Financial Review

And Pause

Sinclair Noe — March 2, 2017

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DOW – 112 = 21,002
SPX – 14 = 2381
NAS – 42 = 5861
RUT – 17 = 1395
10 Y + .03 = 2.49%
OIL – 1.21 = 52.62
GOLD – 15.00 = 1235.00

Yesterday, the Dow advanced about 300 points to close above 21,000 for the first time, just 24 trading sessions after it first hit 20,000. That matches the fastest-ever move between thousand-point milestones, which last happened in 1999 and took the index above 11,000.

The number of Americans filing for unemployment benefits fell to near a 44-year-low last week. Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 223,000 for the week ended Feb. 25, the lowest level since March 1973.

It was the 104th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970.

The Federal Reserve’s Beige Book, a collection of anecdotes about the economy gathered before the central bank makes interest-rate decisions, said “businesses were generally optimistic about the near term but to a somewhat lesser degree than in the prior report.” Overall, the US economy continues to meander along, with all districts reporting “modest to moderate” growth.

Federal Reserve Gov. Lael Brainard has been among the most consistent doves at the Fed, but now, “near-term risks” to the U.S. from abroad appear to have diminished. Brainard the US economy appears to be in transition to a more stable growth path and gradual interest-rate hikes are likely to be appropriate “soon.”

Fed Gov. Jerome Powell became the latest Fed official to hint that a hike is imminent when he said Wednesday that the case for raising interest rates in March “has come together.” Fed Chair Janet Yellen is set to speak on the economic outlook in Chicago on Friday in her last speech before the Fed’s March 14-15 meeting.

Emerging-market borrowers are selling bonds at an unprecedented pace before the Federal Reserve raises interest rates. Emerging-market issuance in dollars and euros this year has already exceeded $100 billion. That’s the fastest pace ever and almost 20 percent more than the previous record for the period in 2014. With yields still favorable to borrowers, they may accelerate plans to refinance maturing debt and lock in current yields.

The yield on the two-year US Treasury note rose 3 basis points to 1.32% in recent trade, its highest end-of-day level since June 10, 2009. Bond yields rise as prices fall. The yield also notched its largest four-day increase since Feb. 8, 2011. The yield on the 10-year Treasury note has popped about 16 basis points in the past week.

The dollar advanced. Oil closed at the lowest level in more than three weeks. US stockpiles expanded to 520 million barrels, the most in weekly government data going back to 1982, even as Saudi Arabia continued to lead OPEC’s efforts to cut production to end the glut.

Snapchat parent Snap Inc raised $3.4 billion in its IPO last night, valuing the company at $24 billion, more than double the size of Twitter and the richest valuation in a U.S. tech IPO since Facebook five years ago.

The shares priced at $17 each, above the expected range of $14-16. And the IPO was oversubscribed by more than tenfold; and when shares started trading, there was a pop to $25, and shares closed at $24.47.

Snapchat’s founder and early investors cashed out over $1 billion today. This for a company which reported revenues of $404 million with losses of $515 million in 2016. And shareholders don’t have voting rights. Go figure.

About 32 million Yahoo user accounts were accessed by intruders in the last two years using forged cookies. The company said some of the latest intrusions can be connected to the “same state-sponsored actor believed to be responsible for the 2014 breach,” in which at least 500 million accounts were affected.

Yahoo also said in December that data from more than 1 billion user accounts was compromised in August 2013. Yahoo’s board of directors have decided to forgo CEO Marissa Mayer’s 2016 bonus following the results of an internal investigation of how the company’s massive hacks were handled.

Yesterday, Amazon’s cloud service S3 went down for a few hours. Today, Amazon blamed the outage on human error and the movie LaLa Land.

Banks globally have paid $321 billion in fines since 2008 for an abundance of regulatory failings from money laundering to market manipulation and terrorist financing, per data compiled by Boston Consulting Group. That tally is set to increase in the coming years as European and Asian regulators catch up with their US peers, who have levied most charges to date.

The Labor Department has proposed delaying a rule that would require retirement advisers to act in the best interest of their clients. The “fiduciary rule” was set to go into effect on April 10 and would have prohibited retirement advisers from accepting incentives for promoting certain funds over others.

The Labor Department announced a proposed 60-day extension for the rule to go into effect on June 9. During that time, the department said it will collect applicable information on the possible effects of rule, including public comments.

As credit card companies compete for customers by offering increasingly better rewards and perks, American Express is giving its Platinum card a facelift and a benefits overhaul. The newly-enhanced card will come with Uber credits, increased travel rewards and more access to special events. But the new benefits don’t come cheap. The card carries a $550 annual fee, an increase from $450, and currently offers no sign-up bonus.

Federal law enforcement officials searched three facilities of heavy machinery manufacturer Caterpillar in Illinois. It was not immediately clear why federal agents raided the three locations, but Caterpillar has been fighting an Internal Revenue Service demand that the company pay $2 billion in taxes and penalties for profits assigned to a Swiss parts distribution subsidiary, Caterpillar SARL, or CSARL, per filings with the Securities and Exchange Commission.

