Financial Review by Sinclair Noe for 10-28-2015
DOW + 198 = 17,779
SPX + 24 = 2090
NAS + 65 = 5095
10 YR YLD + .06 = 2.09%
OIL + 2.93 = 46.13
GOLD – 11.30 = 1156.70
SILV + .07 = 16.04
It’s Decision Day for the Federal Reserve, and it was an easy decision. The FOMC wrapped up a two-day policy session with a statement that interest rates will remain unchanged near zero; where they have been stuck for 7 full years. The Fed’s statement left open the possibility that the Fed will raise rates at its final meeting of the year, in December. While noting that job growth has slowed, it said that other economic indicators remained relatively strong and the domestic economy “has been expanding at a moderate pace”. The Fed also signaled that its concerns about the global economy have diminished. In the statement from the meeting in September the Fed said global economic and financial developments might restrain domestic growth. In today’s statement they just say the Fed “is monitoring global economic and financial developments.”
The next FOMC meeting is scheduled for Dec. 15 and 16. Fed chairwoman Janet L. Yellen said in a late September speech that she still expected to raise rates this year, as long as economic growth continued. Stanley Fischer, the Fed’s vice chairman, said much the same a few weeks later. Many Fed policymakers have been saying they will raise interest rates since March, but there are also doves among the Fed, arguing against rate hikes. Today’s decision to keep rates near zero was supported by nine of the ten members of the Federal Open Market Committee. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, once again dissented, as he did at the September meeting, arguing the Fed should start to raise rates now. Of course any decision would need to be supported by better economic data, and for now at least, the economy can’t seem to build any real momentum.
The Fed will raise interest rates …, someday. But it won’t be easy. We’ve been locked into near zero since December 2008, but that was during rough times; the economy lost 576,000 jobs that month. Things have improved quite a bit since those dark days. But there are still risks and no guarantees that recovery can continue without monetary stimulus. The recovery has received almost no fiscal stimulus – to the contrary. The lack of fiscal stimulus has been one of the main reasons why the recovery has been so sluggish, even as the economy has shown consistent growth. Even as the federal debt grew substantially in recent years, the government’s annual interest payments barely increased thanks to the Fed’s efforts to minimize borrowing costs. Higher rates mean higher debt servicing costs which would choke off any possibility of fiscal policy shouldering the burden of recovery.
The labor market has recovered most of the ground lost during the downturn but there is still slack. Full employment is a loose target and the Fed doesn’t really know when we will hit it. We’re close but not there yet. Workers remain underutilized and discouraged. Wages have not shown strength, certainly not enough to push inflation, which remains well below the Fed’s 2% target. And while the price of oil has an outsized influence on broader prices, the Fed has little control over the commodity markets one way or the other.
The Fed also has little control over long term interest rates, they just set the target for very short-term rates; still, if they raise the target, you could expect the rates on everything from cars to credit cards to mortgages to jump, along with a stronger dollar. And this is where it gets tricky. A stronger dollar would hurt US exports while also making imports cheaper; in other words the possibility of a slowing economy combined with disinflation. Further, it could hurt emerging market economies, as their currencies buy less and their resources sell for less. Higher rates would be good news for savers, who now earn near zero, but for now they have to take on more risk, which is why Wall Street enjoyed a nice rally on today’s news.
The House has approved the reauthorization of the U.S. Export-Import Bank, marking a big victory for business groups that had fought to secure its revival. The bank’s future, however, may not be fully resolved until December. The House bill now goes to the Senate, which recently approved a similar measure as part of an unrelated transportation bill.
Following years of intense debate, the Senate has passed a controversial bill that will see the Department of Homeland Security become a hub for sharing information about cyber-attacks within the government and the private sector. The Cybersecurity Information Sharing Act, known as CISA, would give legal protection to companies that share information about cyber-threats with the government and with each other. This should help them detect intrusions faster, improve their defenses, and take advantage of government advice and intelligence. It should give law enforcement a clearer picture of the threats facing U.S. networks and help in pursuing cybercriminals. The bill, which has faced privacy concerns from high-tech firms and advocacy groups, must now be reconciled with a separate piece of legislation that was passed by the House of Representatives earlier this year. In the end, Senator Harry Reid summed it up best: “The bill, which is okay, is better than nothing.”
