Financial Review

I Want to Go Back to Bahia

Stocks rally for fifth week. Brazil is knee-deep in corruption.

Financial Review by Sinclair Noe for 03-18-2016

DOW + 120 = 17,602
SPX + 8 = 2049
NAS + 20 = 4795
10 Y – .03 = 1.87%
OIL – .26 = 42.13
GOLD – 2.60 = 1256.00
SILV – .11 = 15.89


Just as fast as U.S. stocks tumbled in what was the worst-ever start to a year, they have staged one of the biggest turnarounds in history. The Dow Jones industrial average and S&P 500 officially wiped out their year-to-date losses this week, as the Fed adopted a more dovish stance on interest rates. If the Dow can hold its gains through the end of the month, it would mark the biggest quarterly comeback since 1933. For the week, the Dow rose 1.8 percent, the S&P 500 gained 1.3 percent and the Nasdaq was up 1 percent.


Crude prices hit  new 2016 highs, following a fifth week of gains, marking the longest rising streak in about a year for the benchmark. The run has brought WTI above $42 per barrel, surging more than 50% from 12-year lows in February, on the back of a weaker dollar and growing optimism that major producers will strike a production freeze deal. Today was a quadruple witching session, so the June contract closed down .26 at $42.13.


Investors are beginning to think the economy is not headed for a recession. Consumers aren’t so confident. U.S. consumer sentiment slipped to 90.0 in March — the lowest reading in five months — because of concerns about how fast the economy will grow in the months ahead as well as the expectation that gasoline prices will rise.


The Bank of Russia kept policy on hold. The Bank of Russia held its key interest rate at 11.00% for a fifth straight meeting. In its statement, the central bank made note of “high” inflation and warned that the recent rebound in oil prices could be temporary. Meanwhile, 10-year Japanese government bonds continue to find strong demand on the carry trade, driving the yield to an unprecedented minus 0.135 percent.


ECB President Mario Draghi addressed the EU in Brussels this morning, saying, “even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the Eurozone. For that you need structural reforms, mostly driven to raise the level of demand, public investments and lower taxes. Even more importantly, one needs clarity on the future of our…monetary union.” European leaders will discuss further integration of the economies and policy making at a summit in June.


Hedge funds are shutting down at the fastest pace since the financial crisis. Data from Hedge Fund Research shows 979 hedge funds closed in 2015, a 13% jump in closings from 2014. This made last year the worst in terms of hedge fund closings since 2009. Additionally, the data showed that just 183 hedge funds opened in the fourth quarter, down from 269 in the third quarter. This was the lowest number of new hedge funds in a quarter since 2009.



Starwood Hotels & Resorts, the operator of Sheraton and Westin hotels, has received a binding buyout offer from a group led by China’s Anbang Insurance.  A successful deal would bolster Anbang’s reputation as one of China’s top corporate acquirers and would follow its purchase of New York’s iconic Waldorf Astoria hotel last year. It would also be the biggest acquisition of a U.S. company by a China-based investor. Anbang’s new offer raises the value of Starwood to $13.16 billion from $12.8 billion, or $78 a share in cash. The Anbang offer eclipses Marriott’s cash-and-stock deal, which Starwood agreed to in November and is currently worth about $68 a share. Now we’ll see if Marriott can sweeten their deal.


If the FBI wins its court fight to force Apple’s help in unlocking an iPhone, the agency may run into yet another roadblock: Apple’s engineers. Apple employees are already discussing what they will do if ordered to help law enforcement authorities. Some say they may balk at the work, while others may even quit their high-paying jobs rather than undermine the security of the software they have already created


Nike has unveiled sneakers with self-lacing technology (think Marty McFly) that it plans to make available for the 2016 holiday season, as it looks to one-up rivals in an increasingly tech-driven athletic market. The HyperAdapt Trainer 1.0 has a sensor in the heel that adjusts the sneaker’s fit, while two side buttons allow the user to tighten or loosen the grip. Nike’s new shoes take about three hours to fully charge, and each charge lasts about two weeks.


