Financial Review

Apple Bites

Sinclair Noe — July 26, 2016

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

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DOW – 19 = 18,473
SPX + 0.7 = 2169
NAS + 12 = 5110
10 Y – .01 = 1.56%
OIL – .49 = 42.64
GOLD + 4.40 = 1320.70

The S&P CoreLogic Case-Shiller 20-city composite saw a 0.9% gain in May to stretch the 12-month advance to 5.2%. Phoenix resale home prices were up 0.6% in May, and 5.4% over the past 12 months. Portland had the hottest housing market, New York the weakest. From the 2006 peak, the 20-city composite is down 8.8%; it’s up 40.4% from the trough in 2012.

The Commerce Department reports new home sales increased 3.5 percent to a seasonally adjusted annual rate of 592,000 units last month, the highest level since February 2008. Sales were up 25.4 percent from a year ago. At June’s sales pace it would take 4.9 months to clear the supply of houses on the market, down from 5.1 months in May. The median price for a new home rose 6.1 percent from a year ago to $306,700.

The Conference Board’s consumer confidence index was little changed this month, finishing at 97.3 compared to revised 97.4 in July. Consumers were slightly more positive about current business and labor market conditions. Expectations regarding business and labor market conditions, as well as personal income prospects, declined slightly.

The Federal Reserve has begun a two-day FOMC meeting on interest rate policy. The Fed is all but certain to keep interest rates on hold, acknowledging improved economic prospects, but offering few hints about its next move. Central to the debate will be how to reconcile upbeat economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory. The inflation measure the Fed prefers to track is currently at 1.6 percent, and oil prices have just moved to three-month lows.

Threats to America’s financial stability rose after the U.K. voted in June to leave the European Union but remain moderate, according to a report from the Office of Financial Research, the research arm of the Financial Stability Oversight Council. The vote could usher in “months or years of uncertainty” over rules tied to the U.K.’s investment, financing and trade relations with Europe and the rest of the world. Despite the ability of U.S. markets to recover from the initial shock of a market selloff, persistent concerns remain as the U.K. decides “if, how and when” to leave the EU. Possible spillover effects could jolt the broader financial system, including U.S. banks and nonbanks such as life insurers and broker-dealers.

The Bank of England’s Martin Weale has changed his mind and now supports immediate stimulus for the U.K. economy at next week’s policy meeting. The pivot follows a series of negative business reports, culminating in last week’s poor PMI data. Only a week ago, the widely-followed policymaker called on the central bank to wait for “firmer evidence” before implementing more monetary easing.

Just two months before the yuan is to be included in the IMF’s Special Drawing Rights basket for the first time, the fund’s board has adopted a new methodology for calculating the amounts of its global reserve currencies. New weightings of the dollar, euro, yen and pound will be set on Sept. 30 and fixed for five years, pushing the yuan a step closer to being freely usable internationally.

Specialist Italian pension funds are considering a government request to pour money into a bank rescue fund, days before European stress tests are expected to show the country’s third-largest lender, Banca Monte dei Paschi, is in urgent need of capital. Italy is looking for ways to support struggling lenders without breaking EU state aid rules, but a deeper financial crisis could further undermine confidence in the eurozone’s fourth-largest banking sector.

Here’s a rundown of some of the earnings reports today:
3M posted earnings that beat by one cent a share, on revenue a touch below estimates. The firm lowered its guidance for 2016 sales growth.

Caterpillar reported earnings that beat on both the top and bottom line.

DuPont posted earnings that beat on both the top and bottom line, and raised its full-year forecast.

McDonald’s reported a lower-than-expected rise in U.S. same-store sales. Quarterly earnings, ex-items, did beat expectations.

United Technologies raised full-year guidance and posted quarterly earnings that beat on both the top and bottom line.

Verizon reported quarterly earnings that topped expectations on revenue that missed. The telecommunications giant said a seven-week workers’ strike hurt results.

As the first oil major to report Q2 results, BP announced a loss that missed estimates due to lower refining margins and a multibillion-dollar charge relating to its 2010 oil spill.

Twitter’s stock is crashing, down 10% in after-hours trading, after delivering a revenue forecast that fell well short of expectations.

Also, negative earnings results from Reynolds American, Starwood, KeyCorp, Nielsen, Gilead Sciences and Under Armour.

Positive earnings news from Corelogic (along with higher 2016 guidance), and Texas Instruments beat estimates. Also good reports from Centene, Waters Corp, Avery Denison, Baxter, and Valero.

Of course the big earnings report today came after the closing bell. Apple reported iPhone sales fell for the second straight quarter, although the 15 percent drop was less than feared. The company’s total revenue dropped 14.6 percent in the third-quarter ended June 25, also declining for the second quarter in a row. Apple said it sold 40.4 million iPhones in the third quarter, more than the average analyst forecast of 40.02 million. Apple’s quarterly net profit fell 27 percent to $7.8 billion, while revenue of $42.36 billion beat analyst’s estimates. Phone sales in China dropped 33%.

Apple’s services business, which includes the App Store, Apple Pay, iCloud and other services generated nearly $6 billion in revenue, up 18.9 percent from the previous year. The stock was trading toward the low end of its 52-week historical price range – down 8.5% year-to-date –  and at the bottom of the range for mega-cap tech stocks. In after-hours trade Apple was up about 6%, topping $101 per share.

Annheuser-Busch InBev raised its offer for SABMiller by 2.3% to 79 billion pounds to account for the Brexit-related plunge in sterling.

Switzerland said it plans to give information to U.S. tax authorities about accounts at HSBC Holdings’ Swiss private bank, as part of a U.S. investigation into tax evasion. HSBC’s Swiss unit has already paid tens of millions of dollars in fines after admitting substandard compliance on tax evasion and other issues. The Swiss government said it made the announcement to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the IRS.

Fiat Chrysler Automobiles said it has revised the way it counts monthly sales figures of new cars and trucks and now says its impressive sales streak of 75 months of consecutive sales gains actually ended in September, 2013. It said that under the revisions, there were three months in which it had reported sales gains but now will report them as declines.

