Financial Review

While the Getting is Good

Financial Review by Sinclair Noe

DOW + 56 = 17958
SPX + 9 = 2091
NAS + 23 = 4974
10 YR YLD + .06 = 1.96%
OIL + .37 = 50.79
GOLD – 8.70 = 1194.50
SILV – .36 = 16.25


Initial claims for unemployment benefits increased 14,000 to 281,000 in the week ending April 4th.  Over the past 4 weeks, jobless claims have averaged 282,500 a week; the lowest level in 15 years. While companies are maintaining headcounts, job listings also have climbed. Openings rose to 5.1 million in February, the most since January 2001, according to the JOLTS report on Tuesday.


Wholesale inventories rose 0.3% in February as wholesale sales fell 0.2%, perhaps a sign that companies experienced less demand in late winter that could cause them to temporarily scale back production.


In a televised speech today, Iran’s  supreme leader, the Ayatollah Ali Khamenei said Tehran would agree to a final nuclear accord with the US and five other nations only if all sanctions over its disputed nuclear work were lifted.  In remarks apparently meant to keep hardline loyalists on side, he warned about the “devilish” intentions of the United States. Meanwhile, Iran’s oil minister, speaking today in China said that OPEC would “coordinate” to accommodate Iran’s return to oil markets without causing a price crash.


Samsung Electronics expects to ship record numbers of its new Galaxy S6 smartphone after it goes on sale tomorrow, but will have problems fulfilling demand for the curved-edged version due to difficulties in manufacturing the screens. The hope is that the launch of the flagship device will help spark a turnaround at Samsung following a slump in earnings over the past year or so.


American Airlines and US Airways received their single operating certificate from the Federal Aviation Administration on Wednesday, an important step in the integration of the two airlines. The merger between the airlines closed in December 2013, but the carrier still operated separate American and US Airways flights. Passengers will not see much change. Flights will still be operated under the American and US Airways brands until the carriers merge their reservation and passenger ticketing systems this year. Once that is done, the US Airways brand, ticket counters and website will change to American.


Walgreens will close 200 of its 8,232 US drugstores. The company will also reorganize corporate and field operations and revamp its technology, which along with the store closings will help cut an additional $500 million in costs by the end of fiscal 2017. That would extend a $1 billion cost-cutting initiative announced in August.


Yesterday we talked about the idea that the prospect of higher rates has been pushing consumers away from revolving debt, like credit cards, even as they take on more non-revolving debt, such as car loans; it might also be leading to more borrowers locking in low rates of floating rate mortgages. And mergers and acquisitions are back in a big way. Yesterday was a $100 billion dollar day for M&A.  It started with a big deal in the energy sector; Royal Dutch Shell’s $70 billion acquisition of BG Group of Britain signals that the kinds of mega-energy-mergers that reshaped the industry in the late 1990s may be due for a revival. Mylan’s $29 billion approach to Perrigo, meanwhile, underscores just how red-hot consolidation in health care continues to be. Both of the generic drug makers had done their own deals in just the last two years.


This afternoon, news that Blackstone Group and Wells Fargo are nearing a deal to buy a real estate portfolio from General Electric worth as much as $30 billion. It could be one of the largest real estate deals since Blackstone acquired Equity Office Properties Trust for $39 billion in 2007 at the height of the last property boom. Commercial values in the US have since reached records as investors from around the globe seek places to put money at a time of near-zero interest rates. Unloading the assets would further Chief Executive Officer Jeffrey Immelt’s goal of shrinking GE Capital, whose lack of access to credit during the 2008 financial crisis put the parent company at risk. GE Capital has been disposing billions of dollars in holdings, including foreign bank stakes, while Immelt works to bulk up the industrial side of GE’s business.


Bankers and hedge fund managers are licking their chops as a spree of M&A, fueled by the expectation that a multi-year run of cheap money may be coming to an end is expected to push transactions that could top record value amounts.  Deal value has already surged to $1 trillion for 2015. A projected $3.7 trillion worth of deals this year would be second only to 2007, when all M&A surpassed the $4 trillion mark. Part of that comes on growing sentiment that, whenever the Federal Reserve finally decides to increase rates, this won’t be coming until after summer; so get the deals done while the getting is good. Data housed by S&P Capital IQ says seven of the 10 biggest M&A transactions in the wake of the financial crisis have all been announced within the last 16 months. What’s more, S&P Capital data shows, the year-to-date announced deal value is, right now, as high as it has ever been, including the bellwether year 2007. That also means that deals are attracting a premium.


