Financial Review

December Jobs Report

Sinclair Noe — January 6, 2017

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

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DOW + 64 = 19,963 (intraday record 19,999.63)
SPX + 7 = 2276
NAS + 33 = 5521 (another record close)
RUT – 4 = 1367
10 Y + .05 = 2.42%
OIL – .11 = 53.66
GOLD – 8.40 = 1172.80

Today is a Jobs Report Friday. The US economy added 156,000 jobs in December; this was below estimates of around 170,000. The unemployment rate edged up to 4.7% from 4.6% as more people entered the labor force in search of work.

Employers hired 19,000 more workers than previously reported in October and November. The U.S. has created more than 2 million jobs in each year since 2011, though hiring has slowed over the last two years. Employment growth in 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015.

The slowdown in job growth is consistent with a labor market that is near full employment. The latest payrolls tally brought the advance for 2016 to 2.16 million, after a gain of about 2.7 million in 2015.

The steady gains in employment have finally started to push worker pay higher. Average hourly wages jumped 0.4% to $26 in December. Hourly pay increased 2.9% from December 2015 to December 2016, marking the fastest 12-month increase since a recovery that began in mid-2009.

Hours worked were unchanged at 34.3 last month. December’s job gains were broad, education and health services employment rose 70,000, the biggest increase since February. Leisure and hospitality added 24,000. Manufacturing payrolls gained 17,000 after declining for four straight months.

Transportation added 14,700 jobs. Financial activities gained 13,000 jobs. Retail sector employment rose 6,300 after increasing 19,500 in November, although holiday hires were down significantly from 2015 as many retail outlets turned cautious. Government employment increased 12,000 in December. Construction payrolls fell 3,000 in December after three consecutive months of increases.

Among the details of the December report, the participation rate, which shows the share of working-age people in the labor force, increased to 62.7 percent, from 62.6 percent. The participation rate has fallen significantly since its high around the year 2000. The root cause of declining participation remains disputed, with demographics and discouraged workers cited as some of the possible explanations.

In 2017, the labor-force participation number will likely remain a major focus. About half of the decline reflects Baby Boomers moving into retirement; the other half reflects prime-age workers, many of whom have just abandoned their hopes for a job.

The U-6 unemployment rate dropped one-tenth of a point to 9.2%; U-6 is a broader measure that includes unemployed, under-employed or people working part-time who would like to be full-time, and discouraged workers who have stopped looking for jobs. The U-3 rate has in the past few months returned to the pre-recession levels that economists consider full employment.

The U-6 has seen significant gains in recent months, but remains higher than before the recession. When we hear talk about the economy being near full employment, consider the U-6 rate and realize there is still plenty of slack. The BLS reports 1.7 million people are marginally attached – looking for work; 5.6 million are employed part-time for economic reasons.

Janet Yellen has said the economy only needs to add about 100,000 new jobs per month to maintain current levels of employment and absorb new workers into the labor force. Trump promised to create 25 million new jobs under his administration. The math doesn’t work. To add 25 million jobs, would mean dragging people out of retirement and putting school kids to work, and the unemployment rate would be a negative number. It won’t happen. But there is room for continued job growth in 2017.

This is the last full jobs report of the Obama administration. Since January 2009, the economy has added 11.3 million jobs. This includes a decrease of 354,000 government workers, so private payroll growth has been slightly higher.

The Obama administration loves to tout that the economy has added jobs every month for the past 75 months, the longest streak on record and much higher than the previous record of 48 between 1986 and 1990. By comparison, the Clinton administration added 22.9 million total jobs; Reagan added 15.9 million; Johnson added 12 million nonfarm payrolls.

So, on jobs, Obama tops Carter, Nixon, Truman, Eisenhower, Kennedy, Bush I and Bush II, and Ford – in that order. Considering that the US lost more than 700,000 jobs in each of the first three months of Obama’s presidency — including 791,000 jobs lost in January 2009 — the comeback for the US labor market has been impressive by most counts. As of December 2016, total non-farm employment exceeded its pre-recession peak by 6.9 million jobs.

As more Americans find work and the labor market tightens, you can expect wages to rise because of the competition among employers to attract the remaining qualified job candidates. In recent months, wages have again gained ground, up 2.9% in the past 12 months, compared to inflation running around 1.5% – so we have real gains.

Before the crash, the U.S. was cruising along with annual wages rising at rates between 3 and 4 percent and those rates are characteristic of other economic boom times over the past 30 or so years. So things are still not quite as good as they were—and a lot of the wage growth that did happen in the first several years of the recovery was in fact eaten up by inflation.

So, if there is slack in the labor force, why are we seeing wages start to pick up?

Part of the answer is basic supply and demand. Part of the answer is demographics and skill sets; many younger workers stayed in school during the downturn and now they are entering the workforce well-trained and demanding decent wages. Part of the answer might be recent legal changes affecting wages.

A few weeks ago, over four million Americans were poised to benefit from new overtime regulations at the start of the new year. The new rule – which would require time-and-a-half pay for those working more than 40 hours a week – was part of an executive order signed by President Obama in 2016. The order would have effectively doubled the salary threshold for mandatory overtime pay from $23,660 to $47,476 – forcing employers to either pay many more workers overtime, or bump their salaries beyond the reach of the threshold.

That executive order was overturned in November by a federal judge in Texas, but it is possible that some workers got a raise before that ruling. Those raises might not last; there are already reports that some employers are clawing back those raises. And there is a strong probability the executive order will be rescinded under President-elect Trump.

Some employers will choose to follow-through with existing salary hikes: Walmart says it plans to keep the pay raises it instituted for entry-level manager salaries. In September, the retailer bumped pay for the position to $48,500 up from $45,000 to avoid the federal-overtime threshold.

Also, many minimum wage workers are seeing an increase in their paychecks. According to data collected by the National Employment Law Project, a workers-rights advocacy group, 19 states and 21 local jurisdictions raised their minimum wages at the start of 2017. Many of those increases were small cost-of-living adjustments, but some of them were dramatic.

Arizona, where voters approved a wage hike on Election Day, raised its minimum wage by nearly $2 an hour, to $10 from $8.05. Maine’s minimum wage jumped to $9 an hour from $7.50. Washington state and Massachusetts both raised their minimums to $11 an hour. In total, six states plus the District of Columbia now have minimum wages of at least $10 an hour. (Oregon will join the club later this year.)

Most of those increases in minimum wage did not show up in the December jobs report, but we should see some impact on the January 2017 report in one month. The big question is whether these aggressive increases in minimum wage will be job killers or poverty preventers.

Most studies have found that wage increases have at most a small impact on total employment – that is, there is little evidence for the claim that the minimum wage is a major job-killer. But over the next few months we will see the minimum wage experiment unfold in real-time.

Part of the explanation for rising wages might also be found in the changing landscape of the labor market. According to a paper published last month through the US National Bureau of Economic Research, routine, low-paying, manual labor jobs are disappearing.

Routine occupations employed about 40 per cent of the working-age population in the US in 1979. That figure was stable for about a decade and then declined steadily to reach about 31 per cent in 2014. Many of those routine jobs have been automated or will be. For workers, that means they either accept low paying jobs in other areas, or train for higher-paying jobs, or drop out of the labor market.

This might go a long way to explaining the historically low labor force participation rate, and the stubbornly high U-6 unemployment rate, and the sudden resurgence in wages. The challenge for the future will be solving the mismatch between the types of jobs people used to have and the types of jobs the economy is currently creating.

In the immediate aftermath of the jobs report, the yield on the 10-year Treasury note rose. The dollar halted a two-day slide. Gold stayed lower, while emerging-market equities were little changed. Oil edged above $54 a barrel before sinking lower. The report did little to alter trader expectations on the Federal Reserve’s path for interest-rate increases.

