A Short Week
Financial Review by Sinclair Noe
DOW – 190 = 18,041
SPX – 21 = 2104
NAS – 56 = 5032
10 YR YLD – .08 = 2.14%
OIL – 1.37 = 58.35
GOLD – 18.10 = 1188.80
SILV – .35 = 16.82
The S&P/Case-Shiller Home price index shows prices for existing homes rose in March. Both the 10- and 20-City Composites increased significantly, reporting 0.8% and 0.9% month-over-month increases, respectively. Both the 10-City and 20-City Composites saw year-over-year increases in March. The 10-City Composite gained 4.7% year-over-year, while the 20-City Composite gained 5.0% year-over-year. Phoenix saw prices increase 0.6% in March, and resale home prices were up 3.1% from March 2014.
Sales of new single-family homes climbed 6.8% in April to an annual rate of 517,000 and shoppers have been more active in the first four months of 2015 than any time in the past seven years. Sales surged in the Midwest and in the South. Sales fell slightly in the West and Northeast. New home sales are up 26% compared to one year ago. The median price of new homes, meanwhile, rose 8.3% to $297,300 compared to April 2014.
Orders for durable goods fell a seasonally adjusted 0.5% in April. Orders minus transportation rose 0.5%; that was largely due to a drop in commercial aircraft orders. Orders for core capital goods – a proxy for business investment – climbed 1% to mark the second straight gain. U.S. companies and manufacturers in particular had been hurt by a stronger dollar, weak global growth, a sudden drop in oil-patch investment and a long-running West Coast port dispute that ended earlier this year. So the spring back in business investment could be a good omen. Still, U.S. business investment is running 2.5% behind last year’s pace through the first four months of 2015.
The Conference Board reported a slight rise in consumer confidence in May. Its index rose to 95.4 from 94.3 in April.
Fed Vice-Chair Stanley Fischer says it’s “misleading” to give so much importance to the Fed’s first interest rate hike, since the process of returning to a more normal level will take a few years. Speaking at a conference in Israel, Fischer said any upcoming hike will be determined by data and not by date. Fischer expects the Fed to follow a “gradual and relatively slow” trajectory of short-term interest-rate increases over the next three to four years to bring borrowing costs back to “normal” levels. Friday, Janet Yellen made clear the central bank was poised to raise interest rates this year, but also stressed that economic data would determine the tightening process. So, the good economic news, combined with the jawboning from Yellen and Fischer, points to the Fed raising rates; and the markets threw a little tantrum. This will not be the only tantrum we will see. Fischer said, “The actual raising of rates could trigger further bouts of volatility,” but it should prove manageable.
And that combo strengthens the dollar. And when the dollar goes up, oil goes down; generally speaking of course. Also factoring into the equation is the old story of supply and demand. Supply might be increasing. The decline in drilling activity in the US that has been ongoing for 24 weeks appears to have stopped. Data from the driller Baker Hughes showed that the oil-rig count fell by just one, the slowest pace seen during this streak. The weak hands in the oil patch have largely been taken out. Also, on Sunday, Iran said the Organization of the Petroleum Exporting Countries (OPEC) was unlikely to change its production ceiling at its meeting on June 5. Meanwhile, Iraq has announced intentions to increase oil exports next month, from just under 3 million barrels per day to a record 3.75 million barrels per day. Intentions are not a guarantee of future production, but it looks like the Iraqis are trying to raise money for their fight against ISIS. Of course, if Iraq can’t do better in their fight against ISIS the entire output could be challenged.
Chinese shares marched higher in yet another session today, after the country announced over the weekend it would allow funds domiciled in Hong Kong and China to be sold in each other’s market starting July 1. China also said it would cut duties by as much as 20% on some imported goods in a bid to boost consumer spending at home; the cuts in tariffs are for goods considered necessities, and will not apply to luxury goods. The Shanghai Composite rose 2%, taking its six-day rally to over 14%.
The mystery in Hong Kong continues after Goldin Properties surged as much as 43% today, after plunging more than 40% this past Thursday, along with a related company, Goldin Financial. The companies had no explanation for the decline. Even with the wild swings, the shares are up about 500% in the past year. Also last week, Hanergy Thin Film Power fell 47% before trading was halted; still no information behind that move.
