Financial Review

That’s a Print

Sinclair Noe — July 21, 2016

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DOW – 77 = 18,517
SPX – 7 = 2165
NAS – 16 = 5073
10 Y – .01 = 1.56%
OIL – 1.19 = 44.56
GOLD + 15.40 = 1331.70

The stock market was probably a little tired. After 9 straight sessions with gains that pushed the Dow Industrials and the S&P 500 to record highs, the market takes a pause; and at this point that’s all we can say with certainty. Markets do not go up in a straight line, and it is very rare to see 9 consecutive up days. Remember that this market has been remarkably resilient.

The European Central Bank kept its interest rates and policy plans unchanged and said the immediate stress caused to markets by Britain’s shock vote to leave the European Union had been contained. ECB President Mario Draghi said it was too early to ascertain the full impact of Brexit, but he said the ECB was prepared to take more actions to lift inflation and economic growth if necessary. The bank kept its deposit rate at minus 0.4 percent and the main refinancing rate at 0.00 percent, both record lows.

The Federal Reserve will wait until the fourth quarter before raising interest rates, likely in December after the presidential election, according to a Reuters poll. Just over half the economists surveyed over the past week expect the Fed to raise its federal funds rate in the fourth quarter to 0.50-0.75 percent from 0.25-0.50 percent currently. The move is most likely to come in December as the November policy meeting is only days ahead of the Nov. 8 election.

Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 253,000 for the week ended July 16, the lowest reading since April.  Claims have now been below 300,000, a threshold associated with a healthy labor market, for 72 straight weeks, the longest stretch since 1973.

A couple of weeks after the nationwide jobs report we get updates on the individual states. Arizona lost 39,700 jobs in June, and the unemployment rate went up two-tenths of a percent to 5.6%. That compares to a 6.0% unemployment rate a year ago, but Arizona still lags the national average of 4.9% unemployment. In June, 40,700 government jobs were cut from Arizona’s payrolls, resulting in a net loss of 39.700 jobs in the state.

The National Association of Realtors says existing home sales increased 1.1 percent to an annual rate of 5.57 million units last month, the highest level since February 2007. Mortgage rates fell in June to their lowest levels since 2013 on bets the Federal Reserve would be cautious about raising short-term rates. First-time buyers made up 33 percent of sales in June, the biggest share in nearly four years.

The leading economic index for the U.S. rose 0.3% in June after declining in the prior month. A measure of current conditions increased 0.3%. A “lagging” index fell 0.1%. The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys.

The Justice Department filed an antitrust lawsuit against Anthem and Cigna in federal court in Washington. The government will sue to block a pair of proposed deals that would consolidate the nation’s five biggest health insurers into just three: Anthem’s $48 billion takeover of rival health insurer Cigna and Aetna’s $37 billion bid for Humana. Three of the companies said they would fight the lawsuits, which could tie them up in months of litigation, dragging out deals that were announced about a year ago. Aetna did present two divestiture plans to the Justice Department in an effort to resolve the government’s concerns and allow the Humana deal to go forward.

Turkey’s President Erdogan declared a three-month state of emergency Wednesday night, allowing him to sidestep parliament in passing new laws against supporters of Friday’s coup. The Istanbul stock index is down 9.5% so far this week. Standard & Poor’s downgraded Turkey’s sovereign credit rating and lowered its outlook to “negative.”

General Motors reported second-quarter net income rose to $2.87 billion, or $1.81 a share, from $1.1 billion, or 67 cents a share, a year ago. GM also raised its forecast for full-year profits. Meanwhile, GM said it is recalling nearly 290,000 older Chevrolet Impala cars in the United States because the air bag may not deploy in the event of the crash. GM also said it may be forced by U.S. regulators to recall another 4.3 million vehicles for potentially defective Takata air bag inflators, a call-back that would cost it $550 million; this in addition to a 2,5 million vehicle recall announced in May and June.

Southwest Airlines experienced a tech outage, affecting multiple technology systems and grounding some planes. The airline said it expects to continue to move toward normal operations but that it will take time. Record revenue and cheaper fuel pushed Southwest Airlines’ second-quarter profit up by 35 percent, but that missed analysts’ expectations. However, investors are more concerned with the airline’s warning that it is expecting unit revenue to fall as much as 4% next quarter due to lower ticket prices and greater levels of competition.

Union Pacific dropped 2.8 percent after the No. 1 U.S. railroad posted a lower quarterly net profit, hurt by slumping freight volumes.

Southwest and Union Pacific dragged down the Dow Jones Transport index.

Unilever posted earnings results for the first half of fiscal 2016. The headline numbers met management’s forecast, but they were still marked by weak profit growth as demand for consumer products slowed across many key markets.

Swatch expects a recovery in the second half after net profit plunged 52% in the first half.

Roche confirmed its outlook for 2016 and reported results that exceeded expectations.

Lufthansa cut its full-year profit target, saying “terrorist attacks in Europe” weighed on its bookings.

The fears also hit Easyjet, with shares under pressure after weak third quarter revenues. Easyjet said the Brexit vote has already cost it $53 million, mainly from the drop in the value of the pound.

SABMiller’s net producer revenue grew 2% in the quarter. Meanwhile the Justice Department has approved the $107 billion merger with Anheuser-Busch InBev.

AT&T reported a 22 percent increase in quarterly operating revenue as it added television subscribers, helped by its acquisition of DirecTV. The company’s adjusted profit, however, was in line with the average analyst estimate.

Starbucks said global sales at company-owned cafes open at least 13 months rose 4 percent in the fiscal third quarter ended June 26 from the year-ago period. That was well short of the 5.6 percent gain analysts had expected.

Chipotle reported net income slumped to $25.6 million, or 87 cents per share, in the second quarter ended June 30, from $140.2 million, or $4.45 per share, a year earlier. Sales at restaurants open at least 13 months fell 23 percent. Revenue fell 16.6 percent. Which all sounds terrible, but they have been giving away free burritos and the loyalty program is working; sales inched higher in July. Still, that’s a lot of problems to overcome.

Roger Ailes has resigned as chairman and chief executive Fox News Channel following allegations of sexual harassment. The terms of Ailes’ exit package were not released. Former Fox News anchor Gretchen Carlson sued Ailes earlier this month, claiming sexual harassment. Ailes has denied the charges. Fox hired a law firm to conduct an internal investigation.

Paypal and Visa have announced a partnership which will allow Visa debit customers to move money instantly on Paypal and Venmo accounts. The agreement gives PayPal incentives for increased Visa card spending volumes from merchants and consumers. PayPal will join the Visa Digital Enablement Program to expand point-of-sale acceptance.

Tesla Motors unveiled its Secret Master Plan Part 2 in a blog post overnight. Highlights include an all-in bet on autonomous driving, ride sharing initiatives, urban transport concepts, and new models including pickups and heavy-duty trucks which are already in early development. The first order of business is solar power, that’s where the energy comes from. The pieces are already in place, almost: The Powerwall battery and Gigafactory battery plant, the pending acquisition of solar panel installation and financing firm SolarCity, and a fleet of Tesla vehicles with mobile batteries.

