Financial Review

154 More Days

Sinclair Noe — June 8, 2016

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DOW + 66 = 18,005
SPX + 6 = 2119
NAS + 12 = 4974
10 Y – .01 = 1.70%
OIL + 1.01 = 51.37
GOLD + 18.90 = 1263.10

The Dow closed above 18,000 for the first time since April.

The European Central Bank’s corporate-bond buying program kicked off this morning with the bank buying debt issued by companies including Anheuser-Busch InBev, Telefonica, Siemens, and Renault. Borrowing costs in Europe had already fallen to unprecedented levels with the average yield on investment-grade company notes in euros dropping to 1 percent this week.

In the sovereign debt space, where the ECB also continues to be a buyer, the yield on Germany’s 10-year bund is within a hair of turning negative, falling to (yet another) record low of 0.033 percent this morning.

Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank. Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’s ultra-low rates. Although no decision has yet been taken, the lender has held discussions on the matter with German authorities.

The bulk of negative-yielding debt is concentrated in Japan and Europe. Globally, the total is now $10.4 trillion, according to Fitch Ratings. Individual European countries that do not use the euro are largely trying to weaken their respective currencies, as investors flock to safety.

The European Central Bank, which oversees the euro, introduced negative rates to stimulate growth in the Eurozone. The Bank of Japan also wants to stimulate growth, as well as weaken the yen. The goal is the same: Flood the financial sector with money, hoping that it chases yield into riskier investments.

But if the goal were to coax money into riskier assets, such as stocks, the plan has been a failure so far. European stocks were down 30% at one point after the introduction of negative rates. In Japan, stocks are up only slightly since the beginning of the BOJ’s experiment in January of this year.

Job openings hit 5.8 million at the end of April, up slightly from 5.76 million openings in March, according to the Job Openings and Labor Turnover Summary (JOLTS) report. The report beat analyst consensus estimates of 5.7 million job openings for the month. The job openings rate was 3.9 percent in April, with the biggest increase in wholesale trade, transportation, warehousing, and utilities at 65,000 openings.

Professional and business services saw the biggest decrease, down 274,000 openings. April hires fell to 5.1 million, slightly lower than the previous month’s 5.3 million. The hiring rate was 3.5 percent, little changed in the private sector and down 31,000 for government hires, according to the report. There were 5 million separations, which includes quits, layoffs and discharges.

Last week’s anemic jobs report for May pushed interest rates lower, but the desire for mortgages was already on the rise. Mortgage application volume jumped 9.3 percent last week from the previous week, according to the Mortgage Bankers Association. The volume may have been making up for a big drop two weeks ago, or reacting to a slight drop in interest rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.83 percent from 3.85 percent, with points decreasing to 0.33 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans.

The World Bank slashed its global growth forecast. The World Bank cut its global growth forecast for 2016 to 2.4% from 2.9% as a result of “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.” The bank sees “mounting risks” and expects a “further slowdown in major emerging markets.” Specifically, China’s growth is forecast to slow to 6.7% from 6.9% and both Russia and Brazil are expected to see “deeper recessions” than initially forecast. India’s growth is expected to hold at 7.6%.

While oil markets will start rebalancing after a slump next year, an oversupply in natural gas won’t disappear until the end of the decade, the IEA warned, slashing its gas demand outlook for a fourth straight year. “Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment.” Global consumption will expand by 1.5% annually until 2021, down from last year’s forecast of 2% growth through 2020.

Meanwhile, both Brent and WTI are holding strong above $51 per barrel, helped by industry data showing a larger-than-expected draw-down in U.S. crude inventories, worries about attacks on the Nigerian oil industry and strong Chinese demand. According to data from the API on Tuesday, oil stockpiles fell by 3.6 million barrels last week. Energy Information Administration figures released today show a 3.2-million-barrel drop in inventories.

The dollar declined against the yen. The euro edged up. The dollar index was down again today. The dollar has lost some of its strength after Friday’s disappointing jobs report. That has helped energy companies, as well as mining companies and chemicals and machinery makers and commodities in general; a weaker dollar makes American goods more affordable in other countries.

If the Fed were to raise rates or even suggest that the recent jobs number was just a transitory anomaly, then the lack of strong fundamental support could produce a rather pronounced correction to the down side. Consider that oil traded today at nearly a 100% increase off of the lows that were created just this February; that kind of price movement is not just a simple supply-demand story.

The International Energy Agency reports that 1.26 million electric cars, both battery and plug-in hybrid, were sold worldwide in 2015. Is that a lot? It depends on how you look at the numbers and who is asking the questions. The trend is certainly up. Keep in mind that there were only a few hundred electric cars on the road in 2008 and the current number is a lot higher than anyone would have expected back then. The number has tripled just since 2013.

