Financial Review

22k Day

Sinclair Noe — August 2, 2017

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DOW + 54 = 22,016
SPX + 1 = 2477
NAS – 0.29 = 6362
RUT – 15 = 1412
10 Y + .01 = 2.26%
OIL + .45 = 49.61
GOLD – 2.00 = 1267.20
BITCOIN + 0.06% = 2739.83 USD
ETHEREUM – 0.59% = 218.89

The Dow closed above 22,000 for the first time ever. Not a big surprise. After the closing bell last night, Apple reported a strong quarter for earnings, and the stock moved to a record high, which carried over to today’s trading.

Apple jumped 4.73 percent to a record high. It is up 36 percent this year. Apple’s gains helped push the Dow to a record closing high, although tech heavyweights Microsoft, Facebook and Alphabet all lost ground following recent strong gains that have made the sector the strongest performer in 2017.

The Dow has risen 11 percent in 2017 and hit its sixth straight record close today. The Dow hit the 20,000 level in late January and crossed the 21,000 mark on March 1. The last time the S&P pulled back by 5 percent or more was just ahead of the election when it gave back 5 percent. There also was a sell-off after the June 2016 Brexit vote of 6 percent.

The last large correction was the more than 11 percent pullback that ended in February 2016. So, some of the techs are pulling back now but it is not a sharp pullback, rather a pause to catch your breath; all very orderly and neat, at least for now. The bears haven’t had enough power to break it down and there is still buying interest.

Two-thirds of S&P 500 companies have reported their second-quarter earnings so far and 72 percent of them have beaten Wall Street’s expectations, according to Thomson Reuters I/B/E/S. In a typical quarter, 64 percent of companies beat expectations.

The Dollar index was down slightly again today at 92.7, and it is now at a critical level of long-term support. At some point over the next few days, we should see a bounce or a breakdown. The U.S. dollar index has fallen more than 9 percent this year to its lowest since May 2016.

A weaker dollar is good for US companies with international exposure. Goldman has developed a basket of 50 S&P 500 stocks with a high percentage of international sales. Those companies should do well with a weaker dollar. So far, the group has climbed 18 percent this year, versus 7 percent gains for Goldman’s basket of stocks with domestically-generated sales. The S&P 500 has risen 10.5 percent this year.

Can anything stop the euro? That’s a serious question. Europe’s shared currency briefly rose through $1.19 on Wednesday for the first time since the start of 2015 and rising from as low as $1.0570 in April when the rally started. Although much of the euro’s strength is a function of the dollar’s weakness, there’s no denying that the euro zone economy is gathering pace.

Eurostat data showed the economy expanded 2.1 percent in the second quarter from a year earlier, the fastest pace since 2011. To be sure, a stronger euro could start to bite into the profits of European exporters, and there are signs that analysts are starting to temper their earnings estimates as a result.

Keep an eye on the Bank of England tomorrow. The BOE’s Monetary Policy Committee kept rates unchanged when it last met, in June. But the split vote suggested that some members were worried about the risk of a persistent inflation overshoot.

A weaker dollar has also helped oil prices move higher, but in the oil field, it is still a matter of supply and demand. The shale surge that’s tied down global oil prices shows no signs of abating, as four of the biggest U.S. drillers said this week that they’re not backing away from lofty production targets for 2017. Shale production is going up. It’s not a matter of if; it’s just a matter of how much.

Much of the discussion in markets the next couple of months is likely to center around the U.S. debt ceiling and whether lawmakers raise it or if there will a big battle between Republicans and Democrats that results in a government shutdown that hurts markets. Traders are already willing to pay up for Treasury bills maturing after Oct. 19 to avoid being caught holding securities vulnerable to a technical default.

President Trump signed into law new sanctions against Russia, a move Moscow said amounted to a full-scale trade war and an end to hopes for better ties with the Trump administration. Congress overwhelmingly approved the legislation last week, passing a measure that conflicts with the Republican president’s desire to improve relations with Moscow.

While Trump signed the bill, he criticized it as infringing on his powers to shape foreign policy and said he could make “far better deals” with governments than Congress can.

Data showed U.S. private employers added 178,000 jobs in July after adding 191,000 in June. The more comprehensive non-farm payrolls report is due on Friday.

Tesla shares gained 6 percent after the company reported a narrower-than expected loss. The electric automaker also reported strong revenue as they start making deliveries of the new, more-reasonably-priced Model S sedans.

Tesla continues to burn through cash as it ramps up manufacturing capabilities. Tesla reported negative free cash flow of $1.1 billion in the second quarter in a letter to shareholders Wednesday, less than the $1.3 billion projected by analysts. The burn rate was still a quarterly record and almost double the amount of money Tesla went through in the first three months of the year.

Tesla forecast spending $2 billion in capital expenditures in the second half of the year, up from $1.5 billion in the first six months of the year. Tesla had said it planned to produce 500,000 vehicles annually by 2018 and would ramp up costs to meet that goal.

Shares of Fitbit gained as much as 8 percent after the company posted better-than-expected quarterly results. Co-founder and CEO James Park said Fitbit saw strong sales with unexpectedly strong demand, leading to a reduction in inventory.

Square ticked 1 percent higher after the company reported results that bested analyst expectations. The Jack Dorsey-led company posted a loss of 4 cents per share on $552 million in revenue. Wall Street had expected a loss per share of 5 cents on revenue of $536 million.

Shares of AIG edged higher after the company reported earnings per share above analyst expectations. The company posted earnings per share of $1.53, easily besting the consensus estimate for about $1.20 a share.

Cheesecake Factory shares fell 7 percent after the company reported a decline in comparable restaurant sales, outweighing earnings and revenue that were roughly in-line with expectations. The company said same-restaurant sales declined 0.5 percent during the period.

AutoNation fell 7 percent after the largest U.S. auto retail chain reported lower quarterly profits.

