Financial Review

A Tight Range

Sinclair Noe — May 21, 2015

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

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DOW + 0.34 = 18,285
SPX + 4 = 2130.82
NAS + 19 = 5090
10 YR YLD – .07 = 2.18%
OIL + 1.71 = 60.69
GOLD – 3.00 = 1207.80
SILV + .05 = 17.23

The S&P 500 closed at a record high today.

We had a slew of economic data this morning. The leading economic index rose 0.7% in April, indicating the US economy is still expanding.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 274,000 for the week ended May 16. Despite last week’s increase, claims remained below 300,000, a threshold associated with a strengthening labor market, for an 11th straight week. The four-week average for jobless claims decreased to 266,250, a 15-year low.

The National Association of Realtors reports sales of existing homes fell 3.3% in April to a seasonally adjusted annual rate of 5.04 million. April’s sales pace was up 6.1% from a year earlier. The median sales price of used homes hit $219,400 in April, up 8.9% from the year-earlier period.

The jobless claims and existing home sales are pretty important because they are strong indicators for second quarter growth. We know the Fed is watching the labor market. It would be very difficult for the Fed to hike rates if the labor market starts showing signs of weakness. The housing data is important because this is how low interest rates provide stimulus to the broader economy. Housing is a long-term investment that is very sensitive to interest rates. It would be difficult for the Fed to hike rates if the housing market is showing signs of weakness. And so today’s economic data on jobs and housing would indicate a more accommodative monetary policy from the Fed.

The Philadelphia Fed’s manufacturing index dropped to a reading of 6.7 in May, down from 7.5 in April.

The flash reading of the Markit manufacturing purchasing managers index fell to 53.8 in May from 54.1 in April. New orders growth dropped to the slowest pace since January 2014. Export sales have declined for two straight months, adding to evidence that the strong dollar has been holding down the economy.

We know the markets are following the Fed and waiting for some direction, but for now the markets have shown very little as far as direction. The Dow Industrials have been trading in a range, a very tight range since the start of the year; and if this trend holds till the end of the quarter, it would mark the narrowest first-half trading range in the history of the Dow.

The Senate voted 62-38 on a procedural bill that sets up a vote, likely tomorrow, on the “fast-track” trade negotiating authority to complete the Trans-Pacific Partnership (TPP) trade deal. The TPP, which is near completion after more than five years of negotiations, would create a free trade zone covering 40 percent of the world economy. Trading partners have said they want to see fast-track enacted before finalizing the pact, a goal the administration has set for this year. Obama has campaigned aggressively for fast-track over objections from the left wing of the Democratic Party.

The bill must also pass the House of Representatives, where an even tougher fight is expected. Some conservatives oppose giving the White House more power, and many of Obama’s Democrats worry about the impact on jobs and the environment. Critics say the rules, currently part of the TPP, undermine governments’ ability to set domestic policy on issues such as health and the environment, although supporters argue they are essential to avoid discrimination against foreign investors.

An oil spill has caused California to declare a state of emergency. Houston-based Plains All American Pipeline has spilled as much as 105,000 gallons of crude oil on California’s coast. The spill has prompted California Gov. Jerry Brown to declare a state of emergency.

ISIS has captured the ancient Syrian city of Palmyra. The militant group seized the city in central Syria after a bloody battle with pro-government forces. The fall of Palmyra, which is home to 2,000-year-old Roman ruins, comes five days after ISIS captured Ramadi, a provincial capital in Iraq. Activists say that with the latest advance, the militant group controls more than half of Syria’s territory.

CVS Health Corp said it will buy pharmacy services provider Omnicare for $12.7 billion.  Omnicare delivers drugs and helps senior-living facilities manage residents’ medications. CVS is the nation’s second-largest pharmacy benefits manager, handling drug plans for health insurers and employers.  CVS said the deal will also help expand its presence in the rapidly growing specialty pharmacy business, which sells high-cost drugs to treat complex or rare conditions. Both CVS and Omnicare are big Part D players and there could be some scale benefits in negotiating with other payors.  According to the Centers for Disease Control and Prevention, the number of people aged between 55 and 64 having two or more chronic conditions that require medication grew 39 percent in the last decade.

