Financial Review

Too Hot

Sinclair Noe — June 20, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 61 = 21,467
SPX – 16 = 2437
NAS – 50 = 6188
RUT – 15 = 1402
10 Y – .04 = 2.15%
OIL – .97 = 43.23
GOLD – 1.00 = 1243.60
BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

Tomorrow is the first day of summer. And it is too hot.

The National Oceanic Atmospheric Administration reported Monday that the average global temperature in May 2017 was 1.49 degrees above the 20th-century May average of 58.6 degrees. This May was the third-hottest on record since the organization began collecting data in 1880.

Phoenix has hit 120 only three times in recorded history — the last time 22 years ago. The record high was 122 degrees on June 26, 1990. We hit reached 118 on Monday, which the National Weather Service says is rare. In fact, temperatures at that mark or higher have only been recorded 15 times since record-keeping started in 1896.

Dozens of flights at Arizona’s Phoenix Sky Harbor airport were delayed or canceled on Monday and Tuesday, and airlines are limiting the number of seats sold, to prevent the planes from exceeding maximum weight for safe takeoff in the hot conditions.

Most of the smaller, commuter planes have a maximum operating temperature of 118 degrees. Larger planes made by Boeing and Airbus have maximum operating temperatures of 126 and 127 degrees, respectively.

The real problem with flying in hot temperatures is like the problem faced in high altitudes: thin air. Hotter air is less dense, which means there is less air beneath the wings for lifting the aircraft and less air to flow through the jet engines. To compensate, airlines can keep the weight down, increase thrust, and make sure they takeoff on long runways.

Be careful out there. The main burn center in Phoenix has issued a warning to people to be careful around car interiors and pavement. PetSmart is offering free booties so your pets don’t burn their paws on concrete and pavement. Stay hydrated and pray your AC doesn’t croak.

Oil prices hit a 7-month low. OPEC and non-OPEC producers have agreed to cut production by 1.8 million barrels per day and it appears they are complying with the deal to cut global output, but still prices are down as other countries – not part of the agreement – are pumping more. Both Libya and Nigeria have increased output. And US shale drillers that are staging the longest drilling ramp-up on record.

Meanwhile traders are hoarding an increasing amount of oil in tankers. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open, meaning production is poised to surge further when they turn the spigots on. Hedge fund managers have become very bearish about the outlook for oil prices as production from countries outside OPEC grows and threatens to undermine the effectiveness of OPEC’s output controls.

Shares of oil companies were among the worst performers. The Energy Select Sector SPDR ETF XLE, -1.28%, posting its worst one-day drop since March. West Texas Intermediate crude, the U.S. benchmark closed at $43.23 today, that’s down from a high of $54.45 on Feb. 23, or a 20% decline, which is the common definition of a bear market.

In a speech in Amsterdam to a conference co-sponsored by the central banks of Sweden and the Netherlands, Boston Fed President Eric Rosengren said lower rates may be a more permanent feature on the economic landscape because they reflect broad population trends.

Separately, Chicago Fed President Charles Evans said late Monday the central bank could be done raising rates this year. He reiterated those comments this morning on CNBC and with The Wall Street Journal. He said he supports the current policy of “very gradual” interest-rate hikes and a slow reduction of the balance sheet.  Evans said it was important that financial markets realize that inflation can exceed the Fed’s 2% target from time-to-time.

Earlier on Monday, New York Fed President William Dudley struck a hawkish tone, arguing against slowing the pace of interest-rate increases.

Federal Reserve Vice Chairman Stanley Fischer said that he was worried memories might be fading about the pivotal role housing played in the financial crisis. Fischer said, “House prices are now high and rising in several countries, perhaps because of extended period of low interest rates.”

Fischer noted that U.S. government’s role in housing is increasing with Fannie Mae, Freddie Mac and the Federal Housing Administration “now the dominant providers of mortgage financing.” The Fed’s #2 said “there is more to be done” to strengthen the resilience of the housing finance systems. Just taking the possibility of severe stress seriously would help, he said. And government support for housing should always be made explicit.

The U.S. current-account deficit, a measure of the nation’s debt to other countries, rose 2.5% to $116.8 billion in the first quarter. The increase in the current-account deficit in the fourth quarter was tied to a higher trade deficit in goods such as foreign autos or cellphones and a smaller surplus in primary income — returns on American-owned assets held abroad.

The fourth-quarter gap in the current account was raised to $114 billion. The current-account deficit was 2.5% of GDP in the first quarter, up slightly from 2.4% at the end of 2016. The gap is well below a peak of 6.3% in 2005.

Ford Motor will move some production of its Focus small car to China and import the vehicles to the United States. Ford painted the production shift from Mexico to China, slated in mid-2019, as a purely financial move that will save the company $500 million in reduced tooling costs.

The decision also signals a shift in strategy at Ford, which is responding to dwindling U.S. consumer demand for small cars in favor of more expensive and more profitable trucks and SUVs. Ford said it would invest $900 million at the Kentucky truck plant to build the redesigned Navigator and Ford Expedition. It has contingency plans to build more of the big SUVs at an Ohio plant if demand grows.

The current Focus will be phased out of production in Wayne, Michigan in mid-2018, according to Hinrichs. The Wayne plant will begin building a new Ranger midsize truck in late 2018 and a Bronco midsize SUV in 2020.

MSCI said it plans to add mainland Chinese shares to its benchmark emerging markets index. MSCI will add 222 China A Large Cap stocks on a gradual basis beginning next year. The addition of the mainland Chinese shares could be a big boost to the world’s second-largest stock market, which has until now drawn limited foreign investor interest because of high volatility, frequent trading halts and limited foreign investor access to the Shanghai and Shenzhen stock markets.

The iShares MSCI Emerging Markets ETF (EEM) rose 0.15 percent in after-hours trade. The MSCI Emerging Markets Index is tracked by an estimated $1.6 trillion in assets, as of the end of June last year.

A man killed in a crash last year while using the semi-autonomous driving system on his Tesla Model S sedan kept his hands off the wheel for extended periods of time despite repeated automated warnings not to do so.

The National Transportation Safety Board (NTSB) released 500 pages of findings into the May 2016 fatal crash. The incident raised questions about the safety of systems that can perform driving tasks for long stretches with little or no human intervention, but which cannot completely replace human drivers.

Legislation to impose new sanctions on Russia and Iran that passed the U.S. Senate nearly unanimously last week has run into a procedural problem that could prevent a quick vote in the House of Representatives. The Countering Iran’s Destabilizing Activities Act, which also includes new sanctions against Russia, passed the Senate 98-2 last week.

But the measure must still pass the House before it can be sent to Trump to sign into law, or veto, and the House parliamentarian found that the legislation violated a constitutional requirement that any bill that raises revenue for the government must originate in the House, something known as a “blue slip” violation.

The Russian ruble just had its worst back-to-back days since February 2016, falling 5.68 percent, as the drop in oil and broadened US sanctions took a toll. Russian stocks entered a bear market last week after the U.S. Senate voted overwhelmingly to expand penalties against Russia.

Barclays and four former executives were charged with conspiracy to commit fraud during the bank’s 2008 capital raising from Qatar as it sought to avoid a bailout. The four men are the most senior British banking executives charged since the financial crisis and include former Chief Executive Officer John Varley, former chairman of investment banking for the Middle East Roger Jenkins, ex-wealth chief Thomas Kalaris, and Richard Boath, the former European head of the bank’s financial institutions group.

The details are still a bit sketchy but it looks like Barclays gave Qatar a loan and then Qatar made what was presented as an equity investment to regulators. Qatar got a fee for going along with the ruse and Barclays avoided a bailout.

After the closing bell, FedEx reported a higher-than-expected quarterly profit, as the package delivery company benefited from its TNT Express acquisition and higher sales across its express, ground and freight business units. FedEx said profit will climb as much as 14 percent in the current fiscal year as the courier benefits from a recent jump in prices and package deliveries.

