Financial Review

Heating Up

Sinclair Noe — June 16, 2016

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DOW + 92 = 17,733
SPX + 6 = 2077
NAS + 9 = 4844
10 Y – .04 = 1.56%
OIL – 1.84 = 46.17
GOLD – 11.30 = 1281.20

Well, this was a strange day. The major market indices started the session lower and looked ready to slide into a sixth consecutive loss, but after about an hour of trade, prices started moving higher. Even with the weakness we have seen over the last week or so, the S&P 500 is still only a little more than 2% off its 2016 closing high for the year. From that perspective, can you recall a time when the S&P 500 was this close to a high for the year but where there was this much angst on the part of investors? At one point, the Dow was down almost 170 points, with a 280-point range from sessions low to session high.

Yesterday, the Federal Open Market Committee left the fed funds rate unchanged at 0.25% to 0.50%, as expected. And the Fed’s economic forecasts are even more pessimistic now than they were just a few months ago. Fed chair Janet Yellen held a press conference and mentioned the weak labor market, low business investment and productivity, and concerns about a possible Brexit next week. The Fed’s own forecast sees U.S. growth topping out at 2% in the long run, well below the nation’s historic 3.3% growth rate. Looming in the background is persistently weak global growth. Today, other central banks delivered their policy messages.

The Bank of Japan kept monetary policy steady and lowered its inflation forecast, stating the consumer price index’s year-on-year change is likely to be slightly negative or flat for the time being. The yen surged against the dollar following the news, sparking speculation on whether Japanese policymakers would intervene to halt the strengthening currency, while the Nikkei tumbled 3.1%.

Reiterating its warning that the franc is significantly overvalued, the Swiss National Bank left its negative interest rates unchanged at record lows, conserving ammunition ahead of a British vote on EU membership. As expected, the SNB held its deposit rate at negative-0.75%.

The Bank of England kept its key interest rate at a record low of 0.5% and made no changes to its 375-billion-pound asset-purchase program. The decision marked the last before the June 23 referendum in the U.K. on whether the country should stay or exit the European Union. And the bank warned that a Brexit “could materially alter the outlook for output and inflation.”

“Leave” has surged to a 6-point lead in an important Brexit survey. A new Evening Standard newspaper poll, conducted by the reputable polling firm Ipsos MORI, shows that 53% of respondents favor Leave while 47% favor Remain. This was the first time a poll conducted by Ipsos MORI poll had favored Leave. But both sides of the Brexit campaign have temporarily stopped campaigning after Jo Cox, a Member of Parliament was shot and killed while meeting with constituents in a library. The motive behind the shooting is unknown but many people think it might be Brexit related.

Investors continued to buy up investments considered safe in times of economic uncertainty: United States government bonds, and stocks with high dividends. The yield on the benchmark 10-year Treasury note dropped to 1.52% in intraday trading; the lowest since 2012.

The number of people seeking U.S. unemployment benefits rose last week, but to a low level that indicates employers are still cutting relatively few jobs. Weekly applications rose 13,000 to a seasonally adjusted 277,000, the highest in four weeks. The less volatile four-week average declined slightly to 269,250.

Consumer prices, or prices at the retail level, rose 0.2% in May largely because of higher gasoline prices and rising rents. Although the cost of most goods and services aren’t increasing much, fuel has become more expensive. The energy index climbed 1.2% in May. Rents also jumped 0.4% in May to mark the largest monthly gain since February 2007. And they are rising at the fastest 12-month pace in almost nine years: 3.4%.

Overall price pressures are still muted, however, as the price of groceries dropped 0.6% in May, and prices are now down 0.7% in the past year. The consumer price index has risen just 1% in the past 12 months. The core rate that excludes food and energy has risen at a sharper but still low 2.2% annual pace.

Confidence among U.S. homebuilders climbed to a five-month high in June. The National Association of Home Builders/Wells Fargo builder sentiment gauge rose to 60 from 58. Home builders report cheap borrowing costs and steady improvement in the labor market have bolstered Americans’ abilities to buy homes. Builder sentiment in the West reached a five-month high.

The Philly Fed index rebounded into expansionary territory in June, with the headline index rising to 4.7 from -1.8. The key forward-looking indicators all moved in the wrong direction, with sentiment on new orders, employment, unfilled orders, inventories and capital expenditure intentions all weakening, while the hours worked sub-index remained firmly in contractionary territory in June.

Arizona’s seasonally adjusted unemployment rate increased one-tenth of a percentage point from 5.5% in April to 5.6% in May. The U.S. seasonally adjusted unemployment rate decreased three-tenths of a percentage point from 5.0% in April to 4.7% in May. A year ago, the Arizona seasonally adjusted rate was 5.8% and the U.S. rate was 5.5%.

Arizona lost 19,400 Non-farm jobs in May. Three of the eleven sectors posted gains, one remained unchanged, and seven sectors posted losses. The gains were recorded in Manufacturing, Construction, and Trade, Transportation, and Utilities.  The losses were recorded in Financial Activities, Information, Education and Health Services, Leisure and Hospitality, Professional and Business Services (-5,400 jobs); and Government (the big loser -13,100 jobs). Natural Resources and Mining remained unchanged.

