Financial Review

Wild Ride

Sinclair Noe — November 29, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: Android | RSS

DOW + 103 = 23,940 (Record)
SPX – 0.97 = 2626
NAS – 88 = 6824
RUT + 29 = 1542
10 Y + .04 = 2.38%
OIL – .72 = 57.39
GOLD – 10.00 = 1284.40

Cryptocurrency

• Number of Currencies: 1,361
• Total Market Cap: $313,200,409,865
• 24H Volume: $25,745,255,963

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	24H Volume	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	10,440.0	$176.94B	$12.43B	48.17%	1	+6.76%	+28.76%
	Ethereum	ETH	447.67	$44.05B	$2.91B	11.27%	0.0445032	+6.04%	+21.31%
	Bitcoin Cash	BCH	1,389.00	$24.35B	$2.55B	9.88%	0.140411	+3.95%	+4.72%
	Ripple	XRP	0.24450	$10.06B	$559.05M	2.17%	0.00002528	+4.44%	+9.00%
	Dash	DASH	701.27	$5.64B	$460.44M	1.78%	0.0708762	+6.09%	+27.36%
	Bitcoin Gold	BTG	298.72	$5.34B	$277.71M	1.08%	0.0310805	+6.27%	+28.06%
	Litecoin	LTC	91.090	$4.96B	$827.06M	3.20%	0.00890424	+5.06%	+27.98%
	IOTA	MIOTA	1.37200	$3.83B	$309.61M	1.20%	0.00013365	+8.28%	+54.35%
	Monero	XMR	184.21	$2.91B	$191.79M	0.74%	0.0183086	+11.31%	+15.15%
	Cardano	ADA	0.114583	$2.87B	$207.27M	0.80%	0.00001074	+3.15%	+291.80%

The Dow Industrials hit another record high, even as the Nasdaq suffered a sharp drop.

The U.S. economy’s growth rate last quarter was revised upward to the fastest in three years on stronger investment from businesses and government agencies than previously estimated. Third quarter GDP grew at a 3.3% annualized rate (est. 3.2%), revised from 3%.

The performance, achieved despite two devastating hurricanes, marked the fastest expansion in gross domestic product since a 5.2 percent annual spurt in the third quarter of 2014. Consumer spending, which accounts for about 70 percent of the economy, continues to be the main driver of growth, though revisions showed it was slightly weaker than previously estimated on purchases of both durable and nondurable goods.

The biggest improvement came in business investment, which made a 1.2 percentage-point contribution to growth. In addition to greater spending on transportation equipment, the data also reflected more software spending. Nonresidential structures were revised to a bigger decline. While the first look at third-quarter gross domestic income showed a pickup, the prior quarter was revised downward by 0.6 percentage point, reflecting a smaller gain in wages and salaries.

Price data in the GDP report showed inflation remains behind the Fed’s 2 percent goal. Excluding food and energy, the central bank’s preferred price index tied to personal spending rose at a 1.4 percent annualized rate last quarter. Gross domestic income, adjusted for inflation, rose 2.5 percent after a downwardly revised 2.3 percent gain in the prior three months; second-quarter wages and salaries were revised downward by $26.5 billion.

The GDP report is the second of three estimates for the quarter; the third is due in December.

The pending home sales index, which measures signed contracts to buy existing homes, rose 3.5 percent for the month, but is still 0.6 percent lower than October 2016. That is the highest level since June. Sales were strongest in the South, jumping 7.4 percent for the month and 2 percent compared with a year ago. That was likely due to pent-up demand after two major hurricanes.

Federal Reserve Chair Janet Yellen delivered her final testimony before the Joint Economic Committee on Capitol Hill. Yellen said the country’s economic expansion had broadened and strengthened, and that she expected the growth to continue. Yellen was careful to say that the economy could be doing better. She noted that the pace of economic growth remained slow by historical standards.

The two major determinants of growth, the number of workers and the productivity of the average worker, are rising slowly. She said, “Congress might consider policies that encourage business investment and capital formation, improve the nation’s infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies.”

She did not offer an opinion on tax policy but warned that debt-to-GDP ratios – around 75% – were high, though not excessive.  She added, “It’s the type of thing that should keep people awake at night.” In response to a question, Yellen added, “The equity of the tax code is important and should be taken into account.”

She also said changes in fiscal policy could affect how quickly the Fed raises rates. Fed officials have drawn a careful distinction between tax cuts that increase economic capacity — for example, by encouraging business investment — and tax cuts that provide a short-term sugar high, such as cuts in personal income taxes that would likely increase spending.

The Fed estimates that the economy is already growing at something close to the maximum sustainable pace. A short-term stimulus, therefore, would likely raise inflation. In turn, the Fed could seek to offset faster inflation by raising interest rates more quickly.

Also, today, at the ASU Economic Forecast Luncheon in Phoenix, San Francisco Fed President John Williams delivered an upbeat assessment of the economy, and falling unemployment is expected to put pressure on inflation… eventually, Williams anticipates the Fed will keep raising interest rates gradually.

