Retail sales and wholesale prices dropped; JPMorgan earnings aren’t as bad as they could have been, but 5 big banks failed the “living will” test. Verizon workers on strike. Congress just can’t get the job done. Peabody files for bankruptcy. A break on student loans.
Financial Review by Sinclair Noe for 04-13-2016
DOW + 187 = 17,908
SPX + 20 = 2082
NAS + 75 = 4947
10 Y – .02 = 1.76%
OIL – .41 = 41.76
GOLD – 13.30 = 1243.40
Retail sales dropped a seasonally adjusted 0.3% last month, the second decline in 3 months. The weak pace of retail sales from January through March is likely to contribute to another soft quarter of U.S. growth when the government reports gross domestic product later this month. Sales at U.S. retailers were expected to spring back in March due in part to higher gasoline prices. Retail sales excluding automobiles, gasoline, building materials and food services ticked up 0.1 percent last month after an upwardly revised 0.1 percent gain in February.
The producer price index, a measure of inflation at the wholesale level, slipped 0.1 percent last month after dropping 0.2 percent in February. In the 12 months through March, the PPI dipped 0.1 percent after being unchanged in February. Rising energy prices were offset by a decline in the cost of services, pointing to tame inflation. Last month, energy prices rose 1.8 percent, with gasoline prices surging 7.1 percent in what was the largest increase since May 2015. Wholesale food prices fell 0.9 percent last month. Weak producer prices suggest overall inflation will remain below the Fed’s 2 percent target for a while.
The Federal Reserve published its Beige Book. Two weeks before a FOMC policy meeting the Fed compiles anecdotal reports from the 12 Fed districts to help guide them. Today’s Beige Book shows the economy continued to expand from late February to early April and low unemployment appears to be spurring an uptick in wage growth. Pay increased in all but one of the Fed’s 12 regional bank districts and several reported signs of a pickup in wage growth. Consumer spending increased only modestly in most districts and while capital spending increased on balance, there was only scattered reports of spending for capacity expansion. Manufacturing increased in most districts but expectations for future growth were mixed. One particular bright spot in the employment picture was the healthcare sector
In an interview with Time magazine, Federal Reserve Chair Janet Yellen said that the Fed is unlikely to make any sudden or aggressive moves, given the lingering uncertainty in current global economic conditions.
JPMorgan Chase reported first quarter earnings of $1.35 per share, down from $1.45 a year ago, but better than the $1.24 per share consensus estimate. Overall, JPMorgan reported first quarter revenue of $24 billion, which was stronger than the $23.8 billion expected. JPMorgan gained more than 4% today because the earnings report wasn’t as bad as it could have been, I guess. One of the big stories in the global markets and economy continue to be persistently low energy prices. While this may be good news for consumers, it’s bad news for the investors and creditors of drillers. JPMorgan’s provision for credit losses was $304 million, compared to $61 million in the prior-year quarter.
Five out of eight of the biggest US banks do not have credible plans, or what is known as a “living will”, for winding down operations during a crisis without the help of public money. Federal regulators gave the banks until October 1 to resubmit their plans with serious “deficiencies” corrected, or face stricter regulations, like higher capital requirements or limits on business activities. The requirement for a “living will” was part of the Dodd-Frank reform legislation passed in the wake of the 2007-2009 financial crisis, when the government spent billions of dollars on bailouts to keep big banks from failing and wrecking the economy. The plans are separate from the Fed’s stress tests, where banks demonstrate stability by showing how they would withstand economic shocks in hypothetical scenarios.
The “living wills” that the Federal Reserve and FDIC jointly agreed were not credible came from Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo. None of the eight systemically important banks, which the government considers “too big to fail,” fared well in the evaluations. A bank has to fix deficiencies only if the two regulators jointly determine its plan does not have the potential to work. Only one agency found the “living will” of Goldman Sachs and Merrill Lynch to not be credible, while the other agency noted shortcomings. Citigroup passed the test, but the Fed and the FDIC did note some shortcomings. In short, the 8 most important banks in the US are still a big hot mess, standing at the edge of a potential meltdown and continuing to whine about regulations and fully expecting taxpayers to bail them out if and when they screw things up again. What this really means is that their provisions for losses are not sufficient, and that means that their earnings reports, starting today with JPMorgan, do not reflect reality.
