Financial Review

Strange Days

Sinclair Noe — April 13, 2015      

 

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DOW – 80 = 17,977
SPX – 9 = 2092
NAS – 7 = 4988
10 YR YLD – .02 = 1.94%
OIL + .27 = 51.91
GOLD – 9.30 = 1199.00
SILV – .23 = 16.36

A down day as we head into earnings reporting season. S&P 500 earnings per share has come down 8% over the last three months to $around $117.50 from $119.50, according to analysts at Merrill Lynch. Analysts are projecting EPS to fall 4% to 6%, excluding the impact of stock buybacks. Earnings are taking a hit on two fronts: lower oil prices and a stronger dollar. The energy sector takes the lion’s share of the blame for the earnings decline. Excluding energy companies, first-quarter earnings growth would actually be slightly positive. The dollar’s rise over the past year will also have a significant impact as expectations for companies with sizable foreign sales have been revised down 13% year to date while those with sales concentrated in the US witnessed an upward revision.

The Energy sector is the biggest drag on the growth picture this quarter, with the sector’s earnings on track to be down -63.6% on -40.6% lower revenues. Excluding the drag from the Energy sector, total earnings for the S&P 500 index would be up +4.7% on +0.6% higher revenues, according to Zach’s Research. The best performing sector should be Finance, where earnings are expected to be up +9.1% from the same period last year. Excluding Finance, the earnings growth picture for the S&P 500 becomes even weaker, with first quarter earnings expected to decline -6.4%. We have a busier reporting schedule this week, with 32 S&P members reporting results, including several of the big banks.

If estimates for the first quarter were to stay where they are right now, this would mark the first year-over-year decline in earnings since the third quarter of 2012. And negative earnings growth isn’t just expected for the first quarter. Current estimates project a decline in Q2 earnings as well. Two consecutive quarters of negative growth is known as an “earnings recession”, which is something the market hasn’t seen in quite a while.

The euro fell back towards $1.05 today, hitting its weakest in four weeks as the dollar’s resurgence continued on bets the US Federal Reserve will raise interest rates from their historic lows in the coming months. The dollar had dropped 4% after a much-worse-than-expected US payrolls report earlier in the month threw into doubt a 2015 rate rise, but it has since rallied on upbeat comments from Fed officials and better US data. In addition, the dollar is still the global reserve currency and that means there is about $9 trillion in dollar denominated debt around the world. The $9 trillion owed by borrowers outside the U.S. has surged from $6 trillion at the end of 2008, when the Fed cut its benchmark interest rate to near zero, making it cheaper to issue in the currency. Some of that will need to be repaid even if the remainder will be rolled over. And debt that will eventually be refinanced needs servicing in the meantime. To repay the debt, whether corporate of sovereign, requires accumulating dollars; and that is above and beyond growth or interest rate differentials.

As the U.S. job market improves, the risk is receding that an unexpected setback could derail the recovery once the Federal Reserve raises interest rates, San Francisco Fed President John Williams told Reuters in an interview late on Friday. “So even if the economy got some bad shocks, really you are probably just talking about flattening that path out a bit, or maybe raising rates more slowly,” said Williams, who this year is one of 10 voting members of the Fed’s policy panel. In fact, Williams says the Fed now needs to weigh the risks of waiting too long before a rate lift-off. To get that message across Williams has begun giving away T-shirts, printed at his own expense, showing an arrow busting upwards out of a computer and declaring: “Monetary policy — It’s data dependent.” (I have to get me one of those t-shirts.)

In the last two weeks, three Fed governors have laid out the argument that it is the longer rate path, not the date of lift-off that matters. Williams also said that regardless of the timing of the first hike, rates should stay below neutral to help the economy grow at a faster-than-normal pace. Such accommodative policy is necessary to further reduce unemployment, which at 5.5 percent is still too high in his view, and push up inflation, which remains well below the Fed’s 2-percent target. The San Francisco Fed chief expects the U.S. economy to reach full employment in six to twelve months, and forecasts a tighter labor market will start lifting wages and inflation more broadly.

