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Monday, February 29, 2016

The Vultures Eat

Financial Review

The Vultures Eat

DOW – 123 = 16,516
SPX – 15 = 1932
NAS – 32 = 4557
10 Y – .02 = 1.74%
OIL + 1.12 = 33.90
GOLD + 16.50 = 1239.30

If you missed the past month, you might think things were calm on Wall Street for the month of February. For the month, the Dow rose 0.3 percent, the S&P 500 lost 0.4 percent and the Nasdaq lost 1.2 percent. This marks the first time since 2011 that major indexes posted three consecutive monthly declines.

Chinese shares closed at one-month lows. China cut the amount of cash banks must hold as reserves for the fifth time since last February. The yuan hit a three-week low. China expects to lay off 1.8 million coal and steel workers. 

A weekend meeting of G20 finance chiefs ended without a plan to spur global growth. The G20 issued a statement which basically said the global economy is not as bad as the doomsayers think. G20 finance ministers agreed to use “all policy tools – monetary, fiscal and structural – individually and collectively” to reach the group’s economic goals; but there was no plan for coordinated stimulus.

Participants also repeated previous pledges not to engage in competitive currency devaluations and promised to “consult closely” on exchange markets. Those pledges might not last long, and the Euro Union might be the first to crank up the printing press.

The inflation picture in the Eurozone further deteriorated in February, giving ECB policymakers more bad news to digest just a week before their next meeting. Consumer prices in the 19-nation bloc declined to -0.2% from a positive reading of 0.3% in January, displaying its worst figure in the last year.

Core inflation, which strips out volatile elements such as food and energy, was at 0.7%, down from 1% in the prior month. The deflationary reading in Europe has pushed German yields into negative territory out to nine years.

When the European Central Bank last discussed interest rates in January, Mario Draghi made clear the ECB would pump out more money in March if necessary. He cited a deteriorating outlook for the economy due to uncertainty about global growth, volatile markets and geopolitical risks.

Since then, Japan has introduced negative interest rates to boost an economy that is now shrinking again, and China has told its banks they’re free to lend more cash in the hope of supporting growth. And Britain is gearing up for a vote on whether to leave the EU. At the very least look for the ECB to increase bond purchases.

American and European officials are set to release details about the new trans-Atlantic data-sharing deal that would allow companies to move people’s digital information between the two regions. While the agreement was completed in early February, policy makers will now outline how the new structure will operate in practice. Some disagreement remains, however, regarding the level of protection people should be given over their digital privacy.

The Pentagon is seeking $35 billion through 2021 for cyber-security, in part to beef up offensive military capabilities such as those deployed in newly disclosed operations against Islamic State. The proposed budget would bankroll the Pentagon’s U.S. Cyber Command and its new Cyber Mission Force to assist regional commanders with tools to conduct defensive and offensive operations in their own areas as needed. Who knows, maybe they can hire someone to hack an iPhone.

The National Association of Realtors monthly gauge of pending home sales fell to 106.0 from an upwardly-revised 108.7 in December. It was the 17th straight month in which the index has been higher compared to a year ago, but that gain was only 1.4% in January – and it was a drop from December. The index tracks real estate transactions in which a sales contract has been signed, but the deal has not yet closed.

The median annual household income was $57,173, a gain of $424, or 0.7%, from November.  Incomes are now up 0.4% from where they stood in January 2000—the month that Sentier Research began tracking this data. Before you start thinking everybody got a raise, the data is adjusted for inflation, so volatility in fuel prices can weigh heavily on results.

Another month of volatility for the Chicago PMI which lurched from solid expansion in January to noticeable contraction in February. Today’s report came in at 47.6; any reading below 50 indicates contraction, and confirms other early indications of February softness, not only for manufacturing but for services as well since this report tracks both sectors.

The good news in the report is that new orders have held over breakeven 50 which hints at better readings in next month’s report. Now the bad news. Production is down sharply, backlogs are in a 13th month of straight contraction, employment is down and in a fifth month of contraction, and prices paid are contracting at the fastest pace since 2009.

