Financial Review

Trifecta of Records

Sinclair Noe — October 11, 2017

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DOW + 42 = 22,872 (Record)
SPX + 4 = 2555 (Record)
NAS + 16 = 6603 (Record)
RUT – 1 = 1506
10 Y un = 2.35%
OIL + .39 = 51.31
GOLD + 3.60 = 1292.10

Cryptocurrency

• Number of Currencies: 874
• Total Market Cap: $156,026,671,244
• 24H Volume: $2,398,072,736

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,850.1	$80.49B	$1.21B	50.50%	1	+0.52%	+14.92%
	Ethereum	ETH	304.63	$28.94B	$260.03M	10.84%	0.0628673	+0.41%	+4.26%
	Ripple	XRP	0.26500	$10.32B	$161.04M	6.72%	0.00005519	+0.95%	+20.90%
	Bitcoin Cash	BCH	311.00	$5.22B	$123.95M	5.17%	0.0646502	-0.60%	-12.01%
	Litecoin	LTC	50.900	$2.72B	$56.85M	2.37%	0.0105321	+0.26%	-0.29%
	Dash	DASH	297.00	$2.26B	$26.15M	1.09%	0.0612835	-0.35%	-1.68%
	NEM	XEM	0.21342	$1.93B	$2.68M	0.11%	0.00004419	-0.78%	-0.78%
	NEO	NEO	30.170	$1.51B	$33.17M	1.38%	0.00623998	+0.23%	-0.83%
	IOTA	MIOTA	0.48320	$1.35B	$6.68M	0.28%	0.0001002	+0.33%	-9.64%
	Monero	XMR	87.58	$1.33B	$20.99M	0.88%	0.0181158	+0.12%	-2.62%

The Dow Industrials, S&P 500 and Nasdaq Composite all closed at record highs. With the S&P 500 up 14 percent in 2017, investors are betting on strong earnings growth across the S&P 500. Banks take the focus as JPMorgan Chase and Citigroup report results on Thursday, with analysts warning that results in the sector will largely be held back by low trading volumes compared with a year earlier.

Profits at companies in the S&P 500 stock index are expected to increase by 4.6% in the July-thru-September quarter, once corporations have finished reporting results, according to earnings-tracker Thomson Reuters. That’s a sharp deceleration from the 10%-plus gains in the first two quarters of 2017.

The Federal Reserve released the minutes from their September 20^th FOMC meeting. At that meeting, the Fed decided to begin quantitative tightening, by selling off some of the Treasuries and mortgage backed securities held on their balance sheet; they also left interest rates unchanged.

It is widely expected the Fed will hike rates at the December meeting but the minutes reveal policymakers are a bit skeptical. Inflation is still well below the Fed’s target of 2%. They don’t want to wait until inflation goes flying past 2% but they are also at a loss to explain why inflation remains stubbornly low.

Minutes portray the Fed as roughly divided into three camps. The first, which included “many” Fed officials, thought another increase in interest rates “later this year” was likely to be warranted “if the medium-term outlook remained broadly unchanged.”

The second camp, comprising fewer officials, said they were data-dependent and were looking for “confidence that inflation was moving up.” And the remaining “few” said rate hikes should be deferred until inflation “was clearly on a path toward the Fed’s symmetric 2% objective over the medium term.” Bottom line is that the Fed will probably hike rates in December.

For the “data dependent” camp, they are at a disadvantage. The hurricanes have skewed economic reports on inflation and jobs. The September jobs report showed a loss of 33,000 jobs, breaking an 83-month string of consecutive gains, but today’s JOLT survey shows the labor market remains strong.

The Job Openings and Labor Turnover Survey showed job openings in the country fell slightly to 6.08 million in August from a record 6.14 million in July. Some 5.43 million people were hired and 5.23 million lost their jobs. Job openings declined for most industries, though the biggest drop was in education. Educational employment is always hard to capture at the start and end of school years.

