Financial Review

Inside Bank Earnings

Sinclair Noe — April 19, 2017

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

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DOW – 118 = 20,404
SPX – 4 = 2338
NAS + 13 = 5863
RUT + 5 = 1367
10 Y + .02 = 2.20%
OIL – 1.83 = 50.58
GOLD – 8.90 = 1281.30

Energy stocks were under pressure Wednesday as crude-oil prices settled at a two-and-a-half week low and its biggest one-day loss in 6 weeks. Gasoline inventories posted a surprise increase, a counter-seasonal build of 1.5 million barrels in the latest week, along with an increase in U.S. production. The energy sector was the worst performer among the S&P 500 index’s 11 sectors.

Shares of International Business Machines were largely responsible for a decline in the Dow industrials. IBM lost about 5%, after posting its 20^th consecutive quarter of declining revenue. IBM has an outsize impact because the Dow is price-weighted, meaning the most expensive stocks (rather than the largest companies) have the biggest pull.

Monday’s rally was on low volume, a sign of weakness. Yesterday’s selloff saw volume increase. In the U.S. Treasury market, bond yields rose after a rally on Tuesday sent yields to five-month lows.

The Federal Reserve publishes the Beige Book two weeks prior to FOMC monetary policy meetings. The Beige Book gathers anecdotal reports from the 12 Fed districts; not hard economic data, rather observations and remarks.

Today’s  Beige Book found “a larger number of firms mentioned high turnover rates and more difficulty retaining workers.” Tight labor markets are broadening out wage gains but price pressures remain modest. A couple of districts said that worker shortages and increased labor costs were restraining growth in manufacturing, transportation and construction but overall inflation was modest, the report said.

Selling prices rose only slightly.  The information suggested somewhat softer readings in non-auto consumer spending and an expansion in the manufacturing sector. Home building accelerated and energy-related businesses reported “improved conditions.” Uncertainty about tax-and-spending policies was one factor mentioned in several districts as a restraint on activity.

Federal Reserve Vice Chairman Stanley Fischer today said there’s been a “benign” foreign market reaction to the central bank’s two rate hikes in four months. Fischer said: “The main reason for the positive market reaction is that foreign output expansions appear more entrenched, and downside risks to those economies noticeably smaller than in recent years.” He pointed out that European unemployment has fallen and China’s economy also is on a more solid footing.

He says there’s a chance foreign economies kick into gear enough that U.S. and foreign business conditions become aligned, as they did during the tightening cycles that began in 1999 and 2004. “A gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the U.S. economy and to mitigate the risk of undesirable spillovers abroad.”

Boston Fed President Eric Rosengren says the Fed should start shrinking its balance sheet relatively soon but do it so slowly that it doesn’t disturb the central bank’s plans to continue to gradually raise short-term interest rates. The Fed amassed $4.5 trillion in Treasury and mortgage-related assets in the wake of the financial crisis to push down long-term rates. Officials believe the balance sheet is still boosting economic conditions.

With the economy on more solid footing, the central bank wants to allow the balance sheet to shrink to a more neutral size. Rosengren suggested the Fed should initially retire a small percentage of maturing securities and then very gradually shrink the volume of the securities being reinvested. This confirms that asset purchases are now part of the Fed’s playbook and may be used again in the future; and that this Fed believes in gradualism; no sudden movements to spook the markets.

Earnings season rolls on.

eBay net income rose to $1.04 billion, or 94 cents per share in the first quarter, from $482 million, or 41 cents per share, a year earlier, but they lowered guidance, forecasting current-quarter profit largely below expectations, sending its shares down as much as 4.5 percent in extended trading.

Ebay said it expects current-quarter adjusted profit of 43-45 cents per share. Analysts on average were expecting 47 cents per share. EBay has been facing relentless competition from much larger rival Amazon. To lure more shoppers and better compete with Amazon as well as traditional retailers, the company has made several changes to its platform.

Qualcomm, the largest maker of chips used in smartphones, reported 9.6 percent fall in quarterly revenue, hurt by an arbitration decision to pay Canada’s BlackBerry for previously received royalties. Net income attributable to the company fell to $749 million, or 50 cents per share, in the second quarter ended March 26, from $1.16 billion, or 78 cents per share, a year earlier.

No. 3 U.S. railroad CSX Corp reported a better-than-expected quarterly net profit driven by rising freight volumes across most of the markets it covers and said it plans to cut costs and boost profitability moving forward. CSX posted first-quarter net profit of $362 million or 39 cents a share, up from $356 million or 37 cents per share a year earlier. Revenue increased 10 percent.

American Express posted a better-than-expected first-quarter profit, helped in part by higher spending by card members. AmEx’s net income attributable to shareholders fell to $1.21 billion, or $1.34 per share, in quarter ended March 31 from $1.39 billion, or $1.45 per share, a year earlier which included certain subsequently discontinued co-brand partnerships – also known as Costco.

AmEx faces cut-throat competition, particularly for premium customers, as card issuers offer ever richer levels of rewards to acquire and keep customers. The company last month fattened up rewards on its Platinum charge cards to fortify its high-end market.

BlackRock, the world’s biggest asset manager, reported double-digit profit gains as investors plowed money into lower-cost index funds, but the company’s share price slipped as revenue fell short of analysts’ expectations.

BlackRock’s assets grew 22 percent from a year ago to $5.4 trillion, fees for managing those assets and lending out the securities grew by a smaller 12 percent. Investors poured $82.2 billion into its index funds and iShares exchange-traded funds during the first quarter, while its pricier active funds posted $1.8 billion in withdrawals.

Blackrock CEO Larry Fink made the media rounds this morning and he certainly sounded happy about the quarterly results, but he was less sanguine about the economy overall. Fink said there are indications that the U.S. economy is slowing as businesses weigh whether the Trump administration will be able to pass tax reform and an infrastructure program quickly.

Morgan Stanley, the sixth-largest U.S. bank, generated $1.7 billion in revenue from bond trading in the first quarter, the most in two years. The figure matched what Morgan Stanley had produced before cutting 25 percent of the business’s staff, showing that the bank can do more with less. The bank also delivered more from bond trading than arch rival Goldman Sachs, a rare feat.

Overall, the bank easily beat expectations, reporting a first-quarter profit of $1.8 billion, or $1 per share, up from $1.1 billion, or 55 cents per share, in the year-ago period, and topping estimates of 88 cents per share. Net revenue jumped 25 percent to $9.75 billion.

The major banks have now reported earnings. JPMorgan, Citi, Wells, Bank of America, and Morgan Stanley all beat consensus estimates. You know that game. Banks themselves had steadily walked down analysts’ expectations for almost three weeks leading up to the start of earnings releases, so it shouldn’t have come as a surprise that they magically beat forecasts.

A constant theme has been more trading and fewer loans. Citigroup handily beat earnings per share estimates but the bank’s net interest margin fell 3% to 2.74%, even though the Fed raised rates and net interest margin was supposed to be expanding.

Higher net credit losses at Citi were a weak spot, with consumer banking net credit losses globally up 17% year over year, and up a surprising 33% in North America alone. JPMorgan Chase had a similar EPS beat, topping analysts’ estimates by 8.5%, and had better than expected trading revenue too. But loan growth slowed across all categories.

Wells Fargo beat earnings estimates. While bank officials talked up Wells’ 18 straight quarters of at least $5 billion in revenues and the bank’s ‘highest in the industry’ return on equity and return on assets, it revealed that loan growth fell across the board.

Wells had some negative publicity in the quarter – Side bar here: We learned today that the Office of the Comptroller of the Currency, America’s chief federal banking regulator admits it failed to act on numerous “red flags” at Wells Fargo that could have stopped the fake account scandal years earlier.

One particularly alarming red flag that went unheeded: In January 2010, the regulator was aware of “700 cases of whistle-blower complaints” about Wells Fargo’s sales tactics. The regulator did nothing.

