Financial Review

Returns Day

Sinclair Noe — January 5, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 42 = 19,899
SPX – 1 = 2269
NAS + 10 = 5487
RUT – 16 = 1371
10 Y – .08 = 2.37%
OIL + .47 = 54.69
GOLD + 17.10 = 1181.20

The Nasdaq squeaked out a record high close on thanks to Amazon.com, while deep drops in the retail sector weighed on the broader stock market.

The Institute for Supply Management’s index of nonmanufacturing activity was 57.2 in December, unchanged from November and remaining at its highest level since October 2015. A reading over 50 indicates expansion; so, this was a strong report.

The number of Americans filing for unemployment benefits fell to near a 43 year-low last week, pointing to further tightening in the labor market. Initial claims for state unemployment benefits dropped 28,000 to a seasonally adjusted 235,000 for the week ended Dec. 31.

In a separate report, payrolls processor ADP said private employers added 153,000 jobs in December after increasing their payrolls by 215,000 in November.

In a third report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based employers announced plans to cut 33,627 jobs from payrolls last month, up 25 percent from November. Still, that was below the monthly average of 43,910 job cuts for 2016. Layoffs last month were led by the defense, automotive, energy, transportation and government sectors.

Tomorrow morning the Labor Department will report on Non-Farm Payrolls for December; most estimates are calling for about 170,000 net new jobs, which would extend the longest streak of job creation since the Bureau of Labor Statistics started reporting employment figures. The labor market’s tightness could add on higher wages if employers increase pay while they struggle to find qualified workers, especially in high-paying industries.

The Fed has its eyes on Trump. The minutes from the December Federal Open Market Committee meeting show the Federal Reserve is monitoring how fiscal policy will affect growth and how quickly it should raise rates. The minutes said almost all Fed policymakers: “indicated that the upside risks to their forecasts for economic growth had increased because of prospects for more expansionary fiscal policies in coming years.” Bottom line, the Fed plans to hike rates 3 times this year.

Federal Reserve Chair Janet Yellen pulled off her first dissent-free interest rate decision since June at last month’s meeting as policymakers decided unanimously to raise interest rates by a quarter percentage point, but the minutes of the FOMC meeting show discord between Fed economists and policymakers, the ones who make the call on rates. The policymakers were generally optimistic about the economy, while the staff economists were generally pessimistic.

The House of Representatives passed legislation giving Congress the power to kill dozens of “midnight rules” – regulations imposed by presidents on their way out the door. Under the Congressional Review Act, any federal regulation approved since May could be voided by the Republican-led Congress once President-elect Donald Trump moves into the White House and can sign off on their disapproval. The Senate is expected to take up similar legislation soon.

President-elect Trump is now targeting Toyota, threatening to impose a hefty fee on the Japanese automaker it if builds its Corolla cars for the US market at a plant in Mexico. Trump tweeted: “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.”

The value of the Mexican peso has been in freefall over fears that Trump’s policies would harm Latin America’s second-biggest economy. One of the side effects – a 20% price hike for gasoline in Mexico – is not going over well. “Gasolinazo”, as the price hike is called, took effect on January 1^st, and has resulted in long lines and fuel shortages.

Demonstrators have blockaded highways, looted shops and forced service stations across Mexico to close in a wave of angry protest. The state run oil company, Pemex warned that blockades had created a “critical situation” in at least three Mexican states, while demonstrations in suburban Mexico City turned violent as protesters looted at least two department stores.

Meanwhile, Trump remains opposed to the megamerger between AT&T and Time Warner because he believes it would concentrate too much power in the media industry, according to people close to the president-elect, who has been publicly silent about the transaction for months.

Now there’s an app that lets you know when Trump tweets about your stocks. The free app, called Trigger, will notify you in real time if Trump tweets about a stock that you own. Bully pulpit indeed.

