Financial Review

Taxman Bites Apple

Sinclair Noe — August 30, 2016

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

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DOW – 48 = 18,454
SPX – 4 = 2176
NAS – 9 = 5222
10 Y + .01 = 1.57%
OIL – .70 = 46.28
GOLD – 12.70 = 1311.50

Since July 8, when the S&P rose 1.54%, that index hasn’t moved more than 0.9% in any given day, and most of those changes were slight gains, including 10 all-time highs. Since Brexit, the S&P 500 has now gone 43 straight sessions without a daily decline greater than 0.7%.

Compare that with the first 43 days of this year when it happened 15 times. For the month of August, the S&P 500 has managed to gain just 3 points, which means it is about as flat as it can be.

EU antitrust regulators have ordered Apple to pay up to €13-billion-euro ($14.5-billion dollars) in taxes to the Irish government after ruling that a special scheme to route profits through the country was illegal state aid. The EU Commission says Apple paid an effective corporate tax rate of less than five-one-thousandth of a percent (0.005%) on its European profits in 2014.

Apple has previously said it received no special treatment in Ireland. Apple’s tax arrangement with Ireland also meant the company avoided taxation on almost all profits from sales of its products in the EU single market, as the sales were recorded in Ireland rather than in the country where the transaction took place. Apple and Ireland said they would appeal the decision.

Ireland’s Finance Minister said he would fight the European Commission ruling that would force Apple to pay taxes to Ireland, even though €13-billion-euro in back taxes is more than twice the country’s entire 2015 corporate tax take and equivalent to about $3,000 for every man, woman and child in Ireland.

Apple is one of more than 700 U.S. companies that have units in Ireland, employing a combined 140,000 people. The government maintains that even if it were to take the cash, European rules mean it would have to use the money to pay down some of its €180 billion euros of national debt rather than fund spending.

CEO, Tim Cook wrote an open letter about the tax ruling and in it he said that Apple “in Ireland and in every country where we operate, follows the law and we pay all the taxes we owe.” And that is probably very true; no reason to doubt that Apple has hired top accountants and attorneys to figure out all the legal loopholes. And now the EU is closing one of the loopholes.

Tim Cook, that is to say Apple, has reacted with outrage, saying the decision would “upend the international tax system” and promising to appeal and overturn the decision. No doubt years of legal fees lie ahead for all involved. But the writing has been on the wall for Apple’s convoluted corporate structure in Ireland for years.

In 2013, a US Senate committee found that Apple pushed its foreign profits into a “stateless” company, one that paid no taxes anywhere, while using an intellectual property agreement to shift US profits to the subsidiary. In 2015, the EU released its own investigation, with more specificity: Apple had negotiated two special deals with Ireland that allowed it to allocate profits to this untaxed company.

The U.S. Treasury Department said it was disappointed with the European Commission seeking to force Apple to repay tax breaks given by Ireland and the case could undermine the “spirit of economic partnership between the U.S. and the EU.” In other words, the Treasury hopes to collect taxes on Apple’s overseas cash hoard someday and they don’t want to see that money going to Europe. Plus, any money Apple pays in taxes to the EU is deductible from Apple’s US tax bill.

Apple has its tax issues in Ireland but it will hope to put all that behind it next week as a new iPhone is expected to be announced. After all, as long as Apple is selling iPhones, $14 billion is not that much. What will an iPhone 7 look like? Pretty similar to an iPhone 6 but new features will likely include waterproofing, stereo sound, a touch-sensitive home button, a dual-lens camera, and due to its thinner chassis, the headphone jack will be removed. The starting point for storage on the new entry-level model is thought to be 32GB, up from 16GB.

New MacBooks, iPad features and a monitor may also be in the works from Apple – but at least some of those devices may not be seen until after the company’s Sept. 7 event. A thinner laptop, a faster iPad display to work with Apple Pencil, and 5K monitors are among the updates coming to Apple products. But the MacBook, which some tech bloggers had thought might come alongside the iPhone 7, is more likely to be released in October.

Voters are heading to the polls for Senate and House primaries in Arizona. Locations of polling places are assigned by address. The location that coincides with your registered address (on your voter information) is where you can cast your vote on election day. Arizona law allows any voter who is registered as independent to cast a vote in the primary election, but independent voters must choose a Republican or Democratic Party ballot at the polling place. The polls close at 7 PM.

The S&P CoreLogic Case-Shiller 20-city composite of existing home prices recorded a 0.8% gain in June and a 5.1% year-on-year advance; that’s down from a 5.3% pace the prior month. Home prices in three U.S. cities – Denver, Seattle and Portland, Oregon – showed the highest year-over-year gains. Housing prices in Phoenix were up 5.1% over the past 12 months.

The Conference Board’s consumer confidence index rose to 101.1 in August from a revised 96.7 in July. That’s the highest level since September 2015. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.

