Recap of September 2015 U.S. stock market

So… what happened to the U.S. stock market? Was it:

  • the sermon to the U.S. Congress by Pope Francis,
  • the resignation of John Boehner as Speaker of the House of Representatives,
  • the on-going immigration crisis in the Euro zone countries,
  • the visit to President Obama by China’s President Xi,
  • the drug company who bought a decades-old generic drug with the intention of inflating its price 5,000%,
  • the FOMC (Federal Open Markets Committee) not raising interest rates (federal funds rate),
  •  more companies laying off hundreds of workers?
  • the crude oil market bubble bursting
  • Perhaps it’s the “guillotine” aura of the U.S. Government shutting down AGAIN on September 30, 2015, because of elected officials’ dysfunction and mismanagement.

I won’t comment or opine on any of the above events (well I did a little at the end), there are plenty of others doing it much better than I. Coverage of Pope Francis and China’s president have been all over the news networks and the ‘net. But I will include a link to the drug price “shocker” because it has raised the issue of “outrageous drug prices” in general to the “front page” at least for a little while. Here’s the skinny*:

*definition of “skinny”

The outrageous price increase:  Turing Pharmaceuticals

And the rollback:

However, I’m calling attention to a stock market (which incidentally supposedly looks six months forward in its activity) which reacts quite violently these days to daily news and events, thanks to program trading and algorithms. Below are various articles and/or opinions that are discussing this “increased” volatility, and perhaps some reasons for it, as well as the increasingly “fragile-appearing” economy the U.S. is experiencing. Heck, who needs to go to Vegas!


New York Times

Barron’s  8/21/2015

Author’s Addeneum 10/1/2015:   Here’s a Wall Street Journal article featuring the New York Federal Reserve president, William Dudley. Article is updated as of September 28, 2015. Article discusses possibility of the Federal Reserve Bank finally raising its short-term interest rates.

Definitions: Financial and Economic

Here are some terms and concepts that are used every day in the financial and news media. I will add additional definitions to this list in the future. The definitions are from Investopedia and/or CNBC Explains.


As usual, I go to for a definition, here it is:
“Throughout even the longest uptrends, investors experience declines against the main trend. These are referred to as corrections. At other times, markets correct more than expected in a short period of time. Such occurrences are called crashes. Both of these can lead to a misunderstood situation called capitulation.”

Read more:

Carry trade

Carried interest

Euro-dollar parity

Fractional Reserve Banking

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system.

Also known as “fractional deposit lending”. Definition courtesy of

Read more: Fractional Reserve Banking Definition | Investopedia


Mark to market

Market maker

Negative Interest Rate Policy (NIRP)

During deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even farther, a slowdown or halt in real production and output, and an increase in unemployment. A loose or expansionary monetary policy is usually employed to deal with such economic stagnation. However, if deflationary forces are strong enough, simply cutting the central bank’s interest rate to zero may not be sufficient to stimulate borrowing and lending. A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.

Read more: Bank of Japan Announces Negative Interest Rates | Investopedia

Real return vs. nominal return

Relative Strength

“Relative strength is a momentum investing technique that compares the performance of a stock, exchange-traded fund or mutual fund to that of the overall market. Relative strength calculates which investments are the strongest performers, compared to the overall market, and recommends those investments for purchase. Relative strength is a “buy high, sell higher” strategy that assumes a stock whose price has been rising will continue its upward trajectory.”

Sovereign debt

Transfer Payment
What is a ‘Transfer Payment’

A transfer payment, in the United States, is a one-way payment to a person for which no money, good, or service is given or exchanged. Transfer payments are made to individuals by the federal government through various social benefit programs. These types of payments are executed by the United States to individuals through programs such as Social Security.

Read more: Transfer Payment Definition | Investopedia

Mega Eye Crosser: Trade deficits and a little bit about exchange rates

Try to bear with me on this one all the way to the bottom of the posting. It may or may not become clearer after the first reading. To coin the phrase “it’s a small, small world after all”, (Walt Disney) we all need each other to make any “trade” deal!

This is such a MEGA MEGA Eye Crosser, what else can I say!!! I will start with a disclaimer. As I mention in my “About” page, I am not an economist. I am an amateur investor (versus a professional trader, etc.). I am writing this blog to help me as well as anyone else who is interested, to hopefully, better understand our current economic conditions and circumstances here in the United States. As I sift through information and resources available on the “web”, I try to choose sources that are credible and have “currency” as far as data and informational quality.

