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

Brexit Day

Sinclair Noe — June 23, 2016

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

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DOW + 230 = 18,011
SPX + 27 = 2113
NAS + 76 = 4910
10 Y + .05 = 1.74%
OIL + .96 = 50.11
GOLD – 9.60 = 1257.30

The highly anticipated Brexit referendum is underway in Britain, where citizens across the country are casting their vote on whether to ‘Remain’ or ‘Leave’ the EU. Two polls conducted on Tuesday and Wednesday found “Remain” was in the lead, although the overall picture from the last few days of polling was of a vote that was too close to forecast. Traders across London are still bracing themselves for an all-night vigil, while the G7 nations are poised to take “all necessary steps” to calm markets in case of a Brexit.

The polls in Britain closed at 10 PM, which is 2 PM here in Arizona. Unlike normal general elections there weren’t any exit polls when the voting stations closed. We may start to get a smattering of early results over the next hour or two. The final result is expected around “breakfast time” in London on Friday morning, according to the Electoral Commission, but the outcome may become clear earlier than that as the bigger electoral regions start to announce their votes. Bottom line, you might get results sometime after midnight (here in Arizona), or just wait until tomorrow morning.

As EU members await the results of the U.K. vote, the latest preliminary data on Eurozone business activity revealed yet another slowdown in growth for the single currency area. The composite flash PMI showed that services and manufacturing in the bloc tumbled to a 17-month low in June, falling to 52.8 from a revised figure of 53.1 in May.

The markets are weighing in on the Brexit vote. Blue-chip stocks in the U.K. rallied to a nine-week high. The Financial Times Stock Exchange, or FTSE-100 index, roughly comparable to the Dow Industrial in the US, rallied 1.2% today. The index marked a fifth straight gain and logged its highest close since April 21. At the same time, the British bank Barclays stopped accepting clients’ currency stop loss orders in an effort to limit its exposure to losses that could follow the results of the referendum.

Fewer Americans filed for jobless benefits in the week ending June 18. There were 259,000 initial claims, a decline of 18,000 from the prior week. It marked the 68th consecutive week in which claims were below 300,000, the longest such streak since 1973.

The Commerce Department reports new home sales declined in May, an expected pullback after an outsize jump in April.  Sales ran at a seasonally adjusted annual rate of 551,000. New home sales data are volatile and often subject to hefty revision, but the broad trend is up. May figures were 8.7% higher than in May 2015, and sales so far in 2016 are running about 8% higher than the same period a year ago. The median price of a new home was $290,400, 1% higher than a year ago. Supply is outpacing demand. It would take 5.3 months to exhaust all inventory if sales continued at the current pace.

Prices for entry-level homes in the U.S. are rising at twice the pace of the costliest properties as competition among first-time buyers intensifies.  According to an analysis by Zillow, values in the top third of the market climbed 4 percent in May from a year earlier, compared with an 8 percent increase for the least-expensive houses, Zillow said in a statement Thursday. The supply of starter-home listings plunged 9 percent, while the number of top-tier offerings was little changed.

We keep hearing that in many cities, high home prices are locking out young buyers, and then you have a growing number of people forced to rent at ever higher rates as demand overwhelms supply. Add in stagnant wage growth and it is tough for many wannabe first time home buyers. Some 26 percent of U.S. renters paid at least half their income to landlords in 2014, up from 20 percent in 2001, according to the State of the Nation’s Housing report, published by Harvard’s Joint Center for Housing Studies.

On the other hand, the number of homeowners who are severely cost-burdened by mortgage payments (paying 50 percent or more of their income) or moderately cost-burdened (paying 30 percent to 50 percent) actually fell from 2013 to 2014. The median rent-to-income ratio has hovered between 22.9 percent and 23.3 percent since 2010. While rents increased over that period, so did the median income of market-rate renters, which rose from $44,000 in 2010 to almost $58,000 so far this year. That’s partly because incomes have risen faster for more affluent renters, and that is partly because changing home-buying behavior has kept higher earners in the rental pool longer. Plenty of renters remain cost-burdened, and some of them earn good salaries.