Williams said, “The next time you see a headline about stubbornly low inflation, you can smile to yourself, knowing that the mystery isn’t all that mysterious after all. With the economy doing so well this year and based on the historical pattern, I expect to see a rise in inflation in 2018.” In a Q&A session, Williams said the Fed does not have plans to issue digital currency, but the central bank is interested in the underlying technology and is actively researching it.

Yesterday, Bitcoin hit $10,000. This morning it hit $11,000 – but by the end of the day it was back around $9,290. Wild ride doesn’t begin to describe it. Trading volume was a whopping $9.75 billion over the last 24 hours, according to CoinMarketCap, compared to $2.26 billion for digital currency Ethereum. The heaviest selling came amid reports of service outages and delays on some of the largest online exchanges. If it looks like a bubble, and walks like a bubble, and charts like a bubble….

If bitcoin is a bit too crazy for you, starting in 2018, investors can dump their money into deeply unBogle-like, totally non-passive Vanguard exchange-traded vehicles with flavors like volatility, momentum, value, and, for some reason, low liquidity. That’s right, actively managed ETFs.

Members of the Organization of the Petroleum Exporting Countries and other key producers, including Russia, meet on Nov. 30 to discuss whether to continue to limit production to drain global inventories to help push up prices. They cut production by 1.8 million barrels per day (bpd) in January and agreed to hold down output until March. The market had expected OPEC to extend the limits by another six to nine months, but this is now less certain.

The Supreme Court heard arguments today on whether police need a warrant for cellphone location data in a case that could reshape digital privacy protections. The defendant in the case was convicted of participating in a series of robberies, based in part on records provided by his cellular carrier showing his movements over several months. The defense lawyer said prosecutors had violated the Fourth Amendment, which bars unreasonable searches, by failing to get a warrant for the information.

The court’s decision in the case, Carpenter v. United States, will apply the Fourth Amendment, drafted in the 18th century, to a world in which people’s movements are continually recorded by devices in their pockets and cars, by toll plazas and by transit systems. A ruling in Mr. Carpenter’s favor could revise a fundamental Fourth Amendment principle: that people have no reasonable expectation of privacy when they voluntarily turn over information to a third party, like a phone company.

Recent Supreme Court decisions have expressed uneasiness with allowing the government to have unfettered access to vast amounts of digital data. By the end of arguments, at least five justices seemed prepared to limit the government’s power to obtain records from cellphone companies showing their customers’ locations over long periods of time. But there was no consensus about a rationale for a decision or about how far the court was prepared to go to reshape longstanding constitutional doctrines that allow the government to obtain business records held by third parties.

The Office of the Comptroller of the Currency has advised Wells Fargo’s board of directors that it is weighing a formal enforcement action against the bank over improprieties in its auto-insurance and mortgage operations. In a letter this month, the OCC said Wells had willingly hurt customers in the two businesses and had until Nov. 24 to respond. The OCC letter said Wells repeatedly failed to fix problems in a broad span of areas, not just auto insurance and mortgage-lending.

Nokia is reportedly in talks to buy Juniper Networks.  The offer would value Juniper at around $16 billion.

A scheduling glitch that allowed American Airlines pilots to take vacation at the same time has left thousands of flights during the busy holiday travel period next month without pilots assigned to them. Pilots loaded up their schedules with flights in early December, but many opted to take days off around the holidays, after the system allowed it.

American Airlines is now offering pilots 150 percent of hourly pay to work those dates. It was unclear how much the scheduling problem will cost American Airlines. Whoops.

Financial Review

Non-Freak

Sinclair Noe — August 24, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: Android | RSS

DOW – 28 = 21,783
SPX – 5 = 2438
NAS – 7 = 6271
RUT + 4 = 1373
10 Y + .02 = 2.19%
OIL + .24 = 47.64
GOLD – 4.50 = 1286.80
BITCOIN + 0.99% = 4405.76 USD
ETHEREUM + 0.10% = 326.24

Stocks drifted in an aimless manner today, meandering from positive to negative and back and forth again. The good news is that the market has made it through most of August without freaking out – and there have been a few opportunities for a freak. But the markets have been well behaved and orderly, with a slight downward bias.

Soon, August will end and Congress will return and they will have a plate full of issues including the debt ceiling and tax reform. Trump picked a new fight today with fellow Republicans over the debt ceiling, blaming congressional leaders for not including funding for veterans’ affairs as part of the debt ceiling package. Trump tweeted that debt ceiling approval is now a mess.

Earlier in the week, Senate Majority Leader McConnell said the debt ceiling would be raised. Today at a town hall meeting in Washington state, House Speaker Paul Ryan confirmed debt ceiling legislation would be passed in time. And it probably will. It is not complicated. Write a clean bill, no amendments, and it will pass. It should be easy, but…

On the tax reform side, Republican congressional leaders don’t expect to release a joint tax plan with the White House next month, and they’ll rely instead on House and Senate tax-writing committees to solve the big tax questions that remain unanswered.

