Financial Review

154 More Days

Sinclair Noe — June 8, 2016

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DOW + 66 = 18,005
SPX + 6 = 2119
NAS + 12 = 4974
10 Y – .01 = 1.70%
OIL + 1.01 = 51.37
GOLD + 18.90 = 1263.10

The Dow closed above 18,000 for the first time since April.

The European Central Bank’s corporate-bond buying program kicked off this morning with the bank buying debt issued by companies including Anheuser-Busch InBev, Telefonica, Siemens, and Renault. Borrowing costs in Europe had already fallen to unprecedented levels with the average yield on investment-grade company notes in euros dropping to 1 percent this week.

In the sovereign debt space, where the ECB also continues to be a buyer, the yield on Germany’s 10-year bund is within a hair of turning negative, falling to (yet another) record low of 0.033 percent this morning.

Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank. Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’s ultra-low rates. Although no decision has yet been taken, the lender has held discussions on the matter with German authorities.

The bulk of negative-yielding debt is concentrated in Japan and Europe. Globally, the total is now $10.4 trillion, according to Fitch Ratings. Individual European countries that do not use the euro are largely trying to weaken their respective currencies, as investors flock to safety.

The European Central Bank, which oversees the euro, introduced negative rates to stimulate growth in the Eurozone. The Bank of Japan also wants to stimulate growth, as well as weaken the yen. The goal is the same: Flood the financial sector with money, hoping that it chases yield into riskier investments.

But if the goal were to coax money into riskier assets, such as stocks, the plan has been a failure so far. European stocks were down 30% at one point after the introduction of negative rates. In Japan, stocks are up only slightly since the beginning of the BOJ’s experiment in January of this year.

Job openings hit 5.8 million at the end of April, up slightly from 5.76 million openings in March, according to the Job Openings and Labor Turnover Summary (JOLTS) report. The report beat analyst consensus estimates of 5.7 million job openings for the month. The job openings rate was 3.9 percent in April, with the biggest increase in wholesale trade, transportation, warehousing, and utilities at 65,000 openings.

Professional and business services saw the biggest decrease, down 274,000 openings. April hires fell to 5.1 million, slightly lower than the previous month’s 5.3 million. The hiring rate was 3.5 percent, little changed in the private sector and down 31,000 for government hires, according to the report. There were 5 million separations, which includes quits, layoffs and discharges.

Last week’s anemic jobs report for May pushed interest rates lower, but the desire for mortgages was already on the rise. Mortgage application volume jumped 9.3 percent last week from the previous week, according to the Mortgage Bankers Association. The volume may have been making up for a big drop two weeks ago, or reacting to a slight drop in interest rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.83 percent from 3.85 percent, with points decreasing to 0.33 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans.

The World Bank slashed its global growth forecast. The World Bank cut its global growth forecast for 2016 to 2.4% from 2.9% as a result of “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.” The bank sees “mounting risks” and expects a “further slowdown in major emerging markets.” Specifically, China’s growth is forecast to slow to 6.7% from 6.9% and both Russia and Brazil are expected to see “deeper recessions” than initially forecast. India’s growth is expected to hold at 7.6%.

While oil markets will start rebalancing after a slump next year, an oversupply in natural gas won’t disappear until the end of the decade, the IEA warned, slashing its gas demand outlook for a fourth straight year. “Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment.” Global consumption will expand by 1.5% annually until 2021, down from last year’s forecast of 2% growth through 2020.

Meanwhile, both Brent and WTI are holding strong above $51 per barrel, helped by industry data showing a larger-than-expected draw-down in U.S. crude inventories, worries about attacks on the Nigerian oil industry and strong Chinese demand. According to data from the API on Tuesday, oil stockpiles fell by 3.6 million barrels last week. Energy Information Administration figures released today show a 3.2-million-barrel drop in inventories.

