Morning in Arizona

Morning in Arizona

The Headline Animator

Thursday, May 26, 2016

Java for All

Financial Review

Java for All

DOW – 23 = 17,828
SPX – 0.44 = 2090
NAS + 6 = 4901
10 Y – .05 = 1.82%
OIL – .23 = 49.33
GOLD – 4.50 = 1220.50

The National Association of Realtors said its pending home sales index, based on contracts signed last month, increased 5.1 percent to 116.3, a level not seen since February 2006. Contracts rose in three of the nation’s four regions, with the West reporting an 11.4 percent jump.

Orders for durable or long-lasting goods made in the U.S. jumped 3.4% in April but a key measure of business investment fell again. The increase in new orders last month was powered by a spike in demand for commercial planes. Those orders accounted for 85% of the increase in April bookings.

Typically, large planes are built or delivered five years after they are ordered. Orders for new autos and parts also rose nearly 3%. Stripping out transportation, durable-goods orders increased a modest 0.4% in April after a 0.1% advance in March.

In April, orders for a category known as core capital goods that’s viewed as a proxy for business investment declined 0.8%. They’ve fallen in five of the past six months. While much of the slowdown does seem limited to the oil and gas industry there isn’t much in today’s report that shows investment in other business sectors.

The number of Americans filing for unemployment benefits fell last week, moving back to near cycle lows. Initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 268,000 for the week ended May 21. Claims for the prior week were not revised. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,750 to 278,500 last week.

Claim levels are at 40 year lows, with the normal range around 350,000 weekly initial unemployment claims of levels seen historically during times of economic expansion. The rolling averages generally have been equal to or under 300,000 since August 2014.

WTI crude popped through the $50 a barrel level this morning. Prices are now up about 80% from February, when they hit a 12-year low. The latest bullish news was a greater-than-expected inventory build reported by the EIA yesterday. Producers inside of OPEC – Iran in particular – are set to increase output, and wildfire-related Canadian production declines are coming to an end.

St. Louis Fed president James Bullard says inflation could be on the rise. “In short, labor markets are relatively tight,” Bullard said while speaking in Singapore. “This may put upward pressure on inflation going forward.” Bullard noted that market expectations remained misaligned with the Fed’s projections.

Also today, Federal Reserve Governor Jerome Powell laid out a clear argument for raising interest rates while stressing that global risks, including the Brexit vote in the week following the next meeting of the U.S. central bank, meant there was no reason “to be in a hurry.” Powell said a rate hike might be appropriate fairly soon and any hikes should be gradual.

Federal Reserve Chair Janet Yellen is due to speak tomorrow, just a bit before the bond market closes for the holiday weekend. Yellen could use the appearance to signal that the Fed’s meeting next month is in play, or she might not mention rate hikes. Stay tuned.

Of course, the Fed has 2 mandates: maximum employment and price stability. On the employment front they are close, with the unemployment rate at 5%; there is still plenty of slack and much more room for wage growth – but close.

On the price stability mandate, the Fed’s biggest concern is likely oil prices, which are up significantly from February, and will impact almost all other parts of inflation throughout the economy. The Fed does not control oil prices, but they might not have to. Higher prices could encourage more producers to turn up output, particularly the more cost-sensitive U.S. shale producers, and present the world with another wave of oversupply.

Japan’s prime minister is warning of another “Lehman-scale crisis.” Speaking at the G-7, Japanese Prime Minister Shinzo Abe compared the current situation to the global financial crisis of 2008-2009. Abe noted the 55% drop in commodities prices since 2014 and said fiscal spending was necessary to combat a global slowdown. Abe presented data showing global commodities prices fell 55 percent from June 2014 to January 2016, the same margin as from July 2008 to February 2009, after the Lehman collapse. The summit is set to conclude Friday.

