Financial Review

The Best Story

Sinclair Noe — October 6, 2015

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DOW + 13 = 16,790
SPX – 7 = 1979
NAS – 32 = 4748
10 YR YLD – .02 = 2.03%
OIL + 2.78 = 49.04
GOLD + 11.70 = 1148.60
SILV + .22 = 15.99

The U.S. trade deficit increased to a five-month high of $48.3 billion. The trade gap was 15.6% higher compared to a revised $41.8 billion deficit in July. U.S. exports dropped 2%;  exports have fallen 6% compared to one year ago, hurt by a rising value of the dollar that’s made American goods and services more expensive overseas. Most other economies are not performing as well as the U.S. and that’s also limiting demand.

A slowdown in emerging markets driven by weak commodity prices forced the International Monetary Fund to cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent. Next year the world economy is expected to expand 3.6 percent, less than the 3.8 percent projected in July. Brazil and Russia’s economies are contracting, Japan and the euro area are struggling, and long-time growth engine China is decelerating.

The IMF advised emerging markets to be ready for the U.S. to tighten monetary policy, urged advanced economies to address “crisis legacies” and suggested nations consider the “compelling” case for public infrastructure investment at a time of very low long-term interest rates. The G-20 meets this week in Lima, Peru.

Officially joining the 0% bond club, the U.S. Treasury sold a new government security on Monday containing a three-month maturity and a yield of zero for the first time on record. In essence, buyers gave a free short-term loan to the government in exchange for a highly liquid debt instrument for their portfolio. The result adds to the diminishing expectations, stoked by Friday’s disappointing jobs report, that the Fed will keep interest rates at basement levels throughout 2015.

The U.S. Treasury can’t sell bills below 0%, but once sold at auction the bills can trade however they trade. In early morning trade, the 3 month bill traded at negative 0.003%, but finished the session with a positive yield. The three-month yield also briefly went negative on September 25 and on October 1 and July 13, but has otherwise been in positive territory all year.

Despite the financial turmoil in China and unexpected devaluation, the yuan has now become the world’s fourth-most-used payments currency, edging out Japan’s yen for the spot. According to international payments provider Swift, the renminbi accounted for 2.79% of global payments in value terms in August; although it still trailed the U.S. dollar (44.8%), euro (27.2%) and British pound (8.5%). As recently as August 2012, the yuan only ranked number 12 with a 0.84% share, but Chinese authorities have since aggressively promoted international use of the currency.

Europe’s highest court struck down an international agreement that had made it easy for companies to move people’s digital data between the European Union and the United States. The ruling, by the European Court of Justice, could make it more difficult for global technology giants to collect and mine online information from their millions of users in the European Union. The court declared the data-transfer agreement, which is known as Safe Harbor, immediately invalid.

In its ruling, the court said that the Safe Harbor agreement was flawed because it allowed American government authorities to gain routine access to Europeans’ online information. Such access infringes on Europeans’ rights to privacy. The ruling follows revelations from former National Security Agency contractor Edward Snowden about the Prism program that allowed U.S. authorities to harvest private information directly from big tech companies such as Apple, Facebook, and Google.

Yesterday we reported that 11 countries had reached agreement on the Trans-Pacific Partnership, a trade pact that would cut trade barriers on a bloc that includes 40% of world economic output, and that it was pretty much a done deal. Well, not exactly. The negotiations were wrapped up over the weekend; the actual deal, whatever it is, must still be ratified by the leaders of each country and ratified by their legislatures, where support for the deal is not universal.

In the US, expect a tough fight to push it through Congress next year. And even though negotiators came to some sort of agreement, they have not presented the text of the agreement to the public, and negotiators say it will take at least a month to prepare the text. So, it really isn’t a done deal, in large part because almost nobody knows what the deal is.

Corelogic reports home prices rose 1.2% in August to extend the 12-month gain to 6.9%. CoreLogic forecasts home price growth to slow to 4.3% in the 12 months through Aug. 2016, due to higher mortgage rates and more housing starts. Arizona is still suffering from the housing downturn; home prices are down 25.3% from the peak to current levels.

