Financial Review

Welcome to Earnings Reporting Season

Sinclair Noe — October 11, 2016

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DOW – 200 = 18,128
SPX – 26 = 2136
NAS – 81 = 5246
10 Y + .02 = 1.76%
OIL – .49 = 50.86
GOLD – 7.00 = 1253.40

Alcoa reported third quarter earnings before the bell today, in what has been traditionally known as the start of earnings season. The raw aluminum and specialty parts maker missed estimates on both top and bottom lines. S&P 500 companies are expected to post their sixth straight quarter of declining earnings, according to FactSet data. And while sales are expected to break their six-quarter streak of declines, that optimism may be overdone, based on the dozens of sales warnings to pop up in the last several weeks.

When you look at a chart of the S&P 500, you’ll see we’ve been in a sideways or consolidation pattern since mid-July. Earnings season could be the catalyst for a breakout or a breakdown; with the S&P 500 trading at an historical high valuation in terms of P/E and P/S, the pressure is towards the downside.

In fact, stocks must justify the current 12-month trailing P/E of 25 and the current CAPE ratio of 27 (cyclically adjusted price to earnings ratio) through positive earnings growth. Analysts are usually very conservative on their predictions. Actual earnings have beaten analyst’s estimates since 2014. As this is well known by investors, one should not get too optimistic over the possibility that earnings may beat estimates by a small margin.

In fact, be careful to buy on slightly better than expected earnings given that valuations are high. Now, the good news is that most of the bad news has already been baked into price; by that, I mean we are all aware of concerns with Brexit, China, the price of oil, the US election, and a possible Fed rate hike. The bad news is that the market is complacent. The VIX is low at around 15.

Except for a couple of weeks in September, where the S&P took a big hit and then bounced back, the tight range has been getting tighter, like a rubber band wound to the limit. A break above the September highs of 2180 would serve as a bullish sign that could lead to new all-time highs. Today’s close below 2140 exposes weakness and a break down below 2120 looks dangerous.

Long-term bond yields continued to rise. The yield on the 10-year Treasury note was slightly higher at 1.76%. Earlier Tuesday it hit 1.8% for the first time since early June, marking a four-month high. Futures markets are now pricing in roughly 70% odds of a rate hike at the Fed’s December meeting. We should learn more tomorrow, when the Fed releases minutes of its last policy meeting.

British cabinet ministers are being warned that the Treasury could lose up to £66-billion-pounds a year in tax revenues under a “hard Brexit,” according to leaked government papers seen by The Times. The document also cautions that leaving the single market and switching to WTO rules could cause GDP to fall between 5.4%-9.5%.

The British pound sterling slipped below $1.23 and €1.11 in morning trading to its lowest value since last week’s flash crash. The fall in the pound has boosted the FTSE 100 as many of the companies in the index generate most of their revenues abroad. The UK’s benchmark index broke through its previous record intra-day level to hit 7,129.83 before losing some ground.

Igor Sechin, Russia’s most influential oil executive and the head of state-controlled energy giant Rosneft, said his company will not cap oil production as part of a possible agreement with OPEC. Sechin told reporters that Rosneft planned this year to raise its oil production, already the world’s largest among listed producers. Sechin said he doubted some OPEC countries, such as Iran, Saudi Arabia and Venezuela, would cut their output. Yesterday, WTI pushed above $51 per barrel after Vladimir Putin said Russia was ready to join an output freeze, but not one world producer has willingly taken one solitary barrel off the table this fall.

Samsung’s Galaxy Note 7 has been permanently discontinued, following a problematic recall operation that replaced Note 7 phones with faulty batteries at risk of explosion… with new phones that have the same batteries. The replacement lithium ion batteries in the phone tend to catch fire. The cost to Samsung of the Galaxy Note 7 could be $17 billion, the amount the company was expected to bring in from the sales cycle of the phone.

That figure doesn’t include the damage to the Samsung brand, though. Samsung shares have lost $18 billion in market cap since the problems started. If you have a Galaxy Note 7, and it doesn’t matter if it was the original phone or a phone with a replacement battery, just turn it off and get a refund and buy a phone that doesn’t explode.

Although Salesforce was thought to be out of the mix as of this weekend, a new report suggests the company is still evaluating the benefits of a Twitter deal and what an appropriate valuation might be. Meanwhile, in an internal memo reportedly sent to Twitter employees last week, CEO Jack Dorsey made no mention of any deals, instead highlighting initiatives revolving around the company’s live strategy and other merits.

General Electric said it would buy LM Wind Power, a maker of rotor blades used in wind turbines, from private equity firm Doughty Hanson for $1.65 billion, as it looks to capture a bigger share of the fast-growing renewable energy market. GE separated its renewable energy business from its power unit last year, following the $13.6 billion acquisition of Alstom SA’s power business. Denmark-based LM Wind Power is the largest supplier of rotor blades to GE.

Fiat Chrysler has reached a tentative deal with unionized workers in Canada by agreeing to make more than $300 million in investments for local operations. The pact was announced just minutes ahead of a midnight strike deadline that could have sent more than 9,000 Fiat workers off the job. Union members will vote on the accord at ratification meetings on October 16.

Chicago’s schools and its teachers’ union agreed to a contract proposal late on Monday, averting a strike set for today in the third largest U.S. public school system. Teachers contribute 2 percent to their pension, with the school board chipping in an additional 7 percent. Under Monday’s deal, new hires will not get the 7-percent “pension pickup,” but will get a salary adjustment to compensate for that.

Airbus plans to slow the assembly rate of its A380 to one aircraft per month from 2018 as the European plane maker struggles to revive sales of the world’s largest passenger jet.  Airbus’ assembly rate for the superjumbo currently stands at 2.5 aircraft per month.

Theranos has been sued by one of the blood testing start-up’s biggest backers, Partner Fund Management, for attracting $96 million in investment “through a series of lies, material misstatements, and omissions.” The suit accuses Elizabeth Holmes of deceiving the hedge fund by claiming Theranos had developed “proprietary technologies that worked” and was close to getting regulatory approvals. The suit comes less than a week after Theranos stopped all of its clinical operations, cutting 340 positions and closing its Wellness Centers where blood tests were performed.

A recent update from the Arizona Multiple Listing Service shows Phoenix real estate sales in September were up 6.3% year-over-year. Active inventory was up 3.4% year-over-year, marking the seventh consecutive month of increases in inventory. Cash sales declined to 20.2% of total sales. Meanwhile, foreclosure inventory continues to plunge across the nation, with the foreclosure inventory rate at 0.9% in August, down 29.6% compared to last year. Arizona has one of the lowest levels of foreclosure inventory, at just 0.3%.

Americans are increasingly shopping online and we have been spending less at the malls; overall, we just got tighter with money following the financial crisis. According to a new report from Morningstar, we have a shopping mall problem. The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia – the next two countries with the highest retail space per capita.

Department stores like Sears, Macy’s, and JCPenney have been closing stores to try and get rid of unprofitable stores, and that’s had a devastating effect on malls. When an anchor stores closes, it often triggers a downward spiral in performance for shopping malls that in some cases has led to massive losses on loans.

When an anchor store closes, shopping malls don’t only lose the income and shopper traffic from that store’s business. It often triggers “co-tenancy clauses” that allow the remaining mall tenants to exercise the right to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the vacant anchor space. The Morningstar report supports a recent analysis from Credit Suisse that said about 200 shopping malls are at risk of shutting down if Sears continues to close stores.

Financial Review

Earnings Reporting Season

Sinclair Noe — July 11, 2016

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

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DOW + 80 = 18,226
SPX + 7 = 2137
NAS + 31 = 4988
10 Y + .07 = 1.43%
OIL – .65 = 44.76
GOLD – 10.80 = 1355.60

The S&P 500 Index traded at a new intra-day high this morning, topping 2143, and closing at a record high 2137, taking out the old high of 2130 from May of last year.

