Financial Review

No F8 but What You Make

Sinclair Noe — April 12, 2016

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DOW + 149 = 17,705
SPX + 19 = 2061
NAS + 38 = 4872
10 Y + .04 = 1.78%
OIL + 1.28 = 41.64
GOLD – 2.40 = 1256.70

Earnings season is underway. Later this week big US banks will start releasing results, including JPMorgan Chase, Citigroup and Wells Fargo; the big banks are looking like one of the weakest sectors this earnings season. Expectations for earnings are low this quarter. Analysts surveyed by FactSet expect corporate profits to be down 9.1 percent from a year ago, hurt primarily by the steep drop in oil prices and other commodities. The entire energy sector is expected to report a loss this quarter.

This Sunday, oil producers meet in Doha, Qatar to consider some sort of production cuts. Iran has repeatedly showed zero interest in a production freeze at the current level, saying it would keep pumping until production reaches the pre-sanction level of around 4 million barrels a day. Today, Russia and Saudi Arabia announced a production freeze regardless of whether Iran participates in the plan to tackle a supply glut.

It may be the world’s biggest traffic jam. As seaports struggle to cope with a global oil glut, huge queues of supertankers have formed in some of the world’s busiest sea lanes, where some 200 million barrels of crude lies waiting to be loaded or delivered. The vessels, filled with oil worth around $7.5 billion at current market prices, would stretch for almost 25 miles if formed up in one straight line. Meanwhile, the latest American Petroleum Institute (API) inventory data recorded a build of 6.2 million barrels for the latest weekly data, compared with an expected build of around 1 million.

Wells Fargo chose the wrong time to expand its oil-lending. The bank targeted some of the least creditworthy borrowers in the shale industry, demanding oil and gas reserves as collateral, a type of financing thought to be low risk. With oil now hovering close to $40 a barrel, the value of those reserves held as collateral has plummeted.

This pressure was clearly illustrated yesterday when Chesapeake Energy pledged almost all of its oil and gas reserves, real estate and derivatives contracts to keep its $4 billion credit line. U.S. shale production, meanwhile, is seen reaching a two-year low.

Standard & Poor’s reported that it downgraded 44 US junk-rated companies in March, while upgrading just 15. This comes on top of the 82 issuers it downgraded in February. In the first quarter, about 45% of S&P’s downgrades hit oil & gas companies. Not a surprise, given the state the industry is in; the bigger surprise is that 55% of the downgrades hit companies outside oil & gas.

The International Monetary Fund lowered its estimate for global growth, citing volatility in financial markets, slowing momentum in developed economies and continued difficulty for emerging-market nations, as it also highlighted a growing backlash against trade and global ties. The IMF cut its estimate for global growth to 3.2% this year and 3.5% next year. That represents a downgrade of 0.2% for 2016 and another tenth for 2017 from what it forecast in January. The IMF’s estimate for the U.S. was cut to 2.4% in 2016, a downgrade of 0.2%, and to 2.5% in 2017, representing another tenth of point off its January forecast.

Several Fed policymakers are speaking today. Philly Fed President Patrick Harker, who has urged his colleagues to “get on with” raising rates again, said this morning that he wants to hold off on a second rate hike until inflation picks up. Harker said that given the behavior of oil prices, inflation is likely to be “quite low…. probably even negative” in the first quarter.

Dallas Federal Reserve President Rob Kaplan said he’s not too concerned about the slowing economic growth in the first quarter, and the US economy is likely to grow at just under 2 percent for the year. Kaplan says “we still believe the underpinnings for solid growth are there…We still think the consumer is going to remain strong this year. The job market is strong.” Kaplan sees an interest rate hike in the not-too-distant future, provided gross domestic product numbers recover as he believes they will. “I think people should expect it’s going to be a slow, patient, gradual normalization.”

Also today, San Francisco Fed President John Williams will discuss U.S. monetary policy and the global economic outlook, while the Richmond Fed’s Jeffrey Lacker speaks on “Economic Leadership in an Uncertain World”.

The National Federation of Independent Business (NFIB) said its small business optimism index dipped 0.3 point to a reading of 92.6 last month, the lowest since February 2014. It has declined from a reading of 100 in December 2014 and has pushed further off its 42-year average of 98. The soft reading fits in with recent economic data on consumer and business spending as well as wholesale inventory investment that have suggested economic growth slowed sharply from the fourth quarter’s 1.4 percent annualized rate.

