Morning in Arizona

Morning in Arizona

The Headline Animator

Thursday, January 19, 2017

T Minus One

Financial Review

T Minus One


DOW – 72 = 19,732
SPX – 8 = 2263
NAS – 15 = 5540
RUT – 12 = 1345
10 Y + .07 = 2.46%
OIL + .33 = 51.41
GOLD + .50 = 1204.50

The Dow Industrials erased its gains for 2017 as it fell for the fifth day in a row. The Russell 2000 also turned negative year to date.

The European Central Bank left its quantitative-easing program unchanged at €60-billion-euro per month. Policy makers also kept the main refinancing rate at zero and the deposit rate at minus 0.4 percent.

There is little sign that the Governing Council is ready to endorse more hawkish language just yet, even after a jump in inflation to 1.7 percent in Germany. The U.S. dollar rose against its major rivals, recovering off earlier weakness after ECB President Mario Draghi said he didn’t see any “convincing” pickup in Eurozone inflation.

The ECB’s renewed commitment to stimulus comes a day after Federal Reserve chair Janet Yellen said the American economy is strong enough to warrant higher interest rates.

Trump’s pick for Treasury Secretary Steve Mnuchin began his confirmation process today. Meanwhile, Energy Secretary-designate Rick Perry also went before lawmakers. Trump has chosen former Georgia Gov. Sonny Perdue to lead the Department of Agriculture, rounding out the president-elect’s Cabinet selections.

The Senate has not scheduled a single confirmation vote for Trump’s Cabinet.

On Wednesday, retired Defense Secretary designate General James Mattis became the first nominee to win approval at the committee level.  Senate Republicans still hope to confirm members of Trump’s national-security team on Friday, and the likeliest to receive votes are Mattis, retired General John Kelly as homeland security secretary, and Representative Mike Pompeo as CIA director.

Elaine Chao, the nominee for transportation secretary, could also win Senate approval on Friday. So could Ben Carson, Trump’s pick for housing secretary, though he is considered less likely to get a Friday vote. None of the five have generated significant opposition from Democrats, and all of them sailed through their confirmation hearings last week.

Trump may have more luck with the Senate than his immediate predecessors, and he has Democrats to thank. When they held the majority in 2013, they changed the rules so that executive-branch nominations are no longer subject to the 60-vote threshold for filibusters. That means Trump could conceivably win Senate approval of his entire Cabinet without a single Democratic vote.

In rally after rally, and speech upon speech, Donald Trump built a verbal skyscraper of campaign promises about what he would do on his first day in the White House. Begin building a wall at the nation’s southern border. End the “war on coal.” Label China a currency manipulator. The list went on and on. Tomorrow is Day One.

During a break in inauguration festivities, Trump is poised to wield one of the most powerful tools of his office, the presidential pen, for executive actions that can be implemented without the input of Congress. Trump’s advisers vetted more than 200 potential executive orders for him to consider signing on healthcare, climate policy, immigration, energy and numerous other issues, but it was not clear how many orders he will initially approve.

The number of workers being laid off each week has plunged again back to a more-than-40-year low. Initial jobless claims sank by 15,000 to 234,000 in the week ended Jan 14, just a hair above the post-recession low. Initial claims have been under 300,000 for 98 straight weeks, a streak last replicated in 1970 and one that shows no sign of ending.

Arizona’s seasonally adjusted unemployment rate decreased two-tenths of a percentage point from 5.0% in November to 4.8% in December. The U.S.  unemployment rate stands at 4.7% in December. A year ago, the Arizona unemployment rate was 5.9% and the U.S. rate was 5.0%.

Arizona gained 6,300 jobs in December; breaking that down, 10,900 new jobs in the private sector, minus 4,600 jobs cut from government. Arizona employment grew by 1.2% (32,000 jobs) for the year. The Private Sector accounted for 33,100 jobs (1.4%). Government employment declined by 1,100 jobs. The sectors with the largest gains included Education and Health Services (14,300 jobs); Leisure and Hospitality (10,300 jobs); and Construction (6,300 jobs).

Builders broke ground on more homes in December, as confidence in the economy and demand for properties stays strong. Housing starts ran at a seasonally adjusted annual pace of 1.23 million in December, 11.3% higher than in November but about flat compared to the year-ago rate.

The federal control board overseeing Puerto Rico’s finances might accept a revised fiscal plan by Feb. 28 and extend a debt moratorium until May 1, which would give the U.S. territory more time to negotiate restructuring deals. Both requests will be taken up later this month, but would be conditioned on the government agreeing to turn over more financial information and not taking on extra liquidity loans.

A court in South Korea turned down prosecutors’ request to arrest Samsung’s Jay Y. Lee on alleged bribery, perjury and embezzlement, letting him stay in place atop the country’s most powerful company while they continue their investigation.

The de facto head of the Samsung Group and vice chairman of Samsung Electronics is being investigated for allegedly providing tens of millions of dollars to benefit a close friend of South Korean President Park Geun-hye in exchange for approval of a merger between two Samsung affiliates. The deal helped Lee consolidate control over the sprawling conglomerate founded by his grandfather.

