Financial Review

State of Emergency

Sinclair Noe — August 1, 2017

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DOW + 72 = 21,963
SPX + 6 = 2476
NAS + 14 = 6362
RUT + 2 = 1427
10 Y – .04 = 2.25%
OIL – .94 = 49.23
GOLD – .60 = 1269.20
BITCOIN + 0.29% = 2743.61 USD
ETHEREUM – 0.87% = 225.04

Another record session for the Dow; that’s 5 in a row. It’s the 31^st record high for the Dow in 2017. Between the scandals, the international gaffes, the disturbing handshakes, and a White House that has more turnover than a red-light district Airbnb, keeping up with the news is a full-time job. And through it all, Wall Street has shown an amazing ability to focus on other stuff.

With two thirds of S&P 500 companies having reported their second-quarter earnings, 72 percent have beaten Wall Street’s expectations. In a typical quarter about 64% of companies beat expectations. The S&P 500 is trading at about 18 times earnings estimates for the next 12 months, above its 10-year average of 14 times.

After the closing bell, Apple reported earnings and revenue topped Wall Street estimates. Apple jumped about 5% in after-hours trade. Apple also issued strong revenue guidance for its fourth fiscal quarter, suggesting strong sales growth year-over-year.

The strong guidance also hinted at the launch of a redesigned iPhone in September, which is expected to sell briskly. Although CEO Tim Cook had warned that iPhone sales might see a “pause” ahead of the expected September launch of the new iPhone, iPhone unit sales were in line with Wall Street expectations and in line with last year’s performance.

Apple posted earnings of $1.67 per share, up 17% year-over-year, vs expectations of $1.57. Third quarter revenue came in at $45.4 billion, up 7% year-over-year, vs expectations of $44.9 billion. Gross margin: 38.5%, up 1% year-over-year, vs expectations of 38.2%. Apple sold 14% more iPads than it did a year ago.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 56.3 last month from 57.8 in June, which was the highest level since August 2014. A reading above 50 in the ISM index indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

The annualized pace of U.S. car and light truck sales in July fell to 16.7 million vehicles, down from 17.8 million vehicles a year earlier, according to Autodata Corp. Carmakers continued to trim low-margin sales to daily rental fleets in July as the overall pace of U.S. car and light truck sales fell for the fifth straight month

Automakers have used low-margin sales to rental fleets to avoid factory shutdowns. With more flexible labor agreements, the Detroit automakers have shifted course. They are quicker to idle factories to reduce supply, and they are demanding higher prices.

In a more troubling sign for Detroit, combined sales of large pickups fell 4 percent, and sales of large sport utility vehicles declined by 20 percent. Only the Ford F-series, up 6 percent, improved on year-ago results among major truck models. Ford fell 2.4% and General Motors lost 3.3% after they reported lower monthly sales.

The Commerce Department said consumer spending edged up 0.1 percent in June after a 0.2 percent gain in May. There was also little sign of inflation. The personal consumption expenditures (PCE) price index, excluding food and energy, increased at a 1.5 percent pace in the 12 months through June, after advancing by the same margin in May.

In June, personal income was unchanged. That was the weakest reading since a 0.1 percent dip in November 2016 and followed a 0.3 percent increase in May.

Wages and salaries rose 0.4 percent in June. There are plenty of jobs in the economy but wage growth is sub-par and with it both consumer spending and inflation are flat.

The long length of the economic recovery has created a problem for business. The U.S. has generated 16.6 million new jobs since 2010, squeezing the pool of available workers so much that many companies now complain of a labor shortage.

With job openings near record highs, companies either must pay more in wages, increase spending on training or buy more machines to take the place of workers to keep up with rising demand. For people looking for work, it’s the best time to find a job in more than a decade.

The ultra-tight labor market, however, begs the question: Just how long can companies continue to hire at the current rate of about 180,000 a month? The pace of hiring in the U.S. has already slowed sharply since hitting a post-recession peak of 250,000 a month in 2015. And economists expect hiring to slow even further because there’s fewer people looking for jobs. The July jobs report will be published Friday morning – looking for about 180,000 new jobs.

