Financial Review

Decision Day

Sinclair Noe — July 26, 2017

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

DOW + 97 = 21,711
SPX + 0.7 = 2477
NAS + 10 = 6422
RUT – 8 = 1442
10 Y – .05 = 2.28%
OIL – .08 = 48.67
GOLD + 10.50 = 1261.10
BITCOIN + 0.70% = 2568.14 USD
ETHEREUM – 2.22% = 197.74

The major U.S. stock indexes set all-time highs again.

The Federal Reserve Federal Open Market Committee wrapped up its two-day meeting on monetary policy. They left interest rates unchanged and in a statement, said they would begin running off their $4.5 trillion balance sheet “relatively soon”.

The Fed’s language was not dovish, but perhaps a bit less hawkish. That pushed Treasuries higher. The Euro jumped to a 2-1/2 year high against the dollar. The next scheduled FOMC meeting is September 19-20, and there is a good chance the Fed will announce the onset of the balance-sheet reduction after the September meeting, effective on the first of October.

The Fed has raised interest rates 4 times since they began removing emergency policy in December 2015, and project another increase before the end of this year – most likely at the December meeting. As the Fed starts selling securities from their balance sheet, they will start small and gradually increase the sales, which should allow markets to adjust, at least in theory.

The FOMC said it’s “monitoring inflation developments closely.” There isn’t much inflation to monitor right now, the PCE gauge is running at about 1.4%, and seems to be stuck in a rut, despite the Fed’s targets. At this point in the economic cycle, with the unemployment rate at a 16-year low, you would expect to see wages increasing, which would push prices higher.

But prices aren’t going up, and that raises questions about the real strength of the labor market and the economy. Whatever it is, it is a symptom of an economy that just keeps slogging along but can’t really take off.

Get ready for “vote-a-rama”, where Senate GOP leaders will throw everything they have that resembles a health care bill at the wall to see what sticks. Today they voted on a straight repeal of Obamacare – that vote failed (which was expected), there will be a voting frenzy for senators on a series of amendments.

Next up, votes on various amendments to repeal bits and pieces of Obamacare, or what is known as a skinny repeal that would throw the issue to a Senate-House of Representatives negotiating committee. Republicans hope the they can find some amendments which pass and can then be cobbled into some sort of bill which repeals a portion of Obamacare, in some way, shape, or form.

This morning President Trump tweeted that he would ban transgendered people from serving in the military. Who knows whether Trump will follow up his tweets with an actual order. That would normally come from the Pentagon, which was reportedly surprised by the announcement. If there is an actual order, the matter will quickly move to the courts.

New single-family home sales increased in June as purchases in the West surged 12.5 percent to a near 10-year high, but downward revisions to the sales pace for the prior three months pointed to a housing market that is struggling to gain momentum. The Commerce Department said new home sales gained 0.8 percent to a seasonally adjusted annual rate of 610,000 units last month. The sales pace for March, April and May was revised lower. Sales rose 9.1 percent on a year-on-year basis.

Copper rose again, closing at the highest price in two years and bringing its year-to-date gain to 14 percent. While some of the rally has been fueled by the usual fundamentals –  a stronger Chinese economy and labor disputes at mines –  the latest lurch higher may be caused by momentum and a short squeeze. The way that prices have been gaping higher in a straight line up suggests that somebody had some painful options positions to cover.

Earnings reporting season continues to take center stage on Wall Street and most of the news is good. Consider though, that we’re comparing second quarter 2017 to second quarter 2016, when earnings were in a recession. Are corporate earnings genuinely wonderful? It may depend on your perspective.

For example, after-tax corporate profits have grown at an annualized pace of less than 1% over the last five years. You won’t find many five-year periods that have been as anemic as that. You might assert that the only thing of importance is earnings acceleration since the fourth quarter of 2016.

After the closing bell, Facebook reported better than expected profit and revenue. Instagram, the company’s photo-sharing app, helped second-quarter sales climb 45 percent to $9.3 billion. Net income rose to $3.9 billion, or $1.32 a share, from $2.3 billion, or 78 cents, a year earlier.

There are now 2.01 billion monthly active users, and two-thirds of the monthly users are on Facebook every day. Shares dipped roughly 4% in after-hours trading over apparent confusion related to the company’s recent switch to reporting GAAP numbers. But the confusion was soon sorted out and Facebook shares are up about 1%.

PayPal reported a better-than-expected quarterly profit. The company’s shares were up 2.4 percent in trading after the bell.

General Dynamics posted higher-than-expected quarterly profits driven by increased sales in the unit that makes tanks, but projected slightly lower aerospace sales. Its stock fell 4.4 percent

Boeing swung to a net profit of $1.76 billion, or $2.89 a share, from a loss of $234 million, or 37 cents a share, in the same period a year ago. Boeing raised its 2017 adjusted EPS outlook. The stock shot up more than 8%, its largest percentage gain since August 2009, to a record high of $230.43.

Coca-Cola earned $1.3 billion in the last quarter, slightly better than estimates. Revenue came in at $9.7 billion, beating estimates. Sales of sodas and non-soda drinks improved. Then they announced changes to Coke Zero, which will soon be Coke Zero Sugar, and that’s when I sort of stopped caring.

Shares of Buffalo Wild Wings fell nearly 10 percent in extended trading after the company reported sizable misses in its earnings and revenue.

Whole Foods Market reported third quarter earnings that beat estimates. Revenue was flat. The company said its same-store sales fell 1.9 percent in the quarter, not as bad as expected. Amazon reports earnings tomorrow.

Ford Motor reported higher-than-expected second-quarter profits, and in the next breath warned of a rougher ride for the rest of the year. Ford said full-year pre-tax profit, automotive operating margins and cash flow would be lower than 2016 results, sending the company’s shares down 2.1 percent. Ford reported second-quarter net income of $2.04 billion, or 51 cents per share, up from nearly $2 billion, or 49 cents per share, a year earlier.

Britain will ban the sale of new gas and diesel cars by 2040. The UK joins France, which recently announce it would go electric by 2040. The mayors of Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025. Electric cars currently account for less than 5 percent of new car registrations in Britain. The shift to electric will require a substantial build-out in charging stations, and for auto manufacturers – who have already started the move to electric.

In Europe, so called ‘green cars’ benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. Britain’s move will accelerate the decline of diesel and gas cars. Turning away from oil will add to discussions about whether the world is reaching peak oil demand and how additional electric power can be generated.

It also raises questions about leadership; right now, European auto manufacturers are leading both industry and government in the move to electric; Japanese car-makers are strong electric competitors, and the US is lagging. Also, the ability to generate electricity, especially distributed generation of clean energy will be a huge and growing area.

Soon, it will just be an economically easy move for consumers, as improved technology lowers costs. For example, a $1,000 car battery today is expected to cost just $73 within the next 12 years. Given the rate of improvement in battery and electric-vehicle technology over the last 10 years, by 2040 small-combustion engines in private cars could well have disappeared without any government intervention.

Financial Review

Too Hot

Sinclair Noe — June 20, 2017

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

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DOW – 61 = 21,467
SPX – 16 = 2437
NAS – 50 = 6188
RUT – 15 = 1402
10 Y – .04 = 2.15%
OIL – .97 = 43.23
GOLD – 1.00 = 1243.60
BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

Tomorrow is the first day of summer. And it is too hot.

The National Oceanic Atmospheric Administration reported Monday that the average global temperature in May 2017 was 1.49 degrees above the 20th-century May average of 58.6 degrees. This May was the third-hottest on record since the organization began collecting data in 1880.

