Financial Review

Wipe Out

…..More records for Dow, S&P and Nasdaq. ISM soars. ADP snores. Trump’s wipe out flushes muni bonds. Catalan gone? Equifax, Richard Smith, Gus, Sam, Rich Uncle Pennybags. Getting Googley. Solar shines. Louis Vitton parody.

Financial Review by Sinclair Noe for 10-04-2017

 

DOW + 19 = 22,661
SPX + 3 = 2537
NAS + 2 = 6534
RUT – 4 = 1507
10 y un= 2.33%
OIL – .52 = 49.90
GOLD + 3.50 = 1275.60

The Institute for Supply Management’s index of service-oriented companies  jumped to a 12-year high of 59.8% in September from 55.3%. The last time the index was higher was in August 2005. Numbers over 50% are viewed as positive for the economy and anything over 55% is considered exceptional.

 

ADP reports private-sector employment slowed in September as firms added 135,000 jobs. The ADP data, produced in conjunction with Moody’s Analytics, may be more important than usual this month as it should be much less affected by hurricanes than the government data. Workers are included in ADP payrolls even if they are not paid due to bad weather. Still, Moody’s Analytics’ Chief Economist Mark Zandi said hurricanes Harvey and Irma cut job gains by 50,000-60,000 jobs, mainly by forcing smaller “mom-and-pop” retailers to close. Friday’s Nonfarm Payroll report will be a little crazy, with estimates all over the place due to the hurricanes. The number I’m hearing is 100,000 jobs, which would be very weak, but not enough to change the Fed’s outlook since it will be just a one-month blip in the data. This could provide a nice setup for dollar bulls. We have strong economic data but a weak jobs number could offer a minor, fleeting dip.

 

In a bizarre moment on Tuesday, Trump told Fox News that he was “gonna have to wipe out” Puerto Rico’s debt. Trump said: “We are going to work something out. We have to look at their whole debt structure. You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave goodbye to that.” It isn’t clear how Puerto Rico’s debt could just be made to disappear outside bankruptcy court. Still, to “wipe out” $74 billion in municipal debt, billions of which are guaranteed by the island’s constitution, would shake investor faith in a market long considered one of the safest of havens. Lower-rated municipal borrowers would almost certainly see their borrowing costs rise to account for the added risk. The debt is widely held, by hedge funds, pensions and residents of the territory. Many of the hedge funds could be considered vulture investors who swooped in after Puerto Rico was already in trouble, buying up debt for pennies on the dollar and hoping to force payment at full par. But the biggest chunk of Puerto Rico’s debt is pension obligations.

 

The commonwealth’s budget is under the control of a federally appointed oversight board mandated as part of the bankruptcy legislation. Created by Congress to wield broad sway over the territory’s finances, the panel approves the island’s budget and is meant to help make unpalatable decisions such as closing schools and cracking down on tax evasion. In addition to the existing debt, damages from Hurricanes Irma and Maria are expected to run about $35 billion, or a per capita cost of about $10,000 per citizen of Puerto Rico. The power grid is destroyed and it might be 6 months or more to have electric service restored; the tourism industry is in dire straits and the economy is a mess. Puerto Rico doesn’t have money to repair the hurricane damage, much less to pay off its earlier debt.

 

After Trump’s remarks, a shudder went through the $3.8 trillion muni bond market and Puerto Rican bondholders freaked. Puerto Rico’s beaten-down benchmark bonds plummeted from an already unprecedented 44 cents on the dollar to as little as 30 cents.  If Puerto Rico’s $74 billion in debt can just be wiped away, what does that mean for the rest of the muni bond market. That doomsday scenario, of course, is contingent upon Trump’s actually being able to cancel all of the commonwealth’s debt, amassed over decades and enabled by a yield-hungry Wall Street. There’s no indication he has a plan to do so. Administration officials, as they’ve done throughout his presidency, quickly walked his comments back. Soon after, Trump’s budget head Mick Mulvaney told CNN not to take the president “word for word”.

