Financial Review

The Wall

Sinclair Noe — December 28, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 111 = 19,833
SPX – 18 = 2249
NAS – 48 = 5438
RUT – 16 = 1360
10 Y – .05 – 2.51%
OIL – .21 = 53.69
GOLD + 4.20 = 1142.50

The Dow Industrial Average is flirting with 20,000 but today it hit a wall. Stocks fell the most in two weeks in light holiday trading. Trading has been thin across the globe during the last week of the year, with volumes in crude oil, equities and currencies all below average. We have 2 trading days left in the year.

A jump in consumer spending in the final stretch of December significantly offset a slow start to the holiday shopping season, and is likely to help many retailers beat sales forecasts. The December spending boost contrasts with a muted November, when early holiday promotions and expectations among consumers that deals would always be available took a toll.

Spending over the Thanksgiving weekend in November fell 3.5 percent from a year ago, despite a strong jump in online sales, according to the National Retail Federation. Brick-and-mortar sales in the week ending Dec. 24 rose 6.5 percent year-over-year after having fallen for the rest of the month, according to data from analytics firm RetailNext.

Strong demand for furniture, home furnishings and men’s apparel from the start of November through Christmas Eve pushed U.S. retail sales up 4 percent, higher than the previously expected 3.8 percent, according to data from MasterCard’s holiday spending report. Official government data and results from retailers will not be available until next month.

Contracts to buy previously owned U.S. homes fell in November to their lowest level in nearly a year. The National Association of Realtors said its pending home sales index, based on contracts signed in November, dropped 2.5 percent to 107.3. The biggest slowdown was in the West, where pending contracts dropped by 6.7%. The NAR blamed the slowdown on higher mortgage rates and tight inventory.

The White House is getting ready to announce a package of sanctions and diplomatic censure to punish Russia for its attempts to meddle in the 2016 presidential election. The Washington Post reports several punitive measures were on the table, including “economic sanctions and diplomatic censure.” Other methods may include covert cyber-operations. An announcement describing the public portions of the response could come as early as this week.

Lloyds Banking Group is planning to establish a subsidiary in Germany or the Netherlands if the U.K. leaves the European Union without retaining access to its single market. The EU is in the process of tightening rules for subsidiaries of non-EU banks.

Britain looks likely to lose its financial passport in Brexit negotiations due to start next year. London’s 328-year old insurance market, Lloyd’s of London, is also planning to move some of its operations to the continent in reaction to the UK’s Brexit vote.

Barclays is refusing to settle with the US Department of Justice over allegations it deliberately sold mortgage bonds to investors that it knew were backed by loans “made to borrowers who were not creditworthy and which were supported by house appraisals it knew were inflated”.

By refusing to settle, Barclays is borrowing a page from the Deutsche Bank Playbook; Deutsche also refused to pay a $14 billion settlement for similar wrongdoing, and then eventually settled for $7.2 billion, but only about $3.1 billion of that is actual cash; the rest is loan forgiveness and credit relief.

If Barclays took the settlement as offered it would mean a hit to capital reserve ratios. So, Barclays is likely holding out for a better deal, but it could be a risky play – this is not their first offense.

Airbus is delaying the delivery of 12 double-decker A380 aircraft to Emirates Airline. This comes after the company warned this year that it would scale back production of the super jumbo because of weak demand. Meanwhile, Delta announced it has canceled a $4 billion order for 18 Boeing 787 Dreamliners that was inherited as part of its merger with Northwest Airlines.

Qualcomm is facing an $865 million fine in South Korea. Qualcomm said the Korea Fair Trade Commission issued the penalty after finding it had violated the country’s competition law. The country’s antitrust regulator has accused the chipset designer of imposing unfair licensing fees on mobile device makers using its patents.

The company has faced similar hurdles in China and Europe, but South Korea is an important market: Samsung is Qualcomm’s second-biggest customer. The fine is the largest ever levied in South Korea.

Toshiba shares tumbled 20% overnight,  hitting the Tokyo exchange’s daily downward limit, wiping out about $5 billion in market capitalization over the past 2 days after the company said it could face a multi-billion-dollar charge on the nuclear power unit it acquired last year from Chicago Bridge & Iron. Toshiba executives declined to provide further details about the write-down, adding that the sum would be finalized by mid-February.

Japan’s Takata could be close to settlement with the US Department of Justice over its massive exploding-airbag recall. The Wall Street Journal reports Takata is expected to pay up to $1 billion to resolve allegations of criminal wrongdoing in handling its faulty airbags. At least 184 people have been injured in the United States in incidents involving potentially deadly Takata air bags. Worldwide, approximately 100 million vehicles have been recalled.

Kate Spade might be for sale. The Wall Street Journal reports the handbag and accessory retailer is working with investment bankers about a possible sale of the company; share price jumped nearly 20% on the report. Kate Spade reported lower-than-expected quarterly same-store sales last month and said pricing competition would likely dampen earnings during the holiday shopping quarter.

GNC, the chain of nutrition stores, has temporarily shuttered all 4,464 of its U.S. locations, as it rolls out its revamped pricing strategy. The one-day closures come two months after the retailer admitted that inconsistent prices on its website and in stores, as well as discrepancies over what it charged loyalty members versus casual buyers, were making its locations confusing to shoppers.

While GNC expects its new, simplified pricing structure will bring more shoppers into its stores, there will be repercussions — at least in the short term. When the company raised prices on its website to better align with what shoppers pay in stores, the changes sparked a 30 percent quarterly decline in same-store sales.

Germany is considering fining social networks such as Facebook up to €500,000-euro for each day the platform leaves a “fake news” story up without deleting it. The law would force the social networks to create offices focused on responding to takedown demands and would make the networks responsible for compensation if a post by individual users were found to slander someone.

Can Amazon Echo testify against you? In what may be the first case of its kind, Amazon has denied investigators voice data from an Echo owned by an Arkansas man who has been charged with murder, despite a police warrant. The tech giant refused to hand over the audio data on two separate occasions, although it did share suspect’s account information and purchase history.

Amazon’s Echo (and its main competitor, the Google Home) works by passively recording everything you say. When the Echo hears “Alexa” (or whatever your activation phrase is), it begins to actively record. That snippet of speech is then sent to Amazon’s cloud servers, where your recorded message is run through a speech-recognition neural network and a response is sent back to you, whether that’s playing a song or giving you the weather forecast.

Police in Arkansas think the Echo may have recorded audio of a murder, although that kind of audio probably did not end up in Amazon’s cloud memory.

Come the new year, millions of the lowest-wage workers across the country will get a raise. Some of those raises will be very minor — a cost of living adjustment amounting to an extra nickel or dime an hour. But in several places the jump will be between $1 and $2 an hour. The biggest minimum wage raises, percentage wise, will be in Arizona (up 24% to $10), Maine (up 20% to $9) and three Silicon Valley cities (up 20% to $12). All told, the minimum wage is set to rise in 21 states, at least 22 cities, four counties and one region.

Americans spent $2.1 trillion in 2013 on diagnosis and treatment of health problems, which amounts to more than 17 percent of the total U.S. economy. And spending on health care for 2015 is estimated to top $3.2 trillion; that means Americans pay more for health care than any other country.

A new study published in the Journal of the American Medical Association reveals what patients and their insurers are spending that money on, breaking it down by 155 diseases, patient age and category, such as pharmaceuticals or hospitalizations.

About half of all health-care spending in the US goes to treat a small group of diseases, and diabetes is leading the pack, costing $101 billion in diagnosis and treatment in 2013. Heart disease, the second-largest source of expenses, cost a total of $88 billion that year. Medical spending increases with age — except for newborns. About 38 percent of personal health spending was for people over age 65.

