Tuesday, July 29, 2014 - How Do you Feel?

Financial Review with Sinclair Noe

DOW – 70 = 16,912
SPX – 8 = 1969
NAS – 2 = 4442
10 YR YLD  - .03 = 2.46%
OIL - .63 = 101.04
GOLD – 4.70 = 1299.80
SILV un = 20.66

How are you feeling? Are you confident? Apparently more people are. The Conference Board’s consumer confidence index increase to 90.9 in July, up from 86.4 in June; it is the highest level in almost 7 years; it marks a significant rebound from the February 2009 low of 25.3. The people who compile the index say “Strong job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations,” and the improved confidence “suggests the recent strengthening in growth is likely to continue into the second half of this year.”

Home prices dropped in May compared to April. The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.3% in May on a seasonally adjusted basis, its first decline since January 2012. Prices in the 20 cities rose 9.3% year over year, the slowest year-over-year gain since February 2013. The Phoenix area posted a 0.4% increase from April to May, non-seasonally adjusted.

In a separate report form the Commerce Department, home ownership rates dropped to 64.8% in the second quarter from 65% in the first quarter.

A fairly startling report was published today by the Urban Institute and TransUnion, the credit reporting firm, showing more than one-third (35%) of Americans with credit files had debt in collections in 2013. Non-mortgage delinquent debt totals $11.23 trillion. Which sounds like a lot, and it is, but it’s down from $12.68 trillion in delinquent debt in 2009; this includes debts such as credit cards, auto loans, student loans, utility bills, or even a phone bill or gym membership.  The study looked at debts that had been reported to a credit bureau as delinquent, and turned over to collection; that means the debt is at least 180 days old, but it also means the debt can stay on the credit report for up to 7 years, maybe longer. The share of people with debt 30 days past due is about 5.3%. What this means is that when a debt becomes past due, it lingers on a credit report.

The report on delinquent debt may tell us more about debt collection methods than about deadbeat American consumers. It is very easy for a company to turn over a debt to a credit rating bureau or a debt collection company; it is very hard for a consumer to get a debt removed from a credit report, even if the debt is disputed, or in many instances, even when the debt is paid. Consumers filed 204,000 complaints with the Federal Trade Commission last year, up nearly 3% from 2012, even though the amount of delinquent debt dropped. The most common complaint concerned debt collectors that lied about the amounts a consumer owed and the nature of the delinquency.

The European Union has imposed new sanctions on Russia for its involvement in supporting separatists in Ukraine. The US also toughened its sanctions further. The latest American actions took aim at more Russian banks and a large defense firm, but they also went further than past moves by blocking future technology sales to Russia’s oil industry in an effort to inhibit its ability to develop future resources. The Euro Union agreed to restrictions on trade of equipment for the oil and defense sectors, and "dual use" technology with both defense and civilian purposes. Russia's state run banks would be barred from raising funds in European capital markets. The measures would be reviewed in three months. Previously Europe had imposed sanctions only on individuals and organizations accused of direct involvement in threatening Ukraine, and had shied away from wider "sectoral sanctions."

The orchestrated actions on both sides of the Atlantic were designed to demonstrate solidarity in the face of what American and European officials say has been a stark escalation by Russia in the insurgency in eastern Ukraine. Until now, European leaders have resisted the broader sorts of actions they agreed to today.

Though Europe’s commerce with Russia will probably slump because of the sanctions, the measures are expected to hit Russia more severely, especially the restrictions on Russian banks’ ability to raise money in Europe and the United States. European companies have been warning for some time that their earnings could suffer because of sanctions against Russia. Today, the oil company BP warned that sanctions could hurt earnings. BP owns a 19.75% stake in the Russian oil company Rosneft.

We are about halfway through second quarter earnings season. Here are a few of today’s reports:

The pharmaceutical company, Pfizer posted earnings that beat estimates, while revenue dropped; they also said they expect earnings to drop in the third quarter. Merck had a similar story, beating earnings estimates while revenue slipped. United Parcel Service missed profit forecasts, even as profits and revenue were higher than a year ago. Herbalife, the multi-level marketed nutritional supplement company posted weak earnings after the close yesterday; shares were clobbered today. Corning, the glass making company reported a sharp drop in earnings due to acquisition costs; also clobbered.

