Financial Review

Relatively Soon

Sinclair Noe — October 12, 2016

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DOW + 15 = 18,144
SPX + 2 = 2139
NAS – 7 = 5239
10 Y + .02 = 1.79%
OIL – .24 = 49.94
GOLD + 2.50 = 1255.90

September’s Federal Open Market Committee meeting featured something not often seen since Janet Yellen took over as chair: honest-to-goodness dissent. Three of the FOMC’s 10 voting members opposed the final statement, even as the majority of central bank officials voted to keep its interest rate target anchored at 0.25 percent to 0.5 percent.

The Fed said in a statement after its September meeting that the case for a rate increase had “strengthened.” Today we saw the minutes of the FOMC meeting and it looks like a rate hike could come “relatively soon” if the economy continues to advance at a reasonable pace.

The account, released after a standard three-week delay, said some of the officials who voted to wait viewed the decision as a “close call.” Here’s a key quote from the minutes:
“It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.

A couple of members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the committee had more scope to increase policy rates, if necessary, than to reduce them.”

Today, New York Fed President William Dudley said, “I think we can be quite gentle as we go in terms of gradually removing monetary policy accommodation.” So, not much urgency there, but really it looks like rates will move higher.

Wells Fargo CEO John Stumpf will retire, effective immediately; which sounds more like he was fired than retired; or at least the writing was on the wall. The problem – Wells Fargo set up 2 million fake accounts to meet sales targets.

Predictably, Wells Fargo directors deflected the blame from themselves and instead blamed rampaging hordes of renegade junior staff for opening up the unauthorized accounts to meet cross selling sales goals. Stumpf claimed 5,300 unscrupulous employees were fired for opening false accounts and he encouraged the good remaining employees to call an Ethics Hotline to report problems.

One problem is that when employees called the hotline – they were fired. Wells Fargo got hit with a $185 million fine but more significantly investors are now worried that its business model is broken. WFC has pledged to the regulator that it will now scrap all product sales goals for its retail banking staff. The bank reports its third-quarter results on Friday.

The Bureau of Labor Stats monthly JOLT survey shows monthly jobs openings decreased in August to 5.4 million. The number of quits was essentially unchanged at 3.0 million in August. The quits rate was 2.1%. The numbers of hires was 5.2 million in August, also little changed from July. The hiring rate was 3.6%, unchanged from the prior month.

Total mortgage application volume fell 6 percent for the week ended Oct. 7. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 3.68 percent, from 3.62 percent.

Many Americans are dangerously at risk of being victims of credit card fraud and as many as 41 million U.S. adults have already had their identity stolen, according to a Bankrate survey. Another 49 million know someone who has been affected. Hacked credit card fraud will reach a record $4 billion this year.

A U.S. Navy destroyer was targeted on Wednesday in a failed missile attack from territory in Yemen controlled by Iran-aligned Houthi rebels, the second such incident in four days. The USS Mason fired defensive salvos in response to at least one missile which did not hit the ship.

The White House recently allowed the sale of F-15 fighter jets to Qatar; it’s a 36 jet deal valued at up to $4 billion, with options for up to 72 fighters. Now comes word Qatar Airways will buy 100 Boeing Jetliners in a deal worth $18.6 billion. The airliner deal includes the purchase of 30 787-9 Dreamliners and 10 777-ER aircraft, valued at $11.7 billion. Boeing builds the F-15 in St. Louis. Boeing builds commercial aircraft in Seattle. The deal could affect 104,000 jobs across America.

OPEC reported an increase in its oil production in September to the highest in at least eight years and raised its forecast for 2017 non-OPEC supply growth, pointing to a larger surplus next year despite the group’s deal to cut output.

Steel demand will improve in 2017. The World Steel Association says stronger-than-expected demand from China and emerging markets will boost global demand by 0.5% in 2017.

