Financial Review

Never the Twain Shall Meet

Sinclair Noe — September 22, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 179 = 16,330
SPX – 24 = 1942
NAS – 72 = 4756
10 YR YLD – .09 = 2.12%
OIL – .85 = 45.83
GOLD – 8.70 = 1125.70
SILV – .45 = 14.87

Pope Francis is in Washington. The Pope will visit Washington, New York City and Philadelphia as part of his first-ever trip to the U.S., a six-day, five-night trip which will feature a couple of masses that are expected to draw huge crowds. The Pope will address a joint session of Congress Thursday; he may make points that challenge both parties, particularly if he repeats his remarks against what he sees as the excesses of globalization and capitalism. And he may discomfort both the White House and Congress if he urges them to do more to help Syrian refugees flooding through Europe. Then he will address the United Nations General Assembly in New York, where he will also conduct mass at Madison Square Garden on Friday.

China’s President Xi Jinping touched down in Seattle today to meet American business leaders before heading to Washington on Thursday to speak with President Obama. The two will discuss several thorny issues, including cybersecurity, the South China Sea, North Korea’s nuclear threat, human rights and a widening trade deficit. President Xi will tour the Boeing aircraft plant near Seattle. Not much new to see really, China has stolen more data from Boeing than Xi will ever see on a hospitality tour. Meanwhile, in his first interview with foreign media since Chinese stocks skidded this summer, Xi told The Wall Street Journal that government intervention to arrest the plunge was necessary to “defuse systemic risks” and was akin to acts taken by governments in “some mature foreign markets.” Hmm, wonder who he’s thinking about?

The Asian Development Bank is forecasting the Chinese economy will grow less than 7% this year, and warning of widening fallout from the country’s economic slowdown.

Just two years after a government shutdown over the Affordable Care Act, lawmakers are again heading toward a funding impasse – this time over federal money for Planned Parenthood. In January 2014, the Bureau of Economic Analysis estimated the direct impact of the last closure lopped about three-tenths of a percent off real GDP growth in the 2013 fourth quarter, and experts now estimate a three-in-four chance the government shuts down at the end of September (up from 67% last week).

The dollar hit an almost two-week high against a basket of currencies this morning after comments from Fed officials revived expectations that rates could still be hiked later this year. Dennis Lockhart, a voting member of the Federal Open Market Committee, is scheduled to speak again later in the day. Fed Chair Janet Yellen speaks on Thursday; and this is the speech that matters most. She won’t take questions, so it’s up to Yellen to decide if she wants to guide market expectations by emphasizing the Fed remains on track to raise rates this year, or whether she is willing to wait until next year.

If she stays silent on the topic, that would point to a delayed liftoff. They don’t want to surprise the market, which means they have to lay out a course of action before they can be sure they are going to follow it. There are two remaining FOMC meetings this year. Investors see the chances of liftoff in October as only around 20 percent, while a hike by December is less than a 50-50 proposition, according to trading in federal funds futures.

Bond fund giant Pimco says the pace of Federal Reserve interest-rate increases is likely to be even more gradual than the firm expected in March and that the U.S. central bank may find it impossible to escape the effective lower bound of policy rates. Pimco said in its quarterly Cyclical Forum outlook report that: “In contrast to robust consumption and housing, business investment confronts the headwinds from low oil prices and cutbacks in drilling and exploration, while exports will be challenged by the delayed effects of a stronger dollar and slower growth in emerging economies.” Pimco cut its forecast for U.S. economic growth in the next 12 months to between 2.25 percent and 2.75 percent, from 2.5 percent and 3 percent in March.

The Federal Housing Finance Agency reports house prices rose a seasonally adjusted 0.6% in July. That takes the year-over-year gain to 5.8%. Over 12 months, every region was positive, led by the 9.4% rise in the Mountain region, which includes Arizona.

European Union ministers have approved a plan that compels member countries to take in 120,000 refugees, despite strong objections from four dissident nations in Central Europe. The Czech Republic, Hungary, Romania and Slovakia voted no. Finland abstained. As a legal matter, however, the plan is final and must be carried out even if those countries oppose it.

Problems at Volkswagen continue to grow. Over the weekend, VW said 482,000 vehicles equipped with diesel engines sold in the US were rigged with a sophisticated software algorithm that could detect when a car was undergoing an emissions test; the software would adjust the pollution emitted during the test, and then after that, it was back to spewing deadly nitrous oxide gases at up to 40 times the legal limit. Yesterday, VW announced they had set aside $7.3 billion to deal with the problem.

That’s bad, but it gets worse. Now the company admits that it cheated on the emissions controls for 11 million vehicles worldwide.  Regulators from Germany, France, South Korea and Italy have vowed to scrutinize Volkswagen’s vehicles. The U.S. Justice Department has also begun a criminal probe. The 11 million cars affected are more than VW sells in a year. To address the growing crisis, the executive committee of the carmaker’s supervisory board will meet tomorrow. VW shares have dropped 31% in the past 2 days.

The shock waves from the scandal enveloping Volkswagen were being felt across the sector as traders wondered who else might be affected. Germany’s Daimler, the maker of Mercedes-Benz cars, was down 6 percent, while BMW fell 5.3 percent. France’s Renault was 5.5 percent lower.

