have been burden with such an abundance of bull and still survived just shows we are a super nation.

Lather, rinse, repeat.

Let’s look at the economic news.

Home prices were down slightly in September, according to Corelogic prices were down 0.1% for the month and that resulted in year to year growth of 5.6%, the slowest pace in 2 years. So, the rate of growth in home prices has clearly slowed. For Arizona, home prices are still down 30% from the peak.

New orders for US factory goods fell for the second straight month, down 0.6% in September. August’s orders were slightly revised to show a 10.0 percent fall instead of the previously reported 10.1 percent decline. The decline in orders was led by aircraft, machinery, capital goods and computers and electronic products.

Yesterday we reported that auto sales were up in the third quarter, but the car companies are calling them back faster than they can sell them. Toyota is recalling 5,850 vehicles because of a possible loss of steering control. Ford is looking at 5 recalls totaling 202,000 vehicles for a variety of issues, including an incorrect repair of a steering problem in a previous recall.

Oil futures dipped under $76 a barrel for a while today. If there was any doubt on which country Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now. While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is directed to the US shale producers. The Kingdom made no secret of their displeasure yesterday when they cut oil prices to US buyers while raising them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the US.

The plan is to maintain market share in the US and bury the US energy producers. The Saudis fear predictions that US oil imports could fall to zero by 2037 as a reason they need to nip US oil producers in the bud. They are threatened by US oil production and they are acting to try to break the US producers back. That is one of the reasons todays balance of trade numbers weren’t much higher, even in the face of a strong dollar. The US not only has reduced oil imports but has become a major exporter of oil products.

The nation’s trade deficit increased 7.6% in September to the highest level since the late spring as exports to Europe, China and Japan all fell. In turn, this will likely lead to a lower revision of third quarter GDP; probably a drop from the 3.5% initial estimate, down to about 3%. In September, the trade gap climbed to a seasonally adjusted $43 billion from a slightly revised $40 billion in August. Yet if petroleum is excluded, the nation’s trade gap climbed to $47.2 billion in September to mark the highest level in seven years. Here’s the downside of a strong dollar: US exports of goods fell 3.2% with China, 6.5% with the European Union and 14.7% with Japan.

It’s not just a strong dollar but a combination of weak global economies. Today the European Commission said the Eurozone will need another year to reach even a modest level of economic growth. The new forecast calls for 0.8% growth across the Eurozone economy this year, and just 1.1% growth next year.

The Independent Evaluation Office of the International Monetary Fund issued a report that basically says the IMF did a poor job responding to the financial crisis; the IMF ignored its own research and pushed too early for richer countries to trim budgets. They admit the IMF was overly concerned about high debt levels and large fiscal deficits, and urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

The European Central Bank meets Thursday to try and figure out their next course of action.

Lather, rinse, repeat.

While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance.

When faced with private sector deleveraging, there are limits to the persuasive powers of low interest rates to revive private economic activity; low rates may help in an inflationary environment, but in a deflationary environment, spending is needed to stimulate demand. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes more and more deflationary. The flip side is that fiscal expansion could truly provide economic stimulus without the worry of interest rate increases. That doesn’t mean that we will see fiscal expansion to correct the problem, just because there is indisputable mathematics to support it.

Lather, rinse, repeat.

JPMorgan Chase has added $2.4 billion to its estimate of the amount of legal costs it may face. That figure was disclosed yesterday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market. In the past few days, Citigroup, Royal Bank of Scotland, HSBC, and Barclays all announced new reserves totaling more than $2.3 billion to deal with investigations into foreign exchange rate manipulation. Deutsche Bank added more than $1 billion to legal reserves for the expected cost of settlements. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates.

If it sounds familiar, well that is because we have seen settlements like this before. In 2012 Barclays and UBS entered deals to pay fines totaling almost $2 billion; a UBS subsidiary pleaded guilty to rigging Libor. The prosecutors and regulators probably thought the agreements would deter further bad behavior. The deals involved non-prosecution or deferred prosecution agreements. The agreements allow the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.

But it turns out that simply slapping the banks with more and bigger fines, does not deter future bad behavior. The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So federal prosecutors go for punishment that does not threaten the continued existence of one of the banks. In other words, punishment that doesn’t actually punish.

