Financial Review

Sliding Into the Close

Sinclair Noe — September 3, 2015

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DOW + 23 = 16,374
SPX + 2 = 1951
NAS – 16 = 4733
10 YR YLD – .03 = 2.17%
OIL – .12 = 46.63
GOLD – 8.70 = 1126.00
SILV + .03 = 14.83

Wall Street started the session on a high note, but could not hold it. Stocks slipped into the close and the Nasdaq turned red for the day. The stakes couldn’t be higher for the tomorrow morning’s August employment report, even though the month has typically been cursed by disappointment. The consensus guesstimate calls for about 215,000 to 220,000 new jobs created in August, with the unemployment rate holding at 5.3%, but August is notorious for misses. From 2005 to 2014, forecasters have over-estimated the initial August payrolls print seven times, including in each of the past four years.

What’s more, the Labor Department (excluding annual and benchmark revisions) has marked up its first estimate in subsequent months in eight of the past 10 years. Part of the puzzle of forecasting August payrolls is the difficulty in adjusting for annual changes in the school-year calendar. Financial-market turmoil, at least, probably did little to impact hiring decisions in August. The government surveys households and businesses in the week that contains the 12th of the month, so the data will reflect responses covering the Aug. 9-15 period; that was a few days before the market rollercoaster ride began.

Short-dated Treasury debt yields, which are tied most closely to monetary policy forecasts, rose in August, with the two-year note yield logging its fifth straight monthly increase. That was its longest winning streak since 2006 when the Fed last raised interest rates. Long-dated Treasury yields, often seen as a safe haven from stock market volatility, are virtually unchanged on the year, suggesting that bond investors are brushing off the panic about slowing global growth. This would suggest that bond traders are bracing for an imminent rate hike.

The European Central Bank will continue its 60 billion-euro a month asset purchase plan; that’s the Euro version of QE. The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2%. In the year to August, it stood at 0.2%. ECB President Mario Draghi today said it could go negative in the coming months following recent oil price falls. Draghi said: “The risks to the euro area growth outlook remain on the downside…” And if things actually do get worse, Draghi emphasized he is willing to do even more. The euro dropped against the dollar and Eurozone stock markets enjoyed a nice bounce.

Chinese markets are closed today and tomorrow to mark the 70th anniversary of the end of World War II. The holiday is officially called “The 70^th Anniversary of Victories in the Chinese people’s War of Resistance Against Japanese Aggression and the World Against Fascism”; and right there we have a glimpse into the problems in China. Presiding over the extravaganza, President Xi Jinping said China would remain committed to “the path of peaceful development” and unexpectedly pledged to slash 300,000 troops from the country’s 2.3 million strong military. The announcement came before a huge military parade. At the same time, the U.S. government reported that five Chinese Navy ships were sailing in international waters off Alaska for the first time.

Treasury Secretary Jack Lew criticized China’s handling of its currency devaluation. In a CNBC interview, Lew said, “there’s an economic and a political reality to things like exchange rates,” and “how they manage their exchange rate is a matter of great concern to us and that they need to be willing to let market forces drive the value up, not just drive it down.” Lew, will be participating in a meeting of G-20 financial ministers and central bankers Friday in Turkey. The treasury secretary’s remarks come ahead of the Chinese premier’s visit to the U.S. later this month.

Tomorrow brings the big monthly jobs report for August.  This will be the data that the Fed will use at their FOMC meeting September 16 & 17; the question is whether the report will be weak enough to keep the Fed from hiking rates or strong enough to allow a hike.

Also tomorrow, the G-20 will be meeting in Turkey. The International Monetary Fund has prepared a report for G20 finance chiefs, and the IMF says the turmoil in China and other factors like capital flow reversals were increasing the risks to economic growth around the world. It warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China’s troubles do not stall economic activity in the rest of the world.

The report expressed continued confidence that growth is picking up “modestly” in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil. But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China’s yuan devaluation and the strong dollar. The dollar’s strength, the Fund warned, could take a toll on companies with dollar liabilities. The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.

Of course, writing a report doesn’t make it so. The reality on the ground is that gauging China’s economy is a guessing game; the Chinese simply don’t measure their economy in familiar ways and they certainly run their economy a bit differently. And most analysis overlooks the fact that China’s economy is changing; the service sector is now the driver of growth, so it makes sense that industrial growth is slowing down, but it doesn’t necessarily mean the economy has gone over a cliff. Beijing’s economic policy makers know that even though structural overhauls will moderate growth in the near-term, they’ll also bolster long-term growth and help stave off a major deceleration.

The U.S. trade deficit fell in July to its lowest level in five months as exports rose. The Commerce Department said the trade gap narrowed 7.4 percent to $41.9 billion, the smallest since February. The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter.

The Institute for Supply Management said its services index slipped in August, to 59% from 60.3% in July, but still a very strong reading indicating growth in the sector.  Ahead of Friday’s payrolls report, the ISM services employment index fell 3.6 points to 56%.

