Financial Review

Pushed Out

Sinclair Noe — August 1, 2016

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DOW – 27 = 18,404
SPX – 2 = 2170
NAS + 22 = 5184
10 Y + .04 = 1.50%
OIL – 1.58 = 40.02
GOLD + 2.00 = 1353.40

Chances of a rate cut are being pushed out.  New York Fed President William Dudley declared, describing Friday’s GDP growth figure of 1.2% as “sluggish.” Although he said it was “premature” to rule out monetary policy tightening in 2016, he added that negative shocks were more likely than positive ones due to the unknown fallout from Brexit, a strong dollar and because it was safer to delay a move with rates so low.

Federal Reserve Bank of Dallas President Robert Kaplan said a rate increase at the next policy meeting in September is still possible, but the markets just aren’t buying it. Following Friday’s disappointing GDP data, fed fund futures suggest there’s a 35% probability that the next Federal Reserve interest-rate hike will happen in December. That’s down from the 49% probability that markets were pricing in before last week’s Fed meeting.

You have to wonder what some of these Fed policymakers are looking at; the economy is not very strong; it isn’t falling apart – sluggish might be the way to describe it; corporate earnings have been declining for 5 consecutive quarters – a trend that is considered and earnings recession and rarely ends well; especially considering that stock prices, near records, are not cheap.

Sometimes it feels like the only thing keeping stocks propped up is low rates. Bonds have risen sharply in value, and their yields, which move in the opposite direction, have plummeted. That has made stock prices look cheap and dividends generous. The average dividend for the Standard & Poor’s 500-stock index is about 2.1 percent – much higher than the yield on a 10-year Treasury note. Many investors have moved to stocks in search of a better deal.

Another factor, the strong dollar, has made stock sectors that are fairly impervious to exchange-rate shifts especially attractive. When foreign earnings in, say, euros or pounds translate into fewer dollars, American stocks with predominantly domestic revenue streams usually benefit. That’s why many American utility and phone company stocks, which both pay high dividends, have been soaring – up more than 20% year to date.

The 10-year Treasury note, the benchmark, is trading near historical low rates; the average yield on the 10-year note since 1965 has been 6% – now it trades around 1.5%. Fed policymakers are saying they are still considering rate hikes but the markets are telling a different story. More than $13 trillion in government bonds around the world carry negative yields; you lose money on those bonds.

And so US Treasuries look good, even at 1.5%, but these low rates won’t last forever, and as rates go up, bond prices go down. And stock valuations at these levels only make sense in a low interest rate environment; if rates rise, stock prices could fall fast. It might take a while, but this is setting up for a nasty turn at some point. And that’s why we keep a close eye on the Fed.

U.S. construction spending fell for a third straight month in June with spending on nonresidential construction dropping by the largest amount in six months. Construction spending fell 0.6 percent in June following declines of 0.1 percent in May and 2.9 percent in April. Nonresidential construction declined 1.3 percent, the biggest setback since December, while residential activity was unchanged in June. Spending on government projects fell 0.6 percent, the fourth straight decline, with both federal and state and local construction activity down.

The Institute for Supply Management (ISM) said its index of national factory activity slipped 0.6 percentage point to a reading of 52.6 last month. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy. Manufacturing remains constrained by the strength of the dollar and an oil price plunge, which have hurt exports and undercut business spending.

Although the ISM index has remained above expansion territory for five consecutive months, hard data on manufacturing has been generally weak and business spending has been soft. Last month, manufacturers reported declines in new orders, export orders and order backlogs. Factory employment also fell, though production increased.

Oil fell below $40 a barrel in intraday trading, after its biggest monthly decline in a year as U.S. producers increased drilling and crude and fuel stockpiles remained at the highest seasonal level in at least two decades. Drillers boosted the number of active rigs for a fifth week, the longest run of gains since last August, according to data from Baker Hughes Inc. Gasoline demand usually peaks during the summer months.

Saudi Arabia cut prices to Asian customers as the country continues to fight for market share. The persistence of the supply overhang is upsetting industry expectations, with producers including BP, Royal Dutch Shell and Exxon Mobil reporting second-quarter earnings last week that were worse than estimated.

The national average 30-year fixed home mortgage rate in the U.S. fell to 3.36 percent, matching the record low first reached in December 2012, according to Bankrate.com. Would-be home-buyers and homeowners looking to refinance existing mortgages at lower rates have benefited from a drop in U.S. Treasury yields since U.K. voters decided in June to leave the European Union. A comparable Freddie Mac mortgage gauge watched by the industry is near a record low, at 3.48 percent.

Verizon Communications has entered an agreement to acquire Fleetmatics Group in a deal valued at $2.4 billion. Fleetmatics – based in Ireland – is a mobile workforce solutions company offering businesses the software and means to track and analyze data from their vehicles and, or drivers. The deal, which Verizon expects to close in the fourth quarter, will see the mobile, cable and internet company pay $60 per share in cash, which represents a 40% premium to Friday’s closing price.

