Financial Review

Drifting

Sinclair Noe — June 5, 2017

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

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DOW – 22 = 21,184
SPX – 2 = 2436
NAS – 10 = 6295
RUT – 8 = 1396
10 Y + .02 = 2.18%
OIL – .27 = 47.39
GOLD + .80 = 1280.30
BITCOIN + 4.68% = 2864.70
ETHEREUM +.91% = 247.50

The markets were drifting today. After hitting record highs Friday on a very weak May Jobs Report, there just wasn’t any good news to push the markets higher. There was a bit of negative or sideways news.

On the economic data side, the Institute for Supply Management reported that their non-manufacturing index slipped to 56.9% in May, down slightly from April but still in positive territory.

The government said productivity was unchanged in the first three months of 2017 instead of declining at a 0.6% annual rate. The biggest change: The increase in output, or how many goods and services companies produce, was raised to 1.7% from 1%. The number of hours employees worked, meanwhile, was revised to a slightly higher 1.7% gain instead of 1.6%.

The updated figures show that labor costs rose more slowly than initially reported, a sign companies continue to keep costs down despite a steadily expanding economy and growing shortages of skilled labor.

Hourly compensation — pay and benefits — rose a revised 2.2% in the first quarter, but after adjusting for inflation workers lost ground. Real compensation fell 0.9%.

The upward revision in the first quarter doesn’t change the underlying weakness in productivity, the key to a higher standard of living.

Factory orders dipped 0.2% in April. For the year to date, orders are 4.4% higher than in the same period a year ago. Excluding transportation, which can be volatile, orders rose 0.1% during the month, and are 5.5% higher compared to the same period in 2016.

Activity is ticking up, but so are inventories. Stockpiles rose a seasonally adjusted 0.1% during the month and are 2.5% higher than a year ago.

Markets shrugged off the news of a series of attacks which killed several people and injured dozens in the heart of London on Saturday. The UK has a parliamentary election scheduled for Thursday, pitting the Conservative Incumbent Prime Minister Theresa May against Labor leader Jeremy Corbyn.

With the London attack dominating attention, a reduction in the number of police officers in England and Wales by almost 20,000 during May’s six years as interior minister from 2010 to 2016 shot to the top of the election agenda. Whatever the outcome of the election, the UK still must deal with Brexit.

The UK has slipped to become least attractive developed market for sovereign wealth funds one year after the 2016 Brexit referendum, according to a survey by asset manager Invesco. A survey of 97 sovereign wealth funds, pension funds and central banks with a combined $12 trillion in assets rated the UK 5.5 out of 10 for investor attractiveness, down from 7.5 in 2016.

Germany was the most attractive market in Europe, with a score of 7.8, while Italy and France followed with 6.1. The US was the most attractive place in the world to invest, earning a rating of 8 out 10.

Also on Thursday, former FBI Director James Comey is scheduled to testify before the Senate Intelligence Committee as part of the committee’s Russia-related investigation.

Saudi Arabia, Bahrain, Egypt and the United Arab Emirates have cut diplomatic relations with Qatar, having accused Qatar of supporting terrorism and destabilizing the region. The US’ biggest concentration of military personnel in the Middle East are located at an Air Force base near the Qatari capital of Doha, and is home to some 11,000 US military personnel.

The rift could cause problems for OPEC’s plans to cut oil production. With production capacity of about 600,000 barrels per day (bpd), Qatar’s crude output ranks as one of the smallest among the Organization of the Petroleum Exporting Countries, but tension within the cartel could weaken the supply deal aimed at supporting prices.

President Trump outlined a plan to privatize the US air traffic control system. The FAA spends nearly $10 billion a year on air traffic control funded largely through passenger user fees, and has spent more than $7.5 billion on next-generation air traffic control reforms in recent years.

The Aircraft Owners and Pilots Association said it will not support a plan that imposes fees on small plane owners. The major airlines generally favor the idea but Delta is opposed, saying that privatization would not save money, and would drive up ticket costs and could create a national security risk.

The proposal would require congressional approval. The president will hold a rally in Ohio on Wednesday to make a case for his $1 trillion infrastructure proposal.

The Supreme Court ruled 9-0 today that the SEC’s recovery remedy known as “disgorgement” is subject to a five-year statute of limitations. The justices sided with New Mexico-based investment adviser Charles Kokesh, who previously was ordered by a judge to pay $2.4 million in penalties plus $34.9 million in disgorgement of illegal profits after the SEC sued him.

Kokesh was sued by the SEC in 2009 for misappropriating investors’ money. His penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame. The ruling represented a major victory for Wall Street firms, whose Securities Industry and Financial Markets Association trade group had urged the justices to curb the SEC’s powers.

The Supreme Court agreed to hear a major case on privacy rights in the digital age that will determine whether police officers need warrants to access past cellphone location information kept by wireless carriers, or whether that information is protected by Fourth Amendment rights to be free from unreasonable search and seizure.

The legal fight has raised questions about how much companies protect the privacy rights of their customers. The major wireless carriers receive tens of thousands of requests a year from law enforcement for what is known as “cell site location information”

The justices agreed to hear an appeal brought by a man who was arrested in 2011 as part of an investigation into a string of armed robberies in the Detroit area over the preceding months. Police helped establish that the suspect was near the scene of the crimes by securing cell site location information from his cellphone carrier.

The Supreme Court has twice in recent years ruled on major cases concerning how criminal law applies to new technology, on each occasion ruling against law enforcement. In 2012, the court held that a warrant is required to place a GPS tracking device on a vehicle. Two years later, the court said police need a warrant to search a cellphone that is seized during an arrest.

While the S&P 500 is up 9 percent this year, three of its 11 sectors — energy, telecommunications services and financials — are down by an average of 7.7 percent. The common factor in these 3 sectors is that they were all up big in the fourth quarter, perhaps too much, too fast; and now they have fallen back to earth.

Where has the big money been flowing in this market? It’s been a great year for big tech stocks, and a meager one for the small caps; the Nasdaq 100 index is up 20 percent this year, while the Russell 2000 has risen by less than 3 percent.

