FINANCIAL REVIEW

Hot, Hot, Hot

Sinclair Noe — September 19, 2014

09192014 Financial Review

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DOW + 13 = 17,279 (record)
SPX – 0.96 = 2010
NAS – 13 = 4579
10 YR YLD – .04 = 2.58%
OIL – .61 = 92.46
GOLD – 8.60 = 1217.20
SILV – .73 = 17.89

The Dow Industrials posted the 18th record high close of the year.

The big story on Wall Street today was the Alibaba IPO. You’ve probably never heard of Alibaba, so here is a quick update. Alibaba is China’s biggest online marketplace, and it combines online shopping with online banking, and a search engine. It is the world’s most popular online shopping site; it’s even bigger than eBay and Amazon combined. As a search engine, it goes up against Google and Microsoft’s Bing. It also provides financial services; you could buy certain things using AliPay, so it competes with the new Apple Pay, and it even has its own money market fund with $87 billion in assets; so it’s kind of like a bank.

The company was founded in China 15 years ago by an English teacher named Jack Ma, who is now the richest man in China, with personal net worth over $20 billion. Early investors include Yahoo, with a 16% stake in the company; and Softbank, with a 32% stake. You might think it was a good day for Yahoo; not so much. Yahoo sold 120 million BABA shares, keeping more than 400 million shares. Yahoo share price dropped, leaving capitalization around $40 billion, which is less than the combined $45 billion value of Yahoo’s Asian assets, which includes Yahoo Japan and the holdings in Alibaba. In other words, without the Alibaba investment, Yahoo is worth a negative. This is the largest IPO in US history; shares were priced at $68 and immediately traded above $90. This puts Alibaba market cap above such well-known companies as Intel, Samsung, Oracle, and IBM. The ticker symbol is BABA.

Beyond that, analysts have had a difficult time figuring out valuation on Alibaba. It’s still a Chinese company whose money is earned mainly in China, but its shareholders are now primarily Americans and this might require certain adjustments. For today, it was a feeding frenzy on Wall Street.

The Home Depot now says that about 56 million customer debit and credit cards were put at risk after hackers broke into the company’s payment system. They also say that the malicious software has been removed from its computer system and the company has enhanced encryption at point of sale terminals. Home Depot said there was no evidence that debit card PIN numbers were compromised but they are offering free credit monitoring to customers who used a payment card at a Home Depot store since April.

The company also said it will finish setting up more secure credit card readers in all of its US stores by the end of the year. The new technology will be able to read a new type of credit card that uses a combination of an embedded microchip and a code to authorize transactions. “Chip and pin” technology, as it is known, is supposed to make it much more difficult for thieves to use stolen credit card data to make counterfeit cards. All merchants and banks are under an October 2015 deadline to upgrade to the more secure credit cards.

Banks and technology companies are figuring out how to get you to pay for something with something other than a credit card; while retailers like Home Depot and Target are still trying to figure out how to accept credit card payment without making a hot mess of everything. And celebrities on TV ads beg the question, what’s in your wallet? Perhaps the better question is: How much cash do you have in your wallet? If you were in Germany, the correct answer would be $123 worth of cash. Roughly 80% of all transactions in Germany are conducted in cash. In the US, it’s 46%.

Scottish voters decided to remain part of the United Kingdom and voted against independence. It wasn’t as close as expected; 55% no to 45% yes.
The first Friday of each month brings the national jobs report; it takes a while to break out the jobs by state. Today we find the state with the lowest unemployment rate is North Dakota at 2.8%. Georgia had the nation’s highest rate at 8.1%. Joblessness fell fastest in Illinois, which saw its unemployment rate drop to 6.7% from 9.2% a year earlier. Arizona’s unemployment rate dropped from 8.1% to 7.1%.

The Conference Board’s index of leading economic indicators rose 0.2% in August to 103.8. The Conference Board’s economist said: “The leading indicators point to an economy that is continuing to gain traction, but most likely won’t repeat its stellar second quarter performance in the second half.”

A private report from John Burns Real Estate Consulting finds that student debt will reduce US home sales by about 8% this year, or about 414,000 home sales that won’t happen. The paper estimates that every $250 per month in student loan debt reduces borrowers’ purchasing power by $44,000, and since 2005, some 3.8 million additional households have at least $250 per month in student debt.

Yesterday, I mentioned that the House of Representatives had passed legislation approving money to buy non-radicalized Syrian rebels to fight against ISIS. Late yesterday the Senate approved that legislation. When Congress reconvenes in a couple of months, they’ll begin the debate on the authorization of force against ISIS. The House approved it first with a vote of 273-156, and the Senate followed with a vote of 78-22. Both in the House and Senate the votes were divided along monetary lines.

The average House Representative who voted for arming Syrian rebels received $38,964 in contributions from defense contractors; whereas, Representatives who voted “no” received $25,055 from defense contractors. The average Senator who voted for arming Syrian rebels received $98,611 in contributions from defense contractors; whereas, Representatives who voted “no” received $60,058 from defense contractors.

Meanwhile, French jets struck a suspected ISIS target in Iraq for the first time today.

Monday, September 22 marks the end of summer; the autumnal equinox will occur in the Northern Hemisphere at 7:29 PM pacific time.

According to the National Climatic Data Center, this summer, the Earth had its warmest June through August on record. The combined land and ocean temperature for the globe was 1.28 degrees Fahrenheit above the 20th century average of 61.5 degrees and broke a previous record set in 1998.

While the 48 contiguous states had a near-average summer and the coolest since 2009, California, Oregon and Washington all had seasons that registered in their top five for heat and most of the other states west of the Rocky Mountains turned in warmer summers than average. The mean temperature across the contiguous U.S. was 71.7 degrees, 0.3 degree above the 20th century mean. From January through August, the combined land and ocean temperature around the world was 1.22 degrees above the 20th century average of 57.3 degrees, the third highest on record. In the contiguous U.S., it was 53.9 degrees, about average, and the coolest start of any year going back to 1997. In the context of the world, the results in the US were an aberration. If the last four months of the year rank within their top five warmest, 2014 will replace 2010 as the globe’s hottest year in records going back to 1880.

Next week the United Nations will hold a Climate Summit; a key issue will be carbon pricing in both the public and private sectors. Individual companies, investors, and national and local governments are expected to throw their support behind the idea of putting a price tag on carbon emissions through taxes, emissions trading systems or other schemes. About 40 countries and more than 20 cities, states and provinces have carbon pricing policies or plan to launch them. Ahead of the summit, almost 350 institutional investors representing more than $24 trillion in assets are issuing their own call for government leaders to provide a “stable, reliable and economically meaningful” carbon price that helps redirect their investments away from fossil fuels and toward clean energy and climate solutions.

Corporate carbon prices range from $6 per ton to almost $90 per ton. In addition to calling for a price on carbon, the statement asks governments to phase out fossil fuel subsidies and strengthen regulatory support for energy efficiency and renewable energy.