Financial Review

Dear Prudence

After Friday’s meltdown, more jawboning from Fed policymakers and an olive branch from Brainard spikes the market. Agrium and Potash deal. Linde and Praxair end deal. Samsung sells printers, and recalls phones. Tesla’s new autopilot. Time goes digital. Sanofi and Verily fight diabetes. Bezos blasts off. Hanjin ghost ships.

Financial Review by Sinclair Noe for 09-12-2016

DOW + 239 = 18,325
SPX + 31 = 2159
NAS + 85 = 5211
10 Y un 1.67%
OIL + .14 = 46.02
GOLD – .70 = 1328.10


Financial Times‘ Eric Platt writes: “Janet Yellen will deliver the biggest shock to markets since taking over as chair of the Fed … should the central bank raise interest rates this month, according to a survey of Wall Street economists that shows more than 85 per cent expect it to hold fire. The skepticism among economists may concern the Fed’s top officials, who have spent the past month trying to persuade financial markets that an increase at their meeting on September 21 is a possibility.” Before Friday’s rout, in which the S&P 500 fell by 2.5 percent, the broad stock index hadn’t dropped by more than 1 percent for 52 consecutive trading sessions; and the VIX, the Volatility Index had been bouncing around multi-year lows in July and August. The CBOE total put/call ratio spiked on Friday, meaning investors rapidly bought more puts relative to calls. Still, sentiment indices reflect excess optimism among active managers. At the very least, all the Fed jawboning has been a bit of a shock to a summer of complacency.


Minneapolis Fed president Neel Kashkari, in an interview this morning, said the problems facing the economy cannot be solved by monetary policy so “There doesn’t appear to be a huge urgency to do anything.” Kashkari, who is not a voting member of the Fed’s policy committee, this year, said he wanted to see “more movement” in core inflation, which he said was “stuck” at a 1.6% annual rate.


Also this morning, Atlanta Federal Reserve Bank president Dennis Lockhart says current economic conditions warrant a “serious discussion” of whether to raise interest rates at next week’s Fed meeting. Lockhart asked: “If 1.6 percent inflation and 4.9 percent unemployment were all you knew about the economy, would you consider a policy setting one tick above the zero lower bound still appropriate?” He added in later comments to reporters that there was no “urgency” to raise rates at any specific meeting.


JPMorgan Chase Chief Executive Officer Jamie Dimon said the Federal Reserve should increase interest rates… sooner, rather than later. “Let’s just raise rates,” Dimon said Monday during a discussion at the Economic Club of Washington. “The Fed has to maintain credibility. I think it’s time to raise rates. Normality is a good thing, not a bad thing. The return to normal is a good thing.” Dimon is not a voting member of the Fed, at least in theory. Dimon said, “I’d go sooner rather than later, but I’ll leave the exact timing up to them.”


Still, the last word goes to Federal Reserve Governor Lael Brainard, she is a voting member of the FOMC and a long-time dove. She is the last Fed policymaker to speak on a possible rate hike before a “quiet period” or press blackout prior to the FOMC meeting next week. Today in Chicago, Brainard said, “Today’s new normal counsels prudence in the removal of policy accommodation.” She said the labor market might be farther from full strength than some economists believe, which would suggest “the case to tighten policy preemptively is less compelling.” And the labor market might still tighten further without putting pressure on inflation; Brainard said, “The response of inflation to unexpected strength in demand will likely be modest and gradual, requiring a correspondingly moderate policy response.” If Brainard, had made a hawkish statement, it would have cemented the idea of a rate hike, but she remains firmly in the dovish camp; not a guarantee the Fed will stand pat, but a big indicator.


Even as volatility returned, it did not signal financial Armageddon, as some were predicting over the weekend. The sharp selloff witnessed last Friday in equity markets has created quite a stir, which reverberated around the globe in overnight trade and evidently many have come to accept that yes, interest rates will eventually have to go higher, but this realization was not delivered by Four Horsemen, rather Federal Reserve Bank of Boston President Eric Rosengren said Friday that “a reasonable case can be made” for tightening interest rates. The Dow Industrials dropped 394 points. We started the morning with a modest bounce, and after Brainard’s speech, stocks spiked. Make no mistake, the lifeblood of the equity markets is central bank injected liquidity.



