Financial Review

Two Paths Diverge

Sinclair Noe — December 2, 2015

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

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DOW – 158 = 17,729
SPX – 23 = 2079
NAS – 33 = 5123
10 YR YLD + .03 = 2.18
OIL – 1.67 = 40.1
GOLD – 15.60 = 1054.20

American businesses stepped up hiring last month, led by strong gains in retail, finance and other service industries. Payroll processor ADP says that private companies added 217,000 jobs last month, the most in five months. Service sector firms added 204,000, while manufacturers hired just 6,000. The figures come just two days before the government issues its official jobs report for November. If the Friday jobs report is anywhere close to today’s ADP report, it might lock in a rate hike at the Fed FOMC meeting in two weeks.

The productivity of American businesses was higher in the third quarter than initially reported — but so were labor costs. Newly revised government figures show that productivity rose at a 2.2% annual rate instead of 1.6%. Unit-labor costs were revised higher to show a 1.8% annual increase in the third quarter, and second quarter costs were revised higher. As a result, the year-over-year increase in labor costs climbed to a 3% rate, the highest level in six quarters. Unit-labor costs reflect how much it costs a business to produce one unit of output, such as a refrigerator or a ton of steel.

The Fed published their Beige Book, anecdotes on the economy collected from the 12 Fed districts; the information is published two weeks before FOMC policy meetings. There were no surprises in the report; 9 of the 12 districts report growth, the same as the October report. The economy seems to be growing at a moderate or modest pace. Housing markets improved at a moderate pace. Labor markets are starting to show hints of tightening but we’re not there yet. The conditions in the manufacturing sector were mixed; the strong dollar hurts some areas; low commodity prices hurt some areas, especially the energy sector; but low gas prices were helping consumers. Auto sales were strong. You know this stuff.

Federal Reserve Chair Janet Yellen spoke before the Economic Club in Washington DC; tomorrow she testifies before the Congressional Joint Economic Committee. Today Yellen said the economic data of the past couple of months has been consistent with expectations for an improving labor market and she is confident inflation is headed for the Fed’s target in the medium term. Here’s the key quote from Yellen: “Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

If it sounds like Yellen has made up her mind about raising interest rates in 2 weeks, you are correct. The only suspense is her ability to herd the cats in the FOMC to something approaching unanimity. And the markets have priced in a rate hike. The next concern is the pace, duration, and amount of hikes. And the answer is slow and steady, and not over 1% by the end of 2016; again, this is priced into markets. The next concern is how the Fed will go about trimming its massive $4.5 trillion balance sheet and how the Fed can nudge banks to trim their excess reserves without triggering inflation. I posed that question today to Charles Plosser, the former President of the Philly Fed, and the answer was very slowly and cautiously because we are in uncharted territory.

Eurozone inflation held steady at a lower-than-expected 0.1% in November, giving further encouragement to ECB president Mario Draghi to pump up the central bank’s bond buying program tomorrow during a policy-setting meeting. In March, the ECB launched a more than €1trillion-euro stimulus plan running through September 2016 in order to snap a long period of low or negative inflation in the region, but given recent economic figures, that program will likely get a boost.

Greek Prime Minister Alexis Tsipras is hopeful that capital controls imposed at the height of the country’s debt crisis in July can be lifted in the first half of 2016. Addressing a conference of the Hellenic-American Chamber of Commerce, Tsipras said his government had taken the first steps to address non-performing loans and recapitalize banks so they could start lending again to the economy.

In the US we are starting to see hints of inflation, the labor market has shown steady, solid improvement, and economic growth is up. So, while you might argue against a rate hike from the Fed, really the idea is not particularly controversial. Now, juxtapose that against the Eurozone; ECB President Mario Draghi talks about the need for more and more stimulus policy. Tomorrow we’ll see if he can get the idea past the Germans or if the weakness of the southern tier defines the day; if not tomorrow, then he’ll push the idea of rate cuts and more bond buying to a future policy meeting. No matter the timetable, the paths for the Fed and the ECB are laid out, and they diverge. What happens in this scenario?

Well we can look to 1994, when the Fed tightened and Germany was cutting rates; remember, this was before the Euro Union. Back then, the dollar slipped; not really a surprise. History is not on the dollar’s side. In the last couple of decades, the dollar index has fallen every time the Federal Reserve has begun a cycle of interest rate hikes. The dollar just hit a 12 year high, so you might wonder if it is a bit overbought.

Certainly the thinking is that a rate hike would strengthen the dollar against its weaker global counterparts, and it might, for a while but the dollar would be susceptible to pullbacks on any sign of weakness or any sign the Fed is tightening too much or too fast. Even with modest and controlled tightening we might expect to see economic recovery in the Eurozone weighing on the dollar, not in the next month or two but over the course of the next year.

The bet on a strong dollar is one of the most crowded trades in the market today, despite the precedent of 1994. Meanwhile, bets on the euro are the most bearish ever. The US won’t stand by for long if the dollar appreciates significantly and its international competitiveness deteriorates substantially. Companies are already reporting earnings pressures due to the rising dollar, and some are even calling it a currency war, and demanding a more forceful response.

Next, watch the debt markets and especially the yield curve, that’s the spread between the 2-year yield and the 10-year yield. Rising interest rates and short-term debt yields could choke growth, while stable or falling long-term yields suggests investors see lower growth and looser monetary policy further ahead. Some think the yield curve could invert, with the yield on the 2-year dropping below the yield on the 10-year note. An inversion is a pretty sure sign of recession, but we’re still a long way from an inverted curve.

Also keep an eye on the spread between US Treasuries and German Bunds; this interest rate differential between risk free bonds has widened, but it can only be stretched so far. And watch the spread between the dollar and the currencies of emerging market countries. Sharp movements in interest rates and exchange rates can cause volatility in other markets. If it gets severe, it can create shocks.

And keep in mind that even if the ECB and the Fed diverge on interest rate policy, this shouldn’t shock anybody, because it would just be an extension of the existing divergence on quantitative policy. The Fed has already ended its bond buying binge known as Quantitative Easing Part 3, or 4, or whatever; just as the ECB started up its own QE. We already have quantitative divergence. Monetary policy divergence is not that different.

