Equities Finish Fairly Flat

On the Market

Posted: 3/17/2017 4:15 PM ET

Equities Finish Fairly Flat

U.S. stocks wavered on either side of the unchanged mark before ultimately finishing the regular trading session mildly lower. Treasury yields declined and the U.S. dollar was nearly unchanged despite upbeat economic reads on consumer sentiment and leading indicators. Gold managed minor gains and crude oil prices were mostly flat. In equity news, Adobe Systems posted upbeat earnings and Amgen was lower after announcing study results on a cholesterol-lowering drug. Also, volume was on the heavy side due to quadruple witching, the simultaneous expiration of options and futures contracts on individual stocks and stock indexes.

The Dow Jones Industrial Average (DJIA) decreased 20 points (0.1%) to 20,915 and the S&P 500 Index shed 3 points (0.1%) to 2,378, while the Nasdaq Composite was unchanged at 5,901. In heavy volume due to quadruple witching, 2.2 billion shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.03 higher to $48.78 per barrel and wholesale gasoline ticked $0.01 higher to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.41 to $1,229.02 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined nearly 0.1% to 100.31. Markets were lower for the week, as the DJIA increased 0.1%, the S&P 500 Index gained 0.2%, and the Nasdaq Composite was 0.7% higher.

Adobe Systems Inc. (ADBE $127) reported fiscal 1Q earnings-per-share (EPS) of $0.80, or $0.94 ex-items, compared to the FactSet estimate of $0.87, with revenues rising 21.6% year-over-year (y/y) to $1.7 billion, above the projected $1.6 billion. ADBE said it saw strong creative cloud and document cloud adoption and retention. The company noted that it remains "bullish about our prospects for the rest of 2017 and beyond." Shares finished nicely higher.

Amgen Inc. (AMGN $168) fell after a key study of the company's cholesterol-lowering drug Repatha reduced heart risk by a lower rate than had been expected. Shares of competing cholesterol drugmakers were also lower.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Big Machine: Why Large Caps Are Likely to Outperform, momentum, breadth, sentiment, earnings, valuation and macro conditions currently support a bias within the U.S. equity market toward large caps over small caps. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: How Should Investors Look at Health Care Now?. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Tiffany & Co. (TIF $92) posted 4Q earnings of $1.26 per share, or $1.45 ex-items, versus the expected $1.39, as revenues increased 1.0% y/y to $1.2 billion, roughly in line with estimates. 4Q same-store sales were flat y/y, compared to the forecasted 1.4% decline. The upscale retailer issued current year sales and EPS guidance that was mostly in line with the Street's estimates, noting that despite an outlook for continued macroeconomic and geopolitical challenges it believes it has meaningful growth opportunities. TIF traded solidly to the upside.

Industrial production flat, though consumer sentiment and Leading Index improve

Industrial production (chart) came in flat month-over-month (m/m) in February, compared to the Bloomberg estimate of a 0.2% gain, and January's favorably revised 0.1% decrease. Manufacturing and mining production both gained ground, with the former rising for a sixth-straight month and the latter jumping, while utilities output tumbled amid continued unseasonably warm weather. Capacity utilization dipped to 75.4%, compared to January's upwardly revised 75.5%, where it was expected to remain. Capacity utilization is 4.5 percentage points below its long-run average.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for February matched January's unrevised 0.6% m/m gain, just above projections of a 0.5% increase. Support came from the components pertaining to the yield curve, jobless claims, ISM new orders, stock prices, average workweek, and consumer expectations, more than offsetting a drop in building permits.

The preliminary University of Michigan Consumer Sentiment Index (chart) improved this month to 97.6, from the prior month's 96.3 level and compared to expectations of an increase to 97.0. The current economic conditions component rose solidly m/m, while the outlook portion ticked higher. The 1-year inflation estimate fell from 2.7% to 2.4%, and 5-10 year inflation outlook dropped to 2.2% from 2.5%.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 1.32%, while the yields on the 10-year note and the 30-year bond dropped 4 bps to 2.50% and 3.11%, respectively.

Treasury yields and the U.S. dollar have seen some pressure in the wake of this week's highly-expected Fed rate hike, which also delivered a dovish tone in the statement and forecast of future rate hikes that seemed to ease concerns that an upbeat economic outlook would accelerate the pace of further increases. For analysis of the Fed's decision, see Senior Fixed Income Research Analyst, Collin Martin's, CFA, commentary, Fed Raises Rates, Signals Additional Hikes in 2017, and our article, Fed Rate Hike: What Does It Mean for Your Portfolio?, at www.schwab.com/insights.

Finally, for a look at the stock markets, which rallied after the Fed's decision, potential increased volatility, and festering political uncertainty, see our article, End of an Era: Why Volatility May Return to the Stock Market and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's commentary, Return of the Debt Ceiling: What It Means for Investors, at www.schwab.com/insights.

