Financial Review

Wild Ride

….Dow hits a record, again. 3Q GDP at 3.3%. Yellen takes a curtain call. John Williams in Phoenix. Pending home sales jump. Cryto-currency crazy. SCOTUS and cellphone privacy. Wells Fargo, repeat offender. American Air, whoops.

Financial Review by Sinclair Noe for 11-29-2017

 

DOW + 103 = 23,940
SPX – 0.97 = 2626
NAS – 88 = 6824
RUT + 29 = 1542
10 Y + .04 = 2.38%
OIL – .72 = 57.39
GOLD – 10.00 = 1284.40

 

The Dow Industrials hit another record high, even as the Nasdaq suffered a sharp drop.

 

The U.S. economy’s growth rate last quarter was revised upward to the fastest in three years on stronger investment from businesses and government agencies than previously estimated. Third quarter GDP grew at a 3.3% annualized rate (est. 3.2%), revised from 3%. The performance, achieved despite two devastating hurricanes, marked the fastest expansion in gross domestic product since a 5.2 percent annual spurt in the third quarter of 2014. Consumer spending, which accounts for about 70 percent of the economy, continues to be the main driver of growth, though revisions showed it was slightly weaker than previously estimated on purchases of both durable and nondurable goods. The biggest improvement came in business investment, which made a 1.2 percentage-point contribution to growth. In addition to greater spending on transportation equipment, the data also reflected more software spending. Nonresidential structures were revised to a bigger decline. While the first look at third-quarter gross domestic income showed a pickup, the prior quarter was revised downward by 0.6 percentage point, reflecting a smaller gain in wages and salaries. Price data in the GDP report showed inflation remains behind the Fed’s 2 percent goal. Excluding food and energy, the central bank’s preferred price index tied to personal spending rose at a 1.4 percent annualized rate last quarter. Gross domestic income, adjusted for inflation, rose 2.5 percent after a downwardly revised 2.3 percent gain in the prior three months; second-quarter wages and salaries were revised downward by $26.5 billion. The GDP report is the second of three estimates for the quarter; the third is due in December.

 

The pending home sales index, which measures signed contracts to buy existing homes, rose 3.5 percent for the month, but is still 0.6 percent lower than October 2016. That is the highest level since June. Sales were strongest in the South, jumping 7.4 percent for the month and 2 percent compared with a year ago. That was likely due to pent-up demand after two major hurricanes.

 

Federal Reserve Chair Janet Yellen delivered her final testimony before the Joint Economic Committee on Capitol Hill. Yellen said the country’s economic expansion had broadened and strengthened, and that she expected the growth to continue. Yellen was careful to say that the economy could be doing better. She noted that the pace of economic growth remained slow by historical standards. The two major determinants of growth, the number of workers and the productivity of the average worker, are rising slowly. She said, “Congress might consider policies that encourage business investment and capital formation, improve the nation’s infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies.” She did not offer an opinion on tax policy but warned that debt-to-GDP ratios – around 75% – were high, though not excessive.  She added, “It’s the type of thing that should keep people awake at night.” In response to a question, Yellen added, “The equity of the tax code is important and should be taken into account.”

 

She also said changes in fiscal policy could affect how quickly the Fed raises rates. Fed officials have drawn a careful distinction between tax cuts that increase economic capacity — for example, by encouraging business investment — and tax cuts that provide a short-term sugar high, such as cuts in personal income taxes that would likely increase spending. The Fed estimates that the economy is already growing at something close to the maximum sustainable pace. A short-term stimulus, therefore, would likely raise inflation. In turn, the Fed could seek to offset faster inflation by raising interest rates more quickly.

 

Also today, at the ASU Economic Forecast Luncheon in Phoenix, San Francisco Fed President John Williams delivered an upbeat assessment of the economy, and falling unemployment is expected to put pressure on inflation… eventually, Williams anticipates the Fed will keep raising interest rates gradually.  Williams said, “The next time you see a headline about stubbornly low inflation, you can smile to yourself, knowing that the mystery isn’t all that mysterious after all. With the economy doing so well this year and based on the historical pattern, I expect to see a rise in inflation in 2018.” In a Q&A session, Williams said the Fed does not have plans to issue digital currency, but the central bank is interested in the underlying technology and is actively researching it.

 

Yesterday, Bitcoin hit $10,000. This morning it hit $11,000 – but by the end of the day it was back around $9,290. Wild ride doesn’t begin to describe it. Trading volume was a whopping $9.75 billion over the last 24 hours, according to CoinMarketCap, compared to $2.26 billion for digital currency ethereum. The heaviest selling came amid reports of service outages and delays on some of the largest online exchanges. If it looks like a bubble, and walks like a bubble, and charts like a bubble….

 

If bitcoin is a bit too crazy for you, starting in 2018, investors can dump their money into deeply unBogle-like, totally non-passive Vanguard exchange-traded vehicles with flavors like volatility, momentum, value, and, for some reason, low liquidity. That’s right, actively managed ETFs.

 

Members of the Organization of the Petroleum Exporting Countries and other key producers, including Russia, meet on Nov. 30 to discuss whether to continue to limit production in an effort to drain global inventories to help push up prices. They cut production by 1.8 million barrels per day (bpd) in January and agreed to hold down output until March. The market had expected OPEC to extend the limits by another six to nine months, but this is now less certain.

 

The Supreme Court heard arguments today on whether police need a warrant for cellphone location data in a case that could reshape digital privacy protections. The defendant in the case was convicted of participating in a series of robberies, based in part on records provided by his cellular carrier showing his movements over several months. The defense lawyer said prosecutors had violated the Fourth Amendment, which bars unreasonable searches, by failing to get a warrant for the information. The court’s decision in the case, Carpenter v. United States, will apply the Fourth Amendment, drafted in the 18th century, to a world in which people’s movements are continually recorded by devices in their pockets and cars, by toll plazas and by transit systems. A ruling in Mr. Carpenter’s favor could revise a fundamental Fourth Amendment principle: that people have no reasonable expectation of privacy when they voluntarily turn over information to a third party, like a phone company. Recent Supreme Court decisions have expressed uneasiness with allowing the government to have unfettered access to vast amounts of digital data. By the end of arguments, at least five justices seemed prepared to limit the government’s power to obtain records from cellphone companies showing their customers’ locations over long periods of time. But there was no consensus about a rationale for a decision or about how far the court was prepared to go to reshape longstanding constitutional doctrines that allow the government to obtain business records held by third parties.

 

The Office of the Comptroller of the Currency has advised Wells Fargo’s board of directors that it is weighing a formal enforcement action against the bank over improprieties in its auto-insurance and mortgage operations. In a letter this month, the OCC said Wells had willingly hurt customers in the two businesses and had until Nov. 24 to respond. The OCC letter said Wells repeatedly failed to fix problems in a broad span of areas, not just auto insurance and mortgage-lending.

 

Nokia is reportedly in talks to buy Juniper Networks.  The offer would value Juniper at around $16 billion.

 

A scheduling glitch that allowed American Airlines pilots to take vacation at the same time has left thousands of flights during the busy holiday travel period next month without pilots assigned to them. Pilots loaded up their schedules with flights in early December but many opted to take days off around the holidays, after the system allowed it. American Airlines is now offering pilots 150 percent of hourly pay to work those dates. It was unclear how much the scheduling problem will cost American Airlines. Whoops.

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