Financial Review

The Radical and Necessary Notion

Sinclair Noe — May 27, 2016

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

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DOW + 44 = 17,873
SPX + 8 = 2099
NAS + 31 = 4933
10 Y + .03 = 1.85%
OIL – .06 = 49.40
GOLD – 9.50 = 1211.00

Gross domestic product rose at 0.8% rate from January to March, up from an initial 0.5% reading. The upward revision reflected a smaller drag from trade than previously estimated. The government also reported a rebound in after-tax corporate profits, which increased at a 0.6 percent rate in the first quarter after plunging at an 8.4 percent pace in the fourth quarter. Income growth for the first quarter also was revised higher. The economy has been hurt by a strong dollar and sluggish global demand. The Atlanta Federal Reserve is currently estimating second-quarter GDP rising at a 2.9 percent rate.

Consumer spending, the main engine of the economy, rose 1.9% in the first quarter. That was unchanged from the government’s original estimate. Americans spent more on housing, utility bills and health care and pared back purchases of new cars. Outlays on new home construction surged at 17.1% clip in the first quarter, up from a prior 14.8% estimate. That’s the biggest gain in nearly four years. Business investment declined, in some cases sharply. Outlays on structure such as oil rigs sank 8.9% and spending on new equipment such as computers fell 9%.

The PCE index, the Federal Reserve’s preferred inflation barometer, rose just 0.8% in the 12 months ended in March. That’s down from 1% in the prior month. Inflation as measured by the PCE index rose 0.1% in March, as did the so-called core measure that strips out the volatile food and energy categories. Consumer spending barely rose in March. Americans increased spending by a 0.1% last month. Incomes, meanwhile, advanced a sharp 0.4% last month. The savings rate in March climbed to 5.4% from 5.2%, matching the highest level since the end of 2012.

So inflation is not a problem right now, but the Fed is afraid that if oil prices stay at or above current levels, it will be inflationary. They also are afraid of wage push inflation, which results from a tight labor market. We still have some slack in the labor market but it is getting tighter. We still aren’t seeing consumer spending push the economy into high growth mode because people are still cautious and trying to save, although retail sales are picking up a little and the housing market is showing some serious muscle again. Business is still avoiding investment, which seems to be habit now, even though businesses have been consistently hiring workers. Overall, the revision to GDP showed the economy continues to slog along.

Janet Yellen thinks the economy has made a great deal of progress. Federal Reserve Chair Janet Yellen spoke today at an event hosted by Harvard University. Her speech comes after a number of Fed policymakers this week struck hawkish tones on the trajectory of interest rates. Yellen said the Fed doesn’t have the typical scope to cut rates in case of a shock, in other words they want some ammunition to combat the next inevitable economic downturn which could be coming sooner rather than later. Yellen said the economy continues to improve and if the gains continue, a rate hike would be appropriate in the coming months.

Will the Fed raise rates at the June meeting? Well, they can; they have telegraphed their intentions so the markets will not be surprised. If it looks like the Brexit referendum will pass or if there is really nasty economic data (such as a horrible May Non-Farm Payroll report next Friday – they can still postpone a rate hike. Whether the Fed hikes rates in June or July, in the long run, there really isn’t much difference. We know they really, really want to hike rates.

As Yellen spoke, Treasuries fell, and the odds of a rate hike in the Federal Fund Futures market increased. Stocks slid to the lowest levels of the day. And while Yellen’s outlook for a hike were front and center, she actually said some other stuff. Yellen said the Federal Reserve did not see the financial crisis coming, even though there were apparent clues. She said the explosion in borrowing was a sign, but the Fed did not see the risks evolving into a full-blown crisis.

Crude oil prices are back below $50 in early trading on a round of profit taking by investors and with the U.S. dollar perking up. Traders are also positioning themselves ahead of the next OPEC meeting scheduled for June 2. Energy market watchers are unsure if key OPEC members will agree on a production cap or increase output. Also consider that if the Fed hikes rates in the next couple of months, it would signal a stronger dollar, which would mean lower oil prices. For the week, oil was 1.5% higher, for the third weekly gain in a row.

Enjoy the low gasoline prices this Memorial Day weekend while they last. Even with global oil prices grinding higher, holiday travelers will see the cheapest prices at the pump in more than a decade for this holiday weekend, saving nearly 50 cents a gallon compared with last year. The average gas station has raised its prices 17 cents a gallon over the last month — and 5 cents over the last week alone. According to the AAA motor club the average price for a gallon of regular gasoline nationally was $2.31, 43 cents below a year ago.

The G-7 winds down. Leaders from seven of the world’s biggest industrial powers met in central Japan over the past two days, discussing topics as varied as currency manipulation, Brexit worries, and North Korea. The group agreed to avoid “competitive devaluation” of its currencies and concluded, “Global growth is our urgent priority.” Do they ever accomplish anything at a G7 meeting?

Global investors have raised their holdings of cash and bonds, citing fears about potential shock waves from a Brexit vote rippling beyond Britain and the increased likelihood of a rise in U.S. interest rates this summer. Fund managers polled by Reuters in the United States, Europe, Britain and Japan raised cash allocations to 6 percent in May, the highest level since January when global equity markets were in free-fall. They also increased their bond exposure to 37.8 percent from 37.6 percent in April. Investors trimmed their equity allocation to 46.4 percent.

The American Civil Liberties Union has filed a motion to join Microsoft’s effort to challenge DOJ gag orders that prevent the tech company from telling customers when the government has ordered it to turn over data. Requests from law enforcement agencies for access to users’ personal information routinely flood tech companies that store vast amounts of data in the cloud. Massive data centers run by Microsoft, Amazon and other big tech companies allow businesses and individuals to access email, photos and other content from multiple devices, wherever they are. Law enforcement officials say that access to such data is critical to fighting crime and terrorism. But the ACLU believes the fourth amendment is critical to the Constitution.

Secretary of Labor Thomas Perez announced that Verizon Communications and unions representing nearly 40,000 wireline workers have reached a tentative deal to end a strike that has stretched for more than month. The two sides are writing up the agreement and it still needs to be ratified but workers are expected back on the job next week.

Royal Philips said it sold shares in the IPO of its 125-year-old lighting division at the lower end of the targeted range, valuing the business at $3.3 billion. The sale marks the end of Royal Philips as a sprawling conglomerate that produced everything from light bulbs and television sets to medical scanners and coffee machines.

Sears reported a bigger quarterly loss and said its chief financial officer would step down. Sears has lost more than $8 billion over the last five years. The company has managed to post a quarterly profit just once in the last four years. Sears said it did not intend to borrow money to fund operating losses and expected to close unprofitable stores more aggressively. The main focus this year will be to generate positive earnings. Sears Holdings said it is “exploring partnership opportunities” for top brand names such as Kenmore appliances, DieHard batteries and Craftsman tools to widen distribution, possibly even licensing rights with another company. So, if you can buy Craftsman tools someplace else, why would you ever go into a Sears store again?

Shares of Valeant Pharmaceuticals rose 8.5 percent after news reports of a takeover bid. The Wall Street Journal and Reuters said the company had rejected an overture made earlier this year from Takeda of Japan and the private equity firm TPG Capital.

Lab and medical equipment company Thermo Fisher Scientific said it will buy imaging company FEI for $4.2 billion in cash.

Abercrombie & Fitch posted its 13th straight quarter of sales decline, hit by lower customer traffic, as the apparel retailer struggles in a tough market that forced rivals Aeropostale and American Apparel into bankruptcy.

The atomic bombing of Hiroshima, Japan in 1945 was the beginning of a new era of warfare. But speaking in Hiroshima today, president Obama argued that it also signaled the beginning of a new moral era, one that challenges us to change the way we think about humanity and technology. And he warned of dire consequences if we don’t.

