Financial Review

Dog Days Drag On

Sinclair Noe — August 4, 2016

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

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DOW – 2 = 18,352
SPX + 0.46 = 2164
NAS + 6 = 5166
10 Y – .04 = 1.50%
OIL + .89 = 41.72
GOLD + 2.70 = 1361.40

Another day on Wall Street without conviction. The major indices continue to trade in a very, very tight range.

The Bank of England cut interest rates 25 basis points to 0.25 percent.  The bank also announced it would expand its quantitative-easing program by 60 billion pounds and purchase corporate bonds.

The basic argument for the rate cut is to stimulate economic growth by encouraging people to borrow and invest. This, in turn, should help to spur inflation. The rate cut was widely expected. The extension of bond buying was not as widely expected. The introduction of corporate bond buying will be of particular interest to the markets since it has only briefly been experimented with in the past.

The BoE left its forecast for growth this year steady at 2.0 percent, but 2017 brings a sharp downgrade to growth of just 0.8 percent from a previous estimate of 2.3 percent. Businesses in the U.K. are looking beyond the Bank of England and are calling on Chancellor of the Exchequer Philip Hammond to deliver a “bumper” fiscal stimulus.

The number of Americans filing for unemployment benefits rose last week. Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 269,000 for the week ended July 30. Claims have now been below 300,000, a threshold associated with a strong labor market, for 74 consecutive weeks, the longest streak since 1973.

In separate report, global outplacement consultancy Challenger, Gray & Christmas said employers in the U.S. announced plans to cut 45,346 workers from their payrolls in July, a 19 percent increase from June. Though it was the second straight monthly increase, layoffs were 57 percent lower than in July last year. Job cuts in the energy sector surged 796 percent to 17,725 last month.

Tomorrow is the monthly jobs report from the Department of Labor. The past couple of months have been anything but normal. Employers added a meager 11,000 workers in May, the fewest in almost six years. Payrolls rebounded by 287,000 in June, the most in eight months.

Most estimates are calling for 180,000 or so new jobs in July. Job gains averaged 172,000 a month in the first half of this year. The jobs report is also projected to show the unemployment rate fell to 4.8 percent after climbing to 4.9 percent in June as more people entered the labor force.

As joblessness has reached the Fed’s threshold for full employment, economists are anticipating the pace of payroll growth will slow further. Even if the economy adds just 150,000 new jobs each month, it would push the unemployment rate lower. Wage growth remains flat. A tightening labor market should prompt hiring managers to offer more pay to attract and retain skilled and experienced workers but we really haven’t seen wage pressure.

The US is importing more oil than it’s producing. Domestic production in the U.S. remains under pressure, down 1 million barrels a day in July from a year earlier, while crude imports surged to the highest level since 2012. A large OPEC supply has caused the US to import more oil than it has produced for the first time since January 2014. According to an analyst’s report from Commonwealth Bank, “the increase in US oil imports reflects OPEC’s strategy to target market share instead of price.”

Revenue from tech deals is at its highest level since the dot-com bubble. Tech mergers and acquisitions have brought in $1.9 billion this year, according to Dealogic. That’s up 11.8% from the same period last year and trails only the same period in 2000 ($2.2 billion) for the highest total.

There have been 54 IPOs through July this year, down 54% from 118 deals during the same period in 2015. These IPOs raised $11.5 billion, down 50%. It was the worst year-to-date since 2009. Of the 54 IPOs, 23 were healthcare companies. Their 43% share of all IPOs so far this year is the highest on record, according to Dealogic. Another 11 were in finance. Only 9 were in technology.

Only two IPOs – Twilio and Line – have priced above range, down from 31 last year, the lowest year-to-date number on record. There simply isn’t a whole lot of appetite for overpriced and overhyped IPOs.

The US Chamber of Commerce and the Texas Association of Business filed a lawsuit in Texas federal court that said a regulation from the U.S. Treasury Department in April exceeded what the law allows the department to do. The lawsuit is the first to challenge a rule on inversion, or transactions used by a company whereby it becomes a subsidiary of a new parent company in another country for the purpose of falling under beneficial tax laws.

