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Tuesday, October 06, 2015

The Best Story

Financial Review

The Best Story

DOW + 13 = 16,790
SPX – 7 = 1979
NAS – 32 = 4748
10 YR YLD – .02 = 2.03%
OIL + 2.78 = 49.04
GOLD + 11.70 = 1148.60
SILV + .22 = 15.99

The U.S. trade deficit increased to a five-month high of $48.3 billion. The trade gap was 15.6% higher compared to a revised $41.8 billion deficit in July. U.S. exports dropped 2%;  exports have fallen 6% compared to one year ago, hurt by a rising value of the dollar that’s made American goods and services more expensive overseas. Most other economies are not performing as well as the U.S. and that’s also limiting demand.

A slowdown in emerging markets driven by weak commodity prices forced the International Monetary Fund to cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent. Next year the world economy is expected to expand 3.6 percent, less than the 3.8 percent projected in July. Brazil and Russia’s economies are contracting, Japan and the euro area are struggling, and long-time growth engine China is decelerating.

The IMF advised emerging markets to be ready for the U.S. to tighten monetary policy, urged advanced economies to address “crisis legacies” and suggested nations consider the “compelling” case for public infrastructure investment at a time of very low long-term interest rates. The G-20 meets this week in Lima, Peru.

Officially joining the 0% bond club, the U.S. Treasury sold a new government security on Monday containing a three-month maturity and a yield of zero for the first time on record. In essence, buyers gave a free short-term loan to the government in exchange for a highly liquid debt instrument for their portfolio. The result adds to the diminishing expectations, stoked by Friday’s disappointing jobs report, that the Fed will keep interest rates at basement levels throughout 2015.

The U.S. Treasury can’t sell bills below 0%, but once sold at auction the bills can trade however they trade. In early morning trade, the 3 month bill traded at negative 0.003%, but finished the session with a positive yield. The three-month yield also briefly went negative on September 25 and on October 1 and July 13, but has otherwise been in positive territory all year.

Despite the financial turmoil in China and unexpected devaluation, the yuan has now become the world’s fourth-most-used payments currency, edging out Japan’s yen for the spot. According to international payments provider Swift, the renminbi accounted for 2.79% of global payments in value terms in August; although it still trailed the U.S. dollar (44.8%), euro (27.2%) and British pound (8.5%). As recently as August 2012, the yuan only ranked number 12 with a 0.84% share, but Chinese authorities have since aggressively promoted international use of the currency.

Europe’s highest court struck down an international agreement that had made it easy for companies to move people’s digital data between the European Union and the United States. The ruling, by the European Court of Justice, could make it more difficult for global technology giants to collect and mine online information from their millions of users in the European Union. The court declared the data-transfer agreement, which is known as Safe Harbor, immediately invalid.

In its ruling, the court said that the Safe Harbor agreement was flawed because it allowed American government authorities to gain routine access to Europeans’ online information. Such access infringes on Europeans’ rights to privacy. The ruling follows revelations from former National Security Agency contractor Edward Snowden about the Prism program that allowed U.S. authorities to harvest private information directly from big tech companies such as Apple, Facebook, and Google.

Yesterday we reported that 11 countries had reached agreement on the Trans-Pacific Partnership, a trade pact that would cut trade barriers on a bloc that includes 40% of world economic output, and that it was pretty much a done deal. Well, not exactly. The negotiations were wrapped up over the weekend; the actual deal, whatever it is, must still be ratified by the leaders of each country and ratified by their legislatures, where support for the deal is not universal.

In the US, expect a tough fight to push it through Congress next year. And even though negotiators came to some sort of agreement, they have not presented the text of the agreement to the public, and negotiators say it will take at least a month to prepare the text. So, it really isn’t a done deal, in large part because almost nobody knows what the deal is.

Corelogic reports home prices rose 1.2% in August to extend the 12-month gain to 6.9%. CoreLogic forecasts home price growth to slow to 4.3% in the 12 months through Aug. 2016, due to higher mortgage rates and more housing starts. Arizona is still suffering from the housing downturn; home prices are down 25.3% from the peak to current levels.

