Financial Review

Makes You Want to Holler

Sinclair Noe — March 16, 2017

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DOW – 15 = 20,934
SPX – 3 = 2381
NAS + 0.71 = 5900
RUT + 3 = 1386
10 Y + .01 = 2.52%
OIL – .07 = 48.79
GOLD + 6.10 = 1226.80

President Trump will ask the Congress for cuts to many federal programs, and more money to bulk up defense spending. Trump’s budget outline is a blueprint covering just “discretionary” spending for the 2018 fiscal year starting on October 1.

It boosts spending for defense, homeland security and veterans’ affairs; the Defense Department budget would increase by $54 billion, which will raise defense spending to $639 billion for fiscal year 2018.

The Environmental Protection Agency faces cuts of 31% and the Department of Agriculture would see funding cuts more than 20; State Department 28%; Health and Human Services would be cut 16%; Education faces cuts of 14%.

Trump’s budget proposes eliminating discretionary funding altogether for at least 19 agencies and 61 other programs. Plans for new NASA missions, climate change research, aid for low-income families, funding for commercial flights to rural airports, public broadcasting, and Meals on Wheels would all be on the chopping block.

The spending cuts that Trump proposes come from those agencies that fund education programs, social services, environmental protection, health research, housing and food assistance, national parks, land management, and countless other endeavors. As it is, spending on non-defense discretionary programs is already historically low.

As a share of the economy it’s at its lowest level since 1998 and is well below where it was 50 years ago, per data from the Congressional Budget Office. The net effect is no change in the national deficit. The budget proposal is the first volley in what is expected to be an intense battle over spending in coming months in Congress.

President Trump’s second travel ban was blocked by a federal court in Hawaii hours before it was to go into effect. A federal judge in Maryland also ruled against the ban on the day it was supposed to take effect. The administration has promised to appeal the rulings.

The speaker of the House, Paul Ryan, the Senate Intelligence Committee chairman and the ranking Democrat on the committee all said that they’ve seen no evidence of President Donald Trump’s accusation that he was wiretapped last year by his predecessor.

Senate Intelligence Committee chair Richard Burr and ranking member Mark Warner issued a statement, saying “based on the information available to us, we see no indications that Trump Tower was the subject of surveillance by any element of the United States government either before or after Election Day 2016.”

House Speaker Paul Ryan said that “no such wiretap existed,” citing intelligence reports to House leaders. “We don’t have any evidence,” says the top Republican on the House Intelligence Committee. “No evidence,” says his Democratic counterpart.

The statement from the leaders of the Senate Intelligence Committee marks the clearest and strongest refutation of Trump’s allegations since the President first made them two weeks ago. The senators statement also addresses Trump’s more recent statement that he was not merely speaking about wiretapping specifically.

The leaders of the House Intelligence Committee have said they have yet to see any evidence of wiretapping, but have yet to flatly rule out all surveillance. House Intelligence Chairman Devin Nunes said Wednesday that it was possible that Trump aides were surveilled via “incidental” collection.

Dutch Prime Minister Mark Rutte defeated far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday’s election, albeit with fewer seats than before.

It’s rare for a Dutch election to attract international attention, but the performance of Wilders is being seen as a bellwether for the ascent of populism around Europe, particularly with the National Front’s Marine Le Pen set to reach the run-off in the French presidential election late next month. Germans will vote later in the year.

The Bank of Japan is sticking with its ultra-loose monetary policy even as the Federal Reserve tightens. Japan’s economy is recovering with the help of a weaker yen but growth and inflation remain low. The Bank of Japan to keep its target for 10-year Japanese government bond yields at around zero, a policy it calls “yield-curve control.” It left the short-term interest rate on some yen deposits held by commercial banks at minus 0.1%.

The Bank of England held interest rates at the record low level of 0.25 percent and maintained asset purchases at £435 billion. The UK economy has shown strength since last June’s Brexit referendum and the government revised its forecasts for domestic growth in 2017 sharply higher. That might be wishful thinking.