A former peanut company executive has been sentenced to 28 years in prison for his role in a deadly salmonella outbreak, the stiffest punishment ever handed out to a producer in a foodborne illness case. The outbreak in 2008 and 2009 was blamed for nine deaths and sickened hundreds more, and triggered one of the largest food recalls in U.S. history. Before he was sentenced, former Peanut Corporation of America owner Stewart Parnell listened as nine victims testified about the grief caused by tainted peanut butter traced to the company’s plant in southwest Georgia.

The Securities and Exchange Commission is voting on new rules that would force most mutual funds, outside of money market funds, to have sufficient liquid assets to meet the legal requirement for daily redemptions and access to funds within seven days. It would also allow “swing pricing,” which is the process of reflecting in a fund’s NAV the costs associated with shareholders’ trading activity in order to pass those costs on to the purchasing and redeeming shareholders.

Brian Moynihan will keep his dual role as Bank of America Corp.’s chairman and chief executive officer after shareholders voted to ratify governance changes made last year. Preliminary results showed the resolution passed with about 63 percent of the votes. Bank of America had called the special meeting after angering some investors by undoing a 2009 shareholder-backed bylaw requiring an independent chairman.

Lloyd Blankfein, CEO of Goldman Sachs, said he has been diagnosed with lymphoma and will undergo chemotherapy in New York over the next few months. In a memo published on the investment bank’s website, Blankfein said it is a “highly curable” form of lymphoma, and his doctors fully expect him to recover.

It may not seem like much; just an extra hundred dollars or so a year, but the steady upward creep in health insurance deductibles has easily outpaced the average increase in a worker’s wages over the last five years. According to a new study from the Kaiser Family Foundation deductibles have risen more than six times faster than workers’ earnings since 2010. Four of five workers who receive their insurance through an employer now pay a deductible, in which they must pay some of their medical bills before their coverage starts. Those workers’ deductibles have climbed from a yearly average of $900 in 2010 for an individual plan to above $1,300 this year, while employees working for small businesses have an even higher average of $1,800 a year. One in five workers has a deductible of $2,000 or more.

Is 100 percent renewable energy possible by 2050? Greenpeace says yes. In a new study, Greenpeace projects that complete global reliance on renewable energy is within our grasp, and suggests the switch will create millions of jobs. The prediction sounds idealistic, but in the past equally dramatic Greenpeace predictions have proven accurate. In fact, the US-based Meister Consultants Group concluded earlier this year that “the world’s biggest energy agencies, financial institutions and fossil fuel companies for the most part seriously under-estimated just how fast the clean power sector could and would grow.”

And the main finding of the report includes another positive projection: more renewables will mean more jobs. Solar PV is expected to provide 9.7 million jobs, and wind power is expected to provide 7.8 million. And the projected 20 million jobs coming from renewables are far more than the coal, gas, and oil industries today combined. So although the International Energy Agency predicts the number of jobs to fall after 2020, the Energy Revolution report expects the number of jobs to increase between now and then.

Financial Review

Casino Mentality

Sinclair Noe — July 22, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 68 = 17,851
SPX – 5 = 2114
NAS – 36 = 5171
10 YR YLD – .02 = 2.32%
OIL – 1.62 = 49.24
GOLD – 7.00 = 1095.00
SILV – .05 = 14.90

As of today, Wall Street will have to comply with the “Volcker rule,” which bans taxpayer-insured banks from making bets with their own money. Although major financial institutions have fought for years to change the rule, they have for the most part fallen in line – shedding their proprietary-trading desks, pulling money from certain investment funds and ceasing other speculative activities. The new rule has also changed much of the industry. The five largest U.S. investment banks cut staff on bond sales and trading desks by 18% from 2011 to 2014, while 1,428 new hedge funds were launched during the same period.

Greek MPs are debating a second set of reforms they need to approve to secure a €86 billion-euro bailout, as thousands protest against further austerity measures. The protest outside parliament briefly turned violent. Earlier, Greece’s PM urged rebels within his own Syriza party to support the reforms demanded by creditors. Meanwhile, the European Central Bank has increased its cash lifeline to Greek banks with an emergency injection of an extra €900 million-euro, the ECB’s second in a week, coming just hours before the vote.

The National Association of Realtors reports sales of previously owned homes climbed to an eight-year high in June. Closings on existing homes, which usually occur a month or two after a contract is signed, climbed 3.2 percent to a 5.49 million annualized rate, the most since February 2007. Compared with a year earlier, purchases increased 9.6 percent in June. The median price of an existing home rose 6.5 percent from June 2014 to $236,400, the highest on record before adjusting for inflation. First-time buyers accounted for 32 percent of existing-home purchases in May.

In a separate report, the Federal Housing Finance Agency reports home prices rose 0.4 percent on a seasonally adjusted basis from April to May. The FHFA’s report showed home prices rose 5.7 percent in May from a year earlier. The measure is 1.8 percent below its March 2007 peak and about the same as the April 2006 level.

And it looks like people are catching the real estate bug, again. A new survey from Bankrate.com shows 27% of respondents believe real estate is the best investment, beating out cash for the top spot, as 2006 fades away in the rear view mirror.

