Financial Review

Draghi Put

Sinclair Noe — December 5, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 45 = 19,216
SPX + 12 = 2204
NAS + 53 = 5308
RUT + 23 = 1337
10 Y – 01 = 2.38%
OIL – .64 = 51.04
GOLD – 7.30 = 1170.80

The Dow Industrial Average moved higher in early trading to set a new intraday high of 19,274, and a new record high close.

Italy voters rejected a referendum that would cut the power of the senate, so Matteo Renzi resigned. Italy’s prime minister suffered a major defeat over the weekend in a constitutional-reform referendum he proposed. The measure began as a streamlining of government decision-making processes, and evolved into a vote of confidence in Renzi himself.

Italy’s main bank index dropped around 3.5% in early European trading. Italian banks hold about one-third of the Eurozone’s more than $1 trillion in non-performing loans. Trading in Unicredit shares has been suspended after the bank’s stock fell by more than 5%.  Italy has more than $2.1 trillion in outstanding government debt, worth more than 130% of GDP.

The euro shook off earlier losses and equities climbed as the results of the election were widely expected. Say hello to the Draghi put.

The far right lost in Austria. The Freedom Party’s Norbert Hofer conceded defeat to left-leaning rival Alexander Van der Bellen in the presidential election. Austria is one of several EU countries facing growing far-right parties—France, the Netherlands, and Germany all have elections with similar stakes next year. Still, Hofer did get 47% of the vote.

Britain’s Supreme Court will hear arguments over the next four days to decide whether Theresa May has the right to trigger Article 50 of the Brexit process without a parliamentary vote. All 11 Supreme Court justices will hear the case, so that there can be no accusations the court would have delivered a different decision if the panel had been constituted differently. A verdict is expected in January.

President-elect Donald Trump criticized China in a series of tweets yesterday and he rejected concerns over his decision to take a phone call from Taiwan’s president. Also on Twitter, the President-elect had a warning for companies that offshore their manufacturing, saying they will face heavy new taxes if they wish to sell into the U.S.

Trump taps former rival Ben Carson to be housing secretary. President-elect Trump nominated Ben Carson to lead the Department of Housing and Urban Development. Carson ran against Trump in the Republican presidential primaries, and is a retired neurosurgeon. Carson had previously indicated reluctance to take a position in the incoming administration because of his lack of experience in federal government.

President-elect Donald Trump is widening the circle of candidates for secretary of state and will interview more prospects this week, transition officials said, a sign that after multiple meetings with high-profile hopefuls he still isn’t sold on who he wants as the nation’s top diplomat. Though Trump’s transition team said last week that the search had narrowed to four finalists, new candidates have emerged, including Rex Tillerson, chairman and chief executive officer of Exxon Mobil.

Meanwhile, Trump met with former Vice President Al Gore, an environmental activist who has devoted years to fighting climate change, Gore told reporters: “It was a sincere search for areas of common ground.” Trump has called global warming a hoax and threatened to quit climate accords, though he recently said he is keeping an “open mind.”

Today, General Electric’s power services chief said even if Trump took the United States out of the 2015 Paris climate deal, it would not necessarily cut demand for plant improvements because utilities still want the economic benefits that come with modernization.

Dakota Pipeline project denied federal permits as tribal protestors win the day. The U.S. Army Corps of Engineers said Sunday it would not allow the controversial Dakota pipeline project to proceed, denying permits for the project while it conducts an environmental review to assess route of the 1,170-mile pipeline.

OPEC expects oil demand in 2017 to be as robust as this year, even though recently agreed production cuts could raise prices for buyers. OPEC, along with Russia, last week agreed its first oil output cuts since 2008, looking to reduce production by around 1.8 million barrels per day beginning in January to try to reduce global oversupply and prop up prices. Oil prices have risen since the production agreement, with benchmark Brent crude oil futures topping $55 a barrel, and WTI topping $53 a barrel this morning before settling down.

It’s important to remember that 1.8 million barrels is about one-fifth of US oil output, which has not cut back much at all, despite several bankruptcies in the oil patch; and is expected to ramp up production by year-end to bring overall output up year-over-year — and that was before this massive spike in prices driven by OPEC cuts.

The Institute for Supply Management, or ISM, said its non-manufacturing activity index jumped 2.4 percentage points to 57.2, the highest reading since October 2015. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

Services industries reported a 4-percentage point surge in production last month. A measure of services sector employment jumped 5.1 percentage points to a 13-month high. The services sector survey added to last week’s upbeat manufacturing survey and data on consumer spending in suggesting the economy maintained its momentum early in the fourth quarter after growing at a brisk 3.2 percent annualized rate in the July-September quarter. An ISM reading of 57.2 would be consistent with about a 3.5 percent annual rate in real GDP growth.

James Bullard, President of the Federal Reserve Bank of St. Louis was a featured speaker at the ASU Economic Forecast Luncheon in Phoenix today. Bullard said properly designed and executed policies to boost infrastructure, modify regulations for some industries, and overhaul the tax code “may have some impact … if they are directed towards improving medium-term U.S. productivity growth.” Bullard said it is too early to tell if the policies expected from the Trump administration could move the economy to a different “regime.”

