More Exciting Than Soccer
Closing numbers, economic data, plus a preview of the Doha meeting on oil, and a look at Brazil’s impeachment. The latest Panama Papers fallout. Time to buy your own cable box.
Financial Review by Sinclair Noe for 04-15-2016
DOW – 28 = 17,897
SPX – 2 = 2080
NAS – 7 = 4938
10 Y – .03 = 1.75%
OIL – 1.07 = 40.43
GOLD + 6.50 = 1235.10
It was a pretty good week on Wall Street, even though it feels like some of the recent gains were the result of a short squeeze. On Thursday, the Dow and S&P 500 closed at their highest levels of the year so far. The S&P 500 has recovered about 14% from the February lows. The S&P has posted gains in 7 of the past 9 weeks. The Dow posted a 1.8% gain for the week, its best since the week ended March 18. The S&P 500 added 1.5% for the week.
The world’s second-largest economy grew 6.7% in Q1, the slowest pace of expansion since the financial crisis. But the figure suggested China’s target range of 6.5%-7% growth for 2016 is possible as long as it continues using its vast stimulus toolbox. Other data also reinforced previous signs the country may be finding traction with better-than-expected growth in retail sales, industrial output, fixed asset investment, export figures, and capital outflows.
The biggest oil meeting in decades takes place on Sunday. Major oil producers will gather in Doha, Qatar on Sunday to discuss a potential oil production freeze. Expectations for a deal are low. Notably, Iran has said it won’t send its oil minister to the meeting, which could pose a problem as Saudi Arabia has suggested it won’t agree to a deal unless Iran is involved. Russia’s finance minister has said that even if a deal is reached to freeze production, it might not result in higher prices. The 18 nations set to gather in Doha on Sunday to discuss a production freeze have spent $315 billion of their foreign-exchange reserves, about a fifth of their total, since the oil slump started in November 2014.
The other big event for investors to watch this weekend will be political developments in Brazil, where a last minute attempt to block an impeachment vote against President Dilma Rousseff in the Supreme Court has failed. The vote will now go ahead on Sunday, with markets viewing the removal of Rousseff as a positive development for the country and the global economy. The vote is so important in Brazil that soccer matches are being rescheduled and huge outdoor screens to broadcast proceedings have been set up. One big problem is that some of the most vocal lawmakers pushing to impeach Rousseff are facing serious charges of graft, electoral fraud and human rights abuses. If Rousseff is impeached, the vice president Michel Temer is not expected to take over because he has been accused of involvement in an illegal ethanol-purchasing scheme. The House Speaker Eduardo Cunha, the third in the line of succession, has been charged with accepting millions in bribes. Altogether, 60 percent of the 594 members of Brazil’s Congress face serious charges like bribery, electoral fraud, illegal deforestation, kidnapping and homicide. I would have to agree – this is more exciting than soccer.
In the wake of the Panama Papers scandal, the EU’s five biggest economies have struck a deal to crack down on tax avoidance, agreeing to exchange information on the beneficial owners of companies and trusts. The IMF says tax avoidance is a global risk. At the annual IMF meeting in Washington, Britain’s George Osborne said, “Today we deal another hammer blow against those who hide their illegal tax evasion in the dark corners of the financial system.” The UK, Germany, France, Italy and Spain are now pushing for the rest of the G20 to follow suit.
US manufacturing output declined in March by the most since February 2015. The 0.3 percent drop at factories, which make up 75 percent of production, followed a revised 0.1 percent decrease the prior month. Utility output decreased 1.2 percent after a 3.6 percent slump the previous month. Mining production, which includes oil drilling, decreased 2.9 percent. The Federal Reserve reports total industrial production, including mines and utilities, slumped by a weaker-than-estimated 0.6 percent for a second month.
The University of Michigan’s preliminary consumer sentiment index for this month fell to 89.7, the lowest since September, from 91 in March. Steady employment gains haven’t yet translated into solid wage increases. About a fifth of those surveyed mentioned the election or government policy as likely to have negative implications for future economic growth.