More and more Americans are retiring outside of the United States, according to the Social Security Administration. The number increased 17 percent from 2010 to 2015, and about 400,000 American retirees are now living outside the country. The countries they have chosen most often: Canada, Japan, Mexico, Germany and the United Kingdom.

Financial Review

July Jobs Report

Sinclair Noe — August 5, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 191 = 18,543
SPX + 18 = 5182
NAS + 54 = 5221
10 Y + .07 = 1.57
OIL – .02 = 41.91
GOLD – 23.70 = 1337.70

Today’s Jobs Report showed the economy added 255,000 jobs in July. The unemployment rate held steady at 4.9%. The results easily beat estimates of 180,000. Employment gains for June and May, meanwhile, were revised up by a combined 18,000.

The government said 292,000 new jobs were created in June instead of 287,000. May’s gain was raised to 24,000 from 11,000.  The 3-month average is now 190,000, which is much higher than previously anticipated.

Over the last six months, the economy has added an average of 189,000 jobs a month. In July, the year-over-year change was 2.45 million jobs. A monthly gain of 75,000 to 100,000 jobs is sufficient to keep the unemployment rate steady, while a 125,000 monthly gain is what is required to nudge it down further. The economy has added jobs for 76 consecutive months.

While a maturing labor market will translate into lower job creation over the next twelve months, reduced labor market slack should provide an offset through stronger wage growth. So, a gain of 255,000 is a very good, very solid report.

The unemployment rate was unchanged at 4.9% as more than 400,000 people joined the labor force in search of work in July, a sign they think more jobs are available. Job openings remain near a record high. The number of unemployed persons was essentially unchanged at 7.8 million.

In July, the number of persons unemployed less than 5 weeks decreased by 258,000. At 2.0 million, the number of long-term unemployed (those jobless for 27 weeks or more) was about unchanged over the month and accounted for 26.6 percent of the unemployed.

The resilience of the labor market was reflected in wages and how many hours people work each week. Hourly pay rose 0.3% to $25.69, keeping the 12-month increase in wages at a post-recession high of 2.6%. Inflation is tame, so workers are seeing some modest gains in wages. The average workweek rose 0.1 hour to 34.5 hours, just a tick below an eight-year high.

Every major industry hired in July except for mining and energy companies, which cut 6,000 jobs because of lower oil prices. Business and professional firms led the way, adding 70,000 jobs.

Heath care providers hired 43,000 new workers, and restaurants and hotels added 45,000. Manufacturing, construction, transportation, retail trades, wholesale trades, and utilities sectors all added less than 15,000 jobs each – basically unchanged from June.

Temporary-help jobs, a harbinger of future hiring, increased 17,000. Government added 38,000 new jobs; and this is something different; the recovery has happened without government adding jobs. In fact, we have lost government jobs since 2008. So this should provide a little added boost to the labor market.

An alternate measure of unemployment, called the U-6, increased to 9.7%, up from 9.6% in June, but is down from 10.4% a year ago. The U-6 includes underutilized workers or workers employed part-time for economic reasons. Also, the number of both long term unemployed and part time workers increased slightly.

In July, 2.0 million persons were marginally attached to the labor force, about unchanged from a year earlier. There are many reasons why someone might be considered marginally attached. Not all part-timers are necessarily seeking full-time work, however working mothers, returnees to school and older workers often fall into this category.

The Labor Force Participation Rate increased in July to 62.8%, from 62.7 in June. This is the percentage of the working age population in the labor force. One reason often cited for the low participation rate is demographics; the boomer generation is aging and dropping out of the labor force. At the same time, many boomers have been sneaking back in; the biggest market opportunity for start-ups is older Americans.

AARP holds yearly pitch events and even has its own incubator. And according to a recent survey by AARP 34 million Americans served as unpaid caregivers to a loved one 50 years old or older in the previous 12 months. That’s real work but I doubt that much of that activity is included in the Labor Department’s monthly reports.

Good news for less-educated workers: Jobless rate fell to 10-year low of 6.3% for those without high school degree; that’s down a full percentage point and the biggest move since March of 1999, when unemployment stood at 4.2 percent and companies were scrambling to find workers.

Still, for workers with at least a bachelor’s degree, the unemployment rate is running about 2.5%. Unemployment among Americans 25 or over with less than a high school diploma fell by 118,000, to a total of 669,000, the lowest level since records began in 1992.

Also remember that we have seen 29 states and several cities that have increased minimum wages, plus increases in the lowest-tier salaries by big employers like Walmart, Target and Aetna, are also beginning to ripple through the broader work force.

This week, Minnesota raised its minimum wage by 50 cents, requiring large employers to pay workers $9.50 an hour, while smaller firms must pay at least $7.75. On July 1, similar increases went into effect in Maryland, Oregon and the District of Columbia. And there was concern that it might result in fewer low-end jobs.

It’s still too early to be definitive but that does not seem to be the case; rather, higher minimum wages seem to be drawing workers from off the sidelines. We’re seeing new entrants into the labor market, which implies a longer runway for the business cycle. And it’s not just low-end jobs. Young adults coming out of college are getting hired, and we’re seeing a lot of activity in the $50,000 to $150,000 category.

Stocks opened higher after the release of the Jobs Report, the Nasdaq composite ended up 1.1% to 5221.12, topping its record close of 5218.86, set more than a year ago, July 20, 2015. The S&P 500 stock index closed at 2182.87. That’s a few points above its all-time closing high of 2175.03, set July 22.

Treasury prices tumbled, pushing yields higher.  The combination of strong hiring and rising wages gives new life to the argument that the recovery is strengthening, not faltering, as it enters its eighth year.

While this was a second consecutive strong jobs report, the markets are acting like it probably won’t be enough to move the needle for the Fed. The May jobs report came in at a very weak 24,000, the June report came in at a very strong 292,000; those numbers clearly had some statistical noise, but the 3-month average is 190,000, which is very solid.

For those policy makers in the “wait and see” camp, poor GDP growth (1.2% in the second quarter) and weak inflation provide enough justification for waiting at least until December for the next rate hike. Still, the Atlanta Fed just upped their GDP target for the third quarter to 3.7% up from their previous expectation of 3.6%.

The chances of a rate hike doubled to 18 percent for September after the jobs report and rose to 40 percent from 29 percent for December, according to CME Group’s FedWatch tool; that still means the markets are saying there is a greater chance of no hike than a hike.

We know that the monthly Jobs Report is very important to the Federal Reserve; it is one of the Fed’s two mandates. However, the Jobs Report takes on added importance every four years. We are now about 3 months away from the presidential election.

The United States economy is creating jobs at a rapid pace; most people who say they want a job are able to find one, and employers are having a hard enough time finding workers that they’re having to pay higher wages. Higher wages should result in more consumer spending, which should lift the economy in the second half of the year.

There are still plenty of things that can go wrong with the economy and the financial markets over the next 3 months. But if we get 3 more strong jobs reports, it will have a strong impact on the elections.

Political science research particularly points to changes in income as being predictors of how people vote, and the July data on average hourly earnings suggest American workers are being paid more: a 2.6 percent gain over the last year, tied for the highest since 2009 and a comfortable gain in workers’ purchasing power in an era of low inflation.

It’s the old question – are you better off now than you were 8 years ago? Eight years ago, we were looking at the possibility of a global financial meltdown and the economy was hemorrhaging 800,000 jobs per month. So, you can expect the issue of jobs to be a very relevant part of the political discussion in the next few months.

The reality is that we have seen 76 consecutive months of job growth, we are seeing steady but not exploding growth, very close to full employment, low inflation, low inflation rates, strong but not exploding existing and new home sales, strong auto sales even if softening from the previous record two years, steady but not exploding wage growth, strong equity markets, and no sign of overheating, even as the S&P 500 hits a record high.

