The Fed Raises Rates
Posted by Eddy Elfenbein on December 16th, 2015 at 2:00 pm

The Federal Reserve has raised interest rates by 0.25%. The vote was unanimous. Here’s the complete statement:

Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

Brief Updates
Posted by Eddy Elfenbein on December 16th, 2015 at 1:17 pm

The financial world is on pins and needles. Here are a few items I wanted to pass along.

Jefferies initiated coverage on Hormel Foods (HRL) with a Buy rating. Of course, this comes after the Spam people rallied 50% this year. The stock is close to breaking $80 per share.

Express Scripts (ESRX) said that they’ll announce their guidance for next year on Tuesday, December 22.

Oracle’s (ORCL) earnings report will be our final Buy List earnings report for this calendar year.

The futures market odds for the November 2016 meeting are exactly 50-50 of rates being 0.75% or less, or 1% or more.

Fed Day Is Here
Posted by Eddy Elfenbein on December 16th, 2015 at 12:03 pm

Today is the day. After nearly 10 years, the Federal Reserve is set to raise interest rates later today (here’s my post on the last rate hike). The announcement will come at 2 pm. Wall Street and the Fed have almost continuously overestimated the need for interest rates to rise. But this time, it’s real. According to the futures market, however, there’s still some room for doubt.

I’ll put it as easily as I can. The Fed said it won’t raise rates until X happens. X happened. So that’s why I expect rates to go up.

Here’s the effective Fed funds rates for the last seven years. It’s averaged 0.128%. That means you’ve made less than 1% combined.

Bear in mind that rates aren’t going up much. Interest rates will still be below the rate of inflation. In fact, they’ll be below inflation for quite some time. Perhaps two more years.

The government reported today that industrial production fell 0.6% last month. I think it’s accurate to say that the manufacturing sector has been in a mini-recession for the last several months.

By the way, it’s one of the biggest myths you hear that “America doesn’t make anything anymore.” That’s flatly untrue. In reality, America is a manufacturing powerhouse. The difference is that fewer people do it.

Yesterday, the stock market finally delivered back-to-back gains. This is our first two-day winning streak since the beginning of November. That’s one of the longest such cold streaks in history.

Also, after today’s closing bell, Oracle will report earnings.

Morning News: December 16, 2015
Posted by Eddy Elfenbein on December 16th, 2015 at 7:06 am

Thaw in China-Russia Relations Hasn’t Trickled Down

French Business Grinds to Halt as Services Hit by Terror Attacks

Why Very Low Interest Rates May Stick Around

Congress Reaches Fiscal Agreement That Ends U.S. Oil Export Ban

U.S. Oil Discount to Brent Near 11-Month Low as Exports Awaited

Fed’s Historic Liftoff and Everything After: Decision Day Guide

Valeant Pharmaceuticals Slashes Revenue, Earnings Guidance

What’s Behind Kohl’s 170-Hour Pre-Christmas Shopping Marathon

Global Payments to Buy Heartland Payment for $4.3 Billion

Remaking Dow and DuPont for the Activist Shareholders

Rolls-Royce Culls Executives as East Responds to Profit Drop

Battered, Apologetic and Still Pitching Their Hedge Funds

Boeing Says China Postal Airlines Orders Ten 737-800 Converted Freighters

The Major Difference Between Wall Street and a Casino

Cullen Roche: The Macro-ization of the Investment Landscape

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Qualcomm Rejects Split Idea
Posted by Eddy Elfenbein on December 15th, 2015 at 10:24 am

Qualcomm’s board rejected the idea of breaking itself up. I think that was the wrong decision.

Qualcomm Inc. rejected calls to split, betting that keeping its chipmaking and patent licensing business together is the best formula for turning around an earnings slump and stock drop.

Qualcomm also updated the outlook for its fiscal first quarter ending this month, saying it may “modestly” exceed its prior profit forecast.

Following a review of the “benefits and challenges of the existing structure,” the mobile chipmaker’s board and management decided, as anticipated, not to separate the two arms of the company.

“We have a focused plan in place that we believe will drive growth and we are off to a good start implementing that plan,” said Chief Executive Officer Steve Mollenkopf. “The strategic benefits and synergies of our model are not replicable through alternative structures.”