That subsidiary was also the subject of a 2014 Senate committee report that charged Caterpillar “shifted billions of dollars in profits away from the United States.” Caterpillar also disclosed in its report that it had received grand jury subpoenas from the U.S. District Court for the Central District of Illinois seeking documents and information related to the movement of cash among U.S. and non-U.S. subsidiaries, and the purchase and resale of replacement parts.

Boeing is cutting its Seattle-area workforce by at least 1,800 jobs this year as the company streamlines operations. Boeing approved voluntary layoffs for 1,500 mechanics. Another 305 engineers and technical workers are leaving voluntarily.

Anheuser-Busch InBev  reported worse-than-expected quarterly results. The company said that challenges in Brazil hurt its overall performance.

Shake Shack same-store sales whiff. The burger chain announced adjusted earnings of $0.09 a share, matching estimates, but said same-shack sales, or sales in stores open at least two years, rose 1.6%, well shy of the 2.6% estimated gain.

Barnes & Noble reported third-quarter profit that missed expectations. Same-store sales fell 8.3%, largely due to lower traffic and a decline in coloring books, artist supplies and the best-selling Adele album that was released in 2015. The company now expects full-year 2017 same-store sales to decline about 7%.

Broadcom came in 15 cents above estimates with adjusted quarterly earnings of $3.63 per share, while the chip maker’s revenue was slightly above estimates. The company, which is a major supplier for Apple, said it expects healthy demand for its products to continue.

After the closing bell, Costco reported fiscal second-quarter per-share earnings and sales below expectations and said it plans to raise membership fees in June by $5.

The creepiest thing of the day, and there were multiple candidates – goes to Spiral Toys; a company that sells internet-connected teddy bears that allow kids and their far-away parents to exchange heartfelt messages left more than 800,000 customer credentials, as well as two million message recordings, totally exposed online for anyone to see and listen.

Since Christmas day of last year and at least until the first week of January, Spiral Toys left customer data of its CloudPets brand on a database that wasn’t behind a firewall or password-protected. The exposed data included more than 800,000 emails and passwords.

As we’ve seen time and time again in the last couple of years, so-called “smart” devices connected to the internet—what is popularly known as the Internet of Things or IoT—are often left insecure or are easily hack-able, and often leak sensitive data. There will be a time when IoT developers and manufacturers learn the lesson and make secure by default devices, but that time hasn’t come yet.

So, if you are a parent who doesn’t want your loving messages with your kids leaked online, you might want to buy a good old fashioned teddy bear that doesn’t connect to a remote, insecure server.

Tomorrow is the first Friday in March, but it is not a Jobs Report Friday. The jobs report is a monthly ritual for anyone following markets or the US economy, as it contains some of the main data points measuring the health of the labor market in the world’s largest economy.

The report almost always comes out on the first Friday of the month, but not this month: The February 2017 report is scheduled to be released on March 10, a week later than might be expected. It turns out that this is due to the way the jobs numbers are gathered and how the days of the week fell this year during a short month.

When the 12th is on a Sunday and there are 30 days or less in the month, the release date will wind up being the second Friday of the following month – so March 10, not tomorrow.

Attorney General Jeff Sessions said he would recuse himself from investigations involving the Trump campaign over his contacts with Russian officials during the 2016 election, but stood firm on the answers he gave during his Senate confirmation hearing about his past communications. Sessions denied during his confirmation hearing that he had ever communicated with any Russian officials while he was a top Trump campaign surrogate.

During his press conference, Sessions emphasized that he didn’t meet with Russian operatives about the Trump campaign during the election. So, the story is shifting. Is it too late to change my vote for Creepiest Thing of the Day?

FINANCIAL REVIEW

Catch a Falling Star

Sinclair Noe — November 12, 2014

Podcast: Play in new window | Download (Duration: 13:20 — 6.1MB)

DOW – 2 = 17,612
SPX – 1 = 2038
NAS + 14 = 4675
10 YR YLD un = 2.36%
OIL – 1.19 = 76.75
GOLD – 2.80 = 1161.10
SILV – .04 = 15.76

Stocks have been on a run lately, with the Dow Industrials and the S&P 500 hitting record highs yesterday, and the Dow Transports closing at a new high today. Yesterday, the S&P 500 marked its 40th new closing high of the year, versus 45 in 2013. The last five-day streak of record highs was in May 2013, and the next longest was eight days in June 1997. The Dow also hit a record yesterday, marking 6 consecutive record highs, its longest since June. The S&P 500 has closed above its 5 day moving average for the 19th consecutive session, a streak that has only occurred seven times in the past 20 years. And today did not reverse the trend.

Typically, after a rally like this you might expect a pullback; not necessarily a correction, but a pullback; a pause to catch your breath. And so, now would not look like a good time to buy, but you also haven’t seen a signal to sell, at least not yet. Meanwhile, the advance has been so straight and fast that it hasn’t left any support levels in its wake. You might look at S&P 2000 as a round number, but that is meaningless; there was a little consolidation last week around 2001, but that is not much. Beyond that, you look at another weak support at 1925, and then the real strong support at 1820. Working off trend lines, the 50 day moving average is at 1972. In other words, this rally has outrun its support.

