Financial Review

Goodnight and Good Luck

Sinclair Noe — February 11, 2015  

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 6 = 17,862
SPX – .06 = 2068
NAS + 13 = 4801
10 YR YLD un = 1.98%
OIL – .75 = 49.27

President Obama has asked Congress for formal authorization to fight the Islamic State that would prohibit the use of “enduring offensive ground forces” and limit engagement to three years. The proposed resolution says Islamic State “has committed despicable acts of violence and mass execution.” Its militants have killed thousands of civilians while seizing territory in Iraq and Syria in an attempt to establish a hub of jihadism in the heart of the Arab world. Don’t expect a quick vote by Congress, maybe something in March, maybe just more talk.

We keep hearing that ISIS is growing, and one way they recruit jihadists to their cause is through slick websites and social media. So, you might be wondering why the government doesn’t just close down those sites. I don’t know, but today, the hacktivist group Anonymous has launched a massive cyber-attack against ISIS. A list of more than hundred Twitter and Facebook accounts suspected to belong to Islamic militants has been released by Anonymous. Twitter has already suspended more than 1500 ISIS accounts since the group released the first list in June, 2014 and dozens of militant recruiting websites were knocked offline using collective DDoS Attack. Thousands of Twitter accounts associated with ISIS are still active and spreading jihadist propaganda, but Anonymous says this is just the beginning.

The federal government ran a bigger deficit in January, pushing the imbalance so far this budget year up 6.2% from the same period a year ago.  The Treasury Department said the deficit for January stood at $17 billion compared to $10 billion a year ago.

Home prices moved higher across most of the country. According to the National Association of Realtors, the median price of an existing single-family home rose in the 4^th quarter from a year earlier in 86% of the 175 metropolitan areas measured. Twenty-four areas had price gains of 10% or more, up from 16 regions in the third quarter. Prices declined in 24 areas. The median was $208,700, up 6% from the fourth quarter of 2013. NAR reports Phoenix home prices increased 3.9% over the past year to a median price just over $200,000.

Finance ministers from across the Eurozone have gathered in Brussels today to try to figure out what to do about Greece. The newly elected Greek government is looking for relief from austerity measures. Those restrictions were a condition of Greece’s being granted a total of 240 billion euros, or about $272 billion, in loans from its European neighbors and the International Monetary Fund since 2010. Greece still needs to receive its next loan installment, €7.2 billion, or otherwise bridge the financial gap, to keep from defaulting on its international debt payments in coming months.

Reckless lending and reckless borrowing went hand in hand in the years leading up to the euro crisis. Greek officials did indeed use financial tricks developed by Wall Street to mask the size of budget deficits. Still, even before Greece joined the eurozone, it was clearly living far beyond its means. International lenders knew or should have known this; they were not defrauded so much as willfully blind.  The bailout of Greece was not a rescue of the country, but rather a rescue of the creditors; it was a bank bailout. The Greek government only received 11% of the bailout money to date; the rest went to creditors, or who knows where.

Greece now has more debt than it can ever repay, and lenders share some of the blame for this.  Spending cuts have only resulted in destroying the economy. The Greeks understand; that’s why they voted for Syriza; that’s why there are tens of thousands of Greeks protesting in the streets of Athens today. Unlike many countries, the protestors are not protesting against their government, they are protesting for their government to fight against the creditors. At some point the Euro Union will have to let Greece out of debtors’ prison. At a certain point you have to stop squeezing countries that are in the depths of a depression. And ultimately, some form of forgiveness benefits creditors as much as it helps debtors. Greece is well past the point where debt forgiveness could be considered reward for bad behavior.

By the way, the finance minister for Greece, Yannis Varoufakis, considered by some to be a bit radical, but also well known for research in game theory. So, how about a little game of chicken? Good luck.

Ten U.S. states have sent a letter to Anthem complaining that the company has been too slow in alerting clients that they were victims of a massive data breach disclosed last week and claiming the health insurer should commit to reimbursing customers for losses during the lag time.

The FBI is examining how fraudulent tax returns were filed in 19 states through Intuit’s tax-preparation software TurboTax and whether a computer data breach allowed access to personal information. Intuit halted e-filings of state returns last Friday after spotting criminal attempts to get refunds through its systems, but resumed filing after steps were taken to combat the activity.

