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Wednesday 07.27.2016

Fed appears more willing to lifting interest rates in September

The Federal Reserve on Wednesday opened the door a bit to making an interest-rate increase at its next meeting in September.

“Near-term risks to the economic outlook have diminished,” the Fed said in its policy statement released after a two-day meeting.

That’s a stronger hint of possible move than most Fed watchers were expecting.

After a two-day meeting of its policy-making committee, as expected, the Fed kept its benchmark fed funds rate unchanged in a range between 0.25 and 0.5%. The decision to hold rates steady was widely expected. The Fed was seen as willing to wait to see how markets evolve after U.K. citizens voted last month to leave the European Union.

eBay to shed 2,400 jobs

In developments that raise intriguing questions about the future of eBay as it prepares to spin off PayPal, the e-commerce behemoth announced Wednesday that its breakup will mean 2,400 layoffs, or 7 percent of its workforce, and that it may calve a third company in the process.

The announcements came on the same day the company announced quarterly earnings that met Wall Street's expectations, but its forecasts for the current quarter missed what analysts who follow the company had been anticipating. After investors took in all the day's news they goosed eBay shares up 2.6 percent in after-hours trading.

On top of that, CEO John Donahoe spent a lot of time during a call with analysts talking about how much the company had struggled to bounce back from a cyberattack in May that forced all users to reset their passwords. The core auction site that eBay runs has not recovered, Donahoe said, adding that the company has also been hammered by changes in search engines that have led fewer shoppers to eBay.

"eBay's loyal customers are back," Donohoe said, "but our more occasional customers have not returned." Speculating that the restructuring could lay the groundwork for a future acquisition of eBay and PayPal, which handles online payments, by companies looking to gain a beachhead in the e-commerce and online payments markets, Wall Street analysts singled out Alibaba, Google and Amazon as potential suitors.

Caterpillar Expects More Job Cuts Amid Falling Earnings

Caterpillar, Inc., announced Tuesday that it planned additional job cuts in the second half of 2016 as sluggish conditions in energy and mining weighed on second-quarter earnings.

Caterpillar, which manufactures industrial equipment for energy, mining and construction companies, said it expects higher costs due to restructuring and job cuts as it cited global economic uncertainty due in part to political upheaval in Turkey and Britain.

“Despite a solid second quarter, we’re cautious as we enter the second half of the year,” CEO Doug Oberhelman said. “We’re not expecting an upturn in important industries like mining, oil and gas and rail to happen this year.”

Net income fell 31% to $550 million, while revenue fell 16% to $10.3 billion. Sales dropped in all three of Caterpillar’s industrial businesses. Caterpillar acknowledged that oil prices have risen in 2016, but said the jump has not sparked major new investment.

Marc Faber says gold should be 25% of portfolios to shield you from central banks

How much of your investment portfolio is in gold? Five percent? Ten percent? One contrarian investor believes that the yellow metal should control one-quarter of your portfolio.

Speaking at a recent conference in Chicago, Marc Faber, the editor of the Gloom, Boom & Doom Report, encouraged investment professionals to have 25 percent of their portfolio in gold.

Faber defended this strategy by averring that bullion shields you from “a dangerous combination” of global government debt and bond-buying initiatives from central banks all over the world. He noted that investing in gold prevents you from being a victim of the central banks’ subzero interest rate policies.

He further explained that rates are so minuscule that investors can’t make any significant returns from bonds. Therefore, they head into the stock market, even when stock prices are highly inflated. Central banks, Faber said, had raised stock prices in order to present the illusion of wealth, which would then lead to more people spending their money. The end result? Income inequality and investor resentment.

Do Declining Restaurant Sales Signal An Upcoming Recession?

In a research note sent out to clients today, a copy of which has been reviewed by ValueWalk, analysts at Stifel lay out why it believes the US restaurant industry is now heading for a recession, and why this could signal further bad news for the wider US economy.

It’s Stifel’s view that restaurant industry sales could decline by 150bps to 200bps across all categories during the second half of 2016. Historically, restaurants have led the market lower during pre-recessionary periods a trend that stood out clearly in the 1990, 2001 and 2007 recessions. In each of these cases, the restaurant sector (defined as the Restaurants Index) has declined an average of 23% compared to the S&P 500’s -10% in the three to six month periods before the start of a US recession.

Considering this historic data, analysts at Stifel are now predicting a similar 20% average stock price decline within the restaurant sector over the next six months. If this scenario does play out it could be a possible harbinger to a US recession in early 2017. Restaurants have shown themselves to be fairly good indicators of upcoming US recessions in the past. It all comes down to Relative Pricing Power or RPP for short.