Greece is at risk on running out of cash as soon as this month, unless the leftist government and its international lenders, known as the Troika, agree on a reform plan. At the meeting in Brussels last week, eurozone officials gave Athens six working days to submit a revised list of overhauls. Despite a denial by Greece’s finance ministry, tensions between Greece and its creditors took another turn for the worse over the weekend, following a report that eurozone officials were “shocked” at Greece’s failure to outline detailed structural reforms. If eurozone finance ministers at the Eurogroup meeting on April 24 find the proposals adequate, they can unlock the next tranche of bailout money. That would help Greece meet its debt obligations this spring and avoid a default. Also this week, Greece has to repay €2.4 billion euros ($2.5 billion) in Treasury bills. Last week, the government met its deadline to pay back a loan of roughly €460 million euros to the International Monetary Fund. Once again, negotiations are turning ugly, with one German newspaper quoting Eurozone officials that are allegedly so annoyed that they said Greece acted like a “taxi driver” and just kept asking for cash instead of outlining reform plans. It continues to look like the Greek debt problem might not be worked out.

China’s exports surprisingly tumbled in March while import shipments fell at their sharpest rate since the global financial crisis, setting a poor precursor to the country’s closely-watched first quarter GDP figure due on Wednesday. Chinese exports plunged 15% and imports fell 12.7% last month in dollar terms as weak demand and the impact of the lunar new year weighed heavily on Chinese factories. The soft trade figures sent Chinese shares higher, with the Shanghai Composite closing up 2.2%, as investors bet on more stimulus from Beijing.

Nearly 90% of Americans now have health insurance. The Gallup-Healthways Well-Being Index shows the number is up from closer to 80% as recently as 2013. The new survey included the end of the 2015 period to sign up for health insurance through the public exchanges.

Almost one million people pre-ordered the Apple watch on Friday. They bought an average of 1.3 watches and paid about $503 for each one. How does that stack up in Apple history? Back in 2007, it took the company 74 days to sell its one millionth iPhone, and it took two years to get to that milestone with the iPod. Among those who bought an Apple Watch, 72% had bought an Apple product in the last two years. And 21% preordered an iPhone 6 or iPhone 6 Plus just months ago.

These are strange days indeed. Case in point; organizers have just announced a sail boat race from New York to Victoria, British Columbia; the 7,700 mile race will go from the northeastern part of North America to the northwestern part. The boats will not head south from New York, they will head north to Greenland, then cut across the north of Canada, circle the northern edge of Alaska and then down to Victoria. Impossible you say? Once upon a time; now, not so much. The route used to be unnavigable because of pack ice, which may well still be problematic for the race participants, but there is less ice as of late. Arctic sea ice hit its peak for the year in February—amounting to the lowest coverage on satellite record. Race organizer Robert Molnar told CBC News: “We shouldn’t be able to do it, but because of climate change, we can.”

Space X is the private space exploration company founded by Elon Musk. They had to scrub a scheduled launch of a rocket today due to inclement weather. They will try to launch tomorrow, weather permitting. The tow-stage Falcon 9 rocket is unmanned; it is scheduled to deliver cargo to the International Space Station, which is manned.  The top part of the rocket will deliver the cargo, break away and then burn up as it floats back into Earth’s atmosphere. That will be the easy part. After the launch, SpaceX will try to guide the bottom stage of the rocket upright onto a platform, or what it calls an autonomous spaceport drone ship, in the Atlantic Ocean off Florida. Normally the bottom part would just fall into the ocean and be lost. Recovering the rocket intact would be a big cost savings. Space X says the odds of a successful landing on the platform are about 50-50. And if they don’t land it this time, they’ll just keep trying.

