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Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Thursday, July 16, 2015

Chips and Salsa

Financial Review

Chips and Salsa

DOW + 70 = 18,120
SPX + 16 = 2124
NAS + 64 = 5163
10 YR YLD un = 2.35%
OIL + .13 = 51.04
GOLD – 4.30 = 1145.60
SILV – .12 = 15.08

The Nasdaq Composite closed at a record high, taking out the old record from last month.

After hours of debate, Greek lawmakers passed a bailout agreement late last night. Eurozone finance ministers agreed in principle to extend a €7 billion-euro bridge loan to Greece. The loan would allow Greece to pay some of its outstanding bills, meet a scheduled repayment to the ECB next week and open the door to securing a third bailout package. Up next: the German Bundestag will vote on Friday whether or not to approve the new rescue, however, talks over securing a new €86B bailout are likely to last for another four weeks.  European Central Bank President Mario Draghi said he views the country’s place in the euro as secure. Greek banks are still closed for the time being.

Yesterday, Fed Chair Janet Yellen said once again that the Fed is likely to raise interest rates at some point in 2015. Yellen told the House Financial Services Committee that the first hike since 2006 “will signal how much progress the economy has made in healing from the trauma of the financial crisis.” Today, Yellen repeated her semi-annual testimony to the Senate Banking Committee. Yellen told lawmakers that waiting too long to raise interest rates holds risks for the U.S. economy, along with tightening too quickly; her preference would be to proceed in a “prudent and gradual manner.”

Filings for U.S. unemployment benefits declined last week for the first time in a month, heading back toward the lowest levels in more than a decade. Jobless claims fell 15,000 to 281,000 in the week ended July 11.

The national monthly jobs report is published on the first Friday of each month, and a couple of weeks later we get a report on individual states. The June jobs numbers are out for Arizona, and they are not good. The unemployment rate slipped from 5.8% to 5.9%, and the state lost 55,200 jobs; the majority of the losses were from government and local education as schools let out for the summer (about 39,100 jobs); but the state also lost 5,500 private sector jobs.

The National Association of Home Builders/Wells Fargo Homebuilders’ confidence index held steady at 60 in July. Sales in both the new and existing home markets however builders still face a number of challenges, including shortages of lots and labor.

The average rate for a 30-year fixed-rate mortgage climbed to 4.09% in the week that ended July 16, reaching the highest rate since October, from the prior week’s reading of 4.04%

U.S. senators have introduced a bill to allow Puerto Rico’s public entities to file for bankruptcy, basically Chapter 9 reorganization, under federal laws as the commonwealth starts negotiations with creditors to restructure its $72 billion in debt. Puerto Rico said one of its agencies failed to transfer funds to a trustee to cover a $36 million, Aug. 1 debt payment because the legislature didn’t appropriate the funds when it passed the budget last month.

Although China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels have increased at an even faster pace. Outstanding loans for companies and households stood at a record 207% of GDP at the end of June, up from 125% in 2008. Pershing Square’s Bill Ackman said China is a far bigger global threat than Greece. Hedge fund managers Paul Singer and Jeffrey Gundlach have also weighed in on the crash, calling it “way bigger than subprime” and “far too volatile to invest in.”

It’s earnings reporting season. Here is a quick (very quick) recap of earnings reports: Bank of America beat estimates, Blackrock says money is flowing into higher fee products, Delta Airlines reported a boost in domestic business, Intel offered strong guidance even as PC sales slumped, Kinder Morgan posted a second quarter miss, US Bancorp posted results in-line with expectations, Garmin shares plunge following a disappointing outlook, Goldman Sachs posted a 49% decline in profit as trading revenue slipped and they also had extra litigation expenses (I’m shocked, shocked I tell you), Citigroup topped estimates – in part by cutting costs, Blackstone profits slumped as the hedge fund posted gains but the private equity and real estate businesses declined, eBay raised full year revenue guidance, United Healthcare reported better-than-expected earnings and revenue – and raised full year guidance, Netflix beat second quarter estimates and announced they added a gazillion subscribers in the quarter.

