Layoffs, arbitration, underperforming hedge funds and junk ETFs; and how I upgraded my smartphone.
Financial Review by Sinclair Noe for 05-05-2016
DOW + 9 = 17,660
SPX – 0.49 = 2050
NAS – 8 = 4717
10 Y – .04 = 1.75
OIL + .34 = 44.32
GOLD – 1.40 = 1278.60
The number of Americans filing for unemployment benefits rose more than expected last week, posting the biggest gain in more than a year. Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 274,000 for the week ended April 30. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,000 to 258,000 last week.
Another report showed a 35 percent surge in planned layoffs by U.S.-based employers last month. Most of the announced job cuts were concentrated in the energy sector. Challenger, Gray & Christmas said US-based companies announced 65,141 job cuts last month.
The jobs report for April due out tomorrow morning. Investors will be watching closely to see if it could have any impact on the Federal Reserve’s plans for raising interest rates at its next policy meeting in June. The report is expected to show jobs grew by 200,000 last month while the unemployment rate stayed at 5 percent. A strong jobs report would be a possible indicator of Fed tightening. An early rally on Wall Street this morning faded into the close.
MetLife said it’s seeking to exit most of its hedge-fund portfolio after a slump in the investments. The insurer is seeking to redeem $1.2 billion of the $1.8 billion in holdings, a process that may take a couple of years to complete. The portfolio, which posted negative returns in the quarter, was cut by about $600 million in 2015. MetLife reported profit Wednesday that missed analysts’ estimates. Investment income fell 17 percent to $4.5 billion, hurt by both hedge funds and low bond yields.
American International Group posted a third-straight unprofitable quarter on losses from hedge funds and declines in the value of other investments. AIG is reshaping its portfolio, expanding bets on highly rated bonds and property lending while scaling back on hedge funds after the company was burned on those investments. AIG also is among insurers that have large holdings of energy bonds that were pressured by declines in commodity prices. And it isn’t just the insurance companies that are abandoning hedge funds; the New York City Employee Retirement System, the city’s largest pension fund, announced last month it was liquidating its hedge fund portfolio, citing big fees and bad performance.
Hedge funds have been underperforming. A challenging trading climate in 2015 left a composite index of hedge funds down 0.9 percent for 2015. By comparison, the Standard & Poor’s 500 inched up 1.38 percent for the year. The market pain continued into the first quarter of 2016, when investors pulled $15.1 billion out of the hedge fund industry, the largest outflow since 2009.
It also looks bad for junk bonds. HYG, the high yield ETF, just experienced a 4 day, $2.3 billion outflow, which is the fastest and largest redemption it has ever experienced. Which could mean nothing or it could mean the nearly 60% bounce in crude oil prices from the 2016 low is just a temporary move.
Alibaba Group, China’s biggest e-commerce company, said fourth-quarter revenue rose 39 percent, beating Wall Street estimates, helped by growth in gross merchandise volume. The number of mobile monthly active users rose 42 percent to 410 million. Alibaba represents a big part of the spending by Chinese consumers and so a re-acceleration in volumes is an indication that the Chinese consumer continues to be strong.
Amazon.com could take as much as a 30 percent stake in a large cargo airline, its second such deal this year as the e-commerce giant steps up efforts to take control of its own delivery logistics. As part of the agreement, Atlas Air Worldwide Holdings will operate 20 Boeing 767-300 cargo planes for Amazon. The Seattle-based retailer is moving quickly to build up its delivery network, seeking to wean itself from dependence on United Parcel Service and FedEx.
Tesla Motors on Wednesday posted quarterly results that were just slightly better than Wall Street’s expectations. The electric automaker reported a first-quarter loss of 57 cents per share on $1.6 billion in revenue, but the big news was the guidance from CEO Elon Musk; Tesla delivered just over 14,000 cars in the first quarter; Musk said he expects production of 100,000 to 200,000 Model 3 vehicles in the second half of next year, and 500,000 cars in 2018. If that sounds like a pretty outrageous promise, well… yes, except Tesla already has more than 400,000 pre-orders for the Model S. The challenge isn’t in the sales numbers, it will be the ability to transition from technology and design to manufacturing.
