Financial Review

Hippity Hoppity

Sinclair Noe — April 17, 2017

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DOW + 183 = 20,636
SPX + 20 = 2349
NAS + 51 = 5856
RUT + 15 = 1361
10 Y + .02 = 2.25%
OIL – .43 = 52.75
GOLD – 3.80 = 1285.00

The S&P 500 is coming off a three-day losing streak, having fallen more than 1% over that period. It has also dropped for two straight weeks, closing at its lowest level since February on Thursday. The Dow and the Nasdaq have also dropped over those periods.

Also, geopolitical hotspots did not boil over during the holiday weekend, even though South Korean news agencies are reporting that 2 more US aircraft carriers are headed for the Korean peninsula. The US and South Korea are discussing joint drills, which will include the three aircraft carriers and other ships. So, we were probably due for a bounce.

And today, the market turned its attention to earnings reporting season, just getting underway with an optimistic outlook. Profits of S&P 500 companies are estimated to have risen 10.4 percent in the latest quarter, the first double-digit percentage growth since the third quarter of 2014, according to Thomson Reuters.

The Atlanta Federal Reserve bank downgraded their outlook for U.S. economic growth for the first quarter. The Atlanta Fed said first-quarter gross domestic product was on track to grow 0.5 percent, which was lower than the 0.6 percent growth rate calculated on April 7. Meanwhile, a survey from CNBC and Moody’s analytics puts the consensus forecast at 0.9%.

Now, keep in mind this is first quarter GDP, and we are already in the second quarter, and we are likely to see a familiar pattern emerge, where a weak first quarter is followed by a second quarter revival, and an even stronger third quarter. What’s expected to underpin second-quarter growth is higher household spending.

Consumers cut back early in the year, partly to recover from holiday spending but also because tax refunds were sent out unusually late. Millions of Americans will have more money to spend this month and next. Also, the US economy is simply on much more solid ground than any time since the Great Recession ended in the middle of 2009.

Home-builders are not feeling the animal spirits. The National Association of Home Builders/Wells Fargo housing market index fell 3 points to 68, on a scale where any reading over 50 is considered good. The March reading was an 11-year high. The measure of current sales conditions also fell 3 points, to 74, though it’s been over 70 for five consecutive months.

Tomorrow, the government will release the latest housing starts data, which should show a modest decline in March. Single-family housing starts have more than doubled from the 2009 lows but are well below non-recessionary levels.

Also, this morning, the Empire State manufacturing survey fell to a reading of 5.2 in April from a two-year high of 16.4 in March. The survey still shows improving conditions, since the index was above zero. But several key components to the survey, including new orders and shipments, also declined.

On Friday, the Commerce Department said retail sales fell 0.2 percent in March following a 0.3 percent decrease in February, which was the first and biggest decline in nearly a year.

Meanwhile, the Labor Department said its Consumer Price Index declined 0.3 percent last month. This was the first decline in 13 months and biggest decrease since January 2015 amid falling prices for gasoline and mobile phone services, which offset rising rents and food costs.

So, with the economy continuing its sluggish growth in the first quarter, where is earnings growth coming from? The answer might surprise you – Europe. The Euro area has made an important contribution to global growth with GDP projected to expand 2.25% in the first quarter and 2.5% this quarter.

First quarter earnings per share growth in the Eurozone is forecast to grow at almost double the rate of earnings growth in the US. Higher nominal GDP outside the U.S. is benefiting European firms and US export-oriented names.

For S&P 500 companies that generate more than 50% of sales inside the US, the earnings growth rate is 6.0%. For companies that generate less than 50% of sales inside the US, the earnings growth rate is 15.7%.

So, we are starting to see a bounce back in Europe. Also, emerging-market stocks and bonds have attracted large inflows from investors. Since the beginning of the year, the main exchange-traded fund for emerging markets, iShares MSCI Emerging Markets, is up 11 percent, with funds that track markets like Mexico, Turkey, India and Argentina rising even more.

And China said its economy, buoyed by heavy investment spending, had grown 6.9 percent, a better figure than economists had projected. Other economies considered to be emerging markets — Mexico, South Korea and Brazil — are also overcoming deterrents, like volatile currencies, political upheaval and worries of a trade crackdown.

According to an index of hard and soft economic data points compiled by the Institute of International Finance, growth in emerging economies was up 6.8 percent through the first quarter this year — the model’s highest reading since 2011.

Non-US equities are multi-decade cheap versus the S&P 500. It’s likely, then, that the next long-term trend will favor non-US markets. Stock and bond market gains in emerging markets can be fleeting, vulnerable to political turmoil and investors with short-term investment horizons. But for now, the mood is bullish.

This afternoon, Treasury Secretary Steven Mnuchin said the administration’s timetable for tax reform is set to slip. The Financial Times reports, Mnuchin said the target to get tax reforms through Congress and on President Donald Trump’s desk before August was “highly aggressive to not realistic at this point”.

