Financial Review

Number 9

Sinclair Noe — August 7, 2017

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DOW + 25 = 22,118
SPX + 4 = 2480
NAS + 32 = 6383
RUT + 1 = 1414
10 Y – .01 = 2.26%
OIL – .27 = 49.31
GOLD – 1.10 = 1258.30
BITCOIN + 0.47% = 3447.61 USD
ETHEREUM + 0.88% = 269.15

The Dow hit an early morning, intraday high, dipped into negative territory and then hit a fresh intraday high before drifting into the close. Good enough for the 9^th record high close in a row. We have a low-inflation environment, low interest rates, and corporate earnings have come in incredibly well.

Analysts, on average, expect S&P 500 earnings to have expanded 12 percent in the second quarter and project earnings up 9.3 percent for the third quarter. The S&P, which is up about 11 percent this year, is trading at 18 times expected earnings, compared to its 10-year average of 14.

How long can the Dow Industrial keep hitting all-time highs? Who knows.

But the markets never follow a straight line and eventually this will end.  The streak comes as August trading gets under way and with September looming—historically two of the worst months for investors. If you have cash, there really is no reason to rush out and buy at these levels, especially if you think there will be a sale next week.

Friday’s July employment report showed job growth, at 209,000, well above the estimates for 180,000 new jobs. The unemployment rate fell to 4.3 percent in July, a decline of 0.1 from June, and a 16-year low. Goldman Sachs economists say the outlook for jobs is even better than they thought, and unemployment could go as low as 3.8 percent next year.

The firm’s economists, in a note over the weekend, talked about a labor market “overshoot,” with the trend in job growth remaining in the 150,000 to 200,000 range. Looking at such measures as the long-term unemployment rate, job openings and quits, and reports of skill shortages, the Goldman analysts say “the labor market is about as tight as in the full-employment years 2006 and 1989, though not yet as overheated as in 2000.

They expect the wage growth to finally tick up to about 3% by the end of the year. The economists said it appears that the labor market is likely to “overshoot” full employment, a condition that has resulted in recessions in the past. Even so, they are sticking with their forecast for Fed rate hikes, saying: “Our subjective probability of a hike by the December meeting remains around 60 percent, and our baseline for 2018-2019 is quarterly hikes.”

The dollar drifted slightly lower.  St. Louis Fed President James Bullard said the Fed can leave interest rates where they are for now because inflation is not likely to rise much even if the job market continues to improve.

And Minneapolis Fed President Neel Kashkari at a speech in South Dakota today, took a shot at companies saying they have worker shortages, arguing that workers are available if the pay is higher. Kashkari said, “If you’re not raising wages, then it just sounds like whining.” Kashkari also said that reducing immigration to the United States will reduce economic growth.

Total consumer credit increased $12.4 billion in June to a record seasonally adjusted $3.86 trillion, posting an annual growth rate of 3.9%. The historical main source of credit growth, non-revolving credit, which covers loans for education and cars, rose at an annual rate of 4.9% in June, down from torrid 8.2% in May.

Revolving credit, which is mostly made up of credit-card loans, increased at an annual rate of 3.9% in June, down from 5.7% in May.

The U.N. Security Council on Saturday imposed its toughest round of sanctions yet against North Korea over its two intercontinental ballistic missile (ICBM) tests in July. The sanctions could further choke North Korea’s economy by cutting its $3 billion annual export revenue by a third.

At a summit of Southeast Asian countries, Secretary of State Rex Tillerson held a door open for dialogue, saying Washington was willing to talk to North Korea if it halted a series of recent missile test launches. In a statement Monday, North Korea said it would never place its nuclear program on the negotiating table if the United States maintained a hostile policy against the North.

German health-care provider Fresenius is making a big push into the US market, buying home dialysis company NxStage for $30 per share in a deal valued at $2 billion.  Shares are up 28% on the news.

United Technologies has submitted an offer for aircraft parts maker Rockwell Collins. Rumors that Rockwell Collins has been working with an investment bank sent the stock up 4%. United Technologies did not comment on the news.

