Tuesday, January 3, 2017

Earnings, Not Donald Trump, Are Stocks’ Best Friend In 2017

Continued rebound in corporate profits should prop up share prices regardless of Washington policies.

By Akane Otani 
The Wall Street Journal
January 4, 2017

Wall Street expects U.S. companies to report gains in fourth-quarter earnings in coming weeks, extending a recent recovery and providing fresh fuel to major U.S. stock indexes after a run of records in late 2016.

On Tuesday, the first trading day of 2017, shares of financial companies surged, in part on optimism for their profitability this year, helping the Dow Jones Industrial Average jump 119.16 points to 19881.76, snapping a three-session losing streak. The broader S&P 500 added 0.85%.

Earnings at S&P 500 companies will rise 3.2% from a year earlier in the fourth quarter, according to analysts polled by FactSet. That builds on a 3.1% gain in the third quarter, which marked the first year-over-year rise in corporate earnings since the first quarter of 2015 and could point to a more lasting breakout, analysts said.

The fourth-quarter earnings season kicks off in earnest Thursday, with Walgreens Boots Alliance, Monsanto Co. and Constellation Brands expected to report results that day. Banks, including J.P. Morgan Chase & Co., are slated to report results Jan. 13. By the end of January, 149 companies are expected to have reported results, according to the WSJ Market Data Group.

Donald Trump’s election revved up investors’ hopes for business-friendly policies and the gains since Nov. 8 in major stock indexes have largely been attributed to the potential for tax cuts, looser regulation and fiscal spending under the new administration.

Investors say another strong quarter of earnings reports could help bridge the gap between now and later this year, when many expect Congress to begin enacting policies that aim to speed up economic growth and would likely bolster corporate profits. Corporate profits are among the strongest determinants of market performance, investors and analysts say.

“It’s earnings growth that drives stocks over the long term,” said Tom Cassidy, chief investment officer at Univest Corp. of Pennsylvania’s Wealth Management Division. While “we won’t know if any of these policies will actually be implemented” until later in the year, a rise in earnings typically results in additional stock gains, Mr. Cassidy said.

Analysts expect earnings at S&P 500 companies to grow by 11% from a year earlier in the first quarter, 11% in the second quarter, 9.1% in the third quarter and 14% in the fourth, according to data from FactSet.

It is a long-awaited improvement. An end to the longest earnings slump since the financial crisis comes against a backdrop of improving economic data.

Valuations have risen above their long-term average, prompting many analysts to warn that stock gains could be vulnerable without an upswing in corporate profits.

U.S. gross domestic product, a broad measure of the goods and services produced across the economy, posted its strongest quarterly pace of growth in two years in the third quarter, according to data released by the Commerce Department in December.

On Tuesday, the Institute for Supply Management’s manufacturing index rose in December to its highest levels in two years, the latest sign of momentum in the U.S. factory sector. Separately, Markit’s manufacturing index rose to a 21-month-high last month.

Some analysts point to an improved outlook for financial companies, driven in part by expectations that Trump administration policies will boost growth and inflation, resulting in a steeper “yield curve” that benefits banking firms’ profits.

The S&P 500 financials sector was up 20% in 2016 and was responsible for nearly half of the total earnings growth for the S&P 500 in the third quarter, according to FactSet data.

Financials posted 8% year-over-year earnings growth, according to FactSet. J.P. Morgan Chase, Citigroup Inc., Wells Fargo & Co., Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley all beat analysts’ estimates on an earnings-per-share basis.

Several lenders, including J.P. Morgan, the largest U.S. bank by assets, reported a rebound in their trading businesses. While low interest rates have for years cut into banks’ net interest margins—a key measure of lending profitability—events like the U.K.’s surprise vote to leave the European Union or uncertainty around the Federal Reserve’s next steps on interest rates have helped boost trading revenue, some of the banks said.

Many of the banks expect trading gains to continue. Executives at Citigroup, Bank of America and J.P. Morgan said at a banking conference in early December that they expect key fourth-quarter trading metrics to grow by double-digit percentages from a year earlier.

Utilities are expected to perform well, too. Analysts polled by FactSet see earnings for the S&P 500 utilities sector growing by 20% for the fourth quarter from a year earlier. Technology, consumer staples and health care are expected to report earnings growth in the single-digit percentages for the fourth quarter.

But risks remain.

Industrials—which have helped lead the recent stock-market rally with a 7% gain in the S&P 500 since Election Day—are expected to report an earnings decline of more than 8% in the fourth quarter from a year earlier, according to analysts polled by FactSet.

Caterpillar is projected to be among the biggest drags on the sector’s earnings in the fourth quarter. Shares of the maker of construction and mining equipment—whose results are closely watched as a barometer for global manufacturing activity—gained 36% in 2016.

But for the fourth quarter, the company is expected to report earnings of 66 cents a share, down from expectations of $1.02 a share at the start of the quarter, according to FactSet estimates.

The company said in October that it could report a loss for the year and predicted another tough year for 2017 amid weak demand.

A strengthening U.S. dollar could also hamper the earnings of multinational companies. While a stronger dollar increases U.S. buyers’ purchasing power abroad, it also makes U.S. exports more expensive to foreign buyers, putting pressure on the bottom lines of companies that receive a significant chunk of their revenue from abroad. Roughly 31% of S&P 500 revenue come from outside the U.S., according to FactSet estimates. The dollar has rallied since Election Day on prospects of a higher-growth, higher-rate environment, which makes it more attractive to yield-seeking investors. The WSJ Dollar Index, which measures the dollar against a basket of 16 other currencies, gained about 3% in 2016.

The prolonged S&P 500 earnings slump has also helped make stocks more expensive than their historical averages. The S&P 500 was trading at around 21 times its past 12 months of earnings last week, according to FactSet. Its 10-year price/earnings average is 16.

“People are very inclined to ignore P/E values going up,” said Bret Chesney, senior portfolio manager at Alpine Global, who added that he thinks stocks are too expensive relative to how companies have performed over the past several quarters. “I wouldn’t be too gung-ho to invest at these levels.”

Still, many analysts believe there is reason to be optimistic about the coming year.

“There’s some meat to the rally,” said Karyn Cavanaugh, senior market strategist at Voya investment Management. “I think 2017 is shaping up to be a good year.”

Article Link To The Wall Street Journal:

Rethinking Labor Mobility

By Harold James
Project Syndicate
January 4, 2017

The past year will be remembered as a period of revolt against what US President-elect Donald Trump likes to call “globalism.” Populist movements have targeted “experts” and “elites,” who are now asking themselves what they could have done differently to manage the forces of globalization and technological innovation.

The emerging consensus is that people and communities displaced by these forces should be compensated, perhaps even with an unconditional basic income. But that strategy has many hazards. People who are paid to do meaningless activities, or nothing at all, will likely become even more disengaged and alienated. Regions that are subsidized simply because they are losing out may demand more autonomy, and then grow resentful when conditions do not improve.

Thus, simple transfers are not enough. Humans are ingenious and adaptable, but only in some circumstances; so we must continue to search for viable opportunities that allow people to participate creatively and meaningfully in the economy. To that end, we should look to history, and study what happened to the “losers” during previous periods of rapid techno-globalization.

In the Industrial Revolution of the late eighteenth and early nineteenth centuries, technological innovation, especially in textile machinery, displaced skilled artisans and craft workers en masse, and left them deprived of any real safety net to cushion the blow. But, in retrospect, it is not obvious that governments could have done anything to compensate Silesian handloom weavers or rural Irish artisans. Although they were hard workers, their products were both inferior in quality and more expensive than what was being manufactured in the new factories.

Instead, many displaced workers emigrated – often long distances across oceans – to places where they could take on new forms of work, and even prosper. As the late Thomas K. McCraw’s brilliant book The Founders and Finance shows, America’s tradition of entrepreneurship is a testament to inventive migrants.

To see the benefits of migration, we need look no further than Kallstadt, a town of small-scale farmers in southwest Germany where Friederich (Fred) Trump – Donald Trump’s grandfather – was born on March 14, 1869. He moved to the US in 1885 (his wife was also born in Kallstadt, and he married her there on a return visit in 1902). The father of the founder of the food giant Heinz (now the Kraft Heinz Company), Henry John Heinz, was born in Kallstadt as well, in 1811, and emigrated to Pennsylvania in the 1840s, to escape an agricultural crisis.

But just one century later, emigration was no longer an option for people whose economic activity had suddenly become obsolete, not least because most countries had imposed tougher barriers against migration. In the first half of the twentieth century, the most vulnerable producers were rural, small-scale farmers who could not compete with expanding food production elsewhere in the world.

This was especially true for European farmers, who responded to their sudden impoverishment and bankruptcy with the same sort of populist politics that featured so prominently in 2016. They formed and voted for radical political movements that blended economic and social utopianism with increasingly militant nationalism. These movements against globalization, which culminated in World War II, helped to destroy the contemporary international order.

In the aftermath of World War II, politicians in industrial countries found a different solution to the problem of displaced farmers: they subsidized agriculture, supported prices, and sheltered the sector from international trade.

In the US – which, tellingly, avoided the nationalist surge – this effort had already been embodied in the 1933 Agricultural Adjustment Act. In Europe, price maintenance and supranational protectionism formed the political basis for European integration in the European Economic Community, which would become the foundation for the European Union. To this day, the EU budget is overwhelmingly devoted to the Common Agricultural Policy, the system of subsidies and other measures to support the sector.

