CONFIDENCE

It's been said that banks and other financial firms benefit from higher interest rates.

Well, nearly all the talk today after Friday's job number, headlines like this one from Barron's are common: "Job Number Add Up To Rate Hike." In other words, what was a needlessly protracted  media hand-wringing circus about rising interest rates, is now an absolute certainty owing to 0.1% improvement in the job number as it went from 5.1% to 5.0%.

There must be an awful lot of magic in that one-tenth of percent. Charles Schwab's stock price jumped nearly 6% based on the news you can bet bankers love. At the opposite pole are the capital intensive industries like utilities.

As a result you can expect utilities to get a fair amount of heat (no pun intended) in the media as their stock prices sink some more, though they have been going down for a while. There is an old Wall Street bromide that the market discounts the future. That's a two-way street. The future is not always up.

The  Fed's footprint, however, is far deeper than just this rate hike if it happens next month, as Barron's points out. Just last week Fed Chair Janet Yellen openly expressed concern about bank lending policies, however she tried to ensconce it in Fed speak. Yellen was suggesting tighter Federal scrutiny of bank lending.

Yet a recent Fed survey of  loan officers and their lending showed that they remain tighter than before the 2008-09 financial debacle started. According to one report, the U.S. is currently 12th in the world in creating new businesses. Regulation and scrutiny have their not-always visible costs.

Higher interest rates usually bring with them a stronger dollar, something U.S. exporters will hardily  embrace. Speculation in the U.S. dollar before Friday's announcement hit its highest level in nearly two months. Cash will likely leave the market as higher bond yields compete for it. We've already written about the stock buy back situation.

According to one report  today on MarketWatch, "U.S. corporations, meanwhile, are painfully aware of the adverse impact of a firm dollar. Goldman Sachs economists reviewed transcripts of conference calls from 44 companies and concluded that the continued strength of the greenback is among the themes most often discussed this quarter, along with divergence between consumer and industrials sectors, inflation, and buybacks."

This administration just stuck to the COLA crowd again, postponing any cost of living increase for 2016 based on the Fed's inability to locate any inflation. Yet several big firms, Costco, Pepsi and BigMac, to name a few, mentioned concerns about rising wages in their recent earnings reports. Congress just raised the debt ceiling, most likely creating more fixed-cost obligations not so easily swept under the higher interest rate carpet.

There is also something nearly as abstract as those Fed numbers--confidence. That's something we're going to find out more about soon enough.

A FEW WEEKEND NOTES

Recently, we warned about the stock buyback meme beware-of-buyback-meme that's been so popular in driving up equity prices during this market cycle. Stock buybacks are related to earnings and drive prices. Fewer shares outstanding, higher booked or reported earnings. More shares out, more earnings dilution.

A blurb in this week's Barron notes: "Even stock buybacks, which boosts earnings per share, appear to be falling out of favor.....All told, shares of companies that have been buying back stock under performed the S & P 500 by 2.7 percentage points during the third quarter...."

The current panic over the dangers about climate change is like that summer lobster you unfortunately left a bit too long on the barbecue--overdone. The first clue is the most obvious. To scare up more traction they had to change the name from global warming to climate change.

Global warming is too specific. Climate change covers a great multitude of sins. It much easier to slide a few by the populace that way. The more specific the closer one's feet can be held to the flame. That's the only real global warming. So when the bureaucratic worry-peddlers and scaremongers meet later in a fortnight in Paris, look for the carrying cost to the solution to this exaggerated nemesis to escalate. And that's with a capital E.

The scaremongers, taking their lead from the recent Halloweenies, are out in force ahead of that meeting blaming everything and anything including the flooding of my grandmother's basement on climate change. The only problem is my granny never had a basement.

Related to the climate change madness is the PC craziness. Here's an insightful, long over-needed,
truthful exposure of that crap from ZeroHedge. Read the entire piece at .zerohedge.com/news/2015-11-07/thin-skinned-minority-ruining-nation-professor-crushes-political-correctness-wave-sw

In a time where college students are offended by pretty much everything, The Federalist Papers reports that one professor at UNC-Wilmington decided to cut through the rhetoric and let his students know that they aren’t the special snowflakes liberals and their parents would have them believe.

His epic class introduction has gone viral, and for good reason: this is the most common sense lecture to come out of any college in a long time.

ALL WRAPPED UP

 
As we noted in an earlier post today, be careful what the Fed wishes for. And that by all the evidence seems to be "getting the rate hike" wrapped up before Xmas. And in the  eyes of some they now have the excuse, the just out as yet-to-be revised job numbers.

