Financial Review

Rarely the First

Sinclair Noe — January 9, 2017

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DOW – 76 = 19,887
SPX – 8 = 2268
NAS + 10 = 5531 (record close)
RUT – 9 = 1357
10 Y – .04 = 2.38%
OIL – 2.16 = 52.71
GOLD + 9.20 = 1182.40

Oil prices were sharply lower this morning, as Iran upped exports and U.S. drillers increased activity again, moves undermining efforts by international producers to curb global oversupply.

Treasuries rose with gold today as the risk-on trade wobbled. Treasury yields sit lower than where they were before the Federal Reserve raised interest rates last month, while the dollar remained near a 14-year high.

The Dow, S&P 500, and Nasdaq all hit intraday highs on Friday – the Dow came within a fraction of a point of 20,000. Earnings for the S&P 500 are expected to increase by 6.1 percent in Q4, with the S&P financial sector see having the biggest gains, up 15.7 percent, per estimates from Thomson Reuters. Fourth quarter earnings season ramps up Friday, when JPMorgan Chase, Bank of America, and Wells Fargo report. Financial stocks have gained more than 30 percent since Election Day.

This is a busy week for Federal Reserve policymakers. Today, Atlanta Fed President Dennis Lockhart said the recovery from the economic crisis is “largely done,” and officials should now turn to addressing longer-term issues like how to boost productivity, raise investment, and try to counter trends that are holding down potential growth.

Lockhart said, the economy is near full employment, inflation is close to the Fed’s two percent goal, and the United States appears locked in for steady growth of around 2 percent annually. Lockhart did not address rate hikes directly, though he said he expected any future increases to come at a “gradual” pace.

Boston Fed President Eric Rosengren at a speech in Boston this morning said, “economic circumstances have evolved and now imply the need for a different stance of monetary policy,” Including “somewhat more regular” increases in short-term interest rates.

Rosengren said that what happens with fiscal policy will play a role in the exact timing of rate hikes. The commentary from Fed policymakers has taken a decidedly hawkish tone, and after a yearlong delay between rate hikes, I’m starting to get the feeling they will be more aggressive this year.

The British pound was tumbling to two-month lows this morning after U.K. Prime Minister Theresa May said in her first interview of the year that she was not interested in keeping “bits of membership” of the European Union in the execution of Brexit. The one priority that May has marked out – limits on EU migration – implies that British companies will face new barriers in selling goods and services to hundreds of millions of consumers in Europe.

The prime minister’s position runs counter to rules that require all members of Europe’s single trading market to allow free movement of people across their borders. UK Foreign Secretary Boris Johnson was in Washington today to meet with some of Donald Trump’s top advisers as Britain looks to build ties with the incoming administration ahead of the country’s withdrawal from the European Union.

Nine confirmation hearings begin on Capitol Hill this week, starting tomorrow with lawmakers questioning Attorney General-designate Sen. Jeff Sessions and Homeland Security Secretary-designate retired Gen. John Kelly. The lineup also includes five hearings on Wednesday, including: Rex Tillerson, the nominee for secretary of state; Betsy DeVos, for education secretary; CIA director designate Mike Pompeo; commerce pick Wilbur Ross; and Labor nominee Andrew Puzder; the same day the Senate is expected to vote on a step toward repealing much of the Affordable Care Act, and Wednesday marks Trump’s first news conference since the election.

State-run Chinese tabloid Global Times warned President-elect Donald Trump that China would “take revenge” if he reneged on the one-China policy, only hours after Taiwan’s president made a controversial stopover in Houston.

McDonald’s unloads its business in China. The fast-food giant sold 20-year rights to most of its business in Hong Kong and China to Citic and Carlyle Group for up to $2.1 billion. About one-third of McDonald’s 2,400 restaurants in mainland China and Hong Kong are franchised; this deal will franchise the rest of them. The new partnership plans to add 1,500 in the two areas over the next five years.

Yum China, spun off by its U.S. parent last year, is relaunching the Taco Bell brand in the country, after a near-decade-long absence, opening the first store in Shanghai today.

Fiat Chrysler will invest $1 billion in 2 manufacturing plants in the Midwest, which will add 2,000 new jobs in the U.S. and expand its sports utility and truck lineup. Fiat Chrysler will retool factories in Ohio and Michigan to build new Jeep sport utility vehicles, including a pickup truck, and potentially move production of a Ram heavy-duty pickup truck to Michigan from Mexico. The announcement comes days after Ford decided to scrap a plan to build a facility in Mexico, instead opting to invest in a plant in Michigan.

General Motors CEO Mary Barra says GM  has no plans to change where the automaker produces small cars because of Trump’s Twitter threat of a border tax.

Self-driving cars are a big theme at the North American International Auto Show, which kicked off yesterday in Detroit. Alphabet’s Waymo revealed that it has built all of its sensor hardware in-house and was ready to offer its autonomous-drive technology in “millions” of vehicles at a competitive price. A package of LIDAR sensors and radar, which used to run approximately $75,000 a few years ago, has fallen by more than 90%.

The FBI has arrested Volkswagen’s regulatory compliance executive, Oliver Schmidt, who faces conspiracy charges linked to Dieselgate. The arrest comes as VW nears a deal to pay the Department of Justice more than $3 billion to settle the emissions scandal’s criminal investigation, on top of the nearly $18 billion the automaker will pay to resolve civil claims.

