Financial Review

Mylan Digs a Deeper Hole

Sinclair Noe — August 25, 2016

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DOW – 33 = 18,448
SPX – 2 = 2172
NAS – 5 = 5212
10 Y + .02 = 1.58%
OIL + .61 = 47.38
GOLD – 2.20 = 1322.60

The number of Americans who applied for unemployment benefits last week fell by 1,000 to 261,000 and remained near post-recession lows. Claims fell below the key 300,000 threshold in early 2015 and have remained there for 77 straight weeks, the longest streak since 1970.

Orders for durable or long-lasting goods made in the U.S. surged 4.4% in July to mark the biggest gain since last fall. Higher demand for passenger jets led the way as expected. The Pentagon also put in a bunch of new orders. Stripping out the volatile transportation sector, orders rose a smaller 1.5%. Still, that matches the biggest increase of the year.

Kansas City Fed President Esther George said Thursday she thought it was time to raise interest rates. George, who is a voting member of the Fed’s policy committee this year, said she didn’t know if anything would cause her to change her mind at the Fed’s meeting next month. But she indicated that decision-making remains data-dependent. George has a hawkish track record. Still, she joins Dallas Fed President Robert Kaplan, FOMC Vice Chair Stanley Fischer and New York Fed President William Dudley on the list of Fed officials calling for rate hikes.

Fed chair Janet Yellen delivers a speech at Jackson Hole tomorrow; she is expected to address possible rate hikes. Fed Funds futures are currently predicting only a 53% chance of a rate hike in calendar year 2016, which, of course is only a bit higher than coin flip. So, given the current overbought condition and the complacency seen in many indicators, the bears tell us that stocks are now “set up” for disappointment if Ms. Yellen’s speech takes on a more hawkish tone than expected tomorrow.

Central bankers sit down with their critics. In what is a first for the high-profile policy conference at Jackson Hole, Wyoming, eight central bankers, including William Dudley, president of the New York Fed, will meet with 120 activists from the Fed Up Campaign, which wants to see change at the Federal Reserve.

Mylan is responding to backlash over price increases for its EpiPen emergency allergy treatment by promising to reduce the costs that some patients pay, though the drug maker stopped short of saying it would roll back prices or limit future increases. EpiPen is a lifesaving treatment for millions whose allergies can send them into severe shock, including many schoolchildren who are advised to keep an injector handy at all times. The price has increased 548% since 2007. After widespread criticism recently, Mylan will “double eligibility” for its EpiPen patient assistance program to 400% of the poverty level, saying that a family of four making $97,200 would now pay nothing out of pocket for a prescription.

What the discount does change is how much people with commercial insurance and a high deductible pay. If you were at on the hook for about $600 before, that will now be cut to about $300. For people without insurance, however, the card won’t apply; they’d fall under a separate patient assistance program. It also won’t apply to people under government insurance programs such as Medicare or Medicaid.

Mylan CEO Heather Bresch, who happens to be the daughter of US Senator Joe Manchin, was making the rounds of TV business interviews today, trying to explain that there was nothing she could do about the price increases; she claimed the health care system is broken; she claimed she can’t lower the price because there are many layers, or middlemen, each taking a cut along the supply chain; even if Mylan cut the price, it wouldn’t result in lower prices for consumers. Well, she’s partially correct – the health care system is broken. The rest is pure hogwash.

The cost of a two-pack of EpiPens – shots of epinephrine that relieve symptoms from severe allergies that restrict breathing and can cause death – has risen from $103.50 in 2009 to $608.61 today, despite no changes in the chemical formula. Two vials of the proper dosage of epinephrine and manual syringes would cost only $20; some put the cost of the dosage in each EpiPen at as little as $1.

In 2012, the company behind the EpiPen settled a lawsuit by agreeing to allow a generic competitor into the market in 2015, potentially cutting into a big part of its business. Mylan had already been steadily increasing the price of EpiPen, an injector containing a drug that can save people from life-threatening allergy attacks. After the settlement, it started to raise the price even faster. The increasing price hikes reek of a greedy last grab for profits and an attempt to subvert the court’s ruling.

