Waiting on the FOMC and then a Brexit vote. Supremes say no fresh start for Puerto Rico. Microsoft gets LinkedIn. Apple announced new stuff, meh. Theranos kaput. Goldman Sachs’ continuing criminal enterprise. AT&T and Citi fight over thank you.
Financial Review by Sinclair Noe for 06-13-2016
DOW – 132 = 17,732
SPX – 17 = 2079
NAS – 46 = 4848
10 Y – .02 = 1.62%
OIL – .53 = 48.54
GOLD + 10.50 = 1284.80
Equities across the globe drifted into the red ahead of a data heavy week in the U.S. that will include retail sales, inflation and other economic figures. Reasons for the declines: Brexit woes, weak Chinese investment growth, fresh strength in the yen, and lower oil prices. Traders are also anticipating a busy week for central banks with policy meetings for the Fed, Bank of Japan, Swiss National Bank, and Bank of England. The safe-haven yen strengthened across the board overnight, hitting a three-year high against both the euro and sterling on Brexit worries and reaching a six-week high vs. the greenback. Japan faces a credit rating downgrade after the government delayed a planned second sales tax hike.
With ten days to go until a Brexit vote, the “Leave” campaign has taken a lead over “Remain” in the latest YouGov poll, reversing the one point lead held by the pro-EU camp in the last survey taken on June 6. Another poll from research firm ORB showed that 55% of British citizens feel they should leave the EU, versus 45% who favor remaining. Sterling moved lower against the dollar this morning.
The Federal Reserve FOMC meets tomorrow and then publishes a statement on Wednesday at 11 AM Pacific, followed by a Janet Yellen press conference. Here’s what we might reasonably expect: no rate increase from the Fed. The May jobs report was an abysmal 38,000 new jobs; so there is just too much slack in the labor market right now. Also, the meeting is one week ahead of the Brexit referendum in the UK, which could go either way. So, don’t count on the Fed surprising the markets on Wednesday. Then the question is whether the Fed will be dovish or hawkish about a July rate hike. They will probably try to strike a balance. There is still time to telegraph a hike, if conditions improve substantially.
The Supreme Court has struck down a Puerto Rican law that would have allowed the U.S. territory’s public utilities to restructure their debt. The Bankruptcy Code requires municipalities to seek their state’s permission before they can declare bankruptcy, but Puerto Rico does not count as a “State” for purposes of this provision. The island’s utilities are effectively locked out of the protections afforded to similar debtors in the 50 states. To compensate for this problem, Puerto Rico enacted the Puerto Rico Corporation Debt Enforcement and Recovery Act, which effectively creates a special bankruptcy code under the island’s own law that fills the gap in federal law. Today the Supreme Court ruled that the new law won’t fly. Puerto Rico cannot file for bankruptcy. The 5-2 ruling leaves management of the island’s fiscal crisis to Congress. The House of Representatives passed a bill last week to help Puerto Rico manage its debt crisis. The Senate has not yet acted.
The Puerto Rico case today concerns about $20 billion in debt owed by the island’s public utilities companies. Absent a quick decision by Congress (not likely), power, water, sewer, and transportation are at risk of being shut down or turned off. The lost services are likely to exacerbate Puerto Rico’s debt problems as more people flee the island, depressing Puerto Rico’s tax base even further, potentially forcing deeper cuts, which will lead even more residents to flee. It is a slow motion debt spiral and there is no relief in sight.
Oil futures moved lower today, after dropping 4.2% in the previous two sessions as drilling rigs targeting crude in the U.S. rose by three to 328 last week, a second weekly gain which is a record since last August. The data from Baker Hughes suggests companies that were sidelined by low oil prices are starting to produce at $50 a barrel, and there are certainly many companies that didn’t halt production but just slowed production at lower prices. So, the $50 to $60 per barrel price range seems like the sweet spot where production returns. Now we know where the ceiling is.
Microsoft is acquiring the professional social network LinkedIn Corp. for $26.2 billion. Microsoft will pay $196 per share in an all-cash transaction, inclusive of LinkedIn’s net cash, a 49.5 percent premium to LinkedIn’s closing price Friday. The deal is the biggest ever for Microsoft. LinkedIn has long been valued for having the potential viral growth of a social network with the recurring revenues of a software-as-a-service business.
