With warning labels plastered these days on every conceivable surface, perhaps one more might be in order: It might be wise to attach a “Do Not Enter” sign to the keyboards of government computers.
Hitting the Enter key has caused all sorts of trouble, and not just for those on the Ashley Madison site, an online hookup venue for the supposedly attached but discreet who got outted by hackers last week. More serious was the inadvertent release of the Federal Reserve staff’s economic projections that were intended just for internal consumption. In the immortal words of former Texas Gov. Rick Perry, “Oops!”
Those Fed forecasts were supposed to be kept under computer lock and key for five years, but were put online by mistake on June 29. The lapse wasn’t noticed until last Tuesday, but with the cat out of the bag, the Fed left the numbers on its Website (more about them later).
Hillary Clinton might also wish she hadn’t hit the Enter key on at least four e-mails sent from her personal account while serving as secretary of state. They contained classified information, according to an internal government review. Two inspectors general have requested that the Justice Department open a criminal investigation into the matter. “This is how Hillary could lose the presidency,” wrote Potomac Research Group’s Greg Valliere, in a report excerpted on Friday in Barrons.com’s Best Minds column.
Undeterred by these latest revelations’ implications for her campaign to win the Democratic presidential nomination, Clinton on Friday proposed a sharp hike in capital-gains taxes on short-term profits for the highest earners, ostensibly to force greater focus on long-term investment rather than short-term gains. “It’s time to start measuring value in terms of years -- or the next decade -- not just the next quarter,” she said in a speech on Friday, at the height of earnings-reporting season.
Specifically, she proposed taxing investments held between one and two years at the top ordinary-income rate of 39.6% for couples earning more than $464,850 and single filers earning $411,500. That doesn’t include the 3.8% Medicare levy for upper-income filers.
There was no mention of the treatment of gains from commodity-futures trading, a matter with which the former First Lady has more than passing familiarity. It might be recalled that she turned an initial stake of $1,000 in cattle futures into nearly $100,000 in the late 1970s, a remarkable return for a neophyte trader making her first foray into the futures market. Presumably, Uncle Sam’s coffers would benefit significantly from similarly deft trades under the Clinton plan.
Profits on commodities are rare these days, at least from the long side of the market. The relentless slide showed no sign of abating and, if anything, seemed to gain momentum to the downside last week.
Gold grabbed most of the headlines after its steep plunge through the $1,100-an-ounce mark in early Monday trading in Asia. It ended the week down more than 4%, at $1,098.20, capping a four-week slide of nearly 10%. For those playing at home, the SPDR Gold Trust exchange-traded fund (ticker: GLD), which at its peak briefly laid claim to being the biggest ETF extant, ended the week near late-2009 levels and down 42% from a September 2011 peak.
MORE IMPORTANT FOR THE REAL ECONOMY, crude oil continued to reverse its short-lived recovery, falling back below the $50-a-barrel mark for the U.S. benchmark. For the week, crude for nearby delivery settled down 6%, at just over $48, a cumulative decline of more than 19% for the past four weeks.
The slide in commodities from crude to copper and now even corn (which had bucked the downtrend despite signs of a bumper crop) says less about inflation than global growth. From a personal perspective, the drop in oil prices has yet to trickle down to my gas station; I had let the tank run down to E, waiting for the pass-through of lower prices that is yet to arrive in many parts of the country. From Hong Kong, Barron’s Shuli Ren reports in the Asia Stocks to Watch blog at Barrons.com that rising pork costs are pushing the consumer price index higher in China, despite the drop in commodities.
As Evercore ISI points out, commodity-price weakness correlates with slower global economic growth. That is consistent with signals such as the Broad Leading Indicator of the Organization for Economic Cooperation and Development rolling over, and with it, global industrial production. But the redoubtable outfit led by Ed Hyman also notes that recessions typically were preceded by spikes in commodity prices, not declines. That would include the oil shock of 2007-08 that sent crude to a record $140, which preceded the financial crisis.
