Stocks fell Friday on renewed fears that Greece will default on its debt obligations. This comes as International Monetary Fund (IMF) Managing Director Christine Lagarde warned Greece that missing a debt payment is unacceptable. Put bluntly, Greece will be in default if it does not meet its debt obligations. Greece officials have been asking for a grace period, but it appears that the IMF and the Eurozone will not grant one. It is clear that Greece cannot service its debt load over the long-term, so Prime Minister Alexis Tsipras needs to determine Greece’s desire to remain in the Eurozone. It is possible that new elections will need to be held to determine this. Should Greeks want to remain in the Eurozone, Tsipras may need to construct a new government without the leftists currently in his coalition. These fears sent German bonds to all-time lows as investors hunt for assets deemed safest, with the 10-year bond now yielding 0.07%.
Fed Presidents Split on Timing of Rate Hike:
As an anticipated interest rate hike from the Federal Reserve gets closer, Fed Bank Presidents are making their views known. St. Louis Fed President James Bullard stated on Wednesday that now could be the appropriate time to raise rates. “There’s a mismatch between the monetary policy side, which is still at emergency settings, and the economy itself, which is arguably reasonably close to normal,” Bullard said. His main argument is that raising rates now gives the Fed back its monetary policy tool, should the economy turn south. If that happeed now, the Fed does not have much it can do (as they have stated they would prefer to not go to negative rates). Richmond Fed President Jeffrey Lacker said that an argument could be made to raise rates at the Fed’s June policy meeting. Lacker has long been “hawkish”, so his comments are of no surprise. Even still, he stated he will go into the June policy meeting with an open mind. Boston Fed President Eric Rosengren took the opposite view, stating that the economic weaknesses we have seen lately shows that we should not raise rates just yet. “Incoming data would need to improve to fully satisfy the committee’s two conditions for starting to raise rates,” he said. Atlanta Fed President Dennis Lockhart echoed similar comments, stating “I think waiting a while longer improves the chances of seeing confirmation from incoming data that the economy is on the desired path.” Overall, these comments show how “split” the Fed Presidents are when it comes to the first rate hike. Ultimately, it appears that a June rate hike will be dependent on improving economic data, though the exact “level” of improvement will continue to be debated. Based on the comments above, it seems that a June hike is unlikely, but certainly a lot can happen (economically) between now and then.
Japan Surpasses China as Largest Foreign Holder of U.S. Debt:
The Treasury Department reported that Japan surpassed China in February as the largest foreign holder of U.S. government debt. This is due to China cutting its investments in the U.S., as well as Japan adding to theirs. As the U.S. dollar has appreciated relative to the Japanese Yen, U.S. bonds appear even more attractive. 10 year Japanese bonds are hovering around 0.32%, much lower than the U.S. rates of around 1.9%. Between China and Japan, the two countries combined still own nearly 10% of all outstanding publicly traded U.S. debt, while the total for all foreign holdings is about 50%.
Corporate Earnings Released This Week:
While the unofficial start to earnings season was last week when Alcoa reported, few S&P 500 companies reported last week. This week, however, saw several companies report. A few highlights from this week include:
Bank of America (BAC) announced on Wednesday that it swung to a profit as legal expenses fell sharply. BAC earned $0.27 per share, short of the average analyst estimate of $0.29 per share. Legal expenses fell to $370 Million, down from $6 Billion a year ago. The company announced it will continue to cut costs as the bank trimmed spending on personnel, equipment, and the unit that handles delinquent mortgages. The company funded $16.9 Billion in new mortgages, up nearly 56% from a year ago. However, the bank noted that profits continue to suffer due to the current low interest rate environment. The company estimated that if both short-term and long-term interest rates rise by one percent, an extra $4.6 Billion would be earned by the bank.
