Financial Review

Broken PROMESA

Sinclair Noe — May 3, 2017

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DOW + 8 = 20,957
SPX – 3 = 2388
NAS – 22 = 6072
RUT – 8 = 1390
10 Y + .02 = 2.31%
OIL – .22 = 47.60
GOLD – 19.20 = 1238.70

The Federal Reserve left interest rates unchanged as they wrapped up their two-day FOMC policy meeting. In a hawkish statement, the central bank also said consumer spending continued to be solid, business investment had firmed and inflation has been “running close” to the Fed’s target. “The committee views the slowing in growth during the first quarter as likely to be transitory,” the Fed said in a unanimous statement.

That sounds like the Fed is sticking to its guns and plans on 2 more rate hikes this year. The Fed raised its benchmark rate by a quarter percentage point at its last meeting in March to a target range of 0.75 percent to 1 percent. The rate-setting committee is also gearing up to announce sometime this year when and how the Fed will begin shrinking its $4.5 trillion balance sheet. Wednesday’s statement offered no new details.

Payrolls processor ADP said private employers added 177,000 jobs last month. It was the smallest gain since the 62,000-increase last October. ADP said private employers face increasing difficulty finding qualified workers in a tightening labor market.

The ADP figures come ahead of the Labor Department’s more comprehensive non-farm payrolls report on Friday, which is expected to show about 185,000 net new jobs in April, following an anemic 89,000 new jobs reported in March.

The Institute for Supply Management (ISM) said its index of non-manufacturing activity rose to 57.5 in April from March’s 55.2. A reading above 50 indicates expansion in the services sector.

Puerto Rico announced a historic restructuring of its public debt, touching off what may be the biggest bankruptcy ever in the $3.8 trillion municipal bond market. While it was not immediately clear just how much of Puerto Rico’s $70 billion of debt would be included in the bankruptcy filing, the case is sure to dwarf Detroit’s insolvency in 2013.

The move comes a day after several major creditors sued Puerto Rico over defaults on its bonds. Bankruptcy may not immediately change the day-to-day lives of Puerto Rico’s people, 45 percent of whom live in poverty, but it may lead to future cuts in pensions and worker benefits, and possibly a reduction in health and education services.

The island’s economy has been in recession for nearly 10 years, with an unemployment rate of about 12 percent, and the population has fallen by about 10 percent in the past decade. The debt restructuring petition was filed by Puerto Rico’s financial oversight board and was made under Title III of last year’s U.S. Congressional rescue law known as PROMESA.

The Title III provision allows for a court debt restructuring process akin to U.S. bankruptcy protection. Puerto Rico is barred from a traditional municipal bankruptcy protection under Chapter 9 of the U.S. code, but Title III is basically the same thing. The process will give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries.

U.S. Supreme Court Chief Justice John Roberts will appoint a life-tenured judge, likely a U.S. District Court judge, to oversee the case. That’s different than Chapter 9 municipal bankruptcy cases, where a bankruptcy judge controls the process. The person appointed to oversee the case will have significant power over how it unfolds.

This debt-cutting process has never occurred, so the lack of legal precedent could leave the judge with much sway over the future of Puerto Rico. The oversight board will aim to negotiate debt cuts with creditors, after which it will propose a plan of adjustment.

The judge will decide whether to authorize the plan. For investors, bad news. If investors hold secured bonds, they might get paid in full. But unsecured bondholders could suffer significant cuts, depending on which types of debt the judge determines to be vulnerable.

Complicating matters is the various governmental entities included in the bankruptcy filing, each of which has its own investors and creditors wanting to be paid. It really isn’t clear how creditors stack up against each other, but it is widely anticipated that pensioners will have a low spot in the pecking order. That’s exactly what happened in Detroit.

The GOP health bill gains new life as key holdouts vow support. Representative Fred Upton of Michigan says he will back the bill once an amendment he helped devise is added. It would provide an $8 billion boost in funding for people with pre-existing conditions; and while that sounds like a lot of money, it is but a speck of dust in the overall price tag for healthcare.

A White House official said Republicans are still two or three votes away from being able to guarantee passage. Even if it passes in the House, it would likely fail in the Senate.