Europe ticks higher amid central bank and political focus

European equities nudged higher to add to yesterday's gains, with the global markets continuing to grapple with this week's flood of monetary policy decisions, and eyeing the start of the two-day meeting between G20 finance ministers and central bank governors. The U.S. hiked rates as widely expected, though it offered a dovish statement and forecast for future rate increases that soothed concerns. The U.K., Japan and Switzerland held policies steady, while China increased its short-term borrowing costs. Also, the political front remained in focus, after this week's approval for U.K. Prime Minister May to trigger Article 50, which formally starts the clock on a Brexit, while a midweek Dutch election eased fears about a populist threat in Europe. This set the stage for the upcoming key French Presidential election next month as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick, in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?. In economic news, the eurozone trade surplus narrowed much more than expected, preceding today's meeting between U.S. President Donald Trump and German Chancellor Angela Merkel, and the region's construction output declined. The euro was lower and the British pound ticked higher versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed as the global markets grappled with a plethora of monetary policy decisions this week, headlined by the highly-expected rate hike in the U.S., which included a dovish tone and unchanged rate hike outlook. Also, China raised its short-term rates, while the Japan, the U.K. and Switzerland left policy stances unchanged. Japanese equities declined, with the yen choppy following the monetary policy actions as discussed by Schwab's Michelle Gibley CFA, in her article, Fed Rate Hikes May Benefit Japanese Stocks at www.schwab.com/oninternational, where you can also find her commentary, Currency Hedging: 5 Things You Need to Know. Mainland Chinese shares fell on the heels of the higher borrowing costs, while stocks trading in Hong Kong ticked slightly higher. Securities in Australia and India advanced, while South Korean equities also increased despite lingering geopolitical concerns.

Stocks tick higher following midweek Fed-fueled jump

U.S. stocks nudged higher as a midweek rally was bookended by sessions of modest declines on continued subdued volatility. Lingering global political uncertainty and a plethora of monetary policy decisions kept conviction contained, except for the Fed's highly-anticipated rate hike decision. The stock markets rallied on Wednesday afternoon, while Treasury yields and the U.S. dollar fell as the Central Bank delivered a dovish tone in its statement and its forecast for future hikes cooled concerns of a higher-than-expected acceleration in borrowing costs. Interest rate sensitive sectors made the biggest moves, with financials falling, while real estate and utilities rallied. Energy stocks got a reprieve from recent selling pressure as crude oil prices rebounded modestly from a tumble as of late, with some bullish supply data helping ease some concerns. A robust economic front saw retail sales tick higher and consumer price inflation match estimates, but homebuilder sentiment jumped to the highest level since June 2005. The equity front was relatively quiet in the wake of earnings season, though Dow member Intel Corp's (INTC $35) $15.3 billion agreement to acquire Mobileye NV (MBLY $61) and Oracle Corp's (ORCL $46) solid quarterly results caught the Street's attention.

Next week's economic calendar will decelerate somewhat, but bring a couple key reads on housing in the form of new and existing home sales, along with preliminary looks at manufacturing demand and activity in the form of durable goods orders and Markit's Manufacturing PMI Index.

As noted in the latest Schwab Market Perspective: Teflon Market, political infighting, Presidential tweets, North Korean missile launches, oil falling below $50, European political uncertainty, higher bond yields, and the Fed raising rates: none of those forces have knocked stocks off their recent uptrend. Volatility remains remarkably low but that doesn't mean it won't pick up—investors should be prepared for bouts of volatility, and pullbacks along the way. The U.S. economy continues to expand; although there are signs that first quarter growth could be on the weak side, largely due to continued seasonal issues. We believe that economic growth is generally accelerating, a thought bolstered by the Fed’s confidence to raise rates again. Politics, both here and abroad, are keeping policy uncertainty high and should also contribute to bouts of volatility. Read more at www.schwab.com/marketinsight.

International reports due out next week include: China—property prices. Japan—trade balance and PMI Manufacturing Index. Eurozone—Markit's preliminary Composite PMI Index. U.K.—inflation statistics and retail sales.

Financial Review

Brexit Breakdown Continues

Sinclair Noe — June 27, 2016

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DOW – 260 = 17,140
SPX – 36 = 2000
NAS – 113 = 4594
10 Y – .12 = 1.46%
OIL – 1.31 = 46.33
GOLD + 8.50 = 1325.10

The aftershocks of the U.K.’s vote to leave the European Union reverberated across financial markets again today. The victory for Brexit tore through world markets on Friday, pummeling the pound and high-yielding assets as more than $2.5 trillion was wiped from global equity values. Prime Minister David Cameron resigned without spelling out when the U.K. intends to leave the EU and at least 30 members of Labour Party leader Jeremy Corbyn’s team quit amid calls for his ouster.

On Wall Street, the Dow Industrial average dropped about 300 points and then bounced around, adding to the 610-point loss on Friday. Meanwhile, 10-year U.S. Treasury yields have extended their fall to 1.46.

The pound is getting slammed all over again. It extended its record decline against the dollar, falling 3.1% to as low as 1.315. Cable — as the dollar/pound currency pair is nicknamed — is one of the biggest casualties of the global-market rout triggered late last week by Britain’s vote to leave the European Union.

On Friday, the pound fell to a 30-year low versus the dollar in its biggest single-day collapse ever. UK 10-year Gilt yields have dropped below 1% for the first time to hit a new record low. The fall came after Moody’s downgraded its U.K. sovereign rating to negative from stable, citing diminished policy predictability and economic effectiveness. S&P Global Ratings cut the U.K.’s top credit grade by two levels, to AA from AAA.

