Financial Review

Unsavory Business Model

Sinclair Noe — May 11, 2016

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DOW – 217 = 17,711
SPX- 19 = 2064
NAS – 49 = 4760
10 Y – .02 = 1.74%
OIL + 1.57 = 46.23
GOLD + 11.40 = 1277.70

The Dow Jones industrial average had its worst day since Feb. 11. The S&P 500 closed 0.96 percent lower for its worst day since April 7. Consumer discretionary led nine sectors lower. Oil turned higher and extended gains to close at a high for the year after the EIA’s weekly inventory report showed a decline of 3.4 million barrels, versus expectations of a slight build. Yesterday, the American Petroleum Institute reported a 3.4 million-barrel increase in crude inventories for the week; so, really, take your pick.

A federal judge has blocked Staples acquisition of Office Depot after a judge agreed to the Federal Trade Commission’s request for a preliminary injunction on antitrust grounds. The FTC said the proposed merger would likely eliminate competition. The same result occurred when Office Depot and Staples sought to combine in 1997. Staples will now pay a $250 million break-up fee to its smaller rival for terminating the transaction.

The U.S. government posted a $106 billion budget surplus in April, down 32 percent from the same period last year.

The International Monetary Fund has published a new research paper that says public sector corruption siphons $1.5 trillion to $2 trillion annually from the global economy in bribes and costs far more in stunted economic growth, lost tax revenues and sustained poverty. Extrapolating from 2005 World Bank research, the paper estimated that around 2 percent of global gross domestic product is now paid in bribes annually. But it said corruption’s indirect costs are substantially higher, reducing government revenues by encouraging tax evasion and reducing incentives to pay taxes, leaving less money available for public investments in infrastructure, health care and education.

On Monday, the International Consortium of Investigative Journalists posted online its database of documents related to more than 200,000 offshore accounts created through Panamanian law firm Mossack Fonseca. You can read and search through the database at your leisure at offshoreleaks.icij.org. On Monday, 300 economists signed a letter urging world leaders to end tax havens, saying they only benefited rich individuals and multinational corporations, while boosting inequality. Which is probably true, yet not quite complete. What we are also learning from the Panama Papers is that offshore accounts are a business model for the financial system. It is a core business for global financial institutions.

Tax evasion by wealthy individuals is only a small part of the story. Legal tax avoidance is almost certainly more important. Most of that involves companies; some companies designed to hide the activities of individuals or families, and also large global corporations.

And while it might be impossible at this time to measure the exact amount of evasion and avoidance, we could look at the gross global output and then the amount the financial sector claims in profits, and then try to extrapolate how much of that comes from  tax evasion and avoidance schemes; and don’t forget the manipulation of currency exchanges, and interest rate exchanges, and bond markets and equity markets and commodity markets and derivatives markets, and well… all the other markets that banks have admitted to rigging.

Add it all up and it might total hundreds of billions a year; if we add in the bribery and corruption the IMF calculates (and that should be added in because that money ends up in banks), then we are looking at trillions of dollars a year.

There has been an explosion in financial sector activity and profits in the past 40 years or so, and the bankers claim that it is: “driven by the benefits of a more efficient allocation of capital by rational markets” but a more realistic interpretation is that growth has been driven by an unsavory system that turns a blind eye to a socially counter-productive business model.

As the Puerto Rican debt crisis continues to unfold, mutual fund managers have been busy trimming their holdings to reduce exposure to the commonwealth’s crisis. Over the past year, the number of funds with exposure to the island has been pared to 29 – out of a pool of 562 municipal bond funds – from as many as 48 in June 2015, according to data from Morningstar. Total dollar exposure has been cut as well, from about $9.9 billion last summer to $6.3 billion now.

Pacific Investment Management Co.’s Total Return Fund cut its holdings of emerging-market debt to the lowest level in almost two years in April. Emerging bonds fell to 9.4 percent of assets, the smallest proportion since August 2014, and down from as much as 29 percent in August 2015.

An impeachment vote on Dilma Rousseff. After months of wrangling, the Brazilian senate will vote on whether or not to impeach the country’s embattled president. National media polls show she’s likely to lose and face trial on charges she broke national budget laws. Today could effectively be her last on the job. The Brazilian newspaper O Estado de S.Paulo says President Dilma Rousseff has packed up all her personal belongings at her office and had them sent to the official presidential residence. Brazil’s highest court says it has rejected an appeal to halt the impeachment process in the Senate. An impeachment vote is expected any time now, like in the next few minutes.

Canadian oil sands companies near Fort McMurray are beginning to restart their operations, as the out-of-control wildfire continues to rage but has now moved far enough away from the oil sands’ sites to allow them to return. Royal Dutch Shell is the first firm to turn on its operations, resuming production at its Albian mine. Before Shell’s restart, the total decline to output in the area reportedly reached at least 839,000-barrels per day, or close to one-third of Canada’s overall daily production.

Department store operator Macy’s reported a 7.4 percent fall in first-quarter sales, the fifth straight quarter of decline, as customers cut back on buying apparel.

