Financial News: January 2014

Friday, January 31, 2014

Market Outlook for First week of February and some great charts to profit from (daytraderrockstar)

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Weekly Forex Market Followup (January 27th ? January 31st 2014) (ForexTraders)

Key Fundamental Forex Events for the Week of January 27ththrough January 31st

The following table lists the key economic data and other events that came out during the week of January 27th through January 31st, with release times displayed for the GMT time zone.

The list also indicates how much each release deviated from the market consensus forecast upon release, as well as what the affected major currency pair or pairs did after each event or set of events.

Sunday, January 26th

All Day AUD Bank Holiday

11:50pm JPY Monetary Policy Meeting Minutes noted that, “Japan's economy has continued to recover moderately, and a front-loaded increase in demandprior to the consumption tax hike has recently been observed. Overseas economies —mainly advanced economies— are starting to recover, although a lackluster performance is still seen in part.”* **The currency rose.

11:50pm JPY Trade Balance -1.15T versus -1.33T expected.* The currency rose.

Monday, January 27th

9:00am EUR German Ifo Business Climate 110.6 versus 110.2 expected.* The currency fell.

All Day EUR Eurogroup Meetings: Eurogroup President JeroenDijsselbloem said that, “In the next meetings we will seek to finalise the operational framework for the ESM (European Stability Mechanism) direct recapitalisation instrument.”* **The currency fell.

11:00am EUR German Buba Monthly Report noted that, "In comparison to the situation at the start of the crisis, the current situation and trends in the countries affected show that a great deal has already been achieved.” **The currency fell.

3:00pm USD New Home Sales 414K versus 457K expected.* The currency rose.

6:00pm EUR German Buba President Weidmann said that, “The links between bank risks and sovereign risks have become much stronger, not looser, in recent years. Nonetheless, the reasons for this development are more nuanced than simply the outright public ownership of banks. In any case, it is critical from a financial stability perspective, especially for those countries hit by the European debt crisis, and indirectly for the entire financial system.” **The currency fell.

11:00pm AUD CB Leading Index 0.2% versus 0.5% expected.* The currency rose.

Tuesday, January 28th

12:30am AUD NAB Business Confidence 6 versus last 5 expected.* The currency rose.

Tentative EUR German Constitutional Court Ruling was delayed until the spring.* The currency fell.

9:30am GBP Preliminary GDP 0.7% versus 0.8% expected.* The currency fell.

1:30pm USD Core Durable Goods Orders -1.6% versus 0.7% expected.* The currency rose.

3:00pm USD CB Consumer Confidence 80.7 versus 78.1 expected.* The currency rose.

Wednesday, January 29th

<ul>12:15pm GBP BOE Governor Carney said that, “There are issues with respect to currency unions. We've seen them in Europe. It's one of the factors that affects, actually, the outlook for the UK economy, has affected us over the last five years, affects us going forward, the challenges of having a currency union without certain institutional structures.”* **The currency fell.

7:00pm USD FOMC Statement noted that, “The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”* **The currency fell.

7:00pm USD Federal Funds Rate Decision

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Help wanted: Obama calls on CEOs to help fix jobless problem

President Barack Obama will meet on Friday with a group of chief executive officers who have agreed to make sure their companies do not rule out hiring people just because their resumes show they have been out of work for a while.

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Facebook looks to nab Twitter's 'second screen' crown in Super Bowl

More than 100 million people will be glued to their TV screens on Sunday, when the Denver Broncos take on the Seattle Seahawks in America's premier sporting contest, the Super Bowl. But two fierce rivals, Facebook Inc (FB.O) and Twitter Inc (TWTR.O), will also be clashing head-to-head on a "second screen" that TV viewers will tune in for the big game. The two social networks are jostling to be the venue of choice for fans to comment on big plays, the star-studded halftime show and of course the commercials - multi million dollar productions by major brands that are often a draw in their own right. The Super Bowl is the biggest stage for a broader battle that has intensified over the past year between the two behemoths of social media.

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Euro zone inflation drop in January gives ECB fresh headache

Euro zone consumer prices dropped in January, bucking market expectations for a rise and providing a possible trigger for further easing by the European Central Bank to sustain a fragile recovery and ward against deflation. Consumer prices in the now-18-country bloc fell to 0.7 percent year-on-year in the first month of 2014, down from 0.8 percent in December, data from the EU's statistics office Eurostat showed on Friday. "The ECB's sensitivity to inflation data was already high and even a small surprise like this one today might tip the balance towards more easing," said Frederik Ducrozet, a senior euro zone economist at Credit Agricole.

