Financial Review with Sinclair Noe
DOW – 2 = 17,083
SPX + 0.97 = 1987
NAS – 1 = 4472
10 YR YLD + .05 = 2.51%
OIL - .03 = 102.04
GOLD – 10.10 = 1294.90
SILV - .54 = 20.47
SPX + 0.97 = 1987
NAS – 1 = 4472
10 YR YLD + .05 = 2.51%
OIL - .03 = 102.04
GOLD – 10.10 = 1294.90
SILV - .54 = 20.47
An extremely flat day
on Wall Street but good enough for another S&P 500 record high close.
In economic news:
Initial claims for state unemployment benefits declined 19,000 to a seasonally
adjusted 284,000 for the week ended July 19, the lowest level since February
2006. In the past six months, unemployment has fallen much faster than
expected, from 6.7 to 6.1%. The labor market is still struggling with long-term
unemployment and part-time jobs instead of full-time work, but it seems to be
making progress.
One area not showing
progress is wages. The Labor Department released its latest report on median
wages; on a year-over-year basis, median earnings were up just 0.8% in the
second quarter, to $780 per week, not enough to keep pace with inflation. The
median wage data is a bit different from the weekly earnings data that comes
out of the Labor Department’s payrolls report. That one is the average
earnings, and what is likely happening is the growth for top earners is pulling
that series up more. Average earnings are up 2.1% year-on-year. The report also
showed that women earned 83.5% of what men did.
The Commerce
Department said new home sales dropped 8.1% to a seasonally adjusted annual
rate of 406,000 units in June. It was the biggest decline since July of last
year. May and April sales were revised lower. Therefore, this was a very weak
new home sales report, but earlier in the week, we saw a strong report on
existing home sales.
Let’s move over to
earnings reports:
Amazon.com can sell
stuff, they just have not figured out how make a profit. Amazon is expanding
grocery service, they introduced a new smartphone, and a set-top box for TV
streaming, and they managed to increase revenue 23% to $19.34 billion from
$15.7 billion in the earlier period. They also reported a loss of $126 million
or 27 cents per share.
Caterpillar has the
exact opposite problem; revenue fell but they posted a higher profit.
Caterpillar’s revenue numbers have now fallen in six of its past eight
quarters, with the quarterly year-over-year decline averaging 8.3%. In the last
quarter, sales fell 3% from a year ago to $14.1 billion, while profit increased
4.1%.
Starbucks posted
fiscal third-quarter profit of $512 million, or 67 cents a share, up from $417
million, or 55 cents a share a year ago. Revenue for the three months ended
June 29 rose 11% to $4.1 billion from $3.7 billion.
Signaling a major
turnaround in the airline industry’s fortunes, the nation’s three major legacy
carriers; American Airlines, United Airlines and Delta Air Lines — all posted
record profits in the past quarter. Delta reported net income for the second
quarter of $801 million, up 17 percent from the year-earlier period. United
Airlines, which had a loss in the first quarter and has struggled with its
merger with Continental Airlines, posted a $919 million second-quarter profit.
Douglas Parker, the chief executive of American Airlines, said today that the
airline’s second-quarter profit, excluding special charges, of $1.5 billion was
its best quarterly earnings performance ever.
General Motors posted
second quarter earnings of $190 million on revenue of $39.6 billion, up from
$39.1 billion in the same period a year ago. The problem for GM has been
recalls for safety issues, which have killed 13 people. GM set up a
compensation fund with $400 million; they have also paid $2 billion this year
for the recalls, and they announced pretax charges of $874 million to cover
future product recalls. GM is likely to feel the financial repercussions of the
millions of cars it has recalled for years to come. The company has recalled 29
million vehicles this year, many of which have not yet been repaired. To give a
sense of the pace, GM recalled around 15 million vehicles for ignition switch
related issues so far this year, and repaired around 560,000 in the second
quarter. It announced a recall of more than 700,000 vehicles for a separate
issue just yesterday. The surprising part is the increase in revenue, which
comes in part from pricing, but also the bad press has not deterred buyers.
