Financial Review

Stuff Happening

Sinclair Noe — June 8, 2017

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

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DOW + 8 = 21,182
SPX + 0.65 = 2433
NAS + 24 = 6321
RUT + 18 = 1415
10 Y + .02 = 2.19%
OIL + .04 = 45.68
GOLD – 9.20 = 1278.60
BITCOIN + 0.04% = 2826.04
ETHEREUM + 0.61% = 259.56

We had a bunch of stuff happening today. The Dow Industrials hit a record high intraday, but could not hold on for a record high close. The trading session went from positive to negative and back.

The Nasdaq Composite did manage a new record high. But it looks like markets are still trying to digest everything. The S&P 500 traded in a range of about one-half of one percent.

The VIX, the volatility index, also known as the “fear gauge,” held at historically low levels. The dollar and bonds both traded lower but nothing out of the daily norm.

Let’s start with the testimony of former FBI Director Jim Comey before the Senate Intelligence Committee. The public hearing lasted nearly 3 hours. I won’t try to recap everything. One or two interesting points. None of the senators questioning Comey tried to claim that Comey was lying about his representation of his meetings with President Trump, however there was sharp disagreement over the significance of their conversations.

A one point, Comey said Trump lied. None of the senators tried to claim Trump did not lie. However, after the hearing, Trump’s lawyer, and spokesperson Sarah Huckabee Sanders had the unenviable task of proclaiming the president is not a liar. Comey did not answer some of the most pointed questions because of the classified nature. He later testified before a closed-door committee. We do not know what he said there.

We certainly learned more today than yesterday, when Intelligence chiefs Coats and Rogers stonewalled the Committee, but what Comey said in public is not the be-all, end-all of this investigation, no matter how much you might want to debate about the minutiae and innuendo and nuances of the testimony.

While it was compelling television, it is just one small piece of the puzzle; nothing that exonerated nor nailed the coffin. Perhaps the most important thing we learned today is that contemporaneous memorandums of communication carry probative value.

In other words, it was a smart move to keep a diary. The bottom line is what I said a month ago when Comey was fired: “Comey… is going to consume most of the oxygen in Washington for the foreseeable future.”

We are not seeing much progress on tax reform or an infrastructure plan. This doesn’t mean nothing is happening, just that it is now on a back burner, and time is running out. The Senate is working on its version of Trumpcare but if they can’t come up with something substantially different than the House, it will be dead on arrival.

Today, the House of Representatives voted largely along party lines to replace the 2010 Dodd-Frank Wall Street reform law, a move that is expected to die in the Senate but open the door to revamping or eliminating regulations that came out of the 2007-09 financial crisis. No real word on what might replace Dodd-Frank, other than the prospect of just letting the banksters run wild.

The  European Central Bank left interest rates and policies unchanged while trimming expectations for inflation through 2019. While that was largely expected, the shared currency fell as ECB President Mario Draghi said in his news conference that the euro area still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment.

The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, but that is apparently a debate for another day.

According to an exit poll released shortly after voting ended, Prime Minister Theresa May will win 314 seats in Britain’s election, short of a majority in the 650-seat parliament. That is an exit poll, not official results.

Prime Minister May called the snap election in a bid to strengthen her hand in Brexit negotiations, to win more time to deal with the impact of the divorce and to strengthen her grip on the Conservative Party. It appears that her electoral gamble failed. If the exit polling numbers hold, it means May’s Conservative Party would have to form a coalition or attempt to govern with the backing of other smaller parties.

For investors, the over-riding factor is likely to be greater uncertainty about whether there will be a deal on Brexit and what it will look like. A delay in forming a government could push back the start of Brexit talks, currently scheduled for June 19, and reduce the time available for what are expected to be the most complex negotiations in post-World War Two European history.

Labour, led by veteran socialist Jeremy Corbyn, could attempt to form a government with those smaller parties, which strongly oppose most of May’s policies on domestic issues such as public spending cuts.

If Corbyn’s Labour does take power with the backing of the Scottish nationalists and the Liberal Democrats, both parties adamantly opposed to Brexit, Britain’s future will be very different to the course the Conservatives were planning and could even raise the possibility of a second referendum. The unofficial exit polls sent a small shock through markets, pushing the pound sterling down.

Brazil’s top electoral court excluded testimony of engineering company executives from an illegal campaign funding trial against President Michel Temer, a move that suggested it would throw out a case that had threatened to unseat him.

The Commerce Department’s quarterly services survey, or QSS, showed consumer spending, including healthcare spending, increased at a faster clip than the government had assumed in its second estimate of gross domestic product published last month.

The QSS data suggested first-quarter GDP could be revised up to as high as a 1.5 percent annualized rate from the 1.2 percent growth pace reported in May. Growth in the current quarter may be above 3 percent, due to payback from the first quarter’s 1.2 percent reading, but the underlying trend appears to be holding steady at close to 2 percent for the year.

The Federal Reserve reports net worth of U.S. households and nonprofit groups rose by $2.35 trillion, or 2.5 percent, to $94.84 trillion in the first quarter from the previous three-month period. Household wealth has grown, boosted mostly by a 5.5 percent gain in the Standard & Poor’s 500 Index last quarter and house price appreciation that matched the biggest year-over-year increase since 2014.

Now, the bad news. Household debt increased at a faster rate, or 3.2 percent, as mortgage borrowing advanced at a 3 percent pace. Other forms of consumer credit, including auto and student loans, climbed at a 5 percent rate, the slowest since 2013.

Although measures of consumer confidence have risen since the elections in November, that hasn’t necessarily translated into spending, helping to temper economic growth.

The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 245,000 for the week ended June 3. The Tuesday JOLT survey showed high job openings, and firms appear to be holding on to their workers.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 118 straight weeks. Low layoffs and record high job openings suggest a deceleration in job growth in May was likely because companies could not find suitable workers. Labor market tightness could encourage the Federal Reserve to raise interest rates at its June 13-14 policy meeting.

Department store operator Nordstrom said that some members of the Nordstrom family were considering taking the company private as it struggles with an industry-wide sales slowdown. Going private, which would involve raising debt, would be a risky but potentially profitable bet by Nordstrom’s founding family and largest shareholder bloc that the company can reshape itself and emerge from the retail meltdown stronger.

Shares of the Seattle-based clothing and accessories retailer ended 10.3 percent higher.

Hudson’s Bay Company disclosed that it will be cutting around 2,000 positions within North America as part of a major restructuring effort. HBC owns several major department stores, including Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor.

Yahoo shareholders approved the company’s pending sale of its core internet business to Verizon for $4.48 billion. Yahoo expects that the deal will close on June 13, 2017. The closing of the deal, announced in July, had been delayed as the companies assessed the fallout from two data breaches that Yahoo disclosed last year. Verizon plans to cut 2,100 jobs upon completing the acquisition.

Alibaba Group announced today at an investor conference that is expects revenue growth of 45-49 percent in the 2018 fiscal year. That figure compared with 56 percent revenue growth posted for the 2017 fiscal year ended March 31. At the same event last year, the firm predicted 48 percent revenue growth

 Alibaba was up almost 14% today.

