Financial Review

Again and Again

Sinclair Noe — February 21, 2017

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DOW + 118 = 20,743
SPX + 14 = 2365
NAS + 27 = 5865
RUT + 10 = 1410
10 Y + .01 = 2.43%
OIL + .61 = 54.39
GOLD + 2.20 = 1236.60

Stock prices across the world climbed to record highs. Dow, S&P, Nasdaq, and Russell hit record highs again.

Walmart reports same-store sales in the US rose 1.8% for the quarter, the 10th straight quarterly increase. Meanwhile, e-commerce sales were up 29%, boosted by the purchase of online retailer Jet.com in September as well as online grocery. But profit fell 18% in the fourth quarter as the company invests in its online platforms; still, Walmart beat top and bottom-line estimates.

Amazon just lowered its free-shipping minimum to $35 from $49 for customers who aren’t members of its Prime membership program. The change appears to be a response to Walmart’s recent rollout of free two-day shipping for all customers on orders over $35.

Macy’s reports net income was $475 million, or $1.54 per share, down from $544 million, or $1.73 per share last year, but they beat estimates. Revenue also dropped, missing estimates.  Same-store sales fell 2.1%. The company also released preliminary guidance for 2017, expecting sales to decline by 2% to 3% for the full year at all owned and licensed stores. Macy’s plan is to sell its real estate; $637 million sold last year, more to come this year.

Home Depot reported higher-than-expected profit and sales helped by a strong housing market in the United States and set a $15 billion share buyback plan. The company reported a 5.8 percent rise in quarterly sales to $22.2 billion – beating estimates. Profit rose to $1.7 billion in the fourth quarter from year ago $1.4 billion – also beating estimates.

Verizon Communications and Yahoo! say they will go forward with their proposed acquisition but Verizon cut the price by $350 million from the original cost of 4.8 billion. The revised deal comes after months of speculation as whether talks would break down because of two massive data breaches at Yahoo.

Restaurant Brands International has agreed to acquire Popeyes Louisiana Kitchen for $1.8 billion in cash. Under the terms of the agreement, Restaurant Brands, operator of Burger King and Tim Hortons, will pay $79 per Popeyes’ share.

Kraft Heinz dropped its $143 billion bid to buy Unilever – a deal that would have created the largest food company in the world. Already this year, more than $205 billion in proposed deals have been withdrawn.

Reuters reports SoftBank is prepared to cede control of Sprint to T-Mobile to clinch a merger of the two U.S. wireless carriers. SoftBank is expected to approach T-Mobile parent Deutsche Telekom for negotiations when an ongoing auction of airwaves ends in April and a ban on talks between rivals is lifted.

TransferWise, a London-based startup, has launched a service that allows users to make international transfers with Facebook’s chat application. Facebook already allows its users to send money domestically in the United States via its Messenger app, but has not yet launched similar services internationally.

Growth in eurozone business activity surged in February to its highest level in almost six years, per the latest survey by IHS Markit. The overall flash composite index of services and manufacturing spiked to 56.0, up from 54.4 in January. Growth in Germany’s private sector reached its highest level in nearly three years, while French business activity surged to near a six-year high.

Overall, the PMIs showed that private sector manufacturing and service sector activity in the euro zone this month was its strongest since April 2011.Eurozone stocks pushed to a 14-month high this morning.

HSBC’s pretax profit tanks. Europe’s biggest bank by assets saw pretax profit for 2016 fall to $7.1 billion from $18.8 billion the previous year. The UK-based bank reported a net loss of $4.2 billion in the fourth quarter of 2016. The biggest single hit to its battered bottom line came from a $2.4 billion write-down of the value of its private banking business in Europe. HSBC announced a new $1 billion share-buyback program.

BHP Billiton reports a surge in profits. The world’s largest miner said profits surged seven-fold to $3.1 billion during the six months that ended in December. The extra cash helped BHP boost its dividend and pay down debt.

China has halted all coal imports from North Korea for the rest of 2017, effectively slicing the country’s exports by about half, as it steps up efforts to implement U.N. sanctions against the country. Per BMI Research, China imported 22 million tons of coal from North Korea in 2016, representing 12.3% of its total imports.

Philadelphia Federal Reserve Bank President Patrick Harker said over the weekend that he would likely support raising interest rates at the central bank’s upcoming March meeting if he sees more evidence that economic growth and inflation are accelerating. Federal Reserve Bank of Cleveland President Loretta Mester who said she would be “comfortable” with the central bank raising rates.

Minneapolis Fed President Neel Kashkari said the U.S. labor market has “more room to run,” suggesting he does not believe the central bank should raise rates quickly to head off inflation. Kashkari said it has been a “big surprise” that so many workers have returned to the workforce over the past year and a half, and he is “cautiously optimistic” that the pattern will continue.

Over the past few weeks, Federal Reserve Chairwoman Janet Yellen and a host of other Fed officials have suggested that an interest-rate increase at the policy-setting Federal Open Market Committee’s meeting on March 14-15 remains on the table.

It’s that time of year again – when refinery maintenance season kicks in and the market makes a shift to cleaner-burning gasoline, disrupting production and lifting prices for the fuel at the pump. If prices see the average five-year increase they usually do during the spring, retail gasoline could cost an average $2.85 a gallon around Memorial Day.

Crude oil prices have been moving higher and OPEC said it was sticking to its agreement to cut production by about 1.8 million barrels per day to drain a glut that has depressed prices for over two years. OPEC compliance is helping keep prices afloat, but rising US oil production is acting as a counterweight; the result is a glut of crude supplies.

Here’s the hitch: the glut of gasoline is now the worst in 27 years. At 259 million barrels, US gasoline storage levels are now at their highest level since the Energy Information Administration began tracking the data back in 1990.  If both crude and refined product inventories are going up at the same time, then there should be some reasons for worry.

Part of the reason for the glut, of course, are high levels of production, around 9 to 10 million bpd. But that increase came to satisfy rising demand (which, of course, was stoked by lower prices). More demand should have soaked up that excess supply.

However, US demand has faltered. US gasoline demand plunged to just 8.2 million barrels per day in January, and sales were down 4 percent from a year earlier. It was also the lowest level in four years. Weak demand is raising some red flags for the market.

Demand is seasonal, with softer demand in winter months, but this winter’s ‘valley’ is lower than any other since 2012. The glut of gasoline has led to tankers being turned away at New York Harbor in recent weeks, diverted to ports in the Caribbean.

If demand does not rebound, inventories will rise, pushing prices lower. So, while OPEC production cuts are important, keep an eye on US demand, not just for oil prices but also as a barometer of overall economic activity.

The Department of Homeland Security issued a sweeping set of orders today that implement President Trump’s plan to increase immigration enforcement, placing the clear majority of the nation’s 11 million undocumented immigrants at risk of deportation. The memos instruct all agents — including Customs and Border Protection and Immigration and Customs Enforcement — to identify, capture and quickly deport every undocumented immigrant they encounter.

The memos require undocumented immigrants caught entering the country to be placed in detention until their cases are resolved, increase the ability of local police to help in immigration enforcement, call for the hiring of 10,000 more immigration agents and allow planning to begin on an expansion of the border wall between the United States and Mexico.

The memos make undocumented immigrants who have been convicted of a crime the highest priority for enforcement operations. But they make clear that ICE agents should also arrest and initiate deportation proceedings against any other undocumented immigrant they encounter.

These new guidelines, however, leave untouched the executive order signed by former President Barack Obama in 2012 on deferred action for childhood arrivals, which shields from deportation immigrants who were brought to the US as children.

