Financial Review

Consuming Oxygen

Sinclair Noe — May 10, 2017

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DOW – 32 = 20,943
SPX + 2 = 2399
NAS + 8 = 6129
RUT + 7 = 1399
10 Y + .01 = 2.41%
OIL + 1.45 = 47.33
GOLD – 2.30 = 1219.80

President Trump’s stunning firing of the FBI director, James Comey, injected another volatile ingredient into the partisanship already engulfing the capital and threatened to overwhelm Republican efforts to turn their government control into legislative success.

The abrupt decision has investors raising questions about whether the president’s pro-growth, tax-cutting reforms will stall as the focus shifts to why Comey was dismissed while the FBI was investigating possible Russian ties to Trump’s campaign. Every piece of Trump’s agenda just became harder to get through Congress. Wall Street is shallow that way.

Whoever Trump nominates as Comey’s replacement will face a brutal confirmation hearing before the Senate Judiciary Committee. It will get saturation-level media coverage. There are legal implications that will take time to fully unravel. The Comey dismissal is going to consume most of the oxygen in Washington for the foreseeable future.

As US equity markets continue to price to perfection a grab bag of promised corporate giveaways, a group of researchers at the International Monetary Fund (IMF) had the temerity to ask last month – what could possibly go wrong.

In their April 2017 “Global Financial Stability Report,” IMF researchers methodically pare back the rosy lenses of the stock market and focus on the warning signs in the U.S. corporate debt market. Two findings have the power to potentially jolt the equity markets out of their euphoric stupor. The researchers note:

“The [U.S.] corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010…”

“The number of [U.S.] firms with very low interest coverage ratios—a common signal of distress—is already high: currently, firms accounting for 10 percent of corporate assets appear unable to meet interest expenses out of current earnings.

This figure doubles to 20 percent of corporate assets when considering firms that have slightly higher earnings cover for interest payments, and rises to 22 percent under the assumed interest rate rise.

The stark rise in the number of challenged firms has been mostly concentrated in the energy sector, partly as a result of oil price volatility over the past few years. But the proportion of challenged firms has broadened across such other industries as real estate and utilities.

The report acknowledges that equity markets “have taken a relatively benign view” of the downside risks and warns that there could be a “swift repricing of risks in the event of policy disappointment.”

The Senate rejected efforts to roll back an Obama-era rule limiting methane emissions from energy production sites on federal land. The vote over the greenhouse gas was close — 49-51 — with Republican Sens. John McCain, Lindsey Graham and Susan Collins coming down against the resolution.

In a statement, McCain said he voted against the repeal because the effort made use of a legislative tool called the Congressional Review Act, which would have blocked similar regulations in the future. The greenhouse gas rule is intended to curb a practice called flaring, during which energy producers burn off natural gas that they can’t process or sell. That process releases methane into the atmosphere.

Oil prices rose more than 3 percent, as inventories suffered the biggest one-week drop this year. The US Energy Information Administration said crude inventories fell 5.2 million barrels last week. Gasoline and distillate stocks also fell. Production rose, however, and gasoline demand over the last four weeks was 2.5 percent lower than at the same time a year ago.

Prices also found support in comments by Algeria’s energy minister that Algeria and Iraq favor extending global supply cuts when OPEC meets this month. Saudi Arabia’s energy minister went public with his support not only for an extension of the OPEC cuts for another six months, but he also dangled the possibility of an extension into next year.

Per the just released Monthly Treasury Statement, in April the US Treasury collected $456 billion and spent $273 billion, resulting in a budget surplus of $182 billion, higher than the $179 billion expected, and well above last year’s $106.5 billion surplus.

In a surprising jump in government revenues, receipts rose 3.9% y/y in April while outlays plunged a whopping 17.7% y/y. The increase in the surplus is due entirely to calendar quirks and a shift in the timing of some corporate income tax payments.

On Friday, Treasury Secretary, Steven Mnuchin, will be on the world stage for the start of two days of meetings in Italy, with finance ministers from the G7: The United States and six other major economies — Canada, Germany, Japan, Britain, France and Italy. The talks come amid several geopolitical uncertainties.

The issue of trade was at the forefront in March, when Mnuchin and leaders of the world’s 20 largest economies met in Germany. The tough talks ended in the group deciding to drop longstanding pro-trade language from a joint agreement. Hoping to bypass another row this week, Italian officials said they would keep trade off the official agenda. Italy is the current president of the G7 and has the power to set the agenda of the finance ministers’ meetings.