The United States now has 400,000 electric vehicles on the road, a massive increase since 2010. But there is still a long road ahead, and that road is full of cars with gas engines. There are 1 billion vehicles on the road worldwide at present and that number is expected to increase dramatically in the next 20 years as demand in countries like India and China continues to soar.  For now, lower gasoline prices are an obstacle for more electric vehicle sales.

According to Fortune’s annual ranking of companies by revenue, Walmart is still the 800-pound gorilla. With $482 billion in revenue, it sells more than Apple, Amazon and Microsoft put together. It’s bigger than the No. 2 company, Exxon Mobil, and No. 3, Apple, combined. Its sales are greater than the GDP of Poland. That’s based on revenue. Forbes puts together a list of the 2000 biggest companies around the globe, and revenue is just one metric they use. According to Forbes, the top 3 spots on their list are held by Chinese banks.

Today’s top gainer was a micro-cap stock called Gevo, up 102%. On Tuesday, Alaska Air Group flew two flights using the company’s renewable alcohol to jet fuel. The flights departed using a mixture of traditional jet fuel and a 20% bio-fuel blend made from fermented corn. They flew from Seattle to San Francisco and then on to Washington DC. The airline estimates that the 20% bio-fuel blend will reduce greenhouse gas emissions by 50%.

Keurig Green Mountain is pulling the plug on Kold, its counter-top soda machine. Many consumers balked at the price of the device, which initially cost $369, and its pods, which had cost $1.25 to make an 8-ounce drink. The move comes 10 months after Keurig rolled out Kold and three months after JAB Holding, a major global coffee player, took the company private for about $14 billion.

When Aubrey McClendon drove his Chevy Tahoe into a bridge the day after he was indicted for allegedly rigging the price of oil and gas leases, suspicions arose that he had killed himself. But a two-month probe by Oklahoma Police has found nothing to suggest the Chesapeake Energy founder committed suicide.  Investigators found no information that this was anything other than a car accident, but also admitted: “we may never know 100% what happened.”

Reports of Roger Goodell’s death have been greatly exaggerated; actually his passing was an outright lie – the result of a computer hack. The National Football League became the latest high-profile victim of hackers as the league’s official Twitter account was intercepted and wrongly announced the passing of NFL Commissioner Roger Goodell. The tweet has been deleted. Goodell is alive and well.

The primary season effectively wrapped up last night. Both the Republicans and Democrats have a presumptive nominee. And what the primary season has taught us is that most states don’t know how to hold an election.

Whether it was a lack of polling places in Arizona, or voters scrubbed from voter rolls in New York, or far too many provisional ballots that will likely never be counted in Texas, or broken machines and polling sites that opened late in California, or a judge’s ruling today in Ohio striking down provisions of the state’s recently enacted voting laws; it all points to confusion and the potential for big problems. By the way, we have 154 days until the Election Day. Good luck.

Financial Review

Thoughts on Oil

Sinclair Noe — December 7, 2015

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DOW -117 = 17,730
SPX – 14 = 2077
NAS – 40 = 5101
10 YR YLD – .07 = 2.20%
OIL – 2.37 = 37.60
GOLD – 15.10 = 1072.20

Crude prices fell again in the first trading session after OPEC said over the weekend that it would maintain production at the current levels and made no decision on a new target ceiling. An oil glut has cut prices by more than 60% since June 2014. Abandoning an official output ceiling effectively codifies what OPEC has already done for the past year: ignore its previous target of 30 million barrels a day. The cartel produced 31.4 million barrels per day in October. Indonesia also rejoined OPEC on Friday (after being inactive since 2008), boosting the group’s participants to 13 members. Oil prices today dropped to levels last seen in 2009.

There has been an ongoing battle between OPEC and US shale producers with each side pumping massive amounts of oil in the hopes the other would cut production once crude became too cheap. The world isn’t going quite the way Saudi Arabia expected when it led OPEC to declare a pricing war against US shale drillers last year by flooding the market with crude oil. Far from being a quick kill, shale drillers have stubbornly held on, and OPEC has suffered along with them.

Cheap oil has already affected global markets and economies in countless ways, from disrupting Venezuelan politics to sinking the Russian ruble and introducing the world to “low-flation.” In a note to clients, Citi suggested that one of the only things propping up oil prices has been ETF holders thinking that they’ve gotten in at the bottom, even as larger money managers have increasingly given up on forecasting longer-term prices amid greater volatility.

