Morning in Arizona

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Saturday, February 25, 2017

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Financial Review

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DOW + 11 = 20,821
SPX + 3 = 2367
NAS + 9 = 5845
RUT – 0.1 = 1394
10 Y – .07 = 2.32%
OIL – .42 = 54.03
GOLD + 7.60 = 1257.90

11 days of record breaking closes, the best streak of positive sessions since 1993. The longest streak of record breaking sessions is 14 in a row – back in 1897.

For most of the day, the major indices were in negative territory; Dow futures dropped more than 100 points early in the morning, and then, in the final 17 seconds, buyers jumped in again. The Dow Industrial Average is up more than1,000 points since January 1 and almost 3,000 points since the election.

This was the third up week in a row for the Dow, and the fifth straight positive week for the S&P and Nasdaq. The 10-year Treasury note has its best week since last June. Gold is up 8 of the last 9 weeks and at its highest level since October.

In economic news, U.S. new home sales rose 3.7 percent in January, below the expected increase of 6.3 percent. Meanwhile, consumer sentiment in the U.S. hit 96.3 in February, slightly above an estimate of 96. Earnings season, which is coming to an end, has been much stronger than anticipated.

Per Thomson Reuters, fourth quarter earnings growth is tracking about 7.5%. It seems US equity funds are where the world is parking its money for the time being, with over $25 billion coming into market coffers since January 1.

President Trump spoke before the Conservative Political Action Committee today, and he ramped up his attack against the news media, charging that “fake news” outlets are “the enemy of the people.” And later in the day, the White House fired a shot across the bow, blocking CNN, the New York Times, the Los Angeles Times, Politico and BuzzFeed from an off-camera White House press briefing conducted by White House press secretary Sean Spicer.

The Associated Press and Time magazine boycotted the briefing because of how it was handled. The White House Correspondents Association also protested the move.

Spicer only allowed in reporters from a handpicked group of news organizations that, the White House said, had been previously confirmed. The press session, known as a gaggle, was scheduled as a no-camera event, less formal than his usual briefings that are carried live on cable news. But past administrations have not hand-selected outlets that can attend such sessions.

Two of the barred outlets, CNN and The Times, have been a focus of Mr. Trump’s ire. And during the presidential campaign, some journalists from BuzzFeed News and Politico were prohibited from attending Trump rallies. Representatives of the barred news organizations made clear that they believed the White House’s actions were punitive.

Oil investors have placed the biggest bet in history that prices will rise. Fund managers now hold more Brent oil futures and options contracts than at any time on record, equivalent to some 480 million barrels of oil and nearly double the amount held just two months ago.

The Brent April contract now commands a premium of $1.50 over the December 2018, a condition known as backwardation. Crude inventories held in the world’s richest nations are still high, but they have begun to drain, and traders expect demand for oil to improve to the point where it overtakes supply.

Meanwhile, industry executives, analysts and investors sizing up Saudi Aramco say it may be worth nowhere near the $2 trillion that’s been touted. For example, Wood Mackenzie came up with a rough valuation of Aramco’s core business of $400 billion.

While that is significantly more than Exxon Mobil, with a market cap just under $340 billion; it is not enough to provide the capital the Saudis require to run the national budget. That’s just a guess at valuation because Saudi Aramco has never revealed financial statements.

For the Saudis, the writing is on the wall. Demand for oil will peak in the next 10 to 12 years, according to Royal Dutch Shell projections, as alternative fuels and electric cars gain popularity, putting Middle East energy producers on shakier footing.

Saudi Aramco valuations are premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields, and multiply by $8 (a benchmark used to value reserves). By that logic, though, Russian producer Rosneft’s market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil would be 53 percent smaller than it is.

Another factor for valuation – those reserves might not be all that they’re cracked up to be. Consider that Exxon Mobil just lost 4.3 billion barrels of reserves this week. Not lost really, just removed from their books. The reserves are still under the ground and controlled by Exxon Mobil but for accounting purposes, they no longer meet the SEC’s criteria for being economic to produce anytime soon, chiefly because oil prices have collapsed. Higher prices could push those reserves back onto the books, but lower demand could keep prices much lower for much longer.

