Financial Review

G19

Sinclair Noe — July 6, 2017

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

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DOW – 158 = 21,320
SPX – 22 = 2409
NAS – 61 = 6089
RUT – 19 = 1400
10 Y + .04 = 2.37
OIL + .16 = 45.29
GOLD – 1.70 = 1226.00
BITCOIN +0.08% = 2621.33 USD
ETHEREUM – 1.30% = 265.59

The G20 Summit is underway in Hamburg Germany.

China’s President Xi Jinping and German Chancellor Angela Merkel pledged to work together more closely on a range of issues. Japan and the European Union agreed a free trade pact to create the world’s biggest open economic area and signal resistance to what they see as President Trump’s protectionist turn.

German chancellor Merkel, who is hosting the summit, wants to unite world leaders on environmental goals, but will be careful not to mention the words “climate change” around the US president. Japanese Prime Minister Shinzo Abe urged the G20 states to continue working together on climate protection, after Trump pulled the United States out of the 2015 Paris agreement on climate change policy.

France announced it will end the sale of gasoline and diesel vehicles by 2040 and become carbon neutral 10 years later. Earlier today, Trump delivered a speech in Warsaw before heading to the summit. Tomorrow, Trump meets with Russian President Putin.

The G20 is the G19 this year. Brazil is absent. Brazilian President Michele Temer faces criminal corruption charges. Meanwhile, protesters are capturing the spotlight. There are 20,000 riot police in Hamburg; six times more protesters. What are they protesting? Well, it’s a mixed bag of issues but it seems to include globalization, a lack of action on climate change, war, inequality, refugees, and authoritarianism in general.

Germany, the host of the G19, saw its bond yields climb to the highest levels in 18 months. The yield on German 10-year bunds rose nine basis points to 0.56 percent; part of a drop in global government bonds that spread to the US and pushed the yield on 10-year Treasury notes to the highest level since May.

Bonds across Europe fell after the results of a French debt auction showed a drop in excess demand for 30-year securities. Trading volumes in bund futures contracts jumped after the auction results were announced, sparking the surge in yields. The Stoxx Europe 600 Index fell 0.7 percent as bond yields rose, bringing its decline since mid-May to about 4 percent. Eurozone stocks were hot a couple of months ago, now, not so much.

Hedge funds that built up bullish long-end Treasury wagers to the highest outright level since 2008 are rushing for the exit. DoubleLine Capital Chief Executive Officer Jeffrey Gundlach says the recent selloff is a sign of more pain to come for Treasury bulls.

With a Federal Reserve seemingly committed to raising interest rates a third time this year and speculation the European Central Bank could announce a tapering of bond purchases by the end of the year, the fundamentals aren’t encouraging. As yields are now approaching key technical marks that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.

Tomorrow we will receive the Labor Department’s monthly non-farm payroll report. Today we had a sampling of predictive data.

The ADP National Employment Report showed private sector payrolls increased by 158,000 jobs last month, stepping down from the 230,000 positions created in May and below expectations for a gain of 185,000.

While the ADP report has a spotty record predicting non-farm payrolls, June’s modest job gains together with the modest rise in first-time applications for jobless benefits and cooling services sector employment pose a downside risk to the government’s June jobs report.

Last month, for example, ADP recorded 253,000 private-sector job gains while the Labor Department tallied just 147,000 private jobs and 138,000 total additions, after subtracting out government job losses.

Outplacement consultancy firm Challenger, Gray & Christmas reports the number of planned layoffs fell in June to its lowest level of the year as employers opted to hold onto existing jobs in a tight labor market where skilled laborers are harder to find.

Meanwhile, initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 248,000 for the week ended July 1. It was the third straight weekly increase in claims. Still, it was the 122nd straight week that claims remained below 300,000, a threshold associated with a healthy labor market.

A report from the Institute for Supply Management showed its non-manufacturing sector index rose half a point to a reading of 57.4 in June. A reading above 50 indicates expansion in the vast services sector. Industries reported an increase in new orders, but said employment growth had slowed.

A report from the Commerce Department showed the trade deficit fell 2.3 percent to $46.5 billion in May. When adjusted for inflation, the trade deficit narrowed to $62.8 billion from $63.8 billion in April. Real goods exports surged to an all-time high in May, propelled by record high petroleum exports.

