Financial Review

What Puzzle?

Sinclair Noe — November 20, 2015

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DOW + 91 = 17,823
SPX + 7 = 2089
NAS + 31 = 5104
10 YR YLD + .01 = 2.26%
OIL – .15 = 40.39
GOLD – 4.80 = 1078.00
SILV – .16 = 14.23 

The S&P gained 3.3% for the week, its best showing since December. The Dow rose 3.4% for the week and the Nasdaq added 3.6%. And now we begin the Santa Claus rally on Wall Street, which kicks off with the Turkey Shoot. For 35 years prior to 1987, the Wednesday before and the Friday after Thanksgiving combined were up 33 times.

The only declines were in 1964 and 1965. Subsequently, this trend changed. In the 28 years since 1987, there have been 12 declines and 16 advances. As Thanksgiving bullishness lost steam in 1987, the rally afterwards occurred more frequently.

Since 1987, DJIA has logged gains in 22 of 28 years from the close on Friday after Thanksgiving to year-end. The S&P 500 is up 0.5% in November and 1.5% thus far in 2015. There are 28 trading days remaining in 2015.

And going back to 1950, December is the best month of the year for the S&P 500 with the final 30 days of a year producing a mean gain of 2.36%. There could still be a black swan or some other exogenous event. This does not mean that we are guaranteed a rally, only that the probabilities are good.

ECB President Mario Draghi says the European Central Bank is prepared to deploy its full range of stimulus measures to fight low inflation. The comments from Draghi, echoed by other top ECB officials, suggest support among the highest ranks of the central bank for expanding its quantitative easing program and cutting the deposit rate further. 

Under the ECB’s bond buying program which was launched in March, the central bank is buying $64 billion a month in mostly government bonds. It is slated to run at least through September 2016, but many analysts expect the ECB to extend the program beyond this date.

Federal Reserve Vice Chairman Stanley Fischer says the Fed has done everything we can to avoid surprising the markets and governments” about the first hike in interest rates in nine years. It’s looking more and more like a December rate hike is a done deal, but Fischer said no final decisions have been made and officials continue to scrutinize the data. Fischer said it remains to be seen whether the emerging market countries in Asia and the world are sufficiently prepared for the potential capital flows and market adjustments so that there are no major macroeconomic consequences.

Today, St. Louis Fed President James Bullard said “The economy is going to go into a boom period,” citing the unemployment rate, which is currently 5%. Bullard added that the U.S. labor market was “basically back to normal” after the 2007-2009 financial crisis. But the Fed should not repeat what it did during the 2004-2006 tightening cycle, when it raised rates at 17 consecutive meetings, and Bullard emphasized that policymakers should be more “flexible and reactive” to data this time. 

Bullard also said the persistence of low real interest rates was “a puzzle,” echoing comments he made last week in a speech titled “Permazero”, where he entertained the possibility the United States is entering an era of permanently low rates.

It probably isn’t that big a puzzle. Demand has remained at low levels as fiscal policy contracted. Even where monetary policy produced some stimulus, it was counterbalanced with austerity. Corporate America has been on a stock buyback and financial engineering binge which cut investment in R&D and innovation and capital expenditures. The Great Recession was a knife in the back of workers and even though jobs have come back, wages have not.

As the global economy contracted, investors looked to the safe haven of the dollar and Treasuries, which pushed down exports and also kept a ceiling on rates. The financial industry has grown even larger than before the financial crisis, and it continues to be a giant black hole of derivatives and shadow banking that swallows’ productivity. I could go on, but it isn’t a puzzle.

The House of Representatives passed legislation to increase oversight over the Federal Reserve that includes a provision that would require the central bank to follow a mathematical rule to set interest rates. In May, the Senate Banking Committee already passed Republican-backed legislation to increase oversight of the Fed, but that measure doesn’t require the Fed to follow a mathematical rule.

China’s yuan may enter the IMF’s benchmark currency basket at a lower weighting than previously estimated as the institution considers making weights less related to export volumes and more dependent on financial flows. Such a change would give the renminbi a lower share in the basket than under the current formula. IMF policymakers are expected to vote on the currency’s inclusion to the Special Drawing Rights basket on November 30.