The instinctive reaction of many is that this widening gap between central bank policies must lead to a stronger dollar, but clearly it is not that simple. Different economies, different paths. We have some history to guide us, but it still feels like uncharted territory.

U.S. House and Senate negotiators have reached an agreement on a five-year highway bill that would also reauthorize the Export-Import Bank. The $305 billion bill would be partly financed by use of Fed surplus funds and a cut in the dividends received by commercial banks that own the Fed. House Speaker Paul Ryan predicts the bill will enjoy “good majority support” when it comes up for a full vote.

Crude oil supplies rose by 1.6 million barrels in the week ended November 27, according to the American Petroleum Institute, way above expectations for a decline of 1.2 million barrels. The more closely watched Energy Information Administration report came out later in the afternoon and it showed a buildup of crude supplies and a deepening global glut. Oil prices dipped below $40 a barrel for the first time since August.  The nation’s commercial stockpiles of crude oil, gasoline, diesel and other fuels last week soared above 1.3 billion barrels, a fresh record, according to the Energy Information Administration. Crude-oil stockpiles alone rose for the 10th week in a row, bucking expectations for a decline. OPEC is meeting in Vienna on Friday and there is talk of production cuts to support prices, but for now it looks like the world’s producers are pumping like crazy.

And finally, late news coming in of another mass shooting, this time in San Bernardino. The latest, unofficial tally is 14 dead and 14 injured. A manhunt is underway for three shooters; the suspects were heavily armed and possibly wearing body armor, and a bomb squad was on the scene, trying to defuse what was believed to be an explosive device. It seems like we hear these stories all the time these days. Whatever we are doing, it isn’t working.

Financial Review

Trending

Sinclair Noe — April 28, 2015      

 

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

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DOW + 72 = 18,110
SPX + 5 = 2114
NAS – 4 = 5055
10 YR YLD + .05 = 1.97%
OIL – .06 = 56.93
GOLD + 10.10 =  1212.80
SILV + .21 = 16.71

House prices picked up in February, rising 0.5%, according to the S&P/Case-Shiller 20-city composite index. After seasonal adjustments, home prices rose 0.9% in February, matching January’s gain. Compared with February 2014, prices for the 20-city index were up 5%, the fastest growth in half a year. Home prices in Phoenix gained 0.3% for the month and 2.9% for the 12 month period.

The Commerce Department reports home ownership slipped to a 25 year low of 63.8% in the first quarter. The home ownership rate peaked at 69.4% in 2004. Household formation increased by 1.5 million in the first quarter. More people, starting more households, but they aren’t buying homes. With many Americans still showing an aversion to homeownership, the gains in household formation largely are being driven by renters.

Consumer confidence declined in April to a four-month low as Americans’ views of the labor market and the outlook on the economy deteriorated. The Conference Board’s index dropped to 95.2 from a revised 101.4 reading in March. The report showed fewer respondents said jobs were plentiful in April and income expectations cooled, signaling consumers will remain guarded about spending. The setback in sentiment may indicate demand will be slow to pick up after a stronger dollar, bad winter weather in some regions and a labor dispute at West Coast ports weighed on the economy in the first quarter.  Also, gasoline prices are edging up a little bit, so that’s a little bit of a negative.

Sometimes the general public is quite good at picking up on macro-trends, even short-term changes. As we started the year, crude oil was dropping like a rock and the dollar was blasting through the roof. Both oil and the dollar have turned around recently. Over the past 1½ months, the Dollar Index has been down 3 percent, and oil has gone up more than 30 percent. The question is whether the recent change represents a pause in the secular trend or reversal of the macro-trend.

The euro has finished higher against the dollar during five of the last six weeks. The trend for the dollar is heavily influenced by the Federal Reserve, as well as other central banks. While several global economies have adopted accommodative monetary policy, the Fed is hinting at raising rates. We’ll find out more tomorrow when the Fed concludes its 2 day FOMC meeting; and while no one expects the Fed to hike rates tomorrow, we’ll parse language for dovish or hawkish hints. The Fed will also offer their own economic forecast. And if the Fed holds their cards close to their chest, the secular trend is still for a fairly strong dollar because other central bankers are committed to an easy money policy.

Greek PM Alexis Tsipras said he would have to resort to a popular referendum if lenders insisted on “unacceptable” demands, but was confident about striking a deal to avoid such a scenario. Meanwhile, China’s central bank is planning to launch a new credit-easing program in the next couple of months. The Wall Street Journal reports the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans to boost liquidity and lending. In some ways the dollar is still the cleanest shirt in the dirty clothes hamper.

Meanwhile, the increase in oil prices has been more than a little bounce. In the past month and a half, oil has moved from $45 to $58, or about a 30% move; nothing to sneeze at. And we are heading into a seasonally strong time for oil, the summer driving season. Also, if the dollar shows any sign of weakness, it would lead to higher oil prices.

And then there is the geopolitical situation to consider when we look at oil. Any little mishap raises the Fear Premium for oil. We had a reminder today, when Iran seized a cargo ship near the Strait of Hormuz. The ship was initially reported to be American but later it turned out to be flagged to the Marshall Islands. Iranian news agencies said the seizure was strictly a civilian matter. It likely will be a non-event, but it is a reminder that tensions are high around the Persian Gulf.

We don’t know if oil is going higher or lower. And the dollar could run or stumble; we don’t know. The macro-trends of energy prices and direction of the currency directly impact stock and bond investments. We’ve seen that already in earnings reports; with analysts’ estimates ratcheted lower to reflect a stronger dollar, and depending on the sector, the positive or negative impact of lower oil prices.

Case in point today, BP, the British oil company posted a sharp drop in first-quarter profit; we’re still waiting for most of the Big Oil companies to report;  but BP’s results beat analyst estimates due to a larger than expected increase in refining revenue. In an interesting twist, BP reported underlying replacement cost profit – which takes into account the fluctuations in the price of oil – came in at $2.6 billion, down from $3.2 billion a year earlier. They have oil but they have to guess at its value. Production for the period was 8.3% higher than the first quarter of 2014.

