(ZeroHedge) The LMCI Index Says The Fed Is Late Again

The LMCI Index Says The Fed Is Late Again
In May of 2014, the Federal Reserve began discussing a newly designed labor market index to help support their claim that employment conditions in the U.S were improving. This was an important facility for the Fed which needed support to raise interest rates. My good friend Doug Short has a complete discussion on the LMCI, which is worth reading for context. As he defines:
"The Labor Market Conditions Index (LMCI) is a relatively recent indicator developed by Federal Reserve economists to assess changes in the labor market conditions. It is a dynamic factor model of labor market indicators, essentially a diffusion index subject to extensive revisions based on nineteen underlying indicators in nine broad categories.

 

The indicator, designed to illustrate expansion and contraction of labor market conditions, was initially announced in May 2014, but the data series was constructed back to August 1976."
Unfortunately for the Federal Reserve, the index has not supported the Fed's claims that employment is growing at a rate strong enough to withstand a tightening of monetary policy. In fact, as shown in the chart below, the LMCI index (smoothed with a 12-month average) has been a leading indicator of future weakness in employment. The recent downturn in the LMCI suggests that employment gains may more muted in the months ahead.
LMCI-Employment-101415
Therein lies the problem for the Fed. If the LMCI is indeed forecasting weaker employment, then the Fed's ability to raise interest rates is negated. However, as shown in the chart below, the Fed has ALWAYS been late to the game when hiking interest rates. Each time the Fed began hiking interest rates was at the point the LMCI had effectively peaked. 
LMCI-FedFunds-101415
The Fed is once again very late to the game in hiking rates. The problem is that with the economy growing at less than 2% annualized, there is very little wiggle room for a policy mistake.

Retail Sales Decline

While the weakness in the LMCI is suggesting more disappointing employment growth ahead, retail sales are suggesting that the economy is likely much weaker than headlines suggest. 
Given all the massaging of data through seasonal adjustments, the chart below using the NON-seasonally adjusted data smoothed with a simple 12-month average. This gives a much more realistic look at what is actually happening with retail sales in the economy that makes up roughly 40% of total personal consumption expenditures. I have also provided the SA adjusted data to show the correlation between the two series. 
Retail-Sales-12th-Avg-NSA-101415
As shown, when retail sales have fallen below 4% growth it has historically been a leading indication of the onset of a recession. While there has been no official recession call as of yet by the NBER, it is important to remember that much of the economic data is subject to rather large annual revisions. It will not be surprising to see economic growth revised lower next year. 
The chart below shows the annual rate of change in "control purchases" which is more closely related to the actual activity of average consumers. I have overlaid the analysis with a simplistic economic cycle. Again, as shown above, control purchases are also suggesting that the economic environment is, in fact, very weak. 
Retail-Sales-Control-Purchases-101415
The weakness in retail sales will feed into the personal consumption component of GDP which comprises almost 70% of the economic equation. This will be a problem for the Fed. 

What Inflation? PPI Declines Again

Of course, let me once more remind you why the Fed raises interest rates - to SLOW economic growth and QUELL inflationary pressures in a potentially OVERHEATING economic environment. 
With Q3 economic growth rates closer to 1% than 2%, there is little danger of an overheating economy currently. Furthermore, as shown in the composite inflation index below (average of both PPI and CPI), there is absolutely no worry about spiking inflationary pressures.
Inflation-CompositeIndex-101415
Of course, this is why the Social Security Administration just announced there will be NO INCREASE to social security payments this year. Unfortunately, for those recipients there will be no offset for sharply rising healthcare costs, property taxes or insurance payments. 
For investors, the deflationary decline will erode corporate profitability and ultimately stock prices. As shown in the chart below, sharp declines in inflation have generally been associated with negative annual rates of growth in the financial markets. 
Inflation-CompositeIndex-SP500-101415
Weakness in the financial markets ultimately weighs on consumer confidence which is why the Federal Reserve has been focused on supporting higher asset prices. A collapse in stock prices will quickly turn in to a negative feedback loop for the economy.
The Federal Reserve is quickly becoming trapped by its own "data-dependent" analysis. Despite ongoing commentary of improving labor markets and economic growth, their own indicators are suggesting something very different. 
As I have stated previously, while the Federal Reserve may hike interest rates simply to "save face," there is indeed little real support for them doing so. Tightening monetary policy further will simply accelerate the time frame to the onset of the next recession. Of course, the Fed knows this which is why they recently floated the idea of "negative interest rates" out into the markets. In other words, they already likely realize they are screwed. 
Just something to think about.

