Morning in Arizona

Morning in Arizona

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Wednesday, May 11, 2016

Unsavory Business Model

Financial Review

Unsavory Business Model


DOW – 217 = 17,711
SPX- 19 = 2064
NAS – 49 = 4760
10 Y – .02 = 1.74%
OIL + 1.57 = 46.23
GOLD + 11.40 = 1277.70

The Dow Jones industrial average had its worst day since Feb. 11. The S&P 500 closed 0.96 percent lower for its worst day since April 7. Consumer discretionary led nine sectors lower. Oil turned higher and extended gains to close at a high for the year after the EIA’s weekly inventory report showed a decline of 3.4 million barrels, versus expectations of a slight build. Yesterday, the American Petroleum Institute reported a 3.4 million-barrel increase in crude inventories for the week; so, really, take your pick.

A federal judge has blocked Staples acquisition of Office Depot after a judge agreed to the Federal Trade Commission’s request for a preliminary injunction on antitrust grounds. The FTC said the proposed merger would likely eliminate competition. The same result occurred when Office Depot and Staples sought to combine in 1997. Staples will now pay a $250 million break-up fee to its smaller rival for terminating the transaction.

The U.S. government posted a $106 billion budget surplus in April, down 32 percent from the same period last year.

The International Monetary Fund has published a new research paper that says public sector corruption siphons $1.5 trillion to $2 trillion annually from the global economy in bribes and costs far more in stunted economic growth, lost tax revenues and sustained poverty. Extrapolating from 2005 World Bank research, the paper estimated that around 2 percent of global gross domestic product is now paid in bribes annually. But it said corruption’s indirect costs are substantially higher, reducing government revenues by encouraging tax evasion and reducing incentives to pay taxes, leaving less money available for public investments in infrastructure, health care and education.

On Monday, the International Consortium of Investigative Journalists posted online its database of documents related to more than 200,000 offshore accounts created through Panamanian law firm Mossack Fonseca. You can read and search through the database at your leisure at offshoreleaks.icij.org. On Monday, 300 economists signed a letter urging world leaders to end tax havens, saying they only benefited rich individuals and multinational corporations, while boosting inequality. Which is probably true, yet not quite complete. What we are also learning from the Panama Papers is that offshore accounts are a business model for the financial system. It is a core business for global financial institutions.

Tax evasion by wealthy individuals is only a small part of the story. Legal tax avoidance is almost certainly more important. Most of that involves companies; some companies designed to hide the activities of individuals or families, and also large global corporations.

And while it might be impossible at this time to measure the exact amount of evasion and avoidance, we could look at the gross global output and then the amount the financial sector claims in profits, and then try to extrapolate how much of that comes from  tax evasion and avoidance schemes; and don’t forget the manipulation of currency exchanges, and interest rate exchanges, and bond markets and equity markets and commodity markets and derivatives markets, and well… all the other markets that banks have admitted to rigging.

Add it all up and it might total hundreds of billions a year; if we add in the bribery and corruption the IMF calculates (and that should be added in because that money ends up in banks), then we are looking at trillions of dollars a year.

There has been an explosion in financial sector activity and profits in the past 40 years or so, and the bankers claim that it is: “driven by the benefits of a more efficient allocation of capital by rational markets” but a more realistic interpretation is that growth has been driven by an unsavory system that turns a blind eye to a socially counter-productive business model.

As the Puerto Rican debt crisis continues to unfold, mutual fund managers have been busy trimming their holdings to reduce exposure to the commonwealth’s crisis. Over the past year, the number of funds with exposure to the island has been pared to 29 – out of a pool of 562 municipal bond funds – from as many as 48 in June 2015, according to data from Morningstar. Total dollar exposure has been cut as well, from about $9.9 billion last summer to $6.3 billion now.

Pacific Investment Management Co.’s Total Return Fund cut its holdings of emerging-market debt to the lowest level in almost two years in April. Emerging bonds fell to 9.4 percent of assets, the smallest proportion since August 2014, and down from as much as 29 percent in August 2015.

