Into the Ditch
Financial Review by Sinclair Noe
DOW -181 = 17,919
SPX – 9 = 2119
NAS -10 = 5208
10 YR YLD – 3 = 2.34%
OIL + .21 = 50.36
GOLD + 3.30 = 1102.00
SILV + .18 = 14.95
Earnings reporting season continues with about one-quarter of S&P 500 companies scheduled to report this week. Among the gainers: Harley Davidson posted second quarter earnings and revenue that topped expectations, Travelers posted a second-quarter profit that was better than expected, due to fewer losses from catastrophes. Among the decliners: United Technologies issued a profit warning and announced that its aerospace and elevator units will be below expectations due to a strong dollar and China’s economic slump, IBM’s second quarter earnings fell 17% and revenue dropped 13%, Verizon posted better than expected earnings but revenue missed estimates, Lexmark swung to a loss and announced it will cut 500 jobs.
The big news in earnings came from some of the biggest names:
Apple and Microsoft. Apple sold 47.5 million iPhones, a 35 percent gain, in the period that ended in June. Analysts had anticipated 48.8 million shipments. Net income in the fiscal third quarter, which ended in June, was $10.7 billion, or $1.85 a share, while revenue rose 33 percent to $49.6 billion. Analysts on average had forecast third-quarter profit of $1.81 a share on sales of $49.4 billion. The gross margin was 39.7 percent, topping the company’s outlook for 38.5 percent to 39.5 percent. Apple shares down about 8 percent in after-hours trading. It probably won’t make a difference for Apple, but I hear Lindsey Graham is in the market for a new phone.
Even before the earnings report, Apple was having problems. Users experienced a problem with multiple iCloud services, including Apple Music, Beats 1 and the App Store, where outages knocked out service for up to 4 hours earlier today. Noe report on the cause of the outage.
Every day we hear about a new cyber-attack but this may be one of the scariest stories yet. Security experts are urging owners of Fiat Chrysler vehicles to update their onboard software after hackers took control of a Jeep over the internet and disabled the engine and brakes and crashed it into a ditch. A security hole in FCA’s Uconnect internet-enabled software allows hackers to remotely access the car’s systems and take control. Unlike some other cyberattacks on cars where only the entertainment system is vulnerable, the Uconnect hack affects driving systems from the GPS and windscreen wipers to the steering, brakes and engine control. The Uconnect system is installed in hundreds of thousands of cars made by the FCA group since late 2013.
Microsoft reported its largest-ever quarterly net loss, due a $7.5 billion writedown after the purchase of Nokia’s handset unit. Excluding the Nokia charge and costs related to job cuts, Microsoft said profit in the fourth quarter, which ended June 30, was 62 cents a share. Sales were $22.2 billion. Analysts on average projected profit of 58 cents on sales of $22 billion.
Yahoo reported second quarter revenue, excluding sales shared with partner websites, was little changed to $1.04 billion in the second quarter, the company said Tuesday in a statement. Profit, excluding items such as stock-based compensation, was 16 cents a share. Analysts projected, on average, sales of $1.03 billion and profit of 19 cents. And then Yahoo lowered third quarter revenue guidance.
The Federal Reserve has finalized the capital surcharge amounts for the nation’s largest financial firms, or systemically important financial institutions (SIFIs). For example, the surcharges range from 4.5% for JPMorgan to 1% for BNY Mellon. Taken together, the group’s capital cushion will be more than $200 billion larger than if the surcharge was not implemented. Note: The Fed offered a reprieve to GE Capital from more-intensive regulation, after the company promised to cut its assets by more than half.
The financial industry worries that when the Fed’s tightening plans take hold, a sell-off in the massive U.S. bond market could ensue, and be exacerbated by a lack of bank buyers willing to jump in. Banks, including primary dealers who act as market makers for US Treasuries, have cut their bond inventories in the past few years in response to tougher capital requirements, reducing a liquidity buffer for the fixed income market.