Still, the real trade deficit averaged $63.3 billion in April and May, above the first quarter’s average of $62.2 billion. That suggests trade will be a drag on gross domestic product in the second quarter after contributing 0.23 percentage point to the economy’s 1.4 percent annualized growth pace in the first three months of the year.

As the US economy enters its ninth year of expansion this month, many Americans feel the recovery has been incomplete — and the numbers back them up. Five states — Arizona, Connecticut, Mississippi, Nevada and Wyoming — still haven’t regained their levels of gross domestic product from before the financial crisis, more than five years after the country hit that milestone.

Arizona’s GDP is still 0.3% below the pre-recession peak. Home prices in Arizona are still almost 11% lower than 2007 levels. Eight states are below pre-recession levels of employment. And 15 have home prices that have yet to rebound fully.

Eighteen states and the District of Columbia sued the US Education Department and Secretary Betsy DeVos over the recent suspension of rules that would have swiftly canceled student-loan debt of people defrauded by Corinthian Colleges Inc and other for-profit schools.

The suits claim the department broke federal law in announcing the delay with limited public notice and opportunity to comment. They said the department and DeVos were using the pending litigation as “a mere pretext” to repeal the rules and replace them with one that “will remove or dilute student rights and protections.”

DeVos said she wanted to pause the acceleration of the debt cancellation process because it “puts taxpayers on the hook for significant costs.” She also said a delay was needed while current litigation in California over the rules, works its way through the legal system. Consumer groups Public Citizen and Project on Predatory Student Lending sued to remove the delay as well.

The Home Shopping Network is having a sale. The buyer is QVC, the shopping channel owned by Liberty Interactive is buying Home Shopping Network for $2.6 billion. A combined QVC-HSN ranks as the No. 6 U.S. online retailer ($7.5 billion eCommerce sale in 2016), dwarfed by Amazon ($123.8 billion). QVC and HSN will continue to operate as individual brands.

We’re waiting for an announce from Berkshire Hathaway. Berkshire Hathaway’s energy business is close to a deal to acquire Oncor, the electric-utility giant based in Texas. Oncor, one of the largest utility companies in the US, says it serves 10 million customers across Texas. It earned $935 million in operating revenues and $73 million in net income in the quarter ended March 31.

We just had a vote in Illinois. A financial showdown, more than two years in the making, went to a vote this afternoon in the Illinois House as Democrats enacted a $36 billion spending plan fueled by a 32 percent income tax increase over the Republican governor’s objection.

Votes to override Gov. Bruce Rauner’s vetoes of the budget package give Illinois its first annual budget since 2015 and spell the end of the nation’s longest fiscal stalemate since at least the Great Depression. The standoff entered a third fiscal year on July 1. Credit-rating houses had threatened to downgrade the state’s creditworthiness to “junk,” signaling to investors that buying state debt is a highly speculative venture.

Yesterday, Moody’s Investors Service, put Illinois under review for a downgrade even with the new budget. Moody’s said that while lawmakers have made progress, the House budget does not address the state’s massively underfunded pensions or do enough to pay down bills.

The resolution to the fiscal standoff, which emerged from the Democrat-led legislature over the last several days, triggered a rally in Illinois bond prices by signaling that elected leaders are beginning to tackle the government’s long-building financial strains. Without a full-year budget for the past two years, Illinois continued to run up deficits, leaving it with dwindling reserves, a record pile of unpaid bills and increasing obligations to its underfunded employee pension system.

Thirty-three of the 50 U.S. states reported revenues that came in below projections in fiscal year 2017, the highest number of states since the recession decimated budgets in 2010.

Microsoft announced a major reorganization that will include up to 3,000 layoffs, largely in sales. The job cuts amount to less than 10 percent of the company’s total sales force, and about 75 percent of them will be outside the US. Reports from last week suggested this was going to happen and that Microsoft was going to specifically focus on how it sells its cloud-services product, Azure, which has been booming in recent quarters.

