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Friday, July 31, 2015

Blue Moon

Financial Review

Blue Moon

DOW – 56 = 17,689
SPX – 4 = 2103
NAS – 0.5 = 5128
10 YR YLD – .07 = 2.20%
OIL – 1.64 = 46.88
GOLD + 7.10 = 1096.40
SILV + .04 = 14.87

For the week the S&P 500 index gained 1.2%, while posting a 2% gain for the month of July. The Dow Industrials finished the week with a 0.7% gain which lifted the monthly gain to 0.4%. The Nasdaq was up 0.8% for the weeks and 2.9% for the month. For the month, the yield on the 10 year Treasury dropped 13 basis points. Spot gold dropped 6% for the month and silver was down 5%. The big decline came in oil prices: down 12.59 per barrel or 21% for the month.

Consumer sentiment fell to a final July reading of 93.1 from a final June level of 96.1. For context, the consumer-sentiment gauge averaged 86.9 over the year leading up to the recession. After adjusting for changes in prices, just three in 10 surveyed thought their chances were better than 50 percent for real income gains over the next five years. Call it the voice of experience.

An index that measures the price of US labor slowed sharply in the second quarter, easing fears of inflation and signaling the labor market may not be as healthy as the low unemployment rate suggests. The employment cost index barely increased, rising 0.2% in the second quarter after a 0.7% increase in the first three months of the year. The rise was an all-time low for the series going back to 1982. In the past 12 months, compensation (wages plus benefits) have risen just 2%, about the same pace as since 2010. A spike of 2.6% in the first quarter, which got everyone excited about wage growth, was apparently just a spike in bonus pay, especially for Wall Street. There is no indication companies are having to pay up to lure or retain workers; there is no wage push inflation moving prices higher. Today’s employment cost index certainly gives no reason for the Fed to hike interest rates, but Fed policymakers have not made higher wages a precondition for raising rates.

We still haven’t worked through the fallout from the housing crash.  RealtyTrac reports 7.4 million borrowers were still “seriously” underwater on their mortgages at the end of June. The real estate information company defines that as the loan amount being at least 25 percent higher than the property’s estimated market value. Over 13 percent of all properties with a mortgage are in this predicament, and that is actually a slight increase from the first quarter of this year. The number of underwater borrowers has now increased for two straight quarters but it is still lower than a year ago, when over 17 percent of borrowers were seriously underwater. One reason why there is still a serious negative equity problem is because people with equity have sold to take advantage of higher prices, while homeowners who are underwater are stuck.

The International Monetary Fund has warned it will not participate in a third bailout for Greece unless debt relief is granted to the country. IMF staff reportedly told the fund’s board that Athens’s debt burden and poor track record of implementing reforms rule out further financial help from the fund, until there is an “explicit and concrete agreement” on debt relief from Greece’s Eurozone creditors. The warning means the IMF is unlikely to provide further funds to Athens at this stage, potentially raising pressure on Greece’s Eurozone partners to find more money to plug the country’s short-term financing needs. This is an unusual development; the IMF has never been a friend to debtors. While talk of debt relief may sound magnanimous, it likely just means extending maturities, or lowering interest rates. And the IMF is still demanding structural reform. I’m not sure what would satisfy that requirement; more austerity likely.

Greece’s financial markets are scheduled to reopen on Monday, ending a five-week suspension that began after the country imposed capital controls amid a confrontation with creditors. Greek traders will be able to buy stocks, bonds, derivatives and warrants – but only if they use new money such as funds transferred from abroad or cash-only deposits.

Meanwhile, when or if Greece gets another bailout package, it won’t help much; only a fraction of the money would go toward healing the economy. Nearly 90 percent would go towards debts, interest, and supporting failing Greek banks. And another bailout would actually hurt by increasing Greece’s overall debt, which stifles the potential for an economic rebound.

Investors are bracing for Puerto Rico to miss $58 million in bond payments in the coming days, as the commonwealth attempts to restructure $72 billion of debt. Saturday’s deadline could mark the first skipped payment to bondholders.