Facebook and Twitter are battling to win the right to stream conventional TV programming. Both companies, eager to ramp up their capacity to deliver live streaming video, have approached programmers about a deal for such rights. Facebook and Twitter’s strategy to expand into live TV programming is in line with the current industry trend favoring live video and original content. According to Facebook’s estimates, live and original content broadcast brings three times more views than pre-recorded video content. Live programming on Facebook and Twitter’s platforms will also incorporate various social media functions, such as live Q&A sessions.



The political crisis in Brazil took yet another turn yesterday when a federal judge issued an injunction suspending the appointment of Lula da Silva as President Dilma Rousseff’s chief of staff. Dilma tried to appoint Lula, her former mentor, to her cabinet to provide him with immunity against possible charges of bribery and money laundering. We know this because a different judge made public 50 wiretappd phone conversations between Dilma and Lula about the appointment, and they aired on Brazilian TV, with all the drama of a telenovela; yes, Brazil wiretapped their own president, and apparently without due process.  Dilma has her own problems with possible impeachment for campaign finance irregularities.


The troubles of Dilma and Lula are part of a bigger scandal involving the state run oil company Petrobras, one of the largest companies in the world. By some estimates, politicians and business contractors and executives of Petrobas skimmed more than $5 billion; since the scandal blew up in March 2015, some 86 people have been convicted of crimes relating to Petrobras in total, most of them members of Brazil’s political or economic elite. And even though Dilma is not believed to be directly involved in the Petrobras scandal, she was the chairwoman of Petrobras’s board from 2003 to 2010, so all this occurred on her watch. The scandal is shaking the Brazilian political establishment to its very foundations. Millions of Brazilians have taken to the streets in protest. It isn’t just one political party. Senator Neves, the candidate that Dilma defeated in her 2014 re-election, is also implicated in a corruption investigation; Neves showed up at a street protest earlier in the week, only to have the crowd shout him down and force him to retreat.


And this is all happening during a severe economic downturn. Years of high government spending helped create a debt and inflation problem. The collapse in oil and other commodities prices has shrunk some of Brazil’s most lucrative industries. It’s an even worse version of the stagflation Americans experienced in the 1970s: The Brazilian real (its currency) lost about half its value compared to the dollar in just 2 years.



For now, Rousseff is refusing to resign. Speaker of the House Eduardo Cunha – who is himself, ironically enough, being investigated as part of the Petrobras scandal – filed impeachment charges last year, but the charges died due to lack of political support. However, the new evidence against Lula, as well as the secondary scandal surrounding Rousseff’s attempt to appoint Lula to her Cabinet, may well change the impeachment calculus. Yesterday, Cunha refiled the impeachment charges. But Dilma isn’t facing impeachment for Petrobras, but rather campaign finance problems.


And that brings up a strange twist; even if Dilma survives impeachment she could be forced out of office if the election courts find her election campaigns were funded by dirty Petrobras money, which seems easily within the realm of possibility, a court could rule that election null and void. Dilma and her vice president could be force out of office; the next in line of succession is the speaker of the House, Cunha, who is being investigated on suspicion of involvement with Petrobras, and thus at risk of impeachment himself.


If you dig a little deeper into Brazilian history you will remember that Brazil was ruled by the military from 1964 to 1985. Dig deeper and the PT Party of Lula and Dilma, also known as the Worker’s Party has cultivated a reputation for cleanliness, for sticking up for the common people against a corrupt system. The clear evidence that a number of PT politicians were involved in Petrobras has tarnished that brand considerably. Lula, in his presidency, pushed through the Bolsa Familia program, a poverty relief initiative that distributed cash to about 12 million poor Brazilian families. As a result, many poor Brazilians are deeply loyal to the PT, even in the face of the Petrobras scandal. Many of the protesters now are middle class or upper middle class. And the most vocal opponents of the PT party can be found in the media, led by a newspaper, TV, radio conglomerate known as Globo – which coincidently backed the old military dictatorship, and has openly called for the end of democracy.


None of this is a defense of PT. Both because of genuine widespread corruption in that party and national economic woes, Dilma and PT are intensely unpopular among all classes and groups, even including the party’s working-class base. The corruption appears real, unfortunately the anti-corruption movement appears to be supported by factions that are themselves knee-deep in corruption.



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