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Wednesday 05.04.2016

There's a big warning sign that the wheels of the US economy may be grinding to a halt

Lending standards for business loans are getting tighter, according to the Federal Reserve's "Senior Loan Officer Opinion Survey" (SLOOS).

"Banks have been tightening standards for both commercial and industrial (C&I) and commercial real estate (CRE) loans over the past few quarters and the latest data from the Senior Loan Officer Opinion Survey shows the most severe tightening in lending standards for these types of loans so far in the expansion," said Daniel Silver, economist at JPMorgan.

C&I loans are a catch-all category for loans that help finance purchases or upgrades of equipment. Essentially, the Fed surveys people in charge of giving out loans at financial institutions and asks them if it's getting harder or easier to get a loan. For the past two quarters, these officers have been reporting standards tightening at a faster rate.

On net, 11.6% of respondents reported tighter lending conditions to midsize or large firms (13% reported tighter standards with 1.4% reporting eased standards), up from 8.2% net tighter in the first quarter of 2016. In fact, in the second quarter of 2015, a net 5.3% of lenders reported an easing of standards, so in a year's time it has swung 16.9% on net toward tighter standards. Or, as Bespoke Investment Group put it in a note Monday, "Both reported demand and reported supply of C&I loans are suggesting that credit will stop flowing to business from banks in the near future, if history is any guide."

Healthy US April auto sales fail to offset growth fears

Detroit automakers reported another month of strong demand from U.S. consumers for trucks and sport utility vehicles on Tuesday, but their shares dropped as analysts focused on signs the world's second largest auto market has little room to grow. Ahead of the final tally for U.S. light vehicle sales in April, General Motors Co estimated the seasonally adjusted annualized selling rate will be 17.6 million vehicles. That was more than the 17.5 million vehicles expected by analysts polled by Reuters. U.S. auto sales in 2015 hit a record 17.4 million vehicles.

Wall Street analysts say the U.S. auto market is close to a cyclical peak and that more production cuts, which hurt profits, could be needed to keep inventories of vehicles from ballooning later in the year. "We continue to believe sales growth will be muted this year," Joseph Spak of RBC Capital said in a note to investors.

Inventory data issued early on Tuesday, pointed to some possible "risk to North American production over the coming months," Spak added. The sluggish pace of U.S. economic growth adds to concerns that the auto industry recovery could run out of fuel.

GM and Ford Motor Co shares were down more than 1 percent generally in line with the broader market, while Fiat Chrysler Automobiles NV fell more than 2 percent. GM and Ford Motor Co said sales to individual consumers were still growing. But because GM has been cutting back on low-profit sales to rental car companies and other fleets, its overall April U.S. sales fell by 3.5 per cent. GM's results were among many that highlighted a divide in the market between slumping sales of traditional sedans, and robust demand for pickup trucks and SUVs.

Federal Reserve Should Be Focused on the Labor Report

The Tech Start-Up Bubble Is Bursting

When the dot-com bubble burst in early 2000, the fallout for publicly traded stocks was quick and severe. The Nasdaq Composite Index fell 37% in the 10 weeks following its peak on March 10, 2000. For startups, the immediate impact was less dramatic. In the second quarter of 2000, venture capitalists invested $25 billion in startups, down only 5% from the first-quarter peak.

“There was a lot of suspended disbelief between March and June,” says Keith Rabois, then a vice president at PayPal Inc. and now a partner at Khosla Ventures. Mr. Rabois and others think we’re now in a similar period of suspension of disbelief. Startup investment has cooled. Valuations are falling. But Mr. Rabois says many investors and entrepreneurs haven’t yet grasped the new reality. “If that suspended disbelief ends, all hell breaks loose,” he says.

The parallels between the two eras aren’t perfect. After a seven-month decline, the Nasdaq index has gained 12% since early February. As of April 18, it was within 5% of its post-2000 high. Initial public offerings have all but disappeared, but venture-capital funds raised a record amount of capital in the first quarter.

Mr. Rabois says the record fundraising actually is a bearish sign. Winter is coming, he says, and venture capitalists know it. “One of the reasons people are raising all these funds isn’t because they want the money, but because they believe their own metrics are inflated at the moment, and they want to get that money before companies in their portfolios start crashing and burning,” he said. Some startups also are employing a similar strategy.

Gartman says gold is in a true bull market—and on its way to $1,500

Gold has enjoyed a spectacular beginning to 2016, and one widely followed commodities expert believes the metal could be on the verge of going much, much higher. "I think it's still a bull market," said Dennis Gartman, editor of The Gartman Letter, Monday on CNBC's "Fast Money." He predicts gold could finish out the year 10 to 15 percent above current levels.

