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Thursday 07.07.2016

“It’s Starting to Feel Like 2008”

Nearly everywhere on the planet the giant financial bubbles created by the central banks during the last two decades are fracturing. The latest examples are the crashing bank stocks in Italy and elsewhere in Europe and the sudden trading suspensions by three UK commercial property funds.

If this is beginning to sound like August 2007 that’s because it is. And the denials from the casino operators are coming in just as thick and fast.

Back then, the perma-bulls were out in full force peddling what can be called the “one-off” snake oil. That is, evidence of a brewing storm was spun as just a few isolated mistakes that had no bearing on broad market trends because the “goldilocks” economy was purportedly rock solid.

Thus, the unexpected collapse of Countrywide Financial and the collapse of the Bear Stearns mortgage funds were just one-off events. So all the experts said “nothing to see here.” Just move along and keep buying. In fact, after reaching a peak of 1550 on July 18, 2007, the S&P 500 stumbled by about 9% during the August crisis. But the dip-buyers kept coming back in force on the one-off assurances of the sell-side “experts.” By October 9 the index was back up to the pre-crisis peak and then drifted lower in sideways fashion until September 2008.

Minutes: Fed Wants Clarity on Brexit's Impact Before Hiking Rates

Federal Reserve policymakers decided in June that interest rate hikes should stay on hold until they have a handle on the consequences of Britain's vote on EU membership, according to the minutes from the Fed's June policy meeting released on Wednesday.

The minutes for the June 14-15 meeting, which took place ahead of the June 23 referendum in which Britons voted to leave the European Union, showed widespread unease over the so-called "Brexit" vote, including among voting members on the rate-setting Federal Open Market Committee.

"Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data on the consequences of the U.K. vote," according to the minutes.

Policymakers also cited a severe slowdown in hiring by U.S. employers as a reason for leaving interest rates steady last month, the minutes showed.

Goldman, Deutsche Bank Say Pound Plunge Is Just Getting Started

The pound’s plunge isn’t over yet, according to three of the world’s top currency traders

After falling to a 31-year low Wednesday, sterling may sink another 7 percent to 11 percent this year in the aftermath of the U.K.’s Brexit vote, according to Goldman Sachs Group Inc., Deutsche Bank AG and Citigroup Inc. The currency will weaken to $1.20 on expectations the Bank of England will cut interest rates to contain the economic fallout from the referendum, according to Goldman Sachs and Citigroup. Deutsche Bank has an even more bearish forecast, seeing $1.15 by the end of 2016.

"The question is: how quick do we get there?" Richard Cochinos, London-based head of Europe Group-of-10 currency strategy at Citigroup Inc., the world’s biggest foreign-exchange trader according to Euromoney magazine, said in an interview with Bloomberg Television. "You’re going to need much greater inflows from investors long term and short term before the currency stops weakening."

The pound has tumbled to a three-decade low during the past two days amid mounting evidence the Brexit vote is hurting confidence in Britain’s economy. With real-estate tremors and fund suspensions, concern is building that a failure to control the aftershocks of the referendum will propel the nation into a recession.

Deutsche Bank to sell $1 billion of shipping debt to boost capital

Deutsche Bank (DBKGn.DE) is looking to sell at least $1 billion of shipping loans to reduce its exposure to a sector whose lenders face closer scrutiny from the European Central Bank, sources told Reuters.

While the oil tanker trade has picked up, the container and dry bulk shipping industries are struggling with their worst downturn due to a glut of ships, a faltering global economy and weaker consumer demand.

Banking and finance sources familiar with the matter said Germany's biggest lender was initially looking to offload at least $1 billion.

"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. "They are not looking to exit shipping." Deutsche Bank, which has around $5 billion to $6 billion worth of total exposure to the shipping sector, declined to comment.

When Debt Bubble Pops

Italian Banks Could Spark Next Crisis In Europe

The UK’s recent vote to leave the EU has shed some additional light on existing weak spots in the European economy. One of those weak spots is Italian banks. From The Wall Street Journal:

Britain’s vote to leave the EU has produced dire predictions for the UK economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the US, where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

The EU has formal dos and don’ts when it comes to assisting financial institutions. A dialog is taking place about those rules. From Bloomberg:

Italy’s banking crisis could spread to the rest of Europe, and rules limiting state aid to lenders should be reconsidered to prevent greater upheaval, Societe Generale SA Chairman Lorenzo Bini Smaghi said. “The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television on Wednesday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

Obamacare's smoker penalty dampened insurance enrollment, didn't help qutting

Higher charges imposed on tobacco users who buy Obamacare health plans led to reduced enrollment among users who otherwise would have purchased that coverage, a study released Wednesday reveals.

