Financial Review

We All Know How That Works


Waiting on the Fed. Rent is too high. Drugs are too expensive. CPI up. Sentiment flat. Net worth increases. AZ unemployment rate down. New iPhones. Exploding Galaxies. Deutsche Bank haggles for justice. ExxonMobil’s oil is worth the same today as 2 years ago. Wells Fargo loses billions in market cap, and something more important.


Financial Review by Sinclair Noe for 09-16-2016

DOW – 88 = 18,123
SPX – 8 = 2139
NAS – 5 = 5344
10 Y un 1.70%
OIL – .69 = 43.22
GOLD – 4.20 = 1310.90


The U.S. Federal Open Market Committee and the Bank of Japan both wrap up their policy meetings on Wednesday next week. The BOJ is seen as easing policy slightly, while the Fed is widely expected to keep rates on hold. The CME FedWatch tool is currently showing a 12% probability of a rate increase when the Fed’s policy group convenes. Of course, that means it could still happen, maybe so the Fed can show they are independent, or maybe to prove their credibility.


The rent is too high and medical and drug prices are soaring. The consumer price index rose 0.2% in August. The CPI measures prices at the retail level. Over the past year, overall consumer inflation has risen at a 1.1% rate, up from 0.8% in the prior month.  The price for medical care rose 1% in August, the fastest rate since 1984. The cost of prescription drugs also soared 1.3%, bringing the increase in prices over the past year to 6.3%. That’s the largest year-over-year increase in two years. Food prices dropped and energy prices were flat in August. Stripping out food and energy (for all those people who don’t eat and never leave their cave), the core CPI was up 2.3% in the past 12 months.


The University of Michigan said its consumer sentiment index was unchanged at 89.5 in September. The consumer assessment of the present got a little worse while the expectation for the future improved slightly.  Both near- and long-term inflation expectations fell to near record lows.


Arizona’s seasonally adjusted unemployment rate decreased two-tenths of a percentage point from 6.0% in July to 5.8% in August. The national unemployment rate remained unchanged at 4.9% in August. A year ago, the Arizona seasonally adjusted rate was 6.0% and the U.S. rate was 5.1%. Arizona gained 29,600 Nonfarm jobs in August. This was less than the post-recessionary average gain of 50,600 jobs. The Private Sector lost 1,500 jobs. Government added 31,100 job.


The Federal Reserve reports households net worth increased in the second quarter – to $89.1 trillion, up from a slightly downwardly revised $88 trillion in the first quarter. Household borrowing rose at a 4.4 percent annual rate, up from 2.7 percent growth in the first quarter of 2016.


The new iPhone 7 and 7 Plus go on sale at Apple stores and carrier retail locations in more than 25 countries today, with prices starting at $649. But this year, the company will not disclose opening weekend sales numbers. T-Mobile and Sprint said this week that pre-orders for the new models were almost four times as great as for previous models; and even though Apple was down slightly today, this week Apple gained about 11%, helping drive Apple stock to its highest level in almost five years. But there is a problem.  Apple has not made enough of the devices to meet demand. Customers who haven’t pre-ordered the larger iPhone 7 Plus models will be unable to buy them in Apple stores Friday.


The U.S. Consumer Product Safety Commission has issued an official recall for the Samsung Galaxy Note 7, which will include about 1 million of the mobile phones, because of serious fire and burn hazards. Samsung had issued its own voluntary recall about a week ago, which effectively served to confuse things. Consumers can either get a refund or a replacement device, which should be available at most retail locations no later than Sept. 21, or they can trade for a different Samsung phone. The company will refund any price difference between models. In both cases, Samsung is also handing out a $25 gift card or bill credit to participants. If you have a Galaxy Note 7, Samsung advises contacting the wireless carrier or retail store where you originally purchased the phone for details about making the trade. Do not sell your phone; now that the recall is official, it is illegal to sell a potentially faulty Galaxy Note 7 – and that goes for Samsung as well as individuals. The exploding phone problem shaved as much as $14 billion off its market value, and it looks like about that same amount went over to Apple’s market cap.