Sprint jumped 11% after swinging to a quarterly profit for the first time in three years, while Xerox rose almost 6% after its profit beat expectations. Under Armour enjoyed stunning growth as it built up its footwear sales, but now sneaker sales have dropped and they say it will get worse. Under Armour fell 10.3% to a record low after the sportswear maker cut its full-year sales forecast.

Remember the big infrastructure proposals? Well, we still haven’t heard much about infrastructure – other than a proposal to privatize air traffic control. Privatization plus another proposal that would make it easier for co-pilots to get academic credit for certification have drawn congressional opposition and stalled efforts to reauthorize the Federal Aviation Administration, a must-do for Congress by Sept. 30.

Opponents of privatization now have the hero of the Miracle on the Hudson, retired Capt. Chesley “Sully” Sullenberger speaking out against privatization. Sully argues that privatization would allow a corporate monopoly heavily influenced by the major airlines to manage the nation’s skies. It would make key investment decisions that could put profits over safety and reduce access for the general aviation community, which includes company jets, recreational pilots and agriculture sprayers.

And he says the big airlines don’t always have the interests of the traveling public in mind. Exhibit A, he said, is the shrinking seat sizes that airlines are incorporating in their planes.

The White House Commission on Combating Drug Addiction and the Opioid Crisis issued a preliminary report stating that its “first and most urgent recommendation” is for the president to “declare a national emergency”. The Chris Christie-led White House Opioid Commission says, “With approximately 142 Americans dying every day, America is enduring a death toll equal to September 11th every three weeks.”

In 2015, according to CDC figures, heroin deaths alone surpassed gun homicides for the first time. More than 33,000 people died of opioid overdose, with another 20,000 dying from other drugs. A recent federal study found that prescription painkillers are now more widely used than tobacco.

In addition to declaring a national emergency, the commission’s first report includes several recommendations that public health experts and drug policy reformers have been advocating for years.

They include: Expanding capacity for drug treatment under Medicaid; Increasing the use of medication-assisted treatments, like suboxone, for opioid disorders; encouraging the development of new non-opioid pain relievers; Mandating that every local law enforcement officer in the nation carry naloxone, the drug that rapidly reverses opiate overdose; Broadening “good Samaritan” laws that shield individuals from prosecution when they report a drug overdose to first responders or law enforcement officials.

Notably absent from the report are a number of tough-on-crime measures that the President and his Attorney General, Jeff Sessions, have repeatedly help up as solutions to the opioid crisis, including building a wall on the Mexican border, expanding the use of mandatory minimum sentencing for drug crimes, and seizing more cash and property from individuals suspected of drug crimes.

Two of Venezuela’s leading opposition figures were taken from their homes in the middle of the night by state security agents, in President Nicolas Maduro’s first moves against his enemies since a widely denounced vote giving his government nearly unlimited powers.

A few hours earlier, Washington added Maduro to a steadily growing list of high-ranking Venezuelan officials targeted by financial sanctions, escalating a tactic that has so far failed to alter his socialist government’s behavior. For now, the Trump administration has not delivered on threats to sanction Venezuela’s oil industry, which could undermine Maduro’s government but raise U.S. gas prices.

Maduro called the constitutional assembly in May after a month of protests against his government, which has overseen Venezuela’s descent into a devastating crisis during its four years in power. Due to plunging oil prices and widespread corruption and mismanagement, Venezuela’s inflation and homicide rates are among the world’s highest

Financial Review

Wake Me When It’s Over

Sinclair Noe — August 24, 2016

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 65 = 18,481
SPX – 11 = 2175
NAS – 42 = 5217
10 Y + .02 = 1.56%
OIL – 1.30 = 46.80
GOLD – 13.10 = 1324.80

Today’s marks the first anniversary of a chaotic day in the markets. The S&P 500 lost 77.7 points, or 3.9%, and China’s Shanghai Composite crashed more than 8%, less than a week after the People’s Bank of China announced it was devaluing its currency.

