Financial Review

Ten Years On

…Industrial production up. Construction down. Consumer sentiment high. Jobs plentiful. Waiting on the Fed. Bracing for tariffs. Infrastructure hacks. AT&T-Time Warner court date. Wells Fargo, again. Anniversary of Bear Stearns collapse.

Financial Review by Sinclair Noe for 03-16-2018


DOW + 72 = 24,946
SPX + 4 = 2752
NAS + 0.25 = 7481
RUT + 9 = 1586
10 Y + .02 = 2.85%
OIL + 1.06 = 62.25
GOLD – 2.10 = 1314.60

Stocks moved higher today, and the S&P 500 snapped a 4-day losing streak, but for the week, the major indices posted losses. For the week, the Dow fell 1.57 percent, the S&P lost 1.04 percent, and the Nasdaq dropped 1.27 percent. Today was a quadruple-witching day, which refers to the simultaneous expiration of stock-index futures, stock-index options, single-stock futures and stock options. That led investors to brace for higher volatility, though price action proved relatively subdued. Volume was heavy.


Industrial production surged 1.1% in February, the strongest gain since last October. Manufacturing output jumped 1.2% in February, the biggest gain since October. Mining output rose 4.3%, helped by strong oil and gas extraction and coal mining. The index for oil and gas extraction was about 12% higher than a year ago and was at a record level. Utility output slumped 4.7% on warmer-than-normal temperatures.


Construction on new houses fell 7% in February, but housing starts are still close to a post-recession high and builders show no sign of slowing down. Housing starts declined to an annual rate of 1.24 million last month from a revised 1.33 million in January. The rate of construction in January was the highest since 2008. The decline was concentrated in multi-dwelling units — apartment buildings, condo complexes and the like. It’s a volatile category and there’s also some evidence that the market for rentals is becoming saturated. Construction on single-family homes rose in February. These homes account for 70% of all new residential construction.


The University of Michigan’s consumer sentiment index hit the highest level since 2004 in March, helped by a record favorable assessment of current economic conditions. The index rose to 102 in March from 99.7 in February. All of the gain in the sentiment index was among households with incomes in the bottom third. The main reason for the sunny outlook – jobs.


The latest Job Opening and Labor Turnover Survey, or JOLTS, from the Labor Department shows the number of job openings climbed to a record 6.3 million in January, showing that businesses are still eager to hire. The share of people who left jobs on their own, known as the quits rate, was unchanged at 2.5% among private-sector employees. That number has barely budged in the past year but it’s at a post-recession high, evidence that more workers feel secure enough to leave one job for another.


A tight labor market and possible wage inflation are expected to compel the Federal Reserve to raise interest rates at their FOMC policy meeting next week.  The yield on the short-term 2-year Treasury note hit a high of 2.295 percent, its highest level since Sept. 2008. The yield on 10-year and 30-year Treasuries also moved higher. The Fed has communicated a rate hike for next week’s meeting; they have laid out a timetable for 3 rate hikes this year – all very gradual and incremental. The process should be as boring as watching paint dry, but this will be the first rate hike of the Powell Fed. There will be a press conference following the Fed decision – anything other than total boredom is likely to rattle markets.


Words like gradual, incremental and boring do not apply to the White House. At the start of the week, Secretary of State Rex Tillerson was fired. As we finish the week, there is speculation that National Security Advisor H.R. McMaster might be fired.


The European Commission has created a list of U.S. products it will subject to import tariffs, and they are now reviewing that list with various industries – the first step towards measures to counter planned U.S. taxes on European steel and aluminum. The European Commission, which coordinates trade policy for the 28 EU members, has said that, if the EU is not exempted steel and aluminum tariffs, it should set duties of 25 percent on a range of U.S. products from orange juice and rice to motorcycles and motorboats. Trump has justified the tariffs by invoking a “national security” clause. Look for the World Trade Organization to mount legal challenges to the proposed tariffs.