British stocks were down 2.5% today. While the slide in Europe’s equity benchmark reached 11% over two days, the most since 2008. European bank stocks are still tumbling, too. Shares of RBS and Barclays were briefly halted for about five minutes in London as they plunged 10%. A gauge of European lenders headed for its biggest two-day drop ever.

Many banks may move huge numbers of workers from their UK operations to elsewhere on the continent as the City of London’s role as the region’s financial hub becomes uncertain; at the very least, the UK will have to negotiate new agreements for handling financial transactions with the rest of the world.

Barclays shares fell more than 17% for the second straight day, and the stock has now lost more than half its value in the last 12 months. RBS plummeted as much as 26% in London trading, reaching the lowest levels since January 2009. Lloyds fell 10% at 4 p.m. in London, while challenger banks Virgin Money Holdings, OneSavings Bank and Shawbrook Group all plunged more than 25%.

US bank shares have taken pretty big hits, down nearly 10% since the Brexit vote; but keep in mind US bank stocks have had an atrocious year to date. Since the start of the year, Citi is down 22%, BofA down 23%, JPMorgan down 10%, Goldman Sachs down 21%, and Morgan Stanley down 23%.

The next days and weeks will be key for central banks as they seek to limit volatility in financial markets. The European Central Bank was hosting a three-day meeting in Portugal that will include speeches from its president, Mario Draghi, and Federal Reserve Chair Janet Yellen, plus UK PM David Cameron, German Chancellor Angela Merkel and EU President Donald Tusk. The meeting was cancelled. They can’t even figure out if they want to talk to each other.

The Chinese yuan tumbled to a 6-year low against the dollar. This happened after the People’s Bank of China weakened the currency’s reference rate per dollar by 0.9%, the steepest devaluation since August. China weakened the yuan after Friday’s post-Brexit foreign-exchange action that sent the dollar flying. The Nikkei regained some lost ground overnight after Japanese Prime Minister Shinzo Abe instructed his finance minister to intervene in the currency markets if needed in the wake of Brexit.

The U.K. is ready to face the challenges thrown up by the vote to leave the EU, so said UK Chancellor George Osborne at a press conference today, but be cautioned it would not be “plain sailing” in the days ahead. “Our economy is about as strong as it could be to confront the challenge our country now faces,” he declared, adding that the result was not the one he “campaigned for” but the will of the people “had to be respected.”

Brexit comments from around the world… Boris Johnson: “I cannot stress too much that Britain is part of Europe, and always will be.” (Which is strange because Johnson was the leader behind the Leave movement), Nicola Sturgeon: “We will explore all possible options to protect Scotland’s place in the EU.” (And now we have leaders from Italy, France, Spain, and the Netherlands saying they want to explore their options), Francois Hollande: “What was once unthinkable has become irreversible.” (As in you Brexit, you bought it.) Angela Merkel: Exit talks “shouldn’t drag on forever.” (Meanwhile, Germany, France and Italy said the European Union won’t hold talks with the U.K. on its future relationship with the EU until the government in London formally asks to leave the bloc.)  Barack Obama: “One thing that will not change is the special relationship that exists between our two nations.” (A marked changed from the claim that the Brits would be at the back of the queue.)

More remarks… Jean-Claude Juncker: I would like Brexit proceedings “to get started immediately.” (As in, “you want a divorce? All right, get out of the house.”) Christine Lagarde: Brexit fallout hinges on what “policy makers do in coming days.” George Soros: The decision makes “the disintegration of the EU practically irreversible.” (As in, “I tried to warn you.”) Deutsche Bank: London’s role as a financial center will “weaken, but won’t die.” (As in, we are going to poach as many clients as possible.) Goldman Sachs: The U.K. is now likely to enter a “mild recession” by early 2017. (As in be scared, be very, very scared.)

Adding to political uncertainty in Europe, Spain’s weekend elections delivered a hung parliament for the second time in six months. Acting Prime Minister Mariano Rajoy’s People’s Party again emerged with the single biggest bloc of seats but fell short of a majority, leaving the Eurozone’s fourth-largest economy at risk of another lengthy political stalemate.

So, the question is, what does Brexit mean? The answer is, no one knows. It might be the end of the European Union and the beginning of years of financial and political chaos in Europe which would undoubtedly wreak havoc with global markets. Or it might be the event that forces the EU to reorganize itself and take serious measures to ensure fairness among its members. Again, the truth is that we simply don’t know yet.

What does it mean for you as an investor? It shouldn’t make much difference at all. You should already have a plan; that plan should guide you whether the markets are up or down or sideways. Whatever your plan indicates for you is what you should stick to doing.

If your plan calls for rebalancing, then rebalance; if your plan calls for no change, then do nothing; if your plan calls for buying or selling, then do it. If your plan calls for market timing, then pick some trades. If your plan calls for refinancing your mortgage, then refi. While market moves can be dramatic, there is no reason to get emotional about it. Stick to the plan, stick to your discipline. If you don’t have a plan, you shouldn’t be investing.

