Financial Review

Still Too Hot

Sinclair Noe — June 21, 2017

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DOW – 57 = 21,410
SPX – 1 = 2435
NAS + 45 = 6233
RUT – 3 = 1399
10 Y + .01 = 2.16%
OIL – 1.06 = 42.45
GOLD + 3.70 = 1247.30
BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

The Energy Information Administration reports American crude stockpiles fell by 2.45 million barrels last week and gasoline supplies slid by 577,999 barrels. Meanwhile, oil production rose to 9.35 million barrels a day, the highest level in almost two years.

The report did nothing to sway oil traders from their bearish positions. Brent crude dropped below $45 for the first time in 2017.  West Texas Intermediate dropped 1.06 to 42.45 a barrel. Potentially bullish factors failed to lift prices, including Tropical Storm Cindy halting service at a major oil terminal in the Gulf of Mexico, a shake-up in the Saudi royal family, and Iran’s Oil Minister saying that OPEC may decide to make deeper cuts.

That sent energy shares in the S&P 500 Index to the lowest level in two months. Chipmakers helped lift tech stocks. Healthcare and Biotech shares helped lift the Nasdaq to positive territory. The Nasdaq Biotechnology Index is up 8% this week.

A draft of an executive order on drug prices appears to give the pharmaceutical industry much of what it has asked for — and no guarantee that costs to consumers will drop. The four-page document, obtained by the New York Times, contains several proposals that have long been championed by the industry, including strengthening drug makers’ monopoly power overseas and scaling back a federal program that requires pharmaceutical companies to give discounts to hospitals and clinics that serve low-income patients.

The proposed order does little to specifically call out the drug industry and instead focuses on rolling back regulations.

Senate Republicans have been working for weeks behind closed doors on legislation aimed at repealing and replacing major portions of the Affordable Care Act. Tomorrow, they are expected to unveil their plan. The Republican-controlled House of Representatives narrowly approved its version of repeal last month. An estimated 23 million people could lose their healthcare under the House plan, according to the non-partisan Congressional Budget Office.

The Senate proposal cuts off Medicaid expansion more gradually than the House bill, but would enact deeper long-term cuts to the health-care program for low-income Americans. Senate Majority Leader Mitch McConnell said on Tuesday the Senate healthcare bill would be different from the House version, but he did not elaborate.

Given the opposition of all Senate Democrats to repealing Obamacare, Republican leaders will need the support of at least 50 of the chamber’s 52 Republicans to ensure passage. The bill will be brought to the Senate floor once the CBO has assessed its cost and impact, likely next week. Even if the Senate measure does pass the upper chamber, it will still have to pass muster with the more conservative House before any legislation could be enacted.

A Roper Center analysis shows the proposal with just 29 percent support, making it the most unpopular piece of legislation Congress has considered in decades. There is no state in the union where a majority of voters support the bill.

Meanwhile, a new report, released by the Agency for Healthcare Research and Quality (AHRQ), says the coast-to-coast opioid epidemic is swamping hospitals, showing 1.27 million emergency room visits or inpatient stays for opioid-related issues in a single year.

The report puts Maryland at the very top of the national list for inpatient care. The state, already struggling with overdoses from heroin and prescription opioids, has seen the spread of the synthetic opioid fentanyl, which can be mixed with heroin or cocaine and is extraordinarily powerful. Opioid-related deaths in Maryland had nearly quadrupled since 2010, and deaths from fentanyl had increased 38-fold in the past decade.

Baltimore City saw 694 deaths from drug and alcohol-related overdoses in 2016 — nearly two a day, and a big spike from 2015, when 393 people died from overdoses. Drug overdoses, which range from prescription painkillers to heroin and fentanyl, cause most of the fatal overdoses. In 2015, opioid overdoses killed 33,039 Americans, according to data that the Centers for Disease Control and Prevention.

The sharpest increase in hospitalization and emergency room treatment for opioids was among people ages 25 to 44. The new report shows that women are now as likely as men to be admitted to a hospital for inpatient treatment for opioid-related problems. The report identifies big increases in hospitalizations among people older than 65, but those cases predominantly result from reactions to prescription medication, rather than from overdoses or the use of heroin or other illegal drugs.