Mortgage lending was down at the nation’s biggest housing lender.  Auto lending originations were down 5.5% from the previous quarter and down a whopping 29% from last year’s Q1. At the same time, Wells’ employee count was up by 3700, even after closing almost 30 branches in the first quarter and after cutting 5300 heads because of the bank’s account opening scandal.

Under the fluff, here are the trends coming out of the banks’ earnings reports. Consumer and commercial loan demand is falling. Mortgage originations are going in the wrong direction. Auto loans are being pared back by banks themselves because of “heightened credit underwriting standards,” in response to early signs of rising delinquencies, according to Wells Fargo. Net interest margins haven’t expanded with rising rates.

And if the banks and the markets are slipping, it might not be too long before the economy starts slipping again.

Financial Review

And Pause

Sinclair Noe — March 2, 2017

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

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DOW – 112 = 21,002
SPX – 14 = 2381
NAS – 42 = 5861
RUT – 17 = 1395
10 Y + .03 = 2.49%
OIL – 1.21 = 52.62
GOLD – 15.00 = 1235.00

Yesterday, the Dow advanced about 300 points to close above 21,000 for the first time, just 24 trading sessions after it first hit 20,000. That matches the fastest-ever move between thousand-point milestones, which last happened in 1999 and took the index above 11,000.

The number of Americans filing for unemployment benefits fell to near a 44-year-low last week. Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 223,000 for the week ended Feb. 25, the lowest level since March 1973.

It was the 104th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970.

The Federal Reserve’s Beige Book, a collection of anecdotes about the economy gathered before the central bank makes interest-rate decisions, said “businesses were generally optimistic about the near term but to a somewhat lesser degree than in the prior report.” Overall, the US economy continues to meander along, with all districts reporting “modest to moderate” growth.

Federal Reserve Gov. Lael Brainard has been among the most consistent doves at the Fed, but now, “near-term risks” to the U.S. from abroad appear to have diminished. Brainard the US economy appears to be in transition to a more stable growth path and gradual interest-rate hikes are likely to be appropriate “soon.”

Fed Gov. Jerome Powell became the latest Fed official to hint that a hike is imminent when he said Wednesday that the case for raising interest rates in March “has come together.” Fed Chair Janet Yellen is set to speak on the economic outlook in Chicago on Friday in her last speech before the Fed’s March 14-15 meeting.

Emerging-market borrowers are selling bonds at an unprecedented pace before the Federal Reserve raises interest rates. Emerging-market issuance in dollars and euros this year has already exceeded $100 billion. That’s the fastest pace ever and almost 20 percent more than the previous record for the period in 2014. With yields still favorable to borrowers, they may accelerate plans to refinance maturing debt and lock in current yields.

The yield on the two-year US Treasury note rose 3 basis points to 1.32% in recent trade, its highest end-of-day level since June 10, 2009. Bond yields rise as prices fall. The yield also notched its largest four-day increase since Feb. 8, 2011. The yield on the 10-year Treasury note has popped about 16 basis points in the past week.

The dollar advanced. Oil closed at the lowest level in more than three weeks. US stockpiles expanded to 520 million barrels, the most in weekly government data going back to 1982, even as Saudi Arabia continued to lead OPEC’s efforts to cut production to end the glut.

Snapchat parent Snap Inc raised $3.4 billion in its IPO last night, valuing the company at $24 billion, more than double the size of Twitter and the richest valuation in a U.S. tech IPO since Facebook five years ago.

The shares priced at $17 each, above the expected range of $14-16. And the IPO was oversubscribed by more than tenfold; and when shares started trading, there was a pop to $25, and shares closed at $24.47.

Snapchat’s founder and early investors cashed out over $1 billion today. This for a company which reported revenues of $404 million with losses of $515 million in 2016. And shareholders don’t have voting rights. Go figure.

About 32 million Yahoo user accounts were accessed by intruders in the last two years using forged cookies. The company said some of the latest intrusions can be connected to the “same state-sponsored actor believed to be responsible for the 2014 breach,” in which at least 500 million accounts were affected.

Yahoo also said in December that data from more than 1 billion user accounts was compromised in August 2013. Yahoo’s board of directors have decided to forgo CEO Marissa Mayer’s 2016 bonus following the results of an internal investigation of how the company’s massive hacks were handled.

Yesterday, Amazon’s cloud service S3 went down for a few hours. Today, Amazon blamed the outage on human error and the movie LaLa Land.

Banks globally have paid $321 billion in fines since 2008 for an abundance of regulatory failings from money laundering to market manipulation and terrorist financing, per data compiled by Boston Consulting Group. That tally is set to increase in the coming years as European and Asian regulators catch up with their US peers, who have levied most charges to date.

The Labor Department has proposed delaying a rule that would require retirement advisers to act in the best interest of their clients. The “fiduciary rule” was set to go into effect on April 10 and would have prohibited retirement advisers from accepting incentives for promoting certain funds over others.

The Labor Department announced a proposed 60-day extension for the rule to go into effect on June 9. During that time, the department said it will collect applicable information on the possible effects of rule, including public comments.

As credit card companies compete for customers by offering increasingly better rewards and perks, American Express is giving its Platinum card a facelift and a benefits overhaul. The newly-enhanced card will come with Uber credits, increased travel rewards and more access to special events. But the new benefits don’t come cheap. The card carries a $550 annual fee, an increase from $450, and currently offers no sign-up bonus.

Federal law enforcement officials searched three facilities of heavy machinery manufacturer Caterpillar in Illinois. It was not immediately clear why federal agents raided the three locations, but Caterpillar has been fighting an Internal Revenue Service demand that the company pay $2 billion in taxes and penalties for profits assigned to a Swiss parts distribution subsidiary, Caterpillar SARL, or CSARL, per filings with the Securities and Exchange Commission.

That subsidiary was also the subject of a 2014 Senate committee report that charged Caterpillar “shifted billions of dollars in profits away from the United States.” Caterpillar also disclosed in its report that it had received grand jury subpoenas from the U.S. District Court for the Central District of Illinois seeking documents and information related to the movement of cash among U.S. and non-U.S. subsidiaries, and the purchase and resale of replacement parts.

Boeing is cutting its Seattle-area workforce by at least 1,800 jobs this year as the company streamlines operations. Boeing approved voluntary layoffs for 1,500 mechanics. Another 305 engineers and technical workers are leaving voluntarily.

Anheuser-Busch InBev  reported worse-than-expected quarterly results. The company said that challenges in Brazil hurt its overall performance.

Shake Shack same-store sales whiff. The burger chain announced adjusted earnings of $0.09 a share, matching estimates, but said same-shack sales, or sales in stores open at least two years, rose 1.6%, well shy of the 2.6% estimated gain.

Barnes & Noble reported third-quarter profit that missed expectations. Same-store sales fell 8.3%, largely due to lower traffic and a decline in coloring books, artist supplies and the best-selling Adele album that was released in 2015. The company now expects full-year 2017 same-store sales to decline about 7%.

Broadcom came in 15 cents above estimates with adjusted quarterly earnings of $3.63 per share, while the chip maker’s revenue was slightly above estimates. The company, which is a major supplier for Apple, said it expects healthy demand for its products to continue.

After the closing bell, Costco reported fiscal second-quarter per-share earnings and sales below expectations and said it plans to raise membership fees in June by $5.

The creepiest thing of the day, and there were multiple candidates – goes to Spiral Toys; a company that sells internet-connected teddy bears that allow kids and their far-away parents to exchange heartfelt messages left more than 800,000 customer credentials, as well as two million message recordings, totally exposed online for anyone to see and listen.

Since Christmas day of last year and at least until the first week of January, Spiral Toys left customer data of its CloudPets brand on a database that wasn’t behind a firewall or password-protected. The exposed data included more than 800,000 emails and passwords.

As we’ve seen time and time again in the last couple of years, so-called “smart” devices connected to the internet—what is popularly known as the Internet of Things or IoT—are often left insecure or are easily hack-able, and often leak sensitive data. There will be a time when IoT developers and manufacturers learn the lesson and make secure by default devices, but that time hasn’t come yet.