This week brings a wave of data on all aspects of the economy, except housing. By the end of the week, we’ll have a better idea of the shape of consumers’ spending, the industrial sector and the inflation picture, and estimates of third quarter GDP growth will start to mean something. The picture is likely to show the third quarter picking up some steam, at least compared to the first half. Here’s why: In the second quarter, consumers were spending but government spending, investment, foreign trade and inventories were substantial drags on growth. Business investment and inventories are probably going to remain subdued, and foreign trade will be weighed down by a strong dollar, but government spending historically delivers a jolt to the economy in an election year.


Canada’s Agrium and Potash Corp of Saskatchewan agreed to combine in a deal that would create a fertilizer giant with an enterprise value of about $36 billion. Potash Corp, the world’s biggest crop nutrient company by capacity and Agrium, North America’s largest farm retailer, said the combined entity would be the largest crop nutrient company in the world. The merger will create a company dominant in North America, controlling nearly two-thirds of potash capacity, 30 percent of phosphate production capability and 29 percent of nitrogen capacity. Any deal would be subject to regulatory approval.


Linde and Praxair are ending merger talks. The Wall Street Journal reports that the deal, which would have created a $60 billion industrial gas giant, is being called off because Linde says “governance aspects did not result in a mutual understanding.” I’m not sure what that means, but I think they just couldn’t get along.


Samsung is selling its printer business to HP. The personal computer and printing giant is buying Samsung’s printer business for just over $1 billion, in a move that will give it 6,000 new employees, thousands of new technology patents and a bigger presence in Asia. The acquisition is expected to add to HP’s earnings in its full year after closing.


Samsung was slammed after announcing the Galaxy 7 Note recall. Shares of Samsung dropped 11% over 2 days, wiping away $22 billion in market cap, after the company told users to stop using their phones and return them because faulty batteries were catching fire. The U.S. Consumer Product Safety Commission and Samsung are in talks on an official recall of the devices as soon as possible.


Tesla announced big improvements to Autopilot. The revision will depend more on radar signals to help guide vehicles along roadways, and adds safeguards to keep drivers engaged at high speed. CEO Elon Musk says the new updates will make vehicles with Autopilot three times as safe as those without the feature.


Barrick Gold, the world’s biggest gold producer, said it will partner with Cisco Systems to incorporate digital technology in all aspects of its mining business.  Barrick and Cisco will develop a flagship digital operation at Barrick’s Cortez gold mine in Nevada, embedding technology in various parts of the operation to deliver better, faster and safer mining.


As print ad page sales continue to decline, Time Inc. is launching the People Entertainment Network, an advertising-supported streaming video service. The channel, which will be available to watch live or on demand, will focus on celebrities, human interest stories and live events, and include five hours of original programming a week. Time Inc. is also in talks to acquire programming from outside producers.


Sanofi and Alphabet’s life sciences firm Verily are investing about $500 million in a diabetes joint venture combining devices with services, an example of growing ties between the pharma and tech sectors. “The company will leverage Verily’s experience in miniaturized electronics, analytics, and consumer software development, with Sanofi’s clinical expertise and experience.”


Jeff Bezos unveiled a heavy-lift reusable rocket expected to compete against Elon Musk’s SpaceX and other companies for commercial satellite launches before the end of the decade. Bezos’ Blue Origin space company is designing two versions of the rocket, named New Glenn, a nod to John Glenn, designed to launch commercial satellites and to fly humans into space. Blue Origin has not yet started selling tickets for rides. If test flights continue as expected, Blue Origin pilots could begin flying next year, with paying passengers to follow in 2018.


The world’s largest container shipping firm, Maersk, is seeing a short-term rise in freight rates and an inflow of new clients after the collapse of Hanjin Shipping. About 89 Hanjin ships are stuck at sea without enough money to pay fees to offload their goods. Ports in the US, Asia and Europe have turned the ships away. Hyundai Merchant Marine, South Korea’s second-largest container line, plans to deploy 13 more vessels to the U.S. and Europe to help ease cargo disruptions. Prices for shipping containers have surged, with the cost to transport a box to Los Angeles from Hong Kong jumping 40 percent to the most in more than a year. The container shipping industry is in the midst of its busiest time of the year, with retailers moving goods for Christmas shopping, which theoretically starts at Thanksgiving, but as we all know – really started just after Labor Day.




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