Blaine Rollins: Going Up, Going Down

The Federal Reserve’s plan to start unwinding quantitative easing as early as September could be derailed if Congress fails to tackle the looming deadlock over the US debt ceiling, analysts warn.

Republican failures to win legislative victories — embodied by the collapse of healthcare reforms — last week injected an early bout of nerves into financial markets as investors confronted the possibility of a disorderly stand-off over the US’s public debt limit. In a worse-case scenario, this could lead to a government shutdown as well as market turmoil.

While yields on three-month Treasury bills subsided somewhat at the end of last week, jitters have come sooner than during the debt ceiling countdowns of 2011 and 2013, according to Mark Cabana, a strategist at Bank of America Merrill Lynch. This is striking given that Republicans have control of both wings of Congress and the White House, which ought to put them in a stronger position to reach a deal.

(Financial Times)

“Uncertainty about the outlook for government policy in health care, regulation, taxes, and trade can cause firms to delay projects until the policy environment clarifies,” (Stanley Fischer, Federal Reserve Vice Chairman)

Investors added $3.3bn to European equity funds in the week to July 26, according to flows tracked by EPFR. The figure was up slightly from the week prior and the largest since Emmanuel Macron swept to victory in French presidential elections in May. The inflows accompany a rally in the euro to a more-than-two-year high, with the common currency up 11 per cent against the US dollar this year. By contrast, US stock funds suffered their sixth consecutive week of outflows, the longest streak in more than a year. Investors redeemed nearly $600m from the asset class last week, buoying outflows since mid-June to nearly $20bn.

(Financial Times)

There’s optimism in Europe, particularly France

“While we continue to be cautious on the UK and as they prepare to exit the EU, we are optimistic about the overall outlook for Europe…We also see…a great deal of optimism in France, as President Macron has a clear mandate for reforms including labor market reform which should benefit that economy and stimulate better employment growth.” —Manpower CEO Jonas Prising (Temp Staffing)

Germany is also very strong

“Germany, by definition, which is a big engine in Europe is doing well in the manufacturing side. And our business in Europe, if you look upon the portfolio, Industrial business is very strong.” —3M CEO Inge Thulin (Industrials)

(AvondaleAM)

The last time hedge funds started a year with six straight monthly gains? Well, that would be 2007.

While observers are certainly wary of a market correction, few are expecting another Great Recession. And recent gains suggest more measured exuberance. Right before the last recession, hedge funds shot out of the gate, rising 7.35%. The first half of this year saw more modest returns of 4.33%.

In that time, emerging markets, up 8.13%, have been the leading performers for hedge funds, edging out activist funds, which added 8.10%, followed by European funds, which surged 6.15%, according to data from BarclayHedge.

(Barron’s)

Steve Eisman, the US investor who successfully predicted the subprime crisis and was portrayed on screen in The Big Short, the Oscar-winning film, says the world’s financial system is safer than it has been for decades.

The fund manager, who made a fortune betting against subprime mortgages and the banks holding them in the run-up to 2008, said that regulations introduced since the financial crisis to shore up banks, such as the US’s Dodd-Frank rules, should avert future systemic problems.

“The world is a very different place to what it was pre-crisis. For the first time in my working life, which is more than 30 years, I would regard the financial system as safe,” Mr Eisman told FTfm on the eve of the 10-year anniversary of the subprime mortgage crisis. “The system is now heavily regulated and closely watched, which I believe is right.”…

“There is simply not enough leverage in the system to create a major systemic issue like a decade ago,” he said. “The reality is the system is much safer today and there are not any systemic concerns.”

(Financial Times)

Fortunately, earnings are coming in better than expected. After several years of modest increases, primarily because of poor performance in the energy industry, S&P 500 earnings are expected to break out and be up 10% this year to close to $130, or possibly even higher. Earnings improvements in the financial services industry will also help increase 2017 profits for the index. Continued double-digit earnings increases should not be expected, but I could see S&P 500 earnings exceeding $150 by the end of the decade if no recession takes place. While the current expansion is more than eight years old, few excesses are apparent and I am optimistic that the next serious downturn is several years away. If a recession should occur before then, determining what policy steps could be taken to get us out of it will be difficult. With interest rates already so low, the Fed has little room to create stimulus by dropping the Fed funds rate. Also, a Republican Congress is unlikely to pass bills providing significant fiscal stimulus. As a result, the best policy course is one that attempts to defer the next recession for as long as possible.

