Financial Review

Sunshine

Sinclair Noe — June 15, 2017

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DOW – 14 = 21,359
SPX – 5 = 2432
NAS – 29 = 6165
RUT – 7 = 1410
10 Y + .02 = 2.16%
OIL – .47 = 44.26
GOLD – 6.40 = 1254.70
BITCOIN – 1.86% = 2411.30 USD
ETHEREUM – 3.44% = 348.76

The Dow could not hang on to record highs and the S&P 500 and Nasdaq Composite continued to slip. A selloff in technology stocks that began last Friday has clipped 4.1 percent off the S&P 500 information technology index as investors worry about stretched valuations in 2017’s top-performing sector.

During that time, Alphabet has lost 5.8 percent, Amazon is down 5.2 percent and Facebook is off 4 percent. Apple has declined more than 7 percent in the past five days. Valuations of the mega-tech stocks have moved to lofty levels and there is reasonable concern that valuations have grown too large relative to earnings forecasts.

The question is whether this is just a healthy pullback or the beginning of something more ominous. You must to decide for yourself, but it certainly means you should be paying closer attention to any holdings in these big tech names.

Factory production slipped 0.4 percent in May, as manufacturers cranked out fewer cars, computers and semiconductors, a sign that economic growth remains sluggish. The drop follows a big 1.1 percent gain the previous month, so we might be looking at a little statistical noise.

Overall industrial production, which includes mining and utilities, was unchanged in May. Mining activity posted a large gain for the second straight month, rising 1.6 percent. Much of that increase has been driven by greater oil and gas drilling. Utility production rose 0.4 percent.  Americans are buying fewer cars, after sales reached record levels last year. They have now fallen for five straight months. Automakers responded by slicing output 2 percent in May.

The Empire State manufacturing index climbed to 19.8 in June after falling to minus-1 in May. Readings above zero show that factories are expanding. The Empire State index only measures sentiment in New York, but economists track it because it provides an early read on factory output nationwide. It has risen seven of the last eight months.

The number of Americans applying for unemployment benefits fell for a second straight week. The Labor Department said claims for jobless benefits last week dropped by 8,000, to a seasonally adjusted 237,000. The less-volatile four-week average rose by 1,000 to 243,000. Overall, 1.94 million people were collecting unemployment checks, down 10.2 percent from a year ago.

Applications for unemployment benefits have come in below 300,000, a historically low figure, for 119 straight weeks, the longest such stretch since 1970. And while it is an impressive streak, it also reminds us that fewer people are eligible for unemployment benefits.

The national jobs report is issued the first Friday of each month and each state then reports on non-farm payrolls around the middle of the month. Today, Arizona reported the statewide unemployment rate slightly increased from 5.0% in April to 5.1% in May; still better than 5.3% a year ago, but not as strong as the 4.3% national rate.

Arizona lost 14,700 Nonfarm jobs in May. The private sector lost 5,500 jobs, and government cut 9,200 jobs. Arizona Nonfarm employment grew by 1.8% (48,200 jobs) over the year in May.

President Trump today signed an executive order to expand federally funded apprenticeship programs. The order takes $100 million away from other federally funded job training programs to fund the new apprenticeships. And while apprentice programs seem like a good way to close the skills gap, some economists say the skills gap is not the problem, or at least no more of a problem today than in years past.

Instead they point to a slowdown in startup businesses and new technology that has allowed employers to conduct more thorough research on an applicant before hiring. The proportion of middle-skill jobs in the economy (jobs that might benefit from an apprentice program) has declined since the 1980s, while relative job growth has been concentrated at either the low end of the spectrum, like retail, or the high end, like software development.

In other words, jobs that don’t need extensive training or jobs that need more training than an apprenticeship.

The Senate voted 98-2 approving legislation to impose new sanctions on Russia, and to force President Donald Trump to get Congress’ approval before easing any existing sanctions on Russia. The measure is intended to punish Russia for meddling in the 2016 U.S. election, annexation of Ukraine’s Crimea region and support for Syria’s government in the six-year-long civil war.

The bill also includes new sanctions on Iran over its ballistic missile program and other activities not related to the international nuclear agreement reached with the United States and other world powers. The bill now goes to the House of Representatives.

The Washington Post reported late Wednesday that the special counsel investigating Russian influence in the presidential campaign is now examining whether President Trump tried to obstruct justice. Allegations of obstruction arose last month when he fired FBI Director James Comey.

Meanwhile, the Senate is continuing work on legislation to repeal the Affordable Care Act. If you are not familiar with the Senate version of the repeal, you are not alone. Senate republicans are keeping it a secret. In theory, the bill is open to any of the 52 republican senators, but few seem to know about any of the details.

Democrats have been locked out of the process, along with the rest of the public. Tom Price, the secretary of health and human services, said that he, too, had not seen the Senate bill. The legislation will be considered in the Senate under an expedited procedure that precludes a Democratic filibuster and allows passage by a simple majority. Sunshine is always the best disinfectant.

The Bank of England met today and left interest rates unchanged at a record low of 0.25 percent, but a surprisingly large number of the members of its Monetary Policy Committee, three out of eight, opted for a quarter-point increase. The main concern appears to be inflation, which at 2.9 percent is running hot; but any attempts to curb inflation by hiking rates also runs the risk of slowing the economy, which is already sluggish.

The Bank of Japan concludes a two-day board meeting Friday that isn’t expected to bring any change in policy. The focus will be on Governor Kuroda’s press conference and any clues he gives about possible adjustments to his monetary program and an eventual exit from stimulus.

Yesterday, the Federal Reserve raised interest rates again, and said more increases are on the way, on the belief that the recent slowdown in inflation is transitory. Don’t tell Kroger. Grocery chain Kroger took its biggest one-day loss since 1999.

The company cut its annual profit outlook as it deals with growing competition from discount chain Aldi and from Lidl, a German chain opening its first locations in the US. Kroger’s stock plunged $5.72, or 18.9 percent, to $24.56. Kroger said lower food prices were hurting its profits, sparking a sell-off among its competitors, including Whole Foods and even Wal-Mart.

