Financial Review

Wide-Ranging

Sinclair Noe — June 2, 2016

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DOW + 48 = 17,838
SPX + 5 = 2105
NAS + 19 = 4971
10 Y – .04 = 1.81%
OIL – .05 = 48.96
GOLD – 2.30 = 1211.40

Again today the major market averages started the morning in negative territory – the Dow was down about 70 points in the first hour of trading – and then clawed back to slightly positive gains at the close. On Tuesday and Wednesday, the S&P 500 broke through the widely-watched 2100 mark, but finished just slightly below. Today, the index finally squeezed through.

The Organization of the Petroleum Exporting Countries is meeting in Vienna today. OPEC announced there will be no change in oil production policy, no ceiling set on output. OPEC ministers appeared to be at odds over what the bloc’s next move should be. Saudi Arabia’s energy minister said he was pleased with how the oil market was recovering and rebalancing.

The Saudi oil minister said oil prices at $50 won’t allow shale oil and other higher-cost producers to lift supply to levels that hinder market recovery. Prices need to be at level above $50 a barrel for more crude supplies to come back to the market following a slump over the past two years. Maybe, maybe not.

The European Central Bank is also meeting today. The ECB upgraded its growth and inflation forecasts for this year, but warned of downside risks related to the global economy and the so-called “Brexit” vote in the UK. The bank now sees growth of 1.6 percent for 2016, up from a 1.4 percent forecast in March. It left its growth forecast for 2017 unchanged and trimmed its forecast for 2018 to 1.8 percent. Inflation is seen at 0.2 percent compared to a previous forecast of 0.1 percent. The ECB left interest rates unchanged at 0%. Nobody expected any big changes from this meeting.

The ECB is still trying to figure out what is working, or not. According to recent analysis, a prolonged period of negative interest rates is failing to revive investment at Europe’s companies, with the vast majority of businesses in the region saying the stimulus measures have had no affect at all on their growth plans. Some 84 percent of the 9,440 companies surveyed for the European Payment Report 2016 say low interest rates haven’t affected their willingness to invest.

The ADP Employment report shows private employers added 173,000 new jobs in May. The ADP figures come ahead of the U.S. Labor Department’s more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.

Outplacement firm Challenger, Gray & Christmas reports planned layoffs totaled 30,157 last month, marking a 27 percent decline from the year ago period and the lowest total since December. Companies typically reduce the pace of layoffs in the summer. The energy sector continued to be the biggest job cutter.

In line with the layoff report, the Labor Department reports fewer Americans applied for jobless aid last week, the third straight drop. Weekly applications for unemployment aid dipped 1,000 to a seasonally adjusted 267,000. The four-week average, a less volatile measure, fell to 276,750.

American births declined and the death rate rose last year for the first time in a decade, a rare increase that was driven in part by more people dying from drug overdoses, suicide and Alzheimer’s disease.  The death rate from heart disease also edged up slightly following a long decline.  Preliminary numbers from the Centers for Disease Control and Prevention show there were 3.98 million U.S. births in 2015, down 0.3% from 2014.

The CDC also found the mortality rate to be 729.5 deaths per 100,000 people last year, up from 723.2 the year before. Earlier this year the CDC reported that life expectancy at birth for white Americans had fallen between 2013 and 2014 from 78.9 years to 78.8 years. While recent research has documented sharp rises in death rates among certain groups — in particular less educated whites, who have been hardest hit by the prescription drug epidemic — increases for the entire population are relatively rare.

An audit report published today suggests that debt-laden Puerto Rico may be able to void almost $4.5 billion of its debt because politicians exceeded constitutional debt limits and their own authority. The report states that some of Puerto Rico’s debt may have been issued illegally, allowing the government to potentially declare the bonds invalid and courts to then decide that creditors’ claims are unenforceable.

The U.S. Justice Department is likely to approve AB InBev’s takeover of SABMiller later this month. The agreement may contain measures to keep the beer behemoth from edging craft brewers from shelves, and could also include limits on the combined company’s ownership of distributors. The deal received a green light from South Africa’s Competition Commission earlier this week.