Over the past month, you would be hard pressed to find a sweeter chart than the Dow Jones Transports, which hit another record high close, up 30 at 9091. Those trains just keep on rolling down the track.

Yesterday and today seemed more a pause in the markets. Earnings season is winding down, and it looks like a very good quarter for companies. Only about 40 of the S&P 500 companies are left to report, and it looks like 75% of companies that have reported beat expectations, and overall earnings growth is around 10% from the year ago quarter. That’s about as good as it gets.

Time now for another edition of “Banks Behaving Badly”. Today it was announced that 5 banks are being fined for manipulating the foreign exchange market; this is the $5.3 trillion dollar a day market for currencies, also known as the Forex Market or FX. The investigation was led by the US
Commodity Futures Trading Commission, Britain’s Financial Conduct Authority, and the Swiss Financial market Supervisory Authority. The 5 banks that reached a settlement are: Citigroup, UBS, JPMorgan Chase, Royal Bank of Scotland, and HSBC; the usual suspects.

UBS agreed to pay the largest fine at $800 million, even as regulators acknowledged the bank was first to cooperate on the probe. Separately, the Office of the Comptroller of the Currency has assessed an additional $950 million against Bank of America, Citigroup and JPMorgan for “unsafe or unsound practices” tied to their foreign exchange trading. The total fines are $618 million for HSBC, $634 million for RBS, $1 billion each for JPMorgan and Citi, and $250 million for BofA.

Basically the Forex traders would get together or phone other traders or instant message or plan their schemes in chat rooms to manipulate prices to improve their trades, even if it meant screwing their customers. The instant messages left a digital trail of incriminating evidence. The traders knew they were breaking the law and they did it anyway. The evidence released today included transcripts that the fraud and collusion was taking place within the last year; this is not some scam from 2007. Now, remember that all these banks have a long list of transgressions that resulted in deferred prosecution agreements. Supposedly they are on parole, and they have violated their parole, again.

Tim Massad, chairman of the CFTC, issued a statement, saying: “Today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated.”

What a crock.

It is tolerated. It has been tolerated in the past, and there is nothing to indicate that today’s fines will change much. We’ve seen similar behavior in interest rate markets; the Libor, London Interbank Offered Rate, is manipulated; the ISDA fix in the derivatives markets is manipulated; the precious metals markets are manipulated; the US stock markets sell special high speed access to allow certain firms to manipulate the stock markets. The list goes on. And with every manipulation, the banksters steal a little bit more; they just walk right up and take it out of your wallet.

And the fines today will not deter illegal activity. Several traders have been fired or suspended; many are still trading. And just who goes to jail for this fraud? Not one person, although we hear that there are criminal investigations; which means there will be a few junior level traders that will be thrown under the bus. But today’s fines are mainly another slap on the wrist. Part of the punishment today comes from the Swiss regulators who state that the manipulators at UBS must limit bonuses for traders of foreign exchange and precious metals to 200% of their base salary for two years. Which means the bank will now have to raise the base salary for traders. That’ll teach them.

This purportedly groundbreaking settlement is characteristic of the other ones that have come before it: there’s no mention as to whether an actual legal process was pursued, whether depositions were taken or whether an expert came up with a number for total damages. The settlement is supposed to placate the public, but when the rate controls the trading of over 5-trillion dollars on a daily basis, is 4 billion enough?

The combined fines calculate to be $4.25 billion. The banksters named today trade $5.3 trillion on the foreign exchange each day of the week. The fines calculate to be a 0.08% penalty on what these banks trade daily on the exchange. Again, not eight percent, but 0.08%. These aren’t fines against the banks. $4.25 billion is not punitive. It’s their pocket change.

Despite banksters’ protestations that things are changing, there is evidence published today suggesting that, before the official investigation, whistle-blowers were ignored by banks and complaints from customers (the global businesses and pension funds that rely on foreign exchange markets) pushed aside.

President Obama is in Asia, on his way to the G-20 conference, and at a state visit in China last night China and the US announced new pledges on greenhouse gas emissions. The US will try to reduce US levels between 26% and 28% by 2025, compared to 2005 levels. President Obama’s offer is based on cuts in carbon emissions from coal power. China did not set a specific target, but said emissions would peak by 2030, and that 20% of the country’s energy would come from emission-free sources by then. The two countries also agreed to reduce the possibility of military accidents in the air and sea. It is the first time China has set an approximate date for emissions to peak. The two countries together produce about 45% of the world’s carbon dioxide.

Setting a 2030 target for peak carbon emissions is a first for China, but most analysts expected China’s emissions to peak about that time anyway. Beijing has recently shown it is serious about cleaning up its emissions by strengthening environmental laws, toughening regulations, and stepping up oversight of factories and power plants. They had to do something because the air was thick as soup, and causing health problems. They either had to clean up or watch people stop breathing. The bigger challenge for China may be satisfying the pledge to get 20% of its energy from non-emissions producing sources. That promise will require an additional 800-1,000 gigawatts of nuclear, wind, solar and other zero emission generation capacity; an amount roughly equal to the entire US electricity capacity today.