Bayer might receive financing from the ECB to help fund its possible takeover of Monsanto, according to a Reuters analysis of the terms of the ECB’s bond-buying program. The ECB can buy bonds issued by companies that are based in the euro area, have an investment-grade rating and are not banks, provided that they are denominated in euros and meet certain technical requirements. The ECB bond buying program is running out of sovereign debt and now they are looking around new sources. While the purpose for the bonds is not among the criteria set by the ECB, the bank will start buying corporate paper on the market and directly from issuers next month.

The jury is in and Google has won a $9 billion battle, killing Oracle’s claim to Google’s Android phone business. Oracle contended that Google needed a license to use its Java programming language to develop Android, the operating system in 80 percent of the world’s mobile devices. Jurors in San Francisco federal court rejected that argument and concluded Google made fair use of the code under copyright law.

A decision against Google had the potential to give significantly more weight to software copyrights, and could have resulted in lawsuits against any number of startups. Oracle started the trial at an advantage; Oracle won a 2012 verdict that Google infringed its copyrights, but that jury couldn’t agree whether it was justified under the fair use legal doctrine. Google claimed it was within its rights to use the organization and labeling of the Java code to develop Android because programmers were already familiar with them. Google’s message was that Oracle shouldn’t own programmers simply because they had taken the time to learn Java.

Microsoft and Facebook have announced plans to build the highest capacity data link between the US and Europe. The subsea cable will run 6,600 kilometers between Virginia in the US and Spain with an expected capacity of some 160 terabytes per second of data. The project will be managed by Spanish telecommunications firm Telefonica, which will sell any unused capacity on the cable to other customers.

Tech companies typically have to pay telecommunications firms to use their cables, which can be costly. And the large amounts of data moving across those lines can make them slower. It is not the first subsea cable to be sponsored by a tech company. In 2014 Google paired up with five telecommunications firms to build a subsea cable across the Pacific Ocean. Construction starts in August and will take over one year to complete.

French workers are protesting labor law reforms. The 35-hour week remains in place, but as an average. Firms can negotiate with local trade unions on more or fewer hours from week to week, up to a maximum of 46 hours. Firms are given greater freedom to reduce pay. The law eases conditions for laying off workers, strongly regulated in France. Employers given more leeway to negotiate holidays and special leave, such as maternity or for getting married. These are currently also heavily regulated.

So, French workers are protesting; it started with oil refinery workers; now one-third of France’s 12,000 gas stations are dry. Demand is three times normal levels because of panic buying. Electricity workers have joined in the strike. France’s largest power company has reduced nuclear power output by more than 5,000 megawatts, roughly 10% of demand. Flights at major French airports have been delayed or cancelled. Train service has been curtailed.

Here in the US we have our own problems with transportation. Airport screening delays have caused more than 70,000 American Airlines customers and 40,000 checked bags to miss their flights this year, and that’s just American Airlines. The delays have several causes, including cheaper airfare driving record numbers of travelers to the skies and a miscalculation on part of the TSA concerning the number of travelers who would sign up for a pre-clearance program.

The airlines, too, may have a hand in what’s happening, as travelers opt to carry their bags on flights rather than check them in order to avoid fees. Lawmakers have authorized the TSA to take steps to deal with the influx of flyers, but it remains to be seen if the agency can react quickly enough to accommodate what is expected to be a record number of passengers this summer.

The $34 million that Congress just sent over to the TSA to use for overtime to boost staffing wouldn’t cover the combined salaries of three major airline executives at Delta, United and American. The airlines say the problem is not baggage fees. But really, the only way to prove that is to drop the baggage fees and see what happens. At least then, if the lines are still long, the people in the lines might not be so cranky.

We’ve all heard the stories of the massive recalls of Takata air bag inflators, the largest-ever U.S. safety recall. You may be wondering how Takata can stay in business; it seems Takata is wondering the same thing. Takata named an outside committee in February to lead an overhaul and they hired investment bank Lazard to counsel on the financial restructuring. Takata is in bailout talks with a number of potential investors including private equity firm KKR, which might take a 60 percent stake. I don’t know why they would want a 60 percent stake in Takata.

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