Stocks Fade to a Flat Finish

Charles Schwab: On the Market

Posted: 6/22/2017 4:15 PM ET

Stocks Fade to a Flat Finish

U.S. equities closed the regular trading session mostly flat as markets were unable to hold gains that followed an afternoon surge in healthcare stocks on the heels of the Senate unveiling its bill to replace the Affordable Care Act. Treasuries were higher following economic reports that showed weekly jobless claims increased, leading indicators matched expectations and regional manufacturing activity was better than expected. Gold and crude oil prices moved higher and the U.S. dollar was flat.

The Dow Jones Industrial Average (DJIA) declined 13 points (0.1%) to 21,397, the S&P 500 Index decreased 1 point to 2,435, and the Nasdaq Composite gained 3 points to 6,237. In moderately-heavy volume, 841 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.21 to $42.74 per barrel and wholesale gasoline ticked $0.02 higher to $1.43 per gallon. Elsewhere, the Bloomberg gold spot price increased $3.53 to $1,250.01 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 97.55.

Accenture Plc (ACN $122) reported Q3 diluted earnings-per-share (EPS) of $1.05 or $1.52 ex-items, compared to the $1.52 FactSet estimate, while revenues increased 5.0% year-over-year (y/y) in U.S. dollars and 7.0% in local currency to $8.9 billion. The diluted EPS of $1.05 includes the impact of a previously disclosed settlement charge of $510 million in regard to the termination of its U.S. pension plan. Shares of ACN traded sharply lower.

After the closing bell yesterday, Oracle Corp. (ORCL $50) announced fiscal 2017 Q4 EPS of $0.76 or $0.89 ex-items versus the $0.78 FactSet estimate, while revenues topped estimates, increasing 2.8% y/y to $10.9 billion. CEO, Mark Hurd said the company is experiencing rapid adoption of the Oracle Cloud and is expecting EPS growth to accelerate in fiscal 2018. ORCL rallied.

Carnival Corp. (CCL $66) reported Q2 GAAP EPS of $0.52, compared to the FactSet estimate of $0.47, while revenues rose 5.4% y/y to $3.9 billion, mostly in line with expectations. The company also forecasted that changes in fuel prices and currency exchange rates are expected to decrease earnings by $0.35 per share for full-year 2017. EPS guidance for the current fiscal year was updated to be in the range of $3.60 to $3.70 compared to March guidance of $3.50 to $3.70. CCL ticked slightly to the downside.

Jobless claims higher than expected and leading indicators match projections

Weekly initial jobless claims (chart) increased by 3,000 to 241,000 last week, above the Bloomberg forecast of 240,000, with the prior week’s figure upwardly revised at 238,000. The four-week moving average increased by 1,500 to 244,750, while continuing claims increased by 9,000 to 1,944,000, north of estimates of 1,928,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for May rose 0.3% month-over-month (m/m), matching projections and compared to last month's downwardly adjusted 0.2% increase. The biggest positive contributor to the index was interest rate spread, while the largest negative contributor was building permits.

The Kansas City Fed Manufacturing Activity Index for June increased to 11, from May's 8 reading, topping forecasts of a rise to 9, with a level north of zero depicting expansion.

Treasuries finished slightly higher with the yields on the 2-year note and the 30-year bond declining 1 basis point (bp) to 1.34% and 2.72%, respectively and the yield on the 10-year note decreasing 2 bps to 2.15%. In the Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer', Schwab's Chief Fixed Income Strategist, Kathy Jones informs us that the bond market continues to confound the experts. Each year since the end of the recession in 2009, consensus expectations have called for higher bond yields and the death of the 35-year bond bull market. Yet 10-year Treasury yields are now nearly 200 basis points lower than in 2010. For Schwab's viewpoint on the second half of 2017 be sure to read the whole article on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will bring a look at the housing sector in the form of the May new home sales report, with economists expecting a 3.7% month-over-month (m/m) increase to a rate of 590,000 units after dropping by 11.4% m/m to 569,000 units in April, as well as Markit's preliminary Manufacturing and Services PMIs for June with the manufacturing index forecasted to inch higher to 53.0 from 52.7 and the services index expected to tick lower to 53.5 from 53.6. Readings above 50 for both indexes denote expansion in activity.

Europe and Asia finish mixed

European stocks finished trading mixed as healthcare issues received a late-session boost after the U.S. Senate released details of its bill aimed at replacing the Affordable Care Act. Markets in the region were initially weighed down as the recent pressure that pushed oil prices into bear market territory, declines in commodity-linked issues and political uncertainty fostered some caution among market participants. Amid the pullback in oil and other commodities, investors have been vigilant of potential downward pressure on inflation and how that may impact central bank policies. In other developments in the region, the Bank of England's chief economist said that it may be prudent to withdraw some stimulus in the second half of the year and that he is likely to vote for a rate hike as long as the economic data justifies it, per Bloomberg. Also, U.K. Prime Minister Theresa May arrived in Brussels where she is expected to discuss Brexit details with European Union leaders as a two-day European Council meeting commenced. In light regional economic news, business confidence figures from France were better than expected, while a read on manufacturing confidence was just shy of forecasts. The euro and British pound moved slightly lower versus the U.S. dollar, while bond yields in the region were mostly lower.

Global trade will likely garner some attention in the near future as the latest Schwab Market Perspective: Goldilocks…or the Three Bears?, informs us that the end of the month brings the end of the 90-day trade review ordered by President Trump to identify trade abuses. Our experts explain that trade growth can have a meaningful impact on corporate revenue growth and, as a result, drive earnings and stock price performance. Fortunately, global trade growth looks set for the highest pace in a decade, with the exception of the snapback in 2010-11. This is indicated by the export orders component of the Eurozone purchasing managers' index (PMI), which has done a good job of forecasting global trade growth in the months ahead. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Stocks in Asia finished mixed following yesterday's dip in crude oil prices, while technology companies advanced on the heels of gains for the group in U.S. trading. Mainland Chinese shares dipped after gaining ground in the previous session following the announcement that MSCI will include its A-shares in the company's emerging markets indexes after rejecting its prior three attempts to join. Stocks trading in Hong Kong were also lower. Japanese equities realized losses for a second-straight day following the decline in crude oil prices, while volatility for the Japanese Nikkei 225 Index was near the lowest levels in over a decade and the yen strengthened versus the U.S. dollar. Indian listings finished flat, though on Wednesday the Securities and Exchange Board of India relaxed takeover and restructuring rules for companies with stressed assets, per Bloomberg. Finally, South Korean equities advanced and Australian securities were led higher by a recovery in some energy and materials stocks after selling off the previous session. For a deeper dive into the global market landscape, see the video from Schwab's Jeffrey Kleintop, CFA, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com and be sure to follow Jeff on Twitter: @jeffreykleintop.

