Welcome back! Time to look at what lies ahead for this week.

The earnings are almost non-existent this week, with PVH Corp. (PVH) being the largest company reporting (on Wednesday).

But we do have some big U.S. economic reports due this week:

TUESDAY: ISM Manufacturing Index
WEDNESDAY: ADP Employment Report
THURSDAY: International Trade Gap Report
FRIDAY: August Employment Report

Financial Times: François Hollande purges government after leftwing revolt

Plas brought this up yesterday:

François Hollande has purged his embattled Socialist government of leftwingers opposed to EU austerity after a revolt led by Arnaud Montebourg, the flamboyant economy minister.

Mr Montebourg quit the cabinet on Monday, delivering a blistering attack on what he called “absurd” austerity policies – supported by Mr Hollande – which had brought about “the most destructive crisis in Europe since 1929”.

The outspoken minister said in a televised statement that the eurozone’s fiscal stance was “the cause of the unnecessary prolongation of the economic crisis and the suffering of the European population”.

The cabinet crisis was triggered by figures this month showing there had been no growth in the French economy in the first half of the year, with unemployment continuing to rise.

The economic gloom alarmed the left, already worried by the deep unpopularity of the government. An Ifop poll at the weekend showed Mr Hollande’s approval rating at just 17 per cent, with prime minister Manuel Valls plunging nine points to 36 per cent.

This presents a unique market situation. On one hand, France moving farther away from Germany politically would destabilize the European Union. On the other hand:

Bloomberg: Draghi Pushes ECB Closer to QE as Deflation Risks Rise

Mario Draghi just pushed the European Central Bank closer to quantitative easing.

With euro-area data this week likely to show the weakest inflation since 2009, the ECB president used a high-powered central-banking conference in Jackson Hole, Wyoming, to warn that investor bets on prices have “exhibited significant declines.”

Stocks rose, the euro fell and bond yields dropped to record lows today as the comments fanned speculation the ECB is finally heading for a form of monetary stimulus it has long avoided. Draghi previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases.

The Aug. 22 speech “was a major event and marked a turning point in ECB rhetoric,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. “We think the recent economic developments have increased the chance of outright QE as the next step.”

From a market perspective, central bank action always trumps politics (contrary to popular opinion). One can argue the ECB should have done this several years ago, although I don’t: As we have seen in the U.S., QE only creates economic window dressing by artificially pumping up markets and allowing banks to sell overpriced assets to the Fed (instead of lending money to truly help the economy). If Europe wants to pursue this, expect European markets to do well.

But what about the U.S.? With the Fed ending QE this Fall, around the same time we will possibly getting ECB action, the effect on the world economy should go like this: Dollar rises in value, euro falls, U.S. exports to Europe fall, European exports to the U.S. increase. However, because most European products tend to be high-end, unless the euro falls through the floor (which would require an exceedingly large QE from the ECB, which is not expected), European exports to the U.S. have limited upside. Overall, I would expect the U.S. exporters to be hurt by this news.

As an aside, I would also expect China to be hurt by this news, being effected in the same way as the U.S. If it hurts the Chinese economy severely enough, we might even see the Chinese de-pegging the yuan from the dollar. But this is speculation on activity at least a year away (more likely several years away). Honestly, it is hard to say what the Chinese may do.

For the week ahead, the big event will be the release of the second guess on 2nd Quarter U.S. GDP, coming Thursday at 8:30 am EST.

For earnings reports, I get Prospect Capital (PSEC) today, and SeaDrill (SDRL) on Wednesday. Both stocks are currently in my 401(k), which I use for long-term holdings.

Bloomberg: Jackson Hole Theme: Labor Markets Can’t Take Higher Rates

Global central bankers led by Federal Reserve Chair Janet Yellen said labor markets still have further to heal before their economies can weather higher interest rates.

Even as they signaled international monetary policies are set to diverge as economic recoveries increasingly differ, officials meeting over the weekend in Jackson Hole, Wyoming, placed jobs at the center of their decision making by saying stronger hiring and wages are still needed to drive demand.

The focus on jobs suggests the Fed and Bank of England will tighten policy within a year as their economies show signs of strengthening. By contrast, European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda acknowledged they may be forced to deploy fresh stimulus.

Making her debut as Fed chief at the annual central bankers’ conclave in the shadow of the Teton mountains, Yellen said while U.S. hiring has improved and the debate at the Fed is shifting toward when “we should begin dialing back our extraordinary accommodation,” there is still a “significant” underuse of the workforce, and the labor market has yet to fully recover from the worst recession since the Great Depression.

