Financial Review

Slow Motion Domino

Sinclair Noe — November 10, 2015

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DOW + 27 = 17,758
SPX + 3 = 2081
NAS – 12 = 5083
10 YR YLD – .02 = 2.32%
OIL + .22 = 44.09
GOLD – 2.50 = 1090.40
SILV – .14 = 14.54

Crude prices are set for a slow recovery, according to the latest report from the International Energy Agency, which warned against the deep investment cutbacks in the industry. In its World Energy Outlook, the IEA’s central scenario for oil prices forecast that the market would rebalance at around $50 to $80 per barrel in 2020, (a not very precise guess) “with further increases in price thereafter.” It also predicted that collectively, the U.S., EU and Japan would see their oil demand drop by around 10 million barrels a day by 2040.

Oil production from the Bakken and Eagle Ford shale plays in the U.S. has been falling since March. Total oil output from seven major U.S. shale regions is expected to fall by 118,000 barrels a day to about 4.95 million barrels a day in December. There is no evidence at current prices that rig drilling activity will recover any time this year, so we can expect ever lower production every month well into 2016. That doesn’t mean a quick increase in prices, in part because Iranian oil is expected to come online as sanctions are lifted, and also production increases are expected in other parts of the world.

The National Federation of Independent Business said its Small Business Optimism Index was steady at 96.1 last month, with hiring stagnant even as more owners expected higher sales and more planned to make capital outlays.

Americans are borrowing big again. The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record, up $28.9 billion in September, besting the previous high-water mark set in November 2001, not inflation adjusted. The surge wasn’t driven by mortgage lending, but by an ongoing rise in non-revolving credit—essentially car and student loans, which surged by more than $22 billion to $2.57 trillion.

Revolving debt—mainly credit-card debt—also increased, by $6.7 billion to $925 billion. This new found proclivity to jump into debt points to a busy holiday shopping season. It might also explain why the Fed is ready to take away the punch bowl at the next FOMC meeting.

Greece can’t persuade creditors to release bailout funds. Greece is due $2.2 billion from its bailout as well as $11 billion already set aside for the country’s banks, which are still struggling from capital controls. Though the Greek government has met many of the conditions attached to the bailout, it still needs to push through some financial reforms. Disputes remain on a new foreclosure law which would likely put more and lower priced homes on the foreclosure block, the Value Added Tax on private education, and pricing of non-generic medications, as well as on the timing and pace of pension reform.

Athens needs the money to continue to meet day-to-day expenses such as salaries, but there is not the same sense of urgency as there was in the summer because a sizeable injection of funds was made in September and there are no major debt repayments due. The delay is, however, preventing Greece from moving on to discussions around a restructuring of its debt pile to make it more sustainable. This was demanded by Tsipras at previous negotiations and is a precondition of the International Monetary Fund officially joining the bailout.

Meanwhile, the anti-austerity movement finally spilled over to Portugal. Anti-austerity lawmakers have forced Portugal’s new center-right government to resign by rejecting its policy proposals. The prime minister had been held up as a model proponent of the belt-tightening prescriptions pushed by European Union officials in Brussels, international creditors and countries like Germany. Portuguese voters weren’t buying it.

The new government has promised to unwind parts of the austerity program. The left-wing parties have pledged to cut some taxes and reverse public-sector wage cuts and to suspend Portugal’s privatization program. The political turmoil in Portugal is being closely watched elsewhere in Europe as a bellwether of political trends and an indicator of whether even countries that had been models of austerity prescriptions are now experiencing fatigue with the belt-tightening nearly seven years after the onset of Europe’s debt and euro crisis.

And the next domino might be the pro-austerity government of Portugal’s neighbor – Spain. Prime Minister Mariano Rajoy faces elections on Dec. 20, and polls so far show that his conservative Popular Party may lose what has been an ironclad majority in Parliament, with the potential to leave the Spanish in a similar position to the Portuguese. The government in Spain is not very stable right now. Yesterday, Catalonia voted to secede from Spain by 2017. Catalonia, the triangular region in northeastern Spain, already has its own language and traditions. Now it’s well on its way to becoming its very own country. The region contains Barcelona, Spain’s second-largest city and more than 7 million people; Catalonia also makes up more than 20 percent of the country’s economy.

A federal appeals court has rejected President Obama’s effort to move forward with a series of executive actions he announced last year seeking to give quasi-legal status and work permits to millions of undocumented immigrants. The 2-1 ruling from the New Orleans-based 5th Circuit is a defeat for the Obama administration, but one that may have come just in the nick of time to give the Supreme Court the chance to revive Obama’s attempt to make it easier for many immigrants who entered the U.S. illegally to live and work here.

Obama’s latest round of executive actions has been on hold since February, and delay in the issuance of the appeals court’s ruling was raising doubt about whether the Supreme Court would have an opportunity to resolve the case in time to allow Obama to move forward with the programs before leaving office. The release of the 5th Circuit decision Monday appears to allow the Supreme Court enough time to take up the dispute this term, if the justices choose to wade into the issue. A favorable Supreme Court ruling would permit the administration to implement the executive actions next summer.

Obama’s actions announced last November expanded eligibility for a program the president set up in 2012 to allow immigrants who entered the U.S. illegally as children to get “deferred action” status and be eligible to work legally. The new effort also included a new initiative to grant the same status to illegal immigrants who are the parents of U.S. citizens or green-card holders. Up to 5 million people were estimated to be eligible for the revised Deferred Action for Childhood Arrivals and new Deferred Action for Parents of Americans programs, although it was unknown how many would decide to apply.

Zinc traded near a five-year low, copper has dropped to its lowest since August 26 and nickel fell to its lowest in two months as miners remain under pressure. BHP Billiton has seen nearly 13 percent of its share value erased in the last four sessions following a dam burst at its Brazilian joint-venture that resulted in at least three confirmed dead and another 25 people missing.

Chipotle could reopen locations in Washington state and Oregon as soon as Wednesday after a batch of tests found no E. coli bacteria in food samples. Investigations do not always identify a specific food source as the culprit, because contaminated food is at times consumed before the samples are collected. All of Chipotle’s 43 outlets in those areas, which appear to have sickened over 40 people, have been closed since Oct. 31.

Fast-food and other low-wage workers will walk off the job today in 270 cities and towns across the country as part of a push for a nationwide $15 minimum wage. Fast-food employees will be joined by workers from other industries that typically pay low hourly wages.

Colorado will vote next year on establishing a universal, “single-payer” healthcare system after supporters secured enough signatures to get the measure on the ballot. Under the plan, known as ColoradoCare, the government would provide universal health insurance in the place of private insurance companies. It comes with a $25 billion price tag, to be paid for with a new 10 percent payroll tax.

Valeant tried to stop the bleeding with a conference call this morning. The drug maker has lost two-thirds of its value since August amid questions about its accounting and business practices. Valeant Pharmaceuticals said in its business update that disruption in its dermatology business, from the recent controversies surrounding its Philidor specialty pharmacy subsidiary, would be significant in the short term. Valeant shares continued dropping today.

Four people have been charged in a broad hacking scheme that targeted JPMorgan Chase and other financial institutions between 2012 and 2015. The indictment described 12 victims, which were mostly financial services companies, but also included a financial news organization and software development firms. The US Attorney’s Office said the scheme involved the “largest theft of customer data from a US financial institution in history.”

The hackers stole the personal information of over 100 million customers across the companies. The hackers used information and data collected from JPMorgan and the other companies to manipulate stocks. They bought small amounts of companies’ shares, then used stolen email addresses to inform investors to buy into those stocks.