And while wheat prices have been moving higher on weather related news, most other commodities are significantly lower. Look at oil, now trading below $45 a barrel. Lower oil prices ripple through the economy, putting a lid on inflation. And the lid, or resistance level, for oil seems to be around $55 a barrel; that’s the price that spurs US shale producers to ramp up production.

Meanwhile, bond traders do not seem to share the Fed’s enthusiasm for economic growth. The spread between the yields on two-year and 10-year Treasuries fell to 80 basis points today. The spread is currently within a few hundredths of a percentage point of being the tightest it has been since 2007. A flattening yield curve points to slower economic growth.

Wells Fargo has stepped in it again. The bank has been dealing with a scandal involving opening over 2 million bogus accounts without customer consent. Now Wells Fargo faces a new round of lawsuits accusing the bank of modifying mortgages without customers’ consent.

Any change to a payment plan for a person in bankruptcy is subject to approval by the bankruptcy court and the other parties involved. The changes are part of a trial loan modification process from Wells Fargo and typically resulted in lower monthly loan payments, which would seem to benefit borrowers, particularly those in bankruptcy.

But deep in the details was this fact: Wells Fargo’s changes would extend the terms of borrowers’ loans by decades, meaning they would have monthly payments for far longer and would ultimately owe the bank much more. They put borrowers in bankruptcy at risk of defaulting on the commitments they have made to the courts, and could make them vulnerable to foreclosure in the future.

According to court documents, Wells Fargo has been putting through unrequested changes to borrowers’ loans since 2015. Wells Fargo stood to profit from the new loan terms it set forth, and, under programs designed to encourage loan modifications for troubled borrowers, the bank receives as much as $1,600 from government programs for every such loan it adjusts.

This is not the first time Wells Fargo has been accused of wrongdoing related to payment change notices on mortgages it filed with the bankruptcy courts. Under a settlement with the Justice Department in November 2015, the bank agreed to pay $81.6 million to borrowers in bankruptcy whom it had failed to notify on time when their monthly payments shifted to reflect different real estate taxes or insurance costs.

Maybe you are starting to sense a pattern of bad behavior. They just reach into your pocket and take your money because they can. And because nobody stops them.

Financial Review

Take 64

Sinclair Noe — May 4, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 6 = 20,951
SPX + 1 = 2389
NAS + 2 = 6075
RUT – .02 = 1388
10 Y + .05 = 2.36%
OIL – 2.31 = 45.51
GOLD – 9.70 = 1229.00

The House of Representatives narrowly approved a bill to repeal Obamacare. More specifically the House passed the American Health Care Act, which scraps the Obamacare mandates that people buy health insurance and that employers provide it, eliminates most of its tax increases, cuts nearly $900 billion from Medicaid while curtailing the program’s expansion, and allows states to seek a waiver exempting them from the current law’s crucial prohibition against insurers charging higher premiums to people with pre-existing conditions.

The party line vote was 217-213 with 20 Republicans voting against the bill.

Conservatives complained that the bill did not fully repeal the 2010 law, while moderates blanched at its cuts to Medicaid and its weakening of its most popular consumer protections. Hardliners in the House Freedom Caucus, who had denounced the original version of the bill as “Obamacare-lite,” dropped their opposition after securing an amendment allowing states to opt out of key insurance mandates.

Moderates and even some leadership loyalists balked, but they secured an 11th hour sweetener of their own: an extra $8 billion to help people with pre-existing conditions who might not be able to afford higher premiums that insurers could charge them in high-risk pools. The modest sum was no more than a political fig leaf, as policy analysts said it would not come close to making the new insurance pools work.

What pushed some reluctant members to vote yes in the final days was the growing realization that this bill might not become law. Not as it is currently written. As many hurdles as the American Health Care Act has overcome among Republicans in the House, it faces even more among the considerably narrower GOP majority in the Senate, where party leaders must win over 50 out of the chambers 52 Republicans.

Senators will re-work the legislation, and there is no guarantee they will even vote on it. So, for now, Obamacare remains the law of the land. Senators will now wait up to two weeks for CBO to review the House-passed bill.

The CBO analysis of the first version of the AHCA showed 24 million people would lose insurance coverage over the next 8 years. A widely-cited Quinnipiac University poll in March found that just 17 percent of respondents backed its passage, and that was before Republicans amended the measure to allow states to weaken popular consumer protections.

In a sign of the challenges ahead for the legislation, nearly every major-medical group, including the American Medical Association, American Hospital Association and the AARP, strongly opposed the Republican bill. In an analysis released on Thursday, healthcare consultancy and research firm Avalere Health said the Republican bill would cover only 5 percent of enrollees with pre-existing conditions in the individual insurance markets.

Following CBO analysis, it could take several weeks to agree on revisions, or a new bill entirely, that would then either be sent back to the House or to a conference committee for more negotiations. While the bill’s fate in the Senate is uncertain, its House passage could boost Trump’s hopes of pushing through other big ticket items on his agenda, such as tax reform.

The failure of previous efforts on the healthcare legislation had raised questions about how much Republicans could work together to help Trump fulfill his campaign pledges. Repealing Obamacare is the Senate’s problem now. Many people struggling with soaring premiums, deductibles, co-pays and other onerous costs blame Obamacare for their woes. Trump will become the target of the same criticism if Trumpcare passes, and probably even if it doesn’t.

The oil rally following OPEC’s deal has disappeared. Oil futures dropped to their lowest since late November on growing signs that OPEC’s production cuts are failing to clear a surplus of crude. Oil stocks felt the pinch, with the S&P Oil & Gas Exploration and Production Index slumping as much as 4.9 percent. OPEC is widely expected to extend its production caps for another 6 months but they are unlikely to make deeper cuts.

To counter OPEC cuts, US crude output has risen to the highest since August 2015 as shale drillers add rigs every week. US crude output rose by 28,000 barrels a day last week for the longest run of gains since 2012, according to Energy Information Administration data. Crude stockpiles fell by 930,000 barrels, far less than expected.

Meanwhile on the demand side, China has hit a speed bump and the Chinese government has clamped down on financial leverage and increased regulatory scrutiny of commodity trades.

