Week in Review

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Week in Review

08/23/2014

For the week 8/18-8/22

Edition 802

Washington and Wall Street

It was another jarring week for Planet Earth, not that Wall Street cared. The S&P 500 hit a new record, Nasdaq sits just 500 points from its all-time high set back in March 2000, and markets around the world generally had a good time of it.

Here’s the thing. The world is much worse off than a week earlier and at some point, geopolitics will be meaningful in terms of market sentiment. For now crises in Ukraine, Iraq and Gaza have an impact day-to-day, but then the markets seem to invariably slough it all off and march ever higher.

I am at one of my favorite parts of the world, County Clare, Ireland, for the overseas member/guest tournament at Lahinch Golf Club…my 21st trip to Ireland since 1989. I joined Lahinch back in the mid-90s and every two years we have this grand event, where I get to renew some old friendships in town here, whack the little white ball all around one of the better courses in the world and then afterwards, retire to the 19th hole for more good fun.

But there’s one problem. This event is not in the least bit conducive to work, so I’m taking a pass in terms of this commentary and will make it up to you next time.

For now, a few Wall Street related items. Fed Chair Janet Yellen gave a major policy address in Jackson Hole, Wyoming, site of an annual gathering of economists, and, as expected, it was a nonevent, even though she said the Federal Reserve could lift interest rates sooner than currently anticipated…but it all depends on the labor market, which we already knew.

What is perhaps different is the fact the Fed is clearly confused about the current jobs picture and what full employment in this new era is supposed to look like. Thus the confusion on rates. 

Earlier the Fed released the minutes from their July meeting and they read in part:

“Most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation.”

Wages are still not rising in a significant way, but I maintain they will as the higher-wage jobs picture improves. I also continue to believe there will be real pressure to begin lifting rates off the zero level by year end.

Meanwhile, there was some good news on the homebuilding front. July housing starts were up 15.7% to their best level in 8 months, helped in no small part by falling mortgage rates. July existing home sales also came in better than expected.

Europe and Asia

A flash report on manufacturing and services in the eurozone for August was released and the composite reading came in at 52.8 vs. 53.8 in July; so the halting recovery continues, by this measurement, but the manufacturing number, 50.8, is near the dividing line between growth and contraction.

Germany’s flash composite was 56.4 vs. 56.7 in July, with manufacturing ticking down to 52.0, but France’s manufacturing number, 45.4, was hardly an improvement over the prior month’s 45.2. The Bundesbank warned that the crisis in Ukraine will continue to do a number on business sentiment across Europe as sanctions against Russia have led to economic blowback on many European sectors.

Just a note on the U.K. London home values fell 5.9% in August over July, a more sizable drop than is normally witnessed this time of year there.

Turning to China, home prices fell in 64 of 70 cities in July over June, according to the National Bureau of Statistics, while in Japan, July exports rose 3.9% vs. a year ago, the first increase in three months, an encouraging sign.

Street Bytes

--Stocks staged their biggest rally since April, with the Dow Jones rising 2.0% to 17001, while the S&P 500 hit a new high in gaining 1.7%, and Nasdaq surged 1.7% as well. 

Interest rates were largely unchanged on the week. The July consumer price index was tame, up 0.1%, and up a like amount ex-food and energy. For the 12 months, the CPI is up 2.0%, 1.9% on core, which is why the Fed continues to feel there is zero reason to raise the funds rate in the near future.

--Liberia imposed a night-time curfew and quarantined part of the capital Monrovia in a bid to halt the Ebola outbreak, with growing unrest in the country, including an attack by youths on a facility that led to the escape of 17 Ebola patients. 

But three doctors with Ebola in Liberia showed signs of improvement after taking the experimental drug ZMapp; the same treatment that appears to have helped save the lives of the two American aid workers, who were released from their Atlanta hospital.

However, a 75-year-old Spanish priest who contracted Ebola in Liberia died last week in Spain despite being given the drug.

Meanwhile, Kenya closed its borders to travelers from Guinea, Liberia and Sierra Leone in yet another example of the growing economic impact, which will last years. [Kenyans flying from those states would still be allowed in.]

--With the price of oil continuing to slide, the impact will be severe on Russia, seeing as it relies on hydrocarbon exports for 50% of its budget. Each $1 drop in the price equates to $1.4 billion in lost federal tax revenues. [Moscow Times]

The drop to the $95 range comes as most experts had forecast an average of $105 for the year.