Agricultural protectionism worked well for two reasons. First, US and European agricultural products in this new regime were not fundamentally worthless, as handmade, technically inferior cloth was during the Industrial Revolution. American and European producers still fed the populations of rich countries, even if they did so at a higher cost than was economically necessary. Second, and more important, workers were able to change occupations, and many moved from the countryside to fill attractive, high-paying jobs in urban manufacturing and services.

Of course, today the threat posed by globalization extends precisely to these “new” jobs. Europe and the US have long attempted to support “losers” in manufacturing and services through various small-scale programs that do not, in fact, benefit many workers. For example, the US Trade Adjustment Assistance program, which was augmented under the 2009 Trade and Globalization Adjustment Assistance Act, and the EU’s Globalization Adjustment Fund are small, complex, and expensive measures to compensate displaced workers.

As a result, many of the dilemmas that confronted nineteenth-century policymakers are confronting their counterparts today. No one can deny that it is a waste of human and natural resources to prop up occupations that create unwanted or obsolete goods. Earlier generations had emigration as a release valve, and many people today, especially in Eastern and Southern Europe, are responding to poor local economic conditions in a similar fashion.

Internal migration into dynamic metropolitan hubs is still a possibility, especially for young people. But this kind of mobility – which is increasing in modern Europe, but not in the US – requires skills and initiative. In today’s world, workers must learn to embrace adaptability and flexibility, rather than succumb to resentment and misery.

The most important form of mobility is not physical; it is social or psychological. Unfortunately, the US and most other industrialized countries, with their stultifying and rigid education systems, have failed to prepare people for this reality.

Article Link To Project Syndicate:

Nvidia, After Monster 2016, Enters Spotlight At CES

Company upstages chip behemoth Intel as battle intensifies.

By Therese Poletti
January 4, 2016

Nvidia Corp. is set to take the stage in Las Vegas at CES 2017 on Wednesday evening, where it will upstage rival Intel Corp. following a monster year for the graphics-chip maker.

Nvidia NVDA, -4.43% was the best performing stock in the S&P 500 in 2016, with its stock soaring 224%, while rival Intel’s INTC, +0.91% shares eked out an approximate 5.2% gain in 2016. The evening keynote, the first one at CES, has been given by either Intel or Microsoft Corp. in recent years — Intel CEO Brian Krzanich took the stage the past two years.

Nvidia is mostly known for its graphics chips and cards popular with video-gamers, but it has also made successful forays into new arenas with its high-performance graphics processors — most notably used in data centers and automotive systems — with their focus on deep learning and artificial intelligence. In its most recent third-quarter results, revenue for the 23-year-old chip company soared 54% to $2 billion, far above Wall Street’s expectations.

The company said in a recent press release that “you can be sure” its CEO and co-founder Jen-Hsun Huang will “break news in some of the areas we’re focused on: artificial intelligence, self-driving cars, virtual reality and gaming.” The company may unveil the next iteration of its current graphics processing unit and/or graphics board, based on its current Pascal architecture, but it could also make some announcements in the arena of automotive news, where its chips are being used as part of auto infotainment systems and in self-driving cars.

In its last earnings call, Nvidia also noted that customers such as Amazon.com’s AMZN, +0.51% Amazon Web Services, Microsoft Corp.’s MSFT, +0.71% Azure and Alibaba’s BABA, +0.90% AliCloud are all using its graphics processing units for artificial intelligence, data analytics and high-performance computing in their data centers. “They are all using GPUs to do deep learning,” said Patrick Moorhead, principal analyst of Moor Insights & Strategy.

Moorhead said he expects a bit of a victory lap from Huang and a reiteration of Nvidia’s place in the current tech world, where it is involved in all the fields that have the biggest buzz.

“This is an indication of how hot Nvidia is right now,” Moorhead said. “They are at the epicenter of all of the cool things, almost every buzz word you can think of, self-driving cars, AI, drones are likely done with deep neural network training, games ... They are this center point of some really cool stuff.”

While Moorhead is not worried about Intel’s position, the Silicon Valley chip giant has been making both defensive and offensive moves for the future. Last August it bought Nervana Systems, a startup focused on deep learning, to bolster its focus on artificial intelligence and machine learning, and Intel is clearly gearing up for a battle for the hearts of self-driving cars. Just Tuesday, it bought a 15% stake in Here International B.V., to jointly develop navigation technology for self-driving cars, among its other efforts, such as its pact with BMW AG and Mobileye NV.

Intel is hosting its own press conference at CES late Wednesday afternoon, where it says CEO Krzanich will “immerse you in virtual reality to experience how Intel technology is extending far beyond consumer electronics to define almost every aspect of our lives and transform industries.”

Investors will likely be focused on Huang’s keynote for signs of whether Nvidia can continue its huge momentum going into 2017.

Article Link To MarketWatch:

Southeast Asia's Worst-Performing Currency Is In For Another Tough Year

ING sees Philippine peso weakening 4.4 percent this year; Trade deficit to exceed remittances for first time in a decade.

By Ditas B Lopez
January 4, 2017

Southeast Asia’s worst-performing currency of 2016 is in for another tough year with President Rodrigo Duterte’s spending plans seen boosting imports just as rising U.S. interest rates spur capital outflows.

The peso is forecast to be collateral damage as an economy growing faster than 7 percent and the government’s infrastructure program drive demand for inward shipments. This year will be the first in about a decade when the amount of money Filipinos send home from overseas will be lower than the trade deficit, estimates ING Groep NV.

“It’s a challenging situation for the peso for the next couple of years,” said Joey Cuyegkeng, an economist at the Dutch lender in Manila. “A very strong domestic sector requires imports of both consumer goods and durable equipment as the economy expands and moves into investment-driven growth.”

The peso, which dropped 5.2 percent against the dollar in 2016, will fall a further 4.4 percent to 52 by the end of this year, predicted Cuyegkeng. The uncertain international environment, with Donald Trump poised to take office as U.S. president, and nervousness over President Duterte’s pivot toward China is likely to push investors to demand a peso premium, he said.

The peso strengthened 0.04 percent to 49.76 a dollar as of 11:44 a.m. in Manila, while the Philippine Stock Exchange Index rose 1.8 percent.

Duterte’s fiery outbursts and unpredictability, together with high valuations, also damped the allure of Philippine shares in the second half of 2016. The benchmark index dropped 16 percent from a peak in mid-July to finish the year down 1.6 percent. Opinion is divided on the prospects for this year, with Deutsche Asset Management and Nomura Holdings Inc. predicting a rebound, while Morgan Stanley and Credit Suisse Group AG see more losses.

Political Risk

The government is forecasting a 10 percent jump in imports in 2017, compared with a 4 percent rise in remittances. Money sent home by Filipinos living abroad accounts for around a tenth of the nation’s economy.

Alan Cayetano, the Manila-based head of foreign-exchange trading at Bank of the Philippine Islands, is penciling in a rate of 51.5 to 52 pesos per dollar by the end of 2017. That’s more bearish than the median estimate of 50.8 of 21 analysts surveyed by Bloomberg.

The peso will weaken at a slower pace this year than in 2016 as major developments like higher U.S. rates and more local spending are mostly priced-in, said Cayetano.

“But that’s barring any unforeseen events,” he said. “What can affect the peso locally will be politics.”

Article Link To Bloomberg:

Tesla Deliveries Miss Forecasts Again On Production Delays

Model S maker cites production challenges related to Autopilot; Merger with SolarCity adds pressure for Musk to hit targets.

By Dana Hull
January 4, 2017

Tesla Motors Inc. reported fourth-quarter deliveries that fell short of its own forecasts, sending shares lower in after-market trading, as production delays continue to plague the carmaker led by Chief Executive Officer Elon Musk.

The Palo Alto, California-based maker of electric cars and energy-storage products delivered about 22,200 vehicles in the final three months of last year, according to a statement Tuesday. The total trailed the automaker’s projection for 25,000 units and brought its full-year tally to 76,230 vehicles, below its forecast for at least 80,000 units.

Musk has a history of setting ambitious targets and timelines for Tesla and coming up short, including his calls for how soon the Model X sport utility vehicle and less-expensive Model 3 sedan would follow the top-selling Model S. The pressure on Tesla to make good on its goals has risen following the merger last year of the carmaker with solar-panel installer SolarCity Corp., since both have typically reported losses and burned cash.

“There is a high risk of execution missteps, a challenged track record on meeting timelines, cost challenges, and potential impact from an otherwise full plate of initiatives in ’17,” Brian Johnson, an analyst at Barclays Plc, wrote in a report earlier Tuesday. Johnson said there’s a “high probability” Tesla will announce a delay for Model 3 and estimates zero deliveries of the model for 2017.

Short-term production issues related to new hardware for the Autopilot driver-assistance system contributed to transport delays or prolonged delivery of about 2,750 cars to customers, according to Tesla. The Autopilot-related challenges began in late October and lasted through early December.

Tesla fell 2.1 percent to $212.50 as of 7:52 p.m. in New York after the close of regular trading. The shares slumped 11 percent last year, the company’s first annual decline since its initial public offering in June 2010.

Musk’s Ambitions

Musk is trying to transform Tesla from a niche seller of high-priced electric vehicles into high-volume manufacturer making 500,000 autos annually in 2018 -- nearly six times the number of cars and SUVs it produced last year.