And just because we hit a new high, doesn’t mean we’ve reached the top.  Typically, a breakout results in a bullish rally. The market has broken its multiyear record 17 times, and each of those instances has been followed by prolonged growth. After these 17 multiyear highs, the average return for the S&P 500 has been 8.5% over the next six months and a whopping 15.5% over the next year. Not a guarantee, just an indication of past performance. If you are a bit cautious, wait for confirmation, such as a weekly close above the old high.

So it may come as a surprise that the S&P 500 is also poised to match its longest earnings recession since 1936. At 25 times reported profit, the S&P 500 is trading at a higher multiple than it has for 90 percent of the time in the past eight decades. Earnings have been declining for four consecutive quarters, and if the second quarter numbers do not improve we will have a fifth consecutive quarter of declining earnings. Earnings are not expected to improve; they will probably be down about 5.6% from a year earlier, according to FactSet. And yet, a majority of stocks will probably report better than expected earnings. The average “beat rate” – the percent of the time a company beats the consensus earnings estimate – is 61% for the broad market.

Wall Street analysts lower the bar for earnings and then cheer when a company steps or stumbles over the bar. The “typical” quarter sees companies in aggregate report better-than-expected numbers, with the average margin of upside running around four percentage points. If the pattern persists, companies have an outside shot of ending about even with the 2015 period. The current forecasts for the third quarter are for a slight dip of less than 1 percent in profits, followed by a more notable bounce-back in the fourth quarter.

As far as deciphering the actual earnings reports, well I’ve been reading and analyzing reports for a couple of decades and it just keeps getting tougher and tougher to make sense of the numbers. An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the “adjusted” profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years. At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.

Lynn Turner, chief accountant at the Securities and Exchange Commission, said companies are still touting “made-up, phony numbers” as much as they did 15 years ago, perhaps more, and few experts are calling them out on it. Turner said, “The analysts aren’t doing enough to get behind the numbers that management gives them to find out what’s really going on.” And this of course, begs the question, what is the job of Securities and Exchange Commission?

Alcoa used to be one of the Dow 30 stocks, and with the ticker symbol AA, it kicks off the earnings reporting season. Not only is Alcoa first in line, it is the poster child for what we might expect. Alcoa reported quarterly earnings and revenue that beat analysts’ expectations. The company posted adjusted second-quarter earnings per share of 15 cents on revenue of $5.3 billion. Analysts expected the company to report earnings of about 9 cents per share on $5.2 billion in revenue.

Despite beating expectations, Alcoa’s second-quarter adjusted earnings per share declined from 19 cents in the comparable year-ago period. Revenue also fell — from $5.9 billion — compared to the same quarter last year. After the announcement, Alcoa shares jumped more than 4 percent in after-hours trading.

Earlier in the year, oil and stocks were trading in concert. Oil prices fell more than 1 percent today, hitting two-month lows on extended selling after the market’s break below a key technical support level last week due to oversupply fears. Last week, oil slumped nearly 8 percent in its biggest weekly losses in six months and already hit a two-month low on Thursday after disappointing drawdowns in U.S. crude and gasoline inventories pointed toward weak demand.

Interior minister Theresa May will become Britain’s next prime minister on Wednesday, after her only rival abruptly quit the race today, removing the need for a drawn-out leadership contest. May was left as the only candidate to succeed David Cameron, who announced he was stepping down after Britons voted last month to leave the European Union. May favored a vote to Remain in last month’s referendum.

The Bank of England is weighing a raft of emergency measures to stem the flood of money out of Britain’s biggest property funds that caused fresh market panic last week. These could include “enforced notice periods before redemptions, slashing the price for investors who rush to the door, or additional liquidity requirements for funds.”

Australia’s Malcolm Turnbull declared victory on Sunday in a marathon national election, with his coalition government retaining power and the opposition Labor Party conceding defeat. It’s still unclear whether the prime minister will lead a majority government or one that needs the support of smaller parties and independents. The coalition has so far won 74 of 150 House of Representative seats and is projected to take 76, or the slimmest majority possible.

Prime Minister Shinzo Abe’s Liberal Democratic Party and its allies won a stronger majority in Japan’s Upper House election on Sunday, in a development that will make it far easier to push through his economic agenda. Abe later confirmed a new round of stimulus, nearly $100 billion worth of measures, including loans. To fund a supplementary budget, they said the cabinet will consider the first additional issuance of new government bonds in four years. The announcement on new stimulus measures helped send the yen down 2% against the dollar and pushed the Nikkei up 4%. Other Asian markets also moved higher this morning.

Japanese messaging service Line Corp., set for a dual New York and Tokyo listing this week, has priced its initial public offering at the top of its marketed range, and is expected to raise as much as $1.3 billion and value the company at $6.9 billion. Line’s offering will be the biggest tech IPO of the year and it will mark the first Japanese company to list new shares in the U.S. since 2000.

The hacking outfit OurMine has already been responsible for a few high-profile Twitter account takeovers, but the latest may be particularly embarrassing for the company. Twitter CEO Jack Dorsey had his account briefly hacked Saturday morning, as OurMine tweeted out a link to its website and a message that it was “testing your security,” along with a Vine clip that has since been deleted.

UFC was sold. The mixed martial arts promoter was sold for $4 billion to a consortium of investors, led by the talent agency WME-IMG. Backing the transaction are private equity firms Silver Lake, Kohlberg Kravis Roberts and Michael Dell. Ultimate Fighting Championship fights are now shown in more than 156 countries and claim millennials as some 45% of its audience.

Thomson Reuters agreed to sell its intellectual property and science business to private equity firms Onex Corp and Baring Private Equity Asia for $3.55 billion in cash. The business, which has 3,200 employees, provides intellectual property and scientific information and associated tools and services to governments, universities and companies.

All Starbucks store employees and managers in the U.S. are in for at least a 5% raise starting in October. Employees with at least two years of service will also now be eligible for double the amount of stock award in the company, which is doled out each November as an equity reward that turns into shares of Starbucks stock after a specific time period. The wage increase combined with the new stock award policy means compensation will increase between 5% and 15%.

Black Friday is coming four months early for some retailers. Stores including Target, Sears, Banana Republic, Express, the Gap and Old Navy are offering deals around the same time as Amazon’s big Prime Day sale, which starts tomorrow. Wal-Mart has even eliminated the $50 minimum spending requirement for shoppers to receive free shipping on their online orders. Amazon shares hit a record on Friday, and gained another 1% today.

That all comes ahead of Tuesday’s second annual Prime Day, when subscribers will get access to over 100,000 deals. It will be Amazon’s biggest day ever. Countdown deals rolled out last week, and on Friday Amazon started offering specials. Starting at midnight Pacific time, members of the $99 a year Prime service will see deals as frequently as every five minutes throughout the day.

Today is July 11, or 7-11. Free Slurpees for everyone! At least at participating 7-Eleven convenience stores. Between 11 a.m. and 7 p.m. at participating stores, visitors can receive a free small Slurpee drink available in various flavors.  This is the 14th year the retailer has offered free Slurpee drinks on its birthday.

Maybe Slurpees aren’t your thing. I understand. Just wait until tomorrow July 12, Cow Appreciation Day at Chik-fil-A. The chicken chain will offer a free entrée to anyone dressed in cow attire, whether “head-to-hoof” or sporting a cow-spotted accessory, like a purse or hat.

Financial Review

A Dodgy Day

Sinclair Noe — April 11, 2016

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DOW – 20 = 17,556
SPX – 5 = 2041
NAS – 17 = 4833
10 Y unch = 1.72%
OIL + .61 = 40.33
GOLD + 19.70 = 1259.10

Stocks started the session higher. This morning the Dow was up 150 points for the first hour or so of trade. In the final hour we saw a sell-off that pushed the major indices into negative territory. This kind of trading action makes the recent run-up look like not much more than short covering. With today’s decline, the S&P 500 moved into negative territory year-to-date.

