Financial Review

Decision Day

Sinclair Noe — July 26, 2017

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

DOW + 97 = 21,711
SPX + 0.7 = 2477
NAS + 10 = 6422
RUT – 8 = 1442
10 Y – .05 = 2.28%
OIL – .08 = 48.67
GOLD + 10.50 = 1261.10
BITCOIN + 0.70% = 2568.14 USD
ETHEREUM – 2.22% = 197.74

The major U.S. stock indexes set all-time highs again.

The Federal Reserve Federal Open Market Committee wrapped up its two-day meeting on monetary policy. They left interest rates unchanged and in a statement, said they would begin running off their $4.5 trillion balance sheet “relatively soon”.

The Fed’s language was not dovish, but perhaps a bit less hawkish. That pushed Treasuries higher. The Euro jumped to a 2-1/2 year high against the dollar. The next scheduled FOMC meeting is September 19-20, and there is a good chance the Fed will announce the onset of the balance-sheet reduction after the September meeting, effective on the first of October.

The Fed has raised interest rates 4 times since they began removing emergency policy in December 2015, and project another increase before the end of this year – most likely at the December meeting. As the Fed starts selling securities from their balance sheet, they will start small and gradually increase the sales, which should allow markets to adjust, at least in theory.

The FOMC said it’s “monitoring inflation developments closely.” There isn’t much inflation to monitor right now, the PCE gauge is running at about 1.4%, and seems to be stuck in a rut, despite the Fed’s targets. At this point in the economic cycle, with the unemployment rate at a 16-year low, you would expect to see wages increasing, which would push prices higher.

But prices aren’t going up, and that raises questions about the real strength of the labor market and the economy. Whatever it is, it is a symptom of an economy that just keeps slogging along but can’t really take off.

Get ready for “vote-a-rama”, where Senate GOP leaders will throw everything they have that resembles a health care bill at the wall to see what sticks. Today they voted on a straight repeal of Obamacare – that vote failed (which was expected), there will be a voting frenzy for senators on a series of amendments.

Next up, votes on various amendments to repeal bits and pieces of Obamacare, or what is known as a skinny repeal that would throw the issue to a Senate-House of Representatives negotiating committee. Republicans hope the they can find some amendments which pass and can then be cobbled into some sort of bill which repeals a portion of Obamacare, in some way, shape, or form.

This morning President Trump tweeted that he would ban transgendered people from serving in the military. Who knows whether Trump will follow up his tweets with an actual order. That would normally come from the Pentagon, which was reportedly surprised by the announcement. If there is an actual order, the matter will quickly move to the courts.

New single-family home sales increased in June as purchases in the West surged 12.5 percent to a near 10-year high, but downward revisions to the sales pace for the prior three months pointed to a housing market that is struggling to gain momentum. The Commerce Department said new home sales gained 0.8 percent to a seasonally adjusted annual rate of 610,000 units last month. The sales pace for March, April and May was revised lower. Sales rose 9.1 percent on a year-on-year basis.

Copper rose again, closing at the highest price in two years and bringing its year-to-date gain to 14 percent. While some of the rally has been fueled by the usual fundamentals –  a stronger Chinese economy and labor disputes at mines –  the latest lurch higher may be caused by momentum and a short squeeze. The way that prices have been gaping higher in a straight line up suggests that somebody had some painful options positions to cover.

Earnings reporting season continues to take center stage on Wall Street and most of the news is good. Consider though, that we’re comparing second quarter 2017 to second quarter 2016, when earnings were in a recession. Are corporate earnings genuinely wonderful? It may depend on your perspective.

For example, after-tax corporate profits have grown at an annualized pace of less than 1% over the last five years. You won’t find many five-year periods that have been as anemic as that. You might assert that the only thing of importance is earnings acceleration since the fourth quarter of 2016.

After the closing bell, Facebook reported better than expected profit and revenue. Instagram, the company’s photo-sharing app, helped second-quarter sales climb 45 percent to $9.3 billion. Net income rose to $3.9 billion, or $1.32 a share, from $2.3 billion, or 78 cents, a year earlier.

There are now 2.01 billion monthly active users, and two-thirds of the monthly users are on Facebook every day. Shares dipped roughly 4% in after-hours trading over apparent confusion related to the company’s recent switch to reporting GAAP numbers. But the confusion was soon sorted out and Facebook shares are up about 1%.

PayPal reported a better-than-expected quarterly profit. The company’s shares were up 2.4 percent in trading after the bell.

General Dynamics posted higher-than-expected quarterly profits driven by increased sales in the unit that makes tanks, but projected slightly lower aerospace sales. Its stock fell 4.4 percent

Boeing swung to a net profit of $1.76 billion, or $2.89 a share, from a loss of $234 million, or 37 cents a share, in the same period a year ago. Boeing raised its 2017 adjusted EPS outlook. The stock shot up more than 8%, its largest percentage gain since August 2009, to a record high of $230.43.

Coca-Cola earned $1.3 billion in the last quarter, slightly better than estimates. Revenue came in at $9.7 billion, beating estimates. Sales of sodas and non-soda drinks improved. Then they announced changes to Coke Zero, which will soon be Coke Zero Sugar, and that’s when I sort of stopped caring.

Shares of Buffalo Wild Wings fell nearly 10 percent in extended trading after the company reported sizable misses in its earnings and revenue.

Whole Foods Market reported third quarter earnings that beat estimates. Revenue was flat. The company said its same-store sales fell 1.9 percent in the quarter, not as bad as expected. Amazon reports earnings tomorrow.