In gathering information for the Trade Deficit topic, I feel that I have truly run into one of the most intertwining mechanisms that bind the entire world populations together. In other words, when one hears or reads of a politician saying he/she will “solve” the U.S. trade deficit situation, be very attentive to their words. Oh, and the Federal Reserve source I used also talks about the Exchange Rate and its influence upon the trade between countries. Of course that makes sense since we are measuring/comparing currencies/ values to make the trade deals. I had not intended to put the two (2) concepts together but, of course, how can one talk about one without the other!

Now, back to the subject at hand, The Trade Deficit:  The terms or concepts of “trade surplus,” trade balance,” and “trade deficit” are all encompassed within another concept called current account balance. In struggling on how to present the concept of trade deficit to you, the reader, I have decided that perhaps definition and relationship of terms would be the way to go.

Balance of Payments:  tracks international transactions of goods, services, and finances. Every international transaction is recorded as both a debit and a credit somewhere in the Balance of Payments. The result of this accounting identity is the Fundamental Balance of Payments Identity, which says that the sum of the Current Account, Financial Account, and Capital Account must be zero by definition.

There are three (3) main components of the Balance of Payments:

  1. Current Account
  2. Financial Account
  3. Capital Account
  1. Current Account: commonly referred to when trade balance is discussed. It reflects comparison of national saving and national investment. Current Account is part of the Balance of Payments first mentioned above.

Current Account Balance:   is difference between nation’s income and expenditures and any additional debt the country takes on to cover the difference. Transactions that arise from exporting or importing of goods and services enter directly into the Current Account.

  • Trade Surplus:  when a country exports more than it imports, (i.e. the difference between exports and imports is positive).
  • Trade Balance:  when a country exports exactly as much as it imports.
  • Trade Deficit:  when a country imports more than it exports.

 2. Financial Account: Countries also engage in trade in financial assets. Transactions that arise from trade in financial assets are recorded in the Financial Account.

3. Capital Account: certain other activities result in transfers of wealth between countries. These are recorded in the Capital Account; for instance, transactions such as non-produced, non-financial, and possibly intangible assets, i.e. copyrights and trademarks).

 National Income Accounting Identity:   the current account balance is equal to difference between national saving and national investment.

When a country has trade surplus (positive trade balance), national savings must, by definition, exceed domestic investment. That is, a country with current account surplus is also net lender (this country uses savings not invested domestically to make loans to foreigners).

When a country has a current account deficit, national saving must, by definition, be below investment. The country is a net borrower (as national saving is not sufficient to finance all of domestic investment, and so extra investment must be financed by borrowing from abroad).

What all of the above is getting at is that the concept Trade Deficit that I thought I would talk about singularly by itself is not a very plausible idea. The Trade Deficit is a result of a multitude of transactions and like the other Current Account items: Trade Surplus and Trade Balance, is a cumulative number. Every trade agreement that the United States signs will affect our “trade numbers”.

Just like all the other mechanisms that make up our economic and/or financial systems, calculations of trade balance are very complex and complicated. Here’s my source from the Federal Reserve Bank of San Francisco, the article  is called:   Is the U.S. trade deficit a problem? What is the link between the trade deficit and exchange rates?

There are two (2) other sources that I will give you. Both of them discuss  the concept Trade Deficit in relation to the United States. They are both short items to read. I think they will help clear the question of is a trade deficit good or bad. We sell products like airplanes, wheat, paper, abroad and the buyer must use U.S. dollars to pay the manufacturer, producer or grower. That’s where the exchange rate comes in. Countries must have U.S. dollars in order to complete a transaction. At the same time, all those U.S. dollars in the hands of other countries must be used to purchase U.S. goods or make investments in U.S. financial instruments. Over the years, China has purchased a multitude of U.S. Treasury bonds, so although we have a huge trade deficit with the Chinese, they also have owned a “ton” of U.S. Treasury Bonds:  CNBC article here.

Trade Deficits aren’t good or bad, just weird by Sabri Ben-Achour

Is the U.S. Trade Deficit Really Bad News?  By Daniel Griswold

Needless to say, getting it right with such a very complicated subject is very difficult. Constructive additions to my posting are welcome.

Author’s Addendum 9/23/2015:  Here is a link to the Office of the United States Trade Representative.  Listed are all the current trade agreements between the United States and other countries.

Difference between federal funds rate and discount rate?

Now here are two banking terms that I thought were the same.  At least in my head. The first term is “federal funds rate.” The second term is “discount rate.”

