Financial Review

Show Me the Data

Sinclair Noe — November 12, 2015

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DOW – 254 = 17,448
SPX – 29 = 2045
NAS – 61 = 5005
10 YR YLD – .02 = 2.32%
OIL – 1.28 = 41.65
GOLD – 1.70 = 1085.50
SILV – .11 = 14.34

Crude oil fell below $42 a barrel, its lowest price since August, while copper, gold and silver reached six-year lows. Energy, mining and metals companies fell. Caterpillar, Exxon Mobil and Chevron had the biggest losses in the Dow Jones Industrial average. The Dow and the Standard & Poor’s 500-stock index are now negative for the year.

The Energy Information Administration just released its latest weekly look at the US oil market, and it shows that US crude stockpiles are just 3 million barrels off the record 490 million barrel record in April.  Crude stockpiles grew by 4.2 million barrels last week. A private report released Wednesday had shown an even larger increase. The biggest factors have been a slowdown in demand, and China’s slowdown is a big part of that equation. Meanwhile, oil producers just keep pumping; US shale production has slowed and will likely slow more, even though it remains stubbornly high; OPEC refuses to cut production and the more oil prices fall, the faster they pump.

Prices for copper and other commodities were slumping as investors anticipated that the dollar would become even stronger. The price of silver has fallen for nine consecutive days and is down 10 percent since late October. The price of copper fell 2 percent to $2.17 a pound. It is down 22 percent this year, hitting six-year lows. The copper producer Freeport-McMoRan dropped 4.5 percent.

We had a couple of reports on the labor market this morning. First up, initial claims for state unemployment benefits were unchanged at a seasonally adjusted 276,000 for the week ended Nov. 7. Claims are not too far from levels last seen in the early 1970s. They have now held below the 300,000 threshold for 36 consecutive weeks, the longest stretch in years. Claims below this level are usually associated with a healthy jobs market.

Next on deck, the JOLT survey, Job Openings and Labor Turnover, showed job openings rose in September to the second-highest level in the history of the series, going back to 2000. Job openings rose to a seasonally adjusted 5.53 million from 5.38 million in August, though that’s short of the 5.67 million peak reached this summer. The quits rate was 1.9% for the sixth consecutive month, which is slightly below the 2.1% rate before the downturn in 2007.

The quits rate is important because someone who is working, needs to quit their current job to take a new job, which in theory anyway is a better job. So, why aren’t we seeing a higher quits rate in light of more job openings? One reason is that employers aren’t offering high enough pay to fill these spots. Another possible reason is that employers can’t find skilled workers to fill the job openings. The hiring rate ticked down a notch to 3.6%.

Recent jobs data gives the Federal Reserve a reason to boost interest rates from near zero, where they have been since 2008.Today we heard speeches from Janet Yellen and four regional Fed presidents, as well as Vice Chairman Stanley Fischer this afternoon. St. Louis Fed President James Bullard said this morning that he is still concerned about inflation. Bullard is a known hawk. The most important thing Bullard said in his speech titled “Permazero” is that the US may be entering a permanent period of lower inflation and interest rates. But he still wants to raise rates. Welcome to Fedspeak 2015.

But most of the communication was straightforward, even if the arguments were, at times convoluted. Federal Reserve officials generally said that rates will go up, probably in December and they stressed that policy should be tightened only gradually after interest rates are increased. They have now done everything short of ringing bells and handing out engraved invitations.

Still, the International Monetary Fund published a paper today saying not so fast. In a report prepared for the upcoming Group of 20 meeting, the IMF said spare economic capacity and very low inflation justified keeping monetary policy loose in most major advanced economies. The IMF wrote: “The FOMC decision should remain data-dependent, with the first increase in the federal funds rate waiting until continued strength in the labor market is accompanied by firm signs of inflation rising steadily toward the Federal Reserve’s 2 percent medium-term inflation objective.” And the IMF has a point. The Fed may be anxious to raise rates but for all their talk they haven’t rolled out the data to back that position.

Meanwhile, ECB President Draghi told members of the European Parliament in Brussels that signs of a turnaround in low inflation “have somewhat weakened.” Low annual inflation – currently zero in the 19 countries that use the euro currency – points to weak demand and makes it harder for indebted companies and countries to recover. The ECB is purchasing $1.2 trillion in bonds with newly printed money through September, but inflation remains low. Draghi said at the ECB’s last policy meeting on Oct. 22 that the bank would review whether more stimulus was needed. The euro dropped on Draghi’s remarks.

Angry Greeks, fed up after six years of austerity, are taking to the streets again. The country came to a halt today after employees in both the public and private sector walked off their jobs to protest against yet more spending cuts and tax rises. Earlier this week, Eurozone finance ministers denied Athens the first $2.2 billion tranche of a third foreign aid package, stating the country had not gone far enough on the issue of home foreclosures.

According to Moody’s Investor Service, Puerto Rico is likely to default on at least some of its $355 million in debt payments due Dec. 1. The U.S. commonwealth, facing around $70 billion in total debt, is struggling to breathe life into a stalled economy with a roughly 45% poverty rate. Moody’s, which has Puerto Rico rated at Caa3 negative, said the island “continues to operate with extremely limited internal liquidity and no access to external sources of financing.”

VW has set a November 30 deadline for staff with knowledge about its diesel emissions test cheating to come forward. Workers who get in touch with internal investigators by then will be exempt from dismissal, although whistleblowers might be re-assigned to different jobs. The offer does not apply to managers. So if it turns out that deception was authorized at a high level, those responsible can still expect to be punished.

Government access to personal data from Web companies is still on the rise, building on a contentious privacy issue being debated across the globe. In its biannual report, Facebook said government requests for data jumped 18% in the first half of 2015 to 41,214 accounts, up from 35,051 requests in the second half of 2014.

A new plan from T-Mobile USA to allow unlimited streaming of some video services may become the first test of the federal government’s rules to prevent favoritism on the Internet. T-Mobile, the nation’s third-largest wireless carrier, said customers could stream as many videos as they want, regardless of their data plan limits, from more than two dozen video providers, including Hulu and Netflix. Now if you like streaming videos, you likely cheered, but it also raises some challenges to net neutrality rules and some people are now asking the FCC to consider taking up the issue.

The new rules leave open the possibility for wireless carriers to offer services that do not count against their data limits, a practice known as “zero rating.” The FCC has said that was intentional, to encourage Internet service providers to experiment with new business models. However, the FCC has also warned that it will investigate zero rating of data caps that appeared to harm consumers and hamper competition, leaving it somewhat vague where it would step in. T-Mobile said its new plan did not play favorites. Any video provider can join the program after meeting certain technical requirements.

Alibaba’s astronomical Singles Day sales failed to boost its stock price. Alibaba chief Jack Ma made some cautionary comments about growth expectations in China and the impact on Alibaba. A broad economic slowdown is worrisome in the longer term and offsets any short-term boost from Singles Day revenue. The e-commerce giant handled $14.3 billion in sales over the 24-hour shopping period, a 60% increase compared to 2014. And just to put that in perspective, the Single Day sales are more than the annual revenue of Facebook, or Viacom, or the GDP of Laos.

Walmart is remaking Black Friday by ditching doorbusters as part of a strategy to make holiday shopping easier for customers. The retailer will once again open its doors at 6 p.m. on Thanksgiving, but it won’t be rolling out hourly deals on different items. Instead, it plans to simplify the crazed shopping period by providing nearly all of its deals both online and in stores at once.  Online deals will start at 12:01 a.m. Pacific time on Thanksgiving, while all in-store deals will be available once stores open that evening.

