Illusion of Growth
Inflation up, housing starts rebound, 1Q share buybacks at a new high, IMF eases on Greece, robot truckers, and Supremes punt.
Financial Review by Sinclair Noe for 05-17-2016
DOW – 180 = 17,529
SPX – 19 = 2047
NAS – 59 = 4715
10 Y + .01 = 1.76%
OIL + .78 = 48.50
GOLD + 5.10 = 1280.10
One day up, one day down. If you can spot a trend, give yourself a pat on the back.
Prices at the retail level increased in April at the fast pace in more than 3 years. The CPI, or consumer price index, rose a seasonally adjusted 0.4% last month. Americans paid more for medical care, food, recreation, tobacco, motor vehicle insurance, airline fares and grooming. Much of the recent increase has been driven by higher oil prices. A spike in gas pushed the energy index up by 3.4% in April. Food prices also rose 0.2% last month, though the cost of groceries has fallen in the past year. Stripping out food and energy, so-called core consumer prices rose 0.2% in April. The CPI has risen just 1.1% in the past 12 months. The core CPI increased 2.1% in the 12 months ending in April.
So, we really are pretty close to the Fed’s target of 2%, depending on which numbers you, or the Fed, consider important. And so several Fed officials have been talking up the idea of a June rate hike, which just kills the mood on an otherwise beautiful Tuesday. Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams said the Fed’s decision on whether to hike rates at the June FOMC meeting depends on the data, but June is “certainly” on the table. The Fed has said that the effect of low oil prices was “transitory” and with a big jump in the CPI last month, it looks like we are seeing the transition. This means expectations for a rate hike are now being pulled forward, which probably means weaker markets. Tomorrow, we get the minutes from the April FOMC meeting. If the policymakers are strategic, they will have been clever enough to have included a serious debate about hiking rates in June.
Construction on new houses rebounded in April after a sharp dip in the prior month. Housing starts climbed 6.6% last month to an annual pace of 1.17 million. Construction on apartments, condos and other buildings with at least five units surged 10.7%. Single-family home starts advanced a smaller 3.3%. Permits are running 5.3% below year-ago levels.
Industrial production grew 0.7% in April – the fastest monthly rate in 17 months, bouncing back after two straight monthly declines as auto production rebounded and cooler temperatures boosted utility output. This was only the second increase in industrial production in eight months. Compared to a year ago, production was down 1.1%.
US companies stepped up big to support their own shares at the start of the year, making the first quarter potentially one of the best ever for share buybacks. Based on preliminary data, share repurchases are 20 per cent higher in the first three months of the year versus the fourth quarter and 31 per cent above the year-ago period. Among the biggest buyers of their own shares were Apple, General Electric, McDonald’s and Boeing, while ExxonMobil has significantly cut back on its share repurchases after falling oil prices have hit the energy industry.
Companies have been big buyers of their own stock for the past few years, helping to boost earnings per share as revenue growth has shriveled. Activist investors pushed for better returns; over the long-term you improve returns by re-investing in the business, improving innovation and productivity; the quick fix is to buy back shares. Coming into 2016, rising rates were expected to curtail share repurchases as it would become more expensive to borrow to fund them, and better uses would be found for cash. However, the downturn in the market and expectations for fewer rate rises combined to create a nice scenario for buybacks. The question is, how long can this continue? For the past 7 years, the market has been propped up with easy money from the Fed, the market has grown dependent on finance as an engine of growth, or finance as the illusion of growth.
The IMF is pressing the Eurozone to let Greece skip paying interest or principal on bailout loans until 2040. The IMF is also pressing for Greece’s interest rate on its Eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due. Eurozone governments, led by Germany, are reluctant to make such major concessions on their loans to Athens, which currently total over €200-billion-euro, but they also want the IMF to rejoin the bailout as a lender to boost the program’s credibility. A compromise between Germany and the IMF is needed by June, when Greece is in danger of running out of money to pay its bills, and definitely by July, when major debts fall due. This is all happening as the UK considers a referendum to exit the Euro Union.
