May Flowers & Stocks Still Blooming

On this last trading day of May, one has to wonder if stocks are here to stay. The old adage, “Sell in May and Go Away” has not held up this year, despite doubtable economic data and the Fed-fear frenzy that defined last week. So then one has to wonder just how long will May flowers bloom.

Market ETF	May 1 – May 30	May 31 to 1:20 PM
SPDR S&P 500 (NYSE: SPY)	+3.9%	-0.07%
SPDR Dow Jones (NYSE: DIA)	+3.7%	+0.01%
PowerShares (Nasdaq: QQQ)	+4.5%	+0.18%

May Flowers

Economic Gardening

The Personal Income & Outlays Report was published this morning for the month of April. Personal outlays (consumer spending) declined by 0.2%, matching poorly against economists’ expectations for no change. In March, consumer spending edged up 0.1%. This month’s decline probably has a lot to do with the 0.3% drop in the PCE Price Index. However, when excluding food and energy price change, the Core PCE Price Index was unchanged in April. This means that spending may not have declined outside of price impact, but we must also note that the Easter holiday tends to skew this period.

Economists expected the Core PCE Price Index to increase 0.1% like it did in March, but inflation is nowhere to be found given economic realities globally. The Core PCE Price Index is of high interest, given its status as the Federal Reserve’s favored inflation gauge. My read on consumer spending and prices is that deflation is resulting from weak economic demand globally. The same report offers the latest information on personal income, which was unchanged, versus the 0.3% increase in March.

The Chicago Purchasing Managers Index was reported this morning for the month of May. This measure of Midwestern manufacturing improved greatly this month, with the Business Barometer Index rising to a mark of 58.7, from 49.0 in April. The result far exceeded economists’ expectations for a slight improvement to 50.0. This data offers an interesting contrast to what has generally been poor data for manufacturing nationally recently.

The Reuters / University of Michigan Consumer Sentiment Index improved again in this last report for May. Consumer Sentiment gained to an index level of 84.5, up 8.1 points from April. We can find reason enough for it in rising stock market prices and ongoing real estate recovery, but the broader economy has lagged, which has tended to lead to disappointed high consumer expectations for the forward six months. I would venture that this measure would be different, and very well could be soon, if stocks backed off like many expect on the economic retrenching I am seeing. Economists had expected this measure to just hold steady from its most recent mid-May reading of 83.7. It currently stands at a recovery high mark.

Cleveland Federal Reserve Bank President Sandra Pianalto spoke on financial stability at a joint Fed conference in Washington.

International Varieties

EUROPE	11:50 AM ET	ASIA/PACIFIC	CLOSE
EURO STOXX 50	-1.1%	NIKKEI 225	+1.4%
German DAX	-0.6%	Hang Seng	-0.4%
CAC 40	-1.2%	S&P/ASX 200	-0.1%
FTSE 100	-1.1%	Korean KOSPI	+0.1%
Greek ASE	+2.0%	BSE India SENSEX	-2.2%

Commodities (12:17 PM ET)

WTI Crude	-0.9%
Brent Crude	-1.1%
RBOB Gasoline	-1.0%
NYMEX Natural Gas	+0.4%
Gold Spot	-1.3%
Silver Spot	-2.0%
COMEX Copper	-0.3%
CBOT Corn	+0.6%
CBOT Wheat	+0.1%
CBOT Soybeans	+1.4%
ICE Sugar	+0.5%
ICE Cocoa	+0.9%
ICE Orange Juice Conc.	-1.4%
CME Live Cattle	+0.5%

Specific Stocks

The Sanford C. Bernstein Strategic Decisions Conference offers presentations by Merck (NYSE: MRK), Medtronic (NYSE: MDT), E. I. du Pont de Nemours (NYSE: DD) and McCormick (NYSE: MCK). Catch the annual shareholders meeting of Lowe’s (NYSE: LOW). The corporate wire has the earnings of Genesco (NYSE: GCO), Graham (NYSE: GHM), On Track Innovations (Nasdaq: OTIV) and more.

Come see us at the blog.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Our American Girl Likes Bad Boys

Our American girl is higher today on a modest adjustment to GDP and jobless claims flow, and despite a tailing off of housing activity. Overall, today’s reports were convincingly negative, but apparently bad is a good thing in a market that fears the Fed. She likes the bad boys. The SPDR S&P 500 (NYSE: SPY) is up a half of a point through noon, with the SPDR Dow Jones (NYSE: DIA) trailing and the PowerShares QQQ (Nasdaq: QQQ) leading the way up 0.7%.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Economic Events

The First Quarter GDP revision was published this morning and offered a tenth of a point downward adjustment to a new growth rate of +2.4%, versus the initially reported growth rate of 2.5%. Economists expected the initial growth rate to persist into this revision, but the falloff was marginal nonetheless. The Greek is more concerned about growth into Q2, considering that the Fed’s Math Just Doesn’t Add Up in its forecasting for this year. See also our more cynical blog discussion on the topic here – The Fed’s Funny Math.

