Financial Review

Turkey

Sinclair Noe — February 13, 2017

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DOW + 142 = 20412
SPX + 12 = 2328
NAS + 29 = 5763
RUT + 3 = 1392
10Y + .02 = 2.43%
OIL – .98 = 52.88
GOLD + 8.20 = 1225.70

Wall Street hit record highs again. Stock markets around the world were higher this morning. The S&P 500’s market value topped $20 trillion. The markets appear to be pricing in a best-case scenario for Trump tax cuts, deregulation, plus infrastructure spending. The problem is that Washington is unlikely to deliver best-case.

There are differing opinions on where to cut taxes, by how much, and when. Some of the proponents of tax cuts are also strong deficit hawks who will need to reconcile the books with more than blind faith and dynamic scoring. Even if you think you have the right economic theory, there are always unintended consequences.

Don’t hold your breath waiting for tax action this year. The budget is not agile, and even if unanimity is possible (highly doubtful), it will take time. Assuming of course that there are no distractions. Good luck. Infrastructure spending is not exactly shovel ready and there will be sharp disagreements. So far, Trump’s plan largely means privatizing infrastructure development with tax credits.

Federal Reserve board governor Daniel Tarullo said he would resign from the Fed, leaving the central bank on or around April 5. This now creates three openings at the Fed for the Trump administration to fill. Tarullo was the Fed governor in charge of overseeing financial regulation.

A major part of the post-election rally in stocks was centered on deregulation of the financial sector. Today, the Financial Select Sector SPDR fund (XLF) was up 1.2 percent. Investors may be betting Tarullo will be replaced by a regulator who is friendlier to the banking industry.

Federal Reserve Chair Janet Yellen is not expected to give any clear hints as to the timing of the next rate hike in her semi-annual testimony to lawmakers in Washington this week, but we will get a better idea about inflation trends with release of the CPI report on Wednesday. The first point of interest will be whether Yellen provides any more guidance on the possibility of a March rate hike.

Markets have so far written off the chance, pricing in just an 18 percent probability of a quarter-point move. But that may be too low, given that Yellen is likely to signal that the Fed is close to meeting its inflation and employment goals set by Congress.

A Federal Reserve Bank of New York survey showed inflation expectations are running hot. Consumers expect inflation in the year-ahead to increase to 3.0 percent, from 2.8 percent in December and 2.5 percent in November.

Canadian Prime Minister Justin Trudeau met with President Trump to discuss a variety of topics including jobs, trade, and immigration. Trump said the United States will be “tweaking” its trade relationship with Canada, stopping short of calling for a major realignment. It was a polite meeting – of course.

Japan, the largest holder of Treasuries, cut back on the debt by the most in almost four years in December, according to data from the Ministry of Finance. This appears to be part of a global trend in Treasury ownership, as investors seem increasingly wary of stepping into the nearly $14 trillion market, with uncertainty over the new administration’s policies and the prospect of higher US interest rates. Foreigners still hold almost $6 trillion in US government debt, or about 43%; that’s down from 56% in 2008.

On the surface, this is an alarming development, considering that these investors own almost half of the Treasuries outstanding. Their flight could signal a drastic rise in borrowing costs. China is the biggest seller of US Treasury debt. China has been funneling billions of dollars into its economy to keep it chugging along despite an increasing number of cracks in its credit system and to prevent its currency from depreciating too quickly. Despite all its efforts to prevent money from leaving the nation, capital outflows are continuing.

Japanese Prime Minister Shinzo Abe wrapped up a visit to the US with President Trump calling for a trade relationship that is “free, fair, and reciprocal.” Trump also committed to “the security of Japan”.

The US, Japan, and South Korea have requested a Monday meeting at the UN after North Korea launched an intermediate-range ballistic missile into the Sea of Japan Sunday, violating UN restrictions.

Two US cabinet votes today. The Senate is expected to approve Trump’s nominee for Treasury secretary, Steven Mnuchin, and David Shulkin for Veterans Affairs secretary. Mnuchin is among the prominent Goldman Sachs alums populating the Trump administration.

Copper has been on a tear lately thanks to supply disruptions at the world’s largest mine caused by a strike, plus strong demand from China. Rio Tinto Group said that iron ore prices, which have surged to the highest level since August 2014, are not going to fall off a cliff. In soft commodities, sugar traders are bracing for a wild ride, with global stockpiles set to fall to their lowest levels since 2011-12, meaning the outlook for prices is almost completely dependent on the weather in the coming year. In the shorter-term, there is good news for Valentine’s Day as chocolates should be cheaper on the back of a boom in cocoa supplies.

