Financial Review

Toxic

Sinclair Noe — August 17, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 274 = 21,750
SPX – 38 = 2430
NAS – 123 = 6221
RUT – 24 = 1358
10 Y – .03 = 2.20%
OIL + .23 = 47.01
GOLD + 4.70 = 1288.50
BITCOIN – 0.70% = 4286.30 USD
ETHEREUM + 2.42% = 297.73

All 30 companies in the Dow Industrials finished in negative territory.

Cisco Systems fell 4% after the networking-equipment company late Wednesday reported earnings that missed forecasts and lowered its guidance for next quarter, and Walmart fell 1.6% after its results, which included lower-than-expected sales from its Sam’s Club division.

All 11 of the S&P 500’s sectors closed lower on the session, which has only happened two other times this year.

And the Nasdaq was the biggest percentage loser – down 1.9%. The last time all three major benchmarks finished down 1% or more was May 17.

The Dow is now 1.7% off its closing record, with the S&P 500 and Nasdaq off 2.1% and 3.1% their respective closing highs. Meanwhile, the small-cap oriented Russell 2000 index fell 1.8% to finish at just below 1,359, its first close below its 200-day moving average in 14 months.

The latest deadly use of a vehicle to carry out mass violence occurred Thursday in the Spanish city of Barcelona, where a van mowed down pedestrians on a busy avenue popular with tourists. Many things about the event remain unclear, but it appears that a dozen people have died and about 100 are injured.

ISIS has claimed responsibility and 2 suspects are in custody. Increasingly, cars, trucks, and vans have become weapons of terrorists, from a white supremacist’s deadly attack on protesters in Charlottesville, Va. last weekend to several other vehicle attacks in European cities in recent months.

Airline stocks were among the bigger losers Thursday, with American, Alaska Air and Delta among the 10 worst performers in the S&P 500. The big carriers tend to get hit when people worry about terrorism and the possible impact on global travel.

An exchange traded fund that owns leading companies in Spain also fell after the attack. The iShares MSCI Spain ETF (EWP) was down more than 2%, led by drops in Banco Santander and Telefonica.

Stocks were already having a bad day because of lingering concerns over President Trump’s rift with business leaders. Yesterday, Trump’s Manufacturing Council and the Strategy & Policy Council quit. Today comes word the President’s Advisory Council on Infrastructure, which was still being formed, will not move forward.

The moves marked a most unusual repudiation by American business leaders. The bar for a chief executive of a public corporation to repudiate a United States president is extraordinarily high. Corporate leaders aren’t given their power, prestige, responsibility and nine-figure pay packages to use the corner office as their personal soapbox.

Such a public breakup between a president and business leaders left corporate historians at a loss for precedent; apparently this kind of thing has never happened.

So far, there have been no resignations among White House staff or the administration’s cabinet. However, a rumor this morning that Gary Cohn would resign seemed to spook Wall Street.   Gary Cohn is Trump’s chief economic adviser. Cohn is the former president of Goldman Sachs. Cohn is a calming influence in the administration.

He is also a point man on Trump’s push for tax reform, where his deal making skills will come in handy with Congress. Cohn is now under pressure to quit after the president on Tuesday doubled down on blaming both sides in a white-supremacist rally in Virginia that turned violent and trying to claim that there were many fine people on both sides.

Just a reminder, there are videos of the rally in Charlottesville of protesters carrying torches and Nazi flags and chanting “Jews will not replace us” and “blood and soil”. Temple Beth Israel in Charlottesville was patrolled by armed militia with semi-automatic rifles, and worshippers said it was like they were under siege.

There are several reports today that Cohn was deeply offended by Trump’s remarks. Several former colleagues have urged him to resign before his reputation takes an unrecoverable hit. Many of his former clients abandoned the president’s CEO advisory councils earlier this week because of Trump’s remarks.

Cohn is also considered the front-runner to replace Janet Yellen a chair of the Federal Reserve, when her term expires in February. So, Cohn has a decision to make. Does he try to stick it out or does he cut bait now.

If Cohn leaves, there would be a definite lack of economic talent left in the administration. But it’s not just Cohn, the big issue spooking Wall Street is that if Cohn leaves, it could spark a mass exodus.

Nearly all the nation’s top military leaders unequivocally condemned racism in public messages Wednesday. Five of the country’s top uniformed leaders — of the Army, Navy, Air Force, Marine Corps and National Guard — have all sent tweets critical of “racism,” “hatred” and “extremism.”

The chairman of the Joint Chiefs of Staff, Gen. Joe Dunford was traveling and told reporters in Beijing, “I can absolutely and unambiguously tell you there is no place — no place — for racism and bigotry in the U.S. military or in the United States as a whole.”

Trump unloaded on two Republican senators, Lindsey Graham of South Carolina and Jeff Flake of Arizona. Graham had criticized Trump’s Charlottesville response, prompting Trump to accuse him of telling a “disgusting lie.” Graham said Trump suggested there was a “moral equivalency” between white supremacists and those who protested the rally. Trump has blamed “both sides” for the violence.

Trump called Flake “toxic” and all but endorsed Kelli Ward, who is challenging Flake in a primary. “Great to see that Dr. Kelli Ward is running against Flake,” Trump tweeted. Flake said Wednesday on Twitter, “We can’t claim to be the party of Lincoln if we equivocate in condemning white supremacy.”

It’s possible Trump will further comment when he visits Phoenix on Tuesday for a rally for his 2020 re-election campaign. Although Phoenix Mayor Greg Stanton issued a statement that he was disappointed to learn of Trump’s visit so close to the violent events in Charlottesville.

The mayor called on Trump to delay the visit.  The statement said: “If President Trump is coming to Phoenix to announce a pardon for former Sheriff Joe Arpaio, then it will be clear that his true intent is to inflame emotions and further divide our nation.”

The Labor Department reports initial jobless claims in the period running from Aug. 6 to Aug. 12 declined by 12,000 to 232,000.

Philly Fed’s manufacturing index for August came in at 18.9, compared with a reading of 19.5 in the prior period.

The leading economic index rose 0.3% last month after a 0.6% increase in June, suggesting potentially faster growth in the final six months of 2017.

Industrial production rose in July for the second month in a row. Output climbed 0.2% last month, a touch below expectations. Production at utilities surged 1.6% as Americans cranked up the AC to deal with another sweltering summer.

Mining output also rose 0.5% — the fourth straight increase — reflecting in part frackers pulling more oil and natural gas out of the ground. Yet output among manufacturers slipped 0.1%, the third decline in five months. The drop-off largely stemmed from lower production among auto makers whose sales have cooled off.

Auto production sank 3.5%. Production of business equipment and construction output also declined.

Arizona’s unemployment rate remained unchanged at 5.1% in July. The national unemployment rate declined from 4.4% in June to 4.3% in July. A year ago, the Arizona seasonally adjusted rate was 5.2% and the U.S. rate was 4.9%.

Arizona lost 20,900 Nonfarm jobs in July. The Private Sector lost 9,400 jobs and government lost 11,500. Arizona Nonfarm employment grew by 1.7% (45,000 jobs) over the year in July.

Walmart reported second-quarter earnings and revenue that topped Wall Street estimates, boosted by an increase in foot traffic and by strong online sales. Shares, however, are trading down by about 2%.

America’s largest brick-and-mortar retailer said US comparable-store sales rose 1.8% versus a year ago, making for the 12th straight quarter with positive results. Walmart said food categories delivered their strongest comparable-store sales performance in five years. Walmart raised its guidance slightly.

Alibaba reported yet another winning set of quarterly financials. Revenue was up 56% on-year hitting $7.4 billion, and operating profit more than doubled over the same period to hit $2.88 billion. While investors will likely be pleased, the Chinese government is not.

The Cyberspace Administration of China sent a warning to Alibaba, its music-streaming subsidiary Xiami, and three other companies. The letter accused Taobao, Alibaba’s e-commerce marketplace, of allowing some of its vendors to sell “tools that break computers’ IT systems,” “illegal controlled substances,” “illegal VPN tools,” and “internet accounts.”

