Your Money and Your Life
……..Oil prices on the table in Algiers. BOJ looks at less than zero. The biggest risk – China. New home sales drop. Deutsche Bank stumbles badly. Wells Fargo Round Two. Mylan skips over inversion. Takata looks to BK. Traffic HERE.
Financial Review by Sinclair Noe for 09-26-2016
DOW – 166 = 18,094
SPX – 18 = 2146
NAS – 48 = 5257
10 Y – .03 = 1.59%
OIL + 1.14 = 45.62
GOLD + .80 = 1338.90
We are less than 2 hours from the beginning of the debate. More than 100 million Americans are expected to tune in to the presidential debate between Clinton and Trump. It is expected to run 90 minutes, no commercials. Beyond that, it is hard to say what will happen. Listen closely tonight. It’s your money and your life.
The International Energy Forum, which includes representatives of producing and consuming countries, is meeting this week in Algiers. Oil ministers from OPEC, the Organization of the Petroleum Exporting Countries, and other crucial oil-producing countries, including Russia, may use the forum to work on a deal aimed at propping up oil prices. Since OPEC announced the meeting back in August, Brent oil prices have seesawed between $45 and $50, largely driven by comments by different oil ministers and leaders. Reaching an agreement will probably require overcoming tensions between the two big OPEC powers: Saudi Arabia and Iran. The Saudis quashed a freeze deal in April, when the Iranians refused to participate. Expectations are low that the informal talks will lead to a freeze in oil production. Even if agreement on a freeze is reached, several smaller oil producing nations might not stick to a deal. Libya is set to bring back around 600,000 barrels per day (although those claims are questionable), and Nigeria has already returned somewhere between 200,000 and 300,000 barrels per day of interrupted supply.
And the US, not part of the talks, might see shale output ramp up production. The IEA expects global supplies to exceed demand through next year, and inventories to continue to build through 2017. Crude oil and refined product inventories are only slightly down from record levels, and will take a few more years to get worked through. All of that is to say there is a good chance that ample supplies could ensure relatively low oil prices for several years, perhaps as long as towards the end of this decade. Meanwhile, there are alternatives; more and more hybrids and electric vehicles, reducing demand.
Bank of Japan Governor Haruhiko Kuroda reaffirmed his pledge to do whatever it takes to boost growth and inflation, including taking interest rates further into negative territory. The central bank boss expressed concerns over the persistently low level of inflation in Japan and said he’d use all necessary tools to get inflation back to the 2% target. That includes cutting interest rates deeper below zero as well as keeping a target for long-term interest rates.
Forget about Brexit, forget about the U.S. election and forget about the struggling oil market: The biggest risk to the global economy comes from China, where a looming credit bubble is threatening to dramatically slow economic growth, according to Ken Rogoff, the former chief economist of the International Monetary Fund. In an interview with the BBC, Rogoff said a “hard landing” for the world’s second largest economy is imminent and there’s little other countries can do to prepare for it.
European Central Bank President Mario Draghi addressed the Euro Parliament this morning. Draghi said the euro zone economy is coping well with global uncertainty, such as Britain’s vote to leave the European Union, even if the outlook for external demand has worsened.
Sales of newly-constructed homes dropped 7.6% in August but beat forecasts. The Commerce Department reports new home sales ran at a 609,000 seasonally adjusted annual rate; that was 20.6% higher compared to a year ago. The median sales price in August was $284,000, continuing a downward trend. That was the lowest since September 2014 and 5.4% below year-ago levels. There were 4.6 months’ worth of homes available at the current pace of sales in August.
Deutsche Bank is at an all-time low. Shares of the investment bank tumbled below €11-euro after German Chancellor Angela Merkel ruled out a bailout. Merkel also declined to intervene in Deutsche’s legal battle with the U.S. Justice Department, which earlier this month announced it may seek up to $14 billion from the bank to resolve investigations into crisis-era mortgage securities. Deutsche Bank is a major player in derivatives markets; it is the largest German lender and the fourth largest European bank by assets with $1.9 trillion as of 2015, behind Crédit Agricole, BNP Paribas and HSBC. If Deutsche has to raise cash, and if it has trouble doing so, credit conditions in Germany could tighten. Deutsche Bank responded by saying it did not require assistance from Berlin and had not requested it.