Blackstone Group LP (BX) and Goldman Sachs (GS) both posted “blowout” earnings, signaling a healthy financial industry. Goldman received a big boost from its trading desks, merger-related fees, and its fixed income arm. All told, the company was able to post $5.94 per share in earnings, shattering the average analyst estimate of $4.26. They also announced $1.25 Billion in Goldman shares were repurchased. Blackstone reported that its profit more than doubled over last year on sales of some of its corporate stakes and properties. The company reported a profit of $1.01 per share, up from $0.44 per share last year. The company also announced it will increase its dividend to $0.89 for this quarter, up 150% from last year’s payout of $0.35. The company seemed very optimistic on its future cash flows. Blackstone President Tony James stated, “When we look back years from now, I believe they will be somewhat below average,” referring to the shareholder payouts.
Kinder Morgan Energy Inc (KMI) completed its first full quarter since consolidating its business units. As pipelines are less sensitive to commodity prices, the company was able to post a 63% rise in earnings. All told, the company’s profit increased to $469 million, up from $287 last year. As promised, the company announced it will increase its dividend to $0.48 per share in the upcoming quarter.
Citigroup (C) posted its highest quarterly profit in eight years, mostly driven by its cost cutting measures. The company reported that it earned $1.52 per share, surpassing the average analyst expectation of $1.39 per share. While trading revenue was lower, the bank more than made up for it by slashing costs. Operating expenses were lower by 10% as Citigroup trimmed expenses relating to compensation, equipment, and advertising. Legal expenses were also lower than last year, falling to $403 Million, down from $1.16 Billion.
General Electric (GE) booked major losses in the first quarter as a result of costs related to the company’s plan to sell most of its lending arm. Before these one-time charges, GE reported a $0.31 per share profit for the first quarter, narrowly ahead of the average analyst estimate of $0.30. Revenue fell to $29.36 Billion, well below the $34.23 Billion analysts were expecting. GE attributed the revenue miss to weakness in its oil and gas business and foreign exchange impacts.
Next week will see many more companies reporting earnings. As these are spread throughout the week, we anticipate this will be the driving force behind the market next week. A few of the companies scheduled to report next week are IBM (IBM), Haliburton (HAL), Verizon (VZ), AT&T(T), Boeing (BA), Coca-Cola (KO), McDonald’s (MCD), Qualcomm (QCOM), 3M (MMM), Caterpillar (CAT), Freeport McMoRan Copper and Gold (FCX), General Motors (GM), Google (GOOGL), Microsoft (MSFT), and PepsiCo (PEP).
Tax Deadline Passes:
Though you may be breathing a sigh of relief now that April 15th has come and gone, now is a good time to turn towards 2015 tax planning if you haven’t done so already. A few ideas to consider:
1. Give yourself a raise – If you received a significant tax refund on your 2014 tax return, consider if adjusting the level of withholdings is appropriate. This could provide you additional cash flow during the year.
2. Save for retirement – Review any employer sponsored retirement plans to ensure you are maximizing the most allowable based on your budget. If your plan provides an employer match be sure to at least take advantage of this benefit as this is an immediate return on your investment. If you do not have a retirement plan available to you, consider making contributions to a traditional IRA (pre-tax) or a Roth IRA (after-tax). The max one can contribute to an IRA account is $5,500 per year (those over the age of 50 can contribute an additional $1,000).
3. Be charitable – consider donating items of clothing or household goods to various organizations that accept these donations. Be sure to collect a receipt for your tax records. If you normally gift cash, consider gifting appreciated securities owned for over a year in your portfolio instead. This allows the donor to receive the tax deduction for the fair value of the donation while also avoiding paying any capital gains tax.
4. Education savings plan – Contributions for many in their respective state-sponsored 529 plans provides a state tax deduction.
5. Look to harvest tax losses from your investments. Share lots that you hold in a taxable account can be sold for a capital loss if you held the shares over a year. These losses can be used to offset future capital gains. If no capital gains are realized in a given tax year, up to $3,000 can be used against earned income, with the remainder carried forward to the next year. If the underlying investment is still one you favor, you can re-purchase shares, either 31 days before you sell for a loss or 31 days after you sell for a loss to avoid IRS wash sale regulations.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.