The Supreme Court struck down Texas abortion restrictions that had threatened to close three-quarters of the state’s clinics by putting new requirements on facilities and doctors. The 5-3 ruling is the court’s first abortion decision in almost a decade. It invalidates a law that required clinics to meet hospital-like surgical standards and forced abortion doctors to get admitting privileges at a local hospital.

Panama officially opened an addition to its legendary sea canal on Sunday, capping a nine-year, $5.4 billion expansion project that will double shipping capacity and affect global trade routes. A third lane has been added to the waterway that can accommodate a new generation of super cargo ships large enough to carry up to 14,000 containers, compared with around 5,000 currently.

Saudi Arabia has appointed JPMorgan, HSBC and Citi to arrange its debut international bond as the kingdom presses ahead with fundraising efforts amid an oil price slump. Lenders were summoned to Riyadh last month to submit proposals on how they would help the country to raise money internationally. At the time, bankers said that the kingdom was seeking to raise as much as $15 billion.

Research to be presented this week at a conference in San Antonio suggests that serious joint problems, seizures, vision impairment and other medical issues can be added to the list of risks from Zika exposure in the womb. The new findings also confirm that even when Zika-exposed babies are born without microcephaly, developmental delays may appear in the weeks or months following birth.

New York’s landmark Waldorf Astoria hotel plans to close for up to three years starting next spring so owner Anbang Insurance can begin converting most of its more than 1,400 rooms into luxury condominiums. Anbang and Hilton Worldwide, which will continue to manage the property when it reopens, are said to have reached severance agreements with hundreds of the hotel’s 1,500 employees at a cost of $100 million or more.

Financial Review

Slip Sliding Away

Sinclair Noe — December 9, 2015

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DOW – 75 = 17,492
SPX – 15 – 2047
NAS – 75 = 5022
10 YR YLD – .03 = 2.21%
OIL – .28 = 37.24
GOLD – 2.10 = 1073.50

Stocks started the day in positive territory but then slipped, and the decline coincided with a drop in oil prices, which also went from positive to negative. Oil prices have buckled following the breakdown of OPEC talks last week. We have a price war breaking out between Saudi Arabia and Iran and US shale producers. At the same time, we have Russia, Venezuela, and Brazil all desperate for oil revenues.

But it’s not just oil; iron ore is moving in lockstep with oil, dropping to a 10-year low; Codelco, the Saudi Arabia of copper is refusing to cut output, betting it can outlast rivals and win market share. The major commodity indices have dropped to lows last seen in 1998.  While plummeting commodity prices can be a warning sign that the world economy is heading into recession, the latest sell-off has a different character. The slump is chiefly due to excess production, and amounts to a positive supply shock that should boost global recovery.

Dow Chemical and DuPont are in talks to combine, in what would be one of the largest deals of the year. Each company has a market value of about $60 billion and the combination would create the second-biggest chemical company in the world, after BASF, with more than $92 billion in annual sales. They are also talking about breaking up the merged company into three businesses – agricultural chemicals, specialty products, and materials like plastics. For the past year, both companies have been pressured by activist investors unhappy with their financial performance.

Yahoo will abandon its plans to spin off its $31 billion stake in Alibaba. Instead it will look at other options, like selling its core operations or spinning off its stake in Yahoo Japan. The decision is a repudiation of the strategy taken by Marissa Mayer, who was hired to turn the internet company around. She had planned to spin off the 15 percent stake in Alibaba and focus on the core business of selling advertising. But investors, led by the hedge fund Starboard Value, argued that the risk of capital gains tax was too great.

General Electric is in advanced talks to buy the drill-bits and drilling-services divisions of Halliburton, which is divesting assets to win antitrust approval for its takeover of Baker Hughes. GE is also exploring bids for other assets that Halliburton is seeking to unload, including parts of Baker Hughes’ operations.

Freeport-McMoRan said it will suspend its dividend and further reduce its capital spending. Freeport-McMoRan, the U.S.’s biggest miner and a major copper producer, said ending its annual dividend of 20 cents a share would save $240 million a year. The moves come as the company has been in turmoil as falling energy prices have exposed a disastrous investment in oil and gas drilling. A number of other miners have recently cut their dividends in a bid to improve liquidity.

As widely expected, Kinder Morgan has cut its 2016 quarterly dividend to $0.125/share from the current $0.51, marking the company’s first-ever dividend cut. The company said the move will enable it to use a significant portion of its cash flow to fund the equity portion of its expansion capital requirements, eliminate any need to access the equity market for the foreseeable future, and maintain a solid investment grade credit rating.

China cut the yuan’s reference rate to the weakest since 2011, fueling speculation that the central bank is trying to release pent-up depreciation pressure before a potential rate increase by the Federal Reserve. There are signs that the People’s Bank of China has started guiding the yuan lower before the Fed acts. An index of emerging-market currencies dropped to a record low yesterday on fears a Fed rate hike will spur capital outflows. Traders now put the odds of a Fed liftoff next week at 80 percent.

Puerto Rico Governor Alejandro Garcia Padilla is visiting Washington today to again ask for help as the U.S. commonwealth seeks to recover from a nearly decade-long recession. While the U.S. Treasury and some lawmakers have supported legislative fixes for Puerto Rico, the efforts have not gained momentum.