Volkswagen’s settlement plans to get 482,000 diesel-cheating cars off U.S. roads won a preliminary go-ahead from a federal judge. The plan for buybacks and a possible fix covers car owners, the U.S. government and 44 states and will cost the company about $15.3 billion if the agreements are fully adopted. The settlement includes $10 billion for buybacks, as well as $4.7 billion in government penalties and remediation. With or without a fix, car owners who don’t like the buyback option may be able to keep driving the polluting cars in some states.

The pact eats up almost all of the $17.8 billion the company had set aside to cover the cost of the scandal worldwide. In addition to investor class actions in the U.S. and lawsuits in Germany and South Korea, the company faces criminal probes in all three countries. VW took a 2.2 billion-euro charge in the second quarter, chiefly related to legal risks in the U.S. The company will report full earnings figures on Thursday.

Amazon is partnering with the U.K. government to significantly expand drone testing, a move that could let the devices deliver packages to British homes far earlier than in the US. Amazon will work with British regulators to test drones that fly beyond the line of sight of operators in rural and suburban areas. It will also test whether a single operator can safely command multiple drones at once, as well as technology that lets the machines automatically detect and avoid other planes, buildings and people.

Tesla has doubled the labor force working on its $5 billion battery factory in the Nevada desert, aiming to meet demand for its coming Model 3. Now, 1,000 workers build seven days a week on two shifts in an effort to start churning out lithium-ion cells by late 2016. Elon Musk is set to inaugurate the Gigafactory with a media briefing today, followed by an exclusive tour and party for Tesla customers on Friday.

Have you noticed the changes to Google Maps? For its more than 1 billion users, Google announced a design update to Google Maps yesterday, July 25. Embracing a “cleaner look,” the new reduced interface for mobile and desktop is focused on discovery and socializing, instead of turn-by-turn directions. Areas of interest like restaurants, bars, and shops are now shaded in a light shade of orange, allowing users to learn about new venues around their destination.

The first round-the-world solar powered flight has been completed, after the Solar Impulse aircraft touched down in Abu Dhabi and finished a journey that began over a year ago. The ABB-engineered plane is no heavier than a car, but has the wingspan of a Boeing 747. It’s powered by 17,248 solar cells, runs on battery power at night and has an average airspeed of 46 mph.

Financial Review

Upside-Down World

Sinclair Noe — February 12, 2015

 

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

DOW + 110 = 17,972
SPX + 19 = 2088
NAS + 56 = 4857
10 YR YLD un 1.98%
OIL + 2.28 = 51.12

A ceasefire between Russia and Ukraine is scheduled to start February 15, which apparently means that Putin’s little green men still have 2 days to grab as much land as they can. The agreement follows a 17 hour, four-way meeting between Russia, Ukraine, France and Germany in Minsk. The new deal revived a failed September ceasefire agreement, with commitments from each side to pull back heavy weapons, as well as greater autonomy for separatist regions in eastern Ukraine. IMF chief Christine Lagarde also announced today that Ukraine will receive about $40B in funding over the next four years.

Along with the new cease-fire agreement, that won’t actually end the fighting; there was a non-agreement agreement between Eurozone finance ministers to put off decisions on Greece’s bailout terms until next week. Greek officials were unable to reach a deal over its bailout program yesterday, but will return to Brussels on Monday to try to end the deadlock.

Meanwhile, Sweden’s central bank cut its main interest rate into negative territory and announced a bond-buying program this morning. Sweden now joins Denmark and Switzerland and the European Central Bank in negative rate land. So, now, if you want to make a deposit in Sweden, you have to pay. The reason is lowflation, which is another name for mild deflation. Countries around the world are seeing a sharp slowdown in price growth. In fact, much of Europe is in outright deflation right now, including Sweden if you go by its headline national consumer price index.

Falling prices are great if you are planning to buy something as an individual consumer, but it is problematic for countries or continents. Consumers put off purchases because hey, the price will be cheaper next week. So, nothing gets sold this week. Rinse, lather, repeat next week. Suddenly, there is no economic growth. Negative interest rates are supposed to penalize saving and prompt people to spend and invest instead. The Swedish Central Bank is creating new money electronically and using it to buy government bonds, in an effort to push more money into the economy and weaken the currency, which is another attempt to juice exports while pushing consumers to spend rather than save.

The Swedish Central Bank made a huge mistake in 2010 by raising interest rates to combat high unemployment and low inflation. That didn’t work, so now they turn negative and print money to buy government bonds, and that is supposed to work. In fact, Germany is printing money and buying German government bonds as well, and that is supposed to work; except of course in Greece, where nobody wants to print money to buy Greek bonds, despite outright deflation and depression. Economics is not particularly complicated but economic policy can be insane.

The ECB and the European Monetary Union have no one to blame but themselves. They deployed the monetary policy machinery to uphold the interest of creditors, and they thought the Greeks would remain subservient, but that hasn’t happened. What’s happening to Greece today will happen to Italy tomorrow and then Spain and then Portugal. In Italy, they have the Five Star movement; in Spain, Podemos. They make Syriza look conservative.

Germany thinks it can shut down Syriza here and now, and shut down any further dissent. But the Eurozone is like a house of cards, and if they pull out Greece from the deck, the most likely outcome is that everything falls.

Retail sales fell in January for the second month in a row as drivers spent a lot less on gasoline and didn’t appear to use that savings elsewhere. Retail sales declined by a seasonally adjusted 0.8% last month after a 0.9% drop in December. Sales at gas stations slumped 9.3% to mark the biggest pullback since 2008. Sales fell at auto dealers, home-furnishing stores, grocery chains, department stores, apparel retailers and outlets that sell sporting goods. Internet stores and restaurants, two of the largest retail categories, were among the few sectors to boost sales. Instead of spending the savings at the gas pump, Americans are saving a little; the saving rate increased to 4.9% in December.
Tesla posted quarterly results after the close of trade yesterday.  It was not a good report: deliveries fell short, problems affected production and a strong dollar hurt results. Tesla posted a loss of $0.13 a share, well below analysts’ consensus expectations for a $0.13 a share profit. Elon Musk struck an optimistic tone for the year ahead, however, and went as far predicting a market value of $700 billion by 2025, matching that of Apple. Of course there is nothing concrete to back that up, but when an earnings call is going bad, just say “Apple” and analysts’ eyes glaze over.