SABMiller has rejected an informal takeover bid from Anheuser-Busch InBev stating the offer was too low. An initial proposal made last week was worth slightly over 40 pounds a share, but the British firm’s executives and some shareholders regard a deal closer to 45 pounds as fair value. At the higher price, a deal would value SABMiller $110 billion, and would result in the largest merger this year.

Skyworks Solutions has agreed to buy PMC-Sierra for $2 billion in cash. PMC shareholders will get $10.50 per share, representing a 37% premium to the stock’s closing price on Monday. Semiconductor deal making has already reached more than $80 billion in 2015, surpassing every full year on record except 2000, when M&A in the sector hit $115 billion.

Microsoft’s held a big event in New York City to showcase their devices that run across the tech giant’s new, flagship operating system, Windows 10. What’s on tap? Two new versions of Lumia smartphones, a fitness band, an updated Surface Pro tablet to do battle with the Macbook Pro, and more details regarding HoloLens – an augmented reality headset. Microsoft also announced its first retail store in New York, scheduled to open in about 3 weeks.

Microsoft has less than 3% of the smartphone market, but their Windows 10 operating system is on over 100 million devices. So, the challenge is to get their operating system on mobile devices before mobile operating systems take over the desktop and laptop world. The trick is to make systems and apps that flow seamlessly from mobile to desktop, and whoever wins that battle will control operating systems for the near future.

The value of BP’s settlement with the U.S. government and five Gulf states over the Deepwater Horizon oil spill has been confirmed at $20.8 billion, a $2 billion increase from an agreement reached this past July. The agreement is “the largest settlement with a single entity in American history,” U.S. Attorney General Loretta Lynch declared. The deal takes BP’s total budget for the spill to more than $54 billion but resolves all federal and state claims against the company for the accident.

Freeport-McMoRan is considering spinning off its oil and gas business and other strategic alternative to focus on its copper mining business. The Phoenix-based company produces oil and natural gas around the country. Energy companies have been hurt by falling oil prices and weaker demand. Many have cut spending as a result. Earlier this year, Freeport-McMoRan slashed its quarterly dividend 84 percent because of falling oil prices. And in August, Freeport-McMoRan announced a cost-cutting plan due to falling copper prices and soft economic conditions.

Alcoa will unofficially kick off the earnings reporting season on Thursday.

We are already seeing some earnings numbers. PepsiCo reported a better-than-expected quarterly profit as its commodity costs fell and demand for its snacks and non-carbonated beverages rose in North America.

Yum Brands missed Wall Street’s earnings and revenue estimates. Same store sales in China, where it generates more than half of its operating profit, rose just 2 percent. The parent company for KFC, Pizza Hut and Taco Bell dropped 18% in after hours trade. The biggest embarrassment for Yum Brands may be this nugget:  “Year-to-date through October 5, 2015, we repurchased 4.5 million shares totaling $370 million at an average price of $82.” When you consider the response today, that means they paid a 20% premium because they were too stupid to spend the money on building their business.

McDonald’s is now serving breakfast all day. It only took 43 years. In 1972 a franchisee in California introduced Ray Kroc to a breakfast sandwich with Canadian bacon, egg, and cheese on an English muffin. The wife of a McDonald’s executive came up with the name, Egg McMuffin. The all-day breakfast menu is still a bit limited; you can’t get all breakfast items all day; and there are some quirks; you can’t get Egg McMuffins in the South – they sell biscuits down there. The whole idea is still a bit of a gamble because the breakfast menu has lower profit margins than the regular burger-centric menu.

The World Bank reports the number of people living in extreme poverty is likely to fall for the first time below 10% of the world’s population in 2015. World Bank president Jim Yong Kim said, “This is the best story in the world today. These projections show us that we are the first generation in human history that can end extreme poverty.”

Extreme poverty has long been defined as living on or below $1.25 a day, but the World Bank’s adjustment now sets the poverty line at $1.90 a day. The Bank said the change reflects new data on differences in the cost of living across countries, while preserving the real purchasing power of the previous yardstick. Using the new benchmark, the World Bank projects 702 million people or 9.6% of the world’s population will be living in extreme poverty in 2015, down from 902 million people or 12.8% of the global population in 2012.

