Financial Review

Zilch COLA

Sinclair Noe — October 15, 2015

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DOW + 217 = 17,141
SPX + 29 = 2023
NAS + 87 = 4870
10 YR YLD + .04 = 2.20%
OIL + .28 = 46.92
GOLD – .90 = 1184.40
SILV un = 16.22

The consumer price index, or prices at the retail level, declined by a seasonally adjusted 0.2% in September. Over the past 12 months inflation at the consumer level has shown zero increase. Inflation has fallen sharply over the past year mainly because of lower gasoline prices. The cost of gasoline fell 9% in September.

The cost of food, however, rose 0.4% owing largely to higher prices for dairy, fruits and vegetables. Stripping out food and energy, the core CPI rose 0.2%. Core prices are up 1.9% over the past 12 months. Separately, the Energy Information Administration reports crude inventories rose by 7.6 million barrels in the last week, compared with analysts’ expectations for an increase of 2.8 million barrels.

Americans who collect Social Security won’t get an increase in their monthly checks in 2016. Annual increases in Social Security are made every year based on changes in a component of the consumer price index known as CPI-W. That index fell 0.4% in the period used by the government to calculate the annual increase in cost-of-living adjustments.

The CPI-W looks at prices for Urban Wage Earners and Clerical Workers; this represents about 29% of the population. CPI-U is the price index for all urban consumers; this represents about 88% of the population. There is another measure of inflation called the CPI-E, which is a subset of the urban population using households where the reference person or spouse is 62 years of age or older.

In other words, the CPI-E measures prices for the demographic group that relies on Social Security. For the CPI-E, housing and medical care represents a bigger expense, and these are areas where prices have been increasing. And while the CPI-W dropped 0.4% over the past 12 months, the CPI-E increased 0.6%.

The difference would mean an average of a little more than $500 a year in Social Security benefits. Instead, there will be no increase. Nothing. Zip. Nada. Zilch.

Initial jobless claims in the week ending Oct. 10, declined by 7,000 to a seasonally adjusted 255,000; that’s the lowest level since 1973. In the week ended Oct. 3, continuing jobless claims sank by 50,000 to 2.16 million to mark the lowest level in 15 years.

The U.S. budget deficit narrowed to $439 billion in fiscal 2015, that’s the lowest since 2007, in both dollar terms and as a percentage of gross domestic product. The deficit fell to 2.5% of GDP. Treasury Secretary Jack Lew has moved up the deadline for Congress to raise the nation’s debt limit. Lew told congressional leaders in a letter today that the Treasury Department would exhaust special accounting measures no later than November 3, two days earlier than he had previously estimated. If Congress fails to raise the nation’s debt ceiling by that date, the US could risk a first-ever default on its obligations.

Meanwhile, the pile of Treasury bills sold at an interest rate of zero since the financial crisis topped $1T this summer and multiplied this week through an auction of three-month bills on Tuesday and one-month bills on Wednesday. On its surface, it makes no sense for investors to lend their cash for free. But with rates stuck near zero and supply limited by the U.S. debt ceiling, investors who need a place to park their cash have few other options.

Officials in the Treasury Department and Puerto Rico are discussing the issuance of a “superbond” that would help restructure the commonwealth’s $72 billion of debt. Under the plan, the Treasury or designated third party would administer an account holding at least some of the island’s tax collections, and funds in that account would be used to pay holders of the superbond. Puerto Rico has warned that it is likely to exhaust its remaining cash in November, and a debt payment of almost $300 million is due on Dec. 1.

The first U.S. criminal trial over Libor manipulation got underway in Manhattan yesterday, with former London-based traders Anthony Allen and Anthony Conti accused of conspiring to submit fraudulent rate reports to help colleagues profit on trades. The NY trial follows one this summer in London, where Tom Hayes, a former UBS and Citigroup trader, was convicted of conspiring with others to manipulate Libor. Hayes was sentenced to 14 years in prison, but is appealing.

