Financial Review

We Got Your Volatility Right Here

Markets take a hit, finally. Fed’s Rosengren turns hawkish. September hike back on the table. North Korea plays with nukes. Hanjin sinks lower. Wholesale inventories flat, sales down. Galaxy Note 7 on no fly list. Wake up the regulators – Wells Fargo has a big problem.

Financial Review by Sinclair Noe for 0-09-2016

DOW – 394 = 18,085
SPX – 53 = 2127
NAS – 133 = 5125
10 Y + .05 = 1.67%
OIL – 1.95 = 46.31
GOLD – 10.40 = 1328.80


Over the 41 days, through Thursday, the S&P 500’s highest and lowest closes have been just 1.75 percent apart. It’s the first time that has ever happened in the history of S&P data, which goes back to 1928.  Heading into today’s session the S&P 500 had gone more than 50 trading days without a drop of 1% or more, only the 48th time that has happened since 1950. The last time the Dow Industrials moved over 1% was July 8th, more than 2 months. We got your volatility right here.


Federal Reserve Bank of Boston President Eric Rosengren moved more firmly into the camp of hawkish policy makers, warning that waiting too long to raise interest rates threatened to overheat the US economy and could risk financial stability. Delivering a speech this morning, Rosengren said, “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.” Rosengren’s stance on raising rates are significant because he is a voting member of the FOMC, he has been a longtime dove and someone that is calling for a rate hike even after the recent string of weak economic data. After Rosengren’s comments, futures traded lower, and the major indices opened in negative territory.


Later in the morning, Federal Reserve Bank of Dallas President Robert Kaplan said it isn’t urgent for the central bank to raise interest rates and it can afford to be “patient and deliberate in its actions.” Also Fed Governor Daniel Tarullo made some dovish comments during an interview on CNBC (more on Tarullo in a bit).


So, the Fed is not unanimous on rate hikes, but we’ll get one more piece of the puzzle on Monday, when Fed Governor Lael Brainard, will be delivering a previously unannounced speech in Chicago; the final day Fed officials can speak before the blackout period ahead of the Fed’s September 21 policy statement. Brainard has been one of the most dovish policymakers in the Fed. If she comes out in favor of a rate hike, it would be a clear signal that there will be a very strong push at the September FOMC meeting.


Jeff Gundlach, the widely followed bond investor who runs DoubleLine Funds held a cautious webcast last night. Gundlach said US corporate bonds are highly overvalued and added that many folks have come around to believe that interest rates can never rise, particularly as consensus around the ineffectiveness of negative interest rates solidifies. Gundlach went on to say, “In the investment business, when you hear the word ‘never,’ that means it’s about to happen.”


Global equities were also lower after the European Central Bank held interest rates at record lows and refrained from adding new stimulus. While President Mario Draghi said the ECB was looking at options to continue its money-printing program, investors were looking for more immediate action, including an extension or expansion of the current plan, or at least clearer hints of future actions. Meanwhile, the yield on the 10-year German bond, known as the bund, turned positive Friday for the first time since June 23, the day of the U.K.’s vote to leave the European Union. A sharp global bond selloff that also pushed Treasury yields to their post-Brexit highs.


Hours after multiple global agencies detected a magnitude 5.3 earthquake near North Korea’s nuclear test site, the government in Pyongyang said it has hit the button on its fifth and potentially most powerful nuclear test this morning, claiming to have successfully detonated a nuclear warhead that could be mounted on ballistic rockets. This is the North’s second nuke test in eight months and its fifth since 2006. The announcement drew immediate condemnation from the United States, South Korea, China and Japan. The test violates United Nations resolutions. And the Security Council called an emergency meeting.


Korean Air Lines, the biggest shareholder in Hanjin Shipping, has delayed a decision on a funding plan for the troubled shipping company for a second time, adding to the uncertainty of around $14 billion of cargo stranded at sea. With Hanjin’s future in doubt, carriers have announced they will hike container freight rates by as much as 50% beginning next month as retailers scramble to secure shipping ahead of the peak year-end holiday season.