 Hershey, the chocolate candy maker, reported a drop in net sales for the third quarter in a row, hurt by weak demand in North America, the chocolate maker’s biggest market.

DuPont’s first-quarter results beat Wall Street estimates and the chemicals and seed producer raised its full-year guidance as it sees lower currency impact than expected. DuPont and Dow Chemical agreed in December last year to a $130 billion all-stock merger, in a first step towards breaking up into three separate businesses; that deal faces intense regulatory scrutiny.

Hit by a sharp appreciation in the yen, Toyota is predicting net income to drop 35% to $13billion for the fiscal year ending in March, snapping three straight years of record profit. Toyota also stated it would repurchase as much as $4.6 billion, or about 3.2%, of its stock.

Chipotle Mexican Grill has spent more than $1 billion on share buybacks in the past year, part of efforts to cope with a food-safety crisis and a flagging stock price. But the move has raised questions about whether the money would be better spent elsewhere. The cost of the repurchases is roughly twice the cash Chipotle’s restaurants generated in the same period. Meanwhile, Chipotle has retained two leading food safety experts – including a critic of the burrito chain’s early response to disease outbreaks last year – as it redoubles its efforts to guard against health scares.

Walmart has filed a lawsuit against Visa for allowing customers to verify chip-enabled debit card transactions with a signature instead of a PIN. The lawsuit says that Visa requires Walmart to accept signature-based transactions for chip debit cards, which Walmart says are a less secure method of payment than PIN-based payments. The dispute is really about money: Wal-Mart pays Visa about five cents more per signature transaction than it does for those that use a PIN. The two have tangled frequently in different lawsuits over the last several years.

Mitsubishi Motors now says that cheating on gas mileage ratings on its cars extends to nine models sold in Japan and others that are no longer sold, vastly increasing the scope of the scandal. That encompasses virtually all the models it sold in its home country. They insist that the scandal does not involve cars sold in the US. Mitsubishi has not disclosed a plan yet to compensate customers. Mitsubishi is only the latest automaker to become enmeshed in controversy over its gas-mileage ratings. In the US, Hyundai, Kia and Ford had to revise gas mileage figures on some models in recent years after their rating methods were called into question.

Google will no longer accept ads for payday loans. Google defines payday loans as loans due within 60 days of being issued and in the U.S. loans with an annual interest rate of 36% or higher. Payday lenders will no longer be able to purchase ads that appear above search results for key terms under Google’s AdWords program. But they will still appear in search results.

The change does not rein in companies marketing loans for mortgage, student, car and commercial loans as well as credit card offers. The ban, which takes effect on July 13, comes ahead of stricter regulations from the Consumer Financial Protection Bureau. Facebook officially banned payday loans last August. Payday lenders and their lobbyists complain the move is discriminatory, but we know that there is a special place in hell for usurers.

Thus Spake Yellen

Sinclair Noe — March 29, 2016

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

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DOW + 97 = 17,633
SPX + 17 = 2055
NAS + 79 = 4846
10 Y – .06 = 1.81%
OIL – .90 = 38.49
GOLD + 20.60 = 1242.90

The Federal Reserve raised interest rates in December and indicated they would like four more rate hikes in 2016. The March meeting of the FOMC took a much more dovish tone; policymakers left their benchmark lending rate target unchanged this month at 0.25 percent to 0.5 percent while revising down their median estimate for the number of rate increases that will be warranted this year to two hikes.

Since that meeting a couple of weeks ago, various Fed officials have jawboned the markets about rate hikes, some calling for more rate hikes, others taking a more cautious stance. As a result, there was not much certainty about the Fed’s direction.

Federal Reserve Chair Janet Yellen spoke at an Economic Club of New York luncheon today. Yellen is definitely dovish.  She said it is appropriate for US central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks. The speech made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate.

Yellen mentioned two risks in her speech. Growth in China is slowing and there is some uncertainty about how the nation will handle the transition from exports to domestic sources of growth. A second risk is the outlook for commodity prices, and oil in particular. Further declines in oil prices could have “adverse” effects on the global economy.

The US economy seems to be slogging along and there are encouraging signs, including the continued strengthening of the labor market; the downside is a strong dollar hurting exports. The outlook for inflation is a bit uncertain. Since the March meeting, Fed officials have seen more evidence that the pace of domestic growth may be slowing.

U.S. gross domestic product decelerated to 1.4 percent pace in the fourth quarter, while the Atlanta Fed’s GDPNow estimate for the first quarter is 0.6 percent, partly due to slower rates of consumer spending growth.

Yellen seemed to stress that even though rate hikes might not be imminent, the Fed still has policy ammunition. Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”

Well, of course the markets had a fairly predictable response – risk on. Market players have been conditioned to drink from the free-flowing trough of central bank easy money. Almost immediately government and corporate bond yields fell, the dollar weakened, gold jumped, the VIX declined, stocks popped, and the party was on.

But the celebration was slightly muted; Yellen said she still expected that headwinds from weak growth abroad, low oil prices and uncertainty over China would abate and allow the U.S. recovery to continue alongside a “gradual” series of rate hikes.