The World Bank first introduced a global poverty line in 1990, setting it at $1 a day. It was adjusted last in 2008, when the group raised it to $1.25 a day. Basically that $1.90 today buys about the same as $1.00 in 1990. Across the planet, the number of people living in extreme poverty has dropped by more than half since 1990, when 1.9 billion people lived in extreme poverty.

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

Underwater

Sinclair Noe — June 12, 2015

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DOW – 140 = 17,898
SPX – 14 = 2094
NAS – 31 = 5051
10 YR YLD +. 01 = 2.39%
OIL – .74 = 60.03
GOLD – .70 = 1182.30
SILV – .07 = 16.06

The Trans Pacific Partnership trade deal hit a major roadblock today. The House rejected a key part of a package to fast-track the trade deal. The House voted today on two measures, both of which had to pass in order to send the legislation, which was already approved by the Senate, to the president. A bill to give the president fast-track authority to negotiate future trade deals was approved by a 219-211 vote. But another measure regarding funds to retrain workers failed, 126 to 302. Because the Senate had approved both measures, the failure of the retraining program prevented the package from advancing. The measure would give the Obama administration the ability to wrap up negotiations on the Trans-Pacific Partnership, a free-trade deal years in the making, and present a final agreement to Congress for expedited consideration and an up-or-down vote with no amendments.

In one of the more unusual coalitions of the Obama administration, the trade agenda found strong support with Republicans, while Democrats ended up blocking the measure. Democrats had repeatedly asked for the administration to make the trade deals public before seeking the fast-track power. Democrats also complained that the fast-track measure fails to protect workers, environmental standards and financial regulations, and does nothing to stop unfair currency manipulation. The failure does not necessarily mean an end to the battle. House Speaker John Boehner can bring the measures back if he can find a way to whip up more support.

New information reveals that more personnel records were hacked than previously reported during the federal cyber theft in December. Already considered one of the largest thefts of US government personnel data in history, investigators now estimate that it may include data on as many as 14 million people, more than triple the 4 million current and former government employees reported by the Office of Personnel Management last week. Officials are now weighing responses ranging from counter-intelligence initiatives to destroying the data in the intruders’ servers.

The producer price index increased 0.5 percent in May, the biggest one-month increase since September 2012. Prices at the wholesale level were pushed higher by a sharp jump in the cost of gasoline and a record increase in the price of eggs because of the avian flu. Core prices, which exclude energy and food, rose just 0.1 percent in May. Even with the advance in May, producer prices over the past 12 months are 1.1% lower.

Consumer confidence rose more than forecast in June. The University of Michigan preliminary consumer sentiment index increased to 94.6, from a final reading of 90.7 in May that was the lowest in six months. Consistent gains in the labor market are cited as a major reason for increased confidence, and likely helped underpin household spending, reflected in yesterday retail sales report which showed sales increased 1.2 percent last month.

Yesterday, there were reports that Greece might be nearing a deal on its debt problems. Then late yesterday the International Monetary Fund recalled its negotiating team from talks in Brussels, which might signal doom for any resolution. In response, Greece ruled out cutting pensions and demanded a debt restructuring. So, the battle lines are drawn, or redrawn, and next week EU officials will meet again in Luxembourg for a likely showdown, or it might be part of the game of chicken that both sides seem to be playing. The Greek tragedy could drag out for quite some time or it could come to a head at almost any time, and if a resolution is not found, there will almost certainly be a domino effect.

More bad news from the Eurozone today; Standard & Poor’s says Britain’s “economic policymaking could be at risk of being more exposed to party politics than we had previously anticipated.” The Credit rating agency says it is “similar to the situation in the U.S. in 2011.” Not exactly. The situation in Britain deals with a possible referendum vote on leaving the European Union in 2017. S&P lowered the outlook on the Britain’s AAA rating to “negative” from “stable.” That means there’s a one-in-three chance of a downgrade in the next two years. In its analysis, S&P said that PM Cameron’s pledge for a vote, made to placate elements of his Conservative Party, “represents a risk to growth prospects” for U.K. financial services, exports and the economy as a whole.