The leading economic index jumped 0.6% in October after falling in the two prior months, signaling a pickup in growth after a soft patch during the late summer and early fall. The leading economic index is a weighted gauge of 10 indicators designed to signal peaks and valleys in the business cycle.

Greece’s parliament has backed additional reforms needed to unlock €12-billion-euro from its latest bailout which will help recapitalize the country’s struggling banks and pay off overdue government debts.

Gunmen attacked a hotel in Mali in Western Africa and killed dozens of hostages. The attackers held 140 guests and 30 staff members before a counter-assault by Malian security forces, assisted by the US military, freed the hostages. The death toll is unclear but at least 27 bodies have been found in the hotel. A jihadist group based in northern Mali affiliated with Al-Qaeda, claimed responsibility.

In the past few days, clear signs have emerged showing that the terrorist attacks have had a big economic impact on Paris – one of the most visited cities in the world. A survey by a French hotel and restaurant operators’ union, suggests that sales in the city’s cafes and bars during the past week are down 44% on the same period last year, while hotels have suffered a 57% drop in business. Air France has so far refused to comment on passenger numbers and cancellations bound for Paris, but low-cost airline EasyJet said that travel to the French capital has plummeted.

The U.S. Treasury Department on Thursday took new steps designed to discourage corporate inversions, or deals that allow companies to move their legal address abroad to avoid taxes. Treasury Secretary Jacob Lew said additional steps were planned but also called on Congress to address the issue.

Will the new rules derail a Pfizer-Allergan deal? Maybe not. Allergan and Pfizer are considering structuring a merger of the drug companies so that it is an acquisition of the much bigger Pfizer by the much smaller Allergan.

Nike is buying back $12 billion worth of itself. After the market closed on Thursday, Nike announced a $12 billion stock-repurchase authorization, a 14% dividend hike, and a 2-for-1 stock split, which will go into effect on December 24.

Gap slashed its outlook. Gap announced that sales fell 3% year-over-year to $3.86 billion. Comparable-store sales across the company’s brands — Gap, Banana Republic, and Old Navy — fell 2%. Earnings came in at $0.63 per share, which was right in line with expectations.

Abercrombie & Fitch crushed expectations on profits, revenues, and same-store sales, sending the shares up by as much as 20% in early trading. Ross Stores shares moved higher, after the off-price retailer also reported better-than-expected earnings.

Tyson Foods plans to close two aging prepared-food plants, affecting 880 jobs, in the face of prohibitive renovation costs and changing demand. The closures come as Tyson continues to remake itself after its 2014 acquisition of Hillshire Brands. The company expects to cease operations at a pepperoni plant in Wisconsin and a prepared foods facility in Illinois during the second half of the year ending October 1.

Chipotle is having problems again. A new round of E. Coli infections has hit 45 people in 6 states: Washington, Oregon, California, Minnesota, New York, and Ohio. Sixteen of those people had to be hospitalized and no deaths have been reported. This follows an outbreak at the beginning of November when 22 people in Washington state and Oregon fell ill.

Massachusetts is barring people under the age of 21 from playing daily fantasy sports. While the decision limits a large demographic within the fantasy sports industry, it stops short of following the lead of NY Attorney general Eric Schneiderman, who recently declared daily fantasy “illegal gambling.” The proposals would also ban fantasy competitions based on college sports, prohibit promotions on high school and college campuses and bar anyone connected to professional sports, including athletes and agents.

Tesla Motors is voluntarily recalling all of its 90,000 Model S sedans to check for a potential problem with seat belts. An owner in Europe had an issue with a bolt holding the seat belt system in place coming loose. Tesla said the owner wasn’t involved in an accident and has determined the flaw was an installation issue.

Tesla shares dropped today, but they should have gone up; this was a voluntary recall, unlike GM which fought a recall for faulty ignition switches even as people died, or all the models using Takata airbags which exploded in a shower of shrapnel while car companies denied the problem, or VW which cheated on emissions. Tesla was proactive. No one was injured. The real question is why other car companies can get away with murder.

