Financial Review

Make Way for May

Sinclair Noe — April 28, 2017

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DOW – 40 = 20,940
SPX – 4 = 2384
NAS – 1 = 6047
RUT – 16 = 1400
10 Y – .02 = 2.28%
OIL + .21 = 49.18
GOLD + 4.20 = 1268.70

Looking back on the week, we had a couple of strong moves Monday and Tuesday, following the French election over the weekend – the rally was based on an absence of bad news. After that, markets looked for good news and floundered.

The tax reform plan failed to impress. We had some good earnings reports, which helped to lift a few stocks – notably a few of the big tech stocks, and that helped the Nasdaq Composite climb above 6,000 to new record highs. For the week, the Dow rose 1.9 percent, the S&P gained 1.5 percent and the Nasdaq rose 2.3 percent.

During April, the Dow gained 1.3 percent, the S&P rose 0.9 percent and the Nasdaq jumped 2.3 percent.

Yesterday, Alphabet, Amazon, and Microsoft reported earnings. Alphabet and Amazon crushed it. Microsoft was a slight disappointment. From the close of the market on Thursday to session highs on Friday, all three stocks hit an all-time high. That added more than $30.6 billion to Alphabet’s Class A market capitalization, $14.2 billion to Amazon’s market capitalization, and $6.7 billion to Microsoft’s market cap, reaching about $52 billion between the 3.

The stocks later pared gains, falling below their peaks. By the end of the day on Friday, the trio were just $27.4 billion richer, with Alphabet seeing $22.75 billion of those gains. The gains left both Amazon and Alphabet closing in on share prices of $1,000.

Amazon went public in 1997; if you had been brilliant enough to invest $10,000 at the IPO price of $18, and patiently held, you would be sitting on just over $4.8 million. Amazon’s market capitalization reached about $442 billion, pushing founder Jeff Bezos’ wealth closer to the richest in the world.

Alphabet and Microsoft had market caps of about $636 billion and $529 billion, respectively.

The US economy expanded at the slowest pace in three years as weak auto sales and lower home-heating bills dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling. Gross domestic product, the value of all goods and services produced, rose at a 0.7 percent annualized rate after advancing 2.1 percent in the prior quarter.

Consumer spending, the biggest part of the economy, rose 0.3 percent, the worst performance since 2009. There is a tendency for weak economic growth in the first quarter; the past few years winter storms were blamed for the declines; this year, warm winter weather is being blamed.

Since 2000, expansion in the first quarter of each year has averaged 1 percent, compared with 2.2 percent for the rest of each year. The pattern I recognize is that consumers get tapped out over the holidays and must tighten their belts in the first quarter.

The good news is that the unemployment rate is low, people have jobs, there is no immediate economic dilemma, and the economy should rebound as we move through the rest of the year. The bad news is that the growth trajectory looks a lot like the past few years, solid but sluggish. And in the background, inflation is eating into consumers’ wallets.

Real disposable personal income rose at a 1 percent pace in the period, the weakest since the fourth quarter of 2013. The report also showed price pressures were picking up. The GDP price index rose 2.3 percent in the first quarter. A measure of inflation tied to consumer spending and excluding volatile food and energy costs was up 2 percent, the fastest in four quarters.

And there is a good chance consumers will loosen the strings on the pocketbook in the second quarter. The University of Michigan consumer confidence survey shows consumers feeling good. The current conditions index in April was at its second-highest since 2005, and consumer expectations for inflation in the year ahead, and in five to 10 years, were unchanged from the prior month.

The employment cost index, released by the Labor Department, showed a 2.4 percent annual rise — the fastest pace in two years – and climbed 0.8 percent from the prior quarter for the strongest rate since the end of 2007. The wages and salaries component also increased 0.8 percent in the first three months of the year, the most since the second quarter of 2008.

The Federal Reserve FOMC policy meeting is next week and it is widely expected the Fed will leave interest rates at current levels while maintaining guidance for 2 more rate hikes this year.

The federal government will continue for at least one more week. Faced with a budget deadline of midnight tonight, legislators could not agree on the details of a budget plan to keep the doors open and the lights on, but they did agree to kick the can down the road. Congress approved a one-week extension to agree on a spending bill to fund the government through September.

Leaders of both parties say they’re close to agreement on a broader spending plan after Republicans signaled they would accept Democratic demands that the Trump administration promise to continue paying Obamacare subsidies and drop its bid for immediate funds for a wall on the Mexican border.

House GOP leaders abandoned efforts to vote this week on their plan to repeal and replace Obamacare for lack of support in their party. A vote is still possible next week.

Brazil is on strike, a nationwide general strike to protest President Michel Temer’s austerity measures, hitting public transport and closing schools, factories, banks and other businesses in every state. Police clashed with demonstrators in several cities, firing tear gas in efforts to clear roadways blocked by burning barricades.

Protesters also obstructed the entrances of airports and metro stations. Temer’s efforts to pass pension and labor reforms have deeply angered many Brazilians. Temer has proposed a minimum age for retirement. The lower house of Congress approved a bill this week to weaken labor laws by relaxing restrictions on outsourcing and temporary contracts.

GM, Ford, Toyota, and Mercedes all halted production at factories in Sao Paulo. the strike was strategically concentrated in public transportation so that even people who might want to get to work could not.

Young Europeans are sick of the status quo in Europe. And they’re ready to take to the streets to bring about change, according to a recent survey. Around 580,000 respondents in 35 countries were asked the question: Would you actively participate in large-scale uprising against the generation in power if it happened in the next days or months? More than half of 18- to 34-year-olds said yes.

A U.S. appeals court has blocked health insurer Anthem’s bid to merge with Cigna, upholding a lower court’s decision that the $54 billion deal should not be allowed because it would lead to higher prices for healthcare. The ruling effectively kills the proposed merger that was opposed by the U.S. Justice Department, 11 states and a district court judge after consumers, medical professionals and others objected to it.

In the end, Cigna itself tried to back out. Anthem and Cigna are suing each other. Cigna has sought to abandon the merger and force Anthem to pay a $1.85 billion breakup fee while Anthem filed a lawsuit to force its smaller rival to go through with the combination.

A consortium led by private equity firms Hillhouse Capital Group and CDH Investments offered on Friday to buy Belle International Holdings in a deal valuing the entire Hong Kong-listed shoe retailer at about $6.8 billion.

After months of speculation about whether Time, Inc. would be acquired, its board of directors has decided not to sell the company. Following the news, Time Inc. shares were down more than 19%.

Two initial public offerings went opposite directions Friday, as software company Cloudera shares shot up above its issue price and car-vending machine company Carvana saw its shares slump. Cloudera gained 20%, while Carvana dropped 26%.

Gasoline demand in the US dropped 2.4% in February compared with a year earlier, the second straight monthly decline. Still, coming in at 8.9 million barrels per day. The price of oil has nearly doubled from 12 months ago – a powerful motivation to conserve, but the lower demand also points to less economic activity.

Oil prices settled a bit higher today but still registered a second straight monthly decline. The problem for oil companies is that oil has spent a very long time consolidating around $50 to $55 and has now dropped under that range. Meaning any move higher will face strong resistance.

Meanwhile, any move below $47 would break through support. For oil companies, they have largely based their guidance for 2017 on prices in the $60 a barrel range.

Rising crude prices helped Chevron and Exxon Mobil easily beat analysts’ quarterly profit expectations. Chevron and Exxon expanded production in their American shale portfolios during the quarter, with both deciding the low-cost fields offered an easy opportunity to boost profit. They have laid out plans to increase drilling in those fields this year.

Exxon reported quarterly profit more than doubling to $4 billion, even as production fell 4 percent. Chevron swung to a $2.6 billion quarterly profit and turned cash flow positive. Chevron’s results were helped by $2.1 billion in asset sales. The company has sold more than $5 billion in assets since last year and is seeking buyers for its Canadian oil sands business.

General Motors recorded its highest ever profit for a first quarter. US sales of Chevrolet trucks and crossovers rose 3.5 percent and 12 percent, respectively, during the quarter, while GMC truck and crossover sales jumped almost 10 percent. GM’s net profit rose 33 percent in the first quarter to $2.6 billion, or $1.70 per share, beating estimates of $1.48 per share.

