Inside the Stagecoach
Down again. Market turbulence begets volatility. Oil falls; IEA says no equilibrium. Bolt will beat Tesla to market. Soar growth. Solar showdown in Nevada. Freeport-McMoRan exits Gulf of Mexico. Fewer in poverty. Small biz worried about election. Hanjin docks in LA. Wells Fargo – bandits inside the stagecoach.
Financial Review by Sinclair Noe for 09-13-2016
DOW – 258 = 18,066
SPX – 32 = 2127
NAS – 56 = 5155
10 Y + .06 = 1.73%
OIL – 1.39 = 44.90
GOLD – 9.00 = 1319.40
Stocks opened in negative territory and then slipped further. Any rallies were half-hearted at best. Two months of tranquility was pierced Friday when the S&P 500 tumbled in its worst rout since the Brexit vote. Things aren’t any better in the $13.6 trillion Treasury market. Ten-year notes were stuck in their tightest monthly range in a decade up until September. Stocks exited the tightest trading range in history last week when European Central Bank President Mario Draghi downplayed the need for more measures to boost growth and Boston Fed President Eric Rosengren warned against waiting too long to raise interest rates. Fed rate-hike expectations are falling. Dovish commentary from Federal Reserve Governor Lael Brainard has pushed back expectations for a September interest-rate hike. In a note out late Monday, economists at Goldman Sachs cut their forecast for a rate increase at the Sept. 20-21 meeting to a probability of 25% from 40% previously. It also lifted the odds for a December tightening to 40% from 30%.This is the third time this month the Goldman economists have changed their stance on the September meeting.
But don’t expect the volatility to just vanish. Abrupt breaks in calm have not been easily resolved in the past. In the five prior instances when turbulence spiked as it did Friday, the S&P 500’s daily swings averaged 1.5 percent in the next 20 days. That’s 2.5 times the move in the previous 20 days.
Oil futures dropped after the International Energy Agency cut its crude forecast, warning that supply will continue to outpace demand well into 2017. Global oil consumption growth sagged to a two-year low in the third quarter as demand faltered in China and India, while record output from OPEC’s Gulf members is compounding the glut. As recently as last month, the IEA had expected the market to return to equilibrium this year. The agency downgraded its global oil demand predictions by about 100,000 barrels a day for this year to growth of 1.3 million barrels a day and cut its forecast for 2017 by 200,000 barrels to growth of 1.2 million a day. And as demand weakens, “Global inventories will continue to grow: stockpiles in July smashed through the 3.1 billion barrel wall.”
With its first long-range electric car, General Motors has released figures that show it’s focused on beating Tesla at its own game. The new Bolt will be rated at 238 miles on a single charge when it comes to showrooms later this year, giving it a longer range than the Model 3, which is expected to have a range of least 215 miles and isn’t expected to go on sale until 2017. The Bolt is also likely to be priced at about $37,500, close to the same price point as Tesla’s first mass-market car.
The record-breaking installations of solar panels in the U.S. continues with 2 gigawatts installed in just the second quarter of this year, according to new data from GTM Research and the Solar Energy Industries Association (SEIA). The solar industry installed 2,051 megawatts between April and June, marking the eleventh consecutive quarter in which the U.S. saw more than a gigawatt of solar capacity added to the grid. The volume of installations also marks 43 percent growth from the same quarter in 2015.
Nevada regulators are set to decide this week on a settlement between Berkshire Hathaway’s utility, NV Energy, SolarCity and the state’s consumer advocate to roll back rate increases for customers who installed rooftop solar systems prior to this year. The three-member Nevada Public Utilities Commission has scheduled a September 16 vote on a proposal to shield more than 32,000 rooftop solar customers from increases that took effect in January. Last year, NV Energy proposed increased charges and reduced payments to rooftop solar customers, saying the existing model forced non-solar customers to subsidize those who did use the green power. SolarCity, Sunrun and other solar installers stopped taking customers in the state soon after a December decision by the commission to raise rates on all solar homes. They sued after regulators denied an appeal of the ruling. The proposal would put existing solar homes back onto the rates they paid before the increases started. NV Energy asked the PUC to grandfather those rates for as many as 20 years.
