Financial Review

The Sun Might Come Out in 2Q

Sinclair Noe — April 29, 2015

 

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DOW – 74 = 18,035
SPX – 7 = 2106
NAS – 31 = 5023
10 YR YLD + .06 = 2.04%
OIL + 1.47 = 58.53
GOLD – 7.20 = 1205.60
SILV – .07 = 16.64

Economic growth slowed in the first quarter.  Gross domestic product expanded by 0.2%, down from 2.2% growth in the fourth quarter. The Commerce Department reports consumer spending rose by 1.9%, but economic activity was constrained by bad weather in many areas, the West Coast port closures, a drop in exports (in part due to a stronger dollar), and a big decline in business spending. It is widely expected that the economy will rebound in the second quarter, much like what happened in 2014, when first quarter GDP contracted by 2.1% only to bounce back with a second quarter gain of 4.6%. Exports sank 7.2% in the first quarter, while imports edged up 1.8%. The plunge in oil prices, meanwhile, forced a resurgent U.S. energy industry to retrench. Overall, business investment on “structures” sank 23.1% in the first quarter, the biggest drop in four years. Companies did boost investment on equipment, but just barely so. Equipment spending rose a scant 0.1%.

For all of last year the economy grew at a 3% pace and that dropped down to just 0.2% in the first quarter. We can break it down to three major areas. Weather accounted for about a 1% drop; those winter storms closed roads, and stores, and offices. Some of that lost economic activity will be made up in the second and third quarters, but not all. The strong dollar also accounted for about a 1% drop in GDP. Although the dollar has weakened in the past couple of weeks, it is still fairly strong against major currencies and central banks from Europe to Japan to China are continuing to pump money into the markets and push the value of their currencies lower.  This means we probably won’t see an increase in US exports anytime soon. Oil prices moved to a four month high today, but they were lower in the first quarter and lower oil prices meant less money spent in the oil patch, but it didn’t translate into drivers spending the money they saved at the pump; that knocked about 0.6% from GDP.

But don’t worry, be happy. That’s the Federal Reserve’s new mantra. The Fed’s FOMC policy-setting committee wrapped up its third meeting of the year, and the impression from their statement is that the weak economic data from the first quarter is transitory, the sun will come out tomorrow, don’t worry. The Fed has said they would rely on economic data to determine when they might raise rates, and the first part of today’s statement listed a smorgasbord of weak data. There was no indication that the economy was about to “lift-off”, no sense of urgency to act. So, we do not expect a rate hike at the June FOMC meeting, and futures contracts only seem to give about a 60% chance of a rate hike by the end of the year. The Fed seems to think the economy will come roaring back after a long winter’s sleep. It could happen but it hasn’t happened yet.

Delivering the first-ever speech by a Japanese prime minister to a joint session of Congress, Shinzo Abe laid out his vision for deeper Japanese involvement in Asian security and global diplomacy. He made a pitch for the Trans-Pacific Partnership, a massive free trade deal that the United States, Japan and 10 other countries are now negotiating.

First-quarter earnings are on track to post a slight gain following many stronger-than-expected results. With reports in from 47% of S&P 500 companies as of Tuesday, Q1 earnings are now expected to have risen 0.02% from a year ago, beating a Thomson Reuters forecast for a 2.9% decline. Still, the raised outlook has been mainly attributed to one company – Apple. Without the tech giant, the S&P 500 forecast would show a profit decline of 1.6%.

Lumber Liquidators  said it’s been advised the Justice Department is seeking criminal charges against the company relating to the importation of certain products that possibly contain harmful chemicals, and the DOJ probe will likely cost the company about $10 million; the company also faces more than 100 pending class action lawsuits. Lumber Liquidators also reported a loss for the quarter and sales dropped more than 8% so far in April. This morning, the company announced its CFO will resign in June.