Investors are turning their attention to Fed chair Janet Yellen to see whether she will endorse recent comments from other central-bank officials that indicated rates could rise as early as next month. Yellen is scheduled to speak at the Jackson Hole Wyoming economic symposium on Friday. Recent economic news in the US has been pretty good. Several Fed policymakers have made some hawkish comments in the past few days suggesting the Fed will hike rates in September.

Predictably the idea that the Fed is contemplating a rate rise while all the other major central banks are looking to provide more stimulus led to a stronger US dollar and weaker commodity prices. Odds of an increase in September have climbed to 28 percent, from 10 percent a month ago, while bets on a December hike have risen to 51 percent from 36 percent at the end of July.

With earnings season almost complete, stocks have barely budged in the past 32 trading sessions, but yesterday the S&P 500 and the Nasdaq hit intra-day record highs. The S&P 500 index rose almost 20% since reaching a 22-month low in February, and trades near its highest valuation in more than decade, based on estimated income.

Meanwhile, the CBOE Volatility Index (or VIX) is close to a two-year low. At a mean level around 12 this month, the measure of market turbulence known as the VIX is the lowest for any August since 1994, and has been below 15 for 35 days, the longest stretch of calm since July 2014.

The National Association of Realtors says sales of existing homes fell 3.2% last month to a seasonally adjusted annual rate of 5.39 million. The decline marks a reversal from rising demand that pushed sales in June to their highest level since February 2007. Fewer homes are coming onto the market, putting a cap on sales growth. The number of listings dropped 5.8% from a year ago to 2.13 million, and so it is tougher to find the right property. The median home sales price was $244,100 in July, up 5.3% from a year ago.

The American Petroleum Institute (API), a trade group, reported on Tuesday that U.S. crude inventories rose 4.5 million barrels in the week ending Aug. 19 versus market expectations for a draw of around 500,000 barrels. Crude inventories climbed by 2.5 million barrels in the week ended Aug. 19, according to an Energy Information Administration report. Crude oil dropped about 3% today.

Better-than-expected demand for Samsung’s new Galaxy Note7 has caused the South Korean company to delay the launch of the premium smartphone in some markets. The demand for the large-screen “phablet” (that’s a combination of phone and tablet) follows good reviews since it was launched last Friday in the U.S., South Korea and other countries.

The European Commission is expected to levy a judgment against Apple in the next few months that could total in the billions of euros. The Financial Times reports Apple could be on the hook for as much as$19 billion. The commission is accusing Apple of striking a sweetheart tax deal with Ireland, in which the Apple would move its profits to wholly owned Irish subsidiaries to reduce its corporate taxes. Congress investigated Apple’s tax arrangements in 2013, which led to CEO Tim Cook testifying before the US Senate.

Apple has billions of dollars held offshore that it would love to bring back to the US, but Cook has said that he thinks the system is unfair. And yes, it is legal. In a white paper commissioned by US Treasury secretary Jack Lew, the US warned that the Euro Union was overstepping its powers and becoming a “supranational tax authority”.

The white paper warned that, “The US Treasury Department continues to consider potential responses should the Commission continue its present course. A strongly preferred and mutually beneficial outcome would be a return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU member states.”

So, why is the US Treasury backing Apple in what looks like a somewhat sleazy, if technically legal, tax dodge? The US Treasury warned that American taxpayers could end up footing the bill if the commission goes ahead and demands back taxes from Apple and other US companies as the firms may be able to offset the EU-demand taxes against US tax payments. It described this potential outcome as “deeply troubling, as it would effectively constitute a transfer of revenue to the EU from the US government and its taxpayers”.

So, the basic controversy at the root of this is, people really aren’t arguing that Apple should pay more taxes. They’re arguing about who they should be paid to. And so there’s a tug of war going on between the countries of how you allocate profits.

