Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Tuesday, August 18, 2015

A Slightly Older Mindset

Financial Review

A Slightly Older Mindset

DOW – 33 = 17,511
SPX – 5 = 2096
NAS – 32 = 5059
10 YR YLD + .05 = 2.20%
OIL + .51 = 42.39
GOLD + .10 = 1118.50
SILV – .45 = 14.97

When Chinese markets catch pneumonia, US markets sneeze. That seems to be the trend lately. And once again, Chinese markets were under the weather as the People’s Bank of China took fresh steps to offset capital outflows prompted by its weakened currency. China’s central bank placed $18 billion worth of seven-day reverse repos into the money market during the session – the largest single day injection in almost 19 months. The latest rout raises fresh concerns that the Chinese economy is in dire need of stimulus. Shanghai -6.1%; Shenzhen -6.6%.

Across the Atlantic, European stocks didn’t perform well either. The German DAX dropped 0.2% and the French CAC fell 0.3%. The devaluation in China probably does not have the dire repercussions some have suggested, but it does fit within the broader narrative of a slowing global economy, with less support from emerging markets. And that, in turn, would indicate rising market volatility. At its peak last week, the VIX Index, which measures volatility of the S&P 500 Index, was up 50% from the previous week’s low. There are bigger moves beneath the surface. During the recent earnings season, more than 5% of stocks in the S&P 500 had a move of three standard deviations or more, roughly double the percentage from a few years ago. Still, for now, volatility remains below long-term averages.

The Greek government appears likely to call a confidence vote in the next few days, casting a shadow over the country’s third bailout program. Although the majority of the Greek parliament backed the bailout deal last Friday, Prime Minister Alexis Tsipras had to rely on opposition parties’ support to get the reforms approved. As such, his position as leader would be in doubt if a confidence vote occurs. Meanwhile, Greece has agreed to sell to a German company the rights to operate 14 regional airports. The deal is the first in a wave of privatizations the government had until recently opposed but needs to make to qualify for bailout loans.

Housing starts edged up 0.2% last month to an annual rate of 1.21 million. That marks the highest level since October 2007 but still below the pre-recession peak of 2 million starts per year. Most of the new construction in July took place in the South. Construction tapered off in the Northeast and the West.

Meanwhile, building permits fell 16.3 percent in July to a 1.1 million-unit pace, that followed three straight months of hefty increases. Single-family building permits slipped 1.9 percent in July. Multi-family building permits tumbled 31.8 percent.

Since the housing market bottomed out in April 2009, construction on multi-unit projects has skyrocketed 466%. Work on single-family homes, which historically have accounted for the bulk of new housing, barely doubled over the same span. What’s more, the percentage of multi-unit buildings under construction has risen to a 29-year high of about 35%. Shortly before the onset of the last recession, they only accounted for about 20% of all new housing stock. The desire to rent can be seen through home-ownership rates collected by the U.S. Census Bureau. The percentage of Americans who owned their own homes at the end of the June fell to 63.5% — the lowest level since the government started to keep track in 1980.

Home Depot reported a better-than-expected rise in quarterly same-store sales. Net income rose about 9 percent; net sales rose 4.3 percent. The company also raised its full-year sales and profit forecast.

Walmart reported weaker-than-expected quarterly earnings and lowered its full-year forecast. Walmart said that reduced reimbursement rates from pharmacy benefit managers were hurting margins in its pharmacy business and cited an increase in “shrink,” an industry term for losses due to theft in the store. Profits have also been weighed down by a decision announced in February to invest $1 billion to lift workers’ pay, or as the company describes it, they are improving employee retention and improving customer service. Same store sales increased 1.5% in the last quarter. Walmart still claims more than 11% of all retail sales in the US.

TJX Cos, the owner of off-price retailers TJ Maxx and Marshalls, reported a better-than-expected rise in quarterly comparable store sales as more bargain-hungry shoppers visited its outlets.

A new survey from shows CFOs believe that in any given year 20% of companies intentionally misrepresent their earnings using discretion within GAAP. The magnitude of the typical misrepresentation is quite material — about 10 cents on every dollar. While most misrepresentation results in the overstatement of earnings, a full one-third of firms that are misrepresenting are intentionally lowballing their earnings.