Typically, they are used by US companies to move to countries with lower tax rates, even though they still maintain much or most of their operations in the US. A wave of inversions largely ended after Treasury moved against the deals. A Treasury spokeswoman said in a statement that its action was based on strong policy interests and clear legal authority. It said the department would continue to defend the regulations to slow the erosion of the US corporate tax base.

JPMorgan Chase said US and British authorities ended probes into its activities involving Libor and other benchmark rates without issuing new fines. JPMorgan paid $89 million to the European Union’s antitrust unit in 2013 as part of a multi-firm settlement in relation to Yen Libor. The bank said at the time this concerned “the conduct of two former traders during a one-month period in early 2007.” Now regulators from both countries say they have closed their investigations without further action.

Toyota slashed its forecast. The world’s largest automaker says full-year operating profit will come in at 1.6 trillion yen ($15.7 billion), down from its previous forecast of 1.7 trillion yen. That would represent a 44% drop in profit, caused mostly by the strength of the Japanese yen. Every Toyota and Lexus model available in the U.S. has posted sales declines in 2016, a trend putting Volkswagen on course to surpass its Japanese rival as the world’s top-selling automaker.

In other earnings news: Shares of the mobile payments company Square rose after it reported strong second-quarter results and raised its projections for the year. The stock rose 8.43 percent.

The hamburger chain Jack in the Box reported better-than-expected results and raised its forecasts for the year. Its stock gained 10.56 percent.

The travel website operator TripAdvisor reported lower revenue growth and profit margins in the second quarter, disappointing analysts. The company also said terrorism was one thing making it harder to predict how its business will perform. Its stock lost 8.49 percent.

LinkedIn reported quarterly earnings that beat analysts’ expectations, as sales popped across the board, with revenue up 31%.

MetLife, the largest U.S. life insurer, reported a quarterly profit that widely missed analysts’ estimates, largely due to weaker underwriting and tax-related adjustment in two of its largest markets. Shares dropped about 4% in after-hours trade.

U.S. government researchers have begun their first clinical trial of a Zika vaccine. Meanwhile, funds to fight the virus are expected to run out in the coming weeks due to congressional inaction. The number of locally spread Zika cases has jumped to 15 in Florida and the number of U.S. states affected has reached 45. As of July 27, 1,658 travel associated cases of Zika were reported across the continental U.S. and Hawaii.

Daily fantasy sports games are resuming in New York after Gov. Andrew Cuomo likened the contests to a “game of skill” rather than “based on chance” and signed a bill that will allow operators like DraftKings and FanDuel to obtain registrations. The law requires them to pay an annual fee of as much as $50,000 with a 15% tax on their revenue. It also bars anyone younger than 18 years old from playing and prohibits college and high school matches.

Just do it! Except for golf – don’t do that. Nike is getting out of the golf equipment business. Nike said it would stop making clubs, golf balls and golf bags, instead devoting its resources to shoes and apparel. And Tiger Woods’ golf bag is going to have a different look whenever he returns. Sales at the Nike Golf division fell 8.2% to $706 million in the fiscal year that ended in May, making it the company’s worst performing major category. Shares of Callaway Golf jumped almost 9% this morning.

Meanwhile, Golfsmith International, the retailer of golf clothing and equipment, is considering filing for bankruptcy. Golfsmith hired the investment bank Jefferies LLC to solicit buyers for the roughly 150-store chain, without success so far.

After six years of effort and about $30 million in investments, space-exploration startup Moon Express has become the first commercial venture to get U.S. regulatory authorization for a mission beyond Earth’s orbit. The company expects to send a small robotic lander to the moon in late 2017, and eventually plans to send people there and may get involved in lunar mining.

Apple spent $850 million last year on a 130-megawatt solar farm near San Francisco, and now Apple can begin selling power into wholesale markets, joining Google parent Alphabet in the energy-trading business. Apple’s subsidiary Apple Energy LLC may sell energy, capacity and other services needed to maintain reliable power, according to an order by the Federal Energy Regulatory Commission.

