Déjà vu All Over Again
Financial Review by Sinclair Noe for 09-23-2015
DOW – 50 = 16,279
SPX – 3 = 1938
NAS – 3 = 4752
10 YR YLD + .02 = 2.14%
OIL – 1.67 = 44.69
GOLD + 5.70 = 1131.40
SILV + .03 = 14.89
Pope Francis visited the White House this morning. Speaking from the South Lawn before a crowd of about 15,000, the Pope said “climate change is a problem which can no longer be left to a future generation. When it comes to the care of our common home, we are living at a critical moment of history”; this was also a reference to his encyclical published in May, “Laudato Si – On Care for Our Common Home”, which addressed climate change. Francis has been a frequent critic of the damage caused to the world’s poor and the environment by capitalism’s excesses.
He also urged more attention be paid to the millions in poverty now overlooked by society, quoting Martin Luther King that “we have defaulted on a promissory note and now it is time to honor it.” Pope Francis said he will encourage Congress to guide the U.S. in fidelity to its founding principles including religious liberty. He referred briefly to the issue of immigration, and called on the U.S. to build a “truly tolerant and inclusive” society. Francis described himself as the son of an immigrant Italian family in Argentina. “I am happy to be a guest in this country, which was largely built by such families,” he said. Francis said that his teachings on economic fairness and climate change are “all in the social doctrine of the Church.” Tomorrow Pope Francis will address a joint session of Congress.
Chinese president Xi Jingping arrived in Seattle yesterday, on his way to an official State visit in Washington DC tomorrow. Xi toured a Boeing aircraft plant and apparently liked what he saw. Boeing has signed deals to sell 300 aircraft to three Chinese firms and set up an aircraft plant in China. The aircraft deals, potentially worth $38 billion in total, are collectively the largest order the aerospace firm has received from Chinese companies.
Activity in China’s factory sector fell to the lowest level in over six years. The preliminary China manufacturing purchasing managers’ index dropped to 47.0 in September, down from 47.3 in August. The decline was led by a weak read for new orders and new export orders. Several investment firms lowered their estimates on China growth after factoring in the new manufacturing data.
Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers’ Index for September was 53. That was the same as August, which was its lowest since October 2013. A strong dollar, flagging demand in many export markets and reduced capital spending by energy and other companies were all dragging on U.S. manufacturing. The survey is indicating the weakest manufacturing growth for almost two years, meaning the sector will have acted as a drag on the economy in the third quarter.
The Markit Eurozone Manufacturing PMI fell to 53.9 in September, down from 54.3 in August, but roughly in line with activity over the last eight months. Service sector growth outpaced manufacturing by a small margin. European Central bank President Mario Draghi said it’s too soon to say whether risks to the economic outlook warrant a step-up in the European Central Bank’s stimulus, saying: “Should some of the downwards risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act.”
Bond guru Bill Gross, formerly with Pimco and now with Janus Capital, has long called for the Federal Reserve to raise interest rates. Now Groww is urging the Fed to “get off zero and get off quick” as zero-bound levels are harming the real economy and destroying insurance company balance sheets and pension funds. In his October Investment Outlook report, Gross wrote that the Fed, which did not raise its benchmark interest rates at last week’s high-profile policy meeting, should acknowledge the destructive nature of zero percent interest rates over the intermediate and longer term.
Gross writes: “Zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society.” Adding, “These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8 percent over the long term.” But with corporate bonds now at 2-3 percent, Gross said it was obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10 percent a year to meet the targeted assumption. “That, of course, is a stretch of some accountant’s or actuary’s imagination.”
At a time when fears are high about market liquidity comes a significant shift in the primary players in the corporate bond market. Households, hedge funds and nonprofits, historically considered to be long-term holders of fixed-income instruments, ditched corporate debt in the second quarter, selling $122 billion after reducing their holdings by just $24 billion over the previous three months.
