GDP sags, BOJ surprise, Amazon pops, Ford gets pricey, and Goldman is still playing the ponies.
Financial Review by Sinclair Noe for 04-28-2016
DOW – 210 = 17,830
SPX – 19 = 2075
NAS – 57 = 4805
10 Y -.02 = 1.84%
OIL + .70 = 46.03
GOLD + 20.60 = 1267.40
The US economy grew 0.5% in the first quarter, the slowest pace in 2 years. Economists had forecast the economy expanding at a 0.7 percent rate in the January-March period after growing at a 1.4 percent pace in the fourth quarter. While consumers eased up slightly on spending, business investment fell sharply, stung by lower outlays on equipment and infrastructure like factories and drilling rigs. Almost all sectors of the economy weakened in the first quarter. Households have been frugal, cutting back on big purchases; saving their modest wage gains and paying down debt. Income at the disposal of households after accounting for taxes and inflation increased 2.9 percent in the first quarter after rising 2.3 percent in the prior period. Savings rose to $712 billion from $678 billion in the fourth quarter. Businesses continued to place fewer orders for goods in the first quarter, accumulating $60 billion worth of inventory, down from $78 billion in the fourth quarter. A sustained plunge in energy sector investment undermined business spending. The first-quarter results reinforced what has become something of an annual economic rite in recent years – a weak first quarter, followed by optimistic predictions that a rebound was just around the corner.
Even as the pace of expansion has slowed in the last two quarters, the economy has added an average of nearly 245,000 jobs a month over the same period. In a separate report on Thursday, the Labor Department said initial claims for unemployment benefits last week rose by 9,000 to 257,000. Despite the increase, new jobless claims remained very close to lows last seen in the early 1970s. By the way, if you have survived another day of work, congratulations. The US averaged 150 workplace deaths per day in 2014, according to the AFL-CIO’s new workplace deaths report.
The Federal Reserve on Wednesday opted not to raise interest rates, as expected. One of the few bright spots in the economy, according to the Fed, was housing. The Commerce Department reported that the ownership rate fell a tenth to a seasonally adjusted 63.6% in the first quarter, marking the third lowest figure since the 63.5% low in the second quarter of 2015. The ownership rate was 67.8% in the quarter when the U.S. entered recession. The diminished interest, or ability, to own a home comes at a time when mortgage rates are low but house prices are climbing. According to Case-Shiller data, prices nationally rose at a 5.4% clip in the 12 months ending February. Rents also are picking up, however. The median asking price for rent was $870 in the first quarter, the Commerce Department reported, representing year-over-year growth of 8.9%.
This morning, the Bank of Japan left interest rates unchanged; that was not expected. The Bank of Japan maintained the pace of its asset purchase program and kept steady its 0.1 percent negative rate it applies to some deposits. The central bank also cut its inflation forecasts and again pushed back the timing for hitting its 2 percent price target by six months. BOJ Governor Haruhiko Kuroda left the door open for more stimulus. The yen surged the most against the dollar and the euro in nearly six years as the decision caught investors off guard, while the Nikkei Index dropped 3.6 percent.
Abbott is buying St. Jude for $25 billion. The deal is worth about $85 a share, a 37% premium to Wednesday’s closing price. St. Jude shareholders will receive a combination of cash and stock. Together, the company will compete in nearly every area of the cardiovascular market and hold the No. 1 or 2 positions across large and high-growth cardiovascular device markets.
French pharmaceuticals group Sanofi has offered to acquire US biotech company Medivation in an all-cash deal valued at $9.3 billion. Sanofi has bid $52.50 a share; a relatively small premium compared to Medivation’s close of $52.05 yesterday, representing a market cap of $8.5 billion.
Amazon.com blew past quarterly earnings estimates after the closing bell, posting its fourth straight profit, boosted by a 28 percent sales increase. Amazon reported first-quarter net income of $513 million, or $1.07 per share, on $29.1 billion in revenue. Those figures compare with a loss of 12 cents per share and $22.7 billion in sales for the previous year. Analysts expected Amazon to post earnings of 58 cents per share on $27.9 billion in revenue, according to a Thomson Reuters consensus estimate. Shares popped more than 12 percent in extended trading. Sales easily topped forecasts in both its North America and international units. North America sales came in at almost $17 billion, up 27 percent from $13.4 billion in the previous year. International revenue grew 24 percent to $9.5 billion.