Americans’ view the economy right now was the strongest since before the Great Recession. The present situation index, a measure of current conditions, climbed to 123 from 118.8 and hit the highest level since late 2007. What consumers expect six months down the road, however, was less optimistic. The future expectations index edged up to 86.4 from 82, but it was still well below the post-recession high.

Fed Vice Chairman Stanley Fischer says the US job market is nearly at full strength and the pace of interest rate increases by the Federal Reserve will depend on how well the economy is doing. The Fed has signaled since March it would lift rates twice this year, but investors have been skeptical. Fischer did not comment on the timing of the next Fed rate hike but said “we choose the pace on basis of data.”

The U.S. Labor Department’s monthly employment report on Friday is expected to show the economy added 180,000 jobs in August.  At the end of the day, it always comes down to the jobs number. Yellen can try to persuade us that the case for a rate hike is strengthening, and the other policymakers can chime in with their two cents. But they are all held hostage to the government’s jobs numbers on Friday.

Anything strong (250,000-300,000) and you won’t need anyone from the Fed telling us they are going to raise in September. The number will say it all: below 200,000, and it’s back to a December-only hike.

Trade talks between the European Union and the United States should be halted and a new set started, France’s trade minister said on Tuesday, adding his voice to calls from within Germany for an end to the negotiations. Three years of talks on a Transatlantic Trade and Investment Partnership (TTIP) have failed to resolve multiple differences, including over food and environmental safety.

Critics say the pact would hand too much power to big multinationals at the expense of consumers and workers. But despite a weekend comment by Germany’s Economy Minister that the talks had “de facto failed”, and today’s comments by the French Trade Minister, the European Commission says negotiations are making steady progress and there is an outline of a future agreement.

More than 76,000 people have signed a petition demanding former European Commission President Jose Manuel Barroso be stripped of his pension after taking a job at Goldman Sachs. Organizers plan to present it to current leaders of the EU institutions at the end of September. Critics claim the role is inappropriate given Goldman’s role in the U.S. subprime crisis and Greek debt talks. That’s one way to stop a revolving door.

The FDIC reported that U.S. banks earned $43.6 billion in the second quarter, up from $43 billion a year earlier. Around 60 percent of banks reported an increase in profit from a year earlier. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Only 4.5 percent of banks were unprofitable, down sharply from 5.8 percent in the second quarter of 2015.

Countries including the U.K., Australia and Taiwan have issued travel advisories for tourists to Singapore after the city-state announced a further increase in Zika cases. Singapore’s Ministry of Health confirmed 15 more people with locally-transmitted Zika, bringing the total number affected to 56. Health officials think they will identify even more positive cases.

Financial Review

De Facto Fail

Sinclair Noe — August 29, 2016

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

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DOW + 107 = 18,502
SPX + 11 = 2180
NAS + 13 = 5232
10 Y – .07 = 1.57%
OIL – .69 = 46.95
GOLD + 2.70 = 1324.20

Federal Reserve Chair Janet Yellen, in a speech Friday, said the case for a rate hike had strengthened, but left open the timing. Fed Vice-chair Stanley Fischer followed up by saying a September hike was a possibility. The Fed will have plenty of economic data in the next few days culminating in Friday’s Jobs Report for August.

The market is pricing in a 42% chance of a September interest-rate hike and a 64.7% probability of a rate hike by the end of the year. Over the weekend and today, I read several articles that seemed to relay the basic idea that the Fed is confused and the outlook for rate hikes is muddied. Probably not. I don’t think it’s a done deal but Yellen was pretty straightforward. They haven’t made a decision yet.

If Yellen really wanted to say something straightforward, I think the best thing would be to say the Fed won’t be doing anything right now; they’ve done all they can, and now the politicians in Washington need to do something for the economy.

Americans increased spending by 0.3% in July, buying more new cars and trucks and devoting more money to utilities such as cooling their homes. What’s helped consumers has been a gradual increase in incomes and lower gasoline prices. Personal income rose 0.4% last month. Since incomes rose faster than spending, the personal savings rate climbed to 5.7% from 5.5%.

Inflation as measured by the PCE index was unchanged in July. The core rate of inflation that strips out the volatile food and energy categories rose 0.1%. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.8% in the 12 months ended in July, a tick lower than in June. The annual rate of core inflation was flat at 1.6%.

Japan’s Nikkei climbed 2.3% overnight as the yen weakened against the resurgent dollar following Yellen’s comments. Adding to pressure on the currency, BOJ Governor Haruhiko Kuroda said at Jackson Hole on Saturday that there was ample space for further easing of monetary policy via QE or by cutting interest rates deeper into negative territory.

Hackers have breached databases for election systems in Illinois and Arizona. The FBI has been investigating. In late May, Arizona officials took the statewide voting registration system offline after the FBI alerted the Arizona Department of Administration that there was a credible cyber threat to the voter registration system. When they took the system offline to review any vulnerabilities, they discovered that a county election official’s username and password had been posted online publicly.