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Headwaters initiated with a Buy at Deutsche Bank

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Big banks loosening their grip on lending, WSJ reports

Domtar upgraded to Buy from Hold at Deutsche Bank

Twitter uses Super Bowl to reinforce its ad platform, WSJ reports

Glatfelter upgraded to Buy from Hold at Deutsche Bank

Stocks with implied volatility movement; JCP BBY

February front month equity options expire, February 21, 2014

PerkinElmer price target raised to $50 from $44 at Mizuho

Financial Select Sector overall volatility at 17, 26-week average is 17

Russell 2000 overall implied volatility at 18; 26-week average is 17

iShares Silver Trust overall implied volatility at 28; 26-week average is 30

Home mortgage volumes fell to five year low in Q4, WSJ reports

Fresenius SE downgraded to Neutral from Outperform at Credit Suisse

Infineon upgraded to Overweight from Neutral at HSBC

AkzoNobel downgraded to Neutral from Outperform at Exane BNP Paribas

Ericsson upgraded to Buy from Neutral at UBS

E.ON AG upgraded to Neutral from Underweight at JPMorgan

Hillshire Brands upgraded to Market Perform from Underperform at Wells Fargo

Citrix upgraded to Overweight from Neutral at JPMorgan

Facebook's focus on data attracts advertisers, WSJ reports

Marathon Petroleum upgraded to Outperform from In-Line at Imperial Capital

International Rectifier upgraded to Buy from Neutral at Citigroup

Ericsson, Qualcomm complete inter-vendor LTE Category 6 interoperability testing

Mylan named as Gilead exclusive branded medicines partner for India

Accenture awarded five-year services contract by Tryg

Weyerhaeuser reports Q4 EPS ex-items 27c, consensus 28c

Weyerhaeuser sees significantly higher earnings from Timberlands segment in Q1

Nestle to launch new Butterfinger Peanut Butter Cups with Super Bowl ad

Honda warns on emerging markets while aiming for record sales

Honda Motor Co warned auto demand is cooling in emerging markets and especially Southeast Asia, but Japan's third-biggest carmaker remained upbeat about its prospects and said it aims to sell a record 4.5 million vehicles or more in 2014. Honda said new, smaller models would help it to maintain strong sales growth in some key emerging markets like Indonesia and India where industry-wide demand has been ebbing. Rising interest rates and currency worries have cast a shadow over the economic growth outlook in several emerging markets, which are key to Honda's aggressive expansion targets. That will require Honda to nearly double sales in emerging markets, where it sold 1.6 million to 1.7 million vehicles in 2013.

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Google's outsized ad growth offsets steep price decline

Google Inc's quarterly revenue beat Wall Street's target despite an ongoing decline in prices for its online ads and deepening losses at Motorola, the handset-making division to be sold to China's Lenovo. Shares of Google, which have risen more than 20 percent in the past three months, rose nearly 4 percent to $1,178 in after-hours trading on Thursday. Google executives said in a conference call on Thursday that the company benefited from strong demand from brand marketers and retailers in the fourth quarter, as well as healthy demand for online ads in international markets. "In the holiday season one thing has become very clear, the Web has truly become the new holiday store window," Google Chief Business Officer Nikesh Arora said.

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Asian stocks slip, yen rises in holiday-hit trade

Asian stocks slipped on Friday, as fears about the impact of the Federal Reserve's stimulus withdrawal on emerging markets offset the reassurance of upbeat U.S. growth data. The U.S. dollar index was nearly flat on the day at 81.101 (.DXY) but remained close to a one-week high against a basket of major currencies hit on Thursday, when it rose as far as 81.135 from a session low of 80.545.

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Thursday, January 30, 2014

[video] Forex: What Will it Take to Drive EURUSD Below 1.3500? (Forex News by DailyFX)

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Week of 2/3 Money Supply to be released at 16:30

Week of 2/12 Fed Balance Sheet to be released at 16:30

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Angola holds rate but cuts reserve requirement to 12.5%

Angola's central bank maintained its policy rate at 9.25 percent but cut the reserve requirement ratio for local currency deposits to 12.5 percent from 15.0 percent to "increase the financial resources available for lending to the economy, as well as continue to influence the reduction of the costs of financial intermediation."

The National Bank of Angola, which cut rates by 100 basis points in 2013, kept the reserve requirement for foreign currency deposits unchanged at 15.0 percent.

