Financial Review by Sinclair Noe
DOW + 39 = 17,554
SPX + 9 = 2032
NAS + 12 = 4667
10 YR YLD + .05 = 1.85%
OIL + .93 = 47.40
GOLD – 1.30 = 1293.90
SILV + .14 = 18.21
Gold moved above $1300 an ounce today. When was the last time you saw that? Last August. For the past 3 years, gold has been shellacked, but it is now testing an important level of resistance, and it coincides with the European Central Bank’s anticipated Quantitative Easing plan, which should be revealed on Thursday. Today we learned that an ECB executive board has called for bond purchases of roughly €50 billion per month over the next 12 months. The final number and details could change after the full board weighs in on the plan on Thursday. And the devil will be in details, and one of the most important is whether the ECB will let Greece play in their QE games.
The Bank of Japan held off expanding its stimulus program today, even as they cut their core inflation forecast to 1% from 1.7%. Two Bank of England policy makers dropped calls for higher interest rates. Elsewhere, the battle against inflation intensified as the Bank of Canada unexpectedly cut interest rates for the first time since 2009, saying the oil price shock will drag down inflation. The Bank of Canada is lowering its target for the overnight rate by one-quarter of one percentage point to 0.75%. The Canadian dollar, also known as the loonie, weakened sharply against the dollar, from around 1.20 down to 1.23.
The International Monetary Fund cut its forecast for inflation in advanced nations almost in half. And it looks unlikely the US will achieve its target of 2% inflation. The Federal Reserve FOMC meets next week, and there is growing consensus that Fed policy makers need to reassess their outlook for the economy as global weakness and disappointing data on consumer spending test their resolve to raise interest rates this year. Federal funds futures markets now show only a 15% chance the benchmark interest rate will be 0.5% or higher in June. And more than resisting inflation, the pressing issue seems to be how to create demand and economic energy.
President Obama delivered his State of the Union address last night. He called for new taxes on high-income earners and large financial institutions to pay for free community colleges. Other topics included foreign policy, healthcare, the Internet, Keystone XL, infrastructure, trade agreements, cyberattacks, climate change, and immigration reform.
Yea, that’s not going to happen. There are some things that will actually get done. Obama proposed reducing mortgage insurance premiums on government-backed loans in order to make it easier for low-income Americans to buy homes. This falls under Housing and Urban Development, which is under Obama’s control. Also, reducing methane emissions in the oil and gas industry by fixing leaky equipment and reducing “flaring” of natural gas; this one is the EPA, again under Obama’s control.
I think we might see congressional authorization of the military action against ISIS in Syria. The bombing of ISIS is already underway and congress is real bad at undoing something that has already started. Congress might not act and just leave the military action in a sort of limbo; don’t be surprised if congress tacks on a resolution indicating that the president acted illegally when he failed to get authorization in advance, because there is nothing like a unified front when you go to war. But there seems to be consensus that ISIS needs to be bombed to hell.
Treasury Secretary Jacob Lew said today he is confident that the Obama administration and Congressional Republicans can agree on a plan to reform a “dysfunctional” business tax code. He put the odds of a deal at “greater than 50-50.” Lew is probably a bit overly optimistic. Apple pie can’t even get 50-50 odds in Washington.
The White House wants to lower the corporate tax rate by closing loopholes. Lew said the top corporate tax rate should be reduced to 28% from 35%, and a new minimum tax on foreign earnings should be created to help make it simpler for businesses to repatriate income. Other proposals include a 25% tax rate for domestic manufacturing and allowing more small businesses to use cash accounting.
If I had to bet on one thing not happening even though it sounds plausible, I might say legislation to prevent cyberattacks. Nobody likes the thought of having credit card information stolen, or malware infecting their computer, so you might think lawmakers could come together on legislation but I doubt congress is up to the challenge. It is a serious security issue; the Pentagon says that nearly every US weapons program tested last year showed “significant vulnerabilities” to cyber-attacks. You have to imagine that utilities, and airports, and almost everything is vulnerable to cyber-attacks. And nobody likes getting hacked, but figuring out what to do might not be easy.
First, there are a lot of legitimate companies that gather information on you and then sell that info and there is fierce industry opposition to new security or privacy rules. Meanwhile, civil liberties and privacy activists think that panic about cyber breaches will lead to surveillance and filtering that would destroy the open Internet in the name of saving it. Accommodating these concerns should not be an impossible task, but in today’s Washington, it has been.