It’s believed that a worker may have inadvertently downloaded a virus which exposed the username and password. In this instance, the username and password information posted would only give individuals access to a localized, county version of the voting registration system, and not the entire state-wide system. There is no evidence that any data within the system was compromised and there was no evidence of malware present in the database.

The Illinois database included voters’ names, addresses, sex and birthdays in addition to other information. Some of the records include either last four digits of a voter’s social security number or drivers’ license numbers. Illinois officials say they are confident the hackers did not change the data, although the investigation is still underway.

Brazil’s suspended President Dilma Rousseff testified in her impeachment trial this morning.  Rousseff urged senators to vote against her impeachment, saying it would put at risk the country’s democracy. In a speech during her trial in the Senate, Rousseff recalled her fight against dictatorship, highlighted her social welfare policies, and said the charges against her were manufactured by the country’s elite to take power after losing the 2014 presidential election.

She warned of more inequality and poverty if her successor, Michel Temer, were to be confirmed in office. Rousseff again denied any wrongdoing and accused the opposition of sabotaging her administration to gain power, without consideration to the collateral damage the political maneuvering has caused the Brazilian people.

Turkish forces are intensifying their military campaign in Syria, seizing territory held by ISIS and Kurdish militants. The clashes underscore the complexity of the U.S.-led coalition against Islamic State. American special operations forces are embedded with Kurdish rebels, but also have close contact with their Turkish counterparts and rely on the country for their rear supply lines.

Free trade talks between the European Union and the United States have failed, at least according to Germany’s economy minister, Sigmar Gabriel, citing a lack of progress on any of the major sections of the long-running negotiations. Both Washington and Brussels have pushed for a deal by the end of the year, despite strong misgivings among some EU member states over the Trans-Atlantic Trade and Investment Partnership, or TTIP. Over the weekend, Gabriel, who is also Germany’s vice chancellor, said: “In my opinion, the negotiations with the United States have de facto failed, even though nobody is really admitting it.”

Apple has sent out invitations for September 7^th. A big deal, likely the unveiling of the new iPhone 7, which will look a lot like the iPhone 6. Apple also likely has marked tomorrow for a big event in Europe.

The European Commission started to look into Apple’s Irish tax rate in 2014, and tomorrow they will issue a ruling on the three-year investigation. Today, the EU’s competition commissioner published a 130-page judgement which says that Apple received “illegal state aid” from Ireland – essentially a sweetheart deal that allowed the computer maker to unfairly reduce its tax bill in a way not available to other companies.

The commission focused on how and where Apple lists its intellectual property for tax purposes, which is one of the major loopholes that critics claim tech companies use to funnel assets to low-tax countries. The decision does not have a specific fine attached, but it is expected to be Europe’s largest tax penalty ever, according to the Financial Times, which pegs the amount at “billions of euro.” We’ll learn more tomorrow.

GCL-Poly Energy Holdings, the world’s biggest maker of polysilicon for solar cells, has agreed to purchase the solar-material business of SunEdison for $150 million. SunEdison filed for Chapter 11 bankruptcy protection in April with $16 billion in liabilities.

Separately, D.E. Shaw & Co is weighing a bid for SunEdison’s controlling stake in TerraForm Power, the bankrupt renewable energy producer’s most valuable asset. The hedge fund and its affiliates already own some TerraForm Power common shares after receiving them in an agreement announced last year upon forgiving debt owed by SunEdison. Appaloosa Management and Brookfield Asset Management have also announced plans to jointly bid on “Class B” shares of TerraForm Power.

The saga over the control of the Viacom media empire may finally be completely done. Keryn Redstone, granddaughter of Sumner Redstone, has agreed not to oppose her grandfather’s decision to resolve lawsuits over the removal of Viacom CEO Philippe Dauman, removing a key obstacle to a settlement. In return, Redstone said he will meet with his granddaughter, who has challenged his competency in a Massachusetts court fight.

The FDA has issued an Emergency Use Authorization for Roche’s “Lightmix Zika” test, a quick diagnostic check that allows healthcare professionals to quickly detect the virus. Zika has been associated with microcephaly, a birth defect characterized by an unusually small head and potential developmental problems.

Amid a wave of criticism over the rapid escalation in EpiPen costs, Mylan said it would launch a generic alternative to its allergy auto-injector at a discount of more than 50% to the branded product’s list price. Mylan expects to release the $300 two-pack carton in several weeks, pending completion of labeling revisions. That would still represent about a 300% increase over the past 9 years; and the actual drugs used only cost a few cents per dose. So, it still looks like price gouging.  The House Oversight and Reform Committee has decided to look into the matter.

New rules by the FAA go into effect today, clarifying what is acceptable commercial usage of small unmanned aerial vehicles. Drones must weigh less than 55 pounds, fly up to a maximum of 400 feet in altitude, at a speed of no more than 100 miles per hour, only operated within line of sight and can only be operated during the day (although there are some exemptions for night flights).