Valeant Pharmaceuticals, which has come under fire for aggressively increasing the prices of its drugs, has received two federal subpoenas related to its pricing, distribution and patient support practices. Pricing practices in the pharmaceutical industry, from Valeant and others, have been under pressure over the past several weeks after Martin Shkreli, the 32-year-old CEO of the startup Turing Pharmaceuticals, made headlines by raising the price of a drug his firm purchased by more than 5,000%. Following that business model, Valeant has increased the price of 56 of the drugs in its portfolio an average of 66 percent, highlighted by their recent acquisition, Zegerid, which they promptly raised 550 percent.

Earnings reporting season continues. Citigroup, the No.3 U.S. bank by assets, reported a 51 percent jump in quarterly profit as lower costs more than made up for a fall in revenue amid increased market volatility. Citi’s legal and related costs dropped to $376 million in the third quarter from $1.6 billion a year earlier. Net profit rose 35.7 percent to $4.16 billion, or $1.31 per share, beating the average analyst estimate of $1.28 per share.

Goldman Sachs profit plunged for the second straight quarter as bond trading revenue fell by a third. Net income applicable to common shareholders fell 38 percent – to $1.33 billion, or $2.90 per share, from $2.14 billion, or $4.57 per share, a year earlier. Goldman missed estimates on both its top and bottom line.

Charles Schwab reports third-quarter profit jumped 17 percent on higher trading commissions and interest revenue. Net income totaled $376 million, or 28 cents a share, a penny higher than estimates.

UnitedHealth Group, the largest U.S. health insurer, reported a better-than-expected profit in the third quarter. Profit came in at $1.60 billion, or $1.65 per share, a penny better than estimates.

HCA Holdings, the country’s largest for-profit hospital operator said its third-quarter profit was likely to miss estimates.

According to FactSet, S&P 500 company earnings are expected to drop by 5.1%, that’s down slightly from 5.5% forecast about a week ago; still it’s a decline in earnings. And if third quarter earnings are negative it would mark the second consecutive quarter of negative earnings. Two negative quarters is the generally accepted, though not quite accurate, definition of a recession; but we’re talking about earnings, not the economy; there is a difference. Declining corporate earnings can lead to an economic recession; it has happened before, but it is not inevitable. Strip out the energy sector and S&P profits are holding up fairly well.

Yesterday Walmart took a 10% hit to share price; today they lost another 2%. The news behind the sell-off was that they would be spending more, meaning a hit to earnings, and they didn’t expect earnings to grow until 2019. The investments for Walmart include paying their workers just a bit more in the hopes that customer service can improve from surly apathy to something approaching ambivalent caring; plus some way to actually reduce turnover. Investing in wages and training is actually considered an ordinary expense and not capital investment, and that means no depreciation and so the hit to earnings is immediate, even if there is a longer-term payoff.

Walmart also announced a big new push in e-commerce, where it is currently being crushed by Amazon; this would require more warehouses and also using existing stores to serve as fulfillment centers. Also, cutting back neighborhood store and super-store construction plans. The biggest price tag comes in the form of $20 billion in stock buybacks. And since Walmart has just lost more than $20 billion in market cap in the last 2 days, you might be right to have concerns about the efficacy of this financial engineering. And if Walmart can’t make buybacks work, you have to wonder if this is a financial engineering scheme that has run its course. Time will tell. Meanwhile, look for Walmart to get back to its roots which is clobbering the competition on price – just in time for the holiday shopping season.

Volkswagen roundup: Germany’s automotive watchdog, the Federal Motor Transport Authority, is forcing the automaker to recall 2.4 million vehicles after rejecting a VW proposal under which diesel car owners could voluntarily bring them in for fixes. VW says it will now recall 8.5 million cars in Europe. Meanwhile, the Guardian reports another four car makers have joined the list of those whose diesel cars emit more pollution on the road than in regulatory tests: Mercedes-Benz, Honda, Mazda and Mitsubishi vehicles were all found to perform differently on the road than in test conditions in European tests.

