FINANCIAL REVIEW

Have a Cigar

Sinclair Noe — December 17, 2014

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

DOW + 288 = 17,356
SPX + 40 = 2012
NAS + 96 = 4644
10 YR YLD + .08 = 2.15%
OIL + .06 = 55.94
GOLD – 6.10 = 1189.90
SILV + .03 = 15.85

I have been telling you for a few years now that the Fed is a vital force in the stock market. I have talked about how the stock market has advanced along with the Fed’s balance sheet. Today absolutely confirms what I’ve been telling you.

Most major indices started the day a little higher, and then jumped following the Fed’s FOMC statement and again during Chairwoman Janet Yellen’s press conference. At one point the Dow Industrial Average was up about 300 points; and then people started to digest what was being said; which is what we will do right now.

The Federal Reserve indicated it was moving closer to raising interest rates from record-low levels because the economy and job market are getting stronger. The Fed also promised to take a “patient” approach in doing so, which sounded very reassuring investors; it sounded like the Fed wouldn’t tighten credit too soon and endanger the economic recovery; they won’t surprise us or rush to tighten next year. The Fed kept the phrase “considerable time” and then they added that they will be “patient”, which really did not help to provide clarity or precision.

Yellen’s press conference covered a range of topics. She said a short period of very low unemployment will help get inflation back to target. And we may be closer to the inflation target than we think because market-based expectations for inflation can’t be entirely trusted to give clear signals. The drop in the market’s expectations for inflation could also reflect other factors, such as the flight to safety into Treasuries. The Fed puts more weight on survey-based measures derived from consumers’ expectations and economists’ forecasts.

This morning before the Fed statement we had a report on inflation. The consumer price index fell by a seasonally adjusted 0.3% last month to mark the largest drop since December 2008. Energy costs fell for the fifth straight month, led by a 6.6% decline in the price of gasoline. The cost of food rose just 0.2% in November. And for people who don’t drive or eat food they strip out volatile food and energy costs, so-called core inflation edged up 0.1% last month. The pace of inflation over the past 12 months fell to 1.3% in November and is down sharply from 2.1% just five months ago. Real hourly wages are up just 0.8% in the past 12 months, so there is really no inflationary pressure from wages.

But the Fed doesn’t seem concerned about low-flation. The plunge in oil prices is a plus for the economy and will have only a transitory impact on inflation. Their thinking is that they are on track for their inflation target of 2%, more or less, give or take. Maybe. Except it isn’t happening now. In fact, 2014 will mark the first time in at least 55 years, not one advanced economy will see consumer prices growing more than 4% this year. But the Fed isn’t particularly worried about weakness in the global economy or low oil prices or the meltdown in Russia; they are aware and monitoring but not very concerned.

The Fed will raise rates at some point, probably. Keep in mind that Ben Bernanke talked about raising rates, but he never quite got around to it. But Yellen’s Fed will be raising rates, but they will be patient. The first rate hike won’t come for at least “a couple of meetings.” And “a couple means two.” So, that sounds like a rate hike in March, but Yellen says more likely before the summertime, but that’s not a promise or commitment; more like a qualified maybe.

Raising rates too quickly could increase lowflationary pressures. And it could doom millions of workers to subpar incomes, unemployment or underemployment. Raising rates too slowly could theoretically increase inflationary pressures, but the real danger in the mind of the Fed is that low rates encourage risky financial behavior, the kind of risky behavior that led to the last couple boom-and-bust cycles. It’s not just the departure date that matters, Yellen says. The pace of subsequent rate hikes is what is important. And that will depend on the data.

And after all the tap dancing was over we were back where we started, which is the idea that the Fed will start to raise rates around June as long as the economy continues to improve pretty much as expected and nothing collapses unexpectedly. More or less.

Now, since the press conference I’ve been reading about Yellen’s performance and it is easy proclaim the Fed is wishy washy or uncertain or guessing. But if you have been following the Fed for a long time, and I have, this is just standard operating procedure. When Yellen says a hike could happen in a “couple of meetings” it is a trial balloon. When they add language about being “patient” they are testing the markets while trying to be reassuring. One thing the Fed has learned is not to make sudden movements; it did not work well in 2008; it did not work well in 1987. And it does not look like there will be any sudden movements in the foreseeable future.

