Wednesday, July 23, 2014 - Another Day Another Dollar

Another Day Another Dollar

by Sinclair Noe

DOW – 26 = 17,086
SPX + 3 = 1987
NAS + 17 = 4473
10 YR YLD un = 2.46%
OIL = 103.12
GOLD – 3.50 = 1305.00
SILV - .06 = 21.01

The Standard & Poor’s 500 index rose to an all-time high, as Apple boosted technology companies and health-care shares rallied through another busy day of earnings reports. The Dow was lower, mainly due to Boeing – we’ll get to that in a moment. Apple hit its highest level since 2012, based on earnings reported after the close yesterday.

Profits at S&P 500 members probably rose 6.2 percent in the second quarter, while sales gained 3.3 percent. Let’s knock out a few earnings reports:

Facebook posted $791 million in net income, or 30 cents a share, compared with $333 million or 13 cents a share in the second quarter of 2013; revenue totaled $2.9 billion compared to $1.8 billion in the year ago period. Mobile advertising represented 62% of its ad revenue; they have figured out Facebook on a smartphone. Facebook now claims 1.32 billion monthly users.

AT&T was once the telephone company, now it’s the second largest US mobile provider; they earned  $3.6 billion or 68 cents per share in the second quarter, down from $3.8 billion or 71 cents per share a year ago; even as revenue increase from $32.1 billion to $32.6 billion.

Biogen Idec rallied 11 percent after raising its full-year forecast, while Intuitive Surgical jumped 18 percent as results topped estimates.

At first blush, Boeing’s numbers looked good; the aerospace giant earned $2.40 per share, easily beating estimates of $2 per share; the company lifted its earnings outlook for the rest of the year. Shares dropped about 2%. Revenue growth disappointed. Commercial airline sales were up less than expected; there was a substantial charge for a military tanker. Boeing is one of the dogs of the Dow – down 7% year to date.

Delta Air Lines said its second-quarter earnings were up 17%, driven by higher passenger and operating revenue as traffic increased. Delta has said it plans to reinvest about 50% of its operating cash flow back into the business, resulting in $2 billion to $3 billion of capital expenditures annually through 2018, with $2.3 billion planned for 2014.

Another day, another General Motors recall; the only difference is that today’s recall does not involve ignition switches; it’s a problem with the seats. Today’s recalls total 717,950 vehicles covering six models; bring the total for the year to about 29 million. If you own a GM vehicle, call the dealer. The problem with ignition switches hasn’t gone away, just that today, it moved to Jeep-Chrysler, which announced nearly 800,000 vehicles will be recalled for ignition switch problems.

Another month, another downward revision from the IMF. In June, the International Monetary Fund forecast US economic growth would be about 3% to 3.5% for the rest of this year, and then they revised forecasts down to 2%. Today, the IMF said US economic growth would be about 1.7%. The IMF says lower growth expectations should contribute to continued slack in the labor market for the next three to four years, with the United States remaining below full employment until 2018.

The IMF says the Federal Reserve could keep its benchmark interest rates at zero beyond the middle of 2015, the date implied by policymaker forecasts, as long as inflation and financial stability concerns remain subdued. Future US growth could be disappointing if interest rates rise too quickly, or if there is a broader and concerted slowdown in emerging markets, or if increasing geopolitical tensions in Iraq and Ukraine prompt higher energy prices and severe financial and trade disruptions. The IMF also warned that an aging US population meant the economy would not be able to grow above 2% long term without significant reforms, including tax and immigration changes, more investment in infrastructure and job training, and the provision of childcare assistance, which could help lure more Americans into the workforce. Even without these measures, the IMF said there is "a strong case" for more government spending to support the economic recovery in the near-term, as long as there is a plan to deal with high entitlement spending later on.

