Groundwork for Fed Minutes
Housing starts up. CPI up. Industrial production up. Is the Fed up for a rate hike? 13-F review – lots of shorts. Aetna quits ACA. EPA standards for trucks. Ford gives up the wheel. Knock, knock. It’s Google.
Financial Review by Sinclair Noe for 08-16-2016
DOW – 84 = 18,552
SPX – 12 = 2178
NAS – 34 = 5227
10 Y + .02 = 1.57%
OIL + .84 = 46.58
GOLD + 7.20 = 1346.80
Housing starts ran at a seasonally adjusted 1.21 million annual rate in July, a 2.1% increase over the June figure. Permits were at a 1.15 million annual rate in July, essentially flat from a revised June reading. Single-family starts edged up 0.5% to a 770,000 annual pace. Most of the strength in July came from multifamily starts, which popped 8.3% to a 433,000 annual rate. Overall housing starts are 5.6% higher compared to a year ago, and July’s figure was the second-best of the recovery.
The consumer price index rose 0.8% compared to a year ago. The Labor Department said core CPI, which strips out food and energy, rose 2.2%. The cost of food was unchanged in July, and has risen 0.2% over the past year, the smallest increase since the 12 months ending in March 2010. Energy prices declined 1.6% and are 10.9% lower for the year. (However, today, oil posted its fourth straight session of gains.) Real hourly wages, those which account for inflation, increased 0.4% in July. Wages are up 2.0% over the year. Medical care prices jumped 0.5 percent in the month for a year-on-year rate that leads the major readings, at a downright inflationary 4.0 percent. Housing costs rose 0.3 percent in the month with this year-on-year at 2.4 percent which, next to medical care, is the second highest on the list.
Industrial production in July saw the biggest one-month gain in 20 months, suggesting a hint of strength in manufacturing. Industrial production climbed 0.7% in July, the biggest percentage rise since Nov. 2014. Compared to the same period of 2015, production is still down 0.5%. The factory sector has been hammered by the strong dollar, lower commodity prices and weak growth overseas. Vehicle production was exceptionally strong in June and was also very solid in July.
New York Federal Reserve President William Dudley said an interest rate hike in September is still possible. Dudley said, “The labor market is getting tighter and we’re starting to see signs of wage gains starting to accelerate, so I think we’re getting closer to that point in time when it will be appropriate to actually raise short-term rates again.” The markets still think there is just a 12% chance of a rate hike in September. Dudley says the markets are too complacent about a possible rate hike in September. We might learn more tomorrow when the Fed releases the minutes of the FOMC July policy meeting.
Atlanta Federal Reserve Bank President Dennis Lockhart said today that the US economy is likely strong enough for at least one interest rate increase before the end of 2016, as job gains continue and inflation moves in a “healthy” direction, and he thinks 2 rate hikes are still a possibility. Lockhart said recent U.S. gross domestic product data overstated weakness in an economy whose fundamentals remain on track for moderate growth through this year and next. He added, however, that he is not locked into a particular date for a rate increase.
Warren Buffett’s regulatory filings show he has taken a large bite out of Apple, raising his stake in the stock by 55%. Berkshire Hathaway’s holding in the tech giant was first revealed in May and shares have since risen more than 20%. The move contrasts with Carl Icahn and George Soros, who both sold Apple entirely. Buffett also took a dimmer view on Walmart, cutting his stake in the retailer by 27%.
Hedge funds of a certain size are required to disclose their long stock holdings in filings known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. These filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the position. Still, it does provide a glimpse into where some of the top money managers have been placing money in the stock market.
George Soros has become more bearish on equity markets, nearly doubling his short bet against the S&P 500, following similar moves by Jeffrey Gundlach, Carl Icahn and David Tepper. According to his 13F filing, Soros now holds put options on roughly 4 million shares in SPY, the S&P 500 Exchange Traded Fund, also known as Spiders. Soros Fund Management LLC, which took a $263 million stake in Barrick Gold in the first quarter, and then cut its holdings by 94 percent in the ensuing three months. Looks like Soros timed that trade to perfection; after climbing 169% in the first half, Barrick’s best-ever performance for the period, shares have slipped from a three-year high reached last month.
