Financial Review

Applesauce

Sinclair Noe — June 25, 2015

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DOW – 75 = 17,890
SPX – 6 = 2102
NAS – 10 = 5112
10 YR YLD + .02 = 2.39%
OIL – .57 = 59.70
GOLD – 2.10 = 1173.90
SILV – .04 = 15.94

The Supreme Court ruled to save subsidies for as many as 8 million people under the Affordable Care Act. In the case of King v. Burwell, justices determined that the subsidies should be available in states that don’t have their own exchanges. The court determined that the broader context of the ACA allows subsidies to all those under the Obamacare program. Justices voted 6-3 in favor of upholding the subsidies with Chief Justice John Roberts and swing vote Justice Anthony Kennedy joining the majority.

Obamacare, technically titled The Affordable Care Act, gave states the option to build their own healthcare marketplaces or simply use one operated by the federal government. In all, 34 states decided to rely on the federal “exchange.” And about 8 million low- to moderate-income Americans are now receiving subsidies of on average $260 a month through the federal exchange. But in a lawsuit challenging the law, critics insisted the federal government is not allowed to subsidize insurance in states that rejected their own exchange for the federal system. Those critics based their argument on a single phrase in Obamacare that refers only to participants enrolled through an exchange “established by the State.” The court finds that the act’s tax credits are available in states that have the federal exchange rather than merely in states that created state exchanges.

Yes, the term “established by the State” is ambiguous, but in the end—after taking a whack at the ACA for “more than a few examples of inartful drafting”, chief justice Roberts wrote: “The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral.” Quoting the 2012 Obamacare challenge: “Without the federal subsidies … the exchanges would not operate as Congress intended and may not operate at all …” And Roberts notes, “It is implausible that Congress meant the Act to operate in this manner.”

And then Roberts concluded: “In a democracy, the power to make the law rests with those chosen by the people. Our role is more confined—“to say what the law is.”’ Which is kind of an admission that the Supremes could not figure out a way to turn the applesauce back into apples. The simple reality is that almost 11 million people have signed up for Obamacare and about 8 million are getting subsidies, which means they would likely not get healthcare without Obamacare; that’s nearly 11 million people with contracts; and those contracts represent something of definite value. Talk about a potential legal hot mess. Talk about killing off Obamacare is now moot.

President Obama held a press conference after the decision was announced, and he said: “This law is working, and it’s going to keep doing it.” Like it or not, the comment was pretty much a straightforward factual statement.

The Supreme Court also issued a ruling on “Texas Department of Housing and Community Affairs v. The Inclusive Communities Project”; in a 5-4 decision they determined plaintiffs can file suit under the Fair Housing Act for practices that have a discriminatory effect, even if the accused wasn’t purposely discriminating. The case dealt with low income housing which was built primarily in low-income, predominantly black neighborhoods. Texas may not have enacted this policy explicitly to keep blacks segregated from whites, but under the disparate impact claim which the court just affirmed, the effect of this decision perpetuated segregation.

The ruling affirms that the law forbids “disparate impact” discrimination—that is, discrimination that is race-neutral on the surface but racist in practice. Justice Anthony Kennedy wrote the majority opinion; he explains that the Fair Housing Act, as originally written made it unlawful to “refuse to sell or rent … or otherwise make unavailable or deny, a dwelling to a person because of race.” So, in that regard, the law bars both racist intent and racist consequences.

But wait, there’s more. The Supreme Court still has five big cases to announce in the next couple of days. Here’s a rundown of what’s left to settle:

In a landmark decision, the court will confront two questions. The first is whether states can ban same-sex marriage. The second is whether states must recognize same-sex marriages performed legally in other states.

The justices must also decide a challenge to the drug protocol several states use by to execute inmates. The case is from Oklahoma, and it looks at the mix of drugs used and whether the drugs inflict cruel and unusual pain.