In other earnings news today: United Parcel Service beat first-quarter profit expectations, although sales came up short. Earnings for the latest quarter rose to $1.03 billion from $911 million in the year-earlier period.  Currency changes reduced total sales growth by 2.2 percentage points, even as total shipments increased 2.8% to 1.1 billion packages

Merck reported earnings of $953 million, or 33 cents a share, down from $1.71 billion, or 57 cents a share, a year earlier. The pharmaceutical giant raised its earnings guidance for the year, despite the negative impact of the stronger dollar.

Pfizer posted a profit of $2.4 billion, up from $2.3 billion. Pfizer trimmed its full-year outlook citing a stronger U.S. dollar and weaker euro.

Ford Motor reported first-quarter net income fell 7 percent to $924 million from $989 million a year earlier. Ford is still working to increase production in North America to accommodate their redesigned F-150 truck, meanwhile they posted a loss on South American operations.

According to data from Thomson Reuters, first-quarter earnings are now on track to post a slight gain after the mostly stronger-than-expected results, defying forecasts for the first profit decline since 2009.
 
Yesterday after the close, Apple reported $13.6 billion in net income for the first quarter on revenue of $58 billion; Apple easily beat estimates on both the top and bottom line. Apple also raised its dividend 11% and said it would increase its capital return program from $130 billion to $200 billion. Apple closed down today by about 2%. Sometimes earnings reports don’t make much sense for the trader.

Twitter released their earnings today in tweets, the problem was that they tweeted out earnings news at 3:07PM eastern time, and they weren’t supposed to report until after the market closed at 4:00Pm. Twitter stock fell, trading was halted, then reopened, and then Twitter stock really fell big, about 18%. You would think Twitter would know to be careful what they tweet.

One trend that will emerge from earnings season is even more stock buybacks. Goldman Sachs forecast an 18 percent jump in buybacks and 7 percent climb in dividends for the year. Next week more than 80 percent of the Standard & Poor’s 500 market cap companies will have exited the “blackout period” in which share repurchases are put on hold prior to quarterly results announcements. Companies that make those cash infusions see an automatic increase in their per-share earnings and dividend yield. That tends to raise their share prices, which could bolster the broader market. Of course there are limits to buyback programs, and the bigger consideration is that if a company is buying back their own shares they are using cash that might be used to grow the business, instead of shrinking the shares outstanding.

And then consider the trend of ever increasing margin debt. The NYSE reports margin debt rose to an all-time high in March at $476.4 billion, up from $464.9 billion at the end of February. And the wrinkle is that margin debt rose during the month of March even as the S&P 500 dipped nearly 2 percent. Margin debt is created when investors borrow money in order to buy stocks. If an investor buys $100 worth of stocks with $50 in capital, that individual has $50 of margin debt outstanding. Since margin debt provides leverage, it amplifies gains, but also increases the risk to an investor.

Brazilian oil company Petrobras’ $17 billion write-down, announced last week, may have been meant to close the accounting on a sprawling corruption scandal, but could instead provide fresh ammunition for a U.S. class action lawsuit. The case, filed in Manhattan federal court in December by a group of large investors, alleges $98 billion of the company’s American depository shares, or ADRs, and bonds were artificially inflated since 2010 by the company overstating the value of assets such as major projects. Petrobras has moved to have the case dismissed.

And another trend that just won’t go away – “Banks Behaving Badly.” The Securities and Exchange Commission is investigating whether Bank of America broke rules designed to safeguard client accounts, potentially putting retail-brokerage funds at risk in order to generate more profits. For at least three years, the bank used large, complex trades and loans to save tens of millions of dollars a year in funding costs and to free up billions of dollars in cash and securities for trading that Bank of America otherwise would have needed to keep off-limits. Now, the SEC is investigating whether the bank’s unusual strategy violated customer-protection rules and whether the bank misled regulators about what it was doing. This is not some theoretical threat to consumers. The collapse of Lehman Brothers in 2008 and of MF Global. in 2011 left some brokerage customers waiting for the return of billions of dollars of their own money, leading regulators to strengthen the long-standing customer-protection rule.

Financial Review

Chips and Salsa

Sinclair Noe — April 23, 2015

 

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

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DOW + 20 = 18,058
SPX + 4 = 2112
NAS + 20 = 5056
10 YR YLD – .02 = 1.95%
OIL + 1.32 = 57.48
GOLD – 1.00 = 1193.40
SILV + .02 = 15.85

Record highs on Wall Street today. On March 10, 2000 the Nasdaq Composite Index reached an intraday high of 5,132 and closed at 5,048. It only took a little over 15 years to get back to those levels. The Nasdaq is now up 6.8% for 2015. The Nasdaq Composite now trades at 30 times earnings, versus a multiple of 190 in March 2000; not exactly a value play, but not dot-com frothiness. The S&P 500 hit a new intraday high but could not take out the 2117 record close from early March.

The number of people who applied for regular state unemployment-insurance benefits ticked up 1,000 to 295,000 in the week that ended April 18. Also, the government said continuing claims, which show the number of people already receiving weekly unemployment checks, rose 50,000 to 2.33 million in the week that ended April 11.

Sales of new single-family homes dropped 11.4% to 481,000 in March, hitting the slowest pace since November.  Sales of new single-family homes increased about 19% over the past year. However, sales still remain almost 40% below a long-term pace set over 20 years.

Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers’ Index fell to 54.2 in April from the final March read of 55.7. A reading above 50 indicates growth in the sector. And as the manufacturing sector in the US expands, it is contracting in China.

China’s factory activity declined at its fastest pace in a year, according to HSBC/Markit’s Purchasing Managers Index. China said it will open up bank card processing to foreign firms, sending shares of Visa and MasterCard higher. Morgan Stanley thinks the firms could begin operations in China in late 2016 or early 2017. China said Thursday it will scrap export duties on rare earths and some metal products, including molybdenum, tungsten and some aluminum products, effective May 1. Beijing is attempting to boost exports, which fell 15% year-over-year in March.