FINANCIAL REVIEW

More Worthwhile Pursuits

Sinclair Noe — October 12, 2015
Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)
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DOW + 47 = 17,131
SPX + 2 = 2017
NAS + 8 = 4838
10 YR YLD closed
OIL – 2.10 = 47.53
GOLD + 7.50 = 1164.90
SILV – .01 = 15.92

The Dow Industrials posted a gain for the seventh consecutive session, and ninth gain in the past 10 sessions. During the rally, the Dow has gained 1,130 points. Crude oil futures settled 5.1 percent lower after gaining almost 9 percent last week. The dollar was down slightly.

Dell and private-equity firm Silver Lake will buy EMC Corp. for roughly $67 billion in cash and stock, marking one of the largest technology-industry takeovers ever. The $33.15 a share price tag represents a 19% premium over Friday’s closing price. EMC also owns about an 80% stake in VMware, which will remain a publicly traded company. EMC holders will receive $24.05 a share in cash and in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. VMware has a market value of about $33 billion.

The Dell deal is the largest in tech history, and it may be the biggest tech deal in terms of debt. Dell will add about $50 billion in debt to complete its proposed acquisition, bringing the closely held company’s total debt to about $60 billion.

Budweiser must really like Miller. Anheuser Busch InBev upped the ante again, making its fourth bid in the past few weeks for SABMiller, saying it’s willing to pay $103 billion in cash and stock. Under British takeover rules Anhesuer Busch InBev must make a formal offer by Wednesday or sit on the sidelines for at least 6 months. SABMiller, the world’s second largest brewer, has rejected three prior proposals since news first emerged in September that Anheuser-Busch InBev was interested in a merger.

The deal, if it were to be completed, would create a combined company with $64 billion in annual revenue that commands 30 percent of global beer sales. Any deal between the brewing giants would most likely face significant regulatory scrutiny.

Separately, the Justice Department is investigating allegations that Anheuser-Busch InBev is trying to cut competition by buying distributors, making it harder for fast-growing craft brewers to get their products on store shelves. In the past few months, A-B InBev has made deals for five distributors in three states. Many states require brewers to use distributors to sell their product, and once AB InBev buys a distributor, craft companies say they find that they can’t distribute their beer as easily and sales growth stalls.

A demonstration in Berlin on Saturday involved hundreds of thousands of protesters against the Transatlantic Trade and Investment Partnership being negotiated between the U.S and EU. The broad trade accord is seen as picking up momentum following last week’s Trans-Pacific Partnership deal, along with some gentle nudging from large multinationals. Groups in Europe are taking issue with TTIP’s lack of transparency and the potential impact on labor and safety.

Standard & Poor’s has cut its ratings on Catalonia by one notch to BB-, saying it expects increasing political tension following last month’s regional elections.

Greece’s new government faces a major test this week when several new economic reforms and austerity measures demanded by international creditors need to be voted on to become law. The Greek parliament will vote this week on an omnibus bill cutting pensions, raising the retirement age and increasing punishments for tax evasion ahead of the country’s first bailout review later this month. The reforms will need to be approved to unlock a fresh -euro loan installment from the country’s €86-billion-euro bailout.

Several dozen Republican congressmen have signed a petition that will force the House to vote on whether to revive the Export-Import Bank that helps American companies sell goods overseas. After the House votes on the Ex-Im Bank bill later this month, the Senate would still have to approve the measure.

The interest rate watch goes on. Here’s the latest twist. U.S. Federal Reserve policymakers are still likely to raise interest rates this year but that is “an expectation, not a commitment,” – so says Fed Vice Chairman Stanley Fischer at a weekend International Monetary Fund (IMF) meeting in Peru. Fischer also said “Considerable uncertainties” still surround the U.S. economic outlook, including the drag on exports from slowing global growth, low investment caused by the decline in oil prices and the recent “disappointing” drop in U.S. jobs.

This morning, Atlanta Federal Reserve Bank President Dennis Lockhart says the Fed will have plenty of new economic data to make a decision in December. And San Francisco Federal Reserve Bank President John Williams said that even “a little bit” more economic data could convince him to support a rate hike at the Fed’s next meeting, in October. Over the weekend Chicago Federal Reserve Bank President Charles Evans said the Fed that globally low inflation makes it “challenging” for the U.S. central bank to lift domestic inflation to its 2 percent goal.