Financial Review

Slow Motion Domino

Sinclair Noe — November 10, 2015

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DOW + 27 = 17,758
SPX + 3 = 2081
NAS – 12 = 5083
10 YR YLD – .02 = 2.32%
OIL + .22 = 44.09
GOLD – 2.50 = 1090.40
SILV – .14 = 14.54

Crude prices are set for a slow recovery, according to the latest report from the International Energy Agency, which warned against the deep investment cutbacks in the industry. In its World Energy Outlook, the IEA’s central scenario for oil prices forecast that the market would rebalance at around $50 to $80 per barrel in 2020, (a not very precise guess) “with further increases in price thereafter.” It also predicted that collectively, the U.S., EU and Japan would see their oil demand drop by around 10 million barrels a day by 2040.

Oil production from the Bakken and Eagle Ford shale plays in the U.S. has been falling since March. Total oil output from seven major U.S. shale regions is expected to fall by 118,000 barrels a day to about 4.95 million barrels a day in December. There is no evidence at current prices that rig drilling activity will recover any time this year, so we can expect ever lower production every month well into 2016. That doesn’t mean a quick increase in prices, in part because Iranian oil is expected to come online as sanctions are lifted, and also production increases are expected in other parts of the world.

The National Federation of Independent Business said its Small Business Optimism Index was steady at 96.1 last month, with hiring stagnant even as more owners expected higher sales and more planned to make capital outlays.

Americans are borrowing big again. The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record, up $28.9 billion in September, besting the previous high-water mark set in November 2001, not inflation adjusted. The surge wasn’t driven by mortgage lending, but by an ongoing rise in non-revolving credit—essentially car and student loans, which surged by more than $22 billion to $2.57 trillion.

Revolving debt—mainly credit-card debt—also increased, by $6.7 billion to $925 billion. This new found proclivity to jump into debt points to a busy holiday shopping season. It might also explain why the Fed is ready to take away the punch bowl at the next FOMC meeting.

Greece can’t persuade creditors to release bailout funds. Greece is due $2.2 billion from its bailout as well as $11 billion already set aside for the country’s banks, which are still struggling from capital controls. Though the Greek government has met many of the conditions attached to the bailout, it still needs to push through some financial reforms. Disputes remain on a new foreclosure law which would likely put more and lower priced homes on the foreclosure block, the Value Added Tax on private education, and pricing of non-generic medications, as well as on the timing and pace of pension reform.

Athens needs the money to continue to meet day-to-day expenses such as salaries, but there is not the same sense of urgency as there was in the summer because a sizeable injection of funds was made in September and there are no major debt repayments due. The delay is, however, preventing Greece from moving on to discussions around a restructuring of its debt pile to make it more sustainable. This was demanded by Tsipras at previous negotiations and is a precondition of the International Monetary Fund officially joining the bailout.

Meanwhile, the anti-austerity movement finally spilled over to Portugal. Anti-austerity lawmakers have forced Portugal’s new center-right government to resign by rejecting its policy proposals. The prime minister had been held up as a model proponent of the belt-tightening prescriptions pushed by European Union officials in Brussels, international creditors and countries like Germany. Portuguese voters weren’t buying it.

The new government has promised to unwind parts of the austerity program. The left-wing parties have pledged to cut some taxes and reverse public-sector wage cuts and to suspend Portugal’s privatization program. The political turmoil in Portugal is being closely watched elsewhere in Europe as a bellwether of political trends and an indicator of whether even countries that had been models of austerity prescriptions are now experiencing fatigue with the belt-tightening nearly seven years after the onset of Europe’s debt and euro crisis.

And the next domino might be the pro-austerity government of Portugal’s neighbor – Spain. Prime Minister Mariano Rajoy faces elections on Dec. 20, and polls so far show that his conservative Popular Party may lose what has been an ironclad majority in Parliament, with the potential to leave the Spanish in a similar position to the Portuguese. The government in Spain is not very stable right now. Yesterday, Catalonia voted to secede from Spain by 2017. Catalonia, the triangular region in northeastern Spain, already has its own language and traditions. Now it’s well on its way to becoming its very own country. The region contains Barcelona, Spain’s second-largest city and more than 7 million people; Catalonia also makes up more than 20 percent of the country’s economy.

A federal appeals court has rejected President Obama’s effort to move forward with a series of executive actions he announced last year seeking to give quasi-legal status and work permits to millions of undocumented immigrants. The 2-1 ruling from the New Orleans-based 5th Circuit is a defeat for the Obama administration, but one that may have come just in the nick of time to give the Supreme Court the chance to revive Obama’s attempt to make it easier for many immigrants who entered the U.S. illegally to live and work here.

Obama’s latest round of executive actions has been on hold since February, and delay in the issuance of the appeals court’s ruling was raising doubt about whether the Supreme Court would have an opportunity to resolve the case in time to allow Obama to move forward with the programs before leaving office. The release of the 5th Circuit decision Monday appears to allow the Supreme Court enough time to take up the dispute this term, if the justices choose to wade into the issue. A favorable Supreme Court ruling would permit the administration to implement the executive actions next summer.

Obama’s actions announced last November expanded eligibility for a program the president set up in 2012 to allow immigrants who entered the U.S. illegally as children to get “deferred action” status and be eligible to work legally. The new effort also included a new initiative to grant the same status to illegal immigrants who are the parents of U.S. citizens or green-card holders. Up to 5 million people were estimated to be eligible for the revised Deferred Action for Childhood Arrivals and new Deferred Action for Parents of Americans programs, although it was unknown how many would decide to apply.

Zinc traded near a five-year low, copper has dropped to its lowest since August 26 and nickel fell to its lowest in two months as miners remain under pressure. BHP Billiton has seen nearly 13 percent of its share value erased in the last four sessions following a dam burst at its Brazilian joint-venture that resulted in at least three confirmed dead and another 25 people missing.

Chipotle could reopen locations in Washington state and Oregon as soon as Wednesday after a batch of tests found no E. coli bacteria in food samples. Investigations do not always identify a specific food source as the culprit, because contaminated food is at times consumed before the samples are collected. All of Chipotle’s 43 outlets in those areas, which appear to have sickened over 40 people, have been closed since Oct. 31.

Fast-food and other low-wage workers will walk off the job today in 270 cities and towns across the country as part of a push for a nationwide $15 minimum wage. Fast-food employees will be joined by workers from other industries that typically pay low hourly wages.

Colorado will vote next year on establishing a universal, “single-payer” healthcare system after supporters secured enough signatures to get the measure on the ballot. Under the plan, known as ColoradoCare, the government would provide universal health insurance in the place of private insurance companies. It comes with a $25 billion price tag, to be paid for with a new 10 percent payroll tax.

Valeant tried to stop the bleeding with a conference call this morning. The drug maker has lost two-thirds of its value since August amid questions about its accounting and business practices. Valeant Pharmaceuticals said in its business update that disruption in its dermatology business, from the recent controversies surrounding its Philidor specialty pharmacy subsidiary, would be significant in the short term. Valeant shares continued dropping today.

Four people have been charged in a broad hacking scheme that targeted JPMorgan Chase and other financial institutions between 2012 and 2015. The indictment described 12 victims, which were mostly financial services companies, but also included a financial news organization and software development firms. The US Attorney’s Office said the scheme involved the “largest theft of customer data from a US financial institution in history.”

The hackers stole the personal information of over 100 million customers across the companies. The hackers used information and data collected from JPMorgan and the other companies to manipulate stocks. They bought small amounts of companies’ shares, then used stolen email addresses to inform investors to buy into those stocks.

Financial Review

Rockets and Rocks

Sinclair Noe — July 23, 2015

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DOW – 119 = 17,731
SPX – 12 = 2102
NAS – 25 = 5146
10 YR YLD – .05 = 2.27%
OIL – .74 = 48.45
GOLD – 3.60 = 1091.40
SILV – .14 = 14.76

Greece can begin bailout talks. Greece’s parliament approved new reforms that pave the way for Prime Minister Alexis Tsipras to begin negotiating his country’s third bailout. Parliament overwhelmingly approved the measures, but roughly a quarter of Tsipras’ Syriza party voted against the reforms. Now Greece and its creditors will begin working out the details of the latest bailout package, the third for Athens in the past five years.

