Financial Review

Capping Off a Record Week

Sinclair Noe — July 22, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 53 = 18,570
SPX + 9 = 2175
NAS + 26 = 5100
10 Y – .02 – 1.55%
OIL – .51 – 44.24
GOLD – 8.60 = 1323.10

Stocks closed higher for the fourth straight week, with the S&P hitting a new record high. The rise capped the longest run of weekly gains since March. The Dow Industrial Average did not close at a record high but has been positive for 10 of the last 11 sessions.  A three-week rally in global equities has added more than $4.5 trillion in value.

The next big event for the markets likely will be the two-day Fed policy meeting slated for July 26-27. Although the central bank isn’t expected to push benchmark rates higher, market participants will pore over the updated policy statement for clues on the pace and timing of the next rate hike, which could influence the U.S. dollar, Treasuries and the broader stock market.

In the weeks following Brexit, there was a “dramatic deterioration,” in the British economy; that according to a one-time report from Markit Economics published this morning. Services and manufacturing shrank and a gauge of the private-sector economy plunged to 47.7, well below the 50 level that divides expansion from contraction. The slump is the strongest evidence yet that politics is propelling the world’s fifth largest economy into recession. It intensifies pressure on the Bank of England to deliver fresh monetary stimulus and on the government to reverse fiscal austerity.

The pound dropped after the report was published, with Markit saying its latest readings put the economy on course to contract by 0.4% this quarter. Business activity in the eurozone did not fall as much as expected in July, despite Brexit jitters and the Bastille Day massacre, as Markit’s flash PMI for the region dropped to 52.9 from June’s 53.1.

French President Francois Hollande has given U.K. Prime Minister Theresa May a choice: Accept unlimited immigration from the EU or lose access to its single market. May also confirmed that the triggering of Article 50 won’t come this year as her government works out its negotiating position. Article 50 refers to the official notification to withdraw from the Euro Union. And this is an important point because the UK is not officially out of the EU until it has triggered Article 50 and then gone through 2 years of negotiations. Now the UK could conduct negotiations during that period, but a big part of any new trade deals will be with countries in the EU. Bottom line, the Brits will have a very tough time getting trade deals in place before they exit the EU.

Finance ministers and central bank governors from G20 countries are gathering in Chengdu, China, for a two-day meeting that begins tomorrow. Brexit and monetary policy at a global level are likely to be the main topics of discussion. Ahead of the G20 meeting, the IMF painted a dark outlook for the global economy, issuing an “urgent” call for the world’s largest economies to roll out more growth-boosting policies and act more aggressively.

General Electric reported a sharp rise in adjusted net income in the second quarter, as its aviation, healthcare and power businesses countered weak demand for oil and gas and transportation equipment. During the quarter, GE returned $18 billion to shareholders through stock buybacks. The company shed its designation as a non-bank systemically important financial institution after divesting most of its GE Capital business. GE’s results included four different earnings-per-share numbers.

The conglomerate has said year-over-year comparisons are difficult as the company has recorded both gains and losses from sales of several businesses as part of its GE Capital exit plan, acquired Alstom and recognized pension costs and restructuring charges. The actual bottom line based on generally accepted accounting principles (GAAP) was earnings of $2.74 billion, or 30 cents a share, compared with a loss of $1.36 billion, or 13 cents a share, in the same period a year ago. GE shares dropped about 1.6%.

Boeing has revealed more expensive stumbles with the production of new commercial and military jets, saying it would take $2.1 billion in charges in its coming earnings. The pretax charges stem from delays in developing its new Air Force refueling tanker, demand concerns about its 747 jumbo and the original high costs of its 787 Dreamliner.

American Airlines reported better than forecast second-quarter earnings but profit fell even though the airline managed to cut fuel costs — a major expense — by one-fifth. Overall operating revenue is down, while the average airfare paid fell 6.4% and load factor — a measure of how full flights are — dropped one half percent. Earlier this week, United and Southwest both reported similar revenue pressures. Reduction in spending on the part of the airline and the consumers is a sign of a weakening global economy or, at the least, a sign that growing concern the global economy is headed that way. Britain’s historic vote to leave the EU, is one reason.