Maybe.

Treasuries declined after the Fed statement. The stock market moved higher. Enjoy. Have a cigar. Not some beat up old stogie but a real cigar, a Cuban. Actually, you can’t do that today, but maybe soon. President Obama and Cuban President Raul Castro announced today they would begin normalizing relations between the two nations, as art of a deal brokered by Pope Francis. The pope played a key role in the talks, sending a letter to Castro and Obama urging them to resolve the dispute over Gross and pursue closer relations. The request from the Pope was rare and came shortly after a meeting Obama had with Francis at the Vatican earlier this year.

The action means not simply the opening of a US embassy in Havana but the lifting of some of the restrictions that have limited travel and commerce and kept aficionados from legally bringing Cuban cigars to US soil.

The announcement was wrapped into the release of American aid worker Alan Gross and the exchange of a US spy for three Cuban intelligence agents. Obama and Castro made simultaneous announcements in Washington and Havana to outline the rapprochement. The US will issue regulations within weeks and will open an embassy as soon as logistically possible. Obama said he would engage Congress “in an honest and serious debate” about changing legislation to fully end the US embargo of Cuba. Some legislators have already vowed to block any change in legislation.

If it goes through, US companies will be permitted to export to Cuba telecommunications equipment, agricultural commodities, construction supplies and materials for small businesses. US financial institutions will be allowed to open accounts with Cuban banks. Exports will mainly be permitted to Cuba’s emerging private sector, including residential goods and equipment for small businesses and agriculture; and there will be some travel permitted for US citizens, but not for tourism. Limits on Cuban-Americans’ remittances to relatives in their homeland will jump to $8,000 from $2,000 annually.

Why, after more than 50 years, did a breakthrough in Cuban-American relations happen now? There are many reasons, but one factor is oil. Cuba has been getting about 100,000 barrels of oil per day from Venezuela in exchange for medical personnel. The collapse in oil prices now leaves Venezuela’s economy in terrible shape with the world’s fastest inflation and the country’s bonds on the verge of default. The country faces a 60 percent chance of defaulting on its foreign debt in the second half of next year if oil prices do not recover. Cuba recognized that it was very risky to be overly dependent on Venezuela. Cuba was well aware of the risks of dependency after the economy collapsed in the early 1990s when the Soviet Union collapsed.

Cuba and Venezuela are not the only countries facing problems from low oil prices. Russia of course – we talked about that yesterday. Tomorrow Putin will talk about it. The Russian president will face questions from the media at his annual press conference. Whether a few words from Putin will restore the status of Russian stocks and the ruble remains to be seen.

On December 8th Moody’s gave 6 Middle Eastern countries a thumbs up based on the assumption that oil prices will average $80 to $85 a barrel in 2015. That assumption now seems suspect. Yesterday, oil prices briefly dipped down around $53 a barrel; today crude for January delivery was down as low as $54.21. While Gulf states can make some spending cuts, they’ll need to do more to cover likely shortfalls. The states with bigger sovereign wealth funds will tap them as needed. The ones with weaker positions will borrow. Many of these oil producing countries run sovereign wealth funds which are largely funded by oil. They are pretty certain not to be making new investments and are likely to be making some sales. Not only will their sales have some impact at the margin, but their absence as deep pocket opportunists could be more important than one might imagine. Recall that in the early stages of the financial crisis, sovereign wealth funds stepped up to provide capital to quite a few wobbly banks. There will be fewer to act as rescuers this time around. And sovereign wealth funds are also big investors in private equity.

Greece moved a step closer to early elections after Prime Minister Antonis Samaras failed to gather enough support for his nominee in a parliamentary vote for a new head of state. Samaras got 160 of the 300 votes but needed a two-thirds majority. There will be another vote December 23rd, and if that fails, a third vote on December 29 with a 180 vote threshold, and if that fails the parliament will be dissolved and early elections will be called.

