Financial Review by Sinclair Noe for 09-02-2015
DOW + 293 = 16351
SPX + 35 = 1948
NAS + 113 = 4749
10 YR YLD + .02 = 2.19%
OIL + .59 = 46.00
GOLD – 6.10 = 1134.70
SILV + .08 = 14.80
For the first 8 ½ months of the year, stocks traded in a very tight range, for the most part. We had an occasional triple digit move on the Dow, but that was the exception – now it looks like the norm. Investors have weathered over two weeks of unusually wide-swinging trade that has left the S&P 500 with its worst monthly drop in three years and a loss of 8.5 percent from an all-time high in May. There really isn’t anything that would tell you today marks some kind of recovery, rather it is just volatility and turbulence. Get used to it. Keep calm and carry on.
World markets were a bit more sanguine today; the Shanghai Composite stabilized, but still closed just slightly lower. Nine Chinese brokerages pledged additional funds to purchase shares, answering fresh government calls to support equities. Investors may see the trend continue. Shanghai’s stock market will be closed Thursday and Friday as China commemorates the 70th anniversary of the end of World War II.
U.S. index provider MSCI has declared the market gyrations in China, and a barrage of interventions by the authorities to stop the rout, not to be a factor in deciding whether to include China A-shares in its Emerging Markets Index. Just before the massive selloff began in mid-June, MSCI announced it would temporarily hold off on the move, but said it expected the shares to be incorporated once outstanding issues relating to Chinese market accessibility were resolved.
The Federal Reserve released its Beige Book this afternoon; this is a look at economic conditions around the country, not hard data but just observations and interviews. Manufacturers are starting to feel the effects of China’s economic slowdown and a strong dollar; the oil industry is starting to feel pressure from lower energy prices; housing and auto sales are strong. Economic activity has not slowed since July; keep in mind that the Beige Book runs through August 24, just before the recent volatility on Wall Street. The Fed uses the Beige Book as a guide heading into the FOMC meeting next week to determine monetary policy.
Now, here’s an interesting twist on whether the Fed might hike interest rates next week; it comes from Torsten Slok Deutsche Bank’s chief U.S. economist. The thinking is that if the Fed hikes rates, investors would see it as a policy error, in which case they would pressure yields at the long end of the US Treasury curve; in other words, long-term rates could drop and the dollar could get weaker. A flattening curve is generally considered an easing of financial conditions. He asserts that the central bank ought to “do the first hike exactly when there is a bearish narrative in markets” to ensure it doesn’t prompt yields further out along the curve to jump, as was the case in the infamous bond selloff sparked by 1994’s rate rise. So, if the Fed raises its interest rate target for Fed Funds Futures, don’t be surprised if interest rates and the dollar actually decline. At least that’s one theory.
Last week, as the stock market took a dive, interest rates dropped briefly; and mortgage applications increased dramatically. Jumbo loan borrowers were especially enticed by the potential savings. An index of application volume jumped 11.3 percent. Volume is now up 30 percent from a year ago. Refinance applications, which are most rate-sensitive, increased 17 percent from the previous week to the highest level since April, 2015. Loan applications to purchase a home, which have been less responsive to rates, rose 4 percent for the week and are now 25 percent higher than one year ago. The average contract interest rate for 30-year fixed-rate mortgages remained unchanged at 4.08 percent.
Private-sector employment gains continued in August at a slightly faster pace than in the prior month. Payroll processing firm ADP reports employers added 190,000 jobs last month. The Labor Department’s employment report will be released Friday, and the consensus estimate calls for a gain of about 215,000 new jobs. A significantly more robust number might nudge the Fed to move, but global market volatility recently has prompted some analysts to predict a December rate increase. One wild card: In seven of the last 10 years, the August number for payrolls has come in 48,000 below the consensus, only to be revised upward later, according to RBS. In other words, the Friday Jobs Report is going to be a cliffhanger for nervous investors.
The productivity of U.S. workers in the spring was stronger than initially reported, reflecting a pickup in economic growth after a poor start to the year. Productivity rose at a 3.3% annual pace in the second quarter, up from a preliminary 1.3% estimate.
Entrepreneurship in the United States is at its highest rate in at least 16 years. According to a study by Babson College and Baruch College, 14% of the United States working age population, about 24 million people, reported being entrepreneurs in 2014. The high entrepreneurship rate could be good news for non-entrepreneurs as well: 24% of entrepreneurs said they expect to hire 20 or more people in the next five years.
