FINANCIAL REVIEW

A Grain of Salt

Sinclair Noe — February 5, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 211 = 17,884
SPX + 21 = 2062
NAS + 48 = 4765
10 YR YLD + .02 = 1.82%
OIL + 2.26 = 50.71
GOLD – 4.40 = 1265.50
SILV – .11 = 17.32

More people sought unemployment benefits last week, but the number of applicants remained near historic lows in a positive sign for job growth. The Labor Department says that weekly applications rose 11,000 to a seasonally adjusted 278,000. The four-week average, a less volatile measure, fell 6,500 to 292,750. That average has plunged 15 percent over the past 12 months.

Worker productivity declined in the fourth quarter of 2014, while labor costs increased. Productivity, the amount of output per hour of work, fell at 1.8 percent rate in the fourth quarter after rising at a 3.7 percent rate in the third quarter. Labor costs increased at a 2.7 percent rate in the fourth quarter after having fallen at a 2.3 percent rate in the third quarter. The drop in productivity and rise in labor costs are reflected in the fact that the growth in overall output slowed in the fourth quarter.

The U.S. trade deficit jumped 17.1% in December to a two-year high. The nation’s trade gap jumped to a seasonally adjusted $46 billion in December from a revised $39 billion in the prior month.

If Anthem is your health insurer it may be time to change your passwords – all of them. Anthem said hackers broke into a database containing personal information for about 80 million of its customers and employees in what is likely to be the biggest data breach disclosed by a health-care company. Anthem said the breach exposed “names, birthdays, street addresses, social security numbers and employment information, including income data,” but added that no financial information, including credit card details, was compromised. Anthem said it would send a letter and email to everyone whose information was stored in the hacked database. It also set up an informational website, www.anthemfacts.com, and will offer to provide a credit-monitoring service.

This next item won’t do anything to prevent hacking, but it will mean that you have the same access to the internet as anybody else. FCC chairman Tom Wheeler is now officially on board supporting the strongest possible version of net neutrality. Wheeler said by placing broadband Internet providers such as Comcast and Verizon Wireless under a stricter regulatory regime, consumers would be ensured an open Internet under Title II. Under the new plan, broadband providers would be explicitly banned from blocking content or creating fast lanes for Web services that can pay for preferential treatment into American homes.

Title II is the law that currently regulates telephone networks as common carriers. Applying this to broadband internet gives the FCC extremely strong powers to guarantee free and equal internet access to everyone, just as they currently do for phone companies. The argument against doing this is that Title II has a lot of baggage designed specifically for phone companies; baggage that makes sense for telephones but not for internet connections. Wheeler recognizes this, and says that he plans to “modernize” Title II. A five member FCC panel will vote on Wheeler’s recommendation February 26th.

Industry lobbying groups such as Broadband For America argue that Wheeler’s proposal “could have spillover effects into the broader Internet ecosystem and threaten Silicon Valley companies that rely heavily on the Internet,” take that with a grain of salt. The markets certainly weren’t alarmed. Stocks for the big telecos went up today as market-watchers were relieved that the FCC said it wasn’t going to regulate what the cable and phone companies charge us for internet access.

Fifty years after the internet’s creation, about half the world now uses it to do almost anything and almost everything. The possibilities are only limited by our imagination. Why has the Internet worked so well? Because it’s a level playing field. Everyone has an equal opportunity to compete, to succeed or to fail, to put one’s best ideas or products forward and let the chips fall where they may.

Through a free and open Internet, an excellent idea or an individual can beat a powerful established institution. But we need rules to make sure that in the battle of content it is a fair fight, and that winners and losers are determined by the quality of the content and nothing else.

Late yesterday, the European Central Bank (ECB) announced that it would no longer accept Greek government bonds and government-guaranteed debt as collateral. Although Greece would still be eligible for other, emergency lending from the Central Bank, the immediate effect of the announcement was to raise Greek borrowing costs and squeeze its banks, and to increase financial market instability within Greece, maybe even bank runs.