In other oil-market news: Royal Dutch Shell reported adjusted first-quarter earnings of $3.75 billion, compared with $1.55 billion a year earlier.

US shale driller Chesapeake Energy posted its first quarterly profit since 2014 and braced shareholders for a production surge in the second half of the year as new natural gas and oil wells come online. Chesapeake Energy lost as much as 9.8 percent of its value.

Pioneer Natural Resources saw as much as $1.4 billion in market value wiped out on Thursday.

California Resources, the Los Angeles-based explorer spun off by Occidental Petroleum in 2014, fell as much as 11 percent.

In metals markets, copper posted its biggest 2-day loss since 2015 as the London Metal Exchange reported a 25 percent increase in copper stockpiles. Copper down 1% today, following yesterday’s 3.5% drop.

Meanwhile, iron ore is in full retreat, trading limit down and nickel dropped to a 10-month low on the LME, down 5.3% in the past 2 days. And all this commodity action is happening as the US dollar index continues to inch slightly lower.

Tennessee-based First Horizon agreed to buy North Carolina’s Capital Bank Financial in a deal the companies valued at $2.2 billion. They said it will make one of the largest regional banks in the Southeastern US. However, investors were far from excited and both stocks slumped.

Another busy day of earnings news. Viacom, the owner of MTV, Comedy Central and Nickelodeon, reported second-quarter profit that beat estimates on Thursday, but news that Charter Communications had re-tiered five of Viacom’s flagship networks to its most expensive programming tier, a move that will likely result in lower affiliate revenue for the media company, prompted a steep selloff.

Viacom, along with its peers, is also under pressure as more viewers cancel cable subscriptions to watch content online and advertisers increasingly shift ad dollars to the web. The pay-TV industry just reported its worst-ever first quarter subscriber loss, at an estimated 726,000 subscribers, over five times last year’s loss.

CBS Corp’s quarterly revenue and profit beat analysts’ estimates as the company benefited from higher content licensing and subscription fees, led by the streaming version of its Showtime network. Shares of the most-watched U.S. TV network were up 1.8 percent.

Advertising sales, which accounts for half of the company’s total revenue, fell 23 percent to $1.6 billion from a year earlier, which included popular events such as the 50th anniversary of the Super Bowl and an extra National Football League playoff game. Revenue from the company’s content licensing and distribution segment rose nearly 16 percent, while its affiliate and subscription revenue was up 16.6 percent.

Cornflakes maker Kellogg reported a better-than-expected quarterly profit. The world’s largest cereal maker has been battling weak sales as shoppers prefer healthier options over its processed food offerings. Kellogg launched the “Project K” restructuring program four years ago in a push to drive profit by cutting jobs and optimizing production.

Net income rose to $262 million, or 74 cents per share, in the first quarter ended April 1, from $175 million, or 49 cents per share, a year earlier. The planned tax benefit resulted in a 14-cent benefit to the company’s adjusted profit per share.

Shake Shack sinks after same store sales stall. (say that 5 times fast) Comparable sales for the quarter dropped 2.5%. The burger chain also said full-year 2017 same-store sales will be flat, trimming previous guidance for 2-3% growth.

Cities can sue banks over predatory lending. In Bank of America v City of Miami, the Supreme Court considered whether Miami may attempt to recoup losses it suffered from the 2008 recession by suing Bank of America and Wells Fargo, two of America’s biggest banks, for extending low-cost loans to white people while selling black people and Latinos risky mortgages with high fees and inflated interest rates.

Miami claimed that a decade of discriminatory lending contributed to segregation and led minority borrowers to miss payments and lose their homes. Foreclosures then depressed property values, bringing boarded-up windows and dangerous street corners. This spurred Miami to spend more on policing, fire protection and other city services while its tax base withered.

The impact on the city’s finances, Miami claimed, made it an aggrieved party under the Fair Housing Act (FHA), a law passed in 1968 prohibiting racial discrimination in the lease, sale and financing of property. The swing vote was Chief Justice John Roberts.

The Commerce Department reported the trade deficit dipped 0.1% in March, even as deficits with Mexico and Japan hit an almost 10-year high. The deficit dipped to $43.7 billion in March – a five-month low. Exports slid 0.9% to $191 billion, largely reflecting fewer shipments of pharmaceutical drugs and American-made cars. Imports edged down 0.7% to $234.7 billion.

There will be six Federal Reserve officials speaking on Friday and economists will be listening for clues about balance-sheet policy. The central bank did not shed any new light on the internal discussions on its plans to reduce its $4.5 trillion balance sheet on Wednesday when it released a short statement after a two-day meeting, where they left interest rates unchanged.

Initial U.S. jobless claims fell by 19,000 to 238,000 in the last week of April. Tomorrow is a Jobs Report Friday. Last month the March report showed a weak 89,000 new jobs. The April report is expected to bounce back with about 185,000 jobs.

Stocks Lag Over Healthcare Bill Future

Charles Schwab: On the Market

Posted: 3/24/2017 4:15 PM ET

Stocks Lag Over Healthcare Bill Future

U.S. equities lost momentum late in the day as investors awaited the tally of today’s result of the healthcare vote, only to be left in the dark after President Trump asked Speaker Ryan to pull the bill in the wake of a lack of “yes” votes. In economic news, preliminary durable goods orders were mixed for February and Markit's Manufacturing PMI Index fell short of estimates, but remained in expansion territory. Treasuries, gold and crude oil prices were all higher, while the U.S. dollar dipped.

The Dow Jones Industrial Average (DJIA) fell 60 points (0.3%) to 20,597 and the S&P 500 Index shed 2 points (0.1%) to 2,344, while the Nasdaq Composite was 11 points (0.2%) higher at 5,829. In moderate volume, 791 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.27 higher to $47.97 per barrel and wholesale gasoline gained $0.02 to $1.62 per gallon. Elsewhere, the Bloomberg gold spot price rose $3.20 to $1,248.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 99.58. Markets were lower for the week, as the DJIA lost 1.5%, the S&P 500 Index decreased 1.4%, and the Nasdaq Composite was 1.2% lower.

