The World Continues
DOW + 46 = 18,070
SPX + 6 = 2114
NAS + 11 = 5016
10 YR YLD + .02 = 2.13%
OIL – .22 = 58.93
GOLD + 9.90 = 1188.80
SILV + .27 = 16.47
Orders for factory goods rose to 2.1% in March, a little less than expected. Orders for durable goods rose 4.4%; that’s for goods designed to last for three or more years. Orders for non-durable goods dropped 0.3%. But the big economic news this week will be the Friday Jobs Report. The Jobs Report for March came in at a very disappointing 126,000 jobs added; forecasters predict job creation in April will bounce back to somewhere between 225,000 to 245,000 new jobs, with the unemployment rate ticking down to 5.4%. We’ll also be watching the jobs report for any indication of wage inflation. The employment cost index was up 0.7% in the first quarter.
The government calculates that the typical household threshold for spending on housing and utilities is 30%. The AP reports that more than one in four renters spend more than half their income on housing and utility costs. This is a simple story of supply and demand. Housing supply is very tight. The rental vacancy rate has not been this low in 20 years. Tight supply and strong demand means higher prices. And as rental rates have moved higher, wages have not. According to the Labor Department average hourly wages have risen just 2.1 percent in the past 12 months, while Zillow reports rental prices have climbed 3.7 percent.
So, we all try to save money where we can; one money saving idea is to cut the cable. Today Comcast reported that the number of people who subscribe to the company’s Internet service surpassed its total video subscribers for the first time during the second quarter this year. The internet is killing TV. This turning point in technological evolution was announced during Comcast’s earnings call this morning; despite dwindling cable customers, the company still pulled down net income of $2.1 billion. Comcast continues to generate significantly more revenue from its video business than from broadband. Video revenue was $5.3 billion for the quarter, compared with $3 billion for high-speed Internet.
Over the weekend, about 40,000 investors gathered in Omaha, Nebraska for the Berkshire Hathaway shareholders’ meeting, also known as “Woodstock for Capitalists”. Prior to the big get-together, Buffett talked with Fortune magazine and admitted he has “been wrong on interest rates.” Two years ago, Buffett said he was worried about the Federal Reserve’s efforts to stimulate the economy. In particular, he warned that the end of the Fed’s so-called quantitative-easing program would end badly. Buffet missed out on about $4 billion because he missed the direction of interest rates. He said, “It is so hard for me to believe that you can drop money from a helicopter and not have inflation, but we haven’t.” Today, Berkshire Hathaway reported earnings that topped analysts’ estimates.
The Pimco Total Return Fund, launched by Bill Gross, has lost its title as the world’s biggest bond mutual fund, following two years of withdrawals. Pimco said investors yanked another $5.6 billion from the Pimco Total Return Fund last month, bringing its assets to $110.4 billion at end of April. By comparison, the Vanguard Total Bond Market Index Fund had $117.3 billion as of April 30. The Pimco Total Return Fund delivered a net after fee return of 1.62 percent year-to-date through April.
Warren Buffett and Bill Gross agree on at least one thing: the 30-year bull market in Treasury bonds is coming to an end as 30-year bond yields rose to a four-month high. Buffett said long-term bonds are overvalued and it’s not worth buying long-term bonds at current interest rates. Gross said the bull market “supercycle” for both bonds and stocks is ending.
The U.S.’s two largest food distributors, Sysco and U.S. Foods, will square off with the Federal Trade Commission in a Washington federal court tomorrow, in a seven-day hearing that will decide the fate of their planned merger. The FTC filed suit in February to block the merger after investigating it for more than a year, arguing that the deal would “eliminate significant competition…and create a dominant national food service distributor.”
Faced with the worst sales slump in over a decade and the rise of gourmet burger chains, McDonald’s unveiled a turnaround plan. It’s largely operational; they will divide the company into 4 new global segments; they will also sell off company stores to franchisees. No big announcement on menu changes, and still no word on what they put in that McRib thing.