It demanded that Alibaba immediately remove such vendors from its site, and called on it to launch a “self-investigation.” Alibaba is almost as valuable as Amazon and closing the gap fast.

Mylan has finalized a $465 million settlement resolving Justice Department claims it overcharged the government for its EpiPen emergency allergy treatment, which became the center of a firestorm over price increases.

The settlement resolved claims that Mylan avoided higher rebates to state Medicaid programs by misclassifying EpiPen as a generic product, even though it was marketed and priced as a brand-name product. Under the deal, Mylan did not admit wrongdoing. It will reclassify EpiPen and pay the rebate applicable to its new classification as of April 1, 2017.

Financial Review

Stuff Happening

Sinclair Noe — June 8, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 8 = 21,182
SPX + 0.65 = 2433
NAS + 24 = 6321
RUT + 18 = 1415
10 Y + .02 = 2.19%
OIL + .04 = 45.68
GOLD – 9.20 = 1278.60
BITCOIN + 0.04% = 2826.04
ETHEREUM + 0.61% = 259.56

We had a bunch of stuff happening today. The Dow Industrials hit a record high intraday, but could not hold on for a record high close. The trading session went from positive to negative and back.

The Nasdaq Composite did manage a new record high. But it looks like markets are still trying to digest everything. The S&P 500 traded in a range of about one-half of one percent.

The VIX, the volatility index, also known as the “fear gauge,” held at historically low levels. The dollar and bonds both traded lower but nothing out of the daily norm.

Let’s start with the testimony of former FBI Director Jim Comey before the Senate Intelligence Committee. The public hearing lasted nearly 3 hours. I won’t try to recap everything. One or two interesting points. None of the senators questioning Comey tried to claim that Comey was lying about his representation of his meetings with President Trump, however there was sharp disagreement over the significance of their conversations.

A one point, Comey said Trump lied. None of the senators tried to claim Trump did not lie. However, after the hearing, Trump’s lawyer, and spokesperson Sarah Huckabee Sanders had the unenviable task of proclaiming the president is not a liar. Comey did not answer some of the most pointed questions because of the classified nature. He later testified before a closed-door committee. We do not know what he said there.

We certainly learned more today than yesterday, when Intelligence chiefs Coats and Rogers stonewalled the Committee, but what Comey said in public is not the be-all, end-all of this investigation, no matter how much you might want to debate about the minutiae and innuendo and nuances of the testimony.

While it was compelling television, it is just one small piece of the puzzle; nothing that exonerated nor nailed the coffin. Perhaps the most important thing we learned today is that contemporaneous memorandums of communication carry probative value.

In other words, it was a smart move to keep a diary. The bottom line is what I said a month ago when Comey was fired: “Comey… is going to consume most of the oxygen in Washington for the foreseeable future.”

We are not seeing much progress on tax reform or an infrastructure plan. This doesn’t mean nothing is happening, just that it is now on a back burner, and time is running out. The Senate is working on its version of Trumpcare but if they can’t come up with something substantially different than the House, it will be dead on arrival.

Today, the House of Representatives voted largely along party lines to replace the 2010 Dodd-Frank Wall Street reform law, a move that is expected to die in the Senate but open the door to revamping or eliminating regulations that came out of the 2007-09 financial crisis. No real word on what might replace Dodd-Frank, other than the prospect of just letting the banksters run wild.

The  European Central Bank left interest rates and policies unchanged while trimming expectations for inflation through 2019. While that was largely expected, the shared currency fell as ECB President Mario Draghi said in his news conference that the euro area still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment.

The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, but that is apparently a debate for another day.

According to an exit poll released shortly after voting ended, Prime Minister Theresa May will win 314 seats in Britain’s election, short of a majority in the 650-seat parliament. That is an exit poll, not official results.

Prime Minister May called the snap election in a bid to strengthen her hand in Brexit negotiations, to win more time to deal with the impact of the divorce and to strengthen her grip on the Conservative Party. It appears that her electoral gamble failed. If the exit polling numbers hold, it means May’s Conservative Party would have to form a coalition or attempt to govern with the backing of other smaller parties.

For investors, the over-riding factor is likely to be greater uncertainty about whether there will be a deal on Brexit and what it will look like. A delay in forming a government could push back the start of Brexit talks, currently scheduled for June 19, and reduce the time available for what are expected to be the most complex negotiations in post-World War Two European history.

Labour, led by veteran socialist Jeremy Corbyn, could attempt to form a government with those smaller parties, which strongly oppose most of May’s policies on domestic issues such as public spending cuts.

If Corbyn’s Labour does take power with the backing of the Scottish nationalists and the Liberal Democrats, both parties adamantly opposed to Brexit, Britain’s future will be very different to the course the Conservatives were planning and could even raise the possibility of a second referendum. The unofficial exit polls sent a small shock through markets, pushing the pound sterling down.

Brazil’s top electoral court excluded testimony of engineering company executives from an illegal campaign funding trial against President Michel Temer, a move that suggested it would throw out a case that had threatened to unseat him.

The Commerce Department’s quarterly services survey, or QSS, showed consumer spending, including healthcare spending, increased at a faster clip than the government had assumed in its second estimate of gross domestic product published last month.

The QSS data suggested first-quarter GDP could be revised up to as high as a 1.5 percent annualized rate from the 1.2 percent growth pace reported in May. Growth in the current quarter may be above 3 percent, due to payback from the first quarter’s 1.2 percent reading, but the underlying trend appears to be holding steady at close to 2 percent for the year.

The Federal Reserve reports net worth of U.S. households and nonprofit groups rose by $2.35 trillion, or 2.5 percent, to $94.84 trillion in the first quarter from the previous three-month period. Household wealth has grown, boosted mostly by a 5.5 percent gain in the Standard & Poor’s 500 Index last quarter and house price appreciation that matched the biggest year-over-year increase since 2014.

Now, the bad news. Household debt increased at a faster rate, or 3.2 percent, as mortgage borrowing advanced at a 3 percent pace. Other forms of consumer credit, including auto and student loans, climbed at a 5 percent rate, the slowest since 2013.

Although measures of consumer confidence have risen since the elections in November, that hasn’t necessarily translated into spending, helping to temper economic growth.

The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 245,000 for the week ended June 3. The Tuesday JOLT survey showed high job openings, and firms appear to be holding on to their workers.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 118 straight weeks. Low layoffs and record high job openings suggest a deceleration in job growth in May was likely because companies could not find suitable workers. Labor market tightness could encourage the Federal Reserve to raise interest rates at its June 13-14 policy meeting.

Department store operator Nordstrom said that some members of the Nordstrom family were considering taking the company private as it struggles with an industry-wide sales slowdown. Going private, which would involve raising debt, would be a risky but potentially profitable bet by Nordstrom’s founding family and largest shareholder bloc that the company can reshape itself and emerge from the retail meltdown stronger.

Shares of the Seattle-based clothing and accessories retailer ended 10.3 percent higher.

Hudson’s Bay Company disclosed that it will be cutting around 2,000 positions within North America as part of a major restructuring effort. HBC owns several major department stores, including Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor.

Yahoo shareholders approved the company’s pending sale of its core internet business to Verizon for $4.48 billion. Yahoo expects that the deal will close on June 13, 2017. The closing of the deal, announced in July, had been delayed as the companies assessed the fallout from two data breaches that Yahoo disclosed last year. Verizon plans to cut 2,100 jobs upon completing the acquisition.

Alibaba Group announced today at an investor conference that is expects revenue growth of 45-49 percent in the 2018 fiscal year. That figure compared with 56 percent revenue growth posted for the 2017 fiscal year ended March 31. At the same event last year, the firm predicted 48 percent revenue growth

 Alibaba was up almost 14% today.

The FDA just requested that Endo International take its extended-release opioid painkiller Opana ER (otherwise known as oxymorphone hydrochloride) off the market. The agency said that the decision came after it found that the drug’s benefits no longer outweighed its risk for abuse.