After the closing bell yesterday, Micron Technology Inc. (MU $28) announced fiscal 2Q earnings of $0.77 per diluted share on a GAAP basis and $0.90 per diluted share ex-items, versus the FactSet estimate of $0.86, while revenues jumped 58.4% year-over-year (y/y) to $4.7 billion, roughly matching expectations. Shares of MU were sharply higher.

GameStop Corp. (GME $21) also reported earnings after the close yesterday, announcing 4Q earnings of $2.36 per diluted share on a GAAP basis and $2.38 per diluted share ex-items, topping the FactSet estimate of $2.29, while revenues dropped 13.6% y/y to $3.1 billion, roughly in line with forecasts. Shares of GME finished solidly lower.

A large amount of investor focus was tuned to the current health-care bill that was expected to be voted on yesterday by the House of Representatives, but was postponed to today, only to be pulled from voting today. Though the legislative process is currently underway, many questions still surround the health-care industry and may or may not be addressed by the proposed legislation, however, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA tackles this sector with his three-to-six month outlook in the most recent Schwab Sector Views: How Should Investors Look at Health Care Now?. And be sure to check out Brad's views on ten other sectors at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

Mixed read on durable goods orders

February preliminary durable goods orders (chart) rose 1.7% month-over-month (m/m), compared to the Bloomberg estimate of a 1.4% rise and January's upwardly revised 2.3% increase. Ex-transportation, orders were 0.4% higher m/m, compared to forecasts of a 0.6% gain and versus January's upwardly revised 0.2% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.1%, versus projections of a 0.5% increase, and following the favorably revised 0.3% decline in the month prior.

The preliminary Markit U.S. Manufacturing PMI Index came in at 53.4 for March, down from February's final read of 54.2, and compared to estimates calling for an improved level of 54.8. A reading above 50 denotes expansion.

Treasuries were higher, as the yield on the 2-year note was unchanged at 1.26%, the yield on the 10-year declined 2 basis points (bps) to 2.40% and the 30-year bond rate decreased 3 bps to 3.01%.

As noted in the recent Schwab Market Perspective: Teflon Market, helping to bolster our belief in a strengthening economy—and our bullish stance—is the increased hawkishness of the Federal Reserve and their decision to hike rates at the March Federal Open Market Committee (FOMC) meeting. Additionally, the Fed signaled willingness to continue to hike rates in the coming months, which would mark the first time we would see more than one hike in a year since the financial crisis. Read the whole perspective at www.schwab.com/marketinsight. Also, for analysis on the Fed and its implications for bond investors, see the video from Schwab's Chief Fixed Income Strategist, Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick titled Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Europe lower following delayed health-care vote, Asia mostly higher

European equities finished trading mostly lower on Friday with financials and energy issues leading the decline. Traders seemed to be exercising a cautious and uncertain tone following the delayed health-care vote in the U.S. The declines in the region developed despite some upbeat manufacturing data as Germany and France both posted better-than-expected manufacturing PMI reads, though France also announced its 4Q GDP grew at a 1.1% annualized pace which was just shy of the 1.2% forecast. Elsewhere, U.K. consumers have coped fairly well since the Brexit referendum; however, they may face a real-income squeeze in 2017 as recent reports reveal the lowest level of household saving in the country since the 2008 crisis. The British pound declined versus the U.S. dollar after a U.K. policy maker attempted to downplay the chances of an interest rate increase. In his recent article The future of Europe: EU 2.0 and its impact on the markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, informs us that after 60 years of integration, a rising tide of nationalism threatens to pull Europe’s union apart in the years ahead and there are five possible scenarios defined by the European Commission to address the question of what Europe may look like in 2025. Find out what these scenarios are by reading the whole article at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher following the delayed health-care vote in the U.S. and as the yen weakened, giving markets in Japan a boost, while comments from Bank of Japan (BoJ) Governor Kuroda may have also lent a hand. In referring to the central bank's current government bond buying program, Kuroda said that he does not think it will face difficulties in the near future and that the BoJ will not raise its target level of the long-term interest rates just because of such rises in other countries. Schwab's Director of International Research Michelle Gibley, CFA, discusses in her recent article Fed Rate Hikes May Benefit Japanese Stocks, that the central bank wants to overshoot its 2% inflation target in a bid to get people accustomed to the idea of rising prices again. This could keep changes by the BOJ at bay for some time. Read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks in China and Hong Kong were higher, despite recent concern over central bank policy, as Schwab's Jeffrey Kleintop, CFA, discusses in his recent article The Fed has China in a Tough Spot, where he notes that additional Fed rate hikes in 2017 may put increasing strain on China and revive worries about growth, currency and capital flows as tough trade negotiations near. Read the rest of the article at www.schwab.com/oninternational. Australian securities advanced, with banks contributing solidly to the gains, while listings in India also gained ground, but those traded in in South Korea declined.

Stocks unable to erase losses for the week

U.S. stocks finished the trading week noticeably lower, though most of the downward action took place during Tuesday's session. The economic calendar was slow to start and without much data to drive direction, equities pulled back from recent all-time highs that were reached earlier this month. The delayed health-care vote also seemed to subdue sentiment, but didn't exacerbate the weekly decline. When economic data began to dole out, traders were treated to some mixed housing reports as existing home sales and mortgage applications declined, but new home sales increased and topped expectations. Additional reads showed weekly jobless claims unexpectedly rose and some regional manufacturing activity moved further into expansion territory.

In earnings news for the week, Nike Inc. (NKE $56), Cintas Corp. (CTAS $126), and Lennar Corp. (LEN $51) bested top line projections, though NKE announced a contraction in gross margins, while FedEx Corp. (FDX $188) and General Mills Inc. (GIS $59) missed forecasts. In her latest article, Big Machine: Why Large Caps Are Likely to Outperform, Schwab’s Chief Investment Strategist Liz Ann Sonders notes that momentum, breadth, sentiment, earnings, valuation and macro conditions currently support a bias within the U.S. equity market toward large caps over small caps. Read why at www.schwab.com/marketinsight.

