Financial Review

Lonesome Tom and Tom Alone

Sinclair Noe — January 27, 2016

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DOW – 222 = 15,944
SPX – 20 = 1882
NAS – 99 = 4468
10 Y + .01 = 2.00%
OIL + .71 = 32.16
GOLD + 5.00 = 1125.70

Stocks started the session down, a little over 150 points, then rallied and turned positive, then the Fed released its policy statement to wrap up its two-day FOMC meeting, and stocks fell again; 350 points from peak to trough, even though there was no surprise in the statement.

The Federal Reserve statement had a few changes from the last statement. First, there was no change in interest rates – as expected. The Fed says it expects the economy will continue to warrant only gradual rate increases – as expected. They will closely monitor global economic and financial developments – a soft backpedal from December, when they said risks were balanced. Not a big surprise.

Inflation is expected to remain low because oil prices are down, but that won’t last forever – yeah, yeah. The strong dollar is a bit of a drag. Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year – an acknowledgement that economic growth slowed, well that’s different.

Their confidence in the economy has eroded since December. Not exactly. The Fed also noted the strength of some economic measuring sticks, including continued job growth, more spending by businesses and consumers, and the revival of the housing market.

All in all, the Fed statement was expected. So why did the market selloff? Well, they didn’t rule out another rate hike at the March 16 FOMC meeting; they didn’t commit to a hike either. So, go figure; and while you figure, sell something.

Purchases of new U.S. homes surged in December to the highest level in 10 months, closing out the best year for housing since 2007. Sales jumped 10.8 percent last month, the most since August 2014, to a 544,000 annualized pace. For all of 2015, purchases of new properties climbed 14.6 percent to 501,000. The warmest December on record probably played a big role in the stronger-than-forecast sales gain during the month, but the most basic reason is that demand is outpacing supply.

Puerto Rico plans to meet with creditors on Friday to discuss a possible restructuring of $70 billion of municipal bonds. The talks come as the island struggles to make progress on two tracks – striking deals with bondholders and persuading U.S. legislators that it merits relief from the federal government. Further complicating the process, the territory has more than a dozen types of bonds and is negotiating simultaneously with several creditor groups that have competing claims.

Facebook reported another quarter of soaring revenue. Sales rose 52 percent from a year earlier to $5.84 billion on the strength of its mobile advertising business and an increase in daily users. Profit rose to $1.56 billion, more than doubling from a year earlier. The numbers far surpassed Wall Street’s expectations of $1.2 billion in profit on $5.37 billion in revenue. Facebook reported after the close, and shares jumped in after-hours trade.

Boeing says profit this year will miss analyst estimates by more than a dollar a share as it delivers fewer jetliners. Adjusted profit will probably be $8.15 to $8.35 a share this year. That compared with an average prediction of $9.42.

PayPal’s fourth-quarter sales beat estimates, as it won new vendors and made mobile purchases easier, reassuring investors concerned about the company’s prospects as an independent company. Profit, excluding some items, was 36 cents a share (2 cents better than estimates) on revenue of $2.6 billion. After separating from EBay last year, PayPal increased its total payments volume by bringing on new merchants and enticing shoppers with a Buy button that streamlines transactions on smartphones.

Royal Dutch Shell shareholders approved its $50 billion takeover of BG Group today, clearing the last main hurdle to creating the biggest liquefied natural gas trader in the world. The merger could happen as soon as February 15.

Three major U.S. shale oil firms announced big cuts to their 2016 capital spending plans yesterday in a bid to survive $30 a barrel oil prices, with one of them saying prices would need to rise more than 20% just to turn a profit. The cuts from Hess Corp., Continental Resources and Noble Energy ranged from 40% to 66%, marking the second straight year of pullbacks by a trio of businesses normally seen as among the most resilient shale oil producers. The American Petroleum Institute late Tuesday reported that crude supplies climbed by 11.4 million barrels for the week ended Jan. 22.

Since passage of the last major energy law, in 2007, the United States has gone from fears of oil and gas shortages to becoming the world’s leading producer of both fuels. The use of wind and solar power is rapidly accelerating as those sources become cheaper than fossil fuels in some parts of the country. And President Obama’s clean air regulations are reshaping the nation’s power systems, as electric utilities shutter coal-fired power plants and replace them with alternative sources.

