Place Your Bets
DOW + 113 = 17,904
SPX + 11 = 2096
NAS + 25 = 5055
10 YR YLD – .04 = 2.32%
OIL + .50 = 60.02
GOLD – 4.70 = 1182.50
SILV – .06 = 16.11
The Federal Reserve Federal Open Market Committee is meeting to determine monetary policy. Tomorrow they will issue a statement and Fed Chair Janet Yellen will hold a press conference. Nobody expects the Fed to change policy tomorrow but they will probably signal that they are looking to raise interest rates at the FOMC’s September meeting, with a few qualifiers: if the labor market continues to improve, if mild inflation does not turn into deflation, if global markets don’t melt down, if the dollar remains well behaved. And then, over the next few weeks, the policymakers will talk about how the rate hike will be small and measured.
Of course we have to wait to hear from the Fed but the markets have placed their bets. Global investors have been moving out of equities and into cash. Cash levels rise to 4.9 percent of portfolios, up from 4.5 percent in May; the proportion of investors’ overweight equities falls to net 38 percent from 47 percent. The proportion of investors expecting to underweight global emerging markets surges to a net 21 percent from net 6 percent in May. The U.S. dollar is the most crowded trade as Fed tightening looms; 72 percent predict the euro will weaken vs. the dollar in coming year.
Central banks now own an incredible $22 trillion in assets and they have created $6 trillion of negative yielding bonds this year. Some 45% of government bonds in the world currently yield less than 1%. And 83% of global stock markets are currently supported by zero interest rate policies. If that doesn’t push investors to risk assets, nothing will. And so don’t expect the Fed to just take away the punchbowl without repercussions.
Financial markets remained under pressure today as Greece teetered on the brink of default with a debt deal nowhere in sight. Greek Finance Minister Yanis Varoufakis told Bild newspaper Athens doesn’t have plans to present new proposals at the Eurogroup meeting on Thursday, saying it is up to creditors to make the next move. Greek Prime Minister Alexis Tsipras accused the International Monetary Fund of “criminal” responsibility for his country’s predicament. Tsipras’s rhetoric further diminishes the chances that the Greek government will be able to bridge the divide with its creditors in the IMF, the ECB and the European Commission any time soon.
New reports, mainly out of Germany, that European governments are ready to push for capital controls in Greece if there’s no deal this week. That would mean a severe lockdown on flows of cash similar to the ones brought in for Cyprus in 2013; strict limits on the amount that could be withdrawn from banks, taken abroad physically, or passed between international accounts. The move would slam the brakes on outflows of money streaming out of Greek banks. There’s no institutional procedure for the rest of Europe locking down an individual member state. Greece would have to pass its own law agreeing to the capital controls, and only if there is a run on Greek banks, which has basically been underway for quite some time; the ECB has been supplying emergency liquidity assistance, or emergency cash; so the way to force capital controls is to remove the emergency assistance; the Greek banks run out of cash and the economy comes to a screeching halt, or at least starts printing their own drachma.
Housing starts fell in May. Groundbreaking dropped 11.1 percent to a seasonally adjusted annual pace of 1.04 million units. That partially reversed April’s large gain. April starts were revised up to a 1.17 million-unit rate, the highest since November 2007. Groundbreaking for single-family homes, which account for the largest share of the market, fell 5.4 percent to a 680,000 unit pace. Starts for the volatile multifamily segment tumbled 20.2 percent to a 356,000 unit rate. Meanwhile, permits for future home construction increased 11.8 percent to a 1.28 million-unit rate, the highest since August 2007. Permits have been above a 1 million-unit pace since July. Single-family building permits increased 2.6 percent to their highest level since December. Multi-family building permits soared 24.9 percent. Before we start thinking all is well, the residential home industry is about half of the pre-2005 peak.
