Financial Review

Corporate Clout

Sinclair Noe — April 1, 2015

 

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

Subscribe: iTunes | RSS

DOW – 77 = 17,698
SPX – 8 = 2059
NAS – 20 = 4880
10 YR YLD – .06 = 1.87%
OIL + 2.49 = 50.09
GOLD + 20.40 = 1204.10
SILV + .30 = 17.04

The first quarter is done; Among the winners: the S&P 500 pulled out a modest gain for the ninth consecutive winning quarter; healthcare was the best performing sector in the S&P 500, up 7.4%; utilities were the biggest decliners in the index, down 5.8%. The Nasdaq Composite posted its ninth consecutive quarterly gain (the first time ever). The Dow Industrials posted a small loss year to date. Oil dropped just over 14% for the quarter. The first quarter’s best-performing exchange-traded products include China, Japan, and solar. The first quarter’s worst-performing exchange-traded products include plays on Brazilian stocks, coffee and volatility.

In many ways, the dollar set the tone across markets in the first three months of the year. The dollar index, hit a 12-year high during the quarter. The strong dollar, or at least the pace of its rise, played havoc with earnings of large multinationals who rely heavily on foreign sales. Meanwhile, commodity markets also saw pressure from a stronger dollar.

Treasuries saw price gains in the first quarter. The yield on the 10 year note dropped from 2.17% to 1.93%. The total return in the Treasury market overall, including price increases and interest payments, was 1.48% in the first quarter of 2015, compared with 1.93% in the fourth quarter of 2014, according to the Barclays U.S. Treasury index. The total return for the whole of 2014 was 5.05%. Treasuries have seen the longest stretch of quarterly gains since 2003.

ADP reports private sector employment increased by 189,000 last month. The ADP report is often considered an indicator of the monthly government jobs report due Friday; that report is expected to show the economy added 255,000 new jobs.

The Commerce Department reports construction spending dipped 0.1 percent to an annual rate of $967.2 billion. January’s outlays were revised to show a 1.7 percent decline instead of the previously reported 1.1 percent drop.

Auto sales were up less than 1 percent in March compared with the same month a year ago. U.S. consumers bought 1.5 million new cars and trucks in March. Hyundai’s U.S. sales jumped 12 percent over last March after a big boost in incentives. Subaru’s sales were up 10 percent. Toyota’s sales were up 5 percent; and FCA, the parent of Chrysler and Fiat, said its sales rose 2 percent. But those gains were nearly offset by lower sales at other major automakers. General Motors’ sales fell 2 percent and Ford and Nissan both saw 3 percent declines. Honda’s sales were down 5 percent. Volkswagen’s sales plummeted 18 percent.

Growth in the U.S. manufacturing sector rose to a five-month high in March as output and employment gained, according to an industry report released on Wednesday. Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers’ Index rose to 55.7 in March from 55.1 in February and to its highest since October.

The Institute for Supply Management’s manufacturing index dropped for the fifth consecutive month to 51.5% in March from 52.9% in February. Any reading above 50 indicates expansion in the manufacturing sector. Only 10 of the 18 industries tracked by ISM, for example, reported growth last month, down from 14 in January and 17 last August. Also, companies continued to scale back on hiring. The index measuring employment fell to 50%, the worst reading also since May 2013. The ISM’s new-orders index, meanwhile, dropped to a nearly two-year low of 51.8%.

Simon Property Group has withdrawn its $16.8B proposal to acquire Macerich after the smaller mall owner rejected the sweetened takeover offer as too low. CEO Arthur Coppola said in a letter: “The board unanimously concluded that your proposal (of $95.50-a-share) continues to substantially undervalue Macerich.” Macerich took steps to thwart a hostile takeover following Simon’s first public offer by adopting a poison pill on March 17.

Web hosting company GoDaddy  priced its initial public offering at $20 per share, above its previously indicated $17-$19 range, valuing it at around $4.5 billion, including debt. The company raised $460 million from the IPO. GoDaddy shares are trading on the New York Stock Exchange under the symbol “GDDY.” (+ 6.15 = 26.15)

Thousands of Walmart workers are about to get a raise. Earlier this year, the retailing giant announced it would pay its hourly employees a minimum of $9 per hour starting this month and plans to up the minimum to $10 per hour in 2016 for all workers who complete a six-month training period. Wal-Mart is increasing pressure on suppliers to cut the cost of their products, in an effort to reclaim the crown of low-price leader and turn around its sluggish U.S. sales. The retailer has been telling suppliers to forgo investments in joint marketing, such as eye-catching product displays or online advertisements, and plow the savings into lower prices instead.

