Financial Review

Welcome Back

Sinclair Noe — July 5, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 1 = 21,478
SPX + 3 = 2432
NAS + 40 = 6150
RUT – 6 = 1420
10 Y – .01 = 2.33%
OIL – 1.46 = 45.61
GOLD + 3.50 = 1227.70
BITCOIN – 0.36% = 2619.68 USD
ETHEREUM – 2.87% = 266.25

Welcome back. A holiday shortened trading week kicked off today with FOMC minutes and will finish with a G20 meeting and the jobs report on Friday. Today, the Fed released minutes of its Federal Open Market Committee meeting from June 13-14.

We know the Fed raised its fed funds target rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases. Beyond that, the Fed was divided on the timing of when to begin shrinking its massive balance sheet.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year, maybe within a couple of months – without naming an exact date.

The Fed said in June it would runoff maturing principal payments on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.

The minutes said, “several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.”

Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.

The minutes showed Washington political gridlock is also starting to creep into the outlook of the Fed’s business contacts. “Some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies.”

Factory orders sank 0.8% in May following a smaller decline in April. Factory orders were up 4.8 percent from a year ago. Activity is slowing against the backdrop of a moderation in oil prices and declining motor vehicle sales. Motor vehicle manufacturers reported on Monday that auto sales fell in June for a fourth straight month, leading to a further increase in inventories, which could weigh on vehicle production.

Nationally, home prices rose 6.6% compared to a year ago, according to a home price index from data provider CoreLogic. Prices rose 1.2% from April to May. Arizona posted 6.1% price growth over the past year, and 0.8% from April to May. The cost of rent is growing much faster than inflation – and wages.

Overall single-family rents rose 3.1% for the year in May, while rental costs in the affordable single-family rental segment of the market, which includes properties with rents less than 75% of the regional median, grew 4.7%. Wages rose 2.5% in May compared to a year ago.

Two weeks ago, crude oil slipped into a bear market, then it rallied. Today, oil prices fell sharply, ending the longest winning streak this year, as Russia was said to oppose any proposal to deepen OPEC-led production cuts. They will stick with current production limits but they won’t go for additional output cuts.

After the close, the American Petroleum Institute reported Wednesday a much larger-than-expected drop of 5.8 million barrels in U.S. crude supplies for the week ended June 30. Supply data from the Energy Information Administration will be released Thursday morning.

The death of the internal combustion engine might be just down the road. Volvo will become the first major car manufacturer to go all electric, with the Swedish company saying that every new car in its range will have an electric power train available from 2019.

The company said the announcement marks “the historic end” of cars solely powered by petrol or diesel and “places electrification at the core of its future business”. Volvo – which is owned by China’s Geely – will launch five fully electric cars across its range between 2019 and 2021.

Two of these new cars will be in the company’s Polestar high performance sub-brand, which is being revived. The rest of the company’s range will be available with “plug-in hybrid” power trains and 48-volt “mild hybrid” systems, which give an extra “kick” to the acceleration of normally powered cars.

Meanwhile, other countries are pushing forward with legislation to reduce greenhouse gas emissions that will impact car manufacturing: Germany recently mandated that all vehicles sold in the country must have zero emissions by 2030, effectively outlawing sales on solely gas-powered vehicles; Sweden is aiming to have net-zero emissions of greenhouse gases by 2045; and the EU is tightening the restrictions on how much carbon dioxide vehicles can emit by 2021.

By starting the move to a fully electrified catalogue of offerings now, Volvo is ensuring it can continue to sell its vehicles in some of the largest car-buying markets soon.

Volvo’s announcement comes in the same week that Tesla announced its low-cost Model 3 electric car will go sale. The latest Tesla car – priced at around $35,000 – is aimed at bringing electric cars to the mass market, rather than being the preserve of early adopters of technology or those with deep pockets.

Tesla reports deliveries are flat-lining. Tesla reported quarter-by-quarter shipment declines for the second time in the past year. After the market closed on Monday, the company reported more than 22,000 vehicle deliveries in the second quarter. In addition to stoking fear about whether demand has peaked, these figures cast doubt on whether Tesla can pull off a steep production ramp for the cheaper Model 3 sedan.

The Tesla investment thesis hinges on the success of Model 3, and the ability for the company to ramp production, make the car profitably and deliver good initial build quality. Tesla plunged as much as 6.1 percent today to $331, the steepest intraday decline since May 4.

O’Reilly’s stock plunged $41.64, or 18.9%, to suffer the biggest one-day price and percentage decline since it went public in April 1993. Volume ballooned to 12.8 million shares in recent trade, which was nine times the full-day average. The auto parts retailer said second-quarter same-store sales rose 1.7% from a year, well short of its guidance of 3% to 5% growth.

O’Reilly said the disappointing sales results, in the wake of a slowdown during the final two months of the quarter, will have a “consequent impact” on profitability. There seem to be 2 long term trends at play here; first, brick and mortar retailers are struggling almost across the board; second, auto sales have been extremely strong the past 3 years – meaning people have been buying new rather than repairing.

US credit card processor Vantiv agreed to buy Britain’s Worldpay for about $10 billion. Payments companies have become targets for credit card companies and banks seeking to capitalize on a switch from cash transactions to paying by smartphone or other mobile devices.

Tech stocks moved higher today, breaking a 4-day slump. A funny thing happened while we were celebrating the Fourth. A computer glitch sent shares in dozens of US technology companies including Apple, Amazon and Microsoft to the same price, leading some to apparently lose billions in market value.

The bug showed many stocks on the Nasdaq exchange to briefly be reported as $123.47 on Bloomberg, Reuters and Google Finance data. It was triggered after financial information providers wrongly interpreted a Nasdaq data test as live prices, leading to brief pandemonium on trading floors.

Amazon’s shares were shown falling from almost $950, a drop of 87 per cent, Google owner Alphabet’s fell by 86 per cent and Apple fell by 14.3 per cent. Other companies that have share prices well below $123.47 saw them briefly rocket. Microsoft shares jumped almost 80 per cent, giving the company a valuation of more than $1 trillion and gaming company Zynga rose by more than 3,000 per cent.

The glitch occurred in after-hours trading after the Nasdaq had closed early ahead of the July 4 holiday and led several stocks to be halted. The Nasdaq stock exchange says the glitch stemmed from a routine daily data test that was moved up by several hours because trading closed early on July 3.

Erroneous prices apparently based on test data showed up on Bloomberg terminals used by professional traders, as well as on websites like Google used by non-pros. The root of the error can probably be found somewhere along the chain between Nasdaq and a small number of third-party vendors who distribute market data. Perhaps someone failed to heed a notice of the early data test, or didn’t receive it in the first place.

So far, it doesn’t seem like anyone lost much—if any—money, so the main harm is reputational. But it is increasingly a fact of modern life that mundane, simple human errors now have the potential to spiral rapidly and cause problems for people all over the world.