The Commerce Department reported today on the gross domestic product broken out for each state for 2014. Just 16 states outperformed the country as a whole last year. In 32 states, gross domestic product advanced at the same or slower pace than the 2.2% economic growth recorded for the U.S. And the economies in two other states, Alaska and Mississippi, contracted last year. Among those 16 were the four largest state economies: California, Texas, New York and Florida. The fastest growing state was North Dakota, thanks to a booming oil patch; it is unlikely to repeat in 2015. Arizona came in at #37, with anemic 1.4% growth in GDP.

Jobless claims increased by 12,000 to 282,000 in the week ended Aug. 29. Since the beginning of March claims have held below 300,000, indicating employers in the U.S. are confident in their outlook.

Sony Pictures has reached a settlement with former employees in a lawsuit related to the massive data breach it suffered almost a year ago. The federal lawsuit, which is still pending class-action status, is a combination of seven different cases brought by nearly 50,000 current and former employees whose personal, financial and medical information were posted online. Additional details about Sony’s settlement are expected to be filed by mid-October.

Novartis said it will begin selling the first biosimilar drug in the U.S. after an appeals court in Washington rejected a request to block the Swiss drug maker’s sale of its copycat version of Amgen’s blockbuster remedy, Neupogen. Zarxio was the first biosimilar–a copy of a biotechnology drug–approved by the FDA. In Europe, where biosimilars have been available for several years, they typically cost 15% to 30% less than the original brands.

Royal Dutch Shell’s proposed $58 billion merger with BG Group has received unconditional clearance from the European Commission, the third of five key markets needed to clear the deal. The EU’s top antitrust regulator concluded that the acquisition would not allow Shell to influence prices for oil and natural gas, and that the markets would remain competitive after the transaction.

Pimco Total Return saw another $1.8 billion in net outflows in August, down from $2.5 billion in July and $3 billion in June. Total assets under management at the former giant of mutual funds have now fallen below $100 billion for the first time since 2007 (the fund neared $300 billion at its peak). As for the performance scorecard, Pimco Total Return’s year-to-date gain is 0.72% vs. the benchmark of 0.45%. It’s also outperformed the benchmark over 3-year, 5-year, and 10-year periods, as well as since its inception.

Meanwhile, Bill Ackman has joined a string of high profile hedge fund managers in reporting deep losses for August. The firm’s Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Greenlight Capital -5.3%; Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Omega Advisors -6%; Andor Capital -4.5%.

Financial Review

To Be Fair

Sinclair Noe — April 16, 2015

 

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DOW – 6 = 18,105
SPX – 1 = 2104
NAS – 3 = 5007
10 YR YLD – .02 = 1.88%
OIL + 12 = 56.51
GOLD – 3.70 = 1198.90
SILV – .04 – 16.37

Yesterday the ECB pledged to fulfill its €1 trillion-euro bond-buying program; today Eurozone government borrowing costs slid to new lows. Germany’s 10-year yield fell almost a basis point to 0.087% in early trade, while yields on all German government debt out to January 2024 were negative. Other notable levels include France’s 30-year yield, which fell below 1%, and the yield on two-year Portuguese bonds, which is on its way below zero.

The price of Greece’s three-year notes dropped the most since February and Greek corporate bonds also slumped. Credit-default swaps suggested there was a 79 percent chance of the country being unable to repay its debt in five years. Greece’s three-year yield is at a multiyear high, up 359 basis points at 27.7%. Expectations are low that Greece can reach a deal with its creditors at next week’s Eurogroup meeting. Standard & Poor’s has downgraded Greece’s credit rating to CCC+ with a negative outlook, citing a substantial risk of a default due to the country’s drawn out negotiations with its creditors.

Greece has been pushed a step closer to default and potential exit from the euro after one of its main lenders, the International Monetary Fund, all but ruled out allowing the cash-strapped country to delay repaying the €1 billion-euro due next month. Today, the head of the IMF, Christine Lagarde, said delaying the payments would be an unprecedented action that would only make the situation worse. Her comments followed a report that the Greek finance minister, Yanis Varoufakis, had sounded out the IMF over whether Athens could ask for a delay on the payments it is struggling to afford. Varoufakis denied asking for leniency. So Greece might default, that’s nothing new, but there are still plenty of options; some more realistic than others; we might not expect an enlightened solution to the Greek problem, but with any luck there will be something creative.

The Labor Department reports jobless claims increased by 12,000 to 294,000 in the week ended April 11. Fewer than 300,000 American workers filed applications for unemployment benefits for the sixth consecutive week. The total number of people currently receiving benefits was the lowest since 2000.

The pace of home construction rebounded slightly last month after being snowed out in February. Construction starts on new homes increased 2% in March at an annualized rate of 926,000.

