Thursday 22 February 2018

Was January the High? 1968-70 or 1973-74?



Baltic Dry Index. 1146 +29    Brent Crude 65.01

“I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”

Warren Buffett

Did the Fed minutes just confirm that January was the high for US stocks in 2018? It’s far to early to say, but there’s a high probability it was. With interest rates “normalising, and inflation statistically built in to the numbers ahead, unless crude oil drops back towards $50, stocks just might have run out of “greater fool” buyers.

That doesn’t necessarily result in a market crash. Far more common, is a market that just sags, and sags, for weeks and months.  The market, as a “forward looking” stock indicator, future higher interest rates have nearly always been bad for stocks.  Think 1968-1970 rather than 2008-2009.

Unfortunately these days, the algo computer traders all run as a herd and turn on a dime, front run by the high frequency algo traders stealing from everyone else. 2018-2020 might turn out to be more like 1973-1974.

Dow futures drop as Fed minutes rattle investors

Published: Feb 22, 2018 1:01 a.m. ET
U.S. stock futures hinted at a weaker start for Wall Street on Thursday, as the market continued to digest the minutes of the January Federal Reserve meeting. Dow futures YMH8, -0.46% fell 114 points, or 0.5%, to 24,667, while S&P 500 futures ESH8, -0.28% dropped 7.7 points, or 0.3%, to 2,691. Nasdaq-100 futures NQH8, -0.47% slid 31.25 points, or 0.5%, to 6,728.50.

The Dow Jones Industrial Average DJIA, -0.67% surrendered a 300-point gain on Wednesday to finish down 166.97 points, or 0.7%, to 24,797.78. The S&P 500 SPX, -0.55% fell 0.6% and the Nasdaq Composite COMP, -0.22% dropped 0.2%.

Losses came as the Fed minutes pointing to the "increased likelihood" of more interest-rate hikes to come triggered fresh volatility, with the yield on the 10-year Treasury note TMUBMUSD10Y, -0.46% hitting a fresh four-year high of 2.95%. The yield was hovering at 2.94% on Thursday. Dollar gains also weighed on stocks, though the ICE Dollar Index DXY, -0.02% greenback gave up some of those gains on Thursday, up 0.1% to 90.114.

Dow gives up 300-point gain to end lower as bond yields rise after Fed minutes

Published: Feb 21, 2018 5:07 p.m. ET
----U.S. equity gauges retreated as investors struggled to digest minutes from the Federal Open Market Committee, which pointed to a strong economy, but also the “increased likelihood” of more rate hikes ahead. The news pushed the U.S. dollar higher and sent the yield for the 10-year Treasury note TMUBMUSD10Y, -0.43% to a fresh four-year peak of 2.95%.

Wall Street has been driven by the prospect of inflation returning to the economy, and the Fed having to become more aggressive in raising rates to combat it.

What did the Fed minutes say?

Minutes of the Jan. 30-31 Federal Open Market Committee meeting showed that officials saw a stronger economy than at the end of 2017 and that more rate increases were in the offing.
The strengthening “increased the likelihood that a gradual upward trajectory of the federal-funds rate would be appropriate.” The FOMC altered its message to point to “further gradual increases,” emphasizing its desire to resume rates increases in 2018, according to the minutes.

What are strategists saying?

“Rising rates, if the rates go up far enough, could be a problem not just for the stock market but for the economy,” said Bruce Bittles, chief investment strategist at Baird. That said, Bittles was doubtful that real inflation was picking up.

“Demographics are such that we have 10,000 people retiring every day and being replaced by younger employees with lower salaries,” he said. He also said lower wages outside of the U.S. would keep pressure on inflation in the U.S.

“I think for the most part everything in the minutes was fairly benign,” said Bruce McCain, chief investment strategist at Key Private Bank. “The problem is we haven’t resolved if there’s real inflation working its way through the system. We have no predisposition that we’ve cleared that hurdle,” he said.

What data and speakers are driving trading?

An index that tracks U.S. manufacturers rose to a nearly 3½-year high in February and a gauge for service-oriented companies hit a six-month peak, according to IHS Markit’s flash PMI.
Separately, existing-home sales fell 3.2% in January.

In an interview on Bloomberg Television, Minneapolis Fed President Neel Kashkari said he has “hope” that inflation is picking up, and that the U.S. central bank “can’t make policy based on market blips, up and down.”
More

Fed's Quarles Says U.S. Economy in ‘Best Shape’ Since Crisis

By Christopher Condon
Federal Reserve Governor Randal Quarles delivered an upbeat assessment of the U.S. economy and endorsed a “gradual” path for raising interest rates in his first public speech on monetary policy since joining the central bank in October.

“The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis,” Quarles said in prepared remarks Thursday in Tokyo.

“With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized,” he said. The views appear to align Quarles on monetary policy with Fed Chairman Jerome Powell, who testifies next week before Congress for the first time as central bank chief.