So, if you are a parent who doesn’t want your loving messages with your kids leaked online, you might want to buy a good old fashioned teddy bear that doesn’t connect to a remote, insecure server.

Tomorrow is the first Friday in March, but it is not a Jobs Report Friday. The jobs report is a monthly ritual for anyone following markets or the US economy, as it contains some of the main data points measuring the health of the labor market in the world’s largest economy.

The report almost always comes out on the first Friday of the month, but not this month: The February 2017 report is scheduled to be released on March 10, a week later than might be expected. It turns out that this is due to the way the jobs numbers are gathered and how the days of the week fell this year during a short month.

When the 12th is on a Sunday and there are 30 days or less in the month, the release date will wind up being the second Friday of the following month – so March 10, not tomorrow.

Attorney General Jeff Sessions said he would recuse himself from investigations involving the Trump campaign over his contacts with Russian officials during the 2016 election, but stood firm on the answers he gave during his Senate confirmation hearing about his past communications. Sessions denied during his confirmation hearing that he had ever communicated with any Russian officials while he was a top Trump campaign surrogate.

During his press conference, Sessions emphasized that he didn’t meet with Russian operatives about the Trump campaign during the election. So, the story is shifting. Is it too late to change my vote for Creepiest Thing of the Day?

Financial Review

Mars Looks Pretty Good

Sinclair Noe — September 27, 2016

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

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DOW + 133 = 18,228
SPX + 13 = 2159
NAS + 48 = 5305
10 Y – .03 = 1.56%
OIL – 1.00 = 44.93
GOLD – 10.90 = 1328.00

A CNN poll showed that 62 percent of voters who watched last night’s presidential candidate’s debate felt that Democratic nominee, Hillary Clinton, won. In markets, the Mexican peso seems to agree, with the currency rallying as much as 2 percent after the head-to-head concluded, any other correlations to the markets are hypothetical.

Last night’s debate was all over the place. That’s not a commentary on the candidates, rather on the broadcast itself. Unlike the primaries, the networks do not take turns running the general election debates. Instead, the non-partisan, non-profit Commission on Presidential Debates runs the show and hands out sets of keys to whoever wants them.

That means in addition to every major network, other platforms like Facebook, Twitter, and Yahoo were able to broadcast their own streams. The early estimates are that 81 million people watched the debate on one of the 12 TV networks and about 2.5 million watched live streaming. Although about 90% of the people probably tuned in just to see if the roof would collapse.

Top social media platforms steered hundreds of thousands of users to voter registration websites over the weekend in an effort several states said set new records for registration activity. Facebook, Instagram, Snapchat and other social media networks began reminding users over the age of 18 to register to vote. Users on Facebook were directed to a federal website that would then direct them to sites in their home states.

Today is National Voter Registration Day; it is not the last day you can register to vote, just a day to encourage everyone to register. In Arizona, you have until October 8 to register by mail, or October 10 to register online.

Before we get to the actual election, the government might shut down. The federal budget runs through Friday. We need a new budget to keep running; that is not going to happen. Typically, the politicians come up with a continuing resolution, an extension on the deadline for a budget; that might not happen either. The stopgap funding bill under consideration would keep the federal government running through Dec. 9, as well as provide funds to combat the Zika virus. It also includes disaster-relief aid for flooding in Louisiana and other states.

Senate Democrats are demanding federal aid for residents of Flint, Michigan to deal with their poisonous water problem. Senate majority leader Mitch McConnell is talking about removing aid to flood victims in Louisiana in exchange for aid to Flint.

That deal may or may not fly. But then there is another rider on the stop gap budget, the inclusion of a poison pill policy rider to keep political money from big corporations a secret. The rider would block the Securities and Exchange Commission (SEC) from working on a rule to require publicly traded companies to disclose their political spending. This rider is one of the main sticking points standing in the way of a deal to keep the government open. The deadline for a budget deal is Friday.

Iran is unwilling to freeze its oil production at current levels. The nation’s oil minister also said the country doesn’t intend to strike an agreement with other crude producers in Algiers this week. Iran will increase output from 3.6 million barrels per day to 4 million.

OPEC’s decision to hold informal talks this week has fanned speculation that it might be about to deviate from a two-year-old policy of pumping without limits, which succeeded in hurting rival suppliers but also sent prices into free-fall. Energy Ministers are now calling the gathering a “consultative meeting,” saying “it wasn’t time for decision-making.” A formal OPEC meeting will take place in Vienna on Nov. 30, when a supply agreement may be reached.

The World Trade Organization has cut its forecast for global trade growth this year by more than a third. The new figure of 1.7%, down from its April estimate of 2.8%, would be the slowest pace of trade and output growth since the 2009 financial crisis. It is also the first time in 15 years that international commerce has been left trailing behind the world economy.

The downturn reflects the slowdown in countries such as China and Brazil and lower levels of imports into the US. Trade has grown 1.5 times faster than gross domestic product over the long term – but the WTO say it will only grow 80% as fast this year. That would be the first reversal of globalization since 2001 and only the second time this has happened since 1982.

Global bonds moved higher as renewed concerns over Europe’s banks spur demand for safe assets. Germany’s 10-year yield fell to the lowest since July and Finland’s dropped below zero for the first time. Spain’s 10-year yield dropped to a record low. The outlook may be different for Treasuries, as Blackrock, the world’s biggest money manager, warned of the risks of holding Treasuries as the Federal Reserve moves towards raising rates.

Single-family home prices rose slightly less than expected on an annual basis in July, and the year-over-year gain was smaller than in the prior month. The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5 percent in July on a year-over-year basis, down from 5.1% in June. In Phoenix, existing home prices were up 0.8% from June to July, and up 5.2% over the past 12 months.

A key measure of consumers’ attitudes increased in September, to its highest level since the recession. The Consumer Confidence Index hit 104.1 in September, up from August’s revised reading of 101.8. The survey measures confidence toward business conditions, short-term outlook, personal finances and jobs.

A federal appeals court has ruled that American Express could stop merchants that accept its cards from encouraging customers to use rival payment cards that charge the stores lower transaction fees. The decision reversed a lower court’s 2015 ruling that such restrictions violated federal antitrust law. The decision is a major victory for American Express, which wants to ensure that its customers, who pay higher-than-average membership fees, do not encounter any barriers to use.

The ruling means that American Express can continue to enforce provisions in its contracts with merchants that prohibit them from steering customers toward other forms of payment. Credit card costs are largely invisible to consumers, but retailers pay a fee each time a credit or debit card is used. Amex charges higher so-called swipe fees, or interchange fees, than Visa or MasterCard, and some consumer advocates argue that those costs can get unfairly passed on to shoppers in the form of higher prices.

Samsung Electronics has recovered more than 60% of all recalled Galaxy Note 7 smartphones sold in South Korea and the US. Samsung announced on Sept. 2 a global recall of at least 2.5 million Note 7s in 10 markets due to faulty batteries causing some phones to catch fire.

Caesars and its creditors have agreed on a restructuring to get the casino’s operating unit out of bankruptcy. Creditors will receive about 70% of the fully diluted equity in the new structure, while second lien noteholders and unsecured creditors will get paid $0.66 on the dollar.

Walt Disney is working with a financial adviser to evaluate a possible bid for Twitter. Twitter has started a process to evaluate a potential sale. Salesforce.com is also considering a bid and is working with Bank of America on the process. No deal yet, just speculation.

Last year, the Environmental Protection Agency finalized a far-reaching rule that would, for the first time ever, regulate carbon dioxide emissions from America’s existing coal- and gas-fired power plants, which are a major source of pollution. The Clean Power Plan set specific emissions targets for each state and gives them plenty of flexibility in deciding on how to meet the goals. If all goes as intended, the plan would reduce power plant emissions roughly 30 percent below 2005 levels by 2030.

