Morning in Arizona

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Rainbows over Canyonlands - Dave Stoker

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Monday, May 18, 2015

Milk and Cookies

Financial Review

Milk and Cookies

DOW + 26 = 18,298.99 (record)
SPX + 6 = 2129.20 (record)
NAS + 30 =  5078
10 YR YLD + .09 = 2.23%
OIL – .14 = 59.55
GOLD + 2.30 = 1226.80
SILV + .19 = 17.78

Record high close for the S&P 500 and the Dow Jones Industrial Average. The rationale behind these record highs is suspect. Last week’s economic news was disappointing, and the bad news moved the markets higher, mainly on the idea that the Fed will be slower to raise rates. Retail sales were weak, industrial production was flat and capacity utilization decreased.

Consumers aren’t spending what’s left over after lower oil prices, instead, they are increasing personal savings. A new survey from Princeton Research shows 19% saved the difference from the gas pump, 4% invested, and only 14% took the savings from lower gas prices and went out and spent it on discretionary items such as dining out or vacations; while 40% spent the savings on necessities such as rent and groceries.  Lower oil prices were supposed to provide an economic boost; instead, it was the windfall that wasn’t.

And now it is long gone. Gas prices rose another 22 cents over the past three weeks to $2.82 per gallon, according to the latest Lundberg survey. The cost of regular gasoline has risen 32 of the past 34 days. And ISIS has just city the city of Ramadi, the provincial capital of Iraq’s largest region, about 75 miles from Baghdad. And Baghdad’s actions before and after the setback are raising red flags about the strategy to fight ISIS. Violence in the Middle East puts a floor under oil prices; it also makes for some strange coalitions. The US and Iran and even Saudi Arabia are on one side fighting against ISIS, even as they are on opposite sides in Yemen. And despite it all, the global oil market remains oversupplied. Crude oil inventories remain plentiful and stand some 86 million barrels higher than a year ago. Gas prices are still lower than they have been for this date since 2009. In fact, they’re down nearly a full dollar from a year ago.

Trying to estimate the cost of energy is likely a fool’s errand. The International Monetary Fund today issued a report saying the fossil fuel industry is subsidized to the tune of $5.3 trillion per year, largely due to polluters not paying the costs imposed on governments by the burning of coal, oil and gas. These include the harm caused to local populations by air pollution as well as to people across the globe affected by the floods, droughts and storms being driven by climate change.

The IMF report said that ending subsidies for fossil fuels would cut global carbon emissions by 20%. That would be a giant step towards taming global warming, an issue on which the world has made little progress to date. Ending the subsidies would also cut the number of premature deaths from outdoor air pollution by 50% – about 1.6 million lives a year. Furthermore, the IMF said the resources freed by ending fossil fuel subsidies could be an economic “game-changer” for many countries, by driving economic growth and poverty reduction through greater investment in infrastructure, health and education and also by cutting taxes that restrict growth.

Homebuilder sentiment fell in May but still showed more builders view market conditions as favorable. The National Association of Home Builders Index fell to 54 from 56 the month before. Readings above 50 indicate more builders view market conditions as favorable than poor. NAHB economist David Crowe said: “Consumers are exhibiting caution, and want to be on more stable financial footing before purchasing a home.”

The retail sector jumps into the spotlight this week with heavyweights Target, Home Depot, Lowe’s and Wal-Mart scheduled to report Q1 earnings. As we near the end of the earnings season, the S&P 500 revenue numbers show a decline of 3.7%. The P/Es of the SPY and QQQ are 21.4 and 22.8, respectively. And the forward numbers are also high, coming in at 17.8 and 19.3.

The dollar climbed from a four-month low on speculation reports this week will bolster the case for a Fed interest-rate increase. At a speech in Sweden this morning, Fed Bank of Chicago President Charles Evans repeated his call to hold interest rates near zero until early 2016. Evans, who votes on monetary policy this year, said borrowing costs should rise gradually thereafter because inflation is still well below the Fed’s goal.

Ann Inc. jumped 20 percent after Ascena Retail Group agreed to buy the women’s apparel retailer for about $2.2 billion. Altera has reportedly resumed talks with Intel about a potential buyout. Endo International has agreed to buy Par Pharmaceutical Holdings in a deal valued at $8.05 billion.

A U.S. appeals court reversed part of the $930 million verdict that Apple won in 2012 against Samsung. The Court upheld the patent infringement violations found by the jury. But the $382 million awarded for trade dress dilution will have to be reconsidered by the lower court. Trade dress is a legal term for a trademark on the way a product is packaged or presented. That wasn’t the reason Apple was leading the markets again today. Carl Icahn sent a new letter to Apple CEO Tim Cook. Icahn wrote: “Apple is poised to enter and in our view dominate two new categories (the television next year and the automobile by 2020) with a combined addressable market of $2.2 trillion.” He went on to write that Apple is grossly undervalued and should be worth $240 a share, not the current $130.19.

MasterCard is preparing for an antitrust complaint from European Union regulators probing card-payment fees. EU antitrust regulators have targeted swipe fees on credit-and debit-cards for more than a decade, warning that the way the charges are collectively agreed on is anti-competitive. Retailers have campaigned for years against interchange fees, saying that they push up the final costs of goods and services, and amount to a hidden charge on consumers. Card companies insist that the fees ensure that retailers make a fair contribution to the underlying costs of electronic payment systems. The EU has passed a law that would cap interchange fees on card payments and cut costs on such card transactions by $6.8 billion per year.

U.S. airlines expect to carry a record 222 million passengers this summer, up 4.5% from last year, Airlines for America says. The companies are increasing seating 4.6% to cope with the demand, which the trade group says is being boosted by improved employment and consumer sentiment. In Q1, 10 listed U.S. passenger airlines grew net profit 1.1% to $3.1B, helped by a 3.1% increase in revenues as the number of travelers rose 3.9%.

Gucci, Yves Saint Laurent and other luxury brands have sued Alibaba in Manhattan, alleging that the Chinese e-commerce giant has knowingly allowed the sale of counterfeit goods by merchants using its marketplaces. The brands are seeking a court order that would block the sale of the products along with damages that could include $2 per counterfeit item.

The art market hit a new milestone last week, with a record $2.7 billion sales frenzy and a single Picasso selling for $179.4 million, the highest price paid for any artwork at auction. And it seems especially pricey when you consider that you can get a cheap knock-off on Alibaba for a couple of bucks.

And apparently there is a correlation between record art sales and the stock market. According to a research note from Sundial Capital Research, finds: “previous bouts of expensive art sales have indicated over-confident conditions in the stock market as well. There is broad overlap between the markets, now more than ever. Wealth concentration is near an all-time high, and with stocks doing so well, it has helped to fuel massive confidence in other ‘greater fool’ markets like art. Like any trend in an unhinged market, it’s next to impossible to predict when the confidence will peak. Based on previous peaks, it could (should) be any time. The market is relatively isolated and a plateau in art prices wouldn’t have much effect on broader assets, though it would likely be coincident with a plateau in stock and bond markets.”

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