Financial Review

Shoddy Excuse for a Market

Sinclair Noe — August 25, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 204 = 15,666
SPX – 25 = 1867
NAS – 19 = 4506
10 YR YLD + .14 = 2.13%
OIL + 1.07 = 39.31
GOLD – 14.50 = 1141.40
SILV .10 = 14.80

Leading Asian markets fell again with the Shanghai Composite Index closing with a 7.6% loss and the Nikkei down 4.0%, while other key Asian markets closed with milder losses and Hong Kong ended up in positive territory. European markets were broadly higher, led by the first rise in the FTSE 100 in 11 sessions; the FTSE closed up over 3%; the Euro Stoxx 50 closed up 4.7 percent.

China’s stock market has dropped 22% in the past 4 sessions. Today, their central bank responded by cutting interest rates for one-year lending by 25 basis points to 4.6%, while the one-year deposit rate will fall a quarter of a percentage point to 1.75 percent. The required reserve ratio will be lowered by 50 basis points for all banks to cover funding gaps. China’s surprise yuan devaluation on Aug. 11 led to a tightening in liquidity as the PBOC subsequently bought its currency to stabilize the exchange rate and curb capital outflows.

Roughly $4.5 trillion has evaporated from the Chinese markets since the middle of June – real, tangible wealth that no longer exists. Equities on mainland Chinese exchanges still trade at a median reported earnings multiple of 60+ times. The yuan may face more downside pressure as a result of the latest monetary easing, making it harder to keep depreciation in check. The US dollar rallied for the first time in 5 days.

Against that backdrop this morning, stocks on Wall Street rallied. The Dow Industrial Average gained over 441 points this morning; and for a fleeting moment it looked like the carnage of the past week was but a blip on the screen. It turned out to be a classic dead cat bounce. The Dow lost 646 points from the intraday high to the close; the biggest reversal to the downside since October 29, 2008.

The Standard & Poor’s 500-stock index closed down 1.4 percent, to 1,867, after earlier rising almost 3 percent from Monday’s close. The S&P 500 closed down 12.5 percent from its May high; the Dow ended down 14.6 percent from its May high. Not as bad as yesterday, but still plenty ugly. And the final hour of trading was just nasty, panicky stuff, about a 500 point loss on the Dow in one hour.

So it begs the question: what spooked the markets in the final hour? There are many catalysts in play in the market’s turn, from fears about China to corporate earnings and commodity prices, toss in concerns about emerging market credit. But at the core, much of this plunge is about a loss of faith in cheap money stimulus. In China, the concern is that the people’s Bank of China isn’t responding with enough force, or that they have responded with too much force and it is backfiring; take your pick.

In the US, the concern is that the recovery should be stronger by now, and there is the threat of the Fed hiking interest rates at the mid-September FOMC meeting. It all highlights just how addicted the markets are to cheap money stimulus from central banks, and how that addiction has distorted valuations.

So, for the moment we don’t know what spooked the markets in the final hour of trade. Maybe it was just an algorithm that triggered. Maybe we put too much faith in a shoddy Chinese market that wasn’t built to last and now looks like nothing more than a shiny knock-off of western markets. Maybe too many people grew weary of the pep talks from financial advisers repeating the mantra, don’t worry, you’re in it for the long haul; it just dredges up old ghosts.

If the Financial Crisis of 2008-2009 taught us anything, it was a lesson in the fragility of the financial and capital markets and the stages of denial as market developments unfold. And just because stocks drop in price it doesn’t mean they are cheap or on sale or great values. Maybe there were some big hedge funds that started forced liquidations when things turned south. Maybe traders remembered that the Fed could still hike rates next month, even in the maw of a market correction. I’m still not sure why the Fed seems inclined to a rate hike but they seem to like the idea.