Hurricane Harvey may have also had a negative impact at the end of the month. The quits rate among private-sector employees was unchanged at 2.4%. It slipped a notch to 2.1% if government workers are included. Quitting a job is a positive because people voluntarily quit one job before accepting another, hopefully better job. Many firms complain they can’t find enough skilled workers, but available jobs tend to stay open longer. We still have not seen companies willing to pay more to make a good hire.

If you have a Twitter account, or just follow the news, you know that Trump takes credit whenever the stock market hits a record high. It’s a routine that has played out in 2017. The bull market has been running since mid-2009. Trump had nothing to do with the first 7-1/2 years of that rally.

While there have been times this year when the so-called Trump trade — or the promise of business-friendly policies — has undoubtedly been responsible for the gains, there have also been long stretches when other factors were driving returns.

Earnings growth exploded for the first- and second-quarter reporting periods, which largely occurred in April and July. The S&P 500 saw profit growth of 14% during the first three months of the year and 11% for the second quarter, its best stretch since 2011. Trump had nothing to do with that earnings growth. At some point the bull market will end. If Trump takes credit for the past 9 months, he must also be willing to take the blame when the market inevitably crashes, but you know this is a one-way street.

Today, Trump tweeted: “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election. Need tax cuts.” As a matter of economics, Trump’s tax pitch is nonsensical. “Virtually unprecedented stock market growth” is not a problem for tax cuts to solve. The argument for tax cuts is that they might boost a sluggish economy.

During a recession or depression, tax cuts may provide stimulus to get money circulating through the economy, especially if the tax cuts are directed at the middle class. A tax cut directing half the benefits to the richest percentile is more likely to distort the price action of already extended valuations – something that never ends well.

Republicans have “basically just given up on trying to pay for the tax cuts that they’re going to do. They’re now just trying to figure out what size of tax cut could they pass and how could they put together a coalition of 50 percent plus one. A tax cut now would explode the deficit, at the exact time when the Fed is starting quantitative tightening.

Considering the Fed won’t be the big buyer of all that debt, you could reasonably expect debt prices to tumble, pushing yields much higher and slowing economic growth. And this is a tax plan predicated on dynamic scoring and much faster economic growth. The timing for this tax plan is completely wrong. And that is one reason why Trump is having a hard time trying to sell it.

Japan’s main stock index rose to its highest level in almost 21 years on Wednesday. In large part, Japan’s stronger stock market is part of a global rise in optimism. But Japan has some of its own good news to share. Japan’s gross domestic product has expanded for six consecutive quarters, the first time it has gone that long without a contraction in 11 years.

Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Even Japan’s longtime economic bugbear — persistent wage and price deflation — has eased, with both consumer prices and incomes showing modest gains.

Spanish authorities gave Catalonia’s separatist leader five days to explain whether his ambiguous statement on secession was a formal declaration of independence and warned that his answer dictated whether they would apply never-used constitutional powers to curtail the region’s autonomy.

Threatening to invoke a section of the Spanish Constitution to assert control over the region, Prime Minister Mariano Rajoy said Catalan president Carles Puigdemont’s response to the central government’s ultimatum would be crucial in deciding “events over the coming days.”

Puigdemont announced on Tuesday that he was using the victory in a banned Oct. 1 referendum to proceed with a declaration of Catalan independence, but proposed freezing its implementation for a few weeks to allow for dialogue and mediation with the government in Madrid.

Airlines are feeling the impact of a brutal hurricane season. Delta Air Lines said net income fell 6% to nearly $1.2 billion during its July to September quarter, with $120 million of the decline blamed on Hurricane Irma last month. JetBlue Airways, meanwhile, projected that operating income could be affected by as much as $105 million through the end of the year.

Meanwhile, Delta Air Lines pledged not to pay import duties on Bombardier’s jetliner, which was socked in the last two weeks with 300 percent tariffs by the U.S. Commerce Department. It’s possible Delta will delay deliveries of the C Series planes, which are scheduled to begin next year. The airline is also considering “various other plans” if the preliminary duties are finalized, he said without elaborating. Delta last year agreed to buy at least 75 of the jets at a list price of more than $5 billion.