Arkansas lawmakers passed a Religious Freedom Restoration Act yesterday that critics said would allow businesses to deny service to gays and lesbians. Arkansas followed Indiana, which passed a similar act last week. Corporations have criticized the measures; 39 tech companies wrote an open letter to Indiana Governor Mike Pence in opposition to the law. By Tuesday, a long list of companies were on the record against Indiana’s law, including Nike, The Gap, Levi Strauss, Marriott, and PayPal. Big Pharma companies Eli Lilly and Co. and Roche Diagnostics are opposed, as is insurer Anthem. Indiana based Angie’s List said it would hold off on expansion plans in the state. Indiana based NCAA voiced opposition just ahead of the Final Four matchups this weekend. The state’s largest newspaper, the Indianapolis Star devoted its entire front page to a huge banner that read: “Fix This Now.” Gov. Mike Pence said that he would seek to amend the law to ensure that businesses can’t discriminate against anyone.

The world’s biggest retailer, Wal-Mart, based in Bentonville, Ark., issued a statement saying the Arkansas bill threatened to undermine “the spirit of inclusion” in the state and “does not reflect the values we proudly uphold.” And today, Governor Asa Hutchison called on state lawmakers to either recall or amend legislation billed as a religious freedom measure.

That the business community was able to act so swiftly and decisively against the legislation is a sign of just how far Corporate America has evolved on gay rights; it is also an indicator of just how much clout Corporate America has with politicians. Corporate America’s transformation on gay rights happened slowly, beginning in board rooms and trickling down to workers, who now get better rights and protections from their employers than they do from their government. Eighty-nine percent of Fortune 500 companies have policies that specifically prohibit discrimination based on sexual orientation, according to a recent report from the Human Rights Campaign. In contrast, there is no federal law prohibiting discrimination.

Snowpack in the Sierra Nevada Mountains of California shows just 6% of the long-term average for this time of year; it’s the lowest level on record. The previous low was 25 percent, set in 1977 and again in 2014. Today, California Governor Jerry Brown issued new water restrictions. The State Water Resources Control Board will enforce a 25 percent water use reduction in every city, conserving about 1.5 million acre-feet of water throughout the next nine months. The mandatory cutbacks come a little over a year Brown asked Californians to voluntarily reduce their water use by 20 percent.

The state will also partner with local governments to rid California of 50 million square feet of lawns and replace the water-intensive greenery with drought-tolerant landscaping. Campuses, golf courses, cemeteries and other large landscapes often covered in sprawling lawns will be required to make significant cuts, the announcement notes. Watering ornamental lawns on public street medians will be banned. Residents will also be able to take advantage of a new temporary, statewide consumer rebate program that rewards them for replacing appliances with more water-efficient ones. All new residences and developments will be prohibited from irrigating with potable water unless they use water-efficient drip irrigation systems. Cease-and-desist orders and fines could be issued to those who fail to comply with new restrictions.

Today, of course is April Fools’ Day. And this should serve as a reminder that not everything you read on the internet is absolute truth. In fact, many of the tech companies seem to enjoy spoofing. A quick rundown: Amazon introduced the Dash button; it’s a little plastic button that you can stick on the side of a box of Dash or Tide or cat food or whatever – push the button and a drone will deliver it to your door. Maybe someday, but not today. The real joke from Amazon was turning back the clock on their website, so it looked like 1999; the early version of online shopping looks archaic, but it wasn’t that long ago. The Dash button might be a look into the future and the retro-website was a stroll down memory lane.

Samsung came out with the Galaxy Blade, a smartphone so thin you can use it to cut stuff; it’s even accessorized with a knife handle. No you can’t cut your steak with your smartphone. Motorola offered up hand crafted, artisanal selfie sticks. Google was a bit more kind; they came up with a way to play Pac-man on Google maps; pull up a map of Paris or New York or your hometown and waka waka waka your way along city streets. And then they had backward Google; just type in com.Google, and it’s like looking at Google in a mirror.

Not all April Fools stories are silly or nasty. A car dealership in New Zealand put an ad in the paper claiming that the first person to come in and “ask for Tom” would be able to swap their old car for a new BMW. Tiaana Marsh did just that, and … you can guess what happened from there. They gave her a new BMW. That’s even better than Burger King’s Left handed hamburger.

