Something in the Water
Stocks turn positive. A big water problem that won’t be resolved. Brazil has the most fascinating corruption.
Financial Review by Sinclair Noe for 03-17-2016
DOW + 155 = 17,481
SPX + 13 = 2040
NAS + 11 = 4774
10 Y – .03 = 1.90%
OIL + 1.74 = 40.20
GOLD – 4.50 = 1258.60
After one of the worst starts to the year on record, the Dow Jones Industrial Average and the S&P 500 are now in positive territory for the year, after moving up 1.1 and 0.87 percent respectively. The S&P 500 has risen nearly 12 percent since its February low, while briefly erasing its 2016 drop. The benchmark is now about 4 percent below a record set last May. Oil surged above $40 a barrel for the first time since December. The dollar dropped again today. The weak dollar is bullish for all commodities, especially oil. The lower dollar also makes US multinational companies more competitive overseas. While central banks are focused on addressing slower growth abroad, US data has shown a resilience against the overseas weakness.
The Federal Reserve held interest rates steady Wednesday and signaled it will lift them more slowly than previously indicated because of a weak global environment and volatile stock market. The Fed said in a statement that its rate-setting Federal Open Market Committee decided to leave the central bank’s benchmark interest rate in a range of 0.25%-0.5%. The decision was widely expected. The big change was in the Fed’s so-called “dot plot,” where officials penciled in only two quarter-point hikes this year, down from four in December.
More central bank news: The Swiss National Bank has kept its deposit rate unchanged at 0.75%, while lowering its inflation outlook for this year to -0.8%. (So, technically it’s a deflation outlook.) Norway’s central bank cut its key policy rate by 0.25 percentage points to an all-time low of 0.5%, and raised the prospect of a move into negative territory. The Bank of England has kept the UK base interest rate at its historic low of 0.5% despite a steep fall in the value of sterling linked to the EU referendum, which policymakers said was likely to exert upward pressure on inflation.
The Conference Board’s leading economic index rose 0.1% to 123.2 last month, the first increase in 3 months. Housing permits, stock prices, consumer expectations, and new orders remain sources of weakness, but the Conference Board says the outlook remains positive with little chance of a downturn in the near-term.
The US current-account deficit, a measure of the nation’s debt to other countries, fell 3.6% in the fourth quarter to $125 billion. Yet for all of 2015, the current-account deficit climbed 24% to $484 billion. The increase reflects the weaker US position in trade last year, when exports softened, a result of a stronger dollar and slower economic growth around the world. The current account reveals if a country is a net creditor or debtor. It measures whether a country is selling more goods and services to other countries or the other way around. The current account also measures how much money is coming into a country or going out.
A reading of manufacturing activity in the Philadelphia area turned positive in March, marking the first positive showing in seven months. The Philadelphia Fed manufacturing index rose to 12.4 from a negative 2.8 in February.
The number of Americans who applied for unemployment benefits in the second week of March rose by 7,000 to 265,000. Initial claims have been below the 300,000 threshold for 54 weeks, the longest stretch since 1973.
The number of available jobs rose in January but fewer workers were willing to leave their existing positions, an indication of a labor market that’s improving but still has some slack. The JOLT survey, or Job Openings and Labor Turnover survey show wholesale trade and construction were the fields with the biggest gains in openings. Educational services, state and local government and financial sectors had fewer openings. The quits rate, however, fell to 2% from 2.2%, indicating workers still are not confident to leave their current job in hopes of getting a better job.
Mortgage rates rose for the third week, as Treasury yields rose heading into yesterday’s FOMC meeting. The benchmark 30-year fixed-rate mortgage averaged 3.73% in the week ending March 17, up from 3.68%. The 15-year fixed-rate mortgage averaged 2.99%, up from 2.96%
In Brazil, the corruption scandal goes from bad to slimy. President Dilma Rousseff tried to appoint former president Lula da Silva to serve as chief of staff. State prosecutors requested Lula’s arrest last week over charges of money laundering and fraud. Lula’s appointment as chief of staff would provide him with a legal shield of immunity against prosecution. Only Brazil’s Supreme Court has jurisdiction in cases against ministers. But a Brazilian judge released the recording of phone conversations between Rousseff and Lula, and TV stations played the phone conversations, exposing the scheme; and today, another judge issued an injunction to suspend the appointment of Lula to Rousseff’s cabinet. The judge argued that Lula’s appointment could lead to his interference in police and judicial activities, according to a copy of the decision. He also said that Rousseff may have broken administrative laws. The attorney general’s office said in a statement it will appeal the injunction. Protesters are calling for a nationwide work stoppage today.
