Financial Review by Sinclair Noe
DOW – 261 = 17,515
SPX – 34 = 2046
NAS – 87 = 4909
10 YR YLD – .02 = 2.20%
OIL – .68 = 51.65
GOLD + 3.00 = 1159.00
SILV + .08 = 15.22
The stock market crashed today. Before you accuse me of over exaggerating, I do not consider a 261 point drop on the Dow to be a crash; that’s just a down day, with a dollop of ugly. No, I mean the actual New York Stock Exchange crashed. The computers malfunctioned. Trading stopped for 3.5 hours. Open orders were cancelled. Other orders were re-routed. This was an actual technical crash. It started with a few squirrelly trades in the morning, and at 11:32 AM, the New York Stock Exchange surrendered, halted trading, and tried to reboot the computers.
And for the most part, it did not stop trading in NYSE listed stocks. The other exchanges picked up the trades. First, the Nasdaq did not crash; next the BATS system just re-routed trades, ARCA picked up more trades, and the Philly exchange handled some trades as well. So, in many ways, it was a typical trading day. The New York Stock Exchange is really more of a TV studio these days than a central force behind buy and sell orders. CNBC broadcasts there; tourists gawk; all the trades are electronic, in a room full of servers far from the trading floor on Wall Street, maybe an office park in New Jersey.
Still, there was something strange about the shutdown.
Earlier this morning, United Airways announced they had suffered computer problems, which resulted in a halt to all U.S. departures for about two hours, disrupting travel for thousands of passengers in the second such setback since early June. The FAA described the problem as “automation issues”. United described it as “a network connectivity issue”. United was down for about 2 hours, and just after they resumed flights, the Wall Street Journal’s website went down, and then the NYSE went down.
Both United and the New York Stock Exchange were adamant that the problems were a result of internal technical problems, rather than malicious hackers. And we have not heard anything that connects the malfunctions. Still, it gives you pause and a certain discomfort. The digital world is not as solid as it should be.
Meanwhile, Chinese stock markets crashed; their computers were working just fine; this was an old fashioned sell-off. The Peoples Bank of China issued a statement this morning that it would support market stability by providing liquidity, while guarding against financial risk. Still, they could find buyers. Nearly half of all Chinese listed companies have now voluntarily suspended their shares from trading to insulate themselves from the meltdown. The total market cap of the stocks that were halted is about $2.6 trillion. The Shanghai Composite Index fell 5.9 percent. It’s now about 32 percent below the peak of 5,166 it reached on June 12; the Shenzhen Index dropped 2.6%. The panic in mainland markets also rippled across the border, knocking Hong Kong down 5.8% and Japan 3.1%.
So, why are Chinese companies suspending trading? Part of the reason is to just get a time out and hope the Chinese government can intervene in some way, but the unwinding of margin loans is adding fuel to the fire. Individual investors in China have used generous margin financing terms to enter the stock market and then build up their portfolios. Less-known is that Chinese companies have been doing the same thing by using their own corporate stock to secure loans from banks. Stocks are being suspended by the companies themselves because many have bank loans backed by shares which the banks themselves may want to liquidate.
The Greek economy crashed a few years ago, and now the politicians are just trying to keep it on life support. Greek banks are closed, the ATMs are running out of cash, the Greek stock market is also closed, and Eurozone leaders are meeting in Brussels to determine whether they will continue propping up the patient or if they will pull the plug. Greek Prime Minister Alexis Tsipras has requested a 3 year loan. Creditors are demanding a written, detailed proposal spelling out all the details before they will consider providing aid. They want that proposal by tomorrow.
Earlier today, Germany rejected any debt haircut or debt re-profiling or debt restructuring. Then International Monetary Fund Managing Director Christine Lagarde said that Greece needs debt restructuring as part of a bailout deal, but warned that Athens won’t receive special treatment as the government seeks to delay its loan repayments to the IMF. I think that means they know how to help, they could help, or they might just look the other way.
The Federal Reserve published minutes from its Federal Open Market Committee June 16-17 meeting. The meeting predated the collapse of negotiations between Greece and its creditors, and the continuing descent of the Chinese stock market, but its tone and more recent public remarks of Fed officials suggest that the central bank is still likely to raise rates this year unless the domestic economy is significantly disrupted by global events.
