Financial Review

Time Waits for No One

Sinclair Noe — May 8, 2017

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DOW + 5 = 21,012
SPX + 0.09 = 2399 (record)
NAS + 1 = 6102 (record)
RUT – 5 = 1391
10 Y + .02 = 2.38%
OIL + .28 = 46.50
GOLD – 1.90 = 1227.00

Emmanuel Macron defeated Marine Le Pen in France’s presidential election. The euro fell from six-month highs against the dollar in what looks like a “sell the news” reaction.

The dollar rose with Treasury yields on confirmation of Macron’s widely expected victory. The CBOE Volatility Index dropped to 9.77, marking its lowest close since 1993. The S&P 500 and the Nasdaq Composite traded at new intraday record highs. Macron won by a margin of 66 percent to 34 percent.

The rise of Le Pen’s National Front and France’s persistent economic and industrial problems made this campaign a referendum on Europe and globalization. Macron repeated that the big divide was between those who see an open economy as an opportunity and those who, like Le Pen, seem to fear the challenges it offers.

Macron’s decisive triumph over the anti-euro Marine Le Pen will likely strengthen the EU and deal a blow to the populist wave that has roiled western democracies for the past year.

On assuming office next Sunday as France’s youngest leader since Napoleon, the 39-year-old Macron faces the immediate challenge of securing a majority in next month’s parliamentary election to have a realistic chance of implementing his plans for lower state spending, higher investment and reform of the tax, labor and pension systems.

With the two mainstream parties – the conservative Republicans and the left-wing Socialists – both failing to reach the presidential runoff, his chances of winning a majority that supports his election pledges will depend on him widening his centrist base. Macro’s toughest task may be keeping the Euro Union intact.

The largest global banks in London plan to move about 9,000 jobs to the continent in the next two years. Thirteen major banks including Goldman Sachs, UBS, and Citigroup have given an indication of how they would bulk up their operations in Europe to secure market access to the European Union’s single market when Britain leaves the bloc.

Last week Standard Chartered and JPMorgan were the latest banks to outline plans for their European operations after Brexit. Talks with financial authorities in Europe have been underway for several months, but banks are increasingly firming up plans to move staff and operations.

Demand for bank loans from commercial and industrial firms was weaker in the first quarter. The Federal Reserve survey of senior loan officers showed standards for loans were basically unchanged. The officers said that they continued to tighten standards for commercial real estate, a process that economists said started in late 2015. Many officers cited regulatory reasons for tightening commercial real estate standards. There was also weaker demand for auto loans and credit cards.

The Arizona Regional Multiple Listing Service (ARMLS) reports that overall sales in in the Phoenix market April were up 4.5% year-over-year.  Cash Sales (frequently investors) were down to 22.5% of total sales. Active inventory is now down 11.0% year-over-year.  This is the sixth consecutive month with a YoY decrease in inventory following eight months with YoY increases. Supply and demand formulas would indicate higher prices.

Black Knight Financial Services reported that in the fourth quarter of 2016, 44% of refinances were cash-outs. The housing ATM is now back in working order. This percentage was the highest level of cash-outs in the last eight years.  What was happening eight years ago?

Straight Path surged more than 30 percent after an unnamed telecommunications company (possibly Verizon) raised its offer to buy the wireless spectrum holder for about $3.1 billion, topping a bid by AT&T.

Tyson Foods was the biggest S&P loser, down nearly 6 percent after the meat processor reported a slump in quarterly profit.

Sinclair Broadcast Group said it would buy Tribune Media, one of the largest U.S. television station operators, for about $3.9 billion cash and stock, and assume about $2.7 billion in debt. The $43.50 per share offer represents a nearly 8 percent premium to Tribune’s Friday close. Tribune operates 42 television stations in 33 markets.

Handbag maker Coach said it would buy Kate Spade for $2.4 billion as it looks to tap the popularity of its smaller rival’s quirky satchels and totes among millennials. The $18.50 per share offer in cash represents a premium of 9 percent to Kate Spade’s Friday close.

Amazon has a knack for making simple hardware popular. First, it was the humble e-reader. Now, it’s the voice-controlled speaker. Amazon holds a 70% market share in the new category, which it invented with the Amazon Echo in 2014, according to research from eMarketer.