At the same time, the surcharges for tobacco users did not lead to overall reduced smoking among people who actually ended up enrolling in Obamacare coverage during the first year of the plans, according to the study by researchers at the Yale School of Public Health.

And, oddly, tobacco users who faced lower surcharges than the maximum allowed actually "showed significantly less smoking cessation," according to the study.

"Our findings suggest that high tobacco surcharges undermine attempts to achieve universal coverage, a key goal of the Affordable Care Act," said Abigail Friedman, a Yale professor and co-author of the study, published in the journal Health Affairs.

Slower Days Ahead for US Auto Market, Say Analysts at Fed Symposium

The U.S. automotive market has reached its peak and is expected to level off or decline slightly in the coming years, said analysts at the Federal Reserve Bank of Chicago’s Automotive Outlook Symposium.

More than 60 economists and analysts from business, academia and government attended the symposium, held in June in Detroit. A just-released Chicago Fed Letter summarized the findings.

Paul Traub, senior business economist, Federal Reserve Bank of Chicago, Detroit branch: Sales of light vehicles likely peaked in 2015 at 17.4 million units. Traub sees sales falling off slightly to 17.3 million in 2016 and 17.2 million in 2017, in keeping with Blue Chip Economic Indicators forecasts.

Traub mentioned several reasons for the leveling off of vehicle sales: People are generally saving more than in the past (5.7% of their income in the current decade versus 2.5% in the 2000s and 4.8% in the 1990s). Traub speculated that the rise in saving could be due in part to Millennials growing up accustomed to saving during the Great Recession, making them more inclined to have a higher cushion now. People who held off buying new vehicles during the Great Recession have mostly purchased their vehicles in the past five years, meaning there’s less pent-up demand now. Unless dealers find new ways to attract customers, annual sales will decline.

Gundlach: "When Deutsche Bank Goes To Single Digits People Will Start To Panic"

Following today's Fed minutes release, Jeff Gundlach had a far less "uncertain" message: “Things are shaky and feeling dangerous,” Gundlach told Reuters in a telephone interview.

It's not just stocks that Gundlach was not too excited about, he also had some choice words about buying Treasuries here. "You're seeing people who hated the '2 percent' 10-year suddenly loving it at a 1.38-1.39 percent revisit of the all-time low closing yield," Gundlach said. "If you buy 10-year Treasuries now, I would say, it is a terrible trade location. In fact, it is the worst trade location in the history of the 10-year Treasury."

True, just like buying stocks less than 2% from all time highs, however what Gundlach failed to mention is that those who are buying Treasurys here are not doing it for the yield (or lack thereof on more than $11 trillion in notional), they are simply doing so to frontrun even more central bank purchases now that the monetary spigots have once again been activated as "confused" central banks around the world have just one trick left up their sleeve - to monetize even more debt in hopes of pushing every last investor into risk assets.

The DoubleLine bond king also had some choice words about Europe's banking crisis: "Banks are dying and policymakers don’t know what to do," Gundlach said. "Watch Deutsche Bank shares go to single digits and people will start to panic... you'll see someone say, 'Someone is going to have to do something'."

Can America's working families afford to have kids?

Many American families are under unprecedented financial pressure, but one type of family may be struggling more than others.

Families with small children are facing a sharp rise in the cost of child care, with prices for day care climbing at twice the rate of inflation since the U.S. left the recession in 2009, The Wall Street Journal reports, citing data from the Labor Department. American families with two children in day care pay an average of $18,000 annually, exceeding the $17,000 average annual expense for housing, according to Care.com.

At the same time, many families are contending with stagnant or even declining wages, which is placing even more stress on already strained household budgets. In 33 states and the District of Columbia, child care costs more than college tuition, while day care costs more than rent in most American cities, the Economic Policy Institute found in a 2015 report.

That's pushing many families to make tough choices when it comes to work, forcing them to rely on friends and families to help out or to cobble together staggered work schedules. The cost of child care and nursery school has increased at least 2.1 percent per year since 2009, according to data provided by the Bureau of Labor Statistics. Last year saw the biggest increase, at 4 percent. By comparison, consumer prices rose less than 1 percent in 2015.