[Russia looks at Urals crude oil, which has fallen below $100 from an average of $110 so far in 2014. The Finance Ministry expects a small budget surplus with a price of $104.]

--Russia closed McDonald’s restaurants in Moscow, in another clear retaliation for western sanctions over Ukraine.

--The United States isn’t the only country to feel China’s wrath on the business front. China has fined twelve Japanese car parts companies $202 million for price-fixing. This comes as China’s anti-monopoly crusade continues with its crackdown on multinationals. The fine is said to have been the largest imposed yet.

Earlier in the week, Mercedes-Benz was found guilty of price fixing on spare parts.

But many in the international business community argue they are being disproportionately targeted.

--Home Depot reported super earnings and the shares rose $4.60 to $88.20 following the release. Same-store sales rose a strong 6.4%, far better than other major retailers these days. HD is doing a good job with its online business, now 4.2% of total sales.

--Apple shares closed above $100 on Tuesday, this being their previous, split-adjusted high after almost two years. Investors seem to be optimistic about coming product launches, including the iPhone 6 next month.

But the stock often runs up ahead of these new products and then the share price languishes afterwards.

--Dick’s Sporting Goods reiterated its concerns about the future of the retail golf business in its latest earnings release. Dick’s is laying off 500 PGA professionals who were giving lessons and advice on golf equipment in its stores.

Outside of the golf equipment issue, which Dick’s is taking a $20.4 million charge for, second-quarter income was $81.7 million. Net sales grew 10.3 percent to $1.7 billion, with same-store revenues up 3.2 percent.

--According to Morningstar Inc., Vanguard has overtaken PIMCO as the largest provider of taxable-bond mutual funds by assets, $430 billion to PIMCO’s $425 billion. PIMCO had been tops for more than a decade.

Until the past year, PIMCO’s Bill Gross had managed the world’s largest mutual fund, PIMCO Total Return Fund, but Vanguard’s Total Stock Market Index Fund overtook it.

--Shares in Disney hit an all-time high, $90, up 18% this year, and up 50% from its 2013 low.

--Ten years ago, Aug. 19, 2004, Google went public. As Dennis Berman writes in the Wall Street Journal, back then Google was a company of 2,000 employees involved almost exclusively in search. Yahoo and Microsoft were its only named competition.

Today revenue exceeds $65 billion and its market capitalization is nearly $400 billion.

--Steve Ballmer resigned from Microsoft’s board, eight months after departing from his CEO post. Ballmer thus ends a more than three-decade long relationship with the company, though he remains its largest individual shareholder.

Ballmer can now focus on his role as the new owner of the Los Angeles Clippers.

“Credit Suisse Group AG helped sell billions of dollars of securities that ultimately played a role in toppling Portugal’s second-largest bank….

“Many customers didn’t realize that these vehicles were loaded with debt issued by various Espirito Santo companies and apparently served as a mechanism to finance the family-controlled empire, according to corporate filings and people familiar with Portugal’s investigation into the Espirito Santo affair. It is unclear what, if any, direct role Credit Suisse had in selling the securities to bank customers.

“Now those investment products are at the center of an unfolding scandal.”

Shades of Greece, and how Wall Street interacted with the place pre-financial crisis.

--Retail orange-juice sales fell to their lowest level on record for the four weeks ended Aug. 2. It’s all about changing drinking habits and tons of new competitors in the beverage aisle.

A bacterial disease has also ravaged Florida’s citrus groves, so it’s not as if the price is coming down, which would otherwise perhaps attract consumers again.

According to Nielsen, demand is down 39% over the past decade.

--Dollar General entered the sweepstakes for Family Dollar, topping Dollar Tree’s July bid.

Some analysts say the Dollar General / Family Dollar combination just makes more sense as both are multiprice discount retailers selling most goods below $10, while Dollar Tree is strictly a seller of $1-priced items.

But the new combination would face antitrust concerns and hundreds of stores would have to be divested. At week’s end, Family Dollar had rejected the Dollar General bid, saying it wanted to go ahead with a Dollar Tree combo.

--Bizarre armed robbery in Paris. Five-to-eight Kalashnikov wielding thieves attacked the motorcade of a Saudi prince in Paris, making off with $375,000 and reportedly stealing sensitive diplomatic documents. The thing is the robbers knew exactly which one of ten cars to target. One of the BMW getaway cars and the Saudi vehicle hijacked were later found burned out in a Paris suburb. This isn’t the first time something like this has occurred here in recent years.