SolarCity board members approved a $2.6 billion buyout from Elon Musk’s Tesla Motors in the solar industry’s biggest deal to date. Tesla agreed to pay $25.37 a share in stock for the largest U.S. rooftop solar company. The agreement allows SolarCity to solicit competing takeover offers through Sept. 14, the companies said. The vote will now go to Tesla and SolarCity shareholders. Tesla’s offer represents about half of SolarCity’s value a year ago. Both companies have been burning through cash but they claim they can achieve positive cash flow later this year. We’ll see.

Didi Chuxing is buying Uber China. China’s largest ride-hailing service is buying Uber China for $35 billion. The terms of the deal say Didi will invest $1 billion in Uber global at a valuation of $68 billion and Uber China’s investors will own 20% of the merged Chinese company. Uber burnt about $2 billion to date in China in order to catch up with Didi, which had a two-year head start. As of two months ago, it was still much smaller when measured for daily completed rides.

Uber is currently in over 60 Chinese cities, while Didi is in more than 300. So, Uber is raising the white flag in China. It probably didn’t hurt that Didi had partnered with Apple and Alibaba, a couple of tech powerhouses. Side note: Didi in Chinese means little orange, which is their corporate symbol. What is it about tech companies named after fruit?

A federal judge has thrown out a verdict requiring Apple to pay VirnetX Holding Corp $625 million for infringing four patents relating to Internet security technology, causing VirnetX’s share price to plunge 44% this morning. The judge said it was unfair to Apple that two VirnetX lawsuits had been combined into a single trial. He ordered that both cases be retried separately, with the first trial beginning on Sept. 26.

GlaxoSmithKline is teaming up with Alphabet’s Verily Life Sciences unit to develop bio-electronic medicines, or treatments that use miniature electronic devices to modify how impulses are transmitted around the nervous system. The pair will spend up to $700 million over seven years on the venture, called Galvani Bioelectronics, provided they succeed in hitting various milestones along the way.

Pfizer has acquired privately held gene therapy developer Bamboo Therapeutics in a deal worth up to $645 million to boost its presence in the treatment of rare diseases. Research into gene therapy, which aims to insert corrective genes into malfunctioning cells, goes back a quarter of a century but the field has experienced multiple setbacks and been plagued by safety concerns.

However, the discovery of better ways to carry replacement genes into cells is building optimism. The U.S. Food and Drug Administration has yet to approve any gene therapies but Europe has approved two – a treatment from GlaxoSmithKline for a rare immune disorder in babies and one from uniQure for a serious blood condition.

U.S. authorities have issued subpoenas to Goldman Sachs for documents related to 1MDB, the Malaysian investment fund at the center of an international corruption scandal. Goldman received the orders earlier this year from the DOJ and SEC, which also want to interview current and former bank employees in connection with the inquiries.

Brazil’s interim President Michel Temer has expressed confidence in Rio de Janeiro’s ability to pull off a successful Olympics (beginning this Friday). Around 85,000 security personnel are expected to be deployed during the Games, the largest contingent for a mega event, to guard the half a million visitors expected to descend upon Rio. From my experiences in Brazil, the Olympic Games won’t be perfect, there might be problems, but it will be great.

Financial Review

Number 9

Sinclair Noe — July 20, 2016

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

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DOW + 36 = 18,595
SPX + 9 = 2173
NAS + .53 = 5089
10 Y + .03 = 1.59%
OIL + .29 = 44.94
GOLD – 16.40 = 1316.30

The Dow Industrial Average is on a 9-day winning streak; its longest winning streak since March 2013. The Dow and S&P 500 have set multiple record closing highs in recent days. But the Nasdaq remains 3.5 percent away from its record close.

A 9-day winning streak for the Dow has only happened 7 times since 1980. In each of the other six instances, the index has been up the following six months with an average gain of 10.41%. Going back to 1900, a 9-day streak has happened 30 times and the average gain in the following six months has been 5.96%.

The dollar is at a four-month high against a basket of currencies, bolstered by strong economic data and growing expectations the Fed may raise rates before the end of the year. The dollar index is trading above 97, its highest level since March 10. Fed funds futures rates now suggest a 40% chance of a rate hike in December, compared with less than 20% a few weeks ago. Treasuries declined, with the 10-year yield rising three basis points to 1.59 percent. The yield has risen from an all-time low of 1.318 percent

According to Thomson Reuters, 64 percent of S&P 500 companies have topped earnings estimates. That compares to a long-term average of 63 percent over the past 22 years. Even though earnings are expected to be down 5.4% when compared with year ago levels, they are beating diminished expectations and that is apparently good enough to fuel the rally that’s added more than $4.5 trillion to the value of equities worldwide in three weeks.

Morgan Stanley this morning reported better-than-expected quarterly earnings and revenue, aided by the financial giant’s fixed income and investment banking businesses.

