Financial Review

It’s Just a Matter of Time

Financial Review

DOW + 43 = 17,031
SPX – 1 = 1984
NAS – 48 = 4518
10 YR YLD – .02 = 2.59%
OIL – .17 = 92.75
GOLD + 4.40 = 1233.70
SILV + .04 = 18.76

The Nasdaq just went south today; it was the worst day since July. I’m not sure there is a good explanation, but some of the excuses were entertaining. One idea is the Alibaba IPO is causing traders to rotate from certain stocks in preparation. Yea, sure.

The Federal Reserve FOMC is meeting this week to determine monetary policy. We know the Fed is headed toward the end of QE next month; they are on track to end their massive purchases of mortgage backed securities and Treasuries; they will probably issue some guidance, or hints about when they will raise the target on interest rates. The general expectation is that the federal funds rate will go from near zero to 3.5% by the end of 2017, with the first increases in about 6 to 9 months.

The two day FOMC meeting concludes Wednesday; the FOMC will issue a statement and then Janet Yellen will hold a press conference. Also Wednesday, the Fed’s economic forecasts will for the first time offer estimates for growth, unemployment, inflation and interest rates in 2017. New projections will also be given for 2014, 2015 and 2016. The data will offer some insight into the expected path of interest rates.

Wednesday morning, the Labor Department will release the consumer-price index. The CPI was a little stronger in the spring, then the inflation measure showed signs of leveling off in this summer. Year-over-year, prices rose 2% in July. That’s in line with the Fed’s inflation target, though the central bank prefers a separate gauge calculated by the Commerce Department which shows inflation is less of a problem. It’s expected the August CPI will be flat compared with the reading for July; excluding volatile food and energy prices, forecasters expect prices rose 0.2%. Thursday brings a report on August building permits and new construction starts; it’s expected that housing starts dropped.

This morning the Federal Reserve reported August manufacturing output fell for the first time in 7 months. Factory production dropped 0.4% last month as motor vehicle production fell sharply after a strong report in July. Motor vehicle output declined 7.6 percent last month after a 9.3 percent jump in July. Excluding automobiles, manufacturing output gained 0.1 percent in August. So far in the third quarter, factory production is running at a 4.6 percent annual pace, a sign that manufacturing will continue to support economic growth.

The OECD, the Organization of Economic Cooperation and Development, updated its growth forecasts for major developed economies; this ahead of a meeting of finance ministers and central bankers from the G-20 later this week in Australia. The OECD projected growth in the euro zone at only 0.8 percent this year and rising only slightly next year to 1.1 percent. That marked a sizeable cut from its May Economic Outlook for the euro zone, when the Paris-based organization forecast growth of 1.2 percent in 2014 and 1.7 percent in 2015. In comparison, the OECD saw the United States’ economy growing 2.1 percent this year before accelerating to 3.1 percent in 2015. In May the OECD forecast US growth of 2.6 percent this year and 3.5 percent next year. And they called on the euro-zone to pump up the stimulus, saying: “Recent ECB action is welcome but further measures, including QE (quantitative easing), are warranted,” to address “The perception that policy action is always too little too late needs to be changed.”

Separately, credit ratings agency Standard & Poor’s said it expects the ECB to launch a fully-fledged quantitative easing program targeting private-sector bonds, saying: “In our view, the vulnerability of the recovery in the euro-zone, the elevated risks of a triple dip, and the threat of negative inflation would justify the recourse to additional non-conventional measures.”

Do you remember the movie, Braveheart? That was the film with Mel Gibson portraying William Wallace, the Scottish warrior, with blue face paint and rather gruesome battlefield carnage. Well, 700 years later, we have a sequel to the Scottish independence story; and the battlefield is replaced by the ballot box. Thursday, Scots will vote if they want to be independent from the United Kingdom. So, it may be viewed as a move toward more self-governance. Right now, the vote is considered a tossup.

British politicians are warning that if Scots vote to split from the United Kingdom, it would be an irreversible decision that would bring economic doom and gloom. Meanwhile, the campaign for Scottish independence has peddled hope in the transformational effects of independence. I don’t claim to know, but separatism can be messy; history has shown us that. And no matter how the vote goes Thursday, there will be many people who will be upset; if they don’t get their way with the ballot, they may seek alternate measures. And the whole thing has the prospect of ripping apart the United Kingdom, or at least making things unpleasant for a while.