Data expected next week

Next week, the U.S. economic calendar will again start slowly, with Monday's sole release expected to be the Dallas Fed Manufacturing Index, but the docket will be relatively busy for the remaining four days. A report that will likely garner a fair amount of attention is Thursday's release of the third and final read on 4Q GDP. However, when viewing the results our experts remind us in the recent Schwab Market Perspective, that investors should remember that GDP growth is backward-looking and the stock market is forward looking; which is why leading economic indicators are more valuable "forecasting" tools for the stock market. Read more at www.schwab.com/marketinsight.

Additional reports of note for next week include the advance goods trade balance, wholesale inventories, the Richmond Fed Manufacturing Index, pending home sales, personal income and spending, and the final University of Michigan Consumer Confidence Index.

The international calendar will bring some data worth noting: Japan—retail sales, jobless rate, CPI, industrial production, construction orders, housing starts and vehicle production. China—current account balance, manufacturing PMI and non-manufacturing PMI. Eurozone—consumer confidence and CPI, along with German Ifo business climate survey, Import Price Index, CPI and retail sales. U.K.—consumer credit, GDP, total business investment and GfK consumer confidence.

Financial Review

Trumpcare

Sinclair Noe — March 7, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 29 = 20,924
SPX – 6 = 2368
NAS – 15 = 5833
RUT – 9 = 1374
10 Y + .02 = 2.51%
OIL – .16 = 53.04
GOLD – 9.70 = 1216.40

Healthcare stocks were in focus today after the GOP unveiled its Obamacare replacement bill, called the American Health Care Act. The bill rolls back the Medicaid expansion and eliminates the individual mandate, which requires everyone to buy health insurance.

Under the ACA, tax credits were provided to 85% of people enrolled in the exchanges, and the amount of the subsidy was determined based on income level, geographic region, and age. The amount of the tax credit in the House bill is based exclusively on age: The older you are, the more you get per month (though still less than you would get under the ACA).

A report from the non-profit Kaiser Family Foundation found that older Americans will receive significantly less help paying for their premiums, as will the poorest young Americans. Americans earning $40,000 to $75,000, on the other hand, are the winners—their subsidies will increase. The proposal would  kill a 3.8% investment tax on the wealthy that had used to finance the health-care law. It would also kill a 0.9% surcharge on wages above $250,000.

Under the ACA, insurers could not discriminate against people with pre-existing conditions like cancer, diabetes, or heart disease. The new plan does away with coverage for pre-existing conditions and institutes a continuous coverage provision.

People who have lapses in insurance cannot be denied coverage, but they can be charged more. Enrollees cannot have gone 63 continuous days (or more) without coverage, or they would pay a 30% penalty on premiums.

Older consumers would pay more for coverage under the GOP plan. The oldest consumers on the individual market are 64, just shy of the Medicare eligibility age of 65, and under the Affordable Care Act they can be charged no more than 3 times what a 21-year-old would pay. The GOP plan would broaden the age bands, as these rate limits are called, to 5 to 1, allowing insurers to charge the oldest consumers five times more than younger ones.

What’s more, the proposal would give the states the latitude to broaden those limits even further or to constrict them back to 3 to 1 or another level. Moving to a 5-to-1 rating would increase monthly premiums for a silver plan in 2018 by 25% for a 64-year-old before tax credits.

Older consumers would get hit with a double whammy: not only may their premiums increase, but the restructured tax credits won’t go as far as those under the Affordable Care Act in subsidizing the premium cost. The new tax credits are based on age, not on income, while many of the consumers on the individual market are lower income.

The new tax credits would also rise at a slower rate than under the Affordable Care Act, where credits were pegged to the cost of the second-lowest cost silver plan in the consumer’s region. That benchmark reflects the true market cost of the plan. The new peg, by contrast, is pegged only to a measure of inflation.

The GOP’s plan includes the phase out of the Medicaid expansion. About 10.7 million people were newly eligible for Medicaid coverage after the ACA went into effect. One of the only ways to pay for the GOP’s health subsidies and cut taxes the ACA imposed on the wealthy is to cut off federal Medicaid funding.

States will be allowed to continue to enroll people into Medicaid until 2020. Then, it will “freeze,” and no other enrollees can be added, the thinking being people will eventually drop out of the program as they earn more money; 31 states expanded Medicaid to people above the poverty level under the ACA, and the Republican plan would roll that back, though how has become a major point of argument inside the party.

There are several other components to the bill, including restrictions on funding for Planned Parenthood, plus more generous use of health savings accounts. But the meat and potatoes is that the bill repeals the mandate and replaces it with a 30 percent premium penalty for anyone – healthy or sick – who does not maintain continuous insurance coverage; which sounds kind of like a mandate, and will surely be challenged in the courts.

The tax credits for buying insurance are also altered and reduced, making it more expensive for the old and poor. And major cuts to Medicaid funding which are already running into roadblocks. With Medicaid reductions and smaller tax credits, there is a strong chance that many people would lose their coverage. In other words, the new plan is less of a repeal and more of a revamp or re-branding, absent significant improvements and sustainable solutions.

The proposal has not yet been scored by the Congressional Budget Office, the federal agency that calculates the impact that proposed legislation would have on the debt and other considerations; that means we do not know how it will be paid for and whether it will cost more than ACA.

If all proceeds smoothly, and the votes are lined up, the full House could vote on the bill within two weeks. The votes might not be lining up. The new bill to replace Obamacare is being savaged by early bad reviews from a wide range of conservatives, with one Republican senator declaring it “dead on arrival” in the Senate – if it can make it through the House, and it would take less than two dozen defections among Republicans to sink the repeal effort, assuming Democrats vote as a bloc.

In other words, this could be a long, drawn out process. Just a reminder, Trump has said the repeal and replace of Obamacare needed to take place before moving on to tax reform.

Drug companies were generally lower today, including Endo, Valeant, and Mallinckrodt, which were all down more than 4%. Generics giants Allergan and Mylan were also down as much as 2%.

Losers in the hospital space include Tenet Healthcare, down 4%, and Universal Health Services, down about 2%, and HCA Holdings was down a bit less than 1%.

Biotech stocks were also getting hit, including Juno Therapeutics, Sage Therapeutics, and Intercept Pharmaceuticals, each down as much as 2%. The large health insurance stocks were flat.

