Category: Market Action

Jobs, jobs, jobs!

Good. But not too good.

That is the verdict from economists after the Labor Department reported on Friday that in August employers added 151,000 jobs, the unemployment rate was unchanged at 4.9 percent, and wage gains were modest. It was a solid performance that keeps the economy on track, but not strong enough to push the Federal Reserve to raise its benchmark interest rate when policy makers meet this month.
…
The jobless rate, based on a separate survey of households, stayed at 4.9 percent, roughly half of what it was seven years ago, and consumer spending remains healthy. But a broader measure of unemployment that includes discouraged and underemployed workers is nearly twice that figure.

Wages have only recently begun to climb. The 12-month increase was a modest 2.4 percent in August, slower than in the previous month but a pace that keeps most workers ahead of inflation.

Bloomberg adds:

Traders are pricing in a 32 percent chance the central bank will raise borrowing costs at its September meeting, down from 34 percent before the jobs data, though the probability earlier slipped as low as 20 percent. The first month with better-than-even odds of a hike is December.

Those wagers have influenced trading with stocks, bonds and the dollar amid a spate of mixed economic data and comments from central bank officials. Financial markets were taken aback on Thursday by weak manufacturing numbers, after other reports pointed to a recovery on the heels of still-robust consumer spending. While Fed Chair Janet Yellen said last week that the case for an increase in borrowing costs has strengthened, wagers on a hike receded even before the jobs figures.

Richmond Fed President Jeffrey Lacker said Friday the message he took from the August data was that “labor markets are continuing to tighten.” He called the report “reasonably strong.”

In a sign of the times, McDonald’s is becoming more corporate:

McDonald’s has long been famous for its small-owner-focused franchise system, in which entrepreneurs with only a store or two would sweat the details of their restaurants, yielding better customer service. Lately, however, the fast-food giant has begun shedding mom and pop owners in favor of bigger operators. Since 2014 the number of U.S. McDonald’s franchise owners has dropped 2.6 percent, while the number of franchised locations has grown 1.2 percent, according to data compiled by researcher FranchiseGrade.com. The chain’s biggest franchisees are getting larger, while those who own five locations or fewer are on the wane.

Getting rid of smaller franchisees allows McDonald’s to speed renovations and the implementation of new technology, such as the self-ordering touchscreens being tested in about 250 locations. Such gear can be expensive, and smaller franchisees often don’t have the capital to pay up—making them less willing to embrace the company’s plans.
…
There are about 1,842 domestic McDonald’s franchisees who own five restaurants or fewer, compared with 1,930 in 2014, a 4.6 percent drop, the FranchiseGrade.com data show. There’s been about a 12 percent jump, however, in the number of those operating more than 10 stores: 245 now, vs. 218 in 2014. McDonald’s spokeswoman Becca Hary says that stores often end up in the hands of larger operators when smaller ones sell out, but both big and small operators are among its best franchises.

Capital requirements are pretty steep – it’s not a middle-class business environment any more!

Click for Big

At month-end, PerpetualDiscounts yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.65%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 300bp, a widening from the 290bp reported July 27.

Remember how I said on August 26 that:

But eventually (probably after the Fed Rate has struggled carefully and cautiously to 1% and above) there will be a series of hikes, bang, bang, bang, bang, that will result in a very nasty environment for bonds.

Well, here’s a different view:

Some at the U.S. central bank may still be too optimistic about how high interest rates can rise in the longer run, based on new Federal Reserve Bank of San Francisco research.

San Francisco Fed economist Kevin Lansing started with a simple premise: estimates of the inflation-adjusted neutral interest rate — the one that neither stokes nor slows growth — track pretty well with the U.S. Congressional Budget Office’s four-quarter growth rate of potential GDP estimates. Looking at the CBO’s projections for the next decade, he predicts “a very gradual rise” in the neutral rate, referred to as r-star in standard economic models, from near-zero in 2016 to about 1 percent in 2026.

“If the long-run value of r-star is indeed only around 1 percent or less, then the process of normalizing the federal funds rate may end up being more gradual than the midpoint paths implied,” Lansing wrote. He notes that excluding high and low outliers, officials at the middle of the Fed’s June projection see a longer-run real rate of 1.15 percent.

But don’t be too quick to write of growth! There’s a new growth industry in Germany:

German savers are leaving the security of savings banks for what many now consider an even safer place to park their cash: home safes.

For years, Germans kept socking money away in savings accounts despite plunging interest rates. Savers deemed the accounts secure, and they still offered easy cash access. But recently, many have lost faith.

“It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout.

Interest rates’ plunge into negative territory is now accelerating demand for impregnable metal boxes.

Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”

And don’t forget drones!

Before some cutting-edge online retailer can use a drone to drop granola bars on your doorstep, a railroad born when Abe Lincoln was in Congress will first have to iron out the kinks.

BNSF Railway Co. is flying drones as far as 150 miles (240 kilometers) along the New Mexico desert to inspect tracks, helping the Federal Aviation Administration develop rules for operating unmanned aircraft beyond the pilot’s line of sight. That’s an essential step for expanding use to such commercial endeavors as deliveries by Amazon.com Inc. and other companies.
…
BNSF, owned by Buffett’s Berkshire Hathaway Inc., is particularly suited for the task. The railroad operates 32,500 miles of track crisscrossing sparsely populated areas along a well-defined right of way, which eases planning. Communications towers that are part of a safety system for trains can be used to help guide drones.

The railroad also has a compelling business case. The Latitude HQ-40 drone that Graetz supervises has a six-foot wingspan and is equipped with cameras that when paired with special software can potentially detect track anomalies more quickly, possibly preventing derailments. The flights, from just outside of Playas, New Mexico, lay the groundwork for drone inspections of other fixed infrastructure, such as pipelines and power lines.