But the nation’s energy infrastructure has not kept pace with those changes. And so Congress today started debating a comprehensive energy bill for the first time in more than 8 years. Right now, Congress is just talking and they might not do anything.

Just hours after senators began debating the bill, it came under attack by both liberal and conservative advocacy groups. In a letter to senators, the Sierra Club complained that the bill’s section on energy efficiency in buildings would actually roll back some existing efficiency standards.

Americans for Limited Government, a conservative group, urged lawmakers to reject the bill. In a letter, the group wrote, “There is no excuse for the Senate to move forward with legislation that continues the practice of picking energy winners and losers, expands federal government authority and fails to turn control of federal lands back to the states.”

California regulators are set to decide how much rooftop solar customers can get for selling their excess clean energy. The California Public Utilities Commission will consider a proposal about continuing a policy called net metering, which requires utilities to pay rooftop solar customers the full retail rate for electricity they put onto the grid.

The solar industry has been largely supportive of the proposed measure while the state’s investor-owned utilities have called it unfair and say it means people who don’t have solar systems are subsidizing those who do, so they want to pay less. Seems the utilities don’t want to pay for electricity. I know the feeling.

Meredith Corp. walked away from its attempt to merge with Media General; that opens the door for Nexstar Broadcasting Group to proceed with its plan to acquire the TV station owner after months of negotiation.  Meredith, the owner of broadcast stations and magazines like Better Homes and Gardens, agreed to a termination package that includes a $60 million breakup fee.

Media General initially agreed to acquire Meredith for $2.4 billion in September. Nexstar later offered to buy Media General, eventually reaching an agreement for about $2.3 billion. But that deal couldn’t move forward until Meredith released Media General from its commitment.

Four years after unveiling its wearable glass headset, Alphabet has shut down several social media accounts linked to its Glass gadget, ending the push to popularize its hi-tech eyeglasses. Google stopped selling Glass to consumers last year, but unveiled a reboot of the device, called GG1, in December.

Meanwhile, Google’s secretive drone delivery project could include a component designed to store packages securely. A patent filed Tuesday in the United States, describes a “delivery receptacle” designed to take packages from an “aerial delivery device” for deposit to a secure location. The receptacle would use infrared beacons to connect with drones in the air and then guide them for delivery.

FedEx announced a new share repurchase program covering up to 25 million shares ($3 billion at current prices). The question is what will they do when the drones take over?

Despite a slight drop in sales, Toyota managed to hang on to the title of world’s best-selling automaker in 2015. The company sold 10.15 million cars last year, while Volkswagen came in second with 9.93 million autos, followed in third place by General Motors with 9.8 million vehicles. Volkswagen had been top in the first half of 2015 before a diesel emissions scandal set back sales.

The Federal Trade Commission has a filed a suit against DeVry, alleging that it deceived students with promises they would find jobs that would pay more than they would earn with degrees from other colleges. The FTC said DeVry claimed that 90% of its graduates' land jobs within six months of completing their studies, and that they earned 15% more on average than others.

A jury in London has acquitted five former brokers of charges that they helped a onetime trader at UBS and Citigroup manipulate an important benchmark interest rate known as Libor. The jury is still considering charges against a sixth broker. Prosecutors had accused the men of helping Tom Hayes, a former trader at UBS and Citigroup, by rigging Libor, which helps determine the borrowing costs for trillions of dollars in loans.

In December, Hayes was sentenced to 11 years. A dozen banks have been fined about $9 billion by global authorities over the last four years in relation to the manipulation of Libor. So, there you have it, Tom Hayes rigged a multi-trillion-dollar marketplace all by his lonesome, resulting in billions of dollars of fines; no executives knew anything or helped this mid-level trader, just Tom. Now move along, move along, nothing more to see.