First quarter growth still managed to exceed the dismal fourth quarter 2012 pace of +0.4%. The payroll tax break expiration and the Sequester spending cuts have had meaningful impact upon our economy, along with the heavy weight of Europe. I’m looking for a gross failure this year with regard to economists’ expectations and what reality will unfold. The range of economist expectations extended from 2.3% growth to 3.3% for Q1 initially, exposing their hopeful tendency.

Pending Home Sales data was reported this morning. This is an important early indicator for real estate, but it only increased by 0.3% in April, versus economists’ expectations for a 1.4% increase. The index measures contracts signed in the existing home market (not new homes). This small increase in April matched against the March increase of 1.5%. Yesterday, we warned that rising mortgage rates were threatening to derail the housing recovery.

Weekly Initial Jobless Claims were reported for the period ending May 25, and showed weekly claims rose by 10K against the revised prior result, to 354K. The four-week moving average for jobless claims rose 6,750 to 347,250. This figure is likely to increase further next week, as a low result falls off the moving average; though the period will also probably show some impact from Memorial Day (seasonal adjustments are never perfect). The purge that occurred in labor after the last and very deep economic recession stabilized the situation somewhat, giving us some cushion against future recessionary impact.

Bloomberg’s Consumer Comfort Index deteriorated a bit this past week. The most regular measure of the consumer mood edged down 0.3 points this week and reached a new mark at -29.7. Popular opinion lately, as expressed by CNBC anyway, seems to be that consumers are confident. The same fact has showed up in the latest monthly measures of mood. However, I think this is a temporary anomaly resulting from seasonal upswing on human optimism. The reality of the situation is that Americans are paying more taxes on their paycheck this year versus last year, and too many Americans are still unemployed and unaccounted for.

Overseas Markets

EUROPE	11:50 AM	ASIA/PACIFIC	CLOSE
EURO STOXX 50	+0.5%	NIKKEI 225	-5.2%
German DAX	+0.8%	Hang Seng	-0.3%
CAC 40	+0.6%	S&P/ASX 200	-0.9%
FTSE 100	+0.5%	Korean KOSPI	-0.1%
Greek ASE	-1.4%	BSE India SENSEX	+0.3%

Japan took center stage again today overseas, with the NIKKEI 225 dropping more than five points. This followed a sharp decline yesterday, which built upon last week’s dive. Abe economics is in question, though the Japanese market is still higher since he unveiled his plan to stoke growth.

Commodity Markets (11:54 AM ET)

WTI Crude	+0.7%
Brent Crude	+0.2%
NYMEX Natural Gas	-2.8%
RBOB Gasoline	+0.6%
Gold Spot	+1.4%
Silver Spot	+2.1%
COMEX Copper	+0.5%
CBOT Corn	-1.3%
CBOT Wheat	-1.7%
CBOT Soybeans	-0.6%
ICE Cocoa	+0.1%
ICE Sugar	+0.4%
ICE Orange Juice Conc.	-0.4%
CME Live Cattle	-0.2%

The EIA’s regular Petroleum Status Report, usually reported on Wednesdays, was reported today instead due to the holiday. This data for the week ending May 25 showed crude oil inventory increased by 3.0 million barrels, and remained above the upper limit of the average range for this time of year. We have entered the summer driving season, so draws on gasoline inventory should be the norm moving forward. Total motor gasoline inventory decreased by 1.5 million barrels, but was in the upper half of the average range.

The EIA’s Natural Gas Report was reported today as usual. The latest report covering the period ending May 24 showed working gas in storage increased by 88 Bcf. Stocks were 664 Bcf less than last year at this time and 88 Bcf below the five-year average for this time of year.

Corporate Events

The Sanford C. Bernstein Strategic Decisions Conference highlights presentations by Hewlett-Packard (NYSE: HPQ) and Tyco International (NYSE: TYC). The Nomura Global Media Summit brings news from Time Warner (NYSE: TWX) and Walt Disney (NYSE: DIS). The Deutsche Bank dbAccess Health Care Conference brings news from Amgen (Nasdaq: AMGN). EMC (NYSE: EMC) is having its “Expanded Capital Allocation Strategy Conference Call”.

