Financial Review

Calm Before Storm


…Stocks scratch out gains ahead of VIX expiration and CPI. Powell stays calm. Home prices jump. Wray v. Kelly. Broadcom v. Qualcomm. Pepsi flat. Remington BK.

Financial Review by Sinclair Noe for 02-13-2018


DOW + 39 = 24,640
SPX + 6 = 2662
NAS + 31 = 7013
RUT + 3 = 1494
10 Y – .02 = 2.84%
OIL – .11 = 59.18
GOLD + 6.60 = 1330.10


After the worst week in 2 years, stocks bounced back with their best 2 days in almost 2 years. Today, stocks managed to scratch out a modest gain. The dollar dropped again, its third straight daily loss. Volatility levels remained elevated even after stocks’ modest recovery of the past few days, showing continued unease after the rout that wiped $2 trillion from U.S. shares last week.


All the recent market volatility hasn’t scared the new Fed Chair. Today, Jerome Powell suggested the Fed would push ahead with gradual interest-rate increases even as it remains on the lookout for threats to the financial system in the wake of the recent sell-off.  While the new Fed chairman didn’t specifically mention the steep fall in share prices, other central bank officials have played down its impact on the economy and the financial system. Federal Reserve Bank of New York President William Dudley last week called the share shakeout “small potatoes,” while Cleveland Fed President Loretta Mester said on Tuesday that the turmoil hadn’t affected her economic outlook or her support for further interest-rate hikes. In their last quarterly projection in December, Fed officials penciled in three rate hikes for this year, according to the median forecast in their so-called dot plot. They reiterated that view at their Jan. 30-31 meeting, when they said they expected “further gradual increases in the federal funds rate.” Powell said the Fed had made “great progress in moving much closer” to its goals of full employment and stable prices. Unemployment is down to 4.1 percent. Inflation though remains below the Fed’s 2 percent target, standing at 1.7 percent in December. Tomorrow, we will get an update on inflation with the release of the consumer price index.


Tomorrow’s VIX options expiration could prove extra volatile for the gauge. The Cboe Volatility Index tends to have bigger swings on days its contracts mature, with intraday moves of 13 percent on average on the past 12 monthly expirations. That compares with a mean daily fluctuation of 10 percent in the year through January. Of course, that was before this month, when a record VIX surge on Feb. 5 sent its average intraday move for February to almost 60 percent. What’s more, the recent market turmoil has led to a surge in the number of VIX contracts, and put open interest almost tripled to a record since the Jan. 17 expiration. Counting puts and calls, there are 15.4 million VIX options outstanding, and 40 percent of them mature tomorrow.


A new whistleblower complaint says the VIX is rigged; that according to a letter submitted anonymously to the Securities and Exchange Commission and the Commodity Futures Trading Commission. The letter makes the claim to regulators that fake quotes for the S&P 500 index are skewing levels of the VIX and goes on to say the manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.


Home prices jumped to all-time highs in almost two-thirds of U.S. cities in the fourth quarter as buyers battled for a record-low supply of listings. The National Association of Realtors said prices for single-family homes, which climbed 5.3 percent from a year earlier nationally, reached a peak in 64 percent of metropolitan areas measured; of the 177 regions in the group’s survey, 15 percent had double-digit price growth, up from 11 percent in the third quarter. Home values have grown steadily as the improving job market drives demand for a scarcity of properties on the market. While prices jumped 48 percent since 2011, incomes have climbed only 15 percent, putting purchases out of reach for many would-be buyers. The national median existing single-family home price in the fourth quarter was $247,800, which is up 5.3 percent from the fourth quarter of 2016 ($235,400).


