Financial Review

Bueller? Bueller?

Sinclair Noe — October 9, 2015

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

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DOW + 33 = 17,084
SPX + 1 = 2014
NAS + 19 = 4830
10 YR YLD – .01 = 2.10
OIL + .14 = 49.57
GOLD + 17.40 = 1157.40
SILV + .16 = 15.93

World shares were green across the board after details from the Fed’s minutes cast further doubt on the prospect of a rate rise this year. European stocks broke a one-month high for their best weekly gain since late January on renewed hopes central banks will keep monetary policy loose for longer. Overnight, Asian equities and currencies also moved higher following yesterday’s gains on Wall Street (the Dow ended above 17,000 for the first time since August, while the S&P 500 closed well past its 50-day MA of 1,995).

Oil prices traded above $50 a barrel this morning, with a gain of nearly 9% this week; for the biggest weekly gain in 6 years.

Investors are now positioning themselves for corporate earnings season, which picks up steam next week with most of the nation’s largest banks reporting their results, as well as big companies including; Intel, Netflix, UnitedHealth and GE. Earnings are expected to be down roughly 5.5 percent from a year ago, according to FactSet, mostly because of the drop in commodity prices. Now there is a game on Wall Street where analysts set the bar very low and then celebrate when a company stumbles over it. However, if the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009. In other words, the last time we had consecutive quarters of negative earnings growth, the US economy was in a recession.

Yesterday the Fed published the minutes of the September FOMC meeting; most of the attention was on the policymakers’ decision to leave interest rates unchanged for now; they’re worried about global economies and inflation running below their target of 2%; they think we are at or near full employment. Generally the tone was dovish. The current Fed has talked about raising rates for about a year.  Now we have the Fed saying future interest rate increases will be “data dependent.” Also in the minutes, we saw economic projections and they are basically calling for 2% GDP growth. Slow, sluggish – get used to it.

Emerging market currencies have had a strong week. The Indonesian rupiah was the leader with a 9.2% gain against the dollar, followed by the Russian ruble, with a 7.3% gain. The Malaysian ringgit gained 6.4%, and the Brazilian real was up 4.8%. This does not mean emerging market currencies are in a bull market; for now, it’s just a bounce.

If you follow all the data the Fed is looking at, you would stay quite busy; there are at least 30 economic reports that must be monitored in order to get a clue as to what the Fed’s next move will be. The quick and easy monitor is the dollar index, because the greenback affects just about every tradeable market: inflation, manufacturing, exports, trade balance, jobs, and more – in one handy chart. The dollar index is just a hair under 95. It has traded from a high of 98.7 in August to a low of 92.5 (also in August).

The dollar index has been in a downtrend since September 25, and this is why we have seen a bounce in oil (probably a greater cause than rig counts and demand, or Russia’s moves in Syria.) This is why the commodity indices have had a nice little rally in the month of October. Emerging-markets currencies have been battered over the past year by the expectation that the Federal Reserve will soon raise interest rates, but as the dollar has experienced a recent dip, the emerging currencies have bounced.

The trend lines on the dollar index suggest resistance around 97.5 and support, right about where we landed today; any further breakdown could see the dollar index testing the 92.5 lows. If we see a bounce, or even some sideways action here, then we look for the support and resistance trend lines to cross in the final week of the month, which is coincidentally, when the Fed FOMC holds its next meeting.

Today, New York Fed President William Dudley and Dennis Lockhart of the Atlanta Fed each said they expected a policy tightening in 2015 despite some recent red flags.

In a brief press conference yesterday, Rep. Kevin McCarthy announced he would not seek the nomination as House Speaker, saying he was still short of the support needed to be an effective speaker. Rep. Jason Chaffetz of Utah, current House Oversight chairman, and Rep. Daniel Webster of Florida were running against McCarthy. Rep. Darrell Issa of California says he’s considering jumping into the race for House speaker; Issa says he would support Paul Ryan of Wisconsin, the Chair of the House Ways and Means Committee; Ryan has said he does not want the job. Anybody else? Anybody? …Bueller?

Meanwhile, Congress faces another deadline to lift the debt limit on Nov. 5; today John Boehner acknowledged that getting enough votes to pass a debt-limit increase would be difficult. And another potential government shutdown threat looms in December when the current stop-gap spending bill expires.