Major reports from the international economic docket for tomorrow will be limited to releases from across the pond with GDP from France and industrial orders from Italy, while we will also receive preliminary Markit Manufacturing and Services PMIs from the Eurozone, Germany and France.

Stocks Flat as Oil Touches Five-Month Low

Charles Schwab: On the Market

Posted: 5/4/2017 4:15 PM ET

Stocks Flat as Oil Touches Five-Month Low

U.S. stocks finished mostly flat with energy issues leading the decliners as crude oil prices fell to a five month low, while Facebook, Tesla and Viacom were under pressure following earnings reports. Health care stocks finished higher as the House of Representatives passed the GOP health bill aimed at repealing and replacing the Affordable Care Act. Treasury yields were higher and the U.S. dollar was lower amid some mixed economic data and ahead of tomorrow's key labor report. Gold traded lower.

The Dow Jones Industrial Average (DJIA) declined 6 points to 20,951, the S&P 500 Index added 1 point (0.1%) to 2,390, and the Nasdaq Composite ticked 3 points higher to 6,075. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.30 to $45.52 per barrel and wholesale gasoline fell $0.05 to $1.48 per gallon. Elsewhere, the Bloomberg gold spot price lost $9.61 to $1,228.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 98.74.

Facebook Inc. (FB $151) reported Q1 earnings-per-share (EPS) of $1.04, or $1.30 ex-items, versus the $1.12 FactSet estimate, as revenues grew 49.0% year-over-year (y/y) to $8.0 billion, above the projected $7.8 billion. The social network's monthly and daily active users modestly topped expectations. However, shares were under pressure as the company warned about slowing ad revenue growth for the year.

Tesla Inc. (TSLA $295) posted a Q1 loss of $2.04 per share, or a loss of $1.33 per share ex-items, compared to the shortfall of $0.82 that was projected, as revenues rose 18.0% quarter-over-quarter (q/q) to $2.7 billion, above the forecasted $2.6 billion. TSLA maintained its first-half outlook for vehicle deliveries and said its Model 3 is on track for initial production in July. Shares were solidly lower.

Kraft Heinz Co. (KHC $90) announced Q1 EPS of $0.73, or $0.84 ex-items, versus the forecasted $0.86, as revenues declined 3.1% y/y to $6.4 billion, compared to the expected $6.5 billion. The company noted a slow start to the year, with lower y/y consumption in North America being offset by significant gains from cost savings. Shares traded higher.

Viacom Inc. (VIA $38) reported fiscal Q2 earnings of $0.30 per share, or $0.79 ex-items, versus the projected $0.59, as revenues rose 8.0% y/y to $3.3 billion, versus the forecasted $3.0 billion. Shares moved noticeably to the downside as the company reported a drop in ad revenue at its TV network unit, exacerbating industry uneasiness regarding "cord-cutting" cable subscribers.

Oracle Corp. (ORCL $45) advanced after announcing a strategic agreement with AT&T Inc. (T $38), which will move thousands of its large scale internal databases to Oracle's Cloud Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). T lost ground. 

Trade deficit dips, productivity and jobless claims drop

The trade balance (chart) showed that the deficit came in at $43.7 billion in March, compared to the Bloomberg estimate of $44.5 billion. February's deficit was revised higher to $43.8 billion. Exports dipped 0.9% month-over-month (m/m) to $191.0 billion, while imports declined 0.7% to $234.7 billion.

Preliminary Q1 nonfarm productivity (chart) fell 0.6% on an annualized basis, versus expectations of a 0.1% dip, following the upwardly revised 1.8% increase seen in Q4. Also, unit labor costs increased 3.0%, versus the forecast calling for a 2.7% gain. Unit labor costs were revised lower to a rise of 1.3% in Q4.

Weekly initial jobless claims (chart) fell by 19,000 to 238,000 last week, below forecasts of 248,000, with the prior week’s figure unrevised at 257,000. The four-week moving average rose by 750 to 243,000, while continuing claims dropped by 23,000 to 1,964,000, south of estimates of 1,990,000.

Factory orders (chart) rose 0.2% m/m in March, below the expected 0.4% gain and February's upwardly revised 1.2% increase. March durable goods orders—preliminarily reported last week—were adjusted higher to a 0.9% increase, from a 0.7% gain, and versus expectations of no revision. Orders of nondefense capital goods excluding aircraft—a proxy for business spending—were adjusted higher to a 0.5% increase.

Tomorrow, the economic calendar will culminate with the release of the April nonfarm payroll report, projected to show employment grew by 190,000 jobs, rebounding from the prior month's disappointing 98,000 gain. Private sector payrolls are forecasted to increase by 188,000 jobs, following March's 89,000 rise. The unemployment rate is expected to tick higher to 4.6% from 4.5% and average hourly earnings are anticipated to rise 0.3% m/m and be 2.7% higher y/y. Average hourly earnings could post a fifth-straight monthly gain and the figure is likely to garner scrutiny, given its impact on the consumer, which drives the majority of economic growth, and amid the backdrop of recent soft readings on inflation.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, we don't believe that trend growth is as low as the 0.7% real gross domestic product (GDP) print posted for this year's first quarter, but neither do we believe the economy has accelerated markedly. We continue to believe the bull market will continue due to decent economic growth and a good profits picture, but there will likely be sentiment-driven dips and surges to come. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Is Retail Really Dead?, the American consumer remains relatively healthy in our view, with increasing wages, low unemployment and high confidence. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Treasuries traded lower, with the yield on the 2-year note rising 1 basis point (bp) to 1.31%, while the yields on the 10-year note and the 30-year bond advanced 3 bps to 2.35% and 2.99%, respectively. Bond yields finished mixed yesterday after the widely expected unchanged monetary policy stance from the Federal Open Market Committee (FOMC), which noted that "the slowing in growth during the first quarter is likely to be transitory," and that "near-term risks to the economic outlook appear roughly balanced." In their unanimous decision, the Committee provided little direction of any change to its current outlook for future rate increases, which beforehand showed that members have penciled-in two additional rate hikes this year.

For analysis of the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, offer the video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com, where you can also find our latest article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?. Follow Randy on Twitter: @randyafrederick.