The central bank's monetary policy committee, which met on Jan. 27, said the latest estimates indicate real Gross Domestic Product growth of around 7.4 percent for the country's economy in 2013, up from 5.2 percent in 2012, with an emphasis on the continued growth in the non-oil sector.

Angola's inflation rate eased to 7.69 percent in December from 7.94 percent in November and 9.02 percent in December 2012, as inflation continues to drop since hitting a recent high of 16.08 percent in October 2010.

The central bank also said Angola's international reserves fell by 5.73 percent to US$ 33.17 billion in December from November. It did not give any reason for the decline.

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[video] Forex Strategy Video: Why Doesn't NZD Rally on Hike Expectations? (Forex News by DailyFX)

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Newbie

Hi,

I'm newbie here and trying to get more information, knowledge before embark with real big scale fx trading.

Thank you

Attakiri63

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Wall Street rallies on Facebook and GDP; Amazon sinks late

The S&P 500 scored its biggest gain in more than a month on Thursday as Facebook led a tech rally and data showed the U.S. economy was on solid footing in the fourth quarter. The day's rebound pushed the S&P 500 back into positive territory for the week, but the index was still down 2.9 percent for the month. Facebook Inc (FB.O) shares jumped 14.1 percent to end at $61.08, hitting a lifetime high of $62.50 during the session and supporting both the S&P 500 and Nasdaq. Google Inc (GOOG) shares jumped 2.6 percent to $1,135.39, a day after Lenovo Group said it would buy the Internet search giant's Motorola handset division for $2.91 billion.

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Newbie

Hi,

I'm newbie here and trying to get more information, knowledge before embark with real big scale fx trading.

Thank you

Attakiri63

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[video] Japan CPI (DEC) - 01.31.2014 (Forex News by DailyFX)

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Wall Street rallies on Facebook and GDP; Amazon sinks late

Microsoft board close to naming Nadella as new CEO

NEW YORK/SEATTLE (Reuters) - Microsoft Corp is close to naming a new chief executive, most likely its cloud-computing head Satya Nadella, a source close to the matter said on Thursday, concluding a five-month long search for a heavy-hitter to lead the world's largest software company. As part of the move, co-founder Bill Gates may step aside as chairman but remain on the board, while lead independent director John Thompson will take on the chairman role, the source said on condition of anonymity because the process is private. Nadella, a native of Hyderabad, India - where Microsoft has its largest non-U.S. research center - was promoted to run the company's fast expanding cloud, or internet-based, computing initiatives in July last year as part of current CEO Steve Ballmer's radical re-organization of the company. Before his role in shaping Microsoft's cloud computing business, Nadella was in charge of the company's growing server and tools unit, following on from high-level roles in Microsoft's Office and Bing search engine teams.

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Japan economy minister Amari: The CPI reflects Japan moving smoothly towards price target (ForexLive)

Also:

Markets should react calmly to US monetary policy

High probability of a TPP ministerial meeting in February

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China faces obstacles on road to consumer society

Business should be picking up for Zhao Guoping, a Beijing shopkeeper, as Chinese leaders try to build a consumer society to replace a worn-out economic model based on trade and investment. But his financial ...

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Wireless mergers to invite scrutiny, says US antitrust chief: NYT

(Reuters) - It will be difficult for the U.S. justice department to approve a merger between any of the top four U.S. wireless phone companies, said William Baer, assistant attorney general for the antitrust division, the New York Times reported. Baer's comments come amid speculation that T-Mobile US Inc (TMUS.N) and Sprint Corp (NYS:S) might consummate a deal in coming months. He said any deal would face intense scrutiny because consumers have enjoyed "much more favorable competitive conditions" since the division blocked a proposed merger between AT&T Inc (NYS:T) and T-Mobile in 2011, the NYT reported.

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Royal Dutch Shell raises Q4 interim dividend by 2c to 45c per share

FCC to vote on using digital technology over telecom landlines, WSJ reports

AngloGold upgraded to Overweight from Neutral at JPMorgan

Royal Dutch Shell sees Q1 interim dividend increase of 4.4% to 47c per share

Stocks to Watch: Facebook, Google, Qualcomm are stocks to watch

Among the companies whose shares are expected to see active trade in Thursday’s session are Facebook, Google, and Qualcomm.