Bad news ladies, you have taken a step backwards on the pay scale. New data from the Labor Department shows women earned 81.9 cents for every dollar a man earned in the second quarter of the year. That’s down from almost 84 cents for every dollar a man earned in the second quarter of 2014. Overall, median weekly earnings of all full-time workers climbed 2.7% from a year earlier to $801. Men got bigger paychecks, with wages and salaries climbing 3.4% from a year earlier to $886. For women, the increase was a more moderate 1.4% to $726. Men tend to work more hours than women. Women ages 20-24 come closest to earning the same as their male peers. That gap widens noticeably for women 35-44 and continues to grow.

The report also shows big disparities in pay related to race and educational attainment. For example, median weekly earnings for black men working at full-time jobs were $696 per week, or 76.1 percent of the median for white men. And full-time workers age 25 and over without a high school diploma had median weekly earnings of $499, compared with $1,210 for those holding at least a bachelor’s degree.

New York moved to raise the minimum wage for fast-food workers to $15 an hour by the end of 2018 in New York City and by mid-2021 in the rest of the state. The New York Wage Board voted unanimously for the increase, which would cover some 180,000 workers statewide.

A new report from the Annie E. Casey Foundation finds 22 percent of American children are living in poverty (as of 2013, the latest data available) compared with 18 percent in 2008. Poverty rates are nearly double among African-Americans and American Indians. Problems are most severe in South and Southwest. Particularly troubling is a large increase in the share of children living in poor communities marked by poor schools and a lack of a safe place to play.

Late Tuesday, the American Petroleum Institute said its data showed a 2.3-million-barrel increase in crude stocks in the past week. The more closely-watched data from the U.S. Energy Information Administration was released today, and that report showed stockpiles increased by 2.5 million barrels for the week ending July 17. Since the start of the year, oil prices are down about 5%. The decline in oil prices is part of a larger drop in commodity prices that has seen precious metals dropping 7 of the past 8 sessions; in turn dragging down prices on copper, zinc, and lead. And good news for coffee drinkers, the beans are down 23% since the start of the year.

Earnings reporting season, and the past couple of days have been rough. Dim outlooks and guidance were seen at Apple, IBM, Microsoft, and Yahoo, while commodity producers deepened declines. Shares of Freeport-McMoRan slipped 4.5%, Vale dipped 3%, and BHP Billiton fell nearly 5%.

The biggest hit was from Apple, even though the company topped analysts’ estimates for revenue and earnings, sales of iPhones came in slightly below estimates. Yesterday, Apple stock lost $62 billion in market capitalization. It was the biggest one day loss for Apple, but the record for the biggest one-day market cap loss goes to Microsoft; back on April 3, 2000, Microsoft lost $82 billion in one day, after news that a federal judge ruled it violated antitrust laws. Don’t worry about Apple; their market cap is still around $714 billion and they’re sitting on $202 billion in cash.

While markets remain near record highs, June-quarter S&P 500 earnings are expected to dip 1.5 percent. Of the 102 companies to report through Wednesday morning, 70 percent beat earnings expectations, matching the rate over the past four quarters and above the 63-percent average beat rate since 1994. However, only 55 percent have topped revenue forecasts, below the 61-percent average beat rate since 2002. U.S. companies are expected to post their worst sales decline in nearly six years in the second quarter, in part due to the strong dollar that reduces the value of U.S. companies’ overseas income.

Boosted by a recent stock surge, Facebook’s market capitalization has overtaken that of General Electric. The social network’s 26% climb this year has brought its market value to $275 billion, compared to GE’s $273 billion. Some are expressing concerns: GE racked up $149 billion in sales last year and employed more than 300,000 people. Facebook reported $12.5 billion in sales and employed roughly 9,200.

U.S. authorities have charged five people in the first cases bearing some link to last year’s massive cyber-attack on JPMorgan, which exposed the contact information of 83 million accounts. The men were accused of crimes ranging from securities fraud to money laundering – not with anything directly related to the attack on the bank – but officials confirmed there was a link. Rather, the court filings detailed charges involving a multiyear campaign to drive up the price of worthless penny stocks by pitching them to unsuspecting investors through millions of spam emails. One of the people briefed on the matter said he believed that the defendants had intended to use some of the email addresses obtained in the JPMorgan hacking to find other people who could be persuaded to invest in otherwise worthless stocks. It seems like a particularly reckless way to get a mailing list but that’s the story. Four of the men were arrested in Florida and Israel, while a fifth remains at large.

The bankruptcy drama at Caesars Entertainment came to a head today. Caesars put its largest unit in chapter 11 protection in January, rather than the whole company, preserving many investments of shareholders. In January, subsidiary Caesars Entertainment Operating Co. and nearly 175 affiliates filed for bankruptcy protection in Chicago after the second-lien holders filed an involuntary bankruptcy petition against the entity in Delaware. A Delaware judge later moved the entire case back to Chicago, Caesars’ preferred venue.

The case, as well as the months preceding the chapter 11 filing, has been contentious. In four lawsuits against the parent company, creditors have said Caesars’ entities improperly shifted good assets away from them to benefit its owners, including private-equity firms Apollo Global Management LLC and TPG. At least seven transactions between 2009 and 2014 have been questioned.