Cardinal Health fell 8.2 percent after the drug distributor’s 2018 profit forecast missed analysts’ estimate.

Theranos just reached a settlement with Walgreens. In November 2016, Walgreens filed a $140 million lawsuit against Theranos, accusing Theranos of a breach of contract. Walgreens had ended its relationship with Theranos a few months prior in June 2016.

It had operated Theranos Wellness Centers, where people could go have their blood tested in the company’s stores. Until October 2016, Theranos’s business model was based around the idea that it ran blood tests using proprietary technology that requires only a small amount of blood.

Theranos has been under fire since October 2015 after the Journal published an investigation that questioned the accuracy of its blood test. Eventually, one of the company’s lab-testing locations was shut down, and its founder — Elizabeth Holmes — was originally barred for two years from running a clinical lab.

The settlement with Walgreens is the last in a series of major settlements between Theranos and investors, as well as the state of Arizona.

Financial Review

Up and Down

Sinclair Noe — April 18, 2017

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DOW – 113 = 20,523
SPX – 6 = 2342
NAS – 7 = 5849
RUT + 0.71 = 1361
10 Y – .07 = 2.18%
OIL – .30 = 52.35
GOLD + 5.20 = 1290.20

One day up, one day down.

Housing starts decreased 6.8 percent to a seasonally adjusted annual rate of 1.22 million units as the construction of single-family homes in the Midwest recorded its biggest decline in three years. Last month’s decline in home-building was likely payback after the warm weather pulled forward construction in February.

Single-family home-building, which accounts for the largest share of the residential housing market, fell 6.2 percent to an 821,000-unit pace last month, retreating from a near 9-1/2-year high. Single-family starts in the Midwest declined 35 percent, likely the result of harsh weather.

Still, housing remains on solid footing. Overall building permits increased 3.6 percent, driven by a 13.8 percent jump in the multi-family segment. Though single-family permits fell 1.1 percent last month, they were not too far from the more than nine-year high reached in February.

In a separate report, the Fed said manufacturing production dropped 0.4 percent in March, weighed down by a 3.0 percent decline in the output of motor vehicles and parts. That was the first and biggest decline in factory production since last August. The return of cold temperatures, however, resulted in a record 8.6 percent surge in utilities output.

Manufacturing output rose at a 2.7 percent annual rate in the first quarter as the sector, which accounts for about 12 percent of the U.S. economy, continues to recover after a prolonged drag from lower oil prices, a strong dollar and an inventory overhang.

Confidence in the U.S. economy is at its lowest point in five months. Gallup’s US Economic Confidence Index was +4 for the week ending April 16, down two points from a week earlier. It’s also fallen 12 points from early March when Dow Jones Industrial Average broke through 21,000 for the first time.

Since then, the benchmark stock index has fallen 2.7 percent. Gallup’s indicator is back to where it was shortly after President Trump was elected. Some 33 percent of respondents assessed the economy as good, while 22 percent rated it as poor. But 48 percent of respondents said the economy was getting worse, while 45 percent said it was getting better.

President Trump spoke about his “buy American, hire American” agenda at the Kenosha, Wisc., headquarters of Snap-On Tools. He signed an executive order to review high-skilled H-1B visas, which also asked federal agencies to minimize the use of waivers to Buy American policies.

Trump said, the visas should “never, ever be used to replace Americans.” He also said the North American Free Trade Agreement, or NAFTA, should be renegotiated or he will “get rid of it” — a threat that earned mild applause from the audience.

British Prime Minister Theresa May called for an early election on June 8, saying she needed to strengthen her hand in Brexit talks with the European Union. May said she decided it was necessary to try to stop the opposition “jeopardizing” her work on Brexit. May is betting her strong showing in opinion polls will translate into a snap election victory and strengthen her parliamentary majority.

If the opinion polls are right, May will win a new mandate for a series of reforms she wants to make and a vote of confidence in a vision for Brexit which sees the country outside the EU’s single market. Britain joins a list of western European countries scheduled to hold elections this year.

Votes in France in April and May, and in Germany in September, have the potential to reshape the political landscape around the two years of Brexit talks with the EU expected to start in earnest in June.

Nicola Sturgeon, first minister of the Scottish government, described the decision as a “huge political miscalculation” that could help her efforts to hold a new independence referendum. The government of the Irish Republic also expressed concern that the early election could damage the chances of resolving a political crisis in the British province of Northern Ireland.

Bank of America had the best first quarter of the largest US banks that have reported to date, thanks to higher net interest income spurred by rising rates. Maybe the Federal Reserve should be credited with an assist. Bank of America reported total revenue rose about 7 percent to $22.4 billion in the three months ended March 31, handily beating the average analyst estimate of $21.6 billion.

Revenue from trading activities, excluding special items, rose 21.2 percent to $4 billion, helped by a 29 percent increase in fixed-income trading revenue. Net income surged about 44 percent to $4.35 billion. Earnings per share rose to 41 cents per share, topping the average analyst estimate of 35 cents.

BofA shares traded down 10 cents.

Goldman Sachs’ profit rose from a difficult year-ago quarter, with earnings per share of $5.15 versus $2.68. But the results were well short of analyst forecasts of $5.31 per share. Goldman reported a 2 percent decline in trading revenue, in sharp contrast to results from JPMorgan, Citigroup. and Bank of America, which all beat estimates due to strength in trading.

Overall, Goldman’s profit rose 80 percent to $2.2 billion from $1.2 billion in the first quarter of 2016. Revenue rose 27 percent to $8 billion from $6.3 billion.

Goldman shares fell 4.7 percent.

Johnson & Johnson reported disappointing pharmaceutical and consumer product sales. Revenue of $17.7 billion in the quarter fell short of estimates of $18 billion. Net earnings in the first quarter were $4.42 billion. Excluding items, J&J earned $1.83 per share, beating Wall Street expectations by 6 cents.

