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Thursday, August 13, 2015

Muppets in the Lobby

Financial Review

Muppets in the Lobby

DOW + 5 = 17,408
SPX – 2 = 2083
NAS – 10 = 5033
10 YR YLD + .06 = 2.19%
OIL – 1.07 = 42.23
GOLD – 10.80 = 1115.70
SILV – .12 = 15.52

So, stocks closed basically flat, but it was a roller coaster ride. The major indices started the day in negative territory, then recovered, only to slide into the close. This was a very busy day for economic reports.

Sales at US retailers were solid in July and stronger than previously estimated for May and June. Retail sales rose a seasonally adjusted 0.6% last month, or by 0.4% excluding the auto sector. In the retail sales data in July, the gains were led by the auto sector, where sales jumped 1.4%. This was expected as the light vehicle selling rate rose to a seasonally adjusted 17.5 million units, the second best result since early 2006. And just a quick reminder that many auto sales are imports. But the sales gain in July was broad based. All sectors showed increases except electronics and general merchandise and department stores. In the past year, retail sales have risen 2.4%.

A side note here; it may seem strange that consumers are spending less on electronics, after all it seems like everybody has smartphones and other electro-gadgets; the reality is that we are buying this stuff but paying less for it. We are buying online and finding deals (we are not doing much shopping at department stores like Macy’s), and technology tends to get cheaper over time thanks to innovation (remember Moore’s Law). In fact, since the recession ended in mid-2009, the price of electronics is down 33%, by far the largest decrease of any category tracked by the Commerce Department.

Consumer spending is a huge part of the overall economy. This morning’s retail sales data was watched as a barometer of whether the Federal Reserve would be able to make the case that the economy was performing well enough for a rate hike in September. Of course you can choose any number of other economic indicators to push the barometric pressure one way or another. The Fed has not lifted its zero bound range for rates since it was set in December 2008; a challenging 7 years for retirees attempting to live on fixed income investments like US Treasury notes and bonds which have seen their yields cut in half, or more.

And this Zero Interest Rate Policy raises the nagging question of why the Fed has maintained an emergency posture on interest rates if the economy has actually improved. The Fed finds itself in a dangerous quandary: no ability to cut rates to stimulate the economy if growth starts to tank again because the Fed is already at the zero bound range; while conversely running the risk of setting off a global financial asset selloff that destabilizes markets further if it raises rates.

The prices the US paid for imported goods fell 0.9% in July, the biggest drop in six months. The price drop was led by a drop in fuel prices. However, excluding fuel, import prices declined by 0.3%. In the past 12 months import prices have dropped 10.4%, mostly because of lower oil costs. Import prices are down a smaller 2.6% excluding fuel in the same span. Lower import prices have helped keep a tight lid on US inflation.

US business inventories in June posted their largest gain in 2-1/2 years as sales rose marginally. The Commerce Department said that business inventories increased 0.8 percent, the biggest gain since January 2013, after an unrevised 0.3 percent rise in May. In the second-quarter GDP report published last month, inventories made no contribution to the second-quarter GDP annualized growth pace of 2.3 percent. Today’s report would suggest that second quarter GDP will be revised higher.

In the latest week, the number of people who sought new US unemployment benefits rose by 5,000 to 274,000. The level of applicants remained below 300,000 for the 23rd straight week. Claims hit a low of 255,000 in mid-July, the lowest level since the fall of 1973, but have since rebounded a bit.

Mortgage rates rose for the first time in four weeks. Freddie Mac reports the 30-year fixed-rate mortgage averaged 3.94% in the week ending Aug. 13, up from last week when it averaged 3.91%. A year ago, the 30-year averaged 4.12%. The 15-year fixed rose to 3.17% from 3.13%.

The Mortgage Bankers Association, which represents mortgage lenders, said that the foreclosure starts rate was 0.4% in the second quarter, down slightly from the first quarter and on par with the rate seen during the housing boom. The delinquency rate, which includes loans that are past due but not in the foreclosure process, fell to 5.3%, after adjusting for seasonality, its lowest point since the second quarter of 2007.