Tesla’s new versions of the Model S and Model X will come with improved acceleration and battery packs. The new battery improves the driving range on both models to over 300 miles, with the extra power cutting the 0-60 mph time on a Tesla Model S to 2.5 seconds. We told you about that yesterday. Electric cars can be very, very fast. But the cool part is that Tesla extended the range from about 200 miles per charge to 315 miles without increasing the size of the battery packs.

Instead of changing the external pack shape or size or cell chemistry for the 100 kilowatt-hour battery pack, Tesla created a whole new battery cell cooling system and rearranged the battery cell architecture and electronics. It is likely Tesla added in more battery cells to the same shape pack, but it was able to still place the cells in a position where they could be adequately cooled while charging and discharging. Still, it’s quite a breakthrough. No other company is producing electric cars on a production basis with a 315-mile range.

The world’s largest aircraft, the Airlander 10 airship, has crashed and suffered damage on its second test flight. Today the prototype Airlander 10 undertook its second test flight and flew for 100 minutes, completing all the planned tasks but crashed when it tried to land. Both pilots and ground crew are “safe and well”. The Airlander 10, which looks like a couple of giant blimps tied together, is vying to become a leader in an industry that could be worth $50 billion over the next 20 years, according to the companies building the aircraft.

The inflated flying structures are making a comeback with big players and new challengers promising to develop airships for anything from luxury travel to transporting cargo to remote parts of the world. Hybrid Air Vehicles’ blimp costs around $40 million to buy. As a comparison the cheapest Airbus, the A318 has an average list price of $75.1 million.

The US government is buying 11 million pounds of cheese because no one else will. The US Department of Agriculture is buying $20 million worth of cheese to help alleviate a surplus that is at a 30-year high. The US cheese market has had a significant oversupply problem for most of the year because foreign buyers have looked elsewhere for their dairy products as a result of the strong dollar.

Before this slowdown in exports, many farmers had ramped up their production because of record-high prices. It’s not just a matter of government intervention in the free market for cheese; the surplus will be distributed to food banks across the country and they will get the high-protein food to the tables of those most in need.

A World Bank arbitration tribunal has ordered Venezuela to pay Canada’s Rusoro Mining over $1.2 billion after ruling that the government unlawfully expropriated the company’s gold mines in 2011. It is far from clear whether Venezuela will comply with the order; while Gold Reserve said this month that it had reached a settlement in a similar case, Venezuela has said it will fight an order that it pay $1.4 billion to Crystallex International over similar claims.

In June, a California man filed a proposed class action suit alleging that customers ordering cold beverages from Starbucks received less liquid than advertised as ice could take up as much space as 10 ounces in the cup. Since the lawsuit was first filed, Starbucks has insisted that ice is an “essential component of any ‘ice’ beverage”.

The company also reiterated that any customer unhappy with their beverage could alert their barista and get a new one. Customers are also welcome to ask for light ice or extra ice when placing their order. A judge has issued a ruling, writing in his decision that the cups are clear and customers can see how much ice they are getting, and that even children understand that if you add ice, you have less room for the liquid. Case dismissed. And you thought the justice system was broken.

Financial Review

Thoughts on Oil

Sinclair Noe — December 7, 2015

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

A Short Week

Sinclair Noe — May 26, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 190 = 18,041
SPX – 21 = 2104
NAS – 56 = 5032
10 YR YLD – .08 = 2.14%
OIL – 1.37 = 58.35
GOLD – 18.10 = 1188.80
SILV – .35 = 16.82

The S&P/Case-Shiller Home price index shows prices for existing homes rose in March. Both the 10- and 20-City Composites increased significantly, reporting 0.8% and 0.9% month-over-month increases, respectively. Both the 10-City and 20-City Composites saw year-over-year increases in March. The 10-City Composite gained 4.7% year-over-year, while the 20-City Composite gained 5.0% year-over-year.  Phoenix saw prices increase 0.6% in March, and resale home prices were up 3.1% from March 2014.

Sales of new single-family homes climbed 6.8% in April to an annual rate of 517,000 and shoppers have been more active in the first four months of 2015 than any time in the past seven years. Sales surged in the Midwest and in the South. Sales fell slightly in the West and Northeast. New home sales are up 26% compared to one year ago. The median price of new homes, meanwhile, rose 8.3% to $297,300 compared to April 2014.