Ahead of meetings with finance ministers and central bankers in Washington this week, Mnuchin also rejected fears that the Trump administration may be embarking on a new round of currency wars over the strength of the dollar following the president’s public fretting last week.

He stressed that the US did not intervene in currency markets. He agreed with the president’s repeated comments in recent months that the dollar’s strength in the short term was hurting US exports and the economy.

Budget Director Mick Mulvaney told CNBC.com the administration plans to cut taxes without regard to the budget deficit. Mulvaney also noted House Republicans want to phase out Medicare in favor of vouchers, a position Mulvaney voted for six times when he was in the House —- though he said Trump may or may not go along.

Whatever is happening or is going to happen on the fiscal front, look for opposition from both sides of the aisle. President Trump has promised a raft of presumably Wall Street-friendly initiatives, including tax cuts, an increase in infrastructure spending and deregulation. Those pledges have lifted markets to records, but since March 1, when equity benchmarks last touched a fresh round of all-time highs, momentum has faded.

Meanwhile, the Federal Reserve is lurking in the background. There’s a 47% chance the Fed raises its key interest rate in June, according to World Interest Rate Probability data provided by Bloomberg. That’s down from a 66.5% probability one week ago. The decline in CPI inflation may slow the Fed’s assault on higher rates, but we’ll need to see more data before we can confirm rate hikes are off the table.

Congress remains on vacation as another week begins in Washington, and when lawmakers return they’ll have only days to head off a government shutdown. Senators are due to return Monday, April 24, with House members scheduled to come back a day later. Federal government operations are funded through April 28, and without a new spending bill, a partial shutdown kicks in for the first time since 2013. The key here is “partial.”

United Continental this morning reported first-quarter earnings that topped forecasts. The company earned $0.41 in adjusted earnings per share (0.38 expected) and operating revenue of $8.42 billion ($8.38 billion forecast.) Of course, that was all before last week’s incident where a doctor was dragged from a plane to make way for United employees to fly. The earnings call will be tomorrow.

After the closing bell, Netflix reported a miss on both domestic and international subscriber growth in its first quarter earnings. The bright spot: Netflix turned in a rosier forecast for Q2 than Wall Street was expecting, both domestically and internationally. Earnings beat expectations, and revenue was in line with analysts’ estimates. Shares dropped in after-hours trade.

Netflix said in the fall that it plans to spend $6 billion on content this year, above last year’s predicted spending from companies like Amazon and CBS. Netflix also said in January it plans to produce 1,000 hours of premium original content this year — even as tech giants like Apple try their hand at original shows.

As of last year, Netflix was by far the most-watched streaming service in America, at 52.6 million American households – nearly double the number streaming Amazon.

HCA Holdings warned its first-quarter results would come up short of analyst expectations. HCA pre-announced first-quarter revenues of $10.6 billion, which is one percent below the $10.78 billion top-line consensus estimate. The hospital operator, which specializes in trauma and surgical centers, said emergency room admissions rose 1.1 percent in the latest quarter, down from the 1.6 percent gain in the same quarter a year ago, and below analysts’ expectations.

Boeing plans to lay off hundreds of engineers in Washington state and other locations – and may eliminate more jobs later this year. The latest workforce reduction, which should take effect June 23, follows a separate exodus of 1,500 mechanics and 305 engineers and technical workers who agreed to leave voluntarily earlier this year. Both union and non-union workers will be affected.

Markets Mixed Following Fed Report

On the Market

Posted: 9/7/2016 4:15 PM ET

Markets Mixed Following Fed Report

U.S. equities finished mixed and near the flat line, showing little reaction to the afternoon release of the Fed's Beige Book, while there was likely some additional caution ahead of tomorrow's monetary policy decision from the European Central Bank. News on the equity front was a mixed bag of earnings results. Elsewhere, Treasuries were nearly unchanged and gold lost ground, while the U.S. dollar and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) lost 12 points (0.1%) to 18,526, the S&P 500 Index was nearly unchanged at 2,186, and the Nasdaq Composite inched 8 points (0.2%) higher to 5,284. In moderate volume, 813 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose by $0.67 to $45.50 per barrel, wholesale gasoline gained $0.03 to $1.35 per gallon and the Bloomberg gold spot price fell $4.74 to $1,345.26 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 94.96.

Chipotle Mexican Grill Inc. (CMG $438) got a boost from the disclosure that activist investor Bill Ackman's Pershing Square Capital Management LP acquired a 9.9% stake in the burrito chain. Pershing Square said it intends to engage in discussions regarding the governance and board composition, strategic plans and the future of the company among other items.

Western Digital Corp. (WDC $53) raised its fiscal 1Q EPS and revenue outlooks, with the hard drive and flash storage products company citing its ability to reach a larger number of customers following the recent acquisition of SanDisk and the continued progress of its subsidiaries. WDC rallied over 12%.