Shares fell 3.1 percent in the biggest one-day percentage decline in more than eight years.

IBM said revenue fell 2.8 percent, to $18.1 billion in the first quarter from $18.6 billion a year earlier. Revenue declined for the 20th quarter in a row. Net income dropped to $1.75 billion, or $1.85 per share, from $2 billion, or $2.09 per share.

Corning will sell up to 12.4 million miles of optical fiber to Verizon each year from 2018 through 2020, with a minimum purchase commitment of $1.05 billion. In a statement, Verizon said the deal would help it meet its roll-out schedule for a fiber-optic network in Boston. The company also views fiber as critical for a next generation, or 5G network.

Verizon is testing a 5G fixed wireless service with equipment maker Ericsson in 11 U.S. markets and expects a commercial launch as early as 2018. Both Verizon and competitor AT&T Inc have been buying assets in preparation for 5G.

Every year, Facebook founder and CEO Mark Zuckerberg takes to the stage and tells a packed auditorium of developers and press about new tools, products, and initiatives the company has been working on. Facebook held its annual developers’ conference today, and called for computer programmers to assist the company by building augmented reality-based apps to work with what Facebook calls its Camera Effects Platform.

Facebook announced a new set of tools to help developers and will begin the initiative with a small number of partners in a closed test. Allow me to translate. Augmented reality, so far, refers to little stickers that can be added to photos; for instance, people can attach cartoon thought bubbles above the heads of people they view through their Facebook camera lens, or you can slap a beard on a selfie, put stars on a photo.

Maybe the best example of augmented reality is the Pokemon Go game. But take it to the next level. What if you could leave virtual notes on the wall of a restaurant, noting which item on the menu is worth ordering, or virtual notes at work – a to-do list or another reminder. Or, as Facebook CEO Mark Zuckerberg said: “Think about how many of the things around us don’t actually need to be physical.

Instead of a $500 TV sitting in front of us, what’s to keep us from one day having it be a $1 app?” Facebook does not expect to build these software experiences itself; that’s where the developers come in.

So far, augmented reality has experienced several failed attempts to launch. Facebook’s Oculus Rift googles have been slow to find fans. Microsoft has its version of an augmented reality headset, called HoloLens, which it unveiled two years ago. Remember Google Glasses?

To keep a step ahead of Facebook, today Snap is introduced a new feature for its Snapchat messaging service that will allow users to place 3-D cartoon objects into their videos and pictures. Snap’s new technology, a 3-D lens, can also change and shift in response to physical objects.

Elizabeth Holmes, the CEO of Theranos, personally lobbied the Arizona Legislature and Gov. Doug Ducey in 2015 to pass a bill allowing people to get a blood test without a doctor’s order. Ducey touted the law to open the state up to new and innovative businesses — and he signed the legislation with Holmes standing directly behind him.

Ducey has prioritized luring companies and jobs to Arizona by passing business-friendly legislation and eliminating regulations. Fast forward to October 2016, Theranos shut down its clinical labs in several states and wellness centers inside Arizona Walgreens stores in October and laid off a large part of its workforce.

The move came after federal regulators barred company founder and CEO Elizabeth Holmes from owning or running a medical laboratory for two years, and followed reports the company’s blood tests were unreliable.

In Arizona alone, 10 percent of 1.5 million blood tests were voided or corrected. Today, Arizona Attorney General Mark Brnovich announced Theranos has agreed to pay $4.65 million to cover full refunds for every Arizona customer who used the company’s testing services.

Financial Review

Welcome to Earnings Reporting Season

Sinclair Noe — October 11, 2016

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DOW – 200 = 18,128
SPX – 26 = 2136
NAS – 81 = 5246
10 Y + .02 = 1.76%
OIL – .49 = 50.86
GOLD – 7.00 = 1253.40

Alcoa reported third quarter earnings before the bell today, in what has been traditionally known as the start of earnings season. The raw aluminum and specialty parts maker missed estimates on both top and bottom lines. S&P 500 companies are expected to post their sixth straight quarter of declining earnings, according to FactSet data. And while sales are expected to break their six-quarter streak of declines, that optimism may be overdone, based on the dozens of sales warnings to pop up in the last several weeks.

When you look at a chart of the S&P 500, you’ll see we’ve been in a sideways or consolidation pattern since mid-July. Earnings season could be the catalyst for a breakout or a breakdown; with the S&P 500 trading at an historical high valuation in terms of P/E and P/S, the pressure is towards the downside.

In fact, stocks must justify the current 12-month trailing P/E of 25 and the current CAPE ratio of 27 (cyclically adjusted price to earnings ratio) through positive earnings growth. Analysts are usually very conservative on their predictions. Actual earnings have beaten analyst’s estimates since 2014. As this is well known by investors, one should not get too optimistic over the possibility that earnings may beat estimates by a small margin.

In fact, be careful to buy on slightly better than expected earnings given that valuations are high. Now, the good news is that most of the bad news has already been baked into price; by that, I mean we are all aware of concerns with Brexit, China, the price of oil, the US election, and a possible Fed rate hike. The bad news is that the market is complacent. The VIX is low at around 15.

Except for a couple of weeks in September, where the S&P took a big hit and then bounced back, the tight range has been getting tighter, like a rubber band wound to the limit. A break above the September highs of 2180 would serve as a bullish sign that could lead to new all-time highs. Today’s close below 2140 exposes weakness and a break down below 2120 looks dangerous.

Long-term bond yields continued to rise. The yield on the 10-year Treasury note was slightly higher at 1.76%. Earlier Tuesday it hit 1.8% for the first time since early June, marking a four-month high. Futures markets are now pricing in roughly 70% odds of a rate hike at the Fed’s December meeting. We should learn more tomorrow, when the Fed releases minutes of its last policy meeting.

