Financial Review

Go Figure

Sinclair Noe — February 8, 2017

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DOW – 35 = 20,054
SPX + 1 = 2294
NAS + 8 = 5682
RUT – 2 = 1358
10 Y – .04 = 2.35%
OIL + .19 = 52.97
GOLD + 8.10 = 1242.50

Another record high for the Nasdaq Composite, its 12th all-time close of 2017.

The American Petroleum Institute reported crude supplies rose by 14.2 million barrels last week, undermining OPEC’s efforts to re-balance global markets. The Energy Information Administration said that the U.S. will pump the most crude next year since 1970, as OPEC cuts lift prices and benefit domestic producers.

And in its weekly report this morning, the EIA reported a larger-than-expected increase in crude-oil supplies—their fifth weekly rise in a row and the second-biggest on record, based on EIA data going back to 1982.

Crude inventories climbed by 13.8 million barrels in domestic crude-oil supplies for the week ended Feb. 3. Weekly crude stockpiles haven’t climbed by this much since the week ended Oct. 28. Crude oil prices reversed an earlier loss and eked out a gain on the day. Go figure. Best guess is that the report also showed gasoline supplies fell by 900,000 barrels. Sorry, but that’s about the best excuse I can come up with.

Intel will invest $7 billion to build a new chip factory in Arizona. Brian Krzanich (pronounced Krah-ZAN-nitch – you're welcome) the CEO of Intel says that tax cuts and deregulatory policies pushed by President Trump prompted the company to move forward with its plans to complete the Fab 42 plant.

The completion of Fab 42 in 3 to 4 years will directly create approximately 3,000 high-tech, high-wage Intel jobs for process engineers, equipment technicians, and facilities-support engineers and technicians who will work at the site. Combined with the indirect impact on businesses that will help support the factory’s operations, Fab 42 is expected to create more than 10,000 total long-term jobs in Arizona.

The 7-nanometer semiconductor manufacturing process targeted for Fab 42 will be the most advanced semiconductor process technology used in the world.

Japanese display maker Sharp Corp may start building a $7 billion plant in the United States in the first half of 2017, taking the lead on a project initially outlined by its Taiwanese parent Foxconn. Japanese Prime Minister Shinzo Abe is scheduled to meet President Trump in Florida this weekend. Abe will reportedly unveil a package of investments to create as many as 700,000 US jobs. The investment will be by a Japanese consortium that will also include manufacturing equipment makers.

Britain’s House of Commons gave its final approval Wednesday to a bill authorizing the government to start exit talks with the European Union, despite fears by opposition lawmakers that the U.K. is setting out on the rocky path to Brexit with a sketchy road map. The bill now goes to the House of Lords, which has the power to delay — but not to derail — the legislation; it should become law within weeks.

Volkswagen has launched a U.S. subsidiary designed to oversee $2 billion in investments to promote zero-emission vehicles, a commitment the German auto giant made in the wake of Dieselgate. The Electrify America unit will open more than 500 EV charging stations as it works toward building out a national network. VW will also launch a “Green City” initiative in a yet-to-be-identified California city to pilot future concepts.

According to a court filing, Takata will plead guilty on Feb. 27 to a single felony count of wire fraud to resolve a DOJ investigation into ruptures of its air bag inflators linked to at least 16 deaths worldwide. Last month, the auto parts firm agreed to the guilty plea as part of a $1 billion settlement in the world’s largest-ever recall.

Time Warner reported higher-than-expected fourth-quarter results, largely due to box office hits such as the “Harry Potter” spinoff “Fantastic Beasts.” Time Warner reported an 11.5% rise in quarterly revenue and said the planned $84 billion merger with AT&T remained on track to close later this year.

Swiss pesticides and seeds group Syngenta pushed back the expected closure of its agreed $43 billion takeover by ChemChina to the second quarter of 2017, but said it was making progress in winning regulatory approval for the deal.

Humana earned an adjusted $2.09 per share for its latest quarter, while revenue was slightly below projections. Humana said that it added members in its Medicare Advantage business, and that it would give an update on its transaction to be bought by Aetna by February 16. That deal was blocked in a court ruling last month.

Allergan earned an adjusted $3.90 per share for its latest quarter, beating estimates of $3.76 a share. Its revenue also came in above forecasts on increased sales of Botox and other therapeutic treatments.

Shares of Microchip Technology are up, continuing last night’s gains, after the chip maker yesterday afternoon beat fiscal Q3 expectations and topped consensus as well.

Shares of Panera Bread surged to a record high and the biggest one-day move in almost two years after the company gave an upbeat forecast and said technology investments at its restaurants were paying off.

Whole Foods Market reported revenues and comparable sales that fell short of Wall Street’s expectations. Whole Foods also lowered full-year sales and earnings guidance in wake of the weak results.

Alaska Air, the fifth-largest U.S. carrier, beat estimates by 16 cents a share, with adjusted quarterly profit of $1.56 per share. Revenue beat forecasts and the company also increased its quarterly dividend.