It does not mean that every deal will work out. Altera stock dropped after reports that talks to be bought by chipmaker Intel Corp. have fallen apart. Intel has been on the hunt for growth as it faces a slowdown in the market for PCs that forced a $1 billion cut in its first-quarter sales forecast last month. Altera shares had jumped 28 percent on March 27 after reports of the talks.



In his annual letter to shareholders, Jamie Dimon, the chief of JPMorgan Chase, warns “there will be another crisis” – and the market reaction could be even more volatile, because regulations are now tougher; but the next crisis won’t be caused by the banks because there are so many regulations in place that they would not be the likely cause of a meltdown.  He argued the crackdown on the financial sector, added to more-stringent requirements for capital and liquidity, will hamper banks’ capacity to act as a buffer against shocks in financial markets. Of course, not having enough funds set aside for an emergency didn’t work out so well in 2008. Then he goes on to say the bank is in a better position than before and is much more prepared to handle a downturn. If it all sounds a bit confused; not really; Dimon doesn’t like regulations; JPMorgan share price has not been great and Dimon blames regulations.


Remember that this was an annual letter to shareholders, which means it is basically a 39 page sales brochure. There were plenty of nice charts and graphs, and everything seemed to move from the bottom left side of the page to the upper right side of the page. There is some revisionist history when it came to the acquisitions of Bear Stearns and WaMu, see page 19 of the letter.


Dimon also blamed legal and regulatory costs for weighing on the firm’s share price, writing: “While we acknowledge that our P/E ratio is lower than many of our competitors’ ratio, one must ask why. I believe our stock price has been hurt by higher legal and regulatory costs and continues to be depressed due to future uncertainty regarding both.” The letter mentions continuing foreign-exchange settlement negotiations as an area of uncertainty. Dimon calls for some serious policy discussion about the way regulators regulate, and he thinks the legal costs will “diminish” over time; and they would probably diminish faster if he can change the regulatory policies. He didn’t provide a chart on legal costs, but if he did, the numbers for the past five years would have been about $32 billion; which is bigger than all the credit they extended to small business in 2014, and bigger than the bank’s net income last year. Dimon said he expects the firm’s legal costs to “normalize” in 2016. Deep in the footnotes you can find that the bank is still looking at nearly $6 billion in legal expenses. Which is actually about the average paid for legal expenses in the past few years, but I don’t know if that means it is normal.


The European Central Bank bolstered its emergency funding for Greece’s stricken banks, as Athens made good on its promise to pay back the International Monetary Fund, averting an unprecedented default. Having threatened to deliberately miss a €448m loan repayment to the Fund without a guarantee of fresh bail-out cash, Athens sent its latest payment this morning. Christine Lagarde, the director of the IMF confirmed the payment while speaking in Washington, saying: “Yes, I got my money back.”


The Greek government has warned its paymasters it would run out of funds to make its loan obligations and continue to pay out a €1.7bn monthly social security bill without a release of bail-out cash. A two-month stalemate in Greece’s bail-out negotiations has seen capital flee the country’s banks, which have repeatedly hit the limit on the emergency cash. The ECB’s latest move will just cover the €1.1bn that was withdrawn from banks from March 30 to April 8.


Greece is currently negotiating a short-term bailout extension that it doesn’t really want, offered by European institutions which don’t trust the Greek government and approved by other governments that are running out of patience. That’s the bottom line. Athens currently has until about April 15 to present a completed reform list to its creditors.


But even if Greece gets the bailout deal when European finance ministers meet on April 24 (which isn’t assured), we’ll be back in the same place in about two months. Then, the government isn’t going to want another extension. It’s going to want the major debt deal it promised to deliver when it won the election. A deal to reduce debt is actually a good idea, even if Germany doesn’t want it. Greece’s far-left government is correct about the country’s debt burden; it’s completely unsustainable under the current plans. Greece is about to get some relief for a few months. After that, Athens, Frankfurt and Brussels go back to the brutal negotiations.




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