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Tuesday 08.02.2016

Amazon passes Exxon to become 4th most valuable company in the U.S.

Amazon.com Inc. muscled past Exxon Mobil Corp. Monday to become the fourth-largest U.S. company by market capitalization. Exxon Mobil also fell behind Facebook Inc. into sixth place, to make it an all-technology top five.

Amazon AMZN, -0.12% has now climbed three spots from seventh place in the two sessions since the e-commerce giant reported second-quarter results, passing Warren Buffett’s Berkshire Hathaway Inc. BRK.B, +0.03% and Facebook Inc. FB, -0.05% on Friday.

Amazon’s stock ran up 1.2% to a record close, lifting its market cap to $364.0 billion, while Facebook shares gained 0.3% to take its market cap to $356.9 billion. At the same time, Exxon Mobil shares slumped 3.5%, on the back of a tumble in oil prices, to knock its market cap down to $356.0 billion. Facebook reported better-than-expected results last week, while Exxon Mobil’s results on Friday missed expectations.

Apple Inc.’s stock AAPL, +0.04% surged 1.8% to turn positive on the year, and to keep its lead as the most valuable company with a $571.4 billion market cap. Alphabet Inc. shares GOOGL, +1.21% climbed 1.2% to stay within range at $549.5 billion. Microsoft Corp. MSFT, -0.18% was a distant third at $440.9 billion.

Dow Corning notifies state of 348 layoffs at two sites

Dow Corning Corp. officials have formally notified the state of plans to layoff 348 employees from two mid-Michigan sites. A Worker Adjustment and Retraining Notification Act notice filed with the state in late July says Dow Corning will undertake a restructuring of its operations at its Corporate Center, located at 2200 W. Salzburg in Bay County's Williams Township, affecting 238 employees.

Separations of affected employees are expected to be permanent and are expected to begin on Friday, Sept. 30, the notice states. A second notice filed with the state in late July says Dow Corning also will undertake a restructuring of its operations at its Bay City Site, located at 1 E. Main in Bay City's Uptown development. It is expected that 110 employees will be affected by this restructuring. Their permanent separations also are expected to begin Sept. 30.

On June 1, The Dow Chemical Co. assumed full control of its 73-year joint venture with Corning Inc., becoming the 100 percent owner of Dow Corning's silicones business. Company officials initially announced the plans in December, along with Dow's plans to merge with chemical giant DuPont.

About a month after the Dow Corning takeover was finalized, Dow officials announced plans to eliminate approximately 2,500 positions globally, including about 700 jobs in the Great Lakes Bay Region.

JPMorgan Chase CEO Dimon: US GDP could rise to 4% under next president

JPMorgan Chase CEO Jamie Dimon took a long-term view on the U.S. economy and talked up the bank's competitive position in a wide-ranging interview with CNBC on Monday.

He suggested that his bank makes the world a better place. "I think that JPMorgan makes it a better world," Dimon said Monday. "Every single day in 2,000 communities around the world, trying to do our job well, responsibly lending, opening branches, serving businesses."

Dimon also said he's seeing positive signs for the U.S. economy, and he sought to play down legislation brewing that could alter how large financial institutions do business on Wall Street.

"I wouldn't be over-sensitive to short-term data," the chairman and CEO said in Irvine, California, on the bank's bus tour, which gives it the opportunity to solicit feedback from staffers. At the same time, Dimon is sensitive to the economy's dependence on data. He said that if the next U.S. president implements the appropriate reform programs, that GDP could rise to 4 percent. And in his bullish outlook for the American economy, he highlighted increasing wages and consumer spending as evidence.

Morgan Stanley Asks “Do Corporate Earnings Actually Matter?”

Morgan Stanley’s (Eccentric) Equity Strategist Adam Parker looks at the world through a traditional value investors view point and wonders how markets are determining price levels. With nearly three quarters of the market capitalization reporting second quarter earnings, he notes the positive trends but then questions a key relative value point. His conclusion is in part seen in the headline of the August 1 report titled “Do Corporate Earnings Actually Matter?” (nothing to do with the Federal Reserve). This leads Parker and his team on a circuitous route to determine sector exposure recommendations.