Financial Review

Fed Day

Sinclair Noe — September 21, 2016

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

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DOW + 163 = 18,293
SPX + 23 = 2163
NAS + 53 = 5295
10 Y – .02 = 1.67%
OIL + 1.57 = 45.62
GOLD + 20.30 = 1335.90

Today is Fed Day.  The Federal Open Market Committee left interest rates unchanged, although it was a split decision. Their statement noted that the labor market continued to strengthen and economic activity has picked up in the second half; household spending is growing but business fixed investment remains soft.

Inflation remains tame and “Near-term risks to the economic outlook appear roughly balanced.”  After a two-day session the Committee decided “that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The last time the Fed raised interest rates was December 2015; and they expected to raise rates twice in 2016. They have now held six straight policy meetings with no action. Now the focus will shift to December as the Fed’s likely last chance to raise interest rates in 2016 — a move that depends on how the economy, inflation and markets fare in the months surrounding the presidential election.

The lack of action is not due to a weak economy, rather a lack of urgency. Fed Chair Janet Yellen said at the start of her press conference, “Our decision does not reflect a lack of confidence in the economy. Since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future.”

The target range for the benchmark federal funds rate remains at 0.25 percent to 0.5 percent, where it’s been since a quarter-point increase in December 2015 that ended seven years of near-zero rates.

Fed officials cut their median growth projection for 2016 to 1.8 percent from 2 percent, mirroring the drop in the longer-run forecast, based on median estimates.

Inflation is projected at 1.3 percent in the fourth quarter, down from a forecast of 1.4 percent in June. Policy makers again projected that inflation will reach the 2 percent target in 2018.

The decision to hold rates steady was not unanimous. Ester George, Loretta Mester, and Eric Rosengren wanted to hike rates. George and Mester are long-time hawks. Rosengren had been dovish until about 2 weeks ago when he announced he thought it was time for a hike, news that shook the markets.

Yellen said differences among Fed officials were easy to overstate. Board members agreed that continued growth would warrant a rate increase. In a new round of economic projections published on Wednesday, 14 of 17 Fed officials said they expected to raise the benchmark rate at least once this year.

Because November’s FOMC meeting comes within a week of the presidential election and isn’t followed by a press conference with Yellen, the Fed’s December meeting is probably the earliest realistic chance for a rate increase.

Yellen said at a news conference after the Fed’s announcement: “We’re generally pleased with how the economy is doing. The economy has a little more room to run than might have previously been thought. That’s good news.” It was certainly good news for Wall Street, which loves accommodative monetary policy, which is to say – access to cheap money.

The Bank of Japan also wrapped up its policy meeting today, before the Fed; the BOJ held rates steady at negative – 0.1%. Instead of targeting an annual increase in the nation’s monetary base of about 80 trillion yen, the bank will now target the shape of the Japanese yield curve, announcing that it will purchase Japanese government bonds, with the aim of keeping the 10-year bond rate “more or less at the current level” of about 0%.

So while the scale of asset purchases is expected to be roughly the same as it was previously, the bank is now targeting interest-rate levels, not just the size of its asset purchases. They will do this by scrapping the previous stance of purchasing securities with a set time frame to maturity of seven to 12 years.

The Japanese yen was higher (after an initial slide) on the news and the Nikkei rallied 1.3%. Japanese Bond yields, now central to BOJ monetary policy moving forward, have also lifted. The 10-year Japanese Government Bond yield sits at negative-0.022%, having briefly traded at 0%, a level that had not been seen since the middle of March.

The world economy remains in a “low-growth trap” and weaker conditions in advanced economies will persist into 2017, The Organization for Economic Co-operation and Development, or OECD predicts global growth this year will expand by only 2.9%, the lowest rate since the financial crisis.

The economic think-tank also backtracked on its warning that the U.K. would suffer instant damage from a Brexit vote and has thrown its weight behind Theresa May’s plans to provide fresh post-referendum support.

Brazil’s former president will stand trial. Lula da Silva will be tried on corruption and money laundering charges linked to the state-owned Petrobas oil company. Lula was seen as a possible presidential candidate for the 2018 election—a conviction would bar him from running.

The United Nations secretary general, Ban Ki-moon, announced that he has secured enough commitments from world leaders, enough to ensure that the 2015 Paris climate accord will enter into legal force this year, binding the next American president, whoever it is.

The accord requires all countries to devise plans to achieve the goal of keeping the rise of temperatures within two degrees Celsius (3.6 Fahrenheit) above pre-industrial levels. Scientists say that such a temperature rise still poses risks but could save the planet from the worst effects of climate change, including worsening flooding, storms and droughts that may cause food shortages, species extinction and significant human displacement.

To come into force, the Paris agreement needs ratification from 55 countries that account for at least 55 percent of the planet’s greenhouse gas emissions responsible for climate change. With Wednesday’s event, a total of 60 countries have joined the Paris accord, meeting the threshold. And 14 other countries had signaled they would ratify the accord this year, meaning the agreement is virtually certain to come into force.

Replacements for only half of the 1 million Galaxy Note 7 phones recalled in the U.S. will be available in stores today. The rest will arrive at retail outlets by the end of the month. Samsung is also pushing out two new software updates: One will show a green battery icon (instead of white) to confirm a new Note 7 device. The other will tell owners of old Note 7 phones to get a replacement.

Google released an AI-centric messaging app. The much-anticipated Allo will compete against WhatsApp, Apple’s iMessage, and Facebook Messenger. Users can strike up a conversation with Google Assistant, an artificial-intelligence helper that, while still a work in progress, can solve math problems and translate phrases.

On its official blog, Google wrote that its Allo app for Android and iOS “can help you make plans, find information, and express yourself more easily in chat” and “the more you use it, the more it improves over time.”

AT&T says it has discovered a new way to deliver high-speed broadband over electrical power lines, a method it claims would make it cheaper and easier to bring internet to hard-to-reach places. The company has filed patents for the technology and is looking for a place to conduct field trials next year. Even if it goes well, AT&T warned it would still be several years before the system is commercially available.

Tesla updated its software after hackers remote-controlled a vehicle. Researchers in China remotely manipulated the brake system of a Model S while it was on the move and also opened a car door without using a key. The hackers, from Keen Security Lab, shared their efforts on YouTube.

The U.S. IPO market is heating up… There are nine new listings on the calendar over the next three days, marking the busiest week of 2016, and if next week’s proposed calendar comes through, September will be the busiest month of the year as well.

Among them: The Trade Desk (TTD) which traded today and jumped 67% from its offer, Novan (NOVN), CapStar (CSTR), e.l.f. Beauty (ELF), AC Immune (ACIU), Apptio (APTI), Full Spectrum (FMAX), Gridsum (GSUM) and Valvoline (VVV).

The SEC has charged Leon Cooperman of insider trading. Cooperman is the longtime head of Omega Advisors, a hedge fund he founded. The SEC complaint says an executive of Atlas Pipeline Partners shared information about the sale of a nat gas facility because he believed Cooperman wouldn’t trade on it.

Cooperman was one of Atlas Pipeline’s top investors, but he had been actively selling his holdings and saying bad things about the company; until he allegedly received the inside information, then he started buying out-of-the-money call options that on one day accounted for over 90% of the day’s trading volume.

Mylan Chief Executive Heather Bresch testified before the House Oversight Committee today, trying to defend price gouging on the company’s EpiPen allergic reaction treatment. The company hiked prices 500% since 2007. At the same time Bresch saw her compensation package increase 671%.

The EpiPen treats allergic shock and can be a lifesaver. There are no other options on the market. The lawmakers called the price hikes greedy, unfair and monopolistic, and that was all pretty accurate. Now let’s see if they do anything about it.

Financial Review

Sideways

Sinclair Noe — November 19, 2015

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

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DOW – 4 = 17,732
SPX – 2 = 2081
NAS – 1 = 5073
10 YR YLD – .02 = 2.25%
OIL – .24 = 40.51
GOLD + 11.30 = 1082.30
SILV + .04 = 14.32

The biggest rally in stocks in 4 weeks fizzled today. The S&P is up 2.9% so far this week. The S&P 500 has surged almost 12% from its August lows, including an 8.3% gain in October. Treasuries rose and the dollar fell. The MSCI Emerging Markets Index rallied 1.9%, heading toward the biggest weekly gain since the period ended Oct. 9. Equity gauges in South Korea, India and South Africa jumped more than 1%. Oil touched the lowest level in almost three months.