Disneyland debuts in Shanghai. The theme park, which cost $5.5 billion and took five years to build, opened its doors today. Disney hopes it can tap into China’s growing middle class, as 330 million people live within a three-hour drive or train ride from the park.

California’s insurance commissioner called on the U.S. government to block Anthem’s $48 billion takeover of rival health insurer Cigna, saying the deal would limit competition in the state’s health-insurance market. While Commissioner Dave Jones doesn’t have legal authority to block the merger, his opposition, plus a 22-page letter he sent to the U.S. Justice Department, adds an influential voice to the debate. The takeover would give the combined Anthem-Cigna a greater than 50 percent market share in 28 counties in California, and a market share exceeding 40 percent in 38 counties.

Volkswagen  unveiled a major restructuring today, the broadest overhaul of the company in decades. VW announced plans to deliver 30 electric plug-in models by 2025. The product overhaul and pledge to cut $9 billion in spending come as VW is already facing a bill of more than $18 billion to cover the costs of its emissions scandal.

The company rigged some 11 million diesel cars worldwide with software to cheat emissions standards. The admission triggered a litany of government investigations, a U.S. sales slump, and a management shakeup. This also follows a mandate from the German government that as of 2030, all new cars registered in Germany must be emissions free. The plan is to add one million hybrid and all-electric cars by 2020 and 6 million by 2030.

After three successes, a leftover SpaceX rocket booster crashed Wednesday while trying to land on an ocean barge. In fact, the rocket’s failed landing was, according to a Twitter post by Elon Musk, “Maybe [the] hardest impact to date.” The attempt came minutes after the Falcon 9 rocket successfully launched two satellites into orbit from Cape Canaveral, Florida.

Facebook founder Mark Zuckerberg’s philanthropy venture has made its first major investment, leading a funding round in a startup that trains and recruits software developers in Africa. Google Ventures was also part of the $24 million funding round. The startup, which has nearly 200 engineers currently employed by its Nigeria and Kenya offices, will use the funds to expand to a third African country by the end of 2016.

Philadelphia is set to become the first major American city with a soda tax despite a multimillion-dollar campaign by the beverage industry to block it. The City Council is expected to give final approval today to a 1.5 cent-per-ounce tax on diet and regular soda, iced tea, energy drinks, juice drinks with less than 50% juice, and other sugary beverages.

Microsoft is getting into the marijuana business, announcing a partnership to begin offering software that tracks marijuana plants from “seed to sale,” as the pot industry puts it. The software is meant to help states that have legalized the medical or recreational use of marijuana keep tabs on sales and commerce, ensuring that they remain in the daylight of legality. But until now, even that boring part of the pot world was too controversial for mainstream companies. It is apparent now, though, that the legalization train is not slowing down: This fall, at least five states, including the biggest of them all — California — will vote on whether to legalize marijuana for recreational use.

Get ready, here it comes. An excessive heat watch has been posted for California and Arizona, warning of temperatures that could hit 119-degrees this weekend. The forecast calls for record highs and record high-lows. High lows can sound a bit funny to say but what they translate to is misery: Temperatures stay so warm overnight that there is little relief from the heat even after the sun has set. The only consolation is that we are not expected to break the all-time record high of 122-degrees from June 26, 1990. Small consolation.

Financial Review

ECB Day

Sinclair Noe — April 21, 2016

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DOW – 113 = 17,982
SPX – 10 = 2091
NAS – 2 = 4954
10 Y + .02 = 1.87%
OIL – .71 = 43.47
GOLD + 3.70 = 1249.00

The European Central Bank held its key interest rate at 0% and its deposit rate at negative -0.40%. European Central Bank President Mario Draghi brushed off German criticism of his ultra-loose monetary policy and vowed to use all the tools at his disposal for “as long as needed”.

He said the ECB’s policy was working, which helped boost the euro. Draghi also stepped up his calls on euro zone governments to help get the region’s economy on a more solid footing through fiscal policy and more ambitious reforms.

According to a poll of over 1,000 American adults, even with the Dow Jones industrial average near its record high, only slightly more than half of Americans (52%) say they currently have money in the stock market, matching the lowest ownership rate in Gallup’s 19-year trend. Although Americans in all income groups are less likely to have stock investments now than before the Great Recession, middle-class Americans have been the most likely to flee the market.

Nearly three in four middle-class Americans, with annual household incomes ranging from $30,000 to $74,999, said they invested money in the stock market in 2007. Today, only half report having stock investments. This 22-percentage-point drop is more than double the changes seen in stock investing among higher and lower income groups.

Regulators released long-awaited proposed rules that would restrict how big financial institutions can pay their top executives. The new rules would make bankers wait at least four years to receive portions of their bonuses and force banks to find ways to claw back bonuses from bankers if their behavior leads to big financial losses. The new rules would apply only to incentive-based compensation, generally bonuses.

The structure of executive pay packages before the financial crisis was blamed for encouraging bankers to take unnecessary risks. The 2010 Dodd-Frank legislation required the major financial regulators to collaborate on rules aimed at encouraging a longer-term approach to compensation at big financial institutions. The regulators were supposed to propose the rules within 90 days of the law’s passage; and now, more than 5 years later, we have a proposal.

