Financial Review by Sinclair Noe for 10-15-2015
DOW + 217 = 17,141
SPX + 29 = 2023
NAS + 87 = 4870
10 YR YLD + .04 = 2.20%
OIL + .28 = 46.92
GOLD – .90 = 1184.40
SILV un = 16.22
The consumer price index, or prices at the retail level, declined by a seasonally adjusted 0.2% in September. Over the past 12 months inflation at the consumer level has shown zero increase. Inflation has fallen sharply over the past year mainly because of lower gasoline prices. The cost of gasoline fell 9% in September. The cost of food, however, rose 0.4% owing largely to higher prices for dairy, fruits and vegetables. Stripping out food and energy, the core CPI rose 0.2%. Core prices are up 1.9% over the past 12 months. Separately, the Energy Information Administration reports crude inventories rose by 7.6 million barrels in the last week, compared with analysts’ expectations for an increase of 2.8 million barrels.
Americans who collect Social Security won’t get an increase in their monthly checks in 2016. Annual increases in Social Security are made every year based on changes in a component of the consumer price index known as CPI-W. That index fell 0.4% in the period used by the government to calculate the annual increase in cost-of-living adjustments.
The CPI-W looks at prices for Urban Wage Earners and Clerical Workers; this represents about 29% of the population. CPI-U is the price index for all urban consumers; this represents about 88% of the population. There is another measure of inflation called the CPI-E, which is a subset of the urban population using households where the reference person or spouse is 62 years of age or older. In other words, the CPI-E measures prices for the demographic group that relies on Social Security. For the CPI-E, housing and medical care represents a bigger expense, and these are areas where prices have been increasing. And while the CPI-W dropped 0.4% over the past 12 months, the CPI-E increased 0.6%. The difference would mean an average of a little more than $500 a year in Social Security benefits. Instead, there will be no increase. Nothing. Zip. Nada. Zilch.
Initial jobless claims in the week ending Oct. 10, declined by 7,000 to a seasonally adjusted 255,000; that’s the lowest level since 1973. In the week ended Oct. 3, continuing jobless claims sank by 50,000 to 2.16 million to mark the lowest level in 15 years.
The U.S. budget deficit narrowed to $439 billion in fiscal 2015, that’s the lowest since 2007, in both dollar terms and as a percentage of gross domestic product. The deficit fell to 2.5% of GDP. Treasury Secretary Jack Lew has moved up the deadline for Congress to raise the nation’s debt limit. Lew told congressional leaders in a letter today that the Treasury Department would exhaust special accounting measures no later than November 3, two days earlier than he had previously estimated. If Congress fails to raise the nation’s debt ceiling by that date, the US could risk a first-ever default on its obligations.
Meanwhile, the pile of Treasury bills sold at an interest rate of zero since the financial crisis topped $1T this summer and multiplied this week through an auction of three-month bills on Tuesday and one-month bills on Wednesday. On its surface, it makes no sense for investors to lend their cash for free. But with rates stuck near zero and supply limited by the U.S. debt ceiling, investors who need a place to park their cash have few other options.
Officials in the Treasury Department and Puerto Rico are discussing the issuance of a “superbond” that would help restructure the commonwealth’s $72 billion of debt. Under the plan, the Treasury or designated third party would administer an account holding at least some of the island’s tax collections, and funds in that account would be used to pay holders of the superbond. Puerto Rico has warned that it is likely to exhaust its remaining cash in November, and a debt payment of almost $300 million is due on Dec. 1.
The first U.S. criminal trial over Libor manipulation got underway in Manhattan yesterday, with former London-based traders Anthony Allen and Anthony Conti accused of conspiring to submit fraudulent rate reports to help colleagues profit on trades. The NY trial follows one this summer in London, where Tom Hayes, a former UBS and Citigroup trader, was convicted of conspiring with others to manipulate Libor. Hayes was sentenced to 14 years in prison, but is appealing.
