Financial Review

Casino Mentality

Financial Review by Sinclair Noe

DOW – 68 = 17,851
SPX – 5 = 2114
NAS – 36 = 5171
10 YR YLD – .02 = 2.32%
OIL – 1.62 = 49.24
GOLD – 7.00 = 1095.00
SILV – .05 = 14.90

 

As of today, Wall Street will have to comply with the “Volcker rule,” which bans taxpayer-insured banks from making bets with their own money. Although major financial institutions have fought for years to change the rule, they have for the most part fallen in line – shedding their proprietary-trading desks, pulling money from certain investment funds and ceasing other speculative activities. The new rule has also changed much of the industry. The five largest U.S. investment banks cut staff on bond sales and trading desks by 18% from 2011 to 2014, while 1,428 new hedge funds were launched during the same period.

 

Greek MPs are debating a second set of reforms they need to approve to secure a €86 billion-euro bailout, as thousands protest against further austerity measures. The protest outside parliament briefly turned violent. Earlier, Greece’s PM urged rebels within his own Syriza party to support the reforms demanded by creditors. Meanwhile, the European Central Bank has increased its cash lifeline to Greek banks with an emergency injection of an extra €900 million-euro, the ECB’s second in a week, coming just hours before the vote.

 

The National Association of Realtors reports sales of previously owned homes climbed to an eight-year high in June. Closings on existing homes, which usually occur a month or two after a contract is signed, climbed 3.2 percent to a 5.49 million annualized rate, the most since February 2007. Compared with a year earlier, purchases increased 9.6 percent in June. The median price of an existing home rose 6.5 percent from June 2014 to $236,400, the highest on record before adjusting for inflation. First-time buyers accounted for 32 percent of existing-home purchases in May.

 

In a separate report, the Federal Housing Finance Agency reports home prices rose 0.4 percent on a seasonally adjusted basis from April to May. The FHFA’s report showed home prices rose 5.7 percent in May from a year earlier. The measure is 1.8 percent below its March 2007 peak and about the same as the April 2006 level.

 

And it looks like people are catching the real estate bug, again. A new survey from Bankrate.com shows 27% of respondents believe real estate is the best investment, beating out cash for the top spot, as 2006 fades away in the rear view mirror.

 

Bad news ladies, you have taken a step backwards on the pay scale. New data from the Labor Department shows women earned 81.9 cents for every dollar a man earned in the second quarter of the year. That’s down from almost 84 cents for every dollar a man earned in the second quarter of 2014. Overall, median weekly earnings of all full-time workers climbed 2.7% from a year earlier to $801. Men got bigger paychecks, with wages and salaries climbing 3.4% from a year earlier to $886. For women, the increase was a more moderate 1.4% to $726. Men tend to work more hours than women. Women ages 20-24 come closest to earning the same as their male peers. That gap widens noticeably for women 35-44 and continues to grow.

 

The report also shows big disparities in pay related to race and educational attainment. For example, median weekly earnings for black men working at full-time jobs were $696 per week, or 76.1 percent of the median for white men. And full-time workers age 25 and over without a high school diploma had median weekly earnings of $499, compared with $1,210 for those holding at least a bachelor’s degree.

 

New York moved to raise the minimum wage for fast-food workers to $15 an hour by the end of 2018 in New York City and by mid-2021 in the rest of the state. The New York Wage Board voted unanimously for the increase, which would cover some 180,000 workers statewide.

 

A new report from the Annie E. Casey Foundation finds 22 percent of American children are living in poverty (as of 2013, the latest data available) compared with 18 percent in 2008. Poverty rates are nearly double among African-Americans and American Indians. Problems are most severe in South and Southwest. Particularly troubling is a large increase in the share of children living in poor communities marked by poor schools and a lack of a safe place to play.

 

 

Late Tuesday, the American Petroleum Institute said its data showed a 2.3-million-barrel increase in crude stocks in the past week. The more closely-watched data from the U.S. Energy Information Administration was released today, and that report showed stockpiles increased by 2.5 million barrels for the week ending July 17. Since the start of the year, oil prices are down about 5%. The decline in oil prices is part of a larger drop in commodity prices that has seen precious metals dropping 7 of the past 8 sessions; in turn dragging down prices on copper, zinc, and lead. And good news for coffee drinkers, the beans are down 23% since the start of the year.