Farther down the income spectrum, there’s simply not enough supply to meet demand: More than 10 million renter households earned 30 percent or less of the area median income in 2014, and only about 5 million apartments were cheap enough for those renters to afford. More than 1 million new households were created in 2015, compared with 620,000 new homes built. The shortfall of 430,000 units put more pressure on housing prices, especially at the bottom of the market.

The flash manufacturing purchasing managers index rose to a reading of 51.4 in June from 50.7 in May, the weakest reading since September 2009. The June reading was the best in three months. The manufacturing sector still looks to have acted as a drag on the economy in the second quarter. Still, today’s economic data on manufacturing, jobs, and home sales points to modest second quarter growth.

Helping breathe life into Greece’s struggling economy, the ECB will start accepting junk-rated Greek government debt as collateral for its regular bank lending operations. The decision to open a funding facility that had been shut for 16 months could lead to the partial lifting of capital controls in the coming days.

The casino operating unit of Caesars Entertainment can begin seeking creditor votes for a plan to exit its long and contentious $18 billion bankruptcy. The move will set a final courtroom showdown for early next year between the casino and bondholders who say they’re being shortchanged.

Sumner Redstone’s plan to replace five directors at Viacom is on hold until it can be determined if the 93-year-old is mentally capable of making decisions. The news came at a hearing on Wednesday, where a Delaware judge said he wanted to wait until another case regarding the media mogul’s competency was through its discovery process before ruling on the proposed board changes.

Cloud communications startup Twilio went public today. The deal, is the first Silicon Valley tech IPO of the year, and is being closely watched as a bellwether to test whether the market will be receptive of future tech IPOs this year. So far so good; shares were priced at $15 each, above the target of $12 to $14, and finished at $28.79, up 91%.

Volkswagen will pay owners of its polluting diesel cars up to $7,000, and agree to fund a grant program to offset air pollution, under a $10 billion settlement being negotiated for submission to a federal judge next week. Bloomberg reports VW will provide cash payments worth between $1,000 and $7,000, depending on the vehicle’s age and other factors, to compensate consumers. VW isn’t expected to be able to repair all of the cars affected to the satisfaction of the EPA, which may result in buybacks or extra payments to an environmental remediation fund.

The Supreme Court handed down a couple of decisions this morning. In the Case of the United States v. Texas, the court split 4-4 over President Obama’s plan to spare millions of immigrants in the country illegally from deportation and give them work permits, leaving intact a lower-court ruling blocking the executive action on immigration, which was never implemented. Obama’s 2014 plan was tailored to let roughly 4 million people – those who have lived illegally in the United States at least since 2010, have no criminal record and have children who are U.S. citizens or lawful permanent residents – get into a program that shields them from deportation and supplies work permits. The case was viewed as an important test of the limits of presidential powers.

In the case of Fisher v. University of Texas, the court upheld the practice of considering race in college admissions, rejecting a white woman’s challenge to a University of Texas affirmative action program designed to boost the enrollment of minority students. In the ruling, Justice Anthony Kennedy wrote that “considerable deference” is owed to universities when they are seeking to determine student diversity. He said that “it remains an enduring challenge to our nation’s education system to reconcile the pursuit of diversity with the constitutional promise of equal treatment and dignity.” But in the Texas case, the challengers had failed to show that the university could have met its needs via another process, he said. Kennedy noted that the university “tried and failed to increase diversity” through other race-neutral means.

An airplane powered solely by the sun landed safely in Seville in Spain early this morning after an almost three-day flight across the Atlantic from New York in one of the longest legs of the first ever fuel-less flight around the world. The Solar Impulse 2 touched down after 71 hours aloft, averaging about 43 miles per hour.

An electric racing car built by Swiss student engineers has broken the world record for acceleration by battery-powered vehicles. The “grimsel” car took only 1.513 seconds to reach 62 miles per hour (or 100 kilometers per hour) – slashing about a quarter of a second off the previous record time. So far, no petrol-powered production car has managed to hit the same speed in a comparable time. The grimsel needed only 98 feet of track to reach the landmark speed.