The International Consumer Electronics Show is underway in Las Vegas; this is day 2. The CES show will spotlight a wide range of cool new tech, including: self-driving cars, 4K televisions, wireless audio, smart home systems and drones. Apple, Alphabet, Amazon are the early leaders in connected home platforms, there’s a host of startups and consumer product majors looking to piggyback off the trend. Chinese companies are also hoping to make a large splash, with 1,300 registered as exhibitors.

Amazon.com and the Forever 21 teen retail chain are weighing bids for bankrupt American Apparel. Next Level Apparel and Authentic Brands, are also kicking the tires ahead of Friday’s deadline. Any successful offer would have to top a $66 million stalking horse bid by Canadian apparel maker Gildan Activewear Inc, which American Apparel agreed to when it filed for bankruptcy in November.

Stanley Black & Decker said it would buy Sears Holdings’ Craftsman tool brand for $900 million, strengthening its portfolio of hand and power tools. The Craftsman deal will give Stanley Black & Decker the right to make and sell Craftsman-branded products in non-Sears retail, industrial and online sales channels. Sears will continue to offer Craftsman-branded products at Sears and Kmart stores through a perpetual license from Stanley Black & Decker.

It looks like Amazon ate Macy’s and Kohl’s lunch this holiday season, as the department store chains posted same stores sales were down 2.1% over the holiday season; they also slashed their 2016 profit forecasts, sending shares down for the entire retail sector.  Macy’s will close 68 stores and cut 10,000 jobs; it had already announced plans to close 100 of its 730 stores. Retail was the weak sector today, and it spread beyond Macy’s, Kohl’s and Sears.

After getting off to a slow start following the election, retailers overall rang up a record $91.7 billion in online sales over the holidays, an 11 percent increase on-year but barely edging out an industry forecast.

UPS expects holiday returns to peak today, on what it calls National Returns Day. Shoppers are projected to send back 1.3 million packages with UPS today, and more than 5.8 million this week.

Apple said its App Store generated $20 billion for developers in 2016, a 40 percent jump from 2015. The App Store also received nearly $240 million in orders on New Year’s Day, its highest single day ever.

IT research and advisory company Gartner said on it would buy CEB Inc., a provider of business research and analysis, in a cash-and-stock deal valued at $2.6 billion to expand its business services. The deal represents a premium of about 25 percent to CEB’s Wednesday close.

Two of the nation’s largest credit reporting bureaus, TransUnion and Equifax, will together pay more than $23 million in fines and refunds to settle charges from a federal consumer watchdog that they misled consumers about the pricing and value of credit products. Equifax and TransUnion will pay $17.6 million combined in restitution for consumers and $5.5 million in fines to the CFPB. The companies will need to notify affected customers about the refunds.

The number of large global corporations that defaulted in 2016 outpaced those in 2015 by 40 percent. The figure for 2016 hit 150, making 2016 the worst year for corporate defaults since the financial crisis; almost tw0-thirds of those defaults hit corporate America. Of those, 50 out of 63 globally, were in the oil and gas sector.  (Emerging markets accounted for 28 defaults and Europe for 12).  S&P expects the default rate to rise in 2017.

A study by the World Economic Forum predicted last year that the rise of robots and AI will result in a net loss of 5.1 million jobs over the next five years in 15 leading countries. The 15 economies covered by the survey account for approximately 65% of the world’s total workforce.

And while that might sound like so much science fiction, it has already started. Japanese insurance company Fukoku Mutual will use IBM’s Watson AI to gather and process the information needed for policyholders’ payouts – by reading medical certificates, and data on surgeries or hospital stays.

The firm believes it will increase productivity by 30%; which is another way of saying 34 claims processors just lost their jobs. The company expects to save around $1.2 million a year in salaries after the AI system is installed later this month.

Last year saw the highest costs from natural disasters since 2012, with two earthquakes in Japan in April accounting for the heaviest losses. German reinsurance company Munich Re’s annual survey pegs total losses from natural disasters worldwide at $175 billion last year, some $50 billion of which was covered by insurance.