Fresh data from real-estate website Trulia show that just 34.2% of homes have returned to the peak levels registered before the onset of the recession in 2008. What’s more, Trulia estimates it could take until 2025 for a true national recovery in home prices.

Much of Arizona is such an idiosyncrasy. Tucson is second only to Las Vegas in the ranking of cities where the smallest numbers of homes have recovered their value. In Tucson, only 2.4% of homes have recovered their peak prices. In Phoenix, 5% of homes have climbed back to or above their earlier peak price.

After the closing bell, Facebook reported added 80 million monthly users in the first few months of the year, as ad revenue popped 51 percent from a year ago. Net income rose to $3.06 billion, or $1.04 per share, from $1.73 billion, or 60 cents per share, a year earlier, beating estimates of 87 cents. Revenue was $8 billion vs. $7.8 billion consensus estimate. Shares moved lower in after-hours trade.

Facebook plans to hire 3,000 more people to review videos and other posts after getting criticized for not responding quickly enough to murders shown on its service. The hires over the next year will be on top of the 4,500 people Facebook already has to identify crime and other questionable content for removal.

Tesla posted a wider than expected first-quarter loss but said it had just over $4 billion in cash to handle the future. Tesla is betting on the launch of its $35,000 Model 3 midsize sedan to help meet its goal of producing 500,000 cars annually in 2018. The Model 3 is expected to go on sale later this year in the United States.

Tesla delivered 25,000 vehicles in the first quarter ended March 31, its highest since the carmaker went public in 2010, and a 69 percent increase from a year earlier. Tesla’s results reflect the first full quarter that includes solar panel installer SolarCity, which it bought last year.

Twilio makes cloud-based software that brands can use to reach out to customers: think in-app messaging services. While it has major brands on its books as clients, including Nordstrom, Airbnb and Amazon, Uber and Facebook’s WhatsApp are its two largest clients by far.

Uber accounted for 12% of the company’s revenue during the quarter, but Uber will be moving some of the technology it uses to communicate with customers in-house. The Uber news effectively torpedoed an otherwise horrible earnings report. Twilio down 25% today.

A day after the American Petroleum Institute injected a bit of optimism among traders by reporting a crude oil inventory draw of 4.2 million barrels, the EIA once again poured cold water on the oil bulls by reporting a much smaller decline, of 900,000 barrels. This is only the sixth inventory draw reported by the authority for the last 18 weeks.

In gasoline, the situation was pretty much the same. API estimated inventories in the week to April 28 had fallen by 1.9 million barrels, and the EIA refuted the estimate: according to it, gasoline inventories were up by 200,000 barrels in the seven-day period.

Copper prices dropped 3.5% today, the biggest one-day drop in 19 months after a jump in inventories increased worries about an economic slowdown in China, the world’s largest consumer of the metal.

On-warrant inventories available for delivery at LME-registered warehouses increased by 38,950 tons, or 32 percent. Earlier in the week, copper prices leaped to their highest in nearly a month. Traders expected prices to rise given a planned month-long strike at Freeport-McMoran’s Grasberg mine in Indonesia.

The Writers Guild of America has reached a tentative agreement for a new film and TV contract, averting a potentially devastating strike that would have impacted the fall season. The finale even came with a plot twist – an intervention from studio executives, who normally take a less hands-on approach to union talks.

The Securities and Exchange Commission has approved a request to trade quadruple-leveraged exchange-traded funds, because triple leveraged ETFs were just too boring. ForceShares Daily 4X US Market Futures Long Fund will trade under the ticker UP, and ForceShares Daily 4X US Market Futures Short Fund, under the ticker DOWN.

If you receive an email with an unexpected invitation to open and view a Google Doc, don’t do it. In what appears to be a large-scale phishing attack, people are reporting that they’re receiving these invitations from people they know. If you click on “Open in Docs,” it will spam everyone in your Google contacts, and it may also try to steal your information.