First quarter earnings reporting season is underway, starting with Alcoa’s results after today’s market close. Actually, we’ve already seen a few earnings, but Alcoa is the traditional start of the reporting season because it used to be in the Dow Industrials and it has the ticker symbol AA. The metals and materials company reported adjusted first-quarter earnings of 7 cents per share on $4.9 billion in revenue.

Earnings fell from 28 cents per share in the prior-year period, while sales slid from $5.8 billion. Alcoa beat on earnings and missed on revenue. The company also said it cut 600 jobs in the quarter, with 400 more reductions planned. And they are considering another 1,000 cuts. Shares have plunged more than 25 percent in the last year amid a prolonged commodities slump.

More important than Alcoa is what we see from the first crop of big banks, including JPMorgan Chase and Bank of America, later in the week. Analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs Group, are expected to report the worst results in over ten years. This spells trouble for the financial sector more broadly, since banks typically generate at least a third of their annual revenue during the first three months of the year. In other words, the first quarter could be so ugly, they can’t recover in the second half of the year.

Total earnings for the quarter are expected to be down as much as -11% and revenues are expected to be down -2.3%. Wall Street analysts have a tendency to lower the bar heading into reporting season, and then celebrate when actual earnings beat diminished expectations. The negative earnings growth in Q1 will be the fourth quarter in a row of earnings declines for the S&P 500 index.

The headwinds remain unchanged from other recent periods, essentially a combination of Energy sector weakness, the dollar strength and global growth constraints. What corporate CEOs say about the future could be the biggest determinant of whether Wall Street is sold on the theory that the first-quarter will mark the low point for earnings

The U.S. Federal Reserve conducted a closed meeting this morning “under expedited procedures” during which the Board of Governors reviewed and determined advance and discount rates charged by the Fed banks. The event is notable because the last time such a gathering took place was on November 21, less than a month before the central bank’s historic rate hike.

Economic growth is set to slow in Italy but steady in Canada over coming months, while the outlook for developed nations as a whole continues to weaken, according to leading indicators released Monday by the Organization for Economic Cooperation and Development. Overall, the leading indicators imply that the global economy is unlikely to accelerate this year, following several years of disappointing growth.

UK Prime Minister David Cameron has published his taxes after his father’s name was revealed in the Panama Papers. The returns revealed that Cameron and his wife, Samantha, earned a $19,000 profit from the sale of shares in Blairmore Holdings, an offshore trust held by his late father and named in the Panama Papers; that trust did not pay British taxes. Tax returns also reveal that in 2011, the Prime Minister received £500,000 free of inheritance tax.

Making the matter more onerous, Cameron has, in the past, publicly championed tax transparency as well as being an advocate for austerity. There is nothing in the tax returns that indicates illegal action, but Cameron tried to stonewall the press for about a week, and that hasn’t helped his case.

Taking a cue from Iceland, thousands of British protesters swarmed London’s streets on Saturday to try to get their leader to quit. This morning, Cameron went before parliament to explain his role in the offshore trust, and call for new measures that would go after British corporations that do not crack down on tax evasion through offshore accounts, making tax avoidance a criminal offense.

For the first time, companies will be held criminally liable if they fail to stop their employees from facilitating tax evasion. Also British dependencies and territories that are often used to create offshore companies for tax purposes have agreed to compile information on offshore companies registered there; to share the information among themselves; and to create centralized registries of “beneficial ownership”. The jurisdictions that have agreed to these steps include Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, the Isle of Man, Jersey, Montserrat and Turks and Caicos.

Jeremy Corbyn, leader of the opposition Labour Party said, “There is now one rule for the super-rich and another for the rest.”  Dennis Skinner, a Labour member, was thrown out of the House of Commons for the day for calling the Prime Minister “dodgy Dave” several times. Apparently “Dodgy Dave” was just a bit too rude.

The European Commission will meet tomorrow to consider how to require large companies to make public what they pay in tax in each of the 28 EU countries, and possibly outside the bloc as well. Though the Commission has been working for years on how to stop multinationals playing European countries’ tax codes off each other to minimize payments, the Panama papers may push it to expand the scope of its work. Global finance ministers are expected to discuss evasion when they gather in Washington later this week for the International Monetary Fund’s spring meeting.

The IMF defended negative interest rates, saying they boost demand and support stable prices by supplementing conventional monetary stimulus. The International Monetary Fund said the use of negative interest rates by some of the world’s biggest central banks was appropriate given the “significant risks” of slow growth. But the fund also conceded that negative rates could produce boom-and-bust cycles. The IMF’s annual spring meetings will take place this week in Washington D.C.

Investor interest in Argentina’s new bond offering is strong as the nation, sidelined from global debt markets since its 2001 default, launches a five-day marketing tour across the U.S and U.K. Argentina will cap the offering at $15 billion across 5-, 10- and 30-year tenures; the bonds are expected to come to market as early as April 18.

Wells Fargo settled its “shoddy” mortgage practices. The bank agreed to pay $1.2 billion to settle civil mortgage-fraud claims related to residential mortgages it sold from 2001 to 2008. According to the DOJ statement, Wells Fargo certified that certain loans were eligible for Federal Housing Administration insurance, when in fact they were not. That meant the government wound up having to pay insurance claims when some of those loans defaulted.

Goldman Sachs has agreed to pay just over $5 billion to settle claims that it misled mortgage bond investors during the financial crisis. The settlement, which Goldman disclosed in January, stems from the firm’s conduct in packaging, securitization, marketing and sale of residential mortgage-backed securities between 2007 and 2009. The Justice Department said investors suffered billions of dollars in losses from the securities bought during the period. Goldman also acknowledged a Justice Department statement of facts describing how the firm misled investors.

Valeant Pharmaceuticals asked its CEO to cooperate with a Senate investigation into drug pricing after he failed to appear for a deposition. The Senate Special Committee on Aging said last week that it planned to start legal proceedings against Michael Pearson, who is leaving Valeant after months of turmoil for the drug-maker. Pearson is still under subpoena to appear before the committee for an April 27 hearing. The committee is planning its third hearing since December on soaring drug prices.

The parent company of British newspaper and tabloid site, Daily Mail, is in talks with private-equity firms about a possible offer for Yahoo. The Wall Street Journal reports a bid is likely to take one of two forms: 1) A PE partner would acquire Yahoo’s core business, with the Mail taking over news/media properties, or 2) The PE firm would acquire Yahoo’s core business and merge its media/news properties with the Mail‘s online operations.

Canadian Pacific Railway has ended its bid for its US counterpart Norfolk Southern. The Canadian company entered into early-stage talks with Norfolk Southern — the second-largest railroad in the eastern US, valued at about $25 billion — late last year. Since then, US regulators have been pushing back against the deal.

Annaly Capital Management has announced a definitive merger agreement with Hatteras Financial for $15.85 per share, or $1.5 billion. The transaction has been unanimously approved by the boards of both companies.

Dell’s cyber security unit, SecureWorks, could be valued at up to $1.4 billion in its initial public offering, the first major U.S. listing of a technology company this year. Atlanta, Georgia-based SecureWorks said on Monday its offering was expected to be priced at $15.50-$17.50 per Class A share, raising as much as $157 million.

TransCanada has received authorization from the Pipeline and Hazardous Materials Safety Administration to restart the 590K barrel per day Keystone crude pipeline at reduced pressure. The channel, which delivers light and heavy crude from Hardisty, Alberta, to Cushing, Oklahoma, and Illinois, was shut last Saturday after TransCanada discovered a tube leak in South Dakota.

In advance of the busy summer driving season, gasoline prices gained 8 cents to around $2.10 per gallon in the past three weeks, according to the latest Lundberg survey.