True, there are many people who have not participated fully in the jobs recovery, and the recovery has been slow and sluggish. There are parts of the economy that are struggling, and there are constant risks that could explode in an instant; there are still very real and persistent problems in the economy, and we can always do better and therefore we should never be satisfied, but the facts are clear that we have seen a recovery.

Financial Review

June Jobs Report

Sinclair Noe — July 8, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 250 = 18,146
SPX + 32 = 2129
NAS + 79 = 4956
10 Y – .02 = 1.37%
OIL + .05 = 45.19
GOLD + 4.80 = 1365.60

*S&P just shy of intraday and closing record highs, going back to May 2015.

The Jobs Report for June showed the economy added 287,000 new jobs, and the unemployment rate rose to 4.9% in June from 4.7% as more people entered the labor force in search of work. The results topped consensus estimates around 175,000.

June payrolls were boosted by the return of 35,000 striking workers at Verizon. The May report was revised from 38,000 down to 11,000. April’s gain was revised higher to 144,000 from 123,000. April and May revisions resulted in a net loss of 6,000 jobs compared to initial estimates.

Goldman analysts blamed the month to month discrepancy on weather, saying that during April and May, industries most affected by weather barely hired. Construction, leisure and hospitality and retail, added just 4,000 jobs compared to 113,000 in October through March. Construction hiring was again low in June.

Another consideration is seasonal adjustments based on the school year. In May, we saw a decline in the unemployment rate and a drop in labor-force participation. The change suggested that unemployment was falling for “bad reasons,” as discouraged workers gave up looking for work. Reinforcing that notion, the share of unemployed workers leaving the labor force spiked, on a seasonally adjusted basis.

The unadjusted data painted a different picture. When schools finish up in May, more students start looking for work, which adds people to the labor force. So normally, in data that aren’t adjusted for seasonal fluctuations, fewer people drop out of the workforce from jobless rolls during the month.

That big slowdown in dropouts we usually see in May didn’t happen this year. So when the normal seasonal adjustment was applied, it magnified the flows out of the labor force. That, in turn, helped push the unemployment rate down to 4.7 percent, even though the report only showed 11,000 new jobs created.

In June, however, the slowdown in labor-force dropouts played out more fully. The unemployment rate jumped back 0.2 percentage point, while the participation rate rose 0.1 percentage point, and the economy added 287.000 new jobs.

The numbers in May and June were probably flukes, or outliers. So we can look at broader trends. The US added an average of 147,000 jobs in the past three months. Over the past six months the economy has averaged 172,000 net new jobs per month. Clearly the trend is down from an average of 230,000 per month in 2015, but that is to be expected at this point in the economic cycle.

Taking account of the growing numbers of retiring baby boomers and the population growth, a monthly gain of 75,000 to 100,000 jobs is sufficient to keep the unemployment rate steady, while a 125,000 monthly gain is what is required to nudge it down further.

The Labor Force Participation Rate increased in June to 62.7%, up from May’s 62.6 percent, close to its lowest level since the 1970s. The U-6 unemployment rate declined to 9.6%. The U-6 rate includes the unemployed, the underemployed and the discouraged – people who have given up looking and are no longer counted in the headline number.

While the U-6 rate has made substantial gains in the past years, it remains stubbornly at pre-recession levels. There are 1.97 million long-term unemployed (that’s more than 26 weeks), and that number is up from 1.88 million May. The number of part-time workers who prefer full-time jobs fell by nearly 600,000.

And the ranks of temporary workers increased by 15,000 after falling by 19,000 in May and posting meager gains in recent months. Employers often add such contingent workers before hiring permanent staffers. And even though more than 400,000 candidates jumped back into the labor market, the low labor force participation rate indicates there is still plenty of slack.

Leisure and hospitality added 59,000 jobs in June, following little employment change in the prior month. Job gains in leisure and hospitality have averaged 27,000 per month thus far this year, down from an average of 37,000 in 2015.

Health care and social assistance added 58,000 jobs in June. Employment in financial activities rose by 16,000 in June. Employment in information increased by 44,000 in June. Employment rose in telecommunications (+28,000), largely reflecting the return of workers from the Verizon strike.

Employment in professional and business services continued to trend up in June (+38,000). The industry has added an average of 30,000 jobs per month, compared with an average monthly gain of 52,000 in 2015.

Employment in retail trade edged up by 30,000 in June, after changing little over the prior 2 months; a positive sign for consumer spending. Retail trade has added 313,000 jobs over the year.

Employment in mining continued to trend down in June (-6,000). Since reaching a peak in September 2014, mining has lost 211,000 jobs. Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, and government, showed little or no change in June.

Average hourly wages rose 2 cents to $25.61 in June. In June, the average workweek for all employees on private nonfarm payrolls was 34.4 hours for the fifth consecutive month. Hourly pay increased 2.6% in the 12 months to June 2016, matching the highest level of the recovery; that’s good enough to outpace inflation, so wage gains mean more money in workers pockets, still the gains are not enough to raise concerns about wage push inflation.

More than a dozen cities and states raised wages this year, and those higher pay floors should cause a ripple of extra earnings for people making as much as 20 percent more than the minimum. For states like New York and California, which will increase wages to $15 an hour over the next few years, those benefits will extend to people making $18 an hour. Wage increases above the minimum wage are believed to be a response to what economists call “wage compression,” which occurs when more senior employees are no longer better compensated than less senior employees.

Say you worked at a fast food restaurant in Washington, D.C., at the old local minimum of $10.50. On July 1, your hourly wage increased to $11.50. That’s great news for you, but the shift manager getting paid $12 an hour may not be overjoyed about your sudden good fortune.  There is a hierarchy in wages, but anything above the minimum is discretionary, and that ripple effect only extends to about 20% of the wage scale, give or take.

Overall, only about 3 percent of workers are paid minimum wage, according to an analysis by the Brookings Institute. But nearly 30 percent of workers make less than 1.5 times the minimum wage. By that rough calculation, about 35 million workers could see raises if the minimum increased. The minimum wage does more than simply shift the wage distribution toward higher pay — it effectively compresses the lowest wages.

The end result is a reduction in wage inequality below the median wage — a little under $30,000 for individuals. Beyond that, the impact of increases in minimum wage don’t seem to affect middle income and upper income workers.

Of course, the bigger debate about minimum wage is whether it will mean fewer jobs; the basic idea is that raising the price of anything reduces demand. But there are other factors that must be considered. When workers earn more there is less turnover and productivity increases.

Also, lower wage workers tend to spend almost everything they make, meaning the wages are circulated, increasing the velocity of the money, and stimulating the economy. The net effect is mildly positive, with a lag time.

One of the recurring complaints from employers is that they have a hard time finding skilled workers. Wages of high school dropouts are lower than they were at the turn of the century in real terms. The same goes for workers with a high school diploma, and also for workers who went to college but stopped short of a bachelor’s degree. Although some of the hardest to fill jobs in the country don’t require college degrees: chefs, butchers, bakers, mechanics and electricians. These jobs certainly require skills.

The most obvious solution would be to train workers for skills that are in demand. The problem is that we don’t see much job training in the US. According to the Organization for Economic Cooperation and Development, the United States government spends only 0.03 percent of its gross domestic product on worker training, well below budgets for other developed nations. Penny wise, pound foolish.

The Federal Reserve is back in the game. That’s the simple message from the strong June jobs report. That said, don’t expect a rate hike this month. The May jobs report appeared to spook the central bank and convinced investors the Fed would keep rates on hold all year. Though most Fed officials have continued to signal a desire to raise rates at least once in 2016, minutes from the Fed’s June 14-15 meeting, released on Wednesday, showed the Federal Open Market Committee “generally agreed” they needed to see more data before contemplating another hike.