Financial Review

Mind the Gap

Sinclair Noe — January 18, 2017

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

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DOW – 22 = 19,804
SPX + 4 = 2271
NAS + 16 = 5555
RUT + 6 = 1358
10 Y + .06 = 2.39%
OIL – 1.09 = 51.39
GOLD – 12.70 = 1205.00

The Dow Industrials spent most of the day in slightly negative territory. The S&P 500 traded in a tight range between negative and positive. If it seems like the stock market’s crawl to nowhere over the past month has been particularly strange, that’s because it has been. It turns out the gap between the Dow’s high and low prices over the past month is a tiny 1.4 percent — the narrowest gap in data going back to 1957.

On December 13, the Dow crossed 19,900 and pushed toward 20,000 – getting within a fraction of a point, then falling to a low of 19719, or a 1.4 percent range. So, something has to give – the question is whether we will see a break out or a break down. The long-term trend is still higher, but we really must wait and let the market show us.

Consumer prices rose in December as households paid more for gasoline and rent.  Consumer Price Index rose 0.3 percent last month after gaining 0.2 percent in November. In the 12 months through December, the CPI increased 2.1 percent, the biggest year-on-year gain since June 2014.

The so-called core CPI, which strips out food and energy costs, rose 0.2 percent last month after the same increase in November. As a result, the core CPI was up 2.2 percent in the 12 months through December. Rents rose 4% compared to a year ago, in December, the Labor Department said Wednesday.

That’s the strongest yearly gain since December 2007, the month the Great Recession began. Rising inflation comes against the backdrop of a strengthening economy and tightening labor market, which raises the prospects for more, and faster interest rate hikes from the Federal Reserve.

Fed Chair Janet Yellen delivered a speech today and said the economy is close to the Fed’s objective of full employment and stable prices and she’s confident it will continue to improve. That, in turn, means “it makes sense to gradually reduce the level of monetary policy support,” although Yellen said the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months.” Yellen said, “Right now our foot is still pressing on the gas pedal.”

Meanwhile, Fed Governor Lael Brainard said fiscal policies that boost demand when the economy is already around full employment and 2 percent inflation are “relatively more likely to be accompanied by increases in interest rates.”

Meanwhile, Minneapolis Fed President Neel Kashkari is launching a research institute to generate ideas elected officials might use to help more Americans benefit from a growing economy and address issues such as racial disparity and income inequality.

Meanwhile, the Fed published its Beige Book, reports from all 12 Fed districts which is released 2 weeks before FOMC policy meetings. Manufacturers in “most” of the Federal Reserve System’s 12 regions reported increased sales.

Companies reported uncertainty surrounding the change of administrations in Washington but remained generally optimistic about growth prospects for 2017. Labor markets were reported to be tight or tightening and pricing pressure intensified.

Central bank policy might have a problem, according to the central banks’ bank. A working paper by the Bank for International Settlements found cuts in interest rates and asset purchase programs can help reduce volatility in stocks and bonds, but it also found lower rates, or lower term-premium, doesn’t appear to spark economic growth.

Industrial production rebounded in December due to the biggest jump in utilities since 1989 as temperatures cooled across the country. The Federal Reserve said industrial output rose 0.8 percent last month. The bulk of December’s increase was due to the 6.6 percent rise in the utilities index. Overall industrial production, however, fell at an annual rate of 0.6 percent in the fourth quarter.

The oil market got a stark reminder that rising oil production in the U.S. could upend efforts by major producers to bring global supply and demand for crude back in to balance. The Energy Information Administration released a report on drilling productivity—forecasting a monthly rise of 41,000 barrels a day in February oil production to 4.75 million barrels a day.

Citigroup reported a 7 percent rise in quarterly profit, beating estimates. However, adjusted revenue fell 9 percent to $17 billion due to divestitures and missed the average estimate.

Goldman Sachs Group reported net income of $2.2 billion, a nearly fourfold rise in quarterly profit.  The fifth largest U.S. bank by assets, which relies more on revenue from trading stocks and bonds than other Wall Street companies, posted a 25 percent jump in trading in the fourth quarter compared with the prior year. Goldman beat on the top and bottom lines.

HSBC became the first major bank to detail plans to move jobs out of London after Brexit, saying it will relocate staff responsible for generating around a fifth of its UK-based trading revenue to Paris after Britain leaves the EU.

The United States sued JPMorgan Chase, accusing the bank of discriminating against minority borrowers by charging them higher rates and fees on home mortgage loans between 2006 and at least 2009. Separately, the Labor Department claimed the bank “systematically discriminated” against 93 women technology workers in its investment bank by paying them lower wages since at least 2012.

The Labor Department asked an internal administrative judge to cancel all government contracts and prevent JPMorgan from entering future federal contracts if it fails to provide relief.

United Continental’s fourth quarter profit tumbled. The airline announced fourth-quarter earnings of $1.78 a share on revenue of $9.1 billion but said its profit fell 51% to $397 million because of its tax bill.

American Airlines is introducing its Basic Economy fares, because Economy fares weren’t basic enough. The new fares, also known as Sub-Cattle Class, mean you can’t store carry-ons in the overhead compartments, no assigned seating, last to board, and no changes at all, no upgrades, and no soup for you.

Meanwhile, American’s flight attendants have a problem with their new uniforms – they claim it is causing skin rashes, itchy eyes, sore throat and blisters. The airline spent $1 million on tests and still don’t know what is wrong.

Target cut its quarterly earnings forecast after sales for the holiday season came in lower than expected due to weak demand for electronics, food and other products. Sales at Target stores open at least a year declined 1.3 percent in the November-December period, while total sales fell 4.9 percent. Target follows rivals Macy’s and Kohl’s, which also cut their profit forecasts after reporting disappointing holiday sales.

J.C. Penney shares sank about 2% after announcing a new partnership with Nike to add Nike shops in 600 of its stores. I’m not sure why that would be bad news.

After the closing bell, Netflix report earnings of 15-cents per share, beating estimates by 2-cents. The company said it added 7.05 million subscribers during the quarter, well above its own expectations of 5.2 million. Its stock has risen by a dazzling 35% in the past six months and is tacking on 8% in after-hours trade.

Essilor of France said it would merge with Luxottica Group of Italy, owner of the Ray-Ban and Oakley brands in a $49 billion deal. The combined company would be known as EssilorLuxottica, and would be the largest player in the eyewear market. The new company would have more than 140,000 employees in 150 countries with 2016 revenue of $16 billion.

Navient, the nation’s largest student loan servicer was hit with a Consumer Financial Protection Bureau lawsuit over allegations that it has “systematically and illegally” failed borrowers. Navient, formerly part of Sallie Mae, created repayment obstacles for tens of thousands of student borrowers by providing incorrect payment information, processing payments incorrectly and failing to act when borrowers complained.

British bookies will bet on almost anything, including specific words or phrases Donald Trump might say in his inaugural address on Friday. Ladbrokes, for example, is offering odds of 1/50 for “Make American Great Again”, indicating there’s a good chance Trump will repeat his campaign slogan in Friday’s speech.

That means a $1 bet would only yield 2 cents in case of a win. With slightly longer odds, “Reagan” comes in at 1/5, followed by “tremendous”, “ISIS” and “China” at 1/2. Further down the list sit “fake news” at 3/1 and “totally false” at 5/1. Aside from the buzzword betting, gamblers can also try their luck with Trump’s tie color and speech length.

It’s official, according to the National Oceanic and Atmospheric Administration (NOAA) 2016 was the hottest year on record, again. The planet sizzled to its third straight record warm year in 2016, and 16 of the 17 warmest years have occurred since 2001. The average temperature across the Earth’s land and ocean surfaces in 2016 was 58.69 degrees, a whopping 1.69 degrees above average.

It was the largest margin by which an annual global temperature record has ever been broken. Record high temperatures were set in 2016 on nearly every continent. No land areas were cooler than average for the year. Eight straight months (January through August) were also each the warmest since records began 15 years after the Civil War ended.