Tensions continue to escalate in the Middle East. Earlier in the week, Saudi Arabia announced a cease fire in Yemen; that lasted about one day and then the Saudis resumed their airstrikes. The Saudi escalation of its Yemen campaign is producing exactly the kind of geopolitical tensions that push oil prices higher. Toss in US aircraft carriers and a few destroyers in close proximity to Iranian Navy boats that look like they are trying to deliver arms to the Houti rebels in Yemen, and it makes for a volatile mix. Oil prices are near the highs for the year.

The world is still a crazy place. Reuters reports the Russian Defense Ministry claims US troops are now in the conflict zone of eastern Ukraine to train Ukrainian combat troops. And the Taliban has announced that it will launch its annual spring offensive in Afghanistan later in the week; like it’s a supermarket opening or something.

Meanwhile, five years ago to the day, Greece officially submitted a bailout request…Today, Tsipras chats with Merkel. The Greek and German leaders will meet in Brussels in an attempt to reach a deal on Greece’s debt. The longer these negotiations have dragged out, the closer the opposing sides get to some sort of resolution; they haven’t worked it out yet, but they are closer, maybe.

U.S. and British regulators fined Deutsche Bank $2.5 billion and its British subsidiary pleaded guilty to criminal wire fraud for its role in a scam to manipulate the London Interbank Offered Rate (Libor) and its Euribor cousin – together benchmarks for hundreds of trillions of dollars of financial products and loans worldwide.

Brazil’s state-controlled oil giant, Petrobras, reported its long-delayed quarterly and annual results, which have been stalled by a corruption investigation. The overall loss was $7.2 billion in 2014; Petrobras is writing off $15 billion in overvalued assets and $2 billion for bribery related costs. Federal prosecutors have accused the former executives of illegally “diverting” billions from the company’s accounts for their personal use or to pay off officials. More than 80 people have been charged with bribery and money laundering during the criminal investigation, dubbed “Operation Car Wash.”

Dozens of senior officials and politicians are still under investigation. Brazilian President Dilma Rousseff was chairwoman of Petrobras during many of the years when the alleged corruption took place. She denies any knowledge of the corruption. Her popularity has sunk to record lows because of the scandal and Brazi’s poor economic performance. Dozens of other companies including construction and transportation firms are implicated in the scandal, and over 750 projects are now under investigation. And there is a class action suit, of course.

The Comcast-Time Warner merger is in jeopardy. The FCC has called for a hearing on the Comcast-Time Warner merger. According to The Wall Street Journal, the hearing is a sign the FCC feels the $45 billion deal is not in the best interest of the public. The Department of Justice has also recently spoken out against the deal. And today, Bloomberg reported that Comcast will drop the deal.

Today is one of the busiest sessions for earnings reports, so let’s dig in:
After the close, Google reported weaker-than-expected first-quarter profits, hurt by slowing growth and the rising U.S. dollar. (note – this is becoming a common theme.) Google reported revenue of $17.2 billion, up 12% from $15.4 billion in the year-ago period. Profit of $3.6 billion, up from $3.4 billion. On a side note; today marks the tenth anniversary of the first YouTube video. YouTube’s co-founder, Jawed Karim, posted the video of his visit to the zoo. Google now owns YouTube.

Microsoft revenue rose 6.5% from a year earlier to  $21.7 billion, thanks to the inclusion of sales from Nokia’s mobile-phone business, which Microsoft didn’t own a year ago. Microsoft reported net income of $4.9 billion, or 61 cents a share – in line with estimates. That was down from net income of $5.6 billion, or 68 cents a share, a year earlier.

Amazon posted a sales jump of 15% to $22.7 billion, compared with $19.7 billion a year earlier. And they still managed to lose $57 million.

Starbucks reported same store sales were up 7% in the Americas. Earnings and revenue jumped 18%; profits matched estimates.

General Motors came up short on both the top and bottom line; the problems came from Russia, Europe and South America. Despite ongoing legal problems with deadly ignition switches, GM reported strong sales in North America. The big seller is the Tahoe, a big SUV; no rebates, no incentives, 18 MPG. How quickly we forget $100 a barrel oil.

Caterpillar earnings and revenue came in well above estimates thanks to cost cutting and improved sales in North America. CAT raised its earnings per share outlook for the year.

PepsiCo posted net income was flat at $1.2 billion. Revenue fell 3.2% to $12.2 billion. Earnings per share were 83 cents, missing estimates of 79 cents. PepsiCo says currency exchange rates cut its profit by 11 percentage points this year.

3M revenue and earnings missed estimates with sales down 3% from a year earlier. They blamed a stronger dollar.

Procter & Gamble posted quarterly earnings in line with expectations. But revenue came up short for the fifth straight quarter.  P& G blames the strong dollar and warns foreign exchange rates will continue to be a drag on both sales and profit this year.

Southwest Airlines said its first-quarter profit nearly tripled but forecast a decline in unit revenue for April.

Freeport-McMoRan reported a first-quarter loss of $2.5 billion as it recorded one-time charges of $2.4 billion, mainly for the reduction of the carrying value of its oil and gas properties.

A common theme in earnings reports is a strong dollar hurting sales and profits of US companies. Procter & Gamble, the world’s largest consumer-products maker gets the majority of its sales outside North America, leaving the company vulnerable to a dollar that has gained against a number of currencies. 3M, the maker of Post-it notes and Scotch tape earns almost two-thirds of its revenue outside the U.S. General Motors’ struggled with overseas sales. Freeport-McMoRan grappled with lower commodity prices, directly tied to a strong dollar.

You might think that a strong dollar is about to destroy corporate America, and yet the stock market is hanging out in record high territory. Even though we know that companies use a stronger dollar as a scapegoat, it really doesn’t tell us much about their earnings. It is extremely difficult for an individual investor to know if a company was really hurt or just a little hurt by currency exchanges. You don’t know how much a company actually buys in the local currency; for example, if McDonald’s buys its beef and makes its bread in the same country where they sell hamburgers, then it shouldn’t be a big hit to profits. For others, it might be a very big deal indeed. More often than not, it just muddies the earnings news.

