Financial Review

Sparring

Sinclair Noe — July 20, 2017

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DOW – 28 = 21,611
SPX – 0.38 = 2473
NAS + 4 = 6390 (record)
RUT + 0.58 = 1442 (record)
10 Y – .01 = 2.27%
OIL – .39 = 46.73
GOLD + 3.00 = 1245.00
BITCOIN – 1.93% = 2821.99 USD
ETHEREUM – 0.26% = 227.99

Sen. John McCain tweeted a message of gratitude for the outpouring of support that greeted news Wednesday of his brain-cancer diagnosis. He tweeted: “I greatly appreciate the outpouring of support – unfortunately for my sparring partners in Congress, I’ll be back soon, so stand-by!”

The Dow and the S&P fell slightly from record highs, while the Nasdaq and Russell 2000 squeaked out new record highs. It was close, but the MSCI Emerging Markets Index of stocks managed to eke out its ninth straight increase. That’s the longest rally since April 2015. The 0.02 percent rise in the index was the smallest of the current streak. Still, that brought the index’s gain for the year to 23 percent.

Europe’s economy is experiencing a pickup in both current and forward indicators of growth. Improvements in household and corporate sentiment and activity have been reinforced by a decline in perceptions of political risk following the victory of Emmanuel Macron in the presidential and legislative elections in France.

The European Central Bank may not make a decision on the future of its bond-buying program until October. Policy makers are currently committed to spending 60 billion euros ($70 billion) a month on debt until at least December, and have repeatedly said any winding down must be gradual.

The ECB Governing Council met in Frankfurt today, ECB President Mario Draghi told reporters that policy makers unanimously agreed to put off a formal debate until the fall, but that they opted not to set a precise date for talks.

If you missed out on the euro’s rally because you thought European Central Bank President Mario Draghi was leaning dovish at today’s news conference after policy makers decided to keep interest rates unchanged, you’re forgiven. After all, Draghi emphasized several times the need for patience and evidence that wages and inflation are on the rise before winding down stimulus measures.

All that would normally weigh on a currency. But what Draghi didn’t do was dwell on the recent strength of the euro, other than to say it had received “some attention.” For traders, that was a green light to push it above $1.16 for the first time since May 2016. The euro is spiking because Draghi has not been able to put ‘FX’ and ‘policy’ into the same sentence.

The Fed is on a course of gradual rate increases. Bond guru Bill Gross is warning about looming interest rate increases and the damage they can do to a debt-laden global economy. In his monthly investor outlook, the Janus Henderson Advisors fund manager said the course of global central banks toward tightening policy could be perilous for the economic recovery. Raising interest rates will increase the cost of short-term debt that corporations and individuals hold.

In the U.S. alone, households have $14.9 trillion in debt while businesses owe $13.7 trillion. Gross said, “While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot. ”

A broad measure of how well the U.S. economy is performing surged in June after a strong gain in May, suggesting growth could speed up in the months ahead. The leading economic index jumped 0.6% last month after a revised 0.4% increase in May.

The improvement in the index was spearheaded by strong housing permits after several months of weakness. Home builders plan to step up construction to meet rising demand as the economy enters is ninth year of expansion.

The U.S. got off to a slow start in 2017, and although growth accelerated in the spring, the economy is still not expanding full bore despite the strongest labor market in more than a decade.

The Congressional Budget Office has release its analysis of the latest version of Senate Republicans’ legislation to repeal and replace the Affordable Care Act. CBO says it would leave 22 million Americans without health insurance coverage by 2026. Yesterday, the CBO said that a repeal-only version would result in 32 million uninsured by 2026.

The number of Americans who applied for unemployment benefits sank in mid-July and hovered near a 44-year low, reflecting the healthiest jobs market in more than a decade. Initial jobless claims in the period running from July 9 to July 15 fell by 15,000 to a seasonally adjusted 233,000.  That matches the second-lowest level since the 2007-09 recession.

Arizona’s seasonally adjusted unemployment rate remained the same at 5.1% in June. The US unemployment rate was 4.4% in June. A year ago, the Arizona seasonally adjusted rate was 5.3% and the US rate was 4.9%. Arizona lost 42,800 Non-farm jobs in June. The Private Sector lost 5,700 jobs. Government lost 37,100 jobs. Arizona Non-farm employment grew by 2.4% (62,700 jobs) over the year in June.

With tech stocks at a record high — and stalwarts like Microsoft having doubled their market cap in just about three and a half years — some may worry that we’re setting up for a repeat of the tech bubble. Others may point to research that shows tech earnings are rising in-line with the index’s overall march higher.

Sometimes, things are different. And, on cue, Microsoft reported a better-than-expected quarterly profit and revenue. Microsoft said revenue from its cloud unit, which includes the flagship Azure platform and server products, rose about 11 percent to $7.4 billion in the quarter.

The company’s net income more than doubled to $6.5 billion, or 83 cents per share, from $3.1 billion, or 39 cents per share, a year earlier. Excluding one-time items, Microsoft earned 98 cents per share beating estimates of 71 cents. On an adjusted basis, revenue rose 9 percent to $24.7 billion – also beating estimates.

Microsoft shares hit an intraday record price of $74.30 and closed at an all-time high of $74.22. Microsoft reported after the closing bell, and share were up about 1.5% in after-hours trade.

Visa reported a better-than-expected quarterly profit and raised its full-year earnings forecast. Consumer spending has been on the rise in the United States, and shoppers pay with plastic. Visa’s payment volumes in the US rose 12.1 percent on a constant dollar basis to $840 billion in the quarter.

More than half of the company’s total volume of transactions comes from the United States. Net income rose to $2.06 billion, or 86 cents per share – beating estimates of 81 cents, and up from $412 million, or 17 cents a year ago. Visa also raised its forecast for full-year profit.