The Fed won’t overreact to one strong report any more than it would to a single weak one. The Fed will almost certainly remain on hold at their next meeting on July 26-27. Prior to the report this morning, markets had priced in one rate hike through the end of 2018; now the CME Fedwatch calculates a 23% chance of a rate hike by December.

Financial Review

Jobs Friday

Sinclair Noe — May 6, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 79 = 17,740
SPX + 6 = 2057
NAS + 19 = 4736
10 Y + .03 = 1.78%
OIL + .29 = 44.61
GOLD + 10.10 = 1288.70

The economy added 160,000 new jobs in April, missing expectations of about 200,000. The unemployment rate held steady at 5%. Employment gains for March and February, meanwhile, were reduced by a combined 19,000. The government said 208,000 new jobs were created in March instead of 215,000. February’s gain was trimmed to 233,000 from 245,000.

In a bit of good news, average wages climbed 0.3% to $25.53 an hour; a gain of 8 cents, up from a gain of 6 cents per hour in March. Hourly pay rose 2.5% in the past 12 months, up from 2.3%, reflecting a tighter labor market. Inflation has been running at about 2%, so workers are seeing real wage growth.

Next week, the Labor Department will announce that it’s doubling the salary threshold under which virtually all workers will be eligible for overtime. (The current threshold is $23,660.) As far back as 1940 it was common for presidential administrations to update the wage thresholds, with 6 revisions over 35 years. The outgoing Carter administration issued a rule to raise the threshold in 1980, but when Reagan took over “revisions to increase the salary levels in 1981 were stayed indefinitely”.

It wasn’t until 2004 – 23 years later – that the Labor Department next raised the threshold, and then only slightly, to $23,660. Now the Labor Department plans to double the threshold to about $47,000 and to raise it automatically thereafter with inflation, restoring the status quo that existed before the only US president ever to serve as a union leader took office.

Since the start of the year we have started to see new minimum wage laws; most notably California, Colorado, Michigan and Massachusetts increased their minimum wages at the start of 2016, while Maryland and the District of Columbia are set to enact raises on July 1. In a first-of-its-kind report, researchers at the National Employment Law Project pore over employment data from every federal increase since the minimum wage was first established, making “simple before-and-after comparisons of job-growth trends 12 months after each minimum-wage increase.”

What did the researchers find? The paper’s title says it all: “Raise Wages, Kill Jobs? Seven Decades of Historical Data Find No Correlation Between Minimum Wage Increases and Employment Levels.” They found that 68 percent of the time, total jobs went up across the economy. Retail jobs increased 73 percent of the time. Hospitality employment rose 82 percent of the time. The researchers say business cycles explain the instances when employment fell: Each of those times, they write, the economy had entered or just come out of a recession, or was about to enter one.

While there is some structural change for wages, these really tend to have a very small impact on the overall wage story. A bigger impact is expected if and when we start to get to full employment and possibly start seeing labor shortages, but we are not there yet.

The U-6 unemployment rate came in at 9.7%, down one-tenth of a point. The U-6 rate is defined as all unemployed as well as “persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the labor force.” That means the unemployed, the underemployed and the discouraged.

Gains in general were tilted toward part-time work, with full-time workers declining by 253,000 and part-time workers also dropping, but by just 21,000. The number of people working part-time for economic reasons, at just over 6 million, remains 50 percent above what it was before the 2007-2009 financial crisis and recession. But it has been stuck around that level for more than half a year, a sign that progress may have stopped or that employers have shifted some jobs permanently away from full-time status.

The number of long-term unemployed (those jobless for 27 weeks or more) declined by 150,000 to 2.1 million in April. These individuals accounted for 25.7 percent of the unemployed.

Job growth was concentrated in the business and professional services sector, which added 65,000 positions. Health care was up 44,000, while financial institutions added 20,000 despite some high-profile layoff announcements on Wall Street.

Mining lost another 7,000; this category includes energy-related jobs in the oil patch. Companies that drill for oil and natural gas or mine for coal and other metals have cut almost 200,000 jobs since the fall of 2014. Energy firms have reduced payrolls for 18 straight months. Retail lost about 3,000 jobs. Construction added about 1,000 jobs. Government continued to shed jobs, 11,000 last month.

When roughly 40,000 Verizon workers went on strike last month, it was right in the middle of the week that government number crunchers analyze to gauge the strength of the job market. Over all, the muted tone of April’s report wasn’t because of a big drop in any particular industry.

If you are looking for positive trends in the report, consider that this marks the 74^th consecutive month of job gains. Private employment is now 5.8 million above the pre-recession peak. Private employment is up 14.6 million from the recession low. In April, the year-over-year change was 2.69 million jobs. Over the last 12 months, employment growth averaged 232,000 jobs per month.

For Fed watchers the jobs report was a red flag and the thinking is that a drop of 48,000 jobs might stop the Fed from raising interest rates at their June meeting. Futures tied to the Fed’s benchmark policy rate now put the next interest rate hike into next year, but that might be a disconnect from what Fed policymakers have in store. The rise in wages still might push the Fed closer to hiking rates; if not June, maybe September.

And the simple fact is that employment was not going to continue rising at 200,000 a month indefinitely. Monthly gains of about 100,000 jobs would be enough to maintain the rate of economic growth and absorb new job entrants as the population increases; especially as boomers continue retiring in a huge demographic shift.

The labor force participation rate, which had been on the rise in recent months, fell to 62.8 percent, down two-tenths of a point and its lowest level since January. The total labor force contracted by 362,000. Analysts are divided on whether the decline is “structural”, in other words due to big, long-term shifts in the economy, like baby boomers retiring; or “cyclical”, driven primarily by shorter-term moves in hiring due to the business cycle.

It’s an important question.  If it is structural, it means that the labor pool is smaller and most of the slack is already out of the labor market. If it is cyclical, it means that there are still plenty of potential workers on the sidelines, waiting to get back into the labor pool. A third option is that we are nearing some sort of equilibrium where fewer people are leaving the workforce rather than people re-entering. If that is the case, then we might expect the labor force participation rate to trend sideways or lower from here.

The labor force participation rate edged down, consistent with what Fed policymakers feel is a longer-term trend given the country’s aging population. Since 2008, the labor participation rate has fallen from a high of 67.3% in 2000 to 62.8%, which is near a 38-year low. It seems that most, not all, of the sidelined workers have come back to the labor pool. We are getting closer to full employment – not there yet – but at least wringing some of the slack from the labor market.

Still, most people don’t think this feels like a robust labor market. According to the US Bureau of Labor, workers are considered “employed” even if they are working a couple of part-time jobs to scrape by, even if they work just a couple of hours a week. Many of the jobs created in the recovery are low-paying or part-time; many of the jobs are part of the 1099 economy or the gig economy – temp jobs, freelance, or contracted jobs – in other words, jobs without benefits. The number of Americans working in this capacity grew from 10.1% in 2005 to 15.8% in 2015.

After decades of stagnant wages, 73 million Americans — nearly one quarter of our population — now live in households eligible for the Earned Income Tax Credit, a benefit exclusively available to the working poor. And according to a 2014 report from the Organization for Economic Cooperation and Development, rising income inequality (and the reduced consumer demand that comes with it) knocked 6% to 9% off US economic growth over the previous two decades.

If the US economy were 9% bigger than it is today, it would have created about 11 million additional jobs. Working people and their families are keenly aware of the fact that strong wage growth continues to be the lagging indicator in this recovery.