The British aren’t satisfied with the calibre of their secret policemen:

Once again, the British government has decided that US technology companies should shoulder more responsibility for preventing terrorism.

Facebook, Twitter and YouTube are ‘the lifeblood of Daesh’ and are ‘consciously failing’ to prevent the spread of terrorist material, a panel of lawmakers said today, adding that they are ‘hiding behind their supranational legal status’.

In its report, parliament’s home affairs committee accuses the companies of passing the buck when it comes to cracking down on propaganda online.

“They must accept that the hundreds of millions in revenues generated from billions of people using their products needs to be accompanied by a greater sense of responsibility and ownership for the impact that extremist material on their sites is having,” it reads.

The MPs are calling for the web firms to move far more quickly to close down infringing accounts – or give a good reason why not. It also wants them to second staff to work within the Metropolitan Police’s counter-terrorism internet referral unit (CITRU).

But the American Secret Police are very active:

Lorne Wald thought he had run into a technical glitch on a Friday night in early August when PayPal halted his attempts to purchase two books. The 60-year-old retired IT worker in Mount Royal, Que., has had a PayPal Inc. account since the online payment platform came to Canada in late 1990s and has never had any trouble buying things online.

But Mr. Wald’s transaction hit a roadblock when an error message warned that he had violated PayPal’s “terms of use” when he tried to buy The New Persian Kitchen, a cookbook by Louisa Shafia, and The House of God, a satirical novel about Beth Israel hospital in Boston – from Canadian online bookseller BookOutlet.ca.

When he contacted the company’s customer service, he was informed by a representative that “the payment was pending clearance by OFAC [the U.S. Office of Foreign Asset Control].” He asked if he could simply cancel the purchase, and was told no, it would have to be adjudicated by PayPal’s compliance team. “It sort of creeped me out,” Mr. Wald says. “If they are going to try to crack down on crime that’s all very noble, but then it’s in your face; and this is a $20 transaction.”

There was some moderately hawkish Fed chatter today:

Federal Reserve Chair Janet Yellen still has faith.

On Friday she expressed confidence that tighter labor markets over time will push inflation back to the central bank’s 2 percent goal, setting up a rate hike this year — possibly as soon as next month — if jobs data remain strong. That view breaks with a minority group of Fed officials who are more pessimistic about the relationship between labor markets and prices.
…
Ending two months of public silence about her views, Yellen cited “continued solid performance of the labor market” and said the “case for an increase in the federal funds rate has strengthened in recent months” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming.

Stocks initially rose after Yellen’s remarks, only to decline after Stanley Fischer, the Fed’s vice chairman, reiterated in an interview on CNBC that the possibility exists for two rate increases this year, starting as soon as September.

Yellen’s remarks also signaled she didn’t need to see actual inflation rising toward 2 percent to raise interest rates. She said inflation would reach their 2 percent target “over the next couple of years,” and emphasized that gradual, timely moves were required “to achieve and sustain employment and inflation near our statutory objectives.”

So for what it’s worth – and remember, you’re reading this for free – I think that for the next year or so Fed hikes will be of the ‘one and done’ variety, rather than the steady increase variety. But eventually (probably after the Fed Rate has struggled carefully and cautiously to 1% and above) there will be a series of hikes, bang, bang, bang, bang, that will result in a very nasty environment for bonds.

Assiduous Readers will remember my rants about risk; risk is not something dumb, like “monthly volatility of portfolio value” (which, by the way, implicitly assumes that the critical consideration is Preservation of Capital); risk is the chance that a portfolio will not meet its objectives and hence cause the portfolio holder to revise his lifestyle downward from the expected level. I was pleased to find an essay today on this topic by Jean L.P. Brunel, titled Goals-Based Wealth Management in Practice:

Wealth management processes have not always been responsive to individual clients’ priorities and modes of thinking. A model is presented and evaluated that uses goals-based wealth management concepts to generate module-built portfolios, each of which is driven by a client’s expressed goals. This model allows for a high degree of flexibility and responsiveness to client needs with a practical level of standardization.

I can’t say I’m a fan of the module-based approach to implementation, however:

GenSpring uses four sets of goals-focused modules in creating portfolios:
1. Tax aware with nontraditional strategies,
2. Tax agnostic with nontraditional strategies,
3. Tax aware with only traditional strategies, and
4. Tax agnostic with only traditional strategies.

Goals-Focused Modules. Each of the four sets consists of nine modules that address all the categories of a client family’s needs. The modules are contiguous, but each module must be sufficiently different to distinguish it from the others. Each module must also be optimal within the constraints created by inevitable trade-offs while leaving room for flexibility.

Who woulda thunk it? Fiduciary rules have some drawbacks:

As brokers lay plans to satisfy new federal rules governing their relationships with retirement savers, one thing is becoming clear: Some clients will see their investment options diminished or face the prospect of higher fees.

Brokerage Edward Jones, anticipating the fiduciary rule that will require brokers to put the interests of retirement savers ahead of their own, said on Wednesday that it would stop offering mutual funds and exchange-traded funds in retirement accounts that charge investors a commission. The move makes the St. Louis firm the first big player to disclose detailed plans on retirement accounts that charge a commission.

Retirement savers could be forced to make decisions in the months ahead as other firms determine how they plan to operate under the Obama administration’s new rule, which starts to take effect in April. The rule doesn’t extend to nonretirement accounts.

I’ve heard that regulators everywhere are calling their kindergarten teachers and asking why everybody doesn’t just play nicely.