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Monday, April 27, 2015

Somewhere Between Extremes

Financial Review

Somewhere Between Extremes

Financial Review by Sinclair Noe
DOW – 42 = 18,037
SPX – 8 = 2108
NAS – 31 = 5060
10 YR YLD + .01 = 1.92%
OIL – .16 = 56.99
GOLD + 21.30 = 1201.70
SILV + .65 = 16.50

We’ll get to the economic news in a minute, but the big market news today is Apple. Net income in the quarter that ended in March was $13.6 billion, or $2.33 a share, representing a 33% jump in profit from last quarter. Analysts on average had forecast second-quarter profit of $12.6 billion, or $2.16 a share. Revenue rose 27 percent to $58 billion, beating estimates of $56 billion. IPhone sales in greater China outpaced those in the U.S. for the first time. Total revenue from greater China surged 71 percent to $16.8 billion. IPhone unit sales jumped 40 percent to 61.2 million. That topped analysts’ average prediction for 58.1 million.

Apple forecast the momentum will continue in the third quarter, with revenue projected to rise to $46 billion to $48 billion from $37.4 billion a year ago. Apple has $193 billion in cash, with a capital return program, which now totals $200 billion. Apple will increase its share-buyback authorization by $50 billion to $140 billion, and increase the company’s dividend by 11 percent; to 52 cents from 47 cents.

To recap: Apple posted better than expected sales and profit; they will increase their buybacks and dividends; and they upgraded their third quarter guidance. Basically, they did everything except wash your car for you.

The Federal Reserve FOMC is meeting this week. It’s a pretty safe bet that policy makers will not be raising interest rates at the meeting, but investors will still be watching the language of the statement for signs on when such a rate hike might be expected. This is a delicate dance by the Fed; they want to test the waters without getting a single toe wet; they might try to indicate they are in favor of a rate hike in order to get a read on market reaction.

Also on tap for Wednesday is the preliminary first-quarter readout of GDP, along with some early April economic reports. The spotlight in Asia this week falls on Japan, where a central bank decision could provide clarity on the direction of the world’s third largest economy. Following its meeting, the Bank of Japan is expected to cut its 2015 inflation forecast by several tenths of a percentage point from 1%, and shave its growth forecast from the current 2.1%. Despite inflation dropping back to zero, governor Haruhiko Kuroda has argued strongly that the BOJ’s existing QE program is on track. Japan’s prime minister, Shinzo Abe, visits Washington as the US and Japan prepare to sign an expanded defense accord and finalize a major trade pact. On Wednesday, he will be the first Japanese leader since World War II to address a joint session of Congress.

As the monetary easing by central banks across the globe keep yields at rock-bottom, investment officers predict that Japanese demand for U.S. debt won’t ease up in the months ahead given the lack of alternatives. Japanese life insurers – some of the world’s largest institutional investors – plan to keep pouring money into U.S. debt this year, outlining that Japan even overtook China in Q1 as the largest foreign holder of U.S. Treasurys. While the current 2% yield on the U.S. 10-year is a far cry from yields of 5% or more before the financial crisis, it is still miles apart from the 0.16% yield on German bunds and the 0.29% yield on the 10-year Japanese equivalent.

The finance ministers of Slovenia and Germany on Saturday acknowledged for the first time that they are considering plans on what to do if a Greek deal is not reached by the end of June, breaking their long-held stance of insisting that the country must stay in the eurozone. The issue of a “Plan B” was raised during Friday’s Eurogroup meeting in Riga, where Athens was strongly criticized for delaying the list of reforms needed to unlock its next round of funding. A Eurogroup meeting in Riga, Latvia on Friday descended into name-calling as the currency bloc’s finance ministers hurled abuse at Greek Finance Minister Yanis Varoufakis, accusing him of being a time-waster, a gambler and an amateur.

The Eurogroup finance ministers don’t’ have any intention of negotiating; for them it is simple – Greece needs to collect more taxes and crush the workers. For the Greek negotiators it is fairly simple as well – the workers are already crushed and the country has no money. Varoufakis was pulled from day to day negotiations; he will still be involved, but from the sidelines. Varoufakis tweeted: “FDR, 1936: “They are unanimous in their hate for me; and I welcome their hatred.” A quotation close to my heart (& reality) these days.”