The Fed raised rates in December and its current projections call for another two hikes this year. But you have to wonder if the Fed really has incentive to hike rates in June. Perhaps the Fed will look at the possible inflationary impact of wage gains, but Yellen has said she is not yet convinced that recent signs of rising prices are evidence of a durable trend. There will be one more jobs report before the Fed FOMC meeting in June. Today’s report was not enough to take a rate increase off the table, but it was enough to make the policymakers think twice.

Stocks bounced back from earlier weakness to close higher on Friday but logged their second straight week of losses. Treasury yields rose today, after plunging early in the session to a nearly one-month low. Treasury prices rose for the second week in a row, pushing yields to their largest two-week decline in a month.

Financial Review

Not Fixed Yet

Sinclair Noe — February 5, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 211 = 16204
SPX – 35 = 1880
NAS – 146 = 4363
10 Y – .02 = 1.85%
OIL – .73 = 30.99
GOLD + 18.40 = 1174.50

The S&P 500 extended its loss for the week to 3%.  The index is now down more than 8 percent in 2016. The Nasdaq closed at its lowest since October 2014.

Today is a jobs report Friday. If you are a regular listener, you know that I go into quite a bit of detail. The reason is simple. The jobs report is the single most important economic data we can look at each month. So, here are the numbers:

The economy added 151,000 nonfarm jobs in January; that’s below the consensus estimate of 185,000. The unemployment rate dropped from 5% to 4.9%, the lowest reading since 2008; and an indicator the economy is still creating more than enough jobs to keep up with increases in the size of the labor force. The December jobs report was revised down from 292,000 jobs to 262,000. November’s gain was raised to 280,000 from 252,000.

In the past three months, job growth averaged 231,000 jobs per month. In the past 12 months the economy added 2.67 million jobs. Since the beginning of 2010, the American economy has gained nearly 14 million jobs. Total employment is now 4.9 million above the previous peak.

The average wage paid to U.S. workers jumped 0.5% in January, or an increase of 12-cents an hour, to $25.39 an hour. Though there’s an important caveat here: one-time minimum wage hikes may make some of this a temporary bump. This means we probably won’t see a similar jump next month, but the good news is that wages are higher. Wage growth accelerated toward the end of 2015 and it has climbed 2.5% in the past 12 months, just a hair below the post-recession high set in December.

And with inflation, as measured by the CPI at a little under 2%, that means real wage gains for workers; it also explains why the savings rate has been creeping higher. What’s more, the average amount of time workers spent on the job edged up to 34.6 hours in January. That also matches a post-recession high.

Job gains occurred in several industries, led by retail trade, food services and drinking places, health care, and manufacturing. Employment declined in private educational services, transportation and warehousing, and mining.

Here’s a breakdown of the different sectors: Retail trade added 58,000 jobs in January, following essentially no change in December. Employment in food services and drinking places rose in January (+47,000). Over the year, the industry has added 384,000 jobs. Health care continued to add jobs in January (+37,000). Manufacturing added 29,000 jobs in January, following little employment change in 2015. Financial activities rose in January (+18,000). Employment in professional and business services changed little in January (+9,000), after increasing by 60,000 in December.

Private educational services lost 39,000 jobs in January due to larger than normal seasonal layoffs. Employment in transportation and warehousing decreased by 20,000 in January. Most of the loss occurred among couriers and messengers (-14,000), and that can be considered a seasonal adjustment. Government, on both the federal and local level, lost 7,000 jobs, meaning private payrolls actually gained 158,000 jobs for the month. Employment in temporary help services edged down in January (-25,000), after edging up by the same amount in December.

There are still about 6 million workers working part-time for economic reasons; that means they would like a full-time job but they can’t find it. When you add these marginally utilized workers to the 4.9% headline unemployment rate (which is known as the U-3), you get a different measure of unemployment called the U-6, which was unchanged at 9.9%. There are 2.1 million workers who have been unemployed for a half-year or longer (the long-term unemployed). These individuals accounted for about 27 percent of the unemployed.

Among the major worker groups, the unemployment rates for adult men (4.5 percent) and Whites (4.3 percent) declined in January. There was little change in jobless rates for adult women (4.5 percent), teenagers (16.0 percent), Blacks (8.8 percent), Asians (3.7 percent), and Hispanics (5.9 percent).

The labor force participation rate inched up slightly to 62.7%. The participation rate for workers aged 25 to 54 (the prime working years) increased in January to 81.1%, from 80.8% in December. We have seen meaningful improvements in the participation rate over the past six months which suggests that more sidelined workers are being brought back into the labor pool.

So, was this a good report or a bad report? Well, the numbers were down from last month and they were short of estimates, but that doesn’t mean the numbers were bad. The unemployment rate at 4.9% is very good. The November and December reports were very strong, and probably unsustainable at this point in the recovery. Any job gains above 100,000 per month means that the economy is absorbing population growth. It isn’t realistic to think the economy will add 2.67 million jobs in 2016. At some point we reach full employment. The problem is that we don’t know exactly where that point is.

You can’t measure full employment with a single metric. The Federal Reserve has combined some metrics into something they call ZPOP, which looks at the labor participation rate and workers in prime working years and under-utilization. But that doesn’t tell the whole story. We have seen the unemployment rate down around 4.4% for a brief period about 10 years ago. And several states and cities have experienced unemployment under 4% with no apparent adverse effects.

And even if the unemployment rate drops to 4.5% (to pick a number out of the hat), does that mean we have full employment? Not necessarily. We could still have plenty of slack in the labor market at 4.5%. Just because a worker is employed doesn’t mean he or she is doing what they’re best at or employed in their most productive occupation. If an unemployed engineer takes a job waiting tables to feed the family, that worker will be defined as fully employed, but that worker’s potential is hardly fully utilized.

And then you can look at full employment as the point where we start seeing wage push inflation. And even though we saw a nice bump in wages this month, probably because of the new minimum wages, remember that wages declined slightly a month ago. We really see very little inflation from a tight labor market. And even if we did see wage push inflation, we are in a low inflation environment right now, some might say deflationary, which means we might have even further to go before inflation becomes problematic.

If inflation remains below the Fed’s target for an extended period of time and the unemployment rate continues to decline, the Fed might just reduce its estimate of what the full employment rate really is. In the end, the Fed will always have to make its monetary policy decisions based on incomplete information about the economy. So maybe it is more important to look to wages, than it is to look to the net number of new jobs added each month.

Further, this is not the kind of jobs report that would indicate the economy is headed for a recession. And while the financial markets could drag the economy into recession or an incident in the international credit markets could drag the economy into recession or a geopolitical event could make a mess of everything, the simple truth is that the economy is not on the precipice of a recession with 4.9% unemployment.

Get real folks. That is not a recession number. The fact that unemployment is still falling is a big giveaway that we’re not in a recession yet. Granted the recovery is long in the tooth, but from these levels we are still more than a year away from a recession, maybe a bit longer, absent some black swan event.

Following the release of the jobs data the dollar rose against a basket of currencies on the data as traders saw more rate hikes this year. The yield on Treasury debt fell and stocks extended losses. Mohamed el-Erian, chief economic advisor at Allianz said today’s jobs report “serves as a caution to markets that it is too early to take a Federal Reserve March hike completely off the table.”  The financial markets are clearly afraid of another rate hike.

The Fed’s December rate hike was a mistake, but that is not going to cause a recession; unless the FOMC is crazy enough to raise rates further in a weak economy with no inflation. A question that should be asked is if a rationale for quantitative easing was to increase investment asset prices and spur the economy through the wealth effect, what is the effect going to be when after a year of minimal returns on investment assets those assets begin to decline significantly in price as has been the case since the beginning of this year? That might be a false premise but it will surely play into the Fed’s equation.

So, now the Fed has a very difficult and complicated decision to make.  The financial markets have been looking lousy but the labor market is looking fairly solid. And Fed chair Janet Yellen has said she doesn’t want to wait for full employment and signs of inflation before tightening policy. That explains, or at least justifies, the December rate hike.