FINANCIAL REVIEW

Divergence

Sinclair Noe — December 9, 2014

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

DOW – 51 = 17,801
SPX – 0.49 = 2059
NAS + 25 = 4766
10 YR YLD – .04 = 2.22%
OIL + .80 = 63.85
GOLD + 27.80 = 1233.00
SILV + .73 = 17.21

We’ll start with economic news.

The Labor Department reports there were 4.83 million job openings in October, up from 4.69 million job openings in September. The number of available jobs means workers are more likely to leave their current jobs in search of a better deal. The quit rate, the share of total employees opting to quit their jobs was 1.9% in October, roughly the same level it was just before 2007. With 9 million unemployed people in October, there were about 1.9 potential job seekers per opening. In October 2013, there were 11.14 million unemployed people or about 2.8 potential seekers per opening.

The Commerce Department reports wholesale inventories increased 0.4%, despite an energy price-related decline in the value of petroleum stocks. September’s wholesale stocks were revised up to show a 0.4% gain. This might indicate that third quarter GDP could be revised slightly higher.

The National Federation of Independent Business says small-business sentiment reached a seven-year high in November. The index rose 2 points to 98.1, the highest level since Feb. 2007, as expectations for business conditions in six months surged and expectations for real sales volumes also gained. While stocks have soared and GDP and employment figures have returned to pre-recession highs, small business has lagged in the recovery. But that’s changing. Small businesses added more than 100,000 jobs to their payrolls last month, accounting for almost half of the total gains in the private sector.

So the economic news in the US was pretty good today. No reason for a market selloff, but that’s how the morning started, with a 200 point decline on the Dow. Crude oil prices bounced a little higher but nothing outside the norm. Sure the Federal Reserve could put the brakes on a Santa Claus rally; the Fed FOMC meets next week, and they might make minor changes to their language to indicate a willingness to raise rates next year, or Fed policymakers might drop their assurance that short-term interest rates will stay near zero for a “considerable time” and replace it by saying they’ll be patient before moving rates. What’s the difference between “considerable time” and “patience”? Who knows?

And don’t forget that politicians in Washington could always throw a monkey wrench in the works. They’ve done it before. Congressional negotiators were nearing a deal on massive spending legislation that would avert a government shutdown and bring the 113th Congress to a close, but they can’t resist the temptation to add on bits of legislation not directly related to the spending bill. A vote is expected by Thursday. And even if the bill makes it out of the House, the Senate could take up and pass the spending bill shortly after it leaves the House, but only if all senators agree. And this might shock you but it doesn’t look like all senators are in agreement on the bill; which could mean a push for further debate, forcing a continuing resolution and pushing the matter into next week when most of the politicians are planning a trip home for the holidays.

Meanwhile, the rest of the world is having a hard slog. In China the day started with a hard selloff in equities as the country moves to rein in credit as part of a broader set of financial reforms. China’s securities clearinghouse issued temporary restrictions on using lower-rated or riskier corporate bonds as collateral for short term borrowing. Chinese stocks had been surging for months. The Shanghai Composite Index is up almost 50 percent since July. The rally has been largely fueled by individual retail investors, who have been piling into the market and increasingly resorting to margin financing, or short-term borrowing, to purchase shares. While welcoming signs of life in the country’s stock markets, Chinese officials have grown wary in recent weeks of the rising levels of debt that have fueled the rally, and they have cautioned investors against speculation. If the stock market’s credit line is not yet maxed out, the question for investors is whether Beijing is likely to pull the plug and kill the party. The Shanghai Composite index dropped 5.4% today. The Shenzen Exchange dropped 4.2%. That doesn’t mean the bullish trend is over, but it was a gut check.

Then international trading moved to Europe and the Athens stock market crashed, down 11.2% on the day. Greek Prime Minister Antonis Samaras announced that Greece’s presidential elections will be held on December 17, two months earlier than scheduled. And there are no candidates yet. The opposition party Syriza, best known for its opposition to the Eurozone’s bailout of Greece, said the government doesn’t have the votes needed to elect a president. If Greece does not elect a president on December 17, snap parliamentary elections will be called.