Ford Motor reported higher-than-expected second-quarter profits, and in the next breath warned of a rougher ride for the rest of the year. Ford said full-year pre-tax profit, automotive operating margins and cash flow would be lower than 2016 results, sending the company’s shares down 2.1 percent. Ford reported second-quarter net income of $2.04 billion, or 51 cents per share, up from nearly $2 billion, or 49 cents per share, a year earlier.

Britain will ban the sale of new gas and diesel cars by 2040. The UK joins France, which recently announce it would go electric by 2040. The mayors of Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025. Electric cars currently account for less than 5 percent of new car registrations in Britain. The shift to electric will require a substantial build-out in charging stations, and for auto manufacturers – who have already started the move to electric.

In Europe, so called ‘green cars’ benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. Britain’s move will accelerate the decline of diesel and gas cars. Turning away from oil will add to discussions about whether the world is reaching peak oil demand and how additional electric power can be generated.

It also raises questions about leadership; right now, European auto manufacturers are leading both industry and government in the move to electric; Japanese car-makers are strong electric competitors, and the US is lagging. Also, the ability to generate electricity, especially distributed generation of clean energy will be a huge and growing area.

Soon, it will just be an economically easy move for consumers, as improved technology lowers costs. For example, a $1,000 car battery today is expected to cost just $73 within the next 12 years. Given the rate of improvement in battery and electric-vehicle technology over the last 10 years, by 2040 small-combustion engines in private cars could well have disappeared without any government intervention.

Financial Review

Close But No Cookies

Sinclair Noe — July 25, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 100 = 21,613
SPX + 7 = 2477 (record)
NAS + 1 = 6412 (record)
RUT + 12 = 1450 (record)
10 Y + .07 = 2.33%
OIL + .61 = 48.50
GOLD – 5.40 = 1250.60
BITCOIN – 1.70% = 2547.12 USD
ETHEREUM – 2.57% = 201.76

The S&P 500 index, the Nasdaq Composite and the Russell 2000 all closed at record highs. The Dow is close but no cookies.

It is earnings season and there were plenty of good earnings and a few bad. 3M marked its sharpest-ever drop on a dollar-basis, off $11.43, or down 5.4%, cutting about 80 points from the price-weighted Dow. 3M’s share slide came after disappointing earnings.

The Post-it Notes-and-Scotch tape maker’s share decline, however, was more than offset by a tandem of firm rallies in McDonald’s and Caterpillar which reported second-quarter results that outstripped Street estimates. A drop in Google parent, Alphabet, weighed on the Nasdaq Composite, but the Nasdaq still managed to eke out a record high.

Before we dig into earnings news, there was a lot going on today. The Senate voted on healthcare legislation, in a way. Senate Republicans narrowly agreed to open debate on a bill to end Obamacare, but efforts to repeal or repeal and replace the law still face significant hurdles. Senator John McCain, who was diagnosed this month with brain cancer and has been recovering from surgery at home in Arizona, made a dramatic return to the Capitol to cast a crucial vote in favor of proceeding.

McCain received a standing ovation as he entered the chamber. The Senate vote was deadlocked at 50-50 and Vice President Mike Pence cast the deciding vote. Despite the successful procedural vote, there is no obvious path for any of the GOP’s various proposals to pass out of the Senate in the coming days.

Republicans who voted yes to begin debate warned that they still planned to oppose final passage if the amended legislation was not to their liking. The Senate will now move to an amendment process, but if none of the ensuing proposals can get 50 Republican votes, the party will be stuck again. The Better Care Reconciliation Act has already drawn public opposition from at least four Republicans.

In a speech on the Senate floor, McCain criticized both the underlying proposal and the secretive, partisan process Majority leader Mitch McConnell used to write it. McCain said he would not vote for the bill as it is today. He said the proposal must include changes demanded by Arizona’s governor, Doug Ducey, to win his vote.

The Senate’s next step is to vote on a full repeal of Obamacare – which will probably fail without a proposed bill to replace it. Then it will try an amended version of the Better Care Reconciliation Act, the latest Senate proposal; this will also likely fail since it hasn’t yet been scored by the Congressional Budget Office and thus needs 60 votes to pass rather than just 51.

Then we might be looking at a skinny repeal – a more limited repeal that only gets rid of Obamacare’s insurance mandates and some of its taxes, without eliminating Obamacare’s expansion of Medicaid. However, eliminating the mandates would result in much, much higher premiums for everybody who doesn’t opt out.

Today’s vote means there will be various amendments offered and there will be votes on the amendments, until the Senate can agree on something that seems to be a complete piece of legislation and then there will be a vote on that, maybe by the end of the week, if there is enough support. That means the next few days are going to be a whirlwind.

President Trump says they’ll come up with something really, really wonderful. At this point I’m just hoping I can get coverage for confusion.

The Conference Board said its consumer confidence index rose to 121.1 this month from 117.3 in June. The confidence index is now at its second highest level in 16 years. A big reason is the creation of millions of jobs since 2010 that’s driven the unemployment rate down to as low as 4.3%. That’s the lowest level since the turn of the century.

The difference between those who say jobs are “plentiful” (34.1%) and those who say jobs are “hard to get” (18%) was 16.1 points. Based on that measure, the last time the labor market was just as good was in August 2001.

A “present” situation index that tracks how consumers view the economy now rose to 147.8. That’s the highest level since mid-2001. A future expectations index that tracks how consumers think the economy will perform six months from now increased to 103.3.

Sales of existing homes continued to show solid growth. The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in May compared to a year ago, down from 5.8% in the prior period. The broader national index rose 5.6% for the year in May, the same as in April. Phoenix was right in line – posting 0.6% growth in resale home prices in May, and 5.7% in the 12 months through May.

Meanwhile, oil prices continue to rally. Saudi Arabia said at a meeting in Russia that it would cut August exports to 6.6 million barrels a day—a million barrels less than a year earlier. Separately, Nigeria, which isn’t part of the production-cut agreement led by the Organization of the Petroleum Exporting Countries, also promised to limit its daily production to 1.8 million barrels.

