Financial Review by Sinclair Noe
DOW + 183 = 18,024
SPX + 22 = 2108
NAS + 63 = 5005
10 YR YLD + .07 = 2.11%
OIL – .29 = 59.34
For the week, the Dow dropped 0.3%, the S&P 500 fell 0.4% and the Nasdaq was down 1.7%. May kicks off what has been the worst six months for stocks historically which has brought rise to the old saying “sell in May and go away.” Sometimes it works but no guarantees.
The Detroit 3 automakers reported solid April sales as new models and cheap loans lured even more buyers into what’s already a brisk-moving new-vehicle market. Fiat Chrysler reported sales jumped 6% in April, GM gained 5.9% and Ford rose 5%. Still, their stocks were mixed. Ford and GM were higher, Fiat Chrysler was down.
Merchants displeased with the high fees American Express charges them are permitted to steer customers toward less expensive cards without fearing retaliation from the credit card company. A Judge in Brooklyn federal court has ruled that American Express is not allowed to stop stores from offering discounts, rebates or other incentives for using lower-fee cards – an activity known as steering.
Construction spending fell in March to a six-month low as outlays on private residential construction spending declined sharply. Construction spending slipped 0.6 percent to an annual rate of $966 billion, the lowest level since September. The Institute for Supply Management (ISM) said its index of national factory activity was 51.5 in April, matching the March reading, which had been the lowest since May 2013. A reading above 50 indicates expansion. Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers’ Index fell to 54.1 in April from 55.7 in March. The Thomson Reuters/University of Michigan’s consumer sentiment index for April came in at 95.9, up from the previous month’s reading of 93.0 and the second highest level since 2007. Typically the Labor Department reports monthly non-farm payrolls on the first Friday of the month, but they will deliver the April Jobs Report next Friday.
Today is May Day, also known as International Workers’ Day. May Day has historically been a day when demonstrators rooted deeply in the labor movement call for workers’ rights. But in recent years, immigration reform and civil rights issues have been adopted. There are protests and rallies schedule today across the country, including New York, Chicago, Denver, Seattle, San Francisco, Los Angeles, and many other cities. This year, marches are planned in support of “Black Lives Matter,” a growing movement in the wake of a series of deaths of black men during police encounters. This afternoon, the city prosecutor in Baltimore announced that six police officers will face criminal charges in the death of Freddie Gray.
All major European markets except London, were closed today in observance of May Day, but currency trading never stops and the euro was up to a two-month high, for its best week since October 2011. The Dollar Index moved higher as gains against the yen and sterling offset weakness against the euro. In April, the euro was up by 1.7% on a trade-weighted basis, but is still down about 6.6% year-to-date. Crude oil prices were lower after logging their best monthly gains in six years in April.
The big news this past week was really a non-event. The Federal Reserve FOMC wrapped up a two-day meeting on Wednesday, and their statement on monetary policy didn’t have any real surprises, but that just lead to speculation about when the Fed might hike interest rates.
Warren Buffett and shareholders in his Berkshire Hathaway are gathering this weekend for the company’s latest annual meeting, but before “Woodstock for Capitalists” Buffett said he believes the Federal Reserve won’t be in any hurry to increase interest rates—in part because of the softer U.S. economy at the start of the year, but more so due to what’s going on in European bond markets, where many countries have negative interest rates. Recent calculations by Goldman Sachs showed that more than $2.1 trillion of outstanding euro zone sovereign debt now has a negative yield. So, the disparity between the Federal Reserve and other central bankers is a valid argument for the Fed waiting to increase rates.