The day’s earnings schedule highlights reports from Costco (Nasdaq: COST), Joy Global (NYSE: JOY), Pall Corp. (NYSE: PLL), Big Lots (NYSE: BIG) and China Ming Yang Wind Power Group (NYSE: MY). Also look for news from China Gerui Advanced Materials (Nasdaq: CHOP), Copart (Nasdaq: CPRT), CorVel (Nasdaq: CRVL), dELiA’s (Nasdaq: DLIA), Envivio (Nasdaq: ENVI), Esterline Technologies (NYSE: ESL), Express (Nasdaq: EXPR), Fred’s (Nasdaq: FRED), Golar LNG (Nasdaq: GLNG), Golar LNG Partners (Nasdaq: GMLP), Guess (NYSE: GES), Hanwha Solarone (Nasdaq: HSOL), Hellenic Petroleum (ELPE.AT), Krispy Kreme Doughnuts (NYSE: KKD), Lion’s Gate Entertainment (NYSE: LGF), MGC Diagnostics (Nasdaq: MGCD), Modine Manufacturing (NYSE: MOD), OmniVision Technologies (Nasdaq: OVTI), Palo Alto Networks (Nasdaq: PANW), QAD (Nasdaq: QADB), Sanderson Farms (Nasdaq: SAFM), Ship Finance International (NYSE: SFL), Splunk (Nasdaq: SPLK), Uroplasty (NYSE: UPI) and Yingli Green Energy Holdings (NYSE: YGE).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Catching up on Our Summer Reading

Stocks gave back some ground Wednesday after Tuesday’s post holiday rally, which was likely simply the result of the investment community realizing the flurry on Fed fear was overdone. Here below please find all of Wednesday’s data and analysis for your review as you catch up on your summer reading.

Economic Events

The latest mortgage activity data arrived from the Mortgage Bankers Association Wednesday, and unfortunately continued a deeply negative trend for housing. This led us to author Higher Rates Exposing Underlying Housing Weakness on Wednesday. The report covering the period ending May 24 showed mortgage applications decreased by 8.8%, continuing a three week trend of similar declines. Applications tied to the purchases of homes increased this time though, by 3.0% on a seasonally adjusted basis. The Refinance Index decreased by 12%, as mortgage interest rates continued to increase through the period. We were first to raise the question about just how dependent housing is on synthetically low interest rates, and now we are warning readers to be mindful of the data lag in the home price index data, which may dangerously mislead investors at times of inflection.

The weekly retail same-store sales data from the International Council of Shopping Centers (ICSC) for the week ended May 25 showed a week-to-week sales decrease of 0.9%, versus the 0.2% increase the week before. On a year-to-year basis, sales were higher by 2.8%, versus the 3.1% increase in the prior week. The data may be affected by the Memorial Day holiday this week and next.

Boston Fed President Eric Rosengren spoke in Minneapolis on the economic outlook.

Corporate Events

The corporate schedule had the annual shareholder meeting of Exxon Mobil (NYSE: XOM) at the lead. The Cowen & Company Technology, Media & Telecom Conference highlighted the presentation of Applied Materials (Nasdaq: AMAT). The annual dbAccess Healthcare Conference offered news from Abbott Laboratories (NYSE: ABT). The Sanford C. Bernstein Strategic Decisions Conference offered presentations by Home Depot (NYSE: HD), Best Buy (NYSE: BBY) and SanDisk (Nasdaq: SNDK).

The EPS schedule highlighted reports from Avago Technologies (Nasdaq: AVGO), Brown Shoe Company (NYSE: BWS), Chico’s FAS (NYSE: CHS), DSW (NYSE: DSW), Navarre (Nasdaq: NAVR) and RBC Bearings (Nasdaq: ROLL). Also look for news from Acorn Int’l (NYSE: ATV), Acquity Group (NYSE: AQ), AFC Enterprises (Nasdaq: AFCE), ATA Inc. (Nasdaq: ATAI), ChinaCache International (Nasdaq: CCIH), Daktronics (Nasdaq: DAKT), Eltek (Nasdaq: ELTK), Fresh Market (NYSE: TFM), Hawkins (Nasdaq: HWKN), Magal Security Systems (Nasdaq: MAGS), Michael Kors Holdings (Nasdaq: KORS), Movado (NYSE: MOV), Tilly’s (Nasdaq: TLYS), Trina Solar (NYSE: TSL) and Vimicro International (Nasdaq: VIMC).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Higher Rates Exposing Underlying Housing Weakness

By The Greek:

For three straight weeks now, mortgage activity has been on the downslide and we cannot ignore it any longer. It illustrates how sensitive the housing market is to low interest rates and how vulnerable the housing recovery still is to disruption.

