Category: Market Action

Jobs, jobs, jobs!

he U.S. economy delivered modest job growth in September, keeping labor markets steady as the presidential campaign enters its final stretch and the Federal Reserve grapples with whether to raise interest rates.

Employment outside of farms grew by 156,000 jobs in September, the Labor Department said Friday. That was the smallest gain since May, though it was a level that, if sustained, would deliver enough jobs to keep up with a growing population.
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The figures suggest that while the labor market has cooled from last year, it has been strong enough to draw in many Americans who previously have been too discouraged to look for work. Meanwhile, wages grew 2.6% over the past year, an acceleration that suggests employers are being forced to compete more vigorously over prospective employees.

The main details of the report fell below Wall Street expectations of a 170,000 gain in payrolls and a 4.9% jobless rate.

The latest figures are also likely to weigh on officials at the Fed, who have suggested they are inclined to raise interest rates once by year end. The central bank has kept rates exceptionally low since the recession to spur economic growth by encouraging households and businesses to spend and invest. But Fed officials worry that keeping rates too low for too long increases the risk of creating asset bubbles.

It’s the same old problem:

One of the key things low interest rates are supposed to do is create an incentive to borrow and spend, by lowering the cost of debt while also reducing returns on savings. In Canada, at least for a while, low rates most certainly did their job in terms of promoting borrowing. Consumer and business debts have risen to record highs. Nationwide household debt is up 47 per cent since the end of 2008; corporate loans (excluding the financial sector) are up 60 per cent.

On the consumer side, the bulk of that increased debt has gone into mortgages, as low rates have sustained a strong housing sector throughout the post-crisis period. The Canadian Real Estate Association forecast that the number of homes sold in Canada will reach a record high this year.

But the economic impact since the latest round of Bank of Canada rate cuts, in 2015, has looked less impressive. Growth in mortgage debt this year has slowed to two-year lows. We’ve seen some of the slowest growth in consumer credit (excluding mortgages) since the early 1990s. Retail sales, which increased more than 4 per cent annually in the years immediately following the financial crisis, grew just 1.7 per cent last year. Growth in business credit has been generally slowing since early 2015 and is below precrisis levels.

Businesses can’t see any opportunity to increase their markets, while individuals, memories of Bre-X, Nortel, the Tech Wreck and the Great Recession still fresh in their minds, are putting their cash into a proven performer – real estate.

In a completely surprising, totally unexpected move, the fiercely independent Bank of Canada is endorsing their boss’ latest move:

The Bank of Canada is endorsing the Trudeau government’s efforts to cool the country’s debt-fuelled housing market.

“Over time, the measures announced by the federal government … will help mitigate risks to the financial system posed by household imbalances,” senior deputy-governor Carolyn Wilkins said in remarks prepared for a speech Thursday in Trois-Rivières.

Even with the economy still struggling to gain traction, the central bank has set a high bar for cutting its key interest rate at its next scheduled rate-setting announcement Oct. 19.

“We are mindful that low interest rates can lead to a buildup in financial vulnerabilities,” Ms. Wilkins pointed out.

She added that the bank is continuing to monitor high household-debt levels and the housing market “very closely.”

The other shoe is dropping on the fiduciary responsibility experiment:

Merrill Lynch will no longer give retirement savers the option of paying a commission for trades, a wholesale exit from the traditional Wall Street sales model in accounts that stand to be affected by new conflict-of-interest rules on retirement accounts.

The Bank of America Corp. brokerage unit told its more than 14,000 brokers on Thursday that after April 10, when the new rules take effect, investors who want a retirement account at Merrill will need to pay a fee based on a percentage of their assets, instead of having the option of being charged for each transaction made in their account.

The announced move, coming six months since the unveiling of the Obama administration’s fiduciary rule requiring brokers to put the interests of retirement savers ahead of their own, is roiling firms across the investing world as they look to comply and even capitalize on the changes.
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Merrill clients with individual retirement accounts that charge commissions will have to choose whether to roll that over to a fee-based account, which may be more costly for investors who trade little, or move their assets to Bank of America’s online brokerage, Merrill Edge, according to representatives at the firm. The latter option would offer investors access to a self-directed brokerage account or a generally cheaper fee-based option, as well as a soon-to-launch roboadvisory product, known as Merrill Edge Guided Investing.
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Morningstar said fee-based accounts can yield as much as 60% more revenue than those that charge commissions.