Aetna, one of the major five public health insurers in the US, announced it will remove its products from the Obamacare exchanges in Nebraska and Delaware. The move comes after Aetna announced it was pulling out of Iowa and Virginia over the past few weeks, citing losses sustained in the Affordable Care Act’s individual insurance exchanges.

The moves mean Aetna has completely removed itself from every Obamacare exchange for now.

Tesla opened up orders and announced pricing information for its Solar Roof product. The company also launched a calculator to show people how much it would cost to replace their roof with a Tesla Solar Roof. It uses information like the size of the roof, the average local price of electricity, and how much sunlight a neighborhood receives during a year to calculate the price.

Tesla’s Solar Roof uses both solar and non-solar tiles, which allows consumers to choose how many solar tiles they need based on their home’s electricity consumption. Tesla’s estimate of $21.85 per square foot is based on a roof that’s 35% solar tiles.

To help put the cost into perspective, a Tesla Solar Roof for a home needing 3,000 square feet of roofing would cost more than $65,000 if 35% of the tiles were solar. Per Consumer Reports, a slate-tile roof for a home the same size would cost about $45,000, and an asphalt roof would be about $20,000. Tesla said the cost would be offset by the value of energy the tiles produce.

Sears Holdings Chief Executive Officer Edward Lampert blasted the media for “unfairly singling out” the company over the past decade and blamed “irresponsible” coverage for the retailer’s woes. Sears, once the largest US retailer, warned investors in March there was a chance it may not be able to continue as a going concern after years of losses and declining sales.

But sure, let’s say the reason is the media and not pathetic management that has not been able to capitalize on an iconic brand name, and failed to modernize. Lampert, a hedge fund investor who is rarely seen in public, kicked off his appearance at an annual shareholders’ meeting at Sears’ headquarters in Hoffman Estates with a slideshow of headlines about the company’s financial distress, dating back to 2008.

Sears has not reported a profit for six years, which Lampert compared to Amazon.com’s early unprofitable growth. There is a pretty big difference between Sears and Amazon. Sears has not reported a profit for six years. Sears has been closing stores, selling off assets like its Craftsman brand and borrowing money from Lampert to survive.

Amazon plowed profits back into the company as it created and dominated in e-book readers and voice assisted speakers, and state of the art distribution centers and logistics. Amazon also built a new division that handles cloud computing, one of its fastest growing divisions.

Sears never figured out how to turn its print catalogue into an online catalogue. Sears has almost no online presence. Earlier this year, because of new rules from the Securities and Exchange Commission, Sears was required to disclose that there is “substantial doubt” about the retailer’s “ability to continue as a going concern.”

So today Lampert ranted that the media is to blame for the problems with Sears and he predicted people will look back and wonder how they missed the Sears’ turnaround, which he said would be driven by the Shop Your Way loyalty program. Sure, that’s the ticket Eddie.

Snapchat’s user growth slowed to its lowest pace in years, as parent company Snap Inc. missed Wall Street expectations for its first quarterly earnings as a public company on Wednesday, sending its shares plunging more than 20% in after-hours trading. Snap added 8 million new daily users in the first three months of the year, representing year-on-year growth of 36%. Now last year, Snapchat was growing its DAUs by 52%.

Shares of Whole Foods Market rose by as much as 3.5 percent Wednesday after the company named five new board members and a CFO, and released fiscal second-quarter earnings that met expectations. The grocery store chain posted adjusted earnings of 37 cents per share on $3.74 billion in revenue. Whole Foods had been expected to report earnings of 37 cents per share on $3.73 billion in revenue.

Same-store sales were down 2.8 percent for the quarter — a shallower drop than Wall Street had expected. It was the seventh consecutive quarter of negative comparable store sales.

Financial Review

Earnings Reporting Season Kicks Off

Sinclair Noe — April 13, 2017

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DOW – 138 = 20,453
SPX – 15 = 2328
NAS – 31 = 5805
RUT – 13 = 1345
10 Y – .06 = 2.23%
OIL – .07 = 53.04
GOLD + 1.20 = 1288.80

JPMorgan Chase kicked off a day of earnings reports for three of the nation’s biggest banks with first-quarter earnings that were stronger than expected. The bank reported a nearly 17 percent increase in net profit thanks to rising loans and a bump from its trading business.

The bank earned $6.4 billion, or $1.65 a share — more than $1.52 a share that analysts had expected. JPMorgan closed down 1.1%

Wells Fargo has been trying to rebuild its reputation after revelations that the bankers, under pressure to meet sales targets, opened thousands of fake accounts in customers’ names. The scandal continued to weigh on the bank’s consumer businesses in the first quarter of 2017.