Selfie-fumblers rejoice: Corning just unveiled its newest version of Gorilla Glass, the chemically strengthened super glass that dozens of consumer electronics makers use in their devices. The new glass was formulated to improve drop performance from gadgets that fall onto rough surfaces from certain heights, and survives up to 80% of the time when dropped from 1.6 meters.

Space travel is unpredictable. We’re all familiar with the phrase, “Houston, we have a problem.” So much can go wrong, and it’s impossible to plan for and respond quickly to all of it. The International Space Station has its first 3D printer. If emergencies occur, astronauts can simply print the parts they need. Putting a 3D printer in orbit has huge implications for short- and long-term space travel. Until now, anything astronauts wanted either had to be sent up with them at launch, or delivered later during a resupply mission. Both options are expensive and can take days or weeks. In a dire situation, that’s not good enough. Now, instead of having to wait for a resupply or hack a tool from scraps, the crew can press a button and make one in a matter of hours.

Financial Review

Super Low

Sinclair Noe — July 7, 2016

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

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DOW – 22 = 17,895
SPX – 1 = 2097
NAS + 17 = 4876
10 Y + .02 = 1.39%
OIL – 2.23 = 45.20
GOLD – 3.40 = 1360.80

The Fed didn’t raise its benchmark interest rate last month because officials worried about the “surprisingly weak May employment report,” according to the minutes of the June meeting. And that was before the Brexit vote. The minutes offered no guidance on when the Fed might raise interest rates. Of course, the May jobs report showed just 38,000 net new jobs.

Tomorrow morning, we will find out how many jobs the economy added in June; consensus estimates are around 175,000; something close to that number and we can look at May as an aberration. A repeat of May, or worse, and we have serious problems. This morning we got a couple of reports that might offer clues to tomorrow’s report.

ADP reported that 172,000 private-sector jobs were added in June, above economists’ expectations for a gain of 150,000 jobs. According to ADP, small private-sector businesses added 95,000 jobs in June, medium businesses added 52,000 and large businesses added 25,000. All of those gains were in the service sector—208,000 jobs were added there, compared with a loss of 36,000 for goods producers. The manufacturing sector lost 21,000 jobs in June.

Initial claims for unemployment benefits fell by 16,000 last week to a nearly three-month low of 254,000. Layoffs have remained extremely low even though hiring tapered off in the early spring.

Bond yields are really low. Yesterday, the yield on the 10-year note hit 1.37%. Researchers at Global Financial Data checked monthly long term bond yields stretching all the way back to 1786. Based upon 230 years of data, they conclude that interest rates in the US have hit the lowest levels ever. So is this good or bad news? If you have solid credit and a decent job and you’re looking to get a mortgage and buy a house, or refinance a mortgage, this is incredibly good news.

The 30-year fixed-rate mortgage followed Treasury yields, falling seven basis points to 3.41% in this week’s survey. Mortgage rates have now dropped 15 basis points over the past two weeks, leaving them only 10 basis points above the all-time low. As a result, home loan volume is soaring. The Mortgage Bankers Association reports mortgage applications rose 14.2% over the previous week, in a survey ending July 1. Refinance application volume jumped almost 21% last week to its highest level since January 2015.

If you’re a well-run company looking to borrow and expand, again, this historic low interest rate environment is good news. The same goes for governments who want to borrow and invest in costly infrastructure projects that pay dividends over time.

On the other hand, if you are a bank or financial institution that makes your money on the spread between borrowing short term and lending long term, this is making life more difficult. Likewise, if you’re an insurance company trying to buy long-term bonds that pay you enough of a return to match the claims customers will make on you decades in the future, this is a very difficult environment.

Danone, the world’s largest yogurt maker, has agreed to buy U.S. health group WhiteWave Foods in what would be the French company’s largest acquisition in 10 years. The offer equates to $56.25 per share in cash, resulting in an enterprise value of around $12.5 billion, and would double the size of Danone’s U.S. business.

Avast Software has agreed to buy AVG Technologies for $1.3 billion in cash to expand its geographical reach, internet security opportunities and tap into newer areas such as Internet of Things. Avast, which provides free and paid software for personal computers and mobile devices, has more than 230 million users worldwide.

Burger chain Wendy’s says that a malware it had found at some franchisees in June had enabled hackers to access payment card information from the point-of-sales systems. The company said hackers targeted cardholder names, card numbers and the three-digit card verification value number found on the back of cards.

Since the start of 2016, 20 of the world’s bigger banks have lost a quarter of their combined market value, or about $465 billion, according to FactSet data. They have been losing value since the start of the year, and the Brexit vote was just salt on a wound. The biggest market-value losers, in dollar terms, so far this year: Italy’s UniCredit has lost nearly two-thirds of its value; Royal Bank of Scotland has fallen around 56%; and Credit Suisse, Deutsche Bank and Barclays have all about halved. UniCredit trades at about 21% of book value. Deutsche Bank trades at about 26%, or where it was during the darkest days of the financial crisis.

That means some of these banks are either a bargain or there are legitimate concerns about their viability. Deutsche Bank, Germany’s largest bank, now has a market value that in dollar terms is less than that of SunTrust Banks, the regional U.S. bank focused on the Southeast. And the market values of UniCredit, Deutsche Bank and Credit Suisse combined wouldn’t equal that of Goldman Sachs – itself down about 20% this year.

One of the hardest hit Euro banks is not in the top 20 globally but it is the oldest bank in the world; Banca Monte dei Paschi di Sienna is down 80 percent in the last 12 months. Its shares also trade at under 10 percent of its book value — a measure of its net worth — a sign that investors really think that the bank needs new capital. Also, when bank stocks sink that much, banks find it almost impossible to raise new capital in the markets. The good news is that it is not a megabank, and it is not heavily involved in derivatives trading – it just has a bunch of bad loans. Italy’s banks, including Monte dei Paschi, have about $222 billion of bad loans, and they need about $45 billion in bailouts or bail-ins.

But such a bailout may be illegal under relatively new European rules that aim to protect taxpayers and instead force investors in the banks to provide financial support in times of trouble. Investors lend money to banks by buying their debt securities. Under the anti-bailout rules, those securities would be forcibly turned from debt into new equity, which could absorb any new losses taken on the bad loans. Under such a so-called bail-in, the equity would in theory be worth less than the debt securities, leading to losses for investors who held the debt. The problem with bail-ins is that retail investors take a hit, they stop investing, they stop depositing, they start withdrawing; and before you can blink there is a run on the bank.

The pound sterling, at about $1.2924, has dropped to its lowest level since 1985. If you were ever thinking about a vacation in London, now might be the time. An average round-trip fare from US airports into London was $687.36 by July 3, according to airfare-tracker Hopper. That’s a 14% drop since the Brexit vote, and the lowest fares in 3 years. It might not last. Online searches for flights to the UK are up 60% in the past 2 weeks.

