Financial Review

A Perfect Gift

Financial Review by Sinclair Noe

DOW + 64 = 18,076
SPX + 4 = 2114
NAS + 22 = 5099
10 YR YLD + .10 = 2.37%
OIL – 1.68 = 59.58
GOLD – 7.70 = 1186.00
SILV – .27 = 16.58

 

The U.S. trade deficit narrowed in April on a drop in imports. The Commerce Department said the trade gap narrowed to $40 billion from March’s revised deficit of $50 billion. The 26 percent drop in the April trade deficit was the largest decrease since early 2009 and reflects a surge in imports in March following the end of a West Coast ports labor dispute.

 

Service industries expanded in May at the slowest pace in 13 months. The Institute for Supply Management’s non-manufacturing index, which includes an array of industries from real estate to dining, declined to 55.7 from April’s 57.8. Readings above 50 signal expansion. Limited growth in orders reflects an American consumer who has been saving the extra cash from low gasoline prices and rising employment rather than spending it. Arts and entertainment, real-estate firms and rental companies led the list of the 15 non-manufacturing industries that reported growth in May. Mining, which includes oil extraction, contracted. An index of employment in service industries dropped to 55.3 in May from 56.7.

 

Payrolls processor ADP reports private employers added 201,000 jobs in May, the most since January. The ADP data came ahead of the U.S. Labor Department’s more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment. It is estimated that the Friday Jobs Report will show 225,000 new jobs in May and the unemployment rate steady at 5.4%.

 

Meanwhile, the Labor Department has released details on the April jobs report. Payrolls grew in 50 U.S. metro areas with a population of 1 million or more in April compared with a year earlier. The biggest increase occurred in Silicon Valley’s San Jose metro area, where payrolls grew 6%. That was followed by the areas surrounding Orlando, Fla., where payrolls grew 4.3%, and Riverside, Calif., which saw 4.1% payroll growth. Employment in New Orleans was the only metro area without an increase; holding steady in April from a year ago. Austin, Texas had the lowest unemployment rate in April, at 3%, followed by Salt Lake City, Utah, at 3.1%. The Las Vegas area had the highest jobless rate at 7.1%. Metro Phoenix came in at 4.9%.

 

Two weeks before a FOMC policy meeting, the Fed publishes the Beige Book, an anecdotal assessment of the economy, named for its unassuming beige binding and page turning eloquence. Reports from the Federal Reserve’s 12 major regional district banks show a “generally optimistic” outlook for U.S. economic growth, which is “expected to continue at a modest to moderate pace in several districts.”

 

“Modest growth” was seen since the April 15 Beige Book publication in four Fed districts, while “moderate growth” was seen in three others. Dallas was the only district to report that its economic pace “slowed slightly.” Richmond and New York were the only districts in which consumer spending hadn’t picked up since April 15. And auto sales picked up everywhere except in New York and Cleveland. The Fed highlighted the effect of low gas prices in some of its districts, saying they had provided “a tailwind for consumer spending”; however that assessment has not yet been backed up by hard data. Employment levels were up slightly, with some districts reporting labor shortages.

 

The European Central Bank left interest rates unchanged at record lows. ECB president Mario Draghi said monetary policy stimulus is filtering through to the economy as planned, and he insisted the European Central Bank needs to see its bond buying through to the finish. Since the ECB started its $1.2 trillion quantitative easing program three months ago, inflation in the 19-nation euro area may have bottomed out. The inflation rate in the Eurozone was positive for the first time in six months in May, rising to 0.3 percent from zero. Draghi said:  “The recovery is on track exactly according to our projections.”

 

The fly in the European soup bowl could be Greece. The Greeks presented their proposal for a bailout; creditors presented a take-it-or-leave-it ultimatum in reponse; Greece threatened to miss a loan repayment to the IMF due on Friday if they can’t get a proposal they can live with. German Chancellor Angela Merkel stepped in to unblock the stalemate. Greek Prime Minister Alexis Tsipras is meeting today with European Commission President Jean-Claude Juncker.

 

OPEC is set to carry on pumping oil nearly flat-out for at least the next several months. OPEC is scheduled to meet Friday to determine production quotas and with oil prices having stabilized at around $65 a barrel there’s little appetite within OPEC to modify production limits or address Iran’s request to give it more room in the market as sanctions ease. OPEC officials will be meeting with executives from several major oil companies. Today, BP CEO Bob Dudley said he believes global oil supplies will continue to grow, putting downward pressure on prices.