Wells Fargo said revenue and profit were essentially flat in the quarter compared with the same period a year earlier. Mortgage banking revenue fell 23 percent from a year ago. Wells Fargo shares fell 1.7 percent.

Late yesterday Berkshire Hathaway also disclosed it had cut its stake in the bank to avoid regulations on shareholders owning more than 10% of a systemically important financial institution. Warren Buffett’s Berkshire sold more than 7 million shares earlier in the week.

Citigroup reported it earned $4.09 billion, or $1.35 a share, up 17 percent from $3.5 billion, or $1.10 a share, in the quarter a year earlier. Revenue rose 3 percent, to $18.1 billion from a year earlier. Trading in bonds, currencies and other financial products was strong, with revenue rising 19 percent, to $3.6 billion, in the quarter from a year ago.

Citigroup also reported a big jump in revenue and profit from Europe. The gets well over half of its revenue from overseas. Sales from Europe, the Middle East and Africa rose 30 percent to $2.8 billion compared with a year earlier, while profit from the region more than doubled to $855 million. Citi dropped 0.8 percent.

The bank sector was the best-performing group following the November election, but that rally has stalled. On Wednesday, the group turned negative for the year.

A report from the University of Michigan showed that U.S. consumer sentiment unexpectedly strengthened in April as consumer optimism on current economic conditions climbed to its highest level since November 2000.

Initial claims for state unemployment benefits slipped 1,000to a seasonally adjusted 234,000 for the week ended April 8, the Labor Department said. That was the third straight weekly decline in claims and left them near a 44-year low of 227,000 hit in February. The low level of claims suggests that the slowdown in job growth in March was a blip and the labor market is tightening.

The Labor Department said its producer price index for final demand slipped 0.1 percent last month, the first decline since August. The PPI gained 0.3 percent in February. Despite last month’s dip in prices, the PPI shot up 2.3 percent in the 12 months through March. That was the biggest increase since March 2012 and followed a 2.2 percent jump in February.

A 0.1 percent dip in prices for final demand services accounted for three quarters of the drop in the PPI in March. Energy prices fell 2.9 percent, the first decline since August, with the cost of gasoline down 8.3 percent. With oil prices rising in recent days and recovering nearly all of March’s losses, monthly producer prices are likely to resume their upward trend.

The dollar’s 2.8 percent drop this year against the currencies of the United States’ main trading partners is also keeping the underlying trend in producer prices elevated.

Global oil inventories probably increased in the first quarter despite OPEC’s near-perfect implementation of production cuts aimed at clearing the surplus. The International Energy Agency said cutbacks by OPEC and Russia since January have brought world markets “very close to balance” and should deplete stockpiles in the second quarter, inventories nonetheless expanded “marginally” because of production increases just before the deal took effect, the IEA said in its monthly report on Thursday.

The agency lowered estimates for global demand growth because of weaker-than-expected economic activity in India and Russia. Oil inventories in the 34-nation Organization for Economic Cooperation and Development increased by 38.5 million barrels in the first quarter to about 3 billion barrels, offsetting the decline in emerging economies.

The IEA trimmed forecasts for global oil demand growth this year by about 100,000 barrels a day to 1.3 million a day, or 1.4 percent, because of weaker OECD consumption and economic activity in India and Russia “slowing abruptly.”

Iron ore is in free fall. The price plunged 8.5% to $68.04 a ton on Wednesday, and it has lost 16.6% over the past five sessions. Iron ore is down 28.3% since its multiyear high of $94.86 a ton on February 21.

Earlier this week, Tesla’s market capitalization briefly topped General Motors. Time to roll out the trucks.  Tesla will show an electric semi-truck in September and a pickup in 18 to 24 months, plus they will bring back the Roadster as a convertible. The trucks are expected to be at least semi-autonomous.

For more than a century after the advent of commercial electrical power in the late 1800s, electricity use in the U.S. rose and rose and rose. Sure, there were pauses during recessions, but the general trajectory was up. Until 2007. The initial drop in electricity use in 2008 and 2009 could be attributed partly to the economic downturn. But the economy grew again in 2010, and every year since.

Electricity use in the U.S., meanwhile, is still below its 2007 level, and seemingly flat-lining. The change is even more dramatic if you measure on a per-capita basis. Per-capita electricity use has fallen for six years in a row. We’re now back to the levels of the mid-1990s, and seemingly headed lower.

It seems a little hard to believe because we have all sorts of new digital devices, but most of those devices are efficient. The corporate focus on costs has increasingly come to include energy costs, and parts of the corporate world have also reorganized themselves in ways that make saving energy more of a priority.

