Financial Review

Milk and Cookies

Sinclair Noe — June 19, 2017

DOW + 144 = 21,528
SPX + 20 = 2453
NAS + 87 = 6239
RUT + 11 = 1418
10Y + .03 = 2.19%
OIL – .64 = 44.10
GOLD – 9.80 = 1244.60
BITCOIN + 1.34% = 2677.18 USD
ETHEREUM – 3.60% = 358.49

The Dow Industrial Average hit another record high today. The S&P 500 is up 9% so far, this year, hitting another record high close today.

Just 10 companies have accounted for almost half of the benchmark’s return this year. While stock bears have been stressing caution, some have gone as far as to compare the current environment to the dotcom bubble. The reality is that this concentration is not unusual; it happens in rallies.

On June 9, tech stocks in the S&P 500 dropped 2.7%. But that money mostly stayed in the stock market, flowing into energy and financial shares. Nasdaq’s biotechnology index rose 2.5 percent in its biggest one-day gain since February while the S&P’s healthcare index had a record-high close.

The S&P’s financial sector was also one of the benchmark’s strongest gainers with a 1% rise after New York Federal Reserve President William Dudley said U.S. inflation was a bit low but should rise alongside wages as the labor market continues to improve, allowing the Fed to continue gradually tightening monetary policy.

Dudley said: “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be.” Apparently, the Fed sees underlying strength in the economy that the data doesn’t show right now. The Fed’s base case is that this is just kind of a soft patch and we will continue to cycle higher.

And Wall Street always seems to be optimistic when we have big merger and acquisition news – which we saw on Friday with the Amazon/Whole Foods deal. Not everybody loved the deal, Kroger lost 19% on Thursday when they announced a bad earnings report, then came news of Amazon, and Kroger dropped another 9%, losing $7 billion in market cap in just 2 days. Today, the bottom fishers came in and Kroger bounced 1.5%.

Also, Blue Apron started its IPO roadshow today, hoping that nobody paid any attention to anything last week. Blue Apron Holdings, a startup that offers cook-at-home preparation kits, expects shares to price between $15 and $17 in its initial public offering. With Amazon now casting an anticipatory shadow over the “Fresh food to urban yuppie home delivery” sector, Blue Apron is caught in a gnarly Catch 22.

Its IPO only makes sense if people believe that its business model can drive revenue and maybe create profit, but if that model can indeed drive revenue, what’s to stop Amazon from copying it, using 80 million Prime subscribers and the vast coverage of Whole Foods distribution network?

Resurgent growth is reviving one of the past decade’s hottest trades. Emerging-market investors are again piling into the so-called BRIC nations — Brazil, Russia, India and China — pushing monthly inflows and stock prices to almost two-year highs. Non-resident portfolio flows into BRIC nations rose to $166 billion last month, from $28 billion of outflows 12 months prior.

Oil fell, extending four weeks of declines, as U.S. drillers continue adding rigs and Libya boosts output. U.S. drillers added rigs for a 22nd straight week, the longest uninterrupted stretch of growth in three decades.

The Supreme Court just ruled that social media is a constitutional right. Today, the justices unanimously held that states can’t broadly limit access to social media because cyberspace “is one of the most important places to exchange views.”

In Packingham v. North Carolina, the justices were asked to review a North Carolina statute that bars sex offenders from accessing social media altogether and makes it a felony if they post on any platform. The case has implications for all members of American society, however, not just sex offenders, and the court appears to be extremely conscious of the broader effect.

Justice Anthony Kennedy wrote, “A fundamental First Amendment principle is that all persons have access to places where they can speak and listen, and then, after reflection, speak and listen once more.” Given the fact that social-media platforms allow for this kind of free communication, and that the constitution protects the right to exchange, the justices recognized this case was widely societally important.

North Carolina convicted over 1,000 sex offenders based on its statute barring access to all social platforms. That, according to the high court, simply isn’t acceptable considering the role Facebook, Twitter, Snapchat and others play in current public communication.

The Supreme Court agreed to consider whether there are constitutional limits to how far lawmakers can go in drawing electoral districts to maximize partisan political advantage, a case that could have profound implications for US elections.

The justices in a brief written order said they would review a redistricting case from Wisconsin, where a three-judge lower court last year invalidated a redistricting plan enacted by the Republican-controlled Wisconsin legislature in 2011. That court said Wisconsin lawmakers redrew the state’s legislative districts after the 2010 census to unlawfully maximize the number of Republicans elected and dilute the power of Democratic voters.

Democrats won a popular majority of assembly votes in 2012 and 2014, but Republicans managed to take 60 of the 99 assembly seats. The practice of redrawing electoral maps along partisan lines is known as “gerrymandering.” The Supreme Court has previously struck down gerrymandered maps that disadvantage minority voters, but has yet to prohibit a map because it unfairly advantages one political party over another.