With gold hitting a 15-month high Monday and breaching $1,300, that would represent a price as high as nearly $1,500. Even though he granted the precious metal tends to get to "big, round numbers" like $1,300 and "back off," Gartman said the fundamental case remains intact, due to central bank policies.

"I think the monetary authorities around the world, with the exception of the United States, are continuing to err on the side of easier monetary policies," he said.

Easy monetary policies tend to make a country's currency less valuable, potentially leading investors to turn to gold as a store of value. In addition, the low interest rates engendered by these policies make the yellow metal relatively more attractive, since it means investors aren't missing out on much by holding a nonyielding asset. For these reasons, Gartman is confident that the bear market in gold is officially over, even though it's still down about 33 percent from its 2011 peak.

Fed’s Williams is optimistic about economy and sees more rate hikes ahead

San Francisco Fed President John Williams laid out a “pretty optimistic” outlook Tuesday, with unemployment coming down, growth rebounding and inflation picking up, allowing the U.S. central bank to raise interest rates gradually. “I do expect us to be raising rates gradually over the next couple of years due to the strength of the labor market and where I see inflation going,” Williams said in an interview on Bloomberg Radio.

Williams said he doesn’t agree with negative scenarios for the economy and doesn’t take a “strong signal” from the 0.5% growth rate in the first quarter. He said GDP data were distorted by seasonal factors and growth was actually closer to 2% annual rate.

“So overall I haven’t changed my view of what growth over the whole year will be, around 2% GDP growth, which is what we saw last year,” he said. Asked if there was a chance that first-quarter growth was not an anomaly, Williams said it was good to be “a little bit cautious.”

“I do want to see good consumer-spending data in the next couple months and want to see more signs that the anomalous reading in the first quarter was anomalous,” he said. Williams says he pays more attention to the labor market, which has continued to improve, rather than the weak GDP. “I do take a pretty strong signal from the employment side,” he said. Asked what he needed to see to back a rate hike at the Fed’s June meeting, Williams replied he wanted to see inflation on the “right trajectory” moving toward 2% and continued “good job gains.”

The poorer Uber drivers are, the more they probably depend on Uber

Uber likes to say that its platform is an “important source of income” for drivers. In January 2015, a study commissioned by Uber found that 24% of drivers said Uber was their only source of income, 16% described it as their largest, but not only, source, and 38% said it was a small supplement.

Here’s a new wrinkle: The more drivers rely on Uber, the poorer they’re likely to be. That’s from the JPMorgan Chase Institute, the think-tank arm of JPMorgan Chase, which examined data on 196,000 checking account customers who earned income from at least one of 30 “sharing” or “gig” economy companies between October 2014 and September 2015. The institute divided these companies into two broad categories: “labor” platforms on which people invest their time and energy (e.g., Uber), and “capital” platforms on which they rent out an existing asset (e.g., Airbnb).

According to JPMorgan Chase’s data, people who work for labor platforms and are in the lowest income quintile (earning less than $30,000 a year) get nearly 30% of their earnings from those jobs. Labor platform participants in the highest income quintile ($83,900+), meanwhile, get only 20% of their income from such jobs. Earlier this year, economists Lawrence Katz and Alan Krueger found that Uber could make up half to two-thirds of all gig economy work.

Compare that to people making money on capital platforms like Airbnb. Regardless of income, they derive between 10% and 11% of their total earnings from the capital side of the sharing economy.

Do Americans Really Like the Big Banks?

The financial crisis may have given big banks a bad name, but a new study suggests that, well, people may be really starting to like them again. According to an annual J.D. Power retail banking study, big banks significantly improved in overall customer satisfaction in 2016, while midsize banks declined for the first time since 2010 and regional banks plateaued.

The study is based on responses from more than 75,000 retail banking customers of more than 130 of the largest banks in the U.S. It measures satisfaction in six factors: account information, channel activities, facility, fees, problem resolution and product offerings. Satisfaction is measured on a 1,000-point scale.

The big banks (defined as the six largest financial institutions based on total deposits as reported by the Federal Deposit Insurance Corp., averaging $180 billion and above) scored a total of 793 points, a six-point uptick from 2015. Midsize banks (defined as those with between $33 billion and $2 billion in deposits) scored a 797, but were down five points from last year. And regional banks (defined as those with between $180 billion and $33 billion in deposits) held steady with a score of 790.

The big six gained ground largely due to their technological offerings, scoring the highest in mobile (851), ATM (837) and online satisfaction (838). They’re also apparently been very successful with millennials — which is notable, given this group is the fastest growing customer segment.