Social Security recipients shouldn’t expect an increase in benefits next year. Adjustments are based on increases in inflation, however falling gasoline prices over much of the last year mean the cost-of-living adjustment, set to be announced Thursday, will likely be zero. The COLA adjustment affects payments to around 70 million Americans. This is just the third time in the past 40 years that Social Security would get no increase in next year’s benefits.

Much of the stock market is sensitive to the economic ramifications of Fed decisions, of course. But perhaps the sector with the most near-term sensitivity is the financial sector. The big banks are scheduled to report earnings this week, including: GS, BAC, WFC, C, JPM, and MS. While the broader market has recovered from losses sustained in the latter half of August, banks are still struggling. Other major earnings reports on the calendar this week include, Intel, GE, and Alphabet (formerly known as Google).

General Electric is in advanced talks to sell a specialty finance portfolio, worth more than $30 billion, to Wells Fargo. Reuters reports Wells Fargo has so far outbid other parties for General Electric’s vendor financing, commercial distribution finance and direct lending assets. A deal could be announced by the time Wells Fargo publishes its third-quarter earnings on Wednesday.

Glencore halted trading of its Hong Kong-listed shares overnight pending the announcement of an asset sale. The embattled mining giant then confirmed the sales process for its wholly-owned Cobar copper mine in Australia and Lomas Bayas copper mine in Chile. The deals are part of a broader plan Glencore has outlined to cut $30 billion in net debt, weather a slump in commodity prices and revive its shares (which have dropped 57% this year).

Copper rose 0.4 percent following a near 4 percent gain last week after production cuts by Glencore boosted base metals. Glencore plans to cut zinc production by a third. Zinc capped the biggest one-day gain in at least 26 years on Friday and copper jumped 3.1 percent.  The shift in output may not be enough to offset weak demand growth in China. Demand has been disappointing, but supply has also been worse than expected.

Fiat Chrysler  has disclosed the price range of Ferrari’s initial public offering that could value the luxury unit at close to $10 billion. The company will sell up to 10% of Ferrari in the IPO at a price of between $48-$52 per share and use the proceeds of the offering to help pay for its own turnaround plan.

Looking to secure a larger slice of the world’s biggest auto market, Ford is investing $1.8 billion over the next five years to expand research and development in China. The company also expects to introduce the C-MAX Energi, a plug-in hybrid, to the Chinese market next year. Beijing has been trying to encourage more electric vehicles to combat pollution, but progress has been slow due to the lack of infrastructure.

Angus Deaton, a Princeton economist, was awarded the Nobel Memorial Prize in Economic Science. The award committee said Deaton’s research has “shown other researchers and international organizations like the World Bank how to go about understanding poverty at the very basic level.” Deaton has criticized the widening income gap between rich and poor in the U.S.

In his 2013 book, “The Great Escape,” Deaton wrote that “inequality can sometimes be helpful” in promoting prosperity by giving people incentives to work harder and more efficiently. But last year Deaton wrote that he worried that high-paying jobs in finance and other fields were diverting talented young people from “more worthwhile pursuits.” He also warned that the very rich might be using their disproportionate influence to “write the rules in their favor, and they may work against the public provision of health care or education, for which they pay a large share but have little personal need.”

In a 2003 essay, Deaton wrote about the difficulty in determining how we define poverty. He wrote: Even if you have enough goods, they are worth little if you are not healthy enough to enjoy them. Children who live in an unsanitary environment will obtain little nutritional benefit from the food that they eat if they continually suffer from diarrhea. More broadly, girls who are denied the opportunity to go to school experience yet another type of poverty, the poverty of not being able to read and to participate in activities that are only open to the literate. People are also poor in another sense if they lack the resources to participate fully in the society in which they live, who in Adam Smith’s term “are afraid to appear in public,” even if their incomes would be sufficient in some other society.