Chinese shares suffered their worst month in nearly six years this July despite (or perhaps because of) government-led recovery efforts. The Shanghai Composite lost 9% this week, and is down 14% month to date – its worst monthly performance since August 2009. The latest market crackdown: China’s securities regulator said it launched a probe into automated trading, restricting 24 stock accounts suspected of “influencing securities trading prices.”

Oil prices touched a four-month low. The rout in Chinese stock markets prompted concerns that oil demand in one of the world’s largest energy consumers would fall. Also, high international supplies have kept prices under pressure and increased competition among producers, who are taking cost-cutting measures. But few have ventured to cut production. WTI posted the biggest monthly decline of 2015. For the month of July, U.S. crude has lost 21%.

The big news in earnings today came from Big Oil. Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as Exxon could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges. The companies’ shares fell to the lowest in more than three years. Exxon and Chevron contributed to the avalanche of supply by increasing second-quarter crude output by 12 percent and 1.7 percent, respectively. Exxon cut share repurchases for the current quarter in half to $500 million. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

And while the weak performance from the oil patch raises many questions, one of the most important for investors is what will happen to dividends. The answer is not much. Chevron maintained its quarterly dividend at $1.07 per share in the second quarter, returning $2 billion to shareholders. Chevron hasn’t raised its dividend since Q2 2014. Exxon raised its dividend to 73 cents per share from 69 cents in the first quarter. And that’s about all you can hope for; look for dividends to remain flat, and if you’re lucky, they won’t be cut.

General Electric is taking steps to shift some U.S. manufacturing work overseas now that the U.S. Export-Import Bank will be shuttered at least until September. GE Vice Chairman John Rice says the company is looking to work with export credit agencies in other countries to finance potentially $10 billion worth of projects, with much of the production going to GE plants in those foreign locations.

Three bottlers of Coca-Cola products in Europe are in advanced talks about a merger that would further Coke’s push to consolidate its bottlers around the world and cut costs. Coca-Cola Enterprises is discussing the tie-up with Coca-Cola bottlers in Poland and Germany. Terms of the potential deal are not known, but it is likely to be valued well into the billions of dollars.

Yesterday we told you about Google’s Project Loon, a plan to beam internet from helium balloons. Now, comes word that Facebook has completed building its first full-scale drone called the Aquila, which has the wingspan of a Boeing 737 and will beam Internet down to remote parts of the world. The plane will hover between 60,000 feet and 90,000 feet, above the altitude of commercial airplanes, and will be able to fly for 90 days at a time.

Google is quietly distributing a new version of Google Glass to various enterprise partners ahead of a full launch later this year. The device’s price appears to be “well below” the $1,500 charged for the Explorer Edition, and contains a button-and-hinge system to attach the mini-computer to different glasses. Google is pitching the product “exclusively to businesses,” and that a new consumer version is still “at least a year away.”

The weak underbelly of high tech cars has been exposed again. A white-hat hacker  has released a video showing a security flaw in GM’s OnStar vehicle communications system that can be remotely accessed to unlock cars and start engines. The move comes just one week after Fiat Chrysler recalled some 1.4 million vehicles after hacking experts demonstrated a more serious vulnerability in the Jeep Cherokee. That bug allowed them to gain remote control of a Jeep traveling at 70 mph on a public highway.

The hackers are everywhere. The FBI says financial companies are facing extortion threats from hackers who threaten to knock their websites offline unless firms pay what amounts to a ransom. More than 100 companies, including targets from big banks to brokerages in the financial sector, have received distributed denial of service threats since about April.

Today is not only the end of the month, it is a blue moon, which is not really a reference to the color of the moon, rather it means the second full moon in one month; which also means that 2015 features 13 full moons. Step outside after sunset to check out the blue moon, then if you’re so inclined, go ahead and celebrate by doing something you only do “once in a blue moon.” You do have an excuse, after all.