While the 76,230 vehicles Tesla delivered in 2016 was a record and up 51 percent from a year earlier, the company has a ways to go to be considered a mainstream player. By comparison, Ford Motor Co. sold 72,089 F-Series pickups in the month of November alone.

Tesla has been counting on keeping sales of its Model S sedans and Model X SUVs strong while consumers await the Model 3, which is planned for volume production in late 2017. Musk urged workers in August to cut costs and deliver every car possible, which contributed to Tesla reporting a profit for the three months ended in September, its first in eight quarters.

‘Payback’ Quarter

“They flipped every switch to get every vehicle delivered in the third quarter,” Kevin Tynan, an auto analyst with Bloomberg Intelligence, said by phone. “The fourth quarter is the payback. It feels like the Model 3 can’t get here fast enough because demand for the Model S is softening as it gets deeper into its life cycle.”

Tesla completed its acquisition of SolarCity in November, taking on the solar installer’s $2.89 billion debt load. Last month, the company increased its borrowing capacity under two credit agreements by about $500 million.

Musk’s ambitious production goals depend in part on its battery factory east of Reno, Nevada, which is close to beginning battery-cell production. Tesla is giving investors a tour of its so-called Gigafactory on Wednesday.

Article Link To Bloomberg:

Obama’s Self-Serving Cybersecurity Spin

There’s real cause for alarm, but it isn’t the recent malware.

By Jeffrey A. Eisenach 
The Wall Street Journal
January 4, 2017

Misleading the American people to advance a political narrative has been a hallmark of President Obama’s foreign policy. The most recent example is the administration’s attempt to conflate the hacking of the Democratic Party with potential cyberattacks on critical infrastructure.

Last week, federal officials told the Washington Post that malware linked to Russian hackers was found on a laptop at Burlington Electric, a Vermont power company. By Monday the Post had recanted, writing that investigators “are finding evidence that the incident is not linked to any Russian government effort.”

But Americans could be forgiven for feeling spooked—for worrying that the hack of the Democratic Party was a lot more serious than previously thought, and that perhaps critical systems are facing a new and dangerous threat.

This simply isn’t the case. The kind of malware involved in these two intrusions is neither new nor particularly sophisticated. It is run-of-the-mill spyware that has probably been implanted on thousands of networks around the world, from home computers to those inside banks, power companies and government agencies.

These bugs are freely available online, and the code found at the Democratic National Committee and the power company isn’t even the latest version. The notion that such a mundane piece of software reveals a new and ominous threat to critical infrastructure is laughable.

Which isn’t to say American infrastructure is safe. It is common knowledge in the cybersecurity community that the U.S. power grid and other critical systems are infested with sophisticated malware placed there by foreign actors. If activated, that software has the potential to cause serious harm, similar to how the Stuxnet virus disabled Iran’s nuclear centrifuges in the early days of the Obama administration. In 2012 then-Defense Secretary Leon Panetta warned of a “cyber Pearl Harbor” that would “cause physical destruction and the loss of life,” as well as “paralyze and shock the nation.”

The risk of a serious cyberattack, for now, is moderated by the threat of retaliation: China, Iran and Russia know that the U.S. would strike back if attacked—and not necessarily only in cyberspace. But the cyber equivalent of mutually assured destruction won’t protect us for long. Rogue states like North Korea, and other actors such as Islamic State, are quickly gaining cyberwarfare capabilities. These groups don’t fear retaliation in the same way.

Cyberthreats pose a clear danger to national security, and building an effective defense will take a concerted effort by the Trump administration. Americans are right to be concerned. But by playing on those fears, the Obama administration is putting politics ahead of the national interest.

Article Link To The Wall Street Journal:

Is Julian Assange Telling The Truth About The WikiLeaks Hack?

Consider Assange’s motives for concealing the source of the leaked e-mails.

By Kevin D. Williamson
The National Review
January 4, 2017

The Democrats are committed to their story that Russian intelligence operatives hacked Democratic operatives’ e-mails to interfere with the U.S. presidential election. Julian Assange of WikiLeaks, which published those e-mails, says this is not the case, that the source was a non-state actor. Tucker Carlson, debating the question on Fox News, asked why Assange might lie about this.

This probably already has occurred to Carlson (who is a very sharp thinker), but there are many reasons Assange might prefer that version of events irrespective of its truth or falsehood. Gaming it out a little might help. Imagine you are Julian Assange and . . .

1. You know for a fact that Moscow was not the source of the WikiLeaks e-mails. What do you do? In this case, it seems most likely that you would simply tell the truth, that Russian intelligence was not behind the leak.

2. You know for a fact that Moscow was the source of the WikiLeaks e-mails. What do you do? That is going to depend a great deal upon your personal commitment to the truth and your integrity. For the sake of argument, let’s assume a position of agnosticism on this vis-à-vis Assange. Presumably, Assange does not want to spend the rest of his life hiding out in third-rate embassies, and, presumably, he would like whatever life he has to be long and full and not cut short by, say, poisoning with polonium like that of Alexander Litvinenko. The Assange-WikiLeaks point of view seems to be that it does not in the end matter very much what the source of these documents was, in any case. So, you have a very strong incentive to deny that Moscow was the source.

3. You don’t know whether Moscow was the source. That does not seem to me implausible, either. If Russian state hackers were in fact the people clever enough to phish out the password to John Podesta’s Gmail account, they probably didn’t pass on the information directly from the GRU or whichever conclave of Muscovite nefariousness was behind the deed. The Russians are, in general, pretty good at the sneaky stuff, having as they do a genuine gift for deviousness, and it is unlikely that they would have had any direct contact with WikiLeaks, instead of insulating themselves behind layers of intermediaries. In that case, Assange has a different but similar set of motives: He still doesn’t have a lot of friends, and he still doesn’t want to live in an embassy for the rest of his life, and he’s in need of a Plan B in the direst way. Why unnecessarily annoy Vladimir Putin and the incoming U.S. president? (You need not buy the conspiracy theory that Donald Trump is a Putin puppet to understand why he’d much prefer the source of those DNC e-mails be a cheesed-off Bernie Bro at the DNC instead of Russian spooks.) So, again, you have a pretty strong incentive to deny that Moscow was the source.

All of which leaves us . . . where?

Some sober perspective is in order here.

If the Democrats’ version of the story is true, this represents at most some pretty low-level, apple-stealing stuff in terms of international espionage and post-Soviet dirty tricks. One would almost be disappointed if the Russians weren’t up to more serious hijinks than that. No one disputes the legitimacy of the WikiLeaks documents, and they were not exactly chock-full of sensitive national-security secrets, just a lot of back-and-forth that’s embarrassing to Democrats and to a few of their media sycophants. There isn’t even much evidence that they had a meaningful effect on the election.

That doesn’t mean that we should ignore it, but, in terms of what we are cursed to keep calling “cyberwar” activities, this is pretty small potatoes. There have been much more serious incursions, many of them linked to China, that present genuine national-security threats. But the Obama administration has for the most part sat on its thumb in response to those. The Chinese hack on the Office of Personnel Management was a much more substantial violation of our security, but so far as the waning Obama administration is concerned, stealing private (and, indeed, classified) information on 20 million people is nothing next to causing Debbie Wasserman Schultz a bit of public consternation.

By all means, investigate, and do so vigorously. If the Russians are engaged even in bush-league mucking about with our elections, then that should be exposed and responded to. We shouldn’t take Assange’s word on this one way or the other.

But in the end, the DNC leak is a jaywalking case that we’re prosecuting while our enemies are plotting something more like an electronic 9/11. If it takes embarrassing a few Democrats to get Uncle Stupid moving on this, so be it, but the sorry case of Hillary Rodham Clinton is the beginning of this story, not the end of it.

Article Link To The National Review:

China’s New Year Currency Moves Won’t Make Donald Trump Happy

January 4, 2017

Call it a New Year's greeting from the Chinese government to the incoming administration of Donald Trump.

As the president-elect rang in 2017 entertaining guests at his opulent Mar-a-Lago estate, China quietly ushered in a series of measures aimed at better controlling the value of its local currency, the yuan.

Throughout his campaign, Trump accused China of "manipulating" the yuan to make Chinese exports more competitive in global markets. China's latest announcement will likely add fuel to that debate.

Unlike countries that mostly let markets determine the value of their currencies, Beijing tries to peg the yuan to a basket of other currencies. Starting Jan. 1, the Chinese State Administration of Foreign Exchange will use a new, broader basket of global currencies to benchmark the yuan's value. The change will have the effect of reducing the impact of the U.S. dollar on the official valuation.

"This is unambiguously bad news for the United States," High Frequency Economics Chief Economist Carl Weinberg said in a note to clients Tuesday. "China has put a new chip on the table to counter trade adventurism by the Trump administration."

Some analysts have downplayed the change, noting that it will have little immediate effect on market-based exchange rates.

But Weinberg argues that the new weightings will put added downward pressure on the yuan relative to the dollar, while making China's currency more attractive to investors and trade partners using currencies other than dollars.

"This is not the turn of events the Trump administration is hoping for," he wrote.

A CNBC email to the Trump transition team was not immediately returned.

Trump has repeatedly cited the falling value of the yuan as evidence that China continues to manipulate its currency in order to maintain an unfair trade advantage against U.S. exporters. Countries with weaker currencies have advantages when it comes to exports, because products priced in a cheap currency are more affordable. Trump has pledged to retaliate with punitive tariffs on Chinese goods.

