Financial Review

A Long Week

Sinclair Noe — August 11, 2017

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

DOW + 14 = 21,858
SPX + 3 = 2441
NAS + 39 = 6256
RUT + 1 = 1374
10 Y – .02 = 2.19%
OIL + .16 = 48.75
GOLD + 2.90 = 1289.70
BITCOIN + 0.39% = 3693.86 USD
ETHEREUM + 3.87% = 312.44

The tweets continued today.

Trump says the US military is “locked and loaded”. In Guam, they are telling the schoolkids to duck and cover. China published an editorial in a state-run newspaper, basically saying that the first one to throw a punch loses. If North Korea launches a missile first, threatening U.S. territories and triggering retaliation, China will remain neutral.

A pre-emptive strike against Pyongyang, however, would provoke a Chinese response and they would counter reunification of the peninsula. Russian Foreign Minister Sergei Lavrov said “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top. We still hope and believe that common sense will prevail.”

Wall Street is betting nothing will happen, which is a smart bet in an otherwise insane news cycle. Fire and Fury. Locked and Loaded. Duck and cover. Dumb and Dumber… It’s been a long week.

And, if nobody does something incredibly stupid, we get back to business as usual, sort of. 200 S&P 500 components, or 40 percent, are in correction territory. A stock or an asset class enters a correction when it falls at least 10 percent from its 52-week high. Among the stocks in a correction were e-commerce giant Amazon.com, Goldman Sachs, Exxon Mobil, Starbucks and Netflix.

After a calm and pleasant summer, we can probably expect more volatility. August is when traders take vacation and drama hits the markets. September and October are typically volatile months; and typically trade lower. The past may be prologue or irrelevant, which is what makes stock markets so interesting.

Traders are digesting second quarter earnings and trying to decide if recent record highs are justified. In Washington, the politicians will pull up their socks and get to work on the debt ceiling, plus tax reform at some point, and maybe eventually infrastructure, and there is still work to do on healthcare – repeal has failed, so now they need to fix what they have.

Meanwhile the Fed wants to normalize and tighten, which sends shivers down the jellied spines of Wall Street traders. So, there is still plenty of stuff that could blow up. For individual investors, the key is now and will remain – discipline.

You wouldn’t know it from today, but it’s been just about the worst week all year. For the week, the S&P fell 1.4 percent and the Dow lost 1.1 percent – their largest weekly drops since the week ending March 24 – the Nasdaq was off 1.5 percent and the Russell 2000 index lost 2.7% for the week.

European stocks fell and U.S. junk bonds had the biggest drop since March. Nearly $1 trillion has been wiped out from global equity markets since Trump’s vow on Tuesday to unleash “fire and fury” on North Korea if it threatens the United States.

The VIX briefly topped 16.

Consumer prices remained soft for the fifth straight month in July. The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.2% in July while energy prices slipped 0.1%.

The core CPI, which excludes volatile food and energy costs, also rose 0.1%. Consumer prices have risen an unadjusted 1.7% over the past 12 months, up slightly from 1.6% in June.

But on a core basis, which is watched more closely by Fed officials, consumer prices remained at a 1.7% annual rate, the same rate as in May and June. The core rate was held down by a sharp decline in new vehicle prices, which fell 0.5%, the biggest decline since August 2009.

The cost of cell phones continued to decline, falling 0.3%. The index of used cars fell 0.5%, its seventh consecutive decline. The price of a car may be lower but the rent is still too damn high.

The cost of rent was up 3.8% compared to a year ago, according to the Labor Department. That’s down a tick from the 3.9% annual pace it notched in June. And it’s not as high as the 4.3% annual pace it averaged in the year before the Great Recession started.

It’s not just renters who are feeling the squeeze. The inflation category called “Owner’s equivalent rent,” which tries to quantify how much homeowners would pay for their housing if they rented it, was 3.2% higher in July than a year ago. Still, it’s growing a lot faster than wages.

Muted inflation in the July consumer price data is not something the Federal Reserve is going to be happy to see. But the central bank will have four more reports to review before it needs to decide late year whether to raise short-term interest rates again, as had been previously projected.

Shares of Snap ended down 14 percent after hitting another record low following a miss on revenue and daily active users. At least 12 brokerages cut their price targets on the stock. Valuation is disappearing faster than its messages.

Blue Apron’s stock “performance” makes one wonder why the company ever wanted to go public and why anyone agreed to underwrite it. The recipe-in-a-box startup failed to show adequate signs of life in its first quarter and even reported a very nettlesome operations problem.

Shares of APRN have fallen as far as 20% since the results came out yesterday morning and now even Blue Apron’s underwriters are admitting that they might have missed something during the IPO journey. Goldman Sachs led the underwriting and they just downgraded the stock. Maybe they can their free Blue Apron subscription to order crow.

Starbucks is now facing some serious competition. From other Starbucks. The old joke about a Starbucks on every corner may be coming true. The coffee chain’s relentless pursuit of ubiquity is becoming one of its own foils, according to analysts at BMO Capital Markets, saying the company has saturated the American market so much that it’s now losing sales competing with itself.

Market watchers have an all-too appropriate term for this phenomenon: cannibalization. On average, for every one Starbucks location in the US, there are now about four others within a one-mile radius to compete against. Over all in 2017, more than 62% of Starbucks now compete with at least one other Starbucks coffeeshop.

More than 100 Applebee’s locations and around 20 IHOPs will shutter this year. DineEquity, the parent company of both brands, is focusing on shuttering under-performing locations. An earnings report released yesterday shows sales fell by more than six percent at Applebee’s and nearly three percent at IHOP in the last quarter; meanwhile, DineEquity’s stock has lost almost half its value this year.

Diners these days tend to go either high, spending money on special, fine-dining experiences, or low, eating at cheaper fast-casual chains, meaning places in the middle are feeling the squeeze. These kinds of chains tend to suffer from bloated menus that try to do everything at once, versus the currently-booming specialty fast-casual spots that focus on doing one or two things and doing them well.

