Financial Review

 #Panama Papers

Sinclair Noe — April 4, 2016

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

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DOW – 76 = 17,630
SPX – 8 = 2056
NAS – 28 = 4499
10 Y – .01 = 1.78%
OIL – 1.02 = 36.77
GOLD – 6.70 = 1216.20

On Sunday, the International Consortium of Investigative Journalists published a massive leak of documents, which are being called the Panama Papers. An anonymous source gave the documents to Germany’s Suddeutsche Zeitung and the newspaper shared them with ICIJ. Other media organizations that reported on the documents include the BBC, The Guardian and McClatchy.

The documents are from a Panama-based law firm called Mossack Fonseca, the world’s fourth biggest provider of offshore services. It has acted for more than 300,000 companies. There is a strong UK connection. More than half of the companies are registered in British-administered tax havens, as well as in the UK itself. The firm won’t discuss specific cases of alleged wrongdoing, citing client confidentiality. Mossack Fonseca says it complies with anti-money-laundering laws and carries out thorough due diligence on all its clients.

The documents show corruption and questionable business practices of the world’s politicians, billionaires, entertainers, athletes, drug barons, and others. The papers show Mossack Fonseca helped its clients launder money, dodge sanctions, and avoid paying taxes. Offshore services are not always illegal, but the documents appear to reveal a clandestine web of shell companies, their real owners concealed under layers of secrecy, and connections to firms in different tax havens. An Oxfam briefing paper dated March 14, 2016 says anonymous ownership, is “a consistent feature of international corruption cases, including money laundering and the theft of public assets”.

The names of people in more than 200 countries and territories. The 11.5 million records reveal the offshore holdings of 12 national leaders, among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.

A $2 billion trail leads all the way to Vladimir Putin. The Russian president’s best friend, a cellist named Sergei Roldugin, is at the center of a scheme in which money from Russian state banks is hidden offshore. Some of it ends up in a ski resort where in 2013 Putin’s daughter Katerina got married. the documents allege a close associate of Russian President Vladimir Putin and Bank Rossiya, a Russian bank that has been blacklisted by the U.S. and the EU, laundered hundreds of millions of dollars. The Russian president is never named in the files. The Kremlin said Putin is the target of attempts to destabilize Russia through the publication of reports.

Among national leaders with offshore wealth are Nawaz Sharif, Pakistan’s prime minister; Ayad Allawi, ex-interim prime minister and former vice-president of Iraq; Petro Poroshenko, president of Ukraine; Alaa Mubarak, son of Egypt’s former president; and the prime minister of Iceland, Sigmundur Gunnlaugsson.

Iceland is already calling for snap elections and calling for the PM’s resignation. An offshore investment fund run by the father of British Prime Minister David Cameron avoided ever having to pay tax in Britain by hiring a small army of Bahamas residents to sign its paperwork. The documents also reveal offshore companies linked to the family of Xi Jinping, China’s president who has cracked down on corruption in the country.

Also political leaders or associates of leaders, past or present, from: Iraq, Qatar, Jordan, Georgia, Saudi Arabia, Abu Dhabi, Sudan, Argentina, Morocco, Azerbaijan, Mexico, Ghana, Malaysia, South Africa, Spain, Peru, Columbia, Bolivia, Chile, Australia, and others. At least 57 people already linked to Brazil’s huge Petrobras corruption scandal opened offshore companies through Mossack Fonseca.

Some of the largest banks in the world were identified in the leaked documents, including: HSBC, Credit Suisse, UBS, and Societe Generale. More than 500 banks in all requested that Mossack Fonseca and a predecessor firm create shell companies for their clients from 1977 through the end of 2015, according to the ICIJ. Some of those banks, including HSBC, UBS, and Credit Suisse had entered into deferred prosecution agreements with the US Department of Justice for wrongdoing related to money laundering, rate rigging, tax evasion, and other things. It certainly looks like they might have violated their deferred prosecution agreements.

Now, consider that there are several legal firms working on creating shell companies to hide money; Mossack Fonesca is only considered the fourth largest. So, the leaked documents today are just the tip of the iceberg. In a report from 2010, the Tax Justice Network, estimate there are over 80 tax havens in the world hiding somewhere between $21 trillion and $32 trillion. To put that in perspective, the World Bank estimated the Gross World Product – adding up the GDPs of all countries – at about $62 trillion that year. Further consider that not all illegal money gets funneled through tax havens and shell corporations.

Here are some other numbers in connection with the Panama Papers. The leak includes 11.5 million documents dated from 1977 to 2015, involving 214,488 businesses and 14,153 clients. It involves 12 current or former country leaders, 61 relatives or associates of country leaders, 128 politicians or public officials, and 29 Forbes-listed billionaires in 202 countries.

The US Justice Department said this morning that it is reviewing the Panama Papers to determine whether the documents point to evidence of corruption and other violations of US law. The “Panama Papers” are being called the largest ever leak of secret data, and articles about the offshore bank accounts of the ultra-rich worldwide. There will be attempts to sweep this under the rug. And there is good reason to be suspicious.

No names of US tax evaders have been published, and one explanation is that the 2010 United States – Panama Trade Promotion Agreement included a taxation clause that effectively shut down any chance of rich Americans using Panama as a tax shelter. But the documents go back for many years and not all the documents have been published.

One article I read today suggested that Americans are more honest than the rest of the world and we just don’t want to be bothered with the difficulty of setting up tax haven accounts. That goes beyond naïve to the realm of pure bull. Another possible explanation is that the “International Consortium of Investigative Journalists” is funded and organized entirely by the USA’s Center for Public Integrity, which is funded by the Ford Foundation, Carnegie Endowment, Rockefeller Family Fund, Kellogg Foundation, and George Soros’ Open Society Foundation.

The people named in today’s release reads like a who’s who of people at odds with the US in one way or another. At least 33 people and companies listed in the documents were blacklisted by the US government for wrongdoing. The selective release of the leaked documents presents an opportunity to smear or blackmail or otherwise incriminate. More than 1,000 Germans are named in the leaked Panama Papers; it would be incredibly naïve to imagine no US politicians or business leaders have been involved in tax haven schemes.