Commodities were booming in early trading today, with crude oil hitting a new 2016 high of $44.49 today. However, Kuwait said it boosted oil output, and Libya said it could soon do the same. Iran also reiterated that it will not be part of any oil production freeze. Ahead of this past weekend’s Doha meeting, a key Saudi prince said his country had the capacity to unleash a million barrels of oil a day on the market, while reiterating a “we won’t freeze if everyone else doesn’t” stance.

One of the more interesting moves has been in the grains market. Soybeans blew through the big $10.00 resistance level, with very little resistance. Corn got a good pop above $4.00 and wheat traded above $5.00. The grains and beans have been on a two-week run. You might suspect there is bad weather, horrible growing conditions, but there is no news. Maybe the markets are factoring in some kind of risk premium and we just don’t know what it is yet, or maybe this market just got a little carried away, and is way overbought at these levels. Beats me.

The number of Americans filing for unemployment benefits fell last week, hitting its lowest level since 1973. Initial claims for state unemployment benefits declined 6,000 to a seasonally adjusted 247,000 for the week ended April 16. The labor market is strengthening despite signs that economic growth slowed sharply in the first quarter. Employers are holding onto their employees in convincing confirmation of the strength of the nation’s labor market.

The Conference Board’s index of leading indicators rose 0.2 percent in March to 123.4, snapping a three-month streak of declines. The index’s six-month growth rate points to “slow, although not slowing, growth in the coming quarters,” said the group in a release. “Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”

Solar energy company SunEdison filed for Chapter 11 bankruptcy protection this morning, becoming one of the largest non-financial companies to do so in the past 10 years. Once the fastest-growing U.S. renewable energy developer, SunEdison embarked on an aggressive acquisition strategy that left it struggling with $12 billion in debt.

In its bankruptcy filing, the company said it had assets of $20.7 billion and liabilities of $16.1 billion as of Sept. 30. And if you are wondering what the bankruptcy of SunEdison says about the prospects for renewable energy, the answer is: not much. The failure of SunEd is the story of a company that took on too much debt and charted an overly aggressive growth strategy.

Volkswagen has reached a settlement in principle with the Environmental Protection Agency, California officials and consumers over a plan to fix or buy back nearly half a million vehicles that violated emissions standards. The deal includes “substantial compensation” for owners of cars powered by 2.0-liter diesel engines that were fitted with software to cheat emissions tests. Consumers will be allowed to sell their vehicles back to Volkswagen or get repairs. But financial details of the offer, which is still being finalized, were not disclosed.

The cost to buy back all of the cars affected by the scandal would be more than $7 billion. Volkswagen will also be required to invest funds to “promote green automotive” initiatives and establish an environmental remediation fund after years of cars spewing nitrogen oxide emissions at harmful levels. A US district judge in San Francisco set June 21 as a deadline for the parties to file preliminary proposals on the settlement, after which the public will have a chance to comment before he signs off.

General Motors’ first-quarter earnings and sales beat analysts’ estimates by a wide margin as it posted record results in North America and stepped toward a 15-year goal of ending losses in Europe. Net income more than doubled to $2 billion and adjusted profit rose to $1.26 a share, easily topping estimates of $.99-cents per share.

Verizon Communications said profit in the first quarter met expectations as strong tablet sales helped it add new subscribers, though an ongoing strike by its wireline workers was expected to hurt earnings in the current quarter. Still, the No. 1 U.S. wireless carrier stood by its full-year profit forecast.

Southwest Airlines reported a quarterly profit above analysts’ estimates and said it expected unit revenue to rise “modestly” in the second quarter. Southwest said it earned $511 million in the first quarter, up from $453 million a year earlier.

Under Armour reported earnings of 4-cents per share, beating estimates of 2 cents; and revenue rose 30% to $1.05 billion versus estimates of $1.04 billion. But if you listening to the earnings call, you might have missed the numbers. CEO Kevin Plank mainly raved about basketball player Stephen Curry.

After the closing bell, Google parent Alphabet reported first-quarter earnings that fell short of analyst expectations as growing losses from the tech giant’s investments in speculative new businesses overshadowed Google’s booming advertising business. Alphabet reported earnings per share excluding certain items of $7.50. Analysts had expected $7.96, according to S&P Global Market Intelligence.

Alphabet reported $17.26 billion in revenue. It was the second time that Alphabet reported financial results after restructuring as Alphabet. Now Google’s core business is separate from its “other bets” or so-called “moonshots,” many of which lose money such as smart gadget maker Nest and experimental lab X.

Microsoft’s quarterly adjusted profit missed analysts’ estimates as a continued slump in personal computer sales hurt the company’s core Windows business. Microsoft earned 62 cents per share. Analysts on average had expected a profit of 64 cents per share. Worldwide PC shipments fell 11.5 percent in the first quarter, according to research firm IDC.

Starbucks reported a 16% increase in second quarter earnings.  Sales were the best of any non-holiday quarter ever, jumping 9.4% to $4.99 billion, from $4.56 billion in the year-ago quarter. That came in slightly below what analysts expected. Earnings per share came to 39 cents, in line with analyst expectations. Same store sales increased 6% globally.

Amazon has won a deal worth about $30 million to provide e-books to New York City, the nation’s largest school district. The city’s Panel for Educational Policy voted in favor of the three-year contract for the Department of Education, which will take effect in the coming school year. For New York, there may be savings in buying more digital books, as well as the prospect of saving storage space for printed texts.