U.K. Prime Minister Theresa May accepted that Parliament should be allowed to vote on her strategy for taking Britain out of the European Union as lawmakers who want to keep closer ties to the bloc began to assert themselves. The pound climbed against all of its 31 major peers as May’s move was seen as a conciliatory gesture, calming investor concern that she was taking a gung-ho approach to negotiations with the EU.

The growing product safety crisis at Samsung prompted the company to cut its third quarter operating guidance by 33% to $4.6 billion. The South Korean company is also contending with a new report on an exploding washing machine in the US. So, if you were wondering how much the exploding Galaxy Note 7 problem was going to cost Samsung, the answer is $2.3 billion. But that’s just a starting point. The company’s market capitalization has plunged recently, and then there is the reputational damage.

Apple had a rough back-to-school season in personal-computer sales, while Alphabet’s low-price Chromebooks were a big hit for students. International Data Corp. and Gartner reported tabulations of PC sales for the third quarter, and both analyses showed huge drops for Apple’s Mac sales in the important back-to-school quarter – down about 13%. While Lenovo maintained its crown as the top PC manufacturer, its lead over HP narrowed in the third quarter, both studies found.

IDC reported a near-tie between the two companies, with Lenovo holding 21.3% of the market and HP at 21.2%, up from 19.7% in the same quarter last year. Both studies also showed continuing consolidation of the PC market as those top manufacturers grow more dominant. IDC said the top three vendors controlled 58% of the market in the third quarter, up from 55% a year ago and 51% in 2014; Gartner noted the top six vendors in its survey enjoyed a record 78% of the market.

Deutsche Bank is raising more cash. Yesterday, the bank raised $1.5 billion through the sale of five-year notes. That comes after Friday’s offering that raised $3 billion. It sold the debt at a premium of 290 basis points, or slightly lower than the 300 bps seen at the Oct. 7 sale, but still twice that demanded in a public issue of similar notes back in August 2015. Elsewhere in the world of embattled European financials, Lloyds Banking Group is cutting 1,340 jobs.

Stanley Black & Decker announced a deal to buy Newell Brands’ tools business for $1.95 billion in cash. Stanley said it expects the acquisition, which is expected to close in first half of 2017, to add an adjusted 15 cents a share to earnings in the first year.

Wal-mart, the country’s biggest private employer hiked its minimum salary for store managers in anticipation of the Labor Department’s overtime rule, set to take effect December 1. The rule will double (to $47,476) the salary threshold under which virtually all workers are guaranteed time-and-a-half pay whenever they work more than 40 hours in a given week. Entry-level managers at Walmart were making $45,000 when the rule came out in May, but starting in September they made $48,500.

Jack Ma has ambitious plans to create a group trading platform for small businesses and farmers. The Alibaba chairman envisions an open e-commerce system that would include cross-nation agricultural trading. Ma says the long-term goal for Alibaba is to quintuple its user base to 2 billion by 2036.

For 4 days in September, Facebook posted a 17-word reminder for users to register to vote. It worked. In California, 123,279 people registered to vote or updated their registrations on Friday, Sept. 23, the first day that Facebook users were presented with the reminder. That was the fourth-highest daily total in the history of the state’s online registration site.

Indiana recorded its third-highest daily online registration total ever. Minnesota broke its record for the most online voter registrations in a single week. In Connecticut, 14,883 people registered to vote in the first three days of the Facebook campaign, a more than 12-fold increase over the same period a week earlier.

Now, let’s play a little game? We’ll try to guess your age and sex. Did you see the reminder from Facebook? If you answer “no”, you are probably an older male. If you answer “yes” you are probably between probably younger (ages 18-35) and female.

Financial Review

Terminated for Ethical Behavior

Sinclair Noe — September 29, 2016

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

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DOW – 195 = 18,143
SPX – 20 = 2151
NAS – 49 = 5269
10 Y – .01 = 1.56%
OIL + .57 = 47.62
GOLD – 1.50 = 1320.90

The third and final revision of second quarter gross domestic product shows the economy grew at a 1.4% annual pace instead of 1.1%. Business investment in the second quarter was better than previously reported and that bodes well for third-quarter growth. Investment excluding housing actually rose 1% instead of dropping 0.9%.

