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Thursday, March 19, 2015

Times Change

Financial Review

Times Change

DOW – 117 = 17,959
SPX – 10 = 2089
NAS + 9 = 4992
10 YR YLD + .02 = 1.97%
OIL – .81 = 43.85
GOLD + 4.10 = 1172.00
SILV+ .22 = 16.21

The Federal Reserve wrapped up a two-day FOMC meeting yesterday; and the stock market responded with a rally; the dollar dropped initially. After a day of consideration, stocks slipped and the dollar clawed back gains.  Oil prices rose yesterday and dropped again today. You could make the case that the Fed has maintained an overly accommodative monetary policy for too long, or you could argue that the economy will take a hit if the Fed hikes interest rates too soon. The Fed removed its pledge to be patient in tightening policy, while also cutting its forecast for the economy. Go figure.

Initial jobless claims edged up by 1,000 to a seasonally adjusted 291,000 in the period stretching from March 8 to March 14.  New claims have tracked below 300,000 for the second straight week after spiking to a 10-month high of 325,000 at the end of February in what now appears to have been weather-related quirk.

The Commerce Department said the current account gap, which measures the flow of goods, services and investments into and out of the country, increased to $113 billion from a $98 billion deficit in the third quarter. That was the largest shortfall since the second quarter of 2012.

The Conference Board’s  leading economic index rose 0.2% in February in a sign the U.S. economy should expand at a moderate rate in the months ahead.

If the Dollar Index finishes higher in March, it will be up 9 consecutive months, extending what is already the longest streak in history; so far racking up just over 25% in gains. So, it’s not a surprise that commodities prices are trading at 12-year lows. Yesterday the dollar dropped 3% following the Fed announcement; that was the biggest daily move since March 2009. I read today that the strong dollar might be the next Black Swan event. I grant that the move has been surprisingly strong but I’m not sure it really qualifies for outlier status; or does my doubt qualify it.

Another EU Economic Summit is underway. The two-day meeting in Brussels is attended by leaders from across the eurozone.  The Greek debt crisis and the possibility of extending sanctions against Russia and energy are the key issues up for discussion. The Greek parliament adopted a “humanitarian crisis” bill yesterday, the first package of social measures put forward by the radical left-wing Syriza government. The bill is basically an anti-poverty law, designed to allow people opportunity to stay in housing and providing emergency food aid for the poorest Greeks.  The European Commission warned that Greece should not act unilaterally. This on the same day the European Central Bank opened its plush new €1.4 billion office headquarters in Brussels. The price tag for the Greek humanitarian crisis law to help its poorest: €200 million. At the opening ceremony, the ECB announced that the new HQ was “an example of what Europe is capable of.” Well, apparently so.

Brazilian President Dilma Rousseff has launched an anti-corruption offensive to counter rising discontent over the kickback scandal that took place at Petrobras during the years she was chairwoman of the state-run oil company. Her proposals include the criminalization of campaign slush funds, seizure of assets from government officials convicted of corruption and implementing an anti-bribery law passed more than a year ago. On Sunday, over 1 million people took to Brazil’s streets in anti-government protests. A small minority of the protesters called for a military takeover of the government.
Apple is moving to the Dow Industrial Average, replacing AT&T. The Dow is a price-weighted index, which means the price is determined by the price changes of its components, rather than percentage changes. A 1% move in Apple’s stock–about $1.28 at Wednesday’s closing price–would move the Dow by about 8.54 points. In contrast, the S&P 500 is a market-capitalization weighted index. Since Apple has a $748 billion market cap, its stock has more than twice the influence on the S&P as that of Exxon Mobil which is the second-most heavily-weighted component with a $361 billion market cap.

Starbucks declared a 2-for-1 stock split set for April 9 at its Annual Meeting yesterday, saying it sees enough growth on the horizon to help push the company to a $100 billion market capitalization. Starbucks also announced a new delivery service, for people who don’t want to walk to the corner.

Sony has launched its PlayStation Vue streaming video service in three cities, with a starting price of $50/month, after testing the service since November. The lineup features content from three of the big four (CBS, Fox, NBC), but popular content from Disney – ABC, ESPN and Disney cable – is still a glaring omission. Sony’s price is raising eyebrows, as it’s competing with Sling TV’s $20/month price point. This whole idea of paying for cable TV service is about to change, we just don’t know yet who the big winner will be.