According to industry estimates, the rules could generate more than $82 billion for the U.S. economy and create more than 100,000 new jobs over the next decade. The Federal Aviation Administration says there will be 600,000 commercial drone aircraft operating in the US within the year as a result of the new safety rules.

We’ve all heard about the problems with Takata airbags; the air bags have been linked to the deaths of at least 14 people and more than 100 million vehicles worldwide have been slated for recall to replace the inflators. The company is looking for a financial sponsor to help overhaul its business. Now comes word a truck transporting Takata air bag inflators and propellants exploded in Texas earlier this month, resulting in one death and four injuries, and incinerating a nearby home.

Financial Review

Puerto Rico Screwed

Sinclair Noe — May 2, 2016

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

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DOW + 117 = 17,891
SPX + 16 = 2081
NAS + 42 = 4817
10 Y + .05 = 1.86%
OIL – 1.14 = 44.78
GOLD – 1.50 = 1290.90

Puerto Rico’s governor said Sunday that he had ordered a debt moratorium, blocking a $422 million payment due today.  The US Congress continues to debate a legislative fix for Puerto Rico’s $70 billion debt load. The default ratchets up pressure on Congress to find a legislative solution for Puerto Rico, which owes another $1.9 billion of debt on July 1, including about $777 million in general obligation debt backed by its constitution.

Meanwhile, Puerto Rico is battling the Zika virus, and hospitals and health clinics are forced to shut down because of debt. New York City has sent one million condoms to help combat the spread of the disease. There is some symbolism there.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 50.8 from 51.8 the month before. A reading above 50 indicates expansion in the manufacturing sector and a reading below 50 indicates contraction. The employment index rose to 49.2 from 48.1 a month earlier. Expectations called for a reading of 49.0. New orders dropped to 55.8 from 58.3. The prices paid index rose to 59.0 from 51.5, compared to expectations of 52.0.

Construction spending increased 0.3 percent to the highest level since October 2007, following an upwardly revised 1.0 percent jump in February. Construction outlays were up 8.0 percent from a year ago. In March, construction spending was supported by a 1.1 percent surge in private construction. Public construction outlays fell 1.9 percent in March.

According to a Federal Reserve survey of senior bank loan officers, credit quality deteriorated in the first quarter on loans to businesses and consumers in energy dependent areas of the country. Low energy prices have led to declining activity in regions of the country where oil and natural gas extraction is a key driver of economic activity.

According to the survey 58% of the banks reported that loan quality is going to continue to deteriorate assuming energy prices remain low. About 15% of banks reported that credit quality had worsened on consumer credit card loans and 14% on loans outside of credit card and autos. Commercial real estate loans were a concern for 16% of the banks. And the hardest hit area is auto loans, where 23% of banks reported credit deterioration. Almost half of the banks surveyed said they were tightening lending policies on firms in the energy sector.

Baker Hughes and Halliburton are calling off their megamerger. Opposition from both US and European regulators has caused the two energy giants to call off their $28 billion deal. The deal’s cancellation means Halliburton must pay Baker Hughes a $3.5 billion termination fee by Wednesday. The cash-and-stock acquisition – valued at $34 billion when it was announced in November 2014, and now worth about $28 billion – would have brought together the world’s No. 2 and No. 3 oil services companies, raising concerns about higher prices in the sector.

Oil-and-gas producers Midstates Petroleum and Ultra Petroleum have filed for Chapter 11 bankruptcy protection, joining several companies that have been unable to meet debt obligations after a steep decline in energy prices. Oklahoma-based Midstates and Houston-based Ultra have a combined $5.8 billion in debt.

The two join dozens of U.S. oil and gas producers that have filed for bankruptcy since the start of 2015. Following this weekend’s bankruptcies of Ultra Petroleum and Midstates, the energy high-yield default has soared to a record 13% rate, surpassing the 9.7% mark set in 1999, according to Fitch Ratings.

Talks for a free trade deal between the U.S. and Europe face a serious impasse with “irreconcilable” differences, according to leaked negotiating texts discussing the Transatlantic Free Trade Agreement. The leaked documents come from the Dutch chapter of Greenpeace show that American trade negotiators had pressed their European counterparts to loosen important environmental, consumer protection and other provisions.

The deal, known as the Transatlantic Trade and Investment Partnership, or TTIP, would cover a huge range of goods and services between the world’s largest national economy and the world’s largest single market, spanning telecommunications, agricultural products, textiles, intellectual property, financial services and regulatory compatibility. The documents were shared in advance with several European publications. When you consider this latest document leak along with the recent Panama Papers, one thing is starting to stand out. Secrecy doesn’t exist in the digital age.