Brokers say the fees are justified because they have to provide a higher level of service by spending more time understanding a client’s full financial situation.

As far as that last claim is concerned, I will wait to see whether the average assets per broker drops as expected! It is regrettable that the story makes no mention about what happens with solicitation fees and new issue commissions; it is even more regrettable that those puffing themselves up as Portfolio Managers are not required to post their composite performance numbers.

Amidst all the high-tech excitement, it’s nice to know there are still lots of people making a buck the old fashioned way. Bloomberg investigated Parmesan cheese in February:

How serious is the problem? Bloomberg News had store-bought grated cheese tested for wood-pulp content by an independent laboratory.

Cellulose is a safe additive, and an acceptable level is 2 percent to 4 percent, according to Dean Sommer, a cheese technologist at the Center for Dairy Research in Madison, Wisconsin. Essential Everyday 100% Grated Parmesan Cheese, from Jewel-Osco, was 8.8 percent cellulose, while Wal-Mart Stores Inc.’s Great Value 100% Grated Parmesan Cheese registered 7.8 percent, according to test results. Whole Foods 365 brand didn’t list cellulose as an ingredient on the label, but still tested at 0.3 percent. Kraft had 3.8 percent.
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According to the FDA’s report on Castle [Cheese Inc.], obtained through the Freedom of Information Act, “no parmesan cheese was used to manufacture” the Market Pantry brand 100% grated Parmesan Cheese, sold at Target Corp. stores, and Always Save Grated Parmesan Cheese and Best Choice 100% Grated Parmesan Cheese, sold by Associated Wholesale Grocers Inc., which along with its subsidiaries supplies 3,400 retail stores in 30 states. Instead, there was a mixture of Swiss, mozzarella, white cheddar and cellulose, according to the FDA.
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Of all the popular cheeses in the U.S., the hard Italian varieties are the most likely to have fillers because of their expense. Parmesan wheels sit in curing rooms for months, losing moisture, which results in a smaller yield than other cheeses offer. While 100 pounds of milk might produce 10 pounds of cheddar, it makes only eight pounds of Parmesan.

But it doesn’t always work as planned:

In a request seeking to fit the punishment to the crime, the U.S. is asking that the head of a company that passed off fake grated Parmesan cheese as the real thing be sentenced to time at a food pantry or soup kitchen.

While jail remains an option, sentencing documents filed Tuesday by federal prosecutors in U.S. District Court for western Pennsylvania are only asking that Michelle Myrter, president of Castle Cheese Inc. in Slippery Rock, Pennsylvania, receive 0 to 6 months in lockup, along with her community service. Her attorney has asked for probation.

Myrter pleaded guilty seven months ago to federal misdemeanor charges involving food adulteration. The prosecutors said her company and two others controlled by her family made and distributed hundreds of thousands of pounds of fake cheese, passing it off as 100 percent Parmesan to stores around the country between 2010 and 2013.

The other two companies charged — Universal Cheese & Drying Inc. and International Packing LLC — also pleaded guilty earlier this year to charges of conspiracy and money laundering. These companies are no longer operating and have been unable to pay $1 million in fines that were part of their plea agreements.

PerpetualDiscounts now yield 5.07%, equivalent to 6.59% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.7% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 290bp, unchanged from the September 28 report.

Is it possible that prosperity is just around the corner?

Fresh reminders that central banks may be starting to map their retreat from extraordinary stimulus measures sent a shock wave through markets, roiling bonds, currencies and equities.

Global bonds declined, the euro rebounded from its lows of the day and stocks came under renewed pressure after Bloomberg News reported the European Central Bank is likely to gradually taper asset purchases as it ends quantitative easing. Officials who asked not to be identified didn’t exclude that the program could still be extended past the current end-date of March 2017 at the full pace of 80 billion euros ($90 billion) a month. Oil also retreated.
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Traders have been monitoring central banks for any signs they may be willing to pull back on stimulus measures. Bets on a Federal Reserve interest-rate increase by December climbed after Richmond Fed chief Jeffrey Lacker urged tighter policy and his Cleveland counterpart, Loretta Mester, said the U.S. economy is ripe for a hike. The ECB will probably wind down bond purchases in steps of 10 billion euros a month, according to euro-zone central-bank officials.

