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Tuesday, September 29, 2015

Defeat Devices

Financial Review

Defeat Devices

DOW + 47 = 16,049
SPX + 2 = 1884
NAS – 26 = 4517
10 YR YLD – .04 = 2.09%
OIL + .80 = 45.23
GOLD – 4.40 = 1128.70
SILV + .04 = 14.74

Single-family home prices rose in July, matching the pace of price gains in June but falling just short of expectations. The S&P/Case Shiller composite index of 20 metropolitan areas in July gained 5 percent year over year. San Francisco, Denver and Dallas experienced the highest year-over-year home appreciation among the 20 cities with price increases of 10.4 percent, 10.3 percent and 8.7 percent, respectively.

The worst performing cities on the list include Detroit, and the only surprise is that Chicago was even worse than Detroit. The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs. Phoenix home prices were up 0.7% in July, and up 4.6% year over year.

The Conference Board said its index of consumer attitudes rose to 103.0, the highest since January, from a downwardly revised 101.3 the month before. The present situation index, a measure of current conditions, also climbed to an eight-year high of 121.1 from 115.8. Yet the expectations index declined to 91.0 from 91.6, suggesting Americans are a bit more cautious about the next six months.

After 2 weeks of solid drawdowns, API reports a huge 4.6 million barrel crude oil inventory build last week – the 2nd biggest weekly build in over 5 months.

The Senate yesterday passed a procedural vote to extend federal agency funding levels until December 11 as Congress moved to avoid a government shutdown on Thursday, when the new fiscal year starts. The Senate overwhelmingly advanced the government funding bill; it still has to go to the House for a vote.

The International Monetary Fund is warning of large positions that mutual funds in the United States have built in high-yielding bonds issued by risky companies here and in emerging markets around the world. The warning comes at a time of increased nervousness about China and other emerging markets like Brazil. And it highlights a growing concern on the part of regulators and economists that mutual funds, in their hunger to load up on high-risk, high-yield securities in a low interest rate environment, will be hard pressed to sell them during a market reversal.

Carl Icahn says the Fed is blowing it. Activist investor Carl Icahn released a new video titled “Danger Ahead,” which warns that trouble is coming to the financial markets. Icahn believes the Fed got the US economy into this mess and that its zero-interest-rate policy has created an “earnings mirage.” In the film, Icahn criticized both political parties for not reaching a tax compromise that would encourage American widget makers to bring more than $2 trillion in foreign profits back to the U.S. He criticized Wall Street sales folk for having a code of ethics he jokingly characterized as less virtuous than the mafia.

He criticized earnings reports wholesale as “suspect” due to financial engineering via share buybacks and M&A. Icahn says companies are simply buying other companies to create the perception of growing earnings and that a lot of companies are buying back stock that shouldn’t be. Icahn says: “A buyback is a short-term fix, but it weakens the balance sheet.” So, activist investor Carl Icahn is now opposed to financial engineering? The only surprise here is that…, actually there is no surprise.

Goldman Sachs lowered its S&P target. Goldman Sachs US equity strategist David Kostin lowered his S&P 500 price target to 2,000, down from his previous target of 2,100. Kostin wrote, “The impetus for these reductions is that our models now incorporate a slower pace of economic activity in the US and China and a lower oil price than we had been previously assuming.” For 2016, Kostin sees S&P 500 earnings per share of $120 and a year-end target of 2,100. At best they are late to the analysis, at worst it’s a contrarian indicator.

The new iPhones had a strong debut, with estimates that Apple sold a record 13 million over the weekend. Apple charges $749 for an iPhone 6S with 64GB of storage. But how much does it actually cost Apple to build the phone? ripped apart a new iPhone to figure out exactly what’s inside, and found that the total cost of components is $245. The most expensive bits are the processors, followed by the touch screen. This does not mean Apple is making $499 in profit on each phone, though, as it doesn’t include costs like manufacturing and shipping.

