Financial Review

Veterans Day 2015

Sinclair Noe — November 11, 2015

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DOW – 55 = 17,702
SPX – 6 = 2075
NAS – 16 = 5067
10 YR YLD closed 2.34%
OIL – 1.14 = 43.07
GOLD – 3.00 = 1087.20
SILV – .09 = 14.45

“To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…” Those were the words of President Wilson in 1919, one year after hostilities ended in World War I on this date in 1918, in the 11^th hour, of the 11^th day, of the 11^th month. Back then it was called Armistice Day. Today we call it Veterans Day. And for all the veterans – Thank you.

The 11^th day of November is celebrated in China as Singles Day, symbolized by the four lonely 1s of 11/11. Apparently, this is kind of the anti-Valentine’s Day. Alibaba broke its own record for sales on China’s Singles Day, the world’s largest Internet shopping event, generating more than $9.3 billion in gross merchandise volume by midday Wednesday. Sales now look on track to hit $13 billion. More records: In the first eight minutes of this year’s sale, the company posted more than $1 billion in sales, topping last year’s 17 minutes to hit the billion-dollar mark.

AB InBev has completed an agreement to buy SABMiller for $105 billion, one of the largest mergers in corporate history. Under terms of the deal, SABMiller will sell a 58% stake in its MillerCoors joint venture to partner Molson Coors for $12 billion. A combined AB Inbev-SABMiller would have controlled close to 70% of the U.S. beer market, so the sale of the U.S. division was seen as a concession to competition authorities. In other brewing news, shares in Carlsberg A/S rose as much as 8.7 percent after the beer-maker announced a cost-cutting plan which will see it shed about 2,000 employees.

Iraqi oil puts pressure on shale; 19 million barrels of oil are due to arrive by ship from Iraq in American ports this month, the biggest influx from that country since June 2012, as OPEC members continue to defend market share in the face of low oil prices. The tactic seems to be working as yesterday the Energy Information Administration cut its U.S. crude oil production forecast for 2016 by 1 percent to 8.77 million barrels a day. The American Petroleum Institute said Tuesday that inventories rose by 6.3 million barrels last week. This all adds to concerns about oversupply. Crude oil fell to the lowest level in nearly three months.

Britain’s relationship with the EU is working but the Bank of England Governor Mark Carney says they will do whatever is needed to adapt should Britons vote to leave the bloc in a referendum. Britain is due to vote to stay in the EU before the end of 2017. The announcement came as U.K. unemployment fell to the lowest level in more than seven years, dropping to 5.3% in the third quarter. Also on tap: ECB chief Mario Draghi will deliver a speech today at the Bank of England’s Open Forum.

Online orders for Apple’s iPad Pro started today. The 12.9 inch-screen tablet, aimed in large part at business users and creative pros, will start at $799 but costs more than $1,000 if buyers want a keyboard and stylus included. Yesterday, Apple shares fell 3.1% after a Credit Suisse report said Apple had cut its orders for iPhone 6 components by as much as 10%.

Meanwhile, Apple is in talks with banks in the US about creating its own mobile-to-mobile payments service that sounds a lot like PayPal’s Venmo app. The app would reportedly let people send payments to each other directly from their phones, and automatically take it out of their checking accounts on the back end. While Apple already has its own payments system thanks to Apple Pay, the service so far has been mobile-to-merchant, and the mobile-to-mobile space has largely been dominated by PayPal’s Venmo app, but there is competition from Facebook’s Messenger app, Snapchat, and Square.

Macy’s shares plunged by as much as 14% after the department-store chain said its sales growth was weak because of muted consumer demand. Macy’s also lowered its guidance for 2015 earnings per share. Sales fell 5% to $5.87 billion, below the expectation for $6.1 billion. Bad news for Macy’s could be great news for customers, the company’s revenues have plunged, which means year-end sales are likely to be fantastic.

The New York state attorney general has ordered the fantasy sports sites DraftKings and FanDuel to stop accepting bets in New York, saying that the operations were essentially illegal gambling. The AG said the fantasy sites were considered gambling because customers “are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes.” The state of Nevada took a similar action in mid-October, with the Nevada Gaming Control Board saying the companies had to cease operations in the state.

DraftKings and FanDuel have indicated they would continue to let customers play while they contest the order in New York. Four smaller daily fantasy sports sites: DailyMVP, DraftDay, DraftOps, and MondoGoal Trading say they will stop letting users from New York enter their paid contests.

Nomura lowered its price target on Valeant Pharmaceuticals to $175 from $220. Nomura had been one of the most bullish on the company. The analyst for Nomura wrote: “Valeant’s business update call did not address all our outstanding questions; however, management’s willingness to be as open as possible in its responses was a positive first step towards rebuilding credibility with investors.” Here’s the big problem though, share price has dropped from $263 to $78.90. Every now and then it is a good idea for Wall Street analysts to open their eyes before issuing a forecast.

Valeant’s biggest investor is Bill Ackman of Pershing Square; he doubled down when the bad news on Valeant first hit; after Citron Research, a short-selling firm led by Andrew Left, issued a report two weeks ago asking if the company was running an Enron-like fraud. The stock had already been under pressure after the company was scrutinized for raising the prices for two acquired drugs. The Citron report, though, focused on Valeant’s relationship with Philidor, a specialty pharmacy. Citron has accused Valeant of using Philidor to book “phantom sales.” Valeant is the largest holding in Pershing Sqaure, and that hedge fund is now down about 19% for the year.

And the hits keep coming. A U.S. judge said Valeant Pharmaceuticals and hedge fund manager William Ackman must face a lawsuit accusing them of insider trading in Allergan before making an unsuccessful takeover bid for the maker of Botox. The lawsuit was filed on behalf of investors who sold Allergan shares in the two months before the defendants on April 22, 2014 announced an unsolicited $51 billion bid for Allergan. Pershing had by then quietly amassed a 9.7 percent stake in Allergan, which soared in value after the bid was announced. Investors said Pershing bought those shares knowing that Valeant was preparing a bid that could, and later did, become hostile.