After the closing bell yesterday, Microsoft reported adjusted quarterly earnings of 69 cents per share, 11 cents above estimates, with revenue also beating forecasts. The software giant’s key cloud product, Azure, saw revenue grow 102 percent for its fiscal fourth-quarter.

Intel reported quarterly earnings that beat expectations, but revenues for the quarter came in slightly lower than expected. In particular, the company reported revenue from its data center and “Internet of Things” segments that slightly missed expectations. Intel has previously cast these businesses as the primary profit-growth engines for the company.

American Express, the biggest U.S credit-card issuer by purchases, said second-quarter profit rose 37 percent as customers increased spending and the company booked a $1 billion gain from the sale of its Costco portfolio. Revenue declined but still beat estimates.

Volkswagen’s operating profit came to €7.5-billion-euro in the first half of 2016, beating market expectations and pushing its shares higher. Adjusted for one-off costs of €2.2-billion-euro, operating profit still came to €5.3-billion-euro.

Meanwhile, Volkswagen is being sued by a handful of states. Attorneys general from Maryland, Massachusetts, and New York have filed a lawsuit against Volkswagen, Porsche, and Audi, alleging a “cover up” that was “orchestrated and approved at the highest levels of the company.” The lawsuit accuses Volkswagen of skirting emissions standards by installing “defeat devices” since the mid-2000s. Additionally, the suit says that the group “made a knowing decision to violate the law” and that Volkswagen “allegedly destroyed incriminating documents” upon hearing about the investigation.

The Bank of England says Brexit isn’t killing the economy. “As yet, there was no clear evidence of a sharp general slowing in activity,” said the BOE’s July “Agents’ summary of business conditions.” The central bank did suggest, however, that there was still a high degree of uncertainty as businesses are just now attempting to formulate their strategies for a British exit from the European Union. The European Central Bank hold a major policy meeting tomorrow.

The purge led by Turkey’s President Erdogan following Friday’s failed coup continues to widen, with, at last count, nearly 60,000 people detained, fired or dismissed. The Turkish lira is rebounding somewhat this morning after trading within 1 percent of an all-time low overnight. Turkey’s central bank cut its overnight lending rate by a quarter point to 8.75%. Today, Erdogan imposed a three-month state of emergency.

Federal agents in New York have arrested Mark Johnson, HSBC’s global head of foreign exchange cash trading. Johnson is being charged with conspiracy to commit wire fraud involving front-running client orders, according to the complaint. Stuart Scott, HSBC’s head of foreign-exchange cash trading for Europe, was also accused in the complaint, which was unsealed Wednesday in Brooklyn federal court.

HSBC is under criminal investigation in the currency case. More than two-dozen traders have been suspended by their banks in the course of the investigation.  The arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. Also on Tuesday, the U.S. Federal Reserve banned former UBS Group AG trader Matthew Gardiner from the banking industry for life for his role rigging currency benchmarks.

U.S. prosecutors have detailed an alleged scheme of international money laundering and misappropriation from 2009 to 2015. The Justice Department is seeking to seize more than $1 billion worth of assets it says went through U.S. banks from Malaysian development fund 1Malaysia Development Berhad, known as 1MDB, and was ultimately used to illegally acquire assets. More than $3.5 billion traveled a trail of fraud from Malaysia through a web of shell companies, fueling a spending binge on paintings and luxury real estate and even funding a movie (ironically the movie was The Wolf of Wall Street), with at least $700 million flowing back into accounts controlled by Malaysia’s prime minister, Najib Razak.

Along the way, some of the money was handled by international banks including Goldman Sachs, JPMorgan Chase, Standard Chartered and Deutsche Bank. Money was pilfered from the government fund based on false representations made by 1MDB officials and shell companies. Even when bank officials raised questions about the beneficiaries of various accounts, compliance departments were unable to detect or halt the alleged fraud. The Malaysia fund is at the center of several international investigations into alleged corruption and money laundering by public officials. Prosecutors in Singapore, Switzerland, Luxembourg and the U.S. are looking into money flows from the investment vehicle, which was established for national development.

Anheuser-Busch InBev won U.S. antitrust approval for its takeover of SABMiller, after the maker of Budweiser agreed to give up ownership of the Miller brand and open the door to greater competition from craft beers. AB InBev will sell SABMiller’s stake in MillerCoors, separating the two brands. The Justice Department and the Federal Trade Commission have recently killed proposed tie-ups in the cable, office supplies and oil drilling industries, among others. In this case, the companies proposed asset sales from the start that helped resolve antitrust officials’ concerns.

Aetna says it is ready to go to court if necessary to proceed with its $37 billion takeover of Humana. By taking over Humana, Aetna would become the largest player in Medicare Advantage, with about 4.5 million customers. The U.S. has been said to be preparing to sue to block the deal because it would limit options for consumers.