The outlook underscored the potential payoff from FedEx’s heavy investments in fiscal 2017 to handle more of the surge in e-commerce deliveries. The air-freight pioneer, an economic bellwether because of the variety of shipments it carries, is also poised to gain from a stronger worldwide economy.

Financial Review

Call It Neutral

Sinclair Noe — April 10, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW + 1 = 20,658
SPX + 1 = 2357
NAS + 3 = 5880
RUT + 2 = 1367
10 Y – .01 = 2.36%
OIL + .91 = 53.15
GOLD + .60 = 1255.40

Fed Chair Janet Yellen held a Q&A session today at the University of Michigan. Yellen said the Fed’s task has shifted from a post-crisis exercise of healing the economy to one aimed at sustaining progress.

Yellen said, “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could.”  Now, she says the Fed is trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.

The appropriate stance of policy now is closer to, let me call it neutral.” That still likely means two more rate hikes this year. Minutes of their March meeting showed that most Fed officials also expect to begin shrinking the bank’s $4.5 trillion balance sheet later this year, gradually reversing emergency bond purchases made during the financial crisis and recession.

In last week’s minutes, the Fed policymakers warned that stock prices were on the high side, specifically saying: “Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms.” And, “some measures of valuations, such as price-to-earnings ratios, rose further above historical norms.”

Now, the Fed is not known for its stock picking or timing skills, but this week the proof is in the putting as earnings season kicks into gear. Earnings of S&P 500 companies are estimated to have risen 10.1 percent in the first three months of the year. The index is currently trading at 17.4 times forward earnings estimates, above its long-term average of 15, according to Thomson Reuters I/B/E/S.

JPMorgan, Citigroup and Wells Fargo are scheduled to report earnings on Thursday. The financial sector has been a darling performer since the election on anticipation of deregulation and tax reform policies that have yet to materialize; so, look for the focus to shift to earnings.

Wells Fargo’s board of directors has released its investigation into the bank’s recent fraudulent-accounts scandal, pinning blame primarily on two former executives. According to the report, Wells Fargo’s board will claw back $28 million in pay from former CEO John Stumpf and $47.3 million from former head of community banking Carrie Tolstedt for their roles in the scandal.

The board determined that Stumpf and Tolstedt did not do enough to address the culture at Wells that set quotas for bank employees to open as many as 2 million credit card and retail banking accounts for customers from 2011 to 2015 without their knowledge. According to the report, Stumpf was aware of individual issues as far back as 2002 but did not become aware of the systemic nature of the problem until 2012.

Even when he did become aware, the board said, Stumpf did not do enough to address the issues.

Today’s report also referenced an internal Wells Fargo report prepared 12 years ago, in 2004 which foretold the fake account scandal. That investigation, titled “Gaming,” warned that Wells Fargo employees had an “incentive to cheat” that was “based on the fear of losing their jobs.” It said that workers felt they couldn’t meet the bank’s unrealistic sales goals “without gaming the system.”

With the newly announced clawbacks, Wells Fargo has taken back nearly $183 million from Stumpf, Tolstedt and other executives. Wells Fargo has been fined $185 million by regulators and been the subject of two congressional inquiries.

Until as late as 2015, even as sales practices were labeled a “high risk” in materials provided to the board of directors’ risk committee, there was a general perception within Wells Fargo’s control functions that sales abuses were a problem of relatively modest significance. The report published today did not seem to recognize a failure on the part of the Board of Directors – no clawbacks there.

And it doesn’t look like the money in fines and clawbacks will do much to compensate the victims of Wells Fargo fraud, specifically the customers and the employees who tried to blow the whistle only to be fired for their efforts to be honest.

We’ve told you about the Libor Rate Rigging scandal, where various traders manipulated the daily fix on the London Interbank Offered Rate, which affects trillions of dollars of transactions around the globe; everything from mortgage loans to credit card rates to complex derivatives. The scandal rocked the financial industry when it was uncovered in 2012.

Now the BBC has released an audio recording that implicates the Bank of England, the central bank, of rate manipulation. According to the recording, The Bank of England repeatedly urged commercial banks to lower their Libor settings during the financial crisis. The BOE has consistently said it wasn’t aware of the Libor manipulation until years after the rigging happened.

In response to the BBC findings, the central bank noted that Libor and other global benchmarks weren’t regulated in the U.K. or elsewhere during the period in question. The rate-rigging scandal first came to public attention in 2012 when an international investigation revealed that several major banks colluded to manipulate Libor.

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. At the time, both said that they had only recently become aware of rate manipulation.

Meanwhile, Barclays CEO Jes Staley is in hot water. Staley is a veteran American banker and took the helm at Barclays in December 2015. He pledged to overhaul Barclays’ culture, which had been in the spotlight due to the bank’s involvement in rigging Libor, for which it was ordered to pay a fine of nearly £290 million-pounds.

Staley is accused of twice attempting to use Barclay’s internal security team to track down the authors of two anonymous letters. On the second occasion the security team received assistance from a US law enforcement agency, but still failed to identify the individual.

The whistle-blowing saga began in June 2016 when the board of Barclays received an anonymous letter and a senior executive received a second letter. These letters made allegations about a senior employee who had been recruited by the bank earlier that year. Staley has apologized for his actions and faces a significant cut in his bonus.

Swift Transportation and Knight Transportation are merging in a stock-swap deal, creating a company with a market value of more than $5 billion. Shareholders of Swift will own 54 percent of the new entity and Knight shareholders the rest after the deal closes.

The two companies earned about $5.1 billion in total revenue and $416 million in adjusted operating income last year. The companies expect to achieve about $15 million in cost-saving synergies and pretax revenue in the second half of 2017, and up to $150 million in 2019.

The companies, both based in Phoenix, have a shared history – Jerry Moyes started Swift in 1966, while Randy Knight, who was a part-owner of Swift – founded Knight Transportation along with three cousins in 1990.

Knight’s executive chairman, Kevin Knight, will assume the same title at the new company. Moyes, who retired as co-CEO of Swift last year, will become one of the directors of the new company. The Jerry Moyes family, however, will own about 24 percent of Knight-Swift. The deal will create the largest truckload operator in North America.

AT&T announced it would buy Straight Path Communications, a holder of licenses to wireless spectrum, for $1.25 billion in an all-stock deal as it aims to accumulate the airwaves it needs for a 5G network. AT&T’s offer represents a 162% premium to Straight Path’s closing price on Friday.

After a partisan fight so deep it forced the Senate to go “nuclear” to confirm him, Neil Gorsuch was sworn in as the nation’s newest Supreme Court justice, filling the seat left vacant when Justice Antonin Scalia died last year. In the final months of the Supreme Court’s current term, Gorsuch could break a potential 4-4 deadlock on cases involving religious freedom, racial discrimination, immigration, and other issues.

The court might also have to weigh in on Trump’s executive order restricting travel from majority-Muslim countries. And in the next few years, the justices are expected to consider new cases involving same-sex marriage, abortion, and gun rights.

Toyota said it would invest more than $1.3 billion in its Georgetown, Ky., plant, its largest factory in the world. Although the investment does not include new jobs, the move signals a deepening commitment to the U.S. market.

The 7.5 million-square-foot Kentucky plant makes several vehicles, including the Camry sedan, which Cars.com has dubbed the most made-in-America car in the U.S. based on an assessment of the car’s components. The plant currently has about 8,200 employees, having added 700 in recent months to launch the redesigned 2018 Camry, which was unveiled in January at the Detroit auto show. The investment adds to a $530 million project authorized in 2013 to make a new Lexus vehicle.

What’s the most valuable car company in the USA? No, it is not GM. At the end of January, short interest in Tesla made up about 35% of the float, or shares available for trading. Tesla was burning through cash and had only  delivered 76,230 vehicles in 2016, well below the 80,000 to 90,000 that Wall Street was expecting. General Motors sold about 10 million cars in 2016.

But a funny thing happened – Tesla shares have been moving higher, up 46% so far, this year, a fact that has caused billions of dollars of losses for those who have bet against it. Tesla now has a larger market capitalization than Ford or General Motors.

