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Thursday, May 12, 2016

All the Ships at Sea

All the Ships at Sea

Financial Review by Sinclair Noe for 05-12-2016

DOW + 9 = 17,720
SPX – 0.35 = 2064
NAS – 23 = 4737
10 Y + .02 = 1.76%
OIL + .16 = 46.39
GOLD – 13.50 = 1264.20

Stocks were up, then down and then finished fairly flat. The S&P 500 closed a touch lower, as declines in health care, tech and industrials offset gains in most sectors led by telecommunications. The Dow held onto a minor gain as Boeing moved higher and Apple briefly fell under $90, hitting a fresh 52-week intraday low. After a big up day followed by a big down day this week, the market couldn’t figure out which way to go.

The number of Americans who applied for unemployment benefits in early May jumped for a third week in a row to 294,000, hitting a 14-month high.  There may be some statistical noise in the data as New York City Schools were off for spring break, and many non-teacher school employees (bus drivers, cafeteria workers, etc.) are somehow permitted to file for unemployment when schools are closed for a week or two. Initial claims have held below the key 300,000 level for 62 weeks, the longest streak since 1973. The average of new claims over the past four weeks shot up by more than 10,000 to 268,250.

Brazil’s Senate voted 55-22 to suspend President Dilma Rousseff from office and begin an impeachment trial. Rousseff is charged with illegally doctoring fiscal accounts to mask the size of the budget deficit. During the trial – which could last for up to six months – Vice President Michel Temer will assume the office. Today, Temer named a new cabinet, including a new finance minister, Henrique Meirelles, a former central bank president.

Resisting calls to resign, Rousseff has described the effort to remove her as a coup, but given the overwhelming majority of last night’s vote, analysts give her very little chance of winning the trial and being able to serve her final two-plus years in office. Whether Rousseff ever returns to power, Brazil faces big challenges, not the least is cleaning up corruption, and there are is a chance that the new acting president might be even more corrupt than the suspended president. Meet the new boss, same as the old boss.

Oil prices hit a six-month high, supported by data from the International Energy Agency showing tightening supply and a drop in US crude inventories. There have been disruptions in the oil supply due to wildfires in Canada and bombings in Nigeria. And while it is easy to think that the recent rally in oil is based on a supply-demand equation, it might not be so simple.

Since their February lows, WTI crude has rallied by about 75%; supply hasn’t been disrupted that much. In fact, the American Petroleum Institute report an inventory build of 3.4 million barrels in the past week, and inventories at Cushing, Oklahoma are at record highs; they are running out of room to store more.

To get around the lack of storage space, some commodity trading companies are now storing oil in tankers at sea, just floating around, keeping their product from market until prices rise. By some estimates, at least 30% of Brent crude inventory is in offshore storage. It’s one thing if a commodity trader holds oil in tankers at sea because there are no storage tanks on land; it is another matter if they are trying to manipulate prices. Typically, speculative schemes have a way of coming undone.

The oil rally has been great news for oil producers and investors, but the danger now is that prices rise so much that they actually prevent the market from rebalancing. Higher prices could postpone cuts in US shale output. And, if prices go even higher, they could possibly even inspire more production. The oil market has been extremely volatile but eventually the ships at sea will have to find safe harbor.

The cost the US paid for imported goods rose 0.3% in April, largely because of higher oil prices. Aside from oil, import prices for food and industrial supplies also rose and the cost of foreign autos edged higher. Consumer goods were somewhat cheaper, though. Stripping out fuel, import prices increased 0.1% to mark the first advance since July 2014. American exporters also saw the biggest increase in prices since May 2015. Export prices rose 0.5%. Over the past year, export prices are down 5% and import prices are 5.7% lower.

RealtyTrac reports the number of HELOCs, or home equity line of credit, rose 10% in the first quarter. But their size also grew: the dollar value was 34% higher than in the prior quarter, and 45% higher compared to a year ago. Meanwhile, purchase loan originations dropped 14%. People tend to stay in their homes rather than move, but at least some are finding they can tap equity.

Shares of Monsanto rallied on new reports that Bayer and BASF were interested in acquiring the world’s largest seed producer. Monsanto has long argued it needs to buy or team up with a large crop chemicals maker as farmers increasingly look for one-stop shopping for seeds, pesticides and digital services such as satellite-guided spraying and harvesting.