EBay reported a nearly 94 percent fall in quarterly profit. Net income fell to $27 million, or 2 cents per share, in the second quarter, from $435 million, or 38 cents per share, a year earlier. They did have about $400 million in income tax provisions that dented profits… still, not good.

As part of its review of Amazon’s agreement to buy Whole Foods, the Federal Trade Commission is considering allegations that Amazon misleads customers about its pricing discounts. The FTC is probing a complaint brought by the advocacy group Consumer Watchdog, which looked at some 1,000 products on Amazon’s website in June and found that Amazon put reference prices, or list prices, on about 46 percent of them.

And for 61 percent of products with reference prices, Amazon’s reference prices were higher than it had sold the same product in the previous 90 days.

Retailers and appliance makers fell after Sears said it would sell its Kenmore home appliances on Amazon and integrate the brand’s smart gadgets with the Alexa digital assistant. Sears was up 10.6 percent at $9.60 and Amazon shares rose 0.2 percent.

Once a dominant force, Sears Holdings appliance sales account for about 15 percent of its total sales of $3.3 billion in fiscal 2016. So, you no longer need to go to Sears for Kenmore appliances or Craftsman tools – so, why would you go to Sears?

Home Depot fell 4.1 percent, shaving off 40 points from the Dow and weighing the most on the S&P 500. Retailers Lowes and Best Buy, as well as appliance maker Whirlpool, were down between 3.9 and 5.6 percent. The market cap loss in Home Depot, Lowe’s, Whirlpool and Best Buy was about $12.5 billion by the end of the day.

Yesterday's Gains Wash Away in a Flood of Earnings Data

Charles Schwab: On the Market

Posted: 10/25/2016 4:15 PM ET

Yesterday's Gains Wash Away in a Flood of Earnings Data

U.S. stocks traded lower amid a deluge of divergent corporate earnings reports, while crude oil prices were also under pressure and a read on domestic consumer confidence dropped more than expected. Treasuries were mixed, gold was higher and the U.S. dollar was nearly unchanged. In overseas developments, European equities dipped and stocks in Asia were mixed as the global markets continue to grapple with world monetary and political ambivalence.

The Dow Jones Industrial Average (DJIA) decreased 54 points (0.3%) to 18,169, the S&P 500 Index was 8 points (0.4%) lower at 2,143 and the Nasdaq Composite lost 26 points (0.5%) to 5,283. In moderate volume, 820 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.56 to $49.96 per barrel, wholesale gasoline was unchanged at $1.49 per gallon and the Bloomberg gold spot price gained $9.52 to $1,273.96 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was mostly flat at 98.76.

General Motors Co. (GM $32) reported 3Q earnings-per-share (EPS) ex-items of $1.72, above the $1.48 FactSet estimate, as revenues rose 10.3% year-over-year (y/y) to $42.8 billion, compared to the expected $39.0 billion. GM said it expects full-year EPS to be at the high end of its prior range. However, analyst focus appeared to be on the automaker's performance in Europe and its Chief Financial Officer Chuck Stevens noted that due to the U.K. Brexit vote and ensuing weakness in the British pound, breaking even this year is going to be very challenging. Shares finished solidly lower.

Dow member 3M Co. (MMM $166) posted 3Q profits of $2.15 per share, one penny north of forecasts, with revenues flat y/y at $7.7 billion, roughly in line with projections. MMM lowered the high end of its full-year profit outlook. Shares moved lower.

Dow component Caterpillar Inc. (CAT $84) announced 3Q EPS ex-items of $0.85, exceeding the expected $0.76, as revenues declined 16.4% y/y to $9.2 billion, below the forecasted $9.9 billion. CAT lowered its full-year EPS and revenue guidance. Shares traded to the downside.

Dow member DuPont (DD $70) reported 3Q earnings ex-items of $0.34 per share, topping the estimated $0.21, with revenues rising 1.0% y/y to $4.9 billion, roughly in line with forecasts. DD increased its full-year profit outlook. Shares declined.

Dow component Merck & Co. Inc. (MRK $62) posted 3Q EPS ex-items of $1.07, topping the estimated $0.99, with revenues rising 5.0% y/y to $10.5 billion, exceeding the projected $10.2 billion. MRK raised its earnings guidance for the year. Eli Lilly and Co. (LLY $78) announced 3Q earnings ex-items of $0.88 per share, below the forecasted $0.96, as revenues rose 5.0% y/y to $5.2 billion, versus the estimated $5.3 billion. LLY reaffirmed its full-year EPS outlook. MRK gained ground and LLY ticked higher. 

Dow member Procter & Gamble Co. (PG $87) posted fiscal 1Q earnings ex-items of $1.03 per share, versus the expected $0.98, as revenues were unchanged y/y at $16.5 billion, roughly in line with forecasts. PG reaffirmed its full-year guidance. Shares were nicely higher.

Dow component Visa Inc. (V $82) announced fiscal 4Q EPS ex-items of $0.78, topping the expected $0.73, with revenues increasing 19.0% y/y to $4.3 billion, due to the inclusion of Europe and continued growth in payments volume and processed transactions, compared to the estimated $4.2 billion. V traded lower.

Dow member United Technologies Corp. (UTX $101) reported 3Q EPS ex-items of $1.76, above the forecasted $1.66, with revenues increasing 4.0% y/y to $14.4 billion, exceeding the expected $14.3 billion. UTX raised the low end of its full-year profit outlook, while reaffirming its revenue guidance. Shares are gained ground.

Under Armour Inc. (UA $33) reported 3Q EPS of $0.29, above the expected $0.25, as revenues rose 22.0% y/y to $1.5 billion, roughly in line with forecasts. UA reaffirmed its full-year revenue outlook. Shares fell sharply as some analysts expressed concerns about the slowdown in North American sales growth during the quarter and as the company's revenue growth forecast for 2017 and 2018 disappointed the Street, along with its warning that profit would grow at a slower pace than sales.