Financial Review

Immovable v. Unstoppable

Sinclair Noe — January 4, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW + 60 = 19,942
SPX + 12 = 2270
NAS + 47 = 5477
RUT + 30 = 1387
10 Y un = 2.45%
OIL + 1.02 = 54.31
GOLD + 4.80 = 1164.10

What happens when an unstoppable force meets an immovable object? The Federal Reserve released the minutes from its December meeting; that’s the meeting where the Fed raised interest rates for only the second time in a decade.

Almost all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increases to counteract.

Trump’s promises of tax cuts, infrastructure spending and deregulation could boost inflation and might set the stage for a confrontation between a president seeking to boost economic growth and the Fed, which is tasked with keeping the economy from overheating. The minutes showed policymakers might signal an even more aggressive path of rate increases if inflationary pressures rose.

At the same time, Fed policymakers “emphasized their considerable uncertainty” about future economic policy changes. The Fed expects Trump’s election might result in slightly faster economic growth over the next several years, but it won’t happen right away and they see little chance of the boom times Trump has promised – so business as usual; which is a trajectory of 3 rates hikes in 2017, perhaps the most hawkish FOMC minutes in the past few years.

As for the unstoppable force versus immovable object debate, relativity proves there is no such thing as an immovable object and since we do not have a source of infinite energy to stop an object, there are no unstoppable objects. So, what happens when two massively infinite unacceleratable objects approach each other on a collision course and neither changes its velocity? They must pass right through each other with no effect on each other at all.

Short-term interest rate futures rose slightly after the release of the minutes but not enough to suggest altered expectations for the central bank’s rate hike path this year. The dollar backed off 14-year highs.

The rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009. The London interbank offered rate, or LIBOR, is a global rate benchmark for $350 trillion worth of financial products worldwide.

Mortgage interest rates came down slightly to end the year, but not enough. Mortgage application volume plunged 12 percent for last week, seasonally adjusted, from two weeks earlier. The Mortgage Bankers Association said mortgage application volume typically drops sharply over the holidays.

However, this year, as mortgage rates continued their upward climb reaching the highest levels in more than two years, overall application volume fell even more than the holiday slowdown would suggest. The average interest rate for conforming 30-year fixed-rate mortgages decreased to 4.39 percent from 4.45 percent, plus points.

Meanwhile, President Obama exhorted fellow Democrats to preserve Obamacare, as Republicans launched their bid to scrap it in what Vice President-elect Mike Pence called the “first order of business” of Donald Trump’s administration.

Actually, it would be the second order of business for the 115^th Congress, following a failed attempt to gut the ethics office. Pence met Republican lawmakers to plot the path forward on scuttling the law. Pence said Trump will work in concert with congressional leaders for a “smooth transition to a market-based healthcare reform system” through legislative and executive action.

During two news conferences, Pence, Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell offered few details on what a Republican-backed replacement for Obamacare would look like. And there’s the rub. Any attempt to repeal Obamacare will need a replacement stapled to that bill.

Auto sales for December trickled in through the trading day. US auto sales rose for an unprecedented seventh straight year in 2016, topping the record set in 2015. In December, sales rose at a seasonally adjusted annual rate of 18.4 million according to Autodata.

But the auto sales boom could be leveling off. Some automakers are trimming production because excess cars and trucks are sitting on dealer lots. Car prices are already at record levels. That is partly because buyers are shifting from less expensive cars to crossovers, SUVs and trucks, and partly because of demand for the latest safety and tech features, such as automatic braking and internet.

There is also growing concern about rising default rates on car loans, particularly among less creditworthy buyers. If lenders pull back, that will hurt car sales.

GM led year-on-year growth in December with an increase by 10%. GM said the average transaction price for its vehicles rose $740 from November to $36,386 in December, reflecting in part strong sales of large SUVs.

Ford said it sold 87,512 F-Series pickups in December, the lineup’s best overall sales month in 11 years. The F-series was the best-selling model line in the United States last year, for the 40th year in a row. Ford sales overall were up just 0.1% in December.

Fiat Chrysler sales slid 10%. Nissan sales rose 10%. Honda sales were up 6.4%. Toyota up 2%. Volkswagen posted a 20% gain in sales.

Tesla fell short of its goal for 80,000 auto deliveries in 2016. The electric car manufacturer delivered 76,230 cars in 2016. That’s still far more than the roughly 50,000 cars it delivered a year earlier. Tesla may face fresh competition; Faraday Future unveiled its “FF 91”, which it describes as the most technologically advanced luxury electric SUV. The car is expected to retail for $180,000 and you can reserve one with a $5,000 down payment.

Can you name the best-selling car in Sweden? (Volvo?) Wrong! For the first time in 54 years, the best-selling car in Sweden is not a Volvo. The Volkswagen Golf knocked Volvo’s most popular luxury models off the throne in 2016. Three of the top five models on the sales ranking were from Volvo, and the brand accounted for around one fifth of all vehicles sold in Sweden last year. Sweden is Volvo’s second biggest market after China.

Amazon.com delivered a record more than 2 billion items for sellers worldwide in 2016. Items shipped by Fulfillment by Amazon rose 50% in the holiday season, while deliveries to prime members numbered in the millions. The online retailer said active sellers using the Fulfillment by Amazon service increased more than 70% in 2016, and units shipped grew more than 80% outside the U.S. The number of sellers that reached $100,000 in sales rose by 30%. The company estimates that sellers have created more than 600,000 new jobs outside of Amazon.

Last week we reported that Sears had told employees to expect more store closures. Today Sears went public with the details. The company will shut down a total of 108 Kmart stores and 42 Sears stores by April – 150 stores total, although apparently, none in Arizona.

In the most recent quarter, Sears’ revenue fell 13%, to $5 billion, and its losses widened to $748 million from $454 million in the period last year. Same-store sales dropped 7.4%, including a 10% decrease at Sears stores and a 4.4% decrease at Kmart stores.

Both Kohl’s and Macy’s reported lower sales during November and December 2016 than the year before. Both retailers announced sales declines of 2.1% from the same two months in 2015. Additionally, both Kohl’s and Macy’s said that sales at owned and operated stores were down by 2.7% this holiday season. Following the news, Kohl’s was down over 10.5%, while Macy’s was down 5.5%.

A District judge in Texas almost halved the award in a December jury verdict that ordered Johnson & Johnson and its DePuy Orthopaedics unit to pay more than $1 billion to plaintiffs in six lawsuits who said they were injured by DePuy’s Pinnacle hip implants.

Around $500 million of punitive damages would be cut from the more than $1 billion awarded to the plaintiffs who are California residents that were implanted with the hip devices and experienced tissue death, bone erosion and other injuries they attributed to design flaws.

DCP Midstream Partners said it had acquired the assets of a joint venture between Phillips 66 and Spectra Energy, to create the largest natural gas liquids producer and gas processor in the United States. The combined company, which has an enterprise value of $11 billion, will be renamed DCP Midstream LP and will trade with the ticker symbol “DCP”.

A former Barclays trader pleaded guilty to US charges arising from a global investigation into the manipulation of foreign-exchange prices at major banks. Jason Katz’ plea came after Barclays and three other banks last year pleaded guilty to conspiring to manipulate currency prices. Barclays agreed to pay $2.4 billion to resolve various related U.S. and UK probes. Katz is the first person to admit criminal wrongdoing about the Forex rigging case.

According to a report quietly released by the U.S. Treasury’s Office of Financial Research “U.S. global systemically important banks (G-SIBs) have more than $2 trillion in total exposures to Europe. Roughly half of those exposures are off-balance-sheet…U.S. G-SIBs have sold more than $800 billion notional in credit derivatives referencing entities domiciled in the EU.”

When a Wall Street bank buys a credit derivative, it is buying protection against a default on its debts by the referenced entity like a European bank or European corporation. But when a Wall Street bank sells credit derivative protection, it is on the hook for the losses if the referenced entity defaults.

Regulators will not release to the public the specifics on which Wall Street banks are selling protection on which European banks. The OFR report also indicates that regulators still do not have access to adequate data from the biggest banks and insurers to assess the dangers in real time.

