Stocks and Bonds

More stories

  • 100 Shares129 Views

    in Economy

    Fed Warns Meme Stocks Could Pose Some Risks

    by

    Stocks that experience major volatility as a result of social media attention — often called meme stocks — have not threatened broader financial stability so far but could open the door to vulnerabilities, the Federal Reserve said in a report on Monday.The Fed’s twice-yearly update on America’s financial system included a special section on the meme stock phenomenon. It attributed the trend, in which attention on Twitter, Reddit and other platforms encourages rapid inflows into or out of buzzy stocks, to new trading technologies including mobile apps and to changing demographics, as younger people enter the retail trading market.“Along with the rise in risk appetite and the growing share of younger retail investors, access to retail equity trading opportunities has expanded over the past decade,” the report said.Social media can pump up interest in stocks, and it can also create an echo chamber, one in which “investors find themselves communicating most frequently with others with similar interests and views, thereby reinforcing their views, even if these views are speculative or biased.”Still, internet-inspired pile-ons do not necessarily create conditions that will spur a broad market crash, the Fed’s report suggested.“To date, the broad financial stability implications of changes in retail equity investor characteristics and behaviors have been limited,” the Fed said. The central bank specifically assessed what happened to shares of AMC Entertainment and GameStop in January, noting that activity and volatility in those stocks came alongside high activity on Twitter.While the report concluded that “recent episodes of meme stock volatility did not leave a lasting imprint on broader markets,” the Fed said a few trends “should be monitored.”The report pointed out that young and debt-laden investors may be more vulnerable to stock price swings, especially since they are now using “options,” which allow traders to place bets on whether prices will rise or fall and which can magnify leverage and potential losses.The Fed also warned that “episodes of heightened risk appetite may continue to evolve with the interaction between social media and retail investors and may be difficult to predict,” and that financial firms may not have calibrated their risk-management systems to reflect the volatility and losses that meme stock episodes might trigger.“More frequent episodes of higher volatility may require further steps to ensure the resilience of the financial system,” it said.Looking across a broader range of asset classes and recent trading activity, the Fed’s financial stability analysis generally suggested that the vulnerabilities have moderated compared with earlier in the pandemic — but it did flag high asset prices and a number of lingering risks.Stock prices have increased “notably,” the report said, and prices relative to forecast earnings remain near historical highs. Home prices have climbed, it noted, though mortgage lending standards have not deteriorated too badly. When lenders start to lower their standards, that can make the market more vulnerable.The Fed noted that “corporate bond issuance remained robust, supported by low interest rates,” also pointing out that “across the ratings spectrum, the composition of newly issued corporate bonds has become riskier.”And while many markets show signs of investor optimism, some financial strains from the pandemic shock persist.Some commercial real estate sectors continue to face challenges because “office vacancies are elevated and hotel occupancy rates remain depressed,” the report noted. Plus, “structural vulnerabilities persist in some types of money market funds,” which could amplify a future shock to the system.Money market mutual funds melted down during the pandemic and required a Fed rescue for the second time in a dozen years, and regulators are now looking at how to make them more resilient.The report also warned that life insurers might struggle to raise cash in a pinch.And it delved into climate risks. The central bank is among regulators now trying to understand what risks climate change might pose to banks, insurers and the broader financial system.“The Federal Reserve is developing a program of climate-related scenario analysis,” the report noted. “The Federal Reserve considers an effective scenario analysis program, which is designed to be forward looking over a period of years or decades, to be separate from its existing regulatory stress-testing regime.” More

  • 150 Shares199 Views

    in Economy

    Stocks Hit a Record as Investors See Progress Toward a Spending Deal

    by

    After weeks of fluctuations driven in part by Washington gridlock, share prices hit another high and put a dismal September in the rearview mirror.Wall Street likes what it’s hearing from Washington lately.The S&P 500 inched to a new high on Thursday, continuing a rally aided by signs of progress in spending talks that could pave the way for an injection of some $3 trillion into the U.S. economy.The index rose 0.3 percent to 4,549.78, its seventh straight day of gains and a fresh peak after more than a month of volatile trading driven by nervousness over the still-wobbly economic recovery and policy fights in Washington.The S&P 500’s performance this year