FDA commissioner Scott Gottlieb said in a news release: “We are facing an opioid epidemic – a public health crisis, and we must take all necessary steps to reduce the scope of opioid misuse and abuse.” If Endo doesn’t remove the drug from the market voluntarily, then the FDA can formally withdraw its approval.

Endo shares dropped 14% in after-hours trade.

Financial Review

Black Hole Sun

Sinclair Noe — May 18, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 56 = 20,663
SPX + 8 = 2365
NAS + 43 = 6055
RUT + 5 = 1361
10 Y + .02 = 2.23%
OIL – .01 = 49.34
GOLD – 14.10 = 1247.80

Yesterday the stock market had a little panic attack. As is often the case, these things pass. Therefore, it is important to see confirmation of a major move.

Today we did not see confirmation. Equities did not take kindly to news of Trump influencing or impeding an FBI investigation. The S&P 500 closed at the lows, down 1.8%, and the Nasdaq wiped out 18 days of gains in one session.

So, yesterday was not insignificant, but looking back over the last half year, it is not enough, in and of itself to change the trend, which is still up.

The news of the week is important, and it was a catalyst for the big sell-off yesterday, but while the term ‘impeachment’ may appear more frequently in the press today, the process is initiated by a vote in the House, where Republicans hold a 45-seat majority.

A House impeachment of President Trump would look unlikely. But that doesn’t mean Trump’s problems have been resolved, just slow-tracked. Late yesterday, a special prosecutor was named – former FBI Director Robert Mueller – and whatever the outcome of his investigation, nothing will happen immediately.

Meanwhile, Rep. Jason Chaffetz said today that he will resign from Congress next month, a move that calls into question the future of the House Oversight Committee’s investigation of President Donald Trump and his campaign’s ties with Russia.

Washington can make a slug look like a speed demon. Nothing is imminent and so the markets rebooted. Traders bought the dips. That said, this is proving a distraction from the president’s agenda, including what should be a more detailed budget released next week.

After months of major stock markets posting record highs and historically low volatility across a range of asset classes, something was bound to snap and nobody knows whether it was a one-off or an omen. We’ll get clues in the days and weeks ahead, but a day like yesterday should jolt us from our lethargy and remind us that volatility hasn’t died.

The VIX index was jolted from its slumber yesterday and chalked up its seventh-biggest rise in percentage terms since its launch in 1990. This is an appropriate time to look at risk levels and reassess where we are as investors.

The dollar, two- to 10-year Treasury yield curve and yields on 10-year Treasury Inflation-Protected Securities (TIPS) are all back where they were before Trump was elected in November. The spread between two- and 10-year Treasury yields is its smallest since before the presidential election.

This so-called yield curve flattening suggests investors are losing faith in the economy’s ability to withstand higher interest rates. Money markets have slashed the probability of the Federal Reserve raising rates next month to less than 60 percent from over 90 percent last week.

The U.S. economy is already into its third-longest expansion ever, and a recent fall in the U.S. economic surprises index suggests it is running out of steam. That does not mean a recession is in the offing but it might point to slightly slower growth.

Any time we see a shift, the fast money will look for fresh opportunities. The gap between the U.S. and European surprises indexes is the widest in two years, U.S. corporate earnings growth is double-digit but still lagging the euro zone, and the political turmoil that was supposed to beset Europe this year is concentrated in the United States.

Yesterday was not enough to push investors to cash or run scared but today many investors reconsidered their tactical positions, and rethink their appetite for risk.

Earlier in the day the Philadelphia Federal Reserve said business activity index rose in May after declining for two months. Weekly unemployment data also pointed to strength in the labor market.

Brazilian markets took a big hit, the benchmark Bovespa dropped about 9%. One of the country’s largest newspapers reported that a secret recording exists of President Michele Temer approving a payment to Eduardo Cunha, the former House speaker and mastermind behind last year’s impeachment of former President Dilma Rousseff.

The tape was submitted to the Supreme Court by two senior executives from meat-packing giant JBS as part of a plea bargain deal, according to O Globo newspaper, in which information is offered in exchange for reduced sentences. Though the president’s office confirmed the meeting between Temer and a JBS executive took place in March, it denied Temer asked for payments to silence Cunha.

Temer is far from the only politician to be tied to the corruption scandal, dubbed “Operation Car Wash,” which has implicated nearly all of Brazil’s political class, including every senior member of the ruling party.

Earnings reports from major brick and mortar retailers have been a long list of disappointments, with the occasional exception of Home Depot or Target, and today Walmart reported. Wal-Mart said sales at U.S. stores open at least a year rose 1.4 percent, better than estimates. Investments to bring more customers into the discount retailer paid off and a bigger push into e-commerce boosted online purchases.

Online sales rose 63 percent in the first quarter, which was higher than 29 percent growth in the fourth quarter and 20 percent in the third quarter. Walmart said it is benefiting from a $2.7 billion investment to increase entry-level wages and enhance the training of its workforce, which has led to better stocked shelves and cleaner stores.

Walmart earned $1 per share, topping estimates of 96 cents. Consolidated net income fell to $3.04 billion from $3.08 billion due to a higher tax rate. Revenue rose 1.4 percent to $117.5 billion, slightly lower than analysts’ expectations of $117.7 billion due to a stronger dollar, which reduces the value of overseas sales. Revenue grew 2.8 percent on a currency neutral basis.

Walmart shares flirted with 52-week highs.

Alibaba Group beat first-quarter revenue forecasts but fell short of earnings estimates. The Chinese company, which is targeting new business lines such as cloud computing, big data, entertainment and offline retail as it expands beyond e-commerce, also announcing it will buy back $6 billion shares over the next 2 years.

Salesforce.com reported better-than-expected earnings and raised its full-year revenue guidance. The cloud-software company reported a net loss of $9.2 million on revenue of $2.39 billion for its fiscal first quarter. After adjustments for stock-based compensation and other effects, the company claimed a profit of 28 cents a share, which topped estimates.

Facebook celebrates its fifth anniversary as a publicly traded company. The IPO was 5 years ago today, and it was a mess, but since then the stock is up 279%.

The Telecommunications Services sector was the S&P’s biggest percentage gainer with a 1.2-percent rise. The Federal Communications Commission has officially begun undoing net neutrality rules the agency passed two years ago. The FCC voted 2-1, along political party lines to begin a rule-making process to replace the Open Internet order, or net neutrality rules, adopted in 2015.

The rules won’t disappear overnight but FCC chair Ajit Pai has made it clear that, barring a successful legal challenge, the agency will give up its authority to enforce net neutrality regulations. The rules, first passed in 2015, ban internet service providers from blocking, slowing down, or otherwise discriminating against lawful content.

Without these rules in place, your home internet provider would be free to slow down your Netflix connection to try to keep you paying for cable TV. Your mobile carrier would be allowed to block Skype to promote its own voice plan. Naturally, the country’s largest broadband providers say you have nothing to worry about.

In fact, the industry now claims to love net neutrality. But what the industry is calling “net neutrality” doesn’t really fit the full definition. It’s a version of net neutrality that doesn’t cover the loopholes internet providers have already discovered. If the FCC decides to drop its own protections, you probably won’t wake up one day to find YouTube or Slack blocked. But the principles that made the internet what it is today could still erode over time.

We are already seeing a “toll road’ version of internet service. AT&T, for example, allows users to watch as much video as they want from its own DirecTV Live streaming service without having it count toward their data caps. Competing services like Dish’s Sling, on the other hand, will count against those caps unless the companies behind them pay AT&T to “sponsor” that data.

Verizon has a similar system in place. These data exemptions, known as “zero rating,” may sound innocent enough. Everyone loves getting free stuff. But critics argue that they will end up harming competition.

Although the telecommunications industry group US Telecom sued the FCC to try to reverse its net neutrality protections, most big internet providers say they support net neutrality in principle. Their beef, they say, is just that the FCC went too far in reclassifying broadband access as a “Title II” common carrier service, much like telephone services.