The UK has not yet felt the full impact of Brexit, but that doesn’t mean they won’t. The big question is whether London’s financial institutions will lose access to the single market of the Euro Union after the UK leaves the EU.

The main argument is as follows: since London plays a key financial role in Europe, any disruption would endanger the financing of the EU economy and would ultimately pose a threat to financial stability in the bloc.

My guess is that argument plays better in London than Brussels. That’s not just speculation. The number of new available jobs listed in the UK’s financial center fell 17% in February year-on-year to 6,945.  Or simply, Brexit is Brexit.

Yesterday, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation. The Fed indicated they are still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December.

In a press conference yesterday, Fed Chair Janet Yellen said, “The simple message is, the economy is doing well. We have confidence in the robustness of the economy and its resilience to shocks.”

The labor market has been a strong part of the economic recovery. In the last monthly jobs report, the unemployment rate dropped to 4.7%, but one weak spot was wages, which have flatlined. Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.

For wages to increase, workers need job mobility, the ability to take a new job for more pay. Each month the Labor Department publishes the JOLT survey, or Job Openings and Labor Turnover; and in January, the number of Americans quitting their jobs rose to a seasonally-adjusted total of 3.22 million, the highest number since February 2001. The quits rate rose in January to 2.2%.

People quitting their jobs in droves is a sign of confidence among workers, as folks are unlikely to quit a job unless they are confident they can get another one. Openings totaled 5.63 million in January, above the prior month’s reading of 5.5 million.

The Labor Department said initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 241,000 for the week ended March 11. It was the 106th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

US home-building jumped in February as unseasonably warm weather helped boost the construction of single-family houses to near a 9-1/2-year high. Housing starts increased 3% to a seasonally adjusted annual rate of 1.29 million units last month.

Home-building was up 6.2 percent compared to February 2016. Single-family home-building, which accounts for the largest share of the residential housing market, surged 6.5%. Starts for the volatile multi-family housing segment fell 3.7%.

The Arizona Supreme Court has upheld the constitutionality of Arizona’s minimum wage increase to $10 an hour. Voters approved the increase in November, and the challenge was brought by the Arizona Chamber of Commerce and Industry and other business groups.

The state Supreme Court unanimously rejected the challenge. Proposition 206 raised the state’s minimum wage to $10 an hour in January 2017. Incremental increases continue until 2020, when it will increase to $12.

Four people have been indicted in a 2014 cyber-attack on Yahoo email accounts. The indictment charges two officers of the FSB, Russia’s Federal Security Service, and two hackers who allegedly worked together with them to crack 500 million Yahoo user accounts.

Cyber security specialists have long said the Kremlin employs criminal hackers for its geostrategic purposes. They say the arrangement offers deniability to Moscow and freedom from legal troubles for the hackers.

3M said it would buy Johnson Controls’ safety gear business, Scott Safety, in deal valued at $2 billion. Scott Safety makes respiratory and protective equipment and other safety products for firefighters, industrial workers, police squads and the US military.

Oracle’s cloud business had a huge quarter. The business-software maker announced better-than-expected adjusted revenue and profit, helped by sales at its cloud business surging 62% to $1.19 billion

Adobe Systems stock jumped after the company delivered earnings and revenue that beat expectations.

Cold weather luxury apparel retailer Canada Goose’s stock rocketed 25 percent in its first day of trading. The stock trades under the ticker GOOS.

Amazon is ready to do to the local liquor store what it did to the local book store. It is rolling out free beer and wine 2-hour delivery and $7.99 1-hour delivery for Prime Now members, starting in Cincinnati and Columbus, Ohio.

Financial Review

Suicide is Painless

Sinclair Noe — March 6, 2017

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

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DOW – 51 = 20,954
SPX – 7 = 2375
NAS – 21 = 5849
RUT – 9 = 1384
10 Y flat = 2.49%
OIL – .12 = 53.21
GOLD – 8.80 = 1226.50

On this date in 2009, the S&P 500 hit an intraday low of 666; the closing low was 3 days later but the intraday low was 8 years ago.

