Financial Review

We Can Be Patient

Sinclair Noe — August 8, 2016

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DOW – 14 = 18,529
SPX – 1 = 2180
NAS – 7 = 5213
10 Y un 1.59%
OIL + 1.22 = 43.02
GOLD – .40 = 1336.00

The S&P 500 hit an intraday record high this morning at 2185, as oil prices rose. On Friday, stocks surged, with the Dow jumping nearly 200 points and the S&P and the Nasdaq closing at record highs after a strong July jobs report showed the economy added 255,000 new jobs in July.

Federal Reserve policymaker Jerome Powell says the US economy is at increasing risk of becoming trapped in a prolonged phase of slow growth that points to the need for lower interest rates than previously expected. Powell told the Financial Times he favored a “very gradual” path for any rate hikes as the US economic outlook was dogged by global risks. Powell said, “With inflation below target, I think we can be patient.” Next week, we get the monthly CPI report on July inflation at the retail level; my guess is that anything under 10% inflation and the Fed will continue to remain patient.

Oil rose 2.5% after a report that some OPEC members had called for a freeze in production. Members of the Organization of Petroleum Exporting Countries are planning to hold talks next month on the sidelines of the International Energy Forum in Algeria. But the same obstacles that prevented an agreement on proposals to freeze output in April or fix a new production target in June are still there. Efforts by some OPEC members over the past two years to limit the group’s output have come to nothing. But the threat of a production freeze can help to turn sentiment, at least short-term.

It may feel like earnings season is coming to a close, but one important sector is just getting started. Many of the country’s largest retailers report quarterly earnings this week including: Macy's, Nordstrom, Kohl’s, J.C. Penney, and Ralph Lauren.

Wal-Mart will buy online retailer Jet.com for $3.3 billion in what appears to be the largest-ever acquisition of an e-commerce company. Walmart hopes the acquisition will help jump-start its struggling online business, which is just a fraction of the size of Amazon’s. Walmart generates about $14 billion in annual e-commerce sales, compared with about $99 billion from Amazon. Under the terms of the deal, Jet co-founder and chief executive Marc Lore will remain at his post and run Wal-Mart’s U.S. e-commerce operations. Wal-Mart has been working to scale its online selection to better compete with Amazon, whose vast assortment dominates e-commerce. Jet.com scaled up to 12 million different products in just one year and reached a run-rate of $1 billion in gross merchandise value. Not bad for a relatively young startup.

The side story is there is a guy named Eric Martin, lives in Pennsylvania and works at bathroom refurbishing shop. Last year, Jet.com held a contest to see who could make the most referrals to the new site. Martin took it very seriously, and spent about $18,000 hustling up online referrals. Martin was awarded 100,000 shares in the startup – now worth somewhere around $20 million. Ten other people were runners-up in the contest and they each were awarded 10,000 shares of Jet.com – still a nice reward.

Creating the world’s “largest mattress distribution network,” Steinhoff International Holdings has agreed to buy Mattress Firm for $3.8 billion, including debt. The $64 per share in cash offer represents a 115% premium to Mattress Firm’s closing price of $29.74 on Friday and has been unanimously approved by the boards of both companies. Mattress Firm, founded in 1986, has about 3,500 stores across 48 states with 80 distribution centers. Steinhoff is a German-listed $22 billion furniture conglomerate led by the South African retail mogul Christoffel Wiese. The Mattress Firm deal would give Steinhoff access to the growing American market.

The mountain resort operator Vail Resorts is buying Canada’s Whistler Blackcomb in a deal worth about $1.1 billion. Whistler, which is about 75 miles from Vancouver, was the location of the Nordic events during the 2010 Winter Olympic Games.

TIAA has reached a deal to buy EverBank Financial for $2.5 billion in cash, an agreement that comes about two weeks after the Florida-based lender said it was in talks to be acquired. The bid, worth $19.50 a share, matches the terms EverBank outlined late last month and marks a 26% premium over where shares traded ahead of media reports about the buyout talks. Buying EverBank would give TIAA $27.4 billion in assets and $18.8 billion in deposits. EverBank focuses on online and mobile banking but also has some offices.

