Financial Review

Call It Neutral

Sinclair Noe — April 10, 2017

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DOW + 1 = 20,658
SPX + 1 = 2357
NAS + 3 = 5880
RUT + 2 = 1367
10 Y – .01 = 2.36%
OIL + .91 = 53.15
GOLD + .60 = 1255.40

Fed Chair Janet Yellen held a Q&A session today at the University of Michigan. Yellen said the Fed’s task has shifted from a post-crisis exercise of healing the economy to one aimed at sustaining progress.

Yellen said, “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could.”  Now, she says the Fed is trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.

The appropriate stance of policy now is closer to, let me call it neutral.” That still likely means two more rate hikes this year. Minutes of their March meeting showed that most Fed officials also expect to begin shrinking the bank’s $4.5 trillion balance sheet later this year, gradually reversing emergency bond purchases made during the financial crisis and recession.

In last week’s minutes, the Fed policymakers warned that stock prices were on the high side, specifically saying: “Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms.” And, “some measures of valuations, such as price-to-earnings ratios, rose further above historical norms.”

Now, the Fed is not known for its stock picking or timing skills, but this week the proof is in the putting as earnings season kicks into gear. Earnings of S&P 500 companies are estimated to have risen 10.1 percent in the first three months of the year. The index is currently trading at 17.4 times forward earnings estimates, above its long-term average of 15, according to Thomson Reuters I/B/E/S.

JPMorgan, Citigroup and Wells Fargo are scheduled to report earnings on Thursday. The financial sector has been a darling performer since the election on anticipation of deregulation and tax reform policies that have yet to materialize; so, look for the focus to shift to earnings.

Wells Fargo’s board of directors has released its investigation into the bank’s recent fraudulent-accounts scandal, pinning blame primarily on two former executives. According to the report, Wells Fargo’s board will claw back $28 million in pay from former CEO John Stumpf and $47.3 million from former head of community banking Carrie Tolstedt for their roles in the scandal.

The board determined that Stumpf and Tolstedt did not do enough to address the culture at Wells that set quotas for bank employees to open as many as 2 million credit card and retail banking accounts for customers from 2011 to 2015 without their knowledge. According to the report, Stumpf was aware of individual issues as far back as 2002 but did not become aware of the systemic nature of the problem until 2012.

Even when he did become aware, the board said, Stumpf did not do enough to address the issues.

Today’s report also referenced an internal Wells Fargo report prepared 12 years ago, in 2004 which foretold the fake account scandal. That investigation, titled “Gaming,” warned that Wells Fargo employees had an “incentive to cheat” that was “based on the fear of losing their jobs.” It said that workers felt they couldn’t meet the bank’s unrealistic sales goals “without gaming the system.”

With the newly announced clawbacks, Wells Fargo has taken back nearly $183 million from Stumpf, Tolstedt and other executives. Wells Fargo has been fined $185 million by regulators and been the subject of two congressional inquiries.

Until as late as 2015, even as sales practices were labeled a “high risk” in materials provided to the board of directors’ risk committee, there was a general perception within Wells Fargo’s control functions that sales abuses were a problem of relatively modest significance. The report published today did not seem to recognize a failure on the part of the Board of Directors – no clawbacks there.

And it doesn’t look like the money in fines and clawbacks will do much to compensate the victims of Wells Fargo fraud, specifically the customers and the employees who tried to blow the whistle only to be fired for their efforts to be honest.

We’ve told you about the Libor Rate Rigging scandal, where various traders manipulated the daily fix on the London Interbank Offered Rate, which affects trillions of dollars of transactions around the globe; everything from mortgage loans to credit card rates to complex derivatives. The scandal rocked the financial industry when it was uncovered in 2012.

Now the BBC has released an audio recording that implicates the Bank of England, the central bank, of rate manipulation. According to the recording, The Bank of England repeatedly urged commercial banks to lower their Libor settings during the financial crisis. The BOE has consistently said it wasn’t aware of the Libor manipulation until years after the rigging happened.

In response to the BBC findings, the central bank noted that Libor and other global benchmarks weren’t regulated in the U.K. or elsewhere during the period in question. The rate-rigging scandal first came to public attention in 2012 when an international investigation revealed that several major banks colluded to manipulate Libor.

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. At the time, both said that they had only recently become aware of rate manipulation.

Meanwhile, Barclays CEO Jes Staley is in hot water. Staley is a veteran American banker and took the helm at Barclays in December 2015. He pledged to overhaul Barclays’ culture, which had been in the spotlight due to the bank’s involvement in rigging Libor, for which it was ordered to pay a fine of nearly £290 million-pounds.

Staley is accused of twice attempting to use Barclay’s internal security team to track down the authors of two anonymous letters. On the second occasion the security team received assistance from a US law enforcement agency, but still failed to identify the individual.

The whistle-blowing saga began in June 2016 when the board of Barclays received an anonymous letter and a senior executive received a second letter. These letters made allegations about a senior employee who had been recruited by the bank earlier that year. Staley has apologized for his actions and faces a significant cut in his bonus.

Swift Transportation and Knight Transportation are merging in a stock-swap deal, creating a company with a market value of more than $5 billion. Shareholders of Swift will own 54 percent of the new entity and Knight shareholders the rest after the deal closes.

The two companies earned about $5.1 billion in total revenue and $416 million in adjusted operating income last year. The companies expect to achieve about $15 million in cost-saving synergies and pretax revenue in the second half of 2017, and up to $150 million in 2019.

The companies, both based in Phoenix, have a shared history – Jerry Moyes started Swift in 1966, while Randy Knight, who was a part-owner of Swift – founded Knight Transportation along with three cousins in 1990.

Knight’s executive chairman, Kevin Knight, will assume the same title at the new company. Moyes, who retired as co-CEO of Swift last year, will become one of the directors of the new company. The Jerry Moyes family, however, will own about 24 percent of Knight-Swift. The deal will create the largest truckload operator in North America.

AT&T announced it would buy Straight Path Communications, a holder of licenses to wireless spectrum, for $1.25 billion in an all-stock deal as it aims to accumulate the airwaves it needs for a 5G network. AT&T’s offer represents a 162% premium to Straight Path’s closing price on Friday.

After a partisan fight so deep it forced the Senate to go “nuclear” to confirm him, Neil Gorsuch was sworn in as the nation’s newest Supreme Court justice, filling the seat left vacant when Justice Antonin Scalia died last year. In the final months of the Supreme Court’s current term, Gorsuch could break a potential 4-4 deadlock on cases involving religious freedom, racial discrimination, immigration, and other issues.

The court might also have to weigh in on Trump’s executive order restricting travel from majority-Muslim countries. And in the next few years, the justices are expected to consider new cases involving same-sex marriage, abortion, and gun rights.

Toyota said it would invest more than $1.3 billion in its Georgetown, Ky., plant, its largest factory in the world. Although the investment does not include new jobs, the move signals a deepening commitment to the U.S. market.

The 7.5 million-square-foot Kentucky plant makes several vehicles, including the Camry sedan, which Cars.com has dubbed the most made-in-America car in the U.S. based on an assessment of the car’s components. The plant currently has about 8,200 employees, having added 700 in recent months to launch the redesigned 2018 Camry, which was unveiled in January at the Detroit auto show. The investment adds to a $530 million project authorized in 2013 to make a new Lexus vehicle.

What’s the most valuable car company in the USA? No, it is not GM. At the end of January, short interest in Tesla made up about 35% of the float, or shares available for trading. Tesla was burning through cash and had only  delivered 76,230 vehicles in 2016, well below the 80,000 to 90,000 that Wall Street was expecting. General Motors sold about 10 million cars in 2016.

But a funny thing happened – Tesla shares have been moving higher, up 46% so far, this year, a fact that has caused billions of dollars of losses for those who have bet against it. Tesla now has a larger market capitalization than Ford or General Motors.

Financial Review

Dog Days Drag On

Sinclair Noe — August 4, 2016

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

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DOW – 2 = 18,352
SPX + 0.46 = 2164
NAS + 6 = 5166
10 Y – .04 = 1.50%
OIL + .89 = 41.72
GOLD + 2.70 = 1361.40

Another day on Wall Street without conviction. The major indices continue to trade in a very, very tight range.