The economic news was decent enough: New U.S. single-family home sales rose a bit less than expected in July. Sales increased 5.4 percent to a seasonally adjusted annual rate of 507,000 units. The stock of new houses for sale increased 1.9 percent to 218,000 last month, the highest level since March 2010. Still, supply remains less than half of what it was at the height of the housing boom. The median price of a new home rose 2 percent from a year ago to $285,900.

Home prices continued to rise in June. The S&P Case-Shiller 20-city composite index rose 5 percent year-over-year in June. Home prices in Phoenix posted a 4.1% gain year-over-year.

Consumer confidence rebounded in August. The Conference Board said its index of consumer attitudes jumped to 101.5, up from a reading of 91.0 in July. In the report, Lynn Franco at the Conference Board said, “Consumers’ assessment of current conditions was considerably more upbeat, primarily due to a more favorable appraisal of the labor market … The uncertainty expressed last month about the short-term outlook has dissipated and consumers are once again feeling optimistic about the near future. Income expectations, however, were little improved.”

Financial firm Markit said its preliminary or “flash” reading of its Purchasing Managers Index for the services sector slipped to 55.2 in August from the final 55.7 reading in July. The U.S. services sector expanded at a slower pace in August than July as new business growth softened.

The Congressional Budget Office says the US budget deficit is likely to fall by $60 billion in 2015 due to strong revenue gains. The CBO said it now estimates a $426 billion deficit for fiscal year 2015, down from its $486 billion forecast made in March. It also forecast a fiscal 2016 deficit of $414 billion, a reduction of $41 billion. The CBO says the government may be able to pay its bills without a debt limit hike through early December.

Oil prices managed a mild rally but couldn’t close above $40 a barrel.  API reported a huge 7.3 million barrel drawdown in oil inventories this week (against expectations of a build) and sparked a headline-driven jerk higher in crude prices.

Oil prices dropping below $40 dollar-a-barrel sounds like a beautiful thing. It means cheap gas for your SUV and lower energy bills. At $2.60 a gallon, gas is now about a dollar below where it was last year at this time. And it could continue to fall. Eleven states now have gas prices under $2. When President Obama predicted in his State of the Union Address in January that “the typical family this year should save $750 at the pump,” he was probably right. Multiply that by the nation’s 115 million households and you get a total savings of over $86 billion. That’s huge.

Lower gas prices help poor people in particular; households with incomes of less than $50,000 spent 21% of their income on energy in 2012, while households earning more than $50,000 spent 9%. Additionally, Americans who live in chillier regions like New England and the Midwest could save another $750 or so on energy bills. The bad news is largely restricted to the Dakotas, Texas, Oklahoma, and Alaska. And when oil prices are low, we tend to use more gas; we loosen up on conservation, demand increases and that, of course, leads to higher prices; not all at once, but slowly, over time.

Boeing expects to cut several hundred jobs in its satellite unit through the end of this year. The company said some of those people could find work in other parts of Boeing. The cuts come as commercial orders have been delayed due to lack of funding following the closure of the Export-Import Bank. Boeing also raised its outlook for aircraft demand in China despite the recent turmoil in the nation. Boeing sees China buying 6,330 aircraft in the next 20 years, a 5% jump from last year’s forecast.

Hacked companies, get ready — a federal court just made it easier for the government to sue you. “Monday’s decision from the Third Circuit Court of Appeals clarifies the Federal Trade Commission’s powers, giving it more ammunition against businesses that fail to invest in their own security.” The court’s decision finds that the FTC acted appropriately when it sued Wyndham Worldwide Corporation, a massive international hotel chain and hospitality conglomerate, after Wyndham was hacked three times in two years, exposing the credit card data of more than 600,000 customers.”

Infidelity website Ashley Madison and its parent company, Avid Life Media, have been sued in federal court in California by a man who claims that the companies failed to adequately protect clients’ personal and financial information from theft, saying he suffered emotional distress. The lawsuit seeks class-action status.