The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits slipped 5,000 to a seasonally adjusted 271,000 for the week ended Nov. 14. Claims have now held below the 300,000 threshold for 37consecutive weeks, the longest stretch in years, and are not too far from levels last seen in the early 1970s. Claims below this level are usually associated with a healthy jobs market.

Other data showed a slight pick-up in factory activity in the mid-Atlantic region in November after two straight months of declines. In a separate report, the Philadelphia Federal Reserve said its general activity index rose to 1.9 this month from -4.5 in October. It was the first positive reading in three months.

Arizona gained a net 33,800 jobs in October, dropping Arizona’s unemployment rate to 6.1% from 6.3%. Even so, the state remains well behind the nation’s 5% unemployment rate. In October, Phoenix had 1.9 million workers, about 3,000 fewer than it had in the same month eight years earlier.

Rebuilding the US energy industry to substantially reduce reliance on carbon-based fuels may result in a net gain of 2 million jobs by 2050 while increasing disposable household income, according to a new study sponsored by a nonprofit that advocates clean energy. The report found that a large-scale shift to renewable sources for generating electricity could increase U.S. employment by 1 million jobs by 2030 and 2 million by 2050, even after accounting for job losses related to fossil fuels. The transition would also provide between $300 and $650 in additional disposable income per household annually in 2050. A majority of the 2 million new jobs would be in the construction, utility and manufacturing industries.

Two IPOs came to market today: Square and Match. Both IPOs were underpriced, although the market will probably adjust in time. Square raised less than it had sought in its initial public offering, selling 27 million shares for $9 each, totaling $243 million. The price realized is well below the offer price of $11 to $13 a share and puts the company’s market value at about $2.9 billion, less than half the $6 billion valuation it had in its latest financing. In trading, the price popped to a high of $14.78.

Match Group, the owner of online-dating services Tinder, Match and OkCupid, priced its shares in its IPO at the bottom end of a $12 to $14 per share offering. The sale gives the company a market value of $2.9 billion. The price jumped as much as 24% in the first day of trading, valuing the company at $3.57 billion.

The U.S.’s biggest health insurer is considering pulling out of Obamacare, a month after saying it would expand its presence in the program. UnitedHealth Group is scaling back marketing efforts for plans it’s selling this year under the Affordable Care Act, and may quit the market entirely in 2017, because the business has proven to be more costly than expected. It’s an abrupt shift from October, when the health insurer said it was planning to sell coverage in 11 new markets next year, bringing its total to 34. The company also cut its 2015 earnings forecast.

MetLife, the largest U.S. life insurer, said the Financial Industry Regulatory Authority’s staff has indicated the agency will seek a “significant fine” from the company’s broker-dealer unit as part of a probe into possible violations tied to variable annuities. MetLife said in its quarterly regulatory filing that the company is cooperating in this investigation. MetLife said in the filing that the probe focuses on potential violations “regarding alleged misrepresentations, suitability, and supervision in connection with sales and replacements of variable annuities and certain riders on such annuities.”

Wall Street’s private stock markets would have to reveal whether they favor any particular users including high-frequency traders under a proposal approved Wednesday by the Securities and Exchange Commission. Many of the new disclosure requirements sought by the SEC mirror those currently reserved for public markets such as The New York Stock Exchange.

The regulatory effort follows a series of enforcement actions in which Investment Technology Group and UBS Group paid tens of millions of dollars to settle allegations they misled investors about how their dark pools worked. The proposal would require dark pool operators to make a new public filing that spells out their conflicts of interest, including whether an affiliate trades in the dark pool. If the dark pool creates advantages for any particular users, it would have to reveal that in the filing.

Japanese exports fell for the first time in more than a year in October. Exports slumped 2.1% last month, while imports fell 13.4%, hit by soft demand in China and other Asian economies. Despite the weakness, the Bank of Japan held its current pace of monetary stimulus steady at its policy meeting today.

Volkswagen is expected to announce substantial spending cuts on Friday, the day the carmaker must inform U.S. regulators of how it plans to bring its diesel cars into compliance with air-quality standards. VW is facing class action lawsuits around the globe. Volkswagen has also disclosed that 120,000 U.S. owners have signed up for its $1,000 goodwill package – or about one quarter of the 482,000 vehicle owners covered by the emissions scandal.

Meanwhile, Reuters is reporting that federal prosecutors with the Department of Justice are examining whether Bosch, the world’s largest auto supplier, knew or participated in Volkswagen’s years-long efforts to rig diesel emissions tests. Bosch built key components in the diesel engine used in six Volkswagen models and one Audi model. Federal authorities are also investigating how deeply the scheme permeated VW’s hierarchy. The probe is at an early stage and there is no indication that prosecutors have found evidence of wrongdoing at Bosch.

A proposed four-year labor contract between Ford and the United Auto Workers appears to be in trouble after more than half of those voting so far have rejected the pact and only two days remain for workers to cast ballots. Newer UAW members are providing the most resistance over the length of time it takes for younger workers to reach the top wage level. Older workers feel they gave up too much in earlier contracts. Results of voting are due on Saturday.

Pfizer is in advanced talks to buy Allergan  for as much as $380 per share in a deal that would value the Botox maker as high as $150 billion. The companies might announce an agreement as soon as Monday. Shares in Ireland-based Allergan had dropped due to plans by the U.S. Treasury Department to deter tax inversions, a major motivation behind Pfizer’s pursuit of the company.

The US Treasury Department will release new “targeted guidance” this week designed to reduce the tax benefits available to US companies that move their tax addresses overseas. Treasury Secretary Jack Lew informed lawmakers of the coming announcement in a letter on Wednesday. The administration previously has said it was examining “earnings stripping,” a practice by which companies load up their US operations with deductions and effectively push profits to low-tax countries.

In September 2014, the Treasury Department announced rules against inversions, including limiting companies’ ability to use their offshore profits to finance a deal. That change caused AbbVie to abandon a planned inversion, but other companies moved ahead. The Treasury hasn’t yet issued the formal regulations it promised last year, and congressional efforts to revamp the international tax system have stalled.

The September 2014 announcement included a warning that rules against earnings stripping might be retroactive to inverted companies. That means the Treasury announcement coming later this week could affect companies such as Medtronic and Mylan that finished their inversions in the past 14 months, plus a half dozen more deals that haven’t closed yet.

Cutting Pfizer’s tax rate to 15% would save $2.1 billion in 2017 based on analysts’ estimates. At a multiple of 10, that’s worth just over $20 billion. At the reported deal price, Pfizer would be paying a premium of more than $35 billion for Allergan based on its undisturbed price. If Pfizer can’t get the deal done, it might face a breakup fee of 2 to 3%. And the more companies try to weasel out of taxes through inversions, the greater the likelihood there will be legislative change, which could make any savings short-term or even non-existent.

The attacks in Paris may have finally spurred a brand change for Isis Pharmaceuticals, a drug maker that until now has held on to its name despite the terrorist group’s rise in the Middle East. Named after Isis, the Egyptian goddess associated with good health, the company has had the moniker since its founding 26 years ago. Its ticker symbol is also under review.

The House of Representatives has easily passed a bill to restrict the admission of Iraqi and Syrian refugees to America by requiring extra security procedures. The American Security Against Foreign Enemies Act of 2015, or the American SAFE Act of 2015, would require the secretary of Homeland Security, the head of the FBI and the director of national intelligence to sign off on every individual refugee from Iraq and Syria, affirming he or she is not a threat.

It’s unclear whether the Senate will take up the legislation. President Obama has already said he would threaten such a bill, and the perfect venue for a veto would be directly in front of the Statue of Liberty.

Financial Review

Low Price Leader

Sinclair Noe — October 14, 2015

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

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DOW – 157 = 16,924
SPX – 9 = 1994
NAS – 13 = 4782
10 YR YLD – .07 = 1.98%
OIL – .37 = 46.29
GOLD + 15.40 = 1185.30
SILV + .22 = 16.22

Retail sales rose a seasonally adjusted 0.1% in September. Auto sales were strong, up 1.7% last month. Sales at gas stations were down 3.2% because gas prices were lower. Sales fell at Internet retailers, general stores, home centers, groceries and outlets that sell appliances and electronics. Sales rose at restaurants. Excluding autos and gas, sales were flat. Retail sales have risen 2.4% in the past 12 months, though the gain is a healthier 4.9% if gasoline is omitted.