The Federal Reserve’s accommodative policy has helped the economy recover but the engine still isn’t able to run at full throttle, no matter how much fuel the Fed puts in the tank. The missing ingredient is still a comprehensive fiscal policy response, and this being an election year, there is almost no hope of action; rather there is the distinct probability of inaction. So the Fed is left with nothing but monetary policy, which seems to be losing traction.

Consumer confidence jumped in March to 96.2. The present situation index, a measure of current conditions, slipped to 113.5 from 115.0. But the future expectations index rose to 84.7 from 79.9. On balance, consumers do not foresee the economy gaining any significant momentum in the near-term, nor do they see it worsening.

The S&P/Case-Shiller Home Price Index recorded a 5.4% annual increase in January 2016. The biggest jumps were in Portland, Seattle, and San Francisco, all of which rose by double digits. For Phoenix, prices dropped 0.2% for January, but for the past 12 months, existing home prices in Phoenix gained 6.1%.

The Bank of England is warning that risks around Britain’s referendum on the EU could push up borrowing costs, weaken the sterling and tighten rules for mortgage lending to landlords. The BoE’s Financial Policy Committee says, “The outlook for financial stability in the United Kingdom has deteriorated.” The central bank previously announced contingency plans in case of financial instability, though it has steered clear of recommending whether Britain should stay or leave the union.

Brazil’s biggest political party has left the governing coalition, delivering a major blow to President Dilma Rousseff just weeks before she faces an impeachment vote in Congress. The Brazilian Democratic Movement Party, known as the PMDB, approved the motion at a meeting of its national directorate that lasted less than 10 minutes. Party members can no longer hold positions in Rousseff’s government. The PMDB controls six ministries in her administration. Under Brazil’s presidential system, Rousseff will remain in office but the break sharply raises the odds she could be impeached in a matter of months.

Virtual reality company Oculus has started shipping pre-orders of its highly awaited Rift headsets, about two years after the company was acquired by Facebook. The black headgear, priced at $599, comes with a remote, an audio system, a sensor and an Xbox One wireless controller. Oculus said there were more than 30 games available in the Oculus Store and it would soon add “feature-length movies, new partners and lots more content.”

After successfully hacking the San Bernardino shooter’s iPhone without Apple’s help, the FBI is dropping its legal case to force Apple to unlock the device. Apple said in a statement, “This case should never have been brought.” The FBI did not reveal how they managed to break into the iPhone. And we still don’t know if the FBI will share its information with state and local police agencies. So the fight between Apple and the FBI is over – they both lost.

The Supreme Court handed organized labor a major victory, deadlocking 4 to 4 in a case that had threatened to cripple the ability of public unions to collect fees from workers who chose not to join and did not want to pay for the unions’ collective bargaining activities. The case was brought by 10 California public schoolteachers who objected to what are known as fair share dues being withheld from their paychecks. A ruling in their favor would have affected millions of government workers and weakened public-sector unions, which stood to lose fees both from workers who objected to the positions the unions take and from those who simply chose not to join while benefiting from the unions’ efforts on their behalf.

The case was brought by the Center for Individual Rights, a libertarian group that pursued an unusual litigation strategy. Responding to signals from the Supreme Court’s more conservative justices, the group asked the lower courts to rule against its clients, a Christian education group and the teachers, so they could file an appeal in the Supreme Court as soon as possible. It wasn’t soon enough. Justice Antonin Scalia passed away, leaving just 8 justices and the lower court’s ruling stands.

The Federal Trade Commission filed suit Tuesday against Volkswagen for falsely advertising that hundreds of thousands of diesel vehicles were environmentally friendly, when they were secretly emitting excess pollution. The FTC filed suit in US District Court in San Francisco, saying that US consumers suffered “billions of dollars in injury” as a result of the deception. VW has admitted to using undeclared software that allowed 580,000 diesel vehicles built since 2009 and sold in the US to emit up to 40 times legally allowable pollution. The Justice Department sued VW for up to $46 billion in January for violating environmental laws and VW faces more than 500 civil lawsuits related to excess emissions, along with suits from some U.S. states.

Tesla is getting ready for its biggest-ever unveiling: The Model 3, the $35,000 sedan designed to take electric cars mainstream. It won’t be easy. Tesla’s direct-to-consumer sales are still prohibited by law in six states that represent about 18% of the U.S. new-car market.

SunEdison plunged 54% on reports that the SEC was investigating disclosures to investors about how much cash the solar company had on hand when its stock crash last year. SunEdison has fallen 95% over the past 12 months. Also, a holding company held by SunEdison is expected to seek bankruptcy protection. The company has already postponed the release of its 2015 annual report, twice. If SunEdison fails to file the report by Wednesday, it must reach accommodations with lenders on at least $1.4 billion in loans and credit facilities or face a potential technical default.

Warren Buffett’s stake in Wells Fargo hit 9.9% as of Dec. 31, most of which is held by Berkshire Hathaway. At 10%, Buffett would have to pass a review by the Federal Reserve in order to keep accumulating shares. While the central bank typically tries to limit the ties between non-financial companies and lenders, it has at times accepted a pledge by investors that they don’t plan to influence a bank; this happened in the ’90s when Buffett’s stake in AmEx rose above 10%.

