Financial Review

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Sinclair Noe — February 1, 2016

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DOW – 17 = 16,449
SPX – 0.86 = 1939
NAS + 6 = 4620
10 Y + .04 = 1.97%
OIL – 2.23 = 31.39
GOLD + 10.20 = 1129.00

Following the S&P’s worst January since 2009 (down -5.1%), and a volatile month for oil prices, about a fifth of S&P 500 companies will report earnings this week, while lots of economic data (manufacturing figures, auto sales and Friday’s jobs report) could also help determine the future direction of stocks.

The consensus estimate calls for about 185,000 net new jobs in January, down from 292,000 in December. And just a reminder that last Friday brought the first look at fourth quarter GDP, which grew at an anemic 0.7% annual rate in the fourth quarter. That’s a bad quarter to be sure, and real GDP is up only 1.8% from a year ago.

That’s a weak year judged by the US postwar average of 3.1%, but is not far from the 2.1% annual growth we’ve been averaging since 2009. The Atlanta Fed model’s initial estimate for first-quarter growth has been published; the “Nowcast” of first-quarter growth calls for 1.2% annualized growth. Weak, but not recessionary.

Also on Friday, the Bank of Japan moved to negative interest rates; this Wednesday BOJ Governor Haruhiko Kuroda is scheduled to speak. Today, European Central Bank president Mario Draghi addressed the European Parliament and said, “The ECB is willing to contribute its share to ensuring that the recovery remains firmly on track.” Draghi said risks in emerging markets “have increased again amid heightened uncertainty.”

Federal Reserve Vice Chairman Stanley Fischer in a speech in New York today said the Fed is worried the global market selloff could sap the strength of the U.S. economy, suggesting the market’s expectations of barely any interest rate hikes this year could turn out to be right. For now, Fischer said that the jury was still out on the implications of the weak market on the economy and the central bank. Fischer says it is too soon to jump to conclusions about future rate hikes.

Consumer spending was flat in December as Americans mostly pocketed their income gains. Americans bought fewer new cars and trucks. They also spent less on utility bills due to unseasonably warm weather. The numbers for consumer spending in November were revised higher to 0.5%. Consumers didn’t cut back because of tighter finances, however. Incomes rose 0.3% in December.

With Americans spending less than they earned, the savings rate rose to 5.5% from 5.3% to match a three-year high. Meanwhile, inflation remained low. The PCE index, the Federal Reserve’s preferred inflation gauge, fell 0.1% in December.

Construction spending rose 0.1% in December to a seasonally adjusted annual rate of $1.12 trillion. And even though December was a little flat, construction spending for all of 2015 was 10.5% higher than in 2014. Residential construction spending in 2015 totaled $416 billion, 12.6% higher than in 2014.

The Institute for Supply Management said its manufacturing index rose to 48.2% last month from 48% in December. This is the fourth straight month below 50%, a reading that indicates more companies are shrinking instead of expanding.

South Korean exports cratered. South Korean exports tumbled 18.5% year-over-year in January, posting their biggest drop since mid-2009. This is troubling news for the global economy, as economists look at South Korean exports as the world’s imports. Shipments to China, South Korea’s largest trade partner, fell 21.5% year-over-year.

China’s official factory activity skidded to a three-year low in January, adding to further gloom about the state of the world’s second-largest economy. The official Purchasing Managers’ Index stood at 49.4, compared with the previous month’s reading of 49.7, deepening the case for near-term stimulus and marking the sixth consecutive month of factory activity contraction.

The slowdown in China is one of the contributing factors to lower oil prices, but economists have been debating whether lower oil prices are good for the economy. New research from Bank of America Merrill Lynch, however, puts the oil move into a much bigger perspective, arguing that a sustained price plunge “will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history.”

The research highlights evidence that the fall in the price of crude is having a positive impact on demand. For example, if prices average $40 a barrel over the next 5 years, demand is expected to increase by 1.5 million barrels per day.

You might think lower oil prices would be really bad news for renewable energy, but that isn’t happening, in part because renewable energy prices have been dropping even faster than oil prices. According to a recent report by the investment firm Lazard, the cost of electricity generation using wind power fell 61 percent from 2009 to 2015, while the cost of solar power fell 82 percent. These numbers, which are in line with other estimates, show progress at rates you might only expect to see for information technology. And they put the cost of renewable energy into a range where it’s competitive with fossil fuels.

