Financial Review

End of Easy

Sinclair Noe — March 3, 2017

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DOW + 2 = 21,005
SPX + 1 = 2383
NAS + 9 = 5870
RUT – 1 = 1394
10 Y + fraction = 2.49%
OIL + .58 = 53.19
GOLD + .30 = 1234.30

The S&P 500 and Nasdaq posted their sixth consecutive week of gains this week. The S&P gained 0.7% for the week. The Nasdaq ended the week with a 0.4% gain. The Dow finished the week 0.9% higher, booking a fourth consecutive weekly gain.

Janet Yellen delivered a key speech in Chicago. This was the Fed chairwoman’s last chance to shift market expectations before a mid-March Fed meeting. There will be essentially a blackout period on policymakers' public appearances.

Under Yellen’s leadership, the Fed has always given the markets clear guidance when it was going to raise interest rates and has not moved unless there is at least a 70% chance of a move being priced in by futures markets. Yellen was straightforward, she expects to raise rates this month, barring any unpleasant economic surprises.

Rates remain at a low level by historical standards, supporting economic growth by encouraging borrowing and risk-taking. But Fed officials have increasingly concluded that the economy is nearing the end of its recovery from the 2008 financial crisis, and that maintaining low rates could increase growth to an unsustainable pace. In the past week or so, we have had a steady stream of Fed officials making hawkish calls.

Fed Vice-Chair Stanley Fischer also delivered a speech, effectively putting a cherry on top of the rate hike message. Fischer was asked about comments by other Fed officials this past week that have boosted market odds of a March rate hike. He replied: “If there has been a conscious effort (to raise expectations for a rate hike) I’m about to join it.”

Just to refresh your memory; the Fed does not raise interest rates at the beginning of a business cycle, rather it comes at the latter stages of the cycle, and you could argue that the higher rates hasten the end of the cycle, but that is a chicken-egg debate, the point is that the business cycle has not been repealed and the current cycle is old.

We have seen recessions following tightening cycles, most recently in 2000 and 2008, but it doesn’t hold that tightening cycles cause recessions. What does follow tightening cycles is a period of market indecision and traders and investors digest the implications of higher rates – this usually plays out over about a 12-month period. The last 2 rate hikes were so small and so gradual that they barely registered, but that looks like it could change this year.

Financial stocks posted strong gains this week because rising rates tend to boost bank profits – not like they really need the help. American banks raked in record profits last year. Not only did the banking industry notch its third year of record profits in the past four, but FDIC statistics published this week showed that loan growth was strong and the number of “problem banks” fell to a seven-year low.

Yellen told Congress last month that US banks are “quite profitable” and considered “quite strong relative to their counterparts.’ Yellen credited the fact that American banks quickly built up capital after the crisis, “because of our insistence they do so.”

The Institute for Supply Management said its non-manufacturing index rose to 57.6% last month from 56.5% in January. Any reading over 50% signals that more businesses are expanding instead of contracting.

Attorney General Jeff Sessions said he’ll recuse himself from any current or future investigations related to President Donald Trump’s election campaign amid backlash over his testimony about contacts with Russia. Sessions said he did nothing wrong by failing to disclose that last year while he was a senator and Trump’s campaign ally, he met Russia’s ambassador.

Vice President Mike Pence regularly used personal email to conduct public business while serving as governor of Indiana. The private email account was first reported by the Indianapolis Star, which also reported that the AOL account was compromised last year by hackers. The paper cited emails obtained through a public-records request. Pence used that account to discuss matters ranging from security at his residence to how the state was responding to terror incidents around the world.

The White House is proposing to cut a quarter of the EPA’s budget, targeting climate-change programs and those designed to prevent air and water pollution like lead contamination.

Mexico’s economy minister went to Detroit today. In a speech to the Detroit Economic Club, Ildefonso Guajardo said NAFTA needed to be updated. He doesn’t agree, however, that the US auto industry has gotten the short end of the stick. Topics including labor and environmental standards are among those Guajardo is ready to renegotiate.