Nearly everyone agrees that Greek debt is unsustainably high, but that’s where the agreement ends. The IMF on July 14^th issued a report calling for debt relief, a 180 turn from their earlier demands of austerity. The monetary fund recommended either a “very dramatic extension” of payment deadlines by up to 30 years or “deep upfront haircuts,” banker jargon for write-offs.

Lots of headlines flew out of Asia  overnight: Japan’s exports increased the most in five months in June, fueled by strengthening overseas demand, but imports remained subdued due to the effect of lower commodity prices. South Korea’s economy logged its weakest expansion in six years in Q2, recording just 0.3% growth from the previous quarter, as the country got battered by a MERS outbreak and a severe drought. Heading south: New Zealand’s central bank cut interest rates by a quarter point for the second time in six weeks, stating further easing would likely be necessary to stoke inflation. The cut was less than anticipated, and short sellers were squeezed as the kiwi, the New Zealand dollar unexpectedly rallied.

President Obama is urging lawmakers to renew the charter for the Export-Import Bank before leaving on a break in August, saying both small and large businesses are hurting from the lapse in new loan guarantees and trade insurance. The 81-year-old institution recently saw its charter conclude, after Congress allowed it to expire on June 30. The Ex-Im Bank is still allowed to manage and wind down its portfolio of loans, but cannot enter into any new deals.

The U.S. leading economic index rose 0.6% in June. The Conference Board said the index indicates “continued strength in the economic outlook for the remainder of the year.” A strong reading for housing permits and the interest-rate spread led the LEI’s growth.

New applications for US unemployment benefits declined by 26,000 to 255,000 in the seven days ended July 18 – the lowest level since 1973. New claims have been under key 300,000 since late February, the longest run in 15 years. The data should provide ammunition for those Federal Reserve officials who have been pushing for higher interest rates.

Oil prices have officially moved into bear territory. From the high on June 10^th, WTI oil has dropped just over 20%. Of course, oil is still down about 57% from the highs reached a year ago before the crash. And crude is also still above the lows of the crash near $43 per barrel.

Data from the American Petroleum Institute showed a weekly build in inventories that topped forecasts. And the Energy Information Administration’s weekly data showed a build in stockpiles last week after two periods of declines. Meanwhile, 12-member oil cartel OPEC continues to exceed its production targets to maintain its share of the market. OPEC member Iran is gearing up to boost exports following its deal with world powers that would lift economic sanctions.

Here’s the twist. As oil prices dropped over the past year, demand increased by 1.6 million barrels a day, despite the slowdown in China. Meanwhile, since October the number of rigs actively drilling for new oil around the world has declined about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone, listed oil companies have cut about $129 billion in capital expenditures. US oil production did not drop, it just leveled off, even as OPEC has increased production to over-fill the void.

Oil’s fall is also part of a larger rout in commodities. Copper slumped to a six-year low. The number of requests to withdraw copper from London Metal Exchange warehouses relative to the level of global inventories tracked by the bourse dropped this week to the lowest since March 2013. That shows consumption has almost dried up for the stockpiles that have doubled over the past year.

Copper is an industrial metal used in everything from buildings to cars and more, so it serves as an indicator for what’s to come in raw materials and as a gauge of global expansion. Copper prices have long held the position in some investor’s minds as a viable economic indicator. So strong is this belief that many call it ‘Dr. Copper’ (as in PhD in Economics). The reality is somewhat different. Over the past 4 years, copper has been in a nasty downturn, even as the economy and the stock market have been improving. Dr. Copper is not good for predicting economic activity, but it might be good at reflecting speculation in the copper market.

Meanwhile, a chorus of institutional investors are now singing out against the China market. The Chinese government had tried to lure foreign money by creating A-shares, making it easier for foreign investors to buy mainland listed stocks directly; and for a while it worked. The stock exchanges in Shanghai and Shenzen shot up like a rocket (doubling in less than a year), only to fall like a rock. Overseas investors have pulled cash out of Chinese stocks via a trading link between Hong Kong and Shanghai for 12 of the past 13 trading days. The list of hedge fund managers running from Chinese markets reads like a who’s who: Bill Ackman from Pershing Square, Paul Singer from Elliott Management, Richard Perry from Perry Capital, and Ray Dalio from Bridgewater. These are all recent cheerleaders for the Chinese markets.

You could see this coming from miles away. When an index, or even an individual security, experiences a massive spike in price, it becomes disconnected from fundamentals, and it is inevitable that it will stall, rollover, and plummet back to earth. Technical analysts call this a parabolic run or climax run; and it always seem to end the same way. Some agile short-term traders are willing to make that gamble on the hope they can dump stocks at the first sign of weakness. The difference in China is that the government stepped in and essentially halted trading in about half the high-flying stocks.

Between the end of June and early July, the Chinese government announced at least 40 measures to prop up the market, including an interest-rate cut by the central bank and establishing a stabilization fund to outright buy stocks; all at a cost of about 10% of GDP. The rise and fall of the market over the past year may well have convinced many investors that the market is simply not a reliable investment vehicle, at the very least it created a cap on growth moving forward.

Earnings reporting season is in high gear. In the busiest day for profit reports, some 50 companies are releasing results today. Caterpillar missed revenue expectations and cut it its full-year revenue outlook to $49 billion from $50 billion.

3M posted better-than-expected profits at $2.02 a share versus consensus estimates of $2.00 but missed on revenues, as the company lowered its full-year outlook.

American Express reported its second-quarter earnings fell to $1.47 billion, or $1.42 a share; and revenue dropped 4%. Amex beat profit estimates but missed on revenue projections.

McDonald’s said same-store sales were down 2% in the second quarter, reflecting negative traffic in all its major segments.

SanDisk, which makes flash memory chips, reported lower revenue and profit but quarterly results were better than Wall Street’s much-weaker expectations.

Dow Chemical reported better-than-expected profit of $1.2 billion, but revenue of $12.9 billion missed Street estimates.

General Motors’ second quarter profit doubled, beating expectations at $1.1 billion, as the automotive company sold more trucks, SUVs, and crossover vehicles.

Credit Suisse swung to a profit of $1.1 billion in the second quarter, compared with a loss a year earlier, when it was fined $2.6 billion in the U.S. for helping Americans evade taxes.

After the close, Amazon reported a profit, seriously; it was a small profit of $92 million on revenue of $23.2 billion. Shares of Amazon jumped 17% to $565 in after-hours trading, which pushed the market capitalization up by $40 billion; meaning Amazon now has a larger market cap than Wal-Mart. And don’t even look at the P/E ratio; you could get vertigo.

After delivering its third profit warning this year, Qualcomm has declared it may break itself up and announced plans to slash 15% of its workforce (4,500 jobs). The move comes after hedge fund Jana Partners called for the company to spin off its chip business from its highly profitable IP licensing unit. Qualcomm also aims to reduce costs by about $1.4 billion and boost capital returns to shareholders.

Nikkei, the Japanese media group, is paying about $1.3 billion to acquire the FT Group, which includes The Financial Times, as the pink broadsheet’s British parent company, Pearson, exits the newspaper business to focus on its core educational publishing.

LeBron James is taking his acting talents to Warner Brothers. The NBA star and his company, SpringHill Entertainment, have signed a content creation deal with Warner Bros. that includes potential projects in film, television and other digital properties.