Dave & Buster's Entertainment Inc. (PLAY $45) reported 2Q earnings-per-share (EPS) of $0.50, above the $0.44 FactSet estimate, as revenues increased 12.4% year-over-year (y/y) to $244 million, compared to the projected $243 million. 2Q same-store sales rose 1.0% y/y, versus the expected 2.0% gain. PLAY lowered its full-year same-store sales outlook, and shares were solidly lower.

Southwest Airlines Co. (LUV $39) and Delta Air Lines Inc. (DAL $39) both saw solid gains to boost the airline sector. LUV found support from its August report on results where it forecasted a less-than-expected expansion of capacity that appears to be alleviating concerns about pricing pressures in the sector, per Bloomberg. Also, DAL jumped despite lowering its 3Q guidance due to its August power outage, suggesting the outlook was better than the Street had feared.

Job openings rise to a record, Fed report shows continued modest growth

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, rose by the most in six months to a record level of 5.87 million jobs available to be filled in July, from June's 5.64 million level, and versus the Bloomberg forecast of 5.63 million. The hiring and separation rates remained at 3.6% and 3.4%, respectively.

The MBA Mortgage Application Index rose 0.9% last week, after gaining 2.8% in the previous week. The increase came as a 0.7% gain for the Refinance Index was accompanied by a 1.2% rise for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 3.68%.

Finally, in afternoon action, the Federal Reserve released its Beige Book report—an anecdotal report on national economic activity used by the Central Bank to prepare for the next two-day monetary policy meeting ending on September 21. The report showed that U.S. economic activity continued to expand at a modest pace during July and August, and while employment continued to increase during the period and remained tight in most areas, wage pressures were seen as slight. Consumer spending, though positive, was little changed from the previous report, and most districts cited uncertainty surrounding the November elections to its expectations of moderate growth in sales and construction activity going forward.

As noted in the Schwab Market Perspective: Get Ready for the End of the Summer Slumber, U.S. economic data has perked up, but we need to see consistently better data to confirm a sustainable lift in growth beyond the third quarter. The Federal Reserve is indicating a desire to raise rates, but Friday’s slightly weaker-than-expected jobs report suggests a September hike is less likely. Read the whole perspective at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished nearly unchanged, as the yields on the 2-year and 10-year notes were flat at 0.73% and 1.53%, respectively, while the 30-year bond rate ticked 1 bp higher to 2.24%.

For analysis on the fixed income markets see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones, titled Rate Hikes on the Horizon—but When? at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones. Also, for the latest on the subdued market action in the "dog days" of summer, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest article, All Summer Long: Will the Extreme Lull in Volatility Persist? at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

For tomorrow, investors will have little domestic news on the economic front, with the only reports on the docket being weekly initial jobless claims, forecasted to move slightly higher to a level of 265,000 from the prior week's 263,000, while in the final hour of trading, consumer credit is expected to show consumer borrowing was $16.0 billion in July, up from the $12.3 billion posted in June.

Europe higher as ECB decision looms, Asia mixed following U.S. data

European equities finished higher, though caution likely lingered ahead of tomorrow's monetary policy decision from the European Central Bank (ECB). The ECB is not expected to make any major changes to its highly accommodative stance but the markets will be looking to see if it extends the duration of its asset purchase program. The euro declined versus the U.S. dollar to support export-heavy stocks even as another softer-than-expected economic report in the U.S. yesterday, in the form of a disappointing services sector report, dampened imminent U.S. Fed rate hike expectations. Bond yields in the region mostly lost ground, following an unexpected drop in German industrial production for July. The British pound fell versus the greenback on the heels of a report that showed U.K. manufacturing fell much more than expected in July by the most in a year. The report was in contrast to recent upbeat data in the U.K. that has helped the pound rebound from a tumble in the wake of the late-June vote in favor of leaving the European Union, known as a Brexit. For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't, while Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides a look at the global earnings landscape in his latest article, Mind the Gap: Are Earnings Expectations too High?. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed amid dampened imminent U.S. rate hike expectations following a disappointing read on services sector activity in the world's largest economy. The report came on the heels of last week's slightly softer-than-expected U.S. employment report and unexpected drop to contraction in the manufacturing sector. Japanese equities declined, with the yen rising on the tamped down U.S. rate hike expectations and as uncertainty festered regarding the Bank of Japan's possible expansion of its stimulus measures. Mainland Chinese stocks were flat and those traded in Hong Kong dipped slightly, retreating from a one-year high amid continued low volatility. Australia's markets gain3d modest ground, despite a solid drop in oil & gas issues and the nation's 2Q GDP report that showed a 0.5% quarter-over-quarter pace of expansion, compared to the expected 0.6% growth, and versus the 1.0% gain posted in 1Q. Finally, stocks in both South Korea and India declined, though the MSCI Emerging Markets Index moved higher on the reduced rate hike expectations in the U.S. For more analysis on emerging markets, Schwab's Kathy Jones offers her latest article, Emerging Market Bonds: Curb Your Enthusiasm, at www.schwab.com/onbonds.