White House officials and congressional leaders involved in tax negotiations, jointly released a two-page statement in July that outlined a broad set of agreed-upon tax principles.That statement was short on specifics, including such basic matters as where to set the corporate tax rate and how to set up individual tax brackets.

Back in March, White House press secretary Sean Spicer’s said the Trump administration would be “driving the train” on efforts to rewrite the tax code. So far, the train hasn’t left the station. Chief economic advisor Gary Cohn had said previously that a tax framework would be released after Labor Day. More recently, he indicated the White House was pushing tax efforts back to the hill.

House Ways and Means Chair Kevin Brady has said he expects hearings and markups on tax legislation this fall. The Senate Finance Committee is planning to do the same. It might be possible to get tax reform this year but don’t hold your breath.

Tomorrow, Janet Yellen will be giving what could be her last speech Friday as Fed chair at the annual gathering in Jackson Hole, Wyoming. Yellen’s term as Fed chair expires in February and Trump does not seem inclined to re-appoint her.

Yellen has brushed aside questions about her future. She professes to be focused on the job at hand, which is a significant one — namely, guiding the Fed from a path of the ultra-accommodative crisis-era policies to a more normalized stance. That includes higher – though still low – rates and the first steps toward unwinding the $4.5 trillion balance sheet of bonds the Fed accrued during its economic stimulus efforts.

With all that in play, Fed watchers expect Yellen’s speech to be less a valedictory look at the past and more a course-charting path for her successor. Yellen’s speech comes nearly a full decade after the Fed began cutting its benchmark funds rate, in September 2007 in the face of the unfolding financial crisis that threatened the nation’s banking system and ultimately pulled the economy into recession.

By December 2008, the funds rate had been sliced to near zero and the Fed began buying bonds to generate liquidity and keep interest rates low to spur the housing industry. By the time Yellen took over in February 2014, the Fed was still at zero but had pumped up its balance sheet with trillions of bonds.

Stocks were on their way to the second-longest bull market in history, but the rest of the economy remained in question. The Yellen Fed has begun the process of normalization, raising rates 4 times, even though the inflation rate remains stubbornly south of 2%.

In the next few years, the Fed will continue dealing with the low-interest-rate world the financial crisis ushered in, plus the unwinding of the balance sheet, plus a raft of economic challenges to economic growth. Maybe Yellen will offer some advice tomorrow.

Yellen’s remarks are entitled “Financial Stability,” and therefore could skirt direct discussion of monetary policy. But given the nature of the forum and its high-profile audience — academic economists, top central bankers, and a handful of market participants — that is unlikely.

Rather than focusing on monetary policy directly, Yellen is likely to discuss how the Fed is supposed to manage its mandate of maintaining a stable financial system even as it stimulates economic growth to a level that is strong but does not generate undue inflation — or credit bubbles.

In a way, market expectations that the Fed will leave interest rates on hold at its next meeting in September, waiting until at least December to make another move, provide Yellen some breathing room.

Look for Yellen to maintain a slightly dovish tone, but mainly look for her to say nothing that would freak the markets. Nothing to rock the boat. She only must keep the markets and the economy steady and calm for 6 more months, and then it’s someone else’s problem.

Hurricane Harvey is headed for Texas. The hurricane has been gaining strength in the Gulf of Mexico. Only a few oil and natural gas platforms in the storm’s path have been shut, so they are still producing but rainfall threatens to flood refineries in Corpus Christi and Houston. Winds up to 75 mph and as much as 15 inches of rain were forecast. Flooding will be a big problem as the storm hits the Texas coast.

The National Association of Realtors reports sales of previously-owned homes slid to their lowest level of the year in July as the familiar dynamics of tight supply and strong demand continue to strain the housing market.

Existing-home sales ran at a seasonally adjusted annual rate of 5.44 million in July. That was down 1.3% from a downwardly-revised June pace. While July’s pace was 2.1% higher than a year ago, it was the lowest since last August.

Inventory dropped 9% from year ago levels. Strong demand meant listings went into contract in under 30 days. It also pushed prices higher. The median sales price in July was $258,300, a 6.2% increase compared to a year ago.

Amazon.com’s acquisition of Whole Foods will close on Monday, and they are going to make changes from Day One. The biggest of the changes seemed aimed at changing the store’s reputation as “Whole Paycheck” — a seller of food that might be wholesome for customers but also devastating to their pocket books.

No more. Amazon said it would offer lower prices on a “selection of best-selling staples across its stores, with much more to come.” Amazon also said that its Prime membership program, which costs $99 a year, will eventually become Whole Foods’ customer rewards program, providing members with further savings in stores. It did not provide any other details about those plans.

Shares of some of the country’s biggest grocery companies fell sharply after Amazon’s announcement. Kroger fell more than 6.5 percent, and Walmart, the nation’s biggest grocer, fell about 2 percent.

The collateral damage among grocers is just the latest example of Amazon imposing its will on an entire industry with a simple corporate announcement, leaving billions of dollars of erased market value in its wake. And there’s nothing to suggest this dynamic will slow down anytime soon. Retailers are being forced into a new reality where the specter of Amazon lurks at every turn.