And Chicago Federal Reserve bank president Charles Evans said in Chicago, “An infrastructure plan would be terrific,” adding “I think corporate tax rationalization would be a huge improvement.” Yet he agreed: “you don’t need explicit stimulus” with the jobless rate already so low.

New York Fed President William Dudley also delivered a speech this morning, painting a benign picture of the current U.S. economy. Dudley said the U.S. election of Trump has created “considerable” uncertainty over the policies he will pursue so it is too soon for the Federal Reserve to judge whether its plan for gradual interest rate hikes needs adjusting.

Consolidated Communications Holdings said it would buy broadband service provider FairPoint Communications Inc in an all-stock deal valued at $1.5 billion, including debt. Consolidated’s acquisition of FairPoint marks the fifth such deal in the last two months as growing demand for data and video services drives companies to expand their fiber optic networks in newer regions. The deal will help Consolidated expand into northern New England.

The second of two proposed health insurance mega-mergers goes to trial today in Washington, D.C. The $37 billion combination of Aetna and Humana, two of the nation’s largest insurers, is being challenged by the Justice Department as being bad for consumers and could leave 17 million seniors in the Medicare Advantage market with little choice and higher prices.

Burberry has rejected multiple takeover offers from Coach. Informal talks for a cash-and-stock takeover of Burberry that would have created a luxury fashion brand worth more than $20 billion have gone nowhere, per the Financial Times.

Liberty Mutual is buying the excess and surplus insurance company Ironshore from Fosun International for about $3 billion.

Amazon unveiled Amazon Go, a grocery-store concept that will automatically add shoppers’ products to a digital cart so they can walk out without waiting in a checkout line. The first store is set to open in downtown Seattle in 2017.

Elon Musk may have his share of doubters, but when it comes to the most admired leaders in tech, he completely dominates his peers, according to a recent survey of more than 700 startup founders. Tallying 23% of the write-in votes in First Round Capital’s annual State of Startups poll, Tesla’s Musk beat out Amazon’s Jeff Bezos, who earned 10%, and Facebook’s Mark Zuckerberg, at 6%. The most cited female was Sheryl Sandberg, Facebook’s COO, but she garnered only 1% of the vote. Musk took the top spot in last year’s survey, as well.

Financial Review

Pause

Sinclair Noe — November 16, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 54 = 18,868
SPX – 3 = 2176
NAS + 18 = 5294
10 Y – .40 = 45.41
OIL – .02 = 2.22%
GOLD – 3.40 = 1225.00

The Dow Jones Industrial Average had posted record closes for four straight sessions, before hitting the pause button today. Still, the Dow is up about 8.25 percent year to date, outperforming the S&P 500 and the Nasdaq composite, which were up 6.6 percent and 5.8 percent for the year, respectively.

The last two times the Dow outperformed the S&P and Nasdaq in a year when all three were higher year to date were in 2006 and 1996. If the Dow can break 19,000 it would likely just keep running higher. Based on market data from the past 30 years, when the Dow has crossed levels like 2,000, 3,000, 4,000 – all the way to 18,000, we can expect traders to push it up even higher.

The trend is true not just for a quick one-week return, but also one-month and one-quarter returns. If nothing else, a move through a thousand-point level attracts attention, encouraging more people to jump on board. Of course, we’re not there yet, and it is a probability, not a guarantee.

The producer price index was unchanged in October. The PPI measures inflation at the wholesale level. Higher costs of natural gas and gasoline were offset last month by declines in prices of food as well as services such as financial advice and hospital outpatient care. Still, some modest inflationary pressure is building.

Wholesale costs have risen 0.8% in the past 12 months. That’s the strongest one-year change since the end of 2014. A separate measure that strips out the volatile food, energy and trade margin categories is rising at an even faster rate. So-called core producer prices have climbed 1.6% in the past 12 months, the fastest pace in two years.

Industrial production was unchanged in October after a big drop in output as warmer-than-normal temperatures reduced the demand for heating; utility output dropped 2.6%. Manufacturing output edged up 0.2%, while mining output jumped 2.1% higher, its best performance since March 2014.

The National Association of Home Builders’ index was steady was unchanged at 63 in November. Any reading over 50 indicates improvement.

A measure of mortgage application activity fell to a 10-month low as 30-year mortgage rates jumped to their highest levels since January. Borrowing costs to buy a home and to refinance posted their steepest weekly increase since June 2013. Interest rates on 30-year fixed-rate mortgages with conforming loan balances of $417,000 or less averaged 3.95 percent, which was up from 3.77 percent the previous week and the highest since January

Federal Reserve Bank of St. Louis President James Bullard said there’s a chance the US economy could get a medium-term boost if President-elect Donald Trump increases infrastructure spending and reforms taxes. Bullard said a “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting.” Prices of federal funds futures contracts indicate investors see a more-than 90 percent probability the U.S. central bank will hike when officials meet Dec. 13-14.