J.C. Penney finished down 16.6 percent after hitting a record low following the retailer’s bigger-than-expected quarterly loss. Its 1.3% drop in same-store sales was slightly worse than anticipated, and it lost $62 million in the quarter. The company has been trying to refocus its business more on home appliances and services and less on apparel, but the efforts evidently haven’t paid off.

Department stores almost across the board are in a period of turmoil as they battle the rise of e-commerce, especially Amazon. and in any case, are contending with shoppers who are heading out to malls and stores less often—and usually looking for deep discounts whenever they do. Many chains have announced widespread store closures, and even more may be necessary to get their businesses to the right size for the current era.

President Trump just got a nasty review of his immigration plans from the alma mater he loves to tout. A new study from the University of Pennsylvania’s Wharton business school found that the proposals he backs would dent growth and cost over 1 million jobs over 10 years.

The president has strongly endorsed a bill introduced by US Sens. Tom Cotton and David Perdue called the Raise Act, which adds to the president’s campaign promise to focus on illegal immigration by going after legal immigrants as well. Its proponents say they want to welcome only “good” immigrants — those with a lot of money and high levels of education.

But the Wharton report finds that the legislation, which is supposedly aimed at boosting economic growth and creating more American jobs, would actually have the opposite effect. According to the Wharton model, the Raise Act would reduce GDP by 0.7% and reduce jobs by 1.3 million, over the next 10 years. The estimates suggest nearly 100,000 jobs would be lost in the first year alone.

Vegetable prices may be going up soon, as a shortage of migrant workers is resulting in lost crops in California. Farmers say they’re having trouble hiring enough people to work during harvest season, causing some crops to rot before they can be picked. Already, the situation has triggered losses of more than $13 million in two California counties alone.

It’s unclear exactly how widespread the labor shortage is for farmers throughout the country, which would have a bigger impact on prices consumers pay. Ultimately, drought and flooding have a more significant impact on farms.

Low oil prices could also offset any impact of the worker shortage. But for farmers, who have seen net farm income fall 50% since 2013, any lost income could be potentially devastating.

Financial Review

Fed Day

Sinclair Noe — June 14, 2017

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

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DOW + 46 = 21,374
SPX – 2 = 2437
NAS – 25 = 6194
RUT – 8 = 1417
10 Y – .07 = 2.14%
OIL – 1.78 = 44.68
GOLD – 6.00 = 1261.10
BITCOIN + 1.88% = 2541.31 USD
ETHEREUM – 13.12% = 345.44

Another record high close for the Dow Industrials. Stocks moved lower today after the Federal Reserve announced it was raising interest rates. The move was completely expected, so maybe the markets were reacting to weak retail sales data instead. Stocks recovered from session lows, with the Dow turning positive in the final hour of trade.

The Federal Reserve raised its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent. This was the second rate hike in the past 3 months. The hike was widely expected.

In its statement following a two-day meeting, the Fed’s policy-setting committee indicated the economy had been expanding moderately, the labor market continued to strengthen and a recent softening in inflation was transitory. This was in-line with expectations for one more rate hike from the Fed for 2017, possibly in September or December.

The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015. The Fed’s decision to raise rates was approved 8-1, with Neel Kashkari, head of the Fed’s Minneapolis regional bank, dissenting in favor of holding rates unchanged. Kashkari sees a very different economy from his colleagues, in terms of both inflation and the labor market.

While Yellen and the members who voted for hikes did so, in part, because they were worried about rising inflation, Kashkari doesn’t share their concern. If Kashkari is right, it means the Fed may be leaving lots of jobs and growth on the table.

The Fed also gave a first clear outline on its plan to reduce its $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2008 financial crisis and recession. The Fed will allow its bond holdings to mature and fall off the balance sheet without being replaced or rolled over.

The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion increments every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings. For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month.

Back of napkin math means the Fed will try to shrink the balance sheet in half over about 4 years, once the process starts. No date given. Fed Chair Janet Yellen said the process could begin “relatively soon.”

It won’t take long until you start to feel the rate hike. Look for interest rates on credit cards to jump relatively soon, probably 60 days, or two billing cycles. The average household now pays a total of $1,292 in credit card interest per year, according to NerdWallet’s research. Now that the Federal Reserve increased its rates as analysts expected, the total will rise to $1,309.

On the flip side, savers can look forward to earning higher rates on deposits, but don’t expect much, bank deposits are paying just over 1% which is not enough to keep pace with inflation.

The Fed also issued updated economic forecasts. The Fed’s revised forecasts reduced its estimate for unemployment by year’s end to 4.3 percent from a March projection of 4.5 percent. Unemployment has already reached a 16-year low of 4.3 percent.

The Fed kept forecast for economic growth this year of 2.2 percent, up slightly from its March forecast, with growth of 2.1 percent in 2018 and 1.9 percent in 2019. In a news conference, Fed Chair Janet Yellen said she still expects inflation to hit a 2% target next year, mentioning that recent declines are coming from such areas as telecom.

Earlier in the session we had some disappointing readings on inflation and retail sales.

Higher interest rates are normally good for a currency, but the dollar’s performance suggest traders see little chance for any more increases this year – at least if the turmoil in Washington distracts the Trump administration from implementing its pro-growth fiscal agenda.

Meanwhile, Treasuries rallied, pushing the yield on the 10-year note down 7 basis points and further flattening the yield curve, an indication that debt traders are cutting their expectations for growth. Bond traders are clearly worried the Fed is on a path to harm the nation’s prospects for growth without meaningfully adding to its arsenal of tools to deal with any downturn.

Meanwhile in the oil market, the price of crude is doing its best to keep inflation under wraps. Oil fell below $45 a barrel to its lowest since November as government data showed that weaker demand at the start of the summer driving season led to another increase in gasoline stockpiles.

Gasoline inventories rose 2.1 million barrels last week, according to the Energy Information Administration. Adding to the market pessimism, the International Energy Agency said new production from OPEC’s rivals will be more than enough to meet growth in demand next year, overwhelming the oil group’s efforts to reduce supplies by cutting its own output.