SpaceX launched a satellite, but scrubbed its rocket landing. This is Elon Musk’s other company; they successfully deployed the DSCOVR space weather satellite after several delays due to (ironically) bad weather, but had to cancel an attempt to land a rocket on a drone ship due to high seas and bad weather.

The electric car company and rocket company isn’t the only thing Elon Musk is working on. Tesla’s next innovation could take you off the electric grid. Tesla is planning to unveil a new lithium-ion battery pack that homeowners could buy to store and supply their own energy. Details are still sketchy, but the most obvious idea would be to combine battery packs with solar panels. Solar energy company SolarCity already offers Tesla battery packs in some markets that customers can use to store energy and use as a kind of emergency generator. Musk is the chairman of SolarCity and its largest shareholder.

The idea that Tesla could be as big as Apple in 10 years is still pretty preposterous, except it could happen; they already have a $25 billion market cap, and they haven’t even turned a profit. They could grow from here; not just by selling cars, but also by selling batteries, and changing the way we look at the electric grid. If you are looking for a fast growing industry, you can’t get much bigger than energy. And if you look at Tesla as just a car company, you miss the bigger picture.

So, you’re looking for a travel site. What do you do? Well, if you are Expedia, you search the web, compare sites and then buy Orbitz for about $1.4 billion, or $12 a share in cash. It worked out to about a 25% premium for Orbitz; other travel-related websites moved higher as well.

Chief executive John Chambers says “Cisco is back with a vengeance.” Cisco reported impressive Q2 results following five straight quarters of slumping profit and sluggish sales. Cisco shares were up more than 9%.

And while we almost didn’t notice, the Nasdaq Composite has moved to within less than 4% of 5048; that’s the old record high from March 2000. The S&P 500 is just a couple points away from the 2090 record high close of December 29.

For quite some time I’ve talked about how the big banks repeatedly break laws, only to work out a settlement, and then go back and break even more laws. And one of the crazy things about that merry go round is that the banks settlements typically include something know as a deferred prosecution agreement.

For example, UBS, the largest Swiss bank, avoided prosecution in February 2009 when it admitted to helping Americans evade taxes, paid $780 million and handed over 250 secret accounts. In a deferred-prosecution agreement with the Justice Department, the firm promised to follow the law and cooperate with the US. Now investigators are supposedly looking into whether UBS aided wealthy clients in the use or transfer of bearer securities, which can be used to hide assets and potentially evade taxes; bearer securities have been illegal for decades.

Investigators suspect the conduct may have occurred when the bank was still bound by the deferred-prosecution agreement, which expired in October 2010. If that’s true, the Justice Department could reopen the accord and prosecute the bank on the original conspiracy charge. Prosecutors also could file new charges against UBS and seek stiffer penalties and oversight at sentencing for violating the previous agreement. In addition to the 2009 tax-evasion agreement, the bank settled an antitrust case involving the municipal-bond investments market in 2011. It resolved another Justice Department probe in 2012 for rigging Libor interest rates. The Justice Department has never reopened a closed deferred-prosecution agreement.

Meanwhile, last week 60 Minutes reported on the results of an International Consortium of Investigative Journalists’ research into documents leaked from HSBC, detailing tax evasion schemes at their Swiss subsidiary. Things have been pretty quiet following that report. The Department of Justice actually received the leaked documents 5 years ago, but the media only released the info this past weekend.

HSBC has its own recidivism problems. HSBC paid a $1.9 billion fine in 2012, in a deferred prosecution agreement over money-laundering with Mexican drug cartels and breaches of US sanctions; this was so blatant that the bank even got caught buying a smuggling plane for the Sinaloa cartel. Under that deal, HSBC escaped criminal charges and kept the banking charter that enables it to operate in the US. Then there was Libor rate rigging, illegal deals with Saudi banks linked to Al Qaeda, and still no one thought to reopen a deferred prosecution agreement.

And of course, no high level execs from HSBC or any other bank have been charged. It is now becoming sublimely ridiculous. We’re supposed to believe the CEOs never knew about any of the staggering number of frauds and scandals – and in the case of HSBC we are talking about hundreds of thousands of felony criminal acts. And at the same moment we are to believe that these are highly skilled executives capable of managing massive financial institutions.

Ultimately, scandals like HSBC’s Swiss tax evasion scheme are merely flash points offering us a clearer view of the hidden dynamics at work in the world economy: what is taken from one side shows up at the other. The timing of the scandal is delicious; Greece is going to Brussels to beg a reprieve from debtor’s prison and the failed policies of austerity. There is no such thing as austerity; there is only a highly skewed redistribution of scarce resources. In this upside-down world, money simply tends to flow upwards.

Financial Review

HSBC – Too Big To Jail

Sinclair Noe — February 9, 2015

 

Podcast: Play in new window | Download (Duration: 13:18 — 6.1MB)

DOW – 95 = 17,729
SPX – 8 = 2046
NAS – 18 = 4726
10 YR YLD + .02 = 1.95%
OIL + .90 = 52.59
GOLD + 5.40 = 1239.70
SILV + .28 = 17.07

Let’s start with oil; OPEC lowered its estimate for non-OPEC supply growth this year by about 400,000 barrels a day, the biggest reduction since the forecast was introduced in August. The US led with a cut of 130,000 barrels a day while estimates for Colombia, Canada and Yemen were also trimmed. The group said it may boost global demand forecasts beyond this month’s slight increase amid rising U.S. gasoline use.

OPEC’s research department said: “The main factors for the lower growth prediction in 2015 are price expectations, a declining number of active rigs in North America, a decrease in drilling permits in the US and a reduction in the 2015 spending plans of international oil companies.”

The United Steelworkers strike continues with walkouts at two of BP’s refineries over the weekend. The strike now encompasses more than 5,000 workers at 11 refineries across the country, which account for about 13% of U.S. fuel-making capacity. Facility owners also hit by the strike include Shell, Tesoro, Marathon Petroleum and LyondellBasell.