Financial Review

Assume They Are Still Listening

Sinclair Noe — May 7, 2015

 

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

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DOW + 82 = 17,924
SPX + 7 = 2088
NAS + 25 = 4945
10 YR YLD – .06 = 2.18%
OIL – 1.95 = 58.98
GOLD – 7.00 = 1185.20
SILV – .19 = 16.40

Britons voted today in one of the tightest elections in decades. Final opinion polls showed Prime Minister David Cameron’s Conservatives and Ed Miliband’s opposition Labour Party almost in a dead heat, indicating neither will win enough seats for an outright majority in the 650-seat parliament. Exit polls indicate a victory for the Conservatives but not enough for a majority, so talks will begin tomorrow with smaller parties to strike deals.

And those smaller parties could have a big influence on major decisions. The U.K. Independence Party is on track to become the country’s third largest political party. Its key goal is putting Britain’s EU membership up for an in-or-out referendum, sooner rather than later. UKIP is expected to prop up a Conservative government in exchange for an EU vote. For the financial markets, this is the No. 1 worry.  The Scottish National Party looks set for big gains in Scotland, which it wants to see split off from the rest of the U.K.

So, in addition to worrying about a possible Greek exit from the Euro-union, we now are supposed to be concerned with a British exit, and the whole thing is putting pressure on German bunds, or bonds. And you’re thinking “So what? I don’t own any German bunds.” You don’t have to own German bonds to be affected by that market. The bund is a benchmark and the recent selloff in Euro-debt affects global markets, including the US, and it affects everything from the strength or weakness of the dollar, to corporate profits, to the interest rate on your mortgage to the price of gasoline at the pump.

Yesterday, Fed Chairwoman Janet Yellen suggested stock prices might be too high. Many investors agree that the U.S. stock market is trading at stretched levels. Quarterly corporate earnings were better than expected, but those expectations were low in the first place. Investors are paying about $17 for every dollar of earnings in the Standard & Poor’s 500-stock index, not excessively high but still above the $15 that investors have historically paid for similar results. That doesn’t mean stocks can’t go higher. Mrs. Yellen doesn’t know, you don’t know, I don’t know. The market can stay irrational longer than you can stay solvent; that much we do know.

“It’s very hard to know what markets reflect at any given point in time. It’s really hard to know, except in retrospect when market prices, valuations are defying gravity,” so says Timothy Geithner, the former Treasury Secretary. Geithner thinks the US economy is more stable and resilient than before the 2008 financial crisis; even so he expects that a financial crisis will happen again at some point but the structural reforms could also lead to an extended period of financial stability.

The Federal Reserve is making plans to prevent an abrupt contraction in its balance sheet next year, when some $500 billion in bonds expire. Though it ended a stimulative asset-purchase program last October, the Fed is still buying mortgage and Treasury bonds to replenish its $4.5-trillion portfolio as holdings mature. The central bank has said it will keep reinvesting until some time after it begins raising interest rates later this year. Asked publicly and privately about the longer-term strategy, Fed policymakers say they are in no rush to shrink the portfolio, suggesting they will seek to avoid a “cliff” – a disruptive end to reinvestments that might come if bonds are simply allowed to run off through maturity or prepayment. So, it’s really like QE is never-ending.

The number of people applying for U.S. unemployment benefits rose by 3,000 in the last week to 265,000 – which is near a 15 year low. Continuing jobless claims – people already collecting unemployment checks – declined by 28,000 to 2.23 million to the lowest level since November 2000. Tomorrow morning the Labor Department will report the April Jobs numbers. The guesstimates call for somewhere around 225,000 to 245,000 new jobs added in April, and the unemployment rate to drop to 5.4%. In March, the economy only added 126,000 new jobs, the worst report in more than a year; so it will be important to see a strong rebound; any weakness would suggest a trend of underperformance. We’ll also be watching for trends in wage growth.

The Federal Reserve reports that consumer borrowing increased at a 7.3% pace in March, the largest increase since July. The report looks at outstanding consumer credit, or total debt not including mortgages. Total debt increased by $20.5 billion to $3.36 trillion in March. The latest data follows a pattern similar to last year’s, when consumers started spending again after taking a break following the holiday season and harsh winter weather.  In line with recent trends, car and student loans continued to dwarf credit-card usage in March. Credit card debt rose by a seasonally adjusted $4.4 billion in March, or at a 5.9% annual rate. This is the largest percentage increase since last July. It follows two straight 3.3% declines. Consumers remain reticent to fund consumption with credit and they will probably remain so until the prospects for wage growth improve.