However, Mexico will not accept any tariffs passed by the US regarding the exchange of goods across the border. The Mexican peso rallied after U.S. Secretary of Commerce Wilbur Ross said a new mechanism should be created to stabilize the exchange rate. Ross said the peso could recover “quite a lot” if the US can reach a sensible agreement with Mexico on the NAFTA.

Visa, don’t leave home without it. The European Parliament has passed a nonbinding resolution calling for the reintroduction of visa requirements for American citizens, raising the stakes in a long-running battle over the United States’ refusal to grant visa-free access to citizens of five European Union countries.

European lawmakers played tit-for-tat in their dispute with the United States, demanding restrictions on American travelers unless the Trump administration lifts travel requirements for citizens of Bulgaria, Croatia, Cyprus, Poland and Romania.

The Scottish National Party is calling for a second referendum to vote on staying in the Euro Union, a move that could potentially break up the United Kingdom, which is moving ahead with Brexit.

Today, British Prime Minister Theresa May took aim at Scotland’s ruling party, accusing nationalists of sacrificing not only the United Kingdom but also Scotland with its “obsession” with securing independence. May said: “A tunnel vision nationalism, which focuses only on independence at any cost, sells Scotland short.” Remarkably, May delivered her speech in Glasgow without any sense of irony.

Samsung Group leader Jay Y. Lee will go on trial for bribery and embezzlement on Thursday, for his role in a corruption scandal that has rocked South Korea and led to the impeachment of the president. Lee, the 48-year-old third-generation leader of the country’s top conglomerate, was indicted Tuesday on charges including pledging $37 million in payments to a confidante of President Park.

Spotify hit 50 million paid subscribers. The streaming music service said it grew 25% in less than six months, extending its lead over its closest rival Apple Music, which had about 20 million subscribers in December. Stockholm-based Spotify remains unprofitable.

Snap Inc. had a monster debut. Shares of the social-media company shot up 44% in their market debut to close at $24.48 a share, giving Snapchat’s parent company a market cap of more than $33 billion. Snap is now bigger than Macy’s ($10 billion), Twitter ($11.3 billion), American Airlines ($23.6 billion), and Target ($32.9 billion).

The Snap IPO made many people very rich yesterday; the company’s two founders are now worth an estimated $5.3 billion. And a high school in Mountain View, California also had a big day. Four years ago, Saint Francis, a private Catholic school invested $15,000 in the L.A.-based tech company. That investment was sold yesterday for about $24 million.

Costco reported fiscal second-quarter net income that missed estimates, and Costco shoppers will have to pay more. Starting June 1, annual membership fees for individual, business and business add-on members in the U.S. and Canada will rise $5 to $60. Executive memberships in the U.S. and Canada will increase from $110 to $120. Overall, the fee increases will affect around 35 million members.

Boeing has accepted 1,880 voluntary layoffs from its union workers in the Seattle area, as part of the plane maker’s drive to cut costs through job reductions and other measures.

Daimler, parent of Mercedes-Benz, says it is bringing the latest concept version of its first pickup to the Geneva Motor Show later this month as a luxury midsize model. It will likely become the coolest new pickup truck that Americans won’t ever be allowed to buy – the Mercedes-Benz X-Class. When it hits showrooms later this year, X-Class will be sold in what Mercedes says are a bunch of “key markets,” and the U.S. isn’t included (for the moment).

About 308,000 Mercedes-Benz vehicles across the United States will soon be recalled because of a potential fire hazard. The problem has been linked to 35 car fires. Daimler, determined that there’s an issue with an engine part that can cause an electrical fire. The recall will include certain C- and E-Class vehicles, as well as CLA, GLA and GLC vehicles.

The Financial Stability Oversight Council met late on Thursday afternoon to review its designation of a non-bank firm as “too big to fail,” per a statement from the Treasury Department. While it didn’t name the firm, only three non-bank companies have been labeled as SIFIs to date: American International Group, Prudential Financial and MetLife.

Earlier this week, much of the internet ground to a halt when the servers that power them suddenly vanished. The servers were part of S3, Amazon’s popular web hosting service, and when they went down they took several big services with them. Amazon said it all started with a typo.