Cheap gasoline prices have increased 13 cents in the past two weeks to $2.20 a gallon, nationwide average; but not everybody is buying the idea that oil will keep going up from here. According to US Commodity Futures Trading Commission data cited on Bloomberg. After a two-week rally that pushed oil up 14%, short bets on West Texas Intermediate jumped 1.2% while net-long positions dropped for a third week.

Edward Morse, Citigroup’s global head of commodity research writes that the recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn’t likely until the third quarter. Citi reduced its annual forecast for Brent crude for the second time in 2015. Prices in the $45-$55 range are unsustainable and will trigger “disinvestment from oil” and a fourth-quarter rebound to $75 a barrel. According to the report prices this year will likely average $54 a barrel.

Of course that’s just a guess. I don’t know, you don’t know, and Citigroup doesn’t know, but they print their guesses on glossy paper.

HSBC is a British multi-national bank; it used to be called the Hong Kong and Shanghai Banking Corporation; the UK and Hong Kong are considered home markets, but they also have a subsidiary in Switzerland. And it turns out, they have been misbehaving for quite some time.

At its height, HSBC’s secretive Swiss arm hid a total of $120 billion in assets. These funds were collected from wealthy clients all over the world and have already led to criminal investigations and charges against the bank in France, Belgium, the US and Argentina.

In a report released on Sunday, the International Consortium of Investigative Journalists, an organization based in Washington, along with the newspaper Le Monde in France, The Guardian in Britain, the BBC program “Panorama” and CBS News’s “60 Minutes,” said that secret documents revealed that bank employees had reassured clients that HSBC would not disclose details of their accounts to tax authorities in their home countries and discussed options to avoid paying taxes on those assets.

The documents were stolen from HSBC by a former employee in Switzerland in 2007 and were given to the French authorities, who in 2010 shared them with officials in Britain, Spain and the United States, among other nations. The leaked Swiss HSBC files implicate the bank in apparent misbehavior all over the world; some 30,000 accounts, and about 2,900 clients connected to the US, providing the IRS with a trail of evidence of potential American taxpayers who may have been hiding assets in Geneva. The US Department of Justice and IRS have been investigating HSBC’s Swiss banking operations since the documents were first handed over in 2010 but the scale of those inquiries remain unclear. Tomorrow, Maryann Hunter, who is on the board of governors of the Federal Reserve, and has some responsibility for regulation of foreign banking organizations operating in the US, will give evidence to the Senate banking committee. On Thursday, Geoffrey Graber, a deputy associate attorney general at the DoJ who oversees settlements with Wall Street banks, will appear before a House judiciary subcommittee. Both are expected to be questioned about the leak.

HSBC global and its US bank was forced to pay a $1.9 billion fine two years ago after the DoJ uncovered evidence HSBC subsidiaries had enabled clients to breach US sanctions against Cuba, Sudan and Iran and, due to oversight failures, allowed Mexican drug cartels launder billions of dollars. At the time, the settlement allowed HSBC to escape criminal indictments and keep the banking charter which enables it to operate in the US but the bank had to submit to a 5-year plan to stamp out money-laundering and other illicit practices, and the banks’ compliance would be overseen by an independent, court-appointed monitor.

HSBC is now just over two years into its reform plan, and has been deemed to be complying with the terms of the settlement. However, there are some concerns. In November, the bank reached a settlement with the Securities and Exchange Commission in which HSBC agreed to pay $12.5 million to resolve charges that its Swiss private banking division illegally provided investment and brokerage services to US clients.

So much for the idea that the problems are in the past. The huge amount of leaked info is quite bad for HSBC; it includes stories of coaching clients how to evade taxes; stories of clients being assisted in withdrawing bricks of cash from the Swiss bank. The evidence is quite damning, and yet, still no criminal charges. The Department of Justice will soon face a moment of truth, when they will have to decide whether the phrase “too big to jail” was real or just a crock.

And of course, HSBC is not the only bank that has misbehaved. Financial Times is reporting that the US Department of Justice is investigating whether Barclays and UBS sold structured products without disclosing the profit they were making from currency trades used to generate the products’ returns; essentially skimming profits or perhaps even betting against their own clients. Five major banks, including UBS, were fined $3.4B in November to settle forex allegations, although the DOJ was not one of the agencies involved in the deal. Barclays also did not take part in the earlier settlement.

The S&P 500 rose 3 percent last week, the most in seven weeks, as oil rebounded. The Dow posted its best weekly gain in more than a year. Of the firms that have reported profit so far this season, 78 percent beat analysts’ estimates, while 56 percent topped sales projections. Coca Cola, Time Warner, and MetLife are among 66 S&P 500 companies reporting quarterly results this week.

Comcast and Time Warner Cable’s $45B merger still remains in limbo, with the DOJ and FCC scrutinizing the deal and Tom Wheeler’s new net neutrality proposal. Investors began betting against the combination late last month, with shares of Comcast and Time Warner Cable falling sharply before recovering last week. If regulators allow the deal as is, the merged company would control about 35% of the country’s broadband Internet service coverage and just under 30% of pay television subscribers.

The National Association of Insurance Commissioners, a group representing state regulators, has announced the launch of an investigation into the recent data breach at Anthem. The health insurer revealed last week that hackers had broken into its database containing the personal information of about 80 million customers and employees. Anthem said it welcomes the review and “will cooperate fully.”

If you are one of the 80 million,1 of every 4, Americans who has ever had health insurance with Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, Empire Blue Cross and Blue Shield, Amerigroup, Caremore, Unicare, Healthlink, and DeCare; I am sorry to inform you that your privacy and personal identity has been flushed down the toilet; let the class action lawsuits begin. Not all data breaches are created equal, and the Anthem health insurance hack is about as bad as they get for consumers.

Why? This time the crooks got Social Security numbers. For identity thieves, the Social Security number is the key that unlocks the vault, and they now have millions of them, plus they stole all sorts of other info, so they don’t have to guess when it comes to matching the Social Security data to you and everything you’ve ever worked for. If you have managed to save a nest egg for retirement, you will need to defend it, forever. How could this happen? Because Anthem didn’t encrypt our data, and there is no law that says they must.

