Financial Review

Drifting Higher

Sinclair Noe — June 7, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW + 37 = 21,173
SPX + 3 = 2433
NAS + 22 = 6297
RUT + 1 = 1396
10 Y + .03 = 2.18%
OIL  – 2.10 = 45.88
GOLD – 6.80 = 1287.80
BITCOIN – 1.57% = 2736.57
ETHEREUM – 2.04% = 258.86

Major stock, bond and currency markets did little more than drift higher ahead of what many are calling Super Thursday. That’s when the U.K. holds a very important general election, the European Central Bank announces its decision on monetary policy, former FBI director James Comey testifies to the Senate about Russian meddling in the U.S. election, and Brazil’s Electoral Court may issue a decision on campaign corruption that could unseat President Michel Temer.

The Senate Intelligence Committee held public hearings today, with Director of National Intelligence Dan Coats and NSA Director Admiral Mike Rogers repeatedly said they would not discuss their private conversations with President Donald Trump.

Coats and Rogers said they did not feel the public setting of the Senate intelligence committee’s hearing was an appropriate venue to discuss their conversations with Trump. Acting FBI Director Andrew McCabe invoked the probe of special counsel Robert Mueller, when McCabe said he wouldn’t comment on issues in the special counsel’s lane.

Fired FBI Director James Comey is scheduled to appear before the committee tomorrow. Today, Comey released his written prepared opening remarks, saying the President had demanded his loyalty, pressed him to drop a probe into ex-national security adviser Michael Flynn and repeatedly pressured him to publicly declare that he was not under investigation.

The document provides a detailed account of Comey’s private meetings with the President, included direct quotes from Trump and revealed the former FBI chief’s discomfort with the President’s behavior.

President Trump took to Twitter early this morning to break the news about his pick for FBI director. The nominee is Christopher Wray, a private attorney specializing in the defense of individuals and corporations in white-collar criminal cases. He represented New Jersey Gov. Chris Christie during the “Bridgegate” investigation.

This afternoon, Trump traveled to Cincinnati to pitch his 10-year, $1 trillion infrastructure outline as part of a week’s worth of events emphasizing progress on the proposal, though it has yet to be fully fleshed out.

Over the past week, Trump has often undercut and confounded his own aides as they try to shift the conversation toward the infrastructure plan, he was tweeting out new attacks on the news media and feuding with his own Justice Department over its defense of his targeted travel ban.

So far, the infrastructure proposal is not much more than an outline, short on details and specifics, other than a plan announced this week to privatize the nation’s air traffic control. The plan, conceived by the commerce secretary, Wilbur Ross, and economic advisor Peter Navarro, calls on the federal government to spend $200 billion in cash and tax credits that would, they say, result in $800 billion in additional private investment.

In congressional testimony this year, the transportation secretary, Elaine Chao, predicted that a more detailed proposal would be released by late May. But last week she would say only that it was “coming soon.”

Russian hacking of the 2016 U.S. election included sophisticated targeting of state officials responsible for voter rolls and voting procedures, per a top-secret U.S. intelligence document that was leaked and published this week, revealing another potential method of attempted interference in the vote.

The month-old National Security Agency document outlined activities including impersonating an election software vendor to send trick emails to more than 100 state election officials. However, there is no evidence that hackers could manipulate votes, or the vote tally.

Analysts at the NSA believed the hackers were working for the Russian military’s General Staff Main Intelligence Directorate, or GRU. The document’s publication by The Intercept received attention because an intelligence contractor, Reality Winner, was charged the same day with leaking it.

According to Bill Gross, who manages the $2 billion Janus Henderson Global Unconstrained Bond Fund, markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking. Speaking at a Bloomberg Investors conference in New York, Gross said, “Instead of buying low and selling high, you’re buying high and crossing your fingers.”

Central bank policies for low and negative interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies. Despite being concerned about high asset prices, Gross said he feels required to stay invested and sees value in some closed-end funds.

Consumer and business bankruptcies are rising again, after declining for years since the financial crisis. That’s not a propitious sign. For bankruptcy filings by businesses from large corporations to tiny sole proprietorships, the dance started in November 2015. At first it was the energy bust. But bankruptcies of energy companies have tapered off with new money surging into the oil & gas sector once again.

Now bankruptcies in the retail sector are steadily worsening, and other sectors too have picked up the slack. So here we go again. Total US business bankruptcies in May rose 4.7% year-over-year to 3,572 filings, according to the American Bankruptcy Institute. That’s up 40% from May 2015 and up 10% from May 2014.

And there’s another concern: Bankruptcy filings are highly seasonal. They peak in tax season – March or April – and then fall off. The decline in April after the peak in March was within that seasonal pattern. Over the past years, filings dropped in May. But not this year. This year, they jumped.

Sears is closing 72 more stores, in addition to the more than 180 closings that had already been announced this year.  The closings will bring Sears’ store count to about 1,200, down from 2,073 five years ago.

OPEC and other oil producing nations have cut back production in hopes of shrinking a global oil glut. Today, the U.S. government reported an unexpected increase in inventories of crude and gasoline. Crude stocks in the United States grew 3.3 million barrels to 513 million barrels, according to the U.S. Energy Information Administration.