Financial Review

Sleepwalking Higher

Sinclair Noe — September 7, 2016

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

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DOW – 11 = 18,526
SPX -0.32 = 2186
NAS + 8 = 5283
10 Y – .01 = 1.54%
OIL + 1.34 = 46.80
GOLD – 4.40 = 1346.00

World stocks hit their highest in more than a year and the dollar fell against the yen. Emerging market shares led the charge, touching their strongest levels since July 2015. European shares reversed early losses. The Stoxx 600 index edged up 0.1 percent towards eight-month highs hit on Monday, led by a rise of almost 1 percent in oil and gas shares.

Euro zone government bond yields fell as some investors bet the weak U.S. data, which followed weaker-than-expected jobs numbers on Friday, would pressure the European Central Bank to ease monetary policy further. The ECB meets tomorrow. While US markets were mixed, the Nasdaq Composite hit another record high close.

In a follow-up to last Friday’s Jobs Report, the Labor Department released the JOLT survey, or Job Openings and Labor Turnover, which provides detail on the labor market. Job openings jumped to 5.87 million openings, an all-time high, while hires increased to 5.23 million from 5.17 million in June. The number of people quitting jobs voluntarily was flat at 2.98 million, but that’s still up substantially from the depths of the recession, signaling more worker confidence in the ability to find another job.

The Fed published its Beige Book, an anecdotal look at economic conditions around the country, designed to provide guidance two weeks ahead of the next FOMC policy meeting. Overall, the Beige Book had the same modestly positive tone seen in the last few surveys. The latest report gave no hint of a second-half surge in growth or any reason for urgency to raise interest rates. Six Fed districts reported tight labor markets but overall “wage pressures remained fairly modest.” Three districts reported businesses are cautious ahead of the elections.

It “makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later,” San Francisco Fed President John Williams announced late Tuesday. He also said the economy was in “good shape,” predicting unemployment, now at 4.9%, to fall to 4.5% in 2017 and inflation to rise to the Fed’s 2% target in the next year or two.

Richmond Fed President Jeffrey Lacker and Kansas City Fed President Esther George testified at a congressional hearing this morning. Lacker said, “It looks like the case for a rate increase is going to be strong in September.” George said during the hearing she believes the US labor market is at or near full strength. We keep hearing from Fed officials that a September hike is possible but nobody seems to believe what we hear, in part because the data doesn’t seem to support a hike.

British manufacturing fell sharply in the wake of Brexit. Data from the Office for National Statistics showed manufacturing production fell 0.9% in July, missing expectations of a 0.4% decline. While the reading was disappointing, it should be noted that production fell 0.2% in June and 0.6% in May.

Today is an Apple Event Day. I know you’re all excited, so here are the details: the iPhone 7 has two camera lenses (wide angle and telephoto), it does not have a headphone jack but it will ship with a headphone adapter, they also introduced their own wireless headphone, it is water resistant – so go ahead and toss your $649 phone into 50 meters of water without trepidation.

If nothing else, the iPhone 7 packs a punch. With 256 gigabytes of storage for its most powerful version, Apple’s new iPhone has 64 times the amount of space as the company’s original smartphone nine years ago. Increased storage is a critical piece in convincing consumers to upgrade, as anyone with a 12 gig iPhone 5 can attest.  They also unveiled an iPhone 7 Plus for people who don’t want a phone that can fit in their pocket; plus, an Apple Watch 2 for some reason.

Separately, Ireland’s parliament today debated the government’s decision to appeal the €13-billion-euro tax ruling against Apple by the European Commission. They will collect the tax but they will hold the revenue in escrow while they appeal the decision.

South Korea’s Hanjin Shipping has won a temporary order from a U.S. judge extending bankruptcy protections so its vessels can dock at American ports without fear creditors will try to seize its ships. The world’s seventh-largest container carrier and its clients are scrambling to move an estimated $14 billion worth of cargo off ships that are no longer operating normally in the wake of its collapse last week.

More than half of Hanjin’s ships have been blocked from docking at ports and denied service from lashing firms on fears they will not be paid while some vessels have been seized by creditors. With expectations high that Hanjin will eventually be liquidated, there is little clarity on just how the problem of cargo stranded ahead of the peak-year end shopping season will be resolved.

Poland is seeking formal U.S. approval to buy eight Patriot missile defense systems from Raytheon, marking a key move toward closing the estimated $5 billion deal. If cleared, the country will become the 6th NATO Patriot country and the 14th Patriot partner nation. Raytheon has agreed to perform at least half the value of the work in Poland.

Bill Ackman’s Pershing Square hedge fund has taken a 9.9% stake in Chipotle Mexican Grill, the once high-flying company battered by food-safety issues. Pershing Square says the stock was undervalued and attractive. Chipotle shares have dropped about 40% over the past year. Ackman also left the board of Canadian Pacific on Tuesday, marking the end of a four-year tenure that helped overhaul the ailing railroad company.

Apache Corp. stock was among the top gainers today after the oil and gas company revealed an “immense” oil and gas reserve in west Texas. Apache estimated that its more than 300,000 contiguous acres in the region hold about 3 billion barrels of oil and 75 trillion cubic feet of natural gas. It called the field Alpine High.

New York has opened a probe into whether Mylan broke antitrust law under its EpiPen4Schools program, which gives many schools the devices for free, but may have barred institutions from buying rival products for a year. Meanwhile, new reports suggest Mylan pays no more than $30 per EpiPen, while some patients are forced to pay a little over $600 for a two-pack of the lifesaving medication.

Department of Justice prosecutors are considering criminal charges against HSBC related to conduct on its foreign-exchange desk, possibly upending an earlier deal that let the bank avoid prosecution. The new investigation could lead to a step that has often been threatened but rarely taken: prosecutors tearing up a deferred-prosecution agreement if a company fails to comply with the reform plan laid out by the Justice Department. HSBC is essentially on probation: It admitted in 2012 that it helped Mexican drug cartels launder money and did business with Iran and other sanctioned nations.

To avoid charges, it signed the so-called DPA, which required it to improve its internal controls and submit to an outside monitor. If HSBC is found to have broken the terms of the deferred prosecution, then the bank could find itself pulled back into the money laundering and sanctions case that it thought it had put behind it four years ago; prosecutors could invoke a section of the deal that says HSBC could be held responsible for the conduct it admitted to in 2012.

Prosecutors will consider many factors before deciding whether to file a criminal charge against the bank in the currency case, including the severity of the conduct on the foreign-exchange desk and the extent to which the bank moved to address it. A significant argument against charging the bank is that the foreign-exchange conduct on which the charge would be based appeared to be a one-time event that has not been linked to a wider pattern of behavior. Also, the conduct on the foreign-exchange desk predated the 2012 agreement.

Last year, the Justice Department voided a similar deferred prosecution agreement with UBS Group after the bank acknowledged unlawful conduct on its foreign-exchange desk. In 2012, UBS signed a non-prosecution agreement related to accusations that it and other banks attempted to rig benchmark Libor interest rates that affected trillions of dollars of derivatives and loans. But UBS was granted immunity because it self-reported the forex rigging, so…

The nation’s largest investment bank is barring its top employees from contributing to certain political campaigns. The new rules, which went into effect last week, prohibit partners at Goldman Sachs from donating to politicians running for state or local office, or to state officials who are seeking federal office. That applies to Indiana Gov. Mike Pence, Trump’s running mate, which means that the Goldman Sachs partners can’t contribute to the Republican ticket.

The policy, which was spelled out in a memo obtained by The Associated Press, is meant to remove any implication of a “pay for play” scandal. Four years ago, the bank paid $12 million to settle charges that a Boston-based banker had a bond underwriting business in the state while contributing funds to and working for the campaign of Massachusetts gubernatorial candidate Tim Cahill.

The memo specifically highlights the Trump-Pence ticket – and Super PACs supporting the Republicans – as a campaign to which the partners at the New York-based firm can’t donate. But the rules do not apply to the Democratic ticket, since neither Hillary Clinton nor her running mate, Sen. Tim Kaine, are currently state officeholders, though Kaine is a former governor. The new rules apply to 467 Goldman partners and not the approximately 30,000 other employees.