Under the Kyoto plan, developed economies, including the United States, were supposed to cut their fossil fuel emissions, while developing countries like China were exempt. The United States refused to ratify the treaty, while China went on to become the world’s largest carbon polluter. Many other governments also refused to change pollution standards because the world’s two largest polluters were not acting, so why should they.

The agreement is not binding. If they take the actions to meet the targets, then it’s meaningful, but for now it’s a paper promise. And since physics is uninterested in spin, all the hard work lies ahead.

NATO officials say Russian troops and military equipment including tanks, artillery, air defense systems, and combat troops have been sighted entering Ukraine. Russia’s defense ministry denied that its troops were in eastern Ukraine to help pro-Russian separatists there. However, the rebels have admitted being helped by “volunteers” from Russia. The United Nations Security Council is convening an emergency session on Wednesday to discuss the reported sightings. Fighting and artillery fire have been reported around the cities of Donetsk and Luhansk.

The Rosetta mission has achieved something quite remarkable; the combined effort of the European Space Agency and NASA has landed an unmanned spacecraft on a comet. After flying for 10 years and traversing some 317 million miles the Rosetta orbiter touched down on Comet 67P at 11:00 AM Eastern time. The spacecraft that landed on the comet is about the size of a dishwasher and it has already sent back photos of the comet. The craft has about 2 days of battery life left, and then it will try to operate on solar powered backup batteries, with a little bit of luck.

The point of Rosetta is to gain insight on the universe’s infancy. Comets are the perfect subjects for such study: unlike stars and planets, whose chemistries evolve slowly but significantly, comets are pretty much the same ice balls they were a few billion years ago. By analyzing this comet’s composition, the Rosetta landing craft will help researchers determine the role that comets played in the nascent days of our solar system and the earth; if their ice brought us water, and if the organic matter in their crusts provided the crucial ingredients for life. And what it also tells us is that we are still capable of incredible accomplishments.

FINANCIAL REVIEW

Taking on Water

Sinclair Noe — November 6, 2014

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

Financial Review
DOW + 69 = 17,554
SPX + 7 = 2031
NAS + 17 = 4638
10 YR YLD + .03 = 2.38%
OIL – .70 = 77.98
GOLD + 1.30 = 1142.30
SILV + .11 = 15.53

Record highs for the Dow Industrial Average and the S&P 500 index. Milk and cookies time.

Outplacement consultant Challenger, Gray & Christmas says layoffs increased by 51,000 last month. Layoffs are down 4% from a year ago, and the increase in October follows a 14 year low in September. Meanwhile, the Labor Department reports the number of Americans applying for new jobless benefits fell by 10,000 last week, to 278,000; the eighth straight week under 300,000. This is all part of the setup for tomorrow morning’s monthly jobs report.

The big news today comes from the European Central Bank; ECB president Mario Draghi announced the central bank will increase its balance sheet by €1 trillion, or about $1.2 trillion, over the next 2 years. Interest rates are already at record lows, and Draghi has said they can go no lower. The ECB has issued long-term loans to banks and started buying covered bonds in the hope of flooding the economy with enough liquidity to ease credit constraints. Purchases of asset-backed securities are due to start this month.

Exactly what the ECB will purchase remains uncertain, but they are likely to move into the €1.4 trillion market for investment grade non-financial corporate bonds next month. Corporate bonds still won’t be enough and the ECB will have start buying government debt early next year.

There was a minor brouhaha about Draghi’s announcement; Reuters reported that some ECB policymakers were upset that Draghi was being overly aggressive with monetary policy. Draghi squashed that when he gave the statement, he said the asset purchases had “been approved and underwritten unanimously.”

Meanwhile the Bank of England also met today, and said it would keep its benchmark interest rate at 0.5%, where it has been since March 2009. The bank also left unchanged a stimulus program of holding 375 billion pounds, or about $600 billion.

Meanwhile, an ignominious revelation as Irish newspapers printed a letter from former ECB president Jean-Claude Trichet to former Irish finance Minister Brian Lenihan back in November 2010 where the ECB explicitly threatened to cut off emergency funding from the Irish banking system, unless Ireland immediately applied for a bailout and agreed to a program of austerity and bank recapitalization.

So, it appears the ECB really did take notes from the Federal Reserve.

Let me take you back to 2008 to refresh your memory. The major financial institutions were looking into the furnace of a global financial meltdown; the Bush administration had cobbled together a 3 page plan to bail out the banksters; most politician, both Republicans and Democrats weren’t buying in. Then-senator Obama told reluctant Democrats that as president, he would pursue major foreclosure relief efforts, but it was important to keep the banks out of the furnace. With candidate Obama on board, the bailout passed with minimal Republican support. And then after the election of 2008, the new administration decided that changing bankruptcy laws would be too difficult. Obama and Geithner let the banksters run the administration’s mortgage modification program; truly putting the foxes in charge of the hen house; and as we all know now, the mortgage mod plan was an epic failure.

