Thursday, February 06, 2014 - Waiting on the Friday Jobs Report

Waiting on the Friday Jobs Report

by Sinclair Noe

DOW + 188 = 15,628
SPX + 21 = 1773
NAS + 45 = 4057
10 YR YLD + .04 = 2.70%
OIL + .57 = 97.95
GOLD + .20 = 1258.80
SILV + .05 = 20.05

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits declined 20,000 last week to a seasonally adjusted 331,000. There have been some interesting reports this past week on jobs, including the controversial research from the CBO and the other from the New York Fed.

Competition for jobs is still fierce. Although it varies with the company and the job, on average 250 resumes are received for each corporate job opening. In addition, out of every 1000 people who view an online job posting, 100 people will apply, 4 – 6 will be selected for an interview, 1 – 3 will be invited for a final interview, 1 will be offered the job, and 80% of those who get a job offer accept it.

The Wall Street Journal shows how the very backbone of the labor market, men in their prime (for measurement purposes, 25 to 54), are out of work to an unprecedented degree. More than one in six men ages 25 to 54, prime working years, don’t have jobs—a total of 10.4 million. Some are looking for jobs; many aren’t. Some had jobs that went overseas or were lost to technology. Some refuse to uproot for work because they are tied down by family needs or tethered to homes worth less than the mortgage. Some rely on government benefits. Others depend on working spouses.

The trend has been building for decades, according to government data. In the early 1970s, just 6% of American men ages 25 to 54 were without jobs. By late 2007, it was 13%. In 2009, during the worst of the downturn, nearly 20% didn’t have jobs. Although the economy is improving and the unemployment rate is falling, 17% of working-age men weren’t working in December. More than two-thirds said they weren’t looking for work, so the government doesn’t label them unemployed

The monthly jobs report comes out tomorrow morning. We’ll wait and see.

The largest decline in exports since October 2012 helped widen the trade deficit by 12% in December to $38 billion. When adjusted for inflation, the trade gap rose to $49 billion. In its first estimate of fourth-quarter GDP last week, the government said trade accounted for 1.33 percentage points of the economy's 3.2% annual growth pace during the period. However, the deficit in December was bigger than the government had assumed, and that means fourth-quarter GDP growth will likely be lowered when a revision is published later this month.

A separate report showed US productivity rose at a strong 3.2% rate in the fourth quarter, that follwos a 3.6% increase in the third quarter productivity as businesses managed to step up output sharply while keeping a lid on hiring and hours worked.  For all of 2013, productivity rose just 0.6%, the smallest gain since 2011.

The rise in fourth-quarter productivity helped keep down unit labor costs, which is a measure of the labor-related cost for any given unit of output. They fell at a 1.6% rate, showing no wage inflation pressures in the economy. For the year as a whole, unit labor costs were up just 1.0 percent, the weakest reading since 2010.

A Manhattan jury convicted former SAC Capital Advisors portfolio manager Mathew Martoma of what prosecutors described as the most lucrative insider-trading scheme ever. After more than two days of deliberation, the jury found Martoma guilty of getting secret tips from a neurologist about the results of a clinical trial involving an Alzheimer’s drug, enabling SAC to make about $275 million in profits or avoided losses.

In recent years, US Attorney Preet Bharara has exacted guilty pleas or convictions from seven former portfolio managers or research analysts accused of illegal trading while at SAC. Six of the hedge fund’s former employees have pled guilty to insider trading charges for activities that took place from 1999 through at least 2010. Michael Steinberg, another SAC executive fought similar charges in court and he was also convicted last November. And so this raises the question of why Steven Cohen, the founder of SAC, hasn’t been criminally charged; there is an unbroken string of convictions or guilty pleas against everyone except the big target. There was some question going into the trial about whether Martoma would turn on Cohen, but Martoma did not point a finger at his old boss.

Cohen has not been accused of criminal wrongdoing, but the Securities and Exchange Commission brought a civil case against him in July, alleging that he failed to supervise Steinberg and Martoma. That case is pending. In November, SAC agreed to pay $1.2 billion to settle charges of insider trading, but Bharara indicated he might still pursue Cohen and the agreement does not provide criminal protection or immunity for any individuals.

Last week a judge in New York approved most of an $8.5 billion settlement between Bank of America and a group of mortgage securities investors. At issue in this case are 530 mortgage-backed securities involving troubled loans issued by Countrywide Financial. A group of the largest investors in the bonds agreed to settle their claims with Bank of America, which bought Countrywide in 2008.

