Financial Review

Mylan Digs a Deeper Hole

Sinclair Noe — August 25, 2016

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DOW – 33 = 18,448
SPX – 2 = 2172
NAS – 5 = 5212
10 Y + .02 = 1.58%
OIL + .61 = 47.38
GOLD – 2.20 = 1322.60

The number of Americans who applied for unemployment benefits last week fell by 1,000 to 261,000 and remained near post-recession lows. Claims fell below the key 300,000 threshold in early 2015 and have remained there for 77 straight weeks, the longest streak since 1970.

Orders for durable or long-lasting goods made in the U.S. surged 4.4% in July to mark the biggest gain since last fall. Higher demand for passenger jets led the way as expected. The Pentagon also put in a bunch of new orders. Stripping out the volatile transportation sector, orders rose a smaller 1.5%. Still, that matches the biggest increase of the year.

Kansas City Fed President Esther George said Thursday she thought it was time to raise interest rates. George, who is a voting member of the Fed’s policy committee this year, said she didn’t know if anything would cause her to change her mind at the Fed’s meeting next month. But she indicated that decision-making remains data-dependent. George has a hawkish track record. Still, she joins Dallas Fed President Robert Kaplan, FOMC Vice Chair Stanley Fischer and New York Fed President William Dudley on the list of Fed officials calling for rate hikes.

Fed chair Janet Yellen delivers a speech at Jackson Hole tomorrow; she is expected to address possible rate hikes. Fed Funds futures are currently predicting only a 53% chance of a rate hike in calendar year 2016, which, of course is only a bit higher than coin flip. So, given the current overbought condition and the complacency seen in many indicators, the bears tell us that stocks are now “set up” for disappointment if Ms. Yellen’s speech takes on a more hawkish tone than expected tomorrow.

Central bankers sit down with their critics. In what is a first for the high-profile policy conference at Jackson Hole, Wyoming, eight central bankers, including William Dudley, president of the New York Fed, will meet with 120 activists from the Fed Up Campaign, which wants to see change at the Federal Reserve.

Mylan is responding to backlash over price increases for its EpiPen emergency allergy treatment by promising to reduce the costs that some patients pay, though the drug maker stopped short of saying it would roll back prices or limit future increases. EpiPen is a lifesaving treatment for millions whose allergies can send them into severe shock, including many schoolchildren who are advised to keep an injector handy at all times. The price has increased 548% since 2007. After widespread criticism recently, Mylan will “double eligibility” for its EpiPen patient assistance program to 400% of the poverty level, saying that a family of four making $97,200 would now pay nothing out of pocket for a prescription.

What the discount does change is how much people with commercial insurance and a high deductible pay. If you were at on the hook for about $600 before, that will now be cut to about $300. For people without insurance, however, the card won’t apply; they’d fall under a separate patient assistance program. It also won’t apply to people under government insurance programs such as Medicare or Medicaid.

Mylan CEO Heather Bresch, who happens to be the daughter of US Senator Joe Manchin, was making the rounds of TV business interviews today, trying to explain that there was nothing she could do about the price increases; she claimed the health care system is broken; she claimed she can’t lower the price because there are many layers, or middlemen, each taking a cut along the supply chain; even if Mylan cut the price, it wouldn’t result in lower prices for consumers. Well, she’s partially correct – the health care system is broken. The rest is pure hogwash.

The cost of a two-pack of EpiPens – shots of epinephrine that relieve symptoms from severe allergies that restrict breathing and can cause death – has risen from $103.50 in 2009 to $608.61 today, despite no changes in the chemical formula. Two vials of the proper dosage of epinephrine and manual syringes would cost only $20; some put the cost of the dosage in each EpiPen at as little as $1.

In 2012, the company behind the EpiPen settled a lawsuit by agreeing to allow a generic competitor into the market in 2015, potentially cutting into a big part of its business. Mylan had already been steadily increasing the price of EpiPen, an injector containing a drug that can save people from life-threatening allergy attacks. After the settlement, it started to raise the price even faster. The increasing price hikes reek of a greedy last grab for profits and an attempt to subvert the court’s ruling.