Caesars has called the transfers proper. The bankruptcy reorganization plan on file, which calls for the $1.5 billion investment by the parent as part of a deal to restructure the subsidiary, calls for Caesars to be reshaped as a real-estate investment trust. Senior lenders support the deal, while more junior creditors, including a group of second-lien holders that is suing, have opposed it. The bankruptcy judge in Chicago ruled that creditor lawsuits against Caesars Entertainment can continue and the bankruptcy of the casino’s top subsidiary shouldn’t delay the cases against the parent. Caesars’ stock dropped 41 percent to $4.76 a share.

FINANCIAL REVIEW

A Boatload of Economic News and Earnings Reports

Sinclair Noe — October 23, 2014

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

DOW + 216 = 16,677

SPX + 23 = 1950
NAS + 69 = 4452
10 YR YLD + .05 = 2.28%
OIL + 1.33 = 81.85
GOLD – 9.10 = 1232.90
SILV + .02 = 17.30

The S&P 500 has risen five times in the past six days, pushing the gauge up 4.9 percent since Oct. 15 and recouping about half the losses from a selloff that began in mid-September; the S&P is still down about 3 percent from a record.

The Federal Housing Finance Agency, which tracks deals involving mortgages backed by Fannie Mae and Freddie Mac, said home prices in August were up 4.8% from the year-earlier period; and up a seasonally adjusted 0.5% in August from July. The average rate for a 30-year fixed mortgage was 3.92 percent, down from 3.97 percent last week. The average 15-year rate dropped to 3.08 percent from 3.18 percent. Mortgage rates are now at the lowest levels since the summer of 2013. Refinancing applications jumped 23 percent in the week ended Oct. 17 to an 11-month high.

The number of people who applied for US unemployment benefits rose by 17,000 last week to 283,000, but initial claims remained below the key 300,000 level for the sixth straight week.

The Conference Board’s leading economic index rose 0.8% in September, after no change in August. The index points toward improving employment and income growth which are expected to support moderate economic expansion for the remainder of the year. The leading index is composed of 10 forward-pointing indicators. Nine of the 10 indicators showed strength in September, with the biggest positive contribution coming from a favorable spread of low interest rates. The only negative was average consumer expectations for business conditions.

The Chicago Fed’s national activity index rose to positive 0.47 from negative 0.25 in August. The three-month average stayed positive and accelerated, to 0.25 from 0.16 in August; indicating the economy grew at an above-trend pace in September, recovering after a slower August.

The Markit Economics flash manufacturing purchasing managers index for the US fell to a 56.2 reading in October from 57.5 in September. The index is at a three-month low. The rise in new orders was the slowest in nine months. A number of businesses expressed caution about export sales, perhaps due to the stronger dollar. Input cost inflation eased to its weakest level in six months.

Markit’s Eurozone Composite Flash Purchasing Managers’ Index rose to 52.2 in October from 52 in September. Germany’s private sector saw faster growth this month, France’s business slump deepened, with business activity hitting an eight-month low. In Britain, retail sales fell more than expected in September. Eurozone inflation slipped to its lowest for five years in September. The Flash Index is just a subset of the broader economy. For example, today, Spain reported the number of people without a job dropped by 195,000 in the third quarter, and the unemployment rate dropped to 23.7%, which is still incredibly lousy.

China’s flash HSBC/Markit manufacturing PMI edged up to a three-month high of 50.4 from a final reading of 50.2 in September.

Russian stocks have been falling sharply this week. Standard & Poor’s is scheduled to release a review of Russia tomorrow and it is widely expected that they will cut Russia’s credit rating to junk. Last week, Moody’s Investors Service cut Russia’s debt rating, citing concerns over the Ukraine crisis and the international sanctions.

The European Central Bank is scheduled to release the results of its stress test for Eurobanks on Sunday. The test of 130 lenders is aimed at answering the questions many investors still have about the health of the region’s banking system in the wake of the financial crisis. It is expected that most of the mega banks will pass the test but there are estimates that as many as 20 mid-sized banks might fall short.

The Federal Reserve will put US banks through a stress test, and the methodology was released today. US banks will have to show they can withstand a scenario where the unemployment rate jumps to 10%, the stock market dives by 60%, and oil prices reach $110 a barrel. The Dodd-Frank Act requires these tests of 31 of the largest banks, with $50 billion or more in assets, before the Fed signs off on stock buybacks and dividends. The 8 largest banks will also have to test for counterparty defaults, and 6 with large trading operations will have to test for a “global market shock scenario” that it hasn’t yet released. All the banks must submit these capital plans by January 2015.

Last year, Citi, Zions Bancorp and three foreign banks failed the tests, and Bank of America was forced to suspend a planned increase in its dividend and a stock buyback after finding it had erroneously reported $4 billion more in capital than it actually had.

After a sharp fall, crude oil seems to be finding support at $80 a barrel. Last week, the intraday price dipped below $80 but we have not seen a closing price under $80. Today, the price dipped down to $80.05 and then rallied. The past ten sessions have created a symmetrical triangle on the charts, and within the next few days, we should see a break from that pattern. Whichever way the market breaks out, or breaks down from that triangle pattern could be the way the trend goes for a long period. There is a tendency to go out of this pattern the same way we came in, which would be going down; but right now the prudent move is to wait and let the market tell us whether it can hold this important level of support.

