Wednesday, December 16, 2015

OVERNIGHT

Well, the Fed spoke and apparently most markets liked what they heard.

Japanese stocks rallied on the news over night even in the face, as Reuters reported, of a worse that expected data on exports for November.

TOKYO, Dec 17 Japanese stocks rallied on Thursday morning after the U.S. Federal Reserve announced a gradual tightening cycle with its first rate hike in nearly a decade, boosting sentiment and risk appetite enough for investors to shrug off worse-than-expected Japan export data for November.
The 3.3 percent fall in exports from a year earlier compared with a 1.5 percent decrease expected by economists in a Reuters poll, but the impact was softened as investors took the U.S. rate hike as a mark of confidence in the world's largest economy.
The Nikkei share average had gained 2.3 percent to 19,483.38 in midmorning trade. 
And Japanese exporters smiled when they saw the yen weaken further against the dollar.
The WSJ noted the following;  The Nikkei 225 was up 2.3% on Thursday morning, after a 2.6% rise on Wednesday. It is one of the best-performing markets in the world this year, rising almost 12%, compared with a flat performance for the S&P 500.


This partly reflects a view among investors that the Fed is doing theBank of Japan’s job for it, by driving up the dollar against the yen. A cheaper yen boosts competitiveness and flatters profits for Japan’s exporters.
This currency effect explains why Japanese equities have tended to outperform when the U.S. tightens monetary policy. In four such cycles since 1994, in the month following an initial rate increase by the Fed, Japanese equities have performed better than any other major market except rival Asian exporter Korea, according to Daiwa.
A dollar now buys 122.6 yen, compared with 121.5 yen at the start of November. But the yen remains stronger than it was in August, when a dollar was worth more than 125 yen.

INFREQUENT BUT PAINFUL RUBS

Given all the turmoil and concern about divergence, this is a no brainer if you're a dyed-in-the MSM conventionality follower.

Take a look at a CRB index chart or read up on the fate of emerging markets since much of this economic mess began. The two in many ways are inseparable, commodities and EM.  So, as the headline on this article from MarketWatch.com reveals, "What the big money is betting on for 2016," is hardly mystifying in the least.

They're simply taking what the market has given them. In short, more of the same. But markets are full of surprises and often quite perverse. We're simply making a point, not criticizing. The term big money is loaded, implying big insights and a certain exclusivity beyond that of the masses.

And that might well be. But big money is not always correct. The recent track record of hedge funds states otherwise, particularly those macro-hinged. But, as a friend likes to put it, there's the infrequent but always painful rub. "Anyone can diagnose a common disorder when it arrives dressed in common, textbook fashion. But a really good diagnostician can recognize it when it shows up dressed for the Mardi Gras."

   As the chart shows, commodities rest at 40-year lows.

marketwatch.com/story/what-the-big-money-is-betting-on-for-2016-2015-12-16

Tuesday, December 15, 2015

OVERNIGHT

Gold, the notorious non-yielding precious metal, eased upwards after two days of losses to settle at $1,045.85 an ounce. This came after setting a six year low earlier this month in the face of Wednesday's expected rate hike and the strong dollar. Gold prices and a strong dollar are like oil and water; they don't go together.

In other metals copper remained weak as uncertainty about a global recovery anytime soon continues along with what some see as the divergence meme popularized of late by MSM. To say commodities for the most part have been soft is an understatement given the damage in emerging markets this year.

The up move in the Dow carried over to Japanese equities early Wednesday and higher energy prices for the second straight day didn't hurt the cause either.

In other news Tuesday, Argentina's central bank in its first post-election move bumped up interest rates on a tranche of fixed-deposits ahead of what many expect will be a big debasement of its peso.
Freeing up capital controls will likely weaken the official peso exchange rate. Local market sources said they expect the rate to weaken to around 13.5 to 15 to the greenback, versus the current rate of 9.8 per dollar, Reuters reported. 

According the WSJ, Argentina currently suffers from roughly 25% annual inflation, the biggest fiscal deficit in three decades, a shortage of U.S. dollars needed to pay for imports, and poverty that nears 29%. Argentine exporters also say an overvalued currency makes local goods uncompetitive abroad.


RELIEF RALLY?

Here is a chart from marctomarket.com.

It illustrates quite well the Santa Claus rally often seen in December as we noted yesterday.
As the end of 2015 grinds down ( And we think given the recent market behavior it's been a grind for many investors.), the Santa Claus rally that usually happens comes into question again. Will it happen or no? financialspuds.blogspot.com/2015/12/santa-claus-rally.