American Airlines President Scott Kirby said during the earnings call, “We have seen historically that if there is a business confidence problem, the first thing businesses do is cut entertainment and travel budgets.” In fact, for everyday consumers, air travel is also one of the first budgetary items to be cut when there is concern about the economy. As a result, softness in airline revenues and a decline in demand for air travel can be seen as a bellwether for looming economic issues.

Schlumberger and Halliburton, the world’s two largest providers of oilfield drilling and fracking services, have said that the worst of the two-year-old oil market crash may be over. The first half of the year has seen something of a pick-up in deals, while the backlog of drilling, but not fracked, wells in the U.S. has stopped growing. The one thing that is missing from the picture so far is a recovery in oil prices. WTI crude oil prices dropped about 3% this week.

Even though Schlumberger thinks the oil patch has hit bottom and may be turning around, they will cut more jobs. The world’s largest oil field services provider earned an adjusted $0.23 a share, topping estimates of $0.21. Revenue of $7.16 billion edged out the $7.15 billion that Wall Street was expecting. Schlumberger says it cut 16,000 jobs in the first half of the year, leading to a $646 million restructuring charge.

Meanwhile, the latest news from baker Hughes shows oil rig counts increased by 14 in the last week – up 6 of the last 7 weeks. So, as we look at rebalancing in the oil patch, $50 a barrel looks like the level where the rigs pump come out of hibernation. This week’s report from EIA revealed a slight draw-down in crude oil inventories. Crude oil stocks were down 2.3 million barrels, posting the ninth straight week of declines and adding momentum to a slow but steady oil market balancing. Still, oil inventories stood at 519.5 million barrels as of mid-July, about 60 million barrels higher than year-ago levels. Combined, all U.S. crude oil and refined product stocks jumped to 2.08 billion barrels, an all-time high. This comes at a time of year when peak demand is supposed to draw down on inventories.

There was some strong economic news this week, existing home sales were up, and it looks like first time buyers made up about one-third of all buyers last month.  The low interest rate environment is certainly a factor on home sales. It suggests that important cylinders of the US economic engine continue to fire, despite the slowdown in China and the weakness in Europe.

Aside from homes, cars—another interest-rate dependent sector—are going strong too. GM’s profit was up 150% when they reported earnings the other day. All those new cars are more efficient; they get better mileage, which might explain why we have an oil glut right now.  Refiners are contributing to the draw-down in crude oil stocks, pulling oil out of storage, but they are simply spinning that into gasoline, which then ends up in storage because people are not using as much as the industry thought it would. As summer comes to an end and refiners turn to maintenance and cutback on refining runs, the upward pressure on gasoline inventories could subside, but the demand on crude could also fall.

Automakers are betting big on electric cars, in part to meet aggressive U.S. fuel-economy standards that project the vehicle fleet will average more than 50 miles per gallon by 2025. And while the cars are efficient, they still have to charge up with electricity. The Energy Department has announced a plan to provide $4.5 billion in loan guarantees to build car charging stations, aiming to complete a U.S. network by 2020 to make “coast-to-coast, nationwide zero-emissions travel” a reality.

Stepping into the student loan marketplace, Amazon has formed a partnership with Wells Fargo, in which the bank will offer interest rate discounts to select “Prime Students.” The offer, which will shave a half percentage point off WFC’s student interest rates, will be accessible to Amazon shoppers who want loans to attend college and those who want to refinance existing loans.

Pokemon GO has finally launched in Japan, the birthplace of the little virtual monsters. Besides Nintendo, which owns stakes in both The Pokemon Company and game developer Niantic, shares of McDonald’s Holdings Japan are getting a big boost from the news. Its fast food restaurants across the country are set to become “gyms,” where players can train their Pokemon for virtual fights.

World Markets Extend Rally

Financial Review

No Wagering

Sinclair Noe — October 16, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 74 = 17,215
SPX + 9 = 2033
NAS + 16 = 4886
10 YR YLD un =  2.02%
OIL + .88 = 47.26
GOLD – 5.70 = 1178.70
SILV – .09 = 16.13

World markets extended a rally that has added $4.1 trillion to global equities this month, following a slew of weak economic reports that have dashed expectations for a Fed rate hike in 2015. European stocks are up, and Asian stock markets added to the gains which saw equities close at two-month highs; the Shanghai Composite gained 6.5% for the week. After a rebound yesterday, Wall Street recorded its third straight winning week.