Various oil and coal companies, along with 27 states led by West Virginia, have sued to overturn the Clean Power Plan. Many of these states could meet the plan’s targets fairly easily, but they are opposed to any expansion of EPA powers. In response, the Supreme Court halted implementation of the Clean Power Plan until the court challenges were finished.

Today the litigants presented oral arguments to the DC Circuit Court. A ruling is expected in either late 2016 or early 2017. Whatever the outcome, the next stop for this case is the Supreme Court, which has been split 4-4 between conservatives and liberals ever since Justice Antonin Scalia’s death this year. If there’s a 4-4 SCOTUS split on this case, then whatever the DC Circuit Court rules will stand.

SpaceX has successfully tested a new rocket engine it plans to use to take people to Mars within the next 10 years. CEO Elon Musk tweeted about the successful first firing of the Raptor engine and included photos. Musk said he expects SpaceX to make an unmanned mission to Mars by 2018, using existing technology. He plans to use the Raptor engine for a manned Mars mission by 2025.

SpaceX has yet to carry humans into outer space, but it has won a contract from NASA to carry U.S. astronauts to the International Space Station as soon as next year. Today Musk laid out his plans for Mars colonization. The idea is reusable rockets, somehow making fuel on Mars, refueling stations in space, spaceships carrying about 100 passengers per flight to Mars to inhabit a city of 1 million. All this within the next 10 years.

Financial Review

Easy to Spot Winners

Sinclair Noe — October 22, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 320 = 17,489
SPX + 33 = 2052
NAS + 79 = 4920
10 YR YLD un = 2.03%
OIL + .18 = 45.38
GOLD – .80 = 1166.90
SILV + .16 = 15.94

European Central Bank policymakers are meeting today in Malta. ECB President Mario Draghi announced no change to interest rates or asset purchases, but he warned that emerging markets are hurting Eurozone growth prospects, and he hinted the central bank may lower the deposit rate further or expand its quantitative easing at its December meeting. Markets just love an accommodative central bank.

The European Economics Commission says “Greece has done a certain number of reforms, and we are going to give them money, €3 billion-euro in all,” and in the course of November, December, the commission will deal with the issue of the recapitalization of Greek banks and Greek debt.”

Chinese stocks recovered today as the People’s Bank of China added liquidity to the market. After the close on Wednesday, the PBOC injected $16.6 billion into 11 financial institutions via medium-term lending facilities. Meanwhile, the government’s anti-corruption campaign continues with a crackdown on golf, considered a lavish extravagance. Or in my case, cruel punishment.

New applications for U.S. unemployment benefits inched up by 3,000 to 259,000 in the week ended Oct. 17. This is the first gain after two straight large declines. Claims had fallen by 20,000 in the prior two weeks.

Existing home sales rose 4.7% to a seasonally adjusted annual rate of 5.55 million, the second-highest monthly level since Feb. 2007 and an 8.8% rise from the same month of 2014. The National Association of Realtors attributed the improvement in the housing market to low mortgage rates, an improving jobs environment and a slight thawing in credit availability. There were 2.21 million available homes for sale, down 3% from August. The number of listed properties in August was the second-lowest for that month since 2002.

The White House is making a push to solve the debt crisis in Puerto Rico, pressing Congress to amend bankruptcy code, instate a financial control board and extend tax credits as the commonwealth struggles with $72 billion in debt. On Wednesday, the Government Development Bank, the island’s de facto fiscal authority, ended talks with a group of its bondholders and their advisers after failing to reach a deal on restructuring the debt.

The U.S. Treasury said it will postpone the two-year note auction previously scheduled for Tuesday, as an impasse over the debt limit constrains the nation’s borrowing and inflicts the first ceiling-related auction delay in a decade. The Treasury sent an e-mail saying: “Due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the two-year note” on Nov. 2. The five-year note auction on Oct. 28 and the seven-year note auction on Oct. 29 will proceed as planned.

The yield on the two-year Treasury note slid after the announcement, as it means less supply than had been expected in this sector. Treasury Secretary Jacob Lew said he is concerned that “last-minute brinkmanship” in Congress could lead to a legislative “accident” in which lawmakers would fail to raise the debt ceiling before a Nov. 3 deadline. With $12.9 trillion in marketable securities, the U.S. is considered the world’s most reliable debt issuer. The last time an auction was delayed due to the borrowing limit was in November 2004.

And part of the reason why this is noteworthy is because the Treasury markets are supposed to be boring, incredibly boring and completely predictable, regular, and consistent. This consistency has allowed the government, and by extension the US dollar, to become the safe harbor for investors. Predictability translates into decreased borrowing costs for the US, roughly $27 billion in savings over the past 17 years, simply attributed to the predictable, consistent bond market schedule.

Remember the debt ceiling fight of 2011 was behind the credit rating downgrade that stripped the US of AAA rating. And now we are preparing for another fight over the debt ceiling, and the clock is ticking, and the most boring part of the markets just got important.

The median stock in the US has been flat for 2015. That is actually a big improvement from about one month ago when the median stock was down 8%, so we’ve seen a nice rally, but at the current pace we are on track for the worst performance since 2008. And it doesn’t look like stocks are going to rally on earnings news; third quarter reports are coming in and we are on track for a two consecutive quarters of declining earnings, or an earnings recession.

The bad news is that when we have an earnings recession we tend to get a real recession. This is a statistic not lost on the Fed. Historically there has been a very high correlation between changes in the Fed Funds rate and the profit cycle. The Fed traditionally begins a tightening cycle when profits are moving higher and begins easing when profits decelerated. The notion that the Fed would raise rates in a profits recession, well, it has never happened before.

United Auto Workers members have ratified a new 4-year labor contract with Fiat-Chrysler. UAW members sacrificed gains in a 2011 contract and two years earlier made concessions to allow the former Chrysler to go through bankruptcy. The new contract, effective as of next Monday, provides a clearer path to top pay for so-called “second-tier” workers in a two-tier wage system established in 2007, which pays newer workers less than those hired before 2007. The new contract allows newer workers to earn wages more in line with veteran employees. Next up, negotiations with Ford and GM.

A swift plunge in the stock price of Valeant Pharmaceuticals cost some of Wall Street’s top names billions of dollars on Wednesday but Pershing Square’s Bill Ackman took the meltdown as a buying opportunity. Ackman bought 2.1 million additional shares as the company plummeted as much as 40% on a report from Citron Research that alleged it fraudulently inflated revenues. The report goes so far as to call Valeant the “pharmaceutical Enron.” Today, the stock dropped 10% more.

Let’s take a look at earnings reports:
McDonald’s reported quarterly earnings and revenue that topped estimates. Global sales at established restaurants were up a much better-than-expected 4 percent in the third quarter, ending six straight quarters of flat or falling results. McDonald’s share hit an all-time high on the report.

American Express posted quarterly earnings and revenue that missed analysts’ expectations on Wednesday, citing continued headwinds from a stronger U.S. dollar and a rise in marketing spending.

3M, the maker of Scotch tape and Post-it notes, reported disappointing net sales for the third quarter and said it would cut about 1,500 jobs next year, hurt by a strong dollar and a global economic slowdown.

Caterpillar delivered quarterly earnings and revenue that fell short of expectations on Thursday. The company also lower its earnings outlook for this year and sharply increased its estimates on restructuring costs for 2015.

Southwest Airlines posted an 83% jump in third-quarter profit, boosted by lower fuel prices and cost controls.

Daimler, the owner of Mercedes-Benz, reported a net income of $2.7 billion, a 13% drop compared with a year earlier, but Mercedes car sales rose by 18% in the period.

Hyundai reported a 23% fall in net profit to $1.1 billion on falling China sales, missing estimates.

Freeport-McMoRan will further cut copper and molybdenum output as it posted a bigger-than-expected quarterly loss. The Phoenix-based company said it remains confident in the longer-term outlook for copper, but will halve operating rates at its Sierrita mine in Arizona as prices continue to drop. Freeport reported an adjusted loss of $156 million, or 15 cents a share, lagging analysts’ expectation for an 8 cent loss.