Also, a report from The Financial Times said that Greece and finance ministers in the Eurozone agreed to extend Greece’s bailout by two months after the government failed to adopt the economic reforms required to get the last of their rescue funds. And so while the European Central Bank deals with flagging economic growth and rapidly declining inflation, the Eurozone might have to respond to political unrest in Greece, too.

What exactly is the Syriza political party? Well, first, it isn’t a political party, it is a coalition; so they don’t exactly have a party platform. But generally speaking they are opposed to austerity. They are essentially good with sovereign debt default, or at least a haircut for bondholders; they want the ECB to directly purchase Greek bonds; they want to write off the bank debt of people who can’t afford to repay; they want to tax the rich; and in a country with 25% unemployment and 50% youth unemployment, they want the EU to fund a jobs program.

Now, just a quick refresher on Greece, back in 2010 they faced insolvency; the Euro Union and the International Monetary Fund stepped in and extended non-performing loans and pretended there was no problem. In 2012, they continued the “extend and pretend” strategy while extracting a pound of flesh in the form of austerity budgeting, essentially transferring the hundreds of billions in losses from the Greek bankers to the Greek taxpayers. Eventually, the vulture funds moved into Greece to pick over the remains in the Greek bond market. But now, Greek voters may be saying that they won’t play the game anymore and the Euro-crisis is back on the front burner.

So, as we head into 2015, we have a US economy showing signs of solid recovery with a consistently improving labor market; we have China trying to deal with market instability as they try to stabilize at lower growth rates than in recent years; and the Eurozone dealing with economic stagnation which has fueled social and now political disenchantment which bodes poorly for future investment prospects. Where this all ends up in 2015 is hard to guess, but it would be easy to see some extreme volatility if even one of these economies jumps the tracks.

Meanwhile, the Supreme Court is back in session and they are handing down rulings. Today, the Supremes ruled that warehouse workers who fill orders for retail giant Amazon don’t have to be paid for time spent waiting to pass through security checks at the end of their shifts. The unanimous decision is a victory for the growing number of retailers and other companies that routinely screen workers to prevent employee theft. The justices said federal law does not require companies to pay employees for the extra time because it is unrelated to their primary job duties. Writing for the court, Justice Clarence Thomas said the screenings are not the “principal activity” which the workers are employed to perform.

And that brings us to today’s edition of “Banks Behaving Badly”. Federal prosecutors in Manhattan have sued Deutsche Bank, claiming that the bank owes the United States government about $190 million in unpaid taxes, penalties and interest. Prosecutors contend the tax liability stems from a transaction that Deutsche Bank undertook 14 years ago. The bank had acquired a company that held shares of Bristol Myers Squibb, and when the bank sold those shares, they made a profit of about $100 million. Prosecutors say they did not pay tax on the gain. Deutsche Bank claims they made a deal with the IRS in 2009 and paid to settle. The bank did not release the payment to the IRS, but insiders are saying it was $6 million. Prosecutors say the bank used shell companies to artificially inflate the cost basis of the stock so it did not owe any capital gains on the appreciation.

Citigroup will record $2.7 billion in litigation expenses and another $800 million in repositioning charges in the fourth quarter, leaving the bank with a small profit for the quarter. The $800 million in repositioning charges is an interesting way to say they will be firing more workers and close branches. The legal costs stemmed from government investigations into possible manipulation of foreign exchange markets, rigging Libor interest rates, and violating money laundering rules. That’s right, Citi is a repeat offender.

Citigroup adjusted its third-quarter earnings lower on Oct. 30, two weeks after the numbers were initially reported. The company added a $600 million legal charge that it attributed to “rapidly evolving regulatory inquiries and investigations.” Last month the bank agreed to pay $1 billion to settle a probe into currency manipulation with three regulators in the US and the UK. Michael Corbat was named CEO of Citi 26 months ago. Under Corbat’s tenure, the bank has reported earnings of $21.8 billion over 8 quarters. In the past 26 months, Citigroup has had legal expenses and repositioning charges totaling $13.3 billion, or more than half the banks’ earnings.