The report says Google holds a 23% market share but may be poised to take more of the market in 2017. Researchers say 60 million Americans will use Amazon’s Alexa, Google Now, Microsoft’s Cortana, or Apple’s Siri at least once per month in 2017. For Amazon, this is great news.

The company has recently begun a campaign to make Alexa synonymous with voice assistants: Other developers can now use Alexa in their own applications, and the virtual personal assistant was shoe-horned into dozens of products on display at this year’s Consumer Electronics Show.

Amazon’s market share in voice-controlled speakers mirrors its success in another business, e-books. After killing off the competition from physical book stores like Borders, Amazon now enjoys a 74% share of the e-book market.

The Ira Sohn Conference is different things to different people. For young hedge-fund strivers, it’s high-priced networking. For the old guard, it’s a good show for a good cause. And for the hedge-fund presenters, the annual confab serves as a sort of debutante’s ball for new investment theses, a highly orchestrated and ritualized setting in which to trot out your most darling idea, primped and permed for the admiring gaze of the investing public.

Bill Ackman, Pershing Square, dragged one of his oldest investments out of the basement, threw a shiny new bow on top and presented it as if it were fresh goods. Ackman pimped Howard Hughes Corporation, a position he has held since its 2010 split from General Growth Properties. And it worked to the tune of a 4.5% gain today.

Meanwhile, Doubleline Capital’s Jeff Gundlach’s Sohn 2017 investment these: long emerging markets, short the S&P 500 (an actively managed index, Gundlach reminded us), and leverage it all once over. So, Jeff Gundlach wins Sohn 2017.

This weekend also marked a slightly more bourgeois shindig, the 2017 edition of the Berkshire Hathaway annual shareholder meeting. Much of the discussion centered around the advanced ages of Warren Buffett and Charlie Munger; Warren is 86 and Charlie is 93. Both seemed to acknowledge that time waits for no one.

Buffet said he would continue to run Berkshire until he is buried in the ground. Charlie looks more and more like Yoda with each passing year. Charlie Munger said the Chinese stock market is cheaper than the American stock market. Charlie also says that single-payer healthcare is the answer to fix the nation’s healthcare system woes.

Mr. Buffett said, “The tax system is not crippling our business around the world.” A specter much more sinister than corporate taxes is looming over American businesses: health care costs. And chief executives who have been maniacally focused on seeking relief from their tax bills would be smart to shift their attention to these costs, which are swelling and swallowing their profits.

Warren riffed on his misses as much as his hits. The investing legends twice talked about their failure to invest in Amazon despite having high praise for CEO Jeff Bezos. The Berkshire executives issued a mea culpa on missing out on Walmart and Google. Buffett called missing out on the two growth stories his “worst mistake” and told the nearly 40,000 assembled that he “blew it.” Buffet admitted he was disappointed with IBM, and he has dumped about one-third of his position recently.

Buffett has defended the Brazilian buyout house with which he attempted to take over Unilever, by saying 3G was only following a “standard capitalist” stance to doing business by slashing costs and cutting staff. He also acknowledged, though, that cutting jobs can be a “painful process”.

It wasn’t all bad news. Berkshire’s net worth increased by $27 billion last year, and the conglomerate has $86 billion of cash on hand. Berkshire Hathaway disclosed it more than doubled its stake in Apple during the first quarter. The stock hit an all-time intraday high and Apple’s market capitalization topped $800 billion.

The good news for Americans: life expectancy in the US increased more than five years from 1980 to 2014, up to 79.1 years. The bad news for Americans: your actual life expectancy could vary by more than 20 years depending on where in the US you happened to be born.

University of Washington researchers reported in a study published  today that the life expectancy from birth in the US varies from 67 years in Oglala Lakota County, South Dakota to 87 years in Summit County, Colorado. Counties with lower life expectancies tended to have higher rates of health conditions like obesity and diabetes, higher poverty rates, and higher proportions of minority residents.

In 13 counties across the U.S., Americans can now expect to die younger than their parents did. And the eight counties with the largest declines in life expectancy since 1980 are all in the state of Kentucky.

Globally, the US ranks 42nd in average life expectancy; Monaco has the longest, at 89.5 years, and Japan and Singapore tied for second with an average longevity of 85 years.

Tuesday, August 19, 2014 - It’s Just a Matter of Time

Financial Review with Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again.