Financial Review

The Wall

Sinclair Noe — December 28, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 111 = 19,833
SPX – 18 = 2249
NAS – 48 = 5438
RUT – 16 = 1360
10 Y – .05 – 2.51%
OIL – .21 = 53.69
GOLD + 4.20 = 1142.50

The Dow Industrial Average is flirting with 20,000 but today it hit a wall. Stocks fell the most in two weeks in light holiday trading. Trading has been thin across the globe during the last week of the year, with volumes in crude oil, equities and currencies all below average. We have 2 trading days left in the year.

A jump in consumer spending in the final stretch of December significantly offset a slow start to the holiday shopping season, and is likely to help many retailers beat sales forecasts. The December spending boost contrasts with a muted November, when early holiday promotions and expectations among consumers that deals would always be available took a toll.

Spending over the Thanksgiving weekend in November fell 3.5 percent from a year ago, despite a strong jump in online sales, according to the National Retail Federation. Brick-and-mortar sales in the week ending Dec. 24 rose 6.5 percent year-over-year after having fallen for the rest of the month, according to data from analytics firm RetailNext.

Strong demand for furniture, home furnishings and men’s apparel from the start of November through Christmas Eve pushed U.S. retail sales up 4 percent, higher than the previously expected 3.8 percent, according to data from MasterCard’s holiday spending report. Official government data and results from retailers will not be available until next month.

Contracts to buy previously owned U.S. homes fell in November to their lowest level in nearly a year. The National Association of Realtors said its pending home sales index, based on contracts signed in November, dropped 2.5 percent to 107.3. The biggest slowdown was in the West, where pending contracts dropped by 6.7%. The NAR blamed the slowdown on higher mortgage rates and tight inventory.

The White House is getting ready to announce a package of sanctions and diplomatic censure to punish Russia for its attempts to meddle in the 2016 presidential election. The Washington Post reports several punitive measures were on the table, including “economic sanctions and diplomatic censure.” Other methods may include covert cyber-operations. An announcement describing the public portions of the response could come as early as this week.

Lloyds Banking Group is planning to establish a subsidiary in Germany or the Netherlands if the U.K. leaves the European Union without retaining access to its single market. The EU is in the process of tightening rules for subsidiaries of non-EU banks.

Britain looks likely to lose its financial passport in Brexit negotiations due to start next year. London’s 328-year old insurance market, Lloyd’s of London, is also planning to move some of its operations to the continent in reaction to the UK’s Brexit vote.

Barclays is refusing to settle with the US Department of Justice over allegations it deliberately sold mortgage bonds to investors that it knew were backed by loans “made to borrowers who were not creditworthy and which were supported by house appraisals it knew were inflated”.

By refusing to settle, Barclays is borrowing a page from the Deutsche Bank Playbook; Deutsche also refused to pay a $14 billion settlement for similar wrongdoing, and then eventually settled for $7.2 billion, but only about $3.1 billion of that is actual cash; the rest is loan forgiveness and credit relief.

If Barclays took the settlement as offered it would mean a hit to capital reserve ratios. So, Barclays is likely holding out for a better deal, but it could be a risky play – this is not their first offense.

Airbus is delaying the delivery of 12 double-decker A380 aircraft to Emirates Airline. This comes after the company warned this year that it would scale back production of the super jumbo because of weak demand. Meanwhile, Delta announced it has canceled a $4 billion order for 18 Boeing 787 Dreamliners that was inherited as part of its merger with Northwest Airlines.

Qualcomm is facing an $865 million fine in South Korea. Qualcomm said the Korea Fair Trade Commission issued the penalty after finding it had violated the country’s competition law. The country’s antitrust regulator has accused the chipset designer of imposing unfair licensing fees on mobile device makers using its patents.

The company has faced similar hurdles in China and Europe, but South Korea is an important market: Samsung is Qualcomm’s second-biggest customer. The fine is the largest ever levied in South Korea.

Toshiba shares tumbled 20% overnight,  hitting the Tokyo exchange’s daily downward limit, wiping out about $5 billion in market capitalization over the past 2 days after the company said it could face a multi-billion-dollar charge on the nuclear power unit it acquired last year from Chicago Bridge & Iron. Toshiba executives declined to provide further details about the write-down, adding that the sum would be finalized by mid-February.

Japan’s Takata could be close to settlement with the US Department of Justice over its massive exploding-airbag recall. The Wall Street Journal reports Takata is expected to pay up to $1 billion to resolve allegations of criminal wrongdoing in handling its faulty airbags. At least 184 people have been injured in the United States in incidents involving potentially deadly Takata air bags. Worldwide, approximately 100 million vehicles have been recalled.

Kate Spade might be for sale. The Wall Street Journal reports the handbag and accessory retailer is working with investment bankers about a possible sale of the company; share price jumped nearly 20% on the report. Kate Spade reported lower-than-expected quarterly same-store sales last month and said pricing competition would likely dampen earnings during the holiday shopping quarter.

GNC, the chain of nutrition stores, has temporarily shuttered all 4,464 of its U.S. locations, as it rolls out its revamped pricing strategy. The one-day closures come two months after the retailer admitted that inconsistent prices on its website and in stores, as well as discrepancies over what it charged loyalty members versus casual buyers, were making its locations confusing to shoppers.

While GNC expects its new, simplified pricing structure will bring more shoppers into its stores, there will be repercussions — at least in the short term. When the company raised prices on its website to better align with what shoppers pay in stores, the changes sparked a 30 percent quarterly decline in same-store sales.

Germany is considering fining social networks such as Facebook up to €500,000-euro for each day the platform leaves a “fake news” story up without deleting it. The law would force the social networks to create offices focused on responding to takedown demands and would make the networks responsible for compensation if a post by individual users were found to slander someone.

Can Amazon Echo testify against you? In what may be the first case of its kind, Amazon has denied investigators voice data from an Echo owned by an Arkansas man who has been charged with murder, despite a police warrant. The tech giant refused to hand over the audio data on two separate occasions, although it did share suspect’s account information and purchase history.

Amazon’s Echo (and its main competitor, the Google Home) works by passively recording everything you say. When the Echo hears “Alexa” (or whatever your activation phrase is), it begins to actively record. That snippet of speech is then sent to Amazon’s cloud servers, where your recorded message is run through a speech-recognition neural network and a response is sent back to you, whether that’s playing a song or giving you the weather forecast.

Police in Arkansas think the Echo may have recorded audio of a murder, although that kind of audio probably did not end up in Amazon’s cloud memory.

Come the new year, millions of the lowest-wage workers across the country will get a raise. Some of those raises will be very minor — a cost of living adjustment amounting to an extra nickel or dime an hour. But in several places the jump will be between $1 and $2 an hour. The biggest minimum wage raises, percentage wise, will be in Arizona (up 24% to $10), Maine (up 20% to $9) and three Silicon Valley cities (up 20% to $12). All told, the minimum wage is set to rise in 21 states, at least 22 cities, four counties and one region.

Americans spent $2.1 trillion in 2013 on diagnosis and treatment of health problems, which amounts to more than 17 percent of the total U.S. economy. And spending on health care for 2015 is estimated to top $3.2 trillion; that means Americans pay more for health care than any other country.

A new study published in the Journal of the American Medical Association reveals what patients and their insurers are spending that money on, breaking it down by 155 diseases, patient age and category, such as pharmaceuticals or hospitalizations.

About half of all health-care spending in the US goes to treat a small group of diseases, and diabetes is leading the pack, costing $101 billion in diagnosis and treatment in 2013. Heart disease, the second-largest source of expenses, cost a total of $88 billion that year. Medical spending increases with age — except for newborns. About 38 percent of personal health spending was for people over age 65.

More and more Americans are retiring outside of the United States, according to the Social Security Administration. The number increased 17 percent from 2010 to 2015, and about 400,000 American retirees are now living outside the country. The countries they have chosen most often: Canada, Japan, Mexico, Germany and the United Kingdom.

Financial Review

How Low Can It Go?