Bresch can lower the price, just as easily as she raised the price; or for that matter, even easier than the corporate “inversion” merger with Abbott Labs that moved Mylan’s headquarters to the Netherlands last year, so the company could dodge US taxes.

Brazil’s Senate has started the impeachment trial of suspended President Dilma Rousseff for violating budget laws, with the chances strong that she will be removed from office. Brazilian markets have rallied lately over the prospect of the Vice President Michel Temer permanently taking over from the Rouseff, although Temer was recently found guilty of violating campaign finance limits, a case that could make him ineligible to run for office for eight years.

Colombia’s government and the Marxist rebel group the Revolutionary Armed Forces of Colombia (FARC) have reached a peace deal after 52 years of war that has killed over 220,000 people. In return for giving up its arms, FARC members will be allowed to reintegrate into civilian life and stand for elections. The agreement will be put to a referendum in October, when it is expected to pass.

As one war ends…, Turkey has launched its first major ground assault into Syria since the country’s civil war began, sending in tanks and special forces backed by U.S. airstrikes to help Syrian rebels retake a border town from ISIS. The assault marks a dramatic escalation of Turkey’s role in Syria’s war, but there is more to the move than just fighting ISIS in Syria. Turkey is also aiming to contain expansion by Syria’s Kurds, who are also backed by the United States and have used the fight against ISIS and the chaos of the civil war to seize nearly the entire stretch of the border with Turkey in northern Syria.

Phoenix-based ON Semiconductor has won antitrust approval to buy Fairchild Semiconductor International. ON will sell its Ignition IGBT business to Chicago-based manufacturer Littelfuse. ON Semi and its rivals’ power-management circuits are used in everything from aircraft to home appliances and automobiles to computers. The deal was valued at about $2.4 billion. The FTC, in a statement, said that without the sale the merged company would have controlled more than 60 percent of the market for insulated-gate bipolar transistors, or IGBTs – a type of semiconductor used in automotive internal combustion engines’ ignition systems. That likely would have driven up prices and curbed innovation.

HP Inc., the hardware business of the former Hewlett-Packard Co, reported higher-than-expected quarterly revenue and profit as demand recovered for its notebooks. However, HP forecast current-quarter profit below analysts’ estimates, reflecting weak sales of its printers as companies cut costs across industries.

Sears Holdings is in really bad shape as its earnings report shows. The struggling owner of Sears and Kmart reported a staggering second-quarter loss of $2.03 a share. Same-store sales at discounter Kmart fell 3.3%, representing the seventh straight quarterly decline. Same-store sales at discounter Sears fell 7%, representing the eighth straight quarterly decline. And Sears is running out of money to stay afloat. Cash and equivalents declined to $276 million from $1.8 billion a year ago.

The ride-hailing giant Uber Technologies is not a public company, but every three months, dozens of shareholders get on a conference call to hear the latest details on its business performance. Uber’s losses in the first half of 2016 totaled at least $1.27 billion. For a private business to raise as much capital as Uber is unprecedented. It is also tough to find a tech company that can lose this much money this fast.

The first driverless taxi began work today in a limited public trial on the streets of Singapore. Developer nuTonomy invited a select group of people to download their app and ride for free in its “robo-taxi” in a western Singapore hi-tech business district, hoping to get feedback ahead of a planned full launch of the service in 2018. The trial rides took place in a Mitsubishi i-MiEv electric vehicle, with an engineer sitting behind the steering wheel to monitor the system and take control if necessary.

Over 300 Airbnb hosts have opened up their homes for free to people wracked by earthquakes, floods and fires in central Italy, Louisiana and California. Homes in central Italy, hit by a 6.2 magnitude earthquake Aug. 23, are on free offer on the website’s urgent accommodation page between Aug. 23 and Sept. 11. Airbnb accommodation could serve as an alternative to temporary relief camps for the 1,000 residents, whose homes were destroyed. Accommodation is also available to those affected by floods in Louisiana and prolonged wildfires threatening two Californian counties.