Apple, together with Google, are among a group of tech companies outside the utility industry ramping up investments in energy projects. In addition to the California solar farm, Apple Energy owns 19.9 megawatts of generation capacity in the Nevada Power Company service area and 50 megawatts in the Salt River Project service area in Arizona. Apple may begin wholesale power sales Saturday.

Financial Review

Libor Antitrust Claims Revived

Sinclair Noe — May 23, 2016

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

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DOW – 8 = 17,492
SPX – 4 = 2048
NAS – 3 = 4765
10 Y – .01 = 1.84%
OIL – .33 = 48.08
GOLD – 3.70 = 1249.20

If you were actively trading the markets today – well, you were probably falling asleep. It was like watching paint dry. The S&P 500 index traded in an 8-point range for the session, drifting from positive to negative without conviction.

Including today, we’ve had 98 trading days this year. On 20 of these days, the S&P moved 0.1% or less. That’s just over 20% of the time. In the prior 10 years, there was a total of 2517 trading days. And the S&P had a total of 288 moves of 0.1% or less. That’s just over 11% of the time. There has been plenty of volatility but it has been interspersed with indecision.

John Williams, president of the Federal Reserve Bank of San Francisco, said Sunday the presidential election wouldn’t prevent the central bank from raising interest rates later this year. Mr. Williams has said that he favors raising rates two or three times this year.

St. Louis Fed President James Bullard said today that the strength of the U.S. labor market, inflation levels that are closer to the Federal Reserve’s target of 2% and easing international pressures are three factors that support the Federal Open Market Committee’s aim for a slow normalization of interest rates. According to FOMC member and Boston Fed President Eric Rosengren the U.S. is on the verge of meeting most of the economic conditions the Fed has set to increase interest rates next month.

The market is trying to digest last week’s Fed minutes and the jawboning from policymakers. Everyone will be following the economic data closely over the next 3 weeks. Meanwhile, the bond market has done some of the work for the Fed; since last Wednesday’s release of FOMC minutes yields have jumped, but the Fed can’t just talk about raising rates and then fail to do the deed without a severe loss of credibility.

Bayer has confirmed its offer to acquire Monsanto with a $122 per share all-cash bid that values the U.S. agribusiness at $62 billion. The drug and chemicals giant anticipates annual earnings contributions from synergies of around $1.5 billion after three years, and said it would finance the deal through a combination of debt and equity.

Bayer said a deal would boost earnings per share by a “mid-single-digit percentage” in the first full year after completion, and by more than 10 percent thereafter. Bayer would likely abandon the Monsanto name following the purchase, which would help distance Bayer from Monsanto’s link to genetically modified foods.

The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the US. But that doesn’t mean you want to bet the farm on GMOs. In the United States organic food sales have grown steadily at around 10 percent a year since the Great Recession (and at higher rates before that), which puts the stock market to shame.

In 2015 organic product sales revenue grew 11 percent, while the rest of the food market grew at a rate of 3 percent, according to the Organic Trade Association’s annual survey of the industry. Total sales reached $43.3 billion, which makes the organic industry a force to be reckoned with. For comparison, Monsanto brought in just under $15 billion in revenue last year.

Anthem and Cigna are quarreling and could delay their merger. The Wall Street Journal reported that disagreements could delay antitrust approvals, which would make the $48 billion deal possible. The report said the two health insurers accused each other of violating the terms of their agreement announced last July. A deal would create America’s largest health insurer by members.

Tribune Publishing rejected Gannett’s latest $864 million takeover offer, saying the$15 per share in cash was inadequate, and they have a turnaround plan in place. Tribune Publishing, the owner of the Los Angeles Times and the Chicago Tribune, said billionaire Patrick Soon-Shiong invested $70 million in the company, becoming its second largest shareholder. Still, Tribune said it had invited Gannett to an agreement under which the companies could engage in discussions to see whether a transaction was in the best interests of Tribune and Gannett shareholders.

Ares Capital Corp, an investment and finance company focused on mid-sized firms, is buying smaller rival American Capital Ltd in a cash-and-stock deal valued at $3.4 billion to better fill the credit gap created as big banks turn cautious. The deal, which does not include American Capital’s mortgage management unit, comes about five months after American Capital said it would solicit offers. Ares is the biggest BDC, or Business Development Company, in the United States by assets while American Capital, in addition to operating as a BDC, has a large asset management business.

