Financial Review

Harbingers

Sinclair Noe — March 22, 2017

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DOW – 6 = 20,661
SPX + 4 = 2348
NAS + 27 = 5821
RUT – 0.95 = 1345
10 Y – .04 = 2.39%
OIL – .09 = 48.15
GOLD + 4.00 = 1249.20

London was shaken today by the first major terrorist attack since the 2005 subway bombings. Witnesses told of hearing multiple gunshots after a policeman was attacked outside Parliament. On Westminster Bridge, a car mowed down pedestrians. Two pedestrians and a police officer were killed, and at least 20 people injured, some very seriously.

A vehicle ran over pedestrians before crashing into a fence outside Parliament. A man wielding a knife then ran into the grounds and stabbed a police officer before being shot. Police believe the man, who died from his injuries, was the only attacker and are treating the attack as terrorism.

Global stocks were in retreat mode, but losses were relatively minor. Investors were taking some money out of equities and they’re putting their cash into government bonds.  European markets declined with many indexes down by about 1%. Asian markets ended the day with losses.

Japan’s Nikkei notched the biggest drop of 2.1%. The moves follow a sizable drop for US stocks yesterday. The Dow Industrials fell 1.1%, the S&P 500 dropped 1.2% and the Nasdaq was down 1.8%.

It was the worst day for stocks since October, but it was the first day in which the S&P 500 index traded in a 1 percent range since Dec. 14. In that time, the market did see one other one-day move of 1 percent or greater, when the S&P rose nearly 1.4 percent on March 1 — but since stocks opened sharply higher that day, the S&P did not manage a 1 percent intraday move.

Consequently, the index went 64 days without such a move, which is easily the longest-ever streak according to data that dates back to 1962. The second-place streak, of 34 days in 1995. In the past, after periods of calm, the market tends to continue moving in the direction of the trend – which is up, but calm is not the normal state for the market, so we can expect a period of increased volatility.

So, watch out for some big dips ahead.

That’s the historical tendency, however we also need to watch out for other markets – notably bonds, as we discussed yesterday; where we see a flattening yield curve, and it flattened even more today. A flattening curve means the economic outlook is dampening. When it grows steeper, like it did after the election, the economic outlook is brightening. But a flattening yield curve also influences the stock market negatively.

And if you are waiting for more volatility, you might not have to wait long. Healthcare legislation is schedule for a vote in the House of Representatives tomorrow. This is the first big piece of legislation for the Trump administration, and could serve as a harbinger.

After the health care legislation, Trump’s budget proposal will take front and center and he may face resistance from members of his own party for cuts to environmental programs. That’s due to an Obama administration practice that spread billions of dollars in contracts to Republican as well as Democratic congressional districts. Members of Congress typically resist efforts to cut spending that brings projects and jobs to their district.

A Bloomberg analysis of federal contract data shows that spending related to the environment reached 423 congressional districts in fiscal year 2016 and totaled $5.9 billion. Almost half that spending—47 percent—went to districts represented by Republicans.

Federal contract spending isn’t just spread across congressional districts. It’s also spread across contractors: Last year, 4,462 vendors got contracts categorized as related to the environment, climate, sustainability or similar fields.

Twenty-five publicly traded companies earned more than $10 million each from those contracts. Distributing federal largesse has been standard practice for the Department of Defense for many years, a lesson not lost on the Department of Energy.

President Trump’s second choice to lead the Labor Department is about to get a hearing. Alexander Acosta, a Florida law school dean, testified today. He follows Andrew Puzder, who withdrew his candidacy in February.

The National Association of Realtors says existing home sales declined 3.7% to a seasonally adjusted annual rate of 5.48 million units last month. The NAR says a persistent shortage of houses on the market is pushing up prices and sidelining potential buyers.

Housing inventory has dropped for 21 straight months on a year-on-year basis. With supply remaining tight, the median house price surged 7.7% from a year ago, to $228,400 in February. That marked the 60th consecutive month of year-on-year price gains.

The Mortgage Bankers Association reports mortgage application activity fell from a nearly four-month peak as borrowing costs on 30-year home loans held at their highest level almost three years. Mortgage apps fell 2.7% for the week ended March 18. Average interest rates on 30-year, fixed-rate conforming mortgages, the most widely held type of U.S. home loan, held for a second week at 4.46%, a level last seen in April 2014.

According to a new study from Spectrem Group, the number of millionaire households in America increased by 400,000 in 2016, reaching a new record of 10.8 million. Since the 2008 financial crisis, the number of millionaire households has grown every year, adding a total of 4 million millionaire households.

The number of multimillionaire households has also grown. There are now 1.4 million households worth $5 million or more and 156,000 households worth $25 million or more.

Nike reported earnings that beat estimates but total revenue was up just 5% in the last quarter. The company’s outlook wasn’t that great either. Nike said it expects sales growth to slow a bit this quarter. And future orders, a measure investors look at as a proxy for sales during the next few quarters, were down 4%. Nike is still growing rapidly in emerging markets as well as Asia. Nike was the worst performing stock in the Dow last year, falling nearly 20%.