Financial Review

By Land and Sea

Sinclair Noe — January 11, 2016

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

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DOW + 52 = 16,398
SPX + 1 = 1923
NAS – 5 = 4637
10 Y + .03 = 2.16%
OIL – 2.04 = 31.12
GOLD – 10.40 = 1095.20

Chinese stocks saw another big drop. China’s Shanghai Composite tumbled 5.3% on Monday, bringing its 2016 loss to 14.8%. The sell-off did not trigger circuit breakers because the Chinese exchanges gave up on that idea after last week’s big declines. The decline came even after the yuan gained following a second intervention from the central bank.

Oil prices are sharply lower to start off the week as concerns over demand from China impact trading again, along with some fresh worries. Morgan Stanley is the latest major investment firm to forecast oil prices could fall into the $20s with the U.S. dollar continuing to strengthen against major currencies. WTI crude futures dropped under $32 a barrel; that is a 12-year low. And remember this is at a time of increased tension in the Middle East; forget the fear premium, at least unless shipments are actually disrupted.

Meanwhile, oil is being pumped out of the ground as if price doesn’t matter. Maybe we need to re-think the idea that oil-dependent economies like Saudi Arabia aren’t so much pumping oil now to defend market share but to get oil out of the ground while it has any value at all.

Arch Coal filed for Chapter 11 bankruptcy. The company said it has an agreement with a majority of its lenders to erase $4.5 billion in debt from its balance sheet and allow it to keep operating without interruption. The bankruptcy court filing listed $5.8 billion in assets and $6.5 billion in debt. Coal’s share of electricity generation in the US fell to 30 percent in April, as the historically popular fuel was overtaken by gas for the first time. Coal still generated more than 40 percent of electricity globally.

If you want to see how much of a slowdown we are really seeing, look to the rails. Analysts at Bank of America say railroad cargo in the US dropped the most in six years in 2015. According to the research note, “Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009.”

And the BofA researchers put the data in historic perspective: “Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters.”

You could argue that a shift away from coal, the slowdown in the industrial sector, and weakness in the oil patch would lead to fewer goods being moved by rail. So, for confirmation, look to the sea. Commerce between Europe and North America has literally come to a halt.

Over the weekend, not one cargo ship was in-transit in the North Atlantic between Europe and North America.  All of them (hundreds) were either anchored offshore or in-port.  Nothing was moving. The reason commerce has stopped is simple: People are not buying things. The Baltic Dry Index, an assessment of the price of moving major raw materials by sea, dropped to 468, the lowest since the index began in 1985.

After the close of trade today, Alcoa kicked off the unofficial start to earnings reporting season. Profit excluding one-time items was 4 cents a share, beating estimates of 2-cents per share. Sales dropped to $5.2 billion. With aluminum trading near six-year lows, the company is planning to separate its manufacturing units from its legacy smelting and refining business, creating two companies later this year. Raw-aluminum prices have fallen over 25% in the past year.

To cope with falling aluminum prices amid rising low-cost output from China, Alcoa has divested, closed or curtailed about a third of its global smelting capacity since 2007. Meanwhile demand from aerospace companies, Alcoa’s largest source of revenue after primary metals, has increased along with soaring aircraft production. This morning Alcoa announced it has struck a $1.5 billion long-term supply contract with General Electric’s aviation unit to supply it with advanced nickel-based super alloys, titanium and aluminum components for engines and for engine parts made by GE.

Expectations for earnings season are low, with strategists expecting a 5.3% decline in earnings in Q4, which would mark the third straight quarter of year-on-year declines for corporate profits, the first such period since 2009.

For-profit education provider Apollo Education Group said today it will consider selling itself among other options. Apollo, which had a market value of $714 million as of Friday, has been struggling with increased regulatory scrutiny that has squeezed federal aid. High debt loads and poor job prospects have kept students away. The company also reported a drop in revenue for the 18th straight quarter as new degree enrollments at University of Phoenix fell 38%. The stock lost more than three-quarters of its value in the past year.

Drugmaker Shire Plc says Baxalta International has agreed to a $32 billion cash and stock offer. The London-listed Shire first approached the US-based Baxalta with an all-stock offer in July. Shareholders will receive cash and stock with an implied total value of $45.57 per share based on Jan. 8 prices. The deal marks a strong start to mergers and acquisitions (M&A) in healthcare in 2016 after the sector saw its biggest deal-making streak in history last year, with global deals totaling $673 billion.

Asahi Group Holdings is expected to make an offer for SABMiller’s Grolsch and Peroni beer brands as early as this week. The beer properties could be sold to Asahi for as much as $3.4 billion. Grolsch and Peroni are seen as necessary merger casualties due to acquirer’s Anheuser-Busch’s deep penetration in Europe.

The Supreme Court heard oral arguments today in the case of Friedrichs v. California Teachers Association, where the plaintiff seeks to bar public-sector unions from collecting “fair-share” fees from non-members, a move known as free-riding, that could reduce union membership drastically and drain union coffers. The fair share or “agency” fee is widely seen as a compromise between the First Amendment rights of public employees who may not wish to join a union and the material interest of the unions, which are required by law to bargain on behalf of all members of a given unit, regardless of membership status.

A 1977 decision known as Abood, ruled the fees constitutional. Freidrichs is a teacher in California, and along with other teachers recognized in the case they say they don’t want to underwrite union activities that are contrary to their beliefs.

Should the Supreme Court rule for the plaintiffs, the result will hit the labor movement hard. That’s because members in non-right-to-work states will find themselves newly able to receive the benefits of a union contract without having to pay for them. Public-sector unions are the only part of the labor movement that’s thrived in recent decades: Nearly 36 percent of public-sector workers are unionized, compared to less than 7 percent of private sector workers.

A decision for the Friedrichs plaintiffs would not affect private sector unions because most of these are governed separately under the National Labor Relations Act, from which public-sector workers are excluded. Nor would it necessarily lead to a later decision applying the same reasoning to private unions, because the link to First Amendment rights might be less clear in a private-sector context.

General Motors is set to go to trial today in a lawsuit over its 2014 recall of millions of vehicles for a faulty ignition switch linked to nearly 400 injuries and deaths. In the lawsuit, plaintiff Robert Scheuers claims he was injured in an accident and the air bag did not deploy, which Scheuer blamed on the switch.

It is the first of six trials this year before U.S. District Judge Jesse Furman in the Southern District of New York, who oversees litigation from crash victims and from customers who say their cars lost value. While not binding on other cases, the verdict will provide insight into the strengths of both sides’ evidence as GM looks to wrap up the remaining switch litigation. It has already agreed to pay roughly $2 billion in civil and criminal penalties and settlements over the switch.

Apple Music is reported to now have more than 10 million paying subscribers. Back in October, Apple reported 6.5 million subscribers. Industry leader Spotify said in June it has 20 million paying subs. Spotify needed six whole years to attract its first 10 million paying customers, but it took Apple Music just a few months to hit the same milestone.

Looking at the bigger picture, though, Apple Music’s milestone becomes somewhat less impressive. Apple preinstalls the Apple Music app on every iPhone, and there are about 90 million iPhones in the US alone. No matter how Apple got there, it looks bad for Spotify.

The College Football Championship game between Alabama and Clemson kicks off in about 2 hours, and the winner is … Nike. The brand renewed its deal with Clemson in August, signing an eight-year contract reportedly worth $23 million to the school.

Alabama is even pricier: Nike signed an eight-year, $30 million deal with the school in 2010. That means Nike gets to grab all the television eyeballs for itself. And college football’s biggest stage draws many, many eyeballs. Last year 33 million watched. Good news for the Valley of the Sun as well.

