Financial Review

Earth Day

Sinclair Noe — April 22, 2016

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DOW + 21 = 18,003
SPX + 0.10 = 2091
NAS – 39 = 4906
10 Y + .02 = 1.89%
OIL + .55 = 43.75
GOLD – 15.80 = 1233.20

Most of the session, stocks were in negative territory, and as expected, Alphabet and Microsoft kept the Nasdaq in the red. The stock market hit a wall today. After a rally that pushed the Dow above 18,000 and the S&P 500 above 2100 – close to record high, we have now hit resistance.

And we are about to move into May. Remember the old wisdom: sell in May and go away. For the week, the Dow added 0.6 percent, the S&P 500 gained 0.5 percent and the Nasdaq lost 0.6 percent. Oil gained about 11% on the week.

Investors withdrew $7.3 billion from stocks in the week to April 20, the largest outflows in nine weeks, while continuing to shovel money into corporate and emerging market debt. The equity redemptions were led by $4.2 billion of outflows from U.S. stocks and $2.6 billion from Japan.

Caterpillar reported first-quarter earnings that were weaker than forecast, and lowered its expectations for the rest of the year. The company warned in March that its sales and earnings would drop amid low commodity prices, weak demand and the strong dollar.

McDonald’s reported first-quarter earnings of $1.23 per share on $5.90 billion in revenue; beating top line and bottom line estimates. McDonald’s introduced all-day breakfast at its U.S. restaurants in October. The move boosted sales last quarter and appears to be a factor in the Golden Arches’ earnings beat.

General Electric posted an operating profit and higher revenue in the first quarter, compared to a year earlier, but profit fell short of Wall Street’s expectations. GE technically posted a net loss of $98 million in the first quarter, up from a loss of $13.6 billion, although it recorded a profit of $210 million from continuing operations. The company is selling off a substantial portion of its GE Capital unit as it refocuses its efforts on its industrial businesses.

American Airlines said it was disappointed with its first-quarter revenue. Passenger revenue for each seat flown a mile, a benchmark gauge for airlines, will continue falling all year. Still, first-quarter profit topped analysts’ expectations as tumbling jet fuel prices helped reduce operating costs.

The first tech IPO of 2016 is already a disappointment. Dell’s spinoff SecureWorks priced its initial public offering at $14 per share. This was below the $15.50 to $17.50 range that the company was hoping for. The pricing gives the cyber-security firm a market cap of about $1.13 billion. SecureWorks will trade on the Nasdaq under the ticker ‘SCWX.’ Opened at $14, closed at $14.

Looking to return to profitability, Sears Holdings is closing 68 Kmart stores and 10 Sears stores in late July. The company says that, together with $1.2 billion in debt financing raised earlier this month – to provide capital to execute its transformation and meet its financial obligations – it believes it has taken important steps toward its 2016 objectives. Liquidation sales are expected to start in the coming days.

SunEdison is vowing to press ahead with plans to build solar projects across India, despite filing for Chapter 11 on Thursday. The bankruptcy excluded India, the clean-power giant’s largest market outside the US.

Volkswagen has struck an agreement with the Justice Department to either repair or repurchase approximately 500,000 cars in the US, as part of the reparations for its emissions-cheating scandal. Lawyers in the case are still negotiating details. Volkswagen estimates the cost of the scandal has escalated to more than $18 billion, more than double the amount the company had previously set aside

More emissions trouble… Daimler reported net profit dropped 32% in the quarter, but that was overshadowed by news that the German automaker was reviewing its emissions certification process.

Leaders from 170 nations gathered today in New York for the formal signing of the climate change accord reached in Paris four months ago. The event, at the United Nations headquarters, coincided with Earth Day and marked the largest number of countries ever to sign an international agreement in a single day.

The goal of the climate accord is to keep global temperatures “well below” 2-degrees Celsius increase and “to pursue efforts to limit the temperature increase to 1.5-degrees Celsius above preindustrial levels”. By signing the accord today, leaders from China, Brazil, France, Congo, Italy, Morocco and other nations affirmed that climate change is indeed real and vowed to address it.