Boeing is stepping up efforts to conserve cash, cut costs in its supply chain and trim inventory of parts in its factories, and relying on suppliers to hold parts instead. Boeing is also telling vendors it will take longer to pay bills; up to 120 days to pay, rather than 30 days in the past.

A House panel will debate legislation today that could block a $17.6 billion sale by Boeing to Iran Air. Three measures will be considered, including one preventing the Treasury from licensing the sale, another stopping transactions tied to aircraft export and a third barring the Ex-Im Bank from providing financing for deals with the Islamic Republic. New laws would affect Airbus as well as other firms, since virtually all modern jets have more than 10% U.S. content and require export licenses.

The U.S. government proposed eight airlines to begin scheduled passenger service to Havana, Cuba. Flights could begin as early as this fall. The airlines winning approval for Havana service were American, Delta, United, Southwest, Spirit, Alaska, Frontier and JetBlue.

If you fly, you know that there is a big problem at almost all airports: the TSA screening process. American Airlines is trying to do something about it. They are teaming up with the Transportation Safety Administration to deploy CT technology for carry-on bags and install automated screening lanes. CT, or computed tomography, is a 3D imaging technology that’s widely deployed in the medical field. Although the technology has been around for more than a decade, only now has the TSA decided to put it into use.

The airline will adopt CT technology in a trial program at security checkpoints located in its Phoenix Sky Harbor International Airport hub. Although, CT scanning tech is currently in use for checked baggage, American will be the first US airline to deploy the system for carry-on bags. When applied to the security lane, a CT scanner allows customers to leave their liquids, gels and aerosols, as well as laptops, in their carry-on bags. American Airlines and the TSA expect the Phoenix CT checkpoint scanners to be up and running by the end of the year and could spread to other airports around the country if the trial is successful.

The new security lanes will feature automated conveyor belts to move storage bins between the X-ray machines and the end of the queue. In addition, the bins themselves are 25% larger. There will also be cameras installed to take pictures of the exterior of bags to go along with the X-ray images of its contents. Both parties believe the new lanes, which are expected to come online this fall, will decrease wait times by as much as 30%.

Financial Review

The Gravy Boat

Sinclair Noe — November 25, 2015

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DOW + 1 = 17,813
SPX – 0.27 = 2088
NAS + 13 = 5116
10 YR YLD – .01 = 2.23%
OIL + .25 = 43.12
GOLD – 4.50 = 1071.90
SILV – .05 = 14.26

We have a boatload, or at least a gravy boat full of economic data before we get into the holiday. Initial claims for state unemployment benefits declined 12,000 to a seasonally adjusted 260,000 for the week ended Nov. 21. Claims have now held below the 300,000 threshold for 38 consecutive weeks, the longest stretch in years, and remain close to levels last seen 42 years ago.

Orders for business equipment climbed more than forecast in October. Bookings for non-military capital goods excluding aircraft rose 1.3 percent, the most in three months, after an upwardly revised 0.4 percent increase in September; non-defense capital goods are considered a proxy for business investment.

So, today’s report shows businesses are spending more on business. It may be too early to call it a trend reversal but cap ex spending had been weak, in large part due to cuts in the energy sector, and also the tendency for companies to indulge in share buybacks rather than plowing money back into the business.

Orders for all durable goods, items meant to last at least three years, climbed 3 percent. Commercial aircraft orders surged 81 percent in October after dropping 32.2 percent a month earlier. Excluding transportation equipment demand, which is volatile from month to month, bookings increased 0.5 percent in October. Stronger demand for computers, heavy machinery, military hardware and jumbo jets offset a dip in auto sales.

Consumer spending edged up 0.1% in October after a similar increase in September. Personal income increased 0.4% last month. Savings increased to $761 billion last month, the highest level since December 2012, from $722 billion in September. A little extra money in the bank may just mean consumers are saving up for the holiday shopping season. If so, it would bode well for cleaning out some of the excess inventory reported in yesterday’s GDP report. This points to a labor market that continues to show signs of recovery even though consumers remain wary.

Still, inflation remains tame. The personal consumption expenditures index, the PCE, was up 0.2%. Year on year core PCE is holding at 1.3%, which is far short of the Federal Reserve’s target of 2% inflation. Still, we expect the Fed to raise interest rates at the December FOMC meeting, but this means that rate hikes will likely take a long and shallow trajectory.

The University of Michigan consumer sentiment index rose to 91.3 in November, up from 90 in October; and while that is a gain, it falls short of the preliminary reading of 93.1. Consumers are feeling decent but not giddy. This follows yesterday’s report from the Conference Board that showed a big drop in consumer confidence. Both reports show consumers are sanguine about current conditions but a bit nervous about future economic prospects.

New single family home sales increased 10.7% in October to a seasonally adjusted annual rate of 495,000. The median price of a new home fell 6% from a year ago to $281,500. New home sales are a bigger driver of economic activity than existing home sales. Today’s numbers show solid, steady, though unspectacular growth, which seems to be a theme in recent economic reports. Still, you have to think there is a cumulative positive impact.

Investors across the world are also watching rising geopolitical tensions between Russia and NATO member Turkey after a Russian SU-24 warplane was shot down by a Turkish F-16 fighter jet on Tuesday. Russia’s Foreign Minister Sergei Lavrov said Turkey may have planned to shoot down the Russian warplane near its border, calling the act “planned provocation.” Lavrov also said Russia will reexamine the entire spectrum of its relations with Turkey because “we can’t leave what happened without a response.”

Russia supplies about half of Turkey’s natural gas, for which Turkey pay’s about $10 billion a year. No doubt the incident will cool business relations between Russia and Turkey but Russia needs the cash; and remember that Russia still supplies oil and gas to Ukraine despite their differences. Beyond that it is important to remember that Turkey is a member of NATO.

In its twice-yearly Financial Stability Review, the European Central Bank has warned that chances of an “abrupt risk reversal” are increasing due to slowing growth in China and the withdrawal of monetary stimulus in the U.S.

European authorities are proposing a system to share the cost of protecting bank deposits, as the FDIC does in the United States, but the European Deposit Insurance Scheme, which would protect savings accounts of up to €100,000-euro, could face opposition from Germany, which has long resisted sharing fiscal risks with other Eurozone countries.

The ECB has additionally announced it will temporarily pause its asset purchase program over the holiday season (December 22-January 1) “to reduce possible market distortions” during a period of “lower market liquidity,” which is to say, they will be closing shop for the holidays.

Minutes from the Bank of Japan’s latest meeting show that some policymakers believe an output gap was one reason the country was taking longer to meet its 2% inflation target, highlighting a lingering worry that quantitative easing may not be working. An output gap is the difference between what an economy is producing and what it could produce if operating at its most efficient. Separately, Japan announced it will raise the minimum wage by 3% to try to stimulate growth.

Andre Esteves, CEO of Grupo BTG Pactual, the largest investment bank in Latin America, has been arrested in Brazil as part of a corruption probe of the state-run oil company, Petrobras; which has lost 80% of its market cap. The government’s leader in the Senate, Delcidio Amaral, was also arrested this morning. Esteves and Amaral are accused of trying to suppress testimony in the investigation into a bribery scheme between Petrobras and the nation’s biggest builders.