Sports Authority has decided to sell its remaining assets. Rather than attempt to re-organize under Chapter 11 bankruptcy protection, Sports Authority will hold an auction May 16. If a buyer emerges, some locations could be saved. There are 463 Sports Authority stores in 41 states employing more than 14,500. Sports Authority is $1.1 billion in debt and lost $256 million before taxes in fiscal year 2015. In January, Sports Authority failed to make a $20 million debt payment.

Takata shares plunged as much as 16% overnight on reports that the company, already at the center of the biggest safety crisis in automotive history, will soon get hammered by regulators. The NHTSA has told automakers that recalls will expand to all cars with Takata air bags lacking a moisture-absorbing desiccant that keeps the devices from deteriorating. There are more than 100-million such vehicles worldwide.

Verizon is deploying “thousands” of extra personnel, as a strike of nearly 40,000 wireline workers drags on in its third week with few signs of resolution. Some employees are on special assignment and others are coming out of Verizon’s technical training in Virginia. On Thursday, the company made a “last, best and final offer” to leaders of the CWA and IBEW, but union leaders responded that Verizon needs to “get serious about negotiations.”

Hulu is designing a subscription service that would stream feeds of popular broadcast and cable TV channels, in a move that would make the company a competitor to traditional pay-TV providers and other new digital entrants. Until now, Hulu has offered on-demand programming from major networks, similar to Netflix.

Hulu wants to offer what is known as a “skinny bundle” of broadcast and cable channels; in particular, those operated by 21st Century Fox, the Walt Disney Company and Comcast’s NBCUniversal. Those three media companies co-own Hulu. They hope to launch the service in the first half of 2017. While exact pricing details are still being determined, the new service is expected to cost about $40 a month.

Sony is developing a pair of intelligent contact lenses. The tech nerds are calling them “smart eyes,” and they’re supposed to measure a person’s blink, wink, and tilt of the eye to figure out when to record, save and delete video. Sony’s contacts include a camera, a wireless processing component and a storage unit, and differ from Samsung’s smart lenses patented earlier this month, which rely on a smartphone.

Last week I promised more on the old idea of Sell in May and stay away. Stock market returns are far worse from May through the end of October, than they are during the rest of the year. So as May starts, history suggests that (based on market performance as a whole) you might be smart to sell your shares now, and not bother with markets again until November.  Over the past 15 years, stock markets have performed far better between November of one year and April of the next, than between May and October.

MSCI Asia ex-Japan Index, Singapore’s STI, the Hang Seng, Malaysia’s KLCI, the Shanghai Composite and the S&P 500 (as well as the MSCI World) all perform significantly better from November 1to April 30, than from May 1 to October 31.

For example, the MSCI Asia ex-Japan posted a negative return of 1.7 percent, on average, during the May-November period in 2001-2015, and a 9.0 percent return from November through April. Since 2001, on average the STI has fallen 1.9 percent from May through October, and appreciated by 6.7 percent during the period from November to April.

The biggest difference in performance for the two periods was for the Shanghai Composite, where shares fell by 6.3 percent on average from May through the end of October, but rose by 10.4 percent during the other period.

The S&P 500 has a negative 1.4% from May through October and a positive return of 5.1% for November to May, for a difference of 6.5%. Over the past 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April.

So, the idea was that you sold Friday, and now you can go on vacation until November 1^st. Is it really that simple? Well, yes. Since 1950, there have only been 9 years when the DJIA Best Six Months failed to delivery market gains. And if you want to get a bit more specific, there is an extra entry-exit strategy. Sy Harding made some minor adjustments to the six-month cycle and added MACD as a timing mechanism (MACD stands for moving average convergence divergence).

First, start the bullish cycle on October 16th, which is two weeks earlier. Starting the cycle, a little earlier makes sense because there have been several October bottoms in the S&P 500. Second, start the bearish cycle on April 20th. Third, add MACD to time signals near these cycle dates (October 16th and April 20th).

So, you would look for a bullish MACD any time after October 16 for you buy signal, or you would look for a bearish MACD any time after April 20 for your sell signal. The S&P 500 crossed its signal line last week on the 26^th. As always, momentum indicators and seasonality always takes a back seat to price action. The Sell in May idea is playing probabilities, not a guarantee. The other nice thing is that you can take a summer vacation and you don’t have to worry about the markets.

FINANCIAL REVIEW

More Worthwhile Pursuits

Sinclair Noe — October 12, 2015
Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)
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DOW + 47 = 17,131
SPX + 2 = 2017
NAS + 8 = 4838
10 YR YLD closed
OIL – 2.10 = 47.53
GOLD + 7.50 = 1164.90
SILV – .01 = 15.92

The Dow Industrials posted a gain for the seventh consecutive session, and ninth gain in the past 10 sessions. During the rally, the Dow has gained 1,130 points. Crude oil futures settled 5.1 percent lower after gaining almost 9 percent last week. The dollar was down slightly.