FINANCIAL REVIEW

Paulson, Bernanke, and Geithner Walk Into a Courtroom

Sinclair Noe — October 6, 2014

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Financial Review

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

DOW – 17 = 16991
SPX – 3 = 1964
NAS – 20 = 4454
10 YR YLD – .02 = 2.42%
OIL + .05 = 90.39
GOLD + 16.10 = 1207.80
SILV + .49 = 17.45

Stocks erased early gains. The Russell 2000 Index of small cap stocks took a hit of nearly 1%. Earnings season is right around the corner. Alcoa kicks off the unofficial start of earning season on Wednesday, and we’ll get 8 companies from the S&P500 reporting this week. The average estimate for the S&P500 calls for right at 5% earnings growth; however there are concerns about the impact of a strong dollar on overseas revenue.

Not much in the way of economic data today. The economy added at least 200,000 new jobs in seven of the past eight months and all signs point to similarly strong hiring through the end of the year. The latest evidence? A ninth straight increase in the employment trends index produced by the Conference Board, a nonprofit economic-research firm. The index is now 6.1% higher than a year ago.

Slightly less optimistic is the new, broader, all-purpose employment index from the Federal Reserve, it’s called labor market conditions index; it was up 2.5 points last month after an increase of 2.0 in August. This is a new index the Fed has built that draws on 19 separate jobs-related measures to give a broad sense of the labor market; it includes data on labor force participation, average weekly hours and hourly earnings, and hiring and quit rates. As we have seen in many of the monthly jobs reports, the unemployment rate is more of a headline number that doesn’t always tell us if the labor market is tight or slack. This new index is designed to be more comprehensive. That’s about all I can tell you for now.

The Federal Open Market Committee releases minutes from its Sept. 16-17 meeting on Oct. 8.

The protests in Hong Kong have faded away. Protestors briefly blocked entrances to two government buildings, but faced with the prospect of government violence, combined with an agreement between government and protestors to hold formal talks in the future, the mass crowds have largely gone home. Tens of thousands of protestors are now just a few hundred stragglers. It’s difficult to keep up a mass protest for more than about one week.

World Bank experts say China’s economic growth is likely to slow slightly to 7.4% this year, and to lag even a bit more next year. A separate World Bank report says growth will accelerate in India, expanding at a 6 percent rate next year, and a bit faster in 2016.

Yesterday was election day in Brazil, at least the first round. Incumbent Dilma Rousseff and pro-business rival Aecio Neves, will face off in an Oct. 26 runoff to decide what has been Brazil’s most unpredictable election in decades. The incumbent of the Workers’ Party, or PT, had 42 percent of the votes yesterday, followed by Neves of the Brazilian Social Democracy Party, known as PSDB, with 34 percent. While Brazil’s inflation hovers around the 6.5 percent upper limit of the target range and the economy slid into recession in the second quarter, unemployment at 5 percent remains near record lows.

Last week, JPMorgan Chase disclosed that hackers had broken into their computer systems in a massive security breach affecting 76 million households. That’s a huge number, just shy of two-thirds of American households, making the breach the largest cyber-attack against a bank in history.

Yet the company has not disclosed a separate, presumably even larger figure: the number of individual customers whose personal information was compromised. JPMorgan has said that no account information was stolen by the hackers, but that they were able to access contact details like names, phone numbers and email and home addresses. Internal bank information, such as what types of accounts individuals held, was also stolen. The bank has argued that because contact information was stolen, as opposed to account details, the best way to measure the size of the hack is by households, not individuals.

Hank Paulson, Ben Bernanke, and Tim Geithner walk into a courtroom; it sounds like the making of a joke, but it is serious business about why some firms were bailed out and others were hung out to dry. Specifically, it is part of a lawsuit alleging the 2008 federal rescue of American International Group cheated shareholders of $40 billion. Former Treasury Secretary Hank Paulson testified for 2 hours today. Paulson said he valued stability above all else in regulating markets, followed by the need for market participants to be responsible for the consequences of their actions.

“It was important that terms be harsh because I take moral hazard seriously,” Paulson said, referring to the economic term for consequence-free risks. Paulson drew a distinction between AIG’s treatment and that of Citigroup, which he acknowledged received better terms than the insurer. Paulson said AIG had to be rescued because if it failed “the country faced a real disaster.” The government avoided punitive terms for Citigroup because it feared doing so would encourage shortsellers to attack other banks, further destabilizing the economy. There was no similar risk of a domino effect in the insurance market.