The number of borrowers who owe more on their home than it’s worth is falling, but there are still a number of borrowers who are deeply underwater. Zillow released its 2015 Q1 Negative Equity Report, which showed that negative equity fell in the first quarter of 2015 to 15.4% from 16.9% in the fourth quarter of 2014, and 18.8% during the same time period a year ago; negative equity peaked nationally at 31.4% in the first quarter of 2012. The rate of negative equity improved in all of the 35 largest housing markets in the first quarter of 2015. The rate of underwater homeowners is much higher among the homes with the least value. More than 25% of those who own the least valuable third of homes were upside down, compared to about 8% of the most valuable third of homes.

At the peak of the crisis, more than 15 million homeowners owed more on their mortgages than their homes were worth. Since then, foreclosures, short sales and rapidly rising home values freed nearly half of those homeowners, leaving 7.9 million homeowners upside down at the end of the first quarter; of those that are still underwater, over half or about 4 million owners, still owe 20% more than the value of their home, making it difficult for them to get out from under their mortgage.

For Phoenix, the negative equity rate in the first quarter was 19%, which works out to almost 147,000 homes in negative equity, and 56% of those owners were underwater by more than 20%. And 12.9% of underwater homeowners in Phoenix owe more than twice their home’s value to the bank. While home prices in Phoenix have recovered, according to Zillow valuations, prices are still down 26.9% from the peak.

Actually, it’s worse than that. Realistically, a homeowner needs roughly 20 percent equity in their home to afford the taxes and fees associated with listing and selling it and still have enough left over to afford a reasonable down payment on another home. When including these homeowners with less than 20 percent equity in their home, the national “effective” negative equity rate is 33 percent. Put another way, a third of all homeowners with a mortgage don’t have enough equity to list their home for sale and buy another. And while it’s great that the level of negative equity is falling, there are still so many homeowners underwater that it will likely be years before we get back to more normal levels of around 2% negative equity; and while we wait, many homeowners are stuck in their homes.

Next week the Federal Reserve FOMC will meet to determine monetary policy. No change is expected, although we will watch for any hint about when they plan to hike rates in the future. Also next week, the Fed will publish new quarterly forecasts, and all eyes are going to be on where they set the natural rate of employment; that’s the level of employment that is just strong enough to lift the economy without setting inflation on fire. Many people think the natural unemployment rate is about 5%. The current unemployment rate is 5.5%; so we are close. A new paper by Fed board staff shakes up this view by suggesting the number could be as low as 4.3%; the reason being that wages have not been keeping pace with hiring.

The bigger news next week will be Thursday, when Pope Francis will publish his much anticipated encyclical on the environment and climate change. An encyclical is a letter to followers, about 1.3 billion in this case.

An encyclical is not a scientific document, rather one that explores a particular issue in the light of Catholic social teaching. Yet the Pontifical Academy of Science has thoroughly investigated the research, producing its own documents on topics such as glacier retreat, and it is clear that we must take on board what the science is telling us. Francis will not approach the issue of ecology as a scientist (though he is a trained chemist) or as a politician (though he clearly has excellent political instincts). Rather, he will address his flock as a pastor, a teacher, theologian and spiritual guide. He will remind us that Creation is a gift from God, and that we have a moral responsibility to be responsible stewards. Creation in this instance means more than the ground we walk on and the air we breathe. It also means all of humanity, including the poorest, who are also the most vulnerable to climate change.

By tying climate action to the Christian mandate to aid the afflicted and give comfort to the needy, Pope Francis will be doing much more than merely acknowledging the severity of the problem. By virtue of his moral authority, the pope has the singular ability to mobilize people all over the globe to take whatever form of action they can. No other figure of our time can claim that degree of influence. The climate change narrative is about to change; no longer a debate about science or business; now it will be a moral issue, a religious issue; a simple matter or right or wrong. And with Pope Francis leading the charge, the climate change deniers and fossil fuel apologists will soon realize they haven’t got a prayer.

Financial Review

Chips and Salsa Like 1999

Sinclair Noe — April 24, 2015

 

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

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DOW + 21 = 18,080
SPX + 4 = 2117
NAS + 36 = 5092
10 YR YLD – .03 = 1.92%
OIL – .58 = 57.16
GOLD – 14.40 = 1179.90
SILV – .11 = 15.77
 
Yesterday, the Nasdaq closed at 5,056, finally surpassing its tech-boom peak of 5,048 set in March 2000. It only took a little over 15 years to get back to those levels. Today the party continued. The S&P 500 hit a new record high close, but just barely; topping the March 2 record by a fraction. For the week, the Nasdaq surged 3.2% and the S&P 500 jumped 1.8%. The Dow added 1.4%.