The U.S. political front continues to command attention, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Randy Frederick offer the article, Trump's First 100 Days: Key Observations, on the Insights & Ideas page at www.schwab.com.

Also, consumer credit will be released tomorrow afternoon to round out the economic docket for the week. Economists are forecasting that consumer borrowing expanded by $14.0 billion in March after increasing by $15.2 billion in February.

Europe higher on data, Asia mixed following Fed decision

European equities finished higher, with financials rising following some solid earnings results. The markets digested the unchanged monetary policy stance in the U.S. yesterday. Moreover, French political concerns remained subdued following yesterday's Presidential debate, after which polls suggested mainstream candidate Emmanuel Macron is poised to defeat anti-EU Marine Le Pen in the final vote this weekend. Meanwhile, U.K. Brexit negotiations continued as the nation heads for a June vote, while a German election looms. For analysis of the political uncertainty on both sides of the pond, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. Eurozone and U.K. business activity showed growth accelerated in April, and eurozone retail sales rose slightly more than expected. The euro and British pound moved higher versus the U.S. dollar and bond yields in the region traded mixed.

Stocks in Asia finished mixed on the heels of the highly-expected unchanged monetary policy decision in the U.S., while basic materials continued to slide. Geopolitical and political uncertainty lingered, while volume continued to be lighter than usual as markets in Japan remained closed for a holiday. Australian securities declined, with weakness in financials continuing following recent earnings reports in the banking sector, while the drop in basic materials also weighed on the markets. Chinese shares decreased amid lingering economic concerns in the wake of soft manufacturing and services sector reports as of late, along with festering regulatory crackdown concerns. However, stocks in India rose on strength in the financial sector following reports of new rules for the banking sector, while South Korean equities also gained ground after returning to action following yesterday's holiday break. For analysis of the global landscape, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Tomorrow the international economic calendar will be light, offering construction data from Australia and retail PMI reads from Germany, France, Italy and the Eurozone. Meanwhile, in central bank action, the Reserve Bank of Australia will release its monetary policy statement.

Financial Review

Break Down

Sinclair Noe — November 1, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 105 = 18,037
SPX – 14 = 2111
NAS – 35 = 5153
10 Y – .02 = 1.84%
OIL – .53 = 46.33
GOLD + 10.80 = 1288.80

Stocks started the session in positive territory but slippage was immediate; slow at first then picking up momentum. The Dow Industrial Average dropped below 18,000 for the fourth time since September 12, at one point posting a 200-point loss.

The S&P 500 took out the lows of September at the 2120 level. We had talked about 2020 being a level of support, which has now been broken. The next levels of support are 2080 (representing the 200-day moving average) and 2040 (representing lows from April and May). The point here is that today’s trading did some serious technical damage; the other point is to remind you to keep an eye on the charts; they are very effective at cutting through the chatter and the clutter.

The Fed began its 2-day FOMC meeting.  Treasury yields climbed early toward the highest since May on speculation the Federal Reserve will raise interest rates this year as the global economy improves. The Atlanta Federal Reserve’s GDP Now forecast model shows the economy is on track to grow at a 2.3 percent annualized pace in the fourth quarter; that is a downward revision from just yesterday, when the GDP Now forecast was for 2.7 percent fourth quarter growth.

Investors will be scouring the accompanying statement for clues on how determined the Fed is to raise rates in December. As things stand, the markets are taking policymakers such as Bill Dudley of the New York Fed at their word when they say a move is likely before the year is out if growth stays on track. Fed funds futures data compiled by Bloomberg shows the market is pricing in a 16% chance of a November interest-rate hike and a 71% chance of a rate hike before the end of the year.

The Bank of Japan kept policy on hold. Japan’s central bank voted 7-2 to keep its key interest rate at negative -0.1%, and target for the 10-year Japanese bond yield at 0%, warning that risks to growth and inflation were “skewed to the downside.”

Australia’s central bank held rates steady at 1.50%, as expected, and said “the Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”

American manufacturers grew slightly faster in October and even put more people to work for the first in four months. The Institute for Supply Management said its manufacturing index rose to 51.9%, the highest in three months, from 51.5% in September. Readings over 50% indicate more companies are expanding instead of shrinking.

A measure of factory employment jumped 3.2 percentage points to a reading of 52.9. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest.

The Affordable Care Act Open Enrollment starts today. Arizonans will find in most counties only one insurer selling exchange plans for 2017. Premiums for some plans will be more than double this year, some of the biggest increases in the nation. Only last-minute maneuvering prevented one Arizona county from becoming the first in the nation to have no exchange insurers at all.

Outlays for U.S. construction projects fell 0.4% in September. Spending on private outlays fell 0.2%. Residential spending rose 0.5% but spending on nonresidential projects sank 1%. For overall public construction projects, spending fell 0.9%. Outlays for the first nine months of the year are 4.4% higher compared with the same period in 2015.

CoreLogic reports home prices nationwide, including distressed sales, increased year over year by 6.3 percent in September 2016 compared with September 2015 and increased month over month by 1.1 percent in September 2016 compared with August 2016. Arizona is still 22% below peak prices. Arizona home prices were up 0.6% for the month and 5.6% year-over-year.

Sales of new cars and trucks were expected to fall in October. Auto sales have been strong but there are limits and it looks like car makers hit those limits last month. General Motors’ sales fell 2 percent from last October, while Toyota’s sales fell 9 percent. Honda’s sales were down 4 percent and Nissan’s fell 2 percent. Fiat Chrysler’s sales were down 10 percent. Volkswagen’s sales fell 18 percent. Ford will report later in the week due to a fire at their headquarters.

Sales fell even though automakers increased average discounts per vehicle by 12 percent from last October to $3,726 per vehicle. But the average sales price still was expected to set an October record at $31,383. Prices are rising because more high-priced trucks and SUVs are being sold.

Gasoline is surging, despite a recent drop in crude oil prices. An explosion of a Colonial pipeline in Alabama killed one person and injured 5 other; it is also causing gasoline futures to skyrocket higher. Futures for December delivery jumped 10.8% to $1.57 a gallon. Colonial Pipeline said it hopes to restart its major gasoline pipeline between Gulf Coast refiners and customers in the East and Southeast by noon Saturday; that news pushed prices down, but futures are still up about 4% at $1.48.

Meanwhile, crude oil has not been able to mount any kind of rally despite a weaker dollar. Following last week’s inventory draws across the entire energy complex, API was expected to report a seasonally normal 1.5 million barrel build but instead printed a massive 9.3 million build.