The legal battle with the Department of Justice took a strange turn, just after it was announced. Deutsche said it would not pay $14 billion for mortgage related abuses. Deutsche was a big player in the subprime CDO market – that’s Collateralized Debt Obligations. Essentially they were involved in taking really lousy mortgage debt and bundling it with other, not-so-lousy debt to make the whole package look better; this also allowed them to sell BBB risk at AAA prices. Deutsche also worked with John Paulson to create really lousy CDO’s, which Paulson shorted, or bet against. Paulson was up front about his intent to create CDOs that would fail. Deutsche apparently had no problem in helping him. Goldman Sachs also worked with Paulson, but Deutsche did not reveal that info to investors. In other words, they were sleazy and they tried to hide it. And Deutsche printed nearly twice as much in collateralized debt obligations than Goldman.
Deutsche has about $6 billion in legal reserves to pay a fine; anything over that amount and they will struggle. And remember that the Italian banks are struggling with a crisis of their own. If Italian banks are bailed out, or collapse, Deutsche is next in line, either for a bailout or for a collapse.
Former Wells Fargo employees have filed a class action seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. The lawsuit, filed on behalf of people who worked for Wells in California over the past decade, also includes current employees. Last week, Stumpf testified before a Senate committee. On Thursday, the House Financial Services Committee will hold a hearing on the fake bank accounts created at Wells Fargo. The bank’s chief executive, John Stumpf, has been invited to testify. Maybe they can ask him why those workers were fired for not committing fraud.
Last week, Mylan CEO Heather Bresch testified before the House Oversight Committee about the price hikes on its allergy drug auto injector called EpiPen. It had said it made $100 off each $608 two-pack of the drug it sold. Not exactly. According to The Wall Street Journal Mylan “substantially reduced its calculation of EpiPen profits by applying the statutory US tax rate of 37.5%.” Mylan paid a 7.4% tax rate last year after moving its business to The Netherlands for tax purposes.
Maurice “Hank” Greenberg, the former chief executive of American International Group, is expected to take the witness stand tomorrow in his civil fraud trial, which recently got underway in a New York State court. The 91-year-old Greenberg’ testimony could last several days. He has fought the accusations for more than a decade. Greenberg and another former AIG executive, Howard Smith, face charges that they engineered phony reinsurance transactions intended to make AIG’s numbers look better to Wall Street.
Congress has until midnight on Friday to pass legislation funding the government as the fiscal year draws to a close. Without a budget, the government could shutdown.
The plan to sell Takata to a rescuer, slated by year-end, is likely to extend into 2017 as some bidders want to drag the air bag maker through bankruptcy to wipe out most of its debt. Takata faces about $10 billion in costs to recall inflators worldwide, according to market estimates, and there is also the prospect of legal liabilities related to at least 14 deaths.
Digital map maker HERE will introduce a new set of traffic services this week that allows drivers to see what live road conditions are like miles ahead of them using data from competing automakers, instead of crowd-sourced data. BMW, Daimler and Volkswagen will all contribute to the service, marking their first big collaboration since they bought HERE from Nokia last year.
The union representing Canadian auto workers has won approval for a new four-year contract with General Motors, securing future support for Canada’s auto sector and eventually giving GM more capacity for its pickup trucks in the U.S. The deal, which was ratified by 64.7% of Unifor workers, clears the way for $544 million in local investment, better job security and wage increases, but less favorable pensions than before. The contract might also serve as a template for negotiations with Fiat Chrysler, which faces an October 10 deadline with Unifor.
CBOE Holdings confirmed that it has agreed to buy Bats Global Markets in a cash and stock deal valued at about $3.2 billion. Bats jumped 20 percent Friday on a report that the two companies were in talks. CBOE said it expects to use BATS’ trading technology and will migrate all trading to a single platform.
The world’s largest synthetic rubber maker, Lanxess, has agreed to buy Chemtura for $2.5 billion. Using existing cash and new debt to purchase the specialty chemical maker, Lanxess said it will seek to improve its additives business for lubricants and flame retardants. Both boards have unanimously approved the deal, which is expected to close in mid-2017.
Do you remember Google Glass? Snapchat is getting into the hardware business, unveiling a pair of sunglasses with a built-in wireless video camera. The product, called Spectacles, contains a 115-degree wide view lens, can record clips with a length of up to 10 seconds, and will be priced at $129.99. Snapchat has also renamed itself Snap Inc. and its website says it’s a camera company.