The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail”, while steadfastly refusing to actually jail a bank or major bank executives for criminal violations.

Lather, rinse, repeat.

FINANCIAL REVIEW

The Ghosts of October

Sinclair Noe — October 28, 2014

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

Financial Review
DOW+ 187 = 17,005
SPX + 23 = 1985
NAS + 78 = 4564
10 YR YLD + .03 = 2.29%
OIL + .38 = 81.38
GOLD + 2.90 = 1229.00
SILV + .09 = 17.31

Today, we’ll start with a few earnings reports then move to economic news.

After the close Facebook reported a profit of $806 million, or 30 cents a share, up from $425 million, or 17 cents a share, a year earlier. Excluding share-based compensation and other items, earnings rose to 43 cents a share from 27 cents. Revenue increased 59% to $3.2 billion. Earnings were up about 90%; revenue up about 60%. Shares were just a little lower in after-hours trade.

Dupont reported operating earnings per share of $0.54 were up 20 percent from $0.45 per share last year, in-line with estimates.

Pfizer reports a third-quarter profit of $2.67 billion, or 42 cents a share, up from $2.59 billion, or 39 cents a share. Revenue slipped 2% to $12.36 billion.

Freeport-McMoRan reported earnings of 53 cents per share for third-quarter 2014, reflecting a decline of 32.9% from the year-ago earnings of 79 cents. Profit declined 32.8% year over year to $552 million, hurt by lower pricing of copper and gold.

The S&P/Case-Shiller index of property values increased 5.6 percent from August 2013. Prices are still going up, but at a slower pace. Home prices in the 20-city index adjusted for seasonal variations decreased 0.1 percent in August from the prior month. Unadjusted prices rose 0.2 percent.

In August, durable goods orders dropped 18.3%. Durable goods orders have been volatile in recent months because of big swings in aircraft orders. The thinking was that there would be a modest rebound as businesses increased spending, and aircraft orders would rebound. Not exactly. Durable goods orders for September dropped 1.3%; excluding transportation equipment bookings declined 0.2%. Cars and trucks sold at a 16.3 million annualized rate last month, capping the best quarter since 2006. There was a 2.8% drop in demand for machinery, the biggest decline since February 2013, as bookings for computers and electronic equipment fell 2.5%. Businesses just aren’t investing in their business.

And while businesses are pessimistic, consumers are optimistic. The Conference Board’s consumer sentiment index climbed to 94.5, the strongest reading since October, 2007; up from 89 in September. Steady hiring and fewer layoffs over the past 12 months have pushed unemployment lower; even if they aren’t good paying jobs, they are still jobs; and most people think they will get a raise eventually. Americans are also feeling better because it doesn’t hurt as much to visit the gas pump. Average gas prices have dropped 31 cents in the past month to a nationwide average of $3.03. Incredibly, we feel good about gas at $3 a gallon.

A follow-up to yesterday’s comments about the European Central Bank’s stress test of Euro banks; 25 of the 130 banks failed the test; several others narrowly averted failure. For several banks, the fix is minor. For a few, there may be no corrective action that can save them. But the idea, or at least what the ECB hopes will be the takeaway, is that the Euro banks are in pretty decent shape, everything is under control, and they can start lending again. Of course, we heard the same argument in the 1990’s, but back then it was about cleaning up the troubled Japanese banks; however, healthier Japanese banks could not stop a long, slow deflationary slide. The problem is that bad banks can crash an economy but healthy banks are not an economic engine to drive prosperity.

We are almost through the month of October, and the market has seen pullbacks, but not a crash. It is worth noting that today marks the 85th anniversary of Black Monday, 1929. Stock prices began to decline in September and early October 1929, and on October 18 the fall began. Panic set in, and on October 24—Black Thursday—a record 12 million shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday, during which the Dow Jones Industrial Average fell 13% and 12% back-to-back. Investors after Black Monday’s slide were assured that “banking interests” were supporting the market, “with a hand on the throttle.” But of course, that was not the case. Banks can crash markets, but they really can’t revive the economy.

One reason the bankers could not stop the freefall back in 1929 was overextended investors were forced to dump their stocks to meet margin calls. The falling prices triggered a panic. The bankers and financiers tried to inspire confidence by buying shares but they were quickly buried under the avalanche of margin debt.

