Stocks Extend Weekly Advance Despite Disappointing Data

Charles Schwab: On the Market

Posted: 7/14/2017 4:15 PM ET

Stocks Extend Weekly Advance Despite Disappointing Data

U.S. stocks added to a solid weekly advance, with technology issues leading the ascent amid some eased Fed rate hike expectations following softer-than-expected reads on retail sales and consumer sentiment and as inflation remains subdued following this week's dovish testimony by Fed Chair Yellen. An increase in Treasuries coupled with some negative reactions to mostly upbeat banking earnings reports weighed on financials. The U.S. dollar was lower, while gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) gained 85 points (0.4%) to 21,638, the S&P 500 Index advanced 11 points (0.5%) to 2,459, and the Nasdaq Composite increased 38 points (0.6%) to 6,312. In light to moderate volume, 674 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.46 to $46.54 per barrel and wholesale gasoline was $0.03 higher at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price gained $11.02 to $1,228.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 95.14. Markets gained solid ground for the week, as the DJIA increased 1.0%, S&P 500 Index advanced 1.4% and the Nasdaq Composite surged 2.6%.

Dow member JPMorgan Chase & Co. (JPM $92) reported Q2 earnings-per-share (EPS) of $1.82, above the FactSet estimate of $1.59, as revenues rose 4.5% year-over-year (y/y) to $25.5 billion, compared to the expected $25.0 billion. JPM noted a stable-to-improving global economic backdrop and a U.S. consumer that remains healthy, while saying loans and deposits continue to grow strongly but market trading revenue was down amid lower volatility and client activity. The company's net interest margin came in a bit shy of forecasts due to higher funding costs, and the company lowered its guidance for net interest income. Shares finished lower.

Citigroup Inc. (C $67) posted Q2 EPS of $1.28, topping the projected $1.21, as revenues increased 2.0% y/y to $17.9 billion, above the forecasted $17.4 billion. The company said it saw continued momentum in its businesses, with loan and revenue growth across both sides of the house. Trading revenues topped forecasts and net interest income was roughly in line with forecasts. However, shares were lower amid analyst caution regarding the outlook for net interest income for the industry.

Wells Fargo & Co. (WFC $55) achieved Q2 profits of $1.07 per share, exceeding the projected $1.01, as revenues were roughly flat y/y to $22.2 billion, versus the estimated $22.5 billion. The company noted continued modest economic growth, increased net interest income and continued improvement in credit results. However, loans were down quarter-over-quarter and its core fees missed expectations. WFC traded lower.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the financial sector as they unofficially kick off Q2 earnings season in his latest Schwab Sector Views: Christmas in July! (Status of the Consumer), on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.

Retail sales and consumer price inflation miss, along with consumer sentiment

Advance retail sales (chart) for June declined 0.2% month-over-month (m/m), compared to the Bloomberg forecast of a 0.1% gain and compared to May's favorably revised 0.1% decline. Last month's sales ex-autos declined by 0.2% m/m, versus expectations of a 0.2% gain, and following the unrevised 0.3% decrease seen in the previous month. Sales ex-autos and gas were down 0.1% m/m, compared to estimates of a 0.4% rise, and versus May's unrevised flat reading. The retail sales control group, a figure used to help calculate GDP, dipped 0.1%, compared to the projected 0.3% rise, and the prior month's figure was unrevised at a flat reading. Sales declined at restaurants, gasoline stations, as well as at grocery and department stores, while online and building materials sales were bright spots.

The Consumer Price Index (CPI) (chart) was flat m/m in June, versus estimates calling for a 0.1% gain, while May's 0.1% dip was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, compared to expectations of a 0.2% increase and versus May's unrevised 0.1% rise. Y/Y, prices were 1.6% higher for the headline rate, below forecasts of a 1.7% rise, while the core rate was up 1.7%, matching projections. May y/y figures showed an unrevised 1.9% rise and an unadjusted 1.7% increase for the headline and core rates respectively.

Industrial production (chart) was up 0.4% m/m in June, above estimates calling for a 0.3% gain, and compared to May's upwardly revised 0.1% increase. This was the fifth-straight monthly advance as manufacturing production ticked higher and mining output rose solidly, while growth in utilities was flat. Capacity utilization increased to 76.6%, compared to May's downwardly revised 76.4%, and below forecasts of 76.8%. Capacity utilization is 3.3 percentage points below its long-run average.

The preliminary University of Michigan Consumer Sentiment Index (chart) fell to the lowest level since October 2016, dropping to 93.1 in July from the prior month's 95.1 level, and compared to expectations for it to dip to 95.0. The current economic conditions component improved modestly m/m, while the expectations measure fell. The 1-year inflation forecast rose to 2.7% from 2.6%, while the 5-10 year inflation outlook also ticked higher to 2.6% from 2.5%.

Business inventories (chart) increased 0.3% m/m in May, in line with forecasts, and versus April's unrevised 0.2% decrease.

Treasuries gained ground on the data, notably the softer-than-expected inflation and retail sales data, which added to this week's dovish monetary policy testimony from Fed Chairwoman Janet Yellen to temper expectations of the pace of rate hikes this year and beyond. As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, a mixed economic picture, combined with the recent retreat in some inflation measures, has raised the level of uncertainty regarding future Federal Reserve actions. The environment for U.S. and global stocks continues to be in decent shape, but some risks are elevated and the possibility of a pullback exists. A notable potential driver of bouts of volatility could be U.S. and global central bank policy as they sail toward monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com.

The yield on the 2-year note dipped 1 basis point (bp) to 1.35%, the yield on the 10-year note dropped 2 bps to 2.32% and the 30-year bond rate was nearly unchanged at 2.91%.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front continues to garner attention, with the revised Senate healthcare bill being dissected to see if it has the potential to pass a vote and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses in his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

Europe turns mixed on data and global central bank volatility, Asia mostly higher

European equities finished mixed, with strength in oil & gas issues and basic materials being offset by gains in the euro and British pound versus the U.S. dollar, which found pressure following some disappointing U.S. retail sales and inflation data. The currencies gained ground on eased Fed rate hike expectations that followed the U.S. data and this week's dovish testimony from Fed Chair Yellen. Also, reports fostered speculation that the European Central Bank may be moving closer to scaling back its stimulus measures later this year. Financials saw some pressure as global bond yields moved lower and banking sector earnings reports in the U.S. were scrutinized. In economic news in the region, growth in EU new car registrations slowed, while the eurozone trade surplus came in below forecasts. For more on the markets, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, Where's the Next Bubble?, on the Markets & Economy page at www.schwab.com, as well as his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher, extending global market gains that have been fostered by the recent increase in crude oil prices and dovish monetary policy testimony from U.S. Fed Chair Janet Yellen, while appearing cautious ahead of key earnings reports out of the U.S. banking sector. Japanese equities ticked higher, with the yen giving back recent gains, while mainland Chinese shares also nudged to the upside. Stocks trading in Hong Kong and South Korea advanced, while Indian equities dipped and all three of these constituents have indexes that are at or near record highs and for a look at emerging markets, see Schwab's Jeffrey Kleintop's, CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the Markets & Economy page at www.schwab.com. Australian securities rose.