It seems it will just be a matter of time until we hear some big names from the US. In a tweet this morning, the Editor of Süddeutsche Zeitung responded to the lack of U.S. individuals in the documents, saying “Just wait for what is coming next”.

OK, I just hope I don’t have to wait too long.

Factory orders fell 1.7%, marking the third fall in four months. The Commerce Department reports orders for durable goods were revised to show a 3% decline instead of the previously reported 2.8% fall. Orders for equipment in the hard-hit mining sector, which includes the oil field and gas field machinery segment dropped by 20.1%. Those for nondefense aircraft dropped by 27.2%, and for defense aircraft by 28%. Shipments fell 0.7%, the tenth drop in 11 months. Inventories fell 0.4%, the eighth straight monthly decline.

Iran’s oil minister said the country’s oil exports jumped in March to surpass 2 million barrels a day and Iran will continue increasing oil production and exports until it reaches the market position it enjoyed before the imposition of sanctions. Saudi Arabia, which spearheaded an initial proposal in February for producers to limit output, said last week that it would not join any effort to do so unless Iran were on board, while Russia reported its highest oil production in 30 years.

The US Supreme Court rejected Wal-Mart’s bid to throw out a more than $150 million class action judgment over the retailers’ treatment of workers in Pennsylvania. The justices declined to hear a Wal-Mart appeal, leaving intact a 2014 ruling by the Pennsylvania Supreme Court that largely upheld a lower court judgment awarding $187 million to the plaintiffs. The case affects about 187,000 Wal-Mart employees who worked in Pennsylvania between 1998 and 2006. The Pennsylvania court mostly upheld a 2007 lower court ruling in favor of the employees, who said the company failed to pay them for all hours worked and prevented them from taking full meal and rest breaks.

Alaska Air has agreed to pay $2.6 billion for Virgin America, beating rival JetBlue’s bid (and leapfrogging the carrier) to become the fifth-largest U.S. airline by traffic. Alaska’s offer of $57 per share in cash represents a premium of about 47% to Virgin’s Friday’s close, and will allow it to heavily expand its presence on the U.S. West Coast. Virgin America is 54% owned by Richard Branson’s Virgin Group and New York-based Cyrus Capital Partners.

Network gear maker Brocade Communications Systems says it will buy Ruckus Wireless in a cash and stock deal worth about $1.5 billion to add Ruckus’s Wi-Fi products to its enterprise networking business. Based on Friday’s closing prices, the deal values Sunnyvale, California-based Ruckus at $14.43 per share, a premium of 44 percent.

Blackstone Group is buying a majority stake in Indian IT outsourcing services provider Mphasis Ltd. from Hewlett Packard Enterprise in a $1.1 billion all-cash deal. India’s IT and software services export revenue is likely to grow by 10-12 percent in the fiscal year beginning on April 1 to as much as $121 billion.

After successfully hacking the San Bernardino shooter’s iPhone last week, the FBI has assured law enforcement across the US that it will help unlock mobile devices involved in investigations when it is allowed by law and policy. But according to Apple engineers, the agency’s method for breaking into the locked iPhone 5c is unlikely to stay secret for long. Once it is exposed, the company will try to plug the encryption hole to help insure customer’s privacy.

Orders for Tesla Motors’ new Model 3 electric sedan topped 275,00 by the end of Saturday, a fast start for the company’s first mass-market vehicle, which may not begin to reach customers for another 18 months or more. With a base price of $35,000, the weekend pre-orders for the model are bound to put another $10 billion in Tesla’s bank account.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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DOW – 312 = 16,001
SPX – 49 = 1881
NAS – 142 = 4543
10 YR YLD – .07 = 2.09%
OIL – .03 = 44.40
GOLD – 14.20 = 1133.10
SILV – .53 = 14.70

Well, this was just ugly. All three major indices traded in correction territory today or more than 10 percent below their 52-week highs. For the Nasdaq Composite, the 50 day moving average crossed the 200 day moving average, forming a pattern that goes by the catchy name “death cross”. The Nasdaq Biotechnology ETF closed down 6.3%, following a 5% drop on Friday.

Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low, wiping out more than $5 billion in market valuation. The fall followed publication of a note by analysts at investment bank Investec which raised doubts about Glencore’s valuation if spot metal prices do not improve. The note pointed to high debt levels and a need for deeper restructuring. The analysts wrote: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.” Glencore, a Swiss based company, has said it will suspend dividends, sell assets and raise cash with a $2.5 billion share placement, among other measures, to cut its $30 billion debt pile and protect its credit rating.

The 15-month commodities free-fall is starting to resemble a full-blown crisis. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

Alcoa the world’s largest aluminum producer, says it will split into two separate publicly-listed companies, with the separation expected to be completed in the second half of 2016. The company says the split will create an “upstream company”, focused on bauxite, alumina and aluminum, and a “value-add company”, focused on innovation in “high performance multi-material products and solutions in attractive growth markets”.

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion to shut down exploration in the region. The unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground. Environmental groups and shareholders have also pressured Shell to drop Arctic drilling.

The IMF warns world GDP at 3.3% this year isn’t realistic anymore, and a forecast of 3.8% for next year is not either. IMF Director Christine Lagarde pointed to slowing growth in emerging economies, in particular China. Lagarde says “There is no reason (for the Federal Reserve) to rush” to tighten policy, noting both the Japanese central bank and the ECB in recent years both hiked and then were forced to quickly retreat.

The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, so says William Dudley, New York Fed President, echoing statements from Fed Chair Janet Yellen last week. Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was “not calendar guidance. It depends on the data.” San Francisco Fed President John Williams, also speaking today, made a similar argument.

As world growth falters, the US consumer rolls along. Most of the change over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. China has showed lower growth rates and missed growth forecasts for several years. The news this morning shows Chinese industrial profits fell 8.8% in August year-over-year. It’s not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.