Orders for durable goods fell a seasonally adjusted 0.5% in April. Orders minus transportation rose 0.5%; that was largely due to a drop in commercial aircraft orders. Orders for core capital goods – a proxy for business investment – climbed 1% to mark the second straight gain. U.S. companies and manufacturers in particular had been hurt by a stronger dollar, weak global growth, a sudden drop in oil-patch investment and a long-running West Coast port dispute that ended earlier this year. So the spring back in business investment could be a good omen. Still, U.S. business investment is running 2.5% behind last year’s pace through the first four months of 2015.

The Conference Board reported a slight rise in consumer confidence in May. Its index rose to 95.4 from 94.3 in April.

Fed Vice-Chair Stanley Fischer says it’s “misleading” to give so much importance to the Fed’s first interest rate hike, since the process of returning to a more normal level will take a few years. Speaking at a conference in Israel, Fischer said any upcoming hike will be determined by data and not by date. Fischer expects the Fed to follow a “gradual and relatively slow” trajectory of short-term interest-rate increases over the next three to four years to bring borrowing costs back to “normal” levels.  Friday, Janet Yellen made clear the central bank was poised to raise interest rates this year, but also stressed that economic data would determine the tightening process. So, the good economic news, combined with the jawboning from Yellen and Fischer, points to the Fed raising rates; and the markets threw a little tantrum. This will not be the only tantrum we will see. Fischer said, “The actual raising of rates could trigger further bouts of volatility,” but it should prove manageable.

And that combo strengthens the dollar. And when the dollar goes up, oil goes down; generally speaking of course. Also factoring into the equation is the old story of supply and demand. Supply might be increasing.  The decline in drilling activity in the US that has been ongoing for 24 weeks appears to have stopped. Data from the driller Baker Hughes showed that the oil-rig count fell by just one, the slowest pace seen during this streak. The weak hands in the oil patch have largely been taken out.

Also, on Sunday, Iran said the Organization of the Petroleum Exporting Countries (OPEC) was unlikely to change its production ceiling at its meeting on June 5. Meanwhile, Iraq has announced intentions to increase oil exports next month, from just under 3 million barrels per day to a record 3.75 million barrels per day. Intentions are not a guarantee of future production, but it looks like the Iraqis are trying to raise money for their fight against ISIS. Of course, if Iraq can’t do better in their fight against ISIS the entire output could be challenged.

Chinese shares marched higher in yet another session today, after the country announced over the weekend it would allow funds domiciled in Hong Kong and China to be sold in each other’s market starting July 1. China also said it would cut duties by as much as 20% on some imported goods in a bid to boost consumer spending at home; the cuts in tariffs are for goods considered necessities, and will not apply to luxury goods.  The Shanghai Composite rose 2%, taking its six-day rally to over 14%.

The mystery in Hong Kong continues after Goldin Properties surged as much as 43% today, after plunging more than 40% this past Thursday, along with a related company, Goldin Financial. The companies had no explanation for the decline. Even with the wild swings, the shares are up about 500% in the past year. Also last week, Hanergy Thin Film Power fell 47% before trading was halted; still no information behind that move.

Venezuela’s currency, the Bolivar, has collapsed. Venezuela has maintained strict currency controls since 2003 and currently has three legal exchange rates of 6.3, 12 and 199 bolivars per dollar used for priority imports. On the black market, where people and businesses turn when they can’t obtain government approval to purchase dollars at the three legal rates, the bolivar has weakened 82 percent in the past year. At the start of the month, Venezuelans could exchange 279 bolivars for a dollar, and today that has dropped to 423 bolivars per dollar. To put it simply, it appears that Venezuelans have lost all faith in the bolivar and seem willing to pay whatever it costs for greenbacks.