--The Metropolitan Opera House and its major unions reached agreement on a new contract, after it appeared the company was facing a lengthy work stoppage. The Met is the nation’s largest performing arts organization, but it’s been facing rising labor costs and falling attendance and it appears management was able to get substantial givebacks in pay, work rules and benefits, in exchange for some job security.

--Atlantic City’s Revel casino is closing even sooner than first announced, Sept. 1.   As a story in the New York Times notes, by the end of September, with two other casinos slated to close, Showboat and Trump Plaza, coupled with the shutdown of the Atlantic Club earlier in the year, there will be 413,700 square feet of vacant gambling space. What do you do with it all?

The obvious solution is hotels and condominiums, or space for local colleges, which is already being discussed.

Others contend casinos are not easily remade, and so should be demolished.

--Update: Ousted “Meet the Press” moderator David Gregory was paid $4 million to leave NBC and signed a contract not to speak out against the network, according to the New York Post.

--Frontier Airlines is launching flights to the Bahamas from Trenton-Mercer Airport (New Jersey), which is very cool. [Flights on the airline’s 138-seat Airbus 319 will be on Thursday’s and Sunday’s.]

--The Icelandic meteorological service has issued an orange alert, the second most severe warning, sparking concern that the 2010 Eyjafjallajokull volcano eruption and subsequent ash cloud, which caused chaos for European air travel, could be repeated. It sure screwed up some of my plans that year. 

Iceland’s Bardarbunga volcano has seen extensive seismic activity since Aug. 16.

--A survey revealed 80% of international visitors to Ireland have said their desire to experience the traditional Irish pub brought them here. 83% said “listening to Irish music in a pub” was their number one activity to do when holidaying in Ireland.

The Guinness Storehouse was the biggest fee-charging tourist attraction, drawing 1.2 million visitors – 93% from overseas.

Foreign Affairs

[Again, due to severe time constraints, these are highly abbreviated comments.]

Ukraine/Russia: George Friedman of Stratfor made the point in Barron’s this week that if Russia is going to invade Ukraine it needs to do so in the next six weeks because the tanks will bog down in the eastern marshes afterwards. A few days after Freidman’s prediction, Ukrainian President Poroshenko accused Moscow of a “flagrant violation of international law” when it sent in 100 trucks from its aid convoy across the border into eastern Ukraine without getting customs permission nor an escort from the International Red Cross, which said it would not participate in Russia’s relief effort “in any way.”

The next day, NATO said Russian artillery pieces had crossed the border and Russian troops were shelling Ukrainian soldiers from inside Ukraine.

There is a true humanitarian catastrophe going on in the regions of Luhansk and Donetsk, with residents of Luhansk city being without running water and electricity for over 20 days. 330,000 have fled the area, as the death toll in the war rises to over 2,000. On Monday, a convoy of refugees was shelled, killing 17, with both sides blaming the other.

German Chancellor Angela Merkel is to meet with Ukrainian officials today for her first visit to Kiev since the crisis began, while Poroshanko and President Vladimir Putin are to meet Aug. 26 in Belarus.

For his part, President Obama is having a summit with Baltic leaders in early September following a NATO gathering in Wales. Obama’s visit is intended to send a clear signal to Moscow that the United States and NATO have the backs of their fellow members.

Iraq: The crisis here grew exponentially. The United States has been pinning its hopes on Prime Minister-designate Haider al-Abadi’s ability to form a true government of national unity among Shia, Sunnis and Kurds, but then on Friday, Shiite militia members killed 73 at a Sunni mosque, following attempts by Sunnis to take out Shiites in the area in a series of roadside bombs.

The Sunnis then quit talks with Abadi on the formation of a new government, a total disaster.

In terms of ISIS, the Kurds and the Iraqi Army, with U.S. air support, took back the Mosul dam, with President Obama saying the siege of Sinjar was over. But ISIS slaughtered an estimated 350-400 in one city in the area, taking up to 1,000 women hostage. Obama, by week’s end, was forced to admit the fight against the terrorists “could take months.”

Thursday, Defense Secretary Chuck Hagel said the threat posed by ISIS “is beyond anything that we have seen, while General Martin Dempsey said the Islamic State could not be defeated without attacking its base in Syria. Dempsey said of the group that it is an “organization that has an apocalyptic, end-of-days strategic vision.”

Bottom line, President Obama is being dragged kicking and screaming into Syria’s civil war because the U.S. will indeed need to start initiating airstrikes inside that country to deal a critical blow to ISIS.

