Financial Review

Meet the Press

Sinclair Noe — January 11, 2017

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DOW + 98 = 19,954
SPX + 6 = 2275
NAS + 11 = 5563
RUT + 2 = 1373
10 Y – .01 = 2.37%
OIL + 1.57 = 52.39
GOLD + 4.20 = 1192.50

The Nasdaq pushed to fresh record highs again. The S&P and Dow are very close to records. The S&P 500 index was unchanged yesterday – not a small move – unchanged.

So, we did a little digging. The last time the index ended a trading day flat was Jan. 3, 2008. Before 2008, the benchmark index had gone nearly 11 years without posting an unchanged day. Since 1980, the S&P has recorded just 10 unchanged sessions.

There were no top-tier U.S. economic reports, nor any Fed speeches. President-elect Trump held his first press conference since the election, and yes, it moved the markets.

The healthcare sector dropped after Trump said the country needs more competitive drug bidding. He said pharmaceutical companies are “getting away with murder” by charging high drug prices. Health care dropped more than 1.5 percent as the worst performer in the S&P 500, with the pharmaceuticals sub-sector down more than 1.5 percent and the biotechnology sub-sector off nearly 3 percent.

Lockheed Martin dropped about 1 percent after Trump said the F-35 fighter jet project “is way behind schedule and billions over budget.” Mexico’s peso weakened to a historic low of 22 per dollar, then bounced higher. Gold gained and the Dow dropped.

The dollar dropped as Trump talked about trade but then rebounded when Trump said: “There will be a major border tax on these companies that are leaving and getting away with murder and if our politicians had what it takes they would’ve done it years ago.”

Trump insisted he will not divest himself of his businesses as he assumes the presidency; he will turn over operations to his two oldest sons and will not be involved in operations. The Trump Organization will not enter into any new deals with foreign partners.

Prior to the press conference a Trump lawyer said any profits from foreign government payments to his hotels will be donated to the US treasury. The press conference probably raised as many questions as it answered regarding conflicts of interest.

Trump first said he thinks Russia directed cyberattacks on Democratic Party targets, but later made his view less clear. He said the hacking activity “could be others” and repeatedly deflected attention to attacks by China and other foreign countries and institutions.

He contended that Russia will no longer hack the U.S. when he is president but did not answer questions about whether he will uphold Obama administration sanctions in response to suspected interference in the 2016 election.

Trump blasted BuzzFeed for reporting on unverified allegations that Russia put together compromising information on him. Trump called BuzzFeed a “failing pile of garbage,” arguing the online media outlet “will suffer the consequences.” He also took CNN to task for “going out of their way to build it up,” before refusing to take a question from CNN’s Jim Acosta; saying, “Your organization is terrible. I am not going to give you a question, you’re fake news.”

This story about a possible Russian dossier of compromising info about Trump also raises more questions than it answers, not just about Trump, or the media, but also about the intelligence community. Strange days indeed.

So, it was an interesting and unique press conference. It also shifted focus off the confirmation hearings, which continue on Capitol Hill.

The World Bank says global growth will pick up slightly in 2017. The World Bank has lowered its 2017 global growth forecast to 2.7% from its June outlook of 2.8%, but that would still be ahead of the 2.3% growth that was experienced in 2016.

The World Economic Forum told us what to worry about. WEF’s Global Risks Report, which sets the agenda for the annual confab of global heavyweights in Davos next week, identified rising nationalist sentiment, economic inequality, technological disruption (i.e., jobs becoming obsolete), and climate change as the biggest risks in 2017.

The environment is now considered not just more likely to cause global disruption, but also more capable of generating the biggest impact. The report concludes that the biggest risk for 2017 is “extreme weather events.” It’s not as if the economic risks have just magically melted away. It’s just that environmental problems are considered more urgent than before. Solutions will be discussed by world leaders and corporate bigwigs in Davos next week.

Some of those ideas were echoed in research from Wells Fargo Investment Institute which says we are in the “age of discontent” and we should invest accordingly. The report says households across the country have felt economic recovery to very different and uneven degrees post-financial crisis, according to the report, which attributes such “discontent” for market participants to frustration across economic classes, along with increased political uncertainty on the horizon.

The stark differences in economic recovery might be found in the employed versus the unemployed, savers versus consumers, and small business versus large corporations. What’s more is economic growth is not improving quickly enough for many, the report added, citing wage and real income stagnation as forces “fueling protectionism and geopolitical unrest.”

US oil output is expected to rise in 2017 and 2018. A report released by the US Energy Information Administration on Tuesday showed US crude-oil production was expected to increase by 110,00 barrels a day in 2017 to 9 million and by another 300,000 barrels a day in 2018.

Bill Gross of Janus Capital, who was once referred to as the “Bond King,” says the 2.60% level on the 10-year Treasury yield is what everyone should be watching, as a breakout above that level would mark the end of the 30-year bull market in bonds.

Gross says the 2.6% level is “much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.”