Oil traders have taken these developments as bullish for prices, though many do point out that the Saudis normally lower exports at this time of year because of stronger domestic demand for oil, and Nigeria’s output would still have to rise from its current level of just over 1.6 million barrels a day before the West African nation would cap its output.

Meanwhile, Halliburton forecast a flat rig count in the US; that implies a potential slowdown in oil production. Anadarko Petroleum, cut its investment guidance by $300 million for the full year after posting a larger than expected second quarter loss.

Copper is back to its highest levels in 2 years, as base metals extended a rally in the past month brought on, in part, by economists having become more upbeat about China’s economy;  coupled with the fact that a very strong housing market is creating strong demand for the physical copper. Freeport-McMoRan shares jumped 14.7 percent.

It wasn’t a very good day in the bond market, where the benchmark 10-year Treasury note fell the most in a month. A couple of possible reasons: bond investors expect only modest economic growth and inflation that is stuck well below the Fed’s 2 percent target, and bond traders don’t expect the Fed to increase rates anytime soon – as in maybe December, maybe next year – certainly not tomorrow.

The Federal Open Market Committee, the FOMC, started its 2-day meeting today; tomorrow they will issue a statement that they are standing pat on rates for now. Anything else from the Fed would be a major shock. The Fed’s policy is one of “normalizing” interest rates with a real emphasis that it continues to err on the side of market ease – that is, it does not want to make a mistake of disrupting markets and causing a correction.

That is, it wants to see the stock market continue to rise, the policy it has been following for most of the current economic recovery. The Fed will likely indicate that it is getting closer to trimming its $4.5 trillion balance sheet and selling off Treasuries and mortgage backed securities, but the big unwinding won’t really start to kick in until sometime in 2018, so for now the rally continues.

In earnings news: the markets looked past a 3% drop in Alphabet, which reported after the close yesterday. Alphabet was hit with a $2.7 billion dollar fine from the Euro Union, but looking past that, the parent of Google is still reporting impressive revenue and profit growth.

3M disappointed on earnings and it was punished. That seems to be the theme. Misses are punished. Slightly better than expected earnings get no love, but there is still plenty of good to great earnings news to lift the market to new highs.

With more than one-fourth of the S&P 500 having reported results, earnings are now expected to have climbed 9.1 percent in the second quarter, up from a projection of an 8-percent rise at the start of the month.

McDonald’s posted its biggest jump in global sales at established restaurants in five years, helped by stronger traffic worldwide. McDonald’s has also focused on value for U.S. customers with discounts on soft drinks and offering custom burgers.

And it seems to be working. Global same-restaurant sales climbed 6.6 percent in the second quarter, and sales at U.S. restaurants open at least 13 months rose 3.9 percent. Net income rose to $1.40 billion, beating estimates. Revenue was down slightly but still beat estimates. McDonald’s shares were up 4% and hit an all-time high and were the top gainer on the Dow Jones Industrial Average today.

Caterpillar shares jumped almost 6%, hitting a 5-year high. Earnings and revenue beat estimates and Cat raised its guidance.

AT&T’s quarterly profit topped estimates. Shares rose 2.5 percent. AT&T is locked in battle Verizon and Sprint and T-Mobile for customers in a market where most people already have cell phones. AT&T, which is in the process of buying Time Warner for $85 billion, has sought to compete by bundling mobile service with entertainment.

AT&T lost 89,000 U.S. phone subscribers who pay a monthly bill – that was better than expected.

Financial Review

Broken PROMESA

Sinclair Noe — May 3, 2017

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

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DOW + 8 = 20,957
SPX – 3 = 2388
NAS – 22 = 6072
RUT – 8 = 1390
10 Y + .02 = 2.31%
OIL – .22 = 47.60
GOLD – 19.20 = 1238.70

The Federal Reserve left interest rates unchanged as they wrapped up their two-day FOMC policy meeting. In a hawkish statement, the central bank also said consumer spending continued to be solid, business investment had firmed and inflation has been “running close” to the Fed’s target. “The committee views the slowing in growth during the first quarter as likely to be transitory,” the Fed said in a unanimous statement.

That sounds like the Fed is sticking to its guns and plans on 2 more rate hikes this year. The Fed raised its benchmark rate by a quarter percentage point at its last meeting in March to a target range of 0.75 percent to 1 percent. The rate-setting committee is also gearing up to announce sometime this year when and how the Fed will begin shrinking its $4.5 trillion balance sheet. Wednesday’s statement offered no new details.

Payrolls processor ADP said private employers added 177,000 jobs last month. It was the smallest gain since the 62,000-increase last October. ADP said private employers face increasing difficulty finding qualified workers in a tightening labor market.

The ADP figures come ahead of the Labor Department’s more comprehensive non-farm payrolls report on Friday, which is expected to show about 185,000 net new jobs in April, following an anemic 89,000 new jobs reported in March.

The Institute for Supply Management (ISM) said its index of non-manufacturing activity rose to 57.5 in April from March’s 55.2. A reading above 50 indicates expansion in the services sector.

Puerto Rico announced a historic restructuring of its public debt, touching off what may be the biggest bankruptcy ever in the $3.8 trillion municipal bond market. While it was not immediately clear just how much of Puerto Rico’s $70 billion of debt would be included in the bankruptcy filing, the case is sure to dwarf Detroit’s insolvency in 2013.

The move comes a day after several major creditors sued Puerto Rico over defaults on its bonds. Bankruptcy may not immediately change the day-to-day lives of Puerto Rico’s people, 45 percent of whom live in poverty, but it may lead to future cuts in pensions and worker benefits, and possibly a reduction in health and education services.