Signing the accord is not the same as “joining” it. For it to become law, at least 55 countries representing at least 55% of global emissions have to formally join it by ratifying or approving it within their national governments. There is no fixed timeline for this to happen, but at a minimum it is expected to take several months.

The United States and China, which represent about 40% of all emissions, have said they intend to join this year. Different countries have different ways of approving the accord. The United States is among the countries that will enter it through executive action. China’s centralized government is expected to approve it quickly. The European Union, which accounts for about 12%, has met delays in its effort.

The stated goal of the accord is to keep global temperatures well below 2 degrees Celsius, or 3.6 degrees Fahrenheit, above preindustrial levels. That is a level scientists have said could avert the most damaging effects of climate change. Yet other scientists say 2 degrees is too much, prompting a continuing effort to strengthen the goal to 1.5 degrees. But that climate accord might not be enough. The US has said it will reduce its greenhouse gas emissions by 26% to 28% below its 2005 level by 2025, but the plans currently in place fall short of that target. Still, things are starting to change.

The growth in demand for coal has been dropping. Several countries are suspending coal production, or have announced their intention to go coal-free, including China, as have several US states. President Obama announced in January that he would end most new coal leasing on public lands, but his Clean Power Plan to reduce emissions from power plants was temporarily stayed by the Supreme Court in February while a lower court considers a challenge by some states and industries that say the Environmental Protection Agency lacks the authority to enforce it.

Still, the Paris climate accord has accelerated some of the trends that were evident going in. Last year the world spent a record high of $329 billion investing in renewable energy, with more than half coming from developing countries; keep in mind the increase in investment happened while oil prices were crashing, and also as prices for solar photovoltaics were dropping.

Moreover, 40 countries have adopted or are planning carbon pricing, and 28 countries are undertaking energy subsidy reforms, helped by lower oil prices. Also, more than 1,000 major companies and investors have indicated they support the carbon pricing approach. The issuance of “green bonds” for sustainable infrastructure has tripled to $37 billion during the past year.

Countries, companies, academic institutions, and others have begun divesting from fossil fuels, and turning to clean energy.  JPMorgan, for example, has decided against further financing coal mining projects, and the Rockefeller Family Fund with a long and profitable history of fossil fuel investments, announced last month that it was getting out. Valuation procedures often now include reviewing a company’s environmental impact, including its investment in clean energy.

More than 200 religious leaders gathered in New York this week to say they support the climate change accord negotiated in Paris last week and they want it to be put into effect quickly. They released a statement to the General Assembly of the UN, basically stating that the Earth is a gift, not just a commodity; that we need to consider the long-term protection of life, not just short-term economic gain; and environmental stewardship is a fundamental moral and religious value shared by traditions across the world.

The Paris agreement spurs countries to increase their goals over time. The next target is in 2018. The response to climate change is happening, and that is an irrefutable fact. In the very near future the marketplace for energy will change. The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue.

In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016. A new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5 trillion, but that there was a 1% chance that the overvaluation could be as high as $24 trillion.

If action is taken to tackle climate change, the study found the financial losses would be reduced overall, but that other assets such as fossil fuel companies would lose value. Scientists have shown that most of the coal, oil and gas reserves such companies own will have to stay in the ground if the global rise in temperature is to be kept under 2C. The total stock market capitalization of fossil fuel companies today is about $5 trillion.

In other words, there is no scenario in which the risk to financial assets are unaffected by climate change. There will be winners and losers. Fortunes will be lost; fortunes will be made. And while climate change is a huge story for science, and nature, and religion. This is, quite simply, the biggest financial story in the world.

