Financial Review

The Accord

Sinclair Noe — May 31, 2017

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

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DOW – 20 = 21,008
SPX – 1 = 2411
NAS – 4 = 6198
RUT – 1 = 1370
10 Y – .02 = 2.20%
OIL – 1.03 = 48.63
GOLD + 5.80 = 1269.60
BITCOIN + 3.27% = 2406.36
ETHEREUM – 1.46% = 228.19

President Trump could pull the United States out of the Paris climate accord. Trump refused to endorse the landmark climate change accord at a summit of the G7 Saturday in Italy, saying he needed more time to decide.

The accord, which has been agreed to by 195 countries and ratified by 147 countries since it was signed in December 2015, established a specific set of tools to help countries cut greenhouse gas emissions over time.

Its goal is to hold global warming below 2 degrees Celsius and to avoid the worst risks of a warmer planet. While it’s certainly not the end-all, be-all scheme to reverse global warming, the agreement is the most comprehensive international effort yet to tackle the climate problem, even though compliance is voluntary.

Trump has been dithering on the decision for months, thanks to a tug-of-war playing out among his advisers. He’s already rolled back the policies that would ensure we might make our commitment to Paris, so effectively, he’s stepped out of the accord before officially doing so.

Scientists have been warning us for years that a rise in global average temperature more than 2 degrees Celsius will mean widespread stresses on food and water, sea level rise, and conflict and suffering. To try to avert the worst of these threats, countries agreed to dramatically cut emissions as part of the Paris accord.

But it is essentially a nonbinding agreement and wasn’t ratified by the Senate. So, leaving could be pretty simple, though it will take about four years to formally do it. In the meantime, US officials could stop participating in climate talks. And Trump could pull out of the underlying UN Framework Convention on Climate Change.

That could happen in a just a year’s time and would send the message that the US is done with international cooperation on climate change. A third option is that Trump could declare that the Paris deal is a legal treaty that requires Senate approval.

Such a vote would fail, and then Trump would have Senate backing to not abide by the deal, which he deems a treaty. A letter that 22 Senate Republicans sent to Trump this week urging him to withdraw from the deal, increases the odds of this happening.

Pulling out of the Paris accord could cause serious diplomatic damage. The countries of the world care about climate change. They see it as a profound threat. A decision to withdraw would also fly in the face of nearly across-the-board support for Paris among top American companies, in sectors ranging from oil and gas to retail, chemicals, utilities, agriculture, finance, information, and autos.

The CEOs of ExxonMobil, Apple, Dow Chemical, Unilever and Tesla were among those urging Trump to remain in the agreement, with Tesla’s Elon Musk threatening to quit White House advisory councils of which he is a member if the president pulls out.

Business leaders know climate change is real. They know Paris is an agreement they can work with. They know having US negotiators at the table to protect their interests on matters like intellectual property and trade is crucial.

They know that the transition to clean energy is one of the biggest economic plays of this century, that climate change is a major driver of this transition, that the United States is perfectly positioned to lead with our unmatched culture of innovation, but that opting out of Paris will undermine this opportunity to expand markets, create jobs and build wealth.

In late 2015, Exxon came under fire when New York’s attorney general opened an investigation into whether Exxon misled investors about the effects of climate change. Exxon’s scientists had allegedly been telling company leadership that climate change was an issue as early as the 1970s and ‘80s, but Exxon executives cast doubt on the idea publicly for decades.

Now, Exxon backs the Paris accord. Today, 62.3 percent of investors in Exxon Mobil voted for the company to produce an annual report on the impacts of climate change policies on the company’s business. According to a copy of the resolution, the investors want Exxon to “publish an annual assessment of the long-term portfolio impacts of technological advances and global climate change policies.”

They also instruct the company to annually assess the financial risks of “a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2-degree target.”

We are far past the point when we should be discussing whether climate change is a live risk. The Pentagon calls it a “threat multiplier” in vulnerable regions of the world. The National Intelligence Council says climate change “will almost certainly have significant effects, both direct and indirect, across social, economic, political, and security realms during the next 20 years.”

Firms like BlackRock, Goldman Sachs, Citigroup, and Shell, among others, have produced serious climate reports focused on the transition needed to meet the goals of Paris.

And just look at the signals from nature, at the dozens of “100-year” events—floods, superstorms, droughts, wildfires, record heat waves—taking place in the United States and around the world in recent years. Weather-related losses have tripled since the 1980s.

In the United States, the already strong efforts of our states and cities will loom even larger. States from California, Washington, and Oregon to Minnesota, Illinois, New York, New England, and many others are dedicated to strong climate action and will examine whether there is still more that they can do. Many more states, both red and blue, are charging ahead in developing wind and solar energy.

The dozen US cities that are part of the global C-40 group on climate change account for 25 percent of US population and 30 percent of US GDP. In Mexico City last December, they promised to deliver action, regardless of what the new Trump administration decided to do.

Business also has a crucial role to play in driving the clean energy transformation. The boom is well under way. Wind and solar accounted for two-thirds of all new electric capacity in the United States in 2016. Costs of wind and solar have dropped over 80 percent in the past eight years for solar PV and over 60 percent for wind.

And hi-tech advances are happening all the time, in battery storage, materials science, electric vehicles, and other key elements of the transition. It would be a mistake for companies to bet on a go-slow, “Trump” phase. The transition to clean energy is the smart bet for businesses and investors need to keep their eyes on the prize and not get distracted by the ideological wars of Washington.

While US withdrawal from the Paris accord might cause some other countries to pull back from their commitments to clean energy, it will likely encourage others to step up efforts to fill the void. China has just announced that electric cars are going to account for essentially all growth of car sales as of now.

China’s “road map” plans to have 20% (7 million) of new annual sales to be electric vehicles by 2025 (that is in 8 years), with 2 million electric car sales by 2020. In an extraordinary move China is seeking 8% of new car sales in China being electric vehicles in 2018 (next year). This is not only an emerging problem for the oil industry, it is also a big problem for foreign car makers without electric cars available in China next year.

Many foreign manufacturers are paying attention to China. The latest news means that if you don’t have electric cars or Chinese electric car making partners, then the Chinese market is going to be challenging. BMW has announced that it is prepared to meet the Chinese Government targets. Daimler projects electric vehicles and hybrids will account for up to 35% of worldwide sales in the next 7 years.

And the story for Indian electric car/Internal combustion engine substitution is similar, if not more dramatic (all vehicles electrified by 2032). The scale of the projected changes is huge: 1 Gigaton of CO2 emissions saved and savings of $60 billion in annual petrol/diesel costs in 2030. India is projected to be the 3rd largest automotive market by 2026.

Oil giant BP’s 2016 future energy report barely mentioned electric cars (less than 1.5% penetration by 2035). In its 2017 Energy Outlook, BP had penetration of BEVs at ~4.5% by 2035. BP has projected that the expansion of future oil demand would be dominated by China and India. Now China is saying that it plans to have electric vehicle penetration at 20% of new sales in 2025. And that might be conservative.

Self-driving electric cars are ten times cheaper to run than fossil-based cars, with an expected lifespan of 1 million miles. The only thing holding them back is battery power. The “tipping point” could arrive over the next two to three years as EV battery ranges surpass 200 miles and electric car prices in the US drop to $30,000.

By 2022 the low-end models will be down to $20,000. After that, the avalanche will sweep all before it. What the cost curve says is that by 2025 all new vehicles will be electric, all new buses, all new cars, all new tractors, all new vans, anything that moves on wheels will be electric, globally.

