Morning in Arizona

Morning in Arizona

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Thursday, May 21, 2015

A Tight Range

Financial Review

A Tight Range

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DOW + 0.34 = 18,285
SPX + 4 = 2130.82
NAS + 19 = 5090
10 YR YLD – .07 = 2.18%
OIL + 1.71 = 60.69
GOLD – 3.00 = 1207.80
SILV + .05 = 17.23

The S&P 500 closed at a record high today.

We had a slew of economic data this morning. The leading economic index rose 0.7% in April, indicating the US economy is still expanding.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 274,000 for the week ended May 16. Despite last week’s increase, claims remained below 300,000, a threshold associated with a strengthening labor market, for an 11th straight week. The four-week average for jobless claims decreased to 266,250, a 15-year low.

The National Association of Realtors reports sales of existing homes fell 3.3% in April to a seasonally adjusted annual rate of 5.04 million. April’s sales pace was up 6.1% from a year earlier. The median sales price of used homes hit $219,400 in April, up 8.9% from the year-earlier period.

The jobless claims and existing home sales are pretty important because they are strong indicators for second quarter growth. We know the Fed is watching the labor market. It would be very difficult for the Fed to hike rates if the labor market starts showing signs of weakness. The housing data is important because this is how low interest rates provide stimulus to the broader economy. Housing is a long-term investment that is very sensitive to interest rates. It would be difficult for the Fed to hike rates if the housing market is showing signs of weakness. And so today’s economic data on jobs and housing would indicate a more accommodative monetary policy from the Fed.

The Philadelphia Fed’s manufacturing index dropped to a reading of 6.7 in May, down from 7.5 in April.

The flash reading of the Markit manufacturing purchasing managers index fell to 53.8 in May from 54.1 in April. New orders growth dropped to the slowest pace since January 2014. Export sales have declined for two straight months, adding to evidence that the strong dollar has been holding down the economy.

We know the markets are following the Fed and waiting for some direction, but for now the markets have shown very little as far as direction. The Dow Industrials have been trading in a range, a very tight range since the start of the year; and if this trend holds till the end of the quarter, it would mark the narrowest first-half trading range in the history of the Dow.

The Senate voted 62-38 on a procedural bill that sets up a vote, likely tomorrow, on the “fast-track” trade negotiating authority to complete the Trans-Pacific Partnership (TPP) trade deal. The TPP, which is near completion after more than five years of negotiations, would create a free trade zone covering 40 percent of the world economy. Trading partners have said they want to see fast-track enacted before finalizing the pact, a goal the administration has set for this year. Obama has campaigned aggressively for fast-track over objections from the left wing of the Democratic Party.

The bill must also pass the House of Representatives, where an even tougher fight is expected. Some conservatives oppose giving the White House more power, and many of Obama’s Democrats worry about the impact on jobs and the environment. Critics say the rules, currently part of the TPP, undermine governments’ ability to set domestic policy on issues such as health and the environment, although supporters argue they are essential to avoid discrimination against foreign investors.

An oil spill has caused California to declare a state of emergency. Houston-based Plains All American Pipeline has spilled as much as 105,000 gallons of crude oil on California’s coast. The spill has prompted California Gov. Jerry Brown to declare a state of emergency.

ISIS has captured the ancient Syrian city of Palmyra. The militant group seized the city in central Syria after a bloody battle with pro-government forces. The fall of Palmyra, which is home to 2,000-year-old Roman ruins, comes five days after ISIS captured Ramadi, a provincial capital in Iraq. Activists say that with the latest advance, the militant group controls more than half of Syria’s territory.

CVS Health Corp said it will buy pharmacy services provider Omnicare for $12.7 billion.  Omnicare delivers drugs and helps senior-living facilities manage residents’ medications. CVS is the nation’s second-largest pharmacy benefits manager, handling drug plans for health insurers and employers.  CVS said the deal will also help expand its presence in the rapidly growing specialty pharmacy business, which sells high-cost drugs to treat complex or rare conditions. Both CVS and Omnicare are big Part D players and there could be some scale benefits in negotiating with other payors.  According to the Centers for Disease Control and Prevention, the number of people aged between 55 and 64 having two or more chronic conditions that require medication grew 39 percent in the last decade.

