Bond yields hit all-time low. Mortgage activity jumps. Banks clobbered this year. Italian banks duramente colpite, with no bailouts allowed. Danone buys WhiteWave. Avast buys AVG. If you buy anything at Wendy’s, use cash. Boeing pays late. Flights to Cuba or London. And a faster way through TSA?
Financial Review by Sinclair Noe for 07-07-2016
DOW – 22 = 17,895
SPX – 1 = 2097
NAS + 17 = 4876
10 Y + .02 = 1.39%
OIL – 2.23 = 45.20
GOLD – 3.40 = 1360.80
The Fed didn’t raise its benchmark interest rate last month because officials worried about the “surprisingly weak May employment report,” according to the minutes of the June meeting. And that was before the Brexit vote. The minutes offered no guidance on when the Fed might raise interest rates. Of course, the May jobs report showed just 38,000 net new jobs. Tomorrow morning we will find out how many jobs the economy added in June; consensus estimates are around 175,000; something close to that number and we can look at May as an aberration. A repeat of May, or worse, and we have serious problems. This morning we got a couple of reports that might offer clues to tomorrow’s report.
ADP reported that 172,000 private-sector jobs were added in June, above economists’ expectations for a gain of 150,000 jobs. According to ADP, small private-sector businesses added 95,000 jobs in June, medium businesses added 52,000 and large businesses added 25,000. All of those gains were in the service sector—208,000 jobs were added there, compared with a loss of 36,000 for goods producers. The manufacturing sector lost 21,000 jobs in June.
Initial claims for unemployment benefits fell by 16,000 last week to a nearly three-month low of 254,000. Layoffs have remained extremely low even though hiring tapered off in the early spring.
Bond yields are really low. Yesterday, the yield on the 10 year note hit 1.37%. Researchers at Global Financial Data checked monthly long term bond yields stretching all the way back to 1786. Based upon 230 years of data, they conclude that interest rates in the US have hit the lowest levels ever. So is this good or bad news? If you have solid credit and a decent job and you’re looking to get a mortgage and buy a house, or refinance a mortgage, this is incredibly good news.
The 30-year fixed-rate mortgage followed Treasury yields, falling seven basis points to 3.41% in this week’s survey. Mortgage rates have now dropped 15 basis points over the past two weeks, leaving them only 10 basis points above the all-time low. As a result, home loan volume is soaring. The Mortgage Bankers Association reports mortgage applications rose 14.2% over the previous week, in a survey ending July 1. Refinance application volume jumped almost 21% last week to its highest level since January 2015.
If you’re a well-run company looking to borrow and expand, again, this historic low interest rate environment is good news. The same goes for governments who want to borrow and invest in costly infrastructure projects that pay dividends over time.
On the other hand, if you are a bank or financial institution that makes your money on the spread between borrowing short term and lending long term, this is making life more difficult. Likewise if you’re an insurance company trying to buy long-term bonds that pay you enough of a return to match the claims customers will make on you decades in the future, this is a very difficult environment.
Danone, the world’s largest yogurt maker, has agreed to buy U.S. health group WhiteWave Foods in what would be the French company’s largest acquisition in 10 years. The offer equates to $56.25 per share in cash, resulting in an enterprise value of around $12.5 billion, and would double the size of Danone’s U.S. business.
Avast Software has agreed to buy AVG Technologies for $1.3 billion in cash to expand its geographical reach, internet security opportunities and tap into newer areas such as Internet of Things. Avast, which provides free and paid software for personal computers and mobile devices, has more than 230 million users worldwide.
Burger chain Wendy’s says that a malware it had found at some franchisees in June had enabled hackers to access payment card information from the point-of-sales systems. The company said hackers targeted cardholder names, card numbers and the three-digit card verification value number found on the back of cards.