Exxon Mobil CEO Darren Woods (he’s the guy who replaced Rex Tillerson) – Woods is calling for a nationwide carbon tax to discourage use of polluting fuels. In a blog post, Woods writes: It “would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and provide incentives for markets to develop additional low-carbon energy solutions for the future.”

In a memo signed Feb. 21 but published late on Thursday, US Attorney General Jeff Sessions rescinded a six-month-old order that was to phase out the use of private prisons by the federal government. CoreCivic and Geo Group, two of the largest for-profit prison operators, both rose in after-hours trading. The companies have more than recovered the steep losses their shares suffered after the former administration’s September directive.

JC Penney will shutter two distribution centers and 130 to 140 stores. The closures announced Friday represent 13% to 14% of the company’s store portfolio, less than 5% of total annual sales and 0% of net income. The company is starting an early retirement program for about 6,000 eligible associates. Chief Executive Marvin Ellison said closing stores will allow Penney to adjust its business to “effectively compete against the growing threat of online retailers.”

Department store operators Kohl’s and Macy’s are betting on a potential money-spinner – carving out prime space within their sprawling stores and leasing them to other retailers. The move underscores the pressing need for the two chains to better monetize their real estate assets at a time when fewer people are visiting malls.

Meanwhile, retailers have been lobbying against a border-tax proposal that would increase the tax bite on any company that imports goods into the US. Retailers would be among the biggest losers if such a proposal were implemented in full, as much of their sales are of imported goods.

Retailers and other critics say the planned 20 percent tax on imports could be passed along in higher prices to consumers, including manufacturers that rely on imported goods to make their products. Some critics have warned of a potential global trade war which would sharply curtail US and world economic growth.

Advocates say U.S. exporters will gain as their revenues will be excluded from federal taxes. They say the tax on imports will encourage domestic production and cause the already strong dollar to rise, offsetting upward pressure on import prices. Yesterday, Trump spoke positively about a border-tax.

Today, Gary Cohn, the president’s chief economic adviser, told a group of executives at a private event in Washington that the White House does not support this initiative. If the administration can’t find unanimity in a tax plan, imagine what happens when an actual plan is subjected to public scrutiny.

Royal Bank of Scotland reported a sharp rise in losses, $8.8 billion for the full-year, marked by higher legal penalties and restructuring costs. RBS took charges to set aside money to cover legal cases in the US where analysts expect it to pay the biggest regulatory penalty in its history for mis-selling US securities backed by toxic mortgage loans.

RBS was the only British lender to fail the Bank of England’s stress test in 2016. The British government, which owns more than 70 percent of RBS, has said it will not resume selling its stake until the bank settles its US fine and resolves its state aid requirements.

MacDonald Dettwiler and Associates has agreed to buy US-based DigitalGlobe for about $2.4 billion to strengthen its position in the satellite imagery market.

China’s state-owned Sinochem is in early talks to buy an equity stake in Noble Group. And now, Iceberg Research has issued critical report that raises concerns about Noble’s accounting practices, claiming the commodity firm is not worth its book value. Noble shares are down about 17% on the news.

Google and Uber started off as friends, then became competitors, and are now adversaries in a bitter legal fight to control the future of transportation. Waymo, the Google self-driving-car group, has accused Uber of using stolen technology to advance its own autonomous-car development. Google filed a lawsuit, claiming that a team of ex-Google engineers stole the company’s design for the lidar laser sensor that allows self-driving cars to map the environment around them.

A software bug leaked encrypted personal data from hundreds of thousands of web-pages hosted by Cloudflare. The company said the bug was fixed quickly and there was no sign that the leak was exploited by hackers.

Foot Locker reported better-than-expected earnings in the fourth quarter despite a slowdown in the retail industry. Same store sales were up 5%, topping expectations.

HP Enterprise’s revenues drops 10%. Sales fell in the first quarter, which ended January 31, with sluggish demand for its storage equipment and servers.

Samsung Electronics is tightening board oversight on donations, as the conglomerate struggles with the fallout from a graft scandal. The flagship of South Korea’s top conglomerate Samsung Group has been at the center of an influence-peddling scandal that led South Korea’s parliament to impeach President Park Geun-hye in December.