In a speech at the Hiroshima Peace Memorial, Obama said the nuclear attacks that ended World War II have a clear, simple legacy: We now have the ability to destroy ourselves. As the first sitting US president to visit Hiroshima, Obama didn’t offer an apology for the bombing. But he said the best way to honor its victims is to advance “the radical and necessary notion that we are part of a single human family.”

Have a good and safe Memorial Day.

Financial Review

Slow Motion Domino

Sinclair Noe — November 10, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 27 = 17,758
SPX + 3 = 2081
NAS – 12 = 5083
10 YR YLD – .02 = 2.32%
OIL + .22 = 44.09
GOLD – 2.50 = 1090.40
SILV – .14 = 14.54

Crude prices are set for a slow recovery, according to the latest report from the International Energy Agency, which warned against the deep investment cutbacks in the industry. In its World Energy Outlook, the IEA’s central scenario for oil prices forecast that the market would rebalance at around $50 to $80 per barrel in 2020, (a not very precise guess) “with further increases in price thereafter.” It also predicted that collectively, the U.S., EU and Japan would see their oil demand drop by around 10 million barrels a day by 2040.

Oil production from the Bakken and Eagle Ford shale plays in the U.S. has been falling since March. Total oil output from seven major U.S. shale regions is expected to fall by 118,000 barrels a day to about 4.95 million barrels a day in December. There is no evidence at current prices that rig drilling activity will recover any time this year, so we can expect ever lower production every month well into 2016. That doesn’t mean a quick increase in prices, in part because Iranian oil is expected to come online as sanctions are lifted, and also production increases are expected in other parts of the world.

The National Federation of Independent Business said its Small Business Optimism Index was steady at 96.1 last month, with hiring stagnant even as more owners expected higher sales and more planned to make capital outlays.

Americans are borrowing big again. The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record, up $28.9 billion in September, besting the previous high-water mark set in November 2001, not inflation adjusted. The surge wasn’t driven by mortgage lending, but by an ongoing rise in non-revolving credit—essentially car and student loans, which surged by more than $22 billion to $2.57 trillion.

Revolving debt—mainly credit-card debt—also increased, by $6.7 billion to $925 billion. This new found proclivity to jump into debt points to a busy holiday shopping season. It might also explain why the Fed is ready to take away the punch bowl at the next FOMC meeting.

Greece can’t persuade creditors to release bailout funds. Greece is due $2.2 billion from its bailout as well as $11 billion already set aside for the country’s banks, which are still struggling from capital controls. Though the Greek government has met many of the conditions attached to the bailout, it still needs to push through some financial reforms. Disputes remain on a new foreclosure law which would likely put more and lower priced homes on the foreclosure block, the Value Added Tax on private education, and pricing of non-generic medications, as well as on the timing and pace of pension reform.

Athens needs the money to continue to meet day-to-day expenses such as salaries, but there is not the same sense of urgency as there was in the summer because a sizeable injection of funds was made in September and there are no major debt repayments due. The delay is, however, preventing Greece from moving on to discussions around a restructuring of its debt pile to make it more sustainable. This was demanded by Tsipras at previous negotiations and is a precondition of the International Monetary Fund officially joining the bailout.

Meanwhile, the anti-austerity movement finally spilled over to Portugal. Anti-austerity lawmakers have forced Portugal’s new center-right government to resign by rejecting its policy proposals. The prime minister had been held up as a model proponent of the belt-tightening prescriptions pushed by European Union officials in Brussels, international creditors and countries like Germany. Portuguese voters weren’t buying it.

The new government has promised to unwind parts of the austerity program. The left-wing parties have pledged to cut some taxes and reverse public-sector wage cuts and to suspend Portugal’s privatization program. The political turmoil in Portugal is being closely watched elsewhere in Europe as a bellwether of political trends and an indicator of whether even countries that had been models of austerity prescriptions are now experiencing fatigue with the belt-tightening nearly seven years after the onset of Europe’s debt and euro crisis.

And the next domino might be the pro-austerity government of Portugal’s neighbor – Spain. Prime Minister Mariano Rajoy faces elections on Dec. 20, and polls so far show that his conservative Popular Party may lose what has been an ironclad majority in Parliament, with the potential to leave the Spanish in a similar position to the Portuguese. The government in Spain is not very stable right now. Yesterday, Catalonia voted to secede from Spain by 2017. Catalonia, the triangular region in northeastern Spain, already has its own language and traditions. Now it’s well on its way to becoming its very own country. The region contains Barcelona, Spain’s second-largest city and more than 7 million people; Catalonia also makes up more than 20 percent of the country’s economy.

A federal appeals court has rejected President Obama’s effort to move forward with a series of executive actions he announced last year seeking to give quasi-legal status and work permits to millions of undocumented immigrants. The 2-1 ruling from the New Orleans-based 5th Circuit is a defeat for the Obama administration, but one that may have come just in the nick of time to give the Supreme Court the chance to revive Obama’s attempt to make it easier for many immigrants who entered the U.S. illegally to live and work here.

Obama’s latest round of executive actions has been on hold since February, and delay in the issuance of the appeals court’s ruling was raising doubt about whether the Supreme Court would have an opportunity to resolve the case in time to allow Obama to move forward with the programs before leaving office. The release of the 5th Circuit decision Monday appears to allow the Supreme Court enough time to take up the dispute this term, if the justices choose to wade into the issue. A favorable Supreme Court ruling would permit the administration to implement the executive actions next summer.

Obama’s actions announced last November expanded eligibility for a program the president set up in 2012 to allow immigrants who entered the U.S. illegally as children to get “deferred action” status and be eligible to work legally. The new effort also included a new initiative to grant the same status to illegal immigrants who are the parents of U.S. citizens or green-card holders. Up to 5 million people were estimated to be eligible for the revised Deferred Action for Childhood Arrivals and new Deferred Action for Parents of Americans programs, although it was unknown how many would decide to apply.

Zinc traded near a five-year low, copper has dropped to its lowest since August 26 and nickel fell to its lowest in two months as miners remain under pressure. BHP Billiton has seen nearly 13 percent of its share value erased in the last four sessions following a dam burst at its Brazilian joint-venture that resulted in at least three confirmed dead and another 25 people missing.

Chipotle could reopen locations in Washington state and Oregon as soon as Wednesday after a batch of tests found no E. coli bacteria in food samples. Investigations do not always identify a specific food source as the culprit, because contaminated food is at times consumed before the samples are collected. All of Chipotle’s 43 outlets in those areas, which appear to have sickened over 40 people, have been closed since Oct. 31.

Fast-food and other low-wage workers will walk off the job today in 270 cities and towns across the country as part of a push for a nationwide $15 minimum wage. Fast-food employees will be joined by workers from other industries that typically pay low hourly wages.

Colorado will vote next year on establishing a universal, “single-payer” healthcare system after supporters secured enough signatures to get the measure on the ballot. Under the plan, known as ColoradoCare, the government would provide universal health insurance in the place of private insurance companies. It comes with a $25 billion price tag, to be paid for with a new 10 percent payroll tax.

Valeant tried to stop the bleeding with a conference call this morning. The drug maker has lost two-thirds of its value since August amid questions about its accounting and business practices. Valeant Pharmaceuticals said in its business update that disruption in its dermatology business, from the recent controversies surrounding its Philidor specialty pharmacy subsidiary, would be significant in the short term. Valeant shares continued dropping today.

Four people have been charged in a broad hacking scheme that targeted JPMorgan Chase and other financial institutions between 2012 and 2015. The indictment described 12 victims, which were mostly financial services companies, but also included a financial news organization and software development firms. The US Attorney’s Office said the scheme involved the “largest theft of customer data from a US financial institution in history.”

