Pendulums Swing Wide
Financial Review by Sinclair Noe for 03-07-2016
DOW + 67 = 17,073
SPX + 1 = 2001
NAS – 8 = 4708
10 Y + .02 = 1.90%
OIL + 1.99 = 37.91
GOLD + 7.90 = 1268.00
The U.S. stock market posted its third consecutive weekly gains last week, following an impressive jobs report on Friday. Stocks pulled out small gains today, for the fifth consecutive session. The S&P 500 has now gained in 11 out of 16 sessions since its Feb. 11 low, and closed last week above its 100-day moving average for first time in 2016.
The Federal Reserve FOMC meets next week to determine monetary policy and the battle lines are being drawn. Fed Governor Lael Brainard, who has emerged as a leader of the Fed’s dovish faction, argued for “patience” in raising interest rates. Fed Vice-Chair Stanley Fischer, who has consistently sounded more hawkish than many of his colleagues, warned that inflation is showing signs of accelerating; which would indicate his preference for raising rates. Adding to the mixed signals, the European Central Bank meets this week and is widely expected to expand its stimulus measures, which likely means they go more negative. The big questions being how big and in what form? And that would just make a Fed rate hike all the more awkward.
Negative rates have been spreading through important sectors of high finance in Europe and Asia; about $7 trillion in bonds with negative debt overall, with Japan and Germany leading the way. There is something wrong with the idea that you hand over your money to a bank for safe keeping with a promise that they will only skim off a small percentage. Theoretically, negative interest rates are supposed to increase money in circulation and speed up the velocity of money. Another, more realistic reason is that it is a way to drive down the value of a country’s currency. Negative rates haven’t hit the US yet, but the bond markets are global, and one consequence has been to send investors hunting for higher yields.
International capital markets are thawing out for spring as volatility eases and money flows into bond funds. U.S. high yield spreads (along with the S&P 500) have now returned to levels last seen at the start of January, with investors pouring $5.8 billion into junk bonds for the week ending March 2, the largest weekly amount on record. ExxonMobil priced its biggest bond deal ever last week, raising $12 billion. It followed Johnson & Johnson, which raised $7.5 billion the previous week, as well as Cisco Systems’ $7 billion deal.
The Bank for International Settlements, known as the central banks’ central bank, warned that central-bank stimulus may have less traction in financial markets than it once had, and raised questions about the consequences of negative interest rates. The BIS warned that negative interest rates are not always being passed on to businesses and consumers, and could ultimately undermine the models of banks, pension funds and insurance companies. The BIS says the longer reference rates are set at zero or below, the higher the risk of hitting a “tipping point,” where no one benefits.
China cut its growth target for 2016. Beijing announced a new annual goal of 6.5% to 7%, down from around 7% last year and said it would open up state companies to private competition as part of an increase in public spending. It is part of a new economic plan announced at the People’s Congress, which opened over the weekend. It may be a bit much to call it a new economic plan because it is doubtful China ever had a real plan to begin with. The plan was to print a lot of money and build a lot of buildings, even if they remained empty. The result is massive debt. The new plan apparently involves the transition from a rural to an urban economy, from agriculture and manufacturing to a consumer driven economy. It involves hundreds of millions of people moving from the country to the city. In other words, China is trying to re-invent itself, and even if they have a five year plan, it will be nearly impossible without significant displacement and pain. As a template we can see the Chinese reforms of 20 years ago that led to privatization of state run enterprises and resulted in tens of millions of lost jobs. It might be better this time (doubtful) and it will likely be as bad or worse.
Iron ore jumped 19%, the biggest one-day move ever, after Chinese policy makers signaled their willingness to buttress economic growth, in turn boosting the outlook for steel consumption in the top user – at least in theory. Closer to reality, it was an excuse to light a fuse under speculators who had bet against the market and were caught in a short squeeze. Make no mistake, this was not a move based on fundamental data; the fundamentals of iron ore production and consumption don’t change that much. This was as speculative move, and as such, this over-reaction will probably not be sustained.
