Financial Review

The End of Summer

Sinclair Noe — September 21, 2015

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

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DOW + 125 = 16,510
SPX + 8 = 1966
NAS + 1 = 4828
10 YR YLD + .08 = 2.21%
OIL – .26 = 46.42
GOLD – 6.50 = 1134.40
SILV + .03 = 15.31

The National Association of Realtors says sales of previously owned homes fell 4.8% in August to an annual pace of 5.31 million, marking the first decline in four months. The sales rate in July was revised down slightly to a seasonally adjusted 5.58 million, but that was still the highest level in eight years. The median price of homes sold was up 4.7% to $228,700 from 12 months ago. Inventories of existing homes on the market rose 1.3% to 2.29 million, representing 5.2 months’ supply at current sales trends. Sales fell in all major regions except the Northeast, where they were unchanged.

The Federal Reserve reports businesses racked up new debt at an annual rate of 8.3% in the second quarter. That was the fastest growth since the first quarter of 2008 and was driven mostly by corporate bond issuance. While issuing debt, the corporate stockpile of cash rose to $2.06 trillion from $1.99 trillion. The Fed report also shows that households and nonprofits saw their net worth increase by $695 billion in the second quarter, mostly due to the rise in home values but also due to the stock market. Household credit grew 3.9% in the second quarter, mostly due to student and auto loans. The total debt outside the financial sector – of households, businesses and all forms of government – rose to $43.98 trillion from $43.51 trillion.

Investors will be looking for hints on when the Fed may finally raise rates when a number of central bank officials including Chair Janet Yellen, appear in public this week. Over the weekend, St. Louis Fed President James Bullard said there is a powerful case to be made for a rate hike, which he said could come in October.  Richmond Fed President Jeffrey Lacker explained why he dissented in favor of higher interest rates. San Francisco Fed President John Williams said “most likely” the right time to start lifting interest rates will arrive this year. Bullard is a non-voting member of the Fed. Federal Reserve Bank of Atlanta President Dennis Lockhart, a voting member of the FOMC spoke today, saying he is in favor of a rate hike before the end of the year, even though he voted against a hike at last week’s meeting.

Pope Francis went to east Cuba today to celebrate the second Mass on Cuban soil. In his first two days in Havana, the pope met Cuba’s Fidel and Raul Castro. But there was no encounter for dissidents. Three were hauled away from Revolution Square on Sunday before the pope celebrated Mass for tens of thousands. Pope Francis will fly from Cuba to the United States tomorrow.

Greek voters have given the left-wing Syriza party the second chance it was asking for, following another high-stakes election that marks the next phase of the country’s debt crisis. Syriza leader and former Prime Minister Alexis Tsipras had enraged many Greeks by breaking an election pledge and ignoring the outcome of a referendum, but that did not stop citizens from putting him back in power. Results: Tsipras gathered around 35% of the vote.

The election is over, the economic problems are not. The financial markets are no longer concerned that Syriza will be the template for a political backlash against budget cuts or that it could start the breakup of monetary union by leaving the single currency. There is no reason for the markets to worry about Greece, at least for now. The Greek economy has contracted by 29% in the past 6 years. Greece can’t pay its debts. Tsipras will step up the pressure for debt relief now that he has his new mandate. He will be turned down. Greece will likely default at some point.

The U.S. and China are negotiating what could become the world’s first arms control agreement for cyberspace, with each country committing not to be the first to use the weapons to cripple the other’s critical infrastructure during peacetime. The proposed accord would address attacks on power stations, banking systems, cellphone networks and hospitals, but would not protect against most of the cybercrimes China has been accused of conducting, including the widespread poaching of intellectual property and the theft of millions of U.S. government employees’ personal data.

Some of the most popular Chinese names in Apple App Store were found to be infected with malicious software in what is being described as a first-of-its-kind security breach. The applications were infected after software developers were lured into using an unauthorized and compromised version of Apple’s developer tool kit. Meanwhile, Apple says that last week’s rollout of iOS 9 marked the “fastest iOS adoption ever,” with more than 50% of existing devices upgrading to the new mobile operating system just five days into its launch.  The company began taking preorders for its newest smartphones, the iPhone 6s and iPhone 6s Plus, on September 12. It will begin selling the new hardware in retail stores this Friday.

Apple aims to release its first car in 2019. Although many reports have suggested that Apple is working on a self-driving car, the company’s first vehicle likely won’t be fully autonomous, according to a report in the Murdoch Street Journal. It will be electric. Apple has already been aggressively hiring for its car project, poaching employees from companies like Ford, General Motors, Tesla, Volkswagen, and more.

Many of its recent hires have expertise in connected and autonomous vehicle systems. It remains unclear if Apple will develop its “Apple Car” from the ground up or if it will team up with an existing auto manufacturer. Rumors have suggested Apple has held discussions with BMW over a potential partnership that would see the BMW i3 used as the basis for the Apple Car.

The Environmental Protection Agency (EPA) says Volkswagen used software for diesel VW and Audi branded cars that deceived regulators measuring toxic emissions and could face penalties of up to $18 billion. Volkswagen has for years promoted its TDI turbodiesels as a clean and efficient alternative to hybrids, but now it appears the cars were clean only when hooked up to emissions testing devices and dirty the rest of the time, spewing out about 40 times the allowed levels of pollution.

The EPA and California regulators began asking questions in May 2014 after West Virginia University researchers published a study that found lab results did not match up with road tests. The software was designed to detect when auto emissions were being hooked up to the cars; and only then the car’s emissions-control machinery would kick in. Once the test was over, the software noticed that, too, and returned to its illegally and dangerously dirty operations.

Think about that for a moment. Code had to be written for the express intent of cheating on auto emissions tests. People in the manufacturing process had to know it was happening. It took substantial testing to make it work. It happened across different models and brands. It lasted for 6 years, until it was discovered by an outside source.

It’s estimated that about 482,000 of the cars were manufactured and sold from 2009 through 2015, and are still on the road. It is a near certainty that VW will recall the cars to remove the allegedly illegal software that deceives emission inspection stations; it is less certain what VW will do to bring the cars into compliance with clean-air regulations without hampering their performance and gas-mileage.

At least one class-action lawsuit has already been filed on behalf of Volkswagen and Audi owners. It claims fraud and breach of contract, citing the “diminished value” of the nearly 500,000 recalled diesel vehicles, which usually sell for a premium price over their gasoline counterparts. Specifically, after recalled Volkswagen diesels are fixed, the cars might have degraded horsepower and fuel efficiency. Volkswagen could be criminally prosecuted. And there is evidence that the excessive pollution spewed out by VWs is deadly. VW shares down about 17%, and the company lost nearly $17 billion in market capitalization.

Remember Standard Chartered, the British bank accused of violating sanctions against Iran back in 2006? The investigation into those violations produced one of the most memorable quotes from a bankster, as one senior exec with Standard Chartered purportedly said: “You (blanking) Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

In 2007, StanChart committed to stop dealing with Iranians; then in 2012 they were fined $1 billion for sanctions breaches and compliance failures. Well, a new Financial Times report reveals that even after the 2012 fines, StanChart still had some compliance issues, and they could not say with certainty whether they were still dealing with Iranian customers; and US regulators are now investigating further sanctions breaches.

If the bank is found to have breached sanctions again, it could incur further fines or lose its vital dollar clearing license. And of course, according to the recent Yates Memo from the DOJ, they might seek criminal charges for repeat offenders; requiring the bank to turn over criminally culpable individuals as part of any settlement. This should be an interesting test of the Yates Memo.

You have probably never heard of Daraprim, it is a drug which has been on the market for 62 years, it is the standard of care for a food-borne illness called called toxoplasmosis caused by a parasite that can severely affect those with compromised immune systems, and it is used by HIV/AIDS patients. The pill sells for $13.50, or it used to, until about a week ago, when the price shot up to $750 a pill.

A spokesman for Turing said the company will use the money from the sales to further research treatments for toxoplasmosis, which he said has long been neglected. He also said the firm had plans to invest in marketing and education tools to raise awareness of the disease; a reasonable and reasoned answer, but one that has been unsatisfactory for many, especially in light of the corporate history. It turns out that Turing was a hedge fund that bought the marketing rights to Daraprim in August, and basically decided to jack up the price.

