Financial Review

A Question for the New AG

Financial Review by Sinclair Noe

DOW + 139 = 17,868
SPX + 21 = 2068
NAS + 61 = 4787
10 YR YLD + .04 = 1.99%
OIL – 2.10 = 50.76
GOLD – 5.00 = 1234.70
SILV – .06 = 17.01

Small-business sentiment slipped in January on a decline in optimism over sales growth and business conditions, according to a gauge released Tuesday. The National Federation of Independent Business said its small-business optimism index fell 2.5 points to 97.9, with seven out of 10 components declining.


Good news if you are looking for a job. The Labor Department said job openings surged to 5.03 million in December, the highest level since January 2001, from 4.85 million in November. Hiring jumped to a seven-year high and the number of job seekers for every open position, a key measure of labor market slack, fell to 1.73 in December, the lowest since 2007. The bad news is that there are still about 9 million people looking for a job.


Wholesale inventories barely rose in December, up just 0.1%. Together with data last week showing a 0.3% fall in manufacturing inventories in December, today’s report suggests the boost to GDP growth from restocking in the fourth quarter was probably not as large as initially thought.


Halliburton is cutting as many as 6,500 jobs. The oil company, facing up to the reality of crude oil prices, announced that it’s slashing between 6.5% and 8.5% of its global workforce. The cuts are doing little to assuage investors; Halliburton’s stock is down 3% today.


In the past 2 weeks oil prices bounced 20% from lows around $44 a barrel. The recent surge in oil prices is just a “head fake” and West Texas crude as cheap as $20 a barrel may soon be on the way, according to a new research report from Citigroup’s global head of commodity research. The prediction is that oil will drop to $20, then bounce back to $75, all this year. It’s the stuff of a commodity trader’s dream. Wall Street lusts for it. Hedge funds can hardly contain themselves at the mere thought of it. So whose book is Citi talking up?


If the price of oil stays in the current range, liquidity for much of the oil patch will run out in 2016, and that’s when waves of defaults will begin to cascade through bank and private-equity balance sheets. And beyond that, investment banks stand to lose a lot: in 2014, Citi earned $492 million in energy-related investment-banking revenues – more than any other bank; More even than JP Morgan. So Wall Street must have a V-shaped recovery in place by 2016, or else.


Tomorrow we will get a better idea of the direction of oil prices, at least for the short-term, when the Department of Energy releases its weekly report on inventories. US commercial crude-oil supplies stood at a record high of 413.1 million barrels in the week ended Jan. 30. Analysts are estimating that inventories will hit a new record high, up 4 million barrels for the week. Oil dropped, but closed above $50.


So, what are Americans doing with some of the money they’re saving from cheap gas? They are buying more fuel.  Demand is up. At the same time, faster economic growth and a big influx in hiring over the past year means more Americans are now taking part in the daily commute. According to Nicolas Colas chief market strategist of ConvergEx: “We’ve finally discovered where American consumers are spending some of the savings from lower gasoline prices: they are buying more gasoline.” Plunging prices are encouraging Americans to drive more often and buy more trucks. The best-selling vehicle in the US in December was the Ford F-150; SUVs were also popular. Apparently, when gas prices drop, we forget all about conservation.


The squeeze on U.S. farmers is getting worse as low crop prices and rising costs erode incomes that not long ago were the highest ever. Farm income in the U.S., the world’s top agricultural producer and exporter, is poised to drop for a third straight year in 2015. While raising livestock remains profitable, as tight meat supplies keep prices high, growers of corn, soybeans and wheat saw crop and land values fall faster than many of their costs.


Net-cash income from all farm activity will drop 22% to $89 billion, the biggest drop since 1932 and the lowest since 2009, the U.S. Department of Agriculture said in a report today in Washington. Last year’s slump was 12% to $115 billion. Net income, including the value of inventory and non-cash income, was forecast to drop 32% to $73 billion, with expenses at a record $370 billion.


The drought in California continues. We’ve been hearing a lot about extreme weather lately; historic snowfall in Boston, and last weekend saw more than a foot of rain in some parts of northern California. Water is water and anything can make some difference but the rain last weekend was of the tropical variety and it didn’t result in much snow. California meets most of its water needs from the snowpack; as the snow melts in the summer months, it replenishes the reservoirs. For now, the reservoirs remain far below capacity. And the rain in northern California didn’t make it down to southern Cal. Rainfall totals in the south are anemic, and falling further behind. California has two more months in the traditional winter rain season. Trends could flip and several warm tropical storms could barrel into Southern California, evening the score. But for now, residents of the Southland are getting nervous.