General Motors disclosed in a Securities and Exchange Commission filing that its GM Financial unit was served with additional investigative subpoenas to produce documents from state attorneys general and other governmental offices relating to its subprime auto finance business and securitization of subprime auto loans.

General Motors said it earned $1.4 billion in the third quarter on strength in North America and China, where newly introduced models are more profitable than the ones they replace. That’s up from $700 million, or 45 cents a share, in the 2013 third quarter. Revenue was $39 billion, down slightly from the year-ago $39.3 billion. The earnings equaled 81 cents a share, lower than the 97 cents analysts expected. But the 81 cents is minus a special charge of 16 cents primarily for repairing flood damage at the Technical Center in Michigan and charges in Russia for lost value of long-term assets.

It is earnings reporting season.

3M reported strong growth in US sales and raised its full-year earnings forecast higher. In the latest quarter, profit totaled $1.30 billion, or $1.98 per share, up from $1.23 billion, or $1.78 per share. Sales grew 2.8% to $8.14 billion. Wall Street had expected earnings of $1.96 per share.

Caterpillar reported third-quarter net income rose to $1.63 a share from $1.45 a year earlier. Excluding one-time items, profit was $1.72, surpassing the $1.35 average of estimates compiled by Bloomberg. Caterpillar said per-share earnings excluding one-time items for this year are expected to be $6.50, 30 cents more than previously projected.

In a sign that earnings do still matter to the stock market, just look at 3M and Caterpillar today. 3M was up $6.10 at $145.05; that added about 25 points to the Dow Industrial Average. Caterpillar was up $4.97 at $99.27; adding about 45 points to the Dow. Two stocks, about one-third of the Dow movement.

Microsoft reported earnings of 54 cents per share on revenue of $23.2 billion, beating Wall Street estimates of 49 cents per share on revenue of $22 billion. Microsft was up about 4% today.

Amazon reported a third-quarter loss and revenue that missed analysts’ expectations; and then salt on the wound, Amazon projected weaker-than-expected sales for the important holiday quarter. The company posted a loss of 95 cents per share, compared to a loss of 9 cents per share in the year-earlier period. Three months ago, analysts thought the company would lose 7 cents a share in the third quarter. Then, after Amazon ratcheted down expectations, the estimated loss swelled tenfold, to 74 cents; and today, they missed that by 21 cents. Revenue for the quarter came in at $20.58 billion, against the comparable year-ago figure of $17.09 billion. Amazon tanked in after-hours trading, down about 13%.

Even with Amazon likely to hit $100 billion a year in revenue in 2015, it is having a hard time making a profit. It is getting to be a familiar story. The last time Amazon made a profit in the third quarter was in 2011.

Sears is closing 77 Sears and Kmart stores and cutting 5,300 jobs. And that’s not even the worst news. Most of the store closures will happen before Christmas, which makes it look like Sears is just throwing in the towel. Even the stores that won’t close until after the holidays are already holding going out of business sales rather than gearing up for seasonal promotions. Sears Holdings was up 4.4% on the news today. Go figure.

American Airlines, earned a $942 million profit in the third quarter. The company said it was its biggest profit ever for a quarter, and it was an 87 percent increase over the amount that American and US Airways earned separately last year before their December 2013 merger. Doug Parker, the airline’s chief executive, predicted more records for fourth-quarter and full-year earnings.

United Continental posted net income of $924 million, up from $379 million a year earlier. Excluding one-time items, its adjusted profit was a record $1.1 billion. Southwest profit rose 27 percent to $329 million.

All three companies beat Wall Street expectations for earnings. The airlines increased ticket prices back in April, and since then fuel prices have dropped by about 20%, and that works out to millions in savings: United cut its fuel bill by $13 million. Southwest saved $64 million. And the airlines are likely to save even more on fuel costs in the fourth quarter.

But if you are thinking those fuel savings will be passed along to fliers in the form of lower fares, well, that’s just hilarious. Recent mergers have reduced competition and helped the airlines limit the number of flights, making it easier to increase fares. And the big airlines have just pushed through a fare increase on domestic routes.

Tuesday, August 26, 2014 - A Few Old Sayings

Financial Review with Sinclair Noe

DOW + 29 = 17,106
SPX + 2 = 2000.02 (record)
NAS + 13 = 4570
10 YR YLD + .01 = 2.40%
OIL + .55 = 93.90
GOLD - .70 = 1280.90
SILV - .08 = 19.38

The S&P 500 notched its 30th record of the year and closed above 2000 for the first time ever. The Dow also rose but fell short of its record closing high after setting an all-time intraday high earlier in the session.

There are a few old sayings about the market that seem to fit. The first is, “the trend is you friend”; we have seen a few minor pullbacks since the bottom in 2009, but since the start of 2013 there has been a strong and steady uptrend. “A trend in place is more likely to continue than it is to reverse, until it reverses” and today marked a continuation of the trend, not a reversal.

Why is the market going up? Who knows? There are plenty of problems around the world. The US economy looks sluggish, but “stocks climb a wall of worry to march into bullish territory”; that’s a phrase that’s been thrown around for more than 60 years, but was made popular by Joe Granville in the 1980s.  Another financial proverb claims “Worry is interest paid on trouble before it falls due.” And the opposite of the “wall of worry” is “Bear markets slide down a slope of hope.”