Brazil’s Congress delivered a blow to President Dilma Rousseff by picking members of a special committee that were opposed by her supporters. Rousseff is being accused of tampering with the national budget to illegally disguise poor fiscal performance. The special committee will now gather evidence against the president and hear her defense in the first phase of the impeachment process.

The bill for last month’s catastrophic Samarco dam failure in Brazil could be growing by the day, as the joint venture between Vale and BHP Billiton struggles to formulate an emergency plan demanded by local prosecutors in case of additional accidents. The disaster unleashed an avalanche of mud that killed at least 15 people, destroyed villages downstream, and polluted hundreds of miles of waterways in the Rio Doce basin.

Some of the world’s largest companies, including Unilever, Total, Bank of America, Patagonia and Ikea, announced their commitment on Tuesday to cutting carbon emissions and participating in practices that would support sustainable energy. The pledges came at The New York Times Energy for Tomorrow conference, being held in concurrence with the international climate talks outside Paris.

Secretary of State John Kerry announced Wednesday that the United States would double, to about $860 million a year, its grant-based support for vulnerable countries that need to adapt to climate change by 2020. In his first big speech at the United Nations global climate conference in Paris, Kerry talked about the need to pay attention to climate science and act in the interest of future generations. Throughout the Paris climate talks, developing nations have been asking for more money as world leaders work toward a new global climate agreement.

Pep Boys gave Bridgestone three days to top Carl Icahn’s $863 million takeover offer, saying its board had determined that the billionaire investor’s bid is superior to their earlier agreement.

Alphabet is making its biggest bet yet on spreading connectivity across the nation. On top of 20 other metro areas, Google Fiber now plans to come to Los Angeles and Chicago – the second and third-largest U.S. cities by population – if they pass a long review. The latest announcement follows the Alphabet restructuring, which puts Fiber in a separate division from core Google.

Apple has suspended plans to offer an online TV service, and will focus for now on helping media companies directly sell content via the App Store. Apple isn’t completely giving up on providing a live TV service, but notes its original plan to sell skinny bundles, or packages of about channels for $30-$40/month has “run into resistance from media companies that want more money for their programming”, or were unwillingly to un-bundle content.

For Apple, the idea was to create TV programming similar to iTunes, where you just buy the songs you want, not the entire album. If Apple gets its way, it means the traditional pay TV package, which averages around 100 channels, will get shrunk by nearly 80 percent. And while TV executives will say that they understand that consumers don’t want to pay for channels they don’t watch, all of them will argue that their channels are must-haves.

A class-action lawsuit in California that has the potential undermine Uber just got a whole lot bigger. The case was certified as class action in September but today a 9^th circuit judge expanded the scope of that class action. The suit challenges whether Uber drivers are independent contractors, as the company claims, or employees, which would entitle them to a host of benefits such as health insurance and require Uber to pay on-the-job expenses like gas and maintenance that drivers currently pay themselves.

Today’s ruling says that Uber drivers can take part in the California class action over their employment status even if they didn’t opt out of Uber’s arbitration clause. Chen also ruled that drivers in the class will be able to pursue expense reimbursement claims. Basically, that means the case is going to be much bigger.

According to a new study by the NPD Group, the all-day breakfast initiative at McDonald’s is bringing in new customers. The research firm found that 33% of all customers who ordered breakfast items past the normal cut-off time did not visit the restaurant chain in the thirty days before the launch.

Last month, Chipotle closed 43 restaurants in Washington and Oregon after health authorities linked an E. coli outbreak to six restaurants in the area. Since the initial problem, illnesses linked to the chain have been reported in seven more states. On Monday, 30 students at Boston College fell ill after eating at a local Chipotle, leading the company to close yet another restaurant; On Tuesday, the number grew to at least 80 students.

Although Boston health officials believe the food-borne illness is norovirus -not E. Coli – and is isolated to a single location, they won’t know for sure until test results are available in a few days. Norovirus is a highly contagious virus. It’s the leading cause of outbreaks from contaminated food in the US, making about 20 million people sick a year. Today comes word that more than 120 Boston College students may be ill from food at Chipotle.

German Chancellor Angela Merkel has been named Time’s Person of the Year, praised by the magazine for her leadership on everything from Syrian refugees to the Greek debt crisis. Time also cited Merkel’s strong response to “Vladimir Putin’s creeping theft of Ukraine.”

Financial Review

Transitory, Not Terminal

Sinclair Noe — March 23, 2015

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DOW – 11 = 18,116
SPX – 3 = 2104
NAS – 15 = 5010
10 YR YLD – .01 = 1.91%
OIL + .88 = 47.45
GOLD + 6.90 = 1190.30
SILV + .25 = 17.08

The Dow Jones Industrial Average is still above 18,000. The Nasdaq Composite is above 5,000. The Russell 2000 is near record highs. Japan’s Nikkei 225 Composite, which dipped below 17,000 early in the year, took about a month to surge from 18,000 to 19,000 and is now rapidly approaching the 20,000 level; heights that haven’t been seen since 2000. Germany’s DAX recently traded above 12,000 for the first time and is up nearly 30 percent from the lows set earlier this year. London’s FTSE 100 is over 7,000, at its highest level in 15 years. Central bank monetary easing seems to be having the desired effect of pumping up financial assets around the globe, and even if the Fed is talking about hiking rates in the US, we haven’t seen a serious rate hike tantrum on Wall Street, yet.