And while the markets bet on the odds of a rate hike, let’s not forget that the Fed is not out of ammunition. And don’t forget the long-forgotten concept of fiscal policy to stimulate the economy. But the reality is that the jobs recovery still has a long way to go. Too many people fell out of the labor pool, and were just considered as collateral damage explained away as demographics; too many people ended up with the wrong jobs that provide a paycheck but don’t fully utilize their skills.

The economy is growing. It just isn’t fixed yet.

Financial Review

The Last Jobs Report of 2015

Sinclair Noe — January 8, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 167 = 16,346
SPX – 21 = 1922
NAS – 45 = 4643
10 Y – .02 = 2.13%
OIL – .34 = 32.93
GOLD – 4.60 = 1105.60

The economy added 292,000 new jobs in December, much higher than estimates of 205,000 to 215,000. The unemployment rate was unchanged at 5.0%. The October and November reports were revised higher to show an additional 50,000 new jobs. In the final three months of 2015, the U.S. added an average of 284,000 jobs. That’s the fastest pace in almost a year.

For the past year the economy added 2.7 million jobs. In 2014 the economy added 3.1 million jobs; that’s the best 2 years for job growth since the late 1990s. The economy has added jobs for 70 consecutive months; right at 14 million jobs during that time.  Over the past year the unemployment rate has dropped from 5.7% to the current 5%.

Hiring in December was led by professional firms. They added 73,000 jobs, though almost half were temporary. Construction companies added 45,000 new workers (but that might be more a sign of mild winter weather across much of the country in December, rather than a big upsurge in construction).

Over the year, construction added 263,000 jobs, compared with a gain of 338,000 jobs in 2014.
Health care employment rose by 39,000, with most of the increase occurring in ambulatory health care services (+23,000) and hospitals (+12,000). Job growth in health care averaged 40,000 per month in 2015, compared with 26,000 per month in 2014.

Food services and drinking places added 37,000 jobs in December. In 2015, the industry added 357,000 jobs.

Employment in transportation and warehousing rose by 23,000 in December, with a gain of 15,000 in couriers and messengers.

Manufacturing employment changed little in December, though its nondurable goods component added 14,000 jobs. In 2015, manufacturing employment was little changed (+30,000), following strong growth in 2014 (+215,000).

Employment in mining continued to decline in December (-8,000). After adding 41,000 jobs in 2014, mining lost 129,000 jobs in 2015, with most of the loss in support activities for mining. When we say mining, what we are really talking about is jobs in oil exploration and development as well as oilfield support services.

Speaking of oil, Goldman Sachs’ chief equity strategist David Kostin joins analysts who are now seeing the impacts from the drop in oil prices as more negative for the overall stock market than previously thought. Kostin cut his earnings outlook for the S&P 500, citing a nearly $2 negative impact from energy stocks with that sector likely to see negative twelve-month earnings for the first time since the firm’s data begins in 1967. Overall, Goldman now thinks earnings will fall 7% in 2015. Which also does not bode well for mining jobs.

State and local governments added 13,000 jobs in December and the federal government added 4,000 jobs in the month, and only 17,000 federal jobs were added for the year. This has been a notable distinction of the current job recovery – it has been private employment, and public employment is still down 549,000 from the peak.

Worker pay fell a penny to $25.24, marking the first decline in a year. For the year wage growth was 2.5%. In a stronger job market, we would expect wage growth around 3% to 4%, which is clearly what the Federal Reserve is expecting as the year goes on. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in December.

Nearly half a million people rejoined the labor force, a sign that more jobs were available. The Labor Force Participation Rate was up slightly, (just 0.1%) to 62.6%. In the key demographic of 25 to 54, or the prime working years, the participation rate is 80.8%. Looking at other demographic markers, the unemployment rate for men over the age of 20 is at 4.7%, and for women age 20-plus the unemployment rate is 4.4%.

The unemployment rate for workers with less than a high school diploma is declining; it’s still higher than for skilled, educated workers, but it is coming down, and this may be one of the signs that some of the slack in the market is starting to ooze out. These workers, who on paper are among the least-qualified in the workforce, are vulnerable when the economy is soft and have made huge gains over the last 18 months or so.

And so thinking about the idea that there is no wage growth (or at least not much) the force keeping wages down, in the broadest sense, is remaining slack in the market. But data showing the least-qualified workers find their way back into the workforce the balance of power clearly tipping towards workers and away from employers. This is the slack being taken up. Part of that leverage once-held by employers allowing them to keep wages down, appears to be falling away.

The U6 measure of unemployment was unchanged at 9.9%. The U6 includes unemployed and underutilized workers, or people working part-time even though they would like a full-time job. In December, there were 6 million people part-time for economic reason, down by almost 750,000 for the year. So the economy is trending to more full-time jobs.

There are still 2.08 million workers who have been unemployed for 6 months or more but are still looking for a job; that’s up slightly from 2.05 million in November. This is an important number to watch. When this number goes down substantially, it will be a good indication that the economy is actually getting closer to full employment. That in turn should finally start to push wages higher, another important number to watch.

Another factor that could affect wages is a change in the minimum wage. The country has gone more than 6 years without an increase in the federal minimum wage of $7.25 per hour, but as of January 1, 14 states and several cities are moving forward with their own increases. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners. With the increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9.

Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. Part of the answer is in the speed of increase; slow, incremental increase seem to have less impact on employment. Soon we’ll have actual data to apply to those theories.

So, with another strong jobs report providing momentum to the labor market, the question is whether that momentum can carry into the broader economy and the markets. The Federal Reserve certainly anticipates job growth will eventually lead to wage push inflation, and keeps the Fed on track for more rate hikes.

Traders who bet on rate hikes using fed funds futures contracts now project greater-than-even odds of a March rate hike, according to CME FedWatch. Odds of a rate hike in March had slipped below 50% chance earlier this week as stock markets plunged on concerns that economic weakness in China could spill over into the US.

Another concern has been fourth-quarter US GDP growth, which have been trending down to a 1% annual rate, down from a 2% rate in the third quarter. The first reading on fourth-quarter gross domestic product is due Jan. 29. The jobs report indicates that fourth quarter GDP won’t drop too much.

With economy activity appearing to have leaked modestly lower in recent months, expect some of this positive momentum to be surrendered in the coming months, though the economy is expected to continue creating jobs in a manner sufficient to absorb excess labor market slack. The Fed is unlikely to raise rates at its Jan. 26-27 meeting, but is probably on track to move again at its March 15-16 meeting.

And then there is the problem of the rest of the world. Or at least the emerging markets and China. It was another wild day in China. China’s Shanghai Composite surged to a gain of 3% before plunging to a loss of 2% within the first 15 minutes of trading. The bottom was put in amid speculation the country’s so-called national team came in to support stocks, and the Shanghai Composite finished up 2%.

And fear of volatility spilled over to Wall Street; most of the day Wall Street was slightly positive, on the back off the strong jobs report, but as we headed into the final couple of hours, discretion was the better part of valor and traders decided the best defense was to exit positions before the weekend, and what might be a wild Monday morning of trading in Shanghai.

Both the Dow and S&P 500 had their worst five-day starts to a New Year in history, with the Dow falling 6.2% for the week and S&P 500 sliding 6%. The Nasdaq was down 7.3% this week.

Financial Review

Another Record

Sinclair Noe — May 19, 2015

 

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

Subscribe: iTunes | RSS

DOW + 13 = 18,312.39 (record)
SPX – 1 = 2127
NAS – 8 = 5070
10 YR YLD + .03 = 2.26%
OIL – 2.17 = 57.26
GOLD – 17.80 = 1209.00
SILV – .61 = 17.17

Record high for the Dow Industrials.