Due to the U.S. crackdown on tax inversions, CF Industries is calling off an $8 billion deal to acquire several European and North American operations from OCI of the Netherlands. The two said that they were unable to restructure the acquisition, which would have created the world’s largest publicly traded nitrogen company, in a way that would be attractive to their shareholders.

Sixteen of the world’s largest banks must face antitrust lawsuits accusing them of harming investors who bought securities tied to Libor by rigging the interest-rate benchmark, a ruling that an appeals court warned could devastate them.

The appellate judges reversed a lower-court ruling on one issue, whether the investors had adequately claimed in their complaints to have been harmed, while sending the cases back for the judge to consider another issue: whether the plaintiffs are the proper parties to sue, in part because their claims, if successful, provide for triple damages that could overwhelm the banks.

About a dozen firms have paid almost $9 billion in fines to resolve government investigations around the world into rigging of the key benchmark. The ruling by a three-judge panel opens the possibility the banks may have to pay billions more. Libor, or the London Interbank Offered Rate, underpins hundreds of trillions of dollars of transactions and is used to set rates on credit cards, student loans and mortgages. It is calculated based on submissions by banks.

In their lawsuits, the plaintiffs claim that beginning in 2007 the banks colluded to depress the Libor rate to minimize the amount they had to pay out on investments linked to the benchmark. The Libor-tied investments included asset swaps, collateralized debt obligations and forward rate agreements. The appeals court overturned a 2013 ruling which said the investors had failed to show that they were harmed in a way that would permit them to sue under U.S. antitrust law. Last year, the U.S. Supreme Court permitted the bondholders to appeal the dismissal of their antitrust claim.

The Second Circuit reinstated the lawsuit today, ruling that the alleged horizontal price-fixing constitutes an antitrust violation, basically the district judge got it wrong by adopting a categorical rule that because the banks were cooperating in setting Libor they could not be violating antitrust rules. That argument is that since banks operate as both borrower and lender in Libor transactions, any conspiracy to gain as a borrower would be offset by losses as a lender. However, there might be another argument: that the banks suppressed Libor during the financial crisis to boost earnings or make their finances appear healthier.

The New York-based appeals court remanded the case so that the lower court could reach the second component of standing for asserting an antitrust injury – whether the bondholders are efficient enforcers of antitrust law; in other words, the lower court could dismiss the case again, for new reasons.

Greece’s parliament has approved a raft of fresh taxes and austerity measures needed to unlock further rescue loans, as the country’s most influential creditors – Germany and the IMF – remain deadlocked over debt relief. “Greeks have already paid a lot, but this is probably the first time that the possibility of these sacrifices being the last is so evident,” Prime Minister Alexis Tsipras told lawmakers. Athens hopes the measures will bolster sentiment ahead of tomorrow’s key Eurozone finance ministers meeting.

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services. The federal lawsuit names Puerto Rico’s Governor and Treasury Secretary as well as an unidentified bank receiver. It argues that amendments give preferential treatment to local creditors at the expense of others in violation of American and Puerto Rican law.

The U.S. will fully lift the decades long ban on sales of lethal arms to Vietnam. Speaking in Hanoi, President Obama said lifting the arms embargo would remove one of the last vestiges of the Cold War, it also opens up non-military markets. Vietnam’s VietJet has agreed to order 100 Boeing 737 MAX 200 airplanes, in a deal worth $11.3 billion based on list prices. Delivery of the planes will run for four years beginning in 2019, and will make the airline one of the fastest growing low-cost carriers in the region.

More than 38 million Americans—the most since 2005—are expected to travel during this year’s Memorial Day holiday period, May 26 through Monday, May 30 – and about 90% are expected to drive.  AAA reports gasoline prices are the lowest they’ve been this time of year since 2005. The national average price is $2.26 for a gallon of gasoline; that’s up significantly from the $1.70 a gallon that regular grade gas hit in February but down 40-cents from the average price last Memorial Day. Prices are expected to inch higher over the next few days, heading into the holiday. Meanwhile, truckers will pay about 50-cents per gallon less for diesel versus last year.