Phoenix has hit 120 only three times in recorded history — the last time 22 years ago. The record high was 122 degrees on June 26, 1990. We hit reached 118 on Monday, which the National Weather Service says is rare. In fact, temperatures at that mark or higher have only been recorded 15 times since record-keeping started in 1896.

Dozens of flights at Arizona’s Phoenix Sky Harbor airport were delayed or canceled on Monday and Tuesday, and airlines are limiting the number of seats sold, to prevent the planes from exceeding maximum weight for safe takeoff in the hot conditions.

Most of the smaller, commuter planes have a maximum operating temperature of 118 degrees. Larger planes made by Boeing and Airbus have maximum operating temperatures of 126 and 127 degrees, respectively.

The real problem with flying in hot temperatures is like the problem faced in high altitudes: thin air. Hotter air is less dense, which means there is less air beneath the wings for lifting the aircraft and less air to flow through the jet engines. To compensate, airlines can keep the weight down, increase thrust, and make sure they takeoff on long runways.

Be careful out there. The main burn center in Phoenix has issued a warning to people to be careful around car interiors and pavement. PetSmart is offering free booties so your pets don’t burn their paws on concrete and pavement. Stay hydrated and pray your AC doesn’t croak.

Oil prices hit a 7-month low. OPEC and non-OPEC producers have agreed to cut production by 1.8 million barrels per day and it appears they are complying with the deal to cut global output, but still prices are down as other countries – not part of the agreement – are pumping more. Both Libya and Nigeria have increased output. And US shale drillers that are staging the longest drilling ramp-up on record.

Meanwhile traders are hoarding an increasing amount of oil in tankers. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open, meaning production is poised to surge further when they turn the spigots on. Hedge fund managers have become very bearish about the outlook for oil prices as production from countries outside OPEC grows and threatens to undermine the effectiveness of OPEC’s output controls.

Shares of oil companies were among the worst performers. The Energy Select Sector SPDR ETF XLE, -1.28%, posting its worst one-day drop since March. West Texas Intermediate crude, the U.S. benchmark closed at $43.23 today, that’s down from a high of $54.45 on Feb. 23, or a 20% decline, which is the common definition of a bear market.

In a speech in Amsterdam to a conference co-sponsored by the central banks of Sweden and the Netherlands, Boston Fed President Eric Rosengren said lower rates may be a more permanent feature on the economic landscape because they reflect broad population trends.

Separately, Chicago Fed President Charles Evans said late Monday the central bank could be done raising rates this year. He reiterated those comments this morning on CNBC and with The Wall Street Journal. He said he supports the current policy of “very gradual” interest-rate hikes and a slow reduction of the balance sheet.  Evans said it was important that financial markets realize that inflation can exceed the Fed’s 2% target from time-to-time.

Earlier on Monday, New York Fed President William Dudley struck a hawkish tone, arguing against slowing the pace of interest-rate increases.

Federal Reserve Vice Chairman Stanley Fischer said that he was worried memories might be fading about the pivotal role housing played in the financial crisis. Fischer said, “House prices are now high and rising in several countries, perhaps because of extended period of low interest rates.”

Fischer noted that U.S. government’s role in housing is increasing with Fannie Mae, Freddie Mac and the Federal Housing Administration “now the dominant providers of mortgage financing.” The Fed’s #2 said “there is more to be done” to strengthen the resilience of the housing finance systems. Just taking the possibility of severe stress seriously would help, he said. And government support for housing should always be made explicit.

The U.S. current-account deficit, a measure of the nation’s debt to other countries, rose 2.5% to $116.8 billion in the first quarter. The increase in the current-account deficit in the fourth quarter was tied to a higher trade deficit in goods such as foreign autos or cellphones and a smaller surplus in primary income — returns on American-owned assets held abroad.

The fourth-quarter gap in the current account was raised to $114 billion. The current-account deficit was 2.5% of GDP in the first quarter, up slightly from 2.4% at the end of 2016. The gap is well below a peak of 6.3% in 2005.

Ford Motor will move some production of its Focus small car to China and import the vehicles to the United States. Ford painted the production shift from Mexico to China, slated in mid-2019, as a purely financial move that will save the company $500 million in reduced tooling costs.

The decision also signals a shift in strategy at Ford, which is responding to dwindling U.S. consumer demand for small cars in favor of more expensive and more profitable trucks and SUVs. Ford said it would invest $900 million at the Kentucky truck plant to build the redesigned Navigator and Ford Expedition. It has contingency plans to build more of the big SUVs at an Ohio plant if demand grows.

The current Focus will be phased out of production in Wayne, Michigan in mid-2018, according to Hinrichs. The Wayne plant will begin building a new Ranger midsize truck in late 2018 and a Bronco midsize SUV in 2020.

MSCI said it plans to add mainland Chinese shares to its benchmark emerging markets index. MSCI will add 222 China A Large Cap stocks on a gradual basis beginning next year. The addition of the mainland Chinese shares could be a big boost to the world’s second-largest stock market, which has until now drawn limited foreign investor interest because of high volatility, frequent trading halts and limited foreign investor access to the Shanghai and Shenzhen stock markets.

The iShares MSCI Emerging Markets ETF (EEM) rose 0.15 percent in after-hours trade. The MSCI Emerging Markets Index is tracked by an estimated $1.6 trillion in assets, as of the end of June last year.

A man killed in a crash last year while using the semi-autonomous driving system on his Tesla Model S sedan kept his hands off the wheel for extended periods of time despite repeated automated warnings not to do so.

The National Transportation Safety Board (NTSB) released 500 pages of findings into the May 2016 fatal crash. The incident raised questions about the safety of systems that can perform driving tasks for long stretches with little or no human intervention, but which cannot completely replace human drivers.

Legislation to impose new sanctions on Russia and Iran that passed the U.S. Senate nearly unanimously last week has run into a procedural problem that could prevent a quick vote in the House of Representatives. The Countering Iran’s Destabilizing Activities Act, which also includes new sanctions against Russia, passed the Senate 98-2 last week.

But the measure must still pass the House before it can be sent to Trump to sign into law, or veto, and the House parliamentarian found that the legislation violated a constitutional requirement that any bill that raises revenue for the government must originate in the House, something known as a “blue slip” violation.

The Russian ruble just had its worst back-to-back days since February 2016, falling 5.68 percent, as the drop in oil and broadened US sanctions took a toll. Russian stocks entered a bear market last week after the U.S. Senate voted overwhelmingly to expand penalties against Russia.

Barclays and four former executives were charged with conspiracy to commit fraud during the bank’s 2008 capital raising from Qatar as it sought to avoid a bailout. The four men are the most senior British banking executives charged since the financial crisis and include former Chief Executive Officer John Varley, former chairman of investment banking for the Middle East Roger Jenkins, ex-wealth chief Thomas Kalaris, and Richard Boath, the former European head of the bank’s financial institutions group.

The details are still a bit sketchy but it looks like Barclays gave Qatar a loan and then Qatar made what was presented as an equity investment to regulators. Qatar got a fee for going along with the ruse and Barclays avoided a bailout.

After the closing bell, FedEx reported a higher-than-expected quarterly profit, as the package delivery company benefited from its TNT Express acquisition and higher sales across its express, ground and freight business units. FedEx said profit will climb as much as 14 percent in the current fiscal year as the courier benefits from a recent jump in prices and package deliveries.

