Financial Review

King v Burwell Plan B

Financial Review by Sinclair Noe

DOW – 2 = 17,764
SPX + 0.87 = 2080
NAS – 7 = 5013
10 YR YLD + .04 = 2.42%
OIL + 1.81 = 59.95
 

Each month the Labor Department reports on nonfarm payrolls, usually that report comes out on the first Friday of the month; a few days later they release the JOLT survey, Job Openings and Labor Turnover from the prior month. Job openings at US workplaces rose to 5.3 million in April from 5.1 million in March. That’s the most job openings in 14 years, and those job openings were spread among industries, including health care, retailers and providers of professional services. Now, keep in mind that this is the Job Openings from April, and we just saw the May Jobs report, which showed that the unemployment rate ticked up from 5.4% in April to 5.5% in May; and the reason the unemployment rate was higher is because more people entered the labor pool. Most of the nearly 400,000 new job seekers were under the age of 25.

 

While the number of job openings soared, employers are still taking their time filling them. Total hiring in April fell to 5 million from 5.1 million. The disparity between more openings and flat hiring suggests employers are being picky about new hires. Many companies say they are having difficulty finding qualified workers. They may not be offering high enough wages. Average hourly pay rose just 2.3 percent in April from a year earlier, much lower than the roughly 3.5 percent gains typical in a healthy economy.

 

With 8.5 million unemployed people in April, there were about 1.6 potential job seekers per opening, below March’s ratio of 1.7. In April 2014, there were about 2.2 potential seekers per opening. The number of separations, such as quits and layoffs, dropped to 4.8 million in April from 5 million in March. This indicates that fewer people have confidence to quit their current job to find another job; in other words, people don’t necessarily think the grass is greener on the other side of the fence. In the year that ended in April, employers added a net 2.8 million jobs, representing 60 million hires and 57.2 million separations.

 

The Commerce Department reports wholesale inventories rose 0.4% in April. Inventories of durable goods, such as autos and machinery, increased 0.1%. Meanwhile, inventories of nondurable goods rose 0.8%. Wholesale sales rose 1.6% in April, following a drop of 0.3% in March. Inventories are a key component of gross domestic product changes. At April’s sales pace it would take 1.29 months to clear shelves. An inventory-to-sales ratio that high usually means an unwanted inventory build-up. Conversely, it could show confidence from businesses anticipating better sales in the second quarter.

 

If it sounds like a mixed bag of economic news, well it is. The economy is showing signs of improvement but not enough to achieve escape velocity. And the stock market can’t decide which way to go. Last week stocks traded in their tightest weekly range in 21 years. The S&P 500 index has not moved more than 1 percent in either direction in 14 of the past 15 sessions, and the spread between the highest and lowest close this year has been only 6.9 percent, the narrowest since 2006. About 59 percent of stocks closed above their 200-day moving averages at the end of last week, the lowest percentage in eight months. The lack of breadth is not an indicator of a market top, rather it is a sign of consolidation. At some point, the market will decide which way it is moving but for now it is just grinding sideways.

 

The bond market seems to have no trouble finding direction – it is going down. The global bond market has been sliding for a couple of months, and in the past couple of weeks, US Treasuries have joined in on declines. If you were waiting for confirmation, we now have it; speculative-grade notes (or junk bonds) tend to have shorter maturities and fatter cushions of extra yield over benchmarks than higher-rated bonds, features that can protect the market in periods of rising rates and climbing inflation. And so the high yield debt market has shown some resiliency until right about now. Investors are starting to flee, yanking $1.5 billion from the two biggest high-yield bond exchange-traded funds over the past week.

HSBC will cut costs by as much as $5 billion within two years, selling its units in Brazil and Turkey and laying off as many as 50,000 jobs, or about 20% of its workforce. It will cut its assets by a quarter, or $290 billion on a risk adjusted basis by 2017, and slice $140 billion from its investment bank. HSBC also pledged a new era of higher dividends.

 

German prosecutors have raided Deutsche Bank offices in Frankfurt in a search for evidence related to client securities transactions, as Germany’s largest lender struggles to break free of regulatory issues that contributed to an overhaul of its top leadership this week.