Who knows? Maybe Valeant is an extraordinary bargain at current prices, but I’m guessing it will take years therapy before anybody is able to laugh at this.

The U.S. Department of Transportation has denied an appeal by railroads challenging new “crude-by-rail” regulations on trains hauling hazardous flammable materials. The rules issued in May include the phasing in of tougher tank car standards over several years and require new expensive braking systems on trains hauling more than 70 cars of crude oil by 2021.

General Electric’s stock did something yesterday that it hasn’t done in seven years: it closed above $30/share. In the years since June 10, 2008, GE’s stock has struggled despite CEO Jeff Immelt’s efforts to reassure investors that the company was changing. The mood seems to have shifted over the past year as the company offloaded its finance business and completed its biggest acquisition of all-time with the purchase of Alstom’s energy assets.

On Nov. 11, 1915, exactly three years before the end of World War I, IBM listed for the first time on the New York Stock Exchange — its name then Computing-Tabulating-Recording Co. IBM isn’t making a big deal of Wednesday’s 100th anniversary, which comes at an inauspicious time. Its stock has been the second biggest drag on the Dow Jones Industrial Average this year. For really, really long-term investors, consider this: If you had bought one share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6 million, according to the company. That’s a 3.4 million percent return.

Financial Review

How Low Did We Go

Sinclair Noe — March 9, 2015

 

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DOW + 138 = 17,995
SPX +8 = 2079
NAS + 15 = 4942
10 YR YLD – .05 = 2.20%
OIL – 26 = 50.00
GOLD – 1.80 = 1167.90
SILV – .20 = 15.83

“How Low Can Stocks Go?” That was the headline in the Wall Street Journal 6 years ago. The Dow was still slogging through 4 straight weeks of losses to close at 6547. The S&P 500 was at a 12 year low of 676. The Nasdaq Composite closed at 1268.

Not many people called it at the time. A few did. John Bogle called it 2 weeks early. Barack Obama called it 5 days early. Mark Haines called it one day late. Of course, after all four tires go flat you might not make the prediction that there will be a fifth flat tire. Nobody was really confident about a bottom until about the end of the year. The current bull market is the fourth-longest on record; it’s also the fourth strongest. When will the bull market end? No idea. I could call the end of the bull market every day, and one day I would be right but that would be a waste off time for all of us.

For now, we have a nice bounce from the sell-off on Friday. Friday we learned the economy added 295,000 jobs last month and the unemployment rate dropped to 5.5%, which should be good news, but the market is perverse, and it clearly demonstrated that it is afraid of the Fed raising interest rates. Back in 2008, the fed took emergency actions including setting a Zero Interest Rate Policy, which pushed investors into riskier and riskier assets by making the alternatives look less attractive. Remember, cash earns virtually nothing in the bank and bond yields are extremely low, so investors flocked to stocks. If and when the Fed actually raises rates, we can expect a full-fledged tantrum, or at least an 80% probability of a 5% or greater pullback.

The New York Times editorial board wrote an op-ed asking the Fed to delay rate hikes. The article outlined several reasons why the Fed should remain on hold, noting “wages have barely budged throughout the nearly six-year-old recovery” and “the labor market is not as healthy as those figures might suggest.”

You could make the case that we have seen excess when the population is willing to pay up to $10,000 for a watch with an 18 hour battery life. Which means that they are going to sell a boatload of them. The watch is basically like a smartphone, shrunk down to fit on your wrist; it has a phone, and apps, and such. This is not the first smartwatch; there are already versions from LG, Pebblewatch, Motorola, and Samsung; and they are selling well. About 10 million smartwatches shipped last year; about 40 million will ship this year.

The other announcements coming out of the big Apple event today: a new, lighter, skinnier Macbook; HBO is joining the Apple TV line-up; Apple said the iPhone was now the top smartphone in the world, having sold 700 million; Apple has tripled locations accepting Apple Pay to 700,000, including vending machines; and yes, you can Apple Pay with your Apple Watch.

Looking to stimulate the eurozone economy and avert the threat of deflation, the ECB began its €60B per month QE program today by buying German government bonds. The goal of the program is to drive up inflation, which has slipped into negative territory and has raised the specter of deflation, a broad decline in consumer prices that can eventually undercut corporate revenue. The European Central Bank has said bonds will be purchased on the open market — not directly from bond issuers, in part to avoid accusations that it is violating a ban on central bank financing of Eurozone governments. And it will wait several days before buying newly issued bonds to give financial markets time to determine a price.

QE does not spread across all the Eurozone. Greece was not invited to the party. The ECB is providing emergency aid to Greek banks, as long a they remain solvent and capitalized; they could pull the emergency lending at almost any time, and they might. The Greek government has not come up with details of a bailout plan, mainly because any bailout plan that would be acceptable to Germany would be catastrophic for Greece. Greek ministers floated the prospect of a referendum if their reforms are rejected. And so, each day the Greeks come up with a new story for why they haven’t put together a concrete proposal for bailouts. Scheherazade would be proud.

Credit rating agencies are changing the way they calculate credit scores. The three largest credit rating agencies (Equifax, Experian, and TransUnion) will be more proactive in resolving disputes over information contained in credit reports — a process federal watchdogs and consumer advocates have long decried as being stacked against individuals. Most changes will be implemented nationally and will kick in over the next six to 39 months.

GM settles with activist investor, Harry Wilson. Wilson will give up his request for a seat on the automaker’s board, in exchange for the company agreeing to buy back $5 billion dollars’ worth of shares.

Also on the buyback bandwagon, Qualcomm announced $15 billion in buybacks. The company has about $31 billion in cash on hand, but might take on debt for the buyback, because debt is cheap these days. And apparently they have forgotten how to innovate.