Japan’s Takeda Pharmaceutical will buy cancer drug maker Ariad Pharmaceuticals in a deal valued at $5.2 billion, to beef up its oncology pipeline. Takeda has agreed to pay $24 in cash for each Ariad share, a premium of about 75 percent to its Friday close.

United Health Group is buying Surgical Care Affiliates, an outpatient surgery chain for $2.3 billion. The deal is expected to close in the first half of this year. Surgical Care Affiliates operates 205 surgical facilities, including specialized hospitals, in partnership with surgeons in 30 states.

Candy maker Mars said it will buy VCA, which makes Whiskas and Pedigree pet food and is also the largest operator of pet hospitals in the country. Price tag $7.7 billion.  Mars became the No. 1 pet food maker in 2014, after buying Procter & Gamble’s pet foods business, known for brands such as Iams and Natura, for $2.9 billion.

HMD Global, the Finnish company that owns the rights to use Nokia’s brand on mobile phones, launched the first new smartphone carrying the iconic handset name since 2014 when Nokia chose to sell its entire handset unit to Microsoft. The new device, Nokia 6, runs on Google’s Android platform and is manufactured by Foxconn. It will be sold exclusively in China for about $246.

IBM is the patent winner, again; that’s a 24-year streak and counting. In 2016, IBM filed 8,088 patents (22 per day; 2,700 related to artificial intelligence, cognitive and cloud computing) granted across its more than 8,500 inventors in 47 states and territories, and 47 countries. Samsung filed the second most patents, a mere 5,518.

Ten years ago, today, Steve Jobs introduced a new device called the iPhone. Jobs took to the Macworld stage and announced that “we’re going to make some history together today.” There were skeptics, including Microsoft CEO Steve Ballmer, who in 2007 said there was “no chance” the iPhone would get “any significant market share.”

Since then Apple has sold more than one billion iPhones, passing its billionth last July. The iPhone has grown to dominate the U.S. smartphone market. Its mobile operating system, iOS, is ranked second globally, behind Alphabet’s Android. And Apple’s market cap has climbed to over $628 billion. Current Apple CEO Tim Cook says the “best is yet to come.”

That remains to be seen. A lot can happen in a very short period of time. Apps, touch screens, voice recognition, fingerprint scanners, selfies; that’s all within the past 10 years. What will the next 10 years bring? Many people say AI is the next wave – computers we can talk to; and right now, Apple does not have a leadership position.

Amazon.com has a hit with the voice-based assistant Alexa. Alphabet’s Google is close behind. Partners with both companies spent several days at the CES tech show in Las Vegas last week introducing a deluge of devices powered by these competing technologies. Apple is working on its own device but it doesn’t have one yet. That doesn’t mean Apple is out of the game though. The history of Apple is rarely about being first—think of the iPod—but becoming dominant through superior design and execution.

Tonight, the Alabama Crimson Tide will take on the Clemson Tigers for the national college football championship – and the winner is: Nike. Last year Nike’s stock was the biggest Dow dog – down 20% – and one of only three in the index to fall in 2016. (Coca-Cola and Disney were the other laggards.)

So far in 2017, Nike is up about 5% and tonight’s championship game is basically a 3-hour ad for Nike. Both Alabama and Clemson have multi-year agreements in place with Nike. The Crimson Tide has an eight-year, $30 million deal that runs out in 2018. Clemson’s agreement with Nike, also for eight years, is worth $23 million and lasts until 2022.

Financial Review

Off to the Races

Sinclair Noe — January 4, 2016

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

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DOW – 276 = 17,148
SPX – 31 = 2012
NAS – 104 = 4903
10 YR – .02 = 2.25%
OIL – .11 = 36.93
GOLD + 13.50 = 1075.50

The Dow started the morning with a 467-point decline. An inauspicious start to trading in 2016 kicked off, or more accurately fell down, this morning in China. Traders in Shanghai reacted to growing tensions in the Middle East and a drop in one of China’s manufacturing gauges. Fresh manufacturing surveys revived concerns about Beijing’s economic slowdown.

China’s manufacturing activity contracted for the 10th straight month in December – the official manufacturing PMI stood at 49.7 in December. The yuan, which began new extended trading hours today, also hit its lowest point in more than four years in both onshore and offshore trade.

The China CSI 300 Index dropped 5% and that triggered circuit breakers that resulted in a 30-minute halt in trading of all stocks. When trading resumed, the traders were scared and they rushed to exit their positions. In a matter of about 7 minutes the Index dropped to a loss of 7%, and the next round of circuit breakers triggered a halt to trading for the remainder of the day.

The benchmark Shanghai Composite index closed the shortened session down 6.85% while the broader CSI 300 index, encompassing the largest listed firms by market capitalization in Shanghai and Shenzhen, slid by 6.98%. The small cap CSI 500 index fared even worse, finishing the day down 8.27%.