WTI crude oil closed down 58 cents at $57.16 a barrel, retreating from Thursday’s 2015 high of $58.41. It rose for a sixth straight week, its longest such stretch since the first quarter of 2014. This week’s gain was 2.5 percent. After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 33 percent from a low in March.

In the past year, there’s been an inverse relationship between the price of crude oil and the relative performance of retail stocks. Also, most retailers aren’t hurt by a stronger dollar; rather, it helps because items imported to the US are cheaper. An almost 60 percent decline in oil between June 2014 and mid-March contributed partly to the rally in retailers’ shares as investors anticipated a boost to consumption that would benefit retailers’ profitability. We haven’t seen a big boost; consumers have tended to hold onto a dollar rather than buy baubles. Americans saved 5.8 percent of their disposable personal income in February, the highest since December 2012.

Businesses aren’t spending either. Orders for durable goods rose a seasonally adjusted 4% in March, but the increase was driven almost entirely by higher demand for autos, commercial jets and military hardware. However, a key measure of business investment fell for the seventh straight month to underscore a slowdown in how much companies are spending. So-called core orders excluding aircraft and military goods fell 0.5%. Shipments of core capital goods, a category used to help determine quarterly economic growth, dropped 0.4% in March. Business just aren’t spending much on equipment.

A new Bank of America Merrill Lynch survey finds that U.S. investors pulled $79 billion out of equities YTD – including net outflows in 9 of the past 10 weeks – despite stock prices continuing to break new record highs. The survey says: “Correction risks will grow in the absence of fresh inflows in coming weeks.”

Just a day after clearing a Senate committee, the new Trade Promotion Authority bill has been approved by the House Ways and Means Committee, giving Congress the ability to vote yes or no on trade agreements, but without the ability to make amendments over the next five years. The bill would ease passage of the Trans-Pacific Partnership, which the Obama administration is currently negotiating with Japan and 10 other nations.

After a lengthy delay, Loretta Lynch was confirmed as the new Attorney General. Eric Holder made a farewell address to staff today; as Holder leaves, he takes with him the Holder Doctrine, maybe. The Holder Doctrine is the idea that the Department of Justice and other regulators would not seek criminal prosecution against the big banks because of the potential collateral damage to the economy; it came to be known as “Too Big to Jail.” Lynch is widely believed to possess a better grasp of financial markets and their inner workings than her predecessor, Eric Holder, which some think could make her an even greater threat to big banks. Don’t expect big changes for several reasons; Lynch will only be in office for a maximum of about 18 months, and in that short time she will have plenty of issues on her plate, including: privacy laws and the seizure of phone records by the NSA, criminal  justice reform and sentencing standards for nonviolent drug offenders, changing marijuana laws across the nation, revisions to the Patriot Act, civil rights voting rules, and the use of excessive force by police – just to name a few. The Holder Doctrine is gone but don’t expect anything to change.

Deutsche Bank’s supervisory board gathered today to review a sweeping restructuring plan to cut back investment banking operations. Another proposal calls for Deutsche to exit retail banking entirely, to become a pure investment and commercial bank. A few weeks ago, Deutsche was saying they wanted to be a mega-bank like JPMorgan, now they want to scale back and be more like Goldman Sachs. This follows yesterday’s $2.5 billion fine for the bank’s role in rigging Libor benchmark interest rates. The bank also agreed to accept a criminal guilty plea for the British subsidiary at the center of the case, which is a way of insulating a guilty plea away from the parent company. While the deals require Deutsche Bank to dismiss certain employees, no one at the bank has been criminally charged. The deals will not end the bank’s legal problems. It is also ensnared in the foreign exchange investigation. And it is suspected of violating United States sanctions against countries like Iran.