The producer price index, which measures prices at the wholesale level, fell 0.5% last month. In September the wholesale price of gas sank almost 17%, marking the sharpest decline since January. That drove down the overall cost of goods by 1.2%. The cost of services also fell by 0.4% last month, the biggest decline since February. Core producer prices, excluding the volatile categories of food, energy and trade fell a smaller 0.3% in September. Over the past year, overall producer prices have fallen an unadjusted 1.1%.

Inventories at U.S. businesses were flat in August. Business sales fell 0.6% in August, the biggest drop since January. The inventory-to-sales ratio, an indication of demand, rose to 1.37 from 1.36 in July.

We are two weeks from the next Fed FOMC meeting, and that means the Fed publication of the Beige Book, a compilation of observations from the 12 Fed districts; not necessarily hard economic data. Six of the 12 Fed districts called the expansion “modest,” while three reported “moderate” growth. Two districts, Boston and Richmond, saw an increase in economic activity, while Kansas City declined.

Labor markets “tightened in most districts” even as wage growth remained subdued, with increases concentrated among highly skilled workers (and yes, there is a connection between a lack of skilled workers and the wages workers are offered). Consumer spending “grew moderately,” housing and commercial real estate improved, and banking and finance “were generally positive.” Manufacturing “turned in a mixed but generally weaker performance,” and the energy sector declined further.

The strong dollar acted like a brake on economic activity, particularly in manufacturing, energy and tourism. Price pressures were “contained” as some districts saw cheaper energy and commodities. In short, there is nothing in the Beige Book that seems to tell policymakers to raise interest rates.

The biggest corporate news of the day came in the form of guidance from Walmart. Watch out for falling prices. Walmart dropped its sales forecast for the year and warning that heavy investments in wages and in e-commerce would curb future earnings. Walmart warned that earnings per share would fall 6 to 12 percent next year before they would recover; profits should rebound by the fiscal year 2019, when earnings per share was expected to grow 5 to 10 percent a year. That’s a long time to wait.

To soften the blow, Walmart announced it would increase share buybacks by $20 billion, which is about what they lost in market capitalization today, as the stock closed down 10%, shaving about 45 points off the Dow Industrial Average. Maybe they should have put the money into something a bit more creative.

Doug McMillon, Walmart’s chief executive, said the company needed to invest to return to growth. McMillon said: “Retail history is very clear. Those that are unwilling or unable to change go away. That’s why we’re taking decisive steps now to change and grow our business.”

One major change in retailing is the shift to online commerce, where Walmart is getting kicked by Amazon. So Walmart will invest $2 billion in its e-commerce arm over the next two years, opening online grocery operations in 20 new markets. (compare this to the $20 billion buyback)

Netflix posted third-quarter earnings of 7 cents per share on $1.74 billion in revenue, just missing analyst expectations of 8 cents per share on $1.75 billion in sales. That’s close enough to be forgiven, but the bad news came in the form of subscriber growth. Netflix added 880,000 new U.S. members in the quarter, much lower than the 1.19 million analysts expected. Netflix shares dropped 14%.

Bank of America reported profit of $4.5 billion, or 37 cents a share, beating estimates by 4 cents. Revenue, however, fell 2.4 percent, to $20.9 billion, from the quarter a year ago. Third-quarter results were lifted by a 4 percent decline in expenses and lower charge-offs on loans. The bank also continued to build deposits, with its overall base up $50 billion from a year ago.

A year ago, the bank reported a $232 million loss, as it settled an investigation by the Justice Department into the sale of toxic mortgage-backed securities leading up to the financial crisis. So, the trick to turning a profit is to not get hit with billions of dollars in legal fees. Who knew?

Wells Fargo reported a rise in quarterly profit for the first time in three quarters; they narrowly beat estimates. The bank earned $5.8 billion, or $1.05 a share, up 1% from the quarter a year ago.

BlackRock, the world’s largest asset manager, topped analysts’ earnings forecasts in the third quarter even as its profits fell.  Earnings for the third quarter on an adjusted basis declined 5 percent, to $844 million, or $5 a share, from $890 million, or $5.21 a share, in the quarter a year ago. Overall assets under management fell to $4.5 trillion at the end of September, from $4.7 trillion at the end of June.

Delta Air Lines led off earnings season for the airline industry with a strong report; third-quarter profit topped analysts’ expectations, and it forecast that passenger unit revenue would decline in the fourth quarter year-over-year.

Yesterday Intel reported less than stellar quarterly earnings, noting a slowdown in PC sales, among other things. Today comes news from Microsoft that they are selling their first ever laptop, the Surface Book, as fast as they can make them. Microsoft started taking preorders last week; five days later and they have sold out.

Apple could be facing up to $862 million in damages after a U.S. jury found the iPhone maker used technology owned by the University of Wisconsin-Madison’s licensing arm without permission in chips found in many of its most popular devices. The jury in Madison, Wisconsin also said the patent, which improves processor efficiency, was valid. The trial will now move on to determine how much Apple owes in damages. The jury was considering whether Apple’s A7, A8 and A8X processors, found in the iPhone 5s, 6 and 6 Plus, as well as several versions of the iPad, violate the patent.

Volkswagen has been in trouble lately, as you know, for rigging emissions tests on diesel cars. Their CEO resigned. There are investigations on several continents. Millions of cars will be recalled. Sales have been suspended. So they named a new guy to take over North American operations, Winfried Vahland, a 25 year veteran of the company. Thanks but no thanks. Mr. Vahland has resigned. VW says it is because of a disagreement about reorganizing the North American unit and not because of the emissions scandal.

Goldman Sachs may be in hot water over its advisory role to Malaysia’s troubled sovereign wealth fund – 1Malaysia Development Berhad, or 1MDB. The WSJ reports the bank received more than $350 million for consultant work related to the fund, which is currently under investigation for billions of dollars in missing money. The FBI and Justice Department have already begun examining Goldman’s role in several of 1MDB’s transactions.

Dish Network has officially petitioned the FCC to deny the merger of Charter and Time Warner Cable on “risk of significant harms,” including a “suffocating duopoly.” Dish noted the proposed deal would be no better than the one proposed between Comcast and Time Warner Cable, and stated the merger would result in two broadband providers (the other being Comcast) controlling 90% of U.S. high-speed broadband networks.

Facebook is now testing a dedicated video channel, intensifying its rivalry with YouTube for viewers’ time and advertisers’ spending. The channel would appear as a tab on the home page, allowing users to save clips that have appeared in their news feed and recommend videos based on other things they have watched. The move follows several other fresh initiatives by the social network for online video. Facebook recently said it would begin sharing ad revenue with video creators, unveiled a new feature called Suggested Videos, and has allowed public figures to livestream on its website.

Although it registered for an initial public offering in August, Neiman Marcus is pushing back its stock market flotation to 2016. The luxury department store chain, which is owned by private equity firm Ares Management and the Canada Pension Plan Investment Board, said stock market jitters prompted it to put the plan on hold. Only 26 companies went public in the third quarter, down from 59 in the same period of 2014.

Square, the mobile payments company that shares a chief executive with Twitter, today disclosed its documents for an initial public offering. The company revealed revenue of $850 million last year with losses of $154 million.

First Data Corporation priced its initial public offering today in what could be the largest IPO of the year. The KKR-backed company, which processes more than 40% of electronic payments in the U.S., has been marketing 160 million shares in the $18-$20 range, indicating an offering size of $3 billion and a valuation of almost $17 billion.

Albertsons is also going public, seeking to sell about 65 million shares between $23 and $26 a share, giving the grocer a market value of around $11.6 billion. Pricing was scheduled for this afternoon but is now being pushed back to tomorrow.

U.S. listings had raised about $30 billion through the end of Tuesday, compared with $82 billion by that point last year.