The Dow and S&P were up just under 1% on the week; the Nasdaq was up 1.7%. The rally over the past three weeks has been very narrow, as two thirds of the stocks on the S&P 500 are still below the 200-day moving average. Historically, October may be one of the worst months for stocks, but not in recent years and not so far this month.

Industrial production fell 0.2% in September, in line with expectations, and capacity utilization declined. The only major market group to post a gain in September was consumer goods. Capacity utilization fell to 77.5% from an upwardly revised 77.8% in August, a bit above the 77.4% expected.

Consumer sentiment rose in October after three straight monthly declines. Sentiment rose to a preliminary October reading of 92.1 from a final September level of 87.2.

Job openings dropped in August after reaching a record in the previous month, the Labor Department’s Job Openings and Labor Turnover report, also known as JOLT, showed job openings fell to 5.37 million from 5.67 million in July.  The hiring rate stayed at 3.6%, and the quits rate stayed at 1.9%.

Arizona’s seasonally adjusted unemployment rate remained unchanged at 6.3% in September. The U.S. seasonally adjusted unemployment rate remained unchanged at 5.1% in September. A year ago, the Arizona seasonally adjusted rate was 6.6% and the U.S. rate was 5.9%. Arizona gained 28,800 jobs in September, which is a bit better than the average of the last several years, but in a strange twist, 28,300 of those jobs were government jobs, and only 500 private sector jobs were created last month.

Employment is taking a dive in industries that sell a lot of U.S.-made goods abroad, and things could get worse before they get better. A new report from JPMorgan shows  export-oriented industries have been losing about 50,000 jobs a month for most of this year, after adding 9,000 a month on average in 2014. Recent manufacturing surveys hint the impact could worsen, and the employment erosion may extend into the first half of 2016. In effect, that would mean private payrolls growth takes a step down to around 150,000 a month, from the booming 250,000-plus average of 2014.

Yesterday we reported that the number of Americans filing new jobless claims fell to 255,000 last week; the lowest figure since Richard Nixon was president, and the economy was much smaller 42 years ago. Fewer claims for unemployment should mean the labor market is heating up, but we still don’t see people leaving their job to move to greener pastures; the quit rate remains stagnant. The economy is growing at about a 2% rate so far this year; that’s sluggish, at best. Productivity has cratered.

Inflation, well there is no inflation, based on the latest CPI numbers through September. And Wall Street is reporting third quarter earnings, or the lack thereof; profits are likely down about 5%, marking the second consecutive quarter of negative earnings. So for now at least, it appears we can put the whole idea of a Federal Reserve interest rate hike on hold.

The European Central Bank will be meeting next week. Investors are now speculating about when the central bank will make a further stimulus move, rather than if such a move could happen. That notion was hammered home this week when data confirmed the Eurozone has slipped back into negative inflation, which is bad news for both the ECB and the region’s growth prospects.

Fitch has cut Brazil’s credit rating to the brink of junk, warning the country could soon lose its coveted investment grade due to the “rising government debt burden, increased challenges to fiscal consolidation and a worsening economic growth backdrop.” The rating agency left a negative outlook on the new rating, suggesting it eventually could follow Standard & Poor’s recent downgrade to junk. A second move into the territory would trigger further losses for Brazil’s economy, since it could force many investors to sell some of their assets.

A U.S. appeals court ruled that Google’s massive effort to scan millions of books for an online library does not violate copyright law, rejecting claims from a group of authors that the project illegally deprives them of revenue. Google had said it could face billions of dollars in potential damages if the authors prevailed. A judge had found Google’s scanning of tens of millions of books and posting “snippets” online constituted “fair use” under U.S. copyright law. The appellate court said the case “tests the boundaries of fair use,” but found Google’s practices were ultimately allowed under the law. So, scan on.