The US government posted a $108 billion budget deficit in March, more than double the amount from the same period last year. The government had a deficit of $53 billion in March of 2015. The current fiscal year-to-date deficit was $461 billion, up 5 percent from a $439 billion deficit this time last year. Receipts last month totaled $228 billion, while outlays stood at $336 billion.

U.S. import prices rose in March for the first time in nine months as the cost of petroleum products increased, but the lingering effects of a strong dollar suggested inflation will continue to increase gradually. The Labor Department said import prices gained 0.2 percent last month after a downwardly revised 0.4 percent drop in February. It was the first time since June that import prices rose and the largest increase since May. Prices of imported products were down 6.2 percent in the 12 months through March. Weak import prices have contributed to holding inflation below the Federal Reserve’s 2 percent target.

A committee in Brazil’s lower house of Congress has voted to recommend President Rousseff’s impeachment for allegedly manipulating public finances, a step that increases the chances of her removal from office. A vote in the full lower house is expected to take place on Sunday. If the proceedings continue to Brazil’s Senate, the chamber could decide by a simple majority to put Rousseff on trial, suspending her position for up to six months, and VP Michel Temer would become acting president.

Alibaba is making its biggest overseas bet yet. The Chinese online retailer announced it was buying a controlling stake in the Singapore-based Lazada Group for about $1 billion. The acquisition will allow Alibaba to take advantage of growth opportunities in Southeast Asia.

About 40,000 Verizon workers say they’ll go on strike tomorrow unless the company negotiates a new contract with the Communications Workers of America and the International Brotherhood of Electrical Workers. At issue are pension benefits, outsourcing, and health care costs.

No. 3 U.S. railroad CSX Corp reported a lower quarterly net profit, in line with analysts’ expectations, citing declines in most freight segments, especially coal. First-quarter net income came in at $356 million, or 37 cents per share, down more than 19 percent from $442 million, or 45 cents per share, a year earlier.

Facebook Messenger wants you to chat with businesses and get updates from them, too. That’s the future Facebook pitched at F8, its annual conference for software developers in San Francisco. Facebook handed the more than 50 million businesses on Messenger the tools needed to build interactive experiences, or “chat bots,” that reach the 900 million people who use the messaging app each month.

Chat bots are chat robots, interactive software powered by artificial intelligence often with an assist from humans, which are designed to simulate human conversation. They are popping up on messaging services where you can use them to perform simple tasks. Chat bots are already popular in Asia, where messaging services such as WeChat help users schedule doctor’s appointments, shop for the latest styles, play games or the lottery and send money to friends.

One example of how business is using chat bots already – KLM Airlines recently began allowing passengers to check in, get flight updates, make travel changes and talk to customer service reps in its Messenger app. For some reason I’m just guessing that might not be as good as talking to an actual person, at least not yet.

Among other F8 stuff, Facebook is launching live video streaming working across all devices and services. Mark Zuckerberg gave a demonstration by streaming video from a drone flying in the conference hall. A more compelling use might be high quality live broadcasts – think TV, news, sports, and such. Or you could just start your own TV show. Already some TV stars are getting bigger audiences on the Live Platform than they’re getting on their TV shows.

Facebook also revealed a 360-degree video camera and software system today at its F8 developer conference, which is the kind of video you want for 3D or virtual reality. The camera, which will cost at least $25,000 to build, includes 17 different capture devices that are synchronized, and can record two hours of 360-degree video at up to 60 frames per second. Facebook is also releasing software that stitches the footage together seamlessly. But Facebook doesn’t really want to get into the camera business, so both the hardware and software, as well as the stitching code, are open source projects.

According to research firm Gartner, global shipments of personal computers fell 9.6% to 64.8 million units during the first quarter, marking the first time since 2007 that shipments dropped below 65 million units (IDC reported similar results worldwide). In the U.S., PC shipments totaled 13 million devices, representing a 6.6% decline from a year earlier and the lowest volume in three years. The sector has faced headwinds in recent quarters which include an economic slowdown in China, the strong U.S. dollar and the growing popularity of smartphones.