Consider the shift to cloud computing. From 2000 to 2005, electricity use by data centers in the U.S. increased 90 percent. From 2005 to 2010, the gain was 24 percent. As of 2014, data centers accounted for 1.8 percent of U.S. electricity use.

What happened? The nation outsourced its computing needs to cloud providers, for whom cutting the massive electricity costs of their data centers became a competitive imperative. So, they innovated, with more-efficient cooling systems and new ways of scaling back electricity use when servers are less busy.

In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy researcher Jonathan Koomey offered five reasons why electricity use is down. State and federal efficiency standards for buildings and appliances have enabled us to get by with less electricity.

Increased use of information and communications technologies have also allowed people to conduct business and communicate more efficiently. Higher prices for electricity in some areas have depressed its use. Structural changes in the economy have reduced demand. Electricity use is being underestimated because of the lack of reliable data on how much energy is being produced by rooftop solar panels.

We could expand on that; the economy of the US has undergone a structural change –  a shift away from manufacturing toward sectors that may not provide the kinds of jobs or competitive advantages that factories do. So, does that mean electricity use is in permanent decline? Not likely. Transportation now accounts for just 0.3 percent of retail electricity use in the US. If the shift to electric vehicles ever picks up real momentum, that’s going to start growing, and fast.

There are no plans to remove the maple leaf from the Canadian flag, but our northern neighbors are about to be famous, or infamous, for a different type of leaf. Prime Minister Justin Trudeau introduced legislation on Thursday to legalize the recreational use of marijuana in Canada. Many nations have either decriminalized marijuana, allowed it to be prescribed medically or effectively stopped enforcing laws against it.

But when Mr. Trudeau’s bill passes as expected, Canada will become only the second nation, after Uruguay, to completely legalize marijuana as a consumer product. Though eight American states have legalized marijuana to various extents, the drug remains illegal under federal law. While the new legislation will take Canada beyond its medical marijuana system, it stops far short of creating an open market.

The law will require purchasers to be at least 18 years old — though provinces can set a higher minimum — and it will limit the amount they can carry at any one time to 30 grams, about an ounce. Households will be allowed to grow up to four marijuana plants. Each province will decide where and how marijuana may be sold and will set prices.

The promise of the new law has prompted investors to bid up the stocks of 11 licensed medical marijuana growers. Several have tripled or quadrupled in price over the past year – although down today. But while the existing licensed growers — more than 40 in all, including those that are not publicly traded — are expected to have a head start in the recreational market, it is not clear that they will see a boom of the kind that, say, whiskey distillers enjoyed after Prohibition was repealed.

U.S. financial markets will be closed in observance of Good Friday.

Stocks Finish Lower, One Session Left for 2016

Charles Schwab: On the Market

Posted: 12/29/2016 4:15 PM ET

Stocks Finish Lower, One Session Left for 2016

U.S. stocks closed with mild losses as crude oil prices slipped lower in the wake of an unexpected rise in oil inventories reported by the government. Treasuries and gold were higher and the U.S. dollar dipped. In economic news, weekly jobless claims fell in line with expectations and a preliminary read for the U.S. goods trade deficit unexpectedly widened.

The Dow Jones Industrial Average (DJIA) decreased 14 points (0.1%) to 19,820, the S&P 500 Index lost nearly 1 point to 2,249 and the Nasdaq Composite declined 6 points (0.1%) to 5,432. In moderately-light volume, 572 million shares were traded on the NYSE and 1.3 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.29 lower to $53.77 per barrel and wholesale gasoline was unchanged at $1.68 per gallon. Elsewhere, the Bloomberg gold spot price added $15.93 to $1,157.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 102.65.

Sears Holdings Corp. (SHLD $9) gained ground after announcing that it has obtained a secured standby letter of credit facility, which provides the company with additional liquidity to fund its operations.

Jobless claims drop as expected

Weekly initial jobless claims (chart) fell 10,000 to 265,000 last week, matching the Bloomberg forecast, as the prior week figure was unrevised at 275,000. The four-week moving average dipped by 750 to 263,000, while continuing claims jumped 63,000 to 2,102,000, north of the estimated level of 2,027,000.

The advance goods trade deficit widened unexpectedly to $65.3 billion in November, from the favorably revised $61.9 billion in October, versus projections calling for the deficit to narrow to $61.6 billion.

