FINANCIAL REVIEW

Solid Guesses

Sinclair Noe — July 29, 2015

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DOW + 121 = 17,751
SPX + 15 = 2108
NAS + 22 = 5111
10 YR YLD + .03 = 2.28%
OIL + .91 = 48.89
GOLD + 1.20 = 1097.70
SILV + .13 = 14.91

The Federal Reserve FOMC meeting wrapped up earlier today. They issued a statement but there was no press conference. The Fed did not change monetary policy; no surprise, nobody expected a change from this meeting.

The next FOMC meeting is in September and we might see changes then, or maybe December. There really weren’t many clues in the statement. There were a few subtle changes in wording of the statement; specifically on jobs, the Fed said: “The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year.” “Solid job gains” is a fairly strong phrase for the Fed. No indication of slack in the labor market.

The actual decision to raise rates will come when the Fed sees “some” further improvement in the labor market. The word “some” was new. What does “some” mean? You can give it whatever meaning you want but I think it means the labor market is headed in the right direction and as long as it stays on the tracks and continues to make a little progress, it is good.

The Fed kept language saying that “economic activity has been expanding moderately.” The Fed also said that housing has shown “additional” improvement. The Fed acknowledged that energy prices have remained low and that is causing inflation to run below the FOMC’s long-run inflation objectives. And while it may be hard to justify a rate increase with below-target inflation, we also know from Fed Chair Janet Yellen’s earlier testimony that she believes low energy prices are transitory.

In other words, there is nothing in the statement that would stop the Fed from raising rates in September, or December. I don’t think the Fed is certain exactly when they will raise rates, but absent an unexpected meltdown, we will see at least one rate hike before the end of the year. That’s my guess, and the fed funds futures markets support it; but if you are dovish or hawkish you could interpret the Fed statement to your liking.

The Chinese stock market snapped a three-day losing streak. The Shanghai Composite closed up 3.5%. The China Securities Regulatory Commission said that local governments will increase purchases of stocks, while the central bank injected cash into money markets and hinted at further monetary easing. The country’s securities regulator said it was investigating share dumping incidents.

Bill Gross, the former Pimco bond fund manager, now at Janus Capital, criticized the financial markets today, writing that “all global markets are a shell game now. Artificial prices, artificial manipulation. Where’s the real pea (price)?” Gross says the Chinese government, and all the central banks are manipulating markets and prices. He’s afraid that when they stop manipulating markets, prices will drop. What Gross fails to grasp is that there is no indication central banks will stop manipulating markets.

Standard & Poor’s has warned Brazil it could lose its investment-grade credit rating in the coming year if fallout from a number of corruption investigations further stymies economic growth and implementation of austerity measures. The agency has now put the country’s foreign currency rating, which is rated one notch above junk, on negative outlook for possible downgrade. The Brazilian real slid 2% to 3.43 per dollar following the announcement, its weakest level in more than 12 years.

A disorderly resolution to Puerto Rico’s debt problems would be costly not only for the territory but for the United States as a whole. Treasury Secretary Jack Lew said in a letter to the Senate Finance Committee that “The continued deterioration…has the potential to further harm retiree investment portfolios across the country.” Attempts to grant the commonwealth’s public authorities access to Chapter 9 bankruptcy provisions have so far made little progress.

Just a reminder that the global bond market is about twice the size of the global equities market. The bond market is supposed to be a place for safe money. Bond investors should be extremely nervous and very cautious. Most of the big money that flowed into Greek bonds and Puerto Rican bonds over the past few years came from institutional investors; in theory they are sophisticated investors.

If you make a bad investment, you are supposed to pay the full price, because if you don’t pay the full price, you will keep making bad investments. The only way to get the bond market back to its historic role is to make bondholders feel real fear that they might lose money if they make bad decisions. The market should reward bets that are economically wise, and it should punish the foolish players.

A gauge of pending home sales fell in June, pulling back from May’s reading, which was the highest in more than nine years. The index from the National Association of Realtors reached a seasonally adjusted 110.3 in June, down 1.8% from 112.3 in May, signaling that upcoming deals could slow. June is the first decrease in six months.

S&P 500 earnings for the first half of the year are expected to show a 0.7 percent contraction compared to a year ago, the weakest showing since 2009, according to numbers from FactSet research. Growth in the first quarter was just 1.1%, but the second quarter is more than offsetting that, expected to contract at a 2.2% rate.

Meanwhile, Thomson Reuters calculates first-quarter EPS growth at 2%, and currently pegs the second quarter at 0.3% growth. Whichever number you use, chew this over: Both rates, positive and negative, are nominal. They are not adjusted for inflation, and they don’t account for population growth either.

Facebook reported after the closing bell. Advertising revenue remains strong and the number of mobile users is growing. Revenue rose 39 percent to $4.04 billion, the social-media company said in a statement Wednesday, beating analysts’ average projection for $3.99 billion. Net income was $719 million, down from $791 million a year earlier. They beat estimates.

Whole Foods Market reported disappointing results and cut its annual sales forecast. The problem is that you can now find organic produce in most grocery stores.

After the close yesterday, Twitter announced results that beat estimates, but then they lowered guidance in a brutally frank way, saying execution had failed, new product initiatives were not going well; basically they stopped just short of saying you should never, ever tweet. Shares dropped 14% today.

Advancing its push for commercial drones, Amazon has laid out a proposal to slice U.S. airspace into different categories of aircraft. The plan describes a “high-speed transit zone” from 200-400 feet above the ground for advanced drones and a no-fly area between 400-500 feet to create a buffer zone with manned aircraft. Simple consumer drones would be restricted to a “low-speed” zone below 200 feet. The system also permits one person to oversee many automated drones well beyond his or her sight, but bans flights around airports.

Intel and Micron say they developed a new breed of memory chips that could bring dramatic performance gains to computers, smartphones and other kinds of high-tech products. The companies say the new chips will be up to 1,000 times faster than the NAND flash memory chips now used in most mobile devices. The chips won’t be as fast as DRAM but they will be able to store 10 times more data than dynamic random access memory, and they will retain data, even when powered down.

New hardware from Nokia. Jumping into the virtual reality space, the Finnish technology group has revealed a spherical ball-like camera called OZO that can capture 360-degree videos through eight optical image sensors. Advantages of Nokia’s new camera: Live monitoring – footage can be seen as it’s being shot. Rapid playback – recordings don’t need to be digitally stitched together before they’re viewed.

It’s Here: Microsoft’s Windows 10 Now Available As a Free Upgrade.  The new operating system is now available to download as a free upgrade for Windows 7 and 8 users. If you’re running an older version of Windows, the cost to upgrade is $119.

Chevron plans to eliminate 1,500 jobs across the globe amid the ongoing environment of low oil prices. Chevron said the cuts are aimed at increasing efficiency, reducing costs and focusing on work that directly supports business priorities, with $1 billion in targets coming through corporate center cost reductions.

California Senators Dianne Feinstein and Barbara Boxer introduced emergency drought legislation today aimed at helping communities facing severe water shortages and supporting new water projects in the parched state. Key provisions of the California Emergency Drought Relief Act will assist rural and disadvantaged drought-stricken communities with a new USDA program, seek federal support for desalination projects, promote the building of new reservoirs, support water recycling projects, and increase agriculture water conservation mandates.

The Senate ended debate on its long-term highway bill today. Meanwhile the House is going into recess today, and that means the Senate will have to take up a three-month extension of federal highway funding ahead of an end-of-the-week deadline to prevent a gap in infrastructure funds.