Markets worldwide are being propped up by a secret weapon of sorts: robust cash holdings that are at their highest in almost three decades. While stocks globally have benefited from rebounding earnings growth, bonds have also rallied amid declining inflation expectations and uncertainty around the pace of Federal Reserve interest-rate hikes.

Underpinning gains in both asset classes is $5 trillion of capital that is sitting on the sidelines and serving as a reservoir for buying on weakness. This excess cash acts as a backstop for financial assets, both bonds and equities, because any correction is quickly reversed by investors deploying their excess cash to buy the dip.

Goldman Sachs has issued a report looking at where hedge funds are investing and noted that technology is the favorite sector by far of professional investors. Hedge funds and large-cap mutual funds disagree about the prospects of the financial sector, which has been a shining spot of the Trump trade since the presidential election.

Hedge funds particularly love the “FAANG” stocks: Facebook, Apple, Amazon, Netflix and Google parent Alphabet. Last week, Amazon topped $1,000 per share. Today, Alphabet topped $1,000 per share. So, really, it has been easy to see where the big money has been flowing.

Today, Apple dropped about 1%, even as they presented their annual developers’ conference.

Apple unveiled a Siri-powered smart speaker, the HomePod. It runs $349, which is far more expensive than competing products. Apple is a bit late to the party. Amazon launched its Echo, priced at $179. Six months ago, Google introduced the Google Home speaker priced at $109.

They all use voice commands to play music, tell you the weather, read news, and answer questions. Apple ran through all the big improvements it's made to the software that runs on iPhones, iPads, and Macs. And they announced various tweaks to watches, computers, etc., etc., blah, blah.

Sorry, but these Apple conferences just don’t carry to “wow” factor they used to. It really looked like Apple was behind the curve when it comes to AI, and other big things that might get investors excited.

Separately, Foxconn’s CEO said that Apple and Amazon will join in Foxconn’s bid for Toshiba’s chip business. Representatives for Apple and Amazon declined to comment. The Japanese government has said it will block any deal that would risk the transfer of Toshiba’s key chip technology out of the country.

Financial Review

Hack Attack

Sinclair Noe — December 29, 2016

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

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DOW – 13 = 19,819
SPX – 0.66 = 2249
NAS – 6 = 5432
RUT + 2 = 1363
10 Y – .03 = 2.48%
OIL – .29 = 53.77
GOLD + 16.70 = 1159.40

As expected, the Obama administration is fighting back against Russia for its hacking efforts to influence the election. The operation was broad, involving not only hacking the Democratic National Committee but scanning and intruding into state voter databases. The hackers leaked the pilfered e-mails in a bid to damage Clinton’s campaign, per U.S. intelligence agencies.

The administration sanctioned 2 Russian intelligence services, ejecting 35 Russian intelligence operatives from the US. The FBI and Homeland Security Department also released a report with technical evidence intended to prove Russia’s military and civilian intelligence services were behind the hacking to expose some of their most sensitive hacking infrastructure; a more detailed report will be released in 3 weeks, including malware and computer addresses.

Members of both parties in Congress have expressed alarm about the campaign hacking and vowed to conduct hearings into Russia’s role.

The number of Americans who applied for unemployment benefits in the week before Christmas fell by 10,000 to 265,000 – the lowest levels since last summer. Initial claims have been under 300,000 for 95 straight weeks, the longest streak since 1970. Just a reminder, the December Non-Farm Payroll report from the Department of Labor will be published on Friday, January 6; with early estimates running around 170,000 net new jobs in December.

Jobs are the lifeblood of the economy, and will give direction to the Federal Reserve moving into the New Year. We remember that last year the Fed was predicting 4 rate hikes for 2016; we ultimately got one increase in December. Now the Fed is predicting 3 rate hikes for 2017 as the economy inches toward full employment. So, the jobs reports are crucial data.

The trade deficit increased 5.5% in November to a seasonally adjusted annual $65 billion. Exports rose 1.0% to $121 billion, while imports totaled $187 billion, up 1.2% from October. Wholesale inventories edged up 0.9% to a level of $594 billion; that was 1.2% higher than a year ago. A bigger trade deficit is negative for GDP growth.

Sprint confirmed it would “create or bring back to America” 5,000 jobs, mostly in customer care and sales. President-elect Trump campaigned on bringing jobs back to the US but the 5,000 Sprint jobs confirmed Wednesday aren’t exactly new — they are part of a previously announced initiative led by Japan’s Softbank to create 50,000 jobs in the US.

Splitting from an earlier ruling, a federal appeals court has found that in-house courts at the Securities and Exchange Commission are unconstitutional. That marks a heavy setback for the agency’s enforcement efforts as it uses five administrative-law judges to handle most routine cases. A spokesman said the SEC is reviewing the decision and wouldn’t immediately have further comment.

The Food and Drug Administration released cybersecurity recommendations today for companies that manufacture internet-connected medical devices. The FDA says unsecured devices are subject to hacking and could prove fatal.

Alere is appealing a decision by the Centers for Medicare and Medicaid Services to revoke Medicare billing privileges for the health-care provider’s Arriva Medical diabetes business. CMS had alleged that Arriva submitted Medicare claims for patients who had died. Alere has denied an impropriety.

Sears just announced a fresh round of store closures. The company told employees on Tuesday that it will close 30 Sears and Kmart stores in early 2017. Most of the stores will start liquidation sales on January 6 and go out of business between late March and mid-April. This latest round of closures will bring the total number of stores that Sears has closed this fiscal year to more than 200.

That means the retailer will have fewer than 1,500 stores left by early 2017. That’s down nearly 60% from 2011, when Sears had more than 3,500 stores. The unofficial list of new store closures does not include Arizona stores. CEO Eddie Lampert, a hedge fund manager and Sears’s biggest investor, will offer a $200 million letter of credit to the department-store chain through affiliates of his firm, ESL Investments Inc. The amount could be expanded to as much as $500 million with the consent of lenders.

Apple and Samsung dominated Christmas wish lists this year but both had a luckluster holiday season. Yahoo’s Flurry Analytics looked at new phone and tablet “activations” between Dec 19 and Dec 25. Both Apple and Samsung still dominated but Apple saw a fall in share while Samsung saw a slight increase.