Financial Review

Cleaning Up

Sinclair Noe — August 3, 2015

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

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DOW – 91 = 17,598
SPX – 5 = 2098
NAS – 12 = 5115
10 YR YLD – .05 = 2.15%
OIL – 1.95 = 45.17
GOLD – 9.10 = 1087.10
SILV – .30 = 14.59

This is going to be an extremely busy week. We still have a third of S&P 500 companies to report earnings. There’s also going to be a plethora of economic activity culminating in the Friday jobs report for July. Oil prices hit a six month low. It’s not just oil. Commodities prices across the board are falling thanks to slowing global demand and a rising dollar. All of this makes it very unlikely we’ll see a big pickup in inflation any time soon.

The Athens Stock Exchange reopened today and it was ugly. The ASE Stock Index dropped 23% after being closed for five weeks, with banking shares down by as much as 30%. The index managed to recover from session lows but still closed down 16%. While local traders are able to buy stocks, bonds, derivatives and warrants under certain conditions, international investors don’t face any restrictions, as long as they were active in the markets before they were shuttered.

The selloff shows the scale of the crisis still facing Prime Minister Alexis Tsipras as he negotiates a third bailout with creditors after six months that have put unprecedented strain on the Greek economy and its financial system.

As expected, Puerto Rico missed a $58 million debt payment due over the weekend. Because the deadline was Saturday, the PFC technically has until the end of Tuesday to make its missed payment, but it appears unlikely to make a difference. Puerto Rico does not have the money to pay. Puerto Rico faces a grim future. It’s operating with a $703 million budget deficit for the fiscal year that began last month. And the commonwealth faces $635 million in debt-service payments this month. Many investors are already focusing on broader questions around how Puerto Rico will restructure its $72 billion in debt, what kind of a “haircut” bondholders will need to take and what reverberations will spread to the U.S. municipal bond market.

A default is imminent and it will be the largest government debt restructuring in US history, and maybe the messiest. Puerto Rico’s indebted central government, municipalities and public corporations cannot file for bankruptcy protection without the OK of the U.S. Congress, which leaves them at the mercy of what could be hundreds of lawsuits filed by creditors. Without a referee in the form of a bankruptcy court, it’s going to be a mess.

Over the years, mutual-fund managers have had an incentive to buy Puerto Rican bonds, because their returns are tax-free. And many well-known mutual funds have significant exposure to Puerto Rico, including Oppenheimer, Franklin, Eaton Vance, and others. So on one side you have Main Street America, Mom and Pop investors who may or may not have known what they were buying in those mutual funds. On the other side you have Puerto Rican citizens, facing severe cutbacks and added costs for everything from driving on their roads to healthcare. Meanwhile, hedge funds have been swooping in like vultures on a carcass, buying bonds at steep discounts and hoping to force repayment through the courts. The hedge funds issued a report demanding huge budget cuts and privatization; even that is unlikely to get the island out of debt.

Chinese regulators restricted short selling of stocks, freezing out day traders, in their latest step aimed at stabilizing the world’s second-largest equity market. Investors who borrow shares must now wait one day to pay back the loans. This prevents investors from selling and buying back stocks on the same day.  Under the old T+0 rule, you could go short in the morning and cover your shorts before market close the same day and lock in your profit, if your bet is right. Now with T+1, you can’t cover your short position in the same day, and have to wait till next day at the earliest. That makes shorting a much more risky venture.

Pacific Rim trade officials failed to clinch a final deal for the Trans-Pacific Partnership on Friday following several days of intense talks in Hawaii. Key sticking points: Auto trade between Japan and North America, New Zealand’s dairy exports and monopoly periods for next-generation drugs. The deadlock may also sink U.S.-led plans, which aimed to finalize the trade deal by the end of 2015.

President Barack Obama has officially revealed a finalized version of a plan to reduce the amount of carbon dioxide emissions that power plants across the country can emit. Obama called the plan “the single most important step that America has ever taken in the fight against climate change.” Adding that “there is such a thing as being too late on climate change.”

While US power plants have limits on other air-born pollutants — like nitrogen and sulfur oxides that cause acid rain — there haven’t been limits, until now, on the levels of carbon dioxide emissions that power plants can emit. Power plants that burn fossil fuels, both coal and natural gas, emit carbon dioxide and in turn these greenhouse gases contribute significantly to the warming of the planet.