Treasuries were higher, with the yield on the 2-year note declining 4 basis points (bps) to 1.22%, the yield on the 10-year note dropping 3 bps to 2.48%, and the 30-year bond rate dipping 2 bps to 3.08%.

Despite today's dip, bond yields remain elevated in the wake of upbeat economic data, which has accompanied high expectations for fiscal stimulus, tax reform and regulatory rollbacks following the surprise November Presidential election. Also, the rally in rates was bolstered in early December as the Fed's highly expected 25 bp increase to its target for the fed funds rate included a forecast for more rate hikes in 2017 than it had previously projected. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights, where you can also find her latest, Changing Conditions: A Bond Market FAQ. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Signs of rising inflation have also pressured bond prices and Schwab's Fixed Income Director, Collin Martin, CFA, discusses in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds.

Tomorrow, the U.S. economic calendar will yield the Chicago Purchasing Mangers Index, expected to decline slightly to 56.8 for December from the 57.6 level in November, but still solidly in expansion territory (above 50).

Europe dips, Asia mixed

European equities dipped following the decline in the U.S. yesterday, while volume remained subdued amid a lack of catalysts as the New Year approaches. Financials continued to be hampered as the markets grapple with the expected bailout of struggling Italian lender Banca Monte dei Paschi di Siena SpA (BMDPD $7). Oil & gas issues modestly added to recent gains in the wake of the strength in crude oil prices as of late, while basic materials slightly gave back a recent jump. In economic news, U.K. home prices rose much more than expected in December. The euro gained ground and the British pound ticked higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed following the drop in the U.S. yesterday, with global volume, data and conviction remaining hamstrung in the final trading sessions of 2016. Japanese equities dropped with the yen gaining noticeable ground. Mainland Chinese shares dipped and those in Hong Kong rose, with the markets in the world's second largest economy continuing to grapple with festering currency/liquidity concerns in the wake of the U.S. dollar's recent jump, uncertainty following government crackdowns—notably on the real estate and insurance sectors—and lingering uneasiness regarding trade relations with the U.S. For analysis of the impact on the global markets of the U.S. election, see Schwab's Jeffrey Kleintop's, CFA, latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?.

Australian securities gained ground as basic materials extended yesterday's rally. A rise in South Korean stocks was supported by an upbeat read on the nation's November industrial production, which was partially offset by the government's downwardly revised 2017 GDP forecast. Indian equities continued to rebound from a recent selloff to a five-week low, courtesy of festering earnings and economic concerns, along with government reform uncertainty and monetary policy divergence. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio, Read both articles at www.schwab.com/oninternational, and be sure to check out our latest article, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

The international economic docket for tomorrow will be light, offering CPI from South Korea and PPI from Italy.

Financial Review

Milk and Cookies. Enjoy While You Can.

Sinclair Noe — February 25, 2015       

 

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

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DOW + 15 = 18,224
SPX – 1 = 2113
NAS – 0.98 = 4967
10 YR YLD – .02 = 1.97%
OIL + 1.75 = 51.03
GOLD + 2.90 = 1205.20
SILV + .22 = 16.64

Another record high for the Dow Industrial Average. These are the days of milk and cookies.

Federal Reserve Chairwoman Janet Yellen continued her semi-annual Humphrey-Hawkins testimony today in front of the House Financial Services Committee. The prepared opening remarks were identical to the testimony yesterday in the Senate. The Q&A session became a bit testy today as Yellen was accused of political bias. Republicans questioned Yellen about an October speech on inequality, just before the midterm elections, as evidence she was leaning toward the Obama administration and Democrats. Methinks they doth protest too much. There were also calls for an audit of the Fed, historically a nonstarter with Federal Reserve Chairs. It made for generally poor political theater.

The important part of the testimony was fairly easy to find. Keep in mind the Fed has a dual mandate of maximum employment and price stability. So the key statement from Yellen was when she said: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

So, higher rates will come with higher inflation, indicating that disinflation and deflation are still a concern for now. The Fed believes that inflation is going to move lower before it moves higher because of oil prices and import prices. As for the timing of when we will see inflation and possible interest rate hikes, Yellen said: “We expect inflation over the medium term — the next two or three years — to move up to our 2% target.”

Greek stocks and bonds surged yesterday, with Athens’ main stock exchange closing almost 10% higher on the day after Eurozone financial ministers approved a four-month extension to the country’s bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released.

The German government is now selling five-year bonds with a negative yield. That means investors will pay to lend money to the country for five years. Germany auctioned 3.28 billion euros ($3.72 billion) of bonds due in April 2020 at an average yield of negative 0.08%.