The EIA forecasts output at major American shale fields will reach a record in July.

Consumer prices declined in May, reflecting a big drop in energy prices. The Consumer Price Index, or CPI, edged down 0.1 percent last month following a small 0.2 percent increase in April. Prices had fallen 0.3 percent in March.

In addition to a drop in energy costs last month, the price of clothing, airline fares and medical care also declined. Core inflation, which excludes energy and food, rose a slight 0.1 percent in May. Over the past 12 months, consumer prices are up 1.9 percent while core inflation has risen 1.7 percent.

In May, food costs edged up a tiny 0.2 percent while energy costs fell 2.7 percent, led by a 6.2 percent drop in the price of gasoline. Over the past 12 months, food costs are up just 0.9 percent while energy prices have risen 5.4 percent.

Clothing costs dropped 0.8 percent in May while the cost of new cars and used cars both fell 0.2 percent. Medical services such as the cost of doctor’s visits dipped 0.1 percent in May but have risen 2.5 percent over the past 12 months.

Those low food costs might not last. Wheat has quietly staged a huge rally, as a prolonged dry spell has left the U.S. spring crop in its worst shape in almost three decades. Forty-five percent of the crop, the high-protein variety grown in northern states, was in good or excellent condition as of June 11.That’s down 10 percentage points from the prior week and marks the worst rating for the time of year since 1988.

Futures have surged more than 15 percent in the past month. Spring wheat futures for July delivery reached $6.45 3/4 a bushel, the highest for a most-active contract since December 2014.

The Commerce Department said retail sales dropped 0.3 percent, the first decline since February and the sharpest since a 1 percent decrease in January 2016. Last month, sales fell 2.8 percent at electronics stores, the biggest such drop since March 2016. They fell 2.4 percent at gasoline stations and 1 percent at department stores, which have struggled with competition from online retailers.

Business inventories fell by a seasonally adjusted 0.2 percent in April, following a gain of 0.2 percent in March. It was the first decline since a 0.2 percent drop in October. Sales were flat after contracting 0.1 percent in March. When businesses increase stockpiles, it is generally seen as a sign of their confidence that sales will increase in the coming months. A decrease in inventories can be a sign of pessimism about future sales.

Financial Review

WWTD?

Sinclair Noe — April 14, 2016

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

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DOW + 18 = 17,926
SPX + 0.36 = 2082
NAS – 1 = 4945
10 Y + .02 = 1.78%
OIL – .33 = 41.43
GOLD – 14.80 = 1229.60

Consumer prices rose slightly in March, as the higher cost of filling up at the gas pump offset lower expenses for groceries and new clothes. The consumer price index rose by seasonally adjusted 0.1% last month after falling 0.2% in February. Energy prices climbed 0.9% to mark the first increase in four months. The price of food, on the other hand, fell 0.2%. Real or inflation-adjusted hourly wages, meanwhile, increased 0.2% in March. They are up 1.4% in the past 12 months.

The number of Americans who applied for unemployment benefits last week fell by 13,000 to 253,000, matching the lowest mark since the end of the Great Recession and sinking to a level last seen in 1973.

Arizona’s seasonally adjusted unemployment rate dropped one-tenth of a percentage point from 5.5% in February to 5.4% in March. The U.S. seasonally adjusted unemployment rate increased from 4.9% in February to 5.0% in March. A year ago, the Arizona seasonally adjusted rate was 6.2% and the U.S. rate was 5.5%. Arizona Nonfarm employment grew by 3.2% (84,300 jobs) over the year in March. The Private Sector accounted for all of the March gains, adding 86,000 jobs (3.9%). Government employment declined by 1,700 jobs.

A report from data firm RealtyTrac shows that there were 289,116 foreclosure filings in the first three months of the year, down 4% from the previous quarter and 8% lower than the same period a year ago. That was the lowest since the last quarter of 2006.

The IEA says the oil glut should ease. The International Energy Agency’s latest report says the oversupply of oil will shrink to 200,000 per day from 1.5 million. The IEA report says, “There are signs that the much-anticipated slide in production of light, tight oil in the U.S. is gathering pace.”

The International Energy Agency says a prospective deal to freeze oil output at a meeting of producers in Doha on Sunday won’t change oil markets which have already started to rebalance anyway. Saudi Arabia and Russia are already producing at or near record rates. And don’t forget that Saudi Arabia and Iran can’t agree on anything. Any production freeze by the Saudis is just an opportunity for the Iranians to take more market share.

The Bank of England kept policy on hold. In a unanimous vote, the central bank opted to keep its benchmark interest rate at 0.50% for the 85th consecutive month. The BOE also voted to keep its asset purchase program at £375 billion.

Europe has escaped deflation. The latest release from Eurostat showed Eurozone Final CPI for March ticked up to 0.0% from the previous look of negative -0.1%. While it’s good news that prices in the region are no longer falling, the European Central Bank’s 2% target remains a long way away. Sweden reported 1.2% inflation; Sweden has been experimenting with negative interest rates.

Bank of America, the No. 2 U.S. bank by assets, reported an 18 percent slide in quarterly profit. BofA, one of the biggest U.S. lenders to the oil and gas industry, also said it had set aside 30 percent more money to cover sour loans, mainly to the struggling energy industry. The bank saw a top line miss against analyst estimates, and a dip on the earnings front versus last year’s comparable quarter seeing net income decline 13% to $2.7 billion or $0.21 per share.

Last year, the company saw earnings per share of $0.25. However, it squeezed out a bottom-line number that met analyst estimates. Revenue was $19.7 billion, down 8% year-over-year. Due to the energy sector exposure, the provision for credit losses was increased to $997 million; let’s just call that a cool billion.

Wells Fargo’s quarterly profit fell 7 percent as the No.3 U.S. bank by assets set aside more than $1 billion to cover bad loans, saying its energy portfolio remained under “significant stress.” Income from all three businesses declined, with its largest business, community banking, reporting a 7 percent fall in the first quarter ended March 31.