Lumber Liquidators said Chief Executive Officer Robert Lynch unexpectedly resigned from his post. Company founder Thomas Sullivan is serving as CEO during the search for a permanent replacement. Lumber Liquidators is trying to win back customers after “60 Minutes” reported in March that it sold Chinese-produced laminate flooring with toxic levels of formaldehyde, a known carcinogen. While the company assured consumers its products are safe, sales have slid and the U.S. Consumer Product Safety Commission is probing the allegations. The surprise announcement today undermines all of the company’s denials; and although the resignation is not exact evidence, it raises the possibility that Lumber Liquidators knowingly poisoned customers with dangerous products. It also raises the possibility that regulators are close to taking action against the company.

What is going on in Hong Kong? With no immediate explanation, Goldin Financial and Goldin Properties, both controlled by billionaire Pan Sutong, plunged more than 60% in Hong Kong trading this morning. Before the rout, the two stocks surged more than 300% in 2015 for the biggest gains on the Hang Seng Composite Index. The tumble follows the mysterious 47% drop in 24 minutes by Hanergy Thin Film Power on Wednesday, which erased $19 billion in market value before trading was suspended.

Shopify has priced its IPO at $17, a mark above the e-commerce firm’s lifted range of $14 to $16. Shopify (Pending:SHOP) intends to list its shares on the Toronto and New York stock exchanges.

A U.S. bankruptcy judge has cleared the way for RadioShack to sell its trademark, as well as customer data and other intellectual property to a Standard General affiliate for about $26 million, rejecting a competing bidder’s claim that the auction process was unfair. RadioShack also resolved objections to the sale from several state attorneys general who were concerned the deal could threaten consumers’ privacy.

Radio Shack’s bankruptcy has left some creditors in the lurch. They owe thousand, in some cases, hundreds of thousands to a few hardware startups. For many hardware startups, or almost any kind of startup, it can be difficult to negotiate a strong contract for direct sales to large retailers, so many times the products are placed with the retailers in what is basically a consignment agreement. Radio Shack did pay one creditor, though; Apple received just north of $3.3 million. Obviously the Cupertino giant had a number of contractual clauses that required payment no matter what, a side-effect of having excellent lawyers. Other smaller players were paid portions of the money owed. Maybe they can convert to Shake Shacks.

Goldman Sachs has published its list of the stocks hedge funds like and a list of stocks they love to short. For a long time, Apple reigned “undisputed as the most popular hedge fund stock,” but a quick check of your Apple Watch will show you that times change. The most recent iteration of Goldman Sachs’ quarterly update on holdings of hedge funds shows that the drug company Actavis has taken over the top spot. Some 77 hedge funds reported having Actavis as one of their top 10 holdings. Apple is in second place, followed by Facebook, Valeant and Microsoft. The most shorted stocks by hedge funds are AT&T, Disney, IBM, Verizon, and Intel. You may recall that Apple replaced AT&T in the Dow Jones Industrial Average back in March, and since then, AT&T has gained about 6%, but for the funds it appears to be a case of guilt by lack of association.

The US Census has just released population stats for major cities. Ten US cities now have 1 million or more people; California and Texas each have three off those places. The big cities in Texas are Houston, San Antonio and Dallas. The big cities in California are Los Angeles, San Diego, and….San Jose, which just topped the one million population mark. Texas has been growing for a fairly simple reason – jobs, and many of those jobs are related to the oil industry. It remains to be seen whether the sharp decline in oil prices over the last year will jolt the growth train off the rails.

San Antonio had the fastest growth rate among US cities, up 7.7%. Phoenix has grown by 6% from 2010 through 2014. New York is the largest city in the country with 8.4 million; there are 3.9 million Angelinos; Phoenix comes in at the number 6 spot, and if current growth rates hold up, we should overtake Philadelphia for the number 5 spot sometime in late 2016.

