The New Normal
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DOW + 34 = 17,712
SPX + 4 = 2061
NAS + 27 = 4891
10 YR YLD – .06 = 1.95%
OIL – 3.01 = 48.42
GOLD – 5.70 = 1199.40
SILV – .13 = 17.07
Modest gains on Wall Street today, but not nearly enough to make up for the four previous days of losses. It wound up being the second-worst week for the market so far this year. The Dow Jones industrial average remains down slightly for 2015, and the Standard & Poor’s 500 index is essentially flat. For the week, the S&P 500 fell 2.2 percent, the Dow lost 2.3 percent and the Nasdaq declined 2.7 percent. The semiconductor sector was a leader today after a report that Intel is in talks to buy rival chipmaker Altera. Intel shares were up 6%; Altera shares were up 28%.
Gross domestic product expanded at a 2.2 percent annual rate last quarter. This was the Commerce Department’s third estimate of GDP, and it was unchanged from last month’s estimate. Economic growth cooled in the fourth quarter and after-tax corporate profits recorded their biggest drop since early 2011, as a strong dollar dented the earnings of multinational corporations. The fourth quarter GDP was down from a very strong third quarter reading of 5% growth. The first estimate on the first quarter will be published April 29th.
Profits originating outside the U.S. dropped by $36 billion in the fourth quarter, the biggest decrease since 2008 and the second-biggest since 2002. This would be money earned by big multinational companies, as well as any business that sells goods and services abroad. Profits from the rest of the world accounted for the smallest share of total corporate earnings since 2006 and have been on the downswing for years. Meanwhile profits from domestic industries rose by $5.7 billion in the last three months of 2014. While that’s not stellar, it was weighed down by a drop in earnings of financial companies. Non-financial industries reported a rise in profits of $18.1 billion. Much of the rest of the world is seeing a slowdown, but here in the US, the economy has been getting stronger. As a share of the total economy, corporate profits were just a hair below the record high of 10.5% set in 2013.
Consumer spending rose at a 4.4% annual pace in the fourth quarter, up from an earlier estimate of 4.2% and the fastest pace since the first quarter of 2006. Spending on goods rose at a 4.8% rate versus an earlier estimate of 4.5%. Spending on services grew at a 4.3% pace, up from the earlier estimate of 4.1% and the fastest pace since the second quarter of 2000.
U.S. consumer sentiment dropped in March. The Thomson Reuters/University of Michigan’s final March reading on the index was 93. It was down from the previous month’s reading of 95.4 but beat estimates of 92. Consumer optimism reached a 10-year peak of 95.5 in the first quarter of 2015, its highest level since 2004.
Last week the Federal Reserve FOMC changed their stance on interest rate hikes; they went from “patient” to “not in a hurry”. And for the past week, Fed policymakers have gone out and made speeches, usually saying that the Fed will probably raise interest rates sometime this year. Today, Fed Chairwoman Janet Yellen delivered a speech in San Francisco, entitled “The New Normal in Monetary Policy”. Yellen said she expects “conditions may warrant an increase in the federal funds rate target sometime this year.” The timing of a rate hike will be data dependent; Yellen said, “The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation.”
With labor markets looking set to improve further, and one-time downward pressure on inflation likely to dissipate, a “modest” rate rise would be unlikely to undercut the recovery. So, to translate: the drop in oil prices is probably temporary; things are getting better; the Fed will hike rates; slowly. Unless everything unexpectedly goes to hell in a hand basket.
Saudi Arabian-led airstrikes on Yemen and a potential nuclear deal with Iran would have little near-term impact on oil supplies; so says Goldman Sachs in an overnight note to clients. Goldman analysts say they “expect both events to have negligible near-term supply impacts, with the build in crude inventories set to continue in 2Q15. Longer term, a deal with Iran could lead to greater OPEC supplies although the timing of the sanction relief remains uncertain.”
I’m so glad the analysts at Goldman have figured out this mess, because they are the only ones. Let’s review: In Syria, the U.S. is fighting against Iran and is an enemy of Iran, which supports Hezbollah and the government of Bashar al-Assad. In Syria, the U.S. is also fighting with Iran against ISIS. In Iraq we are fighting with Iran against ISIS, except this week when US warplanes provided air cover to Iranian-backed militias in Tikrit, a joint effort against ISIS; the Iranian backed militia decided they didn’t want to participate. It sounds complicated but it might help to think of it in terms of Shia versus Sunni. For example, Saudi Arabia bankrolled several Sunni insurgency groups against Shias in Syria for several years, including a group that eventually became ISIS, which became a bit too extreme.