Merck reported lower-than-expected quarterly revenue, hurt by disappointing sales of its Januvia diabetes treatment and Remicade arthritis drug. But the second-largest US drugmaker beat first-quarter earnings forecasts because of cost controls and a weakening dollar, and it slightly raised its full-year profit outlook.
The Consumer Financial Protection Bureau unveiled a proposed rule this morning to restrict the use of arbitration clauses in consumer financial contracts, a step that would shift power to consumers and away from companies for a wide range of financial products from credit cards to bank accounts to private student loans. The CFPB aims to prohibit financial companies from using mandatory-arbitration clauses in contracts with consumers as a way to block class-action lawsuits and force customers into private negotiations to solve disputes. The new rule does not require congressional approval.
Class action suits might not be the easiest way to get your day in court, and the big winners tend to be the lawyers. The argument for arbitration is that it is a quick, easy, and inexpensive way to resolve a dispute; the reality is that very few cases, only about 100 a year, for cases under $2,500, end up in arbitration after their path to class action is blocked. And of those cases that make it to arbitration, the customer typically loses, more than 95% of the time. One reason why arbitration works so well for the companies is that they select the arbitrators. The arbitrators that are chosen to serve are not only screened to be big institution friendly; arbitrators that wind up ruling in favor of customers have this funny way of being moved to the bottom of the selection list. The result is that companies using arbitration clauses tend to act with impunity. Class actions are the only way that companies can be brought to heel.
California Governor Jerry Brown has signed a pack of bills that will raise the smoking age from 18 to 21, restrict the use of electronic cigarettes in public places and expand no-smoking areas at public schools. The new laws, which take effect June 9, are a big boost to a movement that is turning into the next major challenge for the $100 billion tobacco industry. Lawmakers in 10 other U.S. states are currently considering similar legislation.
Meanwhile, the FDA announced it will regulate e-cigarettes and vaporizers, also cigars and pipe tobacco. Congress gave the FDA authority to oversee tobacco products in 2009, but until now the agency had not finalized rules to regulate e-cigarettes and cigars. The rules prohibit sales to minors, ban free samples, require package warning labels, and call for makers of products released after 2007 to seek FDA permission to remain on store shelves. Companies will have 24 months to file pre-market applications for their products, according to the rule. The FDA then has a year to review the submission, during which the products can remain on shelves.
YouTube is planning a paid subscription service. Alphabet’s YouTube is planning to launch a subscription-based bundle of streaming cable channels. The new service will be called “Unplugged,” and it is set to launch as soon as 2017. It is not yet clear what channels will be included.
The ECB is also discontinuing production of the €500-euro note due to concerns that it could facilitate illegal activities. Terrorists and drug cartels need cold hard cash to operate, and the European Central Bank is taking a big step to make it harder for them. The ECB will stop printing its 500 bill in the next two years, though it will still be in circulation.
Another oil and gas bankruptcy? SandRidge Energy is in discussions with creditors about reaching a restructuring deal ahead of a possible bankruptcy filing. According to its annual report, SandRidge had $3.6 billion in debt at Dec. 31.
My smartphone has more computing power than the first Apollo space mission that landed on the moon. I don’t use all that computing power. I send text and emails, take pictures, use the maps, and check out stuff on the interwebs. Sometimes I make phone calls. It’s a couple of years old and the battery started fading a couple of weeks ago. I went to Best Buy for a replacement battery; they didn’t have it in stock but the clerk suggested an upgrade to a new phone. I did not buy. I went to Amazon.com and ordered a new battery for $6 dollars compared to a new phone at about 100 times that price. My old phone is working great again. Smartphone upgrades have been steadily declining over the last five years. For the first time, smartphone growth went into the negative for the first quarter. Seems people just aren’t upgrading like they used to.