Financial Review

Had to Happen

Sinclair Noe — January 12, 2017

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DOW – 63 = 19,891
SPX – 4 = 2270
NAS – 16 = 5547
RUT – 12 = 1361
10 Y – .01 = 2.36%
OIL + .80 = 53.05
GOLD + 5.20 = 1197.30

It had to happen – the Nasdaq Composite suffered its first loss of 2017, but it was a record setting run to start the New Year. The Dow Jones industrial average closed lower, with Goldman Sachs and Walt Disney contributing the most losses. At session lows, the blue-chips index had fallen more than 180 points.

Donald Trump’s press conference on Wednesday was not what investors wanted to hear; there was talk of protectionism. Trump took shots at the pharmaceutical industry, which sent health care and biotechnology stocks reeling. He also failed to provide new details on three of his key policies: tax reform, deregulation of certain sectors and fiscal stimulus. The lack of details of the President-Elects administration’s plans for economic stimulus simply left bullish investors empty handed.

European markets and most Asian markets ended the day with modest losses. Despite the negative sentiment, many global stock markets are near record highs. The USDA issued its World Agriculture Supply & Demand Estimates with bullish projections for soybeans, wheat and corn.

On the economic front:  Initial claims for unemployment benefits increased 10,000 to 237,000 in the week ended January 7. This marks 97 consecutive weeks of initial claims below 300,000, the longest streak since 1970.

Import prices increased 0.4 percent last month after an upwardly revised 0.2 percent decline in November. In the 12 months through December, import prices jumped 1.8 percent, the largest gain since March 2012. Import prices are rising as the drag from lower oil prices fades. The report also showed export prices rose 0.3 percent in December after slipping 0.1 percent in November. Export prices were up 1.1 percent from a year ago.

Several Federal Reserve officials are scheduled to speak today. St. Louis Fed President James Bullard said he doesn’t see any need to rush to raise rates in the near-term. On the flip side, Philadelphia President Patrick Harker sees three rate hikes this year, stating that the U.S. economy is “displaying considerable strength.” Fed Chair Janet Yellen is holding a town hall event with teachers tonight.

After debating seven hours through the night, the Senate narrowly passed a budget resolution early today, clearing the first major hurdle in the GOP effort to repeal Obamacare. House leaders plan to take it up tomorrow. Today’s vote was technically on a budget blueprint that sets the stage for a formal repeal vote, potentially within a few weeks. The step is, for now, procedural, but it signals Republican lawmakers are following through on their longstanding promises to axe the law.

In his press conference this week, President-elect Donald Trump assured Americans once again that Obamacare will be repealed and replaced, “essentially, simultaneously.” And we are still waiting on the replace part. The iShares US Healthcare ETF (IHF) flip flopped between positive and negative territory during the first two hours of the trading day.

And as confirmation hearings continue for the Trump Cabinet nominees in Washington DC, there is a steady stream of business leaders in and out of Trump Towers in New York. President-elect Donald Trump’s transition team has been actively considering ways to revamp a temporary visa program used to bring foreign workers to the United States to fill high-skilled jobs. Eric Schmidt, Executive Chairman of Alphabet/Google was spotted at the Tower, although we haven’t heard details of the visit.

Other deal-makers (and prospective deal-makers) are lining up in front of Trump Tower to kowtow to the President Elect include: SoftBank CEO Masayoshi Son, who wants approval for Sprint to participate in wireless consolidation, perhaps by buying T-Mobile. Alibaba CEO Jack Ma met; his company is the major asset of Yahoo in the process of a major asset sale to Verizon.

After that came the Monsanto and Bayer CEOs, who seek merger approval. Next up, AT&T leaders are arriving to talk up their Time Warner deal, which is complicated by Trump’s dislike of his coverage on CNN.

French far-right presidential candidate Marine Le Pen was seen at Trump Tower today but a spokesman for President-elect Donald Trump said she was not meeting with him or his team. “No meetings with anyone,” transition spokesman Sean Spicer said. “It’s a public building.” Although it is safe to assume Le Pen was not just loitering.

The U.S. Justice Department is not expected to bring antitrust action against U.S. airlines after finding little proof the four major carriers – Delta, Southwest, American, and United – coordinated to raise fares by curbing the supply of seats. Investigators failed to uncover sufficient evidence of collusion among airlines to restrain seats, since the DOJ’s probe began in the summer of 2015.

