Financial Review

Chips and Salsa Like 1999

Sinclair Noe — April 24, 2015

 

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DOW + 21 = 18,080
SPX + 4 = 2117
NAS + 36 = 5092
10 YR YLD – .03 = 1.92%
OIL – .58 = 57.16
GOLD – 14.40 = 1179.90
SILV – .11 = 15.77
 
Yesterday, the Nasdaq closed at 5,056, finally surpassing its tech-boom peak of 5,048 set in March 2000. It only took a little over 15 years to get back to those levels. Today the party continued. The S&P 500 hit a new record high close, but just barely; topping the March 2 record by a fraction. For the week, the Nasdaq surged 3.2% and the S&P 500 jumped 1.8%. The Dow added 1.4%.

WTI crude oil closed down 58 cents at $57.16 a barrel, retreating from Thursday’s 2015 high of $58.41. It rose for a sixth straight week, its longest such stretch since the first quarter of 2014. This week’s gain was 2.5 percent. After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 33 percent from a low in March.

In the past year, there’s been an inverse relationship between the price of crude oil and the relative performance of retail stocks. Also, most retailers aren’t hurt by a stronger dollar; rather, it helps because items imported to the US are cheaper. An almost 60 percent decline in oil between June 2014 and mid-March contributed partly to the rally in retailers’ shares as investors anticipated a boost to consumption that would benefit retailers’ profitability. We haven’t seen a big boost; consumers have tended to hold onto a dollar rather than buy baubles. Americans saved 5.8 percent of their disposable personal income in February, the highest since December 2012.

Businesses aren’t spending either. Orders for durable goods rose a seasonally adjusted 4% in March, but the increase was driven almost entirely by higher demand for autos, commercial jets and military hardware. However, a key measure of business investment fell for the seventh straight month to underscore a slowdown in how much companies are spending. So-called core orders excluding aircraft and military goods fell 0.5%. Shipments of core capital goods, a category used to help determine quarterly economic growth, dropped 0.4% in March. Business just aren’t spending much on equipment.

A new Bank of America Merrill Lynch survey finds that U.S. investors pulled $79 billion out of equities YTD – including net outflows in 9 of the past 10 weeks – despite stock prices continuing to break new record highs. The survey says: “Correction risks will grow in the absence of fresh inflows in coming weeks.”

Just a day after clearing a Senate committee, the new Trade Promotion Authority bill has been approved by the House Ways and Means Committee, giving Congress the ability to vote yes or no on trade agreements, but without the ability to make amendments over the next five years. The bill would ease passage of the Trans-Pacific Partnership, which the Obama administration is currently negotiating with Japan and 10 other nations.

After a lengthy delay, Loretta Lynch was confirmed as the new Attorney General. Eric Holder made a farewell address to staff today; as Holder leaves, he takes with him the Holder Doctrine, maybe. The Holder Doctrine is the idea that the Department of Justice and other regulators would not seek criminal prosecution against the big banks because of the potential collateral damage to the economy; it came to be known as “Too Big to Jail.” Lynch is widely believed to possess a better grasp of financial markets and their inner workings than her predecessor, Eric Holder, which some think could make her an even greater threat to big banks. Don’t expect big changes for several reasons; Lynch will only be in office for a maximum of about 18 months, and in that short time she will have plenty of issues on her plate, including: privacy laws and the seizure of phone records by the NSA, criminal  justice reform and sentencing standards for nonviolent drug offenders, changing marijuana laws across the nation, revisions to the Patriot Act, civil rights voting rules, and the use of excessive force by police – just to name a few. The Holder Doctrine is gone but don’t expect anything to change.

Deutsche Bank’s supervisory board gathered today to review a sweeping restructuring plan to cut back investment banking operations. Another proposal calls for Deutsche to exit retail banking entirely, to become a pure investment and commercial bank. A few weeks ago, Deutsche was saying they wanted to be a mega-bank like JPMorgan, now they want to scale back and be more like Goldman Sachs. This follows yesterday’s $2.5 billion fine for the bank’s role in rigging Libor benchmark interest rates. The bank also agreed to accept a criminal guilty plea for the British subsidiary at the center of the case, which is a way of insulating a guilty plea away from the parent company. While the deals require Deutsche Bank to dismiss certain employees, no one at the bank has been criminally charged. The deals will not end the bank’s legal problems. It is also ensnared in the foreign exchange investigation. And it is suspected of violating United States sanctions against countries like Iran.