One of the side effects of the Federal Reserve holding interest rates at near zero levels for the past few years is that it has made margined investing in stocks more attractive. And there is now more margin debt that in 2007, and even more that 85 years ago, in October 1929.

And it’s not just margin debt but stock buybacks that are now financed by debt. It’s a nifty trick when it works. A corporation borrows money at very low rates, buys their own shares, and magically the earnings per share goes up, but only because there are fewer shares outstanding. Buybacks add nothing to a company’s productivity or real value, they only juice up stock prices so executives and shareholders can enjoy bigger profits. The corporations do not invest in their business, they do not make orders for durable goods, and computers, and equipment to improve efficiency. They do not hire new workers. Demand slips. GDP grows more slowly. Prices stagnate and a disinflationary trend can lead to deflation.

For the 12 months ended June, companies raised their stock repurchases to $533 billion, an increase of nearly 27% from a year earlier. Meanwhile, combined buyback and dividend expenditures for the period reached a record of $865.9 billion, with buybacks representing 61.6% of the total. That brings total buybacks since the beginning of 2005 to $4.2 trillion, or nearly one-fifth of the total value of all U.S. stocks today. Each dollar of buybacks appears to be having a greater effect on raising the prices of certain stocks. That’s because fewer shares are changing hands each day. On Wall Street, it’s referred to as a “drying up” of liquidity.

Corporations have been reducing stock buybacks in the past few weeks, and maybe that was just a temporary adjustment because of blackout periods associated with earnings season, or maybe it was a bigger trend associated with the end of QE3. Corporations have been happy to buy back shares using borrowed money with rates near zero, combined with the Federal Reserve shrinking the supply of financial assets by buying US Treasuries and mortgage backed securities. But tomorrow the Fed is expected to announce the end of QE3; no surprise; they’ve been tapering off QE purchases for the past year, but it will change the dynamics of supply and demand.

And we’ve started to see that changing dynamic in the corporate bond market, specifically in high yield or junk bonds. The major bond dealers are reducing their holdings of junk bonds, selling more than $7 billion net since mid-September. Part of the reason is that banks will be required to hold quality paper for the next stress test, and junk bonds don’t qualify; so there just isn’t much of a market there; which means liquidity is drying up.

Now put it all together; the economy is improving, but corporations that were involved in buybacks (IBM comes to mind), they don’t see their profits rise because they have not been investing in productive growth; the Fed hints at raising interest rates; buybacks dry up because there are no buyers for high yield debt; the corporations can’t juice their earnings reports anymore and they can’t grow earnings organically. If stocks start to fall, the bond bubble would also start leaking air. And then the margin calls kick in.

Tomorrow the Fed will issue their statement on monetary policy; maybe they will keep QE going for a while; more likely, they will end QE3 as promised; maybe they will hint at QE4; maybe they will hint at keeping interest rates near zero for a very long time. The Fed will surely be mindful not to spook the markets, like Greenspan did in 1987. Now the Fed has at least learned the importance of an overabundance of guidance. But it has been a very long time since Wall Street has stood on its own, without the very substantial benefit of the Fed propping it up. The problem is that if Wall Street stumbles, it could get buried under an avalanche of illiquidity and debt.

Of course panic selling could kick in at almost any time, but it doesn’t mean that it is the most likely outcome. Six years ago, the Fed stepped in with the first bailouts, followed by $4 trillion or so in stimulus. The pundits back then thought the Fed’s stimulus would cause inflation to soar and the dollar would collapse. They were wrong, even if they still won’t admit it. For now, the economy is reasonably solid, even if it is slow and plodding. The banks are in better shape now than in 2007, assuming that anybody has any kind of realistic notion of the multitude of ways the books are cooked. The crash of 2008 is history, much like Black Monday 1929. The recent pullback is now fading in the rear view mirror and the further we go down the road, the more it looks like bargain hunters stepped in to buy the dip, again. And as we head to the holiday season we’re likely to forget the ghosts of October, and the lessons painfully learned 85 years ago today.

FINANCIAL REVIEW

Monday.