Financial Review

Apple Bites

Sinclair Noe — July 26, 2016

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

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DOW – 19 = 18,473
SPX + 0.7 = 2169
NAS + 12 = 5110
10 Y – .01 = 1.56%
OIL – .49 = 42.64
GOLD + 4.40 = 1320.70

The S&P CoreLogic Case-Shiller 20-city composite saw a 0.9% gain in May to stretch the 12-month advance to 5.2%. Phoenix resale home prices were up 0.6% in May, and 5.4% over the past 12 months. Portland had the hottest housing market, New York the weakest. From the 2006 peak, the 20-city composite is down 8.8%; it’s up 40.4% from the trough in 2012.

The Commerce Department reports new home sales increased 3.5 percent to a seasonally adjusted annual rate of 592,000 units last month, the highest level since February 2008. Sales were up 25.4 percent from a year ago. At June’s sales pace it would take 4.9 months to clear the supply of houses on the market, down from 5.1 months in May. The median price for a new home rose 6.1 percent from a year ago to $306,700.

The Conference Board’s consumer confidence index was little changed this month, finishing at 97.3 compared to revised 97.4 in July. Consumers were slightly more positive about current business and labor market conditions. Expectations regarding business and labor market conditions, as well as personal income prospects, declined slightly.

The Federal Reserve has begun a two-day FOMC meeting on interest rate policy. The Fed is all but certain to keep interest rates on hold, acknowledging improved economic prospects, but offering few hints about its next move. Central to the debate will be how to reconcile upbeat economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory. The inflation measure the Fed prefers to track is currently at 1.6 percent, and oil prices have just moved to three-month lows.

Threats to America’s financial stability rose after the U.K. voted in June to leave the European Union but remain moderate, according to a report from the Office of Financial Research, the research arm of the Financial Stability Oversight Council. The vote could usher in “months or years of uncertainty” over rules tied to the U.K.’s investment, financing and trade relations with Europe and the rest of the world. Despite the ability of U.S. markets to recover from the initial shock of a market selloff, persistent concerns remain as the U.K. decides “if, how and when” to leave the EU. Possible spillover effects could jolt the broader financial system, including U.S. banks and nonbanks such as life insurers and broker-dealers.

The Bank of England’s Martin Weale has changed his mind and now supports immediate stimulus for the U.K. economy at next week’s policy meeting. The pivot follows a series of negative business reports, culminating in last week’s poor PMI data. Only a week ago, the widely-followed policymaker called on the central bank to wait for “firmer evidence” before implementing more monetary easing.

Just two months before the yuan is to be included in the IMF’s Special Drawing Rights basket for the first time, the fund’s board has adopted a new methodology for calculating the amounts of its global reserve currencies. New weightings of the dollar, euro, yen and pound will be set on Sept. 30 and fixed for five years, pushing the yuan a step closer to being freely usable internationally.

Specialist Italian pension funds are considering a government request to pour money into a bank rescue fund, days before European stress tests are expected to show the country’s third-largest lender, Banca Monte dei Paschi, is in urgent need of capital. Italy is looking for ways to support struggling lenders without breaking EU state aid rules, but a deeper financial crisis could further undermine confidence in the eurozone’s fourth-largest banking sector.

Here’s a rundown of some of the earnings reports today:
3M posted earnings that beat by one cent a share, on revenue a touch below estimates. The firm lowered its guidance for 2016 sales growth.

Caterpillar reported earnings that beat on both the top and bottom line.

DuPont posted earnings that beat on both the top and bottom line, and raised its full-year forecast.

McDonald’s reported a lower-than-expected rise in U.S. same-store sales. Quarterly earnings, ex-items, did beat expectations.

United Technologies raised full-year guidance and posted quarterly earnings that beat on both the top and bottom line.

Verizon reported quarterly earnings that topped expectations on revenue that missed. The telecommunications giant said a seven-week workers’ strike hurt results.

As the first oil major to report Q2 results, BP announced a loss that missed estimates due to lower refining margins and a multibillion-dollar charge relating to its 2010 oil spill.

Twitter’s stock is crashing, down 10% in after-hours trading, after delivering a revenue forecast that fell well short of expectations.

Also, negative earnings results from Reynolds American, Starwood, KeyCorp, Nielsen, Gilead Sciences and Under Armour.

Positive earnings news from Corelogic (along with higher 2016 guidance), and Texas Instruments beat estimates. Also good reports from Centene, Waters Corp, Avery Denison, Baxter, and Valero.

Of course the big earnings report today came after the closing bell. Apple reported iPhone sales fell for the second straight quarter, although the 15 percent drop was less than feared. The company’s total revenue dropped 14.6 percent in the third-quarter ended June 25, also declining for the second quarter in a row. Apple said it sold 40.4 million iPhones in the third quarter, more than the average analyst forecast of 40.02 million. Apple’s quarterly net profit fell 27 percent to $7.8 billion, while revenue of $42.36 billion beat analyst’s estimates. Phone sales in China dropped 33%.

Apple’s services business, which includes the App Store, Apple Pay, iCloud and other services generated nearly $6 billion in revenue, up 18.9 percent from the previous year. The stock was trading toward the low end of its 52-week historical price range – down 8.5% year-to-date –  and at the bottom of the range for mega-cap tech stocks. In after-hours trade Apple was up about 6%, topping $101 per share.

Annheuser-Busch InBev raised its offer for SABMiller by 2.3% to 79 billion pounds to account for the Brexit-related plunge in sterling.

Switzerland said it plans to give information to U.S. tax authorities about accounts at HSBC Holdings’ Swiss private bank, as part of a U.S. investigation into tax evasion. HSBC’s Swiss unit has already paid tens of millions of dollars in fines after admitting substandard compliance on tax evasion and other issues. The Swiss government said it made the announcement to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the IRS.

Fiat Chrysler Automobiles said it has revised the way it counts monthly sales figures of new cars and trucks and now says its impressive sales streak of 75 months of consecutive sales gains actually ended in September, 2013. It said that under the revisions, there were three months in which it had reported sales gains but now will report them as declines.

Volkswagen’s settlement plans to get 482,000 diesel-cheating cars off U.S. roads won a preliminary go-ahead from a federal judge. The plan for buybacks and a possible fix covers car owners, the U.S. government and 44 states and will cost the company about $15.3 billion if the agreements are fully adopted. The settlement includes $10 billion for buybacks, as well as $4.7 billion in government penalties and remediation. With or without a fix, car owners who don’t like the buyback option may be able to keep driving the polluting cars in some states.

The pact eats up almost all of the $17.8 billion the company had set aside to cover the cost of the scandal worldwide. In addition to investor class actions in the U.S. and lawsuits in Germany and South Korea, the company faces criminal probes in all three countries. VW took a 2.2 billion-euro charge in the second quarter, chiefly related to legal risks in the U.S. The company will report full earnings figures on Thursday.

Amazon is partnering with the U.K. government to significantly expand drone testing, a move that could let the devices deliver packages to British homes far earlier than in the US. Amazon will work with British regulators to test drones that fly beyond the line of sight of operators in rural and suburban areas. It will also test whether a single operator can safely command multiple drones at once, as well as technology that lets the machines automatically detect and avoid other planes, buildings and people.

Tesla has doubled the labor force working on its $5 billion battery factory in the Nevada desert, aiming to meet demand for its coming Model 3. Now, 1,000 workers build seven days a week on two shifts in an effort to start churning out lithium-ion cells by late 2016. Elon Musk is set to inaugurate the Gigafactory with a media briefing today, followed by an exclusive tour and party for Tesla customers on Friday.