Berkshire Hathaway on Friday reported a 15 percent drop in second-quarter profit and missed estimates, as lower investment gains and a loss from insurance underwriting offset improvement in its BNSF railroad business. Berkshire ended June with about $99.7 billion of cash and equivalents.

ON Semiconductor rose 4.6 percent on stronger-than-expected second-quarter earnings and revenue.

Tyson Foods reported stronger-than-expected quarterly results, sending its shares up 5 percent, and said it would ramp up chicken production in the face of record demand from U.S. consumers.

CBS Corp, owner of the most-watched U.S. TV network, reported a 9.4 percent rise in second-quarter revenue, driven by higher content licensing and subscription fees.

Marriott International will partner with China’s Alibaba Group to tap into the growing number of Chinese citizens who travel abroad. The world’s biggest hotel chain said the joint venture with Alibaba would allow Chinese travelers to book rooms at Marriott hotels via Alibaba’s travel service platform, Fliggy.

The partnership will connect Marriott and Alibaba’s loyalty programs. Tourists would be able to pay for their bookings using Alibaba’s online payments platform, Alipay. Marriott has nearly 300 hotels in China and around 300 hotels in the pipeline.

Last week, Tesla announced its quarterly numbers; and once again, Tesla announced a quarterly loss. As the company ramps up production capacity for the Model 3, it is burning through cash at a prodigious pace. So, once again, Tesla is raising money, but this time they are not issuing more shares of stock.

Tesla will try to raise about $1.5 billion through its first-ever high-yield junk bond offering. Standard & Poor’s reaffirmed its negative outlook for the automaker and assigned a “B-” rating for the bond issue – deep into junk credit territory.

Apple’s iPhone 8 has gone to mass production, according to reports. The smartphone is likely to meet launch in September, and one of the new features will include augmented reality. AR is essentially a graphical overlay of CGI, or computer generated imagery, elements onto real world elements, typically generated by a video feed.

Here’s what that means; if you want to buy a new chair for your living room, you could take of a photo of the living room and the chair, and see how the chair looks in the living room. Or how about this – for hundreds of years, maybe thousands, the only way to measure the room was with a tape measure. The new iPhone will have a virtual tape measure, very handy for measurements where the tape measure can’t reach.

It seems like some people have a phone glued to their hands, and when you think about all the other gadgets we use these days, you might think we are using more electricity than ever. But the U.S. Energy Information Administration reports overall residential electricity sales have declined 3 percent from 2010 to 2016, and 7 percent on a per capita basis.

Americans are using less electricity than we did 10 years ago. Our numerous gadgets are all getting more efficient, so they’re less of a drain on residential electric bills. And our devices are also getting smaller. Most TVs are now flat and require less energy to operate than the giant TVs of yesteryear.

Also, laptops and tablets are more efficient than those big desktop PCs. Eventually, however, the EIA figures the ubiquity of rechargeable devices will counter efficiency gains, causing a net electricity consumption to increase from 2030 to 2040.

The Wall Street Journal reports penalties levied against firms and individuals by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority in the first half of 2017 were down nearly two-thirds compared with the first half of 2016—putting regulators on track for the lowest annual level of fines since at least 2010.

Fines of $489 million in the first half of 2017 compared with $1.4 billion in the 2016 period.

Wink, wink, nod, nod.

Financial Review

A Bit Ironic

Sinclair Noe — March 25, 2015

 

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DOW – 292 = 17,718
SPX – 30 = 2061
NAS – 118 = 4876
10 YR YLD + .04 = 1.92%
OIL + 1.70 = 49.21
GOLD + 1.90 = 1196.10
SILV + .01 = 17.06

Not much in the way of economic data today. Orders for durable goods dropped in February, a possible sign the slowdown in global growth may be weighing on American manufacturers. Bookings for goods meant to last at least three years declined 1.4 percent after a 2 percent gain in January that was smaller than previously estimated. Demand for American-made products may be softening as economies abroad struggle to accelerate and a stronger dollar makes it more attractive for foreign customers to buy from elsewhere.