British cabinet ministers are being warned that the Treasury could lose up to £66-billion-pounds a year in tax revenues under a “hard Brexit,” according to leaked government papers seen by The Times. The document also cautions that leaving the single market and switching to WTO rules could cause GDP to fall between 5.4%-9.5%.

The British pound sterling slipped below $1.23 and €1.11 in morning trading to its lowest value since last week’s flash crash. The fall in the pound has boosted the FTSE 100 as many of the companies in the index generate most of their revenues abroad. The UK’s benchmark index broke through its previous record intra-day level to hit 7,129.83 before losing some ground.

Igor Sechin, Russia’s most influential oil executive and the head of state-controlled energy giant Rosneft, said his company will not cap oil production as part of a possible agreement with OPEC. Sechin told reporters that Rosneft planned this year to raise its oil production, already the world’s largest among listed producers. Sechin said he doubted some OPEC countries, such as Iran, Saudi Arabia and Venezuela, would cut their output. Yesterday, WTI pushed above $51 per barrel after Vladimir Putin said Russia was ready to join an output freeze, but not one world producer has willingly taken one solitary barrel off the table this fall.

Samsung’s Galaxy Note 7 has been permanently discontinued, following a problematic recall operation that replaced Note 7 phones with faulty batteries at risk of explosion… with new phones that have the same batteries. The replacement lithium ion batteries in the phone tend to catch fire. The cost to Samsung of the Galaxy Note 7 could be $17 billion, the amount the company was expected to bring in from the sales cycle of the phone.

That figure doesn’t include the damage to the Samsung brand, though. Samsung shares have lost $18 billion in market cap since the problems started. If you have a Galaxy Note 7, and it doesn’t matter if it was the original phone or a phone with a replacement battery, just turn it off and get a refund and buy a phone that doesn’t explode.

Although Salesforce was thought to be out of the mix as of this weekend, a new report suggests the company is still evaluating the benefits of a Twitter deal and what an appropriate valuation might be. Meanwhile, in an internal memo reportedly sent to Twitter employees last week, CEO Jack Dorsey made no mention of any deals, instead highlighting initiatives revolving around the company’s live strategy and other merits.

General Electric said it would buy LM Wind Power, a maker of rotor blades used in wind turbines, from private equity firm Doughty Hanson for $1.65 billion, as it looks to capture a bigger share of the fast-growing renewable energy market. GE separated its renewable energy business from its power unit last year, following the $13.6 billion acquisition of Alstom SA’s power business. Denmark-based LM Wind Power is the largest supplier of rotor blades to GE.

Fiat Chrysler has reached a tentative deal with unionized workers in Canada by agreeing to make more than $300 million in investments for local operations. The pact was announced just minutes ahead of a midnight strike deadline that could have sent more than 9,000 Fiat workers off the job. Union members will vote on the accord at ratification meetings on October 16.

Chicago’s schools and its teachers’ union agreed to a contract proposal late on Monday, averting a strike set for today in the third largest U.S. public school system. Teachers contribute 2 percent to their pension, with the school board chipping in an additional 7 percent. Under Monday’s deal, new hires will not get the 7-percent “pension pickup,” but will get a salary adjustment to compensate for that.

Airbus plans to slow the assembly rate of its A380 to one aircraft per month from 2018 as the European plane maker struggles to revive sales of the world’s largest passenger jet.  Airbus’ assembly rate for the superjumbo currently stands at 2.5 aircraft per month.

Theranos has been sued by one of the blood testing start-up’s biggest backers, Partner Fund Management, for attracting $96 million in investment “through a series of lies, material misstatements, and omissions.” The suit accuses Elizabeth Holmes of deceiving the hedge fund by claiming Theranos had developed “proprietary technologies that worked” and was close to getting regulatory approvals. The suit comes less than a week after Theranos stopped all of its clinical operations, cutting 340 positions and closing its Wellness Centers where blood tests were performed.

A recent update from the Arizona Multiple Listing Service shows Phoenix real estate sales in September were up 6.3% year-over-year. Active inventory was up 3.4% year-over-year, marking the seventh consecutive month of increases in inventory. Cash sales declined to 20.2% of total sales. Meanwhile, foreclosure inventory continues to plunge across the nation, with the foreclosure inventory rate at 0.9% in August, down 29.6% compared to last year. Arizona has one of the lowest levels of foreclosure inventory, at just 0.3%.

Americans are increasingly shopping online and we have been spending less at the malls; overall, we just got tighter with money following the financial crisis. According to a new report from Morningstar, we have a shopping mall problem. The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia – the next two countries with the highest retail space per capita.

Department stores like Sears, Macy’s, and JCPenney have been closing stores to try and get rid of unprofitable stores, and that’s had a devastating effect on malls. When an anchor stores closes, it often triggers a downward spiral in performance for shopping malls that in some cases has led to massive losses on loans.

When an anchor store closes, shopping malls don’t only lose the income and shopper traffic from that store’s business. It often triggers “co-tenancy clauses” that allow the remaining mall tenants to exercise the right to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the vacant anchor space. The Morningstar report supports a recent analysis from Credit Suisse that said about 200 shopping malls are at risk of shutting down if Sears continues to close stores.

Financial Review

Waiting for the Storm

Sinclair Noe — October 6, 2016

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DOW – 12 = 18,268
SPX + 1 = 2160
NAS – 9 = 5306
10 Y + .03 = 1.74%
OIL + .73 = 50.56
GOLD – 11.30 = 1256.20

The number of people who applied for unemployment benefits fell by 5,000 to 249,000 at the end of September. This marks 83 consecutive weeks of initial claims below 300,000, the longest streak since 1970. Tomorrow the Labor Department reports on how many people found jobs in September; the consensus estimate is calling for about 170,000 new jobs in the last month.

With unemployment near the lowest level since before the last recession, employers are having to offer more incentives to attract skilled workers to blue-collar truck driving and construction jobs.

