Wall Street rallies – go figure. Est-ce que Google a un problème d’impôt? Exxon has a problem with its own shareholders. Deere has a problem renting out tractors.
Financial Review by Sinclair Noe for 05-24-2016.
DOW + 213 = 17,706
SPX + 28 = 2076
NAS + 95 = 4861
10 Y + .02 = 1.86%
OIL + 1.02 = 49.10
GOLD – 21.30 = 1227.90
Yesterday, Wall Street couldn’t figure out which way to go; today stocks rallied for their best day since March 11. The S&P 500 rallied back above its 50 day moving average; we’ll have to see if it can hold on. What was behind the rally? Who knows? Jeffrey Gundlach, CEO of DoubleLine Capital, said the rally feels like a short squeeze and characterized U.S. stocks as “dead money.” Gundlach says the market is not healthy and earnings have come in weak. On the Federal Reserve, Gundlach says the odds of a rate hike in June are 50-50, and it is Janet Yellen’s opinion that matters the most.
Expectations are rising for a rate hike next month after Philly Fed President Patrick Harker reinforced the central bank’s message that it’s getting ready to act now that the U.S. economy has recovered from a weak winter. Harker says he “can easily see the possibility of two or three rate hikes over the remainder of the year,” he told an audience in Philadelphia. “If the data comes in… I think a June rate increase is appropriate.” Markets are also awaiting this week’s main event – a speech from Janet Yellen on Friday.
The Census Bureau reports New Home Sales in April increased to a seasonally adjusted annual rate of 619,000 – an 8 year high; that’s an increase of 16.6% from March, and a 23.8% increase from April 2015. The median price also jumped, rising 9.7% from 12 months ago to $321,100. The big increase in sales took supply sharply lower. At the current pace, it would take 4.7 months to exhaust all inventory.
French investigators raided Google’s Paris headquarters this morning as part of a tax evasion inquiry. Google has based its regional headquarters in Dublin where corporate tax rates are lower than elsewhere in Europe. The company, now part of Alphabet, has been under pressure in recent years over its practice of channeling most profits from European clients through Ireland to Bermuda, where it pays no tax on them. The raid was part of an investigation to determine if Google Ireland Ltd has a permanent base in France and if, by not declaring parts of its activities carried out in France, it failed its fiscal obligations, including on corporate tax and value added tax. The raid was carried out as part of an investigation into aggravated tax fraud and the organized laundering of the proceeds of tax fraud. If Google is found guilty, it could face fines up to 10 million euros or a fine of half of the value of the laundered amount involved.
Separately, attorneys for Oracle and Google presented their closing arguments in a lawsuit over Google’s use of Java APIs owned by Oracle in Android. Oracle accused Google of stealing a collection of APIs, while Google suggested that Android transformed the smartphone market and Oracle sued out of desperation when its own smartphone attempts failed to launch. If the jury finds that Google did indeed steal code from Oracle, it could disturb the way engineers at small startups build their products and expose them to litigation from major companies whose programming languages they use. By the way, API refers to application program interface, which is the set of tools for building software applications. Google has argued that Sun Microsystems, which created Java, always intended for its programming language and accompanying APIs to be used freely. Oracle purchased Sun in 2010 and claimed that Sun executives believed Google had infringed their intellectual property and simply hadn’t brought legal action. An appeals court has already decided that the Java APIs in question are copyrightable. This case, which has stretched over two weeks in a district court in San Francisco, aims to determine whether Google’s implementation of the APIs can be considered fair use. Now we wait for the jury.
The head of SWIFT will present a plan today to fight back against a wave of recent cyber thefts at members of the world’s top payments network. The speech follows three high profile hacks since the beginning of last year: an $81 million heist at the Bangladesh central bank, a $12 million theft from Banco del Austro in Ecuador, and an attack on a Vietnamese lender that was unsuccessful.