On Tuesday, voters voted with their middle finger. Republicans say the 2014 midterms were a referendum on Obama’s failed policies, and they are right; but these were also failed policies of the GOP. Following the financial crisis of 2008 the politicians saved Wall Street and spit on Main Street. As the voters left the polls they were surveyed; two-thirds said the US economic system “favors the wealthy”; about 80% said they were worried about the direction of the economy; about half said things will be worse for the next generation. The economy, as in every election, remained the top issue on voters’ minds.

There has been economic recovery from the near meltdown in 2008, but it has been uneven and insufficient for most people; a few drops of tepid water on a hot summer day in Phoenix; enough to keep you alive but not enough to quench your thirst; meanwhile, a cool waterfall for the lucky few who have it made in the shade. Both Republicans and Democrats share blame for the economic shortcomings, but the buck stops in the Oval Office; rightly so. Voters may or may not be aware of all the details, but they know the game is rigged.

Everything is rigged. The Libor is rigged. The foreign exchange markets are rigged. The metals markets are rigged. The stock market is rigged. The tax system is rigged. The justice system is rigged. And of course, Washington DC is rigged.

If you steal a soda from the corner grocer, you would probably go to jail, and rightly so; but a bankster can steal billions, forge signatures on documents (remember robo-signing), perjure, money launder, inside trade, cheat on taxes, lie on official documents and the worst that happens is a slap on the fine that is ultimately paid by shareholders and consumers, and the whole thing is tax deductible. And the regulator and prosecutor then shuffle through the revolving door to get paid off by corporate America.

There has been some economic recovery but the economy is still headed in the wrong direction. Consider that in 2005, for every $1 of financial wealth there was 66 cents of non-financial wealth, things like homes and family businesses. Ten years later, for every $1 of financial wealth there was just 43 cents of non-financial wealth. What happens to all this financial wealth? Over 90% of the assets owned by millionaires are held in low-risk investments (bonds and cash), the stock market, and real estate. Business startup costs made up less than 1% of the investments of high net worth individuals in North America in 2011. Small business is the backbone of America, the economic engine for new jobs, but that engine has run out of fuel.

On the corporate side, stock buybacks are employed to enrich executives and hedge fund activists rather than to invest in new technologies. In 1981, major corporations were spending less than 3 percent of their combined net income on buybacks, but in recent years they’ve been spending up to 95 percent of their profits on buybacks and dividends. Now you might say that corporations are just sitting on a hoard of cash anyway, so why not employ that cash somewhere; but what it really says is that we have run out of productive ideas and good old Yankee ingenuity is dead. I don’t believe that, I just think we need the right soil to grow small businesses again.

The Upper Middle Class of America Owns a Smaller Percentage of Wealth Than the Corresponding Groups in All Major Nations Except Russia and Indonesia. The upper middle class in the US, defined as everyone in the top half below the richest 20%, owns 11.9 percent of the wealth – that’s 11.9% for the upper middle class in the US. Indonesia at 10.5 percent and Russia at 7.5 percent are worse off, but in all other nations the corresponding upper middle classes own 12 to 27 percent of the wealth. The American Dream is dead.

America’s bottom half compares even less favorably to the world: dead last, with just 1.3 percent of national wealth. Only Russia comes close to that dismal share, at 1.9 percent. The bottom half in all other nations own 2.6 to 10.2 percent of the wealth; just 1.3% in America. A rising tide lifts all boats. And we keep hearing that the tide is coming in, but only a few yachts are rising, and the other boats are taking on water. Don’t get me wrong, I’m not talking about a handout. I’m talking about a hand up, in an economy that’s not rigged against you. It’s the idea of equality of opportunity, make of it what you will.

FINANCIAL REVIEW

A Tale of Three Stocks

Sinclair Noe — October 20, 2014

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Financial Review

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

DOW + 19 = 16,339
SPX + 17 = 1904
NAS + 57 = 4316
10 YR YLD – .02 = 2.18%
OIL – .21 = 81.85
GOLD + 8.70 = 1247.90
SILV + .16 = 17.53

A nice bounce in the S&P 500 index and the Nasdaq Composite. For most of the session, the Dow was in negative territory, clawing its way to positive, barely. There are 3 stocks that had a compelling story today.

We start with IBM, which reported its third-quarter results; a 10th consecutive period of falling sales, marked by weaker performance in growth markets. IBM said its long-standing forecast of earnings per share of $20 for 2015 is no longer achievable. IBM lowered its forecast for free cash flow. The company said it was selling its money-losing chip-making business to GlobalFoundries, a move to further cut costs and focus on its more profitable, faster-growing businesses. Once upon a time, IBM was a pioneer in advancing semiconductor technology, its manufacturing capability fell behind others that produced chips in large volume, but now they will have to pay GlobalFoundries $1.5 billion to take the chip division, while taking a $4.7 billion charge. IBM has been divesting slower-growing and unprofitable businesses, but like many older tech companies, it is caught in the middle; sloughing off the old and expensive without yet having a foothold in the new.