The International Monetary Fund warns the balance of risk in the Asia-Pacific region is tilted toward the downside due to rising debts and a strong U.S. dollar. Asia is still seen as a global growth leader; the region is forecast to have a growth rate of 5.6% in 2015 and 5.5% in 2016, according to the new IMF survey. Positive factors for Asia in the near future include moderating commodity prices, strong labor markets, and solid demand from the U.S. and Europe.

Tesla reported first quarter results and beat on the top and bottom lines.  The company delivered just over 10,000 Model S vehicles in the first quarter and believes it will deliver 55,000 vehicles by year-end. Model X deliveries are expected to begin late in the third quarter. Tesla is fresh from its battery announcement; last week, the company unveiled its stationary battery for homes and small businesses, the Powerwall. CEO Elon Musk called battery demand: “crazy off the hook.”

Whole Foods posted a mixed quarter; earnings beat expectations but revenue fell short.   The company expects comparable same-store sales in the “low-to-mid single digits.” Whole Foods plans to open a sister chain of smaller stores aimed at younger, more cost conscious shoppers, because apparently some shoppers don’t like paying $15 for a watermelon. They’re still trying to come up with a name for the new stores, you know, something other than Whole Paycheck.

Earlier this week we told you that Corinthian Colleges had closed its for-profit college campuses and declared bankruptcy. Add a couple more to the list. Career Education will shut or sell all of its career colleges to focus on its two universities, while Education Management will close 15 of its Art Institute campuses. Career Education and Education Management both said they’ll continue offering instruction for existing students to finish their programs while not accepting new enrollments, a process known as a “teach out.” By shutting down over time, the schools won’t have to cancel student loans, as many Corinthian College students are demanding.

Sotheby’s has wrapped up its first major spring auction of the year. The event brought in a total of $368 million, thanks in part to a $66 million dollar sale of a painting by Van Gogh. The last time this same painting was sold was 2003 when it sold for $12 million. A 452% return in 12 years. Not bad.

A US federal appeals court has ruled that the bulk collection of US telephone records by the National Security Agency is not permitted by laws passed after the 9/11 attacks to increase intelligence collection. The challenge was brought by the American Civil Liberties Union against James Clapper, the director of National Intelligence, along with the heads of the NSA, the FBI, the Department of Justice, and the Department of Defense. (Of the five officials named in the suit when it was filed in January 2014, only Clapper remains in the same role.)

The ACLU was prepared to argue that the government’s dragnet violated the US constitution’s prohibitions on unreasonable searches, but it didn’t have to. A three-judge panel agreed first that the Patriot Act does not allow for the collection of data without a warrant. Specifically, they cited section 215 of the act which permits demands for documents “relevant to an authorized investigation.” However the judges found that the government hasn’t even attempted to identify a particular authorized investigation associated with the collection of bulk metadata of virtually all Americans’ phone calls.

Put another way, the government argues that there is only one enormous “anti-terrorism” investigation, and that any records that might ever be of use in developing any aspect of that investigation are relevant to the overall counterterrorism effort. The government’s approach essentially reads the “authorized investigation” language out of the statute. The United States Court of Appeals for the Second Circuit said that if Congress wanted to permit a bulk phone program, it must say so unambiguously. The ruling arrives just as Section 215 is set to expire on June 1^st, unless lawmakers enact legislation to extend it; now the court says, in essence, that a simple extension would not pass muster.

The judges also cite Edward Snowden, the NSA whistleblower now living in exile in Russia, as the key source of the revelation of this illegal program. Snowden, of course, has not returned to the US for fear of prosecution.

The ruling focuses on the phone-records program, but it might also apply to many of the government’s other mass-surveillance programs. It’s not clear how the government will respond to this decision; Congress could repeal bulk data collection, or at the very least alter the process; the government could appeal to the US Supreme Court. Until such time, just assume they are still listening.