Financial Review

Remain Buckled Up

Sinclair Noe — August 24, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 588 = 15,871
SPX – 77 = 1893
NAS – 179 = 4526
10 YR YLD – .06 = 2.00%
OIL – 2.30 = 38.06
GOLD – 5.50 = 1155.90
SILV – .56 = 14.89

The “Fasten Your Seat-belt” sign stayed on for the entire trip.

The Dow Jones Industrial Average dropped 1089 points, or 6%, to 15,441 to start the session; that was the largest intraday drop in Dow history. The S&P 500 opened 100 points, or 4.9%, lower at 1,874. The Nasdaq Composite began the day down 360 points, or 7.6%, to 4,349. All three major US market indexes are now in correction territory, a 10% drop from a recent high. The latest round of selling comes on the heels of the worst week for the broad S&P 500 since 2011 that stripped more than $1 trillion in market value from US equities.

Before the market opened, Dow futures, S&P 500 futures and Nasdaq 100 futures triggered circuit breakers after falling at least 5%. The New York Stock Exchange operator NYSE Group invoked the rarely used “Rule 48,” which relaxes some trading rules in a bid to ensure a smooth opening to trading. The rule is instituted when trading before the start of the regular session is especially volatile. At the market open, a slew of single stocks and exchange-traded products triggered single-stock circuit breakers, which are initiated when there is a price drop of 10% or more in a five-minute period.

Over the past 5 days the Dow Industrials dropped 2,198 from peak to trough; the Dow lost 1,697 from peak to today’s close; and the Dow was down 1,666 from the open 5 days ago to today’s close. All major trend lines have been violated.

You know things are bad when we start talking about circuit breakers; just to refresh your memory, the New York Stock Exchange said it will halt trading for 15 minutes if the Standard & Poor’s 500 Index drops 7 percent. And just when it looked like the circuit breakers might trip, the market recovered; almost. The Dow bounced back to a loss of only about 100 points; maybe short sellers covered; maybe the Plunge Protection team stepped in; maybe bargain hunters nibbled. Who knows? And then the major indices resumed their slide in the final hour of trade.

A downturn in the stock markets is fairly common; a weekly drop of more than 5 percent has happened 28 other times since 1980. On average, the market is relatively flat the next week, up 1.65 percent over the next four weeks, and up close to 5 percent over the next 12 weeks. Also important to note is that 60 percent of the time, the index moves higher the following week.

Some of the standout years include huge drawdowns of more than 20 percent over the next 12 weeks in 1987 and 2008. On the opposite side of the spectrum, there were massive turnarounds in 1998 and 2009. So, just because the markets drop 10%, it doesn’t mean the markets will go into a 20% bear market. Of course, if you are going to a 20% loss, you have to pass by 10% first.

U.S. markets average one 10 percent correction every 20 months. On average, we should expect these declines to take 71 trading days to play out (about three months). These 10% corrections are more common in a secular bear market. We are not in a secular bear market.

World stock markets fell sharply again as panic selling in China picked right back up to start the week. China’s stock markets have now wiped out the gains built up during the year. The Shanghai Composite Index closed down 8.5%. Fresh signs of a slowdown in China, the world’s second largest economy, have jolted stocks, bonds, currencies and commodities in recent days. Investors were further rattled today by the lack of fresh steps to stem the selloff over the weekend from Chinese authorities. Taking the cues from Asia, the European markets closed lower across the board.

The Chinese central bank is reportedly ready to flood the banking system with liquidity to increase lending, the latest in a series of measures designed to give the flagging economy a boost. China gave approval for pension funds run by local governments to invest in the stock market. The measure was approved over the weekend by the State Council. State media in China estimate close to $97 billion will be eligible to be invested under the new rule. Analysts also expect the People’s Bank of China to lower the reserve requirement ratio by 50 basis points to 100 basis points in reaction to massive capital outflows.