Johnson & Johnson said it would acquire Vogue International for $3.3 billion, adding brands such as OGX shampoos and FX hair styling products to its consumer portfolio that includes Neutrogena and Clean & Clear. Buyout firm Carlyle Group acquired a 49 percent stake in the company in 2014.

The Consumer Financial Protection Bureau released a set of sweeping proposals today aimed at reshaping the market for payday loans and other expensive short-term lending that the agency and consumer advocates call “debt traps.” The Consumer Financial Protection Bureau said the median fee on a storefront payday loan was $15 for every $100 borrowed; and with a typical term of 2 weeks, the average annualized rate can easily top 390%.

The rules would limit the number of payday loans a consumer can take out or rollover, lenders will be required in many cases to verify their customers’ income and to confirm that they can afford to repay the money they borrow. The number of times that people could roll over their loans into newer and pricier ones would be curtailed. The new guidelines do not need congressional or other approval to take effect, which could happen as soon as next year. Lenders say the proposed rules would devastate their industry. I certainly hope so.

In a wide-ranging interview Wednesday night, Tesla CEO Elon Musk said that he expects Apple to have a car available to the public by 2020. In contrast, Google worries him less as a competitive threat. “Google’s done a great job, but they’re not a car company,” he said. Musk is also CEO of Space X, and he detailed plans to have the first rocket carrying human cargo to Mars launch in 2024, and arrive at the red planet 18 months later. Here’s a tip for would-be Martians – take some potatoes.

Jeff Bezos, the CEO of Amazon.com, also offered up a wide-ranging interview yesterday, apparently it was the day for wide-ranging interview with eccentric billionaires; I’ll mark my calendar. Bezos also has a private space company, his is called Blue Origin, expected to launch its first people into space in 2017. Those won’t be paying customers, but thousands have expressed interest in paying for a trip on a suborbital craft. Bezos also hopes to build factories in space, where they can take advantage of nearly unlimited solar power.

Back on earth, Bezos said: “It’s probably hard to overstate how big of an impact (artificial intelligence) is going to have on society over the next 20 years.” To that end, Amazon has 1,000 employees working exclusively on Alexa software and Echo hardware. Bezos also says Amazon isn’t aiming to take over the last mile of delivery from UPS, FedEx or the US Postal Service, but the company is looking to “supplement it heavily”; this is necessary for peak selling seasons ahead of major gift-giving holidays in the countries in which Amazon operates. No word yet on when drones will be dropping off packages on the porch.

Walmart says it will start using drones, not for package delivery but for warehouse management. Walmart showed off its drones today at one of its largest warehouses in Bentonville, Arkansas. In six to nine months, the company said, the machines may be used in one or more of its distribution centers to help catalog inventory.

Walmart workers now manually scan pallets of goods with hand-held scanning devices. The drone’s methodical, vertical movements would essentially mimic the path of a person in a forklift who might be inspecting labels and inventory. The machines could help catalog in as little as a day what now takes employees about a month.

IBM is leading in the race for patents. So far in 2016, IBM has been awarded an average of 24 patents per day. Samsung is close behind, followed by Google and Microsoft. I’m not sure if this means IBM is an innovation leader or if they just have an army of good patent lawyers.

More than 18 months after Apple Pay was introduced in the United States, the smartphone giant has made only a small dent in the global payments market. Apple Pay usage totaled $10.9 billion in 2015 in the US. Global adoption has been snagged by technical challenges, low consumer take-up and resistance from banks. Meanwhile, Goldman Sachs has cut its price target on Apple to $124 from $136, but maintained its Buy rating, as a reflection of lower growth expectations for the smartphone industry.

Saudi Arabia’s sovereign wealth fund is investing $3.5 billion in Uber, the largest investment ever in the ride-sharing leader. A managing director for the Saudi fund will take a board seat at the San Francisco-based company after the deal, which values Uber at $62.5 billion. The investment, which was months in the making, does not cash out any of Uber’s existing investors.

Snapchat has 150 million people using the service each day. That makes the four-year-old messaging app more popular than Twitter by daily active users. Twitter, which was founded in 2006, has less than 140 million users interacting with the service daily.