It also reveals the vulnerability of an interconnected world. If someone really wants to do serious harm, a glitch that could not be easily undone might shake financial institutions to their core.

Financial Review

Jitters

Sinclair Noe — April 5, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 41 = 20,648
SPX – 7 = 2352
NAS – 34 = 5864
RUT – 16 = 1352
10 Y + .01 = 2.36%
OIL – .21 = 50.82
GOLD – .30 = 1256.40

Stocks started the session strong. The Dow was up triple digits early on the strength of the ADP jobs report, but sellers stepped in following the release of the minutes from the last Federal Reserve policy meeting. The Nasdaq composite slipped 0.6 percent after hitting a new all-time high earlier in the session. The Dow and S&P also posted their biggest one-day reversal since February 2016.

The first two months of 2017 saw strong job gains – 238,000 new jobs in January, followed by 235,000 new jobs in February; part of a 7-year string of steady job growth that has seen the unemployment rate drop to 4.7%.

The feeling is that the economy will not continue with the gains we saw in January and February. Most analysts say the March jobs report, due on Friday, will only show about 175,000 new jobs – good, not great.  We might need to adjust those estimates. Private payroll processor ADP reports their survey shows 263,000 new private sector jobs were added in March.

The ADP report doesn’t always match the Labor Department’s report, but they are usually not too far apart. ADP reports consumer dependent industries including healthcare, leisure and hospitality, and trade had strong growth during the month. The biggest gains by industry in March came from the professional and business services sector, which added 57,000 jobs, followed by leisure and hospitality, and construction.

The Institute for Supply Management’s non-manufacturing purchasing manager’s index slowed to 55.2, lower than the forecast for 57. Readings above 50 indicate that there’s still expansion. It is not necessarily that the services side of the economy has cooled, as it just wasn’t running red-hot.

Meanwhile, Markit Economics reported the slowest growth of the US service sector in six months in March. The firm’s PMI, was 52.8, lower than the expectation for 53.1.

Also today, we saw the minutes of the Federal Reserve’s FOMC meeting in March. Policymakers struggled to come to grips with two big uncertainties facing the U.S. economy — whether it would be safe to let inflation rise faster for a while and how to assess the impact of President Trump’s economic stimulus plans.

There was near-unanimous support for the quarter-point increase in the fed funds rate, the second rate hike in three months. There was less agreement over the issues of inflation and Trump’s economic plans. The minutes also showed that Fed officials had a briefing from staff over the central bank’s massive balance sheet, which was quadrupled during the financial crisis.

The Fed has been keeping the level of the balance sheet steady at $4.5 trillion. But financial markets have been closely watching for any Fed signal on the timing of when the Fed would begin reducing the level of its bond holdings by halting its current practice of replacing any maturing bonds.

The minutes indicated that this change could be announced later this year. Unwinding the balance sheet is significant both because of its sheer size and the impact it could have on markets, as Fed members including Chair Janet Yellen have indicated that the move itself would amount to a rate hike.

The minutes also showed policymakers were concerned about stock market valuations, stating: “Some participants viewed equity prices as quite high relative to standard valuation measures.”

If jobs numbers continue to come in strong, the Fed may have more confidence in raising rates at a faster pace, regardless of market valuations. Currently, the market is pricing in two more rate increases this year, in line with the Fed’s so-called dot plot, which charts officials’ expectations for future rate increases.

The minutes showed that several Fed officials believed that Trump’s stimulus plans would likely not begin until next year. The minutes said that because of the “substantial uncertainties” about the outlines of the program that will eventually emerge from Congress, about half of the Fed officials had not included any assumptions about Trump’s efforts in their economic forecasts.

The possibility of tax reform has been one of the main drivers in the stock market’s massive post-election rally, along with deregulation and infrastructure spending. Today, House Speaker Paul Ryan said that tax reform will take longer to accomplish than repealing and replacing Obamacare would, saying Congress and the White House were initially closer to an agreement on healthcare legislation than on tax policy.

Ryan said: “The House has a (tax reform) plan but the Senate doesn’t quite have one yet. They’re working on one. The White House hasn’t nailed it down.  So even the three entities aren’t on the same page yet on tax reform.”

Yesterday, the Trump administration was testing two tax proposals: a value-added tax and a carbon tax. Those trial balloons were shot down. Neither a VAT or carbon tax would have needed to be floated if the GOP’s other big possible offset – House Speaker Paul Ryan’s border adjustment tax — turned out to be politically feasible.

But with Republican opposition to a BAT threatening to drag tax reform down, something else had to be found. With these three major revenue-raisers now politically unacceptable, the Trump administration and congressional Republicans have very few other options for a revenue-neutral tax reform bill.

There will be other proposals, of course, but don’t expect much that will make the deficit hawks happy.  And that begs the question: If Trump and congressional Republicans want a tax cut but can't agree on ways to pay for it, will they still cut taxes even if it means they will be held responsible for a (much) higher federal deficit? Absolutely.

The two-day summit between Trump and China’s President Xi was still in focus for investors, who are looking for clues on ramifications for trade and the dollar. Xi’s visit to Mar-a-Lago in Florida begins tomorrow. The two men are at odds on several issues. Xi has a highly-scripted style, and the Chinese are accustomed to meetings that are tightly choreographed. And right now, the script is fluid, with North Korea firing off more missiles.

The Korean Peninsula isn’t the only geopolitical hotspot. President Trump said the recent chemical attack in Syria crossed “beyond a red line” and changed his mind about Syrian president Bashar Assad, whom Trump had previously suggested could stay in power. But Trump remained vague when asked whether his calculus on taking military action in Syria had changed. Trump has previously urged against using military action in Syria.

Over the last several years, a European family business has spent more than $40 billion assembling a coffee empire. JAB Holding Company has acquired the American brands Peet’s Coffee, Caribou Coffee and Keurig Green Mountain, all since 2012.

It also combined the European coffee giant D.E. Master Blenders 1753 with the coffee business of Mondelez to create a company now known as Jacobs Douwe Egbert. Then it bought the high-end coffee retailers Stumptown Coffee Roasters and Intelligentsia. Mondelez continues to own 25 percent of Douwe Egbert and has a similar stake in Keurig.

Now JAB is adding a nice little bakery to sell all that coffee. Today, JAB said it would buy the Panera restaurant chain for $7.5 billion, including debt. In 2014, JAB bought the bagel chain Einstein Brothers, which it has been combining with Caribou is some markets. And last year, it paid $1.35 billion for Krispy Kreme, the doughnut chain. At some point, you should imagine Starbucks is getting a little nervous.

For the past few years, the housing market has been unbalanced. Strong demand and tight supply resulted in higher prices. Today, the Mortgage Bankers Association’s weekly purchase loan data showed that the average size of a home loan was the largest in the history of its survey, which goes back to 1990.

