Smart money and dumb money are moving in opposite directions

While all seems calm in the U.S. equity markets, with stocks continuing to hit all-time highs, an interesting trend has emerged beneath the surface.

Combing through the latest Commitments of Traders report from the Commodity Futures Trading Commission (CFTC), we found that commercial traders (“smart money”) have a record number of short positions in the Dow Jones Industrial Average DJIA, +0.70% At the same time, noncommercial traders (“dumb money”) have a record number of long positions.

You may be thinking “one group thinks stocks will go up, and the other thinks stocks will go down. What’s the big deal?”

Here’s the big deal.

Buy low, sell high — a pro’s game

There’s a strong negative correlation between commercial traders’ short positions and the Dow Jones Industrial Average, as the below chart shows. When short positions increase, the DJIA usually falls … perfect timing!

iSPYETF

The opposite also is true. When noncommercial traders increase their long positions, the market usually drops shortly thereafter. It seems they have a habit of buying the market at exactly the wrong time.

 
iSPYETF

Given that the “smart money” usually wins this tug of war, let’s focus on the reasons behind their negative outlook for stocks.

Here’s some of the reasons professional money managers may be growing cautious about stocks today.

Value investors say no — here’s why

Findings from Goldman Sachs Asset Management (GSAM) show that by just about every measure, stocks are expensive today.

Median Stock S&P 500
Metric Current Long-term Average Historical Percentile
EV/Sales 2.7 1.4 98%
Forward P/E 17.7 13.1 94%
EV/EBITDA 11.7 8.1 98%
P/E to growth (PEG) 1.8 1.2 100%
Price/Book 3.3 2.2 98%
Source: Mauldin Economics

But it’s not only U.S. stocks that are trading at all-time highs.

This chart from Deutsche Bank shows that, in their own words, “we’re in a period of very elevated global asset prices — possibly the most elevated in history.”

Deutsche Bank

Lofty valuations are likely a big factor in Warren Buffett’s and Seth Klarman’s reasoning for holding record levels of cash in their portfolios. In September, Buffett’s Berkshire HathawayBRK.B, +0.01%  had $99.7 billion in cash on the sidelines. Klarman’s Baupost Group held 42% of its portfolio in cash, the largest single position.

So U.S. stocks are expensive by most measures. But they have been expensive for quite some time. High valuations don’t mean a crash is imminent. They do, however, tell us something about future returns.

If you buy high, expect low returns

This chart from GSAM shows that in 99% of the time since 1926, current valuation levels have led to poor returns over the following decade.

Goldman Sachs

Data from Research Affiliates, an investment-analysis firm, expresses that point in a different way. They found that since 1925, 10-year returns on U.S. stocks have been strongly correlated to the earnings yield on those stocks. As such, they estimate returns in the coming decade will be a measly 3%-4%.

Research Affiliates

With such low returns expected, it’s no wonder that both Pimco and T. Rowe Price recently urged their clients to cut their allocation to U.S. stocks.

Bringing it back to the valuations again, they tell us something else about the future of the market.

The next big correction will be severe

The other big takeaway from today’s valuations is that when the correction does come, it will be severe. Findings from Star Capital show that downside risk tends to increase as market valuations become excessive.

Star Capital

With current market valuations firmly in the “expensive” column, investors would be wise to proceed with caution.

While the focus here has been on the reasons why professional investors are growing cautious on U.S. equities, there is also concern about bubbles forming in a number of other asset classes.

 

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Stocks hit records as IBM propels Dow back above 23,000

Major indexes hit intraday records and the Dow industrials returned above 23,000 on Wednesday as U.S. stocks gained momentum into the afternoon as the latest round of corporate earnings continued to support the market.

What are the main benchmarks doing?

The Dow Jones Industrial Average DJIA, +0.70%  climbed 164 points, or 0.7%, to 23,162. The S&P 500 index SPX, +0.07%  rose 5 points, 0.2%, to 2,563 and the Nasdaq CompositeCOMP, +0.01% gained 9 points, or 0.1%, to 6,632.

Recent trading has had a pronounced upside bias. The Dow is on track for its fourth straight daily rise, as well as its 13th gain of the past 16 trading days. The S&P is set for its fourth straight daily gain, as well as its 14th positive session of the past 17.

