Financial Review

Settling a Score

Sinclair Noe — May 24, 2017

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

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DOW + 74 = 21,012
SPX + 5 = 2404 (record)
NAS + 24 = 6163
RUT + 1 = 1382
10 Y – .02 = 2.26%
OIL – .15 = 51.32
GOLD + 7.90 = 1259.60
BITCOIN + 4% = 2537.16
ETHEREUM + 1.83% =  185.00

After 5 straight winning sessions, the S&P 500 closed at a new record high. The Nasdaq Comp is near a record.

The Federal Reserve released minutes of their May 3^rd FOMC policy meeting. The statement points toward a rate hike as soon as the Fed’s meeting in mid-June. According to minutes: “Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation.”

Officials opted at the May meeting to leave the target range for their benchmark lending rate unchanged at 0.75 percent to 1 percent. They have projected three rate increases in 2017. They made the first rate hike in March. If they follow with 2 more hikes this year, we would be looking at rates around 1.25% to 1.5% by the end of the year, with a strong possibility for 4 more hikes next year.

Fed officials discussed a brightening global economic picture and viewed recent soft inflation and output data as likely caused by transitory factors. Growth slowed in the first quarter to an annualized pace of 0.7 percent, although the Fed expects the economy to bounce back in the second quarter.

Unemployment continued to decline. Labor Department data released two days after the meeting showed the jobless rate in April fell to 4.4 percent, the lowest reading since 2007 and beneath most economists’ estimates of the lowest sustainable level, or what might be considered full employment.

Policy makers have also said they would like to start shrinking their $4.5 trillion balance sheet by year-end, a move that may lift longer-term borrowing costs and dampen growth. It sounds scary to think that the Fed will soon reduce its war chest of bonds. Still, today after the minutes were released, Treasury values rose and longer-term yields fell.

One interpretation is that traders aren’t taking the Fed seriously. But another is that investors just received an unexpectedly concrete sense of the Fed’s methodology for unwinding its balance sheet, and it clearly indicates moving at a slow, gradual, incremental pace.

Fed members said they favored a method that included allowing a certain amount of their holdings to pay down without reinvesting the proceeds. The Fed would cap the amount of debt they’d allow to roll off at a certain level, and then would adjust that level every three months. Officials agreed they should provide additional details of the plan “soon.”

The dollar weakened slightly. Oil prices posted their first decline in six sessions. US crude supplies fell a seventh week in a row. Following the supply data, the price action became a function of positioning ahead of the OPEC meeting tomorrow. OPEC is expected to extend production cuts for 9 months, until March of 2018.  Data from the U.S. Energy Information Administration Wednesday showed that domestic crude supplies fell by 4.4 million barrels for the week ended May 19.

The last time the Congressional Budget Office scored the Republican health care bill back in March, it forced lawmakers to make major changes in order to prevent millions of Americans from losing their health coverage and lower premiums for the elderly. Amendments were added and another vote was held, this time without waiting for a CBO analysis – and the bill passed in the House.

The Congressional Budget Office today released their updated score for the American Health Care Act (AHCA), and the results are just as ugly as the first time. The report from the CBO on the amendments added just before the AHCA was passed by the House shows that 23 million more Americans could be uninsured by 2026 compared to the current healthcare system, slightly lower than the 24 million estimated under the previous iteration of the bill.

The CBO estimates that 14 million people who are currently covered would be uninsured as soon as the House plan were to be signed into law. And another nine million people would lose coverage over the course of the next decade. The AHCA, would also spike coverage costs in many states for people with pre-exiting conditions, especially for older Americans.

Importantly, the score projects that the AHCA will cut the federal deficit by $119 billion, $32 billion less than the $151 billion cut in the previous report. This was key because Republicans plan to consider the bill under the reconciliation process in the Senate. By these rules, the bill must shave off at least $2 billion from the federal deficit to be considered.

The Senate is expected to craft their own version of a healthcare bill instead of using the current form of the AHCA. The practical ramifications of the CBO’s latest report were more limited than its immediate political implications.

The House bill, as written, will not become law. Whatever proposal the Senate comes up with will have significant differences and will need a separate assessment by the CBO before a vote.

President Trump today continued his overseas tour with a visit to the Vatican. Pope Francis gave Trump a medallion engraved with the image of an olive tree – a symbol of peace, he explained.

Francis also presented Trump a signed copy of “Laudato Si’: On Care for Our Common Home”, the first papal encyclical focused solely on the environment. The two men spoke privately for about an hour-and-a-half. Next stop, Brussels.

Testifying to the House Budget Committee, Office of Management and Budget Director Mick Mulvaney suggested the government’s borrowing limit may need to be raised earlier than originally anticipated, citing “slower-than-expected” tax receipts.

The latest monthly budget report from the Treasury shows receipts are up almost 1% for the fiscal year to date. The year before, receipts were up about 1.2% through April, and the year before that, nearly 9%.

Sales of previously-owned homes sputtered in April after a strong first quarter. Lean inventory continued to constrain demand. The National Association of Realtors said existing-home sales ran at a seasonally adjusted annual rate of 5.57 million.

That was a 2.3% decline from March’s selling pace, which was revised down a tick but still stood at a 10-year high, though 1.6% higher compared to a year ago in April.

The median national sales price was $244,800 in April, a gain of 6% compared to a year ago. It was the 62nd-straight month of annual price gains. Despite that, first-time buyers managed to stage a small comeback.

They represented 34% of all buyers in April, up from 32% in March, though still below their long-time average of about 40%. NAR’s report also showed that 52% of homes sold in April were on the market for less than a month, which is a new high.

Sentier Research reports that median annual household income, adjusted for inflation, was $59,361 in April, a big 1% gain from March and a statistically significant move. For the first time since the U.S. entered the worst recession of the post-war era, the typical U.S. household has more income than it did when the century started.

Moody’s Investors Service downgraded China’s sovereign rating one notch to A1, which is two grades above junk status. The previous ratings cut was in November 1989 in the wake of Tiananmen Square.

In a statement, Moody’s said, “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.” China’s total debt is estimated at around 220% of gross domestic product as of 2015, with a large chunk of it owed by corporations.

Global financial markets shrugged off the news because it is more confirmation than revelation.

Ministerial buildings were set ablaze in the Brazilian capital today as tens of thousands of protesters took to the streets to demonstrate against government corruption, renewing calls for Brazilian President Michel Temer to step down.

The federal government filed a lawsuit against Fiat Chrysler, accusing it of using illegal engine-control software to enable its diesel-powered vehicles to pass emissions tests. The filing occurred days after Fiat Chrysler proposed a modification to the software to ensure correct test results in hopes of resolving the issue.

The Environmental Protection Agency accused Fiat Chrysler in January of installing the software on about 104,000 Ram pickup trucks and Jeep Grand Cherokee sport utility vehicles sold from 2014 through 2016.

The Fiat Chrysler problem is very like the legal woes of Volkswagen, which admitted to using “defeat device” software to enable its cars to pass emissions tests while spewing far more pollutants than allowed in normal driving. Volkswagen ended up paying billions of dollars in fines, several of its executives have been investigated or charged with crimes.

Facebook has signed deals with news and entertainment creators Vox Media, BuzzFeed, ATTN, Group Nine Media and others to make shows for its upcoming video service, which will feature long and short-form content. It is an attempt to deliver on Facebook Chief Executive Mark Zuckerberg’s remarks to investors earlier this month that the company was looking for so-called “anchor content” that would draw people to the video tab on Facebook’s app.

Japan Has Dropped Back Into Deflation

Financial Review

Busy Day

Sinclair Noe — September 25, 2015

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

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DOW + 113 = 16,314
SPX – 0.9 = 1931
NAS – 47 = 4686
10 YR YLD + .05 = 2.17%
OIL + .64 = 45.55
GOLD – 7.70 = 1147.40
SILV – .05 = 15.20

For the week, the Dow was down 0.4 percent, the S&P 500 was down 1.4 percent and the Nasdaq was down 2.9 percent.