Earnings have always been a key driver of stock market performance, typically keeping a lid on gains and a bottom on losses. The multiple by which investors can acquire a stock – the price earnings ratio – has always driven relative value analysis. While this formula is influenced by interest rates and forward economic guidance – driving the acceptable price earnings ratio both higher and lower – what Parker notices is a subtle correlation break with this reality.

“Amid a sea of macro concerns,” earnings are having a calming influence on stocks during the second quarter, Parker observes along with Morgan Stanley team members Brian Hayes, Antonio Orgeta and Chndrama Naha. The four analysts note stronger earnings but “mostly weaker forward guidance.”

Forward guidance being a key component of where a price earnings ratio finds fair value might be assumed as a catalyst for price discovery. But Parker, looking for key themes impacting how the stock market finds value – and what it means going forward – notes an oddity in the value equation.

Times Up! Social Security On Fast Track To Insolvency And 29% Benefit Cuts

In 2010, Social Security (OASDI) unofficially went bankrupt. For the first time since the enactment of the SS amendments of 1983, annual outlays for the program exceeded receipts (excluding interest credited to the trust funds). The deficit has grown every year since 2010 and is now up to 8% annually and is projected to be 31% in 2026 and 44% by ’46. The chart below highlights the OASDI annual surplus growth (blue columns) and total surplus (red line). This chart includes interest payments to the trust funds and thus looks a little better than the unvarnished reality.

For a little perspective, the program pays more than 60 million beneficiaries (almost 1 in 5 Americans), OASDI (Old Age, Survivors, Disability Insurance) represents 25% of all annual federal spending, and for more than half of these beneficiaries these benefits represent their sole or primary source of income.

The good news is since SS’s inception in 1935, the program collected $2.9 trillion more than it paid out. The bad news is that the $2.9 trillion has already been spent. But by law, Social Security is allowed to pretend that the “trust fund” money is still there and continue paying out full benefits until that fictitious $2.9 trillion is burned through.

To do this, the Treasury will issue another $2.9 trillion over the next 13 years to be sold as marketable debt so it may again be spent (just moving the liability from one side of the ledger, the Intergovernmental, to the other, public marketable). However, according to the CBO, Social Security will have burnt through the pretend trust fund money (that wasn’t there to begin with) by 2029.

Verizon wants to run every part of your life

Verizon no longer wants to be your mother's Ma Bell spinoff. Sure, the company is still viewed by many as a sleepy telecom. But it is trying to reshape itself into a mobile technology giant with tentacles in the worlds of media as well as connected cars.

The ink is barely dry on Verizon's (VZ, Tech30) $4.8 billion purchase of Yahoo's (YHOO, Tech30) core operating assets. But Verizon announced another notable acquisition on Monday, the purchase of Ireland-based vehicle tracking firm Fleetmatics (FLTX) for $2.4 billion.

The deal will bring Verizon more than 37,000 customers and 737,000 subscribers for Fleetmatics' software, which helps track vehicle location, fuel usage, speed and mileage among other things. Verizon also bought Fleetmatics competitor Telogis in June.

It's all part of the burgeoning business of telematics -- the marriage of autos and mobile tech. A perfect example for consumers is the OnStar technology in GM (GM) cars. For now, telematics is more important for businesses that want the most up-to-date information on their products.

Facebook Might Owe The IRS As Much As $5 Billion In Back Taxes

You know what giant corporations really hate to do? Spend lots of their revenue on taxes. And you know what they have to do anyway? Exactly that. But the IRS is saying that Facebook may not have done enough of it, in past years, and may be on the hook for a big fat chunk of cash overdue to the U.S. government.

Facebook confirmed last week that it may face a tax bill of up to $5 billion, the Washington Post reports, but the company is not going to pay up without a fight.

This all stems from a decision Facebook made back in 2010, when it did what a lot of America’s biggest corporations do: transferred its “intangible” assets to an Irish holding company, so those assets get taxed at the lower Irish corporate tax rate instead of the U.S. one.

The IRS started investigating Facebook’s 2008-2010 tax situation way back in 2013, and that investigation continues today. In a court filing (PDF) from July, the IRS lays out the current state of the investigation. When Facebook sent those assets overseas it retained a third party, Ernst & Young, to determine the value of its assets for income tax purposes, the IRS explains. And speaking with Facebook employees and reading public documents, the IRS has determined that the way Ernst & Young ended up valuing those assets was “problematic,” and that the valuations “were understated by billions of dollars.”