OPEC reports January oil production fell by 890,000 barrels a day compared with December, confirming that its members have so far largely complied with an agreement to slash output. The largest contributor to the output reduction was Saudi Arabia with data showing that it trimmed almost 500,000 barrels per day of production in January.

Almost 200,000 people have evacuated from several Northern California counties after damage to a spillway at the Oroville Dam. The dam remains intact, but the emergency spillway, which guards against the overflow of the dam when water levels are high, was eroding Sunday.

The damage prompted a mandatory evacuation for cities and counties near Lake Oroville. In the worst-case scenario, an uncontrolled release from the dam could send a 30-foot wall of water downstream. But for now, the dam is holding. Workers are draining the lake. Water levels have now dropped 4 feet lower than the emergency spillway, which suffered damage during its first ever water release over the weekend.

Workers with the Department of Water Resources are scrambling to reduce the lake’s overall water level to 50 feet below the emergency spillway elevation of 901 feet. That mission has taken on added urgency as heavy rains are expected later in the week.

Allergan said it would buy Zeltiq Aesthetics for about $2.5 billion. Allergan agreed to pay $56.50 per Zeltiq share, or a premium of 14.4 percent to the company’s Friday close. Zeltiq is known for its body contouring technology, the CoolSculpting System. Allergan, the maker of Botox, has been on an acquisition spree since its $160 billion merger with Pfizer collapsed in April.

South Korean prosecutors summoned Jay Y. Lee, the third-generation heir of the Samsung conglomerate, for a fresh round of questioning, seeking answers about his role in a political corruption scandal. Special prosecutors had previously summoned Lee, the 48-year-old vice chairman of Samsung Electronics, as a bribery suspect in the scandal, as authorities attempted to zero in on payments made by Samsung to organizations linked to the impeached president’s confidante.

Shares in Toshiba moving higher today on reports that tomorrow it will reveal the extent of losses related to its takeover of a nuclear business in 2015. The Japanese firm had originally said in December that it was expecting billions of dollars in losses, which caused shares to tank and lose more than half their value.

Oracle has filed an appeal in its case against Google. In May, Oracle lost a court case against Google and Android regarding bits of code copied from Java — but now it’s arguing that the jury didn’t have all the information it needed to reach a verdict.

South Carolina’s biggest labor union vote in decades scheduled to take place Wednesday; a knock-down, drag out between Boeing and the International Association of Machinists. About 3,000 production workers will be eligible to vote in the election — one of the biggest tests of organized labor in a state with the lowest percentage of union workers nationally.

South Carolina is a right-to-work state, which means no workers can be required to join a labor union. Just 1.6 percent of South Carolina workers belong to a union. This is the second time in two years at the IAM has scheduled a vote at the Boeing campus. In 2015, the union canceled the vote days before it was scheduled to take place, citing political interference and misinformation from Boeing management.

Walt Disney hiked admission prices for US theme parks by as much as $5 for certain one-day tickets. The price increase, effective Sunday, are an annual tradition for Disney parks.

Financial Review

Double Hat Trick

Sinclair Noe — February 10, 2017

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

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DOW + 96 = 20,269
SPX + 8 = 2316
NAS + 18 = 5734
RUT + 10 = 1388
10 Y + .01 = 2.41%
OIL + .81 = 53.81
GOLD + 5.70 = 1234.50

Reckitt Benckiser has agreed to buy Mead Johnson Nutrition for $90 a share, or $16.6 billion, taking the UK consumer-products group into the infant food market. Including debt, the deal is valued at $17.9 billion. The transaction will add to Reckitt’s per-share earnings in the first full year.

Blackstone has agreed to acquire insurance broker AON’s employee benefits outsourcing unit for $4.3 billion in cash, giving Blackstone ownership of a business that processes work benefits for 15% of the U.S. population. It will also allow Aon to exit the capital-intensive business, allowing it to invest in growth areas beyond its core insurance brokerage operations.

The University of Michigan preliminary February consumer sentiment index fell to 95.7 from January’s final reading of 98.5. The most marked decline was in a forward-looking part of the survey, down 5.1% from January.