In addition to the aforementioned, highly-anticipated policy meeting of the ECB, reports slated for tomorrow's international economic calendar include GDP from Japan, trade data out of Australia, and trade and lending statistics from China.

Financial Review

Times Change

Sinclair Noe — September 30, 2015

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

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DOW + 235 = 16,284
SPX + 35 = 1920
NAS + 102 = 4620
10 YR YLD + .01 = 2.06%
OIL – .14 = 45.09
GOLD – 12.40 = 1116.30
SILV – .13 = 14.62

This is the last trading day of the third quarter. China’s main stock market posted its worst quarter since 2008 and its smaller Shenzhen index, posted its worst quarter in at least two decades. Markets in Singapore and Indonesia are set to post their worst quarters since the financial crisis. The MSCI Asia ex-Japan Index fell 19.1% from the beginning of the quarter. The Nikkei closed out its worst quarter since 2010 and the ASX its worst since 2011.

European stocks moved higher today, but not enough to recover from the worst quarter in 4 years. The Stoxx Europe 600 index is down about 9.5% for the quarter. Germany’s DAX index down 12% for the quarter. France’s CAC index posted a quarterly loss of 7.3%, and the UK’s FTSE 100 down 7.7%. The Eurozone is back in deflation. Consumer prices slipped 0.1% year-over-year in September.

The major U.S. averages had a rough third quarter. Concerns about spillover from slowdown in China and the timing of a Federal Reserve rate hike sent markets into correction territory, or more than 10 percent below their 52-week highs, in late August. The major U.S. averages recently fell back into correction mode and were close to retesting the August lows Tuesday.

The Russell 2000 held below its Aug. 24 low Tuesday. For the quarter, the Dow fell 7.6 percent, the S&P lost 6.9 percent and Nasdaq fell 7.4 percent. For September, the Dow fell 1.5 percent while the S&P dropped 2.6 percent and Nasdaq fell 3.3 percent. The Nasdaq biotech index lost 19.8% for the quarter.

West Texas Intermediate and Brent crude oil were down 24% for the quarter, for their sharpest decline since the end of 2014. The LMEX Metals Index is set for its longest streak of monthly declines since January 2009, down 11% for the quarter. Based on the most-active contracts, gold prices lost 1.5% for the month and 4.8% for the quarter. Year to date, gold is down 5.8%.Rice, cocoa, and cotton are the only commodities to post gains year-to-date.

Everything else is down. The worst performers are coffee down 28.8%, and lumber down 34.6%. Brazil and Columbia have flooded the coffee markets to boost exports to customers buying with U.S. dollars, in an effort to help offset losses from weakness in their local currencies. The selloff in lumber tells us something about the construction market, not just domestically but more so in China.

The MSCI Emerging Markets Index is down 19% for the quarter; investors pulled $40 billion out of developing economies in the third quarter, the biggest outflows since the fourth quarter of 2008. About $11 trillion has been erased from global shares in the third quarter.

The head of the International Monetary Fund says there is reason to be concerned about the global economy. In a speech today, IMF Director Christine Lagarde said that her organization sees troubling signs in the world’s finances, and that it is unclear if the current situation is cyclical or if it represents a fundamental downturn. “The simple answer is that there is no simple answer. Certainly, we are at a difficult and complex juncture,” Lagarde said, explaining she is worried about recent global affairs and international economics are similarly distressing.

Interfax reports Russian warplanes have started air strikes against ISIS targets in Syria; this marks Russia’s first use of force in the Middle East since the 1980s. In a speech at the United Nations on Monday, Putin called for a mandate for a broad coalition to fight ISIS that would include Syrian government forces and Iran. The U.S. and a coalition of countries is also carrying out limited airstrikes in Syria against ISIS, but they also say a future Syria must not have Assad at its helm because of his brutal actions against his own people.

Russian strikes will be in support of operations by the Syrian army and won’t target opposition forces other than those of ISIS. At least that’s one story; the other story is that the Russians bombed the Free Syrian Army, the anti-Assad rebel group that is backed by the West. Speaking at the U.N. on Wednesday, Secretary of State John Kerry said the U.S. would have “grave concerns” if Russia targeted other groups. If Putin really wants to jump into Syria with both feet, I suppose the best thing is that nobody tells him he’s jumping into quicksand.

The government will be open tomorrow. The Senate and the House just passed a short-term spending bill that will extend federal funding until December 11 and avoid a government shutdown by tonight’s midnight deadline. Following the votes, Republican leaders plan to start talks with President Obama about a two-year budget, although it’s unclear whether any successor to outgoing House Speaker John Boehner would be interested in such a deal.

