The Dog Ate the Greek Proposal
Financial Review by Sinclair Noe
DOW – 23 = 18,116
SPX – 0.64 = 2109
NAS + 5 = 4960
10 YR YLD – .07 = 2.06%
OIL – 1.36 = 49.45
GOLD – 2.10 = 1202.80
SILV + .05 = 16.42
The S&P 500 climbed 0.6 percent last week to finish at record highs, the third record high of the year. The Dow rose to its first record of the year and the Nasdaq Composite closed at its highest level since March 2000, closing in on 5000. The Russell 2000 Index advanced 0.7 percent, also ending at a record Friday.
Much of the stock market action has followed news of a compromise with Greece. At last week’s meeting, Greece signed up to all the conditions of its current bailout package and to continued international oversight, provided the Greeks come up with a list of reforms. Easier said than done; any reforms have to be acceptable to the Troika (the IMF, the ECB, and the EU, and subject to approval by all EU members) and at the same time it will have to be acceptable to Greeks who voted against the austerity plans of the Troika. The plan was supposed to be presented today, but that didn’t happen. Now the Greeks say they will present the reforms tomorrow. Given that Monday night was treated as a hard deadline for getting the Greek proposals in, Finance Minister Yanis Varoufakis prudently turned in a draft a day early. Apparently that early draft did not satisfy the Troika or the ECB.
Nearly a week after a ceasefire was supposed to have gone into effect in Ukraine, Secretary of State John Kerry said on Saturday that he and his British counterpart, Philip Hammond, would discuss additional sanctions in response to Russia’s “brazen” violations of the agreement. Russia’s credit rating was cut to below investment grade by Moody’s Investors Service on Friday, joining Standard & Poor’s in ranking the country’s debt as junk.
Federal Reserve Chairwoman Janet Yellen will testify before Congress on Tuesday and Wednesday; the semi-annual trek to Capitol Hill for the Humphrey Hawkins testimony. Yellen will likely have to deal with questions on the timing of possible interest rate hikes, the strength of the dollar, and the overall strength of the economy; and also efforts to audit the Fed. The minutes from the Fed’s FOMC meeting in January indicated that there was no rush to raise rates, but don’t be surprised if Yellen floats a trial balloon with the politicians and talks up the strengths of the economy, pointing the way to higher rates.
Any hawkish sentiment from Yellen would likely lead to a stronger dollar but the bigger question is how it might affect the stock and bond markets. If the reaction is negative, it should be fairly easy for the Fed to walk back any particular statement from Yellen; certainly easier than walking back an official Fed statement.
The National Association of Realtors reports existing home sales declined 4.9% in January to an annual rate of 4.82 million units, the lowest level in 9 months. Sales fell in all four regions. Tight inventories are hurting sales by limiting the selection of houses available to potential buyers. The lack of supply is also keeping house prices elevated, helping to sideline first-time buyers from the market. Last month, the inventory of unsold homes on the market slipped 0.5 percent from a year ago to 1.87 million. It was the second straight year-on-year decline. Shrinking supply pushed the median price up by 6.2% in January to $199,600 from a year ago.
This week brings a lot for investors to chew on, including several retailer earnings that should provide some clues about consumer spending, including Home Depot and Lowe’s, as well as Target, Gap Stores, Kohl’s and Dollar Tree. This group will close out the earnings season. Presently, PE ratios are exhibiting levels not seen since 2004. The forward P/E ratio for the S&P 500 is 17.1, well above 5, 10, and 15-year averages, according to Reuters. At the same time, more than 80% of profit forecasts from the S&P 500 fall below the Wall Street consensus and earnings are expected to see their first quarterly YOY decline since the end of the recession.
Falling energy prices continue to weigh on inflation. The Labor Department releases its consumer price index report Thursday. Economists expect a steep 0.7% drop in the January CPI. If that’s the case, yearly inflation could turn into deflation, with the CPI down about 0.2% from a year ago. The core CPI, which excludes food and energy, is expected to be up slightly in January over December and higher than a year ago.
The Commerce Department releases its second reading of the fourth quarter’s gross domestic product Friday. Economists expect the growth rate to be revised down to an annual rate of 2.1%, from the current estimate of 2.6%. One source of the downward revision will be inventories. Monthly data on inventory gains have come in weaker than Commerce estimated. That’s a mixed reading for the outlook. Businesses aren’t dealing with an overhang of too much merchandise, but low inventories are the result of West Coast port troubles.