Financial Review

The World Continues

Sinclair Noe — May 4, 2015

 

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

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DOW + 46 = 18,070
SPX + 6 = 2114
NAS + 11 = 5016
10 YR YLD + .02 = 2.13%
OIL – .22 = 58.93
GOLD + 9.90 = 1188.80
SILV + .27 = 16.47

Orders for factory goods rose to 2.1% in March, a little less than expected. Orders for durable goods rose 4.4%; that’s for goods designed to last for three or more years. Orders for non-durable goods dropped 0.3%. But the big economic news this week will be the Friday Jobs Report. The Jobs Report for March came in at a very disappointing 126,000 jobs added; forecasters predict job creation in April will bounce back to somewhere between 225,000 to 245,000 new jobs, with the unemployment rate ticking down to 5.4%. We’ll also be watching the jobs report for any indication of wage inflation. The employment cost index was up 0.7% in the first quarter.

The government calculates that the typical household threshold for spending on housing and utilities is 30%. The AP reports that more than one in four renters spend more than half their income on housing and utility costs. This is a simple story of supply and demand. Housing supply is very tight. The rental vacancy rate has not been this low in 20 years. Tight supply and strong demand means higher prices. And as rental rates have moved higher, wages have not. According to the Labor Department average hourly wages have risen just 2.1 percent in the past 12 months, while Zillow reports rental prices have climbed 3.7 percent.

So, we all try to save money where we can; one money saving idea is to cut the cable. Today Comcast reported that the number of people who subscribe to the company’s Internet service surpassed its total video subscribers for the first time during the second quarter this year. The internet is killing TV. This turning point in technological evolution was announced during Comcast’s earnings call this morning; despite dwindling cable customers, the company still pulled down net income of $2.1 billion. Comcast continues to generate significantly more revenue from its video business than from broadband. Video revenue was $5.3 billion for the quarter, compared with $3 billion for high-speed Internet.

Over the weekend, about 40,000 investors gathered in Omaha, Nebraska for the Berkshire Hathaway shareholders’ meeting, also known as “Woodstock for Capitalists”. Prior to the big get-together, Buffett talked with Fortune magazine and admitted he has “been wrong on interest rates.” Two years ago, Buffett said he was worried about the Federal Reserve’s efforts to stimulate the economy. In particular, he warned that the end of the Fed’s so-called quantitative-easing program would end badly. Buffet missed out on about $4 billion because he missed the direction of interest rates. He said, “It is so hard for me to believe that you can drop money from a helicopter and not have inflation, but we haven’t.” Today, Berkshire Hathaway reported earnings that topped analysts’ estimates.

The Pimco Total Return Fund, launched by Bill Gross, has lost its title as the world’s biggest bond mutual fund, following two years of withdrawals. Pimco said investors yanked another $5.6 billion from the Pimco Total Return Fund last month, bringing its assets to $110.4 billion at end of April. By comparison, the Vanguard Total Bond Market Index Fund had $117.3 billion as of April 30. The Pimco Total Return Fund delivered a net after fee return of 1.62 percent year-to-date through April.

Warren Buffett and Bill Gross agree on at least one thing: the 30-year bull market in Treasury bonds is coming to an end as 30-year bond yields rose to a four-month high. Buffett said long-term bonds are overvalued and it’s not worth buying long-term bonds at current interest rates. Gross said the bull market “supercycle” for both bonds and stocks is ending.

The U.S.’s two largest food distributors, Sysco and U.S. Foods, will square off with the Federal Trade Commission in a Washington federal court tomorrow, in a seven-day hearing that will decide the fate of their planned merger. The FTC filed suit in February to block the merger after investigating it for more than a year, arguing that the deal would “eliminate significant competition…and create a dominant national food service distributor.”

Faced with the worst sales slump in over a decade and the rise of gourmet burger chains, McDonald’s unveiled a turnaround plan. It’s largely operational; they will divide the company into 4 new global segments; they will also sell off company stores to franchisees. No big announcement on menu changes, and still no word on what they put in that McRib thing.