Businesses and
individuals in the US have parked about $2.6 trillion in money market funds. It
is generally considered a safe place to leave money short term, or that was the
thinking until 2008, when money market funds broke the buck, dropping below par
value of $1 per share. Turns out, the funds were not guaranteed. There is no government
insurance on the safety of deposits, no regulator-required capital buffer to
protect against losses, no central bank ready to stand as “lender of last
resort” to keep a money market fund from suffering a short-term cash crunch. Of
course, the Treasury and the Fed stepped in to bail out the funds and avoid a
run on the funds, which would have been catastrophic.
Therefore, a mere 6
years later, the government has finally managed a few reforms, but they are not
real reforms because the bankers fought reform tooth and nail. The new
reforms do not include capital buffers, but they will allow for a floating NAV,
or net asset value. Therefore, your share in a money market fund may or may not
be worth one dollar. Moreover, if you try to cash out, the funds can impose extra
fees to slow down a potential run. That’s about it. After 6 years, I hope you
feel safe and secure in the knowledge that nothing of any substance has changed
in the last 6 years.
An examination by the
Federal Reserve Bank of New York found that Deutsche Bank AG’s giant U.S.
operations suffer from a litany of serious problems, including shoddy financial
reporting, inadequate auditing and oversight and weak technology systems. In a
letter to Deutsche Bank executives last December, a senior official with the
New York Fed wrote that, financial reports produced by some of the bank’s US
arms “are of low quality, inaccurate and unreliable. The size and breadth of
errors strongly suggest that the firm’s entire U.S. regulatory reporting
structure requires wide-ranging remedial action.”
Deutsche Bank, one of
Europe’s largest banks, was a forceful opponent of the Fed’s push to force
foreign banks to comply with the same capital requirements as domestic banks.
Officials from Deutsche Bank argued that the Fed’s requirement was too restrictive.
This year, the Fed went ahead with those tougher capital requirements for
foreign banks. However, it gave most of them until the middle of 2016 to
comply. Yes, of course it is theoretically possible that management could go
through and fix everything that is wrong with the firm’s US operations but,
really, this is more of a tear down job.
Dark pools are where
institutional investors can place large buy and sell orders without alerting
the broader market. Prices and transactions are not reported; it is the furthest
thing from a free and open marketplace. Different financial institutions
run a variety of dark pools. Barclays runs one of the biggest dark pools called
Barclays LX. They have been sued by the state of New York for fraud; the suit
alleges Barclays favored high frequency traders over other investors in the
dark pool and they falsified marketing materials, inaccurately portraying the
concentration of high-frequency traders in the market, and misrepresenting a
service that purported to protect investors from predatory trading behavior.
Today, Barclays filed
a motion to dismiss the lawsuit, and this is classic bankster logic; they
argued that Barclays’ customers were sophisticated enough to understand that
“glossy marketing brochures” about the dark pool, did not reflect its actual
composition; their customers knew better than to rely solely on the marketing
materials. So, they basically admitted they were lying in their marketing
material, but their clients were smart enough to know that banks are liars.
President Obama called
today for Congress to end a tax loophole that allows big corporations to
designate a foreign country as their official address, in order to avoid US
taxes. The corporation does not have to move their actual headquarters, just set
up an address overseas. Obama called on members of Congress to close the
loophole even if they disagree with his broader calls for changes to the tax
system that would lower corporate rates and close several loopholes, including
that one. The legislative effort is unlikely to succeed in Congress.
Companies ranging from banana distributor
Chiquita Brands to Medtronic have reached nine inversion deals this year. The
whole idea is to pay fewer taxes while still enjoying the benefits of doing
business in the US. Of course, the legal change of corporate headquarters is
essentially a process of renouncing citizenship, and it just seems corporations
should face the loss of citizenship the same way people do, which means they
should pay an exit tax. There are other ways to put an end to this inversion
tax evasion scheme. Moreover, if we do not, you can count on executives whose
companies were born of American ingenuity and which make their profits from
American customers (including the government) will troll international waters
for opportunities in low-cost tax havens. It’s a race to the bottom.
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