Place Your Bets
A full house of Fed heads, mountains of consumer debt, place your bets on the Panama Papers, and leave the driving to your robot.
Financial Review by Sinclair Noe for 04-07-2016
DOW – 174 = 17,541
SPX – 24 = 2041
NAS – 72 = 4848
10 Y – .06 = 1.69%
OIL – .33 = 37.42
GOLD + 18.20 = 1241.50
Federal Reserve officials seemed evenly split at their March meeting on the key question of whether to raise interest rates; policymakers were also split on whether the recent pickup in core inflation would prove persistent. Global risks also seemed to leave the FOMC flat-footed. Ultimately the Fed decided there was no urgent reason to hike rates at the March meeting and there doesn’t seem to be agreement on an April hike either.
Later this evening there will be a rare group interview including Fed Chair Janet Yellen, plus her three predecessors – Ben Bernanke, Alan Greenspan, and Paul Volcker; that’s 37 years of Fed Chairmen. The topic? “How the chairs’ philosophies and personal beliefs impact decision making with international implications.” Please try to curb your enthusiasm.
The number of Americans filing for unemployment benefits fell last week, suggesting the labor market continued to strengthen despite tepid economic growth. Initial claims for state unemployment benefits declined 9,000 to a seasonally adjusted 267,000 for the week ended April 2. Jobless claims have now been below 300,000, a threshold associated with healthy labor market conditions, for 57 weeks, the longest stretch since 1973.
Americans added to their debt at a steady solid pace in February. The Federal Reserve reports consumer credit grew at a seasonally adjusted annual rate of 5.8%, for a gain of $17.2 billion, compared to a 5% gain in January. Consumer credit has been consistently solid over the past year with no monthly gains below 5%. Total consumer borrowing, which does not include mortgage debt, is now $3.57 trillion. There was a a 6.6% gain in the category that covers auto loans and student loans. This was a bit below the 7% gain in January. Pent-up demand for new vehicles and student debt has been two big driver of this new strength in consumer credit. Credit card borrowing rose 3.7% in February after a 0.3% drop in the prior month.
More than 40% of the roughly 22 million Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, according to a quarterly snapshot of the Department of Education’s $1.2 trillion student-loan portfolio. In a survey by Citizens Bank, A startling 6 in 10 millennials said they have no idea when their loans will be paid off and more than a third don’t even know the interest rate they are paying. The report says that on average, graduates owed about $41,000 in student loans.
Apollo Education reported a Q2 adjusted EPS loss of -31 cents continuing operations, a much wider loss than consensus of -10 cents, and said it will not provide future guidance at this time.
Mortgage rates fell to the lowest level since February 2015. Mortgage provider Freddie Mac reports the 30-year fixed-rate mortgage averaged 3.59% in the April 7 week, down from 3.71%. The 15-year fixed-rate mortgage averaged 2.88%, down from 2.98%.
One of the trends of 2016 has been a move from stocks to bonds. According to data from ETF.com the 10 exchange-traded funds that have suffered the biggest outflows this year are all equity funds of some shape or form. Meanwhile, six of the 10 biggest recipients of inflows are bond products from across the spectrum, with everything from Treasuries to high-yield bonds attracting fresh cash. In March, stocks staged a rebound but that isn’t holding in the first few trading days of April.
First quarter earnings reporting season kicks off Monday when Alcoa posts results. Don’t look for earnings to lift the market. Stephen Parker of JPMorgan’s Private Bank told CNBC: “We need to see what companies are saying about the future and, if they can paint a better picture about the back half of the year now that oil has stabilized, that the dollar has come off, that’s going to drive markets higher.” So, that sounds like they are giving up on a decent first quarter earnings season.
Icelandic Prime Minister Sigmundur Gunnlaugsson announced yesterday he was stepping down after Panama Papers revelations that he and his wife held a shell off-shore corporation. So, who is the next world leader who will fall? In Ireland you can bet on almost anything, Irish bookmaker Paddy Power Betfair PLC has opened betting lines on which head of state could be the next to go. Argentina’s President Mauricio Macri is the favorite at 8-1 odds. Paddy Power also has laid odds that the President of Pakistan Nawaz Sharif will leave at 10-to-1 and Ukraine’s President Petro Poroshenko almost as good at 12-1. British Prime Minister David Cameron is listed at 20-1 odds for being forced from power.