Aeropostale has been negotiating a potential sale to private equity firm Versa Capital Management that might save thousands of jobs at the company and see it take over 500 of the teen retailer chain’s leases. Versa’s offer would be a potential stalking horse bid in a bankruptcy auction for Aeropostale scheduled for later this month, setting the minimum price for other potential buyers. Additional bids are due Aug. 18.

Comcast’s NBCUniversal has acquired the rights to J.K. Rowling’s “Harry Potter” and “Fantastic Beasts” franchises from Warner Brothers, in a deal valued at around $200 million. The seven-year deal, which begins in July 2018, will make all eight “Harry Potter” films and the forthcoming “Fantastic Beasts” movies available on NBC’s portfolio of cable networks, which include USA and Syfy. It also lets NBC’s theme parks host fan events, movie screenings and promotional activities tied to both franchises.

Meanwhile, for all the muggles who don’t fly on a broom, Delta Air Lines has resumed flight operations following a massive computer outage that crippled the airline for more than six hours today. According to Delta, a “major system-wide network outage” on Monday had delayed flights worldwide. The widespread computer problem was caused by a power outage at its headquarters in Atlanta. The outage meant flights worldwide were being delayed and airport screens and Delta’s website were not showing updated flight status information. About 450 flights were scrapped and delays and cancellations continued even as systems came back online.

China’s exports and imports fell more than expected in July, making a rocky start for the third quarter and suggesting global demand remains weak in the aftermath of Britain’s decision to leave the EU. Exports fell 4.4% on-year, while imports fell 12.5% in U.S. dollar terms, resulting in a trade surplus of $52.31B. The trade figures will again steer attention to China’s economy, which slowed to a 25-year low in 2015.

Japan’s antitrust regulator has raided the office of Amazon Japan on suspicion of pressuring retailers to offer products with more favorable conditions than rival sites. Amazon Japan’s website booked net sales of $8.3 billion last year, equivalent to 7.7 percent of Amazon.com’s worldwide net sales. Amazon’s practices toward retailers and e-commerce partners have also come under scrutiny in Europe.

Britain’s Serious Fraud Office has launched a formal investigation into suspected fraud, bribery and corruption in connection with commercial plane sales by Airbus. The move comes after U.K. Export Finance suspended the issue of export credits to the French plane maker, citing discrepancies over the number of agents’ fees disclosed in applications for export support, or missing names of third parties, in some cases dating back years.

Apple is preparing to unveil successors to the iPhone 6S and iPhone 6S Plus as early as next month with more advanced photography capabilities and upgraded hardware in a design similar to that of last year’s models. They will also remove the headphone jack, in favor of Bluetooth connectivity and the chance to sell a boatload of wireless headphones. iPhone demand has waned in recent quarters, partly due to the lull between product launches, so the new models will be critical, coming just before the holiday season.

This October, the US Supreme Court is scheduled to take on a case with major implications for designers of all sorts. It centers on how much Samsung should pay Apple for infringing on iPhone design patents. The legal battle between the two smartphone makers is over how much money Samsung should pay Apple, after a US jury ruled in 2012 that Samsung had infringed on Apple patents and copied the design of the iPhone, specifically the rounded corners of the face, its bezel, and the grid in which icons are arranged.

The judgment ordered Samsung to pay Apple $930 million, but on appeal Samsung successfully got the part of the ruling on trademark liability reversed, reducing the amount to $548 million. Samsung believes the amount is still excessive, and wants a cut in the $399 million of that figure attributed to design patents. But designers are concerned that if the court reduces the damages, it reduces the worth we attribute to design and could encourage copying in fashion and other industries.

Currently the relevant section of US law covering design patents states that the infringer is liable for the total profit made on the infringing product. US courts have typically taken this to mean that the party holding the patent is entitled to all profits attributed to the design, even if the infringement is on just one part of the design. Samsung argues the law goes too far. In theory, designers could become something like involuntary licensees, where the copier could still turn a profit off an infringing product and just pay for the portion that it copied.