Greece appeared to offer concessions on some key reforms on Friday, ahead of the Eurogroup meeting in Riga today, but it wasn’t enough to appease the Eurozone finance ministers, who are now demanding a list of reforms before they will consider releasing further funds on behalf of Greece. The government in Athens has come up with several reform pledges but it is not enough for the finance ministers, and the mood at the meetings turned ugly today; Greek Finance Minister Yanis Varoufakis described the meeting as “intense.” Mario Drgahi, president of the European Central Bank, said “Time is running out.” Maybe, but the cost of no solution would be enormous, not just for Greece but the entire Eurozone. And that has been the Greek government’s threat; the only problem is that the Eurozone economies have been recovering, all except Greece.
 
Comcast has dropped its planned acquisition of Time Warner Cable. The news comes after FCC staff recommended a hearing on the deal and a week after another report claimed DOJ antitrust lawyers are leaning against it. Regulators applauded the deal’s demise. Attorney General Eric Holder said the decision was “the best outcome for American consumers,” and Federal Communications Commission Chairman Tom Wheeler called it “in the best interests of consumers.”

Already, Charter Communications has reached out to Time Warner about a possible merger. I don’t see how that would be much better. The FCC appears to be taking their public interest role a bit more seriously of late, and if they had problems with the consequences for consumers of a Comcast-Time Warner merger, a Charter-Time Warner merger could yield the same issues.

Samsung ramped up Galaxy S6 production. Higher-than-expected demand for the company’s new curved-screen S6 Edge prompted it to open a third screen factory sooner than planned, boosting production to 5 million per month from 2 million previously. Meanwhile, Samsung is hinting at a new design for its smartwatch, the same day the Apple Watch becomes available.

The Apple Watch hit the market with a low-key launch. A few high-end fashion boutiques around the world are stocking the watch, though supply is severely limited. But Apple’s own retail stores aren’t yet selling the smartwatch, and most online pre-orders have not yet arrived.

American Airlines posted a record profit in the first quarter of $932 million or $1.30 per share. Passenger revenue per available seat mile is expected to decline 4% to 6% in the second quarter when compared to that period in 2014 due to a variety of factors, including increased competition, and the impact of a strong dollar versus weaker foreign currencies. American Airlines will put off delivery of five Boeing 787 Dreamliners that had been due to arrive next year, a step to curb growth in its long-haul fleet and maintain pricing power.

Biogen reported profits were up 71% for the quarter, but they missed analysts’ estimates.

Yesterday, Amazon, Microsoft, Starbucks, and Google reported earnings and today…
Amazon shares jumped nearly 15% Friday, hitting $445.36 by mid afternoon. That gain made CEO Jeff Bezos just over $4.8 billion, moving him to ninth place on Forbes’ realtime list of the world’s billionaires. He was #15 at the beginning of the year. Just a reminder that Amazon reported a loss yesterday.

Microsoft was up 10.4% at 47.87. It turns out that Amazon and Microsoft are neck and neck in revenue from the cloud. Google climbed almost 18% today. Investors have been looking for Google, Microsoft and Amazon to show promise outside their bread-and-butter businesses. Microsoft cannot solely rely on PC sales to drive its profits, Amazon has very low profit margins on the products it sells and Google is heavily exposed to desktop computer advertising while the world is shifting to mobile. Yesterday’s reports gave us some evidence that these tech companies’ strategies might be working.

The first couple of weeks of earnings brought reports from the banks and the tech companies; we knew those would likely be the strongest sectors and they were. The energy stocks will likely be bad and those reports will come next week.

We’re only about halfway through earnings reporting season. So far, 135 companies in the Standard and Poor’s 500 have reported their earnings, and of those, 100 have beat analysts’ expectations. And while companies have exceeded expectations on profit, only 41% have beat on revenue.

First up next week: Apple, the largest stock in the land, reports after the market closes Monday. Analysts expect $2.14 per share in first-quarter earnings. Tuesday, Twitter will check in, and will use more than 140 characters to do so. Wednesday, MasterCard will show what’s in its wallet.  Thursday, ExxonMobil reports, followed by Chevron on Friday; and that is when things will get scary; we know the oil companies faced big challenges in the quarter, we just don’t know how ugly it might be.