Looking to repair a condition that may keep air bags and seat belt tighteners from deploying in a crash, Fiat Chrysler is recalling 1.9 million vehicles worldwide for a defect linked to three deaths and five injuries. It’s the latest in a series of large-scale air bag recalls as the auto industry grapples with a widening array of problems from potentially unstable inflators to bad software.


Deutsche Bank has been asked to pay $14 billion to resolve a probe into residential mortgage backed securities issued and underwritten between 2005 and 2007. The amount is similar in size to the tax bill Apple faces in Ireland – although that is pure coincidence. The number is far beyond Deutsche Bank’s own expectations. The bank had legal provisions of €5.5 billion at the end of June. But only €4 billion of that is earmarked for regulatory enforcement, including claims that trades by Russians broke sanctions as well as other cases. The bank issued a statement saying it has no intent to settle these potential civil claims anywhere near the number cited. Even if the fine is reduced, it might exceed all provisions held by the bank. And so, today Deutsche Bank bonds were getting crushed. The negotiations are only just beginning. For some reason, Deutsche Bank will be allowed to haggle because they haven’t set aside enough to pay the fine. We all know how that works; say you get a traffic ticket for speeding and the fine is $200, you just go to the judge and say you only set aside $50 for the fine and you have no intention of paying the $200, and the judge eventually decides to collect $50 and let you go on your merry way. Sure. We all know how that works.


Leaders of the European Union’s 27 nations – minus the U.K. – are meeting in the Slovak capital Bratislava as leaders try to fight a surging wave a populism across the union. German Chancellor Angela Merkel warned that Europe is not at all in a good state in a speech ahead of the meeting, which will also likely be dominated by the fallout from the Brexit vote. The one place the summit is expected to provide agreement is on climate change, with a target for ratification of the Paris Climate Accord anticipated as early as next month.


Eric Schneiderman is investigating why Exxon Mobil hasn’t written down the value of its assets, two years into a pronounced crash in oil prices. The New York Attorney General, who has been probing the firm’s past knowledge of the impact of climate change, is also examining its accounting practices. Since 2014, oil producers world-wide have been forced to recognize that wells they plan to drill in the future are worth $200 billion less than they once thought. Because the fall in prices means billions of barrels cannot be economically tapped, such revisions have become a staple of oil-patch earnings, helping to push losses to record levels in recent years.


Tesla just struck a deal to build one of the largest battery storage facilities in the world. It will provide a 20-megawatt Powerpack system at a substation in Mira Loma, California. The lithium-ion battery system will store 80-megawatt hours of energy, enough to power more than 2,500 households for a day. Tesla expects the grid to be completed by 2016. Southern California Edison owns the substation.


Baidu has received a permit to test its self-driving car in California, becoming the 15th company to receive approval from the Golden State. After unveiling its autonomous vehicle in China last December, Baidu has been steadily increasing its investments in the sector and has already tested its prototype on Chinese roads and highways.


Meanwhile, the situation at Wells Fargo just keeps getting worse. For several years, more than 5,300 employees opened up more than 2 million banking accounts out of thin air. The banks has been fined $185 million. For those aggrieved customers who suffered ignominious identity theft, forgery and fraud at the hands of junior banksters executing orders from above, Wells set aside $5 million to pay them back the false fees they were charged. The House Financial Services Committee is investigating. CEO John Stumpf will testify next week. I’m not sure why this scandal is resonating with regulators and politicians, other than the fact that it is pretty simplistic; not nearly as abstract as the mortgage-bond assembly line and derivatives during the financial crisis. Wells Fargo shares are down more than 6 percent in three days, wiping out about $15 billion in market value and causing Wells Fargo to cede its bragging rights as the nation’s biggest bank by market capitalization to JPMorgan Chase. About $1.5 billion has been lopped off the value of Berkshire’s 10 percent stake, and Berkshire’s own shares are down about 2.5 percent over the same period. You can bet Warren Buffett is none too happy. The executives at Wells Fargo were willing to give up reputation and trust for just a very few quick dollars. That’s just incredibly stupid for supposedly smart executives being paid millions of dollars, but it shows the value of a bank’s reputation, or lack thereof.





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