The US Citizenship and Immigration Services said it plans to suspend fast-track processing for the H-1B skilled-worker visa program, a move that could slow down the process of hiring foreign workers for US companies.

The US trade deficit shot up in January to a five-year high. The trade deficit rose 9.6% to $48 billion in January from a revised $44 billion in December. The wider deficit was spurred by a 2.3% increase in imports of consumer goods such as cell phones from China and other countries.

The higher cost of oil also boosted the value of US imports. Imports totaled $240 billion in January. US exports, meanwhile, rose a smaller 0.6% to $192 billion. Exports of cars and trucks, oil and soybeans all rose sharply.

Looking further afield, a new report shows the Eurozone economy grew by 1.7% in the fourth quarter. This was in line with expectations and slightly slower than US growth over the same period. However, German industrial orders in January delivered a nasty shock, slumping 7.4%.

In South America, new figures from Brazil show the country continues to grind through its longest recession ever, spanning eight consecutive quarters. Brazil’s economy shrank 3.6% in 2016. That’s just a slight improvement from 2015, when it contracted 3.8%, but still far from good.

Exxon Mobil promised to invest $20 billion over 10 years to build and expand refineries, chemical and liquefied natural gas plants along the Gulf Coast. Chairman and CEO Darren Woods said the work, which would focus on 11 plants in Texas and Louisiana, would create 12,000 permanent jobs and 35,000 construction jobs. Exxon currently has about 71,000 employees. The promised $20 billion, decade-long investment would be roughly equal to Exxon’s total capital spending last year.

The Justice Department is seeking additional information from General Electric and Baker Hughes over their pending merger, extending the waiting period related to the regulatory review until 30 days after the companies comply. GE announced a deal in October to combine its oil and gas business with Baker Hughes, forming one of the industry’s largest oilfield services and equipment companies.

Salesforce announced an artificial intelligence partnership with IBM. As part of the agreement, data from Big Blue’s Watson will be available to Salesforce customers, and the cloud company’s technology will be integrated into IBM’s system for internal use.

Amazon has abandoned its legal battle to protect its Alexa assistant with First Amendment rights – for now. The company filed a motion against a police search warrant in an Arkansas murder case earlier this month, but dropped it after the defendant agreed to hand over the data contained on his Echo speaker. Amazon previously claimed that voice interactions were a “constitutionally protected opinion.”

RadioShack stores are closing again. General Wireless, the joint venture with Sprint that purchased 1,700 stores from the original RadioShack Corp. after it filed for bankruptcy in 2015, apparently hasn’t been able to fix the 96-year-old brand. General Wireless is now preparing its own bankruptcy filing.

Toshiba is spinning-off its core memory chip business and seeking outside investors in it. Potential suitors include Apple, Foxconn, TSMC, Microsoft, Western Digital, Micron, and SK Hynix. Apple could have the edge to win the business, which would allow it to lock in memory technology for its iPhone and other products. Micron and SK Hynix face antitrust issues while Foxconn faces national security issues. The seller values the business at $17-18 billion. Bids are due March 29.

The Oakland Raiders have found a financial partner to back their new proposed stadium in Las Vegas. Bank of America has been secured to help complete financing on a $1.9 billion, 65,000-seat stadium that would be located on the Las Vegas Strip.

The state of Nevada has committed $750 million to the project, with the team and the league paying the remaining cost contingent on the owners’ approval. The Raiders are eligible for relocation, but 24 of the 32 NFL owners must approve any move. The league’s owners are set to meet in Phoenix later this month.

FINANCIAL REVIEW

Fans of Gridlock

Sinclair Noe — November 21, 2014

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

DOW + 91 = 17,810
SPX + 10 = 2063
NAS + 11 = 4712
10 YR YLD – .02 = 2.32%
OIL + .77 = 76.62
GOLD + 5.80 = 1201.30
SILV + .15 = 16.50

Record highs for the Dow and the S&P.

China has cut interest rates for the first time in more than 2 years. The first thought is that China is trying to stimulate growth for a slowing economy. However, in making the announcement, the People’s Bank of China tried to emphasize that the economy is growing within a reasonable range, and the rate cut was not about spurring growth. Instead, they emphasized the need to reduce corporate financing costs to help struggling companies. So, you might think that lower rates would only encourage more borrowing in a country that already has too much debt. What the Chinese central bank appears to be doing is making it feasible to refinance the existing debt at lower rates, which would allow Chinese companies to lessen their debt burdens. So, in this way, lower rates is a way to deleverage.

And this is not the first attempt at reducing borrowing costs. Since September the People’s Bank of China has provided more than $130 billion in medium term loans to banks on the condition they lower borrowing rates for small businesses; trying to channel to certain industries, including small and rural businesses as well as government-financed low-income housing projects, without adding excess capacity to other industries, such as steel and real estate. The problem is that this did not work; most of China’s piecemeal efforts to make lending more affordable have not worked, and so the next step was to cut rates. And despite the official story, China is concerned about growth. China’s economy, the world’s second-largest after the US, grew by 7.3% year-over-year in the third quarter, its slowest pace in more than five years, and short of their 7.5% growth target.

Meanwhile, a lack of real demand for loans, rather than a shortage of credit, is holding the Chinese economy back; and whatever the justification, the People’s Bank of China is loosening monetary policy, and this is probably not the last rate cut. China joins the European Central Bank and the Bank of Japan in stimulative monetary policy, which raises the question of whether we are in a new round of currency wars or economic battles due to slow growth. Probably not, but this does add extra cash into the global financial system, and the global markets love free money.

Today, Mario Draghi, the chief of the European Central Bank said that inflation must be brought back to target “without delay”, paving the way for full-blown quantitative easing. Draghi says low growth and a lack of inflation must be reversed. Draghi stressed that while there had been improvements in the financial sphere, these had “not transferred fully into the economic sphere”, where the situation “remains difficult”. I wonder if he has heard of “pushing on a string?” Most markets moved higher today, including Europe and the US, which started the day with triple digit gains on the Dow.