Deutsche Bank was downgraded. Moody’s cut Deutsche Bank’s credit rating to “Baa2,” down from “Baa1.” The credit-rating agency said the downgrade was a result of the bank’s difficulty in stabilizing itself amid a world of low growth and low interest rates. Moody’s said, “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm.”
Monsanto has rejected Bayer’s $62 billion takeover offer as too low while saying it’s still open to further deal talks. Bayer will likely come back with a higher bid. Buying Monsanto would create the world’s biggest supplier of farm chemicals and seeds, so even if they can agree on a price, they face regulatory scrutiny and will likely have a hard time making the case that this deal will make for a more competitive market. The consolidation of two big industry players may also limit farmer choice and bargaining power, with increasing seed prices expected to be passed on to the grocery aisles. There is also a question about biodiversity and the potential risks to food safety. As Monsanto rejected the Bayer bid, they left the door open, saying they “believe in the substantial benefits an integrated strategy could provide to growers and broader society, and we have long respected Bayer’s business.”
ExxonMobil will face a revolt from some of its biggest and most influential shareholders on Wednesday as they fight to force the world’s largest oil company to open up about the effect of climate change on its future profits. Investors, including pension funds of the governments of Norway, Canada, California, New York, and even the Church of England are expected to vote in favor of a resolution calling on Exxon to “publish an annual assessment of long term portfolio impacts of public climate change policies.” The resolution is also supported by ISS and Glass Lewis, the world’s leading proxy advice services which advise institutional investors how to vote on such issues. The resolution states that the company “should analyze the impacts on ExxonMobil’s oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2 degree target”. ExxonMobil has tried to block the resolution.
Exxon is currently under investigation by New York’s attorney general over claims that it lied to the public and shareholders about the risks of climate change. It follows reports that internal company documents from the 1980s and 90s show Exxon’s in-house scientists were warning company executives about the dangers of climate change, while Exxon was publicly claiming that climate science was not proven.
The strongest El Nino in nearly 20 years has ended, according to the Australian Bureau of Meteorology, as sea surface temperatures across the Pacific Ocean cool to their neutral levels. El Niño led to damaged crop production (such as wheat, palm oil and rice) due to scorching weather across Asia and east Africa, and heavy rains and floods in South America. A majority of climate models suggest that the climate pattern La Niña will develop in the wake of El Niño, according to the Bureau of Meteorology. La Niña—a climate phenomenon characterized by significantly below-average temperatures in the Equatorial Pacific—brings dry and warm weather to the southern U.S. and Mexico, and wet weather throughout much of the Pacific.
Mandatory evacuation orders were lifted yesterday for the last of Alberta’s oil sands production sites endangered by wildfires, starting the process of inspections by forestry and health officials to make sure the facilities are safe for workers to return. Since late Friday, Alberta has removed orders that had prevented all but critical staff from remaining on sites.
Deere & Co. is tightening conditions for renting equipment as a slump in farming incomes has led customers to prefer leasing rather than buying its agricultural machinery. In the face of lower crop prices, farmers in the U.S., South America and elsewhere have cut back sharply on equipment spending despite planting big crops. For nine straight quarters, the slump has eaten into Deere’s sales and profits, and it is now bleeding into the company’s customer-finance arm. Leases now account for about a quarter of Deere’s customer-financing deals, compared with about 15% in the past. But Deere’s finance unit and dealers have been burdened with used equipment as customers walk away when short-term leases expire. That has forced the company to tighten the terms for renting equipment that has rapidly depreciated in value. Deere took a write-down on used equipment in the latest quarter. It is restructuring leases to share more of the risk of further declines with dealers and new leases will likely cost farmers more as the company lowers residual equipment values at the end of the leases to reflect the depressed prices for used equipment.
Toyota is recalling almost 1.6 million additional American vehicles for front passenger side Takata air bag inflators that could rupture. Toyota said the new recall includes some but not all Corolla, Matrix, Yaris, 4Runner, Sienna, Scion xB, Lexus ES, GX and IS vehicles built between 2006 and 2011. Other reports from 17 automakers recalling Takata’s faulty devices are also due this week.