And then there is the very, very old saying “buy low, sell high.” Any idiot off the street could repeat this phrase to you as if they had the secret recipe for investing success. Honestly, it’s good advice, because the overwhelming top indicator for investors and traders is price. You can’t spend volume or moving averages or stochastics or relative strength, and eventually, inevitably the trend will change.

If you want to look at a chart of an uptrend, just look at the S&P 500. If you want to see a chart of a downtrend look at the past four months’ worth of charts for wheat and corn and soybeans. As we near the end of summer, farmers are preparing for record crops in the Midwest. Wheat crops are forecast at a record 273 million bushels, up from 235 million last year; this year’s  soybean harvest is also expected to be a record, and corn will be a near record. But there is a problem. In many areas, such as the Dakotas, where agriculture has been a mainstay, the energy boom has taken over, and most of that oil travels by rail, and that means grain shipments have been held up, right as we head to harvest.

Reports the railroads filed with the federal government show that for the week that ended Aug. 22, the Burlington Northern Santa Fe Railway, North Dakota’s largest railroad, had a backlog of 1,336 rail cars waiting to ship grain and other products. Another railroad, Canadian Pacific, had a backlog of nearly 1,000 cars. Agriculture Department officials estimate that Canadian Pacific would not be able to fulfill nearly 30,000 requests from farmers and others for rail cars before October.

We have a couple of reports on home prices. The Federal Housing Finance Agency’s home price index shows house prices rose just 0.8% in the second quarter of 2014. This is the twelfth consecutive quarterly price increase for the FHFA index, but it also shows a slowdown. The FHFA index is based on home sales prices from conforming mortgages through Fannie Mae and Freddie Mac. Home prices are up 5.2% from the second quarter a year ago. Arizona ranked 5^th in annual appreciation.

In another indicator of a housing slowdown, the S&P/Case-Shiller National Home Price Index gained just 6.2% in the 12 months ending June 2014, while the 10-City and 20-City Composites gained 8.1%. That’s a dramatic shift from the double-digit, year-over-year price increases that had become the norm in the second half of 2013 and the first part of this year. All three indices saw their rates slow significantly from last month. To be clear, home prices are not dropping, simply rising at a slower rate.

The 20-city composite rose 1% in June. Phoenix posted a 0.6% gain for June, and a 6.9% gain from June of last year. Nationally, prices are still 17% below their peak. In Phoenix, the peak was measured to June 2006; from that point prices dropped 56%, and although prices have recovered, we are still 35% below peak prices.  

The takeaway from the housing reports is that price gains are slowing, and home supply has increased with higher prices and more people renting; consumers are slowly losing their ability to finance large purchases as home price appreciation continues to outpace wages. Absent a big increase in wages, you might expect home prices to remain flat or even decrease a bit in coming months.

Orders for durable goods jumped 22.6% in July; that is a record move, but much of the increase is because Boeing saw a jump in signed contracts for the 777X; it will take years before those planes are flying. Along with Boeing, automakers also turned in a strong performance. Demand for cars and small trucks climbed by 10.2%. Orders excluding the transportation sector, however, fell 0.8% with widespread weakness. Orders for primary metals, machinery, computers and defense goods all declined. Another key measurement of business investment, a category known core capital goods, dropped 0.5% in July. Orders for durable goods are volatile, and can jump around from month to month. While business investment has fallen in three of the past four months, it’s increased by an annual pace of 9% so far this year.

The Conference Board’s consumer confidence index jumped to 92.4 in August, the highest level since October 2007, from a revised 90.3 in July. Confidence has now increased for four straight months, and consumers remain quite positive about the short-term outlooks for the economy and labor market, even as the future expectations index declined from 91.9 to 90.9.

It’s official, minus the approval of regulators; Burger King will buy Tim Hortons for $11.4 billion and move the corporate headquarters to Canada, except they will keep corporate offices in Miami; and even though the deal would make sense without the tax dodging; it is a tax inversion deal. Warren Buffett’s Berkshire Hathaway is providing $3 billion in financing for the acquisition. Berkshire will earn 9% annual interest by taking a preferred equity stake.

The Department of Veterans Affairs says investigators have found no conclusive proof that delays in care caused any deaths at a VA hospital in Phoenix. That may be technically accurate, or not, but a troubled health care system in which veterans waited months for appointments while employees falsified records to cover up the delays, certainly did not serve those veterans with the care they deserved. The inspector general's final report has not yet been issued.

The VA is preparing a whole host of fixes for its healthcare system. Congress approved $17 billion to expand health care resources at the VA. Across the entire VA system, $400 million must be spent on staff overtime or private doctors to ensure veterans are treated quickly. As of Aug. 6, the VA had allocated $128 million in private care costs for 83,000 veterans; 8,248 VA schedulers across the country have been trained in appropriate ways of scheduling patients, including 764 Phoenix workers; an internal investigation board will be created to identify managers at the Phoenix hospital responsible for wrongdoing and what disciplinary actions should be taken; nearly $17 million has been spent in Phoenix to send veterans to private doctors for speedier care.