The Federal Aviation Administration has issued the first approval for flights of small commercial drones at night, in the latest sign of how quickly U.S. regulators are moving to authorize expanded uses of unmanned aircraft. The clearance comes weeks before the FAA is expected to issue long-awaited rules for widespread commercial operations of small drones. So far, such unmanned vehicles have been conducting commercial flights based on thousands of individual exemptions previously permitted by the agency.

Financial Review

Don’t Drink the Water

Sinclair Noe — April 20, 2016

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DOW + 42 = 18,096
SPX + 1 = 2102
NAS + 7 = 4948
10 Y + .07 = 1.85%
OIL + 1.43 = 43.90
GOLD – 6.00 = 1245.30

The S&P 500 hit an intraday high of 2111.05 today, less than 2% away from the 2134 all-time high, last May.

Purchases of previously owned U.S. homes rose more than projected in March. The National Association of Realtors reports contract closings climbed 5.1 percent to a 5.33 million annualized rate from February’s 5.07 million. The median price of an existing home rose 5.7 percent from March 2015 to reach $222,700. The median time a home was on the market decreased to 47 days from 52 days a year earlier.

Meanwhile RealtyTrac reports Americans who sold homes in March realized the highest price gains since December 2007. On average, homeowners sold for $30,500 more than their purchase price, an average 17% price gain.

China’s Shanghai Composite Index fell the most in almost two months, closing 2.3 percent lower, having fallen as much as 4.5 percent during the trading session, with no obvious news driving the decline. The MSCI Asia Pacific Index was little changed, with small gains in Japan where the Topix index closed 0.2 percent higher.

Japan had its biggest surplus in more than 5 years. Japan announced a trade surplus of 755 billion yen in March, the largest since October 2010. However, the internals of the report didn’t look so good. Exports fell for a sixth straight month, down 6.8% compared to a year ago. On the other side of the ledger, imports shrank 14.9%, largely because of the weakness in energy prices.

Looking to counter dwindling oil revenues and reserves, Saudi Arabia is raising $10 billion from a consortium of international banks as it embarks on its first global debt issuance in 25 years. The landmark five-year loan, a signal of Riyadh’s newfound dependence on foreign capital, comes as the sustained oil slump encourages other Gulf governments, such as Abu Dhabi, Qatar and Oman, to tap world bond markets.

Kuwait oil workers said they would end a strike that disrupted output from OPEC’s fourth-largest producer for three days. The size of the disruption, had the strike persisted, would have been quite significant. Meanwhile, API industry data that showed a 3.1 million barrel U.S. inventory build last week, about double estimates.

This morning, the Department of Energy said that crude oil inventories rose by just 2.08 million barrels, which was less than the 2.29 million consensus. Plus, crude stocks at the key Cushing, Oklahoma supply point (which is where the WTI price is settled), fell by 248,000 barrels, a much bigger-than-expected decline. WTI Crude hit a new 2016 high at $44.26 today, a level not seen since November.

Reuters reports Volkswagen and US officials have reached a framework deal under which the automaker would offer to buy back almost 500,000 diesel cars that used software to cheat on emission rules. VW is expected to tell a federal judge in San Francisco tomorrow that it has agreed to offer to buy back up to 500,000 2.0-liter diesel vehicles sold in the United States. That would include versions of the Jetta sedan, the Golf compact and the Audi A3.

The buyback offer does not apply to the bigger 3.0-liter diesel vehicles also found to have exceeded U.S. pollution limits, including Audi and Porsche SUV models. Volkswagen has also agreed to a compensation fund for owners, but it is not clear how much owners might receive.

Mitsubishi Motors cheated to look more environmentally-friendly. Japanese automaker Mitsubishi Motors admits it falsified test data to make its cars look more fuel efficient. Mitsubishi says it manipulated the test results of 625,000 cars that have been made over the past three years, and that it would stop making those cars immediately.

An independent panel has been created to investigate the matter. The manipulated data covers four vehicle models that fall under the Japanese category of kei car. This is a classification that covers minivans, trucks, and passenger cars, but is reserved for vehicles that meet economical fuel consumption standards and are consequently taxed at a lower rate.

Coca-Cola’s sales fell for the fourth straight quarter as demand weakened for its fizzy drinks in Europe and a strong dollar ate into revenue from other markets outside the United States, including Latin America. Net income fell 4.5 percent to $1.48 billion, or 34 cents per share. Net operating revenue fell 4 percent to $10.28 billion.

United Continental Holdings reported first-quarter profit above analysts’ expectations and said it would slow its growth plans because flight capacity across the industry has exceeded passenger demand, pushing down prices. The number 3 airline earned $313 million in the first quarter, down 25% from a year earlier.

Qualcomm earned $1.04 per share, beating average analyst’ estimate of $0.96. Qualcomm forecast third-quarter profit below analysts’ expectations as it expects a drop in chip shipments, its biggest business. Qualcomm, whose chips are used in Apple and Samsung smartphones, expects chip shipments to fall 13-22 percent to 175-195 million in the current quarter.

Toymaker Mattel reported a bigger-than-expected quarterly loss, largely due to weak sales in its Monster High and American Girl brands. Sales of Barbie dolls fell 3.4 percent in the first quarter and have declined in seven of the last eight quarters.