Greece appeared to offer concessions on some key reforms on Friday, ahead of the Eurogroup meeting in Riga today, but it wasn’t enough to appease the Eurozone finance ministers, who are now demanding a list of reforms before they will consider releasing further funds on behalf of Greece. The government in Athens has come up with several reform pledges but it is not enough for the finance ministers, and the mood at the meetings turned ugly today; Greek Finance Minister Yanis Varoufakis described the meeting as “intense.” Mario Drgahi, president of the European Central Bank, said “Time is running out.” Maybe, but the cost of no solution would be enormous, not just for Greece but the entire Eurozone. And that has been the Greek government’s threat; the only problem is that the Eurozone economies have been recovering, all except Greece.
 
Comcast has dropped its planned acquisition of Time Warner Cable. The news comes after FCC staff recommended a hearing on the deal and a week after another report claimed DOJ antitrust lawyers are leaning against it. Regulators applauded the deal’s demise. Attorney General Eric Holder said the decision was “the best outcome for American consumers,” and Federal Communications Commission Chairman Tom Wheeler called it “in the best interests of consumers.”

Already, Charter Communications has reached out to Time Warner about a possible merger. I don’t see how that would be much better. The FCC appears to be taking their public interest role a bit more seriously of late, and if they had problems with the consequences for consumers of a Comcast-Time Warner merger, a Charter-Time Warner merger could yield the same issues.

Samsung ramped up Galaxy S6 production. Higher-than-expected demand for the company’s new curved-screen S6 Edge prompted it to open a third screen factory sooner than planned, boosting production to 5 million per month from 2 million previously. Meanwhile, Samsung is hinting at a new design for its smartwatch, the same day the Apple Watch becomes available.

The Apple Watch hit the market with a low-key launch. A few high-end fashion boutiques around the world are stocking the watch, though supply is severely limited. But Apple’s own retail stores aren’t yet selling the smartwatch, and most online pre-orders have not yet arrived.

American Airlines posted a record profit in the first quarter of $932 million or $1.30 per share. Passenger revenue per available seat mile is expected to decline 4% to 6% in the second quarter when compared to that period in 2014 due to a variety of factors, including increased competition, and the impact of a strong dollar versus weaker foreign currencies. American Airlines will put off delivery of five Boeing 787 Dreamliners that had been due to arrive next year, a step to curb growth in its long-haul fleet and maintain pricing power.

Biogen reported profits were up 71% for the quarter, but they missed analysts’ estimates.

Yesterday, Amazon, Microsoft, Starbucks, and Google reported earnings and today…
Amazon shares jumped nearly 15% Friday, hitting $445.36 by mid afternoon. That gain made CEO Jeff Bezos just over $4.8 billion, moving him to ninth place on Forbes’ realtime list of the world’s billionaires. He was #15 at the beginning of the year. Just a reminder that Amazon reported a loss yesterday.

Microsoft was up 10.4% at 47.87. It turns out that Amazon and Microsoft are neck and neck in revenue from the cloud. Google climbed almost 18% today. Investors have been looking for Google, Microsoft and Amazon to show promise outside their bread-and-butter businesses. Microsoft cannot solely rely on PC sales to drive its profits, Amazon has very low profit margins on the products it sells and Google is heavily exposed to desktop computer advertising while the world is shifting to mobile. Yesterday’s reports gave us some evidence that these tech companies’ strategies might be working.

The first couple of weeks of earnings brought reports from the banks and the tech companies; we knew those would likely be the strongest sectors and they were. The energy stocks will likely be bad and those reports will come next week.

We’re only about halfway through earnings reporting season. So far, 135 companies in the Standard and Poor’s 500 have reported their earnings, and of those, 100 have beat analysts’ expectations. And while companies have exceeded expectations on profit, only 41% have beat on revenue.

First up next week: Apple, the largest stock in the land, reports after the market closes Monday. Analysts expect $2.14 per share in first-quarter earnings. Tuesday, Twitter will check in, and will use more than 140 characters to do so. Wednesday, MasterCard will show what’s in its wallet.  Thursday, ExxonMobil reports, followed by Chevron on Friday; and that is when things will get scary; we know the oil companies faced big challenges in the quarter, we just don’t know how ugly it might be.