The island’s economy has been in recession for nearly 10 years, with an unemployment rate of about 12 percent, and the population has fallen by about 10 percent in the past decade. The debt restructuring petition was filed by Puerto Rico’s financial oversight board and was made under Title III of last year’s U.S. Congressional rescue law known as PROMESA.

The Title III provision allows for a court debt restructuring process akin to U.S. bankruptcy protection. Puerto Rico is barred from a traditional municipal bankruptcy protection under Chapter 9 of the U.S. code, but Title III is basically the same thing. The process will give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries.

U.S. Supreme Court Chief Justice John Roberts will appoint a life-tenured judge, likely a U.S. District Court judge, to oversee the case. That’s different than Chapter 9 municipal bankruptcy cases, where a bankruptcy judge controls the process. The person appointed to oversee the case will have significant power over how it unfolds.

This debt-cutting process has never occurred, so the lack of legal precedent could leave the judge with much sway over the future of Puerto Rico. The oversight board will aim to negotiate debt cuts with creditors, after which it will propose a plan of adjustment.

The judge will decide whether to authorize the plan. For investors, bad news. If investors hold secured bonds, they might get paid in full. But unsecured bondholders could suffer significant cuts, depending on which types of debt the judge determines to be vulnerable.

Complicating matters is the various governmental entities included in the bankruptcy filing, each of which has its own investors and creditors wanting to be paid. It really isn’t clear how creditors stack up against each other, but it is widely anticipated that pensioners will have a low spot in the pecking order. That’s exactly what happened in Detroit.

The GOP health bill gains new life as key holdouts vow support. Representative Fred Upton of Michigan says he will back the bill once an amendment he helped devise is added. It would provide an $8 billion boost in funding for people with pre-existing conditions; and while that sounds like a lot of money, it is but a speck of dust in the overall price tag for healthcare.

A White House official said Republicans are still two or three votes away from being able to guarantee passage. Even if it passes in the House, it would likely fail in the Senate.

Fresh data from real-estate website Trulia show that just 34.2% of homes have returned to the peak levels registered before the onset of the recession in 2008. What’s more, Trulia estimates it could take until 2025 for a true national recovery in home prices.

Much of Arizona is such an idiosyncrasy. Tucson is second only to Las Vegas in the ranking of cities where the smallest numbers of homes have recovered their value. In Tucson, only 2.4% of homes have recovered their peak prices. In Phoenix, 5% of homes have climbed back to or above their earlier peak price.

After the closing bell, Facebook reported added 80 million monthly users in the first few months of the year, as ad revenue popped 51 percent from a year ago. Net income rose to $3.06 billion, or $1.04 per share, from $1.73 billion, or 60 cents per share, a year earlier, beating estimates of 87 cents. Revenue was $8 billion vs. $7.8 billion consensus estimate. Shares moved lower in after-hours trade.

Facebook plans to hire 3,000 more people to review videos and other posts after getting criticized for not responding quickly enough to murders shown on its service. The hires over the next year will be on top of the 4,500 people Facebook already has to identify crime and other questionable content for removal.

Tesla posted a wider than expected first-quarter loss but said it had just over $4 billion in cash to handle the future. Tesla is betting on the launch of its $35,000 Model 3 midsize sedan to help meet its goal of producing 500,000 cars annually in 2018. The Model 3 is expected to go on sale later this year in the United States.

Tesla delivered 25,000 vehicles in the first quarter ended March 31, its highest since the carmaker went public in 2010, and a 69 percent increase from a year earlier. Tesla’s results reflect the first full quarter that includes solar panel installer SolarCity, which it bought last year.

Twilio makes cloud-based software that brands can use to reach out to customers: think in-app messaging services. While it has major brands on its books as clients, including Nordstrom, Airbnb and Amazon, Uber and Facebook’s WhatsApp are its two largest clients by far.

Uber accounted for 12% of the company’s revenue during the quarter, but Uber will be moving some of the technology it uses to communicate with customers in-house. The Uber news effectively torpedoed an otherwise horrible earnings report. Twilio down 25% today.

A day after the American Petroleum Institute injected a bit of optimism among traders by reporting a crude oil inventory draw of 4.2 million barrels, the EIA once again poured cold water on the oil bulls by reporting a much smaller decline, of 900,000 barrels. This is only the sixth inventory draw reported by the authority for the last 18 weeks.

In gasoline, the situation was pretty much the same. API estimated inventories in the week to April 28 had fallen by 1.9 million barrels, and the EIA refuted the estimate: according to it, gasoline inventories were up by 200,000 barrels in the seven-day period.

Copper prices dropped 3.5% today, the biggest one-day drop in 19 months after a jump in inventories increased worries about an economic slowdown in China, the world’s largest consumer of the metal.

On-warrant inventories available for delivery at LME-registered warehouses increased by 38,950 tons, or 32 percent. Earlier in the week, copper prices leaped to their highest in nearly a month. Traders expected prices to rise given a planned month-long strike at Freeport-McMoran’s Grasberg mine in Indonesia.

The Writers Guild of America has reached a tentative agreement for a new film and TV contract, averting a potentially devastating strike that would have impacted the fall season. The finale even came with a plot twist – an intervention from studio executives, who normally take a less hands-on approach to union talks.

The Securities and Exchange Commission has approved a request to trade quadruple-leveraged exchange-traded funds, because triple leveraged ETFs were just too boring. ForceShares Daily 4X US Market Futures Long Fund will trade under the ticker UP, and ForceShares Daily 4X US Market Futures Short Fund, under the ticker DOWN.