Gasoline inventories also unexpectedly rose, imports increased, and exports dropped. The EIA report pegged total product demand at 19.340 million barrels a day. That included a drop of 505,000 barrels a day for gasoline demand and 520,000 barrels a day for distillate demand from a week earlier.

A 1.4 million barrel-per-day petroleum-demand drop is the kind of shift one associates with a catastrophic storm or economic plunge. Even more shocking, the rise for crude inventories came despite a decline in domestic production and the biggest weekly drop in Saudi imports ever.

Oil has traded below $50 for the past couple of weeks amid speculation that rising U.S. output will counter supply curbs by OPEC and its partners, including Russia. U.S. crude production will average more than 10 million barrels a day in 2018, breaking a record almost five decades old.

Low-cost, long-haul air travel has taken off across the Atlantic. Transatlantic routes are among the industry’s most popular and profitable, and budget carriers are trying to grab a slice of that business by boosting capacity on them by 68 percent this summer.

And that means the flying public may see price wars. Like Boston to London, round trip for under $300. Norwegian Air Shuttle and Icelandic rival Wow have grabbed headlines with one-way fares as low as $69 and $55 this summer, although Wow’s flights involve a stop in Reykjavik.

Lufthansa’s Eurowings budget carrier is in its second year of long-haul flying, while Air France is planning to launch a lower-cost long haul brand this fall in a project dubbed Boost. International Airlines Group launched low-cost long-haul brand Level on Thursday with surprisingly strong ticket sales.

Toshiba aims to name a winner for its prized semiconductor business next week. Sources told Reuters the choice has narrowed to one bid from U.S. chipmaker Broadcom and U.S. tech fund Silver Lake and another from Toshiba chip partner Western Digital and Japanese government-related investors.

Toshiba is rushing to find a buyer for the world’s second-largest producer of NAND chips, which it values at $18 billion or more, to cover billions of dollars in cost overruns at its now-bankrupt U.S. nuclear business Westinghouse Electric.

The British pound sterling gained ground today as the UK saw the final day of campaigning ahead of Thursday’s general election. Polls suggest that Theresa May’s Conservative Party hold a lead of around six points over Jeremy Corbyn’s Labour Party, although outliers suggest that lead could be as big as 12 points, or as small as one point.

While a big move in the price of sterling is expected once results start to come out on Thursday evening, investors in Britain’s currency were largely in wait and see mode ahead of the vote. The polls have been notoriously wrong in recent voting.

Yes, there’s a lot going on tomorrow, but don’t forget to keep an eye on Canada. The Bank of Canada will release its semi-annual Financial System Review and investors will be watching for what the central bank says about the nation’s red-hot housing market. Toronto home prices rose almost 30 percent last month from a year earlier.

In Vancouver, the country’s most expensive real estate market, they’ve climbed 58 percent over four years. Meanwhile, household debt is at record levels, surpassing gross domestic product for the first time. Fitch said Wednesday that banks with greater exposure to those two cities are more sensitive to a market correction.

In the last FSR in December, the Bank of Canada listed elevated household indebtedness, housing market imbalances and fixed-income liquidity as the three main risks to the financial system, and the focus should be similar this time.

Financial Review

Happy Day

Sinclair Noe — March 20, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 8 = 20,905
SPX – 4 = 2373
NAS + 0.53 = 5901
RUT – 7 = 1384
10 Y – .03 = 2.47%
OIL – .55 = 48,23
GOLD + 5.10 = 1234.90

The directors of the FBI and NSA appeared before a rare open congressional intelligence committee hearing today.

FBI Director James Comey confirmed the FBI is investigating Russia’s interference in the US election and investigating possible links between the Trump campaign and the Russian government. Comey said the FBI has “no information” to support President Trump’s allegation that Barack Obama wiretapped him.

NSA chief, Admiral Mike Rogers, weighed in as well, saying that he had no knowledge of anyone asking the British or any other ally to wiretap Trump. That seemed to refute another claim made by the White House.

Confirmation hearings for Trump’s Supreme Court nominee kicked off today. Trump nominated Neil Gorsuch, 49, to replace conservative Justice Antonin Scalia, who died in February 2016.

Meanwhile, Wall Street also braced for a contentious House vote on the GOP health care bill slated for Thursday. The bill’s passage is considered a first step toward enacting tax reform, but it has faced criticism from both sides of the aisle.

The Trump administration appealed Friday a temporary restraining order against its revised travel ban policy. The reworked executive order (which halts the issuance of visas to six majority-Muslim countries for 90 days and suspends the refugee resettlement program for 120 days) was set to go into effect on March 16, but federal judges and Hawaii and Maryland blocked it from going forward.

The Justice Department filed an appeal in the Maryland case, which will take that fight to the Fourth Circuit, based in Richmond, Va. Meanwhile, a federal judge in Hawaii declined a request from the Justice Department to narrow the injunction. That ruling clears the way for the Trump administration to appeal the judge’s initial decision to the 9th Circuit Court of Appeals.

Bill Gates met with Donald Trump today.  An agenda wasn’t released, but a statement from the Gates Foundation said it has “a long history of working with officials” on issues like domestic education and global health and development. Gates and Trump also met in December to discuss innovation.

