Financial Review

Spring Break

Sinclair Noe — April 6, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 14 = 20,662
SPX + 4 = 2357
NAS + 14 = 5878
RUT + 12 = 1364
10 Y – .02 = 2.34%
OIL + .55 = 51.70
GOLD – 3.80 = 1252.60

Yesterday saw a big reversal – from triple digit gains on the Dow to a loss at the close. Today’s trading followed that pattern, but not the magnitude.

President Trump flew to Florida to hold his first meeting with Chinese President Xi Jinping, facing pressure from a crisis with North Korea, and working to make good on promises for trade concessions. The US and China account for one-third of the global economy.

The two countries not only drive the world economy but also rely critically on one another, a fact that should moderate the decisions of these two strong-willed leaders. Overall, the U.S. rang up a $347 billion trade deficit with China last year, with California responsible for roughly a third of that amount.

About 30 states imported at least $1 billion more in Chinese goods than they exported, per data from the International Trade Administration, an arm of the U.S. Department of Commerce. Tough actions could end up harming many American consumers and businesses. Bloomberg Intelligence Chief Economist Michael McDonough writes: Shoppers at Wal-Mart and Target would see an immediate surge in imported goods costs. U.S. corporations selling into or producing in China would see lower profits. The promised benefits — a return of U.S. manufacturing jobs — appear uncertain.

High labor costs, automation and sticky supply chains all make it difficult for firms to relocate back to the U.S. This suggests the Trump administration might be content with symbolic wins, rather than major sanctions.

The Pentagon and the White House are in detailed discussions on military options to respond to a poison gas attack in Syria that killed scores of civilians, and which Washington has blamed on the Syrian government. Trump said today that “something should happen” with Assad after the attack, but stopped short of saying he should leave office.

Secretary of State Rex Tillerson said however, there was no role for Assad in Syria in the future. Any US action against Syria’s government would open a new front in Syria’s fighting, with consequences that are difficult to foresee. Entering such a confrontation might complicate the fight against ISIS and potentially draw in Russia. Possibilities for military action reportedly include striking the Syrian air force or specific military targets.

Senate Republicans voted to strip Democrats of the power to filibuster President Trump’s nominee to the Supreme Court, invoking the so-called nuclear option. Senators voted 52-48 along party lines to change the Senate’s precedent, lowering the threshold for advancing Neil Gorsuch from 60 votes to a simple majority.

They then immediately voted 55-45 to advance the nominee to a final confirmation vote, which is expected to happen Friday afternoon. Senators on both sides lamented the escalation of partisan tactics over Gorsuch’s nomination and warned it would erode the fabric of the institution, which has traditionally protected the rights of the minority party.

House Intelligence Committee Chairman Devin Nunes temporarily recused himself today from all matters related to the committee’s ongoing probe into Russia’s interference in the presidential election, as House investigators look into ethics allegations against him.

Nunes said in a statement that he decided to recuse himself after complaints were filed with the Office of Congressional Ethics about his leadership. Nunes called the charges “entirely false and politically motivated,” but said his recusal would be in effect while the House Ethics Committee considers the matter.

The House Ethics Committee released a statement saying it had “determined to investigate” allegations that “Nunes may have made unauthorized disclosures of classified information, in violation of House Rules, law, regulations, or other standards of conduct.”

White House economic adviser Gary Cohn said he supports bringing back the Glass-Steagall Act, a Depression-era law that would revamp Wall Street banks by splitting their consumer-lending businesses from their investment arms. The National Economic Council director, also a former Goldman Sachs president, expressed support to lawmakers for a banking system where firms would focus primarily on trading and underwriting securities or issuing loans.

Big banks have strongly opposed such a move that would fundamentally overhaul their business. Reinstating the law, which was repealed in 1999, has not attracted significant attention in Congress, but advocates in the White House and both parties now argue it would provide critical safeguards to prevent another financial crisis.