Brazilian Supreme Court Justice Teori Zavascki was killed in a plane crash today. Zavascki was overseeing a massive corruption investigation related to the state oil company, Petrobras. Dozens of politicians and some of Brazil’s wealthiest businessmen have been arrested as part of the inquiry, known as Operation Car Wash, over the past two years. The political crisis triggered by the Petrobras investigation eventually led to the impeachment of President Dilma Rousseff in September, on unrelated charges.

The US Justice Department announced a deal with a $5.28 billion settlement with the Swiss banking giant Credit Suisse, for misleading investors in residential mortgage-backed securities it sold in the run-up to the 2008 financial crisis. Credit Suisse will pay a $2.48 billion cash penalty and provide $2.8 billion in consumer relief, including loan forgiveness and financing for affordable housing.

Credit Suisse has admitted that between 2005 and 2007 it knowingly deceived investors in the sale of complex securities derived from residential mortgages. Credit Suisse employees knowingly packaged poor quality loans for sale, referring to them in some instances as “utter, complete garbage” and “complete crap.”

Goldman Sachs is considering moving 1,000 workers in its London offices to Frankfurt because of concerns over Britain’s vote to leave the EU. Yesterday, UBS said that about 1,000 of the bank’s 5,000 employees based in London may be affected by Brexit, while HSBC announced it could relocate 1,000 staff to Paris.

American Express reports quarterly profit fell 8.2 percent to $825 million, or 88 cents per share, from 89 cents per share, a year earlier. Total revenue fell to $8.02 billion from $8.39 billion last year.

IBM forecast full-year earnings above Wall Street estimates and reported better-than-expected quarterly revenue, helped by growth in newer areas such as cloud-based services and analytics. Still, IBM’s revenues declined for the 19th straight quarter.

We’ve often heard we should be smart consumers when it comes to health care; we should shop for the best prices on things like medicine. So, here is a test. Suppose your family needs the EpiPen for emergency allergy treatment.

Mylan makes EpiPen but they raised the price more than 500% to $609 list price for a two-pack of the lifesaving treatments; that prompted a hearing in Congress last September.  In response, Mylan began selling an authorized generic for about $300 for a two-pack.

Last week, CVS Health Corp. said it would sell a twin-pack of the Adrenaclick auto-injector, from Impax Laboratories Inc., for $110, and offer a $100 discount for low-income families.

Today, privately held Kaleo, the maker of the Auvi-Q injectors, said it would list a twin pack for $4,500. But there is a twist. Kaleo, Auvi-Q’s manufacturer, will charge patients who have commercial insurance $0 for the product, if the insurance company pays for it.

That means that for insured patients, Auvi-Q would be the cheapest option. It will also give the product away to families with an income of less than $100,000. For those paying cash who do not qualify to get Auvi-Q for free, the product will cost $360.

If all this sounds like a big pricing scam concocted in the laboratories of Drs. Jekyll and Moreau, well, that is a possibility.

Paul McCartney sued Sony’s music-publishing division seeking a judgment validating his efforts to take back his copyrights in Beatles songs he mostly co-wrote with John Lennon.

McCartney began serving termination notices to Sony/ATV Music Publishing in 2008, intending to reclaim his copyright interests in the music catalog, composed between 1962 and 1971. The termination notices, which McCartney wants the court to validate, are supposed to take effect starting in October 2018.

Stocks Trade Down Despite Upbeat Domestic Data

Charles Schwab: On the Market
Posted: 1/19/2017 4:15 PM ET

Stocks Trade Down Despite Upbeat Domestic Data

U.S. stocks traded lower despite some strong domestic economic reports and ahead of tomorrow's inauguration of President-elect Trump. Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher. In equity news, earnings were in focus, headlined by solid results from Netflix.

The Dow Jones Industrial Average (DJIA) decreased 72 points (0.4%) to 19,732, the S&P 500 Index was 8 points (0.4%) lower at 2,264 and the Nasdaq Composite declined 16 points (0.3%) to 5,540. In moderate volume, 753 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.23 to $52.12 per barrel and wholesale gasoline shed $0.02 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.44 higher to $1,204.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 101.12.

Netflix Inc. (NFLX $138) reported 4Q EPS of $0.15, above the $0.13 FactSet estimate, on a 35% year-over-year (y/y) jump in revenues to $2.4 billion, slightly above the $2.3 billion forecast. The media streaming service provider said an addition of 5.12 million net international subscribers drove quarterly growth, well above estimates of 3.75 million, and that it added 1.93 million net domestic subscribers, also above projections. Shares rallied.

Shares of CSX Corp. (CSX $46) finished solidly higher after the Wall Street Journal reported that Harrison Hunter, outgoing Chief Executive Officer of Canadian Pacific Railways Ltd. (CP $150), will team up with activist investor Paul Hilal to take on CSX in pursuit of a leadership position at the U.S. railway, according to a person familiar with the matter. Billionaire hedge fund manager Bill Ackman, who Hilal worked with for years before starting his own fund, recruited Hunter five years ago to instigate a successful proxy fight against CP to replace it’s then-CEO, Fred Green by mid-2012. CP announced that Keith Creel will replace Hunter and become President and CEO effective Jan 31, 2017. Shares of CP were higher, as the news overshadowed its earnings miss, and lower-than-expected revenues for the 4Q.