Hedge fund manager Paul Tudor Jones, the founder of Tudor Investment Corp, doubled-down on his bet against the stock market, according to his fund’s most recent 13-F filing. During the second quarter, Tudor Investment bought put options on over 5.95 million shares of Spiders. The fund now owns puts on 8.34 million shares of the exchange-traded fund, making it the fund’s largest position.
Aetna is withdrawing from 11 of the 15 states where it currently offers plans through the Affordable Care Act exchanges. Aetna will leave nearly 70% of the counties in which it currently sells coverage. Aetna’s decision follows similar moves from UnitedHealth and Humana, and it puts at least one county, Pinal in Arizona, at risk of having no insurers offering exchange plans in 2017 (a circumstance that would present a major challenge to the basic mechanics of ACA). Some states like Alaska and Oklahoma will be left with only one participant selling individual coverage in 2017. Aetna has said it has been swamped with higher than expected costs, particularly from pricey specialty drugs.
The Environmental Protection Agency and the Department of Transportation issued new rules today to reduce greenhouse gas and set new fuel efficiency standards for medium-and heavy-duty trucks and buses. EPA estimates the standards, as proposed, would: Reduce carbon pollution by one billion tons and cut fuel use by 1.8 billion barrels of oil by 2027. The proposals are expected to save vehicle owners $170 billion in fuel costs over the lifetime of the vehicles, and save the average American household $150 a year by 2030. Transportation recently surpassed power plants as the leading US source of carbon pollution. The EPA and the Transportation Department are near the mid-point of a program expected to raise the average fuel economy of passenger cars to more than 50 miles per gallon by 2025. It has also tackled emissions from power plants and the electrical grid.
The Department of Justice has found Volkswagen liable for criminal wrongdoing. Volkswagen is expected to face criminal and civil penalties for violating the Clean Air Act by installing software on vehicles that violates environmental standards meant to reduce smog, but prosecutors have yet to decide the specific criminal charges they might bring against the automaker. Volkswagen admitted to installing the emissions-cheating software. The automaker expected to receive credit from prosecutors for cooperating with the investigation and agreeing to a civil accord in June with regulators and consumers that could separately cost the automaker up to $15 billion. The credit could reduce the financial penalty Volkswagen receives, among other things, in the final settlement with the Department of Justice. Volkswagen set aside roughly $21 billion to deal with the fallout
We’ve heard plenty lately about self-driving cars; Google has built an autonomous vehicle and logged about 1.8 million miles, but most of the autonomous systems are really driver-assisted. That is changing. Ford Motor plans to have a fully autonomous vehicle – no steering wheel, no gas or brake pedals – available by 2021 for ride-hailing services. Fiat Chrysler has teamed with Google to develop 100 self-driving minivans. Ford conducted unsuccessful negotiations with Google prior to the Chrysler deal. GM has spent almost $600 million – and will spend more – acquiring self-driving software maker Cruise Automation and invested $500 million for a 9 percent stake in ride-hailing company Lyft. GM is testing Cruise’s self-driving software on Chevy Bolt electric cars in Scottsdale.
Google has launched a new video-calling app called Duo. If you have used Apple’s FaceTime, then Duo won’t seem like a big deal but Duo works on both Apple and Android devices. You can initiate a call using a phone number rather than a Google account or Gmail address, making it easier to call friends, family and other people already stored on smartphone contact lists. Google’s main innovative feature is “Knock Knock ,” which lets you see live video of your caller before you answer, unlike Apple’s FaceTime. It runs on Wi-Fi and cellular networks, automatically switching between different types and speeds of connection and adjusting video quality. Google is a little late to the messaging party; there is already plenty of competition. Even if Apple users are enticed by the cross-platform functionality–they can only make Apple-to-Apple FaceTime calls– Google still has to win over Android consumers—that’s over 80% of the worldwide smartphone market—who can use Microsoft’s Skype and Google’s own Hangouts. Plus, these platforms offer file transfers, text messaging and group calling. The main draw of Duo seems to be that it is so basic, even I could use it.