Venezuela’s currency, the Bolivar, has collapsed. Venezuela has maintained strict currency controls since 2003 and currently has three legal exchange rates of 6.3, 12 and 199 bolivars per dollar used for priority imports. On the black market, where people and businesses turn when they can’t obtain government approval to purchase dollars at the three legal rates, the bolivar has weakened 82 percent in the past year. At the start of the month, Venezuelans could exchange 279 bolivars for a dollar, and today that has dropped to 423 bolivars per dollar. To put it simply, it appears that Venezuelans have lost all faith in the bolivar and seem willing to pay whatever it costs for greenbacks.
In the Eurozone, the Greek economy is on razor watch. The Greeks are bankrupt and they have big payments due next week. They do not have money to pay. For now, Greece is held together with Band-Aids and bailing wire as it borrows money from the Troika to make loan payments to the Troika. It is the classic debt trap tactics of loan sharks. At some point, the Troika will have to show compassion or this will end badly for all concerned.
Meanwhile, Tom Hayes went on trial today. Hayes is the former star trader at UBS and Citigroup, and he is the first person to face trial over allegations of rigging Libor interest rates. There are 20 more traders that are facing charges for rigging Libor. Hayes traded in yen-denominated interest rate derivatives tied to Libor, essentially betting against other traders on the direction of rates. What really makes Hayes’ case interesting is that when he was arrested, he claimed that if he went to trial, he would spill the beans on higher ups in the banks; and he implied that knowledge of rate rigging went all the way to the top of the corporate hierarchy. We shall see.
Charter Communications agreed to buy its larger rival Time Warner Cable for $56 billion. The offer is valued at about $195 a share, a 14% premium to Time Warner Cable’s last closing price. Including debt, the deal is valued at $78 billion. The deal comes a month after Time Warner Cable went back on the block after Comcast terminated the companies’ planned $45 billion merger in the face of serious pushback from Washington regulators. Charter would probably face antitrust scrutiny before its deal with Time Warner Cable could be approved, although it is unlikely to face the same level of resistance as Comcast. Charter will also continue with its separate, cash-and-stock bid to acquire Bright House Networks, a smaller competitor, for $10.4 billion. The two acquisitions would approximately quadruple Charter’s base to about 24 million customers or about 30% of the nation’s broadband customers, compared with Comcast’s 27 million.
People are watching less live TV, and ratings are down. Americans are tired of paying for expensive cable bundles that come with hundreds of channels they don’t watch. Americans are streaming more video online than ever. As a result, an increasing number of Americans are cutting the cord, or even choosing never to subscribe to cable when they move into a new home. TV subscriptions may be declining, but broadband internet is booming. During the first quarter of the year, the same three-month period that saw the decline in TV subscriptions, the 17 largest cable companies in the country, which make up 94% of the market, added 1.2 million broadband subscribers. Providing internet is a higher-margin business than providing TV. Internet providers have costs but they don’t have to pay high fees to networks like ESPN, TNT, and The Disney Channel. And high speed internet is even less competitive than TV; according to the FCC, nearly 75% of households in the US have one or no options for broadband.
Bowing to regulatory pressure, Amazon has begun booking European revenue in the countries in which sales were recorded, rather than funneling it through the low-tax haven of Luxembourg. The change, which could have a big long-term effect on Amazon’s EU income tax payments, went into effect on May 1. The company’s move could be a sign of things to come: Apple, Google, Microsoft, Starbucks, and a slew of other U.S. multinationals have also come under fire for their use of tax havens to cut their EU tax bills.
Fiat Chrysler Automobiles CEO Sergio Marchionne made a direct approach to General Motors about a merger last March. An e-mail from the Fiat-Chrysler CEO pitched the strategic advantages of a combination of the two auto heavyweights, but was rebuffed by GM.
Justice Department investigators have identified criminal wrongdoing in General Motors’ failure to disclose its defective ignition switch tied to at least 104 deaths and are negotiating what is expected to be a record penalty. The New York Times reports a final settlement number is still being negotiated but is expected to exceed the $1.2 billion paid last year by Toyota for concealing unintended acceleration problems in its vehicles.
Heavy rains and flooding have killed at least nine people in Texas and Oklahoma, and 12 were missing. Thirteen people were killed in a tornado in Ciudad Acuna, Mexico, near the Texas border. More than 10 inches of rain flooded Houston, freeways were closed, most public transit was suspended, flights were cancelled. Most Houston school districts were closed for the day. The storms also caused power outages. The storm was part of a system that swept east from central Texas, where it caused flooding in downtown Austin and the surrounding area Monday.