On Tuesday morning, members of the S3 team were debugging the billing system. As part of that, the team needed to take a small number of servers offline. “Unfortunately, one of the inputs to the command was entered incorrectly and a larger set of servers was removed than intended,” Amazon said. “The servers that were inadvertently removed supported two other S3 subsystems.”

The subsystems were important. Amazon said that one of them “manages the metadata and location information of all S3 objects in the region,” and without it services that depend on it couldn’t perform basic data retrieval and storage tasks. And suddenly the cloud seemed very vulnerable.

It’s the first Friday of a new month which sometimes but not always brings the government employment report. Today is one of those sometimes days, and the February data won’t be out until next week.

Financial Review

Taxman Bites Apple

Sinclair Noe — August 30, 2016

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DOW – 48 = 18,454
SPX – 4 = 2176
NAS – 9 = 5222
10 Y + .01 = 1.57%
OIL – .70 = 46.28
GOLD – 12.70 = 1311.50

Since July 8, when the S&P rose 1.54%, that index hasn’t moved more than 0.9% in any given day, and most of those changes were slight gains, including 10 all-time highs. Since Brexit, the S&P 500 has now gone 43 straight sessions without a daily decline greater than 0.7%.

Compare that with the first 43 days of this year when it happened 15 times. For the month of August, the S&P 500 has managed to gain just 3 points, which means it is about as flat as it can be.

EU antitrust regulators have ordered Apple to pay up to €13-billion-euro ($14.5-billion dollars) in taxes to the Irish government after ruling that a special scheme to route profits through the country was illegal state aid. The EU Commission says Apple paid an effective corporate tax rate of less than five-one-thousandth of a percent (0.005%) on its European profits in 2014.

Apple has previously said it received no special treatment in Ireland. Apple’s tax arrangement with Ireland also meant the company avoided taxation on almost all profits from sales of its products in the EU single market, as the sales were recorded in Ireland rather than in the country where the transaction took place. Apple and Ireland said they would appeal the decision.

Ireland’s Finance Minister said he would fight the European Commission ruling that would force Apple to pay taxes to Ireland, even though €13-billion-euro in back taxes is more than twice the country’s entire 2015 corporate tax take and equivalent to about $3,000 for every man, woman and child in Ireland.

Apple is one of more than 700 U.S. companies that have units in Ireland, employing a combined 140,000 people. The government maintains that even if it were to take the cash, European rules mean it would have to use the money to pay down some of its €180 billion euros of national debt rather than fund spending.

CEO, Tim Cook wrote an open letter about the tax ruling and in it he said that Apple “in Ireland and in every country where we operate, follows the law and we pay all the taxes we owe.” And that is probably very true; no reason to doubt that Apple has hired top accountants and attorneys to figure out all the legal loopholes. And now the EU is closing one of the loopholes.

Tim Cook, that is to say Apple, has reacted with outrage, saying the decision would “upend the international tax system” and promising to appeal and overturn the decision. No doubt years of legal fees lie ahead for all involved. But the writing has been on the wall for Apple’s convoluted corporate structure in Ireland for years.

In 2013, a US Senate committee found that Apple pushed its foreign profits into a “stateless” company, one that paid no taxes anywhere, while using an intellectual property agreement to shift US profits to the subsidiary. In 2015, the EU released its own investigation, with more specificity: Apple had negotiated two special deals with Ireland that allowed it to allocate profits to this untaxed company.

The U.S. Treasury Department said it was disappointed with the European Commission seeking to force Apple to repay tax breaks given by Ireland and the case could undermine the “spirit of economic partnership between the U.S. and the EU.” In other words, the Treasury hopes to collect taxes on Apple’s overseas cash hoard someday and they don’t want to see that money going to Europe. Plus, any money Apple pays in taxes to the EU is deductible from Apple’s US tax bill.

Apple has its tax issues in Ireland but it will hope to put all that behind it next week as a new iPhone is expected to be announced. After all, as long as Apple is selling iPhones, $14 billion is not that much. What will an iPhone 7 look like? Pretty similar to an iPhone 6 but new features will likely include waterproofing, stereo sound, a touch-sensitive home button, a dual-lens camera, and due to its thinner chassis, the headphone jack will be removed. The starting point for storage on the new entry-level model is thought to be 32GB, up from 16GB.