Canada’s government will provide $282 million in support for Bombardier to help fund two jet programs, including the C Series, the single-aisle plane that competes with Boeing and Airbus Group SE products. After landmark sales of the jetliner to Air Canada and Delta Air Lines in 2016, the company is now seeking new orders while also targeting the first delivery of the Global 7000, its largest business aircraft.

Bank of America is opening robo branches. The bank has opened three automated branches over the past month and has plans to roll out more over the next year. Customers can use ATMs and have video conferences with employees at other offices. BofA is set to open 50 to 60 new branches over the next year, but will also be closing some in certain markets, so they will not represent a net increase.

At its height, back in 2000, the US cash equities trading desk at Goldman Sachs’ New York headquarters employed 600 traders, buying and selling stock on the orders of the investment bank’s large clients. Today there are just two equity traders left. Automated trading programs have taken over the rest of the work, supported by 200 computer engineers.

The experience of its New York traders is just one early example of a transformation of Goldman Sachs, and increasingly other Wall Street firms, that began with the rise in computerized trading, but has accelerated over the past five years, moving into more fields of finance that humans once dominated.  Some areas of trading, like currencies and even parts of business lines like investment banking are moving in the same automated direction that equities have already traveled.

Today, nearly 45 percent of trading is done electronically, per Coalition, a UK firm that tracks the industry. Complex trading algorithms, some with machine-learning capabilities, first replaced trades where the price of what’s being sold was easy to determine on the market, including the stocks traded by Goldman’s old 600.

Now areas of trading like currencies and futures, which are not traded on a stock exchange like the New York Stock Exchange, are coming in for more automation as well. To execute these trades, algorithms are being designed to emulate as closely as possible what a human trader would do.

Goldman Sachs has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer. Some 9,000 people, about one-third of Goldman’s staff, are computer engineers.

Goldman’s new consumer lending platform, Marcus, aimed at consolidation of credit card balances, is entirely run by software, with no human intervention. Next, will be the automation of investment banking tasks, work that traditionally has been focused on human skills like salesmanship and building relationships.

Though those “rainmakers” won’t be replaced entirely, Goldman has already mapped 146 distinct steps taken in any initial public offering of stock, and many can – and will – be automated. Reducing the number of investment bankers would be a great cost savings for the firm. Investment bankers working on corporate mergers and acquisitions at large banks like Goldman make on average $700,000 a year, per Coalition, and in a good year they can earn far more.

Financial Review

Tomorrow, Tomorrow

Sinclair Noe — September 20, 2016

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DOW + 9 = 18,129
SPX + 0.64 = 2139
NAS + 6 = 5241
10 Y – .01 = 1.69%
OIL + .57 = 44.43
GOLD + 1.80 = 1315.60

The Federal Reserve FOMC has started a 2-day meeting. The Fed is likely to hold interest rates steady this week…, however, it might be a closer call than the markets expect. In the past week, the Fed has increased its portfolio. A build up in reserves supports markets. That may give added cushion to markets heading into their FOMC decision tomorrow.

Before we find out what the Fed will do, we will get a statement from the Bank of Japan, which is still pushing on a string, still trying to underpin stocks and real estate, still trying to turn deflationary realities into some kind of magical 2% inflationary panacea.

The BOJ will probably push interest rates even deeper into negative territory. They’ll probably buy more government bonds, more corporate bonds, and more equities if they have to. They’ll buy foreign government bonds to lower those rates to manipulate the yen down to spur export growth if they have to. At least that’s the best estimate.

We have to wait for the announcement. And the Fed will probably stand pat, but they could shake things up with hawkish comments. Whatever happens, tomorrow is a big day.

The U.S. economy is on track to grow at a 2.9 percent annualized rate in the third quarter, that according to the latest update of the Atlanta Federal Reserve’s GDP Now forecast model. The latest third-quarter GDP estimate was lower than the 3.0 percent figure calculated on Sept. 15

Housing starts fell more than expected in August as building activity declined broadly after two straight months of solid increases, but a rebound in permits for single-family dwellings suggested demand for housing remained intact. Groundbreaking decreased 5.8 percent. Permits for single-family homes, the largest segment of the market, increased 3.7 percent.

Gasoline prices in the southeastern United States have seen significant increases following the shutdown of a major fuel pipeline in the region that’s heading into a second week, and prices are expected to spike even higher. Some retailers have run out of gas. According to AAA, the national average for regular gasoline is $2.20 a gallon Monday, up from $2.18 a week ago.

Wells Fargo CEO John Stumpf faced questions today from the Senate Banking Committee over the widespread creation of sham bank accounts and credit cards by Wells Fargo employees trying to meet strict sales goals. Stumpf said he, “accept[s] full responsibility for all unethical sales practices in our retail banking business and I am fully committed to fix this issue.”

Last week Stumpf and other senior executives first placed the blame on certain Wells Fargo employees and denied any problem with the bank’s culture. “Under-performers” was the term they used to define the culprits. Wells Fargo has already fired 5,300 lower level employees, who, we are to believe, orchestrated a mass fraud on banking consumers.