U.S. states plan to slow spending growth in fiscal 2016, taking a cautious approach to forecasting and budgeting in light of only modest increases in revenue. According to a survey by the National Association of State Budget Officers, general fund spending will rise by 3.1 percent for the fiscal year beginning July 1, below the estimated 4.6 percent for the current year. Growth continues to be a “modest slog up the hill,” compared with what the association would expect to see in an economic recovery. Revenue has grown but not as fast as some costs, particularly for pensions, healthcare, and education. A backlog of much-needed infrastructure projects will also pressure budgets longer term. Across the country, taxpayers could see an aggregate net increase of $3 billion in taxes and fees, with governors in 16 states mostly proposing hikes in general sales and cigarette taxes. Twelve states proposed cutting personal income taxes.
The Congressional Budget Office says U.S. government debt held by the public is expected to rise to 107 percent of the economy in 2040 from 74 percent this year, citing an aging population and rising health-care costs. The non-partisan agency kept its forecast for this fiscal year’s deficit at 2.7 percent of GDP. The CBO says stronger economic growth and constraints on federal spending will keep the shortfalls close to their current percentage of GDP through 2019.
This morning, the US Food and Drug Administration announced a new policy on trans fat, essentially banning it from processed foods. Under the new rule, partially hydrogenated oils (PHOs), the biggest source of trans fat, are no longer “Generally Recognized as Safe” (GRAS), and cannot be added to foods after June 18, 2018, without specific approval from the FDA. In use since the 1950s, PHOs are often added to processed foods to extend their shelf life. They are frequently found in products like frosting, microwave popcorn, and coffee creamers. However, what is good for extending shelf life is not necessarily good for extending human life. The FDA said it expects the action to result in reductions coronary heart disease and fatal heart attacks.
Since 2006, the FDA has required food manufacturers to disclose the amount of trans fat on the Nutrition Facts label of a product—but only if the product had 1/2 gram or more of trans fat per serving. A product with up to 1/2 gram of trans fat per serving could still declare “0g of trans fat” on its label, leaving consumers in the dark about PHOs unless they read the ingredients list. Other sources of trans fat, such as those that occur naturally in some meat and dairy products, as well other processed trans fat that contain fatty acids that are chemically and structurally different than those in PHOs, do not fall under the purview of the new rule.
Merger talk in the health-insurance industry is heating up. UnitedHealth has reportedly approached Aetna about a takeover deal that would likely be valued at more than $40 billion, after Anthem approached Cigna with a $45 billion buyout offer that was rebuffed. Meanwhile, Aetna and others are considering buying Humana, which is looking at strategic alternatives including a sale.
Gap is closing stores and laying off workers. The retailer announced plans to close 140 stores and lay off 250 corporate workers during this fiscal year. Over the “next several years,” the number of stores closed is expected to climb to 175. The closures and job cuts are the company’s attempt to recover from five straight quarters of sales declines.
Coty has acquired three beauty products and fragrance lines from Procter & Gamble for almost $12 billion. The businesses are believed to include PG’s Max Factor, CoverGirl and Wella hair care brands. Details of the transaction are still being worked out but if it goes through, it would be the biggest deal in cosmetics in at least a decade and would turn Coty into a world leader in perfume and hair care.
Blackstone Group and Carlyle Group are making a joint bid for NCR, the cash register and ATM manufacturer, in a leveraged buyout that would be the year’s biggest at more than $10 billion, including debt. The auction for NCR is several weeks away from completion, and other buyout firms are expected to compete.
While still in the early planning stages, Goldman Sachs will soon offer loans online to both consumers and to small businesses as it looks to tap into a marketplace worth nearly $850 billion. Taking on consumer lending means taking on a growing field of competitors. Along with traditional credit providers like Wells Fargo and smaller banks, websites like Lending Club and On Deck have moved into the peer-to-peer lending business.
Discover Financial Services, the credit-card issuer that expanded into mortgages and student lending, is closing its home-loan origination business and will offer severance packages to about 460 employees.
Fitbit has raised its IPO price range to $17-$19 per share (from $14-$16). At the high end of the new offering range, FitBit would be valued at about $3.9 billion, and should raise about $656 million for the company. Ticker symbol FIT, going public tomorrow.