If you receive an email with an unexpected invitation to open and view a Google Doc, don’t do it. In what appears to be a large-scale phishing attack, people are reporting that they’re receiving these invitations from people they know. If you click on “Open in Docs,” it will spam everyone in your Google contacts, and it may also try to steal your information.

No Harm In Waiting For A Fed Increase

Financial Review

First Do No Harm

Sinclair Noe — September 17, 2015

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

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DOW – 65 = 16,674
SPX – 5 = 1990
NAS + 4 = 4893
10 YR YLD – .08 = 2.22%
OIL – .25 = 46.90
GOLD + 11.80 = 1132.00
SILV + .21 = 15.24

The Fed will raise rates someday, just not today. The FOMC issued their statement today, and they left interest rates unchanged, again. The biggest change in the wording dealt with international markets, saying: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

The statement also included this new line: “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring developments abroad.” You may recall that China was also frequently referenced in the Beige Book published a couple of weeks ago in preparation for this FOMC meeting.

The Fed also released their economic projections and they seem to be forecasting more of the same: GDP just over 2% for 2015, the unemployment rate finishing the year at 5%, inflation still significantly short of their target, and the outlook for a rate hike before the end of the year. But don’t bet on it; this Fed might never get off the Schneid. There will be growing pressure for a rate hike, if only to avoid the perception that the Fed is weak, or the idea of a Yellen put, or the view that market volatility is enough to stay the Fed’s decision again.

And the Fed’s decision to wait raises concerns about global economic weakness. Slowing growth in China has rippled across the world, hitting commodity-producing countries hard. The MSCI Emerging Markets Index, which captures stock markets in nations such as Brazil, Chile, Egypt and China, is down 14 percent this year. Just how bad is the situation in the emerging markets? And is it about to get worse?

The statement from the Fed also featured the first dissenter, Richmond Fed President Jeffrey Lacker was gung ho for a 25 basis point increase. And in the economic projections, known as the “dot plot”, which include forecasts of where each policymaker thinks the Fed should have its policy rate at the end of a given period, there’s one remarkable outlier in the projections.

For the first time ever, one monetary policymaker thinks the U.S. needs to move to negative interest rates until at least the end of 2016 to achieve full employment and get inflation back to 2 percent. That was probably the parting shot of outgoing Minneapolis Federal Reserve Bank President Narayana Kocherlakota. Beyond that one vote for negative rates, most of the dots point to higher rates by the end of the year. And there is a good chance that might happen, if only to prove they can.

The decision to leave rates unchanged doesn’t mean much; remember we’re talking about one-quarter of one percent. The Fed hasn’t chosen to resolve the doubts about whether its monetary tools can raise rates without causing upheaval in the banking system. But it has also chosen not to create new uncertainty over whether a rate hike is a one-off or a signal of more to come. Even so, forecasts show policymakers predicted that the Fed’s benchmark rate would rise gradually, reaching 2.6 percent by the end of 2017. In June, they predicted that the rate would reach 2.9 percent by then.

Futures traders are pricing in a 21 percent probability the central bank increases it target range in October, a 49 percent chance by the December meeting and a 56 percent likelihood by January. Treasuries rallied, pushing yields lower; while the dollar tumbled to a three-week low; stocks wobbled then slipped – there is bound to be some concern that slowing global growth could hamper the domestic economy.

There was some speculation that if the Fed didn’t raise rates today, they would at least come out with a hawkish statement, reaffirming their intent to raise rates soon – but that didn’t happen. And so this is being interpreted as a very dovish statement from the Fed. It might also be giving us some insight into the Yellen-led Fed. Greenspan or Bernanke probably would have hiked rates, right or wrong. And I thought Yellen would be a bit more hawkish, just to be assertive. That was not the case. Yellen appears more cautious, but that doesn’t mean she made a mistake.

There is more danger in hiking rates prematurely than in waiting. The Fed may think inflation is transitory but for now, it certainly isn’t a problem – no harm in waiting. The Labor market has been improving but there is still plenty of slack; a stronger labor market might attract some discouraged workers to try again; a stronger labor market might result in push on stagnant wages – no harm in waiting.

If the Fed raises rates, no borrower will feel the pain more acutely than the federal government, the nation’s largest borrower; and fiscal policy has been irresponsible at best; the Fed couldn’t feel confident raising rates with the prospect of a federal government shutdown in less than 2 weeks – no harm in waiting.

The housing market has finally shown signs of life, but many markets, like Phoenix, still haven’t fully recovered; a Fed rate hike would almost certainly result in higher mortgage rates – no harm in waiting. A Fed increase might have prompted investors to pull money out of emerging, damaging their economies, and hurting their abilities to buy goods from developed countries – no harm in waiting.

The problem for the Fed is that any action they take will take time to work; steering the economy one way or the other is like trying to steer a huge ship, not a small sports car; there is lag time before the effects of policy are felt. And there might never be a perfect time to change policy. If they don’t get to it by the December, next year we move into an election year, which means there will be political implications thrown into the mix.

There was other economic news today. The number of Americans getting laid off from their jobs remains near the lowest level in decades. New applications for U.S. unemployment benefits fell by 11,000 to 264,000 in the seven days ended Sept. 12. This is the lowest level of claims since mid-July, when claims fell to 255,000, the lowest level since September 1974.

Construction of new homes slowed down over the past two months. Housing starts fell 3% to an annual rate of 1.13 million units in August. Starts in July were revised down sharply to a decline of 4.1% to an annual rate of 1.16 million units from the prior estimate of a 0.2% gain to 1.21 million.

The U.S. current account deficit narrowed to a preliminary $109 billion in the second quarter, or 2.5% of gross domestic product, from a revised $118 billion.

The Philadelphia Fed manufacturing index took a surprise turn into negative territory in September, falling to negative 6 from positive 8.3 in August.