Of the 169 Standard & Poor’s 500 companies that have reported so far, 71 percent beat earnings estimates, according to data from Thomson Reuters; and most estimates had been ratcheted lower. But they did so with help from share buybacks, cost-cutting and other measures, instead of strong sales growth. Despite those beats, analysts are now trimming their profit and sales expectations for the second quarter. Revenue in the first quarter has disappointed – just 44 percent of the early reporters topped analysts’ forecasts – and sales are expected to have dropped 3.3 percent from a year ago. Of the early reporting companies for the first quarter, 59 have beaten earnings estimates but missed on sales, with the trend seen in a wide range of sectors.

Second-quarter S&P 500 earnings could slide 1.6 percent from a year ago. That is down from an April 1 forecast for a decline of 0.5 percent. Sales are forecast to fall 3.9 percent in the second quarter, compared with an April 1 estimate for a 2.8 percent decline. Third- and fourth-quarter estimates are also down since the reporting season began. There could still be negative surprises ahead, and most S&P 500 energy companies have yet to post results, and it’s a safe bet that there will be some ugly numbers in the oil patch.  Stay tuned.

Financial Review

Strange Days

Sinclair Noe — April 13, 2015      

 

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

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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

Lousy Good Friday Jobs Report

Sinclair Noe — April 3, 2015

 

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The New York Stock Exchange and the Nasdaq were closed in observance of Good Friday. The Chicago Mercantile Exchange was open, for a holiday shortened session, so there was some trading in equity index futures, and interest-rate and forex futures, and also some light trading in the bond markets. Good Friday is not a federally recognized holiday, and so the monthly jobs report was issued on schedule. We’ll just have to wait until Monday to see how the markets react.

It was a lousy jobs report. The economy generated just 126,000 new jobs last month, marking the smallest gain since the end of 2013; estimates had been calling for twice as many new jobs. The unemployment rate was unchanged at 5.5%. Employment gains for February and January were revised lower by a combined 69,000. The result: The increase in hiring in the first three months of 2015 has slowed dramatically to an average of 197,000. While the pace of hiring this year is still fairly decent, it doesn’t come close to matching average job gains of 289,000 in the fourth quarter.

This was just one lousy jobs report, and that does not constitute a trend but it might reflect a slowdown that we’ve been seeing in other economic data, including consumer spending patterns, a slowdown in the energy sector, sluggish business investment; and don’t forget the bad weather. The energy sector has responded to lower oil prices by cutting the number of active oil rigs and laying off workers. Lower oil prices have been a boon for most consumers, but it hasn’t resulted in more spending; instead consumers are saving more.

With companies hiring at a slower pace, some 96,000 Americans dropped out of the labor force in March. The labor-force participation rate fell a tick to 62.7%, once again matching the lowest level in 37 years. This indicates that we are now realizing the demographic shift of the boomer population moving into retirement; 37 years ago, back in the late 1970s, the boomers were just moving into the jobs and careers – that pushed the participation rate higher. Right now the participation rate for 25 to 54 year olds, or people in their prime working years, is at 80.9%. For people older than 55 the participation rate is 39%. That’s because as people age, they retire and drop out of the labor force. And get this… in 2000, the 25-to-54-year-old group made up 42% of the population, while the 55-and-over group made up 20%. Today, the over-55 group makes up 27%, while the younger group has declined to 39%. Certainly some people dropped out of the labor force because they were discouraged, and some discouraged workers retired; but more and more we are seeing a massive demographic shift with boomers retiring. The demographic shift can play havoc with economic growth, lopping off more than a half a percentage point in economic growth per year.

Long-term unemployment also remains a problem for older workers even as more seniors are hanging on to their jobs well into their 60s. A report issued by the AARP Policy Institute this week noted that last year, on average, 45 percent of job seekers aged 55 and older were out of work for 27 weeks or more. The number of long-term unemployed was little changed at 2.6 million in March.

That said, we are not at full employment. We’re not even certain what full employment is anymore. The Fed guesstimates that it is around 5% to 5.2%, but that is a guess. There are still 6.7 million workers employed part-time for economic reasons; that means they want a good full-time job, but they can’t get one or because their hours were cut back. These workers are included in the alternate measure known as U-6, which measures unemployment and underutilization. The U-6 decreased to 10.9% in March from 11% in February. This is the lowest U-6 since the summer of 2008.

Slack in the labor market shows up in the wage numbers. If we were at full employment, workers should be demanding and getting higher wages. We are starting to see a little improvement, but still not enough to stoke wage push inflation. McDonald’s and Walmart each announced this week that they would start raising wages for low wage workers; this was not part of this month’s jobs report but it will start showing up over the next few months. Think of slack as who has leverage, employers or workers. Right now, employers still call the shots. Wages are starting to move higher because the leverage is starting to shift, just starting.

Average hourly wages rose a solid 0.3% in March, or 7 cents to $24.86; though how much employees get paid hasn’t shown much change despite the biggest increase in hiring in 2014 in 15 years. The increase in wages over the past 12 months was 2.1%.Year-over-year increases have stuck to a tight range of 1.9% to 2.2% for the past three years. And wage gains have averaged about 2% since 2010, just two-thirds as fast as they normally grow. Still, wage growth is now running just a little ahead of inflation, so the gains are real… except, the amount of time people worked each week slipped 0.1 hours to 34.5 hours after hovering at a post-recession high for months. So, wages up, hours down – it’s a wash.

Total employment increased 126,000 from February to March and is now 2.8 million above the previous peak.  Total employment is up 11.5 million from the employment recession low. Private payroll employment increased 129,000 from February to March, and private employment is now 3.3 million above the previous peak. Private employment is up 12.1 million from the recession low. And that is one of the unique things about the jobs recovery, it has happened without a boost from government jobs; to the contrary, government jobs have been cut since the recession and that has served as a drag on recovery in the labor market.

Breaking it down by industries: government lost 3,000 jobs last month, manufacturing and logging each lost 1,000 jobs, the mining and logging sector lost 11,000 jobs – this includes jobs in the oil exploration and drilling industries. We saw 2,000 jobs added in the information sector, 5,800 new jobs in wholesale trades, 8,000 new jobs in financial activities, a gain of 9,500 in transportation and warehousing, almost 30,000 jobs in retail, and 13,000 new jobs in hospitality and leisure (we saw a big jump in restaurant jobs – 88,000 in February – but that might be tapering off now), education and health services added 38,000 jobs, and professional and business services added 40,000.

