Financial Review

Call It Neutral

…..Fed moves to sustainability mode. Earnings season sighted. Wells Fargo still too stupid after 113-page report. Libor audio tapes implicate the Bank of England. Barclays CEO targets whistleblower. Swift-Knight. AT&T pays for 5G. And Gorsuch makes 9. Toyota’s All-American car plant. Tesla tops GM.

Financial Review by Sinclair Noe for 04-10-2017

DOW + 1 = 20,658
SPX + 1 = 2357
NAS + 3 = 5880
RUT + 2 = 1367
10 Y – .01 = 2.36%
OIL + .91 = 53.15
GOLD + .60 = 1255.40
Fed Chair Janet Yellen held a Q&A session today at the University of Michigan. Yellen said the Fed’s task has shifted from a post-crisis exercise of healing the economy to one aimed at sustaining progress. Yellen said, “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could.”  Now, she says the Fed is trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator. The appropriate stance of policy now is closer to, let me call it neutral.” That still likely means two more rate hikes this year. Minutes of their March meeting showed that most Fed officials also expect to begin shrinking the bank’s $4.5 trillion balance sheet later this year, gradually reversing emergency bond purchases made during the financial crisis and recession.

 

In last week’s minutes, the Fed policymakers warned that stock prices were on the high side, specifically saying: “Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms.” And, “some measures of valuations, such as price-to-earnings ratios, rose further above historical norms.” Now, the Fed is not known for its stock picking or timing skills, but this week the proof is in the putting as earnings season kicks into gear. Earnings of S&P 500 companies are estimated to have risen 10.1 percent in the first three months of the year. The index is currently trading at 17.4 times forward earnings estimates, above its long-term average of 15, according to Thomson Reuters I/B/E/S.

JPMorgan, Citigroup and Wells Fargo are scheduled to report earnings on Thursday. The financial sector has been a darling performer since the election on anticipation of deregulation and tax reform policies that have yet to materialize; so look for the focus to shift to earnings.

 

Wells Fargo’s board of directors has released its investigation into the bank’s recent fraudulent-accounts scandal, pinning blame primarily on two former executives. According to the report, Wells Fargo’s board will claw back $28 million in pay from former CEO John Stumpf and $47.3 million from former head of community banking Carrie Tolstedt for their roles in the scandal. The board determined that Stumpf and Tolstedt did not do enough to address the culture at Wells that set quotas for bank employees to open as many as 2 million credit card and retail banking accounts for customers from 2011 to 2015 without their knowledge. According to the report, Stumpf was aware of individual issues as far back as 2002 but did not become aware of the systemic nature of the problem until 2012. Even when he did become aware, the board said, Stumpf did not do enough to address the issues. Today’s report also referenced an internal Wells Fargo report prepared 12 years ago, in 2004 which foretold the fake account scandal. That investigation, titled “Gaming,” warned that Wells Fargo employees had an “incentive to cheat” that was “based on the fear of losing their jobs.” It said that workers felt they couldn’t meet the bank’s unrealistic sales goals “without gaming the system.”

 

With the newly announced clawbacks, Wells Fargo has taken back nearly $183 million from Stumpf, Tolstedt and other executives. Wells Fargo has been fined $185 million by regulators and been the subject of two congressional inquiries. Until as late as 2015, even as sales practices were labeled a “high risk” in materials provided to the board of directors’ risk committee, there was a general perception within Wells Fargo’s control functions that sales abuses were a problem of relatively modest significance. The report published today did not seem to recognize a failure on the part of the Board of Directors – no clawbacks there. And it doesn’t look like the money in fines and clawbacks will do much to compensate the victims of Wells Fargo fraud, specifically the customers and the employees who tried to blow the whistle only to be fired for their efforts to be honest.