Financial Review

Burn the Doors

Sinclair Noe — July 13, 2015

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

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DOW + 217 = 17,977
SPX + 22 = 2099
NAS + 73 = 5071
10 YR YLD + .01 = 2.43%
OIL – .35 = 51.85
GOLD – 5.30 = 1158.50
SILV – .12 = 15.60

Greece and Eurozone creditors reached a tentative agreement that might unlock about $95 billion in new aid to Greece in exchange for new tough concessions by the Athens government, which included reforms to the pension system, higher taxes, and privatization. However, the €85 billion-euro deal is not official until the Greek parliament on Wednesday passes the deal; and that might be a tough ask given the “no” vote in the recent referendum. Before we get to a Wednesday vote in Athens, there are several Eurozone finance ministers that will have to approve a €12 billion-euro package of short-term bridge financing, to allow the Greek banks to reopen. If the new deal is approved, the bank “holiday” could be lifted as soon as Thursday. And then after that, the Euro Union countries would have to sign off on a deal, unanimously. So, it’s a very complicated deal with considerable risk. Wall Street has never been good at reading the fine print, and stocks moved higher today on the idea that the never-ending negotiations over Greek debt might finally be ending, when in fact, they are just kicking into another gear.

And then even if the all these different governments approve an actual deal, well governments change, and the next government in Athens might not want to be stuck with the deals made by this government. But even if you get past that stumbling block, the deal being offered is even more onerous than the one that was offered 3 weeks ago, which it was widely determined, was unsustainable. In other words, nobody has yet addressed the important concept of how Greece can grow its economy to actually pay back the bailouts. The simple answer is they won’t. In a handful of months, fears over the sustainability of Greek debts will once again grow.

And the idea that privatization will raise the funds is laughable. This is like the story of the man in a mountain cabin, with the winter storm blowing ice and snow outside. He burns through all his firewood, and then he burns the chairs, and then he burns the cabinets, and finally he burns the doors to the cabin.

A couple of months ago, I thought a deal with Greece was inevitable because the cost of failure was too high. In the past month I thought the Troika would try to punish Greece, no matter the cost. Somehow they have crafted a deal that inflicts punishment and persuaded Tsipras to agree to the pain. The quasi-deal agreed to overnight represents the overthrow of the democratically elected government of Greece. Tsipras has surrendered. Greece is no longer a sovereign state. Brussels and Berlin have seized control. Greece needs a modern day equivalent to the Marshall Plan, not more austerity. And the worst damage may be to the Euro Union. If you think this is over, think again.

Meanwhile, we have  story to tell of a debt riddled economy, struggling under failed austerity schemes, unable to pay its debt, sending bond prices tumbling and stocks wobbling, And the creditors smell blood as they circle for the kill. There is no credible plan. No, we’re not talking about Greece anymore; this is Puerto Rico.

Puerto Rican officials are meeting with creditors for the first time since Governor Alejandro Garcia Padilla last month said the commonwealth can’t afford to pay its debts. The IMF has prepared a report suggesting Puerto Rico should try to persuade creditors to exchange old bonds for new bonds with longer maturities and lower debt payments.

Meanwhile, never-ending negotiations seem to be dragging on and on. No, we’re not talking about Greece or Puerto Rico, this time it is Iran. Talks between Iran and six major powers pushed into their 17th day with top Iranian officials saying the talks could go on for days. European officials suggested over the weekend that today was a make-or-break day for the nuclear talks, as both sides said only a final few issues remained to be resolved; so far today, no deal has been made but the talks have not broken down. US diplomats said they wouldn’t be pressured to walk away from talks as long as progress was being made. Who knows? At this point just wait for something conclusive. If the deal is made, we will know because the price of oil will take a big hit.

OPEC lowered its projection for 2015 global oil demand by about 100,000 barrels a day, to 29.2 million a day. That’s more than 2 million a day less than the group’s 12 members pumped last month. Saudi Arabia told OPEC it raised oil production to a record 10.5 million barrels a day in June, exceeding a previous record set in 1980.

U.S. power stations generated 31% of electricity from natural gas in April compared with 30% from coal, research firm SNL Energy estimates, the first time that gas has overtaken coal. In 2010, coal accounted for 45% of power. The milestone has been a long time in coming, with the shale boom causing gas prices to plummet and increasing regulation leading to higher expenses for coal.

In US markets, attention shifted (squirrel) from international headlines to worries about interest rates and also earnings reporting season. Last week Federal Reserve Chair Janet Yellen said she still expected to raise US interest rates this year. Fed funds futures show a 37 percent chance the central bank will increase its benchmark rate in September, up from 33 percent on July 10, and a 69 percent chance by December. The difference between two- and 10-year yields, known as the yield curve, widened to the steepest since November.

Janet Yellen heads across town on Wednesday to testify before the House Financial Services Committee. On Thursday, she will repeat the performance before the Senate Banking Committee. The biannual appearances are billed as reports to Congress on monetary policy, but the questions tend to range widely.

The Treasury reports that the federal government ran a budget surplus of $52 billion in June. That is $19 billion lower than the surplus seen in the same month a year ago. For the fiscal year to date, the government’s budget deficit is $313 billion. That is $52 billion smaller than the year-ago period. The government’s budget year runs from October through September.

According to Deloitte’s second-quarter CFO survey, finance chiefs from large North American companies are concerned about the economy, and have less confidence in the prospects for their own companies. The survey, which measures the views of more than 100 CFOs, found net optimism at its lowest level in two years, down to 18.8% vs. 34.4% last quarter. The number of CFOs that reported rising optimism about their own company fell sharply to 38% from 48% last quarter. A full 65% of those surveyed believe U.S. stock markets are overvalued, up from just 46% last quarter.

MPLX LP has agreed to buy MarkWest Energy Partners LP for about $15.8 billion, creating a master-limited partnership giant with natural gas and crude oil presences. The companies said the combination would create the fourth-largest master-limited partnership with a $21 billion market capitalization. MPLX was created by Marathon Petroleum  in 2012 to own and operate pipelines and other midstream assets. MarkWest Energy Partners processes natural gas in plays including the Marcellus and Utica shales.

Diversified energy firm Black Hills has agreed to acquire natural-gas utility SourceGas Holdings for $1.9 billion from investment funds managed by General Electric and Alinda Capital Partners. The deal allows the South Dakota-based Black Hills to expand in Colorado, Nebraska, Wyoming and Arkansas.

BP may have to pay out over $2 billion more than the $10.3 billion it has set aside to compensate businesses over the 2010 oil spill in the Gulf of Mexico. The money for the firms is in addition to the $18 billion settlement that BP agreed to last week, which resolved all actions against the company from federal, state and local governments.

Mexico’s new oil regime will undergo a major test on Wednesday when the government holds the first auction for private oil companies of 169 oil blocks that are both onshore and offshore. At least 17 companies are expected to participate, though the auction comes as oil prices are low. Pemex, the old national oil company, has decided not to participate. The Mexican Congress passed legislation last year to end Pemex’s monopoly and open the country’s oil patch to international competition.

Detroit’s “Big Three” carmakers are scheduled to start talks with the United Auto Workers (UAW) over a new contract for employees, and a two-tier wage system is likely to be a main topic of discussion. Ford, General Motors and Fiat Chrysler, along with the UAW, have until September 14, when the current contract expires, to reach an agreement.

Apple grabbed 92% of the operating profit of the world’s top eight smartphone companies in first quarter, up from 65% a year earlier. Samsung took 15% in this year’s period. The reason why Apple and Samsung earned over 100% combined is because some rivals only broke even or lost money.

On the earnings front: eBay reports tomorrow, Intel will deliver results on Wednesday, Netflix reports after the close on Wednesday (Netflix shares have nearly doubled in the year-to-date), Google reports on Thursday (expect questions about Google’s $65 billion cash pile and how they might spend it).

The nation’s largest banks will post second-quarter earnings this week, starting with JPMorgan Chase and Wells Fargo on Tuesday; Bank of America on Wednesday, and Goldman Sachs and Citigroup on Thursday. And the expectation is for continued pain due to sagging net interest margins, or the spread between what a bank pays to borrow money and what it can charge on loans. The wild card for banks could be results from their bond, currencies and commodities trading operations. Trading revenue tends to swing wildly each quarter.