Millennials Don't Trust The Markets

Financial Review

Sorry McFly

Sinclair Noe — June 24, 2015

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

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DOW – 178 = 17,966
SPX – 15 = 2108
NAS – 37 = 5122
10 YR YLD – .04 = 2.37%
OIL – .74 = 60.27
GOLD – 3.00 = 1179.00
SILV + .04 = 15.98

The American economy shrank in the first quarter by a smaller amount than previously reported. Gross domestic product declined by 0.2% annual rate from January to March. Previously the Commerce Department had estimated a seasonally adjusted 0.7% drop. This is the third and final revision to first quarter GDP; so this final estimate, while still negative, isn’t as bad as we thought.

Household spending was revised up to 2.1% from 1.8%. Consumers spent more at restaurants and on transportation.  Private sector investment also rose a bit more, up 2.4% vs. a prior 0.7% estimate; and digging deeper, most of the move in private investment came from residential investment – up 6.5% in the final reading. Now this indicates signs of life in the housing market, but we still aren’t seeing enough in the way of business investment. Companies seem to have piles of cash and all they do is buy back their own stock.

Inflation as measured by the PCE price index fell at a 2% annual rate. The core rate that excludes food and energy was up 0.8% in the same span, well below the Federal Reserve’s preferred rate of inflation. Now we know the inflation numbers are a bit skewed because of the volatility in oil prices, but even stripping out energy we are not seeing inflationary pressures; that means we are not seeing wage push inflation and there is still plenty of slack in the labor market. This would indicate that the natural unemployment rate is well below 5%.

The Atlanta Fed, which nailed the first-quarter flop, sees the economy bouncing back in Q2 with 1.9% growth. And at the last FOMC meeting, the Fed revised full year forecasts to between 1.8 percent and 2 percent, from 2.3 percent to 2.7 percent. It is easy to write off the soft patch in the first quarter as an aberration; blame it on the weather or on the West Coast Port closure, but even after you adjust for one-off events the data does not scream for rate hikes.

Eurozone finance ministers are meeting in Brussels tonight with the aim of presenting a final Greek agreement to EU leaders, who begin a two-day emergency summit tomorrow. Greek Prime Minister Alexis Tsipras reportedly told his government that the country’s international creditors have rejected Athens’s latest reform proposal. Greece submitted the proposals on Monday morning in the latest bid to unlock financial aid. And if you have been following what seems like a never-ending Greek drama, you might have recognized that when talks are positive, the markets tend to go up; when it looks like talks are collapsing, the markets sell-off, like today. However this turns out, it will almost certainly impact markets.

Japan’s Nikkei soared to an 18-year high today, ramping up the gains to around 20% since the start of the year. During the session, the index rose to 20,942, its highest since December 1996. It is, however, still roughly half the peak hit in the bubble era a quarter of a century ago. The Nikkei closed at a record 38,915.87 on December 29, 1989, before the bursting of the asset bubble that led to Japan’s “lost decade”.

Lawmakers have approved legislation key to securing a Pacific trade deal. After a six-week congressional battle including two brushes with failure, some fancy legislative footwork and myriad backroom deals to keep the legislation alive, the Senate voted 60 to 38 to grant Obama the power to negotiate trade deals and send them on a fast track through Congress. The bill next goes to Obama for his signature. A deal on the TPP could be wrapped up within weeks.

Dutch food retailer Royal Ahold and Belgium’s Delhaize have agreed to merge, creating one of the largest supermarket operators in the US. Ahold operates the Stop & Shop and Giant chains, as well as online grocery store Peapod, while Delhaize operates the Food Lion and Hannaford banners. Under the new deal, Delhaize shareholders will receive 4.75 Ahold shares for each share held. Ahold investors will own 61% of the $29 billion combined company and Delhaize shareholders will own the rest.

Darden Restaurants plans to separate part of the company into an independent, publicly traded real estate investment trust. Darden, which owns Olive Garden and LongHorn Steakhouse, among other other restaurants, will spin off about 430 of its more than 1,500 restaurants into the REIT. The plan is to lease most all of them back to Darden.

The IPO market is heating up again, with four new companies announcing intentions for public offerings later this year. Among them: Indoor cycling fitness chain SoulCycle, Freeport-McMoRan Oil & Gas, packaging company Ardagh and plus-sized retailer FullBeauty. June is expected to bring forth 32 deals, just one less than the IPO-swamped prior year.

Lake Mead touched a record low Tuesday night by falling below the point that would trigger a water-supply shortage if the reservoir doesn’t recover by January. Lake Mead is at about 37% capacity. Water managers expect the lake’s elevation level to rebound enough to ward off a 2016 shortage thanks to a wetter-than-expected spring. The U.S. Bureau of Reclamation would announce a 2016 shortage this August if it projects that Lake Mead won’t rise above 1,075 feet by January. Much of the Southwest received substantial spring rains, but that is still not enough to end the 15 year drought.

Google has launched a free, ad-supported Google Play Music service that offers curated playlists organized by genre, mood, decade or activity. Users will still pay the $9.99 a month fee to skip the ads, listen to songs on demand or create playlists. Google’s move comes as Apple Music nears its June 30th launch.

Ford is jumping into the car-sharing market, launching a pilot program in six U.S. cities and London, England. The new program will enable owners of vehicles financed by Ford Motor Credit to offer their car, SUV or truck to pre-screened clients for short-term rentals. Think of it as AirBnB for cars. Last month, Ford launched a pay-as-you-go network of shareable, on-demand cars in London, called GoDrive. Ford is also testing a “multi-modal” mobility solution called MoDe:Flex that includes an electric bike that can be folded up and carried in a car; the bike  charges while stored in the vehicle and then an app helps identify the most efficient and cost-effective mode of transportation for a trip. The MoDe:Link app, for example, might suggest you drive your car to the train station, ride the train to the city, then ride your bike the final mile to the office.

Meanwhile, Ford is getting closer to autonomous vehicles. Ford’s new Research and Innovation Center in Palo Alto, California, is working on driverless car technology. Earlier this year, Ford donated a Fusion Hybrid to Stanford University’s engineering program to test driverless car algorithms. Ford now says it’s moved from the “test” phase to the “advanced engineering” phase of its driverless car program — the last stage before producing and selling vehicles.
Some other ideas include new camera technology that can help see around corners. And Ford announced it is partnering with Carbon3D to print parts like bumpers and grommets.

Next stop Lexus, which did not unveil a flying car but the next best thing, a hoverboard. Basically a skateboard, minus wheels, that floats about an inch off the ground using magnet technology and superconductors cooled by liquid nitrogen. No, you may not buy one. It is being used to promote cool technology in online videos. Lexus says it really works but only in a controlled environment. Sorry McFly, it is not for sale. Apparently the whole cost to social benefit equation doesn’t yet pencil out.

Hoverbikes, however, are attracting attention for their potential to offer more than the fun of air-borne transportation. These machines lift into the air with propeller technology and can be ridden like a motorcycle. Defense research firm SURVICE announced last week that it signed a contract with the U.S. Department of Defense to design hoverbikes with engineering company Malloy Aeronautics that could accomplish the tasks of traditional helicopters.

Yes, the auto industry is changing, and there is some amazing new technology. Now if they can just figure out how to make an airbag inflate without killing the passengers.

A new survey from Goldman Sachs finds Millennials don’t trust the stock market.  The survey found only 18 percent of the young adults (age 18 to 34) trusted the stock market as “the best way to save for the future.” More than 20 percent of the respondents said they didn’t know enough about it, while another 16 percent said stocks are either too volatile or the marketplace isn’t fair for small investors.

A new Gallup poll finds that only 28% “have a great deal or quite a lot of confidence in the banks.” Even though that’s up from the 21% lows in 2012’s poll, it’s well below the 40% average the banking industry held for the past 35 years. And it’s still well below the peak year of 1979’s 60% rating. The survey shows that 67% of Americans have confidence in small business, but just 21% have confidence in “big business.”

There are many reasons to dislike big banks: they made wild bets and drove the economy into the ground, scooped up massive bailouts, paid out big bonuses, foreclosed on more than 4 million homeowners, and rigged every market from Libor to Forex to maybe even US Treasury bonds. And after all that the big banks are bigger than ever, which is part of the problem; they have little competition and therefore no incentive to improve conduct or service. For banks to regain public confidence, Gallup suggests some common sense: treat customers better. An interesting though unlikely prospect.