The court could give thousands of federal prisoners new hope and potentially hamstring prosecutors in ruling on a federal law that sets mandatory minimum sentences for federal firearms offenders who already have three convictions for “violent felonies.” At the heart of this case is the vagueness of the term “violent felonies”.

Three cases being considered together ask the court to force the Environmental Protection Agency to consider the economic cost of complying with regulations limiting emissions from power plants before it issues any rules. The government argued that the Clean Air Act made no reference to costs when it required the EPA should to adopt “appropriate and necessary” emissions rules. Above and beyond that argument, there is another question of the true economic cost of emissions from power plants.

The court will also decide an issue that goes to the very founding of the U.S.: Who controls the creation of congressional districts? Arizona voters passed a constitutional amendment in 2000 stripping the Legislature of the power to draw districts and giving it to an independent redistricting commission. It’s meant to avoid “gerrymandering” — the habit of legislators to draw bizarrely shaped districts that give their parties’ candidates the best shot at winning. The Legislature went to court, pointing out that Article I of the Constitution specifies that “the times, places and manner of holding elections for Senators and Representatives shall be prescribed in each state by the legislature thereof” — and that only Congress, not state bodies, can change that.

In economic news: Consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items. Consumer spending rose a seasonally adjusted 0.9% in May. The amount consumers spent in April and March was also a bit stronger than initially reported. Personal income increased by 0.5% for the second straight month. The sharp uptick in spending in May, however, required Americans to draw down their savings. The personal savings rate fell to 5.1% from 5.4%.Despite a stronger labor market, households still aren’t spending as much as they normally do. Consumer spending has risen at modest 3.6% in the past 12 months, though lower gasoline prices has had something to do with that.

The number of people who applied for unemployment benefits in the period running from June 14 to June 20 rose by 3,000 to 271,000. Initial jobless claims have been under the key 300,000 level for 16 straight weeks, the longest stretch since 2000-2001.

The Census Bureau has issued a report on changes within the American populace between April 2010 and July 2014. America is becoming more diverse, and youthful. Ninety-five percent of population growth over the past year came from minorities, and millennials now outnumber baby boomers. Millennials, Americans born between 1982 and 2000, are 44.2 percent minority, a larger amount than previous generations. They also now outnumber Boomers by 7.7 million (83.1 million Millennials compared to 75.4 million Boomers). That actually isn’t anything new; Millennials have outnumbered Boomers for a long time; and part of it depends on what years you count to define Millennials. If you count 1980 to 2004, there are more than 104 million Millennials.

The majority of US children under age 5 are minorities; 50.2 percent are part of any ethnic or race group besides non-Hispanic white. By 2060, more than half of the American population will be a racial or ethnic minority. Migration seems to be a normal part of American life. The tendency to migrate is highest for young adults. However, in the ages following retirement (commonly around 65), we see another spike in migration.

The standoff between Greece and its international creditors was extended into the weekend, just days before Athens has to meet a crucial debt deadline which could decide whether it goes bankrupt and gets kicked out of the euro currency club. A key meeting of Eurozone finance ministers broke up without agreement on Greece’s rescue package.

Executive compensation is supposedly  geared toward results, but some CEOs still got massive pay packages in 2014 even though their investors didn’t do so well. Notables: Viacom’s Philippe Dauman +19.2% to $44.3M (shareholder return -6.6%); GE’s Jeff Immelt +88.4% to $37.3M (shareholder return -6.7%); Boeing’s James McNerney +24.1% to $28.9M (shareholder return -2.5%); IBM’s Virginia Rometty +38.5% to $19.3M (shareholder return -12.4%).

Thursday, August 21, 2014 - Rarefied Air

Financial Review with Sinclair Noe

DOW + 60 = 17,039
SPX + 5 = 1992
NAS + 5 = 4532
10 YR YLD - .02 = 2.40%
OIL + .45 = 93.90
GOLD – 15.10 = 1277.30
SILV - .04 = 19.52
 

The S&P 500 broke two records during today's session, climbing past its previous intraday all-time high of 1,991.39 and ending above its previous record close of 1,987.98. Both had been set on July 24.