Sinclair Noe — July 5, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 108 = 17,840
SPX – 14 = 2088
NAS – 39 = 4822
10 Y – .09 = 1.36
OIL – 2.39 = 46.60
GOLD + 5.70 = 1357.20

Longer-end Treasury yields traded near record lows, with the 30-year yield around 2.15 percent. The 10-year yield dropped to an all-time low of 1.367 percent.

The U.S. dollar index posted another gain to 96.28, with the euro around $1.11 and the pound sterling traded near $1.30, levels not seen in more than 30 years. European stocks were mostly lower, with the German DAX off more than 1.5 percent. The STOXX Europe 600 Banks index under-performed, trading about 2 percent lower.

Factory orders in the U.S. fell 1% in May after two straight gains. So far this year, orders for manufactured goods have dropped 1.9 percent to $2.2 trillion compared to the same period in 2015.

Demand in a category that serves as a proxy for business investment – non-military goods that exclude the volatile aircraft category – slipped 0.4 percent in May. The Commerce Department also reports durable goods orders declined 2.3%.

Demand for mining and energy-related equipment slid 5.8% following a 20.8% plunge in the prior month. Orders for computers were also weaker. Bookings for nondurable goods rose 0.3%.

Corelogic reports home prices nationwide, including distressed sales, increased year over year by 5.9 percent in May 2016 compared with May 2015 and increased month over month by 1.3 percent in May 2016 compared with April 2016.

The CoreLogic HPI Forecast indicates that home prices will increase by 5.3 percent on a year-over-year basis from May 2016 to May 2017 – so more of the same. Twenty-two states reached new highs for the month; Arizona was not one of them; we remain 23.9% below peak prices, but the state did record a 5.8% year-over-year price increase.

Tomorrow we get the minutes from the Fed’s June FOMC meeting. If the minutes show real concerns about the durability of the economy, it could be friendly to the dovish market, which now only has fully priced in the next rate hike in 2018. Alternatively, the minutes could suggest the Fed was fairly confident that the labor market would come back. This would be less friendly for the market.

Federal Reserve Bank of San Francisco President John Williams held a couple of interviews today and said Britain’s vote to exit the European Union probably won’t derail the U.S. economy, leaving the Fed scope to raise interest rates this year if his growth and inflation expectations are met.

The Bank of England takes action. The BOE’s Financial Policy Committee cut its counter-cyclical capital buffer for UK banks to zero from 0.50%, according to the latest Financial Stability Report. The committee says the buffer will remain in place for at least the next year as the UK economy deals with “uncertainty” following the vote for a British exit from the European Union, or Brexit.

Australia’s central bank held its cash rate today at a record low of 1.75%, a widely expected decision given political uncertainty and a lack of timely information on domestic inflation. The country still doesn’t know who won Saturday’s general election and final results may not be known for another week.

Euro zone business growth held steady in June, but the modest pace suggested economic growth in the second quarter was half the rate of January-March, even as a rebound in Italy and rapid acceleration in Spain brightened the outlook. In France, data showed both services and manufacturing contracting. The majority of the surveys were completed before Britain voted on June 23 to leave the European Union.

In the past 24 hours, three different UK property funds have frozen withdrawals, citing a rush by investors to pull out their money in the wake of the UK’s Brexit vote. In 2007, Bear Stearns banned withdrawals from one of its hedge funds after investors were spooked by rising defaults and bankruptcies. The British property funds are very different beasts from the exotic, derivative-laced vehicles that presaged the global financial meltdown. These funds are open to regular retail investors and invest in things like office parks and malls.

But forget about Brexit for a moment; the new worry of the day is Italian banks. A big feature from The Wall Street Journal  captures most of the concerns with Italy’s banking system and the political turmoil it appears liable to set off.

In short, Italian banks are loaded with bad debts; 17% of bank loans in Italy are “sour,” a level much greater even than that of the US banking system at the height of the financial crisis (5%).Of course, issues surrounding the Italian banking system are not strictly new, and in the past year shares of UniCredit — Italy’s only bank considered globally significant — and Banca Monte dei Paschi di Siena, the oldest bank in the world, are down over 60%.

Reports surfaced in April that the government could step in to shore up the banking system; days later the government got executives, insurers, and investors to put 5 billion euros into a rescue fund for Italy’s weakest banks. This morning, a report from Bloomberg said Italy was looking to inject up to 3 billion euros into Monte dei Paschi; this would be the bank’s third bailout since the financial crisis.

The U.S. holds more oil reserves (264 billion barrels) than Saudi Arabia (212 billion) and Russia (256 billion), the first time it has surpassed those held by the world’s biggest exporting nations, according to a new study by Rystad Energy.

The analysis of 60,000 fields worldwide, conducted over a three-year period, shows total global oil reserves at 2.1 trillion barrels. That is 70-times the current production rate of about 30 billion barrels of crude per year. For the U.S. more than 50 percent of the remaining oil reserves is in unconventional shale oil. Today, oil prices dropped nearly 5%.

NASA’s Juno spacecraft, built by Lockheed Martin, ended a five-year, 1.8 billion-mile journey to Jupiter, with a do-or-die engine burn to sling itself into the planet’s orbit. No small trick. At the time of its arrival, Juno was flying through the solar system at over 150,000 miles per hour—making it one of the fastest man-made objects ever.

Juno will spend the next 20 months studying what lies beneath the gas giant’s thick clouds and measure its gravity, magnetic fields and water content. Juno is the ninth spacecraft to see Jupiter up close, but only the second to ever go into orbit around it, and Juno promises to provide the most intimate peek into the far-off Jovian system yet.

Poland has made significant progress in its talks with Raytheon over a Patriot missile system valued at an estimated €5-billion-euro. According to the Polish Defense Ministry, the country is ready to move ahead with the plan because Raytheon pledged that 50% of the missile system spending would be “done in Poland by Polish arms firms.”

BlackBerry will stop making its Classic smartphone. The Classic was launched early last year, with a physical keyboard and powered by the company’s overhauled BlackBerry 10 operating system. BlackBerry has since launched a phone powered by Alphabet’s Android software and plans several more.

Google DeepMind, the London-based artificial intelligence unit owned by Alphabet, announced a research partnership today with the British National Health Service to gain access to a million anonymous eye scans. DeepMind specializes in machine learning, the increasingly important area of technology where algorithms allow computers to learn and figure things out on their own.

DeepMind will use the eye scan data to train its computers to identify eye defects. The aim is to give doctors a digital tool that can read an eye-scan test and recognize problems faster. Earlier detection of eye disorders related to diabetes and age-related macular degeneration could allow doctors to prevent loss of vision in many people

A bidding war with Salesforce.com forced Microsoft to pay nearly $6 billion extra last month to seal its planned takeover of LinkedIn. Details of the frenzied bidding were revealed in a filing with the SEC ahead of a shareholder vote to approve the transaction. A month-long back-and-forth between the two rivals pushed the value of the all-cash deal to $26.2 billion, making it the third-largest acquisition in the tech industry.

Three former Barclays traders have been found guilty of Libor manipulation almost four years after the bank paid out hundreds of millions of dollars in fines for fixing the key benchmark rate. Days after the British firm became the first to settle, its Chief Executive Officer, Bob Diamond, lost his job and regulators eventually imposed roughly $9 billion in penalties on the financial industry.

The convictions bring the total number of bankers Britain has convicted over the long-running Libor-rigging scandal to five. That is still a better fines to conviction ratio by far than the US had for mortgage abuses by big banks.

London Stock Exchange shareholders approved a $27 billion merger with Deutsche Boerse yesterday despite renewed uncertainty following the Brexit vote. The two exchanges insisted that their all-share merger to create the world’s biggest bourse by revenue was essentially “Brexit proof”.