Also, mental health resources have been expanded in Phoenix by filling all but three of 13 psychiatric vacancies and six of seven psychologist positions and adding four social workers. The hospital's primary care staff has been expanded by 53 doctors, nurses and other caregivers. Twenty-seven temporary examination rooms have been opened, and two new outpatient clinics are planned with an additional 30,000 square feet of space.

President Obama went to Charlotte North Carolina today to address the national convention of the American Legion; and he announced steps to expand veterans’ access to mental health care and an initiative with financial companies to lower home loan costs for military families.

The US has begun surveillance flights over Syria to gather intelligence that might lead to airstrikes against ISIS militants in Syria. Military action inside Syria has not been approved yet. Pentagon officials have been drafting potential options for the president, including airstrikes.

Here’s a thought, before we send any more troops back into Iraq, or approve any airstrikes in Syria, we should make sure the VA has figured out a way to provide the best medical care to veterans. No excuses.

Ukraine has captured 10 Russian soldiers, though it did not state how they were caught. Weapons and fighters are able to cross the porous border freely, but until now there has never been confirmation that serving Russian soldiers were active inside Ukraine, despite repeated claims from Kiev. Russian President Vladimir Putin and Ukrainian President Petro Poroshenko held one-one-one talks today in Minsk, aimed at defusing the situation, which is positive, but the Russian POWs undoubtedly makes talks a bit awkward.

After 50 days of fighting, Egypt has brokered a ceasefire between Gaza and Israel. Palestinian and Egyptian officials said the deal called for an indefinite halt to hostilities, the immediate opening of Gaza's blockaded crossings with Israel and Egypt and a widening of the territory's fishing zone in the Mediterranean.

The United Nations has produced a new study on climate change; it includes a summarization of hundreds of scientific papers and is considered to present the best scientific and economic analysis on global warming, and is designed to provide policymakers with a scientific foundation for dealing with global warming. Bloomberg says it has received a leaked copy of the report which highlights the dangers from rising temperatures including damage to crop production, rising sea levels, melting glaciers and more pervasive heatwaves. The report mentions the word “risk” more than 350 times; “vulnerable” or “vulnerability” are written 61 times; and “irreversible” comes up 48 times.

The study, called the “Synthesis Report”, says global warming already is impacting “all continents and across the oceans,” and further pollution from heat-trapping gases will raise the likelihood of “severe, pervasive and irreversible impacts for people and ecosystems”. And the longer we wait to address the problems the more it will cost.

Monday, April 28, 2014 - But Our Bankers Aren’t Oligarchs

Financial Review with Sinclair Noe

DOW + 87 = 16448
SPX + 6 = 1869
NAS – 1 = 4074
10 YR YLD + .01 = 2.67%
OIL - .03 = 100.57
GOLD – 7.50 = 1297.30
SILV - .16 = 19.67

This should be an interesting week. On Wednesday, the Federal Reserve’s Federal Open Market Committee, the FOMC, will meet to determine monetary policy; a statement will be issued Wednesday. On Friday, we’ll have the monthly jobs report.

The market is jittery. The Dow fell 140 points on Friday, rose 139 on Monday morning, and gave it all back Monday afternoon, then recovered at little at the close. Investors are worried about the Ukraine crisis, the Fed’s tapering, peak earnings, high PEs, low GDP, inflation, deflation, and of course, their own shadows.

So far, the stock market has merely been sluggish to start the year; no big crash, no big gains. Last week, the big 3 indices were down a little, while the indices are in negative territory year to date, that could change with one good week of trading. After doubling or tripling since 2009, stocks aren't cheap any more. Companies, meanwhile, are finding it harder to keep raising earnings in a period of soft economic growth. This makes investors more cautious, but because speculative excess still hasn't reached the extremes of past bubbles, and because the Federal Reserve is determined to sustain the recovery, there is less fear of a big decline. The Fed has started slowly rolling back its quantitative easing, gradually ending the unprecedented bond-buying program that dumped more than $1 trillion into financial markets. Investors are trying to figure out how well corporate earnings will grow with less Fed aid.

A big complication is that many companies are reaching the limit of their ability to boost profits by cutting costs. More companies now need to focus on building revenues, which means higher costs for investment, hiring and wages. The days may be ending when Wall Street will reward companies for holding down wages and doing little investing; the focus is shifting to sustainable earnings.

Margin debt, a measure of the use of borrowed money to invest, is at a record high in dollar terms. But as a percentage of market value, it is 2.6%, still between the 2008 low of 2.3% and the 2007 high of 2.8%. Still, the markets haven’t yet shown enough excess to warrant a crash, and so people are still buying the dips; probably because they haven’t yet figured out where else they can go.

Money managers are turning on stocks that have delivered the best returns during the bull market: small caps. Large speculators such as hedge funds are betting $2.8 billion this month that the Russell 2000 Index will fall. That’s the most since 2012 and the highest versus average levels since 2004.

Today, the National Association of Realtors reported its Pending Home sales index increased 3.4% to 97.4. The index is based on contracts signed last month to purchase previously owned homes. These contracts usually become sales after a month or two, and March's rise suggested home resales could rebound in the months ahead. Existing home sales had fallen to their lowest levels in more than 18 months, with March sales down 7.9%; but today’s report suggests the possible end to the soft patch in sales.

