Financial Review

A Spidey Monday

Sinclair Noe — June 22, 2015

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DOW + 103 = 18,119
SPX + 12 = 2122
NAS + 36 = 5153
10 YR YLD + 9 = 2.36%
OIL + .07 = 59.68
GOLD – 14.40 = 1186.90
SILV + .09 = 16.27

The Nasdaq Composite set a new closing and intraday record, topping the highs set on Thursday. The Russell 2000 gained 7 to close at 1292, a record high. The S&P 500 is a stone’s throw from record highs at 2130.

Eurozone leaders are held an emergency summit today to “urgently discuss the situation of Greece at the highest political level.” The summit comes just eight days before Athens needs to make a crucial €1.6-billion-euro payment to the IMF. Over the weekend, Greek PM Alexis Tsipras submitted a new reforms package to foreign creditors, signaling eleventh-hour concessions to avoid a possible default. The Greek government said its proposals included steps to eliminate early retirement options, hike the sales tax, increase tax surcharges that middle- and high-income earners pay and to introduce a levy on companies with annual net income of more than about $570,000.

Eurozone finance ministers welcomed the Greek proposals for a cash-for-reform deal but said they required detailed study and it would take several days to determine whether they can lead to an agreement to avert a default. The ministers agreed to reconvene later this week. And even if there is a deal between Greece and the Troika, Tsipras still faces a hard sale with his own parliament and Greek voters.

The European Union has extended sanctions against Russia by six months to the end of January, keeping up pressure on the Kremlin to bring peace to eastern Ukraine. The restrictions outlaw financing for major Russian banks, ban the export of sophisticated energy-exploration equipment, and prohibit the sale of weapons and some civilian goods with military uses. Debt-stricken Greece, which has been courting Russian economic aid, shied away from a veto.

The National Association of Realtors reports existing home sales increased 5.1 percent to an annual rate of 5.35 million units, the highest level since November 2009. The increase unwound April’s surprise drop in purchases. First-time buyers accounted for 32 percent of transactions, the largest share since September 2012. Relatively low borrowing costs are still supporting would-be buyers who can qualify for credit. The average rate for a 30-year fixed mortgage reached 4.04 percent in the week ended June 11. While that was the highest rate this year, it’s below the average 4.17 percent for all of 2014.The NAR said the median price of an existing home rose 7.9 percent from May 2014 to $228,700.

According to the NAR, sales of U.S. residential real estate to overseas buyers between April 2014 and March 2015 reached a record $104 billion, or about 8 percent of total existing home sales. While the number of properties sold slowed to 209,000 from 232,600 last year, buyers acquired more expensive properties, which brought up the sales total. Chinese were far and away the top foreign buyers of real estate last year, accounting for $28.6 billion in sales. Canada ranked second, with $11.2 billion, followed by India with $7.9 billion. Florida was the top state for overseas real estate buyers, accounting for 21 percent of all U.S. sales to foreign buyers. California ranked second, with 16 percent, followed by Texas with 8 percent and Arizona with 5 percent.

The Senate is scheduled to end the debate on “fast-track authority” for trade deals tomorrow, with a vote that will likely send the Trans-Pacific Partnership to the President’s desk. TPP would create a free trade zone covering 40% of the world economy – making it the largest trade deal since NAFTA.

Big decisions from the US Supreme Court. Rulings on 11 cases are expected to be announced this week, as the highest court in the US approaches the end of its spring term.

The Supreme Court this morning denied Google’s appeal and Google will have to defend claims that its Street View mapping software violates patents held by Vederi. The high court’s decision not to hear the case leaves intact a March 2014 ruling by the U.S. Court of Appeals for the Federal Circuit, which threw out a district judge’s finding that Google had not infringed on four different patents. The case will now return to lower courts for further proceedings.

In another case, the Supremes sided with a renegade raisin farmer in his battle against a federal program designed to keep excess raisins off the market. A majority of justices ruled that the Agriculture Department program, which seizes excess raisins from producers in order to prop up market prices during bumper crop years, amounted to an unconstitutional government “taking.” But they limited their verdict to raisins, lest they simultaneously overturn other government programs that limit production of goods without actually seizing private property.