Europe is powering ahead with wind. Europe already has quite a lot of wind turbines, and it seems to be the preferred way to generate electricity. Across the 28 countries that make up the European Union, 11,791 megawatts of wind power was connected to the grid in 2014—worth up to €18.7 billion ($21.1 billion)—according to a report by the European Wind Energy Association. New coal added 3,305 megawatts, while new gas capacity totaled 2,338 megawatts—less than half of the wind installed. Germany and the UK accounted for 60% of the new wind installations. The EU could now produce 10.2% of the electricity it needs from wind, up from 8% the year before.


Hoping to defuse a standoff that has set Europe and financial markets on edge, Greek officials intend to propose a detailed compromise plan at an emergency meeting with creditors on Wednesday in Brussels. The plan will include the possibility of tapping part of a bailout loan disbursement of $7.9 billion, which Athens had been saying it would reject. Greece still plans to reject some of the harshest austerity conditions attached to Greece’s bailout loans, but will propose retaining about 70% of the terms. Now, the proposal was just tossed out there and there won’t be a meeting until tomorrow, but already Germany has shot down the idea.


Another big meeting in Europe tomorrow; in Minsk, Belarus, the leaders of Germany, France, Ukraine and Russia are due to meet to try to hammer out a peace agreement. Failure to reach an agreement will lead to further EU economic sanctions against Russia, which were delayed at yesterday’s EU foreign minister’s meeting to allow time for the diplomatic offensive tomorrow. Failure to achieve a negotiated peace might draw the US into the conflict, at least as an arms supplier to Ukraine.


Hopes of an orderly resolution to Puerto Rico’s debt crisis suffered a heavy blow after a court voided the island’s restructuring law, raising fears it may be heading for a longer, messier debt overhaul. A US federal judge ruled that the commonwealth’s so-called Recovery Act, which made some of Puerto Rico’s agencies eligible for court-supervised debt restructuring, violated the US constitution by allowing a state government to modify municipal debt. The decision will likely result in a resolution being dragged out over a longer period of time, having the administrative costs incurred eat into the ultimate recovery for the bondholders. Puerto Rico is expected to appeal the ruling, kicking off lengthy litigation with a hard to predict outcome and possibly delaying for months the matter’s final resolution.


In the final stages of a long-running investigation, the U.S. Department of Justice has recently informed Barclays, JPMorgan, the Royal Bank of Scotland and Citigroup that they must plead guilty to criminal charges that they manipulated the prices of foreign currencies, NYT reports. Last November, regulators fined five major banks a total of $3.4B for failing to stop traders from trying to manipulate the foreign exchange market, following a year-long global investigation.

In a separate probe disclosed today, the NY Department of Financial Services was reported to have sent subpoenas to Goldman Sachs, Credit Suisse, BNP Paribas and Societe General, expanding its investigation of whether the banks’ electronic forex trading platforms allowed them to front-run clients. At issue is a latency period between the time an offer is floated and accepted. The department is already probing Barclays and Deutsche Bank over similar concerns and installed monitors at those banks in recent months.


Reuters reports an unnamed official says HSBC could see its 2012 deferred prosecution deal with US authorities over anti-money laundering reopened as a result of separate, ongoing probes into the bank’s alleged role in manipulating currency rates and helping Americans evade taxes. Obama’s nominee for attorney general, Loretta Lynch negotiated a deal with HSBC two years ago that saw it avoid criminal charges but Lynch says DoJ still has powers to act. In the 2012 settlement HSBC was fined $1.9 billion over money-laundering with Mexican drug cartels, including the notorious Sinaloa Cartel, and breaches of US sanctions; it is the largest money laundering case in history; the fine equals about 5 weeks profits. No individual at HSBC was fined or charged. The harshest punishment appears to be partial deferral of some bonuses.


Lynch has sent a letter to Senator Chuck Grassley of the Senate Judiciary Committee, writing that the 2012 Deferred Prosecution Agreement (DPA) “addresses only the charges filed in the criminal information, which are limited to violations of the Bank Secrecy Act for failures to maintain an adequate anti money-laundering program and for sanctions violations. The DPA explicitly does not provide any protection against prosecution for conduct beyond what was described in the Statement of Facts.”


Lynch is scheduled to replace AG Eric Holder, who essentially avoided prosecuting big banks out of fear that it might create global uncertainty if a bank was criminally prosecuted and lost its charter. I’m not sure how being a bagman for drug cartels and tax cheats promotes global financial stability. Maybe that’s something the new AG can answer.





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