While China has sought to dampen the value of its currency in the past, the People's Bank of China has more recently been scrambling to support the yuan. Beijing is deeply concerned that the weakening yuan is encouraging Chinese to shift their wealth out of the country into stronger currencies or other, more stable holdings. China needs a lot of capital in the country in order to continue to fund its growth, which is very heavily reliant on borrowing.

Between August 2015 and August 2016, China sold more than $570 billion in its stockpile of foreign currency to slow the yuan's deprecation, according to Treasury estimates

But despite the intervention, the yuan last year lost roughly 7 percent of its value relative the dollar, to the lowest level in eight years.

Most analysts say the yuan's slide is less a result of China's efforts to weaken it than it is to strong gains by the dollar, which has risen value against most major currencies over the last year.

That strength owes much to the recent policy shift by the U.S. Federal Reserve to begin raising interest rates after nearly a decade of flooding the financial system with cheap money.

As central banks in Europe and Japan maintain a policy of negative interest rates, higher U.S. rates — while still historically low — have attracted a flood of investment to dollar-denominated securities. That has the effect of boosting the currency's value.

China's central bankers are struggling with the opposite problem. A weak yuan has sparked a massive capital flight, some $700 billion worth of capital fled the country in 2015, according to the Institute of International Finance.

Beginning Jan. 1, China imposed tighter oversight of foreign currency purchases and tougher penalties for illegal money outflows.

The annual purchase of foreign currencies will remain capped at $50,000. Individual Chinese investors who want to buy foreign currencies at banks will have to fill out an application and explain the purpose of the transaction.

Article Link To CNBC:

Why Medicare Isn’t Actually Going Bankrupt

By Betsy McCaughey
The New York Post
January 4, 2017

As the new Congress convenes, budget cutters are eyeing Medicare, citing forecasts the program for seniors is running out of money. But federal bean counters have erroneously predicted Medicare’s bankruptcy for decades. One reason: They don’t consider medical breakthroughs.

Another problem is medical ethicists like Dr. Ezekiel Emanuel, who insist the elderly are a burden and that resources would be better spent on the young.

The facts prove otherwise. New medical findings give plenty of reason for optimism about the cost of caring for the elderly. According to data published in the journal JAMA Internal Medicine, Medicare spending on end-of-life care is dropping rapidly, down from 19 percent to 13 percent of the Medicare budget since 2000. Living to a ripe old age shouldn’t be treated like it’s a problem. It’s a bargain. Someone who lives to 97 consumes only about half as much end-of-life care as someone who dies at 68.

Surprised? Myth has it that the older people get, the sicker they are and the more costly their care becomes. But in truth, disability and chronic illness are declining among the elderly.

Dementia, an especially costly condition for seniors, is down a staggering 24 percent over the last 12 years.

Octogenarians, and even centenarians, are staying active instead of languishing crippled in wheelchairs. How?

Medical advances such as carotid artery stenting and thrombolysis prevent stroke damage, something many seniors fear worse than death.

Scientists call this overall improvement in aging “compression of morbidity.” The elderly live longer, stay healthier and have shorter illnesses at the end of life.

All the more reason for seniors to resist making politically correct end-of-life medical plans or advance directives that forgo medical interventions, long before they’re actually facing a terminal illness. They shouldn’t rule out the use of tools like respirators and feeding tubes that could keep them going during a bout of flu or an accident, allowing them to recover and resume active lives.

Patients mistakenly assume ventilators and feeding tubes are permanent. But most patients recover after these interventions. Few ever remember being on a ventilator after it’s removed because they’re sedated while on it.

Why would we emulate Zeke Emanuel, age 59, who swears that at 75, he will forego all medical care and let death come quickly? “Our older years are not of high quality,” he insists. He’ll skip them. In The Atlantic magazine, he dismissed compression of morbidity as “quintessentially American” wishful thinking, and mocked seniors for trying to “cheat death.”

Sorry, Doc. It’s not a pipe dream. Science proves old age is getting better. It’s worth living.

Like Emanuel, the federal government ignores this fact and writes off seniors. Take cancer screenings. Currently the US Preventive Services Task Force recommends against routine colon-cancer screenings after age 75. Even though patients over 75 have the highest risk.

The Task Force also recommends routine mammograms only until age 74. But Dr. Judith Malmgren of the University of Washington explains, “a 75-year-old woman today has a 13-year life expectancy” and should get screened as well.

The Task Force’s guidelines alarmingly resemble those of Britain, where patients over 75 are routinely denied knee replacements, mastectomies and other surgeries. It’s a slippery slope.

Too often, Congress treats Medicare as a piggy bank — raiding it when money is needed elsewhere. In 2010, Democrats in Congress paid for over half of ObamaCare’s spending by cutting Medicare. This year, Republican lawmakers eager to control federal health spending should avoid that error and instead focus on fixing Medicaid, the money pit program for the poor, where spending per capita is growing twice as fast as for Medicare.

Medicaid spending now tops $8,000 per recipient. That’s thousands more than is spent on people in private plans. And for all that money, studies show Medicaid isn’t improving patients’ health.

By contrast, Medicare is a success story. It has transformed aging, enabling older Americans to lead longer, more independent lives than our grandparents did. The average man turning 65 today will live five years longer than in 1970. Not just more years. Quality years. What a gift.

Article Link To The New York Post:

The 401(k) Problem We Refuse To Solve

By Megan McArdle
The Bloomberg View
January 4, 2016

Was the 401(k) a tragic mistake?

When you use one of those online calculators to estimate your expected income in retirement, it can sure seem so. Investment returns have proven variable, and individuals are often prone to making idiotic mistakes (like selling everything when the market crashes, which is literally the worst possible time to do so). And that’s only for people who have a 401(k); many people decline to participate in a plan, even when their employer offers matching grants. And according to the Wall Street Journal, the early boosters are turning sour on the whole idea.

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” former American Society of Pension Actuaries head Gerald Facciani told the Journal. “It was oversold.”

This is true. On the other hand, so was Social Security oversold. As was that good ol' defined benefit pension, so beloved of editorial writers, which was available to only a minority of workers when the 401(k) sprang into being. Nor were those pensions necessarily the generous perpetual incomes of popular imagining; autoworkers and public-sector employees got a great deal, but most people were not working for either the government or General Motors. They got smaller pensions -- sometimes much smaller, if their companies failed and dumped the pensions onto the government’s pension insurer.

There’s a perpetual pundit debate over the best way to provide for retirement: defined benefit plans (pensions), defined contribution plans (401(k)s, IRAs and the like) or pay-as-you-go social insurance schemes (Social Security). Most retirement experts I’ve talked to prefer a mix of these, a “three-legged stool.” But as I’ve written before, this is a bit like arguing whether the Titanic would have survived the iceberg if only its hull had been painted green. All three types of retirement savings have different costs and benefits. But these costs and benefits are not the primary reason that people in Western countries have to worry about an impoverished old age.

The funny thing is that, for all the people arguing that some dire problem in one of these three retirement systems urgently requires that we switch to another kind at once, the major problem with all three is exactly the same. It’s even a problem that’s easy to state and easy to fix -- no need for extensive blue-ribbon commissions or elaborate white papers. Here’s the solution: Pick whichever system you prefer; it really doesn’t matter. Now slap a 10 to 15 percent surcharge on a worker's wage income, and divert that money into the system for the worker’s future use. Problem basically solved, because in all three cases, the only flaw that actually matters is that they’re badly underfunded.

If you expect to spend 40 years of your life working, and then another 20 or 30 years living off the money you made during that time, then you need to save a large portion of your salary. Imagine yourself storing up food for the last 30 years of your life from the harvests made during the first 40. You might hope that when you're older, and no longer toiling in the fields, you won’t need to eat so much. Nonetheless, you’d understand that you would need to put aside a considerable portion of your harvest -- something close to what you're eating each day -- to ensure that you don’t starve to death in your old age.

Somehow, we imagine that modern society can make the math different for all the other stuff we consume, from cars to televisions to little paper umbrellas to stick in the cocktails at our retirement parties. And to be fair, to some extent, it has. If productivity is growing quickly, then it is easier to maintain our pre-retirement lifestyles with a smaller pool of savings, because that savings will buy more.

Alternatively, we can have a lot of kids. No matter how you manage your retirement system, you are ultimately expecting to depend on the labor of people younger than you. Whether that labor comes to you in the form of a dividend check or a government benefit or a saintly daughter-in-law building you a new annex in the backyard, you are still expecting someone else younger than you to make stuff, then give it to you without expecting more than gratitude in return. The more workers there are relative to retirees, the smaller the fraction of their income each worker has to give up to support each retiree, and the easier it will be to get them to do so.

Unfortunately, productivity isn’t growing rapidly, and we didn’t have a lot of kids. That leaves plowing a great deal of money into savings and investment, in the hopes that productivity will start to grow again. There is no substitute, no neat transformation we can enact to make that fundamental problem go away.

All the pundits and experts and not a few politicians have been telling us the exact same thing for decades: The retirement system doesn’t have enough money in it. Yet somehow, we are no closer to the obvious solution of putting more money in it. Arguably, in fact, we’re further away, because these endless arguments about the form that our savings should take provide us an excuse to put off doing the saving.