Purchases of new cars and trucks and strong back-to-school sales drove consumer spending higher in August, a sign the economy continues to expand at a moderate pace. In August, consumer spending rose a seasonally adjusted 0.4% to match the revised gain in July. Personal incomes rose 0.3% last month. Incomes have also risen steadily since the early spring, largely reflecting strong job creation that’s tugged the unemployment rate down to a post-recession low of 5.1%. Since spending grew faster than income, the amount of money individuals save fell a tick to 4.6% from 4.7%. Inflation as gauged by the PCE price index, was unchanged in August. The PCE index is up just 0.3% in the past 12 months.

This week’s big economic report comes on Friday, when the Labor Department publishes the September employment report. The consensus estimate calls for 190,000 new jobs in September. The unemployment rate is likely to remain at 5.1%.

A gauge of pending home sales fell 1.4% in August to the lowest level in five months. The index from the National Association of Realtors declined to a seasonally adjusted 109.4 in August from 110.9 in the prior month. Pending sales have leveled off since mid-summer, with buyers being bounded by rising prices and few available and affordable properties within their budget.

The federal government is funded only through Wednesday but House Speaker John Boehner says there won’t be a government shutdown. Speaking on CBS’ “Face the Nation,” Boehner confirmed plans to pass a short-term funding bill. Boehner, who announced Friday he is resigning from Congress at the end of October, also said he will set up a committee to investigate Planned Parenthood.

President Obama addressed the United Nations General Assembly this morning, saying the US is was willing to cooperate with Russia, as well as Iran, to try to end the Syrian civil war but the two big powers clashed over whether to work with Syrian President Bashar al-Assad, whom Obama called a tyrant. Russian President Vladimir Putin, in contrast, told the gathering of world leaders that there was no alternative to cooperating with Assad’s military in an effort to defeat ISIS. Later, Obama and Putin met privately.

In opening the General Assembly, Secretary General Ban Ki-moon struck a sober theme, asserting that: “Inequality is growing, trust is fading, and impatience with leadership can be seen and felt far and wide.” Mr. Ban called explicitly for an “end to bombings” in Yemen, and named the five countries that, as he said, “hold the key” to peace in Syria: Russia, the United States, Saudi Arabia, Iran, and Turkey.

Pro-independence parties won a majority 72 seats (out of 135) in Catalonia’s regional parliament, but took down only 48% of the vote. Blocked by the national government from holding a referendum on independence, the separatists attempted to turn these elections into just that. While they won a majority of seats, the failure to gain more than 50% of the vote means had this been a referendum, it would have been a loss.

Apple said it sold more than 13 million iPhone 6s and 6s Pluses during their first weekend on the market. The company beat its previous record of 10 million in sales for the previous generation of iPhones in its first weekend in 2014. This year’s results benefited from the inclusion of the Chinese market, where regulatory problems delayed the gadget’s debut last year.

Whole Foods Market said it would cut about 1,500 jobs, or about 1.6 percent of its workforce, over the next eight weeks. The cuts are aimed at reducing costs as the company invests in technology upgrades. Whole Foods said in May that it would launch a new chain of smaller, more value-focused shops next year.

Scientists say there is water on Mars. In a paper published in the journal Nature Geoscience, scientists report definitive signs of liquid water on the surface of present-day Mars, a finding that will fuel speculation that life, if it ever arose there, could persist to now, or possibly in the future. In the research, Dr. Alfred McEwen, a professor of planetary geology at the University of Arizona and the principal investigator of images from a high-resolution camera on NASA’s Mars Reconnaissance Orbiter, along with other scientists discovered in photographs from the Mars Reconnaissance Orbiter dark streaks descending along slopes of craters, canyons and mountains. The streaks lengthened during summer, faded as temperatures cooled, then reappeared the next year.

The researchers were able to identify the telltale sign of a hydrated salt at four locations. In addition, the signs of the salt disappeared when the streaks faded. In other words, small rivers of liquid water; briny water, but water nonetheless. The salts lower the freezing temperature, and the water remains liquid. The average temperature of Mars is about minus 70 degrees Fahrenheit, but summer days near the Equator can reach an almost balmy 70.

Many mysteries remain. For one, scientists do not know where the water is coming from. One theory is that the salts act like a sponge to soak up moisture from the environment. The other possibility is underground aquifers, frozen solid during winter, melting during summer and seeping to the surface.

Financial Review

What Happens When We Run Dry

Sinclair Noe — March 16, 2015

 

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DOW + 228 = 17,977
SPX + 27 = 2081
NAS + 57 = 4929
10 YR YLD – .01 = 2.10%
OIL – 1.12 = 43.88
GOLD – 4.30 = 1155.30
SILV – .01 = 15.73
 
Halfway through March, the S&P 500 is almost exactly flat year to date after a January tumble and February recovery, as we head into a Federal Reserve FOMC policy meeting later this week. Halfway through March a year ago, that was exactly the same situation: US stocks flat for the year directly ahead of the March Fed meeting, when the Fed’s intent to slowly tighten up policy was affirmed. It is widely expected that Fed policy setters will remove the word “patient” from their statement, opening the door for a rate increase in June.

The Fed has kept its benchmark lending rate near zero for more than six years, underpinning a strong rally in stocks. Wall Street loves to feed at the zero interest rate trough. Wall Street has a history of whining about tighter monetary policy; remember the “taper tantrum”, and so today’s gains feel like a sucker’s rally. Or the Fed could surprise us and they could very well remain patient.

Crude fell for a fifth day, dropping to its lowest intraday price since March 2009. Crude oil closed $43.88 a barrel, closely following the IEA’s prediction on Friday that storage tanks in the US may become full this year as drilling-rig cuts fail to slow production. Oil has now broken-down from the $45 to $50 range, to fresh lows; and that means we won’t know where the bottom is until we hit it.

The dollar index closed just above 100. Goldman Sachs says the euro will fall to $0.80. In a note released on Friday, the investment bank predicted the euro would fall to parity in six months and $0.80 by the end of 2017. The call comes a couple of days after Deutsche Bank announced it saw the euro hitting $0.85 before 2017. The Federal Reserve says it really doesn’t pay much attention to the strength of the dollar, but I’m not sure they can avoid the 800 pound canary. The strength of the dollar and the weakness of the euro has a profound effect on US exports; and that has a big impact on profitability for many companies; and in the case of commodities, and especially oil, it is a major difference between deflationary and inflationary forces, or what the Fed calls price stability.