On March 16, the Gates Foundation said that it was “deeply troubled” by the president’s 2018 budget request, released that morning. The proposal included deep cuts to both the EPA and non-military overseas aid. The next day, Gates responded with an article on the Gates Notes blog, “How Foreign Aid Helps Americans.”

The meeting of the Group of 20 in Germany over the weekend featured an apparent win for the US after the communique produced by the talks omitted warnings about protectionism. One thing that was repeated was the pledge to overhaul bank-capital rules, with the statement urging the Basel Committee on Banking Supervision to finalize the Basel III reforms.

Away from the G-20, German Chancellor Angela Merkel joined Japanese Prime Minister Shinzo Abe in calling for a concerted effort to defend free trade.

Nine months after Britain voted to leave the European Union, Prime Minister Theresa May is planning to open divorce proceedings on March 29.  May will trigger Article 50 of the Lisbon Treaty, the EU’s guiding document, which details how a country leaves the bloc. It’s never been activated and is only about 260 words long. It gives the departing country up to two years to negotiate “its future relationship with the Union.” If May has her way, the actual split will occur around April 2019.

Greece missed another deadline for unlocking bailout funds today, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse. Prime Minister Alexis Tsipras had promised the latest bailout’s long delayed review would be completed by March 20, but many see that reaching an agreement even in April is now considered a long shot.

Deutsche Bank will issue 687 million new shares at a 35 percent discount to Friday’s closing price — to raise €8-billion-euros of fresh capital. In its annual report published today the bank said it expected revenue to remain broadly unchanged this year, while revealing that the bonus pool was slashed to €500-million-euros in 2016.

Britain’s Vodafone Group and Idea Cellular agreed to merge their Indian operations in a $23 billion deal. The combined entity would have almost 400 million customers, accounting for 35% of the market share.

Albertsons, the grocery-chain operator backed by Cerberus Capital Management, has held preliminary talks to merge with Sprouts Farmers Market. Bloomberg reports the discussions, which took place in recent weeks, are at an early stage and may not lead to a deal. The talks have involved a plan to take organic grocer Sprouts private and add it to Albertsons’ portfolio, which includes the Safeway store brand.

Unilever is preparing a $7.4 billion sale of some of its food brands, British newspapers reported on Saturday. The British-Dutch company is planning to sell Flora margarine and Stork butter brands. Unilever rebuffed a surprise $143 billion takeover offer from Kraft Heinz last month, saying the bid undervalued the company.

Pressure is growing on Twitter CEO Jack Dorsey to step down, per the Sunday Times, after a report from the University of Southern California and the University of Indiana alleged that up to 48 million of its accounts – equal to 15% of its users – were robots not people (that’s nearly twice the company’s own estimate).

The number of executive departures from Uber is growing. President Jeff Jones is quitting the company, citing “incompatibility with leadership,” while Brian McClendon, a VP responsible for the company’s mapping program, is leaving to return to his home town in Kansas. Uber has been recently plagued by allegations of sexual harassment and the combative behavior of CEO Travis Kalanick.

Bullish bets on West Texas Intermediate crude prices fell by a record amount in the week ending March 14, with wagers on further price falls doubling. Energy lender Arab Petroleum Investment Corp. sees oil prices remaining below $60 a barrel for the rest of the year.

Bank of America Merrill Lynch has published a giant list of asset class returns for the year so far. Here’s a quick rundown. Looking at global asset classes, the Pacific Rim, excluding Japan is up 9.6%, matched by Emerging Market equities, Industrial metals up 7.6%, US equites (7.2%), global equities (up 6.7%) And Euro stocks (up 4.9%).

By country; Russia’s stock market is the laggard this year after being one of the best performers in the world in 2016. India is the leader, year-to-date, up 14.5%, followed by South Korea (up 13.3%) and Brazil (up 12.8%). China and Hong Kong round out the Top Five. Russia is down 9%.

By sector, Biotech is the leader (up 11.9%), followed by information technology (up 11.6%), healthcare (up 9.3%), banks (up 7%), with consumer discretionary and financials both up 6%.

The strongest currencies against the US dollar are the Mexican peso, which took a hit following the US election in November, but has gained 7.8% against the dollar since the start of the year; followed by the South African rand, and the Australian dollar.

Natural gas prices have tumbled amid unseasonably warm weather, which implies weaker demand for heating. The US had its second-warmest February ever on record, per to the National Centers for Environmental Information.

Crude oil is also a big loser, likely to the dismay of the Organization of Petroleum Exporting Countries. The top gainers among commodities include iron ore (up 15.3%), lead (up 12%), aluminum (up 11.1%) and cotton (up 10.5%). Nat gas is down 20% and WTI crude is down 9%.

Or, if you want to keep it simple, Apple hit a record high today, and it is up about 23% from the start of the year. Of course, you still must decide if you want to run with the bulls or buy the dips.

Italy is ranked the healthiest country on Earth in the Bloomberg Global Health Index of 163 countries. A baby born in Italy can expect to live to be an octogenarian.

