Author: admiin

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When obscure corners of the financial markets that are typically considered mundane draw outsize attention on Wall Street, it is always cause for investor concern.

That was the case last week when surging overnight borrowing costs laid bare cracks in a key Wall Street funding mechanism, which left many scrambling for cash and the New York Federal Reserve responding by injecting hundreds of billions of dollars into the financial system to restore calm.

In other words, this was no ordinary week in financial markets and more than a few investors were seeing shades of the 2008 financial crisis, reigniting decade-old nightmares of a systemic funding chaos.

‘There’s really nothing more important than the functioning and transparency of financing markets.’

Hugh Nickola, head of fixed income at Gentrust

“My initial reaction was fear,” said Hugh Nickola, head of fixed income at Gentrust, and a former head of proprietary trading of global rates at JP Morgan. “There’s really nothing more important than the functioning and transparency of financing markets.”

The sudden spotlight on the short-term “repo” market easily overshadowed Wednesday’s highly anticipated Fed decision on monetary policy, where the U.S. central bank cut federal-funds rates by a quarter-of-a-percentage point to a 1.75%-2% range in a divided 7-3 vote.

Rates on short-term funds, that are typically anchored to fed-funds rates, briefly became unhinged, spiking to nearly 10% on Tuesday.

See: Here are 5 things to know about the recent repo market operations

Nickola said his worries only receded after the Fed started to intervene with a series of short-term funding operations that kicked off Tuesday and totaled nearly $300 billion for the week. On Friday, the central bank tightened its grip on rates ahead of the end of the quarter, when liquidity can become scarce, by extending its daily borrowing facilities through at least October 10, and unveiling three, 14-day term operations.

The short-term rate spike also raised concerns about the potential for the funding tumult to shake consumer confidence, at a time when financial markets often are viewed as a barometer of the economy’s vitality.

Bruce Richards, CEO of Marathon Asset Management said the biggest risk to the U.S. economy was a weakening of consumer sentiment, in remarks Thursday at the CNBC Institutional Investor Delivering Alpha conference.

Richards said that while U.S. households are doing well, it would become “very worrisome” if consumer confidence starts to fade, since two-thirds of the U.S. economy is consumer-driven.

“Right now, it is corporate confidence” that is weakening, he said.

Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, also sees reason to fret due to continuing Wall Street liquidity woes that could seep into the real economy.

He pointed to three factors that still leave the money-market plumbing fragile: heavy U.S. Treasury borrowing to fund the widening fiscal deficit, a flat-to-inverted yield curve, and a regulatory environment that limits the ability of banks to absorb government debt.

LeBas thinks overnight funding operations alone won’t be enough to keep credit flowing over the longer run.

Wall Street primary dealers are tasked with helping to execute financial operations for the U.S. Treasury and the Fed and LeBas cautioned that they could run out of cash around the first quarter of next year, unless the Fed makes a series of aggressive cuts to short-term rates or launches a more permanent effort to expand its balance sheet, known on Wall Street as quantitative easing or bond buying.

“I’m not here to tell the Fed what to do,” LeBas said, adding that when banks run out of balance sheet it can lead to sales of assets like corporate debt or force banks to pull back from lending to businesses and individuals. That’s exactly what the Fed wants to avoid because a retrenchment in lending can have the effect of amplifying economic downturns.

“If the Fed does not act with rate cuts or QE, that’s the most obvious way this problem affects the real economy,” he said.

The overnight repurchasing rate, or the amount banks and hedge funds pay to borrow to finance their trading operations for a single day, peaked earlier in the week at three to four times their usual levels of around 2% (see chart below).

Capital Economics

The spike in borrowing costs saw investors clamoring for intervention to ease strains in funding markets. Usually, that aid comes from the New York Fed, which, because of its presence in the hub of the financial capital of the U.S., is tasked with supervising the banking system and helping to ensure financial stability among the nation’s largest institutions.

“That ability of the system to move money around and redistribute — it didn’t work the way we’ve seen in the past,” acknowledged New York Fed President John Williams in an interview on Friday, the Wall Street Journal reported.

“They walked into a situation this week where there was not enough liquidity in the system,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, referring to perceptions that the Fed was slow to anticipate and react to the spike in overnight borrowing costs that took hold on Monday and accelerated the following day. “They completely were out of practice on how to perform an open market operation.” In fact, the Fed’s first intervention in short-term markets on Tuesday was aborted and had to be restarted, stoking further worries about Wall Street’s systems and process among market participants.

The Fed’s missteps come at a uniquely sensitive time for domestic and global markets, and raised serious questions about whether the blowout in short-term rates represented a signal of something more ominous crystallizing in financial markets. More than a decade ago, a seizing up of short-term markets were the hallmark of a financial crisis that saw historic Wall Street institutions Lehman Brothers and Bear Stearns brought to their knees.

So, investors might be forgiven for fearing the worst as funding troubles cropped up last week.

Benchmark U.S. stock indexes have struggled to exceed all-time highs this year because fears about anemic international economic growth and an unsettling conflict between the U.S. and China over import duties has investors on edge.

On top of that, a menacing phenomenon in Treasury markets, known as an inverted yield curve, has investors worrying that a recession might be looming. Companies in the S&P 500 stock index are already in the throes of an earnings recession, a period of successive declines in earnings per share, marking the first such pullback in three years. In aggregate, companies comprising the large-cap index reported an average earnings decline of 0.35% in the second quarter, after an EPS decline of 0.29% in the first quarter.