New MacBooks, iPad features and a monitor may also be in the works from Apple – but at least some of those devices may not be seen until after the company’s Sept. 7 event. A thinner laptop, a faster iPad display to work with Apple Pencil, and 5K monitors are among the updates coming to Apple products. But the MacBook, which some tech bloggers had thought might come alongside the iPhone 7, is more likely to be released in October.

Voters are heading to the polls for Senate and House primaries in Arizona. Locations of polling places are assigned by address. The location that coincides with your registered address (on your voter information) is where you can cast your vote on election day. Arizona law allows any voter who is registered as independent to cast a vote in the primary election, but independent voters must choose a Republican or Democratic Party ballot at the polling place. The polls close at 7 PM.

The S&P CoreLogic Case-Shiller 20-city composite of existing home prices recorded a 0.8% gain in June and a 5.1% year-on-year advance; that’s down from a 5.3% pace the prior month. Home prices in three U.S. cities – Denver, Seattle and Portland, Oregon – showed the highest year-over-year gains. Housing prices in Phoenix were up 5.1% over the past 12 months.

The Conference Board’s consumer confidence index rose to 101.1 in August from a revised 96.7 in July. That’s the highest level since September 2015. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.

Americans’ view the economy right now was the strongest since before the Great Recession. The present situation index, a measure of current conditions, climbed to 123 from 118.8 and hit the highest level since late 2007. What consumers expect six months down the road, however, was less optimistic. The future expectations index edged up to 86.4 from 82, but it was still well below the post-recession high.

Fed Vice Chairman Stanley Fischer says the US job market is nearly at full strength and the pace of interest rate increases by the Federal Reserve will depend on how well the economy is doing. The Fed has signaled since March it would lift rates twice this year, but investors have been skeptical. Fischer did not comment on the timing of the next Fed rate hike but said “we choose the pace on basis of data.”

The U.S. Labor Department’s monthly employment report on Friday is expected to show the economy added 180,000 jobs in August.  At the end of the day, it always comes down to the jobs number. Yellen can try to persuade us that the case for a rate hike is strengthening, and the other policymakers can chime in with their two cents. But they are all held hostage to the government’s jobs numbers on Friday.

Anything strong (250,000-300,000) and you won’t need anyone from the Fed telling us they are going to raise in September. The number will say it all: below 200,000, and it’s back to a December-only hike.

Trade talks between the European Union and the United States should be halted and a new set started, France’s trade minister said on Tuesday, adding his voice to calls from within Germany for an end to the negotiations. Three years of talks on a Transatlantic Trade and Investment Partnership (TTIP) have failed to resolve multiple differences, including over food and environmental safety.

Critics say the pact would hand too much power to big multinationals at the expense of consumers and workers. But despite a weekend comment by Germany’s Economy Minister that the talks had “de facto failed”, and today’s comments by the French Trade Minister, the European Commission says negotiations are making steady progress and there is an outline of a future agreement.

More than 76,000 people have signed a petition demanding former European Commission President Jose Manuel Barroso be stripped of his pension after taking a job at Goldman Sachs. Organizers plan to present it to current leaders of the EU institutions at the end of September. Critics claim the role is inappropriate given Goldman’s role in the U.S. subprime crisis and Greek debt talks. That’s one way to stop a revolving door.

The FDIC reported that U.S. banks earned $43.6 billion in the second quarter, up from $43 billion a year earlier. Around 60 percent of banks reported an increase in profit from a year earlier. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Only 4.5 percent of banks were unprofitable, down sharply from 5.8 percent in the second quarter of 2015.

Countries including the U.K., Australia and Taiwan have issued travel advisories for tourists to Singapore after the city-state announced a further increase in Zika cases. Singapore’s Ministry of Health confirmed 15 more people with locally-transmitted Zika, bringing the total number affected to 56. Health officials think they will identify even more positive cases.