Even though economic growth in Italy has stagnated for decades, and almost 40 percent of its youngsters are out of jobs and it’s saddled with one of the world’s highest debt loads relative to the size of its economy; Italians are in way better shape than Americans, Canadians and Brits, who all suffer from higher blood pressure and cholesterol and poorer mental health.

Italy also has “an excess of doctors.” Then there is the diet, rich in vegetables and drizzled with extra virgin olive oil. Each country in the index was graded based on variables such as life expectancy, causes of death and health risks ranging from high blood pressure and tobacco use to malnutrition and the availability of clean water.

Iceland, Switzerland, Singapore and Australia rounded out the top five most-healthy countries in the index. The U.S. placed No. 34 with a health grade of 73.05 out of 100. It’s ranking for prevalence of overweight people is 67.3 — tipping the scale as one of the world’s heaviest nations.

Norway is now the world’s happiest country, per the 2017 World Happiness Report. The Central African Republic was the least happy of 155 countries. The report was prepared by the Sustainable Development Solutions Network, an international panel of social scientists convened by the United Nations.

Researchers used a scale of zero to 10, covering six areas: gross domestic product per capita, life expectancy, support from relatives or friends, charitable giving, freedom to make life choices, and perceived levels of government and corporate corruption. Norway and several other Nordic countries dominated the top of the list.

America’s rank on the happiness scale is falling.

Even as the country pulled off an economic turnaround, with increases in income and unemployment falling to historic lows, Americans are becoming less happy. When it comes to happiness, the US ranked 19th among the 34 countries in the Organization for Economic Cooperation & Development in 2016, down from third among 24 countries on a similar measure in 2007.

And today is the first day of Spring. Enjoy.

Financial Review

Dog Day Advance

Sinclair Noe — August 17, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 67 = 17,545
SPX + 10 = 2102
NAS + 43 = 5091
10 YR YLD – .05 = 2.15%
OIL – .62 = 41.88
GOLD + 3.70 = 1118.40
SILV + .07 = 15.42

A reading of New York-area manufacturing conditions fell in August. The Empire State general business conditions index nose-dived to a reading of negative 14.9, from positive 3.9 in July, marking the worst level since April 2009.

The National Association of Home Builders/Wells Fargo housing market index rose 1 point to 61, marking the highest level since Nov. 2005. Any reading above 50 indicates “good” conditions. NAHB says the report is consistent with their forecast for a gradual strengthening of the single-family housing sector in 2015.

Japan’s economy contracted in Q2 as overseas demand for Japanese goods slumped and households spent less, raising the possibility the government will act to support the country’s weak recovery. GDP shrank 1.6% on an annualized basis in the April-June quarter.

The yuan started the week on stable footing after the People’s Bank of China set the currency’s daily reference rate at 6.39 per dollar – in line with Friday’s close. The move signals Beijing is willing to cede more control to market forces, following last week’s record devaluation that saw the currency plunge 3.6%. Shanghai +0.7%. Shenzhen +1%.

Rounding up support for Greece’s fresh aid package, German Chancellor Angela Merkel said she expects the IMF to take part in the new bailout – ahead of Wednesday’s crucial vote on the deal in the Bundestag. Merkel reiterated that a so-called haircut remained out of the question for Germany, but extending debt maturities and tweaking rates remained possibilities.

Hundreds of thousands of Brazilians took to the streets on Sunday calling for the impeachment of President Dilma Rousseff. Demonstrators denounced widespread corruption among the country’s political and business elites and called for the end of more than 12 years of Workers’ Party rule. Barely seven months into her second term, Rousseff’s approval rating has dropped to just 8%.

Oil led commodities lower as Iran said OPEC production may hit a record after sanctions on the country are lifted, and as U.S. drilling activity sustained gains. Hedge funds resumed their retreat from U.S. oil, cutting bullish positions for the seventh time in eight weeks.

Israel’s cabinet has approved a regulatory framework that will pave the way for development of the hotly discussed Leviathan natural gas field. The plan will allow Texas-based Noble Energy and Israel’s Delek Group to keep ownership of the massive offshore deposit, but will require them to sell off other assets, including stakes in another large field called Tamar. Leviathan, with estimated reserves of 22 trillion cubic feet of gas, is slated to begin production in 2018 or 2019.

KKR’s Samson Resources Corp. plans to file for chapter 11 bankruptcy protection by mid-September after finalizing a restructuring plan with key lenders Friday. The Oklahoma-based oil and gas producer agreed to hand ownership to a group of its lenders in bankruptcy. The private-equity firm led a $7.2 billion leveraged buyout of Samson in 2011, the biggest-ever such deal for an oil and gas producer. The bankruptcy reorganization would wipe out the roughly $4.1 billion in cash KKR and its partners invested in the company.

IndiGo, India’s biggest airline, has firmed up an order to buy as many as 250 Airbus A320neos, handing the European plane maker its largest-ever deal by number of aircraft. The $26.5 billion purchase helps extend Airbus’s lead over arch-rival Boeing for the fast-growing upgraded narrow-body aircraft segment. According to website data, Boeing has secured 2,831 orders for its 737 Max, while Airbus now has over 4,100 orders for the A320neo.

Brookfield Asset Management, Canada’s largest alternative asset manager, led a group that agreed to pay $6.5 billion in cash and stock for Asciano Ltd., the Australian rail and port operator.