Minneapolis Federal Reserve President Neel Kashkari criticized JPMorgan Chase CEO Jamie Dimon over what he contends are unrealistic views on core U.S. banking regulations. Dimon’s assertions in a letter to shareholders this week that government-imposed capital requirement for big banks are holding back lending and that relaxing them could spur economic growth “are demonstrably false,” Kashkari said in a blog entry posted to the Minneapolis Fed’s website.

In his letter, Dimon lamented that JPMorgan is constrained in lending because of capital demands. In response, Kashkari noted that the bank has bought back $26 billion of its own stock in the last five years, using money that he says could have been loaned to customers.

One thing Kashkari and Dimon did agree on: “reducing regulatory complexity.” But Kashkari is continuing to argue that higher capital can replace other regulations while Dimon said that there is already “excess capital in the system.”

A federal judge in Detroit said he plans to name former FBI director Robert Mueller to oversee nearly $1 billion in Takata Corp restitution funds as part of a Justice Department settlement. In January, Takata agreed to plead guilty to criminal wrongdoing and to pay $1 billion to resolve a federal investigation into its air bag inflators linked to at least 16 deaths worldwide.

As part of the settlement, Takata agreed to establish two independently administered restitution funds: one for $850 million to compensate automakers for recalls, and a $125 million fund for individuals physically injured by Takata’s airbags who have not already reached a settlement.

Even with the US economy boasting impressive job growth and domestic equity markets near record highs, a fragmented recovery has left many states struggling to close budget deficits nearly a decade after the 2008 financial crisis.

The broad recovery has benefited large, economically diverse states like California and Texas, ratings agencies say, while states heavily dependent on oil revenues, like North Dakota and Alaska, and those like Illinois that are grappling with large unfunded pension obligations, have seen budget deficits bloom.

That has left those struggling states with painful decisions over spending cuts and tax increases, and ill prepared to deal with another economic downturn or cuts to federal money tied to the Medicaid program.

S&P Global has downgraded 11 states compared to just two upgrades since January 2016. It has 11 states on negative outlook, which means the ratings agency believes more than 20 percent of states are in danger of a credit downgrade.

Per a recent report by the Center on Budget and Policy Priorities, half of the states face budget shortfalls despite overall economic growth and lack the revenue needed to maintain services at existing levels in 2018. No state has defaulted on its public debt since the 1930s. Despite many near misses more recently, the possibility of any state going under financially is remote at best.

Wall Street’s bet against empty malls is getting too crowded, per Citigroup analysts, who instead recommend wagering against individual retailers as the “next big short.” The strategy differs from the one pursued by a growing number of hedge funds, which have wagered against mall properties through CMBX derivatives indexes that tracks commercial mortgage-backed securities.

The prevailing theory is that failing brick-and-mortar retailers will mean higher vacancies and bankruptcies for mall operators, with losses inflicted on CMBS holders. But the trade has become so crowded in recent weeks that betting the index will drop even further is a longshot.

Retailers have been struggling for years as consumers defect to online merchants such as Amazon and shift spending to experiences such as dining and travel instead of merchandise. Mall operators are under pressure from anchor stores such as J.C. Penney and Macy’s, which have announced plans to shutter stores, and Sears Holdings has raised doubts about its survival.

Yesterday we told you Payless ShoeSource was filing for bankruptcy protection and closing nearly 400 stores. The list of store closures was released today, and 7 stores in Arizona will be shut down.

Taser International  will change its name and ticker – the new name is Axon. A-X-O-N and it is launching a program to equip every US police officer with a body camera, including supporting hardware, software, data storage and training, all free for one year.

Axon’s aim is to provide police departments in the United States with the technology so that officers — frontline officers in particular — can effectively try it, learn how to use it and offer insight on how best to implement it. While Taser will remain one of the company’s trademark products, the company attributed its name and ticker change to changing times and a shift in the focus of their business. The new ticker symbol is AAXN

The number of Americans who applied for unemployment benefits near the end of February fell by 19,000 to 223,000, setting a fresh post-recession low and illustrating the strength of the labor market. We’ll find out more tomorrow with the release of the March Jobs Report.