Not everybody expects a Trump boost for the economy; Bill Gross, manager of the Janus Global Unconstrained Bond Fund, writes: “There is no new Trump bull market in the offing. Investors must drive with caution, understanding that higher deficits resulting from lower taxes raise interest rates and inflation, which in turn have the potential to produce lower earnings.” Gross writes many of the policies Trump favors represent the status quo – and a Clinton administration would have been no better. “Neither party as they now stand has bold policies beyond the reach of K Street lobbyists.”

So far, the Trump transition team does not seem particularly concerned about a transition team staffed heavily with lobbyists from energy, agriculture, transportation, and banking. Meanwhile, Senate Republicans voted to keep Mitch McConnell of Kentucky as the majority leader. Democratic senators elected Chuck Schumer of New York as minority leader.

Now, it is important to remember that Bill Gross is a bond guy; and while stocks have enjoyed record highs since the election, bond prices have tanked. The bond market largely believes Trump’s policies can lead to economic growth at the expense of deficit spending and inflation. And with bond prices dropping, volatility in the bond market has surged. Fixed income markets and equity markets are following completely different narratives after the election.

So, the question is which one is right. And the answer might be that they are both wrong. Stocks are probably overbought and bonds are probably oversold, and that can continue to play out in the near term. The most like course is a reversion to the mean. But absent equilibrium, Gross makes a good point about inflation and higher rates eventually dragging stocks lower.

But the market has not yet determined a clear direction. On Monday, something very rare happened: more than 300 issues on the New York Stock Exchange advanced to new 52-week highs, and more than the same number of issues fell to new lows. It happened for the first time ever.

The number of stocks setting new 52-week highs should normally outnumber those setting new lows (and vice versa,) reflecting some uniformity and clarity of direction. However, a wide dispersion between new highs and lows is not seen as a good market indicator. The high number of stocks making new highs and lows at the same time show that this is a confused market.

Snapchat, the messaging service, has filed to go public in one of the most eagerly anticipated market debuts of 2017. Snapchat is aiming for a valuation of more than $30 billion, which would make it the third-most-valuable technology company at the time of listing, after Alibaba and Facebook.

Snap, the parent company, aims to have shares trading as soon as March. Its last round of financing came in May to the tune of $1.8 billion, which valued the company at around $17.8 billion. Snapchat accounts for 32 percent of social network users in the United States, it’s only getting 2.3 percent of social network ad dollars.

No one questions Snapchat’s ability to engage its users. But turning that engagement into money is another story.

Amazon for the first time has filed lawsuits against counterfeit sellers, after several businesses voiced concern that knockoffs were killing their sales and endangering consumers. Amazon has increasingly relied on third-party sellers to fuel its growth, but opening its website brought with it a greater chance for fake goods to enter its warehouses.

Twitter has launched a counteroffensive against trolls who have been on the attack for too long. The company is expanding its “mute” function, allowing users to block specific content – like words, phrases or conversations – from appearing in their notifications section. The damage to Twitter’s reputation caused by abuse and harassment was reportedly one of the factors that swayed Salesforce against buying the platform earlier this year.

Seeking to ease concerns over its largest ever deal, Microsoft has offered concessions to EU antitrust regulators over its $26 billion bid for LinkedIn. The European Commission, which will rule on the deal by Dec. 6, did not provide details. It’s expected to seek feedback from rivals and customers before deciding whether to accept the concessions, demand more, or open a full investigation.

EU antitrust regulators are set to fine HSBC, JPMorgan and Credit Agricole by the end of the year for rigging financial benchmarks linked to the euro. Charges were levied in May 2014 against the three banks, which denied wrongdoing. Deutsche Bank, RBS and Societe Generale admitted guilt in December 2013, while Barclays avoided a fine because it alerted the European Commission.

Despite years of delays, the SEC has finally approved a plan to introduce a vast surveillance system to oversee trading on the US stock market, in response to the 2010 “Flash Crash.” The creation of a Consolidated Audit Trail will establish a regulatory central database and monitor every trade order, execution, modification and cancellation in real-time.

Boeing will cut 500 jobs over four years and shut two plants as it revamps its defense and space unit. The company also said it would create a new global operations group that would include its defense units in Australia, Saudi Arabia, and UK. Boeing’s defense, space and security business accounted for 31.4% of the plane maker’s total revenue of $23.9 billion in the latest quarter.

During his campaign Donald Trump singled out Ford by name, calling on the American car manufacturer to stop sending jobs to Mexico and threatening to slap tariffs on any cars imported from south of the border. Ford CEO Mark Fields says Ford still intends to move small car production to Mexico, but he hopes to work openly with the new president and Congress.

The Fiesta Bowl has a new sponsor for this year’s game, and not a moment too soon. Six weeks before the Fiesta serves as one of 2016’s two College Football Playoff semifinals, the game is now the PlayStation Fiesta Bowl.