U.S. home resales rebounded less than expected in February. The National Association of Realtors said that existing home sales rose 1.2% to an annual rate of 4.88 million units. Inventories are tight and also sales were hurt by harsh winter weather in the Northeast, where sales dropped 6.5%; sales were up 5.7% in the West. Last month, the inventory of unsold homes on the market rose 1.6 percent to 1.89 million units. Supply was, however, down 0.5 percent from a year ago. Inventory growth should be averaging roughly 5.6 percent at this time of the year, when the market gets ready for the spring selling season. Tight inventories are hurting sales by limiting the selection of houses available to potential buyers. The lack of supply is also keeping house prices high, helping to sideline first-time buyers.

The consumer price index tomorrow is one of the most important data points of the week, with the Fed hoping for a pickup in inflation. For the first time in five months, it’s expected to be positive, but barely. Gas prices rebounded a bit in February while food costs are estimated to have fallen, most likely producing a slight increase in the CPI. Economists are expecting a 0.2 percent rise in the headline number for the Consumer Price Index in February, with core prices excluding the volatile energy and food sectors to have risen by 0.1 percent.

On Wednesday, durable goods for February are out. The Financial Stability Board, an international panel of top central bankers and bank regulators that is working on ways to prevent future financial crises, holds a meeting on Thursday in Germany. Then Friday brings a look at the final estimate on fourth-quarter gross domestic product. After initially estimating a 2.6 percent rate in January, government statisticians revised that downward to 2.2 percent last month. The final estimate is now expected to come in at 2.4 percent.

Also on Friday, Fed Chairwoman Janet Yellen will speak in San Francisco; the title of her speech is “The New Normal for Monetary Policy”, and the thinking is that she might provide more insight on Fed plans to raise interest rates.

Greece and Germany have not been getting along lately. Greece is, of course broke, and could run out of cash in the next 2 weeks. One month ago, Greece promised to come up with a list of economic reforms to qualify for another bailout; the problem is that the reforms being championed mainly by Germany, would be devastating to the Greek economy, which has already been devastated. So, they have not presented the list.

The Financial Times reports that Greek Prime Minister Alex Tsipras did write a letter to German Chancellor Angela Merkel warning that it will be “impossible” for Athens to service debt obligations due in the coming weeks if the EU fails to distribute any short-term financial assistance to the country. Today, Tsipras is in Berlin and he met with Merkel. There was a dinner last night with what was described as intense discussions. A spokesman for Merkel said no one should expect a result from today’s meeting.  Any solution would be the role of the Euro Union and the European Central Bank. After the meeting, Merkel said she wants to see Greece economically strong and to have growth. Still, Merkel was clear that Greece still has to convince its official creditors that its economic policy program does enough to boost competitiveness and rein in spending before any more aid will be released. So for now, they are at loggerheads but the name-calling has stopped.

If the plan of the Troika was to starve the Tsipras government and produce either capitulation or a loss of domestic credibility, their effort appears to be on track. ECB president Mario Draghi was asked if the ECB was blackmailing Greece. He suggested it was the other way around. No matter, the timeline is running short and at some point in the next few weeks, something will happen, and it will be a relatively big event.

On Sunday, Saudi Arabia’s oil minister reiterated it would not unilaterally cut its output to defend prices; saying the Saudis would let the market determine prices for oil and vowed not to cut production unless other non-Organization of the Petroleum Exporting Countries members did. The Saudi oil minister said the kingdom was now pumping around 10 million barrels per day (bpd), which could indicate an increase of 350,000 bpd over its February production. Initially, oil prices moved lower on that news, but then the effect of a declining dollar kicked in. Toss in oversold conditions, and the likelihood that some speculative shorts were exiting positions, and the combo gives a good read of the mood in the energy markets, even if we can’t draw a causal line.

A strong dollar may pose a threat to some corporate earnings, especially US based multinationals. The dollar index has gained about 22% in the past 12 months. Revenue and earnings from foreign markets are worth less when translated into greenbacks and their costs become relatively less competitive against rivals producing in countries with declining currencies. The result might be an earnings recession, which basically means at least 2 consecutive quarters of declining earnings based on year-over-year results. Wall Street analysts currently estimate earnings growth of 1.3 percent for 2015, down from a forecast of 8.1 percent at the beginning of the year, according to Thomson Reuters data. The S&P 500’s earnings per share are expected to drop 3.1 percent in the first quarter and 0.7 percent in the second quarter before recovering modestly in the second-half of the year.

Nearly one-fifth of S&P 500 companies have warned on earnings for the first quarter, with at least 49 companies mentioning the effects of the dollar on results, according to Thomson Reuters. And earnings expectations might be ratcheted lower as more companies asses the dollar impact in coming weeks.

