Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Friday, June 26, 2015


Financial Review


DOW + 56= 17,946
SPX – 0.82 = 2101
NAS – 31 = 5080
10 YR YLD + .08 = 2.48%
OIL – .07 = 59.63
GOLD + 1.30 = 1175.20
SILV – .09 = 15.85

For the week, both the Dow and S&P 500 fell 0.4 percent while the Nasdaq fell 0.7 percent. Nike rose 4.3 percent to $109.71 and was the biggest boost to the Dow after reporting a better-than-expected quarterly profit, lifted as it sold more high-margin shoes and apparel at higher prices.

Micron Technology sank 18 percent to $19.66 a day after forecasting a further decline in prices of chips used in personal computers. It also gave a revenue outlook for the current quarter that was well below market estimates. The PHLX Semiconductor index (SOX) fell 2.4 percent.

The Supreme Court has ruled that same sex couples have a constitutional right to marry nationwide. Voting 5-4, the justices said states lack any legitimate reason to deprive gay couples of the freedom to marry. The ruling in support of marriage equality was widely expected, given the Supreme Court’s previous ruling on the issue. In June 2014, the Supreme Court overturned the 1996 Defense of Marriage Act, opening up federal benefits to same-sex married couples. It heard two cases: Hollingsworth v. Perry, the successful challenge to California’s Proposition 8 measure, a 2008 ballot initiative that banned gay marriage in that state; and a New York case, U.S. v. Windsor, which overturned DOMA. Today’s ruling legalized same sex marriage but there’s still no federal law protecting LGBT employees from discrimination. Twenty-one states and Washington, DC, have passed employee non-discrimination laws, but it’s still legal in many places, even the US Congress, for employers to fire workers based on sexual orientation or gender identity.

The case is Obergefell v Hodges, and the person behind the case is James Obergefell; he married his husband Arthur in 2013 after the Supreme Court struck down the Defense of Marriage Act. Arthur died three months later, and Obergefell sued to be able to have his name included on his husband’s death certificate. That is something that will change with today’s ruling; also look for changes in Social Security rules, taxation, estate planning, insurance, and the military has announced that it will now recognize same sex marriages and allow gay couples in the military to receive benefits from the Department of Defense. So, there will be a big economic impact from today’s ruling, in addition to other implications.

At the center of the marriage case was the question of whether the right to same-sex marriage is protected under the Fourteenth Amendment. Justice Kennedy wrote for the majority that: “Under the Due process Clause of the fourteenth Amendment, no State shall ‘deprive any person of life, liberty, or property, without due process of law.’ The Fundamental liberties protected by this Clause include most of the  rights enumerated in the Bill of Rights… in addition these liberties extend to certain personal choices central to individual dignity and autonomy, including intimate choices that define personal identity and beliefs.”

In closing, Kennedy writes that the petitioners have asked for “equal dignity in the eyes of the law” and the court has granted it.

Health care stocks, especially hospital operators, rose sharply yesterday after the Supreme Court ruled that Obamacare federal subsidies were legal. Fresh health care M&A chatter also followed the decision. Humana, the smallest of the big five insurers, is pursuing a deal to sell itself and could reach an agreement by next week. Among those in the running to buy it are two bigger competitors, Aetna and Cigna. Already, Anthem has offered $47 billion to acquire Cigna, a deal that Cigna has rebuffed, potentially with an eye to buying Humana. Anthem itself had also expressed interest in buying Humana, though it is now focused on Cigna. Still, it remains to be seen whether government regulators will bless too many consolidations, because of antitrust concerns.

In the case Johnson v. United States, the Supreme Court just struck down a provision of the Armed Career Criminal Act that says that someone’s past crimes count as “violent” if they involve a risk of serious injury to another person, even if the crime didn’t actually involve violence. The Armed Career Criminal Act is a federal variation of the “three strikes, you’re out” laws that have been passed in several states, though in this case, it’s closer to “four strikes.” If someone has three violent felonies (or “serious” drug crimes) on his record, the law tacks an extra five years onto his fourth conviction. The problem is what crimes count as “violent felonies”; it’s a term that has never been defined legally. So, that’s what the Supremes struck down, and now they don’t have to make those definitions on a case by case basis. In reality, the Supremes are kicking it back to Congress to fix the language.