Check out: We are in an earnings recession, and it is expected to get worse

That backdrop has made market participants particularly sensitive to news on the U.S. – China international trade dispute and hiccups by the Fed, an institution seen as one of the last lines of defense when the markets go haywire, are even more unnerving.

As the WSJ notes, the Fed hasn’t had to intervene in money markets in the past decade, up until last week, because the U.S. central bank “flooded the financial system with reserves. It did this by buying hundreds of billions of dollars of long-term securities to spur growth after cutting interest rates to nearly zero” after the 2008 financial crisis.

But despite the Fed’s stumbles, Tipp said the market still “managed to roll right through it,” even after the dramatic spike in oil prices following last weekend’s attack on Saudi production facilities.

“While this isn’t a feel-good economy, the fact of the matter is that the market looks pretty resilient,” he told MarketWatch.

For now, George Boyan, president of Leumi Investment Services, said the New York Fed’s rescue measures have been effective. He pointed to the way the effective fed-funds rate inched down to 1.90% on Thursday, or well below the upper bound of the Fed’s preferred target.

In the last few days, the fed-funds rate has either bumped at the range’s ceiling and even briefly above it after the squeeze in repo markets spilled over into the fed-funds rates, pushing the benchmark interest rates higher.

Others saw similarities to the 1980s when the Fed would carry out repo operations a hundred to two hundred times a year, said Dave Leduc, chief investment officer of Mellon’s active fixed-income arm.

“People are reacting to this as a strange thing, but they forget [the Fed’s repo operations] used to happen a lot,” said Leduc.

All that said, the S&P 500 SPX, -0.49%, the Dow Jones Industrial Average DJIA, -0.59%  and the Nasdaq Composite Index COMP, -0.80% are not far from all-time highs and corporate earnings are expected to stage a turnaround. Analysts expect things to turn positive again in the upcoming holiday period, with expectations for 1.3% EPS growth overall in the calendar year.

Next week, surveys may reveal to the extent to which consumers have been impacted by market volatility and slowing economic growth. A reading of U.S. consumer confidence in September is due on Tuesday and a reading of sentiment is due on Friday, with a host of other reports and Fed speakers on deck.

However, Wall Street may be the most keenly attuned to the internal workings of the arcane short-term funding in the hope that it resumes being mundane.

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Global crude production has taken a serious hit following the weekend attack on Saudi oil facilities, leading to a spike in oil prices, but for gasoline — and U.S. drivers — this market-moving event couldn’t have come at a better time.

“Motorists are lucky this didn’t happen during summer driving season,” said Patrick DeHaan, head of petroleum analysis at GasBuddy. Labor Day on Sept. 2 marked the end of the season.

Gasoline prices at the pump are little changed since the Saturday attack on Saudi Arabia’s oil facilities cut an estimated 5.7 million barrels a day from the kingdom’s oil production, equal to more than 5% of the world’s daily supply.

On Monday afternoon, the average per-gallon price for regular gasoline stood at $2.560, compared with yesterday’s average of $2.559, according to gas-price tracker GasBuddy.

Read: Global oil surges after Saudi ‘supply shock’

The “timing is fortunate,” said Denton Cinquegrana, chief oil analyst at the Oil Price Information Service by IHS Markit. “If this happened four months ago, we could be talking about a much more significant retail [gasoline] price spike.”

However, this is the time of year when the market has switched away from the summer gasoline blends, which are required to meet tougher environmental standards, toward winter blends, which are cheaper and easier to make, he said.

Saudi Arabia was producing around 9.6 million to 9.7 million barrels of oil a day before the attack, so this is “a serious hit, but this will be measured in days, weeks or months,” said Cinquegrana.

He also pointed out that the amount of oil the U.S. imports from Saudi Arabia has reached its lowest level in at least a decade.

In May of this year, the U.S. imported 462,000 barrels a day of oil and petroleum products from Saudi Arabia, the lowest monthly figure since March 1987, according to the Energy Information Administration, based on data going back to January 1977.

Still, “we are seeing [gasoline] prices react across the supply chain and around the country” in futures, spot and wholesale prices, Cinquegrana said. The front-month October reformulated gasoline contract RBV19, +0.24% rallied by 12.8%, or 19.9 cents, to settle at $1.7524 a gallon on the New York Mercantile Exchange on Monday.

At the pump, however, “I don’t think it’s going to be a drastic move,” he said, adding that prices may potentially move higher, in the 10-cents-a-gallon vicinity, over the next couple of days.

Retail gas prices have been trending lower in recent weeks.

Oil prices, meanwhile will be “elevated for weeks, if not months,” said DeHaan. “A risk premium will likely stick around … as this remains fresh for quite awhile — at least as long as it takes [Saudi Arabia] to get back to 100% normal, but, even after [that], the shock that such an event happened in Saudi Arabia, a stable and reliable oil producer, will likely continue to haunt the market.”

On Monday, October West Texas Intermediate crude CLV19, -0.07%, the U.S. benchmark, rose nearly 15%, up $8.05, to $62.90 a barrel.

Read: Here’s what happened to the global economy the last eight times oil prices have doubled

Retail gas prices may climb by “pennies or so per day, starting midweek, lasting probably one to two weeks or longer,” with prices eventually going up by 10 cents to 25 cents per gallon, if Saudi Arabia can’t quickly restore production, said DeHaan.

Drivers will “probably notice,” but “I’d classify this as minor still, compared to such events like Hurricane Harvey, Katrina or refinery outages like in 2015 when BP’s Whiting, Ind., refinery went down,” he said.