U.S. import prices declined 0.1 percent. A surge in value of the U.S. dollar last year, fueled by expectations a strengthening U.S. economy would lead to higher interest rates, has been a factor pushing down inflation, evident by declines of non-oil import prices. The smaller than expected decline in import prices might lay a bit of groundwork for an eventual interest rate hike by the Federal Reserve because a smaller downward push on inflation from imports could alleviate the Fed’s concerns that inflation is too low.

In a separate report, the Commerce Department said wholesale inventories rose 0.1 percent in August, boosted by larger stocks of computers and professional equipment used by businesses. Inventories are a key component of gross domestic product changes. The component of wholesale inventories that goes into the calculation of GDP – wholesale stocks excluding autos -rose 0.1 percent. At August’s sales pace it would take 1.31 months to clear shelves. An inventory-to-sales ratio that high usually means an unwanted inventory build-up, which would require businesses to liquidate stocks. That in turn could weigh on manufacturing and economic growth.

Glencore is slashing its zinc production by a third in reaction to a 30% plunge in the commodity’s price over the past few months. The company will cut 500,000 tons of zinc production, 4% of the world’s total supply. Glencore is the world’s biggest miner of the industrial metal.

Chipmaker Intel is set to get the go-ahead from EU antitrust regulators for its $16.7 billion offer for Altera. A decision is scheduled by Oct. 14.

PC sales dropped sharply again in the third quarter. IDC estimates global PC shipments fell 10.8% year-to-year to 71 million units, a drop nearly as large as the second quarter’s 11.8%. Sales have been declining for so long — 14 consecutive quarters — that it is becoming harder to remember a time when PCs ruled the tech world. However, the market’s four biggest players all grabbed share from smaller firms with less scale. IDC calculates market leader Lenovo’s unit share rose 130 basis points year-to-year to 21%, HP’s increased 110 basis points to 19.6%, Dell’s jumped 120 bps to 14.3%, and Apple’s climbed 60 basis points to 7.5%.

Apollo Education Group, the parent company of The University of Phoenix has released information that the Department of Defense has suspended the university from recruiting military students. University of Phoenix, the largest for-profit college in the US, has brought in $1.2 billion in GI Bill money since 2009 and received $20 million in tuition assistance from the Pentagon last year alone. That outsized share of the market, in addition to alleged predatory tactics at the school to lure in military personnel, resulted in an investigation into the school earlier this year. Though the order to stop military recruitment at the University of Phoenix is not yet permanent, it is likely a distressing development for the school, as well as the larger for-profit college industry.

Combining two vaccine components from Crucell Holland and Janssen Pharmaceutical, Johnson & Johnson is beginning clinical trials of a preventive Ebola vaccine regimen in Sierra Leone. Is the Ebola outbreak finally over? For the first time since the disease was reported in March 2014, the World Health Organization reported no new cases over the past week. According to the WHO, this is part of a trend: The number of cases in West African countries has remained below 10 per week over the past three months, but that doesn’t mean the virus can’t surface again. A total of 11,300 have died since the start of the epidemic.

According to the International Monetary Fund, 6.5 percent of global gross domestic product currently goes to energy subsidies. The United Nations Environmental Program has just published a report calling for a $6 trillion cut of public and private investments in high-polluting energy by 2030. The agency estimates the world’s governments and private institutions should be investing $5 to $7 trillion annually on things like infrastructure improvements, clean energy, sanitation and agriculture, starting now, in order to meet the U.N.’s 2030 goals for reducing the pollution that causes climate change.

The 2015 Nobel Peace Prize was awarded today to Tunisia’s National Dialogue Quartet for its efforts to bring democracy to the country. The National Dialogue Quartet is made up of four organizations: the Tunisian General Labor Union; Tunisian Confederation of Industry, Trade and Handicrafts; Tunisian Human Rights League; and Tunisian Order of Lawyers. The Tunisian revolution, which forced the country’s long-time president to step down in what was called the Jasmine Revolution, led to uprisings against dictators in other nations including Egypt, Libya and Syria in what became known as the Arab Spring. Today, Tunisia is the only country in the region to make genuine progress transitioning to a democracy.