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BSkyB secures WWE for five more years

Stocks with implied volatility movement; UNG NBG

New York Community Bancorp downgraded to Market Perform at Keefe Bruyette

February front month equity options expire, February 21, 2014

Citigroup removed from Priority Stock List at Wells Fargo

ION Geophysical to host conference call

Royal Dutch Shell CEO sets performance agenda, capital discipline

Oracle CEO says database not breached, Reuters reports

Stolen vendor credentials led to Target hacking, WSJ reports

Ericsson reports Q4 non-IFRS EPS SEK 2.42 vs. (SEK 1.40) last year

As Fed's bond buying program ends, investors seek new options, WSJ reports

Shell to suspend drilling in U.S. Arctic, WSJ reports

Ericsson raises dividend to SEK 3.00 per share from SEK 2.75 per share

CTI announce UK National Cancer Research Institute Phase 2 trial for Pacritinib

Amazon planning to offer retailers a Kindle checkout system, WSJ reports

BE Aerospace reports Q4 EPS ex-items 90c, consensus 91c

Vivendi upgraded to Outperform from Neutral at Exane BNP Paribas

KPN upgraded to Outperform from Neutral at Exane BNP Paribas

BE Aerospace sees FY14 EPS $4.25, consensus $4.36

CGG SA upgraded to Neutral from Reduce at Nomura

Harmony Gold downgraded to Neutral from Overweight at JPMorgan

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Methanex reports Q4 adjusted EPS $1.72, consensus $1.59

Spansion responds to Macronix's statements, ITC case

Biogen, UCB enter agreements to commercialize MS, hemophilia therapies in Asia

Dassault to acquire Accelrys for $12.50 per share in merger valued at $750M

China's Lenovo steps into ring against Samsung with Motorola deal

Lenovo Group, the Chinese technology company that earns about 80 percent of its revenue from personal computers, is betting it can also be a challenger to Samsung Electronics Co Ltd and Apple Inc in the smartphone market. On Wednesday, Lenovo said it would buy Google Inc's Motorola Mobility handset unit for $2.91 billion in the fourth-largest U.S. acquisition by a Chinese or Hong Kong company ever. "We are not only the number one PC company in the world but with this agreement we will become a much stronger number three smartphone company," said Wong Waiming, Lenovo's chief financial officer, on a conference call on Thursday. The stock fell 8.2 percent on concerns Lenovo might have overpaid for a loss-making business and would dilute the value of shares by issuing new ones to help pay for the purchases.

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Wednesday, January 29, 2014

Analysis: Only time will define Bernanke's crisis-era legacy at Fed

(Reuters) - Ben Bernanke did not hesitate when asked whether he was confident that his signature response to the Great Recession would work. "Well, the problem with QE is that it works in practice but it doesn't work in theory," the head of the U.S. Federal Reserve quipped earlier this month during his last public appearance. He was referring to his decision during the darkest days of the financial crisis to launch an unprecedented program of massive bond purchases, a policy known as quantitative easing, or QE. The aim was to push long-term interest rates lower given that overnight rates, the Fed's main economic lever, were already near zero.

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Exclusive: Deutsche Bank suspends New York head of EM forex desk: source

Deutsche Bank has suspended the head of its emerging markets foreign exchange trading desk in New York in connection with ongoing investigations into the alleged manipulation of the global currency market, a source familiar with the matter said. Diego Moraiz, who has been with the bank since 2004 and has specialized in trading the Mexican peso, was told by the bank on December 18 that he was suspended, the source said. Moraiz's suspension came after an external consulting firm hired by Deutsche Bank examined emails and communications in chatrooms going back seven years, the source said. The source did not know whether Moraiz was still being paid or when the investigation will be completed.

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Mobile ad revenue lifts Facebook past Wall Street targets

Facebook Inc delivered its strongest revenue growth in two years, beating Wall Street targets as the Internet company's mobile ad sales continued to accelerate. Shares of Facebook surged 12 percent to $59.98 in after-hours trading on Wednesday. The world's largest social networking company said that revenue from mobile ads represented 53 percent of its total advertising revenue in the last three months of the year, or $1.24 billion, versus the 49 percent proportion that mobile ads represented in the third quarter. Facebook said it now has 1.23 billion monthly users, with 945 million accessing the service on a smartphone or tablet.

