The Last Century of Fossil Fuels
Financial Review by Sinclair Noe
DOW – 82 = 17,766
SPX – 13 = 2079
NAS – 46 = 5021
10 YR YLD – .02 = 2.38%
OIL + .14 = 58.28
GOLD + 1.40 = 1174.70
SILV – .17 = 16.06
The Standard & Poor’s 500 closed out 2014 at 2,058, and since then it has been trading in a fairly tight range, from about 2050 to 2130. It’s been 3 1/2 years since the broad stock market suffered a 10% drop. At some point the market will either break out or breakdown, but we didn’t see any real indications today. Even though the major market indices have hit record highs this year, the Dow, with today’s loss, is in negative territory year to date.
In contrast, international markets have been anything but boring. Germany’s DAX entered correction territory, down 10%, as European stocks declined on continuation of Greek debt negotiations. And Wednesday could be a very interesting day for Chinese stock exchanges, where the Shenzen has been on a run; up 50% year to date. Index provider MSCI will announce tomorrow whether to include China’s domestic markets in its widely followed emerging-market and global indexes. Rival index provider FTSE Group has already inaugurated transitional indexes for emerging markets to include Chinese A-shares, while S&P Dow Jones Indices said it would likely add the shares to its indexes in September. The new step will add a piece of a market that has some of the world’s highest valuations and volatility to millions of foreign investors.
If you thought the bull market would fix pensions by now, you’d be wrong. Half a trillion dollars wrong. Pensions and other post-employment benefits of the giant companies in the Standard & Poor’s 500 are underfunded to the tune of $584 billion; that’s 44% worse than the $405 billion underfunding in 2013. According to a report released by S&P, just 75% of the total obligations are covered, down from 81% in 2013. And just 4.5% of pension and post-employment benefit plans are fully funded, down from the 8.4% that were in 2013.
Total assets set aside for pensions and post-employment benefits plans grew just 3.5% in 2014. The trouble is that obligations shot up 11.3% to a record $2.34 trillion. That’s a mess. Pensions are still reeling from the 37% hit they took amid the 2008 market meltdown. Most of the mess centers around the low growth of pension investment asset values compared to the skyrocketing of the obligations. The underfunding of corporate pensions hit $389 billion in 2014 – which is 9.7% worse than the shortfall in 2011 – even though the market has shot up by 10% those years. S&P says pensions are the most underfunded since the record high in 2012 at $452 billion.
Leaders from the G7 industrial nations met in the Bavarian Alps for a second day of a summit overshadowed by Greece’s debt crisis and ongoing violence in Ukraine. On Sunday, leaders focused on global growth. Today, German Chancellor Angela Merkel urged G7 leaders to commit to tough goals to cut greenhouse gases. The G-7 nations agreed to cut greenhouse gases by phasing out the use of fossil fuels by the end of the century. Merkel said the leaders had committed themselves to the need to “decarbonize the global economy in the course of this century”. They also agreed on a global target for limiting the rise in average global temperatures to a maximum of 2C over pre-industrial levels, but they did not actually sign off on immediate or binding agreements on emission targets.
In a 17-page communique, the G7 leaders agreed to back the recommendations of the IPCC, the United Nations’ climate change panel, to reduce global greenhouse gas emissions at the upper end of a range of 40% to 70% by 2050, using 2010 as the baseline. Reacting to the summit’s final declaration, the European Climate Foundation described the G7 leaders’ announcement as historic, saying it signaled “the end of the fossil fuel age” and was an “important milestone on the road to a new climate deal in Paris”. That may be a bit of an overstatement, but we are seeing a shift in thinking about fossil fuels, and there are some important implications.
The G-7 meeting is a small step with no binding agreements, it will be followed in a month or two by an encyclical published by Pope Francis dealing with climate change, and then the IPCC summit in Paris later this year, which might actually result in binding agreements.