Liberty Interactive, which owns home shopping network QVC, said it would acquire Zulily in a deal valued at $2.4 billion. Zulily, a website that hosts “flash” sales of clothing primarily for women and children, counts Chinese eCommerce giant Alibaba Group as one of its shareholders.

Expanding into the seafood industry, Cargill has agreed to acquire EWOS from private-equity firms Altor Equity and Bain Capital for $1.5 billion. EWOS, which is based in Norway, produces more than 1.2 million metric tons of fish feed a year and accounts for one-third of the world’s market for salmon and trout feed. The deal would be Cargill’s first entry into the salmon market, making it a leading supplier to salmon farms as it expands its aquaculture business. It is Cargill’s second deal related to operations serving fish farms in recent months. The deal is expected to close by the end of the year.

Pump and valve maker Pentair agreed to buy fastening products maker Erico Global for $1.8 billion in cash, including debt, weeks after activist investor Nelson Peltz asked the company to bulk up through deals.

Citigroup has agreed to pay $180 million to settle charges by the SEC that the bank concealed problems at two of its now-defunct hedge funds, while taking in additional investments in the months before the financial crisis. Citigroup’s settlement comes more than seven years after the two hedge funds collapsed, saddling investors with billions of dollars in losses. The funds used large amounts of leverage to prop up returns from municipal bonds and other fixed income investments.

The funds were sold to investors by Citigroup’s financial advisers, working for the bank’s former Smith Barney wealth management unit, who told clients that the hedge funds were essentially as safe as traditional bond funds. But in 2007 and early 2008, the fund’s managers failed to inform the thousands of investors in the funds about a severe shortage of liquidity and margin calls from lenders. Fund managers also misled investors into believing that potential losses from the funds would be minimal, but they kept selling the funds and raising additional money from investors up until the very end. Citigroup agreed to pay the $180 million to harmed investors without admitting any wrongdoing.

Richard Fisher retired in March as president of the Dallas Federal Reserve Bank.  Today, Robert Steven Kaplan was announced as the new president and chief executive of the Dallas Fed. Kaplan was the former vice-chairman of Goldman Sachs until 2006.

On Wednesday the Fed will publish minutes from the July FOMC meeting. The Fed published a statement following that meeting, hinting at its first rate increase in almost a decade. Also on Wednesday, the Labor Department will report on prices at the retail level; the consumer price index is not the Fed’s preferred inflation gauge but we will be watching for any signs of inflation.

Remember back in May when the IRS announced a computer breach? Hackers stole information on over 100,000 taxpayers? I know all these hacks are starting to blur together. Well, this one is a lot bigger than first reported; potential victims now total 334,000. The thieves accessed a system called “Get Transcript,” where taxpayers can get tax returns and other filings from previous years. In order to access the information, the thieves cleared a security screen that required knowledge about the taxpayer, including Social Security number, date of birth, tax filing status and street address, the IRS said.

The personal information was presumably stolen from other sources. The IRS believes the thieves were accessing the IRS website to get even more information about the taxpayers, which could help them claim fraudulent tax refunds in the future. The IRS will begin mailing letters in the next few days to taxpayers where there were instances of possible or potential access to taxpayer account information.

Sprint announced that it would abandon two-year contracts, joining T-Mobile and Verizon who have made similar moves.

America Movil is removing Mexico-U.S. roaming charges for 40M Mexican prepay clients, after AT&T bought two domestic wireless operators looking to steal market share on its rival’s home turf. Carlos Slim is also under additional pressure. America Movil, which is facing a regulatory crackdown in Mexico, must lower its 70% mobile market share under new antitrust rules.

While it has been long known that American telecommunications companies worked closely with the NSA, newly disclosed documents show that a relationship with AT&T has been especially productive. The New York Times reports AT&T gave the NSA access to billions of emails that have flowed across its networks, some of it classified, and permitted the wiretapping of all Internet communications at United Nations headquarters, among other activities.

The NSA’s top-secret budget in 2013 for the AT&T partnership was more than twice that of the next-largest such program. The company installed surveillance equipment in at least 17 of its Internet hubs on American soil, far more than its similarly sized competitor, Verizon.

Financial Review

Assume They Are Still Listening

Sinclair Noe — May 7, 2015

 

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

Subscribe: iTunes | RSS

DOW + 82 = 17,924
SPX + 7 = 2088
NAS + 25 = 4945
10 YR YLD – .06 = 2.18%
OIL – 1.95 = 58.98
GOLD – 7.00 = 1185.20
SILV – .19 = 16.40

Britons voted today in one of the tightest elections in decades. Final opinion polls showed Prime Minister David Cameron’s Conservatives and Ed Miliband’s opposition Labour Party almost in a dead heat, indicating neither will win enough seats for an outright majority in the 650-seat parliament. Exit polls indicate a victory for the Conservatives but not enough for a majority, so talks will begin tomorrow with smaller parties to strike deals.

And those smaller parties could have a big influence on major decisions. The U.K. Independence Party is on track to become the country’s third largest political party. Its key goal is putting Britain’s EU membership up for an in-or-out referendum, sooner rather than later. UKIP is expected to prop up a Conservative government in exchange for an EU vote. For the financial markets, this is the No. 1 worry.  The Scottish National Party looks set for big gains in Scotland, which it wants to see split off from the rest of the U.K.