Financial Review

Flip Flop Fedspeak

Sinclair Noe — February 18, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 40 = 16,413
SPX – 8 = 1917
NAS – 46 = 4487
10 Y – .06 = 1.76%
OIL – .12 = 30.54
GOLD + 22.30 = 1231.70

After spending 2015 calling for rate hikes St. Louis Fed President James Bullard said Wednesday evening in a speech on monetary policy that it would be unwise for the Federal Reserve to continue raising interest rates given declining inflation expectations and recent equity market volatility.

Bullard, who is a voting member of the Fed’s rate-setting committee this year, said he now feels key assumptions supporting higher rates have been undermined. Bullard’s big concern is inflation expectations, and inflation has been trending lower, and Bullard believes stock market expectations have a big impact on inflation. In contrast to Fed Chairwoman Janet Yellen or Fed Vice Chairman Stanley Fischer, Bullard doesn’t think labor market conditions have much impact on inflation as the traditional “Phillips curve” suggests.

Today, San Francisco Fed President John Williams gave a speech in LA, where he said the economy “is, all in all, looking pretty good.” Williams said his views of the economy haven’t changed much from December: “When I look at my December forecast and compare it with my outlook for unemployment and core inflation today, there’s virtually no change” Williams said he was aware of potential risks facing the economy but added that that watching a stock ticker “isn’t the way to gauge America’s economic health.”

The Federal Reserve’s next policy move is much more likely to be a rate hike than a rate cut, although over the next two years a return to zero rates is a rising possibility – that according to a New York Fed survey of primary dealers. The regular monthly survey of 22 primary dealers, or those that do direct trading with the Fed, see about a 75 percent chance that the Fed’s next policy move will be a rate hike, with just over half expecting that rate hike to take place at the Fed’s March meeting; an 8 percent chance the next move will be a rate cut, and a 17 percent chance of no change in rate in 2016.

Ray Dalio, founder of hedge fund Bridgewater Associates, in a new letter to investors says history is in the making, as central banks have backed themselves into a corner with monetary policies that are about to run out of steam. Dalio expects central banks to keep trying new ideas to stimulate economies, including negative interest rates and more money printing. Dalio says investors should expect to experience lower than normal returns with greater than normal risk.

The Organization for Economic Growth and Development say governments in the US, Europe and elsewhere should take “urgent” and “collective” steps to raise their investment spending and deliver a fresh boost to flagging economic growth. In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can’t be remedied through stimulus from central banks alone.

The OECD cut its global growth forecasts, saying global gross domestic product will expand 3.0 percent in 2016, the same pace as in 2015 and 0.3 percentage point less than predicted in November. The OECD urged governments that can borrow at very low interest rates to boost their spending on infrastructure. The OECD said that if governments work together, fresh borrowing could have such a positive impact on growth that it would reduce rather than increase their debts relative to economic output.

The number of Americans filing for unemployment benefits unexpectedly declined last week to a three-month low. Initial jobless claims dropped by 7,000 to 262,000 in the week ended Feb. 13. Last week coincided with the period that the government surveys businesses and households to calculate payrolls and the jobless rate for February.

High stake talks to keep Britain in the European Union will take place over the next 36 hours, as Prime Minister David Cameron heads to Brussels to hammer out a deal he can sell to British voters. He has called for reform in four areas: measures to curb migration, safeguards to protect London’s financial district, Britain to be excluded from an “ever closer union” and for greater competition in the bloc. Most officials expect a referendum to be held in late June.

The US government’s Energy Information Administration said crude stockpiles rose 2.1 million barrels last week, to a peak of 504.1 million barrels in the third week of hitting record highs in past month. The EIA also cited record high gasoline inventories.

Standard & Poor’s has downgraded the credit ratings of several Middle East nations, in its second mass cut of large oil producers in almost exactly a year. Citing pressures from the drop in crude prices, the ratings agency lowered Saudi Arabia by two notches to A- stable, and stripped Bahrain of its investment grade status. S&P also cut the ratings of Bahrain and Oman to reflect lower oil price assumptions.

Anglo American’s credit rating was cut to junk by Standard & Poor’s, following similar downgrades by Moody’s Investors Service and Fitch Ratings this week. Anglo became the first major London-based miner to be rated junk. They are trying to sell off coal and iron ore assets to pay down debt.

Bloomberg is reporting Citigroup plans to exit retail banking in Argentina and Brazil, where the company has maintained operations for more than 100 years.  Citi announced plans in October 2014 to drop consumer banking in 11 markets, including Peru, Costa Rica and four others in Central and South America.

Marriott and Starwood have scheduled separate shareholder meetings to consider Marriott’s $12.2 billion buyout bid that will create the world’s largest hotel business. If approved, the transaction could close in mid-2016. After the bell yesterday, Marriott posted earnings; revenue fell short of estimates.

Chinese conglomerate Tianjin Tianhai is acquiring electronics distributor Ingram Micro for $6 billion, or $38.90/share in cash (representing a 31% premium to Ingram Micro’s close on Wednesday). Ingram Micro will maintain its headquarters in California, but they will suspend their dividend and buyback programs.