Financial Review

The Moral and Economic Issue of Our Time

Sinclair Noe — April 22, 2015

 

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DOW + 88 = 18,038
SPX + 10 = 2107
NAS + 21 = 5035
10 YR YLD + .06 = 1.98%
OIL – .45 = 56.16
GOLD – 15.00 = 1187.80
SILV – .22 = 15.86

The National Association of Realtors reports existing home sales increased 6.1% in March, the fastest pace of sales in 18 months. The jump in March sales follows a couple of slow months due, at least in part, to bad winter weather. But the latest figures suggest the mix of low mortgage rates, steady job creation and pent-up demand could push full-year sales to prerecession levels. Mortgage rates also are still near their lows for the year. The average interest rate on a fixed, 30-year mortgage was 3.67% last week, down from 4.27% a year ago, according to Freddie Mac’s latest weekly survey.

Greece will not present a list of economic reforms to Eurozone finance ministers on Friday; the deadlines don’t really help and they might even hurt because they lead to brinksmanship in negotiations on what reforms the Syriza government in Greece needs to do to secure more funding. There are signs Greece’s creditors are curbing demands for far-reaching reforms as part of current talks, perhaps a realization that they can’t get blood from a turnip, but the softening stance comes on condition Greece stays co-operative on fiscal targets. The liquidity situation in Greece is already a little tight, but it should be sufficient into June. The European Central Bank’s Governing Council raised the cap on Emergency Liquidity Assistance by about $1.6 billion; this is emergency cash to prevent a run on the Greek banks.

There are really only limited options for Greece; they can’t pay back what they owe because they just don’t have the money; they have already made huge cuts, and it has only pushed the economy into depression; voters made it clear that they did not want further cuts. And even if Greece pays back what they owe and they qualify for a new round of bailout funds, the money would go to banks and almost nothing would go to the Greek economy. So, the only option is for some sort of compromise.

And maybe the ECB and the IMF and the Euro-bankers are starting to realize that a Greek collapse and exit from the European Union would be more expensive than a compromise. While Greece is not a very large economy, the risk of a default and exit has far reaching implications because it would hurt the Euro-banks; not just the default, but the side bets, or derivatives on debt, and the implications for other struggling countries such as Spain and Italy, which might result in recalculation of their debt. The threat is that a couple of hundred billion in bad debt could cascade into much more; just as we saw the collapse of a relatively minor investment bank like Lehman Brothers back in 2008, turn into a major financial meltdown. Beyond that, if Greek leaves or is kicked out of the Euro Union it casts doubt on the whole idea of a European free trade zone, and that economic integration is beneficial to all members of the EU. The consequences of free trade are not always positive. The consequences of a Greek collapse are significant for all of Europe, and by extension the global economy.

Earnings season is in high gear with several big names reporting:
This morning, McDonald’s stock moved higher after the company announced a new turnaround plan to be revealed early next month. Results, though nothing to brag about, were better than expected.

Coca-Cola posted its first quarterly sales gain in two years after higher drink prices helped make up for sluggish demand.

Tesco, the British grocer, reported an annual loss of $9.6 billion, one of the biggest in British corporate history, and warned investors there could be more pain to come. The 96-year-old group, which dominated the British retail landscape for decades, wrote down the value of its business by 7 billion pound. After two decades of uninterrupted growth, Tesco lost its way when it was distracted by expensive overseas expansion and failed to spot the threat from discounters at home.

Boeing said its first-quarter profit rose 38% on growth in its commercial-airlines segment, but its revenue growth didn’t keep pace and costs tied to its flagship 787 program continued to mount.

Chip maker Qualcomm beat earnings estimates but reduced the 2015 outlook for its semiconductor business due to reduced sales in integrated processors.

EBay reported stronger-than-expected first-quarter earnings and sales, led by an 18% improvement in total payment volume and a 26% increase in merchant services volume.

Facebook reported a big jump in revenue, from about $2.5 billion to more than $3.5 billion, but they plowed more money back into the company for data centers and long term initiatives, and net income dropped slightly. Facebook generates more than half its revenue overseas and a stronger dollar hurt results.

AT&T reported slightly lower first quarter profit, just short of analysts’ estimates. Revenue edged slightly higher but also missed estimates. AT&T added more than 400,000 new wireless phone customers even as they faced greater competition from smaller rivals such as T-Mobile and Sprint.

