Financial Review

You’re Fired

Sinclair Noe — May 9, 2017

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DOW – 36 = 20,975
SPX – 2 = 2396
NAS + 17 = 6120
RUT + 0.22 = 1391
10 Y + .03 = 2.40%
OIL – .23 = 46.20
GOLD – 4.90 = 1222.10

President Trump has fired FBI Director James Comey. White House spokesman Sean Spicer said the president “terminated and removed” Comey from office “based on the clear recommendations of both Deputy Attorney General Rod Rosenstein and Attorney General Jeff Sessions.”

In Trump’s letter to Comey, the president said, “It is essential that we find new leadership for the FBI that restores public trust and confidence in its vital law enforcement mission.”

The FBI Director is appointed to a 10-year term and it is unusual for a director to be removed from the office before the term expires. Comey was appointed in 2013. Comey, who has led an investigation into Russia’s meddling during the 2016 election and possible links to Trump aides and associates, is only the second FBI chief to have been fired.

Earlier in the day, the FBI clarified a statement Comey made before a Senate panel that overstated the number of classified emails Hillary Clinton aide Huma Abedin forwarded to the personal computer of her husband, former Rep. Anthony Weiner.

Comey had come under fire from Democrats last year after announcing an investigation into Clinton’s emails right before the presidential election, while not disclosing until later a probe into ties between Donald Trump’s campaign team and Russian intelligence officials.

In a letter sent to Comey, Trump wrote: “While I greatly appreciate you informing me, on three separate occasions, that I am not under investigation, I nevertheless concur with judgment of the Department of Justice that you are not able to effectively lead the Bureau.”

Stocks trade at fresh highs (at least on the Nasdaq) and volatility across assets is so subdued it’s touching near-record lows (the VIX inched slightly higher at the close but is still in single digit territory and dipped as low as 9.56).

With the French election out of the way, investors have stopped paying what had been a five-month high in the cost of insuring against declines in the S&P 500 Index. The price of hedging against a 5 percent drop in the gauge over the next month is 36 percent below its five-year average.

For some, this sense of calm in the market is anxiety-inducing especially as valuations stretch to levels not seen since the aftermath of the 1990s-internet bubble. It has been a long time since we had a 5 or 10 percent correction, and the clock is ticking. Or maybe the bull market is just catching a breath, but the markets are almost never this calm.

Goldman CEO Lloyd Blankfein said today, “Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control … something erupts to remind us that the idea that anybody is in control of everything is hubris. I don’t know what brings us out of the doldrums, but I do know this is not a normal resting state.”

Fed funds futures pricing shows investors are almost universally expecting the Federal Reserve to raise overnight interest rates at its next meeting, with close to a 90 percent perceived chance of an increase next month. Yields on U.S. two-year notes, considered most sensitive to rate-hike expectations, rose to eight-week highs.

While the U.S. economy saw a marked deceleration in the first quarter, the overall outlook remains solid and the Fed is still widely expected to raise U.S. lending rates in June and likely again in September. The positive sentiment (or at least the ubiquitous complacency) and rising U.S. Treasury yields also boosted the dollar. The dollar index, which tracks the greenback’s value against six major currencies, rose to a three-week high, in line with the gains in yields.

Not everyone is cheerfully confident about economic growth. Commerce Secretary Wilbur Ross says the US economy won’t achieve the Trump administration’s 3 percent growth goal this year and not until all its tax, regulatory, trade and energy policies are fully in place.

US trading partners have been spooked by Trump’s vow to renegotiate or pull out of trade deals, such as the North American Free Trade Agreement. A possible rise in the use of tariffs to punish foreign companies deemed to be competing unfairly also has raised concerns of a wave of protectionism. Ross, however, insisted that the Trump administration was not aiming to restrict trade with its actions.

Kansas City Federal Reserve President Esther George said today the central bank should keep gradually raising short-term interest rates despite some economic indicators, like car sales, flashing “yellow”. Among the cautionary areas, auto sales are down from last year’s record pace, and first quarter GDP growth was up at only a 0.7% annual rate, George noted in a speech at the University of California, Santa Barbara.