Twitter reported a net loss of $145 million, or 24 cents a share, compared to a loss of $42 million a year ago. More people used the Twitterverse during the World Cup; revenue was up 124%, but then the users fade away; globally, usage was down 7% from a year ago. Twitter shares have jumped about 30% in after-hours trading. Go figure.

The Federal Reserve FOMC started its two-day meeting today. They will issue a statement tomorrow. The Fed is in the midst of reducing the amount of money it is pumping into the financial system by way of large purchases of mortgage backed securities and Treasuries, a process of tapering the Quantitative Easing. So far, the Fed has reduced purchases from $85 billion a month to $35 billion a month, and tomorrow they are expected to drop that down to $25 billion a month. QE is scheduled to end in October.

Then the Fed will shift their focus to raising its target for short-term interest rates, which have been near zero for more than 5 years. The Fed has already said they will take their time in raising rates. That exit from an accommodative policy is considered dangerous, and today the International Monetary Fund, the IMF, said it could reduce output in the United States by as much as 2% through 2016.

Volatility in the US could ripple through to emerging markets and likewise depress growth, but even worse; cutting growth by as much as 9% in more vulnerable developing countries due to higher interest rates and tighter financial conditions; and then it gets worse, with larger declines coming in time due to lower productivity, weaker trade, and falling commodity prices.

In addition to when the Fed will raise rates, it is also important to consider how high they will raise rates, and if they will wait long enough for liftoff to occur first. Liftoff is when the US economy has regained its strength and momentum and is able to cope with higher rates because of its economic strength. Fear of inflation could prompt the Fed to raise rates before liftoff; there is an even greater chance the Fed will raise rates before emerging markets could bear the burden of higher rates. If the Fed gets it wrong, we could end up stuck in sluggish or permanently lower growth.

Swiss bank UBS and German bank Deutsche Bank have disclosed that they are facing inquiries from the New York attorney general’s office. The UBS inquiry deals with dark pools, or alternative trading platforms, generally used by larger institutional clients such as pension funds and hedge funds, trying to hide orders from public observation. At its core, the dark pools are a form of price manipulation. Deutsche Bank is facing inquiry into high frequency trading and dark pools.

The Financial Times reports: “The Federal Reserve Bank of New York is stepping up pressure on the biggest banks to improve their ethics and culture, after investigations into the alleged rigging of benchmark rates led officials to conclude bankers had not learnt lessons from the financial crisis…

“Fed officials were surprised that some of that reported behavior occurred after the 2008 crisis, leading them to believe bankers had not curbed their poor conduct. To make sure the biggest banks are paying enough attention to ethics and culture, NY Fed bank evaluations have begun incorporating new questions emphasizing such issues. Topics include whether the right performance structure is in place to punish bad behavior, especially when it comes to compensation.”

Well, that is just great; the NY Fed suggests banks pay smaller bonuses when they encounter unethical behavior by the banksters. We’ll file that one under “Cruel and Unusual Draconian Punishment”.

However, if you’re really looking for a funny story about banksters, check out the New York Times Dealbook. It seems the banksters are cashing in on advising companies how to do inversion deals to evade taxes. Inversions are behind the recent rash of merger deals in which major US corporations have renounced their citizenship in search of a lower tax bill offshore. It is important to understand that inversion does not in any meaningful sense involve American business moving overseas; all they’re doing is dodging taxes on those profits.

Investment banks are estimated to have collected, or will soon collect, nearly $1 billion in fees over the last three years advising and persuading American companies to move the address of their headquarters abroad (without actually moving).

The leaders in this growing field include Goldman Sachs, JPMorgan, Morgan Stanley, and Citigroup; they’ve made hundreds of millions aggressively promoting these transactions to major corporations, arguing that such deals need to be completed quickly before Washington tries to block them. These same banks received hundreds of billions from US taxpayers in the form of bailouts. The Joint Committee on Taxation estimates these inversion deals are expected to cost taxpayers nearly $20 billion over the next decade.