Yesterday afternoon we told you about Janet Yellen’s speech in Massachusetts; Federal Reserve Chairwoman Janet Yellen says that an initial rate hike is likely to be appropriate this year. Yellen said she expects inflation will return to 2% over the next few years as temporary factors currently holding it down will wane. Signs of weak growth overseas won’t prove large enough to have a significant impact on policy. Yellen said: “Most FOMC participants, including myself, currently anticipate…an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”

Near the end of her speech, Yellen kind of froze up; she went silent for a while, stumbled over her words, and seemed to be having a hard time. After the speech paramedics checked her out and gave her a clean bill of health. Later attributed the incident to dehydration. She was back at work today.

This morning we heard reports House Speaker John Boehner would resign his position as Speaker of the House and his seat in Congress at the end of October. Boehner held a press conference to confirm. The abrupt decision comes after he faced heavy pressure from conservatives in his party to take a harder line on their causes. Boehner also told the lawmakers that Pope Francis’ visit to Congress the day before was a crystallizing moment.

Representative Kevin McCarthy of California, the No. 2 House Republican, quickly became the leading contender to replace Boehner as speaker. McCarthy has been loyal to Boehner during his frequent tussles with conservatives, but is also close to Tea Party conservatives and in recent months has tacked to the right. Boehner declined to endorse anyone as his successor, but told reporters McCarthy “would make an excellent speaker.”

Boehner told reporters he was stepping aside to avoid another brewing House battle over his leadership, but before he leaves, Boehner will have at least one big battle. With only a few days left until a possible government shutdown, Congress is in overdrive to keep federal funds flowing despite partisan divisions over Planned Parenthood. The issue has ignited the latest crisis in U.S. budget wars and has forced the Obama administration to prepare for a potential repeat of the 2013 shutdown, which lasted 16 days and suspended the salaries of 800,000 federal employees. Boehner’s resignation appeared to ease the threat of a government shutdown next week. Many Republicans said it would free him to forge ahead with a “clean” spending bill. At least that’s one theory; the other line of thought is that Boehner will find it increasingly difficult to herd cats as a lame duck. I’m sure he’ll make a fine lobbyist.

Next on the news docket:  Chinese president Xi Jingping is in Washington for an official state dinner at the White House. President Xi announced that China will start a national pollution-trading system to cut global-warming emissions for its most polluting industries. That’s in addition to previous Chinese commitments to bring its emissions to a peak by 2030 and radically scale up solar and wind power. China even promised $3.1 billion to help poorer countries move away from fossil fuels. The move should also add pressure for a global climate change accord in Paris this December. At a joint news conference with President Obama, Xi said there was no reason to expect China’s yuan currency to depreciate against the U.S. dollar over the long run, saying the exchange rate was “moving toward stability.”

Pope Francis is in New York today. He started the day with a speech before the United Nations General Assembly. Pope Francis strongly condemned the craving for material gains and power, telling world leaders gathered at the United Nations that greed is destroying the Earth’s resources and aggravating poverty. The spiritual leader of the world’s 1.2 billion Catholics condemned the “grave offense” of economic and social exclusion. An attack on the environment was an assault on the rights and living conditions of the most vulnerable, he said, warning that at its most extreme, environmental degradation threatened humanity’s survival. Then he led multi-religious prayer services at the 9/11 Memorial and Museum site, followed by a ride through Central Park in the Popemobile, a visit to a school in Harlem, and then a mass at Madison Square Garden. And you thought you had a busy Friday.

Gross domestic product — the value of everything a nation produces — rose at a 3.9% annual rate from April to June, according to the government’s second update of how fast the nation’s economy expanded during the spring. Previously the Commerce Department had said GDP increased 3.7%. The figures get revised as the government gets more data on how the economy performed. Consumer purchases jumped 3.6%, up from a prior estimate of 3.1%. Americans spent more on services such as health care and transportation. Businesses also invested more in structures such as office buildings and plants than the government initially reported. Investment on structures rose 6.2%, double the earlier estimate. Outlays on equipment also rose slightly instead of declining. And spending for home construction climbed 9.3% instead of 7.8%. After-tax corporate profits jumped 2.6 percent to double BEA’s estimate of 1.3 percent.

S&P 500 companies, excluding financial companies, collectively had $1.43 trillion in cash reserves sitting on the sidelines in the second quarter (April to June) of this year. That’s the second highest level in 10 years, and just a tad lower than the 1.45 trillion high set in the fourth quarter last year. Tech companies especially have much more cash than they did during the dot-com bubble era. Tech leads all sectors in its cash holdings by a long mile.

Some cash numbers are remarkable. Microsoft has $96 billion in cash, Google holds $70 billion and Cisco has $60 billion. The good news is that it reflects very healthy balance sheets. The bad news is that it shows a reluctance to spend by corporate executives, which signals pessimism and that they aren’t seeing enough growth opportunities to invest in.

The final read of consumer sentiment was revised higher to 87.2 from a preliminary tally of 85.7, according to the latest University of Michigan reading. This was down from the August final reading of 91.9.

The Brazilian real enjoyed a massive rally on Thursday after the governor of Brazil’s central bank vowed to use “all instruments” available to policymakers to stem the currency’s recent slide. Busting a five-day losing streak, the real rallied as much as 7% intraday, its biggest gain since November 2008. On Wednesday, the bank announced plans to auction $2 billion worth of currency swaps over two days – restarting a program that was scrapped earlier this year.

Japan has dropped back into deflation for the first time since April 2013 in a symbolic setback to Prime Minister Shinzo Abe’s economic stimulus. Core inflation, excluding fresh food, was down by 0.1% compared with a year ago in August, as slumping global energy prices outweighed headline prices. BOJ Governor Haruhiko Kuroda continues to insist Japan can reach a 2% inflation target by the middle of next year, but most analysts think that goal is now out of reach.

Volkswagen has a new CEO, Matthias Mueller, head of the company’s Porsche brand. Volkswagen has blamed its emissions scandal on a “small group” of people and said suspended a number of staff. Müller pledged to leave “no stone unturned” and “maximum transparency” in an investigation into how the company cheated emissions tests on diesel cars. However, the new VW boss did not reveal how many staff have been suspended or who they are. Bloomberg reported that key parts of the faked emissions tests had been overseen by VW executives based in the company’s headquarters in Wolfsburg.

The iPhone 6s and 6s Plus go on sale in many countries today, including the U.S., U.K., China, Australia, Canada and Germany. Shoppers who purchase the devices in an Apple store can opt in to the new iPhone Upgrade Program, which includes Apple’s warranty plan and the option to upgrade to a new handset every year. Analysts expect 12 million to 13 million phones to fly off the shelves over the weekend, up from more than 10 million last year – when the iPhone 6’s launch was delayed in China.

Google is back under U.S. antitrust scrutiny as officials ask whether the tech giant stifled competitors’ access to its Android mobile-operating system. The Federal Trade Commission reached an agreement with the Justice Department to spearhead an investigation of Google’s Android business. FTC officials have met with company representatives who say Google gives priority to its own services on the Android platform, while restricting others.

Facebook’s Oculus and Samsung Electronics have unveiled a new version of Gear VR for $99, saying the virtual reality headset would ship in time for Black Friday. The new device is 22% lighter and will work with all of Samsung’s 2015 line of smartphones, in contrast to the highly anticipated Oculus Rift, which will need to be wired to an expensive gaming computer. Users will additionally be able to cast 360-degree videos from Facebook’s newsfeed into the Gear VR, and Netflix, Vimeo and Hulu support is also on the way.

A rare astronomical phenomenon Sunday night will produce a moon that will appear slightly bigger than usual and have a reddish hue, an event known as a super blood moon. It hasn’t happened since 1982, and won’t happen again until 2033. A so-called supermoon, which occurs when the moon is closest to earth in its orbit, will coincide with a lunar eclipse, leaving the moon in Earth’s shadow. Individually, the two phenomena are not uncommon, but they do not align often. The moon may appear 14 percent larger and 30 percent brighter, but the difference is subtle to the plain eye. But the reddish tint from the lunar eclipse is likely to be visible throughout much of North America. You’re basically seeing all of the sunrises and sunsets across the world, all at once, being reflected off the surface of the moon.

