A Twisted Duck
Financial Review by Sinclair Noe for 11-04-2015
DOW – 50 = 17,867
SPX – 7 = 2102
NAS – 2 = 5142
10 YR YLD + .01 = 2.23%
OIL – 1.38 = 46.52
GOLD – 9.70 = 1108.50
SILV – .20 = 15.16
Federal Reserve Chair Janet Yellen testified before the House Financial Services Committee today. Yellen reiterated that the Fed could raise its benchmark interest rate in December; she said a rate hike “could be appropriate”; the economy is “performing well”; she expects economic growth to continue; the Fed is inclined to raise rates; however, “no decision has been made.”
Many of the Fed’s immediate concerns have come and gone without catastrophe. The global financial markets are slogging along, and Congress managed to pass a budget and raise the debt ceiling. So, there are only a couple of potential impediments between now and a December rate hike. First is the Friday jobs report; if the payroll growth is in line with expectations, or a bit better, and if that report can be followed with another solid jobs report in early December; plus no stumbles on the GDP numbers, plus some hint of inflation, then Yellen says, “December would be a live possibility.”
We could also draw up a list of reasons why the Fed might want to wait: persistent long-term unemployment, weak growth in third quarter GDP, no signs of inflation, and no signs of wage growth. If the economy doesn’t pick up appreciably, the Fed has little in the tool box, so there will likely be a need for fiscal stimulus, which means more borrowing. And if there is a bubble in the markets, you could blame the Fed for keeping rates artificially low for so long, pushing investors to take on more and more risk. But mainly it just sounds like the Fed wants to raise interest rates.
The odds for a December rate hike spiked from about 50-50 to about a 60% chance. Tomorrow the Fed will unleash a stream of policymakers to deliver speeches and interview to prep the market for a rate hike. The response today was lower stock prices, gains in the dollar, a drop in Treasury prices that sent the yield on the 2-year to the highest levesl in 4 years, and the yield on the 10-year note hit a 6-week high, while gold hit a one month low.
The Labor Department will report on October payrolls on Friday. Today, ADP, the payroll processor reports that the economy added 182,000 private jobs last month; that’s on top of the revised 190,000 jobs added in September, and in line with estimates of 180,000 for Friday’s jobs report.
The Commerce Department said the trade gap fell 15 percent to $40.8 billion, the smallest deficit since February. Exports in September rose 1.6 percent; imports fell 1.8%. Lower crude oil prices also helped to curb the import bill. The drop in the trade deficit reversed the widening seen in August, though the prior month’s figure was revised slightly lower to $48 billion.
The Institute for Supply Management reports the October Non-Manufacturing business survey increased 2.2% to 59.1%; any reading over 50 indicates economic expansion. The ISM survey of the service sector has been reflecting faster growth for 75 consecutive months.
The Treasury Department announced that it is considering adding a 2-month bill maturity to the securities it currently offers. The department also said it will sell $64 billion in notes and bonds next week in its quarterly refunding auction. The department will auction $24 billion in 3-year notes on Nov. 9 and $24 billion in 10-year notes on Nov. 10. The government will also sell $16 billion in 30-year bonds on Nov 12. The supply of bills outstanding as a percentage of the total Treasury portfolio is now at a multi-decade low of about 10%.
Chinese stocks surged today on news the country would further open its markets to foreign investment by establishing a trading link between Shenzhen and Hong Kong by the end of the year, although terms of the deal have not been finalized.
The leaders of China and Taiwan plan to meet on Saturday for the first time since their civil war seven decades ago, shaking up the island’s politics two months before an election that could lift the opposition to power.
Meanwhile, the focus in Tokyo was on the trading debut of Japan Post – the country’s mail-delivery operator – and on its savings bank and insurance subsidiaries. The three listings together fetched about $12 billion, making it Japan’s largest stock offering since 1987 and the world’s largest IPO this year. At the end of the session in Tokyo: Japan Post Holdings +26%; Japan Post Bank +15%; Japan Post Insurance +56% – boosting the Nikkei up 1.3% at the close.