  1. The  federal funds rate is defined according to the Federal Reserve Bank of San Francisco, as “…the interest these institutions* charge one another for overnight loans of reserves, balances that are sometimes needed to meet minimum requirements.”

*All depository institutions, including banks, credit unions, and thrifts

2.  The discount rate is defined as “…the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short-term basis, transactions known as borrowing at the “discount window.”

So, the “fed funds rate” is what banking institutions* charge each other for borrowing from one another,


the “discount rate”  is an interest rate charged by the Federal Reserve Bank to a banking institution* for borrowing money from the Fed.

The federal funds rate and the discount rate are considered part of the Federal Reserve Bank’s monetary policy. The Federal Reserve Bank of San Francisco has a short explanation of the above two (2) rates plus “what is Fed monetary policy” at their website: Federal Reserve Bank of San Francisco

And, just to bring this posting into focus, the federal funds rate is what has been dropped to Zero percent and being held at Zero percent for the past 9 or so years. This is the interest rate that is “fussed” over before every FOMC (Federal Open Markets Committee) meeting. This is the interest rate that indirectly affects all other interest rates, i.e. interest paid on your savings account.

And since “a picture is worth a thousand words,” here’s a chart from the Federal Reserve Bank of St. Louis that depicts the fed funds rate over many decades.  You can move a slider bar along the “X” axis of the chart from the year 1950 to the year 2010.


What is the Export Import Bank? Should It Be Re-authorized?

The Export Import Bank was not re-funded or re-authorized this year 2015. There are influential people who feel that the Export Import Bank is “welfare” for large corporations to do business around the world. The intent of the Export Import Bank according to their website is supporting American jobs.

What is it?

The Export-Import Bank of the United States (EXIM) is the official export credit agency of the United States. EXIM is an independent, self-sustaining Executive Branch agency with a mission of supporting American jobs by facilitating the export of U.S. goods and services.  Source: Export Import Bank

Why is it important?

When private sector lenders are unable or unwilling to provide financing, EXIM fills in the gap for American businesses by equipping them with the financing tools necessary to compete for global sales. In doing so, the Bank levels the playing field for U.S. goods and services going up against foreign competition in overseas markets, so that American companies can create more good-paying American jobs.

Because it is backed by the full faith and credit of the United States, EXIM assumes credit and country risks that the private sector is unable or unwilling to accept. The Bank’s charter requires that all transactions it authorizes demonstrate a reasonable assurance of repayment; the Bank consistently maintains a low default rate, and closely monitors credit and other risks in its portfolio.  Source: Export Import Bank

Examples of the Argument

Here is an example of the argument from Bloomberg QuickTake.

The New York Times Op Ed has an article about the demise of the Export Import Bank, read it here.

Why wasn’t it re-funded?

Here’s an article from the PBS Newshour’s “Making Sense” feature: 5 things to know about the controversial Export Import Bank.

What do you think? Should the Export Import Bank be refunded?

Update on this topic: The Import-Export Bank was re-funded in October, 2015. See this link:  New York Times article


Numbers #6: Producer Price Index (PPI)

“Excluding food and energy”, how many times have you heard that phrase when there is talk about inflation? Well, here is where that “exclusion” happens…. in calculating the Producer Price Index (PPI).

Wow, this is an incredibly complicated economic measurement of U.S. productivity. It not only tracks the price of “finished goods,” it tracks prices all along the “supply chain” using the “intermediate goods index” and the “crude goods index.”  Dan Caplinger of “The Motley Fool” sums up the function of the PPI nicely, “economists look to the PPI to see evidence of price pressure at the industrial level.” His article entitled “Understanding Economic Data: Producer Price Index” is a short but very informative tutorial on the PPI.

I found this a difficult economic indicator to “wrap around my brain” but hope that you find it informative. As I personally go through the learning curve on all these economic indicators along with you, the reader, I think the waters get murkier rather than clearer, as I  hoped. If you dive into the details of compiling the PPI, you will see how “the numbers” may be interpreted or calculated differently by difference parties.

A comparison

One might ask, “What’s the difference between the Producer Price Index (PPI) and the Consumer Price Index (CPI)?”  The following table gives some highlights of these differences.