Yellen can cry about “job market problems” all she wants, but she is facing an increasingly hawkish FOMC. As QE nears an end in October, those hawks will become louder.

Yahoo News: Iran says it downed Israeli drone over nuclear site

Iran’s elite Revolutionary Guard said it has brought down an Israeli stealth drone above the Natanz uranium enrichment site in the centre of the country.

This news is from Iran, so take it for what it is worth. And I would normally ignore it, except for the fact recent news stories have reasonably speculated at a potential Israeli strike in Iran. If you are dabbling in the oil markets, keep this in mind.

Wall Street Journal: Fed Debates Early Rate Hikes

Federal Reserve officials debated at their July policy meeting whether they might need to raise interest rates sooner than expected in light of a strengthening recovery, but they were restrained by lingering doubts about whether the economy’s gains would persist.

The minutes of the meeting, released Wednesday with their regular three-week delay, show an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and a pickup in consumer prices.

Some Fed officials say this long-sought economic progress warrants moving toward tighter credit soon, but they were outnumbered at the meeting by those who wanted more evidence before signaling that rate increases are on the way. The minutes don’t identify participants by name or specify the number who held certain views.

Translation: Markets will continue their “bad economic news is good, and vice versa” for awhile. However, the Fed needs to be watched for signs they aren’t seeing the economy the same way as the markets are.

The search for clues on rate-hike timing now turns to Fed Chairwoman Janet Yellen’s address Friday at a central-bank symposium in Jackson Hole, Wyo. The conference is focused on labor markets and Ms. Yellen will update her views on how they are evolving.

She has argued through her first six months on the job that an abundance of part-time workers and long-term unemployed, in addition to soft wage growth, suggest labor markets and the broader economy weren’t near overheating.

Steven Blitz, chief economist at ITG Investment Research, said he expected Ms. Yellen to revisit these points Friday, to indicate her patience about raising rates. “She doesn’t want the market getting too far in front of the Fed,” Mr. Blitz said.

Bloomberg: Only Rich Know Wage Gains With No Raises for U.S Workers

Call it the no-raises recovery: Five years of economic expansion have done almost nothing to boost paychecks for typical American workers while the rich have gotten richer.

Meager improvements since 2009 have barely kept up with a similarly tepid pace of inflation, raising the real value of compensation per hour by only 0.5 percent. That marks the weakest growth since World War II, with increases averaging 9.2 percent at a similar point in past expansions, according to Bureau of Labor Statistics data compiled by Bloomberg.

Federal Reserve Chair Janet Yellen has zeroed in on faster wage growth as an important milestone for declaring the job market healed and ready to withstand policy tightening, even as other labor measures improve…

Households in the top 20 percent of U.S. socioeconomic groups saw their incomes grow by an average of $8,358 a year from 2008 to 2012, compared with a $275 annual decline for the lowest 20 percent, according to data from the Bureau of Labor Statistics.

If you want to know why the riots in Ferguson, Missouri are happening, look no further than the news above. While the Media might be stoking the racial aspect of the riots, I see the police shooting that took place there as a spark in a tinder box. Before you write that incident off as “blacks being blacks”, consider that every time this country goes through an economic recession or stagnation, blacks always do worse in the employment statistics than other races. The U.S. has serious racial issues, which are only exacerbated by the moat which the upper classes have put around their wealth. When you see the stock indexes hitting new highs with obscene regularity, at the same time the bond markets are flooded with money to the point of paying almost nothing in yield, yet the employment and wages are stagnant, this is clearly an economic disconnect. There is an absurd amount of money being invested, but there isn’t a “trickle down” effect.

On top of the economic flaws, we have a huge education problem, especially in the black community. I would draw your attention to this article, “Did School Integration Fail Black Children?“:

The reality is that black families faced heavier burdens with the desegregation mandate than whites. Black children spent more time commuting, black schools were closed to make desegregation more convenient for whites (and to prevent their flight to the suburbs or private schools), and black teachers and principals were fired when white and black schools were merged. Estimates show that more than 82,000 black teachers provided instruction to a black student population numbering around 2 million in 1954. Within a span of 10 years, around 40,000 black teachers lost their jobs. Ninety percent of black principals lost their jobs in 11 Southern states.

Today, increased public school closings across the nation disproportionately impact black, Latino and poor students who lose their neighborhood schools. Eighty-eight percent of the school closings in Chicago affect black students.