The National Association of Realtors reports  existing home sales were up 1.1% in May, at a seasonally adjusted annual 5.62 million rate.  April’s sales stood 2.7% higher than a year ago, and marked the third-highest selling pace of the past year. The median number of days a property spent on the market dropped to a fresh low of 27 days.

There were 1.96 million homes for sale at the end of the month, 8.4% lower than in the same period a year ago. Lower supply amid sturdy demand nudged prices higher again. The median sales price in May was $252,800, a new all-time high and 5.8% higher than a year ago. May marked the 63rd straight month of yearly price gains.

The Realtors called the pace of price appreciation “unsustainable” and noted that “some would-be buyers are having to delay or postpone their home search” because of low supply.

Confidence and business activity have climbed since the election. The economy seems to be muddling along. This would typically be good for banks, as demand for loans should be higher. However, bank lending has fallen significantly since last year. Total bank loans have grown just 4.6% since February 2016, the weakest showing since 2014. Business loans rose 3.9%—the slowest growth rate in nearly six years—and were the worst-performing segment.

The main reason for the tepid economic growth over the last eight years has been a lack of business investment. Many thought improved consumer confidence and business activity were signs that this trend had reversed. So far, it appears the opposite has happened.

America leads the world when it comes to access to higher education. But when it comes to health, environmental protection, and fighting discrimination, it trails many other developed countries. The Social Progress Index released this week is compiled from social and environmental data that come as close as possible to revealing how people live. America came in at number 18.

The Trump administration made its final plea to the U.S. Supreme Court to allow its proposed ban on travelers from six Muslim-majority countries to go into effect as the justices weigh how to handle the hotly contested dispute. The court papers filed today complete the briefing on the government’s emergency application asking the justices to block lower court injunctions in favor of challengers to the ban.

Lawyers for the state of Hawaii and individual plaintiffs in Maryland urged the high court not to allow the ban go into effect. The Supreme Court could now act at any time.

Travis Kalanick has resigned from his job leading Uber, giving up on his effort to hold onto power as self-inflicted scandals enveloped him and the company he co-founded. Pressure from investors, who have poured more than $15 billion into the company, ultimately did what the board could, or would, not: It convinced the 40-year-old chief executive to step aside. Uber is now in need of a new CEO.

The world’s largest sportswear maker and the world’s largest online retailer might finally work together. According to analysts at Goldman Sachs, Nike will start selling directly on Amazon.com. Nike’s shoes, apparel, and accessories are already sold on Amazon, but from third-party sellers and unlicensed dealers that purchased the product wholesale from Nike.

Selling directly on the site eliminates a layer between Nike and the consumer, allowing the company to better control pricing and presentation. It’s not quite direct to consumer, but it’s a lot closer. Goldman sees it as a deal worth potentially up to $500 million of revenue yearly — an additional 1% of global sales for the Nike.

Nike’s biggest competitors — Adidas and Under Armour — already sell directly on Amazon, and they both have fancy splash pages that highlight the newest and best product the companies offer. Dick’s Sporting Goods and Foot Locker, some of Nike’s biggest retailers, were both down on the news of the increasing competition. Dick’s neared an 18-month low, while Foot Locker fell below a three-year-low.

Sears Canada is preparing to seek court protection against creditors in a move that will likely lead to a liquidation, according to reports by Bloomberg and Reuters. The company was spun off in 2012 from Sears Holdings, which owns Sears’ US business. Sears Holdings still holds 12% of the Canadian business’s stock.

Eddie Lampert, the CEO of Sears Holdings, owns 45% of Sears Canada’s shares. Sears Canada said earlier this month that it had “significant doubt” about its ability to stay in business, and was looking at a possible restructuring or sale.

UPS said today that, for the first time, it will assess a surcharge on peak holiday season deliveries in the US to recoup the higher costs that come with managing the peak surge.

Wal-Mart is telling some technology companies that if they want its business, they can’t run applications for the retailer on Amazon’s cloud-computing service, Amazon Web Services.