Financial Review

The Lights Are On

Sinclair Noe — March 3, 2015      

 

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

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DOW – 85 = 18,203
SPX – 9 = 2107
NAS – 28 = 4979
10 YR YLD + .04 = 2.12%
OIL + 1.00 = 50.59
GOLD – 2.40 = 1204.50
SILV – .13 = 16.33

Just a few economic reports today.

Corelogic reports home prices jumped 1.1% in January to take the year-over-year gain to 5.7%. CoreLogic said 27 states and the District of Columbia are at or within 10% of their peak.

The Thomson Reuters/PayNet Small Business Lending Index fell to 120.9 from an upwardly revised December reading of 133.5.  Small businesses cut back on borrowing. Cold weather may be part of the reason.

Car companies reported February sales figures. Ford Motor sales dropped 2%. Ford was projected to report a 5.8% increase in sales but deliveries of F-Series pickups, Escape sport-utility vehicles and Fusion family cars all declined last month. General Motors sales rose 4.2 percent but they still fell short of estimates as sales of light trucks rose and sedans fell. Toyota, Fiat Chrysler, Honda and Nissan all reported deliveries that increased less than analysts had estimated. Industry-wide, the annualized selling rate, adjusted for seasonal trends, rose to 16.2 million cars and light trucks, from a 15.4 million pace a year earlier.

Chief executives of large U.S. companies see the economy accelerating modestly in 2015. According the Business Roundtable’s first-quarter survey the CEOs expect gross domestic product to advance 2.8% this year; just slightly more optimistic than most estimates. Among the CEOs, 40% said their firms would increase hiring over the next six months, while 23% expect to cut staff; while 80% expect their company’s sales to increase in the next six months.

The House of Representatives has approved funding for the Department of Homeland Security through Sept. 30 without any immigration restrictions, ending a standoff that had threatened a partial shutdown for the agency.

Israeli Prime Minister Benjamin Netanyahu delivered a speech before a joint session of Congress today. He warned the United States was negotiating a bad deal with Iran that paved the way to a “nuclear nightmare.” Delivering dueling messages within hours of each other, Netanyahu made his case against Obama’s Iran diplomacy in a speech to Congress that aligned himself with the president’s Republican foes. Obama responded in the Oval Office, that Netanyahu offered “nothing new.”

As Netanyahu spoke, the price of oil increased $1 per barrel. For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Oklahoma, pushing US supplies to their highest point in at least 80 years. US crude stocks rose 8.4 million barrels last week to a record 434 million. Gasoline stocks fell by 3.1 million barrels. The national average price of gasoline is $2.44 a gallon. That’s $1.02 cheaper than last year at this time, but up 37 cents over the past month.

We’ve talked about the European Central Bank’s $1.2 trillion bond-buying plan to try and stimulate the economies of the Eurozone. The ECB is expected to announce further details of its asset-purchase program after it meets in Cyprus Thursday. Standard & Poors thinks there might be a problem with Euro QE; S&P estimates that the anticipation of quantitative easing in Europe squashed bond yields so much that the liabilities of defined-benefit pension plans rose by up to 18% last year.

Meanwhile, we check in on Greece. The Euro deal done six days ago was supposed to stabilize the Greek debt crisis. In return for a bit of fiscal autonomy the Syriza government recognized its debts as legitimate and gave its lenders a running veto on any measures taken that might impact on the economy, the banks or the budget balance. But the situation in Greece is still critical. First because Greece gets no new loans from the deal, because it is pledged to run a budget surplus it has to finance the state from tax receipts, but these have reportedly slumped by 22% since December. Normally the government could bridge the gap by issuing short term bonds but the ECB has capped that move. And now Greece faces some imminent debt repayments.

It appears the Euro Monetary Union has thrown a lifeline to Greece, with bricks attached. Greece does not want default, nor an exit from the Euro Union; and so they have not embraced the lifeline. Greek Finance Minister Yanis Varoufakis perceives that the Eurozone will tolerate the “creative ambiguity” in the deal; that there is scope for a long-term settlement in June; and that he can keep both the Greek state and its banks solvent until then. The hope is that the rest of the Eurozone will soften on its insistence on austerity, become more tolerant of debt forgiveness, and give growth a chance. The longer they can drag it out, the better their chances.

Hoping to secure a fresh bailout from the IMF, Ukraine lawmakers passed a raft of austerity measures, including pension cuts and tax increases, during a lengthy parliament session yesterday that lasted late into the evening. The $17 billion bailout package, aimed at averting the country from financial collapse, will be considered by the IMF’s executive board on March 11. Russia and Ukraine have a temporary gas deal in place. The overnight agreement will supply Ukraine with gas for the month of March. “Under the deal sealed in Brussels, Ukraine’s Naftogaz will pre-pay and order sufficient quantities of gas to ensure all domestic consumption for March and guarantee undisrupted supplies to the EU.” Ukraine’s central bank raised its benchmark interest rate to 30% from 19% to “stabilize lending markets.”

 Citigroup said it has agreed to sell its consumer finance unit OneMain Financial Holdings to subprime lender Springleaf Holdings for $4.25 billion in cash. Springleaf is a former subprime lending division of American International Group, AIG. OneMain is part of Citi Holdings, which Citigroup created during the financial crisis to park assets that it wanted to eventually divest or wind down. OneMain had filed for an initial public offering in October, but an outright sale was always Citigroup’s preferred choice. Springleaf was apparently able to get OneMain at an attractive price because it was the most logical strategic buyer and Citi was a highly motivated seller.

The resulting company will now be, by far, the biggest lender to consumers with lower credit scores in the country. It will have nearly 2,000 branches in 43 states, through which it provides personal and auto loans at high interest rates to customers with little access to other forms of credit. A recent investor presentation by Springleaf showed that the average interest rate on its outstanding loans has been around 26% to 27%. Losses for bad loans have been trending below 5%, leaving an effective yield earned by Springleaf near 22%. Springleaf personal loans average $4,000 to $5,000 in size and 40 months in term. Typical uses are for debt consolidation, home or car repair or medical bills.

There is certainly plenty of irony in these companies coming together six years after a credit meltdown rooted in subprime lending – the same meltdown that resulted in the near failure of their former parent companies, AIG and Citi, which combined required more than $100 billion of US government bailout money to survive.

Barclays, the British bank, reported a pretax profit of $8.5 billion for 2014, up 12% from a year earlier and better than expected. That includes setting aside an extra $1.2 billion for potential fines relating to allegations of foreign exchange manipulation—even though the bank could face up to $8 billion in fines over the next two years. If you put the legal reserves back in the mix, Barclays reported a loss in the most recent quarter.

Barclays has not yet settled any currency-rigging cases, which is why its reserves continue to pop up in earnings reports. If you look at the other banks’ FX-rigging settlements so far, they seem to cover behavior dating from 2008 through 2013, more or less. That is, mostly post-crisis behavior. We all know the banks behaved badly leading up to the financial crisis, and we hear about settlements covering the pre-crisis acts, and we think the banks are being punished and must surely be conducting current business with some slight measure of probity, even if the facts do not bear out any substantive change in behavior.

Google has confirmed its plans to offer wireless phone service “in the coming months”, promising the service will be small-scale and not intended to compete with the four big U.S. national carriers. Earlier media reports suggested that Google’s service would sift through cellular connections from Sprint, T-Mobile  and Wi-Fi “hot spots” to pick the best signal for routing calls, texts and data.

Apple sold the most smartphones globally in the fourth quarter, overtaking Samsung for the first time since 2011. According to research firm Gartner, Apple sold 74,832 smartphones to end users worldwide, ahead of the 73,032 phones sold by Samsung.

Once upon a time, Blackberry was the big name in mobile phones; half the phones sold in the US were Blackberrys. Within a matter of about 6 years, the company has gone from leader to has-been; they changed their business model to focus on mobile phone software management, and now they are trying to get back in the phone business again. A few months ago they introduced a square smart phone, and today they introduced a 5-inch touchscreen phone that will retail for $275.