Intel To Team Up With Time Warner

Financial Review

Discretionary Reading

Sinclair Noe — August 19, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

A Slightly Older Mindset

Sinclair Noe — August 18, 2015

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

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DOW – 33 = 17,511
SPX – 5 = 2096
NAS – 32 = 5059
10 YR YLD + .05 = 2.20%
OIL + .51 = 42.39
GOLD + .10 = 1118.50
SILV – .45 = 14.97

When Chinese markets catch pneumonia, US markets sneeze. That seems to be the trend lately. And once again, Chinese markets were under the weather as the People’s Bank of China took fresh steps to offset capital outflows prompted by its weakened currency. China’s central bank placed $18 billion worth of seven-day reverse repos into the money market during the session – the largest single day injection in almost 19 months. The latest rout raises fresh concerns that the Chinese economy is in dire need of stimulus. Shanghai -6.1%; Shenzhen -6.6%.

Across the Atlantic, European stocks didn’t perform well either. The German DAX dropped 0.2% and the French CAC fell 0.3%. The devaluation in China probably does not have the dire repercussions some have suggested, but it does fit within the broader narrative of a slowing global economy, with less support from emerging markets. And that, in turn, would indicate rising market volatility. At its peak last week, the VIX Index, which measures volatility of the S&P 500 Index, was up 50% from the previous week’s low. There are bigger moves beneath the surface. During the recent earnings season, more than 5% of stocks in the S&P 500 had a move of three standard deviations or more, roughly double the percentage from a few years ago. Still, for now, volatility remains below long-term averages.

The Greek government appears likely to call a confidence vote in the next few days, casting a shadow over the country’s third bailout program. Although the majority of the Greek parliament backed the bailout deal last Friday, Prime Minister Alexis Tsipras had to rely on opposition parties’ support to get the reforms approved. As such, his position as leader would be in doubt if a confidence vote occurs. Meanwhile, Greece has agreed to sell to a German company the rights to operate 14 regional airports. The deal is the first in a wave of privatizations the government had until recently opposed but needs to make to qualify for bailout loans.

Housing starts edged up 0.2% last month to an annual rate of 1.21 million. That marks the highest level since October 2007 but still below the pre-recession peak of 2 million starts per year. Most of the new construction in July took place in the South. Construction tapered off in the Northeast and the West.

Meanwhile, building permits fell 16.3 percent in July to a 1.1 million-unit pace, that followed three straight months of hefty increases. Single-family building permits slipped 1.9 percent in July. Multi-family building permits tumbled 31.8 percent.

Since the housing market bottomed out in April 2009, construction on multi-unit projects has skyrocketed 466%. Work on single-family homes, which historically have accounted for the bulk of new housing, barely doubled over the same span. What’s more, the percentage of multi-unit buildings under construction has risen to a 29-year high of about 35%. Shortly before the onset of the last recession, they only accounted for about 20% of all new housing stock. The desire to rent can be seen through home-ownership rates collected by the U.S. Census Bureau. The percentage of Americans who owned their own homes at the end of the June fell to 63.5% — the lowest level since the government started to keep track in 1980.

Home Depot reported a better-than-expected rise in quarterly same-store sales. Net income rose about 9 percent; net sales rose 4.3 percent. The company also raised its full-year sales and profit forecast.

Walmart reported weaker-than-expected quarterly earnings and lowered its full-year forecast. Walmart said that reduced reimbursement rates from pharmacy benefit managers were hurting margins in its pharmacy business and cited an increase in “shrink,” an industry term for losses due to theft in the store. Profits have also been weighed down by a decision announced in February to invest $1 billion to lift workers’ pay, or as the company describes it, they are improving employee retention and improving customer service. Same store sales increased 1.5% in the last quarter. Walmart still claims more than 11% of all retail sales in the US.

TJX Cos, the owner of off-price retailers TJ Maxx and Marshalls, reported a better-than-expected rise in quarterly comparable store sales as more bargain-hungry shoppers visited its outlets.

