Financial Review

Take the Overs

Sinclair Noe — August 19, 2016

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DOW – 45 = 18,552
SPX – 3 = 2183
NAS – 1 = 5238
10 Y + .04 = 1.58%
OIL + .27 = 48.49
GOLD – 12.50 = 1340.60

Oil has entered bull-market territory, as both WTI and Brent benchmarks extended their gains past 20 percent over the past three weeks, and up over 8% for the week. The rally has been fueled by speculation OPEC is poised to freeze production, divisions between major powers over output targets remain ahead of next month’s meeting in Algiers.

Saudi Arabia reported yesterday that it hiked its oil and refined-product exports to the highest level for June ever recorded, at 8.8 million barrels a day, as the kingdom seeks to grow market share and address its budget deficit. The S&P GSCI Crude Oil Total Return is up 15.2%, its biggest six-day gain, ending Aug. 18, 2016, since the six-day gain of 16.1%, ending on Apr. 13, 2016.

A side note: yesterday we got state-by-state reports on July Jobs figures (the national report comes out on the first Friday of each month and about 10 days later we get the breakdown by individual states). As we reported yesterday, Arizona’s unemployment rate rose 0.2% to 6%. You might think the oil producing states have suffered huge job losses; well, yes, but not so bad. Louisiana has a 6.3% unemployment rate, but about half the state is under water. South Dakota’s unemployment rate is still the lowest in the country at 2.8%; North Dakota at 3.1%; Texas 4.6%; and Oklahoma 5%.

Aiming to drill for crude in Mexico’s deep-water oil areas, Exxon Mobil, Chevron and Hess have reached an agreement to bid on producing oil in 10 areas up for auction on Dec. 5. Mexico hopes to raise $44 billion in its first-ever sale of deep-water drilling rights in the Gulf of Mexico, located in the Perdido area near the maritime border with the U.S.

The dollar trimmed its losses, rising against all 16 of its major counterparts, but that wasn’t enough to stem its second weekly decline as markets continue to waver on whether the Federal Reserve will hike rates this year. The dollar’s losing streak against this year’s best-performing G10 currency, the yen, is even longer at a fourth consecutive week of losses: The Japanese currency is trading near its strongest levels in almost three years.

San Francisco Federal Reserve Bank President John Williams joined a growing chorus of his colleagues signaling support for a U.S. interest rate hike in coming months, saying that waiting too long could be costly for the economy. Saying he is in no hurry to raise rates, Williams nevertheless warned that the economy could overheat if rates are kept low for too long, like a party at which the host fails to remove the punch bowl. The next signal of the Fed’s intent is likely to arrive next week at the Jackson Hole monetary symposium on August 26; Fed chair Janet Yellen is scheduled to speak and there is growing anticipation that she will take a hawkish stance on September rate hikes.

In a letter to investors, Elliott Management’s Paul Singer wrote that we are experiencing the “biggest bond bubble in world history” as investors continue to rush in despite low and negative yields. The man, known best for suing Argentina over its debt restructuring, called the global bond market “broken” and warned that the end of the current environment will be “surprising, sudden, intense and large.” Singer brings up a valid concern, even if he is a bit dramatic in the presentation.

About $12 trillion of the government bond market currently trades at a negative yield; that’s basically a guarantee of losses. The average yield on the 10-year Treasury note over the past 145 years is about 4.55%; the current yield is 1.58%. If that difference, or deviation, was the only thing you considered, then we might call it a bubble. But about one-third of outstanding bonds are held by central banks around the globe.

And that means that if inflation starts running wild or if liquidity dries up, the anticipated response is another round of bond buying. Central bankers have deep pockets. Singer’s latest assessment of the market is stark and bold. He said that “Everyone is in the dark, experience doesn’t count much, and extreme confidence may be fatal.” Yeah, maybe, but not today.

British Prime Minister Theresa May will not begin formal divorce talks on leaving the European Union before the end of the year. Bloomberg cited unidentified officials as saying that May is sympathetic to the case for acting by April at the latest.  Earlier media reports had suggested May would wait until later in 2017 to kick off the talks. The report suggests invoking Article 50 by April, ending speculation that the U.K. would have several years to prepare to leave the EU. The less time the U.K. has to get things in order, the greater the market fears the fallout. The British pound sterling moved sharply lower today.