Fed officials have concluded that economic problems during the winter months were overstated, reflecting problems in the government’s measuring sticks rather than an actual downturn. The Fed concludes: “Real activity in the first quarter was likely stronger than the then-current official estimate.” The account also cited a “substantial” improvement in labor market conditions over the last year. In particular, it noted signs that increased demand for labor had “begun to result in a firming of wage increases.” The pace of wage increases remains slow by historical standards. But officials have said that faster wage growth would offer an important indication that the labor market was finally returning to full health, and also that higher rates might be necessary to control inflation. And so, the Fed determined that economic conditions are continuing to approach those consistent with warranting a start to the normalization of the stance of monetary policy.”
Fed funds futures give a 54 percent probability that the central bank will lift rates in December, down from 59 percent before the Fed released the minutes of its June policy gathering. At the start of the month, the likelihood of the central bank lifting its near-zero benchmark rate this year was nearly 70 percent. The chance of a September hike is now 21 percent. In other words, the Fed wants to hike interest rates, and your guess is as good as anybody’s as to when they will do it.
Consumer borrowing in the US climbed in May. The Federal Reserve reports total credit increased by $16.1 billion, following a $21.4 billion gain in the prior month that was more than initially reported. Non-revolving debt climbed $14.5 billion in May after increasing $12.9 billion. Revolving debt, which includes credit cards, rose by $1.6 billion in May after an $8.5 billion advance. Lending by the federal government, which is mainly for student loans, rose by $3.9 billion.
Second quarter earnings reporting season kicked off this afternoon as Alcoa posted earnings that missed analysts’ estimates. Alcoa is a former Dow Industrial stock, and with ticker symbol AA, it has the alphabetical distinction of the first major stock to report quarterly earnings, although that starting line has been blurred for a long time. Alcoa kept its 2015 global aluminum-demand growth forecast unchanged at 6.5 percent, and it reduced its projection for industrywide sales to the aerospace and Chinese truck markets. China, the world’s biggest aluminum user, is poised to grow at its slowest pace in a quarter of a century. Get used to companies complaining about a slowdown in China, or Europe, or how they were hurt by a stronger dollar.
After winning key legislation in Congress last month, the Obama administration has now scheduled a high-level trade meeting for late July in an effort to conclude the Trans-Pacific Partnership. Several other lower-level talks will take place beforehand, including tomorrow’s meeting between the U.S. and Japan to close gaps on auto and agriculture trade. According to people following the talks, a deal in coming weeks could allow the TPP to come to a final vote in Congress before the end of the year.
Oil prices fell for a fifth straight session after weekly inventory data showed an unexpected increase in crude supplies. The Energy Information Administration reported commercial crude-oil stockpiles rose by 400,000 barrels in the week ended July 3. The EIA also reported that gasoline stockpiles rose 1.2 million barrels, as demand fell from the prior week.
Microsoft plans to plans to cut up to 7,800 jobs and write down the value of its Nokia purchase by more than 80%, the latest indications of the company’s continuing struggles in the phone business. In addition to the write-down, which will be booked in its recently ended fiscal fourth quarter, Microsoft said it also would take a restructuring charge of $750 million to $850 million. The company expects the moves to be “substantially complete” by the end of the calendar year. The new cuts are in addition to the roughly 18,000 employees Microsoft said it planned to let go a year ago.
JPMorgan has agreed to pay at least $125 million to settle investigations by U.S. state and federal authorities that it sought to improperly collect and sell consumer credit card debt. JPMorgan has been accused of relying on robosigning and other methods of collecting debt from consumers that they may not have owed and providing inaccurate information to debt buyers.
In other banking news, Jon Corzine and other former MF Global officials have agreed to be part of a $64.5 million settlement to end litigation brought by investors burnt by the 2011 collapse of the futures brokerage. The move marks the first time the former New Jersey governor agreed to pay those who lost money in MF Global, which became the eighth-largest bankruptcy in US corporate history when a bet on European sovereign debt soured.