Symantec is buying privately held cyber security company Blue Coat for $4.6 billion, with Blue Coat chief Greg Clark becoming the company’s CEO once the deal closes. Symantec, which makes the Norton antivirus software, has been undergoing a transformation over the past year, selling its data storage unit, Veritas, for $7.4 billion to gain the cash necessary for turning around its core security software business.
Apple started its annual Worldwide Developers Conference in San Francisco today. Here’s what came out of Day One. They announced Apple Pay and Siri for desktop Macs; a new Apple Watch app called Breathe, which is designed to help people control their mood; a big update to the Remote app for the Apple TV; a major update to iOS, the app that runs on iPhones, including fun new messaging options, emoji features, and lock screen and notification menus; programmers can also build apps specifically for iMessage; iOS also has additional new artificial-intelligence features, like a keyboard that can predict what you want to type and updates to the Photos app that can use facial recognition to sort photos by person; the ability for developers to build their apps into Siri and Maps; a revamp to Apple Music; and an app for controlling automated smart homes called “Home”. Most of these new features will hit Apple devices in the fall.
Walgreens has terminated its relationship with Theranos. A statement posted on Walgreens’ website says the pharmacy chain is shutting down all 40 Theranos’ wellness centers at Walgreens stores in Arizona. The decision by Walgreens is a huge blow to Theranos, as the wellness centers were the company’s primary source of revenue. Theranos still operates five centers (four in Arizona and one in California). The company once touted its Edison device as a ground-breaking technology able to test blood from just a pinprick. In October, The Wall Street Journal reported that the company’s tests weren’t producing accurate results and that the company was trying to cover it up. The Justice Department and SEC are investigating Theranos and its founder Elizabeth Holmes. Now comes word that Jennifer Lawrence will portray Elizabeth Holmes in an upcoming movie. I can’t make this stuff up.
Wal-Mart will stop accepting Visa cards in Canadian stores after failing to agree on terms with the credit card provider – the latest in a years-long battle between the two companies over fees and the right to steer customers to certain types of payments. Visa is the largest payments network in Canada, with 50.6M cards in circulation and $232.6B worth of transactions last year.
The Libyan Investment Authority, the country’s sovereign wealth fund, will go head-to-head with Goldman Sachs in a London court today in a case accusing Goldman of bribery to influence fund executives to make risky trades that led to a $1.2 billion loss. Now you might imagine that a sovereign wealth fund takes its chances and they might win some investment bets and lose some, but apparently Goldman execs knew they were pitching complex and unsuitable derivatives. In documents provided to the court by the LIA cited Goldman Sachs describing the sovereign wealth fund as having “zero-level” financial sophistication and one individual having “delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels”. One Goldman executive is quoted as saying: “They are very unsophisticated and anyone could rape them.”
Beyond the question of suitability is the question of bribery, including travel and dining at five-star hotels, prostitutes in Dubai, while an internship at Goldman was also arranged for an official’s brother. The Libyans said the trades were made under “undue influence”. Goldman said the claims were without merit and it would fight them vigorously. And then there is the question of fees charged. While the Libyan Investment Authority was losing $1.2 billion, Goldman was collecting possibly as much as $350 million in fees.
Meanwhile, Goldman Sachs is under investigation by the Justice Department, Federal Reserve, SEC, and New York’s Department of Financial Services for its part in bond sales for 1MDB, Malaysia’s sovereign fund, which is at the center of several international investigations into alleged corruption and money laundering by public officials. Goldman arranged for about $6.5 billion in bond sales. Goldman allegedly took a very large commission in the neighborhood of $600 million. Another problem is $3 billion Goldman raised via a bond issue; days after Goldman sent the proceeds into a Swiss bank account controlled by the fund, half of the money disappeared offshore, with almost $700 million apparently later ending up in the prime minister’s bank account. The case is being investigated in 10 countries. New York’s banking regulator has told Goldman to submit details of its internal review by Tuesday.
On June 2, AT&T launched a customer loyalty program called “AT&T thanks,” trademarking the name in connection with loyalty incentives. Citigroup, meanwhile, has been using the term “thankyou” (all one word) since 2004 to promote its own customer loyalty and rewards programs, and they trademarked it as well. Citigroup is now suing AT&T for thanking its customers, claiming the phrase “AT&T thanks” is confusingly similar. Of course the words “thanks” and “thank you” are some of the most common words in the English language. Thankfully, Citigroup and AT&T do not own those words.