The person who was in charge of the entire consumer banking division was allowed to retire. Praised as the model of what a banker should be, by the CEO and given millions of dollars with absolutely no claw-back for the abuses. Stumpf claimed he didn’t know about the abuses until recently, even though Wells Fargo was the only major bank in the US, that broke out in its 10-Q and 10-K financial statements, filed with the SEC, how much money they were getting from these cross-selling operations.

Stumpf admitted the bank will go back, and investigate banking practices from 2009 through 2011 to see if there were even more violations; which is probably something he should have done before negotiating a $185 million settlement with the CFPB. Meanwhile Stumpf is still employed.

Downing Street met Wall Street late Monday as Theresa May landed in New York to consult with some of America’s largest firms over how her country should proceed with Brexit. The prime minister held two gatherings: a round-table discussion with big investors in the UK including Goldman Sachs, Morgan Stanley, BlackRock, IBM, and Amazon. She then hosted a reception for about 60 American executives, as well as British businesses that invest in the US.

The big issue is whether UK and US banks will keep passporting rights for banking. If not, those banks will need to obtain Euro Union licenses to do business, and they will have to put personnel in the Eurozone, not the UK. Core services such as cross border lending and accepting deposits could be affected by Brexit, as well as law firms and accounting firms that support those core services.

The Euro Union says it won’t cut sweetheart deals; the Brits can’t have passporting rights unless they accept the free movement of labor. The Germans have already said no to any special deals; in fact they said, “Hell no!” So Prime Minister May is talking to US banks to determine important strategic direction. Good luck with that. Three months after the Brexit vote and it doesn’t look like much progress has been made.

A federal judge in New York has ruled that bitcoin constitutes a form of money. The ruling comes from the ongoing case involving the now-defunct bitcoin exchange Coin.mx and one of its former operators. Anthony Murgio, who was indicted for money laundering, sought to dismiss the charges against him in part by arguing that bitcoins don’t count as “funds” in the context of U.S. law.

The world’s biggest IPO this year is getting off to a lukewarm start. Postal Savings Bank of China is planning to price its Hong Kong listing at the lower end of its marketed range, raising $7 to $8 billion, with around three quarters of shares going to just six anchor investors. The bank has 40,000 branches throughout China, 505 million retail customers and is the nation’s fifth largest lender by assets.

Allergan has agreed to acquire Tobira Therapeutics in a deal valued at up to $1.7 billion. Allergan will pay $28.35 per Tobira share. Tobira closed trading on Monday at $4.74 a share, with a market cap of just $89 million. But wait, there’s more. The purchase price could climb to $49.84 per share in contingent value rights, that are payable on the meeting of certain milestones. Tobira makes 2 drugs to treat liver disease. The milestone is that the drugs actually have to be approved, and if that happens, the acquisition price jumps 1,800% compared to yesterday’s close.

Speaking of high prices for drugs, you might remember Mylan, the company behind the much vilified price-hike of EpiPens, the autoinjector used to treat severe allergic reactions. West Virginia is investigating Mylan for Medicaid fraud for inflating the price of the EpiPen by 500%.

The inquiry seeks to force Mylan to turn over company documents related to EpiPen. Similar requests have been made in the last month by lawmakers in Washington, and on Wednesday Mylan Chief Executive Officer Heather Bresch is to testify at a congressional hearing about the product’s price.

Bayer might drop the Monsanto name. The German drug and chemical maker is considering moving Monsanto products under the Bayer CropScience label to remove the stigma of the Monsanto name.

FedEx will raise shipping rates starting next year, including an average increase of 3.9% at its air-shipping Express division and 4.9% for its ground and home-delivery services. The hike comes after UPS unveiled an average rate increase of 4.9% to help pay for system upgrades and expansion.

Starting in February, FedEx also will adjust its fuel surcharges weekly instead of monthly. Meanwhile, FedEx boosted its outlook for full-year profit after topping analysts’ estimates for first-quarter earnings on continuing growth in e-commerce.

Self-driving cars are quickly moving from science fiction to reality, and the US government is trying not to pump the brakes. In its most comprehensive statement yet on autonomous vehicles, the U.S. Transportation Department said it would consider seeking the power to approve technology for self-driving cars and said U.S. states should not issue separate rules.

Regulation around self-driving cars has been patchwork at best, with some states passing laws allowing for self-driving cars to be tested on their roads, and others refusing to do so. Right now, only Florida allows autonomous vehicles to drive on its roads without a person behind the wheel, and eight other states allow autonomous vehicles to be tested in some capacity, as long as there is a human driver that can take over as needed.

The DOT’s rules will aim to set a national framework through which these vehicles can be tested and deployed, while also ensuring that road rules traditionally set by states—such as speed limits—remain intact. The Transportation Department also included a 15-point set of “safety assessment” guidelines, covering issues like cyber-security, black box recordings and how a vehicle would deal with potential ethical conundrums.