So, what does this mean for the economy and the markets? Well, first of all, this is one month, it is not a trend. One year ago, we were just coming out of a harsh winter, and the economy was down, and then the economy bounced back very strong in the second and third quarters with a sharp uptick in new jobs. If you think you know what the economy is doing right now, you are probably delusional. About the only thing I can say with confidence is that these are uncertain times. I have no idea how the markets will respond on Monday. The dollar moved a little lower but it is still strong. Commodity prices moved lower despite a weaker dollar. The yield on the 10-year Treasury note slipped 7 basis points to 1.84%. Stocks could move up Monday on the idea that bad news is good; meaning the weak jobs numbers will restrain the Fed from raising rates in June or maybe even this year; or stocks might drop next week on the idea that bad news is bad; the economy is weak and that will hurt sales and profits.

I don’t think the Fed knows either. Speaking at a conference in San Francisco last week, Janet L. Yellen, the Fed’s chairwoman, warned that the recovery was fragile, despite steady progress on the jobs front. The Fed went from being “patient” about raising rates to being data dependent.

I do think this lousy jobs report means there is almost no chance the Fed will raise rates in June. My thinking is that the Fed does not want to make the mistake of shocking the markets, because markets tend to fall down when they are shocked. So they will want to see next month’s jobs numbers (because they are data dependent) and then they will want to communicate their position to the markets, and then they will want to communicate again (just to make sure everybody knows what they think without any equivocation), and that pushes a rate hike back to August at the earliest, and only if we see a strong rebound in economic data and an improving labor market. If the data remains squishy or turns a bit nasty, we might not see a rate increase this year.

We’ve made it through the first quarter and we still don’t know where we’re headed. Maybe the cold weather in the Northeast and the drought in the West hurt the economy; maybe the West Coast port slowdown was a factor; maybe the stronger dollar is hurting profits for multinationals, but the rest of the world’s economies are acting as a drag on the US. And then we need to remember that the economy still added jobs. It’s not like we lost 800,000 jobs; this is not 2008. The unusual thing about recent labor market data is the consistency of positive news. Over the last 30 years we’ve had just four calendar years in which we didn’t have at least one month with net private sector job creation of less than 100,000. Those years were 1987, 1994, 2013 and 2014. Prior to the relatively weak results for March, we had a streak of 12 consecutive months with private sector job gains exceeding 200,000. That was the first time that has happened since 1977. The trend is still up…, for now.

Financial Review

Transitory, Not Terminal

Sinclair Noe — March 23, 2015

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

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DOW – 11 = 18,116
SPX – 3 = 2104
NAS – 15 = 5010
10 YR YLD – .01 = 1.91%
OIL + .88 = 47.45
GOLD + 6.90 = 1190.30
SILV + .25 = 17.08

The Dow Jones Industrial Average is still above 18,000. The Nasdaq Composite is above 5,000. The Russell 2000 is near record highs. Japan’s Nikkei 225 Composite, which dipped below 17,000 early in the year, took about a month to surge from 18,000 to 19,000 and is now rapidly approaching the 20,000 level; heights that haven’t been seen since 2000. Germany’s DAX recently traded above 12,000 for the first time and is up nearly 30 percent from the lows set earlier this year. London’s FTSE 100 is over 7,000, at its highest level in 15 years. Central bank monetary easing seems to be having the desired effect of pumping up financial assets around the globe, and even if the Fed is talking about hiking rates in the US, we haven’t seen a serious rate hike tantrum on Wall Street, yet.

U.S. home resales rebounded less than expected in February. The National Association of Realtors said that existing home sales rose 1.2% to an annual rate of 4.88 million units. Inventories are tight and also sales were hurt by harsh winter weather in the Northeast, where sales dropped 6.5%; sales were up 5.7% in the West. Last month, the inventory of unsold homes on the market rose 1.6 percent to 1.89 million units. Supply was, however, down 0.5 percent from a year ago. Inventory growth should be averaging roughly 5.6 percent at this time of the year, when the market gets ready for the spring selling season. Tight inventories are hurting sales by limiting the selection of houses available to potential buyers. The lack of supply is also keeping house prices high, helping to sideline first-time buyers.

The consumer price index tomorrow is one of the most important data points of the week, with the Fed hoping for a pickup in inflation. For the first time in five months, it’s expected to be positive, but barely. Gas prices rebounded a bit in February while food costs are estimated to have fallen, most likely producing a slight increase in the CPI. Economists are expecting a 0.2 percent rise in the headline number for the Consumer Price Index in February, with core prices excluding the volatile energy and food sectors to have risen by 0.1 percent.

On Wednesday, durable goods for February are out. The Financial Stability Board, an international panel of top central bankers and bank regulators that is working on ways to prevent future financial crises, holds a meeting on Thursday in Germany. Then Friday brings a look at the final estimate on fourth-quarter gross domestic product. After initially estimating a 2.6 percent rate in January, government statisticians revised that downward to 2.2 percent last month. The final estimate is now expected to come in at 2.4 percent.

Also on Friday, Fed Chairwoman Janet Yellen will speak in San Francisco; the title of her speech is “The New Normal for Monetary Policy”, and the thinking is that she might provide more insight on Fed plans to raise interest rates.

Greece and Germany have not been getting along lately. Greece is, of course broke, and could run out of cash in the next 2 weeks. One month ago, Greece promised to come up with a list of economic reforms to qualify for another bailout; the problem is that the reforms being championed mainly by Germany, would be devastating to the Greek economy, which has already been devastated. So, they have not presented the list.