(ZeroHedge) How $1.3 Trillion In Student Debt Broke The "Birth/Death Adjustm

How $1.3 Trillion In Student Debt Broke The "Birth/Death Adjustment” Model

One of the main reasons why the BLS has been massively overestimating job creation ever since great financial crisis, is due to the well-known birth-death adjustment, aka the CES Net Birth/Death Model, which quantitatively is shown on the chart below, has resulted in the "addition" of some 5.3 million jobs, that don't actually exist, but are merely modeled by the BLS which continues to assume the same new business creation/destruction dynamics that existed before the crisis.

 

The is a big problem with this core assumption, which has follow through effects not only for domestic fiscal policy, but also monetary policy (and explains why despite a 5.1% unemployment, there is zero wage growth, thus keeping the Fed pushing the ZIRP accelerator pedal years later), for the simple reason that as of this moment it is dead wrong.
Here is what Gallup CEO, Jim Clifton, wrote several months ago looking at the trends in new business creation and destruction in the US.
We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

 

The U.S. Census Bureau reports that the total number of new business startups and business closures per year -- the birth and death rates of American companies -- have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.
As Clifton adds "you may not have seen this graph before" and for good reason: it destroys the most sacred assumptions held by the BLS' cubicled actuaries and various tenured economists locked up in their ivory towers: namely that the number of US business startups outnumbers the number of failures. This is no longer true!

 

Here is what the above chart shows: until 2008, startups outpaced business failures by about 100,000 per year. But in the past six years, that number suddenly turned upside down. There has been an underground earthquake. As you read this, we are at minus 70,000 in terms of business survival. The data are very slow coming out of the U.S. Department of Census, via the Small Business Administration, so it lags real time by two years.
Gallup adds that business startups outpaced business failures by about 100,000 per year until 2008. But in the past six years, that number suddenly reversed, and the net number of U.S. startups versus closures is minus 70,000.

 

So what is causing this historic shift in US business creation.
The are various answers, the most obvious of which is that the US never actually left the 2007 depression, whose effects continue to be papered over, literally, with some $13 trillion in global central bank liquidity, which have made life for the richest 0.1% better than ever at the expense of the middle class. 
But the biggest culprit is also the one which over the past 7 years has become America's latest credit bubble, last checkrising to $1.3 trillion in debt: student loans.
This is what Gallup finds when looking at the future of collapsing U.S. new business formation:
... the country can't look to people coming out of college to reverse this trend because too many of them are strapped by student loan debt. Results of the 2015 Gallup-Purdue Index -- a study of more than 30,000 college graduates in the U.S. -- provide a worrisome picture of the relationship between student loan debt and the likelihood of graduates starting their own businesses.

 