Jeff Gundlach, CEO of Doubleline Funds (sometimes called the NEW “Bond King”) says the bond bull market is dead if the 10-year hits 3.00%. During the presentation of his 2017 outlook, Gundlach said a move to 3.00% and above would have “a real impact on market liquidity in corporate bonds and junk bonds.”  If the 10-year moves back above 3% it will be the end of lower-highs in the recent trend and signal, finally, the end of an era.

Gundlach also covered high yield or junk bonds; the major points from his presentation: defaults are high, the rally is entirely predicated upon rising oil prices but seems overdone because the last time spreads were this tight oil was at $80.

Gundlach said: “Many people seem to think that because junk bonds had a great 2016 that they’re somehow not vulnerable to interest rate hikes. Nothing could be further from the truth. The junk bond market has decent interest rate risk on it, it’s just that they were depressed with commodities so low.”

As for stocks, Gundlach says they are overvalued on almost every metric. Looking at forward price/earnings ratios Gundlach says we would need a combination of buybacks funded by repatriated cash, plus lower taxes and some pro forma magic to justify valuations.

Looking to stoke demand for electric cars, BMW, VW, Ford and Daimler are aiming to build a network of ultra-fast charging stations across Europe. The 400 next-generation 350 kilowatt chargers would be nearly three times as powerful as Tesla’s, reloading an electric car in minutes instead of hours.

Airbus’s productivity surged in December, allowing it to record a full year delivery of 688 planes, but it still fell short of rival Boeing, which rolled out 748 jets to customers. But in the race for new business, Airbus recorded 731 net orders in 2016, compared with the 668 of Boeing. Still, the combined book-to-bill ratio of the two giants dipped below 1 for the first time since 2009, placing a dent in record industry order backlogs.

Canada’s largest alternative-asset manager has submitted proposals regarding its interest in buying the yieldcos of bankrupt solar company SunEdison. Brookfield Asset Management would purchase all of TerraForm Power for $11.50 per share in cash, or a total consideration of $1.6B, and may even raise its offer to $12.50 per share if it can also buy TerraForm Global.

FINANCIAL REVIEW

ECB QE

Sinclair Noe — January 22, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 259 = 17,813
SPX + 31 = 2063
NAS + 82 = 4750
10 YR YLD + .04 = 1.90%
OIL – 1.24 = 46.54
GOLD + 9.20 = 1303.10
SILV + .20 = 18.41

The European Central Bank has launched a quantitative easing program, which together with existing programs, will pump €60 billion per month into the Eurozone economies through the purchase of public and private securities, mainly government bonds. The QE program will run through September 2016 with a total price tag of €1 trillion (or $1.3 trillion dollars).

So, it’s a big money printing, QE party for the Eurozone, except for Greece. The central bank effectively shut Greece out of the bond buying until July, and only then if Greece passes a review of its current bailout program. That program is heavy on debt reduction and austerity. The country’s existing program of financial support expires at the end of February. The government will run out of money by June without further aid.

Greece holds elections on Sunday. The Syriza party is expected to win the election. Syriza would like to default on existing debt and scrap the current bailout program; essentially challenging the status quo of fiscal austerity policy. What happens if Syriza wins the election on Sunday? Well, they will probably claim that fiscal austerity has contributed to the despair and poverty of Greece and created a humanitarian crisis in the country, deserving of special assistance.

Greece is an extreme case, as its output has fallen 30 percent since 2008, but not a unique case, as peripheral Europe has suffered disproportionately in the post-global financial crisis era. Syriza has already called for a “European debt conference” to renegotiate the current loan debt. No telling what could happen with such a conference; they might find a sympathetic ear or not; they might repudiate their debt, or not. Greece is unlikely to exit the Eurozone, but the Eurozone might try to kick them out, or not. The real risk for the EU is not a Syriza win, nor a Greek exit, but that EU policy fails to evolve and adjust to the shifting political will of its citizens, particularly now that populist and anti-establishment parties are finding their political voice on national and EU levels of representation. It’s not just Greece that has suffered under austerity.

Is Euro QE bearish for the US? It is widely expected that Euro QE will push down the value of the euro currency, which means European exports would be cheaper for US buyers, and in turn could negatively impact US exports which are already feeling the sting of a strong dollar. Further, cheaper euro exports might have a deflationary or disinflationary impact on the US.

Or, is Euro QE bullish for US? When central banks print money, it inevitably sloshes outside of its own borders, and Britain and America are far more attractive homes for that cash right now than Greece or Italy. There are not many investment opportunities in Italy or Greece or Portugal right now. The US has the best prospects of any of the developed nations right now. The economy is expanding at a healthy rate and jobs are being created. The yield on US Treasuries is higher than the yield on sovereign bonds from Germany, France, or Italy – plus the dollar is moving higher. The S&P 500 moved to its highest level since December 30, and above its 50 day moving average. Wall Street loves free money and they don’t particularly care where it comes from.

And then the big question is will ECB QE work? Probably not. The ECB and the Euro Union have been really bad at handling fiscal and monetary policy. What has evolved in the EU region is a crisis between divergent economies, between stronger and weaker member states, roughly divided between core and periphery, resulting in a two-tiered European Union composed of creditors and debtors. Weaker countries are now locked-in to a subjugated relationship with the core. The core continues to demand more austerity, even though it has been a horrible failure, and the periphery is finally realizing that the rent is just too damn high. The current manifestation of this inequity sees Germany keeping a tight rein on ECB policy by pressing Greek debt service beyond the limits of social tolerance.