Virgin America has received buyout offers from JetBlue and Alaska Air Group, according to Bloomberg. The airline is still discussing the offers with the bidders, and a deal could be announced next week at the earliest. It is also unclear if other suitors will emerge, and Virgin America may yet decide to abandon sale negotiations in favor of remaining independent.

Financial Review

Slip Sliding Away

Sinclair Noe — December 9, 2015

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DOW – 75 = 17,492
SPX – 15 – 2047
NAS – 75 = 5022
10 YR YLD – .03 = 2.21%
OIL – .28 = 37.24
GOLD – 2.10 = 1073.50

Stocks started the day in positive territory but then slipped, and the decline coincided with a drop in oil prices, which also went from positive to negative. Oil prices have buckled following the breakdown of OPEC talks last week. We have a price war breaking out between Saudi Arabia and Iran and US shale producers. At the same time, we have Russia, Venezuela, and Brazil all desperate for oil revenues.

But it’s not just oil; iron ore is moving in lockstep with oil, dropping to a 10-year low; Codelco, the Saudi Arabia of copper is refusing to cut output, betting it can outlast rivals and win market share. The major commodity indices have dropped to lows last seen in 1998.  While plummeting commodity prices can be a warning sign that the world economy is heading into recession, the latest sell-off has a different character. The slump is chiefly due to excess production, and amounts to a positive supply shock that should boost global recovery.

Dow Chemical and DuPont are in talks to combine, in what would be one of the largest deals of the year. Each company has a market value of about $60 billion and the combination would create the second-biggest chemical company in the world, after BASF, with more than $92 billion in annual sales. They are also talking about breaking up the merged company into three businesses – agricultural chemicals, specialty products, and materials like plastics. For the past year, both companies have been pressured by activist investors unhappy with their financial performance.

Yahoo will abandon its plans to spin off its $31 billion stake in Alibaba. Instead it will look at other options, like selling its core operations or spinning off its stake in Yahoo Japan. The decision is a repudiation of the strategy taken by Marissa Mayer, who was hired to turn the internet company around. She had planned to spin off the 15 percent stake in Alibaba and focus on the core business of selling advertising. But investors, led by the hedge fund Starboard Value, argued that the risk of capital gains tax was too great.

General Electric is in advanced talks to buy the drill-bits and drilling-services divisions of Halliburton, which is divesting assets to win antitrust approval for its takeover of Baker Hughes. GE is also exploring bids for other assets that Halliburton is seeking to unload, including parts of Baker Hughes’ operations.

Freeport-McMoRan said it will suspend its dividend and further reduce its capital spending. Freeport-McMoRan, the U.S.’s biggest miner and a major copper producer, said ending its annual dividend of 20 cents a share would save $240 million a year. The moves come as the company has been in turmoil as falling energy prices have exposed a disastrous investment in oil and gas drilling. A number of other miners have recently cut their dividends in a bid to improve liquidity.

As widely expected, Kinder Morgan has cut its 2016 quarterly dividend to $0.125/share from the current $0.51, marking the company’s first-ever dividend cut. The company said the move will enable it to use a significant portion of its cash flow to fund the equity portion of its expansion capital requirements, eliminate any need to access the equity market for the foreseeable future, and maintain a solid investment grade credit rating.

China cut the yuan’s reference rate to the weakest since 2011, fueling speculation that the central bank is trying to release pent-up depreciation pressure before a potential rate increase by the Federal Reserve. There are signs that the People’s Bank of China has started guiding the yuan lower before the Fed acts. An index of emerging-market currencies dropped to a record low yesterday on fears a Fed rate hike will spur capital outflows. Traders now put the odds of a Fed liftoff next week at 80 percent.

Puerto Rico Governor Alejandro Garcia Padilla is visiting Washington today to again ask for help as the U.S. commonwealth seeks to recover from a nearly decade-long recession. While the U.S. Treasury and some lawmakers have supported legislative fixes for Puerto Rico, the efforts have not gained momentum.

Brazil’s Congress delivered a blow to President Dilma Rousseff by picking members of a special committee that were opposed by her supporters. Rousseff is being accused of tampering with the national budget to illegally disguise poor fiscal performance. The special committee will now gather evidence against the president and hear her defense in the first phase of the impeachment process.

The bill for last month’s catastrophic Samarco dam failure in Brazil could be growing by the day, as the joint venture between Vale and BHP Billiton struggles to formulate an emergency plan demanded by local prosecutors in case of additional accidents. The disaster unleashed an avalanche of mud that killed at least 15 people, destroyed villages downstream, and polluted hundreds of miles of waterways in the Rio Doce basin.

Some of the world’s largest companies, including Unilever, Total, Bank of America, Patagonia and Ikea, announced their commitment on Tuesday to cutting carbon emissions and participating in practices that would support sustainable energy. The pledges came at The New York Times Energy for Tomorrow conference, being held in concurrence with the international climate talks outside Paris.