Luxury handbag maker Coach is changing its name to Tapestry. Perhaps they are changing names because they think the new name is a good metaphor, or something – but I think they’re just Carole King fans.

Financial Review

Aggressive Spacing and Large Fonts

Sinclair Noe — September 27, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 56 = 22,340
SPX + 10 = 2507
NAS + 73 = 6453
RUT + 28 = 1485 (record)
10 Y + .08 = 2.31%
OIL + .18 = 52.06
GOLD – 11.20 = 1283.40

The Russell 2000 Index hit a new record high. The S&P 500 index hit an intraday record high but could not take out last week’s closing high.

The Trump Administration finally unveiled their tax cut plan, 9 pages of it (click here for full text). Trump spoke in Indiana today. The framework shrinks the number of tax rates to just three from seven today. The proposed rates are 12%, 25% and 35%. But it will be up to the tax committees to assign income ranges to each rate. The 12% bottom rate is higher than today’s lowest rate of 10%.

The plan doubles the standard deduction, to $24,000 for married couples and $12,000 for single filers. The framework proposes the elimination of most itemized deductions, including the state and local tax deduction. It also eliminates personal exemptions, worth $4,050 per person. So, a family of four could no longer reduce their taxable income by more than $16,000. Now this bears a closer look.

Here’s the important fine print, the plan states: “To simplify the tax rules, the additional standard deduction and the personal exemptions for taxpayer and spouse are consolidated into this larger standard deduction.” Here’s how that math works. Let’s say you are single with no dependents, and you have a moderate income. Currently, you get to take the standard deduction ($6,350) and one personal exemption ($4,050).

If you are 65 or older, you also get to take an additional standard deduction ($1,250). That adds to $10,400, or $11,650 if you’re a senior citizen. The Republican plan would replace all these provisions with a single deduction of $12,000 ($24,000 for married couples.) That’s a 15% increase — except for seniors, who get a 3% increase. Not a doubling, not even close. And then your first dollar of taxable income would be subjected to a 12% tax rate, instead of the current 10%.

Currently, you get to take the personal exemption even if you also itemize deductions, but you only get to take the standard deduction if you forego itemized deductions. Combining these provisions into a single, standard deduction would mean itemizers lose their personal exemption and get nothing back — meaning they’ll typically pay tax on an extra $4,050 of income if they’re single, or $8,100 if they’re married.

The plan does not address the prospects for repeal of popular deductions – the tax breaks for mortgage interest, charitable donations. What happens to other popular deductions is less clear.  The plan would eliminate deductions for state and local tax expenses. States are going to go crazy over that loss.

The National Conference of State Legislatures says the deduction has existed in the federal tax code since its inception. The group says, “tens of millions of middle-class taxpayers of every political affiliation” would experience a greater tax burden if the deduction were eliminated. The group says the deduction’s elimination will also impede states in their efforts to invest in education and other public services.

The plan called for a repeal of the alternative minimum tax, a provision originally intended to tax wealthy households that now reaches well into the middle class. And the plan also calls for eliminating the estate tax.

The document also outlined various provisions for businesses, including a cut in the corporate tax rate to 20 percent, or 25% for small and family-owned businesses conducted as sole proprietorships, partnerships and S corps. But while promising to “modernize” the dozens of tax breaks that favor specific companies and industries, those details remain to be spelled out. It talks about repatriating corporate capital held offshore, but it doesn’t provide any guidance or detail on what rate of tax or any conditions for repatriation.

How to pay for all this without an explosion in the debt and deficit? Animal spirits will lift the economy to tremendous growth – at least that is the argument we are going to here. Cut taxes for corporations and the wealthy, which will shower great jobs on the rabble, which will not only not increase the deficit, it will cut it because so much new revenue will pour in.

More likely, if you get a fiscal boost and tax reform this late in the cycle where most of the slack in the market is eroded, you’re not going to get a lot of bang for your buck. While the rhetoric of cutting taxes sounds good, don’t expect much popular support for specifics. Expect a whole bunch of opposition from various groups who are going to have their specific oxen gored.

