Financial Review

Groping Along

Financial Review by Sinclair Noe


DOW + 263 = 17,976
SPX + 25 = 2086
NAS + 56 = 4947
10 YR YLD + .01 = 1.96%
OIL – .19 = 48.68
GOLD – 13.40 = 1186.00
SILV – .28 = 16.79


The Commerce Department reports consumer spending rose just 0.1% in February; that follows a decline in January. The small increase in spending in February and outright decline in January suggest the economy failed in early 2015 to match the pace of growth at the end of last year. Gross domestic product is forecast to expand just 1.4% in the first quarter, down from 2.2% in the fourth quarter and 5% in the third quarter. Part of the problem might be harsh winter weather; if that is the case, we might expect a rebound in consumer spending in the spring.


Or maybe the American consumer is tired of spending, and is actually starting to save. The saving rate jumped in February to 5.8 percent, the highest since December 2012 and up from 4.4 percent just three months earlier. The savings rate slumped to as low as 1.9 percent in the run-up to the recession, a sign too many Americans were spending beyond their means. Since then, consumers have been trying to clean up their finances.


The National Association of Realtors said its pending-home-sales index rose 3.1% to 106.9 after a downward revision to January’s numbers. Total existing-homes sales in 2015 are forecast to be around 5.25 million, an increase of 6.4%, and the national median existing-home price is expected to increase around 5.6%.


The Commerce Department released the personal consumption expenditures price index, or PCE index, for February. It was up 0.3% for the past 12 months. The PCE is the Federal Reserve’s preferred measure of inflation. The oil price crash, a strong dollar and weak overseas economies have all kept inflation at bay. Some slack in the economy may also be keeping prices muted, but even after taking out food and energy, inflation came in at 1.4%, up very slightly from 1.3% in January. So, inflation is still well short of the 2% target established by the Federal Reserve. And we know the Fed has lowered its target for the unemployment rate to around 5%. We also know that the targets are not firm.


Full employment is that point where most people can find jobs and where the unemployment rate has dropped low enough where it just starts to spark inflation. Former Federal Reserve chairman Ben Bernanke gave a speech and answered questions today at Johns Hopkins. Bernanke said he doesn’t know where the so-called full-employment level is now, saying the Fed “is in some sense groping” to determine it.


One reason why it is difficult to determine full employment is because wages have been stuck in the mud; so, even as people have found jobs, their wages haven’t been enough to kick start inflation. Many of the jobs lost during the downturn were good paying jobs that were replaced in the recovery with lower paying jobs or part-time work. So, when it comes to pinpointing the full employment number, Bernanke says: “Nobody really knows that number with any precision,” adding, “and the Fed will continue to grope to find out what the right number is.”


In addition to a speech, today also marks the first day of Ben Bernanke’s blog. His first post dealt with why the Fed has kept rates artificially low for a long time and hurt savers. Of course, the simple answer is that rising rates would slow the economy at a time when the economy was not yet recovered from a massive downturn; and in that regard, the economy determines rates more than the Fed. What Bernanke didn’t really address is how lower rates pushed investors to chase yield, pushing them into the stock market, and what the effect of higher rates might be on the equity market.


Still, what was also important about the Bernanke blog was why he chose this topic for his first blog post. It almost seems he is trying to get us ready for a Fed rate hike. Dam the torpedoes, higher rates ahead. But it doesn’t look like the bond market is paying attention. Rates remain low despite the Fed warnings that they want to hike rates at some point this year. It looks like the setup for a letdown.



The big economic report this week is the jobs report.  U.S. exchanges will be closed on April 3 in observance of Good Friday, the day when the government releases its official employment report for March. Good Friday isn’t a federal holiday. It’s expected that the economy added about 255,000 net new jobs in March.


The pace of first-quarter profit warnings from S&P 500 companies is running slightly ahead of the same time a year ago, and well ahead of the five-year average. Ahead of the start of earnings reporting season, which unofficially kicks off when Alcoa reports results on April 8, about 84% of the companies that have provided first-quarter outlooks gave negative outlooks. That’s above the 81% that warned for the first quarter of 2014, and higher than the five-year average of 68%. Many of the companies blamed the negative effects of currency movements, lower commodity prices or both, for the negative pre-announcements.