Here a blurb from a story on MarketWatch today you might find of interest marketwatch.com/story/gundlach-says-the-sp-500-cant-handle-a-december-rate-increase-2015-11-06

In his latest salvo warning the Fed off a rate increase, DoubleLine Capital founder Jeffrey Gundlach told a packed audience at the 2015 Inside Fixed Income conference on Thursday night just what a disaster it could be.Gundlach said the Fed’s seeming obsession with getting the job done next month makes no sense, given financial conditions are largely worse than they were in February 2012, when the central bank started its third round of quantitative easing.

He said the biggest red flag against a hike is the S&P 500 itself. The index has recovered from losses in August and September, but looks “vulnerable to another pushback down because earnings are not there,” said Gundlach. “The S&P 500’s trailing 12-month P/E is 19; that’s not cheap.”
“Junk bonds are signaling with clarion bells: Do not raise interest rates,” Gundlach said, advising investors to sell junk bonds “on strength.” And if oil can’t get its head above $50 a barrel, the investment-grade bond market will start getting hit by downgrades, he said, according to Reuters.



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PERFECT MOMENT, PERFECT ANSWER

Market  attention today shifts to the jobless rate.

The September number came in at 5.1% and any drop in that figure, even as some are saying, as small as one-tenth percent, could cause the Federal Reserve to crank up interest rates for the first time   in what has become a long, melodramatic act in the theater of economic absurdity.

Here's a paragraph that pretty much says it all from today's WSJ. It's what you really need to know.

After keeping rates at near-zero for almost seven years, the Fed has been waiting for the perfect monument to raise rates. That would be one when jobs are plentiful, markets are calm and inflation is just right.

The two key words in that paragraph are waiting and perfect. Waiting here is synonymous with indecisiveness and clueless. Even neophyte investors sooner or later learn there's never a perfect time to invest and waiting for it is usually--spelled missed opportunity.

"This has proved elusive. Meanwhile, the longer the Fed waits, the greater the danger delay downs the seeds of future problems,either with inflation or financial stability," the article continues.

But the significance of the jobless rate remains in question, particularly when one looks at the last 15 years, a period the Journal points out which included two boom-and-bust cycles, and the jobless "rate averaged 6.4%."

There are other indicators connected to jobs like the labor participation rate and such the Fed watches, but the bottom line here is pretty simple: these indicator-paralyzed bureaucrats, whatever they opine and do, perfect moments are as rare as truthful politicians.

And for those who argue the hike would most likely be 25 basis points, no big deal since it's reversible, actually defeat their own point. They first apparently downplay those dreaded unexpected, unintended consequences and, second, if the 25 basis point hike is no big deal, why has it taken these economic Federal soothsayers so long to act?

The answer is perfect.

N.B: The number came in for what it's worth at a seven and a half year low of 5% setting off numerous articles about a December rate hike.

A SERIOUS TONE

A lot people think the gap is a clothing outfit. And it is.

But there are many gaps around. One of the ones most important to consumers is, as the WSJ noted today,  "Gasoline Prices Could Be Even Cheaper," the one between the price of a barrel of crude oil and the price they pay for a gallon of gasoline at the pump.

Crude oil prices have dropped in the last year or so from $100 a barrel to around $50, give or take.
So far this year gasoline prices are down 28 %. A barrel of benchmark Brent crude oil is off 50% over the same period. The prices of the two commodities usually move in tandem.

According to the Journal, citing data from the Energy Information Administration, from "2000 to 2014 gasoline sold for an average 95 cents over the price of a gallon of Brent crude." So what's the big deal. Just this: Over this last year, the "gap climbed to about $1.16," a mere difference of 20 cents on average.

But mere like pulchritude rests with the beholder. "Multiplied by 135 billion gallons of gas sold in the past year in the U.S., that amounts to more than $25 billion." Now we don't want to get into a math buzz here. But even if the population of America is 320 million ( and nobody knows the real figure for sure), a whole bunch of folks don't drive, the terribly young, the terribly old and the terribly poor.

Anyway you slice it, $25 billion is a large number that somehow didn't find its way into the pockets of driving consumers. You can read all the supposed reasons in the article. The point here is auto-laden consumers are not benefiting as much as they ought to be from what the Federal Reserve considers to be cheap energy prices.

Even factoring in places like kooky California with its legions of pathetic politicians, environmental nuts and addiction to automobiles where pump prices are jacked up more than average, the Journal notes, "the difference between wholesale and retail prices and factored in the price of ethanol, a plant-based renewable fuel added to most gasoline," since mid-August this year "drivers have paid between $1 billion and $2.5 billion more than they would have normally."