Tesla has confirmed that it will cut jobs in China as it continues to grapple with slow sales in the world’s biggest car market. Tesla will eliminate 30% of its Chinese staff, or about 180 of its 600 employees. Tesla only sold 120 cars in China during January.

Documents released by a Brazilian court have now outlined the alleged use of Swiss bank accounts for the payment of bribes in the ever-widening Petrobras scandal. Brazilian prosecutors investigating the Petrobras scandal allege former company executives and politicians mostly from the ruling coalition government colluded with the energy group’s contractors to receive millions of dollars of bribes in exchange for business deals.

The Brazilian attorney-general’s office this week sought permission from the supreme court to investigate 54 people, most of them politicians. In Brazil, only the highest court can deal with criminal charges against sitting congressmen. The alleged use of Swiss bank accounts in the Petrobras case is fuelling efforts in Brasília to investigate accusations of tax avoidance by Brazilians at HSBC in Switzerland. This follows raids by prosecutors last month on HSBC’s offices in Geneva over allegations of tax evasion by wealthy clients of its Swiss private banking arm.

Gasoline rose 21 cents in the past two weeks, with the average hitting $2.54 a gallon, according to the Lundberg survey. Prices bottomed out Jan. 23, but they’re still nearly $1 lower than a year ago. Oil prices were up slightly today, 26 cents to $50 a barrel.  Goldman Sachs said it expected oil futures to stay low longer but noted that its earlier forecast for $40 oil may be too low.

OPEC’s top official said Sunday that the cartel’s decision to continue pumping crude in the face of collapsing prices is hurting the U.S. shale-oil industry and that a global pullback on investment could lead to a shortage that will push the market upward again. “Projects are being canceled. Investments are being revised. Costs are being squeezed.” Other top officials at the conference said they would maintain their response of continuing to pump in the face of collapsed prices caused in part by a glut of US shale oil.

Hedge funds cut bets on rising oil prices at the fastest pace since December 2012 as U.S. inventories expanded to the highest in more than three decades. Speculators pared their net-long position in West Texas Intermediate crude by 19 percent in the week ended March 3, U.S. Commodity Futures Trading Commission data show. Short wagers increased to a record for a second week. Oil producers are spending less, idling rigs and delaying wells to stem output that the government predicts will reach a four-decade high this year. That’s having little effect so far, with U.S. crude inventories expanding by 10.3 million barrels in the week ended Feb. 27, the most since 2001.The supply builds are astounding and we’re going to run out of places to put the stuff.

The United States has declared Venezuela a national security threat and ordered sanctions against seven officials from the oil-rich country in the worst bilateral diplomatic dispute since socialist President Nicolas Maduro took office in 2013. Declaring any country a threat to national security is the first step in starting a U.S. sanctions program.

Solar Impulse, an ultralight plane powered only by the sun’s rays, took off from Abu Dhabi this morning in an attempt to fly around the world without using fuel. The 21,000-mile flight is expected to take about 4 months.

Despite all thirty-one global banks passing the first round of the Fed’s stress test last Thursday, a tougher second round test this week, known as the Comprehensive Capital Analysis and Review (CCAR), will either approve or disapprove the lenders’ capital return plans. Last year, Citigroup became the only big U.S. bank to have its plans thrown out, with the Fed citing “insufficient” improvement in areas previously flagged. Other 2014 CCAR losers: Citizens, HSBC, and Santander.

Google has “assembled a team of engineers to build a version of the Android operating system to power virtual-reality applications,” sources told the WSJ.  Last year, Google launched Cardboard, a cheap prototype kit meant to get developers to start writing VR apps for Android.

McDonald’s is pursuing an 18-month effort to turn its business around. In July, it announced it would reposition the brand through better value, service, marketing, and menu options. Now, about a third of the way through its turnaround plan, the effort has focused heavily on marketing and has yet to pay off as same-store sales continue to slide. MCD  reported a 4 percent decline in domestic same-store sales (sales at stores open at least 13 months) for February and a 1.7 percent decline globally. It blamed aggressive competition. While U.S. same-store sales in December and January were up, it appears now that most of this bump probably resulted from better weather than last year’s. Maybe they should consider changing the slogan from “the fast food joint that made America fat.”

Financial Review

It’s About to Get Hot

Sinclair Noe — February 13, 2015         

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DOW + 46 = 18,019
SPX + 8 = 2096
NAS + 36 = 4893
10 YR YLD + .04 = 2.02%
OIL + 1.43 = 52.46
GOLD + 6.20 = 1228.90
SILV + .48 = 17.42

The S&P 500 Index closed at an all-time high, taking out the previous record close from December 29. Whenever the S&P 500 hits a record high, we acknowledge it, but for some reason we don’t have a big celebration. When the Dow Industrials hit records we have the orchestra, the parade, milk and cookies; it’s a big ridiculous mess, but S&P 500 record high close; well done, attaboy, next.

Next would be the Russell 2000 index of small and mid-cap stocks hitting a record high close. Well done, next.

The Dow Jones Industrial Average finished above 18,000 for the first time this year. The Nasdaq Composite ended at its highest level since March 2000. For the week, the S&P 500 gained 2%. The Dow Industrial Average was up 1.1% on the week. For the second day, American Express led declines for the Dow, following news Costco was ending its exclusive business arrangement with AmEx. The Nasdaq Composite gained 3% over the past week, and is now within a few percentage points of record highs. The Russell 2000 gained 1.5% on the week.

In economic news, consumer sentiment slipped in February to a three-month low, according to the University of Michigan sentiment index. There has been this hope that low oil prices would have consumers spending like drunken sailors on shore leave; but that hasn’t happened. For the most part, people have been saving a little. It seems like nobody really believes that oil prices will stay low.

The prices we paid for imported goods fell sharply again in January mainly because of much cheaper oil, a trend that’s keeping inflation under wraps. The import price index dropped a seasonally adjusted 2.8% last month. Excluding fuel, import prices declined by 0.7% last month.