Earthquakes on Japan’s southern Kyushu island caused $31 billion worth of damage. Floods in China in June and July caused $20 billion in costs. The third-costliest disaster was Hurricane Matthew, which hit the Caribbean and the eastern US in October. It incurred losses totaling $10.2 billion. In 2015, global natural disaster losses totaled $103 billion.

Financial Review

The Courage to Act, or Not

Sinclair Noe — October 5, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 304 = 16,776
SPX + 35 = 1987
NAS + 73 = 4781
10 YR YLD + .07 = 2.06%
OIL + .72 = 46.26
GOLD – 2.50 = 1136.90
SILV + .40 = 15.77

The Dow Industrial Average has gone from a low of 16,013 Friday morning after the jobs report to an intraday high today of 16,798, or a swing of 785 points. The S&P 500 rose for a fifth session in a row, its longest winning streak this year

The US, Japan and 10 other Pacific Rim economies have reached agreement to strike the largest trade pact seen anywhere in two decades. The Trans-Pacific Partnership covers some 40% of the global economy and will create a new Pacific economic bloc with reduced trade barriers relating to the flow of everything from beef and dairy products to textiles and data as well as new standards and rules for investment, the environment and labor.

Former Fed Chairman Ben Bernanke has published a new book, entitled “The Courage to Act” and so he’s making the rounds. In a CNBC interview, Bernanke said that slow productivity growth is weighing on the economy, and there’s too much reliance on the central bank. He said other policymakers in the government need to step up. He refused to second guess current Fed Chair Janet Yellen on her decision not to increase rates at the Fed’s September meeting.

In an interview with USA Today, Bernanke said that more corporate executives should have gone to jail for their misdeeds. Bernanke explained that the Fed did not have the authority to jail anyone. Rather, it was the Department of Justice’s responsibility to do that. And while a few folks here and there went to prison for various violations, it’s largely been the financial entities that have paid the penalties.

“A financial firm, of course, is a legal fiction,” Bernanke explained. “It’s not a person. You can’t put a financial firm in jail.”

“It would’ve been my preference to have more investigation of individual actions because obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm,” he continued. “In that respect, there should’ve been more accountability at the individual level.”

So, on the one hand you have the former Federal Reserve chairman saying, after the fact, that people should have gone to jail but the financial firms are abstractions. Then on the other hand you have the former attorney general Eric Holder’s infamous quote that some financial institutions became so big, “that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” And on the other hand we have the Supreme Court, which has determined that corporations are people, even if Ben Bernanke says they’re fictitious and he can’t figure out how to lock them up.

The U.S. Supreme Court this morning rejected a U.S. Justice Department bid to restore the insider trading convictions of two hedge fund managers and reverse a lower court’s ruling that prosecutors contend will make it harder to bring such cases. The justices left in place a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that threw out the 2012 convictions of hedge fund managers Todd Newman and Anthony Chiasson for engaging in a scheme involving tips about Dell and Nvidia.

In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit, something more than the nurturing of a friendship. The appeals court also said the person being prosecuted had to know about the benefit. That issue wasn’t before the Supreme Court.

Yes, the Supremes are back in session, and they have some important cases on the docket, including: Evenwel v. Abbott, which will dig into the concept of one-person, one vote; also, Friedrichs v. California Teachers Association, which pits the practical needs of collective bargaining against the First Amendment and could have huge political consequences by crippling public employee unions and possibly all unions; and waiting in the wings at the high court are two politically incendiary cases: one involving abortion, the other birth control under Obamacare.

Saudi Arabia cut prices on oil sales over the weekend as it plays catch-up with OPEC and other producers in the region. State-run Saudi Aramco reduced prices significantly on oil sent to Asia and the U.S. The Saudi strategy is to keep producing oil at high levels in anticipation of improved demand at lower price points. Meanwhile, Russia is ready to meet with members of the Organization of Petroleum-Exporting Countries (OPEC) — as well as non-member oil producers — to discuss the situation facing global oil markets.

