Understanding Global BankingSinclair Noe June 11, 2015
DOW + 38 = 18,039
SPX + 3 = 2130
NAS + 5 = 5082
10 YR YLD – .10 = 2.38%
OIL – .87 = 60.56
GOLD – 3.60 = 1183.00
SILV + .02 = 16.13
Retail sales rose 1.2% in May on a seasonally adjusted basis. Auto dealers and gasoline stations posted the strongest sales, but most major retail segments saw healthy gains. What’s more, sales in April and March were stronger than initially reported. Sales at auto dealers rose 2%; the auto sector generates about one-fifth of all retail spending. Sales were up 3.7% at gasoline stations as the price of fuel crept higher. Even if autos and gasoline are excluded, retail sales rose a healthy 0.7%.
Separately, the Federal Reserve reports household debt grew just 2.2% in the first quarter, as a 0.3% fall in mortgage debt offset a 5.6% rise in auto loans, student loans and credit cards. At the same time, real estate value increased by $411 billion. The net effect is that household net worth jumped $1.6 trillion. Meanwhile, corporate debt grew at a 7.2% seasonally adjusted annual rate in the first quarter as businesses pile on debt before a possible Fed rate increase.
The number of US workers who applied for unemployment benefits in the first week of June edged up by 2,000 to 279,000. Claims have been below 300,000 for 14 weeks in a row, a feat last accomplished 15 years ago.
The prices the US paid for imported goods increased a seasonally adjusted 1.3% in May, entirely because of a sharp increase in fuel costs. It was the first increase in 11 months and the largest in more than three years. Fuel imports jumped 11.8%, the biggest increase since mid-2009, although oil is far less expensive compared to one year ago. Excluding fuel, import prices were unchanged last month.
The World Bank has joined the International Monetary Fund in urging the Federal Reserve to hold off on a rate hike until next year to avoid worsening exchange rate volatility and crimping global growth. The World Bank downgraded its outlook for global economic growth this year, lowering its forecast by 0.2% to 2.8%. The bank expects growth of 3.3% in 2016. The World Bank cut its 2015 forecast for the US economy by 0.5% to 2.7%, saying bad winter weather sapped output in the first quarter despite the economy now gathering steam.
German bunds fell again today, extending a sell-off that has pushed 10-year yields above 1% for the first time since September. The 10-year yield on German bunds edged higher to 1.02%, up sharply from the all-time low of 0.05% hit in April.
The outlook for the Greek economy seems to change day by day, sometimes hour by hour. Today, Greek stocks posted their biggest jump since February, pushing European equities higher for a second day. After a new round of late-night talks with the leaders of Germany and France, Greek PM Alexis Tsipras pledged to work intensively with creditors in coming days to solve all open issues holding up the country’s access to bailout loans. And then today, the IMF said “major differences” remain with Greece over an agreement and there was “no progress in narrowing these differences recently, and thus we are well away from an agreement.” So, the IMF negotiating team has left the talks in Brussels. Meanwhile, S&P lowered Greece’s credit rating to CCC from CCC+ yesterday, stating that Athens will likely default on its debt within twelve months. Athens’ ATG stock index +7.3%.
Greece is not the only one in hot water. Ukraine’s leadership on Wednesday warned that the likelihood of prolonged conflict against Russian-backed separatists and deadlocked creditor negotiations could threaten the West’s $40 billion bailout program. Ukraine is asking for a 40% cut in the face value of the bonds but creditors say no way. Kiev also declared it’s ready to impose a moratorium on foreign debt payments if necessary.
South Korea’s health ministry reported 14 new cases of Middle East Respiratory Syndrome (MERS), taking the total to 122. The rising numbers have sparked concern both within South Korea and across the region. Hong Kong issued a “red alert” advisory against non-essential travel to South Korea, while Singapore Airlines said it would waive fees for customers who want to cancel or re-book flights to South Korea. Today, the Bank of Korea policymakers cut interest rates by a quarter of a percentage point to 1.5 percent, the second rate cut this year, because the MERS virus could hurt businesses and dent consumptions as travelers cancel trips and people stay home out of worries of contagion.