    Source: S&P Dow Jones IndicesBy The New York TimesBut even baby steps by lawmakers have helped end a market swoon that began in September.Share prices began to rise this month when congressional leaders struck a deal to allow the government to avoid breaching the debt ceiling, ending a standoff that threatened to make it impossible for the country to pay its bills. The rally has gained momentum as investors and analysts grow increasingly confident about a government spending package using a recipe Wall Street can live with: big enough to bolster economic growth, but with smaller corporate tax increases than President Biden’s original $3.5 trillion spending blueprint.“It seems like we’re kind of reaching a middle ground,” said Paul Zemsky, chief investment officer, multi-asset strategies at Voya Investment Management. “The president himself has acknowledged it’s not going to be $3.5 trillion, it’s going to be something less. The tax hikes are not going to be as much as the left really wanted.”Share prices had marched steadily higher for much of the summer, hitting a series of highs and cresting on Sept. 2. But a number of anxieties sapped their momentum as the certainty that markets crave began to evaporate. Gridlock over government spending, continuing supply chain snarls, higher prices for businesses and consumers and the Federal Reserve’s signals that it would begin dialing back its stimulus efforts all helped sour investor confidence. The S&P 500’s 4.8 percent drop in September was its worst month since the start of the pandemic.It has made up for it in October, rising 5.6 percent this month. But it’s not just updates out of Washington that have renewed investors’ optimism.The country has seen a sharp drop in coronavirus infections in recent weeks, raising, once again, the prospect that economic activity can begin to normalize. And the recent round of corporate earnings results that began in earnest this month has started better than many analysts expected. Large Wall Street banks, in particular, reported blockbuster results fueled by juicy fees paid to the banks’ deal makers, thanks to a surge of merger activity.Elsewhere, shares of energy giants have also buoyed the broad stock market. The price of crude oil recently climbed back above $80 a barrel for the first time in roughly seven years, translating into an instant boost to revenues for energy companies.But the recent rally seemed find its footing two weeks ago. On Oct. 6, word broke that Senator Mitch McConnell of Kentucky, the Republican leader, was willing to offer a temporary reprieve allowing Congress to raise the debt ceiling. The market turned on a dime from its morning slump, finishing the day in positive territory. That week turned out to be the market’s best since August.Once done as a matter of course in Washington, raising the debt ceiling has been an increasingly contentious issue in recent years — with sometimes serious implications for the market. In August 2011, a rancorous battle over the debt ceiling sent share prices tumbling sharply as investors began to consider the prospect that the United States could actually default on its debts.But the recent deal on the ceiling — even though it only pushed a reckoning into December — suggested to investors that there’s little appetite in Washington for a replay of a decade ago.“I think that let some pressure out of the system,” said Alan McKnight, chief investment officer of Regions Asset Management. “What it signaled to the markets was that you can find some area of agreement. It may not be very large. But at least they can come together.”With the impasse broken, the rally gained strength. Last Thursday, the S&P 500 jumped 1.7 percent — its best day in roughly seven months — as financial giants like Morgan Stanley and Bank of America reported stellar results.Potential progress on a deal in Washington has only brightened investors’ outlook.“Democrats are now moving in the same direction, and hard decisions are being made,” wrote Dan Clifton, an analyst with Strategas Research, who monitors the impact of policy on financial markets, in a note to clients on Wednesday.Understand the U.S. Debt CeilingCard 1 of 6What is the debt ceiling? More