Stifel observes that RPP, which can be defined as menu price increases less the input cost inflation, moves in tandem with macro trends. The restaurant industry, an industry that’s dominated by small independents, has historically rapidly increased discounting significantly as macro conditions worsened during prior pre-recession comp slowdowns. As the cost of producing a meal in the industry is on average around 40% of its cost to customers, restaurants can enjoy higher immediate term profits by slashing prices by as much as 50%.

McDonald’s Posts Lackluster Same-Store Sales Growth

All-day breakfast at McDonald’s Corp. is starting to lose its popularity with consumers. Sales at the fast food giant, which had been riding high on its October launch of all-day breakfast—the company’s biggest operational change since the 2009 rollout of McCafe coffee drinks—slowed significantly in the latest quarter.

Even though it was the fourth consecutive quarter of positive same-store sales across McDonald’s business, it wasn’t the growth analysts expected, and investors are wondering what the burger giant’s next big move will be.

McDonald’s is testing various new products in different markets, including Chicken McNuggets without artificial preservatives, bigger and smaller Big Macs and Quarter Pounders made with fresh beef. The company is also experimenting with self-order kiosks that allow guests to customize their orders and curbside collection whereby customers who order ahead with a mobile app can pick up their food without waiting in the drive-through. But McDonald’s Chief Executive Steve Easterbrook declined on Tuesday to offer specifics about what else the company has in store.

“Clearly, we plan to grow our business. But at the same time, we’re not trying to do that on a quarter to quarter to quarter basis,” Mr. Easterbrook told investors. Mr. Easterbrook said he expected that demand for all-day breakfast would settle down from its initial boost but that the company expects to get another lift in the fall when it makes more breakfast items available all day and that the company will continue to make improvements to its food and operations.

Democrats to Federal Reserve: You're too white

The Federal Reserve has a diversity problem, and Democrats want something done soon. The Democratic Party's platform for its convention calls out the lack of diversity at the Fed, a sore issue for the central bank.

About 82% of the Fed's most senior employees -- there are 231 of them -- are white, according to Fed data. Also, not a single Fed leader on its top policy-setting committee is black or Latino. And 10 of the current 12 Fed regional presidents are white men.

Democrats want to crackdown. They want to "reform the Federal Reserve to make it more representative of America as a whole," according to the party's official platform released in the runup to this week's Democratic National Convention.

That sharp lack of diversity at the top is in the spotlight as the Fed begins a two-day meeting on Tuesday. Among the many things on the agenda are discussions on the economy and interest rates. The Fed is not expected to raise rates at this meeting.

Timeline: The rise and fall of Yahoo

Helicopter Money: Road to Hyperinflation?

Fifteen years after embarking on its largely ineffective quantitative easing program, Japan appears poised to try the form recommended by Ben Bernanke in his notorious “helicopter money” speech in 2002. The Japanese test case could finally resolve a longstanding dispute between monetarists and money reformers over the economic effects of government-issued money.

When then-Fed Governor Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was talking about something quite different from the quantitative easing they actually got and other central banks later mimicked. Quoting Milton Friedman, he said the government could reverse a deflation simply by printing money and dropping it from helicopters. A gift of free money with no strings attached, it would find its way into the real economy and trigger the demand needed to power productivity and employment.

What the world got instead was a form of QE in which new money is swapped for assets in the reserve accounts of banks, leaving liquidity trapped on bank balance sheets. Whether manipulating bank reserves can affect the circulating money supply at all is controversial. But if it can, it is only by triggering new borrowing.

And today, according to Richard Koo, chief economist at the Nomura Research Institute, individuals and businesses are paying down debt rather than taking out new loans. They are doing this although credit is very “accommodative” (cheap), because they need to rectify their debt-ridden balance sheets in order to stay afloat. Koo calls it a “balance sheet recession.”

Why lower gas prices are making college students suffer

Most college students probably don’t pay too much attention to the fluctuations in oil and gas prices, but perhaps they should.

States that rely on energy resources have cut back significantly on their investment in public colleges and universities, thanks to the decline in oil prices. Some schools have slashed programs, scholarships and in some cases are considering raising tuition, experts and officials say.

The cuts come amid a broader decline in state funding to public higher education across the country in the wake of the Great Recession. Leading Democratic politicians, including presidential candidate Hillary Clinton, to propose plans that would use federal government leverage to encourage states to invest more in their public colleges and universities. Research has linked state disinvestment in higher education to rising college costs and growing student debt.