 

And in an interesting twist, the leaders of six of Europe’s largest oil producers are calling for a plan to price greenhouse gas emissions, citing climate change as “a critical challenge for our world.” In a letter to the executive secretary of the United Nations Framework Convention on Climate Change and the president of the upcoming 2015 Paris Climate Conference, the CEOs of BP, Royal Dutch Shell, Statoil, Total, Eni, and BG Group focus on creating a framework for carbon pricing in countries that currently lack one, and then connecting that framework internationally.

 

The OECD, which has a history of cutting its growth outlooks, has done it again, reducing its global forecast due to lagging investment and risks, including a possible Greek default. Chief Economist Catherine Mann said that despite “monetary accommodation, less fiscal drag and a reduction in oil prices,” we’re not getting growth that is “matching the average of the past two decades.”  The OECD now expects the world economy to expand 3.1% in 2015, down from 3.7% predicted in October. Last year, the world economy grew 3.3%.

 

Several of FIFA’s big corporate sponsors including Coca-Cola, Visa, and Adidas said they welcomed the resignation of the soccer governing body’s president, Sepp Blatter, amid a wide-ranging corruption scandal, and urged the organization to enact swift reforms to restore its credibility. Of all the individuals and firms tied up in the scandal over bribery and corruption at FIFA, so far scrutiny has largely escaped KPMG. KPMG was the auditor for FIFA for the entire time under investigation, and it served as advisor for the Russia and Qatar official organizing committees when they prepared the winning bids that are now the target of corruption investigations in the U.S. and Switzerland.
Looking to expand its user base and rev up its revenue engine, Pinterest is planning to launch “buyable pins,” enabling users to buy items they see directly via Pinterest. Although Pinterest won’t take a cut of each transaction, merchants will have the option to pay for “promoted pins” – giving the company an important revenue source following its $11 billion valuation. Instagram has also announced a similar feature, permitting advertisers to add a button to encourage viewers to click through to their website.

 

The internet is the future of course, but online advertising has always been a fraction of the huge budgets spent on TV ads. That’s expected to change by 2019. PriceWaterhouseCoopers estimates that online advertising, which in 2014 brought in $49.45 billion in revenue in the US, will climb to $83.89 billion by 2019. That year will prove to be a major tipping point in advertising, with online ads overtaking television for the first time. Over this same period, TV advertising in the US will grow from $69.2 billion to $81.05 billion.

 

Wendy’s unveiled a new $1.4 billion share buyback, announced the closing of the sale of its bakery operations, reiterated guidance for 2015 and provided a longer-term outlook.

 

Avian flu has been the bane of American poultry farmers for months. Three deadly strains have forced them to kill off entire flocks of chickens, turkeys, and other birds to stop infection spreading, and to shut down facilities for costly disinfection procedures. Now consumers are going to start feeling the effects too. The price of wholesale consumer-grade eggs in the US reached an all-time high of $2.62 per dozen yesterday.

 

The nation’s population of egg-laying hens has been decimated. More than 30 million hens have been killed in Iowa alone, and it will be more than a year before egg production returns to normal across the country. On June 1, the fast-food chain Whataburger announced it will be limiting the hours that customers can order breakfast at its 800 restaurants in 14 states. Instead of serving breakfast taquitos and biscuit sandwiches with scrambled eggs 12 hours a day, Whataburger will offer them for four hours on weekday mornings and six hours on weekend mornings.

 

Takata will “rapidly” reduce its use of ammonium nitrate as an air bag propellant after it appeared “to be one of the factors” contributing to inflator ruptures; that was part of the testimony of Takata executive Kevin Kennedy before  a congressional subcommittee yesterday. However, Representative Michael Burgess, the Texas Republican who chaired the hearing, said he “couldn’t believe” what he was being told. “They are still making an air bag with ammonium nitrate as a propellant without a desiccant and they’re putting that in replacement and new vehicles.” Burgess said, “It almost seems like there should be a warning label stamped on the car.”

 

Hedge-fund manager John Paulson is donating $400 million to Harvard University, the biggest gift in the school’s history. Harvard’s School of Financial Engineering and Applied Sciences will be renamed after Paulson. Paulson rose to fame and fortune in 2007 by using credit default swaps to bet against the subprime mortgage lending market, essentially a bet that mortgages would fail. That gamble paid off big. And while $400 million sounds like a large amount; it won’t make a big difference, not like donating the money where there is actual need. Harvard already has a $36.4 billion endowment, so really it was a perfect choice… for someone like Paulson.

 

 

 

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