The Gravy Boat
Financial Review by Sinclair Noe for 11-25-2015
DOW + 1 = 17,813
SPX – 0.27 = 2088
NAS + 13 = 5116
10 YR YLD – .01 = 2.23%
OIL + .25 = 43.12
GOLD – 4.50 = 1071.90
SILV – .05 = 14.26
We have a boatload, or at least a gravy boat full of economic data before we get into the holiday. Initial claims for state unemployment benefits declined 12,000 to a seasonally adjusted 260,000 for the week ended Nov. 21. Claims have now held below the 300,000 threshold for 38 consecutive weeks, the longest stretch in years, and remain close to levels last seen 42 years ago.
Orders for business equipment climbed more than forecast in October. Bookings for non-military capital goods excluding aircraft rose 1.3 percent, the most in three months, after an upwardly revised 0.4 percent increase in September; non-defense capital goods are considered a proxy for business investment. So, today’s report shows businesses are spending more on business. It may be too early to call it a trend reversal but cap ex spending had been weak, in large part due to cuts in the energy sector, and also the tendency for companies to indulge in share buybacks rather than plowing money back into the business.
Orders for all durable goods, items meant to last at least three years, climbed 3 percent. Commercial aircraft orders surged 81 percent in October after dropping 32.2 percent a month earlier. Excluding transportation equipment demand, which is volatile from month to month, bookings increased 0.5 percent in October. Stronger demand for computers, heavy machinery, military hardware and jumbo jets offset a dip in auto sales.
Consumer spending edged up 0.1% in October after a similar increase in September. Personal income increased 0.4% last month. Savings increased to $761 billion last month, the highest level since December 2012, from $722 billion in September. A little extra money in the bank may just mean consumers are saving up for the holiday shopping season. If so, it would bode well for cleaning out some of the excess inventory reported in yesterday’s GDP report. This points to a labor market that continues to show signs of recovery even though consumers remain wary.
Still, inflation remains tame. The personal consumption expenditures index, the PCE, was up 0.2%. Year on year core PCE is holding at 1.3%, which is far short of the Federal Reserve’s target of 2% inflation. Still, we expect the Fed to raise interest rates at the December FOMC meeting, but this means that rate hikes will likely take a long and shallow trajectory.
The University of Michigan consumer sentiment index rose to 91.3 in November, up from 90 in October; and while that is a gain, it falls short of the preliminary reading of 93.1. Consumers are feeling decent but not giddy. This follows yesterday’s report from the Conference Board that showed a big drop in consumer confidence. Both reports show consumers are sanguine about current conditions but a bit nervous about future economic prospects.
New single family home sales increased 10.7% in October to a seasonally adjusted annual rate of 495,000. The median price of a new home fell 6% from a year ago to $281,500. New home sales are a bigger driver of economic activity than existing home sales. Today’s numbers show solid, steady, though unspectacular growth, which seems to be a theme in recent economic reports. Still, you have to think there is a cumulative positive impact.
Investors across the world are also watching rising geopolitical tensions between Russia and NATO member Turkey after a Russian SU-24 warplane was shot down by a Turkish F-16 fighter jet on Tuesday. Russia’s Foreign Minister Sergei Lavrov said Turkey may have planned to shoot down the Russian warplane near its border, calling the act “planned provocation.” Lavrov also said Russia will reexamine the entire spectrum of its relations with Turkey because “we can’t leave what happened without a response.” Russia supplies about half of Turkey’s natural gas, for which Turkey pay’s about $10 billion a year. No doubt the incident will cool business relations between Russia and Turkey but Russia needs the cash; and remember that Russia still supplies oil and gas to Ukraine despite their differences. Beyond that it is important to remember that Turkey is a member of NATO.
In its twice-yearly Financial Stability Review, the European Central Bank has warned that chances of an “abrupt risk reversal” are increasing due to slowing growth in China and the withdrawal of monetary stimulus in the U.S.