Financial Review

Thankyou

Sinclair Noe — June 13, 2016

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

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DOW – 132 = 17,732
SPX – 17 = 2079
NAS – 46 = 4848
10 Y – .02 = 1.62%
OIL – .53 = 48.54
GOLD + 10.50 = 1284.80

Equities across the globe drifted into the red ahead of a data heavy week in the U.S. that will include retail sales, inflation and other economic figures. Reasons for the declines: Brexit woes, weak Chinese investment growth, fresh strength in the yen, and lower oil prices. Traders are also anticipating a busy week for central banks with policy meetings for the Fed, Bank of Japan, Swiss National Bank, and Bank of England.

The safe-haven yen strengthened across the board overnight, hitting a three-year high against both the euro and sterling on Brexit worries and reaching a six-week high vs. the greenback. Japan faces a credit rating downgrade after the government delayed a planned second sales tax hike.

With ten days to go until a Brexit vote, the “Leave” campaign has taken a lead over “Remain” in the latest YouGov poll, reversing the one-point lead held by the pro-EU camp in the last survey taken on June 6. Another poll from research firm ORB showed that 55% of British citizens feel they should leave the EU, versus 45% who favor remaining. Sterling moved lower against the dollar this morning.

The Federal Reserve FOMC meets tomorrow and then publishes a statement on Wednesday at 11 AM Pacific, followed by a Janet Yellen press conference. Here’s what we might reasonably expect: no rate increase from the Fed. The May jobs report was an abysmal 38,000 new jobs; so there is just too much slack in the labor market right now.

Also, the meeting is one week ahead of the Brexit referendum in the UK, which could go either way. So, don’t count on the Fed surprising the markets on Wednesday. Then the question is whether the Fed will be dovish or hawkish about a July rate hike. They will probably try to strike a balance. There is still time to telegraph a hike, if conditions improve substantially.

The Supreme Court has struck down a Puerto Rican law that would have allowed the U.S. territory’s public utilities to restructure their debt. The Bankruptcy Code requires municipalities to seek their state’s permission before they can declare bankruptcy, but Puerto Rico does not count as a “State” for purposes of this provision. The island’s utilities are effectively locked out of the protections afforded to similar debtors in the 50 states.

To compensate for this problem, Puerto Rico enacted the Puerto Rico Corporation Debt Enforcement and Recovery Act, which effectively creates a special bankruptcy code under the island’s own law that fills the gap in federal law. Today the Supreme Court ruled that the new law won’t fly.  Puerto Rico cannot file for bankruptcy. The 5-2 ruling leaves management of the island’s fiscal crisis to Congress. The House of Representatives passed a bill last week to help Puerto Rico manage its debt crisis. The Senate has not yet acted.

The Puerto Rico case today concerns about $20 billion in debt owed by the island’s public utilities companies. Absent a quick decision by Congress (not likely), power, water, sewer, and transportation are at risk of being shut down or turned off. The lost services are likely to exacerbate Puerto Rico’s debt problems as more people flee the island, depressing Puerto Rico’s tax base even further, potentially forcing deeper cuts, which will lead even more residents to flee. It is a slow motion debt spiral and there is no relief in sight.

Oil futures moved lower today, after dropping 4.2% in the previous two sessions as drilling rigs targeting crude in the U.S. rose by three to 328 last week, a second weekly gain which is a record since last August. The data from Baker Hughes suggests companies that were sidelined by low oil prices are starting to produce at $50 a barrel, and there are certainly many companies that didn’t halt production but just slowed production at lower prices. So, the $50 to $60 per barrel price range seems like the sweet spot where production returns. Now we know where the ceiling is.

Microsoft is acquiring the professional social network LinkedIn Corp. for $26.2 billion. Microsoft will pay $196 per share in an all-cash transaction, inclusive of LinkedIn’s net cash, a 49.5 percent premium to LinkedIn’s closing price Friday. The deal is the biggest ever for Microsoft. LinkedIn has long been valued for having the potential viral growth of a social network with the recurring revenues of a software-as-a-service business.

Symantec is buying privately held cyber security company Blue Coat for $4.6 billion, with Blue Coat chief Greg Clark becoming the company’s CEO once the deal closes. Symantec, which makes the Norton antivirus software, has been undergoing a transformation over the past year, selling its data storage unit, Veritas, for $7.4 billion to gain the cash necessary for turning around its core security software business.

Apple started its annual Worldwide Developers Conference in San Francisco today. Here’s what came out of Day One:

They announced Apple Pay and Siri for desktop Macs; a new Apple Watch app called Breathe, which is designed to help people control their mood; a big update to the Remote app for the Apple TV; a major update to iOS, the app that runs on iPhones, including fun new messaging options, emoji features, and lock screen and notification menus; programmers can also build apps specifically for iMessage; iOS also has additional new artificial-intelligence features, like a keyboard that can predict what you want to type and updates to the Photos app that can use facial recognition to sort photos by person; the ability for developers to build their apps into Siri and Maps; a  revamp to Apple Music; and an app for controlling automated smart homes called “Home”.

