FINANCIAL REVIEW

Keep Your Eye On The Ball

Sinclair Noe — September 22, 2014

0 0 

   

Financial Review

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW – 107 = 17,172
SPX – 16 = 1994
NAS – 52 = 4527
10 YR YLD – .02 = 2.57%
OIL – .91 = 91.50
GOLD – 1.40 = 1215.80
SILV – .06 = 17.83

It’s not a huge week for reports, but we do get a couple worth keeping an eye out for. On Thursday, we’ll get the durable goods report for August; and on Friday, we’ll get the third and final revision to second-quarter Gross Domestic Product. This morning we saw the report on existing home sales.

The National Association of Realtors said existing home sales dropped 1.8 percent to an annual rate of 5.05 million units. The decrease was the first in four months, although the sales pace was still the second highest for the year. Investors had propped up the market by snapping up distressed properties and converting them into rental units, but last month they accounted for only 12 percent of transactions, which was the smallest share since November 2009; all cash sales made up 23 percent of transactions in August. First-time buyers accounted for 29 percent of sales, well below the 40% to 45% considered normal. The inventory of unsold homes on the market increased 4.5 percent from a year-ago to 2.31 million in August. At August’s sales pace, it would take 5.5 months to clear houses from the market, unchanged from July.

A new survey from CNBC called the Corporate Perception Indicator takes a look how individuals and business executives view corporations around the globe. Emerging markets tend to look at corporations more favorably than developed nations; 72 percent of the public in emerging economies saw corporations as a “source of hope, rather than fear”, compared with 52 percent in developed economies.

The survey also found that 57 percent of the general population and 53 percent of executives believed that corporations take advantage of tax loopholes to avoid paying their fair share of tax, including 70 percent of the general population and 67 percent of business leaders in the United States, agreed that it was important for corporations to pay their fair share of taxes.

Another survey, this one from Rutgers University, finds more than 20% of workers laid off in the last five years haven’t found new jobs. Among laid-off Americans who say they’ve found a new job, 46% said it came with a pay cut and 44% reported a drop in status. The survey also found increasing pessimism among the unemployed; 36% said the economy will never fully recover from the recession, up from 29% last January, when they were asked the same question. Likewise, 40% said that the availability of good jobs for those who want to work will never return to pre-recession levels, up from 34%.

This week’s economic calendar also includes a couple of high level conferences. The G20, or Group of 20 industrialized and developed countries just wrapped up a meeting in Australia, a test run for the November G20 leaders’ forum that will include Russia. The assorted and sundry finance ministers and central bankers at the weekend meeting think they’ve figured out a set of policies and initiatives to add an additional 1.8% economic growth, but they also issued a warning about a build-up of excessive risk in the financial markets.

It’s unusual for government finance ministers to comment on the direction of financial markets, but you would have to be blind to miss the fact that the S&P 500 has risen by about 200%, while overall US economic output has only risen by about 20%. Stock prices relative to earnings are above historical averages. Europe faces the risk of deflation; while the Federal Reserve is easing off the stimulus; Brazil is in a recession; Russia is mired in economic sanctions over Ukraine; and even China is projecting slower growth. The G20 also talked about the Ebola crisis in Africa, corporate tax evasion, and climate change.

In New York the climate change issue spilled into the streets yesterday and today. Yesterday, between 300,000 and 400,000 people turned out for the Climate March, ahead of the United Nations Climate Summit, which starts tomorrow. Organizers hailed the turnout as the largest climate change march in history. The organized Sunday march included celebrities and political figures including the Mayor of New York. Also, today, a much smaller group of protesters took their message to Wall Street; today’s protest did not have permits and ended with crowds being pepper-sprayed. By conducting a sit-in on the steps of the New York Stock Exchange, organizers say they are confronting “the system that both causes and profits from the crisis that is threatening humanity.”

Maybe they have a point; at least the Rockefellers seem to think so. In recent years, 180 institutions — including philanthropies, religious organizations, pension funds and local governments — as well as hundreds of wealthy individual investors have pledged to sell assets tied to fossil fuel companies from their portfolios and to invest in cleaner alternatives. In all, the groups have pledged to divest assets worth more than $50 billion from portfolios, and the individuals more than $1 billion. Today, the New York Times reports the $860 million philanthropic organization, the Rockefeller Brothers Fund, is joining the divestment movement.

