Financial Review

Thus Spake Yellen

…..Retail sales rebound. Consumer sentiment dips – blame the election, it is driving us crazy. PPI up. Treasury tackles earnings stripping. Janet Yellen on the grand experiment of economics and the path forward. Earnings: JPM (zero systemic problems but billions in fines), C, WFC (Ohio puts Wells Fargo on probation). A faster server.

Financial Review by Sinclair Noe for 10-14-2016.


DOW + 39 = 18,138
SPX + 0.43 = 2132
NAS + 0.83 = 5214
10 Y + .03 = 1.77%
OIL – .11 = 50.33
GOLD – 7.30 = 1251.50
Sales at US retail stores rebounded in September, with auto dealers and gas stations racking up the biggest gains. Retail sales rose 0.6% last month to snap back from a small decline in August that was the first in five months.  In September, receipts at auto dealers increased 1.1%. Still, auto dealers relied on sharply higher discounts to lure buyers, as demand for new cars and trucks appears to be leveling off after a years-long boom in sales. Auto purchases account for about one-fifth of all retail spending. Sales at gas stations climbed a seasonally adjusted 2.4%. We weren’t buying more gas, just paying more. Department stores suffered a 0.7 percent sales decline in September, part of a long-term slowdown for the anchor tenants at many shopping malls that increasingly must compete with online outlets. But even online sales were soft. They rose a mere 0.3 percent in September, compared with recent monthly gains averaging nearly 1 percent.


The University of Michigan Consumer Sentiment Index dropped to 87.9 from 91.2 in early October. Blame the presidential election. The sub-index of consumer expectations fell to 76.6, its lowest level in two years, mostly from households with incomes lower than $75,000. The index of current economic conditions ticked up to 105.5 from 104.2 last month. In other words, people think things are pretty good now, but they will surely get worse.


By the way, this idea that consumer sentiment is down because of the presidential election – there may be something to it. The American Psychological Association, which is the largest psychological organization in the US, conducted their annual “Stress in America” survey and found that tension regarding the upcoming presidential election is exceedingly high. Fifty-two percent of over 3,500 adults surveyed said they felt stressed by all the politicking and campaigning leading up to the approaching election. It doesn’t matter if you are Democrat or Republican, the election is driving us crazy.


Producer prices rose again in September as wholesale inflation keeps creeping higher. The producer price index advanced 0.3% last month. Energy prices rose 2.5%. But even if you strip out volatile food and energy costs, the core rate also advanced 0.3%, indicating that food costs partly offset higher energy costs and inflation is creeping into the broader economy.


American businesses increased inventories by a modest 0.2% in August as they continue to work down an excessive build up last year. Business sales also increased by 0.2% in the same month. Companies have scaled back production in many areas such as manufacturing to bring inventories back in line, and that’s been a drag on the U.S. economy in the first half of 2016.


The U.S. Treasury has issued final inversion amendment rules in its effort to tackle “earnings stripping” – a tax-reduction technique employed by multinationals. In an inversion, a U.S. company moves its legal address abroad in order to pay lower taxes. Under earnings stripping, a foreign parent company lends money to its U.S. operation, and the interest is then deducted. The rules were initially proposed in April. The final regulations contain some exceptions to the initial proposal, including for certain entities where the risk of earnings stripping is low.


Earlier this week, the Fed released minutes of the September FOMC policy meeting; which we know was a split decision not to raise rates. Boston Fed President Eric Rosengren, one of the hawks, this morning said that he expects the unemployment rate to decline to 4.5% next year, an unsustainable level that may force the Fed to act. This afternoon, Fed chair Janet Yellen spoke at a Boston Fed conference. Yellen said she thinks it might be possible to temporarily run a “high-pressure economy, with robust aggregate demand and a tight labor market.” Yellen made no mention of when the Fed might raise rates but she did question some of the most fundamental principles of economics, including the nature of inflation and the influence of financial markets. Among the questions raised were whether the severe downturn could erode the skills of the nation’s workforce, impeding future growth. Yellen also suggested that changes in spending and behavior among some groups could have outsize effects on the health of the broader economy — a nuance that current mathematical models may not capture well.


