Financial Review

The Wisdom of Solomon

Sinclair Noe — January 31, 2017

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DOW – 107 = 19,864
SPX – 2 = 2278
NAS + 1 = 5614
RUT + 10 = 1362
10 Y – .03 = 2.45%
OIL + .19 = 52.82
GOLD + 14.70 = 1211.00

Economic growth for the Eurozone rose 1.7% last year, growing at a faster rate than the U.S. managed when averaged across the whole of 2016. That’s the first time that happened since 2008. The region’s jobless rate also fell to 9.6%, the lowest figure since May 2009, while inflation of 1.8% is now near the ECB’s target of “close to, but below 2%.”

Following a two-day board meeting, the Bank of Japan kept its monetary policy on hold, but policymakers were more bullish on the economy, raising its 2017 real gross-domestic-product growth forecast to 1.5%, up from its previous forecast of 1.3% offered last November.

The Federal Reserve Federal Open Market Committee is beginning 2 days of meetings to determine monetary policy. Most analysts predict the FOMC will leave interest rates unchanged when Chair Janet Yellen makes the announcement tomorrow. The Fed last met in mid-December and hiked interest rates for only the second time in almost a decade.

Since that meeting, officials stressed they intend to move rates up gradually, the main reason the market doesn’t expect a rate hike this week. Using federal funds rate futures prices, the CME Group says there is a 96 percent probability of no change.

U.S. home prices rose slightly in November from the previous month. The S&P/Case-Shiller U.S. National Home Price Index, which measures all nine U.S. census divisions, was up 5.6 percent on an annual basis in November. Phoenix posted a 0.3% gain from October to November, and a 5.2% increase for the 12 months through November.

The Conference Board’s consumer confidence index fell to a reading of 111.8 in January after hitting a 15-year high of 113.3 in December. Consumers’ appraisal of the present improved, to a reading of 129.7 from 123.5, but the expectations index fell to 99.8 from 106.4. The proportion expecting more jobs in the months ahead decreased from 21.7% to 19.8%, and the percentage of consumers expecting their incomes to increase declined from 21.5% to 18%.

The amount of money it costs businesses to employ workers rose a touch slower in the fourth quarter owing to the smallest increase in benefits in a year and a half. The employment cost index rose 0.5% in the final three months of 2016, below the 0.6% gains in each of the past three quarters. The index grew a slightly faster 2.2% in 2016 after a 2% gain in 2015.

In the fourth quarter, wages advanced 0.5% but benefits only rose 0.4%. Part of the reason: Companies may have passed more of the costs of health care onto workers in the form of higher premiums and deductibles, among other things.

Deutsche Bank has agreed to pay $630 million to end investigations by UK and New York regulators into Russian equity trades that transferred $10 billion out of that country in violation of anti-money-laundering laws. Regulators say Deutsche Bank executed more than 2,400 pairs of so-called mirror trades between April 2012 and October 2014.

The scheme involved buying stock with Russian rubles at Deutsche Bank’s Moscow office and then selling the identical stock – same quantity, same price – at the London office of Deutsche Bank and being paid for the shares with US dollars in London. UK and New York regulators cited repeated shortcomings in Deutsche Bank’s controls to vet clients, including failing to determine their identities and sources of wealth, and to detect suspicious trades.

After the closing bell Apple reported it sold 78.2 million iPhones in the last quarter. That’s a beat. Profit of $3.38 per share; another beat. Revenue of $78.4 billion; another beat. Services revenue of $7.17 billion; another beat. All time revenue records for iPhone, Services, Mac, and Apple Watch. But guidance is on the weak side. Apple shares pop in after hours. Some poor schmuck bet his life savings on Apple puts and now he’s crying on his live stream.

Exxon Mobil  missed earnings forecasts this morning as it took a $2 billion impairment charge, mostly due to the company lowering the value of some of its U.S. gas assets. Persistently low oil prices and weaker profit margins in Exxon’s refining business also weighed on earnings for the full year. Exxon reported fourth-quarter earnings of $1.7 billion, or 41 cents a share.

In the period a year ago, the oil giant reported earnings of $2.8 billion, or 67 cents a share. Revenues for the quarter were $61.01 billion. The impairment resulted from the company’s review of its reserves. Exxon determined that some of its U.S. assets’ future cash flows no longer exceeded their carrying value.

