Wednesday, July 30, 2014

Markets drift lower after Fed trims monthly bond purchases again

Dow lost 31 & in the red for most of the day after a strong opening, decliners over advancers almost 3-2 & NAZ rose 20.  The MLP index tumbled 6+ to the 512s (an unusually large drop) & the REIT was up pennies at 307.  Junk bond funds pulled back while Treasuries were sold.  Oil dropped to a 2-week low, flirting with 100, after a gov report showed that US gasoline supplies gained as demand slipped & gold was down a tad (under 1300).

AMJ (Alerian MLP Index tracking fund)

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CLU14.NYM....Crude Oil Sep 14....100.18 Down ...0.79  (0.8%)

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Janet Yellen
Photo:   Bloomberg

The Federal Reserve (FED) said slack in the labor market persists even as the economy is picking up, & it continued to trim monthly asset purchases that have pumped up its balance sheet to a record $4.4T.  “A range of labor-market indicators suggests that there remains significant underutilization of labor resources,” the FOMC said.  “The likelihood of inflation running persistently below 2 percent has diminished somewhat.”  Policy makers tapered monthly bond buying to $25B in their 6th consecutive $10B cut, staying on pace to end the purchase program in Oct.  The FED is stepping up a debate over when to raise interest rates for the first time since 2006 as unemployment falls faster than expected & inflation picks up toward the 2% goal.  The outlook brightened today with a gov report showing the economy expanded more than forecast in Q2.  At the same time, Yellen has expressed concern about persistent signs of labor-market slack, including low wages.  The FOMC repeated it’s likely to reduce bond buying in “further measured steps” & to keep interest rates low for a “considerable time” after ending purchases.  “Inflation has moved somewhat closer to the committee’s longer-run objective,” the FED said.  Its preferred inflation gauge, the personal consumption expenditure price index, rose 1.8% in May from a year earlier.  Its 12-month gain was as low as 0.8% in Feb.  Philadelphia FED President Charles Plosser dissented, objecting that the guidance on the timing of a rate increase was “time dependent” & didn’t reflect “considerable economic progress.”

Fed Sees Labor-Market Slack Even as It Trims Bond Purchases

Countrywide unit was ordered to pay $1.3B in penalties for defective mortgage loans sold to Fannie Mae & Freddie Mac in the run-up to the 2008 financial crisis, a little more than half of what the federal gov had requested.  US Judge Jed Rakoff issued the civil penalty against the bank today in the first mortgage-fraud case brought by the federal gov to go to trial.  Countrywide & Rebecca Mairone, a former executive with the mortgage lender, were found liable in Oct for selling thousands of bad loans to the 2 gov-sponsored enterprises.  Mairone was ordered to pay $1M.  While Rakoff didn’t grant the gov request for the maximum penalty of $2.1B, he concluded that Fannie & Freddie paid Countrywide nearly $3B for the loans . The judge reduced the penalty by 43% because experts for both sides said more than 57% of the loans were of “acceptable quality.”  Separately, Bank of America is nearing a settlement with the Justice Dept after raising its proposed offer to resolve probes into its sale of mortgage-backed bonds.  Representatives of the bank were at the Justice Dept today to discuss the terms, & an accord could be reached this week.  The amount of the settlement under discussion was $13-$17B.  The discussions include how much money will be paid in cash & how much in consumer relief.  During the Countrywide trial, the gov argued Countrywide committed a “simple but brazen” fraud by misrepresenting risky loans processed in 2007 & 2008 thru its “High Speed Swim Lane,” or HSSL, program as being of investment quality.  The US said Countrywide issued defective mortgages under the program, & then sold them to Fannie Mae & Freddie Mac.  The stock went up a quarter.  If you would like to learn more about BAC, click on this link:

Bank of America’s Countrywide Ordered to Pay $1.3 Billion

Bank of America (BAC)

Twitter CEO Dick Costolo is getting the company back on track with investors by drawing people to use the service more.  The company yesterday reported revenue more than doubled to $312M in Q2 & user growth, buoyed by World Cup-related demand, jumped 24%, topping estimates.  While the net loss widened to $144M, TMTR forecast sales for Q3 that exceeded estimates & raised its full-year guidance.  Costolo bolstered the numbers by making a case that including the audience for tweets beyond its own platform, the company’s reach is more than twice its active user base.  The World Cup features show what it can do for future events, he added.  Costolo said revenue rose mostly because users spent more time on the service, as the product was tweaked to better attract them.  The results & comments are part of a comeback attempt for the company.  After 2 straight qtrs of decelerating user growth, which followed the IPO in Nov, investors had questioned whether the company’s fastest sales growth was in the past.  The CEO responded by gutting executive ranks, including replacing the CFO & operating chief.  “Our main message today was that we’re looking to build, and we know we can build, the largest audience in the world,” Costolo said.  “We can deliver on that promise.”  TWTR still faces challenges.  Its net loss was more than 3X as big as its $42M loss a year earlier.  Total expenses are increasing at a rapid rate, rising to $462M from $178M a year earlier.  User growth also slipped slightly from a 25% increase in the prior period.  Yet TWTR also released numbers showing people are more engaged with the service.  Members, which now total 271M, viewed their TWTR timelines more often, with 173B views, up from 157B in Q1.  The stock shot up 7.71 (20%) to 46.30.  If you would like to learn more about TWTR, click on this link:

Twitter Stock Surges as CEO Costolo Makes Case for Future Growth

Twitter (TWTR)

It's tough to figure out this market.  There was nothing really new from the FOMC decision.  Maybe it was the thought that a strong economy might encourage those guys to raise interest rates sooner, something all bulls fear.  It is widely believed that increases will begin next year which is not all that far away.  Dow is back to where it was on Jun 6.  That's up a modest 300 YTD, about 2%.

Dow Jones Industrials

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Markets sink after GDP and jobs data

Dow fell 63, decliners over advancers 3-2 & NAZ added 9.  The MLP index plunged 6 to the 513s & the REIT index was flattish at 307.  Junk bond funds fluctuated & Treasuries sold off.  Oil advanced, buoyed by stronger-than forecast US economic data while gold slid back under 1300.

AMJ (Alerian MLP Index tracking fund)

CLU14.NYM...Crude Oil Sep 14...101.46 Up ...0.49 (0.5%)

GCU14.CMX...Gold Sep 14.......1,294.90 Down ...4.10  (0.3%)

Gains in consumer spending & business investment helped the US economy rebound more than forecast in Q2 following a slump in Q1 that was smaller than previously estimated.  GDP rose at a 4% annualized rate, the most since Q3-2013, after shrinking 2.1% in Q1, according to the Commerce Dept.  The forecast called for a 3% advance.  Consumer spending, the biggest part of the economy, rose 2.5%, reflecting the biggest gain in purchases of durable goods such as autos in almost 5 years.  Manufacturers should keep improving in H2 as increasing employment lifts consumer confidence & spending.  The pickup in growth, as the expansion enters its 6th year, is among reasons Federal Reserve officials meeting today may continue to pare monthly asset purchases while keeping interest rates low.  With today’s report, the Commerce Dept issued its annual revisions, incorporating newly available data from sources including corp tax returns & wage surveys.  The update altered most statistics back to 1999, with the biggest revisions affecting the past 3 years.  The update showed worker pay was a smaller piece of the income pie than earlier estimated as some Americans reaped significantly more in interest & div payments over the past 2 years.  The report also showed the economy expanded more slowly over the past 3 years.

Economy in U.S. Grows More Than Forecast

Companies added 218K workers in Jul, exceeding the average for the year & showing improving demand is bolstering the US job market.  The gain followed a 281K increase in Jun that was the strongest since Nov 2012, according to ADP Research Institute.  The forecast called for a 230K.  Businesses are limiting dismissals & taking on more workers, spurring consumer confidence & laying the groundwork for a pickup in household spending that accounts for about 70% of the economy.  Private payroll gains have averaged 204K this year, according to ADP.  Manufacturers, builders & other goods-producing industries increased headcount by 16K & employment in construction rose 12K,  Factories added just 3K jobs.  Payrolls at service providers increased by 202,000 (generally lower paying jobs).  Companies employing 500 or more workers added 41K jobs.  Medium-sized businesses, 50-499 employees, took on 92K workers & small companies increased payrolls by 84K.

ADP Says Companies in U.S. Boosted Payrolls by 218,000

Russia's central bank said it’s ready to help lenders targeted by the US & Europe in their latest round of sanctions, as Dutch experts again abandoned an attempt to visit the crash site of Malaysian Air Flight 17.  EU govs agreed yesterday on their most sweeping sanctions against Russia to date, barring state-owned banks from selling shares or bonds in Europe, restricting the export of equipment to modernize the oil industry & barring the sale of technology with military uses.  The sanctions are an attempt to get pres Putin to back down in Ukraine.  “The financial organizations function normally and render their customers a complete range of services, including funds transfers and banking-card settlements,” the central bank said.  “If necessary, adequate measures will be taken to support the said organizations with the view of protecting interests of their customers, depositors and creditors.”  The EU sanctions align the 28-member bloc with the actions taken by the US.  With many European countries reliant on Russian oil & natural gas, the sanctions stopped short of the full-scale commercial warfare that could damage the Euro economy, which is still shaking off the euro debt crisis.

Russia May Aid Sanctioned Banks as MH17 Probe Stymied

The favorable news on GDP data & the first jobs report for Jul, should have brought more buying in stocks, especially following recent weakness.  But Dow, after starting with a good gain an the opening is in in the RED.  Q2 GDP strength sounds good, but revising prior data economic growth data lower was not welcome.  The mini wars in eastern Ukraine & Gaza (where a 4 hour truce was supposed to be in effect, but rockets are being fired) are weighing on the stock markets.  Also the markets are waiting for Janet to speak in the PM.

Dow Jones Industrials

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