More than 100 people have already been arrested, including former top executives at Petrobras and Brazil’s biggest construction conglomerate. And then they started to cut deals with prosecutors by turning evidence on higher ups. Esteves is widely considered the most high-profile figure in Brazilian finance; he is quoted as saying that his company, BTG, stood for “Better than Goldman.” Now the question is whether Esteves can cut a deal by implicating someone even higher up – the president of Brazil.

A federal judge in Manhattan has ruled that General Motors and its law firm, King & Spalding, need not turn over privileged documents to drivers hoping to show that the automaker intended to commit a crime or fraud by concealing defective ignition switches in their vehicles. Most of the documents related to the law firm’s advice from 2010 to 2013 on three crashes involving Chevrolet Cobalts.

Vehicle owners said the deception justified a waiver of attorney-client privilege. The judge found probable cause to believe that GM committed a crime or fraud by hiding the defect from regulators and the public, but did not go the next step to say that communications between GM and the legal firm were made to further such misconduct.

The World Meteorological Organization announced today that 2015 is the hottest year on record, surpassing last year’s record heat. And we still have more than a month left in the year. They made the proclamation without waiting for the end of the year because it has been so extraordinarily hot, forecast to stay that way and unlikely to cool down enough to not set a record.

The World Meteorological Organization is the weather agency of the UN, and they are not alone in their forecast, the US National Oceanic and Atmospheric Administration, NASA, and Japan’s weather agency all say 2014 is the current record hot year with a global temperature of 14.57 degrees Celsius, 58.23 degrees Fahrenheit.

The years between 2011 and 2015 have been the hottest five-year period on record. The record probably won’t last long. Due to the influence of El Nino, which is set to last into the middle of 2016, and continually rising levels of heat-trapping greenhouse gases, which come from the burning of coal, oil and gas, 2016 will be even hotter. The report comes the week before world leaders assemble in Paris to try to negotiate an agreement to fight climate change.

There is some optimism that the Paris summit can move beyond diplomatic posturing. Significantly, investors are beginning to realize that action on climate presents enormous business opportunities. A briefing paper released through the We Mean Business coalition points out that 277 companies with $6 trillion in revenue, and 144 investors with $20 trillion in assets under management, have collectively now made nearly 700 ambitious climate commitments.

The briefing paper  calls for a series of proposals to be included in the text of the Paris agreement to help unlock further flows of finance. These include a goal of net zero greenhouse gas emissions well before the end of the century, strengthening national emissions reduction commitments every five years from 2020, carbon pricing, and improving public policy to scale up private climate finance.

Here’s one way to look at climate change; the internet has been around since the 60’s, and in the 80’s the idea expanded into the World Wide Web. In the 90’s there was talk about building the information superhighway, even though we weren’t quite sure where that road would take us.

There were debates about the cost of building out digital infrastructure and who would bear this huge expense, not who would make fortunes with the business opportunities. It basically boiled down to figuring out how to make money with the technology. Once we wrapped our brains around that, the money started to flow. The same thing is about to happen with Green technology.

Financial Review

Tomorrow

Sinclair Noe — June 4, 2015

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

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DOW – 170 = 17,905
SPX – 18 = 2095
NAS – 40 = 5059
10 YR YLD – .06 = 2.31%
OIL – 1.66 = 57.98
GOLD – 8.60 = 1177.40
SILV – .40 = 16.18

The sun will come out tomorrow, beyond that we don’t have much certainty. Tomorrow could be a very interesting day in the markets. Greece is scheduled to make a debt payment to the IMF; that will not happen. OPEC meets tomorrow in Vienna; they are expected to leave the current production ceiling of 30 million barrels per day unchanged. And in the US, we have a Jobs Report Friday; the Labor Department is expected to report the economy added about 225,000 new jobs in May and the unemployment rate is forecast to remain unchanged at 5.4%. Any one of these three events could result in major market moves. So buckle your seat belts.

This morning the Labor Department reported the number of people seeking unemployment benefits at the end of May remained near a 15-year low. Some 276,000 Americans filed initial jobless claims in the period running from May 24 to May 30, a week that included the Memorial Day holiday. That was down 8,000 from the prior week.

In addition to the headline numbers in the Jobs Report, we will be looking to see if wages are actually increasing; plus, we’ll look to the U-6 number to see how much slack remains in the labor market (hint: quite a bit; the U-6 stands at 10.8%, and in a tighter labor market, it should be closer to 8.5%); and then we’ll look at the industries where jobs are being created; if manufacturing and construction look weak, it might indicate the economy hasn’t pulled out of the first quarter funk.

Also tomorrow, Greece was supposed to pay a little over $300 million to the IMF, part of several payments due in June totaling more than $1.6 billion. It’s not gonna happen. The Greeks are now saying they will defer the payment. The Greeks offered a proposal to their creditors earlier in the week; the creditors responded with their own take-it-or-leave-it ultimatum. Greece rejected the latest proposal from Greece’s international creditors, with the Finance Ministry saying the plan “can’t solve the riddle” and an agreement requires “immediate convergence of the institutions to more realistic” proposals.

The creditors are demanding Greece make spending cuts and slash public programs to try and generate a zero to 3% surplus in its budget; but the problem is that the Greek debt to GDP ratio is now around 180%, and the more they cut spending, the more the GDP shrinks, which in turn makes the debt to GDP ratio higher. And even if they did cut spending and increase taxes and it miraculously didn’t shrink the economy, it would still take about 50 years of austerity for the Greek public sector debt to fall to a level of sustainability.

So, these negotiations are about the IMF and ECB releasing enough emergency cash to keep Greece afloat. It is a dispute about whether the Eurozone’s creditors (at this point, mainly the IMF and the ECB) will release funds so that they can pay themselves and avoid having to call Greece in default. There is a problem when the creditors have to lend money to the borrower just to make interest payments on the debt; and that in turn, means the fiscal targets in future years are just insane.

There is a temptation for lenders to allow Greece to default and then kick them from the Euro Union. Which would probably be a very, very bad idea. State authority has suffered a bloody collapse in the Middle East and North Africa, and it already poses a serious threat to Turkey. To lose Greece in these circumstances would constitute a major defeat, even though it might be good for the Greek economy, or not – nobody really knows. There has only been one hard study on the macro-economics of a Grexit and it shows a 50% devaluation of the Greek currency would not result in rampant inflation, and would likely restore trade competitiveness. Sure there would be some chaos, but then investors would flood the country to buy on the cheap.

For the ECB and the IMF, the fear is that leniency or even debt forgiveness would encourage Spain, Portugal, Italy, and Ireland to default on debt. For Greek Prime Minister Alexis Tsipras there may be more to lose by betraying his core election pledges than by holding firm in negotiations with creditors, even if it does result in a Greek exit. Tsipras will address the Greek parliament tomorrow.

The IMF sent out an emailed statement that says: “Under an Executive Board decision adopted in the late 1970s, country members can ask to bundle together multiple principal payments falling due in a calendar month. The Greek authorities have informed the fund today that they plan to bundle the country’s four June payments into one, which is now due on June 30.”