The Bank of England cut interest rates 25 basis points to 0.25 percent.  The bank also announced it would expand its quantitative-easing program by 60 billion pounds and purchase corporate bonds.

The basic argument for the rate cut is to stimulate economic growth by encouraging people to borrow and invest. This, in turn, should help to spur inflation. The rate cut was widely expected. The extension of bond buying was not as widely expected. The introduction of corporate bond buying will be of particular interest to the markets since it has only briefly been experimented with in the past.

The BoE left its forecast for growth this year steady at 2.0 percent, but 2017 brings a sharp downgrade to growth of just 0.8 percent from a previous estimate of 2.3 percent. Businesses in the U.K. are looking beyond the Bank of England and are calling on Chancellor of the Exchequer Philip Hammond to deliver a “bumper” fiscal stimulus.

The number of Americans filing for unemployment benefits rose last week. Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 269,000 for the week ended July 30. Claims have now been below 300,000, a threshold associated with a strong labor market, for 74 consecutive weeks, the longest streak since 1973.

In separate report, global outplacement consultancy Challenger, Gray & Christmas said employers in the U.S. announced plans to cut 45,346 workers from their payrolls in July, a 19 percent increase from June. Though it was the second straight monthly increase, layoffs were 57 percent lower than in July last year. Job cuts in the energy sector surged 796 percent to 17,725 last month.

Tomorrow is the monthly jobs report from the Department of Labor. The past couple of months have been anything but normal. Employers added a meager 11,000 workers in May, the fewest in almost six years. Payrolls rebounded by 287,000 in June, the most in eight months.

Most estimates are calling for 180,000 or so new jobs in July. Job gains averaged 172,000 a month in the first half of this year. The jobs report is also projected to show the unemployment rate fell to 4.8 percent after climbing to 4.9 percent in June as more people entered the labor force.

As joblessness has reached the Fed’s threshold for full employment, economists are anticipating the pace of payroll growth will slow further. Even if the economy adds just 150,000 new jobs each month, it would push the unemployment rate lower. Wage growth remains flat. A tightening labor market should prompt hiring managers to offer more pay to attract and retain skilled and experienced workers but we really haven’t seen wage pressure.

The US is importing more oil than it’s producing. Domestic production in the U.S. remains under pressure, down 1 million barrels a day in July from a year earlier, while crude imports surged to the highest level since 2012. A large OPEC supply has caused the US to import more oil than it has produced for the first time since January 2014. According to an analyst’s report from Commonwealth Bank, “the increase in US oil imports reflects OPEC’s strategy to target market share instead of price.”

Revenue from tech deals is at its highest level since the dot-com bubble. Tech mergers and acquisitions have brought in $1.9 billion this year, according to Dealogic. That’s up 11.8% from the same period last year and trails only the same period in 2000 ($2.2 billion) for the highest total.

There have been 54 IPOs through July this year, down 54% from 118 deals during the same period in 2015. These IPOs raised $11.5 billion, down 50%. It was the worst year-to-date since 2009. Of the 54 IPOs, 23 were healthcare companies. Their 43% share of all IPOs so far this year is the highest on record, according to Dealogic. Another 11 were in finance. Only 9 were in technology.

Only two IPOs – Twilio and Line – have priced above range, down from 31 last year, the lowest year-to-date number on record. There simply isn’t a whole lot of appetite for overpriced and overhyped IPOs.

The US Chamber of Commerce and the Texas Association of Business filed a lawsuit in Texas federal court that said a regulation from the U.S. Treasury Department in April exceeded what the law allows the department to do. The lawsuit is the first to challenge a rule on inversion, or transactions used by a company whereby it becomes a subsidiary of a new parent company in another country for the purpose of falling under beneficial tax laws.

Typically, they are used by US companies to move to countries with lower tax rates, even though they still maintain much or most of their operations in the US. A wave of inversions largely ended after Treasury moved against the deals. A Treasury spokeswoman said in a statement that its action was based on strong policy interests and clear legal authority. It said the department would continue to defend the regulations to slow the erosion of the US corporate tax base.

JPMorgan Chase said US and British authorities ended probes into its activities involving Libor and other benchmark rates without issuing new fines. JPMorgan paid $89 million to the European Union’s antitrust unit in 2013 as part of a multi-firm settlement in relation to Yen Libor. The bank said at the time this concerned “the conduct of two former traders during a one-month period in early 2007.” Now regulators from both countries say they have closed their investigations without further action.

Toyota slashed its forecast. The world’s largest automaker says full-year operating profit will come in at 1.6 trillion yen ($15.7 billion), down from its previous forecast of 1.7 trillion yen. That would represent a 44% drop in profit, caused mostly by the strength of the Japanese yen. Every Toyota and Lexus model available in the U.S. has posted sales declines in 2016, a trend putting Volkswagen on course to surpass its Japanese rival as the world’s top-selling automaker.

In other earnings news: Shares of the mobile payments company Square rose after it reported strong second-quarter results and raised its projections for the year. The stock rose 8.43 percent.

The hamburger chain Jack in the Box reported better-than-expected results and raised its forecasts for the year. Its stock gained 10.56 percent.

The travel website operator TripAdvisor reported lower revenue growth and profit margins in the second quarter, disappointing analysts. The company also said terrorism was one thing making it harder to predict how its business will perform. Its stock lost 8.49 percent.

LinkedIn reported quarterly earnings that beat analysts’ expectations, as sales popped across the board, with revenue up 31%.

MetLife, the largest U.S. life insurer, reported a quarterly profit that widely missed analysts’ estimates, largely due to weaker underwriting and tax-related adjustment in two of its largest markets. Shares dropped about 4% in after-hours trade.

U.S. government researchers have begun their first clinical trial of a Zika vaccine. Meanwhile, funds to fight the virus are expected to run out in the coming weeks due to congressional inaction. The number of locally spread Zika cases has jumped to 15 in Florida and the number of U.S. states affected has reached 45. As of July 27, 1,658 travel associated cases of Zika were reported across the continental U.S. and Hawaii.

Daily fantasy sports games are resuming in New York after Gov. Andrew Cuomo likened the contests to a “game of skill” rather than “based on chance” and signed a bill that will allow operators like DraftKings and FanDuel to obtain registrations. The law requires them to pay an annual fee of as much as $50,000 with a 15% tax on their revenue. It also bars anyone younger than 18 years old from playing and prohibits college and high school matches.

Just do it! Except for golf – don’t do that. Nike is getting out of the golf equipment business. Nike said it would stop making clubs, golf balls and golf bags, instead devoting its resources to shoes and apparel. And Tiger Woods’ golf bag is going to have a different look whenever he returns. Sales at the Nike Golf division fell 8.2% to $706 million in the fiscal year that ended in May, making it the company’s worst performing major category. Shares of Callaway Golf jumped almost 9% this morning.

Meanwhile, Golfsmith International, the retailer of golf clothing and equipment, is considering filing for bankruptcy. Golfsmith hired the investment bank Jefferies LLC to solicit buyers for the roughly 150-store chain, without success so far.

After six years of effort and about $30 million in investments, space-exploration startup Moon Express has become the first commercial venture to get U.S. regulatory authorization for a mission beyond Earth’s orbit. The company expects to send a small robotic lander to the moon in late 2017, and eventually plans to send people there and may get involved in lunar mining.

Apple spent $850 million last year on a 130-megawatt solar farm near San Francisco, and now Apple can begin selling power into wholesale markets, joining Google parent Alphabet in the energy-trading business. Apple’s subsidiary Apple Energy LLC may sell energy, capacity and other services needed to maintain reliable power, according to an order by the Federal Energy Regulatory Commission.

Apple, together with Google, are among a group of tech companies outside the utility industry ramping up investments in energy projects. In addition to the California solar farm, Apple Energy owns 19.9 megawatts of generation capacity in the Nevada Power Company service area and 50 megawatts in the Salt River Project service area in Arizona. Apple may begin wholesale power sales Saturday.