Among those who graduated between 2006 and 2015, 63% left college with some amount of student loan debt. Of those, 19% say they have delayed starting a business because of their loan debt. That percentage rises to 25% for graduates who left with more than $25,000 in student loan debt. According to the National Center for Education Statistics, nearly 16.9 million bachelor's degrees were conferred in the U.S. over the past 10 years -- a time frame that mirrors Gallup-Purdue Index analysis of recent graduates between 2006 and 2015.
Putting these sad statistics into numbers, Gallup calculates that over 2 million graduates have said they have delayed starting a business because of their student loan debt. If even a quarter of them had done so, we would quickly recoup our average surplus of 120,000 new businesses annually.
It would also mean that the BLS's Birth/Death model would once again be accurate. However, as a result of record student debt, which is increasing at an accelerating pace of over $100 billion per quarter, not only is the birth/death adjustment wrong, but its "contribution" to the total number of jobs should be inverted.
Which, incidentally, would reflect far more accurately the woeful state of the US labor market.
Finally, we know we are spot on right with our assessment that student debt has become the primary culprit holding back the jobs (and businesses) recovery, because two days ago none other than Ben Bernanke said Bthat "student debt no threat to U.S. financial system."
And that is all you need to know why the biggest threat to the US financial system is none other than student debt (after the Federal Reserve itself, of course).

>>> Shire preparing bid for Radius Health

Drug industry consolidation prospects got a shot in the arm on Thursday from talk that Shire (LON:SHP) may bid for US group Radius Health (NASDAQ: RDUS).

Shire is rumoured to have appointed advisers to work on a potential US$90 per share bid for Radius, which is developing therapeutics for patients with osteoporosis and other serious endocrine-mediated diseases.

A Shire spokesperson said: "We don't comment on rumour/speculation."

Proactive Investors also called Radius, but at the time of going to press no-one was available to comment.

Radius is thought to be among alternative acquisition candidates that Shire may target if it fails in its US$30bn bid for US rival Baxalta.

Baxalta rebuffed Shire's approach in August, saying it undervalued the company.

Other potential acquisition targets for Shire include Switzerland's Actelion and America's Ariad Pharmaceuticals, according to reports.

Shire is thought to be keen to do a deal not only to expand its drug portfolio but to prevent it becoming a bid target.

The Dublin-based company faced a £34bn takeover by AbbVie last year, but that foundered due to a clampdown on US companies moving abroad to reduce their tax bills.

In January, it signalled its intention to stay independent with a US$5.2bn deal to buy US speciality drug firm NPS Pharma.

Shares in Shire rose 54p to 4375p by the London close. Radius's stock was up US$3.66 or 6.75% at US$57.81

FT : Isis Inc: Syria’s ‘mafia-style’ gas deals with jihadis

Isis Inc: Syria’s ‘mafia-style’ gas deals with jihadis

The need for energy drives Assad regime into a deadly game

After four years of war, Ahmed thought he had finally been given a break when he landed a job at Syria’s national gas company. Then he was assigned his new supervisors: the militant group, Isis.
For $80 a month, the 25-year-old petroleum engineering graduate from Deir Ezzor spent a nightmarish year working at the Tuweinan gas plant — one of several that have in effect become joint ventures between President Bashar al-Assad’s government and the world’s most notorious jihadi group.