Of course the techies the car dealers and everybody else has to recognize that the all-time best April Fools’ prank came from radio, compliments of the Mercury Theater. (War of the Worlds)

Monday, June 30, 2014 - Narrow Decisions Leave the Doors Wide Open

Financial Review with Sinclair Noe

DOW – 25 =  16,826
SPX – 0.73 = 1960
NAS + 10 = 4408
10 YR YLD - .02 = 2.51%
OIL - .23 = 105.51
GOLD + 11.80 = 1327.90
SILV + .09 = 21.06

 

Today’s session marked the end of trading for June as well as for the second quarter. After a run to record closes, the S&P 500 Index posted a quarterly gain of 4.7%, and the Dow Jones Industrial Average had an increase of 2.2%. The Nasdaq Composite Index had a quarterly gain of 4.9%. It marks the sixth straight quarterly gain for both the S&P and Nasdaq. With six straight quarterly gains, the Nasdaq has had its longest streak of advances since 2000, while the S&P 500 has had its best run since 1998. The Dow, meanwhile, posted its fifth positive quarter of the last six.

For the first half of 2014, the S&P 500 is up 6%, with the Dow industrials up 1.4%, and the Nasdaq up 5.4%. Airline, pharmaceutical, and utilities stocks led advancers during the period, which was marked by the impact of bad weather, and a 2.9% drop in first-quarter gross domestic product. Yields on Ten year Treasury notes started the year at 3.03%, dropped down to 2.71% at the end of the first quarter, then dropped to 2.45% at the start of June. The S&P 500 has scored 22 record closing highs so far this year, which has increased concerns among some investors that the market might be due for a technical pullback. Yet the CBOE volatility index, or VIX, Wall Street’s fear gauge, has held near multiyear lows.

This week will likely see light trading with a holiday shortened week. The markets will close Friday for Independence Day. The monthly jobs report will be issued on Thursday.

Meanwhile, oil prices have advanced steadily from 98.46 a barrel at the start of the year, to 101.58 at the start of April, to 102.87 at the start of June.

The precious metals have also shown some recent signs of life. Spot gold started the year at 1206 an ounce, while silver began the year at 19.54. Since June 1^st, there has been a modest rally from 1252 for gold and 18.91 for silver. This is not a huge rally, and it doesn’t mark a challenge to old highs, but it might signal a bounce off recent lows.

Let’s start with a couple of cases from the Supreme Court. You recall that last week we noted the Supremes had been, uncharacteristically unanimous on several cases; that came to a screeching halt today in the case of Burwell v. Hobby Lobby and Conestoga Wood. In a 5-4 opinion authored by Justice Alito, the court ruled that the Obama administration has failed to show that the contraception mandate contained in the Affordable Care Act is the "least restrictive means of advancing its interest" in providing birth control at no cost to women.

The Affordable Care Act contains a provision requiring most employers to cover the full range of contraception in their health care plans at no cost to their female employees. The Obama administration had granted an exemption for churches and accommodations for religious hospitals, schools and nonprofits, but for-profit companies were required to comply with the coverage rule or pay fines.

Hobby Lobby, a Christian-owned craft supply chain store, and Conestoga Wood Specialties Store, a Pennsylvania wood manufacturer owned by a family of Mennonites, challenged the contraception mandate on the grounds that it violates their religious freedom by requiring them to pay for methods of contraception they find morally objectionable. The Religious Freedom Restoration Act says that the federal government may not put substantial burdens on religious exercise.  The owners of those companies believe certain forms of contraceptives are forms of abortion, in violation of the religious beliefs of the company’s owners.

So, the court was dealing with a couple of issues. First is a company like Hobby Lobby considered a person? This is important because the Religious Freedom Restoration Act protects “persons” but doesn’t mention for-profit corporations. Justice Alito wrote: "Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law."

The other issue was whether the mandate for contraception coverage imposed a substantial burden on Hobby Lobby. Well, it’s a pretty easy argument that anything the government requires a person to do is a substantial burden, so…, strike two.

The case is being billed as a battle between women’s rights and religious rights.

The opinion was written narrowly so as only to apply to the contraception mandate, not to religious employers who object to other medical services, like blood transfusions or vaccines. But there is no certainty the ruling will be interpreted narrowly. What if a company objects to something the government does, outside the realm of health care? Time will tell. Another point came when Justice Ginsburg wrote: “One might ask why the separation [between business and owner] should hold only when it serves the interest of those who control the corporation.”