Sinclair Noe — October 27, 2014

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

DOW + 12 = 16,817
SPX – 2 = 1961
NAS + 2 = 4485
10 YR YLD – .02 = 2.26%
OIL – .52 = 79.92
GOLD – 5.90 = 1226.10
SILV – .10 = 17.21

In economic news: the National Association of Realtors reports pending home sales rose 0.3% in September, hitting the second highest level for this year. The index of pending home sales reached a seasonally adjusted 105 in September, compared with 104.7 in August. Slower price growth and more homes for sale are likely supporting pending home sales. Pending sales typically close within 2 months, and so this gauge augurs well for actual sales.

Financial data firm Markit said its preliminary or ‘flash’ services sector purchasing managers index slipped to 57.3 last month, the lowest reading since April, from 58.9 in September. A reading above 50 signals expansion in the services sector. The index has been gradually declining for 4 months. The October readings would indicate fourth quarter GDP slowing to about 2.5%.

Goldman Sachs analysts revised their price outlook for oil; they are decidedly more bearish, predicting $75 a barrel for the first quarter and second half of next year. The thinking is that US shale oil will be enough to keep prices down, and non-OPEC countries will continue to provide plenty of supply, so even if OPEC wants higher prices, they will find it difficult. Oil prices hit a 28 month low today, breaking a key area of support at $80 a barrel. So, that started a big debate over how low oil can go. One of the more interesting arguments comes from Dennis Gartman, publisher of the Gartman Report, who says the era of oil is over. At one point, Gartman went so far as to compare crude oil to whale oil, which became obsolete following the advent of crude in the early 20th century.

This week’s economic calendar includes reports on durable goods orders and also consumer confidence tomorrow. The durable goods report has been all over the place, so we’ll try to smooth out those numbers; companies probably increased spending and investment in September, after stripping out the volatile airline and auto sectors. Consumer confidence is projected to move from 86 to 87. Friday brings reports on consumer spending and consumer confidence and the core PCE inflation numbers. Wednesday brings the first estimate of third quarter GDP; look for 3% growth, which would be down from 4.6% second quarter GDP growth, but still pretty good. Just the kind of sluggish, mediocre growth that has characterized the recovery. There is a very good chance that 2014 GDP will come in just under 2.5%. One area of concern for the GDP number is whether the strong dollar has hurt exports. Also, there will likely be a little less spending on automobiles, which enjoyed a big sales boom in the second quarter. And lower oil prices actually might trim GDP.

Of course the markets will be following the Federal Reserve FOMC meeting on Tuesday and Wednesday. The Fed will issue a statement on Wednesday but there will be no press conference or economic forecasts. And so we should expect the expected. The Fed will likely announce the end of QE3 bond buying, as previously announced. The Fed will likely say that raising interest rates won’t happen for a considerable time. They will likely say they are still concerned about low inflation. And they will probably say something to appease the financial markets. Do not expect the Fed to say much of anything they haven’t said before.

There were a few interesting developments over the weekend, including stress tests and elections. The European Central Bank conducted stress tests of 130 banks; 25 failed. Some failed by a little, some failed by more, at least 9 failed banks were in Italy. Also, the ECB looked at the assets held on the books of 123 banks, a variation on the stress test known as the Asset Quality Review. The ECB found €136 billion in troubled loans banks had not already confessed to owning, bringing the European total to €879 billion ($1.1 trillion). Now, you may remember Dexia, the Belgian bank that failed a few years ago, after it had passed one of the first ECB stress tests; so, there is some concern about how much these tests actually reveal about the soundness of Euro banking.

The good news is that more than 100 Euro banks passed the test, but it doesn’t mean they will start lending anytime soon. In the US, it has been a long slow climb. Overall US bank lending has grown at a modest 1.9% annual rate during this recovery and commercial and industrial loan growth has grown at a 3.6% rate. Only recently, five years after US stress tests, have total bank lending and business lending started to pick up in earnest. In September total bank loans were up 6.3% from a year ago, the best performance since 2008, and commercial industrial loans were up a robust 12.3% from a year ago. And Ben Bernanke still can’t get his mortgage refinanced.

The bad news is that the tests were designed to show that Euro banks were strong enough to weather another financial crisis. And the fact that many banks are not ready, means that a cascading effect would probably topple the banks that passed. So, if the idea behind the test was to reassure markets, well, probably not.