Weather will weigh on U.S. growth this quarter, just not nearly as much as last year. We keep seeing those pictures of Boston buried in snow, and they expect another snowstorm to hit New England this weekend, but it’s not as bad as last year’s Polar Vortex. Snowfall is on track to subtract 0.4 percentage point from growth in the three months through March, based on estimates from Macroeconomic Advisers LLC.  That’s way smaller than the estimated 1.4 point weather-created hit to GDP growth for the same period last year.

Europe is growing. Not much, but it is growth. The morning started with economic data on the Eurozone. Boosted by strong domestic demand and household spending, the German economy grew at a  0.7% pace in the fourth quarter, after expanding 0.1% in the previous three months, while data from France showed that GDP grew by 0.1% during the quarter, meeting analysts’ expectations. The Eurozone economy as a whole saw growth of 0.3%.
AIG posted a sharply lower fourth-quarter profit as low interest rates and refinancing expensive debt hurt the insurer’s results. The company reported an operating profit of $1.37B, well short of the $1.67B reported in the year-earlier period. AIG is planning to cut annual general operating costs by 3 percent to 5 percent through 2017. AIG also announced that it would buy back about $2.5B in shares of common stock on top of the roughly $4.9B in stock it repurchased in 2014.

Freescale Semiconductor has hired investment bankers to explore a possible sale. The company went public in 2011 after being taken private in 2006 for $17.6B. Freescale’s shares have soared over 75% in the last three months, with much of the rise coming after its strong Q4 results.

Activist investor Harry Wilson  and four hedge funds are pressing GM for an $8B share repurchase by mid-2016. The company is weighing the potential impact of the buyback, which may dent its balance sheet and jeopardize its credit ratings. Two ratings firms indicated this week that the proposed buyback could hurt GM’s current credit rating, which is one notch above junk status. Wilson, however, says GM needs to better manage its $25B in cash, and is looking to nominate himself for the company’s board.

West Coast seaports will be mostly closed for the next few days. Cargo has been struggling for months to cross the docks amid historically bad levels of congestion. The management association, representing large international corporations that run the ports, said it halted ship operations because it believes workers are engaged in a slowdown, and owners do not want to pay the higher premium wages dock workers receive for weekend and holiday shifts.

President Obama went to Silicon Valley today to hustle support from the tech industry for closer cooperation in defending against hackers. Obama signed an executive order aimed at encouraging companies to share more information about cybersecurity threats with the government and each other through new private-sector led information sharing and analysis organizations, or hubs where companies share information with each other and with the Department of Homeland Security.

It is one step in a long effort to make companies as well as privacy and consumer advocates more comfortable with proposed legislation that would offer firms protection from being sued for handing over customer information to the government. Upset about the lack of reforms to surveillance programs, the CEOs of Google, Facebook and Yahoo stayed away from today’s conference, but Apple CEO Tim Cook gave an address and other CEOs attended and spoke.

In his speech, Cook said: “History has shown us that sacrificing our right to privacy can have dire consequences. We still live in a world where all people are not treated equally, too many people do not feel free to practice their religion or express their opinion or love who they choose — a world in which that information can make the difference between life and death.”

Apple had a very good reason to show up for the President’s visit: A seal of approval for Apple Pay.

The White House announced that Apple’s mobile-payment system will be enabled for users of federal-payment cards, including Social Security and veterans benefits that are paid out via debit cards. The deal includes the Direct Express payment network and government cards issued through GSA SmartPay, which handles more than 87.4 million transaction worth $26.4 billion each year. Cook also said Apple Pay will become available in September for many transactions with the federal government, such as at national parks.

Apple Pay is being watched closely to see whether Apple can foster wider use of digital wallets, a goal that has eluded tech companies for years. Major banks and credit-card companies, including MasterCard, teamed up with Apple to develop Apple Pay, which uses the world’s largest payment networks’ tokenization products, a system that replaces some account information with a digital ID for online and mobile purchases.

Visa CEO Charlie Scharf has said that there will be “an awful lot of things being announced and implemented” in the next year that compete with Apple Pay. The networks have also outlined a road map of standards for how banks and merchants can adopt the technology. To coincide with today’s event, Visa announced an expansion of its token services this year and MasterCard said it plans to spend $20 million on a program that uses biometrics to verify purchases.

We have followed the droughts in the Southwest and California for the past couple of years, and now, according to NASA atmospheric scientists in a new study in the journal Science Advances, things are going to get a lot worse. We are about to go from droughts to mega-droughts.

According to the NASA scientists: “Unprecedented drought conditions” — the worst in more than 1,000 years — are likely to come to the Southwest and Central Plains after 2050 and stick around because of global warming. “Nearly every year is going to be dry toward the end of the 21st century compared to what we think of as normal conditions now. We’re going to have to think about a much drier future in western North America.”

There’s more than an 80 percent chance that much of the central and western United States will have a 35-year-or-longer “megadrought” later this century, according to study co-author Toby Ault of Cornell University, adding that “water in the Southwest is going to become more precious than it already is.”

The study is based on current increasing rate of rising emissions of carbon dioxide and complex simulations run by 17 different computer models, which generally agreed on the outcome. The regions looked at include California, Nevada, Utah, Colorado, New Mexico, Arizona, northern Texas, Oklahoma, Kansas, Nebraska, South Dakota, most of Iowa, southern Minnesota, western Missouri, western Arkansas, and northwestern Louisiana.

Looking back in records trapped in tree ring and other data, there were megadroughts in the Southwest and Central Plains in the 1100s and 1200s that lasted several decades, but these will be worse. Those were natural and not caused by climate change, unlike those forecast for the future.

Because of changes in the climate, the Southwest will see less rain. But for both regions the biggest problem will be the heat, which will increase evaporation and dry out the soil. The result is a vicious cycle: The air grows even drier, and hotter.