The outlook underscored the potential payoff from FedEx’s heavy investments in fiscal 2017 to handle more of the surge in e-commerce deliveries. The air-freight pioneer, an economic bellwether because of the variety of shipments it carries, is also poised to gain from a stronger worldwide economy.

Stocks Looking to Extend Winning Streak

Charles Schwab: On the Market

Posted: 5/22/2017 9:00 AM ET

Stocks Looking to Extend Winning Streak

U.S. stocks are higher in early action for a third-session, continuing to rebound from last Wednesday's selloff that came amid a spike in volatility as domestic political uncertainty flared up. Treasury yields are ticking higher and the U.S. dollar remains under pressure, while gold is gaining ground. Crude oil prices are adding to a recent run on optimism of extended production cuts. Ford announced that it replaced its CEO, while Huntsman and Clariant agreed to merge. Asia finished mostly higher, though Europe is mixed.

As of 8:49 a.m. ET, the June S&P 500 Index future is 4 points above fair value, the DJIA future is 37 points above fair value, and the Nasdaq 100 Index future is 6 points north of fair value. WTI crude oil is increasing $0.59 to $51.26 per barrel and Brent crude oil is gaining $0.53 to $54.14 per barrel. The Bloomberg gold spot price is trading $2.49 higher at $1,258.41 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is down 0.2% at 96.90.

Ford Motor Co. (F $11) announced that President and Chief Executive Officer (CEO) Mark Fields will retire and be replaced by Jim Hackett, who has led Ford Smart Mobility LLC since March 2016. The company is set to hold a press conference after the opening bell.

Huntsman Corp. (HUN $27) and Clariant AG (CLZNY $21) announced an agreement to combine in a merger of equals through an all-stock transaction, creating a global specialty chemical company with approximate annual sales of $13.2 billion. The merged company will be named HuntsmanClariant. Under the terms of the deal, Huntsman shareholders will receive 1.2196 shares of the new company for each share owned and each share of Clariant will remain outstanding as a share of the new company. Clariant shareholders will own about 52% of the company and Huntsman shareholders will own approximately 48%.

Fed, housing and business activity reports set to join political focus this week

Treasuries are dipping as the U.S. economic calendar is void of any major releases today. The yields on the 2-year and 10-year notes, along with the 30-year bond, are ticking 1 basis point higher to 1.28%, 2.25% and 2.90%, respectively. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Along with likely continued focus on the political front, this week's economic docket will bring looks at the housing sector with the releases of new and existing home sales. Moreover, manufacturing and business activity will likely be scrutinized, with Markit's preliminary Manufacturing and Services PMIs, along with the second read on Q1 GDP and preliminary durable goods orders. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her article, ½ Full: Seeing Through a Weak Q1 leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Finally, the release of the Fed's May meeting minutes could command attention as the markets grapple with the path of future rate hikes and the expected beginning of the paring of the Central Bank's bloated balance sheet. For analysis, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com, where Randy and Liz Ann Sonders also offer the video, June Rate-Hike Highly Likely? Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Finally, following last week's brief spike in volatility, see the latest articles, Is The Stock Market Just Quiet Or Is It Too Quiet? from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Liz Ann Sonders', Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Europe mixed on M&A, politics and euro strength

European equities are mixed in afternoon action, with the markets continuing the grapple with political uncertainty on both sides of the pond, while shares Switzerland's chemical company Clariant is rallying on today's announced merger agreement with the U.S.-based Huntsman. The euro is extending a recent rally versus the U.S. dollar, which has been pressured by ramped-up U.S. political uneasiness. The euro is getting a further boost from comments from German Chancellor Angela Merkel regarding the currency being "too weak," leading to Germany's trade surplus, per Bloomberg. However, the British pound is dipping versus the greenback, as ongoing U.K. Brexit negotiations are fostering uncertainty. Adding to the political risk, Germany, Italy and the U.K. face elections later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Bond yields in the region are mixed. Oil & gas issues are moving to the upside as crude oil prices are extending a recent rally on optimism the extension of production cuts will be announced.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index are up 0.5%, Germany's DAX Index and Spain's IBEX 35 Index are declining 0.3%, France's CAC-40 Index is ticking 0.1% higher, and Italy's FTSE MIB Index is falling 1.2%.

Asia mostly higher to begin the week

Stocks in Asia finished mostly to the upside as the U.S. markets continued to recover on Friday from a midweek selloff that came as volatility spiked amid flared-up U.S. political uncertainty, which appeared to call President Trump's ability to pass pro-growth policies into question. The global markets are shrugging off lingering geopolitical uncertainty as North Korea conducted another missile test over the weekend, while paying attention to U.S. President Trump's first foreign trip. Japan's Nikkei 225 Index gained 0.5%, with the yen stabilizing after last week's rally, while the nation's trade report showed exports grew at a smaller pace than expected and imports topped forecasts. Australia's S&P/ASX 200 Index rose 0.8%, with basic materials recovering and oil & gas issues gaining ground as crude oil prices extend a recent run on optimism of extended production cuts. South Korea's Kospi Index showed some resiliency in the face of the North Korean missile tests and a deceleration in that nation's export growth, advancing 0.7%. India's S&P BSE Sensex 30 Index moved 0.4% higher, back to near record territory as the markets cheered the finalization of rates for the national sales tax, per Bloomberg.

Chinese stocks finished mixed, with the Shanghai Composite Index declining 0.5%, amid festering regulatory crackdown concerns and economic uncertainty in the wake of recent soft data. However, the Hong Kong Hang Seng Index increased 0.9%, with insurers getting a boost from some analyst optimism toward the group. For analysis of the global front amid the backdrop of trade and geopolitical uncertainty, see Schwab's Jeffrey Kleintop's, CFA, articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Financial Review

Send in the Clowns

Sinclair Noe — May 22, 2017

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

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DOW + 89 = 20,894
SPX + 12 = 2394
NAS + 49 = 6133
RUT + 9 = 1377
10 Y + .01 = 2.25%
OIL + .48 = 50.81
GOLD + 4.80 = 1261.40

First quarter earnings season is wrapping up, and the big-name reports are getting scarce, with this week’s heavy hitters including Best Buy, Dollar Tree, and Costco. Both the S&P 500 and tech-heavy Nasdaq composite set records early last week before worries about growing political uncertainty in Washington, which could hamper President Trump’s agenda of tax cuts and deregulation, knocked those indexes back from their highs.

On Wednesday, the Congressional Budget Office will release its analysis of the health-care bill that passed the House of Representatives earlier this month. Official Washington will comb through the score, with partisans on each side hoping it suits their talking points. The first CBO score estimated that 24 million more people would be uninsured in 2026, and that number is not expected to change substantially.

Another number could unravel the whole deal.  If the bill isn’t found to save at least $2 billion over 10 years, Republicans won’t be able to use the so-called budget reconciliation process to pass it. Under that process, 51 votes are required to pass legislation in the Senate, versus 60.

Not saving at least $2 billion would mean Republicans would have to start all over again by passing a new budget resolution.

The Trump administration today asked that a major federal court case weighing the fate of the Obamacare cost-sharing subsidies be put on hold again, leaving billions of dollars in payments to insurers up in the air for 2017 and 2018. The subsidies are available to low-income Americans who buy individual health insurance on the ACA exchanges.

In the meanwhile, insurers that are trying to set premium rates for insurance plans to be sold in 2018 are running up against deadlines and have repeatedly asked Congress to fund the subsidies during the transition.