Thursday, July 30, 2015

The Value of Everything

Financial Review

The Value of Everything

DOW – 5 = 17,745
SPX + .06 = 2108
NAS + 17 = 5128
10 YR YLD – .01 = 2.27%
OIL – .27 = 48.35
GOLD – 8.40 = 1089.30
SILV – .08 = 14.83

Gross domestic product rose at a 2.3% annual rate from April to June, missing expectations for 2.6% growth. First quarter GDP was revised to show 0.6 percent growth after previous reports showed a 0.2 percent downturn. The latest reading on GDP was propelled by higher consumer spending on big-ticket items such as new cars and trucks and the strongest housing market in years. Personal spending accounted for two percent of the 2.3% headline increase.

Builders increased spending on new home construction at a 6.6% clip in the spring, especially for townhouses, condos and apartment units. That follows 10% gains in the prior two quarters. US exports, meanwhile, snapped back with a 5.3% increase after a 6% drop in the first quarter. Imports rose at a slower 3.5% pace. The improved trade figures also gave the economy a small boost.

Business investment was weak again. Outlays on equipment declined 4.1% and the value of inventories fell slightly to $110 billion from $112.8 billion. Spending on structures such as oil platforms fell 1.6%, largely because of the drop in oil prices. The story on the economy remains consistent: strong consumption, weak investment.

Inflation as measured by the PCE price index increased at a 2.2% annual rate after falling by 1.9% in the first quarter, a decline tied mostly to plunging gasoline costs. Excluding food and energy, core PCE rose to a 1.8% annual pace from 1% in the first three months of the year. The PCE is the Fed’s preferred measure of inflation and it is really close to their inflation target. The personal saving rate was 4.8 percent for the quarter, the same as the average of 2014; this would indicate that people are indeed spending the money they save on lower prices at the gas pump.

Gross domestic product is supposed to be a measure of everything a nation produces. As you might imagine, that is a difficult task. How do you go about placing a value on everything? GDP includes the value of electricity produced but it does not subtract for the air pollution from the coal fired plant; it includes the price of divorce lawyers but places no value on a healthy marriage. In other words, it is imprecise. And so it is constantly subject to revision. The mixing and matching of what drives GDP growth has changed to reflect the economy, with greater emphasis on services, consumption, and housing. Spending on intellectual property products grew at an annual rate of 5.5% in the second quarter, continuing a nice string of advances which offers some hope for improved productivity growth in future quarters. A couple of years ago, intellectual property wasn’t even counted.

The second-quarter report is the first to include new methodology meant to make GDP more accurate. Over the past several years GDP has slightly underestimated growth in the first quarter and sharply overestimated growth in the third quarter. The problems stemmed mostly from difficulties in measuring spending on the military as well as consumer services such as health care. The new report also incorporates changes in how certain taxes and social benefits are categorized. Based on the new calculations, the economy expanded at average 2% rate each year from 2012 to 2014 instead of 2.3% as reported under the old method of calculating GDP. So, if you thought the recovery wasn’t quite as robust as the numbers, you were unfortunately correct.

The GDP report was decent, not great, but good enough. It is totally consistent with the Fed’s assessment of the economy. Yesterday, the Federal Reserve FOMC left interest rates unchanged, but they left the door open for a possible interest rate hike when central bank policymakers next meet in September – if the economy and job growth continue to improve. Fed officials said they felt the economy had overcome a first-quarter slowdown and was “expanding moderately” and job gains have been “solid”. Today’s GDP report is in-line with that view.

The Fed will also watch the next couple of jobs reports to see if they are in-line with their assessment of the economy. Today, a report showed new applications for unemployment benefits rose by 12,000 to 267,000 in the week ended July 25. Jobless claims have been below 300,000 since May. That’s the longest run in 15 years. Next week, we’ll see the jobs report for July; based upon first time claims, the jobs report should be “solid”. And that in turn would point to a September rate hike by the Fed.