But other indicators, like consumer sentiment, remain strong, and household balance sheets are, on average, healthy. And as labor markets continue to strengthen, “continuing the gradual removal of monetary accommodation is the appropriate course for the Fed,” George said. George said that rate hikes must be timed right and that a gradual pace seems appropriate. Going too fast risks derailing the economy, while moving too gradually can pose a risk to financial stability

Boston Federal Reserve President Eric Rosengren said today that efforts to overhaul Fannie Mae and Freddie Mac could lead to “a potential and significant shock” to the commercial real-estate sector.

The pair of mortgage-finance giants, which were bailed out by the U.S. government and placed in conservatorship in 2008 during the height of the financial crisis, have historically boasted outsize influence on the single-family mortgage market, but Rosengren expressed concern that the duo’s growing clout in the multifamily sector may pose risks, as the government considers new structures for the entities.

Job openings and hires moved sideways in March as economic momentum stalled out. The Labor Department says there were 5.74 million job openings, the same number as previously reported in February, which was cut to 5.68 million. Labor’s Job Openings and Labor Turnover Survey lags the closely watched monthly non-farm payroll data but provides more detail.

In March, the JOLTS report showed that the number of workers voluntarily leaving their jobs ticked up by 2.6%. That signals more worker confidence in the labor market.

South Korean liberal politician Moon Jae In has won the country’s presidential election. Moon’s win was fueled by a surge in liberal sympathy after the former conservative president, Park Geun Hye, was removed from office months ago. Park is now in a jail cell as she awaits trial on accusations she took about $52 million in bribes from major companies, including Samsung.

In light of the scandal with the former president, Moon was a seen as a clean candidate who would end corruption. The country’s National Election Commission said more than 33.8 million people voted in the election, a turnout of 77 percent, the highest in two decades. Moon has pushed for a more calm and conciliatory stance toward North Korea. Separately, the North Korean ambassador to the UK told Sky News the country will proceed with its sixth nuclear test.

Disney reported profits that topped expectations, but revenues that fell short of forecasts amid continued weakness at ESPN.  Disney said it earned $1.50 in adjusted earnings per share during its fiscal second quarter, and $13.3 billion in revenue. Revenues from Disney’s parks and resorts increased by 9% to $4.3 billion, helped by Shanghai Disney Resort.

Nvidia reported a 48 percent jump in quarterly revenue, helped by strong demand for its graphics chips and its diversification into fast-growing areas such as self-driving systems and artificial intelligence. Net income rose to $507 million, or 79 cents per share, from $208 million, or 35 cents per share, a year earlier. Nvidia’s revenue rose to $1.9 billion from $1.3 billion.

Yelp reported revenue of $197 million, just short of analysts’ estimates. Yelp cut it full-year 2017 estimates for revenue and earnings. Yelp was slammed – down 28%.

Passengers at an airport in Florida protested on Monday night after the cancellation of multiple flights, leading to a confrontation with airline employees and sheriff’s deputies who arrested three travelers while attempting to restore order. The airport altercation is only one skirmish in Spirit’s war, its customers’ discomfort a kind of collateral damage.

According to a federal lawsuit filed in the Southern District of Florida on Tuesday morning, the Miramar-based airline is accusing the Air Line Pilots Association, an AFL-CIO-affiliated labor union that represents more than 55,000 American and Canadian pilots, of arranging a pilot shortage and forcing Spirit to cancel flights to “purposely and unlawfully disrupting the airline’s operations” as retribution over ongoing pilot contract disputes.

In response to the Fort Lauderdale fracas, Spirit officials quickly passed the buck, blaming the incident on ALPA’s truant pilots. Spirit and ALPA have been at it since 2015, per CNN, but multiple contract negotiations have so far failed to produce an agreement. According to the lawsuit, Spirit has canceled about 300 flights in the past week alone.

A federal court granted Spirit Airlines a temporary restraining order today, compelling the pilots’ union to return to status quo. The pilots’ union said Spirit Airlines pilots will fully comply with the court to help restore normal operations.