About 8 years ago NASA launched the Dawn spacecraft, that’s D-A-W-N; and over the past 8 years the solar powered craft has traveled about 260 million miles; it is now closing in on a far-flung asteroid belt and it has been focusing on a little dwarf planet called Ceres. The dwarf planet looks like a big cratered rock, with one exception; in one of the craters, 57 miles wide, there is a light, a bright light.

The Dawn spacecraft is still too far away to determine the source of the light. It could be the reflection of water vapor or reflective salts, which would be interesting, or it could be something else, which would be even more interesting. With any luck, the spacecraft will fly closer over the next few months and we will learn if the bright lights of Ceres are a natural phenomenon, or if someone left the light on for us.

Financial Review

Gulliver’s Travels

Sinclair Noe — February 24, 2015       

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

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DOW + 92 = 18,209
SPX + 5 = 2115
NAS + 7 = 4968
10 YR YLD – .07 = 1.99%
OIL – .29 = 49.16
GOLD – .50 = 1202.30
SILV – .01 = 16.41

The Dow Industrials and the S&P 500 hit record high closes. The Nasdaq rose for the tenth straight session, its longest streak since July 2009. The Russell 2000 Index of small cap stocks closed at a record 1233.

Fed Chair Janet Yellen testified today before the Senate banking committee in her semi-annual report on monetary policy. Yellen said the Fed is preparing to consider interest rate hikes “on a meeting-by-meeting basis.” Yellen described how the Fed’s rate-setting policy committee will likely proceed in coming months: first by removing the word “patient” in describing its approach to rate hikes, then entering a phase in which rate hikes are possible at any meeting. That approach could open the door to an interest rate increase as early as June, but short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October. And the yield on the ten year Treasury note slipped down below 2%. So, the markets players are placing their bets.

Yellen said she felt labor markets and other key economic indicators “have been increasing at a solid rate.” However, she said she still feels the job market is not fully repaired. The lack of inflation has made some Fed policymakers hesitant to commit to raising rates. Whether Yellen was more hawkish or dovish than in the past is a matter of interpretation or even wishful thinking, but it seems clear the Fed will rely on incoming data and they will communicate their intentions well in advance. Yellen will appear before the House Financial Services Committee tomorrow.

Greece sent a list of economic reform plans to the Eurogroup of euro zone finance ministers around midnight, just making a deadline set by its international creditors. Euro-region finance ministers approved Greece’s package of economic measures and paved the way for a four-month extension to the country’s bailout agreement, keeping its financial system afloat. The list of commitments includes maintaining current state-asset sales, consolidating pension funds to reduce costs and revamping tax collection and administration. In other words, the Greek Syriza party just agreed to the status quo for the next four months. But there is a problem; the status quo has been a horrible failure; it was what the upstart party ran against; the status quo is what the Greek electorate voted against.

The text of commitments states: that “the Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.” The agreement goes on to state:  “The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.”

And to assure there is no rollback, the funds will be held by the European Financial Stability Fund and only released on request by the ECB. So, the Greeks don’t actually get the money, it will be dished out to recapitalize the banks, and only then if the Greeks don’t get uppity.

It is hard to imagine that this will go over well with the voters in Athens.

House prices edged up 0.1% in December to take the year-on-year change to 4.5%, according to the S&P/Case-Shiller 20-city composite. Miami and Denver saw the strongest monthly advance. Compared to year-ago levels, San Francisco saw the strongest growth with 9.3% gains. Phoenix house prices were up 0.2% for the month, and up 2.4% year over year.

HSH.com took the median home price data from the National Association of Realtors for major cities and then compared that to the median income to determine housing affordability. In 11 of 27 major cities, people need to earn more than the median income to afford a house. The median household income was $54,417 in December 2014. The median household income in Phoenix was $43,960 in 2011. And the new data suggest you would need income of $40,658 to buy a median priced home. San Francisco is the least affordable major metro area. Pittsburgh is the cheapest, but then you would have to live in Pittsburgh.

Meanwhile, a new report from Zillow shows rents are increasing by 3.3% year over year, as of January. According to Zillow, monthly rents have grown at roughly twice the pace of wages in the U.S. since 2000. That means Americans are having to spend a greater share of their income on rent, about 30%, versus 25% in the past. Nationwide, you would need to stay in a home for about 2 years before ownership becomes cheaper than renting.

The Conference Board’s consumer confidence index fell to 96.4 in February from a revised 103.8 in January, which marked a 7 ½ year high. A slight bump in gasoline prices might be responsible for curbing enthusiasm.

Financial data firm Markit said its preliminary, or “flash,” reading of its Purchasing Managers Index for the service sector rose to 57.0 in February from 54.2 in January.

President Obama issued his third veto today, rejecting legislation that would allow construction of the Keystone XL pipeline. The Senate has agreed to hold a vote on overriding the veto.

It was Investors Day at JPMorgan Chase, but apparently not Depositors’ Day. JPMorgan is preparing to charge an array of financial firms, including hedge funds, private-equity firms and foreign banks, for some deposits, citing new rules that make holding money for the clients too costly. Certain deposits are less profitable to handle than they used to be due to new federal rules that can penalize banks for holding deposits viewed as prone to fleeing during a crisis or a stressed environment. So, the bank will eliminate about $100 billion of deposits that it holds for international clients. JPMorgan will is also reducing expenses and “simplifying” its biggest business lines. And part of the cost cutting plan is to close 300 branches, or about 5% of the total, over the next 2 years.

And on Investor’s Day, once again management had to field questions about a possible breakup of the bank. Naturally, the bank concluded that a break up would be terrible. So many synergies would be lost — synergies that JPMorgan’s peers don’t enjoy because they’re simply not as big.

Two agencies, the US Department of Justice (DoJ) and the Commodity Futures Trading Commission (CFTC), have launched separate probes into at least 10 major banks for the possible rigging of precious-metals markets. The banks are accused of collusive behavior, whereby personnel from various establishments communicate with each other and coordinate trading behaviors so that prices move according to what they decide. Banks historically set the price of precious metals, which include gold, silver, platinum and palladium, twice a day using the daily precious metal fixes, also known as the London Fix.

If it all sounds familiar, it is because it follows the same pattern as the manipulation of the Libor, Euribor, ISDA or derivatives, and Forex markets.

One of the 10 banks under investigation for rigging precious metals markets is HSBC. They just reported earnings that badly missed estimates. Part of the reason for the miss, is all the money they have to pay in fines. HSBC has set aside another $550 million to cover potential fines for alleged manipulation of foreign exchange markets and warned it could face a $500 million bill to compensate US customers for debt protection products it offered before May 2012. HSBC paid $611 million to global regulators in November when it was one of six institutions fined over allegations of price fixing and manipulating benchmarks in the $5 trillion-a-day forex market.

HSBC has also come under fire for helping clients hide their income from tax authorities. Meanwhile, the CEO of HSBC has been engaged in some fancy footwork to explain his own secret Swiss bank accounts. Stuart Gulliver explained that in the 1990s, when he lived in Hong Kong and worked as a banker at HSBC, employees received lump-sum bonuses whose amounts could be viewed by other employees through a computer system. In an effort to protect his privacy he put the money in Switzerland to hide it from the prying eyes of his Hong Kong colleagues. But he then had to hide it from his curious Swiss colleagues, so he created an anonymous Panamanian company. Gulliver was the top earner at HSBC, and he felt he had to protect his privacy from his Lilliputian colleagues.

HSBC has countered that Gulliver’s accounts were actually opaque and transparent. And for a bank that has been fined more than $1 billion for laundering money for the Sinaloa drug cartel, I suppose combining Panama and Swiss tax havens to ensure secrecy is the new “transparent” in banking. But for anyone who is not drinking Kool-Aid, it carries a certain stank of greed and sleaze.

Financial Review

Risk On

Sinclair Noe — February 20, 2015

 

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

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DOW + 154 = 18,140
SPX + 12 = 2110NAS + 31 = 4955
10 YR YLD + .02 = 2.13%
OIL – .82 = 50.34

Eurozone finance ministers are meeting in Brussels today for the latest round of emergency talks aimed at breaking the deadlock with Greece. Yesterday, Germany rejected a request by Athens to extend a loan program, calling the Greek proposal a Trojan horse. Now it looks like there will be an extension of the bailout loan agreement, probably for four months; the current deal was scheduled to expire on February 28^th.