Bresch can lower the price, just as easily as she raised the price; or for that matter, even easier than the corporate “inversion” merger with Abbott Labs that moved Mylan’s headquarters to the Netherlands last year, so the company could dodge US taxes.

Brazil’s Senate has started the impeachment trial of suspended President Dilma Rousseff for violating budget laws, with the chances strong that she will be removed from office. Brazilian markets have rallied lately over the prospect of the Vice President Michel Temer permanently taking over from the Rouseff, although Temer was recently found guilty of violating campaign finance limits, a case that could make him ineligible to run for office for eight years.

Colombia’s government and the Marxist rebel group the Revolutionary Armed Forces of Colombia (FARC) have reached a peace deal after 52 years of war that has killed over 220,000 people. In return for giving up its arms, FARC members will be allowed to reintegrate into civilian life and stand for elections. The agreement will be put to a referendum in October, when it is expected to pass.

As one war ends…, Turkey has launched its first major ground assault into Syria since the country’s civil war began, sending in tanks and special forces backed by U.S. airstrikes to help Syrian rebels retake a border town from ISIS. The assault marks a dramatic escalation of Turkey’s role in Syria’s war, but there is more to the move than just fighting ISIS in Syria. Turkey is also aiming to contain expansion by Syria’s Kurds, who are also backed by the United States and have used the fight against ISIS and the chaos of the civil war to seize nearly the entire stretch of the border with Turkey in northern Syria.

Phoenix-based ON Semiconductor has won antitrust approval to buy Fairchild Semiconductor International. ON will sell its Ignition IGBT business to Chicago-based manufacturer Littelfuse. ON Semi and its rivals’ power-management circuits are used in everything from aircraft to home appliances and automobiles to computers. The deal was valued at about $2.4 billion. The FTC, in a statement, said that without the sale the merged company would have controlled more than 60 percent of the market for insulated-gate bipolar transistors, or IGBTs – a type of semiconductor used in automotive internal combustion engines’ ignition systems. That likely would have driven up prices and curbed innovation.

HP Inc., the hardware business of the former Hewlett-Packard Co, reported higher-than-expected quarterly revenue and profit as demand recovered for its notebooks. However, HP forecast current-quarter profit below analysts’ estimates, reflecting weak sales of its printers as companies cut costs across industries.

Sears Holdings is in really bad shape as its earnings report shows. The struggling owner of Sears and Kmart reported a staggering second-quarter loss of $2.03 a share. Same-store sales at discounter Kmart fell 3.3%, representing the seventh straight quarterly decline. Same-store sales at discounter Sears fell 7%, representing the eighth straight quarterly decline. And Sears is running out of money to stay afloat. Cash and equivalents declined to $276 million from $1.8 billion a year ago.

The ride-hailing giant Uber Technologies is not a public company, but every three months, dozens of shareholders get on a conference call to hear the latest details on its business performance. Uber’s losses in the first half of 2016 totaled at least $1.27 billion. For a private business to raise as much capital as Uber is unprecedented. It is also tough to find a tech company that can lose this much money this fast.

The first driverless taxi began work today in a limited public trial on the streets of Singapore. Developer nuTonomy invited a select group of people to download their app and ride for free in its “robo-taxi” in a western Singapore hi-tech business district, hoping to get feedback ahead of a planned full launch of the service in 2018. The trial rides took place in a Mitsubishi i-MiEv electric vehicle, with an engineer sitting behind the steering wheel to monitor the system and take control if necessary.

Over 300 Airbnb hosts have opened up their homes for free to people wracked by earthquakes, floods and fires in central Italy, Louisiana and California. Homes in central Italy, hit by a 6.2 magnitude earthquake Aug. 23, are on free offer on the website’s urgent accommodation page between Aug. 23 and Sept. 11. Airbnb accommodation could serve as an alternative to temporary relief camps for the 1,000 residents, whose homes were destroyed. Accommodation is also available to those affected by floods in Louisiana and prolonged wildfires threatening two Californian counties.