Jay Y. Lee, leader of Samsung Group and Samsung Electronics’ vice chairman, was arrested last week after being named a suspect by the South Korean special prosecutor’s office. The Samsung board of directors will now vote on any financial payment of $886,000 or more and disclose any such payments publicly.

Markets Rally to the Finish

Charles Schwab: On the Market
Posted: 2/24/2017 4:15 PM ET

Markets Rally to the Finish

U.S. equities rallied in the final minutes of the week to finish in the green after spending most of the day lower, as investors mulled a mixed bag of earnings and economic data, as well as growing domestic and European political risk. Treasury yields extended a decline, and crude oil prices lost ground, while gold and the U.S. dollar were higher. News on the equity front continued to surround earnings reports, while economic reports showed that new home sales missed forecasts and consumer sentiment topped expectations.

The Dow Jones Industrial Average (DJIA) rose 11 points (0.1%) to 20,822, the S&P 500 Index added 4 points (0.2%) to 2,367, and the Nasdaq Composite gained 10 points (0.2%) to 5,845. In moderately-heavy volume, 932 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $0.46 lower at $53.99 per barrel and wholesale gasoline lost a penny to $1.74 per gallon. Elsewhere, the Bloomberg gold spot price rose $8.23 to $1,257.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 101.13. Markets were higher for the week, as the DJIA increased 1.0%, the S&P 500 Index advanced 0.7%, and the Nasdaq Composite ticked 0.1% higher.

Hewlett Packard Enterprise Co. (HPE $23) reported fiscal 1Q earnings-per-share (EPS) of $0.16, or $0.45 ex-items, compared to the FactSet estimate of $0.44, as revenues declined 10.0% year-over-year (y/y) to $11.4 billion, below the forecasted $12.1 billion. HPE issued 2Q EPS guidance that missed estimates and lowered its full-year profit outlook. Shares fell sharply.

J.C. Penney Co. Inc. (JCP $7) posted 4Q earnings of $0.61 per share, or $0.64 ex-items, versus the forecast of $0.61, with revenues dipping 0.9% y/y to $4.0 billion, roughly in line with projections. 4Q same-store sales declined 0.7% y/y, compared to the expected 0.3% decrease. JCP issued 2017 earnings guidance with a midpoint below estimates and its same-store sales forecast came in just shy of expectations. Separately, the company announced that it expects to close two distribution facilities and up to 140 stores over the next few months as it aims to redirect capital resources to invest in locations and initiatives that offer the greatest revenue potential. JCP traded lower.

Foot Locker Inc. (FL $75) announced 4Q EPS of $1.42, or $1.37 ex-items, above the estimate of $1.32, as revenues increased 5.3% y/y to $2.1 billion, matching expectations. 4Q same-store sales rose 5.0% y/y, north of the forecasted 4.5% gain. Shares rallied.

Nordstrom Inc. (JWN $46) reported 4Q EPS of $1.15, in line with forecasts, but profits were $1.37 per share ex-items, with revenues rising 2.4% y/y to $4.2 billion, versus the projected $4.4 billion. 4Q same-store sales declined 0.9% y/y, compared to the expected 0.5% decrease, but gross margin topped the Street's expectation. JWN issued EPS and same-store sales guidance for the current year that came in just shy of forecasts. Shares gained solid ground on analyst margin optimism.

New home sales miss, while consumer sentiment revised higher than expected

New home sales (chart) rose 3.7% month-over-month (m/m) in January to an annual rate of 555,000, below the Bloomberg forecast of 571,000 units, and compared to the downwardly revised 535,000 unit pace in December. The median home price was up 7.5% y/y to $312,900. New home inventory remained at a 5.7 months' supply at the current sales pace. Sales declined m/m in the West, but rose in the Northeast, Midwest and South. New home sales are based on contract signings instead of closings.

The final February University of Michigan Consumer Sentiment Index (chart) was revised to 96.3 from the preliminary level of 95.7, above estimates calling for an adjusted 96.0 reading. The index was down compared to January's level of 98.5, which was the highest since January 2004. Compared to January, the expectations component declined, while the current conditions component ticked higher. The 1-year inflation outlook dipped to 2.7% from January's 2.8% rate, and the 5-10 year inflation projection remained at 2.5%.