The big disappointment is that this whole tax cut plan really doesn’t look serious. It’s 9 pages, and most of those pages have a whole lot of white space and large fonts; the plan has some flowery promises and almost no math. More generally, the plan has so many holes — left for Congress to fill in — that a full picture of who gains the most cannot be drawn at the outset.

The plan could well benefit both the rich and the middle class, at the cost of national debt, but that remains to be seen. If the proposal follows any kind of order, as Senator John McCain has called for, don’t expect anything of substance any time soon. If Republicans thought health care was tough, just wait until they try to tackle tax reform. In that sense, today’s gains on Wall Street can be called a relief rally – a relief that any type of plan was presented, albeit without many details.

The market for Treasury securities experienced one of its worst days of the year, as yields soared. It’s bad enough that the federal budget deficit has already widened, but what’s concerning now is that the government is likely to ramp up bond sales to pay for tax cuts at a time when the Federal Reserve is planning to reinvest less of the maturing proceeds from its bond holdings back into the market.

The amount of marketable US debt outstanding has already increased to $14 trillion from less than $5 trillion the past decade. And don’t forget the repatriated corporate cash isn’t really cash, it is equivalents, meaning a whole bunch is held in US Treasuries.

The pollsters at Gallup periodically ask people what they think is the most important problem in America. Taxes don’t make the top 10 list. Why? Because most Americans don’t pay much of anything in federal taxes.  In an NBC/ Wall Street Journal poll, 62% of those polled said taxes should go up on the wealthy, and 55% said taxes should rise for corporations.

The biggest threat to the U.S. economy over the next 6 months: North Korea? Rising interest rates? Terrorism? A stock market drop? Nope. Thirty-six percent of Americans chose “the political environment in Washington” as the biggest threat to the economy, according to a new survey by personal finance website Bankrate.com. That easily beat out the next four choices: the threat posed by North Korea (24%), rising interest rates (10%), terrorism (10%) and a decline in the stock market (8%).

Orders for durable or long-lasting goods such as passenger planes rose 1.7% last month. The increase stemmed mainly from a big batch of orders for commercial aircraft. Bookings surged 45%. Demand was higher for most other manufactured goods, but bookings grew at a slower pace. Orders minus transportation edged up 0.2%. The government said Hurricane Harvey appeared to have little effect. The storm slammed the Houston area hard late in the month, but probably too late to reduce orders.

The Commerce Department on Tuesday slapped preliminary anti-subsidy duties of 220 percent on Bombardier jets, which could effectively shut Bombardier out of the US market if upheld, after rival Boeing launched a trade challenge accusing Canada of unfairly subsidizing the aircraft. The dispute could spill into talks between Canada, the United States and Mexico to update the North American Free Trade Agreement. Negotiators are meeting in Ottawa.

Americans signed fewer contracts to buy homes in August, the fifth month of declines in the last six. The National Association of Realtors’ pending home sales index fell 2.6% to 106.3. That was the lowest reading since January 2016 and put the index 2.6% lower than its level a year ago. There is a supply-demand imbalance with very tight inventories.

Here we go again: Sonic may be the latest company to face a cybersecurity breach. The drive-in restaurant chain — which has 3,500 locations across the United States — said that a credit card processing company noticed peculiar activity on some Sonic customers’ cards. That’s a telltale sign that hackers targeted Sonic. The company said it’s not yet clear how many restaurants or customers may be impacted.

Amazon announced a bunch of new hardware today. Amazon introduced 5 new Echo hardware products. The big difference seems to be better speakers. Also, they announced their voice assistant, Alexa, will be available in BMW cars. Amazon also unveiled tiny “Echo Button” devices that can be configured to work and control an Amazon Echo. In one instance, Amazon showed how a family might play a game like “Trivial Pursuit” using the buttons to chime in for answers.