Meanwhile, the IIF, the Institute of International Finance says investors have been willing to take on more risk, pushing borrowing costs down and stock prices higher, based in part on strengthening confidence in the US and global recoveries, but with perhaps too much exuberance. Investors don’t seem to be taking adequate account of the uncertainties around economic growth and monetary policy, and that points to a pull-back in markets. With uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation. The IIF’s concerns echo those of some Federal Reserve officials, who said at their June meeting that low volatility levels and increased risk-taking signaled “market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy.”

Another day and the fighting continues in the Middle East. The latest count has 687 Palestinians killed in the conflict. Ben Gurion Airport in Tel Aviv remains closed to US airlines, and many other global carriers. Secretary of State John Kerry is trying to negotiate a ceasefire but it looks unlikely.

In the Netherlands, a day of mourning as the bodies of the victims were returned for identification. Most of the passengers were Dutch. Two military planes, one Dutch and the other Australian, carrying the first 40 coffins landed at Eindhoven air base. They were met by members of the Dutch royal family, the Prime Minister and hundreds of victims' relatives. In Kiev, the Ukrainian government reports two Ukrainian military jets were shot down within 20 miles of the crash scene.

The downing of a civilian jetliner might turn out to be the Lusitania moment that could draw the US and Russia into a new world war, but for now, it doesn’t seem likely. The more likely reaction will be an increase in sanctions against Russia, which the US has already done; the EU is more reticent. The European Commission, the EU’s executive arm, will put forward its proposals to a committee of the 28 EU member governments in Brussels tomorrow. The bloc’s foreign ministers this week called for plans for measures that could hit “access to capital markets, defense, dual-use goods, and sensitive technologies, including in the energy sector.” Russia supplies 30% of the natural gas to Europe, and it is a major trade partner. Yesterday, France delivered a $1 billion dollar warship to Russia, saying the Russians had paid for it and it was scheduled for delivery. Business drives the truck, coffins are placed in the back.

Events in Gaza and Ukraine have, for the time being, taken global attention away from the Syrian civil war and the ISIS’s advance through Iraq. Last Thursday and Friday were the two bloodiest days yet in Syria’s civil war, with more than 700 people killed in fighting between the Syrian government and ISIS, the Sunni militant group. An ISIS suicide bombing killed 31 people, mainly civilians, in Baghdad yesterday. ISIS appears to be consolidating its newly acquired territories. The government in Baghdad appears to be struggling to cobble together something that would actually pass as a government. The civil wars in Syria and Iraq are growing increasingly chaotic and there doesn’t seem to be much hope for resolution.

The Gaza and Ukraine conflicts are not likely to draw greater powers into a major conflict. And one reason is because Gaza and Ukraine are not major oil producers. The conflict that represents the largest potential threat to markets is still the ISIS invasion of Iraq; there oil supply could be severed and the jockeying among regional middle powers could possibly lead to a wider scale conflagration between Sunni and Shia sponsor states.

So, one of the indicators that things are getting better or worse will be reflected in the price of energy. Think of it this way: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. Anything that disrupts that supply of energy disrupts the work you do.

Right now there is probably a $5 to $10 fear premium built into the price of oil, and that seems to be acceptable. The signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained more or less, Russia and Ukraine will find a solution or just fade away. The non-acceptance of Black Swans is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters. Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant. Maybe, after 13 years of war, the US is just weary of any threat.

At some point the fear premium could pop and oil prices could jump to $150 or $200 a barrel, and if that happens the IMF forecast is way too high; if that happens the economy comes to a grinding halt; if that happens, everybody in the US and Europe will wake up and scream bloody murder, but for now, it’s just another day, another dollar.

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.

