Financial Review

Sleepwalking Higher

Sinclair Noe — September 7, 2016

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DOW – 11 = 18,526
SPX -0.32 = 2186
NAS + 8 = 5283
10 Y – .01 = 1.54%
OIL + 1.34 = 46.80
GOLD – 4.40 = 1346.00

World stocks hit their highest in more than a year and the dollar fell against the yen. Emerging market shares led the charge, touching their strongest levels since July 2015. European shares reversed early losses. The Stoxx 600 index edged up 0.1 percent towards eight-month highs hit on Monday, led by a rise of almost 1 percent in oil and gas shares.

Euro zone government bond yields fell as some investors bet the weak U.S. data, which followed weaker-than-expected jobs numbers on Friday, would pressure the European Central Bank to ease monetary policy further. The ECB meets tomorrow. While US markets were mixed, the Nasdaq Composite hit another record high close.

In a follow-up to last Friday’s Jobs Report, the Labor Department released the JOLT survey, or Job Openings and Labor Turnover, which provides detail on the labor market. Job openings jumped to 5.87 million openings, an all-time high, while hires increased to 5.23 million from 5.17 million in June. The number of people quitting jobs voluntarily was flat at 2.98 million, but that’s still up substantially from the depths of the recession, signaling more worker confidence in the ability to find another job.

The Fed published its Beige Book, an anecdotal look at economic conditions around the country, designed to provide guidance two weeks ahead of the next FOMC policy meeting. Overall, the Beige Book had the same modestly positive tone seen in the last few surveys. The latest report gave no hint of a second-half surge in growth or any reason for urgency to raise interest rates. Six Fed districts reported tight labor markets but overall “wage pressures remained fairly modest.” Three districts reported businesses are cautious ahead of the elections.

It “makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later,” San Francisco Fed President John Williams announced late Tuesday. He also said the economy was in “good shape,” predicting unemployment, now at 4.9%, to fall to 4.5% in 2017 and inflation to rise to the Fed’s 2% target in the next year or two.

Richmond Fed President Jeffrey Lacker and Kansas City Fed President Esther George testified at a congressional hearing this morning. Lacker said, “It looks like the case for a rate increase is going to be strong in September.” George said during the hearing she believes the US labor market is at or near full strength. We keep hearing from Fed officials that a September hike is possible but nobody seems to believe what we hear, in part because the data doesn’t seem to support a hike.

British manufacturing fell sharply in the wake of Brexit. Data from the Office for National Statistics showed manufacturing production fell 0.9% in July, missing expectations of a 0.4% decline. While the reading was disappointing, it should be noted that production fell 0.2% in June and 0.6% in May.

Today is an Apple Event Day. I know you’re all excited, so here are the details: the iPhone 7 has two camera lenses (wide angle and telephoto), it does not have a headphone jack but it will ship with a headphone adapter, they also introduced their own wireless headphone, it is water resistant – so go ahead and toss your $649 phone into 50 meters of water without trepidation.

If nothing else, the iPhone 7 packs a punch. With 256 gigabytes of storage for its most powerful version, Apple’s new iPhone has 64 times the amount of space as the company’s original smartphone nine years ago. Increased storage is a critical piece in convincing consumers to upgrade, as anyone with a 12 gig iPhone 5 can attest.  They also unveiled an iPhone 7 Plus for people who don’t want a phone that can fit in their pocket; plus, an Apple Watch 2 for some reason.

Separately, Ireland’s parliament today debated the government’s decision to appeal the €13-billion-euro tax ruling against Apple by the European Commission. They will collect the tax but they will hold the revenue in escrow while they appeal the decision.

South Korea’s Hanjin Shipping has won a temporary order from a U.S. judge extending bankruptcy protections so its vessels can dock at American ports without fear creditors will try to seize its ships. The world’s seventh-largest container carrier and its clients are scrambling to move an estimated $14 billion worth of cargo off ships that are no longer operating normally in the wake of its collapse last week.

More than half of Hanjin’s ships have been blocked from docking at ports and denied service from lashing firms on fears they will not be paid while some vessels have been seized by creditors. With expectations high that Hanjin will eventually be liquidated, there is little clarity on just how the problem of cargo stranded ahead of the peak-year end shopping season will be resolved.