From there, the bad vibes in the market spread; the Nikkei in Japan dropped 3.1% even as the yen rallied on a safe haven play; the Hong Kong Hang Seng China Enterprises Index dropped 3.7%%. The Stoxx Europe 600 Index fell 2.6%, capping its worst start of the year ever as almost 580 of its companies fell. The MSCI Emerging Markets Index lost 3.5%, its worst day since August, when China devalued its currency. Benchmark gauges in South Korea, Taiwan, Malaysia, South Africa and Poland lost more than 2%.

The first trading day of the year does not seem to have any predictive capacity to tell us the direction of trading for the rest of the year. It’s about a 50-50 chance that the market follows the first day of trading in the year. Still, today was a big drop and it makes us look at historic data.

For example, in 1932, the market started the year trading down 6.9%; in 2001 the markets lost 2.8% on the first day of trading. We can include first day trading losses of under 2% in the 5 worst first days of trade including 1949, 1980, and 1983. Of the 5 worst, 2 came at the start of down years, and 3 came at the start of up years for the market.

Still you could be forgiven if you are concerned that today portends a theme in the markets. For global investors, China is a critical piece of the growth puzzle. As the second-largest economy, China drives demand around the world in commodities, consumer goods and other sectors.

The government has been trying to increase growth through stimulus measures and it has moved aggressively to prop up the stock market with a series of policy actions. The latest economic data and the big drop in their stock markets cast doubts about whether those measures are working. We don’t know and we will only know in time, but if today is any indication we may be in for a boatload of volatility.

Two Fed chiefs came out today to say they’re not worried about China. Federal Reserve Bank presidents, Loretta Mester of Cleveland and John Williams of San Francisco, basically said a weakening economy in China had already been built into the outlook for 2016 by Fed officials. Mester said, “There’s going to be volatility in the markets, that’s kind of the nature of financial markets.” Williams said the Fed would have to continue with “significant monetary accommodation” to keep growth above 2%.

Saudi Arabia cut off diplomatic relations with Iran on Sunday, giving diplomats 48 hours to leave the country, after protesters on Saturday stormed and torched the Saudi Arabian Embassy in Tehran. The move was in response to Saudi Arabia’s execution of 47 prisoners, including a prominent Shiite cleric. Bahrain and Sudan joined Saudi Arabia in severing diplomatic relations with Iran. Bahrain is home to the US Navy’s 5th Fleet.

The United Arab Emirates, meanwhile, recalled its ambassador from Tehran. So this is breaking down along religious lines between Sunni and Shia, but you might also suspect the timing involves Iran’s re-emergence as a major player in oil production.

Meanwhile, the first oil tanker of freely traded American crude oil launched Thursday from the Port of Corpus Christi, marking the end of a long-standing U.S. ban put in place in the 1970s. ConocoPhillips and NuStar Energy loaded the tanker with crude pumped from Eagle Ford.

AAA is projecting that gas prices will stay lower in 2016, estimating an average cost of $2.25-$2.45 per gallon. In 2015, the average price per gallon was $2.40 (Americans saved $540 on average). AAA also forecast that the national average would stay steady or drop another $0.10 in the coming weeks, and would not go above $3/gallon this year. Oil prices moved higher in early trade but closed slightly lower for the day.

Economic news today shows weakness in the manufacturing sector. The ISM manufacturing index slipped to 48.2% last month from 48.6% in November. Readings under 50% indicate more companies are shrinking instead of expanding. The ISM index has posted sub-50% readings for two straight months for the first time since an economic recovery that began in July 2009. An interview with ISM chair Brad Holcomb has been posted on this site. Meanwhile, Markit’s US manufacturing PMI fell to a 3-year low.

The Commerce Department reports construction spending sank 0.4% in November to a seasonally adjusted annual rate of $1.12 trillion. The October increase, originally reported as 1.0%, was revised down to 0.3%. In November, spending was 10.5% higher compared to a year ago. Private construction was down 0.2% during the month, but 12.1% higher for the year.

As a side note, the Commerce Department is revising how it counts construction spending to include private residential improvement spending. That sounds innocuous, but the improvements category account for about one-third of private residential spending, or 13% of the overall total. In November, improvements amounted to a seasonally adjusted annual rate of $144 billion. And these revisions go back 10 years, so there could be adjustments to GDP numbers as well.

The Atlanta Federal Reserve cut its forecast for fourth-quarter growth for the fourth time in the past three weeks. The Atlanta’ Fed’s closely watched forecast model now suggests that gross domestic product grew a scant 0.7% from October through December. In mid-December, the Atlanta Fed was predicting a 2% increase in GDP. It’s since lowered its forecast after disappointing reports on manufacturing, exports, construction spending and consumer spending.

This Friday’s jobs report for December, the highlight of the economic data due in the first full week of January, is expected to show nonfarm payrolls expanded by about 205,000. Even with weakness seen during the summer, job gains in 2015 will top 2.5 million, making it the second-best calendar year for U.S. job growth in this millennium, after last year’s 3.1 million. The last time more jobs were created in a two-year period was at the height of the dot-com boom, in 1998-1999.

After a disappointing 2015 for stocks, it appears the upcoming earnings season will not provide relief. Once again weighed down by the energy and materials sectors, the S&P 500 is expected to see a decline in earnings of 4.7% from the year-ago period, according to estimates from FactSet.