So, technically this is not a default, it is a delay; they are kicking the can, but there is little chance they can bundle together $1.6 billion by the end of the month. The Greeks did not roll over and take the take-it-or-leave-it ultimatum from the IMF. Tsipras issued a statement saying: “The proposal of the Greek government is the only realistic one on the table.” Greece’s decision to withhold the payment carries political and financial-market implications that are hard to predict. You might want to buckle your seat belt because it looks like we’re in for a bumpy ride tomorrow.

This morning the yield on the 10 year German bund moved up to 0.93%; that’s a gain of 48 basis points in the past month. The global bond market selloff has erased all of this year’s gains. And maybe we are starting to see some capitulation after that wild spike; time will tell; it might just be people moving to the sidelines ahead of the jobs report and reaction to the Greek debt delay tomorrow.

Oil prices are 40% below year ago levels. OPEC meets tomorrow in Vienna to determine production levels as world-wide crude output continues to exceed consumption. OPEC, which opted not to cut production at its last meeting despite plunging oil prices, is widely expected to stick to that strategy when it meets Friday. The group’s output level already exceeds its quota of 30 million barrels a day.

European oil majors are openly declaring interest in returning to Iran, with leaders of Royal Dutch Shell, BP and Total all saying they are ready to return as soon as international sanctions are lifted. U.S. oil companies remain somewhat more cautious on Iran, at least for now – give them time.

According to the AP: “One of the biggest hits to the economy last quarter came from cuts in drilling activity by energy companies — fallout from the sharp drop in oil prices over the past year. The government said investment in the category that covers energy exploration plunged at an annual rate of 48.6 percent, the steepest drop since 2009.” There had been hope that consumers would spend savings from lower gasoline prices and give a shot in the arm to the economy, but what has happened is the savings have gone to necessities such as rent and groceries, not discretionary consumer spending. Cheaper prices at the pump are not compensating for a raise in the paychecks; and we all have a sinking feeling that lower gas prices are just temporary anyway.

The International Monetary Fund says the Federal Reserve should delay raising rates until next year given the risks that moving too soon could stall the economy. IMF Director Christine LaGarde said the Fed should wait for “more tangible signs” of wage or price inflation than are currently evident. Starting too early to raise interest rates raises the risk of having to retreat back to zero. Overall, the IMF said that the fundamentals for continued growth and job creation remain in place for the U.S. economy, but momentum has been sapped in recent months by a series of negative shocks. The first Fed rate hike could still rattle markets and lead to instability. The IMF calculates that inflation won’t hit 2% until sometime in 2017. The IMF assessment of the US economy said growth had been slower than it expected, and it cut its 2015 forecast to 2.5 percent, from 3.1 percent.

The report from the fund says: “A later lift-off could imply a faster pace of rate increases following lift-off and may create a modest overshooting of inflation above the Fed’s medium-term goal (perhaps up toward 2.5 percent). However, deferring rate increases would provide valuable insurance against the risk of disinflation, policy reversal, and ending back at zero policy rates.”

Earlier this week, Fed governor Lael Brainard said that “foreign headwinds” were causing problems that could lead the Fed to delay interest rate increases.  She said the Fed should adopt a stance of “watchful waiting” and offered the cautious assessment that “liftoff could come before the end of the year.” Only a few Fed officials, however, have suggested that the Fed should wait until next year.

One of the big problems is the strength of the dollar, and if the Fed raised rates it would likely strengthen the dollar even more, especially in light of weakness in the rest of the developed world. As you know, first quarter GDP was revised lower, to show the economy shrinking by 0.7%; and while the contraction was blamed on temporary factors such as bad weather and the West Coast port closures, you can’t overlook the fact that the trade gap widened and trade has been hard-hit by the strong dollar, which makes US exports expensive compared with those from other countries.

I do not know what will happen in the markets tomorrow, but it should be wild. Stay tuned.

Financial Review

While the Sun Shines

Sinclair Noe — March 26, 2015

 

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

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DOW – 40 = 17,678
SPX – 4 = 2056
NAS – 13 = 4863
10 YR YLD + .09 = 2.01%
OIL + 2.22 = 51.43
GOLD + 9.00 = 1205.10
SILV = .15 = 17.20

Saudi Arabia and its Gulf allies started bombing targets in Yemen as the country slides closer toward civil war. A Saudi military spokesman said there were no immediate plans to launch ground operations in Yemen. Importers say the Saudi attack is not expected to disrupt oil supplies, but the threat of spreading war in the region could likely impact oil flows. Yemeni President Hadi reportedly fled the country yesterday. The White House says the US will provide “logistical and intelligence support.”

Yemen is a fairly small oil producer, but still the news helped push oil prices up almost 5% today, and there are several reasons. First, if things go wrong, this could turn into a proxy war between Shiite Iran, which is backing the rebels, and Saudi Arabia and other Sunni monarchies that supported the Yemeni regime.  The Saudi action could exacerbate tensions in Libya, Syria and Iraq; in other words, this could be part of a trend in the region.

Yemen is also geographically strategic, at the chokepoint of the Red Sea; so there might be the possibility the rebels could disrupt oil tanker traffic; 3.8 million barrels a day are transported through a 25 mile wide stretch of water between Yemen and Djibouti. Foreign ships have been warned not to get to close to Yemen ports.

The flip side of the bullish case for oil is that the Saudis will now need to pay for their military actions, and that means they can’t afford to cut back oil production.

Another consideration is the strong US dollar, which would only get stronger if the Fed hikes rates. This has been a light week for economic data which means it has been a good week for Federal Reserve policymakers to make a case for hiking interest rates. St. Louis Fed President James Bullard says now may be a good time to start normalizing US monetary policy, “so that it is set appropriately for an improving economy over the next two years.” Bullard says there is a concern that prolonged low interest rates could feed into asset price bubbles over the next few years. Atlanta Fed President Dennis Lockhart was interviewed on CNBC today; he says the strong dollar is something that he has upgraded in terms of importance, and that it could have “some dampening effect,” still Lockhart see a rate hike coming “mid-year or a little bit later.” Fed Chairwoman Janet Yellen wraps up the week with a speech tomorrow, just in case the Fed heads haven’t hammered home their point.

When the Fed talks, people listen, and then economists write papers. Laurence Ball economics professor and monetary policy expert at Johns Hopkins University, in a paper to be published next week by the Center for Budget and Policy Priorities says the Fed could create more jobs by letting the unemployment rate fall lower. It should seek to push the rate “well below 5%, at least temporarily,” he writes. That could help bring some discouraged workers to reenter the labor market, as well as help the long-term unemployed find work and involuntary part-time workers find full-time jobs. Mr. Ball allows that a low unemployment rate might result in a temporary jump in inflation above Fed targets but he considers that an acceptable side effect. In other words, it would be easier to fight inflation down the road with rate hikes than it would battling persistently low inflation or deflation with rates already close to zero.