The switch to cheaper winter gasoline blends will help limit the price increases, said DeHaan. “For many motorists, there is no reason to run out to fill up. You aren’t going to wake up tomorrow (or later) to a massive spike like what we’ve seen in previous dramatic events.”

Further, he said, “I don’t think we’ll see any locations in the U.S. surpass their previous 2019 high.”

Meanwhile, President Donald Trump tweeted that he had authorized the release of oil from the U.S. Strategic Petroleum Reserve, if needed.

If the U.S. does release oil from the reserve, it will be a “week or more before refiners get that crude, and not all refiners have access,” DeHaan said. The “West Coast is basically cut off from easy access.”

Refiners and oil companies would likely “bid on the oil … then pay the U.S. government,” he said, adding that this has happened several times before following major weather events, such as hurricanes that disrupted oil production in the Gulf of Mexico.

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Worried about oil prices after the weekend’s raids on Saudi Arabia?

You may want to wait until prices rise more before really getting scared about the risks to your job, your budget, or the economy.

A lot more.

Since 1980, personal incomes have risen eight times as much as oil.

“$110 a barrel — that would probably be enough to put the global economy in recession,” says Steven Kopits, managing director of energy consulting firm Princeton Energy Advisors.

Or, to be on the safe side, let’s say the point to get really worried is when prices start surging toward $100.

Despite the panicked headlines around the world, Monday’s 13% spike in fuel prices left West Texas Intermediate crude oil CL.1, -0.07%  , the U.S. benchmark, around $62 a barrel.

Some context: In April, the price was $66.

Last October, it was north of $75.

Adjusting for inflation, oil prices after the Saudi raids are about half what they were in 1980, early 2008 and 2014.

Measured in 2019 dollars, oil peaked at $158 a barrel in 2008 and was north of $100 as recently as 2014.

Since 1980, personal incomes have risen eight times as much as oil. Energy expenses of all kinds are near their lowest levels, as a share of disposable income, since the World War II.

‘Oil is like oxygen to the economy.’

—Steven Kopits, chief executive of energy consulting firm Princeton Energy Advisors

Among the reasons, say economists: Better fuel efficiency across the board, and the shift of the economy from manufacturing, which is energy-intensive, to services.

The latest move is big for a single day. And it’s been cushioned by President Trump’s move to release supplies from the U.S. Strategic Petroleum Reserve, which was created for just this purpose.

But on a longer-term view, so far the rise in prices is minimal.

That’s not to say it’s unimportant.

“Oil is like oxygen to the economy,” says Steven Kopits, chief executive of energy consulting firm Princeton Energy Advisors. “We almost always have an oil price spike preceding a recession. Oil is our monopoly transportation fuel.”

Kopits noted that oil prices surged before the recession of 1958, the energy crisis recessions of the 1970s and early 1980s, and the 1990-1 recession. He might have added that crude oil prices doubled in the year leading up to the financial crash of 2008.

And even if the U.S. economy is less exposed to oil price fluctuations than it once was, that’s not the same for all other countries. China is now the world’s biggest oil importer. (One reason America is more energy efficient: We’ve moved a lot of our manufacturing to Asia).

Folk memories run deep, especially of the crises of the 1974 and 1979-80, when disruptions of the energy supplies from the Middle East plunged America and the western economies into economic and political crises. So it’s understandable that people are nervous about threats to oil supplies.

As for the effect on the U.S. economy: It’s now a two-way street, says Gregory Daco at Oxford Economics. The U.S. is no longer a major net importer of oil. We’re actually on the cusp of becoming an exporter.

So while a big jump in oil prices would hurt the consumer, it would also boost cash flow and business investment in the shale oil territories like Oklahoma and North Dakota, he said. “For the broad economy, there is increased evidence that oil prices affect the economy in much more nuanced ways than they did 10 or 20 years ago,” he says.

And it would be great for all those “green economy” companies that want to cut our carbon footprints. The more we have to pay for gasoline, the more attractive their products and services will look in comparison. Tesla TSLA, -2.42%, anyone?

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5G wireless technology is a trend that can make you some money.

You don’t have to own household names like Alphabet GOOG, -0.71% GOOGL, -0.72%   , Intel INTC, -1.65%   or Microsoft MSFT, -1.16%  to make decent profits in tech.

Way down the market-cap ladder — and away from the day-to-day headlines — lurk plenty of smaller tech companies that will perform nicely.

The trick to picking winners that are off the radar for most people is to find the right companies with exposure to the right trends. This is no small task. So for guidance, I recently talked with Chris Retzler, who has managed the Needham Small Cap Growth Fund NESGX, +0.18%   since the financial crisis.

Retzler, a former Fulbright scholar who went to Columbia Business School a few years after I was there, is the kind of money manager I’m happy to learn from because he posts great returns. So far this year his fund is up 36.5%, compared to 20% for the S&P 500 SPX, -0.49%   , 23% for the Nasdaq Composite COMP, -0.80%   and 17% for the Russell 2000 RUT, -0.11%  .

Outperformance over eight months can be a fluke, so it’s better to look at longer time frames when weighing the expertise of a fund manager. Retzler’s fund beats its Morningstar small-cap growth category by 4.6 percentage points annualized over the past three years, and 2.8 percentage points over the last five years.

Here are six companies that are plays on three trends Retzler likes to invest in. All of these names have the key attributes Retzler looks for in companies. These include quality boards and management with the right compensation incentives and stock ownership levels, and products with protective moats.