In states like Louisiana, Oklahoma and Wyoming, which lean on energy revenues to fund state coffers, cuts to public colleges and universities have been particularly steep over the past few years as oil and gas prices dwindled. “In certain states that have energy exposure were seeing some real direct, and in some cases, severe, budget impacts tied to the depressed energy prices,” said Chris Collins, an analyst in the public finance group at Moody’s Investors Service.

“It’s Just a Question of When...”

“It’s a question of when, and it looks like it’s coming pretty close…” “It” being the titanic Chinese banking and currency crisis. Trees don’t grow to the sky, and neither do economies. But debt does…

China’s 25-year growth spurt is winding down. Now it’s staring up the sheer of a Great Wall of Debt… and stuffed to its nose holes with excess industrial capacity. That’s why Kevin Smith, CEO of Crescat Capital, thinks China’s massive overcapacity and nonperforming loans have the country on collision course with “a twin currency and banking crisis,” reports Reuters.

Here’s the big deal: Smith says that would bring a 20% decline in the yuan against the dollar. Big deal? China devalued only 4% last August. But its effect on U.S. markets was… dramatic. The Dow closed 508 in the red on Monday, Aug. 24, after plummeting 1,089 points to open the day. It was the index’s eighth-worst single-day crash in its history. And after the previous Friday’s carnage, it marked the first time the Dow had fallen more than 500 points on consecutive days.

Thanks to heavenly intervention — or the Fed’s (how can you tell these days) — stocks managed to grab the railing on the way down. But it was a damn close-run thing, as the Duke of Wellington said about Waterloo. China devalued again this January. Less than 2% this time. That was still enough to kick the stock market off to its worst annual start… ever. Janet of Arc stormed in on the white horse to save the day, but the lesson was clear: China devalues, stocks crater.

Forbes: People want Reagan-esque optimism

The American Dream Is on the Ropes

The United States has long been characterized as a land of opportunity—a place where hard work and ingenuity allow a person to rise, a place where merit trumps birth status. But Americans are increasingly skeptical that life will be better for the next generation—and with good reason.

Recent research suggests the U.S. is a country in which destiny is too often determined by zip code. For example, research by Harvard economist Raj Chetty shows that in many areas of the Midwest and South, less than 5 percent of children will move from the bottom to the top of the socioeconomic ladder.

Alexander Hamilton referred to a vibrant economy as “one of the strongest links of political connection.” Hamilton knew that ensuring access to opportunity was critical to strengthening the bonds that held the new country together. Our country faces the same imperative today. As economic growth and change leave many communities behind, that “political connection” is under enormous strain. One need look no further than the presidential campaign to see how economic anxiety is contributing to an unpredictable rise in voter angst.

On the surface, it’s difficult to square the pervasive economic anxiety seen in most public opinion polls with the steady economic and job growth we are seeing on the national level. What is causing the disconnect?

Apple's cash hoard shrinks for the first time in seven quarters

The Cupertino, California-based company said its cash pile shrunk to $231.5 billion in the fiscal third quarter, down $1.4 billion from the previous quarter.

If Apple's cash hoard was its own company, it would be the 11th largest company, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

The tech giant, however, reported earnings that beat Wall Street expectations on Tuesday as it sold more iPhones than expected.

The news follows investor concern over whether Apple can keep up the parade of hit devices that have floated the company's prosperity since the iPod rolled out 15 years ago.

Still No Sponsor To Replace Sports Authority On Mile High Stadium

Another deadline has come and gone, and yet no one has bid on the naming rights for the field where the Denver Broncos play. They previously belonged to the now-bankrupt retailer Sports Authority, and the company put the opportunity up for sale as part of its intellectual property auction. Auctioneer Hilco Streambank has extended the deadline twice now, but no bidder has made their interest public yet.

Hilco Streambank representatives told the Denver Post that there are bidders interested, but declined to name them or say what the bid might be. The former Sports Authority, which as closed its Denver-area headquarters and is rushing to close its stores earlier than planned, owes $3.1 million on its sponsorship payment plan on August 1st.

If a new sponsor doesn’t sign on within 30 days after that, the team and the Metropolitan Football Stadium District will be free to sell the naming rights to anyone, as long as it’s a company approved by the NFL.

(They’ve already turned down bids from a cannabis dispensary and from a vape pen company, even though recreational use is legal for adults in Colorado.)

Twitter reports slowest quarterly revenue growth since IPO

Twitter Inc reported its slowest growth in quarterly revenue since going public in 2013 and frustrated investors yet again with a disappointing outlook for the current quarter. The microblogging service operator's shares fell 10 percent in extended trading with investors concerned about its expansion and role in the social media landscape as it faces intense competition from fast-growing competitors like Snapchat and Instagram.

The company's second quarter revenue missed Wall Street estimates and the revenue forecast for the current quarter of $590 million to $610 million was well below the average analyst estimate of $678.18 million.