(Barron’s)

CEO Mark Widmar told analysts that “pricing has firmed up in the U.S.” for solar panel “modules,’ the components that make up the panels.

“Again, there is a tremendous amount of demand right now for all the segments of the market, which is firming up that pricing.” Offsetting that, the company’s seeing somewhat lower prices as it moves from existing product, known as “Series 4,” and ramps up production of its forthcoming “Series 6” solar cell technology.

(Barron’s)

“Over the last several years many mall-based retailers have been adversely impacted by reduced foot traffic, resulting from the accelerating shift of consumer behavior away from brick-and-mortar retail and changes in consumer retail activity overall,” Scott Harlan Maw, Starbucks CFO, said in a call with investors at the time. “Our Teavana mall stores have not been immune, with many reporting negative comps and operating losses for some time.”

While Starbucks has invested in new store designs and updated merchandising, Maw said that the rate of decline at mall-based Teavana stores over the last six months has been worse than forecast, and that the company expects further declines.

(Markets Insider)

I felt like I was driving in an Eames chair. That was my first impression as I climbed into the driver’s seat of the Tesla Model 3 at the Fremont Factory on Friday afternoon. It took a moment to orient myself — no gauges, no speedometer, no airplane cockpit cues. Instead, one continuous smooth line between myself and the road ahead, offset by natural, unfinished wood. The premium model of the Model 3 caught me off guard. After hearing so much hype about this car, I was surprised that my first reaction was a profound sense of delight. It wasn’t bland, nor sterile, nor cheap feeling. Here was something different. Here was an exercise in minimalism. Here was the car Elon Musk promised to make 14 years ago.

(The Verge)

The Tesla Model 3 might be the newest and “affordable” vehicle in the electric automaker’s lineup, but as I pushed my foot down on its accelerator, I thought, Yeah, this thing’s still a Tesla. There’s the silent driving, the signature rapid acceleration, and the semi-autonomous Autopilot function built right in. The company has been reminding customers that the Model S, its luxury car rolled out in 2012, will remain the flagship sedan and have the fanciest features. But if you’ve lusted after that expensive Model S, you’ll likely be satisfied with the Model 3 too.

(Wired)

Have I ever driven a more startling small sedan? I haven’t. At speed, it gains a laser-alertness I haven’t encountered before. By happenstance, associate road test editor Erick Ayapana had penciled me into a 2.0-liter Alfa Romeo Giulia to get here, and it feels like a wet sponge by comparison. Technological fascination? Besides what I’ve already described, the Tesla Model 3 is available with Enhanced Autopilot ($5,000) and for another $3,000 what’s called “Full Self-Driving Capability” in the future. A lot of money, sure—but how many $35,000 cars offer that? Or for that matter, standard over-the-air updatability?

(Motor Trend)

The sea in Tampa Bay has risen naturally throughout time, about an inch per decade. But in the early 1990s, scientists say, it accelerated to several inches above normal, so much that recent projections have the bay rising between six inches and more than two feet by the middle of the century and up to nearly seven feet when it ends. On top of that, natural settling is causing land to slowly sink.

Sea-level rise worsens the severity of even small storms, adding to the water that can be pushed ashore. Hard rains now regularly flood neighborhoods in St. Petersburg, Tampa and Clearwater.

By a stroke of gambler’s luck, Tampa Bay hasn’t suffered a direct hit from a hurricane as powerful as a category 3 or higher in nearly a century. Tampa has doubled down on a bet that another won’t strike anytime soon, investing billions of dollars in high-rise condominiums along the waterfront and shipping port upgrades and expanding a hospital on an island in the middle of the bay to make it one of the largest in the state.

Once-sleepy St. Petersburg has gradually followed suit, adorning its downtown coast with high-rise condominiums, new shops and hotels. The city is in the final stages of a plan to build a $45 million pier as a major attraction that would extend out into the bay.

(Washington Post)