Last month, GE announced a sweeping overhaul, jettisoning the bulk of its finance division to focus on big-ticket industrial products such as jet engines and power turbines. There was some speculation that GE might divest its lighting business after deciding last year to sell its appliances segment and moves by Siemens and Philips to hive off lighting units. GE Lighting totaled about $2.5 billion in revenue last year, 2.3 percent of the company’s overall industrial sales. GE will keep its lighting business and give it a high tech boost. GE will collaborate with Qualcomm and Apple to embed technology into lighting, to transmit data from LED lighting to consumers’ smartphones.  One use of the “indoor positioning” technology could be to transmit customized coupons to shoppers depending on their store location. GE also said it will produce an LED bulb compatible with Apple’s yet-to-launch connected-device platform HomeKit. The bulb can change colors to align with the natural rhythms of the body.The tie-ups underscore GE’s plans to dive into the emerging and increasingly competitive market for connected lighting that integrates with smart devices.


Corinthian Colleges has filed for Chapter 11 bankruptcy. The for-profit school operator sold most of its campuses in November and then closed its remaining 28 campuses last month, affecting 16,000 students. At its peak, the company operated more than 120 colleges with more than 110,000 students across North America under the Everest, Wyotech and Heald brands, and investors valued the company at more than $1.4 billion. The only surprise here is why they filed Chapter 11, which involves reorganization; it does not look like Corinthian can reorganize.

Federal and state authorities have accused Corinthian of lying about its graduation and job placement rates, misleading potential students into enrolling and taking on tens of thousands of dollars in student loan debt for an education and credentials of dubious value. State prosecutors in Massachusetts, California and Wisconsin have separately sued the company, as has the federal consumer bureau. California settled similar accusations with the company in 2007. Last month the Department of Education accused Corinthian of falsifying hundreds of job placement rates dating back to 2010 and misleading students and accreditation agencies about graduate employment rates; last month the department fined Corinthian $30 million.

The Department of Education provides the money for federal student loans, and collects payments from students. It also decides when colleges do not meet the basic eligibility standards to receive federal student funds, which provide almost all the revenue of for-profit colleges like Corinthian. Corinthian fell out of favor with the Department of Education last summer over a paperwork dispute, leading to a cash crunch at the company after the department slowed its access to federal financial aid. The Education Department subsequently bailed out the company and brokered a sale of more than half of Corinthian’s campuses to ECMC Group, one of the department’s contracted debt collectors. As the company descended into insolvency, the Education Department allowed it to continue to enroll new students at its remaining campuses in an effort to keep its schools attractive to potential buyers.

And then the story gets more interesting. While Corinthian Colleges is permitted to file Chapter 11 bankruptcy (or any other chapter in the bankruptcy code), indebted students are stuck with the bill for loans made through the Department of Education on  behalf of for-profit schools that had a record of falsifying records, and clearly appeared to be headed toward collapse. Most student loans cannot be wiped out in Chapter 7 or Chapter 13 bankruptcy, unless there is some sort of undue hardship.

As part of the sale of some campuses last summer to the debt collector, the Consumer Financial Protection Bureau negotiated $480 million of forgiveness for students’ private loans. Their federal loans, which can be discharged only by the Department of Education, stayed intact. And that has led to a group of students saying they refuse to pay. They call themselves the Corinthian 100, although there are about 150, and they are debt strikers. They say they should not pay because of the fraud perpetrated by Corinthian. The students seeking debt relief fall into different categories. The 16,000 students whose schools closed last week have a right to loan forgiveness as long as they do not transfer their credits to another institution. The department has been telling students from the 30 newly closed campuses that they could transfer to other for-profit colleges that are also under investigation; the department has not been telling the students that transferring to a new campus would lock in their debt.

The legal status of claims by the debt strikers and other former students who say they were defrauded is murkier, but they may have their debt wiped out if they can show that the company violated state law, and injured them. The debt strikers were to meet with senior Education Department officials today, but canceled their meeting after news reports indicated that the department had already ruled out the group’s central demand. The group issued a statement saying: “We refuse to be the pawns of a department that seeks to use the students’ campaign to give cover to their ongoing failures.”

