Financial Review

Terminated for Ethical Behavior

….. GDP revised higher; biz investment up, consumers spend; profits down again. Pending home sales down; inventory tight. Sick leave for gov contractors. Wells Fargo also screws over the military. Wells CEO goes to Washington, takes personal responsibility and blames low level employees. Deutsche Bank situation very fragile. Och-Ziff makes money the old fashioned way – bribery. An artificial pancreas. Paris Auto Show is electric.

Financial Review by Sinclair Noe for 09-29-2016

DOW – 195 = 18,143
SPX – 20 = 2151
NAS – 49 = 5269
10 Y – .01 = 1.56%
OIL + .57 = 47.62
GOLD – 1.50 = 1320.90

The third and final revision of second quarter gross domestic product shows the economy grew at a 1.4% annual pace instead of 1.1%. Business investment in the second quarter was better than previously reported and that bodes well for third-quarter growth. Investment excluding housing actually rose 1% instead of dropping 0.9%. A 57% plunge in spending by energy companies coping with cheap oil was the main culprit in weak business investment. If mining and drilling are excluded, investment rose a healthy 10% in the second quarter. Consumers are still spending at a healthy clip and the housing market continues to get stronger. Core personal-consumption expenditures – a measure of inflation that excludes volatile food and energy prices – rose by 1.8%, unchanged from the second estimate. America’s largest public companies reported a fourth-straight quarterly drop in profits in Q2, down 1.7% after tax.


The National Association of Realtors’ pending home sales index slumped 2.4% to 108.5 in August. That was 0.2% lower than a year ago, and July’s reading was revised down to 111.2. The index forecasts future sales by tracking real estate transactions in which a contract has been signed but the deal has not closed. Tight inventory is blamed for the setbacks. The group issued a release saying: “Prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the miniscule number of affordable listings.”


Applications for unemployment benefits rose 3,000 to 254,000 in late September, but the low level of initial claims points to a steadily improving labor market in which jobs are the easiest to find in years. Initial jobless claims slid below 300,000 in 2015 and have stayed there for 82 straight weeks. And new claims have tallied less than 270,000 for three months, a feat last accomplished in 1973. So far this year the economy has added an average of 182,000 new jobs a month. The unemployment rate, at 4.9%, is at an eight-year low.


The Labor Department will now require federal government contractors to provide paid sick leave to their workers. The rule will impact more than 1.1 million people, and enable workers to accrue up to seven days of paid sick leave a year. The rule requires that workers in assignments related to many federal contracts receive one hour of paid sick leave for every 30 hours they work, for up to 56 hours of leave a year. Unused leave time can carry over to the next year if the worker remains with the same employer on a contract-related assignment. The rule affects only contracts solicited by the government beginning on Jan. 1, 2017.


The nation’s deficit in goods trade narrowed slightly to $58.4 million in August. Exports rose a solid 0.7 percent in the month reflecting strength in industrial supplies, vehicles, and also consumer goods. Imports also rose in the latest month, up 0.3 percent and reflecting a bounce back for capital goods as well as a gain in food.


Next week we’ll get fresh insight into U.S. manufacturing, construction spending, vehicle sales, trade, factory orders, durable goods, and of course the overall labor market with the jobs report on Friday. That’s obviously the big one, with economists forecasting 175,000 new jobs created in September and an unemployment rate holding flat at 4.9 percent. Wages will also be closely watched for any signs of acceleration. The report is over a week away, but given its significance, it’s time to start looking ahead. Markets are pricing in a slightly greater than 54 percent chance of a U.S. interest rate hike by the end of the year (most likely in December).


Congress avoided a partial government shutdown at week’s end after both chambers passed a short-term spending bill that would keep the government running through early December. Lawmakers agreed to provide federal assistance for residents of Flint, Mich., in separate legislation this year. The spending bill includes $1.1 billion to fight Zika and $500 million for flood victims in Louisiana and other states.