  • 138 Shares169 Views

    in Economy

    Fed Ethics Office Warned Officials to Curb Unnecessary Trading During Rescue

    by

    Months later, some Federal Reserve leaders resumed their market activity, stoking a scandal now engulfing the central bank.On March 23 last year, as the Federal Reserve was taking extraordinary steps to shore up financial markets at the onset of the pandemic, the central bank’s ethics office in Washington sent out a warning.Officials might want to avoid unnecessary trading for a few months as the Fed dived deeper into markets, the Board of Governors’ ethics unit suggested in an email, a message that was passed along to regional bank presidents by their own ethics officers.The guidance came just as the Fed was unveiling a sweeping rescue package aimed at backstopping or rescuing markets, including those for corporate bonds and midsize-business debt. It appears to have been heeded: Most regional presidents and governors of the Fed did not engage in active trading in April, based on their disclosures.But the recommendation, which was confirmed by a person who saw the email, did not go far enough to prevent a trading scandal that is now engulfing the Fed and being leveraged against its chair, Jerome H. Powell, as the White House mulls whether to reappoint him before his leadership term expires early next year.The email could pose further trouble for the Fed, which declined to provide a copy, because it shows that central bank ethics officers — and officials in general — were aware that active trading could look bad when the Fed was taking emergency action to try to save markets and its policymakers had vast access to sensitive information. Despite the early warning, some top officials resumed trading after the most proactive phase of the Fed’s rescue ended, based on financial disclosures and background comments from regional bank spokespeople.Financial disclosures, first reported by The Wall Street Journal, showed that Robert S. Kaplan traded millions of dollars’ worth of individual stocks last year while he was head of the Federal Reserve Bank of Dallas. No dates are provided for those purchases and sales, but a Dallas Fed spokesman has said they did not take place between late March and the end of April.Another Fed official, Eric S. Rosengren, bought and sold securities tied to real estate while running the Federal Reserve Bank of Boston. Such securities are sensitive to Fed policy, and involve a market that Mr. Rosengren himself warned about in public speeches last year. His trading resumed in May, his disclosures show.Both Mr. Kaplan and Mr. Rosengren have since resigned from their positions, with Mr. Kaplan saying he did not want controversy around his transactions to distract from the Fed’s work and Mr. Rosengren citing health issues.Robert S. Kaplan traded millions of dollars’ worth of individual stocks while president of the Federal Reserve Bank of Dallas last year.Richard Drew/Associated PressWhile attention to the Fed’s ethics rules — and trading habits — started with its 12 regional branches, journalists and academics have begun to re-examine previously reported trades by Fed officials who sit on its board in Washington.Richard H. Clarida, the Fed’s vice chair, rebalanced a portfolio toward stocks in late February 2020, just before the Fed signaled that it stood ready to help markets and the economy in the face of the coronavirus pandemic. The timing has raised questions, though the transactions were in line with previous trading he had done. The vice chair has since said he has always acted “honorably and with integrity” while in public office.Mr. Powell also has faced backlash, primarily from progressives who do not want him reappointed, for selling holdings in a popular and broad stock index last October. The Fed was not rolling out new rescue programs at that time, and a spokeswoman has said Mr. Powell sold the holdings to pay for family expenses. Mr. Powell’s critics argue that he should not have made active financial transactions at all last year.As the ethics controversy swells, the Fed has been working to stem the fallout.Mr. Kaplan and Mr. Rosengren announced last month that they would step down, and Mr. Powell has said that “no one is happy” with the situation. He started a review of Fed ethics rules shortly after news of the presidents’ trading broke. He has also asked an independent watchdog to investigate the trades to make sure they complied with ethics rules and the law.But scrutiny has persisted, in part because Mr. Powell is up for reappointment.“It speaks to governance, incentives and general attitude,” said Simon Johnson, an economist at the Massachusetts Institute of Technology who previously wrote a post for Project Syndicate supporting Lael Brainard, a leading contender to replace Mr. Powell.Mr. Johnson, who does not personally know Ms. Brainard, a Fed governor, has been among those flagging Mr. Powell’s transaction to journalists. He has focused on the fact that Mr. Powell sold a stock-based fund while he was in regular contact with the Treasury secretary during an active year for the central bank, and said he thought the trading scandal should factor into the Fed chair’s reappointment chances.“Presumably, someone in the White House will pay attention and look at the details,” Mr. Johnson said.Lael Brainard, a Fed governor, is considered a leading contender to replace Mr. Powell as chair. Cliff Owen/Associated PressMr. Powell’s October transaction and the questions about it highlight that there is no time when Fed chairs can safely sell assets to raise cash should they need it, said Peter Conti-Brown, a professor and Fed historian at the University of Pennsylvania. That reinforces the need to update the Fed’s rules to eliminate any appearance of conflict by taking discretion away from officials, he said.“It’s hard for me to fault him that he did it when he did it,” Mr. Conti-Brown said, later adding that “it would be more a scandal for this trade to end Chair Powell’s career as a central banker.”The board’s March 23 guidance appears to have had some effect, because central bank officials overall conducted little or no active trading during the period last year when they were most active in markets, in March and April.Mr. Powell’s only dated transactions came in September, October and December. Mr. Clarida’s came in February and August. Ms. Brainard did not report any transactions last year.Randal K. Quarles, the Fed’s vice chair for supervision at the time, is shown to have bought a financial stake in a fund in early April; a family trust that his wife has an interest in bought an interest in a fund, which the couple sold before the fund purchased any securities, a Fed spokesperson said. Michelle Bowman, a Fed governor, noted a small sale in mid-April. That came from a retirement fund held in her spouse’s health savings account, and reflected the account’s closing as her husband changed jobs, a Fed spokesman said.At the regional banks, the heads in San Francisco, Minneapolis, Chicago, St. Louis and Kansas City, Mo., noted no disclosures or only college savings plan and retirement contributions last year. John C. Williams, the president of the powerful New York Fed, reported one personal transaction in December.The Fed president in Richmond, Va., reported private equity and bond transactions in July and August, and the Atlanta Fed president helped buy a property in Utah in June. The Cleveland Fed president reported buying index fund shares in February, but then stopped until November.The Philadelphia Fed president made several relatively small transactions throughout April and the year, but a spokeswoman for his bank said the spring trades were not active. They involved an automatic liquidation from a legacy fund that occurs every year, an automatic dividend reinvestment and a bond call.The fact that trading more or less halted last spring is a silver lining, Mr. Conti-Brown said. Regional reserve banks are quasi-private institutions, so it is not unambiguously clear that they must listen to the Board of Governors on such matters.“This tells us that the board’s ability to oversee ethics in the system is there,” he said. “What is missing is a better set of rules.” More