Syriza, the newly elected political party in Greece took power with a promise to Greek voters to get rid of the anti-austerity programs that were part of an earlier IMF-ECB bailout. The Greeks had lived up to the bailout terms to the best of their ability but the economy did not improve, it only got worse. The Greek voters decided they had had enough.

Yesterday’s move by the ECB looks very much like a deliberate attempt to undermine the new government. They are trying to force the government to abandon its promises to the Greek electorate, and to follow the IMF program that its predecessors signed on to. Syriza’s leadership was unbowed by the ECB’s assault. They are not going to voluntarily leave the euro or even suggest the possibility. They are continuing to look for a debt restructuring plan. PM Alex Tsipras said today, “Greece won’t take orders any more, especially orders through emails. Greece is no longer the miserable partner who listens to lectures to do its homework. Greece has its own voice.”

A funny thing happened today. The Athens Stock Market General index dropped, by just over 3%; the markets took it with a grain of salt. That is a sizeable drop but not enough to instill fear in the Greeks; they’ve seen much worse in the past couple of years.

The move is seen as a definitive warning that the ECB is in no mood to give in to Athens’s request for a debt swap. For now it’s all part of the negotiations. Greek banks only have about €8 billion in Greek government debt used as collateral with the ECB. And the Greek economy is in such a bad way, they might not even notice if they ran out of cash for a few months. The crazy part is that the Greek debt is not a huge mountain; the Eurozone could easily afford restructuring. What they can’t afford is to cut off one of their own and leave them hanging out to dry.

And so, what happened yesterday was probably less of an effort by the ECB to force the Greeks into a deal, as it was to force the Germans into a deal; a wake-up call for Angela Merkel and the hard line austerian crowd that if Greece collapses, the entire Eurozone could collapse, and that would be very expensive. Or maybe the ECB is willing to turn Greece into a failed state out of what looks like sheer brutality. Time will tell.

If you were to head over to California to the neighboring ports of Los Angeles and Long Beach, you might typically see one or two of those huge container ships waiting offshore to load or unload. Today, you would see about 18 big ships sitting offshore, and nobody is quite sure how long it will take for them to load or unload. There has been a slowdown at the ports, which alone handle 40% of US container traffic. And contract negotiations with port workers threatens a lockout by employers, possibly within days. A port closure would likely result in losses of $1.5 billion to $2.5 billion per day.

CME Group, the world’s largest futures-market operator, is closing most of its futures trading pits in Chicago and New York as electronic trading has become the overwhelmingly dominant way futures contracts are bought and sold. The move will take effect by July 2. Remember those pictures of traders yelling and screaming and elbowing each other to get an order filled? Yea, they don’t do that anymore. Times change.

Facebook is up about 18 cents in afterhours trading. And that might just be enough. Once upon a time, John Pierpont Morgan created a banking behemoth; such a powerful force that it bailed out Wall Street; then went on to create the world’s largest company at the time, US Steel. The House of Morgan has been a financial leader for more than a century, and with a market cap of about $211 billion, it is a powerhouse to this day. Except, it looks like Facebook has just passed it in terms of market capitalization; not by much, maybe just a couple of hundred million.

On a related note, it’s time for today’s edition of “Banks Behaving Badly”: JPMorgan has agreed to settle a class action lawsuit for $500 million; this goes back to mortgage backed securities sold by Bear Stearns, which was acquired by JPMorgan. Among the plaintiffs in this case were the Public Employees’ Retirement System of Mississippi and the New Jersey Carpenters Health Fund. A judge must still approve the settlement.

Meanwhile, the Justice Department and the Federal Bureau of Investigation are examining Swiss bank UBS for allegedly helping its American wealth-management clients avoid taxes by putting their money into investments that are banned in the US; called bearer securities because they can be transferred without needing to register ownership. Authorities are also trying to determine whether anyone at the bank engaged in criminal efforts to cover up the alleged conduct once it became more widely known about within the bank. This isn’t the first time; in 2009, UBS acknowledged helping American clients evade taxes, and agreed to pay $780 million as part of a deferred prosecution agreement with US authorities. It looks like UBS has a recidivism problem; now, let’s see if the Justice Department has a spine.