Oil is rallying on OPEC. West Texas Intermediate crude oil is higher after data released by the International Energy Agency showed a record-high 90% compliance to the OPEC output deal in the first month.

The IEA, which advises industrial nations on energy policy, said that if current compliance levels are maintained, the global oil stocks overhang that has weighed on prices should fall by about 600,000 barrels per day in the next six months.

But this may be as good as it gets for OPEC; participation in production cuts has been uneven among OPEC members, with Saudi Arabia shouldering the cuts to compensate for other countries which continue to pump – a situation that won’t continue indefinitely.

The Labor Department says import prices increased 0.4 % last month after an upwardly revised 0.5 % rise in December. In the 12 months through January, import prices jumped 3.7 %, the largest gain since February 2012, after advancing 2.0 % in December.

Import prices are rising as firming global demand lifts prices for oil and other commodities, but the spillover to a broader increase in inflation is being limited by dollar strength. Prices for imported fuels increased 5.8 % last month. Import prices excluding fuels fell 0.2 %. The report also showed export prices edged up 0.1 % in January.

Iron ore futures surged past $100 a ton, while spot ore rose to $83.84 a dry ton, the highest since October 2014. The rise came after official data showed that China’s exports surged 7.9% from a year earlier in dollar terms, leaving the country with a trade surplus of $51.4 billion.

In a shift, President Trump agreed to honor the “one China” policy during a phone call with China’s leader Xi Jinping. Trump angered Beijing in December by talking to the president of Taiwan and saying that the United States did not have to stick to the policy.

Trump held a news conference today with Japanese Prime Minister Shinzo Abe at the White House. The US and Japan account for nearly a third of the global economy. Trade in goods and services between the world’s No.1 and No. 3 economies was worth nearly $268 billion in 2015.

Trump vowed that the currencies of the US, China and Japan would soon be on “a level playing field.” Trump did not explain how the three countries would reach a level playing field, or what he meant by the phrase. Trump also said he will make a fresh policy announcement next week in response to the court ruling blocking his travel ban. Again, no details.

$21.6 billion. That’s how much an internal Department of Homeland Security report says Trump’s “wall” along the U.S.-Mexico border would cost. The report’s estimated price tag is much higher than a $12 billion figure cited by Trump during his campaign and the $15 billion estimate from top Republican leaders in Congress.

Meanwhile, the European Union is struggling with a familiar problem – Greece. The country could soon run out of cash and would not be able to make crucial debt repayments. Greece is currently on a third bailout program worth €86 billion euros ($92 billion); that bailout program still has more than a year to go, but the IMF is worried that Greece’s debt is not sustainable.

If indeed European creditors recognize next week that Greece has completed all the agreed measures for the second bailout review, then this would pave the way for new disbursements. With fresh funds, Greece should be in condition to meet deadline payments next summer and avoid a financial collapse.

But the view among creditors is that such a deal next week is “unlikely”. Even as Greece has shown some economic growth, 0.4% last year with 2.7% forecast for 2017, and the Greeks have managed to build a small budget surplus; the Greeks debt load continues to increase, yields on government bonds has climbed into double digits and debt has increased to an expected 183% of the country’s total economy from 159%.

And the main reason is that the Greeks are not eligible to participate in the European Central Bank’s Quantitative Easing program. And right now, the ECB is the only buyer of Euro bonds.

The IMF weighed in this week, publishing its analysis of the challenges to the Greek economy. The IMF says that in addition to needed reforms, European governments need to provide debt relief to Greece. The IMF analysis is that Greece represents a real problem without debt relief; Euro creditors believe they can present a unified front to break the deadlock. Eurozone governments, and especially Germany, are opposed to debt relief.

Today, Greece’s creditors called for more reforms in the form of more austerity measures. The additional austerity dose would hardly be accepted by the government led by Alexis Tsipras. The leftwing Greek leader promised not to impose further cuts or tax raises after almost seven years of painful measures adopted in exchange for the lenders’ money.

The Greeks have also opposed further pension adjustments, as it has adopted 11 cuts since 2010. There is a possibility of snap elections, which would add a new layer of uncertainty. And if things go wrong with Greece, Italy is next in line, with the second highest debt burden among Eurozone nations, plus a dangerously weakened banking system.

The Greek debt crisis seems like the never-ending economic story but that doesn’t mean the problem has been resolved. It doesn’t mean there is an imminent collapse, but consider this – Germany has been repatriating its gold. Germany has been bringing gold home from New York and Paris since 2013.