Financial Review

Anticipation of Consequences

Sinclair Noe — October 8, 2015

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

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DOW + 138 = 17,050
SPX + 17 = 2013
NAS + 19 = 4810
10 YR YLD + .05 = 2.11%
OIL + 1.86 = 49.67
GOLD – 6.80 – 1140.00
SILV – .39 = 15.77

This morning was full of anticipation: earnings season scheduled to kick off after the closing bell, the FOMC scheduled to release minutes from their September policy meeting, the House of Representatives scheduled to select a new Speaker of the House. Wisdom consists of the anticipation of consequences.

Earnings season is underway; the unofficial start is when Alcoa reports; ticker symbol AA, they lead the pack alphabetically, and then it just became tradition. The company reported adjusted third-quarter earnings of 7 cents a share on revenue of $5.57 billion. Analysts surveyed by FactSet had estimated earnings of 13 cents a share on revenue of $5.66 billion. Alcoa indicated that China’s industrial economy is slowing more rapidly than expected, as the aluminum producer slashed its production outlook for the country for cars, trucks and construction. And just like that, we have a trend.

Short interest has hit a peak. Short interest on companies listed on the New York Stock Exchange (NYSE) just hit a seven-year high, going back to the 2008 financial crisis. Short interest, or a bet that prices will drop, tends to increase as stocks are falling, and peak when they’ve bottomed; and so a peak in short interest is often seen as a contrarian indicator. Of course, short interest could still increase from these levels.

The Fed published the minutes of its September FOMC meeting. Most Federal Open Market Committee members still think an interest rate hike is possible this year. According to the Minutes from the September meeting, the Fed decided to wait on concerns about sluggish inflation and global economic growth, particularly in China. It also did not want to hike rates with inflation below its 2% target, as this could have hurt its credibility. The Fed remarked that the pullback in equities in August was likely because investors believed stocks were expensive.

Most thought that their goal of healthy labor market had been met or would be met by the end of the year. That view may be different now that the September jobs report, released after the Fed meeting, showed slowing growth. Fed officials decided it would be “prudent” to wait for more data to confirm the economy was growing at a moderate rate and labor market conditions had improved further.

House Republicans were scheduled to gather today to elect a new Speaker after John Boehner abruptly announced two weeks ago that he plans to retire from Congress at the end of October. House Majority Leader Kevin McCarthy was expected to be the front-runner for the Speaker’s job, but before the vote this morning, McCarthy dropped out of the race.

Yesterday  the Freedom Caucus, a group of about 40 of the House’s most conservative members announced it was throwing its support behind Rep. Daniel Webster, a Florida sophomore considered a longshot challenger to McCarthy. That comes three days after Jason Chaffetz, a three-term Utah Republican and Chair of the Oversight Committee announced he, too, was challenging McCarthy. A full House vote is scheduled for the end of the month. House Republicans tweeted that the leadership election would be postponed.

As the politicians sort through the chaos, there is still work to be done.  The Treasury Department has said it will exhaust its authority to borrow money to fund the government on Nov. 5. If Congress does not raise or suspend the government’s statutory borrowing limit, the government would default on its debt days later, risking economic chaos, soaring interest rates and plunging stock prices. Then, on Dec. 11, a stopgap spending bill expires. Without congressional action, much of the government will shut down. And don’t forget an October 29 deadline to replenish the Highway Trust Fund, which funds many construction projects across the country. With leadership elections occupying much attention, the window to get something done grows smaller.

Brazil is facing political and economic crisis; Brazil’s Federal Accounts Court has ruled President Dilma Rousseff manipulated government budget figures in 2014, and the nation’s highest court permitted a lawsuit to annul last year’s presidential election. The move paves the way for a possible impeachment, although any ouster would likely take months and has no guarantee of succeeding.

Jobless claims fell by 13,000 to 263,000 in the week ended Oct. 3, the fewest since July 18. The four-week average of claims, a less-volatile measure than the weekly figure, dropped to 267,500.

Revolving credit continues to show life, up a solid $4.0 billion in August for a sixth straight gain. Gains in this reading, which have been scarce this recovery, perhaps suggest that consumers are growing less reluctant to run up their credit cards.

The United Auto Workers union has reached a tentative deal with Fiat Chrysler Automobiles on a new four-year contract, averting a strike of the automaker’s U.S. operations. Local UAW leaders will gather in Detroit on Friday to hear details of the deal, while Fiat Chrysler’s 40,000 union workers will have to vote again to finalize the agreement. If the pact is ratified, the UAW will likely use it as a template for negotiations with General Motors and Ford.

A Congressional hearing into the Volkswagen emissions cheating scandal continued today. Volkswagen’s top U.S. executive, Michael Horn, repeatedly apologized but didn’t reveal details of who was behind the scam or who knew what, when.  Horn was grilled on questions he claimed to not have answers to and the lawmakers didn’t get the answers they were looking for. In Germany, police and prosecutors swooped in on Volkswagen factories and employees’ private homes in an early morning raid to gather evidence about who was behind the carmaker’s decision to cheat on diesel emissions tests.

Doubts have been raised over the level of Volkswagen reported death and injury claims in the U.S. over the last decade as the numbers have been so good as to make some industry experts question their validity. Already this year, Honda has been fined in the U.S. for underreporting claims and Volkswagen’s reported claims are significantly below the number Honda was fined for.

Dell, the world’s third largest PC maker, and the cloud storage company EMC Corp. are in discussions about a potential merger, for what could be one of the biggest technology deals in history. An agreement could be reached within a week, according to the New York Times. Of course, it’s also possible the talks won’t lead to any deal at all. It remains unclear if the two companies are discussing a full or partial takeover. EMC has a market capitalization of $50 billion, and it owns the software-development company Pivotal and enterprise-security firm RSA, as well as 80% of the virtualization company VMware.

After triggering a buy-sell clause in a deal with Michael Jackson’s estate, Sony appears ready to sell its half of the world’s biggest music publisher – Sony/ATV Music Publishing (a company worth about $2 billion). Sony and Jackson – and after his 2009 death, his estate – have jointly owned the company since 1995, each with a 50% stake. The publisher has a catalog that has copyrights to most of the Beatles’ songs, among many others including those by the Rolling Stones and Taylor Swift.

Just a few days after Google officially became a subsidiary of Alphabet, its new holding company, Alphabet has acquired the domain name abcdefghijklmnopqrstuvwxyz.com. Google announced its restructuring in August. At the time, Google unveiled its website with a URL of abc.xyz. A Google spokesperson said, “We realized we missed a few letters in abc.xyz, so we’re just being thorough.” The purpose of the new domain is unclear given that the page did not load on this morning.

Netflix is raising prices for the second time in two years. The company’s “standard” tier of service will increase by $1, to $9.99 a month, starting November 18. Prices for its “basic” and “premium” tiers remain the same.

Remember Etsy, the online site for handcrafted stuff? Amazon is looking to crush Etsy by announcing its own marketplace specifically targeted at factory free, handmade goods.

Urban Outfitters has asked salaried workers at the company’s home office to “volunteer” for extra weekend shifts at a new fulfillment center. The picking, packing and preparing that’s required of voluntary workers are, in fact, jobs that normally pay wages. Urban Outfitters says many wage employees offered to pitch in, but hourly-wage workers were excluded from the voluntary work because it might violate labor laws.

Bill Gross sued his former employer, Pimco, for improperly firing him. Gross says his ouster was driven by greed. Gross, a billionaire, is demanding a jury trial and damages of no less than $200 million.

Belarusian writer Svetlana Alexievich won the Nobel Prize in literature. Swedish scientist Tomas Lindahl, American Paul Modrich and U.S.-Turkish national Aziz Sancar won the Nobel Prize in chemistry on Wednesday for showing how cells repair damaged DNA, work that can be used to develop new cancer treatments. The Nobel Prize in medicine was awarded to Irish-born William Campbell, Satoshi Omura of Japan and Tu Youyou – the first-ever Chinese medicine laureate for discovering drugs against malaria and other parasitic diseases that affect hundreds of millions of people every year.

