Financial Review

Waiting on the Fed

Sinclair Noe — March 15, 2016

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DOW + 22 = 17,251
SPX – 3 = 2015
NAS – 21 = 4728
10 Y – .02 = 1.96%
OIL – .84 = 36.34
GOLD – 3.20 = 1232.80

Retail sales dipped 0.1 percent last month as automobile purchases fell and cheaper gasoline undercut receipts at service stations. January’s retail sales were revised down to show a 0.4 percent decline instead of the previously reported 0.2 percent increase. Retail sales excluding automobiles, gasoline, building materials and food services were unchanged after a downward revised 0.2 percent increase in January.

Last month’s weak core retail sales reading, together with January’s modest gain, suggest that consumer spending will probably remain tepid in the first quarter after growing at a 2.0 percent annualized rate in the fourth quarter.

Cheaper gas played a big part in weak retail sales in the first two months of the year and that’s a good thing. Car sales dropped 0.2% last month after a small decline in the first month of the year. The disparity indicates that dealers used sharp discounts to lure buyers to keep sales steady. Only restaurants, building-supply stores and sellers of sporting goods and hobby items posted 1% or more increases in sales.

In a separate report, the Labor Department said its producer price index dropped 0.2 percent last month on lower energy and food costs, after edging up 0.1 percent in January. In the 12 months through February, the PPI was unchanged after falling 0.2 percent in the year through January. It was the first time since January 2015 that the year-on-year PPI did not decline. Excluding the volatile categories of food, energy and trade, core prices edged up 0.1% in February.

With the dollar losing some momentum after gaining 20 percent against the currencies of the United States’ main trading partners between June 2014 and December 2015, imported deflation is starting to wane. That could curb further declines in producer prices.

The National Association of Home Builders housing market index came in unchanged in March at a 58 level which however remains well above break-even 50. Demand for new homes is solid but lack of available lots and shortages in construction labor are holding back growth. Buyer traffic hints at the drawing power of low mortgage rates and speaks to the strength of the labor market. But there hasn’t been much acceleration in housing nor is any expected in tomorrow’s permits data. The housing sector, which was billed as a strength for 2016, has yet to build any momentum this year.

The reports came as Federal Reserve officials gathered for a two-day policy meeting. The U.S. central bank is expected to leave interest rates unchanged as policymakers monitor developments on global financial markets, domestic inflation and the labor market. Tomorrow afternoon the Fed will wrap up its FOMC meeting and they will release a policy statement, updated economic projections including an interest rate “dot plot,” and Fed Chairwoman Janet Yellen will hold a press conference.

Best guess is that the Fed will signal that the economy has improved and they will try to prepare the markets for a rate hike in the very near future. The Fed should go very slowly here, though, not only because of the market gyrations that followed its first rate hike, but because there are some real signs that the Fed’s years-long effort to help the labor markets are starting to take root in a meaningful way—and it would be a pity to jeopardize this. For instance, labor force participation has shown a surprising uptick in recent months as people are being drawn back to work.

These gains could be a blip. Or they could be the start of a very good thing. And the Fed should see how much further it can go in order to pull people back to work. After all, if the economy depends on consumers to consume, today’s retail sales report was another reminder that consumers are still holding tight to a dollar; it probably wouldn’t hurt if a few more of them had jobs.

The Bank of Japan wrapped up its two-day meeting on monetary policy with no changes. The BOJ blindsided global markets on January 29 by unexpectedly announcing it will apply a negative rate to some excess reserves that financial institutions place at the bank, and they will hold those rates at negative 0.1% for a while to assess their impact. The central bank maintained its pledge to increase base money at an annual pace of $700 billion as widely expected, but clarified that money reserve funds would be excluded from the negative rates it introduced at the end of January.