Mortgages, car loans, credit card debt – it all gets “securitized”, or package together and sold to investors. Now add to that list mobile-phone payments. Verizon has become the first company to sell a bond deal backed by monthly mobile phone payments. Verizon’s $1.2 billion sale into a broader marketplace was the first step into what many analysts believe could explode into a multi-billion-dollar market within the next year.

Financial Review

Bad Medicine

Sinclair Noe — April 6, 2016

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DOW + 112 = 17,716
SPX + 21 = 2066
NAS + 76 = 4920
10 Y + .03 = 1.75%
OIL + 1.84 = 37.73
GOLD – 8.90 = 1223.30

The FOMC issued the minutes from its last meeting, where the Fed left rates unchanged and lowered its forecast for hikes this year from four to two. Policymakers debated whether to raise rates but a consensus emerged that risks from a global economic slowdown warranted a cautious approach. According to the minutes, many Fed members said they were concerned that interest rates were still so low that the central bank had limited firepower to respond to shocks from abroad.

The proposed $160 billion merger between US-based Pfizer and Ireland-based Allergan is dead. Changes in U.S. tax codes dealt a blow to the largest-ever heath sector deal. New regulations issued Monday by the Treasury Department targeted so-called inversions, under which a U.S. company moves its base to a country with a more favorable taxation environment. Pfizer is expected to pay Allergan a $150 million breakup fee.

With the deal behind it, Pfizer said it would decide this year about whether to split off its hundreds of generic medicines into a separate business. Allergan said it would move ahead with plans for its $40.5 billion sale of its generic drug business to Israel’s Teva Pharmaceutical Industries. It expects the transaction to close by June.

The chairman of the U.S. House Transportation and Infrastructure Committee has come out against Canadian Pacific’s proposed railroad merger with Norfolk Southern, dealing another blow to the likelihood of a deal. Bill Shuster noted that CP Rail had actively pursued some sort of merger in the U.S. since 2014, which he said “has done nothing but create uncertainty in the rail industry.”

The Justice Department has filed a lawsuit aimed at stopping Halliburton from merging with Baker Hughes, a deal that would combine the No. 2 and No. 3 oil services companies. The DOJ says the deal threatens to eliminate head-to-head competition in 23 products and services used in oil exploration and create a duopoly with market leader Schlumberger. A merger might still happen if they divest assets or make other accommodations, but more than likely, this kills the deal.

Oil prices are rallying on hopes that both OPEC and non-OPEC members will agree to an output freeze at upcoming talks in Doha on April 17. Fresh comments from Kuwait and Russia suggest that global producers could reach a supply agreement deal despite conflicting statements by participants Saudi Arabia and Iran. Crude is also getting a boost from API industry data that showed U.S. crude inventories falling by 4.3 million barrels last week.

Clean energy investment broke new records in 2015 and is now seeing twice as much global funding as fossil fuels. One reason is that renewable energy is becoming ever cheaper to produce. Government subsidies have helped wind and solar get a foothold in global power markets, but economies of scale are the true driver of falling prices.

Just since 2000, the amount of global electricity produced by solar power has doubled seven times over. Even wind power, which was already established, doubled four times over the same period. For the first time, the two forms of renewable energy are beginning to compete head-to-head on price and annual investment.  The reason for the strong growth in clean energy is that it’s a technology, not a fuel. As such, efficiency increases and prices fall as time goes on. What’s more, the price of batteries to store solar power when the sun isn’t shining is falling in a similarly stunning arc.

Global bond yields fell to a record, a warning sign for the worldwide economy. The yield on the Bank of America Global Broad Market Index dropped to 1.3%, the lowest in almost 20 years of data. A third of the world’s developed-market sovereign debt now has negative yields, after Europe and Japan cut interest rates below zero to counter deflation.

Investors rushed to higher-yielding debt, fueling the global rally. Japan’s economy contracted in the last quarter of 2015, while the Eurozone’s barely grew. China this month cut its growth target. Bond yields indicate investors expect inflation worldwide to be about 1.1 percent. The figure dropped to 0.89 percent in February, the lowest level in more than five years.

The “Panama Papers” have claimed their first casualty: Iceland’s Prime Minister, Sigmundur Gunnlaugsson said he stepped down from his post, insisting it was a resignation, after the leak revealed his wife’s ownership of a shell company set up in the British Virgin Islands.

Today, comes word that at least three of the seven people on the Chinese Communist Party’s most powerful committee, including President Xi Jinping, have relatives who have controlled secretive offshore companies. It is uncertain what will happen in China, where most people aren’t even aware of the leaked documents. Chinese government officials have blocked internet searches and online discussion that involve the words “Panama Papers”.

Apparently information about the leaked documents and the players involved will be dished out on a near daily basis. Names of US citizens are expected in about one month. It will take some time to devour 11.5 million documents and connect the dots between 14,000 clients of Mossack Fonseca and the 214,000 offshore entities they created.