Larger mortgage sizes may reflect not just more expensive properties, but also more leveraged ones. The 20% down payment is a relic: the median down payment in 2016 was 10%. For first-time buyers, it was 6%. First-timers and other buyers of less-expensive homes are more leveraged now than they were at the height of the housing bubble a decade ago.

Home loan sizes aren’t the only things that have changed in the years since MBA started its survey. Back at the start of the survey, the median mortgage size was only about 3.3 times the median annual income. It’s now over five times as big – though buyers get bigger homes and lower interest rates.

Mortgage application activity hit a five-week low even as home borrowing costs were little changed from the prior week. The average interest rate on 30-year, fixed-rate conforming mortgages, the most widely held type of U.S. home loan, was 4.34 percent, little changed from 4.33 percent from the prior week.

Arizona lawmakers unanimously approved a bill that would make it tougher for prosecutors to seize property from people suspected of a crime. House Bill 2477 would reform rules dictating when prosecutors can seize the property of those suspected of a crime. Officers can currently seize property based on suspicion alone without the need of a conviction or a charge. Police and prosecutors acquire assets after seized property is forfeited.

The measure comes after recent inquiries into whether officials in Pinal County misused seizure profits and a guilty plea from a former top Pima County official to misusing RICO funds in February. The measure would change Arizona’s civil asset forfeiture laws to require prosecutors to prove property was involved in a crime by “clear and convicting” evidence, a step above the current standard. The bill now goes to the governor.

Financial Review

91 Days

Sinclair Noe — February 22, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 32 = 20,775
SPX – 2 = 2362
NAS – 5 = 5860
RUT – 6 = 1403
10 Y – .01 = 2.42%
OIL – .76 = 53.57
GOLD + 2.50 = 1238.90

Another record high for the Dow. S&P and Nasdaq, not so much.

91 straight trading days — that is how long the S&P has gone without closing lower by 1% or more. The S&P 500 ended 1.2% down on Oct. 11 — more than four months ago — and hasn’t clocked out on such a negative note since then.

The result has been a slow, steady slog to record highs. Hardly the stuff of investor euphoria or irrational exuberance; more like climbing a wall of worry. Stocks are expensive by almost any measure, and Mom and Pop investors seem skeptical, but the reality is that they have few good options but to stand on the edge of the cliff.

In mid-December, Bloomberg polled Wall Street analysts for their full-year predictions.  The average forecast for 2017 was calling for growth of 5.2 percent. The S&P 500 is already up 5.5 percent year-to-date. The average estimate was 2,364. The index touched 2,366 yesterday.

The Federal Reserve’s Federal Open Market Committee held a meeting January 31 – February 1. The Fed stood pat at that meeting, and today they released the minutes from that meeting. Policymakers seemed confident that the labor market was strong, and even though there were signs of inflation, that didn’t seem to worry them.

Fed officials wrestled with uncertainty on issues ranging from the Trump administration’s fiscal stimulus plans to the headwinds a rising dollar may pose. A few participants “noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the committee greater flexibility in responding to subsequent changes in economic conditions.”

The minutes included several references to “downside risks” to the economy. However, the meeting was held before data releases on jobs and inflation early in February that crushed estimates. The takeaway is that they seem ready to raise rates “fairly soon”.

The next policy meeting is March 14-15, and the more likely chance for a rate hike is the policy meeting in June. Still, the Fed is holding to the idea of 3 rate hikes for 2017, so March is on the table.

The National Association of Realtors reports existing home sales jumped 3.3% in January to a seasonally adjusted annual rate of 5.69 million.  January’s sales pace is 3.8 percent higher than a year ago. The median existing-home price for all housing types in January was $228,900, up 7.1 percent from January 2016 and marks the 59^th consecutive month of year-over-year gains.

Total housing inventory at the end of January rose 2.4 percent to 1.69 million existing homes available for sale, but is still 7.1 percent lower than a year ago, and has fallen year-over-year for 20 straight months. And of course, tight inventory combined with higher mortgage rates, means less affordable housing.

Not surprising that lower-price, or starter homes were a sweet spot for buyers. First time buyers rose slightly to 33% of sales in January. For Phoenix, the median listing price was $307,000. And the average time on market was 66 days. Compared to an average of 50 days nationally.

The US has approximately 200,000 unfilled construction jobs, which represents an 81% increase over the last two years, according to estimates from the National Association of Homebuilders. Home-builders like Lennar and Toll Brothers have cited a shortage in construction workers as a major reason they’ve had to slow down home construction.

Toll Brothers reported quarterly profit of 42 cents per share, 7 cents above estimates, while the luxury homebuilder’s revenue beat forecasts by a wide margin. However, overall profit was down 3.8 percent from a year ago, impacted by lower average selling prices.

Shares of Fannie Mae and Freddie Mac plunged by more than 30 percent on Tuesday following a ruling by a US appeals court dismissing hedge funds’ claims that the government seized Fannie’s and Freddie’s profits after their taxpayer bailout.

Fannie and Freddie went into conservator-ship during the 2008 financial crisis, receiving a nearly $188 billion bailout from the federal government. In return, Fannie and Freddie were required to pay a 10 percent dividend to the government. In 2012, the terms of the bailout were amended — the Third Amendment — forcing Fannie and Freddie to forward all their profits to the U.S. Treasury.

On Friday, Fannie and Freddie announced they were sending a combined $10 million in dividends to the U.S. Treasury. Fannie reported a $5 billion profit for the fourth quarter, while Freddie reported a $4.8 billion fourth-quarter profit. Because Fannie and Freddie’s profits have been going to the government, there was nothing left for the investors, who cried foul.

OPEC and Russia will need to prolong their production-cut deal in order to trim the global inventory that is keeping a lid on prices. ABN Amro Bank warned that crude prices could plunge towards $30 a barrel if the cuts are not extended beyond the first half of this year.

Saudi Aramco names 3 underwriters for its IPO. JPMorgan Chase & Co, Morgan Stanley, and HSBC have been selected as the lead underwriters for what is expected to be the world’s largest initial public offering of all time.

Facebook is in discussions with Major League Baseball to air one game a week. Social networks believe their platforms are a “second screen” that sports fans rely on while watching games, and are eager to test the popularity of combining the viewing of video and the commentary that takes place on social networks into a single feed.

Lloyds reported its highest annual profit in a decade, helped by a reduction in payment protection insurance provisions. Pre-tax profits increased by 158%, a level last seen in 2006 before the financial crisis. The UK government’s stake in Lloyds has also fallen below 5% and it wants to return the bank to full private ownership sometime in May.

First Solar  beat fourth-quarter estimates by 27 cents with adjusted quarterly profit of $1.24 per share, and the solar company’s revenue also beat estimates; even as sales fell to $480 million in the quarter from $942 million a year ago. Tempe-based First Solar also tweaked higher its expectations for 2017 sales to between $2.8 billion and $2.9 billion.