Financial Review

We Got Your Volatility Right Here

Sinclair Noe — September 9, 2016

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

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DOW – 394 = 18,085
SPX – 53 = 2127
NAS – 133 = 5125
10 Y + .05 = 1.67%
OIL – 1.95 = 46.31
GOLD – 10.40 = 1328.80

Over the 41 days, through Thursday, the S&P 500’s highest and lowest closes have been just 1.75 percent apart. It’s the first time that has ever happened in the history of S&P data, which goes back to 1928.

Heading into today’s session the S&P 500 had gone more than 50 trading days without a drop of 1% or more, only the 48th time that has happened since 1950. The last time the Dow Industrials moved over 1% was July 8^th, more than 2 months. We got your volatility right here.

Federal Reserve Bank of Boston President Eric Rosengren moved more firmly into the camp of hawkish policy makers, warning that waiting too long to raise interest rates threatened to overheat the US economy and could risk financial stability. Delivering a speech this morning, Rosengren said, “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Rosengren’s stance on raising rates are significant because he is a voting member of the FOMC, he has been a longtime dove and someone that is calling for a rate hike even after the recent string of weak economic data. After Rosengren’s comments, futures traded lower, and the major indices opened in negative territory.

Later in the morning, Federal Reserve Bank of Dallas President Robert Kaplan said it isn’t urgent for the central bank to raise interest rates and it can afford to be “patient and deliberate in its actions.” Also Fed Governor Daniel Tarullo made some dovish comments during an interview on CNBC (more on Tarullo in a bit).

So, the Fed is not unanimous on rate hikes, but we’ll get one more piece of the puzzle on Monday, when Fed Governor Lael Brainard, will be delivering a previously unannounced speech in Chicago; the final day Fed officials can speak before the blackout period ahead of the Fed’s September 21 policy statement. Brainard has been one of the most dovish policymakers in the Fed. If she comes out in favor of a rate hike, it would be a clear signal that there will be a very strong push at the September FOMC meeting.

Jeff Gundlach, the widely followed bond investor who runs DoubleLine Funds held a cautious webcast last night. Gundlach said US corporate bonds are highly overvalued and added that many folks have come around to believe that interest rates can never rise, particularly as consensus around the ineffectiveness of negative interest rates solidifies. Gundlach went on to say, “In the investment business, when you hear the word ‘never,’ that means it’s about to happen.”

Global equities were also lower after the European Central Bank held interest rates at record lows and refrained from adding new stimulus. While President Mario Draghi said the ECB was looking at options to continue its money-printing program, investors were looking for more immediate action, including an extension or expansion of the current plan, or at least clearer hints of future actions.

Meanwhile, the yield on the 10-year German bond, known as the bund, turned positive Friday for the first time since June 23, the day of the U.K.’s vote to leave the European Union. A sharp global bond selloff that also pushed Treasury yields to their post-Brexit highs.

Hours after multiple global agencies detected a magnitude 5.3 earthquake near North Korea’s nuclear test site, the government in Pyongyang said it has hit the button on its fifth and potentially most powerful nuclear test this morning, claiming to have successfully detonated a nuclear warhead that could be mounted on ballistic rockets.

This is the North’s second nuke test in eight months and its fifth since 2006. The announcement drew immediate condemnation from the United States, South Korea, China and Japan. The test violates United Nations resolutions. And the Security Council called an emergency meeting.

Korean Air Lines, the biggest shareholder in Hanjin Shipping, has delayed a decision on a funding plan for the troubled shipping company for a second time, adding to the uncertainty of around $14 billion of cargo stranded at sea. With Hanjin’s future in doubt, carriers have announced they will hike container freight rates by as much as 50% beginning next month as retailers scramble to secure shipping ahead of the peak year-end holiday season.

The FAA, is asking very politely, in a not-at-all-freaked-out way, asking passengers toting the new Samsung Galaxy Note 7 around to keep them switched off on airplanes. Oh, and don’t charge them either. And do not store them in your checked baggage. Seriously. Do not do it.