Certainly not much in the way of news that would push the markets down to triple digit losses, but that’s the way the markets have been recently. In the past couple of weeks we see big moves in the markets, a little more to the downside than the upside. One of the better explanations I’ve heard for what is moving the market – irony. It seems like good news is bad and bad news is good. A strong dollar is good news for the consumer; certainly when it comes to lower gas prices. A strong dollar hurts durable goods orders. The jobs picture has shown solid and consistent improvement, which means the Fed wants to hike interest rates. The US is probably the strongest economy on the planet and yet the Japanese stock market is up 12% year to date and the European stock market is up 18%.

You think you figured out the markets; the gods of irony laugh.

In the absence of hard economic data, the Federal Reserve is sending out policymakers to make speeches this week. Atlanta Federal Reserve President Dennis Lockhart told the New York Times the central bank would have to be really disappointed by economic data to wait beyond September. Lockhart – who has yet to vote for a rise in rates – said: “If we make a decision early – early being June – or if we make a decision later, September or even later, in the greater scheme of things I don’t think it’s going to matter dramatically. I think the economy can absorb that almost on any of those dates.”

An API report yesterday showed a slightly smaller build in U.S. crude stocks at 4.8 million barrels last week. This morning the EIA reported crude oil inventories increased for the 11^th straight week, up 8.2 million barrels for the week ended March 20.  There are now 466 million barrels in storage, the highest for this time of year in 80 years, according to the EIA. This does not mean there is a storage crisis.

No deal yet between the US and Iran over their nuclear program.  Lifting oil sanctions on Iran could hit global markets long before the nation starts pumping more crude. That’s because Iran has been stockpiling oil onshore and in supertankers in the Persian Gulf, possibly up to 35 million barrels. And that could prove a surprise for the energy markets or it might not because there is a problem on the tip of the Arabian Peninsula. Yemen is a chokepoint between the Arabian Sea and the Red Sea and the Suez Canal; which is to say a chokepoint for oil tankers. And Yemen is falling apart.  The Associated Press, said the US backed President Hadi had left the country by boat; rebels have taken over the major airport and much more. The US has pulled all of its personnel out of the country.  Reuters reports that Saudi Arabia is moving heavy military equipment, including artillery, to its border with Yemen. Saudi Arabia says the buildup at the border is purely defensive.

Today marks the anniversary of Greek independence from the Ottoman Empire; they had a parade in Athens; it rained. Greece’s efforts to avoid bankruptcy have hit another hurdle, raising the risk of default next month. Yesterday, the European Central Bank instructed Greece’s largest banks to refrain from increasing their exposure to Greek government debt, essentially shutting off access to money. Greece has until Monday to show how it will follow through on reform commitments that would open the door for Greece to access $1.3 billion to aid their banking system. Greece risks running out of cash by April 20. Depositors pulled money from Greek banks today. There are reports of food shortages as people stock up in anticipation that the Greek economy will soon grind to a halt.

The government coalition in Greece has resorted to increasingly desperate measures to stay afloat, they have sequestered the reserves of public bodies, seized EU subsidies for farmers, and postponed all payments for state supplies while trying to service debt and pay salaries and pensions. On Monday, they are supposed to come up with a list of reforms, they might even write out a list, but the reality is that Greece is broke and can’t pay its debts. I suppose it is ironic that the modern term “irony” comes from the classic Greek theater.