The Energy Information Administration said U.S. commercial crude inventories rose by 3.4 million barrels to a total of 480 million barrels in the previous week, but gasoline and distillate inventories fell. Also, Mexico’s state oil company Pemex said it had received a license from the United States to import U.S. light crude to be refined at Mexican refineries in exchange for its own heavier crude oil. Now, oil was up today, which seems a little counter-intuitive because the EIA had reported weekly jumps of eight million and 7.6 million barrels in its past two reports and today’s data marked a fifth weekly rise in a row.
Volkswagen reported a net loss of $1.84 billion in the third quarter, its first quarterly decline in more than a decade. Volkswagen subtracted €6.7 billion-euro from profit to cover the cost of recalling and repairing about nine million cars equipped with illegal software intended to cheat on emissions tests. The effect of the deceptive software on sales and revenue is likely to worsen in coming quarters.
Fiat Chrysler Automobiles reported a better-than-expected 35 percent jump in quarterly earnings helped by strong performance in North America, and confirmed its full-year guidance.
A successful contract pitch, that included a Super Bowl ad, has landed Northrop Grumman as much as $80 billion to build the U.S. Air Force’s Long-Range Bomber. Northrop beat out Boeing and Lockheed Martin for the contract.
As reported yesterday, Walgreens Boots Alliance is acquiring Rite Aid for $ 9.4 billion, or $17.2 billion after factoring in debt. Walgreens expects the transaction to close in the second half of 2016. Separately, Walgreens Boots Alliance reported a better-than-expected quarterly profit, helped by lower costs achieved through its cost-cutting plan. Walgreens in April launched a plan to cut $1.5 billion in costs by the end of fiscal 2017, which would include store closures and freezing salary hikes for senior U.S. executives.
Confirming earlier rumors, Toshiba has announced the sale of its image sensor business to Sony as it tries to recover from a $1.3 billion accounting scandal. Sony recently said it would spin off its image sensor business into a new wholly-owned subsidiary called Sony Semiconductor Corporation, and Toshiba’s operations are set to come under that umbrella. No financial details of the deal have been disclosed.
Amazon, which has rapidly built a network of on-demand workers for its Prime Now service, now faces a lawsuit over how those workers are treated. The action potentially thrusts Amazon into the center of a debate roiling Silicon Valley over whether on-demand workers should be treated as employees or independent contractors. Companies such as Uber and Postmates, which consider their workers contractors and thereby avoid some expenses, have faced similar suits.
IBM announced it will acquire the digital and data assets of The Weather Company in a deal valued at about $2 billion. The Weather Company is currently owned by the Blackstone Group, Bain Capital and NBC Universal, which paid $3.5 billion for the firm in 2008. IBM will use the Weather Company’s digital assets to boost its Watson cloud and Internet of Things platforms. It’s an interesting idea. The Weather Company gathers data from 147,000 weather collection stations, and that process could be improved through the Internet of Things and then analyzed by Watson. The result: Airlines use it to manage turbulence. Insurance companies use it to judge risk. Agricultural companies use it to manage crops. A side benefit to the deal is that much of the Weather Company’s data is managed on the computing systems of IBM competitors, including Amazon and Google, and now it will move to IBM’s cloud, called Softlayer. That is not enough to right the ship at IBM, but it might give us a hint of how some companies will commoditize the cloud.
Now, just a reminder that the third Republican debate starts in less than one hour, so this is a good time to remind you of the rules for the drinking game. Whenever you hear the phrase that starts with: “I’m the only candidate on this stage….” You take a drink. Also, you should take a shot of something, your choice, whenever a candidate mentions Ronald Reagan. If Reagan is mentioned along with Tip O’Neil, it’s a double shot. Remember to watch responsibly and hydrate.