IBM has agreed to purchase Truven Health Analytics for $2.6 billion, its fourth health data-related acquisition in less than a year. Closely held Truven provides cloud-based data management and analytics to more than 8,500 health-care clients, including hospitals, insurers and government agencies

Boeing engineers and technical workers approved a six-year contract extension that brings better salary, plus vacation, layoff and retirement benefits. Boeing reaffirmed its outlook for strong growth and cash flow over the next five years, and defended accounting practices for the 787 Dreamliner.

This morning Walmart reported fourth quarter profit topped projections, and revenue fell as sales growth slowed at its US stores during the holiday quarter. The 0.6 percent increase in sales at U.S. stores open more than a year marks the chain’s sixth straight three-month period of growth after a long run of decreases.

Walmart lowered its annual sales forecast, saying it now expects to see flat sales instead of 3 to 4 percent growth. The chain said the change in expectations is because of the continued strength of the U.S. dollar and the impact of the decision it announced it January to close 269 of its stores across the globe.

Walmart has been ramping up its efforts in the last year to become a more serious rival in e-commerce to Amazon.com. And yet, some of the numbers in today’s earnings report only serve to showcase how much Amazon is still pummeling Walmart in the category. Walmart said its online sales growth for the full year was 12 percent, with a total e-commerce sales haul of $13.7 billion.

That may sound like a healthy increase, until you consider that Amazon’s total e-commerce sales during the same period were north of $83 billion. Walmart reported $130 billion in revenue in the quarter, a 1.4 percent decrease from the same quarter last year. Profit dipped 8 percent to $4.5 billion. Earnings per share were $1.49, slightly better than the $1.46 that analysts had expected.

Also before the opening bell, MGM Resorts reported a $1.4 billion loss for the fourth-quarter; that compares to a loss of $287 million in the year-earlier period.

In other earnings news: Barrick Gold shares dropped despite a smaller quarterly loss. Newmont Mining posted weaker than expected earnings. CF Industries reported fertilizer prices weakened. GoDaddy said a strong dollar weighed on results. Noble Energy posted an unexpected profit. Nvidia reported higher chip demand, and offered strong guidance. Priceline said hotel bookings increased.

And T-Mobile tripled profits. Virgin America reported a higher fourth-quarter profit that met analysts’ estimates amid lower fuel costs, and said it expects passenger unit revenue to continue to decline in the first quarter. Nestle missed forecasts with a 4.2 percent rise in annual underlying sales and predicted only a similar outcome this year, saying it was getting harder to raise prices in a tough economic environment. DISH Network reported lower net income in 2015 from a year earlier, as pay-tv subscriptions dropped. Dish shares down more than 4 percent.

The FCC has just voted to break the chains that bind you to your cable TV set top box. The FCC vote allows third-party manufacturers to make set-top boxes that deliver cable television. The proposal also requires cable and satellite companies to make their content available for these alternative boxes. According to a July Senate study, more than 99 percent of cable customers in the United States currently rent a box from their cable company for $231 per year on average.

The idea of the FCC proposal is that third-party devices like Nexus Players or Apple TVs could eventually provide cable alongside other streaming apps and Internet services. You can see why the cable industry isn’t keen on this change. Opening the market could drive down cable box prices and push cable companies to spend money improving their set-top tech. Don’t return your cable box just yet though. The rule will now go into the comment period—in which businesses and customers can now weigh in—before the final vote.

Financial Review

What Puzzle?

Sinclair Noe — November 20, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 91 = 17,823
SPX + 7 = 2089
NAS + 31 = 5104
10 YR YLD + .01 = 2.26%
OIL – .15 = 40.39
GOLD – 4.80 = 1078.00
SILV – .16 = 14.23 

The S&P gained 3.3% for the week, its best showing since December. The Dow rose 3.4% for the week and the Nasdaq added 3.6%. And now we begin the Santa Claus rally on Wall Street, which kicks off with the Turkey Shoot. For 35 years prior to 1987, the Wednesday before and the Friday after Thanksgiving combined were up 33 times.

The only declines were in 1964 and 1965. Subsequently, this trend changed. In the 28 years since 1987, there have been 12 declines and 16 advances. As Thanksgiving bullishness lost steam in 1987, the rally afterwards occurred more frequently.

Since 1987, DJIA has logged gains in 22 of 28 years from the close on Friday after Thanksgiving to year-end. The S&P 500 is up 0.5% in November and 1.5% thus far in 2015. There are 28 trading days remaining in 2015.

And going back to 1950, December is the best month of the year for the S&P 500 with the final 30 days of a year producing a mean gain of 2.36%. There could still be a black swan or some other exogenous event. This does not mean that we are guaranteed a rally, only that the probabilities are good.

ECB President Mario Draghi says the European Central Bank is prepared to deploy its full range of stimulus measures to fight low inflation. The comments from Draghi, echoed by other top ECB officials, suggest support among the highest ranks of the central bank for expanding its quantitative easing program and cutting the deposit rate further. 