Euro zone officials said the accord required Greece to submit by Monday a letter to the Eurogroup listing all the policy measures it planned to take during the remainder of the bailout period, to ensure they complied with conditions. So, they haven’t worked out all the details or even come close to resolving the problems; they didn’t have to; they just needed to avoid making a big, irreversible mess of everything. So, they have hit the pause button. It might be the smartest thing they could have done.

Greece has a new government, barely one month on the job. It is not reasonable to expect the new government to have fully formulated all the details of a bailout and recovery plan. They might not come up with a decent plan after 3 or 6 months, but there is no absolute requirement that it had to be done today. So, wait; chill out; and try to come up with something better than the current plan which seemed to be that Greece submit to German domination and policies that have proven to be horrible failures, or conversely, exit the Euro Union and likely destroy the union in the process. You could say that this is just kicking the can down the road, but that is better than having everything explode.

Now, the next hurdle is for Greece to make it through the weekend. Depositors have been pulling money out of Greek banks at an accelerating pace despite government assurances that there is no plan to introduce capital controls to stem the outflows. Deposit outflows rose to a total of over 1 billion euros in the past two days, some of the highest daily levels seen this year.  Monday is a public holiday in Greece. Greeks are nervous before a three-day weekend, given memories of capital controls imposed in Cyprus in 2013 over a long weekend.

Assuming Greece doesn’t make a mess of things over the weekend, the best bet is that time is on their side. Germany would like to humiliate the Syriza party and make an example of them,  so that the other far left challengers to the status quo in Europe are not encouraged, namely the Five Star party in Italy, and the Podemos party in Spain.  Of course, the longer German intransigence on indebtedness continues, the more radical the political movements will become in the periphery.

For now, the markets are assuming that all will be well. Risk on.

The Dow, the S&P 500, and the Russell 2000 all hit record highs. The Nasdaq Composite is close to a record. This is the first time the Dow has closed at a record this year. It’s been 56 days since the Dow’s last all-time high, reached on Dec. 26. The Dow climbed to closing records on 38 days in 2014, and on 52 occasions in 2013. The S&P 500 is up 0.6 percent for the holiday-shortened week after reaching a record reached Feb. 17. It has gained 2.4 percent this year

$5.8 billion has flowed into European stocks this week, with $21.6 billion coming in over the last six weeks. This was the fourth straight week of inflows to high-yield bond funds, which is now the best performing sector this year and 1% from its all-time high.

The biggest refinery strike since 1980 continues after the United Steelworkers union instructed members to reject a seventh labor contract offered by Royal Dutch Shell. The proposal, the first one made by Shell since Feb. 5 on behalf of companies including Chevron and Exxon Mobil, “fails to improve safety” in an enforceable way, the USW declared. Since Feb. 1 more than 5,000 USW workers have walked out of nine U.S. refineries that account for 13% of U.S. fuel capacity.

The International Longshore and Warehouse Union and the Pacific Maritime Association have not been able to reach a deal on a labor contract for dock workers at West Coast seaports that handle some 40% of US trade. Ports in Los Angeles, Long Beach, Oakland, Seattle and Tacoma have endured four months of slowdowns that reduced cargo movement by almost half. Now, Labor Secretary Tom Perez says if no agreement is reached by Sunday, he will call negotiators to Washington for further talks.

Due to the parts shortage from the West Coast port slowdown, Honda said it expected output loss of around 5K cars from Feb. 24 to March 2 at two North American car factories. “The supply situation will be a little bit better next week due to the delivery of more parts by air,” a spokesman said. From Feb. 16-23, Honda reduced output by 20K cars at five North American car factories.

Takata, the Japanese maker of air bags that have led to millions of car recalls worldwide, will be fined $14,000 for each day it fails to cooperate with a US investigation into the part defect. Transportation Secretary Anthony Foxx said his agency has requested documents and other data from Takata about its air bags, and the company hasn’t fully complied. The fines could reach a maximum of $70 million.

We’ve all seen the pictures of the piles of snow in Boston or the partially frozen Niagra Falls, but the National Oceanic and Atmospheric Administration (NOAA)reports that this winter has been the sixth-warmest winter on record in the U.S., and the warmest since 2012. Globally, temperatures on land, as well as temperatures for land and ocean combined were the second-highest for January since records began in 1880.

Temperatures in the December-January period were above average in most of the contiguous U.S., and California averaged record temperatures. Precipitation was below average. While it was colder than average in the northeast, it was warmer than average in the west. There’s a sharp cutoff between areas where storm systems have cut across the Upper Midwest and Northeast, dropping copious, or at least normal, amounts of snow—and areas they missed. The biggest snow loser this year is the West Coast. Much like last year, if you were planning a ski vacation to California, you might want to rethink it. Mt. Shasta, Badger Pass and Mt. High are among a handful of resorts that are closed until the next storm arrives.

Compounding matters, downright hot weather has quickly melted much of the paltry snowpack in the western US. Temperatures have soared as high as the 60s in the mountains this week. While ski resorts and tourist attractions have felt the pinch from the lack of snow, the real worry is what comes in April when snowpack usually melts and feeds reservoirs across the West.

The Justice Department will seek an emergency stay to block a decision by a federal judge and allow eligible immigrants to apply for benefits granted under President Obama’s executive action. Immigration advocates have called on the administration to take legal action to reverse the injunction issued by U.S. District Judge Andrew Hanen that halted the issuance of work permits to eligible immigrants one day before the program’s launch. If the Judge does not approve the stay, a delay could prevent the administration from filing an appeal in the 5th Circuit, where the decision would be taken out of Hanen’s hands. Approximately 4.7 million undocumented immigrants are expected to be granted relief from deportation under the program if it is allowed to go through.

A federal judge ruled that a longstanding practice by American Express aimed at keeping customers from using other forms of payment violates United States antitrust laws. The fees that American Express charges merchants are routinely higher than those of Visa, MasterCard, Discover and other credit card companies. But Amex prohibits any merchant that accepts its cards from encouraging customers to pay with lower-cost cards. Credit card fees are largely hidden from consumers, but they are incorporated into the prices of most goods and services. The Merchants Payments Coalition, a group of retailers, restaurants, gas stations and other consumer businesses, said in a statement that the ruling is a “step forward to bringing badly needed competition and transparency to the entire credit card industry,” and should result “in lower prices for consumers.”

Just after it hired top antitrust lawyers to counsel it in its fight with the Federal Trade Commission, Sysco  has got word that the FTC filed suit against its proposed $3.5 billion takeover of rival U.S. Foods.  Debbie Feinstein, director of the FTC’s Bureau of Competition, said in a statement, “This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline food service distributor.”

Apple is “pushing its team to begin production of an electric vehicle as early as 2020.” The company’s car team currently employs about 200 people. In related news, EV battery maker A123 Systems sued Apple for allegedly poaching senior engineers to build a large-scale battery division, accusing the tech giant of hiring its experts and battery engineers from other companies.

The U.S. manufacturing sector expanded in February at its fastest rate since November. Financial data firm Markit said its preliminary or “flash” U.S. Manufacturing Purchasing Managers Index rose to 54.3 in February, up from the January’s final reading of 53.9.

Next week will be a busy week on Wall Street with a raft of big earnings reports including Target (TGT), Macy’s (M), Home Depot (HD) and Hewlett-Packard (HPQ) to name just a few. The big economic data includes the latest reading on third quarter Gross Domestic Product.

Financial Review

Upside-Down World

Sinclair Noe — February 12, 2015

 

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

DOW + 110 = 17,972
SPX + 19 = 2088
NAS + 56 = 4857
10 YR YLD un 1.98%
OIL + 2.28 = 51.12

A ceasefire between Russia and Ukraine is scheduled to start February 15, which apparently means that Putin’s little green men still have 2 days to grab as much land as they can. The agreement follows a 17 hour, four-way meeting between Russia, Ukraine, France and Germany in Minsk. The new deal revived a failed September ceasefire agreement, with commitments from each side to pull back heavy weapons, as well as greater autonomy for separatist regions in eastern Ukraine. IMF chief Christine Lagarde also announced today that Ukraine will receive about $40B in funding over the next four years.