Dell and private-equity firm Silver Lake will buy EMC Corp. for roughly $67 billion in cash and stock, marking one of the largest technology-industry takeovers ever. The $33.15 a share price tag represents a 19% premium over Friday’s closing price. EMC also owns about an 80% stake in VMware, which will remain a publicly traded company. EMC holders will receive $24.05 a share in cash and in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. VMware has a market value of about $33 billion.

The Dell deal is the largest in tech history, and it may be the biggest tech deal in terms of debt. Dell will add about $50 billion in debt to complete its proposed acquisition, bringing the closely held company’s total debt to about $60 billion.

Budweiser must really like Miller. Anheuser Busch InBev upped the ante again, making its fourth bid in the past few weeks for SABMiller, saying it’s willing to pay $103 billion in cash and stock. Under British takeover rules Anhesuer Busch InBev must make a formal offer by Wednesday or sit on the sidelines for at least 6 months. SABMiller, the world’s second largest brewer, has rejected three prior proposals since news first emerged in September that Anheuser-Busch InBev was interested in a merger.

The deal, if it were to be completed, would create a combined company with $64 billion in annual revenue that commands 30 percent of global beer sales. Any deal between the brewing giants would most likely face significant regulatory scrutiny.

Separately, the Justice Department is investigating allegations that Anheuser-Busch InBev is trying to cut competition by buying distributors, making it harder for fast-growing craft brewers to get their products on store shelves. In the past few months, A-B InBev has made deals for five distributors in three states. Many states require brewers to use distributors to sell their product, and once AB InBev buys a distributor, craft companies say they find that they can’t distribute their beer as easily and sales growth stalls.

A demonstration in Berlin on Saturday involved hundreds of thousands of protesters against the Transatlantic Trade and Investment Partnership being negotiated between the U.S and EU. The broad trade accord is seen as picking up momentum following last week’s Trans-Pacific Partnership deal, along with some gentle nudging from large multinationals. Groups in Europe are taking issue with TTIP’s lack of transparency and the potential impact on labor and safety.

Standard & Poor’s has cut its ratings on Catalonia by one notch to BB-, saying it expects increasing political tension following last month’s regional elections.

Greece’s new government faces a major test this week when several new economic reforms and austerity measures demanded by international creditors need to be voted on to become law. The Greek parliament will vote this week on an omnibus bill cutting pensions, raising the retirement age and increasing punishments for tax evasion ahead of the country’s first bailout review later this month. The reforms will need to be approved to unlock a fresh -euro loan installment from the country’s €86-billion-euro bailout.

Several dozen Republican congressmen have signed a petition that will force the House to vote on whether to revive the Export-Import Bank that helps American companies sell goods overseas. After the House votes on the Ex-Im Bank bill later this month, the Senate would still have to approve the measure.

The interest rate watch goes on. Here’s the latest twist. U.S. Federal Reserve policymakers are still likely to raise interest rates this year but that is “an expectation, not a commitment,” – so says Fed Vice Chairman Stanley Fischer at a weekend International Monetary Fund (IMF) meeting in Peru. Fischer also said “Considerable uncertainties” still surround the U.S. economic outlook, including the drag on exports from slowing global growth, low investment caused by the decline in oil prices and the recent “disappointing” drop in U.S. jobs.

This morning, Atlanta Federal Reserve Bank President Dennis Lockhart says the Fed will have plenty of new economic data to make a decision in December. And San Francisco Federal Reserve Bank President John Williams said that even “a little bit” more economic data could convince him to support a rate hike at the Fed’s next meeting, in October. Over the weekend Chicago Federal Reserve Bank President Charles Evans said the Fed that globally low inflation makes it “challenging” for the U.S. central bank to lift domestic inflation to its 2 percent goal.

Social Security recipients shouldn’t expect an increase in benefits next year. Adjustments are based on increases in inflation, however falling gasoline prices over much of the last year mean the cost-of-living adjustment, set to be announced Thursday, will likely be zero. The COLA adjustment affects payments to around 70 million Americans. This is just the third time in the past 40 years that Social Security would get no increase in next year’s benefits.

Much of the stock market is sensitive to the economic ramifications of Fed decisions, of course. But perhaps the sector with the most near-term sensitivity is the financial sector. The big banks are scheduled to report earnings this week, including: GS, BAC, WFC, C, JPM, and MS. While the broader market has recovered from losses sustained in the latter half of August, banks are still struggling. Other major earnings reports on the calendar this week include, Intel, GE, and Alphabet (formerly known as Google).

General Electric is in advanced talks to sell a specialty finance portfolio, worth more than $30 billion, to Wells Fargo. Reuters reports Wells Fargo has so far outbid other parties for General Electric’s vendor financing, commercial distribution finance and direct lending assets. A deal could be announced by the time Wells Fargo publishes its third-quarter earnings on Wednesday.

