Podcast: Play in new window | Play in new window (Duration: 13:16 — 6.1MB)
DOW – 91 = 17,598
SPX – 5 = 2098
NAS – 12 = 5115
10 YR YLD – .05 = 2.15%
OIL – 1.95 = 45.17
GOLD – 9.10 = 1087.10
SILV – .30 = 14.59
This is going to be an extremely busy week. We still have a third of S&P 500 companies to report earnings. There's also going to be a plethora of economic activity culminating in the Friday jobs report for July. Oil prices hit a six month low. It's not just oil. Commodities prices across the board are falling thanks to slowing global demand and a rising dollar. All of this makes it very unlikely we'll see a big pickup in inflation any time soon.
The Athens Stock Exchange reopened today and it was ugly. The ASE Stock Index dropped 23% after being closed for five weeks, with banking shares down by as much as 30%. The index managed to recover from session lows but still closed down 16%. While local traders are able to buy stocks, bonds, derivatives and warrants under certain conditions, international investors don't face any restrictions, as long as they were active in the markets before they were shuttered.
The sell off shows the scale of the crisis still facing Prime Minister Alexis Tsipras as he negotiates a third bailout with creditors after six months that have put unprecedented strain on the Greek economy and its financial system.
As expected, Puerto Rico missed a $58 million debt payment due over the weekend. Because the deadline was Saturday, the PFC technically has until the end of Tuesday to make its missed payment, but it appears unlikely to make a difference. Puerto Rico does not have the money to pay. Puerto Rico faces a grim future. It's operating with a $703 million budget deficit for the fiscal year that began last month. And the commonwealth faces $635 million in debt-service payments this month. Many investors are already focusing on broader questions around how Puerto Rico will restructure its $72 billion in debt, what kind of a “haircut” bondholders will need to take and what reverberations will spread to the U.S. municipal bond market.
A default is imminent and it will be the largest government debt restructuring in US history, and maybe the messiest. Puerto Rico's indebted central government, municipalities and public corporations cannot file for bankruptcy protection without the OK of the U.S. Congress, which leaves them at the mercy of what could be hundreds of lawsuits filed by creditors. Without a referee in the form of a bankruptcy court, it's going to be a mess.
Over the years, mutual-fund managers have had an incentive to buy Puerto Rican bonds, because their returns are tax-free. And many well-known mutual funds have significant exposure to Puerto Rico, including Oppenheimer, Franklin, Eaton Vance, and others. So on one side you have Main Street America, Mom and Pop investors who may or may not have known what they were buying in those mutual funds. On the other side you have Puerto Rican citizens, facing severe cutbacks and added costs for everything from driving on their roads to healthcare. Meanwhile, hedge funds have been swooping in like vultures on a carcass, buying bonds at steep discounts and hoping to force repayment through the courts. The hedge funds issued a report demanding huge budget cuts and privatization; even that is unlikely to get the island out of debt.
Chinese regulators restricted short selling of stocks, freezing out day traders, in their latest step aimed at stabilizing the world's second-largest equity market. Investors who borrow shares must now wait one day to pay back the loans. This prevents investors from selling and buying back stocks on the same day. Under the old T+0 rule, you could go short in the morning and cover your shorts before market close the same day and lock in your profit, if your bet is right. Now with T+1, you can't cover your short position in the same day, and have to wait till next day at the earliest. That makes shorting a much more risky venture.
Pacific Rim trade officials failed to clinch a final deal for the Trans-Pacific Partnership on Friday following several days of intense talks in Hawaii. Key sticking points: Auto trade between Japan and North America, New Zealand's dairy exports and monopoly periods for next-generation drugs. The deadlock may also sink U.S.-led plans, which aimed to finalize the trade deal by the end of 2015.
President Barack Obama has officially revealed a finalized version of a plan to reduce the amount of carbon dioxide emissions that power plants across the country can emit. Obama called the plan “the single most important step that America has ever taken in the fight against climate change.” Adding that “there is such a thing as being too late on climate change.”
While US power plants have limits on other air-born pollutants — like nitrogen and sulfur oxides that cause acid rain — there haven't been limits, until now, on the levels of carbon dioxide emissions that power plants can emit. Power plants that burn fossil fuels, both coal and natural gas, emit carbon dioxide and in turn these greenhouse gases contribute significantly to the warming of the planet.