Today the Senate moved to avert a shutdown of the Department of Homeland Security. The upper chamber voted 98-2 on a procedural hurdle that would pave the way for a “clean” funding bill to be brought to the floor. It remains unclear when the Senate will vote on final passage on the funding bill. If the Senate passes a clean bill, it would then move over to the House, and it is uncertain if House Speaker John Boehner would allow a vote on such a bill. DHS funding runs out in 2 days.

The White House says President Obama would veto a House Republican effort to rewrite the federal “No Child Left Behind” law. The House bill is expected to pass the chamber later this week. Senate Republicans are working on their own version of No Child Left Behind, which expired in 2007.

New homes sold at annual rate of 481,000 last month, essentially unchanged from December. The Commerce Department reports sales were 5.3% higher in January compared to a year earlier; this despite a drop of 51% in the Northeast, where bad weather kept buyers away. The median price for a new home was up 9% from a year ago.

For all the talk about how lower oil prices would reduce supplies, it hasn’t happened yet. Just the opposite. According to EIA weekly data released today, crude oil in storage in the US jumped 2%, or 8.4 million barrels, to 434 million barrels. Oil storage is bursting at the seams and inventories remain at their highest levels in at least 80 years. The rate of growth of production is slowing slightly but production continues at the highest rate since 1972, for now.

Southwest Airlines took 128 of its jets out of service late Tuesday, or roughly one-fifth of its fleet, after informing federal regulators that it “inadvertently omitted” required maintenance checks on the planes’ backup hydraulic systems. Dozens of flights were immediately canceled as a result, while officials from Southwest and the FAA discussed plans to complete the maintenance checks and return the planes to service.

American Express will raise interest rates on about one million customers. Annual rates will climb by an average of 2.5 percentage points to at least 12.99%. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles.” Typically banks make large scale changes in response to broader shifts in interest rates or risk.

Anthem, which earlier this month reported that it was hit by a massive cyberbreach, has concluded that the personal information of 78.8M customers was exposed in the attack, including 8.8M-18.8M people who were members of independently run Blue Cross Blue Shield plans. Anthem still believes the hacked data was restricted to birthdays and Social Security numbers, among other data, but doesn’t appear to have involved medical information or financial details.

Another company that had problems with cybersecurity is Target, but it doesn’t seem to have hurt their most recent results.  Target saw a higher-than-expected jump in its fourth-quarter earnings and is forecasting modest growth for the first quarter of 2015. Exiting Canada, as the company recently announced it will do, will cost it $5.1 billion.

Earlier this month Wal-mart announced they would be paying workers at least $9 an hour, increasing to $10 an hour next year. Wal-Mart is of course the largest retailer, and we thought this might ripple out through other retailers. Sure enough. T.J. Maxx, Marshalls and other chains owned by TJX Cos. will be increasing the pay of US workers to at least $9 an hour beginning in June, increasing to $10 an hour next year.

Now for today’s edition of “Banks Behaving Badly”; yet another foreign currency scandal, Reuters reports that BNY Mellon is in settlement talks with the DOJ and New York AG over claims that it defrauded clients in foreign exchange transactions. The bank faces several lawsuits, including class actions, stemming from allegations that it misled clients about how it determined currency exchange rates for certain transactions.

HSBC has a “terrible list of problems,” so says the chairman of HSBC, Douglas Flint. And he admits that he couldn’t rule out further scandals emerging at the bank along the same lines as the tax evasion schemes at HSBC’s Swiss private bank, but he said: “I sincerely hope there are no more skeletons.”

A British parliamentary committee questioned Flint and CEO Stuart Gulliver after the tax evasion schemes were revealed by several news organizations. The news story only came to light 4 years after a former HSBC employee turned over bank files. Some of the clients whose details HSBC’s Swiss operations were sheltering included arms dealers and politicians who were part of discredited regimes, like that of Bashir-al-Assad in Syria. Earlier, when asked why some HSBC clients reportedly came to Switzerland with wads of cash, Flint was lost for words. Still to be determined is why the bank should not be broken up.

Move over Alibaba, you could have company next year. Postal Savings Bank of China, the country’s sixth largest lender by assets, is seeking an initial public offering in 2016 that could make history by bringing in some $25 billion .

In a new S-1, GoDaddy declared plans to list on the NYSE under the symbol “GDDY” and announced IPO underwriters including Morgan Stanley, JPMorgan, Citi and others. GoDaddy is a fast-growing company which posted revenue of $1.4 billion in 2014, up 23% from 2013 levels, according to the filing. But it’s also a big money loser. The company posted a loss of $143.3 million in 2014, which is the fourth annual loss in a row.