Russian President Vladimir Putin has unexpectedly directed his country’s armed forces to start withdrawing from Syria, stating that “principal tasks…have been accomplished.” The two Air Force and Naval bases in Syria will stay and operate normally. Putin now believes Russia’s military intervention beginning in September helped turn the tide of war in Assad’s favor after months of gains in western Syria by rebel fighters, who were aided by foreign military supplies including U.S.-made anti-tank missiles. It stretches credulity to believe this was a unilateral and unexpected move by Russia. So, the question is – what did Putin get in return?

With its finances strained by low oil prices, Saudi Arabia is opening a fresh austerity drive by ordering ministries to cut their spending on contracts by at least 5%. The government ran a record budget deficit of nearly $100 billion last year. It is laying plans to boost non-oil revenues with taxes, but that will take years to have much impact, leaving spending cuts as the main way to bring state finances under control.

Valeant Pharmaceuticals cut its 2016 revenue forecast by about 12 percent and said a delay in filing its annual report could mean a debt default, causing its shares to plunge. Valeant, which has incurred a heavy debt load because of a string of acquisitions, is now looking to sell some non-core assets. Valeant’s old mergers and acquisitions business model is dead, customers are demanding big price cuts or not reimbursing various medicines, and the company cannot file audited financial statements.

The Canadian drug maker, the target of U.S. investigations into its business and accounting practices, reiterated that it would put off filing its annual report with U.S. regulators but for the first time raised the specter of a default. If it cannot produce audited results within 60 days, investors can then demand that Valeant repay a chunk of its debt. The company says it is trying to file as fast as it can. But at this point, nobody outside the company knows what is going on and if anything they say can be trusted. Valeant lost 51% today.

The average price of branded prescription drugs in the U.S. has doubled in the past five years, a finding that threatens to fuel political backlash against high prices. Express Scripts, the country’s largest pharmacy group, said the average wholesale price of branded medicines (which are protected by patents) rose 16% last year and was up a total of 98% since 2011.

Avon Products is cutting about 8% of its workforce, or about 2,500 jobs worldwide, as part of its three-year turnaround program. The firm also plans to shift its corporate headquarters “over time” to the UK, where it already has significant commercial operations, but will continue to be incorporated in New York. As a result of the restructuring, Avon expects to record charges of about $60 million in the first quarter.

Puedes escucharme ahora? Verizon has expanded on last fall’s offer of roaming wireless services in Cuba through a direct connection agreement with state telecom monopoly. Verizon previously had to use third parties to connect the calls, adding to costs and lowering quality. A trade embargo remains in place, but relaxed rules in telecom were allowed to benefit ordinary Cubans…, and big telecoms.

Remember GT Advanced Technologies? The Mesa Arizona based sapphire glass maker expects to emerge from Chapter 11 “as soon as possible,” after a court entered an order confirming the debtors’ amended joint plan of reorganization. GT Advanced filed for bankruptcy in October 2014 after its scratch-resistant sapphire glass was left out of Apple’s iPhone 6 and 6 plus.

Outerwall said it would begin exploring “strategic and financial alternatives” – a move that could mean either a break up or outright sale. Outerwall, which owns Redbox video rental, is bringing in Morgan Stanley to assist in the process.

Sony is acquiring the other half of Sony/ATV Music Publishing from the estate of pop star Michael Jackson for $750 million. The world’s largest music publisher has a huge catalog that holds most of the Beatles’ songs, along with those by the Rolling Stones, Bob Dylan, Queen, and Taylor Swift. In October, Sony seemed ready to sell off its half of the business – thought to be worth $2 billion overall at the time – though it would have had to give the Jackson estate a chance to counter any offers.

Almost 300 institutional investors in Germany have filed a €3.3-billion-euro suit against Volkswagen for what they see as breaches of its capital markets duty as a result of its emissions scandal. Separately, VW’s US unit is being accused by a former employee of deleting documents after it was accused of cheating on emissions tests.

According to study published today in the journal Nature Climate Change, researchers from the University of Georgia say up to 13.1 million people could be at risk from sea level rise in coastal communities in the United States by the end of this century. This, researchers say, is three times greater than previously estimated.