After the closing bell, Google’s parent, Alphabet, reported profit and sales that topped estimates. Google changed its structure last year to give investors a better understanding of the Web business and the other parts, which include investments in artificial intelligence, health tech, self-driving cars, and other stuff not really related to web search. The bottom line is that Alphabet reported fourth-quarter net income was $4.92 billion, or $7.06 a share, compared with $4.68 billion, or $6.79, a year earlier.

Profit excluding certain items came in at $8.67 a share, beating the prediction for $8.08. The top line was also strong; fourth-quarter revenue, excluding sales passed on to partners, rose 19% to $17.3 billion. That exceeded analysts’ average projection for $16.9 billion.

Google remains the 800-pound gorilla of the internet. Even as ad prices dropped 16%, in part due to more ads on mobile devices, total clicks were up 31% in the latest period. For now, all the other stuff is an investment in the future, but at least they are not squandering the money on buybacks. And it is all working. Alphabet was up over 5% in after-hours trading; meaning that the market capitalization is now up around $545 billion, or about $10 billion more than Apple, formerly the largest company in the world.

Health insurer Aetna reported a better-than-expected profit in the quarter ended Dec. 31 as its Obamacare insurance business improved at the end of last year, providing a stronger starting point for 2016. Aetna still expects to close the company’s $31 billion acquisition of Humana in the second half of 2016.

The World Health Organization declared the Zika virus an international public health emergency. The mosquito-borne Zika virus causes microcephaly, a devastating brain malformation in babies. Increased cases of the disease were reported in May in Brazil. Over the weekend, Colombian authorities found more than 2,100 pregnant women infected with the disease.

The official “emergency” designation can trigger action and funding from governments and non-profits around the world. It elevates the W.H.O. to the position of global coordinator, and gives its decisions the force of international law.

Abbott Laboratories said it has agreed to buy Alere Inc., a diagnostics company, in a deal with an equity value of $5.8 billion. Abbott Labs said it will pay $56 per Alere share, or a 50% premium over Friday’s closing price.

Energy transportation company Dominion Resources has agreed to buy natural-gas company Questar in an all-cash deal valued at $4.4 billion. Dominion will pay Questar shareholders $25 a share in cash, or a 30% premium. Dominion said the combined company will serve about 2.5 million electric utility customers and 2.3 million gas utility customers in seven states.

Stryker Corp. announced a deal to buy privately-held Sage Products LLC from Madison Dearborn Partners for $2.775 billion in cash. Sage develops disposable health and personal care products for hospitals.

Berkshire Hathaway has resumed its purchases of Phillips 66, spending roughly $832 million in January to boost its stake even as the oil refiner’s profit margins narrowed. According to a regulatory filing, Warren Buffet’s Berkshire paid about $198 million last week for 2.5 million shares of Philips, giving it 72 million shares overall, or a roughly 13.7% stake in the company. Phillips 66 is Berkshire’s sixth-largest stock holding.

Credit Suisse and Barclays have agreed to pay $154 million combined to settle investigations by the SEC and New York attorney general into their dark pools. The settlements mark the two largest fines ever paid in connection with cases involving the privately run stock-trading venues.

Toyota is halting production at all car assembly plants in Japan next week due to a steel shortage. The world’s top automaker said an explosion at an Aichi Steel facility on Jan. 8 had curbed production of the metal used in auto parts including engines, transmissions and chassis. Toyota produced 4 million vehicles in Japan in 2015, roughly 46% of which were exported.

General Electric announced today that it will stop producing compact fluorescent lightbulbs by the end of the year. CFLs are the curly, spiral shaped bulbs that replaced the standard incandescent bulb. Now, the light quality of LEDs has improved and the cost has dropped, so goodbye CFL.

Good news: The U.S. presidential elections turns serious today with the caucuses in Iowa, and the spotlight will be on precinct officials who have been trained on a new free Microsoft app that’s meant to cut down on human error and speed up the reporting process. The good news? After tomorrow, we won’t have to hear about the Iowa caucus for another 4 years.

