Markets recovered a little this week despite surprise news out of China and a refinery shutdown in the Midwest which caused gasoline prices to soar. The economic data indicates slow but sustained growth, suggesting the September time frame for the first interest rate hike remains on track.
You may have noticed this week, gasoline prices have gone up considerably. The culprit is a refinery owned by BP in Whiting, Indiana which went offline for repairs and maintenance. Unfortunately for those of us in the Midwest, this refinery supplied the majority of our gasoline. However, there is another side to this story. With less crude oil being refined, it is causing an oversupply. Last week I casually mentioned that if the supply of crude continues to rise, we might expect to see talks of exporting oil re-emerge. Turns out my crystal ball was right on the money. The Obama administration is set to approve landmark crude oil export swaps with Mexico. Although limited in scope, the move toward freeing up trade will please U.S. producers who say the current restrictions force them to sell oil at below global market rates, and may add momentum to efforts to repeal what advocates see as a relic of the 1970s.
China shocked the world on Monday, when it allowed its currency (the Yuan) to drop in value unexpectedly. After years of watching its Gross Domestic Product (GDP) fall, and various government attempts at manipulating its economy, it seems the Chinese central bank has finally loosened its grip on the Yuan exchange rate. The Yuan fell by 3% this week, which doesn’t seem like a lot, but represents the reversal of over four years of central bank tightening. While most pundits tend to put this move in a negative light, to be fair, the rest of the world has been devaluing their currencies for some time now. Europe and Japan are the most prominent, although the same has happened in South Korea and Brazil. The media talks about the potential for a “currency war,” but I’d argue this is exactly what’s been happening for the past few years. For now, it appears China is done devaluing the Yuan, but if other countries persist, don’t be surprised if China is forced to do it again.
Another big announcement this week was the change in Google’s corporate structure. Google formed a parent company called Alphabet that will act as a holding company for Google’s various ventures. There have been many explanations for this move, but the one that holds the most water is transparency and accountability. In a nutshell, management can more rigorously handle capital allocation for each business, while each business can operate as its own entity within the Alphabet umbrella. Much like a venture capital accelerator, this structure allows small startup ideas to grow within the organization under the auspices of a larger company that can support and nurture them. Investors like what they heard sending the stock up almost 4% this week.
In closing, this week’s story is more a public service announcement. You may be aware, there is a difference between a registered investment advisor (RIA) and an investment advisor who is part of a broker-dealer, i.e. stockbroker, insurance salesman, financial planner, etc.. The RIA is held to a higher standard which puts each client’s interest above those of the firm. The latter is held to a much lower standard of “suitability,” which can create a conflict of interest between the client and the advisor. Recognizing the pitfalls of this arrangement, the Department of Labor (DOL) proposed a new fiduciary rule, aimed at requiring brokers to put client interests ahead of their own when handling retirement money (note: taxable/brokerage money still falls outside of these proposed changes). According to the DOL, this lack of consumer protection costs investors as much as $17 billion annually, but the industry says it’s too expensive and would significantly increase liability risk and regulatory costs. Now you know. And just for clarification, Harvest Financial Advisors has always been a registered investment advisor and is a fiduciary, which means it always puts client interests first.
August 14, 2015