Payroll processor ADP says the private sector added 200,000 new jobs in September. The Labor Department will issue its report on Friday; estimates are calling for 190,000 to 200,000 new jobs in the government report. ADP reports about half of the new jobs were created by large companies with 1,000 employees or more. Small and midsize firms were less aggressive in hiring. Only the energy and manufacturing sector reported job losses.

The Securities and Exchange Commission charged twenty-two municipal underwriting firms with selling municipal bonds using materially false statements or omitting required disclosures to investors. They will pay penalties based on the number and size of the fraudulent offerings identified, with a maximum penalty imposed on PNC Capital Markets of $500,000. Mesirow Financial, and Edward Jones also failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers. The firms did not admit or deny the findings, but agreed to cease and desist from such violations in the future.

Tesla last night launched its long-awaited Model X sports-utility vehicle, which features two electric motors, a range of around 250 miles and seating for seven people, as well as “falcon wing” rear doors that can open differently depending on conditions. Tesla CEO, Elon Musk, said around 25,000 people had ordered the SUV, but they’ll have to wait 8-12 months to receive their cars. The basic theme here is: they can sell them as fast as they make them.

Considering that the founder of Tesla Motors is also into rocket ships, and solar arrays, and cargo carrying pneumatic tubes, and planetary colonization, the car offers some unusual features, including Bioweapon Defense Mode. Elon Musk says it should be useful “if there’s ever and apocalyptic scenario of some kind.” We don’t know how well this might work in the event of thermonuclear war; it is, after all just a slightly more aggressive version of an air filtration system, but it might come in handy if there’s a dead skunk in the middle of the road.

There are some other Easter eggs built into the Model X computer programs. There is “Ludicrous Mode”, a button you can push if you want to go from 0-60 in 3.5 seconds, and then if you keep pushing the button you can see a clip from the movie Space Balls. Or, if you want to know more about the people that built your car, on the computer screen press the Tesla logo and then press the lower right corner of the screen and up pops a photo of the development team. And for audiophiles, a premium sound system where you can turn the volume to eleven.

Meanwhile, the only software Volkswagen can come up with is to cheat on emissions, and General Motors is still trying to make the ignition switch work.

The times are changing, and it’s not just computerized electric cars. The biggest coal companies in the U.S. are in trouble. Twenty-six percent of U.S. coal companies have gone out of business in the last three years, and the value of the companies that have managed to survive has dropped 76% in five years, according to a report from the energy finance research group Carbon Tracker.

As of 2001, just 17.1% of U.S. electricity came from natural gas generation. By 2014, gas’ share had increased to 27.4%. The entire U.S. coal industry made a big, expensive, debt-laden bet that China’s thirst for coal, particularly the kind used to make steel, would never slow down, and they were wrong. And now, New York City’s five pension funds, worth a collective $160 billion, announce they will divest their investments in coal.

In America’s long, dangerous history of mining, not once has a coal mine owner been charged criminally for a worker’s death. Coal miner fatalities, in some ways, have been considered a business expense. All of that changed with the indictment of Donald Blankenship. The former CEO of Massey Energy will stand trial starting tomorrow at a federal court in Charleston, W.Va. He faces up to 31 years in prison for allegedly conspiring to violate safety laws and lying to regulators about safety practices at the Upper Big Branch mine in Montcoal, W.Va., where a 2010 explosion killed 29 workers, the nation’s deadliest mining accident in 40 years.

Blankenship is facing criminal charges when other mining executives have not, in large part, because federal prosecutors say he was intimately involved in Upper Big Branch’s output to an extraordinary degree. He demanded reports every half hour on its production—they were sent to his home by fax on nights and weekends. Blankenship’s trial won’t do anything to resolve the disasters the coal industry has left. His conviction might bring closure to the families of the dead miners (if that’s possible). But in the long term, it might end up being a mere footnote in the tortured history of the Appalachian coalfields.

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.

Intel To Team Up With Time Warner

Financial Review

Discretionary Reading

Sinclair Noe — August 19, 2015

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

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DOW – 162 = 17,348
SPX – 17 = 2079
NAS – 40 = 5019
10 YR YLD – .07 = 2.13%
OIL – 2.02 = 40.60
GOLD + 16.60 = 1135.10
SILV + .44 = 15.41

A new CPI report this morning shows inflation remains muted. The consumer price index, a measure of prices at the retail level, rose 0.1% in July to mark the smallest increase in three months. Yet the cost of housing, the largest expense for most Americans, continued to rise, up 0.4% last month, reflecting the biggest gain in more than eight years. And housing expenses have climbed 3.1% in the past 12 months, the largest annual increase since 2008. The prices of most other consumer goods were little changed in July. Food prices climbed 0.2% while energy prices rose a smaller 0.1%. Excluding food and energy, so-called core consumer prices also advanced 0.1% in July. Aside from shelter, prices for clothes and medical care also rose.