Financial Review

A Bit Ironic

Sinclair Noe — March 25, 2015

 

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

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DOW – 292 = 17,718
SPX – 30 = 2061
NAS – 118 = 4876
10 YR YLD + .04 = 1.92%
OIL + 1.70 = 49.21
GOLD + 1.90 = 1196.10
SILV + .01 = 17.06

Not much in the way of economic data today. Orders for durable goods dropped in February, a possible sign the slowdown in global growth may be weighing on American manufacturers. Bookings for goods meant to last at least three years declined 1.4 percent after a 2 percent gain in January that was smaller than previously estimated. Demand for American-made products may be softening as economies abroad struggle to accelerate and a stronger dollar makes it more attractive for foreign customers to buy from elsewhere.

Certainly not much in the way of news that would push the markets down to triple digit losses, but that’s the way the markets have been recently. In the past couple of weeks we see big moves in the markets, a little more to the downside than the upside. One of the better explanations I’ve heard for what is moving the market – irony. It seems like good news is bad and bad news is good. A strong dollar is good news for the consumer; certainly when it comes to lower gas prices. A strong dollar hurts durable goods orders. The jobs picture has shown solid and consistent improvement, which means the Fed wants to hike interest rates. The US is probably the strongest economy on the planet and yet the Japanese stock market is up 12% year to date and the European stock market is up 18%.

You think you figured out the markets; the gods of irony laugh.

In the absence of hard economic data, the Federal Reserve is sending out policymakers to make speeches this week. Atlanta Federal Reserve President Dennis Lockhart told the New York Times the central bank would have to be really disappointed by economic data to wait beyond September. Lockhart – who has yet to vote for a rise in rates – said: “If we make a decision early – early being June – or if we make a decision later, September or even later, in the greater scheme of things I don’t think it’s going to matter dramatically. I think the economy can absorb that almost on any of those dates.”

An API report yesterday showed a slightly smaller build in U.S. crude stocks at 4.8 million barrels last week. This morning the EIA reported crude oil inventories increased for the 11^th straight week, up 8.2 million barrels for the week ended March 20.  There are now 466 million barrels in storage, the highest for this time of year in 80 years, according to the EIA. This does not mean there is a storage crisis.

No deal yet between the US and Iran over their nuclear program.  Lifting oil sanctions on Iran could hit global markets long before the nation starts pumping more crude. That’s because Iran has been stockpiling oil onshore and in supertankers in the Persian Gulf, possibly up to 35 million barrels. And that could prove a surprise for the energy markets or it might not because there is a problem on the tip of the Arabian Peninsula. Yemen is a chokepoint between the Arabian Sea and the Red Sea and the Suez Canal; which is to say a chokepoint for oil tankers. And Yemen is falling apart.  The Associated Press, said the US backed President Hadi had left the country by boat; rebels have taken over the major airport and much more. The US has pulled all of its personnel out of the country.  Reuters reports that Saudi Arabia is moving heavy military equipment, including artillery, to its border with Yemen. Saudi Arabia says the buildup at the border is purely defensive.

Today marks the anniversary of Greek independence from the Ottoman Empire; they had a parade in Athens; it rained. Greece’s efforts to avoid bankruptcy have hit another hurdle, raising the risk of default next month. Yesterday, the European Central Bank instructed Greece’s largest banks to refrain from increasing their exposure to Greek government debt, essentially shutting off access to money. Greece has until Monday to show how it will follow through on reform commitments that would open the door for Greece to access $1.3 billion to aid their banking system. Greece risks running out of cash by April 20. Depositors pulled money from Greek banks today. There are reports of food shortages as people stock up in anticipation that the Greek economy will soon grind to a halt.

The government coalition in Greece has resorted to increasingly desperate measures to stay afloat, they have sequestered the reserves of public bodies, seized EU subsidies for farmers, and postponed all payments for state supplies while trying to service debt and pay salaries and pensions. On Monday, they are supposed to come up with a list of reforms, they might even write out a list, but the reality is that Greece is broke and can’t pay its debts. I suppose it is ironic that the modern term “irony” comes from the classic Greek theater.

