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Thursday 11.03.2016

The Good News on Jobs Isn't All That Good

Are the initial jobless claims data as useful a tool as they once were in determining the degree of labor slack in the economy? Certainly, today’s very low levels are cited as one of the key proxies -- along with the unemployment rate -- that raises concerns about the tightening labor market and the potential for wage inflation. I’m going to offer an alternative view to that.

First, the weekly initial claims series at 258,000 for the week ended Oct. 22 warrants some attention, as does the 246,000 figure in the last week of September, the lowest level since 1974. Such a low level should cause even the most dovish of monetary policy makers at least some alarm about the potential for inflationary wage pressure. We will get an update to this data series tomorrow (the forecast is for 256,000, according to data compiled by Bloomberg), but with the four-week moving average at just 253,000, this won't change things.

However, comparing initial claims today with the past is the proverbial apples to oranges. An important fact in looking at claims data is that vastly fewer people today are eligible for unemployment benefits. In other words, the number of unemployed people who can't receive jobless benefits -- and thus are not in the initial claims data -- has risen relative to those who have unemployment insurance.

Today, the ratio of those with unemployment insurance to the total number of unemployed is about 30 percent, which pretty much touches the lows so far in this economic recovery. That’s where the comparison with the level of claims in the 1970s -- or perhaps any pre-crisis era -- is misleading.

Anthem says it may trim Obamacare participation in 2018

U.S. health insurer Anthem Inc (ANTM.N) on Wednesday raised the prospect of smaller participation in the individual Obamacare exchanges in 2018, saying it would have a market-by-market strategy that hinges on 2017 profitability.

The company said that losses due to sicker-than-expected customers in its individual Obamacare plans were a bit less than foreseen in the third quarter and that it was planning for a slight profit in that business next year. For 2018, it is targeting 2018 profit margins in the low- to mid-single-digits from the individual business.

Anthem shares rose 4.4 percent. Leerink analyst Ana Gupte said the outlook for a return to profits in the individual business in 2017 was a small positive for the company. The market for individual health insurance created under President Barack Obama's national healthcare law drew fewer than half the enrollees expected, and the members have higher medical costs than foreseen. This has led to losses at Anthem and its rivals, some of which plan to stop selling these plans in 2017.

Anthem, which has not changed its plans for 2017, said it needed to see profits next year and new regulations to stabilize the market before it commits to a 2018 strategy. "We are going to be very surgical" in looking at both regions and states for 2018 participation, Chief Executive Officer Joseph Swedish said during a conference call to discuss third-quarter earnings.

Donald Trump More Trustworthy Than Hillary Clinton, Poll Finds

More voters trust Donald Trump over Hillary Clinton, according to a new tracking poll released Wednesday.

The Republican presidential nominee leads his Democratic rival on honesty and trustworthiness by eight points in a Washington Post-ABC News poll, which found 46% of likely voters saying Trump is more honest and deserving of trust.

That’s considered a wide lead for Trump since the two White House hopefuls were tied on the same question the last time a Post-ABC poll asked voters in September. The poll comes after the FBI reopened an investigation into Clinton’s private email server, having found more emails on the private computer of senior aide Huma Abedin.

The same poll, conducted Friday through Sunday, found Trump and Clinton neck-and-neck in overall voter preferences, with 46% of those surveyed saying they support Clinton and 46% backing Trump.

Jim Rickards: The Road To Ruin

JCPenney Kicks Off Black Friday The Wednesday Before Thanksgiving

Black Friday is coming early this year to JC Penney. The 1,020-unit chain will begin offering select Black Friday deals and promotions early this month in an effort to attract shoppers eager to get a jump on their holiday gift lists. Last year, Black Friday sales did not begin until Thanksgiving Day.

"We're going to kick it off early this year," said Mary Beth West, exec VP-chief customer and marketing officer at Plano, Texas-based JC Penney. "We are going to give customers who want to shop early the opportunity to get some of those exciting deals."

Industry research shows that some 50% of consumers plan to buy at least one gift before Thanksgiving, Ms. West said. To that end, JC Penney will let consumers shop the entirety of its Black Friday promotions online on Nov. 23, the Wednesday before Thanksgiving and a full day earlier than last year.

In addition, to encourage more users of the JC Penney app, the retailer is offering a sneak peek of its 72-page Black Friday sales circular to all consumers who download the app by this Friday, Nov. 4. (They won't be able to buy yet, just peek.)

Move over Illinois, New Jersey now has the worst-off pension system

New Jersey became the state with the worst-funded public pension system in the U.S. in 2015, followed closely by Kentucky and Illinois. The Garden State had $135.7 billion less than it needs to cover all the benefits that have been promised, a $22.6 billion increase over the prior year, according to data compiled by Bloomberg. Illinois's unfunded pension liabilities rose to $119.1 billion from $111.5 billion.