Consumer confidence falls

The Consumer Confidence Index (chart) dropped to 98.6 in October from the downwardly revised 103.5 level in September, and compared to the Bloomberg estimate of 101.5. Sentiment toward the present situation and expectations of business conditions both deteriorated. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—declined to 2.2 from the 5.3 posted in September.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Vertigo: Effect of Spiking Healthcare Costs on Consumers, households remain in relatively good shape, with wages and incomes rising and debt levels/debt servicing costs low. But this upward pressure on inflation bears watching. Remember, consumer spending drives nearly 70% of US economic growth. When inflation is rising alongside a robust economy, it doesn't tend to choke off growth. But if it's rising alongside a sluggish economy it puts pressure on the consumer, which in turn pressures the economy. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.1% gain in home prices y/y in August, versus expectations of a 5.0% increase. Month/month (m/m), home prices were up 0.2% on a seasonally adjusted basis for August, above forecasts of a 0.1% increase.

The Richmond Fed Manufacturing Activity Index improved but remained in contraction territory (a reading below zero), increasing to -4 in October from the -8 posted in September, in line with expectations.

Treasuries were mixed, with the yield on the 2-year note gaining 1 basis point (bp) to 0.85%, while the yield on the 10-year note dipped 1 bp to 1.75% and the 30-year bond rate declined 2 bps to 2.50%. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar  will commence with the weekly MBA Mortgage Applications report followed by wholesale inventories, which are projected to tick 0.1% higher m/m in September. Just after the opening bell, Markit's preliminary Services PMI Index will be released, with economists forecasting an October reading of 52.5, up slightly from September’s 52.3. We will round out the day with some housing data in the form of new home sales, with economists expecting a 1.5% m/m decrease during September to an annual rate of 600,000 units.

The political landscape also remains in focus as the November election approaches, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe lower, Asia mixed

Healthcare stocks led a decline for European equities as the global markets digested a plethora of mixed earnings reports on both sides of the pond. The British pound fell versus the U.S. dollar amid festering Brexit uncertainty and as Bank of England Governor Carney answered questions in the House of Lords on the economic consequences of the Brexit. However, a read on German business confidence improved more than expected in October, on the heels of yesterday's favorable U.S. manufacturing report. The global markets continued to grapple with world political and monetary policy uncertainty and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversificationand why Your portfolio may be less diversified than you think. Read these articles, at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. The euro ticked higher versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished mixed amid a ramp up in earnings reports and yesterday's flood of M&A news and upbeat read on manufacturing activity out of the U.S., while South Korea's disappointing GDP report weighed on its shares. South Korea's 3Q GDP growth slowed to a 2.7% y/y pace from 3.3% in 2Q. Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscapeat www.schwab.com/oninternational. An advance for Japanese equities was aided by some weakness in the yen, while Indian stocks traded lower and Australian securities rose with technology, basic materials and financials leading the way. Equities trading in Hong Kong moved to the downside and mainland Chinese listings ticked higher as traders grappled with increased optimism of further government fiscal stimulus and concerns about the crackdown on the real estate sector.

Tomorrow, the international economic docket will include a consumer sentiment read from China, small business confidence from Japan, the Import Price Index from Germany, retail sales from Italy and house purchase loans for the U.K.

Financial Review

Merger Monday

Sinclair Noe — October 24, 2016

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DOW + 77 = 18,223
SPX + 10 = 2151
NAS + 52 = 5309
10 Y + .02 = 1.76%
OIL – .36 = 50.49
GOLD – 1.30 = 1265.40

Merger Monday is alive and well. AT&T announced it will acquire Time Warner for $85 billion; or at least it will try. The biggest deal in the world this year will give AT&T control of cable TV channels HBO and CNN, film studio Warner Bros and other media assets.

The deal is subject to regulatory approval, and right now it looks like it will face opposition. The Justice Department has the power to reject such a deal if it violates antitrust laws. AT&T said it is unclear if the Federal Communications Commission will also have jurisdiction to review the deal. Remember that regulators blocked Comcast’s planned acquisition of Time Warner.

AT&T has described the deal as a “vertical merger” because there is no overlap between the two companies and hopes that such a tie-up will get the regulatory green light by the end of 2017. The reason we are seeing this deal now is because in the next couple of years, wireless will be changing over to 5G, the next generation technology which will provide high-speed broadband and television service and allow wireless companies to compete with cable companies.

Toronto-Dominion Bank and TD Ameritrade are buying Scottrade Financial Services for $4 billion in a deal that would combine two of the biggest U.S. discount brokerages. TD Ameritrade, the largest U.S. discount brokerage by trade executions, said it would pay $2.7 billion for Scottrade’s brokerage business. Toronto-Dominion Bank, TD’s largest shareholder, is acquiring Scottrade Bank for $1.3 billion.

Rockwell Collins has struck a deal to buy aircraft interior maker B/E Aerospace for $62 a share in cash and stock. The acquisition, valued at $6.4 billion plus the assumption of $1.9 billion in debt, expands the range of products Rockwell Collins supplies to major commercial and business aircraft and broadens its customer base internationally. The acquisition, which is expected to be completed next spring, allows both companies to sell to each other’s customers and to deploy Rockwell’s capability with on-board connectivity to make internet-enabled seats, galleys, lavatories and other cabin systems that B/E Aerospace provides.

Chinese aviation and shipping conglomerate HNA Group said it would buy a stake of about 25 percent in hotel operator and manager Hilton Worldwide Holdings from biggest shareholder Blackstone Group for $6.5 billion. HNA will buy the stake for $26.25 per share, representing a premium of 14.6 percent to Hilton’s closing price on Friday and valuing the hotel company at about $26 billion.

Genworth Financial, a dominant carrier in U.S. long-term-care insurance, agreed to sell itself for $2.7 billion, to a Chinese investment firm, China Oceanwide Holdings Group. The deal comes as China Oceanwide has been pouring hundreds of millions of dollars into U.S. commercial and residential properties in the past two years. Genworth has struggled since the financial crisis, one of the insurers hardest hit by the bursting of the real-estate bubble and later by ultra-low interest rates.