FedEx said some of its largest retail customers shipped fewer packages during the holiday season than forecast, after the delivery giant had ramped up spending and staffing in anticipation of a crush of deliveries. The outcome hurt FedEx’s bottom line during the fiscal third quarter ended Feb 28. While revenue surged 18%, helped by higher rates and more packages shipped, overall margins fell because of a 30% rise in fuel costs and investments to keep up with e-commerce growth.

Fiat Chrysler is the latest automaker to be named in a growing French investigation into diesel emissions cheating. The Paris prosecutor has opened an investigation into potential aggravated fraud at Fiat Chrysler.

Fiat Chrysler acknowledged it was under investigation for “alleged consumer protection violations” but denied wrongdoing. French prosecutors were already investigating Renault and might open an investigation into PSA Group. This follows the $19 billion settlement between US regulators and Volkswagen.  Last week, German prosecutors raided VW headquarters as part of an ongoing investigation.

ING has confirmed a Dutch criminal investigation, but wouldn’t comment beyond the information presented in the bank’s annual report. The investigation relates to the “on-boarding of clients, money laundering, and corrupt practices,” per the 10-K filing, and can result in “significant” penalties.

Just days after finance chiefs of the world’s top 20 economies dropped their pledge for open trade, the European Central Bank has published a study claiming protectionist trade policies may increase, rather than reduce, a country’s trade deficit.

 Separately, Italy is calling for unambiguous support for an open global economy at a G7 finance ministers summit in May, saying they hope the upcoming G7 meeting yield a strong and clear message… against any temptation of protectionist closure.

T+ 3 is history. The SEC voted unanimously on rules to shorten the amount of time it takes for a securities trade to settle from three to two business days. Wall Street and consumer groups are largely supportive of the effort, as it reduces credit and market risk exposure.

Modern technology lets investors make trades in a matter of milliseconds. But since 1993, the SEC’s rules have required brokers to wait for three business days between the time an investor’s order is executed, to when the cash and ownership of the security are exchanged.

Dutch paints and coatings maker Akzo Nobel rejected a second takeover proposal from US rival PPG Industries, saying an improved $24.1 billion offer was still too low and too risky.

AT&T, Verizon, Enterprise Holdings, GSK and other major US advertisers are pulling hundreds of millions of dollars in business from Google and YouTube, following similar moves by advertisers in the UK. The problem is offensive and extremist content. For example, an ad on YouTube for the new Mercedes E-Class ran next to an ISIL video praising jihad that has been viewed more than 115,000 times.

Google pledged this week to keep offensive and extremist content away from ads, but the cleanup can’t happen fast enough. AT&T said that it is halting all ad spending on Google except for search ads. That means AT&T ads will not run on Google’s video service YouTube and on a couple million websites that take part in Google’s ad network.

AT&T emailed a statement saying: “We are deeply concerned that our ads may have appeared alongside YouTube content promoting terrorism and hate. Until Google can ensure this won’t happen again, we are removing our ads from Google’s non-search platforms.”

Financial Review

Never Ending Pi

Sinclair Noe — March 14, 2017

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

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DOW – 44 = 20,837
SPX – 8 = 2365
NAS – 18 = 5865
RUT – 7 = 1362
10Y – .02 = 2.59%
OIL – .45 – 47.95
GOLD – 5.10 1199.60

The Federal Reserve Federal Open Market Committee is meeting today and tomorrow to determine monetary policy. Fed policymakers have clearly indicated they will raise the overnight benchmark interest rate by 25 basis points to a range of 0.75 percent and 1.00 percent,  and may signal there could be even more than the three rate rises they have forecast for this year.

While the Fed meeting is the focus for markets this week, investors also have to assess the impact of central bank meetings in Britain and Japan, a gathering of G20 finance chiefs, President Trump’s first budget and an election in the Netherlands.

The dollar index rose 0.3%. Yields on benchmark 10-year German government bonds briefly hit 14-month highs above 0.5%, before reversing. Oil fell to 3-1/2-month lows after Saudi Arabia announced it has reversed about one-third of its production cuts and the Organization of the Petroleum Exporting Countries (OPEC) reported oil stocks were still rising despite agreed output cuts.

US producer prices increased 0.3% in February after rising 0.6% in January; and the year-on-year gain was the largest in nearly five years. In the 12 months through February, the PPI jumped 2.2 percent, the biggest advance since March 2012. The core PPI, a key gauge of underlying producer price pressures that excludes food, energy and trade services increased 0.3 percent in February, the biggest gain since April 2016. Core PPI increased 1.8 percent in the 12 months through February.

Small-business owner optimism dipped in February but stayed near long-time highs. The sentiment gauge from the National Federation of Independent Business fell 0.6 points to 105.3. The stronger economy increasingly seems to come at a price for small-business owners. The NFIB wrote in its release: “This is one of the tightest labor markets in the 43-year history of the NFIB survey.”

FDIC Vice Chairman Thomas Hoenig rolled out what he called “a comprehensive plan for reforming bank oversight, calling on the biggest lenders to further separate investment banking activities and accept stricter capital requirements in exchange for fewer regulations. It would require large, complex, universal banks to separately capitalize and manage their traditional commercial banking activities and their nontraditional activities, such as investment banking.  In other words, a variation on the Glass-Steagall Act.

