Financial Review

Sometimes Brazenly

Financial Review by Sinclair Noe

DOW – 106 = 18,096
SPX – 9 = 2098
NAS – 12 = 4967
10 YR YLD un = 2.12%
OIL + 1.26 = 51.78
Private-sector employment gains continued in February but at a slower pace than in the prior month. Automatic Data Processing Inc. reported Wednesday that employers added 212,000 jobs last month. On Friday, we’ll get the non-farm payroll report for February; it is expected the economy added about 235,000 jobs last month.


The Congressional Budget Office estimates the Treasury Department will exhaust its capacity to borrow in October or November if the debt limit isn’t raised. The debt limit is suspended until March 15. After that date, so-called extraordinary measures available to the Treasury to keep borrowing include deferring new investments in federal retirement and disability funds.


The U.S. Supreme Court is considering the fate of Obamacare for the second time in three years, weighing an attack on tax credits designed to help millions of people afford insurance. The Court heard arguments today in the case of King v. Burwell, an appeal by four Virginia residents who would block the subsidies in at least 34 states. The fight centers on a four-word phrase that has become a linchpin of the law. The measure says people qualify for tax credits when they buy insurance on an online marketplace “established by the state.” The challengers say that phrase means subsidies aren’t available in dozens of states that declined to set up their own exchanges, as the marketplaces are known. Residents of those states instead use the federal system.


The interplay between the justices and the attorneys generally aligned with partisan expectations and covered familiar ground, the meaning and context of a few key words in the statute and what Congress was trying to do when it wrote the law. The justices spent a great deal of time discussing federalism; specifically, whether the plaintiffs’ reading of the Affordable Care Act would cause inappropriate federal coercion of state governments.


Chief Justice John Roberts, who cast the decisive vote to uphold the health-care law in 2012, asked only a handful of questions and gave little indication how he will vote. Justice Anthony Kennedy, who voted to invalidate the statute three years ago, asked questions of both sides in the one-hour, 20-minute hearing. He said limiting the tax credits to 16 states would create a “serious constitutional problem.” In other words, nobody really has a handle on how the Supremes will rule.


A decision halting the credits might unravel the Affordable Care Act, making other core provisions ineffective and potentially causing the market for individual insurance policies to collapse in much of the country. As many as 9.6 million people could lose their health insurance if the disputed subsidies were invalidated. And that could make a mess of everybody’s insurance.


The silliest question of the day came from Justice Antonin Scalia, who supposed Congress would step in and clean up the problem if the court ruled against subsidies. Scalia asked: “You really think Congress is just going to sit there while all of these disastrous consequences ensue?”


Well, past performance is not a guarantee of future results, but if Congress is the only thing standing between us and chaos, I would not place big bets.


On Wall Street, traders were betting that the Supreme Court would not rule against Obamacare. Hospital and health insurance stocks were market leaders today. Tenet Healthcare, HCA Holdings, and Community Health Systems were trading up 5% or more today. Since the law’s 2010 signing, health insurers like Anthem and UnitedHealth Group are trading near all-time highs, and the hospital companies have also rallied.


The Affordable Care Act will hand out $22 billion in credits to help people buy insurance this year. So far, 11.4 million Americans have signed up for 2015 coverage, giving insurers and hospitals more paying customers and cutting the number who show up in the emergency room to get care without paying.


Meanwhile, the Commerce Department reported today that the percentage of money US consumers spend on health care rose in 2014 for the third straight year to another record high. Some 20.6% of total consumer spending in 2014 was devoted to health care, including prescription and over-the-counter drugs. What we had before didn’t work, and what we have now is awfully expensive.


The Federal Reserve released its Beige Book, an anecdotal look at the economy. Lower oil prices and the stronger dollar were depressing activity in several sectors, notably manufacturing, agriculture and energy exploration. Overall, the report found moderate growth in six of the Fed’s 12 districts, with mixed but generally slower growth in the other regions. And no hard data on this but some companies said they were raising wages.


Fed Chair Janet Yellen lashed out at the culture in the nation’s biggest banks late yesterday. Yellen said: “It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have not done so, sometimes brazenly. These incidents, both individually and in their totality, raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness.”