A new survey from CorporateCounsel.net shows CFOs believe that in any given year 20% of companies intentionally misrepresent their earnings using discretion within GAAP. The magnitude of the typical misrepresentation is quite material — about 10 cents on every dollar. While most misrepresentation results in the overstatement of earnings, a full one-third of firms that are misrepresenting are intentionally lowballing their earnings.

Travel from the U.S. to Cuba has already increased 35% since the beginning of January, and the Obama administration is now working on a deal that would allow scheduled commercial flights by the end of 2015. Presently, Americans must take charter trips to Cuba, and their visit must fall into one of 12 authorized categories due to a congressional ban. The new move would loosen the terms of those categories, permitting direct commercial flight bookings between the two countries.

Federal regulators have granted Royal Dutch Shell the final permit it needed to drill in the Arctic off Alaska’s northwest coast. The permit was granted after the company brought in a vessel carrying a device needed to stop a potential well blowout. Shell has spent $2.1 billion on leases in the Arctic and up to $7B on exploration.

Petrobras is expected to face penalties of $1.6 billion or more as part of an investigation by U.S. authorities in a corporate corruption investigation. Petrobras’ settlement may still be a while away. The process is likely to take another 2-3 years.

The two explosions in the Chinese port of Tianjin last week could generate total insurance losses of $1.5 billion. Over 8,000 vehicles worth about $625M were destroyed in the blasts, including cars made by Volkswagen, Toyota, Renault, Hyundai and Mitsubishi, while damage is still being assessed in other sectors. Zurich Insurance, Allianz and other groups say they have already received insurance claims but could not provide an estimate of potential losses.

Petco is going public, again. According to The Wall Street Journal, Petco has filed for an initial public offering nearly one decade after it was taken private. The offering is expected to raise approximately $100 million and give the company a $4 billion valuation. The company previously went public in 1994 and 2002.

Target said it has reached an agreement with Visa card issuers to reimburse up to $67 million in costs related to a data breach at the retailer in 2013. The breach during the holiday shopping season compromised at least 40 million credit cards and may have resulted in the theft of personal information from as many as 110 million people. The agreement comes three months after a proposed $19 million settlement between Target and Mastercard fell through. Financial institutions have sued Target, saying they have spent billions of dollars to replace compromised cards and beef up customer service operations because of the data breach.

Google is getting into the router business. The cylinder-shaped router, named OnHub, can be pre-ordered for $199. The router comes with in-built antennas that will scan the airwaves to spot the fastest connection. With the router, users will be able to prioritize a device so that they can get the fastest Internet speeds for data-heavy activities

California’s worsening drought will cause the state’s economy to lose as much as $2.74 billion and nearly 21,000 total jobs this year-and ripple effects of the 4-year-old drought will likely continue through at least 2017. The $2.74 billion figure reflects the cost to all economic sectors and when multiple effects are considered. According to a new report by the University of California, Davis Center for Watershed Sciences, also revealed that direct costs to the state’s agriculture economy will total $1.84 billion and 10,100 direct seasonal jobs. The 2015 drought will result in the fallowing of 542,000 irrigated acres, mostly in the state’s Central Valley. Total crop revenue losses are projected to reach $902 million this year, and the study estimates that total gross revenue losses from crops under a continued drought will increase to nearly $940 million by 2017. Additionally, drought-related losses for the state’s dairy industry are expected to reach $250 million this year and another $100 million for the livestock sector. It doesn’t look like the report includes the costs of fighting wildfires.

Necessity may be the mother of invention but invention may be the red-headed stepchild of funding. We know that the drought in the Southwest, and especially California, has been a severe problem, but apparently not enough to attract venture capital. From 2010 to 2014, venture firms invested $1.4 billion worldwide in 405 companies working in the area of water technology, that according to data from CleanTech Group i3. Last year, $281 million was invested globally in 66 water technology startups, up 19% from in 2013. By comparison, $20 billion was invested in 1,812 software companies in the US alone in 2014, according to the PriceWaterhouseCoopers MoneyTree Survey.