First Solar said the more than 300-megawatt Tribal Solar project, which was planned for the Fort Mojave Indian Reservation in Arizona, would not be built. The company’s contract to sell the power to California utility Southern California Edison was canceled. Executives described the cancellation as a one-time event due to the unique concerns of the Fort Mojave Indian Tribe and said the company had several opportunities to offset the impact of the cancellation, including new business in Japan.

Verizon Communications says it will offer its high-speed wireless 5G network to certain customers in 11 U.S. cities in the first half of 2017. Verizon will begin pilot testing 5G “pre-commercial services” in cities, including Atlanta, Dallas, Denver, Houston, Miami, Seattle and Washington, D.C. – Phoenix is not on that list.

New 5G networks are expected to provide speeds at least 10 times and up to maybe 100 times faster than today’s 4G networks, with the potential to connect at least 100 billion devices with download speeds that can reach 10 gigabits per second.

That got me thinking about how the US compares with other countries for internet speed on mobile devices, and the results are not good. South Korea has the fastest mobile internet speeds, followed by Norway and Hungary. The US ranked 36^th on the list, just a bit slower than Romania and Slovenia.

In a big win for rural delivery, UPS just tested a delivery drone on a farm outside of Tampa, Florida, with the Unmanned Aerial Vehicle, or UAV, returning to the roof of the truck. The big feat? The vehicle already moved 2,000 feet down the road. UPS says the “Drones won’t replace our uniformed service providers,” just provide extra assistance. The company also announced it would roll out Saturday ground delivery starting in April.

If you were planning to make a purchase from Amazon.com, today might be good. For today only, Amazon is offering $8.62 off orders of $50 or more. To take advantage of the discount, just enter the promo code “BIGTHANKS” when you check out.

A discount of $8.62 might seem super random, but Amazon has a good reason for that seemingly arbitrary figure. The company ranked No. 1 in the annual Harris Corporate Reputation Poll, earning a score of 86.27 percent, so it’s offering the discount as a thank you to customers.

Watch your mailbox, early-bird filers: Your tax refund should be arriving soon.  So far, the IRS has distributed more than 14 million refunds as of the week ending Feb. 10. The average amount has been $2,058. Both figures are expected to rise as the agency processes more returns.

However, if you will owe tax this year, well…, the current Powerball jackpot is worth $403 million. If you choose the lump sum option, the cash payout is $243.9 million, minus taxes of course.

Financial Review

Dovish Indeed

Sinclair Noe — July 6, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 78 = 17,918
SPX + 11 = 2099
NAS + 36 = 4859
10 Y + .02 = 1.38%
OIL + 1.27 = 47.87
GOLD + 7.00 = 1364.20
Silver + .14 = 20.16

The Federal Reserve released the minutes of the June FOMC meeting. When the central bank met in mid-June, an abysmal May jobs report (just 38,000 new jobs in May) had just startled markets, and the upcoming British referendum on European Union membership loomed large – an event that certainly had the Fed worried.

But beyond that, what was the Fed thinking? Were they confident of a recovery and chomping at the bit to hike rates, or were they more concerned that the economy was still too fragile for higher rates?

Turns out, the Fed was mixed. Some of the policymakers thought the weak jobs report was an aberration; others thought “the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity.”  Even though retail sales were strong in April and May, “a few participants expressed caution.”

Some officials thought business investment could pick up, particularly given the “greater optimism” businesses had expressed, including in the Fed’s Beige Book. Yet “some participants mentioned that the sluggishness in business investment could portend a broader economic slowdown.”

There were similar mixed interpretations on inflation. In the end, the doves prevailed. The decision to leave rates unchanged was unanimous. The June minutes contained no reference to the timing of any future rate rises. Dovish indeed.

Stronger demand for imports boosted the U.S. trade deficit by 10% in May, but the rebound in consumer spending suggests the economy regained momentum after a slow start to the year.

The nation’s trade gap climbed $41.1 billion — a three-month high — from a revised $37.4 billion in April. Imports increased 1.6% in May to a seasonally adjusted $223.5 billion. Exports, meanwhile, slipped 0.2% to $182.4 billion.

Exports have been weak because of a strong dollar that makes American products more expensive as well as slower growth around the world. The U.S. exported fewer autos, airplanes and computer accessories in May.

The Institute for Supply Management’s service sector index jumped to 56.5% in June, a much stronger reading than expected. The forward-looking new orders component jumped 5.7 points to 59.9%, and the production index rose to 59.5. Employment increased 3.0 points to 52.7%, signaling expansion. The ISM says the report shows a “strong rebound” in economic activity.

The pound sterling dropped to a fresh 31-year trough overnight, sliding as far as $1.2796 to record a more than 14% loss in value since last month’s referendum. The 10-year US Treasury note yield hit a new record low of 1.32% in overnight trade; not so much an indication of US strength but of global weakness.

The Stoxx Europe 600 dropped 1.7%, with all but the defensive utilities sector losing ground. Among banks, Switzerland’s Credit Suisse Group and German lenders Deutsche Bank and Commerzbank posted their lowest share-price closes on record.

Henderson Global Investors, Columbia Threadneedle Investments and Canada Life suspended trading in at least $7.4 billion of property funds, taking the number of U.K. firms curbing redemption to six in the wake of Britain’s shock decision to leave the European Union.

Investors pulled money from real estate funds in the lead up to the vote, depleting cash levels, as industry commentators warned that London office values could fall by as much as 20 percent within three years of the country leaving the EU.

Standard Life Investments was the first money manager to halt withdrawals on Monday, followed by Aviva Investors and M&G Investments. These are open end funds. It is kind of like a run on a bank, but it is a mutual fund, and it is not as liquid as many investors had hoped.

Deutsche Boerse has signaled the company to be created from its planned merger with the London Stock Exchange may be headquartered outside of the U.K. following Britain’s EU vote. A referendum committee, involving representatives of both partners, will assess all regulatory and commercial goals aimed at getting the transaction approved.

Paris is sending letters to British executives. German politicians have paid for billboards in London to promote Berlin. Dublin is planning an advertising campaign, and Milan wants to be home to Europe’s bank regulator. Not 2 weeks after the Brexit vote and cities across the Eurozone are trying to steal away British jobs and lay claim as the new financial hub.

In London’s financial district on Tuesday a truck was spotted carrying a billboard with the words “Dear start-ups, Keep calm and move to Berlin.” French and German politicians have sparred over whether Frankfurt or Paris should take over London’s euro-clearing business.

And once again they miss the point; instead of trying to poach the UK’s financial interests, they should try to think about how they can build a union that is better than what they have and so good that people will want more of it.