The Echo Connect is a $35 box that will allow you to place phone calls to landlines using your existing Amazon Echo units. The Echo already supports calling between Echos, but that acts more like an intercom system. Amazon also unveiled a new Fire TV dongle that plugs into the back of a TV (it uses HDMI). It will support 4K content. Resistance is futile.

Meanwhile, Google celebrates its 19^th anniversary today. I have no idea how we found anything 20 years ago.

Financial Review

Justice Deterred

Sinclair Noe — September 10, 2015

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DOW + 76 = 16,330
SPX + 10 = 1952
NAS + 39 = 4796
10 YR YLD + .04 = 2.22%
OIL + 1.51 = 45.66
GOLD + 5.10 = 1111.90
SILV + .10 = 14.81

Wholesale inventories decreased by 0.1% in July, while wholesale sales dropped 0.3%. At July’s sales pace, the inventory-to-sales ratio was unchanged at 1.30 months.

The number of Americans getting laid off from their jobs remains near the lowest level in decades. Initial jobless claims fell by 6,000 to 275,000 in the period running from Aug. 30 to Sep. 5. New claims have been under the key 300,000 level for 27 straight weeks. The last time the pace of layoffs was even lower for such a long stretch was in 1973.

The prices the U.S. paid for imported goods fell by 1.8% in August, marking the biggest decline since the start of the year. Oil prices fell sharply again and strong dollar has also made foreign products cheaper for Americans to buy. Excluding fuel, U.S. import prices declined by a 0.4% last month. Meanwhile, the price of U.S.-made goods exported to other nations dropped 1.4%.

Mortgage rates were little changed ahead of the Federal Reserve’s key rate decision next week. Mortgage buyer Freddie Mac said the 30-year fixed rate mortgage averaged 3.90% in the week ending Sept. 10, up from 3.89%. The 15-year fixed-rate mortgage averaged 3.10%.

Oil prices rallied today.  Energy Information Administration data showed demand for gasoline over the latest four-week period was up almost 4 percent from a year ago, bullish for late-summer consumption of the motor fuel. Gasoline inventories, meanwhile, rose just about half of expected levels last week. Crude oil stockpiles rose nearly 2.6 million barrels last week, more than double expectations. Bottom line, when gas prices are low, we tend to take road trips.

Standard & Poor’s has cut Brazil’s investment-grade credit rating to junk for the first time since 2008, warning that it could lower the grade again in the coming months. The agency pointed to political challenges that are putting a balanced budget at risk as a reason for lowering the rating to BB+. Fitch and Moody’s still have Brazil at investment grade – for now – but if either one follows suit, as the country’s situation rapidly degrades, it would trigger massive cash outflows from pension funds.

The Justice Department is renewing its efforts to charge individuals in corporate investigations. Justice Department officials issued a memo Wednesday to prosecutors outlining best practices and recommending that they only consider a company to have cooperated in an investigation if that company turns over information about the actions of individuals at the firm, “regardless of their position, status or seniority.” And this is not first time the DOJ has tried this scheme. In 2014, then-Attorney General Eric Holder announced that “no company was too big to jail”, and of course since that declaration, no company has been jailed.

The new memo, released by Deputy Attorney General Sally Yates, claims that this new direction “deters future illegal activity, it incentivizes change in future corporate behavior”. This was a point emphasized by Matthew Schwartz, a former prosecutor at the United States attorney’s office in Manhattan who told the New York Times: “The main reason you bring these cases is to send messages to the business community”.

However, they are both wrong; the main reason to seek criminal charges and incarcerate criminals is to punish them, next on the list is deterrence, followed by rehabilitation. That has been the Department of Justice’s longstanding guideline. In fact, in a speech by then-AG Holder in August of 2013, he said “we need to ensure that incarceration is used to punish, deter, and rehabilitate”. It may seem a subtle distinction, but the difference in priorities is huge; especially because it confirms that we have a two-tiered system of justice: one for bankers, and the other for everyone else.

Of course punishment has never been the DOJ’s guideline when dealing with bankers. For many years AG Holder subscribed to the idea of going easy on the banks; it came to be known as the Holder Doctrine, which stems from his now-famous June 1999 memorandum — when he was deputy attorney general — that included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern.

