Financial Review

The Bar is Set Low

Financial Review by Sinclair Noe

DOW + 28 = 18,047
SPX + 3 = 2100
NAS + 5 = 4899
10 YR YLD + .12 = 2.14%
OIL + .27 = 53.05
Another record high close for the S&P 500 index and the Russell 2000 index. As of February 11, 356 S&P 500 companies have reported and 71.3% beat earnings expectations. Total revenues are up +1.5% with 55.6% beating top-line estimates. Earnings growth with little or no revenue growth means companies are cutting costs or repurchasing shares to boost earnings. The Health Care and Telecom Services sectors were the best performers on the quarter. The energy sector was badly beaten down. The 12-month forward P/E currently sits around 16, putting it well above the 10-year average of 14; a little pricey but not excessive. Guidance has been disappointing but the game is to set the bar very low and then stop over it.

 

Eurozone officials and the new government in Greece have been playing hardball. Greece is running out of money. A report from JPMorgan shows Greek banks were losing deposits at the rate of €2 billion a week. The Greek government has so far insisted that budget cuts and economic overhauls mandated by the current €240 billion bailout are hurting its economy and society and that the currency union’s finance ministers haven’t offered sufficient leeway on implementing those measures.

Yesterday, Eurozone ministers gave the Greek government an ultimatum to request an extension of the bailout with the strings attached. Today, Greek Prime Minister Alexis Tsipras gave a defiant speech in Parliament in Athens, saying his government would move to immediately dismantle overhauls mandated by its bailout program and calling for European leaders to hold a summit on his country’s funding needs. And then this afternoon came word that Greece would consider a 4 to 6 month extension of the bailout; but the announcement was seriously devoid of details; so, don’t expect much.

 

Eurozone finance ministers set several preconditions for considering an extension, including a promise from Greece to not roll back any measures implemented under the existing bailout deal and coordinate any new moves with its creditors. They also want the government to pledge that its debts to the Eurozone would be repaid in full. PM Tsipras, in his speech, reiterated plans by his government to immediately unwind already-implemented austerity measures, such as changes to labor laws.

 

You can argue that Greece brought its problems on itself, although it had a lot of help from irresponsible lenders. At this point, however, the simple fact is that Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany — real Greek GDP per capita fell 26% from 2007 to 2013, compared with a German decline of 29% from 1913 to 1919.

 

Despite this catastrophe, Greece is making payments to its creditors, running a primary surplus — an excess of revenue over spending other than interest — of around 1.5% of GDP And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus, and keep running huge surpluses for many years to come.

 

What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another. For now, it looks more and more that the Eurozone finance ministers want to kick Greece out of the union.

 

You will recall that a Ukraine-Russia ceasefire was scheduled to take effect Sunday. Somebody did not get the memo. Ukraine said it would wait until the rebel groups stopped shelling a town in Eastern Ukraine; and the rebels said they would discuss the possible withdrawal of the weaponry later.

 

Meanwhile, Egypt entered the broadening conflict with the Islamic State as its warplanes bombed extremist targets in Libya on Monday in retaliation for the beheading of 21 Egyptian Christians.

 

Cleveland Fed President Loretta Mester says it’s time to drop the “patient” language from the FOMC statement, joining at least six other top Fed officials in suggesting that short-term interest rates could be raised mid-year. Mester says she would like to see the language changed, and she thinks June should be a viable option for the Fed to consider a rate hike.

 

We’ll find out more about what the Fed policymakers are thinking tomorrow, when they release the minutes from the last FOMC meeting.

 

Data from the New York Fed released today shows 11.3% of student loans were delinquent in the final three months of 2014, up from 11.1% in the prior quarter. The share of auto loans at least 90 days overdue also rose, climbing to 3.5% from 3.1% the prior period, even as fewer credit card and mortgage loan payments were late. Delinquency rates for student loans probably understate the actual situation. About half of the student loans are in deferment, in grace periods or in forbearance, temporarily removing them from the repayment cycle.

 

The nation’s student-loan balance climbed by $31 billion last quarter to $1.16 trillion. Just by way of comparison, 10 years ago, student loan debt stood at $363 billion. That makes student loans the largest source of debt after mortgages, which gained $39 billion to $8.2 trillion in the fourth quarter. Auto-loan debt increased by $21 billion to $955 billion. Americans had $700 billion in credit card debt at the end of last year, up just $17 billion, or 2.5 percent, from 12 months earlier. That’s down from $824 billion when the recession ended in mid-2009.