Financial Review

Bargain Bloodhounds

Sinclair Noe — November 13, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 202 = 17,245
SPX – 22 = 2023
NAS – 77 = 4927
10 YR YLD – .04 = 2.28%
OIL – .99 = 40.76
GOLD – 1.10 = 1084.90
SILV – .03 = 14.38

The S&P 500 moved into negative territory year to date, for the first time since Oct. 22. The Dow Industrial Average is also down year to date, moving below the 200-day MA, with a weekly loss of more than 650. Commodity prices are weighing heavily on the markets, following yesterday’s report showing crude oil stockpiles were 4 times higher than market expectations. Still, the IEA predicts that supplies outside OPEC will decline next year by the most since 1992 as low prices take their toll on the U.S. shale industry.  Meanwhile, the dollar index is trading just above 99. That would put it within striking distance of 100.40, its highest level in 12 years.

Retail sales rose a seasonally adjusted 0.1% last month. Sales were revised lower in September to show no gain. Sales were also flat in August. In October, sales were held down by lower spending at auto dealers, gas stations and grocery stores. Although the number of autos sold last month was quite strong, sales fell a seasonally adjusted 0.5%, perhaps suggesting heavier discounting. Stripping out gas and autos, U.S. retail sales rose a somewhat better 0.3%. Shoppers have used some of their gas savings to go out to eat more. Spending at restaurants climbed 0.5% in October.

The third quarter of 2015 was rough for American department stores. Macy’s, the nation’s largest department-store chain, had such a bad quarter that it cut its year-end forecasts across the board, lowering earnings, revenue, and same-store sales projections. And upscale competitor Nordstrom followed suit after reporting a 42% drop in profits, which caused shares to drop 15%.

But it’s not all retail doom and gloom. JC Penney reported same store sales were up 6.4%, and that helped boost net sales nearly 5% to $2.9 billion. The retailer also dialed up its year-end outlook for adjusted earnings before interest, taxes, depreciation, and amortization. All that said, JC Penney still isn’t turning a profit, but its net loss shrank 23% to $137 million. Shares were still down 16% today. Seriously, we should see some major bargains this holiday season.

Consumers were in a good mood. The University of Michigan’s consumer sentiment index rose to 93.1 in early November from a reading of 90.0 in October. The survey showed an improvement in buying plans for large discretionary purchases, especially vehicles. Lower-income households also were upbeat about their prospects in November.

The producer price index fell 0.4% in October. The index, which measures prices at the wholesale level, has been flat or lower for four straight months, contributing to a record 1.6% decline over the past year. The overall cost of services dropped 0.3% last month, reflecting lower revenue generated by wholesalers and retailers. The cost of goods declined 0.4%. Lower energy costs and cheaper imports have pushed prices down. Core producer prices that exclude the volatile categories of food, energy and trade fell a smaller 0.1% in October.

So, to recap: consumers are feeling good, wholesale prices are down (not just going up slowly, but actually down), and retail sales are flat lining right before the holiday shopping season. Here’s a thought; maybe consumers who were slammed by the Great Recession and were forced into squeezing every dime out of a dollar aren’t ready to go back to just throwing their cash at high priced department stores. We learned how to sniff out deals, we learned how to use technology to beat big margins.

The downturn turned us into bargain bloodhounds. Maybe this is the beginning of the end of department stores and malls as we know them. And maybe wage growth hasn’t yet been enough to warrant abandoning our newfound thrift. Maybe there’s even a little saving going on. The savings rate has been stubbornly high (by American standards). Or maybe everybody maxed out their credit cards. Maybe the economy is headed off the recessionary cliff. Or maybe it’s just a little statistical noise in the long term uptrend. Who knows? The salient point is that it isn’t really tough to spot the winners and losers in this market.

The federal government ran a budget deficit of $136 billion in October, up 12% or $15 billion from the same month last year. Spending in the first month of the fiscal year was $348 billion, up 4% from October 2014. Total receipts were $211 billion, a 1% decrease.

Eurozone economic growth was slower than expected in the third quarter. Eurostat said the gross domestic product of the 19 countries sharing the euro expanded 0.3 percent quarter-on-quarter for a 1.6 percent year-on-year increase in the July-September period. This outcome is lower than the ECB’s staff projections, which would add to the already strong case for the ECB to step up monetary stimulus in December.

China is moving to contain leveraged wagers on its stock market, cutting in half the amount of borrowed money investors can use to buy shares. Margin requirements will be raised to 100% from 50% starting on Nov. 23. The rule change means that an investor with 1 million yuan in their account is limited to borrowing another 1 million yuan from a broker to buy more shares. Previously, they could borrow as much as 2 million yuan. That should curtail speculation.

British prosecutors charged 10 former Deutsche Bank and Barclays employees with manipulating a benchmark interest rate, with an 11th facing indictment as soon as next week. Six traders from Deutsche Bank and four from Barclays were charged with conspiracy to manipulate the Euribor benchmark. Banks and other financial institutions have paid about $9 billion in fines tied to Libor and other key rates. So far, we are expected to believe that upper management was nothing but a bunch of overpaid, out of touch, incompetent morons who had no clue about trillions of dollars of trades resulting in billions of profits. At some point, prosecutors will have to figure out that someone in the C-suite knew what was going on and put their seal of approval on all this rigging.

The Group of 20 summit gets underway this weekend in Turkey. The primary purpose of the meeting is to look for ways to stimulate the global economy. A secondary agenda has been raised by Turkish President Erdogan to use concerns in the Eurozone over the refugee crisis to bolster support for military intervention in Syria. And while there will certainly be some lively debates at the G-20 meeting, the most likely outcome is a very nice photo-op.

Mylan failed to attract a majority of Perrigo shareholders by a Friday deadline for its $26 billion unsolicited offer to acquire the over-the-counter drugmaker. About 40 percent of Perrigo holders tendered their shares, short of the 50 percent needed to move ahead. Mylan now can’t try again for a year. Mylan offered $75 in cash and 2.3 Mylan shares for each Perrigo share, a bid that Dublin-based Perrigo had rejected as inadequate.

Cisco had a mixed quarter. The network-technology giant reported better-than-expected revenue and earnings. But guidance was a little light. Management expects to deliver $0.53 to $0.54 per share in earnings, which is below the $0.56 expected.

Hulu may sell a stake of itself to Time Warner as part of a deal that would value the streaming-video service at more than $5 billion and advance its efforts to compete with Netflix and Amazon.com. The Wall Street Journal reports, “The companies have been in talks about Time Warner becoming an equal stakeholder in Hulu alongside Walt Disney, 21st Century Fox and Comcast.

Shares of BHP Billiton fell close to a decade low today as a drop in commodity prices overnight compounded investor worries about the fallout from a dam-burst at its jointly-owned Brazilian iron-ore mine operation last week which killed nine people. Brazil President Dilma Rousseff has slapped preliminary fines of $96 million against the Samarco mine where two waste dams burst, spilling sludge and mine waste over 2 states. The fines could go much higher. Prosecutors are investigating possible crimes that could have contributed to the disaster at the mine

The Supreme Court has agreed to hear a challenge to a Texas law that would leave the state with about 10 abortion clinics, down from more than 40. The court has not heard a major abortion case since 2007, and the new case has the potential to affect millions of women and to revise the constitutional principles governing abortion rights. The case concerns two parts of a state law that imposes strict requirements on abortion providers. One part of the law requires all clinics in the state to meet the standards for “ambulatory surgical centers,” including regulations concerning buildings, equipment and staffing. The other requires doctors performing abortions to have admitting privileges at a nearby hospital. Other parts of the law have already caused about half of the state’s 41 abortion clinics to close. If the contested provisions take effect, the brief said, the number of clinics would again be halved.

The challengers’ brief said that the law “would delay or prevent thousands of women from obtaining abortions and lead some to resort to unsafe or illegal methods of ending an unwanted pregnancy.” The remaining clinics would be clustered in four metropolitan areas: Austin, Dallas-Fort Worth, Houston and San Antonio. The case, Whole Woman’s Health v. Cole, could provide the Supreme Court with an opportunity to decide whether the law interferes with its 1992 decision in Planned Parenthood v. Casey, which said states may not place undue burdens on the constitutional right to abortion before fetal viability. The court said undue burdens included “unnecessary health regulations that have the purpose or effect of presenting a substantial obstacle to a woman seeking an abortion.” The justices will hear arguments in the case within the next few months and hand down a decision by June.

