Inflation, Apple, Brexit
…CPI inflation gauge jumps. Apple for the bear. PM May has a Brexit deal nobody likes. PG&E’s fire problem. Wells Fargo has a puffery problem.
Financial Review by Sinclair Noe for 11-14-2018
DOW – 205 = 25,080
SPX – 20 = 2701
NAS – 64 = 7136
RUT – 12 = 1502
10 Y – .02 = 3.12%
OIL + .31 = 56.00
GOLD + 8.60 = 1211.50
Stocks started the trading session in positive territory and seemed to be holding strong to triple digit gains on the Dow. In the blink of an eye the market turned volatile. The Dow Industrials had a spread of 565 points from session high to session low. After a record breaking 12 consecutive sessions of declines, oil prices bounced a little today – but after the closing bell, the American Petroleum Institute reported that crude supplies rose by 8.8 million barrels for the week ended Nov. 9. Meanwhile natural gas prices jumped 18% today, the biggest single day percentage advance in 14 years.
Three big topics in today’s market: inflation, Apple, and Brexit.
The consumer price index climbed 0.3% in October to mark the biggest advance since January. The increase in the cost of living over the past 12 months rose as well — to 2.5% from 2.3%. The rate of inflation is still below a six-year high of 2.9% set three months ago. Stripping out food and energy costs, the core rate dipped to 2.1% from 2.2%. Higher gas prices accounted for more than one-third of the increase in consumer prices last month. Since the CPI data was collected, crude oil prices have cratered. Still, the cost of rent, used cars and trucks, medical care, home furnishings and car insurance also increased. Prices for new vehicles and communications declined. Prices for major appliances have jumped 8.1% in the past 12 months, with all of the increase coming since April – these price increases appear to be a direct consequence of the trade wars. After adjusting for inflation, hourly wages slipped 0.1% in October. They are up a mild 0.7% in the past year. Consumer prices are of concern to investors, given the Federal Reserve’s focus on inflation.
Apple is now down almost 20% from its all-time high. Apple is still the largest publicly-traded company in the world, but the market cap has now dropped to around$886 billion. Earlier this year, Apple became the first company with a market capitalization north of $1 trillion. Since reporting earnings on November 1, shares of Apple are down more than 10%. And Wall Street analysts continue to pare their expectations for the company as Apple suppliers make the outlook for the iPhone even murkier. UBS cut its price target on Apple. Earlier this week, Goldman Sachs cut its outlook for iPhone unit sales. Guggenheim downgraded shares of Apple to Neutral from Buy. Stripping out some analyst-speak, Guggenheim thinks the story of ever-more-expensive iPhones has already been priced into the stock, with investors now growing concerned over slowing overall iPhone sales. Which, of course, comes right as Apple stops reporting individual unit sales. And right as its suppliers start suggesting these unit sales may be even worse than forecast.
British Prime Minister Theresa May’s cabinet approved a draft plan for exiting the European Union, but bigger battles —and the potential for more market volatility—lie ahead. After a five-hour meeting, a majority of May’s cabinet signed off on the controversial draft exit plan. But news reports said the cabinet was split, with several ministers opposed to the agreement. The U.K. is due to leave the EU in March. Failure to secure an agreement would result in a hard Brexit. That means no deal in place to govern the U.K.’s relationship with the bloc. The tentative plan agreed to by the cabinet would end the free movement of labor, a key goal of Brexit supporters, but see the U.K. remain in a customs union with the EU until London and Brussels reach a trade agreement. Such an arrangement would eliminate the need for a hard border between the Republic of Ireland and Northern Ireland. Any deal would still need to be approved by parliament and the remaining 27 EU member states.
The government of Italy told the European Union it will forge ahead with its fiscal plans despite calls from the bloc’s authorities to revise its draft budget for next year. In October, the EU took the unprecedented step of rejecting Italy’s draft budget as incompatible with the bloc’s rules on fiscal discipline, escalating a battle between Europe’s establishment and those opposing it in Rome. Italy had three weeks or until Tuesday to respond to Brussels. On Nov. 21, the Commission will publish opinions for all countries considered in breach of deficit and debt rules and is likely to recommend opening a so-called excessive-deficit procedure against Italy. The budget fight could come to a head in early December, when other EU finance ministers need to decide whether to endorse or reject the Commission’s recommendation.