European authorities are proposing a system to share the cost of protecting bank deposits, as the FDIC does in the United States, but the European Deposit Insurance Scheme, which would protect savings accounts of up to €100,000-euro, could face opposition from Germany, which has long resisted sharing fiscal risks with other Eurozone countries. The ECB has additionally announced it will temporarily pause its asset purchase program over the holiday season (December 22-January 1) “to reduce possible market distortions” during a period of “lower market liquidity,” which is to say, they will be closing shop for the holidays.
Minutes from the Bank of Japan’s latest meeting show that some policymakers believe an output gap was one reason the country was taking longer to meet its 2% inflation target, highlighting a lingering worry that quantitative easing may not be working. An output gap is the difference between what an economy is producing and what it could produce if operating at its most efficient. Separately, Japan announced it will raise the minimum wage by 3% to try to stimulate growth.
Andre Esteves, CEO of Grupo BTG Pactual, the largest investment bank in Latin America, has been arrested in Brazil as part of a corruption probe of the state-run oil company, Petrobras; which has lost 80% of its market cap. The government’s leader in the Senate, Delcidio Amaral, was also arrested this morning. Esteves and Amaral are accused of trying to suppress testimony in the investigation into a bribery scheme between Petrobras and the nation’s biggest builders. More than 100 people have already been arrested, including former top executives at Petrobras and Brazil’s biggest construction conglomerate. And then they started to cut deals with prosecutors by turning evidence on higher ups. Esteves is widely considered the most high-profile figure in Brazilian finance; he is quoted as saying that his company, BTG, stood for “Better than Goldman.” Now the question is whether Esteves can cut a deal by implicating someone even higher up – the president of Brazil.
A federal judge in Manhattan has ruled that General Motors and its law firm, King & Spalding, need not turn over privileged documents to drivers hoping to show that the automaker intended to commit a crime or fraud by concealing defective ignition switches in their vehicles. Most of the documents related to the law firm’s advice from 2010 to 2013 on three crashes involving Chevrolet Cobalts. Vehicle owners said the deception justified a waiver of attorney-client privilege. The judge found probable cause to believe that GM committed a crime or fraud by hiding the defect from regulators and the public, but did not go the next step to say that communications between GM and the legal firm were made to further such misconduct.
The World Meteorological Organization announced today that 2015 is the hottest year on record, surpassing last year’s record heat. And we still have more than a month left in the year. They made the proclamation without waiting for the end of the year because it has been so extraordinarily hot, forecast to stay that way and unlikely to cool down enough to not set a record. The World Meteorological Organization is the weather agency of the UN, and they are not alone in their forecast, the US National Oceanic and Atmospheric Administration, NASA, and Japan’s weather agency all say 2014 is the current record hot year with a global temperature of 14.57 degrees Celsius, 58.23 degrees Fahrenheit. The years between 2011 and 2015 have been the hottest five-year period on record. The record probably won’t last long. Due to the influence of El Nino, which is set to last into the middle of 2016, and continually rising levels of heat-trapping greenhouse gases, which come from the burning of coal, oil and gas, 2016 will be even hotter. The report comes the week before world leaders assemble in Paris to try to negotiate an agreement to fight climate change.
There is some optimism that the Paris summit can move beyond diplomatic posturing. Significantly, investors are beginning to realize that action on climate presents enormous business opportunities. A briefing paper released through the We Mean Business coalition points out that 277 companies with $6 trillion in revenue, and 144 investors with $20 trillion in assets under management, have collectively now made nearly 700 ambitious climate commitments.
The briefing paper calls for a series of proposals to be included in the text of the Paris agreement to help unlock further flows of finance. These include a goal of net zero greenhouse gas emissions well before the end of the century, strengthening national emissions reduction commitments every five years from 2020, carbon pricing, and improving public policy to scale up private climate finance.
Here’s one way to look at climate change; the internet has been around since the 60’s, and in the 80’s the idea expanded into the World Wide Web. In the 90’s there was talk about building the information superhighway, even though we weren’t quite sure where that road would take us. There were debates about the cost of building out digital infrastructure and who would bear this huge expense, not who would make fortunes with the business opportunities. It basically boiled down to figuring out how to make money with the technology. Once we wrapped out brains around that, the money started to flow. The same thing is about to happen with Green technology.