So far, 642 tons has been transferred. They just expedited a transfer of 330 tons stored with the New York Federal Reserve. They still have about 100 tons in a vault in Paris. Why the rush? The German central bank says it is bringing the gold home to help build public “trust and confidence.”

Sears Holdings reported a 10.3% drop in comparable store sales for the holiday quarter, and said it would cut debt and pension obligations by at least $1.5 billion this year. Sears also announced a new plan to cut costs by at least $1 billion in 2017 by reducing overhead, improving merchandise at its stores and through better inventory management.

Renault peddled SUVs to Europeans and it worked. The French car company’s 2016 profit surged 38% to $3.4 billion from the year before thanks to the popularity of its new SUVs among Europeans. CEO Carlos Ghosn said the automaker would be open to a merger with Nissan if the French government would sell its stake in Renault.

Sweden’s SAAB  has offered to build the world’s most modern fighter aircraft factory in India, it said on Friday, as it goes head-to-head with US rival Lockheed Martin to supply hundreds of locally produced planes to India’s military.

Danish wind turbine maker Vestas Wind Systems has jumped to the top of the U.S. wind market, overtaking General Electric in new capacity installed last year. Vestas, the world’s biggest wind turbine maker, supplied 43% of the 8.2 gigawatts of wind power capacity connected to the US power grid last year; GE supplied 42%.

The Galaxy S8 will be unveiled in New York next month, per the Wall Street Journal, and Samsung is ready to display a whole host of new features. While the physical home button will be stripped away and the fingerprint scanner moved to the back of the device, and only curved-screen versions will be released. The company will also showcase its new virtual assistant called Bixby, and possibly its recently trademarked “Samsung Hello.” And yes, it will have a headphone jack.

For many liquors, aging is the key to their distinct flavors. Brandy is no exception, with top-shelf labels spending years in casks. But chemists think they have discovered a shortcut—ultrasound. Spanish researchers blasted ultrasound through a barrel of brandy for 3 days and the results were close to 2 years of aging.

Now, if they can just figure out a way to reverse the aging process. Still, something to keep in mind as we head into the weekend –  if you are clever, you can get a lot done in just a couple of days.

Financial Review

7 Straight

Sinclair Noe — August 2, 2016

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DOW – 90 = 18,313
SPX – 13 = 2157
NAS – 46 = 5137
10 Y + .03 = 1.53%
OIL – .43 = 39.67
GOLD + 10.40 = 1363.80

The Dow logged its seventh straight drop, while the Nasdaq snapped its five sessions winning streak. The S&P 500 broke out of a very tight consolidation pattern, but still managed to close with a loss of less than 1%.  WTI crude oil erased an early gain and closed down 1.1% at a four-month low.

Consumers boosted spending by 0.4% in June — the third straight strong increase — but they’ve also been saving less to fund their purchases.  Income growth has not been keeping pace with spending. Incomes rose 0.2% in June for the second straight month.

As a result, the personal-savings rate dropped to 5.3% and matched a 15-month low. Savings had hit a four-year high earlier in the year. Inflation as measured by the PCE index edged up 0.1% in June. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.9% in the 12 months ended in June. That’s unchanged from in the prior month.

The annual rate of core inflation was also flat at 1.6%.  Although inflation has been creeping higher lately, there still are no signs of widespread price pressures in the U.S. economy.

CoreLogic reports home prices were 5.7% higher in June compared to a year ago, and prices were up 1.1% from May to June. They forecast a 5.3% increase in home prices over the next year. Including distressed sales, national single family home prices remain 6.7% below peak values recorded in April 2006. Mortgage rates dipped in June to their lowest level in more than 3 years. Among major metro areas, Denver had the lowest unemployment rate and the strongest home price appreciation. Arizona saw a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s cabinet approved a $274 billion stimulus package. The Bank of Japan last week only tweaked its monetary stimulus. By total size, the stimulus package ranks among Japan’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies. The program will include money for infrastructure projects, including a magnetic-levitation train line connecting Tokyo and Osaka, as well as reconstruction projects in the southern region hit by earthquakes in April.  It also will pay for cash handouts to 22 million low-income people.

The Federal Reserve reports loan standards to commercial and industrial firms and commercial real estate tightened for the fourth straight quarter in the three months ended in June. The survey also found standards on all categories of residential real estate mortgage loans were little changed, except some easing for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac. The report also showed that demand for most types of residential real estate loans strengthened over the second quarter.