Family Dollar has rejected a $9 billion dollar buyout offer from Dollar General, opting instead for a smaller $8.5 billion dollar offer from Dollar Tree. The thinking is that a combination of the largest dollar store – Dollar General with the #2 Family Dollar, would be unlikely to win antitrust approval.

Once upon a time, Sears was the largest retailer in the nation. Today, Sears Holdings announce it lost $975 million in the first half of the year; $573 million in the second quarter. This was the 9^th consecutive quarter of losses, and the past quarter also marked the heaviest losses. Quarterly revenue dropped about 10%. The plan now is to close underperforming stores, or, in a classic example of corporate-speak “rationalizing our physical footprint.” The company successfully spun off Lands End earlier this year, to the benefit of shareholders. But its Sears Canada and Sears Automotive stores have been on the block for some time, indicating either a lack of interest on the part of buyers or an unwillingness by Sears to bend on its asking price.

Gap shares moved higher in after-hours trade after earnings topped expectations. With a few exceptions, retail earnings this quarter have been disappointing. Last week, Walmart cut its full-year earnings guidance, and a few days later, Target reported a disappointing quarter. It’s hard to get consumers to loosen their grip on the purse strings.

The National Association of Realtors said sales of existing homes rose 2.4% in July to a seasonally adjusted annual rate of 5.15 million, the fourth consecutive month of gains and the fastest rate of gain in 10 months. More people are buying homes compared to earlier in the year, but the sales pace is still down 4.3% from one year ago. The median existing-home price for all housing types in July was $222,900, which is 4.9% above July 2013. This marks the 29th consecutive month of year-over-year price gains.

In a separate report, the Labor Department said initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 298,000 for the week ended Aug. 16.

The Conference Board’s Leading Economic Index increased 0.9% last month after an upwardly revised 0.6% rise in June.

The Bureau of Economic Analysis, the BEA, has released its state by state analysis of quarterly gross domestic product. California has the biggest economy among the states, with about $2.1 trillion in GDP, followed by Texas at $1.4 trillion, and New York at $1.2 trillion. Vermont has state GDP of about $28 billion. Arizona comes in at almost $265 billion.

The latest numbers from the Census Bureau show the gap between Americans at the top of the economic ladder and those at the bottom is as wide as ever. Between 2000 and 2011, the gap expanded considerably. The net worth of the poorest 20% of US households fell by $5,124. At the same time, the wealthiest 20% posted a $61,379 increase in net worth. Looked at another way, the net worth of the richest 20% of families totaled $630,754 in 2011. The poorest had a negative net worth of $6,029. Altogether, the top 40% of households increased their net worth from 2000 to 2011. The bottom 60% lost ground.

Sentier Research has analyzed Census data on incomes. In June 2014, the median household income was $53,891, down from $55,589 in inflation-adjusted dollars when the economic expansion began in June 2009; that is a 3.1% drop in median income. Now, let’s clarify this report because you may have seen that the average inflation adjusted per-person disposable personal income is up 4.2% over the past 5 years. There is a difference between median and average; Bill Gates walks into a room with 80 other people and the average net worth of everyone in the room is about one billion dollars; while the median net worth is barely changed. The averages can be distorted by the strong income gains among the wealthiest; the median income numbers give a better sense of the majority of Americans.

And it’s not just the past 5 years; median income remains lower than back in January 2000; the middle income family is worse off than they were 14 years ago. The good news is that there has been some improvement in the past 3 years; since 2011, inflation adjusted household incomes are up 3.8%. We are starting to dig out of a hole, but we’re still digging.

The point is that the economic recovery has been pretty miserable for most Americans. Meanwhile, the Federal Reserve is holding its annual confab for the world’s most powerful financial players at Jackson Hole, Wyoming. The invitation only soiree includes central bankers, investment bankers, economists, and a various assortment of other bigwigs. Tomorrow morning, Fed Chair Janet Yellen will deliver the customary opening speech. ECB President Mario Draghi will speak at lunch. This year’s theme is “Re-Evaluating Labor Market Dynamics”.