Financial Review

A Question for the New AG

Sinclair Noe — February 10, 2015        

              

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

DOW + 139 = 17,868
SPX + 21 = 2068
NAS + 61 = 4787
10 YR YLD + .04 = 1.99%
OIL – 2.10 = 50.76
GOLD – 5.00 = 1234.70
SILV – .06 = 17.01

Small-business sentiment slipped in January on a decline in optimism over sales growth and business conditions, according to a gauge released Tuesday. The National Federation of Independent Business said its small-business optimism index fell 2.5 points to 97.9, with seven out of 10 components declining.

Good news if you are looking for a job. The Labor Department said job openings surged to 5.03 million in December, the highest level since January 2001, from 4.85 million in November. Hiring jumped to a seven-year high and the number of job seekers for every open position, a key measure of labor market slack, fell to 1.73 in December, the lowest since 2007. The bad news is that there are still about 9 million people looking for a job.

Wholesale inventories barely rose in December, up just 0.1%. Together with data last week showing a 0.3% fall in manufacturing inventories in December, today’s report suggests the boost to GDP growth from restocking in the fourth quarter was probably not as large as initially thought.

Halliburton is cutting as many as 6,500 jobs. The oil company, facing up to the reality of crude oil prices, announced that it’s slashing between 6.5% and 8.5% of its global workforce. The cuts are doing little to assuage investors; Halliburton’s stock is down 3% today.

In the past 2 weeks oil prices bounced 20% from lows around $44 a barrel. The recent surge in oil prices is just a “head fake” and West Texas crude as cheap as $20 a barrel may soon be on the way, according to a new research report from Citigroup’s global head of commodity research. The prediction is that oil will drop to $20, then bounce back to $75, all this year. It’s the stuff of a commodity trader’s dream. Wall Street lusts for it. Hedge funds can hardly contain themselves at the mere thought of it. So whose book is Citi talking up?

If the price of oil stays in the current range, liquidity for much of the oil patch will run out in 2016, and that’s when waves of defaults will begin to cascade through bank and private-equity balance sheets. And beyond that, investment banks stand to lose a lot: in 2014, Citi earned $492 million in energy-related investment-banking revenues – more than any other bank; More even than JP Morgan. So Wall Street must have a V-shaped recovery in place by 2016, or else.

Tomorrow we will get a better idea of the direction of oil prices, at least for the short-term, when the Department of Energy releases its weekly report on inventories. US commercial crude-oil supplies stood at a record high of 413.1 million barrels in the week ended Jan. 30. Analysts are estimating that inventories will hit a new record high, up 4 million barrels for the week. Oil dropped, but closed above $50.

So, what are Americans doing with some of the money they’re saving from cheap gas? They are buying more fuel.  Demand is up. At the same time, faster economic growth and a big influx in hiring over the past year means more Americans are now taking part in the daily commute. According to Nicolas Colas chief market strategist of ConvergEx: “We’ve finally discovered where American consumers are spending some of the savings from lower gasoline prices: they are buying more gasoline.” Plunging prices are encouraging Americans to drive more often and buy more trucks. The best-selling vehicle in the US in December was the Ford F-150; SUVs were also popular. Apparently, when gas prices drop, we forget all about conservation.

The squeeze on U.S. farmers is getting worse as low crop prices and rising costs erode incomes that not long ago were the highest ever. Farm income in the U.S., the world’s top agricultural producer and exporter, is poised to drop for a third straight year in 2015. While raising livestock remains profitable, as tight meat supplies keep prices high, growers of corn, soybeans and wheat saw crop and land values fall faster than many of their costs.

Net-cash income from all farm activity will drop 22% to $89 billion, the biggest drop since 1932 and the lowest since 2009, the U.S. Department of Agriculture said in a report today in Washington. Last year’s slump was 12% to $115 billion. Net income, including the value of inventory and non-cash income, was forecast to drop 32% to $73 billion, with expenses at a record $370 billion.

The drought in California continues. We’ve been hearing a lot about extreme weather lately; historic snowfall in Boston, and last weekend saw more than a foot of rain in some parts of northern California. Water is water and anything can make some difference but the rain last weekend was of the tropical variety and it didn’t result in much snow. California meets most of its water needs from the snowpack; as the snow melts in the summer months, it replenishes the reservoirs. For now, the reservoirs remain far below capacity. And the rain in northern California didn’t make it down to southern Cal. Rainfall totals in the south are anemic, and falling further behind. California has two more months in the traditional winter rain season. Trends could flip and several warm tropical storms could barrel into Southern California, evening the score. But for now, residents of the Southland are getting nervous.

