A US economic snapshot in the middle of 2018 — not all is well

Let’s take a quick look at the US economy and where it may be headed in the near term.

While unemployment is said to be very low, the rate is still artificially low due to the uncounted Americans no longer in the workforce because of chronic joblessness.

Producer and consumer pricing are rising — not because of tariffs as the left will cite — due to the excessive capital washing out of the stock and bond market. The stock price run up over the last three years was engineered by the Federal Reserve’s quantitative easing capital finding safe haven in stocks and bonds.

Now that capital is exiting the security markets and finding better treatment with private equity firms that are buying out manufacturing and consumer brand companies, which drives up prices in order for the new owner — the PE firm — to make money from the investment through putting the brands deeper into debt to make special payments to them.

So this capital is not from the average American, but the repercussions are being felt by these average Americans through higher prices. Look at the biggest PE firms raising record amounts for new funds.

Taking a quick look at the US bond market to see where the real problems are. The difference in return rates between lending Uncle Sam money over 2 years versus 30 years.

The 2-year return is 2.61%, the 30-year interest rate is 2.96%. The delta between these two 0.35 percentage points return over 28 years. This is what is called a flat yield curve, since the interest curve is very shallow.

In the environment of the bond market capital is not treated well at all with artificially low returns, so this is pushing additional big money out of the public capital markets and into the private funding markets.

What is the down side of this move? Look at the number of bankruptcies in the retailing sector over the last year. These stores: Toys R US and a dozen or so women’s apparel stores are all closed or limping along because these companies were so leveraged up on debt that they could not pay off their huge debt levels imposed on them by their private equity owners.

But don’t worry about these PE firms because they took their money upfront and more than likely owed some of the companies bonds, which were paid off in the bankruptcy.

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JPM hits profit margin out of the park

Despite it being Friday the 13th, JPMorgan chief Jamie Dimon has no superstitions about reporting record profits for second quarter as bank reporting season kicks off.

The globe’s largest bank by assets locked in a profit of $8.3 billion on higher trading and investment banking revenue as compared to year earlier results. Overall the bank beat on both the top line of $28.39 billion, beating estimates of $27.34 billion and bottom line of EPS of $2.29, vs expectations of a $2.22.

The 18% profit number nearly doubled the street estimate of 9.4%.

JPMorgan’s income rose to $8.32 billion, or $2.29 per share, in the second quarter ended June 30, from $7.03 billion, or $1.82 per share, a year earlier.

Analysts expected the bank to earn $2.22 per share.

 

 

Chinese trade tariff tiff will melt in August heat

We are in the midst of summer doldrums. Markets reading tariff headlines and reacting to mounting trade war.

I prefer to call it a trade tariff tiff, since it’s all blather as no country will stop trading with the US. While the markets reeled over the newest $200B in tariff against China, this will not be enacted until mid-August, so there is plenty of wiggle room for it to work out prior to the deadline.

The markets seem to agree with this premise since on Thursday stocks are retracing back almost 90% of Wednesday’s loses.

Short post today as there is little else going on.

Deutsche Bank brings in Zames to help right the ship

Deutsche Bank — in a broadening effort to keep the lights on in its US operations — has agreed to work with NY-based private equity firm Cerberus Capital Management to explore options as a paid advisor.

Cerberus President Matt Zames — once considered by Deutsche to be on short list to replace ex-CEO Jon Cryon and is formerly a C-Suite executive from JPMorgan — is leading the project.

Cerberus holds roughly a 3% stake in Deutsche and a 5% stake in rival German bank Commerzbank. Talk was earlier this year that the two firms should form an alliance since their core businesses have differing strengths. DB on the corporate side and Commerzbank on the retail side in Germany.

New CEO Christian Sewing is struggling to find a palatable solution to the free fall stock price while not retreating from the US.

While neither party is talking merger at this time, Cerberus could push the boards together since PE firms usually have a shorter investment timeline to turn a profit. Shares of Deutsche are off 40% over the last 12 months and is trading at $11.54 here in the US.

 

JPM’s Dimon eyeing Deutsche with Chinese cash

Is Jamie Dimon looking to goose-step into Frankfurt and take over troubled Deutsche Bank using Chinese money?

That appears to be to the story coming out of Germany as Deutsche’s stock spikes more than 6% in European trading on the news.

JPMorgan and Industrial and Commercial Bank of China are looking to take a stake — size unknown –to bolster the troubled bank, the report from the business weekly WirtschaftsWoche said.

WIWO also reported that German Chancellor Angela Merkel had met Axel Weber, the former Bundesbank head who is now chairman of Swiss bank UBS, to discuss his thoughts on Deutsche Bank.

Newly installed CEO Christian Sewing has not given the market any confidence in his ability to turn around the much maligned institution, which has paid nearly $500 billion in penalties and fines to global regulators for its bad banking actions over the last decade.

Sewing is also seen as an impediment to change since he made his bones at the bank during this troubling time as I have written before.

Before the summer ends something will happen with Deutsche Bank. Whether that’s a merger with fellow-troubled German firm Commerzbank or a bailout through cash injections from EU this bank right now is on the ropes and getting pummelled.