Monday, August 19, 2013 - Not Attending Jackson Hole

Not Attending Jackson Hole

by Sinclair Noe

DOW – 70 = 15,010
SPX – 9 = 1646
NAS – 13 = 3589
10 YR YLD + .05 = 2.88%
OIL - .51 = 1365.20
GOLD – 11.60 = 1366.60
SILV - .07 = 23.29

It don't know where Ben Bernanke is. I know he is not scheduled to be in Jackson Hole, Wyoming this week. Most of the Federal Reserve policy makers will be at Jackson Hole for the annual economic get-together to debate whether the Fed should pull back from its $85 billion dollar per month asset purchase plan known as Quantitative Easing, also known as QE, also known as Stock Market Rocket Fuel. QE has lifted the markets to record highs this year, and talk of exiting QE has dropped the markets from highs the past couple of weeks.

Egypt continues to slip into a dark place as the military continues its bloody crackdown on civilian protesters. Just don't call it a coup; that specific designation would require an end to foreign aid. Egypt has been one of the biggest recipients of US foreign aid over the years. Egypt gets about $1.3 billion a year in aid. The money is not sent directly to Egypt; it goes to defense contractors who then send military equipment and expertise to the Egyptian military.

The biggest recipients of foreign aid to Egypt are Lockheed Martin, pulling in more than a quarter billion a year, followed by several others pulling in tens of millions, including DRS Technologies, L-3, Deloitte & Touche (apparently to keep track of everything), Boeing, Raytheon, and many more. The products include F-16s, surveillance equipment, Apache helicopters, Stinger missiles, motors, spare parts, and even teargas grenades.

The latest news out of Egypt is that a court has ordered the former dictator, Hosni Mubarak be released from custody. Mubarak has been detained on a variety of charges since his ouster in 2011. The courts say let him go. Not today, but maybe in a couple of weeks. Don't hold your breath. Actually, the court order means more volatility for Egypt; probably more protests; more protests means more teargas, so if you were in Cairo – hold your breath.

You may recall that when the Arab Spring began, Mubarak used some of the military equipment against protesters, including teargas grenades that proclaimed “Made in the USA”. This turned out to be a very bad marketing strategy. The Muslim Brotherhood then won the election and you have to wonder if the anti-US propaganda was a part of that. The Muslim Brotherhood turned out to be very bad at governing Egypt; the military, equipped with US made equipment, has now taken over the government. Just don't call it a coup.

You may also recall that one of the many factors in the Arab Spring was the release of Wikileaks diplomatic cables showing widespread political corruption. Wikileaks has just created its own “insurance” policy; sort of. Wikileaks is the website founded by Julian Assange; the site has released huge amounts of classified documents, also known as data dumps, detailing all sorts of governmental and diplomatic shenanigans. Assange has sought asylum at the Ecuadorian Embassy in London. WikiLeaks has released about 400 gigabytes' worth of mysterious data in a series of encrypted torrent files called "insurance." And no one can open it. File encryption means that the data is hidden and no one can see what's in the shared files without a key to unlock them, which hasn't been publicly released.

What is the meaning of calling it “insurance”? Is it meant to protect Bradley Manning (who has just been sentenced to 60 years), Edward Snowden, Julian Assange, or someone else? We don't know. The bigger question is what is in the “insurance” data dump? We don't know. It might be the identities of every secret agent working for the US around the world; it might be incriminating video; or everything that Edward Snowden had collected from his job with the NSA; it might be nothing more than a mumbo jumbo of code. It might even be the long anticipated data dump on the wrongdoing by the big banks.

For JPMorgan it appears bad habits, potentially illegal habits can't be broken. Last week, two junior level traders were criminally charged in connection with the London Whale losses. The bank is under investigation by eight agencies; add one more. The US Securities and Exchange Commission (SEC) is investigating whether JPMorgan's Hong Kong office hired the children of China's state-owned company executives with the express purpose of winning underwriting business and other contracts.

US law does not stop companies from hiring politically connected executives, but hiring people in order to win business from relatives can be bribery, and the SEC is investigating JPMorgan's actions under the US Foreign Corrupt Practices Act. If it's not one thing it's another.