And finally, because I know you have all been waiting for it… Britain’s Prince William and the Duchess of Cambridge have named their newborn daughter Charlotte Elizabeth Diana, a choice that honors the baby’s late grandmother Princess Diana and her great-grandmother Queen Elizabeth. The baby will be known as Her Royal Highness Princess Charlotte of Cambridge. Away from the birth of the Princess of Cambridge, however, the rest of the world has continued.

Financial Review

Somewhere Between Extremes

Sinclair Noe — April 27, 2015      

 

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

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Financial Review by Sinclair Noe
DOW – 42 = 18,037
SPX – 8 = 2108
NAS – 31 = 5060
10 YR YLD + .01 = 1.92%
OIL – .16 = 56.99
GOLD + 21.30 = 1201.70
SILV + .65 = 16.50

We’ll get to the economic news in a minute, but the big market news today is Apple. Net income in the quarter that ended in March was $13.6 billion, or $2.33 a share, representing a 33% jump in profit from last quarter. Analysts on average had forecast second-quarter profit of $12.6 billion, or $2.16 a share. Revenue rose 27 percent to $58 billion, beating estimates of $56 billion. IPhone sales in greater China outpaced those in the U.S. for the first time. Total revenue from greater China surged 71 percent to $16.8 billion. IPhone unit sales jumped 40 percent to 61.2 million. That topped analysts’ average prediction for 58.1 million.

Apple forecast the momentum will continue in the third quarter, with revenue projected to rise to $46 billion to $48 billion from $37.4 billion a year ago. Apple has $193 billion in cash, with a capital return program, which now totals $200 billion. Apple will increase its share-buyback authorization by $50 billion to $140 billion, and increase the company’s dividend by 11 percent; to 52 cents from 47 cents.

To recap: Apple posted better than expected sales and profit; they will increase their buybacks and dividends; and they upgraded their third quarter guidance. Basically, they did everything except wash your car for you.

The Federal Reserve FOMC is meeting this week. It’s a pretty safe bet that policy makers will not be raising interest rates at the meeting, but investors will still be watching the language of the statement for signs on when such a rate hike might be expected. This is a delicate dance by the Fed; they want to test the waters without getting a single toe wet; they might try to indicate they are in favor of a rate hike in order to get a read on market reaction.

Also on tap for Wednesday is the preliminary first-quarter readout of GDP, along with some early April economic reports. The spotlight in Asia this week falls on Japan, where a central bank decision could provide clarity on the direction of the world’s third largest economy. Following its meeting, the Bank of Japan is expected to cut its 2015 inflation forecast by several tenths of a percentage point from 1%, and shave its growth forecast from the current 2.1%. Despite inflation dropping back to zero, governor Haruhiko Kuroda has argued strongly that the BOJ’s existing QE program is on track. Japan’s prime minister, Shinzo Abe, visits Washington as the US and Japan prepare to sign an expanded defense accord and finalize a major trade pact. On Wednesday, he will be the first Japanese leader since World War II to address a joint session of Congress.

As the monetary easing by central banks across the globe keep yields at rock-bottom, investment officers predict that Japanese demand for U.S. debt won’t ease up in the months ahead given the lack of alternatives. Japanese life insurers – some of the world’s largest institutional investors – plan to keep pouring money into U.S. debt this year, outlining that Japan even overtook China in Q1 as the largest foreign holder of U.S. Treasurys. While the current 2% yield on the U.S. 10-year is a far cry from yields of 5% or more before the financial crisis, it is still miles apart from the 0.16% yield on German bunds and the 0.29% yield on the 10-year Japanese equivalent.

The finance ministers of Slovenia and Germany on Saturday acknowledged for the first time that they are considering plans on what to do if a Greek deal is not reached by the end of June, breaking their long-held stance of insisting that the country must stay in the eurozone. The issue of a “Plan B” was raised during Friday’s Eurogroup meeting in Riga, where Athens was strongly criticized for delaying the list of reforms needed to unlock its next round of funding. A Eurogroup meeting in Riga, Latvia on Friday descended into name-calling as the currency bloc’s finance ministers hurled abuse at Greek Finance Minister Yanis Varoufakis, accusing him of being a time-waster, a gambler and an amateur.

