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Friday, August 26, 2016

The Case Has Strengthened

Financial Review

The Case Has Strengthened

DOW – 53 = 18,395
SPX – 3 = 2169
NAS + 6 = 5218
10Y + .06 = 1.62%
OIL – .04 = 47.29
GOLD – .90 = 1321.70

Federal Reserve chair Janet Yellen delivered a speech at the Jackson Hole Economic Symposium this morning. Here’s what she said, the key point: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Yellen said the Fed expects “moderate growth” in gross domestic product, additional strengthening in the labor market and inflation rising to 2% over the next few years.  She said that any decision on interest rates “always depends on the degree to which incoming data continues to confirm the Fed policy committee’s outlook.” Yellen spent the bulk of her speech discussing the potential need to add new tools to the Fed’s toolkit to combat the next recession given that interest rates remain so low. Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

In the past, Yellen has been dovish; in no hurry to raise rates; and she wasn’t exactly pounding the table, and she didn’t give a specific date when the Fed might make a move. And even though Yellen was making a case for action, the markets kind of shrugged it off initially. So, vice-chair Stanley Fischer came along later and removed any ambiguity, saying: “Yellen’s comments are consistent with a possible September hike.”

That is not a guarantee of a rate hike but if the Fed takes action in about 3 weeks, you can’t say you weren’t warned. Stocks, bonds and commodities were all sporting nice gains following Yellen’s speech, then Fischer provided clarification and selling ensued, while at the same time the dollar moved higher and the VIX spike 4.5%.

U.S. economic growth was a bit more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending. Gross domestic product expanded at a 1.1 percent annual rate, down from the 1.2 percent rate reported last month. The revision also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8 percent pace in the first quarter. It grew 1.0 percent in the first half of 2016.

The government also reported that after-tax corporate profits fell at a 2.4 percent rate last quarter after increasing at an 8.1 percent pace in the first quarter. Weak profits could limit an anticipated rebound in business spending. With profits declining, an alternative measure of growth, gross domestic income, or GDI, increased at only a 0.2 percent rate in the second quarter, the weakest since the first quarter of 2013.

Masked in the latest quarter is a very strong 4.4 percent annualized growth rate for consumer spending which is 0.2 percent higher than the first estimate. Inventory draw is the quarter’s culprit, pulling down GDP by a very steep 1.3 percentage points. But, in a counter-intuitive twist, lighter inventory in times of slow economic growth is a major positive for future production and employment and is a major plus for the ongoing quarter. The line of thinking is that there’s no pony in here now, but at some future point, there will be a pony, because ponies have always appeared in the past.

The Commerce Department reports the trade gap narrowed to a seasonally adjusted $59.3 billion in July from $64.5 billion in June. Exports rose by $2.9 billion during the month while imports shrank $2.4 billion. A surge in food exports helped cut the nation’s goods gap. Exports of foods, feeds & beverages rose 31 percent in the month though export prices of agricultural goods actually dipped slightly in the month. Other export readings are less favorable including a decline for capital goods, reflecting weak global investment in new equipment, and a small dip for consumer goods.

The University of Michigan’s consumer sentiment index for August slipped to 89.8 from 90.0 in July. The index is 2.3% lower than a year ago.

A very good article by Rex Nutting in Marketwatch asks a key question: Who’s preparing the United States for the 21st century? Nobody, really. Not the 22 million private businesses, not the 118 million households, and not the 90,000 state, local or federal government agencies.

Since the recession, investments have fallen sharply, and they haven’t gotten back up again. It seems that everyone is still scarred by the Great Recession, and by the collapse of asset bubbles in 2000 and 2006. Gross domestic investment totaled about $3.6 trillion in the second quarter of 2016, about 20% of gross domestic product.