Stocks climb as Fed Chief strikes dovish tone

U.S. stocks participated in a global rally that was fueled by eased concerns about the pace of Fed rate hikes as the Central Bank moves toward the start of reducing its bloated balance sheet. Economic data continued to paint a mixed picture with U.S. industrial production extending a winning streak, while retail sales and consumer sentiment missed. However, the bulk of the shift in Fed sentiment came as wholesale and consumer price inflation remained subdued and as Fed Chair Janet Yellen struck a dovish tone in her semi-annual Congressional monetary policy testimony. Yellen said the fed funds rate remains somewhat below its neutral level and "because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance." Technology stocks returned to rally mode after their brief hiccup. Energy and materials issues also helped lead the way as commodity prices added to a recent rebound on another dose of upbeat Chinese economic data and as the U.S. dollar drifted lower. Crude oil prices also rallied, bolstered by some bullish oil inventory data. However, financials were noticeably lower as Treasury yields, especially on the short-to-mid end of the curve, fell, and some key banking sector quarterly results to unofficially kick off earnings season garnered a mixed reaction.

Next week, as earnings take center stage, the U.S. economic calendar will bring updates on areas of the economy that have been bright spots. Housing will dominate the docket, courtesy of the releases of the NAHB Housing Market Index, as well as housing starts and building permits. Moreover, we will get the first look at manufacturing activity—which has suggested growth has accelerated recently—for July, in the form of regional reports the Empire Manufacturing Index and Philly Fed Manufacturing Index. The week will culminate with the Index of Leading Economic Indicators, which is projected to continue to indicate further economic expansion.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her commentary, 2017 Mid-year US Equity Outlook: Rattle and Hum, stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Next week's international economic front will likely garner heightened attention with key release including: Australia—employment change. China—retail sales, industrial production, property prices and Q2 GDP. India—trade balance. Japan—trade balance and the Bank of Japan's monetary policy decision. Eurozone—consumer price inflation and the European Central Bank monetary policy decision. U.K.—inflation statistics and retail sales.

Stocks Continue to Climb

Charles Schwab: On the Market

Posted: 7/14/2016 4:15 PM ET

Stocks Continue to Climb

U.S. stocks closed nicely higher with the Dow and S&P 500 adding to all-time highs, aided by a rebound in crude oil prices and as the Bank of England unexpectedly announced no change to its official bank rate, but did hint at the possibility of looser monetary policy in August. Dow member JPMorgan Chase & Co. reported stronger-than-expected 2Q earnings, while Treasuries fell in the wake of a hotter-than-expected read on producer price inflation and the U.S. dollar was pressured by a surge in the British pound. Gold lost ground.

The Dow Jones Industrial Average (DJIA) rose 134 points (0.7%) to 18,506, the S&P 500 Index increased 11 points (0.5%) to 2,164, and the Nasdaq Composite added 28 points (0.6%) to 5,034. In moderate volume, 825 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.93 higher at $45.68 per barrel, wholesale gasoline gained $0.03 to $1.41 per gallon and the Bloomberg gold spot price decreased $8.90 to $1,333.74 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 96.12.

Dow member JPMorgan Chase & Co. (JPM $64) reported 2Q earnings-per-share (EPS) of $1.55, above the $1.42 FactSet estimate, as revenues rose 2.5% year-over-year (y/y) to $24.4 billion, exceeding the projected $24.2 billion. The company said it performed well in all of its major businesses, highlighted by broad core loan growth, particularly in mortgage and commercial real estate. JPM added that outside of energy, both wholesale and consumer credit quality remained very good. Shares gained ground. 

Delta Air Lines Inc. (DAL $41) posted 2Q EPS ex-items of $1.47, compared to the expected $1.42, with revenues declining 2.4% y/y to $10.4 billion, just below forecasts of $10.5 billion. DAL noted that the revenue environment remains challenging, with persistent headwinds from close-in domestic yields and geopolitical uncertainty. DAL closedto the upside.

Yum Brands Inc. (YUM $89) announced 2Q profits ex-items of $0.75 per share, one penny north of estimates, as revenues declined 3.0% y/y to $3.0 billion, versus the forecasted $3.1 billion. The parent of KFC, Taco Bell and Pizza Hut said its worldwide and China division same-store sales were flat y/y, both below expectations. However, YUM finished nicely higher as it raised its core operating earnings growth guidance and said its China division is off to a good start in 3Q.

CSX Corp. (CSX $29) reported 2Q EPS of $0.47, above the anticipated $0.44, with revenues declining 12.0% y/y to $2.7 billion, roughly in line with expectations. The first major rail company to report 2Q results said it continues to expect full-year earnings to decline as the strong U.S. dollar, low commodity prices and energy market transition continue to challenge financial performance. CSX traded higher. 

Bayer AG(BAYRY $103) announced that it has increased its takeover offer for Monsanto Co. (MON $104) from $122.00 to $125.00 per share in cash, valuing the company at $54.7 billion, per Bloomberg, and offered a $1.5 billion reverse antitrust break-up fee. Monsanto acknowledged receiving the revised offer and said its board will review it. MON traded higher.

Jobless claims hold, while wholesale price inflation jumps

Weekly initial jobless claims (chart) remained at 254,000 last week, versus the Bloomberg estimate of 265,000. The four-week moving average fell by 5,750 to 259,000, while continuing claims rose 32,000 to 2,149,000, north of the estimated level of 2,130,000.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in June rose 0.5% month-over-month (m/m), versus expectations of a 0.3% increase, and compared to May's unrevised 0.4% gain. The core rate, which excludes food and energy, gained 0.4% m/m, topping forecasts of a 0.1% rise, and May's unadjusted 0.3% increase. Y/Y, the headline rate was up 0.3%, versus projections of a flat reading, and the core PPI was 1.3% higher last month, exceeding estimates of a 1.0% gain. In May, producer prices dipped 0.1% and were up 1.2% y/y for the headline and core rates, respectively.

Treasuries finished lower, with the yield on the 2-year note ticking 1 basis point (bp) higher to 0.68%, the yield on the 10-year note rising 6 bps to 1.53%, and the 30-year bond rate gaining 8 bps to 2.25%. Bond yields have shown some signs of life as of late, rebounding from record lows that have come from the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the economic week will end with a flurry of key reports, as we will get June reads on retail sales and the Consumer Price Index (CPI), along with industrial production and capacity utilization. Also, the preliminary July University of Michigan Consumer Sentiment Index will be released. Retail sales are expected to rise for a third-straight month and CPI is projected to grow for a fourth-consecutive month, while industrial production and capacity utilization are estimated to rebound from the prior month's drops. Consumer sentiment is anticipated to be little changed from June's level, and the markets will likely be looking to see how much the relatively positive developments being seen in the U.S. offset the impact from the late-June U.K. Brexit vote.

As noted in the recent Schwab Market Perspective: Looking Beyond Britain, although U.S. consumer confidence has been slightly dented, we see continued supports for consumer spending, including low interest rates, higher wages, better housing data, and a healthy employment picture. If financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

Other releases on tomorrow's economic docket include: the Empire Manufacturing Index and business inventories.