But the fundamental flaw is that nobody is held responsible for insecure systems and bad code. Data breaches cause companies headaches but usually it is little more than bad PR; there are no massive verdicts that have prompted reforms of other defective products. The companies that write bad code have effectively protected themselves through software license agreements, and many companies would still rather hope for the best than spend money to fix their systems.
Here was another strange example in yesterday’s earnings report from Netflix; they report solid earnings growth, not so great on the revenue numbers, but good news on new subscribers. The interesting part was where they talked about competition in the Netherlands. By analyzing Google search terms, Netflix has learned that their biggest competition in the Netherlands is Popcorn Time, which has an unusually strong fan base. Popcorn Time is one of the most popular services for watching pirated movies and television shows. Netflix Chief Executive Officer Reed Hastings wrote a letter to shareholders saying, “Piracy continues to be one of our biggest competitors.”
Twelve years ago, Steve Jobs convinced music labels to sell their songs for 99 cents on iTunes by arguing that was a better solution than losing the sale to music pirates. Popcorn Time shows that as the legal options improve, so do the illicit ones.
Microsoft Windows runs on 91% of the world’s computers, so there is a good chance you use Windows. There is also a good chance that you hate your Windows system because it is old or you hate it because it is the newer Windows 8. Good news. Today Microsoft unveiled the new Windows 10, skipping right past Windows 9 without explanation.
Here’s what you need to know; if you have Windows 7 or 8, you can upgrade to Windows 10 for free in the first year (it won’t be released until later this year, so you have time). The Start Menu returns, it can be viewed as a full-screen Windows 8-like display of tiles or a more familiar Windows 7-like drawer of apps. Windows 10 sticks to desktop mode when it recognizes a mouse and keyboard and tablet mode when there is no keyboard and mouse. The new “Snap” feature will allow Windows 10 users to work on up to four apps at once on the same screen. And there will be a new browser called Spartan.
Now for the cool stuff. Microsoft’s version of Siri will be part of Windows 10. By using voice commands, Cortana can show your notifications, stock information, sports news, and other functions typical of smartphone voice assistants. But you can also say “show me the spreadsheet on January sales” or “show me photos from last month,” and it will quickly run the search query.
And the coolest part: it can make holograms. Windows 10 Hologram will let you play games, watch videos and create virtual elements that will appear in your view. This should be a good way to train people to do surgery or repair plumbing, or learn on-the-go, or play immersive games, or to create 3D toys or devices in a 3D space, which will behave like 3D objects when you interact with them wearing new Microsoft headgear called a HoloLens. HoloLens comes with a holographic processing chip that understands your gestures, voice and where you’re looking. It can map the world around you and display holograms that appear to be in thin air or on objects that surround you. And then of course, you can print them on a 3D printer.
The Commerce Department said single-family housing starts, the largest part of the market, jumped 7.2% to a seasonally adjusted annual pace of 728,000-units – the highest level since March 2008. That offset a 0.8% fall in groundbreaking for the volatile multi-family homes segment, lifting overall housing starts 4.4% to a 1.09 million-unit rate last month.
Time for another edition of “Banks Behaving Badly”. We start with Standard and Poors, the credit rating agency; S&P will be suspended for a year from rating securities in the largest piece of the CMBS market. The Commercial Mortgage Backed Securities probe is separate from a lawsuit by the Justice Department tied to subprime home loans that S&P rigged, or rather rated before the credit crisis. The ratings agency is expected to settle that matter as soon as this quarter for about $1 billion.
In a speech yesterday, Federal Reserve governor Jerome Powell said widespread manipulation of key benchmark interest rates such as the London Interbank Offered Rate, or Libor, threatens public confidence in the financial system, and must be prevented through fines and criminal prosecution. Seriously, I think the man has been asleep for the past five 6 years, and he just woke up.
In 2008, JPMorgan authorized legal counsel to file papers making a loan to GM unsecured instead of secured. While secured creditors were repaid in full during GM’s bankruptcy, unsecured creditors took losses. During bankruptcy proceedings, JPMorgan initially won its argument that the security interest was still in effect, but the appeals court today reversed that decision, and JPMorgan will lose about $1.5 billion. $6.5 billion for the London Whale, about $35 billion in legal expenses since 2009, and now $1.5 billion to GM. This is no way to run a bank.