Tomorrow, the White House is scheduled to release Trump’s first full budget. A president’s budget is a wish list, and many of the proposals in it may not become law.

Also Wednesday, the Fed will release the minutes of its May 2-3 meeting. Over the last few week, labor market and inflation data have sent contradicting signals. The labor market supports the hawkish Fed stance. Employment rose 211,000 in April from a wobbly showing in early spring and the unemployment rate dipped to 4.4%, matching the lowest level since May 2007.

On the other hand, core inflation data was soft in both March and April. Today, Dallas Fed President Rob Kaplan said he still expected two rate hikes this year. Perhaps more important than the timing of the next rate hike is what the Fed plans to do about its balance sheet. Chair Janet Yellen and other top officials have claimed for some time that they are eager to begin reducing their nearly $4 trillion in US government and mortgage debt.

And while this may be true at the margin, the truth is that though many of them may make noises about reducing the size of the balance sheet, a sizable and probably most of the Fed officials believe the massive balance sheet is here to stay — indeed, most of them schooled in the modern central banking theories believe a rather large balance sheet is now an essential part of monetary policy.

More than one Fed official has indicated that even a “normal” balance sheet as they currently envision it could total about $2 trillion worth of government and/or housing debt.

President Trump visited Saudi Arabia over the weekend and sealed $110 billion in arms deals with the Saudis, with options running as high as $350 billion over 10 years. Shares of defense firms General Dynamics, Raytheon, and Lockheed Martin all hit record highs before easing to trade up between 0.6 percent and 1.6 percent. Boeing was up 1.5 percent and the biggest boost on the Dow.

Blackstone and Saudi Arabia’s main sovereign wealth fund, the Public Investment Fund, signed a non-binding memorandum of understanding to create a $40 billion vehicle to invest in infrastructure projects, mainly in the United States. Blackstone said it expected the vehicle to have $40 billion of equity commitments, with a $20 billion anchor investment from the PIF and the rest of the money obtained from other investors.

Through this equity and debt financing, Blackstone expects to invest in over $100 billion of infrastructure projects. Today, Trump visited Israel. Next up, the Pope.

Oil prices moved higher on rising confidence that top exporters will this week agree to extend supply curbs, or even deeper cuts. However, energy companies lagged. Iraq announced this afternoon, that it will back a proposal from Saudi Arabia and Russia to extend output cuts for nine months, removing one of the last remaining obstacles to an agreement at the OPEC meeting in Vienna this week.

Iraq, the second largest producer in OPEC, has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter.

The Supreme Court delivered a unanimous decision on where patent lawsuits may be filed, a setback to patent trolls, or companies that buy patents not to use them but to demand royalties and sue for damages. Such companies have often sued in remote federal courts that have a reputation for friendliness to plaintiffs.

More than 40 percent of patent lawsuits, for instance, are filed in a federal court in East Texas. In recent years, a single judge based in Marshall, Texas, oversaw about a quarter of all patent cases nationwide, more than the number handled by all federal judges in California, Florida and New York combined. The decision was a victory for big technology companies and other patent holders, which have complained about what they called forum shopping in patent cases.

The case, TC Heartland v. Kraft Foods raised the question of whether companies could sue essentially anywhere their products are sold, or in the jurisdiction where it resides.  Today’s Supreme Court decision won’t eliminate patent trolling but it will probably limit the practice.

A divided U.S. Supreme Court rejected two North Carolina congressional districts, saying Republican lawmakers relied too heavily on race when drawing them. The gerrymandered voting districts were used until the 2014 election. The case produced an unusual split: Justice Clarence Thomas, perhaps the most conservative justice, joined the court’s four liberals in the majority.

Ford Motor replaced its chief executive, Mark Fields, and vowed to catch up in the race to build self-driving cars and define a new era in personal mobility.  Jim Hackett, who had overseen the Ford subsidiary that works on autonomous vehicles, immediately takes over as the new CEO.

Fields came under fire from investors and the company’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future. But for a Ford CEO, stock price is Job One; Fields’ biggest transgression during his 3-year tenure as Ford CEO was a 40% drop in Ford’s share price.

Hackett said the board had given him a free hand to transform the nation’s No. 2 automaker, including seeking alliances with Silicon Valley firms, changing its product lineup, and divesting itself of unprofitable global operations.

US-based Huntsman Corp. and Switzerland’s Clariant are combining to create a chemical manufacturer with a market value of more than $14 billion. The deal creates a global specialty chemicals company that is 52% owned by Clariant shareholders and valued at about $20 billion when including debt. Clariant makes aircraft de-icing fluids, pesticide ingredients, and plastic coloring. Huntsman makes chemicals used in paint, clothing, and construction.

In the past 30 days, about 40 percent of the Midwest got twice the amount of normal rainfall, with soils saturated from Arkansas to Ohio. While spring showers usually benefit crops, the precipitation has come fast enough to flood some corn and rice fields and trigger quality concerns about maturing wheat. Bad conditions got worse with rain on Friday. There are lakes in some fields.

Planting was off to a fast start in the second half of April, before 10 inches of May rainfall and lower temperatures erased early optimism. Corn and wheat are headed for monthly gains on the Chicago Board of Trade while rough-rice futures are headed for the biggest such advance in six years. Even with the challenges, farmers have made speedy work of planting.

U.S. sowing of corn, soybeans and spring wheat was ahead or even with the five-year average as of May 14, while corn emergence was behind schedule.

For years, Citigroup employees suspected that millions of dollars that the bank was moving to Mexico might be suspicious. Yet the bank failed to sufficiently alert regulators or step up its monitoring for money laundering. From 2007 to 2012, the banking unit generated about 18,000 alerts of suspicious transactions among the 30 million Mexico remittances it processed, yet the bank conducted fewer than 10 investigations.

Today, Citigroup agreed to pay $97 million to settle an investigation into Banamex USA. In exchange, the Justice Department will not charge the bank criminally for the misdeeds of Banamex USA, based in California.

After 146 years, the Greatest Show on Earth, Ringling Bros. and Barnum & Bailey Circus took its final bow. An army of circus performers and technicians end a tradition that first had its roots in 1871 under showman P. T. Barnum. The circus animals, lions, tigers, and bears will be sent to sanctuaries or to work in European circuses.

And if you’re looking for the clowns, well you can find a reasonable facsimile in Washington DC.

Market Rebound Continues

Charles Schwab: On the Market

Posted: 5/22/2017 4:15 PM ET

Market Rebound Continues

U.S. equities continued their rebound from last week's malaise that came amid a flare-up in domestic political uncertainty and volatility. Defense stocks got a boost from President Trump's deals with Saudi Arabia on his first overseas trip, and Ford announced a new CEO. Treasury yields and gold are moved higher, and the U.S. dollar was little changed, with the economic calendar empty today. Meanwhile, crude oil prices extended a run as of late amid continued production cut optimism.

The Dow Jones Industrial Average (DJIA) increased 90 points (0.4%) to 20,895, the S&P 500 Index added 12 points (0.5%) to 2,394, and the Nasdaq Composite gained 49 points (0.8%) to 6,134. In moderate volume, 792 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.46 to $51.13 per barrel and wholesale gasoline was $0.01 higher at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.06 to $1,260.99 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.98.

Ford Motor Co. (F $11) announced that President and Chief Executive Officer (CEO) Mark Fields will retire and be replaced by Jim Hackett, who has led Ford Smart Mobility LLC since March 2016. Executive Chairman Bill Ford said Jim Hackett is the right CEO to lead Ford during a transformation period for the auto industry and the broader mobility space. Shares gained ground.