Tomorrow’s jobs report could provide clues to the timing of the Fed’s next interest rate rise. If the tight jobs market means average hourly earnings rose more than the projected 0.3 percent, the chances of a hike this year could easily increase beyond the current market-implied 61 percent.

Traders are taking the Fed’s November meeting off the table for two reasons: its closeness to the elections could have aggravated political and market consequences, and the Fed may want to avoid raising rates at meetings without scheduled press conferences. There will be two more jobs reports before the Fed’s December meeting. And so, reading the Fed tea leaves based on this report may be premature, unless we get a very dramatic number tomorrow.

Now, when we see the report that weekly claims for jobless benefits are at the lowest levels in 46 years, you might think that is a sure sign that the labor market is very strong. Not necessarily. The labor market is certainly much stronger than it was 5 or 6 years ago, but one reason why claims for unemployment benefits are so low is because fewer people are eligible to make claims, with just over one in four jobless workers (27 percent) receiving unemployment insurance benefits in 2015. Just since 2011, the proportion of jobless workers receiving unemployment insurance plunged from 67% to a measly 27%. From two-thirds to just one in four.

Global outplacement consultancy Challenger, Gray & Christmas reports employers announced plans to cut 44,324 jobs last month; that’s a 38% increase from August, but 25% less than September a year ago.

A fresh report from the Freelancers Union now shows that nearly 55 million Americans are freelancing. If you tally this up against the Labor Department data, it means that 35% of the work force is made up of freelancers. The view is that the number of freelancers is growing and that the freelance economy has added 2 million workers since 2014. The report also shows that these independent workers are “emerging as a powerful economic and political force” and that freelancers contributed $1 trillion dollars to the economy this year.

Consumer loan delinquencies fell to the lowest on record in the second quarter of the year. The American Bankers Association’s index, which tracks late payments in eight categories, fell 3 basis points to 1.35, a record low. Delinquency rates held below the 15-year average of 2.21% for the third year.

Hurricane Matthew, the fiercest Caribbean storm in nearly a decade, slammed into the Bahamas this morning. Haiti now reports more than 100 dead. Now, it is gathering strength and is expected to slam into Florida in the next 4 to 6 hours as a Category 4 hurricane with sustained winds of about 140 miles per hour and a storm surge up to 11 feet. It might even grow into a Category 5.

The National Hurricane Center extended its hurricane warning area farther north into Georgia and more than 12 million US residents are under hurricane watches and warnings. More than 1.5 million Floridians have been told to evacuate.   Efforts to prepare for the deadly storm have resulted in massive gas lines and empty store shelves as residents either get out of town or bulk up on supplies to ride out the storm.

Airlines have cancelled flights from Florida to the Carolinas. Airlines have cancelled more than 3,000 flights. Expect delays everywhere. Twelve U.S. power generators, including two nuclear plants, are in the storm’s path. The risk to Florida’s orange crop is “minimal” because the worst weather will be along the coast.

Evacuations could push storm damage to $10 billion to $15 billion in losses related to economic disruption, and total losses could top out around $50 billion. Shares of publicly-traded property and causality companies are taking it on the chin as Hurricane Matthew bears down on the Florida, Georgia, and South Carolina coasts.

Shares in Twitter fell hard this morning after technology news site Recode reported that Google doesn’t currently plan to make a bid for the company. Recode also said Disney and Apple are unlikely to bid. That leaves Salesforce.com as a possible suitor, although some analysts say an acquisition could hurt Salesforce more than it helps.

Snapchat has begun preparing filings for an initial public offering and is aiming to sell shares in the first quarter of next year. The Wall Street Journal estimates the social media site known for its disappearing texts and photos could fetch a market value of at least $25 billion.

Looking to gain an even more dominant position in retail, Wal-Mart is accelerating its investment in e-commerce. The company is on track to double the number of warehouses dedicated to online sales by the end of 2016 and has installed technology that for the first time puts them on par with Amazon’s robot-staffed facilities.

Wal-Mart tempered its profit forecast for the next two fiscal years due to investments in its online business. Wal-Mart said it expected flat earnings for the year ending on Jan. 31, 2018, with capital expenditures of about $11 billion. It had previously forecast profit growth. New store growth will slow significantly. The retailer expects to build 35 new supercenters in fiscal 2018, down from 69 last year. Even growth of the company’s smaller format Neighborhood Markets will slow, down to 20 new stores in fiscal 2018 from 161 built last year.

Mylan overcharged the government for the EpiPen. The drug company classified the EpiPen allergy treatment as a generic, allowing it to have inflation protections with Medicaid that are not available to branded drugs. Makers of brand-name drugs have to pay higher rebates to states than generics — 23.1% versus 13%. Also, they have to pay additional rebates if their price increases rise more than inflation. So by having EpiPen classified as a generic Mylan saved itself a bunch of money.

Back in 2009, Mylan paid a $124 million fine for misclassifying its drugs and under-paying rebates this way. It is the responsibility of the manufacturer to maintain accurate information of its drug’s status. From 2011 to 2015, government spending on EpiPen increased 463%, from $86 million to $487 million. As of now, the Centers for Medicare & Medicaid Services are unsure exactly how much they were overcharged.

Theranos fired 40% of its workforce. Life sciences company Theranos will close its clinical labs and fire 340 people, founder Elizabeth Holmes said in an open letter. The company said it is no longer focusing on blood-testing after serious questions were raised about the effectiveness of its novel method, but will develop products for outside labs.

One of Deutsche Bank’s problems might have gone away. German financial regulators say they found no evidence to date that the lender violated rules on money laundering in Russia. The stakes are still high for Deutsche Bank as German government officials quietly meet with U.S. regulators in Washington to broker a deal that would reduce the Justice Department’s $14 billion proposed settlement for mortgage backed securities mis-deeds dating back to the financial crisis. Last week, there was a rumor that the DOJ might accept a $5.4 billion fine. With talks ongoing, it looks like the two sides have not come up with a mutually acceptable resolution.

