FINANCIAL REVIEW

Net Neutrality

Sinclair Noe — November 10, 2014

 

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Financial Review

DOW + 39 = 17,613
SPX + 6 = 2038
NAS + 19 = 4651
10 YR YLD + .05 = 2.36%
OIL – 1.43 = 77.22
GOLD – 26.90 = 1152.60
SILV – .22 = 15.71

Record highs for the Dow Industrial Average and the S&P 500 index, plus new records for the Dow Transportation Average. We enjoy milk and cookies. The S&P 500 has rebounded 9.4 percent from a six-month low on Oct. 15.

We’re still a couple of weeks away from Thanksgiving but third quarter earnings season is wrapping up, and analysts are already looking to next year, anticipating earnings will rise another 7% or so to around $126. And while stock prices have been hitting highs, volatility has dropped; the VIX is back down to 12 or so, indicating a fair amount of complacency, even as stocks hit highs. Commodity prices have been scraping the bottom of the barrel, with oil and gold near multi-year lows; one exception is cattle prices. Live-cattle futures last week hit an all-time high on CME, and prices are unlikely to come down anytime soon. In addition to increasing demand for beef, the recent drought in Texas and Oklahoma dented cattle herds, which has forced farmer to undergo a lengthy cattle replacement process.

Stock market analysts aren’t the only ones looking to next year. The World Economic Forum is out with its new Outlook on the Global Agenda 2015. Deepening income inequality tops the list of economic trends to watch. The US tops the list of most unequal of the world’s rich nations, and has surged ahead of the rest mostly in the last 30 years. What should be done about inequality? The report doesn’t get into specifics, but it does say this: “We know what we need: inclusive economies in which men and women have access to decent employment, legal identification, financial services, infrastructure and social protection, as well as societies where all people can contribute and participate in global, national and local governance.”

After the financial crisis in 2007-2009, governments had to spend billions of dollars of taxpayer money to rescue banks that ran into trouble and could have threatened the global financial system if allowed to go under. Since then, regulators from the Group of 20 economies have been trying to find ways to prevent this happening again. The G-20 is meeting in Australia this week, and Mark Carney, the Bank of England governor and chairman of the Financial Stability Board has released a proposal to put an end to taxpayer bailouts of the “too big to fail” banks.

The proposal calls for the big global banks to have a buffer of bonds or equity equal to 16% to 20% of their risk weighted assets. The bonds could be converted to equity to help shore up a bank if it should falter (at least that’s the theory). The new buffer, formally known as total loss absorbing capacity or TLAC, must be at least twice a bank’s leverage ratio, a separate measure of capital to total assets regardless of the level of risk. Globally, the leverage ratio has been set provisionally at 3 percent but Fitch ratings agency said banks might end up with a buffer equivalent to as much as a quarter of their risk-weighted assets once other capital requirements were included. Analysts have estimated this could run to billions of dollars.

The new rule will apply to 30 banks the regulators have deemed to be globally “systemically important”.

The Financial Times reports Swiss bank UBS is close to a settlement to resolve allegations of improprieties in its precious metals trading business; this might also signal a settlement regarding to rigging forex markets. UBS had closely integrated its forex and metals trading.

US public pension funds performed worse in the third quarter than all other institutional investment plans. Public pensions lost a median 1% in the third quarter, compared with a median drop of 0.84% for all plans over the same period. Small public pensions with less than $1 billion of assets were down 1.07%. Larger corporate funds with more than $1 billion of assets had the best showing for the second quarter in a row, losing just 0.54 percent this past quarter.

President Obama today came out in favor of net neutrality, endorsing a proposal to empower the Federal Communications Commission to require internet service providers to treat all web traffic equally and not charge content providers for better access. Obama’s statement said: “We cannot allow Internet service providers to restrict the best access or to pick winners and losers in the online marketplace for services and ideas.”

The FCC is currently weighing whether ISPs, such as Verizon and Comcast, can choose to block or prioritize delivering traffic to certain websites; creating slow lanes of information delivery for much of the web, and high-speed lanes for a toll. Net neutrality is about what kind of traffic lanes we should have on the Internet. Supporters of net neutrality think all online information should be treated equally; everybody gets to travel at the same speed. Opponents argue that fast lanes and priority access would actually make the Internet better.

Imagine a world where big companies like Netflix and Google pay extra money to give their users faster service. How could a plucky upstart search engine or the next video streaming service hope to compete? To provide the same speed, they’d have to pay too. But being young and small they might not have the resources. Net neutrality puts all Internet companies on the same footing, and in that way it helps support innovation and promote entrepreneurship.

Public policy groups want tough regulations that guarantee all websites are treated equally and can be accessed by people increasingly reliant on the Internet. Companies led by Comcast, Verizon, and AT&T argue that only light regulation is needed to ensure providers don’t block or slow Web traffic, and they say strict rules would squelch investment. What really terrifies the telecoms is that they’ll have to justify the rates you pay under the new rules; if not now, then eventually.

Obama’s plan would reclassify ISPs as common carriers under Title II of the Telecommunications Act, treating the service as a public utility. Under that section, it’s illegal “to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services.” And just like access to telephones or access to electricity, everybody would have equal access. For instance, the FCC doesn’t allow phone companies to charge more than $6.50 for a single line, so that all Americans can afford access. Similar pricing rules are in place at electricity plants. If the internet is regulated under Title II, the government could come up with a similar cap on how much companies can charge for internet access.

Obama’s proposal asks for no blocking of websites, no slowing of Internet content, and no deals that let companies pay for faster delivery of their content. He said the FCC should use utility-style rules that give the agency powers that extend to rate regulation, and forebear from setting prices. FCC Chairman Tom Wheeler has been considering a plan that mixes the utility-style regulation Obama advocates with weaker regulatory powers, which may allow for companies to pay more for quicker content delivery or fast lanes.

And while the telecom companies oppose net neutrality, it has wide support from the public, which submitted to the FCC almost 4 million comments overwhelmingly in favor of net neutrality this summer. Whether FCC Chairman Tom Wheeler will adopt Obama’s plan remains in question.

Nearly two months before notifying federal regulators and the public that it was recalling cars with a dangerously defective ignition switch, General Motors placed an urgent order for 500,000 replacement switches with its supplier, Delphi Automotive. GM sent emails to Delphi on Dec. 18, 2013, a day after a committee met to discuss the switch issue but declined to order a recall. Despite the official inaction, a GM employee sent an email to Delphi the next day requesting the half-million replacement parts for “an urgent field action for our customers.”

The emails were turned over by Delphi during discovery in class-action litigation against the automaker. The defective switch can, if jostled or bumped, shift to off or “accessory” mode without warning, causing a moving car to stall in traffic. The loss of power can deactivate the airbag system and impede power steering and brakes. GM has repeatedly said that the cars are safe to drive if nothing but the car key is on the ring, but in not making the problem public when it ordered the replacement parts, GM did not disseminate that information. The defect led to the recall of 2.6 million vehicles earlier this year. So far, 61 claims have been deemed eligible for compensation, including 30 deaths and 31 injuries.