Huntsman Corp. (HUN $26) and Clariant AG (CLZNY $22) announced an agreement to combine in a merger of equals through an all-stock transaction, creating a global specialty chemical company with approximate annual sales of $13.2 billion. The merged company will be named HuntsmanClariant. Under the terms of the deal, Huntsman shareholders will receive 1.2196 shares of the new company for each share owned and each share of Clariant will remain outstanding as a share of the new company. Clariant shareholders will own about 52% of the company and Huntsman shareholders will own approximately 48%. HUN lost modest ground, while CLZNY moved nicely higher.

Amgen Inc. (AMGN $153) saw some pressure after a study of its osteoporosis treatment showed a newly observed cardiovascular safety signal that will have to be assessed, likely delaying approval in the U.S. Shares of AMGN's Belgian partner for the treatment, UCB SA (UCBJY $35), fell sharply.

Dow member Boeing Co. (BA $184) and Lockheed Martin Corp. (LMT $277), along with other aerospace and defense companies, moved higher after several defense and commercial agreements were announced yesterday amid President Donald Trump's visit to Saudi Arabia as part of his first trip overseas.

Fed, housing and business activity reports set to join political focus this week

Treasuries dipped as the U.S. economic docket was void of any major releases today. The yields on the 2-year and 10-year notes, along with the 30-year bond, all ticked 1 basis point (bp) higher to 1.28%, 2.25% and 2.91%, respectively. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Along with continued focus on the political front, this week's economic calendar will bring looks at the housing sector, beginning with tomorrow's new home sales report, with economists expecting a 1.8% month-over-month (m/m) decline during April to a rate of 610,000 units, as well as Markit's preliminary Manufacturing and Services PMIs for May with both indexes forecasted to inch higher to 53.0 and 53.3, respectively, while the Richmond Fed Manufacturing Index will round out the day, forecasted to move lower to a level of 15 for May. More housing data, manufacturing and business activity reports will come later in the in the form of existing home sales, the second read on Q1 GDP and preliminary durable goods orders. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her article, ½ Full: Seeing Through a Weak Q1 leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Moreover, the release of the Fed's May meeting minutes could command attention as the markets grapple with the path of future rate hikes and the expected beginning of the paring of the Central Bank's bloated balance sheet. For analysis, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com, where Randy and Liz Ann Sonders also offer the video, June Rate-Hike Highly Likely? Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Finally, following last week's brief spike in volatility, see the latest articles, Is The Stock Market Just Quiet Or Is It Too Quiet? from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Liz Ann Sonders', Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Europe mixed on M&A, politics and euro strength, Asia mostly higher

European equities finished mixed, with the markets continuing the grapple with political uncertainty on both sides of the pond. The euro continued to climb versus the U.S. dollar, which has been pressured by ramped-up U.S. political uneasiness. The euro got a further boost from comments from German Chancellor Angela Merkel regarding the currency being "too weak," leading to Germany's trade surplus, per Bloomberg. However, the British pound dipped versus the greenback, as ongoing U.K. Brexit negotiations fostered uncertainty. Adding to the political risk, Germany, Italy and the U.K. face elections later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Bond yields in the region were mixed. Telecommunications issues led to the upside to extend a recent rally, while oil & gas issues moved modestly to the upside as crude oil prices extended a run as of late on optimism the extension of production cuts will be announced.

Stocks in Asia finished mostly to the upside as the U.S. markets continued to recover on Friday from a midweek selloff that came as volatility spiked amid flared-up U.S. political uncertainty, which appeared to call President Trump's ability to pass pro-growth policies into question. The global markets are shrugging off lingering geopolitical uncertainty as North Korea conducted another missile test over the weekend, while paying attention to U.S. President Trump's first foreign trip. Japanese equities gained ground, with the yen stabilizing after last week's rally, while the nation's trade report showed exports grew at a smaller pace than expected and imports topped forecasts. Australian securities rose, with basic materials recovering and oil & gas issues gaining ground as crude oil prices extend a recent run on optimism of extended production cuts. South Korean listings showed some resiliency in the face of the North Korean missile tests and a deceleration in that nation's export growth, advancing 0.7%, and markets in India moved higher, back to near record territory as the markets cheered the finalization of rates for the national sales tax, per Bloomberg.

Chinese stocks finished mixed, with mainland stocks declining, amid festering regulatory crackdown concerns and economic uncertainty in the wake of recent soft data, but those traded in Hong Kong increased, with insurers getting a boost from some analyst optimism toward the group. For analysis of the global front amid the backdrop of trade and geopolitical uncertainty, see Schwab's Jeffrey Kleintop's, CFA, articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

The Markit Manufacturing and Services PMIs from around the globe will dominate tomorrow's international economic calendar, while other reports will include the All-Industry Index from Japan, the Ifo Business Climate survey, GDP and trade data from Germany, as well as Spain's trade balance.

Financial Review

A Tale of Two Markets

Sinclair Noe — May 16, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW – 2 = 20,979
SPX – 1 = 2400
NAS + 20 = 6169 (record)
RUT + 0.76 = 1394
10 Y – .01 = 2.33%
OIL – .35 = 48.31
GOLD + 6.30 = 1237.70

Another record high close for the Nasdaq Composite, with minor losses for the other major indices. The safe play appears to be mega-cap tech plays.

A rally in the euro was reinforced by dollar losses, prompted by allegations that President Trump disclosed highly sensitive intelligence information to senior Russian officials. Late yesterday, White House National Security Adviser H.R. McMaster rejected the conclusions of a Washington Post article which claimed the president had revealed sensitive classified information to Russia’s top diplomat during an Oval Office meeting last week.

McMasters said the story “as reported is false”. Then this morning, Trump took to Twitter and confirmed reports by the Washington Post and other media outlets that he gave sensitive information to Russian officials, tweeting he had the “absolute right” to do so. Questioned about the report in the early afternoon, Trump simply said he had a “great meeting” with the Russians.

The disclosures add to concern over the administration’s chances of passing legislation, including tax reform, that has partly been priced in by financial markets. Sen. Majority Leader Mitch McConnell said, “I think we could do with a little less drama from the White House on a lot of things so that we can focus on our agenda,” “I think we could do with a little less drama from the White House on a lot of things so that we can focus on our agenda.”

Well.., not today – NBC News has just reported that Trump allegedly asked ousted FBI Director James Comey to “let go” of the investigation into former national security advisor Michael Flynn. According to Comey’s account of events, the conversation happened the day after Flynn resigned.  Stock markets continue to hit new highs, even as new headlines out of Washington reflect what appears to be a profoundly dysfunctional White House.

Stocks remain supported by the strongest earnings season for S&P 500 components since 2011. There are mostly two markets, tech and everything else. S&P 500 tech valuations, as measured by price/cash flow, have struggled to break above the 15x threshold that served as valuation floor during the 2002-07 bull market.

The 60%-plus gain in the S&P 500 Technology Index since the end of 2013 has occurred with that price/cash flow ratio hovering at a 15 multiple. The tech trade may be crowded but it still doesn’t look like a bubble at these valuations. The mega-cap tech trade is a different beast. Amazon.com trades at 144x 2017 EPS consensus, 85x 2018 EPS consensus. Netflix trades at 155x 2017 EPS consensus, 84x 2018 EPS consensus. Tesla doesn’t have positive expected EPS for 2017 or 2018.