Consumer Price Index Producer Price Index
Includes goods and services provided by business or government, where explicit user charges are paid for consumers. Personal consumption portion includes all marketable output sold by domestic producers for households.
Includes imports Excludes imports
Only includes components of personal consumption directly paid for by consumer Includes components of personal consumption that may not be paid for by consumer
Sales and other taxes paid by consumers are part of household expenditure and included Excludes taxes

Source: Bureau of Labor Statistics

A definition

The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPI measures price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser’s perspective. Sellers’ and purchasers’ prices may differ due to government subsidies, sales and excise taxes, and distribution costs. Source:


About 10,000 PPIs for individual products and groups of products are released each month. PPIs are available for the output of nearly all industries in the goods-producing sectors of the U.S. economy— mining, manufacturing, agriculture, fishing, and forestry— as well as natural gas, electricity, construction, and goods competitive with those made in the producing sectors, such as waste and scrap materials. The PPI program covers approximately 72 percent of the service sector’s output, as measured by revenue reported in the 2007 Economic Census. Data includes industries in the following sectors: wholesale and retail trade; transportation and warehousing; information; finance and insurance; real estate brokering, rental, and leasing; professional, scientific, and technical services; administrative, support, and waste management services; health care and social assistance; and accommodation.

How is the PPI used?

Three major uses are:

As an economic indicator: The PPIs capture price movements prior to the retail level. Therefore, they may foreshadow subsequent price changes for businesses and consumers. The President, Congress, and the Federal Reserve employ these data in formulating fiscal and monetary policies.

As a deflator of other economic series: PPIs are used to adjust other economic time series for price changes and to translate those series into inflation-free dollars. For example, constant-dollar gross domestic product data are estimated using deflators based on PPI data.

As the basis for contract escalation.: PPI data are commonly used in escalating purchase and sales contracts. These contracts typically specify dollar amounts to be paid at some point in the future. It is often desirable to include an escalation clause that accounts for increases in input prices. For example, a long-term contract for bread may be escalated for changes in wheat prices by applying the percent change in the PPI for wheat to the contracted price for bread. For more information on contract escalation and PPIs, see Escalation Guide for Contracting Parties.  Source:

The above information comes from the U.S. Government’s Bureau of Labor Statistics

Here’s a nice overview of what PPI is: Producer Price Index: CNBC Explains.  Author is Mark Koba, Senior Editor CNBC.

Eye Crosser #11: Consumer Confidence vs. Consumer Sentiment?

Now this is truly an “eye crosser” candidate.  To me, the amateur investor, the two concepts surely seem interchangeable. They sort of “sound the same.” But there is a difference between them. The intent of both survey/indices is to track consumer buying habits and attitude or feelings about the current economy. Here are two differences between the survey/indices:

  1. Consumer Confidence index(r):
  •             Developed by the Conference Board
  •             Data developed through mail-in surveys to 5,000 households
  1. Consumer Sentiment index:
  •             Developed by the University of Michigan
  •             Data developed by telephone survey of 500 people

More details:

  1. The University of Michigan Consumer Sentiment Index

University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1964.

View the current University of Michigan survey press release here.

Definition of “Consumer Sentiment:”

A statistical measurement and economic indicator of the overall health of the economy as determined by consumer opinion. Consumer sentiment takes into account an individual’s feelings toward his or her own current financial health, the health of the economy in the short term and the prospects for longer term economic growth.  Source: Consumer Sentiment Definition | Investopedia 

  1. The U.S. Consumer Confidence index(r)  (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.

Definition of  Consumer Confidence Index(r) – CCI

A survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

Source: Consumer Confidence Index(r)  (CCI) Definition | Investopedia

Read more:   What’s the difference between consumer confidence and consumer sentiment?

In 2006, the Philadelphia Federal Reserve Bank issued a newsletter called Business Review covering the topic: Consumer Confidence Surveys: Can they help us forecast consumer spending in real time? Below is a link to the newsletter:


Philadelphia Fed:

Author note: Any updated facts appreciated since this is an overview posting.

Numbers #5: The Real Low-down on Real Estate Data

This posting is “everything you’d ever want to know about real estate. Well, not really, but it probably comes darn close to covering the landscape. I guess this posting could be considered a quintuple “eye crosser!”