Still, the Fed has maintained a near Zero Interest Rate Policy for about 7 years and there is an expectation that they will raise their target funds rate simply to begin to “normalize rates.” Historically, U.S. short-term interest rates have never been this low for this long, and some people believe the Federal Reserve will start to slowly raise their target rate simply to return to normal or at least bring it closer to the mean. That makes sense, but the Fed addressed this idea in the last line of their statement, which read: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
And that sounds like they are willing to make sure the recovery takes hold, even if the economy overheats just a bit, before they will raise rates. Historically, the Fed has followed its dual mandate of maximum employment and price stability, and raised rates only when economic conditions forced them too. In the past, once they began the process of raising rates from a stable, relatively low value, they have continued to do so at a steady clip. So, the next place to look is the Fed Funds Futures rates, which tells us where people are putting their money with regard to a rate hike. The futures market shows the Fed keeping rates at the zero to quarter percent range at least through September, then about a 60% chance of a small increase in December, followed by small increases, probably one-eighth of one percent per month, until rates are around .75% in September of 2016. The economy has been slowly improving and should be able to handle small, incremental, well-telegraphed increases. The difference between 0.25%, or 0.50% rates, or even 0.75%, is minimal; and that is still historically low; business and the economy shouldn’t be materially harmed by such a move. Wall Street will scream bloody murder and flop about, but again it probably won’t do any material harm.
Equity markets love free money, and again this week we saw $4.5 billion pulled from US equity funds, the 10th outflow in the last 11 weeks. The money isn’t going under the mattress; international funds have seen big inflows this year. Last week about $400 million moved to European funds, where the ECB has been very accommodative as of late; that doesn’t represent a big flow of funds, but last week was the lowest level in the past 15 weeks.
Tesla Motors has unveiled Tesla Energy – a suite of batteries designed for households, businesses, and utilities – as it shifts into calling itself an energy innovation company in addition to being an automaker. Tesla will build the stationary energy storage systems using the same basic batteries it will produce for its vehicles at its gigafactory in Nevada. Tesla’s home battery, named Powerwall, is a rechargeable lithium-ion model that mounts on the wall and comes in 7 kilowatt-hour or 10 kilowatt-hour versions. Deliveries will begin in late summer at prices starting from $3,000 for the smaller model and $3,500 for the larger unit. The larger battery would keep an average-sized home running for a day.
In the near term, the market for home energy storage will depend on how states regulate homeowners’ ability to buy and sell electricity. Net metering, currently available in 43 states, allows residential customers to sell excess generation back to their utility company at retail rates. As long as net metering continues, consumers will have little need to buy an energy storage system because they can sell the excess solar power they generate rather than store it. But the policies are being challenged by utility companies that say it undermines their ability to recoup grid infrastructure costs, and some utilities have started charging for being connected to the grid, even if a customer is feeding more power back to the grid than they are consuming. So, thanks to the utilities being a bit greedy, they have opened the door for Tesla technology that will allow them to go completely off grid. Or alternatively, battery storage would allow such people to maximize the value of the electricity they sell back to the utility.
The major upshot of more and cheaper batteries and much more widespread energy storage could, in the long term, be a true energy revolution as well as a much greener planet. And while most people have focused on batteries for residential use, the bigger market is at the utility scale. It means one that can rely less on fossil fuels and more on renewable energy sources like wind and, especially, solar, which vary based on the time of day or the weather. Battery energy storage means utilities can manage peak loads and improve grid reliability.
Another reason why this energy storage idea is so important for Tesla is that a green household could capture solar energy during the day, store it, and then use the battery to charge an electric vehicle overnight. Elon Musk is also chairman of SolarCity, and energy storage is an enabling technology for solar. It allows customers to meet more scenarios economically. Clever.
More than seven years after the global financial collapse, regulators and investors are still working through a mile-high pile of lawsuits and other civil actions, and it seems like the fines keep on coming. Since the crisis, banks and other institutions have paid more than $150 billion in fines, settlements and other penalties, according to a tally by the Financial Times. That compares with the roughly $700 billion in profits generated by U.S. banks between 2007 and 2014. So where have all the payments gone? The biggest have landed in the Justice Department, which has amassed some $50 billion. Other heavy collectors include the FHFA, Fannie Mae, HUD and the SEC. Among the banks paying the biggest amounts, BofA tops the list – with nearly $58 billion, followed by JPMorgan ($31 billion), Citigroup ($12 billion) and Wells Fargo ($9 billion).