Yellen pointed to big Wall Street banks as major players in the 2008 financial crisis, saying “to a considerable extent, large and complex financial institutions were the epicenter of the crisis” and calling them “the locus for much of the excessive risk-taking that led to the crisis.” Yellen went on to outline specific regulatory changes the Fed had taken since the financial crisis on things like increasing capital and liquidity and other measures introduced with the Dodd-Frank bank-regulation act.

Later in the speech Yellen promised tougher oversight: “The compliance breakdowns in recent years…, undermine confidence in large firms’ risk management and controls, which has implications for financial stability.”


This could all end up being empty words, but maybe not. The Fed has slowly but surely tightened the screws on America’s banking giants over the past few years. Her remarks come just days before the Fed’s annual bank stress tests.


The Phoenix real estate market is starting to heat up. The month of February saw a noticeable increase in the number of homes sold. Mike Orr with the W.P Carey School of Business at ASU and the Cromford Report says the number of homes under contract between $150 – 600,000 jumped by about a third. Most of the homes sold were starter homes. Inventories are tight and builders aren’t building; new home construction is about one-third of normal.


The European Central Bank meets tomorrow to finalize its trillion dollar quantitative easing program. It is expected the ECB will start a major bond buying program in the next week. For the first time ever, the ECB will buy government bonds in the secondary market, mirroring QE programs seen in the U.S. and the U.K. The Eurozone institutions selling the bonds can then use the proceeds to buy other assets and lend money to businesses.


Poland’s central bank cut borrowing costs by 50 basis points to 1.5 percent, a record low. The Reserve Bank of India surprised markets by cutting rates for the second time this year, joining a world-wide trend of monetary easing that is driving global interest rates to multi-year lows. The Indian central bank lowered its benchmark rate by 25 basis points to 7.5%. The move sent India’s Sensex index to an all-time high of 30,024.


Eight of the biggest US technology companies added a combined $69 billion to their stockpiled offshore profits over the past year, even as some corporations in other industries felt pressure to bring cash back home. Microsoft, Apple, Google and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that US companies are holding overseas.
Target is planning to eliminate several thousand jobs, mainly from headquarters locations, as part of a restructuring that will cut $2 billion in costs over two years. During the retailer’s earnings call last week, executives made a strong point in saying that the company’s digital business is its top priority.


Many institutional investors take months to decide on and execute a reallocation from one fund to another. And according to Pimco, that is the reason why they are still experiencing outflows from their flagship fund. The firm reported another $8.6 billion of outflows in February from the Pimco Total Return Fund, bringing withdrawals to $76 billion since Gross moved to Janus Capital.


Actavis sold the second-biggest corporate-bond offering in history yesterday, with a $21 billion deal fueled by investors’ desire for income-generating investments when yields on government debt remain low. The giant sale comes as companies this year sell debt at the fastest pace on record, extending a multi-year boom that has financed a flurry of deal making and stock buybacks. Actavis plans to use the money for its $66 billion acquisition of Botox maker Allergan.


Every five years the private intelligence firm, Strategic Forecasting, or Stratfor, publishes its Decade Forecast, in which it projects the next ten years of global political and economic developments. As Yogi Berra said, ‘It’s tough to make predictions, especially about the future”, but Stratfor has a decent record at prognosticating. Here are a few of the highlights of the Decade Forecast.

Russia will collapse, or at least the Russian Federation will not exist in its current form for the entire decade. If that happens there would be a big problem with loose nukes, and the US might be the only country that could clean things up.

Meanwhile, Germany will see a reversal of economic fortunes. When you think about it, Germany relies on exports, and they benefitted from the continent-wide trade liberalization ushered in by the EU and the Euro, but that just means the country has the most to lose from an even more protracted Euro crisis.

If that sounds like the Euro Union is in trouble, well probably; it might still exist in 10 years, but it would be vastly different, with more regionalism. The economic leader in the Eurozone might well be Poland.

China’s economic growth will slow as the country struggles with coastal urbanization; as things get tough, the Communist government will increase internal oppression. I think we’ve heard that story before. As China’s growth slows, many of the entry level manufacturing jobs will migrate from China to emerging economies such as: Mexico, Nicaragua, Peru, Ethiopia, Uganda, Kenya, Tanzania, Bangladesh, Sri Lanka, Vietnam, Cambodia, the Philippines, and Indonesia.

And as the world gets crazier, the US will try to step back from the disorder. The Stratfor forecast suggests, “The United States will continue to be the major economic, political and military power in the world but will be less engaged than in the past.”





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