Of course, the People’s Bank of China has already intervened in markets; by devaluing its currency, freezing the markets, banning short-selling, arresting short-sellers, and pumping tens of billions of Dollars into the market; one day it appears to provide relief, the next day (like today) it hits the sidewalk with a thump. This has reportedly set up a power struggle in China. The whole world is waiting for massive action from the Chinese government, an economic bazooka that can blast through all this market madness. The problem is that China doesn’t have one. That’s because China’s growth model is broken, and it can’t be fixed by cash injections or other emergency policy measures. The old fixes won’t work anymore.

The Federal Reserve has been intervening in the US markets for the past 7 years (OK, the past 100 years, but the past 7 for today’s example). And after years of Zero Interest Rate Policy and $4.2 trillion in QE securities added to their balance sheet, we are left to wonder what other tools they have in their toolbox. The Fed has been talking about raising interest rates, and that now appears dead for the September FOMC meeting. Or to put it another way, they wouldn’t raise rates if the meeting were held tomorrow. Who knows where we’ll be in 3 weeks. What the Fed and the PBOC are learning is that the global economies are now inextricably linked. The strong dollar and a slowdown in China hits emerging markets. The US is not an island in the global economy. And maybe monetary policy intervention in the markets just can’t get the job done anymore.

Ten-year Treasury yields dropped below 2 percent for the first time since April. Futures traders cut the probability to 24 percent that the Fed will raise interest rates at its September meeting, from 48 percent on Aug. 14. The chance of a December increase fell to 47 percent from 74 percent.

Oil prices plunged to 6.5-year lows as concerns over demand from China rippled across energy markets. Brent crude is below the $45 per barrel level for the first time since 2009, while WTI crude is back into the $30s. Commodities sank to the lowest in 16 years.

Gas prices in the US remained level over the last two weeks, according to the bi-weekly Lundberg survey. Prices were 22% lower than they were for the two-week period a year ago. Significant cuts in retail prices are expected across the US due to the latest developments in the oil markets.

The euro strengthened to $1.15 and the Japanese yen is also higher with traders discounting a move by the Federal Reserve to raise interest rates next month. The euro is now at its lowest level since last February.

Now, that is all backdrop for today’s market movement. Why did stocks fall? More sellers than buyers; actually the numbers matched but selling was the more compelling storyline for the day. Why did markets fall? Who knows? Still, I have seen the steady parade of economists who predicted 9 of the last 5 recessions, and market pundits who predicted 20 of the past 2 corrections, explaining why we are all going to hell in a handbasket.

We’ve also had the Alfred E. Neuman pundits, saying they’re not worried and the markets will rebound tomorrow and everything is beautiful. Whenever you get involved in stocks, you should know your exit plan, even before you buy. If your exit plan called for you to be out, then you should be out. If your plan called for you to remain at these levels, then you sit and wait it out. If you get emotional about market moves, you should not be in the market.

As global markets convulsed this morning, Apple chief executive Tim Cook dashed off an email to Jim Cramer at CNBC. Cramer read the email live on air. Cook wrote: “I can tell you that we have continued to experience strong growth for our business in China through July and August… Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last two weeks.”

Well, as you might imagine, that calmed the frayed nerves of Apple investors, at least a little. Apple shares started the session down more than 15 then managed to rally into positive territory, finishing down 2.5% for the day. The difference was about $75 billion in market cap. Which raises the questions:  Where is the public filing that accompanies this letter which constitutes nothing short of a private business update with an outside, and unregulated by Apple, market cheerleader? And, just how is this not a Regulation Fair Disclosure violation?

Crashes Here There And Everywhere - Financial Review

Financial Review

Crash

Sinclair Noe — July 8, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 261 = 17,515
SPX – 34 = 2046
NAS – 87 = 4909
10 YR YLD – .02 = 2.20%
OIL – .68 = 51.65
GOLD + 3.00 = 1159.00
SILV + .08 = 15.22

The stock market crashed today. Before you accuse me of over exaggerating, I do not consider a 261 point drop on the Dow to be a crash; that’s just a down day, with a dollop of ugly. No, I mean the actual New York Stock Exchange crashed. The computers malfunctioned. Trading stopped for 3.5 hours. Open orders were cancelled. Other orders were re-routed. This was an actual technical crash. It started with a few squirrelly trades in the morning, and at 11:32 AM, the New York Stock Exchange surrendered, halted trading, and tried to reboot the computers.

