Justice Delayed is Par for the Course
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Greece confirms that it plans to submit a request to the euro zone tomorrow to extend a “loan agreement” for up to six months, but EU paymaster Germany says Athens must stick to the terms of its existing international bailout. Greece wants to maintain a budget surplus before interest payments equal to 1.5 percent of gross domestic product; the current plan calls for a budget surplus equal to 4.5 percent of GDP. It’s still unclear what the terms of the extension will look like, as both Athens and its creditors seem determined not to compromise over the loan’s conditions.
The Federal Reserve released minutes from the January 27-28 Federal Open Market Committee meeting. The minutes reveal that “Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.” Allow me to translate; the Fed would like to put off raising interest rates because the economy is still a bit risky.
Well, that’s good news and bad news; good that the Fed isn’t going to raise rates; bad because the economy is still not recovered. The FOMC says the risks are “nearly balanced” but then they list the risks: a strengthening dollar, international flash points from Greece to Ukraine, slow wage growth, and even lower energy prices. Wait a minute; low energy prices are supposed to be a positive for the economy, and they are except some people in the energy industry are losing their jobs, and when people save money at the gas pump they aren’t spending it elsewhere. So, lower energy prices are good except maybe the energy market is telling us something.
Beyond that, low energy prices mean next to no inflation, so why raise rates when there are no inflationary pressures? Fed members who supported an early move said they were concerned that holding rates low for too long might lead to asset bubbles, but backers of waiting longer said an early move would result in the Fed’s having to cut rates back to zero afterward.
Speaking of asset bubbles; for the first three quarters of 2014, companies spent $420 billion on share buybacks, on track to set a record. As buybacks and dividends have risen, so has corporate debt. Since 2012, annual U.S. corporate bond issuance has topped $1 trillion a year. About $503 billion of corporate debt is set to mature this year, and each successive year will see higher amounts of debt maturing, with about $3.7 trillion is set to mature through 2019, according to Standard & Poor’s RatingsDirect.
So, the Fed is playing a delicate balancing act and we should not expect any sudden movements from the Fed; they will eventually raise rates but they will move at about the pace of an arthritic tortoise.
As widely expected, the Bank of Japan maintained its massive 80 trillion yen annual stimulus program today, its main tool to hit 2% inflation by next fiscal year. Data earlier this week confirmed that the country pulled out of recession in the fourth quarter of last year, although annualized growth of 2.2% was much weaker than expected. The Nikkei closed up 1.2% at 18,199 following the decision, its highest level since July 2007.
Bank of England officials voted unanimously to leave the central bank’s benchmark interest rate unchanged at 0.5% this month and the stock of assets purchased under its bond-buying program unchanged at £375 billion.
Construction on new U.S. homes dropped 2% in January to an annual rate of 1.07 million units, as heavy snowfall hindered builders in some regions such as the Midwest and Northeast.
Industrial production rose a seasonally adjusted 0.2% in January, well short of expectations. Another sign of weakness came in a slight downward revision to output in the past four months. Even with the revisions, industrial output advanced at a 4.3% annual rate in the fourth quarter.
Wholesale prices posted a record 0.8% decline in January. Low energy costs kept a lid on Producer Prices, but even when you strip out food and energy costs, the so-called core index dropped 0.3%. The price of goods fell sharply owing to a 10.3% decrease in energy costs. Gasoline prices in particular tumbled 24%, the biggest drop since 2008. Producer prices have shown zero change in the past 12 months because of plunging energy costs. The core PPI is up 0.9% in the same span, however.
So, what is the “Big Money” doing? SEC filings are showing us who has been buying or selling, and what:
Warren Buffett dumped Exxon Mobil. The billionaire’s Berkshire Hathaway holding company disclosed that it sold a $3.7 billion stake in the energy giant as oil prices have plunged. The company also purchased a 5% stake in agriculture equipment maker John Deere, plus shares of Twenty-First Century Fox and Restaurant Brands International, the owner of Burger King and Tim Hortons.