Meanwhile, the price of Brent crude topped $40 a barrel, again looking like an over-reaction and again squeezing shorts. Sometimes the pendulum swings wide, both ways. The United Arab Emirates’ energy minister said that current prices are forcing all suppliers to freeze their production. China imposed a cap on its energy consumption by 2020, marking the first time the world’s second-biggest economy has set such a target. U.S. energy firms cut oil rigs for an 11th week in a row to the lowest since December 2009. On the flip side, the first tanker of Iranian oil arrived in Europe. After a four-year embargo was lifted as part of the end of sanctions in January, a tanker carrying one million barrels of Iranian crude docked in Spain. Another three ships are on their way as Iran aims to boost exports to Europe and get back up to the 3.6 million barrels it produced daily in 2011. Iran won’t be freezing production any time soon. As prices move up, cheating on production is highly likely as so many need funds to pay their bills. This includes of course many marginal players.
The Supreme Court turned away appeals from three financial-services companies that sought to save a total of $1.5 billion by using a tax-avoidance strategy designed by Barclays. The Supremes rejected separate appeals by Bank of New York Mellon, AIG and a unit of BB&T. All three companies were seeking to overturn federal appeals court rulings that said the Barclays strategy lacked economic substance. The cases centered on foreign tax credits generated using an approach known as Structured Trust Advantaged Repackaged Securities, or STARS. BB&T was trying to recoup $600 million from the IRS, while AIG was seeking a refund of more than $306 million.
Apple must pay $450 million to end an antitrust suit after the Supreme Court refused to question a finding that the company orchestrated a scheme to raise the prices for electronic books. The justices turned away an appeal by Apple, leaving intact a federal appeals court ruling favoring the Justice Department and more than 30 states that sued. Government lawyers accused Apple of leading a price-fixing effort as part of the 2010 introduction of its iPad tablet and iBookstore feature.
Apple customers were targeted by hackers over the weekend in the first campaign against Macintosh computers using a type of software known as ransomware. Ransomware encrypts data on infected machines, then typically asks users to pay ransoms in hard-to-trace digital currencies to get an electronic key so they can retrieve their data. Security experts estimate that ransoms total hundreds of millions of dollars a year from such cyber criminals, who typically target users of Microsoft’s Windows operating system. The malware is programmed to encrypt files on an infected personal computer three days after the original infection. An Apple representative said the company had taken steps over the weekend to prevent attacks by revoking a digital certificate from a legitimate Apple developer that enabled the rogue software to install on Macs.
After quietly dropping an encryption option on its Fire tablets, Amazon is restoring the security feature amid criticism from customers and privacy advocates. The decision comes as Apple squares off against the FBI over access to the encrypted iPhone used by one of the San Bernardino shooters.
A SpaceX Falcon 9 rocket blasted off from Cape Canaveral on Friday night, successfully deploying a communications satellite into orbit, but the launch vehicle’s reusable main-stage booster was destroyed when it failed to land itself on an ocean platform. It marked the fourth botched at-sea return landing attempt for Elon Musk, though a Falcon main-stage rocket did achieve a successful ground-based touchdown after soaring back to Earth from a less demanding launch in December.
According to the World Health Organization, about 15 companies are working on Zika vaccines, most in the initial stages. It’s still a long way to go. Under the best-case scenario, officials estimated it will take until roughly the end of 2017 to just gather enough data from trials for regulators. Drugmakers Sanofi, Inovio Pharmaceuticals and NewLink Genetics are among those who are developing treatments for the virus, while companies including Chembio Diagnostics are working on new diagnostic tests.
The Royal Bank of Scotland’s United States securities division botched the firing of a former executive so badly that a Financial Industry Regulatory Authority arbitration panel ordered the bank to pay him $2.05 million in compensatory damages. According to the arbitration panel’s case summary, the reason for the Royal Bank of Scotland to fire the executive, he claimed, was to distract people from finding out about “significant internal turmoil” within the bank. The panel ordered the bank to retract his termination and expunge his regulatory record of defamatory comments. Lawyers who follow securities industry arbitrations say they were surprised by how severely critical the decision was of the bank; maybe they should have been more surprised at how bad the bank was at firing someone.