The Mortgage Bankers Association (MBA) reported its Weekly Applications Survey for the period ending May 24, 2013 on Wednesday. The MBA’s Market Composite Index collapsed by another 8.8% on a seasonally adjusted basis in the latest period, after dropping by 9.8% last week and 7.3% the week before that. Activity declined in mortgage refinancing activity and in mortgage activity tied to the purchases of homes over the three week period, though purchase activity improved in the latest week.

Week of	Market Composite	Repurchase Index	Purchase Index
May 24	-8.8%	-12%	+3.0%
May 17	-9.8%	-12%	-3.0%
May 10	-7.3%	-8.0%	-4.0%

Yet, you hardly hear whimper of it from the popular press and major media. News of this developing situation has not really reached the masses yet. Recent tests of the shares of mortgage bankers and homebuilders instead reflect the latest market uproar about potential Federal Reserve tapering of its dovish monetary policies. Well, that potential tapering would lead to higher mortgage rates, and that is precisely what is stalling activity here. So investors in real estate, and in the shares of the real estate complex, including of course mortgage bankers and homebuilders should be concerned. This is the issue impacting shares of the housing complex on Wednesday. Banks have strangely avoided the day’s demise, but as investors connect the dots, I expect we will also see concern reflected in finance, as it was on the relatively similar Fed flurry.

Company	Wednesday
Bank of America (NYSE: BAC)	+1.0%
Citigroup (NYSE: C)	+0.9%
Wells Fargo (NYSE: WFC)	+0.6%
PulteGroup (NYSE: PHM)	-3.3%
K.B. Home (NYSE: KBH)	-2.9%
Hovnanian (NYSE: HOV)	-1.8%
Radian Group (NYSE: RDN)	-1.9%
MGIC Investment (NYSE: MTG)	-4.2%

Just look at how much mortgage rates have increased over the last three weeks.

Mortgage Loan	May 24	May 17	May 10
30-Yr. Fixed Conforming	3.9%	3.78%	3.67%
30-Yr. Fixed Jumbo	4.07%	3.93%	3.87%
30-Yr. Fixed FHA Spons.	3.62%	3.53%	3.43%

If housing is so sensitive to synthetically lowered rates, it must reflect an economic reality that differs from what investors seem to see. It reflects a real unemployment level nearer to 12% than 7.5%, and the reality of 7.5 million unaccounted for jobless Americans. Some will say this issue is temporary, and simply reflects real estate investors holding off in the short-term for better rates. Only time will tell the truth, but put this on your radar nonetheless, and stay tuned, as your author here intends to keep a tap to this data.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Is Apple Un-American?

Last Monday evening, Senators Carl Levin and John McCain slammed Apple (Nasdaq: AAPL) and seemed to imply the company was un-American in alleged tax avoidance. The Senate Permanent Subcommittee on Investigations published a statement Monday night along with a 40-page memorandum with its findings and recommendations. A hearing followed on Tuesday, with Apple CEO Tim Cook and other executives facing a barrage of questions that attempted to find fault with Apple. The Senate is alleging that Apple has actively sought to avoid paying taxes. That very well may be true, but it is only excessive taxes that Apple is avoiding, and that does not make Apple un-American. After all, doesn’t every American seek to pay as few dollars in taxes as is legally possible? After my own study of the situation, I’ve concluded that Apple has done absolutely nothing wrong. Furthermore, I assess that Apple has no unfair advantage over smaller competitors in the United States because of the construct of its holding companies, as Senator McCain suggested it might. Finally, Apple CEO Tim Cook scored highly in the defense of his company, and so Apple should remain a favorite of patriotic Americans.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Apple Un-American?

The taxes in question are on monies earned overseas, which have already been taxed in the nations within which they have been earned. Apple (Nasdaq: AAPL) is simply choosing to keep capital in one overseas location, Ireland, instead of within many individual nations. And it is not sending excess cash home, due to the unreasonable 35% tax rate it would be forced to pay for simply repatriating the capital. So Apple (AAPL) is basically saving money for its shareholders with smart tax planning. It’s a two-pronged strategy. Apple is avoiding paying excess taxes to Ireland, first and foremost. Secondarily, it is not costing its shareholders unnecessarily by sending excess cash back to the U.S. for extra taxation. However, Apple does pay taxes on the income it earns on the investment of its money in Ireland.

What bothers regulators most is that it appears to them that Apple has gamed the tax laws of the United States and Ireland in order to exempt itself from paying taxes to either nation. In effect, it has placed three subsidiaries in a sort of state of tax limbo, with no nation having legal right to any taxes on hundreds of billions of what could have unnecessarily become taxable income if Apple sent the money home.