In the latest annual letter to shareholders of Berkshire Hathaway, Warren Buffet addressed the possibility of potential acquisition targets for the company. He said simply: Our lines are out. Today, Buffett reeled in Kraft Food. Heinz and Kraft Foods will merge, with Heinz shareholders owning 51 percent and Kraft’s owning 49 percent. In addition, Kraft shareholders will receive a special cash dividend of $16.50 a share, or a total of $10 billion. The combined company will be the third largest food company in North America, and will have eight brands with sales of $1 billion or more and five brands with between $500 million and $1 billion in sales. Brazilian private equity firm 3G Capital and Berkshire Hathaway acquired Heinz for $23.2 billion in 2013. Kraft is 3G Capital’s fifth major deal in the food and beverage industry since 2008, when it engineered a takeover of Anheuser-Busch by brewer InBev. 3G Capital also controls Restaurant Brands International, formed when its Burger King business bought Canadian coffee chain Tim Hortons.

Telefonica has officially announced it will sell U.K. mobile carrier O2 to rival Hutchison Whampoa. Telefonica will receive $13.8 billion in cash up-front, and could receive up to $1.5 billion later, if O2 and Hutchison’s Three U.K. unit hit cash flow targets post-merger. The deal comes as Telefonica gets set to acquire Brazilian wireline carrier GVT for $8 billion, and follows Telefonica’s $12 billion 2014 acquisition of German rival E-Plus.

Hedge fund Standard General has raised its bid to buy about 1,740 stores of bankrupt electronics retailer RadioShack in a court-supervised auction. Standard General increased its bid from $145 million to $165 million. Standard General, which would operate most of the stores in conjunction with Sprint; it also committed to keeping some 7,500 RadioShack jobs. RadioShack’s auction was complicated by disputes among creditors about how Standard General was paying for its bid. The hedge fund provided RadioShack with a $535 million financing package last year to get the company through the year-end retail season. Much of the hedge fund’s bid took the form a “credit bid” – a pledge to forgive some of what it is owed.

The Supreme Court has revived a lawsuit by a former United Parcel Service driver who had to leave her job when she became pregnant and her doctor recommended she not lift heavy items. The justices, voting 6-3, sent the case back for a possible trial, which would center on UPS’s reasons for refusing to offer Peggy Young light-duty work even while giving temporary assignments to workers recovering from on-the-job injuries. The ruling is the Supreme Court’s first since 1991 on employers’ duties toward their pregnant workers.

On Tuesday, the Supreme Court heard a couple of cases called Bank of America v Caulkett and also Bank of America v Toledo-Cardona, that have big implications for the US housing market. The cases have a link to the foreclosure crisis. Under current law, primary residence mortgages cannot be modified in bankruptcy, unlike vacation homes, yachts, car leases, and almost every other form of debt, with the notable exception of student loans. That’s because of a 1992 Supreme Court case called Dewsnup, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. When Bank of America appealed the bankruptcy judge’s ruling in the Caulkett and Toledo-Cardona cases, the 11th Circuit Court of Appeals went against the Dewsnup ruling in May 2014 by deciding in favor of the two homeowners, saying that the previous decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The Supreme Court is expected to make a ruling by June.

Today was the big F8 event. In case you didn’t mark that on your calendar, F8 is the Facebook developer conference, and it offers a glimpse into new products and updates. Among the cool stuff: Facebook is opening up its Messenger chat app to third-party integrations. For example, a week ago, the company announced a feature that will let people use the app to send money to friends. Now it’s also talking about integrating GIF apps into the platform.

And then the next step: they are integrating Messenger with businesses, such as online retailers. This means Facebook will be able to connect shoppers’ identities to their purchases, creating a single thread of all interactions between retailer and consumer, and an app you could just tap to add more to your purchase.

Also, enhanced plug-ins for embedded video and comments. Facebook videos now log 3 billion views per day, and they want more. As for the comments plug-in, new updates would make it easy to carry conversations that occur on news sites that use Facebook comments, such as the New York Times, back to the social network. For publishers, this means much greater engagement in media.