NASA has a little rover, called Curiosity, roaming around Mars, and it has made a pretty amazing discovery. Water. Salt water actually, and lots of it, just beneath the surface of the red planet. The Mars Curiosity rover found frozen water and water vapor in the Martian atmosphere several years ago. Now, scientists have detected the presence of a chemical substance in the Martian soil that absorbs water vapor from the atmosphere to form a brine that keeps being a liquid even when temperatures on the planet fall below the freezing point of water. This might provide future explorers with a source of water, or it might prove more trouble than not. The liquid brine is expected to be highly corrosive. Still, water is considered the source of life as we know it, and now we know Mars has it.

FINANCIAL REVIEW

November Jobs Report – Progress Not Perfection

Sinclair Noe — December 5, 2014

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

DOW + 58 = 17,985
SPX + 3 = 2075
NAS + 11 = 4780
10 YR YLD + .05 = 2.31%
OIL – 1.12 = 65.69
GOLD – 15.50 = 1192.00
SILV – .20 = 16.39

Record highs for the Dow and the S&P 500.

For the past week I’ve been telling you we could see a wild number on the jobs report. We did. The economy added 321,000 net new jobs in November. The unemployment rate held steady at 5.8%. Job gains for September and October were revised higher. September was revised from 256,000 to 271,000, and the change for October was revised from 214,000 to 243,000. With these revisions, employment gains in September and October combined were 44,000 more than previously reported. And that pushes the 3 month average up to about 277,000 jobs per month. November marked the biggest monthly jobs gain since January 2012. So far in 2014 the economy has gained an average of 241,000 jobs a month.

This was the tenth consecutive month of job gains greater than 200,000, and an all-time record 50th consecutive month of job gains. Total employment is now 1.7 million above the previous peak. Total employment is up 10.4 million from the employment recession low. So far this year, the United States has added some 2.65 million jobs, putting the country on track for its best year of job growth since a 3.2 million gain in 1999.

Private payroll employment increased 314,000 from October to November, and private employment is now 2.1 million above the previous peak. Private employment is up 10.9 million from the recession low. In November, state and local governments added 2,000 jobs. State and local government employment is now up 157,000 from the bottom, but still 587,000 below the peak. Federal payrolls increased by 5,000 last month but is still down 17,000 for the year. This is one of the unique things about this recovery, it has not included government jobs, unlike past recoveries.

All in all this was a very good jobs report, but it helps to dig into the details to get a better understanding. First, this is the national report and conditions vary from state to state and town to town. We don’t get a breakdown by state for a couple more weeks, but we know that the October state unemployment report showed Arizona in the bottom 10, with an unemployment rate of 6.8%.

The BLS also counts workers who have had to settle for part-time work because they couldn’t find a full-time gig or because their hours were cut back. They’re employed, sure, but not as employed as they’d like to be. The number of persons working part time for economic reasons decreased in November to 6.85 million from 7.02 million in October. These workers are included in an alternate measure of unemployment which includes underutilized workers, known as U-6. The U-6 unemployment rate dropped from 11.5% in October to 11.4% in November, and is now at the lowest level since 2008.

And the unemployment rate excludes people who would like a job but are not actively looking for one. The participation rate refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate. There are many reasons why someone would not be actively searching for work: many people have retired in the wake of the downturn, so there are demographic reasons; many younger workers have gone back to school to improve their chances; many people have just become discouraged. Now, if the economy was really doing great, it would probably attract discouraged workers to try to find a job, but that didn’t really happen last month. The Labor Force Participation Rate was unchanged in November at 62.8%. And the participation rate for the 25 year old to 54 year old age group, which represents the prime working years, was unchanged in November at 80.8%. This indicates that there is still slack in the labor market.

There are 2.8 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.9 million in October. This is trending down, but is still very high. This is the lowest level for long term unemployed since January 2009.

In one sign of labor market confidence, workers have grown more likely to quit their jobs, meaning they’ve either received new employment offers or feel confident they will. According to the Federal Reserve Bank of St. Louis, the “quit rate,” as it is known, now stands at 2.2 percent among private workers. From July 2008 to July 2014 the rate never surpassed 2 percent.