Last night President Obama delivered a speech on immigration; I’m sure you heard about it – or maybe not; it was a prime time address, except it wasn’t covered by the major networks, which instead decided to air The Biggest Loser, The Big Bang Theory, and Grey’s Anatomy. Today, Obama was signing memorandums that will defer deportation for up to 5 million people who came to the US as children and for parents of children who are citizens or legal permanent resident, provided they meet certain requirements. The administration says the changes won’t provide an easier path to citizenship. Separately the administration will streamline the visa process for foreign workers and their employers and provide more options for foreign entrepreneurs. The plan also calls for tightening border security. The executive order potentially shields as many as 5 million undocumented immigrants from the threat of deportation for up to 3 years.

The White House’s Council of Economic Advisers said the plan by 2024 would raise gross domestic product by at least 0.4%, expand the size of the labor force by between 147,000 and 297,000 workers, and raise average wages for US-born workers by 0.3%. There are widely different views about the economic impact of immigration changes, with some economists arguing that if you increase the supply of labor, you will put downward pressure on wages; the counter argument is that you aren’t really increasing the pool of labor, just bringing it out of the shadows, and that should boost wages, at least in the near term.

The executive action is temporary, and to that end Obama issued a challenge to Congress to pass legislation.

The president’s decision to act unilaterally infuriated Republicans, and already there are threats of lawsuits and cutting off funding for specific agencies that would be tasked with the immigration orders, and maybe also shutting down the entire government. Government funding expires Dec. 11, and lawmakers must make new appropriations or risk a shutdown. No decisions are expected until after the Thanksgiving holiday.

Although today, the Republicans sued Obama; not on immigration; they finally filed a lawsuit against the president over implantation of the Affordable Care Act. Actually, the president was not named as a respondent; the suit names the secretary of health and human services and the Treasury secretary.

The suit claims that the administration’s actions, including the delay of the employer mandate and cost-sharing for insurance companies, were beyond the normal discretion the executive branch has to carry out laws. The first issue that will have to be addressed is “standing.” To get into court, the House would have to prove that it was damaged by the way the administration carried out the ACA, and courts have consistently rejected that idea.

Anyway, if you are a fan of gridlock, you’ll love the next 2 years in Washington DC.

Meanwhile, amnesty is alive and well. I’m not talking about immigration, rather on the other end of the food chain where the non-enforcement of the law protects the elite bankers. Today, a Senate banking subcommittee is digging into the cozy culture between Wall Street bankers and the New York Fed, which is one of the top entities that polices Wall Street, following reports from ProPublica which released 46 hours of recordings of meetings between regulators at Goldman Sachs and the regulators’ bosses at the New York Fed. At the hearings, NY Fed president William Dudley at one point rejected his role as a banking regulator, saying “Our orientation is the safety and soundness of the firms we supervise.” Dudley went on to describe his role as more of “a fire warden, not a cop on the beat.” One thing is certain, Dudley is not a bank regulator. In what looks like a defensive move, the Federal Reserve announced it would review crucial aspects of its bank supervision.

Meanwhile, this is Day 2 of another Senate Committee hearing into how banks have cornered physical commodity markets and how they’ve been rigging prices, specifically Goldman Sachs in the aluminum market. Meanwhile, in what looks like a defensive move, the Federal Reserve announced it is considering putting several new limits on Wall Street’s involvement in the commodities market. The Fed has been examining the need for new rules since 2010.

Much of the shale oil boom can be traced back to Wall Street, where years of low interest rates encouraged energy companies to fuel their growth by tapping eager investors in the bond and loan markets. Now, the price of oil has dropped 25% in 3 months. Many energy companies built their business based on prices around $90 a barrel and a drop to $60 a barrel could cause energy companies to default on their debt, which could start a cascading effect that pushes the whole US energy sector into distress. Energy bonds now account for about 16% of the $1.3 trillion junk bond market, up from about 4% a decade ago; it is the largest sector in the high-yield market.

Not much in the way of economic reports today. The Labor Department released state by state unemployment numbers; nonfarm payroll employment increased in 38 states and decreased in 12 states. North Dakota has the lowest rate of unemployment at 2.8%, and Georgia had the highest rate of unemployment at 7.7%. Arizona remains in the bottom 10 at 6.8% unemployment.

Next week’s economic calendar includes the Tuesday release of the S&P/Case-Shiller report on home prices. Wednesday brings a report on durable goods orders which might give us some indication of capital spending. Also, Wednesday a revision to the third quarter GDP numbers, likely going down from the initial estimate of 3.5% growth. Friday is a half day for the markets. Why not just take the day off? Well the markets are never supposed to be closed for more than 3 consecutive sessions.

Wednesday, March 26, 2014 - Render to Caesar

by Sinclair Noe

Financial Review

DOW – 98 = 16,268
SPX – 13 = 1852
NAS – 60 = 4173
10 YR YLD - .03 = 2.70%
OIL + 1.03 = 100.22
GOLD – 5.90 = 1306.80
SILV - .27 = 19.84

Durable goods orders increased 2.2% in February, ending 2 straight months of declines. Durable goods are items like refrigerators, cars, and airplanes that are built to last for several years. But we need to dig into this report just a little; orders for non-defense goods, excluding aircraft, were actually down 1.3%. This might also indicate that first quarter business investment is weak.

The US Census Bureau began releasing data from its 2012 Economic Census, a survey of American businesses taken every 5 years. The enormous boom in domestic oil and gas production helped make the mining, quarrying and oil and gas extraction industry one of the fastest growing sectors of the US economy. The number of businesses rose 26% from 2007 to 2012, employment in the sector rose 24% and revenue surged 34%. Meanwhile, from 2007 to 2012 manufacturing lost 2.1 million jobs, now down to just 11.3 million people employed in manufacturing.

The finance and insurance sector shed 390,000 jobs between 2007 and 2012 and industry revenue fell by $137 billion, nearly 4%. But revenues in 2012 were still up 61% from 15 years earlier. There were one million retail stores operating in 2012. But the retail trade sector shed 65,000 establishments and nearly 778,000 jobs from five years earlier. Internet-based selling was something of a bright spot, with the number of “nonstore retailers” rising 12%, though employment was basically flat. The health care and social assistance sector is the nation’s largest employer, with 18.6 million workers in 2012. That’s up 11% from five years earlier, and revenue for the industry rose 23% to just over $2 trillion.