Maybe with some exceptions…:

Britain crashing out of the European single market could cost banks and associated businesses in the U.K. almost 40 billion pounds ($51 billion) in lost revenue, undermining a key sector of the economy, an industry report warned on Tuesday.

Finance firms are making a fresh bid for special status in upcoming Brexit negotiations with the EU after U.K. government officials this week indicated banks will get no favors. The report, prepared by Oliver Wyman on behalf of TheCityUK lobby group, warns that almost 70,000 jobs and 10 billion pounds of tax revenue are at risk from a so-called hard Brexit.

Prime Minister Theresa May has ruled out prioritizing protection of the banks in Brexit talks and has dismissed their key business demand for an interim deal to help ease the transition out of the bloc, Bloomberg News reported Monday, citing three government officials. Finance executives have threatened to move jobs if Britain doesn’t secure a deal allowing them to serve European clients from London.

Here’s another risk with narrowly focussed ETFs:

How fast can an exchange-traded fund lose nearly 90 percent of its assets? Less than a day.

That’s all it took for Franklin Templeton Investments Corp. in Toronto to cash in more than $130 million shares of WisdomTree Investment Inc.’s Australia & New Zealand Debt Fund last week, according to a person familiar with the matter. The withdrawal amounted to 88 percent of the fund’s assets and left it with just $19 million under management, data compiled by Bloomberg show.

UPS is attempting to catch up in the drone wars:

UPS, despite its decades of delivery experience, is a latecomer to the drone delivery game. Drone startup Flirtey demonstrated a ship-to-shore drone delivery of medical supplies off the coast of New Jersey earlier this summer, and drone delivery company Zipline declared its intent to delivery needed blood to rural populations in Washington State’s San Juan islands.

And it’s not just startups that are already doing delivery. Amazon’s drone program is perhaps the most famous, but Europe’s own DHL delivery giant experimented with drones in difficult mountain terrain. Chinese online retailer JD.com is also exploring drone delivery in marshy and channel-crossed provinces, where flying drones can fly easily over the car-impassible waterways. That UPS is experimenting with drone technology is more a testament to the technology’s broad appeal than any particular innovation by the company itself.

On a related note, Tyler Cowen of Bloomberg claims that technology favours suburbia:

Self-driving vehicles are also likely to help the suburbs most. One of the worst things about the suburbs is the commute to the city or to other parts of the suburbs. But what if you could read, text or watch TV – safely — during that commuting time? What if you could tackle your day’s work just as you do on a train or plane? Commuting would seem a lot less painful. As driverless vehicles evolve to accommodate work and leisure uses of the automobile space, pleasure will replace commuting stress.

What about drones? They too would seem to favor remote areas where it is harder to access useful goods and services. Drones may do more for exurbs and rural areas than for the suburbs, but it seems cities will gain least. Walking or biking to nearby shops is a potential substitute for drone delivery. Rolling sidewalk drones might find it harder to negotiate crowded cities, and cities with a dense network of tall buildings may be less friendly to flying drones. Population density may increase the risk of a drone falling on someone.

Jared Dillian writes in Forbes about the message we’re sending to the Chinese:

Shockwaves reverberated through Canada last week as the government announced that negotiations would commence on an extradition treaty between Canada and China.
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Make no mistake about it–from Canada’s perspective, this has everything to do with money laundering–and the torrid housing market. In fact, supporters of the extradition treaty directly cite the inability of middle class Canadian families to buy homes that have become prohibitively expensive, due to foreign capital pouring into the country.
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But Canada should really reflect on whether they want a reversal of those capital flows. History has not been kind to countries that have slammed the door shut on foreign investment. And money always goes to where it is treated best. So if Canada becomes hostile to Chinese money, it will find somewhere else to go. And I’m sure lots of countries would be happy to take it.

PerpetualDiscounts now yield 5.01%, equivalent to 6.51% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 290bp, unchanged from September 14.

Here’s a US story we probably won’t see in Canada!

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 — with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit.

Eggs and beef have have grown especially inexpensive, and it isn’t only an American phenomenon: In England, Aldi recently offered its prized 8-ounce wagyu steaks from New Zealand for about $6.50 — a little more than the price of a pint of beer.
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[Analyst at Wolfe Research Scott] Mushkin, who researches local markets, recently found that prices of a typical basket of grocery items in Houston, had fallen almost 5 percent over the past year.

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