Illinois lottery officials said payouts for winnings over $600 will be delayed because the lottery’s coffers are empty. Illinois had been handing out IOUs for jackpots of over $25,000 since July as the state’s fiscal balance continued to deteriorate while politicians bickered over the budget. The state has been operating under a patchwork of consent decrees and court orders, in lieu of a budget, since midsummer. The new lottery slogan: You can’t win, even if you do play. More important than lottery payouts – pensions are in trouble. The Illinois comptroller said Wednesday that the stalemate would prevent the state from making a $560 million pension payment due in November.

Nevada says daily fantasy sports is gambling and the companies operating those websites need licenses if they want to do business in Nevada, and the sites could not accept payment from customers in Nevada until they are licensed. This follows a report indicating the US Justice Department and FBI are looking into whether the daily fantasy-sports sites are violating federal law.

Wynn Resorts had a bad quarter. The casino giant announced earnings of $0.86 per share, which was in line with Wall Street estimates. But revenue dropped 27% year-over-year to just under $1 billion, missing estimates. Revenue from Las Vegas was down 3.9%. The casino suffered through an abysmal quarter in Macau as revenue there crashed 37.9%, and this is where the story gets interesting. Macau is the world’s biggest gambling center, if you’re not counting Wall Street. And suddenly the Chinese government has started cracking down on gambling as part of an anti-corruption drive.

The government is monitoring debit card transactions and they placed cameras in the VIP rooms, and the effect has scared off the high-rollers. Wynn is planning to open a multi-billion dollar casino in Macau next year, but they don’t know how many gaming tables the government will allow them to have.  This appears to be part of a broader crackdown on corporate corruption, following last month’s cutbacks in the Chinese state-owned energy company Sinopec Group. I’m not sure what this tells us about the Chinese economy, but it looks like the fast growth free-wheeling days are coming to an end.

General Electric reported net earnings fell 29% from a year earlier to $2.51 billion, or 25 cents per share. Excluding items, (also known as the cost of being in business) earnings of 29 cents a share beat estimates by 3 cents. GE reported more jet engine sales, but they were hurt by their oil and gas related businesses. GE is in the process of spinning off Synchrony Financial as a stand-alone, which will help retire as much as 7% of its floated shares.

Schlumberger, the world’s No.1 oilfield services provider, said it would cut more jobs and consolidate its manufacturing and distribution network as it did not expect a recovery in demand before 2017. The company, which has already cut 20,000 jobs, or about 15 percent of its workforce, did not say how many jobs it planned to cut in the next round. But don’t look for a quick rebound. Exploration and production spending is expected to fall for a second consecutive year in 2016. Schlumberger said it did not expect a recovery in demand before 2017.

Ten of the world’s big oil companies came together today to say , jointly  that their industry must help address global climate change and said that they agreed with the United Nations’ goals of limiting global warming. The public declaration by a group called the Oil and Gas Climate Initiative was an effort to convince an increasingly skeptical world that energy companies, whose fossil fuels are a big source of greenhouse gases, are serious about delivering cleaner energy and combating climate change.

The companies in the oil group said they would support the climate conference’s effort to reach a global climate change agreement at the Paris conference later this year, even though meeting that target would require leaving much of the world’s existing oil, gas and coal reserves unburned and would require the companies to make major changes in the way they do business.

Now before you think I’m making this up – in this latest show of unity from the oil and gas industry, US oil giants like Chevron and ExxonMobil are nowhere to be found; no US oil companies signed the pledge. And that’s the other thing. A pledge is not the same as action.

Financial Review

Fired Up

Sinclair Noe — August 26, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 619 = 16,285
SPX + 72 = 1940
NAS + 191 = 4697
10 YR YLD + .04 = 2.17%
OIL – .44 = 38.87
GOLD – 15.00 = 1126.40
SILV – .58 = 14.21

Stocks finally snapped a week-long string of severe declines. The gain was the third-highest point gain in history for the Dow Jones Industrials but, on a percentage basis, the 4% gain was not even in the top 20 historically. The Dow opened with a 443-point surge, pulled back and then rallied again to finish near its highs of the day, unlike yesterday when stocks surrendered their entire early gains and turned negative in the final hour of trade.