California governor Jerry Brown issued an executive order aimed at curbing greenhouse gas emissions, saying it was critical to address “an ever-growing threat” posed by global warming to the state’s economy and well-being. Under Brown’s order, by 2030, emission levels will have to be reduced by 40 percent compared with 1990. Under existing state law, emissions are supposed to be cut 80 percent from what they were in 1990 by 2050. In his State of the State address in January, the governor called for reducing gas consumption by cars and trucks by up to 50 percent over the next 15 years. California’s target reflects those set by other governments, including the European Union, ahead of the United Nations conference on climate change in Paris this year.

The Supreme Court has been hearing arguments and issuing rulings; there have been some high profile cases before the court; the issue of same sex marriage for example. And today, the justices heard a challenge of lethal injection as a violation of the ban on cruel and unusual punishment.

There is another case that hasn’t received much publicity but you might find it interesting. The Supreme Court agreed on Monday to spell out Congress’s authority to give someone a right to sue in federal court, even if that individual cannot show that a specific harm was done.  That is an issue under Article III of the Constitution and arose in the case of Spokeo v. Robins, which will be heard and decided in the Court’s next Term.

Under Article III, federal courts only have authority to decide a case or controversy that has something real at stake – a “live” issue, rather than a theoretical claim.  Normally, a case cannot satisfy that requirement unless the suing individual can show some actual or imminent personal injury, or harm.

At issue in the newly granted Spokeo case is whether an individual can sue based on a simple claim that a right created by federal law has been violated, without proof of an additional injury growing out of that violation.  This particular case tests a lawsuit by a Californian, Thomas Robins, who sued under the federal Fair Credit Reporting Act of 1970, claiming that an online search engine put out inaccurate personal information about him. The search engine, operated by Spokeo, gathers information about individuals from public sources, such as telephone books, social networks, marketing surveys, real estate listings, business websites, and other databases.  It makes the information available to those who search for it online, but cautions them that it does not verify the accuracy of the data.

Robins, who filed a class-action lawsuit, claimed that Spokeo had provided flawed information about him, including that he had more education than he actually did, that he is married although he remains single, and that he was financially better off than he actually was.   He said he was unemployed and looking for work, and contended that the inaccurate information would make it more difficult for him to get a job and to get credit and insurance.

A federal judge dismissed his lawsuit, concluding that Robins had not offered sufficient evidence that he was harmed by the information available through Spokeo.  The U.S. Court of Appeals for the Ninth Circuit overturned that result, clearing the way for the lawsuit to go forward.  It concluded that Congress had created a right to sue under the Act, and that was sufficient to show an injury if a violation of the Act was claimed. The Supreme Court asked the U.S. Solicitor General for the federal government’s views on the case, and the government urged the Court not to grant review.  While not embracing the Ninth Circuit’s view of the Article III “standing” issue, the Solicitor General argued that the Ninth Circuit’s ruling could actually be understood as going beyond that to find a genuine claim of injury. The Justices granted review, despite the government’s suggestion.

Litigation makes strange bedfellows. Google, eBay, Yahoo, and Facebook all filed briefs in the Spokeo case, because of course, they all post information about individuals through their sites, and some of that information might not always be accurate; such is the nature of the internet, or at least that was what the tech companies tried to argue. The companies complain that they process so much data about so many people that the decision opens them up to liability from too many people if they violate the law – as if their control of so much personal data in the first place is not part of the problem.

The brief is fascinating since it details the large number of lawsuits the companies are already facing that they hope a favorable Supreme Court decision could just make go away. Google, Facebook, Hulu, and several other tech companies are facing various and assorted suits, and their defense seems to be that it would be difficult for them not to break the law. The arguments also lay bare the fact that even though there have been laws written to respect our privacy or to protect consumers, the laws are almost never enforced, and they only are considered after grievous harm has taken place; which may serve as a form of compensation but doesn’t seem to qualify as protection.

So, this case is a pretty big deal. If the Supremes overturn the Ninth Circuit, laws meant to protect user privacy, as well as consumer and financial protection laws will become unenforceable. If the Supremes rule with the Ninth Circuit it could change the business model and content of the entire internet.