The FDA just requested that Endo International take its extended-release opioid painkiller Opana ER (otherwise known as oxymorphone hydrochloride) off the market. The agency said that the decision came after it found that the drug’s benefits no longer outweighed its risk for abuse.

FDA commissioner Scott Gottlieb said in a news release: “We are facing an opioid epidemic – a public health crisis, and we must take all necessary steps to reduce the scope of opioid misuse and abuse.” If Endo doesn’t remove the drug from the market voluntarily, then the FDA can formally withdraw its approval.

Endo shares dropped 14% in after-hours trade.

Financial Review

Trump Budget

Sinclair Noe — May 23, 2017

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

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DOW + 43 = 20,937
SPX + 4 = 2398
NAS + 5 = 6138
RUT + 3 = 1380
10 Y + .03 = 2.28%
OIL + .36 = 51.49
GOLD – 9.70 = 1251.70

In the morning, U.S. economic data showed new single-family home sales in April tumbled from near a nine-and-a-half-year high, while manufacturing activity for May fell to the lowest level since September.

While the President is on an overseas trip, stocks were helped by a lack of major news updates related to the government probe on possible ties between his election campaign and Russia. While today’s economic data was weak, investors were relieved Trump’s first full budget plan was largely as expected, even if it is not expected to be approved in Congress.

The Trump Budget was published today. Its official title is “A New Foundation for American Greatness” and it includes big changes to the role of the federal government. It would cut or eliminate numerous programs that the White House says are a waste of money or create too much dependency.

Some of these programs — including Medicaid and food stamps — provide benefits to up to a fifth of all Americans. The $4.09 trillion budget proposal for the fiscal year that begins in October, is the first detailed blueprint for how Trump wants the government to change.

White House Office of Management and Budget Director Mick Mulvaney called the plan a “Taxpayer First Budget,” and he said they worked to jettison any spending that they felt they could not defend. In total, this meant roughly $3.6 trillion in cuts over the next 10 years.

The Trump budget team made rosy assumptions about economic growth that many economists — both conservative and liberal — said went too far. Trump has proposed cutting the corporate tax rate from 35 percent to 15 percent, but his budget assumes that corporate tax receipts will increase almost every year.

The budget says the U.S. government will collect $328 billion in estate and gift taxes over the next decade, but it also says Trump will eliminate the estate tax. The budget assumes its policies will kickstart an era of 3% GDP growth by 2021.

The Congressional Budget Office assumes the U.S. can grow at 1.9%, and professional forecasters see, as measured by the Blue-Chip survey, see just 2.1% GDP growth. Per analysis from a Committee for a Responsible Federal Budget, there is no plausible path to 4% growth, and 3% growth is “unlikely.”

It would require exceeding the record levels of productivity set between 1959 and 1968 or restoring capital growth, productivity growth, and labor-force participation to the levels achieved in the booming 1990s. The independent Tax Policy Center estimated that Trump’s campaign tax plan would add $7.2 trillion to the deficit.

Whether realistic or not, higher growth estimates allow the Trump administration to project that the government will collect more revenues from taxpayers and spend less on safety-net programs, offsetting the costs of the president’s wish list to hold deficits down.

The budget would provide $574 billion for the Pentagon, a 10 percent increase from the last full-year budget in fiscal 2016 and about 9.5 percent more than the budget Congress approved for the current fiscal year. Trump’s proposal would exceed the military spending caps under the 2011 Budget Control Act by $52 billion.

The president would reduce nearly a third of funding for diplomacy and foreign aid including global health and food aid, peacekeeping and other forms of non-military foreign involvement. Also, spending more than $2.6 billion for border security, including $1.6 billion to begin work on a wall on the border between Mexico and the US, or at least between Naco and Agua Prieta.

While the Pentagon’s budget would see a $6 billion increase, the push for more high-priced weapons — including fulfilling Trump’s pledge to increase the Navy fleet to 350 ships from 275 that can be deployed today — will wait another year.

He’s also proposing cutting funding for the State Department by more than 28 percent. The budget also makes use of several other classic accounting gimmicks. It assumes that the wars in Afghanistan and the Middle East will cause future Congresses to allocate $593 billion in extra war funding that won’t be needed and then claims to save that amount by not spending it.

On the campaign trail, Trump said, “I’m not going to cut Social Security like every other Republican, and I’m not going to cut Medicare or Medicaid.”  In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in Medicaid health insurance payments, Social Security disability benefits, food stamps, low-income housing assistance and block grants that fund meals-on-wheels for the elderly.

Funding for Medicaid, the health-care program for low-income Americans and many people in nursing homes, and CHIP, the Children’s Health Insurance Program, would be cut by $880 billion over 10 years.

Funding for SNAP, the Supplemental Nutrition Assistance Program, a modern version of food stamps that provided benefits to 44 million people in 2016, would be cut 29 percent. In many cases, a higher burden of paying for anti-poverty programs would be shifted away from the federal government and onto the states.

The budget would cut payments to disabled workers by $72 billion over the next 10 years, or about $7.2 billion a year. That represents 5% of the disability benefits the government doled out in 2016. The disability insurance fund was created in 1956 in a series of amendments to beef up Social Security.

Social Security retirement benefits and Social Security Disability are all part of a single Social Security safety net designed to ensure that American workers can live with dignity when they retire or if they become too disabled to get gainful employment.

Far from a separate program, Social Security Disability Insurance is a protection available to all Americans, and is paid for through the same Social Security payroll taxes that pay for retirement benefits.

The budget also calls for cuts to the National Institute for Health, the Centers for Disease Control and Prevention, the Food and Drug Administration, and Planned Parenthood.

The Environmental Protection Agency, as expected based on prior budget proposal drafts, is set to lose 31% of its current budget, which amounts to a $2.7 billion cut. That will likely hinder the agency’s ability to enforce environmental laws, impede its tap water safety programs, and eliminate its Climate Protection Program, among other changes.

State and tribal assistance grants would be slashed from $1.08 billion to $597 million, or 45%. Those grants pay for states to carry out several federal directives such as toxic substance compliance, pesticides enforcement and brownfield inspections. Some of those categories have been zeroed out entirely, including beach protection, radon monitoring and lead testing.

The White House plan to trim the national debt includes selling off half of the nation’s emergency oil stockpile and the entire backup gasoline supply; a move that would raise $500 million in fiscal year 2018 — and as much $16.6 billion over the next decade — by drawing down the Strategic Petroleum Reserve.

The budget projects raising $1.8 billion over the next decade by opening the 19-million-acre Arctic National Wildlife Refuge to oil and gas development. The idea of allowing drilling in the refuge for its estimated 12 billion barrels of crude has long been championed by Alaska Republicans. But it’s anathema to environmentalists, who have successfully blocked ANWR drilling plans from advancing.

The plan includes changes to a few popular student loan programs – cutting back on the number of loan repayment options; eliminating the program that allows some workers in public service jobs to have their debts waived; and changes to Pell Grants, federal grant issued based on financial need.