Nissan is buying a big stake in Mitsubishi. Nissan has agreed to buy a 34% stake in embattled automaker Mitsubishi for $2.2 billion. The deal will help Mitsubishi “regain trust” as it deals with its third scandal in two decades. In April, Mitsubishi admitted it overstated the fuel economy of at least four of its models; yesterday they admitted they had cheated on fuel economy on all models sold in Japan. With more than a third of the shares, Nissan will be able to take control under Japanese shareholder rules.

While last year set a record for the amount of money spent on corporate mergers — $4.7 trillion — this year is so far setting a very different record: the dollar amount of deals that have come undone. More than $400 billion worth of corporate mergers have been withdrawn in the United States since the beginning of January – almost three times the previous record for the same period. On Tuesday, the Staples and Office Depot called off their $6.3 billion deal. A week earlier, the $35 billion Baker Hughes-Halliburton deal collapsed. And last month Pfizer’s proposed $152 billion merger with Allergan fell apart — all canceled because regulators raised concerns.

The Bank of England lowers its growth forecast. The central bank held its key interest rate at 0.50% for an 86th straight month. In the accompanying Inflation Report, the BOE lowered its second quarter growth estimate to 0.3% from 0.5%, and its 2016 GDP forecast to 2% from 2.2%.

Nordstrom‘s stock tanked after hours when the retailer posted disappointing quarterly earnings. It also slashed its earnings outlook for the rest of the year. The Nordstrom’s report followed a slew of disappointing reports from competitors Macy’s and Kohl’s.

Rival Dillard’s also fell after reporting earnings per share of $2.17 on revenues of $1.54 billion. That compares to estimates of $2.52 per share on revenues of $1.56 billion.

Shares of Shake Shack spiked in extended trading after the fast-casual chain reported better than expected earnings and sales. The company saw a nearly 10 percent increase in sales at existing stores.

Semiconductor company Nvidia saw shares pop after its earnings surprised to the upside. Nvidia specializes in graphics-processing units.

The FTC might be reopening its antitrust case against Google. Senior antitrust officials are collecting information, and are considering reopening their case against Google. The original case was closed in 2013 without finding any wrongdoing. The report may not mean a full new investigation; a majority of commissioners would have to vote to go forward in a closed-door session. Currently, Google is fighting antitrust claims against its Android operating system in Europe.

Google already maps the world; next up, they want to digitally map the interiors of buildings in 3-D down to a resolution of a few inches, and make money in virtual reality along the way, through a project named Tango.  Tango packs cameras and depth sensors along with other software into Android smartphones and tablets. Fire up the application and point the device at a space and it sucks in images and depth information to re-create the environment on the screen and locates itself within that new digital realm.

Linn Energy and LinnCo filed for bankruptcy and say they have reached agreement with creditors to support a new plan of reorganization to include a new $2.2 billion reserve-based and term loan credit facility. Linn expects to maintain sufficient liquidity to support the business during the restructuring process, so it does not expect to seek debtor-in-possession financing.

The Bee Informed Partnership released its annual report on total losses of managed honeybees across the country. The survey asked beekeepers about bee losses between April 2015 and April 2016; the results are bad; US beekeepers lost 44 percent of their colonies in that timeframe. Crops like almonds, cherries, and blueberries are heavily dependent on honeybees, and the pollination services the insects provide come to $10 to $15 billion in total per year. The value of pollination is even more valuable.

A variety of factors are likely contributing to losses overall. Scientists think pesticides could be playing a role in these bee losses but that’s just a theory. Poor nutrition may also be part of the problem; in some regions, there aren’t as many flower-rich meadows as there used to be.  The varroa mite is a tiny parasite that’s been ravaging bee colonies over the last several years. One theory is that pesticides and poor nutrition leave the bees susceptible to parasites.

This summer, if all goes according to plan, the second reactor at Watts Bar Nuclear Power Plant will begin supplying power to the US electrical grid. Construction on the reactor in Spring City, Tennessee, has proceeded in fits and starts since the project began in 1973. It will be the first new nuclear reactor to come online in the US since the first Watts Bar reactor was completed 20 years ago.

And there might be more nuclear plants in the future. The state of Arizona has approached the city of Sedona and the property owners of the Sedona Cultural Park on the construction of a small nuclear power plant at the site. The Sedona Red Rock Verde Valley Nuclear Generating Station would consist of one reactor. If approved, the plant would take three to four years to construct, and cost roughly $8 billion.

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