Financial Review

Ongoing Criminal Enterprises

Sinclair Noe — May 20, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Subscribe: iTunes | RSS

DOW – 26 = 18,285
SPX – 1 = 2125
NAS + 1 = 5071
10 YR YLD – .01 = 2.25%
OIL + .77 = 58.76
GOLD + 1.80 = 1210.80
SILV un = 17.18

April 29 and 30 the Federal Reserve’s Federal Open Market Committee met to determine monetary policy; today, they published the minutes of that meeting. There were no surprises. Policymakers have no plans to increase interest rate targets in June. We all knew that. Officials in April “had increased uncertainty regarding the economic outlook,” the minutes showed. They had no good reason to explain why consumer spending was so weak.

“Most” Fed officials think the dramatic slowdown in growth in the first quarter was transitory and that a moderate rebound would resume in the second quarter. Inflation was also expected to move higher.  The international context isn’t helpful to the US economy. Fed officials deem “foreign economic and financial developments” as constituting “potential downside risks,” and they specifically mention Greece and China. Moreover, despite its recent partial retracement, the dollar’s appreciation is “likely to continue to be a factor restraining US net exports and economic growth for a time.”

This suggests that they see a rate hike coming sometime later this year. Only a “few” on the U.S. central bank questioned whether the Fed was providing enough stimulus for the economy at the present time and cautioned against any rate hike in the near future. This is an interesting point because the Fed really hasn’t provided much stimulus for the economy; they have provided stimulus to financial markets but not the broader economy in a direct fashion.

Indirectly, the Fed has provided stimulus to the broader economy through something known as the monetary transmission mechanism, which works largely through housing or other long-lived investments which are sensitive to interest rates. Interest rates don’t have strong impact on short-term investments or short-term capex. A lot of business investment is short-term; a lot of household spending is short-term. So Fed policy, by moving interest rates, normally exerts its effect mainly through housing. And interest rates do move housing. Remember the early 1980s when Paul Volker decided to tighten, interest rates jumped, and housing collapsed. And housing has come back from the lows, but not all the way back. One reason is because people who are most likely to buy houses got slammed in the downturn and couldn’t or wouldn’t jump back into that frying pan.

Today’s economic data backs up the relationship between housing and rates. Mortgage purchase applications fell 4.0 percent in the May 15 week though, year-on-year, applications are still up a very strong 11.0 percent. The ongoing run up in mortgage rates may be easing demand for mortgage applications just at the time that demand for purchase applications had been gaining steam.

And so the Fed is feeling like it has its back to the wall, and the wall is zero interest rates. If there is an economic problem the Fed can’t respond by lowering interest rates, or at least the impact of going into negative territory would be dangerous ground.

There was some debate about how to communicate any move to tighten rates. Some officials think it is important to give a warning to the markets, others worry that telegraphing intentions to hike rates will only result in a rate tantrum. The recent bond-market rout underscores that with bond yields near historical lows, even a moderate rise in yields would chip away the slim interest payments and inflict pain on bondholders. The Fed identifies this as episodes in which there were large monetary disturbances not caused by output fluctuations. Hopefully the Fed remembers the lesson from the Crash of 87; the markets respond violently to surprise rate hikes.

A mixed bag of economic releases this month has bolstered investors’ expectations that the Fed would wait until late this year to act. Fed Chairwoman Janet Yellen will make a speech on Friday that might provide further guidance.

Five global banks have agreed to pay $5.8 billion in combined penalties and will plead guilty to criminal charges related to manipulating foreign currency exchange rates, also known as Forex. Four of the banks, JPMorgan Chase, Barclays, Royal Bank of Scotland, and Citigroup, will plead guilty to conspiring to manipulate the price of US dollars and euros.

Barclays will pay $650 million, Citigroup $925, million J.P. Morgan $550 million and RBS $395 million. Barclays will pay another $1.3 billion to New York State, federal and U.K. regulators.

The fifth bank, UBS, received immunity in the antitrust case because they informed regulators about the Forex rigging as part of an earlier deal related to Libor rigging; UBS had signed a Non-Prosecution Agreement in 2012 on the Libor charges, and their misconduct in the Forex markets violated that earlier agreement even though they self-reported wrongdoing. So, they have immunity on Forex but they had to plead guilty to Libor rigging.  UBS will pay $545 million in fines to the Justice Department and Federal Reserve.

The five banks will pay a further $1.6 billion in fines to the Federal Reserve. Bank of America also faces a $205 million fine by the Fed, but no criminal charges. No bank employees have been criminally charged. The five banks will be under a three-year period of probation.

Between December 2007 and January 2013, euro-dollar traders at Citigroup, JPMorgan, Barclays, RBS and UBS gathered in an exclusive electronic chat room and used coded language to coordinate their moves in the U.S. dollar-euro market. They referred to themselves as the Cartel. By agreeing not to buy or sell at certain times, they protected each other’s trading positions. The big banks were the market makers, setting daily exchange rates, known as the fix. The fix became the price paid for billions of dollars of currency bought or sold on any given day.

And the Cartel managed to skim a little for their efforts. One Barclays trader in the chat room about adding secret mark-ups to the prices wrote: “If you ain’t cheating, you ain’t trying.” Ben Lawsky, New York’s superintendent of Financial Services explained it simply:  “They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients.” Also, a side note, after the big settlement announcement Lawsky announced he will step down next month as New York’s top bank regulator after four years. To his credit, he is not going to work for JPMorgan.

I have not yet seen a figure for how much prosecutors think the Cartel stole, but the Forex market trades close to $5 trillion dollars a day, so today’s fines amount to about one/one-thousandth of daily volume. The rigging took place over more than 5 years. I’m guessing that the money they stole in rigging Forex might amount to more than the fines ordered today. And that raises another interesting question – how did they report that income? Will they now go back and amend their earnings reports?

Didn’t managers and Board of Directors sign off under Sarbanes-Oxley?

And remember that the Forex scandal follows on the heels of the Libor rigging scandal, and the ISDAfix scandal (that involved the $381 trillion market for interest-rate swaps and the $44 trillion market for options on swaps. Banks use it to set coupons paid for bonds tied to commercial real estate. And there is a mountain of evidence, and today Barclays agreed to a $115 million dollar settlement on the ISDAfix investigation. Other banks are also being investigated.)

And before that, the municipal bond rigging scandals, and scandals in commodity markets including precious metals, and tax evasion scandals, and money laundering scandals, and predatory lending scandals, and much, much, much more. Past performance is not a guarantee of future results, but based on past performance you have to figure that the banks have rigged all the financial markets.

FT has a running total of legal fines and settlements paid by banks to US regulators since 2007. According to their calculations, the tote board just touched $155 billion. In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.)

The big news in today’s settlement was not the size of the fines, not the scale of the scandal, but that the banks actually admitted criminal guilt. UBS violated its 2012 Non-Prosecution Agreement, and we’re still just looking at a fine for a repeat offender. The banks will get to keep their charters; they can continue to conduct business; three years’ probation. They can still vote, or at least buy elections. The deal does not prevent the Department of Justice from going after individual criminal charges but for now, nobody goes to jail.

HSBC has become one of the biggest global banks to say it will begin charging clients on deposits in a basket of European currencies to prevent its profit margins from being crushed in a record low-interest rate environment. The unusual steps come after the ECB last year became the first big central bank to announce a negative deposit rate, in effect a penalty on banks parking their surplus cash.

The Japanese economy staged a comeback in first quarter, expanding at an annualized 2.4% vs. the previous quarter. Despite the positive figure, economists are still worried about Japanese growth and deflation as most of the expansion was due to a huge build-up of inventories. The Nikkei Stock Index finished the session at a 15-year high.

It is widely recognized that Greece is running out of money. The next questions are when they will run out money and what will happen when they run out of money. Nikos Filis, from the ruling Syriza party, told Greek television Greece will not be able to make a €1.5 billion repayment to the IMF that falls due on June 5 if there is no deal with its international creditors by then.