Meanwhile, The City of London has relinquished hopes the U.K. will retain full access to the European single market for goods and services, according to the FT. Officials from the financial sector have concluded that a Norway-style deal is untenable, and are now looking to imitate and build on Switzerland’s deal with the EU, where only some industries have full access to the single market.

Wall Street is no longer New York’s biggest jobs engine. William Dudley, the New York Federal Reserve president, said in a Thursday speech that growth in the city’s tech sector was “picking up much of the slack created by the softness of the securities industry.” Dudley pointed specifically to jobs in the internet publishing, online shopping, and scientific research and development industries.

The battle over Sumner Redstone’s $40 billion media empire is over, according to media reports, bringing to a close a legal fight over whether the 93-year-old had the mental capacity to make decisions and if he was being manipulated by his daughter Shari. Terms of the settlement include the dismissal of Viacom CEO Philippe Dauman (with a $72M severance package), appointment of COO Thomas Dooley as interim chief executive and the expansion of Viacom’s board (based on the five choices of National Amusements).

A Deutsche Bank whistleblower won’t be accepting his award. Eric Ben-Artzi, a former Deutsche Bank risk officer, said in a Financial Times op-ed article that he would not accept his $8.25 million reward for blowing the whistle on Deutsche Bank because the firm’s executives should be the ones paying the award.

Two major institutional investors are suing Valeant Pharmaceuticals and six current and former top executives for allegedly engaging in “a fraudulent scheme” that cost shareholders billions of dollars. Mutual fund giant T. Rowe Price and insurance company Alleghany Corp. filed the lawsuit this week in a New Jersey court. The court filings allege that Valeant resorted to deceptive practices such as refilling patients’ prescriptions without permission and pushing sales of its high-priced medications through a secret channel of pharmacies across the US.

Once the scheme was unmasked the fallout was severe and investors were left holding the bag. Valeant shares collapsed by about 90% after its relationship with Philidor, a now-defunct mail-order pharmacy based in Pennsylvania, came to light and its practice of aggressively increasing the prices of its drugs faced more scrutiny. Valeant also faces a separate class action suit, and is the subject of a criminal investigation.

Now, emails from employees of Philidor and Valeant (one and the same really) ..., emails have been published and it paints a very sleazy picture of price gouging. And it is now looking like Valeant is the pharmaceutical industries equivalent of Enron.

The FCC has put together a “Robocall Strike Force,” it’s really just a group of tech companies getting together to try to stop people from annoying you with spam phone calls. The group – which includes Apple, Comcast, Google, Microsoft, Nokia, Qualcomm, Samsung, T-Mobile, Verizon, and dozens more – held its first meeting today. The strike force is expected to report back to the Commission by Oct. 19 with concrete plans for the development and adoption of new tools, as well as recommendations on the government’s role.

Robocalls span a wide range, from those that are legal but unwanted – telemarketers and public opinion surveyors – to the blatantly illegal – those violating the Do Not Call registry or trying to steal your money or identity. All 33 members of the strike force have already committed to five things: conforming to caller ID standards, adopting SS7 solutions, evaluating the feasibility of a “Do Not Originate” list, developing and implementing new solutions, and adopting call-blocking tech.

Today is Google’s anniversary; August 19, 2004 was the first day Google was publicly traded. The stock didn’t even survive to its tenth birthday. In 2014 it changed its name to Alphabet; still, it has been a pretty good run. Since the first day of trading, Google alphabet shares are up 1,500%.

The political betting site PredictIt has a market in how many totally false statements the two major presidential candidates will make. Yep, you can bet on politicians lying. PredictIt uses the analysis of the site PolitiFact, and statements rated “totally false.” The current odds suggest that Clinton is the more truthful – there’s a 65% probability Clinton will make just one totally false statement in August, according to the betting odds. The least amount of lies to bet on for Trump is four, and the market is split between five and six lies, with 26% odds on each.

That shouldn’t come as a surprise. In an analysis made in June, PolitiFact said Trump had more statements rated “pants on fire” than the 21 other candidates for president combined. That said, Americans don’t think either candidate is particularly honest, only 28% think Clinton is honest and trustworthy, and 27% think Trump is. And while I would never endorse gambling, if you feel compelled to place a wager, I would go with the overs.