Fed Chair Janet Yellen Seems To Be Priming The Markets For A Hike In The Near Future

Financial Review

Speech of the Day

Sinclair Noe — September 24, 2015

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

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DOW – 75 = 16,201
SPX – 6 = 1932
NAS – 18 = 4734
10 YR YLD – .02 = 2.12%
OIL + .43 = 44.91
GOLD + 23.80 = 1155.10
SILV + .36 = 15.25

Pope Francis addressed a joint meeting of Congress this morning. Francis urged the United States not to turn its back on undocumented immigrants, to reject the victimization of religious and ethnic minorities, to overcome income inequality and to save the planet from climate change, citing Scripture and the nation’s founding ideals. He also asked lawmakers to wage a constant battle against poverty and to ensure the wealth of the world is equitably shared and used to create jobs.

It was really a very remarkable and beautifully crafted speech. I’m posting a link to the full text of the speech on by blog, and I would hope that you have a chance to hear or read the entire speech because it covers some of the most important issues of our time. You may be in total agreement with Francis or you might disagree with some parts, but make no mistake – this was a strong and moving address from one of the most influential people in the world.  After the speech, Francis went from some of the most powerful people to some of the least powerful as he had a humble lunch with homeless people. The Pope has flown to New York, where he will deliver another speech tomorrow before the United Nations General Assembly.

Chinese president Xi Jingping will be in Washington this evening for a state dinner at the White House. Xi’s first stop in the US was in Seattle where he met with some of his big corporate customers. Xi signed a deal for $38 billion worth of jets from Boeing. Then Cisco announced it is forming a joint venture with server maker Inspur to sell networking and cloud computing products in China, where the company faces political pressure and declining sales. Microsoft is partnering with Baidu and Tsinghua Unigroup to sell cloud services to Chinese state-owned enterprises and also struck a deal with China Electronics Technology Group to explore ways to deploy a “localized” version of Windows 10.

Fed Chair Janet Yellen delivered a speech this afternoon on “inflation dynamics and monetary policy” at the University of Massachusetts. The Fed held off on a rate hike last week; however, today Yellen seemed to be priming the markets for a hike in the near future, saying: “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.”

In today’s speech, Yellen also echoed Fed vice chair Stanley Fischer, who in August suggested that the Fed could move to tighten monetary policy before inflation had moved all the way back to the Fed’s target. Yellen said: “Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag.

If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

The Fed, of course has a dual mandate of maximum employment and price stability. On those points, it is hard to argue that we have achieved maximum employment when there is so much slack remaining in the labor market and no signs of wage push inflation; in terms of price stability, we have seen no signs of inflation, which must drive some economists crazy. The conventional wisdom is that if interest rates are too low, we will see an increase in inflation; conversely, if rates are too high, it will serve to put the brakes on the economy and inflation will fall and perhaps turn into disinflation or even deflation.

The strange part is that rates have been at historically low levels, and inflation just hasn’t happened; in fact, there’s been a little disinflation. The economists and pundits that called for hyperinflation were gob smacked. The biggest proponents of higher rates are the big banks, because they make money on the difference between the interest rates they receive on loans and the rate they pay on deposits; and right now they have trouble justifying the interest they charge on loans when rates are this low, so they have tended to be more stringent in their lending requirements, and have even started charging to hold deposits. The banks spread, or net interest margin has dropped under a Zero interest rate policy.

And so it’s interesting that several Fed policymakers are calling to raise rates, even though the World Bank and the IMF and many economists cite the risk of higher rates; not just a risk to emerging markets but the domestic economy as well. That still seems a greater risk than the lag time of raising rates.

Brazil’s central bank intervened to try to calm the country’s volatile forex market yesterday, using currency-swap contracts and auctions of dollar-repurchase agreements to prop up the real. Over the past year, the currency has lost about 70% of its value against the dollar due to a struggling economy and corruption scandal at Petrobras that may see the state intervene with a bailout. Earlier this month, Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status.

Purchases of new homes jumped in August to a seven-year high. Sales climbed 5.7 percent to a 552,000 annualized pace, up from a 522,000 rate in July that was stronger than initially reported. Steady job gains and cheaper borrowing costs are bolstering demand for new homes, particularly as the supply of previously owned properties is still scant.

Orders for durable goods in August fell for the first time in three months, mainly because of an expected pullback in bookings for new cars, airplanes and military hardware. Overall business investment also softened. Orders for U.S.-made durable goods such as autos, appliances and heavy machinery fell a seasonally adjusted 2% last month. That’s the first decline since May and follows two big increases in a row. Setting aside autos and aircraft, new orders for long-lasting U.S. goods were flat.

New applications for U.S. unemployment benefits inched up by 3,000 to 267,000 in the seven days ended Sept. 19. This is the 29th straight week claims have come in under 300,000, an unofficial threshold of a firming labor market.

The report on jobless claims came out just before Caterpillar said it plans to cut 10,000 jobs by the end of 2018 as part of a restructuring program. The company is aiming to save $1.5 billion annually through measures that include layoffs of 4,000 to 5,000 people by the end of 2016 and plant closures. The company is lowering its outlook for 2015 sales and revenue by $1 billion to $48 billion, and expects 2016 sales and revenue to be about 5% lower than 2015. Shares have lost 23% in the year so far, while the Dow Jones Industrial Average is down 8.7%.

General Electric said it would create 1,000 new energy-sector jobs in the U.K., after reaching an agreement to access export financing for up to $12 billion with the U.K. export credit agency. The company said the new jobs will support orders it has won, and expect to win, in international markets including Brazil, Ghana, India and Mozambique. Last week, GE said it was moving 500 American jobs overseas, after Congress failed to reauthorize the U.S. Export Import Bank.

The CEO is gone, but the problems at Volkswagen are not going away anytime soon. The automaker is facing billions of dollars in fines, millions in recalls, broken consumer trust and more executives that are likely to follow Martin Winterkorn out the door. Volkswagen has not named a CEO successor.

Volkswagen’s diesel emissions scandal may threaten the future of diesel-powered vehicles, along with their clean air and fuel economy reputation. Although diesel cars are fairly rare in the U.S., they are mainstream in Europe, with cheap fuel as the major selling point. In 2014, diesel motors powered 40% of passenger cars on the road in Europe, and diesel cars comprised 53% of all new auto sales in the region.

Are BMW’s emission tests tainted too? A report this morning in Auto Bild suggests BMW’s X3 exceeds nitrogen oxide levels by more than 11x.

Traders following the moves of bond king Bill Gross would likely be surprised to see the results marking the first anniversary of his dramatic career move. Investors who put money into his new Unconstrained Bond Fund at Janus Capital are sitting on a 2.5% loss, while those who stayed in Pimco’s Total Return fund are up 1.7%. The diverging performances could explain another surprise: Although the outflows from Total Return were indeed huge – $120 billion and counting – barely $1 billion flowed into Gross’s new fund at Janus.

Facebook has introduced a 360-degree “spherical” video feature in its newsfeed, allowing users to drag a cursor or tilt their devices to replicate an immersive panoramic view as the video plays. The move takes Facebook closer to the virtual reality experience, and may be the first step toward integrating content with the Oculus Rift headset (scheduled to be released next year).

Financial Review

Déjà vu All Over Again

Sinclair Noe — September 23, 2015

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

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DOW – 50 = 16,279
SPX – 3 = 1938
NAS – 3 = 4752
10 YR YLD + .02 = 2.14%
OIL – 1.67 = 44.69
GOLD + 5.70 = 1131.40
SILV + .03 = 14.89

Pope Francis visited the White House this morning. Speaking from the South Lawn before a crowd of about 15,000, the Pope said “climate change is a problem which can no longer be left to a future generation. When it comes to the care of our common home, we are living at a critical moment of history”; this was also a reference to his encyclical published in May, “Laudato Si – On Care for Our Common Home”, which addressed climate change. Francis has been a frequent critic of the damage caused to the world’s poor and the environment by capitalism’s excesses.