This year, 44 percent of activations globally were Apple devices, a decline from the 49 percent seen in a similar period in 2015, and 51 percent in 2014. Meanwhile, 21 percent of activations were Samsung devices, a tiny rise from 19.8 percent last year.

AirPods remain in short supply. If you want to buy a pair of the wireless earbuds from Apple, you won’t find them in the local Apple store; there is a 6-week waiting list. That’s what happens when you eliminate the headphone jack on the iPhone. During a visit to the New York Stock Exchange yesterday, CEO Tim Cook called the wireless earbuds “a runaway success,” and said Apple was “making them just as fast as we can.”

Meanwhile, Indian officials are meeting early next week to evaluate the incentives sought by Apple to manufacture its products in the country. The government is trying to promote local manufacturing under Prime Minister Narendra Modi’s “Make in India” campaign, but it remains to be seen whether they would agree to more concessions for Apple.

Toshiba shares dropped another 17% in Tokyo on worries about the company’s financial stability. The stock has fallen by more than 40% after the firm warned this week it’s expecting billions of dollars in losses from its takeover of a US-based nuclear construction business.

Toshiba cannot raise cash by issuing shares because of restrictions imposed by the stock exchange after last year’s accounting scandal. It looks more and more likely that the only solution is to sell off the core of the company. Meanwhile, share price is in a death spiral.

German pharmaceutical company Boehringer Ingelheim agreed to divest five types of animal health products to settle charges that a proposed asset swap with Sanofi would harm competition. The proposed asset swap involved Boehringer Ingelheim’s acquisition of Sanofi’s $13.5 billion animal care subsidiary and Sanofi’s obtaining the Germany company’s consumer health care business unit, valued at nearly $8 billion, plus $5.5 billion in cash.

The City of Madrid says all privately-owned cars with even-numbered registration plates will be banned from the Spanish capital’s roads today to curb rising air pollution. The move follows a dry, sunny stretch of weather which sent levels of nitrogen oxide, a poisonous gas which can cause respiratory problems such as asthma, soaring above European-Union-set limits. The restriction could alternate between odd and even number plates if high levels of contamination persist.

The World Economic Forum (WEF) has determined that in many parts of the world, solar energy is now the same price or even cheaper than fossil fuels for the first time. While the average global LCOE [levelized cost of electricity] for coal and natural gas is around $100 per megawatt-hour, the price for solar has plummeted from $600 a decade ago to $300 only five years later, and now close to or below $100 for utility-scale photovoltaic. For wind, the LCOE is around $50.

According to the WEF, more than 30 countries have already reached grid parity—even without subsidies. (“Grid parity” is the point when an alternative energy source, say solar, can generate power at a LCOE that’s equal or even less than the price of traditional grid power.)

The WEF highlighted how the unsubsidized LCOE for utility-scale solar photovoltaic—which was not competitive even five years ago—has declined at a 20 percent compounded annual rate, making it not only viable but also more attractive than coal in a wide range of countries.

Countries that have already reached grid parity include Chile, Mexico, Brazil and Australia with many more countries also on the same track. The WEF projects that two thirds of the world will reach grid parity in the next couple of years, and by 2020, solar photovoltaic energy is projected to have a lower LCOE than coal or natural gas-fired generation throughout the world.

This means that we have reached a tipping point for renewable energy, which is reflected in new installations. Through the end of September, solar accounted for 39 percent of all new electric generating capacity brought on-line in the U.S. Both utility-scale installations and residential installations grew strongly.

The United States solar market shattered all previous quarterly solar photovoltaic (PV) installation records. One megawatt of solar power was installed every 32 minutes in the U.S. from July to September, for a record total of 4,143 megawatts. That brings total installed solar capacity in the U.S. to 35.8 gigawatts, enough to power 6.5 million homes.

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.

Enjoy Parenthood - NFLX, MSFT Plan To Improve Policies By Providing Maternity & Paternity Leaves.

Financial Review

Sunlight is the Best Disinfectant

Sinclair Noe — August 5, 2015

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

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DOW – 10 = 17,540
SPX + 6 = 2099
NAS + 34 = 5139
10 YR YLD + .06 = 2.27%
OIL – .59 = 45.15
GOLD – 3.00 = 1085.50
SILV + .02 = 14.69

Private-sector hiring slowed in July. Employers added 185,000 private-sector jobs in July, down from 229,000 jobs in June, and below the average pace for the past six months. Gains slowed across all size-firms except large firms in July. Manufacturing employment has slowed sharply since the beginning of the year. The ADP report sometimes offers a hint of what we might expect from the monthly government report on jobs, which will be released Friday. Strength or weakness in the labor market is thought to be a key factor in the Federal Reserve’s decision to possibly hike interest rates in September.

The Institute for Supply Management said its services index surged to 60.3% from a 56% reading in June. Any reading above 50% indicates expansion. It was the highest reading since 2005. The business activity and new orders components both were over 60%, and the employment index increased 6.9 percentage points to 59.6%. We’ll have more details on the ISM report in our next segment.

Atlanta Fed President Dennis Lockhart said it would take “significant deterioration” in the U.S. economy for him to not support a rate hike in September. Lockhart’s opinion is notable because he’s considered a centrist on the FOMC whose views typically mirror the consensus.

The Fed has kept the federal funds rate hovering at historic, near-zero lows for more than six years. But that’s all about to change. Maybe September, maybe December, but sooner rather than later. The cumulative effect of what could be a series of rate hikes over an 18 to 24 month period will ripple across U.S. economy and weigh on America wallets and pocketbooks. For most people the response is to just apply some good old common sense: pay down outstanding debt (the cost to service debt will go up), snag zero percent credit card offers (they will go away), refinance your mortgage (rates will probably rise), and remember that when rates rise bond prices go down.

According to a new IMF report , more “significant work” in analyzing data is needed before deciding whether to grant the renminbi reserve currency status. IMF staff members also suggested that a decision could be postponed by nine months, until September 2016. Since a rejection five years ago, China has been pushing for the yuan to join a list of currencies, including the dollar, pound, euro and yen, which make up the lender’s Special Drawing Rights basket.