We are heading into what should be a decisive weekend regarding Greece. Eurozone finance ministers will meet again on Saturday in a last-ditch effort to find an agreement with Greece, ahead of the country’s crucial €1.6B debt payment due to the IMF by Tuesday. International creditors offered a proposal to extend the Greek bailout program by 5 months and release $17 billion in rescue funds. While German Chancellor Angela Merkel touted the five-month bailout extension as “very generous,” Greek Prime Minister Alexis Tsipras compared its terms to an “ultimatum” and “blackmail.” Greece owes about $1.8 billion on Tuesday; money it does not have. The Greek story is developing right now, and it looks like Tsipras has just called for a July 5 referendum, so it will go to the voters.

If you are wondering why Greece might reject a deal from creditors, it helps to remember that in 2010 and 2012, Greece accepted bailout deals from European creditors totaling hundreds of billions of euros in order to prevent the collapse of the Greek banking system. The funds kept Greece from a potential default that would force it out of the eurozone, but most of the enormous sum of money involved in the bailouts ultimately didn’t end up funding public services or directly going to the Greek people.

Instead, much of the bailout funds went back to the same creditors who gave Greece both the bailouts. This resulted in a situation where the so-called troika of the IMF, European Central Bank and European Commission were effectively lending Greece money so it could pay off the debt it already owed them. Essentially the Troika paid itself while leaving the tab to Greece.  In other words, the Greek situation is very difficult to predict for now.

The University of Michigan consumer sentiment rose to a final June reading of 96.1, reaching a five-month high, rebounding from a drop in May. The yield on the 10-year Treasury rose 8.7 basis point to 2.480%, its highest level since September 30. Over the week, the yield gained 21.1 basis points, the largest weekly gain in the month of June. The two-year yield increased 8.9 basis point to 0.712% and the yield on the 30-year Treasury rose 8.3 basis points to 3.239%. Typically, we have seen that when there is uncertainty, such as the situation with the Greek debt negotiations, there is a flight to safety, but it looks like a shift in trading strategy in the Treasury market from “buying the dips” to “selling the rallies”.

While we have been paying attention to Greece, it looks like a bubble has popped in China. China’s $8.8 trillion stock market is crashing. The Shanghai Composite Index dropped 7.4% today, following a sell-off on Thursday that left Chinese shares down 3.5%. The Shanghai market, China’s largest, closed down almost 20% from its recent peak, while the second-largest Shenzhen market fell 8.2%, and is now down 20% from recent highs, entering bear-market territory. The country’s startup stocks have lost a quarter of their value since hitting a record high earlier in the month; the ChiNext index dropped 8.9% today. The selling pressure seemed driven by the sense that the government had become uncomfortable with the equity market surge throughout much of the first half of the year. At its peak earlier this year, the Shanghai composite was up roughly 60% and the Shenzhen index was up more than 120%.

The U.S. and Japan are likely to resolve outstanding bilateral issues so a 12-nation Trans-Pacific Partnership deal can be struck at a multilateral ministerial meeting in July. A deal between the two countries is vital to clinching the TPP pact, which would cover 40% of the world economy. Remaining bilateral issues include Japan’s market for farm products and the U.S. market for auto parts.

The Russell indexes go through an annual rebalancing, and it happened today. Changes in the small-cap Russell 2000 and the large-cap Russell 1000 and the Russell 3000 mean that the index funds and ETFs that track these benchmark indices must buy or sell stocks to match up with the changes.  Roughly $835 billion is invested in index funds that track the Russell indices. Normally, the rebalancing results in very heavy trading but volume was just slightly higher today.

Islamic extremists have launched terror attacks in 4 countries. As French police pieced together what happened in an attack at a factory near Lyon where one man was decapitated, at least 37 beachgoers were gunned down in Tunisia. A suicide bomber at a Shiite mosque in Kuwait left 25 people dead, while al-Shabaab militants killed 30 peacekeepers in Somalia. Officials say there is no immediate confirmation that the attacks were coordinated. Coordinated or not coordinated; I’m not sure which is scarier.

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