Europe mostly higher despite BoE rate decision surprise, Asia adds to rally

European equities traded mostly higher, with oil & gas and basic materials stocks higher on the heels of the recent optimism in the mining sector and as crude oil prices rebounded from yesterday's drop. Moreover, Italian banking stocks, which have come under fire as of late to weigh on the financial sector in the region, rallied to help boost the markets on eased capital concerns. However, stocks finished off the best levels of the day and U.K. equities reversed to the downside after the Bank of England (BoE) unexpectedly left its benchmark interest rate unchanged at a record low of 0.50%, while Bloomberg economists had anticipated a 25 bps reduction. The BoE voted 8-1 to maintain its monetary policy stance, with the lone dissenter voting for a reduction. The British pound jumped against the U.S. dollar, but the BoE noted in its policy-meeting minutes that "most members of the committee expect monetary policy to be loosened in August." The euro gained ground on the greenback, while bond yields in the region finished mostly higher. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides  Three Reasons Why Now is Not the Time to Retreat from Global Diversificationat www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia continued the rally this week that has seen Japanese markets surge on expectations that the nation will deploy more aggressive stimulus measures. Also, global market sentiment seemingly improved, courtesy of eased Brexit and political uncertainty in the U.K., and as last week's stronger-than-expected U.S. labor report helped soothe global growth concerns. Japanese equities added to a solid weekly gain, with the yen dropping late in the session on ramped up speculation that the country could be close to announcing coordinated fiscal and monetary stimulus measures. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money. Australian and Indian securities gained ground, while South Korean listings also ticked higher on the heels of the Bank of Korea's decision to keep its benchmark interest rate unchanged.

However, performance in China was mixed, with mainland shares declining and stocks in Hong Kong advancing. The moves in China followed yesterday's mixed trade report and came ahead of tonight's flood of economic reports from the nation, with industrial production and retail sales data being accompanied by 2Q GDP, forecasted to show y/y growth slowed to 6.6% from 6.7% in 1Q. Schwab's Jeffrey Kleintop discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read all the articles at www.schwab.com/oninternational.

Tomorrow, the international economic docket will be headlined by the aforementioned plethora of releases from China, while reports from across the pond will include the trade balance from Italy, construction output from the U.K. and the trade balance and CPI for the Eurozone.

Financial Review

Headwinds and Tailwinds

Sinclair Noe — January 14, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW + 227 = 16,379
SPX + 31 = 1921
NAS + 88 = 4615
10 Y + .03 = 2.10
OIL + .66 = 31.14
GOLD – 15.00 = 1079.50

Global stocks have lost almost $3.2-trillion in market value since the start of 2016, pushing all major US indexes into correction or bear market territory. Asian markets (except for China) and European exchanges were mostly lower. Even with a bounce, we’re trending lower, short-term.

The Bank of England this morning kept its key interest rate at a record low of 0.5% and made no changes to its $540 billion asset purchase program. Both decisions were widely expected.

The Hong Kong dollar sank by the most in more than a decade overnight and speculation mounted in the options market that the city’s 32-year-old currency peg will soon come to an end, as investors lost confidence in Chinese assets. Other currencies also took a hit. The loonie fell to its lowest level since April 2003, fueling speculation the Bank of Canada could cut interest rates as early as next week.

The average number of people who applied for jobless benefits in the past month climbed in early 2016 to the highest level since last July. Initial jobless claims for the first full week of January, meanwhile, rose by 7,000 to a seasonally adjusted 284,000; the four-week average rose to 278,750.

The prices the U.S. paid for imported goods fell 1.2% in December, and dropped 8.2% for all of 2015. Even if oil prices are set aside, import prices have been falling. The cost of all imports excluding fuel slid 3.4% in 2015, marking the only decline since the government began keeping track in 2001. At the same time, export prices sank 1.1% in December. For the full year, export prices sank 6.5%, the biggest decline since the government first began keeping records in 1983.

JPMorgan Chase said fourth-quarter profit rose 10 percent. Net income rose to $5.4 billion, or $1.32 a share, from $4.9 billion, or $1.19, a year earlier. Revenue rose 1 percent to $22.9 billion in the fourth quarter. Earnings rose as the bank cut expenses from litigation and employee compensation shrank. Now there’s a business model for you.

We didn’t see much in the way of positive surprises in the earnings report, unless you consider not paying the lawyers and the regulators more to be a surprise. Still, they beat estimates. JPMorgan was up .86 at 58.20 today. Flat is the new up in investment bank land.

JPMorgan kicks off a parade of bank earnings reports. Wells Fargo and Citigroup report on Friday. A few analysts think the big banks have already taken their licks and are so far into oversold territory that there might not be much downside left. The KBW Nasdaq bank index shows bank shares down 17% from their July 2015 highs, down 15% since December, and down almost 10% so far in 2016.

If the big banks are going to climb out of their hole, they’ll need a lot better news than JPMorgan delivered today. One of the bright spots was from advisory fees on M&A. Mergers and Acquisitions in the fourth quarter reached near record levels, capping a record year. Globally, M&A activity topped $4.9 trillion in 2015, outpacing the previous record of $4.6 trillion set back in 2007. In a rising interest rate environment, it is hard to imagine 2016 will be a better year for M&A.

JPMorgan’s advisory revenue was up 43% to $622 million. Not bad but not outrageously great; and it was about the only strong area and not a surprise. Meanwhile trading revenue fell 3%, equity trading fell 7%, and credit underwriting disappeared.

And the headwinds are more problematic than the tailwinds are helpful. There’s no question debt and credit trading was difficult in fourth quarter. High-yield debt in general hit the skids hard, and nowhere was that more prevalent than in the energy sector. The Federal Reserve’s most recent Shared National Credits exam noted that 74% of the increase in classified loans were oil and gas loans, “where near default loans increased four times.”

JPMorgan nearly doubled its loss provisions in the fourth quarter, mostly due to bad energy loans. Asked on the earnings call if the bank is setting aside too little, Dimon says he’d put up more if he could, but accounting rules dictate what can be done.

I’m not sure which rules Dimon was referencing but we do know that every 10 basis points of expense increases for loan loss provisions will knock about 4% off banks’ earnings. Bottom line: a decent report from JPMorgan but it doesn’t look like enough to lift the banking sector.

Following the collapse of the Third Avenue Focused Credit Fund last month, the SEC has launched a review of the entire junk-bond fund complex. Reuters reports the agency “sent detailed requests” to mutual fund and ETF managers following the Third Avenue liquidation plan in which investors could wait a year or more to get their money. Regulators are “seeking information about how they price less liquid securities, and whether certain parties have ever challenged those prices.”

Intel reported a small increase in quarterly revenue, reversing two quarters of declines, as growth in its data center business more than offset weak sales to PC makers. Net income fell to $3.61 billion for the fourth quarter, from $3.66 billion, a year earlier. Net revenue rose to $14.91 billion from $14.72 billion. On a per share basis, earnings were flat at 74 cents. The fourth quarter of 2015 marked the fifth consecutive quarter of worldwide PC shipment decline. Intel was up .83 at 32.74, but they are down over $1 in after-hours trade.

GoPro shares were clobbered, down 26%. The wearable camera maker said on Wednesday it expected revenue of about $435 million for the fourth quarter, well below the average analyst estimate of $512 million.