Royal Dutch Shell and BP both reporting higher than expected earnings by making further deep cuts in spending. Shell announced higher quarterly earnings than Exxon Mobil, the world’s largest listed oil company by output and market capitalization. At $2.8 billion in the third quarter, Shell’s net income was above Exxon’s third quarter net income of $2.65 billion. Both Shell and BP maintained their dividends unchanged as expected.

Mortgage provider Freddie Mac reported a profit of $2.3 billion in the third quarter, as interest rates turned in its favor, credit quality improved, and mortgage volumes surged. Freddie has operated under federal conservatorship since the 2008 financial crisis, when it received $71 billion in bailout funds. In December, the enterprise will remit $2.3 billion to the U.S. Treasury, bringing its total paid post-crisis to $101 billion.

Pfizer lowered its earnings outlook for the year and said it was ending the development of a drug in the cholesterol-treatment sector. Pfizer reported a profit of $1.3 billion, or 21 cents a share, down from $2.1 billion, or 34 cents a share a year prior; bottom line missed estimates – revenue matched estimates.

Prosecutors are focusing on Valeant Pharmaceuticals’ former CEO and CFO as they build a fraud case against the company that could yield charges within weeks. Authorities are considering potential accounting fraud charges related to the company’s hidden ties to Philidor Rx Services LLC, a specialty pharmacy company that Valeant secretly controlled.

Federal prosecutors in Manhattan and agents at the Federal Bureau of Investigation in New York have been investigating the company for at least a year. Last October, accusations of accounting malfeasance combined with government scrutiny over the company’s drug price hikes brought the company to its knees. Valeant’s stock price is down around 90% since last year’s peak.

One of the most difficult things Valeant has had to deal with through this entire mess is its over $30 billion debt load, which could be an even bigger problem with a criminal charge. Prosecutors in Boston and Philadelphia are also said to be conducting separate inquiries of Valeant.

Boston’s investigation focuses on Valeant’s payments to charities that then helped patients make co-payments for the soaring cost of Valeant drugs, some of the most expensive on the market. The Philadelphia case is examining Valeant’s billing of government health care programs for the company’s drugs.

And while that all sounds very bad for Valeant, if you pull up a quote today, you will see the stock is up 33%. The reason – Valeant is in talks to sell its Salix unit to Japan’s Takeda for $10 billion, per the Wall Street Journal. The crown jewel of Salix’s product line is Xifaxan, a drug that cures irritable bowel system.

When the company bought Salix, it told investors that Xifaxan would be a $1 billion drug in 2016. So far though, that hasn’t been in case. Valeant acquired Salix for $11 billion in 2015 and took on around $4 billion of its debt, so the company would be taking a loss, but it would show Valeant still has some valuable assets, even in a fire sale.

Sony’s second-quarter profit missed estimates, as a one-time charge and stronger yen weighed on profit from financial services and PlayStation games.

Angie’s List said it has hired financial advisers to review its strategic options as it continues to work on a turnaround and seek new opportunities. The company said it had a net loss of $16.8 million, or 28 cents a share, in the quarter, after breaking even in the year-earlier period – a big miss on top and bottom line estimates.

Gannett (the publisher of USA Today) has dropped its bid to buy Chicago Tribune and Los Angeles Times publisher Tronc. Gannett first made a bid for Tronc in April, then Tronc rejected a sweetened offer in May.

ChemChina has extended its $43 billion cash offer for Syngenta to Jan. 5 while it works to gain regulatory approval for the transaction. On Friday, EU anti-trust regulators opened an in-depth investigation into China’s biggest-ever foreign acquisition, setting a March 15 deadline to complete its review.

In one week and a few hours, the results will pour in. Hang in there.

Financial Review

Apple Bites

Sinclair Noe — October 25, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 53 = 18,169
SPX – 8 = 2143
NAS – 26 = 5283
10 Y un 1.75%
OIL – 1.22 = 49.30
GOLD + 8.70 = 1274.10

More than 90 companies delivered quarterly results today. Dow components 3M, Caterpillar and DuPont reported earnings before the bell. Caterpillar and 3M posted mixed results, as both beat estimates on the bottom line, while missing on revenues. Caterpillar also lowered its 2016 earnings per share guidance. DuPont posted better than expected quarterly earnings and raised its yearly profit forecast.

The largest S&P 500 stock by market capitalization – Apple – is the highlight of today’s earnings reports. After the closing bell, Apple reported net income per share of $1.67, down from $1.96 a share a year earlier. Revenue fell 9 percent to $46.9 billion. Analysts expected profit of $1.66 a share on sales of $46.9 billion.

Apple experienced its first annual sales decline since 2001. For the third consecutive quarter, iPhone sales were down from the year-ago period. Apple sold 45.5 million iPhones, down from last year’s sales of 48 million. But only a few weeks of iPhone 7 sales were included in this quarter. Next quarter is the holiday quarter, which is Apple’s biggest quarter, and it will be the first full period of iPhone 7 sales. Apple is projecting revenue of between $76 billion and $78 billion, which would be a slight return to growth for the company.

Apple spent much of the past year pushing services, such as the App Store, iCloud storage and Apple Music. That division has become the company’s fastest growing. Though those businesses represent a fraction of iPhone revenue, they foster customer loyalty by making it harder to trade in handsets for those made by rivals. Apple was trading down about 2% in after hours.

European earnings roundup: Syngenta’s third quarter revenue came in at $2.5 billion dollars, down 3%, dragged lower by weak Latin American sales. Orange’s core operating profit beat expectations as strong growth in Spain offset waning revenue in its home market of France. Novartis posted a 4% slump in third quarter profit as sales in its Alcon eye care division and cancer drug Gleevec continued to see declines.

Merck gained 1.9% after beating earnings and sales expectations. Whirlpool took an 11% hit after missing sales and earnings estimates, and lowering its outlook. Procter & Gamble reported better than expected earnings. Lockheed Martin posted higher than expected revenue as sales of Sikorsky helicopters rose nearly 15% and Lockheed announced it will hike its dividend.

Under Armour, the No. 2 U.S. sportswear maker, reported its slowest quarterly sales growth in six years. Although, net sales in North America grew 15% in the third quarter, it was below the 20 percent growth mark that the company normally. The stock dropped 14%.

FreePort McMoRan reported earnings of $217 million, or 13 cents a share on an adjusted basis – missing estimates. Revenue grew to $3.8 billion from $3.3 billion – missing estimates.