The hackers stole the personal information of over 100 million customers across the companies. The hackers used information and data collected from JPMorgan and the other companies to manipulate stocks. They bought small amounts of companies’ shares, then used stolen email addresses to inform investors to buy into those stocks.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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DOW – 312 = 16,001
SPX – 49 = 1881
NAS – 142 = 4543
10 YR YLD – .07 = 2.09%
OIL – .03 = 44.40
GOLD – 14.20 = 1133.10
SILV – .53 = 14.70

Well, this was just ugly. All three major indices traded in correction territory today or more than 10 percent below their 52-week highs. For the Nasdaq Composite, the 50 day moving average crossed the 200 day moving average, forming a pattern that goes by the catchy name “death cross”. The Nasdaq Biotechnology ETF closed down 6.3%, following a 5% drop on Friday.

Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low, wiping out more than $5 billion in market valuation. The fall followed publication of a note by analysts at investment bank Investec which raised doubts about Glencore’s valuation if spot metal prices do not improve. The note pointed to high debt levels and a need for deeper restructuring. The analysts wrote: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.” Glencore, a Swiss based company, has said it will suspend dividends, sell assets and raise cash with a $2.5 billion share placement, among other measures, to cut its $30 billion debt pile and protect its credit rating.

The 15-month commodities free-fall is starting to resemble a full-blown crisis. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

Alcoa the world’s largest aluminum producer, says it will split into two separate publicly-listed companies, with the separation expected to be completed in the second half of 2016. The company says the split will create an “upstream company”, focused on bauxite, alumina and aluminum, and a “value-add company”, focused on innovation in “high performance multi-material products and solutions in attractive growth markets”.

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion to shut down exploration in the region. The unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground. Environmental groups and shareholders have also pressured Shell to drop Arctic drilling.

The IMF warns world GDP at 3.3% this year isn’t realistic anymore, and a forecast of 3.8% for next year is not either. IMF Director Christine Lagarde pointed to slowing growth in emerging economies, in particular China. Lagarde says “There is no reason (for the Federal Reserve) to rush” to tighten policy, noting both the Japanese central bank and the ECB in recent years both hiked and then were forced to quickly retreat.

The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, so says William Dudley, New York Fed President, echoing statements from Fed Chair Janet Yellen last week. Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was “not calendar guidance. It depends on the data.” San Francisco Fed President John Williams, also speaking today, made a similar argument.

As world growth falters, the US consumer rolls along. Most of the change over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. China has showed lower growth rates and missed growth forecasts for several years. The news this morning shows Chinese industrial profits fell 8.8% in August year-over-year. It’s not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.

Purchases of new cars and trucks and strong back-to-school sales drove consumer spending higher in August, a sign the economy continues to expand at a moderate pace. In August, consumer spending rose a seasonally adjusted 0.4% to match the revised gain in July. Personal incomes rose 0.3% last month. Incomes have also risen steadily since the early spring, largely reflecting strong job creation that’s tugged the unemployment rate down to a post-recession low of 5.1%. Since spending grew faster than income, the amount of money individuals save fell a tick to 4.6% from 4.7%. Inflation as gauged by the PCE price index, was unchanged in August. The PCE index is up just 0.3% in the past 12 months.

This week’s big economic report comes on Friday, when the Labor Department publishes the September employment report. The consensus estimate calls for 190,000 new jobs in September. The unemployment rate is likely to remain at 5.1%.

A gauge of pending home sales fell 1.4% in August to the lowest level in five months. The index from the National Association of Realtors declined to a seasonally adjusted 109.4 in August from 110.9 in the prior month. Pending sales have leveled off since mid-summer, with buyers being bounded by rising prices and few available and affordable properties within their budget.

The federal government is funded only through Wednesday but House Speaker John Boehner says there won’t be a government shutdown. Speaking on CBS’ “Face the Nation,” Boehner confirmed plans to pass a short-term funding bill. Boehner, who announced Friday he is resigning from Congress at the end of October, also said he will set up a committee to investigate Planned Parenthood.

President Obama addressed the United Nations General Assembly this morning, saying the US is was willing to cooperate with Russia, as well as Iran, to try to end the Syrian civil war but the two big powers clashed over whether to work with Syrian President Bashar al-Assad, whom Obama called a tyrant. Russian President Vladimir Putin, in contrast, told the gathering of world leaders that there was no alternative to cooperating with Assad’s military in an effort to defeat ISIS. Later, Obama and Putin met privately.

In opening the General Assembly, Secretary General Ban Ki-moon struck a sober theme, asserting that: “Inequality is growing, trust is fading, and impatience with leadership can be seen and felt far and wide.” Mr. Ban called explicitly for an “end to bombings” in Yemen, and named the five countries that, as he said, “hold the key” to peace in Syria: Russia, the United States, Saudi Arabia, Iran, and Turkey.

Pro-independence parties won a majority 72 seats (out of 135) in Catalonia’s regional parliament, but took down only 48% of the vote. Blocked by the national government from holding a referendum on independence, the separatists attempted to turn these elections into just that. While they won a majority of seats, the failure to gain more than 50% of the vote means had this been a referendum, it would have been a loss.

Apple said it sold more than 13 million iPhone 6s and 6s Pluses during their first weekend on the market. The company beat its previous record of 10 million in sales for the previous generation of iPhones in its first weekend in 2014. This year’s results benefited from the inclusion of the Chinese market, where regulatory problems delayed the gadget’s debut last year.

Whole Foods Market said it would cut about 1,500 jobs, or about 1.6 percent of its workforce, over the next eight weeks. The cuts are aimed at reducing costs as the company invests in technology upgrades. Whole Foods said in May that it would launch a new chain of smaller, more value-focused shops next year.

Scientists say there is water on Mars. In a paper published in the journal Nature Geoscience, scientists report definitive signs of liquid water on the surface of present-day Mars, a finding that will fuel speculation that life, if it ever arose there, could persist to now, or possibly in the future. In the research, Dr. Alfred McEwen, a professor of planetary geology at the University of Arizona and the principal investigator of images from a high-resolution camera on NASA’s Mars Reconnaissance Orbiter, along with other scientists discovered in photographs from the Mars Reconnaissance Orbiter dark streaks descending along slopes of craters, canyons and mountains. The streaks lengthened during summer, faded as temperatures cooled, then reappeared the next year.

The researchers were able to identify the telltale sign of a hydrated salt at four locations. In addition, the signs of the salt disappeared when the streaks faded. In other words, small rivers of liquid water; briny water, but water nonetheless. The salts lower the freezing temperature, and the water remains liquid. The average temperature of Mars is about minus 70 degrees Fahrenheit, but summer days near the Equator can reach an almost balmy 70.

Many mysteries remain. For one, scientists do not know where the water is coming from. One theory is that the salts act like a sponge to soak up moisture from the environment. The other possibility is underground aquifers, frozen solid during winter, melting during summer and seeping to the surface.

Financial Review

Cleaning Up

Sinclair Noe — August 3, 2015

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

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DOW – 91 = 17,598
SPX – 5 = 2098
NAS – 12 = 5115
10 YR YLD – .05 = 2.15%
OIL – 1.95 = 45.17
GOLD – 9.10 = 1087.10
SILV – .30 = 14.59

This is going to be an extremely busy week. We still have a third of S&P 500 companies to report earnings. There’s also going to be a plethora of economic activity culminating in the Friday jobs report for July. Oil prices hit a six month low. It’s not just oil. Commodities prices across the board are falling thanks to slowing global demand and a rising dollar. All of this makes it very unlikely we’ll see a big pickup in inflation any time soon.

The Athens Stock Exchange reopened today and it was ugly. The ASE Stock Index dropped 23% after being closed for five weeks, with banking shares down by as much as 30%. The index managed to recover from session lows but still closed down 16%. While local traders are able to buy stocks, bonds, derivatives and warrants under certain conditions, international investors don’t face any restrictions, as long as they were active in the markets before they were shuttered.

