Thursday, March 27, 2013 - Certain Assumptions

Certain Assumptions

by Sinclair Noe

DOW – 4 = 16,246
SPX – 3 = 1849
NAS – 22 = 4151
10 YR YLD - .03 = 2.67%
OIL + 1.02 = 101.28
GOLD – 14.10 = 1292.70
SILV - .05 = 19.79

Stocks fell for the fourth time in 5 sessions. This year's first quarter, which ends Monday, isn't nearly as bullish as last year, when the benchmark Standard and Poor's 500 stock index soared 10% in the first three months of the year on its way to a 29% gain. The broad market is unchanged in 2014.  The losing sectors today included banks and biotech. The Nasdaq Biotechnology Index, up 304% in the last five years, has fallen 11% since the end of February, while the Russell 2000 gauge of smaller companies has slipped 2.7% after rallying more than 230%.

If you really want a great investment, it's hard to beat collecting $7,250 for every $1 you spend. That's the benefit Boeing will reap from a ramped-up lobbying push in Washington state that ended with a massive $8.7 billion tax subsidy. A new analysis of lobbying data shows the tax break came as part of a deal to keep production of a new jet, the 777X, in the Seattle area.

Lobbying data is notoriously difficult to parse because matching individual dollars to specific legislative priorities is often impossible. It's plausible that the company could have achieved the same result with a single phone call, given how terrified state officials were that the company might ship high-paying jobs elsewhere. The governor's office had estimated that Washington would lose an estimated 20,000 jobs and more than $20 billion in economic activity if Boeing took production of the new jets elsewhere.

But the new analysis of the lobbying data shows that Boeing didn't leave anything to chance in pursuit of its goal: that it went about getting what it wanted the old fashioned way, by spending gobs of money on lobbyists to follow lawmakers around, to call them incessantly and otherwise convince them that tax revenue isn't really all that important anyway. Boeing spent about $1.3 million to lobby state lawmakers from 2011 through 2013, according to the findings from the nonprofit National Institute on Money in State Politics. In the previous three-year period, the company spent $450,000. (The $7,250 - to - $1 calculation assumes every lobbying dollar was spent to win the tax subsidy).

About a week ago we reported on the Federal Reserve’s Stress Tests for the 30 biggest US banks. Zions Bank failed. Last week’s test was to determine if banks have sufficient capital to absorb losses and support operations during adverse economic conditions while using a standardized set of capital action assumptions.

 Yesterday, we got the results from the second part of the Stress Tests; to determine if banks could pass the test and expand buybacks and/or dividends, in other words, if the assumptions hold up. There were 5 failures out of 30, including: HSBC North America, RBS Citizens Financial, Santander Holding USA, Zions, and Citigroup. The official punishment is no stock buybacks and no dividend increases. It’s the second time the Fed has failed one of Citigroup’s capital plans. The last rejection came in 2012.

Meanwhile, Bank of America will spend $9.3 billion to resolve a dispute over mortgage securities with the Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac. The FHFA sued 18 financial institutions in 2011 over their sales of toxic mortgage securities to Fannie and Freddie, alleging false representation of the mortgage loans behind the securities. Bank of America said that it will make cash payments of roughly $6.3 billion and also purchase securities from Fannie and Freddie worth more than $3 billion.

Separately, New York's attorney general announced that Bank of America and its former chief executive Kenneth Lewis reached a $25 million settlement to end an investigation into their actions in the 2008 acquisition of Merrill Lynch. The civil fraud lawsuit accused them of failing to disclose Merrill losses and bonuses before the deal closed.

 Credit card companies charge retailers a fee, called a swipe fee, whenever a customer pays with plastic. These fees are determined by the card networks. Wal-Mart has filed a $5 billion lawsuit against Visa, saying the credit card company passed along unreasonable fees when shoppers used credit or debit cards at its stores.

In the lawsuit, Wal-Mart alleged that Visa's swipe fees went against antitrust regulations, and in turn churned up more than $350 billion for issuers over the course of nine years, claiming:  "The anticompetitive conduct of Visa and the banks forced Wal-Mart to raise retail prices paid by its customers and/or reduce retail services provided to its customers as a means of offsetting some of the artificially inflated Interchange Fees.  As a result, Wal-Mart's retail sales were below what they would have been otherwise."

