Financial Review

Sooner Rather Than Later

Sinclair Noe — June 18, 2015

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DOW + 180 = 18,115
SPX + 20 = 2121
NAS + 68 = 5132
10 YR YLD + .04 = 2.35%
OIL + .53 = 60.45
GOLD + 16.90 = 1203.00
SILV + .04 = 16.26

Three straight days of gains on Wall Street.  The Nasdaq finished up 68 points, or 1.3%, to 5132.95 and hit a new intraday record high of 5143.32. That tops its previous all-time intraday high of 5132.52, set back in March 10, 2000. The Nasdaq’s previous closing high of 5,106.59 was notched much more recently, on May 27. The rally was broad-based as all 10 S&P sectors rose with health care leading the way and all 30 stocks of the Dow posted gains.

We start with economic data. The consumer price index rose a seasonally adjusted 0.4% last month, almost entirely because of a surge in gasoline prices ahead of the summer driving season. Gas prices shot up 10.4% to mark the largest gain in six years. The overall cost of food, meanwhile, was unchanged for the second month in a row. Stripping out the volatile food and energy categories, so-called core consumer prices rose a much milder 0.1% in May. The cost of housing, airline tickets and medical care all rose while clothing prices declined.

The Conference Board’s leading economic index rose 0.7% in May for the second month in a row. The Board says the sharp increase confirms the outlook for more economic expansion in the second half of the year after what looks to be a much weaker first half.

The number of jobless workers seeking U.S. unemployment benefits fell again in mid-June and stood near a 15-year low. Initial jobless claims in the period running from June 7 to June 13 fell by 12,000 to a seasonally adjusted 267,000. New claims are 15% lower compared to one year ago.

The Philadelphia Fed’s manufacturing index increased to a reading of 15.2 in June, above the 6.7 in May. This is the highest reading since December; still, down from November’s reading of 40.2

Eurozone finance officials met in Luxembourg today. After 4 hours they did not come to an agreement about Greece, so they will hold an emergency meeting in Brussels on Monday. It is difficult to get a straight story on the Greek situation. Bloomberg ran a story today including a picture of protestors in Athens, it looked like a large crowd; the caption said the protestors were, “against the government and in support of the country’s membership in the euro area.” The Guardian ran a story showing protestors described as, “pro-government” and demanding an end to austerity measures.

Maybe it was two different rallies or maybe the protestors are just as confused as the negotiators. As best I can tell, Greece doesn’t have the money to pay the Troika at the end of the month; the negotiations are whether the Troika will lend Greece money to pay back to the Troika, along with another pound of flesh of course. Meanwhile, the German newspaper says Greek PM Alexis Tsipras and Finance Minister Yanis Varoufakis might not be radical hot-heads after all, rather the foot dragging and brinksmanship may turn out to be brilliant negotiating. Time will tell, and sooner rather than later.

Hong Kong’s legislature has vetoed a China-vetted electoral reform package that had been criticized by pro-democracy lawmakers as flawed and undemocratic. Although the new system would allow the next leader to be directly chosen by voters, Beijing would retain the right to choose the candidates on the ballot. Prior to the vote, Hong Kong’s government made it clear that if the package was defeated, the status quo would prevail and the chief executive would continue to be chosen by a committee of 1,200 members.

General Motors and Fiat Chrysler Automobiles have turned to investment banks for help to deal with a stand-off as Fiat-Chrysler seeks to force a merger with GM. Earlier this year, GM’s board rebuffed a merger proposal from the Italian-American carmaker and Chief Executive Mary Barra said last week she had no interest in a combination. Barra’s rejection has not stopped Fiat Chrysler’s boss Sergio Marchionne, who is lobbying GM investors to support his case.

AT&T Mobility has been fined $100 million for offering consumers “unlimited” data, but then slowing their Internet speeds after they reached a certain amount. The Federal Communications Commission said that the company misled consumers into buying plans they believed would give them unlimited ability to send and receive data, including Web browsing, GPS navigation and streaming videos. But once the consumer hit a certain level, the data on unlimited plans would be slowed down significantly. It’s not unusual for phone companies to slow, or “throttle,” speeds on a network as a way to manage congestion, but the FCC says AT&T was slowing speeds until the customer’s next billing cycle, even when there was no congestion.