Along with the new cease-fire agreement, that won’t actually end the fighting; there was a non-agreement agreement between Eurozone finance ministers to put off decisions on Greece’s bailout terms until next week. Greek officials were unable to reach a deal over its bailout program yesterday, but will return to Brussels on Monday to try to end the deadlock.

Meanwhile, Sweden’s central bank cut its main interest rate into negative territory and announced a bond-buying program this morning. Sweden now joins Denmark and Switzerland and the European Central Bank in negative rate land. So, now, if you want to make a deposit in Sweden, you have to pay. The reason is lowflation, which is another name for mild deflation. Countries around the world are seeing a sharp slowdown in price growth. In fact, much of Europe is in outright deflation right now, including Sweden if you go by its headline national consumer price index.

Falling prices are great if you are planning to buy something as an individual consumer, but it is problematic for countries or continents. Consumers put off purchases because hey, the price will be cheaper next week. So, nothing gets sold this week. Rinse, lather, repeat next week. Suddenly, there is no economic growth. Negative interest rates are supposed to penalize saving and prompt people to spend and invest instead. The Swedish Central Bank is creating new money electronically and using it to buy government bonds, in an effort to push more money into the economy and weaken the currency, which is another attempt to juice exports while pushing consumers to spend rather than save.

The Swedish Central Bank made a huge mistake in 2010 by raising interest rates to combat high unemployment and low inflation. That didn’t work, so now they turn negative and print money to buy government bonds, and that is supposed to work. In fact, Germany is printing money and buying German government bonds as well, and that is supposed to work; except of course in Greece, where nobody wants to print money to buy Greek bonds, despite outright deflation and depression. Economics is not particularly complicated but economic policy can be insane.

The ECB and the European Monetary Union have no one to blame but themselves. They deployed the monetary policy machinery to uphold the interest of creditors, and they thought the Greeks would remain subservient, but that hasn’t happened. What’s happening to Greece today will happen to Italy tomorrow and then Spain and then Portugal. In Italy, they have the Five Star movement; in Spain, Podemos. They make Syriza look conservative.

Germany thinks it can shut down Syriza here and now, and shut down any further dissent. But the Eurozone is like a house of cards, and if they pull out Greece from the deck, the most likely outcome is that everything falls.

Retail sales fell in January for the second month in a row as drivers spent a lot less on gasoline and didn’t appear to use that savings elsewhere. Retail sales declined by a seasonally adjusted 0.8% last month after a 0.9% drop in December. Sales at gas stations slumped 9.3% to mark the biggest pullback since 2008. Sales fell at auto dealers, home-furnishing stores, grocery chains, department stores, apparel retailers and outlets that sell sporting goods. Internet stores and restaurants, two of the largest retail categories, were among the few sectors to boost sales. Instead of spending the savings at the gas pump, Americans are saving a little; the saving rate increased to 4.9% in December.
Tesla posted quarterly results after the close of trade yesterday.  It was not a good report: deliveries fell short, problems affected production and a strong dollar hurt results. Tesla posted a loss of $0.13 a share, well below analysts’ consensus expectations for a $0.13 a share profit. Elon Musk struck an optimistic tone for the year ahead, however, and went as far predicting a market value of $700 billion by 2025, matching that of Apple. Of course there is nothing concrete to back that up, but when an earnings call is going bad, just say “Apple” and analysts’ eyes glaze over.

SpaceX launched a satellite, but scrubbed its rocket landing. This is Elon Musk’s other company; they successfully deployed the DSCOVR space weather satellite after several delays due to (ironically) bad weather, but had to cancel an attempt to land a rocket on a drone ship due to high seas and bad weather.

The electric car company and rocket company isn’t the only thing Elon Musk is working on. Tesla’s next innovation could take you off the electric grid. Tesla is planning to unveil a new lithium-ion battery pack that homeowners could buy to store and supply their own energy. Details are still sketchy, but the most obvious idea would be to combine battery packs with solar panels. Solar energy company SolarCity already offers Tesla battery packs in some markets that customers can use to store energy and use as a kind of emergency generator. Musk is the chairman of SolarCity and its largest shareholder.

The idea that Tesla could be as big as Apple in 10 years is still pretty preposterous, except it could happen; they already have a $25 billion market cap, and they haven’t even turned a profit. They could grow from here; not just by selling cars, but also by selling batteries, and changing the way we look at the electric grid. If you are looking for a fast growing industry, you can’t get much bigger than energy. And if you look at Tesla as just a car company, you miss the bigger picture.

So, you’re looking for a travel site. What do you do? Well, if you are Expedia, you search the web, compare sites and then buy Orbitz for about $1.4 billion, or $12 a share in cash. It worked out to about a 25% premium for Orbitz; other travel-related websites moved higher as well.

Chief executive John Chambers says “Cisco is back with a vengeance.” Cisco reported impressive Q2 results following five straight quarters of slumping profit and sluggish sales. Cisco shares were up more than 9%.

And while we almost didn’t notice, the Nasdaq Composite has moved to within less than 4% of 5048; that’s the old record high from March 2000. The S&P 500 is just a couple points away from the 2090 record high close of December 29.

For quite some time I’ve talked about how the big banks repeatedly break laws, only to work out a settlement, and then go back and break even more laws. And one of the crazy things about that merry go round is that the banks settlements typically include something know as a deferred prosecution agreement.

For example, UBS, the largest Swiss bank, avoided prosecution in February 2009 when it admitted to helping Americans evade taxes, paid $780 million and handed over 250 secret accounts. In a deferred-prosecution agreement with the Justice Department, the firm promised to follow the law and cooperate with the US. Now investigators are supposedly looking into whether UBS aided wealthy clients in the use or transfer of bearer securities, which can be used to hide assets and potentially evade taxes; bearer securities have been illegal for decades.

Investigators suspect the conduct may have occurred when the bank was still bound by the deferred-prosecution agreement, which expired in October 2010. If that’s true, the Justice Department could reopen the accord and prosecute the bank on the original conspiracy charge. Prosecutors also could file new charges against UBS and seek stiffer penalties and oversight at sentencing for violating the previous agreement. In addition to the 2009 tax-evasion agreement, the bank settled an antitrust case involving the municipal-bond investments market in 2011. It resolved another Justice Department probe in 2012 for rigging Libor interest rates. The Justice Department has never reopened a closed deferred-prosecution agreement.

Meanwhile, last week 60 Minutes reported on the results of an International Consortium of Investigative Journalists’ research into documents leaked from HSBC, detailing tax evasion schemes at their Swiss subsidiary. Things have been pretty quiet following that report. The Department of Justice actually received the leaked documents 5 years ago, but the media only released the info this past weekend.

HSBC has its own recidivism problems. HSBC paid a $1.9 billion fine in 2012, in a deferred prosecution agreement over money-laundering with Mexican drug cartels and breaches of US sanctions; this was so blatant that the bank even got caught buying a smuggling plane for the Sinaloa cartel. Under that deal, HSBC escaped criminal charges and kept the banking charter that enables it to operate in the US. Then there was Libor rate rigging, illegal deals with Saudi banks linked to Al Qaeda, and still no one thought to reopen a deferred prosecution agreement.

And of course, no high level execs from HSBC or any other bank have been charged. It is now becoming sublimely ridiculous. We’re supposed to believe the CEOs never knew about any of the staggering number of frauds and scandals – and in the case of HSBC we are talking about hundreds of thousands of felony criminal acts. And at the same moment we are to believe that these are highly skilled executives capable of managing massive financial institutions.

Ultimately, scandals like HSBC’s Swiss tax evasion scheme are merely flash points offering us a clearer view of the hidden dynamics at work in the world economy: what is taken from one side shows up at the other. The timing of the scandal is delicious; Greece is going to Brussels to beg a reprieve from debtor’s prison and the failed policies of austerity. There is no such thing as austerity; there is only a highly skewed redistribution of scarce resources. In this upside-down world, money simply tends to flow upwards.