So why do we spend so much time complaining about some side problem with one of the systems, instead of the major problem with all three? Because none of the experts know how to get people to actually do this: to save 15 to 20 percent of their income, or sit still for a law that would make them. Nor has any clever technocrat come up with a way to sort of slip this by folks without their really noticing.

The 401(k) was not the miracle cure for our retirement problems that was promised by some of its more zealous advocates. But it wasn’t a mistake, either, or at least not the important one. The important mistake was deciding that we could spend our first 25 years in school, and our last 25 years in retirement, without cutting our consumption in between. And, at least to date, that’s one mistake we don’t seem to be able to learn from.

Article Link To The Bloomberg View:

Mnuchin’s Bank Broke Foreclosure Rules, Leaked AG’s Memo Says

Trump Treasury pick ran OneWest Bank during California probe; Memo leaked to the Intercept urged suit that was never filed.

By Zachary Mider
January 4, 2017

A bank run by Steven Mnuchin, President-Elect Donald Trump’s pick to be Treasury secretary, may have engaged in “widespread misconduct” while foreclosing on homeowners, according to a leaked 2013 memo written by lawyers in the California attorney general’s office.

The memo urged top officials in then-Attorney General Kamala Harris’s office to sue OneWest Bank over the allegations, which included backdating mortgage documents to speed up foreclosures and manipulating the results of home auctions. Harris didn’t pursue the case, according to the Intercept, which published the memo on Tuesday. The memo doesn’t say Mnuchin took part in or even knew about alleged misconduct.

“The attorney general’s office made no finding of any violation and took no action against OneWest,” Tara Bradshaw, a spokeswoman for Mnuchin, said in the Intercept. She said that state attorneys general don’t have jurisdiction to investigate federally chartered banks like OneWest, according to the website.

The Senate is vetting Mnuchin and Trump’s other cabinet picks ahead of confirmation hearings. A former Goldman Sachs Group Inc. partner and hedge-fund manager and Trump’s chief fundraiser during the presidential campaign, Mnuchin hasn’t previously worked in government. Trump, a Republican, takes office on Jan. 20.

Harris, a Democrat, was sworn in as a U.S. senator Tuesday. The attorney general’s office referred questions to Harris’s Senate office, which didn’t immediately respond to inquiries. Bradshaw also didn’t immediately respond to a request for comment.

In 2009, Mnuchin led a group of investors who bought a collapsed bank in Pasadena, California, and renamed it OneWest. They sold the bank in 2015, an investment that may have generated about $380 million in proceeds for Mnuchin alone, according to Bloomberg calculations.

During his tenure there, OneWest foreclosed on tens of thousands of homeowners. In many of these cases, OneWest wasn’t the owner of the underlying mortgage, but acted as a servicer. OneWest has defended its foreclosure record in the past, pointing to reviews by the Treasury Department and the Office of the Comptroller of the Currency that showed few errors.

Lawyers in the attorney general’s consumer-law unit came to a different conclusion. One review of loan documents filed in 2009, and subpoenaed from a third-party contractor, found 909 out of 913 documents had been backdated, the memo states. The authors speculate that the backdating may have helped “paper over” mistakes that could delay foreclosures.

The investigation also found instances in which OneWest submitted “credit bids” during foreclosure auctions when it wasn’t entitled to do so under the law. That practice may have frozen out other potential offers, including from the homeowner, the memo states.

The attorney general’s office determined that it didn’t have the jurisdictional authority to subpoena OneWest, the memo states. When it tried to subpoena third-party contractors, OneWest ordered them not to comply, according to the memo.

Article Link To Bloomberg:

Wall Street Lawyer Jay Clayton Emerges As Trump’s Top SEC Choice

By Svea Herbst-Bayliss and Steve Holland
January 4, 2017

Wall Street lawyer Jay Clayton, who has worked on high-profile initial public offerings such as Alibaba Group, is a leading candidate to head the U.S. Securities and Exchange Commission in the Trump administration, two sources familiar with the matter said on Tuesday.

Clayton is a partner at Sullivan & Cromwell who specializes in public and private mergers and offerings, an area that requires expertise on complex securities regulations and corporate governance.

Clayton was not available to comment.

He met with President-elect Donald Trump on Dec. 22 and appears to have overtaken a former U.S. Attorney, Debra Wong Yang, whose name had been floated as a top candidate in early December.

Yang declined to comment.

Clayton's name surfaced relatively recently and he is one of a handful of other top contenders. Besides Yang, other names mentioned include former SEC commissioner Paul Atkins, lawyer Ralph Ferrara, and at least one candidate who used to work at a prominent Wall Street hedge fund, but whose name could not be learned.

Activist investor Carl Icahn, who has been tapped by Republican Trump to play a bigger role in his administration, has been interviewing many of the of the potential SEC candidates.

During the height of the 2008 financial crisis, Clayton worked on major deals involving big banks, including Barclays Capital's acquisition of Lehman Brothers' assets, the sale of Bear Stearns to JP Morgan Chase, and the U.S. Treasury Department's capital investment in Goldman Sachs, according to his law firm's web site.

The position of SEC chair will be very important to Wall Street investors and executives at Fortune 500 companies at a time when Trump has promised to roll back regulation in a variety of areas.

Current SEC Chair Mary Jo White is slated to depart at the end of the Obama administration. Trump is to be sworn in as president on Jan. 20.

Under White, a former federal prosecutor, the SEC's focus on enforcement increased. While some of the cases have involved big firms, the SEC has also sought to crack down on relatively minor violations, in the hopes it will deter bigger problems down the road.

Some investors have said they would like to see the chair be an expert not only in enforcement matters, but have a greater understanding of markets and trading issues as U.S. firms face greater competition for global capital.

Article Link To Reuters:

Ford Ditches Mexico Plan — And Trump Wins Again

By Post Editorial Board
The New York Post
January 4, 2017

President-elect Donald Trump got a fine start to the New Year, as Ford Motor Co. on Tuesday scrapped its plans to build a $1.5 billion plant in Mexico and announced it will instead invest $700 million in a Michigan plant — creating 700 new jobs.

This, on a day when a Trump tweet also seemed to kill the House GOP’s ill-advised drive to weaken an independent ethics office.

And he’s still weeks from actually taking the oath of office.

On the campaign trail, Trump regularly railed against Ford’s Mexico expansion. Yet as recently as last month, Ford CEO Mark Fields was insisting the plan would go ahead. What changed?

Fields told CNN the decision is a “vote of confidence in the [US] economy,” pointedly crediting the president-elect’s “pro-growth” policies while insisting Ford “didn’t cut a deal with Trump. We did it for business.”

That makes it a cleaner win for Trump than last month’s jobs-saving Carrier deal — which, after all, did involve serious subsidies (i.e., legal bribes) to the company from Veep-elect Mike Pence’s Indiana government.

Trump’s triumphant tweet on the Ford move has the right idea: “Instead of driving jobs and wealth away, America will become the world’s great magnet for innovation and job creation.”

But getting there hinges on the new president getting big things done — including corporate tax reform and moves to unleash the US energy sector, as well as a sustained drive to junk unwise Obama-era regulations.

It’s going to take massive change to launch the job-creation boom that America needs.

Article Link To The New York Post:

Is The Stock Market Overpriced?

By William Droms
January 4, 2016

Now that we all (or most of us, anyway) have settled in with the election results, it is pretty fascinating to look back at the market action during the fourth quarter of the year: from Election Day on Nov. 8 through the market close on Nov. 30, the Dow Jones Industrial Average DJIA, +0.60% rose 790 points to 19,123 (+4.3%) and the Standard and Poor's 500 Index SPX, +0.85% climbed 68 points to 2,199 (+3.2%).

Since then we have seen a succession of new highs on both indexes, vaguely reminiscent of the tech bubble of the late nineties when one prescient observer noted that the market discounts the future, but at that time, appeared to be discounting the hereafter as well. Except, maybe it really is different this time . . . and maybe not.

A reasonable take on the U.S. equity market is that the market is definitely pricey, but perhaps for good reason. The very long run average of the S&P 500 Price to Earnings (PE) ratio (since 1900) is approximately 15.8, and the ratio since 1946 (the post-World War II period) is 17.3, so let's call a "normal" PE ratio about 16.5. This is the normal ratio based on trailing twelve month's (TTM) earnings, not the usually lower ratio based on an estimate of "forward" or forecasted future 12 month's earnings. Given the difficulties of forecasting future earnings, and ignoring the illusory precision of calculations based on past earnings "as reported" in corporate annual reports, let's stick to the facts of actual reported earnings for the previous 12 months. By this measure, the current (as of 12/29/16) TTM EPS of the S&P 500 stands at 25.89, which we can fairly call 26. This puts the current PE ratio nearly 60% higher than average, which is perhaps about double the range of "pricey."

Readers of the financial press may now ask: "Well, what about the Shiller PE ratio?" The Shiller PE, named after Nobel Prize-winning economist Robert Shiller of "Irrational Exuberance" fame, which is often abbreviated as "PE10," bases it calculation of PE ratios based on the ratio of the current level of the S&P 500 to the trailing 10-year average inflation-adjusted earnings of the companies comprising the index. The very long-run average (since 1871) of the Shiller PE is 16.7, very close to our estimate of a normal TTM PE ratio. The post-World War II Shiller PE average is 18.7, a good bit higher than the TTM ratio and the very long run Shiller ratio. However, the current level of the Shiller PE at 26.8 is about 60% higher than the long-run average, and 53% higher than the post-World War II average. Surely this observation should give one pause — except, the Shiller PE has been above "average" for most of the last 25 years. In fact, it has been below average only once since 1992 (in 2009 the year of the credit crisis crash).