The telecoms say they don’t mind a little regulation if there are great big loopholes. The problem is that without Title II, the FCC won’t be able to enforce net neutrality. And that means that the big, beautiful, collaborative mosaic of the internet could soon be missing many of the smaller tiles that add so much color to the overall picture.

Financial Review

Farewell, Goodbye

Sinclair Noe — January 10, 2017

Podcast: Play in new window | Download (Duration: 12:16 — 5.6MB)

Subscribe: iTunes | Android | RSS

DOW – 31 = 19,885
SPX unchanged = 2268
NAS + 20 = 5551
RUT + 13 = 1370
10 Y + .01 = 2.38%
OIL – 1.16 = 50.80
GOLD + 6.50 = 1188.30

World stock markets nudged back toward recent multi-month highs, aided by a rally in commodity prices. The US dollar index slumped to a low of 101.51 in overnight action, breaking slightly below the lows of mid-December. The post-Brexit British pound moved lower; it’s the gift that keeps on giving, as the FTSE 100 closed in record territory for the 9^th straight session.

The Dow Industrials flirted with 20,000 again but it was nothing more than coy flirtation – moving within 42 points then slipping away. The S&P 500 was flat; not a fraction – no change at all. The Nasdaq posted its third straight record high close.

The home purchase sentiment index compiled by mortgage finance provider Fannie Mae fell in December, its fifth straight monthly decline. Tight inventories, rising mortgage rates and higher home prices are taking a toll on Americans’ attitudes toward home ownership. The overall index dropped 0.5% to 80.7 in December; down 2.5% from one year ago.

The National Federation of Independent Business said its optimism index jumped 7.4 points to 105.8, the highest level in 12 years. Small business owners overwhelmingly expect business conditions to improve under the new administration. Most of the December improvement came from the “expectations” components of the index. Owners say now is a good time to expand. Job creation plans increased 1 point, to a 9-year high, in December, but actual hiring was basically flat during the month.

Consumer credit expanded at a seasonally adjusted annual rate of 7.9%, or $24.6 billion, in November. The Federal Reserve reported that revolving credit, such as credit cards, jumped 13.5% while nonrevolving credit, such as car and student loans, rose 5.9%.

The Labor Department published its Job Openings and Labor Turnover Survey, also known as JOLTS. There were 5.5 million openings on the last day of November. That was 1.3% higher than October. The number of hires rose 1.1% to 5.2 million. The number of people who quit jobs voluntarily also rose, to 3.1 million. That was the second-highest level since before the recession.

Quits are tracked as a measure of worker confidence in the ability to land another job. The JOLTS report shows employers are slow to fire but also slow to hire. There were some signs of tightening in the labor market; the ratio of the unemployed per job opening dipped to 1.3, from 1.4 in each of the prior three months.

Meanwhile, confirmation hearings are underway for President-elect Trump’s cabinet nominees. Tomorrow, Trump holds his first news conference since before the election, but he was still making news today, calling for the immediate repeal of Obamacare.

Trump, who seemed unclear on the timing of already scheduled votes in Congress this week, demanded a repeal vote “probably sometime next week” and adding, “the replace will be very quickly or simultaneously, very shortly thereafter.” The Senate is planning a vote related to repeal on Thursday morning and the House could vote on Friday; the problem is the replacement, which doesn’t yet exist.

Later tonight, President Obama will give his farewell address in Chicago at 7PM Arizona time (9 ET). This is traditional for most two-term presidents. Most farewell addresses are forgettable, with 2 notable exceptions: the first presidential farewell delivered by George Washington, which was framed with warnings to the young nation about the dangers of sectionalism, overzealous partisanship, and of permanent foreign alliances; and the second noteworthy farewell address was from President Eisenhower, where he warned that the new “conjunction of an immense military establishment and a large arms industry” — which he dubbed “the military-industrial complex” — could pose grave dangers to American liberties and US democracy.

Arizona Governor Doug Ducey delivered the State of the State address yesterday. Ducey said he was ready to make “a commitment our educators can take to the bank.” That includes promises of increased state aid and higher teacher pay. And he had special programs designed to get teachers into schools in areas of high poverty. But Arizonans must wait until Friday when the governor releases his budget proposal to find out what that means in dollars and cents.

Apple has submitted a proposal to expand its manufacturing capabilities at a site in Mesa, Arizona where it already produces certain components for its consumer products. The notice shows Apple seeking to expand its production capabilities at the site in Mesa to be able to produce finished products and utilize foreign status materials/components — including a laundry list of core electronics components, such as printed circuit board assemblies, lithium polymer batteries and monitors.

If it’s approved, however, the Arizona facility would mark an unusual instance of a U.S. tech company manufacturing and assembling a finished product domestically, where labor costs are higher.

Yahoo will rename itself Altaba Inc and Chief Executive Officer Marissa Mayer will step down from the board after the closing of its deal with Verizon. Yahoo has a deal to sell its core internet business, which includes its digital advertising, email and media assets, to Verizon for $4.8 billion.

The terms of that deal could be amended – or the transaction may even be called off – after Yahoo last year disclosed two separate data breaches; one involving some 500 million customer accounts and the second involving over a billion. I wonder how many high level corporate board meetings were required to come up with the new name – Altaba – and I’m not sure how to pronounce it, but it should throw the hackers off the trail for a while.

Wall Street’s largest back-office processing service, Depository Trust & Clearing Corp, is partnering with IBM to upgrade how payments and record-keeping for credit-default swaps are handled by putting the system on a blockchain by early next year. If you’re wondering what blockchain is, it is basically a digital ledger that can publish a continuously growing list of ordered records through peer-to-peer transactions, without the need for a third party.

This is the technology behind Bitcoin; and while Bitcoin might be a bit dodgy, many of the world’s biggest banks and corporations are trying to harness the technology to make the likes of transacting cross-border payments, issuing debt and recording health data more efficient – or in this case record keeping for derivatives. And if it works here, look for it to eventually spread to the Options Exchanges and stock exchanges, etc.

Bank of America is being accused of stiffing the FDIC, the government agency that insures people’s deposits against a bank failure. The FDIC filed a lawsuit in federal court demanding that Bank of America pay $542 million it owes to the regulator’s deposit insurance fund.

The lawsuit claims Bank of America underreported a key risk metric by tens of billions of dollars during the final three quarters of 2013 and all of 2014. The FDIC said that allowed BofA to appear less risky than it really was – and avoid paying the FDIC an average of $77 million each quarter into the agency’s deposit insurance fund.

Volkswagen is considering a $4.3 billion settlement to resolve civil and criminal allegations stemming from its emissions-cheating scandal. The agreement, which has yet to be finalized, would lead to a financial expense that exceeds current provisions. It also includes a guilty plea to some criminal charges, strengthening compliance systems and installing an independent monitor for three years

Alibaba is leading a $2.6 billion bid to privatize Intime Retail Group, which operates 29 department stores and 17 shopping malls in China, giving the e-commerce giant a firmer foothold in bricks and mortar.

Jack Ma, executive chairman of Alibaba, met with Donald Trump to pitch the U.S. president-elect on how the company can create one million small business jobs in America.

Valeant is selling assets. The embattled drug-maker announced plans to sell three skincare brands to L’Oreal for $1.3 billion.

American Apparel has a new owner. The Canadian apparel maker Gildan Activewear won the auction for the failed retailer American Apparel with its bid of about $88 million.

Add another retailer to the casualty list – The Limited has shut down all 250 of its stores and laid off 4,000 workers. Sun Capital, the private-equity firm that owns The Limited, attributed the decision in part to falling foot traffic at shopping malls.

They issued a statement saying: “We’re sad to say that all The Limited stores nationwide have officially closed their doors. But this isn’t goodbye. The styles you love are still available online—we’re just a quick click away 24 hours a day.” I’m not sure, but certainly sounds like goodbye.

Financial Review

What Are the Odds?