Under Armour reported lower-than-expected quarterly sales and announced that Chief Financial Officer Chip Molloy will step down. The company said net income fell to $104.9 million in the fourth quarter ended Dec. 31 from $105.6 million a year earlier. The company’s net revenue rose about 12 percent to $1.3 billion, its slowest sales growth in eight years.

MasterCard posted fourth-quarter earnings per share of 86 cents on revenue of $2.76 billion. MasterCard missed revenue estimates but beat earnings estimates by a penny per share. MasterCard, which processes more than 65,000 transactions every minute, said its gross dollar volumes — the total value of transactions made by customers — rose 9 percent to $1.2 trillion worldwide.

United Parcel Service reported quarterly earnings and revenue that missed Wall Street’s expectations. UPS also posted a 2017 outlook below expectations. During the holiday season UPS delivered more than 712 million packages, a 16 percent increase over the year-ago quarter. The company said it delivered 1.4 billion packages last year, up 7.1 percent. E-commerce has been growing at double-digit rates for years and the 2016 holiday season was no exception: online sales surged 13 percent and UPS saw a surge in business to consumer shipments, which are not as efficient or profitable as B2B.

Aetna’s net profit fell to $139 million, or 39 cents per share, in the fourth quarter ended Dec. 31, from $321 million, or 91 cents per share, a year earlier. Aetna said its total health care medical benefit ratio — the percent of premiums spent on claims — rose to 82.1 percent from 81.9 percent, a year earlier, mainly due to higher medical costs in its individual commercial products.

Aetna and Humana have said they will consider all available options for their proposed merger after a court ruled against the $34 billion deal last week, saying it would lower competition.

Insulin makers are being accused of price fixing. Lilly, Novo Nordisk, and Sanofi are accused of taking part in an “organized scheme to drive up prices at the expense of patients who need insulin drugs to live,” per a complaint filed in the US District Court of Massachusetts.

Pfizer reported a lower-than-expected profit, hit by lower demand for its flagship vaccine Prevnar and higher expenses. Global Prevnar sales fell 23 percent to $1.42 billion, underwhelming consensus estimates. Pfizer closed its $14 billion acquisition of Medivation in September.

Today, President Trump met with executives of several major drug makers and called for lower drug prices while also promising to speed up approval times for new medicines. In an interview with The Associated Press, Pfizer CEO Ian Read stuck to his position that the problem isn’t soaring drug prices but insurers pushing more costs onto patients. He said Pfizer won’t pledge that it will limit annual price increases, as a few rivals recently did. Pfizer typically raises the list price on all its drugs about 10 percent twice each year, though wholesalers and other middlemen get much of those increases.

Rep. Tom Price, the Georgia congressman and nominee for Secretary of Health and Human Services testified in his Senate confirmation hearings on Jan. 18 and 24 that the discounted shares he bought in Innate Immunotherapeutics, an Australian medical biotechnology company, “were available to every single individual that was an investor at the time.”

Not exactly. In fact, the cabinet nominee was one of fewer than 20 U.S. investors who were invited last year to buy discounted shares of the company – an opportunity that, for Price, arose from an invitation from a company director and fellow congressmen.

Senate Democrats today boycotted scheduled votes in the Senate Finance Committee on Steven Mnuchin, the nominee to head the Treasury Department, and Rep. Tom Price to be health secretary. The committee needs at least one Democrat to proceed.

Mnuchin has come under fire for telling the Senate Finance Committee that OneWest, the bank he led as CEO from 2009 to 2015, did not engage in the robo-signing of foreclosure and bankruptcy documents. Court filings have shown that the bank did. Meanwhile, Betsy Devos’ nomination as Secretary of Education cleared Senate Committee today.

The Senate Judiciary Committee delayed voting this morning on the nomination of Sen. Jeff Sessions as attorney general, a pick that’s receiving even more scrutiny in the wake of President Donald Trump’s executive orders on immigration. Last night Trump fired the acting attorney general Sally Yates after she took the rare step of defying the White House and refused to defend new travel restrictions targeting seven Muslim-majority nations.

Dana Boente, (pronounced Ben-tay) U.S. Attorney for the Eastern District of Virginia, was sworn in last night as acting U.S. attorney general until Sessions is approved. The recent news out of Washington has hit Wall Street like a bag of rocks to the gut.