Here is what we do know; the system is rigged, and unless you are part of the one percent, it is rigged against you. Legislatures don’t write laws for you, courts don’t secure justice for you. The taxes you pay are not paid by people who are much wealthier than you; they cheat the system and they get away with it.

It is hard to muster righteous indignation because rational thought and recent history tells us it is nothing more than an exercise in futility. We might reasonably expect a few indictments of minor players, sacrificial lambs for the slaughter.  We know the system is rigged and the elites are cheating the rest of us; the only surprise would be if they weren’t cheating us. The big question that’s circling around the Panama Papers scandal at the moment is why more Americans haven’t been implicated.

Rumors are swirling in the comments section that wealthy Americans have bribed their way out of mention in the documents. It might just be that Mossack Fonseca’s client base is largely Europeans, Asians, and Latin Americans, because US citizens can just set up an anonymous shell company in Nevada, or Delaware, or South Dakota; no need to deal with a Panamanian law firm. As the details from the Panama Papers are dribbled out for consumption, we will see more Americans named.

Puerto Rico’s financial crisis is escalating. The island has taken steps toward a unilateral moratorium on all government debt payments, a sudden move that surprised both Washington and Wall Street. The Puerto Rican legislature passed an emergency declaration authorizing the governor to suspend payments on $72 billion in public debt—setting up a dramatic showdown between Puerto Rico and hedge funds amid the island’s historic debt crisis.

The bill authorizes the Puerto Rican governor to “protect the health, security and public welfare … by using government funds first and foremost for public services.” The emergency measure was in response to a suit filed by hedge funds attempting to freeze the assets of Puerto Rico’s Government Development Bank in efforts to stop the bank from spending money on the island that the hedge funds want to go toward upcoming debt payments.

San Francisco has become the first U.S. city to mandate six weeks of fully paid parental leave (in companies with 20 or more workers), requiring employers to shoulder much of the cost and exceeding federal and state rules for private-sector employees. California’s governor Jerry Brown on Monday signed into law a bill raising the state’s minimum wage from $10 to $15 an hour by the year 2023.

A big change for investors today, as the Labor Department unveiled the final version of its long-awaited fiduciary rule, requiring financial professionals to put their customers’ interests ahead of their own. The language is tougher than an existing rule that only requires brokers to ensure products are “suitable.” The Labor Department made some concessions to the financial industry in the final version of its highly-anticipated fiduciary rule.

In one of the biggest changes from the initial proposal, the final rule simplifies the “best interest contract,” a provision that allows brokers to continue to get paid commissions so long as they make a variety of disclosures to customers.  Unlike the draft proposal, the final rule does not restrict brokers from pushing proprietary products, splitting revenue with creators of funds they promote, or recommending risky, high-fee investments in alternative assets and certain annuities.

Additionally, the final rule includes a “grandfather” provision that won’t require brokers to adhere to a fiduciary standard for their previous recommendations to customers. The rule also loosens previously proposed disclosure requirements for fees. While the initial rule required annual disclosure of fees, the final rule removes that requirement. The final rule also eliminates a requirement to provide clients with one-, five- and ten-year projections of fees at the point of sale.

BP will be able to deduct a big chunk of its $20 billion Gulf of Mexico oil spill settlement for tax purposes. Under U.S. law, companies are not allowed to deduct penalties they pay as part of a settlement, but only $5.5 billion of the $20 billion cost of the settlement is a fine. BP can classify the remainder as “ordinary business expenses,” which are deductible.

Forget Apple vs. the FBI, WhatsApp just switched on encryption for over a billion people. Every conversation on the messaging service, whether it be a private or group chat, will now have full end-to-end encryption, thus making the recipient the only person who can see the message. WhatsApp was bought by Facebook for $19 billion in 2014.

Financial Review

Inversion Dysfunction

Sinclair Noe — November 23, 2015

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

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DOW – 31 = 17,792
SPX – 2 = 2086
NAS – 2 = 5102
10 YR YLD – .01 = 2.25%
OIL + .09 = 41.99
GOLD – 8.50 = 1069.70
SILV – .04 = 14.25

Belgian authorities have extended a lockdown of Brussels for a fourth straight day after police raids searching for those behind last week’s Paris attacks failed to find a prime suspect. The Belgians say they have credible threats of imminent attacks against public gathering places like shopping malls and public transportation. The lockdown will see Brussels’ subway and many shops closed, as well as schools, offices, and mosques; although it is doubtful the terrorists are in mosques.

France’s economy slowed following the Nov. 13 terror attacks in Paris. However, that slowdown in the eurozone’s second-largest member wasn’t sharp enough to slow the Eurozone as a whole.

Economic activity in the eurozone grew at the fastest pace since May 2011 in November, giving some optimism over the health of the region’s economy. Markit’s flash composite Purchasing Managers’ Index climbed to 54.4 from 53.9 last month, as a recovery continued to be led by the service sector. Growth meanwhile accelerated to a three-month high in Germany, where Markit’s flash composite PMI rose to 54.9 from 54.2, fueled by a big improvement in new business.