Three big earnings reports came out after the closing bell: Microsoft, Amazon, and Google parent Alphabet.

Microsoft reported a profit of $4.6 billion, or 57 cents a share, up from $4.5 billion, or 54 cents a share, a year earlier. Profit beat estimates, despite a decline in earnings. For the first time, Microsoft broke out financial results based on three operating division, including its mobile and cloud business.

Amazon posted a profit, always a bit surprising, a profit of $79 million, or 17 cents a share, compared with a loss of $437 million, or 95 cents, a year earlier. You’ll remember that last year’s results included a big whiff with the Fire phone. In the most recent quarter revenue gained 23 percent to $25.4 billion, pushed by Amazon Prime Day, which was even better than Black Friday.

As Amazon has been transformed from an online bookstore into a vast conglomerate, its video-streaming service competes with Netflix Inc. and its third-party logistics business rivals UPS. Its cloud business, with revenue growing 78%, competes with Google and Microsoft to rent storage and computing power. Meanwhile its core e-commerce business challenges brick-and-mortar chains such as Wal-Mart and Target. It has all worked well for CEO Jeff Bezos; with today’s gains Bezos saw his net worth climb to $55 billion, making him the third richest man in America.

Google parent Alphabet reported better-than-projected sales and profit in the latest quarter. Revenue was up 15% to $15.1 billion. Third-quarter net income was $2.74 billion. Total clicks on ads up 23 percent, even as the average price for an ad fell 16 percent. But Alphabet is now more than an online search engine.  Other initiatives range from computers and fast-Internet services, to projects such as like product-delivering drones, life sciences products, airborne wind turbines and self-driving cars. While the new areas have yet to bring in sales to rival Google’s core operations, they’re being given room to operate as distinct units under a new operating structure.

Financial Review

May Day

Sinclair Noe — May 1, 2015

 

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

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DOW + 183 = 18,024
SPX + 22 = 2108
NAS + 63 = 5005
10 YR YLD + .07 = 2.11%
OIL – .29 = 59.34
GOLD – 5.00 = 1177.40
SILV – .03 = 16.15
 
For the week, the Dow dropped 0.3%, the S&P 500 fell 0.4% and the Nasdaq was down 1.7%. May kicks off what has been the worst six months for stocks historically which has brought rise to the old saying “sell in May and go away.” Sometimes it works but no guarantees.

The Detroit 3 automakers reported solid April sales as new models and cheap loans lured even more buyers into what’s already a brisk-moving new-vehicle market. Fiat Chrysler reported sales jumped 6% in April, GM gained 5.9% and Ford rose 5%. Still, their stocks were mixed. Ford and GM were higher, Fiat Chrysler was down.

Merchants displeased with the high fees American Express charges them are permitted to steer customers toward less expensive cards without fearing retaliation from the credit card company. A Judge in Brooklyn federal court has ruled that American Express is not allowed to stop stores from offering discounts, rebates or other incentives for using lower-fee cards – an activity known as steering.

 Construction spending fell in March to a six-month low as outlays on private residential construction spending declined sharply. Construction spending slipped 0.6 percent to an annual rate of $966 billion, the lowest level since September. The Institute for Supply Management (ISM) said its index of national factory activity was 51.5 in April, matching the March reading, which had been the lowest since May 2013. A reading above 50 indicates expansion. Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers’ Index fell to 54.1 in April from 55.7 in March. The Thomson Reuters/University of Michigan’s consumer sentiment index for April came in at 95.9, up from the previous month’s reading of 93.0 and the second highest level since 2007. Typically the Labor Department reports monthly non-farm payrolls on the first Friday of the month, but they will deliver the April Jobs Report next Friday.

Today is May Day, also known as International Workers’ Day. May Day has historically been a day when demonstrators rooted deeply in the labor movement call for workers’ rights. But in recent years, immigration reform and civil rights issues have been adopted. There are protests and rallies schedule today across the country, including New York, Chicago, Denver, Seattle, San Francisco, Los Angeles, and many other cities. This year, marches are planned in support of “Black Lives Matter,” a growing movement in the wake of a series of deaths of black men during police encounters. This afternoon, the city prosecutor in Baltimore announced that six police officers will face criminal charges in the death of Freddie Gray.

All major European markets except London, were closed today in observance of May Day, but currency trading never stops and the euro was up to a two-month high, for its best week since October 2011. The Dollar Index moved higher as gains against the yen and sterling offset weakness against the euro. In April, the euro was up by 1.7% on a trade-weighted basis, but is still down about 6.6% year-to-date. Crude oil prices were lower after logging their best monthly gains in six years in April.

The big news this past week was really a non-event. The Federal Reserve FOMC wrapped up a two-day meeting on Wednesday, and their statement on monetary policy didn’t have any real surprises, but that just lead to speculation about when the Fed might hike interest rates.

Warren Buffett and shareholders in his Berkshire Hathaway are gathering this weekend for the company’s latest annual meeting, but before “Woodstock for Capitalists” Buffett said he believes the Federal Reserve won’t be in any hurry to increase interest rates—in part because of the softer U.S. economy at the start of the year, but more so due to what’s going on in European bond markets, where many countries have negative interest rates. Recent calculations by Goldman Sachs showed that more than $2.1 trillion of outstanding euro zone sovereign debt now has a negative yield. So, the disparity between the Federal Reserve and other central bankers is a valid argument for the Fed waiting to increase rates.

Still, the Fed has maintained a near Zero Interest Rate Policy for about 7 years and there is an expectation that they will raise their target funds rate simply to begin to “normalize rates.”  Historically, U.S. short-term interest rates have never been this low for this long, and some people believe the Federal Reserve will start to slowly raise their target rate simply to return to normal or at least bring it closer to the mean. That makes sense, but the Fed addressed this idea in the last line of their statement, which read: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

And that sounds like they are willing to make sure the recovery takes hold, even if the economy overheats just a bit, before they will raise rates. Historically, the Fed has followed its dual mandate of maximum employment and price stability, and raised rates only when economic conditions forced them too.  In the past, once they began the process of raising rates from a stable, relatively low value, they have continued to do so at a steady clip. So, the next place to look is the Fed Funds Futures rates, which tells us where people are putting their money with regard to a rate hike.  The futures market shows the Fed keeping rates at the zero to quarter percent range at least through September, then about a 60% chance of a small increase in December, followed by small increases, probably one-eighth of one percent per month, until rates are around .75% in September of 2016. The economy has been slowly improving and should be able to handle small, incremental, well-telegraphed increases.  The difference between 0.25%, or 0.50% rates, or even 0.75%, is minimal; and that is still historically low; business and the economy shouldn’t be materially harmed by such a move. Wall Street will scream bloody murder and flop about, but again it probably won’t do any material harm.

Equity markets love free money, and again this week we saw $4.5 billion pulled from US equity funds, the 10^th outflow in the last 11 weeks. The money isn’t going under the mattress; international funds have seen big inflows this year. Last week about  $400 million moved to European funds, where the ECB has been very accommodative as of late; that doesn’t represent a big flow of funds, but last week was the lowest level in the past 15 weeks.

Tesla Motors has unveiled Tesla Energy – a suite of batteries designed for households, businesses, and utilities – as it shifts into calling itself an energy innovation company in addition to being an automaker.  Tesla will build the stationary energy storage systems using the same basic batteries it will produce for its vehicles at its gigafactory in Nevada. Tesla’s home battery, named Powerwall, is a rechargeable lithium-ion model that mounts on the wall and comes in 7 kilowatt-hour or 10 kilowatt-hour versions. Deliveries will begin in late summer at prices starting from $3,000 for the smaller model and $3,500 for the larger unit. The larger battery would keep an average-sized home running for a day.