Harris Poll has released a survey of America’s most- and least-loved corporations. Wegmans, a Rochester, New York grocer, claimed first place, followed by Amazon, Samsung, Costco, and Johnson & Johnson. Halliburton, Monsanto, Dish Network, and AIG were near the bottom of the list. The most hated company: Goldman Sachs.

Samsung’s TVs are listening to your every word. The company disclosed that its smart TVs will automatically capture all nearby conversations as part of its voice recognition features, and potentially transmit sensitive data to a third-party service. George Orwell saw it coming years ago.

A South Korean vacuum robot tried to devour its owner…Firefighters were called after it consumed some of her hair and refused to let go. …Yet Japan is still launching a robot hotel. A 72-room getaway will open this summer, staffed by 10 multilingual humanoids. What could go wrong?

FINANCIAL REVIEW

A Grain of Salt

Sinclair Noe — February 5, 2015

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

DOW + 211 = 17,884
SPX + 21 = 2062
NAS + 48 = 4765
10 YR YLD + .02 = 1.82%
OIL + 2.26 = 50.71
GOLD – 4.40 = 1265.50
SILV – .11 = 17.32

More people sought unemployment benefits last week, but the number of applicants remained near historic lows in a positive sign for job growth. The Labor Department says that weekly applications rose 11,000 to a seasonally adjusted 278,000. The four-week average, a less volatile measure, fell 6,500 to 292,750. That average has plunged 15 percent over the past 12 months.

Worker productivity declined in the fourth quarter of 2014, while labor costs increased. Productivity, the amount of output per hour of work, fell at 1.8 percent rate in the fourth quarter after rising at a 3.7 percent rate in the third quarter. Labor costs increased at a 2.7 percent rate in the fourth quarter after having fallen at a 2.3 percent rate in the third quarter. The drop in productivity and rise in labor costs are reflected in the fact that the growth in overall output slowed in the fourth quarter.

The U.S. trade deficit jumped 17.1% in December to a two-year high. The nation’s trade gap jumped to a seasonally adjusted $46 billion in December from a revised $39 billion in the prior month.

If Anthem is your health insurer it may be time to change your passwords – all of them. Anthem said hackers broke into a database containing personal information for about 80 million of its customers and employees in what is likely to be the biggest data breach disclosed by a health-care company. Anthem said the breach exposed “names, birthdays, street addresses, social security numbers and employment information, including income data,” but added that no financial information, including credit card details, was compromised. Anthem said it would send a letter and email to everyone whose information was stored in the hacked database. It also set up an informational website, www.anthemfacts.com, and will offer to provide a credit-monitoring service.

This next item won’t do anything to prevent hacking, but it will mean that you have the same access to the internet as anybody else. FCC chairman Tom Wheeler is now officially on board supporting the strongest possible version of net neutrality. Wheeler said by placing broadband Internet providers such as Comcast and Verizon Wireless under a stricter regulatory regime, consumers would be ensured an open Internet under Title II. Under the new plan, broadband providers would be explicitly banned from blocking content or creating fast lanes for Web services that can pay for preferential treatment into American homes.

Title II is the law that currently regulates telephone networks as common carriers. Applying this to broadband internet gives the FCC extremely strong powers to guarantee free and equal internet access to everyone, just as they currently do for phone companies. The argument against doing this is that Title II has a lot of baggage designed specifically for phone companies; baggage that makes sense for telephones but not for internet connections. Wheeler recognizes this, and says that he plans to “modernize” Title II. A five member FCC panel will vote on Wheeler’s recommendation February 26th.

Industry lobbying groups such as Broadband For America argue that Wheeler’s proposal “could have spillover effects into the broader Internet ecosystem and threaten Silicon Valley companies that rely heavily on the Internet,” take that with a grain of salt. The markets certainly weren’t alarmed. Stocks for the big telecos went up today as market-watchers were relieved that the FCC said it wasn’t going to regulate what the cable and phone companies charge us for internet access.

Fifty years after the internet’s creation, about half the world now uses it to do almost anything and almost everything. The possibilities are only limited by our imagination. Why has the Internet worked so well? Because it’s a level playing field. Everyone has an equal opportunity to compete, to succeed or to fail, to put one’s best ideas or products forward and let the chips fall where they may.

Through a free and open Internet, an excellent idea or an individual can beat a powerful established institution. But we need rules to make sure that in the battle of content it is a fair fight, and that winners and losers are determined by the quality of the content and nothing else.

Late yesterday, the European Central Bank (ECB) announced that it would no longer accept Greek government bonds and government-guaranteed debt as collateral. Although Greece would still be eligible for other, emergency lending from the Central Bank, the immediate effect of the announcement was to raise Greek borrowing costs and squeeze its banks, and to increase financial market instability within Greece, maybe even bank runs.

Syriza, the newly elected political party in Greece took power with a promise to Greek voters to get rid of the anti-austerity programs that were part of an earlier IMF-ECB bailout. The Greeks had lived up to the bailout terms to the best of their ability but the economy did not improve, it only got worse. The Greek voters decided they had had enough.

Yesterday’s move by the ECB looks very much like a deliberate attempt to undermine the new government. They are trying to force the government to abandon its promises to the Greek electorate, and to follow the IMF program that its predecessors signed on to. Syriza’s leadership was unbowed by the ECB’s assault. They are not going to voluntarily leave the euro or even suggest the possibility. They are continuing to look for a debt restructuring plan. PM Alex Tsipras said today, “Greece won’t take orders any more, especially orders through emails. Greece is no longer the miserable partner who listens to lectures to do its homework. Greece has its own voice.”

A funny thing happened today. The Athens Stock Market General index dropped, by just over 3%; the markets took it with a grain of salt. That is a sizeable drop but not enough to instill fear in the Greeks; they’ve seen much worse in the past couple of years.

The move is seen as a definitive warning that the ECB is in no mood to give in to Athens’s request for a debt swap. For now it’s all part of the negotiations. Greek banks only have about €8 billion in Greek government debt used as collateral with the ECB. And the Greek economy is in such a bad way, they might not even notice if they ran out of cash for a few months. The crazy part is that the Greek debt is not a huge mountain; the Eurozone could easily afford restructuring. What they can’t afford is to cut off one of their own and leave them hanging out to dry.