After the close, Google reported profit of $3.9 billion on revenue of $17.7 billion, solid increases from last year. Google has been spending billions of dollars on data centers, real estate, acquisitions, and research and development to support its existing businesses and find new growth opportunities in industries as disparate as energy, health care, transportation, and generally ruling the world and controlling our minds.

If you want more detailed analysis of individual company earnings reports, feel free to dig into the devilish details, and good luck. Earnings reporting season is generally a headache. It is difficult to decipher. Bad news gets buried in reports, and the numbers can be inscrutable. I’ve been reading earnings reports for a long time and I’ve pretty much given up. If the numbers look bad one way they can be massaged to look much better. In other words, the perfect picture of obfuscation. And then there is the ritual of companies guiding expectations lower, only to beat expectations; it’s sadder than watching Charlie Brown try to kick a football.

The largest center of manufacturing in the U.S. is about as far from the rust belt as you can get. The Los Angeles metro area has the most manufacturing workers in the country. More people work in factories there than traditional blue-collar towns such as Chicago, Detroit or Philadelphia. Even though LA has lost some manufacturing jobs, there are still about 524,000 manufacturing workers in the region, well above 409,000 in Chicago and 368,000 in New York.

European Union regulators have launched twin investigations against Qualcomm. The first investigation will examine whether the company offered discounts to customers on condition they bought chipsets exclusively from Qualcomm. The second will look at whether the firm engaged in predatory pricing tactics by setting prices below their costs to squeeze out competitors.

Carl Icahn thinks Blackrock is a “dangerous company”. Icahn’s beef: That many ETFs (which make up a major segment of BlackRock revenue) are dangerous to the market, particularly high-yielding bond ETFs which he thinks stifle liquidity.

In a first for the airline industry, United Continental has awarded millions of frequent flier miles to hackers who have uncovered gaps in the carrier’s web security. United unveiled the approach in May just weeks before technological glitches grounded its entire fleet twice. Through the “bug bounty” program, researchers flag problems before hackers can exploit them. The cost can be less than hiring outside consultancy.

Last week, Britain’s Financial Conduct Authority took the unusual step of announcing that it was dropping its investigation into the London Whale trading case and would take no further action against Bruno Iksil, whose risky bets on complex derivative contracts ended up costing JPMorgan Chase $6.2 billion in losses.

Iksil, who got his catchy nickname from trading counterparties who marveled at the immense size of his positions; he emerged as the latest face of international financial scandal in 2012, when The Wall Street Journal identified him as the mysterious figure at the center of huge derivative bets that were roiling the market. Since then, JPMorgan Chase has agreed to pay a total of $920 million to resolve accusations by several agencies in the United States and Britain that the bank had misstated financial results and lacked sufficient internal controls to prevent its traders from “fraudulently overvaluing investments,” as the Securities and Exchange Commission put it. As in all such cases, companies do not commit crimes or frauds. Iksil faces no charges. He does not even face civil claims, which have a much lower standard of proof.

Of course, it is not illegal to engage in risky trading and lose money, even billions. Iksil did not conceal his positions within the bank, and his strategy was discussed repeatedly with higher-ranking executives. The government alleged that Iksil’s colleagues (but not Iksil) fraudulently hid the amount of the losses by assigning false values to the positions in their internal reports. And that would be illegal, or at least it would be if it were ever prosecuted.

On May 20 of this year, JPMorgan Chase and Citigroup both entered a guilty plea on one felony count of conspiring to rig foreign currency exchange trades, the largest market on the globe. Five days earlier, on May 15, HUD slipped a notice into the Federal Register, seeking to alter its standard loan-level certification form, known as HUD-92900-A. This form must be filled out for lenders to receive FHA insurance, which reimburses them if the homeowner falls into foreclosure.

On the current HUD-92900-A form, lenders must certify that their firm and its principals “have not, within a three-year period … been convicted of or had a civil judgment rendered against them” for a variety of crimes, including “commission of fraud … violation of Federal or State antitrust statutes or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements or receiving stolen property.”

So, they can just continue to write mortgages. No consequences. The day before HUD released the notice in the Federal Register, the New York Times reported that the Justice Department sought to lessen the consequences of the guilty pleas in the foreign exchange rigging case, ensuring that federal regulators would not use the pleas to bar banks from certain business lines.

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