Poland is seeking formal U.S. approval to buy eight Patriot missile defense systems from Raytheon, marking a key move toward closing the estimated $5 billion deal. If cleared, the country will become the 6th NATO Patriot country and the 14th Patriot partner nation. Raytheon has agreed to perform at least half the value of the work in Poland.

Bill Ackman’s Pershing Square hedge fund has taken a 9.9% stake in Chipotle Mexican Grill, the once high-flying company battered by food-safety issues. Pershing Square says the stock was undervalued and attractive. Chipotle shares have dropped about 40% over the past year. Ackman also left the board of Canadian Pacific on Tuesday, marking the end of a four-year tenure that helped overhaul the ailing railroad company.

Apache Corp. stock was among the top gainers today after the oil and gas company revealed an “immense” oil and gas reserve in west Texas. Apache estimated that its more than 300,000 contiguous acres in the region hold about 3 billion barrels of oil and 75 trillion cubic feet of natural gas. It called the field Alpine High.

New York has opened a probe into whether Mylan broke antitrust law under its EpiPen4Schools program, which gives many schools the devices for free, but may have barred institutions from buying rival products for a year. Meanwhile, new reports suggest Mylan pays no more than $30 per EpiPen, while some patients are forced to pay a little over $600 for a two-pack of the lifesaving medication.

Department of Justice prosecutors are considering criminal charges against HSBC related to conduct on its foreign-exchange desk, possibly upending an earlier deal that let the bank avoid prosecution. The new investigation could lead to a step that has often been threatened but rarely taken: prosecutors tearing up a deferred-prosecution agreement if a company fails to comply with the reform plan laid out by the Justice Department. HSBC is essentially on probation: It admitted in 2012 that it helped Mexican drug cartels launder money and did business with Iran and other sanctioned nations.

To avoid charges, it signed the so-called DPA, which required it to improve its internal controls and submit to an outside monitor. If HSBC is found to have broken the terms of the deferred prosecution, then the bank could find itself pulled back into the money laundering and sanctions case that it thought it had put behind it four years ago; prosecutors could invoke a section of the deal that says HSBC could be held responsible for the conduct it admitted to in 2012.

Prosecutors will consider many factors before deciding whether to file a criminal charge against the bank in the currency case, including the severity of the conduct on the foreign-exchange desk and the extent to which the bank moved to address it. A significant argument against charging the bank is that the foreign-exchange conduct on which the charge would be based appeared to be a one-time event that has not been linked to a wider pattern of behavior. Also, the conduct on the foreign-exchange desk predated the 2012 agreement.

Last year, the Justice Department voided a similar deferred prosecution agreement with UBS Group after the bank acknowledged unlawful conduct on its foreign-exchange desk. In 2012, UBS signed a non-prosecution agreement related to accusations that it and other banks attempted to rig benchmark Libor interest rates that affected trillions of dollars of derivatives and loans. But UBS was granted immunity because it self-reported the forex rigging, so…

The nation’s largest investment bank is barring its top employees from contributing to certain political campaigns. The new rules, which went into effect last week, prohibit partners at Goldman Sachs from donating to politicians running for state or local office, or to state officials who are seeking federal office. That applies to Indiana Gov. Mike Pence, Trump’s running mate, which means that the Goldman Sachs partners can’t contribute to the Republican ticket.

The policy, which was spelled out in a memo obtained by The Associated Press, is meant to remove any implication of a “pay for play” scandal. Four years ago, the bank paid $12 million to settle charges that a Boston-based banker had a bond underwriting business in the state while contributing funds to and working for the campaign of Massachusetts gubernatorial candidate Tim Cahill.

The memo specifically highlights the Trump-Pence ticket – and Super PACs supporting the Republicans – as a campaign to which the partners at the New York-based firm can’t donate. But the rules do not apply to the Democratic ticket, since neither Hillary Clinton nor her running mate, Sen. Tim Kaine, are currently state officeholders, though Kaine is a former governor. The new rules apply to 467 Goldman partners and not the approximately 30,000 other employees.

