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Yellen: There's 'always some chance of recession'

As recession fears mount in the U.S., Fed Chair Janet Yellen conceded there's a "chance" of a downturn ahead. She also said the central bank is studying whether negative interest rates would help should conditions worsen.

"There is always some chance of recession in any year," she said. "But the evidence suggests that expansions don't die of old age."

Asked by Republican Sen. Bob Corker whether the monetary policy-making Federal Open Market Committee would consider going to negative interest rates, which would entail charging banks to store reserves at the Fed, Yellen left the door open. She repeated a statement she said Wednesday that the Fed had considered negative rates in 2010 but decided that wouldn't be the best course at that time.

"In light of the experience of European countries and others that have gone to negative rates, we're taking a look at them again, because we would want to be prepared in the event that we would need (to increase) accommodation. We haven't finished that evaluation. We need to consider the institutional context and whether they would work well here. It's not automatic," she said.

Gold's Soaring Right Now -- Here's What's Next...

Negative rates go deeper, will they ever come ashore here in the U.S.? I wouldn’t put anything past the Fed in their attempt to revive the economy. Well, she came, she conquered, she left. But, she’ll return today for an encore performance. Yesterday, I told you about the two scenarios that I thought were before Janet Yellen, and guess what? She borrowed from both! Now that’s an economist for you. A two handed economist. You know they say “on one hand this could happen, and on the other hand this could happen”. She was all over the board yesterday, but in the end, she said nothing about stopping the rate hikes, instead choosing her words carefully, said that the Fed would continue to hike rates gradually.

Hmmm… does that mean the rate hike for March is still on the table? Does that gradually mean four more rate hikes in 2016? Or does it mean no more rate hikes until 2017? Gradually. Taking place, changing, moving, etc., by small degrees or little by little.

So, if that’s the definition of “gradually”, we can safely come to the conclusion that we still don’t know anything! For the record, I put down for all to read, late last year, that since the Fed had “broken the seal” on the rate hikes that they would go further with their rate hikes in March and June, and have a “Oh, No, what did we do.” But there was none of that to be seen or heard in yesterday’s testimony by Yellen.

There were some comments about the market turmoil, and so on, but I think she was just trying to throw the markets off the scent of what she was really saying. Which was… Oh, I give up! I really can’t say what her overall goal was yesterday, except to leave us all scratching our collective heads. But what I do know, is that I didn’t hear what I wanted to hear.

Restaurant same-store sales dip negative in January

The restaurant industry experienced a discouraging start to the year as measured by same-store sales growth during January; external factors certainly had an impact. Same-store sales fell 0.8 percent in January, which was the softest month since the 0.9-percent decline reported for February 2014, and only the second month with negative same-store sales in the last 15 months.

As a comparison, same-store sales in December 2015 rose 0.6 percent. This insight comes from data reported by TDn2K’s Black Box Intelligence through The Restaurant Industry Snapshot, based on weekly sales from over 23,000 restaurant units and more than 120 brands, representing $57 billion dollars in annual revenue.

“The restaurant industry has experienced a decent run in terms of sales growth for almost two years now,” said Victor Fernandez, executive director of insights and knowledge for TDn2K.

“Although we have seen a slowdown in the pace of this growth in recent quarters, what happened during January is really a reflection of external factors affecting sales. The biggest of these is weather. In fact, the last time we experienced results like these was during the winter of 2014 when weather was also a strong negative factor. As an example, in the third week of January 2016 we saw sales growth for the entire industry drop by more than 10 percent, as those regions most impacted by the winter storms saw same-store sales growth drop by more than 20 percent and close to 40 percent in the case of the Mid-Atlantic.”

Marc Faber: Over 5 Thousand Years We've Never Had Negative Rates

Dry Bulk Bankruptcy Wave Approaching, Warns Precious Shipping CEO

As the Baltic Dry Index (BDI) continues to slip to new record lows, falling to 290 on Wednesday, Khalid Hashim, CEO of Precious Shipping Public Company Limited (PSL) says that there could be wave of bankruptcies in the dry bulk sector as owners find themselves unable to secure financial backing due to banks pulling back on uncertain loans.