Gold at Two-Year High Smothers Demand in Second-Biggest Consumer

Gold demand in India, the world’s second-biggest user, will probably shrink in the second quarter as a surge in local prices to the highest in two years deters buying for a festival next week and weddings this month.

Purchases may slide to about 100 metric tons in the three months through June from 125 tons in the period to March and 154.8 tons a year earlier, said Bachhraj Bamalwa, a director with the All India Gems & Jewellery Trade Federation. Imports were probably 15 tons to 20 tons in April and 15 tons in March, he said by phone from Kolkata this week.

Prices in Mumbai have jumped 22 percent this year and reached the highest since March 2014 on Monday. That reflected gains in global rates as worries over the world economy prompted the U.S. Federal Reserve to refrain from further increases in borrowing costs, boosting the appeal of non-interest bearing assets such as bullion. Akshaya Tritiya on May 9 is considered by the majority Hindu population as the second-most auspicious day to buy gold.

“Normally people place orders in advance so that they can lock in the gold price but we have not seen that this year,” Bamalwa said. “This quarter only the month of May is left as demand slows after June 15 and the prices are at the highest level now, so people will resist buying gold.” Consumption has already been hurt by a jewelers’ strike in March and last year’s poor monsoon, which reduced incomes in rural areas, the source of 60 percent of demand. Jewelers shut shops for almost three weeks to protest against a 1 percent excise tax on ornaments made and sold in the country. An almost dry winter after the first back-to-back shortfall in monsoon rain in three decades cut harvests of everything from rice to sugar cane.

This Analyst's $1,300 Gold Call Was On The Money; Now What?

Seven big banks settle U.S. rate-rigging lawsuit for $324 million

Seven of the world's biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging an interest rate benchmark used in the $553 trillion derivatives market.

The settlement made public on Tuesday, which requires court approval, resolves antitrust claims against Bank of America Corp (BAC.N), Barclays Plc (BARC.L), Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.S), Deutsche Bank AG (DBKGn.DE), JPMorgan Chase & Co (JPM.N) and Royal Bank of Scotland Group Plc (RBS.L).

Several pension funds and municipalities accused 14 banks, including those that settled, of conspiring to rig the "ISDAfix" benchmark for their own gain from at least 2009 to 2012. Companies and investors use ISDAfix to price swaps transactions, commercial real estate mortgages and structured debt securities. The alleged illegal activity included the execution of rapid trades just before the rate was set each day, called "banging the close," causing the British brokerage ICAP Plc (IAP.L) to delay trades until they moved ISDAfix where they wanted, and posting rates that did not reflect market activity.

Under the settlement, payments would include $52 million from JPMorgan; $50 million each from Bank of America, Credit Suisse, Deutsche Bank and RBS; $42 million from Citigroup and $30 million from Barclays. The remaining defendants are BNP Paribas SA (BNPP.PA), Goldman Sachs Group Inc (GS.N), HSBC Holdings Plc (HSBA.L), Morgan Stanley (MS.N), Nomura Holdings Inc (8604.T), UBS AG (UBSG.S), Wells Fargo & Co (WFC.N) and ICAP, lawyers for the plaintiffs said.

4 U.S. governors on jobs: Not enough workers

America's governors -- one a former presidential candidate -- share at least one major concern: lack of skilled workers to do the job. "My number one problem in my state is workforce," Republican Gov. Scott Walker of Wisconsin said at the Milken Global Conference in Los Angeles. "My big problem is how to fill those jobs...I still don't have enough workers."

Former presidential candidate Walker isn't alone. Democrat or Republican, east or west, north or south, governors are seeing the same red flag rising. Republican Gov. Rick Scott of Florida noted Monday that GE (GE) makes most of its money overseas and globalization creates added job pressure from overseas.

"We're competing (globally) for jobs," Scott said on the same panel of four governors moderated Monday by Eric Schmidt, chairman of Google parent Alphabet (GOOG). "I have 30,000 technology jobs open," Democrat Gov. Terry McAuliffe of Virginia advertised -- and lamented -- Monday. He says many open tech jobs in his state are in cybersecurity but that experienced workers aren't available.

All of the governors, including Democrat John Hickenlooper of Colorado, suggested a mix of job training, apprenticeships and curriculum change in schools is needed to combat the job skills gap. In December, McAuliffe proposed $1 billion towards revamping Virginia's educational system with the aim of creating the "New Virginia Economy," focused on STEM jobs. He also touted a scholarship program on Monday for high school girls in Virginia who plan to pursue STEM fields in college. It's an effort to encourage young women, who increasingly make up a larger share of the workforce, to consider job skills applicable to growing industries.