The Obama administration has turned to the Environmental Protection Agency to use the Clean Air Act to regulate carbon dioxide emissions from the power industry through the Clean Power Plan. The White House has used the EPA because politically a national carbon emissions reduction plan wouldn’t be able to pass through Congress.

States will be allowed to create their own plans to meet the requirements and will have to submit initial versions of their plans by 2016 and final versions by 2018. The most aggressive of the regulations requires that by 2030, the nation’s existing power plants must cut emissions by 32 percent from 2005 levels, which is an increase from the 30 percent target proposed in the draft regulation. Electric power generation from coal and natural gas plants is responsible for 40% of U.S. carbon emissions.

Clearly, the clean power industries, including solar, wind and even smaller sectors like geothermal, will benefit greatly from the plan. States that opt to meet their requirements by investing in clean power projects could be a major boon to these technologies. Solar and wind project developers include SunPower, First Solar, NRG Energy, and SunEdison. The natural gas industry will also be a major beneficiary of the plan. The coal industry, of course, is one of the major losers in the plan. One of the leading and most economical ways to reduce carbon emissions from coal plants is to simply shut them down, particularly aging plants. At least one fifth of the coal plants in the U.S. have been closed, or are in the process of closing.

The Obama administration says the plan could lead to “30 percent more renewable energy generation in 2030″ and “create tens of thousands of jobs.” Consumers will collectively be able to save “$155 billion from 2020-2030″ on energy bills, and $85 a year on an individual energy bill by 2030.

The Institute for Supply Management’s manufacturing index fell to 52.7% in July from 53.5% in June. Readings greater than 50 indicate expansion. ISM reported that 11 out of 18 industries reported growth with five reported contractions. The group’s employment measure declined from a month earlier and order backlogs slumped. And for some reason, the data was released just a bit earlier than the scheduled 7:00 AM time.

Spending on U.S. construction projects rose just 0.1% in June, well below forecast. Spending advanced 0.4% for new houses, condos, apartment buildings and other residential properties. Outlays on nonresidential and commercial projects was flat.

Consumer spending edged up 0.2 percent in June, the poorest showing since a similar increase in February; and the government revised the spending gain in May to 0.7% from 0.9%.The largest drop in spending involved big-ticket items such as new cars and trucks, according to the Commerce Department; now a quick note here, we also had a report from the car companies saying auto sales were strong in July – more on that in a moment. Even as spending tapered off, incomes continued to rise steadily. Personal income climbed 0.4% in June for the third straight month.

U.S. auto sales were stronger than expected in July and kept the industry on pace for its best performance since the turn of the century. Auto sales rose 5.3 percent to 1.51 million vehicles, above the 3 percent rise expected by analysts, according to Autodata Corp. The figures translate to an annualized sales rate for July of 17.55 million vehicles and keeps the auto industry on a pace for its best year since 2000. High-margin pickup trucks helped sales of the two market leaders, GM and Ford. GM had record sales of the Colorado pickup. Ford’s F-Series sales alone topped those of all Ford and Lincoln brand sedans.

Alpha Natural Resources has filed for bankruptcy in Virginia. The second-largest US coal company has lost almost all its market value since 2011, when it bought Massey Energy Co. for about $7 billion. The deal made it the biggest U.S. producer of metallurgical coal, used in steelmaking; it also saddled the company with debt, right before prices began their plunge.

Former UBS and Citigroup trader Tom Hayes, the first person to stand trial for manipulating Libor, was found guilty of eight counts of conspiracy to rig the benchmark rate. Hayes has been sentenced to 14 years. Jurors in London found that Hayes conspired with traders and brokers to manipulate the London interbank offered rate to benefit his own trading positions. After initially cooperating and being admitted into a whistle-blower program, Hayes had a change of heart and pleaded not guilty. Throughout the trial Hayes insisted his managers at UBS and Citigroup had known of his attempts to manipulate Libor and at no point told him he was doing anything wrong.  Apparently the defense of “everybody else was doing it, too” is not a particularly strong defense. Now it will be interesting to see if prosecutors will go back and revisit Hayes’ earlier claims that rate rigging was systemic. Having followed the trial, it is hard to imagine Hayes was a mastermind.