These proposals would apply to loans that were issued on or after July 1, 2018. They would not apply to loans issued after July 1, 2018, if those loans are used to finish the borrowers’ current course of study. In other words, a college junior in seeking a loan on July 1, 2018, to finish her bachelor’s would not be subject to these proposals.

The proposed budget estimates that the federal government could save $35 billion over the next decade by rolling back regulations governing Wall Street. The White House does not detail how those savings would be realized. But the administration said an ongoing review of existing financial rules “will likely result in proposals that will provide significant savings to the federal government.”

Treasury Secretary Steven Mnuchin is currently conducting a comprehensive review of the impact of the 2010 Dodd-Frank financial reform legislation. An initial report recommending policy changes is expected to come at the beginning of June.

Fiscally and socially, the Trump proposal is a reverse Robin Hood.

Cuts in domestic programs to fund big military-spending hikes would disproportionately hit the poor. Tax cuts would primarily benefit the affluent. The Library of Congress is filled with budget proposals that presidents sent to Capitol Hill and never saw again in the form of legislation.

Even with a House and Senate controlled by fellow Republicans, Trump’s plans could face the same fate. Congress usually starts its drafting process each year with the existing budget and makes additions or subtractions from that.

If it keeps to that practice, it will be starting with a plan that passed with bipartisan support earlier this month, one Democrats believe many Republicans would not mind sticking to for another year. Remember that Congress has a difficult time passing any budget. Today’s White House proposal likely deepens the divide.

Financial Review

Split

Sinclair Noe — February 7, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW + 37 = 20,090
SPX + 0.52 = 2293
NAS + 10 = 5674 (record high close)
RUT – 5 = 1361
10 Y – .02 = 2.39%
OIL – .75 = 52.88
GOLD – 1.80 = 1234.40

The dollar, recovering from its worst start to a year in three decades, gained against a basket of other currencies. The euro is on the defensive, with markets nervous about elections in the Netherlands, Germany and possibly Italy, plus more wrangling over Greece’s bailout and an upcoming reduction in the European Central Bank’s monthly bond-buying.

The head of the German Bundesbank responded to accusations from the Trump administration that Germany was manipulating the euro lower. Jens Wiedmann said the dollar strength was “triggered by the political announcement s of the new government.” The pound was among the biggest losers today, falling to a two-week low as Brexit and economic growth concerns return to put pressure on sterling.

Yields on two-year Greek bonds are up 9 basis points and are at their highest level since the middle of last year, as a rare split at the International Monetary Fund puts the country’s bailout at risk. The IMF says that Greece won’t meet targets set by Europe for the country to run a budget surplus. The fund also reiterated its view that Greece’s debt levels are unsustainable.

The fund’s annual review of the Greek economy showed they disagree over the austerity measures imposed on Athens and the need for further economic reforms. The split decision fueled fears the fund might pull out of the rescue plan for the country.

China’s foreign exchange reserves have dropped below the $3-trillion level for the first time since 2011, marking the seventh straight monthly decline as capital continues to flow out of the world’s second-largest economy. Data from the People’s Bank of China showed reserves falling by over $12 billion in January, despite government efforts to tighten capital movement controls and stabilize the yuan’s exchange rate.

The US trade deficit rose slightly in 2016 to $502.3 billion, marking the highest level in four years. The trade gap widened last year because exports fell faster than imports, the result of a weak global economy and a stronger dollar that made American products more expensive to foreign buyers. The gap with China is by far the largest among the major U.S. trading partners.

Although the deficit dropped 5.5% in 2016, it still totaled $347 billion. That’s more than three-fifths of the overall U.S. trade deficit. The deficit with Mexico rose 4.2% to $63.2 billion in 2016 to mark a five-year high. Exports rose 2.7% $190.7 billion, led by higher shipments of passenger planes and parts.

Imports increased a smaller 1.5% to $235 billion as demand for pharmaceutical drugs, cell phones and televisions declined.

The Federal Reserve reports total consumer credit increased $14.2 billion in December to a seasonally adjusted $3.76 trillion, posting an annual growth rate of 4.5%, The increase was below estimates for a $20 billion gain. Revolving credit, which is mostly made up of credit card loans, slowed to a gain of $2.3 billion or an annual rate of 2.9%.

Non-revolving credit, which covers loans for education and cars, increased $11.8 billion in December, or at a 5.1% annual rate. For all of 2016, total consumer credit rose at a 6.4% rate, down from a 7% rate in the prior year.

Data provider CoreLogic said its home price index was up 0.8% during December, and 7.2% compared to a year ago. That’s the fifth straight month in which the yearly price increase was higher, including during months that saw mortgage rates jump nearly a full percentage point.

Low supply is boosting home prices higher and higher, and CoreLogic expects that prices will rise 4.7% during 2017. That would take its national index – now 3.9% below the high last set in 2006 – to a fresh high sometime this year. Arizona prices were up 0.6% for the month and 6.8% for the past year. Home prices in Arizona are still 21.4% below the peak.

The Labor Department’s JOLT survey, or Job Openings and Labor Turnover, shows there were 5.5 million job openings on the last day of December. That was essentially flat compared to November. But 5.3 million people were hired during the month, up from 5.2 million in November. Fewer people quit jobs voluntarily in December: 3 million compared to 3.1 million in November. “Quits” are tracked as a signal of how confident workers are in their ability to secure another job elsewhere.

Philadelphia Fed President Patrick Harker said he could support raising interest rates at the central bank’s March meeting if job market momentum holds up, growth continues and wages rise. John Williams, President of the San Francisco Fed, said last week that he sees the March policy meeting as a possible rate-hike candidate.

And on the flip side, Minneapolis Fed President Neel Kashkari published a blog post today stating the economy has not reached the point in terms of inflation and employment that would necessitate aggressive monetary policy. Kashkari wrote: “From a risk management perspective, we have stronger tools to deal with high inflation than low inflation.” Investors give roughly a one in four chance of a quarter-point increase in March, per federal fund futures.

Betsy DeVos was confirmed by the U.S. Senate to be education secretary, but only after Vice President Mike Pence was called in to break a tie that threatened to defeat her. It’s the first time in US history that a vice president has needed to intervene in a cabinet nominee’s confirmation.

The Department of the Army announced today that it has completed a presidential-directed review of the remaining easement request for the Dakota Access pipeline, and has notified Congress that it intends to grant an easement. Thousands of predominately Native Americans protesters boycotted the $3.8 billion pipeline’s construction in the state of North Dakota last year. The Standing Rock Tribe have said that they will fight the decision in court.

Last week President Trump signed an executive order to roll back the Dodd-Frank Act – the 2010 legislation meant to help protect taxpayers from another financial crisis. And Congress has acted, by getting rid of the Dodd-Frank rule that forces huge oil and gas companies to disclose how much they pay foreign governments while they’re doing business abroad.

Three federal judges on the Ninth Circuit Court of Appeals are set to hear oral arguments this evening on whether Trump’s travel ban will remain suspended for now; the court is not expected to decide on the constitutionality of the ban. The central question for the appellate court is whether US District Judge Robart abused his discretion by putting a temporary hold on the travel ban.