And the competition is about to heat up big time. Google rolled out its wireless phone service today. Google’s service will run on the networks of Sprint and T-Mobile, switching between them depending on the stronger signal, and it will use Wi-Fi nets to route phone calls and data. Here’s the kicker: you only pay for the data you use. No other major US phone carriers do that. You pay $20 per month for unlimited calls, texting, mobile hotspot usage, and international coverage. Then you pay $10 for every gigabyte of data you want to use in a month. If you don’t use all the data you buy, Google refunds you the difference. So, if you buy a 3 gigabyte per month plan and you only use 1.4 gig, you get a $16 refund. If you watch a lot of videos on your phone it could get expensive. If you use basic service it will be a bargain. Either way, it is a radical departure in wireless phone pricing.

Today is Earth Day, celebrated on April 22 to build support for environmental protection around the world. First celebrated in 1970, Earth Day is observed in more than 192 countries with festivals, rallies and environmental activities. More than one billion people participate in Earth Day campaigns every year and it is the largest civic event in the world. Today, President Obama delivered a speech on climate change in the Everglades in Florida. I’m not really sure how to celebrate Earth Day, most of the numbers about the Earth and the climate are nothing to celebrate.

The World Wildlife Fund’s Living Planet Report estimates that there has been a decline by 40% in wildlife populations around the world since 1970; almost a third of global fisheries have collapsed since the 1960s; The Keeling Curve, which tracks atmospheric CO2 since 1958, shows we are heading towards catastrophic climate change; and a group of experts say that out of nine safe operating boundaries for Earth, four of them are in the red zone.

Maybe you forgot about Earth Day, maybe you never cared about it, but environmental issues will likely be front and center this year like never before. And the reason is Pope Francis. This summer, Pope Francis will deliver the first major encyclical of his papacy. It will be on climate change and the environment. Encyclicals are a big deal.

Later this month, the Vatican will host a climate change-themed conference, entitled “Protect the Earth, Dignify Humanity. The Moral Dimensions of Climate Change and Sustainable Development.” 2015 is a pivotal year for efforts to jumpstart a transformation of the energy system from a carbon-intensive one that is threatening to destabilize the planet to a low-carbon one that can slow the rise of the planet’s temperature. World leaders are committing to long-term efforts to slow the use of carbon-intensive energy, and the Vatican wants to influence those deliberations that conclude in Paris at the end of the year. The Pope will publish his encyclical in July; he will visit the US in September and address a joint session of Congress.  It could be an uncomfortable moment for many lawmakers: 169 members of the 114th Congress have expressed doubts about the science behind climate change, 35 of whom identify as Catholic. Beyond politics, the Pope recognizes that climate change is becoming the moral issue of our time.

The Pope is likely to use his encyclical, or his letter to more than 1 billion Catholics to explain the basics of what climate change is in plainspoken language that makes the issue available and relevant to everyone, rich and poor, and explain why we need to care about it.  And the Pope will explain that people of faith are called to love their neighbors; because climate change harms our neighbors, we must solve climate change if we want to protect the people we love. Christians are also called to remember our rightful place within creation. That rightful place is one that respects a vast web of life, and honors our responsibility to protect and defend the creation. Pope Francis told a crowd in Rome last May that mistreating the environment is a sin, insisting that believers “safeguard Creation … Because if we destroy Creation, Creation will destroy us! Never forget this!” Christians are also called to care for the poorest and most vulnerable among us, a theme that this particular pope embodies better than any in recent history. The poorest people are least responsible for climate change and most affected by it.

Changing the way we use energy will have an impact on the economy, and many people are fearful of added energy costs, without recognizing the economic opportunities that will be created by the transition. The truth is that climate change itself is the greater economic threat. The natural world underpins everything we do. Climate change will disrupt every sector of the economy, from agriculture and transportation to energy. Beyond the science and the policies and the biblical rationale beneath it, the most important aspect of the pope’s encyclical will be his call to the church to take up the moral cause. The church will hear it, understand it and advocate for it. When a billion people heed their religious leader’s call to reflect and then advocate and act on it, business and political leaders will have no choice but to pay attention.