Secretary of State John Kerry announced Wednesday that the United States would double, to about $860 million a year, its grant-based support for vulnerable countries that need to adapt to climate change by 2020. In his first big speech at the United Nations global climate conference in Paris, Kerry talked about the need to pay attention to climate science and act in the interest of future generations. Throughout the Paris climate talks, developing nations have been asking for more money as world leaders work toward a new global climate agreement.

Pep Boys gave Bridgestone three days to top Carl Icahn’s $863 million takeover offer, saying its board had determined that the billionaire investor’s bid is superior to their earlier agreement.

Alphabet is making its biggest bet yet on spreading connectivity across the nation. On top of 20 other metro areas, Google Fiber now plans to come to Los Angeles and Chicago – the second and third-largest U.S. cities by population – if they pass a long review. The latest announcement follows the Alphabet restructuring, which puts Fiber in a separate division from core Google.

Apple has suspended plans to offer an online TV service, and will focus for now on helping media companies directly sell content via the App Store. Apple isn’t completely giving up on providing a live TV service, but notes its original plan to sell skinny bundles, or packages of about channels for $30-$40/month has “run into resistance from media companies that want more money for their programming”, or were unwillingly to un-bundle content.

For Apple, the idea was to create TV programming similar to iTunes, where you just buy the songs you want, not the entire album. If Apple gets its way, it means the traditional pay TV package, which averages around 100 channels, will get shrunk by nearly 80 percent. And while TV executives will say that they understand that consumers don’t want to pay for channels they don’t watch, all of them will argue that their channels are must-haves.

A class-action lawsuit in California that has the potential undermine Uber just got a whole lot bigger. The case was certified as class action in September but today a 9^th circuit judge expanded the scope of that class action. The suit challenges whether Uber drivers are independent contractors, as the company claims, or employees, which would entitle them to a host of benefits such as health insurance and require Uber to pay on-the-job expenses like gas and maintenance that drivers currently pay themselves.

Today’s ruling says that Uber drivers can take part in the California class action over their employment status even if they didn’t opt out of Uber’s arbitration clause. Chen also ruled that drivers in the class will be able to pursue expense reimbursement claims. Basically, that means the case is going to be much bigger.

According to a new study by the NPD Group, the all-day breakfast initiative at McDonald’s is bringing in new customers. The research firm found that 33% of all customers who ordered breakfast items past the normal cut-off time did not visit the restaurant chain in the thirty days before the launch.

Last month, Chipotle closed 43 restaurants in Washington and Oregon after health authorities linked an E. coli outbreak to six restaurants in the area. Since the initial problem, illnesses linked to the chain have been reported in seven more states. On Monday, 30 students at Boston College fell ill after eating at a local Chipotle, leading the company to close yet another restaurant; On Tuesday, the number grew to at least 80 students.

Although Boston health officials believe the food-borne illness is norovirus -not E. Coli – and is isolated to a single location, they won’t know for sure until test results are available in a few days. Norovirus is a highly contagious virus. It’s the leading cause of outbreaks from contaminated food in the US, making about 20 million people sick a year. Today comes word that more than 120 Boston College students may be ill from food at Chipotle.

German Chancellor Angela Merkel has been named Time’s Person of the Year, praised by the magazine for her leadership on everything from Syrian refugees to the Greek debt crisis. Time also cited Merkel’s strong response to “Vladimir Putin’s creeping theft of Ukraine.”

Financial Review

The Day of Futures Past

Sinclair Noe — October 21, 2015

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

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DOW – 48 = 17,168
SPX – 11 = 2018
NAS – 40 = 4840
10 YR YLD – .04 = 2.03%
OIL – 1.08 = 45.21
GOLD – 9.10 = 1167.70
SILV – .22 = 15.78

Oil futures settled at their lowest level in nearly three weeks. OPEC is holding a special meeting in Vienna with cartel members and non-members Russia and Mexico to discuss ways to prop up oil prices. Don’t hold your breath. Meanwhile, the U.S. Energy Information Administration reported a much bigger than expected increase of eight million barrels in crude supplies for the past week.

The European Commission has ruled that Starbucks and Fiat Chrysler’s tax deals with the Netherlands and Luxembourg are illegal state aid, ordering the respective governments to recover as much as $34 million from each. The ruling follows an EU investigation launched in June 2014. It looked into whether the two companies were given so-called sweetheart tax deals that effectively lowered their corporate taxes.  Who’s up next? European regulators are finishing up investigations into McDonald’s and Amazon’s tax affairs in Luxembourg and Apple’s arrangements in Ireland.

Outgoing House Speaker John Boehner said Republicans will meet on Oct. 28 to nominate a candidate to replace him. Last night, Rep. Paul Ryan of Wisconsin said he would run for the job if certain conditions were met. With a critical deadline just two weeks away, House Republican leaders are discussing options for raising the U.S. debt limit.

Last week, Treasury Secretary Jacob Lew moved the cutoff for raising the debt limit to Nov. 3, earlier than the Nov. 5 date he had set earlier. After that point, Lew said, the Treasury would have less than $30 billion to fund the government, “far short” of expenses on certain days.