Wall Street seems largely unfazed by political turmoil and uncertainty. The major indices are still very close to record highs, and the VIX, the volatility index, is near long-time lows; closing today at 12.23. There are a couple of possible explanations: the global economy has been in recovery mode – a slow, sluggish and boring uptrend.

Per the World Bank, annual global growth since 2011 has hovered in a narrow 2.3 to 3 percent range. The International Monetary Fund’s measure pegs it in an even tighter 3.1 to 3.5 percent range since 2012. And if both institutions’ estimates are met, 2017 will be yet another year of growth being stuck within these narrow parameters. Global company earnings volatility has been low throughout the post-crisis recovery – consistently 5 percent or lower over the past five years.

In the past 20 years, there have been only two significant bouts of earnings volatility of 15 percent and higher, or global recessions. They coincided with the market crashes of 2000-02 and 2007-09. The other reason is that in a low interest rate environment investors don’t have much alternative. You ride out the risk. So, we have strong data but uncertain politics, and they seem to balance out, at least for now.

Luxury fashion retailer Neiman Marcus Group said it was exploring strategic alternatives, including a sale of the company. The move comes about two months after the company pulled its IPO. Neiman Marcus also reported a 6.1 percent drop in second-quarter revenue as issues in its new merchandising and distribution system forced the company to take additional markdowns. Hudson’s Bay has emerged as the most prominent suitor.

MoneyGram International has received a buyout bid from Euronet Worldwide that is 15% higher than MoneyGram’s current buyout deal with Ant Financial Services Group. Euronet’s bid of $15.20 a share in cash will value the company at over $1 billion. The Ant Financial bid MoneyGram agreed to in January was $13.25 a share. MoneyGram’s stock has doubled over the past 12 months through Monday.

Ruby Tuesday it was putting itself up for sale, as the casual dining industry’s slump shows no signs of ebbing. The Tennessee-based company said it’s considering “strategic alternatives,” including a potential sale or merger. The move was paired with an announcement that the company’s sales at restaurants open at least a year tumbled about 4% in the period ended Feb. 28. The chain’s quarterly revenue also fell nearly 17%, compared to a year earlier, to $225.7 million.

Networking software company Citrix Systems has been exploring strategic alternatives including a potential sale. Citrix, which gave activist hedge fund Elliott Management a board seat in 2015, has looked at selling itself in the past, before embarking on spin-offs and sales of smaller business units. It now has a market capitalization of $13.2 billion.

You might not be able to get there from here. A powerful nor’easter is hitting the mid-Atlantic and the Northeast with heavy snow, sleet and rain, prompting more than 6,000 flight cancellations today and more than 2,500 delayed flights, resulting in bad news for the airline stocks. The NYSE Arca Airline index lost about 2% today, dropping to a 4-month low. Plus, the storm resulted in school closures, power outages, and warnings from officials to stay off the roads – and that is bad news for trucking stocks

Brexit is coming. UK Prime Minister Theresa May has been granted the power to trigger Article 50; however, she’s not expected to begin the formal process of the UK’s exit from the European Union until the end of the month.

The New York attorney general accused Exxon Mobil of withholding documents from his office as it investigates whether the energy company misrepresented its understanding of climate change to investors and the public.

Lawyers for Attorney General Eric Schneiderman’s office said in court documents that Exxon hadn’t disclosed that Rex Tillerson, the former chairman and chief executive, used an alias email address to discuss risk-management issues related to climate change. Tillerson, now the U.S. secretary of state, used the pseudonym “Wayne Tracker” from at least 2008 to 2015.

The Trump administration is weighing even deeper cuts to the Environmental Protection Agency than previous versions of their budget outline suggested. In its first budget draft last month, the White House proposed a 25% cut to the EPA budget. But wait there’s more; officials are now considering cutting the agency’s $8.1 billion budget even further.

The ax looks set to fall hardest on EPA’s climate change programs, with the staff there expected to leave the agency. The EPA budget proposal is likely to run into opposition in Congress, and it is already running into opposition from mayors.

Los Angeles Mayor Eric Garcetti is coordinating the effort with dozens of other cities to purchase up to $10 billion worth of electric vehicles. Thirty cities including New York and Chicago jointly asked automakers for the cost and feasibility of providing 114,000 electric vehicles, including police cruisers, street sweepers and trash haulers. That would be comparable to about 72% of total US plug-in vehicle sales last year.

The auto makers have been fighting CAFÉ rules which set fuel efficiency standards and complaining that there is not enough demand to justify developing more efficient electric vehicles. The mayors say they would like to have more electric vehicles on the streets, including some that haven’t been developed yet, such as plug-in fire trucks and street sweepers. While the initiative would probably be spread out over several years, it would provide electric vehicle manufacturers reliable demand.

Alphabet’s Executive Chairman Eric Schmidt announced today via Twitter that “John Goodenough, inventor of the lithium battery, has developed the first all-solid-state battery cells.” And that is a pretty big deal. Goodenough’s batteries reportedly have three times as much energy density as today’s lithium-ion batteries. They store and transmit energy at temperatures lower than traditional lithium-ion packs and can be made using globally abundant supplies of sodium.