Soros Fund Management, the family office of billionaire hedge fund manager George Soros, cut holdings of U.S. stocks in the fourth quarter and shifted assets globally. Soros, which manages almost $30 billion, moved about $2 billion into companies in Asia and Europe. Warren Buffett and George Soros both boosted their stakes in General Motors.
Carl Icahn’s equity holdings declined by 5.2% during the fourth quarter to $31.9 billion as of Dec. 31, even as he bought more EBay and Hertz.
Daniel S. Loeb’s Third Point acquired five million shares of Phillips 66, a stake worth $384.5 million. And Leon G. Cooperman’s Omega Advisors acquired a 2.1 million-share position in Laredo Petroleum and a 652,500-share position in Sanchez Energy. At the same time, Omega sold about 29 percent of its big stake in Sandridge Energy, ending the quarter with 32.2 million shares. ValueAct Capital Management, an activist hedge fund, acquired big new positions in Halliburton and Baker Hughes, two oil field services companies that agreed to a $34.6 billion merger in November.
In the technology sector, David Einhorn of Greenlight Capital reduced his fund’s stake in Apple by about 6 percent, to 8.6 million shares, a stake worth more than $1 billion as of Tuesday. Another hedge fund, Coatue Management, which focuses on technology, reduced its Apple holdings by about 15 percent, to 8.9 million shares, as of the end of 2014. Appaloosa Management, David Tepper’s hedge fund, sold its entire 1.2 million-share stake in Apple, as well as its stakes in Facebook and the Chinese Internet giant Alibaba. Appaloosa Management had $2.74 billion less in U.S. stocks in the fourth quarter, a 40 percent drop from the previous quarter. Louis Bacon’s $14.8 billion Moore Capital Management had $2.3 billion in U.S. equities at the end of the year, about 25 percent less than the end of September.
Are you familiar with Snapchat? Let me explain how it works. Remember the old Mission Impossible shows? The team would get their mission and then the message would self-destruct in 10 seconds. That’s the idea behind Snapchat; it’s an app for your phone, and after you receive a message, the message will erase after a few seconds. Last month Snapchat received $485 million in funding, valuing the company at about $10 billion. Now Snapchat is looking to raise an additional $500 million, which would put the valuation “as high as $19 billion.” That would make the disappearing messaging platform the third-most-valuable VC-backed startup, behind Xiaomi and Uber, and give it a valuation nearly equal to the $22 billion paid by Facebook for WhatsApp.
Now for today edition of “Banks Behaving Badly”:
Switzerland raided HSBC. Police searched the bank’s Geneva offices for evidence of money laundering, in the wake of leaks that document HSBC’s attempts to help clients evade taxes through the use of private Swiss accounts. The story about leaked documents aired 10 days ago. The actual leaked documents were leaked 6 years ago. Justice delayed is par for the course.
BNY Mellon has restated its Q4 results it announced in January, taking a $598M litigation charge that suggests it is on course toward a settlement of cases, including a three-year-old forex lawsuit filed by the DOJ. The adjustment lowers net income for the year by about a fifth, to $2.5 billion. BNY Mellon (NYSE:BK) is one of the many banks under investigation for forex manipulation.
Next, let’s give credit where it is due: Citigroup says it will commit to spend $100 billion on initiatives to help combat climate change over the next ten years.
According to the company’s release the money will be used “to finance activities that reduce the impacts of climate change and create environmental solutions that benefit people and communities.” In 2007, Citi pledged $50 billion over ten years and met that goal three years early, hence the new, higher number.
Citi says it will use its $100 billion climate fund to finance infrastructure projects “that increase access to clean water and manage waste, while also supporting green, affordable housing for clients, including in low- and moderate-income communities”. Citi will also back “sustainable transportation” projects and help cities protect against climate extremes.
In 2012, Bank of America set a goal of $50 billion to provide loans and other financing for environmentally friendly energy projects over 10 years. The same year, Goldman Sachs set a 10-year target of $40 billion for investments in renewable energy projects. Clearly, Citigroup thinks they can make some money on Green Energy.
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