Bruno Iksil, the former JPMorgan Chase trader at the center of the “London Whale” trading scandal, has accused the bank’s Chief Executive Jamie Dimon of laying the ground for the $6.2 billion loss. In an account on his website, Iksil, who traded credit derivatives for JPMorgan in London, also blamed senior executives at the bank.

FINANCIAL REVIEW

Strange Bedfellows

Sinclair Noe — December 10, 2014

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

DOW – 268 = 17,533
SPX – 33 = 2026
NAS – 82 = 4684
10 YR YLD – .05 = 2.17%
OIL – 2.64 = 61.18
GOLD – 6.30 = 1227.10
SILV – -.05 = 17.16

Well, that was ugly. This is why we enjoy milk and cookies while we can. We’ve seen a lot of record highs in the major indices this year, but they remain rare birds. When we fall from record highs the drop can be fast, as it was today. The worst day since the start of October; wiping out gains from the past month.

The month of December has brought positive returns to the Dow every single year for the last five consecutive years. As you might imagine, there’s a lot of pressure to make it six. And it might still happen, despite the past couple of days. Still it’s a good reminder to stay awake through the holidays, keep your stop loss in place, however you employ your stop loss; and if you don’t have a stop loss it is time to wake up and smell the coffee.

Beyond that, it was just an ugly day, with decliners beating advancing issues 4 to 1. All 10 S&P industry sectors were down, with the energy sector down 3.3% as oil prices continue their slide. Brent crude dropped to $63.56, a 5 year low; and West Texas Intermediate dropping down to a critical area of support just above $60. If prices drop below $60 a barrel, the next level of support is around $50, and then further support at $33 from back in January 2009, at the depths of the financial crisis. Oil is cratering; it hasn’t done the full belly flop to $33 but this has been a wild drop.

The latest drop in oil comes as the US Energy Information Administration issued its weekly status report, showing weekly crude stocks were up 1.45 million barrels, against expectations for stocks to drop by 2.2 million barrels. In short, there was an increase in stockpiled crude inventory last week. This morning, Reuters reported that the falling oil prices have started to affect US domestic production, with the US Energy Information Administration (EIA) cutting its forecasted growth by 100,000 barrels per day, a move linked to generally weaker oil demand.

Also, in a report released today, OPEC also reduced its global demand forecast to 28.9 million barrels per day for 2015, the lowest since 2002, and about 1 million barrels a day less than current production. Increased US production and decreased demand have been cited as the culprits for crude’s rapid decline over the last several months. Now there are a couple of reasons for decreased demand; first, the technology has improved and we now have more fuel efficiency; conservation works (and a side note: Bishops from every continent have called upon the 1.2 billion Catholics worldwide to support renewable energy at a climate change conference in Lima, Peru. “As the church, we see and feel an obligation for us to protect creation and to challenge the misuse of nature.” The other reason demand is down is that the global economy is slowing and there is just less activity.

Again, think back to late 2008 and early 2009 when the global financial system was on the verge of meltdown. Today’s oil prices force us to question whether something is not quite right in the global financial markets. And if we have global economic problems, then that would imply that some things in the financial market have been mispriced. Start with the bond market. The Treasury yield curve has been flattening, meaning short-term rates have been rising, while longer-term rates have been falling. If oil were to hit $40 a barrel – and I’m not saying it will and we still have an important level of support at $60 – but if oil hit $40, that would most likely imply a 10-year Treasury with a yield of around 1%, especially in light of global markets where Greece is crumbling, the Eurozone is stagnating, China is slowing, and Japan is frozen in place. Consider that Germany’s two-year bonds have been negative, meaning that if you buy a German 2 year, you pay Germany to park your money.

Meanwhile, as stocks have tumbled and oil has cratered, volatility has picked up. The VIX is up almost 50% since Friday, rising from around 11 to almost 19 in less than 4 sessions. The VIX was up to around 26 in October, when we nearly had a market correction, but for much of the year, the VIX was almost asleep; back in the summer, a big story was how low the VIX was and how volatility had completely disappeared. And while markets were shook up in the fall, the VIX has still remained historically low.