West Coast ports are working at full speed again after operations resumed Saturday evening. The International Longshore and Warehouse Union and the Pacific Maritime Association, which represents employers, came to a tentative agreement on a new five-year labor contract late on Friday, but the contract still must be ratified by members, and it will still take some time, maybe a couple of months, to work through the backlog.
The largest U.S. refinery strike in 35 years entered its fourth week as workers at 12 refineries accounting for one-fifth of national production capacity were walking picket lines over the weekend. A total of 6,550 members of the United Steelworkers union (USW) at 15 plants, including the 12 refineries, are involved in the work stoppage that began on Feb. 1 when talks for a new three-year contract between the USW and lead oil company negotiator Shell Oil Co stopped. Talks were resumed but have halted again after nearly reaching an agreement on Friday.
Meanwhile, the price of oil was down again, and OPEC is worried. Today there were rumors floating that OPEC would call an emergency session to deal with low prices. For now, nothing is scheduled, but OPEC says a meeting is possible in the next month or so.
Funding for the Department of Homeland Security is likely to lapse because of a failure of Congress to pass new funding for the agency by a looming deadline on Friday. White House spokesman Josh Earnest said there is still hope for a last minute deal. Funding for the agency is embroiled in a fight with the Republican-controlled Congress over President Obama’s executive orders on immigration.
At the same time, and I’m sure it is purely coincidental, a video has surfaced from a Somali based terrorist group basically threatening shopping malls in the US, such as the Mall of America in Minnesota. Secretary of Homeland Security Jeh Johnson said security at the mall would be enhanced in ways that were both visible and not visible to the public, and called for shoppers to be vigilant.
So what happens if DHS actually shuts down after midnight on Friday? Most employees stay on the job, without pay: The department has about 230,000 employees, most of whom would be deemed essential and would keep working, without pay. Members of the Coast Guard, like Border Patrol agents, would be required to report to work. But, the DHS says, certain patrols and facility inspections would need to be cut back; nearly $1 billion in acquisition and maintenance contracts would be deferred; and 6,000 civilians who work for the Coast Guard would be furloughed. Neither enlisted men and women nor civilians would be paid. E-Verify, which allows employers to check immigration status of their employees, would not be availbale for the duration of a shutdown.
HSBC reporting that profits fell 17% to $18.7B in 2014, down from $22.6B the year before and below the average analyst forecast of $21B. The bank, which faced a significant number of fines and settlements last year, also cut its target for RoE to “more than 10%” from a previous target of more than 12%. HSBC responded to a report that CEO Stuart Gulliver held a Swiss bank account, saying he declared all his earnings to UK tax authorities.
Valeant made its biggest acquisition yet. The Canadian pharmaceuticals giant will pay $10.1 billion in cash for Salix Pharmaceuticals, best known for making a drug to treat irritable bowel syndrome. Valeant, which tried to buy the maker of Botox last year, recently said it would slow down its acquisition spree and pay down debt.
Apple has announced its largest European investment ever – a €1.7B plan to build and operate two data centers in Ireland and Denmark that will power its online services for customers across the continent. Like all Apple data centers, the two 166,000 sq. meter facilities will run entirely on clean, renewable energy sources, and are expected to begin operations in 2017.
Investment advisers should act in their customers’ best interests. Right now, only some advisers are fiduciaries, required to put their clients’ needs first, while many brokers and advisers need only to recommend “suitable” financial products. The White House has introduced a plan to change that and you should not be surprised that the financial industry is fighting the plan. The Labor Department planned to send the proposal on Monday to the Office of Management and Budget for review and the details of the proposal probably won’t be finalized for a few months. At the heart of the proposal is an effort to tighten the legal standard for brokers handling retirement funds in individual retirement accounts and 401(k)s, which now hold more than $11 trillion. It’s estimated that investors lose more than $17 billion a year to hidden fees, high commissions and conflicted advice.
Birdman won the Academy Award for Best Picture and Best Director. Eddie Redmayne captured the best actor award for his portrayal of Stephen Hawking in “The Theory of Everything.” Julianne Moore won the award for best actress for her role in “Still Alice.” If you aren’t familiar with the winners, don’t feel bad; 7 of the 8 best picture nominees were produced independently. Birdman has only pulled in $74 million in worldwide box office. The good news is that Hollywood is still making films that are not based on comic book characters.