Two new IPOs hit the New York Stock Exchange this morning. Fitbit priced 36-million shares at an offer price of $20 per share. At that level, the company will raise $732 million, at a valuation of $4.1 billion. Univar, a chemical distributor, priced at $22 per share, raising $770 million with a valuation of $3 billion.

FIT + 9.68 = 29.68
UNVR + 3.40 = 25.40

A driver for Uber is an employee, not an independent contractor; so says the California Labor Commission. And while the ruling applies only in California, it could have potential implications for other “crowdsourced” services such as Uber rival Lyft, chore service TaskRabbit, and cleaning service Homejoy. Classifying Uber drivers as employees could mean considerably higher costs for the company, including Social Security, workers’ compensation and unemployment insurance. That in turn could affect its valuation, currently above $40 billion, and the valuation of other companies that rely on large networks of individuals working as contractors.

A report from Americans for Tax Fairness claims that Walmart has $76 billion stashed away in foreign tax havens where they escape U.S. taxation. The report claims that Walmart operates 78 subsidiaries and branches in 15 tax haven countries, especially Luxembourg where the company has 22 subsidiaries but no retail stores.

Thomas Hayes, a former trader on trial over charges he manipulated benchmark interest rates, told prosecutors in 2013 that UBS Group distributed “an instruction manual on fixing Libor” to suit their trading positions. Hayes is the first person to stand trial for rigging Libor. Today, prosecutors showed jurors the instruction manual, entitled, “Guide to Publishing Libor Rates”. Hayes told prosecutors the document was evidence that Libor-rigging was standard operating procedure during his time at UBS.

Remember when banks engaged in fraud and deceptive lending and predatory lending practices? And then after the bailouts and the housing market collapse, the banks botched the foreclosures? And robo-signing? And losing paperwork? And it got so bad that in 2011 a dozen major mortgage companies struck a deal with the Office of the Comptroller of the Currency to bring in independent auditors to review foreclosures documents of aggrieved borrowers. And then that was scrapped because the bankers interfered with the auditors and there were cost overruns. Anyway, part of the 2011 deal was that the banks would clean up their mortgage and servicing departments. The OCC now says 6 banks did not live up to their end of the deal: HSBC, JPMorgan Chase, Santander, US Bank, and Wells Fargo. So, the OCC says it will impose new restrictions and pay closer attention.

The Securities and Exchange Commission charged 36 firms for violating federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The offending firms included familiar names such as Merrill Lynch, JPMorgan, Citigroup, and Goldman Sachs.

The UN has published a report on refugees, showing nearly 60 million people displaced from their homes, 14 million of them in 2014 alone, and half of them children; and more than 230 million children currently live in conflict-affected areas.  Not only is the number of refugees and asylum seekers today the largest since World War II, but the report also shows the fewest number are able to return home under current conditions. The largest toll stems from the four-year civil war in Syria: 7.6 million Syrians are internally displaced and 3.9 million are outside the country.

The National Oceanic and Atmospheric Administration reports that last month was the hottest May on record, and the past five months were the warmest start to a year on record. And that jibes with earlier reports that 2014 was the hottest year for the planet in records going back to 1880. The stifling start to 2015 may be just the beginning. The National Weather Service predicts that a pattern of unusually warm waters in the Pacific Ocean, known as El Nino, has an 85 percent chance of persisting through the 2015-2016 winter. And this El Nino could be a big one. A strong El Nino doesn’t guarantee record-breaking heat, but combined with the general trend of global warming, that possibility is looking increasingly likely.

In his much-awaited encyclical on the environment, Pope Francis offered a broad and uncompromising indictment of the global market economy, accusing it of plundering the earth at the expense of the poor and of future generations. The 183-page document, which Pope Francis addresses not only to Catholics but to “every person living on this planet,” includes pointed critiques of globalization and consumerism, which he says lead to environmental degradation. The pope lays out a moral case for supporting sustainable economic and population growth as part of the church’s mission and humanity’s responsibility to protect God’s creation for future generations.

The pope will visit the United States in late September, during which he’s scheduled to address a joint session of Congress and, separately, the United Nations General Assembly. The highlight of the pope’s trip will be the World Meeting of Families in Philadelphia, where the city is preparing for millions of pilgrims to visit. The letter’s release gives it several months of lead time on a major United Nations climate change conference that will take place in late November and early December in Paris.

