…..ISM pops. ADP private jobs slip. Trade deficit inches up. Happy holiday sales forecast. IMF warns global banking system is too weak to recover. Paris Climate Accord ratified. Hurricane Matthew moves to US coast. ECB to taper. SCOTUS on insider trading. Fidelity’s conflict of interest. Sears sells the tools. Google goes for hardware with an AI assist.
Financial Review by Sinclair Noe for 10-05-2016
DOW + 112 = 18,281
SPX + 9 = 2159
NAS + 26 = 5316
10 Y + .03 = 1.72%
OIL + 1.02 = 49.71
GOLD – 1.90 = 1267.50
The Institute for Supply Management said its services index shot up to a reading of 57.1% in September from 51.4% in August, on a scale where any reading over 50% indicates improving conditions. Sub-indexes on business activity, new orders, and employment – all posted big gains.
Private-sector employment slowed a bit in September. According to data from Automatic Data Processing employers added 154,000 private-sector jobs last month, down from 175,000 in August. This is the smallest increase since April. Analysts use ADP’s data to get a feeling for the Labor Department’s employment report, which will be released Friday and covers government jobs in addition to the private sector. ADP’s report showed that small private-sector businesses added 34,000 jobs in September, medium businesses added 56,000 and large businesses added 64,000.
The US trade deficit rose 3% in August to just over $40 billion as imports climbed to the highest level in almost a year. Exports edged up to about $188 billion to mark the highest level since July 2015. The dropoff likely stems from weak global demand and a strong dollar that makes American goods more expensive for foreign customers to buy. US imports, meanwhile, increased 1.2% in August to $228 billion and hit the highest level in 11 months. The deficit is on track to be smaller in the third quarter than in the spring. That’s likely to boost third quarter Gross Domestic Product.
The National Retail Federation is looking forward to a very happy holiday season; they expect sales for November and December excluding autos, gas and restaurant sales, to increase 3.6% to $655.8 billion. This is higher than the 10-year average growth of 2.5%. Non-store sales, which includes e-commerce, are expected to increase 7% to 10%. The organization believes consumers are in a stronger position from previous years, with steady gains in jobs and incomes.
The International Monetary Fund has issued a warning about the global banking system; a third of biggest banks in the world’s richest countries are so weak their problems could not be solved even by a recovery and rising interest rates. About a third of European banks, with $8.5 trillion in assets, and a quarter of U.S. banks, with $3.2 trillion in assets, are in this too-weak-to-recover category. The IMF says, “This suggests the need for fundamental changes in both bank business models and system structure to ensure a vibrant and healthy banking system.” Earlier this year, the IMF said in a report on the German financial sector that Deutsche Bank appeared to be the riskiest bank in terms of threats posed to global financial system, an insight that prompted a sharp fall in the bank’s stock. Today, fund officials did not backtrack from this view.
Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and it’s still rising. The figure includes debt held by governments, non-financial firms and households. The IMF says current debt levels now sit at a record 225 percent of world gross domestic product; about two-thirds of the liabilities reside in the private sector. The rest of it is public debt, which has increased to 85 percent of GDP last year from below 70 percent. Finance chiefs and central bankers from the IMF’s 189 member nations meet this week in Washington for the annual meeting of the fund, which was conceived during the Second World War to oversee the world monetary system.
Fitch has cut the outlook on Wells Fargo’s credit ratings to Negative, but affirmed the bank’s existing rating of AA-, which is investment-grade. In an announcement, Fitch cited “potential reputational damage from the recent regulatory actions and fines,” as well as a belief that the lender could face “earnings pressure.”
Hurricane Matthew battered Haiti and is now hitting the Bahamas. At least 11 deaths were blamed on the powerful storm during its weeklong march across the Caribbean, five of them in Haiti (and possibly many more). The Category 4 hurricane could hit Florida – or come dangerously close – late tomorrow or early Friday and then scrape the East Coast all the way up to the Carolinas over the weekend. Hundreds of thousands of people along the lower East Coast have been urged to evacuate their homes.