In the near term, the market for home energy storage will depend on how states regulate homeowners’ ability to buy and sell electricity. Net metering, currently available in 43 states, allows residential customers to sell excess generation back to their utility company at retail rates. As long as net metering continues, consumers will have little need to buy an energy storage system because they can sell the excess solar power they generate rather than store it. But the policies are being challenged by utility companies that say it undermines their ability to recoup grid infrastructure costs, and some utilities have started charging for being connected to the grid, even if a customer is feeding more power back to the grid than they are consuming. So, thanks to the utilities being a bit greedy, they have opened the door for Tesla technology that will allow them to go completely off grid. Or alternatively, battery storage would allow such people to maximize the value of the electricity they sell back to the utility.

The major upshot of more and cheaper batteries and much more widespread energy storage could, in the long term, be a true energy revolution as well as a much greener planet. And while most people have focused on batteries for residential use, the bigger market is at the utility scale. It means one that can rely less on fossil fuels and more on renewable energy sources like wind and, especially, solar, which vary based on the time of day or the weather. Battery energy storage means utilities can manage peak loads and improve grid reliability.

Another reason why this energy storage idea is so important for Tesla is that a green household could capture solar energy during the day, store it, and then use the battery to charge an electric vehicle overnight. Elon Musk is also chairman of SolarCity, and energy storage is an enabling technology for solar. It allows customers to meet more scenarios economically. Clever.

More than seven years after the global financial collapse, regulators and investors are still working through a mile-high pile of lawsuits and other civil actions, and it seems like the fines keep on coming. Since the crisis, banks and other institutions have paid more than $150 billion in fines, settlements and other penalties, according to a tally by the Financial Times. That compares with the roughly $700 billion in profits generated by U.S. banks between 2007 and 2014. So where have all the payments gone? The biggest have landed in the Justice Department, which has amassed some $50 billion. Other heavy collectors include the FHFA, Fannie Mae, HUD and the SEC. Among the banks paying the biggest amounts, BofA tops the list – with nearly $58 billion, followed by JPMorgan ($31 billion), Citigroup ($12 billion) and Wells Fargo ($9 billion).

Financial Review

Just Around the Corner

Sinclair Noe — April 17, 2015      

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 279 = 17,826
SPX – 23 = 2081
NAS – 75 = 4931
10 YR YLD – .03 = 1.85%
OIL – .52 = 56.19 Oil posted a 12% gain for the past week.
GOLD + 5.30 = 1,203.30
SILV – .06 – 16.23
 
The economy continues to expand and consumers are feeling better. The University of Michigan Consumer Sentiment Index rose to 95.9 in April, up from 93 in March. Separately, The Conference Board said leading indicators rose 0.2% in March; the leading economic index has been slowing over recent months but it still points to moderate expansion in economic activity.

Consumer prices rose 0.2% in March. Gasoline prices rose 3.9%, which was the biggest jump since February 2013; still, gas prices are about 33% below year-ago levels.  The core-CPI, which excludes energy and food prices, also rose 0.2% due to higher cost of housing and used cars. The cost of clothes, housing, cars, and medical care increased, while food and airfare decreased. Core prices have risen 1.8% in the past year. While the “all-items index” (which includes things like food and energy) declined 0.1% over the last 12 months. Higher inflation would indicate a stronger dollar because it could reinforce the view that the Fed might hike interest rates sooner rather than later.

The Labor Department reports real average hourly earnings for all employees increased 0.1 percent from February to March, seasonally adjusted. This result stems from a 0.3-percent increase in average hourly earnings being partially offset by a 0.2-percent increase in the Consumer Price Index. Real average hourly earnings increased by 2.2 percent, seasonally adjusted, over the past 12 months.

Another tidbit from the Labor Department shows that long-term, wages have not just been flat but slightly down over the past 40 years. Adjusted for inflation, average weekly earnings for production and nonsupervisory employees, the bulk of the workforce, topped out in October 1972. In today’s dollars, the weekly paycheck in 1972 was the equivalent of $811, compared with current paychecks at $703 a week. A recent jump in real average earnings is largely due to low inflation, rather than surging paychecks. Cheaper gasoline and a strong dollar have pushed down overall prices, leaving many Americans with more money, even though they aren’t spending it.

After a string of soft U.S. economic data, the dollar hovered near a one-week low against a basket of major currencies on Friday and was on track for its biggest weekly drop in a month. The dollar index set a fresh one-week low this morning; but moved higher following the economic data on inflation.

An interesting article in the Murdoch Street Journal today argued the idea that the Fed has already tightened monetary policy just by talking about tightening monetary policy. The talk about hiking rates has made itself felt in stock, bond, and most important foreign exchange markets; a version of the taper tantrum, if you will. The dollar’s sharp rise in the last six months is due not just to the European Central Bank’s dramatic easing of monetary policy through quantitative easing (QE, the purchase of bonds with newly created money), but to the juxtaposition of the ECB’s action against anticipation that the Fed will soon tighten. Anticipation of tighter U.S. monetary policy also shows up in various measures of risk such as the spread between yields on corporate bonds and safe Treasuries, which have widened, or the stock market, which has stopped climbing.

This might explain why the economy didn’t seem to take off with the benefits of lower oil prices. It’s also a reminder of something investors and Fed officials routinely forget: Markets discount the Fed’s actions long before they actually occur, in ways that are not obvious at the time.

Bloomberg’s trading terminal experienced a global outage this morning, with traders complaining all over Twitter they had been hit by the issue. And yes, this does affect worldwide trading, especially in the bond markets. There are more than 300,000 subscribers to the Bloomberg terminals and they pay about $20,000 per year for the subscription, so it is for serious business. A lot of traders stepped out for coffee this morning. Service was restored after a couple of hours.

China’s securities regulator tightened rules on margin lending while the country’s two stock exchanges said they would make it easier to short stocks, or bet that stocks will fall in price in an effort to temper the country’s soaring stock markets. Asian markets were generally lower today.

German government bonds continued to break records this morning, lifted by the ECB’s commitment to stimulus, coupled with investors’ appetite for low-risk assets amid growing concerns over Greece. European stocks are down 2.1 percent this week, poised for the worst drop in four months and trimming 2015 gains to 18 percent. In early trade, the yield on Germany’s 10-year bond slipped to 0.049%, breaking through Thursday’s all-time low. The yield on the country’s 30-year debt was just below half a percentage point.

“Liquidity is drying up in Greece,” Greek Finance Minister Yanis Varoufakis said yesterday in Washington. Athens will continue to “compromise for a speedy agreement, but will not be compromised.” International Monetary Fund Managing Director Christine Lagarde warned that she wouldn’t let Greece miss a debt payment. Greece is struggling to win more aid to avoid a default, while resisting more austerity measures. And the Greeks seem to be dragging their feet when it comes to spelling out specific reforms; the reason is simple; the reforms the EU is requesting won’t work and would not be accepted by Greek voters. So, slowly the EU is starting to realize that a Greek exit from the Eurozone would be a big mistake; they don’t know how big a problem it would create but the thinking is that it would be major. Today, there appeared to be a shift in thinking.

In the event of a missed payment, there is no specific plan B to keep Greece in the monetary union. Which is a frightening proposition that now has the big banks scared of other countries exiting the euro, and even bigger concerns that it could breakdown into bank runs. So now, international creditors are starting to show more flexibility in negotiations over Greek finances to prevent a euro exit. The red-line is that the Syriza led government in Athens needs to commit to at least some economic reforms.

If you have been following the Greek situation, it sometimes sounds like it flips then flops between a possible resolution and what seems to be an inevitable train wreck; either Greece bows down to it paymasters or it defaults and exits the Euro Union. But the longer the Greeks delay, the more they are likely to see flexibility from creditors. A Greek exit would be.., well nobody knows but it would probably be bad. And yet, default seems inevitable because they are just too far in the hole. More and more it looks like a best case scenario is a partial default, a few concessions, Greece stays in the Eurozone. That doesn’t mean it will happen that way, but that looks like a possibility. And if, in this whole process, Greece can wean itself off of dependence from the banksters, they could even pull out of the economic depression they are in.