The number of people who filed new applications for benefits at their state unemployment offices, known as initial claims, fell by 9,000 to a seasonally adjusted 282,000 in the period stretching from March 15 to March 21. New claims have tracked below 300,000 for three straight weeks after a weather-induced spike in February that pushed them to the highest level since last spring. And they are running about 9% lower now compared to one year ago.  Layoffs remain near a 15-year low.

A rebound in home prices is good news in the wake of the housing crash — but there can be too much of a good thing. Home prices are rising 13 times faster than wage growth nationwide, according to a report from RealtyTrac. From 2012-2014, median home prices climbed 17% while median wages rose 1.3%.

The House of Representatives today passed a bill to revamp Medicare’s payment formula for doctors. The bill would end the temporary patches known as the “doc fix” that lawmakers approve to prevent payment cuts to doctors. Part of the $214 billion measure is paid for by raising Medicare premiums on wealthy seniors. Passed on a vote of 392 to 37, the bill now goes to the Senate.

The Consumer Financial Protection Bureau has released a plan to rein in payday lenders. The CFPB proposal would require lenders either to ensure borrowers are able to pay back loans or to provide affordable repayment options or other protections such as capping the number of times borrowers can roll over debt. Four out of five payday loans are rolled over or renewed within two weeks. The CFPB’s proposals under consideration also would restrict payday lenders from some questionable practices by preventing repeated and unexpected withdrawals from consumers’ bank accounts. Most payday lenders can access borrowers’ checking accounts and withdraw the funds they are owed, often resulting in high fees when the withdrawal exceeds the checking account balance. In most cases, regulation for payday lenders largely falls to the states, which determine such factors as the maximum interest rates lenders can charge. Annual percentage rates on payday loans, which are offered in 36 states, are typically just shy of 600% in Idaho, Nevada, Texas and Utah, according to a report by the Pew Charitable Trusts. The CFPB proposals will now be opened for feedback from payday lenders and other before putting forward a plan.

Labor Secretary Tom Perez announced plans to travel to Seattle to sit down with workers and employers to discuss “how flexible workplace policies can help support families and businesses.” Perez said only 12% of private sector workers have access to paid sick days. It’s a big problem for low-wage workers. Two thirds of workers at the bottom 25% of the pay scale, the country’s lowest earners, do not receive paid time off for illness, according to the Labor Department. Three quarters of part time employees are not paid when they miss work due to illness. In some cases, they lose their jobs. In a video statement, Perez said: “We are way behind the rest of the world on this. You shouldn’t have to choose between the family you love and the job that you need.”

Of course, Seattle is the headquarters of Microsoft, and today Microsoft announced a new policy requiring suppliers with at least 50 employees to offer workers either 15 days of unrestricted paid time off, or 10 paid sick days and 5 paid vacation days. Microsoft works with a variety of businesses that supply goods and services, ranging from building maintenance and food service to management consulting and “software localization.” The new requirement will apply only to workers at suppliers who do “substantial work” for Microsoft and who have been with the supplier for at least nine months. Microsoft concluded that mandating paid time off for suppliers would ultimately benefit the company and employees by contributing to a “happier and more productive workforce.”

The Commerce Department reports that corporate spending on research and development rose 6.7 percent in 2014, almost twice the previous year’s gain and the biggest advance since 1996. The pickup was capped by a 14 percent fourth-quarter surge that signals additional increases are on the way. More research may help rekindle business investment in equipment that has been bogged down since late last year. Orders for non-military capital goods excluding aircraft, a proxy for future spending on new gear, slumped 1.4 percent in February. It marked the sixth straight decrease, the longest stretch since mid-2012. Investors are now rewarding companies looking to the future rather than those using their horde of cash to buy back shares. Shares of the 190 companies in the S&P 500 that disclosed R&D spending in 2014 outperformed the overall index by 6.1 percentage points. One of the benefits of increased spending on R&D is an increase in productivity, although productivity gains lag R&D spending, sometimes by several years.

The U.S. Energy Information Administration has just released data showing that in just one year, California has increased solar power from 1.9 percent to 5 percent of the state’s total power generation. California isn’t just producing the most utility-scale solar electricity of any state; it’s producing more than all the other states combined. And that’s only what the major electricity producers are generating; it doesn’t include rooftop solar, in which California is also leading the nation. In small-scale solar, capacity for another 2.3 gigawatts has been installed, according to the California Public Utilities Commission. California now accounts for about half of the country’s solar power capacity.

The surge in California’s solar output was driven by a handful of massive new plants, including the Topaz Solar Farm in San Luis Obispo County and Desert Sunlight Solar Farm in the Mojave Desert. Each has a capacity of 550 megawatts, making them among the largest solar plants of their kind in the world. With those plants and others, California added nearly 1,900 megawatts of new utility-scale solar capacity in 2014, raising the state’s overall solar sector to nearly 10,000 megawatts — or enough to power some 2.4 million homes.

Renewable energy, including hydro power and rooftop solar, now constitutes about a third of California’s electricity. And remember that California is going through one of the worst droughts in its history, which has resulted in hydroelectric power being cut in half. The annual increase in California’s solar generation in 2014 offset 83 percent of the decrease in hydroelectric generation. When you don’t have rain, you have to harvest sunshine.

FINANCIAL REVIEW

Game On

Sinclair Noe — December 4, 2014

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

DOW – 12 = 17,900
SPX – 2 = 2071
NAS – 5 = 4769
10 YR YLD – .03 = 2.26%
OIL – .61 = 66.77
GOLD – 3.10 = 1207.50
SILV + .06 = 16.59

Seven of the 10 main industries in the S&P 500 declined. Energy companies slumped 0.8%, following three days of gains. Chevron slid 1.3%, the most in the Dow, and Exxon Mobil declined 0.6%. Crude fell 18% last month and moves of that magnitude cannot be attributed to normal markets following supply and demand. There is manipulation in the oil market, and the question is really whether it will end well.

Initial jobless claims fell 17,000 in the week ended Nov. 29 to 294,000. In the prior week, new filings hit 314,000, the first reading above 300,000 since early September. Tomorrow is the monthly jobs report and the guesstimates are calling for 230,000 new jobs added and the unemployment rate steady at 5.8%. The November jobs reports are subject to some revisions, so don’t be surprised if that guesstimate is wildly off base. When the jobs report surprises to the upside, the S&P trades up two-thirds of the time, with growth sectors like industrials outperforming. When jobs miss, gold does well.

We’ll dig into the report tomorrow, but some of the important bits of data we will track includes where wages are going. There have been signs in recent months of higher employment costs, and workers did get a boost in October from a slightly longer workweek, but hourly earnings haven’t picked up, at least not yet. That means we’ll also watch where jobs are created; in decent paying jobs like manufacturing and construction or in lower paying sectors such as restaurants and bars. Then we’ll see if the jobs added in November are full-time or part-time; last month the U-6 unemployment rate, which tracks underutilized workers, dropped from 11.8% to 11.5%. And of course we’ll follow the participation rate, which ticked up a bit in October, to 62.8% from 62.7% in September; that might be a sign that discouraged, long-term unemployed workers are jumping back in the labor pool.