Major automakers in the U.S. market reported July vehicle sales slightly below expectations as the pent-up demand that has helped drive sales since 2009 plays itself out. In a continuing trend, consumers shunned passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%. Ford sales slipped 3%. Fiat Chrysler sales rose 0.3%. Nissan reported a 1.2% increase. Honda surprised with a 4.4% increase. Ford shares dropped 4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen jumped almost 10% today, after the Wall Street Journal reported that Merck and Allergan have each informally expressed interest in a possible acquisition. A takeover of Biogen would be the biggest of a biotech company since 2008, and one of the largest takeovers by a drug company on record. Biogen makes drugs that treat multiple sclerosis and hemophilia, and its main focus overall is on neurological and autoimmune diseases, as well as rare diseases.

Pfizer said it has reached a $486 million settlement of shareholder litigation accusing it of causing big losses for shareholders by concealing safety risks associated with its Celebrex and Bextra pain-relieving drugs. Pfizer pulled Bextra from the U.S. market in April 2005, and agreed in September 2009 to pay $2.3 billion to settle a U.S. government probe into the marketing of Bextra and other drugs. The accord is subject to negotiation of a final settlement agreement and court approval, and would end more than 11 years of litigation against the drug maker.

Also, Pfizer reported better-than-expected quarterly results, driven by lower taxes and sales of generic medicines, but revenue from its array of branded patent-protected medicines brought disappointment. Pfizer did not offer any hints on whether it plans to split into two separate companies, a long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings through Tuesday morning, 71 percent have topped analyst expectations, according to Thomson Reuters data. Earnings for the second quarter are expected to show a decline of 2.6 percent, an improvement from the expected 4.5 percent decline on July 1.

Emerson Electric, which makes factory automation equipment, said it would sell two units for a total of $5.2 billion as the company focuses on its high-growth businesses. Emerson will sell its network power unit to investment firm Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The Reserve Bank of Australia lowered its benchmark interest rate to a record-low 1.50%, as expected. The central bank’s board noted “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

European bank stocks were crushed again today. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s total losses to more than 30%; with Germany’s Commerzbank pacing today’s decline among individual names, down 8.2% after reporting a 32% drop in quarterly profits.

Credit Suisse and Deutsche Bank – will be dropped from the STOXX 50, an index of Europe’s top 50 blue-chip companies next week. Credit Suisse and Deutsche Bank shares have lost half their value this year. Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

Deutsche’s plight should be of particular concern. Its shares are now worth barely a quarter of its book value. That is a twofold bind: proof that investors distrust the bank; and a practical block on being able to raise the equity needed to boost regulatory capital and absorb the cost of fines; and Deutsche faces considerable fines.  Investors are again pricing in a risk that the bank’s coco (or contingent convertible) bonds will be bailed in. Last month, the International Monetary Fund issued a report that concluded Deutsche is probably “the most important net contributor to systemic risks in the global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte dei Paschi, which utterly failed the stress test last week and now requires recapitalization. The Financial Times reports: “The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalization with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalization fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.”

The only good news is that Monte dei Paschi is nowhere near as big as Deutsche Bank. Italy is turning into the next Greece. Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi has non-performing loans around one-third of its assets. I’m not sure how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where new, confirmed cases of Zika virus that appeared to be locally transmitted were reported. It was the first time the government health agency tasked with preventing the spread of disease has issued such an advisory for the Zika virus within the 48 contiguous US states, and it appeared to be the first time the CDC has warned against visiting any part of the continental United States for health reasons.

The warning applied to a one-square-mile area north of downtown Miami. Despite the narrowness of the warning, it may be problematic for Florida’s important tourism industry. The state drew in more than 100 million visitors and generated more than $89 billion of economic activity last year

At the end of last year, the FAA mandated—arguably as a stopgap against potentially stricter regulations from Congress about how citizens can use drones—that anyone wishing to fly a consumer drone weighing more than a half pound needed to get a registration number from the FAA for $5.

At a conference at the White House today on the future uses of drones in US airspace, Federal Aviation Administration director Michael Huerta told the gathered crowd that more than consumer 500,000 drones had been registered with the agency since December. According to the FAA, it took 100 years for about 320,000 regular aircraft to be registered with US officials—a feat that drones have surpassed in a matter of months.