In a bit of a bombshell, Paulson said he talked with the Chinese government about investing in US firms as part of the rescue scheme; in AIG’s case, Paulson said he didn’t think the Chinese would be interested in a deal without a government guarantee. “The government couldn’t provide that assurance,” Paulson said. “The Chinese were very, very nervous” about investing in U.S. firms at the time.

Geithner is scheduled to testify tomorrow. Bernanke is scheduled to take the stand on Wednesday.

The FCC has extended its public comment timeframe for the proposed Comcast Time Warner Cable mega-merger. The $45 billion marriage was meant to be open for public comment and debate until Oct. 8, but that portion of the review has now been pushed back to Oct. 29; the agency expects its review of the deal to be done by Jan. 2016.

Hewlett-Packard said today that it plans to split into two separate companies, a personal-computer and printer business, and corporate hardware and services operations. Meg Whitman will lead Hewlett-Packard Enterprise, a business focused on corporate hardware and services, while Dion Weisler, the vice president in charge of Hewlett-Packard’s personal-computer and printer operations, will become CEO of that business. The HP split comes a week after eBay announced it would spin off PayPal to shareholders. This looks like another example of financial engineering. If HP hasn’t been able to right the ship after dozens of industry-spanning acquisitions and an inconclusive multiyear restructuring, the next logical step is to bust it up and hope the pieces are worth more than the whole.

Glencore Plc is laying the groundwork for a potential merger with Rio Tinto Group in the next year that would create the world’s largest mining company, worth about $160 billion. As a preliminary step, Glencore has reached out to Aluminum Corp. of China, the Chinese state-backed company that is Rio’s largest shareholder, to gauge its interest in a potential deal. A merger would catapult the combined company past BHP Billiton to become the largest mining group, combining Glencore’s commodity-trading operations with Rio’s portfolio of iron-ore projects.

The Spanish health minister reports a Spanish nurse who treated a missionary for Ebola at a hospital in Madrid, has tested positive for the disease. The female nurse was part of the medical team that treated a 69-year-old Spanish priest who died in a hospital last month after being flown back from Sierra Leone, where he was posted. The nurse is believed to have contracted the virus from that priest. The World Health Organization confirmed there has not been a previous transmission outside West Africa in the current outbreak. Spanish authorities said they were investigating how the nurse became infected at a hospital with modern health care facilities and special equipment for handling cases of deadly viruses.

Today, the White House announced the government would develop expanded screening of airline passengers for Ebola, both in the West African countries hit by the disease and the United States.

The 2014 Nobel Prize in Physiology or Medicine was awarded on Monday to American-British neuroscientist John O’Keefe, and Norwegian scientists May-Britt Moser and Edvard Moser. The Mosers are the fifth married couple to be awarded a Nobel Prize. The trio received the award for their discoveries of cells that constitute a positioning system in the brain, which was described as an “inner GPS.” In 2005, they discovered a type of nerve cell that generates a coordinate system and allows for precise positioning. Together, these discoveries explain how the brain creates a map of space and how we navigate our way through a complex environment. Now, here’s where it gets interesting; Alzheimer and dementia patients often have a hard time with location – they tend to get lost easily. Since these spatial cells are among the first to be hit in Alzheimer’s and other forms of dementia, understanding how they are degraded should shed important light on the disease process.

The Supreme Court today said it would not hear appeals from five states whose same-sex marriage bans had been invalidated by lower federal courts. The decision, issued without explanation, will lead to recognition of gay marriages in 11 more states. It also allows an avalanche of legal challenges to the remaining bans to keep going forward in state and federal courts, where gay and lesbian couples have overwhelmingly prevailed.