 Most of these new features will hit Apple devices in the fall.

Walgreens has terminated its relationship with Theranos. A statement posted on Walgreens’ website says the pharmacy chain is shutting down all 40 Theranos’ wellness centers at Walgreens stores in Arizona. The decision by Walgreens is a huge blow to Theranos, as the wellness centers were the company’s primary source of revenue. Theranos still operates five centers (four in Arizona and one in California).

The company once touted its Edison device as a ground-breaking technology able to test blood from just a pinprick. In October, The Wall Street Journal reported that the company’s tests weren’t producing accurate results and that the company was trying to cover it up. The Justice Department and SEC are investigating Theranos and its founder Elizabeth Holmes. Now comes word that Jennifer Lawrence will portray Elizabeth Holmes in an upcoming movie. I can’t make this stuff up.

Wal-Mart will stop accepting Visa cards in Canadian stores after failing to agree on terms with the credit card provider – the latest in a years-long battle between the two companies over fees and the right to steer customers to certain types of payments. Visa is the largest payments network in Canada, with 50.6M cards in circulation and $232.6B worth of transactions last year.

The Libyan Investment Authority, the country’s sovereign wealth fund, will go head-to-head with Goldman Sachs in a London court today in a case accusing Goldman of bribery to influence fund executives to make risky trades that led to a $1.2 billion loss. Now you might imagine that a sovereign wealth fund takes its chances and they might win some investment bets and lose some, but apparently Goldman execs knew they were pitching complex and unsuitable derivatives.

In documents provided to the court by the LIA cited Goldman Sachs describing the sovereign wealth fund as having “zero-level” financial sophistication and one individual having “delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels”. One Goldman executive is quoted as saying: “They are very unsophisticated and anyone could rape them.”

Beyond the question of suitability is the question of bribery, including travel and dining at five-star hotels, prostitutes in Dubai, while an internship at Goldman was also arranged for an official’s brother. The Libyans said the trades were made under “undue influence”. Goldman said the claims were without merit and it would fight them vigorously. And then there is the question of fees charged. While the Libyan Investment Authority was losing $1.2 billion, Goldman was collecting possibly as much as $350 million in fees.

Meanwhile, Goldman Sachs is under investigation by the Justice Department, Federal Reserve, SEC, and New York’s Department of Financial Services for its part in bond sales for 1MDB, Malaysia’s sovereign fund, which is at the center of several international investigations into alleged corruption and money laundering by public officials. Goldman arranged for about $6.5 billion in bond sales. Goldman allegedly took a very large commission in the neighborhood of $600 million.

Another problem is $3 billion Goldman raised via a bond issue; days after Goldman sent the proceeds into a Swiss bank account controlled by the fund, half of the money disappeared offshore, with almost $700 million apparently later ending up in the prime minister’s bank account. The case is being investigated in 10 countries. New York’s banking regulator has told Goldman to submit details of its internal review by Tuesday.

On June 2, AT&T launched a customer loyalty program called “AT&T thanks,” trademarking the name in connection with loyalty incentives. Citigroup, meanwhile, has been using the term “thankyou” (all one word) since 2004 to promote its own customer loyalty and rewards programs, and they trademarked it as well.

Citigroup is now suing AT&T for thanking its customers, claiming the phrase “AT&T thanks” is confusingly similar. Of course the words “thanks” and “thank you” are some of the most common words in the English language. Thankfully, Citigroup and AT&T do not own those words.

Financial Review

Quiet and Overbought

Sinclair Noe — June 7, 2016

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

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DOW + 17 = 17,938
SPX + 2 = 2112
NAS – 6 = 4961
10 Y – .01 = 1.71%
OIL + .74 = 50.43
GOLD – 1.50 = 1244.20

Fed chief Janet Yellen on Monday called last week’s U.S. jobs numbers disappointing and opted not to repeat her message that U.S. interest rates could rise again in the coming months. That was balanced, however, by her cautioning against attaching too much significance to the payrolls data in isolation and as she pointed to other more upbeat signals for the economy and indicated rate hikes this year would still be appropriate.

On Friday, when the jobs report came in at a very weak 38,000 jobs added, the markets were down slightly. Clearly the news from the jobs report had the effect of taking a June rate hike off the table. In the past, the markets would have rallied on that kind of news, but it made for terrible optics, and so we had to wait for Fed chair Yellen to not say anything. And besides, the markets had already priced in no rate hike in June. So, what’s going on here?

The S&P 500 has gone 42 trading days without a decline of 1% or more. That’s the longest stretch without a big drop since a 66-day period that ended in July 2014, according to FactSet. The U.S. stock market hasn’t dropped by 1% or more since April 7. During one particularly scary stretch in mid-February, the S&P 500 suffered three plunges of 1% or more on separate occasions in just five days. This slow steady advance leaves the market in extremely overbought territory.