Glencore halted trading of its Hong Kong-listed shares overnight pending the announcement of an asset sale. The embattled mining giant then confirmed the sales process for its wholly-owned Cobar copper mine in Australia and Lomas Bayas copper mine in Chile. The deals are part of a broader plan Glencore has outlined to cut $30 billion in net debt, weather a slump in commodity prices and revive its shares (which have dropped 57% this year).

Copper rose 0.4 percent following a near 4 percent gain last week after production cuts by Glencore boosted base metals. Glencore plans to cut zinc production by a third. Zinc capped the biggest one-day gain in at least 26 years on Friday and copper jumped 3.1 percent.  The shift in output may not be enough to offset weak demand growth in China. Demand has been disappointing, but supply has also been worse than expected.

Fiat Chrysler  has disclosed the price range of Ferrari’s initial public offering that could value the luxury unit at close to $10 billion. The company will sell up to 10% of Ferrari in the IPO at a price of between $48-$52 per share and use the proceeds of the offering to help pay for its own turnaround plan.

Looking to secure a larger slice of the world’s biggest auto market, Ford is investing $1.8 billion over the next five years to expand research and development in China. The company also expects to introduce the C-MAX Energi, a plug-in hybrid, to the Chinese market next year. Beijing has been trying to encourage more electric vehicles to combat pollution, but progress has been slow due to the lack of infrastructure.

Angus Deaton, a Princeton economist, was awarded the Nobel Memorial Prize in Economic Science. The award committee said Deaton’s research has “shown other researchers and international organizations like the World Bank how to go about understanding poverty at the very basic level.” Deaton has criticized the widening income gap between rich and poor in the U.S.

In his 2013 book, “The Great Escape,” Deaton wrote that “inequality can sometimes be helpful” in promoting prosperity by giving people incentives to work harder and more efficiently. But last year Deaton wrote that he worried that high-paying jobs in finance and other fields were diverting talented young people from “more worthwhile pursuits.” He also warned that the very rich might be using their disproportionate influence to “write the rules in their favor, and they may work against the public provision of health care or education, for which they pay a large share but have little personal need.”

In a 2003 essay, Deaton wrote about the difficulty in determining how we define poverty. He wrote: Even if you have enough goods, they are worth little if you are not healthy enough to enjoy them. Children who live in an unsanitary environment will obtain little nutritional benefit from the food that they eat if they continually suffer from diarrhea. More broadly, girls who are denied the opportunity to go to school experience yet another type of poverty, the poverty of not being able to read and to participate in activities that are only open to the literate. People are also poor in another sense if they lack the resources to participate fully in the society in which they live, who in Adam Smith’s term “are afraid to appear in public,” even if their incomes would be sufficient in some other society.

Friday, May 23, 2014 - Always Double Check Your Spreadsheets

Financial Review with Sinclair Noe

DOW + 63 = 16,606
SPX + 8 = 1900
NAS + 31 = 4185
10 YR YLD - .02 = 2.54%
OIL + .67 = 104.41
GOLD - .80 = 1293.90
SILV - .01 = 19.58

The S&P 500 Index closed at a record high of 1900.53. It was a record high close but not a record high considering intraday pricing. The S&P hit an intraday high of 1902 on May 13, however it closed on that day at 1897. Today, the intraday high was 1901, but I’ve always considered the close to be a more significant number than the intraday high. Since the start of the year we’ve been on a roller coaster ride in the markets, but as of today the Dow is up 0.2% year to date, the Nasdaq is up 0.2% for the year, and the S&P is up 2.8% since the start of the year.

If you are a regular, you might wonder why we aren’t celebrating a record high. The first answer is that 1900 is just a number with no special significance; the second answer is that we only celebrate when the Dow Industrial Average hits a record high, and the last record high close on the Dow was May 13 at 16,715. We don’t celebrate S&P records, and like so many things, the reasoning is entrenched in archaic traditional dogma.

An example would be Memorial Day, which started after the Civil War as a way to commemorate the soldiers who died while in military service. The holiday was originally known as Decoration Day, a day to place flowers or other such decoration on the graves of the fallen soldiers. It seems like some sort of twisted ritual when today we have such little respect for our soldiers that we can’t even provide timely health care in a VA hospital. Maybe this Memorial Day we can all contact our elected representative.

You can send an email by going to contactingthecongress.org, or the main phone number for Congress is 202-225-3121. I hope you could contact at least one of your elected officials and tell them to take immediate action to straighten out the problems at the VA before we lose another soldier. I really don’t care if you are republican or democrat or something else; this is not a red or blue issue, it’s a red, white, and blue issue.

In economic news, the Commerce Department reports sales of new single family homes rose 6.4% to a seasonally adjusted rate of 433,000 units in April. The rise ended two straight months of declines. The inventory of new houses on the market increased 0.5% to 192,000 units, the highest level since November 2010. Nevertheless, the stock of new houses on the market remains more than 50% below its pre-recession level.  At April's sales pace it would take 5.3 months to clear the supply of houses on the market, down from 5.6 months in March. With inventories rising, the median price of a new home fell 1.3% to $275,800 from April last year.