Economists’ estimates are calling for still-solid gains of 175,000 in the public and private sectors, but that would be down from an average pace of about 237,000 the first two months of the year. The recent strength in the labor market could make it tougher for employers to find skilled workers.

Thursday, June 26, 2014 - Buffers and Filibusters

Financial Review with Sinclair Noe

DOW – 21 = 16,846
SPX – 2 = 1957
NAS – 0.71 = 4379
10 YR YLD - .03 = 2.52%
OIL - .80 = 105.70
GOLD  - .70 = 1317.90
SILV + .10 = 21.22

 

Yesterday, the Commerce Department downgraded the first quarter gross domestic product to a negative 2.9%, meaning the economy shrank by 2.9%. Today, St. Louis Federal Reserve president James Bullard says it’s likely an aberration; the weak report for the first quarter was likely distorted by inventories, weather, and by the challenges of accounting for health-care spending under the new law. Bullard says he isn’t worried, “the market’s right to shake this off. Looking forward over the next four quarter, most forecasters have 3% growth.”

Well, that’s good. No worries. Nothing to see hear, move along, move along.

It’s just that the fall was so nasty, it’s hard not to look and linger over the carnage. It really was ugly. And while we can blame it on the weather, that doesn’t seem right. We always have weather. Minneapolis is underwater today. Bad weather is a fairly constant aberration. We should be past the point of excuses; we are 5 years into a recovery; granted it has been a stealth recovery.

I wonder if Mr. Bullard is confusing the stock market with the economy. A down day in the bull market would just be a blip on the tape, but the stock market is not the economy. And the economy is not bouncing back, which would be the expected move after a seasonal aberration. Most importantly, we haven’t seen a surge in hiring. It looks more like we’ve gone through a very long period where everybody who was going to be fired was fired, and companies are running as lean as they can. So, the jobless claims have leveled off, but there’s a big difference between no more fat to cut and an economy that produces lots of well-paying jobs.

If you want new jobs, and the consumer spending that flows from new jobs, you look for new businesses, and you can just keep looking. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. The decline affected nearly all business sectors. The fact that the economy has been weak since 2007 suggests that new business activity has also declined in existing companies.

New businesses are critical for economic growth because a small fraction of today's startups will become tomorrow's economic heavyweights. Most of today's workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy.

Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding. Also, most of today’s workers are working at smaller businesses, companies with less than 100 employees, and we just aren’t making enough of these smaller businesses.

The Federal Reserve’s monetary policy has been a boon for Wall Street, so we’ve seen record highs even as the economy contracts. The Fed policy was to elevate asset prices in the hope it would trickle down to the rest of the economy; the trickle down part has been a terrible failure but the higher prices have been nifty for a small group of financial companies and some of the largest corporations. The problem is that it is hard to maintain corporate profits in a recession. Also, it’s hard to have sustainable growth from big corporations; they’re like trees; once they reach a certain height, they stop growing. Look back to the Fortune 500 list from 1995; less than half the firms on that list are still on the list today.

And businesses aren’t investing for the future. A major factor in the first quarter contraction was lower gross private domestic investment; a smaller increase in inventories accounted for most of that, but we also saw a drop in investment in non-residential structures, investment in equipment, investment in information processing equipment; countered by a slight increase in investment in intellectual property; that’s tricky to measure because it could be money spent on research and development or it might be money spent on movies. Lower investment accounted for about 2% of the 2.9% drop.

For the last few decades, every boom has depended on housing; same strategy today. The problem is that boomers will not start upgrading now in their 60s. And the young ones expected to pick up the baton are full of debt. And the housing numbers seem to back it up. We did see a big jump in new home sales for May, but that was mainly confined to the South, meanwhile existing home sales barely inched forward, and it appears the big run in home sales has happened and now we’re leveling out. Any boost from housing has already hit.

And this is the recurring theme of the recovery, it’s just around the corner.

No, not that corner, the next corner.

The Supreme Court is still dishing out decisions; two more today, but not the big one on Hobby Lobby; that will probably come on Monday. Today we heard about buffer zones and recess appointments.

