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Friday, July 31, 2015

Blue Moon

Financial Review

Blue Moon

DOW – 56 = 17,689
SPX – 4 = 2103
NAS – 0.5 = 5128
10 YR YLD – .07 = 2.20%
OIL – 1.64 = 46.88
GOLD + 7.10 = 1096.40
SILV + .04 = 14.87

For the week the S&P 500 index gained 1.2%, while posting a 2% gain for the month of July. The Dow Industrials finished the week with a 0.7% gain which lifted the monthly gain to 0.4%. The Nasdaq was up 0.8% for the weeks and 2.9% for the month. For the month, the yield on the 10 year Treasury dropped 13 basis points. Spot gold dropped 6% for the month and silver was down 5%. The big decline came in oil prices: down 12.59 per barrel or 21% for the month.

Consumer sentiment fell to a final July reading of 93.1 from a final June level of 96.1. For context, the consumer-sentiment gauge averaged 86.9 over the year leading up to the recession. After adjusting for changes in prices, just three in 10 surveyed thought their chances were better than 50 percent for real income gains over the next five years. Call it the voice of experience.

An index that measures the price of US labor slowed sharply in the second quarter, easing fears of inflation and signaling the labor market may not be as healthy as the low unemployment rate suggests. The employment cost index barely increased, rising 0.2% in the second quarter after a 0.7% increase in the first three months of the year. The rise was an all-time low for the series going back to 1982. In the past 12 months, compensation (wages plus benefits) have risen just 2%, about the same pace as since 2010. A spike of 2.6% in the first quarter, which got everyone excited about wage growth, was apparently just a spike in bonus pay, especially for Wall Street. There is no indication companies are having to pay up to lure or retain workers; there is no wage push inflation moving prices higher. Today’s employment cost index certainly gives no reason for the Fed to hike interest rates, but Fed policymakers have not made higher wages a precondition for raising rates.

We still haven’t worked through the fallout from the housing crash.  RealtyTrac reports 7.4 million borrowers were still “seriously” underwater on their mortgages at the end of June. The real estate information company defines that as the loan amount being at least 25 percent higher than the property’s estimated market value. Over 13 percent of all properties with a mortgage are in this predicament, and that is actually a slight increase from the first quarter of this year. The number of underwater borrowers has now increased for two straight quarters but it is still lower than a year ago, when over 17 percent of borrowers were seriously underwater. One reason why there is still a serious negative equity problem is because people with equity have sold to take advantage of higher prices, while homeowners who are underwater are stuck.

The International Monetary Fund has warned it will not participate in a third bailout for Greece unless debt relief is granted to the country. IMF staff reportedly told the fund’s board that Athens’s debt burden and poor track record of implementing reforms rule out further financial help from the fund, until there is an “explicit and concrete agreement” on debt relief from Greece’s Eurozone creditors. The warning means the IMF is unlikely to provide further funds to Athens at this stage, potentially raising pressure on Greece’s Eurozone partners to find more money to plug the country’s short-term financing needs. This is an unusual development; the IMF has never been a friend to debtors. While talk of debt relief may sound magnanimous, it likely just means extending maturities, or lowering interest rates. And the IMF is still demanding structural reform. I’m not sure what would satisfy that requirement; more austerity likely.

Greece’s financial markets are scheduled to reopen on Monday, ending a five-week suspension that began after the country imposed capital controls amid a confrontation with creditors. Greek traders will be able to buy stocks, bonds, derivatives and warrants – but only if they use new money such as funds transferred from abroad or cash-only deposits.

Meanwhile, when or if Greece gets another bailout package, it won’t help much; only a fraction of the money would go toward healing the economy. Nearly 90 percent would go towards debts, interest, and supporting failing Greek banks. And another bailout would actually hurt by increasing Greece’s overall debt, which stifles the potential for an economic rebound.

Investors are bracing for Puerto Rico to miss $58 million in bond payments in the coming days, as the commonwealth attempts to restructure $72 billion of debt. Saturday’s deadline could mark the first skipped payment to bondholders.