The selloff shows the scale of the crisis still facing Prime Minister Alexis Tsipras as he negotiates a third bailout with creditors after six months that have put unprecedented strain on the Greek economy and its financial system.

As expected, Puerto Rico missed a $58 million debt payment due over the weekend. Because the deadline was Saturday, the PFC technically has until the end of Tuesday to make its missed payment, but it appears unlikely to make a difference. Puerto Rico does not have the money to pay. Puerto Rico faces a grim future. It’s operating with a $703 million budget deficit for the fiscal year that began last month. And the commonwealth faces $635 million in debt-service payments this month. Many investors are already focusing on broader questions around how Puerto Rico will restructure its $72 billion in debt, what kind of a “haircut” bondholders will need to take and what reverberations will spread to the U.S. municipal bond market.

A default is imminent and it will be the largest government debt restructuring in US history, and maybe the messiest. Puerto Rico’s indebted central government, municipalities and public corporations cannot file for bankruptcy protection without the OK of the U.S. Congress, which leaves them at the mercy of what could be hundreds of lawsuits filed by creditors. Without a referee in the form of a bankruptcy court, it’s going to be a mess.

Over the years, mutual-fund managers have had an incentive to buy Puerto Rican bonds, because their returns are tax-free. And many well-known mutual funds have significant exposure to Puerto Rico, including Oppenheimer, Franklin, Eaton Vance, and others. So on one side you have Main Street America, Mom and Pop investors who may or may not have known what they were buying in those mutual funds. On the other side you have Puerto Rican citizens, facing severe cutbacks and added costs for everything from driving on their roads to healthcare. Meanwhile, hedge funds have been swooping in like vultures on a carcass, buying bonds at steep discounts and hoping to force repayment through the courts. The hedge funds issued a report demanding huge budget cuts and privatization; even that is unlikely to get the island out of debt.

Chinese regulators restricted short selling of stocks, freezing out day traders, in their latest step aimed at stabilizing the world’s second-largest equity market. Investors who borrow shares must now wait one day to pay back the loans. This prevents investors from selling and buying back stocks on the same day.  Under the old T+0 rule, you could go short in the morning and cover your shorts before market close the same day and lock in your profit, if your bet is right. Now with T+1, you can’t cover your short position in the same day, and have to wait till next day at the earliest. That makes shorting a much more risky venture.

Pacific Rim trade officials failed to clinch a final deal for the Trans-Pacific Partnership on Friday following several days of intense talks in Hawaii. Key sticking points: Auto trade between Japan and North America, New Zealand’s dairy exports and monopoly periods for next-generation drugs. The deadlock may also sink U.S.-led plans, which aimed to finalize the trade deal by the end of 2015.

President Barack Obama has officially revealed a finalized version of a plan to reduce the amount of carbon dioxide emissions that power plants across the country can emit. Obama called the plan “the single most important step that America has ever taken in the fight against climate change.” Adding that “there is such a thing as being too late on climate change.”

While US power plants have limits on other air-born pollutants — like nitrogen and sulfur oxides that cause acid rain — there haven’t been limits, until now, on the levels of carbon dioxide emissions that power plants can emit. Power plants that burn fossil fuels, both coal and natural gas, emit carbon dioxide and in turn these greenhouse gases contribute significantly to the warming of the planet.

The Obama administration has turned to the Environmental Protection Agency to use the Clean Air Act to regulate carbon dioxide emissions from the power industry through the Clean Power Plan. The White House has used the EPA because politically a national carbon emissions reduction plan wouldn’t be able to pass through Congress.

States will be allowed to create their own plans to meet the requirements and will have to submit initial versions of their plans by 2016 and final versions by 2018. The most aggressive of the regulations requires that by 2030, the nation’s existing power plants must cut emissions by 32 percent from 2005 levels, which is an increase from the 30 percent target proposed in the draft regulation. Electric power generation from coal and natural gas plants is responsible for 40% of U.S. carbon emissions.

Clearly, the clean power industries, including solar, wind and even smaller sectors like geothermal, will benefit greatly from the plan. States that opt to meet their requirements by investing in clean power projects could be a major boon to these technologies. Solar and wind project developers include SunPower, First Solar, NRG Energy, and SunEdison. The natural gas industry will also be a major beneficiary of the plan. The coal industry, of course, is one of the major losers in the plan. One of the leading and most economical ways to reduce carbon emissions from coal plants is to simply shut them down, particularly aging plants. At least one fifth of the coal plants in the U.S. have been closed, or are in the process of closing.

The Obama administration says the plan could lead to “30 percent more renewable energy generation in 2030″ and “create tens of thousands of jobs.” Consumers will collectively be able to save “$155 billion from 2020-2030″ on energy bills, and $85 a year on an individual energy bill by 2030.

The Institute for Supply Management’s manufacturing index fell to 52.7% in July from 53.5% in June. Readings greater than 50 indicate expansion. ISM reported that 11 out of 18 industries reported growth with five reported contractions. The group’s employment measure declined from a month earlier and order backlogs slumped. And for some reason, the data was released just a bit earlier than the scheduled 7:00 AM time.

Spending on U.S. construction projects rose just 0.1% in June, well below forecast. Spending advanced 0.4% for new houses, condos, apartment buildings and other residential properties. Outlays on nonresidential and commercial projects was flat.

Consumer spending edged up 0.2 percent in June, the poorest showing since a similar increase in February; and the government revised the spending gain in May to 0.7% from 0.9%.The largest drop in spending involved big-ticket items such as new cars and trucks, according to the Commerce Department; now a quick note here, we also had a report from the car companies saying auto sales were strong in July – more on that in a moment. Even as spending tapered off, incomes continued to rise steadily. Personal income climbed 0.4% in June for the third straight month.

U.S. auto sales were stronger than expected in July and kept the industry on pace for its best performance since the turn of the century. Auto sales rose 5.3 percent to 1.51 million vehicles, above the 3 percent rise expected by analysts, according to Autodata Corp. The figures translate to an annualized sales rate for July of 17.55 million vehicles and keeps the auto industry on a pace for its best year since 2000. High-margin pickup trucks helped sales of the two market leaders, GM and Ford. GM had record sales of the Colorado pickup. Ford’s F-Series sales alone topped those of all Ford and Lincoln brand sedans.

Alpha Natural Resources has filed for bankruptcy in Virginia. The second-largest US coal company has lost almost all its market value since 2011, when it bought Massey Energy Co. for about $7 billion. The deal made it the biggest U.S. producer of metallurgical coal, used in steelmaking; it also saddled the company with debt, right before prices began their plunge.

Former UBS and Citigroup trader Tom Hayes, the first person to stand trial for manipulating Libor, was found guilty of eight counts of conspiracy to rig the benchmark rate. Hayes has been sentenced to 14 years. Jurors in London found that Hayes conspired with traders and brokers to manipulate the London interbank offered rate to benefit his own trading positions. After initially cooperating and being admitted into a whistle-blower program, Hayes had a change of heart and pleaded not guilty. Throughout the trial Hayes insisted his managers at UBS and Citigroup had known of his attempts to manipulate Libor and at no point told him he was doing anything wrong.  Apparently the defense of “everybody else was doing it, too” is not a particularly strong defense. Now it will be interesting to see if prosecutors will go back and revisit Hayes’ earlier claims that rate rigging was systemic. Having followed the trial, it is hard to imagine Hayes was a mastermind.