American Express’ profit fell for the fourth straight quarter as costs jumped 5 percent after the credit card issuer boosted spending to fend off rising competition. They still posted income of $1.4 billion on $8.1 billion in revenue.

Pipeline operator Kinder Morgan reported a lower first-quarter profit and further cut its 2016 capital budget. Pipeline companies, once seen as more insulated from commodity price swings due to fixed-fee contracts, are now increasingly facing the risk of bankrupt oil and gas companies reneging on their contracts.

U.S. Bancorp reported a 3 percent fall in quarterly profit, weighed down by higher costs and increased reserves for bad loans to the energy industry. Net income fell to $1.39 billion in the first quarter ended March 31, from $1.43 billion a year earlier. The bank said credit quality was relatively stable other than energy-related commercial loans.

European earnings roundup: SAP’s net profit jumped 38%, indicating that its focus on the cloud is beginning to pay off. ARM Holdings’ pre-tax profits rose 14%, as it expanded licensing growth in a solid first quarter. Hurt by a strong dollar and drop at its Latin American business, Syngenta reported its fifth straight quarterly decline in sales. ABB suffered a 7% drop in orders, but the Swiss industrial giant’s profit fell less than expected. Heineken far exceeded analyst expectations, benefiting from a 23% rise in Asian sales due to the Lunar New Year.

Lexmark agreed to be acquired by a consortium led by Apex Technology of China and PAG Asia Capital. The deal – which pays the company $40.50 a share, a 17% premium to the closing price Tuesday – has an enterprise value of about $3.6 billion, when factoring in debt. Lexmark intends to keep its company headquarters in Kentucky.

UnitedHealth Group will drop out of government-organized health insurance markets in at least 18 states, including Arizona, as the industry leader tries to stem losses from participating in Obamacare. In the states where UnitedHealth stops offering ACA plans for next year, people who are currently enrolled with the insurer will have to choose a new health plan during open enrollment. Their current coverage isn’t affected.

Google is under fire again from EU regulators who say it abused the dominant position of Android. Eurozone regulators allege Google breached competition laws by requiring manufacturers to pre-install apps and operating systems based on the Android open source code. If it is found to have broken the region’s rules, Google could face fines of up to 10% of its global revenue, up to $7 billion max. Google is already facing EU charges over the promotion of its shopping service in Internet searches at the expense of rival services in a case that has dragged on since late 2010 despite three attempts to resolve the issues.

The U.S. Supreme Court upheld Arizona’s state legislative districts, rejecting contentions that the map unconstitutionally dilutes the influence of Republican voters. The justices unanimously said the map, drawn by an independent commission, complies with the “one person, one vote” principle. A group of Arizona residents contended that the commission actually had partisan motivations and packed Republicans into a handful of districts to give Democrats an edge. A three-judge panel said the commission wasn’t driven by partisan motivations but by an effort to comply with the U.S. Voting Rights Act.

The Supreme Court has ruled that Iran’s central bank must pay nearly $2 billion to victims of terrorist attacks. The cases were brought by the families of Americans killed in terrorist attacks found to have been sponsored by Iran, including relatives of the 241 servicemen who died in the 1983 Marine Corps barracks bombing in Lebanon.

The plaintiffs sought to collect frozen funds from Bank Markazi, Iran’s central bank, relying on a 2012 federal law, the Iran Threat Reduction and Syria Human Rights Act; that made the task easier by specifying assets of the bank that could satisfy the plaintiffs’ judgments. The law was quite specific, naming a single, pending consolidated case by caption and docket number.

Two officials with the Michigan Department of Environmental Quality and a water official from the City of Flint are facing criminal charges as a result of an investigation into the lead-contaminated water case in Flint. The three men face felony charges including misconduct, neglect of duty and conspiracy to tamper with evidence. They’ve also been charged with violating Michigan’s Safe Drinking Water Act. State Attorney General Bill Schuette says the charges are “only the beginning” of a lengthy and exhaustive probe.

Financial Review

Worst Ever

Sinclair Noe — January 7, 2016

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

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DOW – 392 = 16,514
SPX – 47 = 1943
NAS – 146 = 4689
10 Y – .02 = 2.15
OIL – .74 = 33.23
GOLD + 15.40 = 1110.20

The Chinese stock market was open for about 15 minutes; stocks dropped 5%, triggering circuit breakers, or rules that suspended trading. When trading resumed, it was all downhill and that triggered another level of circuit breakers, shutting down trading for the day; 29 minutes in total, the shortest session in Chinese market history.

Circuit breakers are a new idea for Chinese markets; they have only been used since Monday, the start of the New Year. Trading was halted on Monday for 30 minutes. We have circuit breakers in place on Wall Street, and the idea is to allow a cooling off period when stocks are in freefall. In the US, trading is halted temporarily after declines of 7% and 13% in the Standard & Poor’s 500 Index, and only suspended for the rest of the day if losses reach 20%.

In China, it only seems to make investors more nervous and they scramble to sell before getting locked out. After the trading halt, Chinese regulators decided to scrap the circuit breaker rule for the foreseeable future.