Trend No. 1: 5G

While many analysts and consumers remain skeptical that 5G will be a big deal — and we have been waiting a long time — Retzler has no doubt. After all, 5G holds a lot of promise. It will deliver speeds anywhere from 10 to 40 times faster than current 4G LTE wireless networks. Lower latency supports new cool stuff like augmented reality, self-driving cars, and cloud gaming.

Bank of America Merrill Lynch predicts 5G phone shipments will rise to 130 million in 2020 and 327 million in 2021, from 17 million this year.

Retzler thinks the 5G infrastructure build out, which is already under way, will pick up in earnest in 2020. If he’s right, this is a good time to get exposure because the stock market often starts pricing in trends about six months in advance.

To reap profits from the 5G build out, Retzler favors companies that supply components like radio-frequency chips used in the gear that will power 5G and 5G phones. He also likes companies that sell equipment used to build those components.

Retzler cites the chip maker Taiwan Semiconductor Manufacturing TSM, -2.29% here. The company posted 10% sequential revenue growth in the second quarter. Sales advanced 25% during August compared to July, and 16.5% over August 2018.

Taiwan Semiconductor says key sources of revenue growth ahead include 5G development and premium smartphone launches, many of which will see solid demand because consumers want to try out 5G.

This trend is already underway. “Over the last three months, we have seen an acceleration in worldwide 5G development,” said CFO Lora Ho in the second-quarter conference call in July. Taiwan Semiconductor is a go-to supplier of sophisticated chips capable of powering 5G speeds, because the company uses cutting-edge 7 nanometer and 5 nanometer lithography to produce them.

Retzler is also bullish on a lesser-known 5G chip demand play called MKS Instruments MKSI, -0.76%. It sells equipment used in the manufacturing of chips, chip casings, and components used in mobile phones. The company gets about half its revenue from sales to chip equipment and chip manufacturers.

CEO Gerald Colella cites demand for smaller chips used in 5G phones as key a source of growth ahead. “We’re very positive because smaller chips will continue to be put into phones, especially with 5G,” he said in the second-quarter conference call in late July.

Trend No. 2: Modernization of the military

The military has always driven tech development — and it’s no different now. This makes military spending on tech a key trend for Retzler. “New technologies are being deployed for greater precision and effectiveness to minimize casualties for our troops and civilians,” he says.

A good example is tech offered by KVH Industries KVHI, +3.01%. The company’s inertial navigation division offers products that assure uninterrupted access to navigation systems like GPS for military vehicles.

Second-quarter sales were weak following eight quarters of double-digit growth. But the slowdown won’t last forever.

“We have a strong pipeline of opportunities and continue to get designed into new platforms,” cofounder and CEO Martin Kits Van Heyningen said in the second-quarter conference call.

Another favorite here is Intevac IVAC, +1.15%  , which makes digital night-vision imaging systems for the U.S. military, based on the company’s proprietary electron-bombarded active-pixel sensor technology.

Intevac’s night-vision systems are used in military aircraft, including Apache helicopters and F-35 fighter jets. The company is working on new technology for head-mounted and weapon-mounted night-vision apps. It also offers laser-illuminated infrared cameras for long-range night-time surveillance systems that can identify targets up to 12 miles away.

Intevac beat second-quarter revenue guidance in part because of strong sales of night-vision devices, and it expects sales here to double over the next five years based on new order and backlog trends.

Retzler also cites Lockheed Martin LMT, -1.32% as a key player in military technology worth owning, though it is too big for his small-cap fund.

Trend No. 3: China’s investment in chip production

Another major trend Retzler likes to invest in is an outgrowth of the U.S-China trade war. President Donald Trump’s on-again, off-bans on sales by U.S. chip and component companies to Huawei and ZTE woke Chinese officials up to the reality that they do not have enough sophisticated semiconductor production capacity of their own.

To build that out they are going to have to buy chip equipment.

Retzler thinks Lam Research LRCX, -0.65% will be a key beneficiary. Lam Research has an expertise in cutting-edge technologies like nanoscale chip production. China has been its biggest source of revenue growth. Sales to China accounted for 23% of revenue in the year ending June 30, up from 13% during the same time frame in 2016-1017.

And while this one is not exactly undiscovered, Retzler also thinks chip-equipment maker Applied Materials AMAT, -1.39%  will benefit from the build out of chip production in China, once China and the U.S. come to a trade-war truce.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks.

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Americans are working hard, but employers aren’t necessarily working for them. Now a radical idea to guarantee U.S. workers a cut of their companies’ profits could one day force employers to cough up more of the wealth.

While established profit-sharing and equity-ownership programs already give a financial boost to many American workers, and enjoy bipartisan support in Washington, some advocates for workers’ rights believe more must be done. They want lawmakers to order U.S. companies to pay workers a cash dividend tied to profits, just like any shareholder receives.

Call it Profit Sharing 2.0. Its supporters envision a day when large privately owned and publicly traded U.S. companies would be required by law to transfer newly issued shares into a collective fund for their workers. Employees wouldn’t individually own the shares, which would wield voting power and be held in a worker-controlled trust, but would receive regular dividends. The fund would be optional for small companies.

“Granting employees an equity ‘stake and a say’ in the companies that they work for means that when corporate executives decide on the level of dividends to be paid to shareholders, the workers who created the profits will not be left in the dust,” Lenore Palladino, a fellow at the Roosevelt Institute and assistant professor at the University of Massachusetts at Amherst, wrote in an article published on the institute’s website.

This dream of a fund that gives money and power to American workers is imported directly from the U.K., where it’s gained considerable traction.