See: Dow 23,000 marks fresh history for blue chips

Don’t miss: Retail investors see this as the ‘best time ever’ to jump into stocks. Time to worry?

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What are strategists saying?

“So far, earnings have beat expectations. I think that the most important thing economically that has happened this year is the clear, sustainable recovery occurring in Europe. We’re getting confirmation of that with almost every economic release. Europe is creating more demand for goods from China which is helping China, so we have the U.S., Europe and China in a synchronized recovery. Economic data globally is confirming positive earnings trends,” said Maris Ogg, president of Tower Bridge Advisors.

“IBM had great numbers, and people think the stock is undervalued. It seems to have a turnaround in progress, no doubt about that. The stock probably got oversold due to too much negativity,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services.

“Overall, earnings are coming in very nicely. Average earnings growth has been 12%, which is way above what people are expecting, though we don’t have that big of a sample yet.”

Which stocks are key movers?

Shares in International Business Machines Corp. IBM, -0.01%  jumped 9.7% a day after the tech giant posted better-than-expected quarterly results. IBM was the Dow average’s biggest gainer, set for its biggest one-day percentage gain since 2009.

Bespoke Investment Group

However, the stock remains down about 4.5% so far this year, having bucked the overall trend in tech names. The tech sector is up more than 25% in 2017 and is the best performer among the primary S&P 500 sectors.

Read more: IBM earnings beat is a product of tax avoidance, and it’s nothing new

Shares in Fogo de Chão Inc. FOGO, -7.68%  sank about 8% after the restaurant chain gave a disappointing outlook late Tuesday.

Abbot Laboratories ABT, +1.31%  rose 1.8% after it reported its quarterly results.

Financial stocks were big gainers led by Citigroup Inc. C, +1.28% Goldman Sachs Group Inc.GS, +2.52%  and Morgan Stanley MS, +2.08%

Allergan PLC AGN, -5.37%  shares continued to fall, dropping 5% after a Texas district court judge earlier this week ruled against the company in a patent lawsuit regarding the company’s billion-dollar dry-eye medication Restasis.

Shares of Electronic Arts Inc. EA, -2.44%  slid 2.5% following news that the company is shuttering the unit that was working on an upcoming “Star Wars” video game.

What could drive markets?

The Fed’s Beige Book report, which gathers economic anecdotes from across the U.S. central bank’s regional districts, showed that economic growth has ranged from modest to moderate, a report that is unlikely to deter the central bank from normalizing interest-rate policy.

What are data saying about the economy?

A report on the housing industry showed that permits and home starts were both down in September. Permits fell by 4.5% on the month at 1.27 million, while starts fell by 4.7% to 1.13 million, according to the Commerce Department.

What are other assets doing?

European stocks SXXP, +0.29% closed higher, while Asian markets were mixed as a key meeting of China’s political elite kicked off. Oil futures CLX7, +0.21% were moderately higher, while gold futures GCZ7, -0.30% pulled back. The ICE U.S. Dollar Index DXY, -0.11% was mostly flat.

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Gold down a third day on dollar strength, with inflation risk in focus

Gold futures marked a third session decline on Wednesday, deepening their retreat from the key $1,300 level on the heels of recent strength in the U.S. dollar, as investors deal with uncertainty over who will become the next Federal Reserve chief and how that will influence the outlook for interest rates.

“The possibility of a more hawkish Federal Reserve Chair succeeding Janet Yellen in February raises the prospect of more interest rate hikes next year,” said Craig Erlam, senior market analyst at Oanda. “Market expectations for interest rates next year are already well below those of the central bank—should Yellen be replaced by someone of a more hawkish nature, the market could find itself well behind the curve.”

December gold GCZ7, -0.30%  gave up $3.20, or 0.3%, to settle at $1,283 an ounce, with prices logging their lowest finish since Oct. 6, according to FactSet data. The exchange-traded SPDR Gold Trust GLD, +0.02%  shed 0.3%.

Shortly after the settlement, the Fed’s Beige Book was released, and gold futures edged up from the finish to trade closer to $1,284, then flattened.

The report, which offers a snapshot of domestic economic activity, said U.S. growth was “split between modest and moderate,” but the Fed still appears to be on track to raise interest ratesby December.