Greece’s economy is about 2 percent of Eurozone economy, and a hardline stance from the Euro Union finance ministers would not overwhelm Europe’s economy. Most of the money Greece owes is now owed to governments or the central bank, and not to private banks, insurance companies, or hedge funds. Private interests have long since left Athens; the exception is vulture hedge funds that bought Greek debt for pennies on the dollar, with the idea of dragging the Greeks through the courts to enforce collection. So, as the finance ministers of Slovenia and Germany work on a Plan B, I just hope they realize that Plan B really means a return to nationalism in the Eurozone, which has a poor history in that area.

The game of chicken between Greece and its international creditors is turning into a vicious blame game as Athens lurches closer to bankruptcy with no cash-for-reform agreement in sight. Europe’s political leaders and central bankers and Greek politicians agree on only one thing: if Greece goes down, they don’t want their fingerprints on the murder weapon.

Financial firm Markit said its “flash,” or preliminary, reading of its Purchasing Managers Index for the services sector slipped to 57.8 in April from a final reading of 59.2 in March, which had been the highest level since August. A reading over 50 signals expansion in economic activity.

Chipotle Mexican Grill has eliminated genetically modified organisms from all its ingredients, an unprecedented move for a national U.S. restaurant chain. The company, which began labeling its GMO ingredients two years ago and vowed to remove them, has now taken the final step of stripping them from tortillas and cooking oil. The move coincides with a new Chipotle marketing campaign that will tout its use of simple, unprocessed ingredients.

Meanwhile, Coca-Cola announced it doesn’t have plans to change the sweetener for Diet Coke away from aspartame despite other beverage sellers shifting their focus to the use of natural sweeteners. Sales of Diet Coke fell 6% year-over-year in the first quarter. On last week’s earnings call, Coca-Cola executives said finding the right path to grow Diet Coke sales was still a “work in progress.”

Corinthian Colleges is closing all of its schools. The school is closing its 28 for-profit schools, meaning approximately 16,000 students will have to finish their degrees elsewhere. The Department of Education will “help the stranded students review their options, including possibly forgiving some of their loans.” In recent years, Corinthian has been accused by multiple federal and state authorities of systematically lying about its graduation or job placement rates, misleading potential students into enrolling and forking over tens of thousands of dollars to obtain credentials many critics believe to be of dubious value. The company annually received some $1.4 billion in federal financial aid for its students. A group of roughly 100 former Corinthian students that calls itself the “Corinthian 100″ has been publicly pressuring the Department of Education to cancel all debts owed by current and former Corinthian students because of the company’s alleged deception related to its job placement and graduation rates.

Police officers in riot gear clashed with rock-throwing protesters in Baltimore after the funeral for 25 year old Freddie Gray, the latest victim of police brutality. Gray died a week after his spine was somehow partially severed in police custody. He was initially stopped because he fled upon noticing officers, who later found a knife clipped to his pocket. Cell phone video shows police dragging Gray into a van, but when officers took him out, he wasn’t breathing.

His funeral was today, further sparking the city-wide demonstrations. At least seven officers were injured in today’s protests and one was unresponsive, according to the Baltimore police department. The violence broke out near the church where Gray was eulogized. Groups of angry young people surrounded a police cruiser and smashed it in; another cruiser could be seen burning. A drugstore was also looted. Other protesters pelted the police with items picked up at nearby vacant lots: rocks, bricks, boards and chunks of concrete. Some arrests were made. The unrest comes after a weekend during which an angry mob protesting outside Oriole Park at Camden Yards forced the team to close the stadium to keep people inside safe from the violence outside. Fears over the potential for crowds to become violent forced the closure earlier today of several downtown businesses and offices.

So, we started today’s review with a story about Apple earning almost a billion dollars per week in profit in the first quarter, and we finish with a story about violent protests in Baltimore. And that’s where we are today; somewhere between two extremes.

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