American Midstream Partners LP said it would buy JP Energy Partners LP in an all-stock deal, creating a $2 billion midstream master limited partnership. The combined company will own and operate more than 3,100 miles of gathering and transportation pipelines.

According to S&P Global Market Intelligence, October 2016 currently stands as the third-strongest month ever for US M&A announced deal value. To date, October has seen $279 billion in announced M&A involving US companies, the highest since July 2015. It’s good news for Wall Street banks, which could bring in up to $200 million in fees from advising on the mergers. You add in financing costs and just the AT&T- Time Warner deal could top $400 million.

Iraq doesn’t want to participate in the OPEC freeze. Iraq, OPEC’s second largest oil producer, says it wants to be exempt from the OPEC production freeze, which is expected to be decided at the November 30 meeting in Vienna, Austria. Comments from Iran’s deputy oil minister, however, helped to push prices higher earlier in the session. He said Tehran would encourage other OPEC members to join an output freeze, adding that $55-$60 a barrel is a fair price to bring stability to the market. All the talk of capping production has managed to push oil above $50 a barrel, but in the past, OPEC has not been able to deliver on holding firm to output cuts.

Credit card giant Visa said its fiscal fourth-quarter results rose 28 percent from a year earlier, as the company processed more payments. The company’s results were also lifted by the recent purchase of Visa Europe. Visa reported net income of $1.9 billion for the period ended Sept. 30, compared with $1.5 billion in the same period a year earlier.

T-Mobile reported a better-than-expected quarterly profit and raised its forecast for customer additions for the year as heavy discounting helped attract subscribers. T-Mobile said it benefited from the launch of the iPhone 7 in the quarter and an increase in branded prepaid customer migrations to postpaid plans.

Earnings season is in full swing with Apple, Alphabet, Amazon.com, Exxon Mobil and Caterpillar among big names scheduled to announce third quarter results this week.

Apple reports earnings on Tuesday and we’ll see if the new iPhone 7 sales live up to expectations; on Thursday, Apple will unveil a new line of Mac computers, which are long overdue for an update and have seen only sluggish sales in recent quarters. And just to drive home the importance of constant updating and reinvention – yesterday the iPod turned 15 years old.

Google has been given an extra week to respond to European antitrust charges that some of the company’s advertising products hampered consumer choice. Google denies any wrongdoing. But it represents the first of three separate responses that Google must give to European competition authorities by early November to allegations that some of its services and products, including the popular Android smartphone operating system, hindered rivals and limited competition in Europe. Alphabet reports quarterly earnings on Thursday.

Tesla reports third quarter earnings on Wednesday – more accurately, Tesla will report a loss. Tesla previously disclosed that deliveries rose 70 percent to 24,500 cars in the July-to-September period. But a loss is likely because the company is spending heavily to introduce a new car, the Model 3, and to start up its gigantic Gigafactory in Nevada, where it will produce batteries.

We’ll also hear from the major car-makers; GM, Ford, and Fiat Chrysler report this week. Today, Consumer Reports said General Motors’ Buick has become the first domestic car brand in more than 30 years to be among the top three most reliable brands; trailing Toyota and Lexus.

Goldman Sachs analysts have cut their outlook for S&P 500 earnings through 2018. They now see earnings per share climbing 5% to $105 (from $110) in 2016, 10% to $116 in 2017 (from $123), and 5% to $122 (from $130) in 2018. The analysts blame disappointing earnings growth from the financials and information technology sectors. Furthermore, they blame the impact of low interest rates on telecom sector pension liabilities.

This week we will also see third quarter reports from most of the major Euro-banks, including BNP Paribas, Santander, UBS, Barclays, Lloyd’s, the Royal Bank of Scotland, and Deutsche Bank. We’ll keep an eye on Deutsche Bank for any update on its negotiations with the Justice Department, which has proposed a $14 billion fine for the bank’s underwriting of mortgage backed securities during the financial crisis.

And as we work our way through earnings the market is holding up relatively well. We’ve talked about a strong level of support for the S&P 500 at the 2120 level, which represents both the highs from June and the lows from September. So far, 2120 is holding up quite well, and we are consolidating in October, a month that can be quite scary. Although right now, the scariest event on the horizon is the election in November.

This Friday we get the first estimate of third quarter GDP growth; look for 2.5% growth. Last month, the Commerce Department reported that GDP grew 1.4 percent in the second quarter of 2016, up from 0.8 percent in the first quarter of 2016.

James Bullard, president of the Federal Reserve Bank of St. Louis and a voting member of the Federal Open Market Committee says low interest rates will likely be the norm during the next two to three years. Bullard’s comments come one month after he voted against hiking the federal funds rate.

The Fed continues to grapple with deciding when it will increase rates from the current target range of 0.25 to 0.50 percent. The last time the Fed raised rates was in December 2015, when it did so for the first time in nine years. Fed watchers expect the next increase to come by year end. Fed fund futures show implied odds of nearly 70 percent for a December rate hike.

And while Bullard seems to indicate rates can be nudged slowly higher, Chicago Fed President Charles Evans said today that the Fed needs to “demonstrate commitment to achieving the inflation target sustainability, symmetrically, and sooner rather than later.” This might require undershooting the unemployment rate and overshooting the 2% inflation target. Even so, Evans expects 3 rate hikes by the end of 2017.

Financial Review

Halftime Report

Sinclair Noe — June 30, 2016

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

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DOW + 235 = 17,929
SPX + 28 = 2098
NAS + 63 = 4842
10 Y + .01 = 1.49%
OIL – 1.48 = 48.40
GOLD + 3.40 = 1322.70

Today is the end of the month, end of the second quarter, and end of the first half of trading, so let’s break down some numbers at halftime.