Financial Review

Risk Off

Sinclair Noe — July 27, 2015

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

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DOW – 127 = 17,440
SPX – 12 = 2067
NAS – 48 = 5039
10 YR YLD – .04 = 2.23%
OIL – .75 = 47.39
GOLD – 5.00 = 1095.50
SILV – .20 = 14.64

Chinese stocks fell sharply today. The Shanghai Composite fell 8.5% to record its largest one-day drop since June 2007, and the Shenzhen A-shares index lost 7% of its value. Weak manufacturing data revealed that profit at the country’s industrial firms dropped 0.3% in June from a year earlier, but the markets appear to be responding to government attempts to stabilize the country’s volatile stock markets; it seems like the Chinese government’s heavy-handed intervention measures are spooking investors. The fear is that the government will withdraw stimulus measures, and once the support disappears, the market won’t be able to stand on its own. In a way, the investors might be front-running the government; getting out before stimulus dries up.

Commodity prices resumed their downward spiral with the CRB commodities index hitting its lowest levels in six years and oil prices hitting a four-month low. Nine of the 10 major S&P 500 sectors were lower with the energy index leading the decliners. Stocks came off session lows in the close. The S&P 500 dipped below its 200-day moving average of 2,064 and closed a few points above it. The energy sector was the worst performer in the S&P 500 as oil extended losses to trade below $48 a barrel. The Dow Jones industrial average closed at its lowest level since February 2.

Earnings season continues with big oil, social media stocks and pharma companies scheduled to report this week. Second-quarter S&P 500 earnings have been mixed, with 74 percent of companies beating analysts’ profit expectations but just 52 percent surpassing revenue expectations. Adding to the concerns regarding lukewarm earnings, the S&P 500 is relatively expensive, trading at 16.9 times forward 12 months’ earnings, above the 10-year median of 14.7 times. Adding to negative sentiment on growth, the number of new lows on the New York Stock Exchange hit the highest level since last October.

The Federal Reserve FOMC will meet this week to determine monetary policy. With the central bank widely expected to hold policy steady at this week’s meeting, Fed watchers are looking to the statement it issues on Wednesday for clues on when they might hike interest rates. Economists surveyed by Bloomberg put the odds of a September rate increase at about 50 percent.

It looks like Greece is on its way some sort of bailout deal, and they might re-open their stock market as soon as tomorrow; it has been closed since June 29. When the Athens exchange reopens, it might be hard to find many buyers. Meanwhile, the International Monetary Fund is telling the European Central Bank that it needs to keep printing money under their QE program to “ensure that banks continue to have access to ample liquidity and maintain orderly conditions in sovereign debt markets”. All this in light of stories that Greece’s former finance minister Yanis Varoufakis had set up an alternative monetary system, sort of based on the drachma, just in case negotiations did not work out.

There was a moment where Greece really did look like it was about to face an imminent default, and when negotiations progressed, anyone who hedged in anticipation suddenly found those hedges aggressively hurting their portfolios. The reality is that any sort of hedging or risk management has been punished in the last two years, with the early July action perhaps the most severe in terms of speed. Stocks begin falling AFTER Greece, which seems like bad timing for risk off, and it might serve as a reminder that we’re not out of the woods just yet.

Following five long years of negotiations, the Trans-Pacific Partnership will go down to the wire this week, as Pacific Rim officials meet in Hawaii for talks that could make or break the deal. The toughest issues have been left until last, including monopoly periods, preferential treatment for state-owned companies and opening protected markets to competition. TPP would cover 40% of the world’s economy, including the U.S., Japan and ten other Pacific nations.

In a rare weekend session, the US Senate voted on Sunday to advance legislation that would resurrect the Export-Import Bank, whose charter expired on June 30 and was not renewed by Congress. The bipartisan vote allowed supporters to attach a measure reauthorizing the federal credit agency to an unrelated three-year highway and infrastructure bill, which was expected to pass in the Senate early this week. Of course, nothing is ever that simple. And it now looks like the House might not approve the 3 year highway package, opting for a 5-month stop-gap package. The Highway Trust Fund has suffered from 33 short-term fixes since 2009, making it harder for states to launch work on needed large-scale transportation projects. The majority of the money for the fund comes from the federal gas tax of 18.4 cents per gallon, which has remained untouched since the early 1990s.

