FINANCIAL REVIEW

Milk and Cookies in the Land of No Satisfaction

Sinclair Noe — November 5, 2014

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Financial Review
DOW + 100 = 17,484
SPX + 11 = 2023
NAS – 2 = 4620
10 YR YLD un = 2.35%
OIL + 1.69 = 78.88
GOLD – 28.20 = 1141.00
SILV – .72 = 15.42

Record highs for the Dow Industrials and the S&P 500.

The midterm election is history, and it was a big night for the GOP. Republicans will have at least 52 Senate seats, a gain of 7. In the House, the GOP will now have at least 243 seats, a gain of 14. The GOP also gained 2 net governorships. So it was a big night. However, Obama was not on the ballot, even though some of the campaign ads made it sound that way; he’s got 2 more years and he still has veto power. It takes a two-thirds majority in both the House and Senate to override a veto. Republicans have nowhere near two-thirds of either chamber. So, get ready for 2 more years of gridlock.

One takeaway is that people are not satisfied with the economic progress of the past few years. While Wall Street is at record highs and the unemployment rate has dropped, that just isn’t enough. Fewer people participated in stock market gains and even though more people have jobs, the jobs aren’t paying what they used to. It doesn’t mean the numbers are wrong; the Dow closed at 17,484 and that is a real number, but the stocks in the Dow have used financial engineering to achieve price gains. The unemployment rate is 5.9%, not 32% (according to a survey released last week by Ipsos Mori, the average American guessed that the unemployment rate is 32%), but people have seen wages decline, they have seen their careers replaced by jobs. The top concerns of voters going into the midterms were economic growth and job creation.

According to national exit poll data, roughly half of the people interviewed as they left the polls said they expected life for the next generation of Americans to be “worse than life today.” Roughly four out of every five America voters were either “very worried” or “somewhat worried” about the direction of the economy in the next year, and just 22% said they were “not at all worried” or “not too worried”. Just 1% of voters felt the economy was “excellent.” Roughly 70% said the economy was “not so good” or “poor.” When asked whether the economy was getting better, getting worse, or roughly the same, voters were split evenly between the three choices. And when asked if a voter’s family financial situation had improved in the past two years, just 29% of respondents said it had. More than 60% of voters polled said they felt the US economic system “favors the wealthy.” On a side note, the new Credit Suisse 2014 Global Wealth Databook reports that each year since the recession, America’s richest 1% have made more than the cost of all US Social programs.

Since 1926, the S&P 500 has gained nearly 17% on average in Year 3 of presidential terms. The next-best years for stocks are presidential election years, when equities have gained 9.8% on average. The Stock Trader’s Almanac tells us that the Dow Jones industrial average has not suffered a third-year loss since 1939. Part of it has to do with the fact that the third year of an administration also tends to see the best growth in gross domestic product. Market strategists surmise that the party in power in the White House has a vested interest in stimulating the economy, and the markets as much as it can in the year before it faces re-election.

Researchers at Leuthold discovered that stocks have risen at an annualized rate of nearly 25% (including dividends) in the period that runs from the midterm elections in November to April of the following year. We are also moving into what is known as the best 6 months in the market; that November through April time is typically better than May through October. And then there is a tendency for an end of year, or Santa Claus rally. According to the Stock Traders’ Almanac, fourth quarters during years when midterm elections are held have produced an average gain of 8% over the past 65 years. They’ve been followed by rallies of almost that much in the next three months, making the average 16% two-quarter rally the best combination of the election cycles.

The S&P 500 has risen an average 15.1% in calendar years when a Democratic president has been opposed by a Republican-controlled Congress since 1945. These are tendencies and probabilities, not guarantees.

Let’s check the economic news. The Institute for Supply Management’s nonmanufacturing index dropped to 57.1% from 58.6% in September. New orders fell 1.9 points to 59.1% and production slipped 2.9 points to 60%. Yet the employment gauge, a sign of hiring intentions, rose 1.1 points to 59.6%, the highest level recorded since 2005.

ADP reports private employers added 230,000 jobs in October, the most since June. The monthly government jobs report is Friday, with most estimates around 225,000 net new jobs.

Productivity rose 1.5% in the third quarter, down from 2.3% in the spring. When workers and companies produce more and more goods and services with the same amount of labor and materials, firms make bigger profits and they can offer larger pay raises. The flip side of low productivity is that it’s often the result of companies that have too few workers to meet growing demand. So it’s usually a sign to hire more workers and rely less on overtime.

Bloomberg reports that of the S&P 500 members that have reported their latest quarterly results, 82% topped profit projections, while 61% exceeded sales estimates; that’s the fastest pace of earnings beats in 4 years.

Qualcomm reported a fiscal fourth-quarter profit of $1.89 billion, or $1.11 a share, on revenue of $6.69 billion. Both revenue and earnings missed estimates.

Chrysler reported a 32% increase in net income on stronger sales of SUV’s and pickup trucks.

Tesla reported third-quarter results that topped expectations after the close, but the electric car maker lowered its delivery forecast for 2014 to 33,000 cars (it had expected to deliver 35,000 cars).

SolarCity reported a 20% rise in quarterly revenue as it added more customers. SolarCity also reported a net loss of $70 million, wider than the $37 million loss it reported a year ago.

When Alibaba Group delivered its first quarterly report as a public company, they showed earnings of $1.1 billion, or 45 cents a share, up 15% from a year earlier; those numbers excluded some $490 million in expenses from Alibaba stock given to employees as part of their compensation. This stock-based compensation expense made up the vast bulk of items excluded from Alibaba’s preferred “adjusted” profit measure.
West Texas Intermediate crude rebounded from a three-year low, climbing to $78.88 a barrel after a government report showed that US oil supplies increased less than analysts expected last week, while refineries increased operating rates.

The recent plunge in oil (today’s move excluded) is propelling shares of airlines and truckers, and that has in turn pushed the transportation index to new highs. Dow theorists will tell you that the performance of the transports often indicates the market’s next move, as they are economically sensitive stocks. With the index at a record, though, some investors are asking a simple question: Is rally in the transports simply all about oil, or are they signaling a stronger economy ahead?

The Federal Reserve unveiled a final rule today designed to prevent large financial firms from becoming so big that their failure could shake the core of the financial markets. The final rule, required by the 2010 Dodd-Frank Wall Street reform law, prohibits banks and certain large financial firms from acquiring another company if that merger would cause their liabilities to exceed 10% of the total consolidated liabilities for all financial firms. The “too big to fail” rule applies to banks and to large financial firms who are designated as “systemic” by the Financial Stability Oversight Council. Richmond President Jeffrey Lacker delivered a speech today, saying that the Bankruptcy Code must be a viable option for large complex financial institutions to end the perception that some firms are too big to fail.