If you’re looking for stock rockets, look no further than Asia. The Shenzen Index is up 146% in the past year. That may be a bit too volatile for most people. Meanwhile, the Nikkei Index in Japan is posting one year gains of 35%; and it has been a wild ride. The past 19 trading sessions included 12 consecutive sessions where the index was up. It was the longest stretch of consecutive days of gains in 27 years in Japan. After a 12-day run, the Nikkei fell six out of the next seven days. You might think a multi-day string of gains would signal a top in the market, but that isn’t necessarily the case. The Nikkei has seen many occasions where it has had 8-day winning runs, and it is more likely to result in a rally than a top. Going back over 35 years, the Nikkei outperforms following multi-day winning streaks, in fact it is more likely to double the performance of time frames without multi-day winning streaks. No guarantees, of course, but it’s the old idea that a trend in place is more likely to continue than reverse…, until it reverses.
New York law enforcement officials have written to eBay and PayPal this week, saying the companies’ revised user policies “raise issues” under consumer protection laws. The updated user agreements would allow the two firms to call or text their combined 322 million users for offers and promotions, to collect a debt or to poll their opinions through questionnaires. eBay’s new user agreement is scheduled to take effect on Monday and PayPal’s will become effective on July 1. The truth is that nobody ever reads those agreements, which means they aren’t really agreements at all.
Rupert Murdoch is preparing to step down as chief executive officer of 21st Century Fox and hand the CEO title to his son James. While it’s unclear whether a reorganization would happen this year or at the start of 2016, Murdoch would stay as chairman.
General Motors will make an announcement next week on a secondary use for electric vehicle batteries. GM’s initiative will involve extended use of EV batteries. Most lithium-ion batteries used in electric vehicles can last about 10 years, which is longer than many of those who lease the vehicles will drive them. Because the batteries still have about 70% of their capacity at the end of their driving cycle, either GM or the owners could sell the batteries to recoup some of their cost. Think something along the lines of the Tesla PowerWall, or some way to use the batteries to store energy in one form or another; anything that would help extend the life of the battery and therefore bring down cost.
California is sinking; it’s because of the drought. Last summer, scientists recorded the worst sinking in at least 50 years. This summer, all-time records are expected across the state as thousands of miles of land in the Central Valley and elsewhere sink. The extent of the problem and how much it will cost to fix are part of the mystery of the state’s unfolding drought. No agency is tracking the sinking statewide, little public money has been put toward studying it and California allows agriculture businesses to keep crucial parts of their operations secret.
The cause is known: People are pulling unsustainable amounts of water out of underground aquifers, primarily for food production, and tens of thousands of square miles are deflating like a leaky air mattress, inch by inch. Groundwater now supplies about 60 percent of the state’s water, with the vast majority of that going to agriculture. Tens of thousands of groundwater pumps run day and night, sucking up about 5 percent of the state’s total electricity; that’s an increase of 40 percent over normal years – or enough electricity to power every home in San Francisco for three years.
The US Court of Appeals in Washington denied a request from broadband providers to delay the implementation of rules adopted by the FCC to ensure an open internet; that means that net neutrality rules go into effect tomorrow. The internet will not slow down or grind to a halt and you won’t have to pay more for what you’ve been getting. Nothing changes, and that is kind of the point.
JPMorgan Chase CEO Jamie Dimon isn’t sure Sen. Elizabeth Warren understands how banking works. Warren is a Senate Banking Committee member, who has challenged the size of large lenders and their political power. She has said it was a mistake for the government to refrain from breaking up big banks after the 2008 financial crisis. Last month, as firms including JPMorgan pleaded guilty to resolve probes into market-rigging, she criticized regulators for granting waivers that let the companies continue operating certain businesses.
At an event in Chicago on Wednesday, Dimon said, “I don’t know if she fully understands the global banking system.” I think I have to agree with Jamie Dimon on this one. If Warren fully understood banking, she would have looted billions of dollars in a bubble inflated through accounting control fraud, crashed the economy, orchestrated the largest upward transfer of wealth in world history in the bailouts, paid herself a big bonus out of the bailout money, and become a billionaire in an industry where net profits equal government subsidies. And then paid millions to buy politicians to push back on regulations, while rigging every market from Libor to Forex to…, well every market. That’s what understanding banking means.