Oil prices slipped as lower production by OPEC and other exporters was undermined by growing evidence of a revival in U.S. shale production and sluggish demand. Prices have been supported over the last two months by efforts by the Organization of the Petroleum Exporting Countries and other exporters to cut output by almost 1.8 million barrels per day in the first half of 2017.

But while OPEC and Russia have together cut at least 1.1 million barrels per day so far, rising U.S. production is compensating for the shortfall. After the close, the American Petroleum Institute estimated that U.S. crude stockpiles had surged 14.2 million barrels last week.

BP’s fourth quarter earnings came in below analyst expectations, with the company saying that its cash flow won’t cover spending and dividends until Brent crude rises above $60 a barrel.

Statoil, Norway’s biggest oil company, said that it is targeting another $1 billion in cost savings after reporting an unexpected loss in the fourth quarter.

General Motors said fourth-quarter net income fell partly because of $500 million in foreign exchange losses, while the automaker forecast 2017 profit per share would be flat to slightly up from 2016. Excluding one-time items, GM earned $2.4 billion, or $1.28 a share, in the latest quarter, down 14 percent from a year earlier. The adjusted result beat analysts’ expectations of $1.17 per share.

Hourly workers for General Motors will get record bonus checks of up to $12,000 after the company reported booming sales in North America. The profit-sharing checks owed to GM’s 52,000 United Auto Workers-represented workers are based on a simple formula. They get about $1,000 for every $1 billion in annual pre-tax North American profit, according to a formula adopted as part of contract negotiations in 2011. Record U.S. industry vehicle sales powered GM to a $12 billion North American profit in 2016, up from $11 billion a year earlier.

After the closing bell, Disney reported quarterly earnings that beat expectations, but revenue fell short of estimates. The company posted first-quarter earnings per share of $1.55 on $14.78 billion in revenue.

Michael Kors Holdings reported a bigger-than-expected drop in comparable sales for the holiday quarter and forecast current-quarter profit well below estimates. Sales at stores open for more than a year fell 6.9 percent in the quarter ended Dec. 31, falling for the seventh time in eight quarters. Kors is trying to regain its brand value by reducing supplies to department stores, which have been heavily discounting its products to drive traffic.

Gap raised its profit outlook for the fourth quarter after reporting better-than-expected sales for the holiday shopping period; sales improved at its Gap and Old Navy stores.

21st Century Fox reported adjusted quarterly profit of 53 cents per share, 4 cents a share above estimates. Revenue was just slightly below estimates. Profit was up 27 percent over a year earlier, as ad sales and affiliate fees increased.

Apple pulled ahead of Samsung in smartphone shipments. Apple shipped 78.3 million units in the fourth quarter, surpassing Samsung for the first time in five years. Samsung shipped 77.5 million units, a number that was affected by its exploding-battery problem, which cost it $3 billion in lost sales.

Financial Review

Uncertain

Sinclair Noe — February 6, 2017

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

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Financial Review by Sinclair Noe for 02-06-2017
DOW – 19 = 20,052
SPX – 4 = 2292
NAS – 3 = 5663
RUT – 11 = 1366
10 Y – .08 = 2.41%
OIL – .72 = 53.11
GOLD + 15.70 = 1236.20

Traders around the world seem uncertain about whether to buy or sell. European markets were mixed. Most Asian markets ended the day with gains. This follows a week where U.S. stocks dropped and then slowly climbed back up. The Dow Jones industrial average ended the week with a 0.1% dip. The S&P 500 and Nasdaq each edged up by 0.1% over the week.

Big business in the UK is starting to feel the pain from Brexit. An Ipsos Mori poll of senior executives at more than 100 of the top 500 companies in the UK found that 58% of businesses believe they are starting to feel the impact of the UK’s decision to leave the European Union.

A decision on a Scottish referendum is coming soon. When the U.K. triggers Article 50 to leave the EU, it might also trigger a fresh independence referendum. Scotland – one of the United Kingdom’s four nations along with England, Wales and Northern Ireland – voted to keep its EU membership last June, but will leave the EU because the UK voted to do so. The British parliament could technically block the move, but to do so would likely provoke a constitutional crisis.

Top Euro Union diplomats have vowed to uphold sanctions against Russia for destabilizing Ukraine, despite US intentions to ease those sanctions. The EU imposed a series of economic and diplomatic sanctions against Russia in 2014. Over the past week, a flare-up in hostilities has erupted between the Ukrainian military and Russia-backed separatists, with each accusing the other of a new wave of shelling. Over the weekend, President Trump committed to meet with NATO leaders in Europe in May.

A federal appeals court rejected early Sunday morning a request from the Justice Department to immediately reinstate an executive order on immigration and refugees, asking for more court filings before it rules on the matter. Airlines in Europe and the Middle East respond to the suspension by allowing passengers from countries that had been blocked to fly.

Ninety-seven tech companies, including Netflix, Twitter, Apple, and Facebook filed an amicus brief on Sunday night against the executive order that places an immigration ban on citizens of seven Muslim-majority countries. The brief states that the executive order “inflicts significant harm on American business, innovation, and growth” and “makes it more difficult and expensive for U.S. companies to recruit, hire, and retain some of the world’s best employees.”

More than any other industry, tech companies hire the lions’ share of the 85,000 foreign workers allowed into the US annually under the H1-B visa program. The H1-B is a temporary visa intended to bring in foreign professionals with college degrees and specialized skills to fill jobs when qualified Americans cannot be found.

A research report from Goldman Sachs estimates that nearly one million H-1B visa holders now reside in the US, and they account for up to 13 percent of American technology jobs. The big tech companies have pressed for increases in the annual quotas, saying there are not enough Americans with the skills they need.

But many tech workers see the H-1B program as a way to pay temporary workers less; or ship their jobs abroad, or at least to bring in workers from abroad, train them, and then ship the jobs offshore.

And it’s not just tech workers. Each year, more than 6,000 medical trainees from foreign countries participate in medical residency programs through J-1 non-immigrant visas, according to the American Association of Medical College.

Once they complete their residency, physicians can either return to their home country for two years before they are eligible to re-enter the U.S. through a different immigration pathway, such as an H1-B worker visa, or they can apply for a Conrad 30 J-1 Visa Waiver. This allows them to extend their stay in the U.S. if they commit to serving in rural and under-served areas for three years.

 The point being, don’t expect a quick resolution to a complex problem.

This past Friday we focused on the January Jobs Report, but there was some other news of note. President Trump signed two executive orders dealing with Wall Street. The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

So, once again the banksters that caused the meltdown of 2008 will oversee policing their industry. What could go wrong?

The second order calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves. The orders don’t do much by themselves to roll back reforms but they do offer details on how the financial industry is likely to receive favored status over the next 4 years.

The order on the fiduciary rule is more like a memo; no extension was granted, and no guidance about seeking a stay to the rule. Nothing in the final version of this memorandum delays the fiduciary rule; still, it was enough for the acting Labor Secretary to state the Department of Labor “will now consider its legal options to delay the applicability date.”

Right now, the date is April 10. And apparently, no matter the administration, government continues to move at a glacial pace.