Here is the link to read the encyclical.

Financial Review

Underwater

Sinclair Noe — June 12, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

The Moral and Economic Issue of Our Time

Sinclair Noe — April 22, 2015

 

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

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DOW + 88 = 18,038
SPX + 10 = 2107
NAS + 21 = 5035
10 YR YLD + .06 = 1.98%
OIL – .45 = 56.16
GOLD – 15.00 = 1187.80
SILV – .22 = 15.86

The National Association of Realtors reports existing home sales increased 6.1% in March, the fastest pace of sales in 18 months. The jump in March sales follows a couple of slow months due, at least in part, to bad winter weather. But the latest figures suggest the mix of low mortgage rates, steady job creation and pent-up demand could push full-year sales to prerecession levels. Mortgage rates also are still near their lows for the year. The average interest rate on a fixed, 30-year mortgage was 3.67% last week, down from 4.27% a year ago, according to Freddie Mac’s latest weekly survey.

Greece will not present a list of economic reforms to Eurozone finance ministers on Friday; the deadlines don’t really help and they might even hurt because they lead to brinksmanship in negotiations on what reforms the Syriza government in Greece needs to do to secure more funding. There are signs Greece’s creditors are curbing demands for far-reaching reforms as part of current talks, perhaps a realization that they can’t get blood from a turnip, but the softening stance comes on condition Greece stays co-operative on fiscal targets. The liquidity situation in Greece is already a little tight, but it should be sufficient into June. The European Central Bank’s Governing Council raised the cap on Emergency Liquidity Assistance by about $1.6 billion; this is emergency cash to prevent a run on the Greek banks.

There are really only limited options for Greece; they can’t pay back what they owe because they just don’t have the money; they have already made huge cuts, and it has only pushed the economy into depression; voters made it clear that they did not want further cuts. And even if Greece pays back what they owe and they qualify for a new round of bailout funds, the money would go to banks and almost nothing would go to the Greek economy. So, the only option is for some sort of compromise.

And maybe the ECB and the IMF and the Euro-bankers are starting to realize that a Greek collapse and exit from the European Union would be more expensive than a compromise. While Greece is not a very large economy, the risk of a default and exit has far reaching implications because it would hurt the Euro-banks; not just the default, but the side bets, or derivatives on debt, and the implications for other struggling countries such as Spain and Italy, which might result in recalculation of their debt. The threat is that a couple of hundred billion in bad debt could cascade into much more; just as we saw the collapse of a relatively minor investment bank like Lehman Brothers back in 2008, turn into a major financial meltdown. Beyond that, if Greek leaves or is kicked out of the Euro Union it casts doubt on the whole idea of a European free trade zone, and that economic integration is beneficial to all members of the EU. The consequences of free trade are not always positive. The consequences of a Greek collapse are significant for all of Europe, and by extension the global economy.

Earnings season is in high gear with several big names reporting:
This morning, McDonald’s stock moved higher after the company announced a new turnaround plan to be revealed early next month. Results, though nothing to brag about, were better than expected.

Coca-Cola posted its first quarterly sales gain in two years after higher drink prices helped make up for sluggish demand.

Tesco, the British grocer, reported an annual loss of $9.6 billion, one of the biggest in British corporate history, and warned investors there could be more pain to come. The 96-year-old group, which dominated the British retail landscape for decades, wrote down the value of its business by 7 billion pound. After two decades of uninterrupted growth, Tesco lost its way when it was distracted by expensive overseas expansion and failed to spot the threat from discounters at home.

Boeing said its first-quarter profit rose 38% on growth in its commercial-airlines segment, but its revenue growth didn’t keep pace and costs tied to its flagship 787 program continued to mount.

Chip maker Qualcomm beat earnings estimates but reduced the 2015 outlook for its semiconductor business due to reduced sales in integrated processors.

EBay reported stronger-than-expected first-quarter earnings and sales, led by an 18% improvement in total payment volume and a 26% increase in merchant services volume.

Facebook reported a big jump in revenue, from about $2.5 billion to more than $3.5 billion, but they plowed more money back into the company for data centers and long term initiatives, and net income dropped slightly. Facebook generates more than half its revenue overseas and a stronger dollar hurt results.