The United States in June posted a record trade deficit with the European Union. The overall US trade deficit, which includes services, climbed 7.1% to a seasonally adjusted $43.8 billion in June. The upturn largely reflected an all-time high in imports such as autos, drugs and commercial aircraft from Europe, whose goods are cheaper to buy because of a weakened currency. The flip side of a stronger US economy compared to the rest of the world is a sharp increase in the value of the dollar that’s made American goods and services more expensive in Europe and elsewhere, cutting into exports. Sales of US-made goods and service abroad fell 0.1% in June to a seasonally adjusted $188 billion.

More fallout from the closure of Export-Import Bank. You may recall the Ex-Im Bank charter was allowed to expire when Congress refused to vote on extending the charter, even though the Bank has been around for 80 years. Despite the name, Ex-Im doesn’t offer import assistance in the US; it is all about exporting. It provides loan guarantees, loans and insurance to help foreign companies buy US-made goods when private banks can’t or won’t make loans in industries including aerospace, energy and manufacturing.

Over the years, Ex-Im helped bankroll projects ranging from the Pan American Highway to insurance waivers that kept airlines flying after the Sept. 11 terrorist attacks. For decades, Congress reauthorized the bank with little or no debate and didn’t even bother with a roll call in either chamber for its extension in 2006. The Export-Import Bank backed $27.5 billion in exports in fiscal 2014, just under 2 percent of the US total, and supported 164,000 American jobs, mainly in manufacturing companies both large and small; and it is not subsidized; it actually paid $675 million to the Treasury last year.

Boeing says it is now scrambling to find alternate financing for a satellite contract worth “several hundred million dollars” that was scuttled by the federal credit agency’s uncertain future. Commercial satellite provider ABS is said to have terminated the satellite order in mid-July, given the absence of U.S. export financing. Jim McNerney, the chairman of Boeing, noting that the Ex-Im Bank helps keep manufacturing jobs in America, wrote recently, “I never thought I’d see the day that U.S. companies would, in effect, be penalized by their own government for not setting up shop overseas and, in the case of Boeing, expanding our domestic production and work force by billions of dollars and thousands of jobs.”

The SEC had a couple of important votes today on Dodd-Frank legislation. The first vote, which passed 3-2,  dealt with a proposed new federal rule to would require public companies to list their chief executives’ total annual compensation as a ratio to the their workers’ median pay. The rule would not apply to companies with less than $1 billion in annual gross revenue. The rule will take effect for companies’ first fiscal year starting on or after Jan. 1, 2017. More than 280,000 public comments supporting the pay ratio rule were submitted to the SEC. Fifty years ago, chief executives were paid roughly 20 times as much as their employees, compared with 331 times as much in 2013. Opponents of the measure claim it was motivated by a desire to shame companies into paying their chief executives less. As always, sunlight is the best disinfectant.

In a separate vote, the SEC considered when to discipline banks’ swaps-dealing units. It has become standard operating procedure to grant an exemption waiver to banks, even when they commit multiple violations for offenses such as selling toxic mortgage securities and manipulating benchmark interest rates. Banks could be barred from managing mutual funds or raising money for hedge funds if they don’t get the exemptions after settling a case; but the exemptions have become routine, even for repeat offenders. So, now the SEC voted to establish a policy that requires SEC commissioners to vote on individual waivers sought by financial firms. Companies would have six months to persuade the SEC to give them a waiver and if they didn’t get it during that time period they would be denied the exemption. Also, in a separate vote banks are now required to register as dealers of security-based swaps.

JPMorgan Chase is loosening its criteria for underwriting big mortgages; that follows similar moves by Bank of America and others trying to grab market share in the high-end housing market for jumbo mortgages, typically loans above $417,000. In the second quarter, overall jumbo originations rose to an eight-year high of $93 billion, up 58% from a year ago. By dollar volume, jumbo mortgages given out by lenders last year accounted for about 20% of all first-lien mortgages.

A failure of JPMorgan Chase poses the greatest risk to the international financial system, even when compared with banks in Europe and Asia. According to a new government study from the Office of Financial Research, the House of Morgan was given a “systemic importance score” of 5% in a report that measures the threat to global financial stability should any one of the world’s 30 largest and most-interconnected banks fail.

U.S. banks dominated the top 10 list of risky global banks, including JPMorgan at No. 1, Citigroup at No. 3 with a score of 4.3%, Bank of America at No. 7, Morgan Stanley at No. 9 and Goldman Sachs at No. 10 with a 2.5% risk assessment; Wells Fargo scored No. 18.  In July, the Federal Reserve released stricter rules for determining how much capital the nation’s 8 largest banks must hold to protect against future calamities. Under the new rules, the Fed imposed a new “risk-based capital surcharge” for banks with at least $250 billion in total assets.

Netflix plans to start offering employees “unlimited” maternity and paternity leave through the first year after a child’s birth or adoption. Employees will be entitled to their normal salary during their time off. Meanwhile, Netflix shares surged 7.6% yesterday to an all-time record high, after the company announced it would offer service in Japan starting on September 2.

Following on the heels of the Netflix announcement, Microsoft said it will offer 12 weeks of paid time off to all new parents, improving its policy as the issues of gender equity and family balance gain greater prominence in the technology industry. Combined with the previously available leave of eight weeks for maternity disability, that means new mothers can now take a total of 20 weeks of leave fully paid.

Only 12 percent of U.S. private-sector employees have access to any paid family leave through their jobs, according to the U.S. Department of Labor. The U.S. is the only nation in the developed world that doesn’t mandate maternity leave with pay.

Be on the lookout for ticker “NMG”. After more than a decade under private equity ownership, Neiman Marcus has filed for a $100M initial public offering. It wouldn’t be the first time the department store chain prepared to head back to the stock market. Warburg Pincus and TPG filed for an IPO of the company in 2013. And this raises a question; will they offer the stock in their Christmas catalog? Do they still have a Christmas catalog?

