Financial Review

The Lights Are On

Financial Review by Sinclair Noe

DOW – 85 = 18,203
SPX – 9 = 2107
NAS – 28 = 4979
10 YR YLD + .04 = 2.12%
OIL + 1.00 = 50.59
GOLD – 2.40 = 1204.50
SILV – .13 = 16.33


Just a few economic reports today.


Corelogic reports home prices jumped 1.1% in January to take the year-over-year gain to 5.7%. CoreLogic said 27 states and the District of Columbia are at or within 10% of their peak.


The Thomson Reuters/PayNet Small Business Lending Index fell to 120.9 from an upwardly revised December reading of 133.5.  Small businesses cut back on borrowing. Cold weather may be part of the reason.


Car companies reported February sales figures. Ford Motor sales dropped 2%. Ford was projected to report a 5.8% increase in sales but deliveries of F-Series pickups, Escape sport-utility vehicles and Fusion family cars all declined last month. General Motors sales rose 4.2 percent but they still fell short of estimates as sales of light trucks rose and sedans fell. Toyota, Fiat Chrysler, Honda and Nissan all reported deliveries that increased less than analysts had estimated. Industry-wide, the annualized selling rate, adjusted for seasonal trends, rose to 16.2 million cars and light trucks, from a 15.4 million pace a year earlier.


Chief executives of large U.S. companies see the economy accelerating modestly in 2015. According the Business Roundtable’s first-quarter survey the CEOs expect gross domestic product to advance 2.8% this year; just slightly more optimistic than most estimates. Among the CEOs, 40% said their firms would increase hiring over the next six months, while 23% expect to cut staff; while 80% expect their company’s sales to increase in the next six months.


The House of Representatives has approved funding for the Department of Homeland Security through Sept. 30 without any immigration restrictions, ending a standoff that had threatened a partial shutdown for the agency.


Israeli Prime Minister Benjamin Netanyahu delivered a speech before a joint session of Congress today. He warned the United States was negotiating a bad deal with Iran that paved the way to a “nuclear nightmare.” Delivering dueling messages within hours of each other, Netanyahu made his case against Obama’s Iran diplomacy in a speech to Congress that aligned himself with the president’s Republican foes. Obama responded in the Oval Office, that Netanyahu offered “nothing new.”


As Netanyahu spoke, the price of oil increased $1 per barrel. For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Oklahoma, pushing US supplies to their highest point in at least 80 years. US crude stocks rose 8.4 million barrels last week to a record 434 million. Gasoline stocks fell by 3.1 million barrels. The national average price of gasoline is $2.44 a gallon. That’s $1.02 cheaper than last year at this time, but up 37 cents over the past month.


We’ve talked about the European Central Bank’s $1.2 trillion bond-buying plan to try and stimulate the economies of the Eurozone. The ECB is expected to announce further details of its asset-purchase program after it meets in Cyprus Thursday. Standard & Poors thinks there might be a problem with Euro QE; S&P estimates that the anticipation of quantitative easing in Europe squashed bond yields so much that the liabilities of defined-benefit pension plans rose by up to 18% last year.


Meanwhile, we check in on Greece. The Euro deal done six days ago was supposed to stabilize the Greek debt crisis. In return for a bit of fiscal autonomy the Syriza government recognized its debts as legitimate and gave its lenders a running veto on any measures taken that might impact on the economy, the banks or the budget balance. But the situation in Greece is still critical. First because Greece gets no new loans from the deal, because it is pledged to run a budget surplus it has to finance the state from tax receipts, but these have reportedly slumped by 22% since December. Normally the government could bridge the gap by issuing short term bonds but the ECB has capped that move. And now Greece faces some imminent debt repayments.


It appears the Euro Monetary Union has thrown a lifeline to Greece, with bricks attached. Greece does not want default, nor an exit from the Euro Union; and so they have not embraced the lifeline. Greek Finance Minister Yanis Varoufakis perceives that the Eurozone will tolerate the “creative ambiguity” in the deal; that there is scope for a long-term settlement in June; and that he can keep both the Greek state and its banks solvent until then. The hope is that the rest of the Eurozone will soften on its insistence on austerity, become more tolerant of debt forgiveness, and give growth a chance. The longer they can drag it out, the better their chances.