In the Eurozone, the Greek economy is on razor watch. The Greeks are bankrupt and they have big payments due next week. They do not have money to pay. For now, Greece is held together with Band-Aids and bailing wire as it borrows money from the Troika to make loan payments to the Troika. It is the classic debt trap tactics of loan sharks. At some point, the Troika will have to show compassion or this will end badly for all concerned.

Meanwhile, Tom Hayes went on trial today. Hayes is the former star trader at UBS and Citigroup, and he is the first person to face trial over allegations of rigging Libor interest rates. There are 20 more traders that are facing charges for rigging Libor. Hayes traded in yen-denominated interest rate derivatives tied to Libor, essentially betting against other traders on the direction of rates. What really makes Hayes’ case interesting is that when he was arrested, he claimed that if he went to trial, he would spill the beans on higher ups in the banks; and he implied that knowledge of rate rigging went all the way to the top of the corporate hierarchy. We shall see.

Charter Communications agreed to buy its larger rival Time Warner Cable for $56 billion. The offer is valued at about $195 a share, a 14% premium to Time Warner Cable’s last closing price. Including debt, the deal is valued at $78 billion. The deal comes a month after Time Warner Cable went back on the block after Comcast terminated the companies’ planned $45 billion merger in the face of serious pushback from Washington regulators. Charter would probably face antitrust scrutiny before its deal with Time Warner Cable could be approved, although it is unlikely to face the same level of resistance as Comcast. Charter will also continue with its separate, cash-and-stock bid to acquire Bright House Networks, a smaller competitor, for $10.4 billion. The two acquisitions would approximately quadruple Charter’s base to about 24 million customers or about 30% of the nation’s broadband customers, compared with Comcast’s 27 million.

People are watching less live TV, and ratings are down. Americans are tired of paying for expensive cable bundles that come with hundreds of channels they don’t watch. Americans are streaming more video online than ever. As a result, an increasing number of Americans are cutting the cord, or even choosing never to subscribe to cable when they move into a new home. TV subscriptions may be declining, but broadband internet is booming. During the first quarter of the year, the same three-month period that saw the decline in TV subscriptions, the 17 largest cable companies in the country, which make up 94% of the market, added 1.2 million broadband subscribers. Providing internet is a higher-margin business than providing TV. Internet providers have costs but they don’t have to pay high fees to networks like ESPN, TNT, and The Disney Channel. And high speed internet is even less competitive than TV; according to the FCC, nearly 75% of households in the US have one or no options for broadband.

Bowing to regulatory pressure, Amazon has begun booking European revenue in the countries in which sales were recorded, rather than funneling it through the low-tax haven of Luxembourg. The change, which could have a big long-term effect on Amazon’s EU income tax payments, went into effect on May 1. The company’s move could be a sign of things to come: Apple, Google, Microsoft, Starbucks, and a slew of other U.S. multinationals have also come under fire for their use of tax havens to cut their EU tax bills.

Fiat Chrysler Automobiles CEO Sergio Marchionne made a direct approach to General Motors about a merger last March. An e-mail from the Fiat-Chrysler CEO pitched the strategic advantages of a combination of the two auto heavyweights, but was rebuffed by GM.

Justice Department investigators have identified criminal wrongdoing in General Motors’ failure to disclose its defective ignition switch tied to at least 104 deaths and are negotiating what is expected to be a record penalty. The New York Times reports a final settlement number is still being negotiated but is expected to exceed the $1.2 billion paid last year by Toyota for concealing unintended acceleration problems in its vehicles.

Heavy rains and flooding have killed at least nine people in Texas and Oklahoma, and 12 were missing. Thirteen people were killed in a tornado in Ciudad Acuna, Mexico, near the Texas border. More than 10 inches of rain flooded Houston, freeways were closed, most public transit was suspended, flights were cancelled. Most Houston school districts were closed for the day. The storms also caused power outages. The storm was part of a system that swept east from central Texas, where it caused flooding in downtown Austin and the surrounding area Monday.