So, in addition to worrying about a possible Greek exit from the Euro-union, we now are supposed to be concerned with a British exit, and the whole thing is putting pressure on German bunds, or bonds. And you’re thinking “So what? I don’t own any German bunds.” You don’t have to own German bonds to be affected by that market. The bund is a benchmark and the recent selloff in Euro-debt affects global markets, including the US, and it affects everything from the strength or weakness of the dollar, to corporate profits, to the interest rate on your mortgage to the price of gasoline at the pump.

Yesterday, Fed Chairwoman Janet Yellen suggested stock prices might be too high. Many investors agree that the U.S. stock market is trading at stretched levels. Quarterly corporate earnings were better than expected, but those expectations were low in the first place. Investors are paying about $17 for every dollar of earnings in the Standard & Poor’s 500-stock index, not excessively high but still above the $15 that investors have historically paid for similar results. That doesn’t mean stocks can’t go higher. Mrs. Yellen doesn’t know, you don’t know, I don’t know. The market can stay irrational longer than you can stay solvent; that much we do know.

“It’s very hard to know what markets reflect at any given point in time. It’s really hard to know, except in retrospect when market prices, valuations are defying gravity,” so says Timothy Geithner, the former Treasury Secretary. Geithner thinks the US economy is more stable and resilient than before the 2008 financial crisis; even so he expects that a financial crisis will happen again at some point but the structural reforms could also lead to an extended period of financial stability.

The Federal Reserve is making plans to prevent an abrupt contraction in its balance sheet next year, when some $500 billion in bonds expire. Though it ended a stimulative asset-purchase program last October, the Fed is still buying mortgage and Treasury bonds to replenish its $4.5-trillion portfolio as holdings mature. The central bank has said it will keep reinvesting until some time after it begins raising interest rates later this year. Asked publicly and privately about the longer-term strategy, Fed policymakers say they are in no rush to shrink the portfolio, suggesting they will seek to avoid a “cliff” – a disruptive end to reinvestments that might come if bonds are simply allowed to run off through maturity or prepayment. So, it’s really like QE is never-ending.

The number of people applying for U.S. unemployment benefits rose by 3,000 in the last week to 265,000 – which is near a 15 year low. Continuing jobless claims – people already collecting unemployment checks – declined by 28,000 to 2.23 million to the lowest level since November 2000. Tomorrow morning the Labor Department will report the April Jobs numbers. The guesstimates call for somewhere around 225,000 to 245,000 new jobs added in April, and the unemployment rate to drop to 5.4%. In March, the economy only added 126,000 new jobs, the worst report in more than a year; so it will be important to see a strong rebound; any weakness would suggest a trend of underperformance. We’ll also be watching for trends in wage growth.

The Federal Reserve reports that consumer borrowing increased at a 7.3% pace in March, the largest increase since July. The report looks at outstanding consumer credit, or total debt not including mortgages. Total debt increased by $20.5 billion to $3.36 trillion in March. The latest data follows a pattern similar to last year’s, when consumers started spending again after taking a break following the holiday season and harsh winter weather.  In line with recent trends, car and student loans continued to dwarf credit-card usage in March. Credit card debt rose by a seasonally adjusted $4.4 billion in March, or at a 5.9% annual rate. This is the largest percentage increase since last July. It follows two straight 3.3% declines. Consumers remain reticent to fund consumption with credit and they will probably remain so until the prospects for wage growth improve.

The International Monetary Fund warns the balance of risk in the Asia-Pacific region is tilted toward the downside due to rising debts and a strong U.S. dollar. Asia is still seen as a global growth leader; the region is forecast to have a growth rate of 5.6% in 2015 and 5.5% in 2016, according to the new IMF survey. Positive factors for Asia in the near future include moderating commodity prices, strong labor markets, and solid demand from the U.S. and Europe.

Tesla reported first quarter results and beat on the top and bottom lines.  The company delivered just over 10,000 Model S vehicles in the first quarter and believes it will deliver 55,000 vehicles by year-end. Model X deliveries are expected to begin late in the third quarter. Tesla is fresh from its battery announcement; last week, the company unveiled its stationary battery for homes and small businesses, the Powerwall. CEO Elon Musk called battery demand: “crazy off the hook.”

Whole Foods posted a mixed quarter; earnings beat expectations but revenue fell short.   The company expects comparable same-store sales in the “low-to-mid single digits.” Whole Foods plans to open a sister chain of smaller stores aimed at younger, more cost conscious shoppers, because apparently some shoppers don’t like paying $15 for a watermelon. They’re still trying to come up with a name for the new stores, you know, something other than Whole Paycheck.

Earlier this week we told you that Corinthian Colleges had closed its for-profit college campuses and declared bankruptcy. Add a couple more to the list. Career Education will shut or sell all of its career colleges to focus on its two universities, while Education Management will close 15 of its Art Institute campuses. Career Education and Education Management both said they’ll continue offering instruction for existing students to finish their programs while not accepting new enrollments, a process known as a “teach out.” By shutting down over time, the schools won’t have to cancel student loans, as many Corinthian College students are demanding.