Incredibly Orwellian Record High

Financial Review with Sinclair Noe — September 17, 2014

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

 

DOW + 24 = 17,156
SPX + 2 = 2001
NAS + 9 = 4562
10 YR YLD + .01 = 2.60%
OIL – .90 = 93.98
GOLD – 11.70 = 1224.20
SILV – .16 = 18.62

The Dow Jones Industrial Average closed at a record high of 17,156.85; the first record high for the Dow since July. The Dow set an all-time intraday high of 17,221.11. It was the sixteenth record close for the blue chip index in 2014. The stock market action today was focused on the Federal Reserve. I suppose we could say the same thing about the past 6 years.

Today, the Federal Reserve wrapped up its FOMC meeting. The FOMC stands for Federal Open Market Committee, which sounds incredibly Orwellian. The meeting was a rousing success; we know this because the media coverage can’t quite figure out whether the Fed will raise interest rates sooner or later, or whether the economy is weaker or stronger.

While the much analyzed phrase “considerable time” remained in the FOMC statement, the newly announced scheme for interest rate normalization shows that higher rates are in the cards. The FOMC also said labor market conditions improved but a significant amount of slack remains.

The Fed said it would end the bond-buying program known as quantitative easing in October. The Fed will purchase $15 billion of mortgage and Treasury bonds in October and then make no purchases in November. The Fed shared some details of its exit strategy, which clearly indicate they are preparing to raise rates at some point in the future, but Yellen stressed in her news conference that the exit plan “is in no way intended to signal a change in the stance of monetary policy.”

The Fed updated their economic growth forecasts, revising lower; they now say they expected the economy to grow between 2% and 2.2% this year, between 2.6% and 3% in 2015, between 2.6% and 2.9% in 2016 and between 2.3% and 2.5% in 2017. Most Fed officials continue to expect the central bank to first increase interest rates at some time next year. In the forecast, 14 of 17 officials said they continue to believe the Fed’s first increase in near zero short-term rates will occur in 2015. One official believes the Fed should boost rates this year, while two think the central bank can hold off until 2016.

Fed officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June. And that sounds like fairly aggressive tightening, but they say the rate guidance is “highly conditional” and remains linked to conditions in the economy. So, you combine aggressive tightening with downward revisions to GDP for the next couple of years, and where exactly does that leave you?

Treasuries fell and the dollar gained. The dollar has been on a tear lately.

Consumer prices fell in August for the first time in 16 months as gasoline prices fell. The consumer price index dropped 0.2% after rising 0.1% in June. In the past 12 months, prices have risen 1.7%. Excluding volatile food and energy costs, price were unchanged, the first time so-called core prices have not increased since October 2010. Core prices are up 1.7% the past year.

In August, energy costs fell by 2.6% to mark the largest decline in 17 months. Lower gasoline prices led the way. The price at the pump has been retreating since midsummer and might fall further in the months ahead. Natural gas also decreased for the fourth month in a row. Food costs rose 0.2%. Beef prices jumped 4.2% to mark the biggest increase in almost 11 years. Beef prices have been surging because the US cattle herd is at its thinnest level in decades. It could take several years to build back up. The cost of housing rose again while alcoholic beverages and new cars also increased in price. Airline tickets, clothing, household furnishings and used vehicles declined. And medical costs were flat. Real wages are only up 0.4% in the past 12 months, but lower inflation gives households a short-term boost by stretching how far their paychecks will go. Real or inflation-adjusted hourly wages jumped 0.4% last month, the biggest gain since late 2012; but that’s because inflation is low, not because wages are higher.

The NAHB/Wells Fargo Housing Market index rose to 59 in September from 55 in August; the index measures sentiment of homebuilders. It was the fourth straight monthly gain following a lengthy slump in builder sentiment through most of the first half of the year.