We Have Met the Enemy

Financial Review with Sinclair Noe — September 11, 2014

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

 

DOW – 19 = 17,049
SPX + 1 = 1997
NAS + 5 = 4591
10 YR YLD – .01 = 2.53%
OIL + 1.38 = 93.05
GOLD – 8.80 = 1241.20
SILV – .27 = 18.77

I’m fairly certain that at some point during this day you have taken at least a moment to recall where you were 13 years ago, how you heard the news, how you responded to the news. Maybe you can recollect specifics or maybe some of the memories have faded in time. What you knew exactly 13 years ago is probably quite different than what you know today.

Last night I watched the president announce another war; this one will be different than the last one; so we are told. The plan is to expand the airstrikes against ISIS and take the fight to their base in Syria. It is no longer just about protecting American embassies and limited humanitarian efforts. The new plan is open-ended, and will likely be long-term. We won’t have combat troops on the ground, but we will have troops in Iraq; about 1600 US troops; I’m fairly certain they are capable of combat if pushed. Boots on the ground combat will come from Iraqi forces and Syrian rebels, apparently.

House Speaker John Boehner says the country should unite behind the administration, even if we don’t know all the details of the plan. Some opposition has come from both the left and right wings. Congress will vote on it next week, and it will likely pass, but there are no guarantees of passage; it may be the only thing Congress can agree on.

Even if nobody actually knows what the threat is or why it’s imminent. American intelligence agencies have concluded that ISIS poses no immediate threat to the United States. Some officials and terrorism experts believe that the actual danger posed by ISIS has been distorted in hours of television punditry and alarmist statements by politicians, and that there has been little substantive public debate about the unintended consequences of expanding American military action in the Middle East. One thing that politicians are good at is spinning the public into a panic.

The big issue in Washington is how war might affect the midterm elections; which is entirely the wrong reason for doing anything. Administration officials told lawmakers in a closed briefing that the new counter-terrorism campaign is covered by the broad authority Congress granted President George W. Bush in 2001, after the 9-11 attacks, and in 2002, to enter the Iraq War.

Secretary of State John Kerry is traveling the region this week to build the international coalition Obama is seeking to take on ISIS. Today, Arab states vowed to “do their share” to destroy ISIS. A joint communiqué issued by the United States and 10 Arab states endorsed a broad strategy to stop the flow of volunteers to ISIS, curtail its financing and provide aid to communities that had been “brutalized” by the militants. It also called for a coordinated military campaign in which nations would contribute “as appropriate.” None of the Arab participants said precisely what they would do, and it remained unclear whether any would join in the actual fighting.

Kerry hopes to sign up as many as 100 countries, which would make for some strange bedfellows. Decades of entrenched autocratic mismanagement and abusive rule in the Middle East and North Africa cannot be erased overnight; I am not confident they can be reversed by foreign intervention. Populations in the region will have to chart their own course in struggles that are likely to be volatile and deadly. The US and others cannot do it for them. Maybe we can help in some way, but our help tends to have unintended consequences and high price tags.

I don’t know how this will all play out over time, but my guess is that it will be a nasty, slow-motion train wreck. And 13 years from now, we’ll look back and be amazed at where we are and how we got there. Yes, I remember where I was on 9/11. I think where we ended up is more important.

Meanwhile, America’s NATO allies face other security challenges, foremost of them Russia’s aggression against Ukraine. Despite the current ceasefire in Ukraine, the US will unveil new sanctions against Russia’s financial, energy and defense sectors. President Obama said that the US “has yet to see conclusive evidence that Russia has ceased its efforts to destabilize Ukraine.” If Russian President Vladimir Putin pulls out of Ukraine, the sanctions could be rolled back, but if “instead Russia continues its aggressive actions and violations of international law, the costs will continue to rise.”

Russia offered up some of the strongest reaction to the plan to go after ISIS. Remember, Russia is Syrian President Bashar Assad’s main international ally. A Russian Foreign Ministry statement said such military action without a UN Security Council resolution “would be an act of aggression and flagrant violation of international law.”