Economic data remains weak; we just wrapped up another horrible earnings season; valuations remain expensive; we are moving into a seasonally weak time period; the yield curve is flattening; volume is weak.

Meanwhile, the bullish case for this market is tenuous at best. It might be bullish…, if the Fed keeps rates unchanged; if the economy bounces back in the second half (we’ve already given up on a second quarter bounce); if earnings improve (which is plausible given how low the bar is now set); if oil trades higher (even though higher oil prices will surely lead to higher supplies); if the dollar doesn’t firm up again; if there is no Brexit; and if the markets continue to ignore the data.

You get the idea. Still, it is possible to take out the old highs on the S&P, even without a bullish case. If that happens I would still be left wondering what is pushing the bullish case, other than a herd mentality that is not sustainable. Today, stocks moved to an 11 month high and then faltered on weak volume.

Productivity remains a key weakness of the economy and is especially evident during the low output of the first quarter. American workers were less productive again in the first quarter. The Labor Department productivity declined at an annual rate of 0.6 percent in the first quarter after a 1.7 percent drop in the fourth quarter.

The government first estimated that productivity fell at a 1 percent rate. Not only did hours exceed output, compensation rose at the same time, up 3.9 percent to lift unit labor costs by 4.5 percent, even faster than the 4.1 percent gain first reported. Though there seems to still be a belief that wage growth remains sluggish, in reality, wages have finally begun to move higher in earnest. The anecdotal and survey evidence has been pointing to rising wages for a while, but the data were slow to fall into line. Now they have.

CoreLogic’s Home Price Index (HPI) shows that home prices in the USA are up 6.2 % year-over-year (reported up 1.8 % month-over-month). Last month’s 6.7 % year-over-year gain was revised downward to 5.5 %. CoreLogic HPI is used in the Federal Reserve’s Flow of Funds to calculate the values of residential real estate.

Consumer credit growth cooled off a bit in April from a torrid pace in March, according to the latest government estimates. Credit growth rose $13.4 billion in April, or at a seasonally adjusted annual rate of 4.5%, the Federal Reserve said Tuesday. Economists had expected a gain of $18 billion in April consumer credit. This is down from a revised $28.4 billion, or 9.6% pace in March. That was the largest dollar gain in consumer credit on record. The Fed said credit-card debt rose at a 2.1% rate in April, down from 13.3% in the prior month, which was the largest gain February 2001.

Non-revolving debt, mainly car and student loans, which has powered credit growth in recent years, expanded at a 5.4% rate in April, below the 8.2% gain in March. As a result of the gain in April, total outstanding consumer credit reached an all-time peak of $3.6 trillion.

Even before Mario Draghi starts his corporate-bond buying program tomorrow, he’s pushed down borrowing costs in Europe toward unprecedented levels, with the average yield on euro investment-grade company notes tumbling to 1%. On Tuesday, a series of government bond yields tumbled to multi-month and all-time lows.

The ECB in March announced it would expand its asset-purchasing program to include corporate bonds in an effort to directly lower borrowing costs for businesses and to help lift persistently low inflation. One concern is that corporate buybacks might have some unintended consequences, such as stock buybacks and widening spreads between bonds that are eligible for ECB’s purchases and those that aren’t.

Second-round bids for Yahoo’s internet business were due yesterday. Verizon Communications reportedly planned to submit a bid worth about $3 billion for Yahoo’s internet business, according to the Wall Street Journal. The telecom giant reportedly isn’t interested in other Yahoo assets such as patents and real estate. The private-equity firm TPG and a team led by Quicken Loans founder Dan Gilbert are said to be among the other interested parties. Yahoo is projected to hold at least one more cycle of bidding, and the offers could change by the final round.

U.S. investigators are trying to determine whether Goldman Sachs violated the Bank Secrecy Act when it didn’t sound an alarm over a suspicious transaction involving Malaysia’s state fund 1MDB. After raising $3 billion via a bond issue for the troubled fund, Goldman sent the proceeds to a Swiss bank account controlled by 1MDB, with half of the money disappearing offshore within days and some reappearing in the prime minister’s bank account.

Royal Dutch Shell will exit oil and gas operations in up to 10 countries in a drive to cut costs as it weathers weak oil prices and has to pay down debt following its $54 billion acquisition of BG Group. The company is active in more than 70 countries and said it would like to focus on 13 important nations where it is making good returns, including Brazil, Australia and the United States. The move, which includes the sale of 10 percent of its oil and gas production assets, will make Shell a smaller company that offers investors access to a more gas-heavy portfolio than some of its rivals.

Shares of Biogen dropped this morning after an experimental drug for multiple sclerosis failed in a mid-stage trial. The drug missed both the main and secondary goals for treating the disorder. Biogen makes most of its money from drugs treating MS and has been seeking new treatments to accelerate growth.