Under the ECB’s bond buying program which was launched in March, the central bank is buying $64 billion a month in mostly government bonds. It is slated to run at least through September 2016, but many analysts expect the ECB to extend the program beyond this date.

Federal Reserve Vice Chairman Stanley Fischer says the Fed has done everything we can to avoid surprising the markets and governments” about the first hike in interest rates in nine years. It’s looking more and more like a December rate hike is a done deal, but Fischer said no final decisions have been made and officials continue to scrutinize the data. Fischer said it remains to be seen whether the emerging market countries in Asia and the world are sufficiently prepared for the potential capital flows and market adjustments so that there are no major macroeconomic consequences.

Today, St. Louis Fed President James Bullard said “The economy is going to go into a boom period,” citing the unemployment rate, which is currently 5%. Bullard added that the U.S. labor market was “basically back to normal” after the 2007-2009 financial crisis. But the Fed should not repeat what it did during the 2004-2006 tightening cycle, when it raised rates at 17 consecutive meetings, and Bullard emphasized that policymakers should be more “flexible and reactive” to data this time. 

Bullard also said the persistence of low real interest rates was “a puzzle,” echoing comments he made last week in a speech titled “Permazero”, where he entertained the possibility the United States is entering an era of permanently low rates.

It probably isn’t that big a puzzle. Demand has remained at low levels as fiscal policy contracted. Even where monetary policy produced some stimulus, it was counterbalanced with austerity. Corporate America has been on a stock buyback and financial engineering binge which cut investment in R&D and innovation and capital expenditures. The Great Recession was a knife in the back of workers and even though jobs have come back, wages have not.

As the global economy contracted, investors looked to the safe haven of the dollar and Treasuries, which pushed down exports and also kept a ceiling on rates. The financial industry has grown even larger than before the financial crisis, and it continues to be a giant black hole of derivatives and shadow banking that swallows’ productivity. I could go on, but it isn’t a puzzle.

The House of Representatives passed legislation to increase oversight over the Federal Reserve that includes a provision that would require the central bank to follow a mathematical rule to set interest rates. In May, the Senate Banking Committee already passed Republican-backed legislation to increase oversight of the Fed, but that measure doesn’t require the Fed to follow a mathematical rule.

China’s yuan may enter the IMF’s benchmark currency basket at a lower weighting than previously estimated as the institution considers making weights less related to export volumes and more dependent on financial flows. Such a change would give the renminbi a lower share in the basket than under the current formula. IMF policymakers are expected to vote on the currency’s inclusion to the Special Drawing Rights basket on November 30.

The leading economic index jumped 0.6% in October after falling in the two prior months, signaling a pickup in growth after a soft patch during the late summer and early fall. The leading economic index is a weighted gauge of 10 indicators designed to signal peaks and valleys in the business cycle.

Greece’s parliament has backed additional reforms needed to unlock €12-billion-euro from its latest bailout which will help recapitalize the country’s struggling banks and pay off overdue government debts.

Gunmen attacked a hotel in Mali in Western Africa and killed dozens of hostages. The attackers held 140 guests and 30 staff members before a counter-assault by Malian security forces, assisted by the US military, freed the hostages. The death toll is unclear but at least 27 bodies have been found in the hotel. A jihadist group based in northern Mali affiliated with Al-Qaeda, claimed responsibility.

In the past few days, clear signs have emerged showing that the terrorist attacks have had a big economic impact on Paris – one of the most visited cities in the world. A survey by a French hotel and restaurant operators’ union, suggests that sales in the city’s cafes and bars during the past week are down 44% on the same period last year, while hotels have suffered a 57% drop in business. Air France has so far refused to comment on passenger numbers and cancellations bound for Paris, but low-cost airline EasyJet said that travel to the French capital has plummeted.

The U.S. Treasury Department on Thursday took new steps designed to discourage corporate inversions, or deals that allow companies to move their legal address abroad to avoid taxes. Treasury Secretary Jacob Lew said additional steps were planned but also called on Congress to address the issue.

Will the new rules derail a Pfizer-Allergan deal? Maybe not. Allergan and Pfizer are considering structuring a merger of the drug companies so that it is an acquisition of the much bigger Pfizer by the much smaller Allergan.

Nike is buying back $12 billion worth of itself. After the market closed on Thursday, Nike announced a $12 billion stock-repurchase authorization, a 14% dividend hike, and a 2-for-1 stock split, which will go into effect on December 24.

Gap slashed its outlook. Gap announced that sales fell 3% year-over-year to $3.86 billion. Comparable-store sales across the company’s brands — Gap, Banana Republic, and Old Navy — fell 2%. Earnings came in at $0.63 per share, which was right in line with expectations.

Abercrombie & Fitch crushed expectations on profits, revenues, and same-store sales, sending the shares up by as much as 20% in early trading. Ross Stores shares moved higher, after the off-price retailer also reported better-than-expected earnings.