The Federal Reserve on Wednesday lowered its expectations for US economic growth and inflation over the next two years. Chair Janet Yellen said during a press conference last week, “export growth has weakened, probably the strong dollar is one reason for that.” And while it is easy to say a strong dollar makes exports more expensive, it might be overly simplistic to say that is the reason behind a 4.1% drop in the value of exported goods in January compared to a month earlier.

You have to look closer to see that the industrial supplies and material group was responsible for 35% of the drop in the value of total exports from October to January; things like non-monetary gold, plus natural gas liquids, and organic chemicals. All right, commodity prices are down, but the items are still shipping. Capital goods excluding autos accounted for a 25% drop; things like civilian aircraft and aircraft engines. All right, but Boeing saw its 2014 orders increase versus the prior year, and the company has backlogs till forever. Consumer goods exports dropped 6%; not good but not horrible, especially in light of the West Coast port slowdown. Certainly a strong dollar is hurting corporate earnings but it hasn’t really spread through the broader economy, or it has been largely offset by the benefits of cheaper imports, such a lower prices for oil. The main point is that the effects so far appear to be transitory, not terminal.

Another consideration is that the Federal Reserve is talking about hiking interest rates while several other central banks are cutting rates, such as Japan and the Eurozone. The result is that in many places rates have turned negative. The European Central Bank’s fight against deflation has pushed yields on almost a third of the euro area’s $6.2 trillion of government bonds below zero. The result is that investors are now chasing yield. Buying negative yield, on the long-term, you only have downside but you never have upside. Even the most risk averse investors are taking chances on assets and regions that they probably wouldn’t have considered just a few months ago. European enthusiasm for higher-yielding assets has helped U.S. borrowers sell 3.28 billion euros of junk bonds in 2015, the busiest start to a year since the currency started in 1999.And while some of that money might come to the US, a lot of it is finding its way to frontier markets.

The bond market worldwide is more vulnerable to losses than at any time on record, based a metric known as duration. Yields for bonds of all types, from the most-creditworthy to the riskiest, are so historically low means that when the selloff finally does happen, it has the potential to be nasty. Consider Germany’s 30 year bonds, currently yielding 0.59%; if yields rose a half a percentage point in the coming year, buyers would suffer losses of 10%.

FINANCIAL REVIEW

King Dollar and the Eurozone

Sinclair Noe — October 10, 2014

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Financial Review

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

DOW – 115 = 16,544
SPX – 22 = 1906
NAS – 102 = 4276
10 YR YLD – .02 = 2.30%
OIL – .25 = 85.52
GOLD – .60 = 1224.00
SILV + .05 = 17.50

The 10 year German bund has a yield that is 141 basis points lower than the US 10 year Treasury note. The yield on German debt will get you 0.89%. Standard & Poor’s lowered France’s credit outlook today, and you can still get a 10 year French note with a yield of 1.25%. A 10 year note from Spain will only get you 2.06%. Is this because the US debt is riskier than the Spanish debt? No, just the opposite.

The problem in the Eurozone is deflation, and it threatens to bring the economy to a grinding halt, and send the EU into a triple dip recession. The president of the European Central Bank, Mario Draghi, gave no indication of any further monetary stimulus beyond what was announced this summer, suggesting in a speech in Washington that governments needed to do more on the fiscal side. Draghi said in effect that Eurozone countries that have enough money should spend it, a clear reference to Germany. His comments echoed remarks this week from Christine Lagarde, the head of the International Monetary Fund.

Today, German Chancellor Angela Merkel said her government was examining how to encourage investment, particularly in the “digital sphere” and the energy sector. Merkel did not elaborate, but the hint was that Germany might use government spending to stimulate growth, a possible shift in position that could ripple across the entire Eurozone. Merkel’s remarks may have been less a declaration of policy change than a signal that her thinking on stimulus was evolving.

On Wednesday, the Federal Reserve released minutes from the September FOMC meeting, and they expressed concern about the global economy and the dollar. In the past 4 months the dollar has jumped about 8% versus the euro; that kind of swing can prove a threat to trade and to financial markets. The Fed normally focuses on the US economy, unless there are global developments that are important enough that they could intrude. Fed officials pointed with concern to the slowdown in China, Europe and Japan. They also worried that the concurrent strengthening of the dollar would add to the risk of price deflation.

We know that a strong dollar could weaken US export performance and hold back growth, but the recent global slowdown represents a more ominous problem. Global economic weakness would undermine the ability of the Fed to maintain financial asset prices well above the levels strictly warranted by the fundamentals. Of course this has been how the Fed has addressed the crisis and the recovery for the past 6 years, they pumped up Wall Street with easy money. A global slowdown threatens that tactic.

The events of the past week indicate the Eurozone and especially Germany might be closer to a move away from the single minded focus on budget austerity that has, to date been an absolute failure. The bigger question is whether the Eurozone countries and the ECB will take action, and if they can actually do anything before the continent slips into full-fledged deflation; and further, what role that might mean for the Federal Reserve.

Finance ministers and central bankers gathered in Washington for the annual meetings of the World Bank and International Monetary Fund and today, Treasury Secretary Jack Lew urged the Group of 20 major economies to refrain from competitive currency devaluations. Federal Reserve officials are hunting for new tactics to raise price increases to their target as slowing global growth, cheaper commodities and flat wages sound warnings that inflation is descending toward the danger zone.