The new memo seems to say that the plan is to talk tough in the hope of deterring illegal activity. The memo says “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” In other words, identify your rogue traders and low-level scapegoats before you try to cut a deal. In fact, the memo goes to great lengths to explain how it is so very, very difficult to bring a case against individuals and especially against executives.

Also, the memo seems to forget the idea from Holder that “no company is too big to jail”. If you want a deterrent effect, how about the idea that a corporate charter can be revoked; imagine if JPMorgan or Goldman Sachs faced the prospect of losing their charter for their crimes; that might prompt directors and officers and shareholders to think twice. Of course that will never happen; the banks really are too big to fail, and nothing has been done in the last 7 years to change that fact.

Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, paid out as corporate expenses, and in some cases, tax deductible. For the banks, justice is just a check that somebody else has to write; not much deterrence there.

Wall Street has assumed control over the government, its agencies, and our legal system. The DOJ says it will increase its efforts in deterring Wall Street crime. Forgive me if I seem skeptical.

Meanwhile, New York regulators have sent letters seeking information to big banks that are primary Treasury dealers as part of a probe into the potential manipulation of bond auctions. The banks – including Barclays, Deutsche Bank, Goldman Sachs, Societe Generale, and Credit Suisse – aren’t charged with specific wrongdoing at the moment, as the investigation is still in its early stages. Boston’s public employee pension fund, State-Boston Retirement System, sued 22 primary dealers in July alleging conspiracy to manipulate Treasury auctions.

Companies raised $28 billion of investment-grade bonds in U.S. markets yesterday as the corporate-debt market roared back to life after a three-week hiatus that was partly due to worries about China. Nineteen companies issued debt, including Gilead Sciences with a $10 billion deal, home-improvement retailer Lowe’s and hotelier Marriott International. Overall, firms have sold $1.2 trillion worth of new debt in the U.S. this year, including junk-rated paper, putting the market on course to set a record for a fourth consecutive year.

XPO Logistics has agreed to acquire trucking and logistics company Con-Way for $3 billion including debt. The agreement is the latest in a string of transactions that have helped XPO grow into a major player in the global logistics market: since 2011, the company has completed at least 14 mergers and increased its revenue to a projected $6.7 billion this year from $177 million.

Bombardier surged 24% in Toronto yesterday, the most in a single day since 1988, amid growing optimism over the potential value of the company’s rail unit and the sales prospects for the firm’s CSeries jet. According to earlier reports, Bombardier rejected a bid by Beijing Infrastructure Investment for 60%-100% of Bombardier Transportation that gave the business an enterprise value of as much as $8 billion.

Ikea’s sales climbed 11% to €31.9 billion-euro in the year to August as the world’s largest furniture retailer enjoyed strong growth across different regions. “China remained the fastest-growing Ikea Group market, followed by Russia,” Ikea said. “Germany showed record growth and North America performed well. Also south Europe demonstrated positive progress.” The Swedish retailer aims to earn annual revenue of €50-billion-euro by 2020.

Dell intends to invest $125 billion in China over the next five years as the world’s third-largest computer manufacturer continues its expansion in the country. CEO Michael Dell said, “Dell will embrace the principle of ‘In China, for China’ and closely integrate Dell China strategies with national policies”. The plan includes strengthening the company’s research and development team in the country.

A new visitors’ center and museum opens today at the Flight 93 National Memorial in western Pennsylvania, one day before the anniversary of the Sept. 11 attacks. Fourteen years after the 40 people on board the hijacked United Airlines flight forced the plane into the ground as terrorists aimed it toward Washington, their story is on display for the hundreds of thousands of visitors who come to central Pennsylvania, near a town called Shanksville, each year to visit the Flight 93 National Memorial. Much of the visitors’ center deals with the final 35 minutes of the flight, as passengers fought the hijackers and the crew tried to keep control of the flight. The field has become a full-fledged national monument, financed by a public-private partnership and operated by the National Park Service.