Before the Deluge
Financial Review by Sinclair Noe for 10-01-2015
DOW – 12 = 16,272
SPX + 3 = 1923
NAS + 6 = 4627
10 YR YLD – .02 = 2.04%
OIL – .11 = 44.98
GOLD – 1.80 = 1114.50
SILV un = 14.63
Manufacturing grew in September at the slowest pace in more than two years. The Institute for Supply Management said its manufacturing index dropped to 50.2% last month from 51.1% in August, reflecting a stronger dollar and weaker global economy that is hurting U.S. exports of many major American-made goods. That’s the weakest reading since May 2013, although any reading above 50 indicates growth.
The number of people who applied for unemployment benefits rose by 10,000 to 277,000 in the week ended Sept. 26, but initial claims remain extremely low in a sign of steady improvement of the labor market. The average of new claims over the past month, meanwhile, fell by 1,000 to seasonally adjusted 270,500. The level of new claims sank below 300,000 in early March and has remained there for 30 straight weeks, a feat last accomplished in 1973, when the nation’s working population was 40% smaller. Tomorrow morning is the monthly jobs report from the Labor Department.
Construction spending increased 0.7% in August, and gained 13.7% over 12 months. Residential construction rose 1.3%, while nonresidential construction grew 0.3%. Construction of lodging climbed 2.8% and has climbed 41.4% over 12 months.
Not all American homes are rising in value and not all markets are experiencing the recovery evenly. According to a report from Zillow, almost 30% of all homes lost value in August from a year earlier; that’s down from a high of 65% in 2009, although a normal housing market would be closer to 20%. Overall, the median value of homes rose 3.3% year-over-year to $180,800, but appreciated at half the pace of August 2014.
President Obama has signed into law a bill that extends federal funding until December 11 after the Senate and the House yesterday passed the proposal, as expected. Had Congress not approved the measures, the government would have shut down today, the first day of the new fiscal year. Republicans and Democrats now have around ten weeks to formulate a long-term budget, with the parties looking to strike a two-year deal.
Hurricane Joaquin is headed for the East coast, maybe. Where it lands is still uncertain. Joaquin is a Category 3 hurricane with winds of 125 miles per hour and gusts to 155 miles per hour; an increase of the sustained winds to 130 mph would make it a Category 4 storm. Right now it is hitting the Bahamas and within the next 24 hours, it is expected to head north, possibly hitting the Carolinas, or Virginia, or even making land near New England. The best guesstimates have it headed for New York City. If the hurricane heads for the coast, it will lose some of its punch and slow down to a Category 1 or possibly a tropical depression before landfall. Even if it veers to the northeast and heads out into open waters, it is expected to produce serious flooding. Beyond the wind and the rains, there is a strong possibility of waves approaching 30 feet and storm surge of 8 feet.
Even as the track of the storm is uncertain, the governors of Virginia and New Jersey have already declared a state of emergency. We all remember Hurricane Sandy but if current projections hold, Joaquin won’t be another Sandy, but nature is unpredictable. Parts of the eastern U.S. from Florida to New Jersey are under flood watches and warnings today, with more than 10 inches of rain already having fallen in some areas this week.
The weather is a staple for the commodity markets. The rain and flooding is expected to be a big problem for cotton farmers in Georgia and the Carolinas. Atlantic hurricanes can be mildly bullish for energy markets as oil and gas platforms could be shut down as a precaution. They could also damage infrastructure, such as refineries and transportation. Traders now expect minimal disruptions to energy markets.
The big three U.S. automakers – GM, Ford, and Fiat Chrysler – reported a jump in September sales as cheap gasoline and ultra-low interest rates drove demand for sport utility vehicles and pickup trucks. Total U.S. auto sales, an early glimpse of consumer spending each month, are expected to have risen about 14% last month. According to auto industry consultancy Edmunds.com sales got a boost from the calendar, with the entire Labor Day weekend falling in September for the first time since 2012. GM said its total sales in September rose 12%; Ford posted sales gains of 23%; and Fiat Chrysler says September sales were up 14%.
Deere and the United Auto Workers union have reached a tentative agreement to replace the six-year master labor contract that ended at midnight last night. The deal is for another six years and will now go to a vote of the 10,000 Deere manufacturing staff that the UAW represents.