A 57% plunge in spending by energy companies coping with cheap oil was the main culprit in weak business investment. If mining and drilling are excluded, investment rose a healthy 10% in the second quarter. Consumers are still spending at a healthy clip and the housing market continues to get stronger.

Core personal-consumption expenditures – a measure of inflation that excludes volatile food and energy prices – rose by 1.8%, unchanged from the second estimate. America’s largest public companies reported a fourth-straight quarterly drop in profits in Q2, down 1.7% after tax.

The National Association of Realtors’ pending home sales index slumped 2.4% to 108.5 in August. That was 0.2% lower than a year ago, and July’s reading was revised down to 111.2. The index forecasts future sales by tracking real estate transactions in which a contract has been signed but the deal has not closed. Tight inventory is blamed for the setbacks.

The group issued a release saying: “Prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the miniscule number of affordable listings.”

Applications for unemployment benefits rose 3,000 to 254,000 in late September, but the low level of initial claims points to a steadily improving labor market in which jobs are the easiest to find in years.

Initial jobless claims slid below 300,000 in 2015 and have stayed there for 82 straight weeks. And new claims have tallied less than 270,000 for three months, a feat last accomplished in 1973. So far this year the economy has added an average of 182,000 new jobs a month. The unemployment rate, at 4.9%, is at an eight-year low.

The Labor Department will now require federal government contractors to provide paid sick leave to their workers. The rule will impact more than 1.1 million people, and enable workers to accrue up to seven days of paid sick leave a year.

The rule requires that workers in assignments related to many federal contracts receive one hour of paid sick leave for every 30 hours they work, for up to 56 hours of leave a year. Unused leave time can carry over to the next year if the worker remains with the same employer on a contract-related assignment. The rule affects only contracts solicited by the government beginning on Jan. 1, 2017.

The nation’s deficit in goods trade narrowed slightly to $58.4 million in August. Exports rose a solid 0.7 percent in the month reflecting strength in industrial supplies, vehicles, and also consumer goods. Imports also rose in the latest month, up 0.3 percent and reflecting a bounce back for capital goods as well as a gain in food.

Next week we’ll get fresh insight into U.S. manufacturing, construction spending, vehicle sales, trade, factory orders, durable goods, and of course the overall labor market with the jobs report on Friday. That’s obviously the big one, with economists forecasting 175,000 new jobs created in September and an unemployment rate holding flat at 4.9 percent.

Wages will also be closely watched for any signs of acceleration. The report is over a week away, but given its significance, it’s time to start looking ahead. Markets are pricing in a slightly greater than 54 percent chance of a U.S. interest rate hike by the end of the year (most likely in December).

Congress avoided a partial government shutdown at week’s end after both chambers passed a short-term spending bill that would keep the government running through early December. Lawmakers agreed to provide federal assistance for residents of Flint, Mich., in separate legislation this year. The spending bill includes $1.1 billion to fight Zika and $500 million for flood victims in Louisiana and other states.

California, the nation’s largest issuer of municipal bonds, is barring Wells Fargo from underwriting state debt and handling its banking transactions after the company admitted to opening about 2 million bogus customer accounts. The bank has already been fined $185 million. The California suspension, in effect immediately, will remain in place for 12 months.

A “permanent severance” will occur if the bank doesn’t change its practices. The state also won’t add to its investments in Wells Fargo securities. Federal prosecutors in New York and San Francisco have opened criminal inquiries. Wells Fargo already faces a raft of lawsuits by fired or demoted workers, customers and investors.

Now, word that Wells Fargo is facing a Justice Department sanction over improperly repossessing cars owned by members of the military. The Servicemembers Civil Relief Act requires lenders obtain court orders before seizing vehicles from soldiers, sailors, airmen and Marines who are delinquent on their loans. The bank has previously been accused of not adhering to the military lending law, which Congress approved decades ago to protect soldiers from legal hassles while they’re on active duty.