Even though energy prices were up slightly in July, that might not last; eventually the price at the pump for gasoline should reflect the price of oil, which has now dropped to a 6 year low of $40.60 per barrel. Based upon historical pricing for oil and gas, we should be paying about $2.00 to $2.10 a gallon at the pump. Gas prices should be declining in the next month or two. Oil has tumbled more than 30 percent since this year’s peak close in June and producers are maintaining output even after a surplus pushed prices into a bear market. The Energy Information Administration reported today that crude supplies rose 2.62 million barrels last week. Oil balances point to further oversupply throughout 2015. So energy prices might be disinflationary for the remainder of this year.

The Federal Reserve has set a target of 2% inflation. We are not there; not even close. The Fed has said that low energy prices are transitory, but low prices are lingering. And even though the economy has been adding jobs; 215,000 in July, and August seems to be on track for a similar number, we still see significant slack in the labor market and no signs of wage push inflation. Against this backdrop, you might not expect the Fed to hike interest rate targets, but in the minutes of the July Federal Open Market Committee meeting we find that most policymakers are itching to get off the Zero Interest Rate schneid.

According to the minutes, most meeting participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” and “Almost all members (of the FOMC)” indicated that “they would need to see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term.”

On a separate issue, the Fed is still trying to figure out what to do with their $4.2 trillion dollar portfolio built up during the various rounds of quantitative easing. About $216 billion of proceeds from maturing Treasury securities come due by the end of this year; the Fed could reinvest, or they could let the securities expire, or they could phase out the investments. They might even time a phase out to coincide with raising rates. No decision was made at the July FOMC meeting. If the Fed decides to not reinvest, and that would be the default position of not doing anything, it would increase the supply of securities available to investors and put upward pressure on yields.

Investors reacted to the FOMC minutes by reducing the probability the Fed would tighten next month to 38 percent, based on pricing of federal funds futures contracts, compared to 50 percent earlier today. The policymakers sound like they want to raise rates but they just lack the confidence to pull the trigger. Now the counter point is that almost 7 years of Zero Interest Rate Policy and trillions of dollars of quantitative easing have not been enough to get the slack out of the labor market or stoke the coals of inflation. So what difference would a few months make?

And while some might argue that the Fed’s courageous action saved the economy (OK, Bernanke, Paulson, and Geithner can make that argument) and that might be true, but they did it with a long term price tag; it is likely that the markets are permanently distorted and at the least we have gone through 7 years of distortion and misappropriation. Further, the last crisis did not preclude the possibility of another crisis. If, or when, the next crisis hits the Fed doesn’t want to be sitting on a $4.2 trillion dollar portfolio with interest rates at zero. What bold and courageous action can the Fed take with no arrows in their quiver?

The minutes from the July FOMC portray a cautious Fed. They remember the taper tantrum of 2013, when then-Fed Chair Bernanke hinted at the possibility of ending QE. The markets responded with all the dignity of a pack of wild hyenas ripping and nipping at both bonds and stocks. When rates eventually rise, in September or December or later, Chair Yellen wants to make sure investors saw it coming.

Volatility prevailed in China’s stock market today, with a late afternoon rally reversing a sharp morning tumble as investors tested whether Beijing would step in to stabilize shares. The Shanghai Composite closed up 1.2% on reports of government intervention after falling as much as 5.1% during the session. Despite the latest stock turmoil, the yuan has held relatively steady this week following the central bank’s shock decision to devalue the currency on August 10.

A slump in emerging market confidence has led to $1 trillion in capital outflows from developing economies over the past 13 months, roughly double the amount that fled during the financial crisis. The sustained exodus of capital highlights concerns that emerging markets, suffering slowing growth and weakening currencies, are relinquishing their longstanding role as locomotives to become a drag on demand. From July 2009 to the end of June last year, a net $2 trillion in capital flowed into the 19 emerging markets. But as the funds now cascade out, a vicious circle is triggered. Currencies tumble against the US dollar, damping demand for imports and driving down aggregate demand. In June, for example, overall emerging market imports were 13.2% lower year-on-year.

German lawmakers have overwhelmingly voted in favor of Greece’s third bailout, ending months of heated negotiations. Prior to the vote German Finance Minister Wolfgang Schaeuble said: “There is no guarantee that this all will work…but due to the fact that the Greek parliament has already approved a big part of the (aid-for-reform) measures, it would be irresponsible not to use the chance for a new beginning.”

Intel announced several new platforms and partnerships at its developer forum, but the chipmaker’s foray into television came as a surprise. Bearing the title “America’s Greatest Makers,” the TV program will engage do-it-yourselfers who turn chips and other components into gadgets. Intel will team with Time Warner for the series, which will appear on TV and other media channels in 2016.