THE FEDERAL OPEN MARKET COMMITTEE gathers this week against the backdrop of weakening commodities prices, which are rattling stock markets, and positive signals from the labor market -- notably, the lowest number of weekly filings for unemployment benefits since 1973. (Just asking: If the labor-force participation rate is at a generational low, and one has to be in the labor force to file for jobless benefits, could that statistic be distorted to the downside?)
The Fed staff’s inadvertently leaked projections call for the key federal-funds policy rate to average 0.35% in the fourth quarter. So, by inference, the Fed’s key policy-rate target would have to be increased by about 25 basis points (a quarter of a percentage point), from its current range of 0% to 0.25%, before the fourth quarter to average 0.35% in the year’s final three months.
The staff was penciling in the much-anticipated liftoff for the September FOMC meeting. But that rate is still lower than those shown on the infamous “dot plot” graph of year end, and the single-point projections of the panel’s members, voting and nonvoting alike. Two members expected no increase, while five anticipated average policy rates of 0.375%, 0.625%, or 0.875%. That meant most on the FOMC had higher expectations than the Fed’s staff.
Higher anticipated U.S. short-term interest rates have been boosting the dollar, which in turn has weighed on commodity prices. The effects are especially visible in various stocks’ action. The plunge in copper prices is obvious in the slide in Freeport-McMoRan (FCX), which plummeted another 10% or so Friday and has shed two-thirds of its market value in the past year.
The poster child for what’s happening in global mining and construction is Caterpillar (CAT), down another 1% on Friday and down 27% in the past year. As Citigroup analysts observe, despite a 4% dividend yield in a yield-starved global environment, Caterpillar is likely to continue to struggle, especially because of China’s slowdown.
While the Chinese stock market has stabilized -- with the injection of $483 billion by the authorities, according to Bloomberg estimates -- Bridgewater Associates, the world’s largest hedge fund and previously a stalwart bull on China, told clients last week that it had turned cautious on the nation because of the effects of the equity market’s plunge. After that confidential note to clients was reported by The Wall Street Journal, Bridgewater backtracked and claimed its thinking hadn’t changed.
Clearly, this is a sensitive topic, but the markets’ assessment of the risks of slowing growth is unequivocal. That is especially the case in the high-yield bond market, which originally provided the funding for much of the debt-financed energy and commodity sector. Spreads between yields on junk bonds and comparable Treasuries are “flaring up again,” writes Jeffrey deGraaf, who heads technical research at Renaissance Macro Research. Meanwhile, the relative strength in materials, industrials, and rail and road transportation stocks has broken down, he adds.
United Rentals (URI), which, as its name implies, rents out equipment, in large part to the energy industry, offers a glimpse into the balance-sheet stresses being felt in the sector. According to a report by KDP Investment Advisors, which specializes in high-yield credits, while United Rentals met expectations for earnings before interest, taxes, depreciation, and amortization, its balance sheet showed that cash balances and liquidity declined as the company drew on bank-credit lines to fund the redemption of notes and stock repurchases. In addition, United Rentals announced a new, $1 billion share repurchase, which may be more propitiously timed given that the stock price is down nearly 37% this year.
Worst off is former BRIC favorite Brazil. It has to contend with falling commodity prices; weakness in China, its biggest customer; inflationary effects from its weakening currency, which may force further interest-rate hikes despite slowing growth; a worsening fiscal situation that may strip the country of its hard-won investment-grade credit rating; and a huge political scandal surround Petrobras (PBR), which may eventually topple the government.
By comparison, the U.S. should feel fortunate. Yet it is a measure of the paucity of growth opportunities that certain stocks are bid to the moon, most recently Amazon.com (AMZN) after it -- wait for this -- turned a profit in the latest quarter. The shares jumped nearly 10% on Friday after the earnings report, as analysts sharply boosted their earnings projections. Citi’s Mark May upped his fiscal-2017 number to $6.72 a share, from $1.82 previously. So, now Amazon trades at just 79 times earnings forecast for two years hence, instead of 290 times the previous estimate.
BCA Research last week asserted in a report to clients that “stocks need reflation.” The uptick in Treasury yields and the dollar are overwhelming the benefits of lower oil prices. All of which would be easier to ignore if the rest of the world were growing.