Financial Review

Somewhere Between Extremes

Sinclair Noe — April 27, 2015      

 

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Financial Review by Sinclair Noe
DOW – 42 = 18,037
SPX – 8 = 2108
NAS – 31 = 5060
10 YR YLD + .01 = 1.92%
OIL – .16 = 56.99
GOLD + 21.30 = 1201.70
SILV + .65 = 16.50

We’ll get to the economic news in a minute, but the big market news today is Apple. Net income in the quarter that ended in March was $13.6 billion, or $2.33 a share, representing a 33% jump in profit from last quarter. Analysts on average had forecast second-quarter profit of $12.6 billion, or $2.16 a share. Revenue rose 27 percent to $58 billion, beating estimates of $56 billion. IPhone sales in greater China outpaced those in the U.S. for the first time. Total revenue from greater China surged 71 percent to $16.8 billion. IPhone unit sales jumped 40 percent to 61.2 million. That topped analysts’ average prediction for 58.1 million.

Apple forecast the momentum will continue in the third quarter, with revenue projected to rise to $46 billion to $48 billion from $37.4 billion a year ago. Apple has $193 billion in cash, with a capital return program, which now totals $200 billion. Apple will increase its share-buyback authorization by $50 billion to $140 billion, and increase the company’s dividend by 11 percent; to 52 cents from 47 cents.

To recap: Apple posted better than expected sales and profit; they will increase their buybacks and dividends; and they upgraded their third quarter guidance. Basically, they did everything except wash your car for you.

The Federal Reserve FOMC is meeting this week. It’s a pretty safe bet that policy makers will not be raising interest rates at the meeting, but investors will still be watching the language of the statement for signs on when such a rate hike might be expected. This is a delicate dance by the Fed; they want to test the waters without getting a single toe wet; they might try to indicate they are in favor of a rate hike in order to get a read on market reaction.

Also on tap for Wednesday is the preliminary first-quarter readout of GDP, along with some early April economic reports. The spotlight in Asia this week falls on Japan, where a central bank decision could provide clarity on the direction of the world’s third largest economy. Following its meeting, the Bank of Japan is expected to cut its 2015 inflation forecast by several tenths of a percentage point from 1%, and shave its growth forecast from the current 2.1%. Despite inflation dropping back to zero, governor Haruhiko Kuroda has argued strongly that the BOJ’s existing QE program is on track. Japan’s prime minister, Shinzo Abe, visits Washington as the US and Japan prepare to sign an expanded defense accord and finalize a major trade pact. On Wednesday, he will be the first Japanese leader since World War II to address a joint session of Congress.

As the monetary easing by central banks across the globe keep yields at rock-bottom, investment officers predict that Japanese demand for U.S. debt won’t ease up in the months ahead given the lack of alternatives. Japanese life insurers – some of the world’s largest institutional investors – plan to keep pouring money into U.S. debt this year, outlining that Japan even overtook China in Q1 as the largest foreign holder of U.S. Treasurys. While the current 2% yield on the U.S. 10-year is a far cry from yields of 5% or more before the financial crisis, it is still miles apart from the 0.16% yield on German bunds and the 0.29% yield on the 10-year Japanese equivalent.

The finance ministers of Slovenia and Germany on Saturday acknowledged for the first time that they are considering plans on what to do if a Greek deal is not reached by the end of June, breaking their long-held stance of insisting that the country must stay in the eurozone. The issue of a “Plan B” was raised during Friday’s Eurogroup meeting in Riga, where Athens was strongly criticized for delaying the list of reforms needed to unlock its next round of funding. A Eurogroup meeting in Riga, Latvia on Friday descended into name-calling as the currency bloc’s finance ministers hurled abuse at Greek Finance Minister Yanis Varoufakis, accusing him of being a time-waster, a gambler and an amateur.

The Eurogroup finance ministers don’t’ have any intention of negotiating; for them it is simple – Greece needs to collect more taxes and crush the workers. For the Greek negotiators it is fairly simple as well – the workers are already crushed and the country has no money. Varoufakis was pulled from day to day negotiations; he will still be involved, but from the sidelines. Varoufakis tweeted: “FDR, 1936: “They are unanimous in their hate for me; and I welcome their hatred.” A quotation close to my heart (& reality) these days.”