  • 113 Shares109 Views

    in Economy

    Economic and Earnings Concerns Begin to Weigh on Stocks

    by

    After having few cares about the markets all year, investors are getting nervous as the Fed signals that harsher policies are on the way.Wall Street’s imperviousness to bad news, which enabled stocks to double in value from their pandemic panic lows, may be starting to crack.When the Federal Reserve signaled in September that it would soon tighten monetary policy by curtailing asset purchases, the stock market took it well, but not for long. The S&P 500 rose modestly for a few days before reversing course, pushing the index more than 5 percent below the high it set earlier in the month, which amounted to its biggest drop for the year.Despite that setback, the market managed to eke out a 0.2 percent gain for the third quarter.A stingier Fed is not the market’s only concern. Inflation, dismissed until recently by the Fed as a transitory artifact of the pandemic, is coming to be seen as more persistent as the prices of goods, services and labor increase. What is being acknowledged as transitory, though, is the jolt to economic growth and corporate profits provided by several trillion dollars of added spending by Congress.With a number of threats to prosperity becoming harder to ignore, many investment advisers have become less enthusiastic about stocks. They are revising return expectations down and recommending exposure only to narrow niches.“We’re not bullish today at all,” said David Giroux, head of investment strategy at T. Rowe Price. “What really drives the market is earnings growth,” he said. “We can’t repeat some of the things we’ve done this year. Earnings growth may slow in ’22, maybe dramatically.”After being a colossal boon for the economy, fiscal stimulus — in the form of enormous federal spending — may now prove to be three problems for the stock market in one. Government expenditure focused on the pandemic that boosted growth is ebbing. There is a broad consensus that taxes will rise soon to help pay for that spending. And, because many people took direct stimulus payments and invested them in the stock market, stocks ran up faster than they would otherwise.The positive effects of so much stimulus may have run their course, as domestic stock funds tracked by Morningstar lost 0.6 percent in the third quarter, with portfolios that focus on financial services among the few clear winners.The SPDR S&P 500 E.T.F. Trust, which tracks the index and is the largest exchange-traded fund, returned 0.6 percent in the quarter, beating the average actively managed mutual fund.The very fact that many investors until lately have seemed untroubled by the perils facing the economy is what some find troubling.“There is complacency in a lot of things,” said Luca Paolini, chief strategist at Pictet Asset Management. He enumerated some of his worries: “‘Inflation is temporary.’ Maybe. Maybe not. Six months ago, consumption was booming. People had money and time. Now they have less money and less time. Earnings momentum has peaked, clearly, relative to six months ago. I’m concerned the market isn’t pricing in deterioration in the economic outlook.”By some measures, stocks are as expensive as at almost any time in history. The S&P 500 trades at about 34 times the last 12 months of earnings. Sarah Ketterer, chief executive of Causeway Capital Management, worries that corporate profits face numerous headwinds and that their impact on stocks could be especially high with valuations so rich.“Inflation is up, economic growth is down,” she said. “The supply chain disruption phenomenon is global, creating cost increases and margin pressure.” Companies in many industries have reported trouble sourcing some commodities and important components of manufactured goods, such as semiconductors, hindering production and making what they do produce more expensive.Rising prices have sent interest rates in the bond market higher, driving down bond prices and keeping a lid on bond funds in the third quarter. The average one rose 0.2 percent, dragged down by a 2.9 percent decline in emerging-market portfolios.