Some customers are trying to move more of their corporate-computing functions to the cloud. The arrival of cheap cloud computing means that corporations don’t need IBM’s big, expensive mainframes. And even if IBM does catch up, the cloud might be such a thin-margined industry that it can’t sustain the profit margins IBM had been telling investors to expect. IBM talked about growth in cloud computing of 50%. But the company’s faster-growing businesses can’t offset its aging businesses. Revenue in hardware systems, including its Z Series mainframe systems, fell 15%. In addition, the once faster-growing services business was off 3%.

IBM earned $3.68 a share on revenue of $22.4 billion, down from earnings of $4.04 a share on $23.3 billion in sales a year ago. Wall Street analysts had forecast IBM to earn $4.31 a share, with sales of $23.37 billion. IBM also cut its earnings outlook for the year to between $15.97 and $16.31 a share from its previous forecast of $18 a share, and said it would no longer stand by its “road map” to reach earnings of $20 a share for 2015. Under previous Chief Executive Samuel Palmisano , the company had pledged in May 2010 to double its earnings to at least $20 a share by 2015 by more aggressively pursuing business in software and high-growth emerging markets.

The company also hinted it may cut back on the massive share buyback program that helped support its earnings targets. In the third quarter, IBM bought back $1.7 billion in stock. The company had $1.4 billion remaining under its current repurchase authorization at the end of September and said it would ask to boost that figure at this month’s board meeting. They might have been better served putting that money into R&D. Sometimes short-term shareholder value leads to longer-term shareholder loses. IBM down 12.95 = 169.10. (-7%). Big Blue is bleeding blue.

Sears Holding, up 6.55 = 34.96 (+23%). Why was Sears up today? It’s a smoke and mirrors move. Sears is bleeding cash; today they got a transfusion of capitol, but this is still one very sick puppy. Sears announced its intentions to conduct a rights offering of units, including senior unsecured notes and warrants. The company will offer shareholders debt and stock warrants worth $625 million, which can be exercised in five years. The exercise price for the rights offering of shares will be the same as the October 17 closing market price of $28.41.

The rights offerings that the company has announced will include 8% senior unsecured notes due 2019, along with the rights to purchase company’s common stock. Sears expects to raise $625 million out of this offering. Sears needed to raise some money because they are burning through cash. The reason they are burning through cash is, well have you been in a Sears store lately? No. Well, that’s why.

The move today also indicates that the cash burn during the quarter might have been higher than the company’s expectations, in turn, urging the company to raise additional capital through these sources. Moreover, the company might be facing pressure from its suppliers to make payments, causing it to try and improve liquidity. And beyond keeping the doors open, why the need to raise cash?

Well, hedge funds are now running Sears, and it has been a bad bet, so now they’re going into salvage mode; scraping cash from the bottom of a barrel. This in addition to already selling its Lands’ End unit, and most of Sears Canada. The bottom line is that Sears needs a big turnaround, and you won’t get that from hedge fund managers; what they will do is slowly and surely chop it up and sell it off.

After the close of trade, Apple said net income was $8.47 billion in its fiscal fourth quarter ended Sept. 27 versus $7.51 billion in the year-ago period. Earnings per share rose more sharply, to $1.42 from a split-adjusted $1.18, because the company’s stock-repurchase program reduced the share count. Revenue rose 12% to $42.12 billion from $37.47 billion in the same period a year earlier. Analysts were expecting earnings of $1.31 per share on revenue of $39.88 billion. Apple started selling the new iPhone6 and iPhone6 Plus on September 19, and they sold 39.2 million; up from 33.7 million units a year ago. Gross margin was 38% in the September quarter, at the high end of the company’s estimated range. Guidance for October through December is strong. Apple finished the quarter with a backlog of orders, and production of the 6 Plus is increasing every week as the company works to balance supply with demand. Apple was up 2.09 = 99.76, and then added another 1.33 in after hours.

Also today, Apple launched Apple Pay. Here’s how it works. With Apple Pay, you’ll be able to hold your iPhone up to a credit card terminal then use Touch ID, Apple’s fingerprint technology, to make a purchase. You’ll also be able to buy stuff within apps, just by using Touch ID at the appropriate time during checkout. It works with iPhone6 and Plus, and the new iPads for apps only; or an older phone with the new Apple Watch. It only works in the US. Both of Apple’s latest phones have Near Field Communication (NFC) chips at the top end of the device. They also both have a separate chip called the secure element (SE). Each time you initiate a transaction, the SE generates a one-use code in lieu of transmitting your debit or credit card number. The secure element found in the iPhones are considered safe from hardware attacks. In fact, if a thief dismantled your phone, the secure element would sense tampering and immediately shut down.

Apple Pay current supports credit and debit cards from Bank of America, Capital One, Chase, Citibank, Wells Fargo and American Express. Support from over 500 more banks will be available later this year, and in 2015. There are already over 220,000 retailers that are compatible with Apple Pay, including McDonald’s, Whole Foods and Walgreens. More stores, including Staples and the Disney Store, will be getting on board later this year. And while that sounds like a lot of stores, it isn’t. You wouldn’t want to think that Apple Pay will replace credit cards and cash in the near future.