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFXD4ycHTKQs_Om2lvGl2NmPoBxY33CgGnAXen1huRPznVdiLdg711ZSPwnH6DfDB-VqcXWV11NvYsAHL7BIXXw13FHB-rRn5l0lQFoz7chxBuSsGfqaehnCumONnr4ytneYmDyfDLPwo/s500/DEc+and+S%2526P+500.PNG

The chart is an excellent breakdown of the various markets. Now let's see if it happens given tomorrow's Fed action. If investor relief is the order of the day, our guess is it will.
 

 




WHAT IF TIME

What if?

So what if one or a bunch of such questions might be in order for after the Fed's actions tomorrow. Call them 2016 what ifs.

What if next year inflation returns faster and higher than anyone suspects? A long, long shot you say given the current global picture with bottom-searing energy prices, China and all the rest. True, it's a long shot viewed through today's lenses. But what if?

What if the Fed is forced out of its analysis-paralysis straight jacket of these past several years and  forced to hike rates several times separated by very short intervals? There are a few what if here. Read both articles to find out more.

What if that doesn't happen and the Fed follows an orderly rate hike pattern as the economy returns to so-called normal? Again, read both articles to learn more.

What if as some are suggesting and Fed Chair Yellen recently offered it will be good to get a rate hike under the belt to show the economy is doing well turns out to be wrong?

fortune.com/federal-reserve-interest-rates-raise
barrons.com/articles/how-to-invest-when-the-fed-raises-rates

ADJUSTED YEARNINGS

 http://si.wsj.net/public/resources/images/BT-AF883_ADJUST_16U_20151214181509.jpg
 Some people call it cooking the books. Others call it gilding the Lilly. We call it human behavior.

What do you do when you want a different result from the one you got? Well, some would say if you're a rationale (whatever that means in these days), intelligent human being, you change or alter your behavior.

And that's what this WSJ story is about, "'Adjusted' Earnings Cloud Results."

What's adjusted earnings? Well, back in the halcyon days of dot-com as the Journal notes, one huge tech company practically everyone has heard of and is still around today reported beating its earnings for 14 straight quarters by one penny. That's adjusted earnings. The stock price did what any Wall Street veteran would expect in what became famous as the "Irrational exuberance" of the time, it went up.

We are not probability or odds experts, but one penny for 14 straight quarters brings up one well known street analyst of the day later reprimanded by the SEC who praised firms publicly but privately named them POSs. That's adjusted earnings.

It's corporate America and Wall Street, Jake.

A financial obfuscation of the dot-com era is making a comeback: Hundreds of U.S. companies are trumpeting adjusted net income, adjusted sales and “adjusted Ebitda.”

These adjusted measures paint a rosier picture of corporate earnings. Without them, third-quarter earnings per share fell 13% for the biggest U.S. companies, according to Deutsche Bank research, instead of falling 0.1% with them.
About one in 10 major securities filings this year used the term adjusted Ebidta—or adjusted earnings before interest, taxes, depreciation and amortization—up from one in 40 a decade ago. About a quarter of earnings-related filings this year included figures that don’t comply with generally accepted accounting principles, or GAAP, as well as more standard measures, according to a Wall Street Journal analysis of 10-K, 10-Q and 8-K filings.

The terms now crop up in quarterly earnings releases and securities filings for companies as varied as Grape-Nuts-maker Post HoldingsInc., chemical company Dow Chemical Co., wireless operator AT&TInc. and hamburger chain Wendy’s Co.

As nearly always, the corporate reason for all this: to help investors understand the balance sheet better.United Technologies Corp. last week was the latest big company to embrace adjusted earnings measures. By adhering to accounting rules, “we’re actually confusing people more than we were helping people understand what’s going on in the business,” said CEO Greg Hayes. “This is a simplification and really allows the investors to more easily understand what the businesses are doing.”

The result, however, is a new yardstick with no standard accounting definition and, often, little comparability to other companies or even other time periods. 



TOMORROW IS ONLY A DAY AWAY

 http://www.investing-in-mutual-funds.com/images/3062-Neg_Corr_Graph.gif
 Correlation is a term you don't hear tossed about much today, at least not directly. There is also the Wall Street term negative correlation which is an oblique way of saying diversification.

