Financial Review

Fuld Again

Sinclair Noe — May 29, 2015

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DOW – 115 = 18,010
SPX – 13 = 2107
NAS – 27 = 5070
10 YR YLD – .04 = 2.09%
OIL + 2.62 = 60.30
GOLD + 2.20 = 1191.00
SILV + .04 = 16.80

The Dow Jones industrial average ended about 115 points lower after falling more than 150 points during the session. The blue chip index posted a 0.9 percent gain for May. The S&P 500 ended up 1.1 percent for the month, and the Nasdaq outperformed with a 2.6 percent monthly gain.

Year to date the Dow Industrials are up about 1 percent, the S&P 500 is up about 2 percent, and the Nasdaq is up about 7%. This has been an extremely tight trading range to start the year. Another way to look at it is consolidation. And at some point the markets will break out of this tight range. The question is whether it will be a breakout or a breakdown. And if you’re looking for a divergent signal, the Dow Transports traded down for the day, for a 3.4 percent loss in May. The index is down 9 percent for the year.

Today’s big economic report was that first quarter Gross Domestic Product in the U.S. shrank at a 0.7 percent annualized rate, revised lower from a previously reported 0.2 percent gain. The revisions showed the trade gap widened more than previously estimated, inventories grew at a slower pace but consumer spending climbed less than previously estimated. That was partly offset by a gain in home building. Income adjusted for inflation rose at a 1.4 percent annualized rate. While the income and GDP should theoretically match, the different methods used in calculating the numbers cause them to sometimes diverge. And that suggests the GDP may be understated, or maybe income is overstated.

Trade was the biggest drag on top-line GDP figures in the opening months of the year. U.S. exports of goods fell by the most since the first quarter of 2009 while overall imports climbed. The widening deficit subtracted 1.9 percentage points from economic growth. A stronger dollar has tamped down overseas demand for US-made goods while making foreign products cheaper to import. Meanwhile, congestion at West Coast ports constrained trade earlier in the year.

The GDP report included a look at inflation; the price index for personal consumption expenditures fell 2.0% in the first quarter of the year. Prices excluding food and energy rose a downwardly revised 0.8%, well below the Fed’s 2% inflation target. Consumers cut their spending in the first quarter of the year, one factor behind halting economic growth. Personal consumption expenditures rose at a downwardly revised 1.8% rate from January through March. Spending on services climbed 2.5% but purchases of goods rose a modest 0.5%. By contrast, consumer spending was up at a 4.4% pace in the final quarter of 2014.

The GDP revision was not as bad as most analysts anticipated; still, it was a big drop from the initial estimate 0.2% growth. And there will be a third revision. Sometimes it seems the numbers are, shall we say – quirky. True enough, but it isn’t easy to calculate the output of the entire country. It probably is less than precise, but it is what we have.

The University of Michigan consumer sentiment index dropped to 90.7 from 95.9 in April. It marked the biggest decline since the end of 2012. Consumers remain cautious about the current economy this month, but the report also said consumers are optimistic about their future financial situations. A separate report showed Chicago-area manufacturing activity contracted; the Chicago PMI unexpectedly fell to 46.2 in May versus a read of 52.3 in April; new orders and inventories slipped.

US crude oil inventories fell for a fourth straight week. Crude oil inventories fell by 2.8 million barrels last week, down for the fourth week. OPEC meets next week to set policy for the next six months and is widely expected to maintain a collective production target of 30 million barrels per day, although they have actually been overproducing by about 1 million barrels per day.

The dollar traded flat, with the euro above $1.09 and the yen near 13-year highs. The greenback is on track for a monthly gain after posting a loss in April.

The United States warned of a possible accident for the world economy if Greece and its creditors miss their June deadlines to avert a debt default. Germany said there was no sign of a breakthrough. IMF Director Christine Lagarde says: “A Greek exit is a possibility.” With Athens struggling to make repayments due next week, the debt stand-off between Greece and its European Union partners overshadowed a meeting of policymakers from the Group of Seven.  US Treasury Secretary Jack Lew repeated warnings not to minimize the global stability risk of Greece sliding out of the euro zone.

