No Rhyme nor Reason
Financial Review by Sinclair Noe for 09-08-2015
DOW + 390 = 16,492
SPX + 48 = 1969
NAS + 128 = 4811
10 YR YLD + .06 = 2.19%
OIL – .11 = 45.94
GOLD – 1.40 = 1122.40
SILV + .22 = 14.90
There is no particular rhyme nor reason to explain today’s rally on Wall Street, or for that matter, last week’s declines. Last Friday’s jobs report did little to provide clarity about whether the Fed would raise rates at next week’s FOMC meeting.
The economy added 173,000 jobs in August, which was below expectations; and the unemployment rate dropped to 5.1%. Following Friday’s employment data, futures market traders predicted about a 20 percent chance a rate hike will come this month, down from around 30 percent before the jobs report. I think the Fed might act next week, just to clear the air. If you remember back to the “taper tantrum” of 2013, when the markets became jittery about the prospect of the end of Quantitative Easing, the anticipation was worse than the actual event. So, the easiest thing might just be to do it and be done.
Of course, it is easy to argue against a rate hike. The U-6 unemployment rate is still around 10.3%; some people consider this the “real” unemployment rate because it includes part-time employees seeking full-time jobs and marginally employed workers. The Fed has a dual mandate: to promote full employment and price stability. Prices have been stable for the most part, inflation is not a problem; the usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high. As for full employment, the Fed has said that 5.2% is full employment, but wages have been stagnant and there is still plenty of slack in the labor market. For many, many people there has been no recovery. The argument for raising rates really does nothing to help Main Street, but it might help the bankers on Wall Street, and faced with that option the Fed has always erred on the side of Wall Street.
China’s imports shrank far more than expected in August, falling for the 10th straight month. Imports fell 13.8 percent from a year earlier; that follows a drop of 8.1% in July. Exports were down 5.5%. The trade is calculated in US dollars, and research firm Capital Economics reckons that “trade has actually been quite healthy recently in volume terms.”
China’s government has spent $236 billion trying to shore up its stock market since a rout began three months ago, according to Goldman Sachs. At the G20, China was all about talking stability. A governor of the People’s Bank of China said the rout in the stock market was near its end, noting that leverage had declined and that the real economy went relatively unscathed. Despite the Chinese economy’s visible slowdown and dramatic action over the past month officials maintained that the economy would continue to grow at 7% annually. Yes, the country’s economy will close this year the same way it did last year; 7% growth, despite all the market turmoil and the yuan devaluation and industrial slowdown; 7% growth. China’s major stock indexes moved higher: the Shanghai was up 2.9% and the Shenzen advanced 3.8%.
Japanese Prime Minister Shinzo Abe has won a second three-year term as the President of his Liberal Democratic Party. Japan’s economy contracted at an annualized of 1.2% rate in the second quarter, which was a little better than estimates. However, capital expenditure fell 0.9%, more than the original estimate of 0.1%, clouding growth prospects.
German exports recovered to climb 2.4% in July after dropping 1.1% in June. Eurozone Q2 GDP growth has been revised up to 0.4% on quarter from an initial estimate of 0.3%. The Stoxx Europe 600 index had its best gains in more than a month.
U.S. small business confidence rose modestly in August, suggesting the economy continued to grow at a steady clip halfway through the third quarter. The NFIB optimism index improved from 95.4 to 95.9 – and still not above the 42 year average of 98. Small business owners did not seem to be very concerned about the antics of the stock market or China’s currency devaluation. Maybe it was too late in the month to be fully captured by the survey so more might be revealed in September, but most small business owners have their capital primarily invested in their own firm, not other people’s firms. And a side note, thirty-three percent of small business owners reported all credit needs met, and 49 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow.
The American Medical Association says two proposed mergers of U.S. health insurers worth tens of billions of dollars would hurt competition in commercial health plans in as many as 17 states. Aetna announced plans to buy smaller rival Humana in early July and Anthem agreed to buy Cigna later that month. Both mergers are being reviewed by federal antitrust regulators as well as state insurance officials. The American Hospital Association also recently made public its analysis of the two deals, also saying they would hurt competition.