In a July 2018 report commissioned by the U.K.’s progressive Co-Operative Party, the New Economics Foundation, a left-leaning London-based think tank, planted the seed for an “inclusive ownership fund” — a new way to transfer control of a business to workers over time.

‘Give more people a stake’

“If we want to build more inclusive, prosperous and productive companies, we need to broaden ownership and give more people a stake,” Mathew Lawrence, director of the London-based think tank Common Wealth and a co-author of the report, said in an email.

For precedent, the report’s authors looked to the John Lewis Partnership, the U.K.’s largest worker-run company, whose generous and lucrative benefits make it something of a gold standard for profit sharing. “In many respects, our proposal for an Inclusive Ownership Fund can be thought of as a John Lewis law,” the report’s authors noted.

The minority Labour Party soon took up the charge. In September 2018 it endorsed a policy requiring U.K. companies with more than 250 employees to transfer 1% of company stock into an inclusive ownership fund for workers every year for 10 years, giving the fund 10% control of the company after a decade. Dividends from company profits would be capped at £500 annually (currently just over $600), with the British government collecting any surplus to help pay for social services. If employee leave a company, they forfeit their interests in the fund.

Inclusive ownership funds presumably would be enacted under a Labour-led government. It’s stirred heated debate in Britain, and surely would seem to be a polarizing topic for Americans. Last May, for example, 2020 Democratic presidential candidate Sen. Bernie Sanders grabbed headlines when he told the Washington Post that an employee-controlled fund similar to the U.K. model should be mandated for U.S. companies, as should giving workers seats on corporate boards. But even many progressive policy experts concede that forcing companies to establish inclusive ownership funds won’t fly with most U.S. politicians or business leaders.

Popular with American workers

Maybe so, but it’s understandably popular among U.S. workers: 55% of Americans support inclusive ownership funds, while just 20% are opposed, according to a March 2019 poll by Democracy Collaborative, a Washington, D.C.–based progressive research group, and YouGov, a U.K.-based market-research firm.

Surprisingly, many Americans would take this restructuring further. The poll found a similar majority backing a workers’ fund that received 2% of a firm’s equity annually for 25 years — meaning that after 25 years every U.S. company with more than 250 workers would have 50% employee ownership.

“Shares are a familiar, nonpartisan, capitalist mechanism,” said Rutgers University professor Joseph Blasi, director of the Rutgers Institute for the Study of Employee Ownership and Profit Sharing and a leading expert on worker issues. “Workers get fair wages and a fair share of the profits, in equity or profit shares or both.”

The prospect of inclusive ownership funds for employees comes at a pivotal time for American workers. While a majority of U.S. workers report being satisfied with their jobs and job security, polls reveal discontent that employers aren’t parceling out enough of the financial goodies a workplace can provide, especially performance bonuses and promotions that boost a salary.

Skin in the game

Moreover, most Americans say they want more than a paycheck; they want a stake in their companies. Surveys indicate a strong preference for working for a business that shares ownership or profits with employees over one that doesn’t. Republican or Democrat, young or old, female or male, having a financial share in the company — skin in the game — evidently makes a commute more worthwhile.

Research shows that private-sector employees with at least some ownership and/or profit sharing make more money and enjoy better benefits and higher morale than their peers at companies not offering such programs. In addition, companies that fund employee stock ownership plans (ESOPs) improve workers’ financial well-being and retirement security.

“You don’t need to have 100% employee-owned firms to have capital shares improve the middle class,” Blasi said. “What you need is an expansion of the reasonable, recognizable share programs that exist in a lot of American companies.”

Companies benefit, too

And it’s not only workers who benefit. Research shows that when employees are given equity ownership and profit sharing, management and outside investors profit, too. Companies that pay attention to their workers’ bottom line find the corporate bottom line is stronger, in terms of sales and return on equity. Plus, workers who own shares are as much as half as likely to leave voluntarily, so a company experiences lower turnover and training costs.

“Employees care a lot about how much influence they have over day-to-day decisions affecting their job,” said Corey Rosen, founder of the National Center for Employee Ownership, a nonpartisan advocacy group in Oakland, Calif. “Companies treat people well, employees generate more ideas, the companies make more money.”

The best-performing ESOP companies offer financial incentives and respect employees’ criticisms and suggestions. “That’s what makes these [ESOP] plans sing,” Rosen said.

Many U.S. companies have gotten the message. Almost half of U.S. private-sector employees, about 59 million workers, have access to ownership or profit sharing where they work, according to a survey taken by the Rutgers Institute for the Study of Employee Ownership and Profit Sharing. About 25 million Americans own company stock, roughly 11 million of them through an ESOP.

Smaller, privately held companies account for most ESOPs, which also serve as a tax-advantaged way for founders to transfer ownership. Some larger companies are paragons of employee ownership, including supermarket chains Publix and WinCo Foods, while robust profit-sharing programs are a hallmark of Southwest Airlines LUV, -1.07% , Procter & Gamble PG, +0.28% and Ford F, +0.77% . Still, less than 10% of ESOP plans are at public companies, and overall U.S. employees currently control about 8% of America’s corporate equity.

Done properly, ESOPs reflect the mutually beneficial interests of workers and business owners. As a result, these plans find support on both sides of the political aisle in Washington. For example, in a rare bipartisan effort, Congress in 2018 passed legislation, spearheaded by Democratic Sen. Kirsten Gillibrand of New York, making it easier for companies to get U.S. Small Business Administration backing for bank loans that fund ESOPs and worker cooperatives. The law also directs the SBA to encourage owners to sell their businesses to employees by creating an ESOP.