Economists Turn a Blind Eye to Historical Data

Economists can’t seem to help themselves. One might think that after they failed to anticipate the greatest financial crisis since the Great Depression, they learned to step back and look at the big picture. Instead, we're seeing the same blind spot: a pre-crisis dependence on the wrong data set of post-World War II recessions, which led to the biggest blunder in economic history.

Many failed to even recognize the crisis for what it was as it was happening. Much of the economic profession was in deep denial until Lehman, AIG and Citi were in free fall -- or worse. I was reminded of this courtesy of a bleak front-page article this weekend in the Wall Street Journal:

Economic growth is now tracking at a 1% rate in 2016 -- the weakest start to a year since 2011 -- when combined with a downwardly revised reading for the first quarter. That makes for an annual average rate of 2.1% growth since the end of the recession, the weakest pace of any expansion since at least 1949.

The piece did note that “The output figures are in some ways discordant with other gauges of the economy. The unemployment rate stands at 4.9% after a streak of strong job gains, wages have begun to pick up, and home sales hit a post-recession high" in June. It also pointed out that consumer spending has been strong as of late.

Deutsche Bank, Credit Suisse Kicked Out Of Stoxx Europe 50 Index

What do you do when you are one of the biggest indices in Europe and are unable to rise simply because two of your biggest constituents, if not so much in market cap any more but certainly in terms of systemic importance, just can’t catch a bid? Why you delete them, of course even if the two names in question happen to be Europe’s two largest banks, Deutsche Bank and Credit Suisse.

STOXX Ltd, the operator of Deutsche Boerse Group’s index business, announced component changes in the STOXX Europe 50 Index due to the fast-exit rule. All changes become effective with the open of markets on Aug. 8, 2016.

What is the Fast Exit rule? “The rule states that a component is deleted from the Dow Jones EURO STOXX 50 or Dow Jones STOXX 50 indexes if it ranks 75 or below on the respective index’s monthly selection lists for a consecutive period of two months. Deleted components for all three indexes will be replaced by the highest ranking non-components on the monthly selection list. Component changes will be announced on the first trading day of the month following the publication of the monthly selection lists, implemented on the close of the fifth trading day and effective the next trading day.”

In other words, someone did not like how DB and CS were trading and decided to kick them out. And here are the replacements. What does this really mean from a price index standpoint? Simple: the following. And that is how you “boost” the performance of the constituent index. It was not immediately clear if there would be any forced selling as a result of these names getting kicked out of one of Europe’s 2 most important indices alongside the broader Stoxx 600 index.

Chicago's bills will increase in 2017 as pension costs escalate

Chicago will live up to its fiscally-challenged reputation in the coming year as its pension liabilities soar. The junk-rated metropolis will pay at least $902 million in 2017 to its four retirement funds that are only 23 percent funded, meaning the pensions have 23 cents for every dollar owed, according to an annual financial analysis released Friday. That's down from 35 percent last year. The shortfall across the four funds ballooned to $33.8 billion from $20 billion a year earlier, mostly due to new accounting rules.

Chicago hasn't paid enough into its retirement funds for years, leaving the city of 2.7 million strapped with hundreds of millions of dollars of obligations and the lowest credit rating of any big U.S. city except Detroit. Officials have been spending more than they're bringing in, and borrowing to push off debt payments, a practice Mayor Rahm Emanuel has promised to end by 2019. Long-term debt-service payments in 2017 are currently projected at about $2 billion, not counting future issuance, the report shows.

Emanuel is projecting a 2017 budget shortfall of $137.6 million, the smallest since 2007. That's down from $654.7 million in 2011 when he took office. Still, that assumes there's enough revenue to pay stepped-up retirement payments. While Emanuel pushed through a record property tax hike in October to provide funding for the public-safety pensions, he still needs state approval for an agreement he reached with unions to keep the laborers' fund from going insolvent in 2027. He is also working on a fix for the municipal workers' fund that has the biggest liability of all. Once these accords are finalized, the city expects to pay more to those funds than current projections, said Alex Holt, Chicago's budget director.

Moody's Investors Service, which rates Chicago Ba1, one step below investment grade, says the city needs to reverse the trajectory of its pension problem. The steps to bolster the pensions are positive, but the problem is still getting worse, just at a slower pace, according to Naomi Richman, a managing director for the New York-based company. Right now, the city is more likely to get downgraded than upgraded, she said. “The drag of the pensions is going to make them a focal point and an albatross for the city for years to come,” said Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances.