Have you noticed the changes to Google Maps? For its more than 1 billion users, Google announced a design update to Google Maps yesterday, July 25. Embracing a “cleaner look,” the new reduced interface for mobile and desktop is focused on discovery and socializing, instead of turn-by-turn directions. Areas of interest like restaurants, bars, and shops are now shaded in a light shade of orange, allowing users to learn about new venues around their destination.

The first round-the-world solar powered flight has been completed, after the Solar Impulse aircraft touched down in Abu Dhabi and finished a journey that began over a year ago. The ABB-engineered plane is no heavier than a car, but has the wingspan of a Boeing 747. It’s powered by 17,248 solar cells, runs on battery power at night and has an average airspeed of 46 mph.

Financial Review

Number 9

Sinclair Noe — July 20, 2016

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

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DOW + 36 = 18,595
SPX + 9 = 2173
NAS + .53 = 5089
10 Y + .03 = 1.59%
OIL + .29 = 44.94
GOLD – 16.40 = 1316.30

The Dow Industrial Average is on a 9-day winning streak; its longest winning streak since March 2013. The Dow and S&P 500 have set multiple record closing highs in recent days. But the Nasdaq remains 3.5 percent away from its record close.

A 9-day winning streak for the Dow has only happened 7 times since 1980. In each of the other six instances, the index has been up the following six months with an average gain of 10.41%. Going back to 1900, a 9-day streak has happened 30 times and the average gain in the following six months has been 5.96%.

The dollar is at a four-month high against a basket of currencies, bolstered by strong economic data and growing expectations the Fed may raise rates before the end of the year. The dollar index is trading above 97, its highest level since March 10. Fed funds futures rates now suggest a 40% chance of a rate hike in December, compared with less than 20% a few weeks ago. Treasuries declined, with the 10-year yield rising three basis points to 1.59 percent. The yield has risen from an all-time low of 1.318 percent

According to Thomson Reuters, 64 percent of S&P 500 companies have topped earnings estimates. That compares to a long-term average of 63 percent over the past 22 years. Even though earnings are expected to be down 5.4% when compared with year ago levels, they are beating diminished expectations and that is apparently good enough to fuel the rally that’s added more than $4.5 trillion to the value of equities worldwide in three weeks.

Morgan Stanley this morning reported better-than-expected quarterly earnings and revenue, aided by the financial giant’s fixed income and investment banking businesses.

After the closing bell yesterday, Microsoft reported adjusted quarterly earnings of 69 cents per share, 11 cents above estimates, with revenue also beating forecasts. The software giant’s key cloud product, Azure, saw revenue grow 102 percent for its fiscal fourth-quarter.

Intel reported quarterly earnings that beat expectations, but revenues for the quarter came in slightly lower than expected. In particular, the company reported revenue from its data center and “Internet of Things” segments that slightly missed expectations. Intel has previously cast these businesses as the primary profit-growth engines for the company.

American Express, the biggest U.S credit-card issuer by purchases, said second-quarter profit rose 37 percent as customers increased spending and the company booked a $1 billion gain from the sale of its Costco portfolio. Revenue declined but still beat estimates.

Volkswagen’s operating profit came to €7.5-billion-euro in the first half of 2016, beating market expectations and pushing its shares higher. Adjusted for one-off costs of €2.2-billion-euro, operating profit still came to €5.3-billion-euro.

Meanwhile, Volkswagen is being sued by a handful of states. Attorneys general from Maryland, Massachusetts, and New York have filed a lawsuit against Volkswagen, Porsche, and Audi, alleging a “cover up” that was “orchestrated and approved at the highest levels of the company.” The lawsuit accuses Volkswagen of skirting emissions standards by installing “defeat devices” since the mid-2000s. Additionally, the suit says that the group “made a knowing decision to violate the law” and that Volkswagen “allegedly destroyed incriminating documents” upon hearing about the investigation.

The Bank of England says Brexit isn’t killing the economy. “As yet, there was no clear evidence of a sharp general slowing in activity,” said the BOE’s July “Agents’ summary of business conditions.” The central bank did suggest, however, that there was still a high degree of uncertainty as businesses are just now attempting to formulate their strategies for a British exit from the European Union. The European Central Bank hold a major policy meeting tomorrow.

The purge led by Turkey’s President Erdogan following Friday’s failed coup continues to widen, with, at last count, nearly 60,000 people detained, fired or dismissed. The Turkish lira is rebounding somewhat this morning after trading within 1 percent of an all-time low overnight. Turkey’s central bank cut its overnight lending rate by a quarter point to 8.75%. Today, Erdogan imposed a three-month state of emergency.

Federal agents in New York have arrested Mark Johnson, HSBC’s global head of foreign exchange cash trading. Johnson is being charged with conspiracy to commit wire fraud involving front-running client orders, according to the complaint. Stuart Scott, HSBC’s head of foreign-exchange cash trading for Europe, was also accused in the complaint, which was unsealed Wednesday in Brooklyn federal court.

HSBC is under criminal investigation in the currency case. More than two-dozen traders have been suspended by their banks in the course of the investigation.  The arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. Also on Tuesday, the U.S. Federal Reserve banned former UBS Group AG trader Matthew Gardiner from the banking industry for life for his role rigging currency benchmarks.

U.S. prosecutors have detailed an alleged scheme of international money laundering and misappropriation from 2009 to 2015. The Justice Department is seeking to seize more than $1 billion worth of assets it says went through U.S. banks from Malaysian development fund 1Malaysia Development Berhad, known as 1MDB, and was ultimately used to illegally acquire assets. More than $3.5 billion traveled a trail of fraud from Malaysia through a web of shell companies, fueling a spending binge on paintings and luxury real estate and even funding a movie (ironically the movie was The Wolf of Wall Street), with at least $700 million flowing back into accounts controlled by Malaysia’s prime minister, Najib Razak.

Along the way, some of the money was handled by international banks including Goldman Sachs, JPMorgan Chase, Standard Chartered and Deutsche Bank. Money was pilfered from the government fund based on false representations made by 1MDB officials and shell companies. Even when bank officials raised questions about the beneficiaries of various accounts, compliance departments were unable to detect or halt the alleged fraud. The Malaysia fund is at the center of several international investigations into alleged corruption and money laundering by public officials. Prosecutors in Singapore, Switzerland, Luxembourg and the U.S. are looking into money flows from the investment vehicle, which was established for national development.

Anheuser-Busch InBev won U.S. antitrust approval for its takeover of SABMiller, after the maker of Budweiser agreed to give up ownership of the Miller brand and open the door to greater competition from craft beers. AB InBev will sell SABMiller’s stake in MillerCoors, separating the two brands. The Justice Department and the Federal Trade Commission have recently killed proposed tie-ups in the cable, office supplies and oil drilling industries, among others. In this case, the companies proposed asset sales from the start that helped resolve antitrust officials’ concerns.

Aetna says it is ready to go to court if necessary to proceed with its $37 billion takeover of Humana. By taking over Humana, Aetna would become the largest player in Medicare Advantage, with about 4.5 million customers. The U.S. has been said to be preparing to sue to block the deal because it would limit options for consumers.

Financial Review

Spotting Highs and Lows

Sinclair Noe — February 22, 2016

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

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DOW + 228 = 16,620
SPX + 27 = 1945
NAS + 66 = 4570
10 Y + .02 = 1.77%
OIL + 1.84 = 31.48
GOLD – 17.70 = 1209.30

Stocks across the globe rallied today, sending Dubai shares into a bull market, as oil rebounded and metals advanced. The pound slid as a split in the U.K.’s ruling party over European Union membership increased the potential for an exit from the bloc. The U.K. currency weakened the most in almost seven years against the dollar after London’s Conservative Mayor Boris Johnson said he’ll campaign for Britain’s exit from the EU, opposing Prime Minister David Cameron.

We all know the old saying, “Buy low and sell high.” The problem is picking the highs and lows. John Stoltzfus, Oppenheimer’s chief market strategist has noticed a trend; in a report this morning he looked at the lows over the past year; there were 7 major lows and they all happened as the S&P 500 dipped down to 16.5 to 17 times earnings. That is when stocks looked cheap and buyers stepped in. Of course, this is not a hard and fast rule; it only works until it doesn’t.