Meanwhile, your friends in MSM are pushing how gasoline prices are the cheapest in 11 years. That's called slanting the news. A long time ago there was an Illinois senator who said: "A billion here, a billion there, pretty soon you're talking serious money."  Keeping $25 billion from U.S. auto-addicted  drivers, in our view, has a serious tone to it.

GREEDY GOVERNMENTS?

The figures below should tell you much about governments in general. It's from an article mostly about Valeant and it's largest shareholder, hedge fund guru Bill Ackman. We didn't bother to run the total, you can do that on your own. But it's a fair chunk of change.

When you factor in all the others over the period to banks, big oil, etc., it leaves an important question that seemingly never gets answered: Where does all that money go? We think is goes to another one of those categories, Don't ask, don't tell. The chart is from MarketWatch. You can read the story there.

CompanyTotal	Financial Penalties in Billions	Number of Settlements	External Auditor
GlaxoSmithKline PLC	$7.56	20	PwC
Pfizer Inc.	$2.96	15	KPMG
Johnson & Johnson	$2.33	14	PwC
Merck & Co. Inc.	$1.86	27	PwC
Abbott Laboratories	$1.82	12	EY
Eli Lilly & Co.	$1.71	13	EY
Schering-Plough	$1.34	7	PwC
AstraZeneca PLC	$0.954	7	PwC
Takeda Pharmaceutical Co. Ltd.	$0.875	1	KPMG
Novartis AG	$0.793	12	PwC
Bristol Meyers Squibb Co.	$0.789	12	Deloitte
Mylan NV	$0.707	19	PwC
Data Source: Pharmaceutical Industry Criminal and Civil Penalties:An Update published Sept. 27, 2012, and MarketWatch research. Valeant external auditor is PwC.

http://www.marketwatch.com/story/ackman-says-valeant-regulatory-compliance-no-worse-than-rest-of-pharma-industry-2015-10-30

NOBODY KNOWS FOR SURE

There's a lot of  concern around today about the Federal Reserve's inevitable, initial interest rate hike and just what the market will do.

That's a theme more worn than my last relationship with my ex-girlfriend.

There's no shortage of those who think another big as in bigger-than-before downturn hovers somewhere just over the market horizon. A few even predict a big, bad bear market. The market as you know--gratis the global money printers--has rebounded from much of its late summer woes.

In roaming around the web, it's always interesting to come across these various view points. Not that anyone knows for sure. They don't. Today, on a site we like to visit from time to time, The Daily Bell, is a couple reads worth reading: thedailybell.com/news-analysis/36621/Is-It-a-Crash-Yet-Two-Articles-Speculate.

Most of us allow our biases to disturb us. It's seems to be part of the human genetic code. Most likely it's been there before we even found out there was a code. Good investors have biases, but most tend to be directional rather than personal.That is to suggest they will learn from just about anyone.

A trader I once knew claimed he had a pet aardvark that would get scratchy at certain times. The guy claimed it was a decent warning sign that volatility was about to pick up. I never looked at his profit-loss statements, but he stayed in the game a long time and as far as I could determine he was sans a rich uncle.

The Daily Bell is a libertarian site. So for all you socialist, communists and anti-semi-capitalists out there, it might not be your personal bear call or bull call spread. In a semi-free society, we will leave that up to you.

Now we lived through the 1987 crash and recall vividly not only where but what we were doing that day as Sir Alan was on a plane to Dallas and how difficult it was to get a trade off through jammed phone lines to buy the stocks we wanted. In those times the Internet was in its infancy. As were cell  phones.

With the 2000 crash we were at the Las Vegas Money show just a few short weeks before that (what was known at the time as TMT) debacle hit the equity fan. Most of the signs, as people love to say in retrospect, were everywhere. The trouble with that statement is nobody was paying attention.

In December 2007 we closed our office to take a long deserved market respite. It wasn't necessarily owing to our market prescience, though we did a few months earlier pen an article about a lot of  new "Red Price Reduced" real estate signs suddenly popping up in SoCal in neighborhoods we were quite familiar with. But the timing seemed right because just a couple of months earlier our partner decided to retire as he motored his boat off into the sunset.

An interesting point in this author's article about hindsight is "...when your portfolio is down 50 percent it is hard to think clearly." True! But what many miss is it's equally as difficult to think clearly when your portfolio is up 100 percent and the sun keeps coming out every day. And don't forget your uncle Vinnie. Before he became an NFL guru, he was a market guru.

So we remain with a question that nobody knows the answer to, but a good starting point is the Zen notion about accidents: How long does it take before an accident happens? However long it takes.

Nobody knows for sure. But here's a closing market thought for you. It  may seem a bit mystical. Eckhart Tolle in one of his books defines Karmic action as "...the perpetuation of unhappiness."

