Immovable v. Unstoppable
…..FOMC minutes show Fed on track for 3 hikes. Mortgage apps slip. Obamacare first order of business. Auto sales record for 2016. Sears closing stores. Amazon the 800-pound gorilla of holiday shopping. Kohl’s, Macy sales dip. J&J halves hip award. Barclays trader pleads guilty to Forex rigging. US big banks on hook for Euro derivatives.
Financial Review by Sinclair Noe for 01-04-2017
DOW + 60 = 19,942
SPX + 12 = 2270
NAS + 47 = 5477
RUT + 30 = 1387
10 Y un = 2.45%
OIL + 1.02 = 54.31
GOLD + 4.80 = 1164.10
What happens when an unstoppable force meets an immovable object? The Federal Reserve released the minutes from its December meeting; that’s the meeting where the Fed raised interest rates for only the second time in a decade. Almost all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increases to counteract. Trump’s promises of tax cuts, infrastructure spending and deregulation could boost inflation and might set the stage for a confrontation between a president seeking to boost economic growth and the Fed, which is tasked with keeping the economy from overheating. The minutes showed policymakers might signal an even more aggressive path of rate increases if inflationary pressures rose. At the same time, Fed policymakers “emphasized their considerable uncertainty” about future economic policy changes. The Fed expects Trump’s election might result in slightly faster economic growth over the next several years, but it won’t happen right away and they see little chance of the boom times Trump has promised – so business as usual; which is a trajectory of 3 rates hikes in 2017, perhaps the most hawkish FOMC minutes in the past few years.
As for the unstoppable force versus immovable object debate, relativity proves there is no such thing as an immovable object and since we do not have a source of infinite energy to stop an object, there are no unstoppable objects. So, what happens when two massively infinite unacceleratable objects approach each other on a collision course and neither changes its velocity? They must pass right through each other with no effect on each other at all.
Short-term interest rate futures rose slightly after the release of the minutes but not enough to suggest altered expectations for the central bank’s rate hike path this year. The dollar backed off 14-year highs. The rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009. The London interbank offered rate, or LIBOR, is a global rate benchmark for $350 trillion worth of financial products worldwide.
Mortgage interest rates came down slightly to end the year, but not enough. Mortgage application volume plunged 12 percent for last week, seasonally adjusted, from two weeks earlier. The Mortgage Bankers Association said mortgage application volume typically drops sharply over the holidays. However, this year, as mortgage rates continued their upward climb reaching the highest levels in more than two years, overall application volume fell even more than the holiday slowdown would suggest. The average interest rate for conforming 30-year fixed-rate mortgages decreased to 4.39 percent from 4.45 percent, plus points.
Meanwhile, President Obama exhorted fellow Democrats to preserve Obamacare, as Republicans launched their bid to scrap it in what Vice President-elect Mike Pence called the “first order of business” of Donald Trump’s administration. Actually, it would be the second order of business for the 115th Congress, following a failed attempt to gut the ethics office. Pence met Republican lawmakers to plot the path forward on scuttling the law. Pence said Trump will work in concert with congressional leaders for a “smooth transition to a market-based healthcare reform system” through legislative and executive action. During two news conferences, Pence, Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell offered few details on what a Republican-backed replacement for Obamacare would look like. And there’s the rub. Any attempt to repeal Obamacare will need a replacement stapled to that bill.
Auto sales for December trickled in through the trading day. US auto sales rose for an unprecedented seventh straight year in 2016, topping the record set in 2015. In December, sales rose at a seasonally adjusted annual rate of 18.4 million according to Autodata. But the auto sales boom could be leveling off. Some automakers are trimming production because excess cars and trucks are sitting on dealer lots. Car prices are already at record levels. That is partly because buyers are shifting from less expensive cars to crossovers, SUVs and trucks, and partly because of demand for the latest safety and tech features, such as automatic braking and internet. There is also growing concern about rising default rates on car loans, particularly among less creditworthy buyers. If lenders pull back, that will hurt car sales.
GM led year-on-year growth in December with an increase by 10%. GM said the average transaction price for its vehicles rose $740 from November to $36,386 in December, reflecting in part strong sales of large SUVs. Ford said it sold 87,512 F-Series pickups in December, the lineup’s best overall sales month in 11 years. The F-series was the best-selling model line in the United States last year, for the 40th year in a row. Ford sales overall were up just 0.1% in December. Fiat Chrysler sales slid 10%. Nissan sales rose 10%. Honda sales were up 6.4%. Toyota up 2%. Volkswagen posted a 20% gain in sales.