Not everyone will divest completely or right away and some are divesting just from specific sectors of the fossil fuel industry, such as coal. Just how transparent the various funds and institutions will be about the progress of their asset sales is uncertain. The Rockefeller Brothers Fund has already eliminated investments involved in coal and tar sands entirely while increasing its investment in alternate energy sources.

The Rockefellers are especially noteworthy given their family history. Patriarchs John D. Rockefeller and William Rockefeller amassed their fortunes while working in the oil industry. The Rockefeller brothers were co-founders of the Standard Oil Company, the world’s largest oil refiner at the time.

The divestment movement began on college campuses, where it has met with mixed results. Harvard has refused to divest; Stanford has agreed to divest its holdings in the coal industry; Yale University is still studying the matter.

Divestment is not an easy thing to accomplish, especially for individual investors. Some of the biggest oil companies, such as ExxonMobil, Chevron, and ConocoPhillips are listed on the S&P 500 index. Many mutual funds and exchange traded funds mimic the S&P 500 by buying all the stocks in it or else use the index as a benchmark. That means anyone who has a stock mutual fund in their retirement portfolio probably owns some Big Oil.

And then there is a question of the impact of divestment, and whether that is the way to go, as opposed to shareholder activism. For the Rockefeller Brothers Fund, they tried activism with ExxonMobil, and say they were largely ignored, and they tried direct investment back in the 80’s without much success; so divestment is what remains. But divestment is just a small part of what is happening.

According to the Columbia Journalism Review, the debate has shifted from a science story to a business story. The thinking here is that all credible science has accepted manmade climate change, and now the question is how to apply a risk management approach to climate change. Risk-management analysis identifies likely financial losses due to things like legal liabilities, uncertainties in credit markets, and the probability of infrastructure failure.

The climate story has largely been locked in the story of rising sea levels and polar bears. That’s compelling but for most people it doesn’t address their bottom line. Sea levels are going to rise but at the edge of the water is someone’s home or business. Temperatures are rising but what impact does that have on the price and availability of the food you buy and eat? What does it mean for the construction industry and how we build buildings? What does it mean for the insurance industry and how we insure property? And insurance companies aren’t just evaluating coastal and flood prone areas; farmers in the heartland benefit from crop insurance and federal disaster relief when their fields wither under extended droughts and heat waves.

Extreme weather can also affect health. JAMA has just released a study showing the many ways climate change can make us sick; from heat related health problems to respiratory illness, to infectious diseases like West Nile and dengue fever, to waterborne diseases. As extreme weather events become more frequent and intense, there’s a growing understanding that the costs could be catastrophic.

So, for many in business, the question of climate change is coming down to understanding not only risk but pricing. Last week, more than 340 global institutional investors with at least $24 trillion in assets — including Swiss Re and the Unitarian Universalist Association — called on government leaders to adopt carbon pricing. The World Bank says 73 countries and more than 1,000 companies and investors support a price on carbon; that is, a carbon tax or buying permits to emit carbon. The list includes countries like No. 1 polluter China, and companies including Cisco Systems, IKEA Group and the Dow Chemical Company. Investors include BNP Paribas Investment Partners, the Illinois State Board of Investment and Rockefeller Asset Management. Absent from the list, however, are the world’s second- and third-largest polluting countries, the US and India.

Dozens of climate-related events will take place this week in the New York, but the summit itself starts tomorrow at UN headquarters. President Obama and leaders from more than 120 countries are likely to announce climate initiatives, and company CEOs will participate in talks or make their own commitments.

So, the UN Climate Summit kicks off tomorrow; it is expected to endorse a new international plan to cut deforestation in the world’s tropical forests – with conservation plans to be paid for by developed counties – and to underscore global efforts to share green technologies with the world’s poorer countries. Ideas for “pricing carbon” and financing efforts to reduce emissions – for example, by taxing internationally traded goods based on the carbon emissions those goods produce.

And today, just before the summit, one final report from the Global Carbon Project shows the world pumped an estimated 36 billion tons of carbon dioxide into the air last year; which is 706 million tons, or 2.3% more than the previous year.

And all of this means that there will be massive investments in developing technologies to deal with the issue of climate change. From a business and investment standpoint, it pays to keep your eye on the ball.