But another big investor in the bonds, including and led by AIG (the insurance company), refused to sign the pact, arguing that the settlement was a fraction of the overall losses. AIG also argued that the trustee for the bonds, Bank of New York Mellon, shirked its responsibility to push for more money in the settlement. One of the Countrywide bond investors, Triaxx, has argued that the claims could potentially affect $31 billion of loans. Now, a new judge in the case, has put the settlement on hold and will hold another hearing on the case in a couple of weeks.

New York state's top financial regulator has demanded documents from more than a dozen banks including Barclays, Deutsche, Goldman Sachs and RBS as part of a probe of trading practices in the $5.5 trillion a day forex, or global foreign currency exchange markets. Regulators are stepping up their investigation following the banks' decision to fire or suspend at least 20 traders following reports that employees at some firms had shared information about their currency positions with counterparts at other companies.

Standard & Poor’s lowered Puerto Rico’s credit rating to junk status on Tuesday; maybe you didn’t notice. Puerto Rico’s bonds traded lower, but there was nothing close to the kind of mass sell-off that might indicate a panic. The Governor of Puerto Rico says they will try to renegotiate almost $1 billion in debt deals; they might even issue a couple of billion in new bonds. Bankruptcy is not an option because Puerto Rico is not considered a state or a municipality; it is a territory and as such it falls in a kind of legal limbo. Hedge funds are smelling blood in the water but waiting for more carnage before stepping in; bond prices have dropped to 65 cents on the dollar; the hedge fund sharks are waiting for prices to drop under 50 cents.

The Senate failed to move forward on a three-month extension of assistance for the long-term unemployed that would allow people who have exhausted their unemployment insurance to continue receiving benefits as long as the government offset the $6 billion cost. The vote was 55-to-42, falling short of the 60-vote threshold to break a Republican filibuster effort. Ultimately, how to pay for the program proved too big a hurdle for senators to overcome.

It appears that immigration reform is dead. House Speaker John Boehner cited executive actions by the Obama administration that have changed or delayed implementation of the president’s health care law, saying: “The American people, including many of my members, don’t trust that the reform that we’re talking about will be implemented as it was intended to be. There’s widespread doubt about whether this administration can be trusted to enforce our laws, and it’s going to be difficult to move any immigration legislation until that changes.” So, if we’re waiting on the GOP to trust Obama before they’ll pass immigration reform.., well it’s just dead as a doornail.

Apparently trust was not an issue in passing a farm bill this week. The Senate signed off on the Federal Agriculture Reform and Risk Management Act of 2013 and has sent it to the President for his signature. The “reform and risk” part of the legislation refers to a change in direct cash payments to farmers under a subsidy system, which is being replaced by crop insurance. Time will tell whether that is risky or prudent.

For the past 2 years, European Central Bank President Mario Draghi has been saying he’ll do “whatever it takes” to get the Eurozone back on a growth path; just not today. The European Central Bank today left its benchmark interest rate unchanged, choosing to wait for additional data before deciding whether to address evidence that the euro zone is sliding into deflation. For the past 4 months, consumer prices in the EU have been below 1% and in January prices slipped to 0.7%. Draghi insisted there is no deflation. 

Wednesday, June 19, 2016 - Don't Fight It

Don't Fight It

by Sinclair Noe

DOW – 206 = 15,112
SPX – 22 = 1628
NAS – 38 = 3443
10 YR YLD + .13 = 2.31%
OIL - .52 = 98.15
GOLD – 17.00 = 1352.30
SILV - .34 = 21.45

One of the best known adages in the financial world is “Don't fight the Fed”. Marty Zweig is credited with that sage wisdom. Zweig was a professor of finance, and a financial analyst; he went on to become a hedge fund manager and he wrote a newsletter. He famously bet that the market would go down in 1987, and by October of that year he was short the market and made a big profit while most other money managers were getting clobbered.

“Don’t fight the Fed”; that meant, according to Zweig’s theory, that if interest rates were going down, stocks would go up, and vice versa. He also claimed the way to make money was to be risk-averse, rather than taking chances on the upside. He said he was a big poker player while at Wharton, but had stopped playing when he became a money manager because he hated losing.

In addition to “Don't fight the Fed”, Zweig is credited with the adage, “Don't fight the tape”; in other words, the market will have the last word, and complaining that the market is wrong is an excellent way to lose money. Zweig had a third rule: “Never relax”.

Today the Federal Reserve concluded their Federal Open Market Committee meeting; they issued a formal statement and then they issued their quarterly economic projections and then Fed Chairman Bernanke held a press conference.