And so, what happened yesterday was probably less of an effort by the ECB to force the Greeks into a deal, as it was to force the Germans into a deal; a wake-up call for Angela Merkel and the hard line austerian crowd that if Greece collapses, the entire Eurozone could collapse, and that would be very expensive. Or maybe the ECB is willing to turn Greece into a failed state out of what looks like sheer brutality. Time will tell.

If you were to head over to California to the neighboring ports of Los Angeles and Long Beach, you might typically see one or two of those huge container ships waiting offshore to load or unload. Today, you would see about 18 big ships sitting offshore, and nobody is quite sure how long it will take for them to load or unload. There has been a slowdown at the ports, which alone handle 40% of US container traffic. And contract negotiations with port workers threatens a lockout by employers, possibly within days. A port closure would likely result in losses of $1.5 billion to $2.5 billion per day.

CME Group, the world’s largest futures-market operator, is closing most of its futures trading pits in Chicago and New York as electronic trading has become the overwhelmingly dominant way futures contracts are bought and sold. The move will take effect by July 2. Remember those pictures of traders yelling and screaming and elbowing each other to get an order filled? Yea, they don’t do that anymore. Times change.

Facebook is up about 18 cents in afterhours trading. And that might just be enough. Once upon a time, John Pierpont Morgan created a banking behemoth; such a powerful force that it bailed out Wall Street; then went on to create the world’s largest company at the time, US Steel. The House of Morgan has been a financial leader for more than a century, and with a market cap of about $211 billion, it is a powerhouse to this day. Except, it looks like Facebook has just passed it in terms of market capitalization; not by much, maybe just a couple of hundred million.

On a related note, it’s time for today’s edition of “Banks Behaving Badly”: JPMorgan has agreed to settle a class action lawsuit for $500 million; this goes back to mortgage backed securities sold by Bear Stearns, which was acquired by JPMorgan. Among the plaintiffs in this case were the Public Employees’ Retirement System of Mississippi and the New Jersey Carpenters Health Fund. A judge must still approve the settlement.

Meanwhile, the Justice Department and the Federal Bureau of Investigation are examining Swiss bank UBS for allegedly helping its American wealth-management clients avoid taxes by putting their money into investments that are banned in the US; called bearer securities because they can be transferred without needing to register ownership. Authorities are also trying to determine whether anyone at the bank engaged in criminal efforts to cover up the alleged conduct once it became more widely known about within the bank. This isn’t the first time; in 2009, UBS acknowledged helping American clients evade taxes, and agreed to pay $780 million as part of a deferred prosecution agreement with US authorities. It looks like UBS has a recidivism problem; now, let’s see if the Justice Department has a spine.

FINANCIAL REVIEW

War, Inversions, and Climate

Sinclair Noe — September 23, 2014

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Financial Review

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

DOW – 116 = 17,055
SPX – 11 = 1982
NA – 19 = 4508
10 YR YLD – .03 = 2.53%
OIL + .06 = 91.62
GOLD + 8.10 = 1223.90
SILV + .05 = 17.88

First up: war. You’ve probably heard by now that the US launched several airstrikes against ISIS targets inside Syria and, separately, in potentially averting an imminent threat to the homeland from an al Qaeda group called Khorasan. Many of the targets were in and around Raqqa, Syria, believed to be an ISIS stronghold. Several Arab nations took part in the US-led operation: Jordan, Saudi Arabia, Bahrain, Qatar and the United Arab Emirates. A spokesman for the Pentagon said they are still assessing the effectiveness of the bombing campaign but the Pentagon believes they were “successful in hitting what we were aiming at.”

The airstrikes against Khorasan was in response to threats, however officials so far have provided no details about the terrorists’ planned attack or the credibility of the intelligence they had on it. A Pentagon spokesman said “the individuals plotting and planning it were eliminated.”

The Syrian government says the US told it of plans to carry out airstrikes. The State Department immediately denied that it gave prior notification. Reuters reports Iranian officials were informed of the airstrikes in advance, but not specific targets. Meanwhile, the Israeli military said that it had shot down a Syrian fighter jet that had “infiltrated into Israeli airspace,” the first such incident in at least a quarter of a century. It is thought that the jet wandered into Israeli airspace accidentally. Maybe, but it also illustrates the possibility of unintended entanglements coming out of the conflict.

In economic news: manufacturing activity is near a 4-1/2 year high in September and factory employment is up, but housing prices were sluggish in July.

Financial data firm Markit said its preliminary or “flash” factory purchasing managers index came in at 57.9, unchanged from August when it touched its highest level since April 2010. A reading above 50 indicates expansion. Manufacturing activity in the third quarter was the strongest since Markit started tracking it in mid-2007. Factory jobs rose for a second straight month, and new orders held steady above 60 for the third time in the last 4 months.

The Federal Reserve Bank of Philadelphia said its new general activity index for non-manufacturing firms in the mid-Atlantic region jumped sharply. The increase in activity reflected more new orders, sales and full-time hiring. Service sector employees also worked longer hours, while firms increased their capital spending.

The Federal Housing Finance Agency said home prices increased 0.1% in July, and 4.4% in the 12 months through July, the smallest gain since September 2012.

Further data showed euro zone business activity in September was the weakest this year, while factory activity in China picked up only slightly.

The Treasury Department today announced new rules to crack down on corporate tax inversions. The idea behind inversions is that a US business merges with or is acquired by a foreign company in a country with a lower tax rate; by redomiciling, or moving their headquarters to the lower tax rate country, they can lower their tax bill, even if they keep most of their business in the US. Obama applauded the Treasury for taking steps to reverse the trend of companies seeking to “exploit this loophole” to avoid paying their fair share in taxes. Yet he said he was still calling on Congress to pursue broader tax reform that would reduce the corporate tax rate, close loopholes and make the tax code simpler.