Wells Fargo agreed to compensate borrowers as one of five mortgage servicers sanctioned for improper home foreclosures, paying $28 million for so-called non-judicial foreclosures that didn’t pass through courts and $59 million for those handled in the judicial system, according to statements issued by the Justice Department last year. The bank didn’t admit or deny the allegations. Wells Fargo might be looking at a $20 million fine, which would be one of the stiffest for such violations.

Earlier this week, Wells Fargo’s board of directors woke up long enough to claw back $41 million in stock awarded to Stumpf. Wells Fargo CEO John Stumpf testified this morning before the House Financial Services Committee. At one point, Stumpf promised to “take care of all customers” affected by the scandal.

That’s bull. It was mainly a chance for politicians to dramatically identify the obvious: Wells Fargo committed fraud and theft, and operated as a criminal enterprise, it plundered its reputation, it cheated customers, it is too big to manage, it should be broken up, it is a repeat offender, the fines thus far are pathetic, the bank was a school for scoundrels, upper management pocketed multi-million dollar bonuses and then tried to blame thousands of low level workers.

At one point, Stumpf said all 5,300 employees were terminated “because of their ethical behavior.” Of course it would have made more sense if those workers had been fired for “unethical behavior” but this is a distinction Stumpf seems incapable of making.

A number of funds that clear derivatives trades with Deutsche Bank have withdrawn some excess cash and positions held at the lender, a sign of counterparties’ mounting concerns about doing business with Europe’s largest investment bank. The International Monetary Fund in June said Deutsche Bank may be the biggest contributor to risk among so-called global systemically important banks.

Deutsche faces a possible $14 billion fine from the US Department of Justice, just south of the bank’s market capitalization. Deutsche share hit an all-time low this week. Credit Suisse CEO Tidjane Thiam says that Europe’s banks were in a “very fragile situation” and said there was doubt that European banks still had a viable business model, calling the sector “uninvestable”.

Commerzbank is making big cuts. The German bank says it will cut almost 10,000 jobs, or more than 20% of its labor force, and eliminate its dividend temporarily as part of a $1.2 billion restructuring plan.

Och-Ziff Capital Management has agreed to settle charges of bribery, paying nearly $200 million to the Securities and Exchange Commission. Och-Ziff was accused of illegally paying the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds.

Other bribes were paid to secure mining rights and corruptly influence government officials in Libya, Chad, Niger, Guinea, and the Democratic Republic of the Congo. Last I heard, bribery was an actual crime. Although in this case … Anyway, a $200 million fine will make Och-Ziff management think twice before they commit their next felonious act of bribery.

Medtronic has won U.S. approval for an “artificial pancreas” that is the first device to automatically deliver the right dose of insulin to patients with type 1 diabetes, freeing them from continually monitoring insulin levels throughout each day. The FDA approved the device six months sooner than expected, however, it still won’t be available until the spring of 2017.

The future is electric at the Paris Motor Show, as the world’s biggest car makers unveil plans to accelerate development of EVs. About two dozen new electric models are set to debut. Mercedes revealed an entirely new brand dedicated to electric vehicles, called EQ, and paired it with a concept car called Generation EQ, a sport-utility coupe with electric range of up to about 310 miles.

Volkswagen debuted the I.D. electric concept, with a range of about 249 to 373 miles, and said a compact car version would hit dealerships in 2020. GM is set to begin selling the first mass-market electric car, the Bolt, which will have range of about 238 miles, by the end of the year.