“I’m hard pressed to find an area of costs that haven’t gone up, and this may continue for some time,” Ms. Ketterer said. “No one knows how long it will take to unravel the tangled supply chain situation.”The situation seems most tangled in Asia, where many raw and intermediate materials originate. China has been the source of several worrying recent events, including power cuts that have impeded manufacturing, and financial instability at the China Evergrande Group, a giant, heavily indebted developer.Some specialists in Asian markets see little chance of Evergrande’s woes spilling over to the wider Chinese financial system, let alone beyond. Matthews Asia, a mutual fund manager, said in a note to investors that mortgage lending standards in China are fairly tight, with large down payments required and the packaging of loans into securities sold to investors minimal.“Evergrande’s problems are unlikely to cause systemic problems and the likelihood of this devolving into a global financial problem is minuscule,” Matthews’s analysts said. But they added that restrictions could be placed on the property sector in coming quarters.Saira Malik, head of equities at Nuveen, an asset manager, likewise does not expect Evergrande to become a global problem, but she cautions that it is not China’s only problem.“The government is focusing on social issues, and some of that is leading to moderation in the growth rate” of China’s economy, she said. While more expansive central bank policies would be helpful, she added, “we think China could get worse before it gets better.”Funds that focus on Chinese stocks got worse in the third quarter, sinking 13.8 percent. International stock funds in general lost 2.9 percent.As prices and risks in stock markets at home and abroad rise, the opportunities for strong, relatively safe gains shrink.Mr. Giroux said he is “buying what the market is concerned about in the short term,” such as stocks in managed care providers, which are trading at a discount to the market because earnings growth has been subdued.He said he would avoid smaller companies, as well as companies that have benefited from fiscal stimulus programs, including automakers, heavy industrial companies and semiconductor manufacturers.Ms. Malik, who said she is “moderately bullish” overall, prefers smaller companies and European stock markets. She also likes makers of office software, such as Salesforce and HubSpot, and high-quality consumer cyclicals like Nike.Mr. Paolini also favors European stocks.“The case for Europe is quite solid,” he said. “Vaccination rates are high; the Covid story is over,” yet government stimulus continues across the region, so “they don’t have the same fiscal cliff as in the U.S. and U.K.”His other recommendations include financial stocks, which tend to benefit from higher interest rates, and drug makers.Ms. Ketterer thinks there is more potential for pandemic recovery stocks to appreciate. In particular, she expects Rolls-Royce, which makes jet engines, to benefit from an operational restructuring, and Air Canada, which cut costs during the pandemic and has a strong balance sheet and little competition, to do well as travel picks up.Ms. Ketterer remains resolute about trying to pick winners when there may not be many winners to pick.“What do we do?” she said. “We’re not going to hide. We don’t want to be in cash, and we don’t want to be in bonds if rates are rising.”Mr. Giroux said he doesn’t care much for bonds or cash — money-market funds — right now, either. He favors bank loans, floating-rate securities created by bundling loans that banks have made to corporate customers. They yield close to 4 percent, and that could increase if market interest rates rise. Default risk is mitigated because bank loans have a high place in corporate capital structures.The troubles in the stock market lately are barely a blip when viewed on a chart of the phenomenal last 18 months, so a single-digit percent return may seem meager. But it may start to look generous if the time has arrived for investors to learn to live with less.“The risk profile for equities over the next three to five years is not as good as it was a year ago because valuations are high, sentiment is good and earnings growth is likely to slow,” Mr. Giroux said. “We pull back on risk assets when things feel pretty good, and right now things feel pretty good.” More