FINANCIAL REVIEW

Columbo Fed

Sinclair Noe — January 7, 2015

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

DOW + 212 = 17,584
SPX + 23 = 2025
NAS + 57 = 4650
10 YR YLD – .01 = 1.95%
OIL + .59 = 48.52
GOLD – 8.20 = 1212.10
SILV – .02 = 16.63

After the holidays we are finally starting to get back to economic data. Let’s start with the ADP payroll report, which shows 241,000 net new private sector jobs for December. Breaking down that number, private-sector service providers added 194,000 jobs, while goods producers added 46,000 jobs. By company size, small businesses added 106,000 private-sector jobs, large businesses added 54,000 and medium businesses added 70,000. The Labor Department reports on jobs Friday morning and we tend to look to the ADP report as a precursor to the government’s monthly report, but it isn’t a real accurate predictor. Last month the government reported 321,000 new jobs and ADP initially showed 208,000 for November. Still, we are probably looking for around 220,000 to 240,000 new jobs on Friday and today’s report was in line with that estimate.

Meanwhile, Gallup has its own Job Creation Index which ended 2014 at plus 27 in December, eight points higher than where it started in January. The index has remained between plus 27 and plus 28 since May; essentially it has remained at the same level for the past eight months, suggesting the job market plateaued in the latter half of 2014.

In a separate report from Gallup, the number of Americans who are positive about the US economy outweighs those who negative about it; but just slightly, 49% to 45%. And everyone, it seems, is bullish about America’s job creation capabilities in 2015. From small businesses to CEOs to regular Americans, optimism is increasing for jobs growth in 2015. There is a good reason for that – for six straight months in 2014, growth exceeded 200,000 jobs a month. Last year, the unemployment rate dipped down to 5.8%, a rate not seen since July 2008. Yet those numbers don’t tell the full story. There is more to an economic recovery than optimism and a low unemployment rate. Americans are still struggling with low wages, with paychecks at roughly 1995 levels.

A large portion of those jobs are low-wage, part-time jobs that do little to help the families that struggle to make ends meet. In November, 6.7 million Americans worked part-time; 2.3 million of them wanted full-time work but couldn’t find it. Almost 4 million of them had only part-time work due to unfavorable business conditions and decline in seasonal demand.

The trend is likely to continue. According to a survey by Careerbuilder, one in four employers plan to hire more part-time workers in 2015, a 6% increase from 2014. But American workers don’t need part-time jobs – they need full-time ones. According to Gallup’s survey of over 600 small business owners, more than a quarter of them will be hiring someone in the next year. Just 8% say they will have to let people go. Additionally, 71% of business owners expect that 2015 will be kind to them and that their financial situation in 2015 will be “very good or somewhat good”. Yet pessimism persists in the top echelon of corporate America. American CEOs predict that 2015 will see weak economic growth, and according to the most recent Business Roundtable CEO outlook survey, gross domestic product will grow by 2.4% this year. Investments will drop by 5.8% and sales by 1.3%.

But Americans remain optimistic about jobs; according to Gallup, 36% think now is a good time to find a quality job. One of the ways to judge if the optimism about the job market is having a practical effect is to look at the number of people leaving their jobs in hopes of finding a better one. In November of this year, about 838,000 people left their jobs; a year ago that number was 890,000. More people are staying put at the jobs they have. And this means employers don’t have to offer big wage increases to get and keep the workers they need. And this remains true even as a jobs recovery has consistently forged ahead in recent years. The turning point in the labor market will be when we see wage growth of 3.5% to 4%. Until then we’re just taking baby steps.

The trade deficit shrank by 7.7% in November to $39 billion, which is the smallest deficit in 11 months. This goes directly to lower prices for imported oil, which more than offset a drop in exports of aircraft, heavy machinery, and computer related equipment.

The Eurozone has slipped into deflation. Consumer prices in Europe dropped 0.2% in December. ECB officials are working on a plan to purchase sovereign debt to prevent a deflationary spiral of falling prices. It is widely expected that ECB President Mario Draghi will announce some sort of quantitative easing scheme on January 25; the fly in the soup is Greece, which holds a snap election on January 22nd, and is likely to vote for an anti-austerity, anti-bailout political party that is calling to repudiate Greek debt. Draghi would like to talk down deflation, but today’s numbers make that argument moot. Come January 22nd the market will no longer hope or even expect a clear plan on QE, it will demand it.

In a separate report, Eurozone unemployment remained at 11.5% in November. Joblessness in Italy rose to a record 13.4%. German unemployment fell to 6.5% in December, the lowest in more than two decades. And, as we noted yesterday, Greece’s unemployment rate is still around 25%.

Bond investors are now hanging on European policy makers doing more; but even a big bond-buying program in Europe, and continued stimulus in Japan, might not be enough to make bond markets optimistic about global economic growth. Some bond investors say the stimulus from the central banks has a decreasing effect because, each time the stimulus occurs, it increases indebtedness and stokes speculation in financial markets that fails to translate into growth in the real economy.

So, Wall Street was moving higher today, a triple digit gain for the Dow despite news off a terrorist attack in Paris that left 12 people dead because apparently terrorists really hate French cartoonists. Also, barely making headlines, a suicide car bomber killed 37 people in Yemen today. The gain in stocks probably had less to do with any economic news or any reaction to geopolitical events and more to do with the simple idea that stocks had been on a 5 day losing streak and were due for a bounce. And then we got the minutes of the December FOMC meeting.

The Federal Open Market Committee consists of the Federal Reserve policymakers and they have previously indicated that there is a likelihood they will start to tighten monetary policy maybe in 2015. The key passage from December’s policy statement was: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” The Fed added that this guidance is “consistent” with its previous language that indicated the Fed would wait a “considerable time” before normalizing policy.

So, let’s try to translate the Fedspeak. The Fed says they will be patient, which means we probably won’t see any rate increases before April, at least. The Fed says there are downside risks from global weakness, which means we might not see any rate increase for quite a while longer. The policymakers think cheaper energy prices are a net positive for GDP growth and job gains, but they don’t see wages accelerating, and cheap oil and a strong dollar is pushing inflation lower; which sounds like they haven’t seen enough data to make a move. It all sounds a little like the old TV show Columbo. Remember how Peter Falk played the role of a befuddled detective with a wrinkled raincoat and he seemed to be completely lost and bumbling his way along, and then he solved the crime. The Fed is a lot like Columbo, they just haven’t solved the crime yet.

And a note on those lower oil prices; based on the Federal Reserve’s economic model, a $20-a-barrel drop in crude oil prices translates to a quarter percentage-point increase in GDP. That’s good but a lot of the benefits from higher consumer spending are front-loaded. Unless energy prices continue declining, there is only a one-time positive impact on the annualized growth of real incomes and real consumption. And it is uncertain if lower fuel prices will help the jobs picture, after all it’s just shifting spending from the gas station to some other retail outlet.

Still, lower gas prices are like a gift for transport-heavy companies like railroads, trucking companies, and the petrochemical industry. If they are smart they should be locking in as much of this downturn as possible. That is a huge benefit on this pullback. But the gift may be temporary. So says President Obama; he says consumers should use the savings wisely. The president also told The Detroit News that demand for oil from emerging markets like China and India would continue to grow “over the long term,” adding that the US needed to remain “smart” about its energy policy.

Right now, it is hard to see the floor for oil prices. Some things need to happen before we see a sustained rebound in prices. It’s an old story of supply and demand. On the supply side, oil prices need to fall below operating cash costs before companies start shutting down existing wells. Next, OPEC (and specifically Saudi Arabia) would need to impose some control over production, and the Saudis seem to be waiting for US oil companies to shut down some wells before they will shut down their own production. Right now, global oil producers are looking at a glut and responding by increasing drilling. Iraq, Russia, Latin America, West Africa, the United States, and Canada – all may increase production this year.