(…)

Qualcomm’s decision contrasts with other technology companies that have split this year. Hewlett Packard became two entities in November, EBay Inc. split with payments unit PayPal and Yahoo! Inc. is separating itself from its stake in Alibaba Group Holding Ltd. to return the asses to shareholders without incurring taxes.

The decline in Qualcomm’s stock price has pushed its market value to about $70 billion, compared with a peak of more than $130 billion in 2014, when it surpassed Intel Corp. to become the biggest U.S. publicly traded chip company. Talk of a split was rekindled earlier this year by activist investor Jana Partners LLC, which bought up stock in the company. Jana signed off on the strategic review, which was initiated in July and included a 15 percent employee reduction and a shakeup of the board.

The stock is up about 2.6% today.

CRB Index Falls to 41-Year Low
Posted by Eddy Elfenbein on December 15th, 2015 at 10:04 am

Yesterday, the CRB Index, a major index of commodities, fell to a 41-1/2-year low. The index hasn’t been this low since the middle of 1973.

Inflation Was Flat Last Month
Posted by Eddy Elfenbein on December 15th, 2015 at 10:00 am

With the Federal Reserve set to raise interest rates this week, we had one more inflation report to digest. This morning, the government reported on inflation for November.

As it turned out, headline inflation was completely flat last month, 0.0%. But core inflation, which excludes food and energy prices, rose by 0.2%.

Over the last year, core inflation has rise by 2%. That’s the fastest pace in more than three years. Of course, it’s still pretty tepid inflation.

Here’s the monthly change in the headline rate:

Here’s the monthly change in the core rate:

Morning News: December 15, 2015
Posted by Eddy Elfenbein on December 15th, 2015 at 7:01 am

Oil Prices Rally on Hopes That U.S. Crude Export Ban Will be Lifted

For Consumers, Fed’s Expected Rate Hike is Unlikely to Cause Shock and Awe

VW’s Europe Market Share Narrows Most Since Emissions Crisis

PR Newswire Sold to Cision for $841 Million

General Electric to Sell Commercial Lending Business in Japan

Why GoPro Shares Could Double in the Next Year

Sanofi Seeks $25 Billion Deal in Asset Talks With Boehringer

Dell’s Finances Show Revenue Decline, Similar to Rivals

Apple Opens Secret Laboratory in Taiwan to Develop New Screens

Dow, DuPont Eye Big Tax Savings in Rare Merger of Equals

Diagnosing Yahoo’s Ills: Ugly Math in Marissa Mayer’s Reign

Inside Information Aside, Lumber Liquidators Is Still In A Lot Of Trouble

Inside A Community’s Fierce Fight To Prevent A Nuclear Tragedy

Jeff Carter: Where Are Calls to Crucify the Speculators?

Roger Nusbaum: Wasn’t Cheaper Crude Supposed To Be A Good Thing?

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Morning News: December 14, 2015
Posted by Eddy Elfenbein on December 14th, 2015 at 7:12 am

European Bonds Fall as Rally Fades Before Fed’s Rate Decision

Dollar Gains Versus Euro as Investors Await Fed’s Rate Decision

Draghi Says ECB Stimulus Will Raise Inflation Without Delay

South Africa Tries to Restore Credibility After Zuma U-Turn

Big Oil, Make Way for Big Solar. The Winners and Losers in Paris

Crude Falls Below $35 per Barrel in New York for First Time Since 2009

Wholesale Prices Fall Again in November, But Food Costlier

AstraZeneca Exploring Strategic Options with Acerta Pharma

Shell Plans to Shed 2,800 Jobs After BG Takeover

Micron Buys Rest of Inotera Memories for $3.2 Billion

Seattle Considers Measure to Let Uber and Lyft Drivers Unionize

Alibaba Agrees on $266 Million Acquisition Deal With South China Morning Post

In Virtual Reality Headsets, Investors Glimpse the Future

Joshua Brown: “Is My High-Yield Fund In Danger?”

Jeff Miller: Is It Finally Time For The Santa Claus Rally?

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Recreating Chaplin/Fairbanks
Posted by Eddy Elfenbein on December 13th, 2015 at 12:47 pm

Here I am doing a very poor job of recreating the iconic image of Charlie Chaplin and Douglas Fairbanks selling World War I bonds.