Abercrombie & Fitch posted a smaller-than-expected loss in the second quarter, thanks to strength from its Hollister brand. The teen retailer said same-store sales fell 1%, better than the expected drop of 2.1%.

Revenue topped analysts’ forecasts at $779.3 million. The adjusted loss of 16 cents a share was better than forecasts for a loss of 33 cents. Sales at its Hollister brand rose 5% during the quarter.

Abercrombie shares jumped by 17% today, which seems like an over-reaction.

Sears recorded a smaller-than-expected loss in the second quarter while its revenue beat Wall Street expectations. Sears recorded an adjusted loss of $1.16 a share on revenue of $4.3 billion. Analysts were expecting a loss of $2.48 a share and sales of $4.2 billion.

Even though the department store topped expectations, it’s still struggling to lure shoppers through its doors. Sears announced it plans to close 28 more Kmart stores this year, which is in addition to the 150 Sears and Kmart stores it’s closing by the end of the current quarter.

Sears shares have fallen 39% over the past year.

Tiffany reported revenue of $959.7 million, boosted by growth in its fashion and design jewelry, and its profit topped expectations at 92 cents a share.

But it wasn’t all good news for Tiffany, same-store sales fell for the seventh quarter in a row, down 2% worldwide, which is a bigger drop than the 1% decline analysts were expecting.

Tiffany shares have jumped nearly 14% since the start of the year.

Dollar Tree advanced 5.6 as one of the best performers on the S&P 500 after the retailer’s profit and comparable sales beat estimates.

Signet Jewelers surged 16.7 percent after the company issued results and said it would buy an online jeweler.

Financial Review

Turkey

Sinclair Noe — February 13, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW + 142 = 20412
SPX + 12 = 2328
NAS + 29 = 5763
RUT + 3 = 1392
10Y + .02 = 2.43%
OIL – .98 = 52.88
GOLD + 8.20 = 1225.70

Wall Street hit record highs again. Stock markets around the world were higher this morning. The S&P 500’s market value topped $20 trillion. The markets appear to be pricing in a best-case scenario for Trump tax cuts, deregulation, plus infrastructure spending. The problem is that Washington is unlikely to deliver best-case.

There are differing opinions on where to cut taxes, by how much, and when. Some of the proponents of tax cuts are also strong deficit hawks who will need to reconcile the books with more than blind faith and dynamic scoring. Even if you think you have the right economic theory, there are always unintended consequences.

Don’t hold your breath waiting for tax action this year. The budget is not agile, and even if unanimity is possible (highly doubtful), it will take time. Assuming of course that there are no distractions. Good luck. Infrastructure spending is not exactly shovel ready and there will be sharp disagreements. So far, Trump’s plan largely means privatizing infrastructure development with tax credits.

Federal Reserve board governor Daniel Tarullo said he would resign from the Fed, leaving the central bank on or around April 5. This now creates three openings at the Fed for the Trump administration to fill. Tarullo was the Fed governor in charge of overseeing financial regulation.

A major part of the post-election rally in stocks was centered on deregulation of the financial sector. Today, the Financial Select Sector SPDR fund (XLF) was up 1.2 percent. Investors may be betting Tarullo will be replaced by a regulator who is friendlier to the banking industry.

Federal Reserve Chair Janet Yellen is not expected to give any clear hints as to the timing of the next rate hike in her semi-annual testimony to lawmakers in Washington this week, but we will get a better idea about inflation trends with release of the CPI report on Wednesday. The first point of interest will be whether Yellen provides any more guidance on the possibility of a March rate hike.

Markets have so far written off the chance, pricing in just an 18 percent probability of a quarter-point move. But that may be too low, given that Yellen is likely to signal that the Fed is close to meeting its inflation and employment goals set by Congress.

A Federal Reserve Bank of New York survey showed inflation expectations are running hot. Consumers expect inflation in the year-ahead to increase to 3.0 percent, from 2.8 percent in December and 2.5 percent in November.

Canadian Prime Minister Justin Trudeau met with President Trump to discuss a variety of topics including jobs, trade, and immigration. Trump said the United States will be “tweaking” its trade relationship with Canada, stopping short of calling for a major realignment. It was a polite meeting – of course.

Japan, the largest holder of Treasuries, cut back on the debt by the most in almost four years in December, according to data from the Ministry of Finance. This appears to be part of a global trend in Treasury ownership, as investors seem increasingly wary of stepping into the nearly $14 trillion market, with uncertainty over the new administration’s policies and the prospect of higher US interest rates. Foreigners still hold almost $6 trillion in US government debt, or about 43%; that’s down from 56% in 2008.

On the surface, this is an alarming development, considering that these investors own almost half of the Treasuries outstanding. Their flight could signal a drastic rise in borrowing costs. China is the biggest seller of US Treasury debt. China has been funneling billions of dollars into its economy to keep it chugging along despite an increasing number of cracks in its credit system and to prevent its currency from depreciating too quickly. Despite all its efforts to prevent money from leaving the nation, capital outflows are continuing.