An impeachment vote on Dilma Rousseff. After months of wrangling, the Brazilian senate will vote on whether or not to impeach the country’s embattled president. National media polls show she’s likely to lose and face trial on charges she broke national budget laws. Today could effectively be her last on the job. The Brazilian newspaper O Estado de S.Paulo says President Dilma Rousseff has packed up all her personal belongings at her office and had them sent to the official presidential residence. Brazil’s highest court says it has rejected an appeal to halt the impeachment process in the Senate. An impeachment vote is expected any time now, like in the next few minutes.

Canadian oil sands companies near Fort McMurray are beginning to restart their operations, as the out-of-control wildfire continues to rage but has now moved far enough away from the oil sands’ sites to allow them to return. Royal Dutch Shell is the first firm to turn on its operations, resuming production at its Albian mine. Before Shell’s restart, the total decline to output in the area reportedly reached at least 839,000-barrels per day, or close to one-third of Canada’s overall daily production.

Department store operator Macy’s reported a 7.4 percent fall in first-quarter sales, the fifth straight quarter of decline, as customers cut back on buying apparel.

 Hershey, the chocolate candy maker, reported a drop in net sales for the third quarter in a row, hurt by weak demand in North America, the chocolate maker’s biggest market.

DuPont’s first-quarter results beat Wall Street estimates and the chemicals and seed producer raised its full-year guidance as it sees lower currency impact than expected. DuPont and Dow Chemical agreed in December last year to a $130 billion all-stock merger, in a first step towards breaking up into three separate businesses; that deal faces intense regulatory scrutiny.

Hit by a sharp appreciation in the yen, Toyota is predicting net income to drop 35% to $13billion for the fiscal year ending in March, snapping three straight years of record profit. Toyota also stated it would repurchase as much as $4.6 billion, or about 3.2%, of its stock.

Chipotle Mexican Grill has spent more than $1 billion on share buybacks in the past year, part of efforts to cope with a food-safety crisis and a flagging stock price. But the move has raised questions about whether the money would be better spent elsewhere. The cost of the repurchases is roughly twice the cash Chipotle’s restaurants generated in the same period. Meanwhile, Chipotle has retained two leading food safety experts – including a critic of the burrito chain’s early response to disease outbreaks last year – as it redoubles its efforts to guard against health scares.

Walmart has filed a lawsuit against Visa for allowing customers to verify chip-enabled debit card transactions with a signature instead of a PIN. The lawsuit says that Visa requires Walmart to accept signature-based transactions for chip debit cards, which Walmart says are a less secure method of payment than PIN-based payments. The dispute is really about money: Wal-Mart pays Visa about five cents more per signature transaction than it does for those that use a PIN. The two have tangled frequently in different lawsuits over the last several years.

Mitsubishi Motors now says that cheating on gas mileage ratings on its cars extends to nine models sold in Japan and others that are no longer sold, vastly increasing the scope of the scandal. That encompasses virtually all the models it sold in its home country. They insist that the scandal does not involve cars sold in the US. Mitsubishi has not disclosed a plan yet to compensate customers. Mitsubishi is only the latest automaker to become enmeshed in controversy over its gas-mileage ratings. In the US, Hyundai, Kia and Ford had to revise gas mileage figures on some models in recent years after their rating methods were called into question.

Google will no longer accept ads for payday loans. Google defines payday loans as loans due within 60 days of being issued and in the U.S. loans with an annual interest rate of 36% or higher. Payday lenders will no longer be able to purchase ads that appear above search results for key terms under Google’s AdWords program. But they will still appear in search results.

The change does not rein in companies marketing loans for mortgage, student, car and commercial loans as well as credit card offers. The ban, which takes effect on July 13, comes ahead of stricter regulations from the Consumer Financial Protection Bureau. Facebook officially banned payday loans last August. Payday lenders and their lobbyists complain the move is discriminatory, but we know that there is a special place in hell for usurers.

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