  • 150 Shares149 Views

    in Economy

    Oil and Gas Prices May Stay High as Investors Chase Clean Energy

    by

    Even as more costly fuel poses political risks for President Biden, oil companies and OPEC are not eager to produce more because they worry prices will drop.HOUSTON — Americans are spending a dollar more for a gallon of gasoline than they were a year ago. Natural gas prices have shot up more than 150 percent over the same time, threatening to raise prices of food, chemicals, plastic goods and heat this winter.The energy system is suddenly in crisis around the world as the cost of oil, natural gas and coal has climbed rapidly in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have led to blackouts and long lines at filling stations.The situation in the United States is not quite as dire, but oil and gasoline prices are high enough that President Biden has been calling on foreign producers to crank up supply. He is doing so as he simultaneously pushes Congress to address climate change by moving the country away from fossil fuels toward renewable energy and electric cars.U.S. energy executives and the Wall Street bankers and investors who finance them are not doing anything to bolster production to levels that could bring down prices. The main U.S. oil price jumped nearly 3 percent on Monday, to about $78 a barrel, a seven-year high, after OPEC and its allies on Monday declined to significantly increase supply.Producers are still chafing at memories of the price crash early in the pandemic. Wall Street is even less enthusiastic. Not only have banks and investors lost money in the boom-bust cycles that whipsawed the sector over the past decade, but many also say they are prepared to pare their exposure to fossil fuels to meet the commitments they have made to fight climate change.“Everyone is very wary since it was just 15 or 16 months ago we had negative-$30-a-barrel oil prices,” said Kirk Edwards, president of Latigo Petroleum, which has interests in 2,000 oil and natural gas wells in Texas and Oklahoma. He was recalling a time of so little demand and storage capacity that some traders paid buyers to take oil off their hands.If the drillers don’t increase production, fuel prices could stay high and even rise. That would present a political problem for Mr. Biden. Many Americans, especially lower-income families, are vulnerable to big swings in oil and gas prices. And while use of renewable energy and electric cars is growing, it remains too small to meaningfully offset the pain of higher gasoline and natural gas prices.Goldman Sachs analysts say energy supplies could further tighten, potentially raising oil prices by $10 before the end of the year.That helps explain why the Biden administration has been pressing the Organization of the Petroleum Exporting Countries to produce more oil. “We continue to speak to international partners, including OPEC, on the importance of competitive markets and setting prices and doing more to support the recovery,” Jen Psaki, Mr. Biden’s press secretary, said last week.But OPEC and its allies on Monday merely reconfirmed existing plans for a modest rise in November. They are reluctant to produce more for the same reasons that many U.S. oil and gas companies are unwilling to do so.Oil executives contend that while prices may seem high, there is no guarantee that they will stay elevated, especially if the global economy weakens because coronavirus cases begin to increase again. Since the pandemic began, the oil industry has laid off tens of thousands of workers, and dozens of companies have gone bankrupt or loaded up on debt.Oil prices may seem high relative to 2020, but they are not stratospheric, executives said. Prices were in the same territory in the middle of 2018 and are still some ways from the $100-a-barrel level they topped as recently as 2014.Largely because of the industry’s caution, the nationwide count of rigs producing oil is 528, roughly half its 2019 peak. Still, aside from recent interruptions in Gulf of Mexico production from Hurricane Ida, U.S. oil output has nearly recovered to prepandemic days as companies pull crude out of wells they drilled years ago.Another reason for the pullback from drilling is that banks and investors are reluctant to put more money into the oil and gas business. The flow of capital from Wall Street has slowed to a trickle after a decade in which investors poured over $1.4 trillion into North American oil and gas producers through stock and bond issues and loans, according to the research firm Dealogic.