Next, demand would need to increase; lower prices will ultimately lead to a pickup in global oil demand, and cheap oil results in complacent conservation; but it won’t happen right away, you could reasonably expect a 6 month lag. Or we might see a longer lag because the global economy is fairly weak. One other way to put a floor under prices, is if we see traders get a little greedy and try to squeeze the shorts, and there are a lot of producers that have taken net short positions in the energy market as a hedge against lower prices. What could trigger a short squeeze? I’m thinking weakness, or even a couple of flashy defaults in the high yield debt markets.

FINANCIAL REVIEW

Fans of Gridlock

Sinclair Noe — November 21, 2014

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 91 = 17,810
SPX + 10 = 2063
NAS + 11 = 4712
10 YR YLD – .02 = 2.32%
OIL + .77 = 76.62
GOLD + 5.80 = 1201.30
SILV + .15 = 16.50

Record highs for the Dow and the S&P.

China has cut interest rates for the first time in more than 2 years. The first thought is that China is trying to stimulate growth for a slowing economy. However, in making the announcement, the People’s Bank of China tried to emphasize that the economy is growing within a reasonable range, and the rate cut was not about spurring growth. Instead, they emphasized the need to reduce corporate financing costs to help struggling companies. So, you might think that lower rates would only encourage more borrowing in a country that already has too much debt. What the Chinese central bank appears to be doing is making it feasible to refinance the existing debt at lower rates, which would allow Chinese companies to lessen their debt burdens. So, in this way, lower rates is a way to deleverage.

And this is not the first attempt at reducing borrowing costs. Since September the People’s Bank of China has provided more than $130 billion in medium term loans to banks on the condition they lower borrowing rates for small businesses; trying to channel to certain industries, including small and rural businesses as well as government-financed low-income housing projects, without adding excess capacity to other industries, such as steel and real estate. The problem is that this did not work; most of China’s piecemeal efforts to make lending more affordable have not worked, and so the next step was to cut rates. And despite the official story, China is concerned about growth. China’s economy, the world’s second-largest after the US, grew by 7.3% year-over-year in the third quarter, its slowest pace in more than five years, and short of their 7.5% growth target.

Meanwhile, a lack of real demand for loans, rather than a shortage of credit, is holding the Chinese economy back; and whatever the justification, the People’s Bank of China is loosening monetary policy, and this is probably not the last rate cut. China joins the European Central Bank and the Bank of Japan in stimulative monetary policy, which raises the question of whether we are in a new round of currency wars or economic battles due to slow growth. Probably not, but this does add extra cash into the global financial system, and the global markets love free money.

Today, Mario Draghi, the chief of the European Central Bank said that inflation must be brought back to target “without delay”, paving the way for full-blown quantitative easing. Draghi says low growth and a lack of inflation must be reversed. Draghi stressed that while there had been improvements in the financial sphere, these had “not transferred fully into the economic sphere”, where the situation “remains difficult”. I wonder if he has heard of “pushing on a string?” Most markets moved higher today, including Europe and the US, which started the day with triple digit gains on the Dow.

Last night President Obama delivered a speech on immigration; I’m sure you heard about it – or maybe not; it was a prime time address, except it wasn’t covered by the major networks, which instead decided to air The Biggest Loser, The Big Bang Theory, and Grey’s Anatomy. Today, Obama was signing memorandums that will defer deportation for up to 5 million people who came to the US as children and for parents of children who are citizens or legal permanent resident, provided they meet certain requirements. The administration says the changes won’t provide an easier path to citizenship. Separately the administration will streamline the visa process for foreign workers and their employers and provide more options for foreign entrepreneurs. The plan also calls for tightening border security. The executive order potentially shields as many as 5 million undocumented immigrants from the threat of deportation for up to 3 years.

The White House’s Council of Economic Advisers said the plan by 2024 would raise gross domestic product by at least 0.4%, expand the size of the labor force by between 147,000 and 297,000 workers, and raise average wages for US-born workers by 0.3%. There are widely different views about the economic impact of immigration changes, with some economists arguing that if you increase the supply of labor, you will put downward pressure on wages; the counter argument is that you aren’t really increasing the pool of labor, just bringing it out of the shadows, and that should boost wages, at least in the near term.

The executive action is temporary, and to that end Obama issued a challenge to Congress to pass legislation.

The president’s decision to act unilaterally infuriated Republicans, and already there are threats of lawsuits and cutting off funding for specific agencies that would be tasked with the immigration orders, and maybe also shutting down the entire government. Government funding expires Dec. 11, and lawmakers must make new appropriations or risk a shutdown. No decisions are expected until after the Thanksgiving holiday.

Although today, the Republicans sued Obama; not on immigration; they finally filed a lawsuit against the president over implantation of the Affordable Care Act. Actually, the president was not named as a respondent; the suit names the secretary of health and human services and the Treasury secretary.

The suit claims that the administration’s actions, including the delay of the employer mandate and cost-sharing for insurance companies, were beyond the normal discretion the executive branch has to carry out laws. The first issue that will have to be addressed is “standing.” To get into court, the House would have to prove that it was damaged by the way the administration carried out the ACA, and courts have consistently rejected that idea.

Anyway, if you are a fan of gridlock, you’ll love the next 2 years in Washington DC.

Meanwhile, amnesty is alive and well. I’m not talking about immigration, rather on the other end of the food chain where the non-enforcement of the law protects the elite bankers. Today, a Senate banking subcommittee is digging into the cozy culture between Wall Street bankers and the New York Fed, which is one of the top entities that polices Wall Street, following reports from ProPublica which released 46 hours of recordings of meetings between regulators at Goldman Sachs and the regulators’ bosses at the New York Fed. At the hearings, NY Fed president William Dudley at one point rejected his role as a banking regulator, saying “Our orientation is the safety and soundness of the firms we supervise.” Dudley went on to describe his role as more of “a fire warden, not a cop on the beat.” One thing is certain, Dudley is not a bank regulator. In what looks like a defensive move, the Federal Reserve announced it would review crucial aspects of its bank supervision.

Meanwhile, this is Day 2 of another Senate Committee hearing into how banks have cornered physical commodity markets and how they’ve been rigging prices, specifically Goldman Sachs in the aluminum market. Meanwhile, in what looks like a defensive move, the Federal Reserve announced it is considering putting several new limits on Wall Street’s involvement in the commodities market. The Fed has been examining the need for new rules since 2010.

Much of the shale oil boom can be traced back to Wall Street, where years of low interest rates encouraged energy companies to fuel their growth by tapping eager investors in the bond and loan markets. Now, the price of oil has dropped 25% in 3 months. Many energy companies built their business based on prices around $90 a barrel and a drop to $60 a barrel could cause energy companies to default on their debt, which could start a cascading effect that pushes the whole US energy sector into distress. Energy bonds now account for about 16% of the $1.3 trillion junk bond market, up from about 4% a decade ago; it is the largest sector in the high-yield market.

Not much in the way of economic reports today. The Labor Department released state by state unemployment numbers; nonfarm payroll employment increased in 38 states and decreased in 12 states. North Dakota has the lowest rate of unemployment at 2.8%, and Georgia had the highest rate of unemployment at 7.7%. Arizona remains in the bottom 10 at 6.8% unemployment.

Next week’s economic calendar includes the Tuesday release of the S&P/Case-Shiller report on home prices. Wednesday brings a report on durable goods orders which might give us some indication of capital spending. Also, Wednesday a revision to the third quarter GDP numbers, likely going down from the initial estimate of 3.5% growth. Friday is a half day for the markets. Why not just take the day off? Well the markets are never supposed to be closed for more than 3 consecutive sessions.