A federal judge has approved the IRS issuing summonses requiring certain companies to hand over information about US taxpayers who used Sovereign Management and Legal for offshore accounts. The companies include FedEx, DHL, UPS, Western Union, The Federal Reserve Bank of New York, and HSBC. This could get interesting.

Apple has plenty of cash on the books, but they want more; so, they’re issuing Swiss bonds. For Apple, the lure of issuing in Swiss francs is clear: Swiss government yields are negative as far out as 2027, with its 10-year government bond yielding negative 0.09%. Apple’s strong brand and high credit ratings—Aa1 from Moody’s Investors Service and AA+ from Standard & Poor’s—should make it an attractive proposition for yield-starved investors who have Swiss currency to put to work. That will make any funding ultracheap.

What will Apple do with the extra cash? Activist investor Carl Icahn has a suggestion: more dividend dollars and a few less Apple shares. This is a common theme on Wall Street; according to the Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54% of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4% of GDP, to prop up their share prices by repurchasing their own stock. Last year’s buybacks were about 3.3% of market capitalization. Since 2004, stock buybacks totaled $6.9 trillion, and that must surely skew our understanding of earnings.

Apple, which began playing with a record valuation of $700B during midday trading in November, ended the day yesterday at $710 billion. The landmark comes just two weeks after Apple posted the largest quarterly net income of any public company in history. Apple will also be launching a new energy project, partnering with First Solar on an $850M solar farm in California.
The deal will supply enough electricity to power all of Apple’s California stores, offices, headquarters and a data center. Apple will get 130 megawatts, enough to power 60,000 California homes. It’s the biggest-ever solar procurement deal for a company that isn’t a utility, and it nearly triples Apple’s stake in solar.

But it’s not the biggest solar project in California, not by a long shot.

Nearly 4,000 acres of desert near Desert Center California have been converted into a massive solar farm. The Desert Sunlight Solar Farm has been running since December and it was officially dedicated on Monday. The 550-megawatt farm is the largest on public lands managed by the federal Bureau of Land Management. It will provide enough energy to power more than 160,000 average California homes annually. Desert Sunlight was developed by First Solar of Tempe.

First Solar received $1.46 billion from the U.S. Department of Energy, a partial loan guarantee funded by a group of private investors, to finance the project. Pacific Gas & Electric Company and Southern California Edison already have agreed to purchase power from Desert Sunlight for the next two decades.
Before 2009 no solar projects had been permitted on public land. Today, there are 29 permitted commercial-scale solar projects throughout the Southwest. Desert Sunlight is the sixth solar project to come online, and eight more are under construction.

Desert Sunlight is the world’s largest solar power plant, but just slightly. The Topaz solar project in San Luis Obispo County, Calif. — which, like Desert Sunlight, was built by Arizona-based First Solar — also has a capacity of 550 megawatts. But the desert has more abundant sunlight than San Luis Obispo County, so Desert Sunlight will actually generate more electricity than Topaz.

It’s an open question, though, whether future solar projects will be anywhere near as big as Desert Sunlight. Developers have been gravitating toward smaller solar farms, which are easier to build and usually have a smaller environmental impact.

One major obstacle for solar development has been the looming expiration of a 30% federal investment tax credit, which is scheduled to fall to 10% at the end of 2016. Another challenge for solar energy developers is that California and other states are already on track to meet increased requirements for renewable energy generation. But the outlook may be more positive after Gov. Jerry Brown in his inaugural speech last month called for half of the state’s power to come from renewable sources by 2030, up from the previous goal of 33% by 2020.

And finally, the Powerball lottery is up to almost $500 million, making it one of the top payouts ever. Actually, the cash payout would be about $370 million, and then you would have to cut taxes out of that. Still, you would be left with a healthy sum. Playing the lottery is a long shot, and it really doesn’t make much sense. But if you are going to play, might as well play when the payout is big. And for a couple of bucks, you can enjoy your own personal fantasy of how you might spend those millions; that’s got to be worth something. Your odds are 175-million to one. If you buy 2 tickets, each ticket will still be 175-million to one odds. It’s a bad bet. Good Luck.