Financial Review

The Vultures Eat

Sinclair Noe — February 29, 2016

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DOW – 123 = 16,516
SPX – 15 = 1932
NAS – 32 = 4557
10 Y – .02 = 1.74%
OIL + 1.12 = 33.90
GOLD + 16.50 = 1239.30

If you missed the past month, you might think things were calm on Wall Street for the month of February. For the month, the Dow rose 0.3 percent, the S&P 500 lost 0.4 percent and the Nasdaq lost 1.2 percent. This marks the first time since 2011 that major indexes posted three consecutive monthly declines.

Chinese shares closed at one-month lows. China cut the amount of cash banks must hold as reserves for the fifth time since last February. The yuan hit a three-week low. China expects to lay off 1.8 million coal and steel workers. 

A weekend meeting of G20 finance chiefs ended without a plan to spur global growth. The G20 issued a statement which basically said the global economy is not as bad as the doomsayers think. G20 finance ministers agreed to use “all policy tools – monetary, fiscal and structural – individually and collectively” to reach the group’s economic goals; but there was no plan for coordinated stimulus.

Participants also repeated previous pledges not to engage in competitive currency devaluations and promised to “consult closely” on exchange markets. Those pledges might not last long, and the Euro Union might be the first to crank up the printing press.

The inflation picture in the Eurozone further deteriorated in February, giving ECB policymakers more bad news to digest just a week before their next meeting. Consumer prices in the 19-nation bloc declined to -0.2% from a positive reading of 0.3% in January, displaying its worst figure in the last year.

Core inflation, which strips out volatile elements such as food and energy, was at 0.7%, down from 1% in the prior month. The deflationary reading in Europe has pushed German yields into negative territory out to nine years.

When the European Central Bank last discussed interest rates in January, Mario Draghi made clear the ECB would pump out more money in March if necessary. He cited a deteriorating outlook for the economy due to uncertainty about global growth, volatile markets and geopolitical risks.

Since then, Japan has introduced negative interest rates to boost an economy that is now shrinking again, and China has told its banks they’re free to lend more cash in the hope of supporting growth. And Britain is gearing up for a vote on whether to leave the EU. At the very least look for the ECB to increase bond purchases.

American and European officials are set to release details about the new trans-Atlantic data-sharing deal that would allow companies to move people’s digital information between the two regions. While the agreement was completed in early February, policy makers will now outline how the new structure will operate in practice. Some disagreement remains, however, regarding the level of protection people should be given over their digital privacy.

The Pentagon is seeking $35 billion through 2021 for cyber-security, in part to beef up offensive military capabilities such as those deployed in newly disclosed operations against Islamic State. The proposed budget would bankroll the Pentagon’s U.S. Cyber Command and its new Cyber Mission Force to assist regional commanders with tools to conduct defensive and offensive operations in their own areas as needed. Who knows, maybe they can hire someone to hack an iPhone.

The National Association of Realtors monthly gauge of pending home sales fell to 106.0 from an upwardly-revised 108.7 in December. It was the 17th straight month in which the index has been higher compared to a year ago, but that gain was only 1.4% in January – and it was a drop from December. The index tracks real estate transactions in which a sales contract has been signed, but the deal has not yet closed.

The median annual household income was $57,173, a gain of $424, or 0.7%, from November.  Incomes are now up 0.4% from where they stood in January 2000—the month that Sentier Research began tracking this data. Before you start thinking everybody got a raise, the data is adjusted for inflation, so volatility in fuel prices can weigh heavily on results.

Another month of volatility for the Chicago PMI which lurched from solid expansion in January to noticeable contraction in February. Today’s report came in at 47.6; any reading below 50 indicates contraction, and confirms other early indications of February softness, not only for manufacturing but for services as well since this report tracks both sectors.

The good news in the report is that new orders have held over breakeven 50 which hints at better readings in next month’s report. Now the bad news. Production is down sharply, backlogs are in a 13th month of straight contraction, employment is down and in a fifth month of contraction, and prices paid are contracting at the fastest pace since 2009.

The big event on this week’s economic calendar is the Friday jobs report. January managed to show a net gain of 151,000 jobs, and February is estimated to come in around 190,000, with a little luck.