The Dow and S&P 500 and Nasdaq are now back in the black for 2016 and for the second quarter. The Dow is up 106 points since the start of the year. The S&P is up 40 points year to date. The Nasdaq is up 106 for the year.

For the month of June, the Dow added 64 points, the S&P gained 2 points, and the Nasdaq is down 106. June included some brutal Brexit related losses. The Dow is still down about 80 points from last Thursday (pre-Brexit), the S&P is still down about 15 points, and the Nasdaq is down about 68 points. Still, it was a nice bounce back; the best 3-day rally in 4 months, following the worst 2-day decline for Wall Street in 10 months.

Tomorrow, July 1^st is the most bullish day of the year; according to the Stock Trader’s Almanac, on July 1, over the past 21 years, the S&P 500 has advanced 85.7% of the time on the first trading day of July. The average gain is 0.46%. Of course, not every July 1 is created equal.

European stocks and the pound held on to a third day of gains as the immediate market flurry over Britain’s vote to pull out of the European Union settled. The rebound was not enough, however, to offset the sharp losses suffered in the aftermath of last week’s vote which have put global stocks on track for their worst monthly performance since January. And this does not mean that we have seen the end of Brexit related problems or fallout in financial markets.

Oil closed down almost 3% today but still posted its best quarter in 7 years. Back in January, West Texas Intermediate crude oil touched a 14-year low, falling below $27 a barrel. It gained about 26.1% for the second quarter, and trades roughly 30.5% higher year to date. Still, WTI has had a hard time cracking $50 a barrel, which seems to be the level that sees producers ramping up output.

Initial U.S. jobless claims rose by 10,000 to 268,000 for the week stretching from June 19 to June 25. Still, new claims remained below the key 300,000 mark for the 69th straight week, the longest streak since 1973.

The Senate passed and sent to the White House a relief measure to help Puerto Rico deal with its fiscal crisis, just two days before the territory planned to default on a large debt payment. President Obama said he will sign the measure. The rescue package will not prevent Puerto Rico from missing the $2 billion debt payment due on Friday, but the bill would bar lawsuits by creditors for nonpayment retroactive to December – an important provision in light of the imminent missed debt payment. The legislation would allow the island’s government to restructure its $72 billion total debt so that it can manage payments and create an oversight board to guide the recovery process; at least that is the theory. There will likely be further defaults in the not so distant future.

Nearly all of the largest U.S. banks are on steady enough footing to issue dividends or make share buybacks after passing the final round of the Fed’s annual stress tests. The US units of Deutsche Bank and Santander were the only lenders to fail for a second year in a row, meaning they cannot increase shareholder payouts until they establish a new plan. “Material weaknesses” were also seen at Morgan Stanley, but the Fed allowed the bank to proceed with a dividend hike and $3.5 billion buyback while it rectifies the issues.

After passing the Dodd-Frank stress tests, Wall Street banks announced their stock-buyback plans. Among the notables, JPMorgan will buy back $10.6 billion worth of stock, while Citi and Bank of America will repurchase $8.6 billion and $5 billion worth of shares. Goldman Sachs will also buy back shares, but it did not release an amount. All told, the 31 banks are planning to dish out about $96 billion.

Separately, the International Monetary Fund says Deutsche Bank is the riskiest financial institution in the world as a potential source of external shocks to the financial system: “Among the globally systemically important banks, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse,” according to the IMF Financial Sector Assessment Program. The institution also said the German banking system poses a higher degree of possible outward contagion compared with the risks it poses internally.

What is the cost of being labeled a systemically important financial institution? In the case of General Electric, the magic number looks to be about $50 billion. GE officially shook off the designation on Wednesday that had been applied by the Financial Stability Oversight Council to its GE Capital finance unit.

April last year, GE began selling off almost all of GE Capital’s assets, about $200 billion in sales. Since G.E. announced its plans to offload the financial side of the business, the company’s stock has added about $5.25 a share, or roughly $50 billion in overall market capitalization. G.E.’s stock is up more than 20 percent, even as the S&P 500 has gone nowhere; and while Morgan Stanley, Citigroup and Goldman Sachs have all lost more than 20 percent of their former value.

A federal appeals court threw out a $7.25 billion antitrust settlement among Visa, MasterCard and millions of retailers over credit card fees. The settlement was intended to resolve nearly a decade of litigation concerning whether Visa and MasterCard improperly fixed fees that merchants were charged when customers used credit or debit cards, also known as swipe fees. The settlement would have allowed Visa and MasterCard to impose higher and higher swipe fees.

The 2nd U.S. Circuit Court of Appeals in New York said the accord was unfair to retailers that stood to receive no payments, and in the court’s view, little or no benefit at all. It also decertified the case as a class action. Circuit Judge Pierre Leval, a member of the three-judge panel that unanimously struck down the settlement wrote: “This is not a settlement; it is a confiscation.” The case could now be renegotiated or it could go to trial.

Looking to free up TV spectrum for cellular use, the FCC has acquired $86 billion worth of wireless airwaves from television broadcasters in the first phase of a complex auction. The agency hopes bidders will be willing to spend that much when it resells the airwaves in an auction that will start later this summer, but it may have to sell less spectrum than expected, or use multiple rounds to settle bidding by broadcasters.

The movie studio Lionsgate agreed to buy Starz, the premium cable channel home to hit shows like “Outlander,” for about $4.4 billion.

Theater chain Carmike Cinemas dropped today’s scheduled shareholder vote on its proposed sale to AMC Entertainment Holdings, saying it was adjourning until next month and throwing the $1.1 billion deal into doubt. The deal was opposed by some of Carmike’s biggest shareholders. Carmike said the adjournment was made at the request of AMC and that the special meeting will reconvene on July 15.

The big deal announced today comes from Mondelez International, a $23 billion offer for Hershey, the chocolate company.  Hershey said that Mondelez had offered to pay $107 a share in cash and stock, a premium of about 10 percent to Hershey’s closing stock price. Hershey said that its board had “rejected the indication of interest and determined that it provided no basis for further discussion between Mondelez and the company.”