In a 5-4 decision the Supremes boosted privacy rights by striking down as unconstitutional a Los Angeles city ordinance requiring hotel operators to show a list of registered guests to the police on demand.The court held that the guest-registry law violated the Fourth Amendment’s protection against unreasonable searches because the legislation gave hotel managers no chance to seek a ruling from a judge or magistrate before complying with a police request.

And in the case of Kimble v Marvel, aka, the Spider Man case, the court ruled that patent holders may not collect royalties on a patent after it expires. The case dealt with a toy that shoots out fake webs, à la Spider-Man. Justice Kagan, writing for the majority said, the parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can). Patents endow their holders with certain superpowers, but only for a limited time.

Things will get more serious later in the week with big announcements on the fate of gay marriage and Obamacare.

There is a merger and acquisition scramble going on in the healthcare insurance sector. Cigna’s board of directors has rejected a $47 billion takeover offer from Anthem, saying in a letter Sunday they were “deeply disappointed” in Anthem’s actions. The Cigna board was unanimous in their decision, which they called “inadequate” in their letter. Anthem announced its $184 a share offer on Saturday.

Others have been quietly maneuvering as well. UnitedHealth Group, the biggest American health insurer by revenue, recently made a preliminary approach to Aetna. And a number of companies (including Cigna) have indicated their interest in buying Humana, one of the smaller major insurers but one with a valuable Medicare franchise. It is still early to say how this will play out, but there is a good chance the Big 5 health insurers will soon be the Big 3.

Williams Companies has rejected an unsolicited buyout offer worth $48 billion from Energy Transfer Equity, but has hired banks to explore alternatives, including a merger, a sale of the company or simply continuing on its current path. Williams said the $64/share bid, a 33% premium to Friday’s closing price, “significantly undervalued” the company and would not deliver value commensurate with what it “expects to achieve on a standalone basis.”

Sequential Brands Group has reached a deal to acquire Martha Stewart Living Omnimedia for $353 million. The deal marks the end of Martha Stewart’s run as an independent company. (It went public in a 1999 IPO.) In recent years, it has suffered from sagging sales related to its core publishing business, as licensing and merchandising emerged as the company’s prime driver.

Over the last year, Facebook’s stock has jumped roughly 30% as the broader S&P 500 has barely managed to keep its head above water. The climb has added more than $65 billion to Facebook’s market value, and it is now bigger than Walmart. Market cap leapfrogging like this happens all the time. But this one might feel particularly ridiculous to many. If we size up Facebook and Walmart, there’s no contest as to which one has the larger economic footprint. By revenue, Walmart is the largest company in the world, with annual sales clocked in at $476 billion last year. Facebook recorded revenue of roughly $12.5 billion, bringing its market cap to more than $236 billion, just above Walmart’s $235 billion.

It represents a shift in the economy, from brick and mortar and industrial to technology. Of the 5 largest US companies in terms of market cap, 3 are tech companies; in order: Apple, Microsoft, Exxon Mobile, Berkshire Hathaway, and Google. The information sector’s share of economic output has stayed remarkably flat, at about 5% of GDP in 2014, roughly where it was in 1997. This is largely because GDP, the benchmark measure of “the economy”, is calculated by adding up monetary transactions. So while Facebook’s advertising sales contribute to GDP, the millions of users logging on for free each day don’t register at all. (The same goes for Google searches and visits to Wikipedia.) That benefit is what’s known as a “consumer surplus,” a benefit to well-being that’s not captured in traditional economic statistics.

Apple is about to launch a new $9.99 monthly music subscription service, Apple Music, on June 30, and to get folks to try it out, Apple will offer free three-month trial subscriptions. At the same time, Apple has told musicians it won’t pay royalties during this period because no money is coming in. At least that was the deal until Taylor Swift stepped up. Swift wrote a blog to Apple, saying: “We don’t ask you for free iPhones. Please don’t ask us to provide you with our music for no compensation.” Apple changed its tune and now says it will pay artists during the free three-month trial.