Financial Review

Don’t Bet the Farm

Sinclair Noe — September 16, 2015

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DOW + 140 = 16,739
SPX + 17 = 1995
NAS + 28 = 4889
10 YR YLD + .02 = 2.30%
OIL + 2.56 = 47.15
GOLD + 14.10 = 1120.20
SILV + .53 = 15.03

The cost of consumer goods fell in August for the first time since the beginning of the year, owing mostly to another sharp drop in gasoline prices as the summer driving season came to an end. The consumer price index, or the cost of living, fell by a seasonally adjusted 0.1% last month. That’s the first decline since January. Retail prices are up just 0.2% in the past year. Excluding food and energy, so-called core consumer prices rose 0.1% in August. Core prices have risen just 1.8% in the past 12 months, unchanged from in July.

Energy prices declined 2% in August. Most of the relief came in the form of lower prices at the pump. The cost of a regular gallon of gas fell about 8% last month. The price of fuel had risen three straight months before the decline in August. Still, energy prices are down 15% over the past year. Food prices rose again, however. They increased 0.2% in August, spurred by higher costs of eggs, fruits and vegetables. The cost of airline tickets dropped for the second straight month. The price of new cars and medical care were unchanged. Lower inflation is also giving American workers more relief. Real hourly wages jumped 0.5% in August, a combination of lower inflation and a bump in pay. Real wages have climbed a modest 2% in the past 12 months.

By the way, the CPI-W is used to determine the COLA, or Cost of Living Adjustment; and it is based on the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers, which came in at negative 0.3% in August. We will still have to wait for September to determine the COLA, but we know it can’t go negative, so it looks like there will be no cost of living adjustment for Social Security benefits, or anything else.

The Federal Reserve will certainly consider inflation, or the lack of inflation, in their FOMC meeting today and tomorrow. An improving labor market and a growing economy are seen giving the Fed enough fodder to justify a hike. But many analysts see enough concern over low inflation and the impact of a rate move on fragile emerging markets as likely to stay the Fed’s hand. The World Bank and the International Monetary Fund have both argued against a Fed rate increase out of concern a move could add to turmoil in emerging-market economies, which has been fueled by a collapse in commodity prices and related concerns about China’s economy and Beijing’s decision last month to devalue its currency.

If you want to understand what the World Bank and IMF are worried about, you can look to 1997 and the Asian financial crisis. In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was swiftly followed by the Philippines, Malaysia, Singapore, and Indonesia. Then came a massive decline in Hong Kong’s stock market that led to losses in markets around the globe. Eventually the Russian ruble collapsed. Long Term Capital Management, a hedge fund run by John Meriwether and a few Nobel laureates, made some highly leveraged bad bets, and for a while it looked like the whole thing might result in a global financial meltdown.

While parallels exist between 1997 and the current emerging market selloff, notably in the form of a stronger dollar, which makes it more expensive for emerging-market countries to finance their debts, plus lower commodity prices and slowing trade, it could be more dangerous today; there are more highly leveraged hedge funds, and sovereign funds, and derivative trades. At the least, emerging market debt will become more expensive, commodities (denominated in dollars) will become less expensive, trade will likely slow, and defaults could become more common.

The Fed’s decision tomorrow will be felt around the world because the dollar is still the reserve currency and the Fed’s monetary policy determines what happens to currencies, stock markets and economies right around the world. The markets are pricing in roughly a one-third likelihood of a rate rise this week, but, in truth, no one has any real idea whether the trigger will finally be pulled or not. I think there is a much higher probability the Fed will hike rates. We’ve been warned, it has been telegraphed and signaled and communicated in almost every way other than an official proclamation. And if they don’t do it tomorrow – when will they?

ZIRP, or Zero Interest Rate Policy was instituted in response to emergency financial conditions nearly 7 years ago. Where is the emergency today to justify ZIRP? The economy is less than stellar but it’s not like Lehman Brothers just shut their doors. And so my best guess is the Fed will raise rates tomorrow, but I’m not betting the farm because I don’t know what will happen. Neither do you. Plan accordingly.