Scientists had already figured that climate change would increase the odds of worse droughts in the future, but this study makes it look worse and adds to a chorus of strong research.

FINANCIAL REVIEW

A Tale of Three Stocks

Sinclair Noe — October 20, 2014

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Financial Review

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

DOW + 19 = 16,339
SPX + 17 = 1904
NAS + 57 = 4316
10 YR YLD – .02 = 2.18%
OIL – .21 = 81.85
GOLD + 8.70 = 1247.90
SILV + .16 = 17.53

A nice bounce in the S&P 500 index and the Nasdaq Composite. For most of the session, the Dow was in negative territory, clawing its way to positive, barely. There are 3 stocks that had a compelling story today.

We start with IBM, which reported its third-quarter results; a 10th consecutive period of falling sales, marked by weaker performance in growth markets. IBM said its long-standing forecast of earnings per share of $20 for 2015 is no longer achievable. IBM lowered its forecast for free cash flow. The company said it was selling its money-losing chip-making business to GlobalFoundries, a move to further cut costs and focus on its more profitable, faster-growing businesses. Once upon a time, IBM was a pioneer in advancing semiconductor technology, its manufacturing capability fell behind others that produced chips in large volume, but now they will have to pay GlobalFoundries $1.5 billion to take the chip division, while taking a $4.7 billion charge. IBM has been divesting slower-growing and unprofitable businesses, but like many older tech companies, it is caught in the middle; sloughing off the old and expensive without yet having a foothold in the new.

Some customers are trying to move more of their corporate-computing functions to the cloud. The arrival of cheap cloud computing means that corporations don’t need IBM’s big, expensive mainframes. And even if IBM does catch up, the cloud might be such a thin-margined industry that it can’t sustain the profit margins IBM had been telling investors to expect. IBM talked about growth in cloud computing of 50%. But the company’s faster-growing businesses can’t offset its aging businesses. Revenue in hardware systems, including its Z Series mainframe systems, fell 15%. In addition, the once faster-growing services business was off 3%.

IBM earned $3.68 a share on revenue of $22.4 billion, down from earnings of $4.04 a share on $23.3 billion in sales a year ago. Wall Street analysts had forecast IBM to earn $4.31 a share, with sales of $23.37 billion. IBM also cut its earnings outlook for the year to between $15.97 and $16.31 a share from its previous forecast of $18 a share, and said it would no longer stand by its “road map” to reach earnings of $20 a share for 2015. Under previous Chief Executive Samuel Palmisano , the company had pledged in May 2010 to double its earnings to at least $20 a share by 2015 by more aggressively pursuing business in software and high-growth emerging markets.

The company also hinted it may cut back on the massive share buyback program that helped support its earnings targets. In the third quarter, IBM bought back $1.7 billion in stock. The company had $1.4 billion remaining under its current repurchase authorization at the end of September and said it would ask to boost that figure at this month’s board meeting. They might have been better served putting that money into R&D. Sometimes short-term shareholder value leads to longer-term shareholder loses. IBM down 12.95 = 169.10. (-7%). Big Blue is bleeding blue.

Sears Holding, up 6.55 = 34.96 (+23%). Why was Sears up today? It’s a smoke and mirrors move. Sears is bleeding cash; today they got a transfusion of capitol, but this is still one very sick puppy. Sears announced its intentions to conduct a rights offering of units, including senior unsecured notes and warrants. The company will offer shareholders debt and stock warrants worth $625 million, which can be exercised in five years. The exercise price for the rights offering of shares will be the same as the October 17 closing market price of $28.41.

The rights offerings that the company has announced will include 8% senior unsecured notes due 2019, along with the rights to purchase company’s common stock. Sears expects to raise $625 million out of this offering. Sears needed to raise some money because they are burning through cash. The reason they are burning through cash is, well have you been in a Sears store lately? No. Well, that’s why.

The move today also indicates that the cash burn during the quarter might have been higher than the company’s expectations, in turn, urging the company to raise additional capital through these sources. Moreover, the company might be facing pressure from its suppliers to make payments, causing it to try and improve liquidity. And beyond keeping the doors open, why the need to raise cash?

Well, hedge funds are now running Sears, and it has been a bad bet, so now they’re going into salvage mode; scraping cash from the bottom of a barrel. This in addition to already selling its Lands’ End unit, and most of Sears Canada. The bottom line is that Sears needs a big turnaround, and you won’t get that from hedge fund managers; what they will do is slowly and surely chop it up and sell it off.

After the close of trade, Apple said net income was $8.47 billion in its fiscal fourth quarter ended Sept. 27 versus $7.51 billion in the year-ago period. Earnings per share rose more sharply, to $1.42 from a split-adjusted $1.18, because the company’s stock-repurchase program reduced the share count. Revenue rose 12% to $42.12 billion from $37.47 billion in the same period a year earlier. Analysts were expecting earnings of $1.31 per share on revenue of $39.88 billion. Apple started selling the new iPhone6 and iPhone6 Plus on September 19, and they sold 39.2 million; up from 33.7 million units a year ago. Gross margin was 38% in the September quarter, at the high end of the company’s estimated range. Guidance for October through December is strong. Apple finished the quarter with a backlog of orders, and production of the 6 Plus is increasing every week as the company works to balance supply with demand. Apple was up 2.09 = 99.76, and then added another 1.33 in after hours.

Also today, Apple launched Apple Pay. Here’s how it works. With Apple Pay, you’ll be able to hold your iPhone up to a credit card terminal then use Touch ID, Apple’s fingerprint technology, to make a purchase. You’ll also be able to buy stuff within apps, just by using Touch ID at the appropriate time during checkout. It works with iPhone6 and Plus, and the new iPads for apps only; or an older phone with the new Apple Watch. It only works in the US. Both of Apple’s latest phones have Near Field Communication (NFC) chips at the top end of the device. They also both have a separate chip called the secure element (SE). Each time you initiate a transaction, the SE generates a one-use code in lieu of transmitting your debit or credit card number. The secure element found in the iPhones are considered safe from hardware attacks. In fact, if a thief dismantled your phone, the secure element would sense tampering and immediately shut down.