The only sectors expected to see any gain in fourth-quarter earnings are telecom, financials, consumer discretionary and health care. If fourth quarter earnings decline, it will mark the first time the index has seen three consecutive quarters of year- over-year declines in earnings since the first 3 quarters of 2009. The ongoing hope is that this will be one of those stock-market-earnings recessions that are able to avoid US economic recessions.

Nokia has officially gained control of French rival Alcatel-Lucent through a €15.6 billion-euro all-share deal after the French stock market authority declared the offer successful. The first day as an operationally combined group will be January 14.

Shire is in advanced talks to acquire Baxalta for $46.50-$48 per share, or about $32 billion in cash and stock, excluding debt. Final details of the transaction are still being negotiated, but the two drug makers are likely to announce a deal this week. Baxalta would benefit from a lower tax rate if taken over by Shire, and the enlarged company would generate $20 billion in sales by 2020, with as many as 30 new drugs to launch over five years.

Meanwhile, Baxalta agreed to pay Symphogen A/S of Denmark as much as $1.6 billion for the rights to develop and sell a handful of experimental cancer products that work by harnessing the power of a patient’s own immune system.

The Justice Department and the Environmental Protection Agency have filed a civil lawsuit against Volkswagen, Porsche, and Audi alleging Europe’s largest automaker knowingly sold nearly 600,000 diesel vehicles with “illegal defeat devices,” which allowed the cars to cheat state and federal emissions tests.

The suit alleges violation of the Clean Air Act and could face up to $18 billion in fines. The Justice Department is also investigating VW for possible criminal conduct related to the devices; plus, as many as 12,000 VW, Audi and Porsche owners have signed onto a class action lawsuit.

Financial Review

Slow to Patch

Sinclair Noe — April 15, 2015

 

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

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DOW + 75 = 18,112
SPX + 10 = 2106
NAS + 33 = 5011
10 YR YLD un = 1.90%
OIL + 2.67 = 55.96
GOLD + 9.60 = 1202.50
SILV + .18 = 16.41

The Federal Reserve reports industrial production dropped 0.6% in March. The biggest drop since August 2012. For the first quarter, industrial production was down at 1% annual rate, the first quarterly decline since the end of the recession.

The National Association of Home Builders/Wells Fargo index of home builder confidence increased to 56 in April from 52 in March. Readings over 50 indicate that more builders see sales conditions as good rather than poor. All three components of the index improved in the month: sales expectations, buyer traffic, and the component gauging current sales conditions all moved higher.

China grew at its slowest pace last quarter since the global financial crisis in 2009; GDP expanded 7% in the three months to March from the year ago period, down from 7.3% the prior quarter. Retail sales and industrial output data broadly missed expectations, however, with the latter expanding at the slowest pace since 2008.

Japan overtook China as the top foreign holder of US government debt for the first time since the global financial crisis. Each country holds a little more than $1.22 trillion in US Treasuries, but Japan has about $7 billion more than China.

Saudi Arabia pumped close to a record amount of crude oil last month, leading the biggest surge in OPEC output in almost four years just as the US shale boom shows signs of slowing. The International Energy Agency said average US oil production of 12.6 million barrels a day in the first six months of 2015 will slide to 12.5 million by the fourth quarter as companies curb drilling.

Meanwhile, Saudi Arabia and other OPEC producers raised output by 890,000 barrels a day to 31 million a day in March. Demand for oil will be higher this year than previously thought, according to the International Energy Agency report. The IEA’s expectation for a “notable acceleration” in demand for oil in 2015 comes as Iran called on fellow OPEC members to cut production. If you think you know where oil prices are going just consider the International Energy Agency’s conclusion to their Oil Market Report; they say, “The outlook is only getting murkier.”

There has been a lot of talk about oil prices and supply and demand; most of the talk is short-term and it can be confusing. We know that many drillers have shut down rigs but then we hear that North Dakota’s Bakken production is expected to surge in the second and third quarters of this year, as that state puts the screws on companies to complete wells and rolls out some new tax incentives.

According to the new annual energy outlook by the Energy Information Administration, the government appears to be even more bullish about U.S. oil production this year than it was last year. Despite a nearly 50% drop in the price of crude-oil since then, the government’s expectation for oil production growth is even more robust than in last year’s energy forecast.

Where it gets more interesting is in the long-term outlook; there we are seeing a fundamental shift. The EIA report says longer-term, US crude oil production will peak at 10.6 million barrels per day in 2020, a million barrels more than the high forecast a year earlier. Crude production will then moderate to 9.4 million barrels per day in 2040, 26% more than expected a year ago. Despite lower prices, higher production will result mainly from increased onshore oil output, predominantly from shale formations.

Perhaps the most interesting long-term idea is that the US could become a net energy exporter over the next 2 to 15 years. And it’s not just a result of more drilling, but rather advanced technologies that are reshaping the energy economy, including the greater use of renewable energy sources, along with conservation efforts, including more efficient cars and trucks. The report found that solar is the fastest growing source of renewable energy with an annual growth rate of 6.8%. The report predicts that 77GW of renewable generation capacity will be added up until 2040 with 44% of that (33.9GW) from solar. Of this 31GW will be solar PV. Only 9GW of nuclear and 1GW of coal capacity is expected to be added in the same period.