The dollar declined against the yen. The euro edged up. The dollar index was down again today. The dollar has lost some of its strength after Friday’s disappointing jobs report. That has helped energy companies, as well as mining companies and chemicals and machinery makers and commodities in general; a weaker dollar makes American goods more affordable in other countries.

If the Fed were to raise rates or even suggest that the recent jobs number was just a transitory anomaly, then the lack of strong fundamental support could produce a rather pronounced correction to the down side. Consider that oil traded today at nearly a 100% increase off of the lows that were created just this February; that kind of price movement is not just a simple supply-demand story.

The International Energy Agency reports that 1.26 million electric cars, both battery and plug-in hybrid, were sold worldwide in 2015. Is that a lot? It depends on how you look at the numbers and who is asking the questions. The trend is certainly up. Keep in mind that there were only a few hundred electric cars on the road in 2008 and the current number is a lot higher than anyone would have expected back then. The number has tripled just since 2013.

The United States now has 400,000 electric vehicles on the road, a massive increase since 2010. But there is still a long road ahead, and that road is full of cars with gas engines. There are 1 billion vehicles on the road worldwide at present and that number is expected to increase dramatically in the next 20 years as demand in countries like India and China continues to soar.  For now, lower gasoline prices are an obstacle for more electric vehicle sales.

According to Fortune’s annual ranking of companies by revenue, Walmart is still the 800-pound gorilla. With $482 billion in revenue, it sells more than Apple, Amazon and Microsoft put together. It’s bigger than the No. 2 company, Exxon Mobil, and No. 3, Apple, combined. Its sales are greater than the GDP of Poland. That’s based on revenue. Forbes puts together a list of the 2000 biggest companies around the globe, and revenue is just one metric they use. According to Forbes, the top 3 spots on their list are held by Chinese banks.

Today’s top gainer was a micro-cap stock called Gevo, up 102%. On Tuesday, Alaska Air Group flew two flights using the company’s renewable alcohol to jet fuel. The flights departed using a mixture of traditional jet fuel and a 20% bio-fuel blend made from fermented corn. They flew from Seattle to San Francisco and then on to Washington DC. The airline estimates that the 20% bio-fuel blend will reduce greenhouse gas emissions by 50%.

Keurig Green Mountain is pulling the plug on Kold, its counter-top soda machine. Many consumers balked at the price of the device, which initially cost $369, and its pods, which had cost $1.25 to make an 8-ounce drink. The move comes 10 months after Keurig rolled out Kold and three months after JAB Holding, a major global coffee player, took the company private for about $14 billion.

When Aubrey McClendon drove his Chevy Tahoe into a bridge the day after he was indicted for allegedly rigging the price of oil and gas leases, suspicions arose that he had killed himself. But a two-month probe by Oklahoma Police has found nothing to suggest the Chesapeake Energy founder committed suicide.  Investigators found no information that this was anything other than a car accident, but also admitted: “we may never know 100% what happened.”

Reports of Roger Goodell’s death have been greatly exaggerated; actually his passing was an outright lie – the result of a computer hack. The National Football League became the latest high-profile victim of hackers as the league’s official Twitter account was intercepted and wrongly announced the passing of NFL Commissioner Roger Goodell. The tweet has been deleted. Goodell is alive and well.

The primary season effectively wrapped up last night. Both the Republicans and Democrats have a presumptive nominee. And what the primary season has taught us is that most states don’t know how to hold an election.

Whether it was a lack of polling places in Arizona, or voters scrubbed from voter rolls in New York, or far too many provisional ballots that will likely never be counted in Texas, or broken machines and polling sites that opened late in California, or a judge’s ruling today in Ohio striking down provisions of the state’s recently enacted voting laws; it all points to confusion and the potential for big problems. By the way, we have 154 days until the Election Day. Good luck.