Is it a debt or deficit problem? Puerto Rico’s bondholders and three former IMF economists have presented a rival recovery plan for the US commonwealth, stating it could move to a surplus by fiscal 2017. The new study argues that the island could avoid a restructuring by eliminating its deficit, but acknowledges that it is cash strapped in the short term and would need some kind of financing to bridge the gap.

Orders for durable goods climbed 3.4% in June, mostly because of strong bookings for passenger airplanes. But overall business investment remained soft and shipments of goods barely rose. Orders minus transportation rose 0.8%. That’s the highest gain since August 2014, but not an especially strong advance. Meanwhile, orders for core capital goods – a reflection of business investment – rose a mild 0.9% in June following two straight declines. Still, core orders are running 3.4% below 2014 levels halfway through the year.

Teva Pharmaceuticals has agreed to buy the generic-drug business of Allergan for about $40.5 billion in cash and stock, ending its effort to acquire rival Mylan. Allergan will receive $33.75B in cash and shares in Teva, giving it a 10% stake in the enlarged company. The acquisition further extends a wave of mergers that has swept over the healthcare industry. Pharmaceutical deals so far this year have topped $180 billion, on pace to beat the $200 billion announced in 2014.

As oil prices slump for a second time this year, the world’s biggest energy groups have shelved $200 billion of spending on new projects in an urgent round of cost-cutting aimed at protecting investors’ dividends. Among companies postponing big production plans while they wait for costs to come down are BP, Royal Dutch Shell, Chevron, Statoil and Woodside Petroleum. Crude prices have now fallen 20% since hitting five-month highs in early May.

General Electric wants to be a “sizable” player in the market for energy storage systems, a sector the company expects to quadruple to $6 billion by 2020. Demand for industrial battery systems has attracted a wide range of companies, including Tesla Motors, which said in April it plans to package batteries for utilities as well as homes and businesses.

Even as stocks struggle, we have some new IPOs ready to hit the market. Planet Fitness filed; they hope to raise about $284 million. Square, the credit card reader for mobile devices is rumored to be going public; no filings yet. Television maker Vizion has filed with the SEC and hopes to raise $172 million in its IPO.

The Apple Watch will be available at more than 100 Best Buy stores in the US starting in August, and more than 300 locations before the holiday season, marking the first time the watch will be sold outside of the Apple retail store.

More M&A is expected in the financial-related media industry. Pearson has moved closer to an exit from business publishing after it announced plans to dispose of its stake in The Economist, just days after the sale of The Financial Times.

McGraw Hill says it has reached a deal to buy SNL Financial from private-equity firm New Mountain Capital for $2.2 billion. SNL offers data, analytics and research into a range of areas including real estate, media and banking.

A jury in London has begun deliberations on whether Tom Hayes, the first person to go on trial accused of rigging rates, dishonestly conspired with other bankers and traders to manipulate Libor. Hayes faces 8 counts of conspiracy to defraud, covering a 4 year period when he worked as a trader for UBS and then Citigroup. Hayes initially cooperated with law enforcement, but apparently he couldn’t work a deal, so he went to trial, arguing that he was not personally dishonest because Libor rigging was commonplace in the industry and all his actions were transparent with the full knowledge of his bosses and colleagues.

The NHTSA is close to hitting Fiat Chrysler Automobiles with a record $105 million fine for recalls affecting more than 11 million vehicles. The penalties are tied to legal violations in an array of areas, including misleading regulators, inadequate repairs, and failing to alert car owners in a timely manner. Fiat Chrysler is expected to sign a consent order agreeing to the fines. Fiat Chrysler also said that about 193,000 Ram trucks previously recalled for suspension and steering problems had not been repaired and were therefore eligible for the buyback deal negotiated with the National Highway Traffic Safety Administration. That could put Fiat Chrysler on the hook for nearly $3 billion, if the average buyback price is $15,000 per vehicle. But the net cost could be much lower because the car company has the option to repair the trucks and resell them to recoup costs.