According to new research published by the New York Fed, states hit hardest by the Great Recession continue to have subdued mortgage balances relative to other states that avoided the turmoil. Some states, like Texas, North Dakota and Delaware, have mortgage balances more than 10% above their previous peak. There are eight states with balances at least 10% below their earlier peak, including Florida, Arizona, Nevada and California, all severely affected during the Great Recession. Household debt is now 17.9% above the trough at the end of the Great Recession. Mortgage debt remains 4.4% below the previous peak reached in the third quarter of 2008. As of the end of 2017, 4.7% of outstanding debt was in some stage of delinquency. Credit card delinquency has been increasing notably from last year and auto loan delinquency has risen slowly since 2012. About 11% of student loans are delinquent or in default. Only 1.3% of mortgage balances 90 or more days delinquent last quarter


Until his abrupt resignation last week, following allegations of physical and verbal abuse by two ex-wives, Rob Porter had served as White House staff secretary, handling classified material under an interim security clearance. The question is when the White House learned about the allegations against Porter, when it learned that he would not be recommended for a permanent security clearance, and whether he would have been allowed to continue working barring the press reports about the allegations.  The White House has claimed ignorance of allegations of spousal abuse against Porter, who was promoted to become a close aide to the president, until the moment photos of one of his ex-wives, Colbie Holderness, were published last week showing her with a badly bruised eye. A White House spokesman blamed that ignorance on a failure by the FBI to wrap up a background check on Porter. White House chief of staff John Kelly said last Wednesday that he was “shocked” to hear of the allegations. But FBI director Chris Wray testified today before Congress that the FBI had submitted a completed background investigation on Porter to the White House in July 2017 and later supplied two follow-up reports. The explanations from White House officials, especially White House Chief of Staff John Kelly, seem directly contradicted by the testimony from Director Wray.


Broadcom moved the goal posts in its hostile takeover bid for Qualcomm, announcing that it is seeking only a majority of the chip maker’s board seats in next month’s shareholder vote and raising questions about the future of the deal. Broadcom said that it would now pursue the election of six nominees that it had put forward, rather than the full 11 it had originally named. Whether the shift will be enough to advance the deal in the face of Qualcomm’s resistance to a takeover is unclear. Qualcomm shareholders vote on the board on March 6. The chip company last week rejected Broadcom’s latest takeover bid, valued at about $121 billion, arguing that it was still too low and that it offered insufficient commitments in case regulators moved to block a union on antitrust grounds. Under the terms of the offer, Broadcom would pay about $82 a share in cash and stock. Putting the two companies together would create one of the world’s biggest chip makers, whose products would be in a majority of the world’s smartphones. Both companies are expected to meet tomorrow for the first time in months, raising the possibility they can bridge their differences and reach an agreement.


The possible Qualcomm takeover bid is really big news in San Diego, where Qualcomm started, and where it has 13,000 local employees whose salaries average about $105,000, Qualcomm generates about $7.4 billion, or 3.6 percent, of the region’s annual economic output. According to a 2013 report from the San Diego Workforce Partnership, for each job the company generates, the city gets almost two and a half more out of the indirect economic effects.  Qualcomm’s takeover battle is coming at a sensitive time for San Diego. Qualcomm served as a platform that spawned innovation and helped to create new startups.  While the city is one of America’s innovation powerhouses and a hive of start-up activity and venture capital investment, it has had less success in attracting big companies — or, for that matter, keeping the growing companies it creates. And that includes everything from biotech firms to the NFL team. The Chargers moved to Los Angeles; their home field in San Diego was Qualcomm Stadium.


PepsiCo reported flat revenue for the last few months of 2017 and said that it will cut some jobs while giving others bonuses of up to $1,000. The layoffs, which will affect its corporate employees, amounts to less than 1 percent of its more than 110,000 employees. Bonuses go to those who make PepsiCo’s snacks and drinks, and those who deliver them. The company will also use its tax savings to bump its annual dividend by 15 percent and increase its share buyback program to $15 billion, from $12 billion.


Remington, which traces its history back to 1816, said it would file for bankruptcy protection. The gunmaker has suffered recently from weak sales, and the company was saddled with more than $1 billion in debt when Cerberus Capital Management acquired Remington in 2007. More than 11 million firearms were manufactured in the U.S. in 2016, up from fewer than four million a decade ago, according to data from the Bureau of Alcohol, Tobacco, Firearms and Explosives. In 2014, 31 percent of American households reported owning a firearm, down from 47 percent in 1973. Gun ownership has become more concentrated as a result, with a small sliver of gun owners owning a growing segment of America’s firearms inventory. These gun buyers have come to be known as “super owners” and one study, conducted by Harvard and Northeastern universities, concluded that about half the guns in America are owned by only 3 percent of the adult population, with an average of 17 firearms each.


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