His comments follow the release of minutes from the Fed’s Jan. 30-31 policy meeting that showed confidence growing among policy makers that growth in 2018 may exceed their December forecasts and justify additional rate hikes this year. Officials have penciled in three hikes in 2018, according to their median projection released in December.

Quarles, who was named to the central bank’s board by President Donald Trump, said recently enacted tax changes and bipartisan budget deals could help sustain the economy’s expansion by increasing demand and spurring business investment. He also drew attention to capital investment data that had already improved in 2017.
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Finally, Asian stocks wobble, will the new Trump Fed start to play catch up? 2018 or 2019?

“Those who know don't tell, and those who tell don't know.”

 Michael Lewis

Five Fed Rate Hikes in 2018 Isn't A Crazy Idea

Economic conditions are ripe -- even overripe -- for inflation to accelerate.
by Charles Lieberman
21 February 2018, 10:00 GMT
I focus on the U.S. employment data most of the time, since it is among the broadest and most accurate of the economic indicators on the health of the economy. But it has been eclipsed in importance at this stage of the business cycle by every available measure of inflation pressures.
Interest rates can remain low only if inflation data remain benign, but that’s no longer likely.
Economic conditions are ripe -- even overripe -- for inflation to accelerate. It’s becoming clearer that the Federal Reserve needs to increase interest rates more quickly now to avoid being forced to play catch-up later and risk a surge in rates that threatens to push the economy over the edge and into recession. Four rate hikes seem likely this year, but more are possible and probably desirable.

At 4.1 percent, the unemployment rate indicates that labor has become scarce. This conclusion is reinforced by every other labor market measure ranging from job openings, quit rates, weekly unemployment insurance filings, and surveys that indicate that workers now believe jobs are easy to find. If labor is scarce, there is every reason to expect rising wage inflation. And since labor represents the lion’s share of the cost of supplying goods and services, any material rise in wage inflation is likely to be transmitted to price inflation. Only the timing of this process is uncertain at this point.

The modest rise in price inflation seen so far, which is still below the Fed’s 2 percent target for the Personal Consumption Expenditure deflator, only implies the transmission process is taking a bit longer than some expect. Although economic theory is incapable of informing us on the timing of the transmission process, it is wishful thinking to believe inflation will not worsen because it hasn’t worsened yet. Unless the laws of supply and demand have been repealed, the tightening labor market will inevitably produce faster inflation.

Despite recent increases, yields on U.S. Treasury securities provide a negative return after adjusting for taxes and inflation. Buyers of Treasuries are not investing, but rather making annual donations to the U.S. government. Historically, 10-year Treasuries have averaged about 250 basis points above inflation, which implies a 4.5 percent yield given the Fed’s inflation target. So even after the sizable declines in recent weeks that pushed yields up to about 2.90 percent, bond prices are likely to drop significantly further.
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February 22, 2018 / 4:27 AM

SE Asia Stocks-Most lower; U.S. rate hike worries weigh

Feb 22 (Reuters) - Most Southeast Asian stock markets fell
on Thursday, as the possibility that the U.S. Federal Reserve
will move to raise interest rates as early as next month weighed
on investor sentiment.

    The Fed's rate-setting committee showed more confidence in
the need to keep raising interest rates at its Jan. 30-31
meeting, minutes released on Wednesday showed, with most
believing that inflation would perk up.

    U.S. benchmark 10-year note yields, which move
inversely to prices, touched a more than four-year high after
the Fed minutes.

    Most Asian share markets followed the S&P 500 futures
lower on Thursday as speculation of faster hikes in U.S interest
rates soured risk appetite globally.

    In Southeast Asia, the Philippine index fell 1.2
percent to hit a one-week low as industrials, financials and
real estate stocks lost ground.

    SM Investments Corp fell as much as 2.8 percent to
its lowest in nearly two weeks, while SM Prime Holdings Inc
 slipped over 3 percent.

    Ayala Corp lost 4.6 percent, its biggest intraday
drop since late October.

    Singapore shares shed as much as 1 percent, with top
lender DBS Group Holdings Ltd retreating from a record
high hit in the previous session and conglomerate Jardine
Matheson Holdings Ltd down as much as 1.1 percent.

    Indonesia slipped 0.4 percent, falling for a third
day, led by financials.

    Bank Negara Indonesia was down 3.4 percent.
More

“The market is weird. Every time one guy sells, another one buys, and they both think they're smart.”

Anon.

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.

Today, how not to run an Indian bank. Looks like there’s enough blame to spread around widely. But are any other Indian banks sitting on scandals?

“Anyone who lives within their means suffers from a lack of imagination.”