Financial Review

Into the Ditch

Sinclair Noe — July 21, 2015

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

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DOW -181 = 17,919
SPX – 9 = 2119
NAS -10 = 5208
10 YR YLD – 3 = 2.34%
OIL + .21 = 50.36
GOLD + 3.30 = 1102.00
SILV + .18 = 14.95

Earnings reporting season continues with about one-quarter of S&P 500 companies scheduled to report this week. Among the gainers: Harley Davidson posted second quarter earnings and revenue that topped expectations, Travelers posted a second-quarter profit that was better than expected, due to fewer losses from catastrophes. Among the decliners: United Technologies issued a profit warning and announced that its aerospace and elevator units will be below expectations due to a strong dollar and China’s economic slump, IBM’s second quarter earnings fell 17% and revenue dropped 13%, Verizon posted better than expected earnings but revenue missed estimates, Lexmark swung to a loss and announced it will cut 500 jobs.

The big news in earnings came from some of the biggest names:
Apple and Microsoft. Apple sold 47.5 million iPhones, a 35 percent gain, in the period that ended in June. Analysts had anticipated 48.8 million shipments. Net income in the fiscal third quarter, which ended in June, was $10.7 billion, or $1.85 a share, while revenue rose 33 percent to $49.6 billion. Analysts on average had forecast third-quarter profit of $1.81 a share on sales of $49.4 billion. The gross margin was 39.7 percent, topping the company’s outlook for 38.5 percent to 39.5 percent. Apple shares down about 8 percent in after-hours trading. It probably won’t make a difference for Apple, but I hear Lindsey Graham is in the market for a new phone.

Even before the earnings report, Apple was having problems. Users experienced a problem with multiple iCloud services, including Apple Music, Beats 1 and the App Store, where outages knocked out service for up to 4 hours earlier today. Noe report on the cause of the outage.

Every day we hear about a new cyber-attack but this may be one of the scariest stories yet. Security experts are urging owners of Fiat Chrysler vehicles to update their onboard software after hackers took control of a Jeep over the internet and disabled the engine and brakes and crashed it into a ditch. A security hole in FCA’s Uconnect internet-enabled software allows hackers to remotely access the car’s systems and take control. Unlike some other cyberattacks on cars where only the entertainment system is vulnerable, the Uconnect hack affects driving systems from the GPS and windscreen wipers to the steering, brakes and engine control. The Uconnect system is installed in hundreds of thousands of cars made by the FCA group since late 2013.

Microsoft reported its largest-ever quarterly net loss, due a $7.5 billion writedown after the purchase of Nokia’s handset unit. Excluding the Nokia charge and costs related to job cuts, Microsoft said profit in the fourth quarter, which ended June 30, was 62 cents a share. Sales were $22.2 billion. Analysts on average projected profit of 58 cents on sales of $22 billion.

Yahoo reported second quarter revenue, excluding sales shared with partner websites, was little changed to $1.04 billion in the second quarter, the company said Tuesday in a statement. Profit, excluding items such as stock-based compensation, was 16 cents a share. Analysts projected, on average, sales of $1.03 billion and profit of 19 cents. And then Yahoo lowered third quarter revenue guidance.

The Federal Reserve has finalized the capital surcharge amounts for the nation’s largest financial firms, or systemically important financial institutions (SIFIs). For example, the surcharges range from 4.5% for JPMorgan to 1% for BNY Mellon. Taken together, the group’s capital cushion will be more than $200 billion larger than if the surcharge was not implemented. Note: The Fed offered a reprieve to GE Capital from more-intensive regulation, after the company promised to cut its assets by more than half.

The financial industry worries that when the Fed’s tightening plans take hold, a sell-off in the massive U.S. bond market could ensue, and be exacerbated by a lack of bank buyers willing to jump in. Banks, including primary dealers who act as market makers for US Treasuries, have cut their bond inventories in the past few years in response to tougher capital requirements, reducing a liquidity buffer for the fixed income market.

Private and public comments by Fed officials show that they do not share Wall Street’s degree of concern about liquidity, and do not believe that capital rules are solely to blame for the bond market’s growing tendency to seize up. Effectively, regulators are telling the industry it is the responsibility of banks, funds and other market players to protect themselves. The Fed’s assertive stance is setting the stage for more volatile fixed income markets, where liquidity droughts could be the price of doing business in bond markets. The message – in public addresses, reports to Congress, and even an investigation into market turmoil last October – is that less liquidity is a necessary consequence of regulatory reform and fitting for an economy that is getting ready for tighter monetary policy.

The Dodd Frank Act is 5 years old. Half a decade later, the debate around the law continues. Regulators are pushing to finalize still lingering projects. New government powers have yet to be tested. And lawmakers in both parties continue to question whether the law’s central goal, ensuring “too big to fail” is a thing of the past, was actually achieved. There are undoubtedly major parts of Dodd-Frank that are fully up and running. Perhaps most notable is the Consumer Financial Protection Bureau. Elsewhere, regulators have put in place new checks on financial derivatives, begun implementing new rules in the mortgage market and taken steps aimed at predicting and preventing broad new threats to the overall financial system. It is estimated that just 63 percent of Dodd-Frank rules have been finalized, with 21 percent of the required rules not yet even proposed. And the nation’s biggest banks still need to prove to regulators that they can safely be wound down in bankruptcy should disaster hit.

Citigroup’s consumer bank has been ordered to pay $700 million in relief to borrowers for illegal credit card practices. The Consumer Financial Protection Bureau said that about 7 million customer accounts were affected by Citibank’s “deceptive marketing” practices, which included misrepresenting costs and fees and charging customers for services they did not receive. Citibank told telemarketers to entice customers with a “free 30-day trial period,” but the bank would sometimes charge during the first 30 days anyway. Or customers were left with the impression that the “free” service would go away after 30 days if they did nothing. Instead, after a month, they started being charged regular fees. Citi charged some customers for services it wasn’t providing, such as credit monitoring. And while Citi was caught, that doesn’t mean they are the only company pulling these shenanigans on customers.

The Securities and Exchange Commission has opened an investigation into the companies with business links to FIFA. Reuters said that Nike is probably one of the companies being scrutinized by the SEC even though it has not been named or charged with any wrongdoing. That’s because the indictment of FIFA officials by U.S. prosecutors described a “$160 million, 10-year deal signed by “Sportswear Company A” that “matched exactly” the details of Nike’s 1996 deal in Brazil to become the footwear and apparel supplier and sponsor of the Brazilian national soccer team.