Following Trump’s executive order on immigration last week, federal judges across the country responded to lawsuits stemming from the travel ban by ordering the Department of Homeland Security to immediately stop enforcing various aspects of the executive order.

By Sunday, reports started coming out that some federal agents from Customs and Border Protection were disregarding the court orders, and continuing to enforce Trump’s travel ban in a way that violated instructions they’d been given by judges. And this sets up a very interesting scenario: What happens when the federal government or its agents refuse to honor a court order handed down by a federal judge? If there is escalation, it will likely be reflected on the scoreboard at Wall Street.

Later this evening, President Trump is expected to announce his nominee to succeed the late Justice Antonin Scalia on the Supreme Court. Whoever he is, let’s hope he has the wisdom of Solomon.

Financial Review

Justice Deterred

Sinclair Noe — September 10, 2015

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DOW + 76 = 16,330
SPX + 10 = 1952
NAS + 39 = 4796
10 YR YLD + .04 = 2.22%
OIL + 1.51 = 45.66
GOLD + 5.10 = 1111.90
SILV + .10 = 14.81

Wholesale inventories decreased by 0.1% in July, while wholesale sales dropped 0.3%. At July’s sales pace, the inventory-to-sales ratio was unchanged at 1.30 months.

The number of Americans getting laid off from their jobs remains near the lowest level in decades. Initial jobless claims fell by 6,000 to 275,000 in the period running from Aug. 30 to Sep. 5. New claims have been under the key 300,000 level for 27 straight weeks. The last time the pace of layoffs was even lower for such a long stretch was in 1973.

The prices the U.S. paid for imported goods fell by 1.8% in August, marking the biggest decline since the start of the year. Oil prices fell sharply again and strong dollar has also made foreign products cheaper for Americans to buy. Excluding fuel, U.S. import prices declined by a 0.4% last month. Meanwhile, the price of U.S.-made goods exported to other nations dropped 1.4%.

Mortgage rates were little changed ahead of the Federal Reserve’s key rate decision next week. Mortgage buyer Freddie Mac said the 30-year fixed rate mortgage averaged 3.90% in the week ending Sept. 10, up from 3.89%. The 15-year fixed-rate mortgage averaged 3.10%.

Oil prices rallied today.  Energy Information Administration data showed demand for gasoline over the latest four-week period was up almost 4 percent from a year ago, bullish for late-summer consumption of the motor fuel. Gasoline inventories, meanwhile, rose just about half of expected levels last week. Crude oil stockpiles rose nearly 2.6 million barrels last week, more than double expectations. Bottom line, when gas prices are low, we tend to take road trips.

Standard & Poor’s has cut Brazil’s investment-grade credit rating to junk for the first time since 2008, warning that it could lower the grade again in the coming months. The agency pointed to political challenges that are putting a balanced budget at risk as a reason for lowering the rating to BB+. Fitch and Moody’s still have Brazil at investment grade – for now – but if either one follows suit, as the country’s situation rapidly degrades, it would trigger massive cash outflows from pension funds.

The Justice Department is renewing its efforts to charge individuals in corporate investigations. Justice Department officials issued a memo Wednesday to prosecutors outlining best practices and recommending that they only consider a company to have cooperated in an investigation if that company turns over information about the actions of individuals at the firm, “regardless of their position, status or seniority.” And this is not first time the DOJ has tried this scheme. In 2014, then-Attorney General Eric Holder announced that “no company was too big to jail”, and of course since that declaration, no company has been jailed.

The new memo, released by Deputy Attorney General Sally Yates, claims that this new direction “deters future illegal activity, it incentivizes change in future corporate behavior”. This was a point emphasized by Matthew Schwartz, a former prosecutor at the United States attorney’s office in Manhattan who told the New York Times: “The main reason you bring these cases is to send messages to the business community”.

However, they are both wrong; the main reason to seek criminal charges and incarcerate criminals is to punish them, next on the list is deterrence, followed by rehabilitation. That has been the Department of Justice’s longstanding guideline. In fact, in a speech by then-AG Holder in August of 2013, he said “we need to ensure that incarceration is used to punish, deter, and rehabilitate”. It may seem a subtle distinction, but the difference in priorities is huge; especially because it confirms that we have a two-tiered system of justice: one for bankers, and the other for everyone else.