The Shanghai Composite Index finished down 7% at 3,125, bringing its losses over just four trading days to 11.7%. It is on track for the largest weekly loss since the week ended Aug. 21. Stock markets fell across the region: Hong Kong’s Hang Seng Index was down 3.1%, the Nikkei Stock Average lost 2.3%, Australia’s S&P/ASX 200 dropped 2.2% and South Korea’s Kospi was down 1.1%.

What’s triggering the panic selling?   The selloff was sparked after the central bank cuts its yuan reference rate by the most since August. China’s foreign reserves dropped by a record $108 billion in December as its defense of the yuan becomes costlier. The economy is decelerating to its slowest annual pace since 1990, but that’s been known for some time.

Analysts are predicting a 6.5% economic expansion this year, but the continued slide in the yuan is weighing heavily on investor sentiment, as it suggests all the government’s stimulus efforts aren’t working. A currency devaluation is seen as a last-ditch effort to boost exports, and the fear is China won’t be able to maintain its growth targets. Global equities have lost $2.5 trillion in value in the first three trading days of the year. It’s the worst start of a New Year for stocks since 2008, and we all remember that year.

Actually, with today’s losses, this is the worst start ever for the S&P 500 – ever.  Earlier today, George Soros compared the current market to 2008, and said the market is now “facing a crisis and investors need to be very cautious.” And then he went on to describe all the things we’ve been telling you about for some time here on the Review.

Of course the big question is where stocks go from here. Stocks are in a downtrend. The S&P 500 is down over 8% from its May high, but the average stock in the larger S&P 1500 was down 24% from its high as of yesterday’s close, according to new research from Bespoke Investment Group.

A bear market is defined as a decline of 20% or more, meaning the average stock has already reached. The S&P 600 Small Cap Index is down 27.6% from its 52-week high. In the midcap S&P 400, the average decline is 23.6%. The S&P 500, the benchmark for US stocks, hit a record high close of 2130 on May 21^st, or about 8%. But the stocks in the S&P 500 have seen an average decline of just over 20%.

Now the reason for the discrepancy between the index and the average stock in the index, is that the indexes are weighted to give greater importance to the larger stocks, and a few of the larger stocks have performed very well; specifically, the FANG stocks: Facebook, Amazon, Netflix, and Google/Alphabet.

The S&P 500 is trading below its 200 day moving average and the 50 day moving average. The next significant levels of support at 1867, the lows set back in August. Likewise, the Dow Industrials are below the 50 and 200 day moving averages. And we are heading into earnings reporting season with expectations for a 4.7% decline in fourth quarter earnings, which would be the third consecutive quarter of declining earnings.

And while any single day of trading isn’t likely to tell you where stocks are headed, trading in the month of January can give you a pretty good clue about the rest of the year. The idea is called the January Barometer, devised by Yale Hirsch, the founder of the Stock Trader’s Almanac, in 1972.

Simply put, if the Standard & Poor’s 500 index ends January with a gain, the odds favor a rising stock market for the year. But if stocks end January in the red for the month, there is a very strong probability the year will finish negative. According to Jeffrey Hirsch, the son of Yale and the current editor of the Almanac, “The January barometer has registered eight major errors since 1950 for an 87.7% accuracy ratio.”

The January Barometer is not a guarantee of performance for the year, just a look at probabilities. And it is still too early to say whether January will be positive or negative. And even if January shows losses, it doesn’t mean you should sell everything; it would just be an alert telling you to be cautious, make sure you have an exit strategy, and make certain you know just how much risk you’re willing to take.

Oil futures in New York slid to the lowest in 12 years with West Texas Intermediate dropping as much as 5.5 percent in overnight trading. Volatility in the oil market may increase today as tensions in the Middle East rise following Iran’s accusation that Saudi Arabia was responsible for a missile attack on its embassy in Yemen. Oil closed down 2.2% at $33.23. By the way, I paid $1.80 a gallon the other day to fill up the tank. When oil was trading at $100 a barrel, (in other words 3 times more than today) the price for a gallon was not $5.40. The oil companies are still ripping us off at the pump.

According to the World Bank, the global economy will sputter along this year as China’s slowdown prolongs a commodity slump and contractions endure in Brazil and Russia. As a result, the international institution cut its forecasts for the third straight year, predicting 2016 growth to fall by 0.4 percentage point to 2.9%. With regards to the U.S., the World Bank decreased its 2016 prospects to 2.7%, down from 2.8 percent from June, citing the dampening effect on exports from the surging dollar.

Late yesterday, the Federal Reserve released the minutes from the last FOMC meeting. Today, Richmond Federal Reserve President Jeffrey Lacker today said the Federal Reserve might need to raise interest rates more than four times this year if oil prices stabilize, the dollar stops appreciating and inflation surges toward the U.S. central bank’s 2 percent target. Lacker’s comments are in-line with Fed vice-chair Stanley Fischer, which would indicate fed funds rates at just over 1% by the end of the year.

So, on one hand we have markets in China dragging down markets around the globe, even though the economy in the US is decent. Nobody thinks the U.S. or European economies are in high gear, and bears point to weakening corporate profits and tighter monetary policy by the Federal Reserve, but this doesn’t look like 2008 in the broader economy.