Stock in struggling Italian bank Monte dei Paschi di Siena bounced back after the country´s financial market regulator temporarily banned short-selling in the bank´s shares. The intervention comes after shares in the troubled lender fell by nearly 20% in yesterday’s session.

Gold prices extended recent gains to strike a fresh two-year high and is now challenging $1400 per ounce. Silver prices topped $20 an ounce, a nearly two-year high, gaining over 10% just in the handful of trading days since the Brexit vote.

Analysts at UBS say gold has now entered a “new phase” and is the go-to investment for the remainder of 2016. They raised their annual forecast to an average of $1,280 an ounce, up from $1,225 an ounce.

Copper inventories are piling up. Copper inventories at the London Metals Exchange-approved warehouses rose 10,525 tons. The jump in inventory made for the biggest copper stockpile in nearly a month.

US cancer drug company Medivation has agreed to open its books and provide confidential information to French pharmaceutical company Sanofi as part of exploring a sale that would be open to other bidders.

Similar agreements have been signed with Pfizer and Celgene, which have also expressed interest in an acquisition. As part of negotiations, Sanofi agreed to drop efforts to have Medivation shareholders replace the board, after its $9.3 billion offer for the company was rejected in April.

Sanofi has also formed a partnership with the US Army to expand R&D of an experimental Zika vaccine that has shown promise in early laboratory studies and is among a few candidates expected to be tested on humans in the coming months. Researchers and companies are racing to get a vaccine to market as quickly as possible – though they caution it is likely to take three years or more before that happens.

Barcelona’s Argentine soccer star Lionel Messi was sentenced on Wednesday to 21 months in prison and fined $2.2 million after being found guilty of three counts of tax fraud, although it is unlikely he will serve time. Another penalty he will miss. Spanish law is such that any sentence under two years for a non-violent crime rarely requires a defendant without previous convictions to serve jail time.

The court also found Messi’s father guilty, sentencing him to 21 months and fining him 1.5 million euros. Messi and his father were accused of defrauding the Spanish government of 4.2 million euros in taxes between 2007 and 2009. They allegedly evaded taxes on income from Messi’s image rights by using a web of shell companies, which were revealed in the Panama Papers expose this spring.

The Pension Benefit Guaranty Corporation (PBGC) is now saying the government is on track to run out of money to prop up the troubled Teamsters Central States Pension Fund in 2024, roughly the same time the fund itself is expected to go bankrupt.

Without congressional action, the confluence of those two events could leave Central States pensioners collecting pennies on the dollars they invested in their retirements. Central States, the largest of the country’s troubled pension plans negotiated between single unions and multiple employers, has been operating at deficits of $2 billion a year recently.

The PBGC, which guarantees a minimum benefit to pensioners, expects to spend the better part of $15 billion assisting Central States in the next decade. But the projected rate of assistance to Central States and other ailing pension plans will wipe out the government’s multi-employer assistance funds by 2024. Should Central States fail and the PBGC emergency fund run dry, all of Central States’ 407,000 participants could see their payments cut almost to nothing.

The scramble to solve the problem has not been as urgent as the pressure to stop the cuts Central States proposed under the Multi-employer Pension Reform Act of 2014 (MPRA). That fight involved rallies by angry pensioners, some of whom faced benefit cuts of 40 to 70 percent. The Government Accountability Office said it would investigate investment decisions made by Wall Street firms hired by Central States Pension Fund trustees.

Financial Review

Don’t Fight the Fed

Sinclair Noe — May 18, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 3 = 17,526
SPX + 0.42 = 2047
NAS + 23 = 4739
10 Y + .12 = 1.88%
OIL – .12 = 48.19
GOLD – 20.80 = 1259.00

There’s an old saying “don’t fight the Fed.” The Fed has indicated that if the data points to a rate hike, they would be prepared to hike rates in June. The markets have not reflected the Fed’s position.

The CME’s Fed Watch tool, which uses fed fund futures trading levels to determine the likelihood of a hike at each meeting, indicates that a better than 50 percent chance of a move doesn’t happen until the December FOMC session. Within the past week, futures trading indicated almost zero chance of an increase in June.

Yesterday, Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams agreed that up to three rate hikes this year “seemed reasonable,” while Dallas President Robert Kaplan said he would call for a rate rise in June or July.

Today, the Fed released minutes from the April FOMC meeting. June is definitely on the table. The minutes indicated that members of the Federal Open Market Committee were worried that markets were underestimating the possibility of an early rate hike. Fed officials sought to correct this misconception, by spelling out what they need to see to raise rates in June. They expect to see continued improvement in the labor market.

The April jobs report was weak, and it was published after the FOMC meeting, but it wasn’t like the labor pool has dried up; the economy is still creating jobs and the unemployment rate is still low. Inflation continues to show signs of life, as evidenced by yesterday’s CPI report, which was stronger than expected. The broader economy had a rough first quarter, but it is perking up in the spring.

The domestic outlook was further enhanced by significant improvements in US and international financial conditions. The global risks are still out there. Japan and Europe are still weakened economies. One question mark on the international stage is the June 23 referendum on the UK exit from the Euro Union. That is a very big question mark.

So, the Fed did not take an unequivocal hawkish stance in the minutes, but they have largely abandoned the dovish position. In anticipation of the release, traders had started to reprice the probability of a Fed hike. According to CME Group, prices for futures contracts on the Fed’s benchmark overnight lending rate implied that investors saw a 34 percent chance of a rate increase next month, up from 19 percent shortly before the release of the minutes.

This was reflected in the upward move in yields on 2-year Treasuries, the maturity most sensitive to Fed action, the probability rise indicated by the Fed funds futures, or the flattening of the yield curve, led by the front end and to an extent not seen since December 2007. This repricing accelerated into the afternoon, with large yield spikes, particularly for 2-year and 5-year Treasuries. And to punctuate the point, the Dollar Index closed up, just a whisker above 95, the biggest jump for the dollar in 6 months, which in turn put the brakes on the recent rally in oil.

It is clear that Fed monetary policy has been a major source of support for the markets. And as the Fed moves further away from its Zero Interest Rate Policy, you have to wonder what catalyst can push the markets higher from these levels.

Japan’s economy dodged a recession last quarter as gains in government and consumer spending compensated for a slide in business investment. Gross domestic product expanded by an annualized 1.7%, exceeding all forecasts and recording the nation’s fastest pace of growth in a year. Prime Minister Shinzo Abe is widely expected to announce new fiscal stimulus during the G7 Summit this month as part of his “Abenomics 2.0” program.

Iran’s oil exports are set to surge in May, climbing nearly 60% from a year ago, with European shipments recovering to about half of pre-sanction levels, according to Reuters. This shows that Tehran is regaining market share at a faster pace than analysts had projected as it battles with Saudi Arabia for customers by lowering its prices. April loadings at 2.3-million barrels per day were around 15% higher than the International Energy Agency estimated earlier this month.