Widening wealth gap

The vocal discussion and debate about employee ownership and board representation in the private sector is, of course, reflective of the increasing alarm globally about the expanding wealth gap between the privileged, comfortable few at or near the top and everyone else — and the social and political consequences this growing income inequality has wrought.

In addition to ensuring voting power, inclusive ownership funds, with their guaranteed share of a company’s wealth, pledge to do for workers what a universal basic income — a guaranteed share of a country’s wealth — promises the general public: to ease the financial insecurity many people confront day-to-day, paycheck-to-paycheck.

Read: The case for paying every American a dividend on the nation’s wealth

In the U.S., for instance, unemployment is historically low, but wage growth for the average worker pales inn comparison with upper management’s gains. The Economic Policy Institute, a Washington, D.C.–based think tank with ties to the labor movement, reports that while productivity growth has soared — meaning workers are making a solid contribution to company profits — wage growth for the rank-and-file has been essentially flat over the past 40 years.

Put more starkly, CEO compensation has risen 940% since 1978, while typical worker compensation is up just 12%, the EPI reports. The average pay of CEOs at the 350 biggest U.S. companies in 2018 was $17.2 million, including cashed-in stock options, which was 278 times the average worker’s yearly paycheck. In contrast, the CEO-to-typical-worker compensation ratio in 1965, also including realized options, was 20 to 1.

“We’ve had four decades of wage suppression,” said Lawrence Mishel, distinguished fellow at EPI and a former president of the organization. “It would be helpful if shareholders and institutional investors took a stronger hand in restraining CEO compensation.”

Indeed, Americans are frustrated with CEO pay. More than 60% believe CEO salaries should be capped — at six times the average worker — and half said the government should restrain CEO compensation, according to a 2016 survey taken by the Rock Center for Corporate Governance at Stanford University.

CEOs and corporate directors, not surprisingly, have a different take. In a companion Rock Center survey of 107 CEOs and directors of Fortune 500 companies, 73% said CEO compensation isn’t a problem. Furthermore, 84% of CEOs believe they are paid correctly in comparison with the average worker, while only 16% of the general public said the same. Limiting CEO pay was opposed by 79% of chief executives, and 97% of CEOs and directors opposed government intervention in CEO pay practices.

“There are people at the top who really need to take a hard look at themselves,” said Peter Gowan, a policy associate at the Democracy Collaborative, a left-leaning research group based in Washington, D.C. “We can change our ownership structures. Owners would be very wise to recognize that it is impossible for them to concentrate wealth while everyone else’s income is stagnating.”

Those at the top are responding to such calls. Some influential captains of U.S. industry — notably J.P. Morgan Chase JPM, -0.40% CEO Jamie Dimon and Ray Dalio, founder of the hedge-fund firm Bridgewater Associates — say America’s capitalist system, which has done so much for so many for so long, now needs repair.

“The American dream is alive, but fraying for many,” Dimon declared in his annual letter to shareholders last April. Dalio has even gone so far as to warn America’s elite to either step up to help make the system more equitable — or be swept up in whatever comes next.

‘A life of meaning and dignity’

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.” That’s the opening sentence of the Business Roundtable’s “Statement on the Purpose of a Corporation,” signed in August by 181 CEOs of America’s biggest and richest corporations, including the leaders of Apple AAPL, -1.46% , Bank of America BAC, -0.77% and Walmart WMT, -0.11% .

In its statement, the organization jettisoned the fundamental principle of shareholder primacy — the widely held belief that corporations should maximize shareholder value above all. The business group’s new thinking is that a company must commit to all of its stakeholders: customers, employees, suppliers and local communities, in addition to shareholders. “Each of our stakeholders is essential,” the statement professed.

The Business Roundtable’s effort depends of course on executives turning words into action. When it comes to employees, the organization pledged to invest in workers by “compensating them fairly and providing important benefits.” CEOs also promised skills training and education, along with “diversity and inclusion, dignity and respect.”

But the statement made no mention of treating employees as stakeholders and shareholders, whose financial interest in an organization’s success involves both a paycheck and equity shares — just as the CEO and other top executives receive.

“It’s hard to argue that it’s the worst thing to grant free shares to employees when it’s already being done for top executives,” said Blasi, the Rutgers professor.

As Loren Rodgers, executive director of the National Center for Employee Ownership, commented in a blog post critiquing the Business Roundtable statement: “Every business is a supplier and a customer. Every person is in a community. Most of us are employees. Why not make an economy where more of us are also shareholders?”

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Major benchmarks were taking a breather from their upward September march Monday, after a weekend attack on key Saudi oil production facilities sent crude prices soaring and sowed uncertainty in global financial markets.

But history shows that past episodes, albeit with some notable exceptions, haven’t caused much harm to stocks. While one-day crude-oil CLV19, -0.07%  price jumps of more than 10% are usually accompanied by losses for the S&P 500 index SPX, -0.49%, Dow Jones Industrial Average DJIA, -0.59%  and Nasdaq Composite Index COMP, -0.80% on the same day, they have been, on average, followed by better-than-usual performance six months out, according to Dow Jones Market Data.

As the chart above shows, the S&P 500 has, on average, risen 10.2% in the six months following one-day, crude-oil price spikes of 10% or more, nearly 4 percentage points higher than the 6.3% average growth of the S&P 500 during other periods. The Dow has risen 8.7% six months after a 10% crude surge, versus a typical 6.1% rise, while the Nasdaq has seen a 15.5% rise compared with a typical 8.2% ascent.