Berkshire Hathaway profit hit a record. The Warren Buffett-led conglomerate announced earnings of $3,333 a share, easily beating the $2,529 that was expected by the Bloomberg consensus. Profits surged 32% to a record $5.48 billion. In his letter to shareholders, Buffett noted that Burlington Norther Santa Fe railroad “dramatically improved” after a bad 2014. Additionally, Buffett said the company bought more of its big four investments (American Express, Coca-Cola, IBM, and Wells Fargo) over the past year.

Warren Buffett thinks the gloom is overdone, however, saying politicians are “dead wrong” on the U.S. economy. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” In his closely watched annual letter to investors, Buffett also defended his ties to 3G capital and Clayton Homes, and revisited Berkshire’s biggest takeover ever – Precision Castparts. Buffett reduced Berkshire’s bond portfolio for a sixth straight year, saying bonds should come with a warning label. Missing topics: No mention of a successor, the slump in commodity prices or recent market volatility.

Fifteen years ago Argentina defaulted on its sovereign debt. A couple of years later the vulture funds swooped in and bought some that debt for pennies on the dollar, or peso. During the 15-year legal battle creditors have attempted to embargo everything from Navy frigates to satellite launches to claw back the money a New York court said they were owed from defaulted bonds.

The alpha vulture was Paul Singer of Elliott Management, who demanded full face value on the debt. He won’t get it, but as of today, it looks like he will get 75% of the face value. Argentina will pay out $4.6 billion, and then be allowed to re-enter the international debt market again; they will issue $15 billion in new bonds, part of which will be used to pay off the old debt. Better luck this time.

The European Commission has cleared Dell’s planned $67 billion acquisition of data storage company EMC Corp. Dell unveiled the deal in October last year, the largest ever in the technology industry sector, and designed to enable it to better challenge rivals Cisco Systems, IBM, and Hewlett-Packard in cloud computing, mobility and cyber security.

Citigroup has received a subpoena in connection with the FIFA bribery scandal, making it the first major U.S. bank to disclose a link to probes involving soccer’s governing body. The summons came from the U.S. Attorney for the Eastern District of New York, asking about the lender’s connection to “certain individuals and entities identified as having had involvement with the alleged corrupt conduct.”

Anti-money laundering laws require banks to alert authorities about shady transactions like the ones at the heart of the FIFA scandal. Authorities allege senior FIFA officials used various U.S. banks, including: Citi, JPMorgan Chase and Bank of America to transfer and receive $150 million in bribes and kickbacks.

Taser International reported better-than-expected earnings as its fast-growing body-worn camera hardware and data business notched sharp gains. Over all, Taser’s profit edged up slightly from a year ago to $5.1 million. Its earnings per share remained flat at 9 cents. Sales rose 20% to $56 million.

Amazon is stepping into the British fresh food market after striking a supply deal with grocer Morrisons. Britain’s fourth largest supermarket said the deal would allow Amazon Prime Now and Amazon Pantry customers access to Morrisons’ fresh and frozen products in the coming months. Amazon previously launched a U.K. packaged groceries service in November, but it stopped short of replicating its broader U.S. Amazon Fresh service, which offers about 20,000 items from local shops.

Starbucks is finally ready to take its Americanized version of Italian coffees back to Italy, with its first outlet set to open in early 2017. It’s a symbolic move for CEO Howard Schultz. On a business trip in the 1980s, he visited Milan and Verona and decided to bring espresso drinks to the U.S., eventually forming the world’s biggest coffee chain. The statement from Schultz said: “We’re going to try, with great humility and respect, to share what we’ve been doing and what we’ve learned.”

Whiting Petroleum, the largest oil producer in North Dakota, has announced that it will suspend all fracking in the state and cut its budget for this year by 80 percent. Whiting said it will stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance. Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows.

Friday, June 27, 2014 - Biscuits on the Table

Financial Review with Sinclair Noe

DOW + 5 = 16,851
SPX + 3 = 1960
NAS + 18 = 4397
10 YR YLD  + .01 = 2.53%
OIL - .10 = 105.74
GOLD – 1.80 = 1316.10
SILV - .25 = 20.97

The major stock indices traded lower for most of the day, and only in the final minutes turned to positive territory. For the week, the Dow slipped 0.6 percent and the S&P 500 declined 0.1 percent, while the Nasdaq gained 0.7 percent. Volume spike today as the Russell Indices were reconstituted.