US banks will undergo another stress test in January, and the banks are already getting ready. Wall Street’s biggest debt dealers have been dumping speculative-grade securities, or what most people call junk bonds, at the fastest pace on record ahead of annual stress tests by the Fed. They reduced their holdings by 68 percent in the week ended Oct. 15. US junk bonds dropped 2.1 percent in September, their worst month since June 2013. They’ve gained 1.1 percent in October as some investors return to the debt to chase higher yields. The 22 primary dealers that trade with the Fed pared their high-yield bonds to a net $2 billion dollars on Oct. 15 from $6.26 billion the week before. The Fed and the Office of the Comptroller of the Currency have been heightening their scrutiny of leveraged lending, too, leading the biggest banks to back away from funding some takeovers financed by the debt. They’ve warned banks that rising levels of such risky loans on their balance sheets may require more capital held against them.

Of course, there is more to economic recovery than sound banks. Thinking that lending somehow can lead GDP is an illusion. Businesses need to believe in an increase in the demand for their products before asking for credits, and if that external demand growth is no longer there, then there is a need for additional stimulus, which has been tried by the Fed, and has helped to prop up the banks, but has not propped up broader demand; to do that we need to improve jobs and wages.

Elections over the weekend in Ukraine showed voters supporting pro-Western parties. President Petro Poroshenko hailed the vote as a mandate to end a rebellion in the country’s east and to steer the country further away from Russian influence.

In Brazil, incumbent Dilma Rousseff defeated challenger Aecio Neves. Dilma represented the Workers Party, which rose to power 12 years ago under Lula da Silva. Aecio represented the Social Democracy party, considered the conservatives in the campaign. Brazilian markets have been erratic and mostly lower leading to the election, and today. The country has experienced a recession. Economic growth has slowed from 7.5% in 2010 to 2.5%. The Brazilian equity markets were down about 2.8% today, and are in bear territory. The currency, the real, was down 1.9% today to a 9 year low. And that’s just the beginning of troubles for Brazil. You may remember the protests that brought millions of Brazilians to the streets to deal with the issue of inequality; it still hasn’t been addressed. Then there are issues of political and judicial corruption; environmental impacts of development projects; and pretty much everything else in Brazil is screwed up, with the possible exception of the beaches.

And Brazil matters. It is the fifth largest country in the world, both by geographical area and population; and the seventh largest economy, and the largest economy in Latin America. At its core, the election was between two opposing ideologies, one supporting business and stabilizing the economy through privatization and tighter fiscal policies; and the other promoting anti-poverty programs, social welfare, and education. The latter won. The question now is what Rousseff will do to consolidate her position.

And it is still earnings season.

Twitter posted 3Q results. Sales of $361 million, better than estimates. EPS of $.01, which Twitter nailed. Down 10% in after-hours trading.
(By the way, I did that in 140 characters.)

Amgen reported higher-than-expected third quarter earnings and revenue, even as net profit fell due to a hefty restructuring charge, and the company raised its full-year forecast and the number of job cuts it expects to make. Excluding items, Amgen earned $2.30 per share, exceeding analysts’ average expectations by 19 cents. Amgen was up about 1%.

Merck beat third-quarter earnings forecasts but disappointing sales of its Gardasil cervical cancer vaccine and other big products sent its shares about 2 percent lower. Merck said it earned $895 million, or 31 cents per share, in the quarter. That compared with $1.12 billion, or 38 cents per share, in the year-earlier period.

Kohl’s, the department store retailer, warned its earnings for the year will likely hit the low end of its previous guidance as October sales have been soft.

The big earnings report tomorrow will be Facebook, after the close.

Elon Musk, the guy behind Tesla, delivered a speech at MIT on Friday, in which he called artificial intelligence the greatest existential threat to our existence. I don’t know. It sounds a bit far-fetched.

But on a related note, Charles Schwab says that it will introduce free automated investment plans picked by computer algorithms in the first quarter of 2015. Investments are allocated by computer algorithm to some 20 asset classes ranging from U.S. stocks and bonds to commodities and emerging markets securities. Robo-advisors, what could go wrong?

FINANCIAL REVIEW

A Boatload of Economic News and Earnings Reports

Sinclair Noe — October 23, 2014

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

DOW + 216 = 16,677

SPX + 23 = 1950
NAS + 69 = 4452
10 YR YLD + .05 = 2.28%
OIL + 1.33 = 81.85
GOLD – 9.10 = 1232.90
SILV + .02 = 17.30

The S&P 500 has risen five times in the past six days, pushing the gauge up 4.9 percent since Oct. 15 and recouping about half the losses from a selloff that began in mid-September; the S&P is still down about 3 percent from a record.