A sustained increase in hourly earnings are necessary to propel the economy onto a higher plane of growth. Wages, are still a problem but there was some improvement in November. Private nominal hourly earnings grew at a 2.1 percent annualized rate in November, rising to $24.66, compared with $24.15 one year ago. Adjusted for inflation, wage growth remains essentially flat. But for the month of November wages were up 0.4%. Americans are taking home more pay, but mainly because they are working longer hours. The average length of the workweek stood at a post-recession high of 34.6 hours in November, up from 34.5. When you combine the extra time with the increase in wages, it means weekly payrolls rose by 0.9%, which is a huge increase. The best we’ve seen in a very long time.

Breaking down the job gains by sector: professional and business services added 86,000 jobs, the retail trade gained 50,000, education and health services added 38,000, Leisure and hospitality gained 32,000, manufacturing gained 28,000, financial activities added 20,000, and construction added 20,000, with transportation and warehousing up nearly 17,000.

Now, I started out by telling you that the November jobs report included some wild numbers, and one reason for this is that the numbers are seasonally adjusted. Each month the Bureau of Labor Statistics adjusts the raw employment numbers to compensate for seasonal hiring and firing, such as when retail workers are hired for the holiday crunch, only to be laid off in January. So, by looking at the raw numbers we can get a better idea if this is just a seasonal variation and if the November numbers look better than they really are. Turns out that retail employment was actually down in November from November of last year. There were more temporary workers hired; also more delivery related jobs. So, this probably made the jobs number look a little better than the labor market really is, but not much; there was broad-based hiring in many industry sectors, and as more people get jobs, it is a good reason for retailers to add extra staff. Yes, the numbers might be slightly off, and they will be revised in months ahead, but the momentum is certainly strong.

Now, we wait and see if the economy really is getting stronger; unless GDP growth accelerates, the mirror image of stronger jobs will be lower productivity. The good news there is that global oil prices have plummeted in what amounts to a de facto raise for American consumers, who are now spending far less at the pump. A couple of reports earlier in the week, the ISM reports on services and manufacturing, showed growth indicative of 5% GDP.

And if the economy really is picking up, there are ramifications for both monetary and fiscal policy. On the monetary side, the Federal Reserve is more likely to raise interest rates. The Fed may want to see further signs of wage growth picking up before hiking, but that could well happen sooner than many expect if the current momentum in hiring is maintained and the underemployment rate continues to fall. Fed fund futures are pricing in interest rates of 1.6% at the end of 2016.

On the fiscal side, stronger economic growth holds the promise of continuing the steep, downward slope of the budget deficit, and that could pave the way to fiscal agreements in the coming year that become far easier as political and financial pressures are eased. The Republican-controlled Congress will again want to balance the budget and cut taxes, and with a stronger economy and more revenues it might just happen. Meanwhile, President Obama has a wish list of social programs which also includes a much delayed and much needed surge in infrastructure spending, which would in turn would create even more jobs and further strengthen the economy. Of course, it is probably crazy to think the politicians can actually accomplish something positive, but if it could happen, now would be a good time.

That is if this holds up. One month does not make a trend. The numbers could be revised lower. The seasonal adjustment could prove to be an aberration. Or the strong hiring combined with wage gains could be an indicator of a stronger economy. Next, we’ll look to see if the trends can be maintained, and if we start to see people coming back into the workforce and wringing out the slack in the labor market. I know it is a little hard to believe but things seem to be headed in the right direction. Consider: one year ago gas prices were $3.26 a gallon, today the nationwide average is $2.77; third quarter GDP growth was 3.9%; the stock market continues to hit record highs; November of last year, the unemployment rate was 7%; five years ago the unemployment rate was 9.9%, and today it stands at 5.8%.

Progress not perfection.