Sotheby’s has wrapped up its first major spring auction of the year. The event brought in a total of $368 million, thanks in part to a $66 million dollar sale of a painting by Van Gogh. The last time this same painting was sold was 2003 when it sold for $12 million. A 452% return in 12 years. Not bad.

A US federal appeals court has ruled that the bulk collection of US telephone records by the National Security Agency is not permitted by laws passed after the 9/11 attacks to increase intelligence collection. The challenge was brought by the American Civil Liberties Union against James Clapper, the director of National Intelligence, along with the heads of the NSA, the FBI, the Department of Justice, and the Department of Defense. (Of the five officials named in the suit when it was filed in January 2014, only Clapper remains in the same role.)

The ACLU was prepared to argue that the government’s dragnet violated the US constitution’s prohibitions on unreasonable searches, but it didn’t have to. A three-judge panel agreed first that the Patriot Act does not allow for the collection of data without a warrant. Specifically, they cited section 215 of the act which permits demands for documents “relevant to an authorized investigation.” However the judges found that the government hasn’t even attempted to identify a particular authorized investigation associated with the collection of bulk metadata of virtually all Americans’ phone calls.

Put another way, the government argues that there is only one enormous “anti-terrorism” investigation, and that any records that might ever be of use in developing any aspect of that investigation are relevant to the overall counterterrorism effort. The government’s approach essentially reads the “authorized investigation” language out of the statute. The United States Court of Appeals for the Second Circuit said that if Congress wanted to permit a bulk phone program, it must say so unambiguously. The ruling arrives just as Section 215 is set to expire on June 1^st, unless lawmakers enact legislation to extend it; now the court says, in essence, that a simple extension would not pass muster.

The judges also cite Edward Snowden, the NSA whistleblower now living in exile in Russia, as the key source of the revelation of this illegal program. Snowden, of course, has not returned to the US for fear of prosecution.

The ruling focuses on the phone-records program, but it might also apply to many of the government’s other mass-surveillance programs. It’s not clear how the government will respond to this decision; Congress could repeal bulk data collection, or at the very least alter the process; the government could appeal to the US Supreme Court. Until such time, just assume they are still listening.

Friday, April 11, 2014 - Corrupt or Incompetent, Take Your Pick

Financial Review with Sinclair Noe

DOW – 143 = 16,026
SPX – 17 = 1815
NAS – 54 = 3999
10 YR YLD - .01 = 2.62%
OIL - .07 = 103.33
GOLD + .30 = 1319.40
SILV - .07 = 20.06

The S&P 500 closed at its lowest level in two months. The gauge slipped 2.7% this week, the biggest loss since 2012. The Dow Industrial are down 2.4% for the week. The Nasdaq Composite Index dropped 1.3% today, capping its biggest two-day retreat since 2011; and down 3.1% for the week; closing at its lowest level in 4 months. The major US indices are all back in the red year to date. Biotechs fell for the 7th week in a row; the worst run since 1998; and now down 21% from recent highs. About 7.4 billion shares changed hands on US exchanges, 5.8% higher than the three-month average.

We are entering a period that has historically been very poor for stocks. The idea is called “Sell in May” or the worst six months. According to the Ned Davis (NDR) database, had you invested $10,000 in the S&P 500 every May 1st starting in 1950 and sold October 31 of the same year, your initial position would only be worth $10,026. Put another way, by investing only from May through October, a $10,000 stake invested in 1950 would have only made $26.

The Labor Department reports the producer price index, gained 0.5% for March. Excluding the volatile categories of food and energy, core PPI prices rose 0.6% after falling 0.2% in February. The University of Michigan/ Thomson Reuters consumer sentiment rose to a preliminary April reading of 82.6, the highest reading since July, from a final March level of 80.

You’ve probably heard about the Heartbleed bug.  Heartbleed is a flaw in OpenSSL, a piece of code intended to create a secure connection between a server and Web browser; for example, between an online shop and customer. The bug allows an attacker to make the server surrender bits of information out of its memory that should not be accessible. What's more, the exploit leaves no trace. The fear is that the bug may expose credit card numbers, passwords, and more.

By some estimates the Heartbleed bug puts two-thirds of all websites at risk. Millions of smartphones and tablets running Google’s Android operating system have the Heartbleed bug. The government has issued a warning to businesses and banks to be on alert for hackers possibly stealing data.

The Federal Financial Institutions Examination Council, made up of representatives from the Federal Reserve Board of Governors, the Consumer Financial Protection Bureau and other regulators, said: “The vulnerability could allow an attacker to potentially access a server’s private cryptographic keys compromising the security of the server and its users. Attackers could potentially impersonate bank services or users, steal login credentials, access sensitive e-mail, or gain access to internal networks.”

And there’s not a lot you, as a consumer, can do until the websites fix the problem on their end. It may take some time. The Heartbleed bug has been found in the hardware connecting homes and businesses to the Internet. Cisco Systems and Juniper Networks said some of their networking products are susceptible to the encryption bug. Security experts say it might help to change passwords on sites you visit, but fixing the network equipment and software means the companies will rely on customers applying patches as they become available. Cisco said it would tell customers when software patches for its affected products are available.