So now we pause to consider the impact of very low interest rates on stock valuations and the further impact of inevitably rising interest rates next year on stock valuations. A seemingly benign idea called the "Fed Model" has attracted some controversy over the years as to the validity of the model (for a concise academic discussion, one may read an NBER working paper from 2009 entitled "Inflation and the Stock Market: Understanding the 'Fed Model'"). A brief intuitive explanation of the model, which has never in fact been endorsed by the Fed but has been referenced in various Fed pronouncements, simply states that the reciprocal of the PE of the stock market (the E/P or earnings yield) can be usefully compared to the yield to maturity of the 10-year government bond. The "theory" behind this, if it is in fact a theory, is that if the 10-year bond yield is say 2.5% (about where it is now), then investors should be willing to pay a price for stock earnings that also yields 2.5%. Thus, in the current market, a "fair" PE to pay for stocks would be about 40 (1/.025), i.e., a PE multiple of 40 results in an earnings yield (EP ratio) of .025 or 2.5%.

So, based on the Fed model, the current extremely low interest rate environment flows through to higher multiples for stock earnings. This approach, to me at least, has some intuitive appeal: it essentially says that if investors are willing to pay 40 times a stream of guaranteed, but fixed, interest payments to own a Treasury bond, they should also be willing to pay 40 times a stream of uncertain, but growing, earnings to own a diversified portfolio of common stocks (i.e., the S&P 500). There also is some empirical support for this position as charts of the 10-year Treasury yield and the S&P 500 earnings yield often follow each other quite closely.

Of course, interest rates are nearly certain to go up over the next few years and increased rates should flow through to the Fed Model PE ratio. If the 10-year rate goes to 4.0%, this implies a fair value ratio of 25 (1/.04), which is about where the current TTM PE resides. A PE of 25 thus may be seen as definitely pricey compared to historical averages, but perhaps justified by the current era of very low interest rates. One thing we do know, however, is that the current level of PE ratios, whether TTM, forward or Shiller, has been shown to be a poor guide to market timing. This knowledge brings us back to the "old time religion" — buying and holding a diversified portfolio commensurate with your personal risk tolerance is the best defense against uncertain markets.

Article Link To MarketWatch:

Fed Minutes Might Disclose Some Clues About Fed Officials' Views Of Trump

By Patti Domm
January 4, 2016

Stocks could benefit Wednesday from investors adding new positions for the new year, as markets await the Fed's minutes for any clues on what the central bank is looking for from Donald Trump this year.

The minutes from the Fed's December meeting will be released at 2 p.m. ET. At that meeting, the Fed raised rates for the second time in 10 years and provided an outlook for three rate hikes this year. Not much is expected, but some are holding out hope that the Fed will have something to say about its view of the incoming Trump administration's plans for stimulus and tax cuts.

"Janet Yellen said some members built fiscal stimulus into their forecasts. She didn't say how many there were and what it means," said Tom Simons, money market economist at Jefferies. The Fed, and other central banks, have been looking for help from lawmakers to spark the economy with stimulus, rather than just monetary policy.

"How do they look at 2017? How do they view the risks given the new administration and what does that mean for policy response? That was the biggest question I had coming out of the last meeting," Simons said.

Investors may also be reading the tea leaves for what the Fed says on inflation, after Tuesday's ISM manufacturing survey for December was stronger than expected and showed a surprisingly large jump in prices paid. ISM rose to 54.7 in December, its highest level since 2014, but prices rose sharply to 65.5, the highest since June 2011.

Simons said the 11 point jump in prices signals inflation is on the nearby horizon. The fact that manufacturers normally raise prices in the first quarter or second quarter made the number even more surprising, and an even stronger signal that inflation could be starting to rise, he said.

"…Prices are starting to go up. That's had an impact going up the chain," he said. "I think that was the message we go from that today."

Simons and others said the report showed solid signs of recovery in manufacturing. "This plays into the global 'reflation' theme with investors pointing to rising input prices in China and elsewhere as signaling a potential return to higher inflation rates. We think average hourly earnings — released Friday — may also fit this narrative as we are forecasting above consensus 0.4 percent MoM [month-over-month] growth," noted Citigroup economists.

Besides the Fed minutes, there will be December vehicle sales in the morning Wednesday. The annualized selling rate is expected to be around a strong 17.5 million. There are also mortgage applications at 7 a.m. EDT.

Stocks on Tuesday closed higher, with the Dow up 118 at 19,881, and the S&P 500 rose 19 to 2,257. Art Cashin, director of floor operations at UBS said the market gained at the end of the day, in part on large orders to buy at the close.

Stocks slipped back from highs earlier after Ford Motor said it changed plans to build a plant in Mexico. The company said it was a business decision, as the small cars it was going to build are out of favor. Instead it is reinvesting in a Michigan plant. Ford stock closed up more than 3.7 percent, but Cashin said it took the wind out of transports that rely on Mexican trade, like Kansas City Southern.

U.S. oil futures, which had been higher earlier, sold off and ended down 2.6 percent at $52.33 on a stronger dollar. Cashin said the stock market was also softer earlier in the day due to the move in crude.

"It was mostly oil, but some of it was the Ford Motor Co acquiescing, and that had people worried about global trade. The transports went negative as soon as that came out. But then you got bailed out at the end because there was big market on close buyers," he said.

Cashin said the market now is watching for signs of what Trump can get done on taxes and stimulus, because companies will hold off on plans until there are more signs that he will have success getting his plans adopted.

Greg Valliere, chief global strategist at Horizon Investments, said he believes the changes will go through, particularly tax reform, but he said the electorate is impatient and wants to see immediate action.

"The 'sugar high' stock market rally after the election was entirely warranted because there's a good prospect of stronger GDP growth in the next two years — stimulated by tax reform and reduced regulations. But the legislative process is often glacial: This will not be a 1,000-mile sprint, it will be one step at a time, starting at noon today," wrote Valliere in a note.

Article Link To CNBC:

Tuesday, January 3, Night Wall Street Roundup: Wall St. Extends Rally In Sharp New Year's Rise

By Noel Randewich
January 3, 2016

Wall Street rose sharply on Tuesday as a post-election rally extended into the new year, helped by gains in Verizon Communications and technology companies Alphabet and Facebook.

U.S. stocks have surged over the past two months on expectations that President-elect Donald Trump will stimulate the economy with tax cuts and infrastructure spending and slash regulations in the financial industry.

"The market is picking up where it left off since the Trump presidency," said Thomas Wilson, senior investment manager at Brinker Capital. "What you are seeing is the market moving up in anticipation of fiscal expansion."

However, with the Dow Jones Industrial Average trading near the never-before-reached 20,000 mark, some investors warned that additional strong gains would be unlikely in the short term. They want to see evidence that Trump's campaign-trail promises will be approved by Republican lawmakers concerned about widening the federal budget deficit.

"The president-elect can't just wave a magic wand," said Warren West, principal at Greentree Brokerage Services in Philadelphia. "He has to deal with Congress, and Congress hasn't proved to be able to agree with itself."

The Dow came within a hair's breadth of the historic 20,000 milestone in December but it has since fallen back. The average rose to as much as 19,938.53 earlier in the session on Tuesday, helped by Walt Disney (DIS.N).

Ford Motor (F.N) jumped 3.79 percent. The carmaker said it would cancel a planned $1.6-billion factory in Mexico and invest $700 million at a Michigan factory, after Trump had harshly criticized the Mexico investment plan.

Oil prices hit an 18-month high before turning negative and falling more than 2 percent. The S&P energy index .SPNY rose 1.15 percent, with Exxon Mobil up 0.70 percent.

The U.S. dollar touched a 14-year high after data showed U.S. factory activity accelerated to a two-year high in December.

The Dow Jones Industrial Average .DJI climbed 119.16 points, or 0.6 percent, to end at 19,881.76 points and the S&P 500 .SPX gained 0.85 percent to 2,257.83.

The Nasdaq Composite .IXIC added 0.85 percent to 5,429.08.

Verizon (VZ.N) gave the biggest boost to the S&P 500, rising 2.25 percent after Citigroup upgraded the stock to "buy."

Also boosting the S&P 500, Google parent-company Alphabet (GOOGL.O) rose 1.96 percent and Facebook (FB.O) added 1.57 percent.

The S&P health index .SPXHC rose 1.40 percent, with Merck & Co (MRK.N) up 2.17 percent and Gilead Sciences (GILD.O) rising 3.56 percent.

The S&P utilities index .SPLRCU dipped 0.30 percent, the only index down among 11 S&P sectors.

Marathon Petroleum (MPC.N) rose 5.12 percent after the company said it would explore a spinoff of its retail business, caving to pressure from activist investor Elliott Management.

Advancing issues outnumbered declining ones on the NYSE by a 3.24-to-1 ratio; on Nasdaq, a 1.79-to-1 ratio favored advancers.

The S&P 500 posted 17 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 121 new highs and 26 new lows.

Article Link To Reuters:

Oil Turns Negative On Strong Dollar After Hitting 18-Month Highs

By Scott DiSavino
January 3, 2016

Oil prices turned negative after earlier hitting 18-month highs on Tuesday, the first trading day of 2017, as the U.S. dollar rallied to its highest since 2002.