The ICE U.S. Dollar Index DXY, -0.11%  traded little changed at 93.44 after the Fed report, but has gained around 0.4% for the week so far. A stronger dollar can make the commodities priced in the currency more expensive to buyers using weaker monetary units.

There has been “something of a recovery in the greenback over the last month or so but even still, it isn’t a million miles from its lows and has some way to go to pare the substantial losses suffered this year,” Erlam said in a morning note.

A break and hold above 94 in the dollar index “may signal such a correction, which may be well supported into the end of the year should a more hawkish Chair appointment be announced and Congress make progress on health care and, more importantly, tax reform,” said Erlam.

 

 
 
Huge gold discovery-astronomers can confirm how precious metals were formed
 

Some analysts said the greenback was still finding upside support following reports this week that President Donald Trump was impressed by Stanford University economist John Taylor.

In other metals trading, December silver SIZ7, -0.18%  ended at $16.997 an ounce, down 0.3%. December copper HGZ7, -0.61%  shed 0.6% to $3.178 a pound, January platinum PLF8, -1.22% lost 1.1% to $924.60 an ounce and December palladium PAZ7, -2.39%  finished at $952.95 an ounce, down 2.4%.

 

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Opinion: Trump is dismantling U.S. alliances, and that’s not good for the dollar.

WASHINGTON (Project Syndicate) — Mark Twain never actually said “Reports of my death have been greatly exaggerated.” But the misquote is too delicious to die a natural death of its own. And nowhere is the idea behind it more relevant than in discussions of the dollar’s international role.

Pundits have been saying last rites for the dollar’s global dominance since the 1960s — that is, for more than a half-century now. The point can be shown by occurrences of the phrase “demise of the dollar” in all English-language publications catalogued by Google.

The frequency of such mentions, adjusted for the number of printed pages per year, first jumped in 1969, following the collapse of the London Gold Pool, an arrangement in which eight central banks cooperated to support the dollar’s peg to gold. Use of the phrase soared in the 1970s, following the collapse of the Bretton Woods system, of which the dollar was the linchpin, and in response to the high inflation that accompanied the presidencies of Richard Nixon, Gerald Ford, and Jimmy Carter in the 1970s.

 

 
 
Trump’s Risky Stock-Market Boasts
 

But even that spike was dwarfed by the increase in mentions and corresponding worries about the dollar starting in 2001, reflecting the shock of the terrorist attacks that September, the mushrooming growth of the U.S. trade deficit, and then the global financial crisis of 2008.

Yet through all of this, the dollar’s international role BUXX, -0.21%  has endured. As my coauthors and I show in a new book, the share of dollars in the foreign-currency reserves held by central banks and governments worldwide hardly budged in the face of these events. The greenback remains the dominant currency traded in foreign-exchange markets. It is still the unit in which petroleum is priced and traded worldwide, Venezuelan leaders’ complaints about the “tyranny of the dollar” notwithstanding.

Pundits have been saying last rites for the dollar’s global dominance since the 1960s — that is, for more than half a century now. But the pundits may finally be right, because the greenback’s dominance has been sustained by geopolitical alliances that are now fraying badly.

To the consternation of many currency traders, the value of the dollar fluctuates widely, as its rise, fall, and recovery in the course of the last year have shown. But this does little to erode the attractiveness of the dollar in international markets.

 

Central banks still hold U.S. Treasury bonds because the market for them is the single most liquid financial market in the world. And Treasury bonds are secure: the federal government has not fallen into arrears on its debt since the disastrous War of 1812.

In addition, U.S. diplomatic and military links encourage America’s allies to hold dollars. States with their own nuclear weapons hold fewer dollars than countries that depend on the U.S. for their security needs. Being in a military alliance with a reserve-currency-issuing country boosts the share of the partner’s foreign-exchange reserves held in that currency by roughly 30 percentage points. The evidence thus suggests that the share of reserves held in dollars would fall appreciably in the absence of this effect.

This under-appreciated link between geopolitical alliances and international currency choice reflects a combination of factors. Governments have reason to be confident that the reserve-currency country will make servicing debt held by its allies a high priority. In return, those allies, by holding its liabilities, can help to lower the issuer’s borrowing costs.