Lumber Liquidators said Chief Executive Officer Robert Lynch unexpectedly resigned from his post. Company founder Thomas Sullivan is serving as CEO during the search for a permanent replacement. Lumber Liquidators is trying to win back customers after “60 Minutes” reported in March that it sold Chinese-produced laminate flooring with toxic levels of formaldehyde, a known carcinogen. While the company assured consumers its products are safe, sales have slid and the U.S. Consumer Product Safety Commission is probing the allegations. The surprise announcement today undermines all of the company’s denials; and although the resignation is not exact evidence, it raises the possibility that Lumber Liquidators knowingly poisoned customers with dangerous products. It also raises the possibility that regulators are close to taking action against the company.

What is going on in Hong Kong? With no immediate explanation, Goldin Financial and Goldin Properties, both controlled by billionaire Pan Sutong, plunged more than 60% in Hong Kong trading this morning. Before the rout, the two stocks surged more than 300% in 2015 for the biggest gains on the Hang Seng Composite Index. The tumble follows the mysterious 47% drop in 24 minutes by Hanergy Thin Film Power on Wednesday, which erased $19 billion in market value before trading was suspended.

Shopify has priced its IPO at $17, a mark above the e-commerce firm’s lifted range of $14 to $16. Shopify (Pending:SHOP) intends to list its shares on the Toronto and New York stock exchanges.

A U.S. bankruptcy judge has cleared the way for RadioShack to sell its trademark, as well as customer data and other intellectual property to a Standard General affiliate for about $26 million, rejecting a competing bidder’s claim that the auction process was unfair. RadioShack also resolved objections to the sale from several state attorneys general who were concerned the deal could threaten consumers’ privacy.

Radio Shack’s bankruptcy has left some creditors in the lurch. They owe thousand, in some cases, hundreds of thousands to a few hardware startups. For many hardware startups, or almost any kind of startup, it can be difficult to negotiate a strong contract for direct sales to large retailers, so many times the products are placed with the retailers in what is basically a consignment agreement. Radio Shack did pay one creditor, though; Apple received just north of $3.3 million. Obviously the Cupertino giant had a number of contractual clauses that required payment no matter what, a side-effect of having excellent lawyers. Other smaller players were paid portions of the money owed. Maybe they can convert to Shake Shacks.

Goldman Sachs has published its list of the stocks hedge funds like and a list of stocks they love to short. For a long time, Apple reigned “undisputed as the most popular hedge fund stock,” but a quick check of your Apple Watch will show you that times change. The most recent iteration of Goldman Sachs’ quarterly update on holdings of hedge funds shows that the drug company Actavis has taken over the top spot. Some 77 hedge funds reported having Actavis as one of their top 10 holdings. Apple is in second place, followed by Facebook, Valeant and Microsoft. The most shorted stocks by hedge funds are AT&T, Disney, IBM, Verizon, and Intel. You may recall that Apple replaced AT&T in the Dow Jones Industrial Average back in March, and since then, AT&T has gained about 6%, but for the funds it appears to be a case of guilt by lack of association.

The US Census has just released population stats for major cities. Ten US cities now have 1 million or more people; California and Texas each have three off those places. The big cities in Texas are Houston, San Antonio and Dallas. The big cities in California are Los Angeles, San Diego, and….San Jose, which just topped the one million population mark. Texas has been growing for a fairly simple reason – jobs, and many of those jobs are related to the oil industry. It remains to be seen whether the sharp decline in oil prices over the last year will jolt the growth train off the rails.

San Antonio had the fastest growth rate among US cities, up 7.7%. Phoenix has grown by 6% from 2010 through 2014. New York is the largest city in the country with 8.4 million; there are 3.9 million Angelinos; Phoenix comes in at the number 6 spot, and if current growth rates hold up, we should overtake Philadelphia for the number 5 spot sometime in late 2016.