Thursday, June 26, 2014 - Buffers and Filibusters

Financial Review with Sinclair Noe

DOW – 21 = 16,846
SPX – 2 = 1957
NAS – 0.71 = 4379
10 YR YLD - .03 = 2.52%
OIL - .80 = 105.70
GOLD  - .70 = 1317.90
SILV + .10 = 21.22

 

Yesterday, the Commerce Department downgraded the first quarter gross domestic product to a negative 2.9%, meaning the economy shrank by 2.9%. Today, St. Louis Federal Reserve president James Bullard says it’s likely an aberration; the weak report for the first quarter was likely distorted by inventories, weather, and by the challenges of accounting for health-care spending under the new law. Bullard says he isn’t worried, “the market’s right to shake this off. Looking forward over the next four quarter, most forecasters have 3% growth.”

Well, that’s good. No worries. Nothing to see hear, move along, move along.

It’s just that the fall was so nasty, it’s hard not to look and linger over the carnage. It really was ugly. And while we can blame it on the weather, that doesn’t seem right. We always have weather. Minneapolis is underwater today. Bad weather is a fairly constant aberration. We should be past the point of excuses; we are 5 years into a recovery; granted it has been a stealth recovery.

I wonder if Mr. Bullard is confusing the stock market with the economy. A down day in the bull market would just be a blip on the tape, but the stock market is not the economy. And the economy is not bouncing back, which would be the expected move after a seasonal aberration. Most importantly, we haven’t seen a surge in hiring. It looks more like we’ve gone through a very long period where everybody who was going to be fired was fired, and companies are running as lean as they can. So, the jobless claims have leveled off, but there’s a big difference between no more fat to cut and an economy that produces lots of well-paying jobs.

If you want new jobs, and the consumer spending that flows from new jobs, you look for new businesses, and you can just keep looking. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. The decline affected nearly all business sectors. The fact that the economy has been weak since 2007 suggests that new business activity has also declined in existing companies.

New businesses are critical for economic growth because a small fraction of today's startups will become tomorrow's economic heavyweights. Most of today's workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy.

Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding. Also, most of today’s workers are working at smaller businesses, companies with less than 100 employees, and we just aren’t making enough of these smaller businesses.

The Federal Reserve’s monetary policy has been a boon for Wall Street, so we’ve seen record highs even as the economy contracts. The Fed policy was to elevate asset prices in the hope it would trickle down to the rest of the economy; the trickle down part has been a terrible failure but the higher prices have been nifty for a small group of financial companies and some of the largest corporations. The problem is that it is hard to maintain corporate profits in a recession. Also, it’s hard to have sustainable growth from big corporations; they’re like trees; once they reach a certain height, they stop growing. Look back to the Fortune 500 list from 1995; less than half the firms on that list are still on the list today.

And businesses aren’t investing for the future. A major factor in the first quarter contraction was lower gross private domestic investment; a smaller increase in inventories accounted for most of that, but we also saw a drop in investment in non-residential structures, investment in equipment, investment in information processing equipment; countered by a slight increase in investment in intellectual property; that’s tricky to measure because it could be money spent on research and development or it might be money spent on movies. Lower investment accounted for about 2% of the 2.9% drop.

For the last few decades, every boom has depended on housing; same strategy today. The problem is that boomers will not start upgrading now in their 60s. And the young ones expected to pick up the baton are full of debt. And the housing numbers seem to back it up. We did see a big jump in new home sales for May, but that was mainly confined to the South, meanwhile existing home sales barely inched forward, and it appears the big run in home sales has happened and now we’re leveling out. Any boost from housing has already hit.

And this is the recurring theme of the recovery, it’s just around the corner.

No, not that corner, the next corner.

The Supreme Court is still dishing out decisions; two more today, but not the big one on Hobby Lobby; that will probably come on Monday. Today we heard about buffer zones and recess appointments.

The Supreme Court ruled on McCullen v. Coakley, striking down a Massachusetts law requiring protesters to stay at least 35 feet from an abortion clinic's entrance and walkways. In a unanimous opinion, the court held that such buffer zones violate First Amendment free speech rights.