The opinion applies to small, closely held corporations, but what if a big, publicly traded corporation makes a similar claim? As the majority itself noted, no big, publicly-traded corporation has emerged to make such a claim. The Court doesn’t have to rule on a question it isn’t asked. And a closely held corporation can still be pretty big. Hobby Lobby has 572 stores. “Closely held” refers to a corporation that has more than 50% of the value of its outstanding stock owned by 5 or fewer individuals. These corporations are thought to make up 90% of corporations; these corporations account for about 52% of private employment, or a little more than 60 million people. Hobby Lobby is being described as a narrow ruling but it has the potential to affect tens of millions of workers.

Now that the court has recognized that corporations have religious exercise, the door has been opened. All it takes is for the right plaintiff to walk through it.

The Supremes also issued an opinion in the case of Harris v. Quinn, ruling 5-4 that some government workers are not required to pay union dues. In writing for the majority, Justice Alito concluded that there was a category of government employee, a partial public employee, who can opt out of joining a union and not be required to contribute dues to that labor group. What is a partial public employee? In this case it refers to home-care aides who typically work for an ill or disabled person, with Medicaid paying their wages.

The court declined to strike down a decades-old precedent that required many public-sector workers to pay union fees, so this does not apply to employees such as teachers or police officers who work directly for the government.

The case, Harris v. Quinn, was brought by eight Illinois workers who provided home health care to Medicaid recipients. Several of the original plaintiffs were mothers who, helped by Medicaid, were personal home-care assistants to their disabled children and opposed joining the union and paying any union fees. Justice Alito wrote in the majority opinion: “Agency-fee provisions unquestionably impose a heavy burden on the First Amendment interests of objecting employees.”

The case deals with the “fair share” fees that most unions charge all employees, including nonmembers, to support collective bargaining. These fees prevent free-riding. Unions are required by law to bargain on behalf of members and nonmembers alike, all of whom benefit from collective bargaining. If some employees could simply decline to pay to support collective bargaining, all would have the incentive to similarly opt out, thereby undermining the union and harming all employees. It’s a classic case of the free-rider problem.

Because the case only deals with partial public employees, it is being called a narrow decision, however, by giving a constitutional underpinning to the anti-union “right to work” stance, the court short-circuited that process, retreating from its decades-long practice of giving states broad latitude in making economic policy, including labor policy. In this way, the court became very much involved in economic policy.

So, today the court split on two different cases, and in those splits they have opened up Pandora’s Box. We are likely to see and hear much more on these issues over the next few years.

Another court ruling today, didn’t quite make it to the Supremes, but potentially still important; the New York state Court of Appeals ruled that towns can use zoning ordinances to ban hydraulic fracturing, or fracking. Numerous municipalities across the state have either banned fracking or are considering doing so, and the trend may accelerate because of the court’s ruling. Of course, a state law in New York does not apply in other states, but it may be the start of a trend if not necessarily a precedent.

General Motors recalled more than 8.4 million vehicles worldwide today, bringing its total figures for the year above 28 million cars, more than the 22 million recalled last year by all automakers combined. GM said it was aware of seven crashes, eight injuries and three fatalities in the recalled vehicles, but said that there was no conclusive evidence that a defect had caused them. The death toll is  just from the latest round of recalls; 13 other deaths associated with other GM recalls involving ignition switches will result in payments of at least $1 million per family; at least that is the starting point unveiled today by a compensation expert hired by GM.

In economic data today; the National Association of Realtors (NAR) said its Pending Home Sales Index, based on contracts signed last month, increased 6.1% to 103.9, the highest level since September of last year. Contracts increased in all regions of the country, with the Northeast and West experiencing the largest gains. The Pending Sales Index looks at contracts for existing homes, with the anticipation there will be an actual sale in about 2 months; so it looks like there might be a little boost for home sales. However, signed contracts were down 5.2% from May of last year. Existing home sales are expected to decrease by 2.8 percent this year to 4.95 million, compared to 5.1 million sales in 2013.

There is a magazine called “The Banker” and each year they publish rankings of the profits and capital strength of the 1,000 biggest banks in the world. They estimate that last year the top 1,000 banks posted a record $920 billion in profit. This was the industry’s largest-ever annual haul, comfortably beating the pre-crisis peak of $786 billion in 2007. Last year's global profits were up 23% from the previous year to their highest ever level.