Valeant Pharmaceuticals, which has come under fire for aggressively increasing the prices of its drugs, has received two federal subpoenas related to its pricing, distribution and patient support practices. Pricing practices in the pharmaceutical industry, from Valeant and others, have been under pressure over the past several weeks after Martin Shkreli, the 32-year-old CEO of the startup Turing Pharmaceuticals, made headlines by raising the price of a drug his firm purchased by more than 5,000%. Following that business model, Valeant has increased the price of 56 of the drugs in its portfolio an average of 66 percent, highlighted by their recent acquisition, Zegerid, which they promptly raised 550 percent.
Earnings reporting season continues. Citigroup, the No.3 U.S. bank by assets, reported a 51 percent jump in quarterly profit as lower costs more than made up for a fall in revenue amid increased market volatility. Citi’s legal and related costs dropped to $376 million in the third quarter from $1.6 billion a year earlier. Net profit rose 35.7 percent to $4.16 billion, or $1.31 per share, beating the average analyst estimate of $1.28 per share.
Goldman Sachs profit plunged for the second straight quarter as bond trading revenue fell by a third. Net income applicable to common shareholders fell 38 percent – to $1.33 billion, or $2.90 per share, from $2.14 billion, or $4.57 per share, a year earlier. Goldman missed estimates on both its top and bottom line.
Charles Schwab reports third-quarter profit jumped 17 percent on higher trading commissions and interest revenue. Net income totaled $376 million, or 28 cents a share, a penny higher than estimates.
UnitedHealth Group, the largest U.S. health insurer, reported a better-than-expected profit in the third quarter. Profit came in at $1.60 billion, or $1.65 per share, a penny better than estimates.
HCA Holdings, the country’s largest for-profit hospital operator said its third-quarter profit was likely to miss estimates.
According to FactSet, S&P 500 company earnings are expected to drop by 5.1%, that’s down slightly from 5.5% forecast about a week ago; still it’s a decline in earnings. And if third quarter earnings are negative it would mark the second consecutive quarter of negative earnings. Two negative quarters is the generally accepted, though not quite accurate, definition of a recession; but we’re talking about earnings, not the economy; there is a difference. Declining corporate earnings can lead to an economic recession; it has happened before, but it is not inevitable. Strip out the energy sector and S&P profits are holding up fairly well.
Yesterday Walmart took a 10% hit to share price; today they lost another 2%. The news behind the sell-off was that they would be spending more, meaning a hit to earnings, and they didn’t expect earnings to grow until 2019. The investments for Walmart include paying their workers just a bit more in the hopes that customer service can improve from surly apathy to something approaching ambivalent caring; plus some way to actually reduce turnover. Investing in wages and training is actually considered an ordinary expense and not capital investment, and that means no depreciation and so the hit to earnings is immediate, even if there is a longer-term payoff.
Walmart also announced a big new push in e-commerce, where it is currently being crushed by Amazon; this would require more warehouses and also using existing stores to serve as fulfillment centers. Also, cutting back neighborhood store and super-store construction plans. The biggest price tag comes in the form of $20 billion in stock buybacks. And since Walmart has just lost more than $20 billion in market cap in the last 2 days, you might be right to have concerns about the efficacy of this financial engineering. And if Walmart can’t make buybacks work, you have to wonder if this is a financial engineering scheme that has run its course. Time will tell. Meanwhile, look for Walmart to get back to its roots which is clobbering the competition on price – just in time for the holiday shopping season.
Volkswagen roundup: Germany’s automotive watchdog, the Federal Motor Transport Authority, is forcing the automaker to recall 2.4 million vehicles after rejecting a VW proposal under which diesel car owners could voluntarily bring them in for fixes. VW says it will now recall 8.5 million cars in Europe. Meanwhile, the Guardian reports another four car makers have joined the list of those whose diesel cars emit more pollution on the road than in regulatory tests: Mercedes-Benz, Honda, Mazda and Mitsubishi vehicles were all found to perform differently on the road than in test conditions in European tests.