On Friday, Fed chair Janet Yellen signaled that an interest rate hike would likely come when Fed leaders meet next week. A March rate hike is now being priced into the markets. About the only thing that could change the Fed’s plan is weak economic data, giving extra significance to Friday’s jobs report.

In January, according to DOL’s Bureau of Labor Statistics, the economy added 227,000 jobs; unemployment was at 4.8 percent; and hourly earnings rose 0.1%. The US probably created a healthy 200,000 new jobs last month, keeping the unemployment rate below 5%.

North Korea fired four ballistic missiles early today. Three landed within a couple hundred miles of Japan, in what Japan considers an exclusive economic zone. The United States has about 28,500 troops and equipment stationed in the South, and plans to roll out the Terminal High Altitude Area Defense anti-missile defense system by the end of the year. And the ongoing provocative actions by North Korea insinuate that somehow that country is skirting sanctions.

The United Nations Security council recently issued a report claiming Malaysian companies are acting as a front in an arms sales operation, and requesting suspect companies’ assets be frozen. Malaysia has denied the claims but otherwise not responded to the UN claims.

China recently announced it would stop all imports of coal from North Korea but the UN report raises concerns about front companies operating in China continuing to do business with North Korea. As early as December 2016, China had blown past a UN-imposed ceiling of 1 million metric tons on coal imports, purchasing twice that amount.

China then shrugged off a requirement to report its North Korean coal imports to the UN Security Council sanctions committee. North Korean banks and firms, meanwhile, have maintained access to international financial markets through a vast network of Chinese-based front companies, enabling Pyongyang to evade sanctions.

President Trump signed a revised executive order today banning citizens from six Muslim-majority nations from traveling to the United States but removing Iraq from the list, after his first attempt was blocked in the courts.

The new order keeps a 90-day ban on travel to the United States by citizens of Iran, Libya, Syria, Somalia, Sudan and Yemen. Iraq was taken off the banned list because the Iraqi government has imposed new vetting procedures, such as heightened visa screening and data sharing, and because of its work with the United States in countering ISIS militants.

Secretary of State Rex Tillerson told reporters after Trump signed the new order that, “It is the president’s solemn duty to protect the American people.” The new order spells out detailed categories of people eligible to enter the United States, such as for business or medical travel, or people with family connections or who support the United States. Trump’s original ban resulted in more than two dozen lawsuits in US courts.

Today’s revised order is likely to face legal challenges as well.

Demand for travel to the United States over the coming months has flattened out following a positive start to the year, with uncertainty over a possible new travel order likely deterring visitors, per ForwardKeys, a travel analysis company which analyses 16 million flight reservations a day from major global reservation systems.

Overall, bookings for travel to the United States over the next three months are 0.4 percent down on last year, whereas they had been 3.4 percent ahead the day before the travel restrictions were imposed. Per travel search site Kayak, searches from Europe for flights to the U.S. are down by 12 percent since the elections.

However, Germans, some of the world’s biggest spenders on travel, have not been deterred, with searches up 10 percent in that period.

General Motors has agreed to sell its European division to Peugeot. The deal will total $2.3 billion and consist of GM’s sales of its unit containing Opel and Vauxhall for $1.3 billion and its European GM Financial arm for $1 billion. GM will take a $4 billion charge on the sale. The Opel deal continues a business theme for GM. Earlier, the company had pulled out of Russia and discontinued its Chevrolet brand in Europe. It had also ended auto manufacturing in Australia.

Deutsche Bank is raising cash. Shares of the German investment bank are down by more than 6% after the company announced it would tap the markets for $8.5 billion to help improve its financial health after two years of heavy losses. Germany’s biggest bank announced plans for the huge share sale on Sunday along with another overhaul of its strategy.