The new rules will mean little for companies that have already inverted, but for at least 10 companies in the midst of completing such deals, and for those considering inversions, the impact will be significant. Most pending deals could become more costly for the buyers, such as AbbVie, and its $54 billion deal to acquire Ireland’s Shire, as well as Medtronic and its $42 billion takeover of Covidien. Neither of these transactions, the biggest of the year, was expected to fall apart completely, partly because paying a break-up fee to walk away would likely be even more costly. AbbVie would have to pay Shire a $1.6 billion penalty if it were to renege on their merger agreement. Medtronic has a contract that lets it or Covidien walk away from their deal if the US Congress changes tax law. The Treasury’s new rules fall short of that, so a break-up fee likely would loom in this case, too, if the merger were called off. Burger King said it will proceed with its $11 billion deal with Canada’s Tim Hortons, stressing that the transaction was not about tax benefits.

There are also some new rules unveiled by the Treasury today, and some of these tax evasion schemes have names that sound like they came right off the playground. One rule will prevent inverted companies from using “hopscotch” loans that allow them to avoid dividend taxes when tapping tax-deferred foreign profits. Another rule will bar inverters from gaining access to offshore profits by using “decontrolling” strategies that restructure foreign units so they are no longer US-controlled. The Treasury is also tightening limits on the levels of ownership that the former US investors can have in an inverted company for it to qualify for foreign tax treatment under US law, a move that will make it harder to do the deals. And then there’s the “spinversion” which is a partial inversion where the US company transfers some of its assets to a newly formed foreign corporation. That corporation is then spun off to public shareholders. New rules would treat the spun-off company as a domestic corporation.

Ultimately, this is an issue that will require legislative action, but for now, it will be more difficult for companies to skip out on their tax obligations by moving offshore; more difficult but not impossible. I suspect there are a lot of tax attorneys working overtime today.

The United Nations Climate Summit kicked off today in New York. The summit was convened to lay the groundwork for nations to sign a binding emissions treaty late next year during climate negotiations in Paris. In speeches delivered at the summit, diplomats from 120 countries laid out a series of new, nonbinding climate commitments. Here is an overview of what world leaders have pledged so far: President Obama delivered an address at the summit this afternoon where he announced an executive order requiring federal agencies to take climate change into account when doling out dollars for international aid and investment abroad. The US has previously pledged to curb emissions 17% from 2005 levels by 2020.

The EU unveiled a new commitment to slash greenhouse-gas emissions 40% from 1990 levels by 2030. British Prime Minister David Cameron said that the U.K. is on track to cut emissions by 80% by 2050. Cameron did not, however, announce any new targets not already agreed to by the country. China’s Vice Premier repeated China’s previously stated goal of cutting carbon emissions by 40 to 45% from 2005 levels by 2020. Iceland said that it aims to power its economy entirely with clean energy, but did not set a date. Mexico announced that it aims to generate more than one third of its electricity from zero-emissions sources by 2018. Costa Rica will be powered purely from clean energy by 2016. And a whole bunch of countries pledged hundreds of million to the Green Climate Fund.

Sounds familiar, right? But maybe this time will be different, and the reason is because this time it might actually pay to go green. All things considered, the cost of curbing carbon emissions may be considerably cheaper than earlier estimates had suggested. For all the fears that climate change mitigation would put the brakes on growth, it might actually enhance it.

Last week, an international commission published the “New Climate Economy” report concludes that efficient investments could deliver at least half of the emission cuts needed by 2030 to keep global temperatures in check. And they could do so while delivering extra economic gains on the side. Side benefits include things like lower health costs.

And it looks like corporations are getting on the climate change bandwagon. Tim Cook, CEO of Apple was in New York, and he said: “The long-term consequences of not addressing climate are huge,” he said. “I don’t think anyone can overstate that.” Google executive chairman Eric Schmidt announced Google would stop funding the American Legislative Exchange Council, or ALEC, claiming the Council had been “literally lying” about the reality of climate change. Schmidt said: “The company has a very strong view that we should make decisions in politics based on facts — what a shock,” said Schmidt. “And the facts of climate change are not in question anymore. Everyone understands climate change is occurring and the people who oppose it are really hurting our children and our grandchildren and making the world a much worse place. And so we should not be aligned with such people — they’re just, they’re just literally lying.”

The basics of climate change have been understood for a long time, don’t seem to be budging much and yet remain challenged by many non-specialists. What’s significant then, in such a public debate, is who acknowledges those basics, as much as what is said. That’s why it was news when former Treasury Secretary Hank Paulson called for a carbon tax, when the Rockefellers, the first family of oil pulled out of oil sands or, the head of the world’s largest company by market cap endorses a brand new climate and business initiative by showing up and saying absolutely anything at all. Tim Cook also challenged the still-common fallacy that good business and environmentalism are mutually exclusive. “Too many people believe you can do this or that,” he said. “If you innovate and you set the bar high you will find a way to do both.”

The World Bank yesterday released a list of 73 countries and more than 1,000 companies that support a price on carbon dioxide pollution. Apple, which now powers 73% of its facilities with renewable energy and has raised its environmental profile, was not among the signatories.

Monday, May 19, 2014 - Still Too Big to Jail

Financial Review with Sinclair Noe

DOW + 20 = 16511
SPX + 7 = 1885
NAS + 35 = 4125
10 YR YLD + .02 = 2.54%
OIL + .58 = 102.16
GOLD - .10 = 1293.60
SILV - .01 = 19.44

Merger Mania Monday. Late yesterday, AT&T announced an offer to buy DirecTV for $48 billion, or $95 per share. The combined AT&T-DirecTV would serve 26 million customers; that would make it the second-largest pay TV operator behind a combined Comcast-Time Warner Cable, which would serve 30 million under a $45 billion merger proposed in February. The Comcast deal still faces regulatory hurdles.

AT&T and DirecTV promised consumer benefits like more economical bundles that tie mobile phone, pay TV and Internet service together on a single bill. The deal could face regulatory scrutiny from the Federal Communications Commission and Department of Justice. Unlike the cable company tie-up, the AT&T-DirecTV merger would effectively cut the number of video providers from four to three for about 25% of US households. That's a situation that could result in higher prices for consumers and usually gives regulators cause for concern.

The value that DirecTV offers that no other national TV provider offers is a special deal for football fans; for $240 to $330 you can buy a special package that gets you all the NFL football games, including your hometown favorite no matter where you live. That’s why DirecTV paid an estimated $4 billion to the NFL for the latest Sunday Ticket contract; that deal expires at the end of the upcoming NFL season. If the Sunday Ticket arrangement were not to be extended, AT&T would reportedly have a legal out, according to terms of the takeover.