In China, the Shanghai Composite Index fell 1.3%, despite a new $22 billion injection from Beijing to shore up growth. Chinese equities have now extended their steepest five-day drop since 1996, losing half their value, or $5 trillion, since mid-June. Shares elsewhere in Asia ended mixed; European stocks were deep in the red.

We started with some strong economic data. Durable-goods orders rose a seasonally adjusted 2% last month after a 4.1% gain in June. Bookings for new cars and trucks and military hardware led the way. Orders rose 4% for autos and 22.3% for large defense goods such as fighter jets, missiles and tanks. Orders for aircraft dropped 6%. Durable goods orders minus transportation rose 0.6%. Business investment outside the volatile defense and transportation industries rose for the second straight month. So-called core orders climbed 2.2%, the biggest gain since June 2014.

The Federal Reserve’s summer symposium in Jackson Hole, Wyo., often has provided a stage for central bank officials to signal an imminent policy change. Along with several other FOMC members, Fed Chair Janet Yellen is planning to skip the annual gathering of monetary policymakers in Jackson Hole this year, marking the second time in three years the Fed’s top official won’t be traveling to Wyoming. Yellen’s predecessor, Ben Bernanke, skipped the 2013 gathering.

The topic for the Aug. 27-29 conference will be inflation dynamics and monetary policy. In reality everyone will be looking for a hint about a possible rate hike in September, and even though Yellen isn’t speaking, Vice-Chairman Stanley Fischer will speak on Saturday.  Fischer is considered more hawkish than Yellen, so his statements or his silence will telegraph a message.

The truth is that a small interest rate hike doesn’t really change the economy in a major way for most Americans. It isn’t going to make much difference to mortgage rates, which are tied more to long-term bond yields. Nor will it mean much for rates on credit cards, auto loans and other consumer loans.

William Dudley, president of the Federal Reserve Bank of New York, told reporters that “from my perspective at this moment” raising rates now “seems less compelling to me than it was a few weeks ago.” But he quickly noted that that “could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing.”

Dudley said economic reports this week “have actually been pretty positive.  Consumer confidence showed a good increase, new-home sales were solid, the durable-goods orders report was quite strong. But you also have to look at all the other things that potentially could affect the economic outlook.” That includes China and the markets’ volatility; “international developments and financial-market developments do have relevance because they can impinge and affect the economic outlook.”

South Korea is willing to discuss North Korea’s demand for an end to sanctions, and is preparing a new channel of dialogue with the North, just a day after the rivals struck a landmark pact that defused a standoff between their forces. Tuesday’s accord saw North Korea express regret over a landmine incident that wounded South Korean soldiers and the South agree to stop broadcasting anti-North propaganda over border loudspeakers. South Korea’s KOSPI Index closed up 2.6% on the news.

In the latest escalation of Yemen’s five-month war, Houthi rebels said they’ve fired a Scud missile into Saudi Arabia while a Saudi official acknowledged sending forces into northern Yemen in a bid to stop border attacks. A Saudi-led coalition recently stepped up its ground offensive after months of airstrikes against the Houthis.

Schlumberger is acquiring oilfield equipment maker Cameron International in a stock and cash transaction valued at $14.8 billion. Cameron shareholders will receive 0.71 shares of Schlumberger stock and a cash payment of $14.44 for each share held. The deal represents a 56% premium to Cameron’s closing stock price on Tuesday.

Despite Schlumberger’s new announcement, the recent market selloff and plunging oil prices are increasing concerns that some of this year’s largest takeover deals are at risk of falling apart, including Shell’s $70 billion offer for BG Group and Halliburton’s $35 billion bid for Baker Hughes. Over the past week, the gap between the agreed price of several takeovers and the market price of the target companies’ shares has widened, which usually is interpreted as a signal of declining confidence that the transaction will be completed as planned.