The Supreme Court ruled on McCullen v. Coakley, striking down a Massachusetts law requiring protesters to stay at least 35 feet from an abortion clinic's entrance and walkways. In a unanimous opinion, the court held that such buffer zones violate First Amendment free speech rights.

Only three other states, Colorado, Montana and New Hampshire, have buffer zone laws on the books, but the Massachusetts zone was the largest. The Massachusetts law was passed after 2 clinic workers were shot and killed by a gunman outside a clinic in 1994. In 2000, the Supreme Court upheld Colorado's 8-foot "floating" buffer zones around individuals as they walk into and exit an abortion clinic.

Chief Justice Roberts delivered the opinion of the court. "It is no accident that public streets and sidewalks have developed as venues for the exchange of ideas." Roberts said: “Even today, they remain one of the few places where a speaker can be confident that he is not simply preaching to the choir. With respect to other means of communication, an individual confronted with an uncomfortable message can always turn the page, change the channel, or leave the Web site."

The court was silent on the free speech rights of protesters confined to “free speech pens” around political conventions, and buffer zones around churches, and funeral services, and for that matter, the buffer around the Supreme Court building in Washington DC.

Also today, the Supremes ruled unanimously in NLRB v Noel Canning that President Obama had violated the Constitution in 2012 by appointing officials to the National Labor Relations Board during a short break in the Senate’s work when the chamber was convening every three days in short pro forma sessions when no business was conducted. Those breaks were too short, Justice Stephen G. Breyer wrote in a majority opinion joined by the court’s four more liberal members.

A ruling could cast a cloud over the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. Justice Breyer added that recess appointments remain permissible so long as they are made during a break of 10 or more days. But many experts say that if either house of Congress is controlled by the party opposed to the president, lawmakers can effectively block such appointments by requiring pro forma sessions every three days. Each house must get the approval of the other chamber for recesses of more than three days. Somebody shows up, claims the Senate is in session, and they hold a fake session and that’s that.

The decision affirmed a broad ruling last year from a federal appeals court in Washington that had called into question the constitutionality of many recess appointments by presidents of both parties. The appeals court last year said that presidents may bypass the Senate only during the recesses between formal sessions of Congress. Two of the three appellate judges went further, saying that presidents may fill only vacancies that arose during that same recess. The Constitution’s recess-appointments clause says, “The president shall have power to fill up all vacancies that may happen during the recess of the Senate.”

And while today’s ruling is being hailed as a major blow to executive power, in practical terms, today’s ruling no longer really matters. That’s because the Senate majority has since eliminated the filibuster on executive and judicial appointments that was the cause of this whole mess to begin with.

After the DC Circuit Court of Appeals ruled last year that the NLRB appointments were illegal, President Obama renominated appointees to fill those slots and submitted them to the Senate. What happened? Senate Republicans filibustered them forever, of course. Eventually, Senate majority leader Harry Reid got fed up and triggered the “nuclear option”: a Senate rules change that would require only 50 votes, instead of 60, to invoke cloture on executive and judicial nominations. The NLRB nominees, and several others that had been held up, made their way through.

Yesterday, the Supremes ruled that law enforcement can’t search your smartphone without a warrant or a really, really good reason why they don’t need a warrant.  Of course, police can search all sorts of things without a warrant, and the solicitor general had argued that cell phones were not that different than briefcases or purses that are regularly searched when you enter a federal building or an airport.

Chief Justice Roberts said: “Cellphones differ in both a quantitative and a qualitative sense from other objects that might be kept on an arrestee’s person.” He went on at length to describe the differences, noting that a cellphone can reveal more private information than the search of an entire house. The phone contains “the sum of an individual’s private life” he said; searching it without a warrant is constitutionally unreasonable. The chief justice’s response to the government’s warning that a warrant requirement would impede law enforcement was basically a shrug: “Privacy comes at a cost.”

What we learned is that Supreme Court justices now have and use smart phones.

The best line yesterday came on the NBC Nightly News when Brian Williams, followed the report by asking the reporter if this will have any effect on the NSA’s ability to electronically dig into our cell phone records without warrants.

That Brian Williams is a real comedian.