Treasuries were higher, as the yield on the 2-year note decreased 5 basis points (bps) to 1.14%, while the yields on the 10-year note and the 30-year bond dropped 6 bps to 2.31% and 2.95%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

As noted in the latest Schwab Market Perspective: Not So Fast!, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors?. Follow Kathy on Twitter: @kathyjones. Finally, for a look at the U.S. political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington's Way: Why Trump's Policy Changes Could Take Time, at www.schwab.com/insights.

Europe lower on earnings and political uncertainty, Asia lower

European equities lost ground, with the Stoxx Europe 600 Index pulling back from a 14-month high, as a plethora of earnings reports weighed on sentiment and the global markets took a breather from a recent surge. U.S. and European political uncertainty continued to fester to foster the pullback in the markets, with the former dealing with high expectations of promised reflationary policy pledges and the latter facing a looming key French Presidential election. For more on the global markets and the European political risk, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, The stock market sees nothing to worry about—that may be about to change. Jeff notes that Europe's economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. He concludes that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months. Read more at www.schwab.com/oninternational, and be sure to check out Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Follow Jeff on Twitter: @jeffreykleintop.  The euro was little changed and the British pound declined versus the U.S. dollar, while bond yields in the region finished lower.

Stocks in Asia finished mostly lower as the recent global market rally pauses amid heightened political uncertainty in the U.S. and Europe. Japanese equities declined, with the yen extending an advance as of late, while basic materials weighed on Australian securities. Stocks in South Korea and Hong Kong fell, while those traded in mainland China bucked the trend and modestly higher. Markets in India were closed for a holiday. Schwab's Director of International Research, Michelle Gibley, CFA, provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Stocks higher in the shortened week, Dow notches more record highs

The major U.S. equity markets finished out the week near record highs in choppy action, as the global markets grappled with the timing and details of promised reflationary policy pledges in U.S., while a looming key French Presidential election fostered uneasiness. The U.S. Dollar Index finished little changed. Financials, which have helped lead the post-election surge, dipped as Treasury yields pulled back, leading to a rally in utilities. Bond yields lost ground despite the minutes from the Fed's most recent policy meeting suggesting a March rate hike remained on the table. The retail sector came into focus as mixed earnings reports poured in, highlighted by Dow members Wal-Mart Stores Inc. (WMT $72) and Home Depot Inc. (HD $146), though a severely softer-than-expected outlook from L Brands Inc. (LB $51) hammered its stock. Tesla Inc. (TSLA $257) also came under pressure after posting a larger-than-expected loss. With earnings season winding down, of the 461 companies that have reported out of the S&P 500, about 73% have topped earnings estimates, while roughly 52% have exceeded sales projections, per data compiled by Bloomberg.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, correlations have come down markedly, especially among sectors. In fact, one of the reasons why volatility has been so low is due to the "offsetting" effect. Earnings are moving from a four-quarter recession to strong double-digit growth in 2017 and forward valuation looks reasonable when looking through an inflation-filtered lens. Read more at www.schwab.com/marketinsight and for a look at all our sector ratings see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Trump Plus OPEC Equals ...What for Energy?. Follow Liz Ann on Twitter: @lizannsonders.

With the possibility of a March Fed rate hike on the table comes a fully-loaded economic calendar for next week, headlined by national manufacturing and services sector reads by the ISM and Markit, durable goods orders, the second look (of three) at 4Q GDP, along with personal income and spending. Also, the week will conclude with Federal Reserve Chairwoman Janet Yellen's economic outlook speech in Chicago. Rising global manufacturing activity and willingness to spend on large ticket items despite financing rates creeping higher are some of the five meaningful indicators of global growth that Schwab's Jeffrey Kleintop, CFA, points to in his article, Simple Indicators In A Complex World, buoying our belief that the bull market remains intact. Read more at www.schwab.com/marketinsight.

In addition to a plethora of global manufacturing and services reports, other international reports due next week include: Australia—4Q GDP and trade balance. India—4Q GDP. Japan—Household spending, consumer price inflation (CPI), industrial production, retail sales and 4Q capital spending. Eurozone—CPI, unemployment rate and retail sales. U.K.—Consumer confidence.