Thursday, June 19, 2014 - Market Hits Record Highs and Supreme Court Hands Down More Decisions

Financial Review with Sinclair Noe

DOW + 14 = 16,921
SPX + 2 = 1959
NAS – 3 = 4359
10 YR YLD + .01 = 2.62%
OIL + .48 = 106.07
GOLD + 42.80 = 1321.30
SILV + .86 = 20.86

Taking a look at economic data, weekly claims for jobless benefits fell 6,000 to 312,000; the labor market still has plenty of slack but still shows signs of modest improvement. The Philly Fed manufacturing index was up to its highest reading since last September. And the Conference Board's index of leading economic indicators rose 0.5% to 101.7 in May.

President Obama said today that the United States would deploy up to 300 military advisers to Iraq to help its Iraqi government forces fend off Sunni militants. Obama emphasized again that he would not send combat troops to Iraq, although there seems to be a fine line between combat troops and advisers; he said the United States would help the Iraqis “take the fight” to the militants, who he said pose a threat to Iraq’s stability and to American interests, because Iraq could become a sanctuary for terrorists who could strike the United States or its allies.

Secretary of State John Kerry will go to Europe and the Middle East this weekend to build support among Iraq’s Arab neighbors for a multisectarian government in Baghdad.

Markets were in negative territory most of the day, nothing big, then we recovered near the end of the session, nothing big; the S&P 500 hit its 21^st record high close of the year. This market is just slowly scratching and clawing its way higher, and that’s a good thing. When the markets go on a sharp move higher, sometimes called a parabolic run, it usually ends with a nasty fall. For now, the markets are moving higher but staying within the channels of standard deviation.

There are plenty of geopolitical hotspots, and a boatload of economic uncertainty, but the US equity markets are as constant as you could want. The past 44 consecutive sessions of the Standard & Poor's 500 index have fluctuated upward or downward by less than 1 percent. To put that streak in context, the S&P 500 hasn't seen this little movement since 1995, when the index didn't change by a full percentage point for 95 days. All the while, stocks have been steadily ticking up. The S&P 500 is up 6% year-to-date.

There always seems to be a crisis somewhere and maybe investors and Wall Street traders are just crisis weary, even if it is a little dangerous to wait for the next hotspot to implode. Ukraine hasn’t resulted in disaster, at least not for the US. We’ve been dealing with a mess in Iraq for more than 10 years, so there’s no reason to freak out now. The full impact of recent world events is still unclear, so just keep trading. Compared with past conflicts in the Middle East, America has reduced its dependence on oil in the region and thus may not be feeling the effects of the current crisis as strongly.

The Federal Reserve’s QE policy has been a tremendous success for Wall Street, even if it hasn’t trickled down to Main Street. Impressive corporate earnings growth may be outweighing any effects that world events are having on the markets. Earnings of companies in the S&P 500 are expected to growth by a rate of 5.4% in Q2 2014, with nine of the ten sectors in the index projecting higher growth than last year.

Yesterday, Fed Chairwoman Janet Yellen dismissed inflation as nothing more than noisy. Wall Street traders loved the dismissal of rising prices as an indication that the Fed would not be swayed from their ongoing accommodative policy. Still, you have to wonder where the Fed is going as they try to oversee an uneven recovery and a benign exit from QE.

Like the Fed, the Bank of England has kept interest rates in the near zero range for the past 5 years. Last week, BOE Governor Mark Carney indicated that economic liftoff might come sooner than the markets think. Unemployment in Britain has been falling faster than expected, even though there is still considerable slack in the labor market. British GDP has steadily risen over the past year and is now just 0.6% below its pre-crisis peak. The improving picture could nudge the BOE toward a rate increase sooner rather than later. And so the BOE has its own form of forward guidance, stressing that the timing of the first rate increase is less important than the idea that once rates increase, the degree and pace of increases will be gradual and limited; in other words, a soft and gentle slope.

The Supreme Court is handing down decisions this week. Today they issued a unanimous ruling on Alice Corp v. CLS Bank International, a case that deals with patents. Alice Corporation, an Australian company developed a method for mitigating settlement risks among multiple parties. In its Supreme Court brief, the company said the method was eligible to be patented largely because it involved shadow records updated in real time that “require a substantial and meaningful role for the computer.”