Financial Review

Blue Light Special

Sinclair Noe — February 19, 2015

 

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW – 44 = 17,985
SPX – 2 = 2097
NAS + 18 = 4924
10 YR YLD + .04 = 2.11%
OIL – .77 = 51.37
GOLD – 6.10 = 1208.20
SILV – .12 = 16.48

The S&P 500 is up 5.2 percent in February, rebounding from a January slump. If the index holds those gains it will be the best monthly performance since October 2011.

Crude-oil futures fell to the lowest level in a week, after data showed inventories have built up much faster than expected. According to a report from the American Petroleum Institute late yesterday, US crude stocks rose by 14.3 million barrels last week vs. expectations of a 3.2 million. The today the US Energy Information Administration released a report showing crude inventories rose 7.7 million barrels for the week ended Feb. 13; that was about double expectations, but far less than the API report. And prices bounced back.

The latest EIA data peg total commercial crude inventories at 425 million barrels, with the government referring to the total as “the highest level for this time of year in at least the last 80 years.” One possible reason for the rising inventories is that there has been a United Steelworkers strike at 11 refineries that account for 13% of US output capacity.  A slowdown in refining would lessen the demand for crude oil. Another possible reason why inventories continue to rise is that most domestic oil drillers have taken on debt, and they have to keep pumping oil to service that debt, at least for now.

The number of Americans filing new claims for unemployment benefits fell more than expected last week, offering fresh evidence that the labor market was gathering steam. Initial claims for state unemployment benefits dropped 21,000 to a seasonally adjusted 283,000 for the week ended Feb. 14.

Leading U.S. economic indicators edged up 0.2% in January, and the December index was revised lower to 0.4%. The Conference Board said the lack of strong momentum in residential construction, along with a weak outlook for new orders in manufacturing, poses a downside risk for the US economy.

The Arizona Regional Multiple Listing Service (ARMLS) reports that for the second consecutive month, inventory in the Phoenix residential real estate market was down year-over-year. Active inventory is now down 4.9% year-over-year. Housing prices bottomed in Phoenix is 2011 at about the current level of inventory. Overall sales in January were down 0.3% year-over-year. And cash sales were down 12% to 32% of total sales. Now, with tighter inventory, we might see a little more price appreciation in 2015.

Greece has submitted a formal request for a six-month loan extension, and it looks like the new Greek government blinked; they pledged to abide by all its previous commitments and recognize the bailout as legally binding. However, the wording of its first point implied that Greece wants to haggle over implementing reforms demanded by the original bailout agreement. Even so, the request is still a major climbdown for the new government, led by Tsipras’ radical left-wing Syriza party, which swept to power on a pledge to overthrow the bailout agreement in January and subsequently declared it “dead”. It pledges to honor all of Greece’s debts and, just as importantly, to continue accepting monitoring visits from the three institutions that have overseen Athens’ implementation of the bailout to date, the hated “troika” of European Central Bank, the International Monetary Fund and the European Commission.

And this morning, Germany rejected the request for bridge financing. The Germans called the proposal a Trojan Horse, that looks to end the current bailout program and acquire bridge financing. Greece’s current €240 billion ($273 billion) financing arrangement expires as the end of this month. After that, the country would find itself cut off from European and International Monetary Fund loans that have kept it afloat for five years. A Greek government spokesman insisted that the eurogroup had only two options: either to accept or reject the Greek request. “It will then be clear who wants to find a solution and who doesn’t.”

Euro-region finance ministers will make a “detailed assessment” of the request and formulate a response later today.

Japanese exports surged in January, providing more evidence that the world’s third largest economy is slowly climbing out of recession. Exports rose by 17% on year last month, their biggest jump since late 2013, while imports in January contracted 9% Y/Y. Helped by gains in financial and shipping companies, Tokyo’s Nikkei touched its highest level since May 2000, that’s a 15 year high. The GDP numbers out yesterday showed the world’s third-largest economy emerging from a brief recession—if you use the conventional definition of two straight quarters of contracting GDP.

True, that was about half the 3.7% analysts had forecasted. But it’s a welcome development, especially given that export growth was a key driver of the quarter. The weak yen engineered by the Bank of Japan seems to be giving a spark to Japan’s important exporting sector.

The key question for the future of Japanese growth is how consumer demand responds. For the moment, Japanese consumers, like consumers worldwide, are getting a real wage raise thanks to declining energy prices. But to create sustainable consumer growth, corporations have to be convinced to give workers a larger cut of profits. It just might be possible. The largest employer in the US, Wal-Mart, signaled today that it was going to begin raising wages for its workforce, in a nod to both rising political pressure and tightening labor markets. Similar dynamics are in place in Japan.