The US House has passed a $577 billion dollar measure to fund the Defense Department. The bill passed the House today, 300-119, without any changes. The Senate probably will follow suit next week. The annual defense policy bill sets military policy and spending targets for fiscal 2015, which started Oct. 1. While laws covering many other parts of the government routinely are allowed to lapse because of disagreements or disinterest, a defense authorization has been enacted for 52 consecutive years. Next week Congress will work on a funding bill to keep the government open.

The European Central Bank met today. Normally, when a major central bank holds a policy meeting you might expect policy, but that’s not how the ECB does it. You may remember 2 years ago, ECB President Mario Draghi said they would do “whatever it takes”, and then they thought about it. The European Central Bank, of course, has not been idle during the past two years. It has cut its benchmark interest rate seven times under Draghi to its current low of 0.05%, or effectively zero. Today, the central bank left the rate unchanged. It has taken the virtually unprecedented step of introducing a negative interest rate on money that commercial banks store at the central bank, to induce them to lend the funds rather than hoard them. And it has allowed banks to borrow money on extremely favorable terms for up to four years. The central bank is set to issue another round of cheap four-year loans next week. They have not embarked on quantitative easing, or a big bond buying program, like the Fed, or the Bank of Japan.

Today, Draghi said that the European Central Bank would reassess its stimulus measures “early next year” and that its governing council “remains unanimous in its commitment to using additional unconventional instruments within its mandate.” Which sounds like a few more words to say the familiar line “whatever it takes”. Stimulus is right around the corner, just not today. And the lack of action leaves the impression that bond buying might not help much; rates are already very low and further declines will have little traction on the economy unless they are matched by fiscal stimulus and reform measures to raise the growth potential of struggling European economies. Whether it will help or not, the ECB will have to take action sooner rather than later.

Also, an interesting development in London, where they have proposed what is being called a “Google tax”; actually a proposed 25% tax on multinational companies’ local profits. The idea is to stop multinationals from using complicated tax structures to move profits from their British operations to jurisdictions like Ireland or Luxembourg, where companies pay less corporate tax. The Google tax would go into effect in April and would force multinational companies to pay more tax in countries where they have large operations.

The tax would not just apply to Google; many other firms including Facebook and Apple have come under criticism for basing their extensive European businesses from Ireland. Google is just catching some extra flack lately, including an investigation by European antitrust authorities over its dominant role in search engines.

Meanwhile, the FBI is continuing to investigate the hack attack on Sony Pictures. Now they aren’t so sure it was North Korean hackers. Sony was hit by hackers on Nov. 24, resulting in a companywide computer shutdown and the leak of corporate information, employee information (including social security data and salaries) and a few films were stolen and posted on the internet. Meanwhile, Deloitte, the consulting and auditing firm, was hacked yesterday. Sony has worked with Deloitte. The leaked data is likely to raise embarrassing questions about Deloitte’s own insider-threat program. The firm has aggressively marketed its digital threat intelligence services and has been providing advice to corporations about how to protect data from employee leaks. Four months ago, Deloitte sponsored an article in The Wall Street Journal about how companies can more quickly identify employees who take internal data, the very issue it now finds itself addressing.

The hacking at Sony stands out because the hackers didn’t just sneak in and sneak out; they defaced the website; they posted pirated films online; they trashed the site and acted in a very brash manner. That’s different, and maybe a bit overconfident, but also maybe they were saying that the hackers are winning the cybersecurity wars. In other words, game on.

Security company Symantec reports there was a 62% increase in hack attacks over the past year. The threats are real and growing worse, and so far there doesn’t seem to be any particular urgency about making basic, fundamental changes to insure cyber security. Meanwhile, more and more commerce is moving online, everything from retail shopping to banking to the functioning of the electric grid to medical processing and recordkeeping to, well almost everything is now online.

In a speech two years ago, Leon Panetta, the former defense secretary, predicted it would take a “cyber-Pearl Harbor”, a crippling attack that would cause physical destruction and loss of life, to wake up the nation to the vulnerabilities in its computer systems. That hasn’t happened yet, not exactly. But there have been attacks. The Home Depot breach compromised over 50 million customers; don’t forget the breach at Target – 40 million credit cards and info on 70 million customers. Smaller hack attacks on the Pentagon, the White House (Even President Obama had to have his credit cards replaced because of a breach), CNN, JPMorgan, universities, hospitals, and scores of others, even the NSA. And the credit cards are small compared to the value of intellectual property hacked by foreign companies and foreign governments.

And part of the reason why this is a growing problem is that we don’t have national standards on security, and we haven’t really established liability in the courts; although there are some lawsuits that might work their way through the legal system and establish some precedent. Sometimes banks get stuck with the cost on fraudulent card usage, but that’s a small price compared to massive investment in security infrastructure. And if your credit card is hacked you may or may not be covered for losses. Most of the time, the only remedy for consumers is to cancel the card or change the password. Seriously. Not exactly a strategic solution.

Sure, there are companies trying to deal with the issue of cybersecurity and they are making progress, but the problem is that the hackers are progressing faster. And while I would like to tell you there are some great new technologies to protect you right around the corner, the reality isn’t quite so Pollyannaish. Five years ago, the Defense Advanced Research Projects Agency, or DARPA, decided to explore what the Internet might look like if we could rebuild the computer systems from the ground up, employing the hard lessons we have learned about security. It’s an interesting notion but it might be impossible. The internet was built for performance not security, and it is on the verge of extending to the Internet of Things, where we can control things like thermostats and lights and garage doors and refrigerators and cars all online. Or where we could lose control of all those things.

Our cyber infrastructure is not secure, and it won’t be until the economics of a breakdown are apparent and assigned. Just try and be careful out there.

NASA scrubbed the launch of its new Orion space capsule this morning after a series of delays caused by high winds and problems with the rocket. They’ll try again tomorrow morning.

FINANCIAL REVIEW

Behind the Curtain

Sinclair Noe — October 16, 2014

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Financial Review

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

DOW – 24 = 16,117
SPX + 0.27 = 1862
NAS + 2 = 4217
10 YR YLD + .06 = 2.15%
OIL + 1.16 = 82.94
GOLD – 2.20 = 1239.90
SILV – .08 = 17.47

The Dow is down for a sixth consecutive session. We started the morning down almost 200 points, so there is that. Part of yesterday’s volatility is being blamed on mini-flash crashes; 179 to be precise. Basically the high frequency traders yank their bids, as their algorithms try to catch up with big moves. It isn’t really a flash crash so much as a lack of liquidity.

Take a deep breath. Think about how you are invested. Consider whether you are diversified across asset classes. The market has not collapsed. It has gone down in a fairly fast and furious manner, but it has not collapsed. What will happen next? Will the market bounce back? Will it go sideways? Will the pullback continue and become really painful? You don’t know; I don’t know; the market doesn’t know; nobody knows. Take a deep breath, consider where you are and where you want to be in the future. The stock market is always a gamble. Maybe you want to gamble with a part of your money, and that’s fine. Maybe you are tired of gambling and want to find something safer; that’s cool, too. Just understand what you’re doing. The volatility of the past couple of weeks is a reminder that the markets fluctuate; they are unreliable, and you have to have a plan in place.