 Factory production in the US declined in February for a third consecutive month, signaling cutbacks in manufacturing will hold back economic growth this quarter. The 0.2 percent decrease at manufacturers followed a 0.3 percent drop in January that was initially estimated as a gain. Total industrial production, which also includes mines and power plants, climbed 0.1 percent, propelled by a record surge in utility use. Delays at West Coast ports have probably disrupted supplies, while sluggish growth in foreign markets and a rising dollar that makes American products more expensive may be crimping demand. Another report this morning showed manufacturing in the New York region grew this month at a slower pace than projected.

Confidence among US homebuilders unexpectedly fell in March to an eight-month low. The National Association of Home Builders/Wells Fargo sentiment gauge dropped to 53 from 55 in February. Sales of single-family homes declined to a five-month low and builder optimism about the outlook failed to improve. Even with this slight slip, the index remains in positive territory. Low mortgage rates and job creation may help spur homebuyer interest in coming months.

It’s back. Once again the US government has hit the debt limit. February 2014 Congress passed legislation, which President Obama signed into law, suspending the cap on government borrowing until March 15, 2015. As of today, the public debt is $18.1 trillion. For now, the Treasury is still paying the nation’s bills, sort of; they are robbing from Peter to pay for Paul, or what the Treasury calls “extraordinary measures.” Those measures include stopping investments in a pension fund for federal employees and suspending the issuance of special Treasury securities used by state and local governments; essentially accounting tricks, but there is a limit to the trickery. The Congressional Budget Office recently estimated that such measures would provide sufficient operating cash for the government until October or November.

We’ve all seen this mess before. Congress will try to tie some pet legislation to a spending bill; that will get shot down, until Congress finally wakes up to the fact that they have to pay for what they already bought. Will the US default? Probably not. Will Congress make a mess of it? Good chance.

Some have suggested that the debt ceiling should just be done away with, that it should be a given that the US will pay its bills. Bad idea. The debt ceiling gives us a regular reminder of the economic incompetence of Congress, and that is just priceless.

And as Congress masters the ridiculous, there is trouble brewing on the Western front. California is going dry, and it is happening much faster than you might imagine. In an op-ed published Thursday by the Los Angeles Times, Jay Famiglietti, a senior water scientist at the NASA Jet Propulsion Laboratory in California, writes that California has lost around 12 million acre-feet of stored water every year since 2011. In the Sacramento and San Joaquin river basins, the combined water sources of snow, rivers, reservoirs, soil water and groundwater amounted to a volume that was 34 million acre-feet below normal levels in 2014. And there is no relief in sight. California now has only enough water to get it through the next year, according to NASA.

This is the “wet season” for California, but January was the driest in California since record-keeping began in 1895. Groundwater and snowpack levels are at all-time lows. The US Department of Agriculture announced that one-third of the monitoring stations in California’s Cascades and Sierra Nevada Mountains have recorded the lowest snowpack ever measured. About half of the state’s land area is experiencing “exceptional drought” conditions. The Bureau of Reclamation told central-valley farmers in February that the federal government wouldn’t delivery any water to them in 2015. Groundwater supplies have been shrinking since the 20th century, and as a result the ground has been sinking in the central valley.

Tomorrow, the State Water Resources Control Board is scheduled to vote on a conservation measure that would limit landscape watering, the strictest mandate directed at such water use the state has considered. Before California runs out of water, the state’s agriculture will run out of water. Many farmers will not be planting this year; that will be bad. Even worse, think about what happens if 35 million people run out of water.

Brazil’s government will present a package of anti-corruption measures after more than 1 million people, some of them calling for President Rousseff’s impeachment, took to the nation’s streets yesterday. Higher taxes and increased prices for government-regulated items are rankling Brazilians as the biggest corruption scandal in the country’s history ensnares powerful figures in her governing coalition. Brazil’s currency tumbled to the weakest level in 12 years on Friday, while the benchmark Ibovespa stock index has declined 15% since Rousseff was re-elected last October.

Vladimir Putin reappeared today. The Russian President had not made a public appearance in 11 days. Putin is in St. Petersburg to meet with the president of Kyrgyzstan. He did not say where he has been or what he was doing. So, I’m guessing he was just hiking on the Appalachian Trail. Meanwhile, Putin ordered nearly 40,000 troops in northern and western Russia to be put on full alert as part of snap-readiness military exercises.

December 2013, Target stores were hacked; payment card data for 40 million customers was stolen, along with the personal information of 70 million customers. Followed by hacks at eBay and Home Depot and other major retailers involving hundreds of millions more customers last year. The constant in these attacks? No criminal convictions. Federal authorities investigating last summer’s data breach at JPMorgan, which exposed the contact information of 83 million customers, are increasingly confident that a criminal case will be filed against the hackers in the coming months. The New York Times reports that officials believe several of the suspects are “gettable,” meaning that they live in a country with which the US has an extradition treaty. That would exclude countries like Russia.

The private banking arm of HSBC faces new criminal charges. A French judge has requested the investment bank be put on trial for allegedly helping wealthy clients avoid paying taxes. France is one of 10 countries looking into the claims.

The former Sears Tower is changing hands. Private-equity firm Blackstone has agreed to buy the Willis Tower for $1.3 billion, a record price for US office space outside of New York City. A group of investors paid $841 million for the Chicago landmark in 2004.

On Thursday, Tesla Motors will unveil an update to its Model S that will address its all-electric range in some form. On Sunday morning, CEO Elon Musk tweeted: “About to end range anxiety…via (over-the-air) software update. Affects entire Model S fleet.” Tesla’s electric cars already have the longest range of any electric vehicles on the road. The base model, with a 60 kwh battery, is EPA rated to go 208 miles. The 85 kwh version can travel 265 miles on a charge. Tesla similarly upgraded its Roadster electric cars last year, expanding their range to almost 400 miles between charges via an over-the-air update. Before the upgrade, Roadsters could travel about 245 miles on a single charge. By upgrading cars wirelessly, Tesla is ushering in a new world for the car business. One day, people might no longer have to buy a new car to get one with better or new features, just get an update.