With inflation at 1.5% according to the Fed’s preferred index, low-flation is getting to be a real issue again. We know a stronger dollar makes US exports overseas less affordable, but a strong dollar makes it cheaper for Americans to pay for imported goods. A 10% increase in the dollar versus currencies of major trading partners could trim inflation by a quarter percentage point, and the Fed has not yet communicated a plan for how they will lift inflation to their desired target of 2%.

An inflation rate approaching zero is bad for the economy because of its impact on behavior by businesses and consumers. Companies’ inability to raise prices hurts profits, and they rarely compensate by cutting wages, so they fire workers instead. Consumers anticipating falling prices may postpone discretionary purchases. This can combine to create a vicious circle of less spending and further downward pressure on prices. Think about your own situation; in the past couple of weeks you’ve seen prices at the pump drop. Were you tempted to drive another day or two before you fill up the tank in the hope that you might save a few pennies per gallon?

And what we are seeing in the Eurozone is that once low-flation becomes deflation, the central bankers don’t really have the tools to deal with the problem. It is known as pushing on a string. They can flood the markets with easy money, but they can’t create demand, because, you know, prices will be lower next week. As we are seeing in the Eurozone, and as we saw in Japan, if you let it go on for too long it becomes a lock-in, it reinforces a bad outcome.

Substantial rallies in the dollar have the power to slam the brakes on GDP growth in a way that Fed tightening even doesn’t. GDP growth could decline by a percentage point if the rapid move in the dollar continues through early 2015. That fall in GDP is even larger than what would occur as a result of a 50-basis-point rise in long-term interest rates, and it works with a lag, too. Even when the dollar rally tapers off, it would be expected to constrain GDP through early 2016.

And for now at least, you might reasonably expect the dollar rally to continue; there is a trend in place. The long dollar bets mean money is being parked in the US, and that means continued downward pressure on long-term interest rates, at least for now. And another thing, when there are very rapid and pronounced changes in the exchange rate there is a tendency for investors to lock in gains from previously accumulated US assets. In other words, there is a tendency to sell stocks, and companies with overseas exposure are more likely to experience a greater decline. And the selloff in stocks is yet another hit to US GDP. It’s a nasty cycle.

On Wall Street, stocks closed out a volatile week with another triple digit loss for the Dow, giving the market the worst week since May 2012. The Dow industrials have now turned negative year to date. Yes, that was fast. The Dow lost 2.7% for the week. The S&P 500 dropped 3.1% on the week. The VIX, the volatility index jumped 45% for the week. The Stoxx Europe 600, Europe’s benchmark stock index posted its biggest slide in 2 years, down 4.1% for the week. The S&P 500 is sitting right at its 200 day moving average. The Dow Industrial dropped below the 200 day moving average, about 40 points lower.

A moving average is simply an average of a certain number of data points. The 200-day moving average is calculated by summing the past 200 days and dividing the result by 200. The 200-day moving average represents the average price over the past 40 weeks. This helps to smooth out day to day volatility and give a longer-term look at the overall trend. The 200 day moving average is considered a very important level of resistance or support; in this case, support. When a stock or an index breaks down below this key level of support you sometimes see a bounce, because there will be some investors who think they are now able to buy stocks cheap. But the bounce can sometimes be misleading; that’s known as a dead cat bounce. If dropped from high enough, even a dead cat will bounce. So the next few days will be critical to see if the markets can bounce, and if they can bounce, will they rally, or will prices just keep falling from here. If we don’t see a turnaround, it would confirm a downward trend.

This week the Nobel Committee handed out prizes for a better lightbulb, the LED; a better microscope, that sees nanoparticles; and a French author that I had never heard of. Today, Malala Yousafzai and Kailash Satyarthi have won the Nobel Peace prize. If you have not heard the story of Malala or heard her speak, you should; she will inspire you. She is the daughter of a teacher, and she grew up in and around schools, at least until 2008, when the Taliban took control of the Swat region of Pakistan, where she lived. The Taliban tried to close down schools for girls. That year, her father took her to Peshawar where she made a speech in front of national press titled “How Dare the Taliban Take Away My Basic Right to Education?” She was only 11 years old. In early 2009, Malala started blogging anonymously for the BBC about what it was like to live under the Taliban.

Two years ago, armed men boarded the converted truck that Malala and her classmates used as a makeshift school bus and they shot Malala in the head. She survived. Nine months after she was shot, Malala gave a now famous speech at the UN, where she said: “They thought that bullets would silence us. But they failed.” She’s continued her high-profile campaign for girls’ education with The Malala Fund, which raises money to promote girls’ education.

At 17, Malala is the youngest winner of the Nobel Peace prize, which she will share with 60 year old Kailash Sayarthi. In 1980 Satyarthi founded the Save the Childhood Movement, and he has helped rescue more than 80,000 children from bondage, trafficking and exploitative labor in the past three decades; he also spearheaded a movement to make free and compulsory education a constitutional right for children in India in 2009.

The Nobel committee said it “regards it as an important point for a Hindu and a Muslim, an Indian and a Pakistani, to join in a common struggle for education and against extremism”.