The raid was apparently tied to a tax rebate strategy by some of the bank’s clients known as “dividend stripping”, in which a stock is bought just before losing rights to a dividend, then sold, taking advantage of a now-closed legal loophole which allowed both the buyer and the seller to reclaim capital gains tax.

 

General Electric has agreed to sell its private-equity-lending unit to Canada’s largest pension fund in a deal valued at about $12 billion. GE is largely getting out of the banking business. With the deal, GE has unveiled $55 billion worth of asset sales, putting the company on track to reach its goal for $100 billion in sales by the end of the year.

 

Fiat Chrysler Automobiles’ CEO Sergio Marchionne is reaching out to hedge funds and other potential allies to prod General Motors into a merger. Marchionne has been emboldened by recent successes of activist investors at GM and sees them as a means to consolidate the fragmented auto industry. So far, GM has resisted all of Fiat Chrysler’s entreaties, including a merger appeal to Chief Executive Mary Barra earlier this year. GM’s annual shareholder meeting is taking place today.

 

Meanwhile, Federal prosecutors are reportedly weighing criminal wire fraud charges against General Motors over the company’s failure to recall vehicles equipped with faulty ignition switches. The Wall Street Journal reports US prosecutors in New York are considering other possible charges and have not made a final decision. Authorities hope to reach a settlement with the automaker by the end of summer or early fall.

 

You know about the extreme drought in California. Governor Jerry Brown declared a state of emergency and set aside $687 million to help households, farmworkers, and others struggling in drought-devastated counties. More than $320 million sits unspent in government bank accounts more than a year after lawmakers voted to use the money to provide water, protect wells from contamination and upgrade outdated water systems.

 

The Obama administration has announced it will forgive federal student loans owed by Americans who can prove their schools broke a state law, such as false advertising, fraudulent recruiting or other deception, to lure them to apply and borrow funds. The move, which could potentially involve billions of dollars, is designed to grant debt relief to former students of now-bankrupt Corinthian Colleges, which lied to prospective students about its graduates’ job success. The forgiveness push, though, will likely stretch far beyond the institution.

 

The Supreme Court is expected to hand down a decision sometime this month in the case of King v. Burwell, which challenges the availability of tax credits to discount the cost of health insurance in at least 34 states. Opponents of the law say it allows subsidies in no more than 16 states that created insurance marketplaces, called exchanges. An adverse Supreme Court ruling would throw insurance markets into disarray, and might spell the end of the Affordable Care Act, or Obamacare, at least in its current form. More than 6 million consumers risk losing discounts on their monthly premiums if the court rules against Obamacare.

 

And so today, President Obama made his case against King v. Burwell. Obama says the Supreme Court shouldn’t have taken up the case challenging the federal subsidies, and that Congress could settle the issue at the heart of the case with a “one-sentence” change to the law. The section states that subsidies will be available for those who purchase insurance through exchanges “established by the state.” This is an issue, because three dozen states refused to set up their own exchanges and left it up to the federal government. Republicans, however, see the lawsuit as an opportunity to undo what they view as Obamacare’s most onerous provisions, or undo Obamacare completely; and it might just happen.

 

If the court ruled against Obamacare, most experts believe the health insurance market would suffer what’s called a “death spiral” without the subsidies. Healthy people in states without subsidies would drop their coverage because it would start costing too much. Then insurance would become more expensive, because premiums would go up with healthier people dropping out of the pool. Then more people would drop their coverage as it got even more expensive. Then premiums would go up once again. This downward spiral could destroy Obamacare’s advances with respect to private health insurance. But the threat of this descent into chaos could also be what saves Obamacare. The Supremes are well aware that if they rule the subsidies are not allowed, the law would basically implode and millions of real people would lose their insurance coverage, and there is a good chance several health insurers would collapse, and that doesn’t even begin to cover the explosion in litigation that would follow.

It’s a fool’s game to predict how the Supreme Court will rule, and so it was most unusual to hear the president speak out against a case that has not yet been decided. I don’t think this was an attempt to sway the justices; they have likely made up their minds by now. Rather, after the decision is announced, no matter which way the Supremes decide, there should probably be a Plan B.

 

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