The move toward globalization is a move away from negative correlation. In short, we're all in the same rub a dub tub. One writer discussing the possibility of a global recovery noted."It's been a rough year for emerging markets across the hoard." Yes, indeed, it has and if one were a good contrarian and felt the global economy was really on the mend, one might dump money there, value trap or otherwise.

A day before the Fed flaps it's huge lips, up or down or steady as she goes, much of the concern is about the global impact of what's been one of the MSM meme, divergence, for months.The world biggest economy hiking rates while other major players take a different direction.

That's one of the major fears surrounding Fed action. That's globalization. That's correlation.
Like that old Vegas saying, "What happens here stays here," no longer applies. It's also what a growing number of EU members are beginning to realize once they got hoodwinked into forfeiting their currencies, customs and cultures to join a monetary union.

The Unites States is linked more than ever before to major players around the world. China's slowdown has hurt other emerging markets. Japan is barely growing. Europe is struggling with low economic growth too. It's been a rough year for emerging markets across the board.
To varying degrees, all that weighs on the U.S. economy and the Fed. The concern is that the Fed's rate hike can cause a boomerang effect: (1) the Fed raises rates, (2) that hurts other economies even more, and then (3) economic woes in developing countries eventually hurt U.S. trade and economic growth.
The U.S. manufacturing sector has already shrunk as a result of the weak global economy and strong U.S. dollar. 

China's efforts, back door or otherwise, to un-peg the yuan from the dollar is about correlation. So the financial globe awaits tomorrow. Keep in mind that correlation is not always causative. The Fed hikes rates and the financial globe collapses. But perception is.

And that's why MSM memes, particularly those they work especially hard, are always dangerous. An example one might want to consider is the MSM and its characterization of Trump.


Monday, December 14, 2015

OVERNIGHT

Expecting big moves in Asian stocks in particular and others in general before the Fed's wannouncement this week is like expecting politicians to stop kissing babies. It ain't gonna happen. In early trading overnight, Reuters reported Asian shares steadied early.

With all the anticipation it may turn out like Y2K that was touted to make the Interner disappear back at the turn of the century, a big yawn once the Fed finally fesses up. In other Asian news, the WSJ is reporting related to China's joining a currency basket and weakening its currency:

The Fed is widely expected to raise rates this week amid signs of a strengthening U.S. economy. Meanwhile, China’s economy is going the other direction, with Beijing cutting interest rates and making other moves to loosen monetary policy and spur slowing economic growth.
A U.S. rate increase could hinder that effort. It would likely make the dollar stronger, forcing China to intervene in currency markets to maintain the peg. That means buying yuan, often from Chinese banks, which effectively takes money out of China’s financial system at a time when Beijing is trying to make more available to its businesses and consumers.

China has big problems not to mention one of them is labor unrest and an economy after six straight rate cuts that has responded very little. Higher U.S. Interest rates could turn up the heat a bit more.