11 Companies That Announced Big Job Cuts During Earnings

So far, first-quarter earnings reports by big public companies have been disappointing -- and not just in terms of profit declines, for which we can blame last quarter's low oil prices and market volatility. Another sore spot has been how many companies gave workers the ax.

Employers announced nearly 185,000 job cuts in the first quarter of 2016, according to Challenger Gray & Christmas. That tally was up 32% from the first quarter of 2015 and up 76% from the fourth quarter, the executive search firm reported.

Roughly 27% of those job cuts last quarter were directly tied to falling oil prices, hitting the energy and industrial sectors in the gut. The ever-changing retail and tech industries -- specifically companies that make personal computers -- also saw their fair share of employee layoffs, Challenger Gray & Christmas said.

"What these sectors share in common is that they are all going through transformational changes," CEO John Challenger said in the March 31 release. "We, as a nation, and really as a global community, are changing the way we produce and consume energy. We are also changing the way we buy goods and services. Technology is in a constant state of change, and, currently, we are shifting away from computing at our desks to computing on our phones and tablets."

Freddie Mac posts $354M "Don't Worry, It's Just Derivatives" loss; Cuts Dividend; Won't Draw on Treasury

First the good news from Freddie Mac’s Q1 2016 Financial Results released on Tuesday morning: Freddie Mac will not need a draw on Treasury for the time being.

Now the bad news: Freddie Mac reported a net loss of $354 million for the first quarter following a net profit of nearly $2.2 billion in Q4. Not only that, but Q1 marked the second time in the last three quarters that Freddie Mac suffered a net loss; for the third quarter of 2015, the net loss was $475 million.

Taxpayers can breathe a sigh of relief after receiving the news that Freddie Mac will not need a draw on Treasury following widespread speculation in the previous week or so that Freddie Mac would need another draw due to the GSEs' dwindling capital buffer, which is currently $1.2 billion.

However, while not needing a draw on Treasury, Freddie Mae will not be making any dividend payments to Treasury for Q2 2016 (the dividend payment for Q1 was $1.7 billion based on Q4’s net profit of $2.2 billion). Freddie Mac’s total cumulative dividend payment to Treasury since 2008 is $98.2 billion, or $26.9 billion more than the $71.2 billion bailout that Freddie Mac took in 2008. Freddie Mac has not taken a draw on Treasury since 2012; they did not need one after taking nearly a half billion dollar net loss in Q3 last year.

Janet Yellen may start 'reverse quantitative easing' in 2016: asset manager

Following its meeting last week, the Federal Reserve chose to leave interest rates unchanged again. While I believe that the Fed would like to adopt more of an increasingly hawkish stance given solidifying economic data in the U.S. and mounting inflationary pressures, it seems that it continues to strike somewhat of a dovish tone to appease certain vocal dissenters and those concerned with global economic growth altogether—though it did indicate in the current release that international factors were no longer as much of a concern by removing the previous wording of, “global economic and financial developments continue to pose risks.”

Hence, I am introducing the term “hovish” to describe this current hybrid state of hawkish/dovish positioning by the Fed. Based on outtakes from the Federal Open Market Committee (FOMC) meetings, we currently believe that there will be two—potentially three—additional rate hikes of 25 basis points (i.e. 0.25%) in 2016, with the next hike likely taking place in June and the following hike in late summer/early fall before the presidential election cycle really starts to heat up.

This would result in a Fed Funds Target rate in the range of 0.75% - 1.00% by the end of 2016. Our forecast is slightly below that of the weighted 2016 target rate forecast of the Fed based on the last released forecasts of the FOMC participants stemming from their December 2015 meeting (see table below) but consistent with what many in the market now believe will be the likely path for this year. We will look to post more recent data in this regard once available.

One other notable research firm that our forecast is well below is Capital Economics. It stated in its “U.S. Chart Book” on April 25, 2016, that it expects the next rate hike to be in June, with the fed funds rate reaching 1.00% to 1.25% by year end and 2.25% to 2.50% by the end of 2017. Looking to next year, the weighted Fed Funds target rate for 2017 currently calculates to a rate of 2.29%, though we presently believe that the target rate will likely be closer to 1.75% - 2.00% by the end of 2017.

U.S. Economic Confidence Down in April

Americans' confidence in the economy retreated in April, with Gallup's Economic Confidence Index averaging -14 for the month, down from -10 in March. The April average ties with September 2015 as numerically the worst since confidence started climbing toward positive territory in late 2014 and early 2015 after gas prices began to decline.