Winning Hershey could prove tricky for Mondelez, since the smaller chocolate maker is effectively controlled by a charitable trust that owns about 81 percent of the company’s voting power. The Hershey Trust, established by Milton Hershey and his wife, Catherine, in 1905, has opposed takeovers of the company in the past.

In 2002, the trust halted an auction of the company at the 11th hour as it was about to accept a $12 billion deal from Wm. Wrigley Jr. Company. News of the offer approach sent shares in Hershey up 16 percent, to $113.49, which is more than the offered amount. So, if Mendelez is serious, they will clearly have to sweeten the deal. (sorry, I couldn’t resist.)

The Justice Department has told Anthem its planned takeover of Cigna threatens competition and probably can’t be fixed by selling parts of their businesses. A decision on the $48 billion merger is expected by mid-July.

If you decide to just kick back for the Fourth, you might take advantage of the downtime to grab your mobile device and reset your passwords. Oculus VR CEO Brendan Iribe, is the latest, high-profile victim of a Twitter account takeover, and he allegedly used an old password. The hackers took over his Twitter account by posting: “Imagine creating the coolest s**t to ever be introduced to gaming and technology but using the same pass for 4 years lol… silly Mr. CEO.” It got worse from there.

Millions of U.S. travelers flying during the busy Fourth of July holiday weekend will face heightened security and increased delays due to the deadly attacks at Istanbul’s main airport. Following the Istanbul attacks, which took place outside security checkpoints, U.S. airports are likely to focus on surveillance and armed personnel in similar public spaces not subject to screening.

The security measures are not limited to airports; look for more officers at July 4^th celebrations as well. A record number of Americans, 43 million, are expected to travel between June 30 and July 4, according to AAA. The vast majority will go by car, AAA said, but 3.3 million are expected to fly.

Financial Review

It’s About to Get Hot

Sinclair Noe — February 13, 2015         

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

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DOW + 46 = 18,019
SPX + 8 = 2096
NAS + 36 = 4893
10 YR YLD + .04 = 2.02%
OIL + 1.43 = 52.46
GOLD + 6.20 = 1228.90
SILV + .48 = 17.42

The S&P 500 Index closed at an all-time high, taking out the previous record close from December 29. Whenever the S&P 500 hits a record high, we acknowledge it, but for some reason we don’t have a big celebration. When the Dow Industrials hit records we have the orchestra, the parade, milk and cookies; it’s a big ridiculous mess, but S&P 500 record high close; well done, attaboy, next.

Next would be the Russell 2000 index of small and mid-cap stocks hitting a record high close. Well done, next.

The Dow Jones Industrial Average finished above 18,000 for the first time this year. The Nasdaq Composite ended at its highest level since March 2000. For the week, the S&P 500 gained 2%. The Dow Industrial Average was up 1.1% on the week. For the second day, American Express led declines for the Dow, following news Costco was ending its exclusive business arrangement with AmEx. The Nasdaq Composite gained 3% over the past week, and is now within a few percentage points of record highs. The Russell 2000 gained 1.5% on the week.

In economic news, consumer sentiment slipped in February to a three-month low, according to the University of Michigan sentiment index. There has been this hope that low oil prices would have consumers spending like drunken sailors on shore leave; but that hasn’t happened. For the most part, people have been saving a little. It seems like nobody really believes that oil prices will stay low.

The prices we paid for imported goods fell sharply again in January mainly because of much cheaper oil, a trend that’s keeping inflation under wraps. The import price index dropped a seasonally adjusted 2.8% last month. Excluding fuel, import prices declined by 0.7% last month.

Weather will weigh on U.S. growth this quarter, just not nearly as much as last year. We keep seeing those pictures of Boston buried in snow, and they expect another snowstorm to hit New England this weekend, but it’s not as bad as last year’s Polar Vortex. Snowfall is on track to subtract 0.4 percentage point from growth in the three months through March, based on estimates from Macroeconomic Advisers LLC.  That’s way smaller than the estimated 1.4 point weather-created hit to GDP growth for the same period last year.

Europe is growing. Not much, but it is growth. The morning started with economic data on the Eurozone. Boosted by strong domestic demand and household spending, the German economy grew at a  0.7% pace in the fourth quarter, after expanding 0.1% in the previous three months, while data from France showed that GDP grew by 0.1% during the quarter, meeting analysts’ expectations. The Eurozone economy as a whole saw growth of 0.3%.
AIG posted a sharply lower fourth-quarter profit as low interest rates and refinancing expensive debt hurt the insurer’s results. The company reported an operating profit of $1.37B, well short of the $1.67B reported in the year-earlier period. AIG is planning to cut annual general operating costs by 3 percent to 5 percent through 2017. AIG also announced that it would buy back about $2.5B in shares of common stock on top of the roughly $4.9B in stock it repurchased in 2014.

Freescale Semiconductor has hired investment bankers to explore a possible sale. The company went public in 2011 after being taken private in 2006 for $17.6B. Freescale’s shares have soared over 75% in the last three months, with much of the rise coming after its strong Q4 results.

Activist investor Harry Wilson  and four hedge funds are pressing GM for an $8B share repurchase by mid-2016. The company is weighing the potential impact of the buyback, which may dent its balance sheet and jeopardize its credit ratings. Two ratings firms indicated this week that the proposed buyback could hurt GM’s current credit rating, which is one notch above junk status. Wilson, however, says GM needs to better manage its $25B in cash, and is looking to nominate himself for the company’s board.

West Coast seaports will be mostly closed for the next few days. Cargo has been struggling for months to cross the docks amid historically bad levels of congestion. The management association, representing large international corporations that run the ports, said it halted ship operations because it believes workers are engaged in a slowdown, and owners do not want to pay the higher premium wages dock workers receive for weekend and holiday shifts.