Financial Review

How Low Can It Go?

Sinclair Noe — July 5, 2016

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

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DOW – 108 = 17,840
SPX – 14 = 2088
NAS – 39 = 4822
10 Y – .09 = 1.36
OIL – 2.39 = 46.60
GOLD + 5.70 = 1357.20

Longer-end Treasury yields traded near record lows, with the 30-year yield around 2.15 percent. The 10-year yield dropped to an all-time low of 1.367 percent.

The U.S. dollar index posted another gain to 96.28, with the euro around $1.11 and the pound sterling traded near $1.30, levels not seen in more than 30 years. European stocks were mostly lower, with the German DAX off more than 1.5 percent. The STOXX Europe 600 Banks index under-performed, trading about 2 percent lower.

Factory orders in the U.S. fell 1% in May after two straight gains. So far this year, orders for manufactured goods have dropped 1.9 percent to $2.2 trillion compared to the same period in 2015.

Demand in a category that serves as a proxy for business investment – non-military goods that exclude the volatile aircraft category – slipped 0.4 percent in May. The Commerce Department also reports durable goods orders declined 2.3%.

Demand for mining and energy-related equipment slid 5.8% following a 20.8% plunge in the prior month. Orders for computers were also weaker. Bookings for nondurable goods rose 0.3%.

Corelogic reports home prices nationwide, including distressed sales, increased year over year by 5.9 percent in May 2016 compared with May 2015 and increased month over month by 1.3 percent in May 2016 compared with April 2016.

The CoreLogic HPI Forecast indicates that home prices will increase by 5.3 percent on a year-over-year basis from May 2016 to May 2017 – so more of the same. Twenty-two states reached new highs for the month; Arizona was not one of them; we remain 23.9% below peak prices, but the state did record a 5.8% year-over-year price increase.

Tomorrow we get the minutes from the Fed’s June FOMC meeting. If the minutes show real concerns about the durability of the economy, it could be friendly to the dovish market, which now only has fully priced in the next rate hike in 2018. Alternatively, the minutes could suggest the Fed was fairly confident that the labor market would come back. This would be less friendly for the market.

Federal Reserve Bank of San Francisco President John Williams held a couple of interviews today and said Britain’s vote to exit the European Union probably won’t derail the U.S. economy, leaving the Fed scope to raise interest rates this year if his growth and inflation expectations are met.

The Bank of England takes action. The BOE’s Financial Policy Committee cut its counter-cyclical capital buffer for UK banks to zero from 0.50%, according to the latest Financial Stability Report. The committee says the buffer will remain in place for at least the next year as the UK economy deals with “uncertainty” following the vote for a British exit from the European Union, or Brexit.

Australia’s central bank held its cash rate today at a record low of 1.75%, a widely expected decision given political uncertainty and a lack of timely information on domestic inflation. The country still doesn’t know who won Saturday’s general election and final results may not be known for another week.

Euro zone business growth held steady in June, but the modest pace suggested economic growth in the second quarter was half the rate of January-March, even as a rebound in Italy and rapid acceleration in Spain brightened the outlook. In France, data showed both services and manufacturing contracting. The majority of the surveys were completed before Britain voted on June 23 to leave the European Union.

In the past 24 hours, three different UK property funds have frozen withdrawals, citing a rush by investors to pull out their money in the wake of the UK’s Brexit vote. In 2007, Bear Stearns banned withdrawals from one of its hedge funds after investors were spooked by rising defaults and bankruptcies. The British property funds are very different beasts from the exotic, derivative-laced vehicles that presaged the global financial meltdown. These funds are open to regular retail investors and invest in things like office parks and malls.

But forget about Brexit for a moment; the new worry of the day is Italian banks. A big feature from The Wall Street Journal  captures most of the concerns with Italy’s banking system and the political turmoil it appears liable to set off.

In short, Italian banks are loaded with bad debts; 17% of bank loans in Italy are “sour,” a level much greater even than that of the US banking system at the height of the financial crisis (5%).Of course, issues surrounding the Italian banking system are not strictly new, and in the past year shares of UniCredit — Italy’s only bank considered globally significant — and Banca Monte dei Paschi di Siena, the oldest bank in the world, are down over 60%.

Reports surfaced in April that the government could step in to shore up the banking system; days later the government got executives, insurers, and investors to put 5 billion euros into a rescue fund for Italy’s weakest banks. This morning, a report from Bloomberg said Italy was looking to inject up to 3 billion euros into Monte dei Paschi; this would be the bank’s third bailout since the financial crisis.

The U.S. holds more oil reserves (264 billion barrels) than Saudi Arabia (212 billion) and Russia (256 billion), the first time it has surpassed those held by the world’s biggest exporting nations, according to a new study by Rystad Energy.

The analysis of 60,000 fields worldwide, conducted over a three-year period, shows total global oil reserves at 2.1 trillion barrels. That is 70-times the current production rate of about 30 billion barrels of crude per year. For the U.S. more than 50 percent of the remaining oil reserves is in unconventional shale oil. Today, oil prices dropped nearly 5%.

NASA’s Juno spacecraft, built by Lockheed Martin, ended a five-year, 1.8 billion-mile journey to Jupiter, with a do-or-die engine burn to sling itself into the planet’s orbit. No small trick. At the time of its arrival, Juno was flying through the solar system at over 150,000 miles per hour—making it one of the fastest man-made objects ever.

Juno will spend the next 20 months studying what lies beneath the gas giant’s thick clouds and measure its gravity, magnetic fields and water content. Juno is the ninth spacecraft to see Jupiter up close, but only the second to ever go into orbit around it, and Juno promises to provide the most intimate peek into the far-off Jovian system yet.

Poland has made significant progress in its talks with Raytheon over a Patriot missile system valued at an estimated €5-billion-euro. According to the Polish Defense Ministry, the country is ready to move ahead with the plan because Raytheon pledged that 50% of the missile system spending would be “done in Poland by Polish arms firms.”

BlackBerry will stop making its Classic smartphone. The Classic was launched early last year, with a physical keyboard and powered by the company’s overhauled BlackBerry 10 operating system. BlackBerry has since launched a phone powered by Alphabet’s Android software and plans several more.

Google DeepMind, the London-based artificial intelligence unit owned by Alphabet, announced a research partnership today with the British National Health Service to gain access to a million anonymous eye scans. DeepMind specializes in machine learning, the increasingly important area of technology where algorithms allow computers to learn and figure things out on their own.

DeepMind will use the eye scan data to train its computers to identify eye defects. The aim is to give doctors a digital tool that can read an eye-scan test and recognize problems faster. Earlier detection of eye disorders related to diabetes and age-related macular degeneration could allow doctors to prevent loss of vision in many people

A bidding war with Salesforce.com forced Microsoft to pay nearly $6 billion extra last month to seal its planned takeover of LinkedIn. Details of the frenzied bidding were revealed in a filing with the SEC ahead of a shareholder vote to approve the transaction. A month-long back-and-forth between the two rivals pushed the value of the all-cash deal to $26.2 billion, making it the third-largest acquisition in the tech industry.

Three former Barclays traders have been found guilty of Libor manipulation almost four years after the bank paid out hundreds of millions of dollars in fines for fixing the key benchmark rate. Days after the British firm became the first to settle, its Chief Executive Officer, Bob Diamond, lost his job and regulators eventually imposed roughly $9 billion in penalties on the financial industry.

The convictions bring the total number of bankers Britain has convicted over the long-running Libor-rigging scandal to five. That is still a better fines to conviction ratio by far than the US had for mortgage abuses by big banks.

London Stock Exchange shareholders approved a $27 billion merger with Deutsche Boerse yesterday despite renewed uncertainty following the Brexit vote. The two exchanges insisted that their all-share merger to create the world’s biggest bourse by revenue was essentially “Brexit proof”.