 

Earnings reporting season, and the past couple of days have been rough. Dim outlooks and guidance were seen at Apple, IBM, Microsoft, and Yahoo, while commodity producers deepened declines. Shares of Freeport-McMoRan slipped 4.5%, Vale dipped 3%, and BHP Billiton fell nearly 5%.

The biggest hit was from Apple, even though the company topped analysts’ estimates for revenue and earnings, sales of iPhones came in slightly below estimates. Yesterday, Apple stock lost $62 billion in market capitalization. It was the biggest one day loss for Apple, but the record for the biggest one-day market cap loss goes to Microsoft; back on April 3, 2000, Microsoft lost $82 billion in one day, after news that a federal judge ruled it violated antitrust laws. Don’t worry about Apple; their market cap is still around $714 billion and they’re sitting on $202 billion in cash.

 

While markets remain near record highs, June-quarter S&P 500 earnings are expected to dip 1.5 percent. Of the 102 companies to report through Wednesday morning, 70 percent beat earnings expectations, matching the rate over the past four quarters and above the 63-percent average beat rate since 1994. However, only 55 percent have topped revenue forecasts, below the 61-percent average beat rate since 2002. U.S. companies are expected to post their worst sales decline in nearly six years in the second quarter, in part due to the strong dollar that reduces the value of U.S. companies’ overseas income.

 

Boosted by a recent stock surge, Facebook’s market capitalization has overtaken that of General Electric. The social network’s 26% climb this year has brought its market value to $275 billion, compared to GE’s $273 billion. Some are expressing concerns: GE racked up $149 billion in sales last year and employed more than 300,000 people. Facebook reported $12.5 billion in sales and employed roughly 9,200.

 

U.S. authorities have charged five people in the first cases bearing some link to last year’s massive cyber-attack on JPMorgan, which exposed the contact information of 83 million accounts. The men were accused of crimes ranging from securities fraud to money laundering – not with anything directly related to the attack on the bank – but officials confirmed there was a link. Rather, the court filings detailed charges involving a multiyear campaign to drive up the price of worthless penny stocks by pitching them to unsuspecting investors through millions of spam emails. One of the people briefed on the matter said he believed that the defendants had intended to use some of the email addresses obtained in the JPMorgan hacking to find other people who could be persuaded to invest in otherwise worthless stocks. It seems like a particularly reckless way to get a mailing list but that’s the story. Four of the men were arrested in Florida and Israel, while a fifth remains at large.

The bankruptcy drama at Caesars Entertainment came to a head today. Caesars put its largest unit in chapter 11 protection in January, rather than the whole company, preserving many investments of shareholders. In January, subsidiary Caesars Entertainment Operating Co. and nearly 175 affiliates filed for bankruptcy protection in Chicago after the second-lien holders filed an involuntary bankruptcy petition against the entity in Delaware. A Delaware judge later moved the entire case back to Chicago, Caesars’ preferred venue.

 

The case, as well as the months preceding the chapter 11 filing, has been contentious. In four lawsuits against the parent company, creditors have said Caesars’ entities improperly shifted good assets away from them to benefit its owners, including private-equity firms Apollo Global Management LLC and TPG. At least seven transactions between 2009 and 2014 have been questioned. Caesars has called the transfers proper. The bankruptcy reorganization plan on file, which calls for the $1.5 billion investment by the parent as part of a deal to restructure the subsidiary, calls for Caesars to be reshaped as a real-estate investment trust. Senior lenders support the deal, while more junior creditors, including a group of second-lien holders that is suing, have opposed it. The bankruptcy judge in Chicago ruled that creditor lawsuits against Caesars Entertainment can continue and the bankruptcy of the casino’s top subsidiary shouldn’t delay the cases against the parent. Caesars’ stock dropped 41 percent to $4.76 a share.

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