FINANCIAL REVIEW

Fed Should Avoid Knee Jerk Hikes

Sinclair Noe — December 8, 2014

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

DOW – 106 = 17,852
SPX – 15 = 2060
NAS – 40 = 4740
10 YR YLD – .05 = 2.26%
OIL – 2.80 = 63.04
GOLD + 11.10 = 1205.20
SILV + .09 = 16.48

No records today. Energy stocks pulled the market lower; 42 of the 43 energy stocks in the S&P 500 posted losses today. Falling oil prices have also hit exchange rates of energy producers, especially in emerging markets. Russia’s ruble continues to slide, and an index tracking 20 key exchange rates has fallen to levels last seen more than a decade ago, down 10.2 percent this year and headed for the biggest annual slide since 2008. While some developing nations may welcome a weaker currency because it makes their exports more competitive, for others the pace of decline is destabilizing their economies by fueling inflation and eroding investor confidence.

While the International Monetary Fund expects developing economies to pick up next year, it still sees them falling short of their longer-term growth. The IMF predicts expansion of 4.95 percent across emerging markets in 2015, up from a forecast of 4.43 percent this year and compared with average growth of 6.44 percent over the past decade.

Let’s start with a quick recap of Friday’s jobs report. The economy added 321,000 jobs in November, well above estimates, the highest monthly gain since January 2010 and the 10th-straight month above 200,000. Payroll gains for October and September were revised up a combined 44,000. The unemployment rate held steady at 5.8%, matching a 6-year low. The average workweek rose to 34.6 hours, the highest since May 2008. Average hourly earnings rose 0.4%, the biggest jump since June 2013, bringing the annual rate of increase to 2.1%.

And suddenly there was talk about the need for the Fed to tighten monetary policy. The Fed has its own measure of the labor market, a 19-point list of various aspects of the labor market, known as the dashboard; it dropped from 3.9 to 2.9. So, don’t expect a knee jerk reaction from the Fed.

One thing we should have learned is that a recovery in the labor market will likely be tougher than many suspect. The reason why I say that is past performance. Seven years ago, the economy slipped into a depression (small “d’ depression, but nasty enough) and we have struggled to recover; although we have made progress, we do not have full employment, and there is a chance we won’t. Long-term unemployment is still very high, more like the days of the Great Depression. Millions of families lost their jobs, lost their homes, their savings, and more. Young Americans looking for a first job in a career, ended up back in their parents’ basement. Some job skills were forgotten and turned rusty while other job skills never developed. Careers that could have been or should have been, instead jumped off the rails and will never really get back on track.

Estimates of the economy’s potential, the amount it can produce if and when it finally reaches full employment, have been ratcheted lower as the economy was unable to recover. In other words, the severity and duration of the downturn damaged future potential. If you need an example, consider Japan, which has now lost a couple of decades to rolling recessions mixed with lethargic growth. Today, Japan revised third quarter GDP lower to negative 1.9%; the second quarter of contractions; the definition of a recession that has seen private consumption drop, which in turn led to businesses cutting production and capital expenditures. Even aggressive monetary policy has been like pushing the proverbial string.

And just as the Great Depression left lifetime scars, so too the small “d” depression has changed the psyche of a generation. More people are more averse to falling into the old debt traps. Today, The Federal Reserve reported that consumers increased their use of credit in October at the slowest pace in a year, despite more jobs and stronger economic growth. Americans increased overall credit by an annual rate of 4.9%, or $13.2 billion, to $3.28 trillion in October. That follows a 5.7% gain in September and 5% in August. The slowdown follows a four-month stretch from the early spring to the start of summer during which credit grew at an 8% average rate. Credit card debt rose by just 1.3%, while non-revolving debt (things like auto and student loans, grew by 6.2%).

When the small “d” depression hit, it did lasting damage, which has taken an inordinate amount of time to repair and which may never be fully repaired. Now, after the strong Friday jobs report, one of the first things we heard about was what the Federal Reserve will do. If we maintain the current pace of job creation, sometime around the middle of 2015 the unemployment rate will be around 5%, which would point to the Fed raising interest rates. Weighing against the Fed tightening is the very low inflation rate. And the Fed has to balance what might be considered full employment versus low-flation. Again, the Fed is expected to raise rates starting around June, but they might want to wait. Here’s why.