Financial Review

Knee Jerk Trading

Sinclair Noe — September 28, 2016

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

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DOW + 110 = 18,339
SPX + 11 = 2171
NAS + 12 = 5318
10 Y + .01 = 1.57%
OIL + 2.34 = 47.01
GOLD – 5.60 = 1322.40

Today started as a regular day: stocks were trading just a bit lower but no big moves. Fed chair Yellen was speaking on Capitol Hill, an economic report on durable goods – kind of a quiet day really. Then came word from Algiers; remember the big oil summit? Reuters reported that two sources in the Organization of the Petroleum Exporting Countries said the group would reduce output to 32.5 million barrels per day from current production of 33.24 million bpd.

How much each country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia. The price of oil popped by about 5%. That was the knee-jerk response, but let’s dig in. First, we know that OPEC members are notorious for violating production limits.

Next, there is no agreement with non-OPEC oil producers (specifically Russia and the US). And there is a seasonal tendency to cut back production in the winter months anyway. So OPEC will produce less, as is their seasonal tendency. Oil demand will drop in the winter and there will still be an oil glut at the end of the year. Still, it was trade first, ask questions later.

Heading into the Energy Forum in Algiers, there was a real concern that prices could dip to sub $20 a barrel levels if no decision was made, and that would leave many producers pumping at below market rate, so with every barrel they would be making a loss (if they aren’t already). The Saudis are running a budget deficit. Venezuela, Nigeria, and Algeria are in desperate need of oil revenues. So, OPEC announced a production limit, which is really no limit at all.

Congress has overwhelmingly rejected President Obama’s veto of legislation allowing relatives of the victims of the Sept. 11 attacks to sue Saudi Arabia, the first veto override of his presidency. The House of Representatives voted 348-76 against the veto, just hours after the Senate rejected it 97-1, meaning the “Justice Against Sponsors of Terrorism Act” will become law.

Obama had argued that the bill could expose US companies, troops and officials to lawsuits, and alienate important allies at a time of global unrest. Major US corporations including General Electric and Dow Chemical also opposed it, as did the European Union and other US allies. Let the lawsuits begin.

The Senate approved a stop-gap funding bill to avert a looming federal government shutdown. Republicans and Democrats agreed to help Flint, Michigan, resolve its drinking water crisis. The bill also includes $1.1 billion to combat the Zika virus and $500 million for flood relief in Louisiana and other states. Lawmakers voted 72-26 to adopt the short-term continuing resolution, or CR, that would keep federal agencies operating from Saturday to Dec. 9.

The vote sends the measure on to the House of Representatives, which also was expected to approve it. Without an extension, many government agencies would run out of money when the federal fiscal year ends at midnight on Friday.

Fed Chair Janet Yellen delivered semi-annual testimony this morning before the House Financial Services Committee. Since the Fed left interest rates steady at its meeting last week, expectations for the next hike have shifted toward the central bank’s December meeting. At the meeting, Yellen hinted that a hike would likely follow before the end of the year, saying that the case for an increase has strengthened but the committee wanted to wait for more economic evidence before raising rates.

Today, Yellen said the financial condition of the top US banks has “strengthened considerably” since the financial crisis as she outlined steps the central bank is considering to make bigger banks have larger cushions and have smaller banks face less stringent requirements. Lawmakers pressed Yellen over the Wells Fargo mess and Yellen said the Fed has started a review of the “disturbing compliance failures.

Wells Fargo Chairman and Chief Executive John Stumpf will forfeit $41 million in unvested equity awards. The bank’s board moved to rescind pay for Stumpf and former community- banking head Carrie Tolstedt ahead of a hearing of the House Financial Services Committee Thursday. Wells Fargo’s board said Tolstedt, who oversaw retail banking during bad behavior there, will forfeit unvested equity awards valued at $19 million.

Clawbacks, or their absence, became a big focus of a Senate Banking Committee hearing last week into the bank’s sales tactics, which earlier resulted in a $185 million fine and regulatory action. During his appearance before that panel, Stumpf and the bank were roundly criticized for firing 5,300 employees over five years, yet taking no action against top executives.

No violins for Stumpf and Tolstedt; Steumpf already holds nearly 5.5 million shares of Wells Fargo worth north of $240 million. Tolstedt is retiring with a $125 million golden parachute, more or less. You have to admit, that’s a hefty pay package for destroying the reputation of a 164-year-old bank.