The rent is too damn high. Americans living in rentals spent almost a third of their incomes on housing in the second quarter, the highest share in recent history. According to a new report from Zillow, a renter making the median income in the US spent 30.2 percent of her income on a median-priced apartment in the second quarter, compared with 29.5 percent a year earlier. The long-term average, from 1985 to 1999, was 24.4 percent. While mortgages remain relatively affordable, landlords have been able to increase rents because demand for apartments remains strong. Meanwhile, historically cheap mortgage rates are keeping the cost of homeownership low. Buyers devoted 15 percent of their income to mortgage payments, which is less than the historical average of 21 percent.

China intervened in the currency market Wednesday in the final moments of trading, after the yuan weakened nearly 2%, the daily limit; that move helped spur a late recovery on Wall Street. Today, the People’s Bank of China set the yuan’s fixing only marginally lower, a sign it wants to let the yuan depreciate but only in a measured way. The country’s central bank has pushed the value of the currency lower for three consecutive days. Since Tuesday, the currency has fallen 4.4 percent, the biggest drop in decades. While China said the move was aimed to make the currency more market-oriented, it has raised concerns that the already slowing economy was in deeper trouble. The sharp and sudden fall has also prompted questions about whether the country’s leadership can manage the slowdown.

The US imports more goods from China than any other country. Through June of this year, the US had imported $226 billion in goods from China versus $150 billion from Canada and $145 billion from Mexico. The Federal Reserve has been struggling to avoid importing deflation into the US; this devaluation move now means that Chinese goods flowing into the US just got cheaper and the ability of US exporters to compete in global markets just got a lot harder. Today, the dollar rose against a basket of currencies as currency war anxiety faded.

Oil prices slipped to a 6 year low today. The yuan’s devaluation this week has driven down oil and industrial metals amid speculation the weaker Chinese currency will hurt demand by making dollar-denominated imports more expensive. Goldman Sachs Group estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall. About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January.

The iPhone 7 release date is thought to be on September 18. Samsung is trying to play the role of disruptor. They presented 2 new phones today; the tech giant hopes the Galaxy Note 5 and Galaxy S6 edge+ will help it regain momentum in the smartphone market. They’re set to arrive on August 21st. It doesn’t look like there are any major upgrades to the new phones; a few minor changes; bigger screens and a pay system to match up with Apple Pay.

Brokerage firm Edward Jones has agreed to pay $20 million to settle charges that it overcharged clients in new municipal bond sales. The SEC said the case was its first against an underwriter in connection with alleged pricing-related fraud in the primary market for municipal bonds.

Investors suing various banks for rigging prices in the foreign exchange market have reached settlements with nine banks that have brought their total recovery to more than $2 billion. HSBC, Barclays, BNP Paribas and Goldman Sachs are among the latest banks to reach settlement in the class action litigation.

Goldman Sachs Group will pay $272 million to settle a lawsuit that claimed the Wall Street bank defrauded investors about the safety of about $6 billion of residential mortgage-backed securities they bought in 2007 and 2008.

Meanwhile, Goldman Sachs Bank USA, a unit of Goldman Sachs, has agreed to buy GE Capital Bank’s online deposit platform, which includes about $8 billion in online deposit accounts and another $8 billion in brokered certificates of deposit. Goldman Sachs Bank will acquire no financial assets in the deal other than cash associated with the deposit liabilities.

Just a refresher, back in 2008, when Goldman was defrauding investors in residential mortgage backed securities, the global financial system had a meltdown. Goldman converted from an investment bank into an FDIC insured bank, which then took billions in bailout money. Many people wondered how that could happen when Goldman didn’t actually hold customers’ deposits, but now, 7 years later, they have bought deposits.

You can’t actually go into a Goldman Sachs office and use an ATM, or deposit a check or cash, because it’s all online accounts. It just wouldn’t do to have the Muppets in the lobby.

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