Times change. The Recording Industry Association of America reports that streaming services accounted for $1.87 billion in revenue last year, while sales of CDs represented $1.85 billion in sales. Apparently the sales on 8-track tapes has not been doing well either.

Another sign of the times. There are now more Uber cars in New York City than there are taxis. According to the city’s Taxi and Limousine Commission: 14,088 registered Uber cars compared with 13,587 yellow cabs.

Target has agreed to pay a $10 million settlement related to its 2013 data breach, which compromised the personal information of as many as 110 million people. Under the proposal, Target would pay individual victims up to $10,000 in damages and implement additional data security measures, such as appointing a chief information security officer and maintaining a written information security program. Target also raised the minimum wage for all of its workers to $9 an hour yesterday, matching moves made by rivals Wal-Mart, GAP and T.J. Maxx.

Bank of New York Mellon is reportedly nearing an agreement to pay just over $700 million to settle allegations that the bank overcharged pension funds and other clients for foreign exchange services. The bank told clients it would provide them with the best possible execution, but instead gave them the worst rates of the day. Meantime, BNY Mellon obtained better spot prices for itself and profited on the spread. The New York AG’s office claims the bank earned $2 billion over ten years through the alleged deception. So, that worked out quite well for the bank. And now you know why pension funds are in trouble.

Teslas can once again be legally sold in New Jersey after Governor Chris Christie signed a bill to allow the company to sell directly to consumers. The step comes after fighting efforts in nearly every state to halt its direct sales method, which doesn’t use independent dealers. Tesla also presented a software update to its Model S vehicle at a news conference this morning. It was widely expected the update would improve the range of the electric car between charges. Instead, Elon Musk announced a safety feature. The car will also warn drivers if battery power is low before they drive beyond an area where they can charge. Musk said drivers were concerned about “range anxiety,” and he says it will now be impossible to run out of charge unless you do so intentionally, or you are driving on the George Washington bridge in New Jersey.

Transocean expects to book an after-tax charge of between $300 million -$325 million as it moves to dispose of four rigs. According to Baker Hughes, U.S. oil-rig count fell to 866 last week, the 14th straight week of declines, as plunging oil prices wreak havoc on the industry. Transocean also logged a $992 million charge to correct the value of its contract drilling business in February, and saw the departure of CEO Steven Newman.

The Bank of International Settlements Quarterly Review shows debt in the global oil and gas industry reached $2.5 trillion in 2014, or 2 ½ times what it was eight years earlier. Cheap financing made it easier for exploration and production companies to finance operations and expand rapidly as the fracking kicked into high gear.  The debt boom is now magnifying the slump in prices; the most immediate effect is a sharp cutback in capital spending plans, and we’ve already seen many rigs shutdown. At the same time, production continues to climb higher because deteriorating balance sheets encourage companies to keep pumping from existing wells to service the debt even as oil prices drop.

The BIS authors warn: “A sell-off of oil company debt could spill over to corporate bond markets more broadly if investors try to reduce the riskiness of their portfolios. The fact that debt of oil and gas firms represents a substantial portion of future redemptions underlines the potential system-wide relevance of developments in the sector.”

And it is not just domestic oil producers. Today, Kuwait’s oil minister said OPEC had no choice but to keep producing in an oversupplied market or risk losing market share.

The National Snow and Ice Data Center at the University of Colorado has been measuring Arctic ice for the past 35 years, and this winter was the smallest winter size on record, by about 130,000 square kilometers, an area about the size of Mississippi.

This winter has been hot. Global temperatures from December to February were the highest on record. If that comes as a surprise to many Americans after an agonizingly cold winter, it’s because the eastern United States and Canada was one of the only regions on earth with lower-than-average temperatures. Globally, the average temperature from December to February was 1.42 degrees Fahrenheit higher than the 20th-century average, according to the National Oceanic and Atmospheric Administration. The average temperature was the highest since tracking began in 1880, surpassing the previous high in 2007 by .05 degrees.

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