New York Department of Financial Services officials have subpoenaed several of the executives of Promontory Financial Group, a financial-services consultancy, including an executive who testified before Congress two years ago. It’s part of a long investigation into potential conflicts of interest at the firm related to its work for the British bank Standard Chartered, which was suspected of processing billions of dollars on behalf of Iran. The regulator is looking at whether Promontory, under pressure from the bank and its lawyers, sanitized a report to NYDFS to minimize the volume of allegedly illegal transactions.

Toshiba’s CEO is out after an accounting scandal. Toshiba’s president and CEO, Hisao Tanaka, has resigned after an internal investigation found the company has been cooking its books for several years. The company overstated its profit by $1.2 billion over several years, almost triple its initial profit.

Qualcomm is expected to conduct a strategic review that may result in the breakup of the company. The chipmaker is expected to announce plans to lay off more than 10% of its 30,000 employees. The expected layoffs are part of what is likely to be a strategic review of the company, which could lead to the eventual spin-off of its chip business from the highly profitable patent-licensing business

The National Oceanic and Atmospheric Administration (NOAA) reports global land and sea surface temperatures from January through June were 1.53 degrees Fahrenheit above the 20th century average, the highest since recordings started in 1880. June was the fourth month this year to break its monthly temperature record, along with February, March and May. And it marks the hottest six months on record. One side effect is that warming ocean waters are expected to result in a strong El Nino weather pattern in the second half of the year; this could bring some much needed rain to California and the southwest. While the state is in need of moisture, too much weather could lead to rain-related destruction. On Friday, heavy rains pounded the bone-dry Southern California region, washing out an elevated section of Interstate 10 near Desert Center, one of the major highways connecting California and Arizona. The Pacific is also expected to see more hurricanes and typhoons this season.  So far in 2015, there have been four hurricanes compared to just two by this time last year.

Financial Review

Trending

Sinclair Noe — April 28, 2015      

 

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

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DOW + 72 = 18,110
SPX + 5 = 2114
NAS – 4 = 5055
10 YR YLD + .05 = 1.97%
OIL – .06 = 56.93
GOLD + 10.10 =  1212.80
SILV + .21 = 16.71

House prices picked up in February, rising 0.5%, according to the S&P/Case-Shiller 20-city composite index. After seasonal adjustments, home prices rose 0.9% in February, matching January’s gain. Compared with February 2014, prices for the 20-city index were up 5%, the fastest growth in half a year. Home prices in Phoenix gained 0.3% for the month and 2.9% for the 12 month period.

The Commerce Department reports home ownership slipped to a 25 year low of 63.8% in the first quarter. The home ownership rate peaked at 69.4% in 2004. Household formation increased by 1.5 million in the first quarter. More people, starting more households, but they aren’t buying homes. With many Americans still showing an aversion to homeownership, the gains in household formation largely are being driven by renters.

Consumer confidence declined in April to a four-month low as Americans’ views of the labor market and the outlook on the economy deteriorated. The Conference Board’s index dropped to 95.2 from a revised 101.4 reading in March. The report showed fewer respondents said jobs were plentiful in April and income expectations cooled, signaling consumers will remain guarded about spending. The setback in sentiment may indicate demand will be slow to pick up after a stronger dollar, bad winter weather in some regions and a labor dispute at West Coast ports weighed on the economy in the first quarter.  Also, gasoline prices are edging up a little bit, so that’s a little bit of a negative.

Sometimes the general public is quite good at picking up on macro-trends, even short-term changes. As we started the year, crude oil was dropping like a rock and the dollar was blasting through the roof. Both oil and the dollar have turned around recently. Over the past 1½ months, the Dollar Index has been down 3 percent, and oil has gone up more than 30 percent. The question is whether the recent change represents a pause in the secular trend or reversal of the macro-trend.

The euro has finished higher against the dollar during five of the last six weeks. The trend for the dollar is heavily influenced by the Federal Reserve, as well as other central banks. While several global economies have adopted accommodative monetary policy, the Fed is hinting at raising rates. We’ll find out more tomorrow when the Fed concludes its 2 day FOMC meeting; and while no one expects the Fed to hike rates tomorrow, we’ll parse language for dovish or hawkish hints. The Fed will also offer their own economic forecast. And if the Fed holds their cards close to their chest, the secular trend is still for a fairly strong dollar because other central bankers are committed to an easy money policy.

Greek PM Alexis Tsipras said he would have to resort to a popular referendum if lenders insisted on “unacceptable” demands, but was confident about striking a deal to avoid such a scenario. Meanwhile, China’s central bank is planning to launch a new credit-easing program in the next couple of months. The Wall Street Journal reports the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans to boost liquidity and lending. In some ways the dollar is still the cleanest shirt in the dirty clothes hamper.

Meanwhile, the increase in oil prices has been more than a little bounce. In the past month and a half, oil has moved from $45 to $58, or about a 30% move; nothing to sneeze at. And we are heading into a seasonally strong time for oil, the summer driving season. Also, if the dollar shows any sign of weakness, it would lead to higher oil prices.

And then there is the geopolitical situation to consider when we look at oil. Any little mishap raises the Fear Premium for oil. We had a reminder today, when Iran seized a cargo ship near the Strait of Hormuz. The ship was initially reported to be American but later it turned out to be flagged to the Marshall Islands. Iranian news agencies said the seizure was strictly a civilian matter. It likely will be a non-event, but it is a reminder that tensions are high around the Persian Gulf.

We don’t know if oil is going higher or lower. And the dollar could run or stumble; we don’t know. The macro-trends of energy prices and direction of the currency directly impact stock and bond investments. We’ve seen that already in earnings reports; with analysts’ estimates ratcheted lower to reflect a stronger dollar, and depending on the sector, the positive or negative impact of lower oil prices.

Case in point today, BP, the British oil company posted a sharp drop in first-quarter profit; we’re still waiting for most of the Big Oil companies to report;  but BP’s results beat analyst estimates due to a larger than expected increase in refining revenue. In an interesting twist, BP reported underlying replacement cost profit – which takes into account the fluctuations in the price of oil – came in at $2.6 billion, down from $3.2 billion a year earlier. They have oil but they have to guess at its value. Production for the period was 8.3% higher than the first quarter of 2014.