Payments are due on June 5^th and it is looking like the best possible outcome is to kick the can further down the road because no real resolution is in sight. Economist Nouriel Roubini said he expects “pots of money” to materialize to avoid a Greek default. He didn’t specify from where those pots might be unearthed. If he’s wrong, June might finally be the month when the curtain closes on the Greek tragedy.

The State Department has removed Cuba from the list of state sponsors of terrorism. The decision was expected following a review earlier this year. In a statement, the department said it still has significant concerns and disagreements with a wide range of Cuba’s policies. But the department found that Cuba has not provided any support for terrorism in the last six months and has provided assurances that it will not do so in the future.

The New York Post reports Intel is close to a deal to buy fellow chipmaker Altera for about $15 billion, and a deal is “likely by the end of next week.” Altera reportedly rejected an Intel $54/share bid just a few months ago and then broke off sales talks, but that was before Altera issued disappointing earnings. Intel also has the option to launch a hostile bid after June 1, when its standstill agreement with Altera expires.

The corruption scandal engulfing FIFA is having corporate sponsors ponder whether to back away from the powerful marketing outlet, although severing ties will not likely be easy. FIFA collected $1.6 billion in sponsorship money in the four years leading up to the 2014 World Cup, nearly half of which came from its six top “partners”: Visa, Adidas, McDonald’s, Coca-Cola, Emirates, and Hyundai. Prosecutors say some of the bribery money was funneled through major global banks including JPMorgan, Citigroup, Bank of America, UBS, and HSBC.  Meanwhile, in a vote this morning Sepp Blatter was re-elected to a fifth term as FIFA President, despite the many calls for him to step down. Protesters stormed the building in Zurich where the vote was held.

And we wrap up today’s commentary with another edition of “Banks Behaving Badly.” Today’s Triple B features some old names: Jamie Dimon and Dick Fuld.

At JPMorgan’s annual meeting last week, only 61 percent of votes cast endorsed the bank’s executive compensation, which confirmed Jamie  Dimon’s $20 million a year plus pay package. Thirty-six percent backed plans to separate Chairman and CEO Jamie Dimon’s dual position after he leaves. Dimon went on a rant against shareholders who followed recommendations from advisory firms like Institutional Shareholder Services and Glass Lewis. Dimon said: “God knows how any of you can place your vote based on ISS or Glass Lewis. If you do that you are just irresponsible, I am sorry. And, you probably aren’t a very good investor, either. I know some of you here do it because you are lazy.”

I am pretty certain that you wouldn’t talk to the owners and/or customers of your company or business this way. I know I wouldn’t talk to the ownership or customers of my business like that, but then again, I am not an elitist banker that takes bailout money from taxpayers. Dimon didn’t stop there. He took part of his time at the conference to rail against Goldman Sachs suggestion that JPMorgan would be worth much more if it was split up into parts. Dimon argued that bigger is better. Then in a separate announcement JPMorgan Chase will lay off more than 5,000 workers by next. The cuts began earlier this year and will reduce JPMorgan’s workforce by at least 2 percent.

Dimon also said that JPMorgan’s criminal guilty plea for rigging the foreign exchange market was “a terrible thing” to go through, and the bank would probably lose some business because of it. Yep, it probably is a terrible thing to get caught. And upon further consideration the shareholders who voted to give Jamie Dimon $20 million in pay probably are stupid and lazy. If they were smart and had some gumption, they would have paid him spit.

Meanwhile, Dick Fuld crawled out from under his rock. You may remember that Fuld is the disgraced former CEO of Lehman Brothers. He appeared at a conference in New York to deliver a keynote address titled, “How Emerging Growth Companies Can Succeed in Today’s Capital Markets: Perspectives from My Journey.” What he actually talked about was a little different. Fuld blamed regulators, borrowers and rumors for the end of the 158-year-old, $47 billion firm he led to the largest bankruptcy in US history. It was a “perfect storm” that sank Lehman, not his own leadership or decisions, Fuld said, while touting Lehman’s “success” to the audience. He also claimed that every one of the 27,000 employees who once worked for Lehman had been a risk manager, because they owned stock in the firm.