The IEA says, “Today’s oil market conditions do not suggest that prices can recover sharply in the immediate future.”  The IEA says oil markets will begin to re-balance in 2017 thanks to falling U.S. production but that decline will prove short-lived as efficiency gains will push U.S. output to new records by the beginning of the next decade. Production of U.S. shale oil is expected to drop by 600,000 barrels per day this year, and a further 200,000 barrels per day next year before gradually recovering.

Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit US oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers Sabine Oil & Gas and Quicksilver Resources are trying to use Chapter 11 bankruptcy protection to drop long-term contracts with the pipeline operators. Pipeline operators have argued the contracts are secure, but restructuring experts say that if the two producers manage to tear up or renegotiate their deals, others will follow.

Exactly how major asset sales and defaults are handled will be a big part of figuring out where oil prices go from here. We really haven’t seen much in the way of major assets sales in the oil patch... yet. There have been some distressed sales and some defaults, and when the banks take over, they are quick to unload assets. Those banks are motivated sellers and will likely keep the market for energy assets depressed for at least a year.

Of course for the big private investors with a long-term time horizon like Blackstone or KKR, this could create a major opportunity. Yet private equity firms are being very disciplined with their capital and are only slowly starting to enter the market for such assets. We haven’t seen much M&A activity, probably because sellers have been clinging to the hope that prices will come back and they will be vindicated for sitting on their assets.

But that might change this year as more sellers are forced by defaults to accept any price they can find, or alternately lose the asset to BK. It will take some time to work through the carnage, probably another year at least. Clearly these are dangerous times for equity investors in the oil patch.

As the U.S. farming sector enters the third year of a downturn caused by a global glut of grains and slumping commodity prices, bankers across the Midwest are starting to tighten lending conditions and even cutting some clients off. Many corn and soybean farmers already are trying to adjust by selling off grain stockpiles, and begging bankers to restructure debt and give them more time to pay it back. Farm sector debt soared past $364 billion last year and is forecast at over $372 billion in 2016.

The flash manufacturing purchasing managers index from Markit fell to 51.0 from 52.4 in January. This matches the lowest level since September 2009. Economists had been expecting a reading of 52.5. While a reading above 50 represents expansion, softer rates of output, new business and employment growth all weighed on the index.

Manufacturing output fell for the third time in the past four months. Markit’s chief economist said: “U.S. factories are reporting the worst business conditions for over three years. Every indicator from the flash PMI survey, from output, order books and exports to employment, inventories and prices, is flashing a warning light about the health of the manufacturing economy.”

CNBC reports that Honeywell and United Technologies have held talks about a merger. A deal would create a company with combined sales of more than $90 billion. It is not a done deal; terms have not been worked out, and there would be some anti-trust hurdles as well.

Sysco has agreed to acquire the Brakes Group, a European food distributor, for $3.1 billion. The deal comes less than a year after Sysco terminated its $3.5 billion deal with US Foods after regulators determined that the combination would be harmful to consumers by leading to higher prices and lower service.

The private banking and asset management firm EFG International has agreed to acquire BSI, the Swiss private-banking arm of the Brazilian investment bank BTG Pactual, for about $1.3 billion; and creating one of the largest private banks in Switzerland with 170 billion francs under management.

HSBC Holdings posted a loss of $858 million, falling far short of analyst expectations for a profit of $1.9 billion. The profit miss is not the only problem facing the bank, the SEC is investigating the company’s Asia Pacific hiring practices. The investigation concerns the bank’s hiring of people that have close government ties.

Fannie Mae is at risk of needing a government bailout that could shake up confidence in the housing finance market, so says the Financial Times.  The reason is because the government does not let Fannie Mae retain profits, its capital buffer (which has dwindled from $30 billion before the financial crisis to $1.2 billion today) is on track to disappear by January 2018. At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership.

Highlights from the Mobile World Congress: Samsung Electronics and LG Electronics unveiled their latest flagship devices, seeking to revive sales momentum and buck slowing industry growth. The new Galaxy S7 comes with an improved camera, memory storage, water resistance and a longer battery life, while the LG G5 showed off a similar range of new features.

The biggest news, however, was the firms’ big jumps into virtual reality. Samsung is teaming up with Facebook to push VR elements into phones and social networking, and the two companies unveiled 360 degree recorders, cameras and viewers.

Payment card operators are also taking part in Mobile World Congress. MasterCard is bringing facial recognition services dubbed “selfie pay” to the U.K. to improve identity verification for mobile phone payments. British users will be able to scan fingerprints or snap selfies to validate their identities for completing online purchases. Meanwhile, Visa wants to turn your car into a mobile payments platform, showing off a concept app that will let drivers pay for fuel and parking without leaving their vehicles.

Also on display at the Mobile World Congress in Barcelona: 5G, or the fifth generation of wireless technology, offering mobile Internet speeds that will let people download entire movies within seconds, and it may pave the way for new types of mobile applications. Under plans for 5G, carriers will most likely offer mobile Internet speeds of more than 10 gigabits per second, or roughly 100 times faster than current networks (and significantly quicker than existing broadband). That would allow you to download high-definition movies almost instantaneously, even if you’re on the go.

Such technology will not come cheap. Carriers and telecom equipment makers will have to install new hardware like cellphone towers in rural areas and tiny mobile hot spots in dense urban areas to reach the 10 gigabits per second target. They will also have to increasingly rely on sophisticated software to manage the expected exponential jump in mobile data traffic.

AT&T is partnering with Intel to test and optimize how drones perform on LTE connections beyond line of sight, at higher altitudes, or when faced with external interference. The collaboration is designed to show how a network that has primarily been designed to connect devices (such as smartphones) on the ground can be re-worked for unmanned aerial vehicles.

Apple CEO Tim Cook has sent a new memo to all Apple employees explaining why the company is resisting an FBI request to decrypt an iPhone used by one of the San Bernardino shooters. In the memo, Cook says the FBI should withdraw its demand to force Apple to develop a tool to help it break into the iPhone.

He writes: “At stake is the data security of hundreds of millions of law-abiding people, and setting a dangerous precedent that threatens everyone’s civil liberties.” A court last week ordered Apple to comply, but the company is challenging the order. Apple is calling for the government to launch a commission of experts to examine the effects of encryption technology on law enforcement.

Lumber Liquidators’ flooring, tested for formaldehyde, was found to have a three times higher risk of causing cancer than previously stated. A report released Feb. 10 used incorrect ceiling heights, lowering by about three times the airborne concentration that should have been examined and reducing the danger. According to the Centers for Disease Control and Prevention the estimated risk of tumors is six cases to 30 cases per 100,000 people, and not the two to nine cases in the earlier report.

US auto safety regulators are examining whether an additional 70 million-90 million Takata airbag inflators should be recalled because they may endanger drivers, according to Reuters. That would nearly quadruple the 29 million inflators that have been called back so far. New recalls would translate into billions of dollars in additional costs for the company and also add years to the replacement process.

US authorities have asked Volkswagen to produce electric vehicles in the U.S. as a way of making up for its rigging of emission tests. The plan would see VW manufacture electric cars at its plant in Tennessee, and help build a network of charging stations for electric vehicles. A VW spokesman said, “Talks with the EPA are ongoing.”

Financial Review

That’s Her Story

Sinclair Noe — February 10, 2016

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

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DOW – 99 = 15,914
SPX – 0.35 = 1851
NAS + 14 = 4283
10 Y – .02 = 1.70%
OIL – .64 = 27.30
GOLD + 8.00 = 1197.80

Fed Chair Janet Yellen delivered her semi-annual Humphrey-Hawkins testimony in Washington today in her first major appearance since the Fed’s rate hike last December. In prepared testimony, Yellen said there are good reasons to believe the United States will stay on a path of moderate growth that will allow the Fed to pursue “gradual” adjustments to monetary policy.