Apple Pay current supports credit and debit cards from Bank of America, Capital One, Chase, Citibank, Wells Fargo and American Express. Support from over 500 more banks will be available later this year, and in 2015. There are already over 220,000 retailers that are compatible with Apple Pay, including McDonald’s, Whole Foods and Walgreens. More stores, including Staples and the Disney Store, will be getting on board later this year. And while that sounds like a lot of stores, it isn’t. You wouldn’t want to think that Apple Pay will replace credit cards and cash in the near future.

Mobile phone payment systems have actually been around for quite some time. If you have an Android phone, you could have been using Google Wallet for the past 2 years, but you probably didn’t. For some reason, when Apple does it, everybody jumps on the bandwagon, and the technology is expected to explode over the next 6 months. But even if Apple can convince consumers to take their money mobile, some merchants aren’t playing ball. Wal-Mart, America’s largest retailer, won’t support Apple Pay at launch. Instead, it and other big-box stores like Best Buy are developing a competing mobile payments platform called CurrentC, set to launch sometime next year. So there will be competition, and the sector will become fragmented.

And then there is the whole matter of setting up the pay system on your phone, and then changing the system if your card changes. And quite frankly, the whole thing seems like a big hassle. Just a reminder that cash still works in a pinch, and the battery never goes dead.

Not much in the way of economic data today, but New York Federal Reserve Bank President William Dudley had some interesting comments at a conference called, “Workshop on Reforming Culture and Behavior in the Financial Services Industry.” Dudley says banks should defer bonus payments for 10 years and tap the bonus pool to pay any regulatory fines.

Dudley asked, “How will a firm know if it is making real progress? Not having to plead guilty to felony charges or being assessed large fines is a good start.” If bad behavior at financial services firms persists, they will have to be “dramatically downsized and simplified so they can be managed effectively.” Dudley said banks should offer longer deferred pay in debt, rather than equity, and added that the bonus pot should be tapped to pay any bank fines so employees would be hit before shareholders.

Fed Governor Daniel Tarullo, the Fed’s top official overseeing bank supervision and regulation, also gave his view on bank compensation saying, “It is important that compensation arrangements, including clawback and forfeiture provisions, cover risks associated with market conduct and consumer protection, as well as credit and market risks.” Tarullo noted that while US bank regulators do not have the power to criminally prosecute, they can remove bank employees from their companies, positions and even the industry.

It almost sounds like the Fed is ready to get tough on banksters, after sitting on their hands for 6 years. Tough talk is good, action is better.

FINANCIAL REVIEW

Hot, Hot, Hot

Sinclair Noe — September 19, 2014

09192014 Financial Review

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

DOW + 13 = 17,279 (record)
SPX – 0.96 = 2010
NAS – 13 = 4579
10 YR YLD – .04 = 2.58%
OIL – .61 = 92.46
GOLD – 8.60 = 1217.20
SILV – .73 = 17.89

The Dow Industrials posted the 18th record high close of the year.

The big story on Wall Street today was the Alibaba IPO. You’ve probably never heard of Alibaba, so here is a quick update. Alibaba is China’s biggest online marketplace, and it combines online shopping with online banking, and a search engine. It is the world’s most popular online shopping site; it’s even bigger than eBay and Amazon combined. As a search engine, it goes up against Google and Microsoft’s Bing. It also provides financial services; you could buy certain things using AliPay, so it competes with the new Apple Pay, and it even has its own money market fund with $87 billion in assets; so it’s kind of like a bank.

The company was founded in China 15 years ago by an English teacher named Jack Ma, who is now the richest man in China, with personal net worth over $20 billion. Early investors include Yahoo, with a 16% stake in the company; and Softbank, with a 32% stake. You might think it was a good day for Yahoo; not so much. Yahoo sold 120 million BABA shares, keeping more than 400 million shares. Yahoo share price dropped, leaving capitalization around $40 billion, which is less than the combined $45 billion value of Yahoo’s Asian assets, which includes Yahoo Japan and the holdings in Alibaba. In other words, without the Alibaba investment, Yahoo is worth a negative. This is the largest IPO in US history; shares were priced at $68 and immediately traded above $90. This puts Alibaba market cap above such well-known companies as Intel, Samsung, Oracle, and IBM. The ticker symbol is BABA.

Beyond that, analysts have had a difficult time figuring out valuation on Alibaba. It’s still a Chinese company whose money is earned mainly in China, but its shareholders are now primarily Americans and this might require certain adjustments. For today, it was a feeding frenzy on Wall Street.

The Home Depot now says that about 56 million customer debit and credit cards were put at risk after hackers broke into the company’s payment system. They also say that the malicious software has been removed from its computer system and the company has enhanced encryption at point of sale terminals. Home Depot said there was no evidence that debit card PIN numbers were compromised but they are offering free credit monitoring to customers who used a payment card at a Home Depot store since April.

The company also said it will finish setting up more secure credit card readers in all of its US stores by the end of the year. The new technology will be able to read a new type of credit card that uses a combination of an embedded microchip and a code to authorize transactions. “Chip and pin” technology, as it is known, is supposed to make it much more difficult for thieves to use stolen credit card data to make counterfeit cards. All merchants and banks are under an October 2015 deadline to upgrade to the more secure credit cards.

Banks and technology companies are figuring out how to get you to pay for something with something other than a credit card; while retailers like Home Depot and Target are still trying to figure out how to accept credit card payment without making a hot mess of everything. And celebrities on TV ads beg the question, what’s in your wallet? Perhaps the better question is: How much cash do you have in your wallet? If you were in Germany, the correct answer would be $123 worth of cash. Roughly 80% of all transactions in Germany are conducted in cash. In the US, it’s 46%.