PG&E Corp, the parent company for Pacific Gas and Electric, dropped about 23% today; shares are down over 50% in the past 5 sessions. The company’s bonds were also falling hard and accounted for three of the top 10 most actively traded investment-grade bonds of the day. California regulators are still investigating the cause of what’s called the Camp Fire that has blazed across roughly 135,000 acres in Butte County, Northern California, causing 50 deaths and destroying thousands of homes. In a regulatory filing Tuesday, PG&E said the outage happened near the city of Paradise where the fire is understood to have started. Paradise was all but completely wiped out in the blaze.
A day before a deadly blaze, PG&E got in touch with one of its customers in the area, Betsy Ann Cowley, saying they needed access to her property because they had problems with their power lines. PG&E initially declined to discuss the email it sent Cowley, saying it has provided an “initial electric incident report” with state regulators and will fully cooperate with any investigations. Publicly, PG&E has said it experienced a problem on an electrical transmission line near the site of the massive fire, minutes before the blaze broke out. The cause of the fire is still under investigation. What is known is that it started Thursday near Cowley’s property.
PG&E warned that while it had renewed its liability insurance coverage for wildfire events in its most recent quarter to an aggregate amount of about $1.4 billion, it could be facing a far larger bill that would have serious implications for its finances.
Imagine that the National Pie Company placed an ad saying they sell the best pies in America. Well, everybody knows that is a lie. I make the best tasting pie in America. When a business makes a claim that is either vague or so obviously inflated that people simply won’t believe it, that’s “puffery,” and not actionable in court. For years, Wells Fargo charged auto-loan borrowers for unnecessary insurance on their vehicles. Wells Fargo saddled roughly 600,000 auto-loan borrowers — disproportionately lower-income customers — with insurance to cover the vehicles that collateralized the loans. Many borrowers, however, already had insurance, so they didn’t need the additional coverage. Some didn’t even know they were being charged because Wells Fargo didn’t itemize the insurance fees on their loan statements. When customers made monthly payments on their loans, according to the consumer lawsuit, Wells Fargo applied them in a way that pushed as many as 275,000 customers into delinquency, resulting in some 25,000 improper repossessions. The bank didn’t always fully or promptly refund the fees and late charges it owed the victimized customers and didn’t always clean up credit reports.
The auto insurance scandal was just one in a string of scandals that rocked the share price of Wells Fargo. Last year, a lawsuit was filed against the bank seeking class certification for all investors who bought the company’s stock from Nov. 3, 2016 — when CEO Tim Sloan announced at an investors conference that he was “not aware” of any undisclosed scandals in sales practices — to Aug. 3, 2018, when the bank disclosed the auto-loan issues in an earnings report. In a legal filing last week aimed at getting a shareholder lawsuit dismissed, the company asserted that statements that the bank was working to “restore trust” among its customers and “trying to be more transparent” about its scandals — statements made by CEO Tim Sloan — were, well, just puffery. The bank says those were generic statements “on which no reasonable investor could rely.” Therefore, even though the bank’s stock price fell sharply when evidence emerged that they were false, investors don’t have grounds to sue for their losses.
Wells Fargo argues that some of the statements by Sloan cited by the shareholder plaintiffs are protected as mere opinion, including his expectation that “probably” the bank will “err on the side of overcommunicating.” The problem there is that protected opinion generally involves an utterance by a third party not privy to all the facts, not a statement by a CEO fully conversant with the truth. The bank’s stock took a hit after the auto-loan disclosures; so, it appears investors were believing the bank execs who were promising transparency and integrity.
Let’s make sure we are clear on this – Wells Fargo lied about restoring customers’ trust. This is like the young man who murdered his parents then begged the courts for mercy because he was an orphan. Wells Fargo says they can’t be sued for lying because nobody believes they tell the truth to begin with. And the crazy part is that the Wells Fargo puffery defense might work. When CEO Sloan said the bank was working to “restore trust” among its customers and “trying to be more transparent” about its scandals – well, that’s a lie. And Wells Fargo tells so many lies that nobody should believe anything they say – that is their legal defense in this case – it is not the fault of the bank for telling the lies, it is your fault if you believe their lies. Actually, the only thing that is truly unbelievable is that Wells Fargo still has a corporate charter.