He also urged more attention be paid to the millions in poverty now overlooked by society, quoting Martin Luther King that “we have defaulted on a promissory note and now it is time to honor it.” Pope Francis said he will encourage Congress to guide the U.S. in fidelity to its founding principles including religious liberty. He referred briefly to the issue of immigration, and called on the U.S. to build a “truly tolerant and inclusive” society. Francis described himself as the son of an immigrant Italian family in Argentina. “I am happy to be a guest in this country, which was largely built by such families,” he said. Francis said that his teachings on economic fairness and climate change are “all in the social doctrine of the Church.” Tomorrow Pope Francis will address a joint session of Congress.

 Chinese president Xi Jingping arrived in Seattle yesterday, on his way to an official State visit in Washington DC tomorrow. Xi toured a Boeing aircraft plant and apparently liked what he saw. Boeing has signed deals to sell 300 aircraft to three Chinese firms and set up an aircraft plant in China. The aircraft deals, potentially worth $38 billion in total, are collectively the largest order the aerospace firm has received from Chinese companies.

Activity in China’s factory sector fell to the lowest level in over six years. The preliminary China manufacturing purchasing managers’ index dropped to 47.0 in September, down from 47.3 in August. The decline was led by a weak read for new orders and new export orders. Several investment firms lowered their estimates on China growth after factoring in the new manufacturing data.

Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers’ Index for September was 53. That was the same as August, which was its lowest since October 2013. A strong dollar, flagging demand in many export markets and reduced capital spending by energy and other companies were all dragging on U.S. manufacturing. The survey is indicating the weakest manufacturing growth for almost two years, meaning the sector will have acted as a drag on the economy in the third quarter.

The Markit Eurozone Manufacturing PMI fell to 53.9 in September, down from 54.3 in August, but roughly in line with activity over the last eight months. Service sector growth outpaced manufacturing by a small margin. European Central bank President Mario Draghi said it’s too soon to say whether risks to the economic outlook warrant a step-up in the European Central Bank’s stimulus, saying: “Should some of the downwards risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act.”

Bond guru Bill Gross, formerly with Pimco and now with Janus Capital, has long called for the Federal Reserve to raise interest rates. Now Groww is urging the Fed to “get off zero and get off quick” as zero-bound levels are harming the real economy and destroying insurance company balance sheets and pension funds. In his October Investment Outlook report, Gross wrote that the Fed, which did not raise its benchmark interest rates at last week’s high-profile policy meeting, should acknowledge the destructive nature of zero percent interest rates over the intermediate and longer term.

Gross writes: “Zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society.” Adding, “These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8 percent over the long term.” But with corporate bonds now at 2-3 percent, Gross said it was obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10 percent a year to meet the targeted assumption. “That, of course, is a stretch of some accountant’s or actuary’s imagination.”

At a time when fears are high about market liquidity comes a significant shift in the primary players in the corporate bond market. Households, hedge funds and nonprofits, historically considered to be long-term holders of fixed-income instruments, ditched corporate debt in the second quarter, selling $122 billion after reducing their holdings by just $24 billion over the previous three months.

Conversely, purchases by foreigners more than doubled, from $80 billion to $172.2 billion. Foreigners now own more than a quarter of the $8.1 trillion corporate bond market, with a 25.9 percent stake that is just shy of the 26.5 percent portion owned by mutual and exchange-traded funds. Households, a category that for statistical purposes also includes hedge funds, now own just 4 percent of the group. So, the fastest growth in ownership of corporate bonds is foreign investors and mutual funds/ETFs, otherwise considered short-term traders, not long-term investors.

A hallmark of the $18 trillion mutual-fund industry is that it promises easy entry and exit for investors. U.S. regulators now want new protections to ensure that pledge can be met due to concerns that firms have loaded up on hard-to-sell assets. The five-member Securities and Exchange Commission voted unanimously to pass a measure Tuesday that funds would have to maintain a minimum cushion of cash or cash-like investments that can be sold within three days. Funds also could charge investors who pull their money on days of elevated withdrawals.

The executive committee of Volkswagen’s supervisory board met today in Germany, with the automaker facing an unprecedented scandal. The company has now admitted that over 11 million diesel vehicles globally have software with programming aimed at defeating emissions control testing. One of their first moves was to hire Kirkland & Ellis – that’s the legal firm that represented BP in the Deepwater Horizon oil spill disaster. Next step, CEO Martin Winterkorn resigned. He had been CEO for the past 10 years. If he knew about the emissions fraud scheme, that’s bad. And it is almost as bad to imagine that he didn’t know what was going on.

Shares of Volkswagen managed to bounce about 2% but are still down about 37% for the week. In Germany, one in six jobs are dependent upon the automobile industry in some way. Economists are trying to estimate the broad impact of the Volkswagen scandal on German GDP.

If you’re wondering why the Volkswagen story is attracting so much attention, you are wise to be skeptical. The recent General Motors problem involving defective ignition switches resulted in more than 120 deaths, and about a $900 million dollar fine for GM. VW would probably take that deal in a New York minute. Then there is the problem with Takata airbags exploding with such force that they spray shrapnel through the passenger compartment.

You may even recall a story about emissions controls from 1998 involving Caterpillar, Cummings, Detroit Diesel, Volvo, Renault, and Navistar. They created their own defeat device – one setting for the emissions tests and another, dirtier setting for regular driving. That deal involved 1.3 million engines. The fines amounted to a little over $80 million, plus a pledge to spend more than $800 million to develop cleaner diesel engines, with no admission of guilt. So, it has happened in the past; which means it isn’t a stretch to imagine that other car companies are trying to game emissions tests. Like Yogi Berra once said, “It’s déjà vu all over again.”

The American Petroleum Institute indicated U.S. crude stockpiles fell 3.7 miillion barrels last week. Stocks at the Cushing, Oklahoma delivery location were down almost 500,000 barrels.

Patriot Coal disclosed that Blackhawk Mining won a bankruptcy auction for the majority of its assets. The terms of Blackhawk’s bid were not disclosed, but it did not include cash; instead, the company offered Patriot’s creditors new debt and a stake in the entity that would own the auctioned assets. The sale is subject to approval by the U.S. bankruptcy court in Richmond, VA.

The Brazilian real hit an all-time low against the U.S. dollar today. Brazil has been hit hard by the steep plunge in commodities prices and the economic slowdown in China. The real has tumbled almost 35 percent against the dollar year to date. Earlier this month, S&P cut Brazil’s credit rating to below investment grade. Brazil’s Treasury bought back fixed-rate notes but failed to sell new notes at two auctions earlier in the week.

A federal judge has ruled that Warner/Chappel does not have a valid copyright to the song “Happy Birthday To You.” The music to Happy Birthday To You was written in the late 19th Century by two sisters who called their version Good Morning To All. That song later evolved into the version popular today and was copyrighted by the sisters’ publisher.

The publisher and the rights to the song were eventually purchased by Warner/Chappell for $25 million in the 1980s. Warner/Chappell earns about $2 million a year from the song. A group of artists who challenged Warner/Chappell’s ownership said over the summer that they had proof that the song belonged in the public domain. They said a songbook from 1922 includes the song, predating its 1935 copyright. Yesterday, the judge agreed. You are free to sing to your heart’s content.

Financial Review

Never the Twain Shall Meet

Sinclair Noe — September 22, 2015

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

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DOW – 179 = 16,330
SPX – 24 = 1942
NAS – 72 = 4756
10 YR YLD – .09 = 2.12%
OIL – .85 = 45.83
GOLD – 8.70 = 1125.70
SILV – .45 = 14.87

Pope Francis is in Washington. The Pope will visit Washington, New York City and Philadelphia as part of his first-ever trip to the U.S., a six-day, five-night trip which will feature a couple of masses that are expected to draw huge crowds. The Pope will address a joint session of Congress Thursday; he may make points that challenge both parties, particularly if he repeats his remarks against what he sees as the excesses of globalization and capitalism. And he may discomfort both the White House and Congress if he urges them to do more to help Syrian refugees flooding through Europe. Then he will address the United Nations General Assembly in New York, where he will also conduct mass at Madison Square Garden on Friday.