General Motors doubled its net income and notched record revenue in the third quarter with strong truck sales in the U.S. market and continued strength in China, but the auto maker signaled continued weakness in Europe because of Brexit fallout. Profit and revenue beat analysts’ estimates. Still, there is a nagging concern that the auto industry has seen 6 years of improving earnings and sales have plateaued. GM dropped about 4% today.

A federal judge has approved Volkswagen’s $14.7 billion settlement with regulators and owners of 475,000 polluting diesel vehicles that don’t meet emissions standard. Volkswagen admitted last year that the cars were programmed to cheat on emissions tests. The German automaker will spend up to $10 billion to either buy the cars back or fix them and compensate owners. The deal covers 475,000 VW models with 2-liter diesel engines dating to 2009. U.S. models include the 2009-2015 Jetta and Audi A3, the 2010-2015 Golf, and the 2012-2015 Beetle and Passat.

Most owners are expected to take the settlement. As of Sept. 16, which was the deadline opt out of the settlement, 3,298 owners said they wouldn’t participate. Those who don’t accept the settlement could sue VW, but it’s not guaranteed they would get better terms. Another 90,000 cars with 3-liter diesel engines also have cheating software, but they aren’t part of this settlement. Owners have a choice – VW will buy back the car or fix the car, although a fix has not yet been approved. The official settlement web site is vwcourtsettlement.com.

Reeling from the biggest and most costly car recall in history, Takata is now at the center of a messy takeover battle that could put the company on a path towards bankruptcy. Its fate will rest heavily on global automakers that will gather in New York today to discuss options for an outside investor to help the firm replace potentially defective airbags in more than 100 million vehicles.

Maybe we should call it driver-less beer. In a major milestone for autonomous trucking, some 45,000 cans of Budweiser beer arrived late last week to a Colorado warehouse after traveling over 120 highway miles in a self-driving semi with no driver at the wheel. Otto, the autonomous truck subsidiary of Uber, shipped the brew with a driver monitoring from the truck’s sleeper berth for the entire two-hour journey.

U.S. home prices rose slightly in August. The S&P/Case-Shiller U.S. National Home Price Index was up 5.3 percent on an annual basis in August from 5.0 percent in July. Top gainers in August were Portland, Oregon, with an 11.7 percent increase year to date, and Seattle, at 11.4 percent over the last year. Phoenix posted a gain of 0.6% from July to August, and prices advanced 5.2% over the past year.

While rising home prices point to a healthy housing market on the demand side, they also expose an affordability problem that has locked some potential buyers out. According to S&P/Case Shiller, the index of national house prices is within 0.1% of the record it set 10 years ago. Higher home prices are indicative of a shortage of homes for sale.

The Mortgage Bankers Association says lenders are expected to issue more than $1 trillion in mortgages for home purchases in 2017, marking the first year this would happen since the housing bust a decade ago. On the other hand, the MBA forecast a steep 40 percent drop in mortgage refinancing next year to $529 billion as the Federal Reserve raises interest rates gradually through 2018.

The Conference Board’s Consumer Confidence index dropped to 98.6 this month from 103.5 in September, a number that was revised lower. Consumer confidence is still near a post-recession peak despite the drop in October. The present situation index, a measure of current conditions, fell to 120.6 from 127.9. Fewer Americans said jobs are “plentiful.” The future expectations index declined to 83.9 from 87.2. That’s the lowest level since July.

The average premium for benchmark 2017 Affordable Care Act insurance plans sold on Healthcare.gov will jump 25% to $302 compared to this year, the biggest increase since the insurance first went on sale in 2013. Seeking to downplay the cost hikes, the administration said that including subsidies 77% of people would be able to find insurance plans with monthly premiums below $100, however, one in five consumers will only have one insurer from which to choose coverage.

The Federal Reserve is inclined to raise interest rates higher than would otherwise be the case if the next president pursues an expansionary fiscal policy. Speaking yesterday evening, Federal Reserve Bank of Chicago President Charles Evans said that the Fed should be more explicit about how policy makers would respond to new information on the economy. Market-implied odds of a rate increase by the central bank in 2016 were at 71 percent.

Renewable energy reached an important turning point last year with record new installations of emissions-free power surpassing sources that burn fossil fuel. According to a new report from the International Energy Agency new installations of renewable energy overtook conventional power for the first time in 2015. Global green power rose by a record 153 gigawatts, equivalent to 55 percent of newly installed capacity last year. Total installed capacity exceeded coal for the first time.

The report shows the acceleration toward clean-power generation was already picking up pace before governments agreed in Paris in December to reduce carbon dioxide emissions. The IEA raised its estimate of the amount of green energy on power grids by 13 percent, revising its forecast to 42 percent by 2021. About 500,000 solar panels were installed each day across the globe in 2015, according to the report.

Renewables will be the world’s fastest-growing source of electricity over the next five years. And the cost is coming down; solar panels are expected to be a quarter cheaper over the next 5 years.

Monday, June 30, 2014 - Narrow Decisions Leave the Doors Wide Open

Financial Review with Sinclair Noe

DOW – 25 =  16,826
SPX – 0.73 = 1960
NAS + 10 = 4408
10 YR YLD - .02 = 2.51%
OIL - .23 = 105.51
GOLD + 11.80 = 1327.90
SILV + .09 = 21.06

 

Today’s session marked the end of trading for June as well as for the second quarter. After a run to record closes, the S&P 500 Index posted a quarterly gain of 4.7%, and the Dow Jones Industrial Average had an increase of 2.2%. The Nasdaq Composite Index had a quarterly gain of 4.9%. It marks the sixth straight quarterly gain for both the S&P and Nasdaq. With six straight quarterly gains, the Nasdaq has had its longest streak of advances since 2000, while the S&P 500 has had its best run since 1998. The Dow, meanwhile, posted its fifth positive quarter of the last six.

For the first half of 2014, the S&P 500 is up 6%, with the Dow industrials up 1.4%, and the Nasdaq up 5.4%. Airline, pharmaceutical, and utilities stocks led advancers during the period, which was marked by the impact of bad weather, and a 2.9% drop in first-quarter gross domestic product. Yields on Ten year Treasury notes started the year at 3.03%, dropped down to 2.71% at the end of the first quarter, then dropped to 2.45% at the start of June. The S&P 500 has scored 22 record closing highs so far this year, which has increased concerns among some investors that the market might be due for a technical pullback. Yet the CBOE volatility index, or VIX, Wall Street’s fear gauge, has held near multiyear lows.