Financial Review

Dead Cat Bounce

Sinclair Noe — June 28, 2016

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DOW + 269 = 17,409
SPX + 35 = 2036
NAS + 97 = 4691
10 Y un = 1.46%
OIL + 1.78 = 48.11
GOLD – 12.60 = 1312.50

Stocks bounced back across the globe after a record $3 trillion in market cap was wiped off the board in just two trading days and sterling fell to its lowest level in over 30 years. Hopes of a more coordinated central bank response to support the financial markets and firmer oil prices are helping stocks claw back some of their losses following the Brexit battering.

And after two days of brutal selling, traders are taking a breath and trying to figure out the best strategy moving forward. Even with the gains today, the Dow is down year to date, but the Dow did not take out the lows for the year, set back in February.

Same story with the S&P 500, which found some support yesterday at the 2000 level, after breaching major support around 2040 and then clawing its way above 200-day moving average resistance at 2021. And if you want to get clever, consider the Russell 2000 index of small cap stocks is also down year to date, did not take out the February lows, but did find some support at the May lows.

Now, you can easily understand that big, multi-national companies are affected by what happens in Europe, but why did the small caps take a hit? Do you buy the dips or sell the rallies?

Heads of government of the EU’s member countries are gathered for a two-day meeting of the European Council in Brussels. No country has ever left the bloc, so they are in uncharted territory as they try to figure out how to make Britain’s separation proceed as smoothly as possible. Pressure is also expected to be applied on the U.K. to trigger Article 50, which would actually start a 2 year exit process. The UK might opt for a much faster exit, or they might drag things out. Several Euro leaders have expressed the idea that the UK needs to explain what they are going to do because the uncertainty is not good.

German Chancellor Angela Merkel warned the U.K. to have no illusions about life outside the European Union. Merkel, in her toughest response yet to last week’s British vote, said that the U.K. can’t expect favored treatment once it leaves and that there will be no informal talks on a new relationship before the government in London files Article 50.

The Brits were hoping they could renegotiate trade treaties and just sort of cherry pick the best deal, while not paying into the EU or abiding by rules and regulations they don’t like. Yea, that’s not gonna happen. One of the leading campaigners for the exit side, Nigel Farage from the UK Independence Party, spoke before the European parliament; he was booed. EU Commission President Jean-Claude Juncker called Farage a liar. This is not going to be an amicable divorce.

The British government has abandoned plans to sell down its shareholdings in RBS and Lloyds in light of the Brexit referendum, leaving a multi-billion-pound hole in its finances. The Treasury had planned to cut its exposure to the domestic banks, raising £9-billion-pounds through stock sales, but the date has now been pushed back until at least 2017 given market volatility.

Moody’s will revise the outlook of “a number of big U.K. lenders” to negative from stable due to fallout from last week’s EU referendum. The plan comes just hours after rival Standard & Poor’s stripped the U.K. of its coveted triple-A rating and Fitch downgraded the sovereign debt.

The first bank casualties might be in Italy. Italy is preparing a €40-billion-euro rescue of its financial system as bank shares collapse on the Milan bourse. Italian officials are studying a direct state recapitalization of the banks, to be funded by a special bond issue. Unlike the Eurozone debt crisis in 2011-2012, there is no serious trouble yet in the sovereign debt markets. The ECB is effectively capping yields under quantitative easing. The Euro STOXX index of bank stocks has collapsed by half since last July. And Italian banks are the Achilles Heel of the Eurozone financial system. Non-performing loans have ratcheted up to 18% of total balance sheets.

The stock market sell-off did shake thing up; of course some stocks were hit harder than others.  Apple still has the largest market capitalization among US stocks, but here are some of the leadership changes. Verizon is now bigger than Walmart. Proctor and Gamble is bigger than JPMorgan. Coca-Cola and PepsiCo beat Chevron and Intel, respectively. And Home Depot is now bigger than Disney.