The Commerce Department said the current account gap, which measures the flow of goods, services and investments into and out of the country, fell to $98 billion in the second quarter from a revised $102 billion shortfall in the first quarter. The current account deficit has been gradually shrinking, hitting a 14-year low in the fourth quarter of 2013, helped in part by declining petroleum imports as the nation reduces its dependency on foreign oil.

The International Monetary Fund says the global economy faces a growing risk from big financial market bets that could quickly unravel if investors get spooked by geopolitical tensions or a shift in US interest rate policy. The IMF also warned that financial market indicators suggested investor bets funded with borrowed money looked “excessive”.

I don’t think the IMF is just looking at margin debt for Mom and Pop investors. Sales of subprime mortgage bonds have withered since the financial crisis, but fresh concerns are arising as issuance of some other types of securitizations surge. Sales of bonds backed by loans used to finance car purchases undertaken by the least creditworthy borrowers have reached pre-crisis levels in the US, prompting a Department of Justice investigation. While losses on subprime auto asset-backed securities (ABS) remained low during the crisis, there are concerns that new specialized lending companies are making riskier loans which are then being bundled into the bonds.

Also, according to Dealogic data, US sales of commercial mortgage-backed securities, or CMBS, have also staged a recovery with $102 billion worth of the deals sold last year, the highest amount since the $231 billion issued in 2007. At the same time, some market participants have been warning that the quality of the loans that underpin the bonds – typically secured by shopping malls, office buildings and other commercial properties – has been slipping.

And even when the investor bets aren’t funded with “borrowed” money, the bets can look a bit excessive. Bill Gross, the co-founder of Pacific Investment Management Co., sold most of the $48 billion of US Treasuries held by his $221 billion Pimco Total Return Fund in the second quarter, replacing them with about $45 billion of futures. The contracts require small up-front payments, freeing up money for Gross to invest in higher-yielding securities including Brazilian, Spanish and Italian debt. They are taking the cash and buying all these peripheral bonds that have a lot of spread on them relative to Treasuries; this is apparently the new trend that is occurring across the money-management industry.

And the Wall Street debt underwriters are now pitching the idea of the “mega-deal”. With investors clamoring for higher-yielding assets and companies on the biggest acquisition spree since 2007, bankers are talking up the ability of credit markets to fund really, really big acquisitions, even those looking for $100 billion or more of financing. That’s stoking speculation debt investors stand ready to fund potential takeovers such as a purchase by Anheuser-Busch InBev of rival beermaker SABMiller. And this even as investors brace for the 30-year rally in bonds to come to an end. The bankers are flush from $18 trillion in corporate bond sales globally the past six years, and I guess they need to meet their quota this year.

Investors have poured about $49 billion this year into mutual funds that buy taxable bonds after pulling $20 billion in 2013. The added cash has helped shrink the extra yield that investment-grade debt worldwide pays above government securities by 15 basis putting the spread near a seven-year low. Hmmm, what happened 7 years ago?

Meanwhile, the IMF is concerned the whole thing could unravel because of geopolitical tensions. Today, Congress gave Obama the go-ahead to arm and train Syrian rebels. The US House approved the president’s plan to send military trainers and arms to Saudi Arabia to help Syrian rebels fight the Islamic State. Republican Congressional leaders backed the legislation, despite their concerns that the administration’s response to ISIS is inadequate.

The biggest trick might be finding the right rebels to arm and train. Apparently we’re looking for moderates, in a land not known for moderation. I’m not sure having the Saudis serve as the HR department will work. In more unrelated news, the Saudis are cutting production to sustain prices above $100 a barrel; after all, the Saudis can’t be expected to do all this without compensation. In addition to the higher prices on a barrel of oil, the administration wants to put some 5,000 of these moderate, non-jihadist Free Syrian Army personnel through a training program in Saudi Arabia at a cost of about $500 million. My back of envelope calculation puts that training at about $100,000 for each moderate rebel, which brings a new Orwellian understanding of the Free Syrian Army. I just wonder if this is the best and highest use we could find for $500 million.