The two were among states whose retirement systems slipped further behind as rock-bottom bond yields and lackluster stock-market gains caused investment returns to fall short of targets. The median state pension had 74.5 percent of assets needed to meet promised benefits, down from 75.6 percent the prior year. The decline followed two years of gains. The shortfall for states overall was $1.1 trillion in 2015.

"It's a long-lived problem and a long-lived solution," said Natalie Cohen, managing director for municipal-securities research with Wells Fargo Securities in New York. "Unfortunately, the solution is ugly, long, hard and requires everybody to sit down at the table together."

Pressure on governments to increase pension contributions has mounted because of investment losses during the recession that ended in 2009, benefit increases, rising retirements and flat or declining public payrolls that have cut the number of workers paying in. U.S. state and local government pensions logged median increases of 3.4 percent for the 12 months ended June 30, 2015, according to data from Wilshire Associates.

Engineers using drones to farm crops

A group of engineers is attempting to prove it is possible to farm a field of crops without anyone having to set foot on the field.

The Hands Free Hectare project will be using remotely controlled machinery, including drones, to plant in March and harvest in September.

Martin Abell, a partner in the project based at Harper Adams University in Shropshire, said the large machines currently used “are doing a lot of damage to the soil”.

Instead of farmers having to physically drive tractors, the smaller machines controlled by an operator from beyond the field will take over the workload. He added that the machines won’t replace farmers, but “change the job farmers do”.

Ford sales fall in October, bringing US industry sales down

Ford's U.S. sales fell 12 percent in October, a steeper-than-expected drop that lowered the overall industry's sales. Most automakers reported sales Tuesday, but Ford's results were delayed by a day because of an electrical fire at its Dearborn, Michigan headquarters.

Overall U.S. auto sales fell 5.8 percent last month, according to revised figures released Wednesday by data firm Autodata Corp. On Tuesday, Autodata had estimated a 4.4-percent sales decline in October, but it had assumed Ford's sales would fall 2 percent.

Ford sold 188,813 vehicles last month. Its car sales plummeted 27.5 percent, while its SUV sales were down 9 percent. Ford paused Transit Connect commercial van sales to fix faulty door latches, which also hurt sales. Transit Connect sales dropped 61.5 percent.

One bright spot was Ford's luxury Lincoln brand, which saw sales rise 7 percent thanks in part to the new Continental sedan. Ford's F-Series pickup sales were flat compared to last October, but the F-Series remained the best-selling vehicle in the U.S., with 65,542 sold. The Chevrolet Silverado pickup, Ram pickup, Honda CR-V SUV and Toyota Camry sedan rounded out the top five.

Why Deutsche Bank’s troubles should worry us

Deutsche Bank is in trouble — and that’s bad news for all of us. Deutsche Bank is Germany’s biggest bank, with more than 100,000 employees around the world and operations in more than 70 countries. Its assets total about $1.7 trillion. One worrying sign of the bank’s distress is that its stock is trading now at about $14 a share, roughly half the peak (almost $29) in the past year and much lower than the historical high point of about $160 in 2007.

For months, rumors about Deutsche Bank have circulated in European financial markets and political circles. How weak is it? Would it need to be rescued by the German government? At best, Deutsche Bank’s failure would be a blow to confidence and squeeze credit availability in Germany and elsewhere. At worst, Deutsche’s failure would cause a global recession.

“The bank is edging close to suffering a general crisis of confidence, which could see investors pull their business from the bank and even depositors wanting their money out,” writes Jacob Funk Kirkegaard of the Peterson Institute, a think tank. Still, Kirkegaard doubts that Deutsche Bank would be allowed to collapse. In a financial crisis, it would probably be rescued by the German government or the European Central Bank, he says.

That could happen. In a separate study, economist William Cline, also of the Peterson Institute, points out that the stock market’s valuation of Deutsche Bank is far less than the company’s valuation. The stock market puts a price tag of around $15 billion on Deutsche Bank. This figure represents simple arithmetic: the number of shares multiplied by the stock’s price. By contrast, the company says its net worth is more than four times that at $68 billion.

The restaurant recession has arrived

Restaurant companies should brace for a challenging period as consumers grapple with the rising costs of rent, prescriptions and car loans and take advantage of cheaper groceries to eat at home more.

That’s the verdict of Moody’s Investors Service, which on Tuesday slashed its operating-profit growth forecast for the restaurant sector and revised its outlook to stable from positive. The ratings agency is now expecting operating profit to grow 2% to 4% in the next 12 to 18 months, down from a previous forecast of growth of 5% to 6%.

“Consumers are wrestling with higher nondiscretionary spending needs, while restaurant companies face higher operating costs, predominantly labor and challenged traffic trends,” Moody’s analyst Bill Fahy wrote in a note.