Renault shares dropped more than 20% after a union said French fraud investigators seized computers from the automaker, apparently as part of a probe into emissions testing. The French government said tests on nearly two dozen Renault models and other automakers found several that exceeded the country’s air quality standards but so far found no evidence of technology designed to cheat on emissions tests, except a couple of VW models.

Volkswagen and EPA officials remain at an impasse following yesterday’s talks between VW CEO Matthias Müller and EPA chief Gina McCarthy, casting doubt over a quick resolution of the automaker’s emissions cheating scandal. The two sides gave no indication of any progress during a meeting at EPA offices in Washington, D.C.

Trading in Fiat Chrysler was halted several times today in Milan Italy, as prices dropped by 10% or more on a report from Automotive News, saying that two Chicago car dealerships have filed a lawsuit alleging the company offered dealers large amounts of money to report US unsold vehicles as sold. A spokesman for Fiat Chrysler in the U.S. said the auto maker “has not been served with this lawsuit and cannot comment.”

West Texas Intermediate crude oil fell to $29.73 in overnight trade, its lowest level since February 2004; prices bounced from that low. Prices have already tanked 20% this year.  Not a big surprise that there was some support at $30. The question is whether support can hold in the face of a potential new source of supply. The United Nations’ nuclear watchdog is likely to confirm on Friday that Iran has curtailed its nuclear program as agreed with world powers, paving the way for sanctions to be lifted.

The past 18 months have been rough for the oil industry. The low price has caused layoffs in what had been a robust and growing shale oil extraction business. A new report shows the number of jobs in the United States in the solar industry outpaced those in the oil and gas industries for the first time ever. As of November 2015 there were almost 209,000 people who worked in the solar industry, 90 percent of whom only work on solar-related projects. There were only about 185,000 people working in oil and gas in the United States in December 2015, according to the Bureau of Labor Statistics.

The solar industry has seen prices drop, not quite as much as oil, but as the technology becomes cheaper, sales have remained solid. One other key difference for the economy, jobs in solar pay about half what jobs in the oil industry pay, on average.

Meanwhile, renewables just finished another record-breaking year, with more money invested ($329 billion) and more capacity added than ever before (121 gigawatts), according to new data released by Bloomberg New Energy Finance. Spending on clean power declined in Europe, but increased 17% in China, 7.5% in the US, and for the first time, more than half of the world’s annual investment in clean energy came from emerging markets.

And since clean energy is also getting cheaper, the world got more bang for each buck. Investment dollars rose 4 percent last year, while the new capacity added for wind and solar jumped 30 percent. Looking out still further, the International Energy Agency said last year that between now and 2020, renewable energy will be the largest area for growth, and predicts 700 gigawatts of added generating capacity.

Oscar nominations were announced this morning.  “The Revenant” led the nominations with 12 nods, including best picture, and best actor for Leonardo DiCaprio; while the action movie “Mad Max: Fury Road” landed 10 nominations.

Financial Review

Watching and Waiting

Sinclair Noe — October 13, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 49 = 17,081
SPX – 13 = 2003
NAS – 42 = 4796
10 YR YLD – .04 = 2.05%
OIL – .53 = 46.57
GOLD + 5.00 = 1169.90
SILV + .09 = 16.01

Anheuser-Busch InBev and SABMiller have agreed on terms for a takeover, with the world’s largest brewer set to pay $106 billion. The deal brings one out of every three beers sold worldwide under a single company. Under terms of the agreement, AB InBev would pay a $3 billion break-up fee to SABMiller should the transaction fail to clear regulatory hurdles or shareholders don’t approve of it.

If the deal goes through, it would be the biggest acquisition of the year, and the largest in British history. SABMiller’s two largest shareholders, Altria Group and Bevco Ltd., can receive cash and stock for their stakes, which account for 41 percent of the company. They won’t be able to sell the shares for five years; a move that might have tax benefits.

Dell’s $67 billion buyout of EMC appears to be a win for nearly everyone involved – except EMC bondholders. Investors in EMC’s $5.5 billion of bonds are down about $338 million since news of the deal first became public last week. Why’s that? Dell’s plan to raise about $50 billion in debt for the acquisition will push existing bondholders down the capital structure (the notes lack protections that would’ve allowed for early repayment in the event of an ownership change). Further, consider that Dell will now have to service that debt, to the tune of about $2.5 billion per year; money that won’t be going into capital expenditures or research and development.

Pepsi is competing against Coca-Cola for an investment in Chobani that could value the Greek yogurt maker at $3 billion including debt. Chobani is looking to sell a minority stake to someone who could help it with distribution and production. The company ran into liquidity issues last year before an investment from private-equity firm TPG.

Wells Fargo agreed to buy $32 billion in assets from General Electric and take on about 3,000 employees as GE retreats from financial services. The sale includes commercial-distribution and vendor-finance units, and a portion of the corporate-finance business from GE Capital.  The transaction is expected to be completed in the first quarter of 2016. Wells Fargo previously agreed to buy commercial real estate assets and GE’s railcar-leasing division.

This is part of a major shift for GE; from financial services to its manufacturing and industrial roots; to this end, GE has now divested $126 billion worth of financial operations. GE had previously said it would seek some time in 2016 to apply to remove its designation as a “systemically important” financial institution.

In the past 24 hours or so, we’ve seen more than $210 billion in acquisitions announced. Mergers and acquisitions are on track for a record year. So far in 2015, there have been nearly $3.5 trillion worth of transactions

China’s trade slump has extended into September, adding more evidence that the world’s second largest economy is stalling. Dollar-denominated imports plunged 20.4% Y/Y last month, while exports slipped 3.7%, translating into a trade surplus of $60.34B. In yuan terms, imports fell 17.7%, while exports dropped 1.1%. China’s official GDP data is due on October 19. Separate data shows auto sales expanding at the slowest pace in three years. Much of the import decline reflects this year’s commodity price slump. Miners and metals were coming under pressure again today, with Glencore dropping as much as 5.5 percent in London.

The U.K. inflation rate turned negative again last month, dropping 0.1% year-to-year due to a smaller than usual rise in clothing costs and falling gasoline prices. Although the Consumer Price Index rate has been at or close to zero for most of 2015, the last time it was in negative territory was April. The Bank of England said this past week it did not expect inflation to reach its 1% target until spring 2016.

The International Energy Agency, which represents some of the world’s largest oil consumers, is warning that oil markets would likely remain oversupplied next year, as oil demand growth slows and Iranian oil adds to supplies. The IEA cut its forecast for oil demand growth for next year by about 200,000 barrels a day compared to its previous assessment in September. The IEA said Iran’s production could ramp up towards 3.6 million barrels a day from 2.9 million barrels a day currently once international sanctions are terminated early next year.

Russia’s economy could shrink 3.8% this year on the back of lower oil prices and international sanctions. The country’s finance minister told CNBC that trade restrictions may not be removed any time soon. Despite a GDP contraction this year, the Russians expect their economy to turn to positive growth of 0.7% in 2016.

Investigators in the Netherlands have concluded that Malaysia Airlines Flight 17 was shot down by a Russian-made anti-aircraft missile, causing the jetliner to break apart in midair, killing all 298 people on board. The Boeing 777 was heading from Amsterdam to Malaysia when it was shot down on July 17, 2014, over Ukrainian territory controlled by pro-Russian separatists. The report does not say who fired the missile.