Each year about this time college students head to campus, and each year about this time we look at the passage of time. According to the Beloit College “Mindset List”, most of the kids heading off to college this year were born in 1997. That was the same year the movie “Titanic” was released, Dolly the Sheep was born, Princess Diana was killed in a car crash in Paris, and the first Harry Potter book was published. Incoming college freshmen believe that Wi-Fi is an “entitlement” and that email is the “new formal communication,” while texts and tweets are considered casual. They have never licked a stamp. There has always been Google and cell phones. “Smartphone shuffles” have always slowed down traffic between classes. Hybrid automobiles have always been mass produced. Surgeons have always used “super glue” in the operating room. “The Lion King” has always been on Broadway. Good luck to the class of 2019 and their teachers.

Financial Review

Dog Day Advance

Sinclair Noe — August 17, 2015

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

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DOW + 67 = 17,545
SPX + 10 = 2102
NAS + 43 = 5091
10 YR YLD – .05 = 2.15%
OIL – .62 = 41.88
GOLD + 3.70 = 1118.40
SILV + .07 = 15.42

A reading of New York-area manufacturing conditions fell in August. The Empire State general business conditions index nose-dived to a reading of negative 14.9, from positive 3.9 in July, marking the worst level since April 2009.

The National Association of Home Builders/Wells Fargo housing market index rose 1 point to 61, marking the highest level since Nov. 2005. Any reading above 50 indicates “good” conditions. NAHB says the report is consistent with their forecast for a gradual strengthening of the single-family housing sector in 2015.

Japan’s economy contracted in Q2 as overseas demand for Japanese goods slumped and households spent less, raising the possibility the government will act to support the country’s weak recovery. GDP shrank 1.6% on an annualized basis in the April-June quarter.

The yuan started the week on stable footing after the People’s Bank of China set the currency’s daily reference rate at 6.39 per dollar – in line with Friday’s close. The move signals Beijing is willing to cede more control to market forces, following last week’s record devaluation that saw the currency plunge 3.6%. Shanghai +0.7%. Shenzhen +1%.

Rounding up support for Greece’s fresh aid package, German Chancellor Angela Merkel said she expects the IMF to take part in the new bailout – ahead of Wednesday’s crucial vote on the deal in the Bundestag. Merkel reiterated that a so-called haircut remained out of the question for Germany, but extending debt maturities and tweaking rates remained possibilities.

Hundreds of thousands of Brazilians took to the streets on Sunday calling for the impeachment of President Dilma Rousseff. Demonstrators denounced widespread corruption among the country’s political and business elites and called for the end of more than 12 years of Workers’ Party rule. Barely seven months into her second term, Rousseff’s approval rating has dropped to just 8%.

Oil led commodities lower as Iran said OPEC production may hit a record after sanctions on the country are lifted, and as U.S. drilling activity sustained gains. Hedge funds resumed their retreat from U.S. oil, cutting bullish positions for the seventh time in eight weeks.

Israel’s cabinet has approved a regulatory framework that will pave the way for development of the hotly discussed Leviathan natural gas field. The plan will allow Texas-based Noble Energy and Israel’s Delek Group to keep ownership of the massive offshore deposit, but will require them to sell off other assets, including stakes in another large field called Tamar. Leviathan, with estimated reserves of 22 trillion cubic feet of gas, is slated to begin production in 2018 or 2019.

KKR’s Samson Resources Corp. plans to file for chapter 11 bankruptcy protection by mid-September after finalizing a restructuring plan with key lenders Friday. The Oklahoma-based oil and gas producer agreed to hand ownership to a group of its lenders in bankruptcy. The private-equity firm led a $7.2 billion leveraged buyout of Samson in 2011, the biggest-ever such deal for an oil and gas producer. The bankruptcy reorganization would wipe out the roughly $4.1 billion in cash KKR and its partners invested in the company.

IndiGo, India’s biggest airline, has firmed up an order to buy as many as 250 Airbus A320neos, handing the European plane maker its largest-ever deal by number of aircraft. The $26.5 billion purchase helps extend Airbus’s lead over arch-rival Boeing for the fast-growing upgraded narrow-body aircraft segment. According to website data, Boeing has secured 2,831 orders for its 737 Max, while Airbus now has over 4,100 orders for the A320neo.