The Eurogroup finance ministers don’t’ have any intention of negotiating; for them it is simple – Greece needs to collect more taxes and crush the workers. For the Greek negotiators it is fairly simple as well – the workers are already crushed and the country has no money. Varoufakis was pulled from day to day negotiations; he will still be involved, but from the sidelines. Varoufakis tweeted: “FDR, 1936: “They are unanimous in their hate for me; and I welcome their hatred.” A quotation close to my heart (& reality) these days.”

Greece’s economy is about 2 percent of Eurozone economy, and a hardline stance from the Euro Union finance ministers would not overwhelm Europe’s economy. Most of the money Greece owes is now owed to governments or the central bank, and not to private banks, insurance companies, or hedge funds. Private interests have long since left Athens; the exception is vulture hedge funds that bought Greek debt for pennies on the dollar, with the idea of dragging the Greeks through the courts to enforce collection. So, as the finance ministers of Slovenia and Germany work on a Plan B, I just hope they realize that Plan B really means a return to nationalism in the Eurozone, which has a poor history in that area.

The game of chicken between Greece and its international creditors is turning into a vicious blame game as Athens lurches closer to bankruptcy with no cash-for-reform agreement in sight. Europe’s political leaders and central bankers and Greek politicians agree on only one thing: if Greece goes down, they don’t want their fingerprints on the murder weapon.

Financial firm Markit said its “flash,” or preliminary, reading of its Purchasing Managers Index for the services sector slipped to 57.8 in April from a final reading of 59.2 in March, which had been the highest level since August. A reading over 50 signals expansion in economic activity.

Chipotle Mexican Grill has eliminated genetically modified organisms from all its ingredients, an unprecedented move for a national U.S. restaurant chain. The company, which began labeling its GMO ingredients two years ago and vowed to remove them, has now taken the final step of stripping them from tortillas and cooking oil. The move coincides with a new Chipotle marketing campaign that will tout its use of simple, unprocessed ingredients.

Meanwhile, Coca-Cola announced it doesn’t have plans to change the sweetener for Diet Coke away from aspartame despite other beverage sellers shifting their focus to the use of natural sweeteners. Sales of Diet Coke fell 6% year-over-year in the first quarter. On last week’s earnings call, Coca-Cola executives said finding the right path to grow Diet Coke sales was still a “work in progress.”

Corinthian Colleges is closing all of its schools. The school is closing its 28 for-profit schools, meaning approximately 16,000 students will have to finish their degrees elsewhere. The Department of Education will “help the stranded students review their options, including possibly forgiving some of their loans.” In recent years, Corinthian has been accused by multiple federal and state authorities of systematically lying about its graduation or job placement rates, misleading potential students into enrolling and forking over tens of thousands of dollars to obtain credentials many critics believe to be of dubious value. The company annually received some $1.4 billion in federal financial aid for its students. A group of roughly 100 former Corinthian students that calls itself the “Corinthian 100″ has been publicly pressuring the Department of Education to cancel all debts owed by current and former Corinthian students because of the company’s alleged deception related to its job placement and graduation rates.

Police officers in riot gear clashed with rock-throwing protesters in Baltimore after the funeral for 25 year old Freddie Gray, the latest victim of police brutality. Gray died a week after his spine was somehow partially severed in police custody. He was initially stopped because he fled upon noticing officers, who later found a knife clipped to his pocket. Cell phone video shows police dragging Gray into a van, but when officers took him out, he wasn’t breathing.

His funeral was today, further sparking the city-wide demonstrations. At least seven officers were injured in today’s protests and one was unresponsive, according to the Baltimore police department. The violence broke out near the church where Gray was eulogized. Groups of angry young people surrounded a police cruiser and smashed it in; another cruiser could be seen burning. A drugstore was also looted. Other protesters pelted the police with items picked up at nearby vacant lots: rocks, bricks, boards and chunks of concrete. Some arrests were made. The unrest comes after a weekend during which an angry mob protesting outside Oriole Park at Camden Yards forced the team to close the stadium to keep people inside safe from the violence outside. Fears over the potential for crowds to become violent forced the closure earlier today of several downtown businesses and offices.

So, we started today’s review with a story about Apple earning almost a billion dollars per week in profit in the first quarter, and we finish with a story about violent protests in Baltimore. And that’s where we are today; somewhere between two extremes.