Congressional leaders unveiled a bipartisan bill today that gives president Obama fast track authority to negotiate a trade deal with 11 other Pacific nations. The bill gives Congress the power to vote on the Trans-Pacific Partnership once it’s completed, but they could not amend the deal. It would essentially be an up or down vote. The legislation would also make any final trade agreement public for 60 days before the president signs it, and up to four months before Congress votes. If the agreement fails to meet the objectives laid out by Congress – on labor, environmental and human rights standards – a 60-vote majority in the Senate could shut off fast track trade rules and open the deal to amendments.

Former Fed Chairman Ben Bernanke has accepted an adviser role at a hedge fund. Bernanke will join Citadel Investment Group as a senior adviser.  Bernanke reportedly chose Citadel because it is not regulated by the Federal Reserve and he won’t be doing lobbying. So, in a way he’s gone from one hedge fund to another. And this is just another example of the revolving door between government and business, but in fairness, when Bernanke was Chairman of the Fed he couldn’t even refinance his mortgage.

Netflix  announced first quarter earnings late yesterday; net income fell to $24 million, or 38 cents a share, from $53.1 million, or 86 cents, as the strong dollar contributed to losses outside the U.S. But Wall Street isn’t paying attention to that, rather the focus is on subscriber growth; and Netflix added 4.8 million new subscribers worldwide.

Goldman Sachs posted the highest earnings per share in more than five years as all of its major businesses topped analysts’ estimates and the firm paid out a smaller portion of revenue to compensate employees. Net income surged 40 percent to $2.8 billion, and trading accounted for much of the increase. That means the improved returns come at a higher risk.

Citigroup reported its highest quarterly profit in nearly eight years. Citi has been slowly getting its house in order by cutting costs and shedding assets that are not critical to its main businesses. It has sold retail operations in many countries and shrunk its US branch network. Adjusted net income rose 16% to $4.8 billion, or $1.52 per share, beating average analyst estimates of $1.39 per share. Adjusted revenue fell 2% to $19.81 billion.

American Express reported a 6.3% rise in quarterly profit, helped by higher spending by card holders and an increase in net interest income.

UnitedHealth reported earnings and revenue that beat expectations. The company also raised its 2015 earnings forecast.

McDonald’s Japan forecast sharp losses. The 49%-owned subsidiary expects an operating loss of $210 million this year after a damaging series of food safety scandals, a costly french fry shortage, and fierce competition in the coffee sector. The operator of McDonald’s in Japan announced it would close 131 restaurants and renovate 2,000 more as part of its restructuring plan.

Yesterday more than 60,000 workers in 200 cities joined in what organizers claimed was the largest protest by low-wage workers in US history. The demonstrations, calling for a $15 per hour minimum wage, were the latest in a series of strikes that began with fast-food workers in New York in November 2012. The movement has since attracted groups outside the restaurant industry: Wednesday’s protesters included home-care assistants, Walmart workers, child-care aides, airport workers, adjunct professors and other low-wage workers. It also sparked international support, with people protesting low wages in Brazil, New Zealand and the UK.

Despite a slow start to IPO debuts so far this year, three big companies went public today. Etsy, the Brooklyn-based online marketplace for artisanal goods, opened for trading at $31 a share on the Nasdaq stock market. That is nearly double its initial offering price of $16 a share. Not bad for an e-commerce platform that so far hasn’t posted a profit and sells handmade items. Etsy is all about potential; it boasts more than 1 million active sellers, with access to 19.8 million active buyers on the site. And the company says it has achieved just shy of $2 billion in gross sales last year, with buyers or sellers in nearly every country.

Meanwhile, Virtu Financial, the big high-frequency trading firm, opened at $23 a share, about 21 percent higher than its $19 offering price. This is the second effort at going public in two years for Virtu. It postponed the stock sale last spring because of controversy about high-frequency trading prompted by the publication of Michael Lewis’s book “Flash Boys.” Virtu doesn’t help its case when they publish a chart showing one single day of losses in six years of trading activity; which is impossible unless you are gaming the trade.

The retailer Party City opened for trading at $20.40, above its offering price of $17 a share. Party City is going public three years after the private equity firm Thomas H. Lee Partners bought control of the nearly 70-year-old seller of party goods. So far this year, 38 companies have gone public in the US, about 60% fewer than at the same time last year.

Bombardier has hired UBS and Citigroup to advise on a potential IPO or sale of its rail unit, which could be valued at about $5 billion. Splitting off the rail unit would allow management to focus on turning around Bombardier’s aerospace division, which posted a 2014 loss of $995 million.

A New York federal bankruptcy judge has blocked most lawsuits against General Motors related to defective ignition switches. The judge ruled that plaintiffs could not sue the company for at least 84 deaths caused by an ignition fault because they predate GM’s 2009 bankruptcy.  The liability shield included in the 2009 agreement that lifted GM from bankruptcy should be allowed to remain in place, even though the company has acknowledged that many employees knew about the defective switch at the time but failed to alert owners of the cars that they might have a potential claim against the company.