FINANCIAL REVIEW

Up, Down – Take Your Pick

Sinclair Noe — February 4, 2015

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

DOW + 6 = 17,673
SPX – 8 = 2041
NAS – 11 = 4716
10 YR YLD + .02 = 1.80%
OIL – 4.49 = 48.56
GOLD + 8.80 = 1269.90
SILV + .06 = 17.43

ADP reports private-sector employment gains slowed in January as employers added 213,000 jobs. ADP revised December’s gain to 253,000 from a prior estimate of 241,000. The non-farm payroll report (that’s the government’s big monthly jobs report) comes out Friday morning; it is expected the economy added about 245,000 jobs in January, down from 252,000 in December.

The Institute for Supply Management said its nonmanufacturing index edged up to 56.7% in January from 56.5% in December. Readings over 50% signal that more businesses are expanding instead of contracting. The good news is that new orders remained very healthy. The index measuring fresh demand rose a few ticks to 59.5% and remained close to a post-recession high. On the downside, the employment gauge fell 4.1 points to 51.6%, marking the lowest level in 11 months. It was also the second worst reading in 20 months. So, on the jobs front, we should still see gains, just not as strong as the past few months.

Gallup’s Job Creation Index came in at plus 28 for the month of January. This is nearly identical to the plus 27 found in December, and just below the seven-year high of plus 30 reached in September. The index has experienced six years of incremental progress after bottoming out at minus 5 in February and April 2009. Gallup says workers’ perceptions of hiring at their places of employment are the most positive Gallup has recorded in any January since Gallup began tracking this in 2008. Americans’ confidence in the economy has improved significantly since early December, and over the same period, Americans have become much more optimistic when asked if it is a good time to find a quality job. Whether these sentiments prove to be advance indicators of hiring that is more visible across U.S. workplaces may partly depend on whether they help fuel more consumer spending.

Oil prices were down today following a rally that pushed up prices by about 22% over the past four sessions (which would technically qualify as a bull market). Drilling activity plunged in the US and oil companies deepened spending cuts to more than $40 billion since Nov. 1. US crude stockpiles increased last week from the highest level in three decades, adding an extra 6 million barrels to inventory. And prices dropped 8% today. So, the question is where are prices headed? I’ve been reading stories all day about the direction of oil prices. Some say the past few days are nothing more than a dead cat bounce or a short squeeze; others claim this is the start of a “V” shaped recovery and prices are going back to triple digits. Up, down – take your pick. I don’t know, the people writing the stories don’t know.

One reason oil prices have dropped is because the dollar has been getting stronger and oil is purchased in dollars; a strong dollar means it requires fewer dollars to purchase the same amount of oil. The Dollar Index is up about 20% since last summer. Oil prices are down about 50% over the same time. It doesn’t quite match. Another thing that doesn’t quite match is all the other stuff we buy that is imported. We’re buying imports with strong dollars.  Why isn’t all that stuff, not made in America, lower in price?

The thing is, the dollar index is measured against a basket of six currencies including the euro and the Japanese yen. If you look at the stuff Americans buy, they’re from countries that aren’t represented in the dollar index; such as: China, Mexico, India, Vietnam and Israel. Almost 80% of U.S. consumer-goods imports, excluding autos, come from countries that aren’t in the dollar index. Comparing against those countries, the dollar is up about 7% and import prices are down about 5.5% So, a strong dollar is just a small part of the reason for lower oil prices.

Even if prices went up from here it might not be enough to save some of the producers and their creditors. And if prices go lower, it might not affect production as you might imagine. Two weeks ago, Baker Hughes announced it was cutting 12% of its workforce and 15% of its output, but previous downturns have resulted in 40% to 60% cuts. At the same time BHP Billiton announced it was cutting the number of rigs it operates in US shale oilfields from 26 to 16, but it would take a few months to cut back, and even after the cutbacks “the company does not expect the slowdown to have an immediate effect on its oil and gas production, which it still expects to average about 700,000 barrels of oil equivalent per day.”

Yes, over time, lower prices will affect production, but over the intermediate term, creditors will demand payments and that means the pumps keep pumping, even at little to no profit. Revenues will have to cover obligations. Debt must be serviced.

Over the last five years, oil and gas companies have issued bonds and taken out loans that are together worth $1.2 trillion, according to data from Dealogic. Back in the 1980s oil crash about 700 banks failed, mainly smaller, regional banks in Texas. Now, there are some smaller Canadian banks and a few Texas-based regional banks with concentrated exposure to the oil patch, but losses are not expected to approach the 80s, and the other creditors are the mega banks that can withstand a few billion in losses.

Still, the sharks are already smelling blood. Several private equity firms such as Carlyle, Blackstone, and KKR are taking on large positions in indebted oil companies. There are already examples of these firms providing emergency loans at very high rates plus an ownership stake. At the recent Davos World Economic Forum, David Rubenstein, co-founder of the Carlyle Group said “The single best opportunity to invest is distressed debt in energy.”

But the energy companies are not going to give up easily. The squeeze is tightest when companies face a deadline to pay back money they have borrowed. And they may be forced to maintain or increase production.

And moving beyond the supply demand equation, yesterday, the New York Times reported that Saudi Arabia has been trying to pressure Russian President Putin to abandon his support for Syrian President Bashar al-Assad, using its dominance of the global oil markets at a time when the Russian government is reeling from the effects of plummeting oil prices. A Saudi diplomat was quoted saying, “If oil can serve to bring peace in Syria, I don’t see how Saudi Arabia would back away from trying to reach a deal.” None of this is a revelation; we talked about oil as a financial weapon back when Russia was first posturing in Ukraine. Any weakening of Russian support for Assad could be one of the first signs that the recent tumult in the oil market is having an impact on global statecraft.

Here’s the point: if anyone says they know what oil prices are going to be, they are wrong.