Chinese shares suffered their worst month in nearly six years this July despite (or perhaps because of) government-led recovery efforts. The Shanghai Composite lost 9% this week, and is down 14% month to date – its worst monthly performance since August 2009. The latest market crackdown: China’s securities regulator said it launched a probe into automated trading, restricting 24 stock accounts suspected of “influencing securities trading prices.”

Oil prices touched a four-month low. The rout in Chinese stock markets prompted concerns that oil demand in one of the world’s largest energy consumers would fall. Also, high international supplies have kept prices under pressure and increased competition among producers, who are taking cost-cutting measures. But few have ventured to cut production. WTI posted the biggest monthly decline of 2015. For the month of July, U.S. crude has lost 21%.

The big news in earnings today came from Big Oil. Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as Exxon could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges. The companies’ shares fell to the lowest in more than three years. Exxon and Chevron contributed to the avalanche of supply by increasing second-quarter crude output by 12 percent and 1.7 percent, respectively. Exxon cut share repurchases for the current quarter in half to $500 million. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

And while the weak performance from the oil patch raises many questions, one of the most important for investors is what will happen to dividends. The answer is not much. Chevron maintained its quarterly dividend at $1.07 per share in the second quarter, returning $2 billion to shareholders. Chevron hasn’t raised its dividend since Q2 2014. Exxon raised its dividend to 73 cents per share from 69 cents in the first quarter. And that’s about all you can hope for; look for dividends to remain flat, and if you’re lucky, they won’t be cut.

General Electric is taking steps to shift some U.S. manufacturing work overseas now that the U.S. Export-Import Bank will be shuttered at least until September. GE Vice Chairman John Rice says the company is looking to work with export credit agencies in other countries to finance potentially $10 billion worth of projects, with much of the production going to GE plants in those foreign locations.

Three bottlers of Coca-Cola products in Europe are in advanced talks about a merger that would further Coke’s push to consolidate its bottlers around the world and cut costs. Coca-Cola Enterprises is discussing the tie-up with Coca-Cola bottlers in Poland and Germany. Terms of the potential deal are not known, but it is likely to be valued well into the billions of dollars.

Yesterday we told you about Google’s Project Loon, a plan to beam internet from helium balloons. Now, comes word that Facebook has completed building its first full-scale drone called the Aquila, which has the wingspan of a Boeing 737 and will beam Internet down to remote parts of the world. The plane will hover between 60,000 feet and 90,000 feet, above the altitude of commercial airplanes, and will be able to fly for 90 days at a time.

Google is quietly distributing a new version of Google Glass to various enterprise partners ahead of a full launch later this year. The device’s price appears to be “well below” the $1,500 charged for the Explorer Edition, and contains a button-and-hinge system to attach the mini-computer to different glasses. Google is pitching the product “exclusively to businesses,” and that a new consumer version is still “at least a year away.”

The weak underbelly of high tech cars has been exposed again. A white-hat hacker  has released a video showing a security flaw in GM’s OnStar vehicle communications system that can be remotely accessed to unlock cars and start engines. The move comes just one week after Fiat Chrysler recalled some 1.4 million vehicles after hacking experts demonstrated a more serious vulnerability in the Jeep Cherokee. That bug allowed them to gain remote control of a Jeep traveling at 70 mph on a public highway.

The hackers are everywhere. The FBI says financial companies are facing extortion threats from hackers who threaten to knock their websites offline unless firms pay what amounts to a ransom. More than 100 companies, including targets from big banks to brokerages in the financial sector, have received distributed denial of service threats since about April.

Today is not only the end of the month, it is a blue moon, which is not really a reference to the color of the moon, rather it means the second full moon in one month; which also means that 2015 features 13 full moons. Step outside after sunset to check out the blue moon, then if you’re so inclined, go ahead and celebrate by doing something you only do “once in a blue moon.” You do have an excuse, after all.

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