The decimation of black educators has had a long-lasting impact. A study by the National Center for Education Statistics found that among 3.3 million teachers in American public elementary and secondary schools in 2012—where minority students are quickly becoming the majority—they were 82 percent white, 8 percent Hispanic, 7 percent black and about 2 percent Asian. The loss of black teachers means that many students have lost contact with their most impactful role models. As black educator Kevin Gilbert told the Associated Press, “Nothing can help motivate our students more than to see success standing right in front of them.”

As usual with most progressive solutions, desegregation sounded good on the surface, but had horrendously bad results. Unfortunately, because of decades of being the only group willing to deal with the black community, the progressives are the only ones to whom the black community are listening. So when smart people like Kareem Abdul-Jabbar offer solutions, they naturally include progressive solutions like food stamps and welfare, which are temporary crutches, not real solutions.

I won’t offer a solution here, but I will say that any solutions that sound good on the surface need to be viewed with more discerning eyes. And the already failed policies of the progressives need to be thrown out. They have already done enough damage.

Here is the calendar for the week ahead, which looks pretty slow:

TUESDAY: The U.S. Consumer Price Index report for July will be released at 8:30 am EST. Home Depot (HD) will also be releasing their quarterly earnings report.
WEDNESDAY: The Federal Reserve’s Open Market Committee meeting minutes from their July 30th meeting will be released at 2 pm EST.
THURSDAY: U.S. Weekly Jobless Claims report released at 8:30 am EST.

And now for an editorial…

Time: The Coming Race War Won’t Be About Race

I haven’t discussed the situation in Ferguson, Missouri, mainly because I haven’t had anything to contribute to the discussion. Fortunately, Kareem Abdul-Jabbar takes care of that for me in the editorial above.

However, while he nails it with most of his editorial, I have to take exception with one point he made:

I’m aware that it is unfair to paint the wealthiest with such broad strokes. There are a number of super-rich people who are also super-supportive of their community. Humbled by their own success, they reach out to help others. But that’s not the case with the multitude of millionaires and billionaires who lobby to reduce Food Stamps, give no relief to the burden of student debt on our young, and kill extensions of unemployment benefits.

Food stamps and unemployment benefits don’t create opportunities for the poor. That is only the “bread” part of the infamous “bread and circuses”. It didn’t solve poverty in Ancient Rome, and it won’t do it in modern America either.

That said, the burden of student debt is something we need to be considering. My view is we need to be targeting certain educational degrees with student grants, instead of using the broad stroke loans for all college educations. If we need more engineers, then let’s give grants to college students studying engineering. If we need more computer programmers, give grants to those students too. If we need more auto mechanics, provide grants to the trade schools for those students. We don’t just need a generation of students with ANY college degree. We need them educated in fields where “we the people” have a need. Unfortunately, this needs to be done intelligently, which means the politicians can’t do it.

The Hill: Why is Obama returning to Washington?

President Obama won’t make any major announcements on immigration reform during his secretive mid-vacation trip back to Washington next week, the White House said Wednesday.

The president is expected to return to the White House on Sunday, but officials won’t say why Obama is taking the unusual, and costly, trip back to Washington. He’s expected to return to Martha’s Vineyard, where he’s been vacationing, on Tuesday.

The article goes into a lot of speculation over immigration reform and other things. My guess is the president is planning some kind of classified military operation. If it goes as planned, we may never hear about it. On the other hand, if it doesn’t, it could create a situation. Maybe something involving Ukraine, Iraq, or Iran?

Regardless of the reason, it would make me reluctant to buy any stocks until next week.

Bloomberg: Recovery Halts as Germany Shrinks, France Stagnates

Yesterday, it was bad news from Asia. Today, we have Europe:

The euro area’s recovery halted in its three biggest economies in the second quarter, underlining the vulnerability of the region to weak inflation and the deepening crisis in Ukraine.

German gross domestic product shrank 0.2 percent, more than economists forecast, while stagnation in France prompted the government to scrap its 2014 deficit target after data released today. Combined with Italy’s unexpected slide into recession, the reports may add pressure on the European Central Bank to expand stimulus.

While Germany’s second-quarter weakness was largely due to a warm winter that shifted production to earlier months, the outlook for coming months is now clouded by the impact of international measures against Russia over its support of separatists in Ukraine. That imperils the euro area as a whole, where inflation is running at the slowest pace since 2009 and measures announced by the ECB will take time to have an effect.