Last month, GE announced a sweeping overhaul, jettisoning the bulk of its finance division to focus on big-ticket industrial products such as jet engines and power turbines. There was some speculation that GE might divest its lighting business after deciding last year to sell its appliances segment and moves by Siemens and Philips to hive off lighting units. GE Lighting totaled about $2.5 billion in revenue last year, 2.3 percent of the company’s overall industrial sales. GE will keep its lighting business and give it a high tech boost. GE will collaborate with Qualcomm and Apple to embed technology into lighting, to transmit data from LED lighting to consumers’ smartphones. One use of the “indoor positioning” technology could be to transmit customized coupons to shoppers depending on their store location. GE also said it will produce an LED bulb compatible with Apple’s yet-to-launch connected-device platform HomeKit. The bulb can change colors to align with the natural rhythms of the body.The tie-ups underscore GE’s plans to dive into the emerging and increasingly competitive market for connected lighting that integrates with smart devices.
Corinthian Colleges has filed for Chapter 11 bankruptcy. The for-profit school operator sold most of its campuses in November and then closed its remaining 28 campuses last month, affecting 16,000 students. At its peak, the company operated more than 120 colleges with more than 110,000 students across North America under the Everest, Wyotech and Heald brands, and investors valued the company at more than $1.4 billion. The only surprise here is why they filed Chapter 11, which involves reorganization; it does not look like Corinthian can reorganize.
Federal and state authorities have accused Corinthian of lying about its graduation and job placement rates, misleading potential students into enrolling and taking on tens of thousands of dollars in student loan debt for an education and credentials of dubious value. State prosecutors in Massachusetts, California and Wisconsin have separately sued the company, as has the federal consumer bureau. California settled similar accusations with the company in 2007. Last month the Department of Education accused Corinthian of falsifying hundreds of job placement rates dating back to 2010 and misleading students and accreditation agencies about graduate employment rates; last month the department fined Corinthian $30 million.
The Department of Education provides the money for federal student loans, and collects payments from students. It also decides when colleges do not meet the basic eligibility standards to receive federal student funds, which provide almost all the revenue of for-profit colleges like Corinthian. Corinthian fell out of favor with the Department of Education last summer over a paperwork dispute, leading to a cash crunch at the company after the department slowed its access to federal financial aid. The Education Department subsequently bailed out the company and brokered a sale of more than half of Corinthian’s campuses to ECMC Group, one of the department’s contracted debt collectors. As the company descended into insolvency, the Education Department allowed it to continue to enroll new students at its remaining campuses in an effort to keep its schools attractive to potential buyers.
And then the story gets more interesting. While Corinthian Colleges is permitted to file Chapter 11 bankruptcy (or any other chapter in the bankruptcy code), indebted students are stuck with the bill for loans made through the Department of Education on behalf of for-profit schools that had a record of falsifying records, and clearly appeared to be headed toward collapse. Most student loans cannot be wiped out in Chapter 7 or Chapter 13 bankruptcy, unless there is some sort of undue hardship.
As part of the sale of some campuses last summer to the debt collector, the Consumer Financial Protection Bureau negotiated $480 million of forgiveness for students’ private loans. Their federal loans, which can be discharged only by the Department of Education, stayed intact. And that has led to a group of students saying they refuse to pay. They call themselves the Corinthian 100, although there are about 150, and they are debt strikers. They say they should not pay because of the fraud perpetrated by Corinthian. The students seeking debt relief fall into different categories. The 16,000 students whose schools closed last week have a right to loan forgiveness as long as they do not transfer their credits to another institution. The department has been telling students from the 30 newly closed campuses that they could transfer to other for-profit colleges that are also under investigation; the department has not been telling the students that transferring to a new campus would lock in their debt.
The legal status of claims by the debt strikers and other former students who say they were defrauded is murkier, but they may have their debt wiped out if they can show that the company violated state law, and injured them. The debt strikers were to meet with senior Education Department officials today, but canceled their meeting after news reports indicated that the department had already ruled out the group’s central demand. The group issued a statement saying: “We refuse to be the pawns of a department that seeks to use the students’ campaign to give cover to their ongoing failures.”
And finally, because I know you have all been waiting for it… Britain’s Prince William and the Duchess of Cambridge have named their newborn daughter Charlotte Elizabeth Diana, a choice that honors the baby’s late grandmother Princess Diana and her great-grandmother Queen Elizabeth. The baby will be known as Her Royal Highness Princess Charlotte of Cambridge. Away from the birth of the Princess of Cambridge, however, the rest of the world has continued.