Sinclair Noe — November 7, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 371 = 18,259
SPX + 46 = 2131
NAS + 119 = 5166
10 Y + .05 = 1.83%
OIL + .85 = 44.92
GOLD – 22.80 = 1282.20

Wall Street this week is all about the election. The FBI’s decision to bring no charges against Hillary Clinton appears to be giving some investors peace of mind. At least momentarily; at least enough to break a string of 9 consecutive declines on the S&P 500, the longest losing streak since 1980.

It was uncertain whether the FBI announcement came in time to change voters’ minds; it’s estimated that 42 million Americans have already cast early votes. Maybe the best news is that in a little over 24 hours, it will be over. Finally.

Until then, we can look at the bookies and the polling sites. Here is a quick rundown of the foreign bookies – so these are betting odds, not percentage of the vote.

PredictIt, an online trading platform jointly run by Victoria University in Wellington, New Zealand, and Washington, D.C.-based political consulting firm Aristotle International Inc: Clinton – 81 percent, Trump – 20 percent.

Iowa Electronic Markets, winner-takes-all trading market: Clinton – 71 percent, Trump – 28 percent.

UK-based Betfair, internet betting exchange: Clinton – 83 percent, Trump – 18 percent.

Ireland’s Paddy Power, bookmaker: Clinton – 83 percent, Trump – 18 percent.

Foreign gamblers can bet on more than the outcome. A survey of foreign betting sites comes up with some interesting ways to bet the election, including voter turnout, the over/under on toss-up states, and even the time of a concession speech, or for that matter, whether there will be a concession speech. But for American voters, the choice is more basic – pick one or the other.

Among the major news outlets: Fox News shows Clinton holds a 4-point lead over Trump among likely voters – 48 percent to 44 percent. A CBS News poll shows Clinton holding a 4-point lead over Trump – 45 percent to 41 percent.

A Washington Post/ABC poll released earlier on Monday also found Clinton with a 4-percentage point lead. A separate Bloomberg Politics-Selzer & Co poll found a 3-point lead for Clinton. NBC News|SurveyMonkey Weekly Election Tracking Poll shows Clinton with a 6-point lead over Trump.

Trump led by 5 points in the Los Angeles Times/USC daily tracking poll 48%-43%. And the IBD/TIPP tracking poll also had Trump ahead by 2 points.

Polling aggregators are also leaning toward Clinton. RealClearPolitics figures Clinton has a 2.2 percentage point lead in a four-way race. Clinton also leads in state polls. If every state voted according to its RCP average, she would win with 297 electoral votes to Trump’s 241, surpassing the needed 270.

Fivethirtyeight.com calculates Clinton has a 67 percent chance of winning compared to 32 percent for Trump, with Clinton taking 295 electoral votes compared to 241 for Trump. The Upshot gives Clinton an 84 percent chance to win.

Quinnipiac University released polls in Florida and North Carolina – two states where Clinton and Trump have been locked in tight races that could help decide the winner – show Clinton ahead by 1 point in Florida and 2 points in North Carolina. Both polls fall well within the 3.3-point margin of error and put the two candidates at a virtual tie. Meanwhile, a new CBS poll has Trump with a 1 percentage point lead in Ohio, and Florida is a tie.

After a long year of seemingly endless polling, the final batch of polls give a slim advantage to Clinton. Nobody calls it a slam dunk, even though Wall Street started the celebration a couple of days early. And then this sets up the Wall Street traders for the possibility of a Brexit-like come-uppance.

You will recall that the UK vote on a referendum to exit the Euro Union, while close among the polling firms, was considered a near impossibility by traders and betting parlors. You will also recall that financial markets had a sharp sell-off followed by a strong rebound.

Here is what we think we know: Clinton will probably win, possibly with a majority in the Senate but not the House. That is not a guarantee, I am just reporting on probabilities; and this is the scenario now priced into the markets. A Clinton sweep or a Trump sweep would likely result in a sell-off and then we wait for rebound, or not.

Typically, the day after the election sees a sell-off and today’s relief rally may be short-lived. In other words, trading based on the election is a big gamble right now. The worst-case scenario is that we don’t have a decision tomorrow night; the worst-case scenario involves recounts, (fivethirtyeight assigns an 8% chance of a recount in a state that decides the Electoral College), which would almost surely make its way to the Supreme Court, which is of course one justice shy and split 4-4.

Feel free to let your paranoia run wild and create your own variations.

Most likely, sometime Tuesday evening, we will have a new president-elect. The markets will probably react. You don’t have to jump into that initial reaction but you should be formulating some longer-term strategies, not based on emotional reaction. And don’t forget to follow the Fed; Fischer, Bullard, Evans, Kashkari and Williams are all slated to speak this week.

Stock markets in Asia and Europe moved higher to start the week. The US dollar index is stronger by roughly 0.5%. Volatility as measured by the VIX, which had surged on the recent downwards moves, dropped by 4 points to roughly 18.5, reversing all its jump over the past week. Gold dropped. Oil prices moved higher after 7 losing sessions.

Not much economic data today and certainly nothing to move markets. A Federal Reserve survey shows banks continued to tighten lending standards to commercial real estate loans in the third quarter. The Fed survey also found that demand for home mortgages strengthened over the third quarter. Demand for auto and credit card loans also rose. Standards for consumer loans were unchanged.

The largest U.S. gasoline pipeline restarted its main gasoline conduit Sunday morning after a deadly explosion shut Line 1 for six days and forced Gulf Coast refiners to cut rates. Colonial anticipates fuel products leaving the pipeline’s Houston origin to arrive in Linden, New Jersey, where the system ends, within approximately three days.

An earthquake with a preliminary magnitude of 5.0 struck near Cushing, Oklahoma, prompting evacuations, but there were no reports of injuries. Oil pipelines intersect in Cushing, which is considered a hub for crude shipments. Oil is sharply higher this morning after a statement said OPEC producers were committed to a deal made in September to cut crude output to try to boost the market.

Berkshire Hathaway missed estimates on earnings but beat on revenue. Other information in the report suggested the Warren Buffett-run firm maintained its 10 percent stake in Wells Fargo despite the bank’s sales practices scandal. The filing shows Warren Buffett is sitting on more cash than ever. Berkshire Hathaway had almost $85 billion on its books at the end of the quarter.

In other earnings news: HSBC posted a 46% drop in pretax profit following a big loss on the sale of its Brazilian business. Nissan Motor cut its first-half net income forecast as a strong yen offset rising sales, but maintained its full-year dividend plan. Softbank’s second quarter profit rose nearly 7%, boosted by a strong performance in its domestic telecoms division.

Oracle has narrowly overcome opposition to its $9.3 billion offer for NetSuite after threatening to walk away if stakeholders held out for a higher price. Nearly 56% of NetSuite shareholders who were eligible to vote chose to take its offer, laying the groundwork for the deal to close today. The tie-up will add nearly $1 billion to Oracle’s revenues from cloud software.

T. Rowe Price had pushed Oracle to pay more, arguing that Oracle’s executive chairman and CTO, Larry Ellison, had a conflict of interest that stopped NetSuite from getting alternative bids and top dollar. Instead, Oracle issued a take-it-or-leave-it offer deadline of Friday at midnight. And if the deal hadn’t gone through, NetSuite would have found itself competing increasingly with Oracle, which now has its own financial software cloud.

Looking to rebound from its Note 7 fiasco, Samsung Electronics plans to adopt a voice-based digital assistant for its upcoming Galaxy S8, scheduled for release next year. Last month, Samsung acquired  U.S.-based artificial-intelligence software company Viv Labs, which will outfit the Galaxy S8 with AI-enabled features “significantly differentiated” from those in the market, such as Apple’s Siri or Google.

While it didn’t invent China’s Singles Day sale, Alibaba made it a fixture of the retail calendar. Now the company plans to use the excitement around the event to launch itself beyond mainland China, catering to shoppers in Hong Kong and Taiwan. Last year, Alibaba sold over $14.3 billion on November 11, more than double the $5.8 billion in total U.S. e-commerce sales for Black Friday and Cyber Monday.