Wells Fargo’s net income fell to $5.09 billion, or 99 cents per share, but total revenue rose 4.3 percent to $22.2 billion. Earlier in the week we reported that Wells had been dinged with a $1.2 billion fraud settlement related to selling bad mortgages, which sounds like a large amount, but it works out to about 3 weeks of profits; and that’s before the tax deductions. No indictments, so really it was a bargain.

Wells Fargo was among the five big banks failed by U.S. regulators on Wednesday on their plans for a bankruptcy that would not rely on taxpayer money. For now, the big banks are still too big to fail; they will have to come up with a better plan by October.

Yesterday, JPMorgan Chase reported earnings that were not as bad as expected, which is to say Jamie Dimon and company have become adept at “playing the market” in their ability to “deliver consistently” dismal earnings projections and then out performing expectations. Trading profits were weak, plus merger and acquisition activity is down across the board.

One common theme among the Big Three US Banks is they are setting aside much more for loan losses; and still the Federal Reserve and FDIC yesterday said they have not done enough and they failed their living will test. The banking sector is not showing signs of strength. As loans sour, we can expect a rocky road ahead.

Deutsche Bank has agreed to settle US lawsuits accusing it of conspiring with other banks to manipulate gold and silver prices at investors’ expense. The settlements were disclosed in letters filed in Manhattan federal court by lawyers representing investors and traders who accused Deutsche Bank of violating U.S. antitrust law. Terms were not disclosed, but both settlements will include monetary payments by the German bank. Deutsche Bank also agreed to help the plaintiffs pursue claims against other defendants.

The plaintiffs accused Deutsche Bank of conspiring with Bank of Nova Scotia, Barclays, HSBC and Societe Generale to manipulate prices of gold, gold futures and options, and gold derivatives through twice-a-day meetings to set the so-called London Gold Fixing; also manipulating silver prices on the Silver Fix. I’m shocked, shocked … that Deutsche Bank rolled over so quickly.

BlackRock, the world’s largest asset manager, posted a 20 percent drop in first-quarter profit.

Delta Air Lines reported a first-quarter profit above analysts’ estimates and indicated it could cut flight capacity in the fall if necessary to stop a months-long decline in unit revenue. The second most-traveled U.S. airline earned $946 million in the first quarter; profit was lifted by lower fuel costs.

It looks like the fight over Yahoo has boiled down to Verizon and SoftBank. According to NY Post sources, Verizon is considered the front-runner (interested in Yahoo’s core business and a 35.5% stake in Yahoo Japan), and appears to have the backing of key investors who like the idea of a simple cash deal. While a Softbank bid would likely be on the whole of Yahoo.

McDonald’s is targeting private equity firms, including Bain Capital, MBK Partners, TPG Capital Management and China Resources, for its planned sale of 2,800 restaurants in North Asia. McDonald’s is adopting a new business model in the region by planning to bring in partners to own the restaurants within a franchise operation.

Total spending on prescription drugs in the U.S. rose 12.2% to nearly $425 billion in 2015, continuing a steep climb fueled by the introduction of expensive new treatments for cancer and infections, as well as price hikes for older medicines. The annual report from IMS Health is likely to further fuel the fire of criticism from politicians, healthcare providers, and patients, stating drugs are out of reach and straining budgets.

Despite delays in the jets’ computer-based logistics system, the U.S. Air Force still expects to declare an initial squadron of Lockheed Martin F-35s ready for combat between August and December.

According to U.S. auto safety regulators, there are still about 85 million unrecalled Takata air bag inflators in American vehicles that would eventually need to be serviced unless the company can prove they are safe. The figure represents the first nationwide public accounting by the U.S. government regarding the total number of Takata inflators, which can explode with too much force and spray metal shards inside vehicles.

You know about the Cloud, which basically means you use someone else’s computers to store your data. Your email is stored in the cloud; all sorts of other documents as well, whether you know it or not. The government wants to look inside the cloud. Microsoft has sued the government for the right to tell its customers when a federal agency is looking at their stuff in the cloud.

They say the government’s actions contravene the Fourth Amendment, which establishes the right for people and businesses to know if the government searches or seizes their property, the suit argues, and Microsoft’s First Amendment right to free speech.

CEO’s of major corporations are busy people; they can’t be in two places at one time. But last week, Accenture CEO Pierre Nanterme was – at least digitally. On Monday, Nanterme went to an Accenture broadcast studio in Paris, where he is based, and had his image beamed to suburban Chicago, where 500 of the company’s top executives were meeting.

At the same time, the professional services firm’s human resources chief, Ellyn Shook, was beamed in from New York, and the resulting three-dimensional “holograms” of the two executives chatted with each other about things like the company’s new performance reviews and recent acquisitions, while answering questions from the audience. It’s still a bit on the extravagant side. Do you really need a hologram to explain recent acquisitions?

If you’re not sure, just ask yourself, what would Tupac do?

Financial Review

Just Around the Corner

Sinclair Noe — April 17, 2015      

 

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

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DOW – 279 = 17,826
SPX – 23 = 2081
NAS – 75 = 4931
10 YR YLD – .03 = 1.85%
OIL – .52 = 56.19 Oil posted a 12% gain for the past week.
GOLD + 5.30 = 1,203.30
SILV – .06 – 16.23
 
The economy continues to expand and consumers are feeling better. The University of Michigan Consumer Sentiment Index rose to 95.9 in April, up from 93 in March. Separately, The Conference Board said leading indicators rose 0.2% in March; the leading economic index has been slowing over recent months but it still points to moderate expansion in economic activity.

Consumer prices rose 0.2% in March. Gasoline prices rose 3.9%, which was the biggest jump since February 2013; still, gas prices are about 33% below year-ago levels.  The core-CPI, which excludes energy and food prices, also rose 0.2% due to higher cost of housing and used cars. The cost of clothes, housing, cars, and medical care increased, while food and airfare decreased. Core prices have risen 1.8% in the past year. While the “all-items index” (which includes things like food and energy) declined 0.1% over the last 12 months. Higher inflation would indicate a stronger dollar because it could reinforce the view that the Fed might hike interest rates sooner rather than later.