A reading of manufacturing sentiment in the US fell in November to its lowest level in 25 months. The flash manufacturing purchasing managers index from Markit fell to a reading of 52.6 from 54.1 in October, with all five of the PMI components deteriorating. Any reading above 50 indicates the manufacturing sector is still expanding.

Sales of previously owned homes in the U.S. fell 3.4% in October to an annual rate of 5.36 million. Despite the decline last month, existing home sales are still 3.9% higher compared to the same period a year ago. The National Association of Realtors reports the median price of homes sold in October, meanwhile, was 5.8% higher vs. a year ago at $219,600.

Foreclosures and short sales dropped to 6% in October, down from 9% a year ago, and the lowest level since the National Association of Realtors stared tracking distressed sales in October 2008. By region, existing home sales in the West fell 8.7% in October, but are still 2.7% above a year ago.

The economic data continues to show steady, although sluggish growth; in other words, good enough for a rate hike in about 3 weeks when the FOMC meets. And we have been hearing from the Fed policymakers that they generally think it is time for a rate hike, with the caveat that they are data dependent.

Their intentions have been well telegraphed, and the data would have to be pretty nasty to avoid a rate hike. The Fed has pretty much run out of reasons to keep rates at zero, and leaving rates unchanged would raise a red flag that something evil is lurking. So we can figure that a rate hike has now been priced into the market, and then the question is how much more they will tighten and over what period of time. And the most likely answer is small and slow; again, this has been priced into the markets.

By about the middle of next year we should learn more about how the Fed will handle its balance sheet. And the big question is whether the Fed can pull it off. Other central banks have been less-than-successful in their efforts to pull off of the zero bound, not exactly a hopeful precedent.

Profits from S&P 500 companies have fallen by about $25 billion in the first three quarters of this year, and a further drop is expected before the end of 2015 as energy companies battle with lower oil prices and a sharp rally in the dollar hits exporters. About 96% of S&P 500 companies have reported third quarter results so far, and their aggregate net income from continuing operations for the first three quarters is $804 billion, compared with $828 billion for the first three quarters last year.

The aggregate revenue for S&P 500 companies has fallen by $287 billion over the same period last year. On a share-weighted basis, S&P 500 profits were down 3.3 percent on year in the third quarter, making this earnings season the worst since 2009, and marking a second consecutive quarter of negative earnings growth.

Oil futures were volatile in early trade today, failing to hold on to a sharp but brief bounce higher after Saudi Arabia said it would work with global oil producers toward stable prices. Oil futures spiked higher after the announcement from the Saudi Press Agency. The rebound soon lost steam, because the remarks were in line with previous Saudi statements. So far, there’s little indication Saudi Arabia is prepared to begin cutting production.

Copper lost 2% to the lowest level since 2009. Nickel touched the lowest in more than a decade; there is a supply glut right now. The London Metal Exchange’s index of six industrial metals is having its worst year since the global financial crisis in 2008.

Charts of the commodity indices are the definition of a downtrend since 2011. Two factors in the energy and materials sectors: a supply glut and a stronger dollar. That means some downward pressure on stocks, but generally good news for consumers. The average nationwide price of unleaded gasoline is expected to hit $1.99 on Thanksgiving; that’s down about 82 cents from Thanksgiving last year. I’ve seen prices around $1.85 a gallon here in Phoenix.

Pfizer and Allergan will merge in a tax inversion deal worth about $160 billion that would create the world’s biggest drug maker by sales. The takeover would be the largest inversion ever, moving one of the top names in corporate America to a foreign country. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate; in this case, the new Pfizer will have corporate headquarters in Dublin Ireland, even though their administrative headquarters will be in New York.

A Pfizer-Allergan combo would still face anti-trust scrutiny, but the US Treasury, concerned about losing tax revenue, has been taking steps to clamp down on tax inversion deals, but it doesn’t look like the existing rules are enough to stop this deal. Pfizer is confident the deal will pay off in lower taxes and cost cutting, unless…, unless Medicaid and Medicare changed their rules and started negotiating drug prices; in which case they could require that administrative headquarters match corporate headquarters, or else.

Looking to create the world’s largest ATM maker, Diebold has launched a $1.8 billion bid in stock and cash for German rival Wincor Nixdorf. A deal would see the two companies land about 35% of the ATM market, leaving NCR, the global number two, with an estimated share of 25%. Wincor expects the transaction to yield at least $160M in annual cost savings.

Petco agreed to be acquired by CVC Capital and the Canadian Pension Plan Investment Board for $4.6 billion. Petco, the No.2 U.S. pet supplies retailer, had been put up for sale by a group of investors led by private equity firms TPG Capital LP and Leonard Green & Partners. It’s not the first time. The two buyout firms took the company private in 2000 for $600 million, and then took it public again in 2002. Then they bought it back again in 2006 in a $1.7 billion deal, taking it private again.