"Do not be surprised to see more bankruptcies and action brought on by the lending banks on borrowers who have failed to show performance in terms of raising additional funds to bolster their liquidity to at least partially service their debt since their shipping revenues are probably not going to be able to do that this year," said Hashim

Banks are examining their lending policies, meaning that they will likely consider "pulling the plug" on their doubtful loans, explains Hashim, noting that dry bulk companies will be left struggling to find access to cash.

"Most dry bulk shipping companies, especially the smaller and non-listed ones, will simply give up as they will not be able to manage against such overwhelming odds," he adds.

Forget the Great Recession—Welcome to the ‘Great Repricing’

Six and a half years removed from the Great Recession, we’re now in the midst of the “Great Repricing.” That’s what David Rosenberg, chief economist and strategist for Gluskin Sheff + Associates, dubbed the current market selloff, one that’s seen the Standard & Poor’s 500-stock index drop more than 11 percent since the new year began. Continued carnage in crude and flows to the yen, commonly considered a safe-haven currency, are signs of a market in which risk appetite is nowhere to be found.

These down markets nevertheless come at a time when the American consumer—the prophesied catalyst of global growth—still appears to be in good shape.

“Adidas just posted double-digit gains in operating profits and revenues, raised its outlook for earnings and sales for the year, and investors are putting their footwear to work and running away from risk,” quipped Rosenberg. Uncertainty isn’t confined to market participants, he said—it also reigns supreme at central banks.

“If [Janet Yellen] is so confused, why shouldn’t the rest of us be?” wrote Rosenberg, commenting on the Fed Chair’s testimony before the House Financial Services Committee. “And the blowout in credit spreads and sharp compression in the market multiple attests to an investor base that indeed is very confused at the moment.” Since the financial crisis (or going back to the early 1980s, depending on whom you ask), selloffs of this severity typically have forced monetary policymakers to refill the punch bowl, creating the appearance of a central bank “put.”

JPMorgan's Dimon buys more than $25 million of company stock

Jamie Dimon, chief executive officer of JPMorgan Chase & Co (JPM.N), on Thursday bought 500,000 shares of the company's stock for more than $25 million, according to a filing with the U.S. Securities and Exchange Commission.

JPMorgan shares closed at $53.07 on Thursday. The stock has fallen nearly 20 percent this year, in line with the decline of the KBW Bank Stock index .BKX.

JPMorgan shares have fallen as the outlook for bank profits has dimmed with expectations of continued low interest rates, higher costs for bad loans, particularly related to energy, and a slow economy.

JPMorgan said last month that its tangible book value, which is its net worth, was $48.13 per share at the end of December.

Millennials Now Prefer Socialism To Capitalism

On Tuesday, Bernie Sanders swept to victory in the New Hampshire primary over rival Hillary Clinton. To be sure, Sanders was expected to win. Handily.

Still, there’s something surreal about the fact that America is edging ever closer to a situation that will see an avowed socialist square off against one of the country’s quintessential capitalists for the keys to The White House.

As we and others have documented, the American electorate is fed up with politics as usual in Washington. Many voters have no hope that the system can be changed as long as both parties continually field mainstream, establishment candidates all of whom are connected to powerful lobbyists, Wall Street, and corporate America.

So disgruntled are Americans that the candidates with the most buzz around their campaigns are Donald Trump and Bernie Sanders. The capitalist and the socialist. Against that backdrop we present the following interesting chart from a recent YouGov survey and brief color from WaPo. As you can see, respondents younger than 30 now rate socialism more favorably than capitalism. We suppose it’s all that good will towards Wall Street.

AIG Posts Hefty Loss, Hurt By Weak Underwriting

American International Group Inc, the biggest U.S. commercial insurer by premiums, reported a bigger-than-expected quarterly operating loss, hurt by weak underwriting and lower returns on investments in a turbulent market. Shares of the company, which boosted its share buyback program and dividend, fell 1 percent in after-hours trading.

AIG is facing pressure from activist investor Carl Icahn to split into three - an idea that has been rebuffed by Chief Executive Peter Hancock.