You might think that the geopolitical problems might give Wall Street a pause, but that doesn’t seem to be the case. The Wall Street Journal’s monthly forecasting survey polled economists on whether their outlook for the world’s largest economies had improved or deteriorated. The survey of 48 economists showed that a resounding majority believe things in the US are likely to improve over the coming year, versus the first half of 2014. But their attitudes towards the eurozone, Japan and China were mixed. One-quarter of economists said their outlook for China had improved, versus nearly 40% that said it had deteriorated. Around 40% said their outlook for Japan had improved, while around one in eight said it had deteriorated. For Europe, about one-third said their outlook had improved, roughly balanced with the share seeing a worse outlook. There was no apparent concern about geopolitical hotsppots.

If anybody is going to end the bull market party, it’s more likely that we will just make a mess of things all by ourselves.

Corporate America celebrates 9-11… no, that’s not the right word, they commemorate…., no that’s not the right word either; they stupidly think they are required to send out social media messages marking the day. That’s it, they’re marking the day: CVS Pharmacy says: We Remember. White Castle hamburger also says: We remember. The Vitamin Shoppe says: We pause and remember. Bikram Yoga says: 9 + 11 = 20% off! Patriot Day Sale. If you ever needed absolute proof that corporations are not people, just check the corporate 9-11 tweets.

And as for the idea that corporations are patriotic, well, tax inversions destroyed that myth. You might think the shame would push them to do the right thing, which is funny. But now we find out it is bad business. Standard & Poor’s Rating Services warned tax-dodging deals known as “tax inversions” could hurt the credit ratings of the companies that do them. When humans have lower credit ratings, they have a harder time borrowing money for new Camaros or iPhone 6 Pluses or whatever. When companies have lower credit ratings, they have a harder time buying computers or private jets or whatever.

But wait, you might be thinking, isn’t the whole point of dodging taxes to get more money, which usually means better credit ratings? Sure, but it doesn’t always work out that way. Here’s why S&P thinks tax inversions are bad: Companies will often borrow a bunch of money today to buy a company to get that sweet tax-free cash in the future. That’s not good for credit ratings. And sometimes they’ll buy another company just for the tax break and then realize, too late, that merging with that other company makes no actual business sense. Everybody suffers, business suffers, credit ratings suffer, and those tax breaks don’t seem so sweet any more.

Companies will also do kind-of-stupid things once they get their hands on money. Tax-inversion deals let them tap all the cash they’ve been hiding offshore from Uncle Sam. Then they give it all away to shareholders and their executives, or maybe they place a bet at the racetrack. Next thing you know, the money’s gone. That’s also bad for the credit rating.

Now you might think that the bad PR would be another reason why companies should not do tax inversion deals, but that would be wrong. There might be some fallout from a boycott of Walgreens or Burger King, but you know and I know and corporations know the consuming public is an unorganized mess. And the threat of boycott or angry speeches from politicians threatening to actually do something, which we all know is just bluster; that has just encouraged the companies to hurry up and do deals while they still can.

Ever notice how the stock market and corporate profits are at all-time highs, while our wages are flat and roughly half of us still think the economy is in recession? America’s capitalists take every chance they get to remind us that they are our “job creators,” but it turns out that their least-favorite thing on earth to do is create jobs. Most U.S. business leaders would rather build robots, outsource work or use part-time employees than hire workers full-time, according to a new Harvard Business School survey; 46 percent of our job creators would rather spend money on technology than employ humans, compared with a sad 26 percent who prefer people to robots, and another 29 percent who were confused or indifferent about the question or fell asleep while the survey taker was talking. Forty-nine percent would rather outsource than hire, compared with 30 percent who’d rather hire.

This is also bad news for the future of the economy because it means fewer workers are getting the training they need for our super-awesome, high-tech, no-job economy, Harvard pointed out: “Firms invest most deeply in full-time employees, so preferences for automation, outsourcing, and part-time hires are likely to lead to less skills development.” This will give business leaders, who already think we lack the necessary skills for their precious jobs, even less reason to hire us in the future.

Pogo said it best: We have met the enemy and he is us.