This week will likely see light trading with a holiday shortened week. The markets will close Friday for Independence Day. The monthly jobs report will be issued on Thursday.

Meanwhile, oil prices have advanced steadily from 98.46 a barrel at the start of the year, to 101.58 at the start of April, to 102.87 at the start of June.

The precious metals have also shown some recent signs of life. Spot gold started the year at 1206 an ounce, while silver began the year at 19.54. Since June 1^st, there has been a modest rally from 1252 for gold and 18.91 for silver. This is not a huge rally, and it doesn’t mark a challenge to old highs, but it might signal a bounce off recent lows.

Let’s start with a couple of cases from the Supreme Court. You recall that last week we noted the Supremes had been, uncharacteristically unanimous on several cases; that came to a screeching halt today in the case of Burwell v. Hobby Lobby and Conestoga Wood. In a 5-4 opinion authored by Justice Alito, the court ruled that the Obama administration has failed to show that the contraception mandate contained in the Affordable Care Act is the "least restrictive means of advancing its interest" in providing birth control at no cost to women.

The Affordable Care Act contains a provision requiring most employers to cover the full range of contraception in their health care plans at no cost to their female employees. The Obama administration had granted an exemption for churches and accommodations for religious hospitals, schools and nonprofits, but for-profit companies were required to comply with the coverage rule or pay fines.

Hobby Lobby, a Christian-owned craft supply chain store, and Conestoga Wood Specialties Store, a Pennsylvania wood manufacturer owned by a family of Mennonites, challenged the contraception mandate on the grounds that it violates their religious freedom by requiring them to pay for methods of contraception they find morally objectionable. The Religious Freedom Restoration Act says that the federal government may not put substantial burdens on religious exercise.  The owners of those companies believe certain forms of contraceptives are forms of abortion, in violation of the religious beliefs of the company’s owners.

So, the court was dealing with a couple of issues. First is a company like Hobby Lobby considered a person? This is important because the Religious Freedom Restoration Act protects “persons” but doesn’t mention for-profit corporations. Justice Alito wrote: "Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law."

The other issue was whether the mandate for contraception coverage imposed a substantial burden on Hobby Lobby. Well, it’s a pretty easy argument that anything the government requires a person to do is a substantial burden, so…, strike two.

The case is being billed as a battle between women’s rights and religious rights.

The opinion was written narrowly so as only to apply to the contraception mandate, not to religious employers who object to other medical services, like blood transfusions or vaccines. But there is no certainty the ruling will be interpreted narrowly. What if a company objects to something the government does, outside the realm of health care? Time will tell. Another point came when Justice Ginsburg wrote: “One might ask why the separation [between business and owner] should hold only when it serves the interest of those who control the corporation.”

The opinion applies to small, closely held corporations, but what if a big, publicly traded corporation makes a similar claim? As the majority itself noted, no big, publicly-traded corporation has emerged to make such a claim. The Court doesn’t have to rule on a question it isn’t asked. And a closely held corporation can still be pretty big. Hobby Lobby has 572 stores. “Closely held” refers to a corporation that has more than 50% of the value of its outstanding stock owned by 5 or fewer individuals. These corporations are thought to make up 90% of corporations; these corporations account for about 52% of private employment, or a little more than 60 million people. Hobby Lobby is being described as a narrow ruling but it has the potential to affect tens of millions of workers.

Now that the court has recognized that corporations have religious exercise, the door has been opened. All it takes is for the right plaintiff to walk through it.

The Supremes also issued an opinion in the case of Harris v. Quinn, ruling 5-4 that some government workers are not required to pay union dues. In writing for the majority, Justice Alito concluded that there was a category of government employee, a partial public employee, who can opt out of joining a union and not be required to contribute dues to that labor group. What is a partial public employee? In this case it refers to home-care aides who typically work for an ill or disabled person, with Medicaid paying their wages.

The court declined to strike down a decades-old precedent that required many public-sector workers to pay union fees, so this does not apply to employees such as teachers or police officers who work directly for the government.

The case, Harris v. Quinn, was brought by eight Illinois workers who provided home health care to Medicaid recipients. Several of the original plaintiffs were mothers who, helped by Medicaid, were personal home-care assistants to their disabled children and opposed joining the union and paying any union fees. Justice Alito wrote in the majority opinion: “Agency-fee provisions unquestionably impose a heavy burden on the First Amendment interests of objecting employees.”

The case deals with the “fair share” fees that most unions charge all employees, including nonmembers, to support collective bargaining. These fees prevent free-riding. Unions are required by law to bargain on behalf of members and nonmembers alike, all of whom benefit from collective bargaining. If some employees could simply decline to pay to support collective bargaining, all would have the incentive to similarly opt out, thereby undermining the union and harming all employees. It’s a classic case of the free-rider problem.

Because the case only deals with partial public employees, it is being called a narrow decision, however, by giving a constitutional underpinning to the anti-union “right to work” stance, the court short-circuited that process, retreating from its decades-long practice of giving states broad latitude in making economic policy, including labor policy. In this way, the court became very much involved in economic policy.

So, today the court split on two different cases, and in those splits they have opened up Pandora’s Box. We are likely to see and hear much more on these issues over the next few years.

Another court ruling today, didn’t quite make it to the Supremes, but potentially still important; the New York state Court of Appeals ruled that towns can use zoning ordinances to ban hydraulic fracturing, or fracking. Numerous municipalities across the state have either banned fracking or are considering doing so, and the trend may accelerate because of the court’s ruling. Of course, a state law in New York does not apply in other states, but it may be the start of a trend if not necessarily a precedent.

General Motors recalled more than 8.4 million vehicles worldwide today, bringing its total figures for the year above 28 million cars, more than the 22 million recalled last year by all automakers combined. GM said it was aware of seven crashes, eight injuries and three fatalities in the recalled vehicles, but said that there was no conclusive evidence that a defect had caused them. The death toll is  just from the latest round of recalls; 13 other deaths associated with other GM recalls involving ignition switches will result in payments of at least $1 million per family; at least that is the starting point unveiled today by a compensation expert hired by GM.

In economic data today; the National Association of Realtors (NAR) said its Pending Home Sales Index, based on contracts signed last month, increased 6.1% to 103.9, the highest level since September of last year. Contracts increased in all regions of the country, with the Northeast and West experiencing the largest gains. The Pending Sales Index looks at contracts for existing homes, with the anticipation there will be an actual sale in about 2 months; so it looks like there might be a little boost for home sales. However, signed contracts were down 5.2% from May of last year. Existing home sales are expected to decrease by 2.8 percent this year to 4.95 million, compared to 5.1 million sales in 2013.