China’s President Xi Jinping touched down in Seattle today to meet American business leaders before heading to Washington on Thursday to speak with President Obama. The two will discuss several thorny issues, including cybersecurity, the South China Sea, North Korea’s nuclear threat, human rights and a widening trade deficit. President Xi will tour the Boeing aircraft plant near Seattle. Not much new to see really, China has stolen more data from Boeing than Xi will ever see on a hospitality tour. Meanwhile, in his first interview with foreign media since Chinese stocks skidded this summer, Xi told The Wall Street Journal that government intervention to arrest the plunge was necessary to “defuse systemic risks” and was akin to acts taken by governments in “some mature foreign markets.” Hmm, wonder who he’s thinking about?

The Asian Development Bank is forecasting the Chinese economy will grow less than 7% this year, and warning of widening fallout from the country’s economic slowdown.

Just two years after a government shutdown over the Affordable Care Act, lawmakers are again heading toward a funding impasse – this time over federal money for Planned Parenthood. In January 2014, the Bureau of Economic Analysis estimated the direct impact of the last closure lopped about three-tenths of a percent off real GDP growth in the 2013 fourth quarter, and experts now estimate a three-in-four chance the government shuts down at the end of September (up from 67% last week).

The dollar hit an almost two-week high against a basket of currencies this morning after comments from Fed officials revived expectations that rates could still be hiked later this year. Dennis Lockhart, a voting member of the Federal Open Market Committee, is scheduled to speak again later in the day. Fed Chair Janet Yellen speaks on Thursday; and this is the speech that matters most. She won’t take questions, so it’s up to Yellen to decide if she wants to guide market expectations by emphasizing the Fed remains on track to raise rates this year, or whether she is willing to wait until next year.

If she stays silent on the topic, that would point to a delayed liftoff. They don’t want to surprise the market, which means they have to lay out a course of action before they can be sure they are going to follow it. There are two remaining FOMC meetings this year. Investors see the chances of liftoff in October as only around 20 percent, while a hike by December is less than a 50-50 proposition, according to trading in federal funds futures.

Bond fund giant Pimco says the pace of Federal Reserve interest-rate increases is likely to be even more gradual than the firm expected in March and that the U.S. central bank may find it impossible to escape the effective lower bound of policy rates. Pimco said in its quarterly Cyclical Forum outlook report that: “In contrast to robust consumption and housing, business investment confronts the headwinds from low oil prices and cutbacks in drilling and exploration, while exports will be challenged by the delayed effects of a stronger dollar and slower growth in emerging economies.” Pimco cut its forecast for U.S. economic growth in the next 12 months to between 2.25 percent and 2.75 percent, from 2.5 percent and 3 percent in March.

The Federal Housing Finance Agency reports house prices rose a seasonally adjusted 0.6% in July. That takes the year-over-year gain to 5.8%. Over 12 months, every region was positive, led by the 9.4% rise in the Mountain region, which includes Arizona.

European Union ministers have approved a plan that compels member countries to take in 120,000 refugees, despite strong objections from four dissident nations in Central Europe. The Czech Republic, Hungary, Romania and Slovakia voted no. Finland abstained. As a legal matter, however, the plan is final and must be carried out even if those countries oppose it.

Problems at Volkswagen continue to grow. Over the weekend, VW said 482,000 vehicles equipped with diesel engines sold in the US were rigged with a sophisticated software algorithm that could detect when a car was undergoing an emissions test; the software would adjust the pollution emitted during the test, and then after that, it was back to spewing deadly nitrous oxide gases at up to 40 times the legal limit. Yesterday, VW announced they had set aside $7.3 billion to deal with the problem.

That’s bad, but it gets worse. Now the company admits that it cheated on the emissions controls for 11 million vehicles worldwide.  Regulators from Germany, France, South Korea and Italy have vowed to scrutinize Volkswagen’s vehicles. The U.S. Justice Department has also begun a criminal probe. The 11 million cars affected are more than VW sells in a year. To address the growing crisis, the executive committee of the carmaker’s supervisory board will meet tomorrow. VW shares have dropped 31% in the past 2 days.

The shock waves from the scandal enveloping Volkswagen were being felt across the sector as traders wondered who else might be affected. Germany’s Daimler, the maker of Mercedes-Benz cars, was down 6 percent, while BMW fell 5.3 percent. France’s Renault was 5.5 percent lower.

A former peanut company executive has been sentenced to 28 years in prison for his role in a deadly salmonella outbreak, the stiffest punishment ever handed out to a producer in a foodborne illness case. The outbreak in 2008 and 2009 was blamed for nine deaths and sickened hundreds more, and triggered one of the largest food recalls in U.S. history. Before he was sentenced, former Peanut Corporation of America owner Stewart Parnell listened as nine victims testified about the grief caused by tainted peanut butter traced to the company’s plant in southwest Georgia.

The Securities and Exchange Commission is voting on new rules that would force most mutual funds, outside of money market funds, to have sufficient liquid assets to meet the legal requirement for daily redemptions and access to funds within seven days. It would also allow “swing pricing,” which is the process of reflecting in a fund’s NAV the costs associated with shareholders’ trading activity in order to pass those costs on to the purchasing and redeeming shareholders.

Brian Moynihan will keep his dual role as Bank of America Corp.’s chairman and chief executive officer after shareholders voted to ratify governance changes made last year. Preliminary results showed the resolution passed with about 63 percent of the votes. Bank of America had called the special meeting after angering some investors by undoing a 2009 shareholder-backed bylaw requiring an independent chairman.

Lloyd Blankfein, CEO of Goldman Sachs, said he has been diagnosed with lymphoma and will undergo chemotherapy in New York over the next few months. In a memo published on the investment bank’s website, Blankfein said it is a “highly curable” form of lymphoma, and his doctors fully expect him to recover.

It may not seem like much; just an extra hundred dollars or so a year, but the steady upward creep in health insurance deductibles has easily outpaced the average increase in a worker’s wages over the last five years. According to a new study from the Kaiser Family Foundation deductibles have risen more than six times faster than workers’ earnings since 2010. Four of five workers who receive their insurance through an employer now pay a deductible, in which they must pay some of their medical bills before their coverage starts. Those workers’ deductibles have climbed from a yearly average of $900 in 2010 for an individual plan to above $1,300 this year, while employees working for small businesses have an even higher average of $1,800 a year. One in five workers has a deductible of $2,000 or more.

Is 100 percent renewable energy possible by 2050? Greenpeace says yes. In a new study, Greenpeace projects that complete global reliance on renewable energy is within our grasp, and suggests the switch will create millions of jobs. The prediction sounds idealistic, but in the past equally dramatic Greenpeace predictions have proven accurate. In fact, the US-based Meister Consultants Group concluded earlier this year that “the world’s biggest energy agencies, financial institutions and fossil fuel companies for the most part seriously under-estimated just how fast the clean power sector could and would grow.”

And the main finding of the report includes another positive projection: more renewables will mean more jobs. Solar PV is expected to provide 9.7 million jobs, and wind power is expected to provide 7.8 million. And the projected 20 million jobs coming from renewables are far more than the coal, gas, and oil industries today combined. So although the International Energy Agency predicts the number of jobs to fall after 2020, the Energy Revolution report expects the number of jobs to increase between now and then.

Financial Review

The End of Summer

Sinclair Noe — September 21, 2015

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

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DOW + 125 = 16,510
SPX + 8 = 1966
NAS + 1 = 4828
10 YR YLD + .08 = 2.21%
OIL – .26 = 46.42
GOLD – 6.50 = 1134.40
SILV + .03 = 15.31

The National Association of Realtors says sales of previously owned homes fell 4.8% in August to an annual pace of 5.31 million, marking the first decline in four months. The sales rate in July was revised down slightly to a seasonally adjusted 5.58 million, but that was still the highest level in eight years. The median price of homes sold was up 4.7% to $228,700 from 12 months ago. Inventories of existing homes on the market rose 1.3% to 2.29 million, representing 5.2 months’ supply at current sales trends. Sales fell in all major regions except the Northeast, where they were unchanged.