Copper prices rose to two-month highs in early Asian trading on worries about supply disruptions due to a powerful earthquake off the coast of Chile – the world’s largest copper producer. The magnitude 8.3 quake shook buildings in the capital Santiago and generated tsunami warnings from New Zealand to California. Five people are now known to have died, and one million residents have been evacuated from Chilean coastal areas.

French media giant Altice has confirmed it will buy Cablevision for an enterprise value of $17.7B, or $34.90/share in cash (a 22% premium to Wednesday’s closing price). Together both operators represent the fourth-largest cable operation in the U.S. market.

General Motors has agreed to pay $900 million and sign a deferred-prosecution agreement to end a U.S. government investigation into its handling of an ignition-switch defect linked to 124 deaths. The deal means GM will be charged criminally with hiding the defect from regulators and defrauding consumers, however, the charges will be put on hold while the automaker fulfills the terms of its settlement. Individuals are also not expected to be charged in the criminal suit.

Australia’s antitrust regulator has deferred a decision again on Royal Dutch Shell’s proposed $70 billion takeover of BG Group, this time until Nov. 12, warning the deal could raise prices and cut the supply of natural gas to consumers on the east coast of Australia. The takeover has already been cleared by the European Commission, U.S. and Brazilian antitrust authorities, but still needs approvals from Australia’s Foreign Investment Review Board and China to go ahead.

Saying the deal was unlikely to hurt competition, the Justice Department has granted antitrust clearance to Expedia’s $1.3 billion takeover of rival Orbitz Worldwide. The department had investigated how the merger might affect the commissions Expedia and Orbitz negotiate with airlines, car rental companies and hotels and explored new charges to consumers.

Northrop Grumman  announced a new $4 billion share repurchase program. The defense contractor had previously approved a $3 billion program last December.

Sony said China censorship rules are hurting sales of its PlayStation 4 video game console, even though a ban on foreign-made gaming consoles was lifted last year.

KKR‘s Samson Resources filed for Chapter 11 bankruptcy protection, as the oil and gas producer hands control over to its lenders. Samson was bought four years ago by a group led by KKR for $7.2 billion.

Back from the dead? Google seems to have resurrected its troubled Glass connected eyewear project, now called Project Aura, by hiring engineers and software developers from Amazon. Aura will remain within Google rather than Alphabet to collaborate more closely with advanced technology efforts and develop other wearables. Google stopped selling the initial $1,500 version of Glass to consumers in January following waning interest, criticism over its price and privacy concerns.

To Hike Or Not To Hike-Is That Really The Question To Ask?

Financial Review

To Hike or Not To Hike

Sinclair Noe — September 11, 2015

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DOW + 102 = 16,433
SPX + 8 = 1961
NAS + 26 = 4822
10 YR YLD – .04 = 2.18%
OIL – 1.12 = 44.80
GOLD – 3.70 – 1108.20
SILV – .13 = 14.68

The S&P 500 index was up 2.1% for the week, the best weekly gains since July.  The Dow was up 2.1% for the week, and the Nasdaq gained 3%.

The Senate has blocked an anti-Iran deal resolution. Senate Democrats successfully fended off an effort by the Republican-led Congress to dismantle the Iran deal with a disapproval resolution. While the Senate killing the resolution should mean that Congress’s bid to undo the deal is over, the House is fighting on with several bills aimed at expressing their disapproval. There’s even talk of filing lawsuits against the president.

Russia is calling for Washington to restart direct military-to-military cooperation to avert “unintended incidents” near Syria, at a time when U.S. officials say Moscow is building up forces to protect President Bashar al-Assad’s government. The U.S. is leading a campaign of air strikes against ISIS fighters in Syrian air space, and a greater Russian presence would raise the prospect of the Cold War superpower foes encountering each other on the battlefield. Both Moscow and Washington say their enemy is ISIS, but Russia supports the government of Assad, while the U.S. says his presence makes the situation worse.

The White House has announced that the U.S. is preparing to accept 10,000 Syrian refugees for the 2016 fiscal year. The Syrian Civil War is now in its fifth year and more than 4 million people have become refugees. Syria’s neighbors currently host the majority of the country’s refugees. As conditions deteriorated, many refugees made the dangerous trip to Europe. European Union governments are likely to agree in principle to shelter 160,000 refugees from crisis zones. To date, the U.S. has resettled less than 1,500 Syrian refugees out of 18,000 referred by the United Nations.

A week before the Federal Reserve’s most critical policy decision in years, Wall Street opinion makers can’t agree on anything. Not only is there no consensus about whether the Fed will end its seven-year-old policy of zero interest rates, but views on the fallout from such a move are wildly disparate.  We’ll all find out more on Wednesday, when the FOMC issues its statement. As divided as the market is on that decision, it’s the aftermath that stirs the real split. Many say the economy is too weak for a rate hike, and fear the markets could tank. Others say the rate hike is warranted, even necessary, and would signal the economy is strong.

The real question is what will happen when interest rates rise? First up, a rate hike would strengthen the dollar, particularly if the hike is part of a long-term cycle. A stronger dollar would likely result in money flowing into the US. A stronger dollar means assets priced in dollars would go down in price; so we might anticipate weakness in commodities such as oil, industrial metals, and precious metals – pretty much all commodities except agriculture. In this way, a rate rise would be deflationary.

A stronger dollar would put even more pressure on emerging market currencies, which have already experienced pressure; there is still plenty of dollar denominated debt in emerging markets. Countries with current account deficits could expect to feel the pressure, led probably by Brazil.

For real estate, there is no question that lower interest rates spurred real estate purchasing activity. So, it stands to reason that an increase in rates will have the opposite effect, by reducing demand due to higher costs of money. Some say that a slight rise will cause a short-term increased demand for purchasing real estate; people think that rates will continue to rise, potentially keeping them out of the market in the future, and so they act. The longer-term effect is to tap the brakes on real estate.