Takaaki Kajita of Japan and Arthur McDonald of Canada won the Nobel Prize in physics on Tuesday for discovering that tiny particles called neutrinos change identities as they whiz through the universe, proving that they have mass; by uncovering the “chameleon-like” nature of neutrinos, the laureates had solved a long-standing puzzle in particle physics that could alter our grasp of the cosmos. Tomorrow, the Nobel Peace Prize will be announced. Anticipation builds.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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DOW – 312 = 16,001
SPX – 49 = 1881
NAS – 142 = 4543
10 YR YLD – .07 = 2.09%
OIL – .03 = 44.40
GOLD – 14.20 = 1133.10
SILV – .53 = 14.70

Well, this was just ugly. All three major indices traded in correction territory today or more than 10 percent below their 52-week highs. For the Nasdaq Composite, the 50 day moving average crossed the 200 day moving average, forming a pattern that goes by the catchy name “death cross”. The Nasdaq Biotechnology ETF closed down 6.3%, following a 5% drop on Friday.

Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low, wiping out more than $5 billion in market valuation. The fall followed publication of a note by analysts at investment bank Investec which raised doubts about Glencore’s valuation if spot metal prices do not improve. The note pointed to high debt levels and a need for deeper restructuring. The analysts wrote: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.” Glencore, a Swiss based company, has said it will suspend dividends, sell assets and raise cash with a $2.5 billion share placement, among other measures, to cut its $30 billion debt pile and protect its credit rating.

The 15-month commodities free-fall is starting to resemble a full-blown crisis. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

Alcoa the world’s largest aluminum producer, says it will split into two separate publicly-listed companies, with the separation expected to be completed in the second half of 2016. The company says the split will create an “upstream company”, focused on bauxite, alumina and aluminum, and a “value-add company”, focused on innovation in “high performance multi-material products and solutions in attractive growth markets”.

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion to shut down exploration in the region. The unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground. Environmental groups and shareholders have also pressured Shell to drop Arctic drilling.

The IMF warns world GDP at 3.3% this year isn’t realistic anymore, and a forecast of 3.8% for next year is not either. IMF Director Christine Lagarde pointed to slowing growth in emerging economies, in particular China. Lagarde says “There is no reason (for the Federal Reserve) to rush” to tighten policy, noting both the Japanese central bank and the ECB in recent years both hiked and then were forced to quickly retreat.

The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, so says William Dudley, New York Fed President, echoing statements from Fed Chair Janet Yellen last week. Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was “not calendar guidance. It depends on the data.” San Francisco Fed President John Williams, also speaking today, made a similar argument.

As world growth falters, the US consumer rolls along. Most of the change over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. China has showed lower growth rates and missed growth forecasts for several years. The news this morning shows Chinese industrial profits fell 8.8% in August year-over-year. It’s not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.

Purchases of new cars and trucks and strong back-to-school sales drove consumer spending higher in August, a sign the economy continues to expand at a moderate pace. In August, consumer spending rose a seasonally adjusted 0.4% to match the revised gain in July. Personal incomes rose 0.3% last month. Incomes have also risen steadily since the early spring, largely reflecting strong job creation that’s tugged the unemployment rate down to a post-recession low of 5.1%. Since spending grew faster than income, the amount of money individuals save fell a tick to 4.6% from 4.7%. Inflation as gauged by the PCE price index, was unchanged in August. The PCE index is up just 0.3% in the past 12 months.

This week’s big economic report comes on Friday, when the Labor Department publishes the September employment report. The consensus estimate calls for 190,000 new jobs in September. The unemployment rate is likely to remain at 5.1%.

A gauge of pending home sales fell 1.4% in August to the lowest level in five months. The index from the National Association of Realtors declined to a seasonally adjusted 109.4 in August from 110.9 in the prior month. Pending sales have leveled off since mid-summer, with buyers being bounded by rising prices and few available and affordable properties within their budget.

The federal government is funded only through Wednesday but House Speaker John Boehner says there won’t be a government shutdown. Speaking on CBS’ “Face the Nation,” Boehner confirmed plans to pass a short-term funding bill. Boehner, who announced Friday he is resigning from Congress at the end of October, also said he will set up a committee to investigate Planned Parenthood.

President Obama addressed the United Nations General Assembly this morning, saying the US is was willing to cooperate with Russia, as well as Iran, to try to end the Syrian civil war but the two big powers clashed over whether to work with Syrian President Bashar al-Assad, whom Obama called a tyrant. Russian President Vladimir Putin, in contrast, told the gathering of world leaders that there was no alternative to cooperating with Assad’s military in an effort to defeat ISIS. Later, Obama and Putin met privately.

In opening the General Assembly, Secretary General Ban Ki-moon struck a sober theme, asserting that: “Inequality is growing, trust is fading, and impatience with leadership can be seen and felt far and wide.” Mr. Ban called explicitly for an “end to bombings” in Yemen, and named the five countries that, as he said, “hold the key” to peace in Syria: Russia, the United States, Saudi Arabia, Iran, and Turkey.

Pro-independence parties won a majority 72 seats (out of 135) in Catalonia’s regional parliament, but took down only 48% of the vote. Blocked by the national government from holding a referendum on independence, the separatists attempted to turn these elections into just that. While they won a majority of seats, the failure to gain more than 50% of the vote means had this been a referendum, it would have been a loss.

Apple said it sold more than 13 million iPhone 6s and 6s Pluses during their first weekend on the market. The company beat its previous record of 10 million in sales for the previous generation of iPhones in its first weekend in 2014. This year’s results benefited from the inclusion of the Chinese market, where regulatory problems delayed the gadget’s debut last year.

Whole Foods Market said it would cut about 1,500 jobs, or about 1.6 percent of its workforce, over the next eight weeks. The cuts are aimed at reducing costs as the company invests in technology upgrades. Whole Foods said in May that it would launch a new chain of smaller, more value-focused shops next year.

Scientists say there is water on Mars. In a paper published in the journal Nature Geoscience, scientists report definitive signs of liquid water on the surface of present-day Mars, a finding that will fuel speculation that life, if it ever arose there, could persist to now, or possibly in the future. In the research, Dr. Alfred McEwen, a professor of planetary geology at the University of Arizona and the principal investigator of images from a high-resolution camera on NASA’s Mars Reconnaissance Orbiter, along with other scientists discovered in photographs from the Mars Reconnaissance Orbiter dark streaks descending along slopes of craters, canyons and mountains. The streaks lengthened during summer, faded as temperatures cooled, then reappeared the next year.

The researchers were able to identify the telltale sign of a hydrated salt at four locations. In addition, the signs of the salt disappeared when the streaks faded. In other words, small rivers of liquid water; briny water, but water nonetheless. The salts lower the freezing temperature, and the water remains liquid. The average temperature of Mars is about minus 70 degrees Fahrenheit, but summer days near the Equator can reach an almost balmy 70.

Many mysteries remain. For one, scientists do not know where the water is coming from. One theory is that the salts act like a sponge to soak up moisture from the environment. The other possibility is underground aquifers, frozen solid during winter, melting during summer and seeping to the surface.

Crashes Here There And Everywhere - Financial Review

Financial Review

Crash

Sinclair Noe — July 8, 2015

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

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DOW – 261 = 17,515
SPX – 34 = 2046
NAS – 87 = 4909
10 YR YLD – .02 = 2.20%
OIL – .68 = 51.65
GOLD + 3.00 = 1159.00
SILV + .08 = 15.22

The stock market crashed today. Before you accuse me of over exaggerating, I do not consider a 261 point drop on the Dow to be a crash; that’s just a down day, with a dollop of ugly. No, I mean the actual New York Stock Exchange crashed. The computers malfunctioned. Trading stopped for 3.5 hours. Open orders were cancelled. Other orders were re-routed. This was an actual technical crash. It started with a few squirrelly trades in the morning, and at 11:32 AM, the New York Stock Exchange surrendered, halted trading, and tried to reboot the computers.

And for the most part, it did not stop trading in NYSE listed stocks. The other exchanges picked up the trades. First, the Nasdaq did not crash; next the BATS system just re-routed trades, ARCA picked up more trades, and the Philly exchange handled some trades as well. So, in many ways, it was a typical trading day. The New York Stock Exchange is really more of a TV studio these days than a central force behind buy and sell orders. CNBC broadcasts there; tourists gawk; all the trades are electronic, in a room full of servers far from the trading floor on Wall Street, maybe an office park in New Jersey.

Still, there was something strange about the shutdown.

Earlier this morning, United Airways announced they had suffered computer problems, which resulted in a halt to all U.S. departures for about two hours, disrupting travel for thousands of passengers in the second such setback since early June. The FAA described the problem as “automation issues”. United described it as “a network connectivity issue”. United was down for about 2 hours, and just after they resumed flights, the Wall Street Journal’s website went down, and then the NYSE went down.

Both United and the New York Stock Exchange were adamant that the problems were a result of internal technical problems, rather than malicious hackers. And we have not heard anything that connects the malfunctions. Still, it gives you pause and a certain discomfort. The digital world is not as solid as it should be.

Meanwhile, Chinese stock markets crashed; their computers were working just fine; this was an old fashioned sell-off. The Peoples Bank of China issued a statement this morning that it would support market stability by providing liquidity, while guarding against financial risk. Still, they could find buyers. Nearly half of all Chinese listed companies have now voluntarily suspended their shares from trading to insulate themselves from the meltdown. The total market cap of the stocks that were halted is about $2.6 trillion. The Shanghai Composite Index fell 5.9 percent. It’s now about 32 percent below the peak of 5,166 it reached on June 12; the Shenzhen Index dropped 2.6%. The panic in mainland markets also rippled across the border, knocking Hong Kong down 5.8% and Japan 3.1%.

So, why are Chinese companies suspending trading? Part of the reason is to just get a time out and hope the Chinese government can intervene in some way, but the unwinding of margin loans is adding fuel to the fire. Individual investors in China have used generous margin financing terms to enter the stock market and then build up their portfolios. Less-known is that Chinese companies have been doing the same thing by using their own corporate stock to secure loans from banks. Stocks are being suspended by the companies themselves because many have bank loans backed by shares which the banks themselves may want to liquidate.

The Greek economy crashed a few years ago, and now the politicians are just trying to keep it on life support. Greek banks are closed, the ATMs are running out of cash, the Greek stock market is also closed, and Eurozone leaders are meeting in Brussels to determine whether they will continue propping up the patient or if they will pull the plug. Greek Prime Minister Alexis Tsipras has requested a 3 year loan. Creditors are demanding a written, detailed proposal spelling out all the details before they will consider providing aid. They want that proposal by tomorrow.

Earlier today, Germany rejected any debt haircut or debt re-profiling or debt restructuring. Then International Monetary Fund Managing Director Christine Lagarde said that Greece needs debt restructuring as part of a bailout deal, but warned that Athens won’t receive special treatment as the government seeks to delay its loan repayments to the IMF. I think that means they know how to help, they could help, or they might just look the other way.

The Federal Reserve published minutes from its Federal Open Market Committee June 16-17 meeting. The meeting predated the collapse of negotiations between Greece and its creditors, and the continuing descent of the Chinese stock market, but its tone and more recent public remarks of Fed officials suggest that the central bank is still likely to raise rates this year unless the domestic economy is significantly disrupted by global events.

Fed officials have concluded that economic problems during the winter months were overstated, reflecting problems in the government’s measuring sticks rather than an actual downturn. The Fed concludes: “Real activity in the first quarter was likely stronger than the then-current official estimate.” The account also cited a “substantial” improvement in labor market conditions over the last year. In particular, it noted signs that increased demand for labor had “begun to result in a firming of wage increases.” The pace of wage increases remains slow by historical standards. But officials have said that faster wage growth would offer an important indication that the labor market was finally returning to full health, and also that higher rates might be necessary to control inflation. And so, the Fed determined that economic conditions are continuing to approach those consistent with warranting a start to the normalization of the stance of monetary policy.”

Fed funds futures give a 54 percent probability that the central bank will lift rates in December, down from 59 percent before the Fed released the minutes of its June policy gathering. At the start of the month, the likelihood of the central bank lifting its near-zero benchmark rate this year was nearly 70 percent. The chance of a September hike is now 21 percent. In other words, the Fed wants to hike interest rates, and your guess is as good as anybody’s as to when they will do it.

Consumer borrowing in the US climbed in May. The Federal Reserve reports total credit increased by $16.1 billion, following a $21.4 billion gain in the prior month that was more than initially reported. Non-revolving debt climbed $14.5 billion in May after increasing $12.9 billion. Revolving debt, which includes credit cards, rose by $1.6 billion in May after an $8.5 billion advance. Lending by the federal government, which is mainly for student loans, rose by $3.9 billion.

Second quarter earnings reporting season kicked off this afternoon as Alcoa posted earnings that missed analysts’ estimates. Alcoa is a former Dow Industrial stock, and with ticker symbol AA, it has the alphabetical distinction of the first major stock to report quarterly earnings, although that starting line has been blurred for a long time.  Alcoa kept its 2015 global aluminum-demand growth forecast unchanged at 6.5 percent, and it reduced its projection for industrywide sales to the aerospace and Chinese truck markets. China, the world’s biggest aluminum user, is poised to grow at its slowest pace in a quarter of a century. Get used to companies complaining about a slowdown in China, or Europe, or how they were hurt by a stronger dollar.

After winning key legislation in Congress last month, the Obama administration has now scheduled a high-level trade meeting for late July in an effort to conclude the Trans-Pacific Partnership. Several other lower-level talks will take place beforehand, including tomorrow’s meeting between the U.S. and Japan to close gaps on auto and agriculture trade. According to people following the talks, a deal in coming weeks could allow the TPP to come to a final vote in Congress before the end of the year.

Oil prices fell for a fifth straight session after weekly inventory data showed an unexpected increase in crude supplies. The Energy Information Administration reported commercial crude-oil stockpiles rose by 400,000 barrels in the week ended July 3. The EIA also reported that gasoline stockpiles rose 1.2 million barrels, as demand fell from the prior week.

Microsoft plans to  plans to cut up to 7,800 jobs and write down the value of its Nokia purchase by more than 80%, the latest indications of the company’s continuing struggles in the phone business. In addition to the write-down, which will be booked in its recently ended fiscal fourth quarter, Microsoft said it also would take a restructuring charge of $750 million to $850 million. The company expects the moves to be “substantially complete” by the end of the calendar year. The new cuts are in addition to the roughly 18,000 employees Microsoft said it planned to let go a year ago.

JPMorgan has agreed to pay at least $125 million to settle investigations by U.S. state and federal authorities that it sought to improperly collect and sell consumer credit card debt. JPMorgan has been accused of relying on robosigning and other methods of collecting debt from consumers that they may not have owed and providing inaccurate information to debt buyers.

In other banking news, Jon Corzine and other former MF Global officials have agreed to be part of a $64.5 million settlement to end litigation brought by investors burnt by the 2011 collapse of the futures brokerage. The move marks the first time the former New Jersey governor agreed to pay those who lost money in MF Global, which became the eighth-largest bankruptcy in US corporate history when a bet on European sovereign debt soured.