Financial Review

Libor Antitrust Claims Revived

Sinclair Noe — May 23, 2016

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

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DOW – 8 = 17,492
SPX – 4 = 2048
NAS – 3 = 4765
10 Y – .01 = 1.84%
OIL – .33 = 48.08
GOLD – 3.70 = 1249.20

If you were actively trading the markets today – well, you were probably falling asleep. It was like watching paint dry. The S&P 500 index traded in an 8-point range for the session, drifting from positive to negative without conviction.

Including today, we’ve had 98 trading days this year. On 20 of these days, the S&P moved 0.1% or less. That’s just over 20% of the time. In the prior 10 years, there was a total of 2517 trading days. And the S&P had a total of 288 moves of 0.1% or less. That’s just over 11% of the time. There has been plenty of volatility but it has been interspersed with indecision.

John Williams, president of the Federal Reserve Bank of San Francisco, said Sunday the presidential election wouldn’t prevent the central bank from raising interest rates later this year. Mr. Williams has said that he favors raising rates two or three times this year.

St. Louis Fed President James Bullard said today that the strength of the U.S. labor market, inflation levels that are closer to the Federal Reserve’s target of 2% and easing international pressures are three factors that support the Federal Open Market Committee’s aim for a slow normalization of interest rates. According to FOMC member and Boston Fed President Eric Rosengren the U.S. is on the verge of meeting most of the economic conditions the Fed has set to increase interest rates next month.

The market is trying to digest last week’s Fed minutes and the jawboning from policymakers. Everyone will be following the economic data closely over the next 3 weeks. Meanwhile, the bond market has done some of the work for the Fed; since last Wednesday’s release of FOMC minutes yields have jumped, but the Fed can’t just talk about raising rates and then fail to do the deed without a severe loss of credibility.

Bayer has confirmed its offer to acquire Monsanto with a $122 per share all-cash bid that values the U.S. agribusiness at $62 billion. The drug and chemicals giant anticipates annual earnings contributions from synergies of around $1.5 billion after three years, and said it would finance the deal through a combination of debt and equity.

Bayer said a deal would boost earnings per share by a “mid-single-digit percentage” in the first full year after completion, and by more than 10 percent thereafter. Bayer would likely abandon the Monsanto name following the purchase, which would help distance Bayer from Monsanto’s link to genetically modified foods.

The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the US. But that doesn’t mean you want to bet the farm on GMOs. In the United States organic food sales have grown steadily at around 10 percent a year since the Great Recession (and at higher rates before that), which puts the stock market to shame.

In 2015 organic product sales revenue grew 11 percent, while the rest of the food market grew at a rate of 3 percent, according to the Organic Trade Association’s annual survey of the industry. Total sales reached $43.3 billion, which makes the organic industry a force to be reckoned with. For comparison, Monsanto brought in just under $15 billion in revenue last year.

Anthem and Cigna are quarreling and could delay their merger. The Wall Street Journal reported that disagreements could delay antitrust approvals, which would make the $48 billion deal possible. The report said the two health insurers accused each other of violating the terms of their agreement announced last July. A deal would create America’s largest health insurer by members.

Tribune Publishing rejected Gannett’s latest $864 million takeover offer, saying the$15 per share in cash was inadequate, and they have a turnaround plan in place. Tribune Publishing, the owner of the Los Angeles Times and the Chicago Tribune, said billionaire Patrick Soon-Shiong invested $70 million in the company, becoming its second largest shareholder. Still, Tribune said it had invited Gannett to an agreement under which the companies could engage in discussions to see whether a transaction was in the best interests of Tribune and Gannett shareholders.

Ares Capital Corp, an investment and finance company focused on mid-sized firms, is buying smaller rival American Capital Ltd in a cash-and-stock deal valued at $3.4 billion to better fill the credit gap created as big banks turn cautious. The deal, which does not include American Capital’s mortgage management unit, comes about five months after American Capital said it would solicit offers. Ares is the biggest BDC, or Business Development Company, in the United States by assets while American Capital, in addition to operating as a BDC, has a large asset management business.

Due to the U.S. crackdown on tax inversions, CF Industries is calling off an $8 billion deal to acquire several European and North American operations from OCI of the Netherlands. The two said that they were unable to restructure the acquisition, which would have created the world’s largest publicly traded nitrogen company, in a way that would be attractive to their shareholders.

Sixteen of the world’s largest banks must face antitrust lawsuits accusing them of harming investors who bought securities tied to Libor by rigging the interest-rate benchmark, a ruling that an appeals court warned could devastate them.

The appellate judges reversed a lower-court ruling on one issue, whether the investors had adequately claimed in their complaints to have been harmed, while sending the cases back for the judge to consider another issue: whether the plaintiffs are the proper parties to sue, in part because their claims, if successful, provide for triple damages that could overwhelm the banks.

About a dozen firms have paid almost $9 billion in fines to resolve government investigations around the world into rigging of the key benchmark. The ruling by a three-judge panel opens the possibility the banks may have to pay billions more. Libor, or the London Interbank Offered Rate, underpins hundreds of trillions of dollars of transactions and is used to set rates on credit cards, student loans and mortgages. It is calculated based on submissions by banks.

In their lawsuits, the plaintiffs claim that beginning in 2007 the banks colluded to depress the Libor rate to minimize the amount they had to pay out on investments linked to the benchmark. The Libor-tied investments included asset swaps, collateralized debt obligations and forward rate agreements. The appeals court overturned a 2013 ruling which said the investors had failed to show that they were harmed in a way that would permit them to sue under U.S. antitrust law. Last year, the U.S. Supreme Court permitted the bondholders to appeal the dismissal of their antitrust claim.

The Second Circuit reinstated the lawsuit today, ruling that the alleged horizontal price-fixing constitutes an antitrust violation, basically the district judge got it wrong by adopting a categorical rule that because the banks were cooperating in setting Libor they could not be violating antitrust rules. That argument is that since banks operate as both borrower and lender in Libor transactions, any conspiracy to gain as a borrower would be offset by losses as a lender. However, there might be another argument: that the banks suppressed Libor during the financial crisis to boost earnings or make their finances appear healthier.

The New York-based appeals court remanded the case so that the lower court could reach the second component of standing for asserting an antitrust injury – whether the bondholders are efficient enforcers of antitrust law; in other words, the lower court could dismiss the case again, for new reasons.

Greece’s parliament has approved a raft of fresh taxes and austerity measures needed to unlock further rescue loans, as the country’s most influential creditors – Germany and the IMF – remain deadlocked over debt relief. “Greeks have already paid a lot, but this is probably the first time that the possibility of these sacrifices being the last is so evident,” Prime Minister Alexis Tsipras told lawmakers. Athens hopes the measures will bolster sentiment ahead of tomorrow’s key Eurozone finance ministers meeting.

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services. The federal lawsuit names Puerto Rico’s Governor and Treasury Secretary as well as an unidentified bank receiver. It argues that amendments give preferential treatment to local creditors at the expense of others in violation of American and Puerto Rican law.

The U.S. will fully lift the decades long ban on sales of lethal arms to Vietnam. Speaking in Hanoi, President Obama said lifting the arms embargo would remove one of the last vestiges of the Cold War, it also opens up non-military markets. Vietnam’s VietJet has agreed to order 100 Boeing 737 MAX 200 airplanes, in a deal worth $11.3 billion based on list prices. Delivery of the planes will run for four years beginning in 2019, and will make the airline one of the fastest growing low-cost carriers in the region.

More than 38 million Americans—the most since 2005—are expected to travel during this year’s Memorial Day holiday period, May 26 through Monday, May 30 – and about 90% are expected to drive.  AAA reports gasoline prices are the lowest they’ve been this time of year since 2005. The national average price is $2.26 for a gallon of gasoline; that’s up significantly from the $1.70 a gallon that regular grade gas hit in February but down 40-cents from the average price last Memorial Day. Prices are expected to inch higher over the next few days, heading into the holiday. Meanwhile, truckers will pay about 50-cents per gallon less for diesel versus last year.