According to Freddie Mac, rates on fixed 30-year mortgages fell to an average of 4.14% this week, a near seven-month low. And mortgage rates almost certainly play a very big role in the housing market and according to a new report from Deutsche Bank they explain the current weakness in the housing market. 

Last year rates spiked as the markets threw a taper tantrum, a strong reaction to the possibility the Fed would exit QE. Mortgage rates bumped up one percentage point, not a huge move, but on a percentage basis, it was more than 30%. Sharp spikes in mortgage rates tend to produce “extended periods of weakness in housing” that last several quarters historically. The current cycle hasn’t disappointed on that front. But they also find that most housing indicators have actually fared better in the recent episode relative to the historical experience.

With the caveat that all real estate markets are local, most indications of housing supply show that markets have returned to pre-crisis and even pre-housing boom levels. Housing demand is improving gradually, though household formation levels have disappointed many analysts so far.

This week Russian President Putin traveled to China to ink a deal to sell natural gas to the China over the next 30 years. Meanwhile negotiators from the US and the Eurozone very quietly began their fifth round of negotiations on the Transatlantic Free Trade Agreement, also known as the Transatlantic Trade and Investment Partnership. Text from the private negotiations has leaked out, but nothing is official yet. Big Oil and Gas is looking at the situation in Europe and seeing a big opportunity, and so they are trying to remove restrictions on the export of energy goods.

For example, any request for an export license to ship natural gas from the US to the EU would be approved “automatically”, even if it means increased gas prices for US consumers, increased dependency of imports to the US, or potential environmental damage. While it would lock in more business for Big Oil, it’s hard to see how this helps the goal of US energy independence or the broader public interest.

The EU’s ideas for free trade in energy with the US would also be a frontal assault on the possibility for governments to impose a “public service obligation,” requiring utility companies to deliver natural gas at certain prices to consumers, for example. Any such public service obligation should be “clearly defined and of limited duration” and also not be “more burdensome than necessary.” In other words, if we have a cold spell in the US and local utilities need natural gas, we could be forced to ship it to Europe, even if for a limited duration.

Sunday brings a presidential election in Ukraine. Putin says he will honor the results, saying Russia will "respect the choice of the Ukrainian people" in the election and will work with the new leadership.  but the results may be a tricky thing; we still don’t know if they will actually be able to handle balloting in eastern Ukraine. And if there is not a clear majority winner, there would be a runoff election in June.

Have you read the new book on economics, “Capital in the Twenty First Century”, written by French economist Thomas Piketty? It’s a big, thick book and a bestseller that has started multiple and running debates. Piketty's book claims that inequality will return to the heights seen in earlier centuries (think the Gilded Age or the French Revolution) unless governments intervene. The best-selling book has been embraced by liberals as a call to action against inequality, and attacked by conservatives as a call for socialism and wealth redistribution. And so a couple of journalists for the Financial Times, Chris Giles and Ferdinando Giugliano did some fact checking and they claim some of the facts are less than factual.

Giles noted what he described as fundamental problems with some of Piketty's numbers on wealth inequality. Giles wrote: "I discovered that his estimates of wealth inequality -- the centrepiece of Capital in the 21st Century -- are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air."

Giles also said that the spreadsheets Piketty provided as source material for his book have "transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source."

In his detailed response, Piketty did not confirm or deny that there were any big errors in his data, but said his raw data sources had to be adjusted in some cases to paint a smoother picture, or to fill in gaps. Piketty wrote:  “I have no doubt that my historical data series can be improved and will be improved in the future, but I would be very surprised if any of the substantive conclusion about the long-run evolution of wealth distributions was much affected by these improvements." Piketty also pointed out that subsequent studies have backed up many of his conclusions, including the idea that wealth has become more concentrated in the US in recent decades.

Next week’s economic calendar includes a look at housing prices from Case-Shiller/S&P; the year-over-year increase in prices in 20 major cities has slowed from the recent peak of 13.7% in November 2013, and the trend likely continued in March.

Next Friday, we’ll get a report on personal income; wider coverage as a result of the ACA meant Medicaid benefits accounted for 20% of all personal income gains in the first three months of the year, therefore income excluding Medicaid benefits is probably a more accurate way to look at the data.

The Conference Board will release its confidence survey Tuesday and the University of Michigan sentiment report is set for Friday; an important subset will be how households view job availability.

On Thursday, we’ll see the Commerce Department’s revised estimates of first quarter GDP; you will recall the first estimate showed growth at just at annual rate of 0.1%, which was really bad; the revised estimate could turn ugly, even negative, like maybe down 0.9%. The second quarter GDP is expected to bounce back, but the hole is getting deeper.

Happy Memorial Day Holiday.