Scottish voters decided to remain part of the United Kingdom and voted against independence. It wasn’t as close as expected; 55% no to 45% yes.
The first Friday of each month brings the national jobs report; it takes a while to break out the jobs by state. Today we find the state with the lowest unemployment rate is North Dakota at 2.8%. Georgia had the nation’s highest rate at 8.1%. Joblessness fell fastest in Illinois, which saw its unemployment rate drop to 6.7% from 9.2% a year earlier. Arizona’s unemployment rate dropped from 8.1% to 7.1%.

The Conference Board’s index of leading economic indicators rose 0.2% in August to 103.8. The Conference Board’s economist said: “The leading indicators point to an economy that is continuing to gain traction, but most likely won’t repeat its stellar second quarter performance in the second half.”

A private report from John Burns Real Estate Consulting finds that student debt will reduce US home sales by about 8% this year, or about 414,000 home sales that won’t happen. The paper estimates that every $250 per month in student loan debt reduces borrowers’ purchasing power by $44,000, and since 2005, some 3.8 million additional households have at least $250 per month in student debt.

Yesterday, I mentioned that the House of Representatives had passed legislation approving money to buy non-radicalized Syrian rebels to fight against ISIS. Late yesterday the Senate approved that legislation. When Congress reconvenes in a couple of months, they’ll begin the debate on the authorization of force against ISIS. The House approved it first with a vote of 273-156, and the Senate followed with a vote of 78-22. Both in the House and Senate the votes were divided along monetary lines.

The average House Representative who voted for arming Syrian rebels received $38,964 in contributions from defense contractors; whereas, Representatives who voted “no” received $25,055 from defense contractors. The average Senator who voted for arming Syrian rebels received $98,611 in contributions from defense contractors; whereas, Representatives who voted “no” received $60,058 from defense contractors.

Meanwhile, French jets struck a suspected ISIS target in Iraq for the first time today.

Monday, September 22 marks the end of summer; the autumnal equinox will occur in the Northern Hemisphere at 7:29 PM pacific time.

According to the National Climatic Data Center, this summer, the Earth had its warmest June through August on record. The combined land and ocean temperature for the globe was 1.28 degrees Fahrenheit above the 20th century average of 61.5 degrees and broke a previous record set in 1998.

While the 48 contiguous states had a near-average summer and the coolest since 2009, California, Oregon and Washington all had seasons that registered in their top five for heat and most of the other states west of the Rocky Mountains turned in warmer summers than average. The mean temperature across the contiguous U.S. was 71.7 degrees, 0.3 degree above the 20th century mean. From January through August, the combined land and ocean temperature around the world was 1.22 degrees above the 20th century average of 57.3 degrees, the third highest on record. In the contiguous U.S., it was 53.9 degrees, about average, and the coolest start of any year going back to 1997. In the context of the world, the results in the US were an aberration. If the last four months of the year rank within their top five warmest, 2014 will replace 2010 as the globe’s hottest year in records going back to 1880.

Next week the United Nations will hold a Climate Summit; a key issue will be carbon pricing in both the public and private sectors. Individual companies, investors, and national and local governments are expected to throw their support behind the idea of putting a price tag on carbon emissions through taxes, emissions trading systems or other schemes. About 40 countries and more than 20 cities, states and provinces have carbon pricing policies or plan to launch them. Ahead of the summit, almost 350 institutional investors representing more than $24 trillion in assets are issuing their own call for government leaders to provide a “stable, reliable and economically meaningful” carbon price that helps redirect their investments away from fossil fuels and toward clean energy and climate solutions.

Corporate carbon prices range from $6 per ton to almost $90 per ton. In addition to calling for a price on carbon, the statement asks governments to phase out fossil fuel subsidies and strengthen regulatory support for energy efficiency and renewable energy.

Apple Bites

Financial Review with Sinclair Noe — September 9, 2014

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

DOW – 97 = 17,013
SPX – 13 = 1988
NAS – 40 = 4552
10 YR YLD + .03 = 2.50%
OIL + .05 = 92.80
GOLD + .30 = 1256.80
SILV + .04 = 19.16

Today’s epiphany is courtesy of Apple; they unveiled not one but three new things. Let’s examine.

The iPhone 6 is the new phone, and it is a little bit bigger than the old phone. And they even have an iPhone 6 plus, which is a little bit bigger. So, the new phones won’t fit in your pocket anymore. I know, it’s like the most totally incredible thing ever.

The Apple Watch is smaller than the old phone; so small it can be strapped on your wrist. It even has a dial so older people will realize it is supposed to be a watch and not just a little phone strapped to your wrist. It is called the Apple Watch because iWatch was just a little too creepy.

The third thing is Apple Pay, which is a payment processing service that has Apple partnering with American Express, MasterCard, and Visa so you can pay for purchases with a big iPhone 6 or an Apple Watch, just like you can pay for things with an American Express, MasterCard, or Visa credit card. The big difference is this is new technology, whereas the credit card is like 50 years old; and this new technology runs on batteries that might last for 12 hours before requiring a charge. But, you don’t need to carry a small piece of plastic that doesn’t require batteries and your transaction will be more secure because it will use the technology of iCloud, which is the same technology that allows hackers to get naked pictures of celebrities, so you know it’s really, really safe.

Apple share price moved higher by about 4.8% during the day but closed down – .37 at 97.99.

Moving over to the economic news of the day:
On the heels of a disappointing jobs report last week, the Labor Department reports more workers are quitting their jobs. The JOLT report, or Job Openings and Labor Turnover summary shows about 2.52 million workers quit their jobs in July, the most since June 2008, and up from 2.31 million a year earlier. This is actually considered healthy, because the idea is that people don’t quit their jobs, unless they think they can find a better job. Or maybe a lot of people just don’t like their job. There were 4.67 million job openings at the end of July, down slightly from 4.68 million openings.