FINANCIAL REVIEW

Anti-Austerity Gets Wind in Sails

Sinclair Noe — February 2, 2015

Podcast: Play in new window | Download (Duration: 12:46 — 5.8MB)

DOW + 196 = 17,361
SPX + 25 = 2020
NAS + 41 = 4676
10 YR YLD – .01 = 1.67%
OIL + 1.59 = 49.83
GOLD – 9.30 = 1274.80
SILV – .05 = 17.28

Americans cut spending in December by the largest amount since 2009; we knew spending on energy would be lower but consumers did not rush out and spend the money. Household savings from lower energy costs, were partly offset in December by higher spending on drugs, health care and housing. These expenses continue to eat up a large portion of American incomes. Incomes posted another solid gain and falling inflation is allowing Americans to get more bang for their buck. Personal spending fell a seasonally adjusted 0.3% last month. Personal income, meanwhile, rose 0.3%. Since income growth outpaced spending, the amount of money individuals save jumped to 4.9% from 4.3% to mark the highest level since midsummer.

The Commerce Department reports construction spending rose 0.4% in December to a seasonally adjusted annual rate $982.1 billion, led by public spending. Private-construction spending rose 0.1% in December, with a 0.3% increase for residential projects and a 0.2% decline for nonresidential projects. Meanwhile, public-construction spending rose 1.1% in December.
The ISM Manufacturing Report for January dropped from 55.1 to 53.5. Any reading above 50 indicates the manufacturing sector is expanding, just not as fast.

Germany’s Angela Merkel ruled out a debt writedown for Greece on Saturday, while an ECB policymaker threatened to cut off funding to Greek banks if Athens doesn’t agree to renew its bailout package. Europe’s bailout program for Greece, part of a €240B rescue package also involving the IMF, expires on Feb. 28. Greece has hired the investment company Lazard to advise on restructuring its debt, and has refused to deal with the “troika” which is pushing for continued austerity.

President Barack Obama has suggested that Greece will not be able to recover from its economic crisis unless there is a let up in austerity policies. “You cannot keep on squeezing countries that are in the midst of depression,” when CNN’s Fareed Zakaria asked him about the case of Greece. “At some point, there has to be a growth strategy in order to pay off their debts and eliminate some of their deficits.

Greek Finance Minister Yanis Varoufakis was in London today trying to win support for a writedown. Britain’s finance minister, George Osborne said Greece needs to act responsibly but that the Eurozone also has to come up with a better plan for jobs and growth. Osborne called the stand-off the “greatest risk to the global economy.”

Think about that for a moment. The Greek bailout package is €240B, and Greece would certainly pay most of that, even if they get a break. Without some sort of break, Greece might well default on everything. So the greater risk seems to be doing nothing to help the Greeks. But there is another risk.

Hundreds of thousands of people marched through Madrid Saturday in a show of strength by a fledgling leftist party, as it becomes the latest European political organization to gain widespread support for its anti-austerity stance. Podemos (‘We Can’) supporters from across Spain converged on Madrid in what was the party’s largest rally to date, as it hopes to emulate the success of Greece’s Syriza party in the Spanish general election later this year. The political party was just formed one year ago, and they are now favorites to win the election.

The anti-austerity movement is catching some wind in its sails, and with good reason; austerity does not work. Spanish unemployment is holding around 25%. Half of Spain’s unemployed no longer receive benefits, while 33 of the 35 biggest companies avoid tax through subsidiaries in tax havens. Half a million children have been plunged into poverty since 2009, but the wealth of Spain’s super-rich has increased by 67%in the past 5 years. To avoid the wrath of a fractious population the government has cracked down on the right to assemble. That did not stop hundreds of thousands of protestors over the weekend.

President Obama presented the White House budget today. At the heart of the budget is what the president calls “middle-class economics”; plans to help middle-income earners afford necessities such as education and child care and bolster their skills, and to pour federal money into building roads and bridges. To pay for such initiatives Obama has outlined a nearly $1 trillion of tax proposals that would hit the wealthy and large financial institutions over the next decade.

The budget foresees a $474 billion deficit, which is 2.5 percent of U.S. gross domestic product. The proposal includes a corporate tax overhaul, plus a 6-year, $478 billion plan to build and improve transit, roads, and bridges – paid for by imposing a one-time tax of 14% on an estimated $2.1 trillion in overseas accounts held by US corporations. The president is proposing to add $38 billion for the military and $37 billion for domestic programs under Congress’s discretion; essentially restoring the cuts made by the 2011 budget deal known as sequestration. Obama called those cuts “mindless austerity.”

The White House is assuming that inflation-adjusted economic growth will rise from 2.2 percent in 2014 to a robust 3.1 percent this year and 3 percent in 2016, and that unemployment will continue to fall, to 5.4 percent this year from the current 5.6 percent, to 5.1 percent in 2016 and to 4.9 percent in 2017 and 2018. Those assumptions would mean that the current record-breaking expansion of private sector jobs would continue well into the future.

It’s important to note that this budget is the president’s proposal—a blueprint – given to Congress to be fought over or blatantly ignored; it’s not law. So, this is first-and-foremost a political document used to outline the president’s vision and define his terms of engagement with Congress. And there are a few things Republicans should like, such as more military spending, a highway trust fund, and corporate tax reform, but the devil is in the details. Most of these measures, to use the language of the moment, will likely be “dead on arrival,” given that both the House and Senate are now under Republican control.

The chairman of the Federal Communications Commission this week is widely expected to propose regulating Internet service like a public utility to ensure so-called net neutrality, or an open Internet. It is expected that the proposal will reclassify high-speed Internet service as a telecommunications service, instead of an information service, under Title II of the Communications Act. The change would give the commission strong legal authority to ensure that no content is blocked and no so-called pay-to-play fast lanes exist. He may also suggest putting wireless data services under Title II and adding regulations for companies that manage the backbone of the Internet. However, it would likely be regulation without specific pricing control. The proposal is expected to be submitted to the agency’s commissioners by Thursday.

About 3,800 employees represented by the United Steelworkers union went on strike at plants accounting for 10% of U.S. refining capacity for a second day, after failing to agree on new labor contracts. Union workers are on strike for a second day at nine U.S. refineries and chemical plants as they seek a new national contract with oil companies covering laborers at 63 plants. The walkouts targeted plants with a combined 10 percent of U.S. refining capacity, although the plants remain open for now.

Exxon Mobil’s quarterly profit fell 21% as weak oil prices took a toll, but earnings topped Wall Street expectations due to tax benefits and a favorable arbitration ruling; revenue missed the mark. Profit in the fourth quarter fell to $6.5 billion, or $1.56 per share, from $8.3 billion, or $1.91 per share in the same quarter a year earlier. Exxon also said it will reduce its share buyback program in the first quarter by more than half to $1 billion.

RadioShack is preparing to shut down the chain in a bankruptcy deal that would see half the stores taken over by Sprint. The rest of the stores would close down. Sprint and RadioShack have also had talks about co-branding the stores. Standard General, a hedge fund and the largest investor in RadioShack, was in talks to serve as the lead bidder at a bankruptcy auction. It is also possible that another bidder could yet emerge to buy RadioShack and continue operating the 94-year-old chain.

Apple announced it will spend about $2 billion to build a new data center in Mesa, Arizona. It will be housed in buildings formerly used by GT Advanced Technologies, which went bankrupt last year after failing to supply sapphire display covers for the iPhone 6. The project will supply 300 to 500 temporary construction jobs and 150 permanent jobs, and the data center will be powered entirely by renewable energy. Apple also will invest to build and finance solar projects, which will produce enough energy to power more than 14,500 Arizona homes. Apple told Bloomberg it will be a “command center for our global networks.”

FINANCIAL REVIEW

Flowers for Angela

Sinclair Noe — January 26, 2015

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

DOW + 6 = 17, 678
SPX + 5 = 2057
NAS + 13 = 4771
10 YR YLD + .01 = 1.83%
OIL – .49 = 45.10
GOLD – 12.80 = 1282.30
SILV – .39 = 18.01

It’s snowing in New York; this is a really, really big blizzard and it could dump up to 3 feet of snow across the northeast, with winds up to 60 miles per hour. The storm has already caused more than 1,800 flight cancellations, roads are closed in New York City except for emergency vehicles, rail traffic is also shut down, and schools are closed, and expect power outages across the Northeast. The Super Bowl will be this weekend in Glendale, and temperatures are expected to be mid-70’s. The folks at the Phoenix Chamber of Commerce are doing their happy dance.