Here, then, and not in another imbroglio over the federal debt ceiling this coming December, is where the real threat to the dollar’s international dominance lies. As one anonymous State Department official put it, President Donald Trump “does not seem to care about alliances and therefore does not care about diplomacy.”

South Korea and Japan are thought to hold about 80% of their international reserves in dollars. One can imagine that the financial behavior of these and other countries would change dramatically, with adverse implications for the dollar’s exchange rate and U.S. borrowing costs, were America’s close military alliances with its allies to fray.

Nor is it hard to imagine how this fraying could come about.

Trump has painted himself into a strategic corner: he needs a concession from North Korea on the nuclear-weapons issue in order to save face with his base, not to mention with the global community. And, for all of Trump’s aggressive rhetoric and posturing, the only feasible way to secure such a concession is through negotiation. Ironically, the most plausible outcome of that process is an inspections regime not unlike the one negotiated by Barack Obama’s administration with Iran.

To get there, Trump’s administration will have to offer something in return. The most obvious bargaining chip that could be offered to make the North Korean regime feel more secure is a reduction in U.S. troop levels on the Korean Peninsula and in Asia in general, With that, the U.S. security guarantee for Asia will weaken, in turn providing China an opportunity to step into the geopolitical breach.

And where China leads geopolitically, its currency, the renminbi USDCNH, -0.1611% , is likely to follow.

This article was published with permission of Project Syndicate — The Demise of Dollar Diplomacy.

 

Barry Eichengreen is professor of economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is “Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History.”

 

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Trump Today: President punts Iran deal to Congress and says he’ll attack Obamacare ‘piece by piece’

President Donald Trump said Friday he won’t certify Iran’s compliance with the 2015 nuclear agreement, called Obamacare a “broken mess” after halting subsidies to health insurers, and said he’d “always be with” the people of Puerto Rico after suggesting a day earlier he’d pull back on federal aid.

DECERTIFYING THE IRAN DEAL

Speaking at the White House, Trump said “we cannot and will not” certify the Iran deal, and announced he has directed the Treasury to sanction the Revolutionary Guard Corps — something he called a “long overdue step.”

The strategy Trump announced Friday doesn’t kill the Iran deal, but instead leaves its future up to Congress. “We will not continue down a path whose predictable conclusion is more violence, more terror and the very real threat of Iran’s nuclear breakout,” Trump said.

Reuters
President Donald Trump speaks about the Iran nuclear deal in the Diplomatic Room of the White House on Friday.

ATTACKING OBAMACARE ‘PIECE BY PIECE’

 

Trump tweeted that he’s beginning to give the country “the great HealthCare it deserves!” Late Thursday, the White House said it was ending billions of dollars in payments to insurers under the Affordable Care Act. Yet Trump has privately told at least one member of Congress that the payments may continue if a deal is reached on health care, according to The Wall Street Journal.

Also see: Wall Street analysts expect gains of up to 64% on their favorite health-care stocks.

The Democrats ObamaCare is imploding. Massive subsidy payments to their pet insurance companies has stopped. Dems should call me to fix!

 

ObamaCare is a broken mess. Piece by piece we will now begin the process of giving America the great HealthCare it deserves!

 

PROPS TO PUERTO RICO

Trump said he’d “always be with” the people of Puerto Rico, following criticism he got Thursday for saying the Federal Emergency Management Agency and the military couldn’t stay there “forever” after Hurricane Maria. On Twitter and in a speech to religious conservatives, he had warm words for the island, a U.S. territory that was already struggling with more than $70 billion in debt before it was battered by the hurricane.

“We’re going to be there as Americans,” he told the Values Voter Summit.

Also read: Trump threatens to pull FEMA from Puerto Rico.

And: Puerto Rico has more than $70 billion in debt because of this.

The wonderful people of Puerto Rico, with their unmatched spirit, know how bad things were before the H’s. I will always be with them!

 

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Want a $10 return on every $1 spent? Help your colleagues with this critical issue…

Companies that provide basic training for managers on how to identify and respond to employees’ mental health issues see major reductions in absences from work and other negative effects of depression on workplace productivity, a new study from the Black Dog Institute, an Australian nonprofit that works on mental health issues, and the University of New South Wales in Sydney found.