I love the excuse for Germany: warm weather. So cold weather slows the U.S. GDP, while warm weather does it to Germany? I guess people only work in Fall and Spring?

Bloomberg: Cisco Cutting 6,000 Jobs as CEO Forecasts Stagnant Growth

Bad news for Cisco fans:

Cisco Systems Inc. (CSCO) is cutting 6,000 jobs and forecasting little to no revenue growth in the current quarter amid a slump in demand from phone and cable companies, and weakness in emerging markets.

The world’s largest networking-equipment maker, which has about 74,000 employees, said it will take a pretax charge of as much as $700 million. Including the latest round of firings, which represent about 8 percent of the workforce, Cisco has eliminated more than 18,000 people over the past three years.

John Chambers, who is nearing retirement after almost two decades as Cisco’s chief executive officer, has been grappling with slowing growth for its market-leading routers and switches. Phone carriers and other large companies are replacing legacy network hardware with software that performs many of the same tasks. Sales in emerging markets won’t recover for several more quarters, Chambers said on a conference call.

While Cisco is still in a good spot financially, they need a strategy for getting out of the death spiral in which they seem to be stuck. If they can replace Chambers with an innovation-oriented CEO, or if the stock drops to book value ($10.90/share, which isn’t likely any time soon), then I might call the stock a buy. Until then, Cisco is a solid “sell”.

Bloomberg: China Industrial-Output Growth Slows in Sign Recovery at Risk

China’s industrial-output and fixed-asset investment growth unexpectedly slowed last month, putting a recovery at risk as the government copes with a property slump and rising bad loans.

Factory production rose 9 percent from a year earlier, the National Bureau of Statistics said today in Beijing, compared with June’s 9.2 percent pace, which was also the median estimate of analysts surveyed by Bloomberg News. Fixed-asset investment increased 17 percent in the January-July period and retail sales gained a less-than-projected 12.2 percent last month.

Earlier today, a report showed the broadest measure of new credit unexpectedly plunged to the lowest level since the global financial crisis. Today’s figures suggest Premier Li Keqiang will need to step up stimulus to meet his target for economic growth of about 7.5 percent this year.

But will he? Consider the following:

Bloomberg: China Credit Gauge Plunges as Expansion in Money Supply Slows

China’s broadest measure of new credit unexpectedly plunged to the lowest level since the global financial crisis, adding risks to economic growth already headed for the weakest annual pace in 24 years.

Aggregate financing was 273.1 billion yuan ($44.3 billion) in July, the People’s Bank of China said today in Beijing, suggesting a tightening after a Bloomberg LP gauge showed China loosened monetary conditions last quarter at the fastest pace in two years. New local-currency loans of 385.2 billion yuan were half of projections, while M2 money supply grew a less-than-anticipated 13.5 percent from a year earlier.

…“The numbers reflect both tightened regulation over certain financing activities and an underlying weak economy,” said Zhang Bin, an economist in Beijing with the state-run Chinese Academy of Social Sciences. “There’s still no real recovery in growth — at best, we can say that economic performance is stabilizing at a low level.”

Economics has it’s own “chicken or the egg” argument. What drives an economy: demand or supply? A lot of empty cities in China prove supply ain’t it, at least not by itself.

To increase money supply without money demand, as some people expect Premier Li Keqiang will do, artificially inflates investment costs, specifically in the area of equities, bonds, and other investments, without actually increasing basic economic activity. You would think the U.S. would be a good enough example of that: Even with last quarter’s GDP increase (after the previous quarter’s fall), the employment participation rate was unaffected. Money is moving around, but it isn’t getting to the people. Where is China’s incentive to increase the money supply? The only reason to do this is to take advantage of untapped demand in their economy. This is possible, but I would hope the Chinese are smarter about it than the U.S. has been.

Bloomberg: Japan’s Economy Shrinks the Most Since 2011 Quake on Tax

China’s neighbor is doing even worse:

Japan’s economy contracted the most since the record earthquake three years ago as consumption and investment plunged after an April sales-tax increase aimed at curbing the world’s biggest debt burden.

Gross domestic product shrank an annualized 6.8 percent in the three months through June, the Cabinet Office said. That was less than the median estimate of 37 economists surveyed by Bloomberg News for a 7 percent drop. Unadjusted for price changes, GDP declined 0.4 percent.