Japanese Prime Minister Shinzo Abe wrapped up a visit to the US with President Trump calling for a trade relationship that is “free, fair, and reciprocal.” Trump also committed to “the security of Japan”.

The US, Japan, and South Korea have requested a Monday meeting at the UN after North Korea launched an intermediate-range ballistic missile into the Sea of Japan Sunday, violating UN restrictions.

Two US cabinet votes today. The Senate is expected to approve Trump’s nominee for Treasury secretary, Steven Mnuchin, and David Shulkin for Veterans Affairs secretary. Mnuchin is among the prominent Goldman Sachs alums populating the Trump administration.

Copper has been on a tear lately thanks to supply disruptions at the world’s largest mine caused by a strike, plus strong demand from China. Rio Tinto Group said that iron ore prices, which have surged to the highest level since August 2014, are not going to fall off a cliff. In soft commodities, sugar traders are bracing for a wild ride, with global stockpiles set to fall to their lowest levels since 2011-12, meaning the outlook for prices is almost completely dependent on the weather in the coming year. In the shorter-term, there is good news for Valentine’s Day as chocolates should be cheaper on the back of a boom in cocoa supplies.

OPEC reports January oil production fell by 890,000 barrels a day compared with December, confirming that its members have so far largely complied with an agreement to slash output. The largest contributor to the output reduction was Saudi Arabia with data showing that it trimmed almost 500,000 barrels per day of production in January.

Almost 200,000 people have evacuated from several Northern California counties after damage to a spillway at the Oroville Dam. The dam remains intact, but the emergency spillway, which guards against the overflow of the dam when water levels are high, was eroding Sunday.

The damage prompted a mandatory evacuation for cities and counties near Lake Oroville. In the worst-case scenario, an uncontrolled release from the dam could send a 30-foot wall of water downstream. But for now, the dam is holding. Workers are draining the lake. Water levels have now dropped 4 feet lower than the emergency spillway, which suffered damage during its first ever water release over the weekend.

Workers with the Department of Water Resources are scrambling to reduce the lake’s overall water level to 50 feet below the emergency spillway elevation of 901 feet. That mission has taken on added urgency as heavy rains are expected later in the week.

Allergan said it would buy Zeltiq Aesthetics for about $2.5 billion. Allergan agreed to pay $56.50 per Zeltiq share, or a premium of 14.4 percent to the company’s Friday close. Zeltiq is known for its body contouring technology, the CoolSculpting System. Allergan, the maker of Botox, has been on an acquisition spree since its $160 billion merger with Pfizer collapsed in April.

South Korean prosecutors summoned Jay Y. Lee, the third-generation heir of the Samsung conglomerate, for a fresh round of questioning, seeking answers about his role in a political corruption scandal. Special prosecutors had previously summoned Lee, the 48-year-old vice chairman of Samsung Electronics, as a bribery suspect in the scandal, as authorities attempted to zero in on payments made by Samsung to organizations linked to the impeached president’s confidante.

Shares in Toshiba moving higher today on reports that tomorrow it will reveal the extent of losses related to its takeover of a nuclear business in 2015. The Japanese firm had originally said in December that it was expecting billions of dollars in losses, which caused shares to tank and lose more than half their value.

Oracle has filed an appeal in its case against Google. In May, Oracle lost a court case against Google and Android regarding bits of code copied from Java — but now it’s arguing that the jury didn’t have all the information it needed to reach a verdict.

South Carolina’s biggest labor union vote in decades scheduled to take place Wednesday; a knock-down, drag out between Boeing and the International Association of Machinists. About 3,000 production workers will be eligible to vote in the election — one of the biggest tests of organized labor in a state with the lowest percentage of union workers nationally.

South Carolina is a right-to-work state, which means no workers can be required to join a labor union. Just 1.6 percent of South Carolina workers belong to a union. This is the second time in two years at the IAM has scheduled a vote at the Boeing campus. In 2015, the union canceled the vote days before it was scheduled to take place, citing political interference and misinformation from Boeing management.

Walt Disney hiked admission prices for US theme parks by as much as $5 for certain one-day tickets. The price increase, effective Sunday, are an annual tradition for Disney parks.

Financial Review

Mind the Gap

Sinclair Noe — January 18, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 22 = 19,804
SPX + 4 = 2271
NAS + 16 = 5555
RUT + 6 = 1358
10 Y + .06 = 2.39%
OIL – 1.09 = 51.39
GOLD – 12.70 = 1205.00

The Dow Industrials spent most of the day in slightly negative territory. The S&P 500 traded in a tight range between negative and positive. If it seems like the stock market’s crawl to nowhere over the past month has been particularly strange, that’s because it has been. It turns out the gap between the Dow’s high and low prices over the past month is a tiny 1.4 percent — the narrowest gap in data going back to 1957.

On December 13, the Dow crossed 19,900 and pushed toward 20,000 – getting within a fraction of a point, then falling to a low of 19719, or a 1.4 percent range. So, something has to give – the question is whether we will see a break out or a break down. The long-term trend is still higher, but we really must wait and let the market show us.