Private and public comments by Fed officials show that they do not share Wall Street’s degree of concern about liquidity, and do not believe that capital rules are solely to blame for the bond market’s growing tendency to seize up. Effectively, regulators are telling the industry it is the responsibility of banks, funds and other market players to protect themselves. The Fed’s assertive stance is setting the stage for more volatile fixed income markets, where liquidity droughts could be the price of doing business in bond markets. The message – in public addresses, reports to Congress, and even an investigation into market turmoil last October – is that less liquidity is a necessary consequence of regulatory reform and fitting for an economy that is getting ready for tighter monetary policy.
The Dodd Frank Act is 5 years old. Half a decade later, the debate around the law continues. Regulators are pushing to finalize still lingering projects. New government powers have yet to be tested. And lawmakers in both parties continue to question whether the law’s central goal, ensuring “too big to fail” is a thing of the past, was actually achieved. There are undoubtedly major parts of Dodd-Frank that are fully up and running. Perhaps most notable is the Consumer Financial Protection Bureau. Elsewhere, regulators have put in place new checks on financial derivatives, begun implementing new rules in the mortgage market and taken steps aimed at predicting and preventing broad new threats to the overall financial system. It is estimated that just 63 percent of Dodd-Frank rules have been finalized, with 21 percent of the required rules not yet even proposed. And the nation’s biggest banks still need to prove to regulators that they can safely be wound down in bankruptcy should disaster hit.
Citigroup’s consumer bank has been ordered to pay $700 million in relief to borrowers for illegal credit card practices. The Consumer Financial Protection Bureau said that about 7 million customer accounts were affected by Citibank’s “deceptive marketing” practices, which included misrepresenting costs and fees and charging customers for services they did not receive. Citibank told telemarketers to entice customers with a “free 30-day trial period,” but the bank would sometimes charge during the first 30 days anyway. Or customers were left with the impression that the “free” service would go away after 30 days if they did nothing. Instead, after a month, they started being charged regular fees. Citi charged some customers for services it wasn’t providing, such as credit monitoring. And while Citi was caught, that doesn’t mean they are the only company pulling these shenanigans on customers.
The Securities and Exchange Commission has opened an investigation into the companies with business links to FIFA. Reuters said that Nike is probably one of the companies being scrutinized by the SEC even though it has not been named or charged with any wrongdoing. That’s because the indictment of FIFA officials by U.S. prosecutors described a “$160 million, 10-year deal signed by “Sportswear Company A” that “matched exactly” the details of Nike’s 1996 deal in Brazil to become the footwear and apparel supplier and sponsor of the Brazilian national soccer team.
New York Department of Financial Services officials have subpoenaed several of the executives of Promontory Financial Group, a financial-services consultancy, including an executive who testified before Congress two years ago. It’s part of a long investigation into potential conflicts of interest at the firm related to its work for the British bank Standard Chartered, which was suspected of processing billions of dollars on behalf of Iran. The regulator is looking at whether Promontory, under pressure from the bank and its lawyers, sanitized a report to NYDFS to minimize the volume of allegedly illegal transactions.
Toshiba’s CEO is out after an accounting scandal. Toshiba’s president and CEO, Hisao Tanaka, has resigned after an internal investigation found the company has been cooking its books for several years. The company overstated its profit by $1.2 billion over several years, almost triple its initial profit.
Qualcomm is expected to conduct a strategic review that may result in the breakup of the company. The chipmaker is expected to announce plans to lay off more than 10% of its 30,000 employees. The expected layoffs are part of what is likely to be a strategic review of the company, which could lead to the eventual spin-off of its chip business from the highly profitable patent-licensing business
The National Oceanic and Atmospheric Administration (NOAA) reports global land and sea surface temperatures from January through June were 1.53 degrees Fahrenheit above the 20th century average, the highest since recordings started in 1880. June was the fourth month this year to break its monthly temperature record, along with February, March and May. And it marks the hottest six months on record. One side effect is that warming ocean waters are expected to result in a strong El Nino weather pattern in the second half of the year; this could bring some much needed rain to California and the southwest. While the state is in need of moisture, too much weather could lead to rain-related destruction. On Friday, heavy rains pounded the bone-dry Southern California region, washing out an elevated section of Interstate 10 near Desert Center, one of the major highways connecting California and Arizona. The Pacific is also expected to see more hurricanes and typhoons this season. So far in 2015, there have been four hurricanes compared to just two by this time last year.