For stocks on Wall Street, the impact of higher rates is tougher to call. Historically, there is no direct correlation between the start of a rate-rising cycle and a drop in stock prices. The reasoning is that rates are hiked when the economy is strong and the economy is humming along, perhaps humming along a bit too fast. Historically, Wall Street reacts negatively to surprise moves by the Fed (think 1987) but the Fed has been warning they will hike rates and they will do so slowly and incrementally – no surprises, just some guessing about the exact date. Most investors aren’t confident that the economy is strong right now; earnings growth has been flat, stocks have suffered a correction, and there is still slack in the labor market.

Ultimately, the stock market will respond to the fixed income and credit markets, and this is pretty straightforward; higher target rates set by the Fed will send bond yields higher, which means bond prices must go down.

With yields already low, the proportionate falls in prices need to be that much greater and the biggest price drops will come for the assets with the greatest duration. The twist here is that long duration assets are widely perceived as less risky, because they carry a lower risk of default; for example: corporate bonds, or municipal bonds. Junk bonds carry greater credit risk, and are considered less sensitive to a rise in interest rates.

The biggest risk is that markets get panicked. People who think they have a low risk asset suddenly realize they are exposed, and they hit the sell button, which can lead to a herd or mob mentality. If prices go too far south too fast, credit markets can freeze, and when that happens, everything freezes. The gears grind to a halt and the markets crash. There really is no reason to expect a crash. The economy can withstand a little quarter point rate increase. We don’t know what the Fed will announce on Wednesday, but we should not be surprised by a hike.

Of course, if you don’t like volatility, you could just stop playing the game for a while. Investors pulled another $19 billion from equity funds over the past week. The exodus from emerging markets also continued, with losses extending into their ninth week. Emerging equity funds shed $4.5 billion, while U.S. equities saw outflows of $15.9 billion and European stocks lost $800 million. Japanese funds were the only category to post inflows. The data also that global equity funds had shed $46 billion over the past four weeks. Year-to-date outflows from emerging stocks total $58 billion.

Consumer sentiment declined in September to the lowest level in year as Americans anticipated a weaker economy in face of a global slowdown and turbulent financial markets. The University of Michigan’s preliminary index dropped to 85.7 from 91.9 in August, the largest one-month decline since the end of 2012. Households were less upbeat about future growth in employment and wages than a few months earlier as 73 percent of respondents reported hearing news of negative economic developments.

Wholesale prices were flat in August, held down by a sharp decline in gasoline prices. The producer price index was unchanged last month on a seasonally adjusted basis. Excluding the volatile categories of food, energy and trade margins, core producer prices edged up 0.1%. Over the past year overall producer prices have fallen an unadjusted 0.8%, unchanged from July. The core rate has risen 0.7% in the same span.

How low can oil go? Goldman Sachs has cut its 2016 forecast to $45 a barrel from $57—and it’s leaving open the possibility that prices could go much lower than that. Goldman says the global surplus of oil is even bigger than previously thought and that could drive prices as low as $20 a barrel. Goldman said in a report e-mailed this morning that it is cutting its Brent and WTI crude forecasts through 2016, in part because a failure to reduce production fast enough may require prices near the $20 level to clear the oversupply.

The Goldman report stands in contrast to a report yesterday from the International Energy Agency, estimating that crude stockpiles will diminish in the second half of next year as supply outside OPEC declines by the most since 1992, with drops in U.S. shale production accounting for 80 percent of the decline. The IEA thinks lower supply will support prices. Twenty bucks isn’t Goldman’s most likely scenario but it’s a nice dramatic number that generates lots of tweets, as were the forecasts by Goldman and others in the not-so-distant past that oil would hit $150-$200 a barrel.

Copper prices dropped today, ending the metal’s longest rally since June. Copper prices have fallen 15 percent this year amid concerns that slower growth in emerging markets will reduce demand. Tighter U.S. monetary policy could further damp consumption as foreign currencies weaken and make the metal more expensive for overseas buyers. Copper for delivery in three months sank 0.5 percent to settle at $2.43 per pound. Prices climbed in the previous four sessions, rising 5.4 percent on concern that supplies would tighten as miners including Glencore took steps to cut production.

Nate Silver from FiveThirtyEight has run the numbers on the 2015 NFL Football season. He figures the season will come down to the Patriots and the Seahawks, and Seattle will win the Super Bowl, even though the Patriots will have win more games – 11.3 to be precise. Silver predicts the Cards will win 8.2 games – not enough to win the division, but more than San Francisco.

Arizona state troopers took two people into custody today who they believe might be connected to a string of 11 recent highway shootings. One detainee was described as a “person of interest.” So far, eight vehicles have been hit by bullets while police haven’t specified what hit the other three. This doesn’t mean the cops have caught the shooter or shooters, just that they have someone in custody. Be careful out there.

Wednesday, July 02, 2014 - Milk and Cookie Binge

Financial Review with Sinclair Noe 

DOW + 20 = 16,976
SPX + 1 = 1974
NAS – 0.92 = 4457
10 YR YLD + .07 = 2.63%
OIL – 1.18 = 104.16
GOLD + 1.10 = 1328.20
SILV + .18 = 21.25

 

Record highs for the Dow and the S&P 500. We celebrate with milk and cookies. It’s good, it’s wholesome.

Unlike Goldman Sachs, which apparently likes to celebrate with binge drinking at strip clubs; at least that’s the accusation by 2 former Goldman employees suing Goldman for discrimination against women. Support for their claims includes statements of former Goldman Sachs employees, expert statistical analyses and evidence on earnings and promotions from the firm’s own records. According to filings with the court, female vice presidents earned 21 percent less than men and female associates made 8 percent less, the former employees claimed; about 23 percent fewer female vice presidents were promoted to managing director of the bank relative to their male counterparts.