Tyson Foods plans to close two aging prepared-food plants, affecting 880 jobs, in the face of prohibitive renovation costs and changing demand. The closures come as Tyson continues to remake itself after its 2014 acquisition of Hillshire Brands. The company expects to cease operations at a pepperoni plant in Wisconsin and a prepared foods facility in Illinois during the second half of the year ending October 1.

Chipotle is having problems again. A new round of E. Coli infections has hit 45 people in 6 states: Washington, Oregon, California, Minnesota, New York, and Ohio. Sixteen of those people had to be hospitalized and no deaths have been reported. This follows an outbreak at the beginning of November when 22 people in Washington state and Oregon fell ill.

Massachusetts is barring people under the age of 21 from playing daily fantasy sports. While the decision limits a large demographic within the fantasy sports industry, it stops short of following the lead of NY Attorney general Eric Schneiderman, who recently declared daily fantasy “illegal gambling.” The proposals would also ban fantasy competitions based on college sports, prohibit promotions on high school and college campuses and bar anyone connected to professional sports, including athletes and agents.

Tesla Motors is voluntarily recalling all of its 90,000 Model S sedans to check for a potential problem with seat belts. An owner in Europe had an issue with a bolt holding the seat belt system in place coming loose. Tesla said the owner wasn’t involved in an accident and has determined the flaw was an installation issue.

Tesla shares dropped today, but they should have gone up; this was a voluntary recall, unlike GM which fought a recall for faulty ignition switches even as people died, or all the models using Takata airbags which exploded in a shower of shrapnel while car companies denied the problem, or VW which cheated on emissions. Tesla was proactive. No one was injured. The real question is why other car companies can get away with murder.

Financial Review

While the Sun Shines

Sinclair Noe — March 26, 2015

 

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

Subscribe: iTunes | RSS

DOW – 40 = 17,678
SPX – 4 = 2056
NAS – 13 = 4863
10 YR YLD + .09 = 2.01%
OIL + 2.22 = 51.43
GOLD + 9.00 = 1205.10
SILV = .15 = 17.20

Saudi Arabia and its Gulf allies started bombing targets in Yemen as the country slides closer toward civil war. A Saudi military spokesman said there were no immediate plans to launch ground operations in Yemen. Importers say the Saudi attack is not expected to disrupt oil supplies, but the threat of spreading war in the region could likely impact oil flows. Yemeni President Hadi reportedly fled the country yesterday. The White House says the US will provide “logistical and intelligence support.”

Yemen is a fairly small oil producer, but still the news helped push oil prices up almost 5% today, and there are several reasons. First, if things go wrong, this could turn into a proxy war between Shiite Iran, which is backing the rebels, and Saudi Arabia and other Sunni monarchies that supported the Yemeni regime.  The Saudi action could exacerbate tensions in Libya, Syria and Iraq; in other words, this could be part of a trend in the region.

Yemen is also geographically strategic, at the chokepoint of the Red Sea; so there might be the possibility the rebels could disrupt oil tanker traffic; 3.8 million barrels a day are transported through a 25 mile wide stretch of water between Yemen and Djibouti. Foreign ships have been warned not to get to close to Yemen ports.

The flip side of the bullish case for oil is that the Saudis will now need to pay for their military actions, and that means they can’t afford to cut back oil production.

Another consideration is the strong US dollar, which would only get stronger if the Fed hikes rates. This has been a light week for economic data which means it has been a good week for Federal Reserve policymakers to make a case for hiking interest rates. St. Louis Fed President James Bullard says now may be a good time to start normalizing US monetary policy, “so that it is set appropriately for an improving economy over the next two years.” Bullard says there is a concern that prolonged low interest rates could feed into asset price bubbles over the next few years. Atlanta Fed President Dennis Lockhart was interviewed on CNBC today; he says the strong dollar is something that he has upgraded in terms of importance, and that it could have “some dampening effect,” still Lockhart see a rate hike coming “mid-year or a little bit later.” Fed Chairwoman Janet Yellen wraps up the week with a speech tomorrow, just in case the Fed heads haven’t hammered home their point.

When the Fed talks, people listen, and then economists write papers. Laurence Ball economics professor and monetary policy expert at Johns Hopkins University, in a paper to be published next week by the Center for Budget and Policy Priorities says the Fed could create more jobs by letting the unemployment rate fall lower. It should seek to push the rate “well below 5%, at least temporarily,” he writes. That could help bring some discouraged workers to reenter the labor market, as well as help the long-term unemployed find work and involuntary part-time workers find full-time jobs. Mr. Ball allows that a low unemployment rate might result in a temporary jump in inflation above Fed targets but he considers that an acceptable side effect. In other words, it would be easier to fight inflation down the road with rate hikes than it would battling persistently low inflation or deflation with rates already close to zero.

The number of people who filed new applications for benefits at their state unemployment offices, known as initial claims, fell by 9,000 to a seasonally adjusted 282,000 in the period stretching from March 15 to March 21. New claims have tracked below 300,000 for three straight weeks after a weather-induced spike in February that pushed them to the highest level since last spring. And they are running about 9% lower now compared to one year ago.  Layoffs remain near a 15-year low.