The Labor Department last Friday said U.S. created 211,000 jobs in November after a nearly 300,000 gain in October, keeping the unemployment rate at an eight-year low of 5%. Against the backdrop of a steadily improving labor market the Federal Reserve is gearing up to raise its benchmark short-term interest rate, now near zero, for the first time since 2006. The Fed is expected to pull the trigger after its Dec. 15-16 meeting.

Federal funds futures imply a 76 percent probability of liftoff in December, and the U.S. two-year Treasury has risen by more than 30 basis points over the past two months. The dollar index moved higher following on the heels of its largest one-week loss since May. In the wake of November’s solid non-farm payrolls report, the conversation has now shifted towards how fast the Fed will have to raise rates and to what eventual level.

Venezuelan voters on Sunday delivered a heavy blow to the socialist party of President Nicolas Maduro by granting the opposition a considerable majority in the national assembly. Venezuela’s opposition leaders say they captured two thirds of the seats in congress in Sunday’s election, a super-majority that offers them a powerful mandate for profound change, including the ability to fire ministers, change the constitution, reshape the judiciary and electoral commission and start a process to recall the president. Nicolas Maduro. The official tally has the opposition far ahead but not yet with the crucial two-thirds margin.

Meanwhile, in France, the right-wing National Front party led by Marine Le Pen performed well in the regional elections held on Sunday. The party, which opposes immigration and the country’s membership in the euro currency union, more than doubled its share of the national vote compared to the 2010 election.

Germany is on pace to take in one million asylum-seekers this year. In the last 11 months, the country has taken in 964,574 new migrants, including more than 200,000 just in November; about 484,000 migrants came from Syria. Germany has accepted the largest number of asylum-seekers of all European countries, according to the UN High Commissioner for Refugees. Chancellor Angela Merkel said in September, “Germany is doing what is morally and legally obliged. Not more, and not less.”

It’s extraordinary also because it’s larger than the total number of refugees that the US—with a population of 320 million to Germany’s 80 million—has accepted in the last 10 years. Since 2005, the US has accepted a total of 675,982 refugees from regions all over the world, according to data from the Refugee Processing Center, an arm of the US Department of Justice’s Bureau of Population, Refugees and Migration.

Beijing issued its most severe smog warning for the next 3 days – the first time the municipal government has issued a so-called red pollution alert. Local authorities upgraded the air pollution alert to red from orange. Some industrial companies must stop or limit production, outdoor construction work will be banned and primary schools and kindergartens are advised to cancel classes. Even healthy people should try to avoid outdoor activity and choose public transportation. The particulates, which reached “very unhealthy” or “hazardous” levels in 28 cities in northern China in November, are caused to a large extent by man-made pollution, including the burning of fossil fuels.

China is the biggest consumer of coal in the world, by a long way. As for the coal-fired power stations? They’re still running, with thousands more planned to be built in the coming years. At a climate conference in Paris, where China is negotiating with the rest of the world on emissions, that strategy is getting harder to argue for. After this week, the idea may be harder to sell in Beijing, too.

Keurig Green Mountain said it has agreed to be acquired by an investor group led by JAB Holding in a deal with an equity value of about $13.9 billion. As part of the deal, JAB will pay $92 in cash for each Keurig share outstanding, which represents a 78% premium to Friday’s closing price of $51.70. The deal is expected to close during the first quarter of 2016. The Coca-Cola Co. which is Keurig’s largest shareholder with a 17% stake, is supportive of the deal. JAB Holding is the investment arm of the secretive Reimann family.

JAB owns a stake in Reckitt Benckiser. It also has a luxury arm which houses investments in Jimmy Choo, Belstaff and Bally, and owns perfume maker Coty. JAB struck a deal in 2013 to buy D.E. Master Blenders 1753, and later agreed a deal with Mondelez International to combine their respective coffee businesses. That created Jacobs Douwe Egberts, which describes itself as the biggest pure-play coffee company in the world; they also control Caribou Coffee and Peet’s. Overall, the company’s retail value would lag behind Nestlé’s which controls about 23% of the coffee market.

General Electric has abandoned plans to sell its appliance business to Electrolux. Both companies were being sued by the Justice Department to stop the deal, which would have combined the number two and three domestic appliance makers in the U.S.

We may be seeing a bidding war for Pep Boys. Carl Icahn has offered $15.50 a share. That bid was 3.3 percent more than the $15-a-share proposal from Bridgestone Corp. that Pep Boys agreed to in October. Philadelphia-based Pep Boys closed at $16.06. Investors are betting that Icahn, Bridgestone or someone else will be willing to pony up for a well-known brand with 800 locations in 35 states.