FINANCIAL REVIEW

War, Pay Phones, Small Business and Big Banks

Sinclair Noe — September 24, 2014

0 0 

   

Financial Review

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW + 154 = 17,210
SPX + 15 = 1998
NAS + 46 = 4555
10 YR YLD + .03 = 2.57%
OIL + 1.18 = 92.80
GOLD – 6.30 = 1217.60
SILV – .11 = 17.78

President Obama addressed the United Nations General Assembly today. He condemned ISIS, and said there was no reasoning and no negotiation with their brand of evil. He said the US “will work with a broad coalition to dismantle this network of death”; that coalition is now up to 40 countries. He urged Muslims to reject the ideology of ISIS and al-Qaeda. He also announced a US warplanes hit ISIS vehicles and arms dumps in new air strikes in Iraq and Syria. ISIS continues to advance in Syria and aid agencies report some 130,000 Kurdish refugees have crossed into Turkey in the past few days. An Algerian jihadist group linked to ISIS has released a video which it says shows militants beheading a French tourist.

The president’s speech also criticized Russia for the recent invasion of Ukraine. Today, NATO reports Russia has withdrawn a sizable number of its troops from eastern Ukraine, although some remain. Russian backed rebels in the region said they had begun pulling back their heavy artillery after Ukrainian troops did the same. For now, the cease fire appears to be holding.

The stock market recovered after three days of losses; for the Dow Industrials it was two days of triple digit declines. Not much in the way of economic news today. New home sales were up 18% in August. In a separate report, the Mortgage Bankers Association said applications for loans to purchase homes fell last week as mortgage rates crept up. New loan applications are well off peaks seen early last year. Yesterday, the NAR reported existing home sales had flat lined, with both “cash sales” and “sales to investors” dropping, or rather plunging since late 2013. Every month since late last year, existing home sales have been below their year-ago levels. Bad news for flippers. Looking at the bigger picture it might give some hints to family formation, or lack thereof. For economists, it might serve as a lesson that rising home prices are a symptom of economic strength, not a cause; and you can’t sustain rising home prices without rising wages.

European Central Bank President Mario Draghi renewed a pledge to keep monetary policy loose for an extended period. The euro dropped below $1.28. The dollar has now posted gains for 10 straight weeks, pushing the dollar index above 85 for the first time since July 2010. A stronger dollar likely means lower prices on basic commodities; it also serves as stimulus for the Eurozone and Japan, making their exports cheaper; and a strong dollar might even fuel another round of M&A activity; also, this might be a great time to take a European vacation.

You’ve heard the stories of data breaches at Target, and then the big one at Home Depot, potentially affecting some 56 million customers; now add Jimmy John’s to the list; 216 stores of the restaurant chain were involved in a security breach on July 30. There has to be a more secure way to buy a sandwich. The security breach at Home Depot is now resulting in fraudulent transactions that may be draining cash from some customer bank accounts as criminals use stolen card information to buy prepaid cards, electronics, groceries, or whatever. Financial institutions are also stepping up efforts to block the transactions by rejecting them if they appear unusual. Best advice is to keep a close eye on your own accounts.

Some people think the next big thing is Apple Pay; it doesn’t store credit card data and Apple fingerprint reading technology could provide an extra layer of security, but it’s a long way from being ubiquitous. It is estimated Apple could end up taking in around $90 million in transaction fees from Apple Pay next year, climbing to more than $300 million by 2016. That should make payments absolutely, super-duper safe and secure.

Meanwhile, Apple announced it is pulling its latest update of the new iOS 8 operating system, which they sent out to fix the glitches in its new HealthKit app. The problem with the update is that people who installed it lost the fingerprinting ID capability and phone calls kept getting dropped. Other than that, how did you enjoy the play Mrs. Lincoln?

Remember Blackberry. Once upon a time Blackberry was the cool mobile phone, and then Apple became the cool mobile phone and Blackberry was so square. Well, they’ve embraced that. Blackberry introduced a new phone today, it’s called the Passport, and the screen is square, not rectangular, so it won’t fit in any pocket.

Wal-Mart thinks the next big thing is a Wal-Mart checking account; they will partner with Green Dot to offer checking accounts accessible by mobile phones, and it comes with a debit card, and monthly fees are waived if you use direct deposit, and it doesn’t rely on credit scores or credit bureau ratings. Wal-Mart is trying to tap into the vast “unbanked” market, which now gets raked over the coals at check cashing stores.

Earlier today, it was reported that the Securities and Exchange Commission has been investigating whether bond fund manager Pimco inflated the returns of its Total Return Exchange Traded Fund run by founder Bill Gross. The probe is said to have sped up in recent weeks but has been going on for “at least a year.” Which means that it was happening when Mohamed El-Erian announced he was leaving the firm.

Investigators from the SEC’s enforcement division are examining whether the $3.6 billion Pimco Total Return ETF bought investments at discounted prices but relied on higher valuations for the investments when the fund calculated the value of its holdings shortly thereafter. Such a maneuver could make it seem as though the ETF had scored quick gains when it was in fact taking advantage of variations in the way some investments are valued in the bond market; which is another way of saying Pimco may have provided inaccurate information about the fund’s performance.

Do you remember where you were in 1988? Do you remember where you worked? Do you remember what you were paid? If you can’t remember what you were paid 26 years ago, don’t worry, there’s a good chance it is the same as today. The economic recovery has yet to translate into higher incomes for the typical American family. After adjusting for inflation, US median household income is still 8% lower than it was before the recession, 9% lower than at its peak in 1999, and essentially unchanged since the end of the Reagan administration. And the income of the median US household is just under $52,000; the same as it was in 1988. Now granted, that number, reported last week in the latest income and poverty data, is based on median income; also, it refers to households, and the typical household has changed over the years. Still…

Six years ago the financial crisis hit Wall Street, turning a housing crisis that was already hammering Main Street into the worst recession since the Great Depression. Job losses averaged nearly 800,000 per month between November 2008 and April 2009 as the unemployment rate climbed. The economy contracted at a rate of 8.3% between the fourth quarter of 2008 and the first quarter of 2009. The crisis hit businesses big and small, but it hit small business harder.

Jobs at small businesses fell 60% from the pre-crisis peak in December 2007 until the private sector started adding jobs again in February 2010. That represents a decline that is 40% larger than the fall in jobs among larger businesses. This is especially problematic because small businesses employ half of the private sector workforce, and since 1995 small businesses have created about two out of every three net new jobs, or 65% of total net job creation. Small businesses have created jobs in every quarter since 2010, and are back to creating two out of every three net new jobs, but still remain well below the job creation levels that we need to see to fill the “jobs gap” left in the wake the recession.

Part of the decline in job creation has also been due to anemic new business formation. Over the past 20 years, businesses less than two years-old accounted for one-quarter of gross job creation even though they employed less than 10% of workers. But, during the crisis new business formation fell sharply. In the decade prior to the crisis, more than 620,000 firms were started every year. But, starts have averaged just about 550,000 annually since 2009, a decline of about 11%. And small business just keeps getting smaller; in 2000, the average new firm had 7.7 employees; by 2010, that number had declined to 5.5.

The formation and growth of small businesses depends on well-functioning credit markets, but throughout the recession and even during the recovery today critical parts of our credit markets are shut for small firms. Small business loans on the balance sheets of banks are down about 20% since the financial crisis; meanwhile, loans to larger businesses have risen by about 4% over the same period. The Federal Reserve Bank of New York reports that 37% of all small businesses applied for credit in the fall of 2013. About 45% did not apply, presumably because they did not need credit, but about 20% did not apply because they were discouraged from doing so. Of businesses that did apply, over 40% either received no capital at all or received less than the amount that they requested.

Part of the problem is that many small community banks closed in the crisis, and they haven’t been replaced; just one new community bank charter was granted in 2010, just 3 new charters in 2011. There were 6,840 banks and 1,173 thrifts last year, down from 14,507 banks and 3,566 thrifts in 1984. And of course the big banks just consolidated and got even bigger, and the Federal Reserve Bank of Atlanta reports that big banks are less likely to extend credit to a small business than a small regional bank.