Traders said crude prices were buoyed earlier in the day by hopes that a deal between OPEC and other big oil exporters to cut production, which kicked in on Sunday, will drain a global supply glut.

Brent futures were down 95 cents, or 1.7 percent, at $55.87 a barrel. U.S. West Texas Intermediate (WTI) crude fell 95 cents, or 1.8 percent, to $52.77 per barrel.

Earlier in the session, both oil contracts hit their highest levels since July 2015 with Brent reaching $58.37 and U.S. $55.24, before paring gains on the strong U.S. dollar.

"The dollar strength is certainly weighing on oil prices," said Andrew Lipow, president of energy consulting firm Lipow Oil Associates in Houston, noting U.S. stock markets also pared their gains from earlier in the day with the dollar rally.

The dollar hit a 14-year high against a basket of other currencies after data showed U.S. manufacturing activity grew more than expected in November.

A stronger greenback pressures demand for dollar-denominated crude, making barrels more expensive for users of other currencies.

Oil futures exchanges were closed on Monday for New Year public holidays.

"WTI was off to a strong start to this New Year with some support developing off of reports that Kuwait and Oman are already in progress of enacting agreed upon cuts," Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates, said in a note.

Jan. 1 marked the official start of a deal agreed by the Organization of the Petroleum Exporting Countries and other exporters such as Russia to reduce output by almost 1.8 million barrels per day (bpd).

Non-OPEC Middle Eastern oil producer Oman told customers last week that it would cut its crude oil term allocation volumes by 5 percent in March.

Elsewhere, Libya, one of two OPEC countries exempt from the output cuts, has increased its production to 685,000 bpd, from around 600,000 bpd in December, an official at the National Oil Corporation said on Sunday.

Non-OPEC Russia's oil production in December remained unchanged at 11.21 million bpd, near a 30-year high, but it was preparing to cut output by 300,000 bpd in the first half of 2017 in its contribution to the accord.

Article Link To Reuters:

Oil Business Seen In Strong Position As Trump Tackles Tax Reform

By David Morgan
January 3, 2017

Big Oil could be in a unique position to protect its interests against a Republican proposal to tax imports, given that President-elect Donald Trump's cabinet is studded with oil champions sensitive to the risk of higher gasoline prices.

Trump's emerging leadership includes Exxon Mobil Corp Chief Executive Officer Rex Tillerson as secretary of state, former Texas Governor Rick Perry as energy secretary and Oklahoma Attorney General Scott Pruitt as Environmental Protection Agency administrator.

Trump himself has made no secret of his support for the energy sector.

And in Congress, both Republicans and Democrats have close industry ties, including House tax panel chairman Kevin Brady, a Texas Republican whose district takes in the northern Houston suburbs.

House Republicans want to adopt a sweeping tax reform that would sharply reduce tax rates for corporations and end the taxation of U.S. corporate overseas profits.

But a provision known as border adjustability is stirring up controversy. Though intended to boost U.S. manufacturing by exempting export revenues from tax, the provision worries some industries because it would also tax imports.

Because U.S. oil refiners import about half the crude oil they use to make gasoline, diesel and other products, analysts say the change could lead to higher gasoline prices and potentially undermine economic growth.

Integrated oil companies such as Exxon, Chevron Corp, BP Plc, Royal Dutch Shell Plc and ConocoPhillips could also be hit, depending on whether they are net importers.

But the industry's allies would likely move to soften any rough edges, analysts say.

"I don't see this mix of leadership figures in the House, Senate and the White House, doing something that has the effect of raising gasoline prices," said Peter Cohn, an energy analyst with Height Securities, a Washington-based investment firm.

The danger is that a move to protect the oil refiners could open the door to assistance for other industries, including retailers and automakers, which would also face higher costs if no longer able to deduct the cost of imports from their taxable income.

Such a knock-on effect could prevent border adjustability from raising an expected $1 trillion in revenues to help pay for lower tax rates over the next decade.

"We hope that raising these concerns early in the process will allow members of Congress to consider the issues carefully," Chet Thompson, president of the American Fuel and Petrochemical Manufacturers trade group, said in a statement.

Brady said earlier this month that his committee was sensitive to the impact on specific businesses and "listening very closely to how we can make sure we smooth that out."

Moreover, some economists dismiss industry worries about higher import costs, saying the dollar's value would rise in response to such sweeping tax changes and ultimately reduce the cost of imports. Currency markets would adjust to higher oil prices by lowering the dollar value of crude, they predict.

"This argument by the oil industry is, frankly, all wrong," said Douglas Holtz-Eakin, former director of the nonpartisan Congressional Budget Office, who now heads the American Action Forum think tank.

"Refiners are going to be basically held harmless. They'll have a lower dollar price of oil. Net cost is the same. And they go about their business. I'm unsympathetic,” he added.

Height Securities' Cohn said Trump and his advisers could look for ways to soften any blow to refiners and their customers: "Trump doesn't want to have refineries closing on his watch."

Oil already benefits from several tax code provisions in place for decades that would be eliminated under the House Republican plan. But they stand to gain more than they will lose.

For instance, an existing tax deduction for domestic production lets oil producers shave down their corporate tax rate to 32 percent from the top headline rate of 35 percent. Under the congressional Republicans' plan, the corporate rate would be cut to 20 percent; under Trump's plan, to 15 percent.

Similarly, companies that now write off intangible drilling costs or get a tax allowance for asset depletion would be able to immediately expense capital investments.

Then there is a tax credit oil companies claim for fees from foreign countries. Congressional Republicans would eliminate foreign taxes altogether, while Trump would maintain taxation at a substantially lower rate.

Article Link To Reuters:

Re-Print Of Hitler's 'Mein Kampf' Takes Germany By Storm

By Paul Carrel
January 3, 2017

Sales of Adolf Hitler's "Mein Kampf" have soared since a special edition of the Nazi leader's political treatise went on sale in Germany a year ago, the German publisher has said.

The book outlines Hitler's ideology that formed the basis for Nazism and sets out his hatred of Jews, which led to the Holocaust.

The new edition is the first reprint since World War Two, released last January after a 70-year copyright on the text expired at the end of 2015. It includes explanatory sections and some 3,500 annotations, and has sold 85,000 copies to the surprise of its publishers.

"These sales figures have taken us by storm," Andreas Wirsching, who heads up the publishers, the Institute for Contemporary History (IfZ) told German news agency dpa.

"No-one could really have expected them," he added.

Hitler wrote "Mein Kampf", which translates as "My Struggle" in English, between 1924 and 1926. It was banned by the Allies at the end of World War Two.

Hitler wrote most of the first, highly autobiographical, volume while incarcerated in Landsberg prison after his failed Munich coup attempt in 1923. After his release, he wrote much of the second volume at his mountain retreat near Berchtesgaden.

A bestseller after he became chancellor in 1933, "Mein Kampf" had by 1945 sold 12 million copies and been translated into 18 languages.

Article Link To Reuters:

U.S. Manufacturing, Construction Sectors Shine As Year Ended

By Lucia Mutikani
January 3, 2017

U.S. factory activity accelerated to a two-year high in December amid a surge in new orders and rapidly rising raw material prices, indicating that some of the drag on manufacturing from prolonged dollar strength and a slump in oil prices was fading.

Other data on Tuesday showed U.S. construction spending hit a 10-1/2-year high in November, providing a boost to a fourth-quarter economic growth estimate. The reports suggested President-elect Donald Trump would inherit a strong economy, with a labor market that is near full employment, from the Obama administration.

"The economy is ending the year on a high note with even the manufacturing sector showing signs of faster growth. It appears that President (Barack) Obama will be leaving his successor with a pretty good economy," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The Institute for Supply Management (ISM) said its index of national factory activity rose 1.5 percentage points to 54.7 last month, the highest level since December 2014. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

A gauge of new orders jumped 7.2 percentage points to its highest level since November 2014. Twelve industries, including petroleum, electrical equipment, appliances and components and machinery, reported growth in new orders last month.

Export orders also rose, but order backlogs were unchanged. A measure of factory employment hit its highest since June 2015 and the production sub-index rose 4.3 percentage points.

Manufacturers reported paying more for raw materials, which suggests producer inflation could push higher in coming months. The ISM's prices index surged 11 percentage points to its highest level since 2011. It was the 10th straight month of increases in raw materials prices.

Last month, 38 percent of supply executives in the ISM survey reported paying higher prices.

"The sharp rise in the prices index plays into the global 'reflation' theme with investors pointing to rising input prices in China and elsewhere as signaling a potential return to higher inflation rates," said Andrew Hollenhorst, an economist at Citigroup in New York.

Strong Dollar A Threat

A collapse in oil prices in 2015 and a surge in the dollar has hobbled manufacturing. Much of the impact has been through weak business spending on equipment, which has contracted for four straight quarters.

But with oil prices rising and touching 18-month highs on Tuesday, manufacturing is perking up. Gas and oil well drilling has risen over the last several months.

Renewed dollar strength following Trump's November election victory could, however, limit gains in factory activity. Trump has pledged tax cuts and massive infrastructure spending, an expansionary fiscal policy agenda that could fan inflation and spur a faster pace of interest rate increases by the Federal Reserve.

