Financial Review

Relatively Soon

…..CPI shows inflation. Jobless claims plummet. AZ unemployment dips. Yellen says rate hike relatively soon. The Minneapolis Plan to avoid another bank bailout and break up the big banks (that’s a bonus). Abe in search of a transition team. Tesla-Solar City – done deal. SpaceX satellite plan. Citi Australia goes cashless. JPMorgan’s Chinese bribe. Wells Fargo loses customers. Valeant-Philidor execs arrested. Ford in India.

Financial Review by Sinclair Noe for 11-17-2016

DOW + 35 = 18,903
SPX + 10 = 2187
NAS + 39 = 5333
10 Y + .05 = 2.28%
OIL – .58 = 45.52
The S&P 500 is close to a record high of 2190. Not today, but close.


The Labor Department reports the Consumer Price Index increased 0.4 percent last month, the biggest increase in six months. In the 12 months through October, the CPI advanced 1.6 percent. Gasoline prices jumped 7 percent last month and rents increased 0.4 percent; food prices were unchanged.   Underlying inflation, however, remained moderate. The core CPI, which strips out food and energy costs, climbed 0.1 percent last month after a similar gain in September. That slowed the year-on-year increase in the core CPI to 2.1 percent.


The number of people who applied for unemployment benefits last week dropped by 19,000 to 235,000, a 43 year low. Initial claims have been under the key 300,000 threshold for 89 straight weeks. Companies have ramped up hiring over the past five years, and many complain they cannot find enough skilled workers to quickly fill open positions.


Arizona’s seasonally adjusted unemployment rate decreased three-tenths of a percentage point from 5.5% in September to 5.2% in October. The national unemployment rate stands at 4.9%. Arizona gained 28,000 Nonfarm jobs in October. Arizona Nonfarm employment grew by 1.8% (49,600 jobs) over the year in October.


Federal Reserve Chair Janet Yellen spoke to the Joint Economic Committee this morning, saying a rate hike is coming “relatively soon.” Yellen said progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. The Fed chair warned of the risks attached to waiting too long before raising rates, saying: “Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.” So the Fed will hike rates in December, absent some catastrophe. Also, in testimony, Yellen pledged to serve out her term despite criticism from Donald Trump during his presidential campaign and she defended the Dodd-Frank Act.


Meanwhile, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis in January, says the big banks are still too big to fail even after the passage of the 2010 Dodd-Frank Act. And he has a proposal, called the Minneapolis Plan, to reduce the risks that these banks pose. In a speech to the Economic Club of New York, Kashkari said his plan would require banks with $250 billion or more in assets to issue common equity of 23.5 percent, up from 13 percent required under current rules. Long-term debt would not be allowed to be counted as part of that cushion because history showed it was not a foolproof buffer to losses. The plan would likely prompt banks to break apart because of the high cost of holding so much capital. In other words, the risk of another financial calamity outweighed the costs of increased regulation. What makes this interesting is that President-elect Trump has called for repealing Dodd-Frank, although we don’t know what he would replace it with. At the same time, the Republican Party platform calls for breaking up the large banks by restoring the New Deal-era Glass-Steagall Act. Kashkari said the Minneapolis Plan would greatly reduce the risks of another financial meltdown.


Kashkari also said he traced some of the nation’s current political anger and polarization to how the government responded to the financial crisis — which allowed large banks to survive while thousands of Americans struggled to keep their homes and find new jobs, saying: “The bailouts violated a core belief that has been handed down from generation to generation in our society that if you take a risk you bear the rewards and consequences of that risk.”


The Bank of Mexico just hiked rates by 50 basis points, to 5.25% up from 4.75%.The Mexican peso fell to a record low against the dollar on election night as rolling results increasingly pointed to a Trump victory. It continued tumbling over the course of last week, but has since retraced some of its losses. The point of a rate rise is not to stem the peso’s fall but to anchor inflation expectations and deter capital flight; still, a rate hike could slow economic growth.  Mexico faces the threat of a rating agency downgrade, and analysts have been trimming their growth forecasts for next year.