Small business optimism continues to be stagnant. The National Federation of Independent Business said its small business optimism index was little changed in September, edging up 0.2 points to 96.1. That’s still below the 42-year average of 98. Small business owners expect sales to decline and the highest share since 2007 say they cannot find qualified workers.

Switzerland’s finance ministry will require Swiss banks maintain capital reserves of 5% of total assets, in line with the U.S. leverage ratio for its biggest banks and above the 3 percent minimum set in a global agreement by the Basel Committee on Banking Supervision.

Since the summer, trading has been largely driven by negative reaction to growing evidence of a global slowdown. Last week, virtually every economically sensitive asset advanced despite a slew of evidence confirming everyone’s suspicions the global economy is indeed decelerating. Instead, investors looked past the soft data and focused on Fed reaction to that weak data, as expressed in the minutes from the September 17^th FOMC meeting. If the Fed obsession seems extreme, consider that fiscal policy is almost non-existent.

In a speech today at the National Association for Business Economics, Federal Reserve Governor Lael Brainard said that the risks to the U.S. economy are now to the downside and that it is important to “nurture” the recovery. Brainard said these risks “argue against prematurely taking away the support that has been so critical to [the U.S. economy’s] success.” Brainard said there was a risk-management argument in favor of a policy of “watching and waiting.”

Also today Federal Reserve Governor Daniel Tarullo said he doesn’t expect conditions to be appropriate to raise interest rates this year. We’ve heard several different Fed policymakers offering differing opinions on the state of the economy and the motivation to raise interest rates; and the only thing we know with any certainty is that Fed policymakers are not unanimous in their positions. And that means it is unlikely that we will see a rate hike at the October meeting.

Michael Novogratz, the CIO of Fortress Investment Group’s macro fund, will step down at the end of this year. His $2.3 billion fund will be closed down, and assets will be returned to investors. Investors redeemed $800 million from the fund at the end of fourth-quarter 2014, a quarter of its total assets. More redemptions followed throughout the year as key bets, like Novogratz’s long call on Brazil, went sour. Fortress’ macro fund was down about 17.5% through the end of September; still, Novogratz will leave with a $255 million golden parachute.

Earnings reporting season kicks into high gear this week, trying to avoid a second consecutive quarter of negatives. Earnings for S&P 500 companies are expected to have dropped nearly 5 percent year over year, which would be the worst quarter for earnings in six years.

Johnson & Johnson reported net income of $3.36 billion, or $1.20 per share, below $4.75 billion, or $1.66 per share, in the year-earlier period. Adjusted earnings per share beat estimates. The company said international sales decreased 13.7% and it had a negative currency impact of 15.8%. J&J also announced it would double its share buyback program to $10 billion. The company will finance the repurchases with debt.

CSX Corp., the third largest railroad in the country, reported third-quarter net income of $507 million or 52 cents per share, down from $509 million or 51 cents per share a year earlier. Results beat estimates, even as revenue declined on lower coal shipments; the company countered by cutting costs.

JPMorgan Chase said third-quarter profit rose 22% as the firm cut expenses and had $2.2 billion in tax benefits. Net income climbed to $6.8 billion, or $1.68 a share, from $5.57 billion, or $1.36, a year earlier. Adjusted earnings came in at $1.32 a share, six cents south of estimates. BofA and Wells Fargo report tomorrow; Citigroup and Goldman Sachs report Thursday.

Intel reported better than expected earnings and revenue, even though both profits and revenue declined. Net income fell to $3.11 billion, or 64 cents per share, from $3.32 billion, or 66 cents per share, a year earlier. Net revenue fell to $14.47 billion from $14.55 billion.

Financial Review

Ongoing Criminal Enterprises

Sinclair Noe — May 20, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Subscribe: iTunes | RSS

DOW – 26 = 18,285
SPX – 1 = 2125
NAS + 1 = 5071
10 YR YLD – .01 = 2.25%
OIL + .77 = 58.76
GOLD + 1.80 = 1210.80
SILV un = 17.18

April 29 and 30 the Federal Reserve’s Federal Open Market Committee met to determine monetary policy; today, they published the minutes of that meeting. There were no surprises. Policymakers have no plans to increase interest rate targets in June. We all knew that. Officials in April “had increased uncertainty regarding the economic outlook,” the minutes showed. They had no good reason to explain why consumer spending was so weak.

“Most” Fed officials think the dramatic slowdown in growth in the first quarter was transitory and that a moderate rebound would resume in the second quarter. Inflation was also expected to move higher.  The international context isn’t helpful to the US economy. Fed officials deem “foreign economic and financial developments” as constituting “potential downside risks,” and they specifically mention Greece and China. Moreover, despite its recent partial retracement, the dollar’s appreciation is “likely to continue to be a factor restraining US net exports and economic growth for a time.”

This suggests that they see a rate hike coming sometime later this year. Only a “few” on the U.S. central bank questioned whether the Fed was providing enough stimulus for the economy at the present time and cautioned against any rate hike in the near future. This is an interesting point because the Fed really hasn’t provided much stimulus for the economy; they have provided stimulus to financial markets but not the broader economy in a direct fashion.

Indirectly, the Fed has provided stimulus to the broader economy through something known as the monetary transmission mechanism, which works largely through housing or other long-lived investments which are sensitive to interest rates. Interest rates don’t have strong impact on short-term investments or short-term capex. A lot of business investment is short-term; a lot of household spending is short-term. So Fed policy, by moving interest rates, normally exerts its effect mainly through housing. And interest rates do move housing. Remember the early 1980s when Paul Volker decided to tighten, interest rates jumped, and housing collapsed. And housing has come back from the lows, but not all the way back. One reason is because people who are most likely to buy houses got slammed in the downturn and couldn’t or wouldn’t jump back into that frying pan.

Today’s economic data backs up the relationship between housing and rates. Mortgage purchase applications fell 4.0 percent in the May 15 week though, year-on-year, applications are still up a very strong 11.0 percent. The ongoing run up in mortgage rates may be easing demand for mortgage applications just at the time that demand for purchase applications had been gaining steam.

And so the Fed is feeling like it has its back to the wall, and the wall is zero interest rates. If there is an economic problem the Fed can’t respond by lowering interest rates, or at least the impact of going into negative territory would be dangerous ground.

There was some debate about how to communicate any move to tighten rates. Some officials think it is important to give a warning to the markets, others worry that telegraphing intentions to hike rates will only result in a rate tantrum. The recent bond-market rout underscores that with bond yields near historical lows, even a moderate rise in yields would chip away the slim interest payments and inflict pain on bondholders. The Fed identifies this as episodes in which there were large monetary disturbances not caused by output fluctuations. Hopefully the Fed remembers the lesson from the Crash of 87; the markets respond violently to surprise rate hikes.

A mixed bag of economic releases this month has bolstered investors’ expectations that the Fed would wait until late this year to act. Fed Chairwoman Janet Yellen will make a speech on Friday that might provide further guidance.