The Financial Times reports that Greek Prime Minister Alex Tsipras did write a letter to German Chancellor Angela Merkel warning that it will be “impossible” for Athens to service debt obligations due in the coming weeks if the EU fails to distribute any short-term financial assistance to the country. Today, Tsipras is in Berlin and he met with Merkel. There was a dinner last night with what was described as intense discussions. A spokesman for Merkel said no one should expect a result from today’s meeting.  Any solution would be the role of the Euro Union and the European Central Bank. After the meeting, Merkel said she wants to see Greece economically strong and to have growth. Still, Merkel was clear that Greece still has to convince its official creditors that its economic policy program does enough to boost competitiveness and rein in spending before any more aid will be released. So for now, they are at loggerheads but the name-calling has stopped.

If the plan of the Troika was to starve the Tsipras government and produce either capitulation or a loss of domestic credibility, their effort appears to be on track. ECB president Mario Draghi was asked if the ECB was blackmailing Greece. He suggested it was the other way around. No matter, the timeline is running short and at some point in the next few weeks, something will happen, and it will be a relatively big event.

On Sunday, Saudi Arabia’s oil minister reiterated it would not unilaterally cut its output to defend prices; saying the Saudis would let the market determine prices for oil and vowed not to cut production unless other non-Organization of the Petroleum Exporting Countries members did. The Saudi oil minister said the kingdom was now pumping around 10 million barrels per day (bpd), which could indicate an increase of 350,000 bpd over its February production. Initially, oil prices moved lower on that news, but then the effect of a declining dollar kicked in. Toss in oversold conditions, and the likelihood that some speculative shorts were exiting positions, and the combo gives a good read of the mood in the energy markets, even if we can’t draw a causal line.

A strong dollar may pose a threat to some corporate earnings, especially US based multinationals. The dollar index has gained about 22% in the past 12 months. Revenue and earnings from foreign markets are worth less when translated into greenbacks and their costs become relatively less competitive against rivals producing in countries with declining currencies. The result might be an earnings recession, which basically means at least 2 consecutive quarters of declining earnings based on year-over-year results. Wall Street analysts currently estimate earnings growth of 1.3 percent for 2015, down from a forecast of 8.1 percent at the beginning of the year, according to Thomson Reuters data. The S&P 500’s earnings per share are expected to drop 3.1 percent in the first quarter and 0.7 percent in the second quarter before recovering modestly in the second-half of the year.

Nearly one-fifth of S&P 500 companies have warned on earnings for the first quarter, with at least 49 companies mentioning the effects of the dollar on results, according to Thomson Reuters. And earnings expectations might be ratcheted lower as more companies asses the dollar impact in coming weeks.

The Federal Reserve on Wednesday lowered its expectations for US economic growth and inflation over the next two years. Chair Janet Yellen said during a press conference last week, “export growth has weakened, probably the strong dollar is one reason for that.” And while it is easy to say a strong dollar makes exports more expensive, it might be overly simplistic to say that is the reason behind a 4.1% drop in the value of exported goods in January compared to a month earlier.

You have to look closer to see that the industrial supplies and material group was responsible for 35% of the drop in the value of total exports from October to January; things like non-monetary gold, plus natural gas liquids, and organic chemicals. All right, commodity prices are down, but the items are still shipping. Capital goods excluding autos accounted for a 25% drop; things like civilian aircraft and aircraft engines. All right, but Boeing saw its 2014 orders increase versus the prior year, and the company has backlogs till forever. Consumer goods exports dropped 6%; not good but not horrible, especially in light of the West Coast port slowdown. Certainly a strong dollar is hurting corporate earnings but it hasn’t really spread through the broader economy, or it has been largely offset by the benefits of cheaper imports, such a lower prices for oil. The main point is that the effects so far appear to be transitory, not terminal.

Another consideration is that the Federal Reserve is talking about hiking interest rates while several other central banks are cutting rates, such as Japan and the Eurozone. The result is that in many places rates have turned negative. The European Central Bank’s fight against deflation has pushed yields on almost a third of the euro area’s $6.2 trillion of government bonds below zero. The result is that investors are now chasing yield. Buying negative yield, on the long-term, you only have downside but you never have upside. Even the most risk averse investors are taking chances on assets and regions that they probably wouldn’t have considered just a few months ago. European enthusiasm for higher-yielding assets has helped U.S. borrowers sell 3.28 billion euros of junk bonds in 2015, the busiest start to a year since the currency started in 1999.And while some of that money might come to the US, a lot of it is finding its way to frontier markets.

The bond market worldwide is more vulnerable to losses than at any time on record, based a metric known as duration. Yields for bonds of all types, from the most-creditworthy to the riskiest, are so historically low means that when the selloff finally does happen, it has the potential to be nasty. Consider Germany’s 30 year bonds, currently yielding 0.59%; if yields rose a half a percentage point in the coming year, buyers would suffer losses of 10%.

Financial Review

Not Patient But No Hurry

Sinclair Noe — March 18, 2015

 

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

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DOW + 227 = 18,076
SPX + 25 = 2099
NAS + 45 = 4982
10 YR YLD – .11 = 1.95%
OIL + 1.25 = 44.71
GOLD + 18.30 = 1166.90
SILV + .36 = 15.99

Today is Fed decision day. The Federal Reserve released a policy statement along with quarterly economic projections followed by a Janet Yellen news conference. In the statement, the Fed removed the phrase about being “patient” regarding an interest rate increase, which might seem like bad news for Wall Street; except, they came up with new language which sounds like they will be …, well, patient about increasing interest rates.

Here is the new language: The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. 
 
So, now we are looking for “further improvement in the labor market” and reasonable confidence” about inflation.

If this sounds like so much word play, well it is; but the bottom line is that they did not make a firm commitment to raising rates in June, and it could be quite some time until we see interest rates rise. Wall Street liked it and went from a triple digit loss to a triple digit gain.

Maybe Wall Street shouldn’t be so happy. The flip side of the interpretation is that there is still way too much slack in the labor force and we are dealing with disinflation and maybe even deflation. Throw in weak economic data and add a dash of a very strong dollar and aggressive monetary policy from the Bank of Japan and the European Central Bank which may already be having an effect similar to a rate increase by cutting into US exports. And you are looking at Fed monetary policy that has painted itself into a dovish corner. Or maybe we can just chalk it up to bad winter weather and a temporary drop in oil prices; whatever, Wall Street seems to love uncertainty when it comes to raising rates.