The Federal Reserve reports businesses racked up new debt at an annual rate of 8.3% in the second quarter. That was the fastest growth since the first quarter of 2008 and was driven mostly by corporate bond issuance. While issuing debt, the corporate stockpile of cash rose to $2.06 trillion from $1.99 trillion. The Fed report also shows that households and nonprofits saw their net worth increase by $695 billion in the second quarter, mostly due to the rise in home values but also due to the stock market. Household credit grew 3.9% in the second quarter, mostly due to student and auto loans. The total debt outside the financial sector – of households, businesses and all forms of government – rose to $43.98 trillion from $43.51 trillion.

Investors will be looking for hints on when the Fed may finally raise rates when a number of central bank officials including Chair Janet Yellen, appear in public this week. Over the weekend, St. Louis Fed President James Bullard said there is a powerful case to be made for a rate hike, which he said could come in October.  Richmond Fed President Jeffrey Lacker explained why he dissented in favor of higher interest rates. San Francisco Fed President John Williams said “most likely” the right time to start lifting interest rates will arrive this year. Bullard is a non-voting member of the Fed. Federal Reserve Bank of Atlanta President Dennis Lockhart, a voting member of the FOMC spoke today, saying he is in favor of a rate hike before the end of the year, even though he voted against a hike at last week’s meeting.

Pope Francis went to east Cuba today to celebrate the second Mass on Cuban soil. In his first two days in Havana, the pope met Cuba’s Fidel and Raul Castro. But there was no encounter for dissidents. Three were hauled away from Revolution Square on Sunday before the pope celebrated Mass for tens of thousands. Pope Francis will fly from Cuba to the United States tomorrow.

Greek voters have given the left-wing Syriza party the second chance it was asking for, following another high-stakes election that marks the next phase of the country’s debt crisis. Syriza leader and former Prime Minister Alexis Tsipras had enraged many Greeks by breaking an election pledge and ignoring the outcome of a referendum, but that did not stop citizens from putting him back in power. Results: Tsipras gathered around 35% of the vote.

The election is over, the economic problems are not. The financial markets are no longer concerned that Syriza will be the template for a political backlash against budget cuts or that it could start the breakup of monetary union by leaving the single currency. There is no reason for the markets to worry about Greece, at least for now. The Greek economy has contracted by 29% in the past 6 years. Greece can’t pay its debts. Tsipras will step up the pressure for debt relief now that he has his new mandate. He will be turned down. Greece will likely default at some point.

The U.S. and China are negotiating what could become the world’s first arms control agreement for cyberspace, with each country committing not to be the first to use the weapons to cripple the other’s critical infrastructure during peacetime. The proposed accord would address attacks on power stations, banking systems, cellphone networks and hospitals, but would not protect against most of the cybercrimes China has been accused of conducting, including the widespread poaching of intellectual property and the theft of millions of U.S. government employees’ personal data.

Some of the most popular Chinese names in Apple App Store were found to be infected with malicious software in what is being described as a first-of-its-kind security breach. The applications were infected after software developers were lured into using an unauthorized and compromised version of Apple’s developer tool kit. Meanwhile, Apple says that last week’s rollout of iOS 9 marked the “fastest iOS adoption ever,” with more than 50% of existing devices upgrading to the new mobile operating system just five days into its launch.  The company began taking preorders for its newest smartphones, the iPhone 6s and iPhone 6s Plus, on September 12. It will begin selling the new hardware in retail stores this Friday.

Apple aims to release its first car in 2019. Although many reports have suggested that Apple is working on a self-driving car, the company’s first vehicle likely won’t be fully autonomous, according to a report in the Murdoch Street Journal. It will be electric. Apple has already been aggressively hiring for its car project, poaching employees from companies like Ford, General Motors, Tesla, Volkswagen, and more.

Many of its recent hires have expertise in connected and autonomous vehicle systems. It remains unclear if Apple will develop its “Apple Car” from the ground up or if it will team up with an existing auto manufacturer. Rumors have suggested Apple has held discussions with BMW over a potential partnership that would see the BMW i3 used as the basis for the Apple Car.

The Environmental Protection Agency (EPA) says Volkswagen used software for diesel VW and Audi branded cars that deceived regulators measuring toxic emissions and could face penalties of up to $18 billion. Volkswagen has for years promoted its TDI turbodiesels as a clean and efficient alternative to hybrids, but now it appears the cars were clean only when hooked up to emissions testing devices and dirty the rest of the time, spewing out about 40 times the allowed levels of pollution.

The EPA and California regulators began asking questions in May 2014 after West Virginia University researchers published a study that found lab results did not match up with road tests. The software was designed to detect when auto emissions were being hooked up to the cars; and only then the car’s emissions-control machinery would kick in. Once the test was over, the software noticed that, too, and returned to its illegally and dangerously dirty operations.

Think about that for a moment. Code had to be written for the express intent of cheating on auto emissions tests. People in the manufacturing process had to know it was happening. It took substantial testing to make it work. It happened across different models and brands. It lasted for 6 years, until it was discovered by an outside source.

It’s estimated that about 482,000 of the cars were manufactured and sold from 2009 through 2015, and are still on the road. It is a near certainty that VW will recall the cars to remove the allegedly illegal software that deceives emission inspection stations; it is less certain what VW will do to bring the cars into compliance with clean-air regulations without hampering their performance and gas-mileage.

At least one class-action lawsuit has already been filed on behalf of Volkswagen and Audi owners. It claims fraud and breach of contract, citing the “diminished value” of the nearly 500,000 recalled diesel vehicles, which usually sell for a premium price over their gasoline counterparts. Specifically, after recalled Volkswagen diesels are fixed, the cars might have degraded horsepower and fuel efficiency. Volkswagen could be criminally prosecuted. And there is evidence that the excessive pollution spewed out by VWs is deadly. VW shares down about 17%, and the company lost nearly $17 billion in market capitalization.

Remember Standard Chartered, the British bank accused of violating sanctions against Iran back in 2006? The investigation into those violations produced one of the most memorable quotes from a bankster, as one senior exec with Standard Chartered purportedly said: “You (blanking) Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

In 2007, StanChart committed to stop dealing with Iranians; then in 2012 they were fined $1 billion for sanctions breaches and compliance failures. Well, a new Financial Times report reveals that even after the 2012 fines, StanChart still had some compliance issues, and they could not say with certainty whether they were still dealing with Iranian customers; and US regulators are now investigating further sanctions breaches.

If the bank is found to have breached sanctions again, it could incur further fines or lose its vital dollar clearing license. And of course, according to the recent Yates Memo from the DOJ, they might seek criminal charges for repeat offenders; requiring the bank to turn over criminally culpable individuals as part of any settlement. This should be an interesting test of the Yates Memo.

You have probably never heard of Daraprim, it is a drug which has been on the market for 62 years, it is the standard of care for a food-borne illness called called toxoplasmosis caused by a parasite that can severely affect those with compromised immune systems, and it is used by HIV/AIDS patients. The pill sells for $13.50, or it used to, until about a week ago, when the price shot up to $750 a pill.

A spokesman for Turing said the company will use the money from the sales to further research treatments for toxoplasmosis, which he said has long been neglected. He also said the firm had plans to invest in marketing and education tools to raise awareness of the disease; a reasonable and reasoned answer, but one that has been unsatisfactory for many, especially in light of the corporate history. It turns out that Turing was a hedge fund that bought the marketing rights to Daraprim in August, and basically decided to jack up the price.