Financial Review

Holy Cow

Sinclair Noe — November 2, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 77 = 17,959
SPX – 13 = 2097
NAS – 48 = 5105
10 Y – .02 = 1.80%
OIL – 1.16 = 45.51
GOLD + 8.70 = 1297.50

The Federal Reserve wrapped up a two-day meeting of its policy-making committee, and delivered the expected news that it would not adjust rates during the final days of a presidential election. However, the Fed’s post-meeting statement reinforced expectations that Fed officials do not plan to wait much longer.

The Federal Open Market Committee issued a statement that said: “The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” adding “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

The Fed’s assessment of economic conditions was also just a little more upbeat than the September statement. The most significant change reflected evidence of stronger inflation. The November statement said inflation “has increased somewhat,” rising closer to the Fed’s preferred annual pace of 2 percent.

The health of the economy has continued to improve. The unemployment rate stood at 5 percent in September, close to a historically normal level. Inflation rose 1.2 percent over the 12 months ending in September, up from 0.8 percent during the 12 months ending in July. And the economy expanded at an annual pace of 2.9 percent in the third quarter.

Fed fund futures are now pricing in an 80% chance of a rate hike in December, but that is not a guarantee. The Fed has repeatedly backed away from planned increases when the economic data has taken a turn for the worse. And the biggest uncertainty right now is the election Tuesday.

The S&P 500 index has dropped for the past 7 trading sessions and yesterdays’ declines saw the benchmark index drop below key support levels. It is longest losing streak in five years, and it happens to be one of the strangest slumps in recent history as well. The last time the index fell for seven straight days was in late November 2011, when the market tanked 8.6%.

Back then investors were gripped by fears over the Eurozone economy and the so-called fiscal cliff. But the current pullback is very shallow, with the index down only 2.5%, having fallen less than 1% at each of those days. What is even stranger is the fact that the S&P 500 has been positive at some point in each of the last seven sessions before ending in negative territory.

The big earnings report today came after the closing bell. Facebook reported a 55 percent rise in quarterly revenue, to $7 billion, beating analysts’ average estimate of $6.9 billion. Net income jumped to $2.37 billion, or 82 cents per share, in the quarter from $891 million, or 31 cents per share, in the third quarter of 2015. Excluding items, the company earned $1.09 per share. On that basis, analysts had expected 97 cents per share.

Facebook said about 1.79 billion people were using its site monthly, up 16 percent from a year earlier. Facebook gained 80 million monthly users in the third quarter and for the first time now has more than 1 billion daily users on mobile.

Shares have been down for 8 straight sessions in Europe with major indices in Germany, France, the UK and Spain all dropping more than 1% today on weak corporate earnings. Germany’s Lufthansa announced its adjusted earnings before interest and taxes fell 6.5% in Q3, while Denmark’s Maersk reported quarterly profits that slumped 43% on lower freight prices.

Payroll provider ADP said that businesses added 147,000 jobs in October, down from 202,000 in September, a figure that was revised strongly higher. The hiring was led by hotels, restaurants and entertainment firms, which added 38,000 positions, followed by health care, which gained 34,000.

Manufacturers shed 1,000 jobs and construction companies cut 15,000. The ADP data cover only private businesses and often diverge from the official figures, but is used as a guide to the government’s monthly jobs report.

Hackers linked to the Russian military have exploited a previously undisclosed Windows security flaw, according to Microsoft, as President Putin looks to strip the software out of government offices and firms. Senior intelligence officials say Putin is planning to replace all foreign software with domestic alternatives, and has already blocked LinkedIn, which is being bought by Microsoft.

A major gasoline pipeline that is a crucial supply source for the U.S. East Coast could reopen as early as Saturday after an explosion in Alabama killed one worker and injured five others. Gasoline futures shot up as much as 15%yesterday on the New York Mercantile Exchange, but gave back gains in the afternoon on news of the weekend reopening. The 5,500-mile Colonial Pipeline is owned by Koch Industries, Royal Dutch Shell and others.

A barrel of West Texas Intermediate dropped below $46 a barrel. The market remains weighed down by record output from the world’s largest exporters, and mounting uncertainty that OPEC and its rivals can do much to tackle a two-year global surplus. The drop in crude prices and the structure of Brent futures means that oil traders can once again take advantage of contango – where oil for delivery today is cheaper than oil in future months – by storing oil in tankers at sea.

Chinese online shopping giant Alibaba Group reported a 55 percent rise in second-quarter revenue, beating analyst estimates on the back of core e-commerce sales and strong media and entertainment growth.

Yum China (ticker symbol YUMC) officially began trading today after spinning off from Yum Brands (ticker symbol YUM)—the fast-food operator behind Taco Bell, Pizza Hut, and KFC restaurants.

And the company—with over 20,000 KFC units, 16,000 Pizza Hut units, and 6,000 Taco Bell units—sees this split as a new chapter of growth, with goals to triple its store count globally; that works out to a new KFC store every 5 hours. The new Yum Brands will focus on US growth along with international growth outside of China. Meanwhile, the China business will have a specific country focus for Pizza Hut and KFC.

Broadcom Limited said today that it had entered into a definitive agreement to acquire Brocade Communications Systems for $5.9 billion. The price breaks down to $12.75 per share in an all-cash transaction.

Time Warner, which two weeks ago agreed to sell itself to AT&T, boosted its outlook for the year as improvement in its TV and film businesses pushed quarterly results above expectations. Revenue increased in all three of the company’s segments – up 8.8% for Turner, 4.3% for Home Box Office and 6.6% for Warner Bros.

If it’s not one thing it’s another. Wells Fargo has agreed to pay $50 million to settle a class-action lawsuit that accused the bank of overcharging hundreds of thousands of homeowners for appraisals ordered after the homeowners defaulted on their mortgage loans. The proposed settlement calls for Wells Fargo to automatically mail checks to more than 250,000 customers nationwide whose home loans were serviced by the bank between 2005 and 2010. The checks will typically be for $120. If a judge signs off on the settlement, as expected, the checks will be distributed next year.

When a borrower falls behind on a loan, mortgage contracts typically let the lender order an appraisal of the home’s current value. The cost of that appraisal, known as a “broker price opinion,” can be passed on to the borrower, but Wells Fargo used one of its own subsidiaries to conduct appraisals and then routinely marked up the cost. A $50 million fine is a drop in the bucket for Wells Fargo, but it isn’t the first drop and likely not the last; drop by drop, soft water can wear away hard stone.

A US appeals court today agreed to revisit a challenge to an Arizona voting law which restricted the ability of advocates to collect absentee ballots by hand. A three judge 9th U.S. Circuit Court of Appeals had earlier upheld the Arizona law, but the full court on Wednesday voted to rehear the case before an 11-judge panel. Five conservative 9th Circuit judges dissented from the decision to rehear the case, saying it was made too close to Election Day.

A survey of policy- and decision-makers by the University of Colorado concludes there is a very real prospect of Colorado River water supply cuts to Arizona and Nevada in January 2018. The Colorado River Future Project focusing on critical issues for the river surveyed some 65 water managers, municipal and agricultural customers, conservationists plus government officials at the tribal, state, federal and congressional levels.

The results acknowledge that more river water than is available is promised to interests in Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming – and Mexico. It points to a continuing 16-year drought diminishing the amount of promised water and says the most urgent need is to firm up contingency plans and extend water-use agreements.

So far, the level has barely remained above the point that would trigger a shortage declaration and cuts of 11.4 percent to Arizona’s usual water allotment, and 4.3 percent of Nevada’s supply. Combined, that amount of water would serve more than 625,000 homes. Officials have warned of possible cuts in January 2018.

There is a price on baseball history. Right now, it’s about $19,500 each for two cozy seats behind the visiting Chicago Cubs dugout for a winner-takes-all faceoff with the Indians in Cleveland tonight.

Fans snatched those prime seats off secondary-market ticket brokerage StubHub. Business has been brisk for the site and its rivals, as the Cubs try to end the longest championship drought in professional sports at 108 years. The Indians and their fans are equally hungry for a first World Series title since 1948.