Since the start of 2016, 20 of the world’s bigger banks have lost a quarter of their combined market value, or about $465 billion, according to FactSet data. They have been losing value since the start of the year, and the Brexit vote was just salt on a wound. The biggest market-value losers, in dollar terms, so far this year: Italy’s UniCredit has lost nearly two-thirds of its value; Royal Bank of Scotland has fallen around 56%; and Credit Suisse, Deutsche Bank and Barclays have all about halved. UniCredit trades at about 21% of book value. Deutsche Bank trades at about 26%, or where it was during the darkest days of the financial crisis. That means some of these banks are either a bargain or there are legitimate concerns about their viability. Deutsche Bank, Germany’s largest bank, now has a market value that in dollar terms is less than that of SunTrust Banks, the regional U.S. bank focused on the Southeast. And the market values of UniCredit, Deutsche Bank and Credit Suisse combined wouldn’t equal that of Goldman Sachs – itself down about 20% this year.
One of the hardest hit Euro banks is not in the top 20 globally but it is the oldest bank in the world; Banca Monte dei Paschi di Sienna is down 80 percent in the last 12 months. Its shares also trade at under 10 percent of its book value — a measure of its net worth — a sign that investors really think that the bank needs new capital. Also, when bank stocks sink that much, banks find it almost impossible to raise new capital in the markets. The good news is that it is not a megabank, and it is not heavily involved in derivatives trading – it just has a bunch of bad loans. Italy’s banks, including Monte dei Paschi, have about $222 billion of bad loans, and they need about $45 billion in bailouts or bail-ins.
But such a bailout may be illegal under relatively new European rules that aim to protect taxpayers and instead force investors in the banks to provide financial support in times of trouble. Investors lend money to banks by buying their debt securities. Under the anti-bailout rules, those securities would be forcibly turned from debt into new equity, which could absorb any new losses taken on the bad loans. Under such a so-called bail-in, the equity would in theory be worth less than the debt securities, leading to losses for investors who held the debt. The problem with bail-ins is that retail investors take a hit, they stop investing, they stop depositing, they start withdrawing; and before you can blink there is a run on the bank.
The pound sterling, at about $1.2924, has dropped to its lowest level since 1985. If you were ever thinking about a vacation in London, now might be the time. An average round-trip fare from US airports into London was $687.36 by July 3, according to airfare-tracker Hopper. That’s a 14% drop since the Brexit vote, and the lowest fares in 3 years. It might not last. Online searches for flights to the UK are up 60% in the past 2 weeks.
Boeing is stepping up efforts to conserve cash, cut costs in its supply chain and trim inventory of parts in its factories, and relying on suppliers to hold parts instead. Boeing is also telling vendors it will take longer to pay bills; up to 120 days to pay, rather than 30 days in the past.
A House panel will debate legislation today that could block a $17.6 billion sale by Boeing to Iran Air. Three measures will be considered, including one preventing the Treasury from licensing the sale, another stopping transactions tied to aircraft export and a third barring the Ex-Im Bank from providing financing for deals with the Islamic Republic. New laws would affect Airbus as well as other firms, since virtually all modern jets have more than 10% U.S. content and require export licenses.
The U.S. government proposed eight airlines to begin scheduled passenger service to Havana, Cuba. Flights could begin as early as this fall. The airlines winning approval for Havana service were American, Delta, United, Southwest, Spirit, Alaska, Frontier and JetBlue.
If you fly you know that there is a big problem at almost all airports: the TSA screening process. American Airlines is trying to do something about it. They are teaming up with the Transportation Safety Administration to deploy CT technology for carry-on bags and install automated screening lanes. CT, or computed tomography, is a 3D imaging technology that’s widely deployed in the medical field. Although the technology has been around for more than a decade, only now has the TSA decided to put it into use. The airline will adopt CT technology in a trial program at security checkpoints located in its Phoenix Sky Harbor International Airport hub. Although, CT scanning tech is currently in use for checked baggage, American will be the first US airline to deploy the system for carry-on bags. When applied to the security lane, a CT scanner allows customers to leave their liquids, gels and aerosols, as well as laptops, in their carry-on bags. American Airlines and the TSA expect the Phoenix CT checkpoint scanners to be up and running by the end of the year and could spread to other airports around the country if the trial is successful. The new security lanes will feature automated conveyer belts to move storage bins between the X-ray machines and the end of the queue. In addition, the bins themselves are 25% larger. There will also be cameras installed to take pictures of the exterior of bags to go along with the X-ray images of its contents. Both parties believe the new lanes, which are expected to come online this fall, will decrease wait times by as much as 30%.