In the latest annual letter to shareholders of Berkshire Hathaway, Warren Buffet addressed the possibility of potential acquisition targets for the company. He said simply: Our lines are out. Today, Buffett reeled in Kraft Food. Heinz and Kraft Foods will merge, with Heinz shareholders owning 51 percent and Kraft’s owning 49 percent. In addition, Kraft shareholders will receive a special cash dividend of $16.50 a share, or a total of $10 billion. The combined company will be the third largest food company in North America, and will have eight brands with sales of $1 billion or more and five brands with between $500 million and $1 billion in sales. Brazilian private equity firm 3G Capital and Berkshire Hathaway acquired Heinz for $23.2 billion in 2013. Kraft is 3G Capital’s fifth major deal in the food and beverage industry since 2008, when it engineered a takeover of Anheuser-Busch by brewer InBev. 3G Capital also controls Restaurant Brands International, formed when its Burger King business bought Canadian coffee chain Tim Hortons.

Telefonica has officially announced it will sell U.K. mobile carrier O2 to rival Hutchison Whampoa. Telefonica will receive $13.8 billion in cash up-front, and could receive up to $1.5 billion later, if O2 and Hutchison’s Three U.K. unit hit cash flow targets post-merger. The deal comes as Telefonica gets set to acquire Brazilian wireline carrier GVT for $8 billion, and follows Telefonica’s $12 billion 2014 acquisition of German rival E-Plus.

Hedge fund Standard General has raised its bid to buy about 1,740 stores of bankrupt electronics retailer RadioShack in a court-supervised auction. Standard General increased its bid from $145 million to $165 million. Standard General, which would operate most of the stores in conjunction with Sprint; it also committed to keeping some 7,500 RadioShack jobs. RadioShack’s auction was complicated by disputes among creditors about how Standard General was paying for its bid. The hedge fund provided RadioShack with a $535 million financing package last year to get the company through the year-end retail season. Much of the hedge fund’s bid took the form a “credit bid” – a pledge to forgive some of what it is owed.

The Supreme Court has revived a lawsuit by a former United Parcel Service driver who had to leave her job when she became pregnant and her doctor recommended she not lift heavy items. The justices, voting 6-3, sent the case back for a possible trial, which would center on UPS’s reasons for refusing to offer Peggy Young light-duty work even while giving temporary assignments to workers recovering from on-the-job injuries. The ruling is the Supreme Court’s first since 1991 on employers’ duties toward their pregnant workers.

On Tuesday, the Supreme Court heard a couple of cases called Bank of America v Caulkett and also Bank of America v Toledo-Cardona, that have big implications for the US housing market. The cases have a link to the foreclosure crisis. Under current law, primary residence mortgages cannot be modified in bankruptcy, unlike vacation homes, yachts, car leases, and almost every other form of debt, with the notable exception of student loans. That’s because of a 1992 Supreme Court case called Dewsnup, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. When Bank of America appealed the bankruptcy judge’s ruling in the Caulkett and Toledo-Cardona cases, the 11th Circuit Court of Appeals went against the Dewsnup ruling in May 2014 by deciding in favor of the two homeowners, saying that the previous decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The Supreme Court is expected to make a ruling by June.

Today was the big F8 event. In case you didn’t mark that on your calendar, F8 is the Facebook developer conference, and it offers a glimpse into new products and updates. Among the cool stuff: Facebook is opening up its Messenger chat app to third-party integrations. For example, a week ago, the company announced a feature that will let people use the app to send money to friends. Now it’s also talking about integrating GIF apps into the platform.

And then the next step: they are integrating Messenger with businesses, such as online retailers. This means Facebook will be able to connect shoppers’ identities to their purchases, creating a single thread of all interactions between retailer and consumer, and an app you could just tap to add more to your purchase.

Also, enhanced plug-ins for embedded video and comments. Facebook videos now log 3 billion views per day, and they want more. As for the comments plug-in, new updates would make it easy to carry conversations that occur on news sites that use Facebook comments, such as the New York Times, back to the social network. For publishers, this means much greater engagement in media.

And then there was an update on a company Facebook acquired a couple of years ago called Parse, which helps to develop apps for the Internet of Things; they’ve developed new tools to help programmers build apps for connected devices.

So, basically Facebook, that geeky social media company where people wast time sharing what they ate for lunch is now trying to control payment systems, shopping, videos you watch, news you read, and any devices you have that connect to the internet. Ironic, isn’t it?