Greek 'No' Vote, But Many Market Maybe's

Financial Review

No

Sinclair Noe — July 6, 2015

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

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DOW – 46 = 17,683
SPX – 8 = 2068
NAS – 17 = 4991
10 YR YLD – .11 = 2.29%
OIL – 4.40 = 52.53
GOLD + 4.10 = 1170.80
SILV + .06 = 15.85

Perhaps you have heard about the big vote in Greece over the weekend. Greeks voted to pay off all of their debt; they put the money in a big wooden horse. They left the horse on the doorstep of the European Central Bank in Brussels. Problem solved.

Actually, Greeks voted ‘No’ in a referendum asking them to accept an international creditor proposal that would have included more austerity reforms. The final tally showed 61% voted “no”; so it was a bit of a landslide. Both the Greek people and their government want to remain within the euro, and it isn’t clear that there is a legal mechanism to kick Greece out of the Eurozone, at least not any time soon.  Of course a Greek exit might not be so bad. If you are an unemployed Greek worker, it really doesn’t matter if you are not being paid in euros or drachmas. Actually, the idea of printing their own currency, even if it is greatly devalued, is probably easier to swallow than the boot to the throat that is austerity. The question is whether the Greeks must leave the euro to have their own currency, or if they can run a parallel currency and still remain in the Eurozone. Don’t put it past the Greeks to fight a form of financial guerilla warfare.

Greek Prime Minister Alexis Tsipras spoke last night, saying that democracy cannot be blackmailed.  “Greeks have made a brave choice and I’m convinced that the mandate is not to clash with Europe,” adding that the question of Greece’s place in Europe should be “off the table completely”.

Depends on whose table. A couple of emergency meetings are now in the works, including an ECB gathering to discuss emergency liquidity assistance and a meeting between Angela Merkel and Francois Hollande that will review the Eurozone’s response to the vote. Merkel is demanding Greece present a proposal for creditors; she says time is running out. Apparently the proposal the Greeks sent on June 30 is not on the table anymore. Meanwhile, Finance Minister Yanis Varoufakis will not be at the table; he is stepping down from his post due to heavy pressure from Greece’s European partners.

The ECB is leaving little doubt about their approach; the beatings will continue until the Greeks collapse. Greek banks will not be getting any more help from the European Central Bank. In an announcement on Monday afternoon, the ECB said it would keep its Emergency Liquidity Assistance, or ELA, to Greece unchanged at levels announced last Monday. That level is believed to be around €89 billion-euro. The problem for Greek banks, as it stands, is that it looks like they are quickly running out of cash, and unless the ECB releases more money to them, the banks will not be able to reopen this week, and the ATMs may run out of cash. Also of note is that the ECB said that it will adjust the haircuts on collateral accepted by the Bank of Greece as part of the ELA. This means, basically, that if the ECB increases the haircuts on collateral accepted by the Bank of Greece, the size of the ELA effectively decreases. If the adjustment is the other way, the ELA is effectively increased in size.

What the rest of Europe doesn’t yet realize is that the entire Eurozone is only as strong as its weakest link, and efforts to punish the Greeks will only backfire on the whole of the Euro Union.

In an interview with German newspaper Die Zeit, French economist Thomas Piketty, the author of “Capitalism in the Twenty-First Century”, said Germany didn’t repay its external debt after World War I nor did it repay debts after World War II and “has no standing to lecture other nations.” Piketty said Germany’s economic miracle after the end of the war is based in part on debt relief, noting that the London Debt Agreement of 1953 forgave 60% of German foreign debt and restructured its internal debts. Piketty says similar steps should be taken now with Greece.

The reaction in the US was muted. Stocks were down initially, then rallied to breakeven, then drifted lower.

The real elephant in the room might be China. Chinese stocks have dropped by 31 percent over the past month, losing more than $3.2 trillion in valuation. That is six times Greece’s entire foreign debt, or 11 years of Greek economic output. Leveraged bets on Chinese stocks have increased to a record versus the size of the market as prices fall faster than margin traders cut positions. Over the weekend, The Securities Association of China announced that 21 of the country’s largest brokerages had agreed to pledge the equivalent of 15 per cent of their net assets, or no less than $26 billion in total, to invest in blue-chip investment stocks. The move represents a massive flow of liquidity into the market that will ultimately find its way to investors so they can undertake a buying binge. In addition to just throwing money at the problem, the Chinese government canned all new stock-market floats. This follows from recent moves to cut interest rates and ease lenders’ capital settings. The trouble is, despite using its well-stocked toolbox, the Chinese government may not necessarily succeed in stabilizing its equity market.

Even after falls of 25 per cent in the past couple of weeks, the Shanghai exchange is still boasting a one-year return of more than 86 per cent. The earnings of Chinese listed companies have not risen 86 per cent this year – thus nor has their real value. Instead, the growth in the Chinese economy has been easing at the same time the stock market was experiencing these gains. Whether the Chinese government’s move represents little more than a padded Band-Aid remains to be seen.

China’s Shanghai Composite finished higher by 2.4% amid a volatile session. The index opened with a gain of more than 8.5% before sliding. Elsewhere, Hong Kong’s Hang Seng dropped 3.2%, as trade entered a technical correction, now 11% off the April high.

Key elements of a nuclear accord between Iran and six world powers fell further into place on Sunday.  U.S. Secretary of State John Kerry warned there were more sticking points that may scuttle the deal and he was prepared to walk away from negotiations if the problems were not resolved by Tuesday. Should sanctions be lifted, Iran would double its oil exports to 2.3 million barrels a day.

Oil production from the Organization of the Petroleum Exporting Countries climbed to its highest monthly level since Aug. 2012. OPEC production in June rose by 170,000 barrels per day from a month earlier, to 31.28 million barrels per day. OPEC is now pumping nearly 1.3 million barrels above its production ceiling of 30 million barrels a day. So, between Greece and China representing possible economic slowdown, plus the prospect of Iran pumping extra supplies, plus the reality of Saudi Arabia actually pumping extra supplies of oil, the price of oil was down almost 8% today; and that should result in savings of 2 cents per gallon in about 6 weeks, maybe.

We don’t know if oil prices will continue to fall but there is a side bet on oil, and that is the Canadian dollar, or the loonie. Hedge funds and other fast money pushed net bets against the loonie to almost-record levels ahead of crude oil’s collapse last year. After the currency and crude oil’s surprising resilience the past few months beat them back, those positions are starting to grow again.

U.S. service companies and other non-manufacturing companies reported that growth picked up slightly in June. The Institute for Supply Management services index rose to 56% in June, compared with May’s reading was 55.7%. Readings over 50% indicate overall expansion.

After weeks of  health insurer merger talks, Aetna has agreed to buy Humana for about $37 billion, or about $230 per share. The deal will see Humana shareholders receive $125 in cash plus Aetna shares for each share held, representing a premium of 23% from July 2nd’s close. Following the merger, Aetna shareholders will own about 74% of the combined company. And the Aetna-Humana deal could pressure other health insurers to merge. Cigna rejected offers from Anthem for as much as $184 a share in cash and stock, citing concerns about governance and management.

Ant Financial, the financial services affiliate of Alibaba, has closed a private placement of shares that values it at more than $50 billion. The so-called Series A round of financing was led by the National Social Security Fund of China, one of the country’s biggest state funds. While a timetable has not yet been revealed for the company’s public listing, Jack Ma has suggested that any IPO would most likely take place in China’s capital markets.

Investors pulled another $3 billion in assets from the Pimco Total Return Fund in June, compared with $2.7 billion the previous month, in another sign the fund is still bleeding since the departure of Bill Gross last fall. On top of cash withdrawals of $5.6 billion in April and $7.3 billion in March, total assets in the fund have now plunged to $102 billion from a peak of $293 billion in April 2013.