Greece Is The Word, Martha Hangs Up Her Apron, JOBS Act Goes To Work And Nasdaq Zooms

Financial Review

Reg A On

Sinclair Noe — June 19, 2015

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

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DOW – 101 = 18,014
SPX – 11 = 2109
NAS – 15 = 5117
10 YR YLD – 08 = 2.27%
OIL – .98 = 59.47
GOLD – 1.70 = 1201.30
SILV – .07 = 16.18

For the week, the Dow was up about 0.9% and the S&P 500 gained 1%. The Nasdaq jumped 1.4% as it hit new all-time highs yesterday.

Eurozone leaders will try to find a bailout deal for Greece at an emergency summit Monday.  News reports said a European Central Bank official warned Eurozone finance ministers that the Greek banks might not be able to open come Monday. The big risk now is that a report about the fear of a bank run will serve to spur a bank run. Greeks pulled more than €1-billion euro out of their banks today. European Central Bank policymakers have agreed to supply extra emergency cash to avert a bank run.

The Associated Press reports Greek Prime Minister Alexis Tsipras has traveled to Russia, likely looking for loans. Russia and Greece signed a deal today to build an extension of a prospective gas pipeline that would carry Russian gas to Europe through Turkey. Russia promised Greece hundreds of millions of dollars in transit payments yearly if it agreed to build the pipeline. Construction of the pipeline is expected to start next year and be completed in 2019. Putin’s spokesman said it was too early to comment on possible loans. Russia has its own economic problems: a recession, a costly invasion of Ukraine, and economic sanctions.

Speaking in St. Petersburg today, Tsipras said the Euro Union should return to its founding principles of “solidarity, democracy and social justice, but the obsession with austerity and policies which rupture social cohesion make it impossible.” What’s at stake is “whether Europe will give space to policies of cohesion rather than the imposition of meaningless and failed programs.”

So, the new emergency meeting is Monday; the deadline for default is the end of the month; bankers are worried about a run on the banks; and the most probable outcome is – nothing. That’s an educated guess, not a guarantee. The Greek crisis could implode at any moment, and it could get very ugly. And for that reason, the most probable outcome is that nothing will happen; the Greeks will probably get an extension of the current bailout until year-end. Another delay is tempting for Eurozone leaders; nobody wants to pull the trigger on the gun that kills Greece and possibly the Eurozone.

Remember the PIIGS? The 5 Eurozone countries that have had economic problems: Portugal, Ireland, Italy, Greece, and Spain. Nowadays we only hear about the problems in Greece. What happened to the other countries? The NYT decided to survey what people in the other Eurozone crisis countries think about the situation in Greece. The survey looked at Ireland, Italy, Spain, and Portugal. The general theme appears to be that we toughed it out, now Greece should too. It would have been useful to include a bit of data on where these countries stand now. Per capita income and employment are all well below their pre-crisis level in all four countries mentioned. By following the path of austerity, unemployment is worse now than in 2007; in Italy it is 3.1% worse, Ireland 8.9% worse, Portugal 11.5% worse, and Spain 14% worse. And GDP in these 4 crisis countries has slipped by 4.4% to 11.5%.

China’s benchmark share indexes dropped again today, taking losses since their early-June peak to more than 10% and putting the market into correction territory. The Shanghai Composite finished the session down 6.4%, its biggest weekly decline since October 2008, after more than doubling over the past 12 months. Shenzhen -6%. ChiNext -5.4%.

Although it must go back to the Senate for another vote, the U.S. House of Representatives has approved a bill granting President Obama “fast-track” trade authority. The move will likely see the swift completion of the Trans-Pacific Partnership, which is central to Obama’s focus on strengthening ties with Asia.

The first Friday of each month brings the nationwide jobs report from the Labor Department. Two weeks later we get a look at the labor market on a state by state basis. Twenty-five states had unemployment rate increases from April (mainly because more people entered the labor pool – which is a good thing), 9 states and the District of Columbia had decreases, and 16 states had no change.

Arizona’s unemployment rate in May was 5.8%; slightly above the national 5.5%, but still down 0.7% in the last 3 months. Total employment in Arizona in May was 2,613,800. The bad news is that Arizona still has not regained all the jobs lost in the economic downturn. We would need to add 65,000 more jobs just to get back to the level of December 2007. Fourteen other states have not recovered all the jobs lost in the recession. Part of the problem is that Arizona was particularly hard hit, part of the problem is that Arizona was poorly positioned for a downturn.

As economic conditions continue to improve, state lawmakers should be making investments in physical (infrastructure) and human capital (education, workforce development) that will spur job creation in the short term and create sustainable growth in the long term.

The EPA today proposed new standards for big trucks aimed at lowering fuel costs and cutting carbon emissions. The new standards would apply to big vehicles ranging from garbage trucks to 18-wheelers to vans and buses to heavy-duty pickup trucks. The basic idea will require that a truck built in 2021 and beyond will be up to 24% more fuel efficient and emit up to 24% fewer carbon emissions than an equivalent truck built in 2018.

America is producing more oil than it has in decades, but the nation no longer guzzles it up like there’s no tomorrow. Starting around 2003, the amount of petroleum consumed in the U.S. began to grow far more slowly than government forecasters had expected. Oil consumption then fell during Great Recession and now it’s projected to remain roughly flat for the next decade. Improved fuel standards are a big reason behind lower consumption. Another factor is that there are fewer cars on the road. The Federal Highway Administration reports the registration of passenger cars fell nearly 19% from 2008 to 2012. That trend is starting to change. Meanwhile, there are more busses than before.

We have a few earnings reports today. KB Home posted better than expected results. Choclate maker Hershey reduced its sales outlook and announced job cuts. CarMax posted first quarter sales that narrowly missed expectations, but profit matched estimates. Gun maker Smith & Wesson beat estimates but lowered guidance.

Bankers say the return of IPOs over the past few weeks reflects the continued demand for stocks, even as investors anxiously eye global concerns. (or maybe just a case of “get it while you can”.) US listings in 2014 came at the fastest pace since 2000, with 293 offerings raising $96 billion, although they slowed toward the beginning of this year due to uncertainty of oil prices and a Fed rate hike. But activity has quietly picked up. There were 20 deals last month, just three fewer than in May 2014, and June is expected to bring forth 32 deals, just one less than the prior year. Upcoming IPOs: Fogo de Chao, Mindbody, TransUnion and Alarm.com.

Regulation A+ of the 2012 Jumpstart Our Business Startups Act, or JOBS Act, went into effect today, allowing startups to raise up to $50 million from non-accredited investors. The provision is a step toward allowing more non-accredited investors to participate in private-company investing and further expand the concept of equity crowdfunding. But as companies await a final ruling on crowdfunding itself, the provision comes with a lot of legwork for companies. Accredited investors are defined as those who have an annual income above $200,000, or a net worth of more than $1 million, not including their primary residence.

Companies are still waiting for final rules on Title III of the JOBS Act, which would allow companies to solicit and take investments from as many non-accredited investors as they desire, with a few provisions. Regulation A+, effective Friday, has two tiers. Tier I allows companies to raise up to $20 million in a 12-month period from accredited or non-accredited investors, but the company has to comply with the law of every state in which it has an investor.  However, state laws differ on such issues as compliance and filing requirements and some may demand large fees. Tier II allows companies to raise up to $50 million in a 12-month period and is generally exempt from state laws. But it also requires companies to file audited financial statements and event reports. If a company isn’t listed on a stock exchange, non-accredited investors are limited in the amount they can invest.  In Tier I, companies still have to report financials, but they can be unaudited

It looks like Martha Stewart might be planning a retirement party. Martha Stewart Living Omnimedia is close to selling itself to Sequential Brands Group. A deal between Sequential Brands and Martha Stewart Living could be announced in the coming days.

Financial Review

To Be Fair

Sinclair Noe — April 16, 2015

 

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

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DOW – 6 = 18,105
SPX – 1 = 2104
NAS – 3 = 5007
10 YR YLD – .02 = 1.88%
OIL + 12 = 56.51
GOLD – 3.70 = 1198.90
SILV – .04 – 16.37

Yesterday the ECB pledged to fulfill its €1 trillion-euro bond-buying program; today Eurozone government borrowing costs slid to new lows. Germany’s 10-year yield fell almost a basis point to 0.087% in early trade, while yields on all German government debt out to January 2024 were negative. Other notable levels include France’s 30-year yield, which fell below 1%, and the yield on two-year Portuguese bonds, which is on its way below zero.