Lynch says DOJ will not pursue charges against Clinton

U.S. Attorney General Loretta Lynch on Wednesday said the Justice Department has decided not to pursue charges against Hillary Clinton or her aides and will close the investigation into her use of a private email server during her tenure as secretary of state.

The announcement comes a day after FBI Director James Comey held a press conference in which he said “no reasonable prosecutor” would pursue a case against Clinton, even though she and her staff were “extremely careless” in their handling of classified material.

“Late this afternoon, I met with FBI Director James Comey and career prosecutors and agents who conducted the investigation of Secretary Hillary Clinton’s use of a personal email system during her time as Secretary of State,” Lynch said in a statement on Wednesday. “I received and accepted their unanimous recommendation that the thorough, year-long investigation be closed and that no charges be brought against any individuals within the scope of the investigation.”

Lynch had previously said that she would accept the FBI’s recommendation, a declaration that came after Lynch came under fire for an impromptu meeting she had with former President Bill Clinton on an airport tarmac late last month.

Hillary Clinton vs. James Comey: Email Scandal Supercut

Are We Sure This Isn't A Recession?

While recessions are a fairly precise technical term, investors never really know where we are in the business cycle until it is past us. We can certainly recognize the middle of a recession, but it is much more difficult to recognize the start. The reason the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) makes more sense than simply holding the S&P 500 is because of the risk of a recession being on the horizon. Corporate earnings are suffering fiercely with low oil prices and a strong dollar hammering away on the value of sales in foreign countries.

Domestic demand depends on consumers spending money on physical goods and services, not on stocks and bonds. This presents a real challenge to the American companies as strong returns to capital lead to more of the wealth concentrated in fewer hands. That makes it more difficult for companies that cater to the disappearing "middle class".

In a nutshell, the companies have performed so well at creating earnings and cash flows that their customer base doesn't have as much capital left for spending.

If we aren't headed into a recession, it still appears we are entering a period of fairly weak growth in real GDP. The result could be that stocks still follow the normal business cycle predictions for a recession. Fidelity believes we are still in the middle of the business cycle and I believe we are closer to the downturn.

Wal-Mart now lets you pay with phone at all 4,600 US stores

Wal-Mart will now let you pay with its phone app at all 4,600 stores nationwide.

The effort is part of Wal-Mart's strategy to make shopping easier and faster, while learning more about consumer behavior.

With Wal-Mart Pay, the cashier scans a QR code on the phone screen to charge a credit, debit or Wal-Mart gift card linked with the account. It differs from Apple, Samsung and Android Pay, which involves tapping your phone next to a payment machine with a wireless technology called NFC.

In December, Wal-Mart said it would develop its own digital wallet rather than honor existing systems from Apple and others, though Wal-Mart said it isn't ruling out third-party wallets in the future. Retailers have been pushing their own systems in part because they retain control. Daniel Eckert, senior vice president of services at Wal-Mart U.S., says data from the app will be used to improve the shopping experience. One way, he said, would be to use past shopping behavior to build a personalized shopping list. The customer could then delete or add items. He said such features would be done only with a customer's permission.

Wanted: U.S. jobs for post-Brexit U.K. jumpers

Post-Brexit jitters are leading some higher-skilled U.K. workers to sniff out opportunity elsewhere. Their main target? The United States.

“The U.S. has long seen high volumes of search from U.K. job seekers interested in working and living in the States,” said Tara Sinclair, chief economist at global job-search site Indeed. “But the [vote for a U.K. split from the EU], at least in the short term, caused the share of U.K. job search into the U.S. to increase as much as 170% — a potential trend as more U.K. and European Union citizens look for opportunities elsewhere.”

Were frantic clicks simply a knee-jerk reaction to the unexpected, late swing toward “leave” in the heavily contested June 23 referendum?

Yes. And no. Following the initial spike in popularity, U.K. searches leveled off but are still elevated through early July, running about 6% higher than U.K.-to-U.S. search logged before the vote, Indeed data showed. English-speaking destinations were most popular, as might be expected. Top searches included roles in marketing, human resources, hospitality and finance sectors, Indeed blogged in a five-chart recap of the Brexit job search.