Also today, the Supreme Court struck down part of a law that bans offensive trademarks, ruling in favor of an Asian-American rock band called the Slants and giving a major boost to the Washington Redskins in their separate legal fight over the team name.

The justices were unanimous in saying that the 71-year-old trademark law barring disparaging terms infringes free speech rights guaranteed in the Constitution’s First Amendment. Justice Samuel Alito said in his opinion for the court, “It offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.”

Silicon Valley went to Washington today. The White House has enlisted tech CEOs to improve government services, reform outdated information technology systems, cut fraud and government costs and improve services for taxpayers. It has cited an economic opportunity to save up to $1 trillion over 10 years through such measures.

Jared Kushner, Trump’s son-in-law, said before the sessions began that the administration wanted to “unleash the creativity of the private sector to provide citizen services in a way that has never happened before.”

French President Emmanuel Macron is poised to rearrange his Cabinet after his new centrist party won a solid majority in the country’s parliamentary election, enabling the government to quickly start passing its first big laws. President Macron flew opened the world’s biggest air show in Paris, today.

Boeing generated a burst of activity on the opening day by launching the 737 MAX 10. Boeing said it had more than 240 orders and commitments from at least 10 customers for the new 737, which can carry up to 230 people in a single-class configuration. Airbus immediately hit back with an order for 100 of its popular A320neo planes.

The Federal Trade Commission said it will seek to stop the merger of DraftKings and FanDuel, because the combined company would control more than 90 percent of the U.S. market for paid daily fantasy sports contests.

This is the latest setback for two companies, which have faced regulatory challenges in several states. They announced the deal in November 2016 as a merger of equals that would cut their legal bills. The companies said in a joint statement that they were considering their legal options.

Late Friday, we told you that CenturyLink had been sued in Arizona by a former employee for allegedly running a sales incentive scheme, by adding services to accounts without customer approval. The whistleblower was fired.

Now, the case is going to class action status in California, seeking damages up to $12 billion. CenturyLink is amid a $34 billion merger with Level 3 Communications.

Financial Review

The Foreseeable Future

Sinclair Noe — November 9, 2015

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

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DOW – 179 = 17,730
SPX – 20 = 2078
NAS – 51 = 5095
10 YR YLD + .01 = 2.34%
OIL – .18 = 44.11
GOLD + 2.50 = 1092.90
SILV – .16 = 14.68

The jobs report on Friday showed a rise of 271,000 new jobs last month and the unemployment rate dropping to 5%. In a speech in Tempe on Saturday, San Francisco Fed President John Williams said: “My forecast is that we’ll reach our maximum employment mandate in the near future and I’m increasingly confident that inflation will gradually move back to our 2% goal.”

Williams said: “I view the next appropriate step as the start of a process of gradually raising interest rates,” and the data will determine when it comes to lifting rates. Williams offered an upbeat outlook on the economy, and he said that it is OK that the pace of job creation has slowed relative to recent history, because continuing on that pace could cause problems. (For whom?)

We all knew about the jobs report on Friday, so why the delayed reaction in the markets today to news from Friday? Well, that would be assuming that the markets went down today because everybody figured out that the Fed is definitely going “live” with a planned rate hike in December. I don’t know why the markets went down today. On any given day, markets go up or down. Buying is stronger than selling or vice versa.

Wipe out the statistical noise in the past 3 months of jobs reports and the labor market looks like it has for a long time, sluggish growth. Wipe out the statistical noise of today’s trading and the market is still in an uptrend, with strong seasonal probabilities to boot. And a trend in place is more likely to continue than it is to reverse…, until it reverses.

In its semiannual economic forecasts, the Organization for Economic Cooperation and Development said that growth in the U.S. would continue to be among the most robust in the group of nations, hitting 2.4% in 2017. It predicted the 19-nation Eurozone would continue to lag behind the U.S., with growth at 1.5% this year, and 1.9% in 2017. Growth throughout the OECD is forecast to hit 2% this year.

Global financial regulators published new rules that aim to stop banks from becoming “too big to fail,” to prevent a repeat of the 2008 financial crisis. The plan, drawn up by the Financial Stability Board in Switzerland, aims to ensure that the world’s biggest lenders maintain sizable financial cushions that can absorb losses as a bank is failing, without threatening a crisis in the broader banking system. The new standards aim to make banks change the way they fund themselves to better weather a crisis, a requirement that could force firms to raise more than $1.2 trillion in new securities.

Under the rule for total loss-absorbing capacity, or TLAC, by January 2019 large lenders will have to hold a financial cushion of at least 16% of their risk-weighted assets in equity and debt that can be written off. That requirement will gradually increase, reaching 18% of assets weighted by risk by January 2022. A leverage ratio requirement will also be imposed, rising from 6 percent initially to 6.75 percent. The rules would apply to the world’s top 30 banks.