Earnings season kicks into high gear next week; it’s shaping up to be the worst quarter for earnings since 2009. The first quarter, should it come in as expected, would mark a third straight quarterly decline in earnings and a fifth straight fall in revenue. This week saw earnings reports from the big banks, and the results were bad but they could have been worse.
Citigroup reported a big drop in earnings this morning. Citi’s revenue fell 11% year-over-year to $17.6 billion. Meanwhile, net income plunged 27% to $3.5 billion or $1.10 per share. That bottom line beat the $1.05 expected by analysts. Citi’s trading revenue fell to $3.79 billion, the fourth straight year that fixed-income and equities trading operations declined in what is typically the industry’s strongest quarter. This has been a common theme among the big banks (JPMorgan, BofA, and Wells Fargo) that reported earnings this week. Other common themes include cost cutting to prop up profits (Citi really added to the bottom line by firing a whole lot of people), also all the banks have big problems with energy loans. Citi set aside about $455 million for energy loans in the first quarter; in all, the bank said provisions were $2.05 billion.
One more thing we learned this week is that the big banks are still too big to fail; five of the 8 biggest banks flunked the Federal Reserve test; seven out of 8 did not have “credible” plans for how they would wind themselves down in a crisis without sowing panic or requiring bailouts. Citi passed the test, barely; regulators said their plan had shortcomings. The Dodd-Frank Act of 2010 told large financial institutions to draw up “living wills”, or plans for dismantling the enterprises if they go bust. The big banks are struggling to comply. Part of the plan calls for the banks to have cash and liquid assets to keep operations operating. That might not be enough to avoid a meltdown. Ultimately, the only way to be sure a bank is not too big to fail, and melt down the economy, is to make the big banks smaller. It’s the difference between eating a bite size piece of steak and trying to swallow the entire cow.
The Federal Communications Commission is working on a new rule that would forbid cable companies from requiring customers rent their set-up boxes directly from their providers. Renting the boxes can run upwards of $240 a year per box, and consumers don’t have a choice between boxes. The price of buying a box outright could easily be less than the fees customers pay over the course of a year. Among the supporters of the set-top box proposal are technology companies like Google, Amazon and Apple, which are eager to establish a broader foothold in the TV market. The cable industry is opposed, calling it a giveaway to wealthy tech companies. If you’re looking for precedent to breaking up the cable industries lock on set top boxes, look back to a time when Americans rented their phones from Ma Bell. And set top boxes might not be the only industry facing a shakeup. The Council of Economic Advisers issued a report today saying that competition was declining in many industries and argued that the decrease was having a harmful effect on consumers and workers.
As Yahoo prepares to accept first-round bids for its core Internet division on Monday, potential buyers have found themselves facing one big problem: How do you value a firm with a declining business when the company appears reluctant to share vital financial details? According to the NYT, Yahoo executives have refused to discuss the outlook for 2017 or answer questions about crucial aspects of the business in meetings and phone calls with potential bidders.
General Motors is recalling more than one million newer pickup trucks for a seat belt flaw. GM said the recall of the 2014-15 Chevrolet Silverado and GMC Sierra 1500 pickups is not linked to any crashes or injuries.
Pre-orders for the Tesla Model 3 are approaching 400,000. Tesla plans to expand its lineup following the Model 3, likely including a Tesla pickup truck that’s been talked about before by CEO Elon Musk.
You know all those fees that airlines have added over the last several years? Delta is taking one away. Delta will drop the fee for U.S. consumers who buy tickets over the phone or at a ticket counter to make things simpler for customers. The phone fee was $25 and the fee for a ticket bought at an airport or other ticket counter was $35. So now Delta and Southwest are the only major airlines that do not charge these particular fees. What has caused Delta to seemingly have a change of heart? Delta says that in-person ticketing gives them a chance to engage with their customers. Yea.., that’s not it. The simple fact is that everybody hates this fee; it made the airline look greedy, very greedy. But the real reason for cutting the fee: airlines are swimming in profits thanks to lower fuel prices.
And whether you fly or drive or find some other means of transportation, the next week might be a good time to get away. The U.S. National Park Service is celebrating its 100th birthday in 2016. And during National Park Week, April 16 through April 24, you can join in on the celebration by enjoying free admission to any of the 58 national parks in the country.