The savings for employers who implement training, according to the study, ultimately average out to a return on investment of $9.98 for every $1 spent, according to researchers. “Good managers know what is going on in their employees’ lives,” Theresa Nguyen, vice president of policy and programs at Mental Health America said. “If there’s stress involved they are more proactive about opening a conversation on whether someone needs a mental health day or sick day, so [the employee] knows it’s OK to ask before they need it.”

 

 
 
This technology may forever change how you sleep
 

In 2013, Canada announced “The National Standard of Canada for Psychological Health and Safety in the Workplace,” a voluntary set of rules and guidelines to prioritize mental health and avoid psychological harm at work, but the U.S. has no such guidelines. “America has always struggled with developing standards for this,” Nguyen said. “There has always been a desire to be more progressive and create standards from a federal perspective but I don’t know if there is the political will to make that happen.”

How much does the U.S. economy lose because of depression?

The U.S. loses about $5,524 per working person each year, or 0.5% of total gross domestic product, because of depression, according to a study published in a journal of Social Psychiatry and Psychiatric Epidemiology in November 2016. It loses an additional $390 per working person each year because of absences from work due to depression, or another 0.03% of GDP.

 

 

The latest findings, published in the Lancet Psychiatry on this week, come as corporations increasingly prioritize their employees’ mental health, said Rachel Bitte, a human resources expert at Jobvite, a job recruiting software company.

“We’ve been focused on the physical well-being of employees in the U.S. for a long time, but companies are just starting to learn more about the importance of the mental aspect,” she said. “With the proper education and awareness, it’s oftentimes easier in the workplace to identify issues affecting the mind and prescribe help because we engage with our colleagues eight hours a day, five days a week.”

What happens when staff undergo mental-health training?

Only 0.14% of managers list any kind of mental health training on their resumes, according to an analysis of more than 815,000 resumes by career insight company Zippia. This does not mean that fully 99.86% of managers have no training in mental health counseling whatsoever, but it does indicate “it’s not currently considered intrinsic to a manager’s responsibilities, or at least not valuable enough to merit space on a resume,” said David Luther, a content creator there.

In the study, some 88 managers responsible for nearly 4,000 staffers underwent a basic mental -health training program on how to spot and respond to employees’ mental health problems. Six months later, researchers measured changes in work absences due to sickness. Employees whose managers received the training reduced their illness-related absences by 18%, or 6.45 hours per employee over six months. Meanwhile, employees of managers who weren’t trained saw sick-related time off jump by 10%.

How employees are managed has a huge effect on their mental health

Recognizing these issues, training staff and creating an accepting environment for employees are critical, she said. “These are all things that mattered to people more than fair pay. It goes a long way to think about the ways managers are supporting their staff members.”

Training in the study focused on three main topics: How to recognize mental illness, the responsibility of senior officers to address it, and effective skills for discussing mental health matters with staff. Managers were shown models of positive and negative responses to mental health issues in staff.

The training followed a “RESPECT” system, which stands for the following principles: Regular contact is essential — the earlier the better — supportive and empathetic communication, practical help rather than psychotherapy, which is something an employee can seek privately. encourage employees to seek help, consider return-to-work options and, of course, tell them the door is always open and arrange next contact.

 

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The Bloomberg Pill: Innovating voice trading workflows for MiFID II compliance

Bloomberg can help firms comply with the new rules with minimal impact to their current voice trading workflows. Firms may be able to leverage one of three Bloomberg workflow solutions to capture data across the voice and sales-trading workflows. All three are based upon an innovation contained within the Instant Bloomberg (IB) chat, called the “Pill”.

1. What is Bloomberg IB?

All Bloomberg users have access to IB, the instant messaging platform integrated within the Bloomberg Terminal. IB enables users to enhance real-time text-based conversations with Bloomberg news, data, analytics, charts and off-venue trading and reporting functionality.

2. What is the Pill?

Voice and chat functionality provides color and context. Once parties are ready for formal price negotiations, the Bloomberg Pill allows the unstructured voice data to be carried to a structured workflow. In technical terms, the Pill is an object that refers to the instrument being negotiated. The Pill, or object, acts as a mechanism that integrates with other workflows.

