Thursday, April 30, 2015

US economy stalls making rate rise later rather than sooner

It's now six years since the United States began a slow recovery from its worst economic crisis since the Great Depression.

But while the economic comeback has been steady since then, growth appears to have stalled in the first three months of this year.

According to the US Commerce Department, the US economy grew at an annual rate of 0.2 percent which is much lower than expected and the weakest performance in a year.

So rather than steaming back to the days before the Lehman Brothers collapse, the pace of growth appears to hesitant and slow.

Optimistic observers have cited a number of one-off factors that have worked to make the quarter appear more sluggish than it is.

Blizzard like conditions at the start of the year meant consumers were at home not spending; the lower oil price trimmed expansion from big oil companies and a union dispute at ports on the US west coast meant exports slowed because ships were blockaded.

And the outcome appears to contradict other good economic data with the US jobless rate now down the 5.5 percent.

While that looks good on the surface, it adds to the debate about a "jobless recovery" in the US - more part time or casual positions and workers in lower paying roles than before the Wall Street collapse.

"We are creating jobs at a pretty rapid pace - 200,000 per month in most months but these are for the most part not very good jobs," Harvard University economist Benjamin Friedman told the BBC earlier today.

"I think our economy here has a long-term structural problem of not being able to provide good, decent jobs with strong upward trajectory of the kind that middle class Americans have come to know for many generations.

"I think that's going to be a problem and I think it's going to be a problem for more than the remainder of this year."

The outlook for weaker growth now appears likely to make the US Federal Reserve more hesitant about raising interest rates from their near zero level later this year.

The Fed today downgraded its outlook for employment while still sending the message that a possible rate rise was a "meeting by meeting" proposition.

Westpac senior economist Elliot Clarke says the slow growth gives the Fed cause to "wait and see" and to be patient about how future data evolves.

"There was further reason to believe that its quite a weak number and momentum might not build as the Fed is expecting which will be a concern for them," Mr Clarke told The World Today.

"The US economy really depends on what's happening with the consumer. They really need to see the consumer fire to see growth accelerate and to give them justification to act on rates."

The surprisingly sluggish growth in the US sent a warning to global investors and played a role in heavy falls across Europe where markets in Frankfurt and Paris fell around three percent.

Until now, the strength of the US economic recovery has been a bright spot in a world of otherwise anaemic or flat growth.

So today's outcome sends a message that the US remains a wildcard in a world where slow or no growth is regarded as the "new normal".

Wednesday, April 29, 2015

Twitter becomes victim of social media as earnings snafu monsters share price

Twitter became a victim of its own technology after market sensitive profit results were accidentally released earlier today.

The social media company's stock fell as much as 26 percent at one point after its first quarter earnings results were posted prematurely on Twitter's investor relations website

The costly error was detected by a data mining company Selerity which promptly circulated the documents and even posted them on Twitter.

Source: Bloomberg

The viral nature of the inadvertent posting sent investors into a spin after Twitter's first quarter profit came in well short of estimates and its second quarter earnings guidance was downgraded.

The incident is now the latest case study in the perils of social media and its ability to spook investors and to move markets.

Twitter shares dropped by six percent before trading was suspended and another 18 percent  when trading resumed.

The confusion allowed traders or algorithms following Selerity's tweets to react in split seconds to get an edge over other investors.

A Twitter spokeswoman confirmed the earnings announcement had been "prematurely disclosed" and that investigations into how that occurred are underway.

"We asked the New York Stock Exchange to halt trading once we discovered our Q1 numbers were out and we published our results as soon as possible thereafter," an investor teleconference was told.

"Selarity who provided the initial tweets with our results informed us the earnings release was available and on our investor relations site before the close of market.

"We explicitly instructed them not to release our results until the market closed and only upon our specific instructions."

Twitter was scheduled to release the earnings results after the New York Stock Exchange closed for the day (4pm US eastern) to allow investors to assess the details and to avoid a kneejerk reaction.