Syrian President Bashar al-Assad arrived in Moscow on an unannounced visit on Tuesday, in the leader’s first known trip outside his country since the start of the country’s civil war. During the meeting, Russia’s Vladimir Putin reiterated his commitment to support Assad through military and political channels, and said he would call on other world powers to look into a potential diplomatic solution to the conflict.

A group of high-profile lawyers plans to file a request today to begin impeachment proceedings against Brazilian President Dilma Rousseff. Today’s move is only the first step in a drawn-out process which could take up to eight months. The Brazilian real is down 32% this year.

General Motors and EMC released their latest earnings reports before opening bell this morning. GM posted adjusted earnings of $1.50 per share, a 55% year over year increase that beat estimates of $1.18 per share. EMC reported earnings of 43 cents per share and revenue of $6.08 billion for the third quarter. Analysts had been looking for earnings of 44 cents per share and $6.17 billion in revenue.

Coca-Cola said revenue fell a worse-than-expected 4.6% in the third quarter despite improvements in volume, as the beverage giant said currency fluctuations will hurt results for the year more than expected.

Boeing posted a $1.7 billion net profit, up from $1.3 billion during the same period last year. Boeing delivered 199 commercial jets in the third quarter, up from 186 during the same quarter last year. And more of those jets are expensive wide-bodies, such as the 787 Dreamliner.

During this quarter last year, 31 Dreamliners were delivered to airlines; this year Boeing delivered 37. The challenge now for Boeing is to bring down the production cost of the long-delayed Dreamliner so it can bring in more cash and maybe, someday, breakeven on the plane whose development costs ran over budget.

Credit Suisse reported worse than expected third-quarter results with net income falling 24 percent and the investment bank posting a pre-tax loss of 125 million francs. Separately, the bank announced a plan to raise $6.3 billion in new capital and a corporate reorganization.

Western Digital agreed to buy SanDisk for about $19 billion. SanDisk is one of the largest makers of Nand flash memory chips, which store data in mobile devices and are increasingly being used in hard drives in computing. The technology uses less power and is faster to access information, making it more useful in cloud-computing data centers.

Lam Research is buying KLA Tencor for about $10.6 billion. The merger will create a $19 billion semiconductor firm that will rival Applied Materials, and serve 42% of the wafer fabrication equipment market when the deal closes in the middle of next year. The offer of $67.02 per KLA Tencor share represents a 24% premium to Tuesday’s closing price.

According to Hedge Fund Research, hedge funds suffered their largest quarterly loss in assets since the financial crisis during the three months that ended in September. The third-quarter saw the average fund lose 3.9% driven by slowing growth in China, sliding commodities prices and a likely U.S. Fed rate hike that sent stocks tumbling. Notables: David Einhorn’s Greenlight Capital is down 17% YTD, and Bill Ackman’s Pershing Square has now fallen 12.6% for the year (down 12.5% for September.)

Today, Ackman’s Pershing Square just purchased 2 million more shares of Valeant Pharmaceuticals. It’s either brilliant or insane; time will tell.  In September Valeant dropped 23% and Ackman’s large 5.7% stake in Valeant really hurt his returns for the month; so he doubled down. And today, Valeant dropped another 30%. We don’t know when Ackman bought in today.

Citron Research, a stock-commentary site run by a short seller, said Valeant is using a couple of specialty pharmacy called Philidor RX Services and R&O Pharmacy to store inventory and record those transactions as sales; comparing the accounting and auditing to Enron. Valeant has been at the forefront of an intensifying debate over price increases for older drugs in the U.S. Last week it said it had received subpoenas from the U.S. Attorney’s Offices in Massachusetts and Manhattan.

Here’s the kicker. R&O Pharmacy has sued Valeant. The lawsuit says that R&O believes that both Valeant and R&O are “victims of a massive fraud perpetuated by third parties” or that “Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others.”

I think I’ll go with insane.

The chairman of the Commodity Futures Trading Commission, Timothy Massad, says that the regulator is very concerned about the potential for disruptive events in the U.S. Treasury market and is already taking steps to address the growth of automated trading and increasing cybersecurity risks. New proposals include requirements for pre-trade risk controls and other measures to reduce risks of automated trading. The CFTC also wants to increase transparency regarding market maker incentive programs and self-trading to make sure it isn’t illegal wash trading.

Toyota is recalling about 6.5M vehicles worldwide to fix a defective power window switch in models including the Yaris/Vitz subcompact, Corolla, Camry and others. Debris caused by wear from the electrical contact points can accumulate and cause a short circuit. That in turn could make the switch assembly overheat, potentially leading to a fire.

Yahoo has signed a search advertising deal with Google. The deal builds on an existing search partnership with Microsoft under which the company gets a percentage of revenue from ads displayed on its sites. The move also follows disappointing Q3 results from Yahoo that missed expectations and unveiled cost cuts, content write-offs, and more soft guidance.

Today is the day that Marty McFly flies the time traveling Delorean to Hill Valley California, and if the flux capacitor is correct, he landed there about 18 minutes ago. We’re talking about the movie Back to the Future, Part 2. And if you don’t really remember the movie or you haven’t heard the news stories over the past few day, the intrepid time traveler from 1989, played by Michael J. Fox, set his time machine to October 21, 2015. Today is the day of futures past.