Microsoft’s Windows 10 has reached more than 75 million devices in almost a month since the operating system was released. Microsoft has promised shareholders that Windows 10 would reach 1 billion users within three years, which would be its fastest adoption rate ever. If you have installed Windows 10 you may have noticed a nasty tendency for notifications to upgrade Office. It’s an advertisement really, and it’s really annoying. And no, you do not have to upgrade. The culprit is the new Get Office app that comes preinstalled on Windows 10. Simply open the Start menu’s All Apps list, right-click on the Get Office app, and select Uninstall. You’ll be asked to confirm the deletion; do so. Boom. Done.

If all this market volatility has you feeling a bit overwhelmed, you can head over to gaming.youtube.com. That’s the new gaming site on YouTube. Announced in July, the streaming service will rival Amazon-owned Twitch, boasting more than 25,000 games and channels from various publishers and YouTube creators. The gaming site launches sometime today.

Amazon will begin delivering wine, beer and spirits to US customers for the first time through its Prime Now program; this follows a trial program in the Seattle area. The move will continue testing the online alcohol delivery market, which is estimated to increase to $1.4 billion in sales by 2020. Amazon already provides quick alcohol delivery in London and offers wine sales across the US.

Fiat Chrysler Chief Sergio Marchionne presented plans for new products to a gathering of auto dealers. The new lineup will include a plug-in minivan, an updated Dodge Charger and new Jeep SUVs with improved gas mileage.

Toyota is beginning trial production of cars at the China plants that were shut following the recent explosions in Tianjin, the first step in reopening the facilities following a two-week closure. The blasts killed at least 123 people and injured 67 Toyota workers living in the area.

The US Army and Marine Corps have chosen Oshkosh Defense for a $6.7 billion contract to start light production of a replacement for the aging Humvee. Oshkosh was considered the favorite for the pact vs. AM General, the privately held maker of the original Humvee, and Lockheed Martin, which has less experience building military ground transport. The contract covers 17,000 Joint Light Tactical Vehicles.

The City of Phoenix held an election yesterday. Phoenix Mayor Greg Stanton was re-elected along with four incumbent council members; all five ballot measures passed, including Prop 104, also known as the light rail expansion, which will impose a 0.7% sales tax until 2050 to fund 42 new miles of light-rail tracks, more bus routes, and street improvement.

Wildfires continue to ravage the West. California has been suffering through a long-running drought, now the state is on fire; there are 42 active fires in California; the largest scorched over 134,000 acres. Oregon has 19 ongoing wildfires; the largest is more than 105,000 acres and only 10% contained. Washington State has 27 active fires; the largest is over 240,000 acres and only 10% contained. At some points the Columbia River is about one-mile wide, and that has not been enough to serve as a firebreak; embers lifted on 40-mile-per-hour gusts of wind have jumped the river to ignite dried grass on the opposite shore.

Firefighters have been brought in from Canada, Australia, and New Zealand; National Guard troops have received quicky training and are sent out to battle blazes; active duty Army troops have been deployed; and 4,000 prisoners are being used in California; 32,000 firefighters in all – and it still isn’t enough. Three firefighters died fighting in Washington, thousands of residents have been displaced, hundreds of buildings have burned, and more than 7.5 million acres have burned nationwide this season.

Accounting for insurance costs, damages to businesses and infrastructure, this year’s fires will likely cost taxpayers $25 billion—and that’s if a whole town or city doesn’t burn, which is a distinct possibility. Some of the costs are hard to assess. Seattle City Light shut down power generation at 3 dams on the Skagit River because transmission lines were damaged. The utility is losing $100,000 in revenue each day that the lines are down. The smoke from wildfires creates a health hazard, and it is not confined to the immediate area. Hospitals across California are seeing an uptick in admissions for respiratory-related complaints, particularly asthma, which is exacerbated by exposure to smoke.

Beyond the fires, the southwest faces the prospect of El Niño in the next few months. A Niño generally produces heavy rains and higher temperatures. The rains will help ease drought conditions in California but not much; the higher temperatures mean there is a slim chance for snowpack, and snowpack is more important than rain. If this El Niño lives up to its potential, this thing can bring a lot of floods, and in areas burned bare by fire we can look for mudslides and mayhem.