The ruling shuts down not only lawsuits stemming from accidents that took place before July 10, 2009, but also most of the suits seeking economic damages for the loss in value of the defective cars. Lawyers had estimated that the economic loss claims potentially totaled $7 billion to $10 billion. Economic loss cases will be allowed to go forward, the judge ruled, only if they can be tied solely to actions by the post-bankruptcy company, known as New GM.

Last year the auto industry issued more recalls involving old models than ever before; more than 60 million vehicles have been recalled in the United States, double the previous annual record in 2004. In all, there were about 700 recall announcements last year, an average of two a day, affecting the equivalent of one in five vehicles on the road.

WikiLeaks has published 30,287 documents and 173,132 emails stemming from last winter’s cyber-attack on Sony Pictures Entertainment. The hack was reportedly initiated by North Korea in response to the studio’s decision to release “The Interview,” a comedy that centered on an assassination attempt on North Korean leader Kim Jong-un. That resulted in a series of embarrassing revelations, exposing correspondence between top executives and producers that ultimately led to the ouster of studio chief Amy Pascal. The correspondence released today exposes Sony’s political fundraising and its lobbying activities on behalf of anti-piracy. In particular, WikiLeaks cites emails detailing how members of the studio set up a “collective” in order to get around campaign donation limits and send money to New York Governor Andrew Cuomo, because of his support for state film and television tax incentives and work cracking down on piracy.

Financial Review

Times Change

Sinclair Noe — March 19, 2015

 

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DOW – 117 = 17,959
SPX – 10 = 2089
NAS + 9 = 4992
10 YR YLD + .02 = 1.97%
OIL – .81 = 43.85
GOLD + 4.10 = 1172.00
SILV+ .22 = 16.21

The Federal Reserve wrapped up a two-day FOMC meeting yesterday; and the stock market responded with a rally; the dollar dropped initially. After a day of consideration, stocks slipped and the dollar clawed back gains.  Oil prices rose yesterday and dropped again today. You could make the case that the Fed has maintained an overly accommodative monetary policy for too long, or you could argue that the economy will take a hit if the Fed hikes interest rates too soon. The Fed removed its pledge to be patient in tightening policy, while also cutting its forecast for the economy. Go figure.

Initial jobless claims edged up by 1,000 to a seasonally adjusted 291,000 in the period stretching from March 8 to March 14.  New claims have tracked below 300,000 for the second straight week after spiking to a 10-month high of 325,000 at the end of February in what now appears to have been weather-related quirk.

The Commerce Department said the current account gap, which measures the flow of goods, services and investments into and out of the country, increased to $113 billion from a $98 billion deficit in the third quarter. That was the largest shortfall since the second quarter of 2012.

The Conference Board’s  leading economic index rose 0.2% in February in a sign the U.S. economy should expand at a moderate rate in the months ahead.

If the Dollar Index finishes higher in March, it will be up 9 consecutive months, extending what is already the longest streak in history; so far racking up just over 25% in gains. So, it’s not a surprise that commodities prices are trading at 12-year lows. Yesterday the dollar dropped 3% following the Fed announcement; that was the biggest daily move since March 2009. I read today that the strong dollar might be the next Black Swan event. I grant that the move has been surprisingly strong but I’m not sure it really qualifies for outlier status; or does my doubt qualify it.

Another EU Economic Summit is underway. The two-day meeting in Brussels is attended by leaders from across the eurozone.  The Greek debt crisis and the possibility of extending sanctions against Russia and energy are the key issues up for discussion. The Greek parliament adopted a “humanitarian crisis” bill yesterday, the first package of social measures put forward by the radical left-wing Syriza government. The bill is basically an anti-poverty law, designed to allow people opportunity to stay in housing and providing emergency food aid for the poorest Greeks.  The European Commission warned that Greece should not act unilaterally. This on the same day the European Central Bank opened its plush new €1.4 billion office headquarters in Brussels. The price tag for the Greek humanitarian crisis law to help its poorest: €200 million. At the opening ceremony, the ECB announced that the new HQ was “an example of what Europe is capable of.” Well, apparently so.

Brazilian President Dilma Rousseff has launched an anti-corruption offensive to counter rising discontent over the kickback scandal that took place at Petrobras during the years she was chairwoman of the state-run oil company. Her proposals include the criminalization of campaign slush funds, seizure of assets from government officials convicted of corruption and implementing an anti-bribery law passed more than a year ago. On Sunday, over 1 million people took to Brazil’s streets in anti-government protests. A small minority of the protesters called for a military takeover of the government.
 