Yahoo shareholders still do not know how – or if – the company’s board plans to restructure the technology giant. The firm’s directors ended three days of deliberations on Friday without announcing whether they will proceed with plans to spin off its stake in Alibaba, sell its core business, shake up management, or do something else entirely. The big question on the Alibaba spinoff is the tax implications. The big question if Yahoo sells off its core business – what would be left?

Chipotle Mexican Grill is struggling to contain the damage from an E. coli outbreak at its restaurants. Chipotle fell in early trading after rescinding its 2016 forecast and projecting its first quarterly same-store sales decline as a public company. Sales at locations open at least 13 months plunged as much as 20 percent in the days after the illnesses were reported and may fall 8 percent to 11 percent for the fourth quarter as a whole. That would be the first drop since Chipotle went public in 2006.

The Arizona Regional Multiple Listing Service reports overall sales in Phoenix in November were up 6.5% year-over-year. Cash Sales (frequently investors) were up slightly at 29.1% of total sales. Active inventory is now down 8.8% year-over-year. After sluggish price increases off 2.4% in 2014, prices are already up 4% through September.

Last summer I went to Hawaii and visited Pearl Harbor and the Arizona Memorial. Oil still leaks from the tanks of the sunken Arizona. They don’t try to drain the tanks because they are in a precarious way and also because the Arizona is considered hallowed ground. They say the tanks will empty the last drops of oil when the last veteran of Pearl Harbor passes away.

Financial Review

Preview

Sinclair Noe — August 6, 2015

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DOW – 120 = 17,419
SPX – 16 = 2083
NAS – 83 = 5056
10 YR YLD – .03 = 2.23%
OIL – .31 = 44.84
GOLD + 5.00 = 1090.50
SILV + .06 = 14.76

Jobless claims rose by 3,000 to 270,000 in the week ended August 1. Firings are at historically low levels as employers hold on to more workers. More hiring would help convince Federal Reserve policy makers that the economy can withstand an increase in the benchmark interest rate this year. Claims have remained below the 300,000 level since March.

Outplacement consult Challenger, Gray & Christmas reports employers announced 105,696 layoffs last month. A year ago, U.S. companies announced plans to cut 46,887 jobs. The Army accounted for more than half of the total with 57,000 cuts expected over the next two years. The technology sector also contributed to July’s announced job reductions, with computer and electronics companies announcing 18,891 layoffs in July.

Tomorrow is the big monthly jobs report; and it probably represents the most important data the Fed will consider before the September 17 FOMC meeting. And the Fed will need to communicate any action beforehand to avoid disruption in the financial markets. We may be seeing a rate hike being priced in right now. The major averages came off session lows in the close. The Dow Jones industrial average ended at its lowest level in 6 months and posted its first 6-day losing streak since October.

The Dow Industrial Average is trending slightly lower, having fallen below its 200 day moving average. The S&P 500 is still in a very flat or sideways trend, but it is just about 10 points above its 200-day moving average, and it has posted losses in 10 of the last 15 sessions. And keep it in context; we’ve had good economic news; earnings season has been solid. But, good news on the jobs front could be bad news for the markets. The S&P has been in a historically tight range for the past 9 months. Something’s got to give. The question is which way it will break. I’m leaning toward the downside, but we haven’t seen good confirmation, yet.

The Fed tends to dig deep into the jobs data. Here’s what they will probably be looking at: first, the gap between the U-3 and the U-6. The U-3 is the headline unemployment rate which stands at 5.3%. The U-6 is the alternative measure which includes unemployed plus underutilized workers – it stands at 10.5%. The difference, or spread, is 5.2%. In the 10 years before the recession began in late 2007, the average spread was 3.6 percentage points. If the gap narrows, even if the U-3 unemployment rate holds steady, it would signal to policy makers and financial markets that the labor market is fully healing from the recession in some important ways: fewer workers stuck in part-time jobs, and better wages and more opportunities drawing those on the fringes back to the labor market.

The Fed will also watch the labor force participation rate; last month it came in at 62.6%, the lowest level since 1977. This indicates that people are moving out of the labor pool, and there is still significant slack. Was last month just a glitch in the data? We could see the headline unemployment number move higher as more people move into the market for a job, and would be considered good for the economy. The other area the Fed will watch is wages, which have been stagnant for what seems like forever. As long as there is not a dramatic and startling move, the Fed doesn’t really seem concerned about wages.