Create a Pill in an IB Chat and a card with information will appear

A client can send a free form Bloomberg IB chat to their sales person to ask for a quote in a particular bond. The sales person can create a Pill by highlighting the customer’s description of the bond and clicking the RFQX button (Request for Quote) in the corner of their screen. In this example, the instrument or object is the bond Vodafone 5’s of 18. The customer is requesting a market on 5MM. The RFQX button transforms the text description into a Pill on both the customer’s and sales person’s IB chat. A Pill can be generated from many places, including Bloomberg’s derivative structuring functions, such as SWPM<GO>.

Hover over the Pill and a card containing descriptive information will appear. This includes the specific ISIN number of the instrument and other MiFID II information such as an instrument’s liquidity profile, eligibility for a pre-trade price transparency waiver and the trade size threshold for a post-trade transparency deferral.

MiFID II solutions for the Sales Trader Workflow (STW)How we help our clients

3. What are the three ways firms can leverage IB and the Pill?

The Pill workflow is seamlessly integrated with Bloomberg’s sell-side Trade Order Management System (TOMS) Sales Trader Workflow (STW). Alternatively, firms can set up two-way communication between IB and their own internal or third-party order management system (OMS) STW solutions with minimal integration.

Perhaps because of an instrument’s liquidity, or how customers prefer to execute, Bloomberg solutions are used in different ways by the sell-side to create unique sales-customer experience. In some cases, the interaction may be predominantly over IB chat. Firms that are adept at scraping and mapping may prefer to use the IB API service to capture and send key inquiry information directly to their internal systems, along with relevant metadata, and to send prices from those systems back into the chat.

Bloomberg’s Trading Network Protocol (TNP), a FIX-based messaging protocol, includes counterparty validation and firm mappings for IB chat-based sales-trader workflows.

More information and demonstrations of all these solutions is available here.

 

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Only 27% of workers do this really healthy thing on vacation and teenagers crave this status symbol just like their parents

Happy Wednesday, MarketWatchers! Check out today’s top stories.

Personal Finance
There’s been a shocking surge in the number of obese children

A new study in the journal Lancet provides new insight into the obesity epidemic

Boy Scouts of America not just for boys anymore — membership opening to girls

Starting next year, the organization says, girls will be welcome to join Cub Scouts programs. 

Harvey Weinstein was also a philanthropist: Can you morally cleanse ‘dirty’ money?

What to do when money comes from a sullied source

These firms may be making it harder for your boss to pay off your debt

Glitches may be keeping student loan repayment from becoming the next 401(k) 

Teenagers, just like their parents, crave this status symbol more than ever

A new report by Piper Jaffray explores the shopping habits of teens

 
How the higher-education system is holding Latino workers back

Many Latino students who go to college attend the open-access colleges white students are fleeing. 

With climate change and sprawling property development, wildfires are here to stay

Wine country was the most recent victim of California wildfires, but the state is still cleaning up from previous fires

Only 27% of workers do this one really healthy thing on vacation

Companies should be worried about their employees’ vacation habits. 

Tony Robbins: 7 questions you must ask to keep a financial adviser honest

Take charge of your money before giving it to a professional manager, Tony Robbins writes. 

Why I’m celebrating my zero net worth

Monitoring your financial net worth regularly is one of the best moves you can make. 

Elsewhere on MarketWatch
Looking for work? U.S. job openings still near record high in August

Despite a small decline in U.S. job openings in August, the labor market is sizzlingand most industries still have their “help wanted” shingles out. 

Here are the actual tax rates the biggest companies in America pay

Companies with high tax rates may get a boost if President Trump’s plan goes through. 

Most of the world is living where income inequality is growing, IMF director says

Most people are still living in countries where income inequality is increasing, especially in China and India, the International Monetary Fund’s fiscal affairs director said Wednesday 

There’s a link between CEOs who torture the English language and poor stock performance

Research by S&P Global Market Intelligence connects executives’ comments on conference calls to subsequent stock action. By Phil van Doorn. 

Donna Karan’s defense of Weinstein could throttle this company’s market value

G-III Apparel Group took an ill-timed $670 million gamble on Donna Karan International.

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A Boeing supplier has dived 34% following news it faked inspection data

It’s another embarrassment for Japan’s industrial heavyweights — and a potential headache for Boeing.