Delta Air Lines reported a 37 percent decline in fourth-quarter net profit to $622 million from $980 million a year earlier. Delta forecast passenger unit revenue, a closely watched metric, to be flat to up 2 percent in early 2017.

Shares in Italy’s biggest bank – UniCredit – are weakening as the firm said it’s writing off €8.1 billion ($8.6 billion) in bad loans. Shareholders are also set to vote on its plans to raise €13 billion ($13.8 billion) to shore up its finances. Several of the largest US banks are scheduled to report fourth quarter earnings tomorrow.

Johnson & Johnson has tentatively agreed with Actelion on a price to acquire the Swiss biotechnology company. Bloomberg reports the talks are now focused on valuing what would be a new unit that would house research and development assets. Before the current round of negotiations started in late December, J&J had made an offer for Actelion valued at about $260 per share, or more than $28B.

More home buyers are getting cold feet and bowing out of deals before the closing. According to an analysis by real-estate website Trulia, the percentage of homes that had an offer but failed to close rose to 3.9% in 2016, compared with 2015, when 2.1% of sales fizzled. The company defined a failed sale as any listing with a preliminary buyer agreement that reverted to for-sale status.

The highest share of failed sales overall was in the starter-home market, where 6.3% of buyers backed out of deals in 2016, up from 3.4% the year prior. That’s in part because starter homes, those valued in the bottom third of the region’s market, saw an influx of first-time home buyers last year. These buyers were more likely to hit financing hurdles or underestimate closing costs.

The Arizona Regional Multiple Listing Service reports overall sales in the Phoenix market in December rose 5.9% year-over-year. Cash sales were down to 23.1% of total sales. Active inventory is down 2.9% year-over-year.

Over the past five years, Amazon created over 150,000 jobs in the United States, growing its workforce here from 30,000 employees in 2011 to over 180,000 at the end of 2016. Today, the company announced that it plans to create an additional 100,000 full-time, full-benefit jobs in the U.S. over the next 18 months.

Apple is said to be planning to build a significant new business in original television shows and movies, a move that could make it a big player in Hollywood and offset slowing sales of iPhones and iPads.

More individuals could be charged in an ongoing investigation by U.S. authorities into Volkswagen’s diesel emissions cheating. The announcement comes after VW agreed with the U.S. government to pay $4.3B in fines and penalties, while six high-ranking employees were indicted in connection with a conspiracy to cheat emissions tests.

Fiat Chrysler shares were briefly halted after plummeting nearly 16% in response to the Environmental Protection Agency accusing the automaker of using emissions cheating software. The EPA said the software allowed excess diesel emissions in just over 100,000 U.S. trucks and SUVs sold since 2014.

The EPA said it believes the software allowed vehicles to generate excess pollution in violation of the Clean Air Act. The EPA alleges that the software was installed in light-duty models of the Jeep Cherokee for the years 2014-2016, as well as Dodge Ram 1500 trucks with 3.0 liter diesel engines sold in the United States.

Japan’s Takata Corp is expected to plead guilty to fraud charges as early as tomorrow as part of a $1 billion settlement with the Justice Department over its handling of air bag ruptures linked to 16 deaths worldwide, sources said. The settlement includes a $25 million criminal fine, $125 million in victim compensation and $850 million to compensate automakers who have suffered losses from massive recalls. As part of the deal, Takata might plead guilty to wire fraud charges, or providing false test data to U.S. regulators.

Ireland-based Shire Pharmaceuticals has agreed to pay $350 million to settle allegations that it bribed clinics and physicians to use its diabetic ulcer treatment. The U.S. attorney general for the Middle District of Florida, said Advanced BioHealing, a company Shire acquired in 2011, bribed providers with dinners, entertainment, travel and medical equipment to promote the use of Dermagraft, a skin substitute used to help treat foot ulcers. The kickback scheme caused false claims to be submitted to the Department of Veterans Affairs. Shire did not admit wrongdoing as part of the settlement.

Tuesday, March 25, 2014 - Want to Buy a Cookie?

by Sinclair Noe

Financial Review

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.