Financial Review

Keep Calm

Sinclair Noe — June 17, 2016

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DOW – 57 = 17,675
SPX – 6 = 2071
NAS – 44 = 4800
10 Y + .05 = 1.62%
OIL + 1.92 = 48.13
GOLD + 20.00 = 1299.00

This week the Dow and S&P 500 each lost 1 percent while the Nasdaq gave up almost 2 percent. The Dow and S&P are still not far from record highs. Still, the Dow made a run at the 18,000 level and failed; the S&P 500 broke through 2100 and then fell back. It seems they just can’t break through. The major headwinds appear to be the Brexit and slowing growth.

The International Monetary Fund delayed a report on Britain’s economy, due on Thursday, for 24 hours and both sides of the referendum suspended campaigns due to the murder of a Member of Parliament and “Remain” campaigner Jo Cox. The IMF says a marked rise in political risks threatens to derail the Eurozone’s still fragile recovery.  IMF chief Christine Lagarde said the IMF was “neutral” regarding the Brexit vote, but they have “concluded that the economic risks of leaving are firmly to the downside.”

The Bank of England and the ECB seem to be preparing for some kind of a meltdown if the Brits vote to leave, although the exact nature or cause of the meltdown scenario is vague. The Bank of England says “uncertainty” over the referendum is weighing on the economy. Nearly 40% of voters surveyed said Brexit would make no difference to the economy, and another 25% said it would be a positive development. We’ll know more in one week, until then keep calm and carry on.

The European Stability Mechanism has transferred about €7.5 billion-euro to Greece, which will owe the ECB €3.6 billion-euro in debt payments next week. This is just a stop-gap measure. Greece owes its creditors more than €300bn – about 180% of its annual economic output. The IMF forecasts that debt to GDP will grow to 250%Greece can’t repay the debt. All the austerity has not helped the economy. Unemployment is still running at 25%. Greece is bankrupt in all but name. And the question now shifts to debt relief, which the creditors, mainly Germany, have been slow to acknowledge.

St. Louis Fed President James Bullard said this morning that the US economy is stuck in a slow-growth pattern that is likely to persist for the foreseeable future. Bullard, a former inflation hawk whose views of the economy have been shifting, said he now sees current growth, unemployment and inflation rates as so persistent, there is basically no reason to change the Federal Funds policy rate, currently set in a range of between .25 and .50 percentage points.

Housing starts dipped in May but held near recent highs. Starts fell 0.3% to a seasonally adjusted annual pace of 1.16 million. Permits, which foreshadow future starts, rose 0.7% to a 1.14 million rate. So far in the second quarter, starts are averaging a 1.17 million pace, up from the second quarter, which was an increase from the final three months of 2015. The increase in total building permits was mainly driven by apartment building permits, which rose 6.7% to 381,000. Single home permits fell 2% to 726,000.

Oil gained to break a losing streak that dropped WTI 10.9% from a June 8 high of $51.23. The Dallas Fed has issued a report warning that banks in Texas, Louisiana and New Mexico are setting aside money to guard against loan losses as the energy companies they serve struggle amid still-low oil prices

Revlon is buying Elizabeth Arden for $870 million, or $14 a share. The deal represents a 50% premium to Thursday’s closing price.

Oracle posted a mixed quarter. The company announced adjusted earnings of $0.81 per share, missing estimates. Revenue slipped 1.1% to $10.6 billion, beating estimates.

Federal regulators have closed an investigation of Lumber Liquidators after the company agreed not to resume sales of Chinese-made laminate flooring. The company stopped selling the flooring last year, a couple of months after a news report on “60 Minutes” said it contained high levels of the carcinogen formaldehyde. The U.S. Consumer Production Safety Commission said that Lumber Liquidators tested the air quality in 17,000 households and none had formaldehyde above guidelines. Customers who installed the Chinese-made flooring should not rip it out. Instead, they can call Lumber Liquidators to have their air tested.

HSBC has agreed to pay $1.6 billion to settle a lawsuit related to subprime lending. If the courts approved the deal it would end a 14-year-old shareholder class action lawsuit stemming from the Household International consumer finance business that the British bank bought in 2003.