If your memory goes back a full  seven years, you might recall that Fuld actually thought the worst of the financial upheaval was over in 2008 and pushed employees to take more risk, marginalizing or firing any who questioned him; even as Fuld scrambled, ineptly to find suitors. At one point he took a question from an attendee at the conference; they asked why he didn’t stay low profile. Fuld answered: “Why don’t you just bite me?”

Thursday, April 03, 2014 - Tomorrow, Tomorrow, It’s Only a Day Away

Financial Review with Sinclair Noe

DOW – 0.45 = 16,572
SPX – 2 = 1888
NAS – 38 = 4237
10 YR YLD - .01 = 2.79%
OIL + .73 = 100.35
GOLD – 3.10 = 1287.80
SILV - .16 = 19.92

Forget about today; at least in terms of Wall Street trading. Tomorrow is more important. The first Friday of each month is always a big day because of the monthly jobs report; tomorrow, maybe more than most. The consensus estimates called for 200,000 net new jobs in March and the unemployment rate is expected to drop to 6.6% from 6.7%. Then there is the whisper number. Many people believe the harsh winter weather has held back hiring, like a balloon trapped under water by a thin sheet of ice, and when the ice melts, as it did in March, the balloon will jump out of the water like a salmon swimming upstream. Weather sensitive industries such as retail, construction and manufacturing might be especially strong performers.

A March jobs report that shows a broad increase in hiring across most or all industries would show the economy is recovering and everything, including the Fed, is on track. A disappointing number, though, would bolster the case of the increasingly famished Wall Street bears that bad weather alone is not the source of weak economic growth so far in 2014.

And if the number comes in right at expectations, we’ll have to go to the tiebreakers. We will look at the number of hours worked, In February, inclement weather kept people from getting to work, at least for a few days. The result: The average workweek slipped by 0.1 hour to 34.2 hours in February, the lowest level since January 2011. Fewer hours mean less take-home pay for many, translating into weaker consumer demand and slower economic growth. The wintry mix continued to hit parts of the country in March but the effect shouldn’t be as bad as earlier in the winter. Even a partial reversal of the weather distortion should generate a rebound in average weekly hours worked, which have slumped from 34.5 last November.

We’ll also look at the U-6 underutilization rate. Federal Reserve Chairwoman Janet Yellen this week highlighted the 7.2 million people who would like a full-time job but instead are working only part time. It’s a sign of slack in the labor market and one reason the Fed is likely to keep rates low for a long time. “This number is much larger than we would expect at 6.7% unemployment, based on past experience, and the existence of such a large pool of ‘partly unemployed’ workers is a sign that labor conditions are worse than indicated by the unemployment rate.”

And we’ll look at the participation rate, the share of working-age adults who have a job or are looking for work, held steady at 63% in February, near a 35-year low. That’s partly because baby boomers are retiring in greater numbers but may also indicate some people are frustrated with their job prospects and have dropped out of the labor force. Greater labor-force participation would be welcome, even if that keeps the unemployment rate from falling further.

Of course, that 200k jobs figure is just a guess, an arbitrary number pulled out of a hat. Total private employment reached 115,848,000 in February, close to the seasonally adjusted record of 115,977,000 from January 2008. If the private sector added more than 129,000 payroll jobs in March, the US will be back to its peak level of private-sector employment. Of course, a lot has changed since the prior peak. State local and federal governments have shed more than half a million jobs, leaving total employment still shy of its all-time high. The population is bigger: The civilian labor force has expanded by 1.6 million since then. And the mix of private-sector jobs has changed. For example, more people work in temp and health care jobs, while fewer are in construction and manufacturing.

With the Federal Reserve in the process of tapering down its bond purchases, big surprises on either side of the forecasts could upend expectations about the pace of the Fed’s stimulus withdrawal and the timing of eventual rate hikes. As important as the jobs figure is, it is also important to remember that, as Fed Chairwoman Janet Yellen has noted, unemployment isn’t the only number policy makers will consider.

It would take a really big number to move the bond market, but something north of 250,000 jobs could push the yield on the 10 year Treasury note above 2.8%. Market expectations appear to be biased toward higher yields.