There were other issues at the G-7 summit. Merkel warned that time is running out for a deal to keep Greece in the Eurozone; she said Europe would show solidarity but only if Greece “makes proposals and implements reforms”. The European Commission is asking for tax increases and cuts in civil servants’ salaries and pensions, before the next €7.2 billion-euro tranche of bailout money can be released. But Greece has robustly rejected these proposals without some form of debt restructuring agreement in return.
President Obama reportedly said that “the strong dollar posed a problem”. A senior White House official denied the report, saying the president was just reiterating his belief that global demand needs to strengthen and G-7 members need to step up use of policy to drive growth. Obama said at a news conference following the G-7 meeting in southern Germany. “Don’t believe unnamed quotes, I did not say that. I make a practice on not commenting on the daily fluctuations of the dollar or any other currency. ”
Apple is hosting its annual developers’ conference today. Apple introduced a streaming music service it developed with Beats Electronics, the company it acquired for $3 billion last year. The service, called Apple Music, allows users to search for songs and stream them over the Internet, similar to Spotify. It also makes recommendations for other playlists and albums for people to listen to. The service costs $10 a month or $15 a month for up to six family members. The new Apple Music service will be offered alongside an overhauled version of iTunes Radio, the Pandora-like radio service it introduced in 2013. The service will now include live stations.
The Apple developers’ conference is a big event but the streaming music service seemed to miss the “wow” factor. The conference also dealt with upgrades to the operating system, upgrades to the Apple watch and Apple pay, plus improvements to the mapping system. Apple is known for the next big thing, but it didn’t seem to happen today.
Google’s new mobile phone payment service, Android Pay, will not collect any transaction fees from credit card companies, possibly putting pressure on Apple to drop or lower its charges for Apple Pay. Visa and MasterCard recently standardized their “tokenization” card-security service and made it free, preventing payment services, such as Google, from charging fees to issuers.
Samsung Electronics plans to offer a mobile payments function in a smartwatch to be launched in the second half of the year. Samsung Pay mobile payments service, which supports NFC technology, will become available for “select partners” in July.
Panasonic plans to send hundreds of its employees to Tesla’s Gigafactory in Nevada to prepare for production of lithium-ion batteries for electric cars, which it confirmed will start sometime next year. Panasonic also said it expects to invest nearly $500 million in the current fiscal year through March in its automotive business, which includes the Gigafactory and a joint development project with Spanish auto parts maker Ficosa International.
Deutsche Bank purged its leadership on Sunday, appointing John Cryan as chief executive to replace co-CEOs Jürgen Fitschen and Anshu Jain. Cryan has been on the bank’s supervisory board since 2013 and was a former chief financial officer of UBS. Deutsche Bank failed a U.S. stress test of large financial institutions in March and has been the subject of hefty penalties in recent months. Back in April, Deutsche Bank settled charges leveled by U.S. and British federal authorities, agreeing to pay $2.5 billion in fines and pleading guilty to U.S. charges that it manipulated a key interest rate. Deutsche Bank, which also is ensnared in a currency-rigging scandal, is awaiting penalties for its role in fixing prices in currency markets too.
General Electric is close to an agreement to sell its private-equity-lending unit to Canada’s largest pension fund, marking a major step in the industrial giant’s retreat from banking, in one of the biggest finance takeovers since the credit crisis. The deal, which would include assets of more than $10B, may be announced by GE and the Canada Pension Plan Investment Board as soon as today.
McDonald’s posted a smaller-than-expected decline in worldwide sales at established restaurants in May. Worldwide sales fell 0.3%, the 12th consecutive month of declines. Sales in the U.S. fell more than 2% as fewer customers and increased competition ate into demand.
Sears Holdings’ reported a narrower-than-expected adjusted loss of $2 per share in its first quarter. Revenue continued to disappoint with sales falling more than 25% from a year earlier. The big problem is that Sears is burning through cash; holding $286 million in cash at the end of the quarter, down from $4.4 billion at the start of 2006. The company has suffered more than $7 billion in net losses since 2012.