Hoping to secure a fresh bailout from the IMF, Ukraine lawmakers passed a raft of austerity measures, including pension cuts and tax increases, during a lengthy parliament session yesterday that lasted late into the evening. The $17 billion bailout package, aimed at averting the country from financial collapse, will be considered by the IMF’s executive board on March 11. Russia and Ukraine have a temporary gas deal in place. The overnight agreement will supply Ukraine with gas for the month of March. “Under the deal sealed in Brussels, Ukraine’s Naftogaz will pre-pay and order sufficient quantities of gas to ensure all domestic consumption for March and guarantee undisrupted supplies to the EU.” Ukraine’s central bank raised its benchmark interest rate to 30% from 19% to “stabilize lending markets.”


 Citigroup said it has agreed to sell its consumer finance unit OneMain Financial Holdings to subprime lender Springleaf Holdings for $4.25 billion in cash. Springleaf is a former subprime lending division of American International Group, AIG. OneMain is part of Citi Holdings, which Citigroup created during the financial crisis to park assets that it wanted to eventually divest or wind down. OneMain had filed for an initial public offering in October, but an outright sale was always Citigroup’s preferred choice. Springleaf was apparently able to get OneMain at an attractive price because it was the most logical strategic buyer and Citi was a highly motivated seller.


The resulting company will now be, by far, the biggest lender to consumers with lower credit scores in the country. It will have nearly 2,000 branches in 43 states, through which it provides personal and auto loans at high interest rates to customers with little access to other forms of credit. A recent investor presentation by Springleaf showed that the average interest rate on its outstanding loans has been around 26% to 27%. Losses for bad loans have been trending below 5%, leaving an effective yield earned by Springleaf near 22%. Springleaf personal loans average $4,000 to $5,000 in size and 40 months in term. Typical uses are for debt consolidation, home or car repair or medical bills.

There is certainly plenty of irony in these companies coming together six years after a credit meltdown rooted in subprime lending – the same meltdown that resulted in the near failure of their former parent companies, AIG and Citi, which combined required more than $100 billion of US government bailout money to survive.


Barclays, the British bank, reported a pretax profit of $8.5 billion for 2014, up 12% from a year earlier and better than expected. That includes setting aside an extra $1.2 billion for potential fines relating to allegations of foreign exchange manipulation—even though the bank could face up to $8 billion in fines over the next two years. If you put the legal reserves back in the mix, Barclays reported a loss in the most recent quarter.


Barclays has not yet settled any currency-rigging cases, which is why its reserves continue to pop up in earnings reports. If you look at the othebanks’ FX-rigging settlements so far, they seem to cover behavior dating from 2008 through 2013, more or less. That is, mostly post-crisis behavior. We all know the banks behaved badly leading up to the financial crisis, and we hear about settlements covering the pre-crisis acts, and we think the banks are being punished and must surely be conducting current business with some slight measure of probity, even if the facts do not bear out any substantive change in behavior.
Google has confirmed its plans to offer wireless phone service “in the coming months”, promising the service will be small-scale and not intended to compete with the four big U.S. national carriers. Earlier media reports suggested that Google’s service would sift through cellular connections from Sprint, T-Mobile  and Wi-Fi “hot spots” to pick the best signal for routing calls, texts and data.


Apple sold the most smartphones globally in the fourth quarter, overtaking Samsung for the first time since 2011. According to research firm Gartner, Apple sold 74,832 smartphones to end users worldwide, ahead of the 73,032 phones sold by Samsung.


Once upon a time, Blackberry was the big name in mobile phones; half the phones sold in the US were Blackberrys. Within a matter of about 6 years, the company has gone from leader to has-been; they changed their business model to focus on mobile phone software management, and now they are trying to get back in the phone business again. A few months ago they introduced a square smart phone, and today they introduced a 5-inch touchscreen phone that will retail for $275.


About 8 years ago NASA launched the Dawn spacecraft, that’s D-A-W-N; and over the past 8 years the solar powered craft has traveled about 260 million miles; it is now closing in on a far-flung asteroid belt and it has been focusing on a little dwarf planet called Ceres. The dwarf planet looks like a big cratered rock, with one exception; in one of the craters, 57 miles wide, there is a light, a bright light.


The Dawn spacecraft is still too far away to determine the source of the light. It could be the reflection of water vapor or reflective salts, which would be interesting, or it could be something else, which would be even more interesting. With any luck, the spacecraft will fly closer over the next few months and we will learn if the bright lights of Ceres are a natural phenomenon, or if someone left the light on for us.



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