Financial Review

Lonesome Tom and Tom Alone

Sinclair Noe — January 27, 2016

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

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DOW – 222 = 15,944
SPX – 20 = 1882
NAS – 99 = 4468
10 Y + .01 = 2.00%
OIL + .71 = 32.16
GOLD + 5.00 = 1125.70

Stocks started the session down, a little over 150 points, then rallied and turned positive, then the Fed released its policy statement to wrap up its two-day FOMC meeting, and stocks fell again; 350 points from peak to trough, even though there was no surprise in the statement.

The Federal Reserve statement had a few changes from the last statement. First, there was no change in interest rates – as expected. The Fed says it expects the economy will continue to warrant only gradual rate increases – as expected. They will closely monitor global economic and financial developments – a soft backpedal from December, when they said risks were balanced. Not a big surprise.

Inflation is expected to remain low because oil prices are down, but that won’t last forever – yeah, yeah. The strong dollar is a bit of a drag. Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year – an acknowledgement that economic growth slowed, well that’s different.

Their confidence in the economy has eroded since December. Not exactly. The Fed also noted the strength of some economic measuring sticks, including continued job growth, more spending by businesses and consumers, and the revival of the housing market.

All in all, the Fed statement was expected. So why did the market selloff? Well, they didn’t rule out another rate hike at the March 16 FOMC meeting; they didn’t commit to a hike either. So, go figure; and while you figure, sell something.

Purchases of new U.S. homes surged in December to the highest level in 10 months, closing out the best year for housing since 2007. Sales jumped 10.8 percent last month, the most since August 2014, to a 544,000 annualized pace. For all of 2015, purchases of new properties climbed 14.6 percent to 501,000. The warmest December on record probably played a big role in the stronger-than-forecast sales gain during the month, but the most basic reason is that demand is outpacing supply.

Puerto Rico plans to meet with creditors on Friday to discuss a possible restructuring of $70 billion of municipal bonds. The talks come as the island struggles to make progress on two tracks – striking deals with bondholders and persuading U.S. legislators that it merits relief from the federal government. Further complicating the process, the territory has more than a dozen types of bonds and is negotiating simultaneously with several creditor groups that have competing claims.

Facebook reported another quarter of soaring revenue. Sales rose 52 percent from a year earlier to $5.84 billion on the strength of its mobile advertising business and an increase in daily users. Profit rose to $1.56 billion, more than doubling from a year earlier. The numbers far surpassed Wall Street’s expectations of $1.2 billion in profit on $5.37 billion in revenue. Facebook reported after the close, and shares jumped in after-hours trade.

Boeing says profit this year will miss analyst estimates by more than a dollar a share as it delivers fewer jetliners. Adjusted profit will probably be $8.15 to $8.35 a share this year. That compared with an average prediction of $9.42.

PayPal’s fourth-quarter sales beat estimates, as it won new vendors and made mobile purchases easier, reassuring investors concerned about the company’s prospects as an independent company. Profit, excluding some items, was 36 cents a share (2 cents better than estimates) on revenue of $2.6 billion. After separating from EBay last year, PayPal increased its total payments volume by bringing on new merchants and enticing shoppers with a Buy button that streamlines transactions on smartphones.

Royal Dutch Shell shareholders approved its $50 billion takeover of BG Group today, clearing the last main hurdle to creating the biggest liquefied natural gas trader in the world. The merger could happen as soon as February 15.

Three major U.S. shale oil firms announced big cuts to their 2016 capital spending plans yesterday in a bid to survive $30 a barrel oil prices, with one of them saying prices would need to rise more than 20% just to turn a profit. The cuts from Hess Corp., Continental Resources and Noble Energy ranged from 40% to 66%, marking the second straight year of pullbacks by a trio of businesses normally seen as among the most resilient shale oil producers. The American Petroleum Institute late Tuesday reported that crude supplies climbed by 11.4 million barrels for the week ended Jan. 22.

Since passage of the last major energy law, in 2007, the United States has gone from fears of oil and gas shortages to becoming the world’s leading producer of both fuels. The use of wind and solar power is rapidly accelerating as those sources become cheaper than fossil fuels in some parts of the country. And President Obama’s clean air regulations are reshaping the nation’s power systems, as electric utilities shutter coal-fired power plants and replace them with alternative sources.

But the nation’s energy infrastructure has not kept pace with those changes. And so Congress today started debating a comprehensive energy bill for the first time in more than 8 years. Right now, Congress is just talking and they might not do anything.

Just hours after senators began debating the bill, it came under attack by both liberal and conservative advocacy groups. In a letter to senators, the Sierra Club complained that the bill’s section on energy efficiency in buildings would actually roll back some existing efficiency standards.

Americans for Limited Government, a conservative group, urged lawmakers to reject the bill. In a letter, the group wrote, “There is no excuse for the Senate to move forward with legislation that continues the practice of picking energy winners and losers, expands federal government authority and fails to turn control of federal lands back to the states.”

California regulators are set to decide how much rooftop solar customers can get for selling their excess clean energy. The California Public Utilities Commission will consider a proposal about continuing a policy called net metering, which requires utilities to pay rooftop solar customers the full retail rate for electricity they put onto the grid.

The solar industry has been largely supportive of the proposed measure while the state’s investor-owned utilities have called it unfair and say it means people who don’t have solar systems are subsidizing those who do, so they want to pay less. Seems the utilities don’t want to pay for electricity. I know the feeling.

Meredith Corp. walked away from its attempt to merge with Media General; that opens the door for Nexstar Broadcasting Group to proceed with its plan to acquire the TV station owner after months of negotiation.  Meredith, the owner of broadcast stations and magazines like Better Homes and Gardens, agreed to a termination package that includes a $60 million breakup fee.

Media General initially agreed to acquire Meredith for $2.4 billion in September. Nexstar later offered to buy Media General, eventually reaching an agreement for about $2.3 billion. But that deal couldn’t move forward until Meredith released Media General from its commitment.

Four years after unveiling its wearable glass headset, Alphabet has shut down several social media accounts linked to its Glass gadget, ending the push to popularize its hi-tech eyeglasses. Google stopped selling Glass to consumers last year, but unveiled a reboot of the device, called GG1, in December.

Meanwhile, Google’s secretive drone delivery project could include a component designed to store packages securely. A patent filed Tuesday in the United States, describes a “delivery receptacle” designed to take packages from an “aerial delivery device” for deposit to a secure location. The receptacle would use infrared beacons to connect with drones in the air and then guide them for delivery.

FedEx announced a new share repurchase program covering up to 25 million shares ($3 billion at current prices). The question is what will they do when the drones take over?

Despite a slight drop in sales, Toyota managed to hang on to the title of world’s best-selling automaker in 2015. The company sold 10.15 million cars last year, while Volkswagen came in second with 9.93 million autos, followed in third place by General Motors with 9.8 million vehicles. Volkswagen had been top in the first half of 2015 before a diesel emissions scandal set back sales.

The Federal Trade Commission has a filed a suit against DeVry, alleging that it deceived students with promises they would find jobs that would pay more than they would earn with degrees from other colleges. The FTC said DeVry claimed that 90% of its graduates' land jobs within six months of completing their studies, and that they earned 15% more on average than others.

A jury in London has acquitted five former brokers of charges that they helped a onetime trader at UBS and Citigroup manipulate an important benchmark interest rate known as Libor. The jury is still considering charges against a sixth broker. Prosecutors had accused the men of helping Tom Hayes, a former trader at UBS and Citigroup, by rigging Libor, which helps determine the borrowing costs for trillions of dollars in loans.

In December, Hayes was sentenced to 11 years. A dozen banks have been fined about $9 billion by global authorities over the last four years in relation to the manipulation of Libor. So, there you have it, Tom Hayes rigged a multi-trillion-dollar marketplace all by his lonesome, resulting in billions of dollars of fines; no executives knew anything or helped this mid-level trader, just Tom. Now move along, move along, nothing more to see.