Brookfield Asset Management, Canada’s largest alternative asset manager, led a group that agreed to pay $6.5 billion in cash and stock for Asciano Ltd., the Australian rail and port operator.

Liberty Interactive, which owns home shopping network QVC, said it would acquire Zulily in a deal valued at $2.4 billion. Zulily, a website that hosts “flash” sales of clothing primarily for women and children, counts Chinese eCommerce giant Alibaba Group as one of its shareholders.

Expanding into the seafood industry, Cargill has agreed to acquire EWOS from private-equity firms Altor Equity and Bain Capital for $1.5 billion. EWOS, which is based in Norway, produces more than 1.2 million metric tons of fish feed a year and accounts for one-third of the world’s market for salmon and trout feed. The deal would be Cargill’s first entry into the salmon market, making it a leading supplier to salmon farms as it expands its aquaculture business. It is Cargill’s second deal related to operations serving fish farms in recent months. The deal is expected to close by the end of the year.

Pump and valve maker Pentair agreed to buy fastening products maker Erico Global for $1.8 billion in cash, including debt, weeks after activist investor Nelson Peltz asked the company to bulk up through deals.

Citigroup has agreed to pay $180 million to settle charges by the SEC that the bank concealed problems at two of its now-defunct hedge funds, while taking in additional investments in the months before the financial crisis. Citigroup’s settlement comes more than seven years after the two hedge funds collapsed, saddling investors with billions of dollars in losses. The funds used large amounts of leverage to prop up returns from municipal bonds and other fixed income investments.

The funds were sold to investors by Citigroup’s financial advisers, working for the bank’s former Smith Barney wealth management unit, who told clients that the hedge funds were essentially as safe as traditional bond funds. But in 2007 and early 2008, the fund’s managers failed to inform the thousands of investors in the funds about a severe shortage of liquidity and margin calls from lenders. Fund managers also misled investors into believing that potential losses from the funds would be minimal, but they kept selling the funds and raising additional money from investors up until the very end. Citigroup agreed to pay the $180 million to harmed investors without admitting any wrongdoing.

Richard Fisher retired in March as president of the Dallas Federal Reserve Bank.  Today, Robert Steven Kaplan was announced as the new president and chief executive of the Dallas Fed. Kaplan was the former vice-chairman of Goldman Sachs until 2006.

On Wednesday the Fed will publish minutes from the July FOMC meeting. The Fed published a statement following that meeting, hinting at its first rate increase in almost a decade. Also on Wednesday, the Labor Department will report on prices at the retail level; the consumer price index is not the Fed’s preferred inflation gauge but we will be watching for any signs of inflation.

Remember back in May when the IRS announced a computer breach? Hackers stole information on over 100,000 taxpayers? I know all these hacks are starting to blur together. Well, this one is a lot bigger than first reported; potential victims now total 334,000. The thieves accessed a system called “Get Transcript,” where taxpayers can get tax returns and other filings from previous years. In order to access the information, the thieves cleared a security screen that required knowledge about the taxpayer, including Social Security number, date of birth, tax filing status and street address, the IRS said.

The personal information was presumably stolen from other sources. The IRS believes the thieves were accessing the IRS website to get even more information about the taxpayers, which could help them claim fraudulent tax refunds in the future. The IRS will begin mailing letters in the next few days to taxpayers where there were instances of possible or potential access to taxpayer account information.

Sprint announced that it would abandon two-year contracts, joining T-Mobile and Verizon who have made similar moves.

America Movil is removing Mexico-U.S. roaming charges for 40M Mexican prepay clients, after AT&T bought two domestic wireless operators looking to steal market share on its rival’s home turf. Carlos Slim is also under additional pressure. America Movil, which is facing a regulatory crackdown in Mexico, must lower its 70% mobile market share under new antitrust rules.

While it has been long known that American telecommunications companies worked closely with the NSA, newly disclosed documents show that a relationship with AT&T has been especially productive. The New York Times reports AT&T gave the NSA access to billions of emails that have flowed across its networks, some of it classified, and permitted the wiretapping of all Internet communications at United Nations headquarters, among other activities.