Tesla fell short of its goal for 80,000 auto deliveries in 2016. The electric car manufacturer delivered 76,230 cars in 2016. That’s still far more than the roughly 50,000 cars it delivered a year earlier. Tesla may face fresh competition; Faraday Future unveiled its “FF 91”, which it describes as the most technologically advanced luxury electric SUV. The car is expected to retail for $180,000 and you can reserve one with a $5,000 down payment.
Can you name the best-selling car in Sweden? (Volvo?) Wrong! For the first time in 54 years, the best-selling car in Sweden is not a Volvo. The Volkswagen Golf knocked Volvo’s most popular luxury models off the throne in 2016. Three of the top five models on the sales ranking were from Volvo, and the brand accounted for around one fifth of all vehicles sold in Sweden last year. Sweden is Volvo’s second biggest market after China.
Amazon.com delivered a record more than 2 billion items for sellers worldwide in 2016. Items shipped by Fulfillment by Amazon rose 50% in the holiday season, while deliveries to prime members numbered in the millions. The online retailer said active sellers using the Fulfillment by Amazon service increased more than 70% in 2016, and units shipped grew more than 80% outside the U.S. The number of sellers that reached $100,000 in sales rose by 30%. The company estimates that sellers have created more than 600,000 new jobs outside of Amazon.
Last week we reported that Sears had told employees to expect more store closures. Today Sears went public with the details. The company will shut down a total of 108 Kmart stores and 42 Sears stores by April – 150 stores total, although apparently, none in Arizona. In the most recent quarter, Sears’ revenue fell 13%, to $5 billion, and its losses widened to $748 million from $454 million in the period last year. Same-store sales dropped 7.4%, including a 10% decrease at Sears stores and a 4.4% decrease at Kmart stores.
Both Kohl’s and Macy’s reported lower sales during November and December 2016 than the year before. Both retailers announced sales declines of 2.1% from the same two months in 2015. Additionally, both Kohl’s and Macy’s said that sales at owned and operated stores were down by 2.7% this holiday season. Following the news, Kohl’s was down over 10.5%, while Macy’s was down 5.5%.
A District judge in Texas almost halved the award in a December jury verdict that ordered Johnson & Johnson and its DePuy Orthopaedics unit to pay more than $1 billion to plaintiffs in six lawsuits who said they were injured by DePuy’s Pinnacle hip implants. Around $500 million of punitive damages would be cut from the more than $1 billion awarded to the plaintiffs who are California residents that were implanted with the hip devices and experienced tissue death, bone erosion and other injuries they attributed to design flaws.
DCP Midstream Partners said it had acquired the assets of a joint venture between Phillips 66 and Spectra Energy, to create the largest natural gas liquids producer and gas processor in the United States. The combined company, which has an enterprise value of $11 billion, will be renamed DCP Midstream LP and will trade with the ticker symbol “DCP”.
A former Barclays trader pleaded guilty to US charges arising from a global investigation into the manipulation of foreign-exchange prices at major banks. Jason Katz’ plea came after Barclays and three other banks last year pleaded guilty to conspiring to manipulate currency prices. Barclays agreed to pay $2.4 billion to resolve various related U.S. and UK probes. Katz is the first person to admit criminal wrongdoing in connection with the Forex rigging case.
According to a report quietly released by the U.S. Treasury’s Office of Financial Research “U.S. global systemically important banks (G-SIBs) have more than $2 trillion in total exposures to Europe. Roughly half of those exposures are off-balance-sheet…U.S. G-SIBs have sold more than $800 billion notional in credit derivatives referencing entities domiciled in the EU.” When a Wall Street bank buys a credit derivative, it is buying protection against a default on its debts by the referenced entity like a European bank or European corporation. But when a Wall Street bank sells credit derivative protection, it is on the hook for the losses if the referenced entity defaults. Regulators will not release to the public the specifics on which Wall Street banks are selling protection on which European banks. The OFR report also indicates that regulators still do not have access to adequate data from the biggest banks and insurers to assess the dangers in real time.