This afternoon the Federal Reserve published its Beige Book, a collection of anecdotal reports from the 12 Fed districts; the report is published 8 times a year, just a couple of weeks before the FOMC meetings to determine monetary policy. Once again, the districts reported that the economy continues to grow moderately or modestly.

Nonfinancial firms saw rising activity across all districts with demand picking up for high-tech services such as cybersecurity and web development. The Boston and Richmond Fed districts saw an increase in healthcare services, and Service providers in Boston, Philadelphia, Kansas City, and Dallas were optimistic about near-term growth trends for their firms. Many districts said that savings from lower gas prices was fueling consumer sales. Auto sales rose in most districts, and all districts expected corporate and leisure travel to be up in 2015. Most Fed districts reported a tight supply of residential real estate, and only New York reported softening conditions in the residential real estate market. In Chicago, inventories of homes were near historic lows, especially for lower-priced homes. And the Fed says banking conditions are generally favorable.

Agricultural conditions worsened slightly across the nation, thanks to wet fields, persistent drought, and a cold winter. Weather was an important consideration in the Beige Book, mentioned 71 times, and it was mostly bad weather.  Energy market conditions declined in the oil patch. Falling oil prices hurt new orders to energy supplier companies. Manufacturing activity was mixed, hurt by the soaring value of the dollar, which makes US goods more expensive overseas.

Another big day for earnings reports. Bank of America reported a better-than-expected first-quarter profit, reversing from a year-earlier loss, as legal costs fell to $370 million for the quarter. BofA has paid at least $70 billion so far to settle legal issues related to the financial crisis. It turns out that throwing away tens of billions of dollars on legal problems is a flawed business model. Who knew?

CSX beat estimates with earnings, while revenue was essentially in line. The rail operator also announced a $2 billion stock buyback, and raised its dividend by 13 percent to 18 cents per share.

Delta Air Lines posted better-than-expected earnings. The carrier said it plans to cut seating capacity later this year on international routes as the strong dollar and declining oil prices damps overseas travel demand.

Charles Schwab said its first-quarter profit fell 7.4%, as the company was hurt by higher one-time costs and a slowdown in trading.

Netflix, the online video-streaming service, reported revenue of $1.57 billion in its first quarter, on earnings of 38 cents per share. Analysts expected earnings of 69 cents per share, but share price moved higher in after-hours trading because they added 4.9 million new subscribers, topping estimates of 4 million.

Keep in mind that this week we’ve seen several of the big financial institutions reporting earnings, and they were expected to turn in good results. Starting next week, we’ll start to see other sectors reporting, and as we get into the energy sector or the manufacturing sector, we are more likely to see ugly numbers.

The European Union has accused Google of anti-trust violations; cheating competitors by distorting Internet search results to favor its shopping service; and regulators also launched another antitrust investigation into its Android mobile operating system. Google now has an opportunity to explain itself and the case might be settled by the company making commitments to change its products.  The EU regulator can demand sweeping changes to Google’s business practices and might impose fines up to $6.6 billion. Google plans to defend the charges.

Nokia has agreed to acquire telecom equipment company Alcatel-Lucent for $16.6 billion, in a deal that would solidify its ambitions to become a major provider of networking equipment. The deal is expected to close in the first half of 2016. The combined company will have about 114,000 employees and combined sales of around 26 billion euros. The new Nokia will have stronger exposure to the North American market, with key contracts with AT&T and Verizon.

With the FCC’s new net neutrality rules published in the Federal Register – let the lawsuits begin. AT&T and three industry trade groups representing cable companies and wireless carriers have filed separate lawsuits challenging the rules. AT&T is the first large individual challenger, joined by the National Cable and Telecommunications Association, wireless group CTIA and the smaller American Cable Association.

After months of negotiations, Target is close to a settlement with MasterCard that would reimburse banks with roughly $20 million for costs they incurred from its massive data breach two years ago. In 2013, Target said at least 40 million credit cards were compromised by a hack during the holiday shopping season, and the attack might have resulted in the theft of personal information. Target also faces a big payout in its negotiations with Visa.

Verizon has published its annual report on cyber security. The report was based on the details of 79,790 “security incidents” given to Verizon’s researchers by 70 organizations, and that’s just for the past year. Phishing may be the oldest trick in the hacker’s book, but it’s still the method behind many of the breaches we’ve seen in recent months. Nearly a quarter of people who receive phishing e-mails open them, according to the report, and 11 percent proceed to download file attachments.

The Verizon report also suggests that companies adopt “improved detection and response capabilities.” Put simply, companies rarely figure out on their own that they’ve been breached. Security professionals often fail to update their systems with patches for known vulnerabilities, and hackers take full advantage of those weaknesses. According to the report, “71 percent of vulnerabilities had a patch available for more than a year prior to the breach.” In other words, many paths hackers took to break into networks last year could have been rendered dead-ends if someone had installed these updates. Worse yet, the issuance of a patch may be a green light for hackers to attack, because it highlights a vulnerability and the hackers know most organizations are slow to patch.