Now for the scary part.

Bloomberg News reports the National Security Agency has known about the Heartbleed bug for 2 years, and rather than report it, or take steps to close it down, the NSA instead regularly used the encryption flaw to gather intelligence. Putting the Heartbleed bug in its arsenal, the NSA was able to obtain passwords and other basic data that are the building blocks of sophisticated hacking operations. The agency found the Heartbleed glitch shortly after its introduction, according to one of the people familiar with the matter, and it became a basic part of the agency’s toolkit for stealing account passwords and other common tasks.

The revelations have created a clearer picture of the two roles, sometimes contradictory, played by the US’s largest spy agency. The NSA protects the computers of the government and critical industry from cyberattacks, while gathering troves of intelligence attacking the computers of others, including terrorist organizations, nuclear smugglers and other governments.

Questions remain about whether anyone other than the US government might have exploited the flaw before the public disclosure. Sophisticated intelligence agencies in other countries are one possibility. If criminals found the flaw before a fix was published this week, they could have scooped up millions of passwords for online bank accounts, e-commerce sites, and e-mail accounts across the world.

If the reports are true, they would represent a serious breach of the NSA's mission.  There’s no excuse for leaving Americans and businesses vulnerable to breaches on this scale. They should be helping to shore up vulnerabilities, not exploiting them. The NSA has issued a statement denying prior knowledge of the Heartbleed bug; which is not a reassuring denial. This is one of the biggest breaches in the history of the internet, and the NSA, which is supposed to watch this stuff, claims they know nothing. For now, the NSA is sticking to their story that they are incompetent rather than corrupt.

Earnings reporting season is gearing up, with an epic miss from the biggest US bank. JPMorgan Chase said its first-quarter earnings fell 20%, driven by a decline in investment banking and mortgage lending. The bank reported net income of $4.9 billion for the first quarter, after stripping out payments to preferred stockholders. That was down from $6.1 billion in the same period a year earlier. On a per-share basis, the earnings amounted to $1.28, missing estimates of $1.39. Revenue, after stripping out the effect of an accounting charge for credit losses, was $23.8 billion, down 8 percent from $25.8 billion a year earlier. Revenues at the bank's fixed income trading business, part of its investment banking unit, slumped 21% to $3.8 billion. Mortgage originations plunged 68% to $6.7 billion, compared with the same period last year; the bank doesn't expect the trend to change anytime soon.

Wells Fargo posted a profit of $5.9 billion, up 14% from the same period in 2013. Still, the bank’s revenue for the quarter fell to $20.6 billion from $21.3 billion in the same period a year ago.

A federal judge has approved the city of Detroit’s latest attempt to extricate itself from some long-term derivatives contracts that have been costing it tens of millions of dollars a year, holding up a settlement as an example of “the very spirit of negotiation and compromise” that he hoped other creditors would follow. Judge Steven Rhodes of United States Bankruptcy Court ruled that Detroit could proceed with a plan to pay $85 million to UBS and Bank of America to terminate the financial contracts, known as interest-rate swaps, that were used to help finance pensions.

Under the terms of the settlement, the two banks agreed to back Detroit’s overall plan of adjustment, which is critical for the city’s push to resolve its bankruptcy by early fall. Municipal bankruptcy rules say that if one class of impaired creditors votes to approve the city’s plan of debt adjustment, the judge may be able to impose the terms forcibly on everybody else. The judge’s decision gives Detroit leverage for settlements with other creditors.

Earlier this year, Judge Rhodes had rejected a previous attempt to end the swaps that called for Detroit to pay the banks $165 million. He called that proposal “just too much money” and noted that Detroit would have a reasonable chance of success if it sued the banks outright, calling the swaps invalid and refusing to make any termination payments at all. The message was to re-engage in negotiations, and apparently it worked.

Detroit’s emergency manager, Kevyn Orr, and other officials have been calling for creditors to negotiate settlements quickly out of fear that Detroit’s case will become a hopeless quagmire if creditors keep fighting the city’s proposals for resolving their debts. The state law that put Detroit under emergency management is scheduled to expire in September.

Detroit entered into the swap contracts in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers’ pension funds. Much of the deal was structured with variable-rate debt, and the swaps were intended to work as a hedge, to protect Detroit if interest rates rose. But rates fell, and under those circumstances, the terms of the swaps called for Detroit to make regular payments to UBS and Bank of America. The swaps cost Detroit about $36 million a year.

The 2005 borrowing also required an unusual structure to avoid violating the city’s legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.

When Detroit declared bankruptcy last summer, it estimated the cost of terminating its swaps at about $345 million. Days before filing its bankruptcy petition, Detroit said Bank of America and UBS had given it a break, so that it would have to pay only about $250 million to cancel the contracts. But other creditors, facing bigger relative losses, complained that the two banks were still getting way too much. They argued, among other things, that the interest-rate swaps were invalid from the beginning because the use of casino taxes for financial hedges is not allowed under state law. So, Detroit either got off cheap at $85 billion or the banks just stole $85 billion.

Tuesday, March 25, 2014 - Want to Buy a Cookie?

by Sinclair Noe

Financial Review

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.