Goldman Sachs has downgraded its outlook on equities to “neutral” over the next 12 months, saying there’s no particular reason to own them. In a research note to clients, Goldman analysts wrote: “Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels.”  Goldman also upgraded commodities to “neutral” on a three-month basis, stayed “overweight” on credit over both 3- and 12-month horizons, and remained “underweight” on bonds.

The Chair of the Securities and Exchange Commission says cyber-security is the biggest risk facing the financial system. Banks around the world have been rattled by an $81 million cyber theft from the Bangladesh central bank that was funneled through SWIFT, a member-owned industry cooperative that handles the bulk of cross-border payment instructions between banks.

SEC Chair Mary Jo White says some major exchanges, dark pools and clearing houses did not have cyber policies in place that matched the sort of risks they faced. Cyber security experts said her remarks represented the SEC’s strongest warning to date of the threat posed by hackers.

The U.S. Senate passed legislation that would allow families of Sept. 11 victims to sue Saudi Arabia’s government for damages. The “Justice Against Sponsors of Terrorism Act,” or JASTA, passed the Senate by unanimous voice vote. If it became law, JASTA would remove the sovereign immunity, preventing lawsuits against governments, for countries found to be involved in terrorist attacks on U.S. soil.

More than 4 million U.S. workers will become newly eligible for overtime pay under rules issued today. Under the new rules, the annual salary threshold at which companies can deny overtime pay will be doubled from $23,660 to nearly $47,500. That would make 4.2 million more salaried workers eligible for overtime pay. Hourly workers would continue to be mostly guaranteed overtime.

The United States has ramped up import duties on Chinese steel makers by 522%, accusing Beijing of anti-competitive behavior by selling steel below cost. Last year, U.S. Steel, AK Steel, ArcelorMittal, Nucor and Steel Dynamics, all filed a complaint to the International Trade Commission, alleging foreign companies were selling steel at unfairly low prices. The industry claims it has had to lay off 12,000 workers as a result of the unfair competition.

Google introduced its answer to Amazon’s Alexa virtual assistant along with new messaging and virtual reality products at its annual developer conference today, doubling down on artificial intelligence and machine learning as the keys to its future.

The new offerings include Google Assistant, a virtual personal assistant, along with the tabletop speaker appliance Google Home; plus, Allo, a new messaging service that will compete with Facebook’s WhatsApp and Messenger products and feature a chatbot powered by the Google Assistant; plus, a new virtual reality platform called Daydream designed to work with the Android mobile operating system.

Google Assistant can search the internet and adjust your schedule, and it can use images and other information to provide more intuitive results. For Google Home, the Google Assistant merges with Chromecast and smart home devices to control televisions, thermostats and other products. Google did not offer a specific release date or pricing for Google Home, saying only that it will be available later this year.

Target reported a lower-than-expected increase in quarterly sales at established stores and gave a cautious outlook for the current period, citing volatile weather and weaker demand for electronics and groceries. Shares of the company, which also reported slower digital sales growth, fell more than 9 percent in early trading.

Home improvement chain Lowe’s followed larger rival Home Depot in reporting better-than-expected quarterly sales as strength in the U.S. housing market and favorable weather led to strong demand for building and home renovation products. Results from the home improvement chains stand in stark contrast to grim quarterly sales reports from retailers such as Macy’s and Target, as consumer spending shifts away from apparel and accessories to big-ticket items including cars and homes.

San Francisco is set to become the first U.S. city to require health warnings on advertisements for soda and other sugar-added drinks after the beverage industry failed to get a court order to stop it. The law goes into effect July 25 and will require that billboards and other public advertisements include the language, “WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay.”

GrubHub shares hit a 2-month low yesterday, after Amazon announced it would expand restaurant delivery service into New York and Dallas. The offering is free with Prime membership and promises no markups from online menus. Where’s the profit? According to the NY Post, Amazon is reportedly charging restaurants 27.5% of each delivery order, compared to the 12-24% charged by GrubHub and Seamless, which merged in 2013.

Fedex has declared its recommended all-cash public offer for TNT Express unconditional, with all requirements having been satisfied or waived. Settlement will take place in one week.

Peabody Energy has won final bankruptcy-court approval for an $800M financing package after lenders made concessions to appease creditors. Peabody said final approval on the Chapter 11 financial arrangements ensures the company can continue operating as usual while it works through a load of debt that it can’t support given the declines in coal demand and prices.

Intel To Team Up With Time Warner

Financial Review

Discretionary Reading

Sinclair Noe — August 19, 2015

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

Subscribe: iTunes | Android | RSS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

Ongoing Criminal Enterprises

Sinclair Noe — May 20, 2015

 

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

Subscribe: iTunes | RSS

DOW – 26 = 18,285
SPX – 1 = 2125
NAS + 1 = 5071
10 YR YLD – .01 = 2.25%
OIL + .77 = 58.76
GOLD + 1.80 = 1210.80
SILV un = 17.18

April 29 and 30 the Federal Reserve’s Federal Open Market Committee met to determine monetary policy; today, they published the minutes of that meeting. There were no surprises. Policymakers have no plans to increase interest rate targets in June. We all knew that. Officials in April “had increased uncertainty regarding the economic outlook,” the minutes showed. They had no good reason to explain why consumer spending was so weak.

“Most” Fed officials think the dramatic slowdown in growth in the first quarter was transitory and that a moderate rebound would resume in the second quarter. Inflation was also expected to move higher.  The international context isn’t helpful to the US economy. Fed officials deem “foreign economic and financial developments” as constituting “potential downside risks,” and they specifically mention Greece and China. Moreover, despite its recent partial retracement, the dollar’s appreciation is “likely to continue to be a factor restraining US net exports and economic growth for a time.”

This suggests that they see a rate hike coming sometime later this year. Only a “few” on the U.S. central bank questioned whether the Fed was providing enough stimulus for the economy at the present time and cautioned against any rate hike in the near future. This is an interesting point because the Fed really hasn’t provided much stimulus for the economy; they have provided stimulus to financial markets but not the broader economy in a direct fashion.

Indirectly, the Fed has provided stimulus to the broader economy through something known as the monetary transmission mechanism, which works largely through housing or other long-lived investments which are sensitive to interest rates. Interest rates don’t have strong impact on short-term investments or short-term capex. A lot of business investment is short-term; a lot of household spending is short-term. So Fed policy, by moving interest rates, normally exerts its effect mainly through housing. And interest rates do move housing. Remember the early 1980s when Paul Volker decided to tighten, interest rates jumped, and housing collapsed. And housing has come back from the lows, but not all the way back. One reason is because people who are most likely to buy houses got slammed in the downturn and couldn’t or wouldn’t jump back into that frying pan.

Today’s economic data backs up the relationship between housing and rates. Mortgage purchase applications fell 4.0 percent in the May 15 week though, year-on-year, applications are still up a very strong 11.0 percent. The ongoing run up in mortgage rates may be easing demand for mortgage applications just at the time that demand for purchase applications had been gaining steam.