“The banks have pulled away from financing,” said Scott Sheffield, chief executive of Pioneer Natural Resources, a major Texas oil and gas producer. The flow of money supplied by banks and other investors had slowed even before the pandemic because shale wells often produced a lot of oil and gas at first but were quickly depleted. Many oil producers generated little if any profit, which led to bankruptcies whenever energy prices fell.Companies constantly sold stock or borrowed money to drill new wells. Pioneer, for example, did not generate cash as a business between 2008 and 2020. Instead, it used up $3.8 billion running its operations and making capital investments, according to the company’s financial statements.Industry executives have come to preach financial conservatism and tell shareholders they’re going to raise dividends and buy back more stock, not borrow for big expansions. Mr. Sheffield said Pioneer now intended to return 80 percent of its free cash flow, a measure of money generated from operations, to shareholders. “The model has totally changed,” he said.Among oil executives, there are still vivid memories of the collapse in energy prices last year, as the pandemic curtailed commuting and travel.Tamir Kalifa for The New York TimesOil company shares, after years of declines, have soared this year. Still, investors remain reluctant to finance a big expansion in production.With oil and gas exploration and production businesses taking a cautious approach and returning money to shareholders, the first company “that deviates from that strategy will be vilified by public investors,” said Ben Dell, managing director of Kimmeridge, an energy-focused private equity firm. “No one is going down that path soon.”This aversion to expanding oil and gas production is driven in part by investors’ growing enthusiasm for renewable energy. Stock funds focusing on investments like wind and solar energy manage $1.3 trillion in assets, a 40 percent increase this year, according to RBC Capital.And the biggest investment firms are demanding that companies cut emissions from their operations and products, which is much harder for oil and gas companies than for technology companies or other service-sector businesses.BlackRock, the world’s largest asset manager, wants the businesses it invests in to eventually remove as much carbon dioxide from the environment as they emit, reaching what is known as net-zero emissions. The New York State Common Retirement Fund, which manages the pension funds of state and local government workers, has said it will stop investing in companies that aren’t taking sufficient steps to reduce carbon emissions.But even some investors pushing for emissions reductions express concern that the transition from fossil fuels could drive up energy prices too much too quickly.Mr. Dell said limited supply of oil and natural gas and the cost of investing in renewable energy — and battery storage for when the sun is not shining and the wind is not blowing — could raise energy prices for the foreseeable future. “I am a believer that you’re going to see a period of inflating energy prices this decade,” he said.Laurence D. Fink, chairman and chief executive of BlackRock, said this could undermine political support for moving away from fossil fuels.“We risk a supply crisis that drives up costs for consumers — especially those who can least afford it — and risks making the transition politically untenable,” he said in a speech in July.There are already signs of stress around the world. Europe and Asia are running low on natural gas, causing prices to rise even before the first winter chill. Russia, a major gas supplier to both regions, has provided less gas than its customers expected, making it hard for some countries to replace nuclear and coal power plants with ones running on gas.OPEC, Russia and others have been careful not to raise oil production for fear that prices could fall if they flood the market. Saudi Arabia, the United Arab Emirates, Russia and a few other producers have roughly eight million barrels of spare capacity.“The market is not structurally short on oil supply,” said Bjornar Tonhaugen, head of oil markets for Rystad Energy, a Norwegian energy consulting firm.Helima Croft, head of global commodity strategy at RBC Capital Markets, said she expected that OPEC and Russia would be willing to raise production if they saw the balance between supply and demand “tighten from here.”If OPEC raises production, U.S. producers like Mr. Edwards of Latigo Petroleum will be even more reluctant to drill. So far, he has stuck to the investment plans he made at the beginning of the year to drill just eight new wells over the last eight months.“Just because prices have jumped for a month or two doesn’t mean there will be a stampede of drilling rigs,” he said. “The industry always goes up and down.”Clifford Krauss reported from Houston, and Peter Eavis from New York. More