Markets Were Full Of Sound And Fury, Signifying ... Not Much?

Financial Review

Sound and Fury

Sinclair Noe — July 10, 2015

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

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DOW + 211 = 17,760
SPX + 25 = 2076
NAS + 75 = 4997
10 YR YLD + .11 = 2.41%
OIL + .04 = 52.82
GOLD + 3.50 = 1163.80
SILV + .23 = 15.72

For the week, the Dow rose 0.17 percent while the S&P fell 0.01 percent and the Nasdaq ended down 0.23 percent in its third straight weekly decline. The markets were full of sound and fury, signifying nothing, perhaps.

Greece faces a Sunday deadline to reach a deal with its creditors. Yesterday, Greek Prime Minister Alexis Tsipras submitted a proposal that appears to meet most creditor demands in exchange for a new €53 billion-euro bailout. The package of spending cuts, pension savings and tax increases almost mirrors that from creditors on June 26, which was rejected by Greek voters in a July 5 referendum. Eurozone decision makers are set to assess the plan during crisis meetings on Saturday and Sunday. Meanwhile, Tsipras took the proposal to the Greek parliament to see if they will stand behind the deal. Outside, anti-austerity protestors rallied against the deal; which makes sense; last week a strong majority voted against the very type of deal Tsipras is now trying to sell. The Greek blueprint for pension cuts and VAT increases is essentially copied word-for-word from the June 24 European proposal; it does not appear to include debt relief. The unsustainable Greek debt from 2 weeks ago still seems unsustainable today.

The euro and stocks surged on the prospect of a resolution to end a near-six-month standoff. We are still waiting to see if this deal will stick with the IMF, the ECB, the Greek parliament, the Greek people, and of course, the Germans. And even if a deal is struck, the bigger question is whether Greece will be able to pull itself out of economic decline. But for now, movement. We’ll have to wait and see if that movement equates to progress.

Chinese stocks rose sharply for a second day today. Chinese Regulators ordered listed companies to submit plans to stabilize their stock prices, via measures such as share buybacks and employee shareholding plans. However, it still remains to be seen whether the rally can overcome the steep declines that wiped out $3.9 trillion in value from Chinese equities over the past four weeks. The Shanghai Composite closed up 4.6% (although it’s still off 25% from its June high).

So, Greece might be nearing a deal and China bounces back with 2 days of solid gains following a month long meltdown. Everything is coming up roses. Not so fast. The Greek deal could still fall apart or if they take the deal, Greece could fall apart; for all we know, Tsipras may have just destroyed Greece and the Eurozone. Chinese markets could still stumble and crash and bring down much of Asia as they fall. Or not. Even if we get past both of these problems, it will likely take some time to work through details and mop up excesses. The global system has the ability to manage through each of these shocks, though not without some stress. It could even handle them both together, provided nothing else goes wrong. Yet success is not guaranteed. It requires much better coordinated and more comprehensive policy responses. And should such responses continue to struggle, asset prices will converge down towards the lower levels warranted by fundamentals

Federal Reserve Chair Janet Yellen deliver a speech today in Cleveland. Yellen maintained her call for an interest rate increase this year, saying: “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” Yellen said the job market had not fully recovered but the overall assessment of the economy was upbeat. She made no mention of China in her speech, and only a passing reference to Greece. Absent an unexpected meltdown, Yellen was prepping the markets for a rate hike.

Kansas City Fed President Esther George spoke yesterday, saying: improvement in the job market and stable inflation suggest that “modestly higher” short-term interest rates are appropriate, and “Economic trends and experience suggest…we would be wise to act modestly but act now.”

The Commerce Department reports that wholesale inventories rose 0.8% in May.  Inventories of durable goods, such as autos and machinery, increased 0.6%. Meanwhile, inventories of nondurable goods rose 1.2%. Wholesale sales rose 0.3% in May, following growth of 1.7% in April. At May’s sales pace, the inventory-to-sales ratio remained at 1.29.