A strong jobs report would also be bullish for the dollar. Today the dollar moved higher against the Euro as European Central Bank President Mario Draghi said policy makers were discussing the possibility of using quantitative easing and other unconventional stimulus measures to counteract extremely low inflation.

The ECB's governing council held its key interest rates unchanged for the fifth month in a row, despite an unexpected slowdown in area-wide inflation and worries about deflation.  Of course, Draghi has been trying to jawbone the Eurozone into economic growth for a couple of years, vowing to do whatever it takes but never actually doing whatever it takes, even as the destructive spiral of falling prices pushes consumers to put off purchases, thus destroying salaries, jobs and investment.

Meanwhile, International Monetary Fund Director Christine Lagarde was railing against the deflation ogre again, and warning the ECB about the dangers of “low-flation”, which is apparently a freshly minted economic term, and calling for more monetary easing by the ECB and the Bank of Japan. Draghi said the IMF has been “extremely generous” in suggesting what the ECB should or shouldn’t do. In fact, he urged the IMF to share the generosity “with other monetary policy jurisdictions, like for example issuing statements just the day before a (Fed) meeting.”

Which also means the ECB will not do whatever it takes to stoke the economic engine. And Lagarde was wrong; they don’t face “low-flation”; prices are falling.  The European Central Bank has let it happen. Deflation has been running at an annual rate of -1.5% in the Eurozone over the past five months, when adjusted for austerity taxes. Prices have dropped more than 6% in Greece, more than 5% in Italy, more than 4% in Spain and Portugal, 3% in Slovenia, and 2% in Holland. A little bit of stimulus would push the currency lower and goose exports and economic activity, but Draghi does nothing but jawbone; his constant promises to do whatever ring hollow.

Deflation can create some serious conundrums for debt. When a country’s debt burden rises faster than nominal GDP, it could engulf the private sector as well; tightening the vice on households and companies with fixed-rate debts; it would erode bank assets; risk fresh bank failures and hit life insurers through a mismatch in maturities.

An International Monetary Fund study detailed this week, that there's still a running assumption that governments would again rescue the biggest banks in the event of another panic. The IMF found that at least through 2012 the euro zone's biggest banks still benefited from an implicit taxpayer subsidy of $90 billion to $300 billion. Subsidies for UK and Japanese banks may have been as high as $110 billion and they ranged from $20 billion to $70 billion in the United States. So the risk, you might assume, is still loaded on the government's tab. Yet government borrowing costs across the western world and beyond have rarely, if ever, been lower.

Eurozone loans to businesses are contracting at a rate of 3%. The ECB is missing its 2% inflation target by 150 basis points, and will continue to miss it badly in 2015 and 2016 based on its own forecasts. Despite Draghi’s incessant and unbelievable jawboning, the ECB has consistently refused to offset the contractionary effects of austerity with enough monetary stimulus to keep GDP growing faster than the debt of the southern nations; and the more austerity the more the debt burden to GDP ratio has climbed. In Italy the debt climbed from 119% to 133% since 2010 despite harsh fiscal policy.

Say what you will about the Fed, and I have said plenty; their QE policy has been misdirected and has led to greater inequality, but at least the US maintains its global position as the cleanest shirt in the dirty clothes hamper because we weren’t hit with the double whammy of tight monetary policy and draconian fiscal austerity. (just the fiscal part)

The ECB insists that the latest dip in Euro inflation is due to falling energy costs, and therefore transient. That could all change if Russia decides to ramp up the use of natural gas as an economic weapon, and a precedent was set earlier this week. Rising energy prices in combination with falling prices for almost everything else would make for a really ugly mess in Euroland, and might force Draghi to stop sitting on his hands.

While offering her advice on “low-flation” to the ECB today, IMF chief Lagarde also spoke about other threats to global growth. Another threat is high corporate leverage in emerging economies, which if not adequately addressed will be worsened by the turmoil from eventual monetary tightening in advanced economies, especially the US. Yet another obstacle is the rise of geopolitical tensions, which could cloud the global economic outlook. "The situation in Ukraine is one which, if not well managed, could have broader spillover implications."