WE CITIZENS LOVE THOSE TEACHING MOMENTS

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Tuhc8fbvv8ApauzMQwMy6Fpg957Q9D6K4MS3isbamEdSw+YH6TO0uPIjKB4WWBVx1VrSSeS7WZSyM2sbLlVbajs1WqdZe/2lZ+CtLeB9Df4p7SQPnVQuqZXZtxsfcts9Md9rNRUcSVdeZEhUKyILhnblaIWc10FXmusgAE4oBQiUDnQ9p42K7z+H+zqVfFBtRpe0Mc8DQZgWxm4i5suCxYtPNehdAdoCgKzvt9UQ0xoS5v7+Cpl127cMuV8Z7rS29haQr12sB6tpHYBsHFozZY0EjTvXM4ai1zxTALc02N4fy5QB8yl2Ptd5xVSpVGalUcKZm14cWx5OvzCXHMOd729kNMi+kmwBWeZWZbj2MsJnxeGXx1/tcbseeuLpZ1eHrvd/hTMeZgLz19EDSV6ljNqtdhKz7Avwz6Z/OXsaR7SvMaxutWLws5q6vwg6rmpqVOEjVICpUNquhTU2wAFBEuA8fL5CsokqY4pxUD6g4oIMS6bJauqgrGSO8e1THVEGEJj1I5RO1UhUJYSoPThhhwCX+TbwHkpgnhYttOlb+nt+6Eh2Wz7oV0J8qNihhtn0mVKZdYdbTaObnPaAPMr3CuvnraW1Acfg6X2KeKw7nc3daw+g9pX0FXOq0YTUcsruuP210fovcXNZlfBtJDCTxaNPCFy7aZa4tLWsINwGgX8Ne8ru31M5MAmFz3SekGvY7QuBnwIj2qZJv06eVYG3WE4Wtlu4Uy4fmZ2gPRcg3APr0GvZDswnL6Ed+q6fpDtZmHoPJILnNLWt4uIjyXD7J2zVbRbRYcgYXSQBJzEu1OmpU5Y71YpM9bijWc9pIjMASDGoIsQQq9Z2YQrr6G8EgqrVZOog8dx+Cu5ocBiIJYfBS1tVRqtymd4KvuOYSgrFWcO6RHD2Ku5qdSdBn5hELiJSlIiUWJEtXYdCcrmVC6Yaxum8uJty+quSfout6BR/K1zFw+/5GtBb6ud5rly/a2fQzfNEG0WhjWMFiX5z6wn7Xa5hg2kAxNjz5qPFO6454AgCeZ3fPJNr1mkjOSQG+o0Hcs0j2M8vd/4qYt46t5DjlcKQLSdHgkuI8Ghc9VN1fxFU3G6x8RIHvWa/VbMPTwfqP7l0kYnEprEryrOJ2HbqfBTOdATGdlvzrvVStXnuQOqYkkQq5KCUwlEG1HXVmicx9qp1VZw5hp4nX4IHuMlRtuU42bPFOogAZjpu71IXIUqZ1/IoQeqNTwhCwtJ4TpSIUJeZbQeXVesm5eT3ODre5fR3RXbgxuEp1pGeMlQcKrRee+x8UiFtZ/la0kCJNxOmbnG5eY/xB6TCjX6mc5o02MJ0mqRmcfUIQok72nK9PLdpbRfXfmeZ4DcBwCk2Q/tEcRPkf1QhWUaFSoAqNXEoQiVOu6VLgny2OCEIhIQmgIQgs0XSO5OlKhEmqTA7aq4VtVlMtyVozgtn6sxHA39AkQo1taZXG7i3s/FZ2zzVrGOaQMoIMXHO2nqhCy3rLT2uPK5cUyv4YOKrFr3NO63dGqrh0lKhasfTxeS7ytTMTXuuBz9BdCFKiKvXnuUBchCBJSIQgjqKSidyEIJqpkxoG6+9SNZmubN+yPeUIQOy8vRCEIP/9k=
He is a senator, a Tennessee Republican who entered the highly sought after chamber eight years ago, a guy who allegedly misfiled his income from real estate, hedge funds and other investments since joining those privileged ranks.

How much allegedly--$7 million, according to the WSJ. Even in upper circles that's a chunk of allegedly. And it brings up another question: in eight years of serving your nation in Congress, how rich can one get?

Now this is not about the Senator, Bob Corker, who, tongue in cheek, one could postulate if these allegations are true, he tried to pull off a real corker on the rest of us. It's about the confidence of Americans in their elected officials and corruption. Most of the polls we've seen suggest that confidence is now lower than an inebriated duck's belly.

Now for the rest of the story, but with this proviso to keep in mind: we will call it the rules of engagement or the concept of a level playing field. Another thought to keep in mind is usually when you underpay or understate your taxes you pay interest and a penalty, a pretty hefty one.

A letter sent to the secretary of the Senate along with the new financial reports acknowledged that the senator’s previous reports didn’t comply with Senate rules.
“I am extremely disappointed in the filing errors that were made in earlier financial disclosure reports,” Mr. Corker said in a statement to the Journal. After the Journal raised questions about the prior reports, Mr. Corker hired an accounting firm to review all of his transactions.
“After completing a full, third-party review, we have corrected this oversight,” Mr. Corker said in his statement.
Under ethics rules for Congress, lawmakers are allowed to invest in just about anything, as long as they properly disclose their personal investments to the public. The purpose of the rules is to allow the public to determine whether a lawmaker has a conflict of interest. The rules don’t prevent members of Congress from voting on legislation that may affect their personal finances.
Senators often file amendments to correct small mistakes and oversights in their financial-disclosure forms, but it is unusual for a member of Congress to amend all of their financial reports in one sweep.
There are no penalties for filing amendments, in part because Congress doesn’t want to punish lawmakers for fixing prior mistakes.
“This is not a situation calling for punishment or admonition by the Ethics Committee,” said Robert Walker, a former chief counsel for the Senate ethics panel. However, the committee could use the episode as a “teaching moment” for lawmakers to “make sure they fully understand these requirements before filing their annual forms,” he said.
Others say there should be some punishment for filing inaccurate financial reports.