Home-builder confidence in the market for newly constructed single-family homes rose a point to 62, the highest level since Nov. 2005, according to the National Association of Home Builders/Wells Fargo housing market index. Any reading above 50 indicates good conditions.

The Energy Information Administration reports oil stockpiles slipped 2.1 million barrels last week. Refineries increased operating rates for the first time since July, and supplies of gasoline and distillate fuels surged. Stocks of oil exploration and production companies rallied, while those of refiners fell. WTI crude rose 5.7%; it was the highest close and biggest one-day gain since Aug. 31.

So, how is the economy on Main Street? The Census Bureau has some answers. The median household income was $53,657 last year, down from $54,462 in 2013 but not statistically different. The poverty rate was 14.8%, which means 46.7 million people were impoverished — the fourth straight year in which the number of people in poverty was not statistically different. The percentage of people without health insurance coverage for the entire 2014 calendar year was 10.4%, down from 13.3% in 2013.

The Obama administration has begun preparations for a possible federal shutdown next month as a series of obstacles threaten a repeat of 2013. Lawmakers have just 15 days to reach a budget agreement before September 30, when current funding expires.

Snapping a major two-day slump, China’s Shanghai Composite Index jumped 4.9%, with all of the gains coming one hour before markets shut in a pattern that’s generally interpreted as government intervention.

Japan debt ratings were cut today by Standard & Poor’s over doubts the government will revive economic growth and end deflation in the next two to three years. The country currently has some $450 billion of debt outstanding; and the credit rating was cut to AA- rating instead of an A+ report card. The S&P downgrade is the most recent of the major credit-rating companies to do so; Moody’s was the first, in December 2014, followed by Fitch in April. S&P justified its downgrade by saying that the outlook for Prime Minister Shinzo Abe’s “Abenomics” program is grim.

Eurozone officials are racing against the clock to restructure Greece’s banking system before new rules kick in that could wipe out corporate deposits and result in disastrous effects for the country’s economy. The rush has been complicated by Sunday’s snap parliamentary elections, which could produce no clear winner and prolong negotiations over a governing coalition.

Anheuser-Busch InBev has informed rival SABMiller that it intends to make an offer to acquire the British firm in a deal that would bring together the world’s two largest beer makers. SAB Miller issued a statement saying, “No proposal has yet been received and the board of SABMiller has no further details about the terms of any such proposal.” So, the deal is far from certain, but if it happens, it would probably value SAB Miller around $75 to $92 billion, and create a brewing giant that would dominate much of the global beer market; which raises some questions about whether such a deal could pass anti-trust muster.

Also, since Anheuser Busch InBev is now a Belgian company trying to acquire SABMilller, a British company, there are some unique rules that come into play. Stringent rules on disclosure require a company to confirm or deny any hint of a deal, whether that comes from an anonymously sourced news article or unusual stock movement. The disclosure triggers a 28-day timeline for a formal, fully financed bid. Known as the put-up-or-shut-up rule, if AB InBev decides to walk away from the transaction it can’t come back for six months.

General Motors has agreed to sign a deferred-prosecution agreement to end a US government investigation into its handling of an ignition-switch defect linked to 124 deaths. The company will pay less than the $1.2 billion that Toyota paid to resolve a similar case, but the exact amount was not immediately known. The deal means GM will be charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case will be put on hold while GM fulfills terms of the deal.

The United Auto Workers union has reached a tentative labor deal with Fiat Chrysler after a long drawn-out night of negotiations. The union hopes the terms can be used as a template for Ford and GM, which also extended their deals past a midnight deadline on Monday to allow more time to wrap up negotiations. Under the agreement, Fiat Chrysler will eventually phase out the two class wage system between new factory workers and more senior employees.

FINANCIAL REVIEW

Inflation or the Lack Thereof

Sinclair Noe — October 22, 2014

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Podcast: Play in new window | Download (Duration: 13:21 — 6.1MB)

DOW – 153 = 16,461
SPX – 14 = 1927
NAS – 36 = 4382
10 YR YLD + .02 = 2.23%
OIL – 2.06 = 80.43
GOLD – 8.40 = 1242.00
SILV – .34 = 17.27

The major stock indices were higher this morning, then they dropped about the time were heard reports of a shooting in Ottawa Canada, near the parliament building. The shooting in the Canadian capital left a soldier dead and the city on lockdown.