FINANCIAL REVIEW

Say Cheese

Sinclair Noe — January 15, 2015

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

DOW – 106 = 17,320
SPX – 18 = 1992
NAS – 68 = 4570
10 YR YLD – .06 = 1.77%
OIL – 2.28 = 46.20
GOLD + 33.50 = 1263.60
SILV + .11 = 17.06

After going through all of 2014 without a losing streak of more than three days, the S&P 500 today completed its second slide of five straight days. The benchmark gauge is down 3.4 percent over the past five days.

For the past 3 years the Swiss have kept their currency, the Swiss franc, from getting too strong; they imposed a cap to keep the euro from trading below 1.20 francs. In early 2010 one franc was less than 0.7 euro. By the middle of 2011 the franc was nearly at parity against the euro, a massive move in a very short period. As the Eurozone experienced economic strife, Switzerland was calm and offered a safe haven. As money poured in, the franc became more and more expensive; which means that things made in Switzerland became more expensive when the Swiss exported. So, they capped the franc. That basically involved printing more francs and buying more euros.

Fast forward to 2015, and the Eurozone is once again experiencing economic strife; money is once again pouring into Switzerland as a safe haven, and after 3 years the Swiss just threw up their hands and said they had enough; it didn’t make sense for the Swiss National Bank to keep on an endless path of buying more and more euros just to keep the currency down, and there was probably some concern that they had too many euros, which might be a liability. So, they removed the cap, without warning. It was quite the surprise.

What does it mean? Well the Swiss franc spiked a whopping 30 percent against the euro. So, it you were planning a vacation to Zurich, it just got more expensive; for many people in Europe who have mortgages with Swiss banks, their mortgage payments just went up; if you were planning to buy a Swiss watch it just got more expensive; same for Swiss chocolates; and if you need a corkscrew that can also work as a screwdriver, pliers, wrench, and knife – that will cost you more. The Swiss stock market fell about 11%. And if you were invested in a company such as Swatch, Nestle, Novartis, or Roche – you just got hammered. Sorry. And if you were trading in the currency markets and you were short the franc and long the euro – please step away from the ledge.

Thursday’s decision to call time on its efforts to keep the euro from trading below 1.20 francs came amid mounting speculation that the European Central Bank will next week back a big government bond-buying program that will put more euros in circulation, diluting their value. That expectation has seen the euro face intense selling pressure in currency markets, particularly against the dollar. The euro has fallen to nine-year lows against the dollar and below its launch rate in 1999. As a result, the cost for the Swiss central bank of constantly defending the peg by buying euros or selling francs has been rising.

The SNB clearly expected to see a huge surge of inflows in the week ahead and saw little reason to provide these buyers of francs with an artificially cheap rate. Switzerland’s immediate neighbors are countries in the Eurozone. The franc’s contiguous boundaries are with the euro. Switzerland’s central bank worried about inflows of hot money from Russia, either directly or via the euro. Think of it this way: yesterday a Moscow-based oligarch could move money from ruble to euro. Then he could move it from euro to Swiss franc, and the Swiss government and Swiss National Bank would maintain a 1.2 currency peg. That is now over.

In addition to making Swiss exports more expensive, a stronger currency makes imports into Switzerland cheaper, further dampening prices already-subdued by big drops in oil prices and other commodities.

In an effort to contain the franc’s appreciation and limit any damage to the Swiss economy, the central bank on Thursday also lowered a key interest rate — what it charges commercial banks to deposit at the bank — to minus 0.75 percent from minus 0.25 percent. That’s right, banks have to pay the Swiss central bank to park reserves. The hope is that it dissuades banks from parking their cash at the national bank and instead possibly invest it. That might not work; the Swiss franc is still considered a safe haven for investors. The franc’s value will remain sensitive to developments around the world, including the crisis in Russia and the oil market slump.

Switzerland is a small country. For most people, the Swiss surprise really is not a huge event, but today’s move confirms that deflation is a clear and present threat to the global economy.