European Union antitrust regulators have approved GE’s $13.9 billion acquisition of the power business of French peer Alstom. GE will have to sell some of Alstom’s assets.
A federal appeals court is set to decide whether judges can tear up corporate prosecution agreements they deem too lenient. In February, a federal district judge in Washington, D.C., rejected a Deferred Prosecution Agreement, or DPA, he considered weak in a case involving Fokker Services BV, a Dutch aerospace firm accused of making more than 1,000 illegal shipments of parts and components to Iran and other sanctioned countries from 2005 to 2010. The U.S. Court of Appeals for the D.C. Circuit is now reviewing the judge’s decision, with arguments scheduled for this week and a ruling expected in coming months.
DPAs have been the favored tool of the Department of Justice in dealing with banksters. The DOJ sets up a deal to allow banksters or other corporate criminals to promise not to break the law in the future in exchange for a fine; in essence, cash for leniency. In the case of Fokker, the DOJ made a big splash about a $10.5 million fine for selling aircraft parts and services to customers in Iran, Burma and Sudan. There was a parallel civil settlement with the Treasury Department’s Office of Foreign Assets Control to pay an additional $10.5 million. If you go down the press release, you find that Fokker received $21 million in gross revenue for these 1,153 illegal transactions, so the penalty was simply to give back what they received.
It is supposed to be a probationary period for the offenders. If they can stay out of trouble, they can stay out of legal trouble. The problem is that many corporations, especially the bankers, are repeat offenders, serial offenders. In the case of Fokker, the probationary period was only 18 months, and a judge considered that overly lenient. It really doesn’t matter because the DOJ never goes back on repeat offenders. The major banks, JPMorgan, BofA, Citi, and Goldman Sachs; along with international cohorts, UBS, RBS, HSBC, Barclays, and Deutsche Bank have all been repeat offenders; everything from rigging Libor to forex to muni bond markets to money laundering to bribery to sanctions violations to forgery…, well the list goes on and on. The result is that even after a long history of offenses, JPMorgan can pay a $550 million dollar fine for rigging the foreign exchange markets, sign a DPA, and Jamie Dimon gets a $20 million pay package.
Media General said it would buy media company Meredith Corp for about $2.3 billion to create the third-largest local TV station owner in the United States. The combined company, to be named Meredith Media General, will initially have 88 TV stations that reach 30 percent of TV households.
Blackstone Group’s real estate fund will buy U.S. luxury hotel owner Strategic Hotels & Resorts and a unit of Strategic Hotels Funding LLC in a deal valued at $6 billion, including debt. Strategic Hotels & Resorts is a real estate investment trust that owns hotels operated by top hospitality chains such as Hyatt Hotels Corp, InterContinental Hotels Group and Marriott International.
United Continental has fired CEO Jeff Smisek because of a probe into improprieties at Port Authority of New York and New Jersey. Smisek, who served as chairman, president and CEO, will receive about $4.9 million as separation payment.
Amazon plans to release a $50 tablet in time for the holiday season, with a 6-inch screen tablet and a mono speaker, priced at half the cost of its cheapest Fire device.
MasterCard starts testing a program today to allow cardholders to verify their online purchases with a selfie. The credit card company is also testing fingerprint and voice recognition for verification. (So, if someone steals your card and takes your picture, you are in real trouble.)
This Wednesday, Apple has a big event planned in San Francisco, where they are expected to announce a new iPhone, because that new phone you just bought is already obsolete; they will almost certainly introduce a faster, slimmer phone because – well, because Apple is a phone company. They are also expected to introduce a redesigned Apple TV set-top box with new capabilities for apps and games, plus recognition of Siri voice commands to search for shows; so now you can ask your TV where you left the remote control. And they are also expected to announce a new, smarter version of Siri; so you could tell Siri to set the alarm for 6 AM tomorrow morning, and it could wake you up and also turn on the lights, open the curtain and start the coffee machine, if you were really a geek about it.