What Puzzle?
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DOW + 91 = 17,823
SPX + 7 = 2089
NAS + 31 = 5104
10 YR YLD + .01 = 2.26%
OIL – .15 = 40.39
GOLD – 4.80 = 1078.00
SILV – .16 = 14.23
The S&P gained 3.3% for the week, its best showing since December. The Dow rose 3.4% for the week and the Nasdaq added 3.6%. And now we begin the Santa Claus rally on Wall Street, which kicks off with the Turkey Shoot. For 35 years prior to 1987, the Wednesday before and the Friday after Thanksgiving combined were up 33 times.
The only declines were in 1964 and
1965. Subsequently, this trend changed. In the 28 years since 1987, there have
been 12 declines and 16 advances. As Thanksgiving bullishness lost steam in
1987, the rally afterwards occurred more frequently.
Since 1987, DJIA has logged gains in 22
of 28 years from the close on Friday after Thanksgiving to year-end. The
S&P 500 is up 0.5% in November and 1.5% thus far in 2015. There are 28
trading days remaining in 2015.
And going back to 1950, December is the
best month of the year for the S&P 500 with the final 30 days of a year
producing a mean gain of 2.36%. There could still be a black swan or some other
exogenous event. This does not mean that we are guaranteed a rally, only that
the probabilities are good.
ECB President Mario Draghi says the European Central Bank is prepared to deploy its full range of stimulus measures to fight low inflation. The comments from Draghi, echoed by other top ECB officials, suggest support among the highest ranks of the central bank for expanding its quantitative easing program and cutting the deposit rate further.
Under the ECB’s bond buying program which was launched in March, the central bank is buying $64 billion a month in mostly government bonds. It is slated to run at least through September 2016, but many analysts expect the ECB to extend the program beyond this date.
Federal
Reserve Vice Chairman Stanley Fischer says the Fed has done everything we
can to avoid surprising the markets and governments” about the first hike in
interest rates in nine years. It’s looking more and more like a December rate
hike is a done deal, but Fischer said no final decisions have been made and
officials continue to scrutinize the data. Fischer said it remains to be seen
whether the emerging market countries in Asia and the world are sufficiently
prepared for the potential capital flows and market adjustments so that there
are no major macroeconomic consequences.
Today,
St. Louis Fed President James Bullard said “The economy is going to go into
a boom period,” citing the unemployment rate, which is currently 5%. Bullard
added that the U.S. labor market was “basically back to normal” after the 2007-2009
financial crisis. But the Fed should not repeat what it
did during the 2004-2006 tightening cycle, when it raised rates at 17
consecutive meetings, and Bullard emphasized that policymakers should be more
“flexible and reactive” to data this time.
Bullard also said the persistence of low real interest rates was “a puzzle,” echoing comments he made last week in a speech titled “Permazero”, where he entertained the possibility the United States is entering an era of permanently low rates.
Bullard also said the persistence of low real interest rates was “a puzzle,” echoing comments he made last week in a speech titled “Permazero”, where he entertained the possibility the United States is entering an era of permanently low rates.
It probably isn’t that big a puzzle.
Demand has remained at low levels as fiscal policy contracted. Even where
monetary policy produced some stimulus, it was counterbalanced with austerity.
Corporate America has been on a stock buyback and financial engineering binge
which cut investment in R&D and innovation and capital expenditures. The
Great Recession was a knife in the back of workers and even though jobs have
come back, wages have not.
As the global economy contracted,
investors looked to the safe haven of the dollar and Treasuries, which pushed
down exports and also kept a ceiling on rates. The financial industry has grown
even larger than before the financial crisis, and it continues to be a giant
black hole of derivatives and shadow banking that swallows’ productivity. I
could go on, but it isn’t a puzzle.
The
House of Representatives passed legislation to increase oversight over the
Federal Reserve that includes a provision that would require the central bank
to follow a mathematical rule to set interest rates. In May, the Senate Banking
Committee already passed Republican-backed legislation to increase oversight of
the Fed, but that measure doesn’t require the Fed to follow a mathematical
rule.
China’s
yuan may enter the IMF’s benchmark currency basket at a lower
weighting than previously estimated as the institution considers making weights
less related to export volumes and more dependent on financial flows. Such a
change would give the renminbi a lower share in the basket than under the
current formula. IMF policymakers are expected to vote on the currency’s
inclusion to the Special Drawing Rights basket on November 30.