This week’s economic calendar is packed, plus we are in earnings reporting season and some big names will post results this week. Microsoft reported after the close today, and we’ll get to that in just a moment. Apple reports tomorrow. Shell, Europe’s largest oil company, reports results on Thursday; it could be an early indicator of the damage being done to company earnings by lower oil prices. Ford Motor, the nation’s second-largest automaker, reports fourth-quarter earnings on Thursday.

On Wednesday, the Fed will end its two-day policy meeting with a statement but without the usual news conference, so investors don’t expect any big changes; they like to match that with the news conference; instead we’ll be digging through the written statement for any subtle change in wording. The FOMC meeting will probably be the biggest non-event of the week, unless they pull a Swiss National Bank on us.

On Friday, the Commerce Department releases its first estimate of economic growth in the fourth quarter of 2014. The consensus view is that the economy expanded at an annual rate of about 3% in October, November and December, down from the blockbuster 5% rate in the third quarter, but still a healthy pace. There are a few things that might skew the GDP number up or down; a slumping global economy appears to have done little to slow down the US economy, but it doesn’t mean we are completely insulated. We’ve seen good job growth (nearly 3 million net new jobs last year) but wage growth has lagged. Lower oil prices have been disinflationary but every time we go to the gas station it’s like we get to stuff a few extra dollars back into our wallets. The flip side is that means less investment in the energy sector. Oil services firm Baker Hughes published data on Friday that showed the number of US oil rigs fell for a seventh straight week to 1,317, the fewest since January 2013.

Meanwhile, government spending is down. The federal government will run a budget deficit of $468 billion for 2015, according to a new estimate released today by the Congressional Budget Office; that represents 2.6% of gross domestic product. A big surge in military spending was a significant contributor to that 5% GDP growth in the third quarter.

After the close, Microsoft reported revenue rose to $26.5 billion from $26.3 billion but earnings per share came in at 71 cents, down 9% from a year ago. Last year, Microsoft got a boost from the end of Windows XP support for enterprises, which essentially forced many companies to upgrade operating systems. Microsoft still gets a big chunk of revenue from commercial licensing of software and services, resulting in $10.7 billion in revenue for the quarter. But Microsoft isn’t just software. They generated $1.1 billion in revenue from sales of the Surface tablet, and $2.3 billion from the sale of 10 million phones. That’s a lot of phones, but it puts the sales price at $230, compared to about $600 for an Apple iPhone. Microsoft was down about 2% in after-hours trading.

Today was a merger mania Monday. We have a few deals to talk about. Energy Transfer Partners agreed to buy fellow pipeline owner Regency Energy Partners LP for about $18 billion including debt, making it the second-largest master-limited partnership. The cash-and-stock deal values Regency at $26.89 a unit based on the Jan. 23 closing price.

PartnerRe and Axis Capital merge in $11 Billion Deal. PartnerRe and Axis, both of which are based in Bermuda, have agreed to merge to create a new reinsurer with a combined market capitalization of nearly $11 billion. Together, the two companies will have more than $7 billion in combined gross premiums written and over $14 billion in capital, and will also have a specialty insurance arm with $2.5 billion in gross premiums.

Two big makers of packaging materials, Rock-Tenn and MeadWestvaco, agreed to merge, creating a $16 billion manufacturer of cardboard cartons and other types of boxes. Together, the two will create a stronger competitor to International Paper, with $15.7 billion in combined net revenue and $2.9 billion in adjusted earnings. The transaction comes after an activist shareholder campaign at MeadWestvaco by the hedge fund Starboard Value, which pushed the company to spin off its chemicals business.

Aer Lingus is considering an improved €1.3 billion takeover proposal from International Consolidated Airlines Group, the third attempt by the owner of British Airways and Iberia to buy its Irish rival.

AT&T has agreed to buy Nextel Mexico for nearly $1.9 billion. It’s the second AT&T acquisition in wireless in Mexico since November.

Not only is Google preparing a new cellphone service that will dial up pressure on the wireless industry’s business model, Cablevision is also prepping one. Google’s new package will hunt through cellular connections provided by Sprint and T-Mobile and WiFi “hot spots,” picking whichever offers the best signal to route calls, texts and data. Meanwhile, Cablevision will start offering Freewheel next month, a WiFi-only mobile-phone service.
And while we’re talking about mobile phones, there are reports that Samsung Electronics will be the main supplier of processors powering Apple’s next handset model. Samsung will likely supply 75% of the chip production for the iPhone 7. Samsung was the company behind the A7 that powered the iPhone 5S, although it was ditched in favor of TSMC for the iPhone 6 and iPhone 6 Plus.

Next we go to Europe, where Syriza won the Greek election yesterday. They captured 149 of the 300 seats in parliament, and then allied with a far-right fringe party to secure a majority. Syriza campaigned on an anti—austerity platform. Today, the reaction in the markets was muted. The euro fell, then recovered. Greek stocks fell about 3%. Greek bonds were down just slightly. Together with last week’s decision by the ECB to pump billions of euros into the euro zone’s flagging economy, Syriza’s victory marks a turning point in the long Eurozone crisis; what remains to be seen is how hard the turn will be. Likely the Euro Union will just deal with Greece, and come up with some sort of deal that is less hard line austerity, which the Germans have been preaching since the inception of the euro.

Syriza and the new Greek Prime Minister Alex Tsipras have said they would like to essentially default on Greek debt, and they don’t want to follow a bailout plan laid down by the Troika. IMF head Christine Lagarde said the Fund would continue supporting Greece, and they wanted to work with the new government. Irish Finance Minister Michael Noonan said there could be some room for a deal to adjust debt maturities and cut interest rates rather than writing the debt off. In an interview, Finland’s prime minister said he would give a “resounding no” to any move to forgive Greece’s debts and warned that a new government in Athens would have to stick to the terms of the existing bailout. Tsipras pledged to end budget cuts and heavy tax rises that have helped send the jobless rate over 25 percent and pushed millions into poverty. Standard and Poor’s sent an early warning shot to Greece’s new government, saying it could downgrade its credit rating even before its next planned review in mid-March if things go badly.

Tsipras can expect strong resistance to his demands from Germany in particular and a series of European policymakers urged Syriza not to renege on previous governments’ commitments. The current Greek bailout expires at the end of February. Greece has €10 billion of debt repayments due over the summer and has €7 billion of aid that is on hold unless and until it negotiates a new bailout deal. The Germans and also the Finns are convinced that the periphery countries are lazy, immoral beggars who deserve to have their economies crushed if they cannot or will not pay their debts. Eurozone officials are convinced that the EU holds all the trump cards in the coming clash with Greece’s new anti-austerity government, including the nuclear option of letting Greek banks collapse. They believe Mr. Tsipras knows his weakness. The hardline approach will be sugared with offers of flexibility on the detail of austerity measures, and a move to allow Greece more time to meet an end of February deadline for renewal of key EU loans that are keeping the country’s economy afloat. A more hardline EU stance might just force a more hardline Greek response. And the more unreasonable the demands of Greece and the Syriza party are, the more likely they will be able to force change.

And so, in a symbolic move, Tsipras’ first action as prime minister was to commemorate Greek resistance fighters with red roses at a memorial in Athens to those executed by Nazis. This is going to be interesting.

Meanwhile, S&P cut Russia’s sovereign credit rating to junk status today, bringing it below investment grade for the first time in a decade. The Russian ruble dropped 6% against the dollar. Russia’s economy is expected to slide into recession this year as low oil prices depress export revenues, and the sanctions over Ukraine cut some of its biggest companies off from Western funding. Pro-Moscow rebels, backed by what NATO says is the open participation of Russian troops, pressed on with their offensive on Sunday after restarting the war in eastern Ukraine. The EU has called an emergency meeting of foreign ministers, and is considering tightening sanctions against Russia.