 

The NAHB/Wells Fargo Housing Market index fell to 55 from 57 the month before; homebuilder confidence levels have held in the mid- to upper 50s range for the past 8 months, which is consistent with a modest, ongoing recovery.

 

Manufacturing activity growth in New York State slipped in February as the pace of incoming orders effectively stalled and a gauge of future activity dropped by the most in six years. The New York Fed’s Empire State general business conditions index fell in February to 7.78 from January’s reading of 9.95.

 

A federal judge in Texas, siding with 25 other states, ordered a temporary halt to President Obama’s initiatives to shield millions of people who are in the United States illegally from deportation. The White House said the Justice Department would appeal Monday’s action by U.S. District Judge Andrew Hanen in Brownsville, Texas. Homeland Security Secretary Jeh Johnson said the administration will comply with the injunction and delay accepting applications for deportation relief that had been set to begin on Wednesday. The backdrop for this is a fight in the Republican-led Congress over legislation passed by the House of Representatives to allow funding for the Department of Homeland Security only if Obama’s immigration actions were nullified.

 

A hacking ring has stolen up to $1 billion from banks around the world in what would be one of the biggest bank heists ever. The hackers have been active since at least the end of 2013 and have infiltrated more than 100 banks in 30 countries. These hacks are a bit different because they target the banks themselves rather than bank customers. The hackers mostly attacked banks in Russia, but they also went after financial institutions in the United States, Germany, China and Ukraine. The information was included in a report from cybersecurity firm, Kaspersky. The banks don’t know the exact amount they have lost. And the crimes went largely undetected until sometime last year.

 

US Attorney General Eric Holder has given US Attorneys a 90 day deadline to evaluate whether they can bring cases against any individuals for their role in the 2008 financial crisis. Federal prosecutors who previously brought charges against institutions for inappropriately marketing residential mortgage-backed securities will investigate individual employees for potential criminal or civil charges. Of course, Holder has already announced his resignation, so if anyone is actually prosecuted, it wouldn’t happen on his watch.

 

Another revelation from Kaspersky Labs, the Moscow-based security software firm that revealed the bank hack; Kaspersky says the NSA has figured out how to hide spying software deep within hard drives made by Western Digital, Seagate, Toshiba, and other top manufacturers, giving the agency the means to eavesdrop on the majority of the world’s computers. Kaspersky said it found personal computers in 30 countries infected with one or more of the spying programs, with the most infections seen in Iran, followed by Russia, Pakistan, Afghanistan, China, Mali, Syria, Yemen, and Algeria. The targets included government and military institutions, telecommunication companies, banks, energy companies, nuclear researchers, media, and Islamic activists. A former NSA employee told Reuters that Kaspersky’s findings were correct.

Top lawmakers in the House and Senate have begun their own probes into a recent wave of fraudulent tax filings made through Intuit’s TurboTax, highlighting a growing problem in the “e-filing” industry. IRS data shows that the issue has grown rapidly, to a record of almost 2M suspected incidents by 2013 from about 440K in 2010. The federal government estimates it blocked about $24B in attempts, but still lost about $5.2B in 2013, due to fraudulent e-filings.

Just a little over a month before Apple releases its smartwatch, LG has unveiled a new smart “luxury timepiece” called the LG Watch Urbane, which features a 1.3 inch touchscreen display and runs on Google’s Android Wear. Companies are vying for leadership in the smartwatch space, a market which is expected to be worth $33 billion by 2020. Apple has reportedly ordered 5 to 6 million watches from its Asia suppliers; and that’s just for the first quarter.

Apple has revolutionized music and phones. Now it is aiming at a much bigger target: automobiles. Apple has several hundred employees working secretly toward creating an Apple-branded electric vehicle. The project, code-named “Titan,” has an initial design of a vehicle that resembles a minivan. At best, it will be several years before an Apple car could hit the road, even if development goes smoothly and if Apple decides to proceed with the project. Yeah, look for an Apple car right after you get your Apple TV. In other words don’t hold your breath. The safe money, of course, is that Apple is using this rumored experiment as a way to delve deeper into becoming the core software provider for cars. Google already has a head start.

 

 

 

 

 

 

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