FINANCIAL REVIEW

Thanks Hank

Sinclair Noe — October 7, 2014

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Financial Review

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

DOW – 272 = 16,719
SPX – 29 = 1935
NAS – 69 = 4385
10 YR YLD – .07 = 2.35%
OIL – 1.91 = 88.43
GOLD + 1.50 = 1209.30
SILV – .16 = 17.29

The S&P 500 dropped below its 50-day moving average last week and has yet to move back above that level. Coincidentally, the S&P 500 has been sliding for a few weeks, going back to September 19, which was the day of the Alibaba IPO, just coincidentally. The Dow is also trading below its 50 day moving average. Welcome to the start of earnings season.

In the past 3 months the US dollar has jumped by 8% against the euro. That makes American goods more expensive relative to European goods. And it wasn’t just the dollar against the Euro, but against a basket of foreign currencies. It is estimated that a 5% rise in the dollar versus the euro results in a drop of about $1 for full-year Standard & Poor’s 500 Index per-share earnings; current estimates for the S&P are running around $118. Partly because of the dollar and the related decline in oil prices, earnings estimates have seen one of the largest downward revisions over the last few years aside from the weather-beaten first quarter of this year.

Earnings-per-share are projected to have grown 4.9% in the third quarter, that’s down from 7.8% earnings growth 3 months ago. At the end of March, third quarter earnings were forecast to grow 9%. The strong dollar may have an even greater impact on guidance for the fourth quarter. Alcoa marks the unofficial start of the earnings season with their report after markets close tomorrow.

US job openings hit a 13-year high in August. According to a report published by the US Labor Department, there were 4.84 million open jobs to fill in the US in August, up from 4.61 million the previous month. The good news is economists were only expecting 4.7 million job openings. The bad news: Hiring in August dropped to 4.6 million from 4.9 million in July.

Americans boosted their use of credit in August by the slowest rate in nine months. Consumers increased borrowing by a seasonally adjusted $13.5 billion in August, or by a 5% annual rate. The gain was the smallest since last November and marks a big deceleration from the 8.1% increase in July. Consumers took out more loans to buy cars or pay for college, with non-revolving credit rising by 7%. Yet Americans actually cut credit-card use a touch, as revolving credit dropped 0.2%. Consumer credit increased by an annual pace of 6.2% in 2012 and 6% in 2013 and it’s on track to grow even faster in 2014 despite the slowdown in August.

A gauge that tracks delinquencies in eight major types of closed-end loans, such as credit to buy cars or pay for property improvements, dropped in the second quarter to 1.57%, the lowest rate in the data’s four-decade history; the data does not include home purchase mortgages.

The International Monetary Fund trimmed its forecast for global economic growth to 3.3%, down from the earlier forecast of 3.4%, forecast in July. The IMF predicts the US economy will grow at a 2.2% pace, which is up from the July forecast. The 17-nation euro zone is expected to expand by just 0.8% this year. If you are thinking you’ve heard this story before, and I’m just repeating myself, well, not exactly; the IMF has developed a nasty habit of missing economic forecasts, and when the misses are exposed, they are forced to revise.

Three scientists win a Nobel for making the world a little brighter. Isamu Akasaki, Hiroshi Amano, and Shuji Nakamura won the Nobel Prize for physics for their discovery of how to produce blue light from semi-conductors, which allowed for the creation of white-light LEDs. So, the Nobel goes to the inventors of a new light bulb, but that is a major deal.

Nearly a fourth of global electricity consumption is used to brighten dark spaces. Traditional incandescent and fluorescent lights are notoriously inefficient with much of the energy used to produce light lost in the form of heat. Meanwhile, LED lamps last longer and use a fraction of the energy to produce the same, if not more, light. That has huge consequences for the developed world, and cities, offices, and homes are already swapping out old bulbs for the brighter, more efficient LEDs. But the technology has perhaps even greater significance for the more than 1.5 billion who lack access to electricity grid. In Sub-Saharan Africa, that’s two out of three people. By requiring less power, LEDs perform better than traditional lights on portable, scale solar energy, which makes spreading electricity to rural, off-grid regions much easier.