Although U.S. employment numbers are strong and stock values are high, there are other indications -- most notably GDP and retail spending -- that raise doubts about whether the economy is currently healthy. This is reflected in Americans' slightly more negative assessment of the U.S. economy and presidential candidates' acknowledgement that certain aspects of the economy need to be addressed. It is also made clear by the Federal Reserve's caution to date in raising interest rates.

In 2014 and 2015, weak first quarter economic growth was followed by stronger growth and increased consumer spending in the second quarter, with many economists attributing the slower first quarters to poor weather. But the sluggish first quarter this year is not a result of poor winter weather holding down consumer activity; thus, it is less predictable whether GDP will bounce back in the second quarter.

One positive sign is that Gallup's measure of consumer spending -- based on respondent self-reports of their actual spending -- showed a strong increase in April, suggesting that second quarter consumer activity could be off to a relatively strong start.

Brussels downgrades eurozone inflation forecasts

The Central Bank War On Savers

The central bank war on savers is rooted in a monumental case of the Big Lie. Here is what a retired worker who managed to save $5,000 per year over a 40 year’s lifetime of toil and sweat in a steel factory now earns in daily interest on a bank CD. To wit, a single cup of cappuccino.

Yet the central bankers claim they have absolutely nothing to do with this flaming economic injustice. That’s right. A return that amounts to one Starbucks cappuccino per day on a $200,000 nest egg is purportedly not the result of massive central bank intrusion in financial markets and pegging interest rates at the zero bound; it’s owing to is a global “savings glut” and low economic growth.

Thus, Mario Draghi insisted recently that ultra loose monetary policy and NIRP are,……… “not the problem, but a symptom of an underlying problem” caused by a “global excess of savings” and a lack of appetite for investment……This excess — dubbed as the “global savings glut” by Ben Bernanke, former US Federal Reserve chairman — lay behind a historical decline in interest rates in recent decades, the ECB president said.

Nor did Draghi even bother to blame it soley on the allegedly savings-obsessed Chinese girls working for 12 hours per day in the Foxcon factories assembling iPhones. Said Europe’s mad money printer: The single currency area was “also a protagonist…….”

FDA Launches $35.7 Million LGBT Anti-Smoking Campaign

The U.S. Food and Drug Administration (FDA) have just launched an anti-tobacco campaign focused on young adults who are lesbian, gay, bisexual and transgender.

The new campaign, “This Free Life,” costs $35.7 million that was collected from the tobacco industry. According to the FDA, the campaign “uses authentic and credible messages from members of the LGBT community encouraging other members to be tobacco-free.”

“This Free Life will challenge the perception that tobacco use is a necessary part of being LGBT and show that living tobacco-free is an important factor in leading a long and healthy life. This Free Life uses a variety of integrated marketing tactics including paid media, engagement through multiple digital platforms, and outreach at the local level,” the FDA campaign material says.

A FDA release says the campaign is important because, “LGBT young adults are nearly two times as likely to use tobacco as other young adults, resulting in tens of thousands of LGBT lives being lost to tobacco use each year. Through This Free Life, FDA’s ultimate goal is to reduce disease, disability, and death related to tobacco use among LGBT young adults.”

US Gun Sales Still Soaring

Sometime in 2009, the number of guns in the United States for the first time exceeded the country’s population. The gap has been widening ever since. In early April, the FBI reported that it had run background checks for nearly 7.7 million Americans wanting to purchase a firearm in the first quarter of 2016. In all of 2015, the FBI ran a record total of more than 23 million background checks. A single background check can cover multiple purchases, so the number is at best a rough indicator of gun sales.

Firearms maker Sturm, Ruger & Co. Inc. (NYSE: RGR) reported on Monday that sales were up 26% in the first quarter of 2016 compared with last year’s sales. The company does not report the number of guns it sells, but it does report that its finished goods inventory dropped by 14,600 units and its distributors’ inventories dropped by 54,300 for the quarter.

Smith & Wesson Holding Corp. (NASDAQ: SWHC) reported its most recent quarterly earnings in March, showing a sales increase of 61.5%, with handgun sales accounting for some 75% of sales in the quarter. The company’s CEO attributed the jump in sales to a “long-term trend toward personal protection.”

Sales began rising late last year following the mass killings in Paris and San Bernardino and have been bolstered by Democratic presidential candidate Hillary Clinton’s promise to push for stricter gun control laws if she is elected. An industry analyst told CNN Money in April, “As the general election draws closer, we believe fear [about second amendment rights] will be maintained.”

Wednesday 05.04.2016

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