Financial Review

A Bit Ironic

Sinclair Noe — March 25, 2015

 

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DOW – 292 = 17,718
SPX – 30 = 2061
NAS – 118 = 4876
10 YR YLD + .04 = 1.92%
OIL + 1.70 = 49.21
GOLD + 1.90 = 1196.10
SILV + .01 = 17.06

Not much in the way of economic data today. Orders for durable goods dropped in February, a possible sign the slowdown in global growth may be weighing on American manufacturers. Bookings for goods meant to last at least three years declined 1.4 percent after a 2 percent gain in January that was smaller than previously estimated. Demand for American-made products may be softening as economies abroad struggle to accelerate and a stronger dollar makes it more attractive for foreign customers to buy from elsewhere.

Certainly not much in the way of news that would push the markets down to triple digit losses, but that’s the way the markets have been recently. In the past couple of weeks we see big moves in the markets, a little more to the downside than the upside. One of the better explanations I’ve heard for what is moving the market – irony. It seems like good news is bad and bad news is good. A strong dollar is good news for the consumer; certainly when it comes to lower gas prices. A strong dollar hurts durable goods orders. The jobs picture has shown solid and consistent improvement, which means the Fed wants to hike interest rates. The US is probably the strongest economy on the planet and yet the Japanese stock market is up 12% year to date and the European stock market is up 18%.

You think you figured out the markets; the gods of irony laugh.

In the absence of hard economic data, the Federal Reserve is sending out policymakers to make speeches this week. Atlanta Federal Reserve President Dennis Lockhart told the New York Times the central bank would have to be really disappointed by economic data to wait beyond September. Lockhart – who has yet to vote for a rise in rates – said: “If we make a decision early – early being June – or if we make a decision later, September or even later, in the greater scheme of things I don’t think it’s going to matter dramatically. I think the economy can absorb that almost on any of those dates.”

An API report yesterday showed a slightly smaller build in U.S. crude stocks at 4.8 million barrels last week. This morning the EIA reported crude oil inventories increased for the 11^th straight week, up 8.2 million barrels for the week ended March 20.  There are now 466 million barrels in storage, the highest for this time of year in 80 years, according to the EIA. This does not mean there is a storage crisis.

No deal yet between the US and Iran over their nuclear program.  Lifting oil sanctions on Iran could hit global markets long before the nation starts pumping more crude. That’s because Iran has been stockpiling oil onshore and in supertankers in the Persian Gulf, possibly up to 35 million barrels. And that could prove a surprise for the energy markets or it might not because there is a problem on the tip of the Arabian Peninsula. Yemen is a chokepoint between the Arabian Sea and the Red Sea and the Suez Canal; which is to say a chokepoint for oil tankers. And Yemen is falling apart.  The Associated Press, said the US backed President Hadi had left the country by boat; rebels have taken over the major airport and much more. The US has pulled all of its personnel out of the country.  Reuters reports that Saudi Arabia is moving heavy military equipment, including artillery, to its border with Yemen. Saudi Arabia says the buildup at the border is purely defensive.

Today marks the anniversary of Greek independence from the Ottoman Empire; they had a parade in Athens; it rained. Greece’s efforts to avoid bankruptcy have hit another hurdle, raising the risk of default next month. Yesterday, the European Central Bank instructed Greece’s largest banks to refrain from increasing their exposure to Greek government debt, essentially shutting off access to money. Greece has until Monday to show how it will follow through on reform commitments that would open the door for Greece to access $1.3 billion to aid their banking system. Greece risks running out of cash by April 20. Depositors pulled money from Greek banks today. There are reports of food shortages as people stock up in anticipation that the Greek economy will soon grind to a halt.

The government coalition in Greece has resorted to increasingly desperate measures to stay afloat, they have sequestered the reserves of public bodies, seized EU subsidies for farmers, and postponed all payments for state supplies while trying to service debt and pay salaries and pensions. On Monday, they are supposed to come up with a list of reforms, they might even write out a list, but the reality is that Greece is broke and can’t pay its debts. I suppose it is ironic that the modern term “irony” comes from the classic Greek theater.