In several instances, Mr. Corker failed to properly disclose investments in and income from the three hedge funds in Tennessee. His report for 2014 didn’t include a gain of between $304,000 and $1.4 million in hedge fund Gerber/Taylor. 

In 2013, he failed to disclose a gain of between $100,001 and $1 million in hedge fund TSW II. And in 2012, he made a gain of $1.2 million in Pointer (QP) LP, though his previous statement reported income of $100,001 to $1 million from the hedge fund.
The amendments also show that he failed to disclose a 2014 investment in Gerber/Taylor of between $500,001 and $1 million and a 2013 investment in Pointer of between $1 million and $5 million.

In one instance, Mr. Corker significantly over reported income from an investment.
The new financial forms indicate that Mr. Corker was using an incorrect methodology to account for annual gains from the hedge funds. Mr. Corker’s office said the income was properly reported when he sold the assets.

The senator also under reported rental income from his commercial real-estate investments in Corker Properties, a company he founded years before being elected to the Senate. The forms show he reported his investment income after expenses, though Senate rules require lawmakers to disclose gross income before expenses are paid.

As a result of the accounting error, Mr. Corker’s new forms show additional income of at least $3.8 million between 2007 and 2014 from his commercial real-estate holdings.
The Journal’s calculations were made using a very conservative methodology using the low end of the numerical ranges in which senators are required to disclose their finances. The actual numbers are likely higher.

 You gotta love those teaching moments. Most of those we get, however, usually come with an exorbitant interest rate and a hefty penalty.

THE FED RESERVE OF GROPING

http://s.hswstatic.com/gif/inflation-360x240.jpg
A story headline in the WSJ today, " Mystery of Missing Inflation Weighs on Fed Rate Move,"  perpetuates one of today's greater myths.

There's plenty of inflation around. The only thing missing is honest, accurate ways to measure it, something you learn early on isn't in the lexicon of central bankers. And never will be. Sure oil prices are down as are prices at the gas pump. And, yes, commodity prices in general are in a slump. There's some unusually warm weather around we can all probably thank climate change for and natural gas prices reflect the weather.

But we're all paying more for lots of things the Fed and its shills don't want to include in their many phony indexes. Housing and rents are good examples. Municipal services are another. Professional license and continuing education fees, college tuitions and health care including insurance premiums are others. And there's the long standing problem of flat wages; that's inflationary. Or how about the COLA crowd who just got gypped. Talk to them; see if they think there's any inflation around.

A business acquaintance owns a scrap iron business, most of which he exports overseas. The strong dollar and low commodity prices are affecting his world and his profit margins. For him that's inflation. The cost of medicare to it recipients increases annually and by no small percentage, either. What we have here is a simple case of that old saying, it depends on whose ox is getting gored.  Federal  Reserve bureaucrats have ample reasons to gerrymander the figures. It's not just the sole province of shady politicians and their campaign managers.It's called potential chaos in paradise resulting in a possible change of the guard.

As nearly everyone knows they're lots of two provider families out there not to forget all the one-provider families daily scrapping hard to get a life. Many of them have young kids who require daycare several days a week. Talk to them about the prices of that daycare. Ask them if there's any inflation afoot.

The Journal article, however, indirectly makes our case for us.

The Fed’s poor record of predicting inflation has set off debate within the central bank over the economic models used by central bank officials. Fed Chairwoman Janet Yellen, in a 31-page September speech on the subject, acknowledged “significant uncertainty” about her prediction that inflation would rise. Conventional models, she said, have become “a subject of controversy.” 

That it took her 31 pages to say such should scare the you know what out of you. To be kind we would substitute skewed for conventional as in an agenda. And here's another interesting paragraph from the article.

Fed officials are coming around to the idea that inflation is influenced by the thinking of families, investors and business owners. Price movements, up or down, can become a self-fulfilling prophesy, according to economists.

Wasn't that what the so-called "Wealth effect" that the Greenspan, Bernanke and this Fed openly and shamelessly pushed, to influence those families and business people? Isn't that what rampant fiscal spending by the government is suppose to be about, persuasion?

The real problem here is groping. What a friend of ours calls The Federal Reserve of Groping.