And for the most part, it did not stop trading in NYSE listed stocks. The other exchanges picked up the trades. First, the Nasdaq did not crash; next the BATS system just re-routed trades, ARCA picked up more trades, and the Philly exchange handled some trades as well. So, in many ways, it was a typical trading day. The New York Stock Exchange is really more of a TV studio these days than a central force behind buy and sell orders. CNBC broadcasts there; tourists gawk; all the trades are electronic, in a room full of servers far from the trading floor on Wall Street, maybe an office park in New Jersey.

Still, there was something strange about the shutdown.

Earlier this morning, United Airways announced they had suffered computer problems, which resulted in a halt to all U.S. departures for about two hours, disrupting travel for thousands of passengers in the second such setback since early June. The FAA described the problem as “automation issues”. United described it as “a network connectivity issue”. United was down for about 2 hours, and just after they resumed flights, the Wall Street Journal’s website went down, and then the NYSE went down.

Both United and the New York Stock Exchange were adamant that the problems were a result of internal technical problems, rather than malicious hackers. And we have not heard anything that connects the malfunctions. Still, it gives you pause and a certain discomfort. The digital world is not as solid as it should be.

Meanwhile, Chinese stock markets crashed; their computers were working just fine; this was an old fashioned sell-off. The Peoples Bank of China issued a statement this morning that it would support market stability by providing liquidity, while guarding against financial risk. Still, they could find buyers. Nearly half of all Chinese listed companies have now voluntarily suspended their shares from trading to insulate themselves from the meltdown. The total market cap of the stocks that were halted is about $2.6 trillion. The Shanghai Composite Index fell 5.9 percent. It’s now about 32 percent below the peak of 5,166 it reached on June 12; the Shenzhen Index dropped 2.6%. The panic in mainland markets also rippled across the border, knocking Hong Kong down 5.8% and Japan 3.1%.

So, why are Chinese companies suspending trading? Part of the reason is to just get a time out and hope the Chinese government can intervene in some way, but the unwinding of margin loans is adding fuel to the fire. Individual investors in China have used generous margin financing terms to enter the stock market and then build up their portfolios. Less-known is that Chinese companies have been doing the same thing by using their own corporate stock to secure loans from banks. Stocks are being suspended by the companies themselves because many have bank loans backed by shares which the banks themselves may want to liquidate.

The Greek economy crashed a few years ago, and now the politicians are just trying to keep it on life support. Greek banks are closed, the ATMs are running out of cash, the Greek stock market is also closed, and Eurozone leaders are meeting in Brussels to determine whether they will continue propping up the patient or if they will pull the plug. Greek Prime Minister Alexis Tsipras has requested a 3 year loan. Creditors are demanding a written, detailed proposal spelling out all the details before they will consider providing aid. They want that proposal by tomorrow.

Earlier today, Germany rejected any debt haircut or debt re-profiling or debt restructuring. Then International Monetary Fund Managing Director Christine Lagarde said that Greece needs debt restructuring as part of a bailout deal, but warned that Athens won’t receive special treatment as the government seeks to delay its loan repayments to the IMF. I think that means they know how to help, they could help, or they might just look the other way.

The Federal Reserve published minutes from its Federal Open Market Committee June 16-17 meeting. The meeting predated the collapse of negotiations between Greece and its creditors, and the continuing descent of the Chinese stock market, but its tone and more recent public remarks of Fed officials suggest that the central bank is still likely to raise rates this year unless the domestic economy is significantly disrupted by global events.