The dollar hit a fresh 14-year high against a basket of currencies on Tuesday's data, while prices for U.S. government debt fell. U.S. stocks traded higher.

In a separate report the Commerce Department said construction spending increased 0.9 percent to $1.18 trillion in November, the highest level since April 2006. It was boosted by gains in both private and public sector investment.

The solid increase in construction spending prompted the Atlanta Fed to raise its fourth-quarter GDP estimate by four-tenths of a percentage point to a 2.9 percent annual rate. The economy grew at a 3.4 percent pace in the third quarter.

Spending on private construction projects jumped 1.0 percent in November to the highest since July 2006 as single-family home building, as well as home renovations, increased.

Investment in private nonresidential structures, which include factories, hospitals and roads, rose 0.9 percent after tumbling 1.5 percent the prior month.

"The outlook for nonresidential investment spending lies in the as-yet-unknown infrastructure plans of the new administration," said John Ryding, chief economist at RDQ Economics in New York.

"However, in nominal dollar terms, nonresidential construction spending is within one percent of the October 2008 high and this may be a further indication of the limited degree of slack in the construction sector that could be deployed on infrastructure projects."Public construction spending rose 0.8 percent in November to the highest level since March. It was the fourth straight month of increases.

Article Link To Reuters:

How Dangerous Is The Islamic State To Israel?

The more Islamic State is suffering military setbacks in Syria and Iraq, the more probable terrorist attacks against Israel become.

The National Interest
January 3, 2017

At the end of October 2015, Islamic State uploaded its first video in Hebrew and threatened that “not a single Jew will remain in Jerusalem.” Two months later, an audio tape of Abu Bakr al-Baghdadi, the leader of Islamic States, surfaced. He threatened Israel directly for the first time: “Palestine will not be your land or your home…It will be a graveyard for you.” A few weeks later, in January 2016, Israel’s president Reuven Rivlin stated: “The Islamic State is already here [in Israel].”

The first firefight between the IDF and an Islamic State-affiliated group in the Golan Heights, and a foiled terrorist attack on Israel’s national football team in Albania, both at the end of November 2016, have evoked the question: how dangerous is Islamic State to Israel?

In order to answer this question, one should assess three theaters: (1) Israel’s border areas where Islamic State-affiliated groups are active; (2) the Palestinian territories; (3) Israel.

The Border Areas: Sinai And The Golan Heights

Cairo is confronted with a serious insurgency in the Sinai Peninsula. Wilayat Sinai, the Sinai Province of Islamic State, concentrates its attacks on Egypt’s security forces in the Sinai and has caused hundreds of casualties. However, since summer 2016, Egypt’s counterinsurgency campaign seems to have gathered momentum; the attacks of Wilayat Sinai have become less effective and complex. Although the border is fairly quiet from Israel’s perspective, the IDF believes that Wilayat Sinai will eventually attack Israel as well. Thus, the IDF has already intensified border controls.

The Syrian civil war confronts Israel with a highly volatile security situation in the northern theater. There were several incidents along the Syrian-Israeli border in the last years, ranging from (accidental) mortar and artillery fire to targeted attacks on Israeli military patrols. Israel, however, has kept its deterrence up with occasional aerial attacks in Syria. Nevertheless, the overall security situation in the Golan Heights is rather quiet.

At the end of November 2016, however, a reconnaissance unit of Israel’s Golani Brigade was attacked by the Khaled Ibn al-Walid Army (an Islamic State-affiliated group formerly known as the Yarmuk Martyr Brigades.) This was the first direct military encounter between Israel and Islamic State. Only time will tell if this incident turns out as an isolated case or turning point in the Golan Heights.

Another scenario Israel should closely monitor is a possible destabilization of Jordan by Islamic State. Keep in mind that Israel shares its longest border with the Hashemite kingdom. Frustrated members of the Muslim Brotherhood, Salafi Palestinians and economically-neglected Bedouin tribes might present a base for recruitment. However, the Jordanian security agencies have proved capable and loyal to the regime.

The Palestinian Territories

So far, there have been very few indications of a direct Islamic State presence in the West Bank. Besides the effective work of Israeli security agencies (sometimes in close cooperation with Palestinian counterparts), the support for Islamic State in the West Bank seems to be limited. Polls have shown that only three percent of the Palestinians consider Islamic State as “truly Islamic” (in contrast to nine percent in Gaza.) Nonetheless, Islamic State promotes its cause: in July 2015, the organization uploaded a video that featured Palestinian fighters in Syria who called on their fellow countrymen to pledge allegiance to Islamic State. At least some of the lone wolf attackers who triggered the terror wave that hit Israel between October 2015 and spring 2016 and caused the death of more than forty Israelis, had been inspired or incited by Islamic State. The deadliest terrorist attack in this regard was committed by two residents of Yatta in the southern West Bank. They opened fire in a restaurant at Tel Aviv’s Sarona Market and killed four Israelis on June 8, 2016. Israel’s Shin Bet emphasized that the attack had been inspired by Islamic State; however, the terrorists had acted alone without direct support of the organization. Thus, Islamic State is above all an inspiration for Palestinians willing to resort to violence.

The Gaza Strip, however, is a different story. Salafism is deeply rooted in parts of Gazan society. Local Salafist groups pledged allegiance to Islamic State. Al-Baghdadi, however, rejected the offer and pointed out that the groups were too weak and ineffective to be considered an Islamic State province.

The Salafist groups are trying to drag Israel into another military escalation by provoking counterattacks through rockets and IEDs along the border fence. They hope to weaken Hamas, their current main enemy. Islamic State and their local supporters consider as misguided Hamas’ core objective, the national struggle of the Palestinians, and promote the establishment and extension of the Caliphate instead. Hamas, in return, perceives the Salafists as a serious challenge to its rule in Gaza and cracks down vigorously on them from time to time.

Thus, Israel must keep a close eye on Islamic State-related activities in the Palestinian territories. However, internal developments in the Gaza Strip defy Israeli control for the most part.


The most dangerous scenario in this context derives from Arab Israelis who support Islamic State. Israel’s Shin Bet has perceived an increasing trend of ISIS-inspired attacks and has qualified this as a severe threat to Israel. The most important medium for recruiting and for spreading propaganda is the internet. Polls have shown that in 2015, around sixteen percent of the Arab Israelis approved ISIS. This seems rather troubling when compared to far less approval in other Arab States, for instance in Jordan (three percent), or in Lebanon (zero per cent). In 2015, some forty Israelis were arrested because they were suspected of supporting Islamic State (the organization had been outlawed in Israel in September 2014). In 2016, 46 Israelis were in prison because of their connection to Islamic State.

So far, Israeli security agencies have managed to neutralize most Islamic State cells at an early stage. Thus, the number of terrorist plots that crossed the line from planning into action is limited. Some Israelis were already arrested when they were just about to join Islamic State. In August 2015, for instance, the Arab Israeli Iman Khanjo was detained in Turkey and brought back to Israel. The 44-year-old doctoral student in Islamic Studies and mother of five wanted to cross the border to Syria and join Islamic State. Others, however, were more successful. A 23-year-old Israeli used a paraglider to fly from the Golan Heights to Syria in October 2015. It is estimated that fifty to one hundred Israelis are fighting in Syria/Iraq; several dozen are probably fighting with Islamic State.

The returnees, however, pose the greatest risk. Around a dozen Israelis came back after fighting and were arrested. In September 2016, a whole family was detained when they returned to Israel. The couple with three kids from the Israeli city Sakhnin had traveled to Turkey and joined Islamic State after crossing the border to Syria.

The most severe threat emerges from terrorist cells in Israel. In July 2015, six residents of the Bedouin village Hura, including four teachers, were arrested for setting up an Islamic State cell and distributing propaganda under their students. In December 2015, it was revealed that Israel’s Shin Bet had detained five Arab Israelis in Nazareth who had pledged allegiance to Islamic State. The cell was already in possession of weapons. In October 2016 six Arabs from Shufat (Jerusalem) were charged with the planning of an Islamic State-inspired terrorist attack.

Although Israel’s security agencies stopped most ISIS-related terror cells at an early stage, there is a troubling trend: young lone wolf terrorists. Individuals not affiliated with a terrorist organization, or small, independent cells conduct terrorist attacks, inspired and incited by Islamic State propaganda without direct links to its commando structure. The terrorist attacks in San Bernadino (December 2015) and Orlando (June 2016) in the United States, as well as in many other countries in the world, show that this is a global problem.


In the context of Israel’s various security risks, Islamic State currently is a substantial but not necessarily a primary threat to the Jewish state. The Islamic State-affiliated groups at Israel’s borders in Egypt and Syria present no existential threat. Even if they decide to turn on Israel, they have never been confronted with a first-rate military force like the IDF before. After all, as Amos Yadlin pointed out, Islamic State consists of a couple of thousand terrorists armed with Kalashnikovs on pick-up trucks.

The Arabs in the Palestinian Territories and particularly in Israel present a much more severe threat. Although Israel’s security forces prevented most of the terrorist attacks through ceaseless efforts, they have detected a growing identification with Islamic State.

An attack on Israel would be a tremendous propaganda victory for Islamic State. Thus, the more Islamic State is suffering military setbacks in Syria and Iraq, the more probable terrorist attacks against Israel become. The recently foiled attack on Israel’s national football team in Albania in November 2016 suggests that Israeli or Jewish institutions abroad could become possible targets as well.

Article Link To The National Interest: