Financial Review

Make Way for May

Sinclair Noe — April 28, 2017

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DOW – 40 = 20,940
SPX – 4 = 2384
NAS – 1 = 6047
RUT – 16 = 1400
10 Y – .02 = 2.28%
OIL + .21 = 49.18
GOLD + 4.20 = 1268.70

Looking back on the week, we had a couple of strong moves Monday and Tuesday, following the French election over the weekend – the rally was based on an absence of bad news. After that, markets looked for good news and floundered.

The tax reform plan failed to impress. We had some good earnings reports, which helped to lift a few stocks – notably a few of the big tech stocks, and that helped the Nasdaq Composite climb above 6,000 to new record highs. For the week, the Dow rose 1.9 percent, the S&P gained 1.5 percent and the Nasdaq rose 2.3 percent.

During April, the Dow gained 1.3 percent, the S&P rose 0.9 percent and the Nasdaq jumped 2.3 percent.

Yesterday, Alphabet, Amazon, and Microsoft reported earnings. Alphabet and Amazon crushed it. Microsoft was a slight disappointment. From the close of the market on Thursday to session highs on Friday, all three stocks hit an all-time high. That added more than $30.6 billion to Alphabet’s Class A market capitalization, $14.2 billion to Amazon’s market capitalization, and $6.7 billion to Microsoft’s market cap, reaching about $52 billion between the 3.

The stocks later pared gains, falling below their peaks. By the end of the day on Friday, the trio were just $27.4 billion richer, with Alphabet seeing $22.75 billion of those gains. The gains left both Amazon and Alphabet closing in on share prices of $1,000.

Amazon went public in 1997; if you had been brilliant enough to invest $10,000 at the IPO price of $18, and patiently held, you would be sitting on just over $4.8 million. Amazon’s market capitalization reached about $442 billion, pushing founder Jeff Bezos’ wealth closer to the richest in the world.

Alphabet and Microsoft had market caps of about $636 billion and $529 billion, respectively.

The US economy expanded at the slowest pace in three years as weak auto sales and lower home-heating bills dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling. Gross domestic product, the value of all goods and services produced, rose at a 0.7 percent annualized rate after advancing 2.1 percent in the prior quarter.

Consumer spending, the biggest part of the economy, rose 0.3 percent, the worst performance since 2009. There is a tendency for weak economic growth in the first quarter; the past few years winter storms were blamed for the declines; this year, warm winter weather is being blamed.

Since 2000, expansion in the first quarter of each year has averaged 1 percent, compared with 2.2 percent for the rest of each year. The pattern I recognize is that consumers get tapped out over the holidays and must tighten their belts in the first quarter.

The good news is that the unemployment rate is low, people have jobs, there is no immediate economic dilemma, and the economy should rebound as we move through the rest of the year. The bad news is that the growth trajectory looks a lot like the past few years, solid but sluggish. And in the background, inflation is eating into consumers’ wallets.

Real disposable personal income rose at a 1 percent pace in the period, the weakest since the fourth quarter of 2013. The report also showed price pressures were picking up. The GDP price index rose 2.3 percent in the first quarter. A measure of inflation tied to consumer spending and excluding volatile food and energy costs was up 2 percent, the fastest in four quarters.

And there is a good chance consumers will loosen the strings on the pocketbook in the second quarter. The University of Michigan consumer confidence survey shows consumers feeling good. The current conditions index in April was at its second-highest since 2005, and consumer expectations for inflation in the year ahead, and in five to 10 years, were unchanged from the prior month.

The employment cost index, released by the Labor Department, showed a 2.4 percent annual rise — the fastest pace in two years – and climbed 0.8 percent from the prior quarter for the strongest rate since the end of 2007. The wages and salaries component also increased 0.8 percent in the first three months of the year, the most since the second quarter of 2008.

The Federal Reserve FOMC policy meeting is next week and it is widely expected the Fed will leave interest rates at current levels while maintaining guidance for 2 more rate hikes this year.

The federal government will continue for at least one more week. Faced with a budget deadline of midnight tonight, legislators could not agree on the details of a budget plan to keep the doors open and the lights on, but they did agree to kick the can down the road. Congress approved a one-week extension to agree on a spending bill to fund the government through September.

Leaders of both parties say they’re close to agreement on a broader spending plan after Republicans signaled they would accept Democratic demands that the Trump administration promise to continue paying Obamacare subsidies and drop its bid for immediate funds for a wall on the Mexican border.

House GOP leaders abandoned efforts to vote this week on their plan to repeal and replace Obamacare for lack of support in their party. A vote is still possible next week.

Brazil is on strike, a nationwide general strike to protest President Michel Temer’s austerity measures, hitting public transport and closing schools, factories, banks and other businesses in every state. Police clashed with demonstrators in several cities, firing tear gas in efforts to clear roadways blocked by burning barricades.

Protesters also obstructed the entrances of airports and metro stations. Temer’s efforts to pass pension and labor reforms have deeply angered many Brazilians. Temer has proposed a minimum age for retirement. The lower house of Congress approved a bill this week to weaken labor laws by relaxing restrictions on outsourcing and temporary contracts.

GM, Ford, Toyota, and Mercedes all halted production at factories in Sao Paulo. the strike was strategically concentrated in public transportation so that even people who might want to get to work could not.

Young Europeans are sick of the status quo in Europe. And they’re ready to take to the streets to bring about change, according to a recent survey. Around 580,000 respondents in 35 countries were asked the question: Would you actively participate in large-scale uprising against the generation in power if it happened in the next days or months? More than half of 18- to 34-year-olds said yes.

A U.S. appeals court has blocked health insurer Anthem’s bid to merge with Cigna, upholding a lower court’s decision that the $54 billion deal should not be allowed because it would lead to higher prices for healthcare. The ruling effectively kills the proposed merger that was opposed by the U.S. Justice Department, 11 states and a district court judge after consumers, medical professionals and others objected to it.

In the end, Cigna itself tried to back out. Anthem and Cigna are suing each other. Cigna has sought to abandon the merger and force Anthem to pay a $1.85 billion breakup fee while Anthem filed a lawsuit to force its smaller rival to go through with the combination.

A consortium led by private equity firms Hillhouse Capital Group and CDH Investments offered on Friday to buy Belle International Holdings in a deal valuing the entire Hong Kong-listed shoe retailer at about $6.8 billion.

After months of speculation about whether Time, Inc. would be acquired, its board of directors has decided not to sell the company. Following the news, Time Inc. shares were down more than 19%.

Two initial public offerings went opposite directions Friday, as software company Cloudera shares shot up above its issue price and car-vending machine company Carvana saw its shares slump. Cloudera gained 20%, while Carvana dropped 26%.

Gasoline demand in the US dropped 2.4% in February compared with a year earlier, the second straight monthly decline. Still, coming in at 8.9 million barrels per day. The price of oil has nearly doubled from 12 months ago – a powerful motivation to conserve, but the lower demand also points to less economic activity.

Oil prices settled a bit higher today but still registered a second straight monthly decline. The problem for oil companies is that oil has spent a very long time consolidating around $50 to $55 and has now dropped under that range. Meaning any move higher will face strong resistance.

Meanwhile, any move below $47 would break through support. For oil companies, they have largely based their guidance for 2017 on prices in the $60 a barrel range.

Rising crude prices helped Chevron and Exxon Mobil easily beat analysts’ quarterly profit expectations. Chevron and Exxon expanded production in their American shale portfolios during the quarter, with both deciding the low-cost fields offered an easy opportunity to boost profit. They have laid out plans to increase drilling in those fields this year.

Exxon reported quarterly profit more than doubling to $4 billion, even as production fell 4 percent. Chevron swung to a $2.6 billion quarterly profit and turned cash flow positive. Chevron’s results were helped by $2.1 billion in asset sales. The company has sold more than $5 billion in assets since last year and is seeking buyers for its Canadian oil sands business.

General Motors recorded its highest ever profit for a first quarter. US sales of Chevrolet trucks and crossovers rose 3.5 percent and 12 percent, respectively, during the quarter, while GMC truck and crossover sales jumped almost 10 percent. GM’s net profit rose 33 percent in the first quarter to $2.6 billion, or $1.70 per share, beating estimates of $1.48 per share.

Financial Review

Turkey, Again

Sinclair Noe — February 14, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 92 = 20,504
SPX + 9 = 2337
NAS + 18 = 5782
RUT + 4 = 1396
10 Y + .04 = 2.47%
OIL + .28 = 53.71
GOLD + 3.30 = 1229.00

Four consecutive trading sessions with record highs.

Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee this morning, part of her semi-annual two-day testimony to Congress. Yellen said the labor market is basically where the Fed wants it to be, and inflation is just a little lower than their target. She said, “Waiting too long to remove accommodation would be unwise, potentially requiring [the Fed] to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.

“At our upcoming meetings [we] will evaluate whether employment and inflation are continuing to evolve in line with [the Fed’s] expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

She said the Fed expected three rate increases this year, and they might hike in March, maybe. That doesn’t mean the Fed will raise rates in March, but the Fed wants that option. Normally, Yellen talks about downside risks, today she seemed more concerned about the upside risk.

“The economic outlook is uncertain, and monetary policy is not on a preset course,” she told members of the Senate Banking Committee, adding that “changes in fiscal policy or other economic policies could potentially affect the economic outlook,” she said, adding that “it is too early to know what policy changes will be put in place or how their economic effects will unfold”. We know that President Trump has promised details on his “phenomenal” tax reform plan within the next couple of weeks. Fed economists will surely pay attention.

Yellen rebutted President Trump’s claims that banks aren’t lending. Trump has targeted the Dodd-Frank Act as part of his quest to roll back regulations, claiming the regulatory reform prevents banks from lending.

Yellen shot down those claims, saying commercial and industrial lending specifically surged after the crisis, rising 75 percent since 2010. Yellen mentioned a recent survey from the National Federal of Independent Business, in which only 2 percent of respondents cited access to capital as their greatest obstacle.

She said US banks are stronger than their foreign counterparts, which makes them more competitive, and it is reflected in record earnings for US banks. Dodd-Frank is making life difficult for banks, but the truth is, banks are lending plenty of money, and companies are not starved for capital.

The two-year note yield jumped to as high as 1.25 percent from a low of 1.18 percent earlier in the day. The 10-year yield rose to 2.50 percent from 2.43 percent before her remarks were released. The dollar rose after Yellen’s comments, hitting a high last reached on Jan. 20. During Yellen’s testimony, stocks flipped between small gains and losses but started carving out fresh intraday highs as the testimony wrapped up.

Richmond Fed President Jeffrey Lacker, a long-time proponent of tighter monetary policy, says the Federal Reserve will likely have to raise interest rates more rapidly than financial markets currently expect given that any new policies by the Trump administration, while uncertain, will force the Fed’s hand.

Producer prices, or prices at the wholesale level, rose more than expected in January, recording their largest gain in more than four years.  The producer price index for final demand jumped 0.6 percent last month. That was the largest increase since September 2012 and followed a 0.2 percent rise in December. Despite the surge, the PPI only increased 1.6 percent in the 12 months through January. The gains in PPI last month largely reflected increases in the prices of commodities such as crude oil.

National Security Adviser Michael Flynn resigned his position, apologizing to Vice President Mike Pence for misleading him about his conversations with Russia. Retired Army Lt. Gen. Keith Kellogg has been named as acting national security adviser in his stead.

In better news for the Trump administration, Steven Mnuchin was confirmed as U.S. Treasury secretary after winning a Senate vote 53-47. Mnuchin‘s  to-do list includes tax reform and how to handle economic cooperation efforts with China, Mexico and other trading partners.

Tens of thousands of Northern California residents are in shelters as engineers worked to shore up a crumbling overflow channel and drain the rain-swollen reservoir at the Oroville Dam before new storms sweep the region. Residents below the dam were ordered from their homes on Sunday when an emergency spillway that acts as an automatic overflow channel appeared on the brink of collapse from severe erosion.

Aetna ended its $37 billion takeover of Humana, after deciding not to appeal a ruling by a federal judge who blocked the health insurers’ combination on antitrust grounds. The companies came to a mutual agreement to terminate the deal, and Aetna will pay Humana a $1 billion breakup fee, or about $630 million after taxes.

Cigna and Anthem filed the paperwork to terminate their proposed merger. Then Cigna filed suit against Anthem, seeking a $1.85 billion reverse termination fee and more than $13 billion in additional damages, which includes the amount of premium Cigna shareholders did not realize.

Hologic said it would acquire medical aesthetics company Cynosure for $1.65 billion. The deal comes a day after Botox maker Allergan said it would buy Cynosure’s rival Zeltiq Aesthetics for about $2. 5 billion. Cynosure makes products used in non-invasive body contouring, hair removal, skin revitalization and women’s health.

Restaurant Brands International, owner of the Burger King and Tim Hortons fast-food chains, has approached Popeyes Louisiana Kitchen about a possible acquisition. Popeyes shares jumped 14 percent in New York. Restaurant Brands and Popeyes have yet to agree on a deal price, and there is no certainty that negotiations will continue.

PSA Group, the French automaker of Peugeots and Citroëns, said it was in discussions about a potential acquisition of the European brands Opel and Vauxhall from General Motors. PSA and GM already produce some vehicles together.

A South Korean special prosecutor’s office is seeking an arrest warrant for Samsung leader Jay Y. Lee. He was questioned for 15 hours yesterday as part of an investigation into a graft scandal that could topple President Park Geun-hye. In January, the special prosecutor wanted to arrest Lee for paying bribes to win the state pension fund’s support for the merger of Samsung C&T and Cheil Industries.

Japan’s Toshiba said its chairman will step down, and the company booked a $6.3 billion write-down to its US nuclear unit, a write-down that wipes out its shareholder equity and will drag the group to a full-year loss.  Toshiba rattled investors by failing to release its earnings on schedule, saying initially it was ‘not ready’ and then announcing later it needed more time to probe its Westinghouse nuclear business after internal reports uncovered potential problems.

Credit Suisse announced a big loss –  $2.3 billion – when considering the $5.3 billion settlement with the US Justice Department tied to its dealing in mortgage-backed securities in the period leading up to the financial crisis. Credit Suisse says it will eliminate up to 5,500 jobs in 2017.

Phoenix-based Freeport McMoRan is cutting production at the world’s second-largest copper mine in Indonesia. That follows new restrictions on copper concentrate exports imposed by that country.

T-Mobile, the No.3 U.S. wireless carrier, reported quarterly profit and revenue above estimates as promotional offers helped add more subscribers. The company has been gaining share from bigger rivals Verizon and AT&T in an over-saturated U.S. wireless market. T-Mobile had several promotional offers in the fourth quarter, including a free iPhone 7 offer with eligible trade-in.

Apple closed on Monday at $133.29 a share, surpassing its record closing high price of $133, set in February 2015. That was enough to push the market cap above $700 billion. The stock is up more than 15 percent in 2017, gaining nearly $100 billion in market cap in just six weeks. It’s also just points away from a split adjusted price of $1,000 a share.

Perhaps what’s even more impressive is the move from its 52-week low in May. The stock has rallied nearly 50 percent and gained more than $200 billion in market cap in just nine months. There is speculation Apple will soon come out with big updates for the iPhone 8, which would also coincide with a 10^th anniversary of the iPhone. Strong sales of the iPhone 6S two years ago, have left a larger-than-normal base of customers ready to upgrade. Guesstimated launch date is September.

Also hitting a new high today, a much smaller company called Lumentum, whose core business is optical communications, late today the company reported mixed fiscal Q2 results and guidance. They also recorded their first 3D sensing consumer revenues, which might be part of an order for final qualification to provide 3D sensing for the new Apple iPhone 8, which will probably include a 3D-sensing module to enable augmented-reality applications. There is no confirmation on an Apple deal just yet.

Financial Review

Hat Trick

Sinclair Noe — February 9, 2017

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DOW + 118 = 20,172
SPX + 13 = 2307
NAS + 32 = 5715
RUT + 19 = 1378
10 Y + .05 = 2.40%
OIL + .71 = 53.05
GOLD – 12.40 = 1229.60

We have new record high closes for the Dow, S&P, and Nasdaq. It’s a hat trick.

The chief executives of several airlines, as well as executives from air cargo companies, were invited to a breakfast meeting at the White House this morning. Trump called the air-traffic control system “outdated” and he told the execs: “We have an obsolete plane system, we have obsolete trains, we have obsolete airports, we have bad roads. And we’re going to change all that.”

Trump also said: “We’re going to be announcing something I would say over the two or three weeks that will be phenomenal in terms of tax and developing our aviation infrastructure.” He gave no indication of what the announcement might entail. Presumably the “phenomenal” tax and infrastructure plan does not apply solely to the airline industry, and Wall Street lapped it up. He went on to say: “Lowering the overall tax burden on American business is big league.”

The rally had stagnated in recent days as investors sought details about Trump’s policy agenda. Financials, which have soared since the election, were the best-performing group, up 1.4 percent after three sessions of declines, while energy shares gained 0.9 percent. Those sectors stand to benefit should lower taxes spur economic activity as interest rates and the demand for energy would presumably rise.

After 18 months of courtship and court cases, two massive deals that would have reshaped the U.S. health insurance industry have both been declared dead. Anthem’s $48 billion deal to buy Cigna was blocked by a federal judge late Wednesday, weeks after another judge halted Aetna’s bid for Humana. Reasons given: The mergers would have led to less competition and higher prices for Americans.

Applications for unemployment benefits in the U.S. unexpectedly declined last week to an almost three-month low. Jobless claims fell by 12,000 to 234,000 in the week ended Feb. 4. The latest results extend a trend of historically low claims, with applications staying below 300,000 in the longest streak since 1970. A shortage of skilled workers is prompting companies to hold on to existing employees while continuing to add more workers to help fulfill demand.

The Senate has confirmed Jeff Sessions as attorney general largely along party lines. The 52-47 vote capped weeks of divisive battles over Sessions, an early supporter of President Trump. Next up is Representative Tom Price, Trump’s pick for health secretary and a staunch advocate of repealing Obamacare. A vote come could come later tonight.

Secretary of State Rex Tillerson met his Canadian counterpart for the first time on Wednesday for talks that touched on NAFTA, the trade agreement President Trump has pledged to renegotiate. The top US diplomat also met with Mexico’s foreign minister to discuss collaboration on law enforcement, migration and security, and agreed to visit the country in the coming weeks.

A US court of appeals is reviewing arguments on whether to reinstate the Trump administration’s temporary ban on immigration, with the outcome likely to be appealed to the Supreme Court.

Meanwhile, Trump’s first executive order, signed January 25, entitled: “Border Security and Immigration Enforcement Improvements” resurrects some of the most controversial immigration enforcement programs of recent years, seeks to deputize state and local law enforcement as immigration officials across the country, and threatens major cuts to federal funding for cities that fail to fall in line with the administration’s vision.

Trump has called for the construction of new immigrant detention facilities along the U.S. border with Mexico – including through private contracts – as quickly as possible, and there have been requests for additional asylum officers at 2 for-profit Detention Centers in Arizona.

A Dallas federal judge has upheld the Labor Department’s fiduciary rule, dealing a setback to the financial industry’s attempts to kill the measure. But the legal move may not mean much for the regulation’s fate. Last Friday, President Trump issued a memorandum to study the rule’s impact and rescind or revise it if it isn’t consistent with his administration’s regulatory principles. A status report will be published on March 10.

Boeing won orders for 39 wide-body aircraft from Singapore Airlines; a deal worth about $14 billion, as Southeast Asia’s biggest long-distance carrier upgrades its fleet over the next decade with more fuel-efficient models to cut costs.  The airline agreed to buy 20 777-9s, which are set to debut at the decade’s end, and 19 787-10s, the longest Dreamliner model.

There’s a good chance you can’t get there from here. More than 2,700 flights were canceled and all public schools in New York City, Boston and Philadelphia will be closed today as the region braced for a winter storm that could dump a foot of snow or more.

President Trump has written a letter to China’s President Xi Jinping in his first direct communication with the leader of the world’s second-biggest economy since he took office. With currency wars threatening to raise their head again, China has managed to get the yuan exactly where it wants it.

The nation’s authorities have let the currency rise against the dollar, making it harder for the U.S. administration to accuse it of undervaluing the exchange rate, while at the same letting the yuan weaken against a trade-weighted basket of currencies.

Greece’s two-year bond yield climbed above 10 percent as negotiations to release further IMF funds remained deadlocked. The International Monetary Fund weighed in this week, publishing a long-awaited analysis of the challenges the Greek economy still faces. The report has been the focal point of heated disagreement between the fund and Europe in terms of what Greece needs to do to get back on track.

The fund has argued that, in addition to needed reforms, European governments must provide debt relief to Greece for the country’s economy to recover fully. Meanwhile, Astellon Capital, a hedge fund based in London, published analysis saying that some form of restructuring is essential for Italy, given the inability of the country’s economy to grow.

The Astellon report also notes that the E.C.B. and sickly Italian banks have been the main buyers of Italian government bonds over the past three years. Also, Mediobanca, the Italian investment bank published a report which highlights just how little Italy has benefited from being in the euro: Growth has been literally zero, and the economy’s competitiveness as an exporter has deteriorated.

Twitter reported fourth-quarter revenue was $717 million, missing the $740 million average analyst estimate. Sales growth of 1 percent slowed dramatically in the period from the 48 percent gain a year earlier. Twitter added 2 million new users, bringing the total number of people who log in monthly to 319 million. Twitter has had trouble persuading advertisers to spend more money on its social-media platform as fewer people join.

Coca-Cola offered up a flat earnings report. Excluding items, the company earned 37 cents per share, in line with estimates. Net operating revenue fell about 6 percent to $9.41 billion, the seventh straight drop, but slightly ahead of estimates. The company forecast 2017 adjusted earnings to fall 1-4 percent from 2016. Coca-Cola has been offloading much of its bottling business to cope with falling demand for carbonated beverages in North America. Coke said it was on track to complete re-franchising of its US bottling operations by the end of this year.

Whole Foods is shrinking its store count for the first time since the recession. After reporting disappointing earnings, the upscale grocer says it will close 9 stores; including one in Prescott.

With about 70 percent of the S&P 500 having reported results, fourth-quarter earnings are on track to have climbed 8.5 percent, which would be the best performance since the third quarter of 2014, according to Thomson Reuters.

Financial Review

Heating Up

Sinclair Noe — June 16, 2016

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

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DOW + 92 = 17,733
SPX + 6 = 2077
NAS + 9 = 4844
10 Y – .04 = 1.56%
OIL – 1.84 = 46.17
GOLD – 11.30 = 1281.20

Well, this was a strange day. The major market indices started the session lower and looked ready to slide into a sixth consecutive loss, but after about an hour of trade, prices started moving higher. Even with the weakness we have seen over the last week or so, the S&P 500 is still only a little more than 2% off its 2016 closing high for the year. From that perspective, can you recall a time when the S&P 500 was this close to a high for the year but where there was this much angst on the part of investors? At one point, the Dow was down almost 170 points, with a 280-point range from sessions low to session high.

Yesterday, the Federal Open Market Committee left the fed funds rate unchanged at 0.25% to 0.50%, as expected. And the Fed’s economic forecasts are even more pessimistic now than they were just a few months ago. Fed chair Janet Yellen held a press conference and mentioned the weak labor market, low business investment and productivity, and concerns about a possible Brexit next week. The Fed’s own forecast sees U.S. growth topping out at 2% in the long run, well below the nation’s historic 3.3% growth rate. Looming in the background is persistently weak global growth. Today, other central banks delivered their policy messages.

The Bank of Japan kept monetary policy steady and lowered its inflation forecast, stating the consumer price index’s year-on-year change is likely to be slightly negative or flat for the time being. The yen surged against the dollar following the news, sparking speculation on whether Japanese policymakers would intervene to halt the strengthening currency, while the Nikkei tumbled 3.1%.

Reiterating its warning that the franc is significantly overvalued, the Swiss National Bank left its negative interest rates unchanged at record lows, conserving ammunition ahead of a British vote on EU membership. As expected, the SNB held its deposit rate at negative-0.75%.

The Bank of England kept its key interest rate at a record low of 0.5% and made no changes to its 375-billion-pound asset-purchase program. The decision marked the last before the June 23 referendum in the U.K. on whether the country should stay or exit the European Union. And the bank warned that a Brexit “could materially alter the outlook for output and inflation.”

“Leave” has surged to a 6-point lead in an important Brexit survey. A new Evening Standard newspaper poll, conducted by the reputable polling firm Ipsos MORI, shows that 53% of respondents favor Leave while 47% favor Remain. This was the first time a poll conducted by Ipsos MORI poll had favored Leave. But both sides of the Brexit campaign have temporarily stopped campaigning after Jo Cox, a Member of Parliament was shot and killed while meeting with constituents in a library. The motive behind the shooting is unknown but many people think it might be Brexit related.

Investors continued to buy up investments considered safe in times of economic uncertainty: United States government bonds, and stocks with high dividends. The yield on the benchmark 10-year Treasury note dropped to 1.52% in intraday trading; the lowest since 2012.

The number of people seeking U.S. unemployment benefits rose last week, but to a low level that indicates employers are still cutting relatively few jobs. Weekly applications rose 13,000 to a seasonally adjusted 277,000, the highest in four weeks. The less volatile four-week average declined slightly to 269,250.

Consumer prices, or prices at the retail level, rose 0.2% in May largely because of higher gasoline prices and rising rents. Although the cost of most goods and services aren’t increasing much, fuel has become more expensive. The energy index climbed 1.2% in May. Rents also jumped 0.4% in May to mark the largest monthly gain since February 2007. And they are rising at the fastest 12-month pace in almost nine years: 3.4%.

Overall price pressures are still muted, however, as the price of groceries dropped 0.6% in May, and prices are now down 0.7% in the past year. The consumer price index has risen just 1% in the past 12 months. The core rate that excludes food and energy has risen at a sharper but still low 2.2% annual pace.

Confidence among U.S. homebuilders climbed to a five-month high in June. The National Association of Home Builders/Wells Fargo builder sentiment gauge rose to 60 from 58. Home builders report cheap borrowing costs and steady improvement in the labor market have bolstered Americans’ abilities to buy homes. Builder sentiment in the West reached a five-month high.

The Philly Fed index rebounded into expansionary territory in June, with the headline index rising to 4.7 from -1.8. The key forward-looking indicators all moved in the wrong direction, with sentiment on new orders, employment, unfilled orders, inventories and capital expenditure intentions all weakening, while the hours worked sub-index remained firmly in contractionary territory in June.

Arizona’s seasonally adjusted unemployment rate increased one-tenth of a percentage point from 5.5% in April to 5.6% in May. The U.S. seasonally adjusted unemployment rate decreased three-tenths of a percentage point from 5.0% in April to 4.7% in May. A year ago, the Arizona seasonally adjusted rate was 5.8% and the U.S. rate was 5.5%.

Arizona lost 19,400 Non-farm jobs in May. Three of the eleven sectors posted gains, one remained unchanged, and seven sectors posted losses. The gains were recorded in Manufacturing, Construction, and Trade, Transportation, and Utilities.  The losses were recorded in Financial Activities, Information, Education and Health Services, Leisure and Hospitality, Professional and Business Services (-5,400 jobs); and Government (the big loser -13,100 jobs). Natural Resources and Mining remained unchanged.

Disneyland debuts in Shanghai. The theme park, which cost $5.5 billion and took five years to build, opened its doors today. Disney hopes it can tap into China’s growing middle class, as 330 million people live within a three-hour drive or train ride from the park.

California’s insurance commissioner called on the U.S. government to block Anthem’s $48 billion takeover of rival health insurer Cigna, saying the deal would limit competition in the state’s health-insurance market. While Commissioner Dave Jones doesn’t have legal authority to block the merger, his opposition, plus a 22-page letter he sent to the U.S. Justice Department, adds an influential voice to the debate. The takeover would give the combined Anthem-Cigna a greater than 50 percent market share in 28 counties in California, and a market share exceeding 40 percent in 38 counties.

Volkswagen  unveiled a major restructuring today, the broadest overhaul of the company in decades. VW announced plans to deliver 30 electric plug-in models by 2025. The product overhaul and pledge to cut $9 billion in spending come as VW is already facing a bill of more than $18 billion to cover the costs of its emissions scandal.

The company rigged some 11 million diesel cars worldwide with software to cheat emissions standards. The admission triggered a litany of government investigations, a U.S. sales slump, and a management shakeup. This also follows a mandate from the German government that as of 2030, all new cars registered in Germany must be emissions free. The plan is to add one million hybrid and all-electric cars by 2020 and 6 million by 2030.

After three successes, a leftover SpaceX rocket booster crashed Wednesday while trying to land on an ocean barge. In fact, the rocket’s failed landing was, according to a Twitter post by Elon Musk, “Maybe [the] hardest impact to date.” The attempt came minutes after the Falcon 9 rocket successfully launched two satellites into orbit from Cape Canaveral, Florida.

Facebook founder Mark Zuckerberg’s philanthropy venture has made its first major investment, leading a funding round in a startup that trains and recruits software developers in Africa. Google Ventures was also part of the $24 million funding round. The startup, which has nearly 200 engineers currently employed by its Nigeria and Kenya offices, will use the funds to expand to a third African country by the end of 2016.

Philadelphia is set to become the first major American city with a soda tax despite a multimillion-dollar campaign by the beverage industry to block it. The City Council is expected to give final approval today to a 1.5 cent-per-ounce tax on diet and regular soda, iced tea, energy drinks, juice drinks with less than 50% juice, and other sugary beverages.

Microsoft is getting into the marijuana business, announcing a partnership to begin offering software that tracks marijuana plants from “seed to sale,” as the pot industry puts it. The software is meant to help states that have legalized the medical or recreational use of marijuana keep tabs on sales and commerce, ensuring that they remain in the daylight of legality. But until now, even that boring part of the pot world was too controversial for mainstream companies. It is apparent now, though, that the legalization train is not slowing down: This fall, at least five states, including the biggest of them all — California — will vote on whether to legalize marijuana for recreational use.

Get ready, here it comes. An excessive heat watch has been posted for California and Arizona, warning of temperatures that could hit 119-degrees this weekend. The forecast calls for record highs and record high-lows. High lows can sound a bit funny to say but what they translate to is misery: Temperatures stay so warm overnight that there is little relief from the heat even after the sun has set. The only consolation is that we are not expected to break the all-time record high of 122-degrees from June 26, 1990. Small consolation.

Financial Review

Libor Antitrust Claims Revived

Sinclair Noe — May 23, 2016

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

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DOW – 8 = 17,492
SPX – 4 = 2048
NAS – 3 = 4765
10 Y – .01 = 1.84%
OIL – .33 = 48.08
GOLD – 3.70 = 1249.20

If you were actively trading the markets today – well, you were probably falling asleep. It was like watching paint dry. The S&P 500 index traded in an 8-point range for the session, drifting from positive to negative without conviction.

Including today, we’ve had 98 trading days this year. On 20 of these days, the S&P moved 0.1% or less. That’s just over 20% of the time. In the prior 10 years, there was a total of 2517 trading days. And the S&P had a total of 288 moves of 0.1% or less. That’s just over 11% of the time. There has been plenty of volatility but it has been interspersed with indecision.

John Williams, president of the Federal Reserve Bank of San Francisco, said Sunday the presidential election wouldn’t prevent the central bank from raising interest rates later this year. Mr. Williams has said that he favors raising rates two or three times this year.

St. Louis Fed President James Bullard said today that the strength of the U.S. labor market, inflation levels that are closer to the Federal Reserve’s target of 2% and easing international pressures are three factors that support the Federal Open Market Committee’s aim for a slow normalization of interest rates. According to FOMC member and Boston Fed President Eric Rosengren the U.S. is on the verge of meeting most of the economic conditions the Fed has set to increase interest rates next month.

The market is trying to digest last week’s Fed minutes and the jawboning from policymakers. Everyone will be following the economic data closely over the next 3 weeks. Meanwhile, the bond market has done some of the work for the Fed; since last Wednesday’s release of FOMC minutes yields have jumped, but the Fed can’t just talk about raising rates and then fail to do the deed without a severe loss of credibility.

Bayer has confirmed its offer to acquire Monsanto with a $122 per share all-cash bid that values the U.S. agribusiness at $62 billion. The drug and chemicals giant anticipates annual earnings contributions from synergies of around $1.5 billion after three years, and said it would finance the deal through a combination of debt and equity.

Bayer said a deal would boost earnings per share by a “mid-single-digit percentage” in the first full year after completion, and by more than 10 percent thereafter. Bayer would likely abandon the Monsanto name following the purchase, which would help distance Bayer from Monsanto’s link to genetically modified foods.

The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the US. But that doesn’t mean you want to bet the farm on GMOs. In the United States organic food sales have grown steadily at around 10 percent a year since the Great Recession (and at higher rates before that), which puts the stock market to shame.

In 2015 organic product sales revenue grew 11 percent, while the rest of the food market grew at a rate of 3 percent, according to the Organic Trade Association’s annual survey of the industry. Total sales reached $43.3 billion, which makes the organic industry a force to be reckoned with. For comparison, Monsanto brought in just under $15 billion in revenue last year.

Anthem and Cigna are quarreling and could delay their merger. The Wall Street Journal reported that disagreements could delay antitrust approvals, which would make the $48 billion deal possible. The report said the two health insurers accused each other of violating the terms of their agreement announced last July. A deal would create America’s largest health insurer by members.

Tribune Publishing rejected Gannett’s latest $864 million takeover offer, saying the$15 per share in cash was inadequate, and they have a turnaround plan in place. Tribune Publishing, the owner of the Los Angeles Times and the Chicago Tribune, said billionaire Patrick Soon-Shiong invested $70 million in the company, becoming its second largest shareholder. Still, Tribune said it had invited Gannett to an agreement under which the companies could engage in discussions to see whether a transaction was in the best interests of Tribune and Gannett shareholders.

Ares Capital Corp, an investment and finance company focused on mid-sized firms, is buying smaller rival American Capital Ltd in a cash-and-stock deal valued at $3.4 billion to better fill the credit gap created as big banks turn cautious. The deal, which does not include American Capital’s mortgage management unit, comes about five months after American Capital said it would solicit offers. Ares is the biggest BDC, or Business Development Company, in the United States by assets while American Capital, in addition to operating as a BDC, has a large asset management business.

Due to the U.S. crackdown on tax inversions, CF Industries is calling off an $8 billion deal to acquire several European and North American operations from OCI of the Netherlands. The two said that they were unable to restructure the acquisition, which would have created the world’s largest publicly traded nitrogen company, in a way that would be attractive to their shareholders.

Sixteen of the world’s largest banks must face antitrust lawsuits accusing them of harming investors who bought securities tied to Libor by rigging the interest-rate benchmark, a ruling that an appeals court warned could devastate them.

The appellate judges reversed a lower-court ruling on one issue, whether the investors had adequately claimed in their complaints to have been harmed, while sending the cases back for the judge to consider another issue: whether the plaintiffs are the proper parties to sue, in part because their claims, if successful, provide for triple damages that could overwhelm the banks.

About a dozen firms have paid almost $9 billion in fines to resolve government investigations around the world into rigging of the key benchmark. The ruling by a three-judge panel opens the possibility the banks may have to pay billions more. Libor, or the London Interbank Offered Rate, underpins hundreds of trillions of dollars of transactions and is used to set rates on credit cards, student loans and mortgages. It is calculated based on submissions by banks.

In their lawsuits, the plaintiffs claim that beginning in 2007 the banks colluded to depress the Libor rate to minimize the amount they had to pay out on investments linked to the benchmark. The Libor-tied investments included asset swaps, collateralized debt obligations and forward rate agreements. The appeals court overturned a 2013 ruling which said the investors had failed to show that they were harmed in a way that would permit them to sue under U.S. antitrust law. Last year, the U.S. Supreme Court permitted the bondholders to appeal the dismissal of their antitrust claim.

The Second Circuit reinstated the lawsuit today, ruling that the alleged horizontal price-fixing constitutes an antitrust violation, basically the district judge got it wrong by adopting a categorical rule that because the banks were cooperating in setting Libor they could not be violating antitrust rules. That argument is that since banks operate as both borrower and lender in Libor transactions, any conspiracy to gain as a borrower would be offset by losses as a lender. However, there might be another argument: that the banks suppressed Libor during the financial crisis to boost earnings or make their finances appear healthier.

The New York-based appeals court remanded the case so that the lower court could reach the second component of standing for asserting an antitrust injury – whether the bondholders are efficient enforcers of antitrust law; in other words, the lower court could dismiss the case again, for new reasons.

Greece’s parliament has approved a raft of fresh taxes and austerity measures needed to unlock further rescue loans, as the country’s most influential creditors – Germany and the IMF – remain deadlocked over debt relief. “Greeks have already paid a lot, but this is probably the first time that the possibility of these sacrifices being the last is so evident,” Prime Minister Alexis Tsipras told lawmakers. Athens hopes the measures will bolster sentiment ahead of tomorrow’s key Eurozone finance ministers meeting.

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services. The federal lawsuit names Puerto Rico’s Governor and Treasury Secretary as well as an unidentified bank receiver. It argues that amendments give preferential treatment to local creditors at the expense of others in violation of American and Puerto Rican law.

The U.S. will fully lift the decades long ban on sales of lethal arms to Vietnam. Speaking in Hanoi, President Obama said lifting the arms embargo would remove one of the last vestiges of the Cold War, it also opens up non-military markets. Vietnam’s VietJet has agreed to order 100 Boeing 737 MAX 200 airplanes, in a deal worth $11.3 billion based on list prices. Delivery of the planes will run for four years beginning in 2019, and will make the airline one of the fastest growing low-cost carriers in the region.

More than 38 million Americans—the most since 2005—are expected to travel during this year’s Memorial Day holiday period, May 26 through Monday, May 30 – and about 90% are expected to drive.  AAA reports gasoline prices are the lowest they’ve been this time of year since 2005. The national average price is $2.26 for a gallon of gasoline; that’s up significantly from the $1.70 a gallon that regular grade gas hit in February but down 40-cents from the average price last Memorial Day. Prices are expected to inch higher over the next few days, heading into the holiday. Meanwhile, truckers will pay about 50-cents per gallon less for diesel versus last year.

Financial Review

Glitch/Print

Sinclair Noe — July 24, 2015

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

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DOW – 163 = 17,568
SPX – 22 = 2079
NAS – 57 = 5088
10 YR YLD un 2.27%
OIL – .31 = 48.14
GOLD + 9.10 = 1100.50
SILV + .08 = 14.84

Well, this turned out to be an ugly week. The Dow lost 600 points from the high a week ago. The Dow lost 2.8% on the week, dropping below its 200 day moving average. The S&P lost 2.1%; Nasdaq down 2.2%. The Russell 3000 was down 3.1% for the week. Amazon gave back about half of yesterday’s gain. Crude oil hit a 4-month low.

And if you are not quite sure what to make of the markets, that is understandable; they aren’t going up and they aren’t going down, we are in a sideways market; this might be the mother of all sideways markets. The Dow is in slightly negative territory year to date. The Dow has moved on either side of breakeven 21 times so far this year. According to research from Bespoke Investment, no other year has been so fickle, the closest being the 20 times the blue chip index swung in both 1934 and 1994. The S&P 500 went through the first half of the year without moving more than 3.5 percent in either direction.

Hedge funds are holding the first ever bet on a decline in gold prices since the government started collecting the data in 2006. The Commodity Futures Trading Commission shows hedge funds shifted to a net-short position of 11,345 contracts in New York futures and options.

The Federal Reserve accidentally published internal staff five-year forecasts on their website today. Then they pulled the forecasts down. Oops. And when you look at the forecast, it got weirder. The numbers just don’t work. Potential GDP is forecast to run about a half a percent below real GDP for the next 5 years; inflation edges right up to 1.9% but can’t top 2%; interest rates move up on a very slow, very gradual glide path reflecting one rate hike this year and 3 more incremental hikes next year; the unemployment rate drops down to just over 5% and stays there – right at that magical level that many think represents full employment.

And that brings us to the Definition of the Day; confirmation bias is a tendency to search for or interpret information in a way that confirms ones preconceptions, leading to statistical errors.

Now normally we don’t think the economists at the Fed are clueless buffoons but that is not out of the question. It is possible that they intended to leak the forecast. It could be a big prank. Maybe a trial balloon. Hey markets, this is what it looks like when the Fed hikes rates; the economy gets better, we reach full  employment without inflation or volatility of any kind.  The Fed said it was a glitch. Apparently the glitch button is right next to the print button.

Speaking of glitches; Fiat Chrysler is recalling about 1.4 million cars and trucks after Wired magazine published a story about software programmers who were able to take over a Jeep Cherokee being driven on a Missouri highway. Fiat Chrysler already issued a software update. They say no vehicles have been hacked, other than the one; they say they are just recalling cars “out of an abundance of caution”.

Meanwhile, in the world of economic data:
The flash reading of the Markit manufacturing purchasing managers index rose slightly to 53.8 in July from a 20-month low of 53.6 in June. The rebound was led by stronger output and order book growth.

Markit’s Eurozone composite PMI fell to 53.7 this month from June’s four-year high of 54.2. Despite the loss of momentum, “the PMI suggests the Eurozone continues to enjoy its strongest performance seen over the past four years” and “indicates that the economy grew 0.4% in Q2.”

Activity in China’s factory sector contracted at the fastest pace in 15 months in July, suggesting that the world’s second-largest economy is struggling to stabilize and halt a broad slowdown. The flash Markit China PMI dropped to 48.2, the lowest reading since April last year and the fifth straight month under 50 – the level that separates growth from contraction.

So, the recap: China contracting, Eurozone with moderate growth that is slowing, and the US has moderate growth that is improving.

Sales of new single-family homes in the U.S. fell 6.8% in June to an annual rate of 482,000, the slowest pace in seven months. June’s sales pace was up 18.1% from a year earlier. The median price of new homes, meanwhile, fell 1.8% to $281,800 compared with June 2014. The supply of new homes was 5.4 months at June’s sales pace, compared with 4.8 months in May.

For the first half of 2015, volume in U.S. commercial real estate – properties like office buildings, shopping malls, and apartment complexes priced above $2.5 million – grew 36% compared to the same time last year, According to data compiled by Real Capital Analytics a total of 15,610 of such commercial properties changed hands with an average transaction price of $16.3 million for a total of $255 billion in transactions, which tops 2006.

Following downgrades by major credit rating agencies, UBS is backing away from its Puerto Rico bond funds, warning clients that they can no longer use them as collateral. By doing so, the bank is effectively admitting that it sold a bad product and that the funds are too risky for itself and average investors. Puerto Rico has been looking to restructure and postpone bond payments since dropping a bombshell on holders of its $72 billion debt in June.

The State-Boston Retirement System filed a class action lawsuit against 22 financial companies that have served as primary dealers of US Treasury securities. The suit filed in federal court, alleges a conspiracy to manipulate Treasury auctions. The suit names Goldman Sachs, JPMorgan Chase and Bank of America’s Merrill Lynch among the other usual suspects. The complaint alleges the banksters illegally profited on the sale of Treasury bills, notes and bonds at investors’ expense, by using chat rooms, instant messages and other means to swap confidential customer information and coordinate trading strategies in the roughly $12.5 trillion Treasury market. This enabled the banks to inflate prices on Treasuries they sold to investors in the pre-auction “when issued” market, and deflate prices when they bought Treasuries to cover their pre-auction sales, violating antitrust laws.

The pension fund said its “expert economists” observed wide gaps between when-issued and auction prices around December 2012, but that these gaps narrowed significantly as the Department of Justice and other regulators began probing alleged manipulation of the London interbank offered rate. At that point the banksters clearly felt they were under scrutiny, and they stopped their manipulation.

Remember when an Amtrak train derailed in Philadelphia back in May? It shut down train traffic on the eastern seaboard for a couple of days. The Transportation Department is now investigating whether 4 airlines intentionally raised prices following the incident. That would be price gouging, and very ugly.

U.S. authorities have initiated investigations into whether banks should have raised alarms about money flows linked to alleged corruption at soccer’s governing body. Prosecutors have questioned lenders, including HSBC, Standard Chartered, Delta National Bank and Trust Company, in connection with the FIFA scandal. The probes could also create a headache for the financial industry over its money-laundering controls, which are increasingly under the regulatory microscope.

Anthem has agreed to buy Cigna in a deal valued at $54 billion, wrapping up a year of negotiations and creating the largest health insurer in the US. Cigna shareholders will get $103.40 per share in cash and 0.51 Anthem shares. The deal comes three weeks after Aetna struck a deal to buy Humana for $37 billion and is part of an industry-wide consolidation that could result in the Big 5 health insurers merging into the Big 3. The deals are still subject to regulatory approval.

AT&T’s proposed $48 billion purchase of DirecTV has cleared its final regulatory hurdle after the FCC voted to approve the merger. At least three of the five commissioners voted in favor of the deal, which will combine the country’s No. 2 wireless carrier with the largest satellite-TV provider.

Meiji Yasuda Life Insurance has agreed to acquire US insurer StanCorp Financial Group for about $4.8 billion, joining several other Japanese insurers that are expanding abroad to counter the shrinking domestic market.

After nearly 30 years of development and testing, the world’s first malaria vaccine – called Mosquirix – has gotten approval from European drug regulators. The shot, which was developed by GlaxoSmithKline in partnership with the PATH Malaria Vaccine Initiative, is expected to be endorsed by the European Commission within a couple of months. Malaria infects around 200 million people a year and killed an estimated 584,000 in 2013.

Financial Review

Milk and Cookies. Enjoy While You Can.

Sinclair Noe — February 25, 2015       

 

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

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DOW + 15 = 18,224
SPX – 1 = 2113
NAS – 0.98 = 4967
10 YR YLD – .02 = 1.97%
OIL + 1.75 = 51.03
GOLD + 2.90 = 1205.20
SILV + .22 = 16.64

Another record high for the Dow Industrial Average. These are the days of milk and cookies.

Federal Reserve Chairwoman Janet Yellen continued her semi-annual Humphrey-Hawkins testimony today in front of the House Financial Services Committee. The prepared opening remarks were identical to the testimony yesterday in the Senate. The Q&A session became a bit testy today as Yellen was accused of political bias. Republicans questioned Yellen about an October speech on inequality, just before the midterm elections, as evidence she was leaning toward the Obama administration and Democrats. Methinks they doth protest too much. There were also calls for an audit of the Fed, historically a nonstarter with Federal Reserve Chairs. It made for generally poor political theater.

The important part of the testimony was fairly easy to find. Keep in mind the Fed has a dual mandate of maximum employment and price stability. So the key statement from Yellen was when she said: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

So, higher rates will come with higher inflation, indicating that disinflation and deflation are still a concern for now. The Fed believes that inflation is going to move lower before it moves higher because of oil prices and import prices. As for the timing of when we will see inflation and possible interest rate hikes, Yellen said: “We expect inflation over the medium term — the next two or three years — to move up to our 2% target.”

Greek stocks and bonds surged yesterday, with Athens’ main stock exchange closing almost 10% higher on the day after Eurozone financial ministers approved a four-month extension to the country’s bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released.

The German government is now selling five-year bonds with a negative yield. That means investors will pay to lend money to the country for five years. Germany auctioned 3.28 billion euros ($3.72 billion) of bonds due in April 2020 at an average yield of negative 0.08%.

Today the Senate moved to avert a shutdown of the Department of Homeland Security. The upper chamber voted 98-2 on a procedural hurdle that would pave the way for a “clean” funding bill to be brought to the floor. It remains unclear when the Senate will vote on final passage on the funding bill. If the Senate passes a clean bill, it would then move over to the House, and it is uncertain if House Speaker John Boehner would allow a vote on such a bill. DHS funding runs out in 2 days.

The White House says President Obama would veto a House Republican effort to rewrite the federal “No Child Left Behind” law. The House bill is expected to pass the chamber later this week. Senate Republicans are working on their own version of No Child Left Behind, which expired in 2007.

New homes sold at annual rate of 481,000 last month, essentially unchanged from December. The Commerce Department reports sales were 5.3% higher in January compared to a year earlier; this despite a drop of 51% in the Northeast, where bad weather kept buyers away. The median price for a new home was up 9% from a year ago.

For all the talk about how lower oil prices would reduce supplies, it hasn’t happened yet. Just the opposite. According to EIA weekly data released today, crude oil in storage in the US jumped 2%, or 8.4 million barrels, to 434 million barrels. Oil storage is bursting at the seams and inventories remain at their highest levels in at least 80 years. The rate of growth of production is slowing slightly but production continues at the highest rate since 1972, for now.

Southwest Airlines took 128 of its jets out of service late Tuesday, or roughly one-fifth of its fleet, after informing federal regulators that it “inadvertently omitted” required maintenance checks on the planes’ backup hydraulic systems. Dozens of flights were immediately canceled as a result, while officials from Southwest and the FAA discussed plans to complete the maintenance checks and return the planes to service.

American Express will raise interest rates on about one million customers. Annual rates will climb by an average of 2.5 percentage points to at least 12.99%. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles.” Typically banks make large scale changes in response to broader shifts in interest rates or risk.

Anthem, which earlier this month reported that it was hit by a massive cyberbreach, has concluded that the personal information of 78.8M customers was exposed in the attack, including 8.8M-18.8M people who were members of independently run Blue Cross Blue Shield plans. Anthem still believes the hacked data was restricted to birthdays and Social Security numbers, among other data, but doesn’t appear to have involved medical information or financial details.

Another company that had problems with cybersecurity is Target, but it doesn’t seem to have hurt their most recent results.  Target saw a higher-than-expected jump in its fourth-quarter earnings and is forecasting modest growth for the first quarter of 2015. Exiting Canada, as the company recently announced it will do, will cost it $5.1 billion.

Earlier this month Wal-mart announced they would be paying workers at least $9 an hour, increasing to $10 an hour next year. Wal-Mart is of course the largest retailer, and we thought this might ripple out through other retailers. Sure enough. T.J. Maxx, Marshalls and other chains owned by TJX Cos. will be increasing the pay of US workers to at least $9 an hour beginning in June, increasing to $10 an hour next year.

Now for today’s edition of “Banks Behaving Badly”; yet another foreign currency scandal, Reuters reports that BNY Mellon is in settlement talks with the DOJ and New York AG over claims that it defrauded clients in foreign exchange transactions. The bank faces several lawsuits, including class actions, stemming from allegations that it misled clients about how it determined currency exchange rates for certain transactions.

HSBC has a “terrible list of problems,” so says the chairman of HSBC, Douglas Flint. And he admits that he couldn’t rule out further scandals emerging at the bank along the same lines as the tax evasion schemes at HSBC’s Swiss private bank, but he said: “I sincerely hope there are no more skeletons.”

A British parliamentary committee questioned Flint and CEO Stuart Gulliver after the tax evasion schemes were revealed by several news organizations. The news story only came to light 4 years after a former HSBC employee turned over bank files. Some of the clients whose details HSBC’s Swiss operations were sheltering included arms dealers and politicians who were part of discredited regimes, like that of Bashir-al-Assad in Syria. Earlier, when asked why some HSBC clients reportedly came to Switzerland with wads of cash, Flint was lost for words. Still to be determined is why the bank should not be broken up.

Move over Alibaba, you could have company next year. Postal Savings Bank of China, the country’s sixth largest lender by assets, is seeking an initial public offering in 2016 that could make history by bringing in some $25 billion .

In a new S-1, GoDaddy declared plans to list on the NYSE under the symbol “GDDY” and announced IPO underwriters including Morgan Stanley, JPMorgan, Citi and others. GoDaddy is a fast-growing company which posted revenue of $1.4 billion in 2014, up 23% from 2013 levels, according to the filing. But it’s also a big money loser. The company posted a loss of $143.3 million in 2014, which is the fourth annual loss in a row.

Financial Review

Goodnight and Good Luck

Sinclair Noe — February 11, 2015  

 

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

DOW – 6 = 17,862
SPX – .06 = 2068
NAS + 13 = 4801
10 YR YLD un = 1.98%
OIL – .75 = 49.27

President Obama has asked Congress for formal authorization to fight the Islamic State that would prohibit the use of “enduring offensive ground forces” and limit engagement to three years. The proposed resolution says Islamic State “has committed despicable acts of violence and mass execution.” Its militants have killed thousands of civilians while seizing territory in Iraq and Syria in an attempt to establish a hub of jihadism in the heart of the Arab world. Don’t expect a quick vote by Congress, maybe something in March, maybe just more talk.

We keep hearing that ISIS is growing, and one way they recruit jihadists to their cause is through slick websites and social media. So, you might be wondering why the government doesn’t just close down those sites. I don’t know, but today, the hacktivist group Anonymous has launched a massive cyber-attack against ISIS. A list of more than hundred Twitter and Facebook accounts suspected to belong to Islamic militants has been released by Anonymous. Twitter has already suspended more than 1500 ISIS accounts since the group released the first list in June, 2014 and dozens of militant recruiting websites were knocked offline using collective DDoS Attack. Thousands of Twitter accounts associated with ISIS are still active and spreading jihadist propaganda, but Anonymous says this is just the beginning.

The federal government ran a bigger deficit in January, pushing the imbalance so far this budget year up 6.2% from the same period a year ago.  The Treasury Department said the deficit for January stood at $17 billion compared to $10 billion a year ago.

Home prices moved higher across most of the country. According to the National Association of Realtors, the median price of an existing single-family home rose in the 4^th quarter from a year earlier in 86% of the 175 metropolitan areas measured. Twenty-four areas had price gains of 10% or more, up from 16 regions in the third quarter. Prices declined in 24 areas. The median was $208,700, up 6% from the fourth quarter of 2013. NAR reports Phoenix home prices increased 3.9% over the past year to a median price just over $200,000.

Finance ministers from across the Eurozone have gathered in Brussels today to try to figure out what to do about Greece. The newly elected Greek government is looking for relief from austerity measures. Those restrictions were a condition of Greece’s being granted a total of 240 billion euros, or about $272 billion, in loans from its European neighbors and the International Monetary Fund since 2010. Greece still needs to receive its next loan installment, €7.2 billion, or otherwise bridge the financial gap, to keep from defaulting on its international debt payments in coming months.

Reckless lending and reckless borrowing went hand in hand in the years leading up to the euro crisis. Greek officials did indeed use financial tricks developed by Wall Street to mask the size of budget deficits. Still, even before Greece joined the eurozone, it was clearly living far beyond its means. International lenders knew or should have known this; they were not defrauded so much as willfully blind.  The bailout of Greece was not a rescue of the country, but rather a rescue of the creditors; it was a bank bailout. The Greek government only received 11% of the bailout money to date; the rest went to creditors, or who knows where.

Greece now has more debt than it can ever repay, and lenders share some of the blame for this.  Spending cuts have only resulted in destroying the economy. The Greeks understand; that’s why they voted for Syriza; that’s why there are tens of thousands of Greeks protesting in the streets of Athens today. Unlike many countries, the protestors are not protesting against their government, they are protesting for their government to fight against the creditors. At some point the Euro Union will have to let Greece out of debtors’ prison. At a certain point you have to stop squeezing countries that are in the depths of a depression. And ultimately, some form of forgiveness benefits creditors as much as it helps debtors. Greece is well past the point where debt forgiveness could be considered reward for bad behavior.

By the way, the finance minister for Greece, Yannis Varoufakis, considered by some to be a bit radical, but also well known for research in game theory. So, how about a little game of chicken? Good luck.

Ten U.S. states have sent a letter to Anthem complaining that the company has been too slow in alerting clients that they were victims of a massive data breach disclosed last week and claiming the health insurer should commit to reimbursing customers for losses during the lag time.

The FBI is examining how fraudulent tax returns were filed in 19 states through Intuit’s tax-preparation software TurboTax and whether a computer data breach allowed access to personal information. Intuit halted e-filings of state returns last Friday after spotting criminal attempts to get refunds through its systems, but resumed filing after steps were taken to combat the activity.

A federal judge has approved the IRS issuing summonses requiring certain companies to hand over information about US taxpayers who used Sovereign Management and Legal for offshore accounts. The companies include FedEx, DHL, UPS, Western Union, The Federal Reserve Bank of New York, and HSBC. This could get interesting.

Apple has plenty of cash on the books, but they want more; so, they’re issuing Swiss bonds. For Apple, the lure of issuing in Swiss francs is clear: Swiss government yields are negative as far out as 2027, with its 10-year government bond yielding negative 0.09%. Apple’s strong brand and high credit ratings—Aa1 from Moody’s Investors Service and AA+ from Standard & Poor’s—should make it an attractive proposition for yield-starved investors who have Swiss currency to put to work. That will make any funding ultracheap.

What will Apple do with the extra cash? Activist investor Carl Icahn has a suggestion: more dividend dollars and a few less Apple shares. This is a common theme on Wall Street; according to the Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54% of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4% of GDP, to prop up their share prices by repurchasing their own stock. Last year’s buybacks were about 3.3% of market capitalization. Since 2004, stock buybacks totaled $6.9 trillion, and that must surely skew our understanding of earnings.

Apple, which began playing with a record valuation of $700B during midday trading in November, ended the day yesterday at $710 billion. The landmark comes just two weeks after Apple posted the largest quarterly net income of any public company in history. Apple will also be launching a new energy project, partnering with First Solar on an $850M solar farm in California.
The deal will supply enough electricity to power all of Apple’s California stores, offices, headquarters and a data center. Apple will get 130 megawatts, enough to power 60,000 California homes. It’s the biggest-ever solar procurement deal for a company that isn’t a utility, and it nearly triples Apple’s stake in solar.

But it’s not the biggest solar project in California, not by a long shot.

Nearly 4,000 acres of desert near Desert Center California have been converted into a massive solar farm. The Desert Sunlight Solar Farm has been running since December and it was officially dedicated on Monday. The 550-megawatt farm is the largest on public lands managed by the federal Bureau of Land Management. It will provide enough energy to power more than 160,000 average California homes annually. Desert Sunlight was developed by First Solar of Tempe.

First Solar received $1.46 billion from the U.S. Department of Energy, a partial loan guarantee funded by a group of private investors, to finance the project. Pacific Gas & Electric Company and Southern California Edison already have agreed to purchase power from Desert Sunlight for the next two decades.
Before 2009 no solar projects had been permitted on public land. Today, there are 29 permitted commercial-scale solar projects throughout the Southwest. Desert Sunlight is the sixth solar project to come online, and eight more are under construction.

Desert Sunlight is the world’s largest solar power plant, but just slightly. The Topaz solar project in San Luis Obispo County, Calif. — which, like Desert Sunlight, was built by Arizona-based First Solar — also has a capacity of 550 megawatts. But the desert has more abundant sunlight than San Luis Obispo County, so Desert Sunlight will actually generate more electricity than Topaz.

It’s an open question, though, whether future solar projects will be anywhere near as big as Desert Sunlight. Developers have been gravitating toward smaller solar farms, which are easier to build and usually have a smaller environmental impact.

One major obstacle for solar development has been the looming expiration of a 30% federal investment tax credit, which is scheduled to fall to 10% at the end of 2016. Another challenge for solar energy developers is that California and other states are already on track to meet increased requirements for renewable energy generation. But the outlook may be more positive after Gov. Jerry Brown in his inaugural speech last month called for half of the state’s power to come from renewable sources by 2030, up from the previous goal of 33% by 2020.

And finally, the Powerball lottery is up to almost $500 million, making it one of the top payouts ever. Actually, the cash payout would be about $370 million, and then you would have to cut taxes out of that. Still, you would be left with a healthy sum. Playing the lottery is a long shot, and it really doesn’t make much sense. But if you are going to play, might as well play when the payout is big. And for a couple of bucks, you can enjoy your own personal fantasy of how you might spend those millions; that’s got to be worth something. Your odds are 175-million to one. If you buy 2 tickets, each ticket will still be 175-million to one odds. It’s a bad bet. Good Luck.