Financial Review

Wisdom of Solomon

Sinclair Noe — June 15, 2015

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DOW – 107 = 17,791
SPX – 9 = 2084
NAS – 21 = 5029
10 YR YLD – .03 = 2.36%
OIL – .44 = 59.52
GOLD + 4.90 = 1187.20
SILV + .12 = 16.17

Debt discussions between Greece and its European creditors collapsed last night; talks broke down after just 45 minutes. It is believed that Greece has until the eurogroup meeting on Thursday to agree on a deal or the risk of default grows enormously. It takes time for any deal to pass through parliaments and therefore any deal beyond 18 June meeting may delay payments being made to Greece to beyond the end of the month.

The other key event this week is the Fed FOMC meeting and while few people now anticipate a rate hike at Wednesday’s meeting, there could be hints that it will come in September which could spark further volatility in the markets. Despite a slow start to the year, the data is improving and we’re now seeing rising wages and spending which is necessary if inflation is going to reach the Fed’s target within the forecasting period. This month’s decision will also be accompanied by a press conference with Chair Janet Yellen; if nothing else, that means Yellen has a good opportunity to float some trial balloons.

The reality is that growth has been tepid despite unprecedented monetary easing and years of Zero Interest Rate Policy. There has been progress in the labor market; the economy adds jobs but wage growth has been stagnant and the labor participation rate has been near historic lows. There are certainly reasons for the Fed to remain cautious but there are also many policymakers desperate to raise rates because they are afraid of another financial bubble; and bubbles always pop eventually, and they want to make sure they can respond; which is difficult with rates near zero.

So far this year, bonds, commodities, and emerging markets have seen increasing volatility even as the major US stock indices have been trading in a very tight range. Something has to give; money either positions for further gains in US stocks or money moves out of stocks, either to the sidelines or to some other areas of the market. We should get some further ideas on where the money is going following the Fed’s meeting on Wednesday.

Industrial output sank 0.2% in May. Compared to 12 months ago, industrial production was up 1.4%, compared to 4.8% growth as recently as November. Since November it has been all downhill. The six-month drop in output, adjusted for inflation, puts the sector in a technical recession.

Saudi Arabia’s $560 billion stock market opened to foreigners today, giving international investors direct access to the Middle East’s largest economy for the first time. Some restrictions on trading will still apply: Foreign investors must have a minimum of $5 billion in assets under management, at least five years of trading experience, and will only be able to own 49% of a single stock.

Remember the Umbrella Revolution? Hong Kong is gearing up for a vote this week on a contentious electoral reform package backed by Beijing, with a weekend poll showing public support has shifted against the proposal. Police are not taking any chances this time around, setting up patrols and barriers, following the sometimes violent clashes during demonstrations last year against the package. More than 100,000 people took to the streets during the height of the protests, bringing key areas of the city to a standstill and taking a heavy toll on GDP.

Stocks with primary listings in China are now valued at just over $10 trillion, an increase of $6.7 trillion in the past 12 months. Many consider the heavy expansion as worrisome. No other stock market has grown as much in dollar terms over a 12-month period; valuations are now their greatest in five years and margin debt has climbed to record highs, all while the economy is mired in its weakest expansion since 1990. Putting it into perspective: The size of Japan’s stock market is $5 trillion. The U.S. market is valued at almost $25 trillion.

Homebuilders are feeling more confident about their sales prospects than they have since last fall, while their outlook for sales over the next six months is at the highest level in 10 years. The National Association of Home Builders/Wells Fargo builder sentiment index climbed to 59 this month, up five points from 54 in May.

California-based homebuilders Standard Pacific and Ryland Group have announced plans to merge, creating the fourth-largest U.S. home builder with a market cap of $5.2 billion. Upon closing of the deal, Standard Pacific stockholders will own about 59% of the combined company.

Cox Automotive announced it would buy Dealertrack Technologies for $4 billion in cash. Dealertrack provides web-based software and services to the automotive industry, including dealers, lenders and vehicle manufacturers. Its products include the industry’s largest online credit application network. Cox Automotive provides digital marketing and software for consumers, auto dealers and manufacturers. Its properties include Autotrader.com and Kelley Blue Book.