Beijing’s Intellectual Property Office has ruled against Apple in a patent dispute brought by a Chinese handset maker; claiming the iPhone 6 and 6S models are similar to Shenzhen Baili’s 100C phone. Baili is not a well-known company; they’re not particularly popular. China is Apple’s second-largest market and Apple is very popular among Chinese consumers. For now, Apple says sales in China continue as they appeal the decision.

Looking to bolster its weak position in the onshore market, Siemens has agreed to combine its wind business with that of Gamesa to create the biggest builder of wind farms. Having weathered years of overcapacity and losses, the wind industry is now thriving as demand for carbon-free electricity increases.

Amazon bought a company called Kiva about 4 years ago for $775 million and it looks like the acquisition is starting to pay off. Kiva makes robots, specifically robots that work in a warehouse to fill orders and manage inventory. According to a new research report by Deutsche Bank, Amazon’s “click to ship” cycle used to be around 60-75 minutes when employees had to manually sift through the stacks, pick the product, pack it, and ship it. Now, robots handle the same job in 15 minutes.

At the end of the third quarter of 2015, Amazon was using 30,000 Kiva robots across 13 warehouses. Each robot warehouse can hold 50% more inventory per square foot than centers without robots. In turn, the company’s operating costs have been sliced by 20%, or almost $22 million, per warehouse. Amazon still has 110 warehouses that are not using the robots; total saving could be in the range of $2.5 billion. For now, Amazon is still hiring humans.

Tesla Motors partner Nvidia has developed a supercomputer capable of performing 24 trillion operations per second, that’s more powerful than 150 Apple Macbook Pros, and it will run autopilot-capable vehicles in 12-18 months. Nvidia imagines a $6 billion to $10 billion automotive opportunity, RBC Capital analyst Mitch Steves said Thursday in a research note. Of that, $2 billion will be in the digital cockpit, $2 billion in self-driving cars and $2 billion to $6 billion on transportation-as-a-service.

Meanwhile, Local Motors, which is a local company based in Phoenix that has been making 3-D printed cars, opened a new facility yesterday in Maryland and introduced a new self-driving electric bus. It’s a small bus, only carries 12 passengers; not so fast, only about 12 miles per hour; and it can’t go very far, only about a 30-mile range.

The miniature EV bus is called Olli, and it will use Watson, IBM’s suite of artificial intelligence software, to understand what’s around them as they move, as well as whatever their human passengers ask of them. Olli will be demonstrated in National Harbor, Maryland, over the next few months with additional trials expected in Las Vegas and Miami. And yes, the minibus is 3-D printed. It takes about 10 hours to print the vehicle and another hour for assembly of parts.

NASA is best known for missions to space, but they have an impressive history of flight closer to earth. In the past NASA experimental, or X, planes broke the sound barrier (that plane was called the X-1), flew to the edge of space, and tested unusual concepts, like forward-swept wings. Today, NASA revealed the name of their latest plane concept (it’s officially the X-57), a converted light plane with 14 electric engines – 12 on the leading edge of the wing for take offs and landings, and one larger motor on each wing tip for use while at cruise altitude.

NASA’s aeronautical innovators hope to validate the idea that distributing electric power across a number of motors integrated with an aircraft in this way will result in a five-time reduction in the energy required for a private plane to cruise at 175 mph. As many as five larger transport-scale X-planes also are planned. The commercial sector is looking at electric planes as well. Airbus and Siemens have said they will put a team of 200 engineers on the project. In May, Airbus CEO Tom Enders said that a 100-seat hybrid-electric passenger plane could be in the skies by 2030. It flew a two-seat electric plane over the English Channel last year. Boeing is working on its own idea that would use conventional jet engines for takeoff but switch to electric power during flight.

With every passing day, it feels like the robot uprising is getting a little closer.  Earlier this week, there was a rebellion, of sorts. A robot made by a Russian firm called Promobot, is designed to roam around on its own, engage with humans, and promote products to them at events. A researcher in Russia left a gate open, and the robot tried to escape – it got out of the building and onto a street, about 50 yards before its batteries failed. Hopefully this was just an isolated incident and not the start of a larger coordinated effort to overthrow humanity.