In the latest annual letter to shareholders of Berkshire Hathaway, Warren Buffet addressed the possibility of potential acquisition targets for the company. He said simply: Our lines are out. Today, Buffett reeled in Kraft Food. Heinz and Kraft Foods will merge, with Heinz shareholders owning 51 percent and Kraft’s owning 49 percent. In addition, Kraft shareholders will receive a special cash dividend of $16.50 a share, or a total of $10 billion. The combined company will be the third largest food company in North America, and will have eight brands with sales of $1 billion or more and five brands with between $500 million and $1 billion in sales. Brazilian private equity firm 3G Capital and Berkshire Hathaway acquired Heinz for $23.2 billion in 2013. Kraft is 3G Capital’s fifth major deal in the food and beverage industry since 2008, when it engineered a takeover of Anheuser-Busch by brewer InBev. 3G Capital also controls Restaurant Brands International, formed when its Burger King business bought Canadian coffee chain Tim Hortons.

Telefonica has officially announced it will sell U.K. mobile carrier O2 to rival Hutchison Whampoa. Telefonica will receive $13.8 billion in cash up-front, and could receive up to $1.5 billion later, if O2 and Hutchison’s Three U.K. unit hit cash flow targets post-merger. The deal comes as Telefonica gets set to acquire Brazilian wireline carrier GVT for $8 billion, and follows Telefonica’s $12 billion 2014 acquisition of German rival E-Plus.

Hedge fund Standard General has raised its bid to buy about 1,740 stores of bankrupt electronics retailer RadioShack in a court-supervised auction. Standard General increased its bid from $145 million to $165 million. Standard General, which would operate most of the stores in conjunction with Sprint; it also committed to keeping some 7,500 RadioShack jobs. RadioShack’s auction was complicated by disputes among creditors about how Standard General was paying for its bid. The hedge fund provided RadioShack with a $535 million financing package last year to get the company through the year-end retail season. Much of the hedge fund’s bid took the form a “credit bid” – a pledge to forgive some of what it is owed.

The Supreme Court has revived a lawsuit by a former United Parcel Service driver who had to leave her job when she became pregnant and her doctor recommended she not lift heavy items. The justices, voting 6-3, sent the case back for a possible trial, which would center on UPS’s reasons for refusing to offer Peggy Young light-duty work even while giving temporary assignments to workers recovering from on-the-job injuries. The ruling is the Supreme Court’s first since 1991 on employers’ duties toward their pregnant workers.

On Tuesday, the Supreme Court heard a couple of cases called Bank of America v Caulkett and also Bank of America v Toledo-Cardona, that have big implications for the US housing market. The cases have a link to the foreclosure crisis. Under current law, primary residence mortgages cannot be modified in bankruptcy, unlike vacation homes, yachts, car leases, and almost every other form of debt, with the notable exception of student loans. That’s because of a 1992 Supreme Court case called Dewsnup, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. When Bank of America appealed the bankruptcy judge’s ruling in the Caulkett and Toledo-Cardona cases, the 11th Circuit Court of Appeals went against the Dewsnup ruling in May 2014 by deciding in favor of the two homeowners, saying that the previous decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The Supreme Court is expected to make a ruling by June.

Today was the big F8 event. In case you didn’t mark that on your calendar, F8 is the Facebook developer conference, and it offers a glimpse into new products and updates. Among the cool stuff: Facebook is opening up its Messenger chat app to third-party integrations. For example, a week ago, the company announced a feature that will let people use the app to send money to friends. Now it’s also talking about integrating GIF apps into the platform.

And then the next step: they are integrating Messenger with businesses, such as online retailers. This means Facebook will be able to connect shoppers’ identities to their purchases, creating a single thread of all interactions between retailer and consumer, and an app you could just tap to add more to your purchase.

Also, enhanced plug-ins for embedded video and comments. Facebook videos now log 3 billion views per day, and they want more. As for the comments plug-in, new updates would make it easy to carry conversations that occur on news sites that use Facebook comments, such as the New York Times, back to the social network. For publishers, this means much greater engagement in media.

And then there was an update on a company Facebook acquired a couple of years ago called Parse, which helps to develop apps for the Internet of Things; they’ve developed new tools to help programmers build apps for connected devices.

So, basically Facebook, that geeky social media company where people wast time sharing what they ate for lunch is now trying to control payment systems, shopping, videos you watch, news you read, and any devices you have that connect to the internet. Ironic, isn’t it?