The push to make sure banks are no longer too big to fail is also advancing on a second front, as Wall Street expands a revision of financial contracts worth trillions of dollars. The changes are expected to allow certain securities and funding contracts to remain intact for as long as 48 hours after a bank fails; theoretically, that would be enough time for governments to step in and set up a healthy version of the doomed institution.

We have reported the story of Turing Pharmaceutical, the company run by a thirty-something former hedge fund manager who bought a shell company and then bought rights to a drug, daraprim, that had been around for more than 60 years; he promptly jacked the price up from $13.50 a pill to $750. At first it seemed like an outlier.

Then we heard from Citron Research, a short-sale researcher, saying that Valeant Pharmaceutical had been cooking the books, setting up bogus specialty pharmaceutical suppliers to show sales that didn’t really exist. Valeant shares were clobbered, losing two-thirds of value from recent highs. Today, Citron came out with another report on another company. In a tweet, Citron says Mallinckrodt’s stock has significantly more downside than Valeant, and is a far worse offender of the reimbursement system – more to follow.

We don’t know what will follow but it has become clear that pharmaceutical companies are gaming the reimbursement system and are actively involved in price gouging – not all of them but enough to sour the entire pharmaceutical industry.

Saudi Arabia is determined to stick to its policy of pumping enough oil to protect its global market share, indicating that the country is in no mood to change tack ahead of OPEC’s Dec. 4 meeting in Vienna. The chairman of Saudi Aramco said, “There have been no conversations here that say we should cut production now that we’ve seen the pain.”

Weyerhaeuser has agreed to buy Plum Creek Timber in a deal that combines the two largest owners of timberland in the U.S. The all-stock transaction will result in a $23 billion timber REIT carrying more than 13 million acres of land.

Anbang Insurance Group said it would acquire U.S. annuities and life insurer Fidelity & Guaranty Life in a deal valued at about $1.57 billion as Chinese insurers seek to expand into the United States. Chinese insurers including Fosun International Ltd and Anbang Insurance have launched some $6.1 billion worth of overseas deals this year as they seek to diversify their holdings by purchasing interests in real estate, insurance and other sectors.

Goldman Sachs is closing its money-losing BRIC fund; BRIC stands for Brazil, Russia, India, and China. The bank said in an SEC filing that it doesn’t expect “significant asset growth in the foreseeable future.” The fund had lost 88 percent of its assets since its 2010 peak.

Google is making its internal AI development software available for free, hoping to influence how people design, test, and run artificial-intelligence systems.  Google is releasing a program called TensorFlow as freely available open-source software. It’s based on the same internal system Google has spent several years developing to support its AI software and other mathematically complex programs.

Dubbing it the “Networks of the Future,” Ericsson and Cisco have agreed to create a broad technology and commercial partnership that stops short of a full-blown merger but aims at an unusual level of cooperation in everything from research and development to customer service. The alliance will help add $1 billion or more in annual sales for each company by 2018. The companies say the partnership will offer customers the best of both companies: routing, data center, networking, cloud, mobility, management and control, and global services capabilities.

Sierra Leone was declared Ebola-free by the World Health Organization on Saturday, making it the second West African nation – besides Liberia – to eradicate the disease. Although the Ebola-free stamp means that Sierra Leone has gone 42 days, or two incubation cycles of the virus, without an infection, the country still faces significant hardships ahead. According to the IMF, Sierra Leone is on track to suffer Africa’s worst recession this year: a ruthless 21.5% contraction.

Greenhouse gas levels in the atmosphere reached a record high in 2014. According to the World Meteorological Organization levels of carbon dioxide, the main greenhouse gas, climbing steadily towards the 400-parts-per-million (ppm) level, having hit a new record every year since reliable records began in 1984. Carbon dioxide levels averaged 397.7 ppm in 2014 but briefly breached the 400-ppm threshold in the northern hemisphere in early 2014, and again globally in early 2015.

Levels of the other two major man-made greenhouse gases, methane and nitrous oxide, also continued a unrelenting annual rise in 2014, reaching 1,833 parts per billion (ppb) and 327.1 ppb, respectively. Both rose at the fastest rate for a decade. Next month 150 countries will be meeting in Paris for a major conference on global warming; so far none of the proposals submitted for consideration at the conference would curb emissions enough to meet a target agreed in 2010 to limit global warming to within 2 degrees Celsius (3.6 Fahrenheit) of pre-industrial levels.

The Center for Public Integrity, a Washington based nonprofit has issued its 2015 State Integrity Investigation, ranking each state for transparency and accountability and conflicts of interest and corruption. The good news for Arizona is we ranked 22^nd; in the bottom half but not the worst. The bad news is Arizona only graded out with a “D”. The most corrupt state was Michigan; the least corrupt, Alaska, Connecticut, and California. I do not make this up.