It is earnings reporting season; here are a few of today’s highlights: Goldman Sachs posted earnings of $2.2 billion or $4.57 a share, up from $1.5 billion or $2.88 a share, a year ago. Goldman likes volatility, and the biggest increases in revenue and profit came from their bond trading.

Google posted a profit of $2.81 billion, or $4.09 a share, down from $2.97 billion, or $4.38 a share, in the same period a year earlier, even as revenue increased 20% to $16.5 billion.

Apple introduced a few new products today, an iPad Air and an iPad Mini, which are just a little bit bigger than an iPhone Plus, but they can’t make phone calls. They also upgraded the Mac, and the screen looks better. This follows one month after the debut of the new iPhone 6 which we learn today are the bestselling Apple phones yet. And the Apple Pay plan has been accepted by 500 banks, and will roll out on Monday. What we didn’t get was an Apple TV. I know, we’re all just waiting on pins and needles.

In economic news, the number of Americans filing new claims for jobless benefits fell to a 14-year low last week. Initial claims for state unemployment benefits dropped 23,000 to 264,000. The jobless claims report reinforced expectations that slack in the labor market was being reduced, very, very slowly; or it was just a statistical fluke tied to the Columbus Day holiday, which may have affected how the data was collected.

The National Association of Home Builders’ housing market index was at 54 in October, down from 59 in September. Any number above 50 indicates that more builders view sales conditions as good than poor, just not as good as the month before.

A report from the Federal Reserve showed production at the nation’s factories, mines and utilities advanced a larger-than-expected 1.0% last month, the biggest gain since November 2012. The Fed pinned part of the gain to unusual weather that boosted air conditioning use, but there was also a broad-based increase in factory output, which grew a solid 0.5%.

Another report from the Fed’s Philadelphia branch showed slowing growth in factory activity in the mid-Atlantic region.

St. Louis Federal Reserve Bank President James Bullard said in a television interview with Bloomberg that the Fed might want to keep its bond-buying program running for longer than anticipated given a drop in inflation expectations. The Fed has been winding down its bond buying program, or quantitative easing. At the last policy meeting in September the Fed FOMC reduced purchases to $15 billion a month and agreed to end the program after the October 29th meeting, if the economy continued to improve. Bullard thinks the economy has been improving, but his worry is inflation, which is low and doesn’t look like it will move higher soon. He may have a point; the strong dollar and lower oil prices are keeping a lid on inflation and actually pushing prices down. But Bullard is the only Fed official to voice the idea of continuing QE, and the idea might be misinterpreted as a sign of weakness in the economy.

And the drop in oil prices is actually helping the US economy, even as it clobbers other countries. Lower oil prices are probably a bigger concern for Russia than sanctions. This week, the Russian owned oil company Rosneft, accused Saudi Arabia of secretly manipulating prices; a conspiracy theory about American and Saudi collusion against the Soviet Union first voiced during the Cold War. If oil prices were to stay in the range they are in now, we’ll see the Russian budget fall into deficit next year; that’s on top of the economic challenges they are already facing from sanctions and the decline in the value of their currency.

Iraq has increased output, but oil revenues are being eaten up by the conflict with ISIS, which could last a very long time. And a side note; while the fight against ISIS has not resulted in any quick victories, one small victory is that the sustained campaign of airstrikes has dismantled their network of oil rigs and refineries, cutting off the terrorist group’s ability to make gasoline for their tanks and trucks, and cutting off sales of black market oil that had been raising about $2 million a day.

Venezuela called for an emergency meeting of OPEC to address the steep decline in prices. For now OPEC is not going to call an emergency meeting. The next scheduled meeting of OPEC is in November, and there will be calls for cutting production to push prices higher. Saudi Arabia might allow lower prices because it squeezes Russia and Iran, and it might even squeeze shale oil producers in the US, who have been taking some of the market share from the Saudis. Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa. Saudi Arabia has very low production costs and its domestic spending program allow for a balanced budget at a price of roughly $95 a barrel, compared with $100 or more for Russia and even more for Iran. Saudi Arabia also has huge cash reserves to prop up its budget while prices remain low. They can afford to squeeze the competition.

When you go to the gas station and save a few bucks, enjoy it while you can. Gasoline now averages $3.18 a gallon nationwide; you might have seen prices drop under $3. Citigroup issued a report today saying that lower oil prices will provide a stimulus of as much as $1.1 trillion to global economies by lowering the costs of fuel and other commodities. We will all have more money to spend on other stuff and that will lead to more growth. Citi says all commodities are energy intensive to one degree or another, and cheaper energy is an advantage to both consumers as well as industrial and manufacturing operations. Which may be one of the greatest endorsements for renewable energy, but that wasn’t the point of their research report.

A slump in the prices of agricultural commodities like corn, soybeans and wheat should, over time, make trips to the grocery store cheaper. Prices of many other industrial commodities have also declined over the last year, silver and iron ore more than oil. One factor has been weakness in Europe and Japan, which means lower demand for commodities as well as a strengthening dollar. The downside of lower commodity prices is that it signals a slower economy, the upside is that you can put food on you plate and drive where you want to drive and still have money in your pocket, which you will likely spend; even though we had a report yesterday showing retail sales in September dropped 0.3%.

But most of the economic data has been fairly positive lately; not outstanding but decent. And still, the bond market has pushed yield on the 10-year Treasury down to 2.15% today, and briefly under 2% yesterday. Treasuries are consider the “safe haven” play. And that has been the move as the stock markets bob up and down on the waves of volatility. Maybe the stock market is trying to tell us something. Maybe the stock market knows something. Nope. The stock market does not have a crystal ball. Many market players thought the market was being guided by a powerful force, but it turns out the all-powerful, all-seeing, all-knowing wizard is really just some guy behind the curtain, or in this case the Fed officials behind the curtain.

For the past couple of years the markets have had excessive confidence in the Fed’s ability to pour money into the markets, and an untested faith that the Fed could calmly turn off the easy money spigot without causing a ripple on the calm waters of the markets. And so investors pushed market valuations higher than what was warranted by the sluggish fundamentals. It seemed as if the economy could move forward, just enough to get some air under the wings without actually taking flight. And that seemed good enough because we avoided recession and also inflation, and volatility was squeezed out of the market. In turn, we confused consistency with performance, and that in turn encouraged risk taking without examination of fundamental valuations, liquidity realities, and the relentless siphoning of profits without the required reinvestment into productive capacity.

The markets go through cycles of fear and greed, and the past couple of years have been the latter, and now we are staring down the former. It hasn’t been any one thing that has shaken investor confidence; it has been a confluence of many things from war to pestilence, from slower growth to unrealistically high valuations, from a lack of fiscal policy to no more tools in the monetary policy tool belt. We always suspected that the exit from QE would be a bit rocky, and a bit unnerving. It is.