Valeant Pharmaceuticals announced a loss of $1.08 a share, which was adjusted to a gain of $1.27 when factoring out one-time adjustments. Valeant cut its 2016 earnings and sales forecasts, marking a major reset point as the once high-flying company tries to get back on its feet.

First-quarter earnings — the last set of full results under former Chief Executive Officer Michael Pearson — gave investors the first detailed picture of the drug maker’s struggles to sell its products during the recent months of chaos. Two of Valeant’s key categories, dermatology and prescription ophthalmology, slumped by 43 percent and 30 percent, respectively. In dermatology in particular, the company has faced push-back from health insurers and pharmacy benefit managers after increasing its prices.

A U.S. District Judge  has found a pattern of misconduct by Merck including lying under oath and other unethical practices, freeing Gilead Sciences from paying damages for infringing on Merck’s patents with its hepatitis C treatments – Sovaldi and Harvoni. The ruling comes after a federal jury on March 24 ordered Gilead to pay $200 million in damages, based on findings that Merck’s patents were valid.

Samsung is considering introducing two new smartphone models that will feature bendable screens. One model is said to fold in half like a cosmetic compact, while the other has a 5-inch display that “unfurls” into a tablet-sized 8-inch panel. The devices using organic light-emitting diodes could be unveiled as soon as early 2017.

Leading European countries have decided not to extend the license for glyphosate, a herbicide used in Monsanto’s top selling weed killer. The EU is worried about growing public concerns it could cause cancer.

Daimler is laying off more than 1,200 workers at three plants in the U.S. and one in Mexico, the second such cut this year in response to falling demand for commercial trucks. Last month, Daimler projected a 15% decline in North America sales of medium and heavy-duty trucks, warning that a slump in the market would significantly lower its earnings before interest and tax in 2016.

Ralph Lauren announced a restructuring plan. The company also plans to cut 8% of its workforce in the current fiscal year. As of April, it employed about 26,000 people around the world, 11,000 of whom are part-time workers. The planned job cuts will be in addition to the 5% workforce reduction that the company already implemented in its last fiscal year. The company plans to close about 50 stores. The company currently has 493 stores, including 216 in the U.S.

Financial Review

Sub Zero

Sinclair Noe — January 29, 2016

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DOW + 396 = 16,466
SPX + 46 = 1940
NAS + 107 = 4613
10 Y – .05 = 1.93%
OIL + .46 = 33.68
GOLD + 2.80 = 1118.80
SILV + .02 = 14.34

It’s Friday and also the last trading day of the month.

For the week, the Dow gained 2.3%, the S&P added 1.7% and the Nasdaq increased 0.5%.
That left the Dow down 5.5% for the month, or a loss of 959 points. The Nasdaq lost 7.9%, or 394 points in January, its largest monthly loss since May 2010.

The S&P was down 103 points, or 5%, although at one point last week the S&P was down 11% since the start of the year.

An index of US Treasury bonds returned 1.8% for January, which has been the best month of the year for bonds, at least over the past few years. The yield on the 10-year note dropped 24 basis points for the month.

Gold and silver shared the safe haven spotlight with Treasuries. Gold gain $58.60, or 6% for the month. Silver added 53-cents or 3.8%, year-to-date.

The dollar has gained just over 1% year-to-date, but is still below November highs.
Even with today’s gain, oil closed out the month of January with a loss of $3.37 or 9%.

The U.S. economy expanded at a slower pace in the fourth quarter. Gross domestic product rose at a 0.7% annualized rate in the three months ended in December after a 2% gain in the third quarter. GDP expanded 2.4% for a second straight year, led by the biggest gain in consumer spending in a decade.

Household purchases rose at a 2.2% annualized pace in the fourth quarter, down from 3% in the third quarter; so consumer spending slowed in the quarter, but businesses saw big cuts in spending.

Business investment decreased at a 1.8% annualized rate, the first drop since the third quarter of 2012 and compared with a 2.6% pace in the third quarter. Businesses cut spending on stockpiles to try to pare unwanted inventories. That effort trimmed growth by 0.5 percentage point in the fourth quarter. Home construction grew at a solid 8.1% annual rate.

Separately, the Labor Department reports wages and salaries rose 0.6% in the fourth quarter – the same pace as in the previous three months, indicating gradual tightening in the labor market has yet to put pressure on employers to boost pay. Wages of all employees, including government workers, advanced 2.1% from the same period in 2014.

The Bank of Japan said that it would adopt a negative interest rate policy for the first time, in an attempt to kick start the world’s number three economy. The central bank said it cut the deposit rate it pays on cash parked at the BOJ by commercial banks in excess of legally required reserves, to minus 0.1% from the previous plus 0.1%. The goal was to push down borrowing costs across a broad time spectrum to stimulate inflation.