And so the Fed is feeling like it has its back to the wall, and the wall is zero interest rates. If there is an economic problem the Fed can’t respond by lowering interest rates, or at least the impact of going into negative territory would be dangerous ground.

There was some debate about how to communicate any move to tighten rates. Some officials think it is important to give a warning to the markets, others worry that telegraphing intentions to hike rates will only result in a rate tantrum. The recent bond-market rout underscores that with bond yields near historical lows, even a moderate rise in yields would chip away the slim interest payments and inflict pain on bondholders. The Fed identifies this as episodes in which there were large monetary disturbances not caused by output fluctuations. Hopefully the Fed remembers the lesson from the Crash of 87; the markets respond violently to surprise rate hikes.

A mixed bag of economic releases this month has bolstered investors’ expectations that the Fed would wait until late this year to act. Fed Chairwoman Janet Yellen will make a speech on Friday that might provide further guidance.

Five global banks have agreed to pay $5.8 billion in combined penalties and will plead guilty to criminal charges related to manipulating foreign currency exchange rates, also known as Forex. Four of the banks, JPMorgan Chase, Barclays, Royal Bank of Scotland, and Citigroup, will plead guilty to conspiring to manipulate the price of US dollars and euros.

Barclays will pay $650 million, Citigroup $925, million J.P. Morgan $550 million and RBS $395 million. Barclays will pay another $1.3 billion to New York State, federal and U.K. regulators.

The fifth bank, UBS, received immunity in the antitrust case because they informed regulators about the Forex rigging as part of an earlier deal related to Libor rigging; UBS had signed a Non-Prosecution Agreement in 2012 on the Libor charges, and their misconduct in the Forex markets violated that earlier agreement even though they self-reported wrongdoing. So, they have immunity on Forex but they had to plead guilty to Libor rigging.  UBS will pay $545 million in fines to the Justice Department and Federal Reserve.

The five banks will pay a further $1.6 billion in fines to the Federal Reserve. Bank of America also faces a $205 million fine by the Fed, but no criminal charges. No bank employees have been criminally charged. The five banks will be under a three-year period of probation.

Between December 2007 and January 2013, euro-dollar traders at Citigroup, JPMorgan, Barclays, RBS and UBS gathered in an exclusive electronic chat room and used coded language to coordinate their moves in the U.S. dollar-euro market. They referred to themselves as the Cartel. By agreeing not to buy or sell at certain times, they protected each other’s trading positions. The big banks were the market makers, setting daily exchange rates, known as the fix. The fix became the price paid for billions of dollars of currency bought or sold on any given day.

And the Cartel managed to skim a little for their efforts. One Barclays trader in the chat room about adding secret mark-ups to the prices wrote: “If you ain’t cheating, you ain’t trying.” Ben Lawsky, New York’s superintendent of Financial Services explained it simply:  “They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients.” Also, a side note, after the big settlement announcement Lawsky announced he will step down next month as New York’s top bank regulator after four years. To his credit, he is not going to work for JPMorgan.

I have not yet seen a figure for how much prosecutors think the Cartel stole, but the Forex market trades close to $5 trillion dollars a day, so today’s fines amount to about one/one-thousandth of daily volume. The rigging took place over more than 5 years. I’m guessing that the money they stole in rigging Forex might amount to more than the fines ordered today. And that raises another interesting question – how did they report that income? Will they now go back and amend their earnings reports?

Didn’t managers and Board of Directors sign off under Sarbanes-Oxley?

And remember that the Forex scandal follows on the heels of the Libor rigging scandal, and the ISDAfix scandal (that involved the $381 trillion market for interest-rate swaps and the $44 trillion market for options on swaps. Banks use it to set coupons paid for bonds tied to commercial real estate. And there is a mountain of evidence, and today Barclays agreed to a $115 million dollar settlement on the ISDAfix investigation. Other banks are also being investigated.)

And before that, the municipal bond rigging scandals, and scandals in commodity markets including precious metals, and tax evasion scandals, and money laundering scandals, and predatory lending scandals, and much, much, much more. Past performance is not a guarantee of future results, but based on past performance you have to figure that the banks have rigged all the financial markets.

FT has a running total of legal fines and settlements paid by banks to US regulators since 2007. According to their calculations, the tote board just touched $155 billion. In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.)

The big news in today’s settlement was not the size of the fines, not the scale of the scandal, but that the banks actually admitted criminal guilt. UBS violated its 2012 Non-Prosecution Agreement, and we’re still just looking at a fine for a repeat offender. The banks will get to keep their charters; they can continue to conduct business; three years’ probation. They can still vote, or at least buy elections. The deal does not prevent the Department of Justice from going after individual criminal charges but for now, nobody goes to jail.

HSBC has become one of the biggest global banks to say it will begin charging clients on deposits in a basket of European currencies to prevent its profit margins from being crushed in a record low-interest rate environment. The unusual steps come after the ECB last year became the first big central bank to announce a negative deposit rate, in effect a penalty on banks parking their surplus cash.

The Japanese economy staged a comeback in first quarter, expanding at an annualized 2.4% vs. the previous quarter. Despite the positive figure, economists are still worried about Japanese growth and deflation as most of the expansion was due to a huge build-up of inventories. The Nikkei Stock Index finished the session at a 15-year high.

It is widely recognized that Greece is running out of money. The next questions are when they will run out money and what will happen when they run out of money. Nikos Filis, from the ruling Syriza party, told Greek television Greece will not be able to make a €1.5 billion repayment to the IMF that falls due on June 5 if there is no deal with its international creditors by then.

Financial Review

Goodbye Patience

Sinclair Noe — April 8, 2015

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

Subscribe: iTunes | RSS

DOW + 27 = 17,902
SPX + 5 = 2081
NAS + 40 = 4950
10 YR YLD un = 1.89%
OIL – 3.05 = 50.93
GOLD – 5.50 = 1203.20
SILV – .32 = 16.61

We start today with a big acquisition in the oil industry. Royal Dutch Shell agreed to buy BG Group for about $70 billion in cash and shares, the oil and gas industry’s biggest deal in at least a decade; since 2004 when Royal Dutch Shell was created. This is the biggest acquisition this year and the 10^th biggest M&A deal overall, and the fourth biggest deal overall in the oil industry. The merged company will boast a market value twice the size of BP, and even larger than Chevron. ExxonMobil is still the 800 pound gorilla with market cap north of $350 billion.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant buyback of $25 billion from 2017 to 2020. Shell investors reacted coolly to the deal. Shell’s B shares, the class of stock being used to finance the deal, fell about 7% percent in London. For BG it represents a 50% premium.