A funny thing happened today with Greece. The Athens General Stock Index closed up today by about 7%. Then this afternoon in New York, right before the close, the ETF that is based on Greece, the GREK, suddenly plunged about 11%. The European Central Bank announced that it will no longer accept Greek government debt as collateral starting next week. The ECB said it is presently impossible to assume a successful conclusion of the current Greek program. In other words, the ECB doesn’t see Greece complying with existing bailout rules.

But the governing council also approved the Greek central bank issuing Emergency Liquidity Assistance to the Greek banking system to cover any liquidity shortfall caused by today’s move. This means Greece could still get money, but they will pay more for it, and it is just a temporary Band-Aid. This also means that the money spigot could be turned off if Greece’s new government doesn’t behave the way the ECB wants. Unless the 15 billion-euro limit on short-term borrowing set by Greece’s troika of official creditors is raised, the government may run out of cash on Feb. 25. With Greeks yanking their cash from banks and withholding tax payments, it is thought the new Greek government would only be able to survive for a few more weeks by tapping social-security funds and withholding payments to vendors.

The Greeks may be able to survive this, provided there is not a run on their banks. It basically boils down to political hardball. The Greeks were hoping to rewrite their debt. The Troika has now slapped down that plan.

General Motors reported a 91% jump in its fourth-quarter profit, beating analyst expectations. GM said it plans to boost its dividend starting in the second quarter. Later this month, GM will pay about 48,000 U.S. hourly workers profit sharing checks of $9,000 based on its 2014 financial performance. Fourth-quarter profit earnings before dividends rose to $1.99 billion compared with $1.04 billion a year earlier. Excluding some charges, the company earned $1.19 a share, handily beating analyst estimates of 83 cents a share.

Ford is adding 1,500 workers across four plants to build the new F-150 pickup truck and plans on shifting hundreds of union-represented workers from entry-level wages to the pay veteran plant workers make, in the coming weeks.

Staples has agreed to buy Office Depot for $6.3 billion. The deal values Office Depot at $11 a share, a premium of 44% over the closing price of Office Depot shares as of Monday. Together, the two companies have roughly 4,000 stores and annual sales of more than $35 billion. A merger would almost certainly reduce competition, result in some store closings, and mean higher prices for consumers. A combination of the two likely would get a close look from antitrust regulators, who in 1997 sued successfully to block the same proposed merger.

FINANCIAL REVIEW

Some Perspective on the Markets

Sinclair Noe — December 16, 2014

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

DOW – 111 = 17,068
SPX – 16 = 1972
NAS – 57 = 4547
10 YR YLD – .04 = 2.07%
OIL – .58 = 55.33
GOLD + 1.50 = 1196.00
SILV – .47 = 15.82

Allow me to provide some perspective. On December 5th the S&P 500 index hit an intraday high of 2079 and a closing high of 2075. That was 7 trading session in the past, which may be a long time if you are trading on the minute bars, but in the grander scheme of things it was just a few days ago. The downturn has been fast and sharp, as downturns are want to be. This downturn has lopped about 90 points off the S&P, or about a 4.3%; which does not qualify as a correction and certainly not a crash, but it does catch your attention.

Both the S&P 500 and the Dow Industrials have dropped below their 50 day moving averages. The Nasdaq Composite has pulled back close to the 50 day moving average. You will recall that stocks hit highs in September and then pulled off sharply in October; from October until 7 sessions ago, the Dow and the S&P just shot higher. With the recent downturn, the major averages have taken out the highs from September, which is to say we have broken near term support.

Then consider that December is usually one of the better months on Wall Street; and you’ve probably heard about the Santa Claus rally, which is the idea that there is happiness and good will on Wall Street… No wait. It is the idea that there are people investing Christmas bonuses, also some tax considerations (or buying after selling off the tax losses), and the idea that retail sales pick up for the holiday shopping season. And the Santa Claus rally does not apply to the entire month of December. It refers specifically to the last five trading days of the year plus the first two of the New Year. Over the past 60 years or so the rally has resulted in an average of 1.5% gains for that 7 day trading window. Of course not every year produces a Santa Claus rally, and 1.5% is good, it beats a 1.5% decline, but hardly reason for joy, or for specific trading. It sometimes serves as a more general indicator of market direction, and the easy way to remember it is the old jingle from Yale Hirsch: “If Santa clause should fail to call, bears may come to Broad and Wall.”

Today it was a Russian bear. Late yesterday we told you that the Russian Central Bank had raised interest rates from 10.5% to 17%. Imagine if the Federal Reserve hiked interest rates like that; you might, rightfully, suspect that there was an urgent problem. Russia has urgent problems. The currency, the ruble, is collapsing; capital is fleeing the country; oil, the number one export has crashed in price and now Russia faces a major budget deficit because the government is financed largely by oil revenue. The Central Bank of Russia is hoping that with interest rates so high, keeping money on deposit in Russia will start to look attractive; kind of like putting lipstick on a pig.

The Russians have tried this before, with five previous interest rate increases, usually 50 or 100 basis points at a time, which had zero effect; the central bank has spent at least $75 billion this year to prop up the ruble and that was just throwing money away because Russians pulled more than $100 billion out of the country; and so yesterday the Central Bank of Russia went whole hog. The hope is that by stabilizing the value of the currency, the interest rate increase will reduce the sense of financial panic and rapid outflows of money. Maybe. But consider the other effect of higher interest rates; it essentially puts the brakes on economic growth, or in this case economic growth just ran into a brick wall. Russia was already headed into recession, and now high rates will slow things down even more. And this is with a backdrop of 10% inflation.

The rate increase might be a last-ditch move by the Russian government to try to contain the drop in the currency without adopting controls on the flow of capital or other more extensive measures to keep money in the country. And if yesterday’s rate hike fails to stem the collapse in the ruble, then things might play out in very unusual ways. Secretary of State John Kerry suggested that Western sanctions could be removed quickly if Russia withdraws from Ukraine. At the same time, the White House announced that President Obama will sign a bill that would allow him to slap tough new sanctions on Russia.