Europe is powering ahead with wind. Europe already has quite a lot of wind turbines, and it seems to be the preferred way to generate electricity. Across the 28 countries that make up the European Union, 11,791 megawatts of wind power was connected to the grid in 2014—worth up to €18.7 billion ($21.1 billion)—according to a report by the European Wind Energy Association. New coal added 3,305 megawatts, while new gas capacity totaled 2,338 megawatts—less than half of the wind installed. Germany and the UK accounted for 60% of the new wind installations. The EU could now produce 10.2% of the electricity it needs from wind, up from 8% the year before.

Hoping to defuse a standoff that has set Europe and financial markets on edge, Greek officials intend to propose a detailed compromise plan at an emergency meeting with creditors on Wednesday in Brussels. The plan will include the possibility of tapping part of a bailout loan disbursement of $7.9 billion, which Athens had been saying it would reject. Greece still plans to reject some of the harshest austerity conditions attached to Greece’s bailout loans, but will propose retaining about 70% of the terms. Now, the proposal was just tossed out there and there won’t be a meeting until tomorrow, but already Germany has shot down the idea.

Another big meeting in Europe tomorrow; in Minsk, Belarus, the leaders of Germany, France, Ukraine and Russia are due to meet to try to hammer out a peace agreement. Failure to reach an agreement will lead to further EU economic sanctions against Russia, which were delayed at yesterday’s EU foreign minister’s meeting to allow time for the diplomatic offensive tomorrow. Failure to achieve a negotiated peace might draw the US into the conflict, at least as an arms supplier to Ukraine.

Hopes of an orderly resolution to Puerto Rico’s debt crisis suffered a heavy blow after a court voided the island’s restructuring law, raising fears it may be heading for a longer, messier debt overhaul. A US federal judge ruled that the commonwealth’s so-called Recovery Act, which made some of Puerto Rico’s agencies eligible for court-supervised debt restructuring, violated the US constitution by allowing a state government to modify municipal debt. The decision will likely result in a resolution being dragged out over a longer period of time, having the administrative costs incurred eat into the ultimate recovery for the bondholders. Puerto Rico is expected to appeal the ruling, kicking off lengthy litigation with a hard to predict outcome and possibly delaying for months the matter’s final resolution.

In the final stages of a long-running investigation, the U.S. Department of Justice has recently informed Barclays, JPMorgan, the Royal Bank of Scotland and Citigroup that they must plead guilty to criminal charges that they manipulated the prices of foreign currencies, NYT reports. Last November, regulators fined five major banks a total of $3.4B for failing to stop traders from trying to manipulate the foreign exchange market, following a year-long global investigation.
In a separate probe disclosed today, the NY Department of Financial Services was reported to have sent subpoenas to Goldman Sachs, Credit Suisse, BNP Paribas and Societe General, expanding its investigation of whether the banks’ electronic forex trading platforms allowed them to front-run clients. At issue is a latency period between the time an offer is floated and accepted. The department is already probing Barclays and Deutsche Bank over similar concerns and installed monitors at those banks in recent months.

Reuters reports an unnamed official says HSBC could see its 2012 deferred prosecution deal with US authorities over anti-money laundering reopened as a result of separate, ongoing probes into the bank’s alleged role in manipulating currency rates and helping Americans evade taxes. Obama’s nominee for attorney general, Loretta Lynch negotiated a deal with HSBC two years ago that saw it avoid criminal charges but Lynch says DoJ still has powers to act. In the 2012 settlement HSBC was fined $1.9 billion over money-laundering with Mexican drug cartels, including the notorious Sinaloa Cartel, and breaches of US sanctions; it is the largest money laundering case in history; the fine equals about 5 weeks profits. No individual at HSBC was fined or charged. The harshest punishment appears to be partial deferral of some bonuses.

Lynch has sent a letter to Senator Chuck Grassley of the Senate Judiciary Committee, writing that the 2012 Deferred Prosecution Agreement (DPA) “addresses only the charges filed in the criminal information, which are limited to violations of the Bank Secrecy Act for failures to maintain an adequate anti money-laundering program and for sanctions violations. The DPA explicitly does not provide any protection against prosecution for conduct beyond what was described in the Statement of Facts.”

Lynch is scheduled to replace AG Eric Holder, who essentially avoided prosecuting big banks out of fear that it might create global uncertainty if a bank was criminally prosecuted and lost its charter. I’m not sure how being a bagman for drug cartels and tax cheats promotes global financial stability. Maybe that’s something the new AG can answer.