The Labor Department said the Consumer Price Index edged up 0.1% last month. In the 12 months through September, the CPI rose 1.7%. The core CPI, which strips out food and energy prices, ticked up 0.1% last month, while the year-on-year change held steady at 1.7%.

Energy prices fell for a third straight month in September, with gasoline costs slipping 1.0% after dropping 4.1% in August. Food prices gained 0.3% in September and were up 3.0% from a year ago, the largest gain in nearly 2-1/2 years. Shelter costs increased 0.3% in September after rising 0.2% in August. The medical care index increased 0.2%, with prices for nonprescription drugs posting a record increase. Airline fares declined for a third straight month, while prices for new motor vehicles and apparel were unchanged. Prices for used cars and trucks fell for the fifth straight month. Wages remain stagnant. Average hourly earnings adjusted for inflation fell 0.2% in September and were up just 0.3% over the past year.

Higher rents are the main reason prices are rising at all. Excluding food, fuel and shelter costs, consumer prices dropped 0.5% at an annualized rate over the past three months. Those costs were up 0.9% over the past 12 months, close to the 0.8% increase in the year ended in February that was the smallest in a decade.

We know the Federal Reserve has a target of 2% inflation. The Fed uses a slightly different report to measure inflation, and their data shows inflation at 1.5%, well below target. The Fed had said last month that quantitative easing would probably end after its next meeting, on Oct. 28-29, and reiterated that rates would remain low for a “considerable time” after the asset purchases program ends. Federal Reserve Bank of St. Louis President James Bullard said last week that the central bank should consider delaying plans to end its bond-buying at the end of this month to halt a decline in inflation expectations. Bullard was probably just trying to talk up the markets, or jawbone; and it seems to have worked. The real question is whether the Fed will continue with QE, or maybe end QE3 and come up with some new stimulus program; after all, inflation is not preventing more stimulus. Indeed, the lack of inflation may be a bigger concern for the Fed.

Deflation can create a trap, but low inflation, or dis-inflation can create the same trap. The idea is that things will cost less tomorrow and so people put off buying, waiting for the lower prices. This also affects employment because there is less demand and fewer sales. Also, it is easier to give raises that are just a little bit less than the inflation rate; that’s like a real wage cut when adjusted for inflation. When inflation is low, the result is fewer new hires and more people laid off. And while inflation is bad for creditors, deflation is horrible for debtors. Prices and wages fall, but debt payments do not. So you’re forced to cut spending. And this cut in spending just increases the downward deflationary spiral.

For many years we were told that inflation was the problem, and it was a big problem…, 40 years ago. There are still some people fretting that, given all the money the Fed has pumped into the economy in quantitative easing, inflation is just around the corner. It might be a problem at some point in the future, but right now the concern is low inflation or deflation.

The CPI is the data that is used to determine Cost of Living Adjustments, or COLA, to Social Security benefits. Millions of older Americans will get a 1.7% increase in their monthly payments next year. The increase amounts to about $20 a month for the typical Social Security recipient. It’s the third year in a row the increase will be less than 2%. The $20 bump in Social Security payments may not sound like much, but it works out to about $240 a year, or about $500 for a married couple. The payments will hit in January.

Congress enacted automatic increases for Social Security beneficiaries in 1975, when inflation was high. For the first 35 years, the COLA was less than 2% only three times. Next year, the COLA will be less than 2% for the fifth time in six years. This year’s increase was 1.5%, the year before it was 1.7%.

The price of oil was down again today. This has been one of the biggest moves in the markets. The Department of Energy says American oil inventories increased by 7.1 million barrels in the week to October 17. Although this was somewhat smaller than the previous week’s 8.9 million-barrel build, it was still much larger than estimates of about 3 million barrels. The key question is whether this steep drop in prices is the result of cyclical factors; such as economic stagnation in Europe, the slowdown in countries such as China and Brazil; or whether it reflects a more fundamental trend.