The Labor Department reports real average hourly earnings for all employees increased 0.1 percent from February to March, seasonally adjusted. This result stems from a 0.3-percent increase in average hourly earnings being partially offset by a 0.2-percent increase in the Consumer Price Index. Real average hourly earnings increased by 2.2 percent, seasonally adjusted, over the past 12 months.

Another tidbit from the Labor Department shows that long-term, wages have not just been flat but slightly down over the past 40 years. Adjusted for inflation, average weekly earnings for production and nonsupervisory employees, the bulk of the workforce, topped out in October 1972. In today’s dollars, the weekly paycheck in 1972 was the equivalent of $811, compared with current paychecks at $703 a week. A recent jump in real average earnings is largely due to low inflation, rather than surging paychecks. Cheaper gasoline and a strong dollar have pushed down overall prices, leaving many Americans with more money, even though they aren’t spending it.

After a string of soft U.S. economic data, the dollar hovered near a one-week low against a basket of major currencies on Friday and was on track for its biggest weekly drop in a month. The dollar index set a fresh one-week low this morning; but moved higher following the economic data on inflation.

An interesting article in the Murdoch Street Journal today argued the idea that the Fed has already tightened monetary policy just by talking about tightening monetary policy. The talk about hiking rates has made itself felt in stock, bond, and most important foreign exchange markets; a version of the taper tantrum, if you will. The dollar’s sharp rise in the last six months is due not just to the European Central Bank’s dramatic easing of monetary policy through quantitative easing (QE, the purchase of bonds with newly created money), but to the juxtaposition of the ECB’s action against anticipation that the Fed will soon tighten. Anticipation of tighter U.S. monetary policy also shows up in various measures of risk such as the spread between yields on corporate bonds and safe Treasuries, which have widened, or the stock market, which has stopped climbing.

This might explain why the economy didn’t seem to take off with the benefits of lower oil prices. It’s also a reminder of something investors and Fed officials routinely forget: Markets discount the Fed’s actions long before they actually occur, in ways that are not obvious at the time.

Bloomberg’s trading terminal experienced a global outage this morning, with traders complaining all over Twitter they had been hit by the issue. And yes, this does affect worldwide trading, especially in the bond markets. There are more than 300,000 subscribers to the Bloomberg terminals and they pay about $20,000 per year for the subscription, so it is for serious business. A lot of traders stepped out for coffee this morning. Service was restored after a couple of hours.

China’s securities regulator tightened rules on margin lending while the country’s two stock exchanges said they would make it easier to short stocks, or bet that stocks will fall in price in an effort to temper the country’s soaring stock markets. Asian markets were generally lower today.

German government bonds continued to break records this morning, lifted by the ECB’s commitment to stimulus, coupled with investors’ appetite for low-risk assets amid growing concerns over Greece. European stocks are down 2.1 percent this week, poised for the worst drop in four months and trimming 2015 gains to 18 percent. In early trade, the yield on Germany’s 10-year bond slipped to 0.049%, breaking through Thursday’s all-time low. The yield on the country’s 30-year debt was just below half a percentage point.

“Liquidity is drying up in Greece,” Greek Finance Minister Yanis Varoufakis said yesterday in Washington. Athens will continue to “compromise for a speedy agreement, but will not be compromised.” International Monetary Fund Managing Director Christine Lagarde warned that she wouldn’t let Greece miss a debt payment. Greece is struggling to win more aid to avoid a default, while resisting more austerity measures. And the Greeks seem to be dragging their feet when it comes to spelling out specific reforms; the reason is simple; the reforms the EU is requesting won’t work and would not be accepted by Greek voters. So, slowly the EU is starting to realize that a Greek exit from the Eurozone would be a big mistake; they don’t know how big a problem it would create but the thinking is that it would be major. Today, there appeared to be a shift in thinking.

In the event of a missed payment, there is no specific plan B to keep Greece in the monetary union. Which is a frightening proposition that now has the big banks scared of other countries exiting the euro, and even bigger concerns that it could breakdown into bank runs. So now, international creditors are starting to show more flexibility in negotiations over Greek finances to prevent a euro exit. The red-line is that the Syriza led government in Athens needs to commit to at least some economic reforms.

If you have been following the Greek situation, it sometimes sounds like it flips then flops between a possible resolution and what seems to be an inevitable train wreck; either Greece bows down to it paymasters or it defaults and exits the Euro Union. But the longer the Greeks delay, the more they are likely to see flexibility from creditors. A Greek exit would be.., well nobody knows but it would probably be bad. And yet, default seems inevitable because they are just too far in the hole. More and more it looks like a best case scenario is a partial default, a few concessions, Greece stays in the Eurozone. That doesn’t mean it will happen that way, but that looks like a possibility. And if, in this whole process, Greece can wean itself off of dependence from the banksters, they could even pull out of the economic depression they are in.

We have a few earnings reports to cover today:
American Express reported quarterly revenue that fell short of analysts’ estimates, dropping 2.7% to $7.9 billion. AmEx was hurt by a stronger dollar and the loss of several co-branded tie-ups; AmEx recently ended its co-branded relationship with JetBlue, while its agreement with Costco is due to expire next March.

Schlumberger shares rose slightly after the oil equipment provider topped first-quarter earnings projections, although revenue missed. Excluding charges, the company booked a per-share profit of $1.06, beating estimates of $0.91, but down from $1.21 a year earlier. Blaming a decline in drilling activity, Schlumberger said it now plans to cut 11,000 more jobs in addition to the 9,000 job cuts announced in January. You might think a big earnings miss would result in a nasty day of trading, but the Wall Street crowd like to see job cuts.

General Electric reports its revenue fell a worse-than-expected 12% in its first quarter. Overall for the quarter ended March 31, GE reported a loss of $13.5 billion, or $1.35 a share, compared with a profit of $3 billion, or 30 cents a share, a year earlier.