That may seem a large sum, but it’s the lowest share of GDP, except during recessions, since 1947. But when you consider depreciation, the actual number is probably closer to $750 billion in the second quarter, or 4% of GDP, about half of the average over the post-war period. In fact, net investment has been running at the lowest rates since the Great Depression of the 1930s.

Business fixed investment has fallen for three quarters in a row, the first time that’s happened outside of a recession or its immediate aftermath since the mid-1980s. Net investment by state and local governments dropped to 0.6% of GDP in the second quarter, about half the average over the post-war period.

We have an economy that’s underperforming, but no one is willing or able to invest the sums needed to build the offices, factories, mines, computers, machinery, roads and airports we’ll need in the future. Business leaders don’t see a quick payoff in long-term investments, and public officials can’t fill the gap because the public thinks austerity now is better than growth tomorrow.

A U.K. sentiment index
 from YouGov and the Centre for Economics and Business jumped to 109.8 from 106.6 in July. The July print was a three-year low, and the rise in August was the largest in three years. It looks like the panic that gripped the public in the immediate aftermath of the Brexit vote has subsided, but the Centre warns it could all change though as details of the Brexit start to become reality.

If you have an Apple iPhone, you need to fix it. Apple issued a patch to repair a dangerous security flaw in iPhones and iPads after researchers discovered that a prominent United Arab Emirates dissident’s phone had been targeted with a previously unknown method of hacking. The hack is the first known case of software that can remotely take over a fully up-to-date iPhone 6. The researchers said they had alerted Apple a week and a half ago, and the company developed a fix and distributed it as an automatic update to iPhone 6 owners.

Adding another twist to the drama over Herbalife, investment bank Jefferies has been looking for the past month to find buyers for Carl Icahn’s 18% (roughly $1 billion) stake in the company. As if the idea of Herbalife’s largest shareholder exiting wasn’t enough of a story, the report also says Bill Ackman was among a possible group of buyers. Ackman has been shorting the stock for years. 

Icahn’s sale would come just weeks after he expressed renewed confidence in the company following the FTC settlement. Ackman kicked off the fight in 2012 with a widely watched presentation and a $1 billion bet that the stock would collapse. Icahn joined the battle a few months later and soon after got several Herbalife board seats.

Since then, the men have screamed at each other on live television and they and the company have traded legal accusations amid multiple investigations and a feature-length documentary. If Ackman really wanted to crush Herbalife, one way would be to get rid of the largest holder and then sell.

Apollo Global Management said it would buy cloud services provider Rackspace Hosting in a deal valued at $4.3 billion. The $32 per-share-offer represents a premium of 6 percent to Rackspace’s Thursday closing price. It’s also a 38% premium to Rackspace’s closing price on August 3. There was a very large short interest in Rackspace, more than $400 million. Ouch.

This exit from the public market can be laid squarely at the feet of Amazon Web Services. Amazon and Rackspace used to be such fierce competitors in cloud computing that Rackspace spearheaded a project called OpenStack to give itself and other IT vendors a chance to compete with Amazon. And OpenStack was successful, just not as successful as Amazon. It says something that the company went private instead of being bought by its partners, Amazon, Microsoft or any IT firms looking to jump start their cloud revenues; and what it probably says is that Amazon is crushing it in the cloud.

The Surgeon General of the United States, Vivek Murthy, has sent an electronic letter to 2.3 million doctors asking for their help to curb what’s being called an “unprecedented” epidemic of opioid painkiller overdose deaths. It’s the first time in history that a surgeon general has sent a letter directly to American physicians. Despite being home to 5% of the world’s population, America consumes 80% of its opioids. Between 2013 and 2014, deaths from synthetic opioids skyrocketed by 79%, according to a new Centers for Disease Control and Prevention report released Thursday.

2014 report from the American Academy of Neurology estimates that more than 100,000 Americans have died from prescribed opioids since the late 1990s. Those at highest risk include people between 35 and 54, the report found, and deaths from opioids in this age group have exceeded those from firearms and car crashes.

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