Financial Review

Dilma’s Demise

Wall Street slips in August. ADP private jobs up 177k. Pending home sales up 1.3%. No inflation in Eurozone. Trump in Mexico. Brazil impeaches Dilma. Fly to Cuba. La Junta takes over Puerto Rico. SWIFT hack. Monsanto whistleblower. ITT down for the count. Ghost ships.

Financial Review by Sinclair Noe for 08-31-2016


DOW – 53 = 18,400
SPX – 5 = 2170
NAS – 9 = 5213
10 Y + .01 = 1.58%
OIL + .20 = 44.90
GOLD – 2.00 = 1309.50

Since the Dow Jones Industrial Average was created in the late 1890s, September has produced an average loss of 1.1%. The 11 other months of the calendar, in contrast, have produced an average gain of 0.8%. September has an impressively consistent record at or near the bottom of the rankings, not just one or two really horrible years. Just a reminder – correlation is not the same as causation.


The S&P 500 lost 3 points for the month of August. The Dow Industrials dropped 56 points for the month, but both indices hit record highs during the month. Speculative long contracts, or bets that stocks are going higher, on the Dow at the Chicago Board of Trade recently hit a record of 38,382; with long bets on the S&P 500 rising to the highest level in three years.


Gold fell again today, holding ground at the lowest levels in two months and down about $40 for the month, the first monthly loss since May.


Oil futures slid to their lowest levels in nearly three weeks, then recovered to post a small gain at the close. Data by industry group American Petroleum Institute late Tuesday showed U.S. crude stocks rose by 942,000 barrels in the week ended Aug. 26. The EIA report Wednesday showed crude-oil and product exports totaling an estimated 4.976 million barrels a day, up from 4.578 million a week earlier. The report also showed a bigger-than-expected rise in crude supplies.

U.S. Treasuries posted
 their largest monthly loss since June 2015 after a slew of hawkish rhetoric from Fed officials almost doubled the probability of a September rate hike to 34% in the futures market. Fed Vice Chairman Stanley Fischer said that any increase will be data dependent, having previously pointed to employment figures on Friday as being of key importance.


ADP reports private-sector hiring stayed strong in August, as employers added 177,000 jobs.  ADP’s data gives us a hint about the Labor Department’s employment report, which will be released Friday and covers government jobs in addition to the private sector. The ADP report is not an exact match to the government report, and there can be significant differences in any given month, but they are usually pretty similar.


Fed Chair Yellen cited 190,000 as a three-month average in her speech and is likely a key number needed to see a rate hike in September. On August 5, just before the release of the July Jobs Report, the Wall Street Journal, reported the following: “The magic number in Friday’s jobs report is 200,000. If the Labor Department reports that employers expanded payrolls by 200,000 or more in July then that will likely keep alive the possibility of a Federal Reserve interest rate increase at its September policy meeting.”


We know the jobs reported last month came in way above 200,000 at 255,000. If above 200,000 for July’s NFP had a rate hike “alive” then another 200,000 for an additional month (August) should have it as a near “lock.”


The National Association of Realtors reports its pending home sales index rose 1.3% in July. It’s 1.4% above year-ago levels and the second-strongest reading since April. The index for the west rose to the highest level in over three years. A sale is listed as pending when the contract has been signed but the transaction has not closed. The pending-home sales index typically represents about 20% of the transactions for existing-home sales so is a leading indicator for that series. The NAR forecast that existing home sales will reach 5.38 million this year, up 2.8% and the highest level since 2006.


Consumer price inflation in the Eurozone was stuck at 0.2% in August, leaving the ECB no closer to its inflation target than when it launched the first of a series of stimulus measures more than two years ago. Other data released by Eurostat showed the bloc’s unemployment rate unchanged at 10.1% (more than double the U.S.). The figures could push the ECB to launch additional stimulus at its next policy meeting on Sept. 8, like extending the duration of its bond-buying program by at least another six months.


Donald Trump will deliver his immigration policy in a speech in Phoenix later today. Earlier today he traveled to Mexico City to meet with Mexican President Enrique Peña Nieto. Standing on stage with Mexican President Enrique Peña Nieto after their brief meeting, Trump described the encounter between the two men as a “great honor” and sang the praises of Mexican-Americans. Trump ticked off a list of five things that he described as shared goals between the US and Mexican governments. For his part, Peña Nieto emphasized the importance of the historic alliance, but did not hesitate to acknowledge the areas where the two leaders differ. In response to questions from reporters, Trump said, “We did discuss the wall. We did not discuss payment of the wall.”


