Financial Review

Where Robots Fear to Tread

ECB Day and Draghi fires the bazooka. Also, the fifth anniversary of Fukushima.

Financial Review by Sinclair Noe for 03-10-2016

DOW – 5 = 16,995
SPX + 0.31 = 1989
NAS – 12 = 4662
10 Y + .04 = 1.93%
OIL – .36 = 37.93
GOLD + 19.20 = 1273.10


The European Central Bank cut all three of its interest rates and expanded its asset-buying program this morning, delivering a bigger-than-expected dose of monetary stimulus to boost the economy and stop ultra-low inflation becoming entrenched. The ECB forecasts that inflation in the Eurozone will run at 0.1% for 2016, and the economy is expected to grow at a sluggish 1.4% pace. The ECB cut its deposit rate deeper into negative territory, charging banks -0.4% for parking their cash, and cut its main refinancing rate to zero from 0.05 percent. They also increased monthly asset buys to 80 billion euros from 60 billion euros, exceeding expectations for an increase to 70 billion. Hoping to boost lending, consumption and inflation, the ECB said it would also start buying corporate debt at a rate of $5.6 billion a month. That works out to nearly 90 billion euros a month in corporate and sovereign debt purchases.


And the ECB will also launch four new rounds of cheap loan packages, to be extended by banks to the real economy, essentially the central bank is paying bankers to lend to businesses and households. There is no question that Draghi is throwing an enormous amount of money at the problem, again. You have to wonder if there might be better ways to spend that money. And what happens if this latest round of stimulus doesn’t get the job done?


 The Stoxx Europe 600 Index surged on the news but faded and government bonds rose. Investment grade corporate bonds also got a big boost. Today’s rate cuts and quantitative easing moves add to a wave of global monetary stimulus this year that includes a lowering of Chinese lenders’ reserve requirements and Japan’s introduction of a negative interest rate. The International Monetary Fund said Tuesday that volatile financial markets and low commodity prices were heightening risks for the global economy.


An unexpected rate cut by New Zealand’s central bank (by 25 bps to 2.25%) triggered a big slide in the kiwi today and sparked talk of a global currency war as countries look to revitalize their economies in a world of slow growth. Meanwhile, South Korea’s won weakened slightly after the Bank of Korea opted to keep its benchmark interest rate unchanged at 1.5%, although that decision was mostly anticipated.


The British pound continues to be undermined by the possibility that the U.K. could exit the European Union.  A referendum on the issue will be held on June 23. Expect lower prices for the pound in advance of the referendum. The thirty year Treasury bonds are higher on the belief that the expanded ECB stimulus is inflationary, which affects the long end of the yield curve the most. The US dollar continues to be supported by bullish interest rate differentials. The euro fell around 1.3% against the dollar; the euro has been the world’s worst-performing major currency over the past month. The long term trend for the dollar is higher.


The number of Americans filing for unemployment benefits declined 18,000 to a seasonally adjusted 259,000 for the week ended March 5, the lowest reading since mid-October. So far, the labor market remains on strong footing, with nonfarm payrolls increasing by 242,000 jobs in February. A tightening labor market and firming inflation could see the Federal Reserve gradually raising interest rates this year. Economists are split over how aggressively the Federal Reserve will signal its next interest-rate move when policy makers meet on March 15-16. The Federal Open Market Committee will publish its policy statement Wednesday, together with updated quarterly economist forecasts and projections of the expected path of policy. Chair Janet Yellen will also hold a press conference Wednesday.


An additional million homeowners regained equity in 2015, bringing the number of mortgaged properties with equity to 91.5% or 46.3 million. Corelogic reports there were still 4.3 million properties with negative equity in the fourth quarter, representing an increase of 2.9% compared to the third quarter. But that was 19.1% lower than in the fourth quarter of 2014. The 8.5% share of underwater mortgages at the end of 2015 compares to a peak of 26% in the fourth quarter of 2009. Arizona ranks fourth among states with the highest percentage of negative equity properties; 14% of Arizona homes are still underwater.


Prosecutors have charged Brazil’s former President Lula da Silva with hiding his ownership interest in a beachfront apartment. Prosecutors say Lula’s concealment constitutes a form of money laundering, which is a criminal offense. Lula was accused last week of giving out favors in return for corporate donations and speaking fees, prompting allies and opponents alike to call for demonstrations. Protégé and successor, President Dilma Rousseff, meanwhile, is herself fighting off impeachment proceedings.