Family incomes and wealth are rising, domestic spending “has continued to advance,” and business investment outside the oil sector accelerated in the second half of the year, she said. Yellen said she expects the labor market to continue to improve and inflation eventually rise towards the Fed’s target despite a recent drop in inflation expectations.

Yellen said that financial conditions “have become less supportive to growth.” If these conditions persist, they could weigh on the economy. In addition, Yellen said there are “downside risks” largely stemming from uncertainty about the health of the Chinese economy. “Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.”

The Fed chairwoman did not come out and say anything about the U.S. central bank’s own forecast, made in December, that it would raise interest rates four times in 2016. She stressed the Fed was not in automatic tightening mode. Yellen said, “Monetary policy is by no means on a preset course.”

With Wall Street off to an ugly start to the New Year, there has been some speculation the Fed might have to reverse course and cut rates; Yellen addressed this in her Q&A session, saying: “I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don’t think it is going to be necessary to cut rates.” Rather, she said she expected continued US growth would allow the Fed to pursue its plan of “gradual” rate hikes.

To boil it down for you, Yellen essentially said that we won’t see a rate hike in March and we won’t see 4 rate hikes in 2016. Tomorrow, Yellen will repeat the story before the Senate.

Treasury 10-year note yields fell two basis points, or 0.02 percentage point, to 1.70%. Two-year note yields rose one basis point to 0.70%. The difference between two- and 10-year note yields fell to the lowest on an intraday basis since January 2008; just 100 basis points. A shrinking gap is known as a flattening yield curve.

The decline in longer term yields probably doesn’t signal the expectation that short term rates might go even lower, but rather, it signals that bond market participants are seeing the possibility of rates going higher as diminishing. The upside, which in this case is a healthy economy with a healthy demand for money, is being perceived as less likely.

A possible side effect is that low rates equate to cheap money. Now that doesn’t mean that interest rates are dropping everywhere; corporate bond rates have not been dropping, largely because quality has been dropping. And don’t expect to see lower rates on credit cards in the foreseeable future; but mortgage rates are cheap.

Calculatedriskblog reports mortgage applications increased 9.3 percent from one week earlier; purchase applications are up 25% year-over-year; and refinancing applications increased 16% from the previous week. The average contract interest rate for a 30-year fixed rate conforming mortgage dropped to 3.91%, the lowest level since April 2015.

We had a similar flight to safety causing Treasury bond rates to plunge during the Euro-crises of 2012 and early 2013. Those low rates gave rise to the biggest increases in housing construction and jobs during the entire US expansion.

Japanese stocks extended a heavy selloff today, the Nikkei dropped 2.3%, closing in the red for six of the past seven sessions, despite a festive atmosphere across East Asia for the Lunar New Year holiday. Japanese Prime Minister Shinzo Abe defended BOJ Governor Haruhiko Kuroda’s handling of the economy, and said it was up to the central bank to decide what policy instruments to use.

The Supreme Court temporarily blocked the administration’s effort to combat global warming by regulating emissions from coal-fired power plants. The order was not the last word on the case, which is most likely to return to the Supreme Court after an appeals court considers an expedited challenge from 29 states and dozens of corporations and industry groups.

But the Supreme Court’s willingness to issue a stay while the case proceeds was an early hint that the program could face a skeptical reception from the justices. The 5-to-4 vote was unprecedented; the Supreme Court had never before granted a request to halt a regulation before review by a federal appeals court.

The challenged regulation, which was issued last summer by the Environmental Protection Agency, requires states to make major cuts to greenhouse gas pollution created by electric power plants, the nation’s largest source of such emissions. The plan could transform the nation’s electricity system, cutting emissions from existing power plants by a third by 2030, from a 2005 baseline, by closing hundreds of heavily polluting coal-fired plants and increasing production of renewable, clean energy.

Though the first emission reduction obligations do not take effect until 2022, the states said they had already started to spend money and shift resources; and any judicial review will be completed well before 2022.

The Treasury Department reports the federal government ran a budget surplus of $55 billion in January, compared with a deficit of $18 billion in the same month a year ago. Including the monthly surplus, the government is running deficit of $160 billion for the fiscal year to date. That’s 17% less than the first four months of the last fiscal year, which ended in September.

Deficit hawks shouldn’t get too excited by the lower year-to-date number, however. The Congressional Budget Office is projecting a deficit of $544 billion for fiscal 2016, which would be more than $100 billion above the shortfall for 2015. The CBO pegged that expected bigger deficit partly on some tax breaks being made permanent.

China has confirmed its first case of the Zika virus in a man who recently traveled to Venezuela. The World Health Organization declared Zika a public health threat on Feb. 1, and raised the possibility that there could be up to 4 million cases of the virus in the Americas alone.

Deutsche Bank shares recovered about 5% today, leading a surge in European bank shares. Deutsche Bank is considering a bond buyback to help ease investor concerns about its debt. The stock remains down over 30 percent since the start of 2016.

HSBC has been sued by the families of U.S. citizens murdered by drug gangs in Mexico, claiming the bank let cartels launder billions of dollars to operate their business. HSBC already paid nearly $2 billion in penalties in December 2012 to resolve charges that it failed to stop hundreds of millions of dollars in drug money from flowing through the bank from Mexico.

Just last week, the Justice Department announced that it had reached a $470 million settlement with HSBC related to mortgage lending and foreclosure fraud that led to the economic collapse of 2008.

MetLife, the same insurance behemoth that advertises how it is a huge international powerhouse, now says that it really isn’t so big after all, and to prove it, they sued the US government over whether regulators can designate non-banking firms as “too big to fail.” Today, the case went to trial.

Non-bank firms designated systemically important must hold more capital and comply with rules intended to stave off the need for a federal bailout should they fail. The rules have yet to be finalized. Last month, MetLife said it plans to split up due to the “regulatory environment” and pressure is mounting on other firms to also shrink and shed the “too big to fail” designation.


A significant barrier to Google’s plan to put driverless cars on the roads has been removed, after the NHTSA supported its interpretation that a robot could meet the legal definition of a driver. Do they get a driver’s license?

Google has also filed for another potential use of its artificial intelligence system in a patent award that described an “autonomous delivery platform” for trucks. The driverless transport vehicle would carry several lockers that could only be opened by the recipient of a package, using a PIN code or credit card.

Time Warner reported a bigger-than-expected drop in quarterly revenue as subscription revenue for its cable channel HBO and Turner television network disappointed. Time Warner dropped about 4% on the day.

Cisco Systems reported its second-quarter earnings rose to $3.1 billion from $2.4 billion in the same quarter last year. Revenue was flat at $11.9 billion. Cisco beat estimates on the top and bottom line. Shares moved higher in after-hours.

Whole Foods Market said profit declined in its latest quarter, same store sales were down and gross margin continued to deteriorate, but they still topped estimates. Shares moved higher in after-hours.

Twitter said it had 320 million average monthly active users in the quarter, lagging a forecast for 323 million users from RBC Capital Markets. Revenue rose 48% to $710 million in the quarter. Twitter posted earnings of 16 cents per share, versus estimates of 12 cents. But the takeaway is that user growth stalled. Shares moved lower in after-hours.

Tesla reports it will be cash flow positive in 2016, and will turn a profit. Just not today. Tesla posted a loss of $320 million, its 11th straight quarterly loss. But good times are right around the bend. Tesla shares moved higher in after-hours.