The International Energy Agency has warned in its widely followed monthly report that the rebalancing of the oil market that started last year has yet to run its course and a bottom in prices “may still be ahead”, because the world remains “massively oversupplied.” In its first oil-consumption assessment for next year, the IEA, which advises industrialized nations on their energy policies, said global oil demand growth is forecast to slow to 1.2 million barrels a day in 2016. That compares with an average 1.4 million barrels a day this year.  In a bearish assessment of market conditions, the IEA said the adjustment process would “extend well into 2016″.

IDC estimates global PC shipments fell to 66.1 million in the second quarter; that follows a 6.7% drop in PC sales in the first quarter.  Gartner is offering their own analysis, estimating shipments fell 9.5% to 68.4 million. Factors blamed for the decline: Inventory reductions ahead of the Windows 10 launch (set for July 29), a strong dollar (which has led to higher overseas prices), and the end of Windows XP support.

Apple’s Mac continues to be one of the few bright spots in the PC industry. Mac shipments reached 5.1 million during the second quarter, representing 16% year-over-year growth. Apple was the only of IDC’s top six global PC makers to grow shipments last quarter. The global leader in the PC world is…Lenovo, with a 20% market share.

U.S. quarterly earnings season kicked off earlier this week, with Pepsi and Alcoa reporting better-than- expected sales. However, corporate earnings are estimated to have fallen 3.1 percent in the second quarter, according to Thomson Reuters data.

Investors poured $14.1 billion into stock funds in the past week, according to tracking firm Lipper. This marks the biggest inflows since mid-December. The inflows were the first in three weeks. Funds that specialize in U.S. shares attracted most of the new cash, at $12.6 billion, while funds that specialize in foreign shares attracted $1.6 billion to reverse the prior week’s $1.1 billion in outflows.

The NYSE shutdown this week was probably just a glitch. When trading shutdown for 3 hours, it generated all kinds of cyberterrorism, hacky kind of conspiracy theories. It happened on the same day as United Airlines suffered a glitch, and those hundreds of grounded flights are most likely a preview of things to come. As airlines switch to electronic luggage tags and more travelers swap paper tickets for boarding passes stored on smartphones, industry consultants say the impact of technology disruptions will keep growing. The airlines are just a big flying computer. It was most likely just a software glitch. The problem is that software now runs the world, and that software was built fast and cheap; and it has been patched over and over and over.

Our dominant operating systems, our way of working, and our common approach to developing, auditing and debugging software, and spending (or not) money on its maintenance, has not yet reached the requirements of the 21st century. You know we have infrastructure problems; failing bridges, dangerous railroad intersections, potholes, crumbling water pipes. Turns out, our cyber-infrastructure is also a mess. And we are on the verge of transitioning to the “internet of things”; which is kind of like building a high rise on top of a Quonset hut. The NYSE shutdown this week was probably just a glitch, which is really, really scary.

Checking in on the Libor trial in London, former UBS and Citigroup trader Tom Hayes has been testifying that he was open about his attempts to influence rates and that his managers were aware of it and that the practice was widespread in the industry. Hayes said he had been made a scapegoat to protect more senior figures, accusing UBS of “sheer hypocrisy” for disowning him when regulators got involved, even though senior managers at the bank had known all about his trading practices.
Checking in on Eric Holder, the former US Attorney General has landed on his feet; actually he landed back at his old job at Covington & Burling, a high powered law firm that regularly represents some of the biggest financial firms in the country; he even landed back in his old office, which the firm kept empty, waiting for his return. Holder will settle into a $2.5 million a year contract; not bad for a guy who could not get a single conviction in court for any crimes related to the financial crisis.

Right now a piano-sized spacecraft is barreling through space at over 36,000 mph. The target is Pluto. So far the New Horizons spacecraft has traveled nearly 3 billion miles. This week it got close, by space standards, just a few million miles away; which was close enough to snap a few good photos. The new pictures show some details we have never seen before. Pluto has distinctive contrasting dark and light colors on its surface. A large light colored region, about 1,000 miles across, is kind of shaped like an enormous heart.  NASA has carefully calibrated the spacecraft to fly within 7,600 miles of Pluto on Tuesday. The spacecraft should be able to tell if there are impact craters on Pluto’s moon, and close enough to take detailed pictures of something the size of a football field; just in case someone is playing football on Pluto.