President Obama went to Silicon Valley today to hustle support from the tech industry for closer cooperation in defending against hackers. Obama signed an executive order aimed at encouraging companies to share more information about cybersecurity threats with the government and each other through new private-sector led information sharing and analysis organizations, or hubs where companies share information with each other and with the Department of Homeland Security.

It is one step in a long effort to make companies as well as privacy and consumer advocates more comfortable with proposed legislation that would offer firms protection from being sued for handing over customer information to the government. Upset about the lack of reforms to surveillance programs, the CEOs of Google, Facebook and Yahoo stayed away from today’s conference, but Apple CEO Tim Cook gave an address and other CEOs attended and spoke.

In his speech, Cook said: “History has shown us that sacrificing our right to privacy can have dire consequences. We still live in a world where all people are not treated equally, too many people do not feel free to practice their religion or express their opinion or love who they choose — a world in which that information can make the difference between life and death.”

Apple had a very good reason to show up for the President’s visit: A seal of approval for Apple Pay.

The White House announced that Apple’s mobile-payment system will be enabled for users of federal-payment cards, including Social Security and veterans benefits that are paid out via debit cards. The deal includes the Direct Express payment network and government cards issued through GSA SmartPay, which handles more than 87.4 million transaction worth $26.4 billion each year. Cook also said Apple Pay will become available in September for many transactions with the federal government, such as at national parks.

Apple Pay is being watched closely to see whether Apple can foster wider use of digital wallets, a goal that has eluded tech companies for years. Major banks and credit-card companies, including MasterCard, teamed up with Apple to develop Apple Pay, which uses the world’s largest payment networks’ tokenization products, a system that replaces some account information with a digital ID for online and mobile purchases.

Visa CEO Charlie Scharf has said that there will be “an awful lot of things being announced and implemented” in the next year that compete with Apple Pay. The networks have also outlined a road map of standards for how banks and merchants can adopt the technology. To coincide with today’s event, Visa announced an expansion of its token services this year and MasterCard said it plans to spend $20 million on a program that uses biometrics to verify purchases.

We have followed the droughts in the Southwest and California for the past couple of years, and now, according to NASA atmospheric scientists in a new study in the journal Science Advances, things are going to get a lot worse. We are about to go from droughts to mega-droughts.

According to the NASA scientists: “Unprecedented drought conditions” — the worst in more than 1,000 years — are likely to come to the Southwest and Central Plains after 2050 and stick around because of global warming. “Nearly every year is going to be dry toward the end of the 21st century compared to what we think of as normal conditions now. We’re going to have to think about a much drier future in western North America.”

There’s more than an 80 percent chance that much of the central and western United States will have a 35-year-or-longer “megadrought” later this century, according to study co-author Toby Ault of Cornell University, adding that “water in the Southwest is going to become more precious than it already is.”

The study is based on current increasing rate of rising emissions of carbon dioxide and complex simulations run by 17 different computer models, which generally agreed on the outcome. The regions looked at include California, Nevada, Utah, Colorado, New Mexico, Arizona, northern Texas, Oklahoma, Kansas, Nebraska, South Dakota, most of Iowa, southern Minnesota, western Missouri, western Arkansas, and northwestern Louisiana.

Looking back in records trapped in tree ring and other data, there were megadroughts in the Southwest and Central Plains in the 1100s and 1200s that lasted several decades, but these will be worse. Those were natural and not caused by climate change, unlike those forecast for the future.

Because of changes in the climate, the Southwest will see less rain. But for both regions the biggest problem will be the heat, which will increase evaporation and dry out the soil. The result is a vicious cycle: The air grows even drier, and hotter.

Scientists had already figured that climate change would increase the odds of worse droughts in the future, but this study makes it look worse and adds to a chorus of strong research.

Apple Bites

Financial Review with Sinclair Noe — September 9, 2014

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

DOW – 97 = 17,013
SPX – 13 = 1988
NAS – 40 = 4552
10 YR YLD + .03 = 2.50%
OIL + .05 = 92.80
GOLD + .30 = 1256.80
SILV + .04 = 19.16

Today’s epiphany is courtesy of Apple; they unveiled not one but three new things. Let’s examine.

The iPhone 6 is the new phone, and it is a little bit bigger than the old phone. And they even have an iPhone 6 plus, which is a little bit bigger. So, the new phones won’t fit in your pocket anymore. I know, it’s like the most totally incredible thing ever.

The Apple Watch is smaller than the old phone; so small it can be strapped on your wrist. It even has a dial so older people will realize it is supposed to be a watch and not just a little phone strapped to your wrist. It is called the Apple Watch because iWatch was just a little too creepy.

The third thing is Apple Pay, which is a payment processing service that has Apple partnering with American Express, MasterCard, and Visa so you can pay for purchases with a big iPhone 6 or an Apple Watch, just like you can pay for things with an American Express, MasterCard, or Visa credit card. The big difference is this is new technology, whereas the credit card is like 50 years old; and this new technology runs on batteries that might last for 12 hours before requiring a charge. But, you don’t need to carry a small piece of plastic that doesn’t require batteries and your transaction will be more secure because it will use the technology of iCloud, which is the same technology that allows hackers to get naked pictures of celebrities, so you know it’s really, really safe.

Apple share price moved higher by about 4.8% during the day but closed down – .37 at 97.99.

Moving over to the economic news of the day:
On the heels of a disappointing jobs report last week, the Labor Department reports more workers are quitting their jobs. The JOLT report, or Job Openings and Labor Turnover summary shows about 2.52 million workers quit their jobs in July, the most since June 2008, and up from 2.31 million a year earlier. This is actually considered healthy, because the idea is that people don’t quit their jobs, unless they think they can find a better job. Or maybe a lot of people just don’t like their job. There were 4.67 million job openings at the end of July, down slightly from 4.68 million openings.