Financial Review

Wound Tight

Sinclair Noe — July 28, 2016

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DOW – 15 = 18,456
SPX + 3 = 2170
NAS + 15 = 5154
10 Y un = 1.51%
OIL – .82 = 41.10
GOLD – 5.10 = 1335.60

The Federal Reserve FOMC wrapped up their FOMC policy meeting yesterday, announcing no change in interest rates – no surprise there. The Fed’s statement said, “Near-term risks to the economic outlook have diminished”; a signal that the Fed is considering a rate hike in September, although it is doubtful they actually will hike rates in September.

Traders cut their bets on a September Fed move from 20% just before the announcement to just 17%. Benchmark 10-year U.S. government bond yields fell back to 1.5%.

The dollar took its biggest tumble in almost two months and stocks were mixed as cautious sounds from the Fed left focus firmly on Japan’s next round of money-printing measures. The greenback was down 0.5% against six other major currencies. The yen notched its fourth rise in six days, as news that Tokyo had unveiled a $265 billion fiscal stimulus package left traders wondering how aggressive the Bank of Japan would be when it meets tomorrow. Costs to insure against dollar/yen swings hit their highest in 8 years.

Tomorrow is going to be a very interesting day as the Bank of Japan monetary policy meeting wraps up, we’ll also get results of the stress tests on Eurozone banks, plus new growth figures from the Eurozone, plus the first estimate of second quarter GDP in the US. We also continue with earnings reporting season and we had a couple of big reports after the closing bell, which will surely influence tomorrow’s trading – more on that in a moment.

So, maybe tomorrow will be a big day, one way or the other, on Wall Street. Something has to give; the market is wound tighter than a 2-dollar watch. LPL Financial, noted on Twitter  that today marked the 11th straight day the S&P 500 closed inside a 1% trading range, the first time this has ever happened in at least 45 years.

Meanwhile, the VIX index — also known as the “fear index” and measures market volatility — is approaching a low hit back in January 2007 and is well below its long-run average. Typically, this kind of consolidation is followed by a move to the upside, but we are entering into the August-through-October period, which is typically the most volatile for the markets. The dog days of summer don’t last. So, enjoy the calm while you can.

The nation’s trade gap widened in June to $63.3 billion, as imports rose faster than exports. Meanwhile, wholesale inventories were unchanged and retail inventories inched higher.

The number of people who applied for unemployment benefits last week rose by 14,000 to 266,000, that’s bouncing off historic lows, and still a low number that reflects a fairly strong labor market. Whatever the case, claims have been below the key 300,000 benchmark for 73 weeks and counting — a feat last duplicated in the early 1970s. The nation’s official unemployment is 4.9% – in the range generally considered as maximum employment or the full employment level.

In a June 6 speech, Federal Reserve chair Janet Yellen said that “the economy is now fairly close to the FOMC’s goal of maximum employment.” And there was a minor change in the wording of yesterday’s FOMC policy statement. In describing the jobs market, the FOMC chose not to refer to “underutilization of labor resources” – a phrase it’s used in the past to suggest the U.S. was still short of maximum employment. Instead, it pointed to “some increase in labor utilization.”

In other words, the Fed is signaling that the labor market is in good shape; they are saying they have fulfilled their mandate for maximum employment; that, in and of itself, is not a reason to raise interest rates, but it is no longer a restriction.

Oil markets continued to slip today, pushing crude prices back to fresh three-month lows; down about 20% from the highs of early June. Low oil prices continued to weigh on European oil majors Royal Dutch Shell and Total in the second-quarter of 2016. Royal Dutch Shell said profit crashed by more than 70% in the second quarter to $1 billion, while Total’s adjusted net income fell 30% to $2.2 billion. Between late May and the middle of June, the price of Brent crude rose above $50 per barrel, but has since come off to trade in the low $40s.