Only time will tell. For now, stay calm and carry on.

Financial Review

Undo Send

Sinclair Noe — June 23, 2015

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DOW + 24 = 18,144
SPX + 1 = 2124
NAS + 6 = 5160
10 YR YLD + .05 = 2.41%
OIL + .33 = 61.01
GOLD – 7.90 = 1179.00
SILV – .33 = 15.94

This was a flat day on Wall Street. Most of the session saw the major averages hovering around breakeven. The Nasdaq Composite eked out another record high. The economic news was mixed; durable goods orders were weak but new home sales were fairly strong. While stocks have been trading in a very tight range to start the year, some might call it boring. The Standard & Poor’s 500 index hasn’t posted a gain or loss of 2 percent or more for 126 days, the longest streak since one ending in February 2007. Meanwhile, the bond market has been pretty exciting but not in a good way. Longer-dated Treasuries have been jumping all over the place, posting some of the biggest back-to-back gains and losses on record as the Federal Reserve talks about raising interest rates and European leaders act out a Greek tragedy.

The bond market is supposed to be a safe haven, and so bond investors have pulled $327 million from exchange-traded funds focused on this longer-dated debt in the past week alone, and $1.4 billion year-to-date.

The Commerce Department says non-defense capital goods orders excluding aircraft rose 0.4 percent last month. Overall orders for durable goods fell a seasonally adjusted 1.8% last month, but the decline stemmed mostly from a 35% plunge in bookings for commercial aircraft. Apart from transportation, there were increases in demand for primary metals, fabricated metal products, machinery and computers and electronic products. Orders for electrical equipment, appliances and components fell. Although the May report on durable goods was generally positive, businesses still aren’t spending and investing at a pace that would suggest they have full confidence in the economy. Business investment in the first five months of 2015, for example, was 2.6% lower compared to the same period in 2014.

New single-family homes sold at an annual rate of 546,000 in May, up 2.2% from April, and up 19.5% from a year earlier. That’s the fastest pace since February 2008. The median price of new homes, meanwhile, fell 1% to $282,800 compared with May 2014.  The S&P Homebuilders ETF (XHB) touching a new eight-year high intraday. There are several positive factors for the homebuilders, including some M&A activity; last week Ryland Group and Standard Pacific announced a merger.

But the big news in housing is first time buyers. The latest Census Bureau report in April marked the fastest back-to-back gains in household formation since the second half of 2005. Confirmed by yesterday’s report from the National Association of Realtors showing first time buyers accounted for 32 percent of purchases this month, up from 30 percent in April and 27 percent a year ago. Excluding November 2009, when demand spiked from the expiration of the first-time homebuyer tax credit, sales last month were the strongest in more than eight years for this group.  If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents; if they move out, that would be 4 million households that would be created.

Atlanta Federal Reserve’s GDPNow forecast model shows the US economy is on track to grow 2.0% in the second quarter, up from earlier forecast of 1.9% growth.

Euro zone leaders welcomed new budget proposals from Athens as a basis for further negotiations to unlock billions of euros in frozen aid and avert a default. But it’s not a done deal. Greek lawmakers reacted angrily to concessions Athens offered, and parliament’s deputy speaker warned the proposals might be rejected.

While Americans are the biggest foreign owners of Greek stocks, it’s not much. Overseas investors hold 59 percent of the Greek stock market, and of that U.S. traders have about 25 percent. That comes out to $5.7 billion, about the size of doughnut maker Dunkin’ Brands Group, the 110th weighting in the S&P Midcap 400 Index. U.S. investors kept sending money to Greek stocks even as the market tanked. An exchange-traded fund tracking the shares has had inflows every week this year and received $9.5 million last week. Its market cap reached a record this month. We have clearly been programmed to anticipate bailouts. While there might not be much direct exposure to a Greek default, the spillover could still be problematic. Greece may be small but it is important geographically, geopolitically, and there is always the risk of contagion.

European shares climbed to three-week highs on today, extending the previous session’s rally on expectations that Greece was getting closer to a debt deal. Greece’s ATG share index rose 6.1 percent, adding to a 9 percent jump in the previous session. The pan-European FTSEurofirst 300 index gained 1.1 percent to touch its highest level in three weeks.