SABMiller has rejected an informal takeover bid from Anheuser-Busch InBev stating the offer was too low. An initial proposal made last week was worth slightly over 40 pounds a share, but the British firm’s executives and some shareholders regard a deal closer to 45 pounds as fair value. At the higher price, a deal would value SABMiller $110 billion, and would result in the largest merger this year.

Skyworks Solutions has agreed to buy PMC-Sierra for $2 billion in cash. PMC shareholders will get $10.50 per share, representing a 37% premium to the stock’s closing price on Monday. Semiconductor deal making has already reached more than $80 billion in 2015, surpassing every full year on record except 2000, when M&A in the sector hit $115 billion.

Microsoft’s held a big event in New York City to showcase their devices that run across the tech giant’s new, flagship operating system, Windows 10. What’s on tap? Two new versions of Lumia smartphones, a fitness band, an updated Surface Pro tablet to do battle with the Macbook Pro, and more details regarding HoloLens – an augmented reality headset. Microsoft also announced its first retail store in New York, scheduled to open in about 3 weeks.

Microsoft has less than 3% of the smartphone market, but their Windows 10 operating system is on over 100 million devices. So, the challenge is to get their operating system on mobile devices before mobile operating systems take over the desktop and laptop world. The trick is to make systems and apps that flow seamlessly from mobile to desktop, and whoever wins that battle will control operating systems for the near future.

The value of BP’s settlement with the U.S. government and five Gulf states over the Deepwater Horizon oil spill has been confirmed at $20.8 billion, a $2 billion increase from an agreement reached this past July. The agreement is “the largest settlement with a single entity in American history,” U.S. Attorney General Loretta Lynch declared. The deal takes BP’s total budget for the spill to more than $54 billion but resolves all federal and state claims against the company for the accident.

Freeport-McMoRan is considering spinning off its oil and gas business and other strategic alternative to focus on its copper mining business. The Phoenix-based company produces oil and natural gas around the country. Energy companies have been hurt by falling oil prices and weaker demand. Many have cut spending as a result. Earlier this year, Freeport-McMoRan slashed its quarterly dividend 84 percent because of falling oil prices. And in August, Freeport-McMoRan announced a cost-cutting plan due to falling copper prices and soft economic conditions.

Alcoa will unofficially kick off the earnings reporting season on Thursday.

We are already seeing some earnings numbers. PepsiCo reported a better-than-expected quarterly profit as its commodity costs fell and demand for its snacks and non-carbonated beverages rose in North America.

Yum Brands missed Wall Street’s earnings and revenue estimates. Same store sales in China, where it generates more than half of its operating profit, rose just 2 percent. The parent company for KFC, Pizza Hut and Taco Bell dropped 18% in after hours trade. The biggest embarrassment for Yum Brands may be this nugget:  “Year-to-date through October 5, 2015, we repurchased 4.5 million shares totaling $370 million at an average price of $82.” When you consider the response today, that means they paid a 20% premium because they were too stupid to spend the money on building their business.

McDonald’s is now serving breakfast all day. It only took 43 years. In 1972 a franchisee in California introduced Ray Kroc to a breakfast sandwich with Canadian bacon, egg, and cheese on an English muffin. The wife of a McDonald’s executive came up with the name, Egg McMuffin. The all-day breakfast menu is still a bit limited; you can’t get all breakfast items all day; and there are some quirks; you can’t get Egg McMuffins in the South – they sell biscuits down there. The whole idea is still a bit of a gamble because the breakfast menu has lower profit margins than the regular burger-centric menu.

The World Bank reports the number of people living in extreme poverty is likely to fall for the first time below 10% of the world’s population in 2015. World Bank president Jim Yong Kim said, “This is the best story in the world today. These projections show us that we are the first generation in human history that can end extreme poverty.”

Extreme poverty has long been defined as living on or below $1.25 a day, but the World Bank’s adjustment now sets the poverty line at $1.90 a day. The Bank said the change reflects new data on differences in the cost of living across countries, while preserving the real purchasing power of the previous yardstick. Using the new benchmark, the World Bank projects 702 million people or 9.6% of the world’s population will be living in extreme poverty in 2015, down from 902 million people or 12.8% of the global population in 2012.