The Hudson’s Bay Company, the Canadian owner of Saks Fifth Avenue and Lord & Taylor, has agreed to acquire the Galeria Kaufhof department store chain in Germany and its Belgian subsidiary from the Metro Group for $3.2 billion, including debt.

CVS Health will pay $1.9 billion to buy Target’s pharmacies and clinics, expanding its reach by adding stores bearing its name inside the Target stores. CVS, which already has 7,800 drugstores, will acquire Target’s more than 1,660 pharmacies across 47 states, renaming them as CVS/pharmacy.

Putting a timeline on its helicopter exit, United Technologies has announced it will decide on spinning off or selling its Sikorsky Aircraft business by the end of the third quarter.

The Paris Air Show is underway. Boeing and Airbus are poised to win at least 220 orders, with a value of $23 billion, for competing narrow-body jets. Last week, Boeing raised its 20-year outlook by about 1,000 jet deliveries to 38,000 planes valued at $5.6 trillion.

North America’s largest video game trade show, the Electronic Entertainment Expo, opens a three-day run at the Los Angeles Convention Center on Tuesday, and you can go. E3, as it’s known, typically attracts more than 40,000 industry-only attendees. For the first time, the event is opening the show to 5,000 members of the public. The gaming industry pulled down about $11 billion in 2011; this year it will be closer to about $120 billion; which means that video games are bigger than Hollywood and the music industry. And gaming is about to get much bigger with 3-D virtual reality headsets making a big buzz this year.

The record $9 billion fine levied against BNP Paribas is presenting US authorities with novel legal questions, after morphing into a fight over whether terrorism victims should get any of the money. BNP pleaded guilty to violating sanctions in June 2014 by funneling billions of dollars through the US financial system for clients in Sudan, Iran and Cuba. Now, a group of terrorism victims is asking the DOJ to compensate them with funds from the BNP settlement, attempting to draw a connection between the French bank’s misconduct and terrorist acts overseas.

Back in 2008 the government provided bailout money to several faltering financial institutions, including the trading unit of AIG. The government demanded a 79.9% equity stake in the financial-services conglomerate in exchange for providing an $85 billion loan at an initial 14.5% interest rate. At the time, U.S. officials said the government acted because AIG was so entangled with other firms around the world that they feared its collapse would be catastrophic to the global financial system. Hank Greenberg, the former AIG chief felt the terms of the bailout were unfair and a bit harsh. He sued. At the center of the case is a dispute about the breadth of the Federal Reserve’s powers, and the limits on its discretion. Today a federal judge issued a ruling saying that AIG was treated unfairly and the government exceeded its authority. And then, with the Wisdom of Solomon, the judge decided that Greenberg would not get any money, because he is just such an ungrateful cuss.

U.S. authorities are also examining payments made by Nike under a 1996 soccer sponsorship with Brazil for possible evidence of wrongdoing by the company or others. Nike has not yet been formally named or charged with any wrongdoing, but allegations of corruption around its $160 million deal are discussed in the Justice Department’s 161-page indictment of FIFA officials.

At some time or another, you’ve probably been to a drive-in teller at the bank and used one of those cylindrical canisters to make a transaction; you put your things in the canister, put the canister in a tube, and it is whisked away with air pressure to the teller. Yea, you don’t see those much anymore, probably because the canisters could become jammed, especially if someone put a bunch of coins in it, which would weigh it down. Anyway, Elon Musk thinks those things are way cool. Elon Musk is the guy behind Tesla electric cars and Space X, the private rocket company. He’s proposing building a big version, he calls it a Hyperloop, and he thinks this might be a way to transport people from city to city.

In a nutshell, Hyperloop involves blasting pods down pressurized tubes at extremely high speeds. In the most popular example given, the transportation would get you from San Francisco to Los Angeles in 30 minutes. Musk has said that he’s not going to build the Hyperloop himself, but has expressed interest in helping the technology along. Most recently he said that he would fund the construction of a test track to illustrate the technology. And today, Musk announced Space X will build a test track near Hawthorne California and he also announced a competition for someone to design a Hyperloop pod. We don’t know what you win, but good luck.