Honeywell reported a 5% drop in quarterly revenue, in part due to a stronger dollar, even as net income rose. Honeywell raised the lower end of its full-year profit forecast, even as they cut their full year revenue forecast.

Fifty years ago April 19th, Gordon Moore, he one-time CEO of Intel, predicted that the number of components on semiconductors or “chips” would continue to double every twelve to eighteen months even as the cost per chip would hold constant. The idea came to be known as Moore’s Law. And it really was a radical idea. Most commodities do not behave like that. Think about meat, grains, coffee, or oil, which get worse and more expensive over time. Computing power and related components of the digital revolution including memory, displays, sensors, digital cameras, software and communications bandwidth, continue to get faster, cheaper, and smaller roughly at the pace Moore anticipated. And through economies of scale, low prices encourage more uses, which raises production and lowers costs in a virtuous cycle. With each cycle of Moore’s Law, computing power doubles, even as price holds constant. If you want to have any understanding of the digital revolution, you have to be able to grasp Moore’s Law.

Thanks to Moore’s Law, tomorrow’s digital products are certain to be better and cheaper. Think of it as the granddaddy of disruption, and the life blood of innovation. Fifty years ago, Moore thought the exponential growth cycle might last for 10 years, but 50 year later it still applies. Every time it seems like innovation has hit a wall, we just break through. And that means there is something new and wonderful just around every corner.

FINANCIAL REVIEW

Theories on Apples and Applesauce

Sinclair Noe — January 16, 2015

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

DOW + 190 = 17,511
SPX + 26 = 2019
NAS + 63 = 4634
10 YR YLD + .04 = 1.81%
OIL + 2.32 = 48.57
GOLD + 17.70 = 1281.30
SILV + .83 = 17.88

Stocks bounced back after five sessions of losses. All 10 of the S&P 500 sectors were higher, though energy led the charge, rising 2.8%. U.S. crude oil futures settled up 5% after the International Energy Agency said there were signs that lower prices had begun to curb production in some areas. On the week, oil rose 0.7%, snapping a seven-week losing streak. The IEA report said that the market’s floor was still anybody’s guess, but “the sell-off is having an impact,” and “A price recovery – barring any major disruption – may not be imminent, but signs are mounting that the tide will turn.

We love lower gas prices. A gauge of consumer sentiment jumped up to an 11 year high this month. The preliminary January reading on the University of Michigan’s consumer-sentiment index increased to 98.2, the highest level since January 2004, from a final December reading of 93.6. Also, more households were reporting increases in household incomes.

Consumer inflation in December saw the biggest monthly drop in six years. Consumer prices, the CPI, fell 0.4% in December. You know the big driver for lower prices; energy prices plunged 4.7% in December, the biggest drop since the end of 2008, as gasoline prices fell 9.4%. Overall consumer prices grew 0.8% in 2014, the second smallest calendar-year increase in the last five decades. Core inflation was 1.6% during 2014. Also, the government reported that inflation-adjusted average hourly earnings rose 0.1% in December. For the year, real average hourly earnings rose 1%.

Good news, everything is on sale. Well, not everything; beef, tomatoes, and eggs went up in price; and rents jumped last year. Most things are cheaper but it may not be cause for celebration. We’ve just seen the weakest stretch for prices since 2009, which was not a good year for the economy. The euro zone is in outright “deflation,” which is the opposite of inflation, prices fall instead of rise. Japan, went through a couple of lost decades when prices just went flat or even dropped. Japan has already started on a quantitative easing program. The Eurozone is expected to announce next week that they will start buying sovereign bonds to stimulate their economy.

Of course the problem is that when prices are falling we tend to put off buying stuff because we expect we can get a better deal tomorrow or next week. When everybody is waiting for a better price, nobody is actually buying; when people stop buying things, it is bad for the economy; really bad. The Federal Reserve tends to think this won’t be a problem; they are planning on raising rates at some point in the not so distant future. Unless something upsets the apple cart.

By the third quarter of this year, the Federal Reserve’s 0.25 percent interest rate is expected to at least double, according to economists surveyed by Bloomberg News. The Fed already has an idea of what the market impact will be: The so-called taper tantrum in May 2013, when then Fed Chairman Ben Bernanke first suggested the U.S. bond-purchase program would be scaled back, saw the yield on the 10-year Treasury jump half a percentage point in four weeks to end the month at 2.13%.

There’s a risk, though, that this time, having flagged the prospect of a change so far in advance, policy makers will be complacent about the probable market reaction. That’s what happened in 2008 when Lehman Brothers went bust. Treasury officials convinced themselves that the financial crisis had been rumbling on long enough for participants to have shielded themselves against the collapse of a big firm; turned out, not so much.

Right now there is a sort of similar situation with regard to Greece, where the problems have been going on so long, that people forget that Greece is on the edge of collapse. Today, two Greek banks applied for emergency funding from the national central bank. This could be a signal that depositors are pulling their money out at an alarming rate. Or it might just be another scheme to scare Greek voters ahead of next week’s election. After the election, the Greeks might repudiate their sovereign debt; the Euro Union might kick them out. Maybe it won’t be a problem.

The big problem seems to be when something happens without warning; like the Swiss abandoning a cap on their currency. Boom, markets move fast, somebody loses a boatload of money. Soon after the Swiss National Bank unexpectedly ended its three-year policy of keeping the franc weaker than 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc yesterday, the euro also plunged 3.5 percent against a basket of 10 developed-nation peers, the most since its 1999 debut, and reached an 11-year low against the dollar today. When the news was first announced, the franc exploded, up 41% versus the euro before things calmed down.