The research could result in “a safe, low-cost all-solid-state cell with a huge capacity giving a large energy density and a long cycle life suitable for powering an all-electric road vehicle or for storing electric power from wind or solar energy.” Goodenough and his team of researchers at the University of Texas have applied for patents on the solid-state battery technology and it may be a while till the batteries move to production.

Goodenough is a National Medal of Science laureate, and by the way, he is 94 years old.

Today, March 14, or 3-14, is Pi Day. Pi is the ratio of the circumference of a circle to its diameter and it is represented by the irrational number that never ends. Math enthusiasts know all about it, and the rest of the population is probably hoping for cherry pie, or maybe pizza.

Financial Review

Inside the Stagecoach

Sinclair Noe — September 13, 2016

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

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DOW – 258 = 18,066
SPX – 32 = 2127
NAS – 56 = 5155
10 Y + .06 = 1.73%
OIL – 1.39 = 44.90
GOLD – 9.00 = 1319.40

Stocks opened in negative territory and then slipped further. Any rallies were half-hearted at best. Two months of tranquility was pierced Friday when the S&P 500 tumbled in its worst rout since the Brexit vote.

Things aren’t any better in the $13.6 trillion Treasury market. Ten-year notes were stuck in their tightest monthly range in a decade up until September.

Stocks exited the tightest trading range in history last week when European Central Bank President Mario Draghi downplayed the need for more measures to boost growth and Boston Fed President Eric Rosengren warned against waiting too long to raise interest rates. Fed rate-hike expectations are falling.

Dovish commentary from Federal Reserve Governor Lael Brainard has pushed back expectations for a September interest-rate hike. In a note out late Monday, economists at Goldman Sachs cut their forecast for a rate increase at the Sept. 20-21 meeting to a probability of 25% from 40% previously. It also lifted the odds for a December tightening to 40% from 30%. This is the third time this month the Goldman economists have changed their stance on the September meeting.

But don’t expect the volatility to just vanish. Abrupt breaks in calm have not been easily resolved in the past. In the five prior instances when turbulence spiked as it did Friday, the S&P 500’s daily swings averaged 1.5 percent in the next 20 days. That’s 2.5 times the move in the previous 20 days.

Oil futures dropped after the International Energy Agency cut its crude forecast, warning that supply will continue to outpace demand well into 2017. Global oil consumption growth sagged to a two-year low in the third quarter as demand faltered in China and India, while record output from OPEC’s Gulf members is compounding the glut.

As recently as last month, the IEA had expected the market to return to equilibrium this year. The agency downgraded its global oil demand predictions by about 100,000 barrels a day for this year to growth of 1.3 million barrels a day and cut its forecast for 2017 by 200,000 barrels to growth of 1.2 million a day. And as demand weakens, “Global inventories will continue to grow: stockpiles in July smashed through the 3.1-billion-barrel wall.”

With its first long-range electric car, General Motors has released figures that show it’s focused on beating Tesla at its own game. The new Bolt will be rated at 238 miles on a single charge when it comes to showrooms later this year, giving it a longer range than the Model 3, which is expected to have a range of least 215 miles and isn’t expected to go on sale until 2017. The Bolt is also likely to be priced at about $37,500, close to the same price point as Tesla’s first mass-market car.

The record-breaking installations of solar panels in the U.S. continues with 2 gigawatts installed in just the second quarter of this year, according to new data from GTM Research and the Solar Energy Industries Association (SEIA).

The solar industry installed 2,051 megawatts between April and June, marking the eleventh consecutive quarter in which the U.S. saw more than a gigawatt of solar capacity added to the grid. The volume of installations also marks 43 percent growth from the same quarter in 2015.

Nevada regulators are set to decide this week on a settlement between Berkshire Hathaway’s utility, NV Energy, SolarCity and the state’s consumer advocate to roll back rate increases for customers who installed rooftop solar systems prior to this year.

The three-member Nevada Public Utilities Commission has scheduled a September 16 vote on a proposal to shield more than 32,000 rooftop solar customers from increases that took effect in January.

Last year, NV Energy proposed increased charges and reduced payments to rooftop solar customers, saying the existing model forced non-solar customers to subsidize those who did use the green power. SolarCity, Sunrun and other solar installers stopped taking customers in the state soon after a December decision by the commission to raise rates on all solar homes.

They sued after regulators denied an appeal of the ruling. The proposal would put existing solar homes back onto the rates they paid before the increases started. NV Energy asked the PUC to grandfather those rates for as many as 20 years.

Phoenix-based Freeport-McMoRan will sell its deep-water Gulf of Mexico assets to Anadarko Petroleum for $2 billion. The deal is expected to close before year’s end. Freeport’s sale all-but ends a disastrous diversification from copper and gold mining into energy drilling, a move that received widespread investor criticism and is at the heart of the company’s 66% share price collapse over the past three years and the suspension of its quarterly dividend.