President Obama has 34 Senate votes in favor of an Iran Nuclear deal, and that means it is a done deal. With 34 senators favoring the accord between Iran and six world powers limiting the country’s nuclear program, opponents may still be able to pass a resolution disapproving the deal later this month, but they do not have the votes to override Obama’s promised veto. In most cases, support for the deal has not been enthusiastic, but enough Democrats have come to the conclusion that killing the accord would be far worse than approving it. The White House and Senate Democrats hope to find seven more votes next week to filibuster the Republican resolution of disapproval. That would ensure the resolution would never leave the Senate, and Obama would not be forced to use a veto.
ConocoPhillips is cutting about 10% of its global workforce, with the largest percentage of layoffs occurring in North America. News of the cuts came on the same day ConocoPhillips announced first oil at its new Surmont 2 thermal project in northern Alberta.
McDonald’s U.S. franchisees have voted to begin offering all-day breakfast on Oct. 6, a widely expected decision that the company and investors hope will help end a sales slump that began nearly three years ago. The move – the company’s biggest menu change in years – follows months of testing the idea at various locations. According to McDonald’s sales reports, breakfast currently accounts for about 25% of its U.S. sales.
A Federal Judge in San Francisco has granted class-action status to a lawsuit claiming that Uber misclassifies its drivers as independent contractors instead of employees. As many as 160,000 Uber drivers in California could now join the case as a group, seeking to require the company to pay payroll taxes, overtime pay, or possibly mileage. The case, filed in 2013, presents challenges to Uber’s business model. Classifying workers as contractors lets the company keep its labor costs low while recruiting scores of people who use their own cars to ferry passengers. The results of the high-profile legal battle may also reshape the sharing economy, setting a precedent for dozens of startups whose futures rely on independent contractors. Well, so much for those valuations.
Federal safety regulators have sharply lowered the number of vehicles likely affected by faulty Takata airbag inflators, cutting the figure by about 40% to 19 million from more than 30 million. New information shows that some of the vehicles were originally thought to be in the U.S. (instead of overseas) and that some cars were counted twice due to driver and passenger side air bags. The recall still remains the largest and most complex automotive recall in history – involving 11 different automakers.
CBS is planning a record amount of live-streaming NFL coverage this season, with all streams available to the public for free. The games will include two regular-season match-ups, four playoff events and Super Bowl 50. CBS’s streams will be available through its website for laptops, desktops, tablets, and on TV via some connected devices (Xbox One, Apple TV, Chromecast and Roku products).
Intel introduced its new generation of processors today – they call it Skylake. The new chips will power the full range of PCs from entry-level laptops to Xeon workstations. Here’s what you need to know: the chips are really fast, the graphics are much better, and it uses less power which will extend battery life. The new graphics deliver a better picture than 4k ultra HD. The new chip was built to work with Windows 10 and the processors can wake up a computer in sleep mode in less than a half second; no more waiting around. Intel is also making a big deal about facial recognition; no more messing around with passwords; your computer will know who you are. Notebooks and other devices equipped with Intel’s R200 RealSense camera will 3D-scan both your face and other objects, with lots of fun potential applications; including the ability to scan objects and send it to your 3D printer; finally we are getting to the Star Trek replicator. And finally, hassle-free wireless charging of laptops, tablets and notebooks. Using magnetic resonance coupling. Actually, they haven’t got that figured out just yet, but they are working on it and think they’ll have something ready to go in about a year.
And an extra note here. In the next 24 to 48 hours you will like see a very disturbing picture. It is a photo of a three year old child from the north Syrian town of Kobani near the Turkish border, scene of heavy fighting between Islamic State insurgents and Kurdish forces a few months ago. Like so many, his family tried to migrate to Europe; taking the treacherous path to sea, headed for the Greek island of Kos. Something went horribly wrong; the boat sank. Seven people were rescued and two reached the shore in life jackets. The official said hopes were fading of saving the two people still missing. The confirmed dead included five children and one woman; the youngest child was 3 year old Aylan Kurdi. The picture you will see showed the little boy wearing a bright red t-shirt and shorts lying face-down in the surf on a beach near the resort town of Bodrum. It is all over the Twitterverse and will undoubtedly make the main stream media. Hashtag #humanity washed ashore. You should look at the picture. It will disturb you.