FINANCIAL REVIEW

Have a Cigar

Sinclair Noe — December 17, 2014

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

DOW + 288 = 17,356
SPX + 40 = 2012
NAS + 96 = 4644
10 YR YLD + .08 = 2.15%
OIL + .06 = 55.94
GOLD – 6.10 = 1189.90
SILV + .03 = 15.85

I have been telling you for a few years now that the Fed is a vital force in the stock market. I have talked about how the stock market has advanced along with the Fed’s balance sheet. Today absolutely confirms what I’ve been telling you.

Most major indices started the day a little higher, and then jumped following the Fed’s FOMC statement and again during Chairwoman Janet Yellen’s press conference. At one point the Dow Industrial Average was up about 300 points; and then people started to digest what was being said; which is what we will do right now.

The Federal Reserve indicated it was moving closer to raising interest rates from record-low levels because the economy and job market are getting stronger. The Fed also promised to take a “patient” approach in doing so, which sounded very reassuring investors; it sounded like the Fed wouldn’t tighten credit too soon and endanger the economic recovery; they won’t surprise us or rush to tighten next year. The Fed kept the phrase “considerable time” and then they added that they will be “patient”, which really did not help to provide clarity or precision.

Yellen’s press conference covered a range of topics. She said a short period of very low unemployment will help get inflation back to target. And we may be closer to the inflation target than we think because market-based expectations for inflation can’t be entirely trusted to give clear signals. The drop in the market’s expectations for inflation could also reflect other factors, such as the flight to safety into Treasuries. The Fed puts more weight on survey-based measures derived from consumers’ expectations and economists’ forecasts.

This morning before the Fed statement we had a report on inflation. The consumer price index fell by a seasonally adjusted 0.3% last month to mark the largest drop since December 2008. Energy costs fell for the fifth straight month, led by a 6.6% decline in the price of gasoline. The cost of food rose just 0.2% in November. And for people who don’t drive or eat food they strip out volatile food and energy costs, so-called core inflation edged up 0.1% last month. The pace of inflation over the past 12 months fell to 1.3% in November and is down sharply from 2.1% just five months ago. Real hourly wages are up just 0.8% in the past 12 months, so there is really no inflationary pressure from wages.

But the Fed doesn’t seem concerned about low-flation. The plunge in oil prices is a plus for the economy and will have only a transitory impact on inflation. Their thinking is that they are on track for their inflation target of 2%, more or less, give or take. Maybe. Except it isn’t happening now. In fact, 2014 will mark the first time in at least 55 years, not one advanced economy will see consumer prices growing more than 4% this year. But the Fed isn’t particularly worried about weakness in the global economy or low oil prices or the meltdown in Russia; they are aware and monitoring but not very concerned.

The Fed will raise rates at some point, probably. Keep in mind that Ben Bernanke talked about raising rates, but he never quite got around to it. But Yellen’s Fed will be raising rates, but they will be patient. The first rate hike won’t come for at least “a couple of meetings.” And “a couple means two.” So, that sounds like a rate hike in March, but Yellen says more likely before the summertime, but that’s not a promise or commitment; more like a qualified maybe.

Raising rates too quickly could increase lowflationary pressures. And it could doom millions of workers to subpar incomes, unemployment or underemployment. Raising rates too slowly could theoretically increase inflationary pressures, but the real danger in the mind of the Fed is that low rates encourage risky financial behavior, the kind of risky behavior that led to the last couple boom-and-bust cycles. It’s not just the departure date that matters, Yellen says. The pace of subsequent rate hikes is what is important. And that will depend on the data.

And after all the tap dancing was over we were back where we started, which is the idea that the Fed will start to raise rates around June as long as the economy continues to improve pretty much as expected and nothing collapses unexpectedly. More or less.

Now, since the press conference I’ve been reading about Yellen’s performance and it is easy proclaim the Fed is wishy washy or uncertain or guessing. But if you have been following the Fed for a long time, and I have, this is just standard operating procedure. When Yellen says a hike could happen in a “couple of meetings” it is a trial balloon. When they add language about being “patient” they are testing the markets while trying to be reassuring. One thing the Fed has learned is not to make sudden movements; it did not work well in 2008; it did not work well in 1987. And it does not look like there will be any sudden movements in the foreseeable future.