U.S. economic growth slowed in the first quarter but not as sharply as previously estimated. Gross domestic product was revised higher to show a 1.1 percent annual rate, rather than the 0.8 percent pace reported last month. Federal Reserve Chair Janet Yellen told lawmakers last week that data pointed to “a noticeable step-up” in GDP growth in the second quarter. The Atlanta Federal Reserve is currently estimating second-quarter GDP rising at a 2.6 percent rate. But uncertainty stoked by the Brexit vote poses a risk to growth for the rest of year.

U.S. house prices rose 1.1% in April. The S&P/Case-Shiller 20-City Index showed a stronger pace of growth in the three months ending in April. March’s reading was 0.9% higher. Compared to the same period a year ago, prices rose 5.4%, down from 5.5% in March. But there was a stark divide between cities, as usual. Super-hot metros like Portland, Seattle and Denver continue to see double-digit annual price gains, while home prices in older cities like New York and Washington rose only about 2% on an annual basis. Phoenix existing home prices rose 0.7% for April; up 5.5% for the past year.

U.S. consumer confidence moved higher in June. The Conference Board said its consumer confidence index rose to 98 from 92.4 in May. The present situations index rose to 118.3 from 113.2, while the expectations index rose to 84.5 from 78.5. However, the cutoff date was June 16, a week before the British referendum that has roiled financial markets.

Oil prices bounced about 2% today. Still, regular unleaded gasoline fell to $2.30 Monday (the nationwide average price), the cheapest price for this time of year since 2005, according to data from AAA. Consumers are reaping the benefits to the tune of $20 billion. That’s how much AAA estimates drivers have saved at the pump so far this year compared to the same period in 2015; with $5 billion of those savings were in the one-month period since Memorial Day alone.

And we are spending the savings at the pump. Americans spent 12.8 percent more on hotels and motels in the first quarter of 2016 than in the same period in 2014, while food and drink spending rose 16 percent, according to data from the U.S. Bureau of Economic Analysis. Consumers are also fueling their vices, including by spending more money on cigarettes. Not all of those gas savings are going up in smoke, however: Americans are also saving some of it for a rainy day. The average personal saving rate in the first four months of the year rose to 5.6 percent, up from 5.2 percent in the same period in 2015 and 5 percent in 2014.

Volkswagen’s price tag to settle lawsuits in the U.S. over its rigging of diesel emissions tests has jumped to more than $15 billion – $5 billion more than previously reported – with a settlement filed in a San Francisco court. VW’s deal includes $10 billion for buybacks of 475,000 polluting vehicles and nearly $5 billion for fines and funds to boost clean-emissions technology. If you own a VW affected by the emissions scandal you may be entitled to cash compensation plus a buyback of the vehicle, or you could wait for a modification to fix the problem. And if you leased an affected car you might also be entitled to cash compensation.

The U.S. Senate is set to launch a debate for establishing a federal oversight board that would be in charge of restructuring Puerto Rico’s debt where one out of every three dollars it earns in revenue is used to pay creditors. The measure is identical to the plan passed by the House earlier this month, as Congress tries to get something done by July 1, when $2 billion in debt payments come due.

A large “Four Points by Sheraton” sign has gone up outside the Havana hotel that this week becomes the first in Cuba to operate under an American brand since the 1959 revolution. The military-owned Gaviota 5th Avenue Hotel, close to the Caribbean seafront, is one of two hotels that Starwood Hotels & Resorts agreed to manage in a multi-million-dollar deal in March.

Airbnb sued San Francisco. The holiday-rental platform wants to block a law that would force it to remove listings from unregistered hosts or face hundreds of thousands of dollars in fines. It complained that the city is violating federal law by holding it accountable for unregistered apartments.

Biotech news roundup: Endo International has held discussions with Private Equity firms about potential asset sales to reduce its more than $8 billion debt pile. Pfizer is investing $350 million to build its first biotech center in China. Horizon Pharma has hired Bank of America to help it explore selling a significant equity stake that would bolster its balance sheet.

The EU is taking steps that could lead to a third antitrust complaint against Google, this time over its dominance in advertising.  Antitrust charges have been filed against Google for allegedly skewing its search results to favor its own shopping service, and more recently in April, over Google’s conduct with its Android mobile-operating system.