China‘s latest efforts to curb risky debt levels are not only shocking local markets but raising worries globally about another market shock. As a result, China has replaced Europe as the top worry for global money managers, according to the latest Bank of America Merrill Lynch survey published today. Thirty-one percent of the 184 respondents consider Chinese credit tightening the biggest “tail risk” for markets.

The second worry is a crash in the global bond market, at 19 percent, followed by trade war, at 16 percent. The China worries also feed into existing worries about expensive stocks. The BofAML survey found that 37 percent of respondents think global equity markets are overvalued. That’s the most since January 2000, just before the burst of the tech bubble.

 The Commerce Department said  housing starts ticked down 2.6% to a 1.17 million annual pace, and stood just 0.7% higher than in the same month last year. Permits fell 2.5% to a 1.23 million pace in April. That was 5.7% higher than a year ago. Starts have been 6% higher in the first four months of this year than in the same period last year, and the pace of permit authorizations is over 10% higher, pointing to stronger growth in the future.

Housing starts remained strong but the more volatile multi-family sector dropped. This should be expected. Apartment construction bounced backed more quickly after the recession and may have peaked. More of the action should now be in the single-family component, which continues to gain traction. Given under-building in many markets, there seems to be plenty of room for continued growth in that sector.

The Federal Reserve said that industrial production grew 1% in April. This is the fastest pace of growth since February 2014. Compared with a year ago, production was up 2.2%. Manufacturing was hurt by the strong dollar in 2015 and 2016 but business investment has picked up this year.

In April, manufacturing output grew 1% after a 0.4% increase in the prior month. This is also the fastest rate since February 2014. One point to watch is the improvement in automobile assemblies. Given tepid auto sales, this may add to inventories and ultimately place downward pressure on car prices.

The US economy is forecast to expand at a 4.1 percent annualized pace in the second quarter, according to the Atlanta Federal Reserve’s GDP Now forecast model.

Investors shrugged off reports Ford plans to cut about 10 percent of its salaried workforce in North America and Asia. Ford does not plan any cuts to its hourly workforce or production capacity. Ford plans to offer financial incentives to convince salaried employees to depart voluntarily, including generous early retirement offers.

In 2016, Ford cut hundreds of white-collar jobs in Europe to cut costs by $200 million annually. The focus of the new cost-cutting effort is on North America and Asia. Ford has about 30,000 salaried U.S. employees.

It seems like the U.S. automakers are in an odd spot. A secular shift toward electric, driverless, or some other automotive technology paradigm seems possible. We also can’t rule out a cyclical downturn, considering a recent flattening in auto sales. Meanwhile, shareholders are clamoring for cost reductions, making it hard to double down on growth projects.

Home Depot’s first-quarter profit and same-store sales topped estimates as customers spent more on expensive items such as appliances and flooring and roofing materials. The company’s shares rose about 2 percent to hit a record high. Sales at stores open for more than a year rose 5.5 percent, topping estimates.

The company also raised its earnings forecast for the year ending January 2018. Home Depot’s results contrast with falling sales at department stores such as Macy’s and JC Penney, which are struggling with lower customer spending on apparel and growing competition from online and off-price retailers.

Shares of Staples jumped 3.5% in premarket trade but then lost 3.5% in regular trade as the retail sector struggled. The office supply retailer beat same-store sales expectations, while matching on profit and coming up short on revenue. The net loss for the quarter to April 29 was $815 million, or $1.24 a share, after a profit of $41 million, or 6 cents a share, in the same period a year ago.

TJX, the owner of T.J. Maxx and Marshalls stores, posted its slowest comparable-store sales growth in more than 10 quarters and forecast a disappointing current-quarter profit. Shares dropped about 5%.

Urban Outfitters became the latest major retailer to report dismal first-quarter results, with key metrics missing on all fronts. Same store sales fell 3.1%. Revenue decline 0.2%. Gross profit margins fell.

Another one bites the dust… retailer Rue21, owned by Apax Partners, has filed for Chapter 11, as shoppers shift their spending online and away from teen fashion trends. Rue21 entered into a Restructuring Support Agreement with certain stakeholders and expects to continue normal operations throughout the Chapter 11 process.

There’s a blame game brewing over the massive cyberattack that infected hundreds of thousands of computers. Microsoft is pointing a finger at the US government, while some experts say the software giant is accountable, too. The hack used a technique purportedly stolen from the US National Security Agency to target Microsoft’s market-leading Windows operating system.

The attack started Friday and has affected computers in more than 150 countries, including severe disruptions at Britain’s National Health Service. The hack effectively takes the computer hostage and demands a $300 ransom, to be paid in 72 hours with bitcoin. Microsoft blamed the NSA’s practice of developing hacking methods to use against the U.S. government’s own enemies.

The problem is that once those vulnerabilities become public, they can be used by others. In 2014, Microsoft ended support for the highly popular Windows XP, released in 2001 and engineered beginning in the late 1990s, arguing that the software was out of date and wasn’t built with modern security safeguards.  The company had already been supporting it longer than it normally would have because so many customers still used it and the effort was proving costly.

Microsoft released a patch for the flaw in March after hackers stole the exploit from the NSA, but some organizations didn’t apply the updates. Businesses that failed to update Windows-based computer systems that were hit by the WannaCry ransomware attack could be sued over their lax cyber security, but Microsoft likely enjoys protection from such lawsuits.

Hackers claim to have stolen an upcoming Disney movie for a ransom, and will release the film if the company doesn’t transfer the fee via bitcoin. It is believed that the movie is the latest installment in the Pirates of the Caribbean series.  CEO Bob Iger said he’s not paying, but is working with the FBI on the matter.

The issue is reminiscent of Netflix’s recent troubles with Orange is the New Black, which had most of its new season released online by hackers.

Financial Review

A Deluge and an Eclipse

Sinclair Noe — April 27, 2017

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

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DOW + 6 = 20,981
SPX + 1 = 2388
NAS + 23 = 6048 (record high close)
RUT – 2 = 1417
10 Y – .02 = 2.29%
OIL – 1.01 = 48.61
GOLD – 5.50 = 1264.50

Today brought a deluge of earnings.

Google parent Alphabet posted a 29 percent rise in quarterly profit, driven by a surge in advertising on mobiles and its popular YouTube video service. Alphabet’s net income rose to $5.43 billion. The company’s consolidated revenue rose 22 percent to $24.75 billion.

Google’s ad revenue, which accounts for a lion’s share of its business, rose 18 percent to $21.4 billion in the first quarter. Revenue from its Google Other unit, which includes Pixel smartphone, Play Store and cloud business, rose 49 percent to $3.10 billion.

Alphabet sales from its moonshots projects like Fiber and Nest also grew to $244 million in the quarter, up from $165 million a year earlier. However, Google’s loss for these ambitious projects ticked up slightly to $855 million. Up 5% in after-hours trade.

Also, after the closing bell, Amazon reported revenue of $35.7 billion, versus Wall Street estimates of $35.3 billion. A nice beat. This compares to $29.1 billion a year ago. EPS of $1.48, versus estimates of $1.13 per share. A big beat.

Analysts were also closely watching the performance of Amazon’s cloud computing unit, Amazon Web Services. AWS reported $3.66 billion in sales, and 43% percent growth, which is not quite as strong as the growth seen in the past 3 quarters but it is still a big beat. Amazon up almost 5% in after-hours trade.