Over the past month, several Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its quantitative easing during and after the financial crisis. There is some concern the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.

In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Moody’s Analytics estimates that if the Fed gets out of the bond-buying business as the economy strengthens, it could help lift 30-year mortgage rates past 6 percent within three years.

Bill Gross, in his monthly newsletter says that other central banks have stepped up bond buying as the Fed has cut back, but when those central banks stop buying bonds, there will be a bear market in bonds that will ripple out.

The global central bank balance sheet has surpassed $12 trillion, Gross said. At the same time, Fitch Ratings recently reported that global sovereign debt with negative yields still surpasses $9 trillion.

Even if central banks remain accommodative, it only serves to inflate asset prices without boosting economic growth, creating “an unhealthy capitalistic equilibrium that one day must be reckoned with.”

JPMorgan has received approval and license to underwrite corporate bonds in China’s interbank bond market, making it the first U.S.-headquartered bank to do so. China is the third largest bond market in the world with $6.3 trillion outstanding at the end of 2016, with the interbank bond market accounting for over 90%.

U.S. energy companies added oil rigs for a 13th week in the last 14. Despite OPEC cuts, U.S. crude inventories increased more than expected last week. With output being cut, more investors are betting on rising prices despite indicators such as the Baker Hughes rig count pointing to increased U.S. supply. The Commodity Futures Trading Commission says investors raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record 412,380 lots.

Canadian department store operator Hudson’s Bay, which also owns the Saks Fifth Avenue stores, has made a takeover approach to U.S. department store chain Macy’s. Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14 billion, to fund the deal. The company could also bring in a partner.

The economic calendar is a bit light this week, with the JOLTS report serving as the highlight alongside the preliminary reading on consumer confidence from the University of Michigan. But we will stay busy with earnings reports. Analysts will be looking for S&P 500 companies to maintain the 7.5% average profit increase that has marked an encouraging fourth-quarter earnings season so far and will be needed to sustain the market rally.

Tyson Foods reported stronger-than-expected first-quarter earnings and sales and raised its annual outlook, citing strong beef and pork sales.

Toyota Motor reported a sharp decline in net profit for its fiscal third quarter, as the relatively strong yen continued to weigh on earnings. Toyota and other Japanese exporters are being hammered by the yen’s strength. A U.S. dollar bought 109 Yen on average in the third quarter; a year earlier, it bought 121 Yen.

Toyota has a glut of used cars in the U.S.–fueled by years of record sales–which is weighing on new car prices. Toyota said it is ramping up production of more-profitable trucks and sport-utility vehicles to increase profit.

Toyota Motor and Suzuki Motor said they plan to trade expertise in parts supplies and R&D. Any deal could see Toyota benefit from a supply chain that has helped Suzuki dominate India’s massive auto market, while Suzuki could hope to access Toyota’s innovations in automated driving, artificial intelligence and low-emission vehicles.

Hasbro’s revenue was helped in the fourth quarter by surging sales of products in its girls’ category, which include its line of Disney Princess and Frozen dolls. Profit and revenue came in above Wall Street’s expectations.

Tiffany & Co. abruptly replaced Chief Executive Officer Frederic Cumenal after disappointing financial results, just hours before the jewelry chain introduced a new campaign with the first Super Bowl ad in its history. The shake-up follows the departure of the jeweler’s top designer three weeks ago, and weak holiday sales that sent the stock tumbling.

Google used the Super Bowl to plug its Google Home connectivity service, but the TV commercial apparently confused the systems in homes of those who already have it. For them, Google Home went wacko. Apparently, the home systems heard the TV broadcasts calling its name, and it became befuddled. OK Google do not listen to the commercial.

Enjoy Parenthood - NFLX, MSFT Plan To Improve Policies By Providing Maternity & Paternity Leaves.

Financial Review

Sunlight is the Best Disinfectant

Sinclair Noe — August 5, 2015

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

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DOW – 10 = 17,540
SPX + 6 = 2099
NAS + 34 = 5139
10 YR YLD + .06 = 2.27%
OIL – .59 = 45.15
GOLD – 3.00 = 1085.50
SILV + .02 = 14.69

Private-sector hiring slowed in July. Employers added 185,000 private-sector jobs in July, down from 229,000 jobs in June, and below the average pace for the past six months. Gains slowed across all size-firms except large firms in July. Manufacturing employment has slowed sharply since the beginning of the year. The ADP report sometimes offers a hint of what we might expect from the monthly government report on jobs, which will be released Friday. Strength or weakness in the labor market is thought to be a key factor in the Federal Reserve’s decision to possibly hike interest rates in September.

The Institute for Supply Management said its services index surged to 60.3% from a 56% reading in June. Any reading above 50% indicates expansion. It was the highest reading since 2005. The business activity and new orders components both were over 60%, and the employment index increased 6.9 percentage points to 59.6%. We’ll have more details on the ISM report in our next segment.

Atlanta Fed President Dennis Lockhart said it would take “significant deterioration” in the U.S. economy for him to not support a rate hike in September. Lockhart’s opinion is notable because he’s considered a centrist on the FOMC whose views typically mirror the consensus.

The Fed has kept the federal funds rate hovering at historic, near-zero lows for more than six years. But that’s all about to change. Maybe September, maybe December, but sooner rather than later. The cumulative effect of what could be a series of rate hikes over an 18 to 24 month period will ripple across U.S. economy and weigh on America wallets and pocketbooks. For most people the response is to just apply some good old common sense: pay down outstanding debt (the cost to service debt will go up), snag zero percent credit card offers (they will go away), refinance your mortgage (rates will probably rise), and remember that when rates rise bond prices go down.

According to a new IMF report , more “significant work” in analyzing data is needed before deciding whether to grant the renminbi reserve currency status. IMF staff members also suggested that a decision could be postponed by nine months, until September 2016. Since a rejection five years ago, China has been pushing for the yuan to join a list of currencies, including the dollar, pound, euro and yen, which make up the lender’s Special Drawing Rights basket.

The United States in June posted a record trade deficit with the European Union. The overall US trade deficit, which includes services, climbed 7.1% to a seasonally adjusted $43.8 billion in June. The upturn largely reflected an all-time high in imports such as autos, drugs and commercial aircraft from Europe, whose goods are cheaper to buy because of a weakened currency. The flip side of a stronger US economy compared to the rest of the world is a sharp increase in the value of the dollar that’s made American goods and services more expensive in Europe and elsewhere, cutting into exports. Sales of US-made goods and service abroad fell 0.1% in June to a seasonally adjusted $188 billion.

More fallout from the closure of Export-Import Bank. You may recall the Ex-Im Bank charter was allowed to expire when Congress refused to vote on extending the charter, even though the Bank has been around for 80 years. Despite the name, Ex-Im doesn’t offer import assistance in the US; it is all about exporting. It provides loan guarantees, loans and insurance to help foreign companies buy US-made goods when private banks can’t or won’t make loans in industries including aerospace, energy and manufacturing.