By the way, the news on big banks failing the “living will” test was leaked to the Wall Street Journal yesterday. Now, the Federal Reserve and Federal Deposit Insurance Corp. requested that inspectors general investigate whether someone at their agencies’ leaked details.
The US Congress has until Friday to produce a budget. If you haven’t heard much about the 2016 Federal budget, there is a good reason – it doesn’t exist. The House cannot find a majority for the budget, and the Senate sees no reason to take a risk without cooperation from the House. Instead of an actual budget, the appropriations process will lop along again without any strategic framework, which means that in all likelihood, Congress will once again be faced with the same end-of-the-year up-against-the-deadline crisis it faced last year.
Nearly 40,000 Verizon employees on the East Coast have walked off the job after working without a contract since August. The strike is being led by the Communications Workers of America and the International Brotherhood of Electrical Workers, who say they’re striking because the company wants to freeze pensions, make layoffs easier and rely more on contract workers. The protest marks the largest US walkout in years, and brings back memories of the 2011 Verizon strike that lasted two weeks.
Panama’s Attorney General raided the law offices at the heart of the Panama Papers scandal, to search for evidence of illegal activities. But Mossack Fonseca still denies wrongdoing, stating that while it set up offshore and anonymous shell companies, it was not involved in how those accounts were used. Conspiracy theories are also swirling that the CIA was behind the leak, and could have hacked the Panama-based law firm.
Shares of Peabody Energy have been suspended after the U.S. coal giant voluntarily filed for Chapter 11. The bankruptcy comes in the wake of a sharp fall in coal prices that left Peabody unable to service a recent debt-fueled expansion into Australia, however its operations Down Under will not be included in the filings. Peabody is the largest coal company and the bankruptcy is the largest bankruptcy in the US this year. The bankruptcy filing came as no surprise after the company announced last month that it was delaying interest payments on two loans. It comes after a number of bankruptcy filings over the last two years by other coal companies, including industry giants like Arch Coal, Patriot Coal, Walter Energy and Alpha Natural Resources. Now, with the industry in near free fall, many banks are pulling away from financing coal projects. Utilities are closing aging coal-fired power plants rather than upgrade them to meet new environmental standards, in large part because the glut of natural gas has offered a cheaper alternative. Peabody disclosed that it has had problems selling holdings in Colorado and New Mexico. Peabody’s last best hope to avert bankruptcy was its attempt to sell three mines to Bowie Resource Partners, but that company has had trouble raising the full $650 million in debt to acquire them.
Adding to the list of woes it faces, Valeant Pharmaceuticals has received a notice of default from bondholders Centerbridge Partners due to its failure to file its annual report. The drugmaker now has until June 11 to make the filing.
Teen fashion retailer American Apparel is laying off hundreds of workers as it overhauls its production process, which could include outsourcing part of its production to another U.S. manufacturer. American Apparel filed for bankruptcy in October following years of losses, but expects to be profitable in 2018.
Google is scaling up its digital skills training programs to accommodate a million Africans in the next year. The tech giant plans to train 300,000 people in South Africa, 400,000 Nigerians, 200,000 Kenyans, and another 100,000 from other sub-Saharan countries. Google has partnered with Livity Africa to develop the training programs and is rolling out a new online education portal for learners in the region.
European privacy watchdogs will issue a judgment today about the new trans-Atlantic data agreement – known as the EU-U.S. Privacy Shield – that allows companies to move information between the two regions. Many of the regulators remain skeptical about the agreement, and if they rule that the deal does not meet Europe’s tough privacy standards, it may cause headaches for global companies when handling personal digital information.
Hundreds of thousands of student loan borrowers will now have an easier path to getting their loans discharged. The Department of Education will send letters to 387,000 people they’ve identified as being eligible for a total and permanent disability discharge, a designation that allows federal student loan borrowers who can’t work because of a disability to have their loans forgiven. The borrowers identified by the Department won’t have to go through the typical application process for receiving a disability discharge, which requires sending in documented proof of their disability. Instead, the borrower will simply have to sign and return the completed application enclosed in the letter. If every borrower identified by the Department decides to have his or her debt forgiven, the government will end up discharging more than $7.7 billion in debt.