The Institute for Supply Management said its services index fell to 56.9% from 59% in August. New orders and prices paid were down, but any reading above 50 indicates growth, and this report marks the 68 consecutive month of growth in the services sector of the economy.

General Electric has drawn a big investment from activist shareholder Nelson Peltz. Peltz’s Trian Fund Management has accumulated $2.5 billion in GE shares since the middle of May —a roughly 1% stake —making it one of the company’s top 10 shareholders. While Trian has some criticism of the company, both sides say they are in agreement on most aspects of GE’s current direction, which includes the sale of the majority of its giant financing arm. Trian hasn’t requested a GE board seat.

Twitter has announced that co-founder and interim CEO Jack Dorsey will stay on as permanent chief executive. As Dorsey formally takes on the Twitter CEO job — after more than three months of drama and speculation — investors are bound to wonder which of Dorsey’s two companies will get short shrift. As Dorsey is reprising his role as Twitter CEO, he is also going to be taking his second company, mobile payments startup Square, public.

American Apparel filed for Chapter 11 bankruptcy in Delaware. The company plans to keep stores open while it seeks approval for its restructuring plan with lenders through the bankruptcy court.

Shares in Google have stopped trading, and have in fact ceased to exist. Instead, you can now trade Alphabet, the parent company for Google. Alphabet is a group of companies, many of which were acquired or developed internally by what used to be Google Labs. The biggest part of Alphabet stock that investors need to watch is the now-focused subsidiary of Google internet businesses.

All those advertising dollars that drove GOOG stock before will still do so, and they will come from this unit. Both GOOG stock and GOOGL stock will continue to trade separately, and at the same previous prices. They are ownership stakes in the parent company, Alphabet. GOOG stock will represent Class C shares of Alphabet, but with no voting rights, while GOOGL stock represents Class A shares with one vote each.

If you trade stocks on Scottrade you might want to be a bit more vigilant. Hackers had access to Scottrade’s network for “a period of several months” in late 2013 and early 2014. The retail brokerage posted a notice on its website. The company said it believes that contact information, names and addresses were the focus of the breach, although “sensitive data” such as Social Security numbers and email addresses were also in the system that was breached. The information of 4.6 million clients was contained in the targeted database, and Scottrade is providing a year of identity protection services to those clients. Scottrade said it is directly notifying clients who had an account before February 2014 that their data may have been accessed.

The FTSE 100 was up about 2.5% and almost the entire move can be attributed to Glencore. The commodities giant Glencore was briefly up 21% in London, and it had jumped by as much as 70% in Hong Kong trade after rumors circulated that management would listen to takeover offers. The company’s board disputed those claims in a press release, however, saying, “It is not aware of any reasons for these price and volume movements or of any information which must be announced to avoid a false market.”

Canadian fertilizer company Potash has backed out of its $8.8 billion takeover attempt of its German rival K+S. According to Potash, it’s dropping the bid because of market conditions and a lack of commitment from K+S management. Back in August, K+S said Potash’s bid undervalued the company and would eliminate jobs

Ford reached a key agreement with a union representing workers at an F-150 plant in Missouri. The UAW workers still need to vote on the deal which covers employment conditions, not the wage levels being negotiated on a national level. The development is crucial for Ford as the Kansas City-area plant is a major producer of the new F-150. Any slowdown in production would create a ripple of worry with F-150 sales continuing to gain momentum in the U.S.

Volkswagen will hold a special board meeting to review n internal investigation on the emissions cheating crisis. One of the biggest challenges for the VW board is how deeply to cut into Volkswagen’s investment budget in order to try to stave off credit agency downgrades.

Air France said last week it was planning cuts to jobs, jets, and routes in the absence of a deal with pilots, who had been asked to work more hours for the same pay to help end annual losses that began in 2011. Air France workers “stormed” the company’s headquarters at Charles de Gaulle Airport near Paris after it threatened to cut 2,900 jobs, interrupting a meeting with union representatives and ripping executives’ clothes off.