Five global banks have agreed to pay $5.8 billion in combined penalties and will plead guilty to criminal charges related to manipulating foreign currency exchange rates, also known as Forex. Four of the banks, JPMorgan Chase, Barclays, Royal Bank of Scotland, and Citigroup, will plead guilty to conspiring to manipulate the price of US dollars and euros.

Barclays will pay $650 million, Citigroup $925, million J.P. Morgan $550 million and RBS $395 million. Barclays will pay another $1.3 billion to New York State, federal and U.K. regulators.

The fifth bank, UBS, received immunity in the antitrust case because they informed regulators about the Forex rigging as part of an earlier deal related to Libor rigging; UBS had signed a Non-Prosecution Agreement in 2012 on the Libor charges, and their misconduct in the Forex markets violated that earlier agreement even though they self-reported wrongdoing. So, they have immunity on Forex but they had to plead guilty to Libor rigging.  UBS will pay $545 million in fines to the Justice Department and Federal Reserve.

The five banks will pay a further $1.6 billion in fines to the Federal Reserve. Bank of America also faces a $205 million fine by the Fed, but no criminal charges. No bank employees have been criminally charged. The five banks will be under a three-year period of probation.

Between December 2007 and January 2013, euro-dollar traders at Citigroup, JPMorgan, Barclays, RBS and UBS gathered in an exclusive electronic chat room and used coded language to coordinate their moves in the U.S. dollar-euro market. They referred to themselves as the Cartel. By agreeing not to buy or sell at certain times, they protected each other’s trading positions. The big banks were the market makers, setting daily exchange rates, known as the fix. The fix became the price paid for billions of dollars of currency bought or sold on any given day.

And the Cartel managed to skim a little for their efforts. One Barclays trader in the chat room about adding secret mark-ups to the prices wrote: “If you ain’t cheating, you ain’t trying.” Ben Lawsky, New York’s superintendent of Financial Services explained it simply:  “They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients.” Also, a side note, after the big settlement announcement Lawsky announced he will step down next month as New York’s top bank regulator after four years. To his credit, he is not going to work for JPMorgan.

I have not yet seen a figure for how much prosecutors think the Cartel stole, but the Forex market trades close to $5 trillion dollars a day, so today’s fines amount to about one/one-thousandth of daily volume. The rigging took place over more than 5 years. I’m guessing that the money they stole in rigging Forex might amount to more than the fines ordered today. And that raises another interesting question – how did they report that income? Will they now go back and amend their earnings reports?

Didn’t managers and Board of Directors sign off under Sarbanes-Oxley?

And remember that the Forex scandal follows on the heels of the Libor rigging scandal, and the ISDAfix scandal (that involved the $381 trillion market for interest-rate swaps and the $44 trillion market for options on swaps. Banks use it to set coupons paid for bonds tied to commercial real estate. And there is a mountain of evidence, and today Barclays agreed to a $115 million dollar settlement on the ISDAfix investigation. Other banks are also being investigated.)

And before that, the municipal bond rigging scandals, and scandals in commodity markets including precious metals, and tax evasion scandals, and money laundering scandals, and predatory lending scandals, and much, much, much more. Past performance is not a guarantee of future results, but based on past performance you have to figure that the banks have rigged all the financial markets.

FT has a running total of legal fines and settlements paid by banks to US regulators since 2007. According to their calculations, the tote board just touched $155 billion. In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.)

The big news in today’s settlement was not the size of the fines, not the scale of the scandal, but that the banks actually admitted criminal guilt. UBS violated its 2012 Non-Prosecution Agreement, and we’re still just looking at a fine for a repeat offender. The banks will get to keep their charters; they can continue to conduct business; three years’ probation. They can still vote, or at least buy elections. The deal does not prevent the Department of Justice from going after individual criminal charges but for now, nobody goes to jail.

HSBC has become one of the biggest global banks to say it will begin charging clients on deposits in a basket of European currencies to prevent its profit margins from being crushed in a record low-interest rate environment. The unusual steps come after the ECB last year became the first big central bank to announce a negative deposit rate, in effect a penalty on banks parking their surplus cash.

The Japanese economy staged a comeback in first quarter, expanding at an annualized 2.4% vs. the previous quarter. Despite the positive figure, economists are still worried about Japanese growth and deflation as most of the expansion was due to a huge build-up of inventories. The Nikkei Stock Index finished the session at a 15-year high.

It is widely recognized that Greece is running out of money. The next questions are when they will run out money and what will happen when they run out of money. Nikos Filis, from the ruling Syriza party, told Greek television Greece will not be able to make a €1.5 billion repayment to the IMF that falls due on June 5 if there is no deal with its international creditors by then.

FINANCIAL REVIEW

Catch a Falling Star

Sinclair Noe — November 12, 2014

Podcast: Play in new window | Download (Duration: 13:20 — 6.1MB)

DOW – 2 = 17,612
SPX – 1 = 2038
NAS + 14 = 4675
10 YR YLD un = 2.36%
OIL – 1.19 = 76.75
GOLD – 2.80 = 1161.10
SILV – .04 = 15.76

Stocks have been on a run lately, with the Dow Industrials and the S&P 500 hitting record highs yesterday, and the Dow Transports closing at a new high today. Yesterday, the S&P 500 marked its 40th new closing high of the year, versus 45 in 2013. The last five-day streak of record highs was in May 2013, and the next longest was eight days in June 1997. The Dow also hit a record yesterday, marking 6 consecutive record highs, its longest since June. The S&P 500 has closed above its 5 day moving average for the 19th consecutive session, a streak that has only occurred seven times in the past 20 years. And today did not reverse the trend.

Typically, after a rally like this you might expect a pullback; not necessarily a correction, but a pullback; a pause to catch your breath. And so, now would not look like a good time to buy, but you also haven’t seen a signal to sell, at least not yet. Meanwhile, the advance has been so straight and fast that it hasn’t left any support levels in its wake. You might look at S&P 2000 as a round number, but that is meaningless; there was a little consolidation last week around 2001, but that is not much. Beyond that, you look at another weak support at 1925, and then the real strong support at 1820. Working off trend lines, the 50 day moving average is at 1972. In other words, this rally has outrun its support.

Over the past month, you would be hard pressed to find a sweeter chart than the Dow Jones Transports, which hit another record high close, up 30 at 9091. Those trains just keep on rolling down the track.

Yesterday and today seemed more a pause in the markets. Earnings season is winding down, and it looks like a very good quarter for companies. Only about 40 of the S&P 500 companies are left to report, and it looks like 75% of companies that have reported beat expectations, and overall earnings growth is around 10% from the year ago quarter. That’s about as good as it gets.

Time now for another edition of “Banks Behaving Badly”. Today it was announced that 5 banks are being fined for manipulating the foreign exchange market; this is the $5.3 trillion dollar a day market for currencies, also known as the Forex Market or FX. The investigation was led by the US
Commodity Futures Trading Commission, Britain’s Financial Conduct Authority, and the Swiss Financial market Supervisory Authority. The 5 banks that reached a settlement are: Citigroup, UBS, JPMorgan Chase, Royal Bank of Scotland, and HSBC; the usual suspects.