Over the years, Ex-Im helped bankroll projects ranging from the Pan American Highway to insurance waivers that kept airlines flying after the Sept. 11 terrorist attacks. For decades, Congress reauthorized the bank with little or no debate and didn’t even bother with a roll call in either chamber for its extension in 2006. The Export-Import Bank backed $27.5 billion in exports in fiscal 2014, just under 2 percent of the US total, and supported 164,000 American jobs, mainly in manufacturing companies both large and small; and it is not subsidized; it actually paid $675 million to the Treasury last year.

Boeing says it is now scrambling to find alternate financing for a satellite contract worth “several hundred million dollars” that was scuttled by the federal credit agency’s uncertain future. Commercial satellite provider ABS is said to have terminated the satellite order in mid-July, given the absence of U.S. export financing. Jim McNerney, the chairman of Boeing, noting that the Ex-Im Bank helps keep manufacturing jobs in America, wrote recently, “I never thought I’d see the day that U.S. companies would, in effect, be penalized by their own government for not setting up shop overseas and, in the case of Boeing, expanding our domestic production and work force by billions of dollars and thousands of jobs.”

The SEC had a couple of important votes today on Dodd-Frank legislation. The first vote, which passed 3-2,  dealt with a proposed new federal rule to would require public companies to list their chief executives’ total annual compensation as a ratio to the their workers’ median pay. The rule would not apply to companies with less than $1 billion in annual gross revenue. The rule will take effect for companies’ first fiscal year starting on or after Jan. 1, 2017. More than 280,000 public comments supporting the pay ratio rule were submitted to the SEC. Fifty years ago, chief executives were paid roughly 20 times as much as their employees, compared with 331 times as much in 2013. Opponents of the measure claim it was motivated by a desire to shame companies into paying their chief executives less. As always, sunlight is the best disinfectant.

In a separate vote, the SEC considered when to discipline banks’ swaps-dealing units. It has become standard operating procedure to grant an exemption waiver to banks, even when they commit multiple violations for offenses such as selling toxic mortgage securities and manipulating benchmark interest rates. Banks could be barred from managing mutual funds or raising money for hedge funds if they don’t get the exemptions after settling a case; but the exemptions have become routine, even for repeat offenders. So, now the SEC voted to establish a policy that requires SEC commissioners to vote on individual waivers sought by financial firms. Companies would have six months to persuade the SEC to give them a waiver and if they didn’t get it during that time period they would be denied the exemption. Also, in a separate vote banks are now required to register as dealers of security-based swaps.

JPMorgan Chase is loosening its criteria for underwriting big mortgages; that follows similar moves by Bank of America and others trying to grab market share in the high-end housing market for jumbo mortgages, typically loans above $417,000. In the second quarter, overall jumbo originations rose to an eight-year high of $93 billion, up 58% from a year ago. By dollar volume, jumbo mortgages given out by lenders last year accounted for about 20% of all first-lien mortgages.

A failure of JPMorgan Chase poses the greatest risk to the international financial system, even when compared with banks in Europe and Asia. According to a new government study from the Office of Financial Research, the House of Morgan was given a “systemic importance score” of 5% in a report that measures the threat to global financial stability should any one of the world’s 30 largest and most-interconnected banks fail.

U.S. banks dominated the top 10 list of risky global banks, including JPMorgan at No. 1, Citigroup at No. 3 with a score of 4.3%, Bank of America at No. 7, Morgan Stanley at No. 9 and Goldman Sachs at No. 10 with a 2.5% risk assessment; Wells Fargo scored No. 18.  In July, the Federal Reserve released stricter rules for determining how much capital the nation’s 8 largest banks must hold to protect against future calamities. Under the new rules, the Fed imposed a new “risk-based capital surcharge” for banks with at least $250 billion in total assets.

Netflix plans to start offering employees “unlimited” maternity and paternity leave through the first year after a child’s birth or adoption. Employees will be entitled to their normal salary during their time off. Meanwhile, Netflix shares surged 7.6% yesterday to an all-time record high, after the company announced it would offer service in Japan starting on September 2.

Following on the heels of the Netflix announcement, Microsoft said it will offer 12 weeks of paid time off to all new parents, improving its policy as the issues of gender equity and family balance gain greater prominence in the technology industry. Combined with the previously available leave of eight weeks for maternity disability, that means new mothers can now take a total of 20 weeks of leave fully paid.

Only 12 percent of U.S. private-sector employees have access to any paid family leave through their jobs, according to the U.S. Department of Labor. The U.S. is the only nation in the developed world that doesn’t mandate maternity leave with pay.

Be on the lookout for ticker “NMG”. After more than a decade under private equity ownership, Neiman Marcus has filed for a $100M initial public offering. It wouldn’t be the first time the department store chain prepared to head back to the stock market. Warburg Pincus and TPG filed for an IPO of the company in 2013. And this raises a question; will they offer the stock in their Christmas catalog? Do they still have a Christmas catalog?

Financial Review

Into the Ditch

Sinclair Noe — July 21, 2015

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

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DOW -181 = 17,919
SPX – 9 = 2119
NAS -10 = 5208
10 YR YLD – 3 = 2.34%
OIL + .21 = 50.36
GOLD + 3.30 = 1102.00
SILV + .18 = 14.95

Earnings reporting season continues with about one-quarter of S&P 500 companies scheduled to report this week. Among the gainers: Harley Davidson posted second quarter earnings and revenue that topped expectations, Travelers posted a second-quarter profit that was better than expected, due to fewer losses from catastrophes. Among the decliners: United Technologies issued a profit warning and announced that its aerospace and elevator units will be below expectations due to a strong dollar and China’s economic slump, IBM’s second quarter earnings fell 17% and revenue dropped 13%, Verizon posted better than expected earnings but revenue missed estimates, Lexmark swung to a loss and announced it will cut 500 jobs.

The big news in earnings came from some of the biggest names:
Apple and Microsoft. Apple sold 47.5 million iPhones, a 35 percent gain, in the period that ended in June. Analysts had anticipated 48.8 million shipments. Net income in the fiscal third quarter, which ended in June, was $10.7 billion, or $1.85 a share, while revenue rose 33 percent to $49.6 billion. Analysts on average had forecast third-quarter profit of $1.81 a share on sales of $49.4 billion. The gross margin was 39.7 percent, topping the company’s outlook for 38.5 percent to 39.5 percent. Apple shares down about 8 percent in after-hours trading. It probably won’t make a difference for Apple, but I hear Lindsey Graham is in the market for a new phone.

Even before the earnings report, Apple was having problems. Users experienced a problem with multiple iCloud services, including Apple Music, Beats 1 and the App Store, where outages knocked out service for up to 4 hours earlier today. Noe report on the cause of the outage.

Every day we hear about a new cyber-attack but this may be one of the scariest stories yet. Security experts are urging owners of Fiat Chrysler vehicles to update their onboard software after hackers took control of a Jeep over the internet and disabled the engine and brakes and crashed it into a ditch. A security hole in FCA’s Uconnect internet-enabled software allows hackers to remotely access the car’s systems and take control. Unlike some other cyberattacks on cars where only the entertainment system is vulnerable, the Uconnect hack affects driving systems from the GPS and windscreen wipers to the steering, brakes and engine control. The Uconnect system is installed in hundreds of thousands of cars made by the FCA group since late 2013.