Mobile phone payment systems have actually been around for quite some time. If you have an Android phone, you could have been using Google Wallet for the past 2 years, but you probably didn’t. For some reason, when Apple does it, everybody jumps on the bandwagon, and the technology is expected to explode over the next 6 months. But even if Apple can convince consumers to take their money mobile, some merchants aren’t playing ball. Wal-Mart, America’s largest retailer, won’t support Apple Pay at launch. Instead, it and other big-box stores like Best Buy are developing a competing mobile payments platform called CurrentC, set to launch sometime next year. So there will be competition, and the sector will become fragmented.

And then there is the whole matter of setting up the pay system on your phone, and then changing the system if your card changes. And quite frankly, the whole thing seems like a big hassle. Just a reminder that cash still works in a pinch, and the battery never goes dead.

Not much in the way of economic data today, but New York Federal Reserve Bank President William Dudley had some interesting comments at a conference called, “Workshop on Reforming Culture and Behavior in the Financial Services Industry.” Dudley says banks should defer bonus payments for 10 years and tap the bonus pool to pay any regulatory fines.

Dudley asked, “How will a firm know if it is making real progress? Not having to plead guilty to felony charges or being assessed large fines is a good start.” If bad behavior at financial services firms persists, they will have to be “dramatically downsized and simplified so they can be managed effectively.” Dudley said banks should offer longer deferred pay in debt, rather than equity, and added that the bonus pot should be tapped to pay any bank fines so employees would be hit before shareholders.

Fed Governor Daniel Tarullo, the Fed’s top official overseeing bank supervision and regulation, also gave his view on bank compensation saying, “It is important that compensation arrangements, including clawback and forfeiture provisions, cover risks associated with market conduct and consumer protection, as well as credit and market risks.” Tarullo noted that while US bank regulators do not have the power to criminally prosecute, they can remove bank employees from their companies, positions and even the industry.

It almost sounds like the Fed is ready to get tough on banksters, after sitting on their hands for 6 years. Tough talk is good, action is better.

Friday, April 25, 2014 - Don't Hold Your Breath

Financial Review with Sinclair Noe

DOW – 140 = 16,361
SPX – 15 = 1863
NAS – 72 = 4075
10 YR YLD - .02 = 2.66%
OIL – 1.25 = 100.69
GOLD + 9.90 = 1304.80
SILV + .07 = 19.83

Consumer sentiment rose in April to a nine-month high as views on current and near-term conditions surged. The Thomson Reuters/University of Michigan's final April reading on the overall index of consumer sentiment came in at 84.1, up from 80 the month before.

Meanwhile, a new Gallup poll shows more Americans are optimistic about the job market this month than at any time since the 2008 financial crisis, with 30% saying now is a good time to find a quality job.

That marks a significant improvement from the 8% who said they were optimistic about the job market in 2010, but it’s still a drop from the pre-2008 highs of almost 50%. And even though almost a third of Americans are optimistic, two-thirds still say the job market is lackluster; 66% of Americans say it’s not a good time to hunt for employment.

Next week’s economic calendar includes a two day Federal Reserve FOMC meeting. Next Friday, we’ll have a monthly jobs report; the current estimates call for 215,000 net new jobs in April and the unemployment rate dipping to 6.6% from 6.7%. Also, the Commerce Department will release its first guess of first quarter GDP; the consensus estimate on the initial estimate is that the economy grew about 1%.

The situation in Ukraine is going to hell in a hand basket. Russian militants have now become entrenched in towns across eastern Ukraine; Russian troops are massed on the border. Ukrainian leaders said operations to expel pro-Russian militants in eastern cities would continue, even though military action so far has done little more than prompt Russia to stage military exercises on Ukraine’s border and raise concerns about Moscow’s next move. The government in Kiev says that if the Russians cross the border they would view that as an invasion. Ukraine's Prime Minister said Russia wanted to start World War Three by occupying the country and creating a conflict that would spread to the rest of Europe.

A group of foreign military observers, possibly including some Germans, traveling under the auspices of the Organization of Security and Cooperation in Europe, along with their Ukrainian military hosts, were detained by pro-Russia separatists in Slovyansk. It was unclear precisely how many were in the group, about a dozen, but the detention appeared to be the first time that members of the Ukraine armed forces had been taken into custody by the separatists.

The US, Britain, and Germany are now calling for more sanctions against Russia, but none of the three countries gave any details of what the sanctions might be, or when they might be enacted. The standoff has already led to heavy capital flight from Russia, prompting credit rating agency Standard & Poor's to cut the country's ratings. That forced the Russian central bank to raise its key interest rate to reverse a drop in the ruble.

The Federal Communications Commission announced new rules governing Internet service. The rules effectively put an end to net neutrality, or the idea that all web traffic should be treated equally. A court decision in January struck down FCC rules meant to ensure that Internet providers do not discriminate by blocking or slowing certain content.