Financial Review

Sooner Rather Than Later

Sinclair Noe — June 18, 2015

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

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DOW + 180 = 18,115
SPX + 20 = 2121
NAS + 68 = 5132
10 YR YLD + .04 = 2.35%
OIL + .53 = 60.45
GOLD + 16.90 = 1203.00
SILV + .04 = 16.26

Three straight days of gains on Wall Street.  The Nasdaq finished up 68 points, or 1.3%, to 5132.95 and hit a new intraday record high of 5143.32. That tops its previous all-time intraday high of 5132.52, set back in March 10, 2000. The Nasdaq’s previous closing high of 5,106.59 was notched much more recently, on May 27. The rally was broad-based as all 10 S&P sectors rose with health care leading the way and all 30 stocks of the Dow posted gains.

We start with economic data. The consumer price index rose a seasonally adjusted 0.4% last month, almost entirely because of a surge in gasoline prices ahead of the summer driving season. Gas prices shot up 10.4% to mark the largest gain in six years. The overall cost of food, meanwhile, was unchanged for the second month in a row. Stripping out the volatile food and energy categories, so-called core consumer prices rose a much milder 0.1% in May. The cost of housing, airline tickets and medical care all rose while clothing prices declined.

The Conference Board’s leading economic index rose 0.7% in May for the second month in a row. The Board says the sharp increase confirms the outlook for more economic expansion in the second half of the year after what looks to be a much weaker first half.

The number of jobless workers seeking U.S. unemployment benefits fell again in mid-June and stood near a 15-year low. Initial jobless claims in the period running from June 7 to June 13 fell by 12,000 to a seasonally adjusted 267,000. New claims are 15% lower compared to one year ago.

The Philadelphia Fed’s manufacturing index increased to a reading of 15.2 in June, above the 6.7 in May. This is the highest reading since December; still, down from November’s reading of 40.2

Eurozone finance officials met in Luxembourg today. After 4 hours they did not come to an agreement about Greece, so they will hold an emergency meeting in Brussels on Monday. It is difficult to get a straight story on the Greek situation. Bloomberg ran a story today including a picture of protestors in Athens, it looked like a large crowd; the caption said the protestors were, “against the government and in support of the country’s membership in the euro area.” The Guardian ran a story showing protestors described as, “pro-government” and demanding an end to austerity measures.

Maybe it was two different rallies or maybe the protestors are just as confused as the negotiators. As best I can tell, Greece doesn’t have the money to pay the Troika at the end of the month; the negotiations are whether the Troika will lend Greece money to pay back to the Troika, along with another pound of flesh of course. Meanwhile, the German newspaper says Greek PM Alexis Tsipras and Finance Minister Yanis Varoufakis might not be radical hot-heads after all, rather the foot dragging and brinksmanship may turn out to be brilliant negotiating. Time will tell, and sooner rather than later.

Hong Kong’s legislature has vetoed a China-vetted electoral reform package that had been criticized by pro-democracy lawmakers as flawed and undemocratic. Although the new system would allow the next leader to be directly chosen by voters, Beijing would retain the right to choose the candidates on the ballot. Prior to the vote, Hong Kong’s government made it clear that if the package was defeated, the status quo would prevail and the chief executive would continue to be chosen by a committee of 1,200 members.

General Motors and Fiat Chrysler Automobiles have turned to investment banks for help to deal with a stand-off as Fiat-Chrysler seeks to force a merger with GM. Earlier this year, GM’s board rebuffed a merger proposal from the Italian-American carmaker and Chief Executive Mary Barra said last week she had no interest in a combination. Barra’s rejection has not stopped Fiat Chrysler’s boss Sergio Marchionne, who is lobbying GM investors to support his case.

AT&T Mobility has been fined $100 million for offering consumers “unlimited” data, but then slowing their Internet speeds after they reached a certain amount. The Federal Communications Commission said that the company misled consumers into buying plans they believed would give them unlimited ability to send and receive data, including Web browsing, GPS navigation and streaming videos. But once the consumer hit a certain level, the data on unlimited plans would be slowed down significantly. It’s not unusual for phone companies to slow, or “throttle,” speeds on a network as a way to manage congestion, but the FCC says AT&T was slowing speeds until the customer’s next billing cycle, even when there was no congestion.

Two new IPOs hit the New York Stock Exchange this morning. Fitbit priced 36-million shares at an offer price of $20 per share. At that level, the company will raise $732 million, at a valuation of $4.1 billion. Univar, a chemical distributor, priced at $22 per share, raising $770 million with a valuation of $3 billion.

FIT + 9.68 = 29.68
UNVR + 3.40 = 25.40

A driver for Uber is an employee, not an independent contractor; so says the California Labor Commission. And while the ruling applies only in California, it could have potential implications for other “crowdsourced” services such as Uber rival Lyft, chore service TaskRabbit, and cleaning service Homejoy. Classifying Uber drivers as employees could mean considerably higher costs for the company, including Social Security, workers’ compensation and unemployment insurance. That in turn could affect its valuation, currently above $40 billion, and the valuation of other companies that rely on large networks of individuals working as contractors.

A report from Americans for Tax Fairness claims that Walmart has $76 billion stashed away in foreign tax havens where they escape U.S. taxation. The report claims that Walmart operates 78 subsidiaries and branches in 15 tax haven countries, especially Luxembourg where the company has 22 subsidiaries but no retail stores.

Thomas Hayes, a former trader on trial over charges he manipulated benchmark interest rates, told prosecutors in 2013 that UBS Group distributed “an instruction manual on fixing Libor” to suit their trading positions. Hayes is the first person to stand trial for rigging Libor. Today, prosecutors showed jurors the instruction manual, entitled, “Guide to Publishing Libor Rates”. Hayes told prosecutors the document was evidence that Libor-rigging was standard operating procedure during his time at UBS.

Remember when banks engaged in fraud and deceptive lending and predatory lending practices? And then after the bailouts and the housing market collapse, the banks botched the foreclosures? And robo-signing? And losing paperwork? And it got so bad that in 2011 a dozen major mortgage companies struck a deal with the Office of the Comptroller of the Currency to bring in independent auditors to review foreclosures documents of aggrieved borrowers. And then that was scrapped because the bankers interfered with the auditors and there were cost overruns. Anyway, part of the 2011 deal was that the banks would clean up their mortgage and servicing departments. The OCC now says 6 banks did not live up to their end of the deal: HSBC, JPMorgan Chase, Santander, US Bank, and Wells Fargo. So, the OCC says it will impose new restrictions and pay closer attention.

The Securities and Exchange Commission charged 36 firms for violating federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The offending firms included familiar names such as Merrill Lynch, JPMorgan, Citigroup, and Goldman Sachs.

The UN has published a report on refugees, showing nearly 60 million people displaced from their homes, 14 million of them in 2014 alone, and half of them children; and more than 230 million children currently live in conflict-affected areas.  Not only is the number of refugees and asylum seekers today the largest since World War II, but the report also shows the fewest number are able to return home under current conditions. The largest toll stems from the four-year civil war in Syria: 7.6 million Syrians are internally displaced and 3.9 million are outside the country.

The National Oceanic and Atmospheric Administration reports that last month was the hottest May on record, and the past five months were the warmest start to a year on record. And that jibes with earlier reports that 2014 was the hottest year for the planet in records going back to 1880. The stifling start to 2015 may be just the beginning. The National Weather Service predicts that a pattern of unusually warm waters in the Pacific Ocean, known as El Nino, has an 85 percent chance of persisting through the 2015-2016 winter. And this El Nino could be a big one. A strong El Nino doesn’t guarantee record-breaking heat, but combined with the general trend of global warming, that possibility is looking increasingly likely.

In his much-awaited encyclical on the environment, Pope Francis offered a broad and uncompromising indictment of the global market economy, accusing it of plundering the earth at the expense of the poor and of future generations. The 183-page document, which Pope Francis addresses not only to Catholics but to “every person living on this planet,” includes pointed critiques of globalization and consumerism, which he says lead to environmental degradation. The pope lays out a moral case for supporting sustainable economic and population growth as part of the church’s mission and humanity’s responsibility to protect God’s creation for future generations.