Revolutions have a way of creeping up on you.

Financial Review

Progress Not Perfection

Sinclair Noe — July 15, 2016

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

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DOW + 10 = 18,516
SPX – 2 = 2161
NAS – 4 = 5029
10 Y + .06 = 1.60%
OIL + .27 = 45.95
GOLD – 3.80 = 1331.80

Another record high close for the Dow Industrials; six straight winning sessions, and since the June 27 lows following the Brexit vote, the Dow Industrials have added just over 1453 points, or an 8.5% gain in less than 3 weeks.

Consumer prices rose in June for the fourth straight month as the cost of gasoline, rent and medical care continued to go up. The consumer price index increased a seasonally adjusted 0.2% last month; the CPI is a measure of inflation at the retail level. Overall inflation remains low. The consumer price index has risen 1% in the past 12 months. And the multi-year trend is disinflationary. Real or inflation-adjusted hourly wages, meanwhile, fell 0.2% in June to mark the second drop in three months. Hourly pay has risen a scant 1.5% in the past 12 months.

The higher cost of gas accounted for much of the increase in inflation in June. Energy prices rose 1.3%. What’s also helping households is the biggest sustained drop in grocery prices since 2010. The so-called food at home index fell 0.3% in June, and it’s down 1.3% in the past 12 months. The core rate that excludes food and energy rose 0.2% in June and increased at a 2.3% annual pace. Yet other key expenses for consumers such as housing and medical care have gotten costlier. Rents rose 0.4% in June and the price of prescription drugs jumped 1.3%. Rent in particular is denting the pocketbooks of consumers, especially people moving into new apartments. Longtime home owners with low mortgages are faring much better.

Retail sales rose a seasonally adjusted 0.6% to mark the third straight strong gain. The surge in spending was led by home-and-garden centers and online stores. Online retailers led by Amazon boasted a 1.1% increase in sales in June. Gas stations and even department stores, lately the industry laggards, also recorded strong sales. Gas prices increased in the spring and early summer, though prices have since leveled off. Sales at apparel stores fell 1%, restaurants lost business and sales at purveyors of electronics and appliances were flat. Auto dealers registered a 0.1% increase. Purchases of new cars and trucks were softer than expected last month.

 Industrial production in June grew 0.6%, the fastest monthly rate in eleven months. Despite the gains, the factory sector is still struggling. For the second quarter as a whole, industrial production fell at an annual rate of 1%, its third consecutive quarterly decline and the fifth out of the past six. Compared to a year ago, production was down 0.7%. Manufacturing has been hurt by the strong dollar and the drop in oil prices.

The University of Michigan said its consumer sentiment index fell to 89.5 in July, a three-month low, from 93.5 in June. Prior to the Brexit vote, virtually no consumer thought the issue would have the slightest impact on the U.S. economy. Following the Brexit vote, it was mentioned by record numbers of consumers, especially high income consumers.

Three Fed policymakers, James Bullard, Robert Kaplan and Dennis Lockhart, all expressed the view yesterday that there’s no hurry to raise interest rates in the wake of the Brexit vote, despite signs that the U.S. is near full employment. Kansas City Fed President Esther George differed on the outlook, stating she would keep an eye on recent market volatility, but stressed that rates were too low for the strength of the economy.

Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits of companies in the S&P 500-stock index will fall 5.6 percent compared with a year ago; the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.” LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely. Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985. The third is the one we’re in right now, and it is not done playing out.

Citigroup reported quarterly earnings and revenue that easily beat analysts’ expectations, even as earnings and revenue dropped from the year-earlier quarter. The company posted second-quarter earnings per share of $1.24, compared with $1.51 a share in the year-earlier period. Revenue for the quarter came in at $17.5 billion, against the year-earlier figure of $19.1 billion.

Wells Fargo reported net income fell from $5.4 billion to $5.2 billion, even as revenue was higher. That’s a bad combination – it means net margins are down or expenses are up, or both. Part of the problem for Wells Fargo is that they have to set aside more provisions for loan losses.

The Federal Trade Commission settled with Herbalife, effectively determining that the nutritional supplement marketer is not a pyramid scheme. However, the FTC did warn Herbalife that it will need to prove that its business model is legitimate going forward. Separately, the company said Carl Icahn and his interests have retained the right to boost their ownership stake of Herbalife to 34.99 percent, up from a previous maximum of 25 percent. Icahn currently owns about 18 percent of Herbalife’s outstanding common shares.

Fiat Chrysler Automobiles is investing more than $1 billion in its assembly plants in Illinois and Ohio, retooling them to boost production of its Jeep Cherokee and Wrangler. Sales of Fiat Chrysler’s Jeep brand rose 17% in June and accounted for 42.5% of the company’s total U.S. sales.

The gavel is finally poised to drop in the drawn-out auction for Yahoo’s core internet business. Final bids for the services, which include its search, email, advertising and media operations, are due Monday, with the board set to make a decision soon afterward.

Costs from BP’s deadly 2010 Gulf of Mexico oil spill will rise by an additional $5.2 billion and ultimately cost $62 billion in pay-outs for one of the worst environmental disasters in U.S. history. The pretax charge for BP’s second quarter will also likely be the last from the Deepwater Horizon accident to have a “material impact” on its financial performance.

A federal appeals court sided with Microsoft in a case over whether the U.S. government could force the company and other tech companies to hand over customer emails stored overseas. The decision reverses a 2014 court order that required Microsoft to turn over email content stored on a server in Ireland. The court found that the federal Stored Communications Act only applies to data stored in the United States — and thus can’t be used to force a company to produce information from servers outside the country. Without the warrant, the government has to go through a much lengthier process set up through a mutual legal assistance treaty with the Irish government to obtain the data. Ireland filed a brief supporting Microsoft in the case, as did many tech companies, including Apple and Cisco.

There is no question that we live in amazing times. You can use your cell phone to look at a map of almost any place in the world, and not just look at the map, but zoom in to street level to look at the trees and buildings. Google Street view has even gone to Mount Everest and the Great Barrier Reef. Still, there are some places…, such as the Faroe Islands, an archipelago between Scotland and Iceland. They have streets and a few cars, but so far, no Google Street View. If Google Street View won’t come to the Faroe Islands, the Faroe Islands will bring 360-street views to them and the world. The islands’ tourism board is strapping 360 degree cameras onto sheep. Each minute, photos and GPS coordinates taken from the sheep are sent back to the tourism board. They’re then uploaded to Google Street View. Progress, not perfection.

Financial Review

Groundhog Day EP

Sinclair Noe — February 2, 2016

Podcast: Play in new window | Download (Duration: 20:26 — 9.4MB)

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DOW – 295 = 16,153
SPX – 36 = 1903
NAS – 103 = 4516
10 Y – .10 = 1.86%
OIL – 1.74 = 29.88
GOLD + 1.00 = 1130.00

A big move for stocks and bonds today. While a 295 point drop, or 1.8%, in the Dow will attract some headlines, we also saw a less flashy move in bonds, with the yield on 10-year Treasuries drop 10 basis points, to 1.86% – that’s a 5.2% drop. After hitting resistance levels from October, yields continued dropping to lows last seen in April.