The Obama administration has turned to the Environmental Protection Agency to use the Clean Air Act to regulate carbon dioxide emissions from the power industry through the Clean Power Plan. The White House has used the EPA because politically a national carbon emissions reduction plan wouldn't be able to pass through Congress.
States will be allowed to create their own plans to meet the requirements and will have to submit initial versions of their plans by 2016 and final versions by 2018. The most aggressive of the regulations requires that by 2030, the nation's existing power plants must cut emissions by 32 percent from 2005 levels, which is an increase from the 30 percent target proposed in the draft regulation. Electric power generation from coal and natural gas plants is responsible for 40% of U.S. carbon emissions.
Clearly, the clean power industries, including solar, wind and even smaller sectors like geothermal, will benefit greatly from the plan. States that opt to meet their requirements by investing in clean power projects could be a major boon to these technologies. Solar and wind project developers include SunPower, First Solar, NRG Energy, and SunEdison. The natural gas industry will also be a major beneficiary of the plan. The coal industry, of course, is one of the major losers in the plan. One of the leading and most economical ways to reduce carbon emissions from coal plants is to simply shut them down, particularly aging plants. At least one fifth of the coal plants in the U.S. have been closed, or are in the process of closing.
The Obama administration says the plan could lead to “30 percent more renewable energy generation in 2030″ and “create tens of thousands of jobs.” Consumers will collectively be able to save “$155 billion from 2020-2030″ on energy bills, and $85 a year on an individual energy bill by 2030.
The Institute for Supply Management's manufacturing index fell to 52.7% in July from 53.5% in June. Readings greater than 50 indicate expansion. ISM reported that 11 out of 18 industries reported growth with five reported contractions. The group's employment measure declined from a month earlier and order backlogs slumped. And for some reason, the data was released just a bit earlier than the scheduled 7:00 AM time.
Spending on U.S. construction projects rose just 0.1% in June, well below forecast. Spending advanced 0.4% for new houses, condos, apartment buildings and other residential properties. Outlays on nonresidential and commercial projects was flat.
Consumer spending edged up 0.2 percent in June, the poorest showing since a similar increase in February; and the government revised the spending gain in May to 0.7% from 0.9%.The largest drop in spending involved big-ticket items such as new cars and trucks, according to the Commerce Department; now a quick note here, we also had a report from the car companies saying auto sales were strong in July – more on that in a moment. Even as spending tapered off, incomes continued to rise steadily. Personal income climbed 0.4% in June for the third straight month.
U.S. auto sales were stronger than expected in July and kept the industry on pace for its best performance since the turn of the century. Auto sales rose 5.3 percent to 1.51 million vehicles, above the 3 percent rise expected by analysts, according to Autodata Corp. The figures translate to an annualized sales rate for July of 17.55 million vehicles and keeps the auto industry on a pace for its best year since 2000. High-margin pickup trucks helped sales of the two market leaders, GM and Ford (F). GM had record sales of the Colorado pickup. Ford's F-Series sales alone topped those of all Ford and Lincoln brand sedans.
Alpha Natural Resources (ANR) has filed for bankruptcy in Virginia. The second-largest US coal company has lost almost all its market value since 2011, when it bought Massey Energy Co. for about $7 billion. The deal made it the biggest U.S. producer of metallurgical coal, used in steelmaking; it also saddled the company with debt, right before prices began their plunge.
Former UBS and Citigroup trader Tom Hayes, the first person to stand trial for manipulating Libor, was found guilty of eight counts of conspiracy to rig the benchmark rate. Hayes has been sentenced to 14 years. Jurors in London found that Hayes conspired with traders and brokers to manipulate the London interbank offered rate to benefit his own trading positions. After initially cooperating and being admitted into a whistle-blower program, Hayes had a change of heart and pleaded not guilty. Throughout the trial Hayes insisted his managers at UBS and Citigroup (C) had known of his attempts to manipulate Libor and at no point told him he was doing anything wrong. Apparently the defense of “everybody else was doing it, too” is not a particularly strong defense. Now it will be interesting to see if prosecutors will go back and revisit Hayes' earlier claims that rate rigging was systemic. Having followed the trial, it is hard to imagine Hayes was a mastermind.