FINANCIAL REVIEW

Good Luck With That

Sinclair Noe — January 29, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 225 = 17,416
SPX + 19 = 2021
NAS + 45 = 4683
10 YR YLD + .02 = 1.75%
OIL + .09 = 44.54
GOLD – 25.20 = 1259.10
SILV – 1.04 = 17.02

Yesterday, the Federal Reserve said it would remain “patient” on raising rates, but indicated it saw the U.S. economy getting stronger. The Fed also said it has seen inflation decline, and it may decline further, but that low oil prices are probably temporary. The FOMC statement said that economic activity has expanded “at a solid pace” and that labor market conditions have improved.

That was certainly the case last week. The fewest Americans in almost 15 years filed applications for unemployment benefits during a holiday-shortened week that typically makes the data more volatile. Jobless claims dropped by 43,000 to 265,000 in the week ended Jan. 24, the lowest since April 2000. No state reported an increase of more than 1,000 in claims for the week ended Jan. 17.

The National Association of Realtors reports its index of pending home sales fell 3.7% in December, though the year-on-year gain was 11.7%, the highest since June 2013. Pending sales measures contracts signed but not yet closed.

The Census Bureau reports the number of owner-occupied households fell by 354,000 from a year earlier as the homeownership rate dropped to its lowest level since 1994. The ownership rate for people under age 35 fell to 35.3%, down 1.5 percentage points from a year earlier and the lowest level in Census data going back to 1982. The number of renter-occupied residences grew by 2 million last year. Vacancy rates for rentals fell to 7% in the fourth quarter, the lowest since 1993. Total households increased 1.66 million. This means that younger people are finally entering the housing market, even if it is as renters rather than owners. That’s good news for landlords, better news for parents.

Denmark’s central bank cut interest rates today to negative 0.5%. Denmark’s rates were already negative, now more so. Denmark operates a currency peg with the euro, which has come under increasing pressure as the single currency has weakened with the recently announce quantitative easing plan.

The German economy has slipped into deflation for the first time in more than five years, and may not see inflation again before the year is out. Prices dropped by 0.3% in the year to January. Eurostat is due to publish inflation figures for the euro area as a whole on Friday. Economists expect these will show prices have fallen faster still, at 0.5% in the year to January.

The Bloomberg Commodity index, which tracks the global prices of 22 different commodities such as gold and oil, dropped to the lowest level since August 2002. The strength of the US dollar has hit commodity prices hard. Because most commodities traded in international markets are quoted in US dollars. When the dollar rises they become more expensive and this hits demand. The US dollar index, which tracks the price of the US dollar against the world’s currencies, has increased by more than 18% within the past six months.

Oil is near a 6-year low as stockpiles surge. The Energy Information Administration reported record-high inventories in the U.S. and raised more anxieties about the global oil glut. Domestic crude inventories rose by almost 9M barrels last week to reach nearly 407M, the highest level since the government began keeping records in 1982.

At the same time that oil price has been declining, we’ve also observed big drops in the price of other commodities like copper, the yield on 10-year US Treasuries, and the value of other currencies relative to the dollar. Certainly part of the reason for the decline in oil is because global demand has dropped, even as supplies remain high, but that isn’t a full explanation for the other commodities dropping.

Markets have been volatile in January. The S&P 500 dropped 1.4 percent Wednesday, bringing its slide this month to 2.8 percent, the most since January 2014. The Chicago Board Options Exchange Volatility Index jumped 32 percent in the previous two days, its biggest gain in almost seven weeks. Earnings season is in high gear as 52 of the S&P 500 companies post results today. Of those that have reported profit so far, 76 percent have exceeded estimates, while 57 percent topped sales projections.

Google posted fourth quarter numbers after the close of trade. They missed on the top line and the bottom line. Revenue (minus traffic acquisition costs) was $14.4 billion versus $14.6 billion estimates. Adjusted EPS was $6.88 vs $7.08 expected. Google’s share of the online-ad market is coming under pressure as more users spend time on smartphones and tablets. The average price of ads fell 3% in the quarter, following a decline of 2 percent in the previous period.

Also after the close, Amazon reported fourth quarter profits. That’s right, a profit not a loss of $214 million, or 45 cents per share, beating estimates of 18 cents. Revenue came in at $29.3 billion, missing estimates of $29.6 billion. Amazon forecast first-quarter sales of $20.9 billion to $22.9 billion, falling short of analysts’ average projection of $23 billion.

Alibaba Group’s quarterly revenue fell short of analysts’ expectations, showing signs of a slowdown in the Chinese e-commerce company’s growth during the holiday shopping season. Revenue rose 40% to $4.2 billion in the December quarter, missing the average analyst estimate of $4.4 billion. But margins increased to 58% from 50% in the prior quarter.

ConocoPhillips, the largest independent oil and gas company, reported a quarterly loss and again slashed its 2015 capital expenditures, citing lower crude prices. ConocoPhillips said its fourth-quarter loss was $39 million or 3 cents per share; excluding one-time items related, ConocoPhillips had a profit of 60 cents. In December, ConocoPhillips announced plans to cut spending 20% including eliminating a $6.5 billion plant in Qatar; now they say they expect to spend $11.5 billion, down from a prior projection of $13.5 billion.

Royal Dutch Shell posted Q4 profit of $4.2 billion, compared with $2.2 billion for same quarter a year earlier, although it said it would lower capex in 2015 and curtail overall spending by a total of $15 billion over the next 3 years.