The Russell Indices are compiled by Russell Investments. The Russell 3000 is an index of the 3000 largest stocks in the US. The Russell 2000 is the 2000 smallest stocks in the Russell 3000. Once a year, the Russell indices are reconstituted, to reflect changes such as acquisitions, bankruptcies, or just changes in the size of the companies listed in the index. The reconstitution probably explains the increase in volume and the last minute increase in prices today.

Some things we need to know heading into the weekend; including Ukraine, Iraq, and Argentina. We’ll start with the situation in Ukraine. The European Union signed a free-trade pact with Ukraine today and warned it could impose more sanctions on Moscow unless pro-Russian rebels act to wind down the crisis in the east of the country by Monday. Georgia and Moldova signed similar deals, holding out the prospect of deep economic integration and unfettered access to the EU's 500 million citizens, but alarming Moscow which is concerned about losing influence over former Soviet republics.

EU leaders meeting in Brussels demanded that, by Monday, Ukrainian rebels agree to ceasefire verification arrangements, return border checkpoints to Kiev authorities, free hostages and launch serious talks on implementing Ukrainian president Poroshenko's peace plan.

EU leaders said they were ready to meet again at any time to adopt significant sanctions on Russia. Diplomats said they could target new people and companies with asset freezes as early as next week. More than 60 names are already on the list. Although it has drawn up a list of hard-hitting economic sanctions against Russia, the EU is still hesitating over deploying them because of fears among some member states of antagonizing their major energy supplier.

Meanwhile, leaders of the European Union's 28 member states voted on the next president of the European Commission, which serves as the EU's executive branch. The president sets the policy agenda, enforces rules and represents Europe abroad. They elected Jean Claude Junker on a 26-2 vote. The losing votes belonged to the United Kingdom and Hungary, and they really have a strong dislike for Junker; so much so that they may try to exit the EU. That probably won’t happen, but there is talk of an “in or out” referendum for the Brits.

A funny thing is happening in Iraq. The US is lining up support for Iraq from Iran and Syria. And the bombing has apparently started, but we’re still trying to figure out who is throwing the bombs. The first aerial bombing took place Monday or Tuesday, apparently carried out by the Syrian Air Force, acting at the behest of the Iranian government in support of the Iraqi government, which the US government supports, but only if the Iraqi’s purge the government of all the goofs who messed up over the past 10 years or so.

Which is to say, the war in Iraq is escalating. Already, the war involves Iraq, Syria, Iran, Turkey, Saudi Arabia, Qatar, ISIS or ISIL if you prefer, Israel, Lebanon, and of course the US. The Pentagon denied reports of US drone strikes along the Iraq-Syria border after reports by BBC of drone bombings. The Murdoch Street Journal reports Syrian airstrikes. Unidentified bombers have reportedly launched an air strike on ISIS positions in northern Iraq. Iraqi television has claimed they are US planes, but the Pentagon has denied responsibility.

US planes were identified by Iraqi television, but the Saudi Al-Arabiya network claims that the raid was carried out by Syria. Meanwhile, Iranian Special Forces sent in to help protect Baghdad and a few select holy sites, along with surveillance drones. And Israel has bombed Syria in retaliation for an attack from Syria that killed Israeli civilians in the Golan Heights.

And so with all this going on, the Pentagon admitted yesterday that armed US drones are now flying over Iraq, equipped with Hellfire missiles, deployed from a base in Kuwait, in addition to unarmed surveillance flights by drones and manned aircraft, and supplemented by US military advisers on the ground.

Meanwhile, the Pentagon says the United States has opened a "joint operations center" in Baghdad, boosting the total number of US service members to 500. And the New York Times reports that Iraqi government officials are saying that the US is planning to send more than 1,000 private security guards to Iraq to protect US troops, which amounts to far more than the US government has previous acknowledged.

For years Iraq has been a major oil producer; it kept Saddam in business all those years; back then Iraq produced about 2.5 million barrels a day; recently output has increased to more than 3 million barrels, and it’s estimated that production could easily top 6 million barrels. In a country of about 30 million, there should be enough natural resources for profound prosperity, but that is not the case. In recent years, none of this oil wealth trickled down to the grassroots, especially in Sunni areas of the country where signs of reconstruction, economic development, restored services, or jobs were hard to find. Instead, the vast new revenues disappeared into the recesses of a corrupt government, and from there – who knows?