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Outside the Box: Hoisington Investment Management: Quarterly Review and Outlook Fourth Quarter 2013 (John Mauldin)

Originally Published by Mauldin Economics

Last week Greg Weldon made the case for rising interest rates on US treasuries. This week Lacy Hunt offers us the case for a continued low-interest-rate environment for long-term treasuries. This is one of the most fascinating tugs-of-war in the investment world today. I’ve made the argument that we are in a deflationary deleveraging world for quite some time to come, or at least until the velocity of money turns around. Lacy makes that point, too, and offers some insights into the velocity of money. This is a fascinating Outside the Box, and I won’t spoil it by stealing any more of Lacy’s thunder.

I write from a sunny, if cold, Dallas. The thermostat has been a topic of conversation in my apartment lately, and not just because we need to keep turning it up. By now, the entire world knows that Google bought the thermostat company Nest for $3.2 billion, a good 50% more than the valuation Nest was trying to raise money on just a month earlier. I was rather surprised at the price, but I was also surprised that Google paid $1.65 billion for YouTube. Now, six years later, the YouTube franchise produced almost $6 billion in revenues last year. Clearly, the founders of Google saw something that much of the world did not see at the time. My suspicion is that Nest will end up ranking in the same category of return on investment for Google.

I have installed the cool new Nest thermostats in my new apartment. Having bought and installed thermostats on my own for various homes in the past, I was thoroughly surprised at the value of the Nest thermostat. Just a few years ago it would’ve cost some three to four times more to buy the same functionality that the Nest thermostat has. And this little toy does so much more. It actually adjusts itself to my personal habits and preferences and allows me to change everything from my iPad when I go to bed in the evening or get up in the morning, with a thoroughly programmable slate of settings. It even senses when I come close to it. It is just one element in what will soon be the Internet of Things that Cisco CEO John Chambers says will rapidly come to be worth $20 trillion.

I’m enjoying all the new technology that we’ve installed in the apartment, and we’ve designed and wired it to be able to adapt to what we think will be the direction of further change. I’m just hoping I don’t have to buy antivirus software for my oven.

Have a great week.

Your thinking about mortgage interest rates analyst,

John Mauldin, Editor

Outside the Boxsubscribers@mauldineconomics.com

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Hoisington Investment Management – Quarterly Review and Outlook - Fourth Quarter 2013

In The Theory of Interest, Irving Fisher, who Nobel Laureate Milton Friedman called America's greatest economist, created the Fisher equation, which states the nominal bond yield is equal to the real yield plus expected inflation. It serves as the pillar of macroeconomics and as the foundational relationship of the bond market. It has been reconfirmed many times by scholarly examination and by the sheer force of historical experience. Examining periods of both low and high inflation offers insight into how each variable in the Fisher equation affects the outcome.

From 1871 to 1948, a period of relatively low inflation, the Treasury bond yield averaged 2.9%, with the inflation rate 1.0% and the real yield 1.9%. From 1948 to 1989, a period of higher inflation, the Treasury bond yield increased to 6.0%, inflation jumped to 4.3% on average, but the real yield remained close to historical levels at 1.7% (Chart 1). In more recent times, the inflation rate has changed, but the real rate has remained close to historical averages. The significant point is that while average inflation and bond yields were volatile, the average real yield was far more stable. Over these longer stretches the average real yield was never far from the post 1871 average of 2.2%. Thus, over long periods of time, bond yields fluctuated in response to rising and falling inflation. However, the real bond yield steadily reverted to its mean indicating that inflation was the driving force in determining the bond yield over time.

Inflation

A host of different factors caused inflation to vary in the aforementioned periods, but two points of significance are identifiable. First, the seventy-year plus span between 1871 and 1948 (excluding the World War years) was an extended global market era. It began about the time of uninterrupted transcontinental railroad travel and the completion of the Suez Canal and resulted in a period of rapidly expanding global trade. By 1871, 10% of U.S. railroad traffic carried goods that were traded globally. This era produced increasing returns to scale and minimized price pressures. Second, the 1871-1948 period encompassed two episodes of high indebtedness: the 1870s and then the 1920s until the mid-to-late 1940s. Both severely destabilized economic activity and produced minimal inflation, which in turn led to bond yields that eventually reached slightly less than 2%.

From 1871 to 1948, there were two, twenty-year periods when the total return on long- term Treasury bonds exceeded the total return on the S&P 500: one from the 1870s to the 1890s and another from 1928 to 1948. Additionally, the traditional vibrancy in demographic trends in the United States ended during the 1930s as both the birth rate and total increase in population slowed dramatically.