Construction starts on new U.S. homes was up 20% in April to a seasonally adjusted annual rate of 1.14 million. That’s the biggest monthly percentage gain in over 24 years and the highest level since November 2007.  Total housing starts remain far below an average pace of about 1.5 million over the 20 years leading up to the housing bubble’s 2006 peak.

A board member of the European Central Bank says the ECB will “frontload” its asset purchases in May and June – that is, step up buying in those months – to maintain its monthly average of $67 billion, given an expected drop in liquidity in the summer vacation period. The policymaker also said the recent selloff in German bunds and other sovereign bonds is not a cause for concern but the rapidity of the move is worrying.

Greek Finance Minister Yanis Varoufakis told a Greek TV channel last night that Greece is “very close” to a deal, other officials are less enthusiastic. European Commission President Jean-Claude Junker said this morning that there will be no agreement for Greece at this week’s summit. At some point, Greece will run out of cash; exactly when is a matter of conjecture but even optimistic forecasts are under 60 days.

Members of the ECB’s Governing Council are scheduled to meet in Frankfurt tomorrow to discuss the fate of the Greek economy. Greece is in such a precarious position that any change in central bank policy could alarm markets and have serious consequences. But the council is reportedly running out of patience and could impose stricter controls on Greek banks to maintain emergency lending protocols. Traders and investors are clearly nervous about the state of the Eurozone, and the euro was down about 2% against the dollar today.

Deutsche Bank is studying whether to move large chunks of its British operations to Germany if the U.K. leaves the EU, underlining the potential fallout in the City of London in the event of a “Brexit”. The German lender, which employs 9,000 people in the U.K., is the first major bank to start formally examining the consequences of a British referendum on EU membership.

The UK slipped into deflation for the first time in at least 55 years. Consumer prices slipped 0.1% year-over-year in the UK, marking an unexpected return to deflation. The UK has not experienced falling prices since the 1950s and 1960s, but its most recent extended bout with deflation was in the 1930s, during the Great Depression.

Taking advantage of the lower borrowing costs in the Eurozone, McDonald’s and United Technologies are now the latest big U.S. companies to issue debt in euros (called “reverse Yankee” bonds), selling €2 billion-euro and €750 million-euro, respectively. The total raised by U.S. companies issuing euro-denominated debt so far this year is just over €37 billion-euro, more than double the previous record of €17 billion-euro in 2007.

Oil prices were down again today. There are several factors at play with oil prices. First, the dollar index has bounced from 93.1 on Friday, up to an intraday high of 95.5 today. The old idea is dollar up, oil down, or vice versa. Next, the Saudis have been pumping out quite a bit; 7.5% more in March than February, or about 7.9 million barrels a day.

Over the weekend, Goldman Sachs issued a research report showing strong inventories combined with weak economies pushing weak demand; the rally in oil prices from $47 mid-March to $63 in early May was described as premature and prices could drop down to around $45 by October. When you look at the recent rally it seems largely supported by sentiment. We still have massive stockpiles. Still, your guess is as good as theirs.

Meanwhile, get ready for a boom in solar. Solar panel makers globally are preparing for their best year since 2011 as China and Japan take advantage of falling prices to shift more of their energy production to clean power. Panel production is forecast to grow by almost a third this year.

China, signed a pact with the US in November to get 20 percent of its energy from renewable sources by 2030, with its total carbon emissions peaking the same year. To reach that goal, the Chinese government earlier this year boosted its target for 2015 solar installations to 17.8 gigawatts from about 12 gigawatts. Japan may install as much as 12.7 gigawatts of solar power this year, the most after China. The country has promoted wider use of renewable energy, especially rooftop panels, after the 2011 Fukushima nuclear plant meltdown.

Cheaper solar has also made the technology more economically viable for emerging economies such as India and South Africa. In India developers are installing panels to replace more expensive diesel generators. The Bloomberg Global Solar Energy Index is up 65% year to date and the TAN Solar ETF is up 39% year to date.

Founding members of the China-backed Asian Infrastructure Investment Bank will hold a three-day meeting in Singapore this week to discuss the draft articles of agreement and operational policies for the establishment of the institution. Although 57 countries have joined the AIIB as founding members, the U.S., Japan and Canada have remained notable absentees.

In a new financial industry survey, more than a third of the respondents said they witnessed or knew of wrongdoing in the workplace. And nearly half said regulators were ineffective in stopping it.

The numbers are in on 2014 CEO compensation, and it does not look like the controversial income gap in America is narrowing. The average S&P 500 company CEO made 373 times the salary of the average production and non-supervisory worker in 2014, up from 331 times in 2013. This translates into an average CEO pay package of $22.6M, up from $20.7M last year.

The Los Angeles City council voted today to increase its minimum wage to $15 an hour by 2020 from the current $9 an hour, in what is perhaps the most significant victory so far in the national push to raise the minimum wage. Several other cities, including San Francisco, Seattle, and Oakland have already approved increases, and dozens more are considering doing the same. The impact is likely to be particularly strong in Los Angeles, where, according to some estimates, more than 40 percent of the city’s work force earns less than $15 an hour. The vote could set off a wave of minimum wage increases across Southern California and there might be national implications.

Japanese air bag manufacturer Takata has agreed to the largest automotive recall in American history, declaring nearly 34 million vehicles defective due to problems with air bag inflators. The case involves air-bag inflators that may deploy with too much force, breaking apart and shooting shrapnel inside the cars. Six deaths have been linked to the defective air bags. Takata faces multiple class actions in the United States and Canada as well as a criminal investigation. With vehicles from 11 different automakers and a severe shortage of repair parts, it could take years for all the cars to be made safe.

It has been a busy day for earnings from retailers. Wal-Mart drew more shoppers to its stores in the last quarter, but international sales were hurt by the stronger dollar, causing overall sales to fall. Wal-Mart said its profit fell 7% to $3.34 billion, as revenue fell 0.4% to $114.8 billion.  U.S. same-store sales edged up 1.1%.

Home Depot reported quarterly profit and revenue that topped expectations, and they also lifted its profit and sales targets for the year. TJX Cos. posted first-quarter earnings of 69 cents a shares, above forecasts for 66 cents a share, on revenue of $6.9 billion. Urban Outfitters reported first-quarter earnings and sales that came in below expectations. Dick’s Sporting Goods reported first quarter profit topped expectations but issued second quarter guidance in the low range of projections.

Financial Review

Blue Light Special

Sinclair Noe — February 19, 2015

 

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

Subscribe: iTunes | RSS

DOW – 44 = 17,985
SPX – 2 = 2097
NAS + 18 = 4924
10 YR YLD + .04 = 2.11%
OIL – .77 = 51.37
GOLD – 6.10 = 1208.20
SILV – .12 = 16.48

The S&P 500 is up 5.2 percent in February, rebounding from a January slump. If the index holds those gains it will be the best monthly performance since October 2011.

Crude-oil futures fell to the lowest level in a week, after data showed inventories have built up much faster than expected. According to a report from the American Petroleum Institute late yesterday, US crude stocks rose by 14.3 million barrels last week vs. expectations of a 3.2 million. The today the US Energy Information Administration released a report showing crude inventories rose 7.7 million barrels for the week ended Feb. 13; that was about double expectations, but far less than the API report. And prices bounced back.

The latest EIA data peg total commercial crude inventories at 425 million barrels, with the government referring to the total as “the highest level for this time of year in at least the last 80 years.” One possible reason for the rising inventories is that there has been a United Steelworkers strike at 11 refineries that account for 13% of US output capacity.  A slowdown in refining would lessen the demand for crude oil. Another possible reason why inventories continue to rise is that most domestic oil drillers have taken on debt, and they have to keep pumping oil to service that debt, at least for now.