We have a few earnings reports to cover today:
American Express reported quarterly revenue that fell short of analysts’ estimates, dropping 2.7% to $7.9 billion. AmEx was hurt by a stronger dollar and the loss of several co-branded tie-ups; AmEx recently ended its co-branded relationship with JetBlue, while its agreement with Costco is due to expire next March.

Schlumberger shares rose slightly after the oil equipment provider topped first-quarter earnings projections, although revenue missed. Excluding charges, the company booked a per-share profit of $1.06, beating estimates of $0.91, but down from $1.21 a year earlier. Blaming a decline in drilling activity, Schlumberger said it now plans to cut 11,000 more jobs in addition to the 9,000 job cuts announced in January. You might think a big earnings miss would result in a nasty day of trading, but the Wall Street crowd like to see job cuts.

General Electric reports its revenue fell a worse-than-expected 12% in its first quarter. Overall for the quarter ended March 31, GE reported a loss of $13.5 billion, or $1.35 a share, compared with a profit of $3 billion, or 30 cents a share, a year earlier.

Honeywell reported a 5% drop in quarterly revenue, in part due to a stronger dollar, even as net income rose. Honeywell raised the lower end of its full-year profit forecast, even as they cut their full year revenue forecast.

Fifty years ago April 19th, Gordon Moore, he one-time CEO of Intel, predicted that the number of components on semiconductors or “chips” would continue to double every twelve to eighteen months even as the cost per chip would hold constant. The idea came to be known as Moore’s Law. And it really was a radical idea. Most commodities do not behave like that. Think about meat, grains, coffee, or oil, which get worse and more expensive over time. Computing power and related components of the digital revolution including memory, displays, sensors, digital cameras, software and communications bandwidth, continue to get faster, cheaper, and smaller roughly at the pace Moore anticipated. And through economies of scale, low prices encourage more uses, which raises production and lowers costs in a virtuous cycle. With each cycle of Moore’s Law, computing power doubles, even as price holds constant. If you want to have any understanding of the digital revolution, you have to be able to grasp Moore’s Law.

Thanks to Moore’s Law, tomorrow’s digital products are certain to be better and cheaper. Think of it as the granddaddy of disruption, and the life blood of innovation. Fifty years ago, Moore thought the exponential growth cycle might last for 10 years, but 50 year later it still applies. Every time it seems like innovation has hit a wall, we just break through. And that means there is something new and wonderful just around every corner.

Financial Review

Holy Grail

Sinclair Noe — March 2, 2015

 

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

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DOW + 155 = 18,288
SPX + 12 = 2117
NAS + 44 = 5008
10 YR YLD + .08 = 2.08%
OIL + .06 = 49.82
GOLD – 7.80 = 1206.90
SILV – .22 = 16.46

February was the best month for stocks since October 2011. The S&P 500 gained 5.5% in February. March is off to a fine start. The Dow Industrial Average closed at a record high. The S&P 500 closed at a record. The Nasdaq Composite hit 5000 for the first time in 15 years. And if you wonder why we celebrate when the indices hit records, it is because 15 years ago we didn’t know it would take 15 years to get back to these levels.

Earnings season is pretty much over and it wasn’t all that pretty. With 485 of 500 S&P 500 companies reporting, FactSet says the blended growth rate is only 3.7%. Without Apple that number shrinks to only 2% but then again if you take out energy, it balloons to nearly 7%. Estimates have been revised lower, which is typical; companies try to ratchet down expectations, but this is different. All sectors are showing expectation deterioration, not just energy.

Earnings growth has slowed, and valuations are a little on the pricey side, and expectations are down. So, why are stocks at record highs? Well, start with the idea that the Fed has not yet shifted from dove to hawk, rates are still low, the economy is growing, slowly but surely, and then the idea that we all have to be somewhere and stocks are as good a place as anything else. Add in a strong dollar, and the rest of the world wants to be in the US stock market. This is an important point.

Looking back, corporate earnings peaked in the second quarter of 1997, and stocks just continued going higher for about 3 years. Earnings momentum may be slowing and valuations may be a little out of kilter, but the market can be wacky longer than you can be solvent. Stocks don’t roll over just because the P/E gets a little high. There is no trigger being pulled on the markets right now; just the opposite, the global flow of funds makes stocks look good.

Any reversal in Fed policy, an upward drift to higher interest rates, a modestly weaker dollar, or further erosion in earnings, and equities could feel the pinch. What we are starting to see already is that a rising tide is not lifting all boats. Even though the market is at highs, it is just a few winners lifting fewer and fewer boats. This bodes well for good stock pickers, not so much for the indexed approach.
 
Consumer purchases adjusted for inflation rose in January. The best job market since 1999, low borrowing costs and cheaper fuel bills are driving household spending. The 0.3 percent increase followed a 0.1 percent drop the prior month. Nominal spending, which doesn’t take into account changes in price, declined 0.2 percent, more than estimated, while incomes grew 0.3 percent for a second month. Disposable income, or the money left over after taxes, climbed 0.9 percent after adjusting for inflation. The saving rate increased to 5.5 percent from 5 percent.

Now Americans are known for spending not saving, so it seems a bit strange that we suddenly start saving. But the increase in real disposable income did not come from big increases in paychecks; rather it was more buying power, mainly from lower prices for fuel. So the only way to realize the increase in income is not to spend it. Also, most people don’t expect low energy prices to last. Most people are not yet convince the economy has truly improved, and for most households, things are still a little rough.

Despite that, the Misery Index is at its lowest level since 1959. The Misery Index was proposed by the economist Arthur Okun in the 1970s; it basically looks at the unemployment rate and the inflation rate; that’s it. The Misery Index captured the angst of the 70’s much better than it recognizes the problems of today. Maybe these aren’t the best of times, but consumers and the Misery Index agree: they are far from the worst of times.

Inflation, as expected, continued to decelerate owing to the widespread effects on the economy of lower energy prices. The PCE inflation index fell 0.5% in January, lowering the increase over the past 12 months to a meager 0.2%. The PCE or personal consumption expenditures index is the Fed’s preferred gauge of inflation. Just eight months ago, the rate of PCE inflation was running at a much higher 1.7%, though that was still below the Federal Reserve’s preferred 2% target. The core rate of inflation that excludes volatile food and energy costs rose 0.1% in January, however. The core rate has risen at a mild 1.3% in the past 12 months.

Construction spending dropped 1.1% in January to a seasonally adjusted $971 billion. The Commerce Department says private-construction spending fell 0.5% in January, despite a 0.6% increase for residential projects. There was a 1.6% decline for nonresidential projects. Meanwhile, public-construction spending dropped 2.6% in January.

The Institute for Supply Management’s manufacturing index edged down to a reading of 52.9% from 53.5% in January. We’ll have more on that in a few minutes.

Asian stocks rose on Monday after China cut interest rates by a quarter percentage point over the weekend, while a survey showed HSBC’s PMI climbing from 49.7 to 50.7 in February, the strongest level since July. The Chinese central bank said: “Deflationary risk and the property market slowdown are two main reasons for the rate cut this time.”  In the last few months, China has been showing further signs of flagging economic growth, with GDP dipping to 7.3% in Q4 – its slowest rate in over two decades.

Euro zone deflation and unemployment eased. Prices fell less quickly in February than feared, and unemployment dropped in January for the third month in a row.

Citigroup will replace American Express as the exclusive issuer for Costco’s credit cards in the U.S. and Puerto Rico. Transactions will be processed by Visa beginning April 1, 2016. Costco business accounts for about 20% of AmEx’s loans and 10% of its cards.

Samsung Electronics has unveiled the Galaxy S6 in a bid to reclaim its throne as the global smartphone leader. The S6’s frame is made completely out of aluminum and uses Corning’s Gorilla Glass 4 for front and back glass panels. Other features: Wireless charging support, a 16MP rear camera, and a mobile payment system which will use the technology of recently acquired startup LoopPay.

NXP Semiconductors has agreed to buy Freescale Semiconductor, in an $11.8 billion deal that would create the eighth largest chip maker. The new company will make chips for various industries, including automobiles and mobile payments. The companies expect the deal to close in the second half this year.