The House Committee on Oversight and Government Reform held hearings today on the Flint, Michigan water crisis. House Democrats called on Michigan Governor Rick Snyder to resign for his role in creating the problem. House Republicans called on EPA Administrator Gina McCarthy to resign because the EPA was slow to catch the problem. In 2011, Flint had a $15 million deficit and Michigan Governor Rick Snyder appointed an emergency manager to take control over the city. Lead began flowing into Flint’s drinking water two years ago, when the city stopped relying on supplies from Detroit and turned to the Flint River to save money. Because that river water wasn’t sufficiently treated to be less corrosive, lead began leaching out of aging pipes. In October 2014, General Motors stopped using Flint water because it was corroding parts at its engine plant in Flint. It wasn’t until October 2015 that state officials told people in Flint to stop drinking the water. The only thing that is clear is that no solutions will come out of the House hearings.
While the water crisis unfolding in Flint is perhaps the most egregious example of austerity in recent memory, it is part of a larger problem developing nationally. A USA Today Network investigation has identified almost 2,000 additional water systems spanning all 50 states where testing has shown excessive levels of lead contamination over the past four years. The water systems, which reported lead levels exceeding Environmental Protection Agency standards, collectively supply water to 6 million people. Limited and inconsistent testing means the full scope of the lead contamination problem could be even more widespread. There are about 75 million homes across the country built before 1980, meaning they’re most likely to contain some lead plumbing. That’s more than half of the country’s housing units. Only when more than 10% of a system’s tap water samples show lead concentrations above 15 parts per billion does an alert go out to customers. But these notifications don’t tell consumers to stop drinking the water.
In 2013, America received a “D” in the drinking-water category of the American Society for Civil Engineers’ Report Card for America’s Infrastructure. The report found that most of the nation’s drinking-water infrastructure is “nearing the end of its useful life.” The country’s wastewater infrastructure also got a “D” grade. In 2013 the EPA released results of a survey showing that $384 billion in improvements are needed to maintain the nation’s drinking water infrastructure through 2030 for systems to continue providing safe drinking water to 297 million Americans. That’s just maintenance, and it doesn’t include all the replacement costs for all those lead pipes. Replacing pipes, treatment plants and other infrastructure as well as expanding drinking water systems to handle population growth could cost as much as $1 trillion. Without that investment, industry groups warn of a future with more infrastructure failures that will disrupt service, transportation and commerce.
Caterpillar warned that first-quarter sales and earnings will come in below expectations. Still, the company affirmed its full-year guidance for 2016 sales and profit. Caterpillar said depressed prices for mining commodities, lower oil prices, a stronger U.S. dollar and weak construction demand are weighing on sales of its bulldozers, excavators, giant dump trucks and engines. The company is expected to next report earnings in April.
FedEx beat on the top and bottom lines. The company announced adjusted earnings of $2.51 a share, easily beating the $2.34 that was expected. Revenue jumped 8% to $12.7 billion, topping estimates of $12.3 billion. FedEx raised its full-year forecast to earnings of $10.70 to $10.90 a share, up from its range of $10.40 to $10.90.
TransCanada Corp, the company behind the Keystone XL oil pipeline, said it would buy Columbia Pipeline Group for $10.2 billion, creating one of North America’s largest regulated natural gas transmission businesses. TransCanada will offer $25.50 per share in cash for each Columbia Pipeline share. Columbia Pipeline Group owns and operates about 15,000 miles of natural gas pipelines, connecting the U.S. Gulf Coast to the Midwest, Mid-Atlantic and Northeast United States.
Chipotle could give away 9 million burritos as it fights to win back customers following several food safety problems that have dented its sales. Executives speaking at an investment forum on Wednesday said the company has recovered about one-third of sales lost to a string of food safety lapses last year, and more free offers may be forthcoming as part of its turnaround strategy.
Apple has begun using Google’s cloud infrastructure platform, and has “significantly reduced its reliance” on market leader Amazon Web Services, which it has used to help run iCloud and other products. The tech giant is reportedly spending between $400 million to $600 million on the services.