His comments come after a string of downbeat earnings from the sector, with the likes of Sonic Corp SONC, Burger King parent Restaurant Brands International Inc. QSR, and Chipotle Mexican Grill Inc. CMG, reporting declines in same-restaurant sales. Analysts who were warning of a restaurant recession in the summer are looking prescient right now — and agree that there is more pain to come.

Fannie Mae announce cash-out refi for student loans

Capitalizing off of its start as a student lender, SoFi and the government-sponsored enterprise Fannie Mae announced a new loan option on Wednesday allowing homeowners to refinance their mortgage at a lower rate and pay down the balance of an existing student loan.

Under the new loan option, which is titled the Student Loan Payoff ReFi, SoFi stated that it will pay down the student loan by disbursing payment directly to the servicer of the student debt.

“People can pay off student loan debt and are left with one loan at the low rates that mortgage borrowers are enjoying in today’s market,” said Michael Tannenbaum, senior vice president of mortgage at SoFi.

Tannenbaum explained in an interview with HousingWire that there’s a big opportunity for borrowers to take out additional mortgage debt on their home thanks to the current low interest rate environment. Typically, he said, student loans carry a much higher rate than mortgages, making it better for borrowers to have more mortgage debt and pay off their student loans.

Barclays Goes There – Central Bank Debt Forgiveness

Central Bank Debt Forgiveness a serious possibility? One big Investment Bank asks that question. Despite unprecedented monetary stimulus, inflation has remained subdued, Barclay’s Macro Economist Michael Gavin notes in an October 31 report. Is Milton Friedman’s annotated “term helicopter” money and the related concept of central bank debt forgiveness a viable alternative to raise the dead that is inflation and manage the unmanagable? Or does an economy doing “so so” at 5% unemployment and reasonably strong GDP growth need to engage in what include radical concepts such as central bank monetary debt forgiveness? We’re not there yet, but Barclays gives the issue deep exploration nonetheless.

The concept behind the derisively termed helicopter money is to combine government fiscal spending to improve the economy with central bank monetary efforts. Gavin raises questions about this concept in a research note titled “Is there anything monetary about ‘helicopter money’?”

Monetary stimulus is typically accomplished through government bond purchases. That said central banks have strayed from this orthodoxy. Notably, the European Central Bank has purchased corporate bonds while the Bank of Japan cut out the middle-“man” and directly purchased Japanese stocks — an economic concept considered unthinkable by noted free market thinkers.

For Gavin this at first raises a practical question. Is a monetary financed fiscal program more reflationary than a bond-financed one? Under normalized economic circumstances, the answer would clearly be “yes,” Gavin opines. Fiscal spending on roads, bridges and schools would likely generate much sought after inflation. But in a world of negative interest rates when economic textbooks have been turned upside down, “we think the difference between monetary and bond finance largely vanishes because the distinction between monetary and non-monetary fixed income assets has been suppressed.”

Your 401(k) Is About to Implode

I hate to break it to you… But if you’re a mainstream investor saving for your retirement, the next 10 years could spell serious trouble for you. That’s the conclusion of an exhaustive study from investment advisory firm Research Affiliates. They found that the chances of you meeting a standard 6-7% long-term investment return target over the next decade are extremely slim. In fact, you should prepare for far lower returns than you ever imagined…

The Research Affiliates study modeled risk and return forecasts for several mainstream investment portfolios and found a shocking result… The probability of investors earning even a measly 5% annualized real return over the next decade are remote at best. How bad is it?

A classic 60/40 portfolio of stocks and bonds has just a 0.2% chance of hitting the 5% target. A more diversified typical public pension plan has only a 7% chance of achieving a 5% real return over the next decade.

And defined contribution retirement plans, the majority of which are 401(k)s, have only a 6% chance of achieving 5% returns. What’s worse is these results didn’t factor in management fees or trading costs. So the actual returns are even worse. Those are scary stats. But what’s the practical effect on those saving for retirement?

$700 billion: The size of US-EU trade

China Economy: Yuan Currency Depreciation May Be A Sign Of More Serious Problems

As the Chinese government struggles to control outflows of its currency, the yuan has fallen to its lowest level against the dollar in six years, Reuters reported, peaking at 6.81 yuan per U.S. currency on Friday.

The Federal Reserve’s decision to delay hiking its interest rate target may save the yuan from potentially hitting a stable 6.80 to 6.90 per dollar exchange rate by the end of January 2017, but the speed of the currency’s drop in value has hinted at something more serious than an effort to bolster exports.

In a sign that the world’s largest economy is facing a wealth drain, 60 percent of China’s highest net worth individuals plan to buy property overseas in the next three years, according to a study by the Hurun Research Institute and Visas Consulting Group.