The court’s decision leaves unchanged 20 state laws blocking same-sex unions. Each is already under legal attack, facing challenges in state or federal court, and sometimes both. Challenges to marriage bans already have reached a handful of state appeals courts and in the federal Fifth, Sixth, Ninth and Eleventh circuit appeals courts. By letting gay and lesbian marriages go forward in 11 other states, the justices almost certainly made it harder to reverse course in the future. If they do, the court would have to do more than simply prohibit some couples from marrying; it would have to invalidate marriages that have already taken place. It will become very hard for the Supreme Court to take that back.

Thursday, May 22, 2014 - A Heckuva Business Model

Financial Review with Sinclair Noe

DOW + 10 = 16,543
SPX + 4 = 1892
NAS + 22 = 4154
10 YR YLD + .02 = 2.55%
OIL - .31 = 103.76
GOLD + 1.80 = 1294.70
SILV + .10 = 19.59

Yesterday we told you Russia and China had signed a 30 year, $400 billion dollar deal for Russia to deliver natural gas to China. Today, both countries vetoed a United Nations Security Council Resolution seeking to refer Syria to the International Criminal Court for possible war crimes. In the short-term, the Russia-China gas deal won’t have a big impact. The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.

The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy; the former to sell the latter to buy, but this link gives an advantage to Russia, especially when the weather turns cold. At least symbolically the deal highlights Russia’s desire to move away from links with Europe. Combine this with Europe’s desire to increase energy security and the relations between the two sides could become increasingly cold and distant. Although, some countries due to geographical proximity, such as Bulgaria or Hungary; or due to long standing economic links, such as Germany - will surely continue to have good relationships with Russia. The entire Ukraine crisis has brought the return of a Cold War, and the gas deal sets up an East and West Economic Bloc.

It also raises questions over future tie ups between Russia and China. Areas such as payments systems, broader financial markets, transportation and machinery have all been touted as sectors for potential cooperation between the two countries. Again while a long term issue, such ties up may concern the West since Russia and China are currently reliant on their exports in many of these areas. Both the EU and US will need to figure a clearer policy for how to deal with such changes.

Unrest continues in Ukraine. BBC reports at least 11 Ukrainian soldiers were killed during an attack on a government checkpoint in eastern Ukraine. The attackers were described as heavily armed terrorists. Russia has claimed that it was pulling back troops from the Ukrainian border, but that has not been confirmed by satellite photos.

Thailand’s army chief went on television today to announce a military coup, after two attempts to negotiate an end to political impasse failed. The country’s Constitution was “temporarily suspended,” and the military said it terminated the caretaker government but said it expected the nation’s Senate, courts and independent organizations to function normally. The military imposed a nationwide curfew, and ordered all street protesters to leave their rallying sites.

In economic news, the National Association of Realtors reports existing home sales increased 1.3% to an annual rate of 4.65 million units, marking only the second gain in sales in nine months. Sales remain down 15% from a peak of 5.38 million units hit in July. Compared to April last year, sales fell 6.8%.The inventory of unsold homes on the market increased 6.5% from a year-ago to 2.29 million in April. That was the highest level since August 2012. The median home price rose 5.2%, the slowest pace since March 2012.

In this cycle we’ve had enormous price increases before we had the demand, which was a function of institutional buying of homes, which pushed prices higher. One thing we should have learned about housing is that when prices start rising, there is a herd mentality that kicks in. It wasn’t just institutional buying, it was a combination of events that swirled around institutional buying. The institutional buyer bought up distressed properties, resulting in fewer distressed inventory, add in people who were locked into their homes by negative equity or low equity;  and for many would-be buyers, it’s just tough to get a decent mortgage, or any mortgage at all.

This doesn’t mean banks aren’t lending – they are; it turns out that banks are ready, willing, and able to lend to small businesses, but you might not like the deal. Typical interest rates are about 125%.  Subprime business lending, the industry prefers to be called “alternative”, has swelled to more than $3 billion a year; that’s twice the volume of small loans guaranteed by the Small Business Administration. Wall Street banks are helping the industry expand by lending originators money. They’re starting to package the loans into securities that can be sold to investors, just as they did for subprime-mortgage lenders. It’s a heckuva business model.

Manufacturing activity picked up in May; Markit's "flash" US manufacturing purchasing managers index rose to 56.2 from 55.4 in April.

New applications for unemployment benefits rose sharply in mid-May, reversing a big drop earlier in the month that put initial claims at a seven-year low. The number of people who applied for new benefits climbed by 28,000 to 326,000 in the week ended May 17. That number might grow in the coming weeks thanks to HP.

Hewlett Packard announced earnings after the close, sales fell, revenue fell, but profits were higher, and they will cut an additional 11,000 jobs, bringing the total for outstanding job cuts to 16,000.  It’s a heckuva business model.

Yesterday, William Dudley, the president of the New York Fed gave a speech to the Regional Economic Press Briefing in New York, and he said: “There have been significant and long-lasting changes to the nature of work. As a result, many middle-skilled workers displaced during the recession are likely to find that their old jobs will never come back. Furthermore, workers are increasingly facing higher skill requirements in order to land a good job. These dynamics in the labor market present a host of challenges for the region to address. However one thing is clear: workers will need more education, training and skills to take full advantage of the types of job opportunities being created in our region, as well as across the nation.”

No doubt education is important. More education and skills will not stop your fall but it might slow it down. And a point that Mr. Dudley failed to grasp, or at least communicate is that a significant percentage of corporate profits have relied upon the widespread loss of worker economic share over the past few decades.

If you have bought or sold on eBay in the past few months, change your password and monitor your financial information. The company says hackers attacked between late February and early March with login credentials obtained from "a small number" of employees. They then accessed a database containing all user records and copied "a large part" of those credentials.

The hackers stole email addresses, encrypted passwords, birth dates, mailing addresses and other information, though no financial data, nor PayPal databases were compromised. The eBay breach would be larger than the one Target Corp disclosed in December, which included some 40 million payment card numbers and another 70 million customer records. Why are we just hearing about the eBay hack now? That is a very good question and so far eBay hasn’t provided a good answer.

We’ve noted many times that bankers have a get out of jail card. This week, Credit Suisse entered a criminal guilty plea in New York for its role in an ongoing tax evasion scheme, but that was a corporate entity, and no actual human bankers went to jail; in fact, the CEO and Chairman get to keep their jobs; but today we note that the handcuffs have been slapped on a banker, the former head of investment banking for JPMorgan Chase, in China.

You may recall the recent allegations against JPMorgan in China. Jamie Dimon had a clever little business development strategy to hire the children of Chinese politicians, to win support for JPMorgan banking activities in China; it’s a heckuva business model, except apparently the SEC’s antibribery unit thinks this might be bribery and thus a violation of the Foreign Corrupt Practices Act; except the SEC was not behind today’s arrest, and we all know that US law enforcement and regulators would never actually arrest a banker. However, finding jobs for the children of China’s elite in exchange for bank underwriting is apparently illegal in China, too.  And in China they have this strange custom of arresting people who break the law, even if work for JPMorgan.

In case you missed it, this week’s criminal settlement with Credit Suisse marked a turning point for law enforcement in dealing with the big banks. The Department of Justice says it proves they will go after the big banks and slap them with felonies convictions, even though they get misdemeanor punishment. Well, the proof is in the putting.

And now we have a new case that will show whether there is really any crackdown on wrongdoing, specifically money laundering; regulators are investigating Charles Schwab Corp and Bank of America Corp's Merrill Lynch brokerage over whether the brokerages missed red flags that could indicate attempts to move money illicitly or to feed proceeds from illegal activities into the financial system. The SEC is probing Schwab and Merrill Lynch for violations of anti-money laundering rules that require the brokerages to know their customers.

Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen began urging regulators two years ago to make sure financial institutions are identifying the true beneficial owners of their accounts. Cohen's exhortations came amid concerns that bad actors, such as drug cartel members and terrorists, are growing more creative in their attempts to secretly transfer tainted funds.

The SEC's investigation so far has found Charles Schwab and Merrill did not pay close enough attention to their clients' true identities, and accepted shell companies and individuals with fake addresses as clients. In both cases, some of the accounts, whose ownership the brokerages did not adequately investigate, were eventually linked to drug cartels. The investigation is not yet complete, and the only thing we know with certainty is that it’s a heckuva business model.