Fewer Americans lived in poverty in 2015 and median incomes charted their first increase since the Great Recession, according to data released today by the Census Department. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5%, and the number of people in poverty fell by 3.5 million.

The threshold for a family of two adults and two children to be considered living in poverty was $24,036. Real median household income rose 5.2% during the year, the first annual increase in median household incomes since 2007. Earnings also increased: 1.5% for full-time year-round male workers, and 2.7% for female workers. That was the first significant annual increase in median earnings for either gender since 2009.

A measure of small-business sentiment declined in August as owners became more hesitant, with election worries at the forefront. The National Federation of Independent Business small-business optimism index fell 0.2 points to 94.4. The outlook for business conditions in the next six months had the most dramatic change, dropping seven points.

Boeing reports Chinese airlines are likely to purchase 6,810 planes worth just over $1 trillion in the next 20 years as they expand fleets to cater to growth in tourism.  Boeing will also unveil its T-X trainer plane today, designed jointly with Sweden’s Saab AB. The company is counting on the model to train generations of U.S. fighter pilots, and keep alive its St. Louis manufacturing base.

A second Hanjin vessel will dock and unload at the Port of Los Angeles after more than a week stranded off the Southern California coast. The move raised hopes that gridlock could be easing after a U.S. bankruptcy judge issued an order Friday allowing the financially ailing Hanjin Shipping Co. provisional protection from creditors so vessels could dock and unload products.

Meanwhile, the South Korean government is sticking to its hard-line stance on Hanjin Shipping. Government money will not be used to bail out the shipping company, although aid may be extended to small-to-medium sized businesses jolted by the process.

Starting in 2011, Wells Fargo employees opened 2 million bank and credit card accounts in customers’ names without their knowledge. The goal was to generate fees for the company and hit aggressive sales targets for employees.

After an investigation, the bank was accused of improperly opening accounts by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles prosecutor. Last week we told you the bank and regulators had settled for $185 million. But wait, there’s more.

The Senate Banking Committee has scheduled a hearing for September 20^th to investigate the matter. Moody’s, a credit rating agency, issued a warning that the settlement may have a negative effect on Wells’ debt because of image concerns and called the incident “highly disturbing.” Today, Treasury Secretary Jack Lew said Wells Fargo had participated in “bad behavior,” and that the accusations showed bank regulation should not be rolled back.

Wells CEO John Stumpf, in an interview with the Wall Street Journal, said that there “was no incentive to do bad things” at Wells and laid the blame on the employees rather than the culture of the firm.

CFO John Shrewsberry said the fraudulent accounts were not opened in order to generate revenue for the bank. Instead, a few employees opened them to boost their performance. The bank claims that 5,300 lower level employees were fired in relation to the cross-selling shenanigans, however that number is now in question.

That figure covers terminations over the period that the regulators investigated, from 2011 through 2015. The regulators did not start investigating until 2014.

Most of the firings were probably not related to the scandal. Or if they were firing employees for opening phony accounts, it means upper management was aware of fraudulent activity and failed to report it.

But wait, there’s more. Wells Fargo executive Carrie Tolstedt tendered her resignation in June and is scheduled to leave the bank at the end of the year. Wells Fargo says her retirement is not a result of the findings of the investigation.

She is in line to receive roughly $125 million in stock and other compensation from the bank; a golden parachute. Tolstedt was in charge of community banking during the entire time the “sandbagging” operation took place.

Her success in cross selling was repeatedly cited in annual proxies as the reason for her $9 million a year in compensation, plus the retirement package. When she resigned, John Stumpf said Tolstedt had been one of the bank’s most important leaders and “a standard-bearer of our culture and a champion for our customers.”

I’m not sure what kind of culture Stumpf champions, but it looks like modern day bandits are more likely to be inside the stagecoach than outside it.

Financial Review

We Got Your Volatility Right Here

Sinclair Noe — September 9, 2016

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

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DOW – 394 = 18,085
SPX – 53 = 2127
NAS – 133 = 5125
10 Y + .05 = 1.67%
OIL – 1.95 = 46.31
GOLD – 10.40 = 1328.80

Over the 41 days, through Thursday, the S&P 500’s highest and lowest closes have been just 1.75 percent apart. It’s the first time that has ever happened in the history of S&P data, which goes back to 1928.

Heading into today’s session the S&P 500 had gone more than 50 trading days without a drop of 1% or more, only the 48th time that has happened since 1950. The last time the Dow Industrials moved over 1% was July 8^th, more than 2 months. We got your volatility right here.

Federal Reserve Bank of Boston President Eric Rosengren moved more firmly into the camp of hawkish policy makers, warning that waiting too long to raise interest rates threatened to overheat the US economy and could risk financial stability. Delivering a speech this morning, Rosengren said, “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Rosengren’s stance on raising rates are significant because he is a voting member of the FOMC, he has been a longtime dove and someone that is calling for a rate hike even after the recent string of weak economic data. After Rosengren’s comments, futures traded lower, and the major indices opened in negative territory.