So here’s where Iraqi oil, or the lack of its revenues at least, comes into play. Communities across Iraq, especially in embittered Sunni areas, began demanding funding for reconstruction, often backed by local and provincial governments. In response, the Maliki government relentlessly refused to allocate any oil revenues for such projects, choosing instead to denounce such demands as efforts to divert funds from more urgent budgetary imperatives. That included tens of billions of dollars needed to purchase military supplies including, in 2011, 18 F-16 jets from the United States for $4 billion. In a rare moment of ironic insight, Time magazine concluded its coverage of the F-16 purchase with this comment: “The good news is the deal will likely keep Lockheed’s F-16 plant in Fort Worth running perhaps a year longer. The bad news is that only 70% of Iraqis have access to clean water, and only 25% have clean sanitation.”

My grandmother used say, as long as we’ve got biscuits on the table, nobody should go hungry. I guess they never heard that saying in Iraq.

Nothing in today's complex world has a single cause, but you have to think that a major reason for all this is the oil.

Argentina is in trouble. They have until Monday to pay a group of hedge fund managers over $1.3 billion on defaulted bonds. If they don’t pay, they risk default. If it goes into default, investors lose faith in Argentina’s capacity to pay, interest rates on its bonds surge, and the country is forced to print money to pay creditors, the economy could collapse.

Then again, if Argentina does pay this group of hedge fund managers over $1.3 billion worth of bonds by July 30, it opens itself up to lawsuits from other investors who also own those bonds, lawsuits that could cost the country up to $15 billion. That's over half the money it has in its central bank.

The story goes back to 2001, when Argentina was going through a financial crisis. Argentina issued bonds, and they defaulted on those bonds. After the default, hedge fund manager Paul Singer and some other hedge funds swooped in to buy the defaulted bonds for pennies on the peso. They knew they were buying defaulted bonds, but the idea was that things might improve or there might be a deal negotiated; that’s what usually happens, debt issuers restructure debt, and negotiate with creditors to pay less. Creditors usually take the deal because it is better to get something rather than nothing. Most of Argentina’s creditors have decided to accept 70 cents on the dollar.

But Paul Singer is demanding 100% face value of the bonds. And if he is not paid, there is a clause that says no other creditors can be paid. And if Argentina pays the full amount to Singer, the other creditors will likely not be satisfied with a 70% haircut. And the reason Argentina is in this jam is because Singer sued, and it went all the way to the US Supreme Court, and the Supremes sided with the hedge funds, and let stand a district court ruling.

The Supreme Court has been busy handing down decisions this week; and we will likely get a couple more decisions on Monday; I guess they don’t hand down decisions on Friday, and opt instead for an early happy hour. Anyway, the decisions of the past week were downright strange for one reason; several were unanimous. Wednesday, the court decided Riley v. California, which unanimously held that police cannot search the cellphones of people they arrest without a warrant. On Thursday, the court handed down two of its major opinions of this year: National Labor Relations Board v. Noel Canning, about the president's recess appointment power and McCullen v. Coakley, about abortion clinic buffer zones.

You will recall that the court is split ideologically, with 5 justices leaning right and 4 justices leaning left, so it’s a little surprising to see the twain meet. Unanimity is rare; a fractured court is the norm, and yet, we had three unanimous decisions among people who are inclined to disagree; and at a time when the House of Representatives is suing the president and people from one side can’t have a civil conversation with someone from the other side. Maybe this is an example of the rule of law being more important than politics. Before we declare a victory for compromise, maybe there’s a little more to how the court arrived at unanimity.

Even when the court agrees on a ruling, it can divide over the reasoning and even how the rule should be applied. In other words they take very different paths to arrive at the same place. It is possible that a 5-4 decision is not an indication of a polarized court. You have to read the decisions behind the vote. And conversely, a unanimous decision can mask deep divisions that appear down the road.