And then there was an update on a company Facebook acquired a couple of years ago called Parse, which helps to develop apps for the Internet of Things; they’ve developed new tools to help programmers build apps for connected devices.

So, basically Facebook, that geeky social media company where people wast time sharing what they ate for lunch is now trying to control payment systems, shopping, videos you watch, news you read, and any devices you have that connect to the internet. Ironic, isn’t it?

FINANCIAL REVIEW

Anti-Austerity Gets Wind in Sails

Sinclair Noe — February 2, 2015

Podcast: Play in new window | Download (Duration: 12:46 — 5.8MB)

DOW + 196 = 17,361
SPX + 25 = 2020
NAS + 41 = 4676
10 YR YLD – .01 = 1.67%
OIL + 1.59 = 49.83
GOLD – 9.30 = 1274.80
SILV – .05 = 17.28

Americans cut spending in December by the largest amount since 2009; we knew spending on energy would be lower but consumers did not rush out and spend the money. Household savings from lower energy costs, were partly offset in December by higher spending on drugs, health care and housing. These expenses continue to eat up a large portion of American incomes. Incomes posted another solid gain and falling inflation is allowing Americans to get more bang for their buck. Personal spending fell a seasonally adjusted 0.3% last month. Personal income, meanwhile, rose 0.3%. Since income growth outpaced spending, the amount of money individuals save jumped to 4.9% from 4.3% to mark the highest level since midsummer.

The Commerce Department reports construction spending rose 0.4% in December to a seasonally adjusted annual rate $982.1 billion, led by public spending. Private-construction spending rose 0.1% in December, with a 0.3% increase for residential projects and a 0.2% decline for nonresidential projects. Meanwhile, public-construction spending rose 1.1% in December.
The ISM Manufacturing Report for January dropped from 55.1 to 53.5. Any reading above 50 indicates the manufacturing sector is expanding, just not as fast.

Germany’s Angela Merkel ruled out a debt writedown for Greece on Saturday, while an ECB policymaker threatened to cut off funding to Greek banks if Athens doesn’t agree to renew its bailout package. Europe’s bailout program for Greece, part of a €240B rescue package also involving the IMF, expires on Feb. 28. Greece has hired the investment company Lazard to advise on restructuring its debt, and has refused to deal with the “troika” which is pushing for continued austerity.

President Barack Obama has suggested that Greece will not be able to recover from its economic crisis unless there is a let up in austerity policies. “You cannot keep on squeezing countries that are in the midst of depression,” when CNN’s Fareed Zakaria asked him about the case of Greece. “At some point, there has to be a growth strategy in order to pay off their debts and eliminate some of their deficits.

Greek Finance Minister Yanis Varoufakis was in London today trying to win support for a writedown. Britain’s finance minister, George Osborne said Greece needs to act responsibly but that the Eurozone also has to come up with a better plan for jobs and growth. Osborne called the stand-off the “greatest risk to the global economy.”

Think about that for a moment. The Greek bailout package is €240B, and Greece would certainly pay most of that, even if they get a break. Without some sort of break, Greece might well default on everything. So the greater risk seems to be doing nothing to help the Greeks. But there is another risk.

Hundreds of thousands of people marched through Madrid Saturday in a show of strength by a fledgling leftist party, as it becomes the latest European political organization to gain widespread support for its anti-austerity stance. Podemos (‘We Can’) supporters from across Spain converged on Madrid in what was the party’s largest rally to date, as it hopes to emulate the success of Greece’s Syriza party in the Spanish general election later this year. The political party was just formed one year ago, and they are now favorites to win the election.

The anti-austerity movement is catching some wind in its sails, and with good reason; austerity does not work. Spanish unemployment is holding around 25%. Half of Spain’s unemployed no longer receive benefits, while 33 of the 35 biggest companies avoid tax through subsidiaries in tax havens. Half a million children have been plunged into poverty since 2009, but the wealth of Spain’s super-rich has increased by 67%in the past 5 years. To avoid the wrath of a fractious population the government has cracked down on the right to assemble. That did not stop hundreds of thousands of protestors over the weekend.

