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Monday, August 31, 2015

It Was All Yellow

Financial Review

It Was All Yellow

DOW – 114 = 16,528
SPX – 16 = 1972
NAS – 51 = 4776
10 YR YLD + .02 = 2.20%
OIL + 2.80 = 48.02
GOLD + .60 = 1135.40
SILV + .04 = 14.73

Both the Dow and S&P had five days of gains or losses of more than 2 percent in August, making it the most volatile month in nearly four years. In August, the S&P lost 6.3 percent, the Dow fell 6.6 percent and the Nasdaq declined 6.9 percent. As far as Augusts go, this has been the worst performance for the Dow in 17 years. Overall it was the sixth worst monthly performance for the Dow and the worst since May 2010, when the Dow dropped 7.9%. For the S&P 500, it was the worst August since 2001; all 10 of the major S&P sectors were down for the month.

Investors are still divided over whether the Federal Reserve will hike rates next month, with Fed Vice Chairman Stanley Fischer adding to the doubts in Jackson Hole over the weekend, saying: “At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.” Fischer was careful to announce he wasn’t signaling an impending rate rise, but the remarks suggest a September move hasn’t been ruled out of the FOMC’s next gathering.

The general tone of the Jackson Hole Symposium was hawkish. Fischer said: “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further … With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening.”

That might be wishful thinking. Maybe Mr. Fischer should talk to Mario Draghi, president of the European Central Bank. The eurozone’s inflation rate held steady in August. Annual inflation came in at 0.2%. The latest figures are a far cry from the 2% target set by the ECB and are likely to provide further impetus for the bank to continue or even expand its €1tillion-euro asset purchasing program.

US economic figures this week include the ISM business surveys, factory orders and trade data; all will provide further clues about an upcoming rate increase. The most important report will be Friday’s jobs report, the last word on the labor market before the Fed’s next FOMC meeting.

Of course the Fed likes to say that the timing of an interest rate increase isn’t as important as the rate of increase. Still, September might be a bad month to test that idea. The “Stock Trader’s Almanac” reports that, on average, September is the month when the stock market’s three leading indexes usually perform the poorest.

Since 1950, the month of September has seen an average decline in the Dow Jones Industrial Average of 1.1%, while the S&P 500 has averaged a 0.7% decline during September. Since the Nasdaq was first established in 1971, its composite index has fallen an average of 1% during September trading. This is, of course, only an average exhibited over many years, and September is certainly not the worst month of stock-market trading every year.

Lots of news out of China: The Shanghai Composite took a dive during the session, closing the month down 12.5%, following reports that Beijing scrapped large-scale share purchases as a method of propping up markets. Meanwhile, more concerns over the world’s second largest economy prompted Goldman Sachs to slash its forecasts for Chinese growth over the next three years. Beijing’s also on the hunt for confessions. Nearly 200 journalists, traders and officials have been punished in what police call a “special campaign” to root out those accused of market destabilizing activities.

The US is preparing sanctions against China. President Barack Obama’s administration has drafted economic restrictions aimed at companies and individuals in China that benefited from large-scale cyber-attacks on the US.  The sanctions could be implemented within two weeks, ahead of a state visit by China’s president.

The combined effects of China’s economic slowdown, a maturing smartphone industry and market volatility are sending jitters through Asian electronic-parts suppliers, which have long-relied on Chinese manufacturing muscle and consumer demand to power growth. Earlier this month, research firm Gartner said smartphone sales in China fell for the first time in Q2, while IDC forecast smartphone shipments in the country to grow just 1.2% this year, down from 19.7% in 2014.

India’s economy grew at an annual rate of 7% between April and June. This is slower than the 7.5% growth recorded for the previous quarter, and lower than expected. India and China – which also posted 7% growth in the second quarter – are now the joint fastest growing major economies in the world.

Tens of thousands of demonstrators in Malaysia defied police orders on Saturday, massing in the capital in a display of anger at the government of Prime Minister Najib Razak, who has been accused of corruption involving more than $630 million that somehow found its way into the prime minister’s personal bank account. The demonstration in central Kuala Lumpur, which had been planned for weeks, was declared illegal by the Malaysian police, but that didn’t stop demonstrators from showing up, dressed in yellow t-shirts. So, the government responded by banning the color yellow. So, if you’re planning a trip to Malaysia, you might want to avoid primary colors.

There is one other twist to this story that most American news media coverage fails to mention. Which corrupt bank do you think helped Mr. Najib launder so much money?  I’ll give you a hint; no you don’t need a hint, it was Goldman Sachs. It goes back to 2012, when Goldman raised a total of $6.5 billion from three bond issues.

Even at the time, the deals were controversial because they were so lucrative for the bank. Goldman earned roughly $590 million in fees, commissions and expenses from underwriting the bonds; a massive 9.1 percent of the total raised. That was almost four times the typical rate for a quasi-sovereign bond at the time. It exceeds what Wall Street firms can charge in what has traditionally been their most lucrative work: taking companies public in the United States. So, Goldman got away with almost as much as the prime minister.

The Chicago PMI, or business barometer index, fell slightly in August but showed that the economy in the Midwest continued to grow at a moderate pace toward the end of summer. The index slipped to 54.4 points in August from 54.7 in July. Any number above 50 signals economic expansion.

Oil capped the biggest three-day gain in 25 years after OPEC said it’s ready to talk to other global producers to achieve ‘fair prices’ and the U.S. government reduced its crude output estimates. Crude traded in New York surged 27 percent in three days, the most since August 1990 when Iraq invaded Kuwait. Both West Texas Intermediate and Brent benchmarks have climbed more than 20 percent from their closing low on Aug. 24, meeting the common definition of a bull market.

Keep in mind that oil hit a 6 year low last week. Today, oil went from a low of $43.60 to a high of $49.20. The fundamental news is that in the US, the EIA cut its output estimates and then OPEC says it’s ready to talk to other producers about cutting output. That really doesn’t explain the huge jump in prices today; which looks very much like an overdose of speculation.

Separately, one of the world’s largest gas fields was discovered in Egypt. Italian energy company Eni said that the Zohr natural gas field off of Egypt’s coast could contain up to 30 trillion cubic feet of gas (equal to 5.5 billion barrels of oil). The gas could provide decades of energy to Egypt.

Apple is expected to make a major announcement next week, in the way in which only Apple can. CEO Tim Cook will appear onstage, in a techie version of a rock concert, and he will tell the world about the newest version of Apple TV. Lots of hype and anticipation. Except we already know what to expect: the new Apple TV will have a revamped processor for better gaming, a remote with a touch-pad, its own App Store, Siri voice control so you won’t even need a remote. And they are going to double the price.

Citigroup is planning to rebuild its equities franchise in the face of new rules designed to make the financial system less risky. Having shored up its business and capital ratios since the financial crisis (largely by spinning off non-core assets), Citi now aims to profit from a retreat of rivals that were slow in adapting to the new regulations that force banks to keep more capital.

The Oxford online dictionary has added some new words. The online dictionary is a bit more current than the actual Oxford English Dictionary is more historical. So, to make sure you are current, here are the new words you need to know: rando, hangry, fatberg, MacGyver (used as a verb), rage-quit, Grexit (the combination of Greece and exit – which already seems dated) and my personal favorite – mic drop. If you don’t know what the words mean – now you can look it up.

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