FINANCIAL REVIEW

ECB QE

Sinclair Noe — January 22, 2015

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

DOW + 259 = 17,813
SPX + 31 = 2063
NAS + 82 = 4750
10 YR YLD + .04 = 1.90%
OIL – 1.24 = 46.54
GOLD + 9.20 = 1303.10
SILV + .20 = 18.41

The European Central Bank has launched a quantitative easing program, which together with existing programs, will pump €60 billion per month into the Eurozone economies through the purchase of public and private securities, mainly government bonds. The QE program will run through September 2016 with a total price tag of €1 trillion (or $1.3 trillion dollars).

So, it’s a big money printing, QE party for the Eurozone, except for Greece. The central bank effectively shut Greece out of the bond buying until July, and only then if Greece passes a review of its current bailout program. That program is heavy on debt reduction and austerity. The country’s existing program of financial support expires at the end of February. The government will run out of money by June without further aid.

Greece holds elections on Sunday. The Syriza party is expected to win the election. Syriza would like to default on existing debt and scrap the current bailout program; essentially challenging the status quo of fiscal austerity policy. What happens if Syriza wins the election on Sunday? Well, they will probably claim that fiscal austerity has contributed to the despair and poverty of Greece and created a humanitarian crisis in the country, deserving of special assistance.

Greece is an extreme case, as its output has fallen 30 percent since 2008, but not a unique case, as peripheral Europe has suffered disproportionately in the post-global financial crisis era. Syriza has already called for a “European debt conference” to renegotiate the current loan debt. No telling what could happen with such a conference; they might find a sympathetic ear or not; they might repudiate their debt, or not. Greece is unlikely to exit the Eurozone, but the Eurozone might try to kick them out, or not. The real risk for the EU is not a Syriza win, nor a Greek exit, but that EU policy fails to evolve and adjust to the shifting political will of its citizens, particularly now that populist and anti-establishment parties are finding their political voice on national and EU levels of representation. It’s not just Greece that has suffered under austerity.

Is Euro QE bearish for the US? It is widely expected that Euro QE will push down the value of the euro currency, which means European exports would be cheaper for US buyers, and in turn could negatively impact US exports which are already feeling the sting of a strong dollar. Further, cheaper euro exports might have a deflationary or disinflationary impact on the US.

Or, is Euro QE bullish for US? When central banks print money, it inevitably sloshes outside of its own borders, and Britain and America are far more attractive homes for that cash right now than Greece or Italy. There are not many investment opportunities in Italy or Greece or Portugal right now. The US has the best prospects of any of the developed nations right now. The economy is expanding at a healthy rate and jobs are being created. The yield on US Treasuries is higher than the yield on sovereign bonds from Germany, France, or Italy – plus the dollar is moving higher. The S&P 500 moved to its highest level since December 30, and above its 50 day moving average. Wall Street loves free money and they don’t particularly care where it comes from.

And then the big question is will ECB QE work? Probably not. The ECB and the Euro Union have been really bad at handling fiscal and monetary policy. What has evolved in the EU region is a crisis between divergent economies, between stronger and weaker member states, roughly divided between core and periphery, resulting in a two-tiered European Union composed of creditors and debtors. Weaker countries are now locked-in to a subjugated relationship with the core. The core continues to demand more austerity, even though it has been a horrible failure, and the periphery is finally realizing that the rent is just too damn high. The current manifestation of this inequity sees Germany keeping a tight rein on ECB policy by pressing Greek debt service beyond the limits of social tolerance.

In 2011, the ECB raised interest rates; compare that to the US Fed starting another round of QE. And then they waited, probably for far too long, to do anything at all. Euro monetary and fiscal policy has been out of step and off base; treating debt and the possibility of inflation as the overwhelming risks, and whistling past the graveyard of deflation and unrelenting weakness and lack of demand.

Today, Societe Generale issued a report saying that the QE plan would likely only add about 0.2% to 0.8% to inflation and overall GDP over the next 2 years; for Eurozone inflation to get anywhere close to a 2% target, the QE would need to be 2 or 3 times bigger. Of course, if the ECB tried to expand the bond buying program to €3 trillion, they would run out of sovereign bonds to buy. And that gets back to the whole problem of QE in the first place; it pumps a whole lot of money into the wrong places. Rather than investing in things like infrastructure or new technology, it pumps money into the financial market casinos.

Of course, most problems seem to be resolved in the richness of time. Deflation and inflation ebb and flow, and eventually the Eurozone will do the right thing, or at least something that resembles the right thing. Expect a lot of volatility before that time. For now the European Central Bank’s QE scheme might be the best hope to return growth to the Eurozone.

Let’s check today’s economic data. US house prices rose a seasonally adjusted 0.8% in November, according to the Federal Housing Finance Agency house price index. October’s gain was revised to 0.4% from 0.6%. Compared to November 2013, prices were up 5.3%, or 4.5% below the April 2007 peak.

The number of people who sought new unemployment benefits in mid-January fell by 10,000, but the level of applicants remained above 300,000 for the third straight week for the first time since July in what’s likely a reflection of post-holiday layoffs. Initial jobless claims declined to 307,000 in the week ended Jan. 10.

The World Bank has issued a forecast on commodity prices; they say all 9 commodity price indices will be down, across the board. We already know that oil prices are down about 55%. The steep decline in oil and related energy products is driving down the cost to extract other commodities. Also a drop in biofuel production is weighing on agriculture prices.

ConvergEx Group polled 306 investment professionals asking, among other things, what oil price would show that a global recession was inevitable; in other words, how low can we go without hurting the economy. The most common answer was $30 a barrel, from 26% of respondents, with $35 a barrel being the second most common answer (16% of respondents). About 68% of the respondents said oil hasn’t reached a bottom yet, and only 20% think it already has. About 66% said current prices are a positive to the US economy.

The US Energy Information Administration said crude inventories rose by 10.1 million barrels on the week ended Jan. 16. Moreover, at 388 million barrels, US crude oil inventories are at the highest level for this time of the year in at least the last 80 years. The oversupply in oil markets is expected to persist through at least the first half of the year, and there’s no indication OPEC or producers outside the cartel would move to cut down on output. Several energy companies have announced capital-budget cuts for this year and some have announced layoffs due to the lower prices, but not significant production cutbacks, at least not yet.

In other news, after almost eight months of constant fighting between Ukrainian troops and Russian-backed separatists, the Ukrainian military lost control of the Donetsk Airport.

Fighters loyal to a renegade general in Libya just seized a Central Bank facility in the coastal city of Benghazi that houses a reported $100 billion in cash and gold.

The president of Yemen quit today, under pressure from rebels holding him captive in his home, severely complicating American efforts to combat al-Qaida’s powerful local franchise and raising fears that the Arab world’s poorest country will fracture into mini-states.

Meanwhile, about 2,500 mainly rich people have gone to Davos Switzerland to attend the World Economic Forum. A bunch of not so rich journalists have followed them. Maybe you’ve seen the pictures and interviews on CNBC or some other network. The interviews take place on a patio with snowy hills in the background; everyone is bundled up in big jackets; it looks cold. For some reason they couldn’t find an indoor location with a picture window.

One of the attendees is Jeff Greene; he’s a billionaire money manager from Florida, and he said, “America’s lifestyle expectations are far too high and need to be adjusted so we have less things and a smaller, better existence. We need to reinvent our whole system of life. Our economy is in deep trouble. We need to be honest with ourselves. We’ve had a realistic level of job destruction, and those jobs aren’t coming back.”

Greene flew to Davos on a private jet with his wife and kids and 2 nannies.

Time for today’s edition of “Banks Behaving Badly”. US and state regulators ordered Wells Fargo and JPMorgan Chase to collectively pay $35 million to settle charges that they participated in an illegal marketing kickback scheme with a now-defunct title company. The CFPB said the former title company, Genuine Title, would give the banks’ loan officers cash, marketing materials and other consumer information in exchange for business referrals; essentially the bank loan officers were trying to make a quick buck rather than treating customers fairly.

The Barclays dark pool drama continues after NY AG Eric Schneiderman accused the British bank of defying subpoenas seeking the testimony of two executives. Previously, the AG accused the bank of false representation and favoring high frequency traders over other investors in its dark pool. Barclays says Schneiderman is overreaching, but it will “continue to seek to cooperate” with the lawsuit.