Central bank officials are debating the best strategy for approaching such a slow recovery. Yellen said today, “If strong economic conditions can partially reverse supply-side damage after it has occurred, then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand.” It sounds like Yellen is a little confounded and annoyed by the sluggishness of the economy, and is willing to test the dovish boundaries of monetary policy and maybe even err on the side of overshooting the recovery.


Before the opening bell, we saw earnings reports from JPMorgan, Citigroup, and Wells Fargo. JPMorgan Chase reported a profit of $6.2 billion, or $1.58 a share. That compares with a profit of $6.8 billion, or $1.68 a share, in the same period of 2015. Revenue rose 8.4% to $25.5 billion. Analysts had expected $24 billion. Earnings and revenue beat estimates. The bank had record earnings in commercial banking and record loan balances in asset management.  JPMorgan is conducting a “deep dive” into the cross-selling of retail products; you know, the kind of stuff that landed Wells Fargo in hot water for opening bogus accounts. JPMorgan’s self-investigation has revealed a few instances; they say they can’t have “zero defects” but claim they do not have systemic problems. Quite a claim from a business that has paid more than $27 billion dollars in fines and legal costs over the past 5 years.


Citigroup said third-quarter profit and revenue were down, but results were still better than what analysts had predicted. Citi reported a profit of $3.8 billion, or $1.24 a share. That compares with the $4.2 billion, or $1.35 a share, it reported in the same period of 2015. Revenue was down to $17.7 billion from $18.6 billion a year ago. Trading revenue rose 16%. Investment banking revenue was up 15%.


Wells Fargo said its third-quarter profit fell to $5.6 billion, or $1.03 a share. That compares with $5.8 billion, or $1.05 a share, in the same period of 2015. Revenue rose to $22.3 billion. Both earnings and revenue topped estimates. The bank faces a raft of federal and state investigations. The earnings presentation addressed the fraudulent account openings in detail. Compared to August, consumers decided to apply for 30% fewer credit cards. And compared to last September, 25% fewer. Consumer checking accounts also took a big fall. Year-over-year, the bank saw 25% fewer checking accounts opened and a whopping 30% fewer in comparison to August. And that’s just the beginning. We’ll probably learn more when fourth quarter earnings are announced in January. We did not learn how many customers have left the bank.


Wells Fargo said it is looking into how customers’ credit scores may have been affected by the 565,000 unwanted credit cards, and that it’s working with credit bureaus to expunge the fraudulent files and restore credit, or furnish the card connected to the account for the people who decided to keep their cards. In addition to that, the San Francisco-based bank will be looking into the indirect and more costly consequences of how the new accounts impacted consumers’ credit scores – for example, the effect it might have on a loan’s interest rate.


It will take more than the retirement of Wells Fargo CEO John Stumpf to make California State Treasurer John Chiang change his mind about doing business with the bank again. Chiang said, “We are beyond the point of tweaking. We want to see fundamental reform of Wells Fargo before we make a decision.” In September, the state suspended its relationship with the lender after it was accused of defrauding customers.


Today, Ohio jumped on the bandwagon, announcing that the Ohio state government will ban all business with Wells Fargo for 12 months. This will include using Wells Fargo to issue debt or bid for financial-services contracts. The decision applies to state agencies.


Verizon says Yahoo’s hack could have “material” impact on their planned acquisition“If they believe that it’s not, then they’ll need to show us that,” so says Verizon general counsel Craig Silliman. Verizon agreed to buy Yahoo’s core assets for $4.8 billion in July, but the deal has yet to close.


Meanwhile, Twitter can’t find a bid. Salesforce will not put in an offer for the company. Salesforce was the last remaining bidder for Twitter after Disney and Google lost interest last week.


Tech giants including AMD, Dell/EMC, Google, Mellanox, Micron, Nvidia and Xilinx have joined forces to give Intel a good kick in the datacenters. The group has come up with an open specification, dubbed OpenCAPI, which can boost server performance by up to 10x. Effectively, they are moving away from PCIe – the current industry standard – to something that is both more open and vastly more powerful.





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