Federal officials asked a group of large banks and other financial institutions last month to check if they had seen indicators associated with the cyberattack that resulted in the theft of account information for millions of JPMorgan customers this summer. A number of financial institutions responded that they had seen traffic from the suspect computer addresses linked to the hackers, but that they didn’t believe they had been breached. Rather, the hackers, whose identity remains unknown, appeared to be “probing,” or searching for weaknesses on the firms’ digital perimeters. So, who has the weakest cyber security? Either the other financial institutions have been hacked and they just don’t realize it yet, or JPMorgan was a pathetically weak link.

The New York Times reports that the Department of Justice is preparing to charge several of the world’s biggest banks with colluding to alter the price of foreign currencies; essentially rigging the Forex market. Deutsche Bank, Citigroup, JPMorgan Chase, Barclays and UBS are among the dozen or so banks under investigation. Prosecutors are reportedly planning to indict individual bank employees for currency manipulation. They will not be going after the bank executives, but rather the traders. That is a familiar story. Everyone knows that the CEOs of big banks know absolutely nothing about what’s actually going on in their banks. The execs offer up a sacrificial lamb and go on with their unsavory practices, but this time might be different.

The idea is that prosecutors would use the currency rigging to reopen earlier settlements in the Libor interest rate rigging cases. Those rate rigging cases have already led to settlements with 5 banks, and part of the deal there was not to do bad things like rig markets. Meanwhile, some banks also remain under investigation. In the last major rate-rigging case against a bank, prosecutors are discussing the possibility of forcing Deutsche Bank or one of its subsidiaries to plead guilty to manipulating Libor. And the Libor case could quite easily result in criminal charges, if the DOJ has the spine for it. That remains to be seen. So far the Department of Justice has been afraid of the impact of a wounded bank on the world economy, and so they have done little more than levy “slap-on-the-wrist” fines, essentially taking a cut of the ill-gotten gains; like allowing a Cocaine Cartel to pay its criminal fines in crack.

The AIG bailout trial started last week. The trial is largely the result of former AIG CEO Maurice “Hank” Greenberg arguing that AIG wasn’t treated as well as the banksters when it came time to pass out taxpayer bailouts. The banksters got sweetheart deals, and for AIG, the government demanded 80% of the company stock, and used it as collateral against the loan, and charged 12% on the loan, and later, started sweeping all the dividends. Greenberg and his companies, notably Starr International, were the biggest AIG investors at the time, and the government’s bailout effectively crushed their shares.

Of course, AIG had been playing fast and loose with derivatives of subprime mortgages, and they had been forced to restate earnings, and their entire operation was a big, greedy hot mess that likely would have collapsed without a taxpayer bailout. AIG had become the industry leader in credit default swaps, essentially insuring the big banksters on large swaths of toxic mortgage deals. If AIG did not unravel all that credit default insurance, the entire banking structure likely would have collapsed.

Yesterday, former Treasury Secretary Hank Paulson admitted that certain firms were treated differently than others; AIG was treated tougher than Citigroup; Paulson said that circumstances warranted it because those banks were more essential to keeping the financial system afloat. He said that the government had to treat AIG harshly to win political support. Of course, the government didn’t treat AIG that harshly, gifting them a carryover tax benefit worth $35 billion and letting their executives take bonuses in 2009. Hank Greenberg argues that AIG could have survived; that other potential suitors were ready to step in with offers, but the government made them an offer they couldn’t refuse, and then the government changed the terms of the offer. There has been no testimony that a gun was held to anyone’s head. AIG took the deal at the time.

Today, Tim Geithner took the stand; Geithner was the president of the New York Fed in 2008, before he succeeded Paulson as Treasury Secretary. Geithner admitted that he had described an AIG bankruptcy as an unacceptable option and that the company represented a “systemic risk” in September 2008 that required government intervention. And that seems to be Greenberg’s argument; that the bailout of AIG was punitive and confiscatory. And it looks like it probably was. That’s what it should have been. AIG was forced to pay the credit default swap insurance, the banks survived; the taxpayers were paid back for their bailout of AIG, and now Hank Greenberg and Starr International want an extra $40 billion.

Of course, AIG might have gone completely bust, they could have dragged down the banksters with them, and the entire financial system could have melted down, and Hank Greenberg could be scrounging for a meal in the dumpster. Instead, he was left with a few billion, just enough to hire some high priced lawyers to spit in the face of taxpayers who saved his bacon. Thanks Hank.

http://dealbook.nytimes.com/2014/10/06/big-banks-face-another-round-of-u-s-charges/