Part of the value of DirecTV is what it isn’t. DirecTV does not offer fixed-line or mobile Internet service, and its rights to airwave frequencies for satellite TV are not the kind that AT&T can use to improve its mobile phone network. If AT&T can convert DirecTV’s customers into high-speed Internet subscribers, they could have 25% of all pay TV subscribers and then two companies would control 55% to 60% of all Internet subscriptions in the US.

The board of AstraZeneca has rejected the improved, and apparently final $119 billion takeover offer from US drugmaker Pfizer. Pfizer, which is the world's second-biggest drugmaker by revenue, has been courting No. 8 AstraZeneca since January. Yesterday, Pfizer raised the offer 15% to $119 billion; that would be the richest acquisition ever among drugmakers and the third-biggest in any industry. AstraZeneca didn't take long to reject the new offer, its board arguing Pfizer is making "an opportunistic attempt to acquire a transformed AstraZeneca, without reflecting the value of its exciting pipeline" of experimental drugs.

Pfizer's offer comes amid a surge of other deals among drugmakers. Those deals include Switzerland's Novartis agreeing to buy GlaxoSmithKline's cancer-drug business for up to $16 billion, to sell most of its vaccines business to GSK for $7.1 billion, plus royalties, and to sell its animal health division to Eli Lilly for about $5.4 billion. Canada's Valeant Pharmaceuticals has also made an unsolicited offer of nearly $46 billion for Botox maker Allergan, which has turned it down, so far.

Law enforcement agents have arrested more than 90 hackers accused of infecting more than half-a-million computers worldwide with malicious snooping software. The suspects were charged with developing, selling and marketing a remote access tool, or “RAT,” that allowed users to infiltrate computers, view files and steal personal data from unwitting victims. Talk about creepy; the malware could even take over your webcam and take pictures and videos of you. The original creator of the software, who founded an organization called “Blackshades,” was arrested in June 2012, but investigators said an international ring of hackers continued to sell and disseminate the software after his arrest, reaching thousands of people in more than 100 countries; 19 countries participated in the arrests, and more than 300 searches had been conducted in what law enforcers described as one of the largest cybersecurity operations in history.

The United States charged five Chinese government officials with allegedly orchestrating cyber-attacks against six major American companies. It marks the first time the US has formally charged foreign government officials for explicitly acting at the behest of a foreign government in cyber-crimes. The companies targeted by hackers were Alcoa, Westinghouse, Allegheny Technologies, US Steel, United Steelworkers Union, and Solar World.

Attorney General Eric Holder said: “In some cases, they stole trade secrets that would have been particularly beneficial to Chinese companies at the time they were stolen. In others, they stole sensitive, internal communications that would provide a competitor, or adversary in litigation, with insight into the strategy and vulnerabilities of the American entity. In sum, the alleged hacking appears to have been conducted for no reason other than to advantage state-owned companies and other interests in China, at the expense of businesses here in the United States.”

The Justice Department has criminally charged Credit Suisse AG and two of its units with conspiring to willfully help Americans evade taxes. A Virginia federal court filing accuses Credit Suisse of conspiring to in part "advise the preparation and presentation of false income tax returns and other documents to the Internal Revenue Service.'' The four-page criminal information charges the bank with "assisting clients in using sham entities'' as the purported owners of secret offshore accounts and "soliciting IRS forms that falsely stated under penalties of perjury that the sham entities … owned the assets in the accounts.''

The criminal case follows a Senate subcommittee investigation that found the bank provided accounts in Switzerland for more than 22,000 US clients totaling $10 billion to $12 billion. The report said Credit Suisse sent Swiss bankers to recruit American clients at golf tournaments and other events, encouraged US customers to travel to Switzerland and actively helped them hide their assets.

Credit Suisse has apparently agreed as part of a settlement to plead to one count of conspiring to aid tax evasion. It would mark the first time in more than 20 years that a major bank has plead guilty to criminal wrongdoing. But make no mistake, this was a negotiated guilty plea that does not bear the consequences of criminal guilt. Credit Suisse will pay about $2.6 billion in penalties and hire an independent monitor for up to two years, which sounds exactly like a civil penalty. Recognizing that criminal charges could prompt regulators to revoke a bank’s license to operate, the corporate equivalent of the death penalty, prosecutors met with regulators to discuss punishing Credit Suisse without putting it out of business and imperiling the economy. The biggest challenge facing Credit Suisse could be that some of its own clients, such as pension funds, have internal requirements that prohibit them from doing business with an entity that has pleaded guilty to a crime.

Otherwise, this amounts to another slap on the wrist. The CEO and Chairman keep their positions. Credit Suisse will admit to a statement of facts that shows the U.S. tax evasion was widely fostered by the bank, the people said. The firm won’t have to disclose the names of US account holders under terms of the agreement.

The Credit Suisse plea won’t be the last. BNP Paribas is expected to plead guilty in coming weeks to doing business with countries like Sudan and Iran that the United States has blacklisted; BNP is also expected to pay more than $5 billion in fines. And eventually, we could see criminal charges brought against American banks such as JPMorgan and Citigroup, which are the subjects of criminal investigations, but those inquiries are at an earlier stage and it is unclear whether they would result in criminal charges. The Justice Department's highest-profile settlement over sales of risky mortgage securities in the run-up to the financial crisis — the $13 billion deal among the department, state regulators and JPMorgan Chase — was a civil case, and no bank executives were charged. Federal prosecutors in California have been conducting a related criminal investigation.

So for now we have a new strategy for controlling the illegality of the big banks: charge them with criminal activity and punish them with civil penalties. So what we have, in the end, seems to be a version of the anemic civil settlements and deferred-prosecution agreements that banks always get when they commit crimes. As usual, it is little more than the cost of doing business. Eric Holder can say that no bank is too big to jail, but then he folds like a tortilla when it comes to pursuing criminal charges that actually carry criminal penalties. For now, the government's message to banks remains the same: Go ahead and break the law. If worse comes to worst, your low-level bankers will take the fall, and your shareholders will pick up the tab.