First, the more accurate measure of unemployment is the U-6, which measures underutilized workers; U-6 unemployment rate is 11.4% and dropping, which is still high. As workers are more fully utilized and the labor market gets tighter, the long-term unemployed and discouraged workers are more likely to re-enter the labor market, expanding the labor pool, and effectively creating a floor for the unemployment rate and reversing the loss of potential output brought about by the prolonged period the economy spent depressed. In other words, we are still a very long way from full employment, even as the headline rate gets closer to 5%.

The monetary concern about full employment is that it will result in cost-push inflation; higher wages resulting in inflation. And we started to see a little increase in wages in November, up 0.4%; one month does not make a trend. The other part of cost-push inflation calls for an increase in raw materials. In other words, general price levels rise (which would be inflation) due to increases in the cost of wages and raw materials. But we are not seeing an increase in the prices of raw materials; just the opposite, raw material prices are disinflationary, just look at the oil market, and most of the commodity markets where prices seem to have turned to a secular bear. Also consider that profit margins are so wide right now that it will take several years of stronger wage growth to generate cost-push wage inflation.

And if we get to the point where there is cost-push inflation, so what? The Fed has shown that it can tamp down inflation fairly quickly by tightening monetary policy. The Fed can put the brakes on inflation but they have a much harder time reversing dis-inflation, and they get downright desperate to do anything about deflation. Which is to say the Fed is better at slowing growth than creating growth. So, if the Fed should allow a period of full employment that results in cost-push inflation, so what? It is much better than underutilized the potential workforce. And the Fed might just discover that the natural rate of unemployment is actually lower than 5%, and it would be very glad not to have tightened too soon.

It looks like Congress has come to some sort of agreement on a spending bill. Congressional negotiators will wait until tomorrow to release the legislation which is expected to keep most of the government open through September 2015; the Department of Homeland Security will likely only be financed through February. Republicans are trying to use a funding debate over the agency responsible for immigration to roll back President Obama’s action easing deportation for undocumented immigrants. There are a variety of smaller issues that may or may not be tacked onto the spending bill including a possible repeal of part of the Dodd-Frank financial-services law to allow more swaps trading to be conducted at banks that have federal insurance, which basically means the banksters could continue to gamble with taxpayer money.

The Supreme Court rejected BP’s challenge to a multi-billion settlement related to the 2010 Gulf of Mexico oil spill. BP had appealed the settlement, claiming that it let businesses collect despite being unable to prove their damages were linked to the spill. The company had lost previous appeals in lower courts. Today’s decision marks a major setback for BP, which wanted to reduce the amount of damages it would pay. Plaintiffs accused the company of merely trying to nullify a settlement it had already agreed to. It’s expected that BPP may need to pay an additional $4.2 billion in claims to businesses and individuals affected by the oil spill. So far, the company has paid about $2.3 billion. BP already settled U.S. criminal charges and agreed to pay $4.5 billion in fines related to that. In January, BP will go on trial for penalties associated with the U.S. Clean Water Act. It could pay as much as $18 billion for that.

In economic news: The Congressional Budget Office reports the government ran a budget deficit of $59 billion in November, $76 billion less than in November 2013. Receipts for the month were $191 billion, up $8 billion from the same month a year ago. The government spent $249 billion in November, $68 billion less than a year ago.

This week’s economic calendar report on retail sales on Thursday which should provide more detail on Black Friday and how holiday shopping is shaping up. On Friday we get the producer price index, a look at inflation on the wholesale level; also consumer sentiment will be reported Friday. We’ll also find out more about the labor market with the JOLTS report tomorrow; that report measures job openings and labor turnover, or how many people are leaving current jobs for greener pastures.

We have a few companies reporting earnings this week, including,: Costco, Burlington Stores, Mens’ Warehouse, and Adobe.

Also tomorrow, the Norwegian Nobel Committee will formally award the 2014 Nobel Peace Prize to Kailash Satyarthi and Malala Yousafzai in Oslo. The two were commended for their struggle to secure the right to education for children and young people around the world.