And it has been intriguing to look back at the movie to see how their fictional predictions have panned out. Of course, one of the favorite futuristic gizmos was the hoverboard; it isn’t a ubiquitous toy but a couple of companies have built functioning hoverboards. The garbage powered portable nuclear fission machines – not so much. Fax machines everywhere – nope. Cubs win the World Series – still within the realm of possibility but the odds are astronomical; however there is now a major league team in Miami.

Still the movie got some things right: Flat panel TVs with built in video-conferencing were in the movie, and I actually have a flat screen at my home with the Skype app. Wearables, such as Google Glasses or Apple Watch – yep. Biometrics – sort of; Biff paid for a taxi with his thumbprint; I can’t do that but I can pay for stuff with my phone and my phone can be unlocked with a thumbprint.

Programmable, automated homes – yes; my home is not automated but the technology exists. 3D holographic entertainment, advertising, and gaming – yes we have that; still working out the specifics, but we have it. The Black & Decker food hydrator – not exactly but I do have a microwave, which is probably worse. There are other examples, but you get the idea.

The writers, 30 years in the past, actually did a pretty good job of predicting the future. New ideas and technologies have completely changed the way we live, learn, and work. So, the next question is: What will our world look like in 2045, thirty years from today?

Maybe we’ll make a mess of everything but I hope and believe that 30 years from now we’ll be doing much better. Maybe we’ll have peace, or end poverty, or find cures to horrible diseases. Try to imagine the world you want to live in 30 years from today, and then move in that direction. And if the future has hoverboards for everybody, that’s just a bonus.

Financial Review

Anticipation of Consequences

Sinclair Noe — October 8, 2015

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DOW + 138 = 17,050
SPX + 17 = 2013
NAS + 19 = 4810
10 YR YLD + .05 = 2.11%
OIL + 1.86 = 49.67
GOLD – 6.80 – 1140.00
SILV – .39 = 15.77

This morning was full of anticipation: earnings season scheduled to kick off after the closing bell, the FOMC scheduled to release minutes from their September policy meeting, the House of Representatives scheduled to select a new Speaker of the House. Wisdom consists of the anticipation of consequences.

Earnings season is underway; the unofficial start is when Alcoa reports; ticker symbol AA, they lead the pack alphabetically, and then it just became tradition. The company reported adjusted third-quarter earnings of 7 cents a share on revenue of $5.57 billion. Analysts surveyed by FactSet had estimated earnings of 13 cents a share on revenue of $5.66 billion. Alcoa indicated that China’s industrial economy is slowing more rapidly than expected, as the aluminum producer slashed its production outlook for the country for cars, trucks and construction. And just like that, we have a trend.

Short interest has hit a peak. Short interest on companies listed on the New York Stock Exchange (NYSE) just hit a seven-year high, going back to the 2008 financial crisis. Short interest, or a bet that prices will drop, tends to increase as stocks are falling, and peak when they’ve bottomed; and so a peak in short interest is often seen as a contrarian indicator. Of course, short interest could still increase from these levels.

The Fed published the minutes of its September FOMC meeting. Most Federal Open Market Committee members still think an interest rate hike is possible this year. According to the Minutes from the September meeting, the Fed decided to wait on concerns about sluggish inflation and global economic growth, particularly in China. It also did not want to hike rates with inflation below its 2% target, as this could have hurt its credibility. The Fed remarked that the pullback in equities in August was likely because investors believed stocks were expensive.

Most thought that their goal of healthy labor market had been met or would be met by the end of the year. That view may be different now that the September jobs report, released after the Fed meeting, showed slowing growth. Fed officials decided it would be “prudent” to wait for more data to confirm the economy was growing at a moderate rate and labor market conditions had improved further.

House Republicans were scheduled to gather today to elect a new Speaker after John Boehner abruptly announced two weeks ago that he plans to retire from Congress at the end of October. House Majority Leader Kevin McCarthy was expected to be the front-runner for the Speaker’s job, but before the vote this morning, McCarthy dropped out of the race.

Yesterday  the Freedom Caucus, a group of about 40 of the House’s most conservative members announced it was throwing its support behind Rep. Daniel Webster, a Florida sophomore considered a longshot challenger to McCarthy. That comes three days after Jason Chaffetz, a three-term Utah Republican and Chair of the Oversight Committee announced he, too, was challenging McCarthy. A full House vote is scheduled for the end of the month. House Republicans tweeted that the leadership election would be postponed.

As the politicians sort through the chaos, there is still work to be done.  The Treasury Department has said it will exhaust its authority to borrow money to fund the government on Nov. 5. If Congress does not raise or suspend the government’s statutory borrowing limit, the government would default on its debt days later, risking economic chaos, soaring interest rates and plunging stock prices. Then, on Dec. 11, a stopgap spending bill expires. Without congressional action, much of the government will shut down. And don’t forget an October 29 deadline to replenish the Highway Trust Fund, which funds many construction projects across the country. With leadership elections occupying much attention, the window to get something done grows smaller.