Stocks moved lower again, following the trail of oil prices, which dropped 5.5% today to close below $30 a barrel. Not a big surprise because the trend has been lower, and a trend in place is more likely to continue than it is to reverse. We are definitely in a downtrend. The S&P 500 is now right at 10% below its May record, which means correction territory, not a bear market, although many stocks in the S&P are in bear market territory –  specifically the energy stocks.

The rally last week looks like not much more than end-of-month reshuffling, which happened at the same time the Bank of Japan surprised the markets with negative interest rates, but the BOJ can’t announce negative interest rates every day.

Right now, any rally tends to be short and sharp. In other words, last week’s rally was not enough to reverse the trend. That means we can expect the S&P 500 to re-test the recent closing low of 1859, set on January 20. There should be a strong floor, or support, right around 1860 to 1870. Any breakdown from those levels and it is Katy bar the door, or maybe Katy short the Spiders.

While earnings growth for the S&P 500-stock index is forecast to come in negative, year-over-year, and earnings growth for the MSCI Europe has been stagnant for an astonishing 48 months, the picture brightens considerably once energy is taken away. Excluding the sector, year-on-year earnings growth in both the US and Europe reach 5 percent and 4 percent, respectively.

When you hear that earnings season is terrible, or that corporate earnings are collapsing; the reality is that commodity sector earnings are collapsing and the rest of the market is still seeing moderate growth. And while the breakdown in the commodity sector has the potential to drag down the broader market, particularly as we see asset write-downs and credit defaults; for now, the benefits of lower oil are acting as a counter balance to the negatives.

This is a very busy week for earnings reports, and today featured results of some of the Big Oil companies.

Exxon Mobil, the largest oil company by market cap, reported a 58% drop in quarterly profit and said it would cut spending this year by one-quarter, to around $23 billion.  Capital outlays that peaked at $42.5 billion in 2013 have been reduced by 45%. That represents the leanest spending plan since 2007. Still, the cutbacks have not really served to reduce production yet.

Exxon said its oil and gas output rose 4.8% in the fourth quarter as it pumped more crude oil. Fourth-quarter net income fell to $2.7 billion, or 67 cents a share, from $6.5 billion, or $1.56, a year earlier. The per-share result was 4 cents higher than estimates. Exxon is the only super-major oil company so far to report better-than-expected fourth-quarter results.

One area where Exxon will make big cuts is in its share buyback program.  Exxon has spent more on share buybacks than any other company in the past 10 years, $210 billion. It far surpasses second-place Microsoft Corp, which has bought back $125 billion in that time. For the first time in 15 years, Exxon will only buy back shares to offset dilution as opposed to return cash to shareholders. Exxon will still use some buybacks for employee benefit plans and options programs.

Some investors worry that oil companies will not spend enough on research and development and new tech, either to sustain growth in their core businesses, or to open options in alternative energy sources for a world in which oil and gas consumption is constrained by climate policy or high prices.

Last September, the Rockefeller Brothers Fund, founded by the sons of the great oilman John D Rockefeller, said it planned to sell its holdings in fossil fuel companies, in part because the family believed renewable energy was the business of the future. The fund suggested the successors to John D’s Standard Oil were failing to grasp the opportunities that he would have seized. And even basic oil exploration and drilling has gone high tech, requiring massive computing power to analyze geophysical data from seismic surveys.

Last year Exxon spent just over $1 billion on R&D, or about 0.2% of total revenue, and just a fraction of what it spent on share buybacks. In 2008, Exxon spent $847 million on R&D but $35 billion on share buybacks. All of which raises the question of what Exxon will do if oil prices remain low.

For now, Exxon posted a profit for the quarter, down but still a profit. And lower oil prices lead to lower feed-stock costs, and as a result the margins in the refining segment have improved and should provide some tailwind. Exxon has managed to maintain a steady share price in the face of lower oil prices, but now they won’t be playing that game with share buybacks. Others might not be so lucky.

BP has reported its worst annual loss in 20 years (even weaker than its 2010 results that included the costs of destroying the Gulf of Mexico). For 2015 as a whole, the company announced a loss of $6.5 billion, and a loss of $3.3 billion in the fourth quarter. BP repeated a commitment it made last month to cut 4,000 jobs this year in its exploration and production unit, and that’s in addition to 3,000 workers from its marketing and refining business by the end of 2017.

PetroChina said last week it expects 2015 profit to fall at least 60 percent. Chevron on Friday reported its first quarterly loss since 2002, while Royal Dutch Shell Plc said last month that fourth-quarter profit is likely to drop at least 42 percent.

Standard & Poor’s has lowered its credit rating on Royal Dutch Shell and placed BP, Eni, Repsol, Statoil and Total on ratings watch with potential negative implications.

Dow Chemical blew past fourth-quarter profit and sales estimates. The company said it had net earnings of $3.5 billion in the fourth quarter, up from $734 million in the year earlier period. Lower oil prices meant higher profits for Dow’s plastics unit. Also today, Dow Chemical CEO Andrew Liveris said he would retire by mid-2017, following the merger of the company with fellow chemical and seeds producer DuPont.

United Parcel Service reported better-than-expected earnings in the most recent quarter as growth in international package delivery drove profitability. UPS also offered upbeat earnings guidance for the current year. For the quarter, UPS posted earnings of $1.33 billion, or $1.48 a share, up from $453 million, or 49 cents a share, a year earlier. In the domestic segment, profit rose an adjusted 18%. Daily shipments ticked up 2.4%, helped by strong demand from e-commerce shippers. UPS benefitted from lower fuel costs, but that was offset in part by acquisition costs of Coyote Logistics, as well as headwind from a stronger dollar on international operations.

Pfizer reported better-than-expected results for its fourth quarter thanks to last year’s acquisition of Hospira and strong sales of new drugs, but the pharmaceutical giant offered soft guidance for 2016. The guidance excludes any impact from its inversion deal with Allergan, which would move Pfizer’s headquarters to Ireland.

Michael Kors Holdings reported fiscal third-quarter profit and sales that beat expectations. Despite their beat, Kors’ comparable sales declined 0.9 percent; not as bad as expected, and that was good for a 24% gain today. The handbag bubble seems to have popped: For a variety of reasons, Americans just aren’t buying purses and bags like they used to. Michael Kors and other affordable US luxury brands, such as Coach and Kate Spade, have been hurting, especially as Americans show less willingness to pay full price for their bags. But the company said it found sales in a couple of places, including new store openings, and most notably, online.

Automakers reported January sales today. General Motors, Fiat Chrysler and Nissan reported surprise sales gains instead of the predicted declines, while drops at Ford, Toyota, and Honda were narrower than projected. The annualized selling rate adjusted for seasonal trends came in at a better-than-expected 17.6 million. Volkswagen reported sales dropped 15%.

The clock is ticking for Volkswagen to submit a repair plan covering 80,000 U.S. diesel SUVs and larger cars with emission levels over allowable levels. The California Air Resources Board set a deadline of February 2 for VW to come up with a remedy. Last month, California rejected VW’s proposal to fix 482,000 2.0 liter cars, calling it “substantially deficient.”

After the closing bell, reports from Yahoo and Chipotle.

Yahoo reported a 15% drop in adjusted quarterly revenue as it struggles to keep its share of online search and display advertising. Yahoo’s revenue fell to $1 billion from $1.18 billion. The company reported a loss of $4.43 billion, or $4.70 per share, in the quarter, compared with a net income of $166.3 million, or 17 cents per share, a year earlier. Excluding items, Yahoo earned 13 cents per share, in line with analysts’ average expectations.