The researchers’ projections show that a 6-foot sea-level rise will subject more than 13 million people to flooding and other hazards from rising seas. The study looked at 2100 population forecasts for all 319 coastal counties in the continental US. They expect the hardest hit areas would include New Orleans, Miami, and New York.

FINANCIAL REVIEW

Anti-Austerity Gets Wind in Sails

Sinclair Noe — February 2, 2015

Podcast: Play in new window | Download (Duration: 12:46 — 5.8MB)

DOW + 196 = 17,361
SPX + 25 = 2020
NAS + 41 = 4676
10 YR YLD – .01 = 1.67%
OIL + 1.59 = 49.83
GOLD – 9.30 = 1274.80
SILV – .05 = 17.28

Americans cut spending in December by the largest amount since 2009; we knew spending on energy would be lower but consumers did not rush out and spend the money. Household savings from lower energy costs, were partly offset in December by higher spending on drugs, health care and housing. These expenses continue to eat up a large portion of American incomes. Incomes posted another solid gain and falling inflation is allowing Americans to get more bang for their buck. Personal spending fell a seasonally adjusted 0.3% last month. Personal income, meanwhile, rose 0.3%. Since income growth outpaced spending, the amount of money individuals save jumped to 4.9% from 4.3% to mark the highest level since midsummer.

The Commerce Department reports construction spending rose 0.4% in December to a seasonally adjusted annual rate $982.1 billion, led by public spending. Private-construction spending rose 0.1% in December, with a 0.3% increase for residential projects and a 0.2% decline for nonresidential projects. Meanwhile, public-construction spending rose 1.1% in December.
The ISM Manufacturing Report for January dropped from 55.1 to 53.5. Any reading above 50 indicates the manufacturing sector is expanding, just not as fast.

Germany’s Angela Merkel ruled out a debt writedown for Greece on Saturday, while an ECB policymaker threatened to cut off funding to Greek banks if Athens doesn’t agree to renew its bailout package. Europe’s bailout program for Greece, part of a €240B rescue package also involving the IMF, expires on Feb. 28. Greece has hired the investment company Lazard to advise on restructuring its debt, and has refused to deal with the “troika” which is pushing for continued austerity.

President Barack Obama has suggested that Greece will not be able to recover from its economic crisis unless there is a let up in austerity policies. “You cannot keep on squeezing countries that are in the midst of depression,” when CNN’s Fareed Zakaria asked him about the case of Greece. “At some point, there has to be a growth strategy in order to pay off their debts and eliminate some of their deficits.

Greek Finance Minister Yanis Varoufakis was in London today trying to win support for a writedown. Britain’s finance minister, George Osborne said Greece needs to act responsibly but that the Eurozone also has to come up with a better plan for jobs and growth. Osborne called the stand-off the “greatest risk to the global economy.”

Think about that for a moment. The Greek bailout package is €240B, and Greece would certainly pay most of that, even if they get a break. Without some sort of break, Greece might well default on everything. So the greater risk seems to be doing nothing to help the Greeks. But there is another risk.

Hundreds of thousands of people marched through Madrid Saturday in a show of strength by a fledgling leftist party, as it becomes the latest European political organization to gain widespread support for its anti-austerity stance. Podemos (‘We Can’) supporters from across Spain converged on Madrid in what was the party’s largest rally to date, as it hopes to emulate the success of Greece’s Syriza party in the Spanish general election later this year. The political party was just formed one year ago, and they are now favorites to win the election.

The anti-austerity movement is catching some wind in its sails, and with good reason; austerity does not work. Spanish unemployment is holding around 25%. Half of Spain’s unemployed no longer receive benefits, while 33 of the 35 biggest companies avoid tax through subsidiaries in tax havens. Half a million children have been plunged into poverty since 2009, but the wealth of Spain’s super-rich has increased by 67%in the past 5 years. To avoid the wrath of a fractious population the government has cracked down on the right to assemble. That did not stop hundreds of thousands of protestors over the weekend.