Financial Review

Zilch COLA

Sinclair Noe — October 15, 2015

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

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DOW + 217 = 17,141
SPX + 29 = 2023
NAS + 87 = 4870
10 YR YLD + .04 = 2.20%
OIL + .28 = 46.92
GOLD – .90 = 1184.40
SILV un = 16.22

The consumer price index, or prices at the retail level, declined by a seasonally adjusted 0.2% in September. Over the past 12 months inflation at the consumer level has shown zero increase. Inflation has fallen sharply over the past year mainly because of lower gasoline prices. The cost of gasoline fell 9% in September.

The cost of food, however, rose 0.4% owing largely to higher prices for dairy, fruits and vegetables. Stripping out food and energy, the core CPI rose 0.2%. Core prices are up 1.9% over the past 12 months. Separately, the Energy Information Administration reports crude inventories rose by 7.6 million barrels in the last week, compared with analysts’ expectations for an increase of 2.8 million barrels.

Americans who collect Social Security won’t get an increase in their monthly checks in 2016. Annual increases in Social Security are made every year based on changes in a component of the consumer price index known as CPI-W. That index fell 0.4% in the period used by the government to calculate the annual increase in cost-of-living adjustments.

The CPI-W looks at prices for Urban Wage Earners and Clerical Workers; this represents about 29% of the population. CPI-U is the price index for all urban consumers; this represents about 88% of the population. There is another measure of inflation called the CPI-E, which is a subset of the urban population using households where the reference person or spouse is 62 years of age or older.

In other words, the CPI-E measures prices for the demographic group that relies on Social Security. For the CPI-E, housing and medical care represents a bigger expense, and these are areas where prices have been increasing. And while the CPI-W dropped 0.4% over the past 12 months, the CPI-E increased 0.6%.

The difference would mean an average of a little more than $500 a year in Social Security benefits. Instead, there will be no increase. Nothing. Zip. Nada. Zilch.

Initial jobless claims in the week ending Oct. 10, declined by 7,000 to a seasonally adjusted 255,000; that’s the lowest level since 1973. In the week ended Oct. 3, continuing jobless claims sank by 50,000 to 2.16 million to mark the lowest level in 15 years.

The U.S. budget deficit narrowed to $439 billion in fiscal 2015, that’s the lowest since 2007, in both dollar terms and as a percentage of gross domestic product. The deficit fell to 2.5% of GDP. Treasury Secretary Jack Lew has moved up the deadline for Congress to raise the nation’s debt limit. Lew told congressional leaders in a letter today that the Treasury Department would exhaust special accounting measures no later than November 3, two days earlier than he had previously estimated. If Congress fails to raise the nation’s debt ceiling by that date, the US could risk a first-ever default on its obligations.

Meanwhile, the pile of Treasury bills sold at an interest rate of zero since the financial crisis topped $1T this summer and multiplied this week through an auction of three-month bills on Tuesday and one-month bills on Wednesday. On its surface, it makes no sense for investors to lend their cash for free. But with rates stuck near zero and supply limited by the U.S. debt ceiling, investors who need a place to park their cash have few other options.

Officials in the Treasury Department and Puerto Rico are discussing the issuance of a “superbond” that would help restructure the commonwealth’s $72 billion of debt. Under the plan, the Treasury or designated third party would administer an account holding at least some of the island’s tax collections, and funds in that account would be used to pay holders of the superbond. Puerto Rico has warned that it is likely to exhaust its remaining cash in November, and a debt payment of almost $300 million is due on Dec. 1.

The first U.S. criminal trial over Libor manipulation got underway in Manhattan yesterday, with former London-based traders Anthony Allen and Anthony Conti accused of conspiring to submit fraudulent rate reports to help colleagues profit on trades. The NY trial follows one this summer in London, where Tom Hayes, a former UBS and Citigroup trader, was convicted of conspiring with others to manipulate Libor. Hayes was sentenced to 14 years in prison, but is appealing.

Valeant Pharmaceuticals, which has come under fire for aggressively increasing the prices of its drugs, has received two federal subpoenas related to its pricing, distribution and patient support practices. Pricing practices in the pharmaceutical industry, from Valeant and others, have been under pressure over the past several weeks after Martin Shkreli, the 32-year-old CEO of the startup Turing Pharmaceuticals, made headlines by raising the price of a drug his firm purchased by more than 5,000%. Following that business model, Valeant has increased the price of 56 of the drugs in its portfolio an average of 66 percent, highlighted by their recent acquisition, Zegerid, which they promptly raised 550 percent.

Earnings reporting season continues. Citigroup, the No.3 U.S. bank by assets, reported a 51 percent jump in quarterly profit as lower costs more than made up for a fall in revenue amid increased market volatility. Citi’s legal and related costs dropped to $376 million in the third quarter from $1.6 billion a year earlier. Net profit rose 35.7 percent to $4.16 billion, or $1.31 per share, beating the average analyst estimate of $1.28 per share.

Goldman Sachs profit plunged for the second straight quarter as bond trading revenue fell by a third. Net income applicable to common shareholders fell 38 percent – to $1.33 billion, or $2.90 per share, from $2.14 billion, or $4.57 per share, a year earlier. Goldman missed estimates on both its top and bottom line.

Charles Schwab reports third-quarter profit jumped 17 percent on higher trading commissions and interest revenue. Net income totaled $376 million, or 28 cents a share, a penny higher than estimates.

UnitedHealth Group, the largest U.S. health insurer, reported a better-than-expected profit in the third quarter. Profit came in at $1.60 billion, or $1.65 per share, a penny better than estimates.

HCA Holdings, the country’s largest for-profit hospital operator said its third-quarter profit was likely to miss estimates.

According to FactSet, S&P 500 company earnings are expected to drop by 5.1%, that’s down slightly from 5.5% forecast about a week ago; still it’s a decline in earnings. And if third quarter earnings are negative it would mark the second consecutive quarter of negative earnings. Two negative quarters is the generally accepted, though not quite accurate, definition of a recession; but we’re talking about earnings, not the economy; there is a difference. Declining corporate earnings can lead to an economic recession; it has happened before, but it is not inevitable. Strip out the energy sector and S&P profits are holding up fairly well.

Yesterday Walmart took a 10% hit to share price; today they lost another 2%. The news behind the sell-off was that they would be spending more, meaning a hit to earnings, and they didn’t expect earnings to grow until 2019. The investments for Walmart include paying their workers just a bit more in the hopes that customer service can improve from surly apathy to something approaching ambivalent caring; plus some way to actually reduce turnover. Investing in wages and training is actually considered an ordinary expense and not capital investment, and that means no depreciation and so the hit to earnings is immediate, even if there is a longer-term payoff.

Walmart also announced a big new push in e-commerce, where it is currently being crushed by Amazon; this would require more warehouses and also using existing stores to serve as fulfillment centers. Also, cutting back neighborhood store and super-store construction plans. The biggest price tag comes in the form of $20 billion in stock buybacks. And since Walmart has just lost more than $20 billion in market cap in the last 2 days, you might be right to have concerns about the efficacy of this financial engineering. And if Walmart can’t make buybacks work, you have to wonder if this is a financial engineering scheme that has run its course. Time will tell. Meanwhile, look for Walmart to get back to its roots which is clobbering the competition on price – just in time for the holiday shopping season.

Volkswagen roundup: Germany’s automotive watchdog, the Federal Motor Transport Authority, is forcing the automaker to recall 2.4 million vehicles after rejecting a VW proposal under which diesel car owners could voluntarily bring them in for fixes. VW says it will now recall 8.5 million cars in Europe. Meanwhile, the Guardian reports another four car makers have joined the list of those whose diesel cars emit more pollution on the road than in regulatory tests: Mercedes-Benz, Honda, Mazda and Mitsubishi vehicles were all found to perform differently on the road than in test conditions in European tests.

Financial Review

Cleaning Up

Sinclair Noe — August 3, 2015

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

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DOW – 91 = 17,598
SPX – 5 = 2098
NAS – 12 = 5115
10 YR YLD – .05 = 2.15%
OIL – 1.95 = 45.17
GOLD – 9.10 = 1087.10
SILV – .30 = 14.59

This is going to be an extremely busy week. We still have a third of S&P 500 companies to report earnings. There’s also going to be a plethora of economic activity culminating in the Friday jobs report for July. Oil prices hit a six month low. It’s not just oil. Commodities prices across the board are falling thanks to slowing global demand and a rising dollar. All of this makes it very unlikely we’ll see a big pickup in inflation any time soon.