Financial Review

$6 Battery

Sinclair Noe — May 5, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 9 = 17,660
SPX – 0.49 = 2050
NAS – 8 = 4717
10 Y – .04 = 1.75
OIL + .34 = 44.32
GOLD – 1.40 = 1278.60

The number of Americans filing for unemployment benefits rose more than expected last week, posting the biggest gain in more than a year. Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 274,000 for the week ended April 30. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,000 to 258,000 last week.

Another report showed a 35 percent surge in planned layoffs by U.S.-based employers last month. Most of the announced job cuts were concentrated in the energy sector.  Challenger, Gray & Christmas said US-based companies announced 65,141 job cuts last month.

The jobs report for April due out tomorrow morning. Investors will be watching closely to see if it could have any impact on the Federal Reserve’s plans for raising interest rates at its next policy meeting in June. The report is expected to show jobs grew by 200,000 last month while the unemployment rate stayed at 5 percent.  A strong jobs report would be a possible indicator of Fed tightening. An early rally on Wall Street this morning faded into the close.

MetLife said it’s seeking to exit most of its hedge-fund portfolio after a slump in the investments. The insurer is seeking to redeem $1.2 billion of the $1.8 billion in holdings, a process that may take a couple of years to complete. The portfolio, which posted negative returns in the quarter, was cut by about $600 million in 2015. MetLife reported profit Wednesday that missed analysts’ estimates. Investment income fell 17 percent to $4.5 billion, hurt by both hedge funds and low bond yields.

American International Group posted a third-straight unprofitable quarter on losses from hedge funds and declines in the value of other investments. AIG is reshaping its portfolio, expanding bets on highly rated bonds and property lending while scaling back on hedge funds after the company was burned on those investments.

AIG also is among insurers that have large holdings of energy bonds that were pressured by declines in commodity prices. And it isn’t just the insurance companies that are abandoning hedge funds; the New York City Employee Retirement System, the city’s largest pension fund, announced last month it was liquidating its hedge fund portfolio, citing big fees and bad performance.

Hedge funds have been underperforming. A challenging trading climate in 2015 left a composite index of hedge funds down 0.9 percent for 2015. By comparison, the Standard & Poor’s 500 inched up 1.38 percent for the year. The market pain continued into the first quarter of 2016, when investors pulled $15.1 billion out of the hedge fund industry, the largest outflow since 2009.

It also looks bad for junk bonds. HYG, the high yield ETF, just experienced a 4 day, $2.3 billion outflow, which is the fastest and largest redemption it has ever experienced. Which could mean nothing or it could mean the nearly 60% bounce in crude oil prices from the 2016 low is just a temporary move.

Alibaba Group, China’s biggest e-commerce company, said fourth-quarter revenue rose 39 percent, beating Wall Street estimates, helped by growth in gross merchandise volume. The number of mobile monthly active users rose 42 percent to 410 million. Alibaba represents a big part of the spending by Chinese consumers and so a re-acceleration in volumes is an indication that the Chinese consumer continues to be strong.

Amazon.com could take as much as a 30 percent stake in a large cargo airline, its second such deal this year as the e-commerce giant steps up efforts to take control of its own delivery logistics. As part of the agreement, Atlas Air Worldwide Holdings will operate 20 Boeing 767-300 cargo planes for Amazon. The Seattle-based retailer is moving quickly to build up its delivery network, seeking to wean itself from dependence on United Parcel Service and FedEx.

Tesla Motors on Wednesday posted quarterly results that were just slightly better than Wall Street’s expectations. The electric automaker reported a first-quarter loss of 57 cents per share on $1.6 billion in revenue, but the big news was the guidance from CEO Elon Musk; Tesla delivered just over 14,000 cars in the first quarter; Musk said he expects production of 100,000 to 200,000 Model 3 vehicles in the second half of next year, and 500,000 cars in 2018.

If that sounds like a pretty outrageous promise, well… yes, except Tesla already has more than 400,000 pre-orders for the Model S. The challenge isn’t in the sales numbers, it will be the ability to transition from technology and design to manufacturing.

Merck reported lower-than-expected quarterly revenue, hurt by disappointing sales of its Januvia diabetes treatment and Remicade arthritis drug. But the second-largest US drug maker beat first-quarter earnings forecasts because of cost controls and a weakening dollar, and it slightly raised its full-year profit outlook.

The Consumer Financial Protection Bureau unveiled a proposed rule this morning to restrict the use of arbitration clauses in consumer financial contracts, a step that would shift power to consumers and away from companies for a wide range of financial products from credit cards to bank accounts to private student loans. The CFPB aims to prohibit financial companies from using mandatory-arbitration clauses in contracts with consumers as a way to block class-action lawsuits and force customers into private negotiations to solve disputes. The new rule does not require congressional approval.

Class action suits might not be the easiest way to get your day in court, and the big winners tend to be the lawyers. The argument for arbitration is that it is a quick, easy, and inexpensive way to resolve a dispute; the reality is that very few cases, only about 100 a year, for cases under $2,500, end up in arbitration after their path to class action is blocked. And of those cases that make it to arbitration, the customer typically loses, more than 95% of the time.

One reason why arbitration works so well for the companies is that they select the arbitrators. The arbitrators that are chosen to serve are not only screened to be big institution friendly; arbitrators that wind up ruling in favor of customers have this funny way of being moved to the bottom of the selection list. The result is that companies using arbitration clauses tend to act with impunity. Class actions are the only way that companies can be brought to heel.

California Governor Jerry Brown has signed a pack of bills that will raise the smoking age from 18 to 21, restrict the use of electronic cigarettes in public places and expand no-smoking areas at public schools. The new laws, which take effect June 9, are a big boost to a movement that is turning into the next major challenge for the $100 billion tobacco industry. Lawmakers in 10 other U.S. states are currently considering similar legislation.

Meanwhile, the FDA announced it will regulate e-cigarettes and vaporizers, also cigars and pipe tobacco. Congress gave the FDA authority to oversee tobacco products in 2009, but until now the agency had not finalized rules to regulate e-cigarettes and cigars.

The rules prohibit sales to minors, ban free samples, require package warning labels, and call for makers of products released after 2007 to seek FDA permission to remain on store shelves. Companies will have 24 months to file pre-market applications for their products, according to the rule. The FDA then has a year to review the submission, during which the products can remain on shelves.

YouTube is planning a paid subscription service. Alphabet’s YouTube is planning to launch a subscription-based bundle of streaming cable channels. The new service will be called “Unplugged,” and it is set to launch as soon as 2017. It is not yet clear what channels will be included.

The ECB is also discontinuing production of the €500-euro note due to concerns that it could facilitate illegal activities. Terrorists and drug cartels need cold hard cash to operate, and the European Central Bank is taking a big step to make it harder for them. The ECB will stop printing its 500 bill in the next two years, though it will still be in circulation.

Another oil and gas bankruptcy? SandRidge Energy is in discussions with creditors about reaching a restructuring deal ahead of a possible bankruptcy filing. According to its annual report, SandRidge had $3.6 billion in debt at Dec. 31.

My smartphone has more computing power than the first Apollo space mission that landed on the moon. I don’t use all that computing power. I send text and emails, take pictures, use the maps, and check out stuff on the interwebs. Sometimes I make phone calls. It’s a couple of years old and the battery started fading a couple of weeks ago. I went to Best Buy for a replacement battery; they didn’t have it in stock but the clerk suggested an upgrade to a new phone. I did not buy.

I went to Amazon.com and ordered a new battery for $6 dollars compared to a new phone at about 100 times that price. My old phone is working great again. Smartphone upgrades have been steadily declining over the last five years. For the first time, smartphone growth went into the negative for the first quarter. Seems people just aren’t upgrading like they used to.