The formal statement was almost identical to the statement from the FOMC meeting in March. No real change in interest rate targets. No real change in their purchases of securities to prop up the markets. No real change in outlook. No real change in targets. No real change in anything. No talk of taper. We'll go through that statement in a moment.

The economic projections showed a very, very, very slight improvement in the economy; a tiny improvement in GDP growth, a slight improvement in unemployment, and just a hint more inflation; it was not a cause for optimism.

Then Bernanke held a press conference. Bernanke said job gains and housing markets had increased consumer confidence; most FOMC participants do not favor selling agency debt; he reiterated that thresholds aren't triggers on rates; the Fed's monetary policy will continue to support recovery; the Fed may vary it's purchases based upon economic data; the Fed may moderate the pace of purchases later this year; the Fed may stop purchases by the middle of next year; and the Fed will ease QE if the economy improves.

And then Bernanke tried to soften the blow by saying: “If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy."

And then Bernanke tried to reassure market participants that any change in the bond purchase program would “be akin to easing off the gas pedal rather than putting on the brake,” and that the Fed is able and willing to adjust its purchases back upward if its forecasts turn out to be too optimistic.

Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy,” and he said he was a “little puzzled by that” and it couldn't be explained by “Monetary policy”. Well, he can believe that if he wants but if it looks like a duck, and quacks like a duck.

In his prepared remarks Bernanke referred to the newly released economic projections: "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."

Let's review the key points of the formal statement:

… economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline... The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

... the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

So, we got a combination of official statement saying “no taper”, then Bernanke saying “taper”. And the bottom line here is that traders in the financial sector are terribly afraid of losing free money from the Fed; and the most obvious rationale behind the fear is that the economy is not strong enough to support valuations.

Elsewhere.

The Congressional Budget Office just released their analysis of the fiscal impact of the immigration reform legislation from the Senate and it turns out that the bill is expected to lower the budget deficit by $197 billion over the next decade. The CBOs guesstimate of the bill's impact over its second decade (2024-2033) is $690 billion in deficit reduction. 

What's going on here is that the budget agency expects immigration to generate more costs but even more revenues. Between health programs, entitlements, SNAP, etc., they expect spending to go up about $260 billion over the next ten years. But they estimate revenues to go up about $460 billion. The net difference, about $200 billion, is the projected impact on the deficit.

Deloitte Financial Advisory Services settled with New York's banking regulator over its consulting work for Standard Chartered Bank on money-laundering issues. In August, the agency said Deloitte consultants hid details from regulators about Standard Chartered Bank's transactions with Iranian clients.

Under the agreement, the consulting firm affiliate of Deloitte & Touche agreed to pay $10 million, to implement reforms designed to address conflicts of interest, and to a one-year suspension from consulting work at financial institutions regulated by New York's Department of Financial Services.

Remember the $25 billion settlement last year with the five biggest mortgage lenders? The mortgage settlement came after the housing crash led to a wave of foreclosures across the country and after widespread improprieties in mortgage lending and in the foreclosure process were uncovered. The Big Five were supposed to change their evil ways. A report has now been issued to see if the lenders are getting better and the answer is “sort of”, but four of the five have yet to meet their commitment to end the maze of frustrations that borrowers must navigate to modify their loans.

The new chair of the Securities and Exchange Commission, Mary Jo White, in an interview with the Murdoch Street Journal said the agency was no longer going to just settle all of its fraud and abuse cases by letting the accused get away without admitting or denying wrongdoing. In some cases, she said, the SEC will actually try to force some admissions of wrongdoing.

White said: "We are going to, in certain cases, be seeking admissions going forward. Public accountability in particular kinds of cases can be quite important." But she went on to say that settling is quicker and not as risky, and it gets money to investors faster, and settling without admitting guilt is still a major tool in the arsenal. White said the SEC will decide case-by-case when to seek admission, depending on "how much harm has been done to investors, how egregious is the fraud." In other words, don't hold your breath waiting for a perp walk.

Meanwhile, Britain's Commission on Banking Standards has just issued a 500 page report calling for a new criminal offense for “senior persons” who run banks in a “reckless manner”, as well as much more stringent clawback rules that could see managers being stripped of several years’ worth of pay. The Commission warned that bankers had escaped “personal responsibility” for their actions, and said that drastic reforms were the only way to restore trust in banks. The report also said the bailout of the Royal Bank of Scotland had hurt the broader economy and the bank should be broken up.