The Athens Stock Exchange reopened today and it was ugly. The ASE Stock Index dropped 23% after being closed for five weeks, with banking shares down by as much as 30%. The index managed to recover from session lows but still closed down 16%. While local traders are able to buy stocks, bonds, derivatives and warrants under certain conditions, international investors don’t face any restrictions, as long as they were active in the markets before they were shuttered.

The selloff shows the scale of the crisis still facing Prime Minister Alexis Tsipras as he negotiates a third bailout with creditors after six months that have put unprecedented strain on the Greek economy and its financial system.

As expected, Puerto Rico missed a $58 million debt payment due over the weekend. Because the deadline was Saturday, the PFC technically has until the end of Tuesday to make its missed payment, but it appears unlikely to make a difference. Puerto Rico does not have the money to pay. Puerto Rico faces a grim future. It’s operating with a $703 million budget deficit for the fiscal year that began last month. And the commonwealth faces $635 million in debt-service payments this month. Many investors are already focusing on broader questions around how Puerto Rico will restructure its $72 billion in debt, what kind of a “haircut” bondholders will need to take and what reverberations will spread to the U.S. municipal bond market.

A default is imminent and it will be the largest government debt restructuring in US history, and maybe the messiest. Puerto Rico’s indebted central government, municipalities and public corporations cannot file for bankruptcy protection without the OK of the U.S. Congress, which leaves them at the mercy of what could be hundreds of lawsuits filed by creditors. Without a referee in the form of a bankruptcy court, it’s going to be a mess.

Over the years, mutual-fund managers have had an incentive to buy Puerto Rican bonds, because their returns are tax-free. And many well-known mutual funds have significant exposure to Puerto Rico, including Oppenheimer, Franklin, Eaton Vance, and others. So on one side you have Main Street America, Mom and Pop investors who may or may not have known what they were buying in those mutual funds. On the other side you have Puerto Rican citizens, facing severe cutbacks and added costs for everything from driving on their roads to healthcare. Meanwhile, hedge funds have been swooping in like vultures on a carcass, buying bonds at steep discounts and hoping to force repayment through the courts. The hedge funds issued a report demanding huge budget cuts and privatization; even that is unlikely to get the island out of debt.

Chinese regulators restricted short selling of stocks, freezing out day traders, in their latest step aimed at stabilizing the world’s second-largest equity market. Investors who borrow shares must now wait one day to pay back the loans. This prevents investors from selling and buying back stocks on the same day.  Under the old T+0 rule, you could go short in the morning and cover your shorts before market close the same day and lock in your profit, if your bet is right. Now with T+1, you can’t cover your short position in the same day, and have to wait till next day at the earliest. That makes shorting a much more risky venture.

Pacific Rim trade officials failed to clinch a final deal for the Trans-Pacific Partnership on Friday following several days of intense talks in Hawaii. Key sticking points: Auto trade between Japan and North America, New Zealand’s dairy exports and monopoly periods for next-generation drugs. The deadlock may also sink U.S.-led plans, which aimed to finalize the trade deal by the end of 2015.

President Barack Obama has officially revealed a finalized version of a plan to reduce the amount of carbon dioxide emissions that power plants across the country can emit. Obama called the plan “the single most important step that America has ever taken in the fight against climate change.” Adding that “there is such a thing as being too late on climate change.”

While US power plants have limits on other air-born pollutants — like nitrogen and sulfur oxides that cause acid rain — there haven’t been limits, until now, on the levels of carbon dioxide emissions that power plants can emit. Power plants that burn fossil fuels, both coal and natural gas, emit carbon dioxide and in turn these greenhouse gases contribute significantly to the warming of the planet.

The Obama administration has turned to the Environmental Protection Agency to use the Clean Air Act to regulate carbon dioxide emissions from the power industry through the Clean Power Plan. The White House has used the EPA because politically a national carbon emissions reduction plan wouldn’t be able to pass through Congress.

States will be allowed to create their own plans to meet the requirements and will have to submit initial versions of their plans by 2016 and final versions by 2018. The most aggressive of the regulations requires that by 2030, the nation’s existing power plants must cut emissions by 32 percent from 2005 levels, which is an increase from the 30 percent target proposed in the draft regulation. Electric power generation from coal and natural gas plants is responsible for 40% of U.S. carbon emissions.

Clearly, the clean power industries, including solar, wind and even smaller sectors like geothermal, will benefit greatly from the plan. States that opt to meet their requirements by investing in clean power projects could be a major boon to these technologies. Solar and wind project developers include SunPower, First Solar, NRG Energy, and SunEdison. The natural gas industry will also be a major beneficiary of the plan. The coal industry, of course, is one of the major losers in the plan. One of the leading and most economical ways to reduce carbon emissions from coal plants is to simply shut them down, particularly aging plants. At least one fifth of the coal plants in the U.S. have been closed, or are in the process of closing.

The Obama administration says the plan could lead to “30 percent more renewable energy generation in 2030″ and “create tens of thousands of jobs.” Consumers will collectively be able to save “$155 billion from 2020-2030″ on energy bills, and $85 a year on an individual energy bill by 2030.

The Institute for Supply Management’s manufacturing index fell to 52.7% in July from 53.5% in June. Readings greater than 50 indicate expansion. ISM reported that 11 out of 18 industries reported growth with five reported contractions. The group’s employment measure declined from a month earlier and order backlogs slumped. And for some reason, the data was released just a bit earlier than the scheduled 7:00 AM time.

Spending on U.S. construction projects rose just 0.1% in June, well below forecast. Spending advanced 0.4% for new houses, condos, apartment buildings and other residential properties. Outlays on nonresidential and commercial projects was flat.

Consumer spending edged up 0.2 percent in June, the poorest showing since a similar increase in February; and the government revised the spending gain in May to 0.7% from 0.9%.The largest drop in spending involved big-ticket items such as new cars and trucks, according to the Commerce Department; now a quick note here, we also had a report from the car companies saying auto sales were strong in July – more on that in a moment. Even as spending tapered off, incomes continued to rise steadily. Personal income climbed 0.4% in June for the third straight month.

U.S. auto sales were stronger than expected in July and kept the industry on pace for its best performance since the turn of the century. Auto sales rose 5.3 percent to 1.51 million vehicles, above the 3 percent rise expected by analysts, according to Autodata Corp. The figures translate to an annualized sales rate for July of 17.55 million vehicles and keeps the auto industry on a pace for its best year since 2000. High-margin pickup trucks helped sales of the two market leaders, GM and Ford. GM had record sales of the Colorado pickup. Ford’s F-Series sales alone topped those of all Ford and Lincoln brand sedans.

Alpha Natural Resources has filed for bankruptcy in Virginia. The second-largest US coal company has lost almost all its market value since 2011, when it bought Massey Energy Co. for about $7 billion. The deal made it the biggest U.S. producer of metallurgical coal, used in steelmaking; it also saddled the company with debt, right before prices began their plunge.

Former UBS and Citigroup trader Tom Hayes, the first person to stand trial for manipulating Libor, was found guilty of eight counts of conspiracy to rig the benchmark rate. Hayes has been sentenced to 14 years. Jurors in London found that Hayes conspired with traders and brokers to manipulate the London interbank offered rate to benefit his own trading positions. After initially cooperating and being admitted into a whistle-blower program, Hayes had a change of heart and pleaded not guilty. Throughout the trial Hayes insisted his managers at UBS and Citigroup had known of his attempts to manipulate Libor and at no point told him he was doing anything wrong.  Apparently the defense of “everybody else was doing it, too” is not a particularly strong defense. Now it will be interesting to see if prosecutors will go back and revisit Hayes’ earlier claims that rate rigging was systemic. Having followed the trial, it is hard to imagine Hayes was a mastermind.