Apple is moving to the Dow Industrial Average, replacing AT&T. The Dow is a price-weighted index, which means the price is determined by the price changes of its components, rather than percentage changes. A 1% move in Apple’s stock–about $1.28 at Wednesday’s closing price–would move the Dow by about 8.54 points. In contrast, the S&P 500 is a market-capitalization weighted index. Since Apple has a $748 billion market cap, its stock has more than twice the influence on the S&P as that of Exxon Mobil which is the second-most heavily-weighted component with a $361 billion market cap.

Starbucks declared a 2-for-1 stock split set for April 9 at its Annual Meeting yesterday, saying it sees enough growth on the horizon to help push the company to a $100 billion market capitalization. Starbucks also announced a new delivery service, for people who don’t want to walk to the corner.

Sony has launched its PlayStation Vue streaming video service in three cities, with a starting price of $50/month, after testing the service since November. The lineup features content from three of the big four (CBS, Fox, NBC), but popular content from Disney – ABC, ESPN and Disney cable – is still a glaring omission. Sony’s price is raising eyebrows, as it’s competing with Sling TV’s $20/month price point. This whole idea of paying for cable TV service is about to change, we just don’t know yet who the big winner will be.

Times change. The Recording Industry Association of America reports that streaming services accounted for $1.87 billion in revenue last year, while sales of CDs represented $1.85 billion in sales. Apparently the sales on 8-track tapes has not been doing well either.

Another sign of the times. There are now more Uber cars in New York City than there are taxis. According to the city’s Taxi and Limousine Commission: 14,088 registered Uber cars compared with 13,587 yellow cabs.

Target has agreed to pay a $10 million settlement related to its 2013 data breach, which compromised the personal information of as many as 110 million people. Under the proposal, Target would pay individual victims up to $10,000 in damages and implement additional data security measures, such as appointing a chief information security officer and maintaining a written information security program. Target also raised the minimum wage for all of its workers to $9 an hour yesterday, matching moves made by rivals Wal-Mart, GAP and T.J. Maxx.

Bank of New York Mellon is reportedly nearing an agreement to pay just over $700 million to settle allegations that the bank overcharged pension funds and other clients for foreign exchange services. The bank told clients it would provide them with the best possible execution, but instead gave them the worst rates of the day. Meantime, BNY Mellon obtained better spot prices for itself and profited on the spread. The New York AG’s office claims the bank earned $2 billion over ten years through the alleged deception. So, that worked out quite well for the bank. And now you know why pension funds are in trouble.

Teslas can once again be legally sold in New Jersey after Governor Chris Christie signed a bill to allow the company to sell directly to consumers. The step comes after fighting efforts in nearly every state to halt its direct sales method, which doesn’t use independent dealers. Tesla also presented a software update to its Model S vehicle at a news conference this morning. It was widely expected the update would improve the range of the electric car between charges. Instead, Elon Musk announced a safety feature. The car will also warn drivers if battery power is low before they drive beyond an area where they can charge. Musk said drivers were concerned about “range anxiety,” and he says it will now be impossible to run out of charge unless you do so intentionally, or you are driving on the George Washington bridge in New Jersey.

Transocean expects to book an after-tax charge of between $300 million -$325 million as it moves to dispose of four rigs. According to Baker Hughes, U.S. oil-rig count fell to 866 last week, the 14th straight week of declines, as plunging oil prices wreak havoc on the industry. Transocean also logged a $992 million charge to correct the value of its contract drilling business in February, and saw the departure of CEO Steven Newman.

The Bank of International Settlements Quarterly Review shows debt in the global oil and gas industry reached $2.5 trillion in 2014, or 2 ½ times what it was eight years earlier. Cheap financing made it easier for exploration and production companies to finance operations and expand rapidly as the fracking kicked into high gear.  The debt boom is now magnifying the slump in prices; the most immediate effect is a sharp cutback in capital spending plans, and we’ve already seen many rigs shutdown. At the same time, production continues to climb higher because deteriorating balance sheets encourage companies to keep pumping from existing wells to service the debt even as oil prices drop.

The BIS authors warn: “A sell-off of oil company debt could spill over to corporate bond markets more broadly if investors try to reduce the riskiness of their portfolios. The fact that debt of oil and gas firms represents a substantial portion of future redemptions underlines the potential system-wide relevance of developments in the sector.”

And it is not just domestic oil producers. Today, Kuwait’s oil minister said OPEC had no choice but to keep producing in an oversupplied market or risk losing market share.

The National Snow and Ice Data Center at the University of Colorado has been measuring Arctic ice for the past 35 years, and this winter was the smallest winter size on record, by about 130,000 square kilometers, an area about the size of Mississippi.

This winter has been hot. Global temperatures from December to February were the highest on record. If that comes as a surprise to many Americans after an agonizingly cold winter, it’s because the eastern United States and Canada was one of the only regions on earth with lower-than-average temperatures. Globally, the average temperature from December to February was 1.42 degrees Fahrenheit higher than the 20th-century average, according to the National Oceanic and Atmospheric Administration. The average temperature was the highest since tracking began in 1880, surpassing the previous high in 2007 by .05 degrees.