Consumer prices rose in December as households paid more for gasoline and rent.  Consumer Price Index rose 0.3 percent last month after gaining 0.2 percent in November. In the 12 months through December, the CPI increased 2.1 percent, the biggest year-on-year gain since June 2014.

The so-called core CPI, which strips out food and energy costs, rose 0.2 percent last month after the same increase in November. As a result, the core CPI was up 2.2 percent in the 12 months through December. Rents rose 4% compared to a year ago, in December, the Labor Department said Wednesday.

That’s the strongest yearly gain since December 2007, the month the Great Recession began. Rising inflation comes against the backdrop of a strengthening economy and tightening labor market, which raises the prospects for more, and faster interest rate hikes from the Federal Reserve.

Fed Chair Janet Yellen delivered a speech today and said the economy is close to the Fed’s objective of full employment and stable prices and she’s confident it will continue to improve. That, in turn, means “it makes sense to gradually reduce the level of monetary policy support,” although Yellen said the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months.” Yellen said, “Right now our foot is still pressing on the gas pedal.”

Meanwhile, Fed Governor Lael Brainard said fiscal policies that boost demand when the economy is already around full employment and 2 percent inflation are “relatively more likely to be accompanied by increases in interest rates.”

Meanwhile, Minneapolis Fed President Neel Kashkari is launching a research institute to generate ideas elected officials might use to help more Americans benefit from a growing economy and address issues such as racial disparity and income inequality.

Meanwhile, the Fed published its Beige Book, reports from all 12 Fed districts which is released 2 weeks before FOMC policy meetings. Manufacturers in “most” of the Federal Reserve System’s 12 regions reported increased sales.

Companies reported uncertainty surrounding the change of administrations in Washington but remained generally optimistic about growth prospects for 2017. Labor markets were reported to be tight or tightening and pricing pressure intensified.

Central bank policy might have a problem, according to the central banks’ bank. A working paper by the Bank for International Settlements found cuts in interest rates and asset purchase programs can help reduce volatility in stocks and bonds, but it also found lower rates, or lower term-premium, doesn’t appear to spark economic growth.

Industrial production rebounded in December due to the biggest jump in utilities since 1989 as temperatures cooled across the country. The Federal Reserve said industrial output rose 0.8 percent last month. The bulk of December’s increase was due to the 6.6 percent rise in the utilities index. Overall industrial production, however, fell at an annual rate of 0.6 percent in the fourth quarter.

The oil market got a stark reminder that rising oil production in the U.S. could upend efforts by major producers to bring global supply and demand for crude back in to balance. The Energy Information Administration released a report on drilling productivity—forecasting a monthly rise of 41,000 barrels a day in February oil production to 4.75 million barrels a day.

Citigroup reported a 7 percent rise in quarterly profit, beating estimates. However, adjusted revenue fell 9 percent to $17 billion due to divestitures and missed the average estimate.

Goldman Sachs Group reported net income of $2.2 billion, a nearly fourfold rise in quarterly profit.  The fifth largest U.S. bank by assets, which relies more on revenue from trading stocks and bonds than other Wall Street companies, posted a 25 percent jump in trading in the fourth quarter compared with the prior year. Goldman beat on the top and bottom lines.

HSBC became the first major bank to detail plans to move jobs out of London after Brexit, saying it will relocate staff responsible for generating around a fifth of its UK-based trading revenue to Paris after Britain leaves the EU.

The United States sued JPMorgan Chase, accusing the bank of discriminating against minority borrowers by charging them higher rates and fees on home mortgage loans between 2006 and at least 2009. Separately, the Labor Department claimed the bank “systematically discriminated” against 93 women technology workers in its investment bank by paying them lower wages since at least 2012.

The Labor Department asked an internal administrative judge to cancel all government contracts and prevent JPMorgan from entering future federal contracts if it fails to provide relief.

United Continental’s fourth quarter profit tumbled. The airline announced fourth-quarter earnings of $1.78 a share on revenue of $9.1 billion but said its profit fell 51% to $397 million because of its tax bill.

American Airlines is introducing its Basic Economy fares, because Economy fares weren’t basic enough. The new fares, also known as Sub-Cattle Class, mean you can’t store carry-ons in the overhead compartments, no assigned seating, last to board, and no changes at all, no upgrades, and no soup for you.

Meanwhile, American’s flight attendants have a problem with their new uniforms – they claim it is causing skin rashes, itchy eyes, sore throat and blisters. The airline spent $1 million on tests and still don’t know what is wrong.

Target cut its quarterly earnings forecast after sales for the holiday season came in lower than expected due to weak demand for electronics, food and other products. Sales at Target stores open at least a year declined 1.3 percent in the November-December period, while total sales fell 4.9 percent. Target follows rivals Macy’s and Kohl’s, which also cut their profit forecasts after reporting disappointing holiday sales.

J.C. Penney shares sank about 2% after announcing a new partnership with Nike to add Nike shops in 600 of its stores. I’m not sure why that would be bad news.