The European Union has decided it is best to get in front of the mob and call it a parade. The EU tax regulators have vowed to stop the kind of tax avoidance uncovered in the Panama Papers scandal. The EU effort to close loopholes includes automatic exchanges of tax deals between countries and companies and they’re working on an automatic system for sharing firms’ tax data between all tax authorities.
The Panama Papers may have an impact on US banking. The U.S. Treasury Department intends to issue a long-delayed rule forcing banks to seek the identities of people behind shell-company accounts, in the wake of the “Panama Papers” scandal which exposed global wealth hidden from tax authorities via offshore vehicles. A department spokesman said the law would “soon” be turned over to the White House for review and issuance, but did not confirm a timetable for the initiative. The regulation is designed to close a loophole allowing “secretive financial maneuvers” in the U.S. banking system. Under current policy, the names of company heads can be obscured as identities are not required when limited liability corporations are registered with certain states. The change would force institutions to identify each individual who owns 25 percent or more of the equity interests. The issue came into the spotlight after Mossack Fonseca was found connected with M.F. Corporate Services Wyoming LLC – a Wyoming-based corporation now being audited by the state, in addition to several other companies in the state and states with similar anonymity policies – which was allegedly being used as a tax haven.
You may be wondering why the US Treasury waited until the Panama Papers to push forward this rule about knowing who is opening a bank account. It seems that Panama and Switzerland are not the only places that allow banking secrecy and anonymous corporate off-shore shell companies. The center of that universe is in the US.
Alibaba says that it became “the largest retail economy in the world” at the end of its fiscal year on March 31, “as measured by gross merchandise volume on its China retail marketplaces.” The company has yet to declare its fourth quarter and full year financial results, but the announcement makes it clear that Alibaba surpassed the $482 billion figure reported by Wal-Mart for its fiscal year ended Jan. 31.
Struggling teen apparel retailer Pacific Sunwear filed for Chapter 11 bankruptcy protection today. The Anaheim, California-based retailer listed assets in the range of $50 million to $100 million, and liabilities of between $100 million and $500 million The company’s shares fell as much 42 percent to a record low of 5 cents in early morning trading.
Will a self-driving car be smart enough to pull over to the side of the road in a dust storm? Alphabet is expanding its testing of self-driving cars to the Phoenix, Arizona metro area. The company’s Google unit has conducted driverless vehicle testing for six years in Mountain View, California, where it is based. Google said its test drivers recently began driving four Lexus RX450h SUVs around the Phoenix area to create a detailed map of streets, lane markers, traffic signals and curb heights. That information will then be fed into the technology embedded in the autonomous cars so they know how to navigate the city on their own.
About a dozen trucks from major manufacturers like Volvo and Daimler just completed a week of largely autonomous driving across Europe, the first such major exercise on the continent. The trucks set off from their bases in three European countries and completed their journeys in Rotterdam in the Netherlands yesterday. One set of trucks, made by the Volkswagen subsidiary Scania, traveled more than 2,000 km and crossed four borders to get there. When trucks autonomously follow one another, it’s called platooning; they’re connected by wifi and they leave a much smaller gap between vehicles than when humans are at the wheel, essentially like Nascar racers drafting behind a vehicle. Platooning can reduce fuel use by up to 15%.
While self-driving cars from Google or Ford get most of the credit for capturing the public imagination, commercial uses for autonomous or nearly autonomous vehicles have been quietly putting the concept to work in a business setting. Turns out that John Deere is the largest operator of autonomous vehicles for the time being. The self-driving technology featured on John Deere tractors is less technically complex than fully driverless cars. And for now, the tractors are still supposed to have a driver at the wheel, even if they never touch it. One reason for the rapid advance in autonomous tractors – they are usually operated on private land and that means fewer regulations and fewer strange things that come around the corner. Also, the robots can drive a more precise straight line than human counterparts. Crops are generally planted in one long row after another, and farmers want to make sure they use up all their land.
I know what you’re thinking, and the answer is yes. They also make robotic lawn mowers.