Southwest Airlines Flight 994 was scheduled to depart Louisville for Baltimore yesterday. The flight was cancelled and the plane was evacuated after a passenger’s Samsung smartphone caught fire. And we have all heard the stories of Samsung phones catching fire. The company, which is announced last month that it would replace 2.5 million of the Galaxy Note 7 phones because of a flaw in the battery’s cell that could result in the devices bursting into flames or exploding…, but this phone was a replacement. The passenger sent his old phone in to be replaced with a new battery, and it still caught fire.

The United Nations has organized the first international pact to reduce the airline industry’s carbon emissions. And the airline industry supported the deal. But there’s some fine print. The restrictions won’t even be set for several more years, and emissions will be capped at 2020 levels, and may indeed rise before then, and the standards won’t become mandatory until 2027. And airlines won’t necessarily have to burn less fuel; emissions beyond the 2020 levels could be offset with investments in renewable energy projects and environmental programs. Aviation contributes about 2% of the world’s carbon emissions.

The town of Summit, New Jersey has hired UBER to provide free rides for commuters to and from its train station under a new six-month pilot aimed at solving its downtown parking crisis. Uber is looking at similar arrangements with “another half dozen” towns along the NJ Transit rail line, and that the model could extend to other states in time.

Financial Review

Thankyou

Sinclair Noe — June 13, 2016

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

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DOW – 132 = 17,732
SPX – 17 = 2079
NAS – 46 = 4848
10 Y – .02 = 1.62%
OIL – .53 = 48.54
GOLD + 10.50 = 1284.80

Equities across the globe drifted into the red ahead of a data heavy week in the U.S. that will include retail sales, inflation and other economic figures. Reasons for the declines: Brexit woes, weak Chinese investment growth, fresh strength in the yen, and lower oil prices. Traders are also anticipating a busy week for central banks with policy meetings for the Fed, Bank of Japan, Swiss National Bank, and Bank of England.

The safe-haven yen strengthened across the board overnight, hitting a three-year high against both the euro and sterling on Brexit worries and reaching a six-week high vs. the greenback. Japan faces a credit rating downgrade after the government delayed a planned second sales tax hike.

With ten days to go until a Brexit vote, the “Leave” campaign has taken a lead over “Remain” in the latest YouGov poll, reversing the one-point lead held by the pro-EU camp in the last survey taken on June 6. Another poll from research firm ORB showed that 55% of British citizens feel they should leave the EU, versus 45% who favor remaining. Sterling moved lower against the dollar this morning.

The Federal Reserve FOMC meets tomorrow and then publishes a statement on Wednesday at 11 AM Pacific, followed by a Janet Yellen press conference. Here’s what we might reasonably expect: no rate increase from the Fed. The May jobs report was an abysmal 38,000 new jobs; so there is just too much slack in the labor market right now.

Also, the meeting is one week ahead of the Brexit referendum in the UK, which could go either way. So, don’t count on the Fed surprising the markets on Wednesday. Then the question is whether the Fed will be dovish or hawkish about a July rate hike. They will probably try to strike a balance. There is still time to telegraph a hike, if conditions improve substantially.

The Supreme Court has struck down a Puerto Rican law that would have allowed the U.S. territory’s public utilities to restructure their debt. The Bankruptcy Code requires municipalities to seek their state’s permission before they can declare bankruptcy, but Puerto Rico does not count as a “State” for purposes of this provision. The island’s utilities are effectively locked out of the protections afforded to similar debtors in the 50 states.

To compensate for this problem, Puerto Rico enacted the Puerto Rico Corporation Debt Enforcement and Recovery Act, which effectively creates a special bankruptcy code under the island’s own law that fills the gap in federal law. Today the Supreme Court ruled that the new law won’t fly.  Puerto Rico cannot file for bankruptcy. The 5-2 ruling leaves management of the island’s fiscal crisis to Congress. The House of Representatives passed a bill last week to help Puerto Rico manage its debt crisis. The Senate has not yet acted.

The Puerto Rico case today concerns about $20 billion in debt owed by the island’s public utilities companies. Absent a quick decision by Congress (not likely), power, water, sewer, and transportation are at risk of being shut down or turned off. The lost services are likely to exacerbate Puerto Rico’s debt problems as more people flee the island, depressing Puerto Rico’s tax base even further, potentially forcing deeper cuts, which will lead even more residents to flee. It is a slow motion debt spiral and there is no relief in sight.

Oil futures moved lower today, after dropping 4.2% in the previous two sessions as drilling rigs targeting crude in the U.S. rose by three to 328 last week, a second weekly gain which is a record since last August. The data from Baker Hughes suggests companies that were sidelined by low oil prices are starting to produce at $50 a barrel, and there are certainly many companies that didn’t halt production but just slowed production at lower prices. So, the $50 to $60 per barrel price range seems like the sweet spot where production returns. Now we know where the ceiling is.

Microsoft is acquiring the professional social network LinkedIn Corp. for $26.2 billion. Microsoft will pay $196 per share in an all-cash transaction, inclusive of LinkedIn’s net cash, a 49.5 percent premium to LinkedIn’s closing price Friday. The deal is the biggest ever for Microsoft. LinkedIn has long been valued for having the potential viral growth of a social network with the recurring revenues of a software-as-a-service business.

Symantec is buying privately held cyber security company Blue Coat for $4.6 billion, with Blue Coat chief Greg Clark becoming the company’s CEO once the deal closes. Symantec, which makes the Norton antivirus software, has been undergoing a transformation over the past year, selling its data storage unit, Veritas, for $7.4 billion to gain the cash necessary for turning around its core security software business.