The period from 1948 to 1989 differs markedly. By 1948, a global market did not exist, and the excessive indebtedness of the 1920-1930s had been eliminated. In the late 1940s, the Iron and Bamboo Curtains imposed by Russia and China removed roughly 50% of the world's population from global trade, reducing economies of scale. During the war years, from 1933 to 1948, the U.S. ratio of public and private debt to GDP dropped from 295% to 139%, as the personal saving rate jumped from below zero to 28% (Chart 2). With normal and sustainable debt levels the U.S. entered the post-war boom, a period of rapidly rising prosperity that produced greater returns in the S&P 500 than on long-term Treasury bonds. Additionally, the abysmal demographics of the 1930s gave way to the post-war baby boom as households became more positive about their economic prospects.

Today, conditions resemble the 1871-1948 period. Global trade is once again less inhibited and public and private debt is high and rising. The saving rate is also greatly depressed. In this modern era of high indebtedness, there have been long periods of negative risk premium which have lasted over a decade. Demographics have also soured. The birth rate in 2013 fell to the lowest level on record, and the population increase was the slowest since the depression era year of 1937. Thus, fundamental conditions are now conducive for an inflation rate averaging 1% or less. Based on the Fisher equation, long-term bond yields should be comfortable trading at 3% or lower.

The global inflation rate is influenced by many factors, but the current bout of low inflation and the insufficiency of demand are both symptoms of extreme over-indebtedness. Weakness in prices is evident in various price indices. Over the twelve months ending in November, the price of goods in the CPI actually decreased 0.5%, while the more accurately measured durable and nondurable components of the U.S. personal consumption deflator fell by 2.0% and 0.6%, respectively. Prices of imported goods fell 1.5% over the same period; excluding oil the decline was nearly as large. Facing weak domestic demand, foreign producers cut prices on goods headed toward the U.S. market, and this forced domestic producers to match those lower prices.

A lack of pricing power is likely to continue in 2014. First, the global economy continues to incur more indebtedness. Both public and private debt in the major economies of the world continue to move further above the levels that create a sustained negative impact on economic activity. Second, monetary conditions moved in the wrong direction last year, partially as a result of misguided policy efforts at quantitative manipulation of reserves. Third, although the sequester of government expenditures will be less in 2014 than in 2013, fiscal policy in the broadest sense is not supportive of economic growth.

Indebtedness

Academic research has shown that a public and private debt to GDP ratio above the range of 260-275% has a depressing impact on economic growth. In 2000 the U.S. debt level exceeded this range. Since then, the bond yield has averaged 4.6%, with inflation 2.1% and the real yield 2.5%. By comparing growth and debt figures prior to 2000 with those afterward, the magnitude of the problem and likelihood of its persistence can be assessed. From 1871 to 1999, private and public debt averaged less than 165% of GDP (well below the 260-275% critical level), and the trend growth in real GDP was 3.8%. From 2000 through 2013, growth has faltered to just 1.9%. Based on the latest 2013 figures, total private and public debt amounted to $58.2 trillion or 344% of GDP (Chart 3). If the debt to GDP ratio were currently the same as the average from 1871 to 1999, total debt should only amount to $30.5 trillion, or almost half of the existing level. The debt to GDP ratio declined since peaking in 2009 but not sufficiently to re-enter the normal range. Moreover, the ratio resumed its upward trend in 2013. Thus, the U.S. appears to be following the Japanese example of trying to cure an indebtedness problem by accumulating more debt.

Scholarly research conducted in the U.S. and Europe over the past three years indicates that existing levels of government debt relative to GDP have reached the point that historically have produced a deleterious effect on economic growth. In the past this effect has lasted two decades or longer. As termed by European researchers, the current levels have reached the "non-linear zone". This means that the negative effects on growth are likely to intensify as this debt ratio moves higher. Ignoring this research is ill advised, especially since the debt levels are advancing. Although the U.S. budget deficit was smaller last year, the more critical debt ratio continued to rise.

According to the Organization for Economic Cooperation and Development (OECD), General U.S. Government Gross Financial Liabilities as a percent of GDP reached 104.1% in 2013, the highest level since the early 1950s (Table 1). (Gross, rather than net, government debt is the appropriate measure; netting out the government debt held in other government accounts is not appropriate since the social insurance trusts have far greater liabilities than they have government securities to fund those future commitments.) By the end of 2015 the OECD projects this figure to jump to 106.5%. Over the next twenty-five years the Congressional Budget Office projects government debt to GDP to move dramatically higher.