Later in the morning, Federal Reserve Bank of Dallas President Robert Kaplan said it isn’t urgent for the central bank to raise interest rates and it can afford to be “patient and deliberate in its actions.” Also Fed Governor Daniel Tarullo made some dovish comments during an interview on CNBC (more on Tarullo in a bit).

So, the Fed is not unanimous on rate hikes, but we’ll get one more piece of the puzzle on Monday, when Fed Governor Lael Brainard, will be delivering a previously unannounced speech in Chicago; the final day Fed officials can speak before the blackout period ahead of the Fed’s September 21 policy statement. Brainard has been one of the most dovish policymakers in the Fed. If she comes out in favor of a rate hike, it would be a clear signal that there will be a very strong push at the September FOMC meeting.

Jeff Gundlach, the widely followed bond investor who runs DoubleLine Funds held a cautious webcast last night. Gundlach said US corporate bonds are highly overvalued and added that many folks have come around to believe that interest rates can never rise, particularly as consensus around the ineffectiveness of negative interest rates solidifies. Gundlach went on to say, “In the investment business, when you hear the word ‘never,’ that means it’s about to happen.”

Global equities were also lower after the European Central Bank held interest rates at record lows and refrained from adding new stimulus. While President Mario Draghi said the ECB was looking at options to continue its money-printing program, investors were looking for more immediate action, including an extension or expansion of the current plan, or at least clearer hints of future actions.

Meanwhile, the yield on the 10-year German bond, known as the bund, turned positive Friday for the first time since June 23, the day of the U.K.’s vote to leave the European Union. A sharp global bond selloff that also pushed Treasury yields to their post-Brexit highs.

Hours after multiple global agencies detected a magnitude 5.3 earthquake near North Korea’s nuclear test site, the government in Pyongyang said it has hit the button on its fifth and potentially most powerful nuclear test this morning, claiming to have successfully detonated a nuclear warhead that could be mounted on ballistic rockets.

This is the North’s second nuke test in eight months and its fifth since 2006. The announcement drew immediate condemnation from the United States, South Korea, China and Japan. The test violates United Nations resolutions. And the Security Council called an emergency meeting.

Korean Air Lines, the biggest shareholder in Hanjin Shipping, has delayed a decision on a funding plan for the troubled shipping company for a second time, adding to the uncertainty of around $14 billion of cargo stranded at sea. With Hanjin’s future in doubt, carriers have announced they will hike container freight rates by as much as 50% beginning next month as retailers scramble to secure shipping ahead of the peak year-end holiday season.

The FAA, is asking very politely, in a not-at-all-freaked-out way, asking passengers toting the new Samsung Galaxy Note 7 around to keep them switched off on airplanes. Oh, and don’t charge them either. And do not store them in your checked baggage. Seriously. Do not do it.

What’s the problem you ask? The new Samsung smartphone seems to have a slight technical problem where it literally explodes. And then it catches fire. The problem appears to be linked to charging the phone. Passengers are still able to carry the phone on flights. It’s unclear why an exploding cellphone would be a problem in the cargo hold but not in the overhead compartment, but we can’t expect airplane mode to bail us out of everything. Samsung has issued a recall of 2.5 million of the phones, so the best move is to just get the phone replaced.

U.S. wholesale businesses left their inventories unchanged as their sales fell in July. The Commerce Department says wholesalers left their stockpiles alone in July after increasing them 0.3 percent in June. Their sales fell 0.4 percent in July, reversing a 1.7 percent increase in June. It was the biggest sales drop since January.

The July numbers show stress in the energy industry. Weak inventory restocking has been a drag on U.S. economic growth. From April through June, businesses overall reduced inventories at the fastest pace since the fall of 2011. That’s one reason second-quarter economic growth came in at a lackluster 1.1 percent.

Federal regulators say employees at Wells Fargo created millions of fake bank accounts and credit card numbers over the past five years in an illegal bid to boost their sales figures. The bank has been fined $185 million for the practices, including a record $100 million by the Consumer Financial Protection Bureau. Wells Fargo has also fired at least 5,300 employees who were involved in the scam.

Customers didn’t know what happened until they received statements, often charging unauthorized fees on unwanted and unknown credit cards. And when those customers attempted to seek legal redress? Wells Fargo fought back and judges dismissed the cases. Unbelievably, the mandatory arbitration agreements customers signed when they opened their original accounts also covered the fraudulent activity.

Now, it can be tough to get one or two people do something, so you might wonder what kind of elaborate criminal scheme was concocted to get more than 5,000 Wells Fargo employees to fabricate millions of fake accounts. It appears that Wells Fargo paid employees to open accounts – bonuses; they also set quotas; so, open accounts or get fired. It was part of a plan to cross-sell, like bundling for bank accounts; salespeople are urged to encourage existing bank customers to use multiple bank products.

This was a large scale effort and it was a systemic problem.  It is virtually impossible for senior executives not to have known what was going on. And Wells Fargo even promoted the aggressive sales scheme in their annual reports. In other words, there is no way to defend the lack of punishment of executives in a fraud of this scale that extended over five years. Either they were in on it, or somehow more than 5,000 lower level employees cooked this up and were able to hide it from the top brass.