Yahoo said it was exploring strategic alternatives in addition to the continued pursuit of the reverse spin-off of its Internet business. The company also said it would cut about 15 percent of its workforce and close offices in five locations. The company said it would simplify its product portfolio and that it had begun to explore divesting non-strategic assets.

Chipotle Mexican Grill reported a decline in quarterly revenue for the first time in its history as a public company, as a string of illness outbreaks linked to its restaurants contributed to a 44% drop in fourth-quarter profit.

Chipotle also said it was served with a subpoena on Jan. 28, widening the scope of a federal probe into an outbreak of foodborne disease disclosed in January. The new subpoena requires Chipotle to produce documents related to companywide food safety dating back to January 2013. Yesterday, the CDC said the two E. coli outbreaks that sickened 60 customers appeared to be over.

Chipotle said revenue fell 6.8% to $997.5 million, narrowly missing the $1 billion estimate. It is the company’s first decline in quarterly sales since going public in 2006.  Chipotle reported a profit of $67 million, or $2.17 a share, down from $121 million, or $3.84 a share, a year earlier.

Yesterday, the World Health Organization declared the Zika outbreak to be a global emergency. Zika also turned out to be bad for a car company in India.  Last year Tata Motors introduced a new hatchback; they touted the car as the next big thing, a good looking zippy car. And that’s how they came up with a name for the car; they shortened and combined zippy and car: Z-I and C-A, Zica. Spelled differently but pronounced the same as the virus. They will introduce a new name for the car in about a week.

On a more serious note, Sanofi has launched a project to develop a vaccine against the Zika virus in the most decisive commitment yet by a major vaccine producer to fight the disease linked to multiple birth defects in Brazil. The French drug maker said its Sanofi Pasteur vaccines division would use its expertise in developing vaccines for similar viruses such as yellow fever, Japanese encephalitis and, most recently, dengue. The closest vaccine prospect so far may be from a consortium including US biotech company Inovio Pharmaceuticals, which could potentially have a vaccine ready for limited emergency use before year-end.

Health authorities in Dallas, Texas said today that a local resident has contracted the Zika virus—the first confirmed case to be transmitted within the United States since the current outbreak began.

Yesterday’s settlements by Barclays and Credit Suisse for misrepresenting their private stock trading sites are unlikely to be the last as regulators continue to pursue abuses in electronic trading. According to the research firm Tabb Group, about 42% of the average daily trade volume is handled in the “dark,” meaning information about trades isn’t publicly known before they are executed. While the pools have existed for decades, they have become more popular in recent years due to the increase in high-frequency trading.

Lumber Liquidators has been ordered by the Department of Justice to pay $10 million for violations of the Lacey Act – a law for the protection of plants, fish and wildlife. The company told U.S. officials the timber for its wood flooring came from Germany rather than the actual source — the habitats of endangered Siberian tigers in Southeast Asia. Lumber Liquidators is also under a separate investigation into charges that its laminate products from China contain excessive levels of formaldehyde.

Yesterday we told you that Alphabet reported better than expected earnings and the stock moved higher in after-hours trade, pushing the market capitalization past Apple, to make Alphabet the most valuable company in the world.

Just in case you were wondering about the other corporate giants, here’s a rundown of the Top 10: Alphabet (formerly Google), Apple, Microsoft, Facebook, Berkshire Hathaway, Exxon Mobil, Johnson & Johnson, General Electric, Amazon.com, and Wells Fargo. It’s not until you get to the 11^th spot on the list that you find a foreign company, Nestle, valued at a mere $236 billion.

Financial Review

The Best Story

Sinclair Noe — October 6, 2015

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

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DOW + 13 = 16,790
SPX – 7 = 1979
NAS – 32 = 4748
10 YR YLD – .02 = 2.03%
OIL + 2.78 = 49.04
GOLD + 11.70 = 1148.60
SILV + .22 = 15.99

The U.S. trade deficit increased to a five-month high of $48.3 billion. The trade gap was 15.6% higher compared to a revised $41.8 billion deficit in July. U.S. exports dropped 2%;  exports have fallen 6% compared to one year ago, hurt by a rising value of the dollar that’s made American goods and services more expensive overseas. Most other economies are not performing as well as the U.S. and that’s also limiting demand.

A slowdown in emerging markets driven by weak commodity prices forced the International Monetary Fund to cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent. Next year the world economy is expected to expand 3.6 percent, less than the 3.8 percent projected in July. Brazil and Russia’s economies are contracting, Japan and the euro area are struggling, and long-time growth engine China is decelerating.

The IMF advised emerging markets to be ready for the U.S. to tighten monetary policy, urged advanced economies to address “crisis legacies” and suggested nations consider the “compelling” case for public infrastructure investment at a time of very low long-term interest rates. The G-20 meets this week in Lima, Peru.

Officially joining the 0% bond club, the U.S. Treasury sold a new government security on Monday containing a three-month maturity and a yield of zero for the first time on record. In essence, buyers gave a free short-term loan to the government in exchange for a highly liquid debt instrument for their portfolio. The result adds to the diminishing expectations, stoked by Friday’s disappointing jobs report, that the Fed will keep interest rates at basement levels throughout 2015.

The U.S. Treasury can’t sell bills below 0%, but once sold at auction the bills can trade however they trade. In early morning trade, the 3 month bill traded at negative 0.003%, but finished the session with a positive yield. The three-month yield also briefly went negative on September 25 and on October 1 and July 13, but has otherwise been in positive territory all year.

Despite the financial turmoil in China and unexpected devaluation, the yuan has now become the world’s fourth-most-used payments currency, edging out Japan’s yen for the spot. According to international payments provider Swift, the renminbi accounted for 2.79% of global payments in value terms in August; although it still trailed the U.S. dollar (44.8%), euro (27.2%) and British pound (8.5%). As recently as August 2012, the yuan only ranked number 12 with a 0.84% share, but Chinese authorities have since aggressively promoted international use of the currency.

Europe’s highest court struck down an international agreement that had made it easy for companies to move people’s digital data between the European Union and the United States. The ruling, by the European Court of Justice, could make it more difficult for global technology giants to collect and mine online information from their millions of users in the European Union. The court declared the data-transfer agreement, which is known as Safe Harbor, immediately invalid.

In its ruling, the court said that the Safe Harbor agreement was flawed because it allowed American government authorities to gain routine access to Europeans’ online information. Such access infringes on Europeans’ rights to privacy. The ruling follows revelations from former National Security Agency contractor Edward Snowden about the Prism program that allowed U.S. authorities to harvest private information directly from big tech companies such as Apple, Facebook, and Google.

Yesterday we reported that 11 countries had reached agreement on the Trans-Pacific Partnership, a trade pact that would cut trade barriers on a bloc that includes 40% of world economic output, and that it was pretty much a done deal. Well, not exactly. The negotiations were wrapped up over the weekend; the actual deal, whatever it is, must still be ratified by the leaders of each country and ratified by their legislatures, where support for the deal is not universal.

In the US, expect a tough fight to push it through Congress next year. And even though negotiators came to some sort of agreement, they have not presented the text of the agreement to the public, and negotiators say it will take at least a month to prepare the text. So, it really isn’t a done deal, in large part because almost nobody knows what the deal is.

Corelogic reports home prices rose 1.2% in August to extend the 12-month gain to 6.9%. CoreLogic forecasts home price growth to slow to 4.3% in the 12 months through Aug. 2016, due to higher mortgage rates and more housing starts. Arizona is still suffering from the housing downturn; home prices are down 25.3% from the peak to current levels.