UBS agreed to pay the largest fine at $800 million, even as regulators acknowledged the bank was first to cooperate on the probe. Separately, the Office of the Comptroller of the Currency has assessed an additional $950 million against Bank of America, Citigroup and JPMorgan for “unsafe or unsound practices” tied to their foreign exchange trading. The total fines are $618 million for HSBC, $634 million for RBS, $1 billion each for JPMorgan and Citi, and $250 million for BofA.

Basically the Forex traders would get together or phone other traders or instant message or plan their schemes in chat rooms to manipulate prices to improve their trades, even if it meant screwing their customers. The instant messages left a digital trail of incriminating evidence. The traders knew they were breaking the law and they did it anyway. The evidence released today included transcripts that the fraud and collusion was taking place within the last year; this is not some scam from 2007. Now, remember that all these banks have a long list of transgressions that resulted in deferred prosecution agreements. Supposedly they are on parole, and they have violated their parole, again.

Tim Massad, chairman of the CFTC, issued a statement, saying: “Today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated.”

What a crock.

It is tolerated. It has been tolerated in the past, and there is nothing to indicate that today’s fines will change much. We’ve seen similar behavior in interest rate markets; the Libor, London Interbank Offered Rate, is manipulated; the ISDA fix in the derivatives markets is manipulated; the precious metals markets are manipulated; the US stock markets sell special high speed access to allow certain firms to manipulate the stock markets. The list goes on. And with every manipulation, the banksters steal a little bit more; they just walk right up and take it out of your wallet.

And the fines today will not deter illegal activity. Several traders have been fired or suspended; many are still trading. And just who goes to jail for this fraud? Not one person, although we hear that there are criminal investigations; which means there will be a few junior level traders that will be thrown under the bus. But today’s fines are mainly another slap on the wrist. Part of the punishment today comes from the Swiss regulators who state that the manipulators at UBS must limit bonuses for traders of foreign exchange and precious metals to 200% of their base salary for two years. Which means the bank will now have to raise the base salary for traders. That’ll teach them.

This purportedly groundbreaking settlement is characteristic of the other ones that have come before it: there’s no mention as to whether an actual legal process was pursued, whether depositions were taken or whether an expert came up with a number for total damages. The settlement is supposed to placate the public, but when the rate controls the trading of over 5-trillion dollars on a daily basis, is 4 billion enough?

The combined fines calculate to be $4.25 billion. The banksters named today trade $5.3 trillion on the foreign exchange each day of the week. The fines calculate to be a 0.08% penalty on what these banks trade daily on the exchange. Again, not eight percent, but 0.08%. These aren’t fines against the banks. $4.25 billion is not punitive. It’s their pocket change.

Despite banksters’ protestations that things are changing, there is evidence published today suggesting that, before the official investigation, whistle-blowers were ignored by banks and complaints from customers (the global businesses and pension funds that rely on foreign exchange markets) pushed aside.

President Obama is in Asia, on his way to the G-20 conference, and at a state visit in China last night China and the US announced new pledges on greenhouse gas emissions. The US will try to reduce US levels between 26% and 28% by 2025, compared to 2005 levels. President Obama’s offer is based on cuts in carbon emissions from coal power. China did not set a specific target, but said emissions would peak by 2030, and that 20% of the country’s energy would come from emission-free sources by then. The two countries also agreed to reduce the possibility of military accidents in the air and sea. It is the first time China has set an approximate date for emissions to peak. The two countries together produce about 45% of the world’s carbon dioxide.

Setting a 2030 target for peak carbon emissions is a first for China, but most analysts expected China’s emissions to peak about that time anyway. Beijing has recently shown it is serious about cleaning up its emissions by strengthening environmental laws, toughening regulations, and stepping up oversight of factories and power plants. They had to do something because the air was thick as soup, and causing health problems. They either had to clean up or watch people stop breathing. The bigger challenge for China may be satisfying the pledge to get 20% of its energy from non-emissions producing sources. That promise will require an additional 800-1,000 gigawatts of nuclear, wind, solar and other zero emission generation capacity; an amount roughly equal to the entire US electricity capacity today.

Under the Kyoto plan, developed economies, including the United States, were supposed to cut their fossil fuel emissions, while developing countries like China were exempt. The United States refused to ratify the treaty, while China went on to become the world’s largest carbon polluter. Many other governments also refused to change pollution standards because the world’s two largest polluters were not acting, so why should they.

The agreement is not binding. If they take the actions to meet the targets, then it’s meaningful, but for now it’s a paper promise. And since physics is uninterested in spin, all the hard work lies ahead.

NATO officials say Russian troops and military equipment including tanks, artillery, air defense systems, and combat troops have been sighted entering Ukraine. Russia’s defense ministry denied that its troops were in eastern Ukraine to help pro-Russian separatists there. However, the rebels have admitted being helped by “volunteers” from Russia. The United Nations Security Council is convening an emergency session on Wednesday to discuss the reported sightings. Fighting and artillery fire have been reported around the cities of Donetsk and Luhansk.

The Rosetta mission has achieved something quite remarkable; the combined effort of the European Space Agency and NASA has landed an unmanned spacecraft on a comet. After flying for 10 years and traversing some 317 million miles the Rosetta orbiter touched down on Comet 67P at 11:00 AM Eastern time. The spacecraft that landed on the comet is about the size of a dishwasher and it has already sent back photos of the comet. The craft has about 2 days of battery life left, and then it will try to operate on solar powered backup batteries, with a little bit of luck.

The point of Rosetta is to gain insight on the universe’s infancy. Comets are the perfect subjects for such study: unlike stars and planets, whose chemistries evolve slowly but significantly, comets are pretty much the same ice balls they were a few billion years ago. By analyzing this comet’s composition, the Rosetta landing craft will help researchers determine the role that comets played in the nascent days of our solar system and the earth; if their ice brought us water, and if the organic matter in their crusts provided the crucial ingredients for life. And what it also tells us is that we are still capable of incredible accomplishments.

FINANCIAL REVIEW

Paulson, Bernanke, and Geithner Walk Into a Courtroom

Sinclair Noe — October 6, 2014

0 0 

   

Financial Review

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW – 17 = 16991
SPX – 3 = 1964
NAS – 20 = 4454
10 YR YLD – .02 = 2.42%
OIL + .05 = 90.39
GOLD + 16.10 = 1207.80
SILV + .49 = 17.45

Stocks erased early gains. The Russell 2000 Index of small cap stocks took a hit of nearly 1%. Earnings season is right around the corner. Alcoa kicks off the unofficial start of earning season on Wednesday, and we’ll get 8 companies from the S&P500 reporting this week. The average estimate for the S&P500 calls for right at 5% earnings growth; however there are concerns about the impact of a strong dollar on overseas revenue.

Not much in the way of economic data today. The economy added at least 200,000 new jobs in seven of the past eight months and all signs point to similarly strong hiring through the end of the year. The latest evidence? A ninth straight increase in the employment trends index produced by the Conference Board, a nonprofit economic-research firm. The index is now 6.1% higher than a year ago.

Slightly less optimistic is the new, broader, all-purpose employment index from the Federal Reserve, it’s called labor market conditions index; it was up 2.5 points last month after an increase of 2.0 in August. This is a new index the Fed has built that draws on 19 separate jobs-related measures to give a broad sense of the labor market; it includes data on labor force participation, average weekly hours and hourly earnings, and hiring and quit rates. As we have seen in many of the monthly jobs reports, the unemployment rate is more of a headline number that doesn’t always tell us if the labor market is tight or slack. This new index is designed to be more comprehensive. That’s about all I can tell you for now.