BB&T Corp. (BBT $45) posted a 4Q profit, excluding charges, of $0.73 per share, in line with the FactSet estimate, on revenues of $2.7 billion, a shade lower than the $2.8 billion expected. The North-Carolina lender’s Chairman and CEO Kelly S. King said, "While higher interest rates created $34M in pre-tax charges, revenue growth was strong, expense control was solid and we are well-positioned for future interest rate increases." Shares traded lower.

Economic news upbeat

Housing starts (chart) for December rose 11.3% month-over-month (m/m) to an annual pace of 1,226,000 units, above the Bloomberg forecast of a 1,200,000 unit rate. November starts were upwardly revised to an annual pace of 1,102,000. Single-family units rose a modest 4.0% m/m, and multi-unit construction jumped a whopping 53.9% m/m, while both indicators were also higher compared to last year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, inched 0.1% lower m/m in December to an annual rate of 1,210,000, after November’s favorably revised 1,212,000 rate, and below the expected annual pace of 1,230,000 units. Permits for single-family and multi-family units were higher m/m. Compared to the same period last year, single family permits were up, while multi-family permits were lower.

Weekly initial jobless claims (chart) declined 15,000 to 234,000 last week, below forecasts of 254,000, with the prior week’s figure revised to 249,000 from 247,000. The four-week moving average decreased by 10,250 to 246,750, the lowest level in the average since November 1973, while continuing claims fell by 47,000 to 2,046,000, south of estimates of 2,083,000.

The Philly Fed Manufacturing Index (chart) in January jumped further into a level depicting expansion (a reading above zero) after surging to 23.6 from 19.7 in December, and compared to estimates of a decline to 16.0.

Treasuries were mostly lower with the yield on the 2-year note nearly unchanged at 1.22%, the yield on the 10-year note advancing 4 bps to 2.47%, and the 30-year bond rate increasing 3 bps to 3.04%.

Treasury yields and the U.S. dollar have seen erratic moves as of late, courtesy of ramped up political uncertainty ahead of President-elect Donald Trump's inauguration this week and volatility in the currency markets following comments from Trump, as well as Brexit remarks from U.K. Prime Minister May. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the recent rally in the greenback in her articles, Changing Conditions: A Bond Market FAQ and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will be void of any major releases.

Europe and Asia mixed

European equities finished mixed, paring an early lift from strong economic data in the U.S., after dovish comments from European Central Bank (ECB) President Mario Draghi following the Central Bank’s decision to leave its benchmark interest rate unchanged, as widely expected. The ECB also kept its asset purchase program in place, where it will continue its purchases of 80 billion euros until March, at which time it will then lower that amount to 60 billion euros through the rest of the year. At his customary press conference following the decision, Draghi elicited a dovish tone, indicating that the recent uptick in inflation was due to oil and base effects. Draghi also reiterated the ECB’s recent stance that it would increase the size and scope of its quantitative strategy in the event that financial conditions tightened or its outlook worsened. Other economic news in the region was light, with Spain’s trade deficit narrowing in November, while prices at the wholesale level in Switzerland were a bit cooler than forecasts. The euro cooled and was modestly lower following Draghi’s comments, and the British pound gained ground vs. the U.S. dollar, while bond yields in the region were higher.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, The CURE for a calm Market: Four risks for 2017, that after a calm post-election climb, developments in China, United Kingdom, Russia, and Europe may bring a return of stock market volatility. However, Jeff points out that better and broader global economic growth should help offset these risks and result in stock market gains for 2017. Read these articles at www.schwab.com/oninternational, where you can also find Jeff's commentary, 5 Reasons International Stocks May Underperform In 2017. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed in lackluster trading ahead of the inauguration of U.S. President-elect Donald Trump, as concerns over potential trade policy changes lingered, while a host of key Chinese economic data is slated for release tonight. Japanese equities rose, buoyed by a continued decline in the yen versus the U.S. dollar, while Australian listings gained ground following a better-than-expected employment report in the nation. Chinese stocks lost ground, with yesterday’s decline in crude oil a drag on energy issues. Liquidity/currency concerns remained a focus as the government injected funds into the system ahead of the Lunar New Year holiday, which begins at the end of this month. Some caution may have also kept markets in the Asian nation in check ahead of the release of its 4Q GDP report tonight, as well as Friday’s upcoming inauguration of President-elect Trump. For more on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017).

Indian securities advanced and South Korean equities inched higher as the recent volatility in the U.S. dollar continues to be a factor on emerging markets. Schwab's Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, 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.

The international economic docket for tomorrow will include department store sales from Japan, PPI from Germany and retail sales from the U.K. In addition to the aforementioned Chinese GDP report, the country is expected to deliver reads on industrial production and retail sales.