SABMiller has rejected an informal takeover bid from Anheuser-Busch InBev stating the offer was too low. An initial proposal made last week was worth slightly over 40 pounds a share, but the British firm’s executives and some shareholders regard a deal closer to 45 pounds as fair value. At the higher price, a deal would value SABMiller $110 billion, and would result in the largest merger this year.

Skyworks Solutions has agreed to buy PMC-Sierra for $2 billion in cash. PMC shareholders will get $10.50 per share, representing a 37% premium to the stock’s closing price on Monday. Semiconductor deal making has already reached more than $80 billion in 2015, surpassing every full year on record except 2000, when M&A in the sector hit $115 billion.

Microsoft’s held a big event in New York City to showcase their devices that run across the tech giant’s new, flagship operating system, Windows 10. What’s on tap? Two new versions of Lumia smartphones, a fitness band, an updated Surface Pro tablet to do battle with the Macbook Pro, and more details regarding HoloLens – an augmented reality headset. Microsoft also announced its first retail store in New York, scheduled to open in about 3 weeks.

Microsoft has less than 3% of the smartphone market, but their Windows 10 operating system is on over 100 million devices. So, the challenge is to get their operating system on mobile devices before mobile operating systems take over the desktop and laptop world. The trick is to make systems and apps that flow seamlessly from mobile to desktop, and whoever wins that battle will control operating systems for the near future.

The value of BP’s settlement with the U.S. government and five Gulf states over the Deepwater Horizon oil spill has been confirmed at $20.8 billion, a $2 billion increase from an agreement reached this past July. The agreement is “the largest settlement with a single entity in American history,” U.S. Attorney General Loretta Lynch declared. The deal takes BP’s total budget for the spill to more than $54 billion but resolves all federal and state claims against the company for the accident.

Freeport-McMoRan is considering spinning off its oil and gas business and other strategic alternative to focus on its copper mining business. The Phoenix-based company produces oil and natural gas around the country. Energy companies have been hurt by falling oil prices and weaker demand. Many have cut spending as a result. Earlier this year, Freeport-McMoRan slashed its quarterly dividend 84 percent because of falling oil prices. And in August, Freeport-McMoRan announced a cost-cutting plan due to falling copper prices and soft economic conditions.

Alcoa will unofficially kick off the earnings reporting season on Thursday.

We are already seeing some earnings numbers. PepsiCo reported a better-than-expected quarterly profit as its commodity costs fell and demand for its snacks and non-carbonated beverages rose in North America.

Yum Brands missed Wall Street’s earnings and revenue estimates. Same store sales in China, where it generates more than half of its operating profit, rose just 2 percent. The parent company for KFC, Pizza Hut and Taco Bell dropped 18% in after hours trade. The biggest embarrassment for Yum Brands may be this nugget:  “Year-to-date through October 5, 2015, we repurchased 4.5 million shares totaling $370 million at an average price of $82.” When you consider the response today, that means they paid a 20% premium because they were too stupid to spend the money on building their business.

McDonald’s is now serving breakfast all day. It only took 43 years. In 1972 a franchisee in California introduced Ray Kroc to a breakfast sandwich with Canadian bacon, egg, and cheese on an English muffin. The wife of a McDonald’s executive came up with the name, Egg McMuffin. The all-day breakfast menu is still a bit limited; you can’t get all breakfast items all day; and there are some quirks; you can’t get Egg McMuffins in the South – they sell biscuits down there. The whole idea is still a bit of a gamble because the breakfast menu has lower profit margins than the regular burger-centric menu.

The World Bank reports the number of people living in extreme poverty is likely to fall for the first time below 10% of the world’s population in 2015. World Bank president Jim Yong Kim said, “This is the best story in the world today. These projections show us that we are the first generation in human history that can end extreme poverty.”

Extreme poverty has long been defined as living on or below $1.25 a day, but the World Bank’s adjustment now sets the poverty line at $1.90 a day. The Bank said the change reflects new data on differences in the cost of living across countries, while preserving the real purchasing power of the previous yardstick. Using the new benchmark, the World Bank projects 702 million people or 9.6% of the world’s population will be living in extreme poverty in 2015, down from 902 million people or 12.8% of the global population in 2012.

The World Bank first introduced a global poverty line in 1990, setting it at $1 a day. It was adjusted last in 2008, when the group raised it to $1.25 a day. Basically that $1.90 today buys about the same as $1.00 in 1990. Across the planet, the number of people living in extreme poverty has dropped by more than half since 1990, when 1.9 billion people lived in extreme poverty.

Financial Review

Burn the Doors

Sinclair Noe — July 13, 2015

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

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DOW + 217 = 17,977
SPX + 22 = 2099
NAS + 73 = 5071
10 YR YLD + .01 = 2.43%
OIL – .35 = 51.85
GOLD – 5.30 = 1158.50
SILV – .12 = 15.60

Greece and Eurozone creditors reached a tentative agreement that might unlock about $95 billion in new aid to Greece in exchange for new tough concessions by the Athens government, which included reforms to the pension system, higher taxes, and privatization. However, the €85 billion-euro deal is not official until the Greek parliament on Wednesday passes the deal; and that might be a tough ask given the “no” vote in the recent referendum. Before we get to a Wednesday vote in Athens, there are several Eurozone finance ministers that will have to approve a €12 billion-euro package of short-term bridge financing, to allow the Greek banks to reopen. If the new deal is approved, the bank “holiday” could be lifted as soon as Thursday. And then after that, the Euro Union countries would have to sign off on a deal, unanimously. So, it’s a very complicated deal with considerable risk. Wall Street has never been good at reading the fine print, and stocks moved higher today on the idea that the never-ending negotiations over Greek debt might finally be ending, when in fact, they are just kicking into another gear.

And then even if the all these different governments approve an actual deal, well governments change, and the next government in Athens might not want to be stuck with the deals made by this government. But even if you get past that stumbling block, the deal being offered is even more onerous than the one that was offered 3 weeks ago, which it was widely determined, was unsustainable. In other words, nobody has yet addressed the important concept of how Greece can grow its economy to actually pay back the bailouts. The simple answer is they won’t. In a handful of months, fears over the sustainability of Greek debts will once again grow.

And the idea that privatization will raise the funds is laughable. This is like the story of the man in a mountain cabin, with the winter storm blowing ice and snow outside. He burns through all his firewood, and then he burns the chairs, and then he burns the cabinets, and finally he burns the doors to the cabin.

A couple of months ago, I thought a deal with Greece was inevitable because the cost of failure was too high. In the past month I thought the Troika would try to punish Greece, no matter the cost. Somehow they have crafted a deal that inflicts punishment and persuaded Tsipras to agree to the pain. The quasi-deal agreed to overnight represents the overthrow of the democratically elected government of Greece. Tsipras has surrendered. Greece is no longer a sovereign state. Brussels and Berlin have seized control. Greece needs a modern day equivalent to the Marshall Plan, not more austerity. And the worst damage may be to the Euro Union. If you think this is over, think again.

Meanwhile, we have  story to tell of a debt riddled economy, struggling under failed austerity schemes, unable to pay its debt, sending bond prices tumbling and stocks wobbling, And the creditors smell blood as they circle for the kill. There is no credible plan. No, we’re not talking about Greece anymore; this is Puerto Rico.