A global agreement to combat climate change by shifting the world economy away from fossil fuels will take force next month after passing a threshold for ratification with support from European nations. In total, 72 countries out of 195 have ratified the agreement. The deal will formally start in 30 days. It took eight years for the previous U.N. climate deal, the 1997 Kyoto Protocol that obliged only rich nations to cut emissions, to gain enough backing to take effect.
Chicago Fed President Charles Evans would be “fine” with raising U.S. interest rates by year end if U.S. economic data continued to come in firm, though any further moves would need to see inflation moving higher. Speaking to reporters after a speech in New Zealand, Evans said any hike would likely come at the Fed’s December policy meeting, though he would not rule out a move in November.
The European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros ($11.2 billion) a month. The talk of tightening and tapering has spurred a reversal in government bond prices across the world, with U.S. Treasuries dropping while German 10-year bond yields are at -0.03 percent this morning, up from -0.15 percent last Friday.
After returning to the bench earlier this week, the Supreme Court will hear a case today that will clarify an issue at the heart of the federal crackdown on insider trading over the past eight years. Justices will decide whether to make it harder to prove illegal activity when company insiders receive no cash or other tangible benefits for their tips.
Fidelity Investments is a huge mutual fund company, founded seven decades ago and run ever since by the Johnson family. A private venture capital arm run on behalf of the Johnsons, F-Prime Capital Partners, competes directly with the stable of Fidelity mutual funds in which the public invests. That conflict can be seen in the case of Ultragenyx Pharmaceutical, a biotech start-up. In 2011 and 2012, the Johnsons’ F-Prime Capital invested a total of $11 million on Ultragenyx before the start-up made an initial public offering of its stock. The pre-IPO investment effectively prevented Fidelity mutual funds from making the same play. If both the private fund and Fidelity’s ordinary funds had invested, they would have violated US securities laws, which prohibit affiliated entities from buying substantial stakes in the same companies at the same time.
The managers of Fidelity’s public funds eventually did purchase Ultragenyx shares, but not until after the stock price skyrocketed in the firm’s January 2014 initial public offering. The Fidelity funds bought about 1.1 million Ultragenyx shares in the second quarter of 2014. The average price for the stock was $41.17 during that three-month period – 12 times higher than the $3.55 a share paid by F-Prime Capital. The Johnson family’s VC fund pulled down about $128 million on the deal, representing a gain of more than 1,000%. Investors in Fidelity’s public funds – not so much. Over the past three years, U.S. regulatory filings show, the Johnson-led venture arm has beaten Fidelity mutual funds to some of the hottest prospects in tech and bioscience – including the best performing IPO of 2015. And after the big initial price surge, they sell it to Fidelity’s public funds. Over this same time frame, there are no examples of Fidelity’s public funds getting into a hot IPO, and then later selling it at a higher price to the Johnson family’s private VC fund.
In a written statement to Reuters, Fidelity said it follows the law relating to potential conflicts of interest between its mutual funds and the venture capital arm. If this sounds like a conflict of interest, well it is, but that doesn’t mean it is illegal. As long as certain rules are followed, the Johnson family gets to eat steak and public investors get the table scraps. I’m guessing they won’t say that in their marketing brochures.
One of the big movers today was Sears Holding, up about 19% on news it was looking to sell its Craftsman tool brand. Final bids may value the brand at about $2 billion, and are reportedly due at the end of the month. Sears put its three best-known brands – Craftsman, Diehard and Kenmore – up for sale in late May in an effort to raise cash. Sears has been burning through cash for at least 8 years and even adding $2 billion to the coffers will likely keep the once iconic retailer afloat for just another year.
Google has officially staked its claim as a bona fide hardware brand, unveiling a raft of new products it hopes will win market share in the smart-phone, smart-home and virtual reality space. Among them: Pixel and Pixel XL smartphones, the Daydream View VR headset, Google Wifi, Chromecast Ultra and Google Home. The common theme in all the new hardware is new Artificial intelligence-powered Google Assistant, which is designed to pull together all of Google’s services into a single, easy-to-use voice-based interface.