The average rate for a 30-year fixed-rate mortgage dropped to 3.98% in the week that ended July 30, falling to the lowest level in almost two months. This would seem to be a good time for many homeowners to refinance, but not everybody can, because many homeowners are still underwater.

There are programs to help, such as the Home Affordable Modification Program, or HAMP, which aims to make mortgages more affordable by changing terms, such as interest rates and loan duration. But there is a problem. Mortgage servicers reject 72% of struggling borrowers from HAMP. The Treasury Department requires mortgage servicers to explain why they reject borrowers, but a new report says the servicers aren’t giving a clear picture for the rejection, and that officials have found that servicers have “wrongfully denied” borrowers from entering HAMP.

Chinese stocks tumbled in the last hour of trading – with the Shanghai composite falling more than 2 percent-on reports that banks were investigating their exposure to the stock market. This year’s slump in China’s property market could hit the country’s banks, according to ratings agency Standard & Poor’s, in the latest warning to the world’s second largest economy.

Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer. The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day.

Earnings season continues: Royal Dutch Shell warned that lower crude prices could continue for several years. Shell announced lower earnings, and plans to cut 6,500 jobs and pull back on capital spending.

Linn Energy reported a $379 million net loss and a 46% decline in revenue. Share price dropped 26% today.

Procter & Gamble posted a better-than-expected profit of $521 million, or 18 cents a share, but the consumer-products giant missed on revenue and provided a downbeat outlook for its fiscal 2016 earnings.

T-Mobile posted better-than-expected second-quarter revenue of $8.2 billion, and said it added 2.1 million subscribers, and raised its full-year subscriber outlook.

Time Warner Cable missed Street estimates with a second-quarter profit of $463 million, or $1.62 a share. The cable company did report a growth in subscribers.

LinkedIn revealed second-quarter results that easily topped Wall Street’s estimates on both lines, along with an upbeat full-year outlook.

Higher sales of Amgen’s blockbuster rheumatoid arthritis drug Enbrel and some newer drugs boosted second-quarter profit 7 percent. Amgen beat Wall Street estimates and raised full year profit forecasts.

Samsung Electronics is warning of “mounting challenges” ahead as the company’s once-highflying mobile unit again dragged on its quarterly results. With poor Galaxy S6 sales and a dramatic loss of Chinese market share, operating profit dropped 4% to $5.9 billion.

Looking to gain a better foothold in the mobile messaging market, Yahoo is launching Livetext, an app that makes video calling almost as private as texting. Users will be able to hold video chats in which text messages/emojis appear on the screen, but no audio is present. The app will be released today for Apple and Android devices.

After recently passing hedge funds in terms of total assets, ETFs are setting fresh sales record. In the past 12 months investors traded $18.2 trillion worth of ETF shares, a 17% increase from the 12 months prior and more than triple what it was 10 years ago. For perspective: The amount of dollars exchanging hands through ETFs is now more than the U.S. GDP, which stands at $17.4 trillion.

Meanwhile, the Export-Import Bank will stay shuttered for the rest of the summer after the House passed a highway funding bill that excluded a measure to save the lender. As a result, several corporations – the latest Boeing – are considering moving work overseas given the federal credit agency’s uncertain future. Ex-Im provided $27.4 billion in financing for U.S. exports in fiscal year 2014.

The Senate today passed legislation funding the nation’s highways, bridges, and roads for another three months – one day before construction across the U.S. would have come screeching to a halt. It is the 34th short-term patch passed by Congress since 2009. Remember the government shutdown of 2013; it didn’t last long, but it was a mess; it actually cost more to shut the government down than to keep it running. After that fiasco, lawmakers agreed to lift spending curbs for 2 years. That agreement expires October 1, when Congress will again be subject to the caps known as sequester. That may sound like plenty of time to fix the problem but remember, we’re talking about Congress; summer recess just started; they won’t even be back in Washington for a few weeks, and then they’ll take another break for Labor Day. So, they will try to pass a stop-gap spending resolution to buy more time in September. Still, you can’t rule out a partial government shutdown, again.