The price of Greece’s three-year notes dropped the most since February and Greek corporate bonds also slumped. Credit-default swaps suggested there was a 79 percent chance of the country being unable to repay its debt in five years. Greece’s three-year yield is at a multiyear high, up 359 basis points at 27.7%. Expectations are low that Greece can reach a deal with its creditors at next week’s Eurogroup meeting. Standard & Poor’s has downgraded Greece’s credit rating to CCC+ with a negative outlook, citing a substantial risk of a default due to the country’s drawn out negotiations with its creditors.

Greece has been pushed a step closer to default and potential exit from the euro after one of its main lenders, the International Monetary Fund, all but ruled out allowing the cash-strapped country to delay repaying the €1 billion-euro due next month. Today, the head of the IMF, Christine Lagarde, said delaying the payments would be an unprecedented action that would only make the situation worse. Her comments followed a report that the Greek finance minister, Yanis Varoufakis, had sounded out the IMF over whether Athens could ask for a delay on the payments it is struggling to afford. Varoufakis denied asking for leniency. So Greece might default, that’s nothing new, but there are still plenty of options; some more realistic than others; we might not expect an enlightened solution to the Greek problem, but with any luck there will be something creative.

The Labor Department reports jobless claims increased by 12,000 to 294,000 in the week ended April 11. Fewer than 300,000 American workers filed applications for unemployment benefits for the sixth consecutive week. The total number of people currently receiving benefits was the lowest since 2000.

The pace of home construction rebounded slightly last month after being snowed out in February. Construction starts on new homes increased 2% in March at an annualized rate of 926,000.

Congressional leaders unveiled a bipartisan bill today that gives president Obama fast track authority to negotiate a trade deal with 11 other Pacific nations. The bill gives Congress the power to vote on the Trans-Pacific Partnership once it’s completed, but they could not amend the deal. It would essentially be an up or down vote. The legislation would also make any final trade agreement public for 60 days before the president signs it, and up to four months before Congress votes. If the agreement fails to meet the objectives laid out by Congress – on labor, environmental and human rights standards – a 60-vote majority in the Senate could shut off fast track trade rules and open the deal to amendments.

Former Fed Chairman Ben Bernanke has accepted an adviser role at a hedge fund. Bernanke will join Citadel Investment Group as a senior adviser.  Bernanke reportedly chose Citadel because it is not regulated by the Federal Reserve and he won’t be doing lobbying. So, in a way he’s gone from one hedge fund to another. And this is just another example of the revolving door between government and business, but in fairness, when Bernanke was Chairman of the Fed he couldn’t even refinance his mortgage.

Netflix  announced first quarter earnings late yesterday; net income fell to $24 million, or 38 cents a share, from $53.1 million, or 86 cents, as the strong dollar contributed to losses outside the U.S. But Wall Street isn’t paying attention to that, rather the focus is on subscriber growth; and Netflix added 4.8 million new subscribers worldwide.

Goldman Sachs posted the highest earnings per share in more than five years as all of its major businesses topped analysts’ estimates and the firm paid out a smaller portion of revenue to compensate employees. Net income surged 40 percent to $2.8 billion, and trading accounted for much of the increase. That means the improved returns come at a higher risk.

Citigroup reported its highest quarterly profit in nearly eight years. Citi has been slowly getting its house in order by cutting costs and shedding assets that are not critical to its main businesses. It has sold retail operations in many countries and shrunk its US branch network. Adjusted net income rose 16% to $4.8 billion, or $1.52 per share, beating average analyst estimates of $1.39 per share. Adjusted revenue fell 2% to $19.81 billion.

American Express reported a 6.3% rise in quarterly profit, helped by higher spending by card holders and an increase in net interest income.

UnitedHealth reported earnings and revenue that beat expectations. The company also raised its 2015 earnings forecast.

McDonald’s Japan forecast sharp losses. The 49%-owned subsidiary expects an operating loss of $210 million this year after a damaging series of food safety scandals, a costly french fry shortage, and fierce competition in the coffee sector. The operator of McDonald’s in Japan announced it would close 131 restaurants and renovate 2,000 more as part of its restructuring plan.

Yesterday more than 60,000 workers in 200 cities joined in what organizers claimed was the largest protest by low-wage workers in US history. The demonstrations, calling for a $15 per hour minimum wage, were the latest in a series of strikes that began with fast-food workers in New York in November 2012. The movement has since attracted groups outside the restaurant industry: Wednesday’s protesters included home-care assistants, Walmart workers, child-care aides, airport workers, adjunct professors and other low-wage workers. It also sparked international support, with people protesting low wages in Brazil, New Zealand and the UK.

Despite a slow start to IPO debuts so far this year, three big companies went public today. Etsy, the Brooklyn-based online marketplace for artisanal goods, opened for trading at $31 a share on the Nasdaq stock market. That is nearly double its initial offering price of $16 a share. Not bad for an e-commerce platform that so far hasn’t posted a profit and sells handmade items. Etsy is all about potential; it boasts more than 1 million active sellers, with access to 19.8 million active buyers on the site. And the company says it has achieved just shy of $2 billion in gross sales last year, with buyers or sellers in nearly every country.

Meanwhile, Virtu Financial, the big high-frequency trading firm, opened at $23 a share, about 21 percent higher than its $19 offering price. This is the second effort at going public in two years for Virtu. It postponed the stock sale last spring because of controversy about high-frequency trading prompted by the publication of Michael Lewis’s book “Flash Boys.” Virtu doesn’t help its case when they publish a chart showing one single day of losses in six years of trading activity; which is impossible unless you are gaming the trade.

The retailer Party City opened for trading at $20.40, above its offering price of $17 a share. Party City is going public three years after the private equity firm Thomas H. Lee Partners bought control of the nearly 70-year-old seller of party goods. So far this year, 38 companies have gone public in the US, about 60% fewer than at the same time last year.

Bombardier has hired UBS and Citigroup to advise on a potential IPO or sale of its rail unit, which could be valued at about $5 billion. Splitting off the rail unit would allow management to focus on turning around Bombardier’s aerospace division, which posted a 2014 loss of $995 million.

A New York federal bankruptcy judge has blocked most lawsuits against General Motors related to defective ignition switches. The judge ruled that plaintiffs could not sue the company for at least 84 deaths caused by an ignition fault because they predate GM’s 2009 bankruptcy.  The liability shield included in the 2009 agreement that lifted GM from bankruptcy should be allowed to remain in place, even though the company has acknowledged that many employees knew about the defective switch at the time but failed to alert owners of the cars that they might have a potential claim against the company.

The ruling shuts down not only lawsuits stemming from accidents that took place before July 10, 2009, but also most of the suits seeking economic damages for the loss in value of the defective cars. Lawyers had estimated that the economic loss claims potentially totaled $7 billion to $10 billion. Economic loss cases will be allowed to go forward, the judge ruled, only if they can be tied solely to actions by the post-bankruptcy company, known as New GM.

Last year the auto industry issued more recalls involving old models than ever before; more than 60 million vehicles have been recalled in the United States, double the previous annual record in 2004. In all, there were about 700 recall announcements last year, an average of two a day, affecting the equivalent of one in five vehicles on the road.

WikiLeaks has published 30,287 documents and 173,132 emails stemming from last winter’s cyber-attack on Sony Pictures Entertainment. The hack was reportedly initiated by North Korea in response to the studio’s decision to release “The Interview,” a comedy that centered on an assassination attempt on North Korean leader Kim Jong-un. That resulted in a series of embarrassing revelations, exposing correspondence between top executives and producers that ultimately led to the ouster of studio chief Amy Pascal. The correspondence released today exposes Sony’s political fundraising and its lobbying activities on behalf of anti-piracy. In particular, WikiLeaks cites emails detailing how members of the studio set up a “collective” in order to get around campaign donation limits and send money to New York Governor Andrew Cuomo, because of his support for state film and television tax incentives and work cracking down on piracy.