Oracle has agreed to acquire NetSuite, a cloud company, in a deal valued at $9.3 billion. Oracle is paying $109 a share. The deal is expected to close in 2016, subject to regulatory and shareholder approval. Oracle expects the acquisition to be “immediately accretive” to earnings. The NetSuite purchase is at the heart of Oracle’s fight to remake itself for the modern world of cloud computing. This transition has shaken up the software business for the last several years, as companies like Google, Microsoft and Amazon have created markets worth billions, and older companies like IBM, Hewlett-Packard and Oracle have struggled to change the way they make and sell their products.

This was a big afternoon for earnings reports from mega-tech companies. Let’s start with Alphabet, Google’s parent, posted a 21.3% increase in second-quarter revenue, exceeding analysts’ expectations, driven by strong advertising sales on mobile devices and for video content.

The strong revenue growth suggests that Google is successfully navigating the transition to mobile. Advertisers typically pay less for user clicks on mobile ads than on desktop ads, Google’s traditional strength, but the strong earnings performance suggest that is beginning to change.

Alphabet’s consolidated revenue rose to $21.5 billion in the quarter, from $17.7 billion a year earlier. Net income rose to $4.88 billion, or $7 per Class A and B common stock, from $3.93 billion, or $4.93 per share. Google’s ad revenue increased 19.5%. Alphabet gained about 5% in after-hours trade at around $804 per share.

Amazon.com reported a 31% rise in quarterly revenue, powered by blockbuster growth in its cloud services unit and an increase in subscriptions for its Prime loyalty program. Net sales rose to $30.4 billion from $23.2 billion a year earlier. The company’s net income rose to $857 million, or $1.78 per share, from $92 million, or 19 cents per share, a year earlier.

That doesn’t sound like strong margins but remember that Amazon continues to plow money back into the business. It’s a beat across the board, with Amazon setting another record-high quarterly profit for the third consecutive quarter. Amazon gained about 2% in after-hours trade.

On Tuesday, Apple reported better than expected earnings; today Apple rose, giving the S&P 500 its biggest lift. Yesterday, Apple announced it had sold its billionth phone, but that left plenty of market share for Samsung. Strong sales of its flagship Galaxy S7 propelled Samsung Electronics to its most profitable quarter in two years. Operating profit rose 18%. Samsung anticipates solid earnings to continue in the second half and is expected to unveil its new Galaxy Note smartphone next week – before Apple launches new iPhones in September.

Ford Motor reported weaker-than-expected profit in the second quarter, and said its full-year earnings forecast was at risk with U.S. auto sales expected to fall in the second half, sending shares tumbling. Auto sales in the United States and China were lower than anticipated in the quarter, and Ford reported its first quarterly loss in the Asia Pacific in three years.

It’s worth noting that Ford notched its most profitable first half in North America in company history. Still, Ford dropped about 8% today. The dynamics of the US market are getting more sluggish. New car and truck sales are still good — on track to come in over 17 million for the year, a bit lower than last year, but millions above a so-called replacement-rate market — but the automakers are beginning to smell a downturn, so incentive spending has been creeping up.

Toyota is in danger of losing its crown as the world’s biggest automaker this year as sales fall behind Volkswagen. Toyota, which has held the title for four years running, sold 4.99 million vehicles in the six months through June, compared to the 5.12 million of VW (despite the German automaker’s emissions scandal). General Motors holds third place with 4.76 million vehicles sold in the first half of 2016.

The U.S. homeownership rate fell to the lowest in more than 50 years as rising prices put buying out of reach for many renters. The Census Department says the share of Americans who own their homes was 62.9% in the second quarter, the lowest since 1965. It was the second straight quarterly decrease, down from 63.5% in the previous three months.

First-time buyers have been struggling to find affordable properties as low mortgage rates and an improving job market spur competition for a tight supply of listings. Home prices rose 5.2% in May from a year earlier, according to the S&P CoreLogic Case-Shiller index released this week.

The largest publishing event of the summer isn’t a novel or a tell-all biography. It’s a script. Harry Potter and the Cursed Child, the top pre-order for both Amazon and Barnes & Noble, is slated to hit shelves on Sunday.