Microsoft net income rose to $4.8 billion, or 61 cents per share, from $3.7 billion, or 47 cents per share, a year earlier. That was an earnings miss. Revenue climbed 6 percent to $23.5 billion, missing estimates.

Microsoft said LinkedIn, which it bought for about $26 billion, contributed $975 million in revenue in the quarter. Revenue from Microsoft’s personal computing unit, its largest by revenue, fell 7.4 percent. Demand for its cloud computing services failed to offset weak growth in its personal computing division. Microsoft down about 2% in after-hours.

Intel reported lower-than-expected revenue for the first quarter. Intel still gets most of its revenue from selling PC chips, a business that returned to growth in 2016 due to stabilizing demand in the second half of the year.

Revenue from Intel’s higher-margin data center business rose 6 percent to $4.2 billion in the quarter, missing analysts’ expectations. Revenue from client computing rose 6 percent to $8 billion. Intel’s net income rose to $2.96 billion, or 61 cents per share, from $2.05 billion, or 42 cents per share, a year earlier. That was a miss of 4 cents per share. Intel dropped about 3.5% after-hours.

Starbucks reported fiscal second-quarter profit of $652 million, or 45 cents per share – in line with estimates. Revenue of $5.29 billion was a slight miss. Comparable-store sales rose 3%, below analysts’ forecast for 3.6%.

United Parcel Service reported a higher-than-expected quarterly net profit as revenue grew across its domestic and international package delivery segments and as well as freight and supply chain operations.

Often seen as a bellwether of US economic activity, UPS said revenue increased to $15.3 billion in the first quarter from $14.4 billion in the year-ago period. Revenue beat estimates. Net income rose 2.4% to $1.15, also beating estimates.  During the quarter, UPS invested to expand its new Saturday deliveries, with $35 million in increased costs.

Ford Motor’s first-quarter profit fell 35% from a year earlier to $1.6 billion, down from $2.5 billion in 2016’s first period, when strong demand for a newly redesigned F-150 pickup truck helped Ford post its best quarterly operating profit in history.

Earnings per share were 39 cents in the latest quarter, beating analysts’ consensus of 36 cents. Revenue for the first quarter rose 4% to $39.1 billion, driven by a favorable mix of pickup trucks and sport-utility vehicles. Ford plans to cut $3 billion in costs this year and expects profit to rebound in 2018, driven by continued strength in the pickup-truck market.

American Airlines Group has a healthy track record with respect to earnings. The company has delivered positive earnings surprises in three of the last four quarters, with an average beat of 20%. The first quarter down 60% from the year ago quarter but it was another beat. Adjusted earnings per share came in at 61 cents per share, beating estimates of 57 cents. American shares dropped about 5% today.

American Airlines announced it was increasing pilot and flight attendant salaries an average of 6.5 percent, or by a total of $930 million through 2019. A JPMorgan analyst described it as a “wealth transfer” to labor groups. American CEO Doug Parker described the higher wages as a correction to years of “incredibly difficult times” for airline employees. American employees had been underpaid compared to other airline employees. Parker called the pay hikes an “investment” in better service.

Southwest Airlines dropped about 2%, after the air carrier reported first-quarter profit and revenue that missed expectations. CEO Gary Kelly announced that Southwest will no longer overbook its flights, ending a practice that sometimes leaves paying passengers without a seat.

It’s impossible for an airline to guarantee it will never have to bump a passenger. Carriers still must transport other pilots and crew members to work, and an air marshal could also need a seat. But ending overbooking does make it less likely.

Comcast beat expectations ahead of the bell and jumped 3%, while Abbvie performed similarly. Those companies were joined by railroad company Union UNP, which also gained 3% in early trade, and another pharmaceutical giant, Bristol-Myers Squibb + 3.5%. Other post-earnings gainers included KKR +5% and Domino’s Pizza, up 2.5%.

European markets closed slightly lower Thursday. The European Central Bank kept interest rates unchanged. ECB President Mario Draghi surprised some investors by explicitly recognizing the bloc’s economic recovery.

The euro initially reached the day’s peak of $1.0930 as Draghi struck an optimistic tone when answering questions from reporters. The ECB maintained a deposit rate of -0.4% for banks, a base interest rate of 0.0%, and a quantitative easing (QE) program of up to €60 billion per month.

President Trump said he’ll give the re-negotiation of the North American Free Trade Agreement a “good, strong shot” but reiterated he would “terminate” U.S. participation if he doesn’t get what he called a fair deal. He said he decided to have talks since pulling out would be a “shock to the system.”

House Speaker Paul Ryan said he’s confident Congress will pass a “short-term extension” of current government funding that would keep operations going past Friday. Ryan did not give a time for a vote.

A gauge of pending home sales declined in March as inventory continued to tighten. The National Association of Realtors’ index fell 0.8% to a reading of 111.4. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed.

Thanks to a strong first quarter, the Realtors forecast sales in 2017 to rise 3.5% compared to 2016. But supply isn’t keeping up with demand. There were 3.8 months of supply in March, and properties stayed on the market an average of only 34 days. A balanced market is usually thought to have 6 months of supply.

West Virginia is coal country. Chris Beam, president of Appalachian Power, the state’s largest utility, is not a coal guy. Beam told the West Virginia Gazette-Mail he had a recent conversation with the governor of West Virginia, who asked him to burn more coal.  Beam responded, “That’s not going to happen.” And the reason is customers don’t want it.

Beam says the debate over climate change, and the role of coal in it, is essentially over. Appalachian Power’s parent company AES believes the regulation of carbon dioxide is inevitable. In the coming decades, renewable energy and natural gas are poised to dominate the fuel mix. Appalachian Power’s residential and industrial customers are now asking about switching to 100% renewables.

To get out in front of this growing demand, the utility, which serves more than a million customers across the US mid-Atlantic region, has begun preparing power plans that would allow customers to stop using fossil fuels. Appalachian Power estimates it will reduce its coal capacity from 60% of its energy mix to about 50% by 2020.

At the same time, wind and solar will rise from about 4% of capacity to 20% by 2031. And yes, West Virginia trails most of the rest of the country in its switch to renewables.

And we finish with a special note for the philatelists among us. The Postal Service will debut a new shape-shifting Forever stamp in June ahead of a rare solar eclipse set for Aug. 21. The new issue will transform from an image of a total solar eclipse into an image of the moon when you press it with your finger. The back will feature a U.S. map tracking when the eclipse will appear across the country.

It’s the first time a stamp will make use of thermochromic ink, which is sensitive to body heat (and changing temperatures — which means stamps should be kept away from direct sunlight). The stamp’s photo of the eclipse was taken in Libya in 2006 by an Arizona-based astrophysicist, Fred Espenak, aka Mr. Eclipse, of Portal, AZ.

Financial Review

Bad Optics

Sinclair Noe — January 3, 2017

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

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DOW + 119 = 19,881
SPX + 19 = 2257
NAS + 45 = 5429
RUT + 8 = 1365
10 Y + .01 = 2.45%
OIL – 1.23 = 52.49
GOLD + 7.30 = 1159.20

Stock markets all over the world opened 2017 with a bang. An upbeat Chinese manufacturing report helped spark a 1% gain for the Shanghai Composite, and Italy’s MIB (+1.7%) pushed an advance in Europe. On Wall Street, we started with a 160-point jump at the open, slowly but surely giving back part of the pop. And everyone is wondering whether the year-end breakout will continue.