Average consumer spending fell in 2013, its first drop in three years; cautious families cut expenditures on restaurants, clothing, entertainment, alcohol and tobacco, and slashed charitable contributions. Last year, total average expenditures by families, singles and other “consumer units” hit $51,100, down 0.7% from 2012′s tally of $51,442, as income edged down. Makes sense; people earned less and spent less. Meanwhile, spending rose for necessities, such as housing and health care.

Today’s young Americans are burdened by debt at a far greater rate than prior generations; 35% of Americans age 24 to 28 have debts that exceed their assets. That’s roughly double the proportion of their peers in the late 1980s and mid-1970s. The share of young Americans with debt, if not the overall dollar amount, has actually fallen from prior generations. Today, 75% of young Americans have debt, compared with 76.5% of late baby boomers at the same age and 78.2% of early baby boomers; but big shifts in the types of debt held by the groups have led to far different experiences.

Younger Americans today are taking on far less mortgage debt and far more student and credit-card debt than the early and late boomers did at the same age. Only 19.8% of today’s young Americans have home-related debt, down from 29.9% of their peers in the late 1980s and 43.1% of those in the mid-1970s. Conversely, 22.4% of young Americans today have education debt, compared with 5.1% among late baby boomers and none among early boomers.

Most people think the economy is headed in the wrong direction, and that is the global economy, not just here in the US. Pew Research Center asked nearly 49,000 people in 44 countries whether they liked the direction in which their country was heading, about their view of the economy, and where they thought the economy was heading. The Greeks, Italians, Spanish, and Ukrainians are the most pessimistic about their economy with 97%, 96%, 93%, and 93% of respondents, respectively, saying their current economic situation was bad. Greece led with the highest percentage of respondents who thought things would get worse in the next 12 months with 53%.

The Chinese are very optimistic. Only 6% of Chinese respondents thought things were bad, and only 2% thought things would get worse. Similarly, only 11% of respondents from Vietnam thought things were bad, along with 15% of those in Germany. In the US, 58% of respondents thought the economy was bad, and 30% thought it would get worse in the next 12 months.

The National Federation of Independent Business said its Small Business Optimism Index for August rose 0.4 to 96.1. Eight of the index’s 10 components either improved or showed no change. The job growth indicated in the survey was sluggish, with owners adding an average of only 0.02 workers per firm, and fewer saying they planned to hire more workers in the future. Some businesses appeared to lose pricing power, with 15 percent of respondents saying they had reduced prices, and a drop in the number of owners saying they planned price hikes. Though more owners said they expect an improvement in business conditions than said so in the month before, a slight majority still are not convinced conditions will improve. The index is still 4 points below where it was before the start of the 2007 financial crisis and recession.

Senator Elizabeth Warren is holding hearings on Capitol Hill, and she actually had the cajones to ask regulators why no senior officials at Bank of America, Citi and JPMorgan Chase have been prosecuted over their role in the housing collapse. The three banks have agreed to a combined tens of billions in penalties, but no officials have been sentenced over the alleged misconduct. Warren allowed that the regulators themselves can’t prosecute; that would be up to the Justice Department. But regulators can provide referrals.

Daniel Tarullo, the governor at the Federal Reserve who’s most involved in bank regulation, said the central bank provided information to the Justice Department. But, when pressed, he indicated that the Fed didn’t specifically refer anyone. Warren noted that after the savings-and-loan crisis in the 1970s and the 1980s, the government brought over 1,000 prosecutions and got over 800 convictions. Warren, by the way, wasn’t alone. Sen. Richard Shelby, the Alabama Republican, put the onus on the Justice Department for the lack of prosecutions. Shelby said: “People shouldn’t be able to buy their way out of culpability.”

No, they should not be able to, but they are.

The Obama administration announced a series of measures to help shore up crumbling infrastructure, including half a billion dollars in loans for the electric grid; part of a $1 trillion dollar plan to fund transportation, water and electricity needs over the next 6 years. New efforts include $518 million in loans for 22 electric projects from the Department of Agriculture that will build 5,600 miles of electrical lines in rural areas and improve the electric grid. Currently, the grid is unable to withstand many outages tied to weather, costing the economy up to $33 billion each year.

Treasury Secretary Jack Lew said investing in infrastructure has historically been one of the best ways to create jobs and boost economic growth, but spending has fallen over the past decade, as two-thirds of roads are now in disrepair, and one out of nine US bridges have structural deficiencies.

The European Union’s trade commissioner is practically begging for the US to start exporting oil and natural gas to Europe. Tension between Russia and the West over the future of Ukraine is spurring the European Union to renew efforts to end decades of dependence on Russian gas. One solution would be greater access to US oil and nat gas resources. Overturning a 40-year US ban on oil exports by agreeing to send oil to Europe could pressure Russian President Vladimir Putin by lowering global crude prices. Nat gas prices in Europe are about 3 times what they are in the US, and one concern is that exporting nat gas, could drive up prices in the US. Whatever happens likely won’t happen for at least a year, which raises the possibility of a cold winter in Europe, if Russia-Ukraine situation turns even uglier.

Speaking of natural gas. McDonald’s reports that global sales at stores open more than a year dropped 3.7 percent in August. That was the company’s worst month for same-store sales since the spring of 2003. This is the second month in a row that McDonald’s has reported global same-store sales that set 10-year marks for awfulness. Performance was dragged down largely by the Asia/Pacific, Middle East and African regions, where same-store sales plunged 14.5 percent. McDonald’s is still recovering after a video surfaced showing workers at one of its meat suppliers in China engaging in unhygienic practices, including picking up meat off the floor and putting it back in a processing machine. McDonald’s was forced to pull meat off menus in many China outlets after the scandal came to light. No word on whether diners could tell the difference between meat and the non-meat menus. McDonald’s US same-store sales fell 2.8 percent, and in August McDonald’s captured its second smallest share of the fast-food market since 2011.