Oscar Wilde

How a $1.8 Billion Indian Bank Fraud Lasted Seven Years

By Jeanette Rodrigues and Bhuma Shrivastava
21 February 2018, 08:11 GMT Updated on 21 February 2018, 09:47 GMT
The story of how India’s biggest bank fraud went undetected for seven years includes an $81 million cyber-heist in neighboring Bangladesh, penny-pinching lenders and a series of missed opportunities.
In 2016, after revelations that hackers had infiltrated the Bangladeshi central bank’s computer systems to siphon off money, its counterpart in India sensed a danger to its own banking system. The Reserve Bank of India reminded all the country’s lenders to ensure their computer networks were properly integrated with Swift, the global system used to transmit payment instructions in the Bangladesh theft.

Unknown to the RBI at the time, a rogue employee at state-owned Punjab National Bank had allegedly been taking advantage of precisely that flaw in the Indian lender’s computer systems for five years, perpetuating a fraud that would eventually balloon to $1.8 billion, according to PNB’s account.

“The biggest thing that didn’t happen was the linkage between Swift and the bank’s back-end software -- they didn’t talk,” said Abizer Diwanji, a financial services partner in India at the accountancy firm EY. “The ball was first dropped” when PNB missed a chance to reconcile the two systems, he said.

As the fallout from the incident spreads and various government agencies move to investigate, one thing stands clear: the financial damage was exacerbated by a combination of inferior technology, weak risk management and insufficient regulatory oversight. Had the fraud been discovered a year earlier, the total amount would have been about $800 million lower.

Fingerpointing

PNB alleges its former employee Gokulnath Shetty provided billionaire jeweler Nirav Modi and his associates with guarantees to obtain loans from abroad. Between 2011 and early 2017, guarantees worth 65 billion rupees ($1 billion) were issued without any collateral, followed by another 49 billion rupees over March to May last year, when Shetty retired, according PNB’s complaint that has been made public.

To read about the modus operandi behind the fraud, click here

Because the computer systems of many Indian banks weren’t compatible with Swift, the RBI didn’t make it a requirement to integrate the two, according to R. Gandhi, a former RBI deputy governor who oversaw the central bank’s risk operations at the time of the Bangladesh hack. However, banks like PNB that hadn’t integrated their systems were required instead to perform daily manual checks to reconcile the Swift messages with internal records, Gandhi added.

Given the prevalence of fraud involving global trade finance transactions, it’s critical for banks to ensure automated or manual reconciliation with Swift, said Tim Phillipps, an Asia-Pacific financial crime specialist at Deloitte. It isn’t hard to build an interface between Swift and the bank’s own software, he said.

---- Cost may have been a factor in preventing Indian banks from upgrading their systems, according to Saswata Guha, a director in the financial institutions group at Fitch Ratings. Indian lenders have been grappling with rising bad loans and insufficient capital for years, a situation that may worsen after new regulations take effect in coming months.
More
A large Bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. If he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done.

Walter Bagehot. Lombard Street. 1873
Technology Update.
With events happening fast in the development of solar power and graphene, I’ve added this section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards?

Small-scale solar power is changing lives and disrupting traditional models

Published 2:57 AM ET Tue, 20 Feb 2018

Solar power is becoming an increasingly important part of the planet's energy mix. In 2016, solar photovoltaic grew faster than any other fuel, with China responsible for nearly half of worldwide expansion, according to the International Energy Agency (IEA).

While solar power projects can be grand in scale there are some that, while smaller, are no less important. Repowering London, a not-for-profit based in the U.K. capital, helps facilitate community-owned renewable energy projects there.

In October 2015, Banister House in Hackney, east London, became home to the borough's first community-owned solar power project. The project was developed by Repowering London, residents of Banister House and Hackney Energy.

Banister House Solar, as the scheme is known, produces community-owned renewable electricity for the building and its residents. According to Repowering London, 679 tons of carbon dioxide will be prevented from entering the atmosphere during the project's 20-year lifetime.

A small community generating its own energy is not restricted to large urban conurbations. In Scotland, for example, the Findhorn Ecovillage is home to four community-owned wind turbines with a total capacity of 750 kilowatts.

These turbines help make the village a net exporter of electricity. According to those behind the project, around half of the electricity generated is used on-site through a private grid, with the rest sent to the main grid.

Back in the capital, Agamemnon Otero, CEO of Repowering London, said that smart meters had also been installed for residents so that they can see what they are generating. The cost of the project, around £150,000 ($209,148), was raised by members of the public, with investors getting a share of the profit when energy is sold back to the grid.

"While it might not seem a large amount, £150,000… all of it was raised from the local community within eight weeks," Otero said.

"There's a 4 percent return on their investment, there (are)… savings to the building owner so that the actual council is making savings as well. The financial benefits stream out both for members and the partners involved."

“No one ever went broke by taking a profit.”

Jesse Livermore

The monthly Coppock Indicators finished January

DJIA: 26,149 +282 Up. NASDAQ:  7,411 +310 Up. SP500: 2,824 +212 Up.

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