In other earnings news today: United Parcel Service beat first-quarter profit expectations, although sales came up short. Earnings for the latest quarter rose to $1.03 billion from $911 million in the year-earlier period.  Currency changes reduced total sales growth by 2.2 percentage points, even as total shipments increased 2.8% to 1.1 billion packages

Merck reported earnings of $953 million, or 33 cents a share, down from $1.71 billion, or 57 cents a share, a year earlier. The pharmaceutical giant raised its earnings guidance for the year, despite the negative impact of the stronger dollar.

Pfizer posted a profit of $2.4 billion, up from $2.3 billion. Pfizer trimmed its full-year outlook citing a stronger U.S. dollar and weaker euro.

Ford Motor reported first-quarter net income fell 7 percent to $924 million from $989 million a year earlier. Ford is still working to increase production in North America to accommodate their redesigned F-150 truck, meanwhile they posted a loss on South American operations.

According to data from Thomson Reuters, first-quarter earnings are now on track to post a slight gain after the mostly stronger-than-expected results, defying forecasts for the first profit decline since 2009.
 
Yesterday after the close, Apple reported $13.6 billion in net income for the first quarter on revenue of $58 billion; Apple easily beat estimates on both the top and bottom line. Apple also raised its dividend 11% and said it would increase its capital return program from $130 billion to $200 billion. Apple closed down today by about 2%. Sometimes earnings reports don’t make much sense for the trader.

Twitter released their earnings today in tweets, the problem was that they tweeted out earnings news at 3:07PM eastern time, and they weren’t supposed to report until after the market closed at 4:00Pm. Twitter stock fell, trading was halted, then reopened, and then Twitter stock really fell big, about 18%. You would think Twitter would know to be careful what they tweet.

One trend that will emerge from earnings season is even more stock buybacks. Goldman Sachs forecast an 18 percent jump in buybacks and 7 percent climb in dividends for the year. Next week more than 80 percent of the Standard & Poor’s 500 market cap companies will have exited the “blackout period” in which share repurchases are put on hold prior to quarterly results announcements. Companies that make those cash infusions see an automatic increase in their per-share earnings and dividend yield. That tends to raise their share prices, which could bolster the broader market. Of course there are limits to buyback programs, and the bigger consideration is that if a company is buying back their own shares they are using cash that might be used to grow the business, instead of shrinking the shares outstanding.

And then consider the trend of ever increasing margin debt. The NYSE reports margin debt rose to an all-time high in March at $476.4 billion, up from $464.9 billion at the end of February. And the wrinkle is that margin debt rose during the month of March even as the S&P 500 dipped nearly 2 percent. Margin debt is created when investors borrow money in order to buy stocks. If an investor buys $100 worth of stocks with $50 in capital, that individual has $50 of margin debt outstanding. Since margin debt provides leverage, it amplifies gains, but also increases the risk to an investor.

Brazilian oil company Petrobras’ $17 billion write-down, announced last week, may have been meant to close the accounting on a sprawling corruption scandal, but could instead provide fresh ammunition for a U.S. class action lawsuit. The case, filed in Manhattan federal court in December by a group of large investors, alleges $98 billion of the company’s American depository shares, or ADRs, and bonds were artificially inflated since 2010 by the company overstating the value of assets such as major projects. Petrobras has moved to have the case dismissed.

And another trend that just won’t go away – “Banks Behaving Badly.” The Securities and Exchange Commission is investigating whether Bank of America broke rules designed to safeguard client accounts, potentially putting retail-brokerage funds at risk in order to generate more profits. For at least three years, the bank used large, complex trades and loans to save tens of millions of dollars a year in funding costs and to free up billions of dollars in cash and securities for trading that Bank of America otherwise would have needed to keep off-limits. Now, the SEC is investigating whether the bank’s unusual strategy violated customer-protection rules and whether the bank misled regulators about what it was doing. This is not some theoretical threat to consumers. The collapse of Lehman Brothers in 2008 and of MF Global. in 2011 left some brokerage customers waiting for the return of billions of dollars of their own money, leading regulators to strengthen the long-standing customer-protection rule.

Financial Review

Who’s Buying Whom

Sinclair Noe — April 2, 2015

 

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

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DOW + 65 = 17,763
SPX + 7 = 2066
NAS + 6 = 4886
10 YR YLD + .03 = 1.90%
OIL – .81 = 49.28
GOLD – 1.10 = 1203.00
SILV – .18 = 16.86

Iran and six world powers, including the US, has agreed to a framework for a final deal on Iran’s controversial nuclear program. The understanding still needs to work out some details but it paves the way for the start of a final phase of talks that aims to reach a comprehensive agreement by the end of June. The agreement concludes weeks of intense negotiations and comes two days beyond the initial March 31 deadline for an outline deal.

Iran has accepted limitations on its enrichment capacity that include retaining only one enrichment facility. Europe and the United States will end nuclear-related economic and financial sanctions on Iran under the future deal after the United Nations’ nuclear agency confirms Tehran’s compliance with the deal.

The standoff over Iran’s nuclear program has dragged on for more than a decade. In November 2013, both sides concluded a preliminary agreement that froze some of Iran’s most sensitive nuclear activities in return for limited sanctions relief. The parties also agreed to reach a conclusive deal by June 2015.

Shortly after the agreement was announced, President Obama read a statement in the Rose Garden of the White House, saying the framework agreement on Iran’s nuclear program as a “good deal” that would block Tehran from obtaining an atomic weapon and make the world safer – a better option than another Middle East war. Obama said there was always the possibility Iran would try to cheat on the deal. But if it did so, he said, the agreement’s framework of inspections and transparency would make it far more likely the United States would know about it, and any US president would still have “all of the options that are currently available to deal with it.”

The situation in Yemen continues to deteriorate. Houthi fighters and their allies seized part of Aden, a strategic port city. Aden lies near the Bab el-Mandeb Strait, which is one of the world’s oil chokepoints. Most exports from the Persian Gulf that transit the Suez Canal and SUMED Pipeline pass through Bab el-Mandeb.