The FAA, is asking very politely, in a not-at-all-freaked-out way, asking passengers toting the new Samsung Galaxy Note 7 around to keep them switched off on airplanes. Oh, and don’t charge them either. And do not store them in your checked baggage. Seriously. Do not do it. What’s the problem you ask? The new Samsung smartphone seems to have a slight technical problem where it literally explodes. And then it catches fire. The problem appears to be linked to charging the phone. Passengers are still able to carry the phone on flights. It’s unclear why an exploding cellphone would be a problem in the cargo hold but not in the overhead compartment, but we can’t expect airplane mode to bail us out of everything. Samsung has issued a recall of 2.5 million of the phones, so the best move is to just get the phone replaced.


U.S. wholesale businesses left their inventories unchanged as their sales fell in July. The Commerce Department says wholesalers left their stockpiles alone in July after increasing them 0.3 percent in June. Their sales fell 0.4 percent in July, reversing a 1.7 percent increase in June. It was the biggest sales drop since January. The July numbers show stress in the energy industry. Weak inventory restocking has been a drag on U.S. economic growth. From April through June, businesses overall reduced inventories at the fastest pace since the fall of 2011. That’s one reason second-quarter economic growth came in at a lackluster 1.1 percent.


Federal regulators say employees at Wells Fargo created millions of fake bank accounts and credit card numbers over the past five years in an illegal bid to boost their sales figures. The bank has been fined $185 million for the practices, including a record $100 million by the Consumer Financial Protection Bureau. Wells Fargo has also fired at least 5,300 employees who were involved in the scam. Customers didn’t know what happened until they received statements, often charging unauthorized fees on unwanted and unknown credit cards. And when those customers attempted to seek legal redress? Wells Fargo fought back and judges dismissed the cases. Unbelievably, the mandatory arbitration agreements customers signed when they opened their original accounts also covered the fraudulent activity.


Now, it can be tough to get one or two people do something, so you might wonder what kind of elaborate criminal scheme was concocted to get more than 5,000 Wells Fargo employees to fabricate millions of fake accounts. It appears that Wells Fargo paid employees to open accounts – bonuses; they also set quotas; so, open accounts or get fired. It was part of a plan to cross-sell, like bundling for bank accounts; salespeople are urged to encourage existing bank customers to use multiple bank products. This was a large scale effort and it was a systemic problem.  It is virtually impossible for senior executives not to have known what was going on. And Wells Fargo even promoted the aggressive sales scheme in their annual reports. In other words, there is no way to defend the lack of punishment of executives in a fraud of this scale that extended over five years. Either they were in on it, or somehow more than 5,000 lower level employees cooked this up and were able to hide it from the top brass. Under Sarbanes Oxley, the CEO and CFO are required to certify the adequacy of financial and operational controls. There is no way Wells Fargo’s can have it both ways. Either they were in on the scam or they were criminally negligent.


You may recall a couple of weeks ago, Wells Fargo was fined $4 million for illegally misleading student loan borrowers and resulted in some paying unnecessary fees;  charging on-time payers with late fees, failing to inform borrowers of steps they could take to minimize fees and leaving credit report errors uncorrected. A few months ago, Wells Fargo was hit with a $70 million penalty by The Office of the Comptroller of the Currency as the bank failed to correct the shortcomings identified in the 2011 consent orders related to mortgage practices in a “timely fashion.” Four million there, $185 million here – it’s just small change for Wells Fargo, and the truth is that Wells is probably not the worst bank when it comes to cheating customers or rigging exchanges – they are just the example of the day, the “bankster du jour”.


Federal Reserve Governor Daniel Tarullo said this morning that the latest scandal involving Wells Fargo shows that bank behavior hasn’t “changed enough” since the financial crisis. Tarullo said too many banks still only respond to particular ethical lapses instead of putting in place comprehensive compliance programs. In an interview on CNBC, the Fed governor said he wanted regulators to hold individuals at banks responsible for inappropriate behavior rather than simply have firms pay fines. Even criminal prosecution of bank officers should be pursued “in order to make the point that there is individual culpability.” Just a reminder for Governor Tarullo the Federal Reserve does more than print money; the Fed’s Division of Banking Supervision and Regulation is responsible for the oversight of banks. Says so right on their website.



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