With stocks having just completed their best month in four years and starting off November with more gains, there’s not a lot of demand for the safety of gold and Treasuries. Yesterday’s 1.8% decline in gold brought its price back to $1,115 per ounce, pretty much canceling out the rally it began right around Labor Day which took the metal to nearly $1,200. Benchmark 10-year Treasury yields rose to trade at 2.2225% yesterday, breaking above 2.2% for the first time since September 22.
This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies show big declines, dragging down market-wide results. So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1 percent on a share-weighted basis. This would be the second straight quarter of profit declines. The damage is the biggest in commodity-related industries, with the energy sector showing a 54 percent drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15 percent. When compared with analyst expectations, about 72 percent of companies have beaten profit forecasts. The picture is brighter for the telecom services and consumer discretionary sectors, with EPS growth of 23 percent and 19 percent respectively so far this quarter. For the year as a whole, S&P 500 earnings are expected to fall 0.5 percent.
Earnings news was generally disappointing today, with weak results from Time Warner and 21st Century Fox sending media companies to their steepest decline since August. Whole Foods Market’s quarterly sales and earnings missed estimates. Same store sales were down, and shares fell 11%.
After hours, Facebook reported better than expected earnings, and shares were up about 5%. And for the first time, more than 1 billion people a day on average used Facebook.
Kraft Heinz plans to cut 2,600 factory-based jobs and close seven US plants and one Canadian plant over the next 12 to 24 months. The company called the move a “critical step” in a plan to eliminate “excess capacity” and reduce operating redundancies for the new combined company.
Volkswagen has another emissions scandal. VW announced that an internal investigation had discovered “irregularities in CO2 levels” in as many as 800,000 vehicles. It is unclear whether the irregularities are related to the recently discovered emissions scandal related to nitrogen-oxide testing. “Under the ongoing review of all processes and workflows in connection with diesel engines it was established that the CO2 levels and thus the fuel consumption figures for some models were set too low during the CO2 certification process,” Volkswagen said in a statement. “The majority of the vehicles concerned have diesel engines.” The road goes on forever and the cheating never ends.
Lockheed Martin expects to close its $9 billion acquisition of Sikorsky Aircraft from United Technologies on Friday, after it received final regulatory approval from China. Separately, Lockheed won a preliminary contract valued at up to $5.3 billion to build a ninth batch of F-35 jets for the U.S. military and its allies.
Chipotle has hired food-safety consulting firms and is batch-testing ingredients after closing 43 restaurants over the weekend due to an E. coli outbreak that has so far infected 37 people. Authorities believe fresh produce is the likely culprit, but the exact source of the contamination hasn’t been identified. It’s still unclear if the contamination occurred at the farm level or at a Chipotle distribution center.
High-frequency trader Michael Coscia has become the first to be found guilty of “spoofing” commodity futures markets. Spoofing is rapidly placing orders with the intent to cancel them before they trade in order to trick other investors by creating the illusion of demand.
The U.S. Senate’s Special Committee on Aging will investigate drug pricing practices by four drug companies, including Valeant Pharmaceuticals, Turing Pharmaceuticals, Retrophin, and Rodelis Therapeutics. The Senate committee sent out letters requesting the CEOs come talk. Both Turing and Valeant have also received multiple subpoenas from federal prosecutors seeking information about drug pricing and other policies. Overall, prescription drug prices have been on the rise for years. Between 2008 through 2014, average prices for the most widely used brand-name drugs jumped 128 percent. Daraprim, Turing’s anti-infection drug that increased from $13.50 to $750 per tablet, is of particular interest. The senators are trying to figure out if this is price gouging. Well, let’s see; it walks like a duck, it looks like a duck, and it quacks like a duck. I wonder what it could be?