The big banks seem to get away with..., everything. That's not always the case with the hedge fund managers; they tend to be viewed in a slightly different light; they are not considered systemically important; Bernie Madoff was sent to the big gray house. Steven Cohen saw his hedge fund charged, although Cohen wasn't personally charged. Today, the SEC announced a deal against Phil Falcone which includes an $18 million penalty, and Falcone must admit wrongdoing, and he will be banned from the securities industry for at least 5 years.

In June 2012, federal regulators had accused Falcone of manipulating the market by improperly using $113 million in fund assets to pay his own taxes and to favor some customer redemption requests secretly over others, among other things. His actions, “read like the final exam in a graduate school course in how to operate a hedge fund unlawfully.”

Falcone and his Harbinger hedge fund entities engaged in serious misconduct that harmed investors, and the SEC says their admissions leave no doubt that they violated the federal securities laws. For Falcone, who is currently engaged in two battles over LightSquared, a broadband company in bankruptcy he is fighting to maintain control over, the settlement appeared to be a positive turn of events. He struck a more upbeat note than the regulator saying he was, “pleased that we were able to reach a settlement to resolve these matters with the S.E.C.”

Following the financial crisis, the Federal Reserve, which is actually a regulator of banks; we forget that some times; the Fed, in addition to its other mandates of price stability and maximum employment, the Fed regulates banks, even though they don't really have their heart in it. The Fed in the role of regulator is kind of like a Pope who doesn't believe in religion. Anyway, following the financial crisis, the Fed started conducting stress tests on the big banks. They graded on a curve.

These annual financial health checkups continue and today the Fed described some significant shortcomings in the banks’ responses to the so-called stress tests. Despite the severity of the recent housing bust, the Fed said some banks weren’t taking into account the possibility of falling house prices when valuing certain mortgage-related assets for the tests. In other cases, banks assumed they would be strong enough to take business away from competitors in stressed times.

The Fed appeared most concerned that banks were applying the tests too generally. In other words, such banks didn’t pay enough attention to the risks that were particular to their assets and operations. Banks excluded material that was relevant to the bank’s “idiosyncratic vulnerabilities.” Under the tests, the banks have to assume weakness in the economy and turmoil in the markets, and then calculate the losses they would suffer under such conditions. The banks then subtract those losses from capital, the financial buffer they maintain to absorb losses. If the assumed losses cause capital to fall below a regulatory threshold, the banks effectively fail the test.

As part of the stress tests, banks have to carefully lay out capital plans to show regulators that they would have the strength to operate through tough times. The Fed says the banks are, in essence just trying to pass the test without really addressing the problems.

The stress tests have created tension between the Fed and the banks. One reason is that the tests can determine how much a bank is allowed to pay out in dividends or spend on stock buybacks.

President Obama is meeting with regulators today to get a status report on the progress of the Dodd-Frank reform act, the financial reform legislation that appears to have stalled after three years. This fall, the president will face a host of renewed efforts for financial reform, including housing finance reform. Just a reminder that September will mark the 5 year anniversary of the bankruptcy of Lehman Brothers, and so maybe it's time to get around to some reforms to prevent another Lehman Brothers collapse.

The Dodd-Frank law, which Congress passed in response to the meltdown, called for hundreds of new rules, including new oversight of the massive swaps market, mortgages and consumer financial products, and large nonbank financial firms. Regulators have missed deadlines on many of the most controversial requirements. The rules are about 40 percent complete. For example, the so-called Volcker rule to forbid banks from making risky trades with their own money is more than a year behind schedule, as five different agencies struggle to agree on a single rule. Despite that, the Dodd Frank act has grown while shrinking; grown from 848 pages of statutory text to 13,789 pages – more than 15 million words of regulation.

The White House meeting features the heads of major financial regulatory agencies, including the Treasury, Comptroller of the Currency, Securities and Exchange Commission, Commodity Futures Trading Commission, and the Consumer Financial Protection Bureau, among others.