FINANCIAL REVIEW

Say Cheese

Sinclair Noe — January 15, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW – 106 = 17,320
SPX – 18 = 1992
NAS – 68 = 4570
10 YR YLD – .06 = 1.77%
OIL – 2.28 = 46.20
GOLD + 33.50 = 1263.60
SILV + .11 = 17.06

After going through all of 2014 without a losing streak of more than three days, the S&P 500 today completed its second slide of five straight days. The benchmark gauge is down 3.4 percent over the past five days.

For the past 3 years the Swiss have kept their currency, the Swiss franc, from getting too strong; they imposed a cap to keep the euro from trading below 1.20 francs. In early 2010 one franc was less than 0.7 euro. By the middle of 2011 the franc was nearly at parity against the euro, a massive move in a very short period. As the Eurozone experienced economic strife, Switzerland was calm and offered a safe haven. As money poured in, the franc became more and more expensive; which means that things made in Switzerland became more expensive when the Swiss exported. So, they capped the franc. That basically involved printing more francs and buying more euros.

Fast forward to 2015, and the Eurozone is once again experiencing economic strife; money is once again pouring into Switzerland as a safe haven, and after 3 years the Swiss just threw up their hands and said they had enough; it didn’t make sense for the Swiss National Bank to keep on an endless path of buying more and more euros just to keep the currency down, and there was probably some concern that they had too many euros, which might be a liability. So, they removed the cap, without warning. It was quite the surprise.

What does it mean? Well the Swiss franc spiked a whopping 30 percent against the euro. So, it you were planning a vacation to Zurich, it just got more expensive; for many people in Europe who have mortgages with Swiss banks, their mortgage payments just went up; if you were planning to buy a Swiss watch it just got more expensive; same for Swiss chocolates; and if you need a corkscrew that can also work as a screwdriver, pliers, wrench, and knife – that will cost you more. The Swiss stock market fell about 11%. And if you were invested in a company such as Swatch, Nestle, Novartis, or Roche – you just got hammered. Sorry. And if you were trading in the currency markets and you were short the franc and long the euro – please step away from the ledge.

Thursday’s decision to call time on its efforts to keep the euro from trading below 1.20 francs came amid mounting speculation that the European Central Bank will next week back a big government bond-buying program that will put more euros in circulation, diluting their value. That expectation has seen the euro face intense selling pressure in currency markets, particularly against the dollar. The euro has fallen to nine-year lows against the dollar and below its launch rate in 1999. As a result, the cost for the Swiss central bank of constantly defending the peg by buying euros or selling francs has been rising.

The SNB clearly expected to see a huge surge of inflows in the week ahead and saw little reason to provide these buyers of francs with an artificially cheap rate. Switzerland’s immediate neighbors are countries in the Eurozone. The franc’s contiguous boundaries are with the euro. Switzerland’s central bank worried about inflows of hot money from Russia, either directly or via the euro. Think of it this way: yesterday a Moscow-based oligarch could move money from ruble to euro. Then he could move it from euro to Swiss franc, and the Swiss government and Swiss National Bank would maintain a 1.2 currency peg. That is now over.

In addition to making Swiss exports more expensive, a stronger currency makes imports into Switzerland cheaper, further dampening prices already-subdued by big drops in oil prices and other commodities.

In an effort to contain the franc’s appreciation and limit any damage to the Swiss economy, the central bank on Thursday also lowered a key interest rate — what it charges commercial banks to deposit at the bank — to minus 0.75 percent from minus 0.25 percent. That’s right, banks have to pay the Swiss central bank to park reserves. The hope is that it dissuades banks from parking their cash at the national bank and instead possibly invest it. That might not work; the Swiss franc is still considered a safe haven for investors. The franc’s value will remain sensitive to developments around the world, including the crisis in Russia and the oil market slump.

Switzerland is a small country. For most people, the Swiss surprise really is not a huge event, but today’s move confirms that deflation is a clear and present threat to the global economy.