And Chinese businesses appear to be following a similar pattern. Last year, Chinese outward direct investment (ODI), or the amount firms invest in capital outside of the country, surpassed foreign direct investment (FDI), the value foreign firms invest in capital within China, according to the Chinese Ministry of Commerce. While China’s ODI has been growing since 2002, the amount rose 18 percent in 2015, to a value of $145.7 billion, auditing service KPMG found.

Venezuela is in trouble, and it only seems to be getting worse

In Venezuela, people have a hard time finding enough food to eat, and the anger that's already bubbling over into the streets is likely to get worse.

Last week, thousands of Venezuelans took to the streets, demanding a referendum to oust sitting President Nicolas Maduro. The New York Times reported last Wednesday that 73 protesters were injured after clashing with police in Merida, a city in northwestern Venezuela. This week, the Vatican interceded directly between Maduro and his opponents to try to head off more violence and dissuade protesters from taking to the streets again.

The latest mass protests were triggered after Maduro's government on Oct. 20 blocked a referendum that would've allowed for his legal removal from power. Had the referendum passed, Venezuela would have been able to elect a new president. But if it's not held before Jan. 10, Maduro's party will remain in power until 2019.

"After doing everything possible to slow down the recall effort of President Nicolas Maduro, the election commission finally suspended it all together. There's no legal mechanism left to remove the leadership, which means the resumption of major anti-Maduro street protests and demonstrations, and the state-supported repression to keep it under 'control,'" Ian Bremmer, president of research firm the Eurasia Group, said in a note.

SEC probes Wells Fargo over sales-practice disclosures: WSJ

The Securities and Exchange Commission (SEC) is probing whether Wells Fargo & Co (WFC.N) violated rules around investor disclosures and other matters relating to its recent sales tactics scandal, the Wall Street Journal reported on Wednesday.

The SEC sent requests to Wells Fargo for documents in recent weeks, following senators' calls in late September for the SEC to investigate whether the San Francisco-based lender misled investors while allegedly engaged in illegal sales practices, the newspaper said, citing a source.

Wells Fargo veteran chairman and chief executive officer, John Stumpf, abruptly departed last month bowing to pressure over the bank's sales tactics that have damaged its reputation and put Wall Street under renewed scrutiny.

The misconduct, carried out by low-level branch staff to meet internal sales targets, shattered the bank's folksy image and a raft of federal and state investigations followed.

Moody’s: UK could face another downgrade

American Apparel may not make it through the holidays

The largest clothing manufacturer in North America is hanging by a thread. American Apparel, less than nine months after emerging from Chapter 11 and losing sales and bleeding cash, has been slashing payroll at its Los Angeles factory — but it may not be enough to keep it afloat through the holidays.

Working with a restructuring expert, the company, famous for its provocative ads and Made in the USA apparel, has had talks with licensing firms and could agree to be sold in a deal that would precipitate another trip through bankruptcy court.

That the once-thriving apparel maker is flailing so soon after reorganization is a black eye to US manufacturing. Whispers around Los Angeles suggest that the company will soon exit its downtown factory, once home to 4,000 jobs, and either drop manufacturing all together or move to a state where labor is less expensive — say, North Carolina — where it would contract out its work.

While presidential candidates Hillary Clinton and Donald Trump talk about wooing manufacturing jobs back to the US, the largest domestic apparel maker can’t make a go of it.

The Federal Reserve To Pensions: Suspend Disbelief Indefinitely

Do we care that saw-wielding magicians don't really cut the girl in two, or that big screen good guys never run out of ammunition? Would the frightening folklore of vampires have survived the ages and still be capable of delivering a captivating bite? Poor Walt Disney would have been just another flash in the pan, and winged porcine platoons never have taken flight. Why love itself might not have survived the rigors of scrutiny without our ability to suspend disbelief. Do I detect a smile on your face?

Levity was indeed Samuel Taylor Coleridge's aim, a just reward for an aesthetic philosopher hitting the zenith of his cognitive prowess at the dawn of the 19th Century. In 1817, Coleridge encouraged those who endeavored to spin tales via the beauty of the written word to marry "human interest and a semblance of truth," thus resulting in a fantastic tale. Contentedly compliant readers would in turn gladly suspend judgement concerning the implausibility of the narrative.

There is of course a caveat. At the risk of inciting deflation, one's critical faculties can, and well, should, only be suspended for finite periods of time. The alternative risks intellectual indigestion, an overdose of fantasy, which carries nasty and lingering side effects.

In the words of the actor Edward Norton, "The more you can create the magic bubble, that suspension of disbelief, for a while, the better." Note Norton only recommends suspension of disbelief for a while.

NEWS to Disturb the Comfortable...

We don't tell you what to think,

but we give you something to think about.