There is a magazine called “The Banker” and each year they publish rankings of the profits and capital strength of the 1,000 biggest banks in the world. They estimate that last year the top 1,000 banks posted a record $920 billion in profit. This was the industry’s largest-ever annual haul, comfortably beating the pre-crisis peak of $786 billion in 2007. Last year's global profits were up 23% from the previous year to their highest ever level.

China's banks made $292 billion in aggregate pretax profit last year, or 32% of the industry's global earnings. Last year China Construction Bank shoved aside America's JPMorgan Chase to become second largest in terms of tier-one capital. And the total Tier 1 capital of Chinese banks has also overtaken that of the US for the first time ever, at $1.19 trillion, to make it the largest single banking sector in the world. ICBC (formerly known as Industrial and Commercial Bank of China) kept the top spot; with more than $200 billion, and it is also the world's most profitable bank, with $55 billion last years. Four Chinese banks made the top ten list for profits, including: ICBC, China Construction Bank, Agriculture Bank of China, and Bank of China.

Chinese officials have ramped up investment in real estate through the state controlled banking system to counter weaker than desired growth. They will likely continue this stimulus, even if it means construction of buildings that will sit vacant. Then there is the $5 trillion dollar question of the health of China’s lightly regulated shadow banking system.

The top US banks in terms of Tier-one capital are JPMorgan, Bank of America, Citigroup, and Wells Fargo. Banks in the United States made aggregate profits of $183 billion, or 20% of the global tally, led by Wells Fargo's earnings of $32 billion. The top 10 US banks in the 2014 ranking have an aggregate capital-to-assets ratio of 7.84%. This compares with a ratio of just 4.47% for the top 10 banks in the EU. To some extent, the difference is explained by US Generally Agreed Accounting Principles (GAAP), which allow netting of derivative positions.

Until 2007, Mitsubishi UFJ Financial Group was a banking giant in terms of tier-one capital, now it ranks tenth, and it is the only Japanese bank in the top ten. In the Top 1000 ranking 20 years ago, all the top six positions were held by Japanese banks. With 20/20 hindsight we can see that the Japanese banking boom was unsustainable. And now China’s banking boom seems to be getting ahead of itself. Chinese banks capital-to-asset ratio is 2 percentage points lower than that in the US, which basically means that if loans start to default, they have a smaller cushion.

Over the past 15 years, Chinese banks average profit growth has been more than 50% per year; while assets have risen more than 20% per year and China’s economic growth has been just under 14% per year. And in the past 4 years, the Chinese economy has slowed from those double digit growth levels, even as Chinese bank profits have accelerated. It seems unlikely that this path is sustainable, and more likely that there is some combination of lower growth rates in the banking sector or stronger growth rates in the Chinese economy.

Ten years ago, Europe counted five banks among the world's top ten. Today there is only one, HSBC, in fifth place. Struggling Eurozone banks contributed just 3% overall to global profits, down from 25% before the 2008 crisis, as recovery remains slow or non-existent in many countries. There are no French or Spanish or German banks in the top ten. Italian banks lost $35 billion last year, and occupy four of the top five spots in terms of the biggest annual losses. And European banks accounted for 24 of the top 25 losses.

Meanwhile, BNP Paribas is in hot water. Today, BNP pleaded guilty in New York state court, admitting to transferring billions of dollars to blacklisted countries under US sanctions. The plea to one count of falsifying business records and one count of conspiracy is part of a broader settlement deal with state and federal authorities. As part of that deal, BNP agreed to plead guilty to criminal charges and pay about $8.9 billion.

BNP is the seventh bank to settle a criminal sanctions violation case but the first to plead guilty; prosecutors consider BNP to be the worst offender. Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions coursing through its New York operations and the broader American financial system, but the wrongdoing was more pervasive at BNP, stretching from at least 2002 into 2012, after the investigation was already in full swing.

The BNP investigation centered on its commodity-trade finance business in Paris and Geneva. About 30 executives who worked there have resigned, gone on leave, been fired or relocated since 2012. Unauthorized dollar payments were made on behalf of oil companies to Sudanese or Iranian entities. Prosecutors also reviewed metals and agriculture commodity deals, as well as non-commodity transactions. In total, the bank is suspected of hiding about $30 billion in transactions.

BNP will prevent certain units within BNP’s headquarters in Paris, as well as offices in Geneva, from processing payments in dollar denominations, also known as dollar clearing, for one year beginning in 2015. The deal also requires BNP dismiss 13 employees. The deal comes six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes. Both banks could have faced the loss of their bank charter in the US, which is considered to be the Wall Street equivalent of a death penalty for a bank. That did not happen. Prosecutors have managed to extract a criminal guilty plea but only a civil penalty, a slap on the wrist, even if it is a nearly $9 billion slap.

In the months ahead, prosecutors will shift their focus to several big banks suspected of manipulating foreign currencies; they are expected to use the Credit Suisse, BNP cases as a template for pulling down criminal guilty pleas without harsh punishment, proving what we’ve known for a very long time – the big banks are too big to jail.

Wednesday, March 26, 2014 - Render to Caesar

by Sinclair Noe

Financial Review

DOW – 98 = 16,268
SPX – 13 = 1852
NAS – 60 = 4173
10 YR YLD - .03 = 2.70%
OIL + 1.03 = 100.22
GOLD – 5.90 = 1306.80
SILV - .27 = 19.84

Durable goods orders increased 2.2% in February, ending 2 straight months of declines. Durable goods are items like refrigerators, cars, and airplanes that are built to last for several years. But we need to dig into this report just a little; orders for non-defense goods, excluding aircraft, were actually down 1.3%. This might also indicate that first quarter business investment is weak.

The US Census Bureau began releasing data from its 2012 Economic Census, a survey of American businesses taken every 5 years. The enormous boom in domestic oil and gas production helped make the mining, quarrying and oil and gas extraction industry one of the fastest growing sectors of the US economy. The number of businesses rose 26% from 2007 to 2012, employment in the sector rose 24% and revenue surged 34%. Meanwhile, from 2007 to 2012 manufacturing lost 2.1 million jobs, now down to just 11.3 million people employed in manufacturing.