AstraZeneca has finalized plans to divest its Crohn’s disease drug Entocort by selling U.S. rights to the medicine to Perrigo for $380 million. The move is part of AstraZeneca’s “externalization” drive, which aims to sell non-core products to help it fill a short-term revenue gap caused by older drugs, while investing in a pipeline of new medicines.

Walmart can’t wait for Cyber Monday. So, they are starting a day early, launching all its Cyber Monday deals on the Sunday after Thanksgiving rather than the early hours of Monday morning as in previous years. Actually, the starting line is already blurred. A number of retailers are promoting deals for ‘Black Friday’ – the day after Thanksgiving and traditionally one of the busiest shopping days – weeks in advance.

A jury in West Virginia has been struggling with the idea of sending a CEO to jail. The CEO is Don Blankenship; the company is Massey Energy. The trial was to determine whether Blankenship is guilty of conspiring to break safety laws, defrauding mine regulators and lying to both investors and regulators about mine safety. Massey’s Big Branch mine in West Virginia turned out to be anything but safe; an explosion in 2010 killed 29 people. In the year leading up to that catastrophe, mine inspectors had cited it nearly 500 times, often for “significant and substantial” violations. Blankenship faces 30 years in jail if convicted.

The prosecutors seem to have laid out a damning pattern of facts. Blankenship clearly raked in millions in compensation. He was a micromanager, with a staff of individuals whom prosecutors derided as “yes men”, who seems – based on some documents and tape recordings he himself made of his own phone calls – to have been concerned about the costs of safety regulations and their impact on production levels. Orders reached the miners to cover up safety violations, and it seemed clear to many from who they had originated, according to testimony. But for now, the jury is deadlocked.

Facebook’s Mark Zuckerberg has announced he will take two months of paternity leave after his daughter’s birth, though he did not say when she is due, or who would be his interim successor. Facebook allows its U.S. employees to take up to four months of paid maternity or paternity leave, which they can use all at once or throughout the year.

Financial Review

What Puzzle?

Sinclair Noe — November 20, 2015

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

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DOW + 91 = 17,823
SPX + 7 = 2089
NAS + 31 = 5104
10 YR YLD + .01 = 2.26%
OIL – .15 = 40.39
GOLD – 4.80 = 1078.00
SILV – .16 = 14.23 

The S&P gained 3.3% for the week, its best showing since December. The Dow rose 3.4% for the week and the Nasdaq added 3.6%. And now we begin the Santa Claus rally on Wall Street, which kicks off with the Turkey Shoot. For 35 years prior to 1987, the Wednesday before and the Friday after Thanksgiving combined were up 33 times.

The only declines were in 1964 and 1965. Subsequently, this trend changed. In the 28 years since 1987, there have been 12 declines and 16 advances. As Thanksgiving bullishness lost steam in 1987, the rally afterwards occurred more frequently.

Since 1987, DJIA has logged gains in 22 of 28 years from the close on Friday after Thanksgiving to year-end. The S&P 500 is up 0.5% in November and 1.5% thus far in 2015. There are 28 trading days remaining in 2015.

And going back to 1950, December is the best month of the year for the S&P 500 with the final 30 days of a year producing a mean gain of 2.36%. There could still be a black swan or some other exogenous event. This does not mean that we are guaranteed a rally, only that the probabilities are good.

ECB President Mario Draghi says the European Central Bank is prepared to deploy its full range of stimulus measures to fight low inflation. The comments from Draghi, echoed by other top ECB officials, suggest support among the highest ranks of the central bank for expanding its quantitative easing program and cutting the deposit rate further. 

Under the ECB’s bond buying program which was launched in March, the central bank is buying $64 billion a month in mostly government bonds. It is slated to run at least through September 2016, but many analysts expect the ECB to extend the program beyond this date.

Federal Reserve Vice Chairman Stanley Fischer says the Fed has done everything we can to avoid surprising the markets and governments” about the first hike in interest rates in nine years. It’s looking more and more like a December rate hike is a done deal, but Fischer said no final decisions have been made and officials continue to scrutinize the data. Fischer said it remains to be seen whether the emerging market countries in Asia and the world are sufficiently prepared for the potential capital flows and market adjustments so that there are no major macroeconomic consequences.

Today, St. Louis Fed President James Bullard said “The economy is going to go into a boom period,” citing the unemployment rate, which is currently 5%. Bullard added that the U.S. labor market was “basically back to normal” after the 2007-2009 financial crisis. But the Fed should not repeat what it did during the 2004-2006 tightening cycle, when it raised rates at 17 consecutive meetings, and Bullard emphasized that policymakers should be more “flexible and reactive” to data this time. 

Bullard also said the persistence of low real interest rates was “a puzzle,” echoing comments he made last week in a speech titled “Permazero”, where he entertained the possibility the United States is entering an era of permanently low rates.

It probably isn’t that big a puzzle. Demand has remained at low levels as fiscal policy contracted. Even where monetary policy produced some stimulus, it was counterbalanced with austerity. Corporate America has been on a stock buyback and financial engineering binge which cut investment in R&D and innovation and capital expenditures. The Great Recession was a knife in the back of workers and even though jobs have come back, wages have not.