The NSA’s top-secret budget in 2013 for the AT&T partnership was more than twice that of the next-largest such program. The company installed surveillance equipment in at least 17 of its Internet hubs on American soil, far more than its similarly sized competitor, Verizon.

Financial Review

Muppets in the Lobby

Sinclair Noe — August 13, 2015

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

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DOW + 5 = 17,408
SPX – 2 = 2083
NAS – 10 = 5033
10 YR YLD + .06 = 2.19%
OIL – 1.07 = 42.23
GOLD – 10.80 = 1115.70
SILV – .12 = 15.52

So, stocks closed basically flat, but it was a roller coaster ride. The major indices started the day in negative territory, then recovered, only to slide into the close. This was a very busy day for economic reports.

Sales at US retailers were solid in July and stronger than previously estimated for May and June. Retail sales rose a seasonally adjusted 0.6% last month, or by 0.4% excluding the auto sector. In the retail sales data in July, the gains were led by the auto sector, where sales jumped 1.4%. This was expected as the light vehicle selling rate rose to a seasonally adjusted 17.5 million units, the second best result since early 2006. And just a quick reminder that many auto sales are imports. But the sales gain in July was broad based. All sectors showed increases except electronics and general merchandise and department stores. In the past year, retail sales have risen 2.4%.

A side note here; it may seem strange that consumers are spending less on electronics, after all it seems like everybody has smartphones and other electro-gadgets; the reality is that we are buying this stuff but paying less for it. We are buying online and finding deals (we are not doing much shopping at department stores like Macy’s), and technology tends to get cheaper over time thanks to innovation (remember Moore’s Law). In fact, since the recession ended in mid-2009, the price of electronics is down 33%, by far the largest decrease of any category tracked by the Commerce Department.

Consumer spending is a huge part of the overall economy. This morning’s retail sales data was watched as a barometer of whether the Federal Reserve would be able to make the case that the economy was performing well enough for a rate hike in September. Of course you can choose any number of other economic indicators to push the barometric pressure one way or another. The Fed has not lifted its zero bound range for rates since it was set in December 2008; a challenging 7 years for retirees attempting to live on fixed income investments like US Treasury notes and bonds which have seen their yields cut in half, or more.

And this Zero Interest Rate Policy raises the nagging question of why the Fed has maintained an emergency posture on interest rates if the economy has actually improved. The Fed finds itself in a dangerous quandary: no ability to cut rates to stimulate the economy if growth starts to tank again because the Fed is already at the zero bound range; while conversely running the risk of setting off a global financial asset selloff that destabilizes markets further if it raises rates.

The prices the US paid for imported goods fell 0.9% in July, the biggest drop in six months. The price drop was led by a drop in fuel prices. However, excluding fuel, import prices declined by 0.3%. In the past 12 months import prices have dropped 10.4%, mostly because of lower oil costs. Import prices are down a smaller 2.6% excluding fuel in the same span. Lower import prices have helped keep a tight lid on US inflation.

US business inventories in June posted their largest gain in 2-1/2 years as sales rose marginally. The Commerce Department said that business inventories increased 0.8 percent, the biggest gain since January 2013, after an unrevised 0.3 percent rise in May. In the second-quarter GDP report published last month, inventories made no contribution to the second-quarter GDP annualized growth pace of 2.3 percent. Today’s report would suggest that second quarter GDP will be revised higher.

In the latest week, the number of people who sought new US unemployment benefits rose by 5,000 to 274,000. The level of applicants remained below 300,000 for the 23rd straight week. Claims hit a low of 255,000 in mid-July, the lowest level since the fall of 1973, but have since rebounded a bit.

Mortgage rates rose for the first time in four weeks. Freddie Mac reports the 30-year fixed-rate mortgage averaged 3.94% in the week ending Aug. 13, up from last week when it averaged 3.91%. A year ago, the 30-year averaged 4.12%. The 15-year fixed rose to 3.17% from 3.13%.