After the beheading of journalist James Foley, Americans should have a far better idea of the threat posed by the terrorists. The threat ISIS poses to Europeans is even greater, witness the terrorist on the Foley video speaking in a British accent. There will be a serious attack by yearend on the continent.

Israel / Gaza: The latest ceasefire ended on Tuesday and the shelling resumed. The Palestinian death toll is at least 2,100, while a 4-year-old Israeli boy was killed by mortar fire from across the border. Hamas executed 18 suspected of collaborating with Israel.

Syria: The United Nations’ Human Rights chief said the death toll is now 191,000, though he called the figure “an underestimate.”

Back to James Foley, he was killed by ISIS in Syria. We then learned an attempt to rescue Foley and other captives failed this summer, with U.S. Special Forces flying into Syria, only to discover Foley and the others weren’t there.

China: Chinese hackers allegedly attacked one of America’s biggest hospital groups, Community health Systems (CHS), which operates 206 hospitals across the U.S. Personal data on 4.5 million patients was compromised, including names, addresses, birth dates and Social Security numbers.

But, supposedly not medical information or any credit card data. The attack was discovered by FireEye Inc.’s Mandiant forensics unit.

As reported by the South China Morning Post: “Working with security experts, CHS said it discovered information that the attackers…work steadily to gain access to a target’s systems to steal data rather than cause damage to the systems.”

India / Pakistan: In an underreported setback in relations between the two, India’s new Prime Minister Modi canceled the first formal talks with Pakistan in two years. Foreign secretaries from the two were to meet in Islamabad on Aug. 25, but India called it off when Pakistan’s high commissioner to India sought to meet with Kashmiri separatist groups, which is nothing unusual in terms of Pakistan’s past practices. 

Pakistani Prime Minister Nawaz Sharif had attended Modi’s inauguration in May, a hugely positive gesture.

Last week, Modi accused Pakistan of engaging in “a proxy war of terrorism” because it lacks the strength to fight a conventional war, which seems to your editor to be a most unnecessary statement. [Bloomberg News]

For his part, Sharif has been facing major internal opposition, with tens of thousands protesting last weekend against his rule. The two largest opposition groups have vowed to continue their demonstrations until Sharif steps down.

And then at week’s end, opposition leader Imran Khan said he had suspended talks with the government, amid growing fears the military could step in to fill the void.

Germany: I wrote before that when German Chancellor Angela Merkel was blasting the U.S. for spying on both her and her country, she needed to calm down. Now she is getting her comeuppance, in spades.

“ ‘It is hard not to write satire,’ the Roman poet Juvenal famously quipped, adding: ‘I get an itch to run off beyond the Sarmatians and the frozen sea every time those men, who pretend to be paragons of virtue and live an orgy, dare to spout about morals.’

“Fast forward to the land the Romans called Germania. Recall the furor unleashed by National Security Agency tattletale Edward Snowden. U.S. intelligence, he let it be known, had burrowed into Chancellor Angela Merkel’s cellphone. Dubbed ‘Handygate’ (Germans call mobile phones ‘handys’), the affair united the country in an uproar over American arrogance.

“How can you spy on friends? bellowed the chorus of indignation. We don’t do it to you, how dare you do it to us? Parliament formed an NSA committee. The CIA station chief in Berlin was sent packing.

“Now, however, the chorus has fallen silent. It turns out that German intelligence services eavesdropped on then-Secretary of State Hillary Clinton in 2012, and thereafter at least once on John Kerry. As they say, pride goeth before the fall. Meanwhile, the Turks have declared diplomatic war on Berlin after learning that they have been, and surely will continue to be, the target of Germany’s systematic, NSA-style digital snooping.”

Of course German spying on Turkey is totally legit, these days, given that nation’s issue with the Kurds, and the fighting in Iraq and Syria. As Joffe adds, Turkey is also “a land bridge for jihadists to join Islamic State fighters…and for those coming in to plot attacks on European targets.”

“Besides, nobody knows where Turkish Prime Minister Recep Tayyip Erdogan stands.”

Random Musings

--Texas Gov. Rick Perry was booked on political corruption charges on Tuesday. Perry called the charges “baseless.” He is accused of abusing his authority by trying to force out Democratic District Attorney Rosemary Lehmberg after she was convicted of drunk driving.   When she refused to step down, Perry vetoed funding for her office.

I couldn’t care less about Perry with regards to his 2016 presidential prospects, but I just think this case is totally bogus.

“There are many fair grounds on which to criticize Rick Perry’s performance as governor… But the list does not include the charges newly levied against him by an Austin grand jury….