So now Saudi Arabia, which represents the Sunni side, is having to battle against the kind of Sunni extremism represented by ISIS, which means they are on the same side as Iran, which represents the Shia side. And in Yemen, now we are backing Saudi Arabia and Egypt and a coalition against rebel forces reportedly, though not definitively backed by Iran; but we say we aren’t going to get deeply involved. We’ll just kind of assist with some intelligence. While at the same time, major diplomatic negotiations are underway in Switzerland with Iran over their nuclear program and sanctions, while we continue to fight against them in Yemen and Syria, and fight with them in Syria and Iraq.
So, that takes us back to Goldman Sachs’ conclusion that this is all going to be nothing more than a short-term disruption and everything will be worked out over time. Maybe the thinking is that everyone will be so confused, we’ll just take a nap. And the price of oil jumped nearly 5% yesterday and then dropped more than 5% today. If you can make sense of it all, you are either delusional or you might be an oil analyst for Goldman. Or both.
Greece submitted a long-awaited list of structural reforms to its creditors today as its government warned it would stop meeting debt obligations if negotiations failed and aid was not forthcoming. Greece’s international economic affairs minister, Euclid Tsakalotos, raised the stakes, saying while Greece wanted an agreement it was prepared to go its own way “in the event of a bad scenario”.
He told the Guardian: “We are working in the spirit of compromise, we want a solution, but if things don’t go well you have to bear the bad scenario in mind as well. That is the nature of negotiations.”
The reforms apparently do not include cuts to pensions and salaries. Greek government aides said: “The government is not going to continue servicing public debt with its own funds if lenders do not immediately proceed with the disbursement of funds which have been put on hold since 2014. The country has not taken receipt of an aid instalment from the EU or IMF since August 2014 even though it has habitually fulfilled its obligations.”
Officials from the European Central Bank, the EU, and the International Monetary Fund are expected to respond to the Greek reform proposals on Monday. They say nothing focuses the mind like the threat of execution in the morning.
Despite its revenues falling 6%, JPMorgan has retained its crown as the top performing investment bank in 2014, according to industry analytics firm Coalition. JPMorgan pulled in $22 billion from investment banking last year, compared with $23.3 billion in 2013. Other U.S. banks also continued to dominate top spots, with Goldman Sachs coming second overall across investment banking, and Citigroup and BofA sharing third place with Deutsche Bank.
Apple CEO Tim Cook plans to give away all his wealth after paying for the college tuition of his 10-year-old nephew. “You want to be the pebble in the pond that creates the ripple for change,” Cook stated. Fortune Magazine estimates Cook’s net worth, based on his holdings of Apple stock, at about $120 million. He also holds restricted stock worth $665 million if it were to be fully vested.
Back in the 1970s the Hunt Brothers, Nelson and Herbert – sons of a Texas oil billionaire, started buying up silver; they bought mining shares, physical silver, and futures contracts. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments). They were trying to corner the market. And for a while it worked; the price of silver climbed from $6 an ounce to nearly $49. In January 1980, the Comex changed its rules on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall, they were unable to meet their obligations. The brothers were on the hook for about $1.7 billion in losses; a panic hit the markets, not just the silver market, it spread to stocks and commodities and other futures. A consortium of banks stepped in to bail out the Hunt Brothers. That panic occurred on Thursday, (Silver Thursday) March 27, 1980; 35 years ago today. The Hunt Brothers lost about $1 billion dollars, but they avoided criminal charges. The price of silver didn’t approach $50 an ounce until thirty one years later in 2011.
It was bound to happen… Willie Nelson is launching his own brand of weed. Yes, after being a longtime proponent and enthusiast of marijuana, Nelson is looking to get into the business of actually selling it. The product is called Willie’s Reserve, and it could be available to the public as early as 2016. It will also be distributed through physical stores, which Nelson and his family hope to open up across the US in states that’ve legalized marijuana.