Financial Review

To Be Fair

Sinclair Noe — April 16, 2015

 

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

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DOW – 6 = 18,105
SPX – 1 = 2104
NAS – 3 = 5007
10 YR YLD – .02 = 1.88%
OIL + 12 = 56.51
GOLD – 3.70 = 1198.90
SILV – .04 – 16.37

Yesterday the ECB pledged to fulfill its €1 trillion-euro bond-buying program; today Eurozone government borrowing costs slid to new lows. Germany’s 10-year yield fell almost a basis point to 0.087% in early trade, while yields on all German government debt out to January 2024 were negative. Other notable levels include France’s 30-year yield, which fell below 1%, and the yield on two-year Portuguese bonds, which is on its way below zero.

The price of Greece’s three-year notes dropped the most since February and Greek corporate bonds also slumped. Credit-default swaps suggested there was a 79 percent chance of the country being unable to repay its debt in five years. Greece’s three-year yield is at a multiyear high, up 359 basis points at 27.7%. Expectations are low that Greece can reach a deal with its creditors at next week’s Eurogroup meeting. Standard & Poor’s has downgraded Greece’s credit rating to CCC+ with a negative outlook, citing a substantial risk of a default due to the country’s drawn out negotiations with its creditors.

Greece has been pushed a step closer to default and potential exit from the euro after one of its main lenders, the International Monetary Fund, all but ruled out allowing the cash-strapped country to delay repaying the €1 billion-euro due next month. Today, the head of the IMF, Christine Lagarde, said delaying the payments would be an unprecedented action that would only make the situation worse. Her comments followed a report that the Greek finance minister, Yanis Varoufakis, had sounded out the IMF over whether Athens could ask for a delay on the payments it is struggling to afford. Varoufakis denied asking for leniency. So Greece might default, that’s nothing new, but there are still plenty of options; some more realistic than others; we might not expect an enlightened solution to the Greek problem, but with any luck there will be something creative.

The Labor Department reports jobless claims increased by 12,000 to 294,000 in the week ended April 11. Fewer than 300,000 American workers filed applications for unemployment benefits for the sixth consecutive week. The total number of people currently receiving benefits was the lowest since 2000.

The pace of home construction rebounded slightly last month after being snowed out in February. Construction starts on new homes increased 2% in March at an annualized rate of 926,000.

Congressional leaders unveiled a bipartisan bill today that gives president Obama fast track authority to negotiate a trade deal with 11 other Pacific nations. The bill gives Congress the power to vote on the Trans-Pacific Partnership once it’s completed, but they could not amend the deal. It would essentially be an up or down vote. The legislation would also make any final trade agreement public for 60 days before the president signs it, and up to four months before Congress votes. If the agreement fails to meet the objectives laid out by Congress – on labor, environmental and human rights standards – a 60-vote majority in the Senate could shut off fast track trade rules and open the deal to amendments.

Former Fed Chairman Ben Bernanke has accepted an adviser role at a hedge fund. Bernanke will join Citadel Investment Group as a senior adviser.  Bernanke reportedly chose Citadel because it is not regulated by the Federal Reserve and he won’t be doing lobbying. So, in a way he’s gone from one hedge fund to another. And this is just another example of the revolving door between government and business, but in fairness, when Bernanke was Chairman of the Fed he couldn’t even refinance his mortgage.

Netflix  announced first quarter earnings late yesterday; net income fell to $24 million, or 38 cents a share, from $53.1 million, or 86 cents, as the strong dollar contributed to losses outside the U.S. But Wall Street isn’t paying attention to that, rather the focus is on subscriber growth; and Netflix added 4.8 million new subscribers worldwide.

Goldman Sachs posted the highest earnings per share in more than five years as all of its major businesses topped analysts’ estimates and the firm paid out a smaller portion of revenue to compensate employees. Net income surged 40 percent to $2.8 billion, and trading accounted for much of the increase. That means the improved returns come at a higher risk.

Citigroup reported its highest quarterly profit in nearly eight years. Citi has been slowly getting its house in order by cutting costs and shedding assets that are not critical to its main businesses. It has sold retail operations in many countries and shrunk its US branch network. Adjusted net income rose 16% to $4.8 billion, or $1.52 per share, beating average analyst estimates of $1.39 per share. Adjusted revenue fell 2% to $19.81 billion.

American Express reported a 6.3% rise in quarterly profit, helped by higher spending by card holders and an increase in net interest income.

UnitedHealth reported earnings and revenue that beat expectations. The company also raised its 2015 earnings forecast.