FINANCIAL REVIEW

King Dollar and the Eurozone

Sinclair Noe — October 10, 2014

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Financial Review

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

DOW – 115 = 16,544
SPX – 22 = 1906
NAS – 102 = 4276
10 YR YLD – .02 = 2.30%
OIL – .25 = 85.52
GOLD – .60 = 1224.00
SILV + .05 = 17.50

The 10 year German bund has a yield that is 141 basis points lower than the US 10 year Treasury note. The yield on German debt will get you 0.89%. Standard & Poor’s lowered France’s credit outlook today, and you can still get a 10 year French note with a yield of 1.25%. A 10 year note from Spain will only get you 2.06%. Is this because the US debt is riskier than the Spanish debt? No, just the opposite.

The problem in the Eurozone is deflation, and it threatens to bring the economy to a grinding halt, and send the EU into a triple dip recession. The president of the European Central Bank, Mario Draghi, gave no indication of any further monetary stimulus beyond what was announced this summer, suggesting in a speech in Washington that governments needed to do more on the fiscal side. Draghi said in effect that Eurozone countries that have enough money should spend it, a clear reference to Germany. His comments echoed remarks this week from Christine Lagarde, the head of the International Monetary Fund.

Today, German Chancellor Angela Merkel said her government was examining how to encourage investment, particularly in the “digital sphere” and the energy sector. Merkel did not elaborate, but the hint was that Germany might use government spending to stimulate growth, a possible shift in position that could ripple across the entire Eurozone. Merkel’s remarks may have been less a declaration of policy change than a signal that her thinking on stimulus was evolving.

On Wednesday, the Federal Reserve released minutes from the September FOMC meeting, and they expressed concern about the global economy and the dollar. In the past 4 months the dollar has jumped about 8% versus the euro; that kind of swing can prove a threat to trade and to financial markets. The Fed normally focuses on the US economy, unless there are global developments that are important enough that they could intrude. Fed officials pointed with concern to the slowdown in China, Europe and Japan. They also worried that the concurrent strengthening of the dollar would add to the risk of price deflation.

We know that a strong dollar could weaken US export performance and hold back growth, but the recent global slowdown represents a more ominous problem. Global economic weakness would undermine the ability of the Fed to maintain financial asset prices well above the levels strictly warranted by the fundamentals. Of course this has been how the Fed has addressed the crisis and the recovery for the past 6 years, they pumped up Wall Street with easy money. A global slowdown threatens that tactic.

The events of the past week indicate the Eurozone and especially Germany might be closer to a move away from the single minded focus on budget austerity that has, to date been an absolute failure. The bigger question is whether the Eurozone countries and the ECB will take action, and if they can actually do anything before the continent slips into full-fledged deflation; and further, what role that might mean for the Federal Reserve.

Finance ministers and central bankers gathered in Washington for the annual meetings of the World Bank and International Monetary Fund and today, Treasury Secretary Jack Lew urged the Group of 20 major economies to refrain from competitive currency devaluations. Federal Reserve officials are hunting for new tactics to raise price increases to their target as slowing global growth, cheaper commodities and flat wages sound warnings that inflation is descending toward the danger zone.

With inflation at 1.5% according to the Fed’s preferred index, low-flation is getting to be a real issue again. We know a stronger dollar makes US exports overseas less affordable, but a strong dollar makes it cheaper for Americans to pay for imported goods. A 10% increase in the dollar versus currencies of major trading partners could trim inflation by a quarter percentage point, and the Fed has not yet communicated a plan for how they will lift inflation to their desired target of 2%.

An inflation rate approaching zero is bad for the economy because of its impact on behavior by businesses and consumers. Companies’ inability to raise prices hurts profits, and they rarely compensate by cutting wages, so they fire workers instead. Consumers anticipating falling prices may postpone discretionary purchases. This can combine to create a vicious circle of less spending and further downward pressure on prices. Think about your own situation; in the past couple of weeks you’ve seen prices at the pump drop. Were you tempted to drive another day or two before you fill up the tank in the hope that you might save a few pennies per gallon?