Ratification of a contract between the UAW and Fiat Chrysler appears to be impossible after workers at assembly plants in Ohio and Michigan on Tuesday overwhelming voted against a proposed four-year deal.
Samsung is now accused of Volkswagening its TVs. Yep, that’s the new word for cheating on environmental tests. Independent lab tests show Samsung televisions use less power when they are tested for energy efficiency ratings than during real world use. Sweden’s government has also been looking into TVs from unspecified manufacturers that “clearly recognize” the video used in testing, and which “immediately lower their energy use by adjusting the brightness of the display” in response.
Google and Microsoft have ended a long-running patent spat involving about 20 suits in the U.S. and Germany. Microsoft had alleged that Google’s former Motorola Mobility unit infringed its IP. Google, which held onto most of Motorola’s patents following its sale to Lenovo, alleged that Xbox consoles infringed its patents. Now they’ve made nice with each other, Google and Microsoft plan to cooperate on various patent issues.
The Centre for Economic Policy Research says the Eurozone recession is over. Like the National Bureau of Economic Research in the U.S., the CEPR labels recessions based on a variety of economic indicators and not the informal definition of two consecutive quarters of negative GDP growth. The CEPR said the period from the third quarter of 2011 to the first quarter of 2013 represented the second post-financial crisis recession in the Eurozone. The reason the CEPR feels confident in saying the Eurozone is out of the recession is that the duration of the recovery has made up for its slow speed. However, the Eurozone recovery has been “unusually lackluster” by historical standards.
The third quarter was ugly for stocks, but there were a few winners. More than 3 dozen companies in the S&P 500 posted double digit gains for the quarter. Chipotle, Amazon, and Google posted 20% gains for the quarter. Merger news also pushed some stocks higher, such as Teco, AGL Resource, Cablevision, Chubb, and Molson Coors. Also making the list: Activision Blizzard, Nike, Under Armor, Best Buy, Royal Caribbean, Southwest Airlines, Reynolds American, and Altria.
Merger activity has been strong in 2015. According to data from Thomson Reuters, $3.19 trillion in deals were announced year-to-date, just 2% below 2007 levels. Many of the transactions were worth more than $10 billion, making up 36.5% of the total. In the third quarter there were fewer deals than in any other three-month period this year, yet the dollar volume surpassed $1 trillion. Energy has been the top industry by value, as companies sought strength in consolidation as the price of commodities plummeted. There was also a slew of health care transactions, especially in insurance and pharmaceuticals. Goldman Sachs and Morgan Stanley were the top-ranked financial advisers on these deals.
Bankers like to make big dollar deals; they don’t like to get their hands dirty with smaller loans, but that doesn’t mean they won’t take a cut. For many years the big banks have bankrolled smaller consumer lenders, also known as payday lenders. In the past they were known as loan sharks, and even as the names changed, the terms didn’t; these lenders are still charging outrageous rates, sometimes more than 200%. But now the Consumer Financial Protection Bureau (CFPB) is starting to tighten regulations on the consumer lenders. The lenders have come under scrutiny for a range of practices that can lead borrowers to believe they are paying far less in interest and fees than they actually are. Now that regulation is getting tighter, the big banks are trying to protect their loans to the subprime lenders; the big change is an amendment that says that if one of the loan sharking companies faces regulatory action that has a material impact on its business, it would constitute a default. And a default would give the big banks the right to seize the lender’s assets, at least in theory; or a pound of flesh if it suits them.
JPMorgan Chase shareholders have won court permission to pursue their securities fraud lawsuit as class action against the bank over the “London Whale” trading scandal, which caused a $6.2 billion loss. Shareholders led by pension funds in Arkansas, Ohio and Oregon alleged that JPMorgan, CEO Jamie Dimon and CFO Douglas Braunstein knowingly hid increased risks at the Chief Investment Office operating in London, including on an April 13, 2012 conference call when Dimon called reports about the synthetic portfolio a “tempest in a teapot.” It turned out to be a $6.2 billion loss by the London Whale and fallout contributed to even bigger losses for shareholders as market capitalization dropped by $40 billion from April 13 to May 21, 2012. And don’t forget the $1 billion in fines reached in a settlement with regulators that included a rare admission of wrongdoing.