The plant is not far from a military base where Isis months earlier had killed dozens of soldiers and displayed their heads on spikes. “It was frightening, but I didn’t have a choice,” says Ahmed in a phone interview. Like all employees interviewed, he asked to change his name for his family’s safety. “For people like me, you basically have no other work opportunities in Syria.”
Isis and the Assad regime remain battleground enemies, but on Syria’s gasfields the need for electricity has forced them into a Faustian bargain.
Gas supplies 90 per cent of Syria’s power grid, on which Isis and the Assad regime depend. Isis controls at least eight power plants in Syria, including three hydroelectric facilities and the country’s largest gas plant. The regime has companies that know how to run them.
Syrian activists and western officials have long accused the regime of making secret oil deals with Isis, which controls nearly all of Syria’s petroleum-producing east. But an FT investigation shows co-operation is strongest over the gas that generates Syria’s electricity. Interviews with over a dozen Syrian energy employees have revealed agreements that are less about cash than about services — something they may find more valuable than money.
The business deals do not translate into a truce. The two sides continually attack one another’s employees and infrastructure. The regime points to these clashes as proof that such understandings do not exist. In a written statement, Syria’s Ministry of Oil and Natural Resources said: “There is no co-ordination with the terrorist groups regarding this matter.” But it acknowledged some of its employees work under Isis “for the sake of preserving the security and safety of these facilities”.
But others describe the fighting as part of a struggle for better terms, where neither seeks to destroy the other. “Think of it as tactical manoeuvres to improve leverage,” said the owner of one Syrian energy company, who met the FT but asked not to be named. “This is 1920s Chicago mafia-style negotiation. You kill and fight to influence the deal, but the deal doesn’t end.”
Isis Syria gas map
Deadly game
The pawns in this deadly game are employees of state-run energy companies and the private groups they contract.
Instead of worrying over valves and pipelines, Ahmed spent much of his time at Tuweinan parsing a high-stakes mind game with his militant overseers. They beat workers regularly, and even killed one in front of his colleagues.
“The worst part is knowing that once you’re there, you belong to no one,” he said. “To both the regime and to Isis, you become untrustworthy.”
Like Ahmed, most workers sent to Isis territory are from Syria’s Sunni Muslim majority, who drove the revolt that spawned Syria’s brutal civil war against the Assad family and elites from their minority Alawite sect that have dominated the state. Many members of Syria’s minorities have supported Mr Assad — especially since Isis overtook the rebellion and branded non-Sunnis infidels.
Marwan, another Sunni engineering graduate who worked for the Syrian Gas Company before fleeing the country this summer, says only minorities and Sunnis with good political connections can secure jobs in government-controlled areas. Less fortunate employees find little sympathy from the state company if they try to avoid a posting in an Isis-controlled plant.
“If you try and complain, they say, ‘Forget about it. Trust me, it’s better in the Isis areas, people are happier there’,” Marwan, a bespectacled 25-year-old, told the FT.

Workers say that in agreements between Isis and the regime, the Syrian state and private gas companies pay and feed their employees and supply equipment to the facilities. The two sides divide the electricity produced from the methane heavy “dry gas”, while Isis gets the fuel products made from the plants’ liquid gas.
For example, employees at Tuweinan say its gas is sent to the Isis-held Aleppo thermal power plant. When facilities are working — there are frequent outages due to the instability in the area — the Tuweinan deal nets the regime 50mw of electricity each day. Isis takes 70mw.
At most plants where the two sides co-operate, Isis gives its daily output of liquid petroleum or cooking gas, and condensate — used for generators — to its own members or sells it to locals. At Tuweinan, unstable conditions mean it currently produces about 300 barrels of condensate but no cooking gas.
Tuweinan is partly run by the Syrian company Hesco, whose owner, George Haswani, is under EU sanctions on suspicion of dealing with the regime and Isis. Several workers said Hesco sends Isis 15m Syrian lira (about $50,000) every month to protect its equipment, which is worth several million dollars.

Michel Haswani, the owners’ son and a manager at Hesco, denies this. He said that claims the company pays Isis or communicates with it in any way are “not true and imprecise”. But he says that Isis was “partly” running the plant.
Isis enforcement
Isis installs “emirs” who monitor operations and negotiate with the regime through mediators. There is an emir for the plant, a religious emir and another from the Hisba, the group’s morality police. Workers say the Hisba emir at Tuweinan, known as Sheikh Haseeb, patrolled the plant to enforce strict Islamic practice. Anyone breaking the rules would receive 75 lashes.
Sheikh Haseeb also allowed gunmen to threaten employees. They particularly targeted the plant’s two dozen Christians, even though workers say Hesco had already paid Isis a poll tax for them in gold. “One guy pointed his knife at an engineer saying, ‘By God we will slaughter you like a sheep,’” one Hesco employee recalled in an interview via WhatsApp. “I never saw him or any of the other Christian employees again.”
The director of operations at Tuweinan, Taha al-Ali, was known as the Syrian Gas Company’s mediator with Isis. A pious man, he was popular with his colleagues, but workers say Isis members suspected him of being a regime collaborator.
When the emir discovered that gas was being diverted to Arak, a plant then held by the regime but now under Isis control, he accused Mr Ali of stealing for the Assad government. He was dragged away by guards. Workers say he returned disheveled three months later, on the day they were forced to witness his execution.
“He was accused of mocking Islam and being a loyalist of the regime,” said one colleague who recounted the event in a telephone interview. “The gunmen shot him in the head, one bullet each. Then Sheikh Haseeb came up and shot him in the stomach. It was terrifying.”