China's banks made $292 billion in aggregate pretax profit last year, or 32% of the industry's global earnings. Last year China Construction Bank shoved aside America's JPMorgan Chase to become second largest in terms of tier-one capital. And the total Tier 1 capital of Chinese banks has also overtaken that of the US for the first time ever, at $1.19 trillion, to make it the largest single banking sector in the world. ICBC (formerly known as Industrial and Commercial Bank of China) kept the top spot; with more than $200 billion, and it is also the world's most profitable bank, with $55 billion last years. Four Chinese banks made the top ten list for profits, including: ICBC, China Construction Bank, Agriculture Bank of China, and Bank of China.

Chinese officials have ramped up investment in real estate through the state controlled banking system to counter weaker than desired growth. They will likely continue this stimulus, even if it means construction of buildings that will sit vacant. Then there is the $5 trillion dollar question of the health of China’s lightly regulated shadow banking system.

The top US banks in terms of Tier-one capital are JPMorgan, Bank of America, Citigroup, and Wells Fargo. Banks in the United States made aggregate profits of $183 billion, or 20% of the global tally, led by Wells Fargo's earnings of $32 billion. The top 10 US banks in the 2014 ranking have an aggregate capital-to-assets ratio of 7.84%. This compares with a ratio of just 4.47% for the top 10 banks in the EU. To some extent, the difference is explained by US Generally Agreed Accounting Principles (GAAP), which allow netting of derivative positions.

Until 2007, Mitsubishi UFJ Financial Group was a banking giant in terms of tier-one capital, now it ranks tenth, and it is the only Japanese bank in the top ten. In the Top 1000 ranking 20 years ago, all the top six positions were held by Japanese banks. With 20/20 hindsight we can see that the Japanese banking boom was unsustainable. And now China’s banking boom seems to be getting ahead of itself. Chinese banks capital-to-asset ratio is 2 percentage points lower than that in the US, which basically means that if loans start to default, they have a smaller cushion.

Over the past 15 years, Chinese banks average profit growth has been more than 50% per year; while assets have risen more than 20% per year and China’s economic growth has been just under 14% per year. And in the past 4 years, the Chinese economy has slowed from those double digit growth levels, even as Chinese bank profits have accelerated. It seems unlikely that this path is sustainable, and more likely that there is some combination of lower growth rates in the banking sector or stronger growth rates in the Chinese economy.

Ten years ago, Europe counted five banks among the world's top ten. Today there is only one, HSBC, in fifth place. Struggling Eurozone banks contributed just 3% overall to global profits, down from 25% before the 2008 crisis, as recovery remains slow or non-existent in many countries. There are no French or Spanish or German banks in the top ten. Italian banks lost $35 billion last year, and occupy four of the top five spots in terms of the biggest annual losses. And European banks accounted for 24 of the top 25 losses.

Meanwhile, BNP Paribas is in hot water. Today, BNP pleaded guilty in New York state court, admitting to transferring billions of dollars to blacklisted countries under US sanctions. The plea to one count of falsifying business records and one count of conspiracy is part of a broader settlement deal with state and federal authorities. As part of that deal, BNP agreed to plead guilty to criminal charges and pay about $8.9 billion.

BNP is the seventh bank to settle a criminal sanctions violation case but the first to plead guilty; prosecutors consider BNP to be the worst offender. Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions coursing through its New York operations and the broader American financial system, but the wrongdoing was more pervasive at BNP, stretching from at least 2002 into 2012, after the investigation was already in full swing.

The BNP investigation centered on its commodity-trade finance business in Paris and Geneva. About 30 executives who worked there have resigned, gone on leave, been fired or relocated since 2012. Unauthorized dollar payments were made on behalf of oil companies to Sudanese or Iranian entities. Prosecutors also reviewed metals and agriculture commodity deals, as well as non-commodity transactions. In total, the bank is suspected of hiding about $30 billion in transactions.

BNP will prevent certain units within BNP’s headquarters in Paris, as well as offices in Geneva, from processing payments in dollar denominations, also known as dollar clearing, for one year beginning in 2015. The deal also requires BNP dismiss 13 employees. The deal comes six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes. Both banks could have faced the loss of their bank charter in the US, which is considered to be the Wall Street equivalent of a death penalty for a bank. That did not happen. Prosecutors have managed to extract a criminal guilty plea but only a civil penalty, a slap on the wrist, even if it is a nearly $9 billion slap.

In the months ahead, prosecutors will shift their focus to several big banks suspected of manipulating foreign currencies; they are expected to use the Credit Suisse, BNP cases as a template for pulling down criminal guilty pleas without harsh punishment, proving what we’ve known for a very long time – the big banks are too big to jail.