The company is cutting costs as its underwriting business struggles with falling rates for commercial property and casualty insurance. The insurer, which has frozen its employee pension plan, is looking to cut its gross general operating expenses by another $1.6 billion by the end of 2017.

AIG reported an after-tax operating loss attributable to the company of $1.35 billion, or $1.10 per share, for the fourth quarter ended Dec. 31. Analysts on average were estimating a loss of 93 cents per share, according to Thomson Reuters I/B/E/S. The company's commercial property and casualty insurance business, traditionally AIG's forte, posted a pre-tax operating loss of $2.34 billion, as the company strengthened its reserves.

Love For Gold Spreads Worldwide

Gold has seen considerable gains since the start of the year and appears to be reasserting itself as a global currency, seeing broad gains in foreign exchange markets, in the wake of growing global economic uncertainty.

According to Kitco’s Gold-Currency charts, gold has been trading higher in both “hard” and “other” currencies terms over the past 60 days. The Kitco charts provide gold prices in multiple currency terms, including the U.S. dollar, euro (EUR), Swiss franc, British pound sterling (GBP), Japanese yen (JPY) and Russian ruble (RUB), among other currencies.

Gold, typically priced in U.S. dollars, caught investors by surprise again Thursday as the metal’s rally continued and pushed prices up to a 12-month high at $1,263.90 an ounce. The metal is up more than 18% so far this year. April Comex gold futures were last quoted up $47.5 at $1242.10 an ounce on the day.

Looking at Kitco’s data, gold priced in “other” currencies showed that the metal has made the biggest gains against the Russian ruble and is up more than 25% in the past 60 days. Next in line was gold in Mexican peso terms (+23.49%) and South African rand terms (+18.93%). Mining analysts have noted that the weaker rand has been a significant boost for South African’s mining sector as well.

How Much Does America’s Huge National Debt Actually Matter?

After briefly surging to the forefront of the national debate, concerns about U.S. debt appear to have gradually dissipated in the body politic. A recent Pew survey found just slightly above half of Americans consider the budget deficit a top priority, down from 72% in 2013, and the issue has fallen in that time from the public’s number two priority (behind only the economy) to number nine.

But while deficit hawks may no longer hold as much sway, their concerns are still worth investigating, especially as election season approaches. The essential question: How much does national debt matter? For a country like the U.S. with a good payment history, (relatively) strong economy and control over its own currency, the answer at least for the moment, is “not too much.” To understand why, looking at the country’s total debt, which has nearly doubled following the financial crisis, matters less than how much it costs to finance our debt. That is, the most important number is the minimum payment on the credit card bill, rather the the total amount we owe.

Luckily for the U.S., that minimum payment has actually decreased even as total debt has risen. The more people want to buy U.S. debt (Treasury bonds), the lower interest payments the government needs to offer in order to incentivize those purchases, and American bonds are in high demand because they’re seen as a relatively safe investment in a troubled economic climate. As a result, the United States is forking over less in debt interest payments (as a percentage of GDP) now than it has since the late 1970s—even though the country owes significantly more.

Ok great, so we can borrow even more? Not exactly. While our debt load right now isn’t necessarily worth getting angsty about, thanks in large part to cheap cheap financing, at some point you really can have too much of a bad thing. Where exactly that point is continues to be a matter of dispute. There’s an ongoing controversy over whether a particular high debt watermark among advanced economies—such as a 90%-debt-to-GDP ratio—is broadly correlated with slower growth, or whether such thresholds are effectively arbitrary or too general to be of significance.

Boeing's Accounting of 747 and Dreamliner Aircraft Investigated

Another Way for Corporations to Avoid Paying Taxes

If you thought there was a problem with inversions — deals that allow American companies to relocate their headquarters to lower their tax bills — wait until you hear about the real secret to avoiding corporate taxes. It’s called earnings stripping, and it is a technique that the Obama administration has so far failed to stop.

The public outcry over the use of inversions is now entering its third year. Pfizer is trying the biggest one yet, a $152 billion deal for Allergan, the maker of Botox, which is based in Dublin. The flight of American icons like Pfizer has led to complaints that corporations are gaming the system to lower the taxes they pay to Washington. At the same time, the companies stay in the United States, getting all the benefits of our country. But the tax games don’t stop with a relocation to Ireland, Britain or anywhere with a lower corporate tax rate than the United States.