President-elect Donald Trump is expected to meet with Japanese Prime Minister Shinzo Abe today. But Japanese officials don’t know where or when it will take place, nor do they know who will be attending. The Bank of Japan has been on the defensive, buying Japanese Government Bonds in a bid to offset rising treasury yields. Governor Haruhiko Kuroda said he would not allow market pressure from the U.S. to interfere with Japanese monetary policy and does not need to move in tandem with the Federal Reserve, and so the Bank of Japan will buy unlimited bonds – keep in mind they carry a negative interest rate.


Walmart reported earnings and revenue that slightly missed estimates. Wal-Mart said it earned 98 cents a share during the fiscal third quarter, slightly lower than 99 cents a share in the prior-year period. It raked in sales of $118 billion, a 0.7 percent increase over the prior-year period but below estimates.


Cisco Systems, another Dow stock, reported late Wednesday earnings and revenue above forecasts.  But Cisco warned on outlook for the current quarter, as the company’s traditional business of switches and routers continues to struggle with sluggish demand.


Best Buy, the electronics retailer, posted third quarter earnings of 62 cent per share, topping estimates of 42 cents. Revenue also beat. Comparable store sales were up 1.8% from the same quarter last year. Guidance for the fourth quarter came in strong.


After five months of wrangling and two different recommendations from proxy advisory firms, shareholders approved the $2.6 billion merger between Tesla and SolarCity.


Documents filed with the FCC show SpaceX plans to deploy 4,425 satellites to create a super-fast global internet network. That’s more than three times the 1,419 operational satellites that are currently in orbit, according to the Union of Concerned Scientists. The initiative was first floated by Elon Musk in early 2015, when he estimated the project would take at least five years and cost around $10 billion.


Citigroup’s Australian arm is going cashless, telling customers that it will no longer handle notes and coins as of Nov. 24, because fewer than 4% of customers have used them in the last year. While Citi is a small force in Australian retail banking, the move is a sign of how banks are being forced to reinvent branches in the face of a boom in digital transactions and contactless payments.


Following a nearly three-year investigation, JPMorgan has agreed to pay more than $264 million to settle bribery allegations that it hired children of well-connected Chinese decision-makers to win business. JPMorgan may take another hit; Fox Business is reporting that CEO Jamie Dimon might be named Treasury Secretary in the new Trump administration.


Wells Fargo said retail customers opened 44 percent fewer new accounts in October compared with the same period a year earlier following the bank’s settlement with regulators over its cross-selling scandal. New credit-card applications dropped by half to 200,000 in October, the first full month since the lender disclosed the settlement.


Andy Davenport, the CEO of Philidor, the secret pharmacy whose discovery led to a crisis at Valeant Pharmaceuticals, has been arrested and charged with “engaging in a multimillion-dollar fraud and kickback scheme.” Gary Tanner, a former Valeant executive who went on to work for Philidor, was also arrested. US prosecutors are separately investigating former Valeant CEO Michael Pearson and CFO Howard Schiller but they have not been charged at this time. Philidor is at the heart of the scandal that erased 90% of Valeant Pharmaceuticals’ market value. Valeant hadn’t told investors about the pharmacy, which Valeant had an option to acquire and which accounted for at least 5% of the company’s sales. After the pharmacy’s existence came to light, and accusations that it was using fraudulent tactics to push Valeant’s drugs quickly followed, the company was quick to break off the relationship.


Toyota is getting serious about electric cars. The world’s biggest car company is setting up a separate in-house division to focus purely on developing an electric-car strategy to meet ever-tightening global emissions regulations. Until now, Toyota has been investing mainly in the development of hydrogen-fuel-cell cars.


Ford’s new EcoSport is set to become the smallest SUV in the Detroit automaker’s line-up, but it could also fuel the big debate over automotive trade. That’s because the model will roll off a Ford assembly line in India. Ford has also made plans to move all of its small car production to Mexico.



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