Brazil is facing political and economic crisis; Brazil’s Federal Accounts Court has ruled President Dilma Rousseff manipulated government budget figures in 2014, and the nation’s highest court permitted a lawsuit to annul last year’s presidential election. The move paves the way for a possible impeachment, although any ouster would likely take months and has no guarantee of succeeding.

Jobless claims fell by 13,000 to 263,000 in the week ended Oct. 3, the fewest since July 18. The four-week average of claims, a less-volatile measure than the weekly figure, dropped to 267,500.

Revolving credit continues to show life, up a solid $4.0 billion in August for a sixth straight gain. Gains in this reading, which have been scarce this recovery, perhaps suggest that consumers are growing less reluctant to run up their credit cards.

The United Auto Workers union has reached a tentative deal with Fiat Chrysler Automobiles on a new four-year contract, averting a strike of the automaker’s U.S. operations. Local UAW leaders will gather in Detroit on Friday to hear details of the deal, while Fiat Chrysler’s 40,000 union workers will have to vote again to finalize the agreement. If the pact is ratified, the UAW will likely use it as a template for negotiations with General Motors and Ford.

A Congressional hearing into the Volkswagen emissions cheating scandal continued today. Volkswagen’s top U.S. executive, Michael Horn, repeatedly apologized but didn’t reveal details of who was behind the scam or who knew what, when.  Horn was grilled on questions he claimed to not have answers to and the lawmakers didn’t get the answers they were looking for. In Germany, police and prosecutors swooped in on Volkswagen factories and employees’ private homes in an early morning raid to gather evidence about who was behind the carmaker’s decision to cheat on diesel emissions tests.

Doubts have been raised over the level of Volkswagen reported death and injury claims in the U.S. over the last decade as the numbers have been so good as to make some industry experts question their validity. Already this year, Honda has been fined in the U.S. for underreporting claims and Volkswagen’s reported claims are significantly below the number Honda was fined for.

Dell, the world’s third largest PC maker, and the cloud storage company EMC Corp. are in discussions about a potential merger, for what could be one of the biggest technology deals in history. An agreement could be reached within a week, according to the New York Times. Of course, it’s also possible the talks won’t lead to any deal at all. It remains unclear if the two companies are discussing a full or partial takeover. EMC has a market capitalization of $50 billion, and it owns the software-development company Pivotal and enterprise-security firm RSA, as well as 80% of the virtualization company VMware.

After triggering a buy-sell clause in a deal with Michael Jackson’s estate, Sony appears ready to sell its half of the world’s biggest music publisher – Sony/ATV Music Publishing (a company worth about $2 billion). Sony and Jackson – and after his 2009 death, his estate – have jointly owned the company since 1995, each with a 50% stake. The publisher has a catalog that has copyrights to most of the Beatles’ songs, among many others including those by the Rolling Stones and Taylor Swift.

Just a few days after Google officially became a subsidiary of Alphabet, its new holding company, Alphabet has acquired the domain name abcdefghijklmnopqrstuvwxyz.com. Google announced its restructuring in August. At the time, Google unveiled its website with a URL of abc.xyz. A Google spokesperson said, “We realized we missed a few letters in abc.xyz, so we’re just being thorough.” The purpose of the new domain is unclear given that the page did not load on this morning.

Netflix is raising prices for the second time in two years. The company’s “standard” tier of service will increase by $1, to $9.99 a month, starting November 18. Prices for its “basic” and “premium” tiers remain the same.

Remember Etsy, the online site for handcrafted stuff? Amazon is looking to crush Etsy by announcing its own marketplace specifically targeted at factory free, handmade goods.

Urban Outfitters has asked salaried workers at the company’s home office to “volunteer” for extra weekend shifts at a new fulfillment center. The picking, packing and preparing that’s required of voluntary workers are, in fact, jobs that normally pay wages. Urban Outfitters says many wage employees offered to pitch in, but hourly-wage workers were excluded from the voluntary work because it might violate labor laws.

Bill Gross sued his former employer, Pimco, for improperly firing him. Gross says his ouster was driven by greed. Gross, a billionaire, is demanding a jury trial and damages of no less than $200 million.

Belarusian writer Svetlana Alexievich won the Nobel Prize in literature. Swedish scientist Tomas Lindahl, American Paul Modrich and U.S.-Turkish national Aziz Sancar won the Nobel Prize in chemistry on Wednesday for showing how cells repair damaged DNA, work that can be used to develop new cancer treatments. The Nobel Prize in medicine was awarded to Irish-born William Campbell, Satoshi Omura of Japan and Tu Youyou – the first-ever Chinese medicine laureate for discovering drugs against malaria and other parasitic diseases that affect hundreds of millions of people every year.

Takaaki Kajita of Japan and Arthur McDonald of Canada won the Nobel Prize in physics on Tuesday for discovering that tiny particles called neutrinos change identities as they whiz through the universe, proving that they have mass; by uncovering the “chameleon-like” nature of neutrinos, the laureates had solved a long-standing puzzle in particle physics that could alter our grasp of the cosmos. Tomorrow, the Nobel Peace Prize will be announced. Anticipation builds.