Financial Review

Risk Off

Sinclair Noe — July 27, 2015

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

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DOW – 127 = 17,440
SPX – 12 = 2067
NAS – 48 = 5039
10 YR YLD – .04 = 2.23%
OIL – .75 = 47.39
GOLD – 5.00 = 1095.50
SILV – .20 = 14.64

Chinese stocks fell sharply today. The Shanghai Composite fell 8.5% to record its largest one-day drop since June 2007, and the Shenzhen A-shares index lost 7% of its value. Weak manufacturing data revealed that profit at the country’s industrial firms dropped 0.3% in June from a year earlier, but the markets appear to be responding to government attempts to stabilize the country’s volatile stock markets; it seems like the Chinese government’s heavy-handed intervention measures are spooking investors. The fear is that the government will withdraw stimulus measures, and once the support disappears, the market won’t be able to stand on its own. In a way, the investors might be front-running the government; getting out before stimulus dries up.

Commodity prices resumed their downward spiral with the CRB commodities index hitting its lowest levels in six years and oil prices hitting a four-month low. Nine of the 10 major S&P 500 sectors were lower with the energy index leading the decliners. Stocks came off session lows in the close. The S&P 500 dipped below its 200-day moving average of 2,064 and closed a few points above it. The energy sector was the worst performer in the S&P 500 as oil extended losses to trade below $48 a barrel. The Dow Jones industrial average closed at its lowest level since February 2.

Earnings season continues with big oil, social media stocks and pharma companies scheduled to report this week. Second-quarter S&P 500 earnings have been mixed, with 74 percent of companies beating analysts’ profit expectations but just 52 percent surpassing revenue expectations. Adding to the concerns regarding lukewarm earnings, the S&P 500 is relatively expensive, trading at 16.9 times forward 12 months’ earnings, above the 10-year median of 14.7 times. Adding to negative sentiment on growth, the number of new lows on the New York Stock Exchange hit the highest level since last October.

The Federal Reserve FOMC will meet this week to determine monetary policy. With the central bank widely expected to hold policy steady at this week’s meeting, Fed watchers are looking to the statement it issues on Wednesday for clues on when they might hike interest rates. Economists surveyed by Bloomberg put the odds of a September rate increase at about 50 percent.

It looks like Greece is on its way some sort of bailout deal, and they might re-open their stock market as soon as tomorrow; it has been closed since June 29. When the Athens exchange reopens, it might be hard to find many buyers. Meanwhile, the International Monetary Fund is telling the European Central Bank that it needs to keep printing money under their QE program to “ensure that banks continue to have access to ample liquidity and maintain orderly conditions in sovereign debt markets”. All this in light of stories that Greece’s former finance minister Yanis Varoufakis had set up an alternative monetary system, sort of based on the drachma, just in case negotiations did not work out.

There was a moment where Greece really did look like it was about to face an imminent default, and when negotiations progressed, anyone who hedged in anticipation suddenly found those hedges aggressively hurting their portfolios. The reality is that any sort of hedging or risk management has been punished in the last two years, with the early July action perhaps the most severe in terms of speed. Stocks begin falling AFTER Greece, which seems like bad timing for risk off, and it might serve as a reminder that we’re not out of the woods just yet.

Following five long years of negotiations, the Trans-Pacific Partnership will go down to the wire this week, as Pacific Rim officials meet in Hawaii for talks that could make or break the deal. The toughest issues have been left until last, including monopoly periods, preferential treatment for state-owned companies and opening protected markets to competition. TPP would cover 40% of the world’s economy, including the U.S., Japan and ten other Pacific nations.

In a rare weekend session, the US Senate voted on Sunday to advance legislation that would resurrect the Export-Import Bank, whose charter expired on June 30 and was not renewed by Congress. The bipartisan vote allowed supporters to attach a measure reauthorizing the federal credit agency to an unrelated three-year highway and infrastructure bill, which was expected to pass in the Senate early this week. Of course, nothing is ever that simple. And it now looks like the House might not approve the 3 year highway package, opting for a 5-month stop-gap package. The Highway Trust Fund has suffered from 33 short-term fixes since 2009, making it harder for states to launch work on needed large-scale transportation projects. The majority of the money for the fund comes from the federal gas tax of 18.4 cents per gallon, which has remained untouched since the early 1990s.

Is it a debt or deficit problem? Puerto Rico’s bondholders and three former IMF economists have presented a rival recovery plan for the US commonwealth, stating it could move to a surplus by fiscal 2017. The new study argues that the island could avoid a restructuring by eliminating its deficit, but acknowledges that it is cash strapped in the short term and would need some kind of financing to bridge the gap.

Orders for durable goods climbed 3.4% in June, mostly because of strong bookings for passenger airplanes. But overall business investment remained soft and shipments of goods barely rose. Orders minus transportation rose 0.8%. That’s the highest gain since August 2014, but not an especially strong advance. Meanwhile, orders for core capital goods – a reflection of business investment – rose a mild 0.9% in June following two straight declines. Still, core orders are running 3.4% below 2014 levels halfway through the year.

Teva Pharmaceuticals has agreed to buy the generic-drug business of Allergan for about $40.5 billion in cash and stock, ending its effort to acquire rival Mylan. Allergan will receive $33.75B in cash and shares in Teva, giving it a 10% stake in the enlarged company. The acquisition further extends a wave of mergers that has swept over the healthcare industry. Pharmaceutical deals so far this year have topped $180 billion, on pace to beat the $200 billion announced in 2014.

As oil prices slump for a second time this year, the world’s biggest energy groups have shelved $200 billion of spending on new projects in an urgent round of cost-cutting aimed at protecting investors’ dividends. Among companies postponing big production plans while they wait for costs to come down are BP, Royal Dutch Shell, Chevron, Statoil and Woodside Petroleum. Crude prices have now fallen 20% since hitting five-month highs in early May.

General Electric wants to be a “sizable” player in the market for energy storage systems, a sector the company expects to quadruple to $6 billion by 2020. Demand for industrial battery systems has attracted a wide range of companies, including Tesla Motors, which said in April it plans to package batteries for utilities as well as homes and businesses.

Even as stocks struggle, we have some new IPOs ready to hit the market. Planet Fitness filed; they hope to raise about $284 million. Square, the credit card reader for mobile devices is rumored to be going public; no filings yet. Television maker Vizion has filed with the SEC and hopes to raise $172 million in its IPO.

The Apple Watch will be available at more than 100 Best Buy stores in the US starting in August, and more than 300 locations before the holiday season, marking the first time the watch will be sold outside of the Apple retail store.

More M&A is expected in the financial-related media industry. Pearson has moved closer to an exit from business publishing after it announced plans to dispose of its stake in The Economist, just days after the sale of The Financial Times.

McGraw Hill says it has reached a deal to buy SNL Financial from private-equity firm New Mountain Capital for $2.2 billion. SNL offers data, analytics and research into a range of areas including real estate, media and banking.

A jury in London has begun deliberations on whether Tom Hayes, the first person to go on trial accused of rigging rates, dishonestly conspired with other bankers and traders to manipulate Libor. Hayes faces 8 counts of conspiracy to defraud, covering a 4 year period when he worked as a trader for UBS and then Citigroup. Hayes initially cooperated with law enforcement, but apparently he couldn’t work a deal, so he went to trial, arguing that he was not personally dishonest because Libor rigging was commonplace in the industry and all his actions were transparent with the full knowledge of his bosses and colleagues.

The NHTSA is close to hitting Fiat Chrysler Automobiles with a record $105 million fine for recalls affecting more than 11 million vehicles. The penalties are tied to legal violations in an array of areas, including misleading regulators, inadequate repairs, and failing to alert car owners in a timely manner. Fiat Chrysler is expected to sign a consent order agreeing to the fines. Fiat Chrysler also said that about 193,000 Ram trucks previously recalled for suspension and steering problems had not been repaired and were therefore eligible for the buyback deal negotiated with the National Highway Traffic Safety Administration. That could put Fiat Chrysler on the hook for nearly $3 billion, if the average buyback price is $15,000 per vehicle. But the net cost could be much lower because the car company has the option to repair the trucks and resell them to recoup costs.