Travel from the U.S. to Cuba has already increased 35% since the beginning of January, and the Obama administration is now working on a deal that would allow scheduled commercial flights by the end of 2015. Presently, Americans must take charter trips to Cuba, and their visit must fall into one of 12 authorized categories due to a congressional ban. The new move would loosen the terms of those categories, permitting direct commercial flight bookings between the two countries.

Federal regulators have granted Royal Dutch Shell the final permit it needed to drill in the Arctic off Alaska’s northwest coast. The permit was granted after the company brought in a vessel carrying a device needed to stop a potential well blowout. Shell has spent $2.1 billion on leases in the Arctic and up to $7B on exploration.

Petrobras is expected to face penalties of $1.6 billion or more as part of an investigation by U.S. authorities in a corporate corruption investigation. Petrobras’ settlement may still be a while away. The process is likely to take another 2-3 years.

The two explosions in the Chinese port of Tianjin last week could generate total insurance losses of $1.5 billion. Over 8,000 vehicles worth about $625M were destroyed in the blasts, including cars made by Volkswagen, Toyota, Renault, Hyundai and Mitsubishi, while damage is still being assessed in other sectors. Zurich Insurance, Allianz and other groups say they have already received insurance claims but could not provide an estimate of potential losses.

Petco is going public, againAccording to The Wall Street Journal, Petco has filed for an initial public offering nearly one decade after it was taken private. The offering is expected to raise approximately $100 million and give the company a $4 billion valuation. The company previously went public in 1994 and 2002.

Target said it has reached an agreement with Visa card issuers to reimburse up to $67 million in costs related to a data breach at the retailer in 2013. The breach during the holiday shopping season compromised at least 40 million credit cards and may have resulted in the theft of personal information from as many as 110 million people. The agreement comes three months after a proposed $19 million settlement between Target and Mastercard fell through. Financial institutions have sued Target, saying they have spent billions of dollars to replace compromised cards and beef up customer service operations because of the data breach.

Google is getting into the router business. The cylinder-shaped router, named OnHub, can be pre-ordered for $199. The router comes with in-built antennas that will scan the airwaves to spot the fastest connection. With the router, users will be able to prioritize a device so that they can get the fastest Internet speeds for data-heavy activities

California’s worsening drought will cause the state’s economy to lose as much as $2.74 billion and nearly 21,000 total jobs this year-and ripple effects of the 4-year-old drought will likely continue through at least 2017. The $2.74 billion figure reflects the cost to all economic sectors and when multiple effects are considered. According to a new report by the University of California, Davis Center for Watershed Sciences, also revealed that direct costs to the state’s agriculture economy will total $1.84 billion and 10,100 direct seasonal jobs. The 2015 drought will result in the fallowing of 542,000 irrigated acres, mostly in the state’s Central Valley. Total crop revenue losses are projected to reach $902 million this year, and the study estimates that total gross revenue losses from crops under a continued drought will increase to nearly $940 million by 2017. Additionally, drought-related losses for the state’s dairy industry are expected to reach $250 million this year and another $100 million for the livestock sector. It doesn’t look like the report includes the costs of fighting wildfires.

Necessity may be the mother of invention but invention may be the red-headed stepchild of funding. We know that the drought in the Southwest, and especially California, has been a severe problem, but apparently not enough to attract venture capital. From 2010 to 2014, venture firms invested $1.4 billion worldwide in 405 companies working in the area of water technology, that according to data from CleanTech Group i3. Last year, $281 million was invested globally in 66 water technology startups, up 19% from in 2013. By comparison, $20 billion was invested in 1,812 software companies in the US alone in 2014, according to the PriceWaterhouseCoopers MoneyTree Survey.

Each year about this time college students head to campus, and each year about this time we look at the passage of time. According to the Beloit College “Mindset List”, most of the kids heading off to college this year were born in 1997. That was the same year the movie “Titanic” was released, Dolly the Sheep was born, Princess Diana was killed in a car crash in Paris, and the first Harry Potter book was published. Incoming college freshmen believe that Wi-Fi is an “entitlement” and that email is the “new formal communication,” while texts and tweets are considered casual. They have never licked a stamp. There has always been Google and cell phones. “Smartphone shuffles” have always slowed down traffic between classes. Hybrid automobiles have always been mass produced. Surgeons have always used “super glue” in the operating room. “The Lion King” has always been on Broadway. Good luck to the class of 2019 and their teachers.

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