Puerto Rican officials are meeting with creditors for the first time since Governor Alejandro Garcia Padilla last month said the commonwealth can’t afford to pay its debts. The IMF has prepared a report suggesting Puerto Rico should try to persuade creditors to exchange old bonds for new bonds with longer maturities and lower debt payments.

Meanwhile, never-ending negotiations seem to be dragging on and on. No, we’re not talking about Greece or Puerto Rico, this time it is Iran. Talks between Iran and six major powers pushed into their 17th day with top Iranian officials saying the talks could go on for days. European officials suggested over the weekend that today was a make-or-break day for the nuclear talks, as both sides said only a final few issues remained to be resolved; so far today, no deal has been made but the talks have not broken down. US diplomats said they wouldn’t be pressured to walk away from talks as long as progress was being made. Who knows? At this point just wait for something conclusive. If the deal is made, we will know because the price of oil will take a big hit.

OPEC lowered its projection for 2015 global oil demand by about 100,000 barrels a day, to 29.2 million a day. That’s more than 2 million a day less than the group’s 12 members pumped last month. Saudi Arabia told OPEC it raised oil production to a record 10.5 million barrels a day in June, exceeding a previous record set in 1980.

U.S. power stations generated 31% of electricity from natural gas in April compared with 30% from coal, research firm SNL Energy estimates, the first time that gas has overtaken coal. In 2010, coal accounted for 45% of power. The milestone has been a long time in coming, with the shale boom causing gas prices to plummet and increasing regulation leading to higher expenses for coal.

In US markets, attention shifted (squirrel) from international headlines to worries about interest rates and also earnings reporting season. Last week Federal Reserve Chair Janet Yellen said she still expected to raise US interest rates this year. Fed funds futures show a 37 percent chance the central bank will increase its benchmark rate in September, up from 33 percent on July 10, and a 69 percent chance by December. The difference between two- and 10-year yields, known as the yield curve, widened to the steepest since November.

Janet Yellen heads across town on Wednesday to testify before the House Financial Services Committee. On Thursday, she will repeat the performance before the Senate Banking Committee. The biannual appearances are billed as reports to Congress on monetary policy, but the questions tend to range widely.

The Treasury reports that the federal government ran a budget surplus of $52 billion in June. That is $19 billion lower than the surplus seen in the same month a year ago. For the fiscal year to date, the government’s budget deficit is $313 billion. That is $52 billion smaller than the year-ago period. The government’s budget year runs from October through September.

According to Deloitte’s second-quarter CFO survey, finance chiefs from large North American companies are concerned about the economy, and have less confidence in the prospects for their own companies. The survey, which measures the views of more than 100 CFOs, found net optimism at its lowest level in two years, down to 18.8% vs. 34.4% last quarter. The number of CFOs that reported rising optimism about their own company fell sharply to 38% from 48% last quarter. A full 65% of those surveyed believe U.S. stock markets are overvalued, up from just 46% last quarter.

MPLX LP has agreed to buy MarkWest Energy Partners LP for about $15.8 billion, creating a master-limited partnership giant with natural gas and crude oil presences. The companies said the combination would create the fourth-largest master-limited partnership with a $21 billion market capitalization. MPLX was created by Marathon Petroleum  in 2012 to own and operate pipelines and other midstream assets. MarkWest Energy Partners processes natural gas in plays including the Marcellus and Utica shales.

Diversified energy firm Black Hills has agreed to acquire natural-gas utility SourceGas Holdings for $1.9 billion from investment funds managed by General Electric and Alinda Capital Partners. The deal allows the South Dakota-based Black Hills to expand in Colorado, Nebraska, Wyoming and Arkansas.

BP may have to pay out over $2 billion more than the $10.3 billion it has set aside to compensate businesses over the 2010 oil spill in the Gulf of Mexico. The money for the firms is in addition to the $18 billion settlement that BP agreed to last week, which resolved all actions against the company from federal, state and local governments.

Mexico’s new oil regime will undergo a major test on Wednesday when the government holds the first auction for private oil companies of 169 oil blocks that are both onshore and offshore. At least 17 companies are expected to participate, though the auction comes as oil prices are low. Pemex, the old national oil company, has decided not to participate. The Mexican Congress passed legislation last year to end Pemex’s monopoly and open the country’s oil patch to international competition.

Detroit’s “Big Three” carmakers are scheduled to start talks with the United Auto Workers (UAW) over a new contract for employees, and a two-tier wage system is likely to be a main topic of discussion. Ford, General Motors and Fiat Chrysler, along with the UAW, have until September 14, when the current contract expires, to reach an agreement.

Apple grabbed 92% of the operating profit of the world’s top eight smartphone companies in first quarter, up from 65% a year earlier. Samsung took 15% in this year’s period. The reason why Apple and Samsung earned over 100% combined is because some rivals only broke even or lost money.

On the earnings front: eBay reports tomorrow, Intel will deliver results on Wednesday, Netflix reports after the close on Wednesday (Netflix shares have nearly doubled in the year-to-date), Google reports on Thursday (expect questions about Google’s $65 billion cash pile and how they might spend it).

The nation’s largest banks will post second-quarter earnings this week, starting with JPMorgan Chase and Wells Fargo on Tuesday; Bank of America on Wednesday, and Goldman Sachs and Citigroup on Thursday. And the expectation is for continued pain due to sagging net interest margins, or the spread between what a bank pays to borrow money and what it can charge on loans. The wild card for banks could be results from their bond, currencies and commodities trading operations. Trading revenue tends to swing wildly each quarter.

Financial Review

Pick Your Poison

Sinclair Noe — June 29, 2015

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

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DOW – 350 = 17,596
SPX – 43 = 2057
NAS – 122 = 4958
10 YR YLD – .15 = 2.33%
OIL – 1.30 = 58.33
GOLD + 5.90 = 1181.10
SILV + .01 = 15.86

Late Friday, Greek Prime Minister Alexis Tsipras called for a July 5 referendum on whether to accept the latest offer from Greece’s creditors. That meant that Greece would not pay $1.8 billion to the Troika due tomorrow. The European Central Bank responded by halting emergency lending to Greek banks.  With emergency aid to the country frozen, Athens has imposed capital controls to halt bank runs and confirmed that the country’s banks would remain shut for six working days; Greek banks are closed and the Greek stock market is closed, possibly until the July 5 referendum. ATM withdrawals are being capped at €60-euro-per-day.

We’ve been watching the problems in Greece for a long time. A few years ago, we knew Greece had a debt problem; that was back when they were lumped together with Portugal, Italy, Ireland, and Spain. They were called the PIIGS. The Troika of the European Central Bank, the International Monetary Fund, and the European Monetary Union, decided to crack down on the PIIGS; prescribing a big dose of austerity; the cure has been debilitating. Spain is dealing with 22% unemployment, Italy with 12.4% joblessness, Portugal at 13% (with youth unemployment at 32%), and Greece has an unemployment rate of 25.6%. Those are numbers comparable to the Great Depression. And now they have a bank holiday to match.

The ECB couldn’t wait until July 5 for voters to decide on a referendum; they shut off funding and effectively closed the country’s banks. And they are now moving to the punishment phase off the negotiations. The message is clear; accept austerity or the ECB will crush the Greek economy. The Troika made Tsipras an offer that was unacceptable. The only option for Tsipras was to reject the offer or put it to a referendum of the voters. By shutting down the banks the Troika has spit on the democratic process.