A rebound in home prices is good news in the wake of the housing crash — but there can be too much of a good thing. Home prices are rising 13 times faster than wage growth nationwide, according to a report from RealtyTrac. From 2012-2014, median home prices climbed 17% while median wages rose 1.3%.

The House of Representatives today passed a bill to revamp Medicare’s payment formula for doctors. The bill would end the temporary patches known as the “doc fix” that lawmakers approve to prevent payment cuts to doctors. Part of the $214 billion measure is paid for by raising Medicare premiums on wealthy seniors. Passed on a vote of 392 to 37, the bill now goes to the Senate.

The Consumer Financial Protection Bureau has released a plan to rein in payday lenders. The CFPB proposal would require lenders either to ensure borrowers are able to pay back loans or to provide affordable repayment options or other protections such as capping the number of times borrowers can roll over debt. Four out of five payday loans are rolled over or renewed within two weeks. The CFPB’s proposals under consideration also would restrict payday lenders from some questionable practices by preventing repeated and unexpected withdrawals from consumers’ bank accounts. Most payday lenders can access borrowers’ checking accounts and withdraw the funds they are owed, often resulting in high fees when the withdrawal exceeds the checking account balance. In most cases, regulation for payday lenders largely falls to the states, which determine such factors as the maximum interest rates lenders can charge. Annual percentage rates on payday loans, which are offered in 36 states, are typically just shy of 600% in Idaho, Nevada, Texas and Utah, according to a report by the Pew Charitable Trusts. The CFPB proposals will now be opened for feedback from payday lenders and other before putting forward a plan.

Labor Secretary Tom Perez announced plans to travel to Seattle to sit down with workers and employers to discuss “how flexible workplace policies can help support families and businesses.” Perez said only 12% of private sector workers have access to paid sick days. It’s a big problem for low-wage workers. Two thirds of workers at the bottom 25% of the pay scale, the country’s lowest earners, do not receive paid time off for illness, according to the Labor Department. Three quarters of part time employees are not paid when they miss work due to illness. In some cases, they lose their jobs. In a video statement, Perez said: “We are way behind the rest of the world on this. You shouldn’t have to choose between the family you love and the job that you need.”

Of course, Seattle is the headquarters of Microsoft, and today Microsoft announced a new policy requiring suppliers with at least 50 employees to offer workers either 15 days of unrestricted paid time off, or 10 paid sick days and 5 paid vacation days. Microsoft works with a variety of businesses that supply goods and services, ranging from building maintenance and food service to management consulting and “software localization.” The new requirement will apply only to workers at suppliers who do “substantial work” for Microsoft and who have been with the supplier for at least nine months. Microsoft concluded that mandating paid time off for suppliers would ultimately benefit the company and employees by contributing to a “happier and more productive workforce.”

The Commerce Department reports that corporate spending on research and development rose 6.7 percent in 2014, almost twice the previous year’s gain and the biggest advance since 1996. The pickup was capped by a 14 percent fourth-quarter surge that signals additional increases are on the way. More research may help rekindle business investment in equipment that has been bogged down since late last year. Orders for non-military capital goods excluding aircraft, a proxy for future spending on new gear, slumped 1.4 percent in February. It marked the sixth straight decrease, the longest stretch since mid-2012. Investors are now rewarding companies looking to the future rather than those using their horde of cash to buy back shares. Shares of the 190 companies in the S&P 500 that disclosed R&D spending in 2014 outperformed the overall index by 6.1 percentage points. One of the benefits of increased spending on R&D is an increase in productivity, although productivity gains lag R&D spending, sometimes by several years.

The U.S. Energy Information Administration has just released data showing that in just one year, California has increased solar power from 1.9 percent to 5 percent of the state’s total power generation. California isn’t just producing the most utility-scale solar electricity of any state; it’s producing more than all the other states combined. And that’s only what the major electricity producers are generating; it doesn’t include rooftop solar, in which California is also leading the nation. In small-scale solar, capacity for another 2.3 gigawatts has been installed, according to the California Public Utilities Commission. California now accounts for about half of the country’s solar power capacity.

The surge in California’s solar output was driven by a handful of massive new plants, including the Topaz Solar Farm in San Luis Obispo County and Desert Sunlight Solar Farm in the Mojave Desert. Each has a capacity of 550 megawatts, making them among the largest solar plants of their kind in the world. With those plants and others, California added nearly 1,900 megawatts of new utility-scale solar capacity in 2014, raising the state’s overall solar sector to nearly 10,000 megawatts — or enough to power some 2.4 million homes.

Renewable energy, including hydro power and rooftop solar, now constitutes about a third of California’s electricity. And remember that California is going through one of the worst droughts in its history, which has resulted in hydroelectric power being cut in half. The annual increase in California’s solar generation in 2014 offset 83 percent of the decrease in hydroelectric generation. When you don’t have rain, you have to harvest sunshine.