Thursday, May 08, 2014 - Monetary Policy Is Not A Panacea

Financial Review with Sinclair Noe

DOW + 32 = 16550
SPX – 2 = 1875
NAS– 16 = 4051
10 YR YLD + .01 = 2.60
OIL – 01 = 100.24
GOLD - .10 = 1290.80
SILV - .15 = 19.25

Stocks were mostly lower today. The closing numbers looked quiet but it was a roller coaster ride with the Dow Industrials up about 150 points. The Nasdaq also squandered early gains to finish in negative territory. The Nasdaq ended lower for a third straight session, its longest losing streak since early April. A late selloff in utilities and energy, among the best performing sectors recently, dragged the S&P 500 lower. Of 445 companies in the S&P 500 that have reported earnings, 68.2% beat expectations, above the 66% beat rate for the past four quarters. Profits are expected to rise 5.3% this quarter.

The number of people who applied for new unemployment benefits last week fell to the lowest level in a month. Initial jobless claims dropped by 26,000 to a seasonally adjusted 319,000.

The federal government had a budget surplus of $114 billion in April. That is $1 billion more than a year ago and would be the biggest April surplus since 2008. For the fiscal year to date, CBO estimates the deficit to be $301 billion, down $187 billion compared to the same period in 2013.

Retailers posted modestly higher sales in April. Results from March and April are generally viewed together because of the shifting nature of Easter, which fell about three weeks later this year and moved into April from March last year. For the two-month period, retailers reported 3.4% growth, down from 3.5% a year earlier.

Consumer credit balances increased by $17.5 billion in March to a total of $3.141 trillion. The gain was a bigger increase than the $15.5 billion expected by economists. This was the biggest month-over-month growth rate since February 2013. Nonrevolving debt like college and auto loans grew by $16.4 billion. Revolving debt like credit cards increased by $1.1 billion.

At 4.21%, the 30-year fixed-rate mortgage is at its lowest since the week of November 7, 2013, so says Freddie Mac in their new weekly report on national mortgage rates. Last week, it averaged 4.29%. A year ago, it was 3.42%. Since the housing market crashed, the Federal Reserve has used extraordinarily easy monetary policy to keep interest rates like mortgage rates low in its effort to bolster the housing market and stimulate the economy.  Lately, various housing-market metrics such as existing-home sales, new-home sales, and mortgage applications have all been flagging. Last week, we learned that the US homeownership rate was at a 19-year low, and some experts think it'll never come back.

Yesterday, Fed Chair Janet Yellen said, "One cautionary note, though, is that readings on housing activity—a sector that has been recovering since 2011—have remained disappointing so far this year and will bear watching. The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery." That was the big takeaway from Yellen’s Congressional testimony yesterday.

Fed Chair Janet Yellen was back on Capitol Hill today for a second day of testimony. She appeared before the Senate Budget Committee.  Yellen’s favorite new line is, “Monetary policy is not a panacea.” That pretty much says it all.

There are a couple of trends that concern Yellen; long term unemployment; there are about 3.5 million workers who haven’t found a job for at least 6 months. Also, income inequality is pulling down spending and slowing the economy. Yellen would like to do something about these disturbing trends, but you know, “Monetary policy is not a panacea.”

Meanwhile, the European Central Bank was meeting to determine monetary policy for the Euroland; they decided to leave interest rates unchanged at 0.25%. ECB President Mario Draghi’s favorite line is “whatever it takes” and he’s been saying it for a couple of years. Euroland is slogging along with persistently low inflation and high unemployment. Draghi says something should be done, but he did not say what; and the ECB might address stimulus of some sort or another next month or so.

Perhaps Draghi is waiting to see how the situation in Ukraine plays out; right now the picture is smoky and very gray. Rebels in eastern Ukraine say they will proceed with a referendum this weekend seeking autonomy even though Russian President Putin appeared to withdraw his support for the vote. Putin yesterday presided over nationwide army drills, a day after he softened his tone by promising to withdraw troops from the border. The government in Kiev says a referendum would be illegal. Putin also indicated he would pull Russian troops from the Ukrainian border, but satellite images show that probably isn’t happening. The situation involving the tug of war between the West and Russia regarding Ukraine has steadily worsened over time and now involves outright economic warfare; sanctions on one side and the threat of energy shortages on the other.