The number of Americans filing new claims for unemployment benefits fell more than expected last week, offering fresh evidence that the labor market was gathering steam. Initial claims for state unemployment benefits dropped 21,000 to a seasonally adjusted 283,000 for the week ended Feb. 14.

Leading U.S. economic indicators edged up 0.2% in January, and the December index was revised lower to 0.4%. The Conference Board said the lack of strong momentum in residential construction, along with a weak outlook for new orders in manufacturing, poses a downside risk for the US economy.

The Arizona Regional Multiple Listing Service (ARMLS) reports that for the second consecutive month, inventory in the Phoenix residential real estate market was down year-over-year. Active inventory is now down 4.9% year-over-year. Housing prices bottomed in Phoenix is 2011 at about the current level of inventory. Overall sales in January were down 0.3% year-over-year. And cash sales were down 12% to 32% of total sales. Now, with tighter inventory, we might see a little more price appreciation in 2015.

Greece has submitted a formal request for a six-month loan extension, and it looks like the new Greek government blinked; they pledged to abide by all its previous commitments and recognize the bailout as legally binding. However, the wording of its first point implied that Greece wants to haggle over implementing reforms demanded by the original bailout agreement. Even so, the request is still a major climbdown for the new government, led by Tsipras’ radical left-wing Syriza party, which swept to power on a pledge to overthrow the bailout agreement in January and subsequently declared it “dead”. It pledges to honor all of Greece’s debts and, just as importantly, to continue accepting monitoring visits from the three institutions that have overseen Athens’ implementation of the bailout to date, the hated “troika” of European Central Bank, the International Monetary Fund and the European Commission.

And this morning, Germany rejected the request for bridge financing. The Germans called the proposal a Trojan Horse, that looks to end the current bailout program and acquire bridge financing. Greece’s current €240 billion ($273 billion) financing arrangement expires as the end of this month. After that, the country would find itself cut off from European and International Monetary Fund loans that have kept it afloat for five years. A Greek government spokesman insisted that the eurogroup had only two options: either to accept or reject the Greek request. “It will then be clear who wants to find a solution and who doesn’t.”

Euro-region finance ministers will make a “detailed assessment” of the request and formulate a response later today.

Japanese exports surged in January, providing more evidence that the world’s third largest economy is slowly climbing out of recession. Exports rose by 17% on year last month, their biggest jump since late 2013, while imports in January contracted 9% Y/Y. Helped by gains in financial and shipping companies, Tokyo’s Nikkei touched its highest level since May 2000, that’s a 15 year high. The GDP numbers out yesterday showed the world’s third-largest economy emerging from a brief recession—if you use the conventional definition of two straight quarters of contracting GDP.

True, that was about half the 3.7% analysts had forecasted. But it’s a welcome development, especially given that export growth was a key driver of the quarter. The weak yen engineered by the Bank of Japan seems to be giving a spark to Japan’s important exporting sector.

The key question for the future of Japanese growth is how consumer demand responds. For the moment, Japanese consumers, like consumers worldwide, are getting a real wage raise thanks to declining energy prices. But to create sustainable consumer growth, corporations have to be convinced to give workers a larger cut of profits. It just might be possible. The largest employer in the US, Wal-Mart, signaled today that it was going to begin raising wages for its workforce, in a nod to both rising political pressure and tightening labor markets. Similar dynamics are in place in Japan.

Wal-Mart reported fourth-quarter profit rose to $4.97 billion, or $1.53 a share, from $4.43 billion, or $1.36 a share, a year ago.  Sales rose to $131.6 billion from $129.7 billion. Wal-Mart missed on both the top and bottom line. But the big news from Wal-mart is that the company said it will give raises to about 500,000 full-time and part time employees and ensure hourly employees earn at least $9 an hour, $1.75 above federal minimum wage. By Feb. 1, 2016, current employees will earn at least $10 an hour.

The company also said it would strengthen a “department manager” role, giving it a minimum wage of $13 per hour this year and $15 next, thus offering low-wage hourly workers a clearer path to advancement. Including similar bumps at Walmart-owned Sam’s Clubs, the company expects 500,000 workers to receive a raise at a cost of $1 billion a year.

That all sounds good and magnanimous, but Wal-Mart was more or less dragged, kicking and screaming to this moment. Over the past three years, Wal-Mart has faced a wave of union-backed attacks: legal, political, media, and consumer pressure, anchored by the first coordinated store walkouts in the company’s history.

Back in its 2007 fiscal year, before the recession, Walmart reported $183,500 in revenue per employee and $5,938 in profit. Not bad, but by 2014 those numbers had risen 18 percent and 22 percent. The company’s sales and profits rose nicely in that time while the company kept a lid on its payroll. Gains went to Walmart shareholders, not Walmart workers. Of course, it takes a lot of people to run a Wal-Mart store, and the unemployment rate has dropped down to 5.7%, meaning Wal-Mart now faces competition for workers.

The decision is likely to ripple across the economy and will undoubtedly lead to similar moves by other companies. Indeed, Wal-Mart is not the first to raise wages, just the biggest; and as the biggest, it sets a standard for the entire retail industry. Walmart CEO Doug McMillon told analysts higher wages lead to a better experience for workers and customers, “which can drive higher sales and returns for our shareholders.” In Walmart’s case, many of the 1.3 million US workers are also customers that can spend their extra dollars at Wal-Mart. And most Wal-Mart workers will spend their paychecks as soon as they are cashed. It still is just about $1 billion in wage increases, and so don’t look for a big change in economic numbers on a nationwide level. All things equal, that amounts to a gain of 0.097% in average hourly earnings for retail workers. For all workers, that translates into a rise of 0.01% — basically, nothing. But it is a step in the right direction.

We’ve all heard the stories of cybersecurity breaches and hack attacks. Maybe you wonder how hackers manage to hack what should be secure computers. Well, in the case of Lenovo, the world’s largest PC maker, they pre-installed a virus-like software on laptops that makes the devices more vulnerable to hacking. Users reported as early as last June that a program called Superfish pre-installed by Lenovo on consumer laptops was ‘adware’, or software that automatically displays adverts. Superfish was malicious software that hijacks and throws open encrypted connections, paving the way for hackers to also commandeer these connections and eavesdrop, in what is known as a man-in-the-middle attack.

The Los Angeles Times reports that two medical scopes used at UCLA’s Ronald Reagan Medical Center may have been contaminated with the potentially deadly, antibiotic-resistant bacteria known as CRE. Two patients have died from complications that may be connected to the bacteria, and authorities believe that 179 more patients have been exposed. The really scary part of this is that infections occurred even though the instruments had been cleaned according to the manufacturer’s instructions.

Most healthy people aren’t at risk of catching a CRE infection, but in hospitals this bacteria can be quite dangerous: CRE kills as many as half of all people in whom the infection has spread to the bloodstream. The Centers for Disease Control and Prevention (CDC) are working with the California Department of Public Health to investigate the situation, which is expected to result in more infections.

The problem isn’t just in Los Angeles, though. Last month, USA Today reported that hospitals around the country struggle with transmissions of bacteria on these scopes—medical devices commonly used to treat digestive-system problems—and there have been several other under-the-radar outbreaks of CRE.

Samsung Electronics has acquired mobile wallet startup LoopPay, indicating its intention to launch a smartphone payments service to compete with Apple Pay and others. Despite strong backing, mobile payments have been slow to catch on, as many retailers have been reluctant to adopt the infrastructure required for the mobile payment options to work. LoopPay, however, works off existing magnetic-stripe card readers by transmitting a magnetic signal similar to that of a swiped card, putting Samsung at an advantage.