Only three other states, Colorado, Montana and New Hampshire, have buffer zone laws on the books, but the Massachusetts zone was the largest. The Massachusetts law was passed after 2 clinic workers were shot and killed by a gunman outside a clinic in 1994. In 2000, the Supreme Court upheld Colorado's 8-foot "floating" buffer zones around individuals as they walk into and exit an abortion clinic.

Chief Justice Roberts delivered the opinion of the court. "It is no accident that public streets and sidewalks have developed as venues for the exchange of ideas." Roberts said: “Even today, they remain one of the few places where a speaker can be confident that he is not simply preaching to the choir. With respect to other means of communication, an individual confronted with an uncomfortable message can always turn the page, change the channel, or leave the Web site."

The court was silent on the free speech rights of protesters confined to “free speech pens” around political conventions, and buffer zones around churches, and funeral services, and for that matter, the buffer around the Supreme Court building in Washington DC.

Also today, the Supremes ruled unanimously in NLRB v Noel Canning that President Obama had violated the Constitution in 2012 by appointing officials to the National Labor Relations Board during a short break in the Senate’s work when the chamber was convening every three days in short pro forma sessions when no business was conducted. Those breaks were too short, Justice Stephen G. Breyer wrote in a majority opinion joined by the court’s four more liberal members.

A ruling could cast a cloud over the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. Justice Breyer added that recess appointments remain permissible so long as they are made during a break of 10 or more days. But many experts say that if either house of Congress is controlled by the party opposed to the president, lawmakers can effectively block such appointments by requiring pro forma sessions every three days. Each house must get the approval of the other chamber for recesses of more than three days. Somebody shows up, claims the Senate is in session, and they hold a fake session and that’s that.

The decision affirmed a broad ruling last year from a federal appeals court in Washington that had called into question the constitutionality of many recess appointments by presidents of both parties. The appeals court last year said that presidents may bypass the Senate only during the recesses between formal sessions of Congress. Two of the three appellate judges went further, saying that presidents may fill only vacancies that arose during that same recess. The Constitution’s recess-appointments clause says, “The president shall have power to fill up all vacancies that may happen during the recess of the Senate.”

And while today’s ruling is being hailed as a major blow to executive power, in practical terms, today’s ruling no longer really matters. That’s because the Senate majority has since eliminated the filibuster on executive and judicial appointments that was the cause of this whole mess to begin with.

After the DC Circuit Court of Appeals ruled last year that the NLRB appointments were illegal, President Obama renominated appointees to fill those slots and submitted them to the Senate. What happened? Senate Republicans filibustered them forever, of course. Eventually, Senate majority leader Harry Reid got fed up and triggered the “nuclear option”: a Senate rules change that would require only 50 votes, instead of 60, to invoke cloture on executive and judicial nominations. The NLRB nominees, and several others that had been held up, made their way through.

Yesterday, the Supremes ruled that law enforcement can’t search your smartphone without a warrant or a really, really good reason why they don’t need a warrant.  Of course, police can search all sorts of things without a warrant, and the solicitor general had argued that cell phones were not that different than briefcases or purses that are regularly searched when you enter a federal building or an airport.

Chief Justice Roberts said: “Cellphones differ in both a quantitative and a qualitative sense from other objects that might be kept on an arrestee’s person.” He went on at length to describe the differences, noting that a cellphone can reveal more private information than the search of an entire house. The phone contains “the sum of an individual’s private life” he said; searching it without a warrant is constitutionally unreasonable. The chief justice’s response to the government’s warning that a warrant requirement would impede law enforcement was basically a shrug: “Privacy comes at a cost.”

What we learned is that Supreme Court justices now have and use smart phones.

The best line yesterday came on the NBC Nightly News when Brian Williams, followed the report by asking the reporter if this will have any effect on the NSA’s ability to electronically dig into our cell phone records without warrants.

That Brian Williams is a real comedian.