Meanwhile, the chairman of the Joint Chiefs of Staff, US Army general Martin Dempsey, told a Senate committee that if this approach doesn’t do the trick, he may recommend that the US send ground forces. A White House spokesman threw water on the idea, saying the US “will not deploy ground troops in a combat role into Iraq or Syria.” (Nobody had the heart to tell him about the 1600 troops already deployed to Iraq.)

Wednesday, April 09, 2014 - Feeding Time at the ZIRP Trough

Financial Review with Sinclair Noe

DOW + 181 = 16,437
SPX + 20 = 1872
NAS + 70 = 4183
10 YR YLD un = 2.68%
OIL + 1.04 = 103.60
GOLD + 4.30 = 1313.30
SILV  - .22 = 19.95

In an otherwise light week for economic news, the big report is today’s release of the FOMC minutes from last month’s meeting. No surprises. You may recall that after the last meeting, Chairwoman Janet Yellen talked about the possibility of raising the fed funds target rate after a “considerable time”; when pressed she indicated a “considerable time” was about six months after the Fed ends it asset purchases under Quantitative Easing. That would mean late spring or summer of 2015.

Fed policymakers were unanimous in wanting to ditch the thresholds they had been using to telegraph a policy tightening; no hard and fast target of 6.5% unemployment or 2% inflation. The minutes indicate the Fed would like to see more improvement in the economy; the emphasis on quality rather than quantity. In other words, the Fed remains dovish, and they will taper but they will also keep rates low for a long time. And also, those “dots” are over-rated.

The dots are actually charts suggesting the fed funds rate would top 2% by the end of 2016. In the minutes published today, several policy-makers claim the charts overstated the shift in projections, which would suggest the Fed is not ready to tighten policy. A couple of the voting members wanted to commit to keeping rates low if inflation remains persistently below the Fed's 2-percent goal.

Wall Street loves feeding at the Zero Interest Rate Policy trough. Stocks were up. Despite the three-day selloff, the S&P 500 index managed to hold above its 50-day moving average around 1,840, a key support level. The Nasdaq Composite is in positive territory year to date.

In other economic news, Commerce Department data showed that wholesale inventories rose at a slower pace of 0.5% in February, in line with expectations, after a revised gain of 0.8% in January, which could support views that restocking did not help the economy in the first quarter. You recall that companies were overstocked on inventory in the fourth quarter; we haven’t worked our way through those full shelves, and that likely means that the economy is slogging along in the first quarter.

The IMF, the International Monetary Fund says the global economy is strengthening but emerging markets still face challenges from outflows of capital and the big threat for the global economy is super-low inflation, or low-flation.

The IMF expects the global economy to grow 3.6% this year and 3.9% in 2015, up from 3% last year. Those figures are just one-tenth of a percentage point below the IMF's previous forecasts in January. And the forecasts will likely be revised lower as more months pass; that seems to be the tendency. The IMF made no changes to its forecasts for US growth, which it estimates at 2.8% this year and 3% in 2015. Overall, the recovery seems to be broad, fairly strong and more stable.

The IMF and the World Bank will hold their spring meetings in Washington this weekend. Finance ministers and central bankers from the Group of 20 leading economies will meet Thursday. The IMF is expected to reiterate the message that central banks should be more aggressive.

Inflation in the 18 countries that use the euro currency fell to an annual rate of 0.5% last month. Though consumers can enjoy flat prices, ultra-low inflation can stifle growth. People and companies postpone purchases knowing that prices will be little changed months later. Debts become harder to pay off. That's a particularly severe problem in Europe, where many governments remain squeezed by debts. Super-low inflation also raises the risk of deflation; a decline in wages and prices that slams the brakes on economic growth.

Another topic at the meetings is expected to be inequality. The IMF’s new interest in income distribution coincides with other, seemingly unorthodox positions coming from the fund and some of its experts since the financial crisis of 2008. It has come to support some controls on cross-border capital flows. Its research has argued in favor of fiscal stimulus, pointing out its positive impacts on economic growth.