FINANCIAL REVIEW

Proportional Response

Sinclair Noe — December 18, 2014

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

DOW + 421 = 17,778
SPX + 48 = 2061
NAS + 104 = 4748
10 YR YLD + .05 = 2.20%
OIL – 1.88 = 54.59
GOLD + 9.00 = 1198.90
SILV + .13 = 15.98

If you were waiting for confirmation, you got it. The major indices went through about 7 days of doom and gloom. Maybe this has something to do with the Federal Reserve’s FOMC statement yesterday. The central bank said in its official statement Wednesday it would “be patient” in deciding when to start raising interest rates from near zero. But then it added that it sees “this guidance as consistent with its previous statement” pledging to keep rates very low for “considerable time.” When asked what “patient” meant, Chairwoman Yellen said the Fed would not begin hiking rates for “a couple” of meetings. Pressed further, she confirmed “a couple” means two. But I’m not sure whether it was hawkish or dovish; more likely it was just a continuation.

Here’s my guess and it is only a guess because I don’t know and probably nobody knows. My guess is that a lot of money has come out of oil lately and now that money is moving back into stocks. It’s the buy on the dip mentality, with a little sector rotation on the side. Whatever it was, it was the best day for the S&P 500 this year. The Dow had its biggest gain in 3 years. Not enough to take out the old highs but back within striking distance.

The MSCI All-Country World Index gained 2.18% and emerging-market stocks surged 1.8%. The STOXX Europe 600 Index advanced 3%, the most in three years. Treasuries moved lower, pushing yields higher. Oil slumped 3.2% after wiping out a 4% rally.

Goldman Sachs released a report showing almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields, excluding US shale, and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the US, the shale-oil party isn’t over yet, but there are bound to be some oil projects planned for next year that have little hope of a productive future. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8% of current global demand.

Meanwhile, today the chief economist for JPMorgan said the drop in oil prices could be painful for Texas and could throw the state into recession, citing the similarities to 1986 when oil prices were cut in half. The economist says there are some reasons to believe this time may be different, such as “rapid technological gains” in the energy sector that have reduced extraction costs. But he concluded that those arguments “are not so strong as to signal smooth sailing for the Texas economy.”

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion. If the price of oil averages $70 in 2015, $150 billion will be pulled from oil and gas exploration around the world. With oil prices at $65 it could trigger the biggest drop in project finance in decades.

And then the question is where will all that money go? Will it eventually be poured back into oil rigs, or will it end up financing some other, less volatile, less polluting energy source? Or maybe the money will just shift to some other place.

And the flip side is that while lower oil prices may be hard for Texas and global oil producers, it is great for consumers who keep a few extra dollars in their purse with each fill-up. The consumer drives the US economy, which drives the global economy, so that’s good news.

In economic news: Initial jobless claims fell by 6,000 to a seasonally adjusted 289,000 in the seven days ended Dec. 13, and for 13 of the past 14 weeks new claims are under 300,000.

The Federal Reserve Bank of Philadelphia’s monthly index on regional manufacturers fell to 24.5 in December from 40.8 in November.

The Conference Board’s leading economic index rose 0.6% in November, indicating the US is likely to expand at a fairly robust pace in the next few months. The coincident index, which measures current conditions, rose 0.4% in November, while the lagging index gained 0.3%.

Russian President Vlad Putin delivered a 3 hour press conference today. Putin said the problems in Russia will pass, the ruble will come back in time, about 2 years; he said Russia was facing a perfect storm of low oil prices combined with economic sanctions from the West over Ukraine. He did not say how he would fix it. The ruble continued to weaken against the dollar and the euro following the speech. For the typical Russian these are going to be a difficult times but it is tough to sympathize with Putin. Russia should not be a debtor country. It has managed this nonetheless, presumably because corporations and banks have borrowed abroad, and somehow that money has ended up invested in luxury London real estate and other things. Oligarchy is not an optimal economic model.

Sony Pictures canceled the December 25 premier of “The Interview.” The studio pulled the North Korea-themed comedy’s planned release following terrorist threats against theaters and a devastating hacker attack that leaked reams of sensitive company data. US security officials told news outlets that North Korea directly ordered the hacks, but some say the evidence is thin. The United States said the cyber-attack on Sony Pictures was a serious national security matter and the Obama administration was considering a proportional response.

I don’t know what that means. Maybe we’ll cancel the premier of a North Korean film, or maybe we can get James Franco and Seth Rogen to make more films and we’ll just swamp North Korea with mindless comedies. Or better yet, maybe we can send some Sony executives to North Korea, to motivate the workers.