Apple started its annual Worldwide Developers Conference in San Francisco today. Here’s what came out of Day One:

They announced Apple Pay and Siri for desktop Macs; a new Apple Watch app called Breathe, which is designed to help people control their mood; a big update to the Remote app for the Apple TV; a major update to iOS, the app that runs on iPhones, including fun new messaging options, emoji features, and lock screen and notification menus; programmers can also build apps specifically for iMessage; iOS also has additional new artificial-intelligence features, like a keyboard that can predict what you want to type and updates to the Photos app that can use facial recognition to sort photos by person; the ability for developers to build their apps into Siri and Maps; a  revamp to Apple Music; and an app for controlling automated smart homes called “Home”.

 Most of these new features will hit Apple devices in the fall.

Walgreens has terminated its relationship with Theranos. A statement posted on Walgreens’ website says the pharmacy chain is shutting down all 40 Theranos’ wellness centers at Walgreens stores in Arizona. The decision by Walgreens is a huge blow to Theranos, as the wellness centers were the company’s primary source of revenue. Theranos still operates five centers (four in Arizona and one in California).

The company once touted its Edison device as a ground-breaking technology able to test blood from just a pinprick. In October, The Wall Street Journal reported that the company’s tests weren’t producing accurate results and that the company was trying to cover it up. The Justice Department and SEC are investigating Theranos and its founder Elizabeth Holmes. Now comes word that Jennifer Lawrence will portray Elizabeth Holmes in an upcoming movie. I can’t make this stuff up.

Wal-Mart will stop accepting Visa cards in Canadian stores after failing to agree on terms with the credit card provider – the latest in a years-long battle between the two companies over fees and the right to steer customers to certain types of payments. Visa is the largest payments network in Canada, with 50.6M cards in circulation and $232.6B worth of transactions last year.

The Libyan Investment Authority, the country’s sovereign wealth fund, will go head-to-head with Goldman Sachs in a London court today in a case accusing Goldman of bribery to influence fund executives to make risky trades that led to a $1.2 billion loss. Now you might imagine that a sovereign wealth fund takes its chances and they might win some investment bets and lose some, but apparently Goldman execs knew they were pitching complex and unsuitable derivatives.

In documents provided to the court by the LIA cited Goldman Sachs describing the sovereign wealth fund as having “zero-level” financial sophistication and one individual having “delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels”. One Goldman executive is quoted as saying: “They are very unsophisticated and anyone could rape them.”

Beyond the question of suitability is the question of bribery, including travel and dining at five-star hotels, prostitutes in Dubai, while an internship at Goldman was also arranged for an official’s brother. The Libyans said the trades were made under “undue influence”. Goldman said the claims were without merit and it would fight them vigorously. And then there is the question of fees charged. While the Libyan Investment Authority was losing $1.2 billion, Goldman was collecting possibly as much as $350 million in fees.

Meanwhile, Goldman Sachs is under investigation by the Justice Department, Federal Reserve, SEC, and New York’s Department of Financial Services for its part in bond sales for 1MDB, Malaysia’s sovereign fund, which is at the center of several international investigations into alleged corruption and money laundering by public officials. Goldman arranged for about $6.5 billion in bond sales. Goldman allegedly took a very large commission in the neighborhood of $600 million.

Another problem is $3 billion Goldman raised via a bond issue; days after Goldman sent the proceeds into a Swiss bank account controlled by the fund, half of the money disappeared offshore, with almost $700 million apparently later ending up in the prime minister’s bank account. The case is being investigated in 10 countries. New York’s banking regulator has told Goldman to submit details of its internal review by Tuesday.

On June 2, AT&T launched a customer loyalty program called “AT&T thanks,” trademarking the name in connection with loyalty incentives. Citigroup, meanwhile, has been using the term “thankyou” (all one word) since 2004 to promote its own customer loyalty and rewards programs, and they trademarked it as well.

Citigroup is now suing AT&T for thanking its customers, claiming the phrase “AT&T thanks” is confusingly similar. Of course the words “thanks” and “thank you” are some of the most common words in the English language. Thankfully, Citigroup and AT&T do not own those words.

Financial Review

Until After the Fact

Sinclair Noe — January 25, 2016

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

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DOW -208 = 15,885
SPX – 29 = 1877
NAS –  72 = 4518
10 Y – .03 = 2.02%
OIL -2.36 = 19.83
GOLD + 11.90 = 1108.90

Stocks in Asia rallied overnight, with the Topix index in Tokyo increasing 1.3 percent, China’s Shanghai Composite Index rising 0.8 percent and the MSCI Asia Pacific Index adding 1.2 percent. Despite gaining in early trading, shares in Europe turned lower. US stocks were down all day, but the selling got worse into the close.

Oil gave up some of its recent gains after Saudi Arabia said it is keeping up investments in energy products and data from China showed that diesel consumption dropped for a fourth consecutive month. Also, Iraq’s oil ministry told Reuters that the country had record output in December, producing as much as 4.13 million barrels a day. A senior Iraqi oil official said separately the country may raise output even further this year. After posting a 21% gain in just 3 days last week, West Texas Intermediate closed down 7.3%.

Following the lifting of economic sanctions and the release of billions of dollars’ worth of frozen Iranian assets, Tehran is ready for business: The country just struck a provisional deal to buy eight A380 superjumbos, while an agreement for 100 more planes from Airbus and Boeing could be completed this week. Over the weekend, China and Iran also mapped out a plan to broaden relations and expand bilateral trade up to $600 billion over the next decade.

Market-based expectations point to a 96 percent chance of the Federal Reserve maintaining rates unchanged at its meeting on Wednesday. In other words, there is also most zero chance of a rate hike, because the Fed knows they can’t surprise the markets right now.

The April FOMC meeting still has about a 30% chance of a rate hike. Investors will be scouring the statement released afterward for hints that the Fed is backing away from its base case of four quarter percentage-point rate increases in 2016.  Roughly $2.5 trillion of stock market value wiped out in the past three weeks could throw the Fed off its course of gradual interest rate hikes.