Monday, June 16, 2014 - Manic Monday

Financial Review with Sinclair Noe

DOW + 5 = 16,781
SPX + 1 = 1937
NAS + 10 = 4321
10 YR YLD - .01 = 2.59%
OIL - .12 = 106.79
GOLD – 4.20 = 1272.70
SILV un = 19.77

It’s Monday, and that means mergers. Today’s acquisition news comes from Medtronics, the medical device maker, announcing it will acquire Covidien for nearly $43 billion. Medtronics was founded in a garage in Minneapolis in 1949, but they will change their headquarters to Ireland, which is where Covidien has been headquartered since 2009. Covidien is actually a Massachusetts company, and they operate out of Massachusetts. Medtronics will continue to operate out of Minneapolis; the whole deal is about a lower tax rate, and for Medtronics, the ability to repatriate $20 billion in offshore profits, without paying tax.

Meanwhile, the IPO market remains white hot, and 14 companies will come to market this week. So far this year 124 companies have priced in the US, up 57% from a year ago. Total proceeds raised come to $25.8 billion, up almost 41% from 2013.

Data today showed industrial production climbed more than forecast in May. Output at factories, mines and utilities rose 0.6% after a revised 0.3% drop in April that was smaller than previously estimated. In a separate report, the New York Fed’s Empire manufacturing report rose to 19.28, better than expectations.

The Fed FOMC meets later this week to determine monetary policy. After their meeting concludes Wednesday, Fed officials will release their updated projections for interest rates, growth, inflation and unemployment, and also are likely to trim their bond-buying program by an additional $10 billion a month.

The latest report from the International Monetary Fund, the IMF, might suggest the Fed doesn’t need to be in a hurry to exit a Zero Interest Rate Policy. Of course, the IMF doesn’t set Fed policy, but the latest IMF forecast for the US economy cuts the outlook for growth to 2% from the 2.8% predicted back in April; the lower forecast is mainly a result of the weakness in the first quarter. The IMF kept if 2015 forecast unchanged at 3%. The forecast says the economy is starting to rebound but will remain below historical averages as the population ages and productivity growth slows. Their forecasts show we won’t return to full employment until the end of 2017, with inflation remaining low.

The IMF suggests the US raise the minimum wage as one way to boost the economy; other suggestions include more spending on infrastructure and education, plus changing parts of its tax system, including boosting the federal gasoline tax and reinstating the tax credit for research and development, to help spur growth. In the future, policymakers should also reform corporate taxes, introduce a carbon tax and move toward a federal value-added tax.

IMF Director Christine Lagarde says the oil shock that could result from the current tension in Iraq might affect the economy but for that to happen, the shock would have to be rather deep and rather long-lasting. You’ll probably start seeing the price increase at the pump, as prices hover just below $107 a barrel. And oil prices are being whipsawed by the headlines; if we see fighting in Baghdad, we could easily see prices pop up to $120 a barrel.

Iraq, excluding the Kurdish region, holds 150 billion barrels in proven crude reserves, the world’s fifth-biggest deposits. A pipeline from the Kirkuk region to Turkey has been shut down since March, and now Kurdish troops are defending the Kirkuk oilfields from ISIL rebels. Even if the rebels are turned back, the Iraqi government in Baghdad may have a hard time displacing Kurdish troops in the future.

Meanwhile, Ukraine said Russia cut natural gas supplies after demanding fuel payments be made in advance, the first time shipments have been affected in this year’s crisis in relations between the two countries. Tensions escalated over the weekend with 49 servicemen killed when pro-Russia fighters shot down an aircraft.

British climate change economist Lord Nicholas Stern says our current models “grossly underestimate” the economic damage that will be wrought by climate change. In 2006 Stern wrote a scientific paper that estimated the externalized costs of burning fossil fuels will impact the world economy by five per cent to 20 per cent of global GDP, which would work out to between $2.3 trillion and $9.1 trillion each year. Now, Stern says he “got it wrong on climate change; it’s far, far worse.”  So, Stern and a colleague, Simon Dietz just published a new preliminary paper that makes a few key updates, and now Stern believes that “climate change is the greatest markets failure the world has ever seen.”

The old model looks at any point in time, measures the economy’s productive capacity, and then gauges how much climate change will dampen that productivity in that moment. But climate change can also reduce that productive capacity itself. Stronger storms can damage infrastructure; sea level rise can force people to abandon homes, businesses or equipment; and climate damage can channel more investment into repairs and away from creating new capital. Stern and Dietz account for that, and the result is a double hit: at any given moment, the effects of climate change are reducing the economy’s ability to produce wealth, but they’re also reducing the economy’s overall capacity to produce wealth at future moments.