The Big Unravel: US Commercial Bankruptcies Skyrocket

This year through June, there have been 91 corporate defaults globally, the highest first-half total since 2009, according to Standard and Poor’s. Of them, 60 occurred in the US. Some of them are going to end up in bankruptcy. Others are restructuring their debts outside of bankruptcy court by holding the bankruptcy gun to creditors’ heads. In the process, stockholders will often get wiped out.

These are credit fiascos at larger corporations – those that pay Standard and Poor’s to rate their credit so that they can sell bonds in the credit markets.

But in the vast universe of 19 million American businesses, there are only about 3,025 companies, or 0.02% of the total, with annual revenues over $1 billion; they’re big enough to pay Standard & Poor’s for a credit rating.

About 183,000 businesses, or less than 1% of the total, are medium-size with sales between $10 million and $1 billion. Only a fraction of them have an S&P credit rating, and only those figure into S&P’s measure of defaults. The rest, the vast majority, are flying under S&P’s radar. About 99% of all businesses in the US are small, with less than $10 million a year in revenues. None of them are S&P rated and none of them figure into S&P’s default measurements.

Goldman Expects the S&P 500 to Fall as Much as 10 Percent Before Ending the Year at 2,100

According to Goldman Sachs Group Inc., now is not the time to buy stocks.

In a new note from Chief U.S. Equity Strategist David Kostin and his team, the firm says it expects there to be a pullback of as much as 10 percent in the S&P 500 before it makes a comeback to 2,100 later this year.

"Although investors appear complacent in the wake of Brexit, a maturing economic cycle with elevated valuations, decelerating buybacks, and growing political uncertainty provide the basis for potential market weakness in the second half," the team writes. "However, above-trend U.S. GDP growth, a cautious Fed, and an earnings recovery will return the S&P 500 to 2,100 by year-end, extending the flat market of the past two years."

With 3-month, 6-month, and 12-month S&P 500 price targets of 1,950, 2,100 and 2,150, respectively, the team has been recommending that clients invest in firms with high dividend yields and high domestic exposure due to the rising uncertainty in both the economic and political arenas. Unfortunately for the broader stock market bulls, the team expects the uncertainty to move higher yet as the U.S. presidential election draws closer.

Why aren't U.S. employees taking all of their days off?

How Wall Street is breaking America's kneecaps

Wall Street, like any big American business, presents itself as a creator of jobs and economic value. They wield the magic of prices, markets, and sophisticated financial instruments to allocate capital to its most productive locations. Hey presto, more growth and more wealth.

The lickspittle financial press takes this as axiomatic, as Alex Pareene once discovered on CNBC, where the hosts reacted with stunned incomprehension to the argument that high bank profits are not their own justification.

Yet one should not take Wall Street at its word. The financial sector now accounts for about 6.5 percent of GDP, and up to 40 percent of corporate profits (depending on the state of the market). And in many cases, those profits are the result of economic parasitism rather than capital allocation.

Compare a community bank to an organized crime syndicate. The former institution (ideally) lends out money to local creditworthy businesses and individuals, so that they can start new stores, build homes, buy land, and so forth. The bank's profits come from the success of the funded projects. Organized crime has a much simpler business model: Send people around to say, "Pay me or I'll beat you up." The former example is the picture-book model of capital allocation. The latter is pure economic parasitism. And in many instances today, Wall Street is closer to the second model than the first.

Autonomous Robots Will Be Delivering Food In London, Packages In Germany

If they come bearing hot French fries and gooey pizza, I, for one, will welcome our new robot overlords with open arms. The artificial intelligence revolution is one step closer to that reality in Europe, where a food delivery service, a package delivery company, and a retail chain are testing out autonomous robot couriers.

Food delivery companies Just Eat and Pronto will be trying out the self-driving robots in London, while Germain retail chain Metro AG and German parcel delivery company Hermes will test them out in Dusseldorf, Germany, and Bern, Switzlerland, as well as another undisclosed German city, says the robot’s maker, Starship Technologies.

Starship Technologies, a London-based company started by two Skype co-founders, has been testing the so-called “ground drones” in Europe over the last nine months, but these trials will mark the first time businesses will be using the technology to deliver real orders to paying customers, Allan Martinson, Starship’s chief operating officer tells Bloomberg.

Each company’s trial will involve anywhere between five and 10 robots in one or two areas of each city. Starship may announce further customers, including U.S.-based businesses, in coming months, Martinson said.

NEWS to Disturb the Comfortable...

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