Kik Interactive, the Canadian startup behind a popular messaging app, has turned to China’s Tencent for a $50 million investment that values it at $1 billion. With more than 240 million registered users, Kik still has a long road to travel, facing stiff competition from the likes of Snapchat, WhatsApp and Facebook’s Messenger.

More than 17 years after the FDA approved Pfizer’s Viagra, the first drug to treat low sexual desire in women has won approval from U.S. health regulators. Addyi, produced by privately-held Sprout Pharmaceuticals, will only be available through certified health care professionals and pharmacies due to its safety issues. The drug can re
sult in potentially dangerous side effects such as low blood pressure and fainting, especially when taken with alcohol.

Hackers claiming to have stolen data from AshleyMadison.com, a website that facilitates hook-ups between would-be adulterers, have released information they say includes details of more than 36 million user accounts. The hackers posted full names, e-mail addresses, partial credit-card data and dating preferences on a site called infidelities-R-us.com. And for divorce lawyers, the Ashley Madison hack should be renamed the Full Employment Act of 2015. Already, reporters have discovered that the list includes about 15,000 military and government email accounts, plus more than 600 email accounts associated with banks.

Time once again to check out this week’s bank docket: JPMorgan is in advanced talks with the SEC to pay more than $150 million for steering clients to its own investment products without proper disclosures. Citigroup has agreed with the New York attorney general to return $4.5 million in management fees charged on some 15,000 frozen accounts, while BNY Mellon will shell out $15 million to settle several bribery cases. Apparently the bank was hiring relatives of foreign officials who managed a Middle Eastern sovereign wealth fund. Because really, what’s the point of having interns?

Financial Review

Because it’s Friday

Sinclair Noe — August 14, 2015

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

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DOW + 69 = 17,477
SPX + 8 = 2091
NAS + 14 = 5048
10 YR YLD + .01 = 2.20%
OIL – .10 = 42.13
GOLD + .10 = 1115.80
SILV – .18 = 15.34

For the week, the Dow rose 0.6 percent, the S&P 500 added 0.7 percent and the Nasdaq gained 0.1 percent.

Wholesale prices climbed at a slower pace in July, as energy prices dropped. The 0.2 percent increase in the producer-price index followed a 0.4 percent gain in June. Even with the recent increases, producer prices dropped 0.8 percent over the past 12 months. Wholesale prices excluding food and energy rose 0.3 percent for a second month, and those costs were up 0.6 percent from July 2014.

Industrial production climbed 0.6% in July; there were also upward revisions of 0.1% each in February, May and June. Capacity utilization for the industrial sector increased 0.3 percentage point to 78%. The auto sector posted a 10.6% surge in production.

Looking to capitalize on rising demand, General Motors has increased its rate of production on larger trucks and SUVs, and added Saturday overtime shifts at a Texas plant. The move could see 48,000 to 60,000 additional vehicles for the 2016 model year. Make hay while the sun shines.

The University of Michigan’s consumer sentiment index edged slightly lower to a reading of 92.9 in August from 93.1 in July.

Secretary of State John Kerry is in Havana, where he helped raise the flag over the US embassy in Cuba for the first time in 54 years. The flag was raised by three men who as US Marines lowered it when the US embassy closed 54 years ago.

The Eurozone’s economic recovery unexpectedly slowed in the second quarter, as expansion in its three largest economies fell short of estimates. First quarter gross domestic product in the 19-nation region rose 0.3%, which was just short of estimates. On an annualized rate, the Eurozone grew at a 1.3% pace. For the quarter Germany’s economy grew 0.4%, Italy’s 0.2%, while France stagnated. With oil prices sharply lower, the euro at multiyear lows and the European Central Bank on a $1.3 trillion bond-buying spree to keep market interest rates low, there were hopes that the Eurozone had turned a corner after years of crisis. You can’t really blame the weakness on Greece. The Greek economy grew 3.1 percent, from only 0.1 percent at the beginning of the year. They are not out of the woods just yet.

Greek legislators have approved a new €86 billion-euro bailout agreement, which is said to include sweeping economic reforms and budget cuts mandated by the country’s creditors. The deal is expected to be cleared by Eurozone finance ministers today, but may face a harder challenge when Germany votes on it next week.

Ukraine and a group of its largest creditors have agreed to continue debt discussions after holding two days of negotiations in San Francisco.

The yuan halted a three-day slide after China’s central bank raised its reference rate for the first time since Tuesday’s devaluation and said it will intervene to prevent excessive swings.

Fifteen US states, led by coal-producing West Virginia, are seeking a stay order, or injunction, against President Obama’s Clean Power Plan, which calls for power plants to cut carbon emissions 32% (from 2005 levels) by 2030.

Earnings season marches on. JC Penney posted a smaller than expected second-quarter loss.

Nordstrom reported a better than expected second-quarter profit.