In the latest edition of the World Economic Outlook, the fund makes the case that inflation in the United States and other developed nations should be higher to help pull the world economy out of its morass. IMF Director Christine Lagarde now argues economic policy cannot be only about promoting low inflation and robust growth. Healthy, stable economies also depend on a reasonably equitable distribution of the rewards. The study concludes a flatter distribution of income contributes more to sustainable economic growth than the quality of a country’s political institutions, its foreign debt and openness to trade, its foreign investment and whether its exchange rate is competitive.

Deep inequality breeds resentment and political instability, discouraging investment. It can lead to political polarization and gridlock, as it cleaves the political system between the interests of the haves and the have-nots. And it can make it more difficult for governments to deal with brewing crises and economic imbalances. An analysis published last year by economists in the IMF’s fiscal affairs department concluded that efforts to curb budget deficits increase inequality, especially if they take the form of spending cuts. It suggested that targeted government spending and progressive taxes could offset some of these effects.

Fears that High Frequency Traders have been rigging the stock market went mainstream last week when 60 minutes ran a story on Michael Lewis’s new book “Flash Boys”. Then the FBI announced it would investigate; my guess is that this will slowly fade away in the light of the Holder Doctrine, which basically says that the Department of Justice and other supposed law enforcement types only arrest petty criminals, and if you have enough money and provide jobs, you are entitled to a “get out of jail” card.

Anyway, the High Frequency Traders are nothing new, they've been around for a long time. The major exchanges lease high speed access. Perhaps less well known are the dark pools. So much trading is now happening away from exchanges that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is. And this problem could cost investors far more money than any shenanigans related to high frequency trading.

When the average investor, or even a big portfolio manager, tries to buy or sell shares now, the trade is often matched up with another order by a dealer in a so-called "dark pool," or another alternative to exchanges. Those whose trade never makes it to an exchange can benefit as the broker avoids paying an exchange trading fee, taking cost out of the process. Investors with large orders can also more easily disguise what they are doing, reducing the danger that others will hear what they are doing and take advantage of them. 

The rise of "off-exchange trading" is terrible for the broader market because it reduces price transparency. The problem is these venues price their transactions off of the published prices on the exchanges; and if those prices lack integrity then "dark pool" pricing will itself be skewed. Around 40% of all US stock trades, including almost all orders from "mom and pop" investors, now happen "off exchange," up from around 16% six years ago.

A brokerage has several ways to fill customers' orders. It can match buy and sell orders from its own customers, known as "internalizing," or sell its orders to another broker that can do the same. Brokers also send trades to "dark pools," which are similar to exchanges, except the fees are lower and they are anonymous, with orders going unreported until after they have been executed. And finally, they can send trades to exchanges, where they will have to pay higher fees. A major concern with off-exchange trading is that brokers who internalize trades and offer dark pools do not provide any data to the market before the trade is executed.

On a stock exchange, when an order is sent in, the price of the stock is adjusted and everyone with a data feed sees it. Dark pools only report data after a trade has occurred. At that stage, information about the trade has little influence on the price. In other words, dark pool trading is priceless, and you actually need prices to have a marketplace; price discovery is an essential element; cut that out of the equation, and you can see some serious manipulation and distortion.

And finally, in today’s edition of “Banks Behaving Badly”, Bank of America has agreed to pay nearly $800 million in fines and restitution to settle allegations of deceptive marketing and unfair billing involving credit card products. The Consumer Financial Protection Bureau and Office of the Comptroller of the Currency said the bank had misled roughly 1.4 million people about the cost of two credit card payment protection products, which allow consumers to suspend minimum card payments if they lose their job or suffer a severe illness, and the amount of time they would receive benefits from them.

The bank also billed customers for identity protection products before they received them and did not provide some fraud-monitoring services consumers thought they were buying. About 1.9 million people were unfairly billed. The fines work out to about $5 million the rest in restitution. The bank says it has already issued refund payments to most customers who were affected. Bank of America neither admitted nor denied wrongdoing.