The finance and insurance sector shed 390,000 jobs between 2007 and 2012 and industry revenue fell by $137 billion, nearly 4%. But revenues in 2012 were still up 61% from 15 years earlier. There were one million retail stores operating in 2012. But the retail trade sector shed 65,000 establishments and nearly 778,000 jobs from five years earlier. Internet-based selling was something of a bright spot, with the number of “nonstore retailers” rising 12%, though employment was basically flat. The health care and social assistance sector is the nation’s largest employer, with 18.6 million workers in 2012. That’s up 11% from five years earlier, and revenue for the industry rose 23% to just over $2 trillion.

President Obama said after a summit with top EU officials that Russian President Vladimir Putin had miscalculated if he thought he could divide the West or count on its indifference over his annexation of Crimea. The United States and the European Union agreed to work together to prepare possible tougher economic sanctions in response to Russia's behavior in Ukraine. The sanctions could possibly include the energy sector.

Yesterday, the Supreme Court went back to revisit the Affordable Care Act, hearing the consolidated arguments in Sebelius v. Hobby Lobby and Conestoga Wood Specialties Corp, in which the owners of the for-profit businesses Hobby Lobby and Conestoga claim they should be allowed to deny their employees health insurance coverage for certain types of birth control based on the owners' personal religious beliefs.

 In enacting the ACA, Congress required large employers to provide basic preventive care for employees. That turned out to include all 20 contraceptive methods approved by the Food and Drug Administration. Under the law, religious nonprofits were exempted from this requirement, but for-profit corporations were not. Hobby Lobby's attorneys argue that the law violates the company's constitutional right to religious freedom by forcing it to cover all forms of birth control or pay steep fines.

This is a very interesting case on several levels. The Supreme Court, in business cases, has held that "incorporation's basic purpose is to create a legally distinct entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created it, who own it, or whom it employs." In recent constitutional law cases, however, the justices seem to have forgotten this basic principle of corporate law. In Citizens United, the court effectively held that corporations enjoyed the same free speech rights as ordinary individuals.

Now, in the Hobby Lobby case, the owners of the craft store chain want the court to again forget about the basic principles of corporate law and decide that corporate personhood extends beyond free speech to religious freedoms. It seems a bit of a stretch. Hobby Lobby’s owners certainly have constitutionally protected religious rights, but Hobby Lobby's owners aren't required by the law to do anything. The legal duty falls on Hobby Lobby, the company, not its owners. If Hobby Lobby fails to provide the required insurance, the company, not the owners, is responsible.

The Hobby Lobby case would require the Supremes to "pierce the corporate veil"; legalese for looking behind the corporation's legal identity and basing a ruling on the interests and desires of the owners of the firm, but Hobby Lobby's owners only want to pierce the veil for this one issue, birth control, while maintaining the protections of the corporate form for everything else, including limited liability. The whole point of corporations being “people” is that they are distinct from their owners, officers, and employees.

Hobby Lobby should only have the rights of legal personhood that are essential for its operations. Supreme Court Chief Justice John Marshall wrote nearly 200 years ago, "Being the mere creature of law," the corporation "possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence." In Citizens United, the Supreme Court said this includes some limited speech rights, as we ordinarily expect firms to advertise and communicate with employees and customers.

Not everyone, or even a majority, agree with the Citizens United ruling. A February 2010 ABC News-Washington Post poll found 80% of Americans opposed Citizens United and 72% support the idea of a legislative workaround to reinstate the limits the court lifted. And expanding corporate personhood to religious liberty, well that’s even more of a stretch.

Until 1990, the court applied a tough test to examine laws that disadvantaged people's religious beliefs. Then, the justices changed direction in a case involving penalties for the use of peyote as part of a Native American religious ceremony, the court ruled that as long as a law that applies generally to all citizens is neutrally applied, it is constitutional, even though it may have some unhappy consequences for some believers. 

Congress didn’t like the decision, and in 1993 passed the Religious Freedom Restoration Act. Under the act, if a law imposes a substantial burden on the free exercise of religion, it has to meet a high threshold for justification. Hobby Lobby claims the religious practice of the corporation now faces a substantial burden. And if there is a burden, can the government justify it with a “compelling state interest” and the “least restrictive means” of reaching it.

The case raises some interesting philosophical arguments that began with the liberal justices peppering Hobby Lobby’s lawyers with slippery-slope hypotheticals.  If Hobby Lobby can deny coverage for contraception, why couldn’t a Christian-Scientist-owned company deny health insurance completely?  What if a Muslim-owned company wanted to make employees were burqas on the job? What then?

 “How does a corporation exercise religion?” that was a question posed by Justice Sotomayor yesterday.

Justice Anthony Kennedy, who many expect to be the swing vote in this case, questioned both sides aggressively. Kennedy asked why the company couldn't just choose not to provide health insurance at all, pay a tax and then raise salaries to allow employees to purchase health care on their own. Assuming that would be a financial "wash," Kennedy asked, "Then what would your case be?"

And that may very well be the key question of the day, for two reasons. First, is it a “substantial burden’ for a company to not offer health insurance to its employees? For Hobby Lobby they are looking at about $26 million in taxes, but that is cheaper than the cost of the insurance; a bigger burden is the loss of competitive advantage. Justice Kagan, in particular, effectively said “so what?”  But is that really true? Is it really a trivial thing to not offer a desired benefit to employees?  I guess we’ll see in June. The second reason is that the individual mandate is a tax.

Let’s take the way-back machine to the summer of 2012. And we land on the steps of the Supreme Court in Washington DC. Chief Justice John Roberts has just issued a decision in the case of National Federation of Independent Business v. Sebelius. Surprisingly, Roberts sided with the 4 liberal justices to determine that the Affordable Care Act is constitutional and that the individual mandate is not valid as an exercise of Congress’ commerce clause power but the majority upholds the mandate as a tax. 

Chief Justice Roberts wrote in the controlling opinion: "The individual mandate cannot be upheld as an exercise of Congress's power under the Commerce Clause. That Clause authorizes Congress to regulate interstate commerce, not to order individuals to engage in it. In this case, however, it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation is within Congress's power to tax."

Obamacare, or the Affordable Care Act, relies upon the individual mandate, which basically says you get insurance or pay a penalty, and that mandate is a tax. We all have to pay taxes, individuals and corporations alike. There are many ways the government spends tax dollars that I don’t like; you probably feel the same way; someone might even have religious objections to the way the government spends tax dollars. But we all have to pay taxes; that decision was handed down a long time ago: “Render to Caesar the things that are Caesar’s and to God the things that are God’s.” And we’ll see if the Supreme Court can recognize the difference.