Fed officials have concluded that economic problems during the winter months were overstated, reflecting problems in the government’s measuring sticks rather than an actual downturn. The Fed concludes: “Real activity in the first quarter was likely stronger than the then-current official estimate.” The account also cited a “substantial” improvement in labor market conditions over the last year. In particular, it noted signs that increased demand for labor had “begun to result in a firming of wage increases.” The pace of wage increases remains slow by historical standards. But officials have said that faster wage growth would offer an important indication that the labor market was finally returning to full health, and also that higher rates might be necessary to control inflation. And so, the Fed determined that economic conditions are continuing to approach those consistent with warranting a start to the normalization of the stance of monetary policy.”

Fed funds futures give a 54 percent probability that the central bank will lift rates in December, down from 59 percent before the Fed released the minutes of its June policy gathering. At the start of the month, the likelihood of the central bank lifting its near-zero benchmark rate this year was nearly 70 percent. The chance of a September hike is now 21 percent. In other words, the Fed wants to hike interest rates, and your guess is as good as anybody’s as to when they will do it.

Consumer borrowing in the US climbed in May. The Federal Reserve reports total credit increased by $16.1 billion, following a $21.4 billion gain in the prior month that was more than initially reported. Non-revolving debt climbed $14.5 billion in May after increasing $12.9 billion. Revolving debt, which includes credit cards, rose by $1.6 billion in May after an $8.5 billion advance. Lending by the federal government, which is mainly for student loans, rose by $3.9 billion.

Second quarter earnings reporting season kicked off this afternoon as Alcoa posted earnings that missed analysts’ estimates. Alcoa is a former Dow Industrial stock, and with ticker symbol AA, it has the alphabetical distinction of the first major stock to report quarterly earnings, although that starting line has been blurred for a long time.  Alcoa kept its 2015 global aluminum-demand growth forecast unchanged at 6.5 percent, and it reduced its projection for industrywide sales to the aerospace and Chinese truck markets. China, the world’s biggest aluminum user, is poised to grow at its slowest pace in a quarter of a century. Get used to companies complaining about a slowdown in China, or Europe, or how they were hurt by a stronger dollar.

After winning key legislation in Congress last month, the Obama administration has now scheduled a high-level trade meeting for late July in an effort to conclude the Trans-Pacific Partnership. Several other lower-level talks will take place beforehand, including tomorrow’s meeting between the U.S. and Japan to close gaps on auto and agriculture trade. According to people following the talks, a deal in coming weeks could allow the TPP to come to a final vote in Congress before the end of the year.

Oil prices fell for a fifth straight session after weekly inventory data showed an unexpected increase in crude supplies. The Energy Information Administration reported commercial crude-oil stockpiles rose by 400,000 barrels in the week ended July 3. The EIA also reported that gasoline stockpiles rose 1.2 million barrels, as demand fell from the prior week.

Microsoft plans to  plans to cut up to 7,800 jobs and write down the value of its Nokia purchase by more than 80%, the latest indications of the company’s continuing struggles in the phone business. In addition to the write-down, which will be booked in its recently ended fiscal fourth quarter, Microsoft said it also would take a restructuring charge of $750 million to $850 million. The company expects the moves to be “substantially complete” by the end of the calendar year. The new cuts are in addition to the roughly 18,000 employees Microsoft said it planned to let go a year ago.

JPMorgan has agreed to pay at least $125 million to settle investigations by U.S. state and federal authorities that it sought to improperly collect and sell consumer credit card debt. JPMorgan has been accused of relying on robosigning and other methods of collecting debt from consumers that they may not have owed and providing inaccurate information to debt buyers.

In other banking news, Jon Corzine and other former MF Global officials have agreed to be part of a $64.5 million settlement to end litigation brought by investors burnt by the 2011 collapse of the futures brokerage. The move marks the first time the former New Jersey governor agreed to pay those who lost money in MF Global, which became the eighth-largest bankruptcy in US corporate history when a bet on European sovereign debt soured.