Of course punishment has never been the DOJ’s guideline when dealing with bankers. For many years AG Holder subscribed to the idea of going easy on the banks; it came to be known as the Holder Doctrine, which stems from his now-famous June 1999 memorandum — when he was deputy attorney general — that included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern.

The new memo seems to say that the plan is to talk tough in the hope of deterring illegal activity. The memo says “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” In other words, identify your rogue traders and low-level scapegoats before you try to cut a deal. In fact, the memo goes to great lengths to explain how it is so very, very difficult to bring a case against individuals and especially against executives.

Also, the memo seems to forget the idea from Holder that “no company is too big to jail”. If you want a deterrent effect, how about the idea that a corporate charter can be revoked; imagine if JPMorgan or Goldman Sachs faced the prospect of losing their charter for their crimes; that might prompt directors and officers and shareholders to think twice. Of course that will never happen; the banks really are too big to fail, and nothing has been done in the last 7 years to change that fact.

Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, paid out as corporate expenses, and in some cases, tax deductible. For the banks, justice is just a check that somebody else has to write; not much deterrence there.

Wall Street has assumed control over the government, its agencies, and our legal system. The DOJ says it will increase its efforts in deterring Wall Street crime. Forgive me if I seem skeptical.

Meanwhile, New York regulators have sent letters seeking information to big banks that are primary Treasury dealers as part of a probe into the potential manipulation of bond auctions. The banks – including Barclays, Deutsche Bank, Goldman Sachs, Societe Generale, and Credit Suisse – aren’t charged with specific wrongdoing at the moment, as the investigation is still in its early stages. Boston’s public employee pension fund, State-Boston Retirement System, sued 22 primary dealers in July alleging conspiracy to manipulate Treasury auctions.

Companies raised $28 billion of investment-grade bonds in U.S. markets yesterday as the corporate-debt market roared back to life after a three-week hiatus that was partly due to worries about China. Nineteen companies issued debt, including Gilead Sciences with a $10 billion deal, home-improvement retailer Lowe’s and hotelier Marriott International. Overall, firms have sold $1.2 trillion worth of new debt in the U.S. this year, including junk-rated paper, putting the market on course to set a record for a fourth consecutive year.

XPO Logistics has agreed to acquire trucking and logistics company Con-Way for $3 billion including debt. The agreement is the latest in a string of transactions that have helped XPO grow into a major player in the global logistics market: since 2011, the company has completed at least 14 mergers and increased its revenue to a projected $6.7 billion this year from $177 million.

Bombardier surged 24% in Toronto yesterday, the most in a single day since 1988, amid growing optimism over the potential value of the company’s rail unit and the sales prospects for the firm’s CSeries jet. According to earlier reports, Bombardier rejected a bid by Beijing Infrastructure Investment for 60%-100% of Bombardier Transportation that gave the business an enterprise value of as much as $8 billion.

Ikea’s sales climbed 11% to €31.9 billion-euro in the year to August as the world’s largest furniture retailer enjoyed strong growth across different regions. “China remained the fastest-growing Ikea Group market, followed by Russia,” Ikea said. “Germany showed record growth and North America performed well. Also south Europe demonstrated positive progress.” The Swedish retailer aims to earn annual revenue of €50-billion-euro by 2020.

Dell intends to invest $125 billion in China over the next five years as the world’s third-largest computer manufacturer continues its expansion in the country. CEO Michael Dell said, “Dell will embrace the principle of ‘In China, for China’ and closely integrate Dell China strategies with national policies”. The plan includes strengthening the company’s research and development team in the country.

A new visitors’ center and museum opens today at the Flight 93 National Memorial in western Pennsylvania, one day before the anniversary of the Sept. 11 attacks. Fourteen years after the 40 people on board the hijacked United Airlines flight forced the plane into the ground as terrorists aimed it toward Washington, their story is on display for the hundreds of thousands of visitors who come to central Pennsylvania, near a town called Shanksville, each year to visit the Flight 93 National Memorial. Much of the visitors’ center deals with the final 35 minutes of the flight, as passengers fought the hijackers and the crew tried to keep control of the flight. The field has become a full-fledged national monument, financed by a public-private partnership and operated by the National Park Service.