While Prime Minister Shinzo Abe is counting on a quick rebound, the economy was struggling in June, with output falling the most since March 2011 as companies tried to pare elevated inventories. The government is ready to take flexible action if needed, Economy Minister Akira Amari said today, as Abe weighs whether Japan can bear another bump in the levy in 2015.

Tax increases have such a great history of economic improvement (tongue firmly planted in cheek)…

Bloomberg: First-Time Buyers Shut Out of Expanding U.S. Home Supply

The four-bedroom house that Ilia Nielsen-Dembe purchased in west Denver earlier this year wasn’t her top choice. The first-time buyer had to settle on a home in a neighborhood with a high crime rate after losing out on bids for five properties in more desirable areas.

“I definitely sacrificed in terms of location,” said Nielsen-Dembe, 33, who lives with her husband and two daughters in the house she bought in April for $184,500. “I had to cross streets that were not ideal in order to get a house.”

While the supply of U.S. homes for sale is at an almost two-year high and price gains are moderating, buyers such as Nielsen-Dembe wouldn’t know it. An inventory crunch for entry-level houses has only worsened during the past year as discounted foreclosures become scarce and cash-paying investors snap up affordable listings to convert to rentals. Properties at the lower end of the market are also the most likely to have underwater mortgages, keeping would-be sellers from moving.

In other words, the U.S. housing market is still broken.

Bloomberg: How Bond Traders Profited Off U.S. Wage of $24.45 an Hour

I am not quoting the article above, but I will call it a must-read. Although it is discussing the bond market, it is also an insightful view of the U.S. economy.

Bloomberg: Hillary Clinton Faults Obama for ‘Stupid Stuff’ Policy

Hillary Clinton is taking on President Barack Obama with the same issue he used against her in the 2008 Democratic primary: foreign policy vision.

Obama lacks a specific doctrine, according to an Atlantic magazine interview with Clinton, the unannounced presidential candidate who is leading Democrats and Republicans in 2016 polling.

“Great nations need organizing principles, and ‘don’t do stupid stuff’ is not an organizing principle,” Clinton told the Atlantic’s Jeffrey Goldberg, also a Bloomberg View columnist, in reference to the way Obama and his aides describe his approach to foreign policy.

It is hard to argue with that. Then again, attacking the Obama administration on most topics is the verbal equivalent of shooting fish in a barrel…

Wall Street Journal: Why It’s Worrying That U.S. Companies Are Getting Older

This chart says it all:

Not only is the American population aging, businesses in the U.S. also are growing older.

Older firms are increasingly controlling the largest market share in different sectors of the economy, according to a paper by the Brooking Institution’s Robert E. Litan and Ennsyte Economics’s Ian Hathaway. By 2011, the portion of U.S. businesses aged at least 16 years reached 34%, compared to 23% in 1992. Moreover, those mature companies went from employing only 60% of private-sector workers in 1992 to employing nearly three quarters of the private-sector labor force in 2011.

The report attributes this trend to declining entrepreneurship, among other reasons. The rate of new business creation in the U.S. has been constantly shrinking in the past three decades. “The decline in new firm formation rates had occurred in every U.S. state and nearly every metropolitan area, in each broad industry group, and in all firm size classes,” the authors explain.

Moreover, it has become more difficult for younger companies to survive and compete with the bigger ones. Business failures are more frequent and likely among start-ups, which may account for the fall in business creation after the 1990s. The economy has grown more advantageous for incumbent firms and less helpful for fledgling ones.

The authors argue that younger companies are crucial to attaining a healthier economy as they have had the largest contribution to past “disruptive and thus highly productivity enhancing innovations” across different sectors ranging from airplanes and automobiles to computers and internet search.

In the highly regulated business environment in the U.S., this trend will continue, as the larger companies can more easily afford to comply with the regulations, basically moating themselves from competition.

The Guardian: World’s top PR companies rule out working with climate deniers

Some of the world’s top PR companies have for the first time publicly ruled out working with climate change deniers, marking a fundamental shift in the multi-billion dollar industry that has grown up around the issue of global warming.

Public relations firms have played a critical role over the years in framing the debate on climate change and its solutions – as well as the extensive disinformation campaigns launched to block those initiatives.

Now a number of the top 25 global PR firms have told the Guardian they will not represent clients who deny man-made climate change, or take campaigns seeking to block regulations limiting carbon pollution. Companies include WPP, Waggener Edstrom (WE) Worldwide, Weber Shandwick, Text100, and Finn Partners.

I know when I want to learn about climate science, the first place I go is PR companies (tongue firmly planted in cheek)…