The
leading economic index jumped 0.6% in October after falling in the two prior
months, signaling a pickup in growth after a soft patch during the late summer
and early fall. The leading economic index is a weighted gauge of 10
indicators designed to signal peaks and valleys in the business cycle.
Greece’s
parliament has backed additional reforms needed to unlock
€12-billion-euro from its latest bailout which will help recapitalize the
country’s struggling banks and pay off overdue government debts.
Gunmen
attacked a hotel in Mali in Western Africa and killed dozens of hostages.
The attackers held 140 guests and 30 staff members before a counter-assault by
Malian security forces, assisted by the US military, freed the hostages.
The death toll is unclear but at least 27 bodies have been found in
the hotel. A jihadist group based in northern Mali affiliated with Al-Qaeda,
claimed responsibility.
In
the past few days, clear signs have emerged showing that the terrorist
attacks have had a big economic impact on Paris – one of the most visited cities
in the world. A survey by a French hotel and restaurant operators’ union,
suggests that sales in the city’s cafes and bars during the past week
are down 44% on the same period last year, while hotels have suffered
a 57% drop in business. Air France has so far refused to comment on
passenger numbers and cancellations bound for Paris, but low-cost airline EasyJet
said that travel to the French capital has plummeted.
The
U.S. Treasury Department on Thursday took new steps designed to discourage
corporate inversions, or deals that allow companies to move their legal address
abroad to avoid taxes. Treasury Secretary Jacob Lew said additional steps were
planned but also called on Congress to address the issue.
Will
the new rules derail a
Pfizer-Allergan deal? Maybe not. Allergan and Pfizer are considering
structuring a merger of the drug companies so that it is an acquisition of the
much bigger Pfizer by the much smaller Allergan.
Nike
is buying back $12 billion worth of itself. After the market closed on
Thursday, Nike announced a $12 billion stock-repurchase authorization, a 14%
dividend hike, and a 2-for-1 stock split, which will go into effect on December
24.
Gap
slashed its outlook. Gap announced that sales fell 3% year-over-year to
$3.86 billion. Comparable-store sales across the company’s brands — Gap, Banana
Republic, and Old Navy — fell 2%. Earnings came in at $0.63 per share, which
was right in line with expectations.
Abercrombie
& Fitch crushed expectations on profits, revenues, and same-store
sales, sending the shares up by as much as 20% in early trading. Ross Stores
shares moved higher, after the off-price retailer also reported
better-than-expected earnings.
Tyson
Foods plans to close two aging prepared-food plants, affecting 880
jobs, in the face of prohibitive renovation costs and changing demand. The
closures come as Tyson continues to remake itself after its 2014 acquisition of
Hillshire Brands. The company expects to cease operations at a pepperoni plant
in Wisconsin and a prepared foods facility in Illinois during the second half
of the year ending October 1.
Chipotle
is having problems again. A new round of E. Coli infections has hit 45
people in 6 states: Washington, Oregon, California, Minnesota, New York, and
Ohio. Sixteen of those people had to be hospitalized and no deaths have been
reported. This follows an outbreak at the beginning of November when 22 people
in Washington state and Oregon fell ill.
Massachusetts
is barring people under the age of 21 from playing daily fantasy
sports. While the decision limits a large demographic within the fantasy sports
industry, it stops short of following the lead of NY Attorney general Eric Schneiderman,
who recently declared daily fantasy “illegal gambling.” The proposals would
also ban fantasy competitions based on college sports, prohibit promotions on
high school and college campuses and bar anyone connected to professional
sports, including athletes and agents.
Tesla
Motors is voluntarily recalling all of its 90,000 Model S sedans to check
for a potential problem with seat belts. An owner in Europe had an issue with a
bolt holding the seat belt system in place coming loose. Tesla said the owner
wasn’t involved in an accident and has determined the flaw was an installation
issue.
Tesla shares dropped today, but they
should have gone up; this was a voluntary recall, unlike GM which fought a
recall for faulty ignition switches even as people died, or all the models
using Takata airbags which exploded in a shower of shrapnel while car companies
denied the problem, or VW which cheated on emissions. Tesla was proactive. No
one was injured. The real question is why other car companies can get away with
murder.
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