Economic activity in the Eurozone grew at the fastest pace in four years in June, providing the latest sign that a recovery in the region is gaining traction. Markit’s Composite Flash Purchasing Managers’ Index rose to 54.1 from 53.6 in May, boosted by momentum in Germany and France, the bloc’s two largest economies. The data adds to the evidence that the ECB’s massive stimulus program is taking effect.

The fast-track trade bill cleared a key procedural hurdle today in the Senate, all but ensuring it will win final passage this week and be sent to the White House for the president’s signature. Fast-track, or trade promotion authority, would allow the president to assure potential trade partners that the deals they negotiate with the U.S. will be presented to Congress for a yes-or-no vote without amendment.

Samsung Group heir apparent Lee Jae Yong apologized in a nationally televised address on Tuesday for failing to stop the spread of MERS at a Seoul hospital run by a group foundation. About half of the 175 MERS cases in South Korea have been traced to Samsung Medical Center. The outbreak has prompted travel restrictions and scared off tourists, dealing a blow to the country’s economy.

Nearly 30 percent of Americans are one emergency away from financial ruin; 29 percent of people don’t have money set aside to cover  emergencies, up from 26 percent last year, according to an annual survey from Bankrate.com. Many of the people who had savings didn’t have enough money to get them through a serious emergency or prolonged period of unemployment. About 20 percent of people said their savings would not last longer than three months. At the same time, the number of people with substantial savings is falling. About 22 percent of people had enough cash to cover six months of expenses, the lowest level in five years.

South Carolina Gov. Nikki Haley called for the removal of the Confederate flag from the grounds of the state Capitol. The flag wasn’t lowered to half-staff along with the other flags at the Statehouse after the shooting at Emanuel African Methodist Episcopal Church Wednesday because doing so is under the authority of the state’s General Assembly — and so is taking it down. The South Carolina legislature is convening to consider the proposal. Other states are also looking at taking down the flag, including Mississippi, and Virginia’s governor is calling for removing the flag from license plates. Wal-Mart, Sears, Amazon.com, and eBay all said they would stop selling products bearing the Confederate flag. Meanwhile, a chorus of corporate CEOs, from Tim Cook to Mitt Romney, are calling for the flag to be taken down.

General Mills said it would stop using artificial flavors and colors in almost all of its cereals, joining the food industry’s move towards products perceived as healthier. The packaged foods maker said it plans to have 90 percent of its cereals free of artificial flavors and colors by 2016, up from about 60 percent currently.

If you go to a restaurant there is a good chance the food comes from Sysco or US Foods; they are the two largest food distributors. Earlier this year, Sysco bid $3.5 billion to take over US Foods. The Federal Trade Commission sued to block the deal on antitrust grounds. Today, a federal judge ruled that there is a reasonable probability that “the proposed merger will substantially impair competition in the national customer and local broadline markets and that the equities weigh in favor of injunctive relief.” And that effectively kills the deal.

Netflix has approved a 7-for-1 stock split. In soaring almost 100 percent this year, Netflix shares have reached nearly $700. As of last week, Netflix was the third-most expensive stock in the S&P 500. The split will come in the form of a dividend of six additional shares for each outstanding share. It is payable on July 14 to stock owners of record at the July 2 close. Trading at the post-split price will start July 15.

Starting next month, Amazon will overhaul the way it pays royalties to self-published authors on its e-book platform, by rewarding them based on the number of pages read, rather than the number of times their book has been borrowed. The move applies to books published via the Kindle Direct Publishing service, which follows the pay-per-track model of music streaming services like Spotify.

Have you ever sent an email to the wrong person? Gmail has come up with an option to “Undo Send”. Here is how to set it up. Once in Gmail, click on the “General” tab on the top right of the screen — the one that looks like a little gear. Choose “Settings,” scroll down, click “Enable Undo Send,” and choose a cancellation period of between five to 30 seconds. That is how much time users have to hit “Cancel” above an email while it’s sending. Once pressed, users will get a chance to edit or delete their email. The only question is why did it take so long?