After the closing bell, Netflix report earnings of 15-cents per share, beating estimates by 2-cents. The company said it added 7.05 million subscribers during the quarter, well above its own expectations of 5.2 million. Its stock has risen by a dazzling 35% in the past six months and is tacking on 8% in after-hours trade.

Essilor of France said it would merge with Luxottica Group of Italy, owner of the Ray-Ban and Oakley brands in a $49 billion deal. The combined company would be known as EssilorLuxottica, and would be the largest player in the eyewear market. The new company would have more than 140,000 employees in 150 countries with 2016 revenue of $16 billion.

Navient, the nation’s largest student loan servicer was hit with a Consumer Financial Protection Bureau lawsuit over allegations that it has “systematically and illegally” failed borrowers. Navient, formerly part of Sallie Mae, created repayment obstacles for tens of thousands of student borrowers by providing incorrect payment information, processing payments incorrectly and failing to act when borrowers complained.

British bookies will bet on almost anything, including specific words or phrases Donald Trump might say in his inaugural address on Friday. Ladbrokes, for example, is offering odds of 1/50 for “Make American Great Again”, indicating there’s a good chance Trump will repeat his campaign slogan in Friday’s speech.

That means a $1 bet would only yield 2 cents in case of a win. With slightly longer odds, “Reagan” comes in at 1/5, followed by “tremendous”, “ISIS” and “China” at 1/2. Further down the list sit “fake news” at 3/1 and “totally false” at 5/1. Aside from the buzzword betting, gamblers can also try their luck with Trump’s tie color and speech length.

It’s official, according to the National Oceanic and Atmospheric Administration (NOAA) 2016 was the hottest year on record, again. The planet sizzled to its third straight record warm year in 2016, and 16 of the 17 warmest years have occurred since 2001. The average temperature across the Earth’s land and ocean surfaces in 2016 was 58.69 degrees, a whopping 1.69 degrees above average.

It was the largest margin by which an annual global temperature record has ever been broken. Record high temperatures were set in 2016 on nearly every continent. No land areas were cooler than average for the year. Eight straight months (January through August) were also each the warmest since records began 15 years after the Civil War ended.

Financial Review

December Jobs Report

Sinclair Noe — January 6, 2017

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

Subscribe: iTunes | Android | RSS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

Ms. Yellen Goes to Washington

Sinclair Noe — June 21, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 24 = 17,829
SPX + 5 = 2088
NAS + 6 = 4843
10 Y + .03 = 1.70%
OIL – .52 = 48.85
GOLD – 22.30 = 1268.70

Federal Reserve chair, Janet Yellen, presented her semiannual testimony on monetary policy today before the Senate Banking Committee. In prepared remarks, Yellen said weak economic growth in the United States could force the Federal Reserve to hold off on any imminent interest rate increases.

While the American economy’s long-term prospects remain favorable, Yellen signaled that headwinds in the form of slower employment gains in recent months, weak productivity growth and a sluggish pace of inflation have prompted the Fed to adopt a more cautious stance. Yellen said: “Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective.”

Yellen stressed that monetary policy “remains accommodative” and that “if the economy were to disappoint, a lower path of federal funds rate would be appropriate”. Yellen tried to sound an optimistic outlook for the second half of the year, however, she warned that the British vote on Thursday on whether to stay in the European Union, alongside a US hiring slowdown, posed risks to the economic outlook.

Meanwhile the Federal Reserve submitted its monetary policy report to Congress ahead of Yellen’s testimony. One of the things that stands out is the Fed seems to think the stock market is getting a bit pricey. The report says: “Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades.” Of course, the Fed is not known for its stock picking acumen. Still, stocks probably are over-valued, in large part because the Fed’s low interest rate policy has driven investors to take more risk.

The message seems to be no rate increase in July; a September rate hike is still possible but not as likely, unless we see a big improvement in economic data. That whole idea of 4 rate hikes this year? Forget about it. Two hikes? That’s what Yellen says but then she was calling for 4 hikes at the start of the year. It is hard to imagine 2 more increases when the Fed can’t even seem to do one.

And yet, the Fed seems bent on trying to raise rates, although they haven’t made a real strong case for why they want a rate hike, other than they want tools to fight a potential downturn. What they have not done is to identify which part or parts of the economy are so strong that they require monetary tightening to avoid overheating the economy.

Remain is surging in the polls. The latest Brexit referendum poll from The Telegraph shows that Remain has jumped out to a 7-point lead. The poll, conducted by ORB International, shows Remain ahead of Leave by 53% to 46%. You could look at other polls and find different results, and considering the margin of error, you could still call it a toss-up. Most likely, the fear of Brexit is likely worse than Brexit itself. Of course, we won’t know for sure until we get there.

The most likely market response to an exit is that the British pound and euro drop while the US dollar goes higher in a flight to quality; likewise, US Treasury prices move higher, pushing yields down; stocks probably take a hit. If the Remain campaign wins, then look for a bounce in the pound sterling, higher bond rates due to less uncertainty and a more hawkish stance from the Fed, and a rally in stocks. Again, we won’t know for sure until we get there. One thing that seems likely is that Friday will be a volatile session.