The Federal Housing Finance Agency, which tracks deals involving mortgages backed by Fannie Mae and Freddie Mac, said home prices in August were up 4.8% from the year-earlier period; and up a seasonally adjusted 0.5% in August from July. The average rate for a 30-year fixed mortgage was 3.92 percent, down from 3.97 percent last week. The average 15-year rate dropped to 3.08 percent from 3.18 percent. Mortgage rates are now at the lowest levels since the summer of 2013. Refinancing applications jumped 23 percent in the week ended Oct. 17 to an 11-month high.

The number of people who applied for US unemployment benefits rose by 17,000 last week to 283,000, but initial claims remained below the key 300,000 level for the sixth straight week.

The Conference Board’s leading economic index rose 0.8% in September, after no change in August. The index points toward improving employment and income growth which are expected to support moderate economic expansion for the remainder of the year. The leading index is composed of 10 forward-pointing indicators. Nine of the 10 indicators showed strength in September, with the biggest positive contribution coming from a favorable spread of low interest rates. The only negative was average consumer expectations for business conditions.

The Chicago Fed’s national activity index rose to positive 0.47 from negative 0.25 in August. The three-month average stayed positive and accelerated, to 0.25 from 0.16 in August; indicating the economy grew at an above-trend pace in September, recovering after a slower August.

The Markit Economics flash manufacturing purchasing managers index for the US fell to a 56.2 reading in October from 57.5 in September. The index is at a three-month low. The rise in new orders was the slowest in nine months. A number of businesses expressed caution about export sales, perhaps due to the stronger dollar. Input cost inflation eased to its weakest level in six months.

Markit’s Eurozone Composite Flash Purchasing Managers’ Index rose to 52.2 in October from 52 in September. Germany’s private sector saw faster growth this month, France’s business slump deepened, with business activity hitting an eight-month low. In Britain, retail sales fell more than expected in September. Eurozone inflation slipped to its lowest for five years in September. The Flash Index is just a subset of the broader economy. For example, today, Spain reported the number of people without a job dropped by 195,000 in the third quarter, and the unemployment rate dropped to 23.7%, which is still incredibly lousy.

China’s flash HSBC/Markit manufacturing PMI edged up to a three-month high of 50.4 from a final reading of 50.2 in September.

Russian stocks have been falling sharply this week. Standard & Poor’s is scheduled to release a review of Russia tomorrow and it is widely expected that they will cut Russia’s credit rating to junk. Last week, Moody’s Investors Service cut Russia’s debt rating, citing concerns over the Ukraine crisis and the international sanctions.

The European Central Bank is scheduled to release the results of its stress test for Eurobanks on Sunday. The test of 130 lenders is aimed at answering the questions many investors still have about the health of the region’s banking system in the wake of the financial crisis. It is expected that most of the mega banks will pass the test but there are estimates that as many as 20 mid-sized banks might fall short.

The Federal Reserve will put US banks through a stress test, and the methodology was released today. US banks will have to show they can withstand a scenario where the unemployment rate jumps to 10%, the stock market dives by 60%, and oil prices reach $110 a barrel. The Dodd-Frank Act requires these tests of 31 of the largest banks, with $50 billion or more in assets, before the Fed signs off on stock buybacks and dividends. The 8 largest banks will also have to test for counterparty defaults, and 6 with large trading operations will have to test for a “global market shock scenario” that it hasn’t yet released. All the banks must submit these capital plans by January 2015.

Last year, Citi, Zions Bancorp and three foreign banks failed the tests, and Bank of America was forced to suspend a planned increase in its dividend and a stock buyback after finding it had erroneously reported $4 billion more in capital than it actually had.

After a sharp fall, crude oil seems to be finding support at $80 a barrel. Last week, the intraday price dipped below $80 but we have not seen a closing price under $80. Today, the price dipped down to $80.05 and then rallied. The past ten sessions have created a symmetrical triangle on the charts, and within the next few days, we should see a break from that pattern. Whichever way the market breaks out, or breaks down from that triangle pattern could be the way the trend goes for a long period. There is a tendency to go out of this pattern the same way we came in, which would be going down; but right now the prudent move is to wait and let the market tell us whether it can hold this important level of support.