The Fed’s economic forecasts see the economy growing 2.3% to 2.7% in 2015, below its prior target of 2.5% to 3%. Nor does the Fed see the U.S. growing more than 2.7% in 2016 or 2017, even with the unemployment expected to fall to as low as 4.8% from its current 5.5% level. And then converting that economic forecast into a dot plot chart, shows interest rates going from zero to  0.625% by the end of the year, down from an earlier projection of 1.125% by the end of 2015.

After the Fed issued the statement, Janet Yellen held a news conference. She said that even though the Fed removed the word patience, they will be patient. Other highlights of the news conference: Yellen says productivity has been “disappointingly low.” She said that equity valuations “appear on the high side but not outside of historical ranges,” and she had no comment of specific sectors, such as biotech. She said the Fed hasn’t made a decision about when to reduce its balance sheet. She also said the Fed can’t change the “brazen” behavior at some of the banks it supervises; which seems like a strange thing for a regulator to admit. And regarding the specifics about just how much improvement the Fed would need to see in the labor market and how confident they would need to be about inflation, well, that was all a little vague but Yellen says the Fed will know it when they see it.

For now, the Fed has opened the door for a rate hike but they don’t appear to be in a hurry to cross the threshold.

Oil extended losses earlier today, and then turned higher following the Fed announcement. Late yesterday the American Petroleum Institute said its data showed U.S. crude stockpiles rose by a massive 10.5 million barrels in the week ended March 13. That was more than double market expectations. This morning the EIA reported that stockpiles rose by 9.6 million barrels to 458 million barrels last week; that’s a new record, and storage has been surging for 10 consecutive weeks. Oil prices have been falling since mid-2014, but the decline stalled in February, raising expectations that prices had bottomed out. But Nymex oil has lost roughly 15% month to date as production has surged despite lower prices; even if we haven’t seen a corresponding drop in retail prices yet; always a little lag in lowering prices at the pump.

Prices are low, storage is filling up, and oil-drilling rigs are being idled at an unprecedented rate. But the U.S. oil boom hasn’t slowed yet.  Global oil demand marches higher each and every year by nearly a million barrels per day. Inventories aren’t likely to max out, there is still room in the storage tanks; but even the possibility of that happening is adding pressure to an oversupplied oil market.

Supply and demand have both been freakishly in tandem for the last 15 years; each up by the same million barrels. Global demand is right around 93 million barrels a day; so just a swing of a few million barrels per day can swing the price from $40 a barrel to $120 a barrel. So, we will see domestic production growth slow, probably sooner rather than later. OPEC is expected to cut production in June. So, the thinking, including Fed forecasts, is that oil prices will rise again, with all the attendant implications for the economy.

There is something that could change the equation for oil price volatility – renewable energy. The cost of solar cells has fallen 75% over the last six years. Meanwhile, fuel efficiency has been improving. Renewable energy doesn’t have to replace oil in order to put a thumb down on global energy prices. It merely needs to become the “swing producer,” what the US became in the past half-decade thanks to the fracking boom, the additional source of supply that tips the balance.

Oil prices may go lower, but at some point the price movement will swing and probably move higher, which would encourage some oil producers to tap wells that are being idled today, but higher oil prices will also encourage more renewable supplies. Eventually, all these wild swings in energy prices will give way to stable, predictable energy, but not just yet.

Greece frustrated its main creditors yesterday by refusing to update euro zone peers on its reform progress at a scheduled teleconference, insisting that the discussions should be escalated to tomorrow’s EU summit. Prime Minister Alex Tsipras hopes to unlock funds from the country’s $254 billion bailout package. Greece faces about $2.1 billion in debt payments on Friday. Athens is likely to run out of cash by the end of the month. The IMF says Greece is its most “unhelpful client ever.” This is all pointing to a possible Greek exit from the Eurozone.

And it is a safe bet that the ECB has been calculating the possibility of a Greek Exit. Greece has about € 320 billion in debt. You would have to think an exit would mean default. And you might wonder why Greece would default when there was already a bailout, two bailouts actually. In the first bailout, the ECB allowed European nations and banks to dump sovereign bonds onto the ECB balance sheet in exchange for cash. In the second bailout, the ECB dumped Greek bonds onto banks, mainly French and German banks. About 80% of the bailout money went to Greek bondholders, not to the Greek economy. So, the earlier bailouts were about giving money to banks that were using Greek bonds as collateral to meet capital reserve requirements. It had almost nothing to do with helping Greece.

So, if Greece defaults, what are the implications? Well Greek debt amounts to about 2% of Europe’s GDP. Why not take a hit and give Greece a fresh start with a square deal that has them make much smaller payments with a haircut for the bondholders? And the most likely answer is that the Troika – the ECB, and the IMF, and the Euro Monetary Union – don’t care a flip about Greece. The fear is that if Greece gets a deal, then Spain and Italy and Portugal and maybe even France will want a deal; and then you are talking about € 3 trillion in sovereign debt, which in turn has been used as collateral for something like € 100 trillion in various derivatives deals. So, the Troika can’t afford a Greek default and they can’t afford a precedent of leniency; which means the preferred approach is to take a hard line to force the Greeks into a bad deal, again.

Just one little problem, now, it is obvious that it is a bad deal. The Greek voters voted against more austerity and more bad deal. Other Europeans see what is happening to Greece and they don’t’ want the same deal. Violent protests hit the streets of the German city of Frankfurt today, as anti-austerity protesters rallied against the opening of a new $1.4 billion building for the European Central Bank.

Premera Blue Cross, which sells health insurance in the northwestern US, said information on 11 million people may have been exposed in a cyberattack uncovered six weeks ago. Hackers may have accessed information including names, Social Security numbers, bank accounts and medical information. The company says it discovered the breach on Jan. 29, said notified the FBI, and is sending letters to affected individuals.

Facebook is updating its PC and mobile Messenger apps to allow users to send cash to each other. Once users link a Visa or MasterCard debit card to their Messenger account, they will be able to send their friends money for free by tapping a dollar sign in the chat box. Some are now speculating that WhatsApp will also join rival messaging platforms to support payments.