Generally, currency trades don’t have big moves. And so brokerages and exchanges allow leverage to entice traders. The U.S. Commodity Futures Trading Commission allows investors to put down as little as 2 percent of the value of their foreign-exchange bets. Brokers may get stuck with the balance of losses suffered by clients who used leverage, borrowed on credit cards, or did both to bet against the franc. FXCM handled $1.4 trillion in currency trades last quarter; today they say clients owe $225 million on their accounts. This afternoon, Leucadia National announced it would provide $300 million in financing to FXCM, which would allow FXCM to maintain its regulatory capital requirements. FXCM isn’t the only casualty from the franc’s sudden move. Global Brokers Ltd., based in New Zealand, said losses from the surge are forcing it to shut down.

Meanwhile the Chicago Mercantile Exchange announced that it will double, then triple, margin on Swiss franc futures contracts. That means they will extend a bit more credit and hope their customers just wait it out and everything will return to something like normal. That will reduce the margin calls but it won’t eliminate them, and I suspect we’ll see some more tales of woe in coming days. And that includes some of the big banks; both Deutsche Bank and Citigroup each reported lost $150 million on Swiss franc trades. The losses are mounting, but so far nothing the markets can’t absorb.

Now let’s look at another market that has seen some fast moves – oil. We’ve been tracking the decline since last summer, but still, that is considered a fast move. The day traders have certainly had their chance to get in or out of a trade, but there are many other investors who can’t jump in and out of positions quite so fast. For example, there is quite a bit of debt associated with oil exploration and drilling and refining. And that energy debt is then bundled together in pools, known as CLOs or collateralized loan obligations, and then those CLOs are traded. But the market for CLOs is not as liquid as you might think, and it becomes less liquid when it looks like some off the loans that were bundled might not perform.

Under provisions of the Dodd-Frank Act, banks are required to sell their stakes in certain complex securities, such as CDOs and CLOs. But there has been a push to repeal parts of the Act. The Volcker reprieve would have given banks until 2019 to sell their stakes in CLOs. Much of the recent energy boom has been financed with junk debt and a good portion of that junk debt ended up in collateralized loan obligations. CLOs are also big users of credit default swaps, which are an important target of the Dodd Frank push-out. In addition, over the past 6 months banks were unable to unload a substantial portion of the junk debt originated and so it remained on bank balance sheets. That debt is now substantially underwater and, potentially, facing default. To hedge or hide the losses, banks are using credit default swaps. Hedge funds are actively shorting these junk debt financed energy companies using credit default swaps.

The Dodd-Frank Act was supposed to get the banks out of that derivatives business in 2015, but if the banks had to mark to market on those CLOs today, it would likely lead to big losses. And so they are asking the politicians to delay implementation of the Volker Rule, so they have more time to sell off their bad CLOs, or maybe for the market to rebound. The reason to expect such heavy concentration of energy debt in CLOs is that energy debt has made a big increase in its total share of the junk bond market, up from 4% ten years ago to 16% now. 16% might not seem like a big deal until you realize that the real increase in energy credit issuance happened in the last few years, so the proportion of energy borrowing to total risky borrowing was vastly higher of late so as to move the averages so much in a short time.

We don’t know exactly how much bad energy debt is bundled into CLOs. Some estimates peg it around $200 billion, but that doesn’t mean everything will go into default. But here is where CLOs are dangerous; they take good energy debt and bad energy debt and other types of debt and they smash it all together. It’s kind of like taking a bunch of apples, and making apple sauce. And once you smash the good apples with the bad apples, you can’t unmake the apple sauce.

The opacity of the banks’ situation is creating a mindset on Wall Street to sell first and ask questions later. On days when oil is plunging in price, big bank stocks are getting hit across the board. Institutional investors with large bank positions who can’t readily dump shares are trying to hedge their exposure by buying puts on Exchange Traded Funds (ETFs) which track the financial services sector. Wholesale dumping of shares could come later if more negative news emerges.

FINANCIAL REVIEW

Columbo Fed

Sinclair Noe — January 7, 2015

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

DOW + 212 = 17,584
SPX + 23 = 2025
NAS + 57 = 4650
10 YR YLD – .01 = 1.95%
OIL + .59 = 48.52
GOLD – 8.20 = 1212.10
SILV – .02 = 16.63

After the holidays we are finally starting to get back to economic data. Let’s start with the ADP payroll report, which shows 241,000 net new private sector jobs for December. Breaking down that number, private-sector service providers added 194,000 jobs, while goods producers added 46,000 jobs. By company size, small businesses added 106,000 private-sector jobs, large businesses added 54,000 and medium businesses added 70,000. The Labor Department reports on jobs Friday morning and we tend to look to the ADP report as a precursor to the government’s monthly report, but it isn’t a real accurate predictor. Last month the government reported 321,000 new jobs and ADP initially showed 208,000 for November. Still, we are probably looking for around 220,000 to 240,000 new jobs on Friday and today’s report was in line with that estimate.

Meanwhile, Gallup has its own Job Creation Index which ended 2014 at plus 27 in December, eight points higher than where it started in January. The index has remained between plus 27 and plus 28 since May; essentially it has remained at the same level for the past eight months, suggesting the job market plateaued in the latter half of 2014.

In a separate report from Gallup, the number of Americans who are positive about the US economy outweighs those who negative about it; but just slightly, 49% to 45%. And everyone, it seems, is bullish about America’s job creation capabilities in 2015. From small businesses to CEOs to regular Americans, optimism is increasing for jobs growth in 2015. There is a good reason for that – for six straight months in 2014, growth exceeded 200,000 jobs a month. Last year, the unemployment rate dipped down to 5.8%, a rate not seen since July 2008. Yet those numbers don’t tell the full story. There is more to an economic recovery than optimism and a low unemployment rate. Americans are still struggling with low wages, with paychecks at roughly 1995 levels.

A large portion of those jobs are low-wage, part-time jobs that do little to help the families that struggle to make ends meet. In November, 6.7 million Americans worked part-time; 2.3 million of them wanted full-time work but couldn’t find it. Almost 4 million of them had only part-time work due to unfavorable business conditions and decline in seasonal demand.