President Obama presented the White House budget today. At the heart of the budget is what the president calls “middle-class economics”; plans to help middle-income earners afford necessities such as education and child care and bolster their skills, and to pour federal money into building roads and bridges. To pay for such initiatives Obama has outlined a nearly $1 trillion of tax proposals that would hit the wealthy and large financial institutions over the next decade.

The budget foresees a $474 billion deficit, which is 2.5 percent of U.S. gross domestic product. The proposal includes a corporate tax overhaul, plus a 6-year, $478 billion plan to build and improve transit, roads, and bridges – paid for by imposing a one-time tax of 14% on an estimated $2.1 trillion in overseas accounts held by US corporations. The president is proposing to add $38 billion for the military and $37 billion for domestic programs under Congress’s discretion; essentially restoring the cuts made by the 2011 budget deal known as sequestration. Obama called those cuts “mindless austerity.”

The White House is assuming that inflation-adjusted economic growth will rise from 2.2 percent in 2014 to a robust 3.1 percent this year and 3 percent in 2016, and that unemployment will continue to fall, to 5.4 percent this year from the current 5.6 percent, to 5.1 percent in 2016 and to 4.9 percent in 2017 and 2018. Those assumptions would mean that the current record-breaking expansion of private sector jobs would continue well into the future.

It’s important to note that this budget is the president’s proposal—a blueprint – given to Congress to be fought over or blatantly ignored; it’s not law. So, this is first-and-foremost a political document used to outline the president’s vision and define his terms of engagement with Congress. And there are a few things Republicans should like, such as more military spending, a highway trust fund, and corporate tax reform, but the devil is in the details. Most of these measures, to use the language of the moment, will likely be “dead on arrival,” given that both the House and Senate are now under Republican control.

The chairman of the Federal Communications Commission this week is widely expected to propose regulating Internet service like a public utility to ensure so-called net neutrality, or an open Internet. It is expected that the proposal will reclassify high-speed Internet service as a telecommunications service, instead of an information service, under Title II of the Communications Act. The change would give the commission strong legal authority to ensure that no content is blocked and no so-called pay-to-play fast lanes exist. He may also suggest putting wireless data services under Title II and adding regulations for companies that manage the backbone of the Internet. However, it would likely be regulation without specific pricing control. The proposal is expected to be submitted to the agency’s commissioners by Thursday.

About 3,800 employees represented by the United Steelworkers union went on strike at plants accounting for 10% of U.S. refining capacity for a second day, after failing to agree on new labor contracts. Union workers are on strike for a second day at nine U.S. refineries and chemical plants as they seek a new national contract with oil companies covering laborers at 63 plants. The walkouts targeted plants with a combined 10 percent of U.S. refining capacity, although the plants remain open for now.

Exxon Mobil’s quarterly profit fell 21% as weak oil prices took a toll, but earnings topped Wall Street expectations due to tax benefits and a favorable arbitration ruling; revenue missed the mark. Profit in the fourth quarter fell to $6.5 billion, or $1.56 per share, from $8.3 billion, or $1.91 per share in the same quarter a year earlier. Exxon also said it will reduce its share buyback program in the first quarter by more than half to $1 billion.

RadioShack is preparing to shut down the chain in a bankruptcy deal that would see half the stores taken over by Sprint. The rest of the stores would close down. Sprint and RadioShack have also had talks about co-branding the stores. Standard General, a hedge fund and the largest investor in RadioShack, was in talks to serve as the lead bidder at a bankruptcy auction. It is also possible that another bidder could yet emerge to buy RadioShack and continue operating the 94-year-old chain.

Apple announced it will spend about $2 billion to build a new data center in Mesa, Arizona. It will be housed in buildings formerly used by GT Advanced Technologies, which went bankrupt last year after failing to supply sapphire display covers for the iPhone 6. The project will supply 300 to 500 temporary construction jobs and 150 permanent jobs, and the data center will be powered entirely by renewable energy. Apple also will invest to build and finance solar projects, which will produce enough energy to power more than 14,500 Arizona homes. Apple told Bloomberg it will be a “command center for our global networks.”