Twitter's user base, however, modestly increased to 313 million average monthly active users in the second quarter from 310 million in the first quarter. "Clearly, the turnaround is still a work in progress and the question of whether being a platform for a mass audience versus a niche audience needs to be answered," said James Cakmak, analyst at Monness, Crespi, Hardt & Co.

The company, which has been struggling with flat user growth and lower spending by advertisers, is doubling down on efforts to attract users. Under co-founder and Chief Executive Jack Dorsey, it is also working to better define its role in social media. This week it rolled out a video ad that showed it as the place to go for live news, updates and discussion about current events.

Morgan Stanley Predicts Plummeting Oil Prices - $35 Likely

The price of oil will likely continue to falter in the latter half of this year amid an oversupply of gasoline, according to a Morgan Stanley study published last Sunday.

The Morgan Stanley analysts predicted numerous “worrisome trends” for the supply and demand of oil, chief of which is an excessive production of gasoline by refineries. The study’s authors believe that faced with the need to cut back on capacity utilization to protect profit margins, these refineries will cut back on crude oil purchases and drag prices lower in an attempt to protect profit margins.

“Crude oil demand is trending below refined product demand for the first time in three years…Given the oversupply in the refined product markets, fading refinery margins, and economic run cuts, we expect crude oil demand to deteriorate further over the coming months,” the report detailed.

Oil prices have fallen by more than US$8 in the past few weeks to a rate of around US$45 per barrel this week, yet the experts implied the price of crude could reach as low as US$35 per barrel.

U.S. Currency Counterfeiting Plot Foiled

The Pension Crisis Is Coming For All of Us

Today, more evidence that pensions are a slow-moving disaster that will in your lifetime consume our nation like the inexorable creep of hot lava down a volcano’s edge consumes everything in its path.

Pensions depend on earning certain long-term investment returns in order to ensure that they have enough money to pay out to retirees when their time comes. The very short reason (besides instances of corruption and wanton mismanagement) that pensions throughout the country are walking directly towards a cliff: they are not earning enough money. And the long term trend is for returns to go down, down, down. The longer this goes on, the worse the reckoning will be.

From the Wall Street Journal: Twenty-year annualized returns for public pensions in the U.S. are poised to decline to 7.47% once fiscal 2016 results are released in coming weeks, according to an estimate from Wilshire Trust Universe Comparison Service, which tracks pension investment returns. That would be the lowest-ever annual mark recorded by Wilshire, which began tracking the statistic 16 years ago. In 2001, near the height of the dot-com boom, pensions’ 20-year median return was 12.3%, according to Wilshire.

These long-term returns are, of course, raised by the higher returns of past years; the short-term returns are much worse.

Stocks Were Already Crashing the Last Two Times this Happened. So What Gives?

Over the last 20 years, margin debt – when investors buy stocks with borrowed money – went through three multi-year run-ups, each topped off with a spike, followed by a reversal and decline: during the final throes of the bubbles in 2000 and 2007, each followed by an epic stock market crash – and now.

That pattern of jointly soaring and then declining margin debt and stocks even occurred during the run-up and near-20% swoon in 2011.

The grand cycle began in February 2009, at the trough of the Financial Crisis, when margin debt had dropped to $200 billion. It was followed by a multi-year record-breaking run-up, topped off with a spike that culminated in an all-time peak of $507.2 billion in April 2015. Then margin debt reversed and began to decline. On cue, the stock market began to decline a month later. Margin debt zigzagged lower, and stocks did too. But in February this year, stocks suddenly bounced off sharply – without margin debt.

The New York Stock Exchange reported on Monday that margin debt declined again in June, by $3.7 billion to $447.3 billion, just a hair above where it had been in February.

Gov. Accepts 9,500 Applications to Import Illegal Alien Kids

The United States has received more than 9,500 applications from foreigners seeking to bring their illegal alien children to the U.S. under President Obama’s Central American Minors Refugee/Parole program, the Department of State admitted Tuesday.

In a press release announcing the expansion of the CAM program, the administration claimed:

The United States is also pleased to announce an expansion of our existing Central American Minors program, which currently provides children in El Salvador, Guatemala, and Honduras with a safe and orderly alternative to the dangerous, irregular journey that some children are currently undertaking to reach the United States. As of today, the United States has received more than 9,500 applications for this program, which allows a lawfully-present parent within the United States to request refugee status for their children located in one of these three countries.

These “lawfully-present” adults include illegal aliens who’ve been granted temporary amnesty under Obama’s executive immigration actions, as well as those under “withholding of removal” or “deferred enforced departure.”

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