Greece’s economy is about 2 percent of Eurozone economy, and a hardline stance from the Euro Union finance ministers would not overwhelm Europe’s economy. Most of the money Greece owes is now owed to governments or the central bank, and not to private banks, insurance companies, or hedge funds. Private interests have long since left Athens; the exception is vulture hedge funds that bought Greek debt for pennies on the dollar, with the idea of dragging the Greeks through the courts to enforce collection. So, as the finance ministers of Slovenia and Germany work on a Plan B, I just hope they realize that Plan B really means a return to nationalism in the Eurozone, which has a poor history in that area.

The game of chicken between Greece and its international creditors is turning into a vicious blame game as Athens lurches closer to bankruptcy with no cash-for-reform agreement in sight. Europe’s political leaders and central bankers and Greek politicians agree on only one thing: if Greece goes down, they don’t want their fingerprints on the murder weapon.

Financial firm Markit said its “flash,” or preliminary, reading of its Purchasing Managers Index for the services sector slipped to 57.8 in April from a final reading of 59.2 in March, which had been the highest level since August. A reading over 50 signals expansion in economic activity.

Chipotle Mexican Grill has eliminated genetically modified organisms from all its ingredients, an unprecedented move for a national U.S. restaurant chain. The company, which began labeling its GMO ingredients two years ago and vowed to remove them, has now taken the final step of stripping them from tortillas and cooking oil. The move coincides with a new Chipotle marketing campaign that will tout its use of simple, unprocessed ingredients.

Meanwhile, Coca-Cola announced it doesn’t have plans to change the sweetener for Diet Coke away from aspartame despite other beverage sellers shifting their focus to the use of natural sweeteners. Sales of Diet Coke fell 6% year-over-year in the first quarter. On last week’s earnings call, Coca-Cola executives said finding the right path to grow Diet Coke sales was still a “work in progress.”

Corinthian Colleges is closing all of its schools. The school is closing its 28 for-profit schools, meaning approximately 16,000 students will have to finish their degrees elsewhere. The Department of Education will “help the stranded students review their options, including possibly forgiving some of their loans.” In recent years, Corinthian has been accused by multiple federal and state authorities of systematically lying about its graduation or job placement rates, misleading potential students into enrolling and forking over tens of thousands of dollars to obtain credentials many critics believe to be of dubious value. The company annually received some $1.4 billion in federal financial aid for its students. A group of roughly 100 former Corinthian students that calls itself the “Corinthian 100″ has been publicly pressuring the Department of Education to cancel all debts owed by current and former Corinthian students because of the company’s alleged deception related to its job placement and graduation rates.

Police officers in riot gear clashed with rock-throwing protesters in Baltimore after the funeral for 25 year old Freddie Gray, the latest victim of police brutality. Gray died a week after his spine was somehow partially severed in police custody. He was initially stopped because he fled upon noticing officers, who later found a knife clipped to his pocket. Cell phone video shows police dragging Gray into a van, but when officers took him out, he wasn’t breathing.

His funeral was today, further sparking the city-wide demonstrations. At least seven officers were injured in today’s protests and one was unresponsive, according to the Baltimore police department. The violence broke out near the church where Gray was eulogized. Groups of angry young people surrounded a police cruiser and smashed it in; another cruiser could be seen burning. A drugstore was also looted. Other protesters pelted the police with items picked up at nearby vacant lots: rocks, bricks, boards and chunks of concrete. Some arrests were made. The unrest comes after a weekend during which an angry mob protesting outside Oriole Park at Camden Yards forced the team to close the stadium to keep people inside safe from the violence outside. Fears over the potential for crowds to become violent forced the closure earlier today of several downtown businesses and offices.

So, we started today’s review with a story about Apple earning almost a billion dollars per week in profit in the first quarter, and we finish with a story about violent protests in Baltimore. And that’s where we are today; somewhere between two extremes.