Microsoft reported its largest-ever quarterly net loss, due a $7.5 billion writedown after the purchase of Nokia’s handset unit. Excluding the Nokia charge and costs related to job cuts, Microsoft said profit in the fourth quarter, which ended June 30, was 62 cents a share. Sales were $22.2 billion. Analysts on average projected profit of 58 cents on sales of $22 billion.

Yahoo reported second quarter revenue, excluding sales shared with partner websites, was little changed to $1.04 billion in the second quarter, the company said Tuesday in a statement. Profit, excluding items such as stock-based compensation, was 16 cents a share. Analysts projected, on average, sales of $1.03 billion and profit of 19 cents. And then Yahoo lowered third quarter revenue guidance.

The Federal Reserve has finalized the capital surcharge amounts for the nation’s largest financial firms, or systemically important financial institutions (SIFIs). For example, the surcharges range from 4.5% for JPMorgan to 1% for BNY Mellon. Taken together, the group’s capital cushion will be more than $200 billion larger than if the surcharge was not implemented. Note: The Fed offered a reprieve to GE Capital from more-intensive regulation, after the company promised to cut its assets by more than half.

The financial industry worries that when the Fed’s tightening plans take hold, a sell-off in the massive U.S. bond market could ensue, and be exacerbated by a lack of bank buyers willing to jump in. Banks, including primary dealers who act as market makers for US Treasuries, have cut their bond inventories in the past few years in response to tougher capital requirements, reducing a liquidity buffer for the fixed income market.

Private and public comments by Fed officials show that they do not share Wall Street’s degree of concern about liquidity, and do not believe that capital rules are solely to blame for the bond market’s growing tendency to seize up. Effectively, regulators are telling the industry it is the responsibility of banks, funds and other market players to protect themselves. The Fed’s assertive stance is setting the stage for more volatile fixed income markets, where liquidity droughts could be the price of doing business in bond markets. The message – in public addresses, reports to Congress, and even an investigation into market turmoil last October – is that less liquidity is a necessary consequence of regulatory reform and fitting for an economy that is getting ready for tighter monetary policy.

The Dodd Frank Act is 5 years old. Half a decade later, the debate around the law continues. Regulators are pushing to finalize still lingering projects. New government powers have yet to be tested. And lawmakers in both parties continue to question whether the law’s central goal, ensuring “too big to fail” is a thing of the past, was actually achieved. There are undoubtedly major parts of Dodd-Frank that are fully up and running. Perhaps most notable is the Consumer Financial Protection Bureau. Elsewhere, regulators have put in place new checks on financial derivatives, begun implementing new rules in the mortgage market and taken steps aimed at predicting and preventing broad new threats to the overall financial system. It is estimated that just 63 percent of Dodd-Frank rules have been finalized, with 21 percent of the required rules not yet even proposed. And the nation’s biggest banks still need to prove to regulators that they can safely be wound down in bankruptcy should disaster hit.

Citigroup’s consumer bank has been ordered to pay $700 million in relief to borrowers for illegal credit card practices. The Consumer Financial Protection Bureau said that about 7 million customer accounts were affected by Citibank’s “deceptive marketing” practices, which included misrepresenting costs and fees and charging customers for services they did not receive. Citibank told telemarketers to entice customers with a “free 30-day trial period,” but the bank would sometimes charge during the first 30 days anyway. Or customers were left with the impression that the “free” service would go away after 30 days if they did nothing. Instead, after a month, they started being charged regular fees. Citi charged some customers for services it wasn’t providing, such as credit monitoring. And while Citi was caught, that doesn’t mean they are the only company pulling these shenanigans on customers.

The Securities and Exchange Commission has opened an investigation into the companies with business links to FIFA. Reuters said that Nike is probably one of the companies being scrutinized by the SEC even though it has not been named or charged with any wrongdoing. That’s because the indictment of FIFA officials by U.S. prosecutors described a “$160 million, 10-year deal signed by “Sportswear Company A” that “matched exactly” the details of Nike’s 1996 deal in Brazil to become the footwear and apparel supplier and sponsor of the Brazilian national soccer team.

New York Department of Financial Services officials have subpoenaed several of the executives of Promontory Financial Group, a financial-services consultancy, including an executive who testified before Congress two years ago. It’s part of a long investigation into potential conflicts of interest at the firm related to its work for the British bank Standard Chartered, which was suspected of processing billions of dollars on behalf of Iran. The regulator is looking at whether Promontory, under pressure from the bank and its lawyers, sanitized a report to NYDFS to minimize the volume of allegedly illegal transactions.

Toshiba’s CEO is out after an accounting scandal. Toshiba’s president and CEO, Hisao Tanaka, has resigned after an internal investigation found the company has been cooking its books for several years. The company overstated its profit by $1.2 billion over several years, almost triple its initial profit.

Qualcomm is expected to conduct a strategic review that may result in the breakup of the company. The chipmaker is expected to announce plans to lay off more than 10% of its 30,000 employees. The expected layoffs are part of what is likely to be a strategic review of the company, which could lead to the eventual spin-off of its chip business from the highly profitable patent-licensing business

The National Oceanic and Atmospheric Administration (NOAA) reports global land and sea surface temperatures from January through June were 1.53 degrees Fahrenheit above the 20th century average, the highest since recordings started in 1880. June was the fourth month this year to break its monthly temperature record, along with February, March and May. And it marks the hottest six months on record. One side effect is that warming ocean waters are expected to result in a strong El Nino weather pattern in the second half of the year; this could bring some much needed rain to California and the southwest. While the state is in need of moisture, too much weather could lead to rain-related destruction. On Friday, heavy rains pounded the bone-dry Southern California region, washing out an elevated section of Interstate 10 near Desert Center, one of the major highways connecting California and Arizona. The Pacific is also expected to see more hurricanes and typhoons this season.  So far in 2015, there have been four hurricanes compared to just two by this time last year.

Financial Review

How to Eat a Bank

Sinclair Noe — April 10, 2015

 

Podcast: Play in new window | Download (Duration: 13:14 — 6.1MB)

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DOW + 98 = 18,057
SPX + 10 = 2102
NAS + 21 = 4995
10 YR YLD – .01 = 1.95%
OIL + .99 = 51.78
GOLD + 13.80 = 1208.30
SILV + .34 = 16.59

For the week, the Dow is up 1.6 percent, the S&P is up 1.7 percent and the Nasdaq is up 2.3 percent. Both the Dow and S&P notched their second straight week of gains.

Oil posted its fourth consecutive weekly gain. The oil rally coincided with a stronger dollar, which weighs on dollar denominated commodities. In March, the prices the U.S. paid for imported goods and services fell for the eighth time in the last nine months, even though the cost of foreign oil actually rose for the second straight time. Import prices dropped 0.3% last month, or an even steeper 0.4% excluding fuel.