In 2011, the ECB raised interest rates; compare that to the US Fed starting another round of QE. And then they waited, probably for far too long, to do anything at all. Euro monetary and fiscal policy has been out of step and off base; treating debt and the possibility of inflation as the overwhelming risks, and whistling past the graveyard of deflation and unrelenting weakness and lack of demand.

Today, Societe Generale issued a report saying that the QE plan would likely only add about 0.2% to 0.8% to inflation and overall GDP over the next 2 years; for Eurozone inflation to get anywhere close to a 2% target, the QE would need to be 2 or 3 times bigger. Of course, if the ECB tried to expand the bond buying program to €3 trillion, they would run out of sovereign bonds to buy. And that gets back to the whole problem of QE in the first place; it pumps a whole lot of money into the wrong places. Rather than investing in things like infrastructure or new technology, it pumps money into the financial market casinos.

Of course, most problems seem to be resolved in the richness of time. Deflation and inflation ebb and flow, and eventually the Eurozone will do the right thing, or at least something that resembles the right thing. Expect a lot of volatility before that time. For now the European Central Bank’s QE scheme might be the best hope to return growth to the Eurozone.

Let’s check today’s economic data. US house prices rose a seasonally adjusted 0.8% in November, according to the Federal Housing Finance Agency house price index. October’s gain was revised to 0.4% from 0.6%. Compared to November 2013, prices were up 5.3%, or 4.5% below the April 2007 peak.

The number of people who sought new unemployment benefits in mid-January fell by 10,000, but the level of applicants remained above 300,000 for the third straight week for the first time since July in what’s likely a reflection of post-holiday layoffs. Initial jobless claims declined to 307,000 in the week ended Jan. 10.

The World Bank has issued a forecast on commodity prices; they say all 9 commodity price indices will be down, across the board. We already know that oil prices are down about 55%. The steep decline in oil and related energy products is driving down the cost to extract other commodities. Also a drop in biofuel production is weighing on agriculture prices.

ConvergEx Group polled 306 investment professionals asking, among other things, what oil price would show that a global recession was inevitable; in other words, how low can we go without hurting the economy. The most common answer was $30 a barrel, from 26% of respondents, with $35 a barrel being the second most common answer (16% of respondents). About 68% of the respondents said oil hasn’t reached a bottom yet, and only 20% think it already has. About 66% said current prices are a positive to the US economy.

The US Energy Information Administration said crude inventories rose by 10.1 million barrels on the week ended Jan. 16. Moreover, at 388 million barrels, US crude oil inventories are at the highest level for this time of the year in at least the last 80 years. The oversupply in oil markets is expected to persist through at least the first half of the year, and there’s no indication OPEC or producers outside the cartel would move to cut down on output. Several energy companies have announced capital-budget cuts for this year and some have announced layoffs due to the lower prices, but not significant production cutbacks, at least not yet.

In other news, after almost eight months of constant fighting between Ukrainian troops and Russian-backed separatists, the Ukrainian military lost control of the Donetsk Airport.

Fighters loyal to a renegade general in Libya just seized a Central Bank facility in the coastal city of Benghazi that houses a reported $100 billion in cash and gold.

The president of Yemen quit today, under pressure from rebels holding him captive in his home, severely complicating American efforts to combat al-Qaida’s powerful local franchise and raising fears that the Arab world’s poorest country will fracture into mini-states.

Meanwhile, about 2,500 mainly rich people have gone to Davos Switzerland to attend the World Economic Forum. A bunch of not so rich journalists have followed them. Maybe you’ve seen the pictures and interviews on CNBC or some other network. The interviews take place on a patio with snowy hills in the background; everyone is bundled up in big jackets; it looks cold. For some reason they couldn’t find an indoor location with a picture window.

One of the attendees is Jeff Greene; he’s a billionaire money manager from Florida, and he said, “America’s lifestyle expectations are far too high and need to be adjusted so we have less things and a smaller, better existence. We need to reinvent our whole system of life. Our economy is in deep trouble. We need to be honest with ourselves. We’ve had a realistic level of job destruction, and those jobs aren’t coming back.”

Greene flew to Davos on a private jet with his wife and kids and 2 nannies.

Time for today’s edition of “Banks Behaving Badly”. US and state regulators ordered Wells Fargo and JPMorgan Chase to collectively pay $35 million to settle charges that they participated in an illegal marketing kickback scheme with a now-defunct title company. The CFPB said the former title company, Genuine Title, would give the banks’ loan officers cash, marketing materials and other consumer information in exchange for business referrals; essentially the bank loan officers were trying to make a quick buck rather than treating customers fairly.

The Barclays dark pool drama continues after NY AG Eric Schneiderman accused the British bank of defying subpoenas seeking the testimony of two executives. Previously, the AG accused the bank of false representation and favoring high frequency traders over other investors in its dark pool. Barclays says Schneiderman is overreaching, but it will “continue to seek to cooperate” with the lawsuit.