And even though George Soros warns that a Brexit would result in a meltdown worse than Black Wednesday, the only thing happening this week is a vote. If the Leave Campaign wins, it would still take a couple of years before the Brits actually leave the EU, during which time they will negotiate various trade deals and treaties. Leaving the EU requires an act of Parliament, which means they will craft the details of an exit. The Leave Campaign admits that markets might be volatile but they dismiss the economic consequences as fear mongering.

Germany’s Constitutional Court has rejected a legal challenge to the ECB’s Outright Monetary Transaction program, a never-used crisis tool that allowed the central bank to buy debt of financially strained countries. The case was brought by 35,000 German politicians and academics who argued that the so-called OMT scheme violates European law, ever since the ECB announced the program in 2012 and pledged to do “whatever it takes” to prevent the Eurozone from imploding. Basically the Germans confirm they don’t want to provide relief to Greece.

The European Union’s Brussels envoys agreed to extend until the end of January the energy, financial and defense sanctions on Russia over the conflict in Ukraine, but formal approval is still pending.

Chinese internet giant Tencent Holdings and its partners will pay $8.6 billion to buy an 84% stake in the maker of the popular “Clash of Clans” mobile game, in a deal that values the Finnish game maker at $10.2 billion. Tencent and its partners will purchase the stake in Supercell Oy from Japanese telecommunications giant SoftBank and the Finnish company’s current and former employees.

Brazilian telecom Oi has filed for bankruptcy protection; it is the largest ever bankruptcy in Brazil, about $19 billion. The Brazilian economy is slogging through the second year of recession. The filing is likely to have major repercussions in Brazil, since several major state-owned banks are among Oi’s top creditors.

Bids for Sports Authority store leases are due Thursday, and outlets with leases that go unsold are in danger of going dark (the company sold its inventory to a trio of liquidators in May). The New York City-based Modell’s Sporting Goods and the Britain-based Sports Direct are considering a joint bid for as many as 200 stores of the bankruptcy retailer Sports Authority.

Boston Retirement System has filed the first bondholders proposed class action against Volkswagen claiming that “false and misleading statements” led to the securities’ decline after its “emissions scandal went public.” German prosecutors have also launched a probe against former CEO Martin Winterkorn and another senior executive for allegedly not informing investors quickly enough about potential losses.

Boeing signed a tentative agreement, valued at potentially $25 billion, to sell jetliners to Iran, in what would be one of the Islamic republic’s biggest deals with a U.S. manufacturer since trade sanctions on Tehran were eased.

The Federal Aviation Administration has approved new rules for commercial drone operations. Drone flights will be approved for agriculture, research and development, educational and academic use, and powerline, pipeline and antenna inspections. They will also be approved for aiding rescue operations, bridge inspections, aerial photography and wildlife nesting area evaluations.

The rules, which will take effect in late August, will allow drones that weigh less than 55 pounds and fly up to 400 feet high and 100 miles per hour, but only within sight of an operator and not over people. Drones will not be allowed to fly at night unless they have special lighting and must stay at least 5 miles from airports. Operators must be at least 16 and have a remote pilot certificate. The new rules do not cover drones to deliver your online purchases; that would require separate action.

Samsung, the world’s top smartphone maker, plans to invest about $1.2 billion in the United States over the next four years on internet of things technologies. Samsung said it will make the investments through its Silicon Valley arms such as the Samsung Global Innovation Center in order to develop relevant technologies and strengthen cooperation with startup companies.

Evidence is mounting that doctors who receive as little as one meal from a drug company tend to prescribe more expensive, brand-name medications for common ailments than those who don’t. A study published online Monday by JAMA Internal Medicine found significant evidence that doctors who received meals tied to specific drugs prescribed a higher proportion of those products than their peers. And the more meals they received, the greater share of those drugs they tended to prescribe relative to other medications in the same category.

The 2015 Jeep Grand Cherokee that rolled backward down a driveway and killed the actor Anton Yelchin had been recalled for a gearshift issue. Fiat Chrysler in April recalled more than 1.1 million cars and SUVs worldwide because vehicles may roll away after drivers exit, an issue linked to 41 injuries, 212 crashes and 308 reports of property damage.

If you bought a ticket through Ticketmaster between late 1999 and early 2013, you could be eligible for free tickets to a number of events. An email sent to eligible Ticketmaster customers includes instructions on how to get vouchers for free tickets to selected events as well as discounts on Ticketmaster purchases. The vouchers are the result of a class-action lawsuit over ticket fees and other charges, and about 50 million people are in line to receive the vouchers.

Pacific Gas and Electric is preparing to close the Diablo Canyon Power Plant, California’s last operating nuclear facility. The plant’s two reactors would be shut down in 2024 and 2025, when their operating licenses expire. The proposal is part of an agreement with environmental and labor groups, intended to help meet California’s aggressive clean energy goals. It comes after years of public pressure to close the plant, near San Luis Obispo, because of safety concerns over its location, near several fault lines, and its use of ocean water for cooling.