Know What You’re Selling: $50 Billion Peace Treaty Edition

Taking JPMorgan’s $13 billion mortgage settlement in November as their model, analysts are saying that the big banks of Wall Street might be able to “buy their peace from federal authorities” for the meager sum of $50 billion, “roughly half the total annual profit of large American banks in 2012.”  An analyst with RBC Capital Markets says, “Yes, $50 billion is a big number.  But it is manageable for the 16 banks, and the industry wants to put this behind them.”  Meanwhile, banks are cutting jobs and fighting harder for a diminishing pool of home loans for purchasing and refinancing.  “Analysts expect results across the sector to show that the number of loan originations for home purchases and refinances fell by 20% to 30% in the fourth quarter from the previous quarter.”  Also, this is pretty great: “For the past few years, mortgage-loan officers such as John Cannon had a simple strategy for making money: answering the phone.  That changed when mortgage rates began rising last year.  Mr. Cannon realized he needed to start attending open houses so he could meet real-estate agents who might deliver clients looking to purchase homes, as refinancing dwindles.  “Much to my detriment, I’ve been a ‘refi’ guy pretty much my whole career,” said Mr. Cannon.”  At least he didn’t suddenly find out he was a “leveraged and inverse ETFs” guy: FINRA has ordered two affiliates of Stifel Financial Corporation “to pay combined fines of [over $1 million] in connection with sales of leveraged and inverse exchange-traded funds (ETFs).”  Apparently “some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs: nonetheless, Stifel and Century allowed the representatives to recommend them to retail customers.”  So its good to know what you are selling to clients, unless you worked at Countrywide circa 2007.

74,000 Jobs…

The Labor Department reports that “nonfarm payrolls rose only 74,000 last month, the smallest increase since January 2011, and the unemployment rate fell 0.3 percentage point to 6.7 percent.”  74,000 jobs is a bit short of the 196,000 expected and has a lot of economists scratching their heads.  A closer look at the data reveals a significant drop in construction and transportation, which seems to correlate with the fact that 273,000 workers couldn’t get to their jobs thanks to snow storms in December; that is the highest number of “stayed-at-homes” for the month of December since 1977.  BlackRock’s fixed income chief Rick Rieder doesn’t like this excuse for a weak jobs report and says that the unemployment situation has gone through a structural change thanks to technology.  Meanwhile, America’s favorite economic faux power couple Carmen Reinhart and Ken Rogoff say that basically if the United States economy doesn’t continue to get better than the rest of the world will slip into a Great Depression worse than anything we’ve seen before so, you know, no pressure or anything.  By the way, the unemployment rate continues to drop as a result of people leaving the labor force (just had to get that last little twist of the knife in there).

Mo Money, Mo Pensions, Mo Problems

Bloomberg says that US companies “are poised to boost business investment to a record in 2014, using a growing cash hoard to propel corporate spending past last year’s $2 trillion.  Chief Executive Officers are buying new machinery and investing in real estate as a U.S. budget deal and growth in Europe signal a rebound in customer demand.”  Over the past few years companies have been hoarding cash, but now “must lay the groundwork for future profit increases.”  Let’s just hope they are the kind of profit increases we can count on.  The Wall Street Journal reports “some companies that have adopted ‘mark-to-market’ pension accounting in the past few years — recognizing pension gains and losses when they happen, instead of spreading them over several years — could record major gains when they report fourth-quarter earnings in the coming weeks.”  This is the opposite of what they’ve had to do in the last couple years as pension assets with market values closely linked to interest rates and the stock markets have posted mark-to-market losses.  The advent of GAAP vs non-GAAP reporting, however, makes all of this really confusing.  For example, AT&T reported a GAAP loss of 68 cents/share in Q4 2012 on pension losses; and a non-GAAP (and-a-wink) profit of 44 cents/share.  Since interest rates rose and we saw a strong stock-market performance in 2013, companies with mark-to-market pension accounting could report a GAAP profit and a non-GAAP loss in Q4.  So basically there is some worry that companies (and investors for that matter) might lean towards GAAP or non-GAAP reporting depending on how conveniently they frame the income statement.  Meanwhile, the SEC is charging Diamond Foods and two of its executives for “their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts.”  The CFO says the delayed payments to walnut growers were simply “levers” for managing earnings in Diamond’s financial statements so yes, I think we are justified in feeling a bit concerned about earnings manipulation.

Boeing: The Saga Continues

Members of the local Seattle chapter of the machinists union are filing unfair labor practice charges against their international leadership for “holding the vote against the objections of local machinists union leaders and when many members were away on vacation.”  Meanwhile, Boeing and other manufacturers are asking the IRS not to do away with their Research and Development tax deduction abilities.  Apparently the original intention of the new regulation was to “make [the R&D tax break] applicable to a wider array of expenses, including more manufacturing process-oriented costs” so its probably safe to say that Boeing will get its way on this one, too.

China: King of Trade and Tourists

China’s total trade for 2013 stands at $4.2 trillion.  At its current rate, the United States is expected to end the year at $3.5 trillion.  There is still some suspicion, however, that “inflated invoices used to circumvent China’s strict capital controls” may still be at work here.  Meanwhile, the China National Tourism Administration reports that “ninety-seven million Chinese traveled abroad in 2013, beating the 2012 mark by roughly 14 million…[China’s tourists] overtook German and US tourists as the world’s biggest-spending travelers in 2012, spending $102 billion overseas, a 40-percent increase from 2011.”



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