The Labor Department had just announced it has opened a “top-to-bottom review” of how Wells treated workers tasked to meet unrealistic sales targets. That includes firing workers who reported misdeeds. It also includes failing to pay overtime to workers who toiled extra hours to reach impossible sales quotas.  The agency has set up a special website for current and former Wells Fargo employees to instruct them how to file complaints about labor law violations.

The state of California will no longer use Wells Fargo as an underwriter for the issuance of state municipal bonds, and the bank will have no involvement in the state’s banking or investment activities for the next 12 months. California currently has $2.3 billion invested in Wells Fargo “fixed income and equity and is the largest issuer of municipal bonds and the home state of Wells Fargo.

California state Treasurer John Chiang issued a statement saying: “Wells Fargo’s fleecing of its customers by opening fraudulent accounts for the purpose of extracting millions in illegal fees demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed.”

The Arizona Republic has never endorsed a Democrat for president — until now. The newspaper’s editorial board writes: “The challenges the United States faces domestically and internationally demand a steady hand, a cool head and the ability to think carefully before acting. Hillary Clinton understands this. Donald Trump does not.” The newspaper said Trump, “is not conservative and he is not qualified.”

Orders for durable or long-lasting goods were unchanged in August after a sizable gain in the prior month; still, it was better than estimates which called for a decline. Demand declined for aircraft, heavy machinery, computers and electrical equipment.  Orders for core capital goods rose 0.6% and posted the third increase in a row. The last time that happened was at the end of 2014 and early 2015. Core orders are viewed as a proxy for business investment.

Anheuser-Busch InBev clinched its $103 billion takeover of SABMiller Plc after the British brewer’s investors approved a deal that unites the world’s two biggest beer-makers about a year after it was proposed. AB InBev will dominate the combined entity, which will account for one of every three beers sold worldwide. The Budweiser maker will keep its name, ditching any vestiges of SABMiller, and only one SABMiller executive will be on the new company’s senior leadership team.

Germany denies reports of a possible Deutsche Bank bailout. Germany’s finance ministry says it’s not working on a rescue plan for Deutsche Bank, contrary to an earlier report from the German newspaper Die Zeit. Deutsche Bank told employees not to worry.  In a memo sent to employees, the German investment bank said it had no intention to settle with the US Department of Justice at a price “anywhere near the opening position of $14 billion” and that is had no plans to raise capital.

RBS has agreed to a “toxic” mortgage settlement. The bank has agreed to pay $1.1 billion to settle claims it mis-sold toxic mortgage security products to the US Central Federal Credit Union and Western Corporate Federal Credit Union in the run-up to the 2008 financial crisis.

It may have been the world’s largest IPO in two years, but shares of Postal Savings Bank of China failed to generate much enthusiasm in the Hong Kong market. The lender raised $7.4 billion but priced the deal near the bottom of its marketing range; shares gained 02%. The lukewarm start comes as investors remain cautious on the outlook for the Chinese banking industry, battling bad debts and a slowing economy.

Tyson Foods is recalling 60 tons of fully cooked chicken nuggets that may be contaminated with hard plastic. The problem may have come from a rod used in the manufacturing process, but there are no confirmed reports of adverse reactions to the products. Tyson said the nuggets were supplied to Costco stores and a Pennsylvania wholesaler.

It’s the end of an era. BlackBerry, the Canadian company that invented the smartphone and addicted legions of road warriors to the “crackberry,” has stopped making its iconic handsets. Finally conceding defeat in a battle it had long ago lost to Apple and Samsung, BlackBerry is handing over production of the phones to overseas partners while it turns its full attention to the more profitable and growing software business. BlackBerry said it struck a licensing agreement with an Indonesian company to make and distribute BlackBerry-branded devices. More deals are in the works with Chinese and Indian manufacturers.