The Mortgage Bankers Association, which represents mortgage lenders, said that the foreclosure starts rate was 0.4% in the second quarter, down slightly from the first quarter and on par with the rate seen during the housing boom. The delinquency rate, which includes loans that are past due but not in the foreclosure process, fell to 5.3%, after adjusting for seasonality, its lowest point since the second quarter of 2007.

The rent is too damn high. Americans living in rentals spent almost a third of their incomes on housing in the second quarter, the highest share in recent history. According to a new report from Zillow, a renter making the median income in the US spent 30.2 percent of her income on a median-priced apartment in the second quarter, compared with 29.5 percent a year earlier. The long-term average, from 1985 to 1999, was 24.4 percent. While mortgages remain relatively affordable, landlords have been able to increase rents because demand for apartments remains strong. Meanwhile, historically cheap mortgage rates are keeping the cost of homeownership low. Buyers devoted 15 percent of their income to mortgage payments, which is less than the historical average of 21 percent.

China intervened in the currency market Wednesday in the final moments of trading, after the yuan weakened nearly 2%, the daily limit; that move helped spur a late recovery on Wall Street. Today, the People’s Bank of China set the yuan’s fixing only marginally lower, a sign it wants to let the yuan depreciate but only in a measured way. The country’s central bank has pushed the value of the currency lower for three consecutive days. Since Tuesday, the currency has fallen 4.4 percent, the biggest drop in decades. While China said the move was aimed to make the currency more market-oriented, it has raised concerns that the already slowing economy was in deeper trouble. The sharp and sudden fall has also prompted questions about whether the country’s leadership can manage the slowdown.

The US imports more goods from China than any other country. Through June of this year, the US had imported $226 billion in goods from China versus $150 billion from Canada and $145 billion from Mexico. The Federal Reserve has been struggling to avoid importing deflation into the US; this devaluation move now means that Chinese goods flowing into the US just got cheaper and the ability of US exporters to compete in global markets just got a lot harder. Today, the dollar rose against a basket of currencies as currency war anxiety faded.

Oil prices slipped to a 6 year low today. The yuan’s devaluation this week has driven down oil and industrial metals amid speculation the weaker Chinese currency will hurt demand by making dollar-denominated imports more expensive. Goldman Sachs Group estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall. About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January.

The iPhone 7 release date is thought to be on September 18. Samsung is trying to play the role of disruptor. They presented 2 new phones today; the tech giant hopes the Galaxy Note 5 and Galaxy S6 edge+ will help it regain momentum in the smartphone market. They’re set to arrive on August 21st. It doesn’t look like there are any major upgrades to the new phones; a few minor changes; bigger screens and a pay system to match up with Apple Pay.

Brokerage firm Edward Jones has agreed to pay $20 million to settle charges that it overcharged clients in new municipal bond sales. The SEC said the case was its first against an underwriter in connection with alleged pricing-related fraud in the primary market for municipal bonds.

Investors suing various banks for rigging prices in the foreign exchange market have reached settlements with nine banks that have brought their total recovery to more than $2 billion. HSBC, Barclays, BNP Paribas and Goldman Sachs are among the latest banks to reach settlement in the class action litigation.

Goldman Sachs Group will pay $272 million to settle a lawsuit that claimed the Wall Street bank defrauded investors about the safety of about $6 billion of residential mortgage-backed securities they bought in 2007 and 2008.

Meanwhile, Goldman Sachs Bank USA, a unit of Goldman Sachs, has agreed to buy GE Capital Bank’s online deposit platform, which includes about $8 billion in online deposit accounts and another $8 billion in brokered certificates of deposit. Goldman Sachs Bank will acquire no financial assets in the deal other than cash associated with the deposit liabilities.

Just a refresher, back in 2008, when Goldman was defrauding investors in residential mortgage backed securities, the global financial system had a meltdown. Goldman converted from an investment bank into an FDIC insured bank, which then took billions in bailout money. Many people wondered how that could happen when Goldman didn’t actually hold customers’ deposits, but now, 7 years later, they have bought deposits.

You can’t actually go into a Goldman Sachs office and use an ATM, or deposit a check or cash, because it’s all online accounts. It just wouldn’t do to have the Muppets in the lobby.