Chip equipment maker Applied Materials fell short of Wall Street expectation on both profit and revenue.

Restaurant chain El Pollo Loco missed Wall Street estimates on revenue for the quarter and same-store sales.

King Digital Entertainment posted a sharp slowdown in sales and bookings.

Aflac is increasing its stock repurchase program by 40 million shares, or about $2.5 billion.

Tesla Motors has boosted its stock offering to about 2.7 million shares, hoping to raise more than $640 million as it prepares to start selling its Model X sport-utility vehicle.

Nelson Peltz’s Trian Partners has taken a more than 7 percent stake in the food service company Sysco, worth around $1.6 billion, or about 42 million shares.

German prosecutors charged seven current and one former Deutsche Bank employees over a scheme to help the lender and clients evade taxes on carbon-emissions trades. The bankers are charged with being part of a group that tricked the authorities about value-added tax refunds on carbon-emissions trading in 2009 and 2010. If it’s not one thing it’s another; Bloomberg calculates Deutsche Bank’s bill for fines and legal settlements surpassed 11 billion euros in the second quarter.

The company said last month that the cost of litigation will “remain a burden in the coming quarters.” The lender has yet to resolve investigations into its role in attempts to manipulate foreign exchange markets as well as a probe of whether it broke US laws on processing payments for countries subject to trade sanctions. It also faces lawsuits that claim the company didn’t make adequate disclosures about US mortgage-backed securities. The bank said last month that it is cooperating with regulators in these matters.

After previously aiming for a fall launch, Apple is now looking to bring its Web TV service to market in 2016. The delay is blamed on slow-moving licensing talks with TV networks and the need for capacity upgrades. Sources suggest Apple wants to charge about $40/month for its service, in comparison to Dish’s Sling TV (which provides a limited number of channels) for $20/month and Sony’s more expansive PlayStation Vue service for $50-$70/month.

A US administrative judge has ruled that BP manipulated the Texas natural gas market in 2008 and then conducted an inadequate internal investigation, opening the possibility of more fines against the company.

US crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986. It even surpasses the decline of 2011, when prices fell as much as 21 percent over the summer as the US and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi. It looks even worse when you consider that summer is supposed to be peak season for oil. Total gasoline supplied to the US market rose to an eight-year high of 9.7 million barrels a day last month.

So, why is the price at the pump so high? One reason is that we export gasoline. In January 2010 the US exported 6.8 million barrels of gasoline. By January 2011 it had doubled. In January 2015 the US exported 16 million barrels of finished motor gasoline. Still, in 2004, the average price of oil was $37.66 a barrel.  In 2004, the average price of gasoline was $1.85 a gallon. So, if you think the price at the pump should be a bit lower, you are probably right.

Domestic equity funds surrendered $20.4 billion in July alone and have seen $158.6 billion in redemptions over the past 12 months. Meanwhile, international equity funds have attracted $179.3 billion. Don’t confuse international funds with emerging market funds. Depositors may be looking forward to an increase in Federal Reserve interest rates and the commodity bulls may be fearing it, but what about all those emerging markets that are heavily exposed to commodities as their principal export and heavily exposed to overseas borrowings in US dollars.

For them, the fall in commodity prices has been dramatic and damaging while the rise in the US dollar has started to increase debt repayments just when they can least afford it. The emerging markets have been clobbered over the last month. In July, China dropped 11.2%, Brazil tumbled 12.2%; South Africa, Colombia, Chile, Thailand, Taiwan, Turkey, Peru, and Korea all dropped by more than 5% on the month.

You might not have noticed but the junk bond market is looking a bit dicey. Average yields for low-rated companies have jumped to 7.3 percent and spreads between such debt and comparable duration Treasuries have widened dramatically. The average yield is the highest since mid-December and has risen 120 basis points, or 1.2 percentage points, just since June. Spreads are at 580 basis points, a level hit only twice in the last three years. Since the most recent lows in June, spreads have widened a full percentage point. Then again, maybe you have noticed; retail investors have been pulling money from US focused mutual funds – $155 billion in outflows over the past 12 months, and high yield corporate funds have watched billions walk out the door.

And it’s not just the junk; investors yanked $1.1 billion from US investment-grade bond funds last week, the biggest withdrawal since 2013. Dollar-denominated company bonds of all ratings have lost 2.3 percent since the end of January.

Once upon a time, Treasuries paid a high yield; 30 years ago to be precise. The last Treasury bond with a coupon above 10 percent was issued on August 15, 1985.

Social Security turns 80 today. President Franklin Delano Roosevelt signed the Social Security Act on Aug. 14, 1935. Last year, Social Security paid benefits of nearly $850 billion— about a quarter of all federal spending. The average monthly payment is $1,221. That comes to about $14,700 a year. For most retirees, Social Security accounts for the majority of their income.

Two Cows, because it’s Friday.