The number of Americans who applied for new unemployment benefits in 2015 fell to the lowest level in 42 years. This week’s figures show 277,000 people filed initial jobless claims in the seven days running from Dec. 27 to Jan 2. That is down 10,000 from an unrevised 287,000 in the prior week.

In a separate report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based employers announced plans to cut 23,622 jobs in December, the fewest since June 2000. That was down 24% from November and the lowest December job-cut total on record.

The Department of Labor will report on December payrolls tomorrow morning; the consensus estimate is for somewhere around 205,000 to 215,000. This should be a major tell on whether the Federal Reserve is on the right track or whether their forecasts are nothing more than hooey.

Yahoo is working on a plan to cut its workforce by at least 10% and it could start the process as early as this month. The layoffs, which would result in more than 1,000 people leaving the tech giant, are set to affect the company’s media business, European operations, and platforms-technology group. The move also follows Starboard Value’s letter to Yahoo yesterday, which took aim at CEO Marissa Mayer, her leadership team, and raised the prospect that a proxy battle may be on the way.

Macy’s had a tough Christmas. The department store chain says it will eliminate about 4,500 jobs, or about 3 percent of its work force, in a major restructuring drive designed to save about $400 million.  Macy’s said sales at its Macy’s and Bloomingdale’s stores fell 4.7% in November and December.

Here’s the latest Consumer Electronics Show news: BlackBerry has unveiled plans for building autonomous car software to capture a piece of the ballooning industry. The company wants to extend its QNX software (already used by automakers to build in-car entertainment systems) to self-driving technology, and plans to launch the product in the second quarter of 2016.

CES attendees also saw General Motors show off its Chevrolet Bolt, the automaker’s newest electric vehicle that has a range of 200 miles. The Bolt is likely to be priced at $38,000 and cost around $30,000 after the federal $7,500 income-tax rebate for electric car purchases.

 Meanwhile, Volkswagen assumes it will have to buy back about 115,000, cars in the United States as a result of its emissions crisis. The rest of VW’s 500,000 U.S. vehicles will need major refits, incurring significant costs for parts and a long stay at the garage as sections of the exhaust must be reconstructed and approved.

Financial Review

Off to the Races

Sinclair Noe — January 4, 2016

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

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DOW – 276 = 17,148
SPX – 31 = 2012
NAS – 104 = 4903
10 YR – .02 = 2.25%
OIL – .11 = 36.93
GOLD + 13.50 = 1075.50

The Dow started the morning with a 467-point decline. An inauspicious start to trading in 2016 kicked off, or more accurately fell down, this morning in China. Traders in Shanghai reacted to growing tensions in the Middle East and a drop in one of China’s manufacturing gauges. Fresh manufacturing surveys revived concerns about Beijing’s economic slowdown.

China’s manufacturing activity contracted for the 10th straight month in December – the official manufacturing PMI stood at 49.7 in December. The yuan, which began new extended trading hours today, also hit its lowest point in more than four years in both onshore and offshore trade.

The China CSI 300 Index dropped 5% and that triggered circuit breakers that resulted in a 30-minute halt in trading of all stocks. When trading resumed, the traders were scared and they rushed to exit their positions. In a matter of about 7 minutes the Index dropped to a loss of 7%, and the next round of circuit breakers triggered a halt to trading for the remainder of the day.

The benchmark Shanghai Composite index closed the shortened session down 6.85% while the broader CSI 300 index, encompassing the largest listed firms by market capitalization in Shanghai and Shenzhen, slid by 6.98%. The small cap CSI 500 index fared even worse, finishing the day down 8.27%.

From there, the bad vibes in the market spread; the Nikkei in Japan dropped 3.1% even as the yen rallied on a safe haven play; the Hong Kong Hang Seng China Enterprises Index dropped 3.7%%. The Stoxx Europe 600 Index fell 2.6%, capping its worst start of the year ever as almost 580 of its companies fell. The MSCI Emerging Markets Index lost 3.5%, its worst day since August, when China devalued its currency. Benchmark gauges in South Korea, Taiwan, Malaysia, South Africa and Poland lost more than 2%.

The first trading day of the year does not seem to have any predictive capacity to tell us the direction of trading for the rest of the year. It’s about a 50-50 chance that the market follows the first day of trading in the year. Still, today was a big drop and it makes us look at historic data.

For example, in 1932, the market started the year trading down 6.9%; in 2001 the markets lost 2.8% on the first day of trading. We can include first day trading losses of under 2% in the 5 worst first days of trade including 1949, 1980, and 1983. Of the 5 worst, 2 came at the start of down years, and 3 came at the start of up years for the market.

Still you could be forgiven if you are concerned that today portends a theme in the markets. For global investors, China is a critical piece of the growth puzzle. As the second-largest economy, China drives demand around the world in commodities, consumer goods and other sectors.

The government has been trying to increase growth through stimulus measures and it has moved aggressively to prop up the stock market with a series of policy actions. The latest economic data and the big drop in their stock markets cast doubts about whether those measures are working. We don’t know and we will only know in time, but if today is any indication we may be in for a boatload of volatility.

Two Fed chiefs came out today to say they’re not worried about China. Federal Reserve Bank presidents, Loretta Mester of Cleveland and John Williams of San Francisco, basically said a weakening economy in China had already been built into the outlook for 2016 by Fed officials. Mester said, “There’s going to be volatility in the markets, that’s kind of the nature of financial markets.” Williams said the Fed would have to continue with “significant monetary accommodation” to keep growth above 2%.