The US is on its way to becoming energy independent, although it will take another 15 years or so. We are conserving more, thanks to ideas such as better fuel standards for cars, and at the same time we are producing more domestic oil. Next year, the US will become the top global oil producer. Nigeria used to be the fifth largest external supplier of oil to the US, but Nigeria has not exported a single barrel to this country since July. Lower oil prices will hurt some global economies, such as Russia and Iran, but it will help the economies of countries dependent on oil imports, such as Europe, Japan, India, and even the US. Moody’s estimates $1.2 billion in savings for United States consumers for each percentage-point decline in the price of gasoline every year. The drop in fuel will free up as much as $60 billion over the next year that the consumers can spend on other goods and services.

The global economics team at Bank of America Merrill Lynch weighed in with the idea that a 25 dollar drop in US crude oil prices could be good for as much as 40 basis points worth of GDP growth over two years. That’s doesn’t sound like much, until you realize the global economy is bumping along at something like 2% annual growth these days.

Of 135 US companies in the S&P 500 that have reported results, 68.9% beat expectations, higher than the rate over the previous four quarters.

Boeing said it had net income of $1.3 billion, or $1.86 a share, in the third quarter, up from $1.1 billion, or $1.51 a share, in the year-earlier period. The company blew past profit and sales estimates and raised its outlook for the full year. Shares dropped more than 4%. I don’t really understand that one, but Boeing is not a Wall Street darling this year.
AT&T reported adjusted third-quarter earnings of 63 cents a share on revenue of $32.96 billion. Analysts were looking for 64 cents a share on revenue of $33.22 billion.

Yelp is an online review site; so I’m told; I’ve never used it. Yelp reported third quarter results beat estimates but they issued weak guidance. Shares were slammed 15%.

US Bancorp said it earned a little more than $1.47 billion in the quarter, up from just under $1.47 billion a year earlier. On a per-share basis, the bank earned 78 cents, up from 76 cents. Revenue increased 2% to $4.99 billion. The results were in line with estimates. US Bank’s nearly 3,200 branches throughout the upper Midwest and West make the bank’s financial results a dispatch from the land of shale oil, which has fueled economic activity throughout the region. One sign: Lending by US bank for construction and development in the third quarter rose 27.6% from a year earlier, to $8.9 billion.

Tomorrow’s earnings calendar includes Microsoft, GM and 3M.

Yesterday we learned sales of previously owned homes just hit the highest level in a year. The latest numbers show new home sales surging August, when they hit their highest level since 2008. Consumer sentiment is hitting its highest levels since the crisis. Claims for unemployment benefits hit the lowest level in 14 years. Job openings are surging, hitting their highest levels since 2001. And the US is on track for its best year of job growth since the late 1990s. Industrial production just saw its biggest month-on-month gain since 2010. And capacity utilization hit a post crisis high. Meanwhile, inflation remains almost nonexistent, by historical standards, and is running so low that it might prompt the Fed to do something dovish. Consumer borrowing costs are falling, with mortgage rates at super low levels. And gas prices have dropped, and that should result in big savings and a little extra money in your pocket, which will be promptly spent, which will prop up the economy. The economy is actually looking pretty good.

But according to a new study by economists Emmanuel Saez of the University of California, Berkeley, and Gabriel Zucman of the London School of Economics, the middle class is getting killed. The middle-class share of American wealth has been shrinking for the better part of three decades and recently fell to its lowest level since 1940. In this case, “middle class” is defined rather expansively as the bottom 90% of all Americans. “Wealth” is the total of home equity, stock and bond holdings, pension plans and other assets, minus debt. The two big reasons why the middle class is getting clobbered? Inflation adjusted incomes have been stagnant for a few decades now, but debt has increased. Along with rising debt levels, stagnant wages have made it impossible for most families to save very much money, and so all the wealth the middle class accumulated since 1940 is gone.

If you want to make God laugh, tell him about your plans.