The trend is likely to continue. According to a survey by Careerbuilder, one in four employers plan to hire more part-time workers in 2015, a 6% increase from 2014. But American workers don’t need part-time jobs – they need full-time ones. According to Gallup’s survey of over 600 small business owners, more than a quarter of them will be hiring someone in the next year. Just 8% say they will have to let people go. Additionally, 71% of business owners expect that 2015 will be kind to them and that their financial situation in 2015 will be “very good or somewhat good”. Yet pessimism persists in the top echelon of corporate America. American CEOs predict that 2015 will see weak economic growth, and according to the most recent Business Roundtable CEO outlook survey, gross domestic product will grow by 2.4% this year. Investments will drop by 5.8% and sales by 1.3%.

But Americans remain optimistic about jobs; according to Gallup, 36% think now is a good time to find a quality job. One of the ways to judge if the optimism about the job market is having a practical effect is to look at the number of people leaving their jobs in hopes of finding a better one. In November of this year, about 838,000 people left their jobs; a year ago that number was 890,000. More people are staying put at the jobs they have. And this means employers don’t have to offer big wage increases to get and keep the workers they need. And this remains true even as a jobs recovery has consistently forged ahead in recent years. The turning point in the labor market will be when we see wage growth of 3.5% to 4%. Until then we’re just taking baby steps.

The trade deficit shrank by 7.7% in November to $39 billion, which is the smallest deficit in 11 months. This goes directly to lower prices for imported oil, which more than offset a drop in exports of aircraft, heavy machinery, and computer related equipment.

The Eurozone has slipped into deflation. Consumer prices in Europe dropped 0.2% in December. ECB officials are working on a plan to purchase sovereign debt to prevent a deflationary spiral of falling prices. It is widely expected that ECB President Mario Draghi will announce some sort of quantitative easing scheme on January 25; the fly in the soup is Greece, which holds a snap election on January 22nd, and is likely to vote for an anti-austerity, anti-bailout political party that is calling to repudiate Greek debt. Draghi would like to talk down deflation, but today’s numbers make that argument moot. Come January 22nd the market will no longer hope or even expect a clear plan on QE, it will demand it.

In a separate report, Eurozone unemployment remained at 11.5% in November. Joblessness in Italy rose to a record 13.4%. German unemployment fell to 6.5% in December, the lowest in more than two decades. And, as we noted yesterday, Greece’s unemployment rate is still around 25%.

Bond investors are now hanging on European policy makers doing more; but even a big bond-buying program in Europe, and continued stimulus in Japan, might not be enough to make bond markets optimistic about global economic growth. Some bond investors say the stimulus from the central banks has a decreasing effect because, each time the stimulus occurs, it increases indebtedness and stokes speculation in financial markets that fails to translate into growth in the real economy.

So, Wall Street was moving higher today, a triple digit gain for the Dow despite news off a terrorist attack in Paris that left 12 people dead because apparently terrorists really hate French cartoonists. Also, barely making headlines, a suicide car bomber killed 37 people in Yemen today. The gain in stocks probably had less to do with any economic news or any reaction to geopolitical events and more to do with the simple idea that stocks had been on a 5 day losing streak and were due for a bounce. And then we got the minutes of the December FOMC meeting.

The Federal Open Market Committee consists of the Federal Reserve policymakers and they have previously indicated that there is a likelihood they will start to tighten monetary policy maybe in 2015. The key passage from December’s policy statement was: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” The Fed added that this guidance is “consistent” with its previous language that indicated the Fed would wait a “considerable time” before normalizing policy.

So, let’s try to translate the Fedspeak. The Fed says they will be patient, which means we probably won’t see any rate increases before April, at least. The Fed says there are downside risks from global weakness, which means we might not see any rate increase for quite a while longer. The policymakers think cheaper energy prices are a net positive for GDP growth and job gains, but they don’t see wages accelerating, and cheap oil and a strong dollar is pushing inflation lower; which sounds like they haven’t seen enough data to make a move. It all sounds a little like the old TV show Columbo. Remember how Peter Falk played the role of a befuddled detective with a wrinkled raincoat and he seemed to be completely lost and bumbling his way along, and then he solved the crime. The Fed is a lot like Columbo, they just haven’t solved the crime yet.

And a note on those lower oil prices; based on the Federal Reserve’s economic model, a $20-a-barrel drop in crude oil prices translates to a quarter percentage-point increase in GDP. That’s good but a lot of the benefits from higher consumer spending are front-loaded. Unless energy prices continue declining, there is only a one-time positive impact on the annualized growth of real incomes and real consumption. And it is uncertain if lower fuel prices will help the jobs picture, after all it’s just shifting spending from the gas station to some other retail outlet.

Still, lower gas prices are like a gift for transport-heavy companies like railroads, trucking companies, and the petrochemical industry. If they are smart they should be locking in as much of this downturn as possible. That is a huge benefit on this pullback. But the gift may be temporary. So says President Obama; he says consumers should use the savings wisely. The president also told The Detroit News that demand for oil from emerging markets like China and India would continue to grow “over the long term,” adding that the US needed to remain “smart” about its energy policy.

Right now, it is hard to see the floor for oil prices. Some things need to happen before we see a sustained rebound in prices. It’s an old story of supply and demand. On the supply side, oil prices need to fall below operating cash costs before companies start shutting down existing wells. Next, OPEC (and specifically Saudi Arabia) would need to impose some control over production, and the Saudis seem to be waiting for US oil companies to shut down some wells before they will shut down their own production. Right now, global oil producers are looking at a glut and responding by increasing drilling. Iraq, Russia, Latin America, West Africa, the United States, and Canada – all may increase production this year.

Next, demand would need to increase; lower prices will ultimately lead to a pickup in global oil demand, and cheap oil results in complacent conservation; but it won’t happen right away, you could reasonably expect a 6 month lag. Or we might see a longer lag because the global economy is fairly weak. One other way to put a floor under prices, is if we see traders get a little greedy and try to squeeze the shorts, and there are a lot of producers that have taken net short positions in the energy market as a hedge against lower prices. What could trigger a short squeeze? I’m thinking weakness, or even a couple of flashy defaults in the high yield debt markets.

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.)