The World Bank first introduced a global poverty line in 1990, setting it at $1 a day. It was adjusted last in 2008, when the group raised it to $1.25 a day. Basically that $1.90 today buys about the same as $1.00 in 1990. Across the planet, the number of people living in extreme poverty has dropped by more than half since 1990, when 1.9 billion people lived in extreme poverty.

Monday, October 05, 2015

The Courage to Act, or Not

Financial Review

The Courage to Act, or Not

DOW + 304 = 16,776
SPX + 35 = 1987
NAS + 73 = 4781
10 YR YLD + .07 = 2.06%
OIL + .72 = 46.26
GOLD – 2.50 = 1136.90
SILV + .40 = 15.77

The Dow Industrial Average has gone from a low of 16,013 Friday morning after the jobs report to an intraday high today of 16,798, or a swing of 785 points. The S&P 500 rose for a fifth session in a row, its longest winning streak this year

The US, Japan and 10 other Pacific Rim economies have reached agreement to strike the largest trade pact seen anywhere in two decades. The Trans-Pacific Partnership covers some 40% of the global economy and will create a new Pacific economic bloc with reduced trade barriers relating to the flow of everything from beef and dairy products to textiles and data as well as new standards and rules for investment, the environment and labor.

Former Fed Chairman Ben Bernanke has published a new book, entitled “The Courage to Act” and so he’s making the rounds. In a CNBC interview, Bernanke said that slow productivity growth is weighing on the economy, and there’s too much reliance on the central bank. He said other policymakers in the government need to step up. He refused to second guess current Fed Chair Janet Yellen on her decision not to increase rates at the Fed’s September meeting.

In an interview with USA Today, Bernanke said that more corporate executives should have gone to jail for their misdeeds. Bernanke explained that the Fed did not have the authority to jail anyone. Rather, it was the Department of Justice’s responsibility to do that. And while a few folks here and there went to prison for various violations, it’s largely been the financial entities that have paid the penalties.

“A financial firm, of course, is a legal fiction,” Bernanke explained. “It’s not a person. You can’t put a financial firm in jail.”

“It would’ve been my preference to have more investigation of individual actions because obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm,” he continued. “In that respect, there should’ve been more accountability at the individual level.”

So, on the one hand you have the former Federal Reserve chairman saying, after the fact, that people should have gone to jail but the financial firms are abstractions. Then on the other hand you have the former attorney general Eric Holder’s infamous quote that some financial institutions became so big, “that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” And on the other hand we have the Supreme Court, which has determined that corporations are people, even if Ben Bernanke says they’re fictitious and he can’t figure out how to lock them up.

The U.S. Supreme Court this morning rejected a U.S. Justice Department bid to restore the insider trading convictions of two hedge fund managers and reverse a lower court’s ruling that prosecutors contend will make it harder to bring such cases. The justices left in place a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that threw out the 2012 convictions of hedge fund managers Todd Newman and Anthony Chiasson for engaging in a scheme involving tips about Dell and Nvidia.

In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit, something more than the nurturing of a friendship. The appeals court also said the person being prosecuted had to know about the benefit. That issue wasn’t before the Supreme Court.

Yes, the Supremes are back in session, and they have some important cases on the docket, including: Evenwel v. Abbott, which will dig into the concept of one-person, one vote; also, Friedrichs v. California Teachers Association, which pits the practical needs of collective bargaining against the First Amendment and could have huge political consequences by crippling public employee unions and possibly all unions; and waiting in the wings at the high court are two politically incendiary cases: one involving abortion, the other birth control under Obamacare.

Saudi Arabia cut prices on oil sales over the weekend as it plays catch-up with OPEC and other producers in the region. State-run Saudi Aramco reduced prices significantly on oil sent to Asia and the U.S. The Saudi strategy is to keep producing oil at high levels in anticipation of improved demand at lower price points. Meanwhile, Russia is ready to meet with members of the Organization of Petroleum-Exporting Countries (OPEC) — as well as non-member oil producers — to discuss the situation facing global oil markets.