AT&T reported slightly lower first quarter profit, just short of analysts’ estimates. Revenue edged slightly higher but also missed estimates. AT&T added more than 400,000 new wireless phone customers even as they faced greater competition from smaller rivals such as T-Mobile and Sprint.

And the competition is about to heat up big time. Google rolled out its wireless phone service today. Google’s service will run on the networks of Sprint and T-Mobile, switching between them depending on the stronger signal, and it will use Wi-Fi nets to route phone calls and data. Here’s the kicker: you only pay for the data you use. No other major US phone carriers do that. You pay $20 per month for unlimited calls, texting, mobile hotspot usage, and international coverage. Then you pay $10 for every gigabyte of data you want to use in a month. If you don’t use all the data you buy, Google refunds you the difference. So, if you buy a 3 gigabyte per month plan and you only use 1.4 gig, you get a $16 refund. If you watch a lot of videos on your phone it could get expensive. If you use basic service it will be a bargain. Either way, it is a radical departure in wireless phone pricing.

Today is Earth Day, celebrated on April 22 to build support for environmental protection around the world. First celebrated in 1970, Earth Day is observed in more than 192 countries with festivals, rallies and environmental activities. More than one billion people participate in Earth Day campaigns every year and it is the largest civic event in the world. Today, President Obama delivered a speech on climate change in the Everglades in Florida. I’m not really sure how to celebrate Earth Day, most of the numbers about the Earth and the climate are nothing to celebrate.

The World Wildlife Fund’s Living Planet Report estimates that there has been a decline by 40% in wildlife populations around the world since 1970; almost a third of global fisheries have collapsed since the 1960s; The Keeling Curve, which tracks atmospheric CO2 since 1958, shows we are heading towards catastrophic climate change; and a group of experts say that out of nine safe operating boundaries for Earth, four of them are in the red zone.

Maybe you forgot about Earth Day, maybe you never cared about it, but environmental issues will likely be front and center this year like never before. And the reason is Pope Francis. This summer, Pope Francis will deliver the first major encyclical of his papacy. It will be on climate change and the environment. Encyclicals are a big deal.

Later this month, the Vatican will host a climate change-themed conference, entitled “Protect the Earth, Dignify Humanity. The Moral Dimensions of Climate Change and Sustainable Development.” 2015 is a pivotal year for efforts to jumpstart a transformation of the energy system from a carbon-intensive one that is threatening to destabilize the planet to a low-carbon one that can slow the rise of the planet’s temperature. World leaders are committing to long-term efforts to slow the use of carbon-intensive energy, and the Vatican wants to influence those deliberations that conclude in Paris at the end of the year. The Pope will publish his encyclical in July; he will visit the US in September and address a joint session of Congress.  It could be an uncomfortable moment for many lawmakers: 169 members of the 114th Congress have expressed doubts about the science behind climate change, 35 of whom identify as Catholic. Beyond politics, the Pope recognizes that climate change is becoming the moral issue of our time.

The Pope is likely to use his encyclical, or his letter to more than 1 billion Catholics to explain the basics of what climate change is in plainspoken language that makes the issue available and relevant to everyone, rich and poor, and explain why we need to care about it.  And the Pope will explain that people of faith are called to love their neighbors; because climate change harms our neighbors, we must solve climate change if we want to protect the people we love. Christians are also called to remember our rightful place within creation. That rightful place is one that respects a vast web of life, and honors our responsibility to protect and defend the creation. Pope Francis told a crowd in Rome last May that mistreating the environment is a sin, insisting that believers “safeguard Creation … Because if we destroy Creation, Creation will destroy us! Never forget this!” Christians are also called to care for the poorest and most vulnerable among us, a theme that this particular pope embodies better than any in recent history. The poorest people are least responsible for climate change and most affected by it.

Changing the way we use energy will have an impact on the economy, and many people are fearful of added energy costs, without recognizing the economic opportunities that will be created by the transition. The truth is that climate change itself is the greater economic threat. The natural world underpins everything we do. Climate change will disrupt every sector of the economy, from agriculture and transportation to energy. Beyond the science and the policies and the biblical rationale beneath it, the most important aspect of the pope’s encyclical will be his call to the church to take up the moral cause. The church will hear it, understand it and advocate for it. When a billion people heed their religious leader’s call to reflect and then advocate and act on it, business and political leaders will have no choice but to pay attention.