Chicago was once home to one of the largest trading pits in the world. Since 1848, the trading pits were the very symbol of the markets. In 1997, there were close to 10,000 traders on the floor in Chicago. It was physical. It was loud. It was total mayhem, as traders yelled out their buy and sell orders. The open outcry trading pits are now a relic, replaced by computers. The Chicago Mercantile Exchange closed the pits today. About a dozen traders donned multi-colored jackets and traded soybeans, more for the show than anything. Then the bell rang, and that was it. The robots win another round.

Greece Is The Word, Martha Hangs Up Her Apron, JOBS Act Goes To Work And Nasdaq Zooms

Financial Review

Reg A On

Sinclair Noe — June 19, 2015

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 101 = 18,014
SPX – 11 = 2109
NAS – 15 = 5117
10 YR YLD – 08 = 2.27%
OIL – .98 = 59.47
GOLD – 1.70 = 1201.30
SILV – .07 = 16.18

For the week, the Dow was up about 0.9% and the S&P 500 gained 1%. The Nasdaq jumped 1.4% as it hit new all-time highs yesterday.

Eurozone leaders will try to find a bailout deal for Greece at an emergency summit Monday.  News reports said a European Central Bank official warned Eurozone finance ministers that the Greek banks might not be able to open come Monday. The big risk now is that a report about the fear of a bank run will serve to spur a bank run. Greeks pulled more than €1-billion euro out of their banks today. European Central Bank policymakers have agreed to supply extra emergency cash to avert a bank run.

The Associated Press reports Greek Prime Minister Alexis Tsipras has traveled to Russia, likely looking for loans. Russia and Greece signed a deal today to build an extension of a prospective gas pipeline that would carry Russian gas to Europe through Turkey. Russia promised Greece hundreds of millions of dollars in transit payments yearly if it agreed to build the pipeline. Construction of the pipeline is expected to start next year and be completed in 2019. Putin’s spokesman said it was too early to comment on possible loans. Russia has its own economic problems: a recession, a costly invasion of Ukraine, and economic sanctions.

Speaking in St. Petersburg today, Tsipras said the Euro Union should return to its founding principles of “solidarity, democracy and social justice, but the obsession with austerity and policies which rupture social cohesion make it impossible.” What’s at stake is “whether Europe will give space to policies of cohesion rather than the imposition of meaningless and failed programs.”

So, the new emergency meeting is Monday; the deadline for default is the end of the month; bankers are worried about a run on the banks; and the most probable outcome is – nothing. That’s an educated guess, not a guarantee. The Greek crisis could implode at any moment, and it could get very ugly. And for that reason, the most probable outcome is that nothing will happen; the Greeks will probably get an extension of the current bailout until year-end. Another delay is tempting for Eurozone leaders; nobody wants to pull the trigger on the gun that kills Greece and possibly the Eurozone.

Remember the PIIGS? The 5 Eurozone countries that have had economic problems: Portugal, Ireland, Italy, Greece, and Spain. Nowadays we only hear about the problems in Greece. What happened to the other countries? The NYT decided to survey what people in the other Eurozone crisis countries think about the situation in Greece. The survey looked at Ireland, Italy, Spain, and Portugal. The general theme appears to be that we toughed it out, now Greece should too. It would have been useful to include a bit of data on where these countries stand now. Per capita income and employment are all well below their pre-crisis level in all four countries mentioned. By following the path of austerity, unemployment is worse now than in 2007; in Italy it is 3.1% worse, Ireland 8.9% worse, Portugal 11.5% worse, and Spain 14% worse. And GDP in these 4 crisis countries has slipped by 4.4% to 11.5%.

China’s benchmark share indexes dropped again today, taking losses since their early-June peak to more than 10% and putting the market into correction territory. The Shanghai Composite finished the session down 6.4%, its biggest weekly decline since October 2008, after more than doubling over the past 12 months. Shenzhen -6%. ChiNext -5.4%.

Although it must go back to the Senate for another vote, the U.S. House of Representatives has approved a bill granting President Obama “fast-track” trade authority. The move will likely see the swift completion of the Trans-Pacific Partnership, which is central to Obama’s focus on strengthening ties with Asia.

The first Friday of each month brings the nationwide jobs report from the Labor Department. Two weeks later we get a look at the labor market on a state by state basis. Twenty-five states had unemployment rate increases from April (mainly because more people entered the labor pool – which is a good thing), 9 states and the District of Columbia had decreases, and 16 states had no change.

Arizona’s unemployment rate in May was 5.8%; slightly above the national 5.5%, but still down 0.7% in the last 3 months. Total employment in Arizona in May was 2,613,800. The bad news is that Arizona still has not regained all the jobs lost in the economic downturn. We would need to add 65,000 more jobs just to get back to the level of December 2007. Fourteen other states have not recovered all the jobs lost in the recession. Part of the problem is that Arizona was particularly hard hit, part of the problem is that Arizona was poorly positioned for a downturn.

As economic conditions continue to improve, state lawmakers should be making investments in physical (infrastructure) and human capital (education, workforce development) that will spur job creation in the short term and create sustainable growth in the long term.

The EPA today proposed new standards for big trucks aimed at lowering fuel costs and cutting carbon emissions. The new standards would apply to big vehicles ranging from garbage trucks to 18-wheelers to vans and buses to heavy-duty pickup trucks. The basic idea will require that a truck built in 2021 and beyond will be up to 24% more fuel efficient and emit up to 24% fewer carbon emissions than an equivalent truck built in 2018.

America is producing more oil than it has in decades, but the nation no longer guzzles it up like there’s no tomorrow. Starting around 2003, the amount of petroleum consumed in the U.S. began to grow far more slowly than government forecasters had expected. Oil consumption then fell during Great Recession and now it’s projected to remain roughly flat for the next decade. Improved fuel standards are a big reason behind lower consumption. Another factor is that there are fewer cars on the road. The Federal Highway Administration reports the registration of passenger cars fell nearly 19% from 2008 to 2012. That trend is starting to change. Meanwhile, there are more busses than before.

We have a few earnings reports today. KB Home posted better than expected results. Choclate maker Hershey reduced its sales outlook and announced job cuts. CarMax posted first quarter sales that narrowly missed expectations, but profit matched estimates. Gun maker Smith & Wesson beat estimates but lowered guidance.

Bankers say the return of IPOs over the past few weeks reflects the continued demand for stocks, even as investors anxiously eye global concerns. (or maybe just a case of “get it while you can”.) US listings in 2014 came at the fastest pace since 2000, with 293 offerings raising $96 billion, although they slowed toward the beginning of this year due to uncertainty of oil prices and a Fed rate hike. But activity has quietly picked up. There were 20 deals last month, just three fewer than in May 2014, and June is expected to bring forth 32 deals, just one less than the prior year. Upcoming IPOs: Fogo de Chao, Mindbody, TransUnion and Alarm.com.

Regulation A+ of the 2012 Jumpstart Our Business Startups Act, or JOBS Act, went into effect today, allowing startups to raise up to $50 million from non-accredited investors. The provision is a step toward allowing more non-accredited investors to participate in private-company investing and further expand the concept of equity crowdfunding. But as companies await a final ruling on crowdfunding itself, the provision comes with a lot of legwork for companies. Accredited investors are defined as those who have an annual income above $200,000, or a net worth of more than $1 million, not including their primary residence.

Companies are still waiting for final rules on Title III of the JOBS Act, which would allow companies to solicit and take investments from as many non-accredited investors as they desire, with a few provisions. Regulation A+, effective Friday, has two tiers. Tier I allows companies to raise up to $20 million in a 12-month period from accredited or non-accredited investors, but the company has to comply with the law of every state in which it has an investor.  However, state laws differ on such issues as compliance and filing requirements and some may demand large fees. Tier II allows companies to raise up to $50 million in a 12-month period and is generally exempt from state laws. But it also requires companies to file audited financial statements and event reports. If a company isn’t listed on a stock exchange, non-accredited investors are limited in the amount they can invest.  In Tier I, companies still have to report financials, but they can be unaudited

It looks like Martha Stewart might be planning a retirement party. Martha Stewart Living Omnimedia is close to selling itself to Sequential Brands Group. A deal between Sequential Brands and Martha Stewart Living could be announced in the coming days.