Average consumer spending fell in 2013, its first drop in three years; cautious families cut expenditures on restaurants, clothing, entertainment, alcohol and tobacco, and slashed charitable contributions. Last year, total average expenditures by families, singles and other “consumer units” hit $51,100, down 0.7% from 2012′s tally of $51,442, as income edged down. Makes sense; people earned less and spent less. Meanwhile, spending rose for necessities, such as housing and health care.

Today’s young Americans are burdened by debt at a far greater rate than prior generations; 35% of Americans age 24 to 28 have debts that exceed their assets. That’s roughly double the proportion of their peers in the late 1980s and mid-1970s. The share of young Americans with debt, if not the overall dollar amount, has actually fallen from prior generations. Today, 75% of young Americans have debt, compared with 76.5% of late baby boomers at the same age and 78.2% of early baby boomers; but big shifts in the types of debt held by the groups have led to far different experiences.

Younger Americans today are taking on far less mortgage debt and far more student and credit-card debt than the early and late boomers did at the same age. Only 19.8% of today’s young Americans have home-related debt, down from 29.9% of their peers in the late 1980s and 43.1% of those in the mid-1970s. Conversely, 22.4% of young Americans today have education debt, compared with 5.1% among late baby boomers and none among early boomers.

Most people think the economy is headed in the wrong direction, and that is the global economy, not just here in the US. Pew Research Center asked nearly 49,000 people in 44 countries whether they liked the direction in which their country was heading, about their view of the economy, and where they thought the economy was heading. The Greeks, Italians, Spanish, and Ukrainians are the most pessimistic about their economy with 97%, 96%, 93%, and 93% of respondents, respectively, saying their current economic situation was bad. Greece led with the highest percentage of respondents who thought things would get worse in the next 12 months with 53%.

The Chinese are very optimistic. Only 6% of Chinese respondents thought things were bad, and only 2% thought things would get worse. Similarly, only 11% of respondents from Vietnam thought things were bad, along with 15% of those in Germany. In the US, 58% of respondents thought the economy was bad, and 30% thought it would get worse in the next 12 months.

The National Federation of Independent Business said its Small Business Optimism Index for August rose 0.4 to 96.1. Eight of the index’s 10 components either improved or showed no change. The job growth indicated in the survey was sluggish, with owners adding an average of only 0.02 workers per firm, and fewer saying they planned to hire more workers in the future. Some businesses appeared to lose pricing power, with 15 percent of respondents saying they had reduced prices, and a drop in the number of owners saying they planned price hikes. Though more owners said they expect an improvement in business conditions than said so in the month before, a slight majority still are not convinced conditions will improve. The index is still 4 points below where it was before the start of the 2007 financial crisis and recession.

Senator Elizabeth Warren is holding hearings on Capitol Hill, and she actually had the cajones to ask regulators why no senior officials at Bank of America, Citi and JPMorgan Chase have been prosecuted over their role in the housing collapse. The three banks have agreed to a combined tens of billions in penalties, but no officials have been sentenced over the alleged misconduct. Warren allowed that the regulators themselves can’t prosecute; that would be up to the Justice Department. But regulators can provide referrals.

Daniel Tarullo, the governor at the Federal Reserve who’s most involved in bank regulation, said the central bank provided information to the Justice Department. But, when pressed, he indicated that the Fed didn’t specifically refer anyone. Warren noted that after the savings-and-loan crisis in the 1970s and the 1980s, the government brought over 1,000 prosecutions and got over 800 convictions. Warren, by the way, wasn’t alone. Sen. Richard Shelby, the Alabama Republican, put the onus on the Justice Department for the lack of prosecutions. Shelby said: “People shouldn’t be able to buy their way out of culpability.”

No, they should not be able to, but they are.

The Obama administration announced a series of measures to help shore up crumbling infrastructure, including half a billion dollars in loans for the electric grid; part of a $1 trillion dollar plan to fund transportation, water and electricity needs over the next 6 years. New efforts include $518 million in loans for 22 electric projects from the Department of Agriculture that will build 5,600 miles of electrical lines in rural areas and improve the electric grid. Currently, the grid is unable to withstand many outages tied to weather, costing the economy up to $33 billion each year.

Treasury Secretary Jack Lew said investing in infrastructure has historically been one of the best ways to create jobs and boost economic growth, but spending has fallen over the past decade, as two-thirds of roads are now in disrepair, and one out of nine US bridges have structural deficiencies.

The European Union’s trade commissioner is practically begging for the US to start exporting oil and natural gas to Europe. Tension between Russia and the West over the future of Ukraine is spurring the European Union to renew efforts to end decades of dependence on Russian gas. One solution would be greater access to US oil and nat gas resources. Overturning a 40-year US ban on oil exports by agreeing to send oil to Europe could pressure Russian President Vladimir Putin by lowering global crude prices. Nat gas prices in Europe are about 3 times what they are in the US, and one concern is that exporting nat gas, could drive up prices in the US. Whatever happens likely won’t happen for at least a year, which raises the possibility of a cold winter in Europe, if Russia-Ukraine situation turns even uglier.

Speaking of natural gas. McDonald’s reports that global sales at stores open more than a year dropped 3.7 percent in August. That was the company’s worst month for same-store sales since the spring of 2003. This is the second month in a row that McDonald’s has reported global same-store sales that set 10-year marks for awfulness. Performance was dragged down largely by the Asia/Pacific, Middle East and African regions, where same-store sales plunged 14.5 percent. McDonald’s is still recovering after a video surfaced showing workers at one of its meat suppliers in China engaging in unhygienic practices, including picking up meat off the floor and putting it back in a processing machine. McDonald’s was forced to pull meat off menus in many China outlets after the scandal came to light. No word on whether diners could tell the difference between meat and the non-meat menus. McDonald’s US same-store sales fell 2.8 percent, and in August McDonald’s captured its second smallest share of the fast-food market since 2011.