Earlier in the year, I thought the Troika and Greece would come to an agreement because the cost of default and possible Greek exit from the EU would be much more expensive than a settlement. Greece may be a small country with a small economy but it is geopolitically and geographically important. The Troika feared that leniency would encourage Spain, Portugal and Italy to seek leniency; what they forget is that Greek default may also encourage the peripheral countries, or scare other countries. And even though there is a form of depositor insurance, it is woefully underfunded. If the bank runs in Greece spark bank runs in Italy and/or Spain, the Eurozone could be facing huge problems. We’re not there yet, but it has been a wild day.

There was quite a bit of market turbulence. The Euro Stoxx 50 Index fell more than 3 percent. Greek 10-year notes plunged by the most since at least 1998, driving the yield to 14.6 percent, the highest since December 2012. German bunds rose the most since 2011, sending the 10-year yield to 0.74 percent, as money flowed out of Spain, Italy, and Portugal. The euro fell 0.6 percent to $1.1093. The currency pared its loss following purchases by the Swiss National Bank to curb gains in the Swiss franc.

Few think a Greek default will lead to a scenario similar to one that played out in 2008, when Lehman Brothers collapsed. For one, international banks have far less exposure to Greece than in the past; they have also had more time to prepare. We have seen this slow motion train wreck coming. It is not a black swan event that surprises everyone. There has been plenty of time to “ring-fence” assets; plenty of time to prepare. Still, the cost of insuring corporate debt against default surged by the most since the day Lehman collapsed. The Markit iTraxx Europe index of credit-default swaps on 125 investment-grade companies jumped 20 percent this morning to the highest level since March 2014.

And then to pour gasoline on the fire, the Bank for International Settlements warned in its annual report that the world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises. The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies. Rather than simply reflecting widespread economic weaknesses, ultra-low rates have contributed to the slow recovery in the global economy by entrenching the excessive reliance on debt and causing large-scale misallocation of capital. Now imagine the Greek problem causes a downturn in the Eurozone; in normal times, the ECB could cut interest rates, and Greece would be nothing more than a minor downturn. The ECB can’t cut rates much lower than the zero bound.

The July 5 Greek referendum will ask Greek voters: “Should the agreement plan submitted by the European Commission, European Central Bank and the International Monetary Fund to the June 25 eurogroup and consisting of two parts, which form their single proposal, be accepted?” Greek PM Tsipras says a “no” vote will give him more leverage in negotiations. Euro Commission President Jean-Claude Juncker says “no” vote would lead to a Greek exit from the Eurozone; he described it as committing suicide. Not exactly. The Maastricht Treaty of 1992 which formed the Eurozone does not include a provision for expulsion of a country. There does not appear to be a legal basis to kick Greece out. The only thing they could do is squash the Greek economy, which might come off as a bit sadistic.

Greece is not the only one in hot water. Puerto Rico’s long-simmering debt crisis is about to come to a boil. The commonwealth’s governor, Alejandro García Padilla, says “The debt is not payable,” and investors should be prepared to sacrifice if they want the cash-strapped island’s economy to grow. Puerto Rico is in the midst of a decades-long economic struggle fueled by years of recession and slow economic growth. As a result, its government has taken out massive loans from creditors to cover its costs. Many also anticipate Puerto Rico’s electricity provider, which has borrowed $9 billion, to miss a payment to creditors this week, in what would be one of the largest municipal defaults ever. Padilla called the situation a “death spiral.” And he wasn’t exaggerating: Puerto Rico’s debt is four times that of Detroit’s, and the island has more debt per capita than any American state. Analysts believe the central government will run out of cash as soon as July, which could lead to a government shutdown, emergency measures and an unpredictable crisis. Greece can’t file for Chapter 9 reorganization. The White House today said there would be no bailout for Puerto Rico but did say there should be a change in the bankruptcy law.

And while Greece and Puerto Rico struggle with debt, China’s equity markets have slipped into a bear market. The Shanghai Composite slid 3.3% today to levels more than 20% below its June 12 close of 5,180, meeting some investors’ definition of having entered a bear market. The smaller Shenzen Index is already in a correction and it closed down 6.1% for the day; and the ChiNext board, which consists of small-cap companies, ended the day down 7.9%. The plunge comes despite a rate cut by the PBOC over the weekend. Chinese regulators are now considering suspending initial public offerings to stabilize the country’s tumbling equity markets.

Contracts to purchase previously owned U.S. homes rose in May for a fifth month. The National Association of Realtors said the pending home sales index increased 0.9 percent after a revised 2.7 percent advance in the previous month. Purchase contracts rose 8.3 percent in the 12 months ended in May.

The Supreme Court ruled today that Oklahoma’s lethal-injection procedure does not violate the Eighth Amendment ban on cruel and unusual punishment. The decision was 5–4, and Justice Samuel Alito wrote the majority opinion. He argued that the inmates on death row in Oklahoma who had brought forward the case did not prove that a less painful alternative existed, so I guess now it is up to the inmates to pick their poison.

Hours after the Supreme Court finished its term on Monday, the justices put on hold the Fifth Circuit’s ruling allowing Texas’ draconian anti-abortion law to go into effect. The decision grants a last-minute reprieve to over half of Texas’ remaining eighteen abortion clinics. Under the new law, which forces clinics to meet incredibly stringent standards unrelated to women’s health, all but seven of these clinics would have been forced to close. The court stayed the ruling by a 5-4 vote.

The Supreme Court ruled 5-4 that the Environmental Protection Agency needs to consider costs when regulating pollution caused by coal-fired plants.

The U.S. Supreme Court today rejected appeals from BP and Anadarko Petroleum over fines related to the 2010 oil spill in the Gulf of Mexico. The companies had argued that oil had not leaked from a well they co-owned, but from a broken underwater pipe owned by Transocean Ltd. The justices let a lower court’s ruling about fines stand.

The Supreme Court ruled that Arizona’s voters were entitled to try to make the process of drawing congressional district lines less partisan, upholding an independent commission set up by Arizona voters to draw congressional districts. The 5-4 ruling rejected contentions that the Arizona law, approved in a 2000 ballot initiative, strips state lawmakers of power reserved to them by the US Constitution. The decision opens a new path for efforts to limit gerrymandering, the practice of drawing irregular district lines to gain a political advantage. The Supreme Court has previously refused to put constitutional limits on partisan districts. The ruling applies only to congressional redistricting and doesn’t affect the Arizona commission’s role in drawing state legislative maps.

Financial Review

Trending

Sinclair Noe — April 28, 2015      

 

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

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DOW + 72 = 18,110
SPX + 5 = 2114
NAS – 4 = 5055
10 YR YLD + .05 = 1.97%
OIL – .06 = 56.93
GOLD + 10.10 =  1212.80
SILV + .21 = 16.71

House prices picked up in February, rising 0.5%, according to the S&P/Case-Shiller 20-city composite index. After seasonal adjustments, home prices rose 0.9% in February, matching January’s gain. Compared with February 2014, prices for the 20-city index were up 5%, the fastest growth in half a year. Home prices in Phoenix gained 0.3% for the month and 2.9% for the 12 month period.

The Commerce Department reports home ownership slipped to a 25 year low of 63.8% in the first quarter. The home ownership rate peaked at 69.4% in 2004. Household formation increased by 1.5 million in the first quarter. More people, starting more households, but they aren’t buying homes. With many Americans still showing an aversion to homeownership, the gains in household formation largely are being driven by renters.