If you have your S&P 500 chart open you might want to draw some channel lines over the past year; the bottom boundary would be marked by lows set June 27 following the Brexit vote – to November 4 and the US election; the upper boundary is marked by three distinct drives to highs in April, August, and December.

We are currently near that upper boundary; meaning we will need to see a break above 2277 for the bulls to keep running. The presumption is that we see a drop back to the lower channel line just above 2100, which has been a strong level of support over the past 2 years. This is not to say we will drop to that level, just that the market is looking at that level, respecting that level.

That’s the technical side of the outlook. On the fundamental side, take another chart of the S&P 500, overlay it on top of the Federal Reserve’s balance sheet and note the similarity. The Fed has a history of causing major market crashes by hiking interest rates. With interest rates near all-time lows in the history of the United States, rates have almost nowhere to go but up.

Yellen said they intend to hike three more times in 2017. It would be nearly miraculous if the Fed can raise rates gently and without doing harm. And if the path forward for the economy gets rough, the Federal Reserve has no room to lower interest rates to jump start the economy. Negative rates over in Japan and Germany have not helped resuscitate their economies.

The three best decades for stock markets were the 1920s, the 1980s, and the 1990s. The Fed was not able to slow those markets gently, rather the markets crashed. In all other past cases, the Fed had plenty of room to reduce interest rates.

The $64,000 question for the bond market might be – when and how will the Federal Reserve adjust its holdings of US Treasuries and mortgage-backed securities. Do they stop reinvesting interest and principal payments or go straight to selling issues?

I really don’t want to sound bearish. Two weeks into 2016 the broadcast and print media were calling for a bear market; once again sounding foolish. I fully expect the S&P to make a run at new highs and the Dow Industrials will make another push to break through 20,000. Still, I am not sanguine at these levels. The only constant is change, and that means 2017 will offer many unexpected surprises and opportunities.

The dollar is flying. The US dollar index trading higher, moving above 103, at its best level since the end of 2002. The euro slipped below 105 and seems like it wants to find parity with the dollar. Yields were screaming higher across Europe, where the UK 10-year is up 9 basis points at 1.33%.

Bonds saw heavy selling early with yields across the Treasury curve moving higher, then pared losses throughout the session.

Meanwhile, crude oil prices topped $55 a barrel following confirmation that both Kuwait and Oman have lived up to their promises to cut production, but oil prices slipped – maybe because of the strong dollar, maybe because non-OPEC Libya is increasing output, maybe because the oil rig count in the US was up, maybe because of a strong report on manufacturing.

The Institute for Supply Management said its manufacturing index climbed to 54.7% in December from 53.2%. Any number above 50% signals expansion. The overall economy has been growing for 91 consecutive months, and the manufacturing sector hit a 2-year high, finishing the year on a positive note.

Corelogic reports home prices rose 7.1% year over year. On a month-over-month basis, home prices increased by 1.1% in November. Corelogic forecast an increase of 4.7% year-over-year in November 2017. In Arizona, the Home Price Index increased 0.6% for November; up 5.8% in the past 12 months through November, with a forecast of 6.2% growth over the coming year. Still, home prices in Arizona remain 21.4% below peak values.

Construction spending rose to its highest level in 10-1/2 years. The Commerce Department said construction spending increased 0.9 percent to $1.18 trillion, the highest level since April 2006. It was boosted by gains in both private and public sector investment.

Spending on private construction projects jumped 1.0 percent in November to its highest level since July 2006 as single-family home building, as well as home renovations, increased. Investment in private nonresidential structures – which include factories, hospitals and roads – rose 0.9 percent after dropping 1.5 percent the prior month.

Public construction spending gained 0.8 percent in November to the highest level since March. It was the fourth straight month of increases.

The 115th Congress was sworn in today, and Republicans continue to oversee both legislative houses. The House Republican Conference voted Monday night to approve a change to House rules to weaken the independence of the Office of Congressional Ethics and place it under the oversight of the House Ethics Committee – a panel controlled by party leaders.

They planned to vote on the measure today – what would have been the first vote of the new Congress – what would have been a textbook definition of bad optics. Not surprisingly, there was broad criticism of the move to gut the independent ethics office, including from President-elect Trump, who tweeted that House Republicans should focus on more important policy, even though he called the ethics watchdog “unfair”.

President-elect Donald Trump took aim at General Motors for making the Chevrolet Cruze sedan in Mexico. Trump slammed GM on Twitter for (quote) “sending Mexican-made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”

A month ago, GM CEO Mary Barra agreed to join a panel of CEOs who will advise Trump on economic policy. The U.S. auto industry has defended NAFTA as critical to its business model, but Trump has described the deal as venomous to American jobs.

This is not the first-time Trump has gone after a carmaker for offshoring jobs. During the final weeks of the presidential campaign, Trump slammed what he called Ford’s “horrible” plans to move all small car production to Mexico within three years.

And today Ford said it will cancel production of a $1.6 billion plant in Mexico, and will instead invest $700 million in Flat Rock, Michigan; adding 700 direct new jobs to produce electric and autonomous vehicles, plus the Ford Mustang and Lincoln Continental.

Ford had originally planned to build its Ford Focus in San Luis Potosi, Mexico. The company said it will continue to build its Focus at an existing plant in Hermosillo, Mexico. Ford CEO Mark Fields told CNBC that Trump wasn’t the main factor when Ford decided to cancel its plans for a $1.6 billion plant in Mexico, rather the decision not to move was due to market demand.

And that may be the case but you can also bet that Ford management is a better judge of bad optics than Washington politicians.

A “technology disruption” Monday evening left thousands of international travelers stuck in US airports for hours on one of the busiest travel days of the year. Don’t blame the airlines. A four-hour outage for U.S. Customs and Border Protection left angry passengers dealing with significant delays from South Florida to Boston to Los Angeles. All affected airports were back up and running by late Monday.

Samsung’s upcoming flagship Galaxy S8 smartphone could give users the ability to plug it into a screen and turn it into a desktop personal computer. The All About Windows Phone blog posted a leaked slide from a presentation showing a Samsung smartphone being connected to a screen with a keyboard and mouse. The slide is titled “Samsung Desktop Experience” and shows a phone powering a screen to create a multi-tasking interface. We might see the new phone in February.

SpaceX is preparing to resume rocket launches next Sunday, using revised operational procedures developed in response to a fiery accident that occurred during routine ground preparations last fall. SpaceX’s blastoff date is subject to results of testing later this week, WSJ reports, but if everything checks out, Iridium Communications will get the first 10 of its next-generation communications satellites into orbit.

Last year turned out to be a disappointing one for new drug approvals with the FDA clearing just 22 new medicines for sale, the lowest number since 2010 and sharply down on 2015’s tally of 45. Several factors led to the decline: Five new drugs that had been scheduled for approval in 2016 ended up winning an early green light at the end of 2015. There was also a decline in drugs being filed for approval and the FDA rejected or delayed more applications in 2016 than in the previous two years.

Many sufferers of type 1 or type 2 diabetes are bracing for changes in insurance coverage of their insulin as prices soar. CVS Caremark will no longer cover the insulin brand Lantus in favor of a new biosimilar version, Basaglar.

Biosimilars are considered the generic versions of “biologic” drugs that are based on natural sources. Prices for many insulin brands have increased from about $300 to $500 between January 2013 to October 2016, per drug discount search company GoodRx.

Retailers are bracing for a fresh wave of store closures at the start of the new year. Macy’s will close 35 to 40 under-performing stores, around 5% of its total locations in 2017