The Institute for Supply Management said its services index fell to 56.9% from 59% in August. New orders and prices paid were down, but any reading above 50 indicates growth, and this report marks the 68 consecutive month of growth in the services sector of the economy.

General Electric has drawn a big investment from activist shareholder Nelson Peltz. Peltz’s Trian Fund Management has accumulated $2.5 billion in GE shares since the middle of May —a roughly 1% stake —making it one of the company’s top 10 shareholders. While Trian has some criticism of the company, both sides say they are in agreement on most aspects of GE’s current direction, which includes the sale of the majority of its giant financing arm. Trian hasn’t requested a GE board seat.

Twitter has announced that co-founder and interim CEO Jack Dorsey will stay on as permanent chief executive. As Dorsey formally takes on the Twitter CEO job — after more than three months of drama and speculation — investors are bound to wonder which of Dorsey’s two companies will get short shrift. As Dorsey is reprising his role as Twitter CEO, he is also going to be taking his second company, mobile payments startup Square, public.

American Apparel filed for Chapter 11 bankruptcy in Delaware. The company plans to keep stores open while it seeks approval for its restructuring plan with lenders through the bankruptcy court.

Shares in Google have stopped trading, and have in fact ceased to exist. Instead, you can now trade Alphabet, the parent company for Google. Alphabet is a group of companies, many of which were acquired or developed internally by what used to be Google Labs. The biggest part of Alphabet stock that investors need to watch is the now-focused subsidiary of Google internet businesses.

All those advertising dollars that drove GOOG stock before will still do so, and they will come from this unit. Both GOOG stock and GOOGL stock will continue to trade separately, and at the same previous prices. They are ownership stakes in the parent company, Alphabet. GOOG stock will represent Class C shares of Alphabet, but with no voting rights, while GOOGL stock represents Class A shares with one vote each.

If you trade stocks on Scottrade you might want to be a bit more vigilant. Hackers had access to Scottrade’s network for “a period of several months” in late 2013 and early 2014. The retail brokerage posted a notice on its website. The company said it believes that contact information, names and addresses were the focus of the breach, although “sensitive data” such as Social Security numbers and email addresses were also in the system that was breached. The information of 4.6 million clients was contained in the targeted database, and Scottrade is providing a year of identity protection services to those clients. Scottrade said it is directly notifying clients who had an account before February 2014 that their data may have been accessed.

The FTSE 100 was up about 2.5% and almost the entire move can be attributed to Glencore. The commodities giant Glencore was briefly up 21% in London, and it had jumped by as much as 70% in Hong Kong trade after rumors circulated that management would listen to takeover offers. The company’s board disputed those claims in a press release, however, saying, “It is not aware of any reasons for these price and volume movements or of any information which must be announced to avoid a false market.”

Canadian fertilizer company Potash has backed out of its $8.8 billion takeover attempt of its German rival K+S. According to Potash, it’s dropping the bid because of market conditions and a lack of commitment from K+S management. Back in August, K+S said Potash’s bid undervalued the company and would eliminate jobs

Ford reached a key agreement with a union representing workers at an F-150 plant in Missouri. The UAW workers still need to vote on the deal which covers employment conditions, not the wage levels being negotiated on a national level. The development is crucial for Ford as the Kansas City-area plant is a major producer of the new F-150. Any slowdown in production would create a ripple of worry with F-150 sales continuing to gain momentum in the U.S.

Volkswagen will hold a special board meeting to review n internal investigation on the emissions cheating crisis. One of the biggest challenges for the VW board is how deeply to cut into Volkswagen’s investment budget in order to try to stave off credit agency downgrades.

Air France said last week it was planning cuts to jobs, jets, and routes in the absence of a deal with pilots, who had been asked to work more hours for the same pay to help end annual losses that began in 2011. Air France workers “stormed” the company’s headquarters at Charles de Gaulle Airport near Paris after it threatened to cut 2,900 jobs, interrupting a meeting with union representatives and ripping executives’ clothes off.