Since European fiscal policies mirror those in the U.S., it is not surprising that growth prospects there remain dismal. According to the OECD, General Government Gross Financial Liabilities in the Euro area reached 106.4% of GDP in 2013, up from 95.6% in 2011, an even faster rise than in the United States (Table 1). New research shows that the world average of total public debt, expressed as a percent of global GDP, is approximating its highest level since 1826 (IMF Working Paper WP/13/266, "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten", December 2013, by Carmen M. Reinhart and Kenneth S. Rogoff). Private debt to GDP in the Euro currency zone and the UK (and interestingly, in Japan) are all higher than in the U.S. and even further above the levels that research has identified as being detrimental to growth.

Monetary Conditions

As discussed in our last quarterly letter, three academic papers presented at the Jackson Hole conference determined that the present approach of quantitative easing by the Federal Reserve has actually slowed economic activity. Three considerations - real interest rates, the money multiplier and the velocity of money - indicate that monetary policy is working against economic growth.

First, monetary policy works primarily through price effects. The level of real interest rates determines the price of credit. In 2013, long-term Treasury bond yields rose 100 basis points, or 1.0%. The inflation rate, measured by the year-over-year change in the Fed's targeted core personal consumption expenditure deflator, dropped 50 basis points. This pushed the real yield on the thirty-year bond to nearly 3% at the close of 2013. Thus, real yields currently carry a significant premium to the long-term average. The effects of this rising price of credit are visible in the high frequency housing data. Pending and existing home sales in November were below year ago levels. Mortgage applications for home purchases in December were at their lowest level in more than a decade.

Second, the money multiplier, which reflects the conversion of bank reserves into deposits (money) by the banking system, fell to a new 100 year low of less than 3 in late December 2013. This is an indication that the Fed's Large Scale Asset Purchases (LSAP) are not currently producing real, tangible economic effects and are not likely to in the future. Since 1913, $1 of high-powered money has, on average, resulted in an increase of $8.20 of M2 (Chart 4). The current multiplier constitutes an unprecedented historical gap. To begin the process of accelerating economic growth from a monetary perspective, an increase in the multiplier would be necessary. The best indicator of whether this process is working would be the expansion of bank credit, which includes bank investments and bank loans. Unfortunately, the expansion of total bank credit is only 2.0% higher than a year ago, and bank loans have expanded by only 1.9%. In spite of the Fed's massive LSAP, M2 expanded at a slightly slower pace in the latest twelve months than it did in 2012.

Third, the even more important velocity of money (V) rejects the argument that monetary policies are gaining traction. Velocity, or the speed at which money turns over, links M2 to the level of nominal economic activity. With the money supply expanding at 5.6% in the latest year, it would be reasonable to expect the same growth rate in nominal GDP if V were stable. Unfortunately, since 1997 velocity has been falling, and in the last twelve months it has dropped by 3% to 1.57, the lowest level in six decades (Chart 4). While velocity is influenced by a myriad of factors, the rate of change of financial innovation and lending for productive purposes affect its direction. If debt generates an income stream that repays principal and interest and creates other activities, it will tend to expand economic activity and cause V to rise. Student, auto and other loans for consumption (which represent the bulk of the increase in consumer credit in 2013) do not meet the necessary criteria, so debt is merely an acceleration of future consumption. This will tend to inhibit the borrower's ability to increase consumption in the future. Further, new regulations on our financial industries are discouraging financial innovation, and this will bring further downward pressure on velocity. In 2014, if velocity continues to erode at a 3% pace and money supply continues to grow around 6%, it is reasonable to anticipate that nominal GDP will expand at about a 3% growth rate.

Fiscal Issues

Based on scholarly research, only half of the negative economic impact emanating from the $275 billion 2013 tax increase has been registered. Due to the recognition and implementation lags, the remaining drag on growth from the tax increase will occur this year and again in 2015. Carrying a negative multiplier of 2 to 3, this impact far outweighs the sequester (which is expected to be slightly less in 2014 than in 2013) since the multiplier for government expenditures is zero, if not slightly negative.

An important fiscal policy event for 2014 is the Affordable Care Act (ACA). Healthcare is the largest U.S. industry, comprising 17.2% of the economy in 2012. This is more than twice as large as residential construction, oil and gas exploration and the automotive sectors combined. The scope and scale of ACA may divert energy and activity away from more productive endeavors. The ACA's employer mandate was waived in 2013, as were similar obligations of labor unions and others, but these waivers expire this year. Firms may have to cut some full time employees to part time, reduce total employment or cut benefits since they lack pricing power to cover these costs. As such, this will place the burden of adjustment on consumers. On January 1, health insurance premiums that target small businesses and individuals were raised. These groups create jobs and are vital for growth, thus even though the amount of the increase is small, this is still a net drag for economic growth. While the ACA is an unprecedented event for which no historical point of comparison exists, history does confirm that substantial increases in government regulation are not a springboard for innovation, the lifeblood of economic activity.