The patents were challenged by CLS Bank International, which says it clears $5 trillion in foreign exchange transactions a day using methods to ensure that both sides performed. The bank said that Alice Corporation’s patents merely recited “the fundamental economic concept of intermediated settlement of escrow.”

A trial court invalidated Alice’s patents and then a court of Appeals affirmed the lower court ruling. Writing for the Supremes, Justice Clarence Thomas said that was “a patent-ineligible abstract idea,” and “Merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.”

The case had been closely watched by the software industry. Patent claims over the way ideas are incorporated into computers, cellphones and other devices have become a challenge for many high-tech companies. Justice Thomas indicated that the decision posed no threat to the concept of software patents, writing: “There is no dispute that many computer-implemented claims are formally addressed to patent-eligible subject matter.”

The Supremes were also unanimous in ruling on United States v. Clarke; in this case the Court held that a taxpayer may conduct an examination of IRS officials in response to a summons for information and records if the taxpayer can point to facts or circumstances that could raise an inference of bad faith on the part of the IRS.

Another unanimous ruling says the First Amendment protected an Alabama whistleblower. In Lane v. Franks, the high court ruled that Edward Lane's First Amendment rights protected him from job retaliation when he testified in the public corruption trial of then state Rep. Sue Schmitz in 2010, who was accused of being on the payroll at the college but failed to actually show up for work. Schmitz’ bogus job was uncovered and detailed, along with many other cases of corruption in the state's two-year college system as part of a two-year investigation of the system by The Birmingham News in 2006-07.

 Lane was fired by the two-year college he worked after his testimony. Lower courts had ruled against Lane, finding that he was testifying as a college employee, not as a citizen. Writing for the court, Justice Sonia Sotomayor said Lane's testimony was constitutionally protected because he was speaking as a citizen on a matter of public concern, even if it covered facts he learned at work. The decision is a win for whistleblower advocates, who said it could encourage more government workers to cooperate with prosecutors in public fraud cases without fear of losing their livelihoods.

Meanwhile, there is still some fallout, and uncertainty surrounding a Supreme Court decision earlier this week involving sovereign debt of Argentina. Argentina defaulted on nearly $100 billion of debt in 2002. Because some of the debt was sold under New York law, it faced a court challenge after it settled with only some creditors in 2005 and 2010. A few “hold out” creditors sought better repayment terms, specifically, some hedge funds bought the debt after the 2002 default for pennies on the dollar and then demanded full payment. The president of Argentina has called the hedge funds, “vultures” The Supreme Court has given the vultures a victory.

In the next 10 days, we’ll see if Argentina will succeed in defying the United States courts. On June 30, there is a scheduled interest payment on a set of Argentine bonds that its government wants to pay. But the courts say that interest may not be paid unless the country pays all it owes on bonds it defaulted on years ago, something Argentina says it cannot and will not do.

Argentina’s plan is to convert the bonds on which it wants to make payment into new bonds that would not be subject to New York law. Several banks and other financial institutions were willing to accept a partial payment but now that might risk the ire of American courts.

There is no equivalent to bankruptcy law for sovereign debtors. There is no legal procedure to resolve debts of destitute countries. There is no court to approve a restructuring plan that will wipe out some debts and convert others to equity, as there is for companies. Instead, troubled countries negotiate with lenders to restructure the debts. That restructuring could involve reducing the amount owed, lowering the interest rate, extending the maturity of the debt or some combination of the three.

The IMF would typically work with poor countries by offering emergency money contingent on financial reforms for the country; the IMF money was understood to rank above the old debts. Bondholders could, and did, hold out for full payment, but they faced the risk that the restructuring would go through and those who agreed would get partial payouts, while the holdouts got none. Now it has changed, at least for countries that issue bonds under New York law. The hand of holdouts has been strengthened immensely. Financial market service providers are now sovereign debt enforcement agents.

What would happen then? In a brief submitted to the Supreme Court, Joseph Stiglitz, the Columbia University professor who was formerly chief economist of the World Bank, offered a warning: “Unable to restructure, governments that default would be permanently shut out from the debt market, with consequential adverse effects on development and economic growth prospects.” In other words, a modern day debtors’ prison for countries with oppressive debt.

We’ll see how this one unfolds.