The sharply lower cost of imported goods is a double-edged sword. We may pay less for commodities and all sorts of goods such as cell phones and electronics; and that can stretch paychecks. Next Tuesday the Commerce Department reports on retail sales and we’ll find out if shoppers are in a spending mood or a savings mood. A strong dollar is also great if you plan to travel abroad; they say April in Paris is pretty nice. Yet the strong dollar also makes US goods and services more expensive for foreigners to buy, reducing demand for American-made exports. That’s cutting into corporate profits and could even cost American jobs, potentially slowing the nation’s pace of growth. The Labor Department will report on both producer and consumer prices next week, prices at the wholesale and retail levels. Economists expect both the CPI and the PPI to be up in March compared to February, but maybe not enough to move into positive territory.

Earnings season kicked off this week. The corporate earnings outlook for 2015 is ugly, as first-quarter earnings for the S&P 500 index are expected to come in 4.7% lower , while second-quarter earnings are expected to be 2.1% lower, according to FactSet. Meanwhile, Thomson Reuters says profits of companies on the S&P 500 are projected to have declined by 2.9% in the first quarter. So, that should give you a range.

The big banks start reporting earnings next week, with JPMorgan and Wells Fargo posting results on Tuesday. Mortgage lending is expected to prop up bank earnings, as lower mortgage rates have spurred applications to refinance home loans. Financials have the best outlook among sectors, with analysts projecting first-quarter 2015 earnings to have surged 10% from a year ago, according to Thomson Reuters data. Meanwhile, energy is expected to be the worst performing sector; companies may see first-quarter earnings plummet 64% from the same quarter a year ago.

If you were hoping to be one of the first people to sport the new Apple watch, yea, that ship has already sailed. At one minute after midnight, Apple started taking orders for delivery of the watches in June. Within 6 hours they were sold out. It’s hard to believe we’ve all survived so long without one of those watches.

Also this coming week, we might see a plea deal in the long running investigation into manipulation of the London Interbank Offered Rate, or Libor. The NY Times reports Deutsche Bank is close to a deal with New York financial regulator, federal prosecutors, plus regulators in Washington and London to pay a penalty (somewhere in the neighborhood of $1.5 billion) and accept a criminal guilty plea. The bank also faces investigations into currency manipulation and violations of United States sanctions against countries like Iran. Several other banks have already reached settlements on interest rate rigging, but Deutsche was a holdout.

General Electric plans to sell most of its $30 billion real estate portfolio over the next two years as it gets back to its industrial roots; GE also set a share buyback plan of up to $50 billion – the second-largest ever. Blackstone Group and Wells Fargo are buying most of the assets of GE Capital Real Estate in a deal valued at about $26 billion. GE said it had letters of intent to sell an additional $4 billion of commercial real estate to other buyers that it did not identify. The total deal is the biggest in the commercial property market since Blackstone’s acquisition of office landlord Equity Office Properties Trust in 2007 for $39 billion.

GE’s deal to sell off real estate and get out of most of the finance business will result in an after-tax charge of $16 billion in the first quarter, and up to $4 billion worth of taxes on repatriated earnings. Right now, US-based multinationals are not taxed by the US government on what they earn overseas, until they repatriate or bring that money back to the US. According to a report in March by Credit Suisse, the cumulative earnings parked by S&P 500 companies overseas is over $2 trillion, and there’s at least $690 billion in overseas cash. It’s not like the money is lost overseas; it is sometimes used for foreign acquisitions; another trick is to borrow against the cash pile to pay for dividends or share buybacks; not exactly a path to productive, organic growth.

To console investors about the costs, GE authorized one of the largest buybacks ever, second only to Apple’s $90 billion buyback plan. General Electric has the potential to return more than $90 billion to investors through 2018 in the form of dividends, buybacks and other measures. The exit of most of GE Capital businesses is expected to release about $35 billion in dividends to GE, which would be allocated to its planned $50 billion share buyback.

CEO Jeff Immelt has been scaling down GE Capital since the financial crisis, when GE Capital almost wiped out the entire company. What was once seen as a way for GE to help finance sales to its own clients had grown into a financial behemoth that stretched into subprime lending among other areas. For years, Jack Welch had used reserves that GE Capital maintained against problem loans to smooth out the books at GE; adding to reserves in strong quarters and reducing them in weak quarters, when the income was needed. GE Capital became a black box of financial complexity that baffled even experts but allowed Welch to “deliver” remarkably consistent earnings, almost as if he could produce numbers out of thin air. At the same time it managed to suck the life out of research and development at the parent company. Who needs research and development and innovation on the industrial side when you can cook the books on the financial side?

In September 2008, GE Capital was on the verge of collapse, only revived by an infusion of cash and confidence from Warren Buffett (and yes, Warren pulled down a sweetheart deal). That seems to have been the point where Immelt recognized the need for a new direction, back to its industrial roots. The only financial operations to be retained will be the leasing operations that are directly tied to GE’s manufacturing businesses, which make equipment ranging from aircraft engines to medical scanners. GE anticipates that the industrial operations will generate 90% of revenue by 2018.

The finance arm still has $500 billion in assets, making GE Capital the country’s 7^th largest bank; that position also earned GE Capital the designation of a “systemically important financial institution” or SIFI. The designation as a so-called “SIFI” brings with it tougher oversight by the Federal Reserve. GE wants to lose the designation and the regulatory oversight that goes with it. They will still have a financing arm, but it will be greatly scaled down.

So far four non-bank firms, including GE Capital, have been designated as a SIFI. The others are insurers American International Group, Prudential Financial, and Metlife.   Metlife is suing the federal government over the label. Just yesterday, Jamie Dimon of JPMorgan bemoaned the burdens of regulation. Some of the SIFI firms have privately griped that regulators haven’t provided them with a clear path on how to shed the designation. The Wall Street Journal calls it the “Hotel California” of Fed oversight; it’s a clever line, and I wouldn’t be surprised if the marketing team at Metlife or JPMorgan came up with it, but it is also incredibly stupid and a lie. It is easy to drop the SIFI designation; all a bank has to do is get smaller; sell off parts, spin off parts – simple. And the path was laid out in the Brown-Vitter bill. The legislation presented the mega banks “with a clear choice: Either have enough of your own capital to cover your own losses or downsize until you are no longer a risk to taxpayers.” The banks managed to squash that legislation because they still like the old business model of privatized profits and socialized losses.

For Metlife the whole idea of SIFI regulations was just too much to bear. When the insurer was designated too big to fail, they sued; because nothing says you are not big like taking on the entire US government. The Metlife argument might be better if the company didn’t tout, in its own advertising that it is indeed a huge, global company with tens of billion in revenue and trillions in life insurance in force. They just don’t want to be forced to hold extra capital in reserve because it might bring down their profits. So, Metlife thinks that is terrible. But the government thinks it might be a good idea to have some reserves just in case something goes wrong; it would be like a cushion against a catastrophe, some type of safeguard against disaster, some protection from a meltdown, you might even call it insurance.

So, what today’s deal shows is that there is a way out of the “too big to fail” problem with the mega banks; just cut them into small bite sized pieces that can be easily digested, and the American taxpayer need never be forced to choke on bailouts again. That is how you eat a bank. In that regard, the GE deal might be the most important restructuring of the American banking system to happen under the Dodd-Frank Wall Street reform law.