The slow nominal growth rate anticipated for 2014 should continue to put downward pressure on the inflation rate as the insufficiency of demand continues to create highly competitive markets. With slower inflation, lower long-term interest rates are a probable outcome.

Van R. Hoisington

Lacy H. Hunt, Ph.D.

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PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investorâ€™s interest in alternative investments, and none is expected to develop.

by InformedTrades via InformedTrades

Lenovo to buy Google's Motorola in China's largest tech deal

NEW YORK/SAN FRANCISCO (Reuters) - Lenovo Group said on Wednesday it agreed to buy Google Inc's Motorola handset division for $2.91 billion, in what is China's largest-ever tech deal as Lenovo buys its way into a heavily competitive U.S. handset market dominated by Apple Inc. It is Lenovo's second major deal on U.S. soil in a week as the Chinese electronics company angles to get a foothold in major global computing markets. Lenovo last week said it would buy IBM's low-end server business for $2.3 billion. The deal ends Google's short-lived foray into making consumer mobile devices and marks a pullback from its largest-ever acquisition.

by via Yahoo! Finance: Top Stories

Learning options

I traded options (futures) years ago through a broker. Now that I trade futures on my own I wan to learn how to trade options, but with stocks. What is the best way to get started?

All comments are welcome

Thank You

wal

by wal via InformedTrades

Asia shares in retreat from risk, yen gains

Asian shares were in retreat on Thursday as strains in emerging markets returned with a vengeance and the Federal Reserve further scaled back its stimulus - sending investors scurrying to safety in bonds and yen. Japan's Nikkei (NIK:^9452) shed 2.5 percent, so surrendering almost all of the previous day's gains. Australian stocks fell 1 percent (.AXJO), while MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.3 percent. Most Asian markets had rallied on Wednesday on hopes that aggressive rate hikes by Turkey would shore up its currency and ease the risk of capital flight.

by via Yahoo! Finance: Top Stories

Wall Street sells off after Fed sticks with stimulus cuts

U.S. stocks dropped more than 1 percent on Wednesday, hitting session lows after the Federal Reserve stuck with its plan to scale back stimulus even in the midst of emerging market turmoil. With the day's decline, the S&P 500 is down 4 percent for the month - its worst monthly loss since May 2012. Some investors have been bracing for a correction, given the S&P 500's gain of 30 percent last year. Trading was volatile after the Fed's move, which further reduces its monthly bond purchases by $10 billion a month.

by via Yahoo! Finance: Top Stories

Target says criminals attacked with credentials stolen from vendor

Target Corp said on Wednesday that the cyber criminals who breached its system used credentials they stole from one of the retailer's vendors. "The ongoing forensic investigation has indicated that the intruder stole a vendor's credentials, which were used to access our system," Target spokeswoman Molly Snyder said in a statement. She declined to elaborate on what type of credentials were taken from the vendor.

by via Yahoo! Finance: Top Stories

SmallCap Investor: Interview With Mickey Fulp The Mercenary Geologist (Mickey Fulp)

See the Casey Research Guide to Resource Investing

by InformedTrades via InformedTrades

[video] Forex Strategy Video: If the FOMC Taper Can't Break Risk, What Will? (Forex News by DailyFX)

from Forex News by DailyFX

View Other Videos From Forex News by DailyFX

by InformedTrades via InformedTrades

Trade Like a Pro with Newbie-Trader.com - 1/28/2014 (NinjaTrader, LLC)

Try A Free NinjaTrader Demo Account

by InformedTrades via InformedTrades

AUDJPY Climbs to Resistance After Breaking Out of Range; Going Short (Simit Patel)

Learn to trade*by following my own personal trading blog.

AUDJPY was in a range for several months of the end of 2013, but it finally broke out to the down side recently. Now, it has rallied to test the bottom of the range. I’m using this as an opportunity to try shorting the pair. The chart below illustrates the setup. As for the target exit, half will be taken off at the first green line while the remainder will be taken off at the second — provided the market moves in my favor, of course.

Originally Published on FX Times

by InformedTrades via InformedTrades