If you were planning a trip to Davos Switzerland for the World Economic Forum, we can save you some money. The WEF 2015 Global Risks Report was published today; geopolitical issues are considered to be the biggest threat to global stability over the coming decade. According to the WEF’s lead economist, “Twenty-five years after the fall of the Berlin Wall, the world again faces the risk of major conflict between states,” and the means to wage such conflict are broader than ever, whether through cyberattack, competition for resources or sanctions and other economic tools. “Addressing all these possible triggers and seeking to return the world to a path of partnership, rather than competition, should be a priority for leaders as we enter 2015.” When asked to assess risks in terms of their potential impact, the nearly 900 experts surveyed by WEF found water crises as the greatest threat to the world.

US producer prices in December recorded their biggest fall in more than three years on tumbling energy costs while underlying inflation pressures were muted. The Labor Department said its producer price index for final demand declined 0.3 percent, the biggest drop since October 2011, after falling 0.2 percent in November. A sustained plunge in energy prices is keeping a lid on inflation throughout the pipeline, from bills for businesses to the consumer’s cost of living.

The number of Americans filing claims for unemployment benefits increased to a four-month high last week.

Consumer confidence increased last week to the highest level since mid-2007 as steady declines in gasoline prices and more hiring boosted Americans’ attitudes about the economy. The Bloomberg Consumer Comfort Index rose to 45.4 in the period ended January 11, from 43.6 the week before.

Bank of America, the second-largest US bank by assets, reported a 14 percent fall in quarterly profit as a decline in sales and trading revenue more than offset a big drop in operating expenses. Revenue from bond trading, which is part of the bank’s sales and trading business, plunged 30 percent to $1.46 billion.

Citigroup reported its fourth-quarter profit plunged as the bank was hit by large legal charges. The bank reported a profit of $350 million–which includes $3.5 billion in previously disclosed legal and repositioning charges–compared with a year-earlier profit of $2.46 billion. On a per-share basis, Citigroup reported a profit of six cents. Analysts had expected earnings of nine cents a share including the charges. On Wednesday, a provision — drafted by Citigroup — to repeal part of the Dodd-Frank financial reforms (Section 716) was added by House Republicans to their spending bill. On Thursday, Citigroup led the charge to persuade enough Democrats to vote for that bill. The repeal of Section 716 stayed in the spending bill only because Wall Street brought so much pressure and influence to bear. Apparently buying politicians is cheaper than paying fines and settlements for violating the law. Of course, I still maintain that not breaking the law is the best solution, but clearly that is not under consideration.

Bank of America slipped 5.2 percent to the lowest since August and Citigroup dropped 3.7 percent.

After the close, Intel reported fourth quarter net income rose to $3.66 billion, or 74 cents per share, for the quarter ended Dec. 27, from $2.6 billion, or 51 cents per share, a year earlier. Revenue rose to $14.7 billion from $13.8 billion. Intel forecast first-quarter sales that may fall short of analysts’ estimates because PC sales are down.
We’re starting to see some oil companies respond to lower oil prices. Schlumberger, the oilfield services provider, announced it will cut 9,000 jobs, even as they reported a 6 percent rise in quarterly revenue. Revenue rose to $12.64 billion from $11.91 billion. Net income attributable to the Houston, Texas-based company fell to $302 million, or 23 cents per share, in the fourth quarter ended Dec. 31, from $1.66 billion, or $1.26 per share, a year earlier.

Apache says it will also lay off several hundred employees, cutting 5% of its workforce this week. The move signals one of the first major workforce cuts at an American oil producer after the recent drop in crude prices. Apache had been profitable until the third quarter of last year, when it reported a $1.2 billion loss.

BP is planning to cut 300 jobs from its 4,000-strong North Sea business following a review of its operations. The U.K.-based oil major, which has been downsizing since the Deepwater Horizon oil spill in 2010, said it had long planned the cuts, but was speeding up the process due to falling oil prices.

This afternoon, there was more news on BP. A US District judge has ruled that the company dumped 3.19 million barrels of oil into the Gulf of Mexico in 2010. Today’s ruling on the spill’s size sets the stage for a trial next week at which the judge will determine the amount of the fines, based on the law’s provision for as much as $4,300 per barrel released and factors such as what BP did to minimize or mitigate the effects of the disaster. The court rejected the government’s 4.2 million barrel estimate of the spill size, decreasing the potential maximum fine from $18 billion to a maximum fine of $13.7 billion.