If you were planning a trip to Davos Switzerland for the World Economic Forum, we can save you some money. The WEF 2015 Global Risks Report was published today; geopolitical issues are considered to be the biggest threat to global stability over the coming decade. According to the WEF’s lead economist, “Twenty-five years after the fall of the Berlin Wall, the world again faces the risk of major conflict between states,” and the means to wage such conflict are broader than ever, whether through cyberattack, competition for resources or sanctions and other economic tools. “Addressing all these possible triggers and seeking to return the world to a path of partnership, rather than competition, should be a priority for leaders as we enter 2015.” When asked to assess risks in terms of their potential impact, the nearly 900 experts surveyed by WEF found water crises as the greatest threat to the world.

US producer prices in December recorded their biggest fall in more than three years on tumbling energy costs while underlying inflation pressures were muted. The Labor Department said its producer price index for final demand declined 0.3 percent, the biggest drop since October 2011, after falling 0.2 percent in November. A sustained plunge in energy prices is keeping a lid on inflation throughout the pipeline, from bills for businesses to the consumer’s cost of living.

The number of Americans filing claims for unemployment benefits increased to a four-month high last week.

Consumer confidence increased last week to the highest level since mid-2007 as steady declines in gasoline prices and more hiring boosted Americans’ attitudes about the economy. The Bloomberg Consumer Comfort Index rose to 45.4 in the period ended January 11, from 43.6 the week before.

Bank of America, the second-largest US bank by assets, reported a 14 percent fall in quarterly profit as a decline in sales and trading revenue more than offset a big drop in operating expenses. Revenue from bond trading, which is part of the bank’s sales and trading business, plunged 30 percent to $1.46 billion.

Citigroup reported its fourth-quarter profit plunged as the bank was hit by large legal charges. The bank reported a profit of $350 million–which includes $3.5 billion in previously disclosed legal and repositioning charges–compared with a year-earlier profit of $2.46 billion. On a per-share basis, Citigroup reported a profit of six cents. Analysts had expected earnings of nine cents a share including the charges. On Wednesday, a provision — drafted by Citigroup — to repeal part of the Dodd-Frank financial reforms (Section 716) was added by House Republicans to their spending bill. On Thursday, Citigroup led the charge to persuade enough Democrats to vote for that bill. The repeal of Section 716 stayed in the spending bill only because Wall Street brought so much pressure and influence to bear. Apparently buying politicians is cheaper than paying fines and settlements for violating the law. Of course, I still maintain that not breaking the law is the best solution, but clearly that is not under consideration.

Bank of America slipped 5.2 percent to the lowest since August and Citigroup dropped 3.7 percent.

After the close, Intel reported fourth quarter net income rose to $3.66 billion, or 74 cents per share, for the quarter ended Dec. 27, from $2.6 billion, or 51 cents per share, a year earlier. Revenue rose to $14.7 billion from $13.8 billion. Intel forecast first-quarter sales that may fall short of analysts’ estimates because PC sales are down.
We’re starting to see some oil companies respond to lower oil prices. Schlumberger, the oilfield services provider, announced it will cut 9,000 jobs, even as they reported a 6 percent rise in quarterly revenue. Revenue rose to $12.64 billion from $11.91 billion. Net income attributable to the Houston, Texas-based company fell to $302 million, or 23 cents per share, in the fourth quarter ended Dec. 31, from $1.66 billion, or $1.26 per share, a year earlier.

Apache says it will also lay off several hundred employees, cutting 5% of its workforce this week. The move signals one of the first major workforce cuts at an American oil producer after the recent drop in crude prices. Apache had been profitable until the third quarter of last year, when it reported a $1.2 billion loss.

BP is planning to cut 300 jobs from its 4,000-strong North Sea business following a review of its operations. The U.K.-based oil major, which has been downsizing since the Deepwater Horizon oil spill in 2010, said it had long planned the cuts, but was speeding up the process due to falling oil prices.

This afternoon, there was more news on BP. A US District judge has ruled that the company dumped 3.19 million barrels of oil into the Gulf of Mexico in 2010. Today’s ruling on the spill’s size sets the stage for a trial next week at which the judge will determine the amount of the fines, based on the law’s provision for as much as $4,300 per barrel released and factors such as what BP did to minimize or mitigate the effects of the disaster. The court rejected the government’s 4.2 million barrel estimate of the spill size, decreasing the potential maximum fine from $18 billion to a maximum fine of $13.7 billion.