Wal-Mart reported fourth-quarter profit rose to $4.97 billion, or $1.53 a share, from $4.43 billion, or $1.36 a share, a year ago.  Sales rose to $131.6 billion from $129.7 billion. Wal-Mart missed on both the top and bottom line. But the big news from Wal-mart is that the company said it will give raises to about 500,000 full-time and part time employees and ensure hourly employees earn at least $9 an hour, $1.75 above federal minimum wage. By Feb. 1, 2016, current employees will earn at least $10 an hour.

The company also said it would strengthen a “department manager” role, giving it a minimum wage of $13 per hour this year and $15 next, thus offering low-wage hourly workers a clearer path to advancement. Including similar bumps at Walmart-owned Sam’s Clubs, the company expects 500,000 workers to receive a raise at a cost of $1 billion a year.

That all sounds good and magnanimous, but Wal-Mart was more or less dragged, kicking and screaming to this moment. Over the past three years, Wal-Mart has faced a wave of union-backed attacks: legal, political, media, and consumer pressure, anchored by the first coordinated store walkouts in the company’s history.

Back in its 2007 fiscal year, before the recession, Walmart reported $183,500 in revenue per employee and $5,938 in profit. Not bad, but by 2014 those numbers had risen 18 percent and 22 percent. The company’s sales and profits rose nicely in that time while the company kept a lid on its payroll. Gains went to Walmart shareholders, not Walmart workers. Of course, it takes a lot of people to run a Wal-Mart store, and the unemployment rate has dropped down to 5.7%, meaning Wal-Mart now faces competition for workers.

The decision is likely to ripple across the economy and will undoubtedly lead to similar moves by other companies. Indeed, Wal-Mart is not the first to raise wages, just the biggest; and as the biggest, it sets a standard for the entire retail industry. Walmart CEO Doug McMillon told analysts higher wages lead to a better experience for workers and customers, “which can drive higher sales and returns for our shareholders.” In Walmart’s case, many of the 1.3 million US workers are also customers that can spend their extra dollars at Wal-Mart. And most Wal-Mart workers will spend their paychecks as soon as they are cashed. It still is just about $1 billion in wage increases, and so don’t look for a big change in economic numbers on a nationwide level. All things equal, that amounts to a gain of 0.097% in average hourly earnings for retail workers. For all workers, that translates into a rise of 0.01% — basically, nothing. But it is a step in the right direction.

We’ve all heard the stories of cybersecurity breaches and hack attacks. Maybe you wonder how hackers manage to hack what should be secure computers. Well, in the case of Lenovo, the world’s largest PC maker, they pre-installed a virus-like software on laptops that makes the devices more vulnerable to hacking. Users reported as early as last June that a program called Superfish pre-installed by Lenovo on consumer laptops was ‘adware’, or software that automatically displays adverts. Superfish was malicious software that hijacks and throws open encrypted connections, paving the way for hackers to also commandeer these connections and eavesdrop, in what is known as a man-in-the-middle attack.

The Los Angeles Times reports that two medical scopes used at UCLA’s Ronald Reagan Medical Center may have been contaminated with the potentially deadly, antibiotic-resistant bacteria known as CRE. Two patients have died from complications that may be connected to the bacteria, and authorities believe that 179 more patients have been exposed. The really scary part of this is that infections occurred even though the instruments had been cleaned according to the manufacturer’s instructions.

Most healthy people aren’t at risk of catching a CRE infection, but in hospitals this bacteria can be quite dangerous: CRE kills as many as half of all people in whom the infection has spread to the bloodstream. The Centers for Disease Control and Prevention (CDC) are working with the California Department of Public Health to investigate the situation, which is expected to result in more infections.

The problem isn’t just in Los Angeles, though. Last month, USA Today reported that hospitals around the country struggle with transmissions of bacteria on these scopes—medical devices commonly used to treat digestive-system problems—and there have been several other under-the-radar outbreaks of CRE.

Samsung Electronics has acquired mobile wallet startup LoopPay, indicating its intention to launch a smartphone payments service to compete with Apple Pay and others. Despite strong backing, mobile payments have been slow to catch on, as many retailers have been reluctant to adopt the infrastructure required for the mobile payment options to work. LoopPay, however, works off existing magnetic-stripe card readers by transmitting a magnetic signal similar to that of a swiped card, putting Samsung at an advantage.