Workers say Tuweinan has continued to function despite the violence. But slowly the number of workers has dropped from 1,500 to about 300 as many have fled.
Many regime supporters insist these dealings are necessary to preserve infrastructure and keep the lights on, and some agreements are extensions of pre-existing deals made with rebel groups that controlled the areas before Isis took over last summer. “There’s no conspiracy, but as the regime guys say, it’s necessary complicity,” said the Syrian energy company owner.
Another oil company official who works with the Syrian regime, says juggling these deals has become a preoccupation for the oil ministry.
“Before it was [rebel groups] Jabhat al-Nusra or the Islamic Front. Nowadays it’s representatives for Isis,” he told the FT in Beirut.
Not all Isis-controlled plants are as miserable as Tuweinan. Employees say treatment is better at the “Conoco” plant in eastern Deir Ezzor. Syria’s biggest gas producer, the plant was named for the US company that first developed it. Employees say its emir, Abu Abdulrahman al-Jazrawi, is a Saudi Arabian with years of experience who holds training sessions and gives workers a barrel of condensate each month in addition to the state salary. A barrel can sell for about $100 — often more than their wages.

Many workers also say that even finding work at regime-controlled facilities is no guarantee of safety, because they are targeted by the jihadis. Marwan worked at the Ebla plant in government-controlled Faruqlus, near Homs, where Isis blew up pipelines and set off a car bomb that killed his manager in April.
“Every day, we went over evacuation plans,” he said. “I’m Sunni — if I fled too quickly, the Alawites would accuse me of being a conspirator. If I waited too long, Isis could catch me.”
The nearby Shaer gasfield, which produces nearly half Syria’s electricity, was taken over by Isis twice in 2014 before the regime recaptured it. Everyone working there disappeared and is presumed dead, according to Marwan and other employees.
When nearby Palmyra fell to Isis this summer, Marwan says many of his friends working at Hayyan, near Shaer, wanted to flee. “The army wouldn’t let them. They said who ever tried to run will be shot dead.”
Back at Tuweinan, Ahmed found events like Mr Ali’s killing too much to bear. “He was one of the few people I’ve met in life I would say was an amazing human being,” he said. A few months later, he and some other workers smuggled themselves across the border to Turkey, crossed the Mediterranean, and trekked to Germany. All say they are now considered fugitives for abandoning state posts.
Officials at the plant have been unable to find someone willing to replace Mr Ali. But the deal goes on.

WSJ : Glencore Plans More Debt Cuts to Help Win Upgrade in Credit Rating

Glencore Plans More Debt Cuts to Help Win Upgrade in Credit Rating

Heavily indebted Swiss mining and trading giant seeks strong investment-grade rating three or four notches above junk status

LONDON—Executives at Glencore PLC are cobbling together a plan they hope will result in a credit-rating upgrade, people familiar with the embattled company’s effort said, a previously undisclosed part of the firm’s attempt to strengthen its balance sheet.

The Swiss mining and trading giant, whose stock has been buffeted by investor concerns over its highly leveraged balance sheet, has said it would reduce net debt by $10 billion, bringing it down to about $20 billion. But the company’s plans to raise cash through streaming deals, asset sales and other moves could potentially cut more than $12 billion, putting its net debt at about $18 billion.

With those reductions, Glencore is targeting a credit rating that would put its debt three or four notches above junk status, a person familiar with the matter said. Glencore wants a strong investment-grade rating, said a different person close to the company.