The real gains from an inversion can come from earnings stripping, and here’s how it works: A company completes an inversion deal and moves its headquarters for tax purposes outside the United States. The now-foreign company still has operations in the United States. These American operations are still taxed in the United States and pay taxes here. The point of the inversion, of course, was to reduce taxes as much as possible. So, the company arranges for the United States parts of its operations to borrow large amounts of money from the now-foreign parent. The indebted American subsidiary will pay interest on that debt to the parent. Under the U.S. tax code, the interest payment can be used to offset the American earnings.

Voilà! The earnings of the company are now offset by these interest payments. What used to be a significant tax bill disappears. To be fair, the earnings-stripping option is available to any foreign company with earnings in the United States. But it does appear that American companies that have inverted are particularly poor expatriates, willing to take aggressive acts to exploit this tax loophole. A 2004 study of 12 corporate inversions found evidence that after inversion, companies engaged in earnings stripping. The authors found that four of the companies had engaged in almost 100 percent earnings stripping, costing the U.S. Treasury roughly $700 million over two years. The authors also concluded that “most of the tax savings” found in corporate inversions was attributable to this earnings stripping.

Morgan Stanley to pay $3.2 billion for its bad mortgages

Federal and state authorities on Thursday announced a $3.2 billion settlement with Morgan Stanley over bank practices that contributed to the 2008 financial crisis, including misrepresentations about the value of mortgage-backed securities.

The nationwide settlement, negotiated by the working group appointed by President Barack Obama in 2012, says the bank acknowledges that it increased the acceptable risk levels for mortgage loans pooled and sold to investors without telling them. Loans with material defects were included, packaged into the securities and sold.

Morgan Stanley said it previously reserved funds for all related amounts. "We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters," spokesman Mark Lake said Thursday.

For New York state, the settlement includes $400 million of mortgage reductions and other consumer and community relief, as well as $150 million in cash. State Attorney General Eric Schneiderman co-chairs the nationwide working group.

The War on Cash is About to Go into Hyperdrive

The global Central Banks have declared War on Cash. Historically, one of the safest things to do when the markets begin to collapse is to move a significant portion of your holdings to cash. As the old adage says, during times of deflation, “cash is king.” The notion here is that cash is a safe haven. And while earning 1-2% in interest doesn’t do much in terms of growing your wealth, it sure beats losing 20%+ by holding on to stocks or bonds during their respective bear markets

However, in today’s world of fiat-based Central Planning, cash represents a REAL problem for the Central Banks. The reason for this concerns the actual structure of the financial system. As I’ve outlined previously, that structure is as follows:

The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion. When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system. In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size. The US bond market (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion. Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion. Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.

When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).

Saudi Arabia is increasing its production to force OPEC's hand

What a Recession Does to Your Money

If we are indeed in the midst of a recession — and we won't know we're in one until well after it's begun — stocks likely still have a long way to go down. The Standard & Poor's 500 index has dropped 14 percent since peaking last summer, and it joined markets around the world in another steep slide on Thursday. Worries are high that the sharp slowdown in China's growth, falling U.S. corporate profits and other downward pressures will pull the economy back into a recession.

If a garden-variety one is on the way, the stock market's drop isn't even halfway done. Stocks have lost an average of 33 percent from top to bottom around past recessions, going back to 1929, according to a review by strategists at Credit Suisse.

Investors are scared enough that they're already pulling pages from the recession playbook. They're moving into types of stocks and other investments that have typically held up best during past downturns and avoiding those that tend to get hit the worst.

The temptation to sell everything and get out of stocks can be costly, though. Following every past recession, stocks have eventually gone on to recover their losses — and then climb higher.

Oil Patch Bankruptcies Soar in 2015

A total of 48 oil and gas exploration and production (E&P) companies filed for bankruptcy in 2015, and 39 oilfield services companies also filed for bankruptcy protection last year. So far in 2016, six E&P companies have filed for bankruptcy.