One of the most shocking revelations to come out of the Sony hack is that people are still saying stupid things in email. You have to assume that everything you write in an email, instant message, or text, or any digital form of written communication, will be read by your boss and co-workers and your spouse; and if you write something incredibly stupid it might even go viral. Seriously.

The Sony hack raises a whole bunch of issues, including whether insurance would pay a claim for someone injured in an attack on a theater. And then there are first amendment questions. And then there is the whole question of cyber security, and why it was clearly lacking at Sony, and just how bad it is at other major companies, and who is liable for hacks. Some Sony employees have already filed lawsuits accusing Sony of negligence for failing to secure its network, and not taking adequate steps to protect employees once the company knew the information was compromised. In the past, companies have tried to cut costs on cyber security, because they felt the liability should fall on the hackers, even if nobody was actually tracking down the hackers. Now, the liability might fall on the company because they knowingly left the keys in the car.

Here’s a quiz for you: Have you ever heard of Kabam, Instacart, WeWork, and Stripe? Probably not. These are the names of companies that did not exist a couple of years ago and now they are worth between $1 billion and $5 billion. Instacart is a same day grocery delivery company; WeWork provides shared office space; Stripe is an online payment company; Kabam makes games for mobile devices. Companies are going from zero to billion-dollar valuations faster than ever before, despite a lack of revenue and, perhaps, even a market plan. In the frenzy, ideas that once were discarded as failures are being recycled into billion-dollar start-ups.

Have your heard about Cuba? Not the island country, but the energy drink. Shares of Cuba Beverage Company were up 140% yesterday. The jump comes on a day when President Barack Obama said the United States will begin to normalize relations and establish diplomatic ties with Cuba–the country, not the company. The company is an energy-drink purveyor with less than $10,000 in sales last quarter that was trading for 1.59 cents on Tuesday afternoon, and absolutely no link whatsoever to certain islands 90 miles off the coast of Florida but which contains the magic four letters, in the correct order? Actually, the ticker symbol is CUBV. If the ticker had been CUBA, I’m guessing it would have been a ten-bagger. Well, why haven’t you placed that buy order yet?

Food startup Hampton Creek Foods, whose goal is to replace egg products in food with plant-based alternatives, just scored $90 million in funding at a reported $500 million valuation; this for a company that wants to make fake mayonnaise. Vox Media just went through a round of funding that valued the online media company at $380 million; compare that to the $250 million sale price for the Washington Post. The big start up story this year is Uber. Actually Uber started 5 years ago, but in the past 6 months the valuation went from $18 billion to $41 billion. If it all sounds a little bubblicious, well it probably is.

FINANCIAL REVIEW

More Jobs

Sinclair Noe — December 3, 2014

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

DOW + 33 = 17912
SPX + 7 =2074
NAS + 18 = 4774
10 YR YLD + .01 = 2.29%
OIL + .49 = 67.37
GOLD + 11.60 = 1211.10
SILV – .04 = 16.52

Record high for the Dow Industrials and the S&P 500.

About 2 weeks before the Federal Reserve FOMC meets to determine monetary policy they gather together reports from across the nation on how the economy is doing; the Fed then binds those reports in a Beige folder, or what we call the Beige Book. As the name would imply, the Beige Book is not always a page turner, but it can provide some useful information as well as an indicator of what the Fed policymakers are thinking, and then there is the occasional surprise nugget of information.

The Beige Book was released today and it shows the US economy holding up well despite global slowing; economic activity continued to expand in October and November, with lower gasoline prices boosting consumer spending. Despite a sharp drop in crude oil prices, drilling activity in shale production districts remained steady; oil and gas exploration activity decreased in North Dakota and increased in Montana relative to a month earlier; production remained at record levels. Lower oil prices have some oil companies concerned and closely monitoring prices, which are close to many firms’ breakeven price.

Employment gains were widespread. Better conditions in the labor market meant more employers were struggling to retain key workers as well as fill job openings in sectors such as information technology, engineering, legal and health services, manufacturing and transportation. Inflation remains tame, thanks to lower gas prices, and also because a stronger job market has not yet pushed inflation higher.

Oil was a dominant theme is this edition of the Beige Book; it got more mentions than any other word. Contrary to the Fed’s outlook for domestic oil producers, Reuters reports a drop of almost 40% in new well permits issued across the US in November. Just a reminder that about 20% of the high yield or junk bond market involves the energy sector, and fully a third of the capital expenditure among S&P 500 companies can be traced to the energy sector. The Beige Book takeaway is that the economy isn’t seeing much response to the falling price of oil right now, but everyone is on the lookout for a big impact.

The Institute for Supply Management said its services index rose to 59.3 last month from 57.1 in October, and just below the post-recession high of 59.6 hit in August. A reading above 50 indicates expansion in economic activity. Two out of the ten components of the survey, employment and imports, fell from October, but all were above the 50 level.