Saudi Arabia cut off diplomatic relations with Iran on Sunday, giving diplomats 48 hours to leave the country, after protesters on Saturday stormed and torched the Saudi Arabian Embassy in Tehran. The move was in response to Saudi Arabia’s execution of 47 prisoners, including a prominent Shiite cleric. Bahrain and Sudan joined Saudi Arabia in severing diplomatic relations with Iran. Bahrain is home to the US Navy’s 5th Fleet.

The United Arab Emirates, meanwhile, recalled its ambassador from Tehran. So this is breaking down along religious lines between Sunni and Shia, but you might also suspect the timing involves Iran’s re-emergence as a major player in oil production.

Meanwhile, the first oil tanker of freely traded American crude oil launched Thursday from the Port of Corpus Christi, marking the end of a long-standing U.S. ban put in place in the 1970s. ConocoPhillips and NuStar Energy loaded the tanker with crude pumped from Eagle Ford.

AAA is projecting that gas prices will stay lower in 2016, estimating an average cost of $2.25-$2.45 per gallon. In 2015, the average price per gallon was $2.40 (Americans saved $540 on average). AAA also forecast that the national average would stay steady or drop another $0.10 in the coming weeks, and would not go above $3/gallon this year. Oil prices moved higher in early trade but closed slightly lower for the day.

Economic news today shows weakness in the manufacturing sector. The ISM manufacturing index slipped to 48.2% last month from 48.6% in November. Readings under 50% indicate more companies are shrinking instead of expanding. The ISM index has posted sub-50% readings for two straight months for the first time since an economic recovery that began in July 2009. An interview with ISM chair Brad Holcomb has been posted on this site. Meanwhile, Markit’s US manufacturing PMI fell to a 3-year low.

The Commerce Department reports construction spending sank 0.4% in November to a seasonally adjusted annual rate of $1.12 trillion. The October increase, originally reported as 1.0%, was revised down to 0.3%. In November, spending was 10.5% higher compared to a year ago. Private construction was down 0.2% during the month, but 12.1% higher for the year.

As a side note, the Commerce Department is revising how it counts construction spending to include private residential improvement spending. That sounds innocuous, but the improvements category account for about one-third of private residential spending, or 13% of the overall total. In November, improvements amounted to a seasonally adjusted annual rate of $144 billion. And these revisions go back 10 years, so there could be adjustments to GDP numbers as well.

The Atlanta Federal Reserve cut its forecast for fourth-quarter growth for the fourth time in the past three weeks. The Atlanta’ Fed’s closely watched forecast model now suggests that gross domestic product grew a scant 0.7% from October through December. In mid-December, the Atlanta Fed was predicting a 2% increase in GDP. It’s since lowered its forecast after disappointing reports on manufacturing, exports, construction spending and consumer spending.

This Friday’s jobs report for December, the highlight of the economic data due in the first full week of January, is expected to show nonfarm payrolls expanded by about 205,000. Even with weakness seen during the summer, job gains in 2015 will top 2.5 million, making it the second-best calendar year for U.S. job growth in this millennium, after last year’s 3.1 million. The last time more jobs were created in a two-year period was at the height of the dot-com boom, in 1998-1999.

After a disappointing 2015 for stocks, it appears the upcoming earnings season will not provide relief. Once again weighed down by the energy and materials sectors, the S&P 500 is expected to see a decline in earnings of 4.7% from the year-ago period, according to estimates from FactSet.

The only sectors expected to see any gain in fourth-quarter earnings are telecom, financials, consumer discretionary and health care. If fourth quarter earnings decline, it will mark the first time the index has seen three consecutive quarters of year- over-year declines in earnings since the first 3 quarters of 2009. The ongoing hope is that this will be one of those stock-market-earnings recessions that are able to avoid US economic recessions.

Nokia has officially gained control of French rival Alcatel-Lucent through a €15.6 billion-euro all-share deal after the French stock market authority declared the offer successful. The first day as an operationally combined group will be January 14.

Shire is in advanced talks to acquire Baxalta for $46.50-$48 per share, or about $32 billion in cash and stock, excluding debt. Final details of the transaction are still being negotiated, but the two drug makers are likely to announce a deal this week. Baxalta would benefit from a lower tax rate if taken over by Shire, and the enlarged company would generate $20 billion in sales by 2020, with as many as 30 new drugs to launch over five years.

Meanwhile, Baxalta agreed to pay Symphogen A/S of Denmark as much as $1.6 billion for the rights to develop and sell a handful of experimental cancer products that work by harnessing the power of a patient’s own immune system.

The Justice Department and the Environmental Protection Agency have filed a civil lawsuit against Volkswagen, Porsche, and Audi alleging Europe’s largest automaker knowingly sold nearly 600,000 diesel vehicles with “illegal defeat devices,” which allowed the cars to cheat state and federal emissions tests.

The suit alleges violation of the Clean Air Act and could face up to $18 billion in fines. The Justice Department is also investigating VW for possible criminal conduct related to the devices; plus, as many as 12,000 VW, Audi and Porsche owners have signed onto a class action lawsuit.