BG Group is the exploration part of the former state owned British Gas that was privatized by Margaret Thatcher in the 1980s. British Gas was split into BG and Centrica. The new company will be the largest producer of liquefied natural gas, or LNG, among international oil companies. Shell pioneered the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal. The deal will still need antitrust approvals from regulatory agencies in Australia, China, Brazil and the EU.

This is a very interesting deal for many reasons, not the least is the downturn in oil prices over the past year, which has been devastating for smaller or less strategically positioned companies in the oil industry. Case in point: Noble Energy just announced it is cutting 220 jobs across the U.S., with around 100 losses at the oil company’s Houston headquarters and another 100 or so at its Colorado operations. The cuts represent 10% of Noble’s 2,200 U.S. employees. The news comes after the firm said earlier this year that it was planning to slash spending by 40%.

The roughly 50% premium paid for BG Group would make sense with oil priced at $90 a barrel, which is not the current price. Of course we could see oil prices skyrocket; the situation in Yemen is a stupid mess and that is right at a chokepoint to the Red Sea; and that is just one of many potential hotspots. Absent a geopolitical flare-up, the price of oil is not likely to zoom in the face of excess supply and moderate demand.  Saudi Arabia is reporting it raised oil output to 10.3 million barrels a day in March, the highest in at least 12 years, and intends to keep producing 10 million barrels per day despite low crude prices. The Saudi oil minister says he believes oil prices will rise in the “near future”; maybe, but right now there is a glut.

America’s oil in storage just hit another record after rising by the most since March 2001. Stockpiles rose by almost 11 million barrels, or 2.3%. Analysts had expected an increase of 3.25 million barrels. The EIA report today showed the amount of oil the U.S. is cranking out also edged up slightly, to a rate of 9.4 million barrels a day. Investors have been closely watching the oil gather in storage tanks, which has been rising steadily since the oil-price crash started last year. U.S. crude production has been at the highest in decades even as drillers have made unprecedented reductions in the number of oil rigs out drilling new wells.

The last time we saw deals of this size was in 1999 when Exxon and Mobil merged at a cost of $83 billion and BP bought Amoco for $48 billion. Back in 1998, oil was priced closer to $12 a barrel, and the deal making marked a trough in prices. Shell CEO Ben van Beurden said the deal is “not a bet on the oil price.” You can believe that if you wish, but I doubt they would have made the deal if they thought oil was going to $30 a barrel for an extended period.

So oil prices are important but not the only thing. In the past 12 months, the oil majors have had to deal with the consequences of events in Ukraine and the Crimea as well as western government sanctions on Russia and the effects these sanctions have had on the profitability of their assets exposed to those sanctions. Shell was likely attracted by BG’s deepwater assets in Brazil and its LNG portfolio. BG Group is one of the world leaders in LNG and recently completed a $20 billion facility in Australia. The combination of Shell and BG will result in a portfolio that controls roughly 16% of the global LNG market. The LNG market is crucial for Europe; if Russia can’t or won’t meet Eurozone needs, this is an opportunity for Shell to seize market share. So, it looks like Shell is diversifying away from its core oil business, at a time when oil and gas exploration is becoming increasingly expensive in terms of profitability.

Earnings season is back. Alcoa unofficially kicks of quarterly earnings; a traditional thing; the aluminum company used to be one of the Dow 30 stocks; ticker symbol AA; they go first. Alcoa beat earnings estimates by a couple of cents per share but posted a slight missed on revenue projections. Overall, S&P 500 earnings for the first quarter are forecast to have dropped 2.8% from the year ago quarter, which would be the worst performance since the third quarter of 2009.

The Federal Reserve has released minutes from the FOMC policy meeting in March. That was the meeting where the Fed dropped the term ”patient” from the language surrounding policymakers’ approach to future interest rate hikes. At the time, Janet Yellen said that axing patient “does not mean we are going to be impatient.” Today’s minutes reveal that some policymakers are indeed impatient, ready to raise rates in June; others are very patient indeed, and a couple don’t like the idea of rate hikes at all. So, not much new in the minutes. As we suspected the Fed has not made up its collective mind about rate hikes even as they take a very small step closer to a hike. Uncertainty at the Fed is a recipe for volatility in the markets.

In other words, we could see markets moving in multiple directions, and some of the moves might even seem contrarian. While higher target rates from the Fed would likely slow economic activity by making borrowing costs higher, it would also signal that the economy is stronger and it would push the dollar higher. That would signal the world to bring their money to America – the safe haven play.

Switzerland today became the first country ever to issue 10-year debt that gives investors a yield under 0%. Several European countries inside and outside the Eurozone have sold government debt with up to five years of maturity at negative yields, which means investors effectively pay for the privilege of buying it. But no other country has previously stretched this out as long as 10 years. For Eurozone investors they have the option of paying Switzerland to park their cash, or coming to the US, letting the Treasury pay, plus arbitrage on a strengthening dollar.

So, it is possible that rates could move lower, even as the Fed moves closer to hiking rates. And some people argue that the Fed doesn’t really set interest rates, the bond market does. There is another old saying: “don’t fight the Fed.”

What does that mean for you? Well, if or when rates go up, investors will be able to buy newly issued bonds generating higher streams of income in the not so distant future. That means bonds go down in price, and bond funds go down.

It also means that personal debt becomes more expensive. Take a look at the makeup of your debt, too. Is your mortgage a floating rate loan? Do you have any other floating rate debt? If so, this might be the right time to lock it in place at a low rate. Mortgage rates are the lowest that many lenders have witnessed in their lifetimes; given the Fed’s clear signals, do you really want to delay acting on this? If you’ve been contemplating taking out a loan to make some home improvements, to buy a second home, or for some other purpose; and assuming that you’re in a financial position to handle the payments of course; this is probably a good time to think about the timing of your plans.

It might already be happening. The Federal Reserve reports consumer credit grew at a seasonally adjusted annual rate of 5.6%, for a gain of $15.5 billion in February. This is the fastest pace of growth since October. All of the increase came from non-revolving debt, like car and student loans, which grew at a 9.4% rate up – from a 5.8% rate in January. This is the fastest pace since February 2013. Revolving, or credit-card, debt declined at a 5% rate in February, after a 1.4% decline in the prior month. This is the biggest decline in credit card loans since April 2011. So, in a strange twist, the threat of higher rates is starting to cause increased credit activity; but that is likely temporary.

Over the longer term, higher rates mean less affordable homes and cars. Higher rates mean anything financed costs more. Higher rates mean a higher dollar and that means less profit for multinationals. The direction is clear, and most of us can see it. A CNBC All America Economic Survey shows 27% of Americans judge the economy as excellent or good, the highest level in eight years, up from 16% at this time last year. Looking forward, only 28% of Americans believe the economy will get better in the next year, well below the post-recession high of 36% in March 2012. Things are pretty good now but the road ahead is not so certain. Goodbye patience, hello uncertainty and volatility.