President Obama presented the White House budget today. At the heart of the budget is what the president calls “middle-class economics”; plans to help middle-income earners afford necessities such as education and child care and bolster their skills, and to pour federal money into building roads and bridges. To pay for such initiatives Obama has outlined a nearly $1 trillion of tax proposals that would hit the wealthy and large financial institutions over the next decade.

The budget foresees a $474 billion deficit, which is 2.5 percent of U.S. gross domestic product. The proposal includes a corporate tax overhaul, plus a 6-year, $478 billion plan to build and improve transit, roads, and bridges – paid for by imposing a one-time tax of 14% on an estimated $2.1 trillion in overseas accounts held by US corporations. The president is proposing to add $38 billion for the military and $37 billion for domestic programs under Congress’s discretion; essentially restoring the cuts made by the 2011 budget deal known as sequestration. Obama called those cuts “mindless austerity.”

The White House is assuming that inflation-adjusted economic growth will rise from 2.2 percent in 2014 to a robust 3.1 percent this year and 3 percent in 2016, and that unemployment will continue to fall, to 5.4 percent this year from the current 5.6 percent, to 5.1 percent in 2016 and to 4.9 percent in 2017 and 2018. Those assumptions would mean that the current record-breaking expansion of private sector jobs would continue well into the future.

It’s important to note that this budget is the president’s proposal—a blueprint – given to Congress to be fought over or blatantly ignored; it’s not law. So, this is first-and-foremost a political document used to outline the president’s vision and define his terms of engagement with Congress. And there are a few things Republicans should like, such as more military spending, a highway trust fund, and corporate tax reform, but the devil is in the details. Most of these measures, to use the language of the moment, will likely be “dead on arrival,” given that both the House and Senate are now under Republican control.

The chairman of the Federal Communications Commission this week is widely expected to propose regulating Internet service like a public utility to ensure so-called net neutrality, or an open Internet. It is expected that the proposal will reclassify high-speed Internet service as a telecommunications service, instead of an information service, under Title II of the Communications Act. The change would give the commission strong legal authority to ensure that no content is blocked and no so-called pay-to-play fast lanes exist. He may also suggest putting wireless data services under Title II and adding regulations for companies that manage the backbone of the Internet. However, it would likely be regulation without specific pricing control. The proposal is expected to be submitted to the agency’s commissioners by Thursday.

About 3,800 employees represented by the United Steelworkers union went on strike at plants accounting for 10% of U.S. refining capacity for a second day, after failing to agree on new labor contracts. Union workers are on strike for a second day at nine U.S. refineries and chemical plants as they seek a new national contract with oil companies covering laborers at 63 plants. The walkouts targeted plants with a combined 10 percent of U.S. refining capacity, although the plants remain open for now.

Exxon Mobil’s quarterly profit fell 21% as weak oil prices took a toll, but earnings topped Wall Street expectations due to tax benefits and a favorable arbitration ruling; revenue missed the mark. Profit in the fourth quarter fell to $6.5 billion, or $1.56 per share, from $8.3 billion, or $1.91 per share in the same quarter a year earlier. Exxon also said it will reduce its share buyback program in the first quarter by more than half to $1 billion.

RadioShack is preparing to shut down the chain in a bankruptcy deal that would see half the stores taken over by Sprint. The rest of the stores would close down. Sprint and RadioShack have also had talks about co-branding the stores. Standard General, a hedge fund and the largest investor in RadioShack, was in talks to serve as the lead bidder at a bankruptcy auction. It is also possible that another bidder could yet emerge to buy RadioShack and continue operating the 94-year-old chain.

Apple announced it will spend about $2 billion to build a new data center in Mesa, Arizona. It will be housed in buildings formerly used by GT Advanced Technologies, which went bankrupt last year after failing to supply sapphire display covers for the iPhone 6. The project will supply 300 to 500 temporary construction jobs and 150 permanent jobs, and the data center will be powered entirely by renewable energy. Apple also will invest to build and finance solar projects, which will produce enough energy to power more than 14,500 Arizona homes. Apple told Bloomberg it will be a “command center for our global networks.”