Just one week ago, Bank of Japan Governor Haruhiko Kuroda said he was not thinking of adopting a negative interest rate policy now, signaling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying program. So, this really was shocking news for global markets.

The yen tumbled after the announcement. The benchmark Topix index closed 2.9% higher. Money is pouring into bonds all over the world, pushing yields lower. Germany’s 10-year yield is off 6 bps at 0.33%, making for the lowest reading in nine months, and yielding about the same as a US 3-month note.

Now, these negative rates in Japan are not being applied at the retail level; this is directed at the banks, and the reserves held by banks with the central bank. But if the negative rates last long enough, it could work to the consumer level. For now, the idea is to nudge banks to make loans and circulate money through the economy, with a little punishment for banks that hoard the cash.

In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there’s a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead. We have seen negative rates over the past year or so in the Eurozone, and Sweden, Denmark and Switzerland.

We don’t really know yet how it will play out, and we don’t have historic data to guide us. This time it really is different. We’ve heard that before, but it is true this time. For the Eurozone and now for Japan, rates are at the lowest levels in at least 500 years – and, yes, Deutsche Bank did look that far back in sovereign debt records.

So what do negative interest rates tell us about the global economy? We appear to be in a long-term low growth and low inflation environment. Perhaps the central bankers, including the Fed, need to re-think their ideas about acceptable levels of inflation; perhaps a 2% rate of inflation is too low. Today’s action by the Bank of Japan will almost certainly influence the Fed’s thinking on future interest rate hikes.  At the very least it should lead to discussion of how monetary and fiscal policy is conducted and coordinated on a global scale.

And for investors, we need to consider whether the US economy really is so much stronger than our global business partners; and we should also consider the spread between global and international rates and the spread between US long-term and short-term Treasuries (it is flattening, and you know that’s not good); also the impact of negative interest rates on a variety of asset classes, including equities, currencies, and commodities.

Oil prices started the session with big gains but pared losses throughout the day as the dollar index gained more than 1%.  It proved near impossible to prop up oil on the notion of a Russia-OPEC deal to cut production. The Wall Street Journal reported that an Iranian oil official said the country would not join an immediate OPEC production cut. The paper said Iran wants to boost crude exports by 1.5 million barrels a day. Baker Hughes reports energy firms in the US cut oil rigs for the sixth straight week and were expected to shed more.

Puerto Rico plans to propose a debt exchange to investors, offering to swap existing bonds for two new types of securities to help the U.S. commonwealth alleviate its debt burden. Both classes of debt would delay payments, giving the island time to make fiscal adjustments and spur economic growth. One would eventually pay interest at 5%, while the other would carry a value determined by Puerto Rico’s fiscal health.

The World Health Organization is warning that the Zika virus is “spreading explosively” in the Americas, and will convene a special meeting on Monday about whether to declare a public health emergency. While there is no approved vaccine, U.S. health officials and drug makers could start working on an experimental one soon. Both GlaxoSmithKline and Sanofi are considering developing a treatment.

Xerox said it would split into two companies, one holding its legacy hardware operations and the other its business process outsourcing unit, in which activist investor Carl Icahn will get three board seats. The company, whose shares had fallen more than 30% in the past 12 months, has been trying to turn itself around by focusing on software and services as businesses cut costs and a switch to mobile devices hits demand for printers.

Fourth-quarter earnings reporting season is well under way, with S&P 500 companies on average expected to post a 4.1% drop in earnings, according to Thomson Reuters. Excluding energy companies, earnings are seen rising 2.1%.

Chevron reported its first quarterly loss in more than 13 years on Friday as the oil producer struggled to cope with plunging crude prices that are eroding profitability across all its divisions. The company posted a fourth-quarter net loss of $588 million, or 31 cents per share, compared with a net profit of $3.47 billion, or $1.85 per share, in the year-ago period. The last time Chevron posted a quarterly loss was the third quarter of 2002. Chevron last month announced it would cut its 2016 budget by 24% to $26 billion.

It’s time now for another edition of Banks Behaving Badly: In today’s edition we take you back to last summer, when we told you tens of thousands of Malaysians gathered in Kuala Lumpur and demanded to know how almost $700 million linked to the debt-laden government investment fund 1Malaysia Development Berhad (1MDB) ended up in prime minister Najib Razak’s personal bank accounts. 1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond deals underwritten by Goldman Sachs, which charged nearly $600 million in fees, and resulted in little or no development in Malaysia.

We now have an answer from the attorney general appointed by Najib to investigate Najib. The AG says the $700 million that just appeared in the Prime Minister’s personal bank account was a personal gift from the royal family of Saudi Arabia, and there was no bribery or corruption. So, the Prime Minister has been cleared of all wrongdoing because hey, sometimes wealthy Saudis just hand out really lavish gifts. Meanwhile, Tim Leissner, chairman of the Goldman Sach’s Southeast Asia ops, is taking leave of absence from Goldman and moving from Singapore to LA.  And that’s the way they do it.