And what we are seeing in the Eurozone is that once low-flation becomes deflation, the central bankers don’t really have the tools to deal with the problem. It is known as pushing on a string. They can flood the markets with easy money, but they can’t create demand, because, you know, prices will be lower next week. As we are seeing in the Eurozone, and as we saw in Japan, if you let it go on for too long it becomes a lock-in, it reinforces a bad outcome.

Substantial rallies in the dollar have the power to slam the brakes on GDP growth in a way that Fed tightening even doesn’t. GDP growth could decline by a percentage point if the rapid move in the dollar continues through early 2015. That fall in GDP is even larger than what would occur as a result of a 50-basis-point rise in long-term interest rates, and it works with a lag, too. Even when the dollar rally tapers off, it would be expected to constrain GDP through early 2016.

And for now at least, you might reasonably expect the dollar rally to continue; there is a trend in place. The long dollar bets mean money is being parked in the US, and that means continued downward pressure on long-term interest rates, at least for now. And another thing, when there are very rapid and pronounced changes in the exchange rate there is a tendency for investors to lock in gains from previously accumulated US assets. In other words, there is a tendency to sell stocks, and companies with overseas exposure are more likely to experience a greater decline. And the selloff in stocks is yet another hit to US GDP. It’s a nasty cycle.

On Wall Street, stocks closed out a volatile week with another triple digit loss for the Dow, giving the market the worst week since May 2012. The Dow industrials have now turned negative year to date. Yes, that was fast. The Dow lost 2.7% for the week. The S&P 500 dropped 3.1% on the week. The VIX, the volatility index jumped 45% for the week. The Stoxx Europe 600, Europe’s benchmark stock index posted its biggest slide in 2 years, down 4.1% for the week. The S&P 500 is sitting right at its 200 day moving average. The Dow Industrial dropped below the 200 day moving average, about 40 points lower.

A moving average is simply an average of a certain number of data points. The 200-day moving average is calculated by summing the past 200 days and dividing the result by 200. The 200-day moving average represents the average price over the past 40 weeks. This helps to smooth out day to day volatility and give a longer-term look at the overall trend. The 200 day moving average is considered a very important level of resistance or support; in this case, support. When a stock or an index breaks down below this key level of support you sometimes see a bounce, because there will be some investors who think they are now able to buy stocks cheap. But the bounce can sometimes be misleading; that’s known as a dead cat bounce. If dropped from high enough, even a dead cat will bounce. So the next few days will be critical to see if the markets can bounce, and if they can bounce, will they rally, or will prices just keep falling from here. If we don’t see a turnaround, it would confirm a downward trend.

This week the Nobel Committee handed out prizes for a better lightbulb, the LED; a better microscope, that sees nanoparticles; and a French author that I had never heard of. Today, Malala Yousafzai and Kailash Satyarthi have won the Nobel Peace prize. If you have not heard the story of Malala or heard her speak, you should; she will inspire you. She is the daughter of a teacher, and she grew up in and around schools, at least until 2008, when the Taliban took control of the Swat region of Pakistan, where she lived. The Taliban tried to close down schools for girls. That year, her father took her to Peshawar where she made a speech in front of national press titled “How Dare the Taliban Take Away My Basic Right to Education?” She was only 11 years old. In early 2009, Malala started blogging anonymously for the BBC about what it was like to live under the Taliban.

Two years ago, armed men boarded the converted truck that Malala and her classmates used as a makeshift school bus and they shot Malala in the head. She survived. Nine months after she was shot, Malala gave a now famous speech at the UN, where she said: “They thought that bullets would silence us. But they failed.” She’s continued her high-profile campaign for girls’ education with The Malala Fund, which raises money to promote girls’ education.

At 17, Malala is the youngest winner of the Nobel Peace prize, which she will share with 60 year old Kailash Sayarthi. In 1980 Satyarthi founded the Save the Childhood Movement, and he has helped rescue more than 80,000 children from bondage, trafficking and exploitative labor in the past three decades; he also spearheaded a movement to make free and compulsory education a constitutional right for children in India in 2009.

The Nobel committee said it “regards it as an important point for a Hindu and a Muslim, an Indian and a Pakistani, to join in a common struggle for education and against extremism”.