“What everyone should recognize is that this particular kerfuffle fell within the bounds of partisan politics, which, as they saying goes, ain’t beanbag….

“This isn’t the first tendentious prosecution of a nationally prominent Texas politician: A decade ago, Ms. Lehmberg’s predecessor brought questionable campaign finance charges against then-House Majority Leader Tom DeLay (R), which were later overturned on appeal….

“Of course, public servants should be held to a higher standard. But criminal prosecution is not always the appropriate remedy for dubious or despicable behavior by those in power, especially now where the relevant law is not clearly applicable. Political abuses call for political accountability, which is why we have media exposure, elections and impeachment.”

Conservatives and others have been coming out in support of Perry. Even former Obama top aide David Axelrod tweeted: “Unless he was demonstrably trying to scrap the ethics unit for other than his stated reason, [the] Perry indictment seems pretty sketchy.”

“A front-page article in The Times by Carl Hulse, Jeremy Peters and Michael Shear chronicled how (President Obama’s) disdain for politics has alienated many of his most stalwart Democratic supporters on Capitol Hill.

“His bored-bird-in-a-gilded-cage attitude, the article said, ‘has left him with few loyalists to effectively manage the issues erupting abroad and at home and could imperil his efforts to leave a legacy in his final stretch in office.’….

“First the president couldn’t work with Republicans because they were too obdurate. Then he tried to chase down reporters with subpoenas. Now he finds members of his own party an unnecessary distraction.

“His circle keeps getting more inner. He golfs with aides and jocks, and he spent his one evening back in Washington from Martha’s Vineyard at a nearly five-hour dinner at the home of a nutritional adviser and former White House assistant chef, Sam Kass.

“The president who was elected because he was a hot commodity is now a wet blanket.

“The extraordinary candidate turns out to be the most ordinary of men, frittering away precious time on the links. Unlike L.B.J., who devoured problems as though he were being chased by demons, Obama’s main galvanizing impulse was to get himself elected.

“Almost everything else – from an all-out push on gun control after the Newtown massacre to going to see firsthand the Hispanic children thronging at the border to using his special status to defuse racial tensions in Ferguson – just seems like too much trouble.”

--I’m not commenting on the situation in Ferguson, Missouri, for a simple reason…we don’t have all the facts. Of course I’m the ‘wait 24 hours’ guy, which isn’t how the American media operates.

--The New York Daily News reported that when it came to the Big Apple’s stop-and-frisk policy, officers assigned to two key Brooklyn precincts stopped 126 people in the first half of 2014, compared to 10,540 stops between January and June of 2011…or a 99% drop.

But shootings in the two are up 27% and 47% over the same period.

However, the murder rate in all of New York City continues to fall, from 203 at this point in the year in 2013 to 179 this year.

So to the New York City Civil Liberties Union, this proves stop-and-frisk was unnecessary.

--Julian Assange said he plans to walk out of Ecuador’s embassy a free man, avoiding arrest and extradition to Sweden to face the music on sexual assault allegations.

There have been rumors Assange’s health was deteriorating and he acknowledged it had during his two years of confinement, though he seemed to put to rest conjecture he was leaving to deal with a heart issue.

--For Pope Francis followers, it was an exhilarating, and melancholy, week. During a press-conference on his return flight from a highly successful five-day visit to South Korea, the Pontiff was asked how he is coping with his huge popularity.

“I try to think of my sins, my mistakes, so as not to think that I am somebody. Because I know this will last a short time, two or three years, and then to the house of the Father.”

Some of us are praying it is indeed three years. That should be enough time to complete the revolution and his goal of shaking up the Vatican and institutions that haven’t changed in centuries.

The Pope has had trouble recently keeping all his appointments, and it’s well-known he isn’t in the best of health.

It didn’t help this week when he learned three of his relatives were killed in a car crash in Argentina.

Pray for the men and women of our armed forces…and all the fallen.

Gold closed at $1280
Oil $93.65

Returns for the week 8/18-8/22

Dow Jones +2.0% [17001]
S&P 500 +1.7% [1988]
S&P MidCap +2.2% 
Russell 2000 +1.6%
Nasdaq +1.7% [4538]

Returns for the period 1/1/14-8/22/14

Dow Jones +2.6%
S&P 500 +7.6%
S&P MidCap +6.2%
Russell 2000 -0.3%
Nasdaq +8.7%

Bulls 46.4
Bears 16.2 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

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