Under Sarbanes Oxley, the CEO and CFO are required to certify the adequacy of financial and operational controls. There is no way Wells Fargo’s can have it both ways. Either they were in on the scam or they were criminally negligent.

You may recall a couple of weeks ago, Wells Fargo was fined $4 million for illegally misleading student loan borrowers and resulted in some paying unnecessary fees; charging on-time payers with late fees, failing to inform borrowers of steps they could take to minimize fees and leaving credit report errors uncorrected. A few months ago, Wells Fargo was hit with a $70 million penalty by The Office of the Comptroller of the Currency as the bank failed to correct the shortcomings identified in the 2011 consent orders related to mortgage practices in a “timely fashion.”

Four million there, $185 million here – it’s just small change for Wells Fargo, and the truth is that Wells is probably not the worst bank when it comes to cheating customers or rigging exchanges – they are just the example of the day, the “bankster du jour”.

Federal Reserve Governor Daniel Tarullo said this morning that the latest scandal involving Wells Fargo shows that bank behavior hasn’t “changed enough” since the financial crisis. Tarullo said too many banks still only respond to particular ethical lapses instead of putting in place comprehensive compliance programs. In an interview on CNBC, the Fed governor said he wanted regulators to hold individuals at banks responsible for inappropriate behavior rather than simply have firms pay fines. Even criminal prosecution of bank officers should be pursued “in order to make the point that there is individual culpability.”

Just a reminder for Governor Tarullo the Federal Reserve does more than print money; the Fed’s Division of Banking Supervision and Regulation is responsible for the oversight of banks. Says so right on their website.

FINANCIAL REVIEW

The Only Winner is Gravity

Sinclair Noe — October 9, 2014

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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

Monday, June 23, 2014 - Calm Before the Storm

Financial Review with Sinclair Noe

DOW – 9 = 16,937
SPX – 0.26 = 1962
NAS + 0.64 = 4368
10 YR YLD un = 2.62%
OIL  - .13 = 106.04
GOLD + 3.60 = 1319.30
SILV + .02 = 21.00

The economic data today from the National Association of Realtors shows existing home sales picked up in May. Total sales rose 4.9% to 4.89 million units from an upwardly revised 4.66 million in April. While that marks a month to month increase, sales are down from the 5.15 million level of May one year ago.  Total housing inventory increased 2.2% in May. Unsold inventory is 6% higher than a year ago.

Meanwhile, Markit's US Flash manufacturing PMI report for June, increased to 57.5 from 56.4 in May.

The stock market has drifted slightly higher over the past couple of months. Yes we hit record highs last week, but the movement has been very slow, volume has been light, and volatility is almost non-existent. Volume is down about 50% since 2008. The VIX, or volatility index, sometimes known as the fear index, is down below 12, which means that the only people in the options market are all maxxed out on Ambien, or Valium. The S&P 500 hasn’t had a daily move of 1% in more than 2 months. Russia invades Ukraine – wake me when it’s over. Radical militants threaten to tear apart Iraq – we’ve seen this story before. The US economy is weak right now but growth is right around the corner – rinse, lather, repeat. The US plays Portugal in the World Cup and it’s a tie, of course.

The Federal Reserve looked at monetary policy and cranked up the old Xerox to publish their statement. Maybe this is the result of all that Federal Reserve fiddling; maybe they have created the boring stock market, which lulls everyone into a false sense of complacency. Of course, that’s not how markets work, no matter how much central bank finesse is applied. Markets are risky, always have been, always will be. I think it’s safe to say this is the calm before the storm, because there is always a storm in the markets.

There was some merger activity today. General Electric struck a deal to acquire France-based Alstom's power business for $16.9 billion after a lengthy pursuit. There was another utility deal, Wisconsin Energy announced a deal to acquire Integrys Energy for $9.1 billion. Oracle also announced a deal to acquire MICROS Systems for $4.6 billion.

The price of oil has been one of the few markets to show movement, which is not good news for drivers. Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given the recent jump in oil prices, gasoline prices are poised to increase in coming weeks. Higher prices at the pump serve as a tax on consumers, whose purchasing power is still questionable. It’s estimated that an increase of $10 a barrel subtracts 0.4% from real GDP growth. Of course, for that to apply, the price increase has to stick.

The Supreme Court is in session and today they ruled on limiting the Environmental Protection Agency’s power to regulate facilities that emit carbon dioxide. The decision would reduce the number of carbon-emitting facilities the EPA can regulate, but it is a limited ruling, and even Justice Scalia said: "It bears mention that EPA is getting almost everything it wanted in this case."

Meanwhile a statement from the EPA claims victory, "The Supreme Court’s decision is a win for our efforts to reduce carbon pollution because it allows EPA, states and other permitting authorities to continue to require carbon pollution limits in permits for the largest pollution sources." Industry groups, such as the American Petroleum Institute, also claimed victory. The group said in a statement that the decision was a "stark reminder that the EPA's power is not unlimited."

The decision won't have a huge impact on US climate policy, as the decision only modestly changed the number of large facilities subject to certain permitting requirements. It also won't affect the Obama administration’s proposal to reduce emissions from power plants, which is a separate program.