Brazil’s Senate voted to impeach suspended President Dilma Rousseff. Rousseff is accused of mishandling Brazil’s budget and misrepresenting the state of the economy. Some of her accusers, as Rousseff noted in her testimony, are themselves accused or convicted of serious corruption charges. She testified for 14 hours straight on Monday. Rousseff defended her innocence and characterized the impeachment as a coup. The most remarkable aspect of all of this – and what fundamentally distinguishes this process from impeachment in, say, the US – is that Dilma’s removal results in the empowerment of a completely different party that was not elected to the presidency. Michel Temer the interim president who served as Ms. Rousseff’s vice president before breaking with her this year, is now expected to remain in office until the end of the current term in 2018. Several of the men Temer named to his cabinet have already resigned under the cloud of scandal, including his anticorruption minister and his planning minister, because of claims that they were trying to stymie investigations into the bribery engulfing the national oil company, Petrobras. Temer is accused of accepting bribes and was recently found guilty of violating campaign finance limits, a conviction that could make him ineligible to run for office for eight years.


The first regularly scheduled commercial flight between the U.S. and Cuba since 1961 is set to fly today, as a JetBlue plane departs Fort Lauderdale for Santa Clara. Transportation Secretary Anthony Foxx will be on board. Other U.S. air carriers that are planning to begin airline service to Cuba include American Airlines, Frontier Airlines, Silver Airways, Southwest Airlines and Sun Country Airlines.


A seven-member board has been appointed to oversee a financial restructuring for Puerto Rico, which has been crippled by a $70 billion debt crisis. The idea of a fiscal control board, known colloquially as La Junta in Puerto Rico, is largely reviled on the island, which has a 45 percent poverty rate and whose chronic economic slump has helped spur rampant outmigration. The board was created under the federal law known as PROMESA, passed earlier this year, which will bring Puerto Rico’s finances under federal oversight and give it the authority to restructure some of its debt. The board will be tasked with assessing and certifying annual budgets and a fiscal recovery plan presented by the island’s government, as well as facilitating debt restructuring talks on the island, possibly through a bankruptcy-like process.


SWIFT has disclosed new hacking attacks on its member banks as it pressured them to comply with security procedures instituted after February’s $81 million heist at the central bank of Bangladesh. The global financial messaging system said it might report institutions if they failed to meet a November 19 deadline for installing the latest version of software which includes a host of new security features.


A former Monsanto executive who tipped the Securities and Exchange Commission to accounting improprieties involving the company’s top-selling Roundup product has been awarded more than $22 million from the agency’s whistleblower program. The award was tied to an $80 million settlement between the SEC and Monsanto in February. The SEC said Monsanto lacked sufficient internal controls to account for millions of dollars in rebates that it offered to retailers and distributors. It ultimately booked a sizeable amount of revenue, but then failed to recognize the costs of the rebate programs on its books. That led Monsanto to “materially” misstate its consolidated earnings for a three-year period.


For-profit educator ITT Technical Institute announced today that it will no longer accept any new enrollments. The news came four days after the US Department of Education imposed sanctions on ITT Education Services, the college chain’s parent company, barring the school from enrolling students who use federal financial aid and requiring ITT to provide a letter of credit showing it’s sufficiently funded. The sanctions prohibiting the enrollment of students who use financial aid struck such a blow to ITT Tech because, like most for-profit colleges, it’s highly dependent on federal aid. Last year, ITT fell into hot water with the Education Department because of its refusal to provide the proper accounting of federal grants it distributes to students dating back to 2009. The department then placed restrictions on federal financial aid at ITT. ITT Tech is under multiple federal and state investigations relating to the way the for-profit organization runs its operations.


“All hands on deck” may soon be a thing of the past. Ship designers, their operators and regulators are gearing up for a future in which cargo vessels sail the oceans autonomously with minimal or even no crew. British engine maker Rolls-Royce is among those leading the pack, with its Advanced Autonomous Waterborne Applications initiative involving other companies and universities. It predicts unmanned shipping to cut transport costs by 22%.


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