President Obama said after a summit with top EU officials that Russian President Vladimir Putin had miscalculated if he thought he could divide the West or count on its indifference over his annexation of Crimea. The United States and the European Union agreed to work together to prepare possible tougher economic sanctions in response to Russia's behavior in Ukraine. The sanctions could possibly include the energy sector.

Yesterday, the Supreme Court went back to revisit the Affordable Care Act, hearing the consolidated arguments in Sebelius v. Hobby Lobby and Conestoga Wood Specialties Corp, in which the owners of the for-profit businesses Hobby Lobby and Conestoga claim they should be allowed to deny their employees health insurance coverage for certain types of birth control based on the owners' personal religious beliefs.

 In enacting the ACA, Congress required large employers to provide basic preventive care for employees. That turned out to include all 20 contraceptive methods approved by the Food and Drug Administration. Under the law, religious nonprofits were exempted from this requirement, but for-profit corporations were not. Hobby Lobby's attorneys argue that the law violates the company's constitutional right to religious freedom by forcing it to cover all forms of birth control or pay steep fines.

This is a very interesting case on several levels. The Supreme Court, in business cases, has held that "incorporation's basic purpose is to create a legally distinct entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created it, who own it, or whom it employs." In recent constitutional law cases, however, the justices seem to have forgotten this basic principle of corporate law. In Citizens United, the court effectively held that corporations enjoyed the same free speech rights as ordinary individuals.

Now, in the Hobby Lobby case, the owners of the craft store chain want the court to again forget about the basic principles of corporate law and decide that corporate personhood extends beyond free speech to religious freedoms. It seems a bit of a stretch. Hobby Lobby’s owners certainly have constitutionally protected religious rights, but Hobby Lobby's owners aren't required by the law to do anything. The legal duty falls on Hobby Lobby, the company, not its owners. If Hobby Lobby fails to provide the required insurance, the company, not the owners, is responsible.

The Hobby Lobby case would require the Supremes to "pierce the corporate veil"; legalese for looking behind the corporation's legal identity and basing a ruling on the interests and desires of the owners of the firm, but Hobby Lobby's owners only want to pierce the veil for this one issue, birth control, while maintaining the protections of the corporate form for everything else, including limited liability. The whole point of corporations being “people” is that they are distinct from their owners, officers, and employees.

Hobby Lobby should only have the rights of legal personhood that are essential for its operations. Supreme Court Chief Justice John Marshall wrote nearly 200 years ago, "Being the mere creature of law," the corporation "possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence." In Citizens United, the Supreme Court said this includes some limited speech rights, as we ordinarily expect firms to advertise and communicate with employees and customers.

Not everyone, or even a majority, agree with the Citizens United ruling. A February 2010 ABC News-Washington Post poll found 80% of Americans opposed Citizens United and 72% support the idea of a legislative workaround to reinstate the limits the court lifted. And expanding corporate personhood to religious liberty, well that’s even more of a stretch.

Until 1990, the court applied a tough test to examine laws that disadvantaged people's religious beliefs. Then, the justices changed direction in a case involving penalties for the use of peyote as part of a Native American religious ceremony, the court ruled that as long as a law that applies generally to all citizens is neutrally applied, it is constitutional, even though it may have some unhappy consequences for some believers. 

Congress didn’t like the decision, and in 1993 passed the Religious Freedom Restoration Act. Under the act, if a law imposes a substantial burden on the free exercise of religion, it has to meet a high threshold for justification. Hobby Lobby claims the religious practice of the corporation now faces a substantial burden. And if there is a burden, can the government justify it with a “compelling state interest” and the “least restrictive means” of reaching it.

The case raises some interesting philosophical arguments that began with the liberal justices peppering Hobby Lobby’s lawyers with slippery-slope hypotheticals.  If Hobby Lobby can deny coverage for contraception, why couldn’t a Christian-Scientist-owned company deny health insurance completely?  What if a Muslim-owned company wanted to make employees were burqas on the job? What then?

 “How does a corporation exercise religion?” that was a question posed by Justice Sotomayor yesterday.

Justice Anthony Kennedy, who many expect to be the swing vote in this case, questioned both sides aggressively. Kennedy asked why the company couldn't just choose not to provide health insurance at all, pay a tax and then raise salaries to allow employees to purchase health care on their own. Assuming that would be a financial "wash," Kennedy asked, "Then what would your case be?"

And that may very well be the key question of the day, for two reasons. First, is it a “substantial burden’ for a company to not offer health insurance to its employees? For Hobby Lobby they are looking at about $26 million in taxes, but that is cheaper than the cost of the insurance; a bigger burden is the loss of competitive advantage. Justice Kagan, in particular, effectively said “so what?”  But is that really true? Is it really a trivial thing to not offer a desired benefit to employees?  I guess we’ll see in June. The second reason is that the individual mandate is a tax.

Let’s take the way-back machine to the summer of 2012. And we land on the steps of the Supreme Court in Washington DC. Chief Justice John Roberts has just issued a decision in the case of National Federation of Independent Business v. Sebelius. Surprisingly, Roberts sided with the 4 liberal justices to determine that the Affordable Care Act is constitutional and that the individual mandate is not valid as an exercise of Congress’ commerce clause power but the majority upholds the mandate as a tax. 

Chief Justice Roberts wrote in the controlling opinion: "The individual mandate cannot be upheld as an exercise of Congress's power under the Commerce Clause. That Clause authorizes Congress to regulate interstate commerce, not to order individuals to engage in it. In this case, however, it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation is within Congress's power to tax."

Obamacare, or the Affordable Care Act, relies upon the individual mandate, which basically says you get insurance or pay a penalty, and that mandate is a tax. We all have to pay taxes, individuals and corporations alike. There are many ways the government spends tax dollars that I don’t like; you probably feel the same way; someone might even have religious objections to the way the government spends tax dollars. But we all have to pay taxes; that decision was handed down a long time ago: “Render to Caesar the things that are Caesar’s and to God the things that are God’s.” And we’ll see if the Supreme Court can recognize the difference.