Dow Chemical, the No. 1 U.S. chemical maker by sales, reported a higher-than-expected adjusted profit as cost cutting ratcheted up margins to their highest in more than a decade. Dow has been cutting administration costs and laying off employees ahead of its $130 billion merger with traditional rival DuPont.
Net income more than doubled at Ford Motor, thanks to robust pricing of its F-150 pickup trucks in North America and improved profit in Europe. Ford reported its highest-ever quarterly operating margins. Ford’s net income of $2.4 billion, or 61 cents per diluted share, in the first quarter through March 31, was up 113 percent from $1.3 billion, or 29 cents per diluted share, a year ago. Meanwhile, Ford announced plans to introduce a long-range electric vehicle to compete with battery-powered models coming from Tesla and GM that would go 200 miles or more on a charge. You can’t just ignore Tesla getting 400,000 reservations on a vehicle in a little more than a week’s time.
Gilead Sciences shares dropped more than 6 percent as the company posted earnings of $3.03 a share ex-items on just shy of $8 billion in revenue. Analysts expected Gilead to report earnings of about $3.15 a share on $8.1 billion in revenue.
Expedia shares soared more than 11 percent after the company reported earnings of 9 cents a share ex-items on $1.90 billion in revenue. Analysts had expected the company to post a loss of 6 cents a share on $1.84 billion in revenue.
Shares of LinkedIn jumped after the company reported better-than-expected earnings. The stock spiked more than 15 percent before giving back some of its gains. The professional social network posted earnings of 74 cents a share ex-items on $861 million in revenue. Analysts had expected the company to report earnings of 60 cents a share on $828 million in revenue.
Samsung Electronics’ first quarter operating profit grew 12% to $5.84 billion and its revenue increased 5.6% as the company benefited from the early release of its flagship Galaxy S7 smartphones.
Global smartphone shipments fell for the first time on a year-on-year basis in the first quarter, contracting 3% to 334 million units. Samsung’s volumes dropped 4.5% to 79 million, although the South Korean company retained its crown as market leader. Apple remained in second place but shipments slumped 16% to 51 million units. The data adds to concerns that the smartphone market has matured to the point that sales growth will be increasingly hard to come by.
Deutsche Bank’s first quarter net profit dropped 58% to $267 million, but beat forecasts for a loss, while revenue fell 22%. Factors affecting Deutsche Bank’s earnings include difficult market conditions, the decision to exit certain businesses as part of a restructuring and lower legal costs. Investment-banking revenues plunged 23%, while its wealth-management performance was weak.
Earlier this week we reported Goldman Sachs Bank USA is offering FDIC insured savings accounts with no minimums and certificates of deposits for as little as $500 with above-average yields, meaning it’s going after this money aggressively from the little guy. Historically, what smells like money to Goldman Sachs has been eight-figure money and higher. So why this generous move now by Goldman Sachs Bank USA to offer above average returns to the little guy? The answer might be found in a report from the Office of the Comptroller of the Currency, looking at the derivatives exposure of the four biggest US banks. According to the report, the credit exposure from derivatives versus the bank’s risk-based capital is as follows: JPMorgan Chase 209 percent; Bank of America 85 percent; Citibank 166 percent and Goldman Sachs (wait for it) – a whopping 516 percent.
You might recall that one of the key promises of the Dodd-Frank financial reform legislation was that after the largest bank bailout in financial history in 2008, these derivatives were going to be pushed out of the insured bank into bank affiliates that would not endanger the taxpayer-backstopped deposits and force another monster taxpayer bailout in the next crisis. In other words, the legislation was supposed to keep the banksters from gambling on the ponies. This became known as the “push-out rule” which could never seem to materialize into a hard and fast law. Then, in December 2014, Citigroup simply used its muscle to legislate the rule out of existence.
You might also recall that Dodd-Frank was supposed to scale back all those derivatives. According to the OCC, as of December 31, 2015 there were $237 trillion in notional derivatives (face amount) at the 25 largest bank holding companies with the bulk of that amount on the books of the insured banks. That compares with $169 trillion on the books of the 25 largest bank holding companies at December 31, 2007, just prior to the implosions on Wall Street. This means there has been an explosive 40 percent increase in eight years. Back to Goldman Sachs, and why they are opening up accounts for the little guy; the answer – FDIC insured.
GDP, BOJ, St. Jude, Sanofi, Amazon.com, Ford, Goldman Sachs,