California, the nation’s largest issuer of municipal bonds, is barring Wells Fargo from underwriting state debt and handling its banking transactions after the company admitted to opening about 2 million bogus customer accounts. The bank has already been fined $185 million. The California suspension, in effect immediately, will remain in place for 12 months. A “permanent severance” will occur if the bank doesn’t change its practices. The state also won’t add to its investments in Wells Fargo securities. Federal prosecutors in New York and San Francisco have opened criminal inquiries. Wells Fargo already faces a raft of lawsuits by fired or demoted workers, customers and investors.


Now, word that Wells Fargo is facing a Justice Department sanction over improperly repossessing cars owned by members of the military. The Servicemembers Civil Relief Act requires lenders obtain court orders before seizing vehicles from soldiers, sailors, airmen and Marines who are delinquent on their loans. The bank has previously been accused of not adhering to the military lending law, which Congress approved decades ago to protect soldiers from legal hassles while they’re on active duty. Wells Fargo agreed to compensate borrowers as one of five mortgage servicers sanctioned for improper home foreclosures, paying $28 million for so-called non-judicial foreclosures that didn’t pass through courts and $59 million for those handled in the judicial system, according to statements issued by the Justice Department last year. The bank didn’t admit or deny the allegations. Wells Fargo might be looking at a $20 million fine, which would be one of the stiffest for such violations.


Earlier this week, Wells Fargo’s board of directors woke up long enough to claw back $41 million in stock awarded to Stumpf. Wells Fargo CEO John Stumpf testified this morning before the House Financial Services Committee. At one point, Stumpf promised to “take care of all customers” affected by the scandal. That’s bull. It was mainly a chance for politicians to dramatically identify the obvious: Wells Fargo committed fraud and theft, and operated as a criminal enterprise, it plundered its reputation, it cheated customers, it is too big to manage, it should be broken up, it is a repeat offender, the fines thus far are pathetic, the bank was a school for scoundrels, upper management pocketed multi-million dollar bonuses and then tried to blame thousands of low level workers. At one point, Stumpf said all 5,300 employees were terminated “because of their ethical behavior.” Of course it would have made more sense if those workers had been fired for “unethical behavior” but this is a distinction Stumpf seems incapable of making.


A number of funds that clear derivatives trades with Deutsche Bank have withdrawn some excess cash and positions held at the lender, a sign of counterparties’ mounting concerns about doing business with Europe’s largest investment bank. The International Monetary Fund in June said Deutsche Bank may be the biggest contributor to risk among so-called global systemically important banks. Deutsche faces a possible $14 billion fine from the US Department of Justice, just south of the bank’s market capitalization. Deutsche share hit an all-time low this week. Credit Suisse CEO Tidjane Thiam says that Europe’s banks were in a “very fragile situation” and said there was doubt that European banks still had a viable business model, calling the sector “uninvestable”.


Commerzbank is making big cuts. The German bank says it will cut almost 10,000 jobs, or more than 20% of its labor force, and eliminate its dividend temporarily as part of a $1.2 billion restructuring plan.


Och-Ziff Capital Management has agreed to settle charges of bribery, paying nearly $200 million to the Securities and Exchange Commission. Och-Ziff was accused of illegally paying the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds.  Other bribes were paid to secure mining rights and corruptly influence government officials in Libya, Chad, Niger, Guinea, and the Democratic Republic of the Congo. Last I heard, bribery was an actual crime. Although in this case … Anyway, a $200 million fine will make Och-Ziff management think twice before they commit their next felonious act of bribery.


Medtronic has won U.S. approval for an “artificial pancreas” that is the first device to automatically deliver the right dose of insulin to patients with type 1 diabetes, freeing them from continually monitoring insulin levels throughout each day. The FDA approved the device six months sooner than expected, however, it still won’t be available until the spring of 2017.


The future is electric at the Paris Motor Show, as the world’s biggest carmakers unveil plans to accelerate development of EVs. About two dozen new electric models are set to debut. Mercedes revealed an entirely new brand dedicated to electric vehicles, called EQ, and paired it with a concept car called Generation EQ, a sport-utility coupe with electric range of up to about 310 miles. Volkswagen debuted the I.D. electric concept, with a range of about 249 to 373 miles, and said a compact car version would hit dealerships in 2020. GM is set to begin selling the first mass-market electric car, the Bolt, which will have range of about 238 miles, by the end of the year.




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