When the EPA classifies something (like carbon dioxide) as a harmful pollutant, it triggers a number of legal requirements under the Clean Air Act. One of them, known as a "prevention of significant deterioration" (PSD) rule, requires factories, power plants, and other large facilities to get the EPA's approval before they make changes that would lead to higher pollution. These facilities also must use the "best available control technology" to reduce the effects of pollution they emit. Another provision requires any facility that is a "major source" of pollution to get a permit from the EPA.

Under the Clean Air Act, facilities become subject to these regulations if they emit more than 250 tons (or in some cases as little as 100 tons) of pollution per year. Traditional pollutants such as sulfur dioxide or lead can be harmful even if they are only emitted in trace amounts, so a relatively low threshold makes sense. Only large factories and power plants emit that much of these conventional pollutants.

But carbon dioxide is different. Factories produce vastly more carbon dioxide than other pollutants regulated by the EPA. Under existing rules, about 15,000 facilities are required to get permits under the Clean Air Act based on their emissions of non-carbon pollutants. If the EPA had used the same 250-ton threshold for carbon dioxide emissions, 6.1 million facilities would suddenly have needed permits. The agency estimated it would cost $21 billion per year just to process all that paperwork.

So the agency effectively re-wrote the law, exempting facilities that emitted less than 100,000 tons of carbon dioxide from getting a permit. Several states and business groups challenged this decision, arguing that the EPA had no authority to unilaterally re-write the law.

Almost everyone agrees that a literal reading of the Clean Air Act would lead to madness. The EPA has warned that "decade-long delays in issuing permits would become common, causing construction projects to grind to a halt nationwide." The Supreme Court didn't want that to happen.

But a majority of the court, led by Justice Scalia, also didn't like the EPA's approach. The court said that if Congress set a threshold of 250 tons, the EPA can't just unilaterally change it to 100,000 tons. Instead, the court's majority held that the term "air pollutant" can have different meanings in different parts of the Clean Air Act. While the "Act-wide definition" of air pollutant includes carbon dioxide, Scalia wrote, "EPA has routinely given it a narrower, context-appropriate meaning" in certain parts of the Clean Air Act. Scalia used the same trick to avoid subjecting millions of facilities to burdensome permitting requirements. He held that the definition of "air pollutant" didn't include carbon dioxide in sections of the Clean Air Act where including it would lead to a vast expansion in regulation.

The court's four liberals, led by Justice Stephen Breyer, preferred a different approach. Rather than selectively interpreting "any air pollutant" to exclude carbon dioxide, Breyer would instead have interpreted another phrase in the same section of the law, "any source" to exclude power plants that produce only modest amounts of carbon dioxide.

Two of the court's conservatives, Samuel Alito and Clarence Thomas, wrote a separate opinion arguing that the Supreme Court had been wrong to push the EPA into regulating carbon dioxide in the first place in 2007.

While the EPA can't impose regulations on new power plants based on their carbon dioxide emissions, the court ruled that the courts can regulate the carbon dioxide emissions of facilities that are already subject to regulations based on their emissions of conventional pollutants. So the EPA will still do what the EPA does; it’s estimated that 83% of greenhouse gas emissions that could potentially be regulated under the Environmental Protection Agency's interpretation of the law would still be covered as a result of the ruling, compared with the 86% of emissions that the EPA says it wants to regulate.

What today’s ruling really shows is that Congress has been out of touch and dysfunctional in dealing with pollution and climate change; rather than deal with issues, they stick their heads in the sand and hope the problem goes away, but it doesn’t; it simply shifts to another part of government that may or may not manage to resolve the problem, but in either case, is not held accountable to the voters; and then finally, if the problem persists, it goes to the courts. It’s a bad way to make and enforce laws.

A couple of other cases today: in Loughrin v. US; the court declined to reduce the scope of a federal criminal law against bank fraud, ruling that prosecutors do not need to prove that defendants intended to defraud a bank. The decision came in an appeal brought by Kevin Loughrin, who was convicted of six counts of bank fraud for stealing checks that he then altered so he could buy merchandise at Target stores.

Loughrin told police he meant to buy the items using the checks, then return the items for cash refunds. He was charged with using altered checks totaling $1,184.  Loughrin appealed his conviction. He argued that the bank fraud statute required prosecutors to prove that he intended to defraud the banks on which the checks were drawn. He said his intent was only to deceive Target. In other words, this was run of the mill fraud, and the use of a check was incidental. Loughrin did not appeal his related convictions for identity theft and possession of stolen mail. Between 2006 and 2010, the government sought to prosecute nearly 3,000 cases using the statute. Meanwhile, no major bankers have gone to jail for the crimes associated with the financial crisis; I’m just saying.

One more decision today: New Jersey wanted to institute legalized gambling on football, passing a law that the NFL and other sports leagues quickly fought in court.  The NFL won (as it often seems to do in court) at the federal appellate level, forcing New Jersey to take the case to the Supreme Court. The Supremes declined to review the case, so if you are in New Jersey, or any other state except Nevada, you’ll have to continue to call your bookie, or you can play fantasy football in a league set up through the NFL’s website.