  • 150 Shares199 Views

    in Economy

    Kaplan and Rosengren, Fed Presidents Under Fire for Trades, Will Step Down

    by

    Robert S. Kaplan will exit his role as head of the Federal Reserve Bank of Dallas next month. Eric S. Rosengren, the head of the Federal Reserve Bank of Boston, is also retiring earlier than planned.Eric S. RosengrenSteven Senne/Associated PressRobert S. KaplanAnn Saphir/ReutersTwo Federal Reserve officials embroiled in controversy for trading securities that could have benefited from the central bank’s 2020 intervention in financial markets announced on Monday that they would leave their positions.Robert S. Kaplan, who heads the Federal Reserve Bank of Dallas, will retire on Oct. 8, according to a statement released Monday afternoon. Mr. Kaplan’s statement acknowledged the controversy as the reason for his departure. Eric S. Rosengren, the president of the Boston Fed, will retire this Thursday, accelerating his planned retirement by nine months. Mr. Rosengren cited health reasons for his early departure.The resignations followed the Fed’s announcement this month that Chair Jerome H. Powell had ordered a review of the central bank’s ethics rules in light of the concern surrounding the trades. When asked about his confidence in Mr. Kaplan and Mr. Rosengren during a news conference last week, Mr. Powell expressed displeasure with what had happened.“No one on the F.O.M.C. is happy to be in this situation, to be having these questions raised,” Mr. Powell said, referring to the policy-setting Federal Open Market Committee. He added, “This is an important moment for the Fed and I’m determined that we will rise to the moment.”Mr. Kaplan noted in his statement that it was his decision to leave the Fed, and that “the recent focus on my financial disclosure risks becoming a distraction” to the central bank’s economic work.Mr. Kaplan drew scrutiny for buying and selling millions of dollars in individual stocks, among other investments, last year — trading first reported on by The Wall Street Journal on Sept. 7. He has maintained that his trades were consistent with Fed ethics rules.Mr. Rosengren announced on Monday morning that he was retiring earlier than planned to try to prevent a kidney condition from worsening, in the hopes of staving off dialysis. The Boston Fed president came under criticism because he held stakes in real estate investment trusts, which invest in and sometimes manage properties, and listed purchases and sales in those in 2020. He spent last year warning publicly about risks in the commercial real estate market, and was helping to set Fed policy on mortgage-backed security purchases, which can help the housing market by improving financing conditions.Both presidents had previously announced that they would convert their financial holdings into broad-based indexes and cash by Sept. 30.Mr. Powell offered statements of support for both of the retiring officials in the news releases announcing their exit.But the controversy has pushed him into a delicate position. His own term as Fed chair expires early next year, and the White House is actively considering whether to reappoint him. A scandal at his central bank is sure to draw questions from senators when he testifies this week, and could even hurt his reappointment chances.As chair, Mr. Powell has also focused on shoring up public support in the central bank and explaining its role. He holds frequent news conferences, aims to speak in simpler language, and championed a series of “Fed Listens” events where top central bank officials meet and hear from community members whom they might not otherwise interact with — from community college students to local food pantry staff.The 2020 trading disclosures, which are shaping up to be the most headline-grabbing scandal the central bank has faced in years, risk chipping away at the widespread trust he has been working to build.Responses to Mr. Kaplan and Mr. Rosengren’s trading disclosures have been swift, and scathing. The group Better Markets had been calling for the Fed to fire both presidents if they did not resign. Other progressive groups had called for at least one of them to be ousted, and ethics watchdogs have said that the rules that had enabled their trades needed to be revisited.After the resignation announcements on Monday, Wall Street promptly began to assess what the departures would mean for monetary policy. Both officials have tended to worry about financial stability, and for that reason were likely to favor removing monetary policy support sooner than some of their colleagues — a stance often referred to as being hawkish.“Their exit will take out two of the nine more hawkish Fed officials who saw a 2022 rate hike as of the September F.O.M.C. meeting last week and remove important voices on financial stability issues in particular,” Krishna Guha at Evercore ISI wrote in a note to clients shortly after the announcement.Mr. Rosengren has been president of the Boston Fed since 2007, and his retirement was previously planned for June. The Fed’s 12 regional members rotate in and out of voting seats, and Mr. Rosengren would have had a vote on monetary policy next year. Mr. Kaplan would have voted in 2023.Kenneth C. Montgomery, the Boston Fed’s first vice president, will serve as interim president at that bank. The Boston Fed’s board members — excluding bank representatives — will need to select a permanent pick for president, subject to approval from the Fed’s Board of Governors in Washington.A longtime Fed employee who worked in research and bank supervision before becoming president, Mr. Rosengren played a key role in the 2020 crisis response. His regional Fed ran both the money market mutual fund and Main Street lending backstop programs that the Fed rolled out last year.The Boston Fed noted in the release that Mr. Rosengren hoped that his health condition would improve, and that he would be able to “explore areas of professional interest” in the future.Mr. Kaplan has been at the head of the Dallas Fed since late 2015, before which he taught at Harvard University and had a long career at Goldman Sachs. Meredith Black, that bank’s first vice president who had planned to retire, will serve as interim president until a successor is named, the Dallas Fed said. More

  • 163 Shares129 Views

    in Economy

    The Fed will re-examine ethics rules after trades by two officials drew scrutiny.

    by

    The Federal Reserve is poised to overhaul the rules regarding what its officials are allowed to invest in and trade after disclosures last week showed that two of the central bank’s officials were active in markets in 2020, drawing an outcry.Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, and Eric Rosengren, the president of the Boston Fed, bought and sold stocks and real estate-tied assets last year.Those transactions complied with Fed guidelines, but they involved securities that could have been affected by Fed decisions and communications during a year in which it was actively supporting a broad swathe of financial markets amid the pandemic. Policy researchers and even some former Fed employees were upset by the disclosures.In response to the scrutiny, both regional presidents announced that they would sell their holdings and move them to cash and broad-based funds. Still, the episode highlighted that the Fed’s rules governing its officials’ financial activity — although in line with what much of the government uses, and in some cases stricter — allow for considerable individual discretion. The central bank said on Thursday that it would re-examine those policies at the direction of Jerome H. Powell, the Fed chair.“Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell late last week directed board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,” a Fed representative said in a statement.“This review will assist in identifying ways to further tighten those rules and standards,” the representative added. “The board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct.”The statement came about an hour after Senator Elizabeth Warren, a Massachusetts Democrat, announced that she had sent letters to the Fed’s 12 regional banks urging them to adopt tougher restrictions.“The controversy over asset trading by high-level Fed personnel highlights why it is necessary to ban ownership and trading of individual stocks by senior officials who are supposed to serve the public interest,” Ms. Warren wrote in the letters. More