Maybe.

Treasuries declined after the Fed statement. The stock market moved higher. Enjoy. Have a cigar. Not some beat up old stogie but a real cigar, a Cuban. Actually, you can’t do that today, but maybe soon. President Obama and Cuban President Raul Castro announced today they would begin normalizing relations between the two nations, as art of a deal brokered by Pope Francis. The pope played a key role in the talks, sending a letter to Castro and Obama urging them to resolve the dispute over Gross and pursue closer relations. The request from the Pope was rare and came shortly after a meeting Obama had with Francis at the Vatican earlier this year.

The action means not simply the opening of a US embassy in Havana but the lifting of some of the restrictions that have limited travel and commerce and kept aficionados from legally bringing Cuban cigars to US soil.

The announcement was wrapped into the release of American aid worker Alan Gross and the exchange of a US spy for three Cuban intelligence agents. Obama and Castro made simultaneous announcements in Washington and Havana to outline the rapprochement. The US will issue regulations within weeks and will open an embassy as soon as logistically possible. Obama said he would engage Congress “in an honest and serious debate” about changing legislation to fully end the US embargo of Cuba. Some legislators have already vowed to block any change in legislation.

If it goes through, US companies will be permitted to export to Cuba telecommunications equipment, agricultural commodities, construction supplies and materials for small businesses. US financial institutions will be allowed to open accounts with Cuban banks. Exports will mainly be permitted to Cuba’s emerging private sector, including residential goods and equipment for small businesses and agriculture; and there will be some travel permitted for US citizens, but not for tourism. Limits on Cuban-Americans’ remittances to relatives in their homeland will jump to $8,000 from $2,000 annually.

Why, after more than 50 years, did a breakthrough in Cuban-American relations happen now? There are many reasons, but one factor is oil. Cuba has been getting about 100,000 barrels of oil per day from Venezuela in exchange for medical personnel. The collapse in oil prices now leaves Venezuela’s economy in terrible shape with the world’s fastest inflation and the country’s bonds on the verge of default. The country faces a 60 percent chance of defaulting on its foreign debt in the second half of next year if oil prices do not recover. Cuba recognized that it was very risky to be overly dependent on Venezuela. Cuba was well aware of the risks of dependency after the economy collapsed in the early 1990s when the Soviet Union collapsed.

Cuba and Venezuela are not the only countries facing problems from low oil prices. Russia of course – we talked about that yesterday. Tomorrow Putin will talk about it. The Russian president will face questions from the media at his annual press conference. Whether a few words from Putin will restore the status of Russian stocks and the ruble remains to be seen.

On December 8th Moody’s gave 6 Middle Eastern countries a thumbs up based on the assumption that oil prices will average $80 to $85 a barrel in 2015. That assumption now seems suspect. Yesterday, oil prices briefly dipped down around $53 a barrel; today crude for January delivery was down as low as $54.21. While Gulf states can make some spending cuts, they’ll need to do more to cover likely shortfalls. The states with bigger sovereign wealth funds will tap them as needed. The ones with weaker positions will borrow. Many of these oil producing countries run sovereign wealth funds which are largely funded by oil. They are pretty certain not to be making new investments and are likely to be making some sales. Not only will their sales have some impact at the margin, but their absence as deep pocket opportunists could be more important than one might imagine. Recall that in the early stages of the financial crisis, sovereign wealth funds stepped up to provide capital to quite a few wobbly banks. There will be fewer to act as rescuers this time around. And sovereign wealth funds are also big investors in private equity.

Greece moved a step closer to early elections after Prime Minister Antonis Samaras failed to gather enough support for his nominee in a parliamentary vote for a new head of state. Samaras got 160 of the 300 votes but needed a two-thirds majority. There will be another vote December 23rd, and if that fails, a third vote on December 29 with a 180 vote threshold, and if that fails the parliament will be dissolved and early elections will be called.