More than 30,000 job cuts have been announced across the oil industry as companies shrink budgets. Exploration and production spending is expected to fall by more than $116 billion, or 17%.

Qualcomm reduced its outlook for fiscal 2015, saying it expects its newest Snapdragon mobile chip to not be used in a “major customer’s” flagship smartphone. The company also blamed increased competition in China for the reduced guidance. Still showing surprising growth for its latest quarter, Qualcomm reported that first-quarter net income rose 5% from a year ago to $2 billion.

Nokia reported stronger-than-expected quarterly profits this morning lifted by robust sales of latest-generation wireless telecom equipment in North America. Net profit in the three months to end-December quarter was €443M. However, the company stuck to a forecast for weakening profitability.

Confirming the firm’s first annual earnings decline in three years, Samsung Electronics said that October-December profit fell 28% from a year earlier, as strong chip earnings failed to make up for weakness in its mobile division (its fifth consecutive quarter of decline). Samsung issued a statement saying: “Uncertainties for global business conditions will likely grow further in 2015 due to the slowing Eurozone economy and financial risks in emerging countries.”

Deutsche Bank, has a boatload of legal problems and even more investigations but they posted a surprise Q4 net profit today after cutting the reserves it set aside to cover upcoming legal action and on higher investment banking revenue. Net profit of €438M beat expectations of a €289M loss forecast by analysts.

One of those legal investigations involves rigging the $5.3 trillion-a-day foreign exchange markets. Deutsche Bank and 11 other major banks are under investigation. A judge in Manhattan says investors can proceed with their anti-trust lawsuit accusing the big banks of a long running manipulation of closing spot prices, also known as the Fix. According to the 2013 lawsuit, these banks have held an 84 percent global market share in currency trading, and were counterparties in 98 percent of U.S. spot volume. The lawsuit is separate from criminal and civil probes worldwide into whether banks rigged currency rates to boost profit at the expense of customers and investors.

If you go to a restaurant today, chances are the food came from either Sysco or US Foods. The approval for an $8.2 billion Sysco-US Foods deal is being delayed again after the FTC sent a subpoena to a third-party food distributor this week asking for more information. Antitrust concerns are focused on whether the Sysco deal will drive up costs, as the two are the only ones with geographic reach to offer nationwide contracts for a wide variety of goods.

The FCC voted today to classify broadband internet as connections that provide download speeds of at least 25 megabits per second (Mbps) and upload speeds of 3 Mbps. That’s a good move. Those speeds are a lot faster than many people probably get from their internet provider (ISP). By definition, ISPs won’t be able to say they provide broadband unless they can give you at least those speeds.

Thursday, July 10, 2014 - If It’s Not One Thing…

Financial Review with Sinclair Noe

DOW – 70 – 16,915
SPX – 8 = 1964
NAS – 22 = 4396
10 YR YLD - .01 = 2.53%
OIL + .59 = 102.88
GOLD + 8.70 = 1336.30
SILV + .32 = 21.52

 

We start today with the hottest stock in the world: CYNK Technology, ticker CYNK.  It is a one person company, which has something to do with a website, with headquarters in Belize, maybe. There is no indication of revenue, possibly about a million in losses. It had been trading for a couple of pennies, and then for no apparent reason it started trading higher. After closing at 6 cents on May 15 it began its surge with a 3,650% jump to $2.25 on June 17. The stock climbed as much as 49% to $21.95 earlier today in over-the-counter trading on volume of more than 380,000 shares before erasing its gain to close down 5.5% to $13.90, and a market cap of a little more than $4 billion. How and why did this happen? Nobody seems to have an answer, but I think it would be a very, very bad idea to do anything with this stock, just to be clear.

Se nao e uma coisa e outra coisa.

Which is Portuguese for “if it’s not one thing, it’s another thing.”

I’m sure somebody in Lisbon was fully aware of what was going on, and they were waving their arms and screaming about the bank that was ready to implode; and nobody paid any attention because there was so much else happening around the world. Iraq is fractured, bombs are flying in Israel, Germany is expelling a US spy, the Italian economy looks wobbly, Libya, Ukraine, Nigeria, Thailand, China. Pick a global hot spot, pick ten global hotspots, and I bet Portugal is not on the list.

Here’s the story: Espirito Santo International is a big conglomerate in Portugal; they missed a payment on some short-term debt this week. So, a couple of subsidiaries got clobbered, Espirito Santo Financial Group shares down 9%, and Banco Espirito Santo shares down 17%. Trading was halted.  The credit rating agency, Moody’s, cut the corporate credit rating to junk status, which is basically closing the barn gate after the cow gets out.

While I make no claim to any particular knowledge of the Portuguese banking system, the consensus is that this problem should not create a meltdown scenario; however, there has been a singe factor. Borrowing costs for Greece, Spain, and Italy bounced a bit higher. Again, this is not earth shaking, but it did cause a brief flash of realization that the banking problems of the past few years have not been corrected.

A couple of years ago the European Central Bank developed a plan for dealing with sovereign debt crises, the OMT or Outright Monetary Transactions program, but it has never been used and it probably wouldn’t apply even if the situation in Portugal started to create a meltdown scenario. So the fear out of Portugal is something called the “doom loop”; that’s the cycle in which weak banks lean on governments for support, draining public finances, which in turn drags down the banks with them.