Thursday, May 15, 2014 - A Calm Port in a Stormy World

Financial Review with Sinclair Noe

DOW – 167 = 16,446
SPX – 17 = 1870
NAS – 31 = 4069
10 YR YLD - .04 = 2.50%
OIL - .81 = 101.56
GOLD – 8.90 = 1297.80
SILV - .29 = 19.56

Today, it seems there is a lot going on. Let’s start with international hotspots.

Turks are angry following a deadly mine explosion that has killed at least 300 miners and trapped possibly 100 more; thousands of workers joined a protest strike, demonstrators clashed with security forces, and the discontent threatens the government. An aide to the prime minister was photographed assaulting a protester and there are claims that Prime Minister Erdogan himself struck a teenage girl; that after he was forced to flee an angry crowd and seek safety in a nearby grocery store. Turkish trade unions held a one-day strike over safety standards in the mining industry. Security forces deployed tear gas and water canons against protesters.

Meanwhile, reports of dozens of deaths from an explosion along the border between Syria and Turkey. Also, further allegations of ongoing chemical attacks by the Syrian government. Speaking in London today, Secretary of State John Kerry announced the US, Britain, and European and Arab states are increasing efforts to support rebels fighting to overthrow President Assad. Assad still has the backing of Russia, and that makes already tense relations with Russia even more edgy.

Fears of a civil war in Ukraine are mounting. Nobody wants to jump in with troops, and so there are clandestine forays by unidentified groups or squads of soldiers. And the major powers are only explicit with sanctions. Today, Russia announced it will halt the export of rocket engines crucial to US military defense and space programs. It must be very uncomfortable on the International Space Station these days.

Anti-Chinese sentiment has been running high in Vietnam ever since Beijing deployed an oil rig into disputed waters in the South China Sea on May 1st. There have been encounters including ramming and exchanges of water cannon between Chinese vessels operating near the rig and boats from Vietnam, which wants China out of the area. Today, Cambodia reports hundreds of Chinese nationals had poured across the border from Vietnam to escape riots.

Also, Japan’s Prime Minister, Shinzo Abe, has called for a review of how Japan interprets its pacifist constitution to allow its military to participate in conflicts beyond its borders for the first time since the end of the second world war; this in response to a growing conflict between China and Japan over islands claimed by each country; of course, it’s not just islands but the oil reserves around the islands.

Meanwhile, China issued a bunch of economic data this week, and it mostly points to a real estate slump; home sales fell 18%; housing starts were scaled back by 25%. Moody’s Analytics estimates that the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product last year. That is higher than in the US, Spain or Ireland at the peaks of their housing bubbles. The scale of China’s building boom and the country’s reliance on infrastructure investment for growth is unprecedented. In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, and it all seems to be on shaky ground these days. Each attempt to rein in China’s $25 trillion credit bubble seems to trigger wider tremors.

Brazil has sent army troops to Recife, the capital of the northeastern state of Pernambuco, after strikes lead to riots. State police walked off the job Tuesday. Schools and universities also closed down because of concerns for student safety. Today, further protests in Sao Paolo and Rio de Janeiro drew tens of thousands to the streets. The protests are centered on cities that will host the upcoming World Cup, the quadrennial global soccer championship games. Huge anti-government protests across Brazil last year overshadowed the Confederations Cup, a warm-up tournament for the World Cup. Some of the demonstrations saw clashes between activists and police, and at least six people were killed.

Many Brazilians are angry at the billions spent to host the World Cup. Protesters have said the government should focus spending instead on improving Brazil's woeful health, education, security, housing, and infrastructure systems. The World Cup starts in less than 30 days, and the whole world will be watching.

In one week, Europeans will elect a European Parliament. It’s the second biggest election in the world, after India. Voters look set to choose more assorted extremists, anti-Europeans and oddballs than ever. The Euroland economy is going nowhere, and with the razor thin exception of Germany, most countries are seeing economic contraction; that tends to lead to strange election results.

There are other hotspots around the World. The president of Yemen has declared all-out war on Al Qaeda militants and army troops are now trying to dislodge Al Qaeda from the Arabian Peninsula. Political violence returned to Bangkok Thailand, and the Thai army killed a handful of protesters and threatened more military action if the protests continue. And of course, the Nigerian crazies, Boko Haram, and the kidnapping of hundreds of schoolgirls. And of course, all the old seething conflicts that haven’t been resolved. And don’t forget, the US is still at war in Afghanistan. I know, it’s easy to forget. Apparently, it’s even easier to forget the veterans that have served our country.