General Motors disclosed in a Securities and Exchange Commission filing that its GM Financial unit was served with additional investigative subpoenas to produce documents from state attorneys general and other governmental offices relating to its subprime auto finance business and securitization of subprime auto loans.

General Motors said it earned $1.4 billion in the third quarter on strength in North America and China, where newly introduced models are more profitable than the ones they replace. That’s up from $700 million, or 45 cents a share, in the 2013 third quarter. Revenue was $39 billion, down slightly from the year-ago $39.3 billion. The earnings equaled 81 cents a share, lower than the 97 cents analysts expected. But the 81 cents is minus a special charge of 16 cents primarily for repairing flood damage at the Technical Center in Michigan and charges in Russia for lost value of long-term assets.

It is earnings reporting season.

3M reported strong growth in US sales and raised its full-year earnings forecast higher. In the latest quarter, profit totaled $1.30 billion, or $1.98 per share, up from $1.23 billion, or $1.78 per share. Sales grew 2.8% to $8.14 billion. Wall Street had expected earnings of $1.96 per share.

Caterpillar reported third-quarter net income rose to $1.63 a share from $1.45 a year earlier. Excluding one-time items, profit was $1.72, surpassing the $1.35 average of estimates compiled by Bloomberg. Caterpillar said per-share earnings excluding one-time items for this year are expected to be $6.50, 30 cents more than previously projected.

In a sign that earnings do still matter to the stock market, just look at 3M and Caterpillar today. 3M was up $6.10 at $145.05; that added about 25 points to the Dow Industrial Average. Caterpillar was up $4.97 at $99.27; adding about 45 points to the Dow. Two stocks, about one-third of the Dow movement.

Microsoft reported earnings of 54 cents per share on revenue of $23.2 billion, beating Wall Street estimates of 49 cents per share on revenue of $22 billion. Microsft was up about 4% today.

Amazon reported a third-quarter loss and revenue that missed analysts’ expectations; and then salt on the wound, Amazon projected weaker-than-expected sales for the important holiday quarter. The company posted a loss of 95 cents per share, compared to a loss of 9 cents per share in the year-earlier period. Three months ago, analysts thought the company would lose 7 cents a share in the third quarter. Then, after Amazon ratcheted down expectations, the estimated loss swelled tenfold, to 74 cents; and today, they missed that by 21 cents. Revenue for the quarter came in at $20.58 billion, against the comparable year-ago figure of $17.09 billion. Amazon tanked in after-hours trading, down about 13%.

Even with Amazon likely to hit $100 billion a year in revenue in 2015, it is having a hard time making a profit. It is getting to be a familiar story. The last time Amazon made a profit in the third quarter was in 2011.

Sears is closing 77 Sears and Kmart stores and cutting 5,300 jobs. And that’s not even the worst news. Most of the store closures will happen before Christmas, which makes it look like Sears is just throwing in the towel. Even the stores that won’t close until after the holidays are already holding going out of business sales rather than gearing up for seasonal promotions. Sears Holdings was up 4.4% on the news today. Go figure.

American Airlines, earned a $942 million profit in the third quarter. The company said it was its biggest profit ever for a quarter, and it was an 87 percent increase over the amount that American and US Airways earned separately last year before their December 2013 merger. Doug Parker, the airline’s chief executive, predicted more records for fourth-quarter and full-year earnings.

United Continental posted net income of $924 million, up from $379 million a year earlier. Excluding one-time items, its adjusted profit was a record $1.1 billion. Southwest profit rose 27 percent to $329 million.

All three companies beat Wall Street expectations for earnings. The airlines increased ticket prices back in April, and since then fuel prices have dropped by about 20%, and that works out to millions in savings: United cut its fuel bill by $13 million. Southwest saved $64 million. And the airlines are likely to save even more on fuel costs in the fourth quarter.

But if you are thinking those fuel savings will be passed along to fliers in the form of lower fares, well, that’s just hilarious. Recent mergers have reduced competition and helped the airlines limit the number of flights, making it easier to increase fares. And the big airlines have just pushed through a fare increase on domestic routes.