As the global economy contracted, investors looked to the safe haven of the dollar and Treasuries, which pushed down exports and also kept a ceiling on rates. The financial industry has grown even larger than before the financial crisis, and it continues to be a giant black hole of derivatives and shadow banking that swallows’ productivity. I could go on, but it isn’t a puzzle.

The House of Representatives passed legislation to increase oversight over the Federal Reserve that includes a provision that would require the central bank to follow a mathematical rule to set interest rates. In May, the Senate Banking Committee already passed Republican-backed legislation to increase oversight of the Fed, but that measure doesn’t require the Fed to follow a mathematical rule.

China’s yuan may enter the IMF’s benchmark currency basket at a lower weighting than previously estimated as the institution considers making weights less related to export volumes and more dependent on financial flows. Such a change would give the renminbi a lower share in the basket than under the current formula. IMF policymakers are expected to vote on the currency’s inclusion to the Special Drawing Rights basket on November 30.

The leading economic index jumped 0.6% in October after falling in the two prior months, signaling a pickup in growth after a soft patch during the late summer and early fall. The leading economic index is a weighted gauge of 10 indicators designed to signal peaks and valleys in the business cycle.

Greece’s parliament has backed additional reforms needed to unlock €12-billion-euro from its latest bailout which will help recapitalize the country’s struggling banks and pay off overdue government debts.

Gunmen attacked a hotel in Mali in Western Africa and killed dozens of hostages. The attackers held 140 guests and 30 staff members before a counter-assault by Malian security forces, assisted by the US military, freed the hostages. The death toll is unclear but at least 27 bodies have been found in the hotel. A jihadist group based in northern Mali affiliated with Al-Qaeda, claimed responsibility.

In the past few days, clear signs have emerged showing that the terrorist attacks have had a big economic impact on Paris – one of the most visited cities in the world. A survey by a French hotel and restaurant operators’ union, suggests that sales in the city’s cafes and bars during the past week are down 44% on the same period last year, while hotels have suffered a 57% drop in business. Air France has so far refused to comment on passenger numbers and cancellations bound for Paris, but low-cost airline EasyJet said that travel to the French capital has plummeted.

The U.S. Treasury Department on Thursday took new steps designed to discourage corporate inversions, or deals that allow companies to move their legal address abroad to avoid taxes. Treasury Secretary Jacob Lew said additional steps were planned but also called on Congress to address the issue.

Will the new rules derail a Pfizer-Allergan deal? Maybe not. Allergan and Pfizer are considering structuring a merger of the drug companies so that it is an acquisition of the much bigger Pfizer by the much smaller Allergan.

Nike is buying back $12 billion worth of itself. After the market closed on Thursday, Nike announced a $12 billion stock-repurchase authorization, a 14% dividend hike, and a 2-for-1 stock split, which will go into effect on December 24.

Gap slashed its outlook. Gap announced that sales fell 3% year-over-year to $3.86 billion. Comparable-store sales across the company’s brands — Gap, Banana Republic, and Old Navy — fell 2%. Earnings came in at $0.63 per share, which was right in line with expectations.

Abercrombie & Fitch crushed expectations on profits, revenues, and same-store sales, sending the shares up by as much as 20% in early trading. Ross Stores shares moved higher, after the off-price retailer also reported better-than-expected earnings.

Tyson Foods plans to close two aging prepared-food plants, affecting 880 jobs, in the face of prohibitive renovation costs and changing demand. The closures come as Tyson continues to remake itself after its 2014 acquisition of Hillshire Brands. The company expects to cease operations at a pepperoni plant in Wisconsin and a prepared foods facility in Illinois during the second half of the year ending October 1.

Chipotle is having problems again. A new round of E. Coli infections has hit 45 people in 6 states: Washington, Oregon, California, Minnesota, New York, and Ohio. Sixteen of those people had to be hospitalized and no deaths have been reported. This follows an outbreak at the beginning of November when 22 people in Washington state and Oregon fell ill.

Massachusetts is barring people under the age of 21 from playing daily fantasy sports. While the decision limits a large demographic within the fantasy sports industry, it stops short of following the lead of NY Attorney general Eric Schneiderman, who recently declared daily fantasy “illegal gambling.” The proposals would also ban fantasy competitions based on college sports, prohibit promotions on high school and college campuses and bar anyone connected to professional sports, including athletes and agents.

Tesla Motors is voluntarily recalling all of its 90,000 Model S sedans to check for a potential problem with seat belts. An owner in Europe had an issue with a bolt holding the seat belt system in place coming loose. Tesla said the owner wasn’t involved in an accident and has determined the flaw was an installation issue.

Tesla shares dropped today, but they should have gone up; this was a voluntary recall, unlike GM which fought a recall for faulty ignition switches even as people died, or all the models using Takata airbags which exploded in a shower of shrapnel while car companies denied the problem, or VW which cheated on emissions. Tesla was proactive. No one was injured. The real question is why other car companies can get away with murder.