 

On Monday, Catalonian politicians will try to hold a parliamentary session to evaluate the October 1 vote to secede from Spain. Then they are expected to declare their independence. What happens after that remains a mystery. Spain and the EU say the independence vote was illegal. Spain’s High Court launched an investigation against top Catalan police and organizers on suspicion of inciting rebellion against the state, just hours after the Spanish king charged that the Barcelona separatists were acting “outside the law and outside democracy.”  As the king addressed the nation, trade unions in Catalonia led a powerful general strike that shut down businesses, highways and schools in a mass protest against police violence. Protesters took to the streets. Stay tuned.

 

Richard Smith, the recently-former CEO of Equifax testified before the Senate Judiciary subcommittee today. Smith said the Equifax data breach happened because of a breakdown in communication at the company. They knew their software was vulnerable and needed to be fixed but the tech guy never patched the glitch. Smith didn’t say who the tech guy was but said he has since been fired. Senator Al Franken gave the unknown tech guy a name – Gus; saying, “Why is the security of 145 million people all in the hands of one guy? Why is it all up to Gus?” If Smith knows Gus’s real name, he kept it to himself. But Gus may not be entirely at fault. Smith said it’s possible “this one guy” didn’t know all of Equifax’s various business portals were using the faulty software. Later security scans didn’t detect the vulnerability either. Equifax made more missteps after it publicly disclosed the hack Sept. 7.

 

A customer service representative – let’s call this one Sam – tasked with responding to customers’ Tweets sent out incorrect links to the website the company created to help consumers sign up for credit monitoring. Instead, that person was tweeting out links to a phishing website with a similar name. Sam, the customer service representative is no longer with the company. Richard Smith resigned with a multi-million-dollar golden parachute and still refuses to accept responsibility. The hearing drew a silent protester dressed like the Monopoly man character, (you know – Rich Uncle Pennybags in top hat, monocle) who sat in the audience behind Smith but in the range of the video camera. She was there to protest forced arbitration. Equifax’s initial offer of free credit monitoring after the hack would have made consumers accept arbitration to settle disputes with the company, something Smith has said was a mistake and has since been removed.

 

Google held a splashy press event in San Francisco today. They showed off the second generation of various Google devises, including: two new versions of its Pixel smartphone; a new premium laptop; a cheaper, smaller model of its Home speaker and a larger version designed for music. All the products go head-on with recent offerings from Apple and Amazon. Those two rivals are aggressively shipping devices with built-in features, like voice-assistance and augmented reality, that could upend how people access information — Google’s main business.

 

Google’s latest device refresh is all about making sure it can claim a lead in that next era of computing, and keep its services front-and-center in people’s lives – and that means a sharp focus on its artificial intelligence software. Google owns Android, the software behind most smartphones, but it has long struggled with ways to tame its many hardware partners and make them competitive with Apple’s iPhones. Apple tightly controls hardware and software, and has lured consumers with mobile payments, its voice-based Siri assistant and initial forays into augmented reality, technology that splices the digital and physical worlds. Amazon, meanwhile, has emerged as a viable contender in the smart home market with its assistant, Alexa, and a seemingly unending suite of Echo gadgets. Samsung, which makes Android phones has tried to push its own, new voice assistant – Bixby – which is still light years behind Google assistant. My pick for the coolest gadget unveiled go to Google Pixel Buds – wireless headphones or earbuds, which can be paired with Google Assistant and can provide live translation of up to 40 languages.

 

The International Energy Agency reports solar power grew faster than any other source of fuel for the first time in 2016. The IEA says 165 gigawatts of renewables were completed last year, which was two-thirds of the net expansion in electricity supply. Solar powered by photovoltaics, or PVs, grew by 50 percent, with almost half of new plants built in China. Solar PV capacity growth will be higher than any other renewable technology through 2022. This marks the sixth consecutive year that clean energy has set records for installations. The IEA expects about 1,000 gigawatts of renewables will be installed in the next five years. China is the undisputed leader in renewables and solar, installing more than 2 times the gigawatt capacity of the US, and accounting for close to half of the global market.

 

On Monday, the US Supreme Court threw out an appeal in a trademark suit brought by Louis Vuitton against a California companythat makes tote bags featuring cartoon drawings of … Louis Vuitton bags. (“Permissible parody,” the court ruled.)

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