The U.S. Treasury slapped sanctions on 19 Russian citizens and five entities for election meddling and cyber attacks. After initially equivocating about a chemical attack on a former Russian double agent in Salisbury, England, the White House joined a statement by the leaders of Britain, France and Germany in which they said they “abhor the attack” and blamed it on Moscow. While the Treasury put off targeting oligarchs and officials close to Russian President Putin, it said further sanctions were coming and for the first time blamed Moscow for cyber attacks stretching back at least two years that targeted the U.S. power grid, including nuclear facilities. According to a Department of Homeland Security report, Russian hackers attempted to infiltrate numerous sectors of American infrastructure, including energy, nuclear, commercial facilities, water, aviation and manufacturing. Russian actors gained the ability to disrupt or completely shut down power plants and other critical infrastructure. The tactics outlined in the DHS report are remarkably similar to those employed by Russia when it took down parts of Ukraine’s electrical grid in 2015 and 2016.


When the Justice Department goes to court Monday to try to block the $85 billion megamerger between AT&T and Time Warner, it will rely on a tried-and-true approach of arguing that the deal would raise prices for ordinary consumers. A Justice Department win would usher in a new era in antitrust policy, signaling a more aggressive view toward mergers that create sprawling entities whose operations touch different corners of the economy. But a government defeat would give AT&T full control over one of the world’s largest media and entertainment conglomerates, and open the floodgates to a wave of new vertical mergers Justice may have little power to stop. Already, more than $409 billion worth of deals have been announced in 2018, a 67 percent jump from the same time last year and the fastest start ever for mergers and acquisitions in a single year.


A federal investigation into Wells Fargo has broadened to include its wealth-management division, according to a Wall Street Journal report. The Justice Department is now investigating whether Wells Fargo made inappropriate recommendations or referrals, or failed to inform customers about potential conflicts of interest. Earlier this year, the Federal Reserve put significant restrictions on the San Francisco bank citing “widespread consumer abuses.” The bank is replacing four members of its board and its asset level has been frozen by the Fed until internal controls are improved. Separate from the sales-practices and the reported wealth-management investigations, Wells Fargo is under investigation for potentially overcharging corporate customers in foreign-exchange transactions as well as an investigation into its auto-lending business, where it forced auto insurance policies onto customers who did not need them.


Ten years ago today, JPMorgan Chase announced it would buy collapsing investment bank Bear Stearns for pennies on the dollar – it worked out to $2 per share, a figure later revised to $10. The move would become a milestone for Wall Street, but it didn’t hold off the meltdown for long. Six months later, Lehman Brothers collapsed, and the lessons of Bear Stearns emboldened the Fed to think the markets could survive a Lehman collapse without Fed intervention. Ultimately, Congress brought the crisis to an end with passage of the $700 billion Troubled Asset Relief Program. In 2010 Dodd-Frank was signed into law, mandating strict bank capital requirements and other changes aimed at preventing the need for future bailouts.


Maiden Lane, a small, winding street in Lower Manhattan, is home to the rear entrance of the headquarters of the Federal Reserve Bank of New York. Its name was lent nearly a decade ago to a lending facility created by the Fed to assist JPMorgan Chase in its emergency acquisition of the fatally wounded broker-dealer Bear Stearns. The symbolism was rich: The Fed was lending out its back door in an emergency effort to contain the biggest financial crisis since the 1920s. Today some $1.7 billion of Maiden Lane LLC assets remain on the Fed’s balance sheet, a small portion of the $30 billion of dicey mortgage securities Maiden Lane acquired during the financial crisis of 2008-09, and a reminder of its rescue effort.


This week, on the 10th anniversary of the collapse of Bear Stearns, Congress is looking to soften or roll back parts of the Dodd-Frank banking bill.  Over the past 10 years, the banks have recovered, they are earning big profits, and they are bigger than ever. What could go wrong?

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