Even former Treasury Secretary Tim Geithner is coming out of exile to hawk a new book. Geithner says there had been talk about nationalizing banks back in the crisis days. On the legacy of the bailouts, Geithner rejects criticism that the Troubled Asset Relief Program benefited the rich rather than ordinary Americans. And yet he acknowledges that the too big to fail banks are bigger and more dangerous than ever.

Have you ever seen a boxer knocked out? The devastating blow is the one you don’t see coming. Mark Carney, governor of the Bank of England and head of the Financial Stability Board, an international watchdog set up to guard against future financial crises, was recently asked to identify the greatest danger to the world economy. He answered shadow banking. It is huge and growing fast, and little understood, and even less transparent. We don’t even know exactly what counts as shadow banking; basically, it refers to lending by non-bank institutions and it involves more than $70 trillion in assets, up from about $25 trillion ten years ago.

A broader definition, however, would include any bank-like activity undertaken by a firm not regulated as a bank: it could be bond trading platforms set up by technology firms, or payment systems offered by Paypal or financing offered by a retailer such as Sears, or peer-to-peer lending, or money market funds, or who knows what. At the core is the concept of credit and lending. Shadow banking fills a void left by traditional banks, which have become miserly with lending.

Yet shadow banking is poorly or non-regulated. Think of the structured investment vehicles, a legal entity created by banks to sell loans repackaged as bonds. These were notionally independent, but when they got into trouble they pulled in the banks that had set them up. Or money market funds, which seemed like a nice safe place to park cash as a stop-gap measure; they seemed conservative, nearly risk free, until they suffered a run.

Banks must now incorporate structured investment vehicles on their balance-sheets. Money-market funds must hold more liquid assets, to guard against runs. Limits on leverage have been imposed or are being considered for many forms of shadow banks. American regulators are still allowing some money-market funds to create the impression that an investor can never lose money in them. The problem for banks is that they are involved in shadow banking, either in the form of loans to shadow banks, or because the banks buy the products created by shadow banks.

One of the biggest paces for concern is China. Banks there are banned from expanding lending to certain industries, and from luring deposits by offering high returns. So they do both of these things indirectly, through shadow banks of various sorts. Some firms are setting themselves up as pseudo-banks. It is hard to imagine that all the shadowy loans to unprofitable steel mills and overextended property developers will pay off. At which point the Chinese government will likely step in a take control, but there will be a cost.

Nouriel Roubini, the New York University professor and chairman of Roubini Global Economics is known as something of an economic pessimist, and now he thinks we’re on the verge of a bubble, but not a collapse. Roubini says the Federal Reserve will keep its key lending rate low even after it lifts off from near zero, where it has rested for the few years. That slow process of normalization will keep the spigot of borrowing flowing, helping support the economy. But it will also lead to risky lending practices. Hence, a bubble is inflating that could eventually pop.

Roubini cited the return of some of the key characters associated with the period before the last financial collapse: Lots of low quality bond sales, debt without strong protections for bondholders. Roubini says: “All the risky things that were happening back in ’06 and ‘07 are back again to the same level, if not more. So we are in the beginning of a credit bubble, but just the beginning.”

Nonetheless, Roubini doesn’t see the reversal happening immediately, citing money that continues to rush into the market. For now, credit investors appear to be stuck in an uneasy equilibrium.

He’s by no means the first person to make this claim: the question of financial stability is one of the key criticisms of the Fed’s accommodative policies. Roubini didn’t criticize the central bank, so much as say that the Fed is damned-if-you-do, damned-if-you don’t.

Yeah, well, we’ve all learned that monetary policy is not a panacea.