McDonald’s Japan forecast sharp losses. The 49%-owned subsidiary expects an operating loss of $210 million this year after a damaging series of food safety scandals, a costly french fry shortage, and fierce competition in the coffee sector. The operator of McDonald’s in Japan announced it would close 131 restaurants and renovate 2,000 more as part of its restructuring plan.

Yesterday more than 60,000 workers in 200 cities joined in what organizers claimed was the largest protest by low-wage workers in US history. The demonstrations, calling for a $15 per hour minimum wage, were the latest in a series of strikes that began with fast-food workers in New York in November 2012. The movement has since attracted groups outside the restaurant industry: Wednesday’s protesters included home-care assistants, Walmart workers, child-care aides, airport workers, adjunct professors and other low-wage workers. It also sparked international support, with people protesting low wages in Brazil, New Zealand and the UK.

Despite a slow start to IPO debuts so far this year, three big companies went public today. Etsy, the Brooklyn-based online marketplace for artisanal goods, opened for trading at $31 a share on the Nasdaq stock market. That is nearly double its initial offering price of $16 a share. Not bad for an e-commerce platform that so far hasn’t posted a profit and sells handmade items. Etsy is all about potential; it boasts more than 1 million active sellers, with access to 19.8 million active buyers on the site. And the company says it has achieved just shy of $2 billion in gross sales last year, with buyers or sellers in nearly every country.

Meanwhile, Virtu Financial, the big high-frequency trading firm, opened at $23 a share, about 21 percent higher than its $19 offering price. This is the second effort at going public in two years for Virtu. It postponed the stock sale last spring because of controversy about high-frequency trading prompted by the publication of Michael Lewis’s book “Flash Boys.” Virtu doesn’t help its case when they publish a chart showing one single day of losses in six years of trading activity; which is impossible unless you are gaming the trade.

The retailer Party City opened for trading at $20.40, above its offering price of $17 a share. Party City is going public three years after the private equity firm Thomas H. Lee Partners bought control of the nearly 70-year-old seller of party goods. So far this year, 38 companies have gone public in the US, about 60% fewer than at the same time last year.

Bombardier has hired UBS and Citigroup to advise on a potential IPO or sale of its rail unit, which could be valued at about $5 billion. Splitting off the rail unit would allow management to focus on turning around Bombardier’s aerospace division, which posted a 2014 loss of $995 million.

A New York federal bankruptcy judge has blocked most lawsuits against General Motors related to defective ignition switches. The judge ruled that plaintiffs could not sue the company for at least 84 deaths caused by an ignition fault because they predate GM’s 2009 bankruptcy.  The liability shield included in the 2009 agreement that lifted GM from bankruptcy should be allowed to remain in place, even though the company has acknowledged that many employees knew about the defective switch at the time but failed to alert owners of the cars that they might have a potential claim against the company.

The ruling shuts down not only lawsuits stemming from accidents that took place before July 10, 2009, but also most of the suits seeking economic damages for the loss in value of the defective cars. Lawyers had estimated that the economic loss claims potentially totaled $7 billion to $10 billion. Economic loss cases will be allowed to go forward, the judge ruled, only if they can be tied solely to actions by the post-bankruptcy company, known as New GM.

Last year the auto industry issued more recalls involving old models than ever before; more than 60 million vehicles have been recalled in the United States, double the previous annual record in 2004. In all, there were about 700 recall announcements last year, an average of two a day, affecting the equivalent of one in five vehicles on the road.

WikiLeaks has published 30,287 documents and 173,132 emails stemming from last winter’s cyber-attack on Sony Pictures Entertainment. The hack was reportedly initiated by North Korea in response to the studio’s decision to release “The Interview,” a comedy that centered on an assassination attempt on North Korean leader Kim Jong-un. That resulted in a series of embarrassing revelations, exposing correspondence between top executives and producers that ultimately led to the ouster of studio chief Amy Pascal. The correspondence released today exposes Sony’s political fundraising and its lobbying activities on behalf of anti-piracy. In particular, WikiLeaks cites emails detailing how members of the studio set up a “collective” in order to get around campaign donation limits and send money to New York Governor Andrew Cuomo, because of his support for state film and television tax incentives and work cracking down on piracy.