The payroll processing firm ADP provides their own survey of the labor market each month just before the government’s monthly jobs report. Today, ADP estimates the economy added 208,000 private sector jobs in November. The number was just a little below expectations. Services dominated the picture, with 176,000 new jobs, compared to 32,000 in goods-producing. And small business continue to be the biggest job creators, adding 101,000 jobs last month, compared to medium sized businesses which added 65,000 jobs. Both the ADP and the government report on payrolls have risen more than 200,000 in at least 7 of the past 8 months. These are not blockbuster numbers but they are solid growth numbers.

Friday’s job report is expected to come in around 230,000 net new jobs; the ADP report today does not change that estimate. However, it is important to realize that the estimates for November are all over the board, and one reason is because of seasonal adjustments to the number; and the guesstimate is that the seasonal adjustment in October was a bit harsh; also, there is a tendency over the past few years for the Labor Department to make pretty big upward revisions in November. Also, we’ve seen some strong economic data recently. The Institute for Supply Management’s surveys of manufacturing and services firms in November were consistent with GDP growth north of 5%. TrimTabs Investment Research, after analyzing income tax deposits from workers subject to withholding, estimates 306,000 jobs were created. Jobless claims, a proxy for layoffs, were low in the week companies were surveyed. I’m just saying, you want to tune in Friday for the results.

Meanwhile, the Labor Department reported today revisions to third quarter productivity. Productivity grew at a revised 2.3% annual pace instead of 2% from the beginning of July through the end of September. The increase in output of goods and services was raised to 4.9% from 4.4%. Hours worked were revised up by a smaller amount, to 2.5% from 2.3%.Unit-labor costs, meanwhile, fell 1% instead of rising 0.3%. And labor costs for the second quarter were revised to show a 3.7% plunge — a much larger decline than the previously reported 0.5% drop. The amount of compensation employees receive per hour of work rose in the third quarter after declining in the spring, but the increase was small: 1.3% before inflation is taken in to account. That’s down from an initial estimate of 2.3%, though. Adjusted for inflation, compensation rose just 0.2%. Let’s break that down. The report means workers are more productive, but they aren’t being rewarded for producing more. This slow growth in wages is holding back the recovery. If you want to know why most people don’t feel like the economy is strong, it’s because their own paychecks are anemic, despite their hard work.

It seems to me the best way to push wages higher is to have more jobs; that would help push wages for everyone a bit higher. The best welfare program is a job at a living wage. There is no better anti-poverty program than jobs for those who want to work. Offering a job is a hand-up not a hand-out. Working promotes community. It allows for shared prosperity. We all benefit when everyone works. It is consistent with American values. We have a half-century of experience with hand-outs instead of hand-ups. Hand-outs do little to reduce poverty. Inequality is worse.

In other news today:
Honda has announced a nationwide airbag recall in the US. Honda has already recalled 3.5 million cars with Takata airbags and now they’re expanding the recall to all 50 states, despite a parts shortage. In other words, call first.

News out of Ukraine that does not involve Russia. The country’s energy minister said there was a short circuit at a 1,000 megawatt nuclear power plant, the largest in Europe; they reported rolling blackouts throughout the country. The problem is not with the nuclear reactors, still….

The Russian ruble continues its meltdown. About a month ago, the Russian central bank said it would stop intervening to prop up the ruble except in emergency situations. Yesterday and today they intervened.

The dollar hit a 5 year high. The euro dropped to a 27 month low against the dollar. This would be consistent with the European Central Bank taking stimulative measures to boost growth and fend off deflation when they meet tomorrow.

Hackers who knocked Sony Pictures Entertainment’s computer systems offline last week used tools very similar to those used last year to attack South Korean television stations and ATMs. South Korea publicly blamed the 2013 attacks on North Korea. The FBI issued a private warning to companies to be on the lookout for a certain type of destructive malware that can basically wipe out hard drives.

A United Nations global warming conference has convened in Peru, trying to pave the way for an international treaty they hope to forge next year. In the more than 2 decades since leaders first got together on climate change, life on Earth has changed. And this conference provides some of the actual numbers. Carbon dioxide emissions: up 60%. Global temperature: up six-tenths of a degree. Population: up 1.7 billion people. Sea level: up 3 inches. US extreme weather: up 30%. Ice sheets in Greenland and Antarctica: down 4.9 trillion tons of ice. In other words, it is hotter, more polluted, more crowded, and more extreme.

Tomorrow morning at 7:05AM Eastern Time, the Orion spacecraft is scheduled to be launched by NASA from Cape Canaveral. This Orion test vehicle won’t be carrying a crew. The flight is meant only to check out the spacecraft’s systems for the first time in space. But a full-featured version of the spaceship is scheduled to send astronauts beyond Earth orbit in 2021, for the first time since the Apollo 17 moonshot in 1972. NASA plans to use Orion spaceships to send astronauts to an asteroid by the mid-2020s, and to Mars and its moons starting in the 2030s.