Today, Secretary of Veterans Affairs, General Eric Shinseki went before the Senate Veterans Committee to explain the mess that is the VA; this following revelations that as many as 40 veterans died while waiting for medical care at the VA facility in Phoenix.

Since the allegations arose last month that veterans were forced to wait months for appointments at the Phoenix VA medical center and that VA officials were covering up the problem, Shinseki said he has asked the VA's inspector general to investigate. He said he has also launched an intense investigation of scheduling practices at the VA's other 151 medical centers. Shinseki said he was “mad as hell” and the various Senators all acted very indignant. Of course, it wasn’t very believable theatre.

One of the documents brought forth today was an internal VA memo, written in 2008 by a team of VA managers, listing 25 ways that VA scheduling clerks were cooking the books to make it appear that veterans waiting for medical care actually were being seen on time, when in fact they were being made to wait weeks or months.

And then, 2 years ago, the Government Accountability Office reported that VA schedulers were fudging wait times for veterans seeking outpatient care and avoiding using the electronic waitlist as required. The GAO report includes a response from Shinseki's chief of staff at the time, writing that the VA has "proactively taken steps in response to GAO's findings." Clearly that didn’t happen.

Meanwhile, Southern California is on fire. Actually nine fires are burning in the greater San Diego area and they have already destroyed more than 10,000 acres, forcing evacuation of about 125,000 residents. California Governor Jerry Brown has declared a state of emergency to free up resources. It’s hot, it’s dry, and it’s just the start of the fire season.

The 2014 fire season is repeating a pattern of destruction established over the past decade by a combination of high temperatures, parched vegetation and more people living in wooded areas. Fires feeding on plentiful dry grass, brush and hardwood are requiring more personnel and money to bring them under control. More than twice as many acres burned across the US through May 9 this year than during the same period in 2013.

Last week, 96% of California was considered to be under “severe” or worse drought conditions, with about 4% of the southeastern tip of the state still in “moderate” drought conditions. A year ago, only 46% of the state suffered from “severe” or worse conditions. As of today, the National Drought Mitigation Center reports severe drought conditions now engulf 100% of California.

Meanwhile, former Treasury Secretary Tim Geithner is trying to polish his tarnished image; he’s on a book tour peddling the notion that the Wall Street bailout was a huge success. And while it might be argued it prevented a Great Depression, it is delusional to consider it a success. It was at best an experiment that did not result in a worse catastrophe. It did little or nothing for the tens of millions of Americans who lost billions of dollars in home equity and savings, and the millions more who lost their jobs. The toll was greatest on the poor and the middle class. Nor have reforms been enacted that will help the middle class and the poor the next time Wall Street implodes.

Economic data today showed industrial production in the US unexpectedly declined in April, held back by a plunge in utilities as temperatures warmed and a broad-based decrease in manufacturing. That contrasted with a higher-than-forecast reading on the Fed Bank of New York’s gauge of regional manufacturing, which climbed to 19.01 this month, from 1.29 in April.

Initial claims for state unemployment benefits declined 24,000 to a seasonally adjusted 297,000 last week. It was the lowest reading since May 2007.

Consumer prices recorded their largest increase in 10 months in April. The Consumer Price Index increased 0.3% last month as food prices rose for a fourth consecutive month and the cost of gasoline surged. In the 12 months through April, consumer prices rose 2.0%. Stripping out food and energy prices, the so-called core CPI rose 0.2% after advancing by the same margin in March. In the 12 months through April, the core CPI increased 1.8%, the biggest gain since August last year.

Normally you might expect higher inflation numbers to result in lower bond prices, which means bond yields would move higher; not today. The yield on the 10-year Treasury note dipped below 2.5% intraday. Of course, Treasuries are considered a safe haven investment, and it seems a lot of people are looking for a calm port in a stormy world.