Gunmen from the Islamist militant group al Shabaab stormed a university in Kenya and killed at least 150 people this morning, 80 others were injured in the worst attack on Kenyan soil since the US embassy was bombed in 1998. The gunmen spared Muslim students and either killed Christian students on the spot or took them hostage. The 15 hour siege ended when police and soldiers killed the four gunmen.

Greece has submitted a new list of reforms to its creditors. Greece’s government provided a lengthy list of reforms, which included new revenue streams. The plan also proposes an increase in spending on some government programs. An unnamed eurozone official noted, the proposals are a “very long way from being a basis [for a deal].”  Meanwhile, The European Central Bank has increased its emergency assistance to Greece. Greek banks are now eligible to receive $77 billion through the ECB’s Emergency Liquidity Assistance program. The measure provides more liquidity for the country’s struggling lenders.
 
The Labor Department reports 268,000 people applied for unemployment benefits in the period stretching from March 22 to March 28, down 20,000 from the prior week. For four straight weeks initial claims have tracked below 300,000, a key threshold typically associated with a strengthening labor market. New applications for benefits are also running about 19% below year-ago levels.

The employment report for March will be released tomorrow morning, even though the markets will be closed in observance of Good Friday. Estimates for job gains are now running between 240,000 and 255,000. Yesterday, ADP said job creation in March was the weakest in 14 months.

The Commerce Department reports factory orders rose 0.2% in February, breaking a six-month streak of declines. However, January’s data was revised to show a 0.7% decline instead of a previously reported 0.2% drop. Excluding transportation, orders rose 0.8% in February. Shipments rose 0.7%.

The U.S. trade deficit declined by $7.2 billion, or 17%, to $35.4 billion in February from a revised $42.7 billion in January. The trade deficit is now at its lowest level since 2009, largely because of lower oil prices; however another possible cause for the lower trade numbers could be the lingering effects of a port slowdown on the West Coast; many companies complained of a shortage of key imported materials or saw their unsold products slated for export pile up on docks as negotiations dragged on.

Yesterday we told you that California was enacting mandatory water restrictions in response to the state’s worst drought, so it seems inevitable that we would start hearing stories of H20 abuse in the Golden state. The first culprit on the block: Nestle, the Swiss food giant, and also a major player in bottled water. Seems Nestle drew 50 million gallons from Sacramento sources last year, less than half a percent of the Sacramento Suburban Water District’s total production. It amounts to about 12 percent of residential water use. In other words, Nestle may be bottling more than locals drink from the tap. Consumers can only blame themselves, of course, for buying so much bottled water. The average price for a gallon of the bottled water is $1.21. For just $1.60, Californians could purchase 1,000 gallons of tap water.

Union Station is the railway and subway line that serves Washington DC; it is right next to the US Capitol and the SEC. And there is now an advertisement on the walls of Union Station featuring the cartoon likeness of Securities and Exchange Commissioner Mary Jo White dressed as a superhero, urging White to rein in corporate campaign contributions.

The Supreme Court ruled in the 2010 Citizens United case that companies and unions could spend unlimited money on election ads. While companies are required to report donations made through political action committees, they don’t have to report contributions to third parties, including industry groups such as the US Chamber of Commerce, which fund ads for and against candidates; this is often called dark money.

Supporters of the SEC’s involvement say shareholders deserve to know about political activity that could be contrary to shareholders views or possibly offend customers and impact a company’s sales. Skeptics, including many business groups and securities lawyers, say political spending is an insignificant cost.

So far, Commissioner White doesn’t think corporate campaign contributions are important enough to disclose because they don’t “primarily inform investment decisions.” Which is absolutely true; nobody has information on the contributions so there is no information to inform a decision. If you are the shareholder in a company, it just seems that you should know which politicians you are buying.

An incredible 97 percent of Americans, Democrats and Republicans alike, agree: the time has come to end government corruption in America. The only people who don’t want to see an end to corruption are the politicians. It seems unlikely that our current Congress, hot off the heels of the most expensive midterm election in US history, will usher in reforms to limit special interest money in politics; the dark money from mega donors has already started to pour in for the 2016 presidential election.  Since the SEC doesn’t quite understand that sunshine is the best disinfectant, about the only way to shine a light on dark money is through executive action. With just the stroke of a pen, there’s something President Barack Obama can do today to help fix the problem. He can issue an executive order requiring the political spending of government contractors, which includes many of our country’s biggest corporations, be disclosed.

An executive order would expose this spending to the light of day and allow the public to follow the money. It would help restore a democratic process that all Americans can believe in. The basic idea would apply to all contracts of $5 million or more and to aggregated donations of $10,000 or more from directors, officers and/or any employee of the corporation or its subsidiaries; it would require that the head of the corporation and its subsidiaries attest that all donations, including dues to agencies or associations with a history of electioneering, are fully disclosed. To remain compliant with federal law, it would mandate disclosure after the contract is awarded. It would archive all data in a searchable, downloadable format on the data.gov website. Voters would know which corporations are trying to buy political influence and could call them out on it.

After all, government contracts provide funding for critical services and should go to companies best-suited to do the work, not those that can best game the system. All dark money is concerning. But when it’s from a federal contractor and could be used or perceived to be used in an attempt to sway the contract-award process itself, it’s particularly alarming because it has the appearance of conflict of interest. But it rises from alarming to obscene when the donated money is skimmed from a government subsidy or tax exemption. The upshot is a closed loop in which taxpayer money flows in and out of politicians’ pockets and back to the corporate bribers.

The Supreme Court has underscored not just the constitutionality but also the importance of the disclosure of political spending. Justice Anthony Kennedy wrote about just this in his majority opinion for the Citizens United ruling in a section that eight of the nine justices joined — all but Clarence Thomas. The court noted that transparency allows voters to “make informed decisions and give proper weight to different speakers and messages.” Justice Kennedy wrote: “Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.” That sounds good, but it hasn’t happened.

There is no single solution to the problem of Big Money corruption in politics but closing your eyes doesn’t make the problem go away; shining a light on the problem would at least let us see who’s buying whom, and who’s selling what.