The results show that while Twitter's revenue of US$436 million was up 74 percent year on year, it was below market forecasts.

It also reported a net loss of US$162 million which worsens last year's loss of US$132.4 million.

But investors appeared shocked when Twitter downgraded its revenue forecasts to be between US$2.17 billion to US$2.27 billion which is lower than the range forecast in December.

"We underperformed against our expectations. We anticipate the factors that effected our first quarter result which also effect our 2015 guidance," chief executive Dick Costolo told investors.

"While I'm disappointed we didn't continue to exceed expectations on revenue I am proud of the teams focus, innovation and energy around the way we manage the business in light of the shortfall."

Dick Costolo is battling criticism after Twitter's slowing user growth which climbed 18 percent compared to 20 percent in the previous quarter.

Mr Costolo and Twitter executives are now moving to push new innovation tools to dispel doubts about Twitter's professed potential as a destination for advertising and social media.

Twitter is now placing a lot of hope in its live streaming video service Periscope which has been used in major events such as last week’s floods in and around Sydney, the Baltimore riots and the Nepal earthquake.

"Periscope enables people to connect to what's happening in their world and it actually takes that connection to an entirely new level," Mr Costolo said.

"By transforming into people's lives you can now jump into the life of a Paris ballet director, you can see what he sees, you can hear him speak to his dancers and you can communicate with him on the moment as his day unfolds."

Mr Costolo will be looking for similar fancy footsteps as he bets Periscope will bring more logged-on used and advertisers to Twitter to turn the slowing growth around.

Twitter shares ended down 9.4 percent at $US42.27 a share.

Tuesday, April 28, 2015

China Iphone sales surpass US as Chinese consumer latest tech bling

The steady growth of China's aspirational middle class and the rush to own the latest technology bling is the running story behind Apple's strategy to dominate of the global smartphone market.

Today's quarterly profit result reveals that for the first time Apple sold more IPhones in China than the United States.

Gift buying during the Chinese New Year helped Iphone sales soar with China revenue up by 71 percent to US$16.8 billion as consumers rushed to buy the IPhone 6 and IPhone 6 plus.

Apple has now well and truly hitched itself to the seemingly unstoppable rise of the Chinese consumer as the world's second biggest economy is on the verge of esclipsing the United States where many consumers remain subdued almost seven years after the global financial crisis.

"Really and truly, everything you look at in China was extremely good," Apple chief executive Tim Cook told investors this morning  as he revealed global IPhone sales totalled 61.2 million in the quarter.

Mr Cook revealed that in expanding the China "ecosystem" Apple was  "many more cities than we were before" with 21 retail stores in greater China that will grow to 40 by the middle of next year.

Apple has also widened its online stores in China where revenue is up over three times year on year with coverage up from 319 cities to 365 cities by the end of this quarter.

The surging online sales have been helped by Apple adding UnionPay as an option for Chinese customers given its status as the nation's most popular payment card.

"We're investing a lot in our infrastructure, in our products, on partnering with different companies. Chinese developers are coming on in significant numbers," Mr Cook said.

"We've now made payments to developers in greater China of over US$5 billion, half of which was in the last twelve months."

Even for Tim Cook, the consumer expansion in China is moving at a staggering pace.

"I've never seen as many people coming into the middle class as they are in China and that's the where the bulk of our sales are going," Mr Cook said.

"And so we're really proud of the results there and will continue to invest in the country."

The outlook for Apple's growth in China comes as its economy continues to slow to albeit stellar seven percent.

And as the managed slowdown continues, domestic consumption is expected to rise as Chinese consumers continue to see technology bling like the IPhone as their birthright rather than looking to the West for trends to set the pace of their lives.

Friday, April 24, 2015

Deutchse Bank fined US$2.5 billion over LIBOR scam

Germany's biggest bank, Deutsche Bank, has become the latest global financial giant to be fined for rigging a key interest rate known as the LIBOR.

Deutsche will pay a record US$2.5 billion to settle investigations into dodgy practices where it manipulated the benchmark rate for its own profit.