What’s the problem you ask? The new Samsung smartphone seems to have a slight technical problem where it literally explodes. And then it catches fire. The problem appears to be linked to charging the phone. Passengers are still able to carry the phone on flights. It’s unclear why an exploding cellphone would be a problem in the cargo hold but not in the overhead compartment, but we can’t expect airplane mode to bail us out of everything. Samsung has issued a recall of 2.5 million of the phones, so the best move is to just get the phone replaced.

U.S. wholesale businesses left their inventories unchanged as their sales fell in July. The Commerce Department says wholesalers left their stockpiles alone in July after increasing them 0.3 percent in June. Their sales fell 0.4 percent in July, reversing a 1.7 percent increase in June. It was the biggest sales drop since January.

The July numbers show stress in the energy industry. Weak inventory restocking has been a drag on U.S. economic growth. From April through June, businesses overall reduced inventories at the fastest pace since the fall of 2011. That’s one reason second-quarter economic growth came in at a lackluster 1.1 percent.

Federal regulators say employees at Wells Fargo created millions of fake bank accounts and credit card numbers over the past five years in an illegal bid to boost their sales figures. The bank has been fined $185 million for the practices, including a record $100 million by the Consumer Financial Protection Bureau. Wells Fargo has also fired at least 5,300 employees who were involved in the scam.

Customers didn’t know what happened until they received statements, often charging unauthorized fees on unwanted and unknown credit cards. And when those customers attempted to seek legal redress? Wells Fargo fought back and judges dismissed the cases. Unbelievably, the mandatory arbitration agreements customers signed when they opened their original accounts also covered the fraudulent activity.

Now, it can be tough to get one or two people do something, so you might wonder what kind of elaborate criminal scheme was concocted to get more than 5,000 Wells Fargo employees to fabricate millions of fake accounts. It appears that Wells Fargo paid employees to open accounts – bonuses; they also set quotas; so, open accounts or get fired. It was part of a plan to cross-sell, like bundling for bank accounts; salespeople are urged to encourage existing bank customers to use multiple bank products.

This was a large scale effort and it was a systemic problem.  It is virtually impossible for senior executives not to have known what was going on. And Wells Fargo even promoted the aggressive sales scheme in their annual reports. In other words, there is no way to defend the lack of punishment of executives in a fraud of this scale that extended over five years. Either they were in on it, or somehow more than 5,000 lower level employees cooked this up and were able to hide it from the top brass.

Under Sarbanes Oxley, the CEO and CFO are required to certify the adequacy of financial and operational controls. There is no way Wells Fargo’s can have it both ways. Either they were in on the scam or they were criminally negligent.

You may recall a couple of weeks ago, Wells Fargo was fined $4 million for illegally misleading student loan borrowers and resulted in some paying unnecessary fees; charging on-time payers with late fees, failing to inform borrowers of steps they could take to minimize fees and leaving credit report errors uncorrected. A few months ago, Wells Fargo was hit with a $70 million penalty by The Office of the Comptroller of the Currency as the bank failed to correct the shortcomings identified in the 2011 consent orders related to mortgage practices in a “timely fashion.”

Four million there, $185 million here – it’s just small change for Wells Fargo, and the truth is that Wells is probably not the worst bank when it comes to cheating customers or rigging exchanges – they are just the example of the day, the “bankster du jour”.

Federal Reserve Governor Daniel Tarullo said this morning that the latest scandal involving Wells Fargo shows that bank behavior hasn’t “changed enough” since the financial crisis. Tarullo said too many banks still only respond to particular ethical lapses instead of putting in place comprehensive compliance programs. In an interview on CNBC, the Fed governor said he wanted regulators to hold individuals at banks responsible for inappropriate behavior rather than simply have firms pay fines. Even criminal prosecution of bank officers should be pursued “in order to make the point that there is individual culpability.”

Just a reminder for Governor Tarullo the Federal Reserve does more than print money; the Fed’s Division of Banking Supervision and Regulation is responsible for the oversight of banks. Says so right on their website.