Along with the economic news this week, we’re keeping an eye on geopolitical events, as Ukraine is crumbling under a constant barrage. Russian backed militants extended their hold on eastern Ukraine by seizing more public buildings in Donetsk region, breaking up rallies by supporters of the government in Kiev. The mayor of the second largest city in Ukraine was shot today. Russian gunmen are holding about 40 hostages, including 6 military observers from the Organization for Security and Cooperation in Europe, their interpreter and 4 Ukrainian army officers who were accompanying them.

Today, President Obama announce more sanctions against Russian oligarchs; imposing travel bans and asset freezes for 7 individuals and 17 companies. So far, most of the sanctions have been targeted toward energy companies or energy company executives and banks and bankers. Stop and think about that for a moment. Russian bankers are considered oligarchs fomenting geopolitical unrest and supporting the corrupt regime of Putin. And in the US we’re supposed to believe that our bankers are the beneficent titans of industry and pillars of commerce.

Last week we reported that the Department of Justice was in the early stages of negotiating a settlement with Bank of America. The government is reportedly seeking $13 billion in penalties, on top of $9.5 billion that BofA agreed last month to pay to the Federal Housing Finance Agency. The problem is that BofA sold mortgage backed bonds stuffed with shoddy mortgages that did not meet basic standards.

A big part of the settlement would go to the FHFA as compensation for selling the defective bonds to Fannie Mae and Freddie Mac. Another part of the settlement takes the form of consumer relief; requiring the bank to adjust mortgages to make them more affordable for borrowers; the problem is the bank probably doesn't own the mortgages, so the bank wouldn't really have that expense.

Also, digging deeper into the previously announced $9.5 billion settlement with FHFA, about $3.2 billion involved BofA buying back mortgage bonds, but they bought those securities for 20 cents on the dollar, and they still have value, probably a lot more than what BofA paid. When is a penalty a profit? When a big bank settles with the bank regulators.

The Supreme Court will hear a case that has some intriguing implications for mortgages; it involves the Truth in Lending Act. The case is Jesinoski v. Countrywide, the subsidiary of Bank of America. The Jesinoskis refinanced a mortgage in 2007; when their loan was closed, Countrywide did not provide all of the disclosures required by the Truth in Lending Act (TILA). Their suit states that they were not provided with two copies of a “Notice of Right to Cancel” and two copies of a “Truth in Lending Disclosure Statement.”

Under the Truth in Lending Act, a borrower has the right to rescind the loan by midnight of the third business day following the closing of the loan, or until the lender has provided the borrower with all the legally required loan documents. The Act also creates a three-year time limit to exercise the right to rescind the loan, even if the required disclosures have not been delivered to the borrower. Three years to the day, the Jesinoskis sent a letter to Bank of America rescinding the loan. BofA said the letter meant nothing. The Jesinoskis sued to enforce their rescission request, saying that their letter should have been sufficient.

The case has made its way through appellate courts, which denied their appeal, but other District Courts have been split on whether a letter is an allowable form of notification in instances such as the Jesinoskis’ case. The Supreme Court merely said they would hear the case; any actual decision is a long way off.

A more pressing matter for Bank of America is capital levels required by the Federal Reserve. You may remember the Fed recently conducted stress tests for big banks and it turns out that, following further review, Bank of America flunked the test; seems they miscounted  the treatment of structured notes assumed in its acquisition of Merrill Lynch in 2009. The bank notified the Fed of its mistake and the Fed is now “requiring the Bank of America Corporation to resubmit its capital plan and to suspend planned increases in capital distributions.” Or in plain English, no stock buybacks, and no dividend increases.

Particularly concerning for regulators and shareholders, the bank had been making the accounting error for more than four years, potentially inflating its true level of capital during that period. This basically goes to the practice of booking gains or losses based on changes in the value of a firm’s own debt, which led to BofA’s regulatory capital problem. Essentially, accounting rules mean that, in some cases, the worse off a firm is from a credit standpoint, the more it may gain in terms of earnings. That is because the value of its own debt would be falling during a stressed time. This would lead to a smaller liability. And a decline in a liability results in a gain to income.

This didn't used to be much of an issue since the value of bank debt didn't change all that much. Then came the financial crisis. And as bank debt remained volatile in its wake, firms were left with big counter-intuitive gains or losses in their income based on fluctuations in the value of some of their liabilities. Banks started to exclude the impact of such changes from their results. Investors couldn't make heads nor tails of the mess, and so they ignored it, at least until it affects buybacks and dividends. The important part to remember is that BofA flunked its stress test, and nearly 6 years after the financial meltdown they still have toxic junk on their books and they haven’t figured out how to count it.

Meanwhile, regulators in Britain announced they've begun criminal proceedings against 3 former Barclays employees suspected of manipulating the Libor. The new criminal proceedings are the latest development in a broad investigation into the manipulation of major interest rates by some of the largest global banks, including Barclays, UBS, Royal Bank of Scotland, and others. Twelve people in total are now facing criminal charges in Britain. All 12 are mid-level traders. Barclays, RBS, UBS, the Dutch lender Rabobank and ICAP have combined to pay more than $3 billion in fines to British and American authorities in the investigation of manipulation of various Libor-linked interest rates, but so far regulators have not been able to figure out whether higher level execs at these institutions knew anything about manipulation in a multi-trillion dollar market; which seems remarkably unlikely.