The dollar has appreciated by some 2 percent since the central bank last met on Dec. 16. Coming on top of a 11 percent increase in the year prior, the latest advance will curb already slowing economic growth and put downward pressure on an inflation rate that the Fed judges is too low as it is. The Fed doesn’t want to appear to kowtow to the markets, so look for the statement to mention something about how the Fed remains “data dependent”.

One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the drop in oil prices. Fast-forward to today and the analysts provide an update to their previous thesis. Here’s what they say:

“The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market. The ABX history suggests that oil will see more declines in the next couple of months and find a floor somewhere in the low 20s in the March-April time frame.

Both the duration of the decline (1.5+ years) and the scale of the decline are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective “bubble” bursting patterns are so similar.

“Consider how things tend to work. Denial on what constitutes fair value is a big component of bubbles, on the part of both market participants and policymakers. When perceived “bubbles” burst, markets take their time in steadily shredding views of the perception of fundamental value, as prices move lower and lower. Along the way, many will cite “technical factors” as the cause of the decline, which in some way suggests the price decline may not be real when in fact it is all too real.

In the end, the technicals drive the fundamentals, as credit flees and borrowers go bust, and a feedback loop lower kicks in. Lower prices beget accelerated selling, as asset owners need to raise cash. It could be margin calls or it could be producer selling needs, it doesn’t really matter: the selling becomes inevitable and turns into forced selling.”

The point here is not that oil is necessarily the new subprime per se but that the recent action in the price of crude resembles nothing if not the bursting of a bubble and the sudden realization that the asset has been overvalued for too long.

Meanwhile, the economists at Moody’s Capital Markets Research weigh in; they say, if you want to know where equities are going, look at junk bonds. Specifically, look at the spread in yield between junk bonds and Treasuries. That spread has been widening sharply. And look at the Expected Default Frequency (EDF), a measure of the probability that a company will default over the next 12 months. It has been soaring.

Moody’s Expected Default Frequency began spiking last summer and has nearly doubled since then to 8%, the highest since 2009. The average spread between high-yield bonds and Treasuries has widened to 813 basis points (8.13 percentage points). But at the lower end of the junk-bond spectrum (rated CCC and below), the yield spread is a red-hot 18.4 percentage points.

Here’s why the spread matters: A wider-than 800 basis-point high-yield spread reflects elevated risk aversion that will reduce capital formation and spending by non-investment-grade businesses. In addition, ultra-wide bond yield spreads favor a continuation of equity market volatility that should sap the confidence of businesses and consumers. How bad is it? That’s the scary part, they say we won’t know until after the fact.

California Insurance Commissioner Dave Jones is urging insurers to voluntarily divest from thermal coal, citing the risks of climate change and the danger of losses on assets backing policyholder obligations. California is the sixth-largest insurance marketplace in the world, and this is the first time a state insurance regulator has called for the divestment of such assets. The commissioner is also requiring insurers to annually disclose their carbon-based investments, including holdings in oil, gas and coal.

McDonald’s reported fourth-quarter profit and sales that beat expectations.  US same store sales were up 5.7% in the fourth quarter. Same-store sales across all regions rose 5% from a year earlier. The big reason for the turnaround is that customers are eating up the all-day breakfast menu.

Halliburton reported a fourth-quarter net loss of $28 million, or 3 cents a share, compared with $901 million, or $1.06 share a year earlier. Halliburton also said it expanded its list of assets to sell as it tries to convince antitrust authorities around the world that its purchase of rival Baker Hughes won’t impede competition. The cash and stock deal was valued at $34.6 billion when it was announced near the end of 2014, just as oil prices had begun their downward spiral. Shares of both companies have dropped more than 30 percent since then.

This week’s quarterly earnings announcements will include results from three of the tech sector’s most important companies: Apple reports on Tuesday, Microsoft and Amazon report on Thursday.

Alphabet has agreed to pay $185 million in a back-tax settlement with U.K. authorities, setting off a hostile response from opposition politicians questioning the government’s handling of the case. According to a panel in 2013, Google paid just $16 million in U.K. corporate tax from 2006 to 2011 on $18 billion of revenue. Separately, Apple is facing a European tax investigation that could force the iPhone maker to pay more than $8 billion in back taxes.

Johnson Controls and Tyco International have announced plans to merge, in a deal that values the combined company at $40 billion. Both firms have recently fallen on hard times – Johnson has dropped more than 20% over the past year, while Tyco is down more than 25%. The new company will change its headquarters to Ireland for tax purposes.  Tyco was one of the first big U.S. industrial companies in seeking tax relief by moving its legal residence offshore. The company moved its headquarters to Bermuda from New Hampshire in 2007, then to Switzerland in 2009, and to Ireland in 2014.

Siemens has agreed to buy CD-adapco, a privately held U.S. engineering software firm, for close to $1B in cash. The acquisition comes ahead of Siemens’ annual shareholders meeting on Tuesday.

Twitter CEO Jack Dorsey tweeted late Sunday night that 4 senior Twitter executives are leaving the media company, the biggest leadership changes since Dorsey returned as chief executive as he struggles to revive the company’s growth. Twitter’s stock has fallen nearly 50 percent since Dorsey’s return last year and is now trading below its IPO price.

U.S. health inspectors have found serious deficiencies at Theranos’ northern California laboratory that, if not fixed, could see the lab suspended from the Medicare program. Regulators did not detail the problems, but results of the inspection are expected to be made public soon. The findings could also lead Walgreens to take an even harder look at what remains of its partnership with Theranos.

Takata shares tumbled 10% in Tokyo overnight, hitting their lowest level since 2009, after U.S. regulators said recalls involving the company’s air bags would expand by around 5 million vehicles. Takata executives are also meeting automakers this week to discuss the company’s financial condition, including how to split recall-related costs that could climb into the billions of dollars.