Financial Review

No F8 but What You Make

Sinclair Noe — April 12, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 149 = 17,705
SPX + 19 = 2061
NAS + 38 = 4872
10 Y + .04 = 1.78%
OIL + 1.28 = 41.64
GOLD – 2.40 = 1256.70

Earnings season is underway. Later this week big US banks will start releasing results, including JPMorgan Chase, Citigroup and Wells Fargo; the big banks are looking like one of the weakest sectors this earnings season. Expectations for earnings are low this quarter. Analysts surveyed by FactSet expect corporate profits to be down 9.1 percent from a year ago, hurt primarily by the steep drop in oil prices and other commodities. The entire energy sector is expected to report a loss this quarter.

This Sunday, oil producers meet in Doha, Qatar to consider some sort of production cuts. Iran has repeatedly showed zero interest in a production freeze at the current level, saying it would keep pumping until production reaches the pre-sanction level of around 4 million barrels a day. Today, Russia and Saudi Arabia announced a production freeze regardless of whether Iran participates in the plan to tackle a supply glut.

It may be the world’s biggest traffic jam. As seaports struggle to cope with a global oil glut, huge queues of supertankers have formed in some of the world’s busiest sea lanes, where some 200 million barrels of crude lies waiting to be loaded or delivered. The vessels, filled with oil worth around $7.5 billion at current market prices, would stretch for almost 25 miles if formed up in one straight line. Meanwhile, the latest American Petroleum Institute (API) inventory data recorded a build of 6.2 million barrels for the latest weekly data, compared with an expected build of around 1 million.

Wells Fargo chose the wrong time to expand its oil-lending. The bank targeted some of the least creditworthy borrowers in the shale industry, demanding oil and gas reserves as collateral, a type of financing thought to be low risk. With oil now hovering close to $40 a barrel, the value of those reserves held as collateral has plummeted.

This pressure was clearly illustrated yesterday when Chesapeake Energy pledged almost all of its oil and gas reserves, real estate and derivatives contracts to keep its $4 billion credit line. U.S. shale production, meanwhile, is seen reaching a two-year low.

Standard & Poor’s reported that it downgraded 44 US junk-rated companies in March, while upgrading just 15. This comes on top of the 82 issuers it downgraded in February. In the first quarter, about 45% of S&P’s downgrades hit oil & gas companies. Not a surprise, given the state the industry is in; the bigger surprise is that 55% of the downgrades hit companies outside oil & gas.

The International Monetary Fund lowered its estimate for global growth, citing volatility in financial markets, slowing momentum in developed economies and continued difficulty for emerging-market nations, as it also highlighted a growing backlash against trade and global ties. The IMF cut its estimate for global growth to 3.2% this year and 3.5% next year. That represents a downgrade of 0.2% for 2016 and another tenth for 2017 from what it forecast in January. The IMF’s estimate for the U.S. was cut to 2.4% in 2016, a downgrade of 0.2%, and to 2.5% in 2017, representing another tenth of point off its January forecast.

Several Fed policymakers are speaking today. Philly Fed President Patrick Harker, who has urged his colleagues to “get on with” raising rates again, said this morning that he wants to hold off on a second rate hike until inflation picks up. Harker said that given the behavior of oil prices, inflation is likely to be “quite low…. probably even negative” in the first quarter.

Dallas Federal Reserve President Rob Kaplan said he’s not too concerned about the slowing economic growth in the first quarter, and the US economy is likely to grow at just under 2 percent for the year. Kaplan says “we still believe the underpinnings for solid growth are there…We still think the consumer is going to remain strong this year. The job market is strong.” Kaplan sees an interest rate hike in the not-too-distant future, provided gross domestic product numbers recover as he believes they will. “I think people should expect it’s going to be a slow, patient, gradual normalization.”

Also today, San Francisco Fed President John Williams will discuss U.S. monetary policy and the global economic outlook, while the Richmond Fed’s Jeffrey Lacker speaks on “Economic Leadership in an Uncertain World”.

The National Federation of Independent Business (NFIB) said its small business optimism index dipped 0.3 point to a reading of 92.6 last month, the lowest since February 2014. It has declined from a reading of 100 in December 2014 and has pushed further off its 42-year average of 98. The soft reading fits in with recent economic data on consumer and business spending as well as wholesale inventory investment that have suggested economic growth slowed sharply from the fourth quarter’s 1.4 percent annualized rate.

The US government posted a $108 billion budget deficit in March, more than double the amount from the same period last year. The government had a deficit of $53 billion in March of 2015. The current fiscal year-to-date deficit was $461 billion, up 5 percent from a $439 billion deficit this time last year. Receipts last month totaled $228 billion, while outlays stood at $336 billion.

U.S. import prices rose in March for the first time in nine months as the cost of petroleum products increased, but the lingering effects of a strong dollar suggested inflation will continue to increase gradually. The Labor Department said import prices gained 0.2 percent last month after a downwardly revised 0.4 percent drop in February. It was the first time since June that import prices rose and the largest increase since May. Prices of imported products were down 6.2 percent in the 12 months through March. Weak import prices have contributed to holding inflation below the Federal Reserve’s 2 percent target.

A committee in Brazil’s lower house of Congress has voted to recommend President Rousseff’s impeachment for allegedly manipulating public finances, a step that increases the chances of her removal from office. A vote in the full lower house is expected to take place on Sunday. If the proceedings continue to Brazil’s Senate, the chamber could decide by a simple majority to put Rousseff on trial, suspending her position for up to six months, and VP Michel Temer would become acting president.

Alibaba is making its biggest overseas bet yet. The Chinese online retailer announced it was buying a controlling stake in the Singapore-based Lazada Group for about $1 billion. The acquisition will allow Alibaba to take advantage of growth opportunities in Southeast Asia.

About 40,000 Verizon workers say they’ll go on strike tomorrow unless the company negotiates a new contract with the Communications Workers of America and the International Brotherhood of Electrical Workers. At issue are pension benefits, outsourcing, and health care costs.

No. 3 U.S. railroad CSX Corp reported a lower quarterly net profit, in line with analysts’ expectations, citing declines in most freight segments, especially coal. First-quarter net income came in at $356 million, or 37 cents per share, down more than 19 percent from $442 million, or 45 cents per share, a year earlier.

Facebook Messenger wants you to chat with businesses and get updates from them, too. That’s the future Facebook pitched at F8, its annual conference for software developers in San Francisco. Facebook handed the more than 50 million businesses on Messenger the tools needed to build interactive experiences, or “chat bots,” that reach the 900 million people who use the messaging app each month.

Chat bots are chat robots, interactive software powered by artificial intelligence often with an assist from humans, which are designed to simulate human conversation. They are popping up on messaging services where you can use them to perform simple tasks. Chat bots are already popular in Asia, where messaging services such as WeChat help users schedule doctor’s appointments, shop for the latest styles, play games or the lottery and send money to friends.

One example of how business is using chat bots already – KLM Airlines recently began allowing passengers to check in, get flight updates, make travel changes and talk to customer service reps in its Messenger app. For some reason I’m just guessing that might not be as good as talking to an actual person, at least not yet.

Among other F8 stuff, Facebook is launching live video streaming working across all devices and services. Mark Zuckerberg gave a demonstration by streaming video from a drone flying in the conference hall. A more compelling use might be high quality live broadcasts – think TV, news, sports, and such. Or you could just start your own TV show. Already some TV stars are getting bigger audiences on the Live Platform than they’re getting on their TV shows.

Facebook also revealed a 360-degree video camera and software system today at its F8 developer conference, which is the kind of video you want for 3D or virtual reality. The camera, which will cost at least $25,000 to build, includes 17 different capture devices that are synchronized, and can record two hours of 360-degree video at up to 60 frames per second. Facebook is also releasing software that stitches the footage together seamlessly. But Facebook doesn’t really want to get into the camera business, so both the hardware and software, as well as the stitching code, are open source projects.

According to research firm Gartner, global shipments of personal computers fell 9.6% to 64.8 million units during the first quarter, marking the first time since 2007 that shipments dropped below 65 million units (IDC reported similar results worldwide). In the U.S., PC shipments totaled 13 million devices, representing a 6.6% decline from a year earlier and the lowest volume in three years. The sector has faced headwinds in recent quarters which include an economic slowdown in China, the strong U.S. dollar and the growing popularity of smartphones.