 

We’ve told you about the Libor Rate Rigging scandal, where various traders manipulated the daily fix on the London Interbank Offered Rate, which affects trillions of dollars of transactions around the globe; everything from mortgage loans to credit card rates to complex derivatives. The scandal rocked the financial industry when it was uncovered in 2012. Now the BBC has released an audio recording that implicates the Bank of England, the central bank, of rate manipulation. According to the recording, The Bank of England repeatedly urged commercial banks to lower their Libor settings during the financial crisis.  The BOE has consistently said it wasn’t aware of the Libor manipulation until years after the rigging happened. In response to the BBC findings, the central bank noted that Libor and other global benchmarks weren’t regulated in the U.K. or elsewhere during the period in question. The rate-rigging scandal first came to public attention in 2012 when an international investigation revealed that several major banks colluded to manipulate Libor. The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. At the time, both said that they had only recently become aware of rate manipulation.

 

Meanwhile, Barclays CEO Jes Staley is in hot water. Staley is a veteran American banker and took the helm at Barclays in December 2015. He pledged to overhaul Barclays’ culture, which had been in the spotlight due to the bank’s involvement in rigging Libor, for which it was ordered to pay a fine of nearly £290 million-pounds.  Staley is accused of twice attempting to use Barclay’s internal security team to track down the authors of two anonymous letters. On the second occasion the security team received assistance from a US law enforcement agency, but still failed to identify the individual. The whistleblowing saga began in June 2016 when the board of Barclays received an anonymous letter and a senior executive received a second letter. These letters made allegations about a senior employee who had been recruited by the bank earlier that year. Staley has apologized for his actions and faces a significant cut in his bonus.

 

 

 Swift Transportation and Knight Transportation are merging in a stock-swap deal, creating a company with a market value of more than $5 billion. Shareholders of Swift will own 54 percent of the new entity and Knight shareholders the rest after the deal closes. The two companies earned about $5.1 billion in total revenue and $416 million in adjusted operating income last year. The companies expect to achieve about $15 million in cost-saving synergies and pretax revenue in the second half of 2017, and up to $150 million in 2019. The companies, both based in Phoenix, have a shared history – Jerry Moyes started Swift in 1966, while Randy Knight, who was a part-owner of Swift – founded Knight Transportation along with three cousins in 1990. Knight’s executive chairman, Kevin Knight, will assume the same title at the new company. Moyes, who retired as co-CEO of Swift last year, will become one of the directors of the new company. The Jerry Moyes family, however, will own about 24 percent of Knight-Swift. The deal will create the largest truckload operator in North America.

 

AT&T announced it would buy Straight Path Communications, a holder of licenses to wireless spectrum, for $1.25 billion in an all-stock deal as it aims to accumulate the airwaves it needs for a 5G network. AT&T’s offer represents a 162% premium to Straight Path’s closing price on Friday.

 

After a partisan fight so deep it forced the Senate to go “nuclear” to confirm him, Neil Gorsuch was sworn in as the nation’s newest Supreme Court justice, filling the seat left vacant when Justice Antonin Scalia died last year. In the final months of the Supreme Court’s current term, Gorsuch could break a potential 4-4 deadlock on cases involving religious freedom, racial discrimination, immigration, and other issues. The court might also have to weigh in on Trump’s executive order restricting travel from majority-Muslim countries. And in the next few years, the justices are expected to consider new cases involving same-sex marriage, abortion, and gun rights.

 

Toyota said it would invest more than $1.3 billion in its Georgetown, Ky., plant, its largest factory in the world. Although the investment does not include new jobs, the move signals a deepening commitment to the U.S. market. The 7.5 million-square-foot Kentucky plant makes several vehicles, including the Camry sedan, which Cars.com has dubbed the most made-in-America car in the U.S. based on an assessment of the car’s components. The plant currently has about 8,200 employees, having added 700 in recent months to launch the redesigned 2018 Camry, which was unveiled in January at the Detroit auto show. The investment adds to a $530 million project authorized in 2013 to make a new Lexus vehicle.

 

What’s the most valuable car company in the USA? No, it is not GM. At the end of January, short interest in Tesla made up about 35% of the float, or shares available for trading. Tesla was burning through cash and had only  delivered 76,230 vehicles in 2016, well below the 80,000 to 90,000 that Wall Street was expecting. General Motors sold about 10 million cars in 2016. But a funny thing happened – Tesla shares have been moving higher, up 46% so far this year, a fact that has caused billions of dollars of losses for those who have bet against it. Tesla now has a larger market capitalization than Ford or General Motors.

 

 

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