Hewlett-Packard said it would buy Wi-Fi gear maker Aruba Networks for about $2.7 billion, the biggest deal for the world’s No. 2 PC maker since 2011.

“60 Minutes” reported that Lumber Liquidators  sold flooring containing levels of formaldehyde higher than California health and safety standards. The flooring comes from mills in China. The investigation used undercover reporters and hidden cameras to show that managers at three factories admitted to using false labeling that made it look like flooring produced for Lumber Liquidators met regulations when it didn’t. (LL) down 22% today.

In his annual letter to shareholders, Warren Buffett wrote: “Both the board and I believe we now have the right person to succeed me as CEO.”  In a separate letter from Charlie Munger, Berkshire’s vice chairman, suggests reinsurance head Ajit Jain or energy boss Greg Abel as worthy replacements. Berkshire posted a 16.7% decline in Q4 net profit over the weekend, dipping to $4.1 billion from $4.9 billion a year earlier. That’s actually pretty lousy performance for the fourth quarter.

Still, people want to invest like Warren; but you are not Warren. And some of the things that set Warren apart are that he is a value investor; so it makes sense that his style of investing didn’t work in the fourth quarter when the markets were hitting record highs. Warren has an extremely long time frame for investments; which means he has more patience than you or me. Warren also has more discipline than you or me. And discipline is the closest thing there is to the Holy Grail when it comes to investing; it doesn’t matter whether you are a day trader or a value investor.

Financial Review

Milk and Cookies. Enjoy While You Can.

Sinclair Noe — February 25, 2015       

 

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

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DOW + 15 = 18,224
SPX – 1 = 2113
NAS – 0.98 = 4967
10 YR YLD – .02 = 1.97%
OIL + 1.75 = 51.03
GOLD + 2.90 = 1205.20
SILV + .22 = 16.64

Another record high for the Dow Industrial Average. These are the days of milk and cookies.

Federal Reserve Chairwoman Janet Yellen continued her semi-annual Humphrey-Hawkins testimony today in front of the House Financial Services Committee. The prepared opening remarks were identical to the testimony yesterday in the Senate. The Q&A session became a bit testy today as Yellen was accused of political bias. Republicans questioned Yellen about an October speech on inequality, just before the midterm elections, as evidence she was leaning toward the Obama administration and Democrats. Methinks they doth protest too much. There were also calls for an audit of the Fed, historically a nonstarter with Federal Reserve Chairs. It made for generally poor political theater.

The important part of the testimony was fairly easy to find. Keep in mind the Fed has a dual mandate of maximum employment and price stability. So the key statement from Yellen was when she said: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

So, higher rates will come with higher inflation, indicating that disinflation and deflation are still a concern for now. The Fed believes that inflation is going to move lower before it moves higher because of oil prices and import prices. As for the timing of when we will see inflation and possible interest rate hikes, Yellen said: “We expect inflation over the medium term — the next two or three years — to move up to our 2% target.”

Greek stocks and bonds surged yesterday, with Athens’ main stock exchange closing almost 10% higher on the day after Eurozone financial ministers approved a four-month extension to the country’s bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released.

The German government is now selling five-year bonds with a negative yield. That means investors will pay to lend money to the country for five years. Germany auctioned 3.28 billion euros ($3.72 billion) of bonds due in April 2020 at an average yield of negative 0.08%.

Today the Senate moved to avert a shutdown of the Department of Homeland Security. The upper chamber voted 98-2 on a procedural hurdle that would pave the way for a “clean” funding bill to be brought to the floor. It remains unclear when the Senate will vote on final passage on the funding bill. If the Senate passes a clean bill, it would then move over to the House, and it is uncertain if House Speaker John Boehner would allow a vote on such a bill. DHS funding runs out in 2 days.

The White House says President Obama would veto a House Republican effort to rewrite the federal “No Child Left Behind” law. The House bill is expected to pass the chamber later this week. Senate Republicans are working on their own version of No Child Left Behind, which expired in 2007.

New homes sold at annual rate of 481,000 last month, essentially unchanged from December. The Commerce Department reports sales were 5.3% higher in January compared to a year earlier; this despite a drop of 51% in the Northeast, where bad weather kept buyers away. The median price for a new home was up 9% from a year ago.

For all the talk about how lower oil prices would reduce supplies, it hasn’t happened yet. Just the opposite. According to EIA weekly data released today, crude oil in storage in the US jumped 2%, or 8.4 million barrels, to 434 million barrels. Oil storage is bursting at the seams and inventories remain at their highest levels in at least 80 years. The rate of growth of production is slowing slightly but production continues at the highest rate since 1972, for now.

Southwest Airlines took 128 of its jets out of service late Tuesday, or roughly one-fifth of its fleet, after informing federal regulators that it “inadvertently omitted” required maintenance checks on the planes’ backup hydraulic systems. Dozens of flights were immediately canceled as a result, while officials from Southwest and the FAA discussed plans to complete the maintenance checks and return the planes to service.

American Express will raise interest rates on about one million customers. Annual rates will climb by an average of 2.5 percentage points to at least 12.99%. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles.” Typically banks make large scale changes in response to broader shifts in interest rates or risk.

Anthem, which earlier this month reported that it was hit by a massive cyberbreach, has concluded that the personal information of 78.8M customers was exposed in the attack, including 8.8M-18.8M people who were members of independently run Blue Cross Blue Shield plans. Anthem still believes the hacked data was restricted to birthdays and Social Security numbers, among other data, but doesn’t appear to have involved medical information or financial details.

Another company that had problems with cybersecurity is Target, but it doesn’t seem to have hurt their most recent results.  Target saw a higher-than-expected jump in its fourth-quarter earnings and is forecasting modest growth for the first quarter of 2015. Exiting Canada, as the company recently announced it will do, will cost it $5.1 billion.

Earlier this month Wal-mart announced they would be paying workers at least $9 an hour, increasing to $10 an hour next year. Wal-Mart is of course the largest retailer, and we thought this might ripple out through other retailers. Sure enough. T.J. Maxx, Marshalls and other chains owned by TJX Cos. will be increasing the pay of US workers to at least $9 an hour beginning in June, increasing to $10 an hour next year.

Now for today’s edition of “Banks Behaving Badly”; yet another foreign currency scandal, Reuters reports that BNY Mellon is in settlement talks with the DOJ and New York AG over claims that it defrauded clients in foreign exchange transactions. The bank faces several lawsuits, including class actions, stemming from allegations that it misled clients about how it determined currency exchange rates for certain transactions.

HSBC has a “terrible list of problems,” so says the chairman of HSBC, Douglas Flint. And he admits that he couldn’t rule out further scandals emerging at the bank along the same lines as the tax evasion schemes at HSBC’s Swiss private bank, but he said: “I sincerely hope there are no more skeletons.”

A British parliamentary committee questioned Flint and CEO Stuart Gulliver after the tax evasion schemes were revealed by several news organizations. The news story only came to light 4 years after a former HSBC employee turned over bank files. Some of the clients whose details HSBC’s Swiss operations were sheltering included arms dealers and politicians who were part of discredited regimes, like that of Bashir-al-Assad in Syria. Earlier, when asked why some HSBC clients reportedly came to Switzerland with wads of cash, Flint was lost for words. Still to be determined is why the bank should not be broken up.

Move over Alibaba, you could have company next year. Postal Savings Bank of China, the country’s sixth largest lender by assets, is seeking an initial public offering in 2016 that could make history by bringing in some $25 billion .

In a new S-1, GoDaddy declared plans to list on the NYSE under the symbol “GDDY” and announced IPO underwriters including Morgan Stanley, JPMorgan, Citi and others. GoDaddy is a fast-growing company which posted revenue of $1.4 billion in 2014, up 23% from 2013 levels, according to the filing. But it’s also a big money loser. The company posted a loss of $143.3 million in 2014, which is the fourth annual loss in a row.