There is a certain amount of irony in Wal-Mart filing a lawsuit based on antitrust regulations.

Applications for unemployment benefits dropped last week to a 6 month low.

The seasonally adjusted pending home sales index dropped 0.8% to 93.9. The index has fallen 10.5% over the past 12 months. Contracts to purchase previously owned homes fell in February for an eighth straight month; the housing data this week has been weak. Higher mortgage rates, rising prices and a limited supply of homes have slowed sales since last summer. Average fixed-rate mortgages edged up slightly from last week; 30-year fixed-rate mortgages averaged 4.40% up from 4.32% on March 20.

The Commerce Department released its third and final estimate of fourth quarter Gross Domestic Product. The earlier estimate was that the economy grew at a 2.4% pace; the revised estimate was increased to 2.6% growth. Consumer spending increased at a 3.3% annual pace, partly on stronger health care outlays, up from the previous 2.6% estimate. Also, state and local government spending and exports rose more rapidly than initially thought.

Business equipment expenditures, a key gauge of companies' appetite for capital spending, also picked up more than previously estimated. A negative behind the growth is that much of the fourth quarter expansion was related to businesses stockpiling inventory; that was followed by bad weather, which means much of the inventory stayed on the shelves, and there will likely not be strong demand in the first quarter. Most estimates for first quarter GDP are coming in around 2%.

Earnings reporting season kicks into gear in about 2 weeks; it could be ugly. Earnings rose 8% in the fourth quarter of 2013, but first quarter earnings are expected to drop to 0.9%. The slashing of earnings forecasts for the first quarter are starting to ripple into the rest of the year. Investors now think earnings will only grow 7.7% for the full year of 2014. That's down from the 10% growth expected at the start of the year.

These rapid decreases in earnings projections leave investors with less reason to pay up with current stock valuations, much less push the market up higher still. Of course, there is a big difference between earnings estimates and earnings reports; there is a game played between companies and analysts, where companies ratchet down expectations and then try to beat diminished expectations.

More than 6 million people have now signed up for private insurance plans under Obamacare. The last-minute boost has exceeded the nonpartisan Congressional Budget Office's estimate that 6 million people would sign up in the program's first year, down from earlier expectations of 7 million enrollees because of problems with websites. It's unclear how many of the more than 6 million signups are people who did not previously have insurance. Also unclear is how many people have paid for their policies, a step necessary for the plans to take effect. Bottom line is that a lot of people signed up and you can’t un-sign all those contracts, so Obamacare is here to stay.

President Obama is in Italy today meeting with Pope Francis at the Vatican, after wrapping up a summit with European leaders. Meanwhile, Russian President Putin announced plans for a G-1 meeting in Sochi in June.

The US Senate and House passed separate bills today imposing additional sanctions on Russian officials for the nation’s annexation of Crimea from Ukraine. The Senate bill, approved on a voice vote, includes about $1 billion in loan guarantees and authorizes $150 million in direct assistance to Ukraine. The House legislation would impose additional asset freezes and visa bans on senior Russian officials and corporations.

The International Monetary Fund announced a $14-18 billion standby credit for Kiev in return for tough economic reforms that will unlock further aid from the European Union, the United States and other lenders over two years, effectively pulling Kiev closer to Europe; in a smothering, debt soaked embrace.

Obama said in Rome today that additional sanctions on Russia would inevitably also hit the economies of the US and Europe. The US and its allies are looking at Russia’s military, energy and finance industries as possible targets if it moves deeper into Ukraine.

Top Ukrainian security officials say that Russia now has 100,000 troops on its side of the Russia-Ukraine border. Other estimates put the number much lower, around 30,000, but still enough to overpower the undermanned and undersupplied Ukrainian armed forces. CNN reported that US intelligence assessments have increased the likelihood that Russia will invade Ukraine in the past week. This has been based on a number of worrying indicators about the Russian military buildup on the Ukrainian border.