So, it looks like Putin is getting his comeuppance, but this story hasn’t played out yet. There are no guarantees that Putin will rollover, and even if he does, there are no guarantees the Russian economy will bounce back. Instead of heading into recession, the Russian economy could run right into depression, and that might complicate a whole host of things.

Let’s set the way back machine for 1994. John Meriwether, the acclaimed head of bond trading for Salomon Brothers open a little hedge fund called Long Term Capital Management (LTCM). Meriwether brought on Myron Scholes and Robert Merton, a couple of geniuses who had earned a Nobel Prize for something known as the Black Scholes model, which was a way of pricing options over time – still used today – and really opened up the use of derivatives. LTCM was a big success, generating returns in excess of 40% in its second year.

Now let’s set the way back machine to the summer of 1997. The baht, the currency of Thailand ran into trouble and was devalued. You might not think it was a big deal; Thailand is not exactly a major player in the global financial markets, but it started a capital flight, with cash flowing out of developing Asian economies. Next thing you know the currency crises spread to Malaysia and the Philippines and South Korea. Several Asian companies defaulted. And then the crisis spread to Russia, driving the value of the Russian ruble sharply lower and the Russian stock market went into free fall.

In 1998, Russia’s central bank raised its key rate to 150 percent and it wasn’t enough to stop the flight of capital from Russia. The ruble collapsed. LTCM is heavily invested and heavily leveraged in global markets, including Russia.

Risk is generally considered to be a function of potential market movement based on historical market data. For example, the odds of drawing the ace of spades from a deck of cards is 1 in 52 because there are only 52 cards in a deck and only one is the ace of spades. But financial markets are subject to uncertainty, which is another way of saying there are an unknown number of possible outcomes in the deck, not just 52. Before 1929, a computer would have calculated very slim odds of a Great Depression; after it, considerably greater odds. Just so, before August 1998, Russia had never defaulted on its debt, at least not since 1917, at any rate. When it did, credit markets behaved in ways that Long-Term didn’t predict and wasn’t prepared for.

In August 1998, the LTCM calculated that its daily “value at risk”, meaning the total it could lose on any given day, was only $35 million. Later that month, it dropped $550 million in a day. Eventually the losses grew to $4.5 billion. And LTCM was leveraged about 33 to 1, meaning that the hedge fund only held about 3% in equity; meaning that if the hedge fund went belly up, the losses would grow as they rippled out through investors and financial institutions. Wall Street feared that its unraveling could set off a systemic meltdown. The Federal Reserve stepped in and arranged a bailout among 14 major banks to rescue LTCM. The only major bank that did not go along with the Fed bailout was, ironically, Bear Stearns. Within a few weeks, calm returned and the crisis passed.

The current situation has a way to go before it gets as desperate as the summer of 1998, but you never know exactly how and where contagion can spread. In 1998, the global financial system came close to a meltdown as a hedge fund run by geniuses failed to accurately measure risk. Fast forward to today, and substitute LTCM for a bunch of highly leveraged European banks. And just a reminder, the Eurozone is going through a bit of a rough patch itself right now.

The saga of Long-Term Capital Management looms large in the psyche of global markets, even if the lesson went unlearned. We saw another near meltdown of the global financial system in 2008 and the story line was eerily similar to the summer of 1998. Highly leveraged financial institutions used derivatives to place big bets on the subprime mortgage market rather than bets on the Russian ruble. Bear Stearns, ironically, was one of the first to falter. The risk was ill-considered. When people figured out there was a problem, liquidity evaporated. The belief that one can safely get out of a liquid market is one of the great lessons that went unlearned.

This is not to say that the collapse of the Russian ruble is going to repeat like 1998. History doesn’t repeat, but sometimes it rhymes. The ruble plummeted into a freefall, losing as much as 19% before recovering slightly (down just 5%) as panic swept across Russian financial markets after the surprise interest-rate increase failed to stem the run on the currency. But the panic in Russia spread to other developing markets from Dubai to Indonesia.

And nobody really knows how this will play out. Putin may feel pushed into a corner, he might lash out; he might think NATO is afraid of him. Imagine Cyprus with nukes. The last time oil prices experienced this kind of run-up and decline, the Soviet Union fell. If that’s not terrifying enough, consider that Russia is not the only country headed for problems. The Middle East is full of countries that need a high oil price to protect their economies.

We’re heading into the holidays, usually a good time for the markets, usually a time when you can get together with family and friends and leave all your cares behind. Stay awake kids.

FINANCIAL REVIEW

Floors and Ceilings

Sinclair Noe — October 17, 2014

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Financial Review

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW + 263 = 16,380
SPX + 24 = 1886
NAS + 41 = 4258
10 YR YLD + .05 = 2.20%
OIL + .27 = 82.97
GOLD – .70 = 1239.20
SILV – .10 = 17.37

The markets were down for the week, even with the bounce today. For the week, the Dow and the S&P each dropped about 1%; the Dow was down 164 points on the week, and the S&P was down 20 points. The S&P is now down for 4 consecutive weeks.

Let’s take a look at the charts. Earlier in the week I talked about support and resistance. Someone mentioned to me that they weren’t quite clear on the concept. So, here is a good way to look at these topics. Support is the floor and resistance is the ceiling. Think of a chart as a staircase under construction. The stairs are being built, hopefully higher and higher, and to prop up the stairs, you have to have a structure, or floors and ceilings. When you break through the ceiling to a new higher level, that ceiling then becomes the floor for the next level up. In other words, resistance becomes support. If the staircase of price falls, the last floor will catch you, or provide support. Then to go higher yet again, you will have to punch through that ceiling, or resistance, again.

So, let’s look at support and resistance for the major indices. The Dow Industrials dropped below support last Friday, when the price dropped below the 200 day moving average at 16,592. On Monday, the Dow dropped below another level of support at 16,310, slightly below the old low of 16,333 on August 7. Tuesday, the Dow was just slightly lower, trying to cling to that level of support. Wednesday, was another big down day. Thursday was an inside day, just slightly down; an inside day means the high and the low were within the range of the highs and lows for Wednesday. Then today we got a bounce.