The story of 1MDB continues to spiral down. Investigators with the FBI and Justice Department have subpoenaed Tim Leissner, formerly of Goldman Sachs, and their lead guy on the Malaysian sovereign wealth fund, 1MDB, between 2012 and 2013. Goldman arranged a series of bond sales for 1MDB and charged fees of 9.1%, nearly double the norm. Goldman pocketed $593 million and about $700 million somehow ended up in Malaysian Prime Minister Najib Razak’s personal account. It’s estimated that somewhere between $2 billion to $4 billion of funds belonging to the people of Malaysia has been looted. And just to make sure everyone’s palms were greased, Goldman Sachs hired the daughter of and ally to the Malaysian Prime Minister to work for the bank at the time the deals were set up; which would technically be considered a bribe. Once upon a time, Malaysia was considered an democratic success story, with a stable currency and a steady and growing economy – and then Goldman Sachs came along.

Nasdaq has agreed to buy the International Securities Exchange from Deutsche Borse for $1.1 billion. ISE operates three electronic options exchanges – ISE, ISE Gemini and ISE Mercury – that serve as venues for more than 15% of trading in U.S. options. With those, Nasdaq would have six exchanges handling 38% of U.S. volume, taking the market lead from CBOE. The transaction could also help Deutsche Boerse fund another acquisition. The Frankfurt-based company is in merger talks with London Stock Exchange Group Plc.


The European Commission has approved Teva Pharmaceutical Industries’ $40.5 billion acquisition of the generics activities of Allergan conditional on a number of divestments, notably Allergan businesses in Britain and Ireland. The Commission said it had concerns that the merged entity would have faced insufficient competition for a number of generic pharmaceuticals.


Twitter is sweetening its employee compensation packages to stem a talent drain, a pressing move that may be followed by other tech firms with sinking share prices. Over the past month, the social media company has been offering additional restricted stock across the company, extending from the upper ranks to junior-level staff. Since the fall, Twitter has also been doling out cash bonuses to some employees ranging from $50,000 to $200,000.


Looking to gain an edge in the auto industry’s self-driving race, Toyota has recruited the entire staff (16 employees) of Jaybridge Robotics, a small Massachusetts-based autonomous-vehicle company. The move reflects a trend among auto industry companies to rapidly build their R&D skills by taking over small and specialized companies, or raiding a company’s workforce. Toyota last year pledged to invest $1 billion into artificial intelligence research, with a big focus on autonomous vehicles.


Beginning this month, Honda will compensate U.S. dealers for depreciation costs of vehicles that cannot be sold due to the massive recall linked to potentially faulty air bag inflators made by Takata. According to Automotive News, the company will also provide financial assistance to offset floor-planning costs resulting from the temporary suspension of sales at Honda and Acura dealers. In January, American Honda ordered a stop-sale on 1.7M new and used cars from model years 2007-2015.


Five years ago, one of the worst earthquakes in history triggered a 50-foot high tsunami that crashed into the Fukushima Daiichi nuclear power station causing multiple meltdowns. Nearly 19,000 people were killed or left missing and 160,000 lost their homes and livelihoods. Today, about 100,000 people are still displaced. The radiation at the Fukushima plant is still so powerful it has proven impossible to remove the extremely dangerous blobs of melted fuel rods. Japan has been sending robots into the core of the Fukushima nuclear reactor to retrieve dangerous melted fuel rods, only to have them die in droves. When they approach the radioactive rods, the robots’ wiring gets short-circuited, rendering them effectively dead.


Tepco, the utility in charge of the plants, has sent workers into the complex, and they pour water over the spent fuel rods to prevent even further meltdown. Who knows what damaged is being done to the humans. Authorities still don’t how to dispose of highly radioactive water stored in an ever mounting number of tanks around the site, and the irradiated water is leaking and contaminating groundwater and the ocean. The land around the plant was also contaminated. Radiation levels in the region around the plant have fallen by roughly half; part of that is from cleanup efforts, part is just due to the natural radioactive decay. Tepco has completed around 10 percent of the work to clear the site up – the decommissioning process could take 30 to 40 years. In the longer term, the biggest issue will be what to do with the highly radioactive cores of the reactors themselves, each filled with melted uranium fuel, where even robots fear to tread.


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