Consumer confidence declined in April to a four-month low as Americans’ views of the labor market and the outlook on the economy deteriorated. The Conference Board’s index dropped to 95.2 from a revised 101.4 reading in March. The report showed fewer respondents said jobs were plentiful in April and income expectations cooled, signaling consumers will remain guarded about spending. The setback in sentiment may indicate demand will be slow to pick up after a stronger dollar, bad winter weather in some regions and a labor dispute at West Coast ports weighed on the economy in the first quarter.  Also, gasoline prices are edging up a little bit, so that’s a little bit of a negative.

Sometimes the general public is quite good at picking up on macro-trends, even short-term changes. As we started the year, crude oil was dropping like a rock and the dollar was blasting through the roof. Both oil and the dollar have turned around recently. Over the past 1½ months, the Dollar Index has been down 3 percent, and oil has gone up more than 30 percent. The question is whether the recent change represents a pause in the secular trend or reversal of the macro-trend.

The euro has finished higher against the dollar during five of the last six weeks. The trend for the dollar is heavily influenced by the Federal Reserve, as well as other central banks. While several global economies have adopted accommodative monetary policy, the Fed is hinting at raising rates. We’ll find out more tomorrow when the Fed concludes its 2 day FOMC meeting; and while no one expects the Fed to hike rates tomorrow, we’ll parse language for dovish or hawkish hints. The Fed will also offer their own economic forecast. And if the Fed holds their cards close to their chest, the secular trend is still for a fairly strong dollar because other central bankers are committed to an easy money policy.

Greek PM Alexis Tsipras said he would have to resort to a popular referendum if lenders insisted on “unacceptable” demands, but was confident about striking a deal to avoid such a scenario. Meanwhile, China’s central bank is planning to launch a new credit-easing program in the next couple of months. The Wall Street Journal reports the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans to boost liquidity and lending. In some ways the dollar is still the cleanest shirt in the dirty clothes hamper.

Meanwhile, the increase in oil prices has been more than a little bounce. In the past month and a half, oil has moved from $45 to $58, or about a 30% move; nothing to sneeze at. And we are heading into a seasonally strong time for oil, the summer driving season. Also, if the dollar shows any sign of weakness, it would lead to higher oil prices.

And then there is the geopolitical situation to consider when we look at oil. Any little mishap raises the Fear Premium for oil. We had a reminder today, when Iran seized a cargo ship near the Strait of Hormuz. The ship was initially reported to be American but later it turned out to be flagged to the Marshall Islands. Iranian news agencies said the seizure was strictly a civilian matter. It likely will be a non-event, but it is a reminder that tensions are high around the Persian Gulf.

We don’t know if oil is going higher or lower. And the dollar could run or stumble; we don’t know. The macro-trends of energy prices and direction of the currency directly impact stock and bond investments. We’ve seen that already in earnings reports; with analysts’ estimates ratcheted lower to reflect a stronger dollar, and depending on the sector, the positive or negative impact of lower oil prices.

Case in point today, BP, the British oil company posted a sharp drop in first-quarter profit; we’re still waiting for most of the Big Oil companies to report;  but BP’s results beat analyst estimates due to a larger than expected increase in refining revenue. In an interesting twist, BP reported underlying replacement cost profit – which takes into account the fluctuations in the price of oil – came in at $2.6 billion, down from $3.2 billion a year earlier. They have oil but they have to guess at its value. Production for the period was 8.3% higher than the first quarter of 2014.

In other earnings news today: United Parcel Service beat first-quarter profit expectations, although sales came up short. Earnings for the latest quarter rose to $1.03 billion from $911 million in the year-earlier period.  Currency changes reduced total sales growth by 2.2 percentage points, even as total shipments increased 2.8% to 1.1 billion packages

Merck reported earnings of $953 million, or 33 cents a share, down from $1.71 billion, or 57 cents a share, a year earlier. The pharmaceutical giant raised its earnings guidance for the year, despite the negative impact of the stronger dollar.

Pfizer posted a profit of $2.4 billion, up from $2.3 billion. Pfizer trimmed its full-year outlook citing a stronger U.S. dollar and weaker euro.

Ford Motor reported first-quarter net income fell 7 percent to $924 million from $989 million a year earlier. Ford is still working to increase production in North America to accommodate their redesigned F-150 truck, meanwhile they posted a loss on South American operations.

According to data from Thomson Reuters, first-quarter earnings are now on track to post a slight gain after the mostly stronger-than-expected results, defying forecasts for the first profit decline since 2009.
 
Yesterday after the close, Apple reported $13.6 billion in net income for the first quarter on revenue of $58 billion; Apple easily beat estimates on both the top and bottom line. Apple also raised its dividend 11% and said it would increase its capital return program from $130 billion to $200 billion. Apple closed down today by about 2%. Sometimes earnings reports don’t make much sense for the trader.

Twitter released their earnings today in tweets, the problem was that they tweeted out earnings news at 3:07PM eastern time, and they weren’t supposed to report until after the market closed at 4:00Pm. Twitter stock fell, trading was halted, then reopened, and then Twitter stock really fell big, about 18%. You would think Twitter would know to be careful what they tweet.

One trend that will emerge from earnings season is even more stock buybacks. Goldman Sachs forecast an 18 percent jump in buybacks and 7 percent climb in dividends for the year. Next week more than 80 percent of the Standard & Poor’s 500 market cap companies will have exited the “blackout period” in which share repurchases are put on hold prior to quarterly results announcements. Companies that make those cash infusions see an automatic increase in their per-share earnings and dividend yield. That tends to raise their share prices, which could bolster the broader market. Of course there are limits to buyback programs, and the bigger consideration is that if a company is buying back their own shares they are using cash that might be used to grow the business, instead of shrinking the shares outstanding.

And then consider the trend of ever increasing margin debt. The NYSE reports margin debt rose to an all-time high in March at $476.4 billion, up from $464.9 billion at the end of February. And the wrinkle is that margin debt rose during the month of March even as the S&P 500 dipped nearly 2 percent. Margin debt is created when investors borrow money in order to buy stocks. If an investor buys $100 worth of stocks with $50 in capital, that individual has $50 of margin debt outstanding. Since margin debt provides leverage, it amplifies gains, but also increases the risk to an investor.

Brazilian oil company Petrobras’ $17 billion write-down, announced last week, may have been meant to close the accounting on a sprawling corruption scandal, but could instead provide fresh ammunition for a U.S. class action lawsuit. The case, filed in Manhattan federal court in December by a group of large investors, alleges $98 billion of the company’s American depository shares, or ADRs, and bonds were artificially inflated since 2010 by the company overstating the value of assets such as major projects. Petrobras has moved to have the case dismissed.

And another trend that just won’t go away – “Banks Behaving Badly.” The Securities and Exchange Commission is investigating whether Bank of America broke rules designed to safeguard client accounts, potentially putting retail-brokerage funds at risk in order to generate more profits. For at least three years, the bank used large, complex trades and loans to save tens of millions of dollars a year in funding costs and to free up billions of dollars in cash and securities for trading that Bank of America otherwise would have needed to keep off-limits. Now, the SEC is investigating whether the bank’s unusual strategy violated customer-protection rules and whether the bank misled regulators about what it was doing. This is not some theoretical threat to consumers. The collapse of Lehman Brothers in 2008 and of MF Global. in 2011 left some brokerage customers waiting for the return of billions of dollars of their own money, leading regulators to strengthen the long-standing customer-protection rule.