A couple of years ago,ECB President Mario Draghi bought some time when he declared the central bank would do “whatever it takes”, and then they did nothing. So it was like a whiff of smoke that reminds you that never bought fire extinguishers, even after that little explosion in 2008, and the Greece fire in 2011.

And so, European stocks took a hit today, and that spread over to Wall Street, where the Dow Industrials started the day with a 180 point dip, until traders remembered – it’s Portugal. And then they decided that a little pullback following a 6 week rally was to be expected and Banco Espirito Santo is nothing to fear, even if you don’t have a fire extinguisher.

So, with the long-term memory of a dog chasing a squirrel, we move on to our next topic. After all, we live in a mobile-first and cloud-first world. So says Satya Nadella, the CEO of Microsoft; no he’s not the guy trying to buy the LA Clippers, he’s the guy who replaced Steve Ballmer. Nadella has sent out a really long email to all Microsoft employees outlining his vision for Microsoft. Over the years, Microsoft made a very large amount of money serving the PC world. Its Windows operating system and Office software generated the vast majority of its sales and profits, but now the personal computer is going the way of the typewriter. Microsoft used to talk about “a computer on every desk and in every home,” a vision it clearly succeeded in delivering. But what do you do when you’ve delivered that vision?

So Nadella writes: “Computing is ubiquitous and experiences span devices and exhibit ambient intelligence. Billions of sensors, screens and devices – in conference rooms, living rooms, cities, cars, phones, PCs – are forming a vast network and streams of data that simply disappear into the background of our lives. This computing power will digitize nearly everything around us and will derive insights from all of the data being generated by interactions among people and between people and machines. We are moving from a world where computing power was scarce to a place where it now is almost limitless, and where the true scarce commodity is increasingly human attention.”

There are a couple of interesting phrases in the mission statement from Nadella; he writes, “computing is ubiquitous” and also “ambient intelligence”. The idea that computers are ubiquitous is fairly easy to understand; just look around you; you probably have a smart phone close at hand; if you are in an office, you still have PCs, and don’t forget the computers in the printers and telephones, and thermostat, and electric meter. If you are driving right now, your car is a computing marvel. And if you are at home, check out the computer in your refrigerator, and dishwasher, and a dozen other gadgets and appliances. Another name for ubiquitous computing is the “internet of things”.

And the idea here is to connect machine to machine, and machine to human, and then human to human. We’ve been talking about that for a long time. The computers would be embedded in almost everything and everything would communicate seamlessly with everything else. We’re not there yet, but if you have questions about the internet of things, just ask Siri or Cortana.

All that computing power means we are surrounded by an ocean of data. The exploration of that data constitutes what Microsoft researchers call the “fourth paradigm”, exploration of data to discover new and interesting results to power a new generation of artificial intelligences. Microsoft Research head Peter Lee recently talked about some of the AI breakthroughs that were powering the new tools. Discussing the concept of “transfer learning,” he revealed that by training a speech recognition neural net on multiple languages, its performance improved with each new language, even on previously trained languages.

There are already apps that can infer context from our emails and documents and then deliver information we need, or might need, when we need it. We’ve already seen this in marketing and advertising; based upon your searches, the data programs can figure out whether you are getting married, pregnant, planning a vacation, or looking for a job; and then they deliver advertising that should grab your fancy and even calculate the probability of a purchase, putting the supply chain in motion, ready to send out drones to deliver your package with same day delivery, or even within the hour. It’s a little like the waiter anticipating when you want a coffee refill; that sounds like a simple task but it is incredibly complex and requires understanding the differences between correlation and causation. Computers are not good at that, but they’re getting better, or maybe they’re getting smarter.

As computing becomes more and more ubiquitous all those little computers, embedded in almost everything, are gathering data; and the neural networks are analyzing the data – watching and learning, and the data eventually becomes information, and the information becomes knowledge. And we end up with collective wisdom. At least that’s the idea.

We’re closer than you think. We already know that computing power grows exponentially. Moore’s Law basically says that technology performance indicators double every 18 months, which leads to incredible innovative applications only slightly bogged down by social acceptance. Not every innovation makes it into common usage because of concerns about privacy, lack of trust, reliability, or just information overload. Somewhere there is a huge scrapyard of abandoned apps.

There is an even larger ocean of smaller and more powerful embedded computers monitoring our actions and data and trying to figure out where we want to go, and then trying to figure out how to help us get stuff done. That’s the benign version. The version will a little less sugar coating involves a complete loss of privacy and subjugation before the robot overlords. Then again, in a world of CYNK Technology and Portuguese doom loops, maybe we deserve robot overlords.

Microsoft will have an earnings call next week, and we’ll likely learn more then. Today’s six page memo was big on building productivity, but that might also mean pink slips for many Microsoft employees; after all there are bound to be some redundancies following the Nokia acquisition. Nadella writes that "We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more." But for all the talk of a brave new mobile first, cloud first world, don’t expect Microsoft to abandon the Xbox game console; it’s a money maker. Still, it is a fairly bold new direction for Microsoft, maybe the biggest vision change since Bill Gates ran the place.