THREE CHEERS FOR PFIZER

The U.S. Economy grew at a less than robust 1.5 percent in the third quarter, some of the heavy hitters in energy fear continued weak prices after booking losses during the quarter and a big shout out goes to Pfizer, the huge drug manufacturer, in their quest to send a shot across the bow of those tax-grubbing, freedom-stifling, anti-business politicians in Potomac Land.

In what could be the biggest nose-thumbing yet, Pfizer continues it's overseas quest to cut U.S. corporate taxes as it pursues an apparent takeover of Ireland's Allergan PLC, a $100 billion-plus pursuit, according to today's WSJ.

The move puts the huge maker of Advil and Viagra besides a host of other drugs once again in the cross hairs of a nasty debate with Congress about a company's right to locate its head office wherever and whenever it wants irrespective of tax consequences. That's really what's at stake here, liberty, absolute liberty, the real American way.

Recall Pfizer waged an earlier battle with Potomac Land's politically self-righteous last year when it tried to merge with UK drug maker AstraZeneca PLC for $120 billion before the deal fell through, bringing out the politically-initiated anti-American catcalls mostly from politicians living, playing and profiting on the left.

Known in the business as inversions, the Journal reports, last year "The Treasury Department announced a plan to make these deals less attractive, mostly by limiting access to overseas cash."
It's no secret that politicians and candidates "in both parties want to reduce the tax advantages of incorporating abroad, but they disagree on how to do it," the Journal said. Pfizer's tax rate for 2014 was nearly 26%.

Just this past week, the Journal reports, billionaire investor Carl Icahn "pledged a $150 million to a political-action committee that would lobby to reduce taxes on  corporate profits earned overseas and support legislation to block inversion."

We don't know Icahn's politics but we suspect they lean more left than right. His proposal is called an incentive though some might call it a bribe, something nearly every state government in the country worthy of the name uses to try to attract businesses from other higher-tax locales here and abroad.

For those who reside in high-tax states like California, it's commonplace to read about and run into bureaucrats from lower-tax areas like Mississippi and Texas trying to cajole local business away with lower tax incentives. And rightfully so. That, too, is called liberty.

The real truth is competitive is as competitive does and as the Journal notes, competition is particularly heavy in pharmaceuticals "where many of the largest players are based in lower-tax countries: 17 of the 25 biggest drug companies by value are foreign and paid an average 17% tax rate last year versus 24% for U.S. companies."

So here it is: Hip, Hip, Go Get 'Em Pfizer!

BEWARE OF BUYBACK MEME

Besides cheap money courtesy of the Federal Reserve, investors for some time have been told the market's run-up owes much to corporate buy backs. A good thing for investors.

Like the old saying what comes around sooner or later goes around, that might be the case now with those stimulating buy backs investors apparently have come to love. There is a story today
 on ZeroHedge, "Goldman-finds-buybacks-no-longer-work-to-boost-stock-prices-two-reasons-why," worth a look.

Here's a couple of charts from the article that pretty much tell the tale, but read it for yourself.



Buying shares back at their highs, as noted, hardly seems like prudent business practices, especially when one recalls all those time businesses were hoarding cash because they could not, on the their terms, find prudent, meaningful investments.

A cynic might argue it's just another way to push up the value of their stock options. But since we don't know any real cynics, we just mention it in passing.
 

THE HINTING GOES ON AT FED

The data prostitutes spoke again this week after their usual two-day meeting, hinting that the door for a December interest rate hike was still ajar.

The template once again centered on their shop-worn and now nearly silly, meaningless drivel about if the data supported a reason for the rate hike. One wonders when someone will come up with a television game show based on which outfit--politicians or central bankers--inspire the least confidence among the masses.

A rate hike when it does come will most likely boost the dollar making the lives of US multi-nationals even more difficult. A good number of the S&P 500 companies earn a good portion of their earnings overseas.

Stocks reacted to the news as expected with the Dow rising nearly 200 points. In September after the market swooned before Fed officials swooned themselves on hiking rates, the Fed pointed to lack of global growth, most particularly in China. Recall when this whole charade started back in 2008 the same Fed was interested only, they opined, in restoring U.S. growth.

After the market swooned in September the Fed sent out six of its hand-picked propaganda ambassadors to assuage investor nerves in its on-again-off-again nonsense. As the free money continues to flow, the Wall Street Journal today reports Fed Chair Janet Yellen is "planning to become more outspoken in the lead up" to the so-called big December decision.

All this data-dependent palaver is colloquially called analysis-paralysis. It's Fed speak for we are really clueless. As we said, the hinting goes on.