US wins ownership of rare 'double eagle' gold coins

A federal appeals court on Monday said a cache of exceptionally rare gold coins stolen from the U.S. Mint in the 1930s belongs to the U.S. government, not the Pennsylvania family that possessed it for decades.

By a 9-3 vote, the 3rd U.S. Circuit Court of Appeals in Philadelphia said Joan Langbord and her sons Roy and David cannot keep the 10 "double eagle" 1933 US$20 gold pieces, estimated to be worth several million dollars each.

Monday's decision could end a decade-long battle that began after the Langbords, heirs to late Philadelphia jeweler Israel Switt, found the coins in a safe deposit box and asked the Mint to authenticate them, only to have them seized in 2004. "The Langbord family fully intends to seek review by the Supreme Court of the important issue of the unbridled power of the government to take and keep a citizen's property," its lawyer Barry Berke said.

First Assistant U.S. Attorney Louis Lappen said: "This ruling properly establishes that the United States is the lawful owner of the 1933 Double Eagle gold coins." The coins were among 445,500 double eagles struck by the Philadelphia Mint, but never circulated as President Franklin Roosevelt took the United States off the gold standard.

I Learned More at McDonald's Than at College

Deutsche Bank Says U.S. GDP Flop Is a Sign of Secular Stagnation

You can now add the rates strategy team at Deutsche Bank AG to the growing list of Wall Street analysts who reckon the U.S. economy is probably ensnared in secular stagnation.

In a research note published on Friday, Deutsche Bank strategists, led by Dominic Konstam, say the Federal Reserve risks a "big policy error" if it hikes interest rates in September as the latest GDP numbers mark an imminent labor market-driven slowdown for the U.S. economy.

The world's largest economy expanded by just 1.2 percent in the second quarter while first-quarter expansion was revised down to 0.8 percent from an initial 1.1 percent estimate. The second-quarter rate of expansion was less than half the advance forecast by economists in a Bloomberg survey.

"If the economy can only muster growth in the vicinity of 1 percent when the labor market is at full employment, one must take the secular stagnation thesis more seriously," the Deutsche Bank analysts write. "In other words, perhaps the 2.1 percent average growth rate of the present cycle has been an over-performance. If productivity continues to underwhelm, we will likely see downward revisions to potential growth, telling us after the fact that we have been closing the output gap faster than we thought."

Venezuela's top officials sport luxury watches while the rest of country starves

In Spanish there is an old saying that goes something like this: “Tell me what you brag about, and I'll tell you what you lack." In today’s Venezuela, the folksy saying seems confirmed.

While the socialist government officials often rant about “equality,” “austerity” and “anti-imperialism,” the expensive watches Chavistas flaunt, along with their travels, tell a whole different story about what their priorities are after hours. Launched in 2014, the blog Relojes del Chavismo (Chavismo's Watches) has posted more than 150 pictures of high-ranking officials wearing all sorts of expensive watches, mostly Swiss made.

The list of watch aficionados includes President Nicolas Maduro, Assemblyman Diosdado Cabello and Army General Vladimir Padrino Lopez, who was recently appointed financial czar to try and rescue the country’s collapsing economy.

All together, the watches on the blog add up to more than $500,000, according to the site administrator. “I decided to create the blog after reading an article published on The Telegraph about bloggers protesting in China,” said the site administrator, who wouldn’t reveal his name for fear of government retaliation.

Obamacare insurers in Michigan requesting 17.3% rate hike next year

Obamacare is having a difficult year with enrollment lower than once expected, several more co-ops failing and double-digit rate increases expected for next year. From the Detroit Free Press, prices on the exchange are expected to rise 17.3% next year:

Of the 14 insurers with individual market plans, 10 are seeking increases exceeding 10%. They include a proposed 13.9% average increase by Priority Health, 18.7% by Blue Cross Blue Shield of Michigan, 16.8% by Health Alliance Plan and 39.2% by Humana.