The Greek Situation Still Is A Long Way From Being Resolved

Financial Review

Unsustainable

Sinclair Noe — July 7, 2015

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

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DOW + 93 = 17,776
SPX + 12 = 2081
NAS + 5 = 4997
10 YR YLD – .05 = 2.23%
OIL + .14 = 52.67
GOLD – 15.50 = 1155.30
SILV – .70 = 15.15

These are interesting times. There is the situation in Greece; the Chinese equity markets are suffering a bit of a meltdown; Puerto Rico has fallen into a black hole of debt; negotiations are underway with Iran; and the cherry on top – earnings season starts tomorrow. Traders might be forgiven if they were a feeling a little jittery. This morning the stock market headed into triple digit negative territory, (the Dow was down 200 points earlier) only to get an afternoon jolt of good news; namely, there may be a deal to be had with Greece. So, let’s dig in there.

Greek Prime Minister Alexis Tsipras is in Brussels for an emergency Eurozone summit. Over the weekend, Greeks overwhelmingly voted to reject more austerity. Actually, they voted on a debt proposal that is no longer under consideration, but figuratively they voted against austerity. Greek banks remain closed and ATMs are reportedly running out of cash. The European Central Bank has maintained its emergency loan cap for Greek banks. German Chancellor Angela Merkel said there was no basis for reopening negotiations with Athens. European leaders have all made clear the onus is on Greece to explain how it plans to pull itself out of the crisis.

Before the meeting, President Obama got involved; making phone calls to Merkel and Tsipras. At the meeting, Greece proposed a settlement until the end of the month; an intermediate stop-gap measure, with promises of a more substantive proposal to follow tomorrow. And the longer this drags out, the optics of soup kitchens upon soup kitchens paints an ugly picture of modern day Europe. And Sunday’s “no” vote is already resonating with several other Euro countries, especially the southern tier of nations. And the “no” vote was also a figurative vote to default on Greece’s debt to the IMF, and a defeat for Germany’s Angela Merkel and the Troika of creditors she led that insisted and continue to insists that there is no way out for Greece but to pay back its debt. The “no” vote was also a victory for democracy. We should have greater trust in the democratic process.

Most of the news stories about Greece harp on the idea that the Greeks are lazy and irresponsible; they borrowed money unwisely, they spent too much on pensions and other government giveaways, they didn’t pay taxes, and now they don’t want to pay their debts. The reality is that the effective tax rate to GDP in Greece (even after the tax evasions) was higher than ours. Their work week is higher than ours and Germany. And much of the country’s tax-collection problems stem from the fact that there are two and a half times more self-employed and small-business people in Greece than there are in the average country. And small businesses are expert at avoiding tax. If Greece were more like Germany, with big corporations and unionized workforce, in other words if they were more socialists, then tax collection would be much higher in Greece. And about irresponsibility, remember the banks decided to lend three hundred billion to Greece despite knowing all these facts (corruption, tax evasion). So who was more irresponsible, the banks or the Greeks?

Debt carries risk; risk for the borrower and risk for the lender. That is why borrowers pay interest on debt to the lender. The lender does not get a guarantee; they could lose their money; that’s how free markets work. And if the borrower does not or cannot repay, the lender does not enslave the borrower. We now have bankruptcy laws that allow a borrower to get out from under unsustainable debt and get a chance at a fresh start.

When it comes to loans, it takes two to tango. One party lends and the other one borrows. Both sides take risks and both sides receive benefits. It is incumbent on the lender to assess the risks and set interest rates at appropriate levels to compensate for taking the risk. If the lenders are not well-prepared they can lose. That is how a free market is supposed to work.

Greece’s lenders were not well prepared, and that was their failure. The loans were originally made by private investment banks, such as Goldman Sachs. And when they were staring in the face of losses, the banks managed to unload their bad debts onto the Eurozone governments, who were not well prepared. Germany and its allies should have left the debt in private hands where it belonged, but the politicians have a tendency to kowtow to the bankers, and that was their failure. The IMF’s own assessment of Greek debt, published just a few days ago, states: “Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable.” Germany’s own bankers knew Greece couldn’t pay this back. And yet Merkel persisted, demanding a pound of flesh in lieu of cash.

The IMF analysis also suggested the Europeans would have to accept a principal writedown. As a member of the so-called troika of creditors that included the European Commission and European Central Bank, the fund’s hands were tied from the start, and the analysis was little more than an admission of the inevitable; the bloodletting failed to cure the patient. An internal review in 2013 concluded that the IMF should have pushed earlier for a restructuring of Greece’s debt, which would have eased austerity and limited the economy’s contraction. As it turned out, Greece plunged into a much deeper recession than anticipated, with unemployment surging to about 25 percent. So, it wasn’t surprising that the Greeks voted against more of the same.

The Greek situation still is a long way from being resolved, but if Greece gets kicked out of the Euro, it wouldn’t be the worst thing that could happen.

Wiping out much of yesterday’s rebound, Chinese shares fell yet again today, casting doubt on the slew of recent support measures unleashed by Beijing. Traders are also getting increasingly nervous about the unusually large number of Chinese companies asking for their shares to be suspended. About a quarter of the roughly 2,800 companies listed in Shanghai and Shenzhen filed for a trading halt by the close on Monday, and another 200 announced a suspension today. In the face of a big sell-off, the Chinese answer is to stop the trading, and the logical next step is to forbid talking about selling. Shanghai -1.3%; Shenzhen -5.8%; ChiNext-5.7%.

Iran and six major powers will keep negotiating past today’s deadline for a long-term nuclear agreement as they try to tackle the most contentious issues, including the continuation of a UN arms embargo on Iran. The spokeswoman for the US delegation said the terms of an interim deal between Iran and the six would be extended through Friday to give negotiators a few more days to finish their work. The negotiations have been impacting the price of oil. Yesterday, US crude oil futures dropped by 7.7%, or $4.40, to close at $52.53, almost rivaling the price decline in the aftermath of OPEC’s decision to not intervene in oil markets last year.

Lawyers for Puerto Rico have asked the U.S. Court of Appeals in Boston to reinstate a law to help it deal with $72 billion in debt. The court resisted, agreeing instead with a San Juan judge who threw out the statute in February. The dispute centers on whether the island, which is excluded from federal bankruptcy code regarding municipal entities, can make its own rules for allowing public agencies to seek protection from creditors. In a majority decision, the appeals court wrote: “In denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico’s case.” Barring help from federal lawmakers, the decision means Puerto Rico will have no other choice except to continue piecemeal negotiations with creditors.

We have a couple of economic reports today:
Corelogic reports home prices increased 1.7% in May, while year-over-year growth rose to 6.3%, the fastest annual pace since last July. CoreLogic expects home prices to slow to annual growth of 5.1% by May 2016.

The US trade deficit widened in May as exports declined by the most in three months, showing businesses were having trouble drumming up sales to overseas customers. The gap grew 2.9 percent to $41.9 billion from the prior month’s revised $40.7 billion. Domestic crude production reduced America’s imported fuel bill, which dropped in May to the lowest level since February 2002. While persistent US household spending led to record automobile imports.

Job openings at U.S. workplaces rose to a record high of 5.36 million in May. Compared with same period in the prior year, May’s job openings rose 16%.  With 8.67 million unemployed people in May, there were about 1.6 potential job seekers per opening, matching April’s ratio. In May 2014, there were about 2.1 potential seekers per opening.

Alcoa kicks off the second quarter earnings reporting season tomorrow after the closing bell. A recent report from FactSet examines expectations for second quarter earnings as reporting season approaches. According to the report, year-over-year earnings and revenue for the S&P 500 are expected to decline by 4.5% for the second quarter of 2015. If that happens, it will mark the largest year-over-year decline in earnings since the second quarter of 2009. The last time the index reported a year-over-year decrease in earnings was a 1.0% dip in the third quarter of 2012. Companies that generate more than 50% of sales inside the United States are anticipated to have an earnings growth rate of 0.3%. Companies that generate the majority of their sales abroad, however, have an estimated earnings decline of 11.4%.