Financial Review

King v Burwell Plan B

Sinclair Noe — June 9, 2015

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

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DOW – 2 = 17,764
SPX + 0.87 = 2080
NAS – 7 = 5013
10 YR YLD + .04 = 2.42%
OIL + 1.81 = 59.95
GOLD – 1.60 = 1176.10
SILV – .04 = 15.92

Each month the Labor Department reports on nonfarm payrolls, usually that report comes out on the first Friday of the month; a few days later they release the JOLT survey, Job Openings and Labor Turnover from the prior month. Job openings at US workplaces rose to 5.3 million in April from 5.1 million in March. That’s the most job openings in 14 years, and those job openings were spread among industries, including health care, retailers and providers of professional services. Now, keep in mind that this is the Job Openings from April, and we just saw the May Jobs report, which showed that the unemployment rate ticked up from 5.4% in April to 5.5% in May; and the reason the unemployment rate was higher is because more people entered the labor pool. Most of the nearly 400,000 new job seekers were under the age of 25.

While the number of job openings soared, employers are still taking their time filling them. Total hiring in April fell to 5 million from 5.1 million. The disparity between more openings and flat hiring suggests employers are being picky about new hires. Many companies say they are having difficulty finding qualified workers. They may not be offering high enough wages. Average hourly pay rose just 2.3 percent in April from a year earlier, much lower than the roughly 3.5 percent gains typical in a healthy economy.

With 8.5 million unemployed people in April, there were about 1.6 potential job seekers per opening, below March’s ratio of 1.7. In April 2014, there were about 2.2 potential seekers per opening. The number of separations, such as quits and layoffs, dropped to 4.8 million in April from 5 million in March. This indicates that fewer people have confidence to quit their current job to find another job; in other words, people don’t necessarily think the grass is greener on the other side of the fence. In the year that ended in April, employers added a net 2.8 million jobs, representing 60 million hires and 57.2 million separations.

The Commerce Department reports wholesale inventories rose 0.4% in April. Inventories of durable goods, such as autos and machinery, increased 0.1%. Meanwhile, inventories of nondurable goods rose 0.8%. Wholesale sales rose 1.6% in April, following a drop of 0.3% in March. Inventories are a key component of gross domestic product changes. At April’s sales pace it would take 1.29 months to clear shelves. An inventory-to-sales ratio that high usually means an unwanted inventory build-up. Conversely, it could show confidence from businesses anticipating better sales in the second quarter.

If it sounds like a mixed bag of economic news, well it is. The economy is showing signs of improvement but not enough to achieve escape velocity. And the stock market can’t decide which way to go. Last week stocks traded in their tightest weekly range in 21 years. The S&P 500 index has not moved more than 1 percent in either direction in 14 of the past 15 sessions, and the spread between the highest and lowest close this year has been only 6.9 percent, the narrowest since 2006. About 59 percent of stocks closed above their 200-day moving averages at the end of last week, the lowest percentage in eight months. The lack of breadth is not an indicator of a market top, rather it is a sign of consolidation. At some point, the market will decide which way it is moving but for now it is just grinding sideways.

The bond market seems to have no trouble finding direction – it is going down. The global bond market has been sliding for a couple of months, and in the past couple of weeks, US Treasuries have joined in on declines. If you were waiting for confirmation, we now have it; speculative-grade notes (or junk bonds) tend to have shorter maturities and fatter cushions of extra yield over benchmarks than higher-rated bonds, features that can protect the market in periods of rising rates and climbing inflation. And so the high yield debt market has shown some resiliency until right about now. Investors are starting to flee, yanking $1.5 billion from the two biggest high-yield bond exchange-traded funds over the past week.

HSBC will cut costs by as much as $5 billion within two years, selling its units in Brazil and Turkey and laying off as many as 50,000 jobs, or about 20% of its workforce. It will cut its assets by a quarter, or $290 billion on a risk adjusted basis by 2017, and slice $140 billion from its investment bank. HSBC also pledged a new era of higher dividends.

German prosecutors have raided Deutsche Bank offices in Frankfurt in a search for evidence related to client securities transactions, as Germany’s largest lender struggles to break free of regulatory issues that contributed to an overhaul of its top leadership this week.
The raid was apparently tied to a tax rebate strategy by some of the bank’s clients known as “dividend stripping”, in which a stock is bought just before losing rights to a dividend, then sold, taking advantage of a now-closed legal loophole which allowed both the buyer and the seller to reclaim capital gains tax.

General Electric has agreed to sell its private-equity-lending unit to Canada’s largest pension fund in a deal valued at about $12 billion. GE is largely getting out of the banking business. With the deal, GE has unveiled $55 billion worth of asset sales, putting the company on track to reach its goal for $100 billion in sales by the end of the year.

Fiat Chrysler Automobiles’ CEO Sergio Marchionne is reaching out to hedge funds and other potential allies to prod General Motors into a merger. Marchionne has been emboldened by recent successes of activist investors at GM and sees them as a means to consolidate the fragmented auto industry. So far, GM has resisted all of Fiat Chrysler’s entreaties, including a merger appeal to Chief Executive Mary Barra earlier this year. GM’s annual shareholder meeting is taking place today.

Meanwhile, Federal prosecutors are reportedly weighing criminal wire fraud charges against General Motors over the company’s failure to recall vehicles equipped with faulty ignition switches. The Wall Street Journal reports US prosecutors in New York are considering other possible charges and have not made a final decision. Authorities hope to reach a settlement with the automaker by the end of summer or early fall.

You know about the extreme drought in California. Governor Jerry Brown declared a state of emergency and set aside $687 million to help households, farmworkers, and others struggling in drought-devastated counties. More than $320 million sits unspent in government bank accounts more than a year after lawmakers voted to use the money to provide water, protect wells from contamination and upgrade outdated water systems.

The Obama administration has announced it will forgive federal student loans owed by Americans who can prove their schools broke a state law, such as false advertising, fraudulent recruiting or other deception, to lure them to apply and borrow funds. The move, which could potentially involve billions of dollars, is designed to grant debt relief to former students of now-bankrupt Corinthian Colleges, which lied to prospective students about its graduates’ job success. The forgiveness push, though, will likely stretch far beyond the institution.

The Supreme Court is expected to hand down a decision sometime this month in the case of King v. Burwell, which challenges the availability of tax credits to discount the cost of health insurance in at least 34 states. Opponents of the law say it allows subsidies in no more than 16 states that created insurance marketplaces, called exchanges. An adverse Supreme Court ruling would throw insurance markets into disarray, and might spell the end of the Affordable Care Act, or Obamacare, at least in its current form. More than 6 million consumers risk losing discounts on their monthly premiums if the court rules against Obamacare.

And so today, President Obama made his case against King v. Burwell. Obama says the Supreme Court shouldn’t have taken up the case challenging the federal subsidies, and that Congress could settle the issue at the heart of the case with a “one-sentence” change to the law. The section states that subsidies will be available for those who purchase insurance through exchanges “established by the state.” This is an issue, because three dozen states refused to set up their own exchanges and left it up to the federal government. Republicans, however, see the lawsuit as an opportunity to undo what they view as Obamacare’s most onerous provisions, or undo Obamacare completely; and it might just happen.

If the court ruled against Obamacare, most experts believe the health insurance market would suffer what’s called a “death spiral” without the subsidies. Healthy people in states without subsidies would drop their coverage because it would start costing too much. Then insurance would become more expensive, because premiums would go up with healthier people dropping out of the pool. Then more people would drop their coverage as it got even more expensive. Then premiums would go up once again. This downward spiral could destroy Obamacare’s advances with respect to private health insurance. But the threat of this descent into chaos could also be what saves Obamacare. The Supremes are well aware that if they rule the subsidies are not allowed, the law would basically implode and millions of real people would lose their insurance coverage, and there is a good chance several health insurers would collapse, and that doesn’t even begin to cover the explosion in litigation that would follow.

It’s a fool’s game to predict how the Supreme Court will rule, and so it was most unusual to hear the president speak out against a case that has not yet been decided. I don’t think this was an attempt to sway the justices; they have likely made up their minds by now. Rather, after the decision is announced, no matter which way the Supremes decide, there should probably be a Plan B.