“The attack in Saudi Arabia is something to watch, but it doesn’t look like a major problem,” said Sam Stovall, investment strategist at CFRA. “The U.S. said it would open up the strategic reserves, and the Saudis have redundancies, and as a result the effects should be offset somewhat.”

While some companies and households could bear the cost of higher oil prices, Stovall said, the increasingly large American energy sector will benefit, potentially leading to higher profits, hiring and investment for U.S. energy companies.

Despite these bullish average outcomes, however, there is still reason for investor caution. In many individual instances of spikes in oil prices, the stock market was beset by significant volatility. Six months following a September 22, 2008 rise in oil prices of 15.7%,the S&P 500 fell 31.8%, as the U.S. economy found itself in a deep economic recession.

Another foreboding example is June 20, 1990, when the price of crude oil rose 10.7% in the months leading up to the Iraqi invasion of Kuwait. As that conflict grew over the next year, there were more than two dozen instances when crude oil prices rose more than 5% during a single trading day. Six months after the initial price spike, the S&P 500 was 8% lower.

Much of the average strength of equity markets following big changes in oil prices can be attributed to the energy sector itself. During Monday’s action, the energy sector has been the only one in the green, with the Energy Select Sector SPDR fund XLE, +0.08%  up 3.9% compared with a 0.3% decline for the S&P 500.

There may be reason to expect this outperformance to continue. “The energy sector has historically averaged a gain of 1.86% over all three month periods,” wrote George Pearkes of Bespoke Investment Group in a Monday email to clients. “But following big one-day price gains for oil, the sector has averaged a three-month gain of 2.66%.”

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Fed watchers may have just witnessed Powell’s ‘Bernanke moment,’ writes Sven Henrich. See full story.

Facebook says ‘tens of thousands’ of apps suspended over privacy issues

For more than a year, Facebook Inc. suspended “tens of thousands” of apps from about 400 developers that improperly pried into the personal information of its users, the company said in a blog post late Friday. See full story.

‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

But he says it’s important not to ‘over-glorify’ Costa Rica, as it is ‘not without its problems.’ See full story.

3 things NOT to do with your savings now that the Fed has cut interest rates

Already, the Fed’s rate cut has affected banks’ decision-making. See full story.

These 10 solid U.S. colleges prove you don’t need Harvard or Yale to achieve the American Dream

State and local public universities help low-income kids move into the middle class and beyond. See full story.


More than 20% of the U.S.’s college students are parents. See full story.

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It’s become a late-summer ritual: Lines of consumers snaked around Apple Inc.’s retail stores on a Friday in New York, San Francisco and all points in between on the first day a new iPhone is available.

In the days leading up to Friday’s big retail launch, it seemed Apple AAPL, -1.46%   was at an inflection point that threatens its carefully calibrated Apple iPhone Hype formula. The heavily-promoted iPhone launch event — as has been the case the past few years — was panned as incremental news that could easily have been disclosed in a press release. Some tech pundits even suggested that Apple — gasp! — discontinue its early September iPhonefest.

Recent iPhone sales worldwide reflect the sentiment, especially as tensions escalate over the impact a trade war with China will have on Apple hardware products. Apple has lost significant market share the past year to smartphone rivals Huawei Technologies and Xiaomi Corp. 1810, +1.20%   , makers of cheaper and feature-packed handsets that dominate the market in China, the world’s largest for smartphones. Indeed, queues at Apple’s Beijing and Shanghai stores on Friday combined were a few dozen, compared to hundreds in previous years, according to a Reuters report.

Yet there was Apple Chief Executive Tim Cook at the renovated Fifth Avenue store in Manhattan on Friday, basking in loud applause as pumped-up customers waved their newly purchased iPhone 11 models this Friday. News organizations, including MarketWatch, slavishly reported the festivities a day after Apple was named the country’s most relevant brand for the fifth year in a row in the annual Brand Relevance Index from Prophet.

“Demand looks strong out of the gates for Apple as the lines at its flagship NYC store were up 70% today compared to what we saw last year,” Wedbush Securities analyst Dan Ives said in an effusive note Friday.

Apple has acknowledged its flagship product is losing steam through its product strategy and several high-profile management changes. For the first time in nearly seven years, iPhone sales accounted for less than half of its quarterly revenue, according to its third-quarter earnings report released Aug. 1. Sales of iPhone were $25.99 billion, down sharply from a year ago, when iPhone revenue totaled $29.47 billion. In the same quarter a year earlier, iPhone comprised 63% of total revenue.

Read more: The iPhone just did something it hasn’t done in nearly 7 years, and it isn’t good for Apple

Cook has made no secret Apple is shifting its revenue-growth reliance to software and services. Its previous big event in March focused on the Apple TV+ streaming service, and Apple shared news of its pricing ($4.99 per month) last week. The company has also parted company in recent months with three principal figures closely associated with iPhone: Steve Dowling, head of communications; design boss Jony Ive; and retail chief Angela Ahrendts. Apple, in essence, has air-brushed part of iPhone history.

Read more: Apple design should be fine without Jony Ive

But you can’t argue with marketing success. Even as Cook reshapes his executive team and Apple pivots strongly to content, one thing is unlikely to change. As long as reporters show up en masse at Apple product events, consumers line up at Apple Stores in the U.S., and Cook receives a hero’s welcome on retail day — and it is dutifully covered — Apple won’t mess with a cliched albeit effective PR strategy.

Apple shares declined 1.5% on Friday, giving it a market value of $984 billion.