Financial Review

Inmates Run the Asylum

Sinclair Noe — May 15, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Subscribe: iTunes | RSS

DOW + 20 = 18,272
SPX + 1 = 2122
NAS – 2 = 5048
10 YR YLD – .10 = 2.14%
OIL – .01 = 59.87
GOLD – 2.20 = 1223.00
SILV + .06 = 17.53

The S&P 500 index hit a record high close for the second day in a row. The S&P added 0.3 percent this week for its first back-to-back weekly gain in more than a month. The Nasdaq posted a small gain for the week.  The Dow Jones Industrial Average gained about 0.4 percent for the week. The Dow is close to another record. The old record is 18,288 from March 2.

So, to see if this little rally has legs, we can look at the Dow Jones Transportation Index, because according to Dow Theory, if the industrials are performing, they have to ship their products to market, so the Dow Transports should confirm any move by the Industrials. We are not getting confirmation. Transports topped out in November, and then there were 4 failed attempts to break through the high of 9310. And since March, the Transports have been consolidating lower. Now this doesn’t mean that the Industrials can’t hit a new record on Monday; after all the index is within spitting distance of the old record; but if the rally has legs, we would need to see Transports exhibit some signs of life. When we see a divergence, the we can expect the transports to drag down the broader market.

Industrial production fell a seasonally adjusted 0.3% in April.  Excluding autos, manufacturing was down 0.1%. As expected, mining and utilities output declined last month; that category includes oil exploration – which was down 14.5%. Capacity utilization dipped to 78.2% from 78.6% in March, indicating little cost pressure on goods prices. Meanwhile, the University of Michigan Consumer Sentiment Index fell to a preliminary May reading of 88.6, a seven-month low, compared with a final April level of 95.9.

A new study of labor market data by the Kansas City Fed concludes that since 2009, job growth has been strong for middle-skill and high-skill workers, but has remained weak for low-skill jobs. Middle-skill jobs rebounded in the first two years of the recovery and high-skilled jobs started to return in 2012. Growth in the upper two sectors has improved in each of the past three years. Low-skill jobs remain the one segment of the labor market that has yet to return to prerecession growth levels.

Note, the study talks about skill jobs, not about wages, although it may rightly be assumed that a highly skilled adjunct professor would make more than burger flipper – that is not always the case. Last week’s jobs report showed average hourly wages increased by only 0.1% in April and 2.2% for the past twelve months, which really means wages were flat after factoring inflation, and even in a recovering job market. What we have seen is wages fall in a recession, but remain flat in an economic recovery. Because wages remain sluggish, monetary policy doves are urging the Fed to hold off on raising rates. Yellen acknowledged that wages are not where they should be at her Congressional testimony last month.

So, where is the slack in the labor market? Much of it comes from workers who lost jobs in the downturn, and just left the labor pool; many of those workers were discouraged at prospects, and many others took a somewhat forced version of retirement. It is estimated that somewhere between 6 million to 17 million workers are under-employed, while another 6 or 7 million left the labor pool and are no longer counted. And don’t forget that new workers are added to the labor pool at the rate of about 80,000 per month. All those students in their graduation caps and gowns will be looking for jobs next week. So, there is plenty of slack (without even touching on globalization), and that is all reflected in wages.

The median weekly real income of men (including both wage and salary workers) working full time is an amazing $80 per week less today than it was 36 years ago in 1979, when converting to current dollars. That adds up to some $4,000 per year. And the median household income is down $5,000 per year over the past 15 years. And this is happening even as the jobs that are available demand a higher and higher skill set.

Dealmaking in the U.S. in 2015 has climbed 48 percent year-on-year to $565 billion, the highest level since 2007, following a string of multi-billion dollar acquisitions this week, including: Danaher acquiring Pall for $13.8 billion, Williams Companies acquiring Williams Partners for $13.8 billion, and Verizon acquiring AOL in a $4.4 billion deal. JPMorgan tops the list of U.S. M&A advisers with $153 billion from 52 deal. The New York Times is reporting that Visa, the credit card company is said to be in talks to buy its former subsidiary, Visa Europe, for as much as $20 billion. And the Wall Street Journal is reporting. Shutterfly, which is in a proxy fight with Marathon Partners Equity Management, said it would continue to consider “strategic transactions that provide compelling value”

Next week, four banks are expected to plead guilty to criminal antitrust charges in relation to manipulating the foreign exchange, or Forex, markets. The four banks are Barclays, JPMorgan Chase, Citigroup, and Royal Bank of Scotland. UBS will escape a guilty plea to fraud and antitrust charges related to foreign-currency rigging.

As required by the terms of a 2012 settlement, UBS self-reported the currency rigging and provided early cooperation which helped prosecutors in their investigation, so they felt they should have immunity for the fraud and anti-trust charges. But UBS is not off the hook; they will likely skate on anti-trust but still face fraud charges; and the reason is simple – they are a repeat offender. In 2012, UBS was under investigation for rigging the Libor, interest rates; the bank reached a settlement with prosecutors in which they agreed to “commit no United States crimes whatsoever” for the two-year term of the agreement. The 2012 settlement on rigging Libor followed on the heels of a 2011 settlement related to antitrust violations in the municipal-bond market. And that followed on the heels of a deferred-prosecution agreement in 2009 to resolve charges it helped American taxpayers hide money overseas.

So, now UBS is whining about not getting total immunity; apparently unable to distinguish between leniency and absolution. As a result, the bank is scrambling to continue to hold its charter in the US by obtaining waivers from regulators to allow it to continue operating certain businesses and access some benefits. UBS lawyers have been in marathon talks this week with prosecutors hammering out what court-filed documents will say about the bank’s alleged violations.

So, it sounds like the Justice Department is finally getting tough. According to the Murdoch Street Journal, the prosecutors were blowing up the 2012 deal. It sounds tough, right? Not so much. It is very likely that UBS will be allowed to continue doing business in the US, after they pay a multi-million dollar, slap on the wrist, fine. But what about the other banks that are expected to plead guilty to criminal anti-trust charges? Well, again, it’s a slap on the wrist fine and they will be able to continue doing business despite criminal charges.

But wait, there’s more. For example, what will happen to the foreign exchange market? Don’t worry, it’s in good hands. The New York Federal Reserve Bank is responsible for something called the Foreign Exchange Committee meets six to eight times per year and is responsible for establishing best practices in the Forex market. The committee members are commercial banks and investment banks. The Chair of the committee is a man named Troy Rohrbaugh, who is also the head of Foreign Exchange Trading at JPMorgan Chase, now and when the criminal activity was alleged. Before him, the chair was a man named Jeff Feig, who was from Citigroup. So, at the NY Fed, the committee charged with cleaning up the Forex market was chaired by a couple of guys from a couple of banks that are about to plead guilty to criminal charges in the Forex markets. And with guilty pleas expected next week, what has the NY Fed done about this arrangement? Nothing. Because the NY Fed is a captured regulator. Truly a case of the inmates running the asylum.

And that brings us to former Federal Reserve Chairman Ben Bernanke’s latest blog. The Bailout Prevention Act-a bipartisan bill introduced Wednesday-would seek to curb risk-taking from large banks by removing some of the Fed’s ability to bail them out. Bernanke thinks limiting bailouts is a bad idea. Bernanke says that in the 2008 crisis, the Fed served as a lender of last resort and he takes his bows for saving the global financial system from meltdown. And there is some truth to that. Then he says the Fed should still be able to bailout the banks if another problem crops up. And there he is wrong.

Bernanke says limiting the Fed’s ability to protect the economy in a financial panic would be a mistake. But we know the Fed has many other tools beside bailouts. What the Fed should do is fulfill its duty as a regulator. The Fed should set strong standards for banking activity; they should work with prosecutors to enforce the rules; if the laws are broken, the offending banks should have their charters revoked and the bank officers jailed. And if that happened, I suspect the banks would become the very picture of financial probity and we would never have to worry about a bailout ever again. And if they did slip up and try to destroy the financial system, we could chop them into small digestible pieces that could no longer pose a threat.