Just Around the Corner
Financial Review by Sinclair Noe
DOW + 117 = 17,880
SPX + 13 = 2080
NAS + 30 = 4917
10 YR YLD un = 1.90%
OIL + 2.84 = 51.98
GOLD + 12.00 = 1215.00
SILV + .20 = 17.07
The jobs report on Friday showed the economy added 126,000 nonfarm payroll jobs in March, the slowest monthly increase since December 2013, and the unemployment rate held at 5.5%. It was a bad jobs report; it raises concerns about a spring revival in the economy and should give the Fed cause to be more patient in initiating rate hikes.
New York Fed President William Dudley said the timing of interest rate hikes are uncertain and the Federal Reserve must watch that the surprising recent weakness in the economy does not foreshadow a more substantial slowdown, especially in the labor market. Dudley said: “It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.” Still, Dudley said the weak economic data likely reflected “temporary factors to a significant degree.”
Maybe. There is still some question of whether the markets are pricing in higher rates. You can understand why markets might be slow to accept higher rates, like the kids in the back of the station wagon asking “are we there yet?”; and the parents in front saying “just around the corner”; we just aren’t quite sure which corner they are referencing. Earlier this year, it was nearly unanimous – the Fed was going to raise interest rates in June 2015. Then it slowly shifted, and the consensus opinion was that the Fed would raise rates in September 2015. After the Friday jobs report, the thinking is that it might not happen this year. So, part of the thinking is that bad news is good news; the bad jobs report means the Fed might wait to hike rates, so the market moved higher at the prospect of an extension on cheap money; whistling past the graveyard of an idea that a weak jobs report might mean there is weakness in the economy.
Of course it’s never just one thing that influences markets. We don’t know why the markets move one way or another on any given day, even at the end of the day. Maybe it was something to do with energy prices. Oil futures moved higher today, after Saudi Arabia raised its prices for crude sales to Asia for the second month running, signaling improved demand in the region.
Hedge funds increased bullish oil bets by the most in four years as negotiators worked to reach a deal over Iran’s nuclear program. According to CFTC data, speculators boosted their net-long position in crude by 21% during the seven days ended March 31, the biggest percentage increase since March 2011. Short positions declined by the most in three months.
Earnings season gets its unofficial start on Wednesday when Alcoa reports. The biggest drag will come from a 63 percent profit decline at energy companies. Oil prices have fallen by about half from a year ago as companies pumped their way into a global glut, and the dollar’s climb of about 25 percent against a basket of currencies. It’s like a one-two punch, and not just to energy companies; U.S. Steel last month announced plans to shut an Illinois mill partly on falling demand from the energy companies. The dollar’s surge helped make steel imports cheaper, hurting producers such as Nucor. At Dow Chemical, profit is poised to drop as plastics prices decline with oil and farmers buy fewer chemicals because their crops are selling for less.
First-quarter earnings per share for companies in the Standard & Poor’s 500 Index may have fallen about 5.8 percent, according to estimates compiled by Bloomberg, in the first year-over-year decline since 2009’s third quarter. Once energy companies are pulled out of the picture, S&P earnings look a bit better, with a projected rise of 1.9 percent.
The Institute for Supply Management said its nonmanufacturing index fell to 56.5% from 56.9% in February. Still, readings over 50% signal more businesses are expanding instead of contracting.
There really isn’t much economic data due out this week. Tomorrow brings the JOLTS report, the Labor Department survey of job openings and labor turnover; Wednesday brings the minutes of the last Fed FOMC meeting. And that’s about it this week.
Greece reassured the IMF that it’s good for the money. Greek Finance minister Yanis Varoufakis met with IMF chief Christine Lagarde and told her that Greece will honor its $500 million repayment due April 9. Greek officials have warned that if the country makes the payment, it may not have enough money for pensions and public sector wages. Greece has not received bailout funds since August last year and has resorted to measures such as borrowing from state entities to tide it over. It offered a new package of reforms last week in the hope of unlocking funds, but has yet to win agreement on the proposals with its EU and IMF lenders.