As always with these stories it has to be said that the overwhelming majority of people buying these plans will be shielded from the increase in premiums by government subsidies. However that’s not true for everyone:

Michiganders such as Tim Lee, 61, of Escanaba, whose household makes over the tax credit thresholds, must bear the full cost of their health plan and whatever increase gets enacted next year… He said he pays $671 a month for his “bronze premier” plan that has a hefty $6,300 deductible, which means he generally must spend that much out of pocket before insurance kicks in. So he wasn’t happy to learn that Blue Cross wants to raise its individual plan rates by 9.6% to 19.2% next year, or an average of 18.7%. The proposed increases would affect 116,000 covered individuals, including Lee. “Frankly we can afford it, which is why we’re not getting any subsidies,” said Lee, whose wife qualifies for Medicare. “But it still is a kick, to say the least.”

Two-Thirds of Americans Support Free College Tuition

This might be an idea whose time has come: Nearly two-thirds of Americans are in favor of free college for everyone, and about three-quarters think at least some people should be eligible for free college, a new survey shows.

As the labor market increasingly benefits the better educated, and as college education and earnings potential become more tightly linked, people are coming around to an idea that seemed radical until very recently.

Vermont senator Bernie Sanders touted the idea as a central plank of his primary platform, and Democratic nominee Hillary Clinton recently announced her own version, which includes a household income cap of $85,000 that rises to $125,000 in the future, while Republican nominee Donald Trump has not released a detailed plan to address tuition costs.

But beyond talking points on the campaign trail, college costs clearly are an issue resonating with Americans today. According to a new survey of nearly 5,000 adults conducted by Bankrate.com, 62 percent think tuition at public colleges and universities should be free for all students, and about a quarter of those who oppose making college free for everyone think it should be available to families with incomes below $50,000.

Collapsing U.S. GDP Growth Belies Rosey Forecasts - Peter Schiff

The Burrito Index: Consumer Prices Have Soared 160% Since 2001

In our household, we measure inflation with the "Burrito Index": How much has the cost of a regular burrito at our favorite taco truck gone up? Since we keep detailed records of expenses (a necessity if you’re a self-employed free-lance writer), I can track the real-world inflation of the Burrito Index with great accuracy: the cost of a regular burrito from our local taco truck has gone up from $2.50 in 2001 to $5 in 2010 to $6.50 in 2016.

That’s a $160% increase since 2001; 15 years in which the official inflation rate reports that what $1 bought in 2001 can supposedly be bought with $1.35 today. If the Burrito Index had tracked official inflation, the burrito at our truck should cost $3.38—up only 35% from 2001. Compare that to today's actual cost of $6.50—almost double what it “should cost” according to official inflation calculations.

Since 2001, the real-world burrito index is 4.5 times greater than the official rate of inflation—not a trivial difference. Between 2010 and now, the Burrito Index has logged a 30% increase, more than triple the officially registered 10% drop in purchasing power over the same time.

My Burrito Index is a rough-and-ready index of real-world inflation. To insure its measure isn’t an outlying aberration, we also need to track the real-world costs of big-ticket items such as college tuition and healthcare insurance, as well as local government-provided services. When we do, we observe results of similar magnitude. According to official statistics, inflation has reduced the purchasing power of the dollar by a mere 6% since 2011: barely above 1% a year. We’ve supposedly seen our purchasing power decline by 27% in the 12 years since 2004—an average rate of 2.25% per year. But our real-world experience tells us the official inflation rate doesn’t reflect the actual cost increases of everything from burritos to healthcare.

There's one reason a big chunk of Americans have 'negative wealth'

Most people have some debt — payments to make, loans to pay back. But for some Americans, debt has gotten to an extreme and dire level: all their debts, added up, cost more than all their assets combined.

It's called "negative wealth," and a new analysis from the Federal Reserve Bank of New York shows that 14% of Americans are dealing with it, along with another 1.1% who are just breaking even. Which means that for 15.1% of Americans, everything they own isn't enough to pay off their debt.

The analysis was done by four economists using data from the Survey of Consumer Expectations from 2015. (The 2014 data was just released on the SCE website.) The economists were interested in the composition of households with negative and non-negative wealth. In other words, who are these 15.1% of Americans? How much money are they making, and what kind of debts do they owe?

Some of their findings are intuitive. The heads of households with negative wealth are younger, on average, than heads of non-negative households, and are slightly less likely to have a college degree. They have lower annual incomes ($39,077 versus $86,309), and they're also four times more likely to be single parents, less likely to own their home, and more likely to be black or Hispanic.

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