Phoenix-based Freeport-McMoRan will sell its deepwater Gulf of Mexico assets to Anadarko Petroleum for $2 billion. The deal is expected to close before year’s end. Freeport’s sale all-but ends a disastrous diversification from copper and gold mining into energy drilling, a move that received widespread investor criticism and is at the heart of the company’s 66% share price collapse over the past three years and the suspension of its quarterly dividend.
Fewer Americans lived in poverty in 2015 and median incomes charted their first increase since the Great Recession, according to data released today by the Census Department. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5%, and the number of people in poverty fell by 3.5 million. The threshold for a family of two adults and two children to be considered living in poverty was $24,036. Real median household income rose 5.2% during the year, the first annual increase in median household incomes since 2007. Earnings also increased: 1.5% for full-time year-round male workers, and 2.7% for female workers. That was the first significant annual increase in median earnings for either gender since 2009.
A measure of small-business sentiment declined in August as owners became more hesitant, with election worries at the forefront. The National Federation of Independent Business small-business optimism index fell 0.2 points to 94.4. The outlook for business conditions in the next six months had the most dramatic change, dropping seven points.
Boeing reports Chinese airlines are likely to purchase 6,810 planes worth just over $1 trillion in the next 20 years as they expand fleets to cater to growth in tourism. Boeing will also unveil its T-X trainer plane today, designed jointly with Sweden’s Saab AB. The company is counting on the model to train generations of U.S. fighter pilots, and keep alive its St. Louis manufacturing base.
A second Hanjin vessel will dock and unload at the Port of Los Angeles after more than a week stranded off the Southern California coast. The move raised hopes that gridlock could be easing after a U.S. bankruptcy judge issued an order Friday allowing the financially ailing Hanjin Shipping Co. provisional protection from creditors so vessels could dock and unload products. Meanwhile, the South Korean government is sticking to its hard-line stance on Hanjin Shipping. Government money will not be used to bail out the shipping company, although aid may be extended to small-to-medium sized businesses jolted by the process.
Starting in 2011, Wells Fargo employees opened 2 million bank and credit card accounts in customers’ names without their knowledge. The goal was to generate fees for the company and hit aggressive sales targets for employees. After an investigation, the bank was accused of improperly opening accounts by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles prosecutor. Last week we told you the bank and regulators had settled for $185 million. But wait, there’s more.
The Senate Banking Committee has scheduled a hearing for September 20th to investigate the matter. Moody’s, a credit rating agency, issued a warning that the settlement may have a negative effect on Wells’ debt because of image concerns and called the incident “highly disturbing.” Today, Treasury Secretary Jack Lew said Wells Fargo had participated in “bad behavior,” and that the accusations showed bank regulation should not be rolled back. Wells CEO John Stumpf, in an interview with the Wall Street Journal, said that there “was no incentive to do bad things” at Wells and laid the blame on the employees rather than the culture of the firm. CFO John Shrewsberry said the fraudulent accounts were not opened in order to generate revenue for the bank. Instead, a few employees opened them to boost their performance. The bank claims that 5,300 lower level employees were fired in relation to the cross-selling shenanigans, however that number is now in question. That figure covers terminations over the period that the regulators investigated, from 2011 through 2015. The regulators did not start investigating until 2014. Most of the firings were probably not related to the scandal. Or if they were firing employees for opening phony accounts, it means upper management was aware of fraudulent activity and failed to report it.
But wait, there’s more. Wells Fargo executive Carrie Tolstedt tendered her resignation in June and is scheduled to leave the bank at the end of the year. Wells Fargo says her retirement is not a result of the findings of the investigation. She is in line to receive receive roughly $125 million in stock and other compensation from the bank; a golden parachute. Tolstedt was in charge of community banking during the entire time the “sandbagging” operation took place. Her success in cross selling was repeatedly cited in annual proxies as the reason for her $9 million a year in compensation, plus the retirement package. When she resigned, John Stumpf said Tolstedt had been one of the bank’s most important leaders and “a standard-bearer of our culture and a champion for our customers.”
I’m not sure what kind of culture Stumpf champions, but it looks like modern day bandits are more likely to be inside the stagecoach than outside it.