There has been volatility at the gas pumps as well. The lower prices have been a windfall for drivers, with estimates that it puts billions of dollars back into our wallets. Goldman Sachs had estimated the savings at $75 billion; now they say it will be closer to $125 billion. Goldman analysts wrote a research report stating: “History suggests that higher gasoline consumption should show up quickly, while the boost to other categories of spending may take a bit longer to materialize,” and that should lift real gross domestic growth by up to half of a percentage point in 2015. And think about it, when oil prices go up, we have seen that it can throw the economy into a recession, but when oil prices drop it inevitably leads to economic growth.

So, heading into 2015, we have a boost from lower oil prices, then let’s make a comparison to same time last year. In 2013, we were just coming off a government shutdown that cost somewhere around $50 or $60 billion and by some estimates lopped off almost a full percentage point of GDP growth. And then there was the sequester, which lopped off another half a percentage point of GDP growth, more or less. And then there was the polar vortex, all that lousy weather that hit much of the country to start 2014. By comparison, the economy is looking pretty good right now.

The Treasury Department reported this morning that the budget deficit for November shrank 58% compared with a year ago. The November shortfall was $57 billion, compared with a deficit of $135 billion in November 2013. And the November deficit would have been $92 billion, or 8% less than the November 2013 shortfall, if not for calendar quirks. For instance, $41 billion in payments of veterans’, active military and other benefits that would usually have been made in November were sent in October since Nov. 1 was a Saturday. November is the second month of the 2015 fiscal year. For the fiscal year to date, the deficit is $179 billion, 21% lower than in the first two months of fiscal 2014. The shortfall for fiscal 2014 was $483 billion. Last year’s deficit was 2.8% of gross domestic product—the lowest by that measure since 2007.

And late last night, House and Senate lawmakers reached an agreement on a nearly $1.1 trillion bill to fund most of the government through September and avert a shutdown. It still faces an actual vote, which could be messy, because there are a bunch of things that are included in the bill that aren’t really part of the budget. And one thing not many people have heard about that may be a real problem.

If you have a pension and if House and Senate lawmakers approve the $1.1 trillion bill to fund most of the government through September and avert a shutdown, there is a provision in the spending bill would allow the promised pension benefits of up to 1.5 million workers and retirees to be cut. It would affect the pooled pension plans – called multiemployer plans – of mostly union workers across a bunch of companies, where it looks like the plans won’t be able to cover full benefits in coming decades. This would not affect all private pensions. The 31 million people in so-called single employer plans wouldn’t be affected by the bill. The bigger fear is about the 10 million workers and retirees in pooled plans. Ten to 15% of those workers are in plans that may need to make cuts. And the cuts could be drastic. For example, a retiree with a pension of $24,000 per year and 25 years of service could see his or her annual benefit cut in half; although not all troubled pensions would need to be cut that deeply.

Again, this doesn’t affect everybody with a pension. Nothing in the proposed bill affects pooled plans that are in good financial shape, or any of the plans offered by single employers. Still, I’m thinking this one will tick off a bunch of retirees, especially because this is not something that has been debated openly, but just seems tacked on because it can be tacked on.

But wait there’s more! It’s not just retirees, there is another little provision tacked onto the spending bill that would cut $303 million or 1.3% of the $22.5 billion for the Pell grant program. This is the grant program for low income college students. Not a huge part of the overall budget, but the interesting thing is where the money will go. Part of it will be used to fund student loan debt servicers. So, they cut the grants and spend the money for debt collectors on the loans.

And then there is the partisan bickering over the spending bill. Some Democrats are opposed to a Republican-backed provision in the $1.1 trillion measure to ease regulations imposed on big banks in the wake of the 2008 economic meltdown. They also opposed a separate section that eases limits on campaign contributions to political parties. Some Republicans are upset that the measure left the administration’s controversial new immigration policy unchallenged, at least until the end of February.

It seems there is something for everyone to hate. The AFL-CIO and the Heritage Foundation have both called for the spending bill to be defeated, proving that politics makes strange bedfellows. And maybe, just maybe setting the stage for the 113th Congress to make one more mess of things before they convene.