In an interview with the Orange County Register, Mohamed El-Erian was asked about everything from life after Pimco to where he is currently putting most of his money. Rather than putting most his money in stocks or bonds, El-Erian reveals that most of it is actually sitting in cash. And the reason is simple: pretty much everything else has gotten too elevated.
Hoping to solve expensive roaming charges, Google is in talks with Hutchison Whampoa for a deal that would allow Americans to use their phones abroad at no extra cost. Hutchison could give Google access to mobile service in the UK, Ireland, Italy, and several more markets. Google appears to be trying to create a global network with the same cost for calls, texts, and data no matter where a customer is located. Google has so far described its mobile network aspirations as “small scale.”
U.S. federal law enforcement agencies questioned about 10 Herbalife members last week for information about their business practices. HLF said it is cooperating with requests for information, and “remains confident in the integrity of our business practices.” Separately, Herbalife also received inquiries recently about irregular trading in its stock as part of a broader investigation into possible market manipulation. HLF says the investigation is focused on Bill Ackman’s “nearly three-year effort to drive down HLF’s stock.”
A teardown of the new Samsung Galaxy S6 smartphone didn’t turn up a single Qualcomm part, suggesting a deeper loss of business for the U.S. chipmaker than previously anticipated. However, the WSJ says Qualcomm will remain the S6’s modem supplier for “a meaningful share” of units.
Merrill Lynch is shaking up the ranks of its 14,000 brokers with an apparent zero-tolerance approach to brokers who break key company rules. Case in point: A top Indiana adviser with $1.3 billion in assets under management was terminated in March without advance warning. In the past, brokerages have tended to give second chances to top producers. The tougher approach is seen largely as a response to closer regulatory scrutiny of brokerages. Securities lawyers agree this attitude is taking hold in the industry. They say even small violations, such as poor record keeping or email retention, are drawing stricter penalties.
Last week, California Governor Jerry Brown imposed mandatory water restrictions on urban water use, the first ever. He exempted farmers, who already had to deal with huge reductions in surface water from the state’s irrigation works. Mr. Brown defended the decision on ABC’s “This Week” on Sunday, saying, “They’re providing most of the fruits and vegetables of America to a significant part of the world.”
In normal times, agriculture consumes roughly 80 percent of the surface water available for human use in California, and experts say the state’s water crisis will not be solved without a major contribution from farmers. So far, most farmers are trying to continue farming, but it comes at a cost. Therre has been a drilling frenzy in California’s Central Valley. In some places, water tables have dropped 50 feet or more in just a few years. With less underground water, the land surface is sinking as much as a foot a year in spots, causing roads to buckle and bridges to crack. Shallow wells have run dry. Some communities are dry; not Prohibition-era dry, but Dust Bowl-era dry.
And just in case you haven’t figured out the math yet; this means that food is going to cost more. It costs more to drill wells. Growers with older, shallower wells are watching them go dry as neighbors drill deeper and suck the water table down. Pumping takes huge amounts of electricity to pull up deep water, and costs are rising. Some farmers are going into substantial debt to drill deeper wells, engaging in an arms race with their neighbors that they cannot afford to lose.
An estimated 38.8 million people live in California today, more than double the 15.7 million people who lived here in 1960, and the state’s labor force exploded to 18.9 million in 2013 from 6.4 million people in 1960. California’s $2.2 trillion economy today is the seventh largest in the world, more than quadruple the $520 billion economy of 1963, adjusted for inflation. The median household income jumped to an estimated $61,094 in 2013 from $44,772 in 1960, also adjusted for inflation.
Last week Governor Brown said: “You just can’t live the way you always have.” Now that doesn’t mean California will stop or collapse. It just means the prices are going to change. California may have to slow the number of new housing developments, but that doesn’t mean you can’t move there; it will just cost more. They aren’t telling farmers they can’t grow almonds, they are just cutting back water supplies; almonds will become scarcer. State officials signaled on Friday that reductions in water supplies for farmers were likely to be announced in the coming weeks. This isn’t the first crisis California has faced, and somehow things tend to get worked out, but there is almost always a price to pay.