Yahoo’s board has authorized the company’s plan to spin off of its 384 million-share stake in Alibaba even though the IRS has declined to rule on whether the move will be tax free. Yahoo cautioned that the spinoff is still “subject to certain other conditions, including final approval by Yahoo’s Board of Directors (and) receipt of a legal opinion with respect to the tax-free treatment of the transaction.” The stake is worth $22.75 billion.

Sprint has confirmed  that it won’t take part in the FCC’s broadcast incentive auction for wireless spectrum next March. The auction, for prized low-band airwaves that will help with indoor penetration and in rural areas, won’t be cheap, so skipping it should make a major difference to cash burn, a vital issue for Sprint.

Reynolds American has agreed to sell the international rights to its Natural American Spirit division to Japan Tobacco for about $5 billion. The deal doesn’t include the brand’s U.S. operations, Winston-Salem.

After nearly two years’ worth of delays, Tesla kicks off Model X deliveries today. Prices top out at $132,000. Initial demand looks strong. Tesla has booked roughly 30,000 reservations for the vehicle. The launch isn’t the only big project for Tesla, which aims to open a $5 billion battery factory in Nevada next year.

By now, you’ve heard about the Volkswagen diesel scandal. The company installed software that would cheat emissions tests, and then when the cars went back out on the road, in regular driving situations, the cars would emit 40 times the legal limit for nitrogen oxide, or NOx. The CEO of Volkswagen, Martin Winterkorn was fired. To make matters worse, it appears that Volkswagen was warned about the illegality of the software as far back as 2007 by Robert Bosch. Bosch is the engineering and electronics firm which supplied VW with certain components that are at the center of the scandal, but it did so for testing purposes only.

According to Automotive News Bosch told VW that using the technology in a production vehicle was unlawful. VW’s supervisory board, said the board had received an internal report at its meeting on Friday showing VW technicians had warned about illegal emissions practices in 2011. No explanation was given as to why the matter was not addressed then.

Now, you may wonder how serious this whole mess really is; sure it’s a hit to VW’s reputation; there will likely be recalls of millions of cars; there will be class action lawsuits, and more. But then you recall General Motors had a problem with faulty ignition switches that resulted in 124 deaths and even more injuries. GM was charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case was put on hold as part of a deal where GM pays a $900 million fine and signed a deferred prosecution agreement – basically saying they won’t do it again.

Volkswagen pollution is harder to link to individual deaths, but it is still a deadly bit of deception. The New York Times reports that the chemicals that spewed illegally from the Volkswagen diesel cars — known as nitrogen oxides or NOx — have been linked to a host of respiratory and cardiovascular illnesses, as well as premature deaths.

Of course all that death an illness can’t be linked back to VW directly, but scientists now calculate that the excess pollution from VW, about 46,000 tons since late 2008, likely resulted in 106 deaths, plus an as-yet uncalculated number of illnesses. Of course, that’s just for the illegal emissions. Most of the air pollution from cars is perfectly legal.

In fact, the average gap between real-world emissions and official test results has been growing. A new report by the International Council on Clean Transportation, the research group that first flagged suspicious emissions patterns at Volkswagen, found that under normal conditions the average carbon-dioxide emissions for passenger cars are some 40% higher than the official amounts certified by European lab tests.

In 2001, the gap was less than 10%. Daimler showed a gap of nearly 50% between what researchers measured on the road and what technicians recorded in official lab tests. The artificial, and predictable, conditions under which cars are tested makes it easy for carmakers to engineer favorable emissions-test results without breaking any rules. Tuning engines to perform most efficiently at the power and load levels commonly used in tests is one way to do it.

And it’s not that VW was the only car company trying to skirt emissions standards. For years, emissions from cars built by almost every major manufacturer have been higher out on the road than when tested in labs. Over the years, several major auto manufacturers — including GM, Ford, Honda and, yes, Volkswagen — have been forced to pay hefty fines and recall vehicles after getting caught using defeat devices. In what was then the largest environmental enforcement case in U.S. history, companies including industry leaders Caterpillar, Cummins Engine, Mack Trucks and Volvo Truck agreed to pay $83 million in fines and reprogram the computers.

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