Financial Review

Gulliver’s Travels

Sinclair Noe — February 24, 2015       

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

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DOW + 92 = 18,209
SPX + 5 = 2115
NAS + 7 = 4968
10 YR YLD – .07 = 1.99%
OIL – .29 = 49.16
GOLD – .50 = 1202.30
SILV – .01 = 16.41

The Dow Industrials and the S&P 500 hit record high closes. The Nasdaq rose for the tenth straight session, its longest streak since July 2009. The Russell 2000 Index of small cap stocks closed at a record 1233.

Fed Chair Janet Yellen testified today before the Senate banking committee in her semi-annual report on monetary policy. Yellen said the Fed is preparing to consider interest rate hikes “on a meeting-by-meeting basis.” Yellen described how the Fed’s rate-setting policy committee will likely proceed in coming months: first by removing the word “patient” in describing its approach to rate hikes, then entering a phase in which rate hikes are possible at any meeting. That approach could open the door to an interest rate increase as early as June, but short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October. And the yield on the ten year Treasury note slipped down below 2%. So, the markets players are placing their bets.

Yellen said she felt labor markets and other key economic indicators “have been increasing at a solid rate.” However, she said she still feels the job market is not fully repaired. The lack of inflation has made some Fed policymakers hesitant to commit to raising rates. Whether Yellen was more hawkish or dovish than in the past is a matter of interpretation or even wishful thinking, but it seems clear the Fed will rely on incoming data and they will communicate their intentions well in advance. Yellen will appear before the House Financial Services Committee tomorrow.

Greece sent a list of economic reform plans to the Eurogroup of euro zone finance ministers around midnight, just making a deadline set by its international creditors. Euro-region finance ministers approved Greece’s package of economic measures and paved the way for a four-month extension to the country’s bailout agreement, keeping its financial system afloat. The list of commitments includes maintaining current state-asset sales, consolidating pension funds to reduce costs and revamping tax collection and administration. In other words, the Greek Syriza party just agreed to the status quo for the next four months. But there is a problem; the status quo has been a horrible failure; it was what the upstart party ran against; the status quo is what the Greek electorate voted against.

The text of commitments states: that “the Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.” The agreement goes on to state:  “The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.”

And to assure there is no rollback, the funds will be held by the European Financial Stability Fund and only released on request by the ECB. So, the Greeks don’t actually get the money, it will be dished out to recapitalize the banks, and only then if the Greeks don’t get uppity.

It is hard to imagine that this will go over well with the voters in Athens.

House prices edged up 0.1% in December to take the year-on-year change to 4.5%, according to the S&P/Case-Shiller 20-city composite. Miami and Denver saw the strongest monthly advance. Compared to year-ago levels, San Francisco saw the strongest growth with 9.3% gains. Phoenix house prices were up 0.2% for the month, and up 2.4% year over year.

HSH.com took the median home price data from the National Association of Realtors for major cities and then compared that to the median income to determine housing affordability. In 11 of 27 major cities, people need to earn more than the median income to afford a house. The median household income was $54,417 in December 2014. The median household income in Phoenix was $43,960 in 2011. And the new data suggest you would need income of $40,658 to buy a median priced home. San Francisco is the least affordable major metro area. Pittsburgh is the cheapest, but then you would have to live in Pittsburgh.

Meanwhile, a new report from Zillow shows rents are increasing by 3.3% year over year, as of January. According to Zillow, monthly rents have grown at roughly twice the pace of wages in the U.S. since 2000. That means Americans are having to spend a greater share of their income on rent, about 30%, versus 25% in the past. Nationwide, you would need to stay in a home for about 2 years before ownership becomes cheaper than renting.

The Conference Board’s consumer confidence index fell to 96.4 in February from a revised 103.8 in January, which marked a 7 ½ year high. A slight bump in gasoline prices might be responsible for curbing enthusiasm.

Financial data firm Markit said its preliminary, or “flash,” reading of its Purchasing Managers Index for the service sector rose to 57.0 in February from 54.2 in January.

President Obama issued his third veto today, rejecting legislation that would allow construction of the Keystone XL pipeline. The Senate has agreed to hold a vote on overriding the veto.

It was Investors Day at JPMorgan Chase, but apparently not Depositors’ Day. JPMorgan is preparing to charge an array of financial firms, including hedge funds, private-equity firms and foreign banks, for some deposits, citing new rules that make holding money for the clients too costly. Certain deposits are less profitable to handle than they used to be due to new federal rules that can penalize banks for holding deposits viewed as prone to fleeing during a crisis or a stressed environment. So, the bank will eliminate about $100 billion of deposits that it holds for international clients. JPMorgan will is also reducing expenses and “simplifying” its biggest business lines. And part of the cost cutting plan is to close 300 branches, or about 5% of the total, over the next 2 years.

And on Investor’s Day, once again management had to field questions about a possible breakup of the bank. Naturally, the bank concluded that a break up would be terrible. So many synergies would be lost — synergies that JPMorgan’s peers don’t enjoy because they’re simply not as big.

Two agencies, the US Department of Justice (DoJ) and the Commodity Futures Trading Commission (CFTC), have launched separate probes into at least 10 major banks for the possible rigging of precious-metals markets. The banks are accused of collusive behavior, whereby personnel from various establishments communicate with each other and coordinate trading behaviors so that prices move according to what they decide. Banks historically set the price of precious metals, which include gold, silver, platinum and palladium, twice a day using the daily precious metal fixes, also known as the London Fix.

If it all sounds familiar, it is because it follows the same pattern as the manipulation of the Libor, Euribor, ISDA or derivatives, and Forex markets.

One of the 10 banks under investigation for rigging precious metals markets is HSBC. They just reported earnings that badly missed estimates. Part of the reason for the miss, is all the money they have to pay in fines. HSBC has set aside another $550 million to cover potential fines for alleged manipulation of foreign exchange markets and warned it could face a $500 million bill to compensate US customers for debt protection products it offered before May 2012. HSBC paid $611 million to global regulators in November when it was one of six institutions fined over allegations of price fixing and manipulating benchmarks in the $5 trillion-a-day forex market.

HSBC has also come under fire for helping clients hide their income from tax authorities. Meanwhile, the CEO of HSBC has been engaged in some fancy footwork to explain his own secret Swiss bank accounts. Stuart Gulliver explained that in the 1990s, when he lived in Hong Kong and worked as a banker at HSBC, employees received lump-sum bonuses whose amounts could be viewed by other employees through a computer system. In an effort to protect his privacy he put the money in Switzerland to hide it from the prying eyes of his Hong Kong colleagues. But he then had to hide it from his curious Swiss colleagues, so he created an anonymous Panamanian company. Gulliver was the top earner at HSBC, and he felt he had to protect his privacy from his Lilliputian colleagues.

HSBC has countered that Gulliver’s accounts were actually opaque and transparent. And for a bank that has been fined more than $1 billion for laundering money for the Sinaloa drug cartel, I suppose combining Panama and Swiss tax havens to ensure secrecy is the new “transparent” in banking. But for anyone who is not drinking Kool-Aid, it carries a certain stank of greed and sleaze.

Financial Review

The Bar is Set Low

Sinclair Noe — February 17, 2015       

 

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

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DOW + 28 = 18,047
SPX + 3 = 2100
NAS + 5 = 4899
10 YR YLD + .12 = 2.14%
OIL + .27 = 53.05

 Another record high close for the S&P 500 index and the Russell 2000 index. As of February 11, 356 S&P 500 companies have reported and 71.3% beat earnings expectations. Total revenues are up +1.5% with 55.6% beating top-line estimates. Earnings growth with little or no revenue growth means companies are cutting costs or repurchasing shares to boost earnings. The Health Care and Telecom Services sectors were the best performers on the quarter. The energy sector was badly beaten down. The 12-month forward P/E currently sits around 16, putting it well above the 10-year average of 14; a little pricey but not excessive. Guidance has been disappointing but the game is to set the bar very low and then stop over it.