There are five (5) numbers tracked by the financial and economic gurus in calculating the various reports, predictions, reflections, and opinions regarding the U.S. housing market. They are:

  1. S&P/Case-Shiller home price index which tracks the price of existing? Homes for sale.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions.  Source:

  1. New Home Sales U.S. Census Bureau and Department of Housing and Urban Development (HUD) reports new home sales (

New residential sales for July 2015: Press Release

  1. New Housing Starts U.S. Census Bureau and the Department of Housing and Urban Development (HUD) track new housing starts

New residential construction for July 2015: Press Release

  1. Number of mortgage applications: Mortgage Bankers Association reports on mortgage applications.

Press Release:   New mortgage applications

  1. Existing Home Sales The National Association of Realtors reports on existing home sales

Press Release: Pending Sales July 2015

In another posting, I wrote about “Shadow Banking.” Shadow Banking is a rather scary financial mechanism in my hunble opinion. Well, this time I discovered “Shadow Inventory.”  Here is the Department of Housing and Urban Development a.k.a. HUD’s definition for “shadow inventory”:

For our purposes, we define the shadow inventory as housing units being held off the market by lenders, either in the form of Real Estate Owned (REO) properties not offered for sale or in the form of mortgages delinquent for more than X months on which the lenders have not foreclosed.

Source: U.S. Department of Housing and Urban Development

HUD has published a “white paper” regarding this subject: Chasing Shadow Inventory: Sloppy Foreclosures and Unintended Consequences

Source: Department of Housing and Urban Development

Numbers #4: Fed’s Beige Book

Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

Source: Federal Reserve Bank

The twelve Federal Reserve Bank districts are located in:

Boston (MA)

New York (NY)

Philadelphia (PA)

Cleveland (OH)

Richmond (VA)

Atlanta (GA)

Chicago (IL)

St. Louis (MO)

Mineapolis (MN)

Kansas City (MO)

Dallas (TX)

San Francisco (CA)

Each district reports on:

  • Manufacturing activity, e.g. employment, wages, and prices
  • Retail sales, e.g. consumer spending and tourism
  • Demand for non-financial services, transportation activity, banking activity such as loans
  • Residential and commercial real estate sales or construction
  • Agricultural conditions
  • Energy issues and production

Author’s Addendum (9/13/2015): CNBC has a nice article by Mark Koba entitled: The Beige Book: CNBC Explains. (February 2, 2012)

Numbers #3: Those Naughty Market Indices, They Move Up and Down!

heart monitor

The three (3) most widely watched U.S. market indices are the Standard and Poor’s (S&P) 500, the DOW Jones Industrial Average and the NASDAQ.

Since analogies are a great way to explain concepts, I think that picturing the ten (10) Standard & Poor’s  (S&P) market sectors as a vital signs monitor would be a graphic visualization. Not that I’m insinuating that the U.S. economy is a “patient”…. at least not right now.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Quote Source:  Standard & Poor’s Index

Anyway, the S&P 500 index consists of ten (10)  industrial/commercial sectors of publicly traded common stock.  The ten sectors of the S&P 500 are:

  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Healthcare
  • Information Technology
  • Industrials
  • Materials
  • Telecommunication Servies
  • Utilities

On the other hand, the DOW Jones Industrial Average (the DOW) consists of only thirty (30) publicly traded stocks and they are not all industrial companies as the index name implies. The thirty (30) stock components (companies) do change, although not very often.  A look at the history of  Dow listings since inception in 1884  is an interesting “portal” into how the industrial age and new technologies changed the landscape of the United States over the last one hundred years. Just this year 2015, Apple Inc. was added to the DOW. The DOW Industrial Average is indexed by the price of each stock. Thus the Dow Jones Industrial Average (DJIA) changes daily and may move abruptly up or down based upon the price of each DOW “component.” Apple Inc. is such a highly priced stock at this point in time it can “move” the DJIA value up or down quite a bit just based on Apple’s pricing activity for the day! So even though there are 29 other corporate stocks on the DJIA index, Apple because of it’s high capitalization* can greatly affect the DJIA on any one day.

*DEFINITION of ‘Market Capitalization’
“The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.”  Source: Market Capitalization Definition | Investopedia

The third market index I mentioned above is the NASDAQ. The NASDAQ is a very “technology heavy” index meaning many of the hardware/software and high tech publicly traded companies are listed here. The NASDAQ is actually an electronic stock exchange  just like the New York Stock Exchange (NYSE), but the NASDAQ does not have a traditional physical trading floor like the NYSE does. To be listed on the NYSE, a company must meet certain capitalization criteria. Thus, new companies that become public many times list on the NASDAQ exchange first and then move to the NYSE after meeting its listing criteria. Some companies such as Apple and Microsoft still list on the NASDAQ even though they would qualify to be listed on the NYSE exchange.  However, both Apple and Microsoft qualify to be listed on the Dow 30!