The Federal Open Market Committee releases minutes from its Sept. 16-17 meeting on Oct. 8.

The protests in Hong Kong have faded away. Protestors briefly blocked entrances to two government buildings, but faced with the prospect of government violence, combined with an agreement between government and protestors to hold formal talks in the future, the mass crowds have largely gone home. Tens of thousands of protestors are now just a few hundred stragglers. It’s difficult to keep up a mass protest for more than about one week.

World Bank experts say China’s economic growth is likely to slow slightly to 7.4% this year, and to lag even a bit more next year. A separate World Bank report says growth will accelerate in India, expanding at a 6 percent rate next year, and a bit faster in 2016.

Yesterday was election day in Brazil, at least the first round. Incumbent Dilma Rousseff and pro-business rival Aecio Neves, will face off in an Oct. 26 runoff to decide what has been Brazil’s most unpredictable election in decades. The incumbent of the Workers’ Party, or PT, had 42 percent of the votes yesterday, followed by Neves of the Brazilian Social Democracy Party, known as PSDB, with 34 percent. While Brazil’s inflation hovers around the 6.5 percent upper limit of the target range and the economy slid into recession in the second quarter, unemployment at 5 percent remains near record lows.

Last week, JPMorgan Chase disclosed that hackers had broken into their computer systems in a massive security breach affecting 76 million households. That’s a huge number, just shy of two-thirds of American households, making the breach the largest cyber-attack against a bank in history.

Yet the company has not disclosed a separate, presumably even larger figure: the number of individual customers whose personal information was compromised. JPMorgan has said that no account information was stolen by the hackers, but that they were able to access contact details like names, phone numbers and email and home addresses. Internal bank information, such as what types of accounts individuals held, was also stolen. The bank has argued that because contact information was stolen, as opposed to account details, the best way to measure the size of the hack is by households, not individuals.

Hank Paulson, Ben Bernanke, and Tim Geithner walk into a courtroom; it sounds like the making of a joke, but it is serious business about why some firms were bailed out and others were hung out to dry. Specifically, it is part of a lawsuit alleging the 2008 federal rescue of American International Group cheated shareholders of $40 billion. Former Treasury Secretary Hank Paulson testified for 2 hours today. Paulson said he valued stability above all else in regulating markets, followed by the need for market participants to be responsible for the consequences of their actions.

“It was important that terms be harsh because I take moral hazard seriously,” Paulson said, referring to the economic term for consequence-free risks. Paulson drew a distinction between AIG’s treatment and that of Citigroup, which he acknowledged received better terms than the insurer. Paulson said AIG had to be rescued because if it failed “the country faced a real disaster.” The government avoided punitive terms for Citigroup because it feared doing so would encourage shortsellers to attack other banks, further destabilizing the economy. There was no similar risk of a domino effect in the insurance market.

In a bit of a bombshell, Paulson said he talked with the Chinese government about investing in US firms as part of the rescue scheme; in AIG’s case, Paulson said he didn’t think the Chinese would be interested in a deal without a government guarantee. “The government couldn’t provide that assurance,” Paulson said. “The Chinese were very, very nervous” about investing in U.S. firms at the time.

Geithner is scheduled to testify tomorrow. Bernanke is scheduled to take the stand on Wednesday.

The FCC has extended its public comment timeframe for the proposed Comcast Time Warner Cable mega-merger. The $45 billion marriage was meant to be open for public comment and debate until Oct. 8, but that portion of the review has now been pushed back to Oct. 29; the agency expects its review of the deal to be done by Jan. 2016.

Hewlett-Packard said today that it plans to split into two separate companies, a personal-computer and printer business, and corporate hardware and services operations. Meg Whitman will lead Hewlett-Packard Enterprise, a business focused on corporate hardware and services, while Dion Weisler, the vice president in charge of Hewlett-Packard’s personal-computer and printer operations, will become CEO of that business. The HP split comes a week after eBay announced it would spin off PayPal to shareholders. This looks like another example of financial engineering. If HP hasn’t been able to right the ship after dozens of industry-spanning acquisitions and an inconclusive multiyear restructuring, the next logical step is to bust it up and hope the pieces are worth more than the whole.

Glencore Plc is laying the groundwork for a potential merger with Rio Tinto Group in the next year that would create the world’s largest mining company, worth about $160 billion. As a preliminary step, Glencore has reached out to Aluminum Corp. of China, the Chinese state-backed company that is Rio’s largest shareholder, to gauge its interest in a potential deal. A merger would catapult the combined company past BHP Billiton to become the largest mining group, combining Glencore’s commodity-trading operations with Rio’s portfolio of iron-ore projects.

The Spanish health minister reports a Spanish nurse who treated a missionary for Ebola at a hospital in Madrid, has tested positive for the disease. The female nurse was part of the medical team that treated a 69-year-old Spanish priest who died in a hospital last month after being flown back from Sierra Leone, where he was posted. The nurse is believed to have contracted the virus from that priest. The World Health Organization confirmed there has not been a previous transmission outside West Africa in the current outbreak. Spanish authorities said they were investigating how the nurse became infected at a hospital with modern health care facilities and special equipment for handling cases of deadly viruses.

Today, the White House announced the government would develop expanded screening of airline passengers for Ebola, both in the West African countries hit by the disease and the United States.

The 2014 Nobel Prize in Physiology or Medicine was awarded on Monday to American-British neuroscientist John O’Keefe, and Norwegian scientists May-Britt Moser and Edvard Moser. The Mosers are the fifth married couple to be awarded a Nobel Prize. The trio received the award for their discoveries of cells that constitute a positioning system in the brain, which was described as an “inner GPS.” In 2005, they discovered a type of nerve cell that generates a coordinate system and allows for precise positioning. Together, these discoveries explain how the brain creates a map of space and how we navigate our way through a complex environment. Now, here’s where it gets interesting; Alzheimer and dementia patients often have a hard time with location – they tend to get lost easily. Since these spatial cells are among the first to be hit in Alzheimer’s and other forms of dementia, understanding how they are degraded should shed important light on the disease process.

The Supreme Court today said it would not hear appeals from five states whose same-sex marriage bans had been invalidated by lower federal courts. The decision, issued without explanation, will lead to recognition of gay marriages in 11 more states. It also allows an avalanche of legal challenges to the remaining bans to keep going forward in state and federal courts, where gay and lesbian couples have overwhelmingly prevailed.

The court’s decision leaves unchanged 20 state laws blocking same-sex unions. Each is already under legal attack, facing challenges in state or federal court, and sometimes both. Challenges to marriage bans already have reached a handful of state appeals courts and in the federal Fifth, Sixth, Ninth and Eleventh circuit appeals courts. By letting gay and lesbian marriages go forward in 11 other states, the justices almost certainly made it harder to reverse course in the future. If they do, the court would have to do more than simply prohibit some couples from marrying; it would have to invalidate marriages that have already taken place. It will become very hard for the Supreme Court to take that back.