Greece is entering the seventh year of its troubled bailout still struggling to begin a recovery. The country has largely closed the gaping budget deficit that triggered its debt crisis. But the IMF-European bailout—including austerity measures that in total have amounted to more than 30% of GDP so far—contributed to a 25% decline in the country’s economic output since before the debt crisis.
Portions of Hong Kong have been shut down as part of a drastic security increase as the city prepares for a rare visit by National People’s Congress Chairman Zhang Dejiang. He will be the first senior Chinese official to come to Hong Kong since the 2014 Occupy pro-democracy demonstrations which shut down the territory’s financial hub for months. Zhang is scheduled to speak at an economic conference, but will also meet with a small group of pro-democracy legislators tomorrow evening.
Warren Buffett has several rules for investing. The first rule is don’t lose money. The second rule is don’t forget the first rule. Also, Warren Buffett does not bid in auctions. Warren Buffett does not invest in technology. More like guidelines than hard and fast rules. Buffett announced a nearly $1 billion stake in Apple, and he’s already lost about a $100-million (give or take); he also announced he’s financing a bid for Yahoo!’s internet assets as part of a group along with Quicken Loans founder Dan Gilbert. Refer back to Rule number one.
Jack Dorsey is making it easier for Twitter users to stick more stuff in their tweets. Not by dropping the service’s famous 140 character limit – an idea the company had previously floated – but by expanding it, in a way: Twitter won’t count the characters used to insert photos, links or other media into tweets. The change could happen in the next two weeks.
LendingClub, which plunged 51 percent last week with the surprise departure of its leader and disclosure of faulty internal controls, dropped again this morning following a regulatory filing from the company that said strategies to restore investor confidence and obtain new capital for loans might include equity or debt sales, fee changes or other moves that could be “costly or dilutive” to shareholders. Lending Club has received a subpoena from the DOJ, and says it “intends to cooperate” with the department.
Phone book publisher Dex Media has filed for bankruptcy protection after reaching a restructuring deal with creditors. The Chapter 11 announcement marks the fifth time in seven years the firm or its predecessors have found themselves in a bankruptcy court as yellow-pages companies struggle with the move of advertisers and consumers to the Internet.
Picture an 18-wheel truck barreling down the highway with 80,000 pounds of cargo and no one but a robot at the wheel. A team of former Alphabet executives is launching a start-up called Otto, O-T-T-O, focused on self-driving trucks, in an attempt to improve driverless technologies in the long-haul trucking industry. Otto plans to sell kits to retrofit existing trucks with autonomous platforms, but has not disclosed when they will go on sale. The technology will only work on highways for now, with human drivers required off-highway, potentially allowing the vehicles to travel much greater distances.
The Supreme Court has rejected Exxon Mobil Corp’s appeal of a $236 million judgment against the oil company in a case brought by the state of New Hampshire over groundwater contamination linked to a gasoline additive. The justices left in place the New Hampshire Supreme Court’s 2015 ruling upholding the judgment by a jury that in 2013 rejected Exxon’s claims that the contamination linked to its fuel additive was not its fault but rather the fault of the local gas stations and storage facilities that spilled it.
Exxon argued in its appeal that its due process rights were violated because New Hampshire had not proved the company’s liability for the alleged pollution at each individual site. The additive at the center of the case is called methyl tertiary butyl ether, or MTBE. It is an oxygen-containing substance that was added to gasoline to promote more complete combustion and reduce air pollution. It was one of several additives that had been recommended by regulators to reduce emissions but has now largely been phased out of the U.S. fuel supply because of the hazard it poses to groundwater. New Hampshire officials called the $236 million judgment the largest MTBE-related verdict since states and other agencies began making claims for remediation and other damages.
The court agreed to hear exactly zero new cases, continuing to set a sparse stage for its next term, which may see the lightest caseload in its already-light recent history. So far, only 12 cases are on the court’s docket for the October 2016 term, which runs through June 2017. The most likely reason for the slowdown is that there are now just 8 justices (split 4-4) and the court is reluctant to take on an issue in which it might not be able to provide a clear answer.