Other factors in modeling climate change’s economic effects are what scientists call “tipping points”; moments when global warming kicks off feedback loops in the planetary ecology that cause the effects to speed up. Examples of tipping points include the polar ice melting in a way that results in sudden huge collapses rather than gradual melting; or melting permafrost in the northern hemisphere releasing underground methane that in turn speeds up global warming even more. They can also include second-order social effects that damage economies: drought and food scarcity kicking off wars or mass refugee movements, for instance.

June is a big month for the Supreme Court and several major rulings are expected in the next few weeks, and some cases have already been decided.

Last Thursday, the Supremes announced opinions on only two of the 22 cases it has in front of it: POM Wonderful v. Coca-Cola which deals with whether a company can sue another one for unfair competition based on false or misleading product descriptions; and Clark v. Rameker, which weighs whether individual retirement account (IRA) inheritance can be exempted from Chapter 7 bankruptcy under the “retirement funds” exemption.

In the POM case, the court ruled that POM, a company that makes pomegranate juices, had the right to sue Coca-Cola for falsely advertising one of its juices as being made mostly of pomegranate and blueberry juice when it was actually made of apple and grape juices. POM, which makes a special pomegranate-blueberry juice blend, claimed it lost sales as a result of Cola-Cola’s false labeling. The ruling reversed a decision from the Ninth Circuit Court of Appeals, which essentially said POM lacked the legal standing to sue because of a conflict with state and federal law.

In Clark v. Rameker, the court ruled that IRA inheritance funds do not meet the “retirement funds” exemption and must be included as part of the estate in the bankruptcy process. Because an IRA is intended for the retirement of the person who originally put the funds into the account, and an inherited IRA functions essentially as a fund that can be used at any time and not just for retirement, the exemption does not apply.

Today, the Supreme Court handed Argentina two major defeats in cases brought by bondholders who refused to accept reduced payments after the country’s 2001 default. The Supremes decided against hearing Argentina’s appeal of an order requiring it to pay holders of defaulted notes from 2001 when making payments on its restructured debt. The next payment on those bonds comes due June 30. Shortly after the first decision, the Supremes handed down another ruling allowing the bondholders to issue subpoenas to banks in an effort to trace Argentina’s assets abroad.

The inaction by the Supreme Court is a victory for the minority of investors, led by a hedge fund controlled by billionaire Paul Singer, who have refused to exchange their defaulted bonds for about 30 cents on the dollar. Argentina calls those investors “vultures” because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall; in other words, they bought the bonds for pennies on the dollar, refused to accept 30 cents on the dollar, and the Supremes say they now must be paid the full face amount of the bonds.

In response to today’s decisions, lawyers for Argentina wrote: “Since Argentina lacks the financial resources to pay the holdouts in full (what would amount to $15 billion) while also servicing its restructured debt to 92 percent of bondholders, Argentina will have to face, objectively, a serious and imminent risk of default.”

Argentina claimed that lower-court rulings misread Argentina’s bond agreements and violated its immunity as a sovereign nation. In court filings, the Argentine government has said it would comply with lower-court rulings. But in public pronouncements, Argentine President Cristina Fernández de Kirchner has vowed not to pay a group of creditors she has referred to as “predators.”

Also today, the Supremes dealt a rare blow to the gun lobby Monday by ruling that purchasers must report when they are buying firearms for other people.

Other rulings expected this week might include Sebelius v. Hobby Lobby, which deals with whether a for-profit company has to provide contraceptive care for its employees if the owner has a religious objection, even though the employees are entitled to it through the Affordable Care Act (ACA), also known as Obamacare.

Also, American Broadcasting Company v. Aereo, which should be of interest if you watch TV over the internet. Aereo is a Web startup company that allows consumers to pay an $8 or $12 subscription fee to watch their local TV networks live on any Internet-connected device. The major broadcasters say this amounts to theft of their product.

And a couple of cases that deal with the Fourth Amendment: Riley v. California, and United States v. Wurie; both cases are about whether the police have to obtain a warrant to search an individual's cellphone when an arrest is made.