Glencore’s debt currently is ranked two notches above the lowly junk characterization. Moody’s Investors Service and Standard & Poor’s have put Glencore on a negative watch, raising the possibility of a ratings downgrade if commodity prices worsen.

The focus on Glencore’s debt highlights the uneasy balance between its trading division and its mining arm. Founded as a trading company, its executives had long maintained it didn’t need high credit ratings, as its credit was mostly short-term and backed by the assets it shipped.

When Glencore became a mining force with its 2013 acquisition of Xstrata, it acquired $15 billion in long-term debt and became the most indebted of the world’s biggest miners. Its BBB credit rating, which is high for the trading industry, became a liability in a world of largely A-rated mining giants and volatile commodities prices.

Glencore’s share price has been hammered, falling 60% this year, including 29% in one day last month, as investors worry about its high debt and a credit rating that is lower than its competitors. Rio Tinto PLC and BHP Billiton Ltd. each have ratings above “A” and $13.7 billion and $24.4 billion in net debt, respectively.

In September, Moody’s called a Glencore upgrade “unlikely given the negative outlook,” but added one was possible if the company’s debt was brought “sustainably” to less than 2½ times earnings before interest, taxes, depreciation and amortization. It would, in theory, hit that target if the company reduced its debt to $18 billion to $20 billion, with roughly $9 billion in Ebitda expected this year and next, though that profit figure is based on current commodity prices, which some experts say will fall.

It isn’t assured that Glencore will achieve all its debt-reduction goals, and its asset sales might not get as much as the company is aiming for. A ratings upgrade could rely on earnings from its mining division performing better than some skeptics expect—a difficult goal in a period of depressed commodity prices for nearly everything the company sells.

The more ambitious debt-reduction plan shows Glencore is steeling its balance sheet for a worse commodity route than that expected by its chief executive, Ivan Glasenberg, people familiar with the situation said.

In a series of meetings this past summer, after Glencore posted lackluster first-half results, investors told the company they were concerned that if the copper price dropped another 20% or so to $4,000 a ton, it could face ratings downgrades and resulting financial issues.

Mr. Glasenberg has said repeatedly in recent months that he doubted copper, among Glencore’s most important commodities, would fall so low. But he has agreed to the $10 billion in debt cuts to protect the balance sheet from what executives called a doomsday scenario.

Slashing debt by $12 billion could happen a number of ways. Some of it would come from asset sales and precious-metals streaming deals, in which the company agrees to provide a stream of gold or silver to another firm in exchange for an upfront payment of cash. Glencore said in September that it expects to get $2 billion from the sale of assets and streaming deals. But bankers familiar with the company say it could get as much as $1.5 billion from streaming deals and $3 billion from asset sales.

That would come on top of $2.5 billion Glencore raised from the sale of shares and the $2.4 billion it expects to save by cutting dividends. The company has said it also expects to save $1 billion to $1.8 billion from reducing long-term loans and advances and spending cuts, and about $1.5 billion from cuts in working capital.

The bulk of the cash from asset sales is likely to come from the sale of 30% to 40% of Glencore’s agriculture business, which could fetch between $2 billion and $3 billion, according to the people familiar with the discussions. The company earlier this week said it is also looking to sell two copper mines, deals analysts say could raise more than $1 billion.

Glencore is also seeking buyers for some of its oil-and-gas assets, people familiar with the discussions said, though it isn’t clear how much the company could raise. A person familiar with the situation said the oil-and-gas asset sales would likely be small.

Commodity prices remain a key uncertainty, with the copper price falling to multiyear lows in August to $4,968 a ton.

Jeffrey Currie, global head of commodities research at Goldman Sachs Group Inc., said at a media round table in London on Thursday that he expects the copper price to fall to $4,200 a ton by the end of 2016. The researcher said prices for the industrial metal haven’t fallen below how much it costs to produce a ton—in the “low $4,000 a ton” range, he says, but miners aren’t taking enough capacity out of production to buttress prices. “Copper is the most overvalued [commodity] and you want to be short copper,” Mr. Currie said.