The pope will visit the United States in late September, during which he’s scheduled to address a joint session of Congress and, separately, the United Nations General Assembly. The highlight of the pope’s trip will be the World Meeting of Families in Philadelphia, where the city is preparing for millions of pilgrims to visit. The letter’s release gives it several months of lead time on a major United Nations climate change conference that will take place in late November and early December in Paris.

Here is the link to read the encyclical.

Financial Review

Underwater

Sinclair Noe — June 12, 2015

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

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DOW – 140 = 17,898
SPX – 14 = 2094
NAS – 31 = 5051
10 YR YLD +. 01 = 2.39%
OIL – .74 = 60.03
GOLD – .70 = 1182.30
SILV – .07 = 16.06

The Trans Pacific Partnership trade deal hit a major roadblock today. The House rejected a key part of a package to fast-track the trade deal. The House voted today on two measures, both of which had to pass in order to send the legislation, which was already approved by the Senate, to the president. A bill to give the president fast-track authority to negotiate future trade deals was approved by a 219-211 vote. But another measure regarding funds to retrain workers failed, 126 to 302. Because the Senate had approved both measures, the failure of the retraining program prevented the package from advancing. The measure would give the Obama administration the ability to wrap up negotiations on the Trans-Pacific Partnership, a free-trade deal years in the making, and present a final agreement to Congress for expedited consideration and an up-or-down vote with no amendments.

In one of the more unusual coalitions of the Obama administration, the trade agenda found strong support with Republicans, while Democrats ended up blocking the measure. Democrats had repeatedly asked for the administration to make the trade deals public before seeking the fast-track power. Democrats also complained that the fast-track measure fails to protect workers, environmental standards and financial regulations, and does nothing to stop unfair currency manipulation. The failure does not necessarily mean an end to the battle. House Speaker John Boehner can bring the measures back if he can find a way to whip up more support.

New information reveals that more personnel records were hacked than previously reported during the federal cyber theft in December. Already considered one of the largest thefts of US government personnel data in history, investigators now estimate that it may include data on as many as 14 million people, more than triple the 4 million current and former government employees reported by the Office of Personnel Management last week. Officials are now weighing responses ranging from counter-intelligence initiatives to destroying the data in the intruders’ servers.

The producer price index increased 0.5 percent in May, the biggest one-month increase since September 2012. Prices at the wholesale level were pushed higher by a sharp jump in the cost of gasoline and a record increase in the price of eggs because of the avian flu. Core prices, which exclude energy and food, rose just 0.1 percent in May. Even with the advance in May, producer prices over the past 12 months are 1.1% lower.

Consumer confidence rose more than forecast in June. The University of Michigan preliminary consumer sentiment index increased to 94.6, from a final reading of 90.7 in May that was the lowest in six months. Consistent gains in the labor market are cited as a major reason for increased confidence, and likely helped underpin household spending, reflected in yesterday retail sales report which showed sales increased 1.2 percent last month.

Yesterday, there were reports that Greece might be nearing a deal on its debt problems. Then late yesterday the International Monetary Fund recalled its negotiating team from talks in Brussels, which might signal doom for any resolution. In response, Greece ruled out cutting pensions and demanded a debt restructuring. So, the battle lines are drawn, or redrawn, and next week EU officials will meet again in Luxembourg for a likely showdown, or it might be part of the game of chicken that both sides seem to be playing. The Greek tragedy could drag out for quite some time or it could come to a head at almost any time, and if a resolution is not found, there will almost certainly be a domino effect.

More bad news from the Eurozone today; Standard & Poor’s says Britain’s “economic policymaking could be at risk of being more exposed to party politics than we had previously anticipated.” The Credit rating agency says it is “similar to the situation in the U.S. in 2011.” Not exactly. The situation in Britain deals with a possible referendum vote on leaving the European Union in 2017. S&P lowered the outlook on the Britain’s AAA rating to “negative” from “stable.” That means there’s a one-in-three chance of a downgrade in the next two years. In its analysis, S&P said that PM Cameron’s pledge for a vote, made to placate elements of his Conservative Party, “represents a risk to growth prospects” for U.K. financial services, exports and the economy as a whole.

The number of borrowers who owe more on their home than it’s worth is falling, but there are still a number of borrowers who are deeply underwater. Zillow released its 2015 Q1 Negative Equity Report, which showed that negative equity fell in the first quarter of 2015 to 15.4% from 16.9% in the fourth quarter of 2014, and 18.8% during the same time period a year ago; negative equity peaked nationally at 31.4% in the first quarter of 2012. The rate of negative equity improved in all of the 35 largest housing markets in the first quarter of 2015. The rate of underwater homeowners is much higher among the homes with the least value. More than 25% of those who own the least valuable third of homes were upside down, compared to about 8% of the most valuable third of homes.

At the peak of the crisis, more than 15 million homeowners owed more on their mortgages than their homes were worth. Since then, foreclosures, short sales and rapidly rising home values freed nearly half of those homeowners, leaving 7.9 million homeowners upside down at the end of the first quarter; of those that are still underwater, over half or about 4 million owners, still owe 20% more than the value of their home, making it difficult for them to get out from under their mortgage.

For Phoenix, the negative equity rate in the first quarter was 19%, which works out to almost 147,000 homes in negative equity, and 56% of those owners were underwater by more than 20%. And 12.9% of underwater homeowners in Phoenix owe more than twice their home’s value to the bank. While home prices in Phoenix have recovered, according to Zillow valuations, prices are still down 26.9% from the peak.

Actually, it’s worse than that. Realistically, a homeowner needs roughly 20 percent equity in their home to afford the taxes and fees associated with listing and selling it and still have enough left over to afford a reasonable down payment on another home. When including these homeowners with less than 20 percent equity in their home, the national “effective” negative equity rate is 33 percent. Put another way, a third of all homeowners with a mortgage don’t have enough equity to list their home for sale and buy another. And while it’s great that the level of negative equity is falling, there are still so many homeowners underwater that it will likely be years before we get back to more normal levels of around 2% negative equity; and while we wait, many homeowners are stuck in their homes.

Next week the Federal Reserve FOMC will meet to determine monetary policy. No change is expected, although we will watch for any hint about when they plan to hike rates in the future. Also next week, the Fed will publish new quarterly forecasts, and all eyes are going to be on where they set the natural rate of employment; that’s the level of employment that is just strong enough to lift the economy without setting inflation on fire. Many people think the natural unemployment rate is about 5%. The current unemployment rate is 5.5%; so we are close. A new paper by Fed board staff shakes up this view by suggesting the number could be as low as 4.3%; the reason being that wages have not been keeping pace with hiring.

The bigger news next week will be Thursday, when Pope Francis will publish his much anticipated encyclical on the environment and climate change. An encyclical is a letter to followers, about 1.3 billion in this case.

An encyclical is not a scientific document, rather one that explores a particular issue in the light of Catholic social teaching. Yet the Pontifical Academy of Science has thoroughly investigated the research, producing its own documents on topics such as glacier retreat, and it is clear that we must take on board what the science is telling us. Francis will not approach the issue of ecology as a scientist (though he is a trained chemist) or as a politician (though he clearly has excellent political instincts). Rather, he will address his flock as a pastor, a teacher, theologian and spiritual guide. He will remind us that Creation is a gift from God, and that we have a moral responsibility to be responsible stewards. Creation in this instance means more than the ground we walk on and the air we breathe. It also means all of humanity, including the poorest, who are also the most vulnerable to climate change.

By tying climate action to the Christian mandate to aid the afflicted and give comfort to the needy, Pope Francis will be doing much more than merely acknowledging the severity of the problem. By virtue of his moral authority, the pope has the singular ability to mobilize people all over the globe to take whatever form of action they can. No other figure of our time can claim that degree of influence. The climate change narrative is about to change; no longer a debate about science or business; now it will be a moral issue, a religious issue; a simple matter or right or wrong. And with Pope Francis leading the charge, the climate change deniers and fossil fuel apologists will soon realize they haven’t got a prayer.