Shares in Kobe Steel Ltd. 5406, -17.79%  have tumbled 34% so far this week as investors react to the growing scandal that is engulfing Japan’s third-largest steelmaker.

Over the weekend, the company fessed up to falsifying inspection data on metal products shipped to 200 customers, as a Financial Times story has pointed out. On Wednesday, Kobe Steel said a steel-powder product, which is used to manufacture parts such as gears, also could be a problem.

Kobe’s big customers include U.S. airplanes maker Boeing Co. BA, +0.20%  , Nissan Motor Co. 7201, -0.32%  and Toyota Motor Corp. 7203, -0.97%  The company’s customers are now scrambling to check the safety of products that might rely on those potentially problematic metals, according to the FT.

Kobe Steel’s revelation raises fresh worries about the integrity of Japan’s manufacturers, as a Bloomberg report notes. Nissan last week said it would recall more than 1 million cars after unauthorized workers performed parts of final inspections. Takata Corp. TKTDY, -8.89%  pleaded guilty in February to criminal wrongdoing and agreed to pay $1 billion in penalties for providing misleading reports to clients on its air bags.

The selloff for Kobe Steel’s stock is shown in the chart above, and it’s featured as our Need To Know column’s chart of the day.

 

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Americans are getting comfortable with debt again, raising risk for financial institutions, Moody’s says

After the 2008 financial crisis, Americans whittled their debt burdens significantly. But households in certain categories are reversing that trend, upping the risk for financial institutions, Moody’s Investors Service wrote in a recent research report.

The credit-rating agency highlighted families in the 20th-39.9th percentile of incomes, or those with before-tax incomes of about $33,100, whose debt burdens ticked up to 15.6% in 2016 from 15.3%, according to data from the Federal Reserve’s Survey of Consumer Finances.

That’s not a big jump, Moody’s acknowledged, but wrote that “the rise suggests a change in behavior among certain borrowers and/or lenders that may lead to further increases or widen.”

Read: Blacks make up 13% of the population but only got 6% of the mortgages last year

It’s worth noting that the debt burden of those Americans stood as high as 17.5% in the 1990s and again just after the recession, before they spent years paying down debts and squirreling away savings.

And in 2016, groups in two higher-income percentiles had bigger debt burdens. Those in the 60th-79.9th percentile had burdens of 16.1%, and those in the 80th-89.9% percentile had 16.3%.

 

But the group flagged by Moody’s was the only income category in which debt burdens increased from 2013 to 2016. As the ratings agency noted, bigger debt burdens for those moderate-income Americans likely means more risk for subprime and near-prime lenders and securitizations—the bonds made out of lots of different debts.

Households in this income bracket also had lower real income gains during the period in question—5% as opposed to 10% for all households—even as credit standards loosened up. In 2016, 70.4% of Americans with this income level told the Fed that they had some form of debt, up from 66.5% in 2013.

Read: 6 years in, the economic recovery finally reaches middle-class Americans

It’s not just Americans of more modest means that are taking on more debt. From 2013 to 2016 there was a jump in the share of households in the 80th- 89.9% income percentile carrying debt burdens of more than 40%, Moody’s noted.

“Debt burdens above the 40% threshold will be more likely to strain borrower finances, though high PTIs (payment to income ratios) can be less negative for borrowers with high incomes than low incomes,” Moody’s wrote.

The households in that income bracket had median before-tax usual incomes of $135,300.

One overall positive, Moody’s noted, is that fewer families in most income tiers are experiencing such “especially high” debt burdens. But it’s striking to note how the share of those high debt burdens gets bigger and bigger the lower the household income.

 

 
 
What happens to your debt when you die
 

What’s more, as Moody’s noted, most Americans are paying more toward expenses that aren’t debt, but are still critical, like housing.

Read: Rent is eating up the typical American pay raise

“Rent costs that have been rising faster than inflation since the crisis also constrained a larger number of familiar because of the concurrent collapse in homeownership rates,” the ratings agency wrote. According to the Harvard Joint Center for Housing Studies, the share of renters paying more than 50% of their incomes for rent climbed to a record 25.6% in 2016, Moody’s wrote.

 

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