We’ll stick with milk and cookies.

Tomorrow we’ll get the monthly jobs report, one day early due to the holiday shortened weekend. Today we got the ADP Employment Report showing private nonfarm payrolls increase 281,000 in June. That’s the best ADP report since the fall of 2012. That would be a very good number indeed if it translates to the government report tomorrow. The ADP report should not be used as a predictor of the government jobs report. Both reports tend to move in the same direction in the long term, but month to month fluctuations can be quite pronounced. It is expected tomorrow’s report will show 215,000 net new jobs in June.

Here’s another indicator; the ISM manufacturing employment index was unchanged in June at 52.8%; the historical correlation between the ISM employment index and the BLS employment report suggest the economy lost about 5,000 manufacturing jobs in June; the ADP report showed the economy added 12,000 manufacturing jobs last month.

The best way to boost the economy is to have more people working, which then equates to more people spending. Even though the unemployment rate has dropped to 6.3%, that’s still high; and long term unemployment is still a problem, and indicates there is still slack in the labor market. Just as important as the number of jobs created is the quality of the jobs created. For several years, the trend has been for lower paying jobs, where wages are below the average of $24.38 an hour. There has been some improvement this year, with 61% of the 1.07 million new jobs in 2014 paying above the average hourly wage. So, keep an eye on wage growth in tomorrow’s report; it will be a critical component in overall GDP growth.

So, as we wait for the jobs report, we are left to question whether the economic recovery is really gaining traction. Dr. Copper says yes. Copper closed at its highest price in more than 4 months. Copper for September delivery gained 6 cents, or 1.9 percent, to settle at $3.27 a pound. Since copper is an industrial metal used in everything from buildings to cars, it’s considered a good economic indicator, however it might be a better indicator of growth in China, the world’s largest buyer  of copper.

Federal Reserve chairwoman Janet Yellen delivered a speech to the International Monetary Fund and she says the Fed has the right focus on jobs and inflation, and should leave stability concerns to regulation. Many economists and investors are concerned the Fed’s policies have fostered potential financial asset bubbles. Yellen said today: “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

Yellen said she saw pockets of increased risk-taking across the financial system that could warrant a more "robust macroprudential approach" if those concerns grew.

BNP agreed on Monday to pay almost $9 billion while admitting criminal violations of United States sanctions. BNP admitted to funneling and hiding some $30 billion in transactions to Iran, Sudan, and Cuba. The bank will also be barred from clearing any financial transactions in dollars for a year starting in January. Credit Suisse and a subsidiary of UBS also pleaded guilty recently to tax avoidance and interest-rate rigging, respectively. JPMorgan Chase, Bank of America and other United States banks have paid billions of dollars in penalties but have, so far, avoided criminal liability. The French government says that’s not fair.

And while it might be easy to dismiss the French for whining, they are correct. New research suggests that overseas firms like BNP Paribas do in fact pay bigger fines and plead guilty more often than United States companies. United States criminal fines from 2001 to 2010 were about five times greater on average for foreign firms than for their American counterparts. The average penalty was 22 times bigger for foreign companies after adjusting for the type of crime and whether the company was listed. One reason may be that prosecutors single out only the most serious cases abroad. Another reason might be because prosecutors are afraid of hurting a domestic business. Another reason might be that prosecutors are spineless wimps in the face of the political clout of US banks.

What we have learned is that businesses and investors don’t seem to care about the criminal convictions of Credit Suisse and BNP and that might signal that if a conviction will not shut down the company, then there’s no reason not to convict, international or domestic.

Yesterday we told you about that creepy experiment by Facebook, designed to make you feel good or bad by filtering out good or bad content. Facebook faces a government investigation in Europe over its study of whether manipulating people's news feeds could change their emotions. Facebook won't be helped by the fact that the company didn't alter its terms of service to disclose to users that their posts would be used for research until four months after the experiment took place.

The implementation of the European Union's so-called "right to be forgotten" policy is already having a worrying impact on the media, with at least two outlets revealing on Wednesday that links to articles of theirs have been scrubbed from Google. A European court ruled in May that Google must remove links to articles from its search engine if the subjects of the post asked it to. The court specified that links could be scrubbed if they were "inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed."

When the ruling came down, some worried that it would place too much power in the hands of public figures who wished to have unflattering information about themselves hidden. On Wednesday, the Guardian and the BBC both disclosed that just such an occurrence seemed to have taken place with stories of theirs. The Guardian case involved 6 articles that were taken down from Google’s European platforms. The BBC case involved Stan O’Neal, the former head of Merrill Lynch, implicated in the subprime mortgage scandal. Is the data in the BBC report "inadequate, irrelevant or no longer relevant"? Hmm.

Solar installers SolarCity and SunRun have filed a lawsuit against Arizona’s revenue department over the state’s decision to apply property taxes to third-party solar-power systems. SolarCity and SunRun have popularized leasing, rather than owning, residential rooftop systems. The companies install and maintain the systems in return for monthly payments that are generally less than a homeowner’s monthly power bill. 

Arizona’s revenue department last year decided to tax leased solar panels, resulting in $152 extra in property taxes for the first year of a homeowner’s leased $34,000 solar panel array, a charge that would decrease as the value of the array goes down; still it’s a large enough increase to wipe out most or all of the savings from going solar. Until last year, both owners and leasers of solar panels didn’t have to pay property taxes. There are concerns that applying taxes on systems would wipe out the savings from solar leasing and stunt solar-power growth in Arizona.