CEO John Cryan said in a release: “The new three-pillar structure of our operating business should position us for significant growth, both in revenues and earnings.” This marks the fourth time Deutsche has raised capital since 2010. The four add up to a total of about $32 billion, more than the bank’s current market value.

Standard Life and Aberdeen Asset Management are merging. The deal to combine the two investment firms values the combined entity at about $13.4 billion. The merger will create the largest asset manager in Britain.

Wells Fargo execs may face criminal charges, (don’t hold your breath); but Reuters reports the US Department of Justice is investigating whether Wells Fargo executives hid details of the company’s recent scandal from the company’s board and regulators.

Wells Fargo disclosed in a $190 million settlement with regulators in September that staff opened as many as 2.1 million checking, savings and credit card accounts without customer consent over several years to satisfy management’s sales quotas.

Officials are seeking to find out if executives shared everything they knew about the phony accounts to the Wells Fargo board of directors and the Office of the Comptroller of the Currency, the lead regulator for national banks.

Greece’s economy suffers a setback. Greece’s economy shrank by 1.2% in the fourth quarter of 2016, per the latest data from the country’s statistical service Elstat. That was worse than the previous estimate of a 0.4% contraction.

Alphabet, Google’s parent company, is suing Uber for theft of trade secrets, alleging that one of the top engineers in its self-driving car program decamped with thousands of confidential files, including designs that helped him start self-driving truck company Otto and then quickly sell it to Uber. Uber denies those claims.

Hope you enjoyed yourself with that Snapchat IPO, because the fun’s just about over, at least for now, according to a weekend feature on Barron’s .  You can start by trying to justify this crazy number: A market cap that surged at one point to $37.8 billion means 93 times its 2016 revenue of $405 million, with no profits expected until at least 2019. Several analysts initiated coverage of Snap as a “sell.” And many shareholders apparently felt it was a good time to pocket profits, as shares slid 7% today.

TG Therapeutics said a late-stage study testing a combination of its experimental cancer drug, in combination with an existing drug from AbbVie proved superior in high-risk patients with a common form of leukemia. The trial involved adult patients with high-risk chronic lymphocytic leukemia, who had undergone at least one prior therapy. TG Therapeutics more than double in share price intraday.

A strain of bird flu has been detected in a chicken breeder flock on a Tennessee farm contracted to Tyson Foods. Tyson, the biggest chicken meat producer in the United States, said in a statement it was working with state and federal officials to contain the virus by euthanizing 73,500 birds on the contract farm. In 2014 and 2015, during a widespread outbreak of bird flu, the United States killed nearly 50 million birds, mostly egg-laying hens.

The Arizona state Supreme Court is scheduled to hold a hearing Thursday on a challenge to a minimum wage increase. Last year, voters passed a measure to raise the state’s hourly minimum to $12 by 2020, up from $8.05. Under the measure, the minimum increased to $10 in January. In a court order issued last month, Chief Justice Scott Bales said “the court will limit arguments to whether [the measure] violated a state constitutional provision that requires ballot measures to identify a funding source.”

Even though the state is exempted from the measure, the Arizona Chamber of Commerce and other business interests argue it will be impacted because of increased wages for private sector employees under state contracts. Any relief from the court would appear to be limited to state contractors and not private employers, unless the court agrees with the business groups’ arguments that the entire measure is unconstitutional.

The chamber and other business interests went to court after Prop. 206 passed with support from 58 percent of voters. The measure gradually raises the state’s minimum wage to $12 an hour by 2020 and requires employers to provide paid sick leave. The first step — an increase to $10 per hour — took effect Jan. 1. The sick-leave provision is scheduled to begin July 1.

Just 6% of U.S. adults who expect to receive a tax refund this year plan to splurge on something such as a vacation or shopping spree. According to a new Bankrate.com report, the most popular uses for the money are much more practical: save or invest it (34%), spend it on necessities such as food or utility bills (29%) and pay down debt (27%). Approximately 47% of all taxpayers anticipate a refund this year. Millennials are the most likely to receive refunds, the most likely to save/invest them and the most likely to have filed early.