The data were reported by the law firm of Haynes and Boone and are worse than the 67 oil and natural gas firms cited by consulting firm Gavin/Solmonese as having filed for bankruptcy protection in 2016. Either way it’s a really big number, and according to Gavin/Solmonese, a year-over-year increase of 379%.

The culprits, of course, are low crude and natural gas prices. When oil prices were double or more what they are now, small E&P firms invested a boatload of cash from willing lenders and investors in pulling hydrocarbons out of the ground. Even with big debts and big payments on those debts, the firms could mostly show solid profits, pay good dividends and invest in more growth.

Now, surviving companies pump oil and gas mainly to pay debt service. Dividends have been eliminated or sharply reduced by many E&P and services companies, staff cuts have cost thousands of jobs and growth is no longer a consideration except for the very largest companies.

Wipro Bets Big on U.S. Healthcare Outsourcing Market, Acquires HealthPlan For $460 million

Wipro has reached a deal with U.S.-based Water Street Healthcare Partners to acquire its subsidiary, HealthPlan Services, for $460 million and deepen its presence in the lucrative and expanding healthcare outsourcing market in the United States.

With over 200 employees, HealthPlan is a technology and business-process-as-a-service (BPaaS) provider. Florida-based HealthPlan offers technology platforms to health insurance companies (payers), connecting its clients to hundreds of both public and private exchanges across the United States.

This is Wipro’s third acquisition in as many months. In December last year, it purchased Germany-based Cellent for $77 million and then U.S.-based Viteos for $130 million. European pharmaceutical company Boehringer Ingelheim is one of the major clients of Cellent.

Compared with Europe, American healthcare market is huge and worth about a staggering $20 billion. And these days, following the implementation of Affordable Care Act, many expect large growth in the healthcare outsourcing sector as the government offers insurance cover to millions of Americans.

Boeing plans job cuts in commercial airplane unit

Boeing said on Wednesday it would cut jobs at its commercial airplane unit, addressing intense pressure to reduce costs and compete with Airbus even as the industry booms.

Boeing and Airbus are turning out planes at record rates, and plan to boost output in coming years as they work through backlogged orders that stretch out seven or eight years.

But last year Airbus won 57 percent of new orders booked by the two airplane makers. Boeing's operating profit margin also narrowed to 3.5 percent in the fourth quarter, from 9.3 percent a year earlier. Factors included the high cost of producing its state-of-the-art 787 Dreamliner and a charge it took to account for slowing sales of its 747 jumbo.

"To win in the market, fund our growth and operate as a healthy business, we are taking thoughtful steps to reduce the cost of designing and building our airplanes, part of which involves evaluating our employment levels across all of commercial airplanes," Boeing said after its Airplanes chief, Ray Conner, announced the move in an employee webcast.

Nordstrom has officially become a discount outlet chain

Nordstrom is on the verge of losing its luxurious luster. The department store's off-price store, Nordstrom Rack, has been growing rapidly, to the point that there are more Rack stores than there are regular department stores. The company plans to have 300 stores by 2020.

And now, Sapna Maheshwari of Buzzfeed reports that the lines between the original brand and its outlet off-shoot have been further blurred, as consumers can return items purchased at Nordstrom Rack to Nordstrom, and they can also return items purchased at the company's namesake store to its off-price store. Unsurprisingly, Buzzfeed notes that Nordstrom does not promote this return policy.

Having the ability to return full-price apparel to an off-price store sends the message: "why shop full price at all?" It also convolutes the brand's level of luxury, as the two begin to ideologically merge together.

Buzzfeed points out that many other department stores with off-price versions of their namesake brands — like Saks Fifth Avenue and its Saks Off Fifrth and Neiman Marcus and its Last Call — do not have such a policy. These other retailers have been keeping the line between full-price and discount distinct, in a clear attempt to maintain the namesake stores' respective reputations, something that Nordstrom is now at risk of losing. "As more customers view Nordstrom Rack as their Nordstrom experience versus the full-price store, how do you not have the brand get less special or more associated with off-price over time?" Liz Dunn, CEO of Talmage Advisors, said to Buzzfeed.

Friday 02.12.2016

NEWS to Disturb the Comfortable...

We don't tell you what to think,

but we give you something to think about.