The big event on this week’s economic calendar is the Friday jobs report. January managed to show a net gain of 151,000 jobs, and February is estimated to come in around 190,000, with a little luck.

Berkshire Hathaway profit hit a record. The Warren Buffett-led conglomerate announced earnings of $3,333 a share, easily beating the $2,529 that was expected by the Bloomberg consensus. Profits surged 32% to a record $5.48 billion. In his letter to shareholders, Buffett noted that Burlington Norther Santa Fe railroad “dramatically improved” after a bad 2014. Additionally, Buffett said the company bought more of its big four investments (American Express, Coca-Cola, IBM, and Wells Fargo) over the past year.

Warren Buffett thinks the gloom is overdone, however, saying politicians are “dead wrong” on the U.S. economy. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” In his closely watched annual letter to investors, Buffett also defended his ties to 3G capital and Clayton Homes, and revisited Berkshire’s biggest takeover ever – Precision Castparts. Buffett reduced Berkshire’s bond portfolio for a sixth straight year, saying bonds should come with a warning label. Missing topics: No mention of a successor, the slump in commodity prices or recent market volatility.

Fifteen years ago Argentina defaulted on its sovereign debt. A couple of years later the vulture funds swooped in and bought some that debt for pennies on the dollar, or peso. During the 15-year legal battle creditors have attempted to embargo everything from Navy frigates to satellite launches to claw back the money a New York court said they were owed from defaulted bonds.

The alpha vulture was Paul Singer of Elliott Management, who demanded full face value on the debt. He won’t get it, but as of today, it looks like he will get 75% of the face value. Argentina will pay out $4.6 billion, and then be allowed to re-enter the international debt market again; they will issue $15 billion in new bonds, part of which will be used to pay off the old debt. Better luck this time.

The European Commission has cleared Dell’s planned $67 billion acquisition of data storage company EMC Corp. Dell unveiled the deal in October last year, the largest ever in the technology industry sector, and designed to enable it to better challenge rivals Cisco Systems, IBM, and Hewlett-Packard in cloud computing, mobility and cyber security.

Citigroup has received a subpoena in connection with the FIFA bribery scandal, making it the first major U.S. bank to disclose a link to probes involving soccer’s governing body. The summons came from the U.S. Attorney for the Eastern District of New York, asking about the lender’s connection to “certain individuals and entities identified as having had involvement with the alleged corrupt conduct.”

Anti-money laundering laws require banks to alert authorities about shady transactions like the ones at the heart of the FIFA scandal. Authorities allege senior FIFA officials used various U.S. banks, including: Citi, JPMorgan Chase and Bank of America to transfer and receive $150 million in bribes and kickbacks.

Taser International reported better-than-expected earnings as its fast-growing body-worn camera hardware and data business notched sharp gains. Over all, Taser’s profit edged up slightly from a year ago to $5.1 million. Its earnings per share remained flat at 9 cents. Sales rose 20% to $56 million.

Amazon is stepping into the British fresh food market after striking a supply deal with grocer Morrisons. Britain’s fourth largest supermarket said the deal would allow Amazon Prime Now and Amazon Pantry customers access to Morrisons’ fresh and frozen products in the coming months. Amazon previously launched a U.K. packaged groceries service in November, but it stopped short of replicating its broader U.S. Amazon Fresh service, which offers about 20,000 items from local shops.

Starbucks is finally ready to take its Americanized version of Italian coffees back to Italy, with its first outlet set to open in early 2017. It’s a symbolic move for CEO Howard Schultz. On a business trip in the 1980s, he visited Milan and Verona and decided to bring espresso drinks to the U.S., eventually forming the world’s biggest coffee chain. The statement from Schultz said: “We’re going to try, with great humility and respect, to share what we’ve been doing and what we’ve learned.”

Whiting Petroleum, the largest oil producer in North Dakota, has announced that it will suspend all fracking in the state and cut its budget for this year by 80 percent. Whiting said it will stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance. Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows.

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