The details of the game work like this. Because Apple’s subsidiaries, Apple Operations International (AOI) and Apple Sales International (ASI), are incorporated in Ireland, they are free of the legal reach of the U.S. tax authority. And because these subsidiaries are managed and controlled (an Irish tax concept) by the parent company, which is located outside of Ireland, they are exempt of legal tax obligation to Ireland as well. A third subsidiary with no legal tax residency status, Apple Operations Europe (AOE), has reportedly helped the company to save some more money. According to the Senators, from 2009 to 2012, the company’s tax haven constructs have allowed it to save approximately $44 billion in taxes. Senator Levin seemed to imply that the holding companies are merely for show, set up as tax havens, by asking Apple’s somewhat shaken Tax Operations Head, Phillip Bullock, where the operations were truly “managed and controlled” from. Bullock and Cook fended him off well though, because they made both legal and logical sense. The companies are operated out of Ireland, but of course, the final say and direction comes from California.

Now, no matter how badly the United States could use these funds today, they are not really due to our nation. After all, these are monies earned on overseas sales, and so fall under the jurisdiction of other nations, and taxes are paid to those nations. Senator Levin of Michigan said Apple sought the “Holy Grail of tax avoidance,” by levering tax loopholes to avoid paying any taxes anywhere. Senator McCain said, “The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.” He also noted that even though Apple brags about being one of America’s most important corporate tax payers, it is also one of its greatest tax avoiders. With all due respect to Senator Levin, whom I’m glad is serving our nation and in the role he is serving, because of his shrewd legal sense, I have determined that these allegations are exaggerations of reality. Also, in my view, Senator McCain was not fully committed to fighting this battle yet, and open to discussion.

According to the Senate’s inquiries, Apple along with many other large corporations like Microsoft (Nasdaq: MSFT), Hewlett-Packard (NYSE: HPQ) and others have avoided paying taxes. Yes, I agree that Apple has avoided paying them to Ireland, thanks to Irish tax law, and that Apple has returned value to its shareholders instead. Many if not most of those equity stakeholders are found on American soil and have benefited from those saved dollars or euros. Unfortunately, in the end, what the government may actually accomplish is to embolden and empower the EU to flex its muscle against these important American companies. Recently, at one of its meetings, G7 members agreed to target tax evasion, and look what the Irish Times published last week. Are we now handing them Apple on a stick?

Because of the importance of these companies, they have leveraged their influence to gain favorable tax deals in exchange for placing stakes into the ground of nations like Ireland, who are willing and welcome to them. In return, the company employs people in those nations and makes those nations more marketable to other companies. It also encourages domestic businessmen to stay home when incorporating. So, it is not just a matter of taking; Apple and others also return something of value to nations like Ireland. Also, I gleaned from the inquiry that Apple does pay something on the order of 2% to Ireland by contract negotiated between the nation and the company. It seems that Apple has managed to leverage some of its own strength to bless Ireland with its presence. Plus, it employs roughly 4,000 Irishmen.

In this case, I think the government is wrong in its implication of wrongdoing. Furthermore, John McCain’s suggestion that Apple has a special and unfair ability in its tax construct that smaller businesses cannot match is wrong. There is nothing to stop American companies doing business overseas from setting up similar arrangements, but it is true that they may not get the same deal with Ireland. The world is not a fair place though, and some economies of scale are hard earned and gained through cunning and skill. That is capitalism and a reality of the competitive environment, not illegal activity.

If Congress wants to squeeze some more juice out of our most fruitful oranges to pay for our debts, then it should find other means to do so. Tim Cook expressed a willingness to bear some increased cost if our government would reform corporate tax law. The cost of repatriating capital back to the United States is excessive, and corporate tax rates are the highest in the world. Cook said that Apple would repatriate at a fair tax rate, but the current level of corporate rates and the rules regarding repatriation put American companies at disadvantage globally.

I conclude that not only is Apple not un-American, but in fact Apple exemplifies what is American in that it pays its due taxes and operates smartly under our capitalist scheme. It does what is most value creating and value preserving for its shareholders and so maximizes its value. Finally, I want to also note something about Tim Cook. In my previous article I said that this would be a defining moment for Tim Cook, one that he would be remembered for. I said he could be seen as a winner or a loser depending on how events unfolded. Well, he came out of this inquiry not only as a winner, but he preserved the Apple brand in the process and defended its image in the eyes of patriots. Apple’s competitors should garner nothing from this day, as long as those telling the story understood what unfolded. At least this author did, and so I hope you are reading this clear reflection of reality.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.