Since the start of 2013, payrolls have climbed at an average monthly pace of 225,000. And government data out tomorrow is expected to show a similar-sized gain in July. Of course, part of that is recovery from the downturn – in other words, we are still in the process of taking slack out of the labor market. Generally speaking, the economy only needs to add 150,000 jobs per month to maintain employment levels; some analysts say we could hold steady with just 100,000 or so new jobs per month. So the Fed doesn’t need a big jobs number to justify a rate increase.

The Fed has two mandates: maximum employment and price stability. And while we’re not at maximum employment, and nobody is quite sure exactly what that is, price stability may be easier to spot; the most common gauge is inflation, which is running below target.

Commodity markets continue to slide. Oil can’t seem to find a bid even after the Energy Information Administration (EIA) reported a whopping 4.4 million barrel drop in weekly crude oil supply, much larger than expected. So oil is moving on other issues each day, like Fed speak and the Chinese stock market and other issues. If the Fed raises rates, the fear is that U.S. demand will fall. In China, if demand slows, oil is toast. Saudi Arabia is feeling the pinch of the oil -price war that they started. Reuters reports that “Saudi Arabia has issued its first sovereign bonds since 2007 to cover a budget deficit created by low oil prices, launching a series of debt sales that could reshape its financial markets. The government sold $4 billion of bonds to local banks this year.” Of course oil has crashed three times this year and anyone who got short at these levels lost big. Maybe the third time will be the charm, or not. Today, crude dropped .31 = 44.84

Meanwhile, a sharp fall in prices for vegetable oils and dairy products saw the Food and Agriculture Organization of the United Nation (UN)’s food price index fall to 164.6 points last month, one percent lower than in June and 19.4 percent lower than last year. The index is trade-weighted, and follows international market prices for cereals, dairy, sugar, vegetable oils and meat.

The Bank of England’s policy makers decided that price pressures are too weak to raise interest rates for now; policymakers left rates unchanged at a record-low 0.5%.  The BOE governor said that the outlook is “consistent” with the need for higher borrowing costs — but only in due course.

The average rate for a 30-year fixed-rate mortgage dropped to 3.91% in the week that ended Aug. 4, falling to the lowest level in two months, from the prior week’s reading of 3.98%.

Greece’s banking share index headed back uphill this morning, following a three-day plunge that wiped out 63% of its market value. Greek stocks are also bouncing, with the ASE Stock Index +3.7%.

Tesla posted a wider quarterly loss, revising down its sales forecast, and stating that it may need to raise more cash to offset heavy spending. The company posted a net loss of $184 million in Q2, compared with a loss of $61 million in the year-ago period, and it’s now possible Tesla won’t be cash-flow positive until early 2016. The automaker also lowered its full-year sales outlook to 50K-55K cars. There is still strong demand. The problem is with production as the electric car company prepares to introduce a new, lower cost model later in the year. Tesla dropped 8% today.

Automakers recalled more cars in the U.S. through the end of July (34.5 million vehicles) than during any other similar time frame except 2014 – highlighting the lax quality standards of the auto industry and unprecedented government crackdown on safety lapses. Honda recalled 8 million vehicles due to defective Takata air bags; Fiat Chrysler called back more than 9.6M vehicles due to cybersecurity gaps and rear gas tank fires.

Keurig Green Mountain shares were down about 29 percent, after the K-Cup coffee maker announced a workforce reduction of about 5 percent, as quarterly revenue and sales projections missed forecasts.

Coca-Cola Enterprises will merge with two Western European Coca-Cola bottlers to form the largest bottling company serving over 300 million consumers across 13 countries.

Creating the world’s largest publicly traded nitrogen company, CF Industries and OCI have entered into an agreement under which CF will combine with OCI’s European, North American and Global Distribution businesses in a transaction valued at approximately $8 billion.

Bill Ackman has built a $5.5B stake in Mondelez, betting that the snack maker will become a large target in a wave of consolidation reshaping the food industry. The new move squeezes Mondelez between two well-known activist investors. Nelson Peltz’s Trian Fund Management also holds a substantial stake in the food company.

Viacom fell 14 percent to its lowest in almost four years after reporting lower-than-expected quarterly revenue due to weakness in its cable TV business. Walt Disney was down for a second session after it lowered profit guidance for its cable networks unit on Tuesday. The S&P 500 media index lost 2.1 percent and notched its biggest two-day fall since November 2008, with Time Warner, Comcast, and CBS all in the red and Twenty-First Century Fox down 6.4 percent. All the media stocks are down and it seems people just want to get out of the sector at any cost and take any loss. Viacom’s results and Disney’s warning put the spotlight on a trend of viewers shifting from cable TV to Internet-based services such as Netflix, which rose 2.2 percent.