That new rule gives broadband providers what they’ve wanted for a long time, the right to speed up some traffic and degrade others. When broadband accelerates some traffic the result is that other traffic slows down. We take it for granted that bloggers, start-ups, or nonprofits on an open Internet reach their audiences roughly the same way as everyone else. Now they won’t. They’ll be moved over to a slow lane and forced to line up for their chance to reach an audience as they watch as companies that can pay tolls to the cable companies speed ahead. The motivation is not complicated. The broadband carriers want to make more money for doing what they already do. Never mind that American carriers already charge some of the world’s highest prices, around sixty dollars or more per month for broadband, a service that costs less than five dollars to provide.

After the ruling, internet providers like Comcast and Verizon cut deals with content providers, such as Netflix, which would pay to stream their content in an Internet “fast lane.” The new rules effectively create a fast lane and a slow lane on the internet. The fast lane includes big tech companies that can afford to pay; the slow lane includes startups, small businesses and everybody else. The internet providers are also becoming more and more involved in providing content, and it just makes sense to think their content will get preferential treatment. Companies like Verizon and Comcast will have staggering power to decide what bits of information reach your devices and mine, in what order and at what speed. That is, assuming we're permitted to get that information at all.

Bottom line is that the internet is going to get more expensive; if content providers have to pay extra for the fast lane, they’ll pass those costs on to the end user. The finer details will be hashed out in the coming months, starting on May 15, when the proposed rules become public.

Back in the Spring of 2010 the Office of the Comptroller of the Currency (OCC) and the Federal Reserve issued consent orders to 11 mortgage servicers, mandating that borrowers who had pending foreclosures, or had completed foreclosure sales in 2009 or 2010 could request an investigation by independent reviewers. The independent reviews would be paid for by the servicers, and in a shocking twist, the independent reviewers were anything but independent.

Eventually 16 servicers were included in the reviews, accused of using forged and shoddy paperwork to rapidly foreclose on homeowners, a practice known as “robo-signing.” The servicers, including Bank of America and Wells Fargo, agreed to have independent consultants review their foreclosure files for errors. In the 12 months that the review was up and running, not a single homeowner received any compensation. But the eight consultants managing the process were paid a total of $1.9 billion.

And so the independent review was cancelled and the regulators and the banksters worked out a quick and dirty settlement, with $3.3 billion going to wronged homeowners; a bunch of insultingly small checks distributed to a wide swath of people, and the regulators and banksters got to say: look how many people we helped. Meanwhile, nobody went to jail for the thousands of forged documents, the perjury, the obstruction of justice, etc., etc. in what was surely one of the largest fraud cases in American history.

Another problem is that nobody really knew who had been wronged and in what amounts, and so when the restitution was paid, nobody really knew if there was any rationale for the payments. The OCC said the consultant’s review had found an overall error rate of about 4.5% after assessing about 100,000 files, but that always seemed to be a lowball estimate.

Meanwhile, Representative Elijah Cummings continued to get data, and now that data is coming to light. In one example, a reviewer, Promontory Financial, found errors with 60% of the loan modifications conducted by Bank of America; a partially completed review found similar problems of the cases reviewed for PNC Bank. Based upon those numbers, the banksters got off with a puny little fine, and the wronged homeowners got shortchanged.

Now, you’re probably thinking to yourself, that this is old news about the robo-signing, but what is still relevant is  how the politicians have suppressed this information for so long; further proof of how deeply pretty much all of Washington DC is in bed with the banks. Only now when foreclosure abuses are considered old news does the public begin to get an inkling of how much the official story was close to a complete fabrication.

Of course, the people who went through the Independent Foreclosure Review process knew full well what a charade it was, but they were never taken seriously. The review process cost nearly $2 billion and it turned out to be a cost efficient whitewashing by the banksters. If you’ve lost your home, you are sure to be under financial duress, and people with no money don’t have any clout with our government. Foreclosure is considered a stigma, which discourages victims from telling their stories and sets those brave enough to do so up for abuse; the banks have done a great job of playing up the “deadbeat borrower” meme, whether it fits or not.

And we finish today with the story of how a top bank executive finally has to pay for his fraudulent actions. Bank of America's former finance chief, Joe Price, has agreed to pay $7.5 million to settle a New York lawsuit that accused the bank and its former executives of misleading investors during the lender's acquisition of Merrill Lynch. The top execs at BofA lied about the toxic assets on the books at Merrill Lynch and mounting losses leading to the merger; and misrepresenting the impact the merger would have on the bank's future earnings; this violated so many securities laws that it is crazy.

New York Attorney General Eric Schneiderman said: "This settlement is one more step in our effort to hold top financial executives accountable for their actions." What a crock.

The bank paid the fine for Joe Price, which means the shareholders are actually paying. Joe Price did not have to admit wrongdoing. Former BofA CEO Ken Lewis settled last month; the bank paid his fine too; Lewis did not admit wrongdoing.

Meanwhile, there is still a $2.3 billion class action lawsuit pending, and the Department of Justice is now offering a $13 billion settlement to Bank of America to resolve federal and state investigations of the lender’s sale of bonds backed by home loans in the run-up to the 2008 financial crisis. Don’t hold your breath for justice.