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For more than a year, Facebook Inc. suspended “tens of thousands” of apps from about 400 developers that improperly pried into the personal information of its users, the company said in a blog post late Friday.

The apps were banned for “inappropriately sharing data obtained from us, making data publicly available without protecting people’s identity or something else that was in clear violation of our policies,” Facebook said.

The company’s admission came the same day court filings revealed Facebook had suspended 69,000 apps. The case stemmed from an investigation it began in March 2018 following the disclosure that British consultancy Cambridge Analytica accessed the data of 87 million Facebook FB, -0.11%  users without their permission to aid Donald J. Trump in the 2016 presidential campaign.

The unsealed documents in a state court in Boston, part of a separate investigation by the Massachusetts attorney general into Facebook, indicate 10,000 apps were flagged for potentially mishandling personal data from Facebook users. Most of the suspensions occurred because developers failed to respond to emailed information requests.

Facebook said it has looked at millions of apps so far in its ongoing investigation. In August 2018, it said it suspended 400 apps. (In July, Facebook settled with the Federal Trade Commission for a record $5 billion over privacy violations from the Cambridge Analytica scandal.)

Read more: Facebook shares dip after record FTC settlement, before earnings report

The disclosure about wide-scale app suspensions renews questions about how Facebook and other large tech companies handle personal information, and how that data fuels their considerable marketing power. Facebook is being investigated by the FTC, along with Inc. AMZN, -1.50%. The Justice Department is investigating Apple Inc. AAPL, -1.46%   and Alphabet Inc.’s GOOGL, -0.72% GOOG, -0.71%  Google.

Indeed, House lawmakers have asked more than 80 companies how the businesses practices of the aforementioned quartet has harmed them, according to a report in the New York Times.

Facebook’s acknowledgment that its data privacy issues are significantly larger than it previously disclosed is sure to ratchet up political pressure on how it and its Big Tech brethren do business. Presidential candidate Sen. Elizabeth Warren, D-Mass., has advocated breaking up the companies, while others are pushing for stiff regulation.

Friday’s disclosure is particularly troublesome for Facebook Chief Executive Mark Zuckerberg, who huddled with President Donald J. Trump and lawmakers on Capitol Hill this week to hash out concerns about its privacy practices and discuss potential regulation. Zuckerberg has repeatedly vowed to secure Facebook’s platform, spending billions of dollars in the process.

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‘Don’t look at me for answers,’ Jerome Powell seems to say.

Fed Chair Jerome Powell doesn’t know the answer, he knows he doesn’t know, and he knows you know he doesn’t know. So quit asking it.

“It” of course is the trillion-dollar question (and its many permutations) that everyone on Wall Street, on Main Street, and in Washington is asking: What’s happening in the economy? Is a recession coming? Will the Fed cut rates in time? Should I buy or sell? Should I refinance? Should I expand my business? Will the trade war blow over?

And so when the Fed released its latest forecasts on Wednesday, everyone rushed to look at the dot plot to see if the Fed was going to cut rates again in December. The answer was no, and everybody got sad.

But that’s the wrong response, because as I said, Powell doesn’t know the answer.

Also read: Fed lowers interest rates, and many on panel foresee another cut this year

Forward guidance

For nearly two decades, the Federal Reserve has tried to be as predictable as possible, on the theory that the best way to conduct monetary policy is to give everybody a road map to where the Fed is likely heading. Forward guidance would let investors, traders, businesses and consumers set their expectations about monetary policy, and that would keep the economy humming along.

Except in emergencies, the Fed’s policy was to never surprise the markets. For much of the tepid expansion, the Fed’s message was: We promise to keep interest rates low for a very long time. They published a “dot plot” to illustrate that commitment to keep rates low.

And then, once they began tightening, their message was: We will raise rates very gradually. And the dot plot helped them communicate that.

But once the Fed started to ease rates again, the strategy of forward guidance became a liability to the Fed. The dot plot now does more harm than good.

Put no stock in our forecasts

On Wednesday, Powell all but declared forward guidance dead.

Don’t pay any attention to our forecasts, he seemed to be saying, because we really don’t know what will happen next. We have no faith in our forecasts, and neither should you.

You can’t give meaningful forward guidance if you do not know which way you are going to turn. Powell promised the Fed would remain vigilant and would try to steer the economy out of trouble, but he couldn’t say whether trouble would come, or when.

Read: Stock market’s eerie parallels to September 2007 should raise recession fears

Powell said that the Fed can do a lot to support the economy, but it cannot do the one thing that is needed right now: Supply a “settled roadmap for international trade.” Only President Donald Trump can tell businesses what the rules are. Only Trump can create certainty.

Not knowing if or when the trade chaos will be resolved means that everyone’s forecasts become less valuable. Beyond the direct hit from higher tariffs, the trade war also means businesses don’t know what the rules will be next year, or next week. There’s a huge unknown in the equation that’s depressing investment.

What the Fed needs to convey now is not a roadmap to the future, but a credible promise that it will take the right steps, whatever happens.

All 17 members of the Federal Open Market Committee are optimistic that a recession can be avoided. About half of the committee think one more rate cut may be needed, but none of them are willing to go public with a forecast for more aggressive easing, even though each of them knows that further cuts might become necessary.

None of them have much confidence in those forecasts. There are too many unknowns to predict anything with confidence. What the Fed needs to convey now is not a roadmap to the future, but a credible promise that it will take the right steps, whatever happens.

Given past failures, that’s a hard message to sell. The one thing the Fed has going for it right now is humility. Powell knows that he does not control events; he can only react.

Good luck!

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