The bank has been slammed for "cultural failings" almost seven years after the Wall Street collapse was triggered by greed and bad banking behaviour.

LIBOR is the London Interbank Offered Rate and an average rate set daily to determine how banks borrow and lend between each other.

It is used to price hundreds of trillions of dollars of financial transactions around the world and a higher or lower rate can mean millions in big business deals.

The impact of LIBOR goes unseen by most people even though it can flow into mortgage rates, car loans, personal loans and credit card rates.

Deutsche's US$2.5 billion fine from US and British regulators comes as banks around the world - including Australia - are being scrutinised more than ever for alleged unlawful and unethical practices.

The settlement dwarfs fines paid by Barclays and UBS which paid $US500 million and $US1.5 billion respectively.

While the fine is less than what Deutsche Banks makes in a year it is around what it makes in a quarter.

But in the case of Deutsche the evidence has been damning and that appears to have ramped the the severity of the fine.

One request, now public, highlights the deals done on LIBOR with a Deutsche trader pleading with Barclays for a lower quote saying: "I'm begging you, don't forget me .. I'm on my knees."

Deutsche's image has not been helped by the accidental destruction of around 482 tapes of telephone calls of LIBOR transactions.

Martin Arnold, the banking editor at the Financial Times, says Deutsche sent the impression it had something to hide.

"It's pretty damaging and what stands out in this case is some of the language by particularly the UK's Financial Conduct Authority which is very critical of how the banks has behaved during this investigation and been very resistant to cooperating," Mr Arnold told the BBC.

"And it says misled the regulator at several points and even says that the bank destroyed some evidence that the regulator had requested it preserve. So there's a lot of criticism there and this doesn't reflect well on Deutsche Bank's leadership."

The US Justice Department says investigations are far from over and that a range of other banks and individuals are being quizzed about the LIBOR scam.

So far total fines are approaching $US9 billion but analysts say that's tiny compared to what banks could make through LIBOR fixing.

To date there has been no evidence that any Australian bank has been involved in LIBOR rigging although their reputations have been tainted by association. 

Thursday, April 23, 2015

Accused "flashcrash" trader to fight extradition to United States

A British trader accused of triggering a "flash crash" on Wall Street five years ago is fighting extradition to the United States.

The 36-year-old man, who was arrested at his parent's home in West London, faced court briefly and is about to be released on US$7.5 million bail after a night behind bars.

Navinda Singh Sarao was arrested in the living room of his parent's home dressed in a tracksuit rather than the pinstripe fashion that many would associate with high powered market traders.

It is alleged that Sarao was responsible for a sudden crash in share valuations on May 6 2010 which saw the Dow Jones Industrial Average briefly plunge more than 1,000 points.

The crash temporarily wiped nearly a trillion dollars off sharemarket valuations.

The high speed trader made his first court appearance after the US Justice Department charged him with wire fraud, commodities fraud and market manipulation over several years.

Sarao is accused to using a complex automated program to "spoof" markets which saw him reap a profit of US$40 million.

The court heard that the "spoof" program generated large sell orders that pushed down prices which allowed Saroa to cancel trades to buy in at lower prices.

It is alleged that Sarao's activity on 6 May earned him a profit of US$750,000.

However, experts are divided on whether US regulators have the necessary proof to secure a conviction against Sarao.

Hain Bodek, a former trader with UBS and Goldman Sachs, became a "whistleblower" on irregularites caused by high speed trading.

But he told the BBC there is no firm agreement on what actually caused the "flashcrash" in 2010 and that prosecutors will need to come up with hard evidence.

"It's a very bold approach for the regulators. It would require that they provide some form of analylitics or some real concrete scientific justification," Mr Bodek said.

"And even with this latest action we still don't have a general agreement on the cause or the trigger of  the flash crash."

Navinda Sarao will remain on bail before he faces an extradition hearing in August but has indicated he plans to fight the action to place him on trial in the United States.