In the mountains of Wyoming, the air is thin, and around Jackson Hole, it is rarefied: One banker was quoted as saying: "It seems that conditions reflect the best of all worlds - US economic growth that is neither too slow, which would put pressure on earnings - nor too fast, implying inflationary pressures which could lead to (price-to-earnings ratio) contraction and possibly accelerate the Fed's move towards higher interest rates."

Kansas City Federal Reserve Bank President Esther George says the time has come for the Fed to raise rates, citing improvement in the labor markets. George said: "I don't want us to be behind the curve in beginning to normalize interest rates… When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that… I think a very natural response when you get to this point is worrying that you might derail the recovery, but then again we've seen data come in stronger than we expected."

Fed officials are convinced that the economy is gaining strength after the years of false starts, but a majority of policy makers, led by Janet Yellen, favors a slow retreat from the Fed’s efforts to encourage job creation. They note that millions of people still cannot find jobs, while inflation remains relatively weak.

The theme is the labor market, and the Fed tracks wage trends closely because they're an important inflation indicator, and they're also a reflection of how close the economy is to full capacity. Also, in a well-functioning economy, wages should be rising particularly when productivity is going up. The Fed can't really do anything to get wages up; what it can do is wait to raise interest rates until the job market is healthier and that's what they're debating now - should they wait a while longer?

The latest government data show average hourly earnings adjusted for inflation have not increased at all in the last year, even though we're told the economy is getting better and other wage measures show similar trends. The problem with Jackson Hole is somebody like Bill Gates walks into a restaurant, and all the economist believe they are billionaires.

It is shaping up to be another good year in the equity markets, not as good as last year, but not a letdown; investors have ignored the calls for a correction, and this is still a risk-on market. Typically, when risk is not given much weight, this would be a good time to hedge one’s portfolio. And the reason for “risk-on” is a Federal Reserve that keeps interest rates at historic low levels; add in the demographics of most investors who have no choice but to stick what they have into higher risk assets such as stocks; plus the corporate world that is sitting on cash and the closest idea to innovation is to buy back their own stock, thus pushing prices even higher.

In this environment, weakness in the economy and even geopolitical events are being disregarded, with both being seen as buying opportunities. Investors might not have much choice but to hang onto the bandwagon, but you also should be keenly aware of when you need to get off because the markets could switch to risk-off in the blink of an eye.

The Bank of America settlement deal was announced today. BofA agreed to pay $16.65 billion to end federal and state investigations into the sale of toxic mortgage securities during the subprime housing boom; actually, it works out to $9.65 billion that will actually be paid, plus $7 billion in soft-consumer relief; minus about $600 million in tax deductions. About $5 billion of the cash portion of the settlement is paid as a penalty to the US Treasury. Other portions will go toward compensating investors, including state pension funds. Just under $1 billion will be split among six states.

Under the out-of-court settlement, Bank of America acknowledged that Merrill Lynch told investors in subprime mortgage bonds in 2006 and 2007 that the loans generally complied with underwriting guidelines, though reviews suggested as many as 50% did not. Bank of America also acknowledged that Countrywide did not generally tell investors the extent to which it made exceptions to its own internal guidelines. The settlement also covered some post-crisis conduct, including Bank of America's admission that from 2009 to 2012 it submitted loans for government insurance under the Federal Housing Administration that did not qualify.

The statement of facts failed to identify the amount of profit the bank gained, or show how the penalty will restore losses to investor victims. No individuals were charged. Maybe we can blame robots.

Bank of America shares jumped 4.1% to $16.16; the thinking is that the worst is behind them. The bank had already set aside reserves to handle the legal problems and the thinking is that this settlement is the settlement to end all settlements. Ultimately it works out to about a half year’s profit, give or take; you know, the cost of doing business.