So, as of today, we have a new floor, which is the low for the day of 16,118. The next ceiling, or level of resistance is 16,310, and then the next level of resistance is the 200 day moving average at 16,586, and then the next level of resistance is the old high on September 19th at 17,350. That means the Dow would have to break through three ceilings to get back to new highs. Keep in mind the idea of the staircase, and as we go through each ceiling we have to have something to prop up the staircase. We would need very strong earnings, or accommodative monetary policy, or something that could justify those prices going higher.

Now, the really important short-term level of resistance and support is around 16,310. If we look back over the past few months we find that that level served as support in April, May (twice in May), and August. That’s important because the more times that floor supports the market it indicates that that is a level where the floor is very strong. If the Dow cannot hold above the 16,300 to 16350 level, then the next support level is around 15,350 from back in February. So, if next Monday or Tuesday, we take out today’s low of 16,118, the next level of support is all the way down to 15,350.

For the S&P 500 index the 200 day moving average is at 1906, which is also the low from August. Of course that level was breached at the start of the week. And so now the old level of support at 1906 becomes the new level of resistance. Then, the next level of resistance would be the old high from September 19, at 2019. If the S&P 500 can’t hold above today’s low of 1864, we might expect to drop down to the next level of support. The next levels off support are at 1815, the old low from April; then at 1737, the old low from February.

Today’s price action would indicate that the indices are trying to reverse the slide. If you use candlestick charts, the pattern today could be described as a morning star. The morning star is a three candle pattern. The first candle was Wednesday, which was a big down day; yesterday was a neutral day (slightly positive on the S&P 500 and only slightly negative on the Dow), or what is known as a doji; and today we had a strong positive day that closed above the high from Wednesday.

When found in a downtrend, this pattern can be an indication that a reversal in the price trend is going to take place. What the pattern represents from a supply and demand point of view is a lot of selling in the period which forms the first black candle; then, a period of lower trading but with a reduced range, which indicates indecision in the market; this forms the second candle. This is followed by a large white candle, representing buyers taking control of the market. Today, you have to think that some of the hedge funds and big money players were stepping in to buy the dip, or pick up bargains, or to cover short positions. And if you want to increase your probabilities, you would wait for confirmation in the fourth candle, however today’s move was big enough that more aggressive traders might not wait. With the usual caveat that I don’t know what the markets will do on Monday, you don’t know; nobody knows. None of this is a guarantee, it is just looking at probabilities.

Another consideration is that we are still in a very long and strong bull market; the past couple of weeks have not changed that overall trend. We’ve had a few whiffs of panic, lots of indecision, and reasons for concern, but we haven’t seen a full-fledged freak out. The possible exception to that, at least in equities, would be the Russell 2000 index of small cap stocks, which saw a 10% drop, or what is considered a correction; and there we saw a nice bounce back this week. The Russell was down about 3 points today, but for the week it is up about 30 points at 1082.

There are several possible reasons why small caps have found support, including: bargain hunting and short covering, but also small caps have less international exposure; and with global weakness, especially in Europe, the small caps are a way to focus on US growth. And even though the economic news in the US has not been great, it has been reasonably good and it has been better than most other global markets.

Today, the Thomson Reuters/University of Michigan preliminary October reading on the overall index on consumer sentiment came in at 86.4, up from 84.6 in September, and the highest since July 2007.

And separate data showed groundbreaking for new homes rose more than expected last month. Housing starts rose 6.3% to an annual 1.02 million-unit pace. Newly issued permits also rose. You’ve got to think the recent reduction in rates will have a somewhat positive effect for the housing market in the next couple of months.

Toss in a few good earnings reports today: GE’s third-quarter net income rose 10% to $3.5 billion, or 35 cents per share; that was better than expected. Revenue, at $36.1 billion was a bit under guesstimates, but then GE raised guidance on revenue.

Morgan Stanley reported an 87% increase in third quarter earnings, as they got back to their investment banking roots, and focused on bond trading and wealth management; and working on the Alibaba IPO also helped.

Honeywell reported net income rose to $1.17 billion in the quarter, or $1.47 per share, from $990 million, or $1.24 per share, a year earlier. Honeywell also raised the low end of its full-year forecast range for both profit and revenue, and said it is looking for acquisitions. Not a big surprise as Honeywell is very involved in aerospace, which has been very strong this year.

Schlumberger reported better than expected earnings and revenue. Schlumberger is in the oilfield services business, and they provide drilling technology and equipment, and construction services and such. Of course, the drilling activity in the US has carried over to that sector. Of course, it will be interesting to see how the oil sector fares moving forward as oil prices are down more than 25% from the June highs.

Earlier this week, Russian President Vlad Putin warned that Russia might reduce gas supplies to Europe if Ukraine steals from the transit pipeline to cover its own needs. In June, Russia cut off supply to Ukraine over what gas exporter Gazprom said were billions of euros in unpaid bills. Without Russian flows, there is concern Ukraine might have to siphon off gas from flows transiting the country en route to Europe this winter. Today, after talks with leaders from Europe and Ukraine in Milan, Italy, Putin said a deal had been reached that would ensure gas supplies to European buyers “at least for the winter.” More talks continue in Brussels next week.

Also, earlier this week, Credit Suisse published a report saying rising inequality in the US is at levels that have been associated with recessions in the past, and that the ratio of income to wealth is at the highest level since the Great Depression. Today, Federal Reserve Chairwoman Janet Yellen delivered a speech in Boston at a conference on inequality, and she said the increase in inequality is a concern for her. Though Yellen didn’t go so far as to echo Credit Suisse’s recession alarm, she did warn that rising inequality risked doing serious harm to the overall strength of the US economy. Yellen noted that living standards have been “stagnant” for most Americans for the past few decades, and that is an unhealthy development for an economy that relies mainly on consumer spending to drive growth.

Yellen also stepped just a little outside the boundaries of monetary policy to hint at the idea of more federal funding for education. The Boston Fed named education as one of the four “building blocks of opportunity” that could help reduce inequality, with the other three being parents’ financial resources, starting a business, and inheritance.