Conversely, purchases by foreigners more than doubled, from $80 billion to $172.2 billion. Foreigners now own more than a quarter of the $8.1 trillion corporate bond market, with a 25.9 percent stake that is just shy of the 26.5 percent portion owned by mutual and exchange-traded funds. Households, a category that for statistical purposes also includes hedge funds, now own just 4 percent of the group. So, the fastest growth in ownership of corporate bonds is foreign investors and mutual funds/ETFs, otherwise considered short-term traders, not long-term investors.
A hallmark of the $18 trillion mutual-fund industry is that it promises easy entry and exit for investors. U.S. regulators now want new protections to ensure that pledge can be met due to concerns that firms have loaded up on hard-to-sell assets. The five-member Securities and Exchange Commission voted unanimously to pass a measure Tuesday that funds would have to maintain a minimum cushion of cash or cash-like investments that can be sold within three days. Funds also could charge investors who pull their money on days of elevated withdrawals.
The executive committee of Volkswagen’s supervisory board met today in Germany, with the automaker facing an unprecedented scandal. The company has now admitted that over 11 million diesel vehicles globally have software with programming aimed at defeating emissions control testing. One of their first moves was to hire Kirkland & Ellis – that’s the legal firm that represented BP in the Deepwater Horizon oil spill disaster. Next step, CEO Martin Winterkorn resigned. He had been CEO for the past 10 years. If he knew about the emissions fraud scheme, that’s bad. And it is almost as bad to imagine that he didn’t know what was going on.
Shares of Volkswagen managed to bounce about 2% but are still down about 37% for the week. In Germany, one in six jobs are dependent upon the automobile industry in some way. Economists are trying to estimate the broad impact of the Volkswagen scandal on German GDP.
If you’re wondering why the Volkswagen story is attracting so much attention, you are wise to be skeptical. The recent General Motors problem involving defective ignition switches resulted in more than 120 deaths, and about a $900 million dollar fine for GM. VW would probably take that deal in a New York minute. Then there is the problem with Takata airbags exploding with such force that they spray shrapnel through the passenger compartment. You may even recall a story about emissions controls from 1998 involving Caterpillar, Cummings, Detroit Diesel, Volvo, Renault, and Navistar. They created their own defeat device – one setting for the emissions tests and another, dirtier setting for regular driving. That deal involved 1.3 million engines. The fines amounted to a little over $80 million, plus a pledge to spend more than $800 million to develop cleaner diesel engines, with no admission of guilt. So, it has happened in the past; which means it isn’t a stretch to imagine that other car companies are trying to game emissions tests. Like Yogi Berra once said, “It’s déjà vu all over again.”
The American Petroleum Institute indicated U.S. crude stockpiles fell 3.7 miillion barrels last week. Stocks at the Cushing, Oklahoma delivery location were down almost 500,000 barrels.
Patriot Coal disclosed that Blackhawk Mining won a bankruptcy auction for the majority of its assets. The terms of Blackhawk’s bid were not disclosed, but it did not include cash; instead, the company offered Patriot’s creditors new debt and a stake in the entity that would own the auctioned assets. The sale is subject to approval by the U.S. bankruptcy court in Richmond, VA.
The Brazilian real hit an all-time low against the U.S. dollar today. Brazil has been hit hard by the steep plunge in commodities prices and the economic slowdown in China. The real has tumbled almost 35 percent against the dollar year to date. Earlier this month, S&P cut Brazil’s credit rating to below investment grade. Brazil’s Treasury bought back fixed-rate notes but failed to sell new notes at two auctions earlier in the week.
A federal judge has ruled that Warner/Chappel does not have a valid copyright to the song “Happy Birthday To You.” The music to Happy Birthday To You was written in the late 19th Century by two sisters who called their version Good Morning To All. That song later evolved into the version popular today and was copyrighted by the sisters’ publisher. The publisher and the rights to the song were eventually purchased by Warner/Chappell for $25 million in the 1980s. Warner/Chappell earns about $2 million a year from the song. A group of artists who challenged Warner/Chappell’s ownership said over the summer that they had proof that the song belonged in the public domain. They said a songbook from 1922 includes the song, predating its 1935 copyright. Yesterday, the judge agreed. You are free to sing to your heart’s content.