Eurozone officials and the new government in Greece have been playing hardball. Greece is running out of money. A report from JPMorgan shows Greek banks were losing deposits at the rate of €2 billion a week. The Greek government has so far insisted that budget cuts and economic overhauls mandated by the current €240 billion bailout are hurting its economy and society and that the currency union’s finance ministers haven’t offered sufficient leeway on implementing those measures.

Yesterday, Eurozone ministers gave the Greek government an ultimatum to request an extension of the bailout with the strings attached. Today, Greek Prime Minister Alexis Tsipras gave a defiant speech in Parliament in Athens, saying his government would move to immediately dismantle overhauls mandated by its bailout program and calling for European leaders to hold a summit on his country’s funding needs. And then this afternoon came word that Greece would consider a 4 to 6 month extension of the bailout; but the announcement was seriously devoid of details; so, don’t expect much.

Eurozone finance ministers set several preconditions for considering an extension, including a promise from Greece to not roll back any measures implemented under the existing bailout deal and coordinate any new moves with its creditors. They also want the government to pledge that its debts to the Eurozone would be repaid in full. PM Tsipras, in his speech, reiterated plans by his government to immediately unwind already-implemented austerity measures, such as changes to labor laws.

You can argue that Greece brought its problems on itself, although it had a lot of help from irresponsible lenders. At this point, however, the simple fact is that Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany — real Greek GDP per capita fell 26% from 2007 to 2013, compared with a German decline of 29% from 1913 to 1919.

Despite this catastrophe, Greece is making payments to its creditors, running a primary surplus — an excess of revenue over spending other than interest — of around 1.5% of GDP And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus, and keep running huge surpluses for many years to come.

What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another. For now, it looks more and more that the Eurozone finance ministers want to kick Greece out of the union.
 
You will recall that a Ukraine-Russia ceasefire was scheduled to take effect Sunday. Somebody did not get the memo. Ukraine said it would wait until the rebel groups stopped shelling a town in Eastern Ukraine; and the rebels said they would discuss the possible withdrawal of the weaponry later.

Meanwhile, Egypt entered the broadening conflict with the Islamic State as its warplanes bombed extremist targets in Libya on Monday in retaliation for the beheading of 21 Egyptian Christians.

Cleveland Fed President Loretta Mester says it’s time to drop the “patient” language from the FOMC statement, joining at least six other top Fed officials in suggesting that short-term interest rates could be raised mid-year. Mester says she would like to see the language changed, and she thinks June should be a viable option for the Fed to consider a rate hike.

We’ll find out more about what the Fed policymakers are thinking tomorrow, when they release the minutes from the last FOMC meeting.

Data from the New York Fed released today shows 11.3% of student loans were delinquent in the final three months of 2014, up from 11.1% in the prior quarter. The share of auto loans at least 90 days overdue also rose, climbing to 3.5% from 3.1% the prior period, even as fewer credit card and mortgage loan payments were late. Delinquency rates for student loans probably understate the actual situation. About half of the student loans are in deferment, in grace periods or in forbearance, temporarily removing them from the repayment cycle.

The nation’s student-loan balance climbed by $31 billion last quarter to $1.16 trillion. Just by way of comparison, 10 years ago, student loan debt stood at $363 billion. That makes student loans the largest source of debt after mortgages, which gained $39 billion to $8.2 trillion in the fourth quarter. Auto-loan debt increased by $21 billion to $955 billion. Americans had $700 billion in credit card debt at the end of last year, up just $17 billion, or 2.5 percent, from 12 months earlier. That’s down from $824 billion when the recession ended in mid-2009.

The NAHB/Wells Fargo Housing Market index fell to 55 from 57 the month before; homebuilder confidence levels have held in the mid- to upper 50s range for the past 8 months, which is consistent with a modest, ongoing recovery.

Manufacturing activity growth in New York State slipped in February as the pace of incoming orders effectively stalled and a gauge of future activity dropped by the most in six years. The New York Fed’s Empire State general business conditions index fell in February to 7.78 from January’s reading of 9.95.

A federal judge in Texas, siding with 25 other states, ordered a temporary halt to President Obama’s initiatives to shield millions of people who are in the United States illegally from deportation. The White House said the Justice Department would appeal Monday’s action by U.S. District Judge Andrew Hanen in Brownsville, Texas. Homeland Security Secretary Jeh Johnson said the administration will comply with the injunction and delay accepting applications for deportation relief that had been set to begin on Wednesday. The backdrop for this is a fight in the Republican-led Congress over legislation passed by the House of Representatives to allow funding for the Department of Homeland Security only if Obama’s immigration actions were nullified.

A hacking ring has stolen up to $1 billion from banks around the world in what would be one of the biggest bank heists ever. The hackers have been active since at least the end of 2013 and have infiltrated more than 100 banks in 30 countries. These hacks are a bit different because they target the banks themselves rather than bank customers. The hackers mostly attacked banks in Russia, but they also went after financial institutions in the United States, Germany, China and Ukraine. The information was included in a report from cybersecurity firm, Kaspersky. The banks don’t know the exact amount they have lost. And the crimes went largely undetected until sometime last year.

US Attorney General Eric Holder has given US Attorneys a 90 day deadline to evaluate whether they can bring cases against any individuals for their role in the 2008 financial crisis. Federal prosecutors who previously brought charges against institutions for inappropriately marketing residential mortgage-backed securities will investigate individual employees for potential criminal or civil charges. Of course, Holder has already announced his resignation, so if anyone is actually prosecuted, it wouldn’t happen on his watch.

Another revelation from Kaspersky Labs, the Moscow-based security software firm that revealed the bank hack; Kaspersky says the NSA has figured out how to hide spying software deep within hard drives made by Western Digital, Seagate, Toshiba, and other top manufacturers, giving the agency the means to eavesdrop on the majority of the world’s computers. Kaspersky said it found personal computers in 30 countries infected with one or more of the spying programs, with the most infections seen in Iran, followed by Russia, Pakistan, Afghanistan, China, Mali, Syria, Yemen, and Algeria. The targets included government and military institutions, telecommunication companies, banks, energy companies, nuclear researchers, media, and Islamic activists. A former NSA employee told Reuters that Kaspersky’s findings were correct.

Top lawmakers in the House and Senate have begun their own probes into a recent wave of fraudulent tax filings made through Intuit’s TurboTax, highlighting a growing problem in the “e-filing” industry. IRS data shows that the issue has grown rapidly, to a record of almost 2M suspected incidents by 2013 from about 440K in 2010. The federal government estimates it blocked about $24B in attempts, but still lost about $5.2B in 2013, due to fraudulent e-filings.

Just a little over a month before Apple releases its smartwatch, LG has unveiled a new smart “luxury timepiece” called the LG Watch Urbane, which features a 1.3 inch touchscreen display and runs on Google’s Android Wear. Companies are vying for leadership in the smartwatch space, a market which is expected to be worth $33 billion by 2020. Apple has reportedly ordered 5 to 6 million watches from its Asia suppliers; and that’s just for the first quarter.

Apple has revolutionized music and phones. Now it is aiming at a much bigger target: automobiles. Apple has several hundred employees working secretly toward creating an Apple-branded electric vehicle. The project, code-named “Titan,” has an initial design of a vehicle that resembles a minivan. At best, it will be several years before an Apple car could hit the road, even if development goes smoothly and if Apple decides to proceed with the project. Yeah, look for an Apple car right after you get your Apple TV. In other words don’t hold your breath. The safe money, of course, is that Apple is using this rumored experiment as a way to delve deeper into becoming the core software provider for cars. Google already has a head start.