There are multiple issues at stake in the Scottish vote including public spending and taxation, the role in the EU, healthcare, immigration, and no surprise – oil. Scotland might be entitled to 91 per cent of the UK’s oil and gas fields, which might produce a tax windfall of £7 billion a year in the next five years, more or less. Not bad for a population of a little more than 5 million.

A judge refused to extend a timeout in Detroit’s bankruptcy trial after a deal with a major creditor removed another opponent from the city’s plan to exit the largest Chapter 9 case in US history. A bond insurer, Financial Guaranty Insurance, said it needs more time to craft trial strategy after another insurer ironed out a settlement with Detroit. But Judge Steven Rhodes said Financial Guaranty should have been prepared to lose an ally, and he resumed the trial. The trial was suspended last Wednesday so Detroit and Syncora could reach an agreement. Syncora is getting cash and long-term leases on a parking garage and the tunnel between Detroit and Canada, among other concessions.

Remember the investigations into manipulation in the Forex, the $5.3 trillion dollar a day market for currency exchanges? Yea, that just faded away without so much as a whimper. Well, it’s back, maybe. US investigators are reportedly using multiple bank employees as informants in the manipulation investigations and are preparing to seek criminal charges against individual traders as early as next month. Justice Department prosecutors and Federal Bureau of Investigation agents have “flipped” a number of bank employees who remained at their jobs, secretly gathering evidence against their colleagues by engaging in exchanges with suspects about possible crimes and recording them.

For more than a year, global investigators have been looking into misconduct in the foreign-exchange market, including possible efforts by traders to manipulate currencies to maximize profits and minimize losses. The initial probes were propelled, in part, by a separate inquiry into allegations that employees at numerous banks rigged the London interbank offered rate, the interest-rate benchmark also known as Libor. As banks struck deals to cooperate in that probe, their assistance produced new leads on possible manipulation of currency exchanges. Whether prosecutors are able to go higher up the bank hierarchy to seek charges against executives or others remains unclear.

The number of people killed in crashes caused by a faulty ignition switch in older General Motors cars now stands at 19 and could grow to well over 100 based on the number of claims filed against the automaker. That, according to the first report from Kenneth Feinberg, a victims’ compensation consultant hired by GM, who is administering a plan to award payments to crash victims and their families. Feinberg said he has received 445 claims, including 125 for deaths, 58 for serious injuries and 262 for brief hospitalizations or outpatient care. Feinberg is the sole decision maker on the size of the payments. Victims or their heirs would have to give up the right to sue GM in order to receive the money.

TRW Automotive, one of the largest safety parts makers, said that it agreed to be acquired by the German auto parts maker ZF Friedrichshafen in a deal that valued the company at $13.5 billion. The transaction is expected to create one of the world’s largest auto parts suppliers with combined sales of about $41 billion and 138,000 employees. TRW is expected to be operated as a separate division within ZF. TRW makes air bags, crash sensors and other parts used to protect passengers.

On this day, 6 years ago, September 15, 2008, Lehman Brothers collapsed. Wall Street came closer to imploding than at any other time since the Great Depression. Within days, the insurer AIG had to be bailed out by the federal government while other investment banks, including Morgan Stanley and Merrill Lynch, were pushed to the brink. Merrill was eventually sold to Bank of America.

Six years later, the nation’s financial system seems to have largely healed. Banks are back to posting record profits. Over the past several years, financial stocks have been among the hottest areas of the market. That’s cold comfort to those who retired in the past five years. Big upfront losses can crack a nest egg, even if the market later improves. When stocks fall, the stability of cash can cushion the blow. Yet things don’t necessarily work out that way. Just ask shareholders of Schwab YieldPlus. This so-called ultrashort bond fund — which was marketed as a cash alternative, though it really wasn’t one — fell 35% in 2008 when the mortgage securities that provided the “plus” in the fund’s name turned out to be riskier than thought. In January 2011 Schwab settled the charges that it misled investors but did not admit wrongdoing.

Six years after, and we still face many of the same risks: monetary policy risks, a weak economy, a lack of structural reforms, too big to fail banks that are bigger than ever, and of course, with the market near all time highs and interest rates near all time lows, – bubbles. So, after 6 years, what have we learned? It’s just a matter of time.

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