Meanwhile, revenues of S&P 500 companies are expected to decline 2.8% in the first quarter from a year ago, which would mark the worst year-to-year drop since the third quarter of 2009. One sector is holding up well, healthcare is expected to see revenue growth of 9.1%. The energy sector, however, more than makes up for it. The average price of oil in Q1, at $48.65 a barrel, had been cut in half from a year ago ($98.56). So revenues are expected to plunge 38%. And earnings for the energy sector are expected to drop 64%.


But it’s not just the energy sector. Expect declining earnings for utilities, materials, telecom services, consumer staples, and IT. Look for possible earnings growth in consumer discretionary, financials, and healthcare. Oil & gas companies are blaming the oil bust for the collapse of their revenues and earnings. The rest of the companies are blaming the strong dollar in near unison. But ironically, they’re not pointing at the strong dollar and at oil as a force in lowering costs. Cost reductions are the result of superior management; sales and earnings declines are the fault of the strong dollar.


And of course, there will be a spillover effect into the second quarter; in fact revenues are expected to drop even more; down 3.1%, compared to first quarter declines of 2.8%. And earnings, after the decline of 4.6% in Q1, are expected to fall 1.8% in Q2, down from of an estimated growth of 4.2% and 5.3% respectively at the beginning of the year. Of course, part of this is ongoing game of ratcheting down expectations, only to beat expectations when earnings are reported, but more and more it looks like the economy might not be as strong it is sometimes portrayed.


Chinese stocks took off today after policy makers signaled the country had capacity to ease monetary policy and boost sluggish growth. Policymakers with the People’s Bank of China said that China’s policy makers had to be “vigilant” against the risk of disinflation and suggested that the nation had “room to act.” China’s central bank has already taken a series of easing steps since November, cutting interest rates twice and slashing banks’ reserve requirements.


Greece’s biggest creditor, Germany said this morning that the euro zone would give Athens no further financial aid until it has a more detailed list of reforms and some are enacted into law. Greece submitted a list of reforms on Friday. Greek Prime Minister Alex Tsipras spoke to the Greek parliament today; he said that Greece’s list of “short-term measures” to creditors included curbing fuel and tobacco smuggling, checks on bank transfers and fighting sales tax fraud. He said, “It’s time for the ‘haves’ to start paying and for the looting of the middle class and salaried workers to stop.” In the negotiations with the creditors, he said, “We are seeking an honorable compromise with our partners, but do not expect an unconditional surrender.”


A renewed Eurozone crisis poses the biggest risk to the global economy, according to a Fitch Ratings poll at its March sovereign credit briefing in Hong Kong and Singapore. The report showed that 41% of the respondents in Hong Kong and 45% in Singapore pointed to fresh Eurozone instability as the most likely thing to derail the global economic recovery. Whether by design or due to the combination of Greece submitting a lot of not-fully-fleshed out reforms right before the Easter holiday, it looks like Greece stays in the sweatbox for the next two weeks.


Monday is for mergers. Typically, the final details of a merger get worked out over a weekend and the announcement comes on a Monday. We had a boatload of deals announced this morning. UnitedHealth Group announced plans to buy Catamaran Corp., the fourth-largest pharmacy-benefit manager in a$12.8 billion deal.


Teva Pharmaceutical Industries is acquiring Auspex Pharmaceuticals in a deal valued at $3.2 billion


Horizon Pharma said it planned on purchasing the pharma company Hyperion Therapeutics for $955 million, in cash and debt commitments.


Switzerland’s Dufry has agreed to buy airport tax and duty free seller World Duty Free in a deal that values the latter at about $3.9B, including debt. Dufry will pay about $1.5 billion for the Italian Benetton family’s 50.1% stake in the airport retailer. The deal is the second high-profile foreign takeover of an Italian company in less than a week after ChemChina bought a majority stake in tire maker Pirelli last Sunday.
In Asia’s biggest block deal this year, Chevron has sold its entire stake in Caltex Australia, the country’s biggest refiner, for$3.7 billion.










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