Monday, June 16, 2014 - Manic Monday

Financial Review with Sinclair Noe

DOW + 5 = 16,781
SPX + 1 = 1937
NAS + 10 = 4321
10 YR YLD - .01 = 2.59%
OIL - .12 = 106.79
GOLD – 4.20 = 1272.70
SILV un = 19.77

It’s Monday, and that means mergers. Today’s acquisition news comes from Medtronics, the medical device maker, announcing it will acquire Covidien for nearly $43 billion. Medtronics was founded in a garage in Minneapolis in 1949, but they will change their headquarters to Ireland, which is where Covidien has been headquartered since 2009. Covidien is actually a Massachusetts company, and they operate out of Massachusetts. Medtronics will continue to operate out of Minneapolis; the whole deal is about a lower tax rate, and for Medtronics, the ability to repatriate $20 billion in offshore profits, without paying tax.

Meanwhile, the IPO market remains white hot, and 14 companies will come to market this week. So far this year 124 companies have priced in the US, up 57% from a year ago. Total proceeds raised come to $25.8 billion, up almost 41% from 2013.

Data today showed industrial production climbed more than forecast in May. Output at factories, mines and utilities rose 0.6% after a revised 0.3% drop in April that was smaller than previously estimated. In a separate report, the New York Fed’s Empire manufacturing report rose to 19.28, better than expectations.

The Fed FOMC meets later this week to determine monetary policy. After their meeting concludes Wednesday, Fed officials will release their updated projections for interest rates, growth, inflation and unemployment, and also are likely to trim their bond-buying program by an additional $10 billion a month.

The latest report from the International Monetary Fund, the IMF, might suggest the Fed doesn’t need to be in a hurry to exit a Zero Interest Rate Policy. Of course, the IMF doesn’t set Fed policy, but the latest IMF forecast for the US economy cuts the outlook for growth to 2% from the 2.8% predicted back in April; the lower forecast is mainly a result of the weakness in the first quarter. The IMF kept if 2015 forecast unchanged at 3%. The forecast says the economy is starting to rebound but will remain below historical averages as the population ages and productivity growth slows. Their forecasts show we won’t return to full employment until the end of 2017, with inflation remaining low.

The IMF suggests the US raise the minimum wage as one way to boost the economy; other suggestions include more spending on infrastructure and education, plus changing parts of its tax system, including boosting the federal gasoline tax and reinstating the tax credit for research and development, to help spur growth. In the future, policymakers should also reform corporate taxes, introduce a carbon tax and move toward a federal value-added tax.

IMF Director Christine Lagarde says the oil shock that could result from the current tension in Iraq might affect the economy but for that to happen, the shock would have to be rather deep and rather long-lasting. You’ll probably start seeing the price increase at the pump, as prices hover just below $107 a barrel. And oil prices are being whipsawed by the headlines; if we see fighting in Baghdad, we could easily see prices pop up to $120 a barrel.

Iraq, excluding the Kurdish region, holds 150 billion barrels in proven crude reserves, the world’s fifth-biggest deposits. A pipeline from the Kirkuk region to Turkey has been shut down since March, and now Kurdish troops are defending the Kirkuk oilfields from ISIL rebels. Even if the rebels are turned back, the Iraqi government in Baghdad may have a hard time displacing Kurdish troops in the future.

Meanwhile, Ukraine said Russia cut natural gas supplies after demanding fuel payments be made in advance, the first time shipments have been affected in this year’s crisis in relations between the two countries. Tensions escalated over the weekend with 49 servicemen killed when pro-Russia fighters shot down an aircraft.

British climate change economist Lord Nicholas Stern says our current models “grossly underestimate” the economic damage that will be wrought by climate change. In 2006 Stern wrote a scientific paper that estimated the externalized costs of burning fossil fuels will impact the world economy by five per cent to 20 per cent of global GDP, which would work out to between $2.3 trillion and $9.1 trillion each year. Now, Stern says he “got it wrong on climate change; it’s far, far worse.”  So, Stern and a colleague, Simon Dietz just published a new preliminary paper that makes a few key updates, and now Stern believes that “climate change is the greatest markets failure the world has ever seen.”

The old model looks at any point in time, measures the economy’s productive capacity, and then gauges how much climate change will dampen that productivity in that moment. But climate change can also reduce that productive capacity itself. Stronger storms can damage infrastructure; sea level rise can force people to abandon homes, businesses or equipment; and climate damage can channel more investment into repairs and away from creating new capital. Stern and Dietz account for that, and the result is a double hit: at any given moment, the effects of climate change are reducing the economy’s ability to produce wealth, but they’re also reducing the economy’s overall capacity to produce wealth at future moments.

Other factors in modeling climate change’s economic effects are what scientists call “tipping points”; moments when global warming kicks off feedback loops in the planetary ecology that cause the effects to speed up. Examples of tipping points include the polar ice melting in a way that results in sudden huge collapses rather than gradual melting; or melting permafrost in the northern hemisphere releasing underground methane that in turn speeds up global warming even more. They can also include second-order social effects that damage economies: drought and food scarcity kicking off wars or mass refugee movements, for instance.

June is a big month for the Supreme Court and several major rulings are expected in the next few weeks, and some cases have already been decided.

Last Thursday, the Supremes announced opinions on only two of the 22 cases it has in front of it: POM Wonderful v. Coca-Cola which deals with whether a company can sue another one for unfair competition based on false or misleading product descriptions; and Clark v. Rameker, which weighs whether individual retirement account (IRA) inheritance can be exempted from Chapter 7 bankruptcy under the “retirement funds” exemption.

In the POM case, the court ruled that POM, a company that makes pomegranate juices, had the right to sue Coca-Cola for falsely advertising one of its juices as being made mostly of pomegranate and blueberry juice when it was actually made of apple and grape juices. POM, which makes a special pomegranate-blueberry juice blend, claimed it lost sales as a result of Cola-Cola’s false labeling. The ruling reversed a decision from the Ninth Circuit Court of Appeals, which essentially said POM lacked the legal standing to sue because of a conflict with state and federal law.

In Clark v. Rameker, the court ruled that IRA inheritance funds do not meet the “retirement funds” exemption and must be included as part of the estate in the bankruptcy process. Because an IRA is intended for the retirement of the person who originally put the funds into the account, and an inherited IRA functions essentially as a fund that can be used at any time and not just for retirement, the exemption does not apply.

Today, the Supreme Court handed Argentina two major defeats in cases brought by bondholders who refused to accept reduced payments after the country’s 2001 default. The Supremes decided against hearing Argentina’s appeal of an order requiring it to pay holders of defaulted notes from 2001 when making payments on its restructured debt. The next payment on those bonds comes due June 30. Shortly after the first decision, the Supremes handed down another ruling allowing the bondholders to issue subpoenas to banks in an effort to trace Argentina’s assets abroad.

The inaction by the Supreme Court is a victory for the minority of investors, led by a hedge fund controlled by billionaire Paul Singer, who have refused to exchange their defaulted bonds for about 30 cents on the dollar. Argentina calls those investors “vultures” because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall; in other words, they bought the bonds for pennies on the dollar, refused to accept 30 cents on the dollar, and the Supremes say they now must be paid the full face amount of the bonds.

In response to today’s decisions, lawyers for Argentina wrote: “Since Argentina lacks the financial resources to pay the holdouts in full (what would amount to $15 billion) while also servicing its restructured debt to 92 percent of bondholders, Argentina will have to face, objectively, a serious and imminent risk of default.”

Argentina claimed that lower-court rulings misread Argentina’s bond agreements and violated its immunity as a sovereign nation. In court filings, the Argentine government has said it would comply with lower-court rulings. But in public pronouncements, Argentine President Cristina Fernández de Kirchner has vowed not to pay a group of creditors she has referred to as “predators.”

Also today, the Supremes dealt a rare blow to the gun lobby Monday by ruling that purchasers must report when they are buying firearms for other people.

Other rulings expected this week might include Sebelius v. Hobby Lobby, which deals with whether a for-profit company has to provide contraceptive care for its employees if the owner has a religious objection, even though the employees are entitled to it through the